Feature

Will Globalization Go Bankrupt?

Global integration is driven not by politics or the Internet or the World Trade Organization or even -- believe it or not -- McDonald's. No, throughout history, globalization has been driven primarily by monetary expansions. Credit booms spark periods of economic integration, while credit contractions quickly squelch them. Is today's world on the verge of another globalization bust?

"Only the young generation which has had a college education is capable of comprehending the exigencies of the times," wrote Alphonse, a third-generation Rothschild, in a letter to a family member in 1865. At the time the world was in the midst of a technological boom that seemed to be changing the globe beyond recognition, and certainly beyond the ability of his elders to understand. As part of that boom, capital flowed into remote corners of the earth, dragging isolated societies into modernity. Progress seemed unstoppable.

Eight years later, however, markets around the world collapsed. Suddenly, investors turned away from foreign adventures and new technologies. In the depression that ensued, many of the changes eagerly embraced by the educated young -- free markets, deregulated banks, immigration -- seemed too painful to continue. The process of globalization, it seems, was neither inevitable nor irreversible.

What today we call economic globalization -- a combination of rapid technological progress, large-scale capital flows, and burgeoning international trade -- has happened many times before in the last 200 years. During each of these periods (including our own), engineers and entrepreneurs became folk heroes and made vast fortunes while transforming the world around them. They exploited scientific advances, applied a succession of innovations to older discoveries, and spread the commercial application of these technologies throughout the developed world. Communications and transportation were usually among the most affected areas, with each technological surge causing the globe to "shrink" further.

But in spite of the enthusiasm for science that accompanied each wave of globalization, as a historical rule it was primarily commerce and finance that drove globalization, not science or technology, and certainly not politics or culture. It is no accident that each of the major periods of technological progress coincided with an era of financial market expansion and vast growth in international commerce. Specifically, a sudden expansion of financial liquidity in the world's leading banking centers -- whether an increase in British gold reserves in the 1820s or the massive transformation in the 1980s of illiquid mortgage loans into very liquid mortgage securities, or some other structural change in the financial markets -- has been the catalyst behind every period of globalization.

If liquidity expansions historically have pushed global integration forward, subsequent liquidity contractions have brought globalization to an unexpected halt. Easy money had allowed investors to earn fortunes for their willingness to take risks, and the wealth generated by rising asset values and new investments made the liberal ideology behind the rapid market expansion seem unassailable. When conditions changed, however, the outflow of money from the financial centers was reversed. Investors rushed to pull their money out of risky ventures and into safer assets. Banks tightened up their lending requirements and refused to make new loans. Asset values collapsed. The costs of globalization, in the form of social disruption, rising income inequality, and domination by foreign elites, became unacceptable. The political and intellectual underpinnings of globalization, which had once seemed so secure, were exposed as fragile, and the popular counterattack against the logic of globalization grew irresistible.

THE BIG BANG

The process through which monetary expansions lead to economic globalization has remained consistent over the last two centuries. Typically, every few decades, a large shift in income, money supply, saving patterns, or the structure of financial markets results in a major liquidity expansion in the rich-country financial centers. The initial expansion can take a variety of forms. In England, for example, the development of joint-stock banking (limited liability corporations that issued currency) in the 1820s and 1830s -- and later during the 1860s and 1870s -- produced a rapid expansion of money, deposits, and bank credit, which quickly spilled over into speculative investing and international lending. Other monetary expansions were sparked by large increases in U.S. gold reserves in the early 1920s, or by major capital recyclings, such as the massive French indemnity payment after the Franco-Prussian War of 1870, the petrodollar recycling of the 1970s, or the recycling of Japan's huge trade surplus in the 1980s and 1990s. Monetary expansions also can result from the conversion of assets into more liquid instruments, such as with the explosion in U.S. speculative real-estate lending in the 1830s or the creation of the mortgage securities market in the 1980s.

The expansion initially causes local stock markets to boom and real interest rates to drop. Investors, hungry for high yields, pour money into new, nontraditional investments, including ventures aimed at exploiting emerging technologies. Financing becomes available for risky new projects such as railways, telegraph cables, textile looms, fiber optics, or personal computers, and the strong business climate that usually accompanies the liquidity expansion quickly makes these investments profitable. In turn, these new technologies enhance productivity and slash transportation costs, thus speeding up economic growth and boosting business profits. The cycle is self-reinforcing: Success breeds success, and soon the impact of rapidly expanding transportation and communication technology begins to cause a noticeable impact on social behavior, which adapts to these new technologies.

But it is not just new technology ventures that attract risk capital. Financing also begins flowing to the "peripheral" economies around the world, which, because of their small size, are quick to respond. These countries then begin to experience currency strength and real economic growth, which only reinforce the initial investment decision. As more money flows in, local markets begin to grow. As a consequence of the sudden growth in both asset values and gross domestic product, political leaders in developing countries often move to reform government policies in these countries -- whether reform consists of expelling a backward Spanish monarch in the 1820s, expanding railroad transportation across the Andes in the 1860s, transforming the professionalism of the Mexican bureaucracy in the 1890s, deregulating markets in the 1920s, or privatizing bloated state-owned firms in the 1990s. By providing the government with the resources needed to overcome the resistance of local elites, capital inflows enable economic-policy reforms.

