The Hindu Business Line : World Bank's problem Paul

When Mr Paul Wolfowitz was appointed President of the World Bank, developing countries were dismayed . Once he took over the functioning of the Bank, the staff described the atmosphere as "at a funeral."

Mr Moises Naim, editor of Foreign Policy, said the Wolfowitz nomination could "turn the World Bank into an American Bank." Prof Paul Krugman modified it to "an ugly American Bank" (The New York Times, March 18, 2005). All this clearly suggests that Mr Wolfowitz was a troubled man from Day One .

In the earlier months, the trouble was with his loyalty to the Bush administration and Neocon ideology. His involvement with the policy that led to the war on Iraq continued to disturb many. Within days of the war, he informed Congress that Iraq's oil revenues could pay for the war and also cover the cost of reconstruction. More than a show of unilateralism, it revealed a high level of immaturity fuelled by impudence.

The war that followed raised crude oil prices and added another dimension to global financial imbalances. Four million Iraqis had to leave their country; a UN conference is seeking global assistance for their rehabilitation. It also had an adverse effect on the Bush administration; it weakened the President who had to seek subventions from a recalcitrant, Democrat-controlled Congress to pursue the war.

Public relations exercise

Mr Wolfowitz was well aware that not all Arabian perfumes can clear the air. He knew he had to continue regretting his Iraqi legacy even after joining the Bank. Reports suggest that before the approval of his nomination , he lobbied with a number of Foreign Ministers at the Bank. He is believed to have travelled to many countries to show his human face and his determination to alleviate poverty in developing countries especially Africa. A massive public relations exercise indeed.

Once he took over at the Bank, the fear among many observers was not with his Iraqi misadventure but his style of functioning. The staff feared that at a time when the Bank had disowned its earlier policies and got involved in poverty-alleviation programmes, Mr Wolfowitz could reverse the process with his State Department baggage.

On his arrival, Mr Wolfowitz declared his intention to streamline the management structure. Five Managing Directors left the Bank after he joined; new replacements were not in place even after a year. Financial Times reported that power has gravitated to his immediate circle - mainly Republican stalwarts, prompting agitation among the career staff" (Financial Times, January 24, 2006). In an editorial, the Financial Times went on to caution that Mr Wolfowitz could not give the Bank a greater focus or overhaul its management operations in more than 100 countries by relying on a handful of aides from the US. .

Poor style

Growing cronyism led to serious dissensions within the Bank management. Half the Bank's 29 highest-level executives left since June 2005. Among them were veterans such as Christian Poortman, Vice-President for the Middle East. Referring to the exodus, Eckhard Deutscher, the German Executive Director, told Bloomberg, "The Bank needs to be very careful not to lose too much of its human capital." Sadly, Mr. Wolfowitz had his own style.

In the place of old hands, he appointed Republicans with a strong association either with the US President Bush, or the Vice-President, Mr Dick Cheney. Many country directors felt that he was relying on a coterie of political advisers who had little expertise in development.

One of the issues that led to clashes with senior executives was Mr Wolfowitz's covert strategy to increase the Bank's presence in Iraq. Many Executive Directors, especially the German Director, were sceptical of these operations with regard to the safety of staff. However, Mr Wolfowitz pushed ahead. As Nancy Birdsall, former director of the Bank's Policy Research Department, said, his plans to step up Bank's role in Bagdad "exposes him to charges of attempting to provide political cover for the White House." To counter such criticism, Mr Wolfowitz began to focus attention on poverty reduction in Africa.

Another important issue that led to attacks on Mr Wolfowitz by developing countries, civil society organisations and most Executive Directors, was his relentless pursuit of a single point agenda — eradication of corruption. He was seen to be arbitrary, unimaginative and dictatorial. He suspended loans and contracts to countries including India, Chad, Kenya, Congo, Ethiopia and Bangladesh.

Mr Wolfowitz is by no means a moralist. His anti-corruption campaign was the continuance of the Neocon ideology of "good governance" taken to its extremes. He had mixed up his priorities — he did not realise that in many developing countries, development and building of sound institutions deserve higher priority than preventing corruption. As the Finance Minister, Mr Chidambaram, said at the Development Committee Meeting in September 2006, the Bank's new stance carried the risk "of governance becoming a conditionality for development... Development cannot wait for improved governance and a corruption-free world. Both must go hand in hand."

Prof Joseph Stiglitz was harsher in his criticism. As he explained, "Some critics worry about corruption in the corruption agenda itself: that the fight will be used as a "cover" for cutting aid to countries that displease the US administration. Such concerns have found resonance in the seeming incongruity of the Bank's talk on corruption and simultaneous plans to expand lending to Iraq. No one is likely to certify that Iraq is corruption-free or even ranks low on corruption internationally."

This is also borne out by the case of the Bank's loan to Uzbekistan, which was rejected in 2006. This decision came shortly after Uzbekistan decided to refuse landing rights for US aircraft fighting the war in Afghanistan. The decision to refuse the loan was taken without any inputs from the senior staff.

Fighting corruption

Anger against the Wolfowitz style of functioning peaked at the Annual Meetings of Fund/Bank in September last. There was near unanimity among the member-countries, which stressed the need for "predictability, transparency, and consistent and equal treatment across member countries." It was also decided that all decisions, should not be taken by the President personally, but by the Executive Board.

On March 20, 2007, the World Bank committed itself to a new strategy to combat corruption in its loan programme but not to cut off financing to poorly or dishonestly governed countries without consulting the Bank's Board.

Though Mr Wolfowitz expressed satisfaction over this decision, he would have realised that his wings had been clipped. He was checkmated by the fear that member-countries would not chip in with additional resources to the Bank unless the new guidelines are followed and he changed his style of functioning. The question is will he?

It was around that time that the Riza Shah affair surfaced. It is not necessary to go into the details of the sordid tale. But, ultimately, the Executive Board faulted him for wrongful actions. It did hint that he should leave the institution in its larger interests.

On April 22, as requested by the Executive Board, the Bank's Internal Evaluation Group, reported that the current problems could impair the institution's functioning and its ability to raise funds for IDA causing irreversible harm to worldwide efforts poverty reduction and sustainable development. Mr Wolfowitz remains defiant and has decided to fight it legally. Until the legal imbroglio is resolved, the Bank will remain dysfunctional without a requiem.

Mr Wolfowitz may stay in office. Having lost credibility and also the trust of the Bank staff, it is unclear how effective he can be in future. He will continue to be troubled and, like his ally President Bush, stay in office as a lame duck.

(The author, a former Finance Ministry official, has experience in international, financial and trade issues.)

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