Beware the big, bland wolf: The first year of Paul Wolfowitz at the World Bank

5 June 2006

What has most surprised World Bank watchers is how little Paul Wolfowitz has changed the institution he took over one year ago. On Africa, infrastructure, and debt relief, he has stayed the course – for better or worse – set by his predecessor James Wolfensohn. On the high-profile issue of corruption, he has created a lot of noise, but many question whether or not he has a plan. Only in his management moves has he lived up to the fears – or in some cases wishes – of his critics.

When Wolfowitz’s name was first put forward by US president Bush as a potential candidate for World Bank president on 16 March 2005, reaction was hostile. In ten days, Brussels-based NGO Eurodad had compiled a list of 1650 civil society organisations worldwide outraged by the appointment of the former Pentagon hawk and architect of the US war in Iraq to the head of the world’s largest multilateral development bank. Polls conducted by the Financial Times, and the World Bank staff association showed support for Wolfowitz dipping into the single digits.

There were fears that Wolfowitz would freeze engagement with civil society, push the kind of neo-liberal economic conditions which characterised ‘reconstruction’ efforts in Iraq, and facilitate the use of the Bank as a tool of US economic and security interests. Greeted by protests on his first day on the job, 1 June 2005, Wolfowitz stated that his priorities were Africa and good governance, and also emphasised the need to “re-engage” with middle-income countries through infrastructure financing. A year later, have the fears of Wolfowitz’s critics been realised? And how has he fared on his own stated priorities?

Wolfowitz had barely moved into his office in Washington, before he was off to visit Nigeria, Rwanda, Burkina Faso and South Africa on a whirlwind tour. That same month, at the G8 summit, the Bank was asked to elaborate an ‘action plan for Africa’. The resulting plan, laid out at the annual meetings in September 2005, is based around each country’s Poverty Reduction Strategy Paper, making more money available for strengthening governance institutions, and spending on infrastructure, education and health. Several new mechanisms have been created, focusing on investment, infrastructure and agriculture. Since then, there has been debt relief for 14 African countries and welcome Bank support for repatriation of money stolen from public accounts and ferreted away in overseas bank accounts.

Missing from the fanfare over the flurry of shiny new initiatives is questioning of the failure of the export-led, resource-intensive growth model that the Bank has been supporting in Africa for three decades. While there has been a turnaround in recent years thanks to the voracious appetite of Asian economies, the Bank itself conceded in a report in mid-2005 that after considering resource depletion and pollution damage, many countries which are touted as success stories turn out to be losers.

Former president James Wolfensohn liked to take credit for committing the Bank in 1996 to “fight the cancer of corruption”. Over the past months, Wolfowitz has ordered a halt on hundreds of millions in Bank lending to countries across the globe; initiated a framework to coordinate multilateral development banks’ anti-corruption efforts; and ordered internal reviews of Bank programmes plagued by corruption. However, his tactics have come in for severe criticism – by allowing high-profile projects to come all the way to the final stages of board approval before stepping in to postpone them, Wolfowitz appears to be aiming more at members of the US senate foreign relations committee (who have led a two-year investigation into corruption at the multilateral development banks) than at solving a complex problem. What is needed are both internal reforms in the Bank’s accountability systems, and fundamental changes in the way the organisation does business, particularly when funding infrastructure and oil, gas and mining. A recent discussion paper circulated to board members obtained by the Bretton Woods Project suggests that Wolfowitz may take steps on the former but is unlikely to touch the latter.

James Wolfensohn started his presidency by withdrawing Bank financing from a controversial dam project in Nepal over social and environmental concerns. In contrast, Wolfowitz has signalled his intention to champion ‘high risk-high reward’ infrastructure. This return to infrastructure is being driven by the financial imperative for the Bank to remain relevant in middle-income countries and from rich country interest in lucrative construction contracts. In January the Bank’s infrastructure network released a paper which outlined “lessons from the last two decades of Bank engagement”. These included: balancing growth in overall infrastructure with access of the poorest; avoiding an over-emphasis on private sector provision; designing projects to “safeguard people and nature”; and explicitly confronting corruption.

Many on the ground where the direct impact of Bank-funded infrastructure projects will be felt fear that those lessons are not being learned. Bosshard and Lawrence, of US NGOs International Rivers Network and Environmental Defense, cite the example of Pakistan’s Indus Basin irrigation system as “a prominent example of how corruption pervades economic development and distorts the priorities of infrastructure investment.” A series of Bank-funded projects has displaced over 200,000 people yet operates extremely inefficiently. It has lined the pockets of Pakistan’s Water and Power Development Agency, which accounted for close to half of the more than 31,000 complaints received by Pakistan’s anticorruption ombudsman in 2002.

The Bank approved $37 billion in debt relief for 17 countries at the end of March, effectively conceding that its previous debt relief efforts were a failure. While there was some suggestion that Wolfowitz was a positive influence on US support for the deal, impetus came from campaigns which shamed the G7 creditor countries, and the roadmap was laid out at the G7 finance ministers’ meeting in spring 2005, well before Wolfowitz started at the Bank. Serious concerns remain about economic conditionality attached to the relief, and the number of countries still living under debt burdens which prevent spending on desperately needed public services.

One of the most common ways that new World Bank presidents have stamped their authority on the institution is by embarking on organisational restructuring. While Wolfowitz has so far resisted this siren call, he has redrawn lines of accountability by stealth. Surrounding himself with former colleagues from the US government, Wolfowitz has left senior Bank staff left out in the cold. A mass exodus has been the result. Blocked out by Wolfowitz’s inner circle, and under attack from insinuations of corruption, staff morale is at an all-time low.

Adding to staff woes is the looming shadow of an organisational budget crisis, similar to that of colleagues across the street at the IMF. The Bank’s income from borrowers’ fees and investment income has fallen by over 50 per cent between 2001 and 2004. Wolfowitz is reportedly examining options for rationalising the current 30-odd vice presidencies. First on the chopping block may be the Environment and Socially Sustainable Development unit – traditionally one of the few potential allies of the environment and indigenous peoples at the Bank.

Unchanged from the Wolfensohn years has been Bank policy on civil society engagement. Wolfowitz has continued Wolfensohn’s tradition of holding ‘town hall’ meetings with civil society organisations at the spring and annual meetings. Access, both in Washington and in-country, seems largely unchanged; ditto concerns that civil society participation in key economic policy decisions remains marginal at best.

A number of questions loom ahead for Wolfowitz year two. Will the corruption crusader turn his theatrics into a coherent strategy, or will corruption simply become the new pretext for Washington imposed governance recipes? Are key US allies in the war on terror going to face the same scrutiny of their corrupt practices as ‘less important’ neighbours? And which bits of the Bank will face the axe as the budget squeeze tightens?

If he is to quell his many critics, Wolfowitz will need to show leadership in reforming the farcical governance structures of the Bank that see countries most affected by its policies with the least say in its decision-making. He needs to take decisive action to get the Bank to stop dictating borrowers’ economic policies, and ensure that the Bank really has “learned the lessons” of infrastructure. And if the big, bad wolf really wants to blow the house down, he could finally address the question of odious debt – the responsibility of the Bank and other creditors for knowingly lending to kleptocrats and dodgy projects. But don’t hold your breath.

Jeff Powell is coordinator of the Bretton Woods Project.