WORLD BANK - New World Bank Order

Can Robert Zoellick devise a strategy to ensure the aid agency’s relevance?

IN THE JOCKEYING FOR PLUM positions that followed President George W. Bush’s reelection in 2004, thenU.S. trade representative Robert Zoellick set his sights on the presidency of the World Bank, which was about to become vacant on the retirement of James Wolfensohn. A veteran of Washington’s foreign and economic policy establishment, Zoellick had spent four years advocating free trade as a powerful tool to promote development and combat the frustration that feeds terrorism, so running the Bank -- the world’s leading development agency -- seemed a fitting capstone to his career. There was just one snag: Bush decided to dispatch Zoellick to the State Department as deputy to newly named secretary Condoleezza Rice and to award the Bank job to Paul Wolfowitz, the former deputy Defense secretary and an architect of the U.S.-led invasion of Iraq.

Today Zoellick and the Bank are getting a second chance. The renowned policy wonk and former Goldman, Sachs & Co. executive is working hard to restore order and credibility to an institution in disarray following Wolfowitz’s unprecedented resignation over allegations of favoritism. It’s a task that will demand the utmost of the former trade czar’s formidable diplomatic skills. The leadership crisis revealed deficiencies in the Bank’s governance and discontent among its 10,000-strong staff, who chafed at Wolfowitz’s high-handed management style and rebelled over disclosures that he had arranged a big pay raise and choice secondment for his girlfriend, a Bank employee.

Zoellick has been working quietly but effectively to repair the damage since taking over as president in July. He has visited several of the Bank’s main shareholders and many of its clients in Latin America, Africa and Asia to assure them that the Bank is putting its house in order. Getting that message across is vital as Zoellick seeks commitments of more than $30 billion in funding from donor governments for the Bank’s concessional lending program for poor countries. The new president has also reached out to staff, many of whom felt ignored or disdained by Wolfowitz, to involve them more closely in shaping the Bank’s strategy.

“To restore the efficiency and effectiveness of this institution, the most important thing to do is restore confidence,” says François Bourguignon, the Bank’s chief economist. “This is what Bob Zoellick is doing.”

Bolstering morale is certainly welcome, but that’s only a start. Now comes the hard part for Zoellick -- setting clear priorities for the Bank at a time of unparalleled challenges and opportunity.

Development remains at the top of the global agenda because of the concern, fanned by the September 11, 2001, terrorist attacks, that growing inequality feeds instability and conflict. Developed countries have committed themselves to cutting global poverty to half its 1990 level by 2015 and to making other measurable improvements in the lives of the world’s poorest people under the United Nations’ millennium development goals. Nongovernmental organizations and private philanthropists are pouring unprecedented sums of money into the fights against AIDS, malaria and other maladies.

With its global reach and decades of experience, the World Bank is the ideal organization to lead the global development campaign. But the Bank so far has failed to measure up to the task, critics say. The reason: mission creep. Under Wolfensohn and Wolfowitz, the Bank took on a growing number of mandates at the behest of its shareholders, from helping rebuild war-ravaged states to stopping the spread of avian flu to mitigating the effects of climate change. Although all laudable, the multiplying goals fragmented the Bank’s efforts.

“The Bank really lost its way in recent years,” says Jeffrey Sachs, a Columbia University economist and campaigner for African development. “It has been poorly led and poorly managed, with, in my opinion, very little accountability to clear objectives.”

Consider Africa. Wolfowitz identified the continent as the Bank’s central mission after the Group of Eight nations agreed in 2005 to double aid there, but the numbers tell a different story. In the fiscal year ended June 30, 2007, the Bank made $34.3 billion in loans, grants, equity investments and guarantees. Of that, 33 percent went to countries in South and East Asia; sub-Saharan Africa got 22 percent, just ahead of Latin America and the Caribbean’s 20 percent.

The Bank needs to overcome two big hurdles if it wants to change that pattern, says Paul Collier, director of the University of Oxford’s Centre for African Studies and a former World Bank research director whose recent book, The Bottom Billion, argues for concentrating development efforts on the poorest countries. The first is a genuine dilemma: It’s hardest to give aid to countries that need it most because they lack the stability and governing institutions to spend the money well. The second is bureaucratic inertia: It’s more comfortable, and usually more prestigious, to hold a senior post in a country like Brazil or China than in, say, Sierra Leone. Of the Bank’s 33 top managers, Collier points out, just one -- vice president for Africa Obiageli Katryn Ezekwesili -- is focused solely on that continent. “Three percent of top management talent is assigned to 70 percent of the problem,” Collier says. “There’s got to be a better focus on the core mission of the Bank.”