This relationship between capital and reform is frequently misunderstood: Capital inflows do not simply respond to successful economic reforms, as is commonly thought; rather, they create the conditions for reforms to take place. They permit easy financing of fiscal deficits, provide industrialists who might oppose free trade with low-cost capital, build new infrastructure, and generate so much asset-based wealth as to mollify most members of the economic and political elite who might ordinarily oppose the reforms. Policymakers tend to design such reforms to appeal to foreign investors, since policies that encourage foreign investment seem to be quickly and richly rewarded during periods of liquidity. In reality, however, capital is just as likely to flow into countries that have failed to introduce reforms. It is not a coincidence that the most famous "money doctors" -- Western-trained thinkers like French economist Jean-Gustave Courcelle-Seneuil in the 1860s, financial historian Charles Conant in the 1890s, and Princeton University economist Edwin Kemmerer in the 1920s, under whose influence many developing countries undertook major liberal reforms -- all exerted their maximum influence during these periods. During the 1990s, their modern counterparts advised Argentina on its currency board, brought "shock therapy" to Russia, convinced China of the benefits of membership in the World Trade Organization, and everywhere spread the ideology of free trade.

The pattern is clear: Globalization is primarily a monetary phenomenon in which expanding liquidity induces investors to take more risks. This greater risk appetite translates into the financing of new technologies and investment in less developed markets. The combination of the two causes a "shrinking" of the globe as communications and transportation technologies improve and investment capital flows to every part of the globe. Foreign trade, made easier by the technological advances, expands to accommodate these flows. Globalization takes place, in other words, largely because investors are suddenly eager to embrace risk.

THE BIG CRUNCH

As is often forgotten during credit and investment booms, however, monetary conditions contract as well as expand. In fact, the contraction is usually the inevitable outcome of the very conditions that prompted the expansion. In times of growth, financial institutions often overextend themselves, creating distortions in financial markets and leaving themselves vulnerable to external shocks that can force a sudden retrenchment in credit and investment. In a period of rising asset prices, for example, it is often easy for even weak borrowers to obtain collateral-based loans, which of course increases the risk to the banking system of a fall in the value of the collateral. For example, property loans in the 1980s dominated and ultimately brought down the Japanese banking system. As was evident in Japan, if the financial structure has become sufficiently fragile, a retrenchment can lead to a collapse that quickly spreads throughout the economy.

Since globalization is mainly a monetary phenomenon, and since monetary conditions eventually must contract, then the process of globalization can stop and even reverse itself. Historically, such reversals have proved extraordinarily disruptive. In each of the globalization periods before the 1990s, monetary contractions usually occurred when bankers and financial authorities began to pull back from market excesses. If liquidity contracts -- in the context of a perilously overextended financial system -- the likelihood of bank defaults and stock market instability is high. In 1837, for example, the U.S. and British banking systems, overdependent on real estate and commodity loans, collapsed in a series of crashes that left Europe's financial sector in tatters and the United States in the midst of bank failures and state government defaults.

The same process occurred a few decades later. Alphonse Rothschild's globalizing cycle of the 1860s ended with the stock market crashes that began in Vienna in May 1873 and spread around the world during the next four months, leading, among other things, to the closing of the New York Stock Exchange (NYSE) that September amid the near-collapse of American railway securities. Conditions were so bad that the rest of the decade after 1873 was popularly referred to in the United States as the Great Depression. Nearly 60 years later, that name was reassigned to a similar episode -- the one that ended the Roaring Twenties and began with the near-breakdown of the U.S. banking system in 1930–31. The expansion of the 1960s was somewhat different in that it began to unravel during the early and mid-1970s when, thanks partly to the OPEC oil price hikes and subsequent petrodollar recycling, a second liquidity boom occurred, and lending to sovereign borrowers in the developing world continued through the end of the decade. However, the cycle finally broke down altogether when rising interest rates and contracting money engineered by then Federal Reserve Chairman Paul Volcker helped precipitate the Third World debt crisis of the 1980s. Indeed, with the exception of the globalization period of the early 1900s, which ended with the advent of World War I, each of these eras of international integration concluded with sharp monetary contractions that led to a banking system collapse or retrenchment, declining asset values, and a sharp reduction in both investor risk appetite and international lending.

Following most such market crashes, the public comes to see prevalent financial market practices as more sinister, and criticism of the excesses of bankers becomes a popular sport among politicians and the press in the advanced economies. Once capital stops flowing into the less developed, capital-hungry countries, the domestic consensus in favor of economic reform and international integration begins to disintegrate. When capital inflows no longer suffice to cover the short-term costs to the local elites and middle classes of increased international integration -- including psychic costs such as feelings of wounded national pride -- support for globalization quickly wanes. Populist movements, never completely dormant, become reinvigorated. Countries turn inward. Arguments in favor of protectionism suddenly start to sound appealing. Investment flows quickly become capital flight.

