More than one crisis at World Bank

The controversy over Paul Wolfowitz raises questions about the US role and the bank's future.

Whether Paul Wolfowitz remains president of the World Bank or not, the furor over his leadership raises questions about the importance of reforming the policies and structure of an institution born more than 60 years ago, at a time of very different global financial needs.

Does the bank still need to make loans to middle-income countries, for instance, given the rivers of investment capital that now flow around the world? Does the tradition of allowing the United States to name the bank's president make sense any longer?

Does the bank even need to continue to exist?

"The good thing about this crisis is that the US government may realize it has to pay more attention to these international financial institutions," says Colin Bradford, a senior fellow for global economics and development at the Brookings Institution. "It's not enough to just put your guy in there."

The future of the US-designated leader of the World Bank should become clear this week. An internal special committee has been investigating controversy surrounding Mr. Wolfowitz's actions in regard to his companion, Shaha Riza, who on his direction was given a large pay raise when she was reassigned from the World Bank to the State Department in 2005.

Wolfowitz says he tried to recuse himself from the situation and took personal action only after the bank's ethics committee said he must. Bank officials say they were unaware of the generous terms of Ms. Riza's transfer.

Board takes up Wolfowitz matter

At time of writing, the full 24-member board of the World Bank was scheduled to receive the special committee's findings and conclusions on May 14. Wolfowitz himself was scheduled to testify before the board on May 15. Following that, the board must decide whether or not to take the unprecedented step of ousting the bank president.

If they do, the bank's new leader will have a tough job, say some experts – and not just because they would be taking office following a period of internal turmoil.

"A new president really has to define a new vision for the World Bank," says Nancy Birdsall, president of the Center for Global Development.

For one thing, the bank's role in China, India, and other rapidly developing middle-income countries needs to be revitalized, says Ms. Birdsall.

World Bank borrowing from this group of countries has declined "dramatically," says a Center for Global Development report, due to their increasing access to private capital markets and their perception that dealing with the World Bank can be a hassle.

Among other things, the bank should reorient itself so that the provision of development advice and knowledge is one of its primary products for middle-income nations, says Birdsall.

"Knowledge and experience is what defines the institution," she says.

Birdsall also believes that the bank should focus more and more on projects that deal with problems that cut across national borders, such as global warming, and that it needs to expand its provision of out-and-out grants to countries so poor that their per capita income is below $500.

Many experts also believe that the struggle over Wolfowitz's actions point out that the governing structure of the World Bank should be modernized.

By tradition, the US appoints the head of the World Bank and Europe appoints the head of the International Monetary Fund (IMF). That may have made sense when the bank was founded in 1945, since US financial and military power was unchallenged in the wake of the destruction of World War II. But today it may simply seem a quasi-colonial privilege, say critics.

Calls for merit-based selection

Instead, both the bank and the IMF should have a merit-based selection process, says Dr. Bradford. That way, the bank's president reasonably could say they represent the world community as a whole. "The person has to be a world figure," he says.

Stanley Fischer, a former professor of economics at Massachusetts Institute of Technology and World Bank vice president who is currently governor of the Bank of Israel is one such possible candidate.

Is World Bank necessary?

Other critics of the bank have taken the opportunity of the Wolfowitz crisis to question whether the World Bank is even necessary. Columnist George Will, for instance, wrote on May 10 that "the bank's rationale, never strong, has evaporated."

It's hard to show that bank loans produce growth, Will argues. At the same time, most loans go to the middle-income countries, who today are perfectly capable of attracting private-sector money on their own.

The bank's defenders say that its financial strength and expertise will be essential if the world is to even approach the Millennium Development Goal of halving global poverty by 2015.

"But the bank faces some real challenges in adapting its internal governance structure and instruments – put in place 60 years ago – to dramatic changes in the global economy and in the relative power and needs of its shareholders," says the Center for Global Development report.