The American Spectator

The latest “scandal” to hit the Bush administration involves Paul Wolfowitz, deputy defense secretary turned World Bank president. But forget his missteps in handling his girlfriend’s departure from the Bank.

His biggest mistake has been failing to recognize that the Bank has lost its raison d’etre. That is reason enough to choose new leadership. Bank lending programs have consistently failed; the world is awash in private investment capital. The status quo is no longer sustainable.

Wolfowitz was a poor choice from the start. He never was particularly interested in international development. Before signing on as president, he demanded a sufficient salary increase so his pay would match that of the head of the International Monetary Fund. The IMF’s managing director had previously played a similar game of financial one-upmanship, at the obvious expense of taxpayers around the world who ultimately fund both the Bank and Fund.

Once ensconced in power, Wolfowitz pushed a $500 million lending program Iraq, which raised the specter, fair or not, of an attempt to use the independent institution to advance Bush administration policies. But what is now threatening his position is his treatment of Bank employee and girlfriend Shaha Ali Riza, for whom he ordered a $60,000 pay increase before detailing her to the U.S. State Department.

The specifics are complicated and personal animus motivates many of his critics. But the apparent conflict of interest is particularly embarrassing since he has initiated a campaign against corruption abroad.

Nevertheless, Wolfowitz has found some conservative support. For instance, the Wall Street Journal blamed “the forces of the World Bank status quo” for his problems, citing his anti-corruption efforts. The Journal missed the most important issue, however.

Corruption is endemic to the developing world, but does not explain why more than a billion people live in desperate poverty. The chief cause is bad policy. Unfortunately, for decades authoritarian and elected governments alike have impoverished their peoples by collectivizing their economies.

Rather than emphasize the importance of further policy liberalization, Wolfowitz has “gone native” and pushed for increased financial transfers to developing nations. The ink was barely dry on his roughly $400,000 contract before he urged the U.S. government to treble aid levels.

Wolfowitz has pressed Africa as a priority. Last September he declared: “African countries cannot build on a foundation of hollow promises. If the rich countries abandon their commitments to double aid to Africa by 2010, we will have failed to serve the best hope for Africa’s future: its people.”

Naturally, however, he went on to argue that “Africa is our first priority, but it cannot be our only priority.” More money must be provided to Asia, Latin America, and the Middle East. For this reason he has been lobbying the industrialized states for a $30 billion replenishment of the International Development Association, which makes de facto grants to the poorest of the poor — and among the worst sinkholes of foreign aid.

The plight of the world’s needy should move us. As Wolfowitz told last year’s annual World Bank meeting, “there are millions of poor people who, when given the chance, will work hard to escape poverty. It is not their performance that holds them back, but the conditions around them from bureaucratic red tape to potholed roads, to protected markets.”

Quite true. But foreign aid has removed little red tape, filled in few potholed roads, and opened few protected markets. Since 1950 the industrialized states alone have provided about $1.6 trillion — more than $2 trillion adjusted for today’s dollars — in assistance. Over that time aid recipients have regularly suffered political chaos, economic decline, social collapse, and civil strife. Most aid recipients have remained dependent on Western financial transfers for decades.

Indeed, for a half century foreign aid has more often worsened the problem of Third World poverty. Institutions such as the World Bank consistently subsidized the most authoritarian and statist regimes on earth. By enriching incumbent political elites, aid enabled governments to stave off pressure for far-reaching economic reform. If international “assistance” is no longer quite so obvious a hindrance to economic development, it is only because many of the worst Third World regimes have fallen into the great wastebasket of history. But there is no reason to believe that slightly less corrupt governments today, whether democracies or dictatorships, will use additional foreign funds more productively.

Recognition that “assistance” often proves to be a hindrance has slowly grown; today the traditional case for foreign aid is dead. Most obviously, there is no correlation between aid levels and wealth or growth. The factor that matters, according to two comprehensive annual global economic surveys, one undertaken by a consortium of international think tanks led by Canada’s Fraser Institute (Economic Freedom of the World), the other by the Heritage Foundation (Index of Economic Freedom), is the degree of economic liberty. Even aid advocates today acknowledge that no amount of aid can overcome the impact of bad economic policies.

The research is overwhelming in finding that Western financial transfers do not generate Third World prosperity. For instance, Peter Boone of the London School of Economics surveyed developing economies, reporting that “[p]overty is not caused by capital shortage, and it is not optimal for politicians to adjust distortionary policies when they receive aid flows.”