In early March World Bank president James Wolfensohn showed up at the U.S. Department of Treasury for a regularly scheduled briefing for Treasury Secretary Paul O’Neill. It was no love fest. According to officials familiar with the session, O’Neill “went ballistic,” pounding the table and accusing Wolfensohn of having criticized him in a recent speech for the Treasury secretary’s disdain for conventional development-assistance programs, such as large infrastructure projects. O’Neill vehemently insisted, sources say, that he and the Bush administration had entirely valid concerns about how effective conventional aid -- of precisely the sort the World Bank administers -- is at alleviating poverty.
The U.S. and the World Bank can’t agree on much about how to attack global poverty, and their ideological and political rifts gape wide, with major implications not only for development policy but also for the world’s poor. As if to drive home the point,
President George Bush unveiled the U.S.'s alternative global antipoverty program at an Inter-American Development Bank meeting in Washington on March 14. Standing beside rock star and activist Bono, Bush announced a $5 billion-a-year -- or 50 percent -- increase in U.S. development aid over three years, starting with the 2004 budget.
Dubbed the Millennium Challenge Account, or MCA, by Bush National Security Adviser Condoleezza Rice, this mini Marshall Plan comes with plenty of strings attached, in keeping with the administration’s insistence that foreign aid produce measurable results: Funds are available only to countries making discernible progress in promoting economic and political freedom and investing meaningfully in health and education. Continuation of aid depends on trackable outcomes.
Wolfensohn was unimpressed. “An extra $5 billion, as important as it is, unless it is linked to the work of others is not going to achieve the objectives of effectiveness,” he told Institutional Investor during a series of interviews (see below). European and other critics worry that the aid will be earmarked for explicitly political purposes, such as encouraging allegiance to Washington’s war on terrorism. The Bush administration is adamant that the MCA will not become politicized.
The White House, for its part, is not bowled over by Wolfensohn’s World Bank. They see it as an inflexible, bloated bureaucracy and complain that aid programs have accomplished “precious little,” in Secretary O’Neill’s words. “Although it is always good to congratulate people who are meaning well and working hard, there is still a huge amount of poverty around the world, and the progress is much less than it could be,” says Treasury’s top international hand, undersecretary for international affairs John Taylor. “The World Bank has a lot of resources it can use to focus and address poverty, so it is the responsibility of the people who contribute to the World Bank to demand that the funds be used as effectively as they can.”
The Bush administration may be accused of equivocating on economic policy, but it has a definite agenda on development aid. For a start, it wants the World Bank to switch half its aid for the very poorest countries from cheap loans to outright grants, to help prevent these struggling nations from piling on even more unmanageable debt; the U.S.'s initiative here has been at best only partially successful.
Washington is also convinced that U.S. aid -- and, by logical extension, World Bank aid as well -- should only to go to countries that are making good progress toward democracy, free markets and decent education and health care. And just as the U.S. demands that American aid produce tangible, measurable results -- the proportion of children inoculated for measles, primary education completion rates, the rate of business start-ups -- it also wants the World Bank to adopt, and heed, such “results-based” indicators. In his March 14 speech, Bush described the Millennium Challenge Account as “a new compact for global development, defined by new accountability for both rich and poor nations alike.”
The president “is changing the whole structure of foreign assistance,” says Andrew Natsios, administrator of the U.S. Agency for International Development and one of the administration officials busily framing out MCA. “That’s why the U.S. is upsetting some people. That’s why Wolfensohn, who I have great respect for, is in some ways defending the old model, the way the multilateral development banks have done aid. I am not sure it has been terribly successful.”
Paradoxically, Wolfensohn finds himself more on the defensive than ever about the World Bank and its methods just when the climate for bolstering its antipoverty mission couldn’t be much more favorable and the Bank itself appears to be emerging from a difficult patch (Institutional Investor, September 2000). Staff morale, abysmal just three years ago, has bounced back, according to the most recent independent survey. The Bank’s lending, which had dramatically declined following a temporary surge during the Asian financial crisis, is on the rise again, hitting $19.5 billion in the fiscal year that ended June 30.