So far Zoellick has spent his time listening to colleagues and shareholder governments rather than laying out a detailed vision for the Bank. He has jump-started a review of the Bank’s strategy and programs that was begun at the start of the year but interrupted by the Wolfowitz affair. The review will be discussed with ministers at the Bank’s annual meeting in Washington in October, and officials hope to have a new strategy adopted by the end of the year. Zoellick declined to be interviewed, but talks with Bank officials and public comments by the president suggest several themes:

* Stepping up efforts to combat poverty in the world’s poorest countries. At a time when rich nations are failing to fulfill their pledges of increased aid, Zoellick has already been prodding countries like France, Germany and Japan to boost their contributions to the International Development Association, or IDA, the Bank arm that makes no-interest loans and grants to the poorest countries;

* Unbundling some of the Bank’s services in middle-income countries, like China and Brazil, to focus more on technical advice and consulting and less on lending. Zoellick, who came to the Bank from a yearlong stint as international adviser at Goldman Sachs, sees opportunity for the Bank to expand in financial services, from helping stimulate domestic bond markets in emerging economies to arranging a facility to help Caribbean nations obtain cheaper insurance by pooling their risk against hurricanes;

* Focusing on cross-border environmental and health issues, such as helping developing countries find cleaner energy sources to combat climate change;

* Promoting freer trade as a ladder out of poverty. Zoellick is eager to use the World Bank pulpit to lobby for completion of the stalled Doha round of trade talks, which he helped initiate as U.S. trade representative in 2001 and which aims to provide greater trade openings to developing countries, particularly in agriculture.

None of those ideas are dramatically new or innovative, and all face significant obstacles -- from the limited capacity of many poor nations to use rather than waste aid to a Bank culture that has traditionally measured success by the volume of lending rather than by improvements in living standards. Bank officials and outsiders in the development field hope that by focusing the Bank’s budget and bureaucracy around a clear and concise set of priorities, Zoellick can greatly increase its effectiveness.

“The issues we’re grappling with now have bedeviled us before,” says Katherine Sierra, vice president for sustainable development. “What I’ve been impressed with is how quickly Zoellick has mobilized the staff’s energy. If he’s able to come up with a vision that’s compelling, that is what will motivate people the most.”

The Bank needs a fresh start because, in many ways, the past two years were a lost opportunity. Wolfowitz arrived at the Bank in a storm of controversy, thanks to his pivotal role in pushing for the invasion of Iraq. He defused much of the criticism initially by winning pledges of increased aid at the G-8 summit in Gleneagles, Scotland, and by attacking U.S. farm subsidies as a barrier to trade with developing countries. But Wolfowitz never managed to build on that early promise because of his abrasive management style and failure to develop a coherent strategy, officials say.

Wolfowitz antagonized senior staff by recruiting a handful of top aides who appeared to be chosen more for their ideology or loyalty than for their development or managerial experience, such as chief adviser Robin Cleveland, who previously had helped win congressional funding for the Iraq war as an assistant at the Bush administration’s Office of Management and Budget. Wolfowitz also hired Juan José Daboub, a conservative former Finance minister of El Salvador, as one of the Bank’s two managing directors, the No. 2 spot behind the president. The Bank’s chief scientist, Robert Watson, criticized Daboub for seeking to water down references to climate change in a Bank report on energy. “They basically ran the place like a U.S. agency,” says one former Bank official.

The former president also clashed with the board of directors over the Bank’s anticorruption efforts. Wolfensohn had made fighting corruption a major issue years earlier, but putting that principle into practice has always been problematic. As Collier points out, corruption is rife in many of the countries that most need development aid. Against that background, Wolfowitz’s decisions to suspend or cut off aid to programs in Congo, India and Uzbekistan without any clear guidelines for doing so raised concerns that the president was acting in an ad hoc fashion at best, or serving U.S. policy ends at worst. Critics noted that the Bank left its aid tap open for Pakistan, a country with governance problems but a key U.S. ally, even as it sanctioned India. The board upbraided Wolfowitz at the Bank’s annual meeting in Singapore in September 2006 and ordered him to redraft a policy on governance and corruption.

“Mr. Wolfowitz had no strategy for the World Bank. His fight against corruption became, de facto, the only strategy,” says Pierre Duquesne, the French director of the Bank.

Wolfowitz denied he was playing politics with aid and noted that, suspensions notwithstanding, the Bank’s spending rose on his watch (up 7.1 percent, to a record $23.6 billion, in 2006). But he acknowledged the need to clarify the Bank’s anticorruption policy.

