Wealth of Nations April 2005

Shock and Awe Come to the World Bank

The Bush administration's critics at home and abroad are astounded, scandalized, and reeling from the decision to name Paul Wolfowitz the next head of the World Bank.

When President Bush named Paul Wolfowitz as the next head of the World Bank, he threw the global economics commentariat into extraordinary confusion. Possibly that was the idea. With Iraq quieting down a little, maybe someone in the White House was getting bored. Perhaps the president's advisers felt that it was somebody else's turn for shock and awe—and sending Wolfowitz to the World Bank would be a laugh, if nothing else.

If the idea was to give Bush-bashers a collective nervous breakdown, it worked. The administration's critics at home and abroad are astounded, scandalized, reeling: Many do look as if a daisy cutter just exploded nearby. Still, one cannot help wondering, if causing such havoc was not the main idea (or not the only idea), then what was?

A lot of development-policy heavyweights are at a loss to say. They are still literally sputtering with rage. Joseph Stiglitz, a professor of economics at Columbia University, a best-selling author, and a former chief economist at the Bank, considers the appointment an outrage. Like many others on the left, he sees Wolfowitz as the architect of America's selfish and illegal war against Iraq and, more generally, as the intellectual champion of aggressive American unilateralism in world affairs. How can such a man be expected to lead a peace-loving, green-tinged, NGO-embracing multilateral development bank? Stiglitz, rarely given to understatement, predicts anti-Bank riots in the streets of developing countries, an upsurge in anti-American terrorism, and the possible fall of governments that continue to do business with the Bank.

Only slightly less hysterical is Jeffrey Sachs, also of Columbia University, who is a tireless adviser to poor countries across the globe, the principal author of the United Nations' new mammoth study on foreign aid and development, and—not least—a close friend of Bono, who one also imagines is quite concerned about the new appointment. Sachs, like Stiglitz, believes that Wolfowitz is not remotely up to the job, and that the move, as they say, sends all the wrong signals to the developing world.

Putting renowned economists and their rock-star friends to one side, reactions elsewhere have expressed every possible permutation of comment. Wolfowitz will be bad for the Bank, because he will turn it into an instrument of American foreign policy. Alternatively, he will be good for the Bank, because he will turn it into an instrument of American foreign policy. Likewise, some development types are saying that he is a bad choice because he lacks relevant qualifications and experience in development economics and finance; whereas, others are saying that is exactly why he is a good choice—no outdated intellectual baggage to discard.

I have heard it argued that the move is a good thing because Wolfowitz will do less harm at the World Bank—where he will go native and turn into a die-cast development bureaucrat within six months—than at the Defense Department, where he has a say in sending armed forces to and fro and dropping bombs on people. More commentators, you might think, ought to be taking the converse line here too, deploring the move because the United States and its Defense Department need Wolfowitz far more than does a marginalized and anachronistic development bank. (The war on terror that began after 9/11 hasn't ended, has it?) Oddly enough, this is one line of criticism that one doesn't hear much.

Suppose the White House is right to believe that Wolfowitz can safely be spared from his job at the Defense Department. Will he be good for the Bank and good for the developing countries? Much as I would like to see him succeed in his new role, the odds are stacked against him.

The likeliest scenario is that he will indeed be absorbed and neutered by the Bank's all-suffocating bureaucracy. His lack of training and experience in development or finance—that much-cited ambassadorship to Indonesia is hardly worth mentioning—is a genuine problem in this regard, though not in the way most critics of the appointment seem to believe. Much of the development economics that Wolfowitz would have learned in years gone by, had he learned any, would now need to be unlearned, anyway. The problem is that Wolfowitz, so used to being an expert in his own field of operation, is now going to be a novice, surrounded by hundreds of people with more practical and theoretical knowledge than he has. It would take a monstrous ego, which Wolfowitz does not have, or a very clear vision of where he wants the Bank to go, which he presumably also lacks, to be unintimidated by that.

The fact that his appointment has aroused such controversy only increases the danger that he will be ruled by the organization, rather than the other way round. Most of his immediate underlings will resent his arrival; at the very least, they will be anxious and suspicious. Wolfowitz, contrary to many reports, is only human. He will likely want to make friends, to tread cautiously, to disappoint those people who are predicting that he will make (as they see it) reckless and ill-thought-through changes in Bank policy—in short, to get on with his colleagues. Somebody whose appointment had been broadly welcomed, and who was equipped with relevant expertise and experience—it is easy to think of several Americans and non-Americans who would have fit that bill—would feel less vulnerable. It would have been easier for that kind of newcomer to embark on the changes the Bank needs—many of them unpopular within the institution—changes that the administration would! presumably wish to see.

The suspicion that the White House seeks to annex the Bank and make it a wholly owned subsidiary of the American government only adds to these pressures. Policies of which Wolfowitz is likely to approve—for instance, strengthening the incentives for better and more democratic government in the countries the Bank lends to—might nowadays command a pretty wide consensus. Current thinking in development underlines the importance of those ideas. But the Bank, for the sake of its credibility with all participating countries, creditors and debtors alike, must try to remain operationally independent from the United States, and be seen to be. It is already sensitive to the charge that it is just following America's orders.

I'm betting that Wolfowitz will be no different from his predecessors in this: He will not want his Bank to be seen as awaiting instructions from the White House. But because of who he is, he will have to do a lot more (or, as the case may be, a lot less) to overcome such suspicions than would a less divisive nominee. It is another reason why he is likely to be timid.

If that is how things turn out, it will be a pity. The Bank's new boss should be leading a rethink of both global development policy and the Bank's own role. The idea, popular in Republican circles, that aid of any kind never works is wrong. Certain kinds of aid, especially programs that aim to treat or eradicate diseases that ravish poor countries, have been extremely successful, saving and improving many lives at remarkably little cost. But this is not the type of aid the Bank mainly gives out. Much of the new thinking on the sorts of aid that work best, and the money to pay for the aid, is coming not from the Bank, but from charities such as the Gates Foundation.

At present, the Bank's main business is banking, of a sort. It borrows from the global capital market and lends, supposedly on market terms, to developing-country governments. The fact that the world's governments stand behind it represents, in effect, a handsome hidden subsidy. Even so, the Bank is, after a fashion, a bank. This is the wrong model for the future.

The Bank's days as a development lender ought to be coming to an end. Countries that are capable of borrowing on commercial terms should go directly to the international capital market for their loans. The Bank should concentrate its financial and human resources more narrowly on very poor countries that lack such access, and which are governed well enough so that money from the Bank (preferably in the form of grants rather than debt) is not squandered on doomed projects or graft.

This type of Bank would look very different. It would no longer be a bank. It could be smaller overall, and it would certainly have a much smaller footprint in Washington. Even if global aid flows increased—as they should—the Bank's total disbursements to developing countries ought to shrink, because there are better ways of mediating those enlarged flows of money.

To push through such a vision, the Bank would need a bold innovator at the top. Many of Wolfowitz's opponents expect him to be a radical of just this sort. My guess is, they will find they were worrying for no reason.

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