Mission impossible II
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Mission impossible II

The damage wrought on the World Bank in recent years is substantial. As he struggles to salvage its credibility and define its role, president Robert Zoellick faces an unenviable task - but also a rare opportunity

By Taimur Ahmad and Lucien Chauvin

The damage wrought on the World Bank in recent years is substantial. As he struggles to salvage its credibility and define its role, president Robert Zoellick faces an unenviable task - but also a rare opportunity


When Robert B Zoellick was nominated to succeed Paul Wolfowitz as president of the World Bank in July, the sigh of relief among many of the institution’s shareholders was palpable. 

Perhaps out of expediency, few publicly contested the appointment, eager to nail shut the ignominy of the Wolfowitz years: Zoellick’s nomination was thus spared the widespread outcry – barring a few prominent calls for change – that has in recent years accompanied the longstanding practice of picking out rich-country envoys to head up the world’s multilateral lenders. 

Like Wolfowitz,  a former US deputy defence secretary, Zoellick too was plucked from Washington’s policy elite; unlike his predecessor, he came without comparable stigma – in Wolfowitz’s case, the scent of war. A former US trade diplomat, Zoellick was long regarded by many as the worthier candidate last time around, but he lost out to his erstwhile colleague in June 2005 through political manoeuvrings in Washington, following the retirement of then Bank president James Wolfensohn. 

He may be second time lucky, but the task now facing Zoellick in restoring the credibility of what has been the world’s leading development agency is hard to overstate. With a growing number of observers asking whether and how the Bank can remain relevant to today’s globalized economy, Zoellick is also facing up to the Bank’s internal wounds following what many staffers describe as years of weak leadership and bad management. 

Among Zoellick’s first priorities has been reaching out to the 24-member executive board while wrestling with how to boost morale among the Bank’s 10,000 plus staff. For some, the change in dynamic is already clear – and the simple fact of a new boss has itself helped lift the mood: “The relationship between the board, top management and staff has improved,” says Rogerio Studart, one of the Bank’s executive directors representing Brazil, six other Latin American countries and the Philippines. Though not all the issues from the Wolfowitz era have abated, “Zoellick has been very efficient in demonstrating dedication and vision.” 

A vision thing

Setting the institution’s priorities is Zoellick’s principal challenge as he grapples with how to keep the Bank at the forefront of the global development campaign.  

In October, Zoellick laid out, in a speech marking his first 100 days in office, an ambitious vision for the institution in which he described it as a “catalyst for market dynamism” and made clear he was determined to make it more effective.

“We shouldn’t lose sight of the fact that the Bank is in the development business,” says Joseph Stiglitz, the Bank’s former chief economist, who argues that the Bank has lost its way in recent years. 

His contention holds currency with other leading development economists. “The Bank is at risk of becoming another aid agency,” says Nancy Birdsall, president of the Center for Global Development, a Washington based think-tank, and a former World Bank official. “We don’t need another one – we have a lot.”

Former president James Wolfensohn pursued an anti-poverty strategy with what many describe as a single-minded zeal during his decade at the helm. At the same time, under him – and at the behest of its major shareholders – the Bank assumed more and more mandates over the years: reconstruction in Bosnia, faith-based initiatives, bird flu, a carbon trading facility, the recovery of assets stolen by former leaders of oil states –  “You name it, we generated it,” says Gautam Kaji, a World Bank managing director under Wolfensohn. Critics argue this badly damaged the institution by spreading the Bank’s efforts too thinly over multiple goals. 

“The mission of the Bank ought to be development – broadly. If we want to be a ‘world’ bank we can’t say we’re only focusing on poverty. That’s where we went wrong [under Wolfensohn],” says one veteran staffer.  

“We created a justification for ourselves in one sentence. It was chiselled down to one catch phrase: ‘poverty’. Just like ‘freedom’ in Iraq, ours is ‘poverty,’ but the slogan is now rather washed out.” 

This, he says, is especially true when governments in many middle-income countries – including China – think of the general spread of prosperity rather than “poverty reduction” as such as their major economic objective.

What mission? 

The debate over the Bank’s emphasis on poverty reduction – an end whose worth itself no one disputes – boils down to a struggle between those who believe that the Bank should remain geographically inclusive – continuing to retool its offerings for middle-income countries like Brazil, Russia, or much of east Asia – and those who contend that the real mission is assisting the world’s poorest countries, especially in Africa. Purists argue that the Bank’s mission is to help the poor and, given that a majority of the world’s poor are found in the middle-income countries, overlooking them would be a violation of the original charter. 

Studart says the Bank cannot afford to ignore the middle-income countries and does so at its own peril: “The Bank can only be relevant for less developed countries if it becomes more relevant in middle-income countries. It is through lending to middle-income countries that the Bank has the resources for the poor countries,” he says.

Yet demand for Bank financing is declining because there is competition – principally, according to Birdsall, from four new and rapidly growing sources: an increasing number of billionaire philanthropists, China, private capital flows and windfall resources in the form of higher commodity prices.

With such concerns in mind, Zoellick announced in September that the Bank will slash by 25 basis points the interest rates it charges middle-income countries to borrow money – the first such cut in nearly a decade. He also pledged to increase aid sharply for the poorest nations – increasing to a record $3.5 billion its own contribution to the International Development Association (IDA), which it uses to provide grants and credits to the world’s poorest countries.

The steps were seen as an attempt by Zoellick to balance disparate interests among shareholders. The lower borrowing fees for developing countries such as China and Brazil could make them more willing to go along with wealthier nations in contributing more to development in extremely poor parts of Africa, the argument goes.

