Special report | Paul Wolfowitz at the World Bank

A regime changes

The World Bank's new president is famous for his commitment to “regime change”. The Bank is committed to a peaceful version of the same thing

|

ON ITS way to the Mekong river, the Nam Theun tributary flows uninterrupted across the Nakai plateau in Laos, the poorest country in South-East Asia. Not for much longer. In March, the World Bank backed a proposal to dam it. Hydroelectric turbines will generate up to 1,070 MW of electricity, 95% of which will be exported to neighbouring Thailand.

This is the World Bank's natural habitat, where its compulsions and capabilities are both shown to full advantage. The project is not just an exercise in hydrology. The Bank's grants will help to resettle villagers, including Vietic-speaking hunter-gatherers, from the inundated plateau behind the dam and to compensate inhabitants of the dried-out riversides below it. As the Bank's International Advisory Group reported earlier this year, the displaced are experimenting with new ways to make a living, from an organic mulch plant to eel breeding. The project will set aside a nature reserve, where wildlife, from pangolin to reticulated python, will be defended by village gamekeepers, their salaries paid out of the dam's revenues.

But this is not, it is safe to say, the natural habitat of Paul Wolfowitz, who took office as the Bank's new president on June 1st. The plight of the reticulated python and the Vietic-speaking peoples are unlikely to have crossed his desk in the Pentagon, where he previously served as America's deputy secretary of defence. Mr Wolfowitz has instead spent most of his career cogitating about America's power in the world, representing it abroad and lobbying to enlarge it, first in congressional back offices, most recently at the intellectual forefront of George Bush's foreign policy. He knows little about finance; only a little more about development, although, as ambassador to Indonesia for three years, he has lived in a populous, poor country. Behind him, he leaves the ongoing nightmare of reconstructing Iraq, a project that is certainly behind schedule and over budget.

The Bank which Mr Wolfowitz now heads has as many sides as the Pentagon he has left. Speaking on May 31st he said he would be willing to listen and experiment, but it will take him some time to get to grips with a complex organisation. The Bank's most prominent aspect is the International Development Association (IDA), which gives grants ($1.7 billion last year) and soft loans (another $7.3 billion) to 81 of the world's poorest countries. As important, but less widely understood, is the International Bank for Reconstruction and Development (IBRD), which lent about $11 billion last year. The IBRD has some claim to being a bank rather than a fund. Blessed with a AAA-credit rating, it can borrow cheaply on the capital markets, and lend, slightly less cheaply, to the aristocracy of the third world, such as China and Brazil.

The Bank also has third and fourth sides—two smaller agencies that take on some of the risk of private lending to poor countries—and a fifth that settles disputes between foreign lenders and sovereign borrowers. Dams in Laos notwithstanding, only 5% of the Bank's money went to the energy and mining sectors last year. Three times as much went to social services, such as health, while education received 8%. The Bank also performs a type of economic chiropractics, giving money to governments in need of an “adjustment” in their policies, fiscal or monetary.

Mr Wolfowitz may, in fact, discover much that is familiar to him at the Bank. It is first and foremost a formidable technocracy. But in its own bloodless idiom, the Bank now talks increasingly about politics, even if it does so in euphemisms such as “good governance”, “capacity building”, “voice” and “empowerment”. It is committed to understanding the political institutions of the countries in which it operates. Haltingly, hesitantly, it is also committed to changing them.

In June 2000, for example, the Bank lent $190m to help finance a 1,000km pipeline from the oilfields of landlocked Chad to the port of Kribi in Cameroon. But laying the pipe was the easy bit. Much harder is managing the revenues, which threaten to overvalue Chad's currency and underwrite endemic corruption.

The Bank's answer was two-fold. It insisted that the pipeline revenues be paid into an offshore escrow account. About 10% of the money would be held aside for future generations. The rest would flow to the government's poverty-fighting efforts under the close supervision of a new body, commonly known as the Collège. Staffed by parliamentarians, judges and representatives from human-rights groups, the Collège was, in effect, a new institution of state. It was soon debating whether to withhold money from the government. Clearly then, even when it is in the business of erecting dams and laying pipelines, the Bank is also often building states and reforming regimes.

Naïfs no more

That is a big change. Until 1996, politics was the variable that dared not speak its name at the Bank. Country directors, who head its branch offices in borrowing countries, came to their jobs as “self-described political neophytes”, according to a recent Bank publication that recounts their education in the ways of the world.

Their initial innocence was largely self-imposed. Basil Kavalsky, who served as the Bank's country director across eastern Europe, confesses that it was “an article of faith...that we did not take political considerations into account.” Actually, it was more than an article of faith. The Bank's articles of agreement, its founding charter, enjoin its officers to remain studiously apolitical.

