from Follow the Money

Wolfowitz and the World Bank

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Paul Wolfowitz looks to be heading toward the Presidency of the World Bank. He probably was not the first choice of anyone outside the US, not even the UK. But no one seems to see much of an upside in blocking his nomination.

Wednesday’s Wall Street Journal noted (accurately) that Europeans do not want to start Bush’s second term on the wrong foot. Why repeat the contentious UN debate on Iraq in the World Bank now?

Europeans also do not want the US to block their candidates to run other multilateral institutions.

I suspect there is a third reason as well. Europeans know that if they block Wolfowitz, they won’t get a Sachs, a Stiglitz, a Summers or a Birdsall. Nor will they end up with a credible candidate from a major emerging economy. They will likely end up with another pro-war, American conservative. Remember, that when the US vetoed one German candidate to head the IMF back in 2000, the only politically acceptable alternative was another German. Blocking Wolfowitz would antagonize Bush, convince the American right that both Europe and the World Bank are worthless, and likely result in the eventual appointment of someone Europeans (and developing countries) find no more palatable.

That said, Wolfowitz’s nomination is not exactly generating much enthusiasm in the development world. I suspect that the Brits are (quietly) rather upset, despite Jack Straw’s public support. Remember, development -- and specifically helping Africa -- is a big theme of the UK’s G-8 Presidency. It is also a politically charged issue inside the UK: Blair wants the votes of the UK’s development campaigners, and to show that his close partnership with Bush is delivering tangible results for Britain. Wolfowitz’s nomination certainly doesn’t help Blair make that case.

I have three more specific concerns.

One, despite Wolfowitz’s I-am-not-Rumsfeld diplomatic charm offensive, I am not convinced Wolfowitz will bring American conservatives around to backing the World Bank. Developing a vision for the Bank that the Bush Administration, the World Bank’s other board members (remember that the Europeans put up more money than the US, and unlike the US, they are willing to put up more) and the World Bank staff all buy into will not be easy. The battle over development policy that is not being fought out now may end up being fought out in the Bank’s board at a later date. The Bank could end up paralyzed.

Two. Wolfowitz’s views on political liberalization (which extend beyond support for "regime change" in Iraq; Wolfowitz also pushed hard for the US to encourage autocratic US allies, notably the Phillippines in the 1980s, to democratize) are well-known. However, Wolfowitz’s views on development -- and the economic policies needed to jumpstart development -- are rather hard to decipher. Fareed Zakaria is right -- much of the interesting thinking on development is coming from the left, not the right. It is not clear whether Wolfowitz is willing to embrace some of this work.

Three. Wolfowitz’s experience with Iraq does not suggests he has a good grasp of development finance, which, after all, is rather central to the Bank’s mission. Wolfowitz famously said that Iraq could pay for its own reconstruction out of its own oil revenues, and relatively quickly -- it was not going to cost US taxpayers much. That forecast proved to be wildly optimistic, if not outright misleading.

It was also a judgment that in my view had real consequences. The US initially was working with a shoestring budget of only $2 billion or so of "appropriated funds" for Iraq’s reconstruction. There was a reason why the Coalition Provisional Authority initially was said to stand for "cannot provide anything." One of the richest countries in the world took over one of the poorest, and had no money of its own to spend.

The US was forced to rely on other pots of money, including the money found in Iraq’s central bank and the leftover funds in the oil for food program, before eventually conceding that more appropriated funds were needed. In the scramble for money and the general chaos of post-war Iraq, the US generally did not live up to the highest standards for financial transparency. I certainly don’t know all the details, but it certainly seems that some corners were cut and some funds were shifted around to meet what seemed to be pressing needs at the time (for more, see various reports from Iraq Revenue Watch). All this is unfortunate. The murky use of oil revenue is often a real obstacle to sustained development, and a source of the oil curse.

Moreover, once the US decided it needed more money, it had a hard time figuring out how to spend the money in ways that quickly made a difference in Iraq. That reflected, I suspect, the initial expectation that Iraq could pay for itself, the absence of a more developed aid pipeline, and over-reliance on large US contractors. The US also had an unrealistic expectations of what unleashing the "market" would do, and, in my view, was unwilling to recognize that countries emerging from autarky do not usually transition seemlessly into successful market economies (look at what happened to Russia).

Destruction often precedes creation in creative destruction. Getting rid of Iraq’s state owned enterprises meant getting rid of many people’s livelihoods, and at least a short-run increase in unemployment. The pure market mechanism for adjustment would have implied lettinbg already low wages fall further, at least initially, to create incentives for other firms to hire the workers released from the state owned firms. That process, though, takes time, even outside a war zone. No wonder the US military seems to have insisted that the Coalition Provisional Authority back off from its initial dreams of shock therapy.

Wolfowitz touts his experience in Indonesia. But that experience did not seem to help him estimate, realistically, the amount of financing Iraq needed, or to develop a sensible plan for Iraq’s economic transition. Rather the contrary, judging by the evidence. Hopefully, Wolfowitz has learned a thing or two from this experience.

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