who's minding the bank?

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Who's Minding the Bank?Author(s): Stephen FidlerSource: Foreign Policy, No. 126 (Sep. - Oct., 2001), pp. 40-50Published by: Washingtonpost.Newsweek Interactive, LLCStable URL: http://www.jstor.org/stable/3183258 .

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Who's Minding the

The World Bank is in crisis, struggling to devise a formula for development as

critics slam it for incompetence, inefficiency, and irrelevance. Who to blame? T r

bank PresidentJim Wolfensohn, whose personal failings and misguided policies have muddled the bank's mission and pushed its best staff out the door. But the

bank's travails also underscore the hypocri~y of its rich shareholder nations, who

speak grandy about reducing povery but stand by as the world's top development institution falls apart. An exclusive investigative report. By Stephen Fidler

f the World Bank were a private corpora- tion, the 1990s would have been a decade of record profits, and the institution a growth stock. With the decline of commu-

nism, governments around the world became disil- lusioned with the public sector as an engine of growth and embraced market capitalism. From Latin America to Eastern Europe, political leaders slashed barriers to trade, privatized state-owned enter- prises, and deregulated markets. Third World governments beat a path to the World Bank's door seek- ing out its unequaled expertise in the field of development-and its money. The bank's potential for influencing the path of the global economy seemed to be on the verge of an unprecedented expansion.

But that potential was never realized. Without a clear mandate or well-defined products, the World Bank instead finds itself in crisis, its power severely diminished and its global role under attack from across the political spectrum. Critics speak freely of closing the institution altogether, or at least of radically shrink- ing it. Poised for spectacular growth 10 years ago, the World Bank now gropes for relevance precisely when

new ideas and trends in the international economy should have placed the institution at center stage.

Under these conditions, what would a private company do? Easy-fire the chief executive officer (CEO). But not the World Bank. Since June 1995, James D. Wolfensohn has presided over what many close to the bank view as a tragic deterioration of the world's premier development institution, which they describe as rudderless and lacking strategic direction. But, rather than getting the ax, Wolfensohn was reappointed for a second five-year term as World Bank president, through June 2005.

Observers blame the World Bank's troubles on Wolfensohn's personal failings-his phenomenal temper, constant need for approval, and inability to resist the latest development fad. Sebastian Edwards, a UCLA professor and former World Bank senior economist, points out that the high volume of private capital flowing to developing nations has also seriously diminished the institution's importance. But, he says, Wolfensohn's own actions have accel- erated the trend. "It's happened faster because of him," Edwards argues. "What Wolfensohn has done has been incredibly frivolous."

Edwards and others maintain that Wolfensohn's attempts to make the bank friendlier to numerous

Stephen Fidler is the U.S. diplomatic editor of the Financial Times.

40 FOREIGN POLICY



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outside constituencies-in particular to nongovern- mental organizations (NGOs)-have made the institution softheaded, less analytical in its approach, and therefore less relevant. They also say Wolfen- sohn's poor stewardship and lack of focus have weakened the bank's internal organization, making it less equipped to take the lead on important development issues. Calls for reform have multiplied: "We should be impatient" with the World Bank, argues John Taylor, the undersecretary for international affairs at the U.S. Treasury.

These views have barely been aired in public. Except among those close to the bank, the conventional wisdom about Wolfensohn is that of a charm- ing and committed individual who has gone a long way to improve the bank's image worldwide. But on the evidence of internal bank communications, staff morale has collapsed [see box on page 47]. Disillu- sionment among employees is palpable, and many of the institution's most capable managers have left.

Yet the World Bank's decline is not simply another story of a bad boss run amok. While Wolfensohn deserves his share of the blame, the true culprits are the bank's shareholder nations-the United States and other advanced economies. Wolfensohn is not only a cause of the World Bank's

problems, he is also a symptom of the hypocrisy of the leaders of rich countries, many of whom speak eloquently on behalf of the world's poor yet do not care enough about them to prevent the decline of the world's top development institution.

