Wolfowitz vs. the World Bank Board: It's Trench Warfare

Is Paul Wolfowitz under siege? And is his campaign to root out — or at least prune — the corruption that permeates lending at the $200 billion World Bank already a casualty?

Appointed by the Bush Administration to the presidency of theWorld Bank 19 months ago, Wolfowitz, former U.S. Deputy Defense Secretary and intellectual architect of the war against Saddam Hussein, has been locked in a cold war with his 24-member board of directors, who represent 185 countries. That war is now getting hotter — threatening to stall or even cripple Wolfowitz’s aggressive campaign to root out sdfsdfsdfcorruption from the world’s largest and most influential anti-poverty institution.

FOX News has obtained the confidential minutes of a Jan. 8, 2007, meeting at the bank’s Washington headquarters that dramatically illustrates the explosive level of animosity currently focused on Wolfowitz and his management team by the World Bank board. Among other things, the minutes appear to show that almost every aspect of Wolfowitz’s proposals to shift resources at the bank, create new priorities and keep a cap on bank spending face heavy opposition.

Click HERE to view the "raw" version of the minutes.(pdf)

Click HERE to view a "cheat sheet" that gives the full names and titles of people referenced in the "raw" version. (pdf)

Click HERE to view the official, more sanitized version of the minutes. (pdf)

Traditionally, such memos are couched in language aimed at muffling political divisions and differences of opinion. But this captures a session in which one director after another appears to be chewing apart the bank’s top management over nearly every detail of Wolfowitz’s governance.

Moreover, the critics are named, offering a rough map of the opposition that Wolfowitz faces from almost every quarter.

The vitriolic tone and sweeping nature of the opposition to Wolfowitz and his agenda raise serious questions about whether the two sides are simply too gridlocked to get much of anything accomplished. That could have drastic consequences at an institution with 26,000 staffers and consultants, which doles out roughly $20 billion a year for 2,000 projects worldwide, and which manages a loan portfolio of $200 billion. The U.S., long the agency’s biggest single donor, contributes nearly $1 billion annually, and votes roughly 16% of the shares of the bank.

Among other things, the memo — and a sanitized version for broader (but still limited) consumption, which FOX News has also obtained — accuses Wolfowitz of lacking an effective strategy for the bank, or any clear vision of where to take the 61-year-old institution. And it emphatically rejects a Wolfowitz plan to make unspecified cutbacks and “redeployments” in the bank’s 2007-2008 budgets that seem to be among Wolfowitz’s main proposals for action.

One longtime bank staffer in Washington says about the Wolfowitz team: “They were basically told that they have no strategy, no objectives and no clear rationale behind any of things they proposed or discussed. This gives you a good sense of the environment.”

The minutes come from a Washington meeting of the board’s budget and “development-effectiveness” committees, which are co-chaired by officials from Brazil and China. The meeting was called to discuss a “paper” —apparently an informal set of budget proposals — that was submitted by the bank’s management, and to lay out goals and priorities — as well as certain cutbacks and “redeployments” worth as much as $225 million per year — for the next three years. FOX News was unable to obtain the discussion paper itself. But according to the memos, the discussion quickly devolved into a bitch-and-nitpick party that could rival the critics at last week’s Paris haute-fashion shows.

So it was perhaps appropriate that in the memo, France’s alternate board director helped lead the assault, backed by the rep from Switzerland. The pair dismissed the management paper as a “lost opportunity.” A director from Mexico found the paper “confusing.” The directors or reps from Saudi Arabia, India, China, Canada, the United Kingdom and three other countries carped that it “fell short of its objective to establish a link between strategic priorities and budget allocation.” Australia, the Netherlands and France went even further, complaining that the Wolfowitz team “had not outlined a 'vision' for the bank linked to both a medium-and-long term outlook.”

And that view was echoed by Italy, Japan, Brazil, Mauritius and others, who concluded that the paper “simply provided a list of priority items without articulating criteria… or a rationale.”

The director from Burundi, representing 21 African nations (many of them steeped in corruption), called for greater “transparency” from the bank and wondered if a “zero-growth” budget made sense in light of what he called the bank’s “expanding mandate.”

By the time those criticisms had been transferred to the sanitized version of the document, some of them had been muted into softer tones of diplomatic civility. The board directors were no longer "puzzled" by the listing of management's priorities, they were simply "not satisfied." Similarly, what began as a board concern that a budget redeployment of 15 percent of the bank’s resources "would" have a "profound negative impact" on staff morale had become something that "could" have a "negative impact."

But both versions kept the same conclusion: "In the absence of an adequately articulated strategic framework, [directors] found it difficult to understand or access budgetary implications."

The response from Wolfowitz’s team is not contained in the raw record of the meeting, but is folded into the sanitized version of the document. Essentially it amounts to a conciliatory position that acknowledges the directors’ “frustration,” but warns this was not intended to be a “business as usual” year for the bank, and predicts that management might not be able to “satisfy their expectations” for more information with full details in time for a March meeting.

“The broad strategic direction of the bank remains unchanged,” the Wolfowitz team asserted, and it defended itself by saying that there is no intent to “establish a hierarchy” among priorities, as directors complained. The full details of the proposed three-year cutbacks and redeployments will become clearer over the next year, it stated. And, in a response to Burundi and the African nations, bank management reasserted Wolfowitz’s commitment to a flat budget.

From the day he was nominated by President Bush, Wolfowitz was never warmly received by the bank’s board, which feared he would rock the boat that had been sailed more comfortably by his predecessor, James Wolfensohn — too comfortably, in view of the reform-minded Bush Administration. And the directors were right.

