The Spring meetings of
the World Bank and the IMF (April 14-15) were completely overshadowed this time
by the corruption scandal engulfing World Bank president, Mr. Paul Wolfowitz. At issue is the role Mr. Wolfowitz played in
securing a promotion and a substantial pay rise for his domestic partner, Ms.
Shaha Riza (former World Bank press officer) when she transferred to the State
Department in 2005. The scandal brewed
for nearly a month, prolonged by Mr. Wolfowitz’s various attempts to mislead
inquiries about the situation.
It was only on Friday
April 12 that Mr. Wolfowitz apologized about the situation and offered to
release all documentation, including a memo detailing the instructions he
actually provided to the Bank’s head of human resources. While a forced
resignation seemed unavoidable over the weekend, the Board of Directors
continues to review the matter.
Several aspects of the
situation –beyond those that make it suitable tabloid material—are worth
highlighting.
First, the scandal exposes the risks and flaws of the
current process for selecting the leadership of such an influential institution.
Leadership for the World Bank and International Monetary Fund are chosen by
majority vote in the Board. Seems fair in theory, but the EU and US have such a disproportionate number of votes that they have final say. Through a “gentleman’s agreement” the US chooses the President of the Bank and the European governments choose the head
of the IMF. As you’ll recall, the
decision to appoint Mr. Wolfowitz was made by the current US administration after limited
consultation.
Critics have called for an open and competitive process where several
candidates are formally considered and required to defend their credentials and
visions for the institutions. If anything, the ongoing
scandal is illustrative of the need for a thorough and public review and scrutiny
of the character and credentials of candidates.
Second, in an ironic twist, shortly after taking over
his duties Mr. Wolfowitz launched an anti-corruption drive, pushing for making
good governance and the fight against corruption a critical element of the
World Bank activities. Understandably, the events of this year’s Spring
meetings, unveiling corruption and mismanagement at the top of the Bank itself,
inspired in many thoughts of “poetic justice.” Indeed, there hardly could have
been a more straightforward way to expose the contradictions inherent in the
claim by the Bank to have the authority to judge corruption and governance in
poor countries
Third, the investigation of the affair has brought to
light what seem to be ingrained corruption problems in the Bank. The
investigation continues to unearth evidence that the Wolfowitz scandal, rather
than an isolated event that can be purged by removing him, is just the tip of
an iceberg in terms of corruption and clientelism at the Bank. While requests
for inquiries on Mr. Wolfowitz have already expanded beyond the affair, some
have pointed out that a culture of preferential hiring of family members and
those with contacts at the Bank is one that the Bank perpetuates—with Mr.
Wolfowitz’s situation being just one more example of it. The role of the Board
is also implicated. In fact, can the Board justify its own lack of due
diligence? Granted, Mr. Wolfowitz did not follow the Board advice but,
reportedly, when the Board learned of the final arrangement for Ms. Riza it
said “the conflict of interest had been dealt with appropriately.” An anonymous
employee complaint on the same matter, in January 2006, was equally dismissed
by the Board. It is impossible not to draw analogies to the scandal around the
“oil for food” program in the context of the UN. In that case, the Security
Council had overseen all contracts for whose handling the former Secretary
General of the UN, Kofi Annan, was being questioned. Yet, governments holding
decision-making and even veto power in the Security Council were those very
same governments showing the toughest stance on Mr. Annan’s behavior.
The passionate response Mr. Wolfowitz has unleashed
inside the Bank is also prompting many questions. Last week one of his two
Managing Directors (effectively a number two at the Bank), appointed by him,
called for his resignation. Staff at the Bank is deeply divided. The risks that
his continuation may result in a permanent state of “civil war” within the
commonly perceived monolithic institution, and the repercussions on the Bank’s
ability to carry out normal business, are becoming a new source of
preoccupation and definitely feature in the calculations of those charged with
providing some closure to the affair. No doubt the staff reaction has to do
with Mr. Wolfowitz’s controversial background: his role as a close advisor in
the Bush Administration, his support of the Iraq invasion, his insistence in
surrounding himself with a close-knit group of highly influential advisors linked
to the Bush Administration and, finally, what some describe as a slowness to
act and lack of vision that has brought the Bank into paralysis.
It is only fair to ask how much of the vitriolic staff
reaction is no more than what one might expect from the cadres of any
organization who see long held and condoned nontransparent and clientelist
practices challenged by an outsider empowered to overhaul them. Should this
hypothesis prove right, what are the implications for the nature of past World
Bank loans? As corruption hits home, will the Bank continue to assume no
responsibility for loans of questionable use to known dictatorial and corrupt
regimes? More worrisome, what is the moral of the story for a reform of World
Bank practices? What is the lesson for future would-be reformers of the Bank?
In fact, in an institution where the general incentive is to move money around
and the individuals’ promotions and incentives are linked to that same
imperative, taking a hard stance on corruption may be something that can only happen
“against great odds”, or not at all.
Finally, the crisis
comes at the pressing time of replenishment of the World Bank coffers that lend
to the poorest countries. Given the debt cancellation deal of 2005,
where the developed countries canceled the debts of some of the most highly indebted developing countries, the pressure is on to raise 165 percent of what it raised last time around. The
scandal at the highest level of the Bank structure significantly undermines the
credibility of the Bank efforts at this critical time. While reducing the pot of money for poor
countries may be of little importance to the US government – its policies have
consistently promoted a downsizing of multilateral development institutions—it
is certainly a matter of concern to other donors.
Mr. Wolfowitz’s
departure increasingly seems not a way out of the problem, but just the lesser
of two evils. Whether Mr. Wolfowitz stays or goes, the future standing of the
Bank will never be the same.
Posted by Aldo Caliari, Director, Rethinking Bretton Woods Project.