FRIENDS IN HIGH PLACES

Wolfensohn was nominated to the World Bank post by President Bill Clinton in March 1995 to replace the ailing Lewis Preston. At age 61, Wolfensohn became the fourth president since Robert McNamara, the former U.S. defense secretary who created the mod- ern World Bank before stepping down in 1981 after 13 years in office. Wolfensohn had long craved the job; he even shed his Australian nationality and became a U.S. citizen when the prospect of a nomination first emerged 21 years ago. Traditionally, the presidency of the bank is reserved for an American, much as Western European governments choose the head of the International Monetary Fund (IMF). The job is regarded as important enough for the decision to be made not by the Treasury Department, which handles most U.S. dealings with the bank, but by the White House, which invariably chooses candidates with connections to the U.S. political establishment.

SEPTEMBER I OCTOBER 2001 41



Who's Minding the Bank?

Iv- ve

"~;"d

How to win jobs and influence nations: Jim Wolfensohn hits the links with Bill Clinton in 1995.

When Clinton nominated him, the U.S. president described Wolfensohn, who made a fortune running his own boutique investment bank advising multina- tional corporations, as having "a long-standing, broad and active interest in the developing world and development issues." Wolfensohn indeed was admired widely for the attention he devoted, if not exactly to international development, to a variety of philan- thropic causes, such as New York's Carnegie Hall and the Kennedy Center for the Performing Arts in Wash- ington, D.C. He was chairman of both institutions and excelled at fundraising. If his experience in development was limited, then he was little different from most of his predecessors. " [Wolfensohn] wouldn't be the first lousy World Bank president," says Ricardo Hausmann, an economics professor at Harvard Uni- versity and former chief economist at the Inter-Amer- ican Development Bank. "This is a consistent pattern. Part of the pattern has to do with the way that the Americans choose the president.... It's quite structural and it's to do with the fact that there is little open com- petition in the process of nomination." In fact, many past presidents also came to the position late in life and

without a background in the job. "These people are trying to learn what development is in their 60s," Hausmann says.

Although he lacked development experience, Wolfensohn had superb connections around the world, including with senior political figures in the United States. From 1989 to 2000, according to data from the Center for Responsive Politics, Wolfensohn and his wife Elaine donated more than $130,000 to U.S. political campaigns. The vast majority was to Clinton's party, though a judicious $1,000 went to George Bush's campaign coffers in 1991. As Wolfensohn retreated from campaign contributions after he joined the World Bank, his wife increased her donations.

In an interview for this article, Wolfen- sohn says the contributions and political connections had nothing to do with his appointment. "It wasn't because I had given money to political campaigns. I wasn't making any political contributions because I was chairman of the Kennedy Center. I had met Bill Clinton once ... about two years before, but I'd never given him any money and to this day I haven't given him any money." But giving $138,000 over 10 years, he says, would not have been difficult. Con- tributions would go to friends. As trustee of

the Kennedy estate, he would give to the political campaigns of Patrick and Edward Kennedy. He would attend dinners and make political contributions that way. "It's not difficult if you have a lot of friends to make 10 donations a year of a thousand dollars," he explains.

Wolfensohn disagrees that he lacked experience, pointing instead to the expertise he developed at a series of investment banks. "When I got here, I think I was pretty damn good in assessing what the strengths and the weaknesses of the institution were and also its position as a development institution in a changing environment."

Certainly, Wolfensohn may be the hardest work- ing president the World Bank has ever had, and his personal commitment to the job appears enormous. But his personality seems to obstruct his efforts. "His ego is bound up with the World Bank and making a success of it," says one World Bank officer. One former senior bank official admits that Wolfensohn may be the organization's brightest leader since McNamara but also describes him as the "most insecure man I have met in my life." A for-

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42 FOREIGN POLICY



The Poor Man's President

James David Wolfensohn Born: Sydney, Australia, December 1, 1933

EDUCATION 1954 B.A., University of Sydney 1957 L.L.B., University of Sydney 1959 M.B.A., Harvard Graduate

School of Business

CAREER 1954-1957 Lawyer, Allen, Allen &

Helmsley 1956 Member, Australian Olympic

Fencing Team; Officer, Royal Australian Air Force (commis- sioned)

1960-1961 Director, Growth and Devel- opment, Rheem International

1962-1963 Catena Investments 1963-1965 Partner, Ord Minnett, T.J.

