The world’s World Bank problem

Robert Wade
10 July 2007

The fight between the Americans and the Europeans over the fate of Paul Wolfowitz obscured the bigger question of whether the world still needs the World Bank. The immediate contest may be over and Robert Zoellick installed as the new president (nominated by the White House / United States treasury), but the question looms over everything the bank does.

Before addressing this question, however, two points should be made about the Wolfowitz affair. First, the blame for the scandal that brought him down was not entirely on his side, and on its own it would not have led to his departure. In particular, the bank's ethics committee gave him muddled advice when he approached it about a conflict of interest between him being president and his then romantic partner being a bank employee.

But in any case, the ethics issue became the lightning-rod for much broader anger over the way he was running the bank. He had brought in a small group of lieutenants from the Pentagon and United States vice-president's office who set about administering the bank in a brutal and highly ideological way. He and they showed undisguised contempt for the senior managers (advised to run an important speech about the bank's role in governance reform past the relevant vice-presidents to get their buy-in, Wolfowitz replied: "Not past this lot. That would be like casting pearls before swine.")

Robert Wade is professor of political economy at the London School of Economics. He worked as a World Bank economist in the 1980s.

He is the author of Governing the Market: Economic Theory and the Role of Government in East Asia's Industrialization (Princeton University Press, 1990) and of "Is globalization reducing poverty and inequality?", in John Ravenhill, ed., Global Political EconomyOxford University Press, 2005)

Also by Robert Wade in openDemocracy:

"Inequality of world incomes: what should be done?" (14 November 2001)

"The invisible hand of the American empire" (13 March 2003)

"Globalisation: emancipating or reinforcing?" (29 January 2007The senior managers became cowed, and spent their time trying to figure out how to minimise their vulnerability, rather than exercise their professional judgment. Those who pushed back were invited to seek employment elsewhere. The lieutenants systematically corrupted the bank's checks and balances, especially in staff recruitment and promotion (though this process was already well advanced under James Wolfensohn).

The second point relates to Wolfowitz's declaration (which he made with a straight face, and he highlighted as his biggest regret about resigning) that pushing forward the corruption agenda was his signature issue. It is true that in some countries and in some sectors corruption is a big problem, substantially lowering the productivity of investment and the legitimacy of the state. But Wolfowitz and his lieutenants defined the agenda in narrow and punitive terms, as though the bank should punish a country (refuse new loan proposals, for example) wherever corruption is uncovered.

But corruption is endemic in developing countries because they are developing countries. The corruption agenda has to be broad enough to include civil-service reform, and legal and judicial reform - yet the bank is hardly staffed up with experts in these areas. Moreover, the board and the staff also saw Wolfowitz as wanting to apply the corruption agenda selectively, as a cover for advancing United States-centric political objectives.

For example, two months after the United States was obliged to comply with an Uzbek government demand that the US should withdraw its military forces in the country, the bank announced in March 2006 that new loan proposals for Uzbekistan were suspended, ostensibly for reasons of corruption in bank projects. The bank now does have a more sensible corruption agenda, which board and staff have endorsed. But it will take some time to recover momentum because of the way corruption has been discredited by the Wolfowitz team.

The challenge of reform

The new president, Robert Zoellick, is a good choice - if the choice had to be restricted to someone in the Bush circle.

Apart from the day-to-day challenges, the biggest challenge for the new team is to find a way out of the bank's crisis of relevance. Its market has changed fundamentally in the past decade, but the bank continues to operate in much the same way and with much the same products as a decade ago and more. The challenge to reposition itself is almost as big as that faced by the March of Dimes when a cure for polio was found.

The change in the bank's market was dramatically symbolised in May 2007 when the African Development Bank held its annual meeting not in Africa but in Shanghai - an event which will be looked back on as a milestone in the history of the early decades of the 21st century.