This pattern emerged in the aftermath of the 1830s crash, when confidence in free markets nose-dived and the subsequent populist and nationalist backlash endured until the failure of the much-dreaded European liberal uprisings of 1848, which saw the earliest stirrings of communism and the publication of the Communist Manifesto. Later, in the 1870s, the economic depression that followed the mass bank closings in Europe, the United States, and Latin America was accompanied by an upsurge of political radicalism and populist outrage, along with bouts of protectionism throughout Europe and the United States by the end of the decade. Similarly, the Great Depression of the 1930s also fostered political instability and a popular revulsion toward the excesses of financial capitalism, culminating in burgeoning left-wing movements, the passage of anti-bank legislation, and even the jailing of the president of the NYSE.

PROFITS OF DOOM

Will these patterns manifest themselves again? Indeed, a new global monetary contraction already may be under way. In each of the previous contractions, stock markets fell, led by the collapse of the once-high-flying technology sector; lending to emerging markets dried up, bringing with it a series of sovereign defaults; and investors clamored for safety and security. Consider the crash of 1873, a typical case: Then, the equivalent of today's high-tech sector was the market for railway stocks and bonds, and the previous decade had seen a rush of new stock and bond offerings that reached near-manic proportions in the early 1870s. The period also saw rapid growth of lending to Latin America, southern and eastern Europe, and the Middle East. Wall Street veterans had expressed nervousness about market excesses for years leading up to the crash, but the exuberance of investors who believed in the infinite promise of the railroads, at home and abroad, coupled with the rising prominence of bull-market speculators like Jay Gould and Diamond Jim Brady, swept them aside. When the market collapsed in 1873, railway securities were the worst hit, with many companies going bankrupt and closing their doors. Major borrowers from the developing world were unable to find new financing, and a series of defaults spread from the Middle East to Latin America in a matter of months. In the United States, the Congress and press became furious with the actions of stock market speculators and pursued financial scandals all the way to President Ulysses S. Grant's cabinet. Even Grant's brother-in-law was accused of being in cahoots with a notorious group that attempted a brutal gold squeeze.

Today, we see many of the same things. The technology sector is in shambles, and popular sentiment has turned strongly against many of the Wall Street heroes who profited most from the boom. Lending to emerging markets has all but dried up. As of this writing, the most sophisticated analysts predict that a debt default in Argentina is almost certain -- and would unleash a series of other sovereign defaults in Latin America and around the world. The yield differences between risky assets and the safest and most liquid assets are at historical highs. In short, investors seem far more reluctant to take on risk than they were just a few years ago.

This lower risk tolerance does not bode well for poor nations. Historically, many developing countries only seem to experience economic growth during periods of heavy capital inflow, which in turn tend to last only as long as the liquidity-inspired asset booms in rich-country financial markets. Will the international consensus that supports globalization last when capital stops flowing? The outlook is not very positive. While there is still broad support in many circles for free trade, economic liberalization, technological advances, and free capital flows -- even when the social and psychic costs are acknowledged -- we already are witnessing a strong political reaction against globalization. This backlash is evident in the return of populist movements in Latin America; street clashes in Seattle, Prague, and Quebec; and the growing disenchantment in some quarters with the disruptions and uncertainties that follow in the wake of globalization.

The leaders now gathered in opposition to globalization -- from President Hugo Chávez in Venezuela to Malaysian Prime Minister Mahathir bin Mohamad to anti-trade activist Lori Wallach in the United States -- should not be dismissed too easily, no matter how dubious or fragile some of their arguments may seem. The logic of their arguments may not win the day, but rather a global monetary contraction may reverse the political consensus that was necessary to support the broad and sometimes disruptive social changes that accompany globalization. When that occurs, policy debates will be influenced by the less emotional and more thoughtful attacks on globalization by the likes of Robert Wade, a professor of political economy at the London School of Economics, who argues forcefully that globalization has actually resulted in greater global income inequality and worse conditions for the poor.

If a global liquidity contraction is under way, antiglobalization arguments will resonate more strongly as many of the warnings about the greed of Wall Street and the dangers of liberal reform will seem to come true. Supposedly irreversible trends will suddenly reverse themselves. Further attempts to deepen economic reform, spread free trade, and increase capital and labor mobility may face political opposition that will be very difficult to overcome, particularly since bankers, the most committed supporters of globalization, may lose much of their prestige and become the target of populist attacks following a serious stock market decline. Because bankers are so identified with globalization, any criticism of Wall Street will also implicitly be a criticism of globalizing markets.