Thompson & Partners 1963-1966 Visiting Lecturer, Finance,

University of South Wales 1965-1967 Managing Directoi, Darling & Co. 1968-1970 Managing Director, J. Henry

Schroder, Wagg & Co.

mer Wall Street colleague says Wolfensohn is "extremely smart, extremely good at maneuvering but has a tremendous ego." He seems, say col- leagues, to require constant reassurance of his worth.

According to people who have worked with him, Wolfensohn is prone to personalize disputes and often uses emotional terms in his discussions with subordinates. People who oppose him are often depicted as disruptive, not "team players." One former official remembers a clash at a meeting with senior managers soon after Wolfensohn joined the bank. On the following day, the president told the group that he had not slept all night. He told them, according to this account, "You don't love me; you don't care for me."

Such qualities are not limited to Wolfensohn's dealings within the World Bank. Ann Pettifor, who headed the Jubilee 2000 campaign to reduce the debts of the poorest countries and had frequent encounters with him, says Wolfensohn "personalizes everything. That's what gives him his freshness and

1970-1976 President and CEO, J. Henry Schroder Banking Corp.

1977-1981 Executive Partner, Salomon Brothers

1977-1983 President, International Federation of Multiple Sclerosis Societies

1977-1984 Director, Population Council 1979-1985 Director, Rockefeller Foundation 1980 Obtained U.S. citizenship 1980-1991 Chairman of the Board,

Carnegie Hall (now Chairman Emeritus)

1981-1995 President and CEO, James D. Wolfensohn, Inc.

1986-present Chairman of the Board of Trustees, Institute for Advanced Study

1990-1995 Chairman of the Board of Trustees, John E Kennedy Center for the Performing Arts

1994 Fellow, American Academy of Arts and Sciences

1995 Honorary Knighthood (awarded by Queen Elizabeth II)

1995-present President, World Bank Group

his passion, and these are great strengths. But it is also a sign of a lack of maturity."

Subordinates, past and present, say that loyalty is the paramount virtue Wolfensohn seeks in people he appoints to senior positions. Yet many also believe that his public criticism of bank staff and management prevents the growth of reciprocal loyalties that tie effective leaders to those who follow them. "He has never created a sense of oneness between himself and the organization, and you can't lead an organization on that basis," says a former official. As a result, he says: "Loyalty, the thing he craves so much, is precisely the thing that has eluded him."

BREAKING THE BANK

During his six years as president, Wolfensohn has com- pletely overhauled senior management in an unprecedented manner. Wolfensohn has appointed 24 out of 26 vice presidents, and he brought in four out of five





'i~

Me, myself, and I: Wolfensohn opens the International Monetary Fund and World Bank

meetings in Prague on September 26, 2000.

managing directors from outside the bank. From 1997 to 2000, nearly one fourth of its 10,000 employees have turned over. In terms of personnel, Wolfensohn has dis- mantled the bank that was created by McNamara. Unfortunately, the evidence suggests that this turnover was more expensive than effective in enhancing the bank's performance or boosting its relevance.

Many are critical of Wolfensohn's internal changes. "He's been unwilling or unable to set up a management structure beneath him to compensate for the fact that he can't run the institution on a day-to- day basis," says a former senior U.S. government official. Others criticize Wolfensohn for promoting favorites and ignoring World Bank regulations when

they don't suit him. For example, in contravention to the bank's anti- nepotism rules, he appointed Nicholas Stern to the position of chief economist in 2000 when Stern's brother Richard was vice president for human resources. The appointment caused an internal furor, and Richard subsequently left the bank.

Other observers assert that the World Bank's senior management is weaker now than at any time in memory. This weakness exists in part, they believe, because Wolfensohn has avoided appointing any individual who could challenge him, thereby deepening the bank's management difficulties. "The best way to make an enemy out of Wolfensohn is to shine close to him," says another former official. Wolfensohn has promoted or hired a series of individuals whom he first lionized and then shunned or even insulted. These include Rachel Lomax, a senior British civil servant, brought in as high chief of staff; former U.S. Treasury and IMF official Jessica Ein- horn, promoted to managing director for finance; and Germany's current Deputy Finance Minister Caio Koch- Weser, also promoted to managing director. All three subsequently left the bank, as did other talented individuals who would not tolerate Wolfensohn's management style.