In its traditional products - aid projects and economic policy advice to governments of developing countries - the bank faces an array of new competitors. These include China and Korea, which have become big sources of financial assistance to poorer countries; private consulting firms; private investment banks; and private foundations, like the Bill & Melinda Gates Foundation. But the bank retains a sizeable competitive advantage over these other entities based on three elements: its governmental guarantees, its own revenue base, and its global reach.

The bank can and should shift more of its activity into genuinely global problems, where private-capital markets are less likely to lend, especially for global-problem-reducing investments in low-income countries. For example, it can and should take a much bigger role in tackling one of the biggest questions of our time: how to decouple economic growth from carbon emissions. The bank has much experience of translating economic policies into investment plans and investment plans into investments on the ground. It should use this experience to take the general conclusions of the Stern report (October 2006) and the latest Intergovernmental Panel on Climate Change (IPCC) reports (2007); spell out what the general conclusions mean for specific countries, like China, Russia, India, Bangladesh, and Brazil; and then work with these governments to formulate concrete plans of action.

The bank would have to develop new financing instruments to accelerate the uptake of climate-friendly technologies. For example, a carbon fund - or since the fund should not be tied only to carbon, a "climate stabilising and adaptation" fund. Such a fund could be used to encourage a developing country government to borrow from the bank for a power station and choose a state-of-the-art minimum carbon-emission technology even though more expensive than the standard one, with the fund rather than the government bearing the incremental cost. The fund could be used to accelerate climate-friendly technologies in power, transportation (eg railways in Africa), forestry, land use, and still more.

Some of the finance could come straight from World Bank reserves. The reserves are currently $36 billion, while only $25 bn is needed to maintain the all-important triple-A credit rating. The fund would also receive grants from OECD governments and private foundations.

Also in openDemocracy on Paul Wolfowitz and the World Bank:

Alex Wilks, "US bank or World Bank?" (26 March 2005)

Sidney Blumenthal, "Paul Wolfowitz's tomb" (1 June If the world says no


To advance in this direction the bank has to address another looming question: how to decouple itself from White House/treasury control. At a dinner party a few years ago Laurence Summers - then president of Harvard, and former US deputy treasury secretary, then treasury secretary - exclaimed enthusiastically that until he entered the treasury he had not realised just how useful were the bank and the International Monetary Fund (IMF) for US foreign-policy objectives. His remark is all the more striking because he had earlier been vice-president for economics and research at the bank - so he was scarcely an outsider.

Certainly the US executive branch thinks that "we" still need the World Bank (though the Congress does not always appear to agree); and that we need the bank with its present governance arrangements, which give the US its dominance. But as some developing countries gradually become more self-confident (China, Brazil and India for example) the hope is that their governments will in one way or another assert themselves more in the governance of both the World Bank and the IMF, and ease the organisations out of the heartland of the American empire.

Any shift may be galvanised by desperation. The Americans basically run both the World Bank and the IMF (the Europeans may appoint the fund's managing director, but the Americans have a lock on the fund's number-two position, whose incumbent is often more powerful than the managing director). How long will it be before the bank's middle-income borrowers - seeing the organisation as US-dominated and concerned to impose upon them free-market policies advantageous to the US (or protective policies advantageous to the US, like intellectual-property protection of the US type) - walk away, and deprive the bank of the interest revenue which is the main component of its revenue base?

How long will it be before the developing-country executive directors on the board of the bank and fund insist - as they could if their governments were not afraid of upsetting the Americans and Europeans - it is high time that an Asian, or a Latin American, or an African or a Canadian could lead one of these organisations? How long before they say (to echo Dorothy in The Wizard of Oz): "we are not in 1944 anymore"?

At least the board of the bank had the gumption to call Zoellick to something like an "interview" before agreeing to support his nomination (even though their agreement was guaranteed just about whatever he said). A dedicated optimist might say that they were acting in the spirit of the Chinese proverb, "cross the river one stone at a time". Let's see whether Rodrigo de Rato's successor at the IMF is nominated after a search which includes non-European (and non-American) candidates.

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