The decision of James D. Wolfensohn, President of the World Bank Group, to retire in May when his second five-year term comes to an end gives the Bush administration the opportunity it has been seeking to carry out far-reaching measures of reform of the premier multilateral development bank, with consequential effects on the others. Whether it will grasp that opportunity remains to be seen: it involves the resolution of sharply conflicting interests within the United States’ administration.

For example, when in July last year the Senate Foreign Relations Committee was examining the responsibilities and activities of the Treasury Department with regard to investigative oversight of the multilateral development banks, the committee’s chairman, Senator Richard Lugar, said that his initial inquiries into this topic suggested confusion or indecision within the Treasury Department about its oversight role.

When preparatory to the committee’s hearings on the question of combating corruption in the MDBs, Senator Lugar’s staff forwarded a specific allegation of World Bank corruption to the Treasury Inspector General’s Office, they received the following response:

“We are in the initial phases of determining Treasury OIG’s criminal investigative jurisdiction in matters like the one you have referred to this office…At this time, we anticipate no further action in this matter.”

Senator Lugar was perplexed to learn that the Office of Inspector General remained unsure of its jurisdiction in this important area of policy, because the Treasury Department has had responsibility for MDB oversight since the creation of the World Bank in 1946.

Dennis Schindel, at the time Acting Inspector General at the Treasury Department, was invited to testify before the committee when it met to review U.S. policy towards the MDBs. This included the World Bank, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank and the European Bank for Reconstruction and Development. Leading people from each of these institutions, among them James D. Wolfensohn, were invited to appear but either refused to attend or cancelled their acceptance. In the latter cases, the sudden withdrawals were at the direct instance of the U.S. Treasury.

Mr. Schindel also declined to take advantage of his opportunity to appear. His staff explained by e-mail that the Inspector General’s office was not currently working on multilateral development bank corruption. “We are exploring bases for invoking jurisdiction to do work in this area, but have not reached any conclusions.” The note added that the office was low on resources since its divestiture to the Homeland Security department. Given that the United States has provided more than $39 billion in direct contributions to the MDBs since 1960, Senator Lugar was understandably concerned that the Treasury should plead lack of resources in exoneration of its rebuff to one of the most influential committees of the U.S. Congress.

“If the Inspector General’s office is not the best location for MDB oversight”, he said, “then the Administration and Congress should work together to provide clear authority for this mission to another agency.” This was an unmistakeable warning to the World Bank as well as the Treasury. For those who could read, the writing began to appear on the wall.

Tidal wave of loans flowing eastwards

No doubt having taken soundings in Washington as to his prospects of reappointment, in the weeks immediately preceding his decision to go, Mr. Wolfensohn took the world stage in pressing on the Palestinian authorities the need for economic reforms. With Prime Minister Sharon in Israel he proposed the lifting of travel restrictions in the West Bank, in exchange for $500 million aid additional to the $900 or so million the Palestinians have been receiving annually in recent years.

Only then, he was reported as saying, would there be any hope of resuscitating the Palestinian economy. It seemed as though the development banks were unleashing what one commentator in The Times was to describe later as a tsunami of generosity. When on 2004-12-26 the news broke of the real tsunami disaster in the Indian Ocean, within three days the World Bank announced an initial contribution of $250 million for reconstruction in the three worst hit Asian countries.

Taking into account the initial offer by the Asian Development Bank to the same three countries – Indonesia, Sri Lanka and the Maldives – that brought to $425 million the funds to be made immediately available, plus the promise of an additional $150 million in concessional lending from the Asian Development Fund.

Since then the Asian Development Bank has said it is prepared to provide up to $500 million additional funds to the three countries in the form of grants and concessional leading. That announcement came three weeks after the International Bank for Reconstruction and Development awarded the first of its Development Policy Loans to the Indonesian Government in the sum of $300 million.

This loan, said the World Bank Group, would support Indonesia’s public agenda in key economic areas, with specific focus among other things on improving financial management and anti-corruption activities. The characteristic of this form of lending is that it puts the country itself in the driving seat in planning and carrying out poverty reduction programs. Mr. Wolfensohn arrived at the 2005-01-06 ASEAN meeting in Jakarta called to co-ordinate relief efforts and afterwards took the opportunity to visit North Sumatra where some 100,000 are reported dead or missing. From there he travelled on to Sri Lanka and the Maldives group of low atolls some 800 km west of Colombo, threatened apart from the tsunami by rising sea levels attributed to global warming.

These visits to the devastated territories were of course timely initiatives. But back in Washington, pressure for reform of the World Bank is growing. It is a critical time for the MDBs because this year donors such as the United States and the United Kingdom will decide on the 14th three-year funding replenishment for the International Development Association (IDA), the arm of the World Bank that lends interest-free to the poorest countries. When the same question came up three years ago, a powerful group of America’s non-governmental associations together with the churches and trade unions formed a coalition for reform: the essence of their case was that more money without reform would be wasteful at best and harmful for its intended beneficiaries at worst. That case broadly stands to this day: in their view the waste and harm has continued. As already reported, the funding issue is being taken up by the Senate Foreign Relations Committee. The renewal of the Bush Administration’s mandate in November leaves Senator Lugar in a position to continue his investigative work after the interval imposed by the elections. It is understood that the senator’s office has recently held a roundtable meeting on what is to be done to improve accountability for development funds either lost, stolen or misused. The significance of this move will not be lost on the World Bank. It would now appear that Mr. Wolfensohn has correctly read the writing on the wall, and will depart with his integrity intact to allow scope for the U.S. Government to implement the reforms which the Foreign Relations Committee is demanding. This is a process that should result in a stronger anti-corruption infrastructure in the development banks. As Senator Lugar foreshadowed in his statements at the 2004 series of hearings, the Foreign Relations Committee intends to tackle the prevention of waste, fraud and corruption with vigour.