According to a senior bank staffer, Wolfensohn's record at the World

Bank "would suggest that he doesn't want anybody who is both knowledgeable and at all charismatic or capable of making judgments. He wants to be both the CEO and the coo. But, looking at his career, he has never shown an indication that he has that kind of tal- ent." Wolfensohn, who managed his own boutique investment bank with a staff of about 110 people prior to joining the World Bank, counters that, "I've never run 10,000 people, though I have given liberal advice to people who ran hundreds of thousands of people and they seemed to think that the advice was not bad." But even he acknowledges his shortcomings in this area. "I don't think I'm very good at the internal processes, approvals, and the way the bank runs,

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44 FOREIGN POLICY



and I've sought to delegate that.... I'm much better on the outside than on the inside."

The "outside" is precisely the realm where Wolfen- sohn appears to have thrived. Since he took over the World Bank, he has visited more than 100 countries, meeting with governments and representatives from business, labor, media, NGOs, religious and women's groups, students, and teachers. Alongside this official diplomacy, Wolfensohn has also kept in close personal touch with powerful figures worldwide. A central facet of his vigorous personal diplomacy includes his house in Jackson Hole, Wyoming.

"I invite friends to my ranch in Wyoming," Wolfensohn says, denying such invi- tations are a tool of personal diplomacy. The friends include U.S. Fed- eral Reserve Chairman Alan Greenspan, who chooses the guest list for the Friday night dinners held at Wolfensohn's house during Jack- son Hole's annual gathering of the world's central bankers. Wolfensohn has also entertained former U.S. Pres- ident Bill Clinton, former Vice President Al Gore, current Vice President Dick Cheney, and many others there. "People like my house, but it's not a ranch, it's a house," he says.

However, Wolfensohn bristles at the suggestion that his past successes flow from his networking abil- ities. This charge, he argues, "goes back to the notion that my strength is that I have a lot of people in my card index and that I spend all my time on the telephone call- ing them up to make sure they remember me or invit- ing them to dinner.... They said the same thing about me in my investment banking days. But if you think you can build a business that does $80 billion of mergers and acquisitions in its last year against Goldman Sachs, and Merrill [Lynch] and Morgan Stanley, because you've got a good Rolodex, you're out of your mind."

On the contrary, Wolfensohn says his efforts have never been superficial: "What I'm trying to do is deal with the substantive issues and use the net- work as a mechanism of selling substantive issues. The crucial thing is to link substance with the relationships, but the relationships without the substance mean nothing."

NEW AGE ECONOMICS

Over the last six years, Wolfensohn has deployed his significant communication and public- speaking skills in an effort to reconcile the sub-

stance of his work with his personal relationships-and his own image-outside the institution. "He's a relationship guy," says one World Bank official. "He has enormous credibility with influential and powerful people around the world." Another official commends Wolfensohn for having done a "fabulous job communicating with the outside constituencies: the governments of the industrialized countries and the NGOs."

But this kinder, gentler image has exacted a heavy price. Critics charge that, under pressure from NGOs and other interest groups, and as a result of his own insecurities, Wolfensohn has sur-

Wolfensohn has avoided appointing any individual who could challenge him, thereby deepening the

bank's management difficulties.

rendered the World Bank's intellectual integrity, rushing to embrace the latest fads in development thinking regardless of their substantive merit. No initiative embodies this trend better than Wolfen- sohn's "Comprehensive Development Framework" (CDF), launched in January 1999. According to the bank, the CDF is a "holistic, long-term, and country-owned approach that focuses on building stronger participation and partnerships to reduce poverty." Wolfensohn maintains that the bank's true focus these days is at the country level, with the World Bank listening to what borrowers want rather than imposing solutions on them. Under the approach Wolfensohn has championed, countries base their economic strategies on the CDF. The "holistic" approach supposedly reflects the under- standing that there is no simple, single element to successful development strategies. (Wolfensohn orig- inally insisted on the "New Development Frame- work" as a name for this initiative, forcing his col- leagues to point out that the notion of development as a multifaceted process was nothing new.)

