May 3 (Bloomberg) -- A classic chicken-or-the-egg dilemma faces Asia: Does it receive scant international capital because it sometimes disappoints investors, or does it disappoint because it doesn't get enough?

It's hardly an academic question for Asian policy makers arriving in Hyderabad, India, this week for the Asian Development Bank's annual meeting. One explanation may be that China's boom is sucking up most of the capital that Asia once shared. Another deserves more attention: corruption.

Asia, to varying degrees, has made less progress than hoped in cleaning up its business culture in the nine years since the region's financial crisis in 1997. The meltdown was partly fueled by Asia's ``crony capitalism.''

Now for the good news: The World Bank is rolling up its sleeves to tackle corruption and, this time, it means business. Last month, World Bank President Paul Wolfowitz stepped up the push in Indonesia, a logical place given that it's Southeast Asia's largest economy and one of the region's most corrupt.

Corruption ``is a major obstacle to achieving the development successes this country is capable of and which the Indonesian people deserve,'' Wolfowitz said in Jakarta on April 11. ``Where corruption is rampant, contracts are unenforceable, competition is skewed and the cost of doing business is stifling. When investors see that, they take their money elsewhere.''

Corruption's Costs

It's a painfully obvious point, though you wouldn't know it from the lack of urgency with which many governments approach the issue.

At the heart of recent turmoil in Thailand and the Philippines, for example, were allegations of corruption by the leaders of both nations. South Korean markets are again being roiled by alleged improper activities by family owned conglomerates.

Indonesia's challenges are much greater. Suharto hasn't been president since 1998, but the political and financial systems he created in his 32 years in power linger. While things are improving in Indonesia, the vestiges of Suharto rule prevent most of the nation's 238 million people from getting the benefits of 6 percent growth.

Indonesia ranked 137th in Transparency International's Corruption Perceptions Index for 2005, in the same category as Iraq, Liberia and Uzbekistan. It means many of those in power -- or close to them -- hoard resources better spent on reducing poverty and improving health care, education and urban planning.

Indonesia's Example

The lack of trustworthiness will complicate President Susilo Bambang Yudhoyono's plan to attract $426 billion in investment by 2009 to build roads, power plants and ports as the country aims to cut unemployment and poverty rates by half in the same period.

``Corruption is the key to so much of what is wrong with Indonesia's economy, and indeed many in Asia,'' Vivek Sharma, Singapore-based director of development economics at the business graduate school Insead, told me in Jakarta last month.

Less corruption would allow Asia's consumers a bigger share of economic growth. Bond investors would enjoy more legal certainty of being repaid and less volatility in yields. Greater corporate transparency and independence from politicians would serve equity aficionados.

It's heartening to see the World Bank, and other lending institutions, putting corruption front and center. But you can't blame investors for being a bit cynical; we've been here before.

Blame Growth

In late 1996, then World Bank President James Wolfensohn delighted many by describing corruption as a ``cancer'' on the global economy. Before that, the issue was rather taboo; the word ``corruption'' was often avoided in World Bank documents. Almost 10 years on, there's been little progress in Asia on that issue.

Perhaps the biggest culprit was the return of rapid growth. As gross domestic product accelerated, there was less urgency for the microeconomic upgrades needed to clean up economies. Fast growth lets Asia paper over its problems.

It's becoming harder to sweep corruption under the rug. If longtime Asia investors such as Marc Faber, managing director at Hong Kong-based Marc Faber Ltd., are right that the world's economic power is shifting toward Asia faster than many realize, it's time for this region to prepare.

Amid risks ranging from record oil prices to bird flu to terrorism to a plunge in the U.S. dollar, Asia must strengthen and integrate its economies faster, something for which the Manila-based Asian Development Bank has been pushing.

Now or Never

At the top of Asia's to-do list is figuring out how to grow better, not faster. For decades, Asia made the mistake of measuring progress with high GDP rates. A better gauge is how the lives of people from the richest to the poorest are changed. Few things would do more in that regard than reducing corruption.

Asia doesn't have a monopoly on crony capitalism; the unfolding Enron Corp. trial in the U.S. is a case in point. Still, Asia's poverty challenges make it a more pressing issue. It's good to see the World Bank developing strategies to mobilize all its instruments -- loans, grants, research, technical assistance and private-sector investment -- to strengthen governance and fight corruption as a means of boosting investor confidence.

Outside pressure can only do so much, though. The real push must come from the inside as leaders realize corruption's high cost. With the Asian Development Bank predicting 7.2 percent growth in Asia (excluding Japan) this year, there's rarely been a better time.

To contact the writer of this column: William Pesek Jr. in Hyderabad, India, or through the Tokyo newsroom at wpesek@bloomberg.net.

Last Updated: May 2, 2006 15:53 EDT