Scandal May Jeopardize World Bank Funds

By Peter S. Goodman and Krissah Williams
Washington Post Staff Writers
Tuesday, May 8, 2007

The leadership crisis engulfing the World Bank began with talk of favoritism for a girlfriend and ill feeling about the Iraq war. But as the bank's board this week considers the fate of President Paul D. Wolfowitz, the ethics controversy has swelled into a test of who controls the institution and its future relevance in battling global poverty.

The outcome could determine whether governments from Berlin to Buenos Aires would be willing to contribute new funds in support of the bank's mission.

"There's a real danger because of this Wolfowitz stuff that donors are going to find a reason not to give," said Elizabeth Stuart, senior policy adviser for Oxfam International, an anti-poverty group in Washington.

The sense of turmoil surrounding the bank intensified yesterday with the resignation of a senior Wolfowitz aide, Kevin Kellems. Once a key spokesman in helping Wolfowitz deflect criticism, Kellems initially defended the president, telling reporters that "all arrangements" in the substantial pay raise Wolfowitz engineered for his companion had been "made at the direction of the bank's board of directors."

In subsequent weeks, however