Putting Principles Out To Posture

By Steven Pearlstein
Friday, April 13, 2007

Let's give a warm Washington welcome to finance ministers and central bankers from around the world who arrive today for a weekend of nonstop networking, limousine gridlock and multilateral mumbo-jumbo. It's the spring meetings of the World Bank and the International Monetary Fund, and there's hypocrisy in the air.

Things kick off this afternoon at the Treasury with the meeting of the G-7 industrial countries, who will no doubt issue a communique stressing the importance of completing the Doha round of world trade talks that have been on life support for the past six months. The G-7 communique will warn ominously of the danger of rising protectionist sentiment in some countries. What it will leave out is that the G-7 signatories themselves are largely to blame for the collapse of the talks because their political leaders are too weak to cross farmers, growers and ranchers who cling to their subsidies and tariff barriers.

A more nuanced form of hypocrisy will be on display Saturday with the meeting of the IMF's governing board. You have to feel sorry for the IMF these days. The global economy is in such good shape, with money flowing so freely through global financial markets, that no countries are knocking on its doors looking for loans. Even those with outstanding loans have decided to pay them off early to escape the fund's demands for privatization, deregulation and fiscal rectitude. Things have gotten so bad that the fund is scrambling to trim its lavish budget.

Of course, this is precisely when the global economy needs the IMF to play the other role of a central banker, taking away the punch bowl when the party gets too rowdy. And, indeed, if you dip into the fund's latest Global Financial Stability Report, you'll find plenty to worry about. There's the huge spike in lending to sub-Saharan African countries, a binge of international borrowing by banks in Russia and Kazakhstan, and a flood of money pouring into overpriced stock markets in China and India. Belatedly, the fund seems to have discovered a problem with subprime mortgages and overly leveraged deal-making in the United States.

But rather than challenge the market herd and issue clear warnings, IMF officials continue to couch their language and hedge their conclusions, while avoiding completely the biggest issue before them, China's stubborn refusal to allow its currency to appreciate. In his speeches, Managing Director Rodrigo de Rato likes to portray all this as an appropriate expression of institutional modesty. Cowardice might be a more accurate characterization.

For rank hypocrisy, however, nothing beats the soap opera playing out this week at the World Bank, where the staff and several members of the executive board are in open revolt against its American president, Paul Wolfowitz.

Wolfowitz's mistake -- and let it be said this was a major-league lapse of judgment -- involved the transfer of a bank employee named Shaha Riza, his close companion, to the State Department to avoid a conflict of interest. In the process, he apparently insisted on a contract that guaranteed her "merit" raises and promotions that have already put her pay above that of Secretary of State Condoleezza Rice.

It would be wonderful if the indignation of the bank's staff and directors derived from a deeply felt sense of moral outrage at such an unwarranted expenditure by an institution designed to alleviate world poverty. But that's unlikely. These are, after all, among the highest-paid civil servants in the world. There are probably 200 of them who, like Riza, are paid more than Rice -- but unlike Rice pay no taxes on their salaries. Most have five to six weeks of paid vacation each year and generous health insurance. Until cutbacks in 1999, the gravy train was even more scandalous.

So the present outrage from the bank staff feels like resentment toward a colleague who has been allowed to get ahead unfairly, not any commitment to fiscal probity.

There is no question that Wolfowitz's misguided nepotism badly undercuts the credibility of the anti-corruption campaign he launched as his signature initiative at the bank. How can the bank cut off lending to countries where politicians engage in bribery and self-dealing when its top official is caught feathering his own nest?

The irony, of course, is that the staff and board making this argument spent much of the last year fighting Wolfowitz on his anti-corruption crusade. For years, the bank had turned a blind eye to government corruption, even when bank funds were being skimmed or when the success of bank-funded projects was in jeopardy. The bank saw its mission as alleviating poverty, not reforming political and legal systems -- and many felt it would be wrong to punish poor people for the misdeeds of government officials.

As Wolfowitz saw it, however, official corruption was the source of decades of failure of bank lending to alleviate poverty in the poorest countries of Africa and elsewhere. When he moved to cut off lending in a few of those countries, he was opposed not only by a staff that found his approach autocratic and ham-handed, but also by member governments that had their own agendas: France, always reliable in its amorality, was unwilling to jeopardize its commercial interests; India and Brazil feared what might happen if anti-corruption criteria were applied so stringently to them; and England was swayed by powerful advocacy groups pushing for more foreign aid, not less.

In the end, Wolfowitz was forced to backtrack in his anti-corruption campaign, agreeing last month to a much watered-down policy requiring him to get board approval to cut off lending to any country (unlikely). The new policy sets up yet another bureaucratic architecture, involving detailed criteria, evaluations and consultations aimed at reducing corruption and preventing "leakage" from bank loans.

Now, with Rizagate, the staff and directors of the World Bank probably won't have Paul Wolfowitz to kick around much longer. A new president might be in a better position to pursue an anti-corruption crusade. The question is: Will he?

Steven Pearlstein can be reached atpearlsteins@washpost.com.

© 2007 The Washington Post Company