Monday, March 21, 2005

Trading Wolfies 

Another thing I didn't get to last week -- and man, am I glad that's over! -- was commenting on Paul Wolfowitz' nomination to head the World Bank. My first reaction was 'whoa!' You might think one needs to be an economist or a banker to run the place, but that would be mistaken. The first president of the World Bank, after all, was Eugene Meyer, who was head of the Federal Reserve Board when it made a series of bad moves in 1931 which exacerbated the Great Depression. He lasted only six months before returning to operate the Washington Post. (He was Katherine Graham's father.) The Bank has had Robert McNamara run it 1968-81 and Barber Conable 1986-91. So it's not like Bush went too far afield in nominating Wolfowitz.

The left in Europe is aghast, of course. They've signed a petition upset that the US gets to pick the World Bank president -- a deal that has been around for decades informally, in return for the US acceding to Europe on selection of the head of the IMF -- and that the World Bank might actually try to help the U.S. with foreign policy. (The horror!) Indeed, David Steven reports this note from someone at the Bank:
The nomination has shown conclusively that the intent of the Bush administration is to try to use the Bank as a tool of its foreign policy. Only someone of Wolfowitz's stature and credibility with Bush can fight this - that is, once we at the Bank have partly sucked him in to our agenda.
So it's worth asking what is it that Wolfowitz would want to do? I can point to two things that can help, each of which Wolfowitz might be able to do. First, James Wolfensohn, the outgoing Bank president, was quite resistent to the changes envisioned in the Meltzer Commission's recommendations when they were made. The WSJ opines that these comments are valid since they were so vehemently resisted at the time. Retaliation at critics within the Bank have been rather public (Joe Stiglitz and Bill Easterly would be just two). While the Bank has made fighting corruption a priority, it still engages in massive lending to governments at favorable interest rates, creating a moral hazard problem. Meltzer said this about the Bank:
...they lend about $20 billion a year; it takes 9,500 full-time employees to do that. God knows how many others are there on part-time or consulting services, but not on the official payroll. And they have very little to show for their work. The places where they have success are places like China, where they're a drop in the bucket as to the total amount of capital that comes to China. The places where they have failure are places where they're the principal lender. They haven't been able to create the incentives for those countries to want to do the right thing. That's one thing we're continuing to try to do, trying to push them in the direction of getting more responsive to incentives.

In the 21st century, we have large parts of the poorest world where there isn't potable water, there aren't sanitary sewers, there isn't inoculation against measles�all of those things. People talk about AIDS, and AIDS is in the headlines, but lots of children die of measles, and for about 5 cents a person we know how to inoculate people against measles. So it just seems wrong that we don't have a system in place to do some of those things.
Could Wolfowitz fix that problem? The installation of Horst Kohler at the Fund -- who was Europe's second choice after the US pressured them over their first -- got several changes made there. So it's possible. Suffice to say, Wolfowitz will not be bothered by the Meltzer recommendations at all, as they've largely been part of U.S. economic development policy.

Second, Bush policy has centered on the Millennium Challenge Account, a grant that has $5 billion behind it. Quietly a corporation overseeing up to half of this money has been established and is in the process of understanding how to use the rules to get countries to focus on "governance, democracy, rule of law and human rights." Lost in the hubbub last week was that MCC just executed its first loan, to Madagascar. The reason for MCC is that the World Bank and other mulitlateral development banks have two major problems. First, as Meltzer also pointed out, the lending tends to be towards short-term goals.

Wolfowitz may fix that, as well as perhaps cut back on the size of the Bank's bureaucracy. If he can get that done, he'll go down as one of the Bank's best presidents.