According to bank documents, the CDF helps establish development priorities based on the principles of "country ownership" and "partnership," and with a "focus on results and a comprehensive and long-term perspective." The bank recognizes it does not have the resources to deal with every issue raised by the CDF, so it develops a "Country





Assistance Strategy," aimed at intervening where the institution's expertise and comparative advan- tage are greatest.

For many of the bank's critics, the CDF is not a solution to the World Bank's lack of focus but rather a perfect example of the problem. One former World Bank official calls the CDF "a cruel joke." The newsletter of the bank's staff association quoted one staff member as describing a new "Strategic Framework Paper," published this year and meant to provide new direction for the bank's development efforts, as "confusing, meaningless and stuffed with every cliche that has been uttered in the last two years ... holistic, empowerment, ownership, even core competencies."

Critics charge that the CDF represents a capitu- lation to NGOs. UCLA's Sebastian Edwards believes there is a qualified case for listening to NGOs. "Since they are unattached to power structures," he says,

retreat of bank country directors in May 2001. Sum- mers, also the former chief economist of the World Bank, said there was little evidence that giving weight to local communities-in World Bank jargon, "empowerment"-resulted in improved decision making. "I am concerned," he said, "that the move toward empowerment, rather than an economic approach, is standing in some ways for a reduced emphasis on the analytic element in the bank's work. If that is so, it seems to be a troubling development."

Many observers think that Wolfensohn's posi- tioning of the bank has accentuated the institution's lack of focus, leaving staff unsure about priorities. In a speech last October to the World Bank's board, Valeriano Garcia, the outgoing executive director for Argentina, captured this widely held sentiment: "The strategic thinking of the bank has been muddled by too many ad-hoc initiatives.....We really need to be more focused."

Under pressure from NGOs and other interest

groups, and as a result of his own insecurities, Wolfensohn has surrendered the World Bank's intellectual integrity.

"[NGOs] have more freedom to say what they think. But listening to them is not the same as becoming increasingly constrained by their views." Yet, the World Bank has altered its project mix based on NGO criticisms. For example, under pressure from NGOs and activists, the bank increasingly has avoided con- tentious projects such as construction of large dams. This strategy has helped the institution satisfy its rich-country shareholders and appease outside critics, though it has not silenced them. Wolfensohn himself says, "I don't know of a single issue since I came here that has been finally settled with the NGOs."

Many borrowing governments complain that it is inappropriate for the World Bank to anoint non- elected, self-styled representatives of civil society to interfere in bank programs. "I am deeply troubled by the distance the bank has gone in democratic countries toward engagement with groups other than governments in designing projects," lamented Larry Summers, the former U.S. Treasury secretary and currently president of Harvard University, at a private

Such initiatives include Wolfen- sohn's World Faiths Development Dialogue, which brings together various religious leaders from around the world with the bank and other development institutions in order to "catalyze the active, coordinated engagement of the world's faiths in the development process." The dialogue, which World Bank officials now liken to George W. Bush's initiative to use

faith-based organizations as instruments of social welfare, has cost the World Bank up to $1 million annually, according to Devesh Kapur, a political sci- entist at Harvard University and coauthor of the official history of the World Bank. Other initiatives include support for cultural projects in the Balkans (amounting to more than $20 million), as well as the Global Development Gateway, an attempt to encour- age "new economy" ideas in developing countries and create online portals for information on national- level economic development and reforms. Of the Gateway, Garcia cautioned: "To carry the IT revo- lution to [African countries] instead of teaching them how to reap better crops is a grave mistake. The mistake will make them poorer compared to the rest of the world." Even NGOs and activist groups such as the Bretton Woods Project have criticized the Gateway, assailing it as a "major land grab on the [I]nternet" that seeks to "gain more control over what analysis and opinions on development topics are deemed relevant and sound.... Many grassroots

46 FOREIGN POLICY



Victim or Bully? Returning to Washing-

ton, D.C., last Decem- ber after what he felt

had been a successful trip to India, James Wolfensohn asked his staff and management to explain the contrast between the World Bank's excellent global image and the "bitchy" atmos- phere he found upon returning to headquarters. Mistrust and a lack of team spirit seemed per- vasive and there was no loyalty to the institution, he said. What was the cause of this malaise afflicting the World Bank?

