Corruption, Mismanagement and Malinvestment at the World Bank

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In an interview
promoting his recently published book about the World Bank Steve
Berkman
, a 16-year veteran of the Bank and former head of its
anti-corruption department, asserts that the World Bank is corrupt.
As one of his many pieces of evidence he cites the forced resignation
or firing of Paul Wolfowitz as World Bank President in the spring
of 2007 over allegations that Wolfowitz had improperly employed
his girl friend and increased her salary in contravention of Bank
policy. Berkman asserts that this was just a pretext to get rid
of Wolfowitz who had held up the funding for several projects in
India and other countries pending corruption investigations by the
Bank.

Since Wolfowitz
was a key architect of the United States' Iraq war and war on terrorism
in his position as Deputy Secretary of Defense under Donald Rumsfeld
there are no doubt any number of reasons why his tenure at the World
Bank was opposed by the Bank's member countries and management.
So while this makes great headlines for marketing Berkman's book
the real story is the Bank itself and the numerous stories of corruption
at the World Bank which Berkman discusses. This will come as no
surprise to libertarians and Austrian economists who know all too
well the sad legacy of the corrupting influence of government money
and the squandering of capital whether in a rich or poor country.
Government enterprises are inherently flawed since in addition to
being morally wrong (they are redistributors of wealth forcibly
taken from private taxpayers) they invest and provide funding for
businesses and projects the private sector avoids which necessarily
indicates these are bad businesses or projects for investment.

The
World Bank was created July 1, 1944 as part of the agreements reached
at Bretton Woods to provide for reconstruction and development of
post-war Europe and Asia. The Bank now provides financial and technical
assistance to developing countries in Africa, South America and
Asia. The Bank provides low-interest loans, interest-free credit
and grants to developing countries (primarily governments) for education,
health, infrastructure, communications and other purposes while
its affiliate, the International Finance Corporation (IFC), provides
debt and equity capital to private sector businesses. The Bank is
headquartered in Washington, D.C. with an international staff of
over 10,000 employees deployed in offices around the world. The
Bank is funded through the sale of bonds and from contributions
by its 185 member countries. The Bank consists of the International
Bank for Reconstruction and Development (IBRD) and the International
Development Association (IDA). The IBRD focuses on middle income
and creditworthy poor countries, while IDA focuses on the poorest
countries in the world. Affiliated with the World Bank and making
up what is referred to as the World Bank Group are the IFC, the
Multilateral Investment Guarantee Agency (MIGA) and the International
Centre for Settlement of Investment Disputes (ICSID).

The
current President of the Bank as well as President of the IFC and
the Bank's affiliates is Robert B. Zoellick who was elected by the
Bank's Board of Governors July 1, 2007 following the resignation
of Paul Wolfowitz. Before taking on these roles with the World Bank
Group Zoellick was an investment banker with Goldman Sachs, worked
in the US State Department, was the US Trade Representative, was
an Executive Vice President of Fannie Mae and worked in the Treasury
Department. He is also a member of the Council on Foreign Relations.
Prior to Wolfowitz the President of the World Bank was an Australian,
James D. Wolfensohm, an investment banker with Salomon Brothers,
Schroeders (of London) and Darling & Co (Australia) as well
as being a director of the Rockefeller Foundation, the Brookings
Institute and also a member of the Council on Foreign Relations.
From its earliest days most of the Presidents of the Bank have come
out of the United States' banking community along with some senior
political appointees. Murray
Rothbard
has described in some detail the relationship which
exists between the commercial banking community and American foreign
policy including the United States' participation in the World Bank.

In
contrast to his predecessor and successor Wolfowitz is not an investment
banker but is an academic and has been in the employ of the Pentagon
during most of his government service which began in the early 1970s.
The Bank needs projects to fund in order to create the rationale
for issuance of its bonds which are sold through investment bankers
thereby serving as the source of funding for its investment bankers
and the many consultants, suppliers and contractors retained for
its projects. Wolfowitz's hold on the funding of certain projects
created a great deal of resentment within the Bank as well as those
to be benefitted from the funding of these projects by the Bank.
Thus, it is not surprising that such a controversial President would
soon be pushed out by the bureaucrats and board members of the Bank.