Moreover, the Bank has shifted away from the mammoth white elephant projects -- highways through the Amazon, environmentally disastrous dams in India -- that once gave it such a bad name. Now it concentrates on focused, governance-oriented infrastructure projects, such as helping countries manage their health and finance ministries. What’s more, it has been heeding its own research, which shows that aid is effective only among countries that genuinely want to reform: In 1997'98, countries with what the Bank judged to be good development policies received almost twice as much money per capita as countries with poor policies. And the Bank’s quasi-independent evaluation reports show that more of its projects are meeting their specific objectives.
“Wolfensohn took over the World Bank in 1995, when it was seen even internally as a sunset institution,” says Robert Picciotto, head of the Bank’s operations evaluation department. “He broadened the focus on social development, despite internal opposition. He gradually changed the leadership, and he embraced development effectiveness. Now we have a different Bank. Lending resources have been shifted to favor countries with better policies, the [reflexive] approval culture has declined, and quality management has improved.”
Clare Short, head of the U.K.'s Department for International Development, which oversees Britain’s foreign aid spending, concludes that “Wolfensohn has been an important reformer in increasing the effectiveness of the institution.” By and large, other European donors would agree.
The great fear now of World Bank officials, the Bank’s European shareholders and mainstream development officials is that the U.S.'s go-it-alone approach to aid could undermine the Bank just when its services are needed most and it is better positioned to help poor countries than it has been for decades. Yet the undeniable fact is that Wolfensohn and the Bank need the Bush administration more than it needs them. Out of 184 member countries, the U.S. is by far the World Bank’s major shareholder, and Washington exerts much greater sway over Bank policy than its 17 percent stake might imply. “The major agenda for the Bank going forward is keeping the U.S. in the tent,” acknowledges Jo Ritzen, World Bank vice president for human development.
That may prove a bigger challenge, however, than the average World Bank project. Washington has demonstrated an unwillingness to work with the Bank that not only undercuts Wolfensohn personally but also the Bank and, ultimately, the wider campaign to rid the world of poverty. “For multilateral institutions to be effective, the U.S. needs to take charge and provide leadership,” contends Nancy Birdsall, former director of policy research at the Bank and founder and head of the Washington think tank Center for Global Development, who has consulted with the Bush White House on development matters. “The problem is that the U.S. won’t do it with Wolfensohn -- he’s seen as a part of the old team, though it’s also unclear if the U.S. would do it with anyone else.”
Staunch liberal Democrat Wolfensohn and conservative Republican Bush officials have butted heads repeatedly over the administration’s distaste for existing multilateral development initiatives, especially those involving the World Bank.
Last summer the U.S. took on the Bank’s European shareholders in a bid to revamp the way the International Development Association, the Bank’s concessional-loan arm, operates. Bush proposed that half of the funds given out by IDA be disbursed as grants -- not loans. “Debt relief is really a short-term fix,” Bush said. “This proposal doesn’t merely drop the debt; it helps stop the debt.” The U.S. said it was prepared to increase its IDA contribution by 18 percent, to $2.85 billion, provided the Bank could demonstrate that the loans and grants were having measurable effects in improving health care, education and the business climate.
Converting IDA loans to grants is not an unstudied concept. The U.S. Congress’s Meltzer Commission on the World Bank and a number of international financial institutions recommended two years ago that the Bank make nothing but grants. The switch to grants “is a way to deal with a lot of the debt problems that have been created because of these loans,” says the U.S. Treasury’s Taylor. “For example, when Kyrgyzstan declared independence it had no debt. Now it has the equivalent of 100 percent of GDP in debt, and much of that is from the international financial institutions.”
