REVIEW & OUTLOOK
Banking on Wolfowitz
And you thought Iraq was difficult.
Our World Bank sources tell us that when news was received yesterday of Deputy Defense Secretary Paul Wolfowitz's nomination to succeed outgoing Bank President James Wolfensohn, a collective shudder could be felt throughout its Washington headquarters. It's an affront to multilateralism. It will make the Bank look like an arm of American imperialism. It will spark a revival of the antiglobalization movement the Bank has tried so hard to "dialogue" with and co-opt.
Whatever. The World Bank is a dysfunctional bureaucracy that requires deep reform if it is to recover the trust of American taxpayers and survive as a relevant institution in the 21st century. That President Bush named as talented and senior a public servant as Mr. Wolfowitz is a sign he still takes the World Bank seriously--something we sometimes find hard to do--and that he means to reshape its cash-input-driven culture, which so far has produced negligible outputs for its ostensible clients, who are the world's poor.
To gain a sense of what ails the Bank, it's useful to read the bipartisan 2000 Meltzer report on international financial institutions, which counts liberal development guru Jeffrey Sachs among its authors. The report is a bit dusty, but since the Bank fiercely resisted its conclusions, the analysis remains valid. Inter alia, the report found that 70% of the World Bank's "non-aid" funds go to 11 countries that already have easy access to capital markets, such as China, Mexico, Brazil and Thailand.
It found that beneficiary countries that do not have access to markets mostly "remain poor because their political system is unstable, private property rights are very limited, the judicial system is weak or subservient, or the government is corrupt," and that assistance to such countries "at best provides relief [and] at worst . . . supports corruption or programs that waste scarce local and external resources."
The report also devastated the Bank's internal culture. It found "weak counterbalance to the incentive to lend" and "no penalties for project failure." It found that by the Bank's own evaluations, 59% of its investment programs in the 1990s failed. Finally, the report noted that while Bank lending had doubled in 30 years, to $32.5 billion in 1999, its share of overall private sector capital flows to developing countries was only about 2%, basically an irrelevance.
Upon such terrain Mr. Wolfowitz's parachute now lands. He should be prepared for some stiff resistance to his reforms, including high-level departures to whatever is the World Bank equivalent of Canada. But so be it: The Bank can hardly demand good governance of its client states if it is incapable of imposing some internal standards and controls.
Outsourcing its auditing functions--a move resisted by Mr. Wolfensohn--is just the place to start. Another is to steer the Bank further away from making loans toward grants, tie grants to performance, and measure performance using well-defined metrics: miles of road built, number of students graduated and so on.
Some of Mr. Wolfowitz's critics were already asking yesterday what expertise a "neo-con" security intellectual could possibly bring to international finance. But the former diplomat has plenty of knowledge of the Third World, and has seen the Bank on the ground, in stints as Ambassador to Jakarta and Assistant Secretary of State for East Asia. He served in both posts in the 1980s, when the benefits of free-market reforms were blossoming in that part of the world.
More important, Mr. Wolfowitz is willing to speak truth to power. In Indonesia, and before that in the Philippines, he saw earlier than most, and spoke publicly about, the need for dictators to plan democratic transitions. Too bad they didn't take his advice. His predecessor at the Bank has devoted a lot of time to berating democratic donor states for being too "stingy" with their largesse, as if another $100 billion is all that stands in the way between the poor and their redemption.
In fact, it is the world's dictators who are the chief causes of world poverty. And it seems to us that if anyone can stand up to the Robert Mugabes of the world, it must be the man who stood up to Saddam Hussein.