Of course, the neophytes soon learned all about the political character of their host countries. But, notes Mr Kavalsky, they treated corruption as “a given, a part of the environment to be factored into the calculation. We did not treat it as a variable—something which we should make a concerted effort to address.”

That changed with James Wolfensohn, Mr Wolfowitz's predecessor. It was perhaps his most far-reaching innovation in a tumultuous ten-year reign. In May 1996, he visited Indonesia, where Mr Wolfowitz had been ambassador from 1986 to 1989. The brazen corruption of the country's ruling Suharto clan irked them both. Mr Wolfowitz broached the issue, albeit politely, as he prepared to leave his ambassadorial post in the country in 1989. Seven years later Mr Wolfensohn was more forthright. “Let's not mince words,” he said at the Bank's 1996 annual meeting in Washington, DC, “we need to deal with the cancer of corruption.”

The following year, the World Development Report, written by a team led by Ajay Chhibber, was the first publication in which the Bank properly addressed the topic. It was the beginning of a thorough re-examination of the role of the state and political institutions in development.

Mr Chhibber is now given to quoting Napoleon: “institutions alone fix the destinies of nations”. That dictum finds some support in the latest economic research on development. A number of economists believe the policies they advocated in the 1980s and 1990s—stabilise prices, liberalise trade, privatise industries—matter less than the institutions that stand behind those policies.

Leading the chorus are Daron Acemoglu, Simon Johnson and James Robinson of the National Bureau of Economic Research. As they point out, for example, the prescription of stable finances and sound money did little to help in Argentina. The state found itself chronically prone to profligacy, for deep institutional reasons. It had to appease the country's unruly outlying provinces, which contribute little to the economy but dominate parliament. Likewise, they argue, Ghana's wildly overvalued exchange rate in its post-independence decades was not a monetary blunder. It was a political strategy designed to redistribute resources from the country's cocoa exporters, who received artificially low prices for their exports, to the import-buying city dwellers, on whose support the regime depended.

Measure for measure

Testing such theories is fraught with difficulty. But the measurement of institutions has made some progress. Dani Kaufmann, at the World Bank, notes an explosion of indicators of good government, most based on business surveys or expert perceptions, that offer measures of accountability, bureaucratic competence, the rule of law, and so on. By sorting and sifting these numbers, he and his colleagues believe that they can derive workable measures of misrule. Precise rankings between countries are not possible, but broad comparisons are, and changes over time can be discerned. Over the past eight years, for example, many governments in Africa have defied the Afro-pessimists (see table), although more have regressed.

Mr Kaufmann believes he and his colleagues can demonstrate a strong causal link between his indices of sound government and prosperity. If the rule of law in Somalia, for example, were to match even that prevailing in Laos, Somalia's income would rise two- to three-fold in the long run, Mr Kaufmann estimates.

These are powerful arguments. But even if it is true that institutions fix a nation's destiny, can the Bank fix a nation's institutions? Is there a reliable “transmission mechanism” between the levers the Bank can pull and the results it cares about?

By training and temperament, Bank staff have tended to view government as a practical art. But their efforts to date give comfort to those of a more fatalistic cast of mind, who believe good government cannot be engineered, but must evolve.

In 2000, the Bank unveiled its strategy for reforming public institutions and strengthening governments. Between 2000 and 2004, lending to promote economic reforms fell by 14% a year, but lending to improve governance rose by 11%. In the 2004 fiscal year the Bank committed 25% of its lending to law and public administration (see chart). It had 220 staff dedicated to the cause, and more than 840 professionals affiliated with it.

For the most part, its direct efforts were confined to poorer countries, dependent on IDA for grants and soft loans. The richer developing countries, such as Brazil or India, where the state apparatus was formidable, were reluctant to cede ground to outsiders. In China, where Edwin Lim once served as chief of mission for the Bank, “the economic dialogue was always,” he admits, “within the Chinese ideological and political limits.”

A review of the Bank's efforts to prune the lush bureaucracies of African states concluded that civil-service reform remains elusive and intractable. Elsewhere, anti-corruption commissions proliferated, but achieved little—indeed they were often set up in the wake of some scandal as an alternative to doing anything.

Part of the difficulty, as Dani Rodrik of Harvard University points out, is that typical measures capture institutional outcomes, not institutional forms. The “rule of law”, for example, measures how secure an investor feels about his property. It tells us little about precisely what makes him feel that way. According to Michael Woolcock, of the Bank, and Lant Pritchett, of Harvard University, the development industry can agree on “objectives” (children should be taught, roads should be passable, the rule of law should prevail) and “adjectives” (government should be accountable, transparent and responsive). But that is about all. As a result, Mr Kavalsky notes, the Bank's prescriptions in this field often come “very close to a tautology”. What is required for growth? Good governance. And what counts as good governance? That which promotes growth.

