Sat, 12 Mar 2005

Democracy in inaction at the World Bank

Joseph E. Stiglitz Project Syndicate

James Wolfensohn, the president of the World Bank, has announced his intention to leave, and the search is on for a new head of the world's most important multilateral organization promoting development. The choice is especially important now, when poverty in the Third World is finally being recognized as our greatest problem and challenge.

The World Bank's designation as a "bank" understates its importance and its multifaceted roles. It does lend money to countries to undertake a variety of projects, and to help them through crises (such as the US$10 billion it provided to Korea in 1997-1998). It has been, and is, playing a vital role in post- conflict reconstruction around the world.

But the Bank also provides grants and low-interest loans to the poorest countries, particularly for education and health, and advises these countries on development strategies. It has often joined with the IMF in strong-arming countries into accepting this "advice": Unless they do, they will not only be cut off by the IMF and the World Bank, but also by other donors, and capital markets will be discouraged from providing funds.

Sometimes -- its critics will say often -- the advice provided by the IMF and World Bank is misguided. This was certainly true in the 1980s and early 1990s, when right-wing ideology dominated, producing a one-size-fits-all prescription entailing privatization, liberalization, and macroeconomic stability (meaning price stability), with little attention to employment, equity, or the environment.

The term "bank" is a misnomer in a second sense: While the World Bank refers to its members as "shareholders," it is hardly a private bank. On the contrary, the World Bank is a global public institution. But, while the G-7 countries, which dominate voting at the Bank, all declare their commitment to democracy and good governance -- and espouse promoting them as one of their central objectives -- there is a yawning gap between what they preach and what they practice.

Indeed, the entire process of choosing these international institutions' leaders is a historical anachronism that undermines their effectiveness and makes a mockery of the G-7 countries' commitment to democracy. This process, established at the outset 60 years ago, is framed by an agreement that an American would lead the World Bank and a European would lead the IMF. The American president would choose the Bank's head, and Europe would collectively decide on the IMF leader, with the understanding that the other side would exercise its veto only if a candidate were totally unacceptable.

Within the United States, all major presidential appointments must be ratified by the Senate; even if rejections are rare, the vetting process is important, for the president knows that he can go only so far. But the presidency of the World Bank is a rare presidential plum -- an appointment that is not subject even to Congressional hearings.

How can advice on democratic reforms be taken seriously when the multilateral institutions that offer it do not subscribe to the same standards of openness, transparency, and participation that they advocate? Why should the search for Wolfensohn's successor be limited to an American (and especially an American loyal to a particular political party)? Why is the search process going on behind closed doors? Shouldn't these international public institutions be looking for the best-qualified person, regardless of race, religion, gender, or nationality?

The two names that have been floated so far -- presumably leaked as trial balloons -- are particularly disturbing. To put it bluntly, given the World Bank's importance, consideration of either putative U.S. candidate, Assistant Defense Secretary Paul Wolfowitz or former Hewlett-Packard CEO Carleton Fiorina, have been highly controversial around the world. Even if convention allows the American president to appoint the World Bank's head, the organization's success depends on the confidence of others. Neither Wolfowitz nor Fiorina have any training or experience in economic development or financial markets.

Of course, some past appointees turned out to be far better than anticipated; they rose to the occasion, despite qualifications that, in any open and objective selection process, would never even have left them on the short list. They proved that there is always a chance of outperforming. But this does not outweigh the risk of underperforming, which is why the best policy is to look for the best candidate.

There are some absolutely first-rate individuals who could step into the job, people who have shown their command of economic development, their intellect and personal integrity, and their political and managerial skills. Such potential candidates include former Mexican president Ernesto Zedillo, a Yale Ph.D. who now teaches there and has been strongly supported in an editorial in the Financial Times; Arminio Fraga, a Princeton Ph.D. and former head of Brazil's central bank; and Kemal Dervis, a former World Bank vice-president who has taught at Princeton and successfully managed one of Turkey's crises as finance minister. Why should the world settle for anything less than candidates of this caliber?

It is time that the G-7 countries back up their democratic rhetoric with action. Many stood up to the U.S. as it pushed for the war in Iraq. They were right to be skeptical about U.S. claims of an imminent danger from weapons of mass destruction.

What is at stake here is no less important: The lives and well being of billions in the Third World depend on a global war on poverty. Choosing the right general in that war will not assure victory, but choosing the wrong one surely enhances the chances of failure.

The writer, a Nobel laureate in economics, is Professor of Economics at Columbia University.