As the memos in FOX News’ possession underline, Wolfowitz since then has been trying to rein in a bloated bureaucracy that some experts say could be effectively cut by half. And his aggressive anti-graft campaign, which tied poverty aid to corruption-reduction efforts by recipients and suspended approximately $1 billion worth of loans to the world’s most corrupt governments, has infuriated many nations on the board. The fury boiled over in Singapore last September, during the bank’s annual meeting, when a British government official launched a rare public attack of Wolfowitz, followed by a temporary halt of UK funding to the bank.

Relations between the bank president and the board seemed calmer by December, after Wolfowitz toned down (at least for a while) some of the stringent conditions that his team is attaching to poverty aid. He also agreed that the board should have a role in the “oversight” of his anti-corruption policy. That was roundly hailed by the British tabloids and European leaders as a defeat for Wolfowitz. In fact, as president of the bank, he retains the upper hand, with the sole power to bring any and all loans to the bank board for approval. Or not to.

Wolfowitz was said to be unhappy about the board’s rebellious behavior, especially in Singapore, but as the recent memos show, he is still trying to push ahead. Currently, he is getting feedback from consultants, academics and private sector figures to help him formulate a more definite anti-corruption plan, which he’ll present to his feisty board this April.

What is also clear from the memos is that the personalities of the board members opposing Wolfowitz also have a significant role to play in the current bank tug-of-war. And they are far from an easy crew to deal with. Not surprisingly, many good directors burn out and quit after 2-3 years, while the longest serving ones are usually the most tied to the bank’s old ways (and happy with their $200,000 tax-free salaries, plus perks like free education for their kids, and extra payments for spouses.)

According to one top insider in Wolfowitz's circle, that cast has at times included one longtime director whose arrogance and bullying have made him widely disliked by his colleagues, another director who seems to enjoy taking "reflexive" positions opposing the U.S. "as a matter of principle," and one director "widely regarded as a buffoon" and prone to long and mysterious absences. Another director has personally attacked Wolfowitz on subjects ranging from Iraq to his girlfriend (whom he met at the bank). Still another director is said to take orders from his country's development minister to "shovel loans out the door and minimize the conditions on them."

In that circus setting, it’s little wonder that dramatic change as proposed by Wolfowitz has led to vitriolic dialogue. Wolfowitz’s first major decision — a rejection of loans to corrupt Congo — was supported only by the U.S. and Japanese directors.

Personalities aside, the main problem is the World Bank’s history and structure. It is, after all, an open-handed lending agency where half the governing board is made up of directors who represent borrowers — a concept that would be unthinkable in a private-sector bank. “I can’t recall a borrowing country ever voting against a loan [to its own country], or criticizing it, or voting against a budget,” says one current top insider. “We have no support reining in the budget.”

Indeed, by most accounts, the borrower-directors mainly see their job as simply getting as much money for their countries as possible — supervising a global pork-producing machine, where everybody votes in favor of one another’s projects and nobody abstains from voting for their own.

“This reflects a genuine governance conundrum,” says Robert Holland, a Dallas attorney and former CEO of Triton Energy, who served as the U.S. director on the World Bank’s board from 2001 until last May. “On the one hand, borrowers have a legitimate interest in the development prescriptions handed down by the bank. On the other hand, no characteristic of the bank that I have mentioned to my friends in the private sector produces greater astonishment than the fact that half the board represents borrowers. Their typical response upon hearing that is, ‘My God, the inmates are running the asylum.’”

Holland remains a huge supporter of Wolfowitz’s effort to try to put a lid on corruption, which some experts believe taints more than 20 percent of the funds the bank disburses every year — for a loss of $100 billion since 1945. “His emphasis on corruption is the most serious challenge to the status quo the lending culture has ever faced,” says Holland.

Indeed, the problem is serious enough that even the World Bank itself has acknowledged it. One internal review confessed that the bank had been overtaken by a dangerous “culture of approval,” where staffers felt heavy pressure to push new loans out the door even when presented with overwhelming evidence that the development projects were ill-advised.

One big problem is an utter lack of accountability for projects that typically take long time spans to develop, implement and finally to measure the results. “By then, the guy who originated the project is gone, and governments in that country have come and gone, so there is no accountability,” says Holland, “If it goes wrong, they just blame it on a previous manager, or a previous government.”

Indeed, a World Bank development project evaluation in 2000 actually began with the admission, “Despite the billions of dollars spent on development assistance each year, there is still very little known about the actual impact of projects on the poor.”

The admirable battle against corruption would be easier if the board were less secretive in its deliberations. Since Wolfowitz took over, there have been two board votes on whether to loosen up its anti-disclosure policy. Both efforts were soundly defeated by the vast majority of directors. Says Transparency International’s Nancy Zucker Boswell, whose organization is working closely with the bank on its anti-corruption strategy: “You need political will. We need the shareholders to agree to be more transparent.”

Boswell thinks the bank’s management under Wolfowitz is moving in the right direction by publishing more information than in the past, but much less progress has been made among the borrowers. “What are they doing with the funds?” she asks. “How are they conducting their procurement with those funds? That’s where the door shuts. And the people of the country where the government has borrowed are not seeing what the government is doing with those funds, yet they are the ones paying the taxes to repay the loan.”

One thing is sure about the current standoff, as revealed in the documents obtained by FOX News: all those questions still need to be asked. And the battle to answer them, and clean up the World Bank’s policies, still looks something like trench warfare.