Bush/ World Bank and corruption

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The world’s World Bank problem

By Robert Wade
Created 2007-07-10 14:52
The fight between the Americans and the Europeans over the fate of Paul Wolfowitz obscured the bigger question of whether the world still needs the World Bank. The immediate contest may be over and Robert Zoellick installed as the new president (nominated by the White House / United States treasury), but the question looms over everything the bank does.

Before addressing this question, however, two points should be made about the Wolfowitz affair [0]. First, the blame for the scandal that brought him down was not entirely on his side, and on its own it would not have led to his departure. In particular, the bank's ethics committee gave him muddled advice when he approached it about a conflict of interest between him being president and his then romantic partner being a bank employee.


But in any case, the ethics issue became the lightning-rod for much broader anger over the way he was running the bank [1]. He had brought in a small group of lieutenants from the Pentagon and United States vice-president's office who set about administering the bank in a brutal and highly ideological [1] way. He and they showed undisguised contempt for the senior managers (advised to run an important speech about the bank's role in governance reform past the relevant vice-presidents to get their buy-in, Wolfowitz replied: "Not past this lot. That would be like casting pearls before swine.")


Robert Wade is professor [2] of political economy at the London School of Economics. He worked as a World Bank economist in the 1980s.

He is the author of Governing the Market: Economic Theory and the Role of Government in East Asia's Industrialization (Princeton University Press, 1990 [3]) and of "Is globalization reducing poverty and inequality?", in John Ravenhill, ed., Global Political EconomyOxford University Press, 2005 [4])

Also by Robert Wade in openDemocracy:

"Inequality of world incomes: what should be done? [4]" (14 November 2001)

"The invisible hand of the American empire [4]" (13 March 2003)

"Globalisation: emancipating or reinforcing? [4]" (29 January 2007The senior managers became cowed, and spent their time trying to figure out how to minimise their vulnerability, rather than exercise their professional judgment. Those who pushed back were invited to seek employment elsewhere. The lieutenants systematically corrupted the bank's checks and balances, especially in staff recruitment and promotion (though this process was already well advanced under James Wolfensohn [5]).

The second point relates to Wolfowitz's declaration (which he made with a straight face, and he highlighted as his biggest regret about resigning) that pushing forward the corruption agenda was his signature issue. It is true that in some countries and in some sectors corruption is a big problem, substantially lowering the productivity of investment and the legitimacy of the state. But Wolfowitz and his lieutenants defined the agenda in narrow and punitive terms, as though the bank should punish a country (refuse new loan proposals, for example) wherever corruption is uncovered.

But corruption is endemic in developing countries because they are developing countries. The corruption agenda has to be broad enough to include civil-service reform, and legal and judicial reform - yet the bank is hardly staffed up with experts in these areas. Moreover, the board and the staff also saw Wolfowitz as wanting to apply the corruption agenda selectively, as a cover for advancing United States-centric political objectives.

For example, two months after the United States was obliged to comply with an Uzbek government demand [6] that the US should withdraw its military forces in the country, the bank announced in March 2006 that new loan proposals for Uzbekistan were suspended [7], ostensibly for reasons of corruption in bank projects. The bank now does have a more sensible corruption agenda, which board and staff have endorsed. But it will take some time to recover momentum because of the way corruption has been discredited by the Wolfowitz team.

The challenge of reform

The new president, Robert Zoellick [8], is a good choice - if the choice had to be restricted to someone in the Bush circle.

Apart from the day-to-day challenges, the biggest challenge for the new team is to find a way out of the bank's crisis of relevance. Its market has changed fundamentally in the past decade, but the bank continues to operate in much the same way and with much the same products as a decade ago and more. The challenge to reposition itself is almost as big as that faced by the March of Dimes when a cure for polio was found.

The change in the bank's market was dramatically symbolised in May 2007 when the African Development Bank [9] held its annual meeting not in Africa but in Shanghai - an event which will be looked back on as a milestone in the history of the early decades of the 21st century.

In its traditional products - aid projects and economic policy advice to governments of developing countries - the bank faces an array of new competitors [10]. These include China and Korea, which have become big sources of financial assistance to poorer countries; private consulting firms; private investment banks; and private foundations, like the Bill & Melissa Gates Foundation [11]. But the bank retains a sizeable competitive advantage over these other entities based on three elements: its governmental guarantees, its own revenue base, and its global reach.

The bank can and should shift more of its activity into genuinely global problems, where private-capital markets are less likely to lend, especially for global-problem-reducing investments in low-income countries. For example, it can and should take a much bigger role in tackling one of the biggest questions of our time: how to decouple economic growth from carbon emissions. The bank has much experience of translating economic policies into investment plans and investment plans into investments on the ground. It should use this experience to take the general conclusions of the Stern report [12] (October 2006) and the latest Intergovernmental Panel on Climate Change (IPCC) reports [13] (2007); spell out what the general conclusions mean for specific countries, like China, Russia, India, Bangladesh, and Brazil; and then work with these governments to formulate concrete plans of action.