The board finally adopted a revised corruption strategy in March -- fatefully for Wolfowitz, just as details leaked about his role on behalf of his girlfriend, Shaha Riza. The board’s ethics committee had ruled in July 2005 that Riza, then a Bank communications officer for the Middle East, would have to be reassigned because her relationship with the president created a potential conflict of interest. Wolfowitz arranged for Riza to get a secondment to the State Department and a nearly $50,000 raise in salary, to $180,000 a year. For a man who had made combating corruption his signature issue, the disclosures were incendiary. With staff and critics accusing Wolfowitz of hypocrisy, the controversy overshadowed the Bank’s spring meetings in Washington and paralyzed the institution. Following weeks of legal infighting, Wolfowitz finally agreed to resign in May after getting the board to state that he had acted “ethically and in good faith.”

Board members acknowledge that the affair exposed flaws in the Bank’s governance. Eckhard Deutscher, the German executive director who played a leading role in the negotiations over Wolfowitz’s resignation, tells Institutional Investor that the board’s committee on governance and administrative matters will propose an overhaul of ethics procedures, including an expansion of the ethics board, at the annual meeting in October.

Deutscher also indicated the board would respond positively to a Bank proposal for implementing its anticorruption strategy. That paper, released late last month, states that combating corruption “is not an end in itself” and that the Bank must stay engaged even in countries where corruption is prevalent so that “the poor do not pay twice.” “We have to build working institutions in client countries,” Deutscher says. “The World Bank can’t be a world policeman on issues of corruption.”

Rejecting the advice of thenpolitical adviser Karl Rove, who pushed for former Senate majority leader William Frist to replace Wolfowitz, President Bush sided with his powerful Treasury secretary, Henry Paulson Jr., and tapped Zoellick for the job. The prompt appointment helped contain the turmoil at the Bank but brought fresh calls from developing nations to end the U.S. lock on the presidency -- a complaint echoed more loudly last month over European efforts to install former French Finance minister Dominique Strauss-Kahn as head of the International Monetary Fund.

“He’s going to have to take more time to build coalitions than if he had been appointed under a different process,” says Dennis de Tray, vice president of the Center for Global Development, a Washington-based think tank, and a former World Bank official.

A challenging task, but most people who know Zoellick believe he is more than up to it. As a protégé of former U.S. Treasury secretary and secretary of State James Baker, Zoellick learned the art of diplomacy from a masterful tactician. A Harvard Law School and John F. Kennedy School of Government graduate, Zoellick entered government service in 1985 as deputy assistant Treasury secretary for financial institutions policy and was quickly chosen by Baker as his counselor. He went with Baker to State in 1989 and served as lead U.S. negotiator in the talks that led to German reunification in 1990, an experience that earned him lasting goodwill in Berlin. “He has a high reputation in Germany,” says Caio Koch-Weser, a Deutsche Bank vice chairman who has held senior posts at the World Bank and the German Finance Ministry.

When Bill Clinton took over the White House in 1993, Zoellick went to Fannie Mae as executive vice president, where he successfully lobbied Congress to expand the agency’s role in the U.S. housing finance industry.

After advising Bush on economic policy during the 2000 election campaign, Zoellick won appointment as U.S. trade representative. He forged a close relationship with Pascal Lamy, then the European Union trade commissioner and now head of the World Trade Organization, with whom he worked closely to launch the Doha round of negotiations. He also developed extensive ties in Beijing, first by negotiating China’s entry to the WTO in 2001 and later as deputy secretary of State in 2005, when he called for China to become a “responsible stakeholder” in the international system.

Zoellick has a reputation as a demanding but fair boss who works long hours and masters technical details -- and expects every bit as much from his staff. He wasted little time in imposing his no-nonsense management style at the Bank, instituting daily 8:30 a.m. meetings with senior executives -- a practice and hour virtually unheard of at the institution. (Wolfowitz and Wolfensohn held staff meetings once a week.) James Adams, vice president for East Asia/Pacific and admittedly not a morning person, says he now has to arrive at the Bank at 7:00 a.m. to talk to officials in the field before the meeting but nonetheless welcomes the new openness at the top. “This guy basically gives the message, ‘I want you to do your job, and if there’s an issue, come to me,’” he says.

But for Zoellick and his staff, the Bank’s job is becoming harder than ever. According to the latest UN report, released last month, some 41.1 percent of the population of sub-Saharan Africa was living on less than $1 a day in 2004, compared with 46.8 percent in 1990. In South Asia, by contrast, the rate has fallen to 29.5 percent from 41.1 percent.