The
World Bank forms only part of the network of government sponsored
multilateral agencies which exist not only in the US (e.g. Overseas
Private Investment Corporation and Export-Import Bank of the United
States) but in other countries as well; in addition to regional
development banks such as the Asian Development Bank headquartered
in Manila. The purpose of all these agencies is to promote international
development by governments through direct grants as well as loans,
guarantees of loans, provision of political risk insurance and similar
programs for private sector businesses and projects. The Bank (as
well as these multilateral agencies) redistributes money from the
taxpayers of its member countries to the beneficiaries receiving
funding. These are businesses and development projects that the
private sector would not otherwise fund due to the risk (political
or economic) or uneconomic nature of the project or enterprise.
Thus, inherent in the provision of any government funding by the
World Bank (whether in the form of grants, loans or equity investment)
or insurance coverage is the uneconomic nature of the investment
i.e. they are malinvestments and thus represent a waste of precious
capital (forcibly taken from private taxpayers). This is not dissimilar
from the malinvestment scheme currently being promoted by Lehman
Brothers' Felix
Rohatyn for the United States.

It is not surprising
with so much money being thrown at politicians and bureaucrats that
there is corruption — it would be surprising if there were not.
As Berkman says the Bank enriches the government elites of the Third
World while creating massive amounts of debt which cannot be repaid.
"[T]he Bank pretends it is lending for noble purposes, while
the borrowers pretend they will put the money to good use,"
says Berkman. Instead the money is put into the hands of government
officials and leaders who historically have looted their national
treasuries. Ten percent of the $20 billion disbursed by the Bank
each year is lost to corruption and it is estimated that 25 to 35%
of total lending is lost to corruption. While the corruption takes
many forms of course here are just a few examples:

  • Shell companies
    paid for goods and services that were never delivered
  • Tainted
    pharmaceuticals bought by the Bank for distribution to the public
  • Faulty AIDS
    testing kits bought by the Bank
  • Bank benchmark
    certification achievement for a hospital built with Bank funds
    when in fact all that existed was a hole in the ground
  • Bribes and
    kickbacks being paid to senior government officials while suppliers
    go unpaid
  • Farmers
    aid programs billed for hundreds of thousands of dollars for office
    furniture, vehicles, lodging, air conditioners, fencing, household
    furniture rather than aid to the farmers

As important
as it is to weed out corruption it is equally important to understand
the inherent mismanagement and malinvestment (along with corruption)
which occurs in the Bank's funding process. I say inherent because
the basic premise for the Bank's existence — to invest in projects
the private sector would not touch — is flawed and thus with $20
billion of someone else's money (taxpayers money or central-bank-created
fiat money) to be distributed annually by a large political bureaucracy
in countries around the world for allocation to projects which are
inherently malinvestments (not investments seeking a market financial
return) there can be no other result than corruption, mismanagement
and malinvestment.

A
case
study of the Ivory Coast
will suffice to paint the picture of
how the World Banku2018s process works and the manner in which the government
and the ruling elite of a country (this can be applied to any country
not just the one in the case study) operate in their dealings with
the Bank. After a generation of relative success (8% annual growth
rates) following World War II due to a relatively competitive free
enterprise system the Ivory Coast experienced a slump from which
it has yet to pull out. Notwithstanding its recognition of the problem
the World Bank was powerless to assist the country despite it being
the country's largest creditor.

Following
the Ivory Coast's post-war economic success the government extended
its authority over the economy and allocation of resources as it
began to develop large inefficient infrastructure projects which
were financed by the World Bank. The World Bank did not require
that their loans provide a financial return. The ruling elite withdrew
(legally and illegally) sizeable percentages of the capital loaned
by the Bank to the government. The loans eventually represented
as much as 85% of the country's GDP. The country became dominated
and controlled by a small governing minority acting as intermediary
between the populace and the international marketplace and community
(as well as intermediary domestically) similar to the social and
governing structure which existed during the period of French colonialism.

The
concentration of more power in the central government allowed the
urban elite to keep its grasp on power by holding back rural development.
The primary means for this control was the central purchasing authority
for the nation's coffee and cocoa production. Since it had the government
granted monopoly this authority purchased all the coffee and cocoa
production of the country and then resold it on the world market.
Since the government was the sole purchaser of coffee and cocoa
production in the country it could dictate prices to the producers
which it did at rates representing only 37% of the world prices.
Natually, the government reaped substantial revenues from such an
arrangement in addition to controlling the primary export market
of the Ivory Coast.

Originally
the World Bank's analysis supported the government's interventionist
model which declared that the success of the country was due to
the government's intervention in the economy and the implementation
of the government's economic policies. Thus, the Bank's objective
was to strengthen the state in order to promote more coherent economic
policies. This centralized planning by a one-party state allowed
the government to control the allocation of resources and distribution
of wealth within the country which became an obstacle to economic
growth and improvement in the prosperity of the country's citizens.
The World Bank was, wittingly or unwittingly, a co-conspirator in
this gradual destruction of the Ivory Coast's economy as it continued
to provide funding to meet the growing budgetary deficits of the
government.