The bank would have to develop new financing instruments to accelerate the uptake of climate-friendly technologies [14]. For example, a carbon fund - or since the fund should not be tied only to carbon, a "climate stabilising and adaptation" fund. Such a fund could be used to encourage a developing country government to borrow from the bank for a power station and choose a state-of-the-art minimum carbon-emission technology even though more expensive than the standard one, with the fund rather than the government bearing the incremental cost. The fund could be used to accelerate climate-friendly technologies in power, transportation (eg railways in Africa), forestry, land use, and still more.

Some of the finance could come straight from World Bank reserves [15]. The reserves are currently $36 billion, while only $25 bn is needed to maintain the all-important triple-A credit rating. The fund would also receive grants from OECD governments and private foundations.



Also in openDemocracy on Paul Wolfowitz and the World Bank:

Alex Wilks, "US bank or World Bank? [15]" (26 March 2005)

Sidney Blumenthal, "Paul Wolfowitz's tomb [15]" (1 June If the world says no


To advance in this direction the bank [16] has to address another looming question: how to decouple itself from White House/treasury control. At a dinner party a few years ago Laurence Summers - then president of Harvard, and former US deputy treasury secretary, then treasury secretary - exclaimed enthusiastically that until he entered the treasury he had not realised just how useful were the bank and the International Monetary Fund [17] (IMF) for US foreign-policy objectives. His remark is all the more striking because he had earlier been vice-president for economics and research at the bank - so he was scarcely an outsider.

Certainly the US executive branch thinks that "we" still need the World Bank (though the Congress does not always appear to agree); and that we need the bank with its present governance arrangements, which give the US its dominance [18]. But as some developing countries gradually become more self-confident (China, Brazil and India for example) the hope is that their governments will in one way or another assert themselves more in the governance of both the World Bank and the IMF, and ease the organisations out of the heartland of the American empire [19].

Any shift may be galvanised by desperation. The Americans basically run both the World Bank and the IMF (the Europeans may appoint [20] the fund's managing director, but the Americans have a lock on the fund's number-two position, whose incumbent is often more powerful than the managing director). How long will it be before the bank's middle-income borrowers - seeing the organisation as US-dominated and concerned to impose upon them free-market policies advantageous to the US (or protective policies advantageous to the US, like intellectual-property protection [21] of the US type) - walk away, and deprive the bank of the interest revenue which is the main component of its revenue base?

How long will it be before the developing-country executive directors on the board of the bank and fund insist - as they could if their governments were not afraid of upsetting the Americans and Europeans - it is high time that an Asian, or a Latin American, or an African or a Canadian could lead one of these organisations? How long before they say (to echo Dorothy in The Wizard of Oz): "we are not in 1944 anymore"?

At least the board of the bank had the gumption to call Zoellick to something like an "interview" before agreeing to support [22] his nomination (even though their agreement was guaranteed just about whatever he said). A dedicated optimist might say that they were acting in the spirit of the Chinese proverb, "cross the river one stone at a time". Let's see whether Rodrigo de Rato [23]'s successor at the IMF is nominated after a search which includes non-European (and non-American) candidates.

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[6] http://www.eurasianet.org/departments/insight/articles/pp073105.shtml
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[10] http://americas.irc-online.org/am/4364
[11] http://www.gatesfoundation.org/default.htm
[12] http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm
[13] http://www.ipcc.ch/calendar.htm
[14] http://www.wri.org/climate/pubs_description.cfm?pid=4292
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[18] http://www.bicusa.org/en/Issue.10.aspx
[19] http://newleftreview.org/?view=2305
[20] http://news.independent.co.uk/business/analysis_and_features/article2750528.ece
[21] http://www.computing.co.uk/vnunet/news/2188919/singles-top-piracy-offenders
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[23] http://www.imf.org/external/np/omd/bios/rrf.htm


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Wolfowitz Resigns: some integrity restored

May 18, 2007
Wolfowitz Resigns From World Bank

By STEVEN R. WEISMAN
WASHINGTON, May 17 — Paul D. Wolfowitz, ending a furor over favoritism that blew up into a global fight over American leadership, announced his resignation as president of the World Bank Thursday evening after the bank’s board accepted his claim that his mistakes at the bank were made in good faith.

The decision came four days after a special investigative committee of the bank concluded that he had violated his contract by breaking ethical and governing rules in arranging the generous pay and promotion package for Shaha Ali Riza, his companion, in 2005.

The resignation, effective June 30, brought a dramatic conclusion to two days of negotiations between Mr. Wolfowitz and the bank board after weeks of turmoil.

“He assured us that he acted ethically and in good faith in what he believed were the best interests of the institution, and we accept that,” said the board’s directors in a statement issued Thursday night. “We also accept that others involved acted ethically and in good faith.”

