[A-List] Wolfie's replacement

["Michael Keaney" <michael011@xxxxxxxxxxx>]

Here's another potential candidate, although more likely a direct
Democrat appointee. Interestingly the only person in the highly touted
FT economists' forum who publicly responded to Martin Wolf's comment. MK


The World Bank must regain the high ground
By Martin Wolf
Financial Times: April 18 2007

?If you want to make poverty history you have to make corruption
history.? Paul Wolfowitz, embattled president of the World Bank, cited
this remark by Nuhu Ribadu, head of the Economic Crimes and Corruption
Commission of Nigeria, in a speech made only last month. There he
emphasised, once again, the guiding theme of his presidency: fighting
corruption and improving governance.

How credible, after recent revelations, is the World Bank as a beacon of
good governance and a scourge of corruption? ?Much less than it should
be? is the answer.

In a speech just over a year ago in Jakarta, Mr Wolfowitz defined
governance as ?the combination of transparent and accountable
institutions, strong skills and competence, and a fundamental
willingness to do the right thing?. Corruption is narrower: it is the
abuse of public position for private gain. Corruption, as Jim
Wolfensohn, Mr Wolfowitz?s predecessor, said, is ?a cancer on the
development process?.

Yet corruption is also the natural thing to do. That is why it has
always been pervasive. It is its absence that is unnatural. A society
relatively free of corruption has removed the motivations of the
marketplace from politics, public administration and the law. Since rich
countries are far less corrupt than poor ones, the former have a
better-enforced line between what lies within the market and what lies
outside it (see chart).

Yet is it their wealth that causes the low corruption or the low
corruption that causes their wealth? If it were solely the former, the
World Bank?s anti-corruption campaign would be a waste of time.

Fortunately, as Daniel Kaufmann, the bank?s leading researcher on
governance, argues, the relationship works both ways. ?We estimate?,
writes Mr Kaufmann, ?that a country that improved its governance from a
relatively low level to an average level could almost triple the income
per capita of its population in the long term, and similarly reduce
infant mortality and illiteracy.?

Yet, as the chart also shows, the relationship between corruption and
economic growth is, in fact, not just weak, but even perverse: corrupt
countries have recently tended to grow a little faster. This is because
underlying opportunities also matter. The corrupt countries were poorer
and, other things being equal, poorer countries should grow faster than
rich ones, because they have an opportunity to catch up on the latter.

As Paul Collier of Oxford university notes in a wonderful forthcoming
book, development depends on two things: opportunity and the ability to
seize it.* The quality of governance is an important determinant of the
latter. But a country?s resources, size, location, environmental
condition and disease load determine the former.

The argument between those who stress institutions and those who stress
underlying conditions is fatuous. Both matter. With favourable
conditions ? such as the discovery of oil ? a badly governed country
with poor policies can grow, at least for a while. With extremely
unfavourable ones, even a relatively well-governed country will remain
poor.

Yet this desperately sad fact does not make the quality of governance
less important, but rather more so. As Prof Collier points out, many of
the world?s poorest countries do indeed suffer from limited
opportunities. Where they do have wealth, it is usually in the form of
commodities, such as oil. The management of such resources is intensive
in good governance, as is management of large inflows of aid.

In contrast, one of the world?s most corrupt countries, Bangladesh, has
grown successfully for a generation, because it depends on exports of
labour-intensive manufactures. This has proved to be both the most
potent and most governance-proof opportunity of all. It is why China and
Vietnam have both done so well.

Thus, even though the quality of governance is far from the only cause
of success in development, it is hugely important, particularly for many
of the world?s poorest and least successful countries. The bank has been
right therefore to make this one of its areas of attention. The question
is whether anybody can do much about governance. The answer, again, is
that it is hard, but not impossible.

In the significant case of corruption, it is a question of changing
incentives and moral norms. Changing incentives involves: paying
officials more; removing unnecessary and, above all, unnecessarily
complex regulation; increasing transparency, not least through free
media; and allowing citizens to exercise a ?voice? through elections.
Making such changes is hard technically and politically, since the
beneficiaries of the corrupt status quo have the power to make progress
difficult. But it is sometimes possible.

Can international financial institutions help? The answer, here, too, is
yes. They can, above all, strongly support reformers when they come
forward, as they often do.

The bank group has, after much internal dissent, come up with what looks
like a sensible, seven-point programme: first, the focus on governance
and anti-corruption follows from its mandate to reduce poverty; second,
the country must have primary responsibility; third, the bank remains
engaged in fighting poverty, as best it can, even in poorly governed
countries; fourth, bank engagement will avoid a ?one-size-fits-all?
approach; fifth, the bank will engage with a broad range of government,
business and civil society stakeholders; sixth, the bank will try to
strengthen rather than bypass the government of a country; and, seventh,
the bank will not act in isolation.

