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World Bank woes remain despite Wolfowitz resignation

World Bank woes remain despite Wolfowitz resignation
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First Published: Wed, May 23 2007. 04 26 PM IST
Updated: Wed, May 23 2007. 04 26 PM IST
Washington: The crisis has ended over Paul Wolfowitz, with his resignation as president of the World Bank last week. But the bank's identity crisis has just begun.
The entire international economic architecture established after World War II -- the World Bank, the International Monetary Fund and what is now called the World Trade Organization -- is buckling under the weight of globalization, trade disputes and the ambitions of rising economic powers in Asia and elsewhere, experts and policy makers say.
The World Bank and its sister groups were established to secure the international economy in 1944 at Bretton Woods, N.H.
The World Bank was supposed to rebuild Europe and reduce poverty elsewhere with grants and loans. The IMF tried to avoid financial meltdowns by monitoring countries' economic policies. The WTO sought to ensure the smooth flow of goods and services, thus keeping the world economy growing.
The World Bank's cumulative lending to China, for example, is $40 billion (Rs1,62,329 crore) for 274 projects. But China is now an export superpower, sitting on reserves worth more than $1 trillion -- so wealthy that it recently announced its own $210 billion program of loans and credits to Africa. Some question whether the World Bank should be lending to China at all.
"The Bretton Woods system has become outmoded," said Robert Rubin, a former U.S. Treasury secretary who now is chairman of the executive committee at Citigroup.
Eckhardt Deutscher, a German development official who serves as the dean of the bank's board of directors, called for a re-examination of the role of all the institutions.
"The biggest challenge of the World Bank is to restore its credibility," Deutscher said. The most immediate issue that the bank and the fund must face, experts say, is who governs them.
The recent bank crisis erupted over a narrow dispute over charges of favoritism against Wolfowitz. But it exposed a larger fissure over whether the U.S. could retain its role of picking the bank president at a time when U.S. contributions to the pool of grants and loans to the poorest have fallen in relation to what other countries do.
President Bush's appointment of Wolfowitz, an architect of the Iraq war, was not a popular one with the Europeans in 2005, but they went along with it. Now the administration wants to retain the power to pick the bank president, and Europe wants to continue picking the head of the IMF. But there is a growing consensus that this dual tradition is outdated.
"The Wolfowitz situation exposed what an antediluvian system the bank has," said Kenneth Rogoff, professor of public policy and economics at Harvard, referring to how the head of the organization is chosen.
Among those with vested interests in the bank, Rogoff said, are some who do not want to acknowledge that the bank's role in lending -- the total was $23 billion last year -- has become less relevant to current realities.
Last year, more than $14 billion (Rs56,837 crore) of the bank's lending went to so-called middle-income countries like China and India. The bank borrows the money at low cost because of its peerless credit rating and then lends it at slightly above that rate. The money it makes on the loans helps pay the bank's overhead, including salaries to its 13,000 employees.
Some bank officials acknowledge that one reason for continuing loans to middle-income countries is that their repayments keep the bank staff large enough to provide technical assistance and analysis needed by donors and recipients alike.
In 2000, an advisory commission created by Congress and headed by Allan Meltzer, professor of political economy and public policy at Carnegie Mellon University, recommended stopping loans to middle-income countries and converting loans to the poorest countries into grants.
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First Published: Wed, May 23 2007. 04 26 PM IST