The World Bank was founded in 1944, charged with the monumental task of eradicating global poverty. It offers loans to countries that might not otherwise get them. Since its inception, the bank has lent or given $400 billion.
Yet critics say the World Bank is a bloated, corrupt organization that has outlived its usefulness. Those criticisms have gotten a boost from the scandal involving outgoing bank president Paul Wolfowitz. He will step down from his post June 30 following accusations that he arranged a sweetheart promotion and pay deal for his companion, bank employee Shaha Riza.
Sebastian Mallaby is a senior fellow at the Council on Foreign Relations and author of The World's Banker. He spoke with NPR about the challenges facing the World Bank.
If you were appointed World Bank president, what would be your first priority?
To rebuild a very bruised institution. If the World Bank were a private company right now, its stock price would be down about 25 percent because of a loss of confidence from the staff and from the borrowers — and also, a loss of confidence from the shareholders, the rich countries who give the bank money. Everybody is down on the institution now.
Are the bank's problems a direct result of the Wolfowitz scandal?
I think Wolfowitz's management style has a lot to answer for. Part of it is that he came in with a strike against him because of the Iraq war, and part of it is he made it worse by appearing not to listen to people. He was just a bad leader.
For a long time, the World Bank was criticized for funding large projects, such as dams, in developing countries—projects that these countries didn't necessarily want but were, in a way, foisted upon them. Is that still a fair criticism?
That criticism was probably accurate around 1980. That criticism had some truth to it, and the World Bank responded. By the early 1990s, the more responsible critics were saying that, actually, when it comes to the interaction of the environment and development, the World Bank was the most responsible institution in the world. And yet the criticism carried on. It was almost because people had scored such dramatic success pointing out the World Bank's problems a decade earlier that they didn't want to give up on that shtick.
Critics of the World Bank argue that it is a vestige from another era and it is no longer needed. Do you agree?
No. I think that's wrong. The reason you need a World Bank is twofold. First of all, there are poor countries that still don't have much access to private capital markets, and these countries benefit from the World Bank.
Secondly, there are projects that support global public goods. Take the concern over global warming. If China is building a coal plant, the whole world has an interest in making sure it is a clean coal plant. The Chinese could borrow money themselves and make a clean coal plant, but they are more likely to do that if they are offered subsidized lending from the World Bank. Otherwise, the borrowing countries will say 'Why should we pay extra for a cleaner coal plant?' The benefits are shared globally, so shouldn't the cost be shared globally? That's where the World Bank can help.
Another critique of the World Bank is that it encourages imprudent borrowing and feeds an addiction to cheap loans. Is that a real problem?
It seems to me that private capital markets can easily create an addiction to cheap capital, too. That's what you've seen ever since Mexico defaulted in 1982 because it borrowed too much from New York banks. Another argument for the World Bank is to be a counter-cyclical lender, to lend more in the wake of, for instance, the Asian financial crisis in 1997, when all of a sudden, Southeast Asia didn't have any private lenders.
What sort of person would make an ideal president of the World Bank at this time?
You need, first of all, someone who understands the institution and doesn't need to learn on the job. Typically the World Bank leaders spend the first six months figuring out what this complicated animal is. A couple of names come to mind. One is Stanley Fisher, who is now the governor of the Central Bank of Israel, although he's an American citizen. In the past, he was the chief economist at the World Bank. He's an insider with man-of the-world experience. He's not purely a creature of the bureaucracy.