The Hindu Business Line : Economic consequences of Mr Wolfowitz

IT WAS an unapologetic political statement made by the US President, Mr George Bush, on March 16 when he announced the nomination of Mr Paul Wolfowitz as President of the World Bank. There were reports that he had floated the idea a month earlier with his European counterparts and, except for the UK, the response was not enthusiastic. And, yet, Mr Bush decided to go ahead with it. When the announcement was finally made, there was no attempt to conceal the arrogance attached to unilateral decision. No other decision in recent years, except the one to invade Iraq, had provoked so much bitterness across the globe. What indeed shocked global opinion was that Mr Wolfowitz was the lightning rod of controversy as an architect of the Iraq war.

Across the spectrum of developing countries and among civil society organisations, the anger was evident. Even moderate financial papers described it as "Wolf at the door," "Wolf in wolf's clothing," "the poodle and the wolf," and so on.

More than the developing countries, the Bank staff felt "like at a funeral". They bemoaned the years it took for them to disassociate the Bank from the bad old days of being on a leash for the US and reaching the "worst position ever by being the tool of not even the US as a whole, but neo-conservatism."

European countries made their own noises. But the dust seems to have settled down and Mr Wolfowitz has met EU Ministers. Even the German Chancellor, Mr Gerhard Schroder, the staunchest critic of the US' Iraq policy, has decided to support the nomination. Though other EU Ministers have reacted variously, it is clear that all of them will go along with the US decision.

What would be the economic consequences of this new president?

It has been commented by most of the critics such as Jeffrey Sachs that Mr Wolfowitz has no experience in economics, development, environment or health. No doubt, Mr Bush referred effusively to his organisational ability and how he ran the Pentagon for a few years. More ironically, he referred to his years as the US Ambassador to Indonesia in the late 1980s when he was said to be deeply involved in development. Reference was also made to his emotional attachment to Indonesia. It can reasonably be argued that the Bank is endowed with a team of world-class economists and professionals and Mr Wolfowitz need not be an economist himself. This may be tenable if there is the assurance that the president is a mature leader with a proven record of sound and balanced decisions taken in his career. Sadly, a closer analysis of his record suggests that he is too much of a partisan and a loyalist and does not possess an attitude of mind which is tolerant and inclusive. He is identified with the core group of neo-conservatives professing fundamentalist solutions to social issues.

Mr Wolfowitz is credited with Indonesia's economic development during his term as ambassador from 1986 to 1989. It is common knowledge that what was attempted during those years was massive structural adjustment steered by the Berkley Mafia involving massive opening up of the economy, privatisation, bank loans, and so on.

Though it was glorified as the East Asian Miracle in 1993 by the World Bank economists, even they would dismiss it now as a bad dream. Unless the World Bank is wedded to the same model of development, it is unclear how it would help Mr Wolfowitz in guiding the affairs of the Bank.

Mr Wolfowitz was flawed in his judgment and strategy over Iraq. His advocacy of the unilateral war was based on his judgment of its strategic need and the assumption that the war would be over within days and, further, that the cost of the war could be more than covered by the additional oil revenues.

The Iraq war, by all accounts other than American, is not over. The additional oil revenues have not come about and the US budget deficit is uncontrollable. Oil prices zoom above $57 per barrel. In short, the brilliant strategist was unprepared for these developments. The fault, as they say, is not in his intellect. It is more because it was running on narrow grooves created by his loyalties. Strategists may be gunners; but development agencies such as the World Bank need Field Marshals.

The mindset of Mr Wolfowitz and his unabashed espousal of the neo-conservative would pose serious economic consequences to the world, especially to the developing countries. There are many including the relationship between the US government, the Bank and other members.

But there are three broad areas where Mr Wolfowitz could cause damage. The first area is financing of infrastructure. The second is on the formulation and contents of poverty eradication programmes. The last is the involvement of the Bank in high-risk areas, especially extractive industries including oil.

On infrastructure, the Bank has swerved from one extreme of funding projects directly out of its resources and driving developing countries to seek private capital. It is now trying to provide `fiscal' space for financing infrastructure in developing countries. Mr Wolfowitz would try to move the clock back and restore the primacy to the private sector.

Poverty reduction strategies of the Bank are based on programmes which are called "poverty reduction strategy papers" (PRSPs). These are the favourite programmes initiated by Mr Wolfensohn. Every country is expected to write out its own strategy which would be approved by the Fund/Bank.

There are eminent economists who have criticised these as structural adjustment programmes under a different garb. Mr Wolfowitz may seize the opportunity and impose neo-conservative programmes on the developing countries with a vengeance. He may even look upon PRSPs cynically. If he cannot do away with them totally, he may add newer elements such as democratisation, and try to fulfil the foreign policy goals of the US government.

The World Bank has been under pressure from large corporations to enter high-risk areas such as investment in extractive industries, especially oil and mineral resources. Due to global pressure, the Bank's Board has not been able to take a decision till date. These investments would help large corporations inasmuch as they use the Bank as the front and also get guarantees vis-à-vis the host countries. Some pipeline projects as the West African one reaching up to Chad have already been taken up. The Bank is unable to move fast or in a big way. When Mr Wolfowitz is at the helm, given his loyalty to the Bush administration and its links to the oil industry, he would have no hesitation in pushing them vigorously.

The above economic consequences flowing from the nomination of Mr Wolfowitz could "turn the World Bank into the American Bank", as Moises Naim put it. But as Paul Krugman modified it in an article in The New York Times (March 18) and added: "Make that the ugly American Bank."

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

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