Paul Wolfowitz and the World Bank

Six Questions for Walker Todd on Paul Wolfowitz and the World Bank

DEPARTMENT Washington Babylon
BY Ken Silverstein
PUBLISHED April 27, 2007

Walker Todd, an attorney and economic consultant, is a visiting research fellow and instructor at the American Institute for Economic Research in Great Barrington, Massachusetts. Between 1985 and 1994, Todd was assistant general counsel and research officer at the Federal Reserve Bank of Cleveland; before that was an attorney in the Legal Department of the Federal Reserve Bank of New York. Todd has been on four World Bank country missions and in 2004 organized a conference on World Bank and IMF reform. I spoke to him by phone yesterday about Paul Wolfowitz's tenure at the World Bank.

1. Should Paul Wolfowitz be fired as head of the World Bank?

I don't think he deserves to be fired because of his role in seeking a raise for his girlfriend, but he is in a situation where, politically, it's impossible for him to stay. There's a lot of hypocrisy on the part of some of his critics from foreign governments, who are saying that he has no credibility on corruption because of all this. This is pretty petty and their corruption is grand. But because of the relationship with his girlfriend, it's impossible for him to prosecute an anti-corruption campaign, so he needs to go.

2. Wolfowitz's supporters credit him with initiating an anti-corruption drive at the Bank. How successful has he been?

Anti-corruption initiatives at the Bank started under Wolfowitz's predecessor, James Wolfensohn. He scaled back aid to Asian countries that were notorious for corruption, such as Indonesia and the Philippines. Wolfensohn also had appointed an excellent anti-corruption czar, Masood Ahmed. Wolfowitz named his own anti-corruption official, someone he brought with him from outside of the Bank and who was not able to be effective. To his credit, Wolfowitz did try to target corruption in Africa, but it's too early to know if his initiatives will bear fruit.
“Wolfowitz should have known that he needed to be careful about creating the perception that he was a tool of American foreign policy.”

3. Wolfowitz cut off loans to Uzbekistan over the corruption issue. Are there other corrupt regimes that have been spared a loan cut-off, and if so, has politics played a role there?

It's a fair criticism to say that he's been inconsistent in the application of anti-corruption measures. In Uzbekistan, the World Bank became more rigorous only after the government threw out the United States from military bases. That made it seem as if a country's relationship to the United States foreign policy apparatus was more important to the World Bank than how that country was delivering on internal reforms and good governance. Wolfowitz should have known that he needed to be careful about creating the perception that he was a tool of American foreign policy. People never accused Wolfensohn of that, yet it was a trap that Wolfowitz walked into and didn't seem to care much about. Wolfowitz has a certain arrogance. He's an adherent of Leo Strauss, and the Straussians are an odd bunch—their school of thought is “Jeremy Bentham meets the Plato of Plato's Republic on a bad day.” They believe in government by the elite, ostensibly for the greater good, but the elite decides what the greater good is.

4. What accounts for the Bank's general failure to help the poor?

For years, the way you got ahead at the World Bank was to disburse loan money come hell or high water. So the money went out the door, no matter whether it was likely to get stolen or not. It should be a development agency, but it operated like a commercial bank. Many of the projects it funded were not well thought out—the Aswan High Dam in Egypt, for example, and the Three Gorges Dam in China (Update: the World Bank initially voiced support for the Three Gorges project but backed out in the face of criticism). Only in recent years did it begin to take seriously initiatives like micro-credit and direct lending to the poor.
“ They believe in government by the elite, ostensibly for the greater good, but the elite decides what the greater good is.”

5. Who has benefited more from the Bank's programs, First World countries or Third World countries?

In the 1980s, when the Third World debt crisis emerged, the bulk of the World Bank's lending efforts were aimed at propping up countries that were having trouble paying off their loans to foreign banks. The Bank made what it called “structural adjustment loans,” which were used to finance massive layoffs and early retirement of civil servants. It was really just a euphemism for a bailout for First World banks, so structural adjustment was very helpful to banks in New York and London, but didn't do much good for the average citizens of developing countries. Other major beneficiaries have been First World contractors who provide the goods and services that World Bank money pays for—somebody has to sell all the cement for all those dams—and First World consultants who are paid to provide technical advice. Big beneficiaries in the developing world are the local elites—the bright young lads and ladies who get good jobs and career opportunities at the Bank.

