IFI governance


From Wolfowitz to Zoellick: an opportunity lost

28 June 2007

versión en español

The worst crisis faced by the World Bank in over 60 years brought business to a halt for over six weeks. What really happened, what unfinished business remains, and what lessons have been learned?

In early April, US NGO Government Accountability Project revealed payroll data for Shaha Ali Riza, a Bank communications officer seconded to the US State Department to avoid a conflict of interest over her ‘romantic links’ with then incoming president Paul Wolfowitz. The data confirmed allegations that Riza had received pay rises which grossly exceeded those allowed by Bank staff rules. Wolfowitz, who had made the fight against corruption his signature issue (see Update 55, 53), had pushed the deal through.

a track record of arm-twisting, blackmail, pay-offs and abuse of power

As the spring meetings opened, a media feeding frenzy had begun. More questions were being asked about the details of the deal, the legality of the Libyan-born UK-national’s secondment to the US State Department (State is still today reviewing “anomalies” in security vetting and legal complications in the transfer of Riza from the Bank to its Middle East section) and the nature of her work for an organisation set up by US vice president Dick Cheney’s daughter Elizabeth to promote democracy in the Middle East (where she was seconded subsequent to the State Department placement). Questions were also being raised about the propriety and legality of Wolfowitz’s role in securing Riza a position with a Defence Department contractor in 2003, before his arrival at the Bank.

The Bank’s board formed an ad hoc committee to investigate. Initially Wolfowitz apologised for his “mistake” and said he would “fully cooperate” with the board’s investigation. In an unprecedented move, ministers on the Bank’s highest body, the Development Committee, commented in the spring meetings communiqué: “We endorse the board’s actions in looking into this matter and we asked it to complete its work. We expect the Bank to adhere to a high standard of internal governance.”

The more that came to light, the longer grew the list of those calling for Wolfowitz’s head, including the Bank staff association, 37 of 39 country directors, 42 of the Bank’s senior former executives, current managing director Graeme Wheeler, and the Independent Evaluation Group who lamented that “the ability of staff to carry out daily interactions with clients, as well as the institution’s ability in convening partners, is eroding”. Inside the Bank, work had come to a virtual halt under what staffers came to call “The Current Situation” or TCS.

Wolfowitz then hired attorney Robert Bennett, who accused detractors of leading a “smear campaign”, attempted to discredit members of the board and staff, and threatened to reveal board and staff salaries. However, former general legal counsel Roberto Dañino, former board member and chair of the ethics committee Ad Melkert, and former head of human resources Xavier Coll, rebutted all attempts to pin the blame for the affair on staff and the board.

European, Asian and Latin American board members were in the resign camp. A spokesperson for German development minister Heidemarie Wieczorek-Zeul was the first official to declare outright: “voluntary resignation [would be] the best solution for the Bank and its goals”. The US, Japan, Canada and Africa were said to remain defenders of Wolfowitz. The position of African ministers was made particularly difficult – Wolfowitz’s support for debt relief in some African countries and veiled US threats made it difficult for them to call for his resignation. African civil society groups distanced themselves from the insinuation that ‘Africa backed Wolfowitz’.

After several delays as the board attempted to counteract Bennett’s charges of a “rush to judgement”, the ad hoc group released its findings 14 May. It concluded that Wolfowitz had violated the Bank’s code of conduct and a string of staff rules, and that his involvement in Riza’s external assignment constituted a conflict of interest.

Three agonising days later, Wolfowitz resigned. Diplomatic niceties required the board to retreat from the clear-cut conclusions of the ad hoc committee: “He assured us that he acted ethically and in good faith in what he believed were the best interests of the institution, and we accept that.” The date of his resignation was set for 30 June, with much speculation – neither confirmed nor denied – that his contract included a two-year service bonus which came due in June.

The staff association called on the board to place Wolfowitz on administrative leave effective immediately, and tellingly “to protect staff against any retaliation” to prevent Wolfowitz from making any decisions affecting the work of the Bank or its staff.

While Wolfowitz never embarked on a threatened ‘farewell tour’ to Africa, before his departure he did name Australian Simon Stolp, former consultant for the US Department of Defence, as Iraq country director. Besides angering Bank staff who object to being pushed into Iraq, Stolp follows in the pattern of inadequately experienced political appointees. The Bank panel which interviewed candidates for the job said they “felt uncomfortable as to whether he could become a credible, substantive representative of the Bank with Iraqi and donor counterparts, on account of his weak analytical background, and lack of knowledge about the Bank.”

The gang of six

A critical matter left unresolved is the fate of the ‘gang of six’ – high-level appointments made by Wolfowitz.

Most controversial were former Bush administration officials Kevin Kellems, Robin Cleveland and Karl Jackson, appointed as ‘special advisers’ and given pay deals equivalent to the most senior Bank staff. Kellems was linked with a number of embarrassing indiscretions and is suspected to be the architect of an anonymous and poorly judged attack on UK development minister Hilary Benn at the Singapore annual meetings in 2006. In early May, he resigned.