Financiers, after all, were not the popular heroes in the 1930s that they were during the 1920s, and current events seem to mirror past backlashes. Already the U.S. Securities and Exchange Commission, which was created during the Great Depression of the 1930s, is investigating the role of bankers and analysts in misleading the public on the market excesses of the 1990s. In June 2001, the industry’s lobby group, the Securities Industry Association, proposed a voluntary code, euphemized as "a compilation of best practices... to ensure the ongoing integrity of securities research and analysis," largely to head off an expansion of external regulation. Increasingly, experts bewail the conflicts of interest inherent among the mega-banks that dominate U.S. and global finance.

Globalization itself always will wax and wane with global liquidity. For those committed to further international integration within a liberal economic framework, the successes of the recent past should not breed complacency since the conditions will change and the mandate for liberal expansion will wither. For those who seek to reverse the socioeconomic changes that globalization has wrought, the future may bring far more progress than they hoped. If global liquidity contracts and if markets around the world pull back, our imaginations will once again turn to the increasingly visible costs of globalization and away from the potential for all peoples to prosper. The reaction against globalization will suddenly seem unstoppable.

Feature

Who's Minding The Bank?

The World Bank is in crisis, struggling to devise a formula for development as critics slam it for incompetence, inefficiency, and irrelevance. Who to blame? Try bank President Jim Wolfensohn, whose personal failings and misguided policies have muddled the bank's mission and pushed its best staff out the door. But the bank's travails also underscore the hypocrisy of its rich shareholder nations, who speak grandly about reducing poverty but stand by as the world's top development institution falls apart. An exclusive investigative report.

If the World Bank were a private corporation, the 1990s would have been a decade of record profits, and the institution a growth stock. With the decline of communism, governments around the world became disillusioned with the public sector as an engine of growth and embraced market capitalism. From Latin America to Eastern Europe, political leaders slashed barriers to trade, privatized state-owned enterprises, and deregulated markets. Third World governments beat a path to the World Bank's door seeking out its unequaled expertise in the field of development -- and its money. The bank's potential for influencing the path of the global economy seemed to be on the verge of an unprecedented expansion.

But that potential was never realized. Without a clear mandate or well-defined products, the World Bank instead finds itself in crisis, its power severely diminished and its global role under attack from across the political spectrum. Critics speak freely of closing the institution altogether, or at least of radically shrinking it. Poised for spectacular growth 10 years ago, the World Bank now gropes for relevance precisely when new ideas and trends in the international economy should have placed the institution at center stage.

Under these conditions, what would a private company do? Easy -- fire the chief executive officer (CEO). But not the World Bank. Since June 1995, James D. Wolfensohn has presided over what many close to the bank view as a tragic deterioration of the world's premier development institution, which they describe as rudderless and lacking strategic direction. But, rather than getting the ax, Wolfensohn was reappointed for a second five-year term as World Bank president, through June 2005.

Observers blame the World Bank's troubles on Wolfensohn's personal failings -- his phenomenal temper, constant need for approval, and inability to resist the latest development fad. Sebastian Edwards, a UCLA professor and former World Bank senior economist, points out that the high volume of private capital flowing to developing nations has also seriously diminished the institution's importance. But, he says, Wolfensohn's own actions have accelerated the trend. "It's happened faster because of him,"

Edwards argues. "What Wolfensohn has done has been incredibly frivolous."

Edwards and others maintain that Wolfensohn's attempts to make the bank friendlier to numerous outside constituencies -- in particular to nongovernmental organizations (NGOs) -- have made the institution softheaded, less analytical in its approach, and therefore less relevant. They also say Wolfensohn's poor stewardship and lack of focus have weakened the bank's internal organization, making it less equipped to take the lead on important development issues. Calls for reform have multiplied: "We should be impatient"with the World Bank, argues John Taylor, the undersecretary for international affairs at the U.S. Treasury.

These views have barely been aired in public. Except among those close to the bank, the conventional wisdom about Wolfensohn is that of a charming and committed individual who has gone a long way to improve the bank's image worldwide. But on the evidence of internal bank communications, staff morale has collapsed. Disillusionment among employees is palpable, and many of the institution's most capable managers have left.

Yet the World Bank's decline is not simply another story of a bad boss run amok. While Wolfensohn deserves his share of the blame, the true culprits are the bank's shareholder nations -- the United States and other advanced economies. Wolfensohn is not only a cause of the World Bank's problems, he is also a symptom of the hypocrisy of the leaders of rich countries, many of whom speak eloquently on behalf of the world's poor yet do not care enough about them to prevent the decline of the world's top development institution.

FRIENDS IN HIGH PLACES

Wolfensohn was nominated to the World Bank post by President Bill Clinton in March 1995 to replace the ailing Lewis Preston. At age 61, Wolfensohn became the fourth president since Robert McNamara, the former U.S. defense secretary who created the modern World Bank before stepping down in 1981 after 13 years in office. Wolfensohn had long craved the job; he even shed his Australian nationality and became a U.S. citizen when the prospect of a nomination first emerged 21 years ago. Traditionally, the presidency of the bank is reserved for an American, much as Western European governments choose the head of the International Monetary Fund (IMF). The job is regarded as important enough for the decision to be made not by the Treasury Department, which handles most U.S. dealings with the bank, but by the White House, which invariably chooses candidates with connections to the U.S. political establishment.

