The Three C’s of World Bank Practice: Corruption, Clientelism, and Cronyism

Aldo Caliari

(April 23, 2007) The Spring meetings of the World Bank and the IMF (April 14-15) were completely overshadowed this time by the corruption scandal engulfing World Bank president, Mr. Paul Wolfowitz. At issue is the role Mr. Wolfowitz played in securing a promotion and a substantial pay rise for his domestic partner, Ms. Shaha Riza (former World Bank press officer) when she transferred to the State Department in 2005. The scandal brewed for nearly a month, prolonged by Mr. Wolfowitz’s various attempts to mislead inquiries about the situation. 

It was only on Friday April 12 that Mr. Wolfowitz apologized about the situation and offered to release all documentation, including a memo detailing the instructions he actually provided to the Bank’s head of human resources. While a forced resignation seemed unavoidable over the weekend, the Board of Directors continues to review the matter. 

Several aspects of the situation –beyond those that make it suitable tabloid material—are worth highlighting.

First, the scandal exposes the risks and flaws of the current process for selecting the leadership of such an influential institution. Leadership for the World Bank and International Monetary Fund are chosen by majority vote in the Board.  Seems fair in theory, but the EU and US have such a disproportionate number of votes that they have final say. Through a “gentleman’s agreement” the US chooses the President of the Bank and the European governments choose the head of the IMF.  As you’ll recall, the decision to appoint Mr. Wolfowitz was made by the current US administration after limited consultation.

Critics have called for an open and competitive process where several candidates are formally considered and required to defend their credentials and visions for the institutions. If anything, the ongoing scandal is illustrative of the need for a thorough and public review and scrutiny of the character and credentials of candidates.

Second, in an ironic twist, shortly after taking over his duties Mr. Wolfowitz launched an anti-corruption drive, pushing for making good governance and the fight against corruption a critical element of the World Bank activities. Understandably, the events of this year’s Spring meetings, unveiling corruption and mismanagement at the top of the Bank itself, inspired in many thoughts of “poetic justice.” Indeed, there hardly could have been a more straightforward way to expose the contradictions inherent in the claim by the Bank to have the authority to judge corruption and governance in poor countries

Third, the investigation of the affair has brought to light what seem to be ingrained corruption problems in the Bank. The investigation continues to unearth evidence that the Wolfowitz scandal, rather than an isolated event that can be purged by removing him, is just the tip of an iceberg in terms of corruption and clientelism at the Bank. While requests for inquiries on Mr. Wolfowitz have already expanded beyond the affair, some have pointed out that a culture of preferential hiring of family members and those with contacts at the Bank is one that the Bank perpetuates—with Mr. Wolfowitz’s situation being just one more example of it. The role of the Board is also implicated. In fact, can the Board justify its own lack of due diligence? Granted, Mr. Wolfowitz did not follow the Board advice but, reportedly, when the Board learned of the final arrangement for Ms. Riza it said “the conflict of interest had been dealt with appropriately.” An anonymous employee complaint on the same matter, in January 2006, was equally dismissed by the Board. It is impossible not to draw analogies to the scandal around the “oil for food” program in the context of the UN. In that case, the Security Council had overseen all contracts for whose handling the former Secretary General of the UN, Kofi Annan, was being questioned. Yet, governments holding decision-making and even veto power in the Security Council were those very same governments showing the toughest stance on Mr. Annan’s behavior.

The passionate response Mr. Wolfowitz has unleashed inside the Bank is also prompting many questions. Last week one of his two Managing Directors (effectively a number two at the Bank), appointed by him, called for his resignation. Staff at the Bank is deeply divided. The risks that his continuation may result in a permanent state of “civil war” within the commonly perceived monolithic institution, and the repercussions on the Bank’s ability to carry out normal business, are becoming a new source of preoccupation and definitely feature in the calculations of those charged with providing some closure to the affair. No doubt the staff reaction has to do with Mr. Wolfowitz’s controversial background: his role as a close advisor in the Bush Administration, his support of the Iraq invasion, his insistence in surrounding himself with a close-knit group of highly influential advisors linked to the Bush Administration and, finally, what some describe as a slowness to act and lack of vision that has brought the Bank into paralysis.

It is only fair to ask how much of the vitriolic staff reaction is no more than what one might expect from the cadres of any organization who see long held and condoned nontransparent and clientelist practices challenged by an outsider empowered to overhaul them. Should this hypothesis prove right, what are the implications for the nature of past World Bank loans? As corruption hits home, will the Bank continue to assume no responsibility for loans of questionable use to known dictatorial and corrupt regimes? More worrisome, what is the moral of the story for a reform of World Bank practices? What is the lesson for future would-be reformers of the Bank? In fact, in an institution where the general incentive is to move money around and the individuals’ promotions and incentives are linked to that same imperative, taking a hard stance on corruption may be something that can only happen “against great odds”, or not at all.

Finally, the crisis comes at the pressing time of replenishment of the World Bank coffers that lend to the poorest countries. Given the debt cancellation deal of 2005, where the developed countries canceled the debts of some of the most highly indebted developing countries, the pressure is on to raise 165 percent of what it raised last time around. The scandal at the highest level of the Bank structure significantly undermines the credibility of the Bank efforts at this critical time. While reducing the pot of money for poor countries may be of little importance to the US government – its policies have consistently promoted a downsizing of multilateral development institutions—it is certainly a matter of concern to other donors.

Mr. Wolfowitz’s departure increasingly seems not a way out of the problem, but just the lesser of two evils. Whether Mr. Wolfowitz stays or goes, the future standing of the Bank will never be the same.

Aldo Caliari, Director of Rethinking Bretton Woods Project of the Center of Concern. This article was first published in Catalyst, a publication of the Center of Concern and may be viewed at http://coc-catalyst.typepad.com/catalyst/2007/04/the_three_cs_of.html .

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