6. How should the World Bank be reformed?

It should gradually transition from being a lending institution to a grant-making organization. Critics say that over time that means the Bank would go out of business, since it would eventually run out of money. That answer to that is, “So what?”




The World Bank: Worse than Wolfowitz
DEPARTMENT Washington Babylon
BY Ken Silverstein
PUBLISHED April 23, 2007

Paul Wolfowitz's conduct at the World Bank is outrageous and he deserves to be fired—although, let's face it, any woman who would sleep with him does deserve a raise—but let's not be romantic about his Bank opponents. To hear it from them, once Wolfie is out the door, the Bank will get back to its core mission. If by core mission they mean rewarding corrupt, Third World elites and making the poor poorer, I think they'd be correct.

There are few organizations that have done more harm to the people of the planet than the World Bank. During the 1960s and 1970s, it played a huge role in creating the global debt crisis that decimated the Third World by approving huge loans that shored up tinpot dictators like Mobuto Sese Seko in Zaire and the generals that ruled most of Latin America. The loans were unpayable, so the countries inevitably had to take out fresh loans to pay off old ones, leading to a never-ending spiral of debt. Beyond that, World Bank funds were frequently used to pay for white elephant projects—like dams that never generated a kilowatt of electricity and highways that destroyed rain forests—and much of the money found its way into the pockets of crooked government officials and the balance sheets of First World banks.

Then came the 1980s and 1990s, when the Bank became a big booster of neoliberal policies. That meant deregulation, reduced social spending (in order to save money that could be used to pay off old loans), and privatization of the same state-owned companies whose creation the Bank had previously encouraged. All of this failed just as abysmally as the Bank's prior policies. “Despite an intensified campaign against poverty, World Bank programs have failed to lift incomes in many poor countries over the past decade, leaving tens of millions of people suffering stagnating or declining living standards,” the Washington Post reported last year, summarizing a report by the Bank's own autonomous assessment arm. Indeed, the few countries that in recent years have succeeded in reducing poverty—China, to take the most prominent example—have done so by aggressively rejecting the Bank's advice.

Wolfowitz is often lauded for allegedly attacking corruption at the World Bank, but his record on that matter is spotty at best. He cut off loans to Uzbekistan, which had blocked the Bush Administration's access to military facilities, but has kept lending money to numerous regimes that are friendly to the United States. And an unnoted irony in the current controversy is that Wolfowitz's main supporters in his fight to keep his job are African leaders, most of them hardly models of civic virtue.

But what of Wolfie's Bank critics? Many World Bank employees are well-intentioned and they seem sincere in their outrage. Because of the Iraq war, Wolfowitz was unpopular when he came to the Bank. He infuriated employees by bringing in Robin Cleveland and Kevin Kellems, overpaid, arrogant Bush Administration hacks, and then further alienated senior staff by cutting them out of the decision-making loop.

However, hating Wolfowitz doesn't make you a saint. Some of those Bank senior vice presidents and managing directors complaining about the hefty pay raises Wolfowitz arranged for Shaha Riza don't have much credibility given that their salaries, according to the Bank's annual report, are hovering in the range of $300,000 annually—and that's tax free and doesn't include generous perquisites.

One person with whom I spoke who knows the Bank well said that many of Wolfowitz's critics have been unenthusiastic about any effort to root out corruption. “Some of them believe,” said this person, “that corruption is inevitable and it's not the Bank's job to fight it. Others say he's been selective about the issue, as with the case of Uzbekistan. And others come from countries where they know people who have done very well from corruption and so their attitude is, ‘What's wrong with a little bribery?’ They're using the uproar about his girlfriend's salary as a pretext to get rid of him, but there are no white hats on either side.”

This is no defense of Wolfowitz and I'll be the first to celebrate if he gets the boot. But I wouldn't expect that outcome will actually mean much for the world's poor.
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The Persistently Poor
An Internal Report Criticizes World Bank's Efforts on Poverty

By Peter S. Goodman
Washington Post Staff Writer
Friday, December 8, 2006; D01

NEW YORK, Dec. 7 -- Despite an intensified campaign against poverty, World Bank programs have failed to lift incomes in many poor countries over the past decade, leaving tens of millions of people suffering stagnating or declining living standards, according to a report released Thursday by the bank's autonomous assessment arm.