In the carefully negotiated statement, the bank board praised Mr. Wolfowitz for his two years of service, particularly for his work in arranging debt relief and pressing for more assistance to poor countries, especially in Africa. They also cited Mr. Wolfowitz’s work in combating corruption, his signature issue.

Mr. Wolfowitz said he was grateful for the directors’ decision and, referring to the bank’s mission of helping the world’s poor, added: “Now it is necessary to find a way to move forward. To do that I have concluded that it is in the best interests of those whom this institution serves for that mission to be carried forward under new leadership.”

Mr. Wolfowitz’s negotiated departure averted what threatened to become a bitter rupture between the United States and its economic partners at an institution established after World War II. The World Bank channels $22 billion in loans and grants a year to poor countries.

But he left behind a place that must heal its divisions and overhaul a flawed, cumbersome structure that had allowed the controversy over Mr. Wolfowitz to spread out of control.

People close to the negotiations said that Mr. Wolfowitz had agreed not to make major personnel or policy decisions between now and June 30. Some bank officials said he might go on an administrative leave and cede day-to-day functions to an acting leader, but that might not be decided until Friday.

President Bush earlier in the day praised Mr. Wolfowitz at a news conference but signaled that the end was near by saying he regretted “that it’s come to this.” A White House spokesman, Tony Fratto, said, “We would have preferred that he stay at the bank, but the president reluctantly accepts his decision.”

More important for the bank’s future, Mr. Fratto said, President Bush will soon announce a candidate to succeed Mr. Wolfowitz, quashing speculation that the United States would end the custom, in effect since the 1940s, of the American president picking the bank president.

Many European officials previously indicated that they would go along with the United States’ picking a successor if Mr. Wolfowitz would resign voluntarily, as he now has.

Treasury Secretary Henry M. Paulson Jr. said Thursday that he would “consult my colleagues around the world” before recommending a choice to Mr. Bush, in what seemed to be an effort to assure allies that the United States would not repeat what happened in 2005 when Mr. Bush surprised them by selecting Mr. Wolfowitz, then a deputy secretary of defense and an architect of the Iraq war.

Leaders of Germany and France objected but decided not to make a fight over the choice and risk reopening wounds from their opposition to the war two years earlier. Some also argued that Mr. Wolfowitz, as a conservative seeking to write a new chapter in a career that had been focused on national security, might bring new support to aiding the world’s poor.

Soon after Mr. Wolfowitz took office, however, he engaged in fights in various quarters at the bank over issues including his campaign against corruption, in which he suspended aid to several countries without consulting board members, and his reliance on a small group of aides.

Mr. Wolfowitz’s resignation, while ending the turmoil that erupted in early April over the disclosure of his role in arranging Ms. Riza’s pay and promotion package, will not by itself repair the divisions at the bank over his leadership, bank officials said Thursday evening.

By all accounts, the terms of Mr. Wolfowitz’s exoneration left a bitter taste with most of the 24 board members, who represent major donor countries, as well as clusters of smaller donor and recipient countries. Most had wanted to adopt the findings of the special board committee that determined he had acted unethically on the matter of Ms. Riza.

But the closest the board came to criticizing Mr. Wolfowitz was saying in that “a number of mistakes were made by a number of individuals in handling the matter under consideration and that the bank’s systems did not prove robust to the strain under which they were placed.”

Also angered was the bank’s staff association, which had called for Mr. Wolfowitz’s resignation in early April. The bank’s internal blogs were filled with denunciations of the action on Thursday evening.

Late in the evening, the association issued a statement saying, “Welcome though it is, the president’s resignation is not acceptable under the present arrangement,” and that it “completely undermines the principles of good governance and the principles that the staff fight to uphold.”

The association represents most of the 7,000 full-time employees at the bank in Washington. Their unhappiness could be a crucial factor in the bank board’s ability to heal the wounds left by the fight over Mr. Wolfowitz. It appeared likely that after Mr. Wolfowitz’s departure there would be a departure of several top aides, including Robin Cleveland, who officials said was involved in the negotiations over the statements accompanying his departure.

During the day, as word spread throughout the institution that Mr. Wolfowitz was close to a deal, some officials said that one of the obstacles was his compensation package. But there was no information Thursday night on whether he would receive any sort of severance package or pension, or be reimbursed for legal fees from his long battle.

Mr. Wolfowitz’s pay package was $302,470 in salary as of 2004 — the bank pays any of the taxes on that sum — and $141,290 in expenses. His contract calls for him to be paid a year’s salary if he is terminated, but it was unclear whether his resignation would be considered a termination as defined by the contract.

Mr. Wolfowitz’s fight for vindication was led by his lawyer, Robert S. Bennett, and negotiated at the bank by the British director, Thomas Scholar, a close associate of Gordon Brown, the chancellor of the Exchequer who is to become prime minister this summer.

Copyright 2007 The New York Times Company

Wolforwitz - gone.
Rumesfeld - gone
Gonzalez
Negroponte -