The Bush administration’s real thrust in championing grants, though, was to fundamentally overhaul the way the Bank operates. “This is part of a bigger strategy to get the World Bank to have better results,” says Steven Radelet, who was deputy assistant Treasury secretary for Africa, the Middle East and South Asia until this June, when he left to become a senior fellow at Birdsall’s Center for Global Development. “If within ten years the Bank shows it is doing well, it won’t be a problem for Congress to make up the shortfall” in IDA funding.
The U.S. proposal nevertheless provoked a firestorm of criticism. The World Bank released a study purporting to show that moving to grants would undermine the IDA’s “sustainability.” Researchers estimated that relying half on grants rather than wholly on loans would reduce the IDA’s resources by a cumulative $7.5 billion over 20 years. The Bank then bowed out of the debate: Wolfensohn, though he was understood to oppose the U.S. proposal, made a strategic decision to let the donors duke it out so as not to antagonize Washington.
The Bank’s European shareholders led the resistance, arguing that there was no guarantee that future governments would make up any IDA funding shortfall and that the grants amounted to “mission creep.” Explains Norway’s development minister, Hilde Johnson, “We felt it was important to maintain the division of labor between the World Bank and the United Nations.” The U.N. makes grants through member agencies.
Britain was especially implacable in its opposition. “Of all the instruments we use, IDA loans are the most important. If reflows are not funded, IDA would shrink,” says U.K. aid overseer Short. “I honestly think the U.S. didn’t know how IDA worked, that it depended on reflows. It was a simplistic, ‘We’re big and we’ll tell people what to do’ approach.” Treasury’s Taylor laughs at the idea that he didn’t understand how IDA works: “There was no misunderstanding at all -- highly concessional loans had very little element of loan in the first place, so let’s face up to it that they are grants.”
The eventual compromise was judged a setback for the U.S. It limits grants to 18 to 21 percent of IDA disbursements, rather than the 50 percent that Washington had sought, and restricts them to certain aid categories -- HIV/AIDS, education and postconflict reconstruction -- where results can take years to materialize and loans are the least suitable. “The Bush administration really lost the battle on that one,” says exWorld Banker Birdsall. “The Europeans stuck to their guns. The U.S. could have gotten more if they had been more diplomatic.”
Officially, the U.S. is gratified by the outcome, although Treasury officials confide privately that the rap on American diplomatic skills has some basis. “We are very pleased with the IDA conclusion,” asserts Treasury’s Taylor. “The president wanted 50 percent of IDA funds for social sectors in grants, but we got 100 percent of social sector in grants.”
The U.S. and the Bank were soon at odds again, however. At the June 2627 Group of Eight summit in Kananaskis, Canada, the U.S. rebuffed Wolfensohn’s plea that half of the $12 billion in extra aid promised by the U.S. and other rich countries at an aid conference in Monterrey, Mexico, on March 18 be allocated to Africa. “Mentioning certain fractions may be helpful for some people, but I think it is basically not the way we should proceed,” says Taylor. “We should proceed on the basis of where we can be most effective and where the good policies are.”
Earlier that same month the U.S. gave short shrift to another Wolfensohn pet project: a $4 billion World Bankled multilateral “Education for All” initiative, designed to get all the world’s children into primary schools by 2015. Instead of supporting the EFA, the Bush administration announced that it would contribute a modest $20 million a year over five years to a U.S.-African education program.
The White House regards the Millennium Challenge Account as its primary conduit for development aid. Conceived at the White House, the MCA emerged largely in response to pressure from Europeans, poor countries and development activists for America to increase aid and demonstrate support for multilateral aid efforts. The events of September 11 provided a further goad: President Bush made an explicit link between poverty and terrorism in his speech introducing the MCA.
A joint State DepartmentTreasury task force began working out of the White House on the concept of an “accountable” aid program last November. Security Adviser Rice put the finishing touches to the version presented by the president in March. And it was Rice, not O’Neill, who briefed Wolfensohn on the plan before it was announced.