When Clinton nominated him, the U.S. president described Wolfensohn, who made a fortune running his own boutique investment bank advising multinational corporations, as having "a long-standing, broad and active interest in the developing world and development issues."Wolfensohn indeed was admired widely for the attention he devoted, if not exactly to international development, to a variety of philanthropic causes, such as New York's Carnegie Hall and the Kennedy Center for the Performing Arts in Washington, D.C. He was chairman of both institutions and excelled at fundraising. If his experience in development was limited, then he was little different from most of his predecessors. "[Wolfensohn] wouldn't be the first lousy World Bank president,"says Ricardo Hausmann, an economics professor at Harvard University and former chief economist at the Inter-American Development Bank. "This is a consistent pattern. Part of the pattern has to do with the way that the Americans choose the president... It's quite structural and it's to do with the fact that there is little open competition in the process of nomination." In fact, many past presidents also came to the position late in life and without a background in the job. "These people are trying to learn what development is in their 60s," Hausmann says.

Although he lacked development experience, Wolfensohn had superb connections around the world, including with senior political figures in the United States. From 1989 to 2000, according to data from the Center for Responsive Politics, Wolfensohn and his wife Elaine donated more than $130,000 to U.S. political campaigns. The vast majority was to Clinton's party, though a judicious $1,000 went to George Bush's campaign coffers in 1991. As Wolfensohn retreated from campaign contributions after he joined the World Bank, his wife increased her donations.

In an interview for this article, Wolfensohn says the contributions and political connections had nothing to do with his appointment. "It wasn't because I had given money to political campaigns. I wasn't making any political contributions because I was chairman of the Kennedy Center. I had met Bill Clinton once... about two years before, but I'd never given him any money and to this day I haven't given him any money." But giving $138,000 over 10 years, he says, would not have been difficult. Contributions would go to friends. As trustee of the Kennedy estate, he would give to the political campaigns of Patrick and Edward Kennedy. He would attend dinners and make political contributions that way. "It's not difficult if you have a lot of friends to make 10 donations a year of a thousand dollars," he explains.

Wolfensohn disagrees that he lacked experience, pointing instead to the expertise he developed at a series of investment banks. "When I got here, I think I was pretty damn good in assessing what the strengths and the weaknesses of the institution were and also its position as a development institution in a changing environment."

Certainly, Wolfensohn may be the hardest working president the World Bank has ever had, and his personal commitment to the job appears enormous. But his personality seems to obstruct his efforts. "His ego is bound up with the World Bank and making a success of it," says one World Bank officer. One former senior bank official admits that Wolfensohn may be the organization's brightest leader since McNamara but also describes him as the "most insecure man I have met in my life." A former Wall Street colleague says Wolfensohn is "extremely smart, extremely good at maneuvering but has a tremendous ego." He seems, say colleagues, to require constant reassurance of his worth.

According to people who have worked with him, Wolfensohn is prone to personalize disputes and often uses emotional terms in his discussions with subordinates. People who oppose him are often depicted as disruptive, not "team players." One former official remembers a clash at a meeting with senior managers soon after Wolfensohn joined the bank. On the following day, the president told the group that he had not slept all night. He told them, according to this account, "You don't love me; you don't care for me."

Such qualities are not limited to Wolfensohn's dealings within the World Bank. Ann Pettifor, who headed the Jubilee 2000 campaign to reduce the debts of the poorest countries and had frequent encounters with him, says Wolfensohn "personalizes everything. That's what gives him his freshness and his passion, and these are great strengths. But it is also a sign of a lack of maturity."

Subordinates, past and present, say that loyalty is the paramount virtue Wolfensohn seeks in people he appoints to senior positions. Yet many also believe that his public criticism of bank staff and management prevents the growth of reciprocal loyalties that tie effective leaders to those who follow them. "He has never created a sense of oneness between himself and the organization, and you can't lead an organization on that basis," says a former official. As a result, he says: "Loyalty, the thing he craves so much, is precisely the thing that has eluded him."

BREAKING THE BANK

During his six years as president, Wolfensohn has completely overhauled senior management in an unprecedented manner. Wolfensohn has appointed 24 out of 26 vice presidents, and he brought in four out of five managing directors from outside the bank. From 1997 to 2000, nearly one fourth of its 10,000 employees have turned over. In terms of personnel, Wolfensohn has dismantled the bank that was created by McNamara. Unfortunately, the evidence suggests that this turnover was more expensive than effective in enhancing the bank's performance or boosting its relevance.

Many are critical of Wolfensohn's internal changes. "He's been unwilling or unable to set up a management structure beneath him to compensate for the fact that he can't run the institution on a day-to-day basis," says a former senior U.S. government official. Others criticize Wolfensohn for promoting favorites and ignoring World Bank regulations when they don't suit him. For example, in contravention to the bank's anti-nepotism rules, he appointed Nicholas Stern to the position of chief economist in 2000 when Stern's brother Richard was vice president for human resources. The appointment caused an internal furor, and Richard subsequently left the bank.

