World Bank Chief Will Back Free Markets

SO there is life in the Bush administration yet. And a bit of good sense. After allowing the 10,000 staff of the World Bank to sink Paul Wolfowitz for reasons that had less to do with Wolfowitz’s girlfriend than with his support for the policy that led to the Iraq war, President George Bush recovered his poise and resisted pressure to give up the 60-year-old prerogative of the American president to nominate the president of the World Bank.

Bob Zoellick was the man Bush wanted to name as the new head of the bank when Jim Wolfensohn stepped down in 2005. But he needed a job for Wolfowitz, and one that did not require Senate confirmation. So Zoellick subordinated his ego and agreed to accept the booby prize of second-in-command to Condi Rice at the State Department. This was destined to be an unhappy posting: Rice is an international celebrity, and whenever Zoellick stood in for her at meetings, he faced an unmistakable sense of disappointment from a room full of foreign negotiators cheated out of a much-lusted-after photo-op with the attractive, female, black, American secretary of state.

Now that Zoellick finally has the opportunity to run his own show, after a stint at Goldman Sachs, what can we expect? He is well known for two things: a sharp intelligence, and even sharper elbows. The first is certainly accurate, the second less so. Zoellick can be a tough-minded negotiator, but I have always found him courteous when we disagree, willing to engage in serious argument. And Zoellick’s ability to match the World Bank staff in intellectual weight and international contacts will make it difficult for these highly paid, tax-exempt men and women to justify continuing the vendetta that brought down Wolfowitz. But they will try: a senior bank official rushed to tell the press: “Zoellick is from the same people who brought you the Iraq war . . . Any American appointed by this president would carry that stigma.”

More important than this infighting is the question of policy. The World Bank is on the verge of irrelevance. In this era of huge private philanthropy and cheap money, everyone from Bill Gates to China and private lenders is making funds available to many of the bank’s potential clients, with no annoying reform requirements attached; a significant portion of World Bank loans are said to have ended up in Swiss bank accounts; the large projects the bank has funded are often low on the list of needs of people in client countries, who prefer clean water to roads to nowhere; its preference for huge government projects flies in the face of what we have learnt from Hernando de Soto about the key role of private property rights, and about the effectiveness of microfinance from Muhammad Yunus, the Bang-ladeshi banker who won the Nobel Peace Prize, and Amartya Sen, the Harvard professor who was awarded the Nobel Prize for economics.

In conferences with Treasury secretary Hank Paulson, when Zoellick was just one on a list of candidates, Bush’s nominee laid out plans to carve out a role for the World Bank that recognises that the world has changed since the bank was established in 1944 to cope with the ravages of war. The basic goal of the bank’s two institutions – the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) – is to relieve poverty in poor but nevertheless creditworthy countries (IBRD), and in the world’s poorest countries (IDA).

Zoellick brings to that task a firm belief in free markets. He is keenly aware that government intervention often does more harm than good. He recently minuted me, after I flirted with expanding the role of government in economic life: “Consider how Soviet economic planning was considered such a ‘success’ for so long.” The role of government, he thinks, is to set the macroeconomic conditions that maximise growth, productivity, education, and research and development.

This belief is a potential source of conflict with the bank’s staff and some of its clients, who have grander visions of the role of government. If Zoellick is not captured by the bank’s culture – its Washington staff are encased in a stunning glass building that for some strange reason encourages neither outward looking nor transparency – he will insist that countries that want loans move in the direction of freer markets. Reform first; loans later – a position that might annoy Gordon Brown, who is ever eager to pour funds into Africa.

Zoellick’s goal will be unvarying, but the route will be flexible. When he was United States trade representative and couldn’t get America’s trading partners to sign on to the Doha free-trade agreement that he was instrumental in starting, he struck bilateral deals with countries that saw it advantageous to open their markets in return for reciprocity from America. These deals offended the purists, and for good reason: they are not as efficiency-creating as global arrangements. But they put recalcitrant countries on notice that the freer-trade train was leaving the station, and they would do better to get on board than to wave goodbye to access to the huge American market.

Perhaps most important, more important even than Zoellick’s effort to find a role for the bank in today’s world – if indeed such a role exists – is that Bush has reminded his critics that he still occupies the Oval Office, and is not so weakened that he has to pander to his international critics by giving up one of the important powers he has: the power to make key appointments. The World Bank board can reject Zoellick, as some of its members are hoping it will, but only if it wants to trigger the withdrawal of full-hearted American support for the institution just as it launches a $30 billion fund-raising drive.