The administration describes the MCA as the U.S.'s third great foreign policy initiative in 100 years, in league with the Marshall Plan and John F. Kennedy’s Alliance for Progress. Bush has asked O’Neill and Secretary of State Colin Powell to develop indicators to rank all aid candidates according to their economic and political freedoms and their investment in health and education. Countries doing the most to promote good government, create an open business environment and further education and health would be eligible for continuing MCA assistance -- but only if they produce palpable, measurable results.
Rice chairs the interagency White House task force now evaluating proxy indicators for economic and political progress, such as gauges of economic freedom created by the Heritage Foundation and of political freedom developed by Human Rights Watch. The administration plans to disclose this month details about the still-evolving MCA aid criteria and how the program will be administered.
The White House has already begun lobbying Congress to authorize MCA intact. If ever there were a time when American politicians ought to be receptive to additional aid spending, this is it. “Since 9/11 there is a much greater awareness that foreign aid is an essential component of a national security strategy,” points out Republican Representative Jim Kolbe, chairman of the House Appropriations subcommittee overseeing foreign aid.
Kolbe, who will be a key figure in getting MCA through, wants the administration to run a pilot program before rolling out the full plan but strongly supports the MCA concept. (The administration is mulling the pilot program.) “If we can focus MCA on results-oriented changes in countries, we have made a fundamental change in the way we give foreign assistance,” Kolbe says. “We have come to a realization that we have got to insist on results. There aren’t enough dollars in this country or the world to lift developing countries out of poverty if they’re not willing to make changes themselves.”
MCA aid would be based strictly on outcomes -- statistically significant improvements in health care or education, for example. By contrast, development aid has traditionally been evaluated on inputs -- the sheer volume of aid devoted to schools or health, say -- rather than outputs. The Bank concentrates its energies on devising development reforms in conjunction with recipient countries, and what can count most is how much money projects absorb, not how well they work over time.
“MCA is demand-driven, not supply-driven, and that is a profoundly different model,” says the U.S. Agency for International Development’s Natsios. “Whether the U.S. way of doing things drives some multilateral institutions, I think it should, because, frankly, a lot of the multilateral institutions don’t have a good track record.”
MCA could be hampered, however, by the difficulty of coming up with and monitoring appropriate “outcomes” benchmarks. “Historically, we are better at measuring inputs than outputs,” says Ian Goldin, the World Bank’s director of development policy. “It becomes a very large coordination program across different sectors to collect data and determine attribution.” Indonesia, for example, decided at one point to use the number of houses having mud floors as an indicator of poverty. Told to reduce poverty, regional administrators predictably installed concrete floors and proclaimed poverty eliminated.
“Outcomes can be manipulated by multilaterals and governments: That’s how Kenyan president Daniel arap Moi managed to get 22 structural adjustment loans from the International Monetary Fund and World Bank since 1980 and never showed progress,” contends William Easterly, a senior fellow at the Center for Global Development and a prominent critic of aid, who was forced to leave his post as a research economist at the World Bank after he wrote a newspaper article criticizing aid without getting prior Bank approval. “It is like selling laundry detergent that is new and improved: The aim is good, but you have to ask why previous attempts didn’t work.”
“We are not having a tough time with indicators,” insists Natsios. “The debate is which ones to choose. Some in the development community are worried that their programs may not meet our standards. That puts more pressure on developing countries, the donors and nongovernmental organizations, and that’s good.”
The MCA’s fixation on measurable results is not all that makes World Bank and European development officials uneasy. They also worry that the U.S. will implement the program unilaterally. “In aggregate, unilateral aid is more influenced by political and commercial considerations than multilateral aid,” notes Lant Pritchett, an economist at Harvard University who once worked at the World Bank. Then, too, say World Bank officials, the U.S.'s independent approach could complicate aid coordination and increase the already overwhelming administrative burdens of recipient countries.
“One of the largest problems for less developed countries is donor coordination,” says the Bank’s Ritzen. “Tanzania, for example, has to provide 2,400 reports each quarter to donors.” Marie Clarke, national coordinator for debt relief advocacy group Jubilee USA Network, says, “If MCA criteria are different from that of the World Bank and the IMF, it would complicate things and work against streamlining.”