The answers shocked Wolfensohn. As reactions flooded in from the bank's more than 10,000 staff, it was clear that at least a large minority felt the problems at the world's top development institution began with Wolfensohn himself.

The harshest criticism came from the bank's Middle East and North Africa (MNA) department. An unsigned memo argued that staff morale had plunged for several reasons, the most important of which was the president's leadership and management style. The memo described a "climate of fear" at the bank, arguing that Wolfen- sohn's love of new ideas had dif- fused the bank's focus, and that the president did not practice the values he preaches. "He does not welcome criticism or tolerate

dissent.... Managers at all levels live under fear. Many have learnt that it serves them to agree with him. He is thus isolated from reality," the memo said.

When details emerged in public, Wolfensohn's external- relations team depicted the memo as an example of the bank's dis- affected old guard fighting against the changes Wolfensohn had introduced. They argued that he was being criticized by the many losers of his organizational restructuring. Morale had suffered because of budgetary pres- sures. Wolfensohn's supporters pointed to the many staff, including the leaders of the bank's 1,200-strong African group, who stood up in favor of Wolfensohn.

Yet the criticisms of Wolfen- sohn clearly were not limited to a few old hands. Other feedback found similar views to those of the MNA memo. "Wolfensohn never saw an initiative he didn't like," the staff association newsletter quoted a budget man- ager as saying. Another official from the World Bank's financial sector said: "Consistency is... lacking from senior management and from Wolfensohn in particular." Wolfensohn, this com- mentator suggested, sent confusing signals about priorities while staff suffered wild budgetary swings and repeated attempts at reorganization. Another senior

official complained that Wolfen- sohn "has never let the organization settle down."

Wolfensohn was stunned by these expressions of discontent. "I misread the familial quality of my relationship with everybody in this place. My self-deception was that we were one family that was going through a tough per- iod and that the last thing in the world that you do with a family is to start beating up your moth- er and father.... I came with this thing thinking we are one family, we've got some problems, let's talk about it. What I didn't expect was that X number of people would say the bloody problem is you, you son of a bitch."

The author of another memo to Wolfensohn regard- ing the bank's low morale was subsequently demoted. The author, Manuel Conthe, former financial sector vice president at the bank, filed a formal com- plaint in June 2001 saying the reason for his demotion was that his memo had been leaked to the Financial Times. Accus- ing Wolfensohn and his close associates of cronyism, Conthe wrote, "Unfortunately, what the Bank's staff regularly iden- tifies and decries in developing countries, few people have the courage to recognize at home: as in the fable, it is not always easy to announce that 'the Emperor has no clothes.'"

--S.F.

and campaign-oriented sites will be weeded out." Meanwhile, World Bank staffers complain that they are short of funds to support basic operations in borrower countries, while financing seems amply available for what they see as marginal projects that meet Wolfensohn's approval.

In a barely veiled criticism of these initiatives, Paul O'Neill, the current U.S. treasury secretary, told a congressional subcommittee in May 2001 that "the scope of the World Bank's activities has become too diffuse, and this reduces its focus on the core objective of raising income per capita." He





went on to say that he was skeptical about the bank's concentration on unrelated areas such as "cultural heritage projects that have peripheral development impact." In an apparent reference to the Gateway, O'Neill questioned the usefulness of World Bank involvement in "sophisticated elec- tronic information systems that may duplicate work being undertaken by the private sector." O'Neill stepped up his censures in June in a speech before the prestigious Detroit Economic Club: "The World Bank Group alone has lent $470 billion since its inception, and $225 billion in just the last decade. Visit some of the poorest nations in the world, and you'll see that we have little to show for it. It's time for a new approach to eliminating poverty." He again characterized the bank's work as excessively diffuse, reasserting that the bank should focus strictly on projects that "raise productivity or raise income per capita."

