Wolfowitz Saga Exposes Structural Flaws of the World Bank

Reactions to the conflict-of-interest allegations against Paul Wolfowitz, president of the World Bank, have been muted: Europe won’t criticize Wolfowitz much for fear of losing its monopoly over the IMF; countries that depend on World Bank funding may regard the scandal as leverage against strict expectations about corruption within their borders; and up-and-comers such as India and China seek quiet exit from the bank’s grip. The lack of passion over ethics violations by a man who promised to eliminate corruption in World Bank dealings, combined with shifting power about the globe, could reveal the decreasing relevance of such global institutions, suggests Professor Devesh Kapur of the University of Pennsylvania. Resolution of the Wolfowitz issue, according to Kapur, will neither address the deep structural problems within these international organizations nor clarify the role of global governance. Global institutions can no longer afford to limit leadership positions to a narrow pool of talent or rely on old structures that encourage nations to act on parochial interests. – YaleGlobal

Wolfowitz Saga Exposes Structural Flaws of the World Bank

The apathy of some international players hints at the decreasing relevance of global institutions
Devesh Kapur
Tuesday, May 15, 2007

PHILADELPHIA: As the controversy around Paul Wolfowitz’s stewardship of the World Bank continues, many voices have weighed in on his conduct and whether he should resign.

More curious than the vocal critics and defenders of Wolfowitz are the voices that have remained silent, or are doing so belatedly, and what this implies about the state of international organizations. While countries dependent on the bank have maintained prudent silence and larger developing countries have yawned, Europeans have allowed the issue of the US-dominated World Bank to fester for fear that it might come to haunt them about their monopoly over the IMF. As for Japan, once again, it hesitates to take a stance that might offend the US.

It should be emphasized that there’s nothing new about Wolfowitz’s actions. The recent scandal over the pay raises of a World Bank staffer with whom he’s romantically involved is just one example of the arrogance that has characterized his leadership since he assumed the position. Despite widespread knowledge of his questionable managerial style while at the Pentagon, his appointment for president of the World Bank sailed through.

And notwithstanding Wolfowitz’s personal baggage arising from his role in the Iraq debacle, his core managerial traits changed little after he joined the bank. He surrounded himself with a coterie that used troubling tactics of intimidation to silence critics, driving talent from the bank. This group systematically undermined the bank’s internal structures and processes in a manner unprecedented in its history. These new advisors often expected staff to send reports directly to them, bypassing their managers, who after repeated humiliations saw little point in remaining at the institution. Their replacements were often of modest talents – mediocrity has fewer exit options and is therefore likely to be more supine.

Nearly $80 million is spent annually on the World Bank’s governance – comprising of the Board of Governors, the Development Committee, the large and substantially staffed Executive Board, the Inspection Panel, the Office of the Ombudsman and the Independent Evaluation Group. What does this massive expenditure – especially the large expenditure on the in-house Executive Board representing member countries – achieve? If the World Bank’s Executive Board did not know about such systemic management problems, one wonders what it actually does. And if it did know, why was it sleeping at the switch?

The fact that this problem arose in the first case and continued for so long is a severe indictment not just of Wolfowitz but of the bank's Executive Board, and by extension its principals, the member countries of the bank. And therein rests a disquieting foretaste of a deeper malaise facing not just the World Bank, but international organizations in general.

In principle, the Bank’s Executive Board is supposed to act collectively on behalf of the institution’s interests. In practice, individual board members represent parochial national interests. Of the 24 members of the executive board, five are appointed by the member countries with the largest number of shares – currently the US, Japan, Germany, France and the UK – while the remaining 19 are elected by other member countries in a bi-annual election process.

It’s obvious why the US executive director has kept quiet amid the Wolfowitz scandal. The contrast with the indignation that John Bolton, in his capacity as US representative at the United Nations, would treat a comparable issue at that institution could not be starker. But when the person in question is close to the US president, standards of integrity become more flexible even if it means that the US, despite the nearly $1 billion it gives to the World Bank, through the International Development Association, earns opprobrium instead of gratitude.

Non-governmental organizations, never known for rectitude in matters concerning the Bretton Woods institutions, have also been relatively quiet. Their relationship with the World Bank has always been contentious, and since the most immediate adverse effects of the Wolfowitz presidency have been on the institution’s own staff and management, this internal turmoil has not exercised their energies as much.

The Europeans only recently voiced criticism of Wolfowitz, fearing that in the absence of support from other members this would be twisted by the US as another example of an out-of-touch “Old Europe.” But even more, European countries themselves have an uneasy conscience. The key underlying problem with the Wolfowitz issue is not the man himself, but a fundamental principle: More than six decades after the establishment of the Bretton Woods institutions, the leadership of the World Bank continues to be an entitlement of the US. Unseating Wolfowitz might challenge the European monopoly on the leadership of the International Monetary Fund (IMF), a decidedly unpalatable prospect.

Perhaps more interesting is the “strategic morality” of developing countries. The silence of African countries is understandable – they have the most to lose if they say anything openly against the bank’s president, particularly if he survives. The case of Brazil, Russia and, in particular, China and India, is most curious. Despite private reservations, they have chosen to fence-sit, believing that they have no dog in this fight. Why risk a fight with the US on an institution of marginal importance to them? In the past, these countries relied upon the good graces of the World Bank for loans and to finance development projects. Today, many of the World Bank’s key functions are carried out through alternative institutional arrangements, since greater liquidity in capital markets has given middle-income developing countries alternative sources of finance.

More cynically, many developing countries would prefer a weakened bank president, convinced that a preacher caught coming out of the brothel is not in the best position to hector them about corruption in their countries.

Thus, more than anything else, the Wolfowitz saga reflects the increasing difficulties of global collective action in a period when global power is in transition. Industrialized countries have not given up their privileges and the rising powers are unwilling to exercise leadership. The outcome of the mismatch between a global institutional architecture set up six decades ago and subsequent fundamental shifts in power is a growing indifference toward international organizations set up in the post-war era.

This issue of an outdated system of global governance can also been seen in the IMF. A decade ago, the IMF’s actions aroused hostility, but today it faces apathy – a consequence of its growing irrelevance. Developing countries have responded to the lack of voice in the IMF, maintained by the persistence of the old governance structures, by quietly exiting – building up foreign-exchange reserves, securing access to foreign-exchange through remittances or setting up new central-bank swap facilities. They see little reason to engage in a battle for power at an archaic organization that loses relevance by the year.

Critics argue that many of the functions of these institutions are moot today in a world of freely flowing capital. That is undoubtedly true, but they can play a potentially substantial role addressing emerging challenges in the area of global public goods, such as the many complex causes and implications of climate change, the provision of knowledge and finance for poor countries, and for middle-income countries (MICs) when private markets get skittish. However, this would work only if the governance included the MICs in a relevant way.

Consequently, while Wolfowitz's departure would undoubtedly mitigate the bank's current problems, it would not resolve deeper structural causes. The old international order is increasingly threadbare – but the new is a long way from arriving. And that transition holds increasing global risks, not least to multilateral institutions.

Devesh Kapur holds the Sobti Professorship for the Study of Contemporary India at the University of Pennsylvania and is the co-author of the official history of the World Bank, “The World Bank: Its First Half Century,” published by The Brookings Institution.

© 2007 Yale Center for the Study of Globalization