Other observers assert that the World Bank's senior management is weaker now than at any time in memory. This weakness exists in part, they believe, because Wolfensohn has avoided appointing any individual who could challenge him, thereby deepening the bank's management difficulties. "The best way to make an enemy out of Wolfensohn is to shine close to him,"says another former official. Wolfensohn has promoted or hired a series of individuals whom he first lionized and then shunned or even insulted. These include Rachel Lomax, a senior British civil servant, brought in as high chief of staff; former U.S. Treasury and IMF official Jessica Einhorn, promoted to managing director for finance; and Germany's current Deputy Finance Minister Caio Koch-Weser, also promoted to managing director. All three subsequently left the bank, as did other talented individuals who would not tolerate Wolfensohn's management style.

According to a senior bank staffer, Wolfensohn's record at the World Bank "would suggest that he doesn't want anybody who is both knowledgeable and at all charismatic or capable of making judgments. He wants to be both the CEO and the COO. But, looking at his career, he has never shown an indication that he has that kind of talent." Wolfensohn, who managed his own boutique investment bank with a staff of about 110 people prior to joining the World Bank, counters that, "I've never run 10,000 people, though I have given liberal advice to people who ran hundreds of thousands of people and they seemed to think that the advice was not bad." But even he acknowledges his shortcomings in this area. "I don't think I'm very good at the internal processes, approvals, and the way the bank runs, and I've sought to delegate that... I'm much better on the outside than on the inside."

The "outside" is precisely the realm where Wolfensohn appears to have thrived. Since he took over the World Bank, he has visited more than 100 countries, meeting with governments and representatives from business, labor, media, NGOs, religious and women's groups, students, and teachers. Alongside this official diplomacy, Wolfensohn has also kept in close personal touch with powerful figures worldwide. A central facet of his vigorous personal diplomacy includes his house in Jackson Hole, Wyoming.

"I invite friends to my ranch in Wyoming," Wolfensohn says, denying such invitations are a tool of personal diplomacy. The friends include U.S. Federal Reserve Chairman Alan Greenspan, who chooses the guest list for the Friday night dinners held at Wolfensohn's house during Jackson Hole's annual gathering of the world's central bankers. Wolfensohn has also entertained former U.S. President Bill Clinton, former Vice President Al Gore, current Vice President Dick Cheney, and many others there. "People like my house, but it's not a ranch, it's a house," he says.

However, Wolfensohn bristles at the suggestion that his past successes flow from his networking abilities. This charge, he argues, "goes back to the notion that my strength is that I have a lot of people in my card index and that I spend all my time on the telephone calling them up to make sure they remember me or inviting them to dinner... They said the same thing about me in my investment banking days. But if you think you can build a business that does $80 billion of mergers and acquisitions in its last year against Goldman Sachs, and Merrill [Lynch] and Morgan Stanley, because you've got a good Rolodex, you're out of your mind."

On the contrary, Wolfensohn says his efforts have never been superficial: "What I'm trying to do is deal with the substantive issues and use the network as a mechanism of selling substantive issues. The crucial thing is to link substance with the relationships, but the relationships without the substance mean nothing."

NEW AGE ECONOMICS

Over the last six years, Wolfensohn has deployed his significant communication and public- speaking skills in an effort to reconcile the substance of his work with his personal relationships -- and his own image -- outside the institution. "He's a relationship guy," says one World Bank official. "He has enormous credibility with influential and powerful people around the world." Another official commends Wolfensohn for having done a "fabulous job communicating with the outside constituencies: the governments of the industrialized countries and the NGOs."

But this kinder, gentler image has exacted a heavy price. Critics charge that, under pressure from NGOs and other interest groups, and as a result of his own insecurities, Wolfensohn has surrendered the World Bank's intellectual integrity, rushing to embrace the latest fads in development thinking regardless of their substantive merit. No initiative embodies this trend better than Wolfensohn's "Comprehensive Development Framework" (CDF), launched in January 1999. According to the bank, the CDF is a "holistic, long-term, and country-owned approach that focuses on building stronger participation and partnerships to reduce poverty." Wolfensohn maintains that the bank's true focus these days is at the country level, with the World Bank listening to what borrowers want rather than imposing solutions on them. Under the approach Wolfensohn has championed, countries base their economic strategies on the CDF. The "holistic" approach supposedly reflects the understanding that there is no simple, single element to successful development strategies. (Wolfensohn originally insisted on the "New Development Framework" as a name for this initiative, forcing his colleagues to point out that the notion of development as a multifaceted process was nothing new.)

According to bank documents, the CDF helps establish development priorities based on the principles of "country ownership" and "partnership," and with a "focus on results and a comprehensive and long-term perspective." The bank recognizes it does not have the resources to deal with every issue raised by the CDF, so it develops a "Country Assistance Strategy," aimed at intervening where the institution's expertise and comparative advantage are greatest.

