Bush administration weighs in on Wolfowitz and World Bank, better late than never, I guess, and thoughts about Bank anti-poverty policy

Not being in any highfalutin' political loops about the Bank and Wolfowitz, either international circles or in DC, I have been puzzled as to why the Bush administration has been so lackadaisical in defending Wolfowitz. The occasional word from Bush, but really very little said. Sometimes I have even far-fetchedly wondered whether the Bush administration's secret plan was to appoint but Tony Blair. In any case, the message taken away in foreign capitals from the lack of visible support surely would have to be that the administration would not care one way or the other what happened, at least so long as the US retained the informal right to appoint the Bank head. The view from Europe is summed up in this Financial Times editorial, here; it is essentially a rebuttal to the Wall Street Journal's editorials of the past few days.

According to the US papers today, however, the Bush administration has belatedly started to respond and defend Wolfowitz, including State and Treasury. The Wall Street Journal news pages have a good summary, behind the subscriber wall, Thursday, May 10, 2007, A6, Neil King Jr. and Greg Hitt, "Rice Launches Wolfowitz Defense." The Washington Post has an article in the business section today, John Ward Anderson and Peter S. Goodman, "Europeans Wince, Wait for Wolfowitz Saga to End," Thursday, May 10, 2007, D1, here. The WP piece seems to have been written and researched almost entirely from the European perspective, and says very little about US lobbying efforts on Wolfowitz's behalf.

The Washington Post also has a personality profile piece that finally shows a little sympathy for the woman who has really paid the career price for this, Shaha Riza. I have never met her, know nothing about her apart from what is in the papers and the blogs. I have to say, though, a surprising number of the comments posted on Bank-staff-related blogs show an utter viciousness toward her; some of these folks appear to be not such nice people, at least when concealed behind the internet veil of anonymity. (Washington Post article, here.) Indeed, to judge only by comments on the Bank-staff blogs, one might think that this campaign is essentially about getting her, even more than getting Wolfowitz.

I am also pleased to note that my Financial Times comment appeared in Arabic today, May 9/10, 2007, in the respected Beiruit newspaper An-Nahar, for those - alas, not I - who read Arabic, here, or so I am told. I've also been contacted by Le Monde about it appearing in French, but haven't seen it so far. But of course it is a modest piece, reflecting a corporate governance lawyer's concerns about what the publicly released documents show about the process and questions of fiduciary duty.

There are larger issues of policy about the Bank, obviously. Joseph Stiglitz raised some of them in his Financial Times comment, also May 7, 2007. I myself have views on some of them, although I have kept them quite separate from the narrow, lawyerly issues of fiduciary duty and corporate governance in the Wolfowitz affair. I do have another life in development finance, however. Curiously, because most of what I do pro bono as a corporate finance professor has to do with a nonprofit development fund, a nonprofit venture fund that engages primarily in lending and investment, I have a certain appreciation for what the Bank has traditionally used as its development strategy - a combination of subsidized loans and technical assistance, because that is what the organization I work with does.

One thing is clear from that kind of activity - if you are a nonprofit with a mission, but a mission driven nonprofit that nonetheless acts like a venture fund or bank, then you have to be very careful in how you target your loans and investments, because, presumably, it matters whether you get repaid or not. That is absolutely true in the case of my organization - if we lose the money, eventually donors will get tired of this and stop funding us and we are out of business. As a consequence, the places and circumstances where we can make investments are limited - places so poor that projects will not manage to repay loans don't work, nor do places where governance and rule of law is so poor that we could not hope to enforce our legal contractual rights. That leaves a circumscribed range of countries and societies in which it fits our mission to lend, but where we have a reasonable chance of repayment on a sustainable (albeit subsidized) business model.

In the case of the World Bank, something akin to the mission/lending tensions also applies - although the prospects of it going broke because its funders give up on it are vanishingly remote. The safest thing to do is borrow on the capital markets at a discount, combine this with various additional funds from donor countries, but then lend to places where you are likely to get repaid. You lend at a subsidized rate, but you don't really risk massive default. That leads you, however, not to the poorest countries, for which loans don't make sense, but to middle income countries.

The problem with middle income countries is that although they fit the business model, they don't really fit the mission of getting to really poor people. The proof, ironically, that they do fit the business model is that these countries can today tap the private capital markets. Sure, of course anyone who can get cheaper capital through the Bank will do so - in my nonprofit venture fund, we constantly get proposals from businesses that don't fit our mission profile but naturally like the idea of subsidized loans well below local rates, who wouldn't? But as I recall from Adam Lerrick, the Bank's lending in the past five years has been something like 90% to a group of 27 middle income countries, and that Bank lending was well under 1% of the total private capital market capital tapped by those countries. The Bank's lending was entirely superfluous to what the private markets were already doing - safe from a business perspective, but largely pointless from a mission perspective.

I have long accepted the Allan H. Meltzer proposals (quick summary 2 page PDF, here) - long rejected, naturally, at the Bank, since its professional structure is largely built around the Bank as a lending institution to stand-in for private capital markets - for the Bank to focus on the world's poorest people and turn itself into a grant making/technical assistance institution. If you do that, however, you don't need much of the existing machinery or, really, highly paid, highly skilled financial professionals whose task it is to manage the interaction of the Bank with its borrowings on the capital markets. You more likely need more locally focused people who can operate much closer to the "retail" level of economic development. Wrong structure, wrong set of staff, wrong focus. To be fair, the Bank has developed the world's leading expertise in poverty reduction studies - what works, what doesn't - and the world's greatest expertise in technical assistance. Compared, for example, with the corresponding UN programs, the Bank is the most important repository of knowledge, best practices, etc. - despite my criticisms here, I do acknowledge that and the accumulated intellectual capital it represents. But that is, curiously, still adjunct to its now largely overtaken financial and banking mission.

