BIC statement on the Wolfowitz scandal

With all eyes on Wolfowitz, few are looking deeper at the true scandal about the World Bank – that the governance of the world’s leading development agency is shrouded in secrecy and fundamentally undemocratic.

Oh the irony.  While the World Bank is pushing a tough new “good governance and anti-corruption” agenda aimed at developing countries, its President Paul Wolfowitz is facing charges of abusing the power of his office, and the Bank’s Board of Directors of condoning his conduct. There is no doubt that the apparent hypocrisy of the Bank’s leadership has damaged the institution’s credibility.  But more importantly, it exposes the profound democratic deficit and lack of accountability in the Bank’s governance structure, and underscores the urgent need for far-reaching reforms. 

The proximate cause of the recent furor was Wolfowitz’s personal involvement in securing a significant pay raise and promotion for a Bank staff member with whom he was romantically involved, after she was induced to take an external assignment to avoid any conflicts of interest. Not only did the generous terms of her reappointment violate Bank pay and promotion codes, but Wolfowitz initially sought to cover up his personal involvement in the process.

As evidence of malfeasance has mounted, so has staff outrage.  In a press conference timed for the beginning of the Bank’s Spring Meetings earlier this month, Bank staff demanded that Wolfowitz resign and “acknowledge that his conduct has compromised the integrity and effectiveness of the World Bank Group and has destroyed the staff’s trust in his leadership.”  Their appeals have been echoed by a growing chorus of voices both within and outside the institution, including over forty former senior Bank managers and the European Parliament.

Although some European governments have joined the call for Wolfowitz’s resignation, Europe and the United States share the blame – and thus the shame – for abuses of Presidential power in the Bank.  For the last half century, the United States and Europe have colluded to protect the privileges of the world’s most powerful countries at the expense of the effectiveness and integrity of the Bank. 

Wide and growing inequalities in the distribution of global power and resources are institutionalized in the Bank’s governance structure. Although all 184 member countries of the World Bank are represented on the Board of Governors, day-to-day decisions about the Bank’s policies and projects are taken by a 24-member Board of Directors.  Voting power is apportioned among the Directors roughly according to countries’ economic power, on a “one-dollar-one-vote” formula. This wealth-weighted system ensures that the largest shareholders (US, Japan, Germany, France, UK, China, Saudi Arabia and Russia) each appoint one Director, while the remaining 176 member countries share the other sixteen Board seats, through a complex mixed constituency system.     

Informal practices have reinforced the dominance of the most powerful countries.  The Bank’s Articles of Agreement unequivocally give the Bank’s Board of Directors the authority to select and dismiss the President.  However, by tradition the United States has always appointed the President of the World Bank.  European countries support this arrangement in exchange for the prerogative to name the managing director of the International Monetary Fund. Other member countries have acceded to this unwritten agreement as the price for continued aid flows.  It is widely understood today that the dismissal of the World Bank President requires US consent, irrespective of what the rest of the world thinks.  It is just as widely believed that appeals to the US will fall on deaf ears, as did the public outcry at Wolfowitz’s nomination two years ago.

Revelations of nepotism and patronage at the highest levels in the Bank come as little surprise to the institution’s critics, who have long deplored the secrecy and “old boys’ network” that reign in the Bank’s boardroom. The Board of Directors, which oversees day-to-day decisions at the Bank, meets behind closed doors, where its deliberations remain secret. The scandal currently engulfing the Bank is a product of this fundamentally opaque and undemocratic governance system.

The Board’s delayed reaction underscores the need for greater transparency in Board deliberations and broader stakeholder participation in Bank decision-making.  Records indicate that the Board was not only aware of but had been directly involved in approving the reimbursement package that landed Wolfowitz in trouble.  The Board did not protest nor move to act against mounting evidence of impropriety by the President until the Bank Staff Association took the extraordinary step – at significant personal and professional risk – to publicize staff complaints. By refusing to exercise the oversight authority it was given under the Articles of Agreement, the Board has essentially abdicated its responsibility to protect the global public interest.

Wolfowitz’s resignation might provide some immediate satisfaction to his adversaries within and outside of the Bank.  However, the Bank’s integrity and effectiveness will remain under constant threat so long as the US and Europe resist fundamental reforms to make the world’s pre-eminent development institution more transparent and democratically accountable to the global public it ostensibly serves.

Governance at the Bank could be significantly improved by instituting double-majority voting for important Bank decisions, including selection (and dismissal) of the Bank’s President.  Such a system would require that decisions secure support from a majority of the Bank’s Board of Directors (which over-represents the largest shareholders) as well as the support of a majority of the Bank’s Board of Governors (which represents each member country equally).  While not without its problems, this voting procedure, coupled with enhanced Board transparency, has more political appeal than most alternative options, especially the status quo.         

No institutional design has proven to be fool-proof.  However, checks and balances can help prevent failures in one part of a governance system from being generalized. Ultimately, the goal is to make the institution more accountable to a broader cross section of its global constituents and more effective at its stated mission of reducing poverty.  With or without Wolfowitz, if the Bank entertains any hope of regaining public trust, it will have to undertake comprehensive, rather than cosmetic, reforms to democratize its governance.

***Also be sure to check out the global sign-on letter regarding the current scandal at the World Bank. The letter calls for not only Wolfowitz’s resignation but fundamental reforms in the governance of the institution itself. Please provide an organizational sign-on if you agree with the demands and pass on to others who may also be interested. The letter: http://www.bicusa.org/en/Article.3289.aspx ***