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16 - 23 May 2007 
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Finance and Banking


Paul Wolfowitz: The Untold Story

Since the "Wolfowitz scandal" broke, critics of the World Bank president, within the bank, have engaged in selective press leaks and calculated smears intended to oust him. Initially, the bank’s bureaucracy systematically sought to prevent Mr. Wolfowitz and his girlfriend Shaha Riza from telling their side of the story. Could there be more than meets the eye in this saga?

A majority on the World Bank's board, many of whom are directors from Third World countries opposed to president Paul Wolfowitz's anti-corruption campaign, understandably want him out. But why is the World Bank Group Staff Association so intent on getting rid of Wolfowitz?

It's all about jobs. Wolfowitz's actions threaten to lead to a dramatically scaled back workforce, possibly even the bank's collapse.

In a world now awash in private capital, the World Bank is not as competitive as it once was. To stay in the game, it has been "lowering its fees to the point of losing money," stated Adam Lerrick, an economist with Carnegie Mellon University. In a 2005 study for the American Enterprise Institute, Lerrick had found that the interest subsidy embedded in bank loans, "a compelling 12 percent per annum in 1999, has now shrunk to less than 2percent on average as emerging nations have gained increasingly greater access to private capital."

But the bank has had one competitive advantage that no private-sector Western lender can match – a willingness to lend large sums to corrupt Third World administrations with few governance strings attached. Wolfowitz's arrival in 2005, and the anti-corruption measures he has brought in, have jeopardized that advantage big time, as seen in a chilling memo the bank received on March 12 of this year.

The e-mail memo, entitled "Sanctions Reform Roll-Out in EAP [East Asia and Pacific Region] – Your Feedback Needed," was from the manager of the bank's operation in China, Hsiao-Yun Elaine Sun, to James Adams, vice-president for East Asia and Pacific Region. It warned that the bank could lose its second-largest customer, the Chinese government, if it insisted on carrying through with its intention to hold borrowing countries to account for World Bank monies that were used inappropriately.

China's Ministry of Finance (MOF) "is very concerned about the implementation. They foresee potential disagreements as to the scope, level, and approach of the bank's involvement on specific cases. Our MOF counterpart is so worried and is considering to suspend the lending program discussions next year – in order to avoid getting into a confrontational situation with the bank."

Losing a large borrower like China, which has some US$21-billion in outstanding loans and credits with the bank, and accounts for close to 10percent of the bank's total portfolio, would lead to significant staff layoffs. Moreover, at least three other countries – India, Mexico and Indonesia – have also expressed alarm at the bank's anti-corruption program, which would make their officials subject to investigation and exposure. These four countries alone, ranked first, second, third and fifth in size among bank customers, account for 30 percent of all World Bank business. World Bank staffers can be forgiven for feeling that they are standing at the edge of an abyss.

Without corruption-related lending, the bank's prospects are grim indeed; the bank's continued existence would be called into question. Moreover, Wolfowitz seemed determined to press ahead with his reforms, despite the upsets he was creating.

Prior to Wolfowitz's arrival, the bank had never acted against a borrowing country or its officials over allegations of corruption – it limited its sanctions to contractors, and even then sanctions were a rarity, despite an estimated 20 percent to 30 percent of all World Bank lending that went missing. Wolfowitz promptly suspended or cancelled loans to Kenya, Chad, India, Bangladesh and Argentina, among others.

The bank's board of directors, which includes representatives of the Third World countries that benefited from the bank's largesse, erupted when he cut off funding. Wolfowitz did not back down, as seen in his plan to roll out the sanction reforms broadly to borrowing governments.

The leak over Wolfowitz's handling of his girlfriend's compensation occurred two weeks after the e-mail from China began reverberating through the World Bank's corridors.

Some World Bank employees are, in all likelihood, themselves on the take (dozens have been either disciplined or are under investigation), and oppose Wolfowitz for fear that they could be exposed. These are a minority. The majority are complicit in that they knew what was going on, and chose to turn a blind eye. Their financial incentive to do so is clear: The World Bank's remuneration for its professional staff is exceedingly high. In 1995, a U.S. Government Accountability Office study pegged it at US$125,000 per year tax free, excluding the highest level of management. While the bank does not reveal its average salary today, it would top US$175,000 tax free, assuming an escalator of 3 percent per annum.

This financial incentive sheds light on the staff's determination to rid the bank of Wolfowitz – staffers have been far more vocal in their desire to oust Wolfowitz than the board, where Canada, the United States, Japan and several reform-minded African countries are thought to be supporting Wolfowitz and his desire to rid the world of corruption. The members of the board – some represent lenders, some borrowers, some countries that are clean, some that are corrupt – have diverse interests. Not so with the more uniform reaction of World Bank staff: It overwhelmingly depends on the continuation of corruption for its own continuation. Wolfowitz be damned.

By Patricia Adams
Economist and Executive Director of Probe International

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