(George Will summarizes some of this thinking, largely drawn from Meltzer and Adam Lerrick in today's Washington Post, here. I think the Bank's intellectual capital in the areas of technical assistance, best practices, etc., is considerably more robust than Will and others who don't work in the area would admit.)

In addition to the Meltzer proposals to convert to grant making, rather than middle income lending, there is a second policy issue at the heart of the Bank professionals' objections to Wolfowitz (apart from everything else, I mean). That is the question of whether the function of the Bank, the measure of the Bank's success, is to shovel money out the door in a kind of European style welfare program gone global - essentially, an attempt at global income redistribution. The alternative is to focus on governance, and condition aid on governance reforms, as Wolfowitz and the American government has generally favored, in which aid is seen as an investment in the future, including governance reform, anti-corruption, all the rest, rather than simply income-shifting today, and in particular as an investment that draws in private direct foreign investment which, in the case of those countries which have lifted themselves out of poverty, has been the economic engine. (I discuss some of those questions tangentially, in a discussion about the relationship between microfinance and globalization, free download pdf at SSRN, here.)

It seems pretty obvious that the Europeans and the Americans fundamentally differ on the approach to global poverty. The same debate figured in the 2005 UN reform arguments over the Millennium Development Goals, where, for the UN bureaucracy and the Europeans, the issue was simply more and more money. Two different approaches - yet where there is no clear evidence that the World Bank-European approach has made any positive long term, generational difference to world poverty, and, to be fair, just as there is no evidence that the American preference for governance reform in fact makes any difference over the generational long term. No one, frankly, has any evidence-based method for international public institution intervention for poverty reduction.

In that case, perhaps the best thing would be to create two different institutions and let them compete in the global poverty market and see which works better. The Europeans can have the Bank, and pay for its goldplated operations; the Americans could perhaps ramp up the Millennium Development Corporation and put the money otherwise devoted to the Bank there. In a generation, maybe it will start to become clearer which approach works better - although, to be sure, as the parties become invested in their approaches, it is unlikely that either side would admit of anything.

But despite the virtues of a policy competition in something as unknown and fraught with uncertainty as this, the exhausted Bush administration, and future American administrations, are unlikely to try anything so ambitious. The reason is that the Bank is no longer really about poverty reduction for the US government. It is, instead, a place for the Americans, and for future administrations, to demonstrate their multilateral sincerity and bona fides. Serious intellectual challenge to the policy model takes a backseat far behind the need to show that the US is a team player, even if the team's policies have little to show in the past and little reason to predict that they will pay off in the future. The US is likely to seek, for a while to come, venues in which it can show itself to be a good, meek multilateralist.

The price paid in a healthy competition over effective policy on global poverty reduction - where the questions are genuinely open on both sides, and maybe what is needed is something altogether different from either one - is unfortunately considered collateral damage alongside the short term political need to demonstrate multilateral solidarity in an arena in which the costs of multilateralism - the costs of the failures of any particular anti-poverty strategy - are paid by neither the Europeans nor the Americans.

(ps, May 11, 2007. Marcela Sanchez, in the Washington Post, here, on Latin American countries, and not only those leaning Chavist, moving away from the IMF and the World Bank in favor of other sources of capital.)

PPS, May 11, 2007. Steven Weisman's New York Times account of current pressures by the Europeans to make it impossible for Wolfowitz to stay, behind the subscriber wall, but May 11, 2007, A14, notes the threat by European governments to reduce their contributions to the Bank if Wolfowitz stays. One might have thought this ... unilateralist. In any case, one wonders what they might do with the funds instead. Weisman says they would possibly contribute them to European aid agencies, and I'm sure that's so.

Why that would be such a terrible thing, however, I don't know. They would thereby shift funds from the World Bank to European aid agencies that would do approximately the same thing with the funds - although likely those agencies would put much less of that money into middle income country lending that is good for the Bank's balance sheet but not very relevant to economic development, particularly not of the world's very poor people. And my experience of the European aid agencies is that they are closer to the ideal I mention above. In my experience, they are less goldplated in their operations because they are not paying wages tied to the presumed skill sets of knowing how to tap into the private capital markets. They tend to be more efficient, much closer to what is going on at ground level, and define ground level much more as the world's poorest people.

Again, I emphasize, as I said above, I do respect the Bank as a repository of expertise on poverty reduction even if I don't think its core lending business makes sense anymore. Still, when it comes to delivery, I think the European country aid agencies - the Nordic countries, the Dutch, the Swiss, especially, do the best job I have seen of any governmental or intergovernmental agencies. The British are a mixture of the worst of the Americans and the Europeans - European in the sense of proposing to spend lots of money and measure success by spending lots of money, and American in the sense of not actually doing it - very Blairite, in the sense of the faux-solidarity Blair, really wonderful, Churchillian speeches by the Claire Shorts of this world, but then no money and no real follow through. I prefer the stolid, stodgier, but frankly much more stick-to-it Nordics - phlegmatic but dogged.

(US AID, it goes without saying, remains the bureaucratic nightmare it has always been - a trainwreck of an aid agency. Anyone who gets involved with US AID gradually shifts their orientation away from those they are supposed to be aiding and towards the worship of the bureaucracy of Washington. US AID needs to abolished and the US start over from scrach. But reforming the US delivery of poverty reduction aid is a whole other story.)

Far from being a threat, for European governments to shift financing from the Bank to their own aid agencies seems like a good idea in any case. I don't really see the downside, except, of course, if you're the Bank.