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Endgame at the World Bank

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
May 14, 2007
Washington Post

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If the World Bank were a company, its share price would have fallen 25 percent amid the current leadership scandal. The board of directors wouldn’t care about the scandal’s details; it would have replaced the beleaguered CEO with someone who could lead effectively. Justice for the boss would matter less than restoring the company to good health.

After all, the company has thousands of customers, shareholders and employees. The boss is just one person, and he can find another job.

The World Bank’s customers are the poor; and their interests ought to trump the hair-splitting over whether the bank’s president, Paul Wolfowitz, overpaid his girlfriend. What matters is that Wolfowitz has lost the confidence of the bank’s shareholders, borrowers and staff — including the support of those who initially welcomed him despite his record on Iraq. He has brought about a collapse in the World Bank’s external prestige and internal morale, and he should go quickly.

The endgame may come this week, at a meeting of the World Bank’s board on Wednesday. If Wolfowitz manages to hold on to his job, it will reveal the hypocrisy of the governments to which the bank’s board answers. The Bush administration and its allies, notably the British government of Tony Blair and Gordon Brown, have gone to the microphones repeatedly to proclaim their support for development. Now that the world’s premier development organization is in shambles, these leaders have a responsibility to replace the man who caused it.

Some say the bank isn’t worth rescuing. My colleague George F. Will asserts that 90 percent of the bank’s loans go to 27 middle-income countries that can get all the development finance they need from private capital markets. But this statistic leaves out the bank’s soft-loan and grant-making arm, which serves countries with gross domestic products of less than $965 per capita. Counting that, just under half of the bank’s money went to poor countries in 2006. The middle-income countries that received the rest of the cash include such places as China and Brazil, which are home to millions of poor people.

The bank’s critics ought to understand that while capital markets are marvelous things, they can’t be expected to do everything. Private investors won’t provide loans in the midst of a crisis, as the World Bank did during the East Asian meltdown a decade ago. Private investors tend not to finance global public goods — projects that are important for the world but not a priority for any one country. The world needs to curb carbon emissions, for example, but an individual country won’t capture all the benefits of a clean coal plant, since these benefits are shared globally. Because of this “externality” problem, there is a role for the World Bank in subsidizing anti-carbon policies.

Conservatives portray resistance to Wolfowitz as the work of corrupt and cosseted World Bank bureaucrats. But there’s no evidence that the bank’s staff is particularly corrupt. A probe instigated by Wolfowitz recently uncovered 10 instances of staff fraud or corruption in 2005 and another 10 in 2006 — this at an institution of 10,000 people. As to the cosseting, that depends on your benchmark. A World Bank infrastructure expert who leaves for a private equity firm gets paid a lot more. An economist who leaves to teach at a U.S. university comes out about even once you adjust for the bank’s tax exemption and the university’s long vacations.

But the biggest misconception about the bank is that it needs the goading force of Wolfowitz to fight graft in poor countries. Even before Wolfowitz arrived in 2005, the bank was trying to plug leaks in government budgets, reform civil services and back new anti-fraud units: From 2000 to 2004 the bank’s lending to improve public-sector governance grew 11 percent annually. Wolfowitz’s goal was to take these anti-corruption efforts to the next level. The instinct was noble; the implementation horrible.

Wolfowitz seemed oblivious to research finding that corruption projects often fail; he didn’t explain how a greater investment in this field would produce value for money. He brushed off the evidence that corruption is not the overarching blockage to development but merely one blockage among many; some corrupt countries manage to fight poverty effectively. And he mishandled the inevitable recriminations from the World Bank’s board. If the bank’s president cuts off a country on grounds of corruption, he better be able to show that it was really more corrupt than other places where the bank does business.

The scandal over his girlfriend’s pay is the final nail in Wolfowitz’s anti-corruption efforts. It has created a situation in which the bank can’t publicize its new anti-corruption manual, “The Many Faces of Corruption,” because doing so would invite ridicule. Things have reached the point where anyone who believes in Wolfowitz’s anti-corruption agenda should be rooting for his departure. Surely even Wolfowitz himself can see that?

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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