A few of Wolfensohn's new ideas have received praise. For instance, his efforts to decentralize the institution and push a large minority of staff into

against the will of senior management, to make emergency loans during and after the Asian financial crisis of the late 1990s. Overall, however, Wolfensohn maintains that the challenges of global development require this more variegated approach. "They're saying because I'm interested in religion and culture that it's a perfect example of my idiotic extension in thinking, as though they are driving forces in the institution that cause all the stress, which is nonsense. The simple fact is that doing development has become a lot more difficult."

READ MY LIP SERVICE

Ultimately, Wolfensohn's predilections do not explain everything about the World Bank's growing agenda or its apparent lack of focus. A good part of the responsibility lies with the bank's rich-country shareholders, and with the United States, the largest shareholder. "As its own bilateral aid program has shrunk, the United States has found the World Bank an espe- cially useful instrument for projecting its influence in

The world's rich nations behave like absentee

owners who ignore the World Bank except on the

particular occasions when it can help them meet their own pet objectives.

the field have been welcomed by some, even though the new policies have multiplied the bank's management difficulties. Harvard's Devesh Kapur says such initiatives provide "halo benefits" for the bank but only dubious advantages for the borrowing countries that ultimately foot the bill through the higher interest rates they must pay on loans to cover the bank's soaring operational costs.

Wolfensohn defends the World Bank's broader agenda. He claims the organization is following much more elaborate and expensive safeguard policies, for example, to ensure environmental guidelines are followed. The bank has attempted to impress upon its client governments the importance of such issues as the environment, gender equality, and avoiding corruption. It has been asked to provide debt forgiveness for the poorest countries and more detailed poverty reduction strategies. It was forced,

developing countries," argues Robert Wade of the Institute for Advanced Study in Berlin. "The bank is a source of funds to be offered to U.S. friends or denied to U.S. enemies."

In fact, the world's rich nations behave like absentee owners who ignore the bank except on the particular occasions when it can help them meet their own pet objectives. Although no other member states come close to matching U.S. power

over the World Bank, all its influential owners- Great Britain, France, Germany, and others-have borrowing governments whose interests they pur- port to sponsor, as well as key issues (such as the environment) that their electorates view as important. For instance, many in the bank believe that political sensitivities to Tibetan lobby groups in important shareholder countries finally killed a controversial antipoverty project in western China last year, rather than any real concern about the merits of the program. Accountability and oversight from donor governments are uneven at best and nonexistent at worst. Meanwhile, the few powerful borrowing nations that could exert some influence over the bank's direction are afraid to voice their concerns lest they lose access to the institution's financing.

When top shareholder governments do pay attention to the World Bank, they do so for the

48 FOREIGN POLICY



r? --? .A, "r

A new boss in town: Wolfensohn listens to President George W. Bush address the World Bank in July 2001.

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same reason that Willie Sutton robbed banks: It's where the money is. Unlike agencies of the United Nations, whose budgets are funded directly by member governments, the World Bank raises most of its funding by issuing bonds. While a default by a big borrower that exceeded the World Bank's ample reserves could in theory mean that industrialized countries could be asked to supply the capital they have pledged to the bank, such an event has not happened in more than 50 years. As Devesh Kapur observes, industrialized countries' bank ownership costs have been falling. "The influence that came with ownership became less expensive, indeed almost cost-free-and therefore more attractive," Kapur argues. Rich countries have happily loaded new responsibilities onto the World Bank, knowing they will not have to foot the bill, which instead is paid by middle-income borrowers through higher interest margins. Meanwhile, the need to generate increas- ing income to pay for higher administrative costs explains why the bank must continue lending large sums to middle-income countries to support often questionable development programs.

This pressure on the bank is overshadowed by what some consider to be another source of confusion: the fear that no one-neither the World Bank

nor others-has discovered the right formula for development. The market-oriented economic reforms introduced over the last decade throughout the developing world have facilitated some measure of economic recovery and growth, but nowhere near what was anticipated. "All of these judgments of the World Bank are happening in the context of feelings that we haven't got the recipe right. We haven't got the right ideas to promote development," says Har- vard University's Ricardo Hausmann. "There is a crisis in development thinking. It's a crisis where leadership will not come from Wolfensohn."

