Dysfunctional Bank

Robert Zoellick officially succeeded Paul Wolfowitz as head of the World Bank this weekend. President Bush tapped Zoellick, a former U.S. trade representative and State Department negotiator, back in May, and ever since, observers have asked the same question they ask every time a new Bank head is on his way in: Will he be able to reform the institution to make it effective in fighting poverty? Despite a multitude of reforms over the years, nobody — inside or outside of the Bank — ever seems satisfied with the Bank’s performance.

It’s easy to see why dissatisfaction is so widespread. The Bank is practically unmanageable. It is an international government bureaucracy of some 10,000 employees and thousands more contractors responsive to dozens of donor governments, whose political and economic priorities often conflict.

It is an agency beset by missions as disparate as fighting corruption, promoting gender equality, reducing disease, supporting agriculture, privatizing state firms, building dams, and funding microcredit. Thus, it is without focus.

And contrary to the lessons of economic history, its development model is based on transferring wealth from rich country governments to poor country governments, which typically lack transparency or the capacity to undertake myriad government programs.

With so many “priorities,” bosses, and sovereign actors, it should be no surprise that a central problem at the World Bank is the lack of accountability. Indeed, the very way in which Wolfowitz left the Bank because he authorized a large pay raise to his girlfriend, lacked transparency or accountability. His ouster was negotiated behind closed doors rather than through an on–the–record vote by the executive board for an episode that occurred right under the board members’ noses and with their involvement. In the end, the Bank both forced Wolfowitz to leave and cleared him of ethical violations. Beyond that, the board slapped itself on the wrist by noting that “mistakes were made.” Classic World Bank.

But far more significant to the world’s poor is the lack of accountability in World Bank lending. The aid agency does not allow independent audits of the projects it finances, but we know that an incredible number of Bank projects — between 20 and 50 percent, since the 1990s — have not been sustainable according to the Bank’s own criteria.

The bipartisan Meltzer congressional commission found in 2000 that the Bank reviewed only five percent of its programs within three to ten years of the funds’ distribution. That problem has not been solved, leading to a consensus across a broad spectrum of observers in favor of truly independent audits. As Nancy Birdsall, president of the Center for Global Development recently stated, “Without impact evaluations that are rigorous, independent, and thus credible, we cannot know what programs work. We cannot even argue convincingly that foreign aid itself works.”

The Bank measures success by the amount of aid it pushes rather than by results. The institutional pressure to lend is well known by its borrowers. Countries take aid money promising to undertake projects, but as long as they keep current on their loans, the Bank can continue lending and can boast a high payback rate, despite the quality of the projects financed. The goal of borrower and lender alike is to keep the aid money flowing, thus the Bank often makes new loans available shortly before old ones come due. (In the rare cases when countries fall into arrears, the United States and other donor nations have on occasion provided the offending nations direct bridge loans, which are then used to pay back the World Bank, which then resumes lending.)

The pressure to lend undermines aid conditioned on policy reform as well. Since the Bank rarely cuts countries off, countries uninterested in reform face little Bank pressure to change. In a review of aid to Africa, Oxford University’s Paul Collier explained that “Some governments have chosen to reform, others to regress, but those choices appear to be largely independent of the aid relationship. The microevidence of this result has been accumulating for some years. It has been suppressed by an unholy alliance of donors and their critics. Obviously, the donors did not wish to admit that their conditionality was a charade.”

Indeed, problems in World Bank lending reflect problems that plague foreign aid in general. There is no relationship between aid and growth nor between aid and reform. High–growth successes like China and India have received relatively little per capita aid. On the other hand, when aid goes into countries that maintain bad economic policies, the result is debt, not development. That is certainly the case of sub–Saharan Africa, where decades of generous aid have helped governments impoverish the region and have led to massive debt burdens now deemed unpayable by the World Bank. The response of the Bank has been a “debt forgiveness” scheme in which it raises new money for the heavily indebted countries and thus resumes lending to them.

Surely there are ways to help poor countries, including by opening our markets to their goods and by exchanging ideas and technology. But the World Bank’s approach to promoting development is hopelessly unsuited to the task, a fact we’ll be reminded of when Zoellick steps aside.

Ian Vásquez is director of the Center for Global Liberty and Prosperity at the Cato Institute.