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.”
World Bank economists Craig Burnside and David Dollar concluded that “aid is not promoting growth in the average recipient.” Michael O’Hanlon and Carol Graham of Brookings wrote in their book-length study that “the negative relationship between aid flows and performance is clear at a general level.”
The World Bank and IMF have responded to such criticism by claiming that they can use loans and grants to promote economic reform. But international agencies have been unable to buy the political will in aid recipients to adopt often socially disruptive changes. Reform is a continuing process that cannot succeed without broad-based local support.
Indeed, though Burnside and Dollar still backed aid in certain circumstances, they reported that “we find no systematic influence of aid on our index of fiscal, monetary, and trade policies.” Former World Bank chief economist William Easterly reviewed nearly 1,000 “conditioned” Bank loans and concluded: “government mismanagement usually continued in these countries. The growth rate of income per person of the typical member of this group during the past two decades was zero.”
Similar was the finding of IMF economists Raghuram G. Rajan and Arvind Subramanian in a 2005 study. Their conclusion was particularly damning because all Fund loans are theoretically conditioned on policy reform:
We find little evidence of a robust positive impact of aid on growth … . we find some evidence for a negative relationship in the long run (40 year horizon), though this is not significant and does not survive instrumentation. We find some evidence of a positive relationship for the period 1980-2000, but only when outliers are included. We find virtually no evidence that aid works better in better policy or institutional or geographic environments, or that certain kinds of aid work better than others.
So much for the contention that foreign aid will work if only the World Bank can reduce corruption in borrowing states. Wolfowitz is not alone, of course, in believing in the triumph of hope over experience when it comes to development assistance. But his expectation that finally, after nearly six decades, foreign aid will “work” is no better grounded in reality than, well, his expectation that Iraqis would welcome an American occupation.
Actually, the fact that more developing states are reforming both their economic and political systems argues for cutting, not increasing, foreign aid. Explains Ian Vasquez of the Cato Institute: “Good policies will reap the rewards of growth. ‘Overrewarding’ those countries with foreign aid, by contrast, may have effects similar to those of traditional foreign aid programs: slowing the pace of reform and development.”
Paul Wolfowitz never should have been appointed Bank president. His dramatic self-immolation provides a convenient opportunity for the institution to start anew.