Antipoverty activists regard MCA as a step forward for the U.S. in that it represents an increase in aid but warn that far more money is required and that MCA is at high risk of being politicized. “We are thrilled the administration is looking at new ways of tackling the impasse of failed aid,” says Jamie Drummond, international director of Debt, AIDS, Trade in Africa, a new advocacy group set up by musicians Bono and Bob Geldof and music producer Bobby Shriver and funded by the Bill & Melinda Gates Foundation. “It is not rocket science: It is about geopolitics, special interests and keeping it purely about fighting poverty and good governance, not as defined by Washington but as defined by aid recipients. MCA must not replace resources for fighting AIDS or canceling debt.”
The Bush administration remains every bit as skeptical of Wolfensohn and the World Bank as the activists are of the president and Washington. Senior officials are concerned that Wolfensohn hasn’t done enough to focus the Bank on a few key priorities, as the MCA seeks to do, and that the Bank hasn’t been doing enough to monitor and evaluate its programs.
“The administration is extremely suspicious about the Bank’s approach to aid,” says Adam Lerrick, director of the Gailliot Center for Public Policy at Carnegie Mellon University, who served as a senior adviser to the Meltzer congressional commission and has discussed the Bank with top Treasury officials. Adds Representative Kolbe: “The basic problem with the Bank is that it is a very cumbersome bureaucracy -- it is huge and very slow to change. It is not an agency that is able to adapt. It is not nimble or flexible enough. I’m not sure if this is a matter of [Wolfensohn] or a matter of the institution.”
Many observers -- not just Bush administration sympathizers -- are convinced the World Bank is not changing fast enough. Wolfensohn has worked overtime to accommodate activists and nongovernmental organizations, sending the Bank far afield from its original development mandate. For example, the Bank gave Ethiopia $5.7 million to train caretakers of its national movements.
“With so much attention focused on it by issue lobbies, the World Bank has caved into a situation where it claims to serve all objectives as priority No. 1, and this is not a recipe for an effective organization,” says critic Easterly. “In that twisted situation you can’t trust the World Bank to be selective. Wolfensohn has one big eye focused on public relations and another big eye on rich-country money.”
The Bank continues to resist external audits, although its own evaluation numbers are suspect because they’re prepared internally (albeit by a group that reports directly to the Bank’s board, not its management). “The methodology for measuring effectiveness is flawed,” contends Carnegie Mellon’s Lerrick, who has persuaded Republican Representative Jim Saxton to call for making an external audit by private sector consultants a condition for U.S. contributions to the IDA.
The World Bank’s Picciotto firmly rejects the notion of external audits. “People mistake external for independent,” he says. “But external audits are less independent because the auditors will be looking for their next contract.”
Bush administration and other critics also complain that the Bank is hostage to its poor-country shareholders and rarely turns them down. “The World Bank as a rule does not cut off countries if they are not reforming,” says Brett Schaefer, a fellow at the conservative Heritage Foundation. “The World Bank has made a lot of statements that are similar to the stated goals of the MCA but hasn’t followed through.”
Still, the Bush administration’s analysis of the failure of foreign aid to do more to promote development ignores what Mark Weisbrot, co-director of the Washington-based Center for Economic and Policy Research, calls the “elephant in the middle of the conference room": the seeming failure over the past decade of the liberal economic policies touted as the “Washington consensus” to promote more rapid growth in many developing countries.
That is a whole other debate.
‘That is my hope, that is my prayer’
Halfway through his second five-year term, World Bank president James Wolfensohn faces what could be his greatest challenge: a conservative U.S. administration determined to overhaul America’s approach to development assistance and, in the process, revamp the World Bank from the ground up. Wolfensohn believes that he has already done a great deal to reform the balky, bureaucratic organization and that its record in fighting global poverty is much better than the Bush administration gives it credit for. What’s more, he disputes key aspects of the U.S.'s “results-based” aid approach. Here Wolfensohn, 68, talks about his contrasting vision of how to combat global poverty with Institutional Investor Senior Writer Deepak Gopinath.
