Wolfowitz Nomination Depressing to Those Who Care About Economic Development

Last week, President Bush announced his nomination of Deputy Defense Secretary Paul Wolfowitz to be the next World Bank president. This is a disappointing decision for those who care about international economic development. At best, it shows a casual disregard for the Bank. At worst, it represents a politicization of the institution that could seriously hamper its work.

The World Bank was established after World War II as part of the Bretton Woods Agreement, which sought to put the world economic system back together again after the twin shocks of the Great Depression and the greatest war in history. The International Monetary Fund and the General Agreement on Tariffs and Trade (now the World Trade Organization) were part of the same effort.

The IMF was to maintain stability among world currencies and prevent volatile movements in exchange rates. The GATT was to break down tariff barriers and facilitate world trade. The Bank??¢â???¬â???¢s function was to help the countries that had suffered most from the war get back on their feet. The first Bank loan went to France and most of its early lending went to Japan and the nations of Europe.

But as time went by, the Bank??¢â???¬â???¢s reconstruction role ended as the physical damage of war receded. It should probably have closed up shop at that point, since its primary goal had been accomplished. But decolonization created a large number of newly independent countries in Africa, Asia and Latin America that needed help achieving economic prosperity. Since their poverty was thought to make them fertile soil for Communism, international economic development became an important goal of Western policy. So the Bank lived on.

There is no law assuring that an American will hold the World Bank presidency. Indeed, its current president, James Wolfensohn, is Australian by birth, but a naturalized U.S. citizen. However, there has been an informal understanding since Bretton Woods that the managing director of the IMF will always be a European and the president of the Bank will always be an American. In practice, the U.S. Executive Director simply puts forward a nominee when there is a vacancy and it is rubber-stamped by the other directors.

Although the U.S. is the Bank??¢â???¬â???¢s largest shareholder, it does not own a majority of shares. (The Bank is structured like a private corporation, except that all its shareholders are governments and its shares don??¢â???¬â???¢t trade.) Theoretically, the other shareholders could get together and impose their own candidate. Although a few are complaining about a lack of consultation, in all likelihood Wolfowitz will prevail.

One difference this time is that the Treasury Department appears to have been totally out of the loop on the nomination. Historically, it chose the Bank president and the White House went along. This is fitting because the Treasury monitors the Bank on a day-to-day basis and instructs the U.S. Executive Director on how to vote on loans and other policy issues.

Having worked at the Treasury Department, I cannot believe that it recruited Wolfowitz or favored his appointment. His government service has been at competing departments. He has no experience in banking or finance, has never worked in the development field except peripherally, and is not known to have studied or written on the subject. The nomination appears to have been imposed upon Treasury by the White House.

By all accounts, Wolfowitz had hoped to succeed Defense Secretary Donald Rumsfeld. But with Rumsfeld showing no signs of leaving his position, Wolfowitz may just want to move on. The Bank presidency is conveniently available (Wolfensohn??¢â???¬â???¢s term runs out in May), pays well, and requires no messy Senate confirmation. In return for his work on Iraq, Bush may have no other motive than rewarding a loyal aide.

But it is also possible that Bush wants to use the Bank to pursue his goal of spreading democracy to the Middle East and elsewhere. In the past, the Bank has generally ignored domestic political factors in making loans, judging each one on its own merits rather than the worthiness of those in power. With few real democracies in the developing world, most loans necessarily have gone to nations best characterized as having authoritarian rule.

Although the Bank takes account of corruption in making loans, if only to protect its investments, it is rightly wary of compromising its neutrality by seeming to have a political agenda. Doing so would greatly complicate the Bank??¢â???¬â???¢s job and put its staff in danger of being considered political partisans. Under Wolfowitz, they may even be viewed as agents of American foreign policy.

Similar concerns were expressed when Robert McNamara, a former Secretary of Defense, was named president of the World Bank in 1968 and it survived. However, I??¢â???¬â???¢d feel better if President Bush had appointed an actual banker to this position.


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