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.