Controversy over Wolfowitz highlights World Bank problems

by William Neikirk

Chicago Tribune (MCT)

17 May 2007


WASHINGTON - The World Bank sprang to life from America’s bold efforts to help Europe rise from the ashes of World War II and proved valuable during the Cold War as the bank’s cheap and easy loans were employed to gain support from many needy allies.

Now, the bank is struggling to maintain its relevance in a 21st century global economy where many countries it helped, and still helps, can get all the capital they need from private sources and where fighting poverty, its main mission, has proven to be extraordinarily difficult, especially in Africa.

The protracted ethical scandal involving its president, Paul Wolfowitz, has brought the bank’s deep-seated problems to the fore, raising questions whether it needs to change the way it provides assistance to poverty-stricken nations and perhaps even shrink its staff of 10,000 employees.

Named by President Bush to the job, Wolfowitz aroused suspicion from the start from those at the bank fearful that he would pursue a political agenda by focusing on the Middle East. When Wolfowitz turned his attention to fighting corruption in many countries eligible for World Bank loans, it also stirred controversy as being too harsh.

The former No. 2 official at the Defense Department, one of the architects of the Iraqi war, found himself accused of a different kind of corruption, arranging a generous pay package and transfer for his girlfriend, Shaha Riza, a bank employee. Though a special bank panel accused him of conflict of interest, Wolfowitz refused to resign, saying the bank also bore responsibility in the case.

Although his days appeared numbered as White House officials made it clear he could no longer be effective, negotiations with the bank’s board over terms of his resignation failed to yield fruit on Wednesday.

But the bank has problems beyond the scandal. Barry Bosworth, an economist at the Brookings Institution, called it “kind of bloated” and too bureaucratic and said that U.S. presidents “have used it as a dumping ground for people who needed a political favor.”

When the U.S. and its allies created the bank in 1944 at Bretton Woods, N.H., it was agreed that the U.S. would appoint the president of the World Bank and Europe would provide the head of the International Monetary Fund. Now, some analysts say, this arrangement may have outlived its usefulness.

“There is something wrong with the way the bank is operating,” said Desmond Lachman, a scholar at the American Enterprise Institute. “It takes on too many objectives. It is very difficult to hold them to account. They would serve the international community better if they were narrow in their objectives,” such as fighting malaria, improving literacy, or providing technical assistance.

“The bank needs a better mission statement,” Bosworth said. “It doesn’t have a clear understanding of what it can do.”

Lachman and other critics said the bank should stop or scale back its lending to “middle-income” countries that now can easily borrow money on world markets without the bank’s assistance. “Seventy percent of their money is lent to countries that don’t need it,” he said.

Another critic, William Easterly, a New York University economics professor and former bank official, said that the bank has poured hundreds of billions of dollars into Africa over the years, with little measurable economic impact, as measured by gross domestic product (GDP), the annual output of goods and services.

Wolfowitz has defended the way the bank parcels out aid, saying that it allocates funds to well-governed countries where there is a good chance of success. At the World Economic Forum in Switzerland in January, he said that Asia has been a bank success story. “Five-hundred million people have escaped poverty in the last 25 years, most in East Asia,” he said.

Even though many analysts find fault with bank operations, they believe it should survive because of the prevalence of poverty in the world, albeit as a reformed institution. “You really have to focus the money more,” said Bowman Cutter, managing director of Warburg Pincus LLC in New York. “The middle-income countries should get less and the poor countries should get more.”

Also, Cutter said, the bank should “use its immense store of knowledge” to provide financial and other types of expertise to developing countries. “That can make it more relevant,” added Cutter, a former economic official in the Clinton administration. He also serves as chairman of the board of CARE USA, a relief organization.

The bank has gone through several transformations, but most analysts say that its heyday occurred under Robert McNamara, a former Defense Secretary and architect of the Vietnam War. He took over the bank in 1968 and served until 1981, aiming its resources at the poorest of the poor countries.

“I think he wanted it because of what he had done wrong in Vietnam,” Bosworth said. “I think he worked to overcome a lot of mistakes in that era.”

Now, in a new era of globalization, analysts said the bank should work to overcome mistakes that have damaged its credibility and raised questions about its relevance.

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