On top of this comes a book from World Bank insider William Easterly, challenging the notion that World Bank loans ever did much good**. Easterly says that bank efforts in Africa have demonstrably failed: income per person in the sub-Sahara is at about the same subsistence levels as in 1980.
Wolfensohn has plenty of external critics, too. Free-market conservatives led by U.S. Treasury Secretary Paul O’Neill claim bank lending has been counterproductive in Asia, Latin America and Africa. Only countries that shunned aid and embraced competitive world markets enjoyed strong growth over the past four decades, O’Neill and Co. argue. They want the bank to end all lending and limit itself to giving advice and occasional grants.
The anti-globalists of the Western left would also like Wolfensohn to back off. Environmentalists, anarchists and Marxists say the bank destroys the environment, degrades cultures and raises poverty levels by forcing predatory capitalism on the Third World. Anything else? Oh, yes. Many of Wolfensohn’s critics, annoyed by his arrogance, call him Lord Jim. Against all this, I’d like to suggest the world’s least favorite banker may be doing something right.
The complaints against him are obviously contradictory. After taking over in 1995, Wolfensohn decided to try something new. He had nothing to lose. Tired of the bank’s questionable results, rich countries were limiting its funds anyway. Wolfensohn began hiring lawyers, sociologists and environmentalists, and firing some economists. He continued some traditional projects–like new financing for a huge dam in Uganda. But he also funded reform of legal, banking and accounting systems, and tried to placate the conservatives and radicals alike. He organized debt relief for the poor, provided they undertook free-market reforms. He accepted O’Neill’s proposal to convert cheap loans to $2 billion a year in outright grants, which pleased the humanitarians as well.
Politics aside, these changes made sense. By 1995, private sources were pouring far more money into middle-income developing countries than government-backed sources like the World Bank. Private capital was doing the real work in successfully developing countries from Mexico to Malaysia. Public loans were still the main source of capital for the 100 poorest countries, but were drained of effect by lawlessness and corruption.
So was it soft to attack these cultural problems? Critics say the bank financed similar civil reforms in the 1950s and ’60s, and saw them fizzle. They insist that traditional road, dam and irrigation loans always worked better, and now that market reforms are spreading in places like China and India, the returns from such lending would soar. “I spent my life trying to persuade countries that rapid economic growth through the private sector was the best way to reduce poverty,” says Jagdish Bhagwati of Columbia University. “Just when poor countries start doing it, Wolfensohn changes the subject to anti-corruption, institutional and education reform.”
This criticism, however, slides past the main point. Traditional World Bank development projects tend to displace (not promote) private growth in the poorest countries, where sound civil order and market reforms are lacking. Such loans create the illusion of growth, but the proceeds of the projects wind up being wasted or stolen by local pols. Growth flourishes only where competitive markets are framed by laws protecting property and contracts from debilitating bribery, confiscation and excessive taxation.
Afghanistan lacks everything from roads to laws after two decades of communist and Islamic tyranny. Tribal armies roam the land, the government is pitiably weak and corruption cripples even food relief. If Wolfensohn’s bank can even begin to help to establish a free and productive civil order, the bank will have earned the world’s thanks. Afghanistan may need new power plants and roads, but it needs freedom within the rule of law even more.
