Breaking the Bank
By Joseph Sternberg

Well, Bono he isn't. Paul Wolfowitz, nominated yesterday to head the World Bank, may lack a vast store of international goodwill, and he's certainly allowing his hair to gray naturally (both in marked contrast to the Irish U2 rocker-cum-development specialist whose name was jokingly circulated recently as a contender for the post). Nonetheless, and despite varying degrees of protest from politicians and peaceniks alike, Wolfowitz might just be what the Bank needs.

 

Wolfowitz possesses three virtues in particular that should serve him well in his new post. He's not an economist. He's not a banker. And he's not popular.

 

To understand why these counterintuitive virtues will work in his favor, it helps to step back and consider the World Bank in all its current glory. The Bank (and its sister, the International Monetary Fund) were born in 1944 as part of an effort to shore up the European economy. The IMF would offer short-term help in financial crises, while the Bank would fund longer-term projects to rebuild after the war. In the 1950s, with Europe firmly on its way to prosperity, the two institutions went global.

 

The IMF's success is a tale for another day. But one thing is clear--the World Bank is pretty bad at what it does. Sixty years after its founding it doesn't have much true economic growth to show for itself, but has left a trail of stalled projects, absurd boondoggles and ruinous debt in its wake. That's not even counting all of the dictators its loans have effectively subsidized over the years (an unfortunate side effect of the fungibility of money).

 

The Bank's problem is that it captures so perfectly a particular moment in history. It was reared in the era of big government: It was chartered to make loans to governments, in order to fund government projects. The theory was that any government could tax and spend its way into economic growth. The Bank would just loan the spending money for poor countries lacking a sufficient tax base.

 

All too often that growth never came. So those same countries were still lagging behind when the Cold War went Third World in the '60s and '70s. In the heat of an East-West battle for hearts and minds, the Bank became a vehicle for America and its allies to fund elaborately wasteful projects to compete with the elaborately wasteful projects the Soviets were financing in the same regions.

 

Unfortunately it wasn't just a phase. The dubious economic logic invoked to justify such projects continues to haunt the Bank. The junior staffers who inhaled the vapors while starting their professional lives in the extravagant '60s and '70s are now senior staffers. Although the thinking has gone through so many permutations that it might appear unrecognizable (over the years we've gone from dams and roads that don't go anywhere to primary schools to clinics), at heart nothing has changed. The Bank rests its hat on an economic theory that assumes governments are the engines of growth, and that if you just loan enough money for the right projects, development will happen.

 

Which is why Wolfowitz's first virtue is that he's not an economist. He's an intelligent man, so he will be comfortable moving amongst intelligent economists. But he won't be "one of them." He has not spent his professional life bandying about the economic axioms (many of them misguided or downright false) that echo through the halls of the Bank's offices.  He has the potential to offer a breath of fresh air.

 

One of the most problematic facets of the World Bank is that it's a bank in the first place. The debt-forgiveness crowd is right that foreign debt stifles many poor countries. Whatever one thinks about the wisdom of forgiveness (and there are many compelling arguments against it), it at least seems reasonable to ask why, if poor countries are saddled with unbearable debts today, it would be a good idea to shackle them to yet more debt-dependent development strategies. Yet the Bank hasn't wanted to ask that question--after all, making those loans are the core of its mission.

 

A fault of James Wolfensohn, whom Wolfowitz will replace when the current Bank president's ten-year term ends in June, was that he emerged from the banking world. Wolfowitz's second virtue is that he doesn't. Wolfensohn tried to bring new ideas to the Bank during his tenure, even if his tireless energy was perpetually thwarted by bureaucratic inertia and his own fatally flawed management style. Yet he was hampered by his banker's instincts. He would tinker with the lending formulae or with the type of projects the Bank would support instead of questioning the wisdom of a lending regime in the first place. Although he has lately come to advocate debt forgiveness, most of his tenure was spent creating that debt.

 

In fact, economists are finally coming to the conclusion that governments are ill suited to the task of fostering growth. The trick instead is to encourage trade in free markets. Unfortunately, this is an approach for which the Bank is fundamentally ill-suited. So Wolfowitz's third virtue might just prove to be his unpopularity among developed-world politicians. If their distaste of him encourages them to marginalize the Bank when they think about development, perhaps we're making progress.

 

Joseph C. Sternberg is managing editor of The Public Interest.