“We need to look at becoming like a full-service bank that is much more in tune with middle-income countries and their needs, recognizing that we bring to the table knowledge and capacity for solutions that Wall Street banks do not provide,” says Pamela Cox, the Bank’s vice-president for Latin America. 

The question of relevance also involves how the Bank processes lending requests, regardless of countries’ income level. Loans can take up to two years to be approved, which could dissuade middle-income countries that have access to other sources of financing. The lending rate cut will help, but the Bank must also deal with high non-financial costs, if it hopes to get countries like India or Mexico interested in loans that they can get from private banks, at slightly higher costs but with none of the cumbersome baggage attached to a World Bank credit. 

Cox says it is important for the Bank to streamline processes and adopt new approaches, like lending to sub-national governments (municipalities, states) and making loans in local currencies. She would also like to see the Bank put a little more faith in countries that have developed their own checks-and-balances systems, to cut some of the non-financial costs of loans and speed up approvals.  

In August, Zoellick, a former vice-chairman of Goldman Sachs, hinted at the direction he might take the Bank by announcing a raft of new financial products for the institution to deploy. Examples include insurance against natural disaster, protection against sudden swings in the value of currencies, or hedge funds to insure against a fall in commodity prices. But reaction to the proposals has been mixed, with many questioning whether the Bank should be encouraging developing countries to invest in complex financial instruments, some of which are being blamed for the current volatility in global markets. “It won’t do to try to save the Bank by making it a pale shadow of Goldman Sachs,” says one Bank staffer.

Urgent tasks

Zoellick’s most pressing task is to persuade donors to restock IDA. The Bank is looking for $31.8 billion from donors over a three-year period starting July 2008. But major donors such as the United States are hesitating to make new commitments to IDA because they face budget problems or prefer to provide aid for specific projects through their own development agencies.

There is also criticism within the US government circles about how the World Bank programmes are managed. In early September, the US Senate approved an amendment that calls for the US Government Accounting Office to investigate IDA. Congress too is taking a tough line. House Financial Services Committee chairman Barney Frank told Emerging Markets his committee would only be prepared to step up support for the Bank if it “becomes more sensitive to economic distribuion issues.” 

“If we can get the Bank moving in the right direction in terms of social things. then we’ll provide support,” he says.Cox says that it is too easy to say the World Bank or other multilateral helps or hinders development, but she adds that the US lawmakers are right to look at IDA, because it is funded by US taxpayers. “I think that it is right that our shareholders want to be sure that we are spending their money in the right way,” she says. 

Shareholders may also spare a thought for the parlous state of the Bank’s human resources, which suffered a steady blood-letting under Wolfowitz. The former president riled senior staff by surrounding himself with a handful of top advisers, who appeared to be picked more for their ideology than for their development or managerial know-how. But the decline in leadership predates his ill-fated tenure, many contend: “The quality of leadership declined significantly [under Wolfensohn],” says Shahid Husain, a former World Bank senior vice-president, a process which then gained momentum under his successor.

“There is no second-tier leadership because that layer was hollowed out [by Wolfensohn] – he put in place people who were singularly unimaginative and risk averse,” says another long-serving staffer. “If we are really at the cutting edge of the IFI [international financial institutions] community, we desperately need better managers.” 

In an attempt to reassert the Bank’s past strength, Zoellick appointed Ngozi Okonjo-Iweala, former Nigerian finance minister and long-serving Bank executive, as managing director, with responsibility for the Bank’s Africa, South Asia, Europe and central Asia regions. She is one of three top lieutenants, alongside Graeme Wheeler of New Zealand and Juan Jose Daboub of El Salvador, the latter a controversial Wolfowitz appointee. 

Yet some say even Zoellick faces an uphill battle in reclaiming moral authority, especially among the developing world, after his stint as US trade ambassador. “His behaviour throughout Cancun [WTO ministerial meeting in 2003] was one of contempt for the developing countries,” says Jagdish Bhagwati, economics professor at Columbia University. “The most important reason Cancun failed was because Bob Zoellick couldn’t accept the fact that the G20 stood up to the US, so he instructed [chairperson Luis Ernesto] Derbez to shut it down.” 

“He was so conscious of American power,” says Bhagwati.   A future role

Neverthless, if Zoellick is able to reverse the Bank’s human resources plight, he could find himself in a strong position to build on the institution’s strengths –in particular, its comparative advantage in helping countries manage development. 

“The role of the Bank should be to push – it’s the only institution that can see the big picture,” says Birdsall. “I don’t think it’s a matter of evolving away from poverty.”

Birdsall recommends developing a “clearer, sharper and better- funded mandate for dealing with global public goods” including global warming (and energy management more broadly) and generating better technologies in health, agriculture, communication and information systems that could be transforming for development. 

Second, she urges a “clear policy pricing of the Bank’s technical advisory services, making advice without loans one of the products on offer”. A focus on global public goods would mean that the Bank’s major contribution takes the form of technical advice. Money for such an initiative comes from what Birdsall calls a “global public goods trust fund”, which would operate like a global credit cooperative. 

“Is there a better institution than the Bank to oversee a major effort to see how global warming can be addressed, including, for example, monitoring and surveillance of any agreed reductions by countries?” she asks. “Similarly, is there a better institution than the Bank to catalyze and finance research and development (R&D) for new technologies for poor countries?”   

The Bank should focus on such big questions, says Birdsall, but right now it doesn’t have a mandate for doing this – “It will take the shareholders in their collective wisdom to make this decision on the Bank’s future.” 

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