Cleveland, intensely disliked by most staff, remains at the Bank. Against Bank protocol, she vetted senior appointments, handing out posts to key allies of the Bush administration. It was also Cleveland who briefed Marwan Muasher, the newly arrived Jordanian director for external relations, on how to respond to the Riza affair. They agreed on a statement that included misleading claims.

Juan José Daboub, former finance minister under the right-wing ARENA government in El Salvador, was appointed managing director by Wolfowitz in mid 2006. He was first caught attempting to delete all references to family planning in both the Madagascar country assistance strategy and the Bank-wide health strategy (see World Bank health strategy rejected). Bank chief scientist Robert Watson then confirmed that Daboub had “literally tried to eliminate the words ‘climate change’ everywhere in [the Clean energy investment framework] policy paper”.

Ana Palacio, former foreign minister under the right-wing Aznar administration in Spain, was appointed general legal counsel in mid 2006. Questions are being asked about the qualifications of her appointed staff and her professional conduct. Suzanne Rich Folsom, an American attorney, was appointed head of the Bank’s department of institutional integrity by Wolfowitz end 2005. Question marks here about Folsom’s willingness to investigate charges against key Wolfowitz allies.

Opportunity lost

A string of high-profile commentators, including former Bank chief economist Joseph Stiglitz, UN secretary general Ban Ki-Moon, and South African finance minister Trevor Manuel, called for an end to the gentleman’s agreement which sees the Americans appoint the head of the Bank and the Europeans the director of the IMF. Over 700 participants in a poll conducted by US development think tank Center for Global Development (CGD) rejected the traditional selection prerogative of the US by large margins, with equally strong support for an open, transparent, competitive selection process.

A glimmer of hope came in a 29 May board statement, which gave a 15 June deadline for the submission of nominees to replace Wolfowitz and outlined key qualities which any candidate should possess. These qualities included leadership, management experience in international organisations, willingness to tackle governance reform, commitment to development, and political objectivity and independence.

Immediately the Bush administration moved to crush any challenge to the status quo. The same day, after little or no consultation, they nominated Robert Zoellick, former US deputy secretary of state and lead trade representative. NGO reactions were universally unfavourable. New economics foundation’s David Woodward highlighted “a track record of arm-twisting, blackmail, pay-offs and abuse of power in the WTO to promote US interests at the expense of the developing world”. Zoellick has close ties to the private sector, coming immediately from a stint at US investment bank Goldman Sachs and previously serving on the advisory board of disgraced US energy giant Enron. He has also served on the board of international environmental NGO, the World Wildlife Fund.

Zoellick immediately embarked on a world ‘listening’ tour of Africa, Europe and Latin America. He endorsed the Bank’s focus on Africa, hailed the importance to development of completing the Doha round of trade talks, and rebuked Venezuela’s leader Hugo Chavez.

After a bruising battle with the US administration over the Wolfowitz resignation, no country had the diplomatic nous to put forward an alternative candidate. This despite a wealth of qualified developing country possibilities and some serious concerns about Zoellick’s suitability. The CGD poll ranked Zoellick seventh out of nine candidates based on criteria similar to those chosen by the board. Zoellick was confirmed as president 25 June and begins his duties immediately in July.

The task ahead for Zoellick is daunting. In the short term, he will have to deal with staff discontent, the legacy of Wolfowitz appointees, the IDA replenishment (see Update 55) and follow through on the implementation of Wolfowitz’s anti-corruption drive. In the medium term, Zoellick will have to decide how much priority to give to the Bank’s role in addressing climate change. He will also need to distance himself from US interference in the Bank’s reproductive health work. Bigger questions about the Bank’s role in an increasingly competitive international aid architecture and fundamental reform of its governance structure loom on the horizon. All eyes will be on his steer of an anticipated strategic review; chief economist Francois Bourguignon has already begun an analysis of the implications of a changing international aid architecture for Bank policy.

What have we learned?

One of the most damaging episodes in the Bank’s sixty year history presents a number of issues:

  • Will future presidents learn from Wolfowitz’s fatal mistake? His initial decision to surround himself with Bush administration insiders confirmed the suspicions of his detractors. Those insiders then directed appointments and the Bank’s agenda, turning staff against the president.
  • The staff association played a decisive role in first placing and then maintaining the debacle in the public eye. Could Bank staff start to throw their weight around more on issues where highly-trained development professionals should have more objective insight than political appointees, such as on climate change, impact assessment or governance reform?
  • Better relations with sympathetic staff are what NGOs need if they are to do a better job understanding the Bank, working with Southern shareholders, and exposing inner failings before they reach crisis levels.
  • The board failed in its oversight of the president. Processes must be put in place for the board to evaluate the performance of the president against a work plan, and for the performance of the board itself to be evaluated. An initiative by the New Rules for Global Finance coalition on IMF board accountability should be instructive.
  • A leaked memo from senior Bank managers calls for greater separation of powers between the executive office and the legal, personnel and anti-corruption functions of the bank. The board would do well to listen.
  • Best practice whistleblower protections are needed to ensure that staff come forward sooner if such incidents arise and that they are heeded.
  • The governance structure of the Bank is broken. The board must immediately end the gentleman’s agreement on leadership selection, and introduce democratic principles to the governance of the Bank. If they don’t, many countries will simply go elsewhere.