All the sound and fury concerning Paul Wolfowitz' troubled World Bank presidency is distracting attention from the deeper questions about the World Bank's continued relevance in today's global economy. What sense does it make for the World Bank to lend the major part of its resources to a handful of middle-income countries, which can more than meet their financing needs in the international capital market? And what basic changes might be needed in the World Bank's lending strategy to the world's poorest countries to make the Bank more successful than it has been to date in lifting those countries out of poverty?
Despite the Bank's rhetoric to the contrary, under Mr. Wolfowitz' presidency little has changed regarding the disproportionate amount of money that the Bank lends to those countries which least need it. Indeed, the World Bank's own annual report highlights the fact that in 2006 over 50 percent of the Bank's lending went to as few as five middle income countries—Brazil, China, India, Mexico, and Turkey. And this was the case even though each of these countries is presently flush with foreign exchange and now has more than ready access to the private capital market.
China is probably the most egregious example of a country which should long since have graduated from World Bank borrowing. After all, China is now sitting on a mountain of over US$1 trillion in international reserves and is adding to those reserves at a mind-boggling rate of $250 billion a year. Meanwhile, as if to underline the superfluity of World Bank lending, China has embarked on an ambitious lending program of its own to a whole host of African and Latin American countries in its efforts to secure a more reliable commodity supply.
The World Bank lamely insists that it must stay financially involved in China if it is to have any influence on China's economic development. Never mind that the Bank's loan program to China is but a tiny fraction of the flood of private sector money flowing to China. Never mind that the Bank could better use those resources to materially transform the many African countries starved of foreign capital and lagging so dramatically behind the rest of the world.
Even more basic than the need to radically reorient its lending program away from the middle income countries is the need for the World Bank to fundamentally rethink its overall lending strategy to the less developed countries. For the World Bank appears to have very little to show for the many billions of dollars that it has channeled to those countries over the past sixty years.
Extensive research by scholars like Professor William Easterly of New York University conclusively show that those countries which have been the largest recipients of World Bank loans have performed no better, and oftentimes worse, than those countries which did not receive the Bank's favor. And to make matters worse, those countries like China and India, which have ignored the Bank's nostrums, comfortably outperformed those countries like Russia and Argentina, which were more receptive to World Bank advice.
To his credit, Mr. Wolfowitz did make the reduction of corruption a centerpiece of his mission at the Bank. However, he limited himself to halting Bank lending to Uzbekistan and but a few of the world's other most corrupt countries He did so even though by the Bank's own evaluation, as many as 54 countries, which are still recipients of World Bank funding, are about as corrupt as Uzbekistan.
A more serious failing on Mr. Wolfowitz' part in addressing the global poverty issue was his tendency to compound the errors of his predecessor by ever-extending the Bank's mandate. As Professor Easterly correctly reminds us, beyond poverty reduction, the Bank's goals now extend to such open ended issues like securing children's and women's rights, promoting world peace, and attaining the Millennium Development Goals.
By extending its mandate, the Bank has not only lost focus on its primary goal of poverty reduction but it has also made it difficult to hold the Bank accountable for its core activities. This has to make one wonder whether the world's poor would not be better served by a less grandiose World Bank which narrowed its focus to objectives that were truly relevant to poverty reduction. These narrower goals might include the eradication of debilitating illnesses like malaria, feeding the hungry, and supplying clean water.
It would be a crying shame if Mr. Wolfowitz' forced departure from the World Bank were to prove to be a victory for the entrenched interests in the Bank that are rigidly opposed to real change. For the world still very much needs a World Bank. However, it needs one that is truly focused on effectively addressing the world's poverty problem.
The author is Resident Fellow, American Enterprise Institute.