Then in 1982
the World Bank's analysis changed. Government intervention along
with the centralized purchasing agency was viewed as the problem
not the cure. The price controls of the central purchasing authority
were recognized by the Bank as a primary cause of the income inequality
in the country. The more interventionist (e.g. taxes and regulations)
the slower the economic growth and the more unequal the distribution
of incomes. The World Bank began to propose market-oriented reforms
which of course were viewed by the government and the ruling elite
as a threat to their continued authority and accumulation of wealth
at the expense of the rest of the populace. The government and the
ruling elite ignored the Bank's proposals for reform while the Bank
kept lending the country money. Why and how this happened is a case
study in the functioning of bureaucracies especially government
bureaucracies.

As
the World Bank's reform proposals began to be pressed with the ruling
elite the reaction was typical Third-World spin. The World Bank
was said to be an instrument of the rich Western nations which wanted
to keep the Ivory Coast poor (this was the unintended consequence
of the Bank's funding of this malinvestment). The ruling elite said
the World Bank wanted to keep the country dependent on coffee and
cocoa at the expense of the country industrializing. Lastly, the
government used its support of the Western countries in Africa as
extortion to maintain the flow of World Bank funds.

At
the personnel level the government bureaucrats who manage these
programs were relatively senior and part of the ruling elite. They
had a vested interest in making sure taxes were collected and expenditures
paid. They were not penalized for expenditures exceeding tax collections.
Thus, the government bureaucrats were only interested in getting
more funding to make up the government's budget deficits. On the
other side the Bank personnel were rewarded with the continuation
of their employment with the Bank and advancement within the Bank
by increasing the number and a size of their loan portfolio — there
was no incentive based on financial returns. The Bank's loan officers
were only interested in keeping the funding flowing to the government
for as long as possible. Thus, despite the analysis by the Bank's
analysts (the analysts operated independently of the loan administrators)
pointing out the negative effects of the state's interventionist
policies and the detrimental effects of the central purchasing authority
the Ivory Coast kept borrowing and the World Bank kept lending.
Eventually, in 1990 the Bank stopped its loans to the Ivory Coast
and soon after the country slipped into civil war among its competing
political groups.

The World Bank
will never be able to assist nations such as the Ivory Coast to
transition from poverty to prosperity — first, because it fails
the basic premise of investment in that it is not a private wealth-generating
institution whose objective is to make a return commensurate with
the risk of its investments but merely operates as a wealth transfer
and redistribution intermediary taking wealth from the taxpayers
of one country to redistribute to the ruling elite of another country
and second, because it is not willing to adopt the Rothbard
Plan
and embrace the radical conversion of its client countries
to the free market as a condition to any funding by the Bank (moreover
the Rothbard Plan would reject any loans from the Bank).

The
dimensions of the proffered Rothbard Plan for desocialization should
now be clear: (1) Enormous and drastic reductions in taxes, government
employment, and government spending. (2) Complete privatization
of government assets: where possible to return them to the original
expropriated owners or their heirs; failing that, granting shares
to productive workers and peasants who had worked on these assets.
(3) Honoring complete and secure property rights for all owners
of private property. Since full property rights imply the complete
freedom to make exchanges and transfer property rights, there must
be no government interference in such exchanges. (4) Depriving the
government of the power to create money, best done by a fundamental
that at one and the same time liquidates the central bank and uses
its gold to redeem its notes and deposits at a newly defined unit
of gold weight of existing currencies. All this could and should
be done in one day, although the monetary reform could be done in
steps taking a few days.

Even if the
World Bank bureaucrats could accept the concepts of the Rothbard
Plan they could never agree to the timetable for its immediate implementation
preferring instead a period of transition over months or even years;
but as Rothbard explains time is of the essence and critical to
its success since the free market is an interconnected web of lattice-work;
it is made of innumerable parts which intricately mesh together
through a network of producers and entrepreneurs exchanging property
titles. Holding back, freeing only a few areas at a time, will only
impose continuous distortions that will cripple the workings of
the market and discredit it in the already fearful and suspicious
public.

Thus,
the only solution for poor countries desiring prosperity is adoption
of the Rothbard Plan, avoidance of funding by multilateral agencies
such as the World Bank and the liquidation or privatization of the
World Bank (and other multilateral agencies) to stop its continuous
legacy of inherent corruption, mismanagement and malinvestment which
keeps the populace of the Bank's clients poor while enriching their
governments and ruling elites.

August
16, 2008

Jacob
Steelman [send
him mail
], an American ex-pat, is President of International
Ventures Group a global investment, finance and development company
located in Sydney, Australia.

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