Global Poverty Research Group

The World Bank: From Wolfensohn to Wolfowitz

By John Toye*

The World Bank is a pretty malleable institution and has survived over the last sixty years precisely by exercising its capacity to re-invent itself as circumstances – and especially US politics – require it to do so. So the nomination of Deputy Secretary of Defence, Paul Wolfowitz, to be the next President of the World Bank may both herald another re-invention and, at the same time, not create such a fundamental break with the past as it is being currently represented. To understand how a World Bank re-shaping is likely to work out, the previous one is the best place to start.

The Wolfensohn Legacy

In the mid-1980s, the World Bank got into political difficulties in the United States – but not primarily with the Reagan Administration. When several US environmental NGOs attacked Bank-financed projects in Brazil for encouraging environmental damage, the Bank caved in to pressure from the US Congress and Treasury and set up an Environment Department in 1987. Then in 1992, an independent review charged that the Bank had breached its own guidelines for the conditions on which the people displaced by dam construction were to be resettled. In the course of these environmental controversies, the US NGOs demonstrated their ability to harass the Bank by means of well-organised lobbying of the US Congress.

The demonstrated power of NGOs to move the US Congress brought about a fundamental change of political stance at the Bank. Since 1996, when James Wolfensohn became President, the Bank has been pro-actively reaching out to its NGO critics, and shaping its policies to reflect their concerns. Wolfensohn, not wanting the Bank to be so badly wrong-footed again, has pursued this populist approach both in his public rhetoric and in a managerial style that frequently placed him at odds with the pre-existing bureaucratic culture of the institution. He has tried to baffle off some of the NGO criticism of the Bank by promoting his brainchild, the Comprehensive Development Framework (CDF), a matrix for coordinating all the development activities of a country. Being the guardian of the CDF allows the Bank to identify itself as a development partner and facilitator, instead of as arrogant bankers. Further, the Bank has tried to position itself as a “knowledge agency” – the repository of the world’s experience in achieving development.

Wolfensohn’s choice of new issues for the Bank to address was designed to pre-empt the opposition of the NGOs. As well as declaring poverty reduction to be the Bank's over-riding objective, the Bank's efforts have been directed to a range of other aims that will find favour with US NGOs - including the promotion of the private sector, strengthening participation and ownership and reform of public institutions to bring “good governance”. The Bank's liberal political aspirations, its willingness to accommodate pressure from NGOs and its search for policy leverage led it to support the Jubilee 2000 campaign for enhanced debt relief for highly indebted poor countries. Since debt relief was intended to be additional to existing aid flows, and since the E-HIPC beneficiaries were countries that had not managed their debt well in the past, the Bank and IMF felt that they had to insert extra safeguards. This concern was the origin of the operational device of Poverty Reduction Strategy Papers. Production of an interim PRSP was part of the E-HIPC qualification procedure. The overall aim was to ensure that the additional HIPC resources were used for poverty reduction purposes, and that this could be verified.

The Wolfowitz Nomination

The populist politics of the Bank under Wolfensohn clearly made it vulnerable to a change from a Democratic to a Republican Administration in the US. The nomination of Wolfowitz indicates that the Bush Administration is seeking a reorientation of the Bank as significant as the one that Wolfensohn has brought about – but with global security concerns uppermost in mind. This nomination is of a pattern with that of Condaleeza Rice as US Secretary of State and John Bolton as US Ambassador to the UN. Trusty confidantes from President Bush’s first term are being moved on to more prominent positions from which they can orchestrate US “soft power” in support of the continuing “war on terror”. The World Bank is seen as one more serviceable instrument for that purpose.

The appointment is not wholly unprecedented, in that not all previous Bank Presidents have had banking experience. Roberet McNamara, regarded as one of the most successful, had been US Defence Secretary for seven years, in charge of the Vietnam War. He had prior experience as an industrialist, but not as a banker. Wolfowitz also comes from a Defence position, but by contrast is a diplomat and administrator. It is possible to argue that lack of banking experience matters even less now that banking operations loom less large at the Bank, and private foreign investment provides much greater volumes of development finance for middle income developing countries. Wolfowitz does have some acquaintance with the Bank through his Arab girl friend who works there. The qualifications issue is unlikely to stand in the way of his confirmation, as European opposition has clearly already been discounted.

The part of the Wolfensohn era agenda least endangered by the change is that of good governance. Wolfowitz is currently being praised for his success in bringing democracy to the Arab world (somewhat prematurely, perhaps) and is very likely to use his leadership of the Bank to pursue a strong pro-democracy agenda. This may either involve changing its Articles of Association that require it to be politically neutral, or, if that is unmanageable, simply ignoring them. NGOs that are concerned with promoting “good governance” may find their links to the Bank strengthening, while those that are targeted on poverty reduction may find their access and influence diminishing. Wolfowitz is unlikely to dispense with programmes on participation, because of the link to democratisation. Private sector development will retain a place in the new scheme, and the ideological usefulness of claiming to be a “knowledge agency” that co-ordinates all the other development actors will not be carelessly discarded.

The Bank’s future operations will be changed in any case by the terms of the latest IDA replenishment. The total value over the next three years will be $34 billion, of which £18 billion will be new money. This was quite generous (a 25% increase over the previous replenishment), and which also increased the ratio of grants to loans to 30 %. The incoming Bank President will thus have adequate financial means at his disposal, and the key question will be how their allocation is to be changed in future. How far will commitment to democracy be taken as a pre-condition of receipt of World Bank assistance? Will enough new democracies “emerge” in the medium term to ensure that all the funds can be spent? How far will the introduction of electoral cycle into the public finances of developing countries damage their macroeconomic performance? These are some of the operational problems that the Bank will have to solve in the Wolfowitz presidency.

* The views expressed are those of the author(s) and do not necessarily represent those of the Global Poverty Research Group, Oxford University, or the Economic and Social Research Council