The World Bank: A Bigger Problem Than Wolfowitz

By Mark Weisbrot

This article was published in the following news outlets:

Knight-Ridder/Tribune Information Services - March 17, 2005
San Jose Mercury News - March 21, 2005
Columbus Dispatch - March 21, 2005
Taiwan News - March 21, 2005

The Bush Administration's choice of Deputy Secretary of Defense Paul Wolfowitz to head the World Bank has ignited a storm of international controversy. Coming on the heels of the nomination of anti-UN John Bolton for Ambassador to the United Nations, the selection of Wolfowitz is widely perceived as sending a strong message to the rest of the world.

And that message is decidedly not friendly. Wolfowitz is a major architect and symbol of the Bush Administration's war in Iraq, its contempt for multilateral institutions, and general disregard for world public opinion.

But what will it mean for the future of the World Bank? Here in Washington, there is a deep sense of dread and malaise among World Bank staff. Naturally they do not want to be seen as just another instrument of U.S. foreign policy.

But most people are not aware how much the World Bank already plays that role. First of all, almost all of the World Bank's policy-based lending is subordinated to the International Monetary Fund (IMF). In other words, the Bank throws its (larger) lending weight behind the IMF's macroeconomic policies, by refusing to lend in most cases unless the borrowing country meets IMF approval. The IMF, in turn, is dominated almost completely by the U.S. Treasury department. While the Europeans and Japanese could theoretically outvote the United States, they haven't yet done so in the last 60 years.

This gives the U.S. Treasury control over a powerful creditors' cartel, since the Fund and the Bank together are often able to persuade other multi-lateral lenders, rich country governments, and even the private sector not to lend if a country doesn't meet with IMF/Treasury approval. In the last few years this power has eroded somewhat, as Argentina -- one of these institutions' largest borrowers -- called the cartel's bluff and won big. After defaulting on $100 billion of private debt, Argentina twice threatened default to the IMF itself -- an almost unprecedented act of defiance -- and surprised the experts by jump-starting their recovery with rapid growth and a lower debt burden.

But the IMF/ World Bank cartel still has enormous influence over policy in most developing countries. The record of the last 25 years indicates that this influence has been overwhelmingly negative: outside of Asia, the vast majority low and middle-income countries have suffered a sharp slowdown in economic growth. There are almost no success stories to point to -- the World Bank and IMF can hardly take credit for the Chinese growth spurt since 1980. But where these institutions have been heavily involved, the economic failure is striking: In Latin America, income per person has grown about 12 percent in the last 25 years, as compared with 80 percent in just the previous two decades (1960-1979). Africa has fared much worse, and the World Bank and IMF have been slow and stingy in providing even debt cancellation for the poorest countries -- something that can be done with the stroke of a pen.

Wolfowitz will therefore be taking over an institution that, by any standard economic measure, has failed. But the Bank has refused to even consider this possibility. Much of its economic research is politically driven. For example, on the eve of a key Congressional vote on trade last year, the Bank published a study showing that NAFTA had increased growth in Mexico. Their main result stems from an economic modeling error; yet the report remains uncorrected, on their web site.

In short, despite liberal sentiments among many of its staff, the World Bank is not a liberal institution. In fact it is so illiberal in practice that some of the United States' most prominent socially responsible investment funds (e.g., the Calvert group), largest unions (Service Employees International Union), and ten city governments have all pledged to boycott the World Bank's bonds -- which are commonly held by institutional investors -- until it reforms some of its most abusive polices toward developing countries.

Paul Wolfowitz is unlikely to advance these needed reforms. But until the other 183 countries that are members of this institution have a voice in its decisions, the World Bank is unlikely to live up to its mission of reducing poverty and improving living standards for developing countries -- no matter which American is formally in charge.