Institutional Investor: You said that after September 11 the imaginary walls between rich and poor came crashing down. How has the environment for development aid changed since then?
Wolfensohn: There was a growing recognition that issues of development and inequity and poverty had an impact on the developed world. People concluded that poverty and terror were not natural partners but that if you had poverty and inequity, you had a breeding ground.
But new priorities are forcing themselves on people in developed countries. The priorities are that since April you’ve had a reduction in the European stock market of trillions of dollars. So I think it is still true that there is an impact from September 11, but I think to say that it is continuous, without regard to what is happening in the domestic market, is not correct.
The U.S. administration has been skeptical about the effectiveness of aid. And U.S. Treasury Secretary Paul O’Neill has been especially critical.
Paul has said: “Why are we only looking to reduce poverty by 50 percent -- why is it not 100 percent? Why is it that there are any poor people when you have all this money?” There are answers to these questions, and they are not under the singular control of the World Bank, the U.S. government or anybody. And they are very, very complex geopolitical, geosocial issues.
We know there are things that make aid ineffective, and they are lack of capacity, lack of protection of rights, financial systems that don’t work and corruption. What I see happening, which I think is very positive, is that you’ve got developing countries coming in and saying, “We will take care of these things, and then we expect from you certain support” -- which includes increased development assistance and openness of trade. I think O’Neill would say that that’s a fair basis on which you can start to have a dialogue. He is right to ask the questions, but he is not the first to ask these questions.
The U.S. asserts that the Millennium Challenge Account is a completely new way of providing aid and that multilateral, conditionality-based aid hasn’t worked. Do you see MCA as competition for the Bank?
I don’t. I would reject the notion that you can describe what is being done by us or by bilaterals or others as simply conditionality that hasn’t worked. So that statement is nonsense -- it is nonsense.
An extra $5 billion, as important as it is, unless it is linked to the work of others, is not going to achieve the objectives of effectiveness. I would hope that there is consultation and partnership, because it is a big enough sum and the U.S. is powerful enough to affect the whole development program. But to start by rubbishing everything that everybody else has done -- that’s not the way to go about it.
There has been much talk about the U.S. going it alone. Are you seeing some step back by this administration from multilateralism?
I hope it is too early to know. But I think we will get a very clear sense of the direction when we know the form and nature of the Millennium Fund. If it is one that is anxious to build cooperation, partnership, mutual reinforcement, information clearing, I think that is the leadership that the U.S. should take. That is my hope, that is my prayer.
What is your strategy for keeping the U.S.'s interests allied with the Bank’s?
There’s no way that the Bank can lead the U.S. They are our principal shareholder, so in a way I work for them. What I am trying to do is simply be responsive and through the strength of our ideas hopefully get their support. But there is no overall plan. Maybe there should be, but there isn’t.
There is no open breach at this stage. What is emerging is a coming together or a modulation of the views of the U.S. coming closer, in a way, to what is mainline policy so far as the Bank is concerned.
There have been calls for an outside audit of Bank performance.
I have no problem in getting an assessment of this institution. In many ways we are our own leading critic. But before we rush off and appoint an international commission with no guidelines, I think it makes sense for all of us to come together and see what is the best practice at the moment. What I don’t want to do is to have somebody who doesn’t know anything about it coming in and inventing some rules as we go along, when there is no single person I know in the world who would be capable of doing this.
Critics say that during your term the Bank has become more bureaucratic -- that staffing has increased, particularly at senior levels, while lending levels have fallen.
You cannot change a culture overnight. It is impossible. Lending levels have stabilized and are moving up, and the quality has improved. I’m not trying to sound unusually offensive or arrogant, but for once in our lives, things have come together. And after seven years we deserve a moment when at least people might say there are signs of hope. We’ve got to be able to get people to say maybe it is working.