For many of the bank's critics, the CDF is not a solution to the World Bank's lack of focus but rather a perfect example of the problem. One former World Bank official calls the CDF "a cruel joke." The newsletter of the bank's staff association quoted one staff member as describing a new "Strategic Framework Paper,"published this year and meant to provide new direction for the bank's development efforts, as "confusing, meaningless and stuffed with every cliché that has been uttered in the last two years... holistic, empowerment, ownership, even core competencies."

Critics charge that the CDF represents a capitulation to NGOs. UCLA's Sebastian Edwards believes there is a qualified case for listening to NGOs. "Since they are unattached to power structures," he says, "[NGOs] have more freedom to say what they think. But listening to them is not the same as becoming increasingly constrained by their views." Yet, the World Bank has altered its project mix based on NGO criticisms. For example, under pressure from NGOs and activists, the bank increasingly has avoided contentious projects such as construction of large dams. This strategy has helped the institution satisfy its rich-country shareholders and appease outside critics, though it has not silenced them. Wolfensohn himself says, "I don't know of a single issue since I came here that has been finally settled with the NGOs."

Many borrowing governments complain that it is inappropriate for the World Bank to anoint nonelected, self-styled representatives of civil society to interfere in bank programs. "I am deeply troubled by the distance the bank has gone in democratic countries toward engagement with groups other than governments in designing projects," lamented Larry Summers, the former U.S. Treasury secretary and currently president of Harvard University, at a private retreat of bank country directors in May 2001. Summers, also the former chief economist of the World Bank, said there was little evidence that giving weight to local communities -- in World Bank jargon, "empowerment" -- resulted in improved decision making. "I am concerned," he said, "that the move toward empowerment, rather than an economic approach, is standing in some ways for a reduced emphasis on the analytic element in the bank's work. If that is so, it seems to be a troubling development."

Many observers think that Wolfensohn's positioning of the bank has accentuated the institution's lack of focus, leaving staff unsure about priorities. In a speech last October to the World Bank's board, Valeriano García, the outgoing executive director for Argentina, captured this widely held sentiment: "The strategic thinking of the bank has been muddled by too many ad-hoc initiatives... We really need to be more focused."

Such initiatives include Wolfensohn's World Faiths Development Dialogue, which brings together various religious leaders from around the world with the bank and other development institutions in order to "catalyze the active, coordinated engagement of the world's faiths in the development process." The dialogue, which World Bank officials now liken to George W. Bush's initiative to use faith-based organizations as instruments of social welfare, has cost the World Bank up to $1 million annually, according to Devesh Kapur, a political scientist at Harvard University and coauthor of the official history of the World Bank. Other initiatives include support for cultural projects in the Balkans (amounting to more than $20 million), as well as the Global Development Gateway, an attempt to encourage "new economy" ideas in developing countries and create online portals for information on national-level economic development and reforms. Of the Gateway, García cautioned: "To carry the IT revolution to [African countries] instead of teaching them how to reap better crops is a grave mistake. The mistake will make them poorer compared to the rest of the world." Even NGOs and activist groups such as the Bretton Woods Project have criticized the Gateway, assailing it as a "major land grab on the [I]nternet" that seeks to "gain more control over what analysis and opinions on development topics are deemed relevant and sound... Many grassroots and campaign-oriented sites will be weeded out." Meanwhile, World Bank staffers complain that they are short of funds to support basic operations in borrower countries, while financing seems amply available for what they see as marginal projects that meet Wolfensohn's approval.

In a barely veiled criticism of these initiatives, Paul O'Neill, the current U.S. treasury secretary, told a congressional subcommittee in May 2001 that "the scope of the World Bank's activities has become too diffuse, and this reduces its focus on the core objective of raising income per capita." He went on to say that he was skeptical about the bank's concentration on unrelated areas such as "cultural heritage projects that have peripheral development impact." In an apparent reference to the Gateway, O'Neill questioned the usefulness of World Bank involvement in "sophisticated electronic information systems that may duplicate work being undertaken by the private sector." O'Neill stepped up his censures in June in a speech before the prestigious Detroit Economic Club: "The World Bank Group alone has lent $470 billion since its inception, and $225 billion in just the last decade. Visit some of the poorest nations in the world, and you'll see that we have little to show for it. It's time for a new approach to eliminating poverty." He again characterized the bank's work as excessively diffuse, reasserting that the bank should focus strictly on projects that "raise productivity or raise income per capita."

A few of Wolfensohn's new ideas have received praise. For instance, his efforts to decentralize the institution and push a large minority of staff into the field have been welcomed by some, even though the new policies have multiplied the bank's management difficulties. Harvard's Devesh Kapur says such initiatives provide "halo benefits" for the bank but only dubious advantages for the borrowing countries that ultimately foot the bill through the higher interest rates they must pay on loans to cover the bank's soaring operational costs.