Among 25 poor countries probed in detail by the bank's Independent Evaluation Group, only 11 experienced reductions in poverty from the mid-1990s to the early 2000s, while 14 had the same or worsening rates over that term. The group said the sample was representative of the global picture.

"Achievement of sustained increases in per capita income, essential for poverty reduction, continues to elude a considerable number of countries," the report declared, singling out programs aimed at the rural poor as particularly ineffective. Roughly half of such efforts from 2001 to 2005 "did not lead to satisfactory results." During that period, new World Bank loans and credits aimed directly at rural development totaled $9.6 billion, or about one-tenth of total bank lending, according to the group.

In a statement distributed with the report, World Bank management rejected its assessment as "overly bleak," arguing that the overall trend is improving in every region except Africa. Bank administrators noted that reducing poverty requires economic growth, something they said the world has been enjoying: Over the past two years, developing countries collectively grew by about 5 to 6 percent a year, excluding swiftly developing China and India. Even sub-Saharan Africa has grown by more than 4 percent annually over the past five years.

But the study found that growth has rarely been sustained, exposing the most vulnerable people -- the rural poor -- to volatile shifts in their economic fortunes. Per capita income rose continuously from 2000 to 2005 in only two in five of the countries that borrowed from the World Bank, the study reported, and it increased for the full decade, from 1995 to 2005, in only one in five.

The study emphasized that economic growth is, by itself, no fix: How the gains are distributed is just as important. In China, Romania, Sri Lanka and many Latin American countries, swiftly expanding economies have improved incomes for many, but the benefits have been limited by a simultaneous increase in economic inequality, putting most of the spoils into the hands of the rich and not enough into poor households, the study concluded.

In Georgia, the bank has helped foster growth by lending in support of the oil industry, but this has created few jobs and had a negligible impact on poverty, the study found. In Brazil, on the other hand, there has been little growth but significant advances against poverty because wealth has been distributed more evenly.

"For a sustained reduction in poverty over a period of time, it really pays to worry about both growth and distribution," said Vinod Thomas, director-general of the Independent Evaluation Group. "It has been a mistaken notion that you can grow first and worry about the distribution later."

Overall, from 1990 to 2002, the percentage of the world's people who subsist on less than $1 per day declined from 28 to 19, according to World Bank research. But officials with the evaluation group noted that much of the advance was registered in China, which has rejected many of the tenets of the development model advocated by the West and barely relied on the largesse of the World Bank.

"If you take out China, the numbers would be unfavorable," Thomas said. "The sheer numbers of people living under the $1-a-day definition of poverty has been stubbornly high." By the bank's reckoning, 1.1 billion people subsisted at that level in 2001.

Some of the report reads like an amalgam of the criticisms that have been leveled against the World Bank for years by outside activists. The report chides the bank for failing to help cushion poor people against price and currency liberalizations, for focusing on the fiscal sustainability of pension systems to the detriment of the poor and for promoting the privatization of power industries without thinking enough about wiring up the indigent.

It criticizes the bank for failing to tailor projects to local conditions and for sometimes attempting to accomplish more than national governments can handle. In Uganda, the bank assisted the government with an ambitious effort to increase school enrollments but failed to plan for sufficient teacher hiring or classroom construction. By last year, Uganda's schools had an average of 94 students per classroom, and each book was being shared by three pupils.

Critics of the bank used the report to claim vindication and call for change in the institution's policies -- in particular, loan conditions that sometimes force poor countries to slash spending on social services and reduce price controls on food. "At a certain point, you have to say, 'This is policy failure,' " said Mark Weisbrot, an economist and co-director of the Center for Economic and Policy Research, who has long argued that the bank's emphasis on austerity and privatization has increased poverty.

World Bank administrators said it would be simplistic to view rising poverty rates as a sign that their projects do not work, noting that the worst-off borrowing countries are grappling with war, famine and natural catastrophes.

"There's a lot that has to go right for country-wide incomes to improve other than just good projects financed by the World Bank," said Vikram Nehru, director of the bank's economic policy and debt department. "These countries are in very difficult circumstances."

Still, Nehru said the bank could benefit from greater consideration of what is actually possible in any given country.

"We need to be much more sober in our assessments," he said.
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