Robert Zoellick took over as president of the World Bank at the end of June after controversial US politician Paul Wolfowitz was forced out of the role. Zoellick is a far more skilled diplomat than Wolfowitz and has a better understanding of modern finance, but he faces significant challenges in enacting change at an institution where anti-American sentiment has grown. Jon Macaskill reports.
The prolonged struggle to oust Paul Wolfowitz from his role as president of the World Bank dispirited and distracted its staff, while also solidifying opposition within the institution to the policies of the Bush administration. The World Bank is based in Washington, the US is its biggest shareholder and it is by tradition run by an American. But it has a polyglot staff and the Wolfowitz administration saw internal dissatisfaction with perceived American domination spread from the junior ranks up to executive directors.
Wolfowitz was best known as one of the architects of the US invasion of Iraq when he took over at the helm of the World Bank in June 2005. That did not endear him to many of his new employees and his focus on implementing a more aggressive anti-corruption stance towards World Bank clients also caused tension with staffers.
When it emerged that Wolfowitz had abused the World Bank’s self-imposed ethical rules in awarding a new position and a generous pay settlement to his domestic partner, who was a bank employee, this tension turned into open conflict.
Wolfowitz’s treatment of his partner, economist Shaha Riza, did not amount to outright venality. By financial industry standards her compensation was not high, and nor was the increase that Wolfowitz pushed through.
But his disregard of clear World Bank rules for the treatment of domestic partners by senior executives made a mockery of his defining policy goal of tackling corruption among the bank’s clients.
Wolfowitz clung on to his post in the early months of this year as details emerged of his treatment of Riza, before eventually resigning in the middle of May.
The choice of Robert Zoellick as successor to Wolfowitz was widely praised as a smart decision by the Bush administration. In his longstanding roles as a US trade representative and deputy secretary of state, Zoellick built a reputation as a hard but diplomatically skilled negotiator. He became used to manoeuvring within large bureaucracies and made personal contacts outside the US that aided an easy confirmation of his nomination by the World Bank’s 24-member executive board.
Zoellick worked for Goldman Sachs in the year between leaving his position as a deputy secretary of state and receiving the nomination for the World Bank presidency. He had also worked at Fannie Mae between 1993 and 1997 and at the Treasury while still in the Bush administration.
Zoellick’s better understanding of modern financial instruments, compared to that of Wolfowitz, is expected to prompt a renewed push to use new hedging techniques as part of the World Bank’s operations.
Zoellick signalled in August that he intends to promote initiatives such as programmes to help World Bank borrowers to manage their interest rate and foreign exchange risk, and encourage use of new techniques to hedge against exposure to weather (see feature on weather risk management in this supplement).
But the biggest near-term challenge for Zoellick is how to revive the anti-corruption drive that had been the defining aspect of Wolfowitz’s tenure without causing further tumult within the World Bank.
Zoellick was given a major boost in this battle on September 13, with the release of a report on the work of the World Bank’s anti-corruption unit by a committee chaired by former Federal Reserve chairman Paul Volcker.
The anti-corruption unit, known as the institutional integrity department (INT) was set up in 2001. It met resistance from World Bank employees when it stepped up its investigation of corruption within the bank and this intensified when Wolfowitz appointed Suzanne Rich Folsom, a counsellor with close ties to the US Republican party, to run the unit at the beginning of 2006.
Volcker’s independent report began by noting the slow progress that has been made in the anti-corruption fight at the World Bank since its board endorsed a strategy based on four core principles in 1997. The goals were to prevent fraud and corruption in World Bank projects; to assist countries that asked for help in curbing corruption; to bring corruption concerns directly into country analysis and lending decisions and to join a broader international effort against corruption.
“Every dollar lost to illicit acts is a dollar taken from those most in need, the world’s poor,” the Volcker report said. “Moreover, the bank’s support for national efforts to improve governance can hardly be credible if the bank does not effectively deal with corruption programmes that it supports with its own funds. Conversely, there is an important demonstration effect to the extent the bank can prevent, identify and successfully deal with the threat of fraud and corruption in its own programmes.”
The Volcker report detailed ways in which relations between the INT unit and other parts of the World Bank had become strained, in turn affecting relations between the bank and its borrowers and funding partners.
The report placed an emphasis on recommendations for ways to improve the effectiveness of the INT unit. It said that the role of head of the INT should be upgraded to join the ranks of the 22 vice-president at the bank, with a reporting line to the president maintained. But it recommended that the combined role of head of the INT and counsellor to the president, which was enjoyed by Folsom, should be ended. An external advisory oversight board for the INT function was recommended, along with a series of tactical changes designed to reduce the friction between the INT and other parts of the bank, without making the unit toothless.
The Volcker report seemed designed to allow Zoellick to make a swift endorsement of its main recommendations in order to revive the anti-corruption drive early on his watch as president.
Zoellick enthusiastically endorsed the bulk of the report when it was formally unveiled. “The Volcker report makes clear the serious challenges ahead in overcoming the cancer of corruption in operations supported by the bank, and it offers constructive recommendations. Now it will be up to all of us to move forward, as part of our ongoing commitment to address this vital issue,” Zoellick said. “The World Bank group needs a strong, professional institutional integrity department, backed by management and supported by a bank-wide commitment. As the report has explained, INT has achieved notable success, but we can do better and need to integrate its work into our operations more effectively and consistently.”
But Zoellick also said that he would retain Folsom in her position as head of the INT, virtually guaranteeing further conflict within the bank. A report produced by a US lobby group called the “government accountability project” (GAP) just before the Volcker report went further in criticising the staff installed by Wolfowitz to run the INT. After the release of the Volcker report on September 13, GAP criticised both the language used by the independent committee, and the way its findings were treated by Zoellick.
“Where the panel describes INT’s treatment of staff in investigative matters as fair and then goes on to describe the use of coercive and intimidating tactics, often the conclusions drawn by the panel seem irrelevantly benign,” the lobby group said. “Overall, this schizophrenic pattern first appears in the divergence between the content of the World Bank’s laudatory press release about INT and the report and the rather critical content of the panel’s actual review. This same inconsistent treatment of INT occurs with the necessarily stripped-down content of the executive summary and the relatively pointed and acute observations made later on the same points in the body of the text.”
One of the criticisms levelled by GAP, and other critics of recent World Bank policy, is that the INT has been dominated by American staff since the installation of Wolfowitz as president in 2005. The Volcker report addressed that issue and recommended that the INT should ensure more diversity in its staff, consistent with a need to recruit investigators of high technical competence.
Zoellick resisted the temptation to pander too openly to the anti-American lobby within the bank by throwing Folsom overboard. But he would presumably not be too downhearted if she decided to make a return to the private sector, allowing Zoellick to draw a clearer line between his administration and that of Wolfowitz.
The World Bank group committed US$34.3bn in loans, investments and guarantees in its fiscal year to June 30, the day Zoellick took up the role of president. Even critics of Zoellick hope that he can use his long diplomatic experience to improve the effectiveness of the World Bank’s use of this enormous resource to combat poverty around the globe.
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