Wolfensohn defends the World Bank's broader agenda. He claims the organization is following much more elaborate and expensive safeguard policies, for example, to ensure environmental guidelines are followed. The bank has attempted to impress upon its client governments the importance of such issues as the environment, gender equality, and avoiding corruption. It has been asked to provide debt forgiveness for the poorest countries and more detailed poverty reduction strategies. It was forced, against the will of senior management, to make emergency loans during and after the Asian financial crisis of the late 1990s. Overall, however, Wolfensohn maintains that the challenges of global development require this more variegated approach. "They're saying because I'm interested in religion and culture that it's a perfect example of my idiotic extension in thinking, as though they are driving forces in the institution that cause all the stress, which is nonsense. The simple fact is that doing development has become a lot more difficult."

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Ultimately, Wolfensohn's predilections do not explain everything about the World Bank's growing agenda or its apparent lack of focus. A good part of the responsibility lies with the bank's rich-country shareholders, and with the United States, the largest shareholder. "As its own bilateral aid program has shrunk, the United States has found the World Bank an especially useful instrument for projecting its influence in developing countries," argues Robert Wade of the Institute for Advanced Study in Berlin. "The bank is a source of funds to be offered to U.S. friends or denied to U.S. enemies."

In fact, the world's rich nations behave like absentee owners who ignore the bank except on the particular occasions when it can help them meet their own pet objectives. Although no other member states come close to matching U.S. power over the World Bank, all its influential owners -- Great Britain, France, Germany, and others -- have borrowing governments whose interests they purport to sponsor, as well as key issues (such as the environment) that their electorates view as important. For instance, many in the bank believe that political sensitivities to Tibetan lobby groups in important shareholder countries finally killed a controversial antipoverty project in western China last year, rather than any real concern about the merits of the program. Accountability and oversight from donor governments are uneven at best and nonexistent at worst. Meanwhile, the few powerful borrowing nations that could exert some influence over the bank's direction are afraid to voice their concerns lest they lose access to the institution's financing.

When top shareholder governments do pay attention to the World Bank, they do so for the same reason that Willie Sutton robbed banks: It's where the money is. Unlike agencies of the United Nations, whose budgets are funded directly by member governments, the World Bank raises most of its funding by issuing bonds. While a default by a big borrower that exceeded the World Bank's ample reserves could in theory mean that industrialized countries could be asked to supply the capital they have pledged to the bank, such an event has not happened in more than 50 years. As Devesh Kapur observes, industrialized countries' bank ownership costs have been falling. "The influence that came with ownership became less expensive, indeed almost cost-free -- and therefore more attractive," Kapur argues. Rich countries have happily loaded new responsibilities onto the World Bank, knowing they will not have to foot the bill, which instead is paid by middle-income borrowers through higher interest margins. Meanwhile, the need to generate increasing income to pay for higher administrative costs explains why the bank must continue lending large sums to middle-income countries to support often questionable development programs.

This pressure on the bank is overshadowed by what some consider to be another source of confusion: the fear that no one -- neither the World Bank nor others -- has discovered the right formula for development. The market-oriented economic reforms introduced over the last decade throughout the developing world have facilitated some measure of economic recovery and growth, but nowhere near what was anticipated. "All of these judgments of the World Bank are happening in the context of feelings that we haven't got the recipe right. We haven't got the right ideas to promote development," says Harvard University's Ricardo Hausmann. "There is a crisis in development thinking. It's a crisis where leadership will not come from Wolfensohn."

This frustration reaches right inside the bank. One of its most respected economists, William Easterly, pointed out in July that the IMF and World Bank had, during the last decade, given 36 poor countries 10 or more loans each, with conditions attached. "The growth rate of income per person of the typical member of this group during the past two decades was zero," he wrote in the Financial Times. "The failure is so widespread that pointing the finger at any single institution is futile."

Yet many development experts think that the bank's positions matter a great deal. Former U.S. Treasury Secretary Larry Summers argues that the institution is torn between appeasing NGOs and other constituents and its fundamental development objectives. "If you are a development organization, you really cannot be in bad grace with the principal carriers of moral energy around development," he said at the country retreat he attended in May 2001. Yet it would be "inimical to the goal of progress and the goal of reducing poverty around the world" if the views of NGOs and other campaigning groups guided policy. "I think it would be a great tragedy in terms of the bank's potential contribution to reducing/global poverty," Summers said, "if, in the name of demonstrating its compassion and moral energy, [the World Bank] were to lose sight of the rigorous analytic basis and emphasis on supporting market forces that have allowed the bank to make such a great contribution to global poverty reduction efforts over these last 50 years."

To Wolfensohn's critics, he has already stepped well over that line. In the interview for this article, Wolfensohn made a plea for others to do what many say he is not able to do himself -- separate the institution from its president. "Put me aside for the moment and say I'm useless, egocentric, insecure, all the things you want to say, but don't damage the institution because you want to damage me. This is too good an institution to damage in that way. Don't confuse the two, because that's not doing anybody any good.”