SANDERS: Time to foreclose on the World Bank

ANALYSIS/OPINION:

An adage holds that bureaucracies can pursue their original goals successfully only for a generation at most. After that, their efforts go to feathering their bureaucratic nests. Freddie Mac and Fannie Mae are examples: outrageous executive compensation and payoffs to congressional friends, all contributing to a housing bust now requiring ever more billions of dollars in taxpayer bailouts.

Another example might well be the World Bank, which, along with the International Monetary Fund, is one of the two great post-World War II institutions for restructuring the world economy. John Maynard Milord Keynes, the author of the Bretton Woods accords setting them up, said the clerks got it wrong: The bank should have been called a fund and the fund should have been called a bank.

Created to rebuild Western Europe, the World Bank soon was eclipsed by the Marshall Plan and its appendages as West European capital markets recovered. Looking for new fields to conquer, it turned to what then were unambiguously called undeveloped countries, entering its golden age under Eugene Black (1949-1963), a former Wall Street bond salesman. Black’s aw-shucks hillbilly act masked a wily Washington politician — although one longtime World Bank insider quipped, “Gene Black was a figment of Nate McKitterick’s imagination,” a reference to Black’s anonymous policy adviser and aide.

Black stuck to underwriting specific subsidized infrastructure projects, fudging later with parallel lending for soft currencies. His lending record, some $15 billion in the currency values of the day, theoretically without default, masked disastrous policies such as supporting India’s Soviet-style planning for three decades and initiating vast Indonesian (corrupt) lending that would underpin the 36-year Suharto dictatorship.

But it was under Robert McNamara’s leadership from 1968 to 1981 that the World Bank went “cosmic.” (McKitterick once remarked that “cosmic lovers are people who cannot relate to human beings, so they fall in love with the cosmos.”) McNamara called in the management experts at McKinsey & Co. to supply the usual bloviated rationale for the client’s preconceived strategy, in this case a vast expansion. He proceeded to ignore charter requirements for specific projects, funding social welfare schemes and muscling in on the IMF with balance-of-payments loans.

In his search, apparently, for expiation of his perceived Vietnam War sins as Lyndon B. Johnson’s secretary of defense, McNamara played down capitalist enterprise. He neglected the bank’s International Finance Corp., its “free-enterprise window” designed to guarantee foreign capital partnering with locals to encourage private-sector growth. His lieutenants even had a hard time getting him to be seen on Wall Street selling the bank’s highly rated bonds (not a big deal since they were backed, after all, by governments’ sovereign credit).

But, increasingly in a world of enormous multinational corporations, vast liquidity and increasingly sophisticated finance, the World Bank has become superfluous. Its subsidized lending would be better left to the discipline of the market. Its vaunted research is too often suspect, outdistanced by more hard-nosed entrepreneurial analysis.

And now a minor crisis has arisen: The Europeans’ prerogative to pick the IMF director while Americans choose the World Bank president is being questioned by Beijing in the wake of the unanticipated refusal of American Robert B. Zoellick to seek a second term as president. A bureaucrat meandering through the Washington circuit, including time at Fannie Mae, Mr. Zoellick came to office after his predecessor was ousted in a sex scandal and has undistinguished himself by having the shortest fuse since former Treasury Secretary William Simon left town, while continuing to sanction the bank’s massive China funding.

The World Bank’s bloated bureaucracy, now more than 10,000 strong, gives off a miasma of institutionalized corruption - extraordinarily high, tax-free salaries, unparalleled “extras” and fabulous retirement packages. One sign of the troubled situation has been the International Finance Corp.’s attempt to partner with corrupt Vietnamese government entities run by the Communist Party. Ironically, Mr. Zoellick’s parting shot, a long-winded study on China’s economy in collaboration with a Beijing Communist Party/government think tank, calls for massive restructuring as China inevitably stumbles off high growth rates. But the chances of Beijing’s new team, scheduled to take office this fall, moving away from state capitalism are virtually nil — unless a charismatic reformist figure somehow surfaces from among the faceless partycrats.

An incoming Republican administration, if and when it arrives, should fold up the whole caboodle as part of its Washington cleanup. But, given the size of the quagmire awaiting the next administration, the World Bank’s woes seem an unlikely priority. That means choosing a new World Bank president - Hillary Rodham Clinton is rumored hovering offstage - will become just one more bone of contention between Washington and Beijing.

(Transparency alert: The writer was deputy of the World Bank’s Tokyo mission from 1960 to 1962.)

• Sol Sanders, a veteran international correspondent, writes weekly on the intersection of politics, business and economics. He can be reached at solsanders@cox.net and blogs at www.yeoldecrabb.wordpress.com.