More Problems After Wolfowitz
May 17, 2007
The World Bank Will Have to Respond to Pressure to Reform its Leadership Selection Process and Redefine its Mission
BusinessWeek
By: Richard S. Dunham
It’s not just about Paul Wolfowitz.
With the chief architect of the Iraq war’s turbulent reign at the World Bank ending on June 30, the global-development institution must face fundamental questions about its future—if it has one.
The controversy over Wolfowitz’s role in securing a lucrative pay package for his girlfriend has overshadowed other, more substantial challenges at the institution. Debates are ongoing over recent bank presidents’ top-down management style, the institution’s mission in a world awash in aid organizations, and the "gentleman’s agreement" that allows the U.S. President to choose the World Bank leader. There are deep divisions within the bank’s governing board about what direction to take. But one thing is certain: Change is coming. In the wake of the Wolfowitz scandal, "it’s going to be very difficult to put Humpty Dumpty back together again," says Edwin "Ted" Truman, senior fellow at the Peter G. Peterson Institute for International Economics.
The World Bank board announced Wolfowitz’s impending departure late on May 17. President George W. Bush, who had remained publicly loyal to his embattled ally during the month-long controversy, expressed disappointment at recent events. "I regret that it’s come to this," Bush told reporters shortly before the widely rumored resignation was made public.
New Rules from Old Hands
The first question that will face the 24-member international board of directors—and the governments they represent—is the process for choosing a new World Bank boss. Since its creation in 1946, the bank has always been run by an American citizen. The first was Eugene Meyer, publisher of The Washington Post. Other notable bank presidents have included former Defense Secretary (and auto executive) Robert McNamara, former Representative Barber Conable (co-author of the Reagan tax cuts), and investment banker James Wolfensohn.
But Bush’s 2005 choice of Wolfowitz, a deputy defense secretary and close White House ally, was deeply unpopular in most of the world. Wolfowitz, who had no banking experience, was seen by Europeans as a political patronage pick and an unwelcome reminder of a war that has isolated the U.S. from many of its historical allies. As the Wolfowitz conflict-of-interest saga unfolded, Japan was the only nation on the World Bank board that stood firmly with the U.S. in defense of the embattled chief executive.
Many diplomats and academics are suggesting a radical overhaul of the selection process to make it both transparent and merit-based. A group of 190 economists, development experts, and World Bank veterans created the New Rules for Global Finance Coalition. The group advocates an end to the informal convention that has allowed the U.S. to name the World Bank president while the European governments designate the director of the International Monetary Fund.
A Firm Atlantic Hand
But even supporters of the change acknowledge it is unlikely that both Bush and European Union leaders will give up their 60-year duopoly of power. More likely, they say, is a new system in which international banking officials prepare a list of finalists for the U.S. President, or one in which the U.S. leader sends a list of finalists to the World Bank board, from which it would then select its own leader. "This crisis provides the U.S. an opportunity to lock in a more legitimizing process without necessarily giving up the long-held right to appoint an American," says Nancy Birdsall, president of the Center for Global Development.
The person eventually chosen to lead the World Bank after Wolfowitz will have to repair the damage done by his management style, which was condemned by rank-and-file staff as imperious. Indeed, the bank’s staff association called for his resignation weeks ago, arguing that he could no longer be an effective leader.
The next bank head will need to fill several high-ranking positions left by longtime staffers who decided they could not work with Wolfowitz and his small coterie of political allies imported from the White House and Pentagon. To rebuild morale and to get the bank functioning normally once again, "it’s necessary that the next president must adopt a much more collegial work style," says Truman.
A Broader Mission?
The new president and the old board also will face fundamental questions about the bank’s role in the 21st century. Its mission of reducing poverty by spurring economic growth in the developing world is not likely to change. But amid a plethora of international financial aid efforts, ranging from the Bill & Melinda Gates Foundation to the Chinese government and Venezuela’s Hugo Chávez, the bank has to find a niche that best uses its economic-development expertise and targets its limited financial resources.
"In the 1940s, when the bank was formed, founders like [John Maynard] Keynes couldn’t imagine problems like avian flu and climate change and AIDS and money laundering crossing borders," says Birdsall.
Some board members would like to continue Wolfowitz’s anticorruption efforts to make sure that less of the money loaned by the bank is siphoned off by crooked government officials in recipient countries. Others would like to focus on dealing with complex issues such as AIDS and global warming that are low on the economic priority lists of poor countries. That’s a far cry from the bank’s first transaction in 1947, a $250 million loan to France for post-war reconstruction.
Countering Islamic Fundamentalism
William Galston, a former policy adviser to President Bill Clinton, says the World Bank could assist U.S. efforts against Islamic fundamentalists by focusing more attention on getting aid recipients to govern more effectively. "Everywhere we look, we find that at the heart of the radicals’ appeal is a very concrete claim that states are not delivering basic services to their people," says Galston, a public policy professor at the University of Maryland.
If the Wolfowitz scandal paralyzes the World Bank, American economic influence in the developing world is likely to wane. Already, Europeans contribute more than twice as much as the U.S. to World Bank loan funds. If major European nations decide to shift money to the European Union or to their own bilateral aid organizations, the clout of the U.S.-led bank would shrink. "It would be a big loss to U.S. leadership if the World Bank is no longer the premier institution," says Birdsall.
Richard S. Dunham is a senior writer for BusinessWeek.