Wolfodämmerung II: So what does the World Bank do now?

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Paul Wolfowitz is now really, truly on the way out (although he is, as has become his custom, dragging it out for as embarrassingly long as possible). So now President Bush will pick a replacement. Whose job should be what, exactly?

The answers to this question I’ve been seeing have mostly been about healing wounds at the bank and figuring out what to do about Wolfowitz’s anti-corruption campaign. But the former shouldn’t be all that hard as long as the administration picks somebody with interpersonal skills and/or a pedigree in development, and when I was doing the reporting for my column on the World Bank a couple of weeks ago, most of the people I talked to thought Wolfowitz’s corruption crusade was a side issue. The much bigger question facing the World Bank is whether it still needs to be a bank:

The World Bank’s initial job was to finance reconstruction in Europe. The Marshall Plan rendered that task superfluous, so the bank–in the first of several reinventions–moved on to bankroll development in other countries. The idea was to lend to governments that were creditworthy but had no access to rich-country capital markets. “Now we live in a world where there are huge global capital markets, where, if anything, investors are too willing to invest in developing countries,” says Adam Lerrick, a former investment banker who teaches economics at Carnegie Mellon University. The World Bank’s net lending has plummeted over the past few years, even as it keeps shopping loans to the likes of Brazil, Turkey, Russia and China, sometimes on hugely generous terms.

Carnegie-Mellon is a hotbed of World Bank and International Monetary Fund bashers whose tough talk I had never taken all that seriously before. But when I spoke to Nancy Birdsall, a former World Banker who now runs the Center for Global Development, and she echoed parts of Lerrick’s critique, I knew something was up.

The first issue is that, for most of the “middle-income” countries that the World Bank arm called the International Bank for Reconstruction and Development lends to, more loans are the last thing they need right now. Many of them do probably need credit counseling and advice on how to spend their money–and the World Bank might be well-positioned to provide that if it weren’t so busy trying to shove loans down their throats.

The second issue is that the other half of the bank, the International Development Association, structures its aid to poor countries as loans when it would be far more honest just to make grants and leave it at that. As it is, the IDA’s lending has often been a matter of throwing good money after bad to avoid messing with the World Bank’s pristine record of almost no defaults.

That both those approaches need changing seems to be something that’s widely agreed upon outside the bank, but opposed at least tacitly within. And as best I can tell Wolfowitz didn’t even try to address these issues. In the early years of the Bush administration, Under Secretary of the Treasury John Taylor made a big push to move the IDA from lending to granting. Wolfowitz never seems to have gotten the memo on that. In fact, as far as previous administration policy on the World Bank went, his appointment was a total non sequitur.

Now I’m not saying there’s anything like full agreement on the future course of the World Bank. I think Lerrick would be happy to see the World Bank shrivel up and die, whereas Birdsall believes it can play a crucial role as the global multilateral organization most capable of actually getting stuff done. I’m enough of a multilateralist that I pretty much side with Birdsall on this. But does the World Bank really need a staff of 10,000 and a $230 billion loan portfolio to be effective? Don’t think so.