Part of the problem is money. At the G-8 summit meeting two years ago, rich nations promised to increase their combined aid by $50 billion a year, to $130 billion, by 2010; aid to Africa was supposed to double as part of the package. But so far, few countries have delivered. Aid provided by the world’s main donors fell 5.1 percent last year, to $103.9 billion, according to the Organization for Economic Cooperation and Development. “There needs to be greater effort on the part of the donors,” says Daniel Leipziger, the Bank’s vice president for poverty reduction. “It’s an issue where the Bank can play a leadership role.”

Zoellick’s most urgent task is to persuade donors to replenish IDA. The Bank is seeking $31.8 billion from donors for the three-year period beginning in July 2008, a gain of nearly 50 percent from the previous period, owing largely to the cost of debt relief already agreed to by the G-8. Zoellick has begun pressing the issue with senior officials, including Finance Minister Koji Omi last month in Japan, the Bank’s second-largest shareholder, but countries have been noncommittal. Japan faces domestic budget constraints, and the U.K. has criticized the Bank for failing to heed its own policy of limiting the number of conditions attached to aid. All donors need to be persuaded that the Bank is reforming itself to ensure that aid is used effectively, says Germany’s Deutscher. “The president knows convincing steps are still necessary.”

Getting the money will be difficult enough; spending it effectively will be harder still. The Bank revised its action plan for Africa, which gets half of the IDA’s aid, earlier this year to focus on a smaller number of priorities, such as strengthening the private sector, expanding transportation networks among countries and improving health care, but measurable gains remain few and far between.

Columbia’s Sachs argues that the Bank should ditch its own priorities and focus on the UN’s millennium development goals, which include getting all children in primary school, slashing child mortality by two thirds and reversing the spread of AIDS and malaria. “Those goals are quantitative. There’s a timetable. And country managers need to be put on notice that they are accountable for helping move their countries toward those goals,” says Sachs.

Other critics advocate more of a micro approach. Allan Meltzer, an economics professor at Carnegie Mellon University and author of a critical report in 2000 that called for a radical overhaul of the Bank, says Zoellick needs to commission independent audits of all the Bank’s programs. Those that produce measurable gains in living standards would continue to be funded; those that don’t wouldn’t.

One area where Zoellick is eager to expand is the role of the International Finance Corp., the Bank’s private sector lending arm. The IFC boosted its investment commitments to IDA countries by 75 percent in the 12 months ended June 30, to $3 billion, or 37 percent of its overall business. Most of that money was invested in what Lars Thunell, the agency’s president, calls frontier countries, those with the lowest incomes or the highest country-risk ratings. Thunell, a former CEO of Swedish bank SEB, says Zoellick sees plenty of opportunity to link the IFC’s commercial investments with IDA activities, which focus on fundamentals like infrastructure, education and economic policy. “He understands the private sector,” Thunell says.

In addition to boosting the Bank’s efforts in poor regions, Zoellick is determined to maintain its activities in middle-income countries like China and India. They still have large pockets of poverty despite their newfound economic dynamism -- 300 million people in India live on less than $1 a day, for example.

Zoellick is also eager to stay engaged in China because of the country’s growing influence in developing countries as an investor and buyer of commodities. Cooperation with Beijing can improve the prospects that Chinese investments contribute to the Bank’s development goals rather than prop up corrupt countries, Bank officials believe. An early hopeful sign: In June the IFC signed a memorandum of understanding with China’s export-import bank to apply IFC lending standards in Indonesia and Africa.

Rising prosperity is bound to affect the World Bank’s role in

middle-income countries, forcing it to develop new activities and rely as much on technical know-how as on lending. Increasingly, that means focusing on energy and climate change. The Bank estimates that developing countries need to invest $165 billion a year to meet their growing energy needs. Shifting to low-carbon energy alternatives could cost an additional $30 billion a year; adapting to climate change could add $40 billion to the bill.

In China, where the Bank helped draft the first law on carbon emissions trading, officials hope to set up a center of energy expertise in Beijing that would offer advice, and possibly funding, to provincial authorities on ways to meet power demands with cleaner, more efficient plants. The approach is a departure from the Bank’s traditional project-oriented lending, but with China aiming to improve its energy efficiency by 20 percent over the next five years, officials see plenty of demand for the service. “I think we have a real role in doing more, not less,” on Chinese energy, says Asian chief Adams.

Others share that vision. “The World Bank is ideally positioned to play a growing role in clean energy,” says Deutsche Bank’s Koch-Weser. “You need macro, micro and sectoral expertise, finance and convening power. It’s an enormous opportunity for Zoellick.”

And one that Zoellick, with his extensive network of contacts and diplomatic skills, is eager to seize.

Robert Zoellick has restored calm at

the bank after the upheaval surrounding the resignation of Paul Wolfowitz, but can

he devise a strategy

to ensure the aid agency’s relevance and effectiveness?