This frustration reaches right inside the bank. One of its most respected economists, William East- erly, pointed out in July that the IMF and World Bank had, during the last decade, given 36 poor countries 10 or more loans each, with conditions attached. "The growth rate of income per person of the typical member of this group during the past two decades was zero," he wrote in the Financial Times. "The failure is so widespread that pointing the fin- ger at any single institution is futile."

Yet many development experts think that the bank's positions matter a great deal. Former U.S. Treasury Sec- retary Larry Summers argues that the institution is torn between appeasing NGOs and other constituents





and its fundamental development objectives. "If you are a development organization, you really cannot be in bad grace with the principal carriers of moral energy around development," he said at the country retreat he attended in May 2001. Yet it would be "inimical to the goal of progress and the goal of reducing poverty around the world" if the views of NGOs and other cam- paigning groups guided policy. "I think it would be a great tragedy in terms of the bank's potential contribution to reducing global poverty," Summers said, "if, in the name of demonstrating its compassion and moral energy, [the World Bank] were to lose sight of the rigorous analytic basis and emphasis on supporting

market forces that have allowed the bank to make such a great contribution to global poverty reduction efforts over these last 50 years."

To Wolfensohn's critics, he has already stepped well over that line. In the interview for this article, Wolfen- sohn made a plea for others to do what many say he is not able to do himself-separate the institution from its president. "Put me aside for the moment and say I'm useless, egocentric, insecure, all the things you want to say, but don't damage the institution because you want to damage me. This is too good an institution to damage in that way. Don't confuse the two, because that's not doing anybody any good." III

Want to Know More?

The World Bank has recently been the focus of fierce public debate, much of it stemming from the March 2000 publication of the report by the International Financial Institution Advisory Commission, chaired by Carnegie Mellon University economist Allan Meltzer, which argued that the bank should scale back its functions. Ripostes to the Meltzer Commission's majority conclusions include the April 2001 report "The Role of the Multilateral Development Banks in Emerging Market Economies," issued by a blue-ribbon commission chaired by former Mexican Finance Minister Jos6 Angel Gur- ria and former Federal Reserve Chairman Paul Volcker. The report is available on the Web site of the Economic Reform Project of the Carnegie Endowment for International Peace.

Former World Bank Chief Economist Joseph Stiglitz offers a firsthand account of the World Bank's lack of influence during the Asian financial crisis of 1997-98 in "The Insider" (The New Republic, April 17-24, 2000). For a view explaining Stiglitz's departure from the World Bank, see Robert Wade's "Showdown at the World Bank" (New Left Review, No. 7, January/Febru- ary 2001). Devesh Kapur of Harvard University provides a technical account of how shareholders and the bank's president use the World Bank in "The Common Pool Dilemma of Global Public Goods: Lessons from the World Bank's Net Income and Reserves" (World Development, forth- coming). Also read Kapur's "Who Gets to Run the World?" (FOREIGN POLICY, November/Decem- ber 2000) for a description of the leadership selection processes in the world's leading multilateral organizations, including the World Bank. For conventional profiles of James Wolfensohn, see "A Brave New World Bank" (The Banker, September 1, 1997) and Alex Brummer's "The Peo- ple's Plutocrat" (The Guardian, June 12, 1999).

Mois6s Naim traces the intellectual evolution of the economic principles that guided World Bank strategies during the 1990s in "Washington Consensus or Washington Confusion?" (FOR- EIGN POLICY, Spring 2000). Also see Naim's "The World Bank: Its Role, Governance and Organizational Culture" in Bretton Woods: Looking to the Future (Washington: Bretton Woods Commission, 1994). (The article is available on the FP Web site.) For an official history of the World Bank, read The World Bank: Its First Half Century (Washington: Brookings Institution, 1997) by Kapur, John Lewis, and Richard Webb. For critical perspectives, see Kevin Danaher's, ed., 50 Years Is Enough: The Case Against the World Bank and the International Monetary Fund (Boston: South End Press, 1994).

)For links to relevant Web sites, as well as a comprehensive index of related FOREIGN POLICY

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