Corruption and the World Bank

keywords: Paul Wolfowitz, World Bank, development, corruption, Grameen Bank

It’s past one o’clock AM on a train someplace in the US South, heading toward Penn Station - but three hours behind schedule. I’m certain to miss my connecting train to Buffalo, where my car sits in a parking lot. So I’ll miss Anatol Rapoport’s memorial service on Sunday.

Despite having both seats to myself, so I can curl up, I’m not comfortable and not sleepy. Instead I have the World Bank in my head. I ought to be able to figure out its problems, shouldn’t I? At a Borders bookshop near the Atlanta train station I bought World Affairs, a think journal published by Brown University. While waiting for my train I read the several articles on corruption in the World Bank.

Today the newspaper said that Paul Wolfowitz (see photo) has agreed to resign in June. His poor judgment has been the main topic of news lately, though the poor judgment of Albert Gonzales is a close tie in the world of pack journalism. The angle every news story pursues is that he was corrupt for promoting his lover to a high-paid position. There are four articles in the World Affairs journal, but the girlfriend nepotism issue was not mentioned in any of them. They did, however, dwell on the corruption angle.

It seems that when Wolfowitz was chosen to head the World Bank in 2005, at least 90 percent of its employees disapproved of his appointment. They regarded him as a proven ideologue. However, he did not immediately confirm their worst fears about his neo-con orientation. Nothing showed up as remarkable for a year or so. Then he did demonstrate his fixedness of mind about, among other things, dams. There was an expert panel that looked over the successes and failures of the bank’s projects, and produced a review that was almost as tough as the other critics — especially about the funding of dams in the Third World. It has been known for a decade or more that dams do more harm than good for poor rural populations. Wolfowitz ignored the criticism and forged ahead with yet more emphasis on funding dams. A bad sign, one might reasonably conclude.

Next he got exercised about corruption in the bank’s recipient countries. He made it clear that no further loans would be granted to countries where governments have a record of siphoning off large amounts of money. Now this is a real problem. Some dictators, in particular, have stolen as much as $15 billion — money that can never be recovered. Yet oddly (or at least it seems odd to me) the staff of the bank regarded it as an outrage for Wolfowitz to make a fuss over this matter. For one thing, that’s not supposed to be their business, reforming bad governments. It’s up to the countries themselves to throw thieves out and keep their governments honest. The bank’s business is simply to try to overcome poverty in the less-developed countries. He should focus on that goal alone.

Well, okay, maybe so. But it does seem appropriate to me for a lending agency to make sure that it’s not funneling money into the pockets of crooks. On the other hand, if he’s going to make corruption into a huge issue, then he’s got to be immaculate about his own behavior, which explains why he left himself open to such criticism over his lady-friend’s high salary.

But there were other grounds for more serious criticism. First, it seems that the record of the bank is very poor on the reduction of poverty. There are only about eleven countries that have received substantial loans from the bank and they tended to be fairly prosperous countries, not the poorest of the poor. Besides, when loans were given to eradicate poverty, there is no evidence that they have succeeded. Something very fundamental is wrong in the whole process. This goes beyond any personal criticism of Wolfowitz and seems to call for a change in policies at a basic level. The poor are not benefiting from the World Bank’s largesse. Instead, it is funding projects such as the development of Bangalore, which will actually increase the gap between rich and poor Indians.

There was also a second critique that impressed me. What about the illegitimate lending practices of the bank itself? It seems that in many cases, the bank lent money to corrupt governments though they knew full well that the money was being stolen. Now the people of Indonesia, the Philippines, and Rwanda are having to pay off these odious debts. A bank is supposed to investigate the credit-worthiness of anyone to whom they lend money. It is immoral, even illegal, to hold the citizens of a poor country responsible for debts incurred illegally in their name. They should not have to pay back those debts, for it was the fault of the bank itself for allowing the transaction to take place in the first place. To me, this is a far more serious type of corruption than the hiring of a lover at a high salary.

But if the loans, even when legitimate, are not helping to relieve poverty, that’s the most serious problem of all. I am forced yet again to think about William Easterly's critical work about foreign aid. He is the fellow who so fiercely opposes Jeffrey Sachs. He does say that there are some kinds of investment that work: notably expenditures for health and infrastructure. These loans do not undermine the initiative of poor people. Presumably the Grameen bank-type micro loans are also beneficial to the whole population of a less-developed country.

So instead of just making a personal attack on Wolfowitz (who deserves it, to be sure) journalists should be making a more serious criticism of the World Bank itself. In the World Affairs journal there’s an interview with Joseph Stiglitz about the matter. He says that the goal should be to democratize the World Bank. Having the US President appoint an American as the head is an improper way to run an international organization. The countries themselves should have serious input into the selection. There are excellent economists in the Third World who could manage their own projects, but the bank specifies that the top decision-makers should be from the Western countries. There are even economists in poorer countries who are qualified to head the World Bank itself. It’s time to change some fundamental processes in the working of the bank.