A regime changes – Paul Wolfowitz at the World Bank

The Economist
June 4, 2005
U.S. Edition

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.

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.

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 overleaf). 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.

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.

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.

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