That “P” word again

But the main difficulty was the obvious one: politics. When the Bank moved in on examples of bad governance, it too often forgot to ask, bad for whom? Consider, says Mr Chhibber, Turkey's banking system prior to that country's financial crisis in 2001. In 1998, the government was advised to set up an independent financial regulator, styled on those of Britain and Canada. Instead it created a regulator that was packed with political appointees. To the Bank's technocrats, it was obvious that the country had too many banks, many of them state-owned, and that they were not serving the economy at all well. But in Turkey at that time, state banks had a different purpose. They were the playthings of politicians, given to them as the spoils of electoral victory.

In such a situation, Mr Chhibber points out, all the Bank can do is bide its time. After the 2001 financial crisis, political resistance to an independent regulator broke down. Once established, the regulator closed more than 20 private banks, and cleaned up the system, at a cost of 33% of GNP. Mr Chhibber argues that earlier failures contributed to the eventual success. The work undertaken in 1998 allowed Turkey, under a new economy minister, Kemal Dervis, himself an alumnus of the Bank, to take advantage of the opportunity for reform when it arose.

In a speech in 2000, Mr Wolfowitz reflected on the thawing of authoritarian regimes in South Korea, Taiwan and the Philippines—the last of them on his watch as assistant secretary of state for East Asia. In these regimes, he noted, America worked on institutional, rather than revolutionary, change. It once counted Ferdinand Marcos, the dictatorial president of the Philippines, as an ally. If it had written him off, it would have lost all influence over him, Mr Wolfowitz said. But America could not coddle Marcos indefinitely either.

Such dilemmas will almost certainly revisit Mr Wolfowitz in his new job. The Bank must continually choose whether to coddle bad governments, or to cut them off. If misrule matters so much for development, should it reserve its money for committed reformers, turning its back on the reform-shy? That would make its money go further; it might also encourage laggards to reform. David Dollar and Victoria Levin, two Bank economists, reckon that since 1995 the Bank's soft-loan arm, IDA, has become much choosier about its clients. Broadly speaking, money flows to countries based on two main criteria: how well run is it? And how poor?

IDA may be pickier than it once was, but the Bank as a whole is not quite as discriminating as this study suggests. Richer countries, even if badly run, can still unlock money from the IBRD, the Bank's commercial-loan arm. And disastrously run countries are never entirely shunned by IDA. Each gets a small allocation regardless of its performance, and some qualify for money from the Bank's £25m trust fund for failed states, which it calls “low-income countries under stress”.

Some think that, if it were to confine itself to the well-governed parts of the globe, the World Bank would scarcely warrant its title. But the Bank is learning that every unfit government is unfit in its own way. In some countries, citizens cannot hold policymakers to account (China); in others, policymakers cannot bend the bureaucracy to their will (Armenia). In some cases, the state is captured by venal interests—either wealth captures power (Russia under Yeltsin), or power captures wealth (Russia under Putin). In others, the state is so weak there is nothing worth capturing.

The Bank must pitch itself accordingly. If the state is honest, but weak, the Bank can try to train judges and equip civil servants. But there is no point investing in the machinery of a captured state. A project to strengthen the fiscal apparatus of Mobutu Sese Seko, the kleptocratic former ruler of Zaire, counts as the most misguided Bank project ever, in the opinion of Susan Rose-Ackerman, a corruption expert at Yale University.

If there is no will for reform on the part of government leaders, the Bank can try to go over their heads, stimulating demand for reforms in the public at large. Sometimes this works. When Thailand slipped in the Bank's ratings of good government, Mr Kaufmann recalls, the prime minister had to go on the radio to explain himself.

Truman's show

Some will argue, of course, that foreign aid has been political since its inception. The World Bank owes its existence to America's strategic commitment to rebuild post-war Europe. And many think the modern aid business and the cold war were twin-born at the moment of President Harry Truman's inaugural address in 1949. That speech is famous for Truman's vow to strengthen the freedom-loving nations of the world against the false philosophy of communism. But in it he also promised to share America's know-how and some of its resources with those parts of the world threatened by the “ancient enemies—hunger, misery and despair.”

Mr Wolfowitz, of all people, is not one to disavow Truman's commitment to strengthen freedom. But if the ends Truman sought were deeply political, the means were mostly technocratic. The Bank which Mr Wolfowitz now leads is in a different game. The ends it pursues are primarily technocratic—it wants to fight poverty, not a false philosophy. But the means it employs have to be canny, opportunistic and, yes, political.

This article appeared in the Special report section of the print edition under the headline "A regime changes"

The Europe that died

From the June 4th 2005 edition

Discover stories from this section and more in the list of contents

Explore the edition