World Bank Props Up Despots With New ‘Corruption’ Loans

Jim Wolfensohn came out swinging when he took over the World Bank in 1995. As a scion of the New York investment banking establishment and consigliere to the high and mighty, he seemed to have a decent shot at reforming the World Bank’s sclerotic bureaucracy. But when he trained his sights on official corruption, promising to “redefine the ‘C’ word,” there were gasps all around. Wall Street was as delighted as the Beltway was horrified: Finally, someone had stepped up to take on the behemoths of international finance.

Five years later, though, Mr. Wolfensohn hasn’t gotten too far.

For evidence, check out the World Bank’s sexy new product line: “corruption loss insurance.” If your regime is so demonstrably untrustworthy that foreign investors have decamped en masse, the World Bank can help. It will lend you tens of millions of dollars, furnished by foreign taxpayers, so that you can offer investors insurance against your own perfidiousness.

The business of insuring foreign investors against sovereign acts like expropriation, change in law, currency inconvertibility and war-so-called “political risk insurance”-is not new. Private insurance companies and quasi-governmental organizations have long offered insurance against such risks, but, generally speaking, no one writes political risk coverage against sovereigns that are totally unreliable.

Enter the World Bank, with its “Leveraged Insurance Facility for Trade and Development.” Uniquely, this loan program is closed to countries that behave themselves. To qualify for it, a regime must be unsavory to foreign investors. In this fractured bad-is-good universe, the government in question must first purposefully fail to provide the elemental infrastructure and protections that make foreign investors comfortable and that permit local businesses to thrive.

Does your country have clear laws defining property rights? If it does, this program is not for you. An impartial judiciary? Sorry. Honest officials? Next window, please. But, if your government and judiciary are corrupt, your country lacks a consistent body of law, the few laws you do have are applied arbitrarily, and both local and foreign businessmen quail at the thought of investing, the World Bank wants to help. It will lend good money to bad governments so those selfsame regimes can sell investors insurance against misdeeds that are totally within their own control.

Given such stringent preconditions, not just any old untrustworthy regime is good enough. To date, only Ukraine and Albania have been sufficiently unattractive to investors to qualify for programs like this. Albania is the stolen-car capital of Europe; Germans joke that, if your car is missing, you look for it not at the local pound but on the docks outside Tirana. Ukraine, of course, has similar qualifications: The International Monetary Fund is investigating Ukraine’s Central Bank for misrepresenting the level of its reserves, I.M.F. money may have gone astray, and the Ukraine is restructuring its external bonds.

Consistent with those standards, the World Bank invited Kazakhstan to join the Leveraged Insurance club. It plans to lend Kazakhstan $50 million so that, if Kazakhstan continues lying to foreign investors, it has the dough to compensate them for the costs of its own corruption, arbitrary legal changes and capricious enforcement. (The loan is slated for approval by the World Bank’s board in June.)

Kazakhstan seems to meet the World Bank’s criteria perfectly. Transparency International, a global watchdog group, gives Kazakhstan a dismal 2.3-out of a possible 10-on its Corruption Perceptions Index. That ranks Kazakhstan as one of the most corrupt countries anywhere.

Then there’s its dismal human rights record. Freedom House reports that President Nursultan Nazarbaev runs one of the most repressive regimes on earth. Mr. Nazarbaev controls the police and the judiciary and, said Freedom House, “corruption is evident at every level of the judicial system.” The authorities routinely use libel laws to discourage free speech.

Some say that the World Bank would be out of business if it did not lend money to creepy regimes. Nonetheless, the ironies inherent in the World Bank’s relationship with Kazakhstan abound. The bank’s mission statement requires it to “encourage governments to create the legal and institutional framework for transparency, predictability and competence in the conduct of public affairs.”

Instead of encouraging Kazakhstan to achieve any of those objectives, however, the World Bank has instead set about enabling Kazakhstan to avoid them. The World Bank plays no useful role when it implicitly encourages bad government and bad actors. Lots of Third World countries are struggling to implement economic and political reforms-and many are succeeding. Loans to regimes like Mr. Nazarbaev’s mock those efforts and encourage other miscreants, who really need no encouragement.

Jay Newman is a money manager who specializes in foreign debt.