I agree with Mr Wolfowitz that fighting corruption matters. But the
institution must lead by example. Using his office to obtain what seems
an extraordinarily favourable deal for his girlfriend is not, by the
standards of our world, more than a venial sin. But his position as
leader of the world?s most important multilateral development
institution and, above all, one dedicated to the fight against
corruption makes it so.

Similarly, the pretence of ministers that a board whose members they
appoint is free to act on its own is not the gravest imaginable failure
in governance. But the fact that this is an institution dedicated to
making governance better worldwide again makes it so. The moral
authority of the bank is in the dust. Only one decent outcome of this
tragically unnecessary affair exists. The cause on which so many rightly
agree is bigger than the fate of one man.

*The Bottom Billion, Oxford University Press

*****

Comments

One should not be the only person to comment on one's own column, but I
am shocked that not one member of the forum had anything to say on
corruption, governance, the World Bank or Mr Wolfowitz. These are surely
pretty big topics - or, at least, the first two are.

Posted by: Martin Wolf | April 26, 2007 at 04:43 PM

****

Brad DeLong: Some of it is that we are not at all sure what went on, and
many people wish to reserve judgement.

But judgement is getting hard to reserve. The principal thing to note is
that Mr Wolfowitz is now on story #4. In order, the stories are:

1. That Shaha Riza's extra-sweet deal at the US State Department was
decided on not by Paul Wolfowitz - who had nothing to do with it - but
by the World Bank's Board of Directors.
2. That Shaha Riza's extra-sweet deal at the US State Department was
negotiated by Paul Wolfowitz, but he was doing exactly what the Board of
Directors wanted.
3. That Shaha Riza's extra-sweet deal at the US State Department was
dictated by Paul Wolfowitz, but that he had kept the Bank Board of
Directors informed of what he was going to do beforehand.
4. That Shaha Riza's extra-sweet deal at the US State Department was
dictated by Paul Wolfowitz, and Wolfowitz did not inform the Bank Board
of Directors, but a whistle blower wrote to the Board's Ethics Committee
after the deal was done, and the Ethics Committee did not object, so
nobody now has any standing to object.

>From this and other evidence, I don't know but I think I can guess what
the story Paul Wolfowitz tells himself is, and it goes like this:

"They hated me. And so they told me that I couldn't have Shaha Riza as
one of my close personal aides and pay her what I was paying Kellums and
Cleveland. They told me I couldn't have her as one of my close personal
aides at all. This was unfair: she, after all, was the reason I got
interested in being World Bank president in the first place. Well, if I
couldn't have her at my right hand, I was at least going to make sure
that she was paid well. What I did was no deep secret - anybody who
wanted to could have found out about it. But I was strong then, and
nobody's home government wanted to pick another fight with the Bush
administration, so they pretended that they did not know. Now I am
weaker, and they think they can take me down, and so they pretend to be
shocked! shocked! - they are having their own little
Claude-Rains-Captain-Renault-Holier-than-Thou moment. Liars. Hypocrites.
Bureaucrats. Corrupt friends of kleptocrats. They knew, and they didn't
object. Or they ought to have known. Or they could have found out if
they had dug for the details. And it's all their fault."

By contrast, the Bank staff have not changed their public story. And,
reading between the lines, I think I know what the real story is:

"We told Wolfowitz that he could not rescuse himself on personnel
matters involving Shaha Riza and yet keep her in the bank as one of his
confidential aides and with him as her boss. We told him to move her
somewhere outside his authority. We never imagined - having told him
that refusal on personnel matters was insufficient - that he would then
interfere in personnel matters affecting her to the extent that he would
dictate her salary and give her a massive raise: we expected him to
delegate that task of exactly where and at what pay grade to some vice
president somewhere.

"When we discovered what he had done after the fact, we knew that our
home country governments did not want another fight with the Bush
administration, so we let it drop. But it was still a bad and unethical
thing for Wolfowitz to do. And now that the Bush administration is weak
and people care little about appeasing further, now that it is clear
that Wolfowitz has been a disaster as World Bank president, now that the
issue has been raised not by us but by the press, and now that Wolfowitz
has responded by telling lots of lies, we are ready to do now what we
should have done when we discovered this and make a huge stink -
hopefully, a huge enough stink to drive him out of the World Bank
presidency, for which he has shown himself unsuited."

As corruption goes, this particular episode is penny-ante corruption - a
matter of $50,000 a year, perhaps $500,000 in present value - but it is
corruption, it is a straw, and it is the straw that breaks the camel's
back.

Should this be the straw that breaks the camel's back? The only
difference between Wolfowitz's intervention in Riza's salary and his
intervention in Kellums's and Cleveland's is that there were rules
against the first because Riza was already at the World Bank. If
Wolfowitz were highly qualified to be World Bank president and were
doing an excellent job, it would be time for a simple reprimand. This
doesn't mean that what Wolfowitz did is a good and ethical thing - it is
a bad and unethical thing. But it is not worth ending the tenure of an
excellent and effective World Bank president.

But Wolfowitz is not an effective and excellent World Bank president.

Posted by: Brad DeLong | May 10, 2007 at 04:48 AM


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