Abstract:
When the World Bank signed an agreement with the government of Peru in December, 1997 to provide a $22.5 million loan to help reform the country's antiquated and corrupt judicial system, the Bank knew it faced risks. Peru's President Alberto Fujimori was under fire and observers considered it possible that, rather than exhibiting real commitment to reform, the government may have been seeking the loan chiefly to lend a veneer of legitimacy to measures that in reality reduced judicial independence and concentrated more power in the executive. On balance, however, Bank officials who had to make the decision on whether to proceed with the agreement believed it offered a rare opportunity to address a variety of longstanding ills-including limited access to the justice system, a crumbling infrastructure, and inadequate training of judges and prosecutors. But just three months after the agreement had been signed, Peru's Congress--dominated by members loyal to the President--passed a measure which led Bank officials to question the good faith of the government. The new law limited the powers of one of the pillars of the loan agreement--the National Council of Magistrates, an independent entity mandated to ratify and remove judges and prosecutors. The Council's members resigned en masse and, in response, the Bank postponed the effective date of the judicial reform loan by six months--halting any disbursement of funds. But in the days following the announcement, Peru's government put increasing pressure on the Bank to change its mind and finally summoned the Bank's country director for Peru to a personal meeting with President Fujimori. The country director would have to decide whether to stick with the loan postponement--and, more broadly, take stock of what was really going on in Peru. Would the loan help a government sincerely embarked on reform? Or might it simply abet a government bent on subverting the judiciary to further its own political goals?
Learning Objective:
The case allows for discussion of how international officials whether from multilateral organizations, NGOs, or even the private sector can assess political risk in a volatile situation. Too, it raises the classic dirty hands ethics question of whether, by involving itself with Fujimori, the Bank compromised its mission or advanced it.
