Wolfowitz and the Bank

Wolfowitz and the Bank

Paul Wolfowitz’s resignation won’t reform the World Bank. But it could spark a new era of independence from the International Monetary Fund.


When Paul Wolfowitz finally agreed to resign from the presidency of the World Bank, it seemed that all of Washington breathed a sigh of relief. Of course, the Bank board’s assurance that Wolfowitz acted “ethically and in good faith in what he believed were the best interests of the institution” was hard for many to swallow. But as one Bank insider told the Financial Times, “It is terrible–but I guess that was the price to pay to get him out.”

It was not just Wolfowitz’s role in arranging an overly generous pay increase and promotion for his girlfriend that lay behind his unprecedented departure. The appointment two years ago of an infamous neoconservative and architect of the Iraq War was an unseemly way of showing the world that the Bank belonged to Washington, that other countries’ opinions did not matter. He brought in cronies from his Pentagon days, at high salaries, and appeared to be pushing a Bush Administration agenda on issues like global warming and family planning. He was unwanted at all levels of the institution.

Yet the narrow focus on Wolfowitz and his foibles overlooks some fundamental facts about not only the Bank but the entire structure of the international lending institutions. Wolfowitz’s resignation won’t reform the Bank. But a series of epoch-making changes in the international financial system have been eroding the Bank’s influence, along with that of its more powerful ally and leader, the International Monetary Fund.

By tradition, established with the founding of the World Bank and IMF in 1944, Washington picks the president of the 185-nation Bank, and the Europeans get to pick the head of the IMF. But these formalities mask the true power structure at these institutions. For example, the Europeans, despite choosing the IMF’s chief, do not exercise any more power at the Fund than they do at the Bank. Also, there is a hierarchy: The Bank is generally subordinate to the IMF, especially on the crucial matter of economic policies adopted by borrowing countries. At the top of the ladder is the US Treasury Department, which dominates the IMF.

These relationships reflect the world of 1944, when the United States was the only standing major industrial power and much of the developing world was still formally colonized. Over the past three decades especially, the IMF and the World Bank, directed by the Treasury, have run a powerful “creditors’ cartel.” Developing countries that do not meet the IMF’s conditions will generally not get credit from the much larger World Bank, regional lenders such as the Inter-American Development Bank, the G-7 governments and sometimes even the private sector.

This concentrated control over credit has been the major avenue of US influence in low- and middle-income countries, especially in promoting its “Washington Consensus” reforms: tighter monetary and fiscal policies, “independent” central banks, privatization of state-owned enterprises, indiscriminate opening to international trade and capital flows and the abandonment of development strategies and policies generally. These “reforms” have coincided with a sharp slowdown in economic growth and reduced progress on major social indicators (life expectancy, infant and child mortality) in the vast majority of developing countries since 1980. The major exceptions have been where the IMF and World Bank have had the least influence on economic policy: mostly in Asian nations, like China, Vietnam and India.

Over the past seven years the power of the IMF-led creditors’ cartel has collapsed in middle-income countries. The breakdown began after the Asian financial crisis of 1997-99, which greatly damaged the IMF’s credibility. The middle-income countries there began to accumulate reserves so that they would never again have to borrow from those institutions. The Latin American countries have also broken away from the cartel in recent years, especially since the Venezuelan government has offered an alternative source of credit and aid to many of its neighbors, including Argentina, Bolivia and Ecuador.

The breakdown of the IMF/World Bank creditors’ cartel has been the most important change in the international financial system since the collapse of the Bretton Woods system of fixed exchange rates in 1973. It is in this context that the battle for reform at the World Bank is most meaningful. The IMF/World Bank cartel is still operating in the poorest countries, and it is through this cartel that the World Bank does its worst damage: the privatization of water in countries like Ghana and Tanzania, the imposition of user fees on primary healthcare and education in Kenya and other African countries, the privatization of social security systems in Latin America and Central and Eastern Europe, the destabilization and overthrow of Haiti’s democratically elected government in 2004 and, most recently, the cartel’s role in deciding that poor countries in sub-Saharan Africa could not spend 70 percent of the desperately needed aid money that they received from 1999 to 2005–to name just a few of many disastrous examples.

For those who care about reform, one feasible change would be to make the World Bank independent of the IMF. Congress–perhaps with Europeans going along–could make this a condition of continued funding for the Bank. In other words, the Bank would no longer make its loans contingent on IMF conditions or approval. This would help break up the cartel and keep the Bank from enforcing some of the IMF’s most destructive policies.

Realistically, so long as developing countries have no significant voice within the World Bank, it cannot be expected to pursue an agenda that benefits poor countries or poor people generally. But the United States, Europe and Japan show no inclination to change the Bank’s voting, or even the nonvoting (i.e., Treasury supremacy), structure in the foreseeable future. Economic and social progress will therefore most likely result from the diminishing power of these institutions, as has happened in recent years. But from a “harm reduction” perspective, detaching the World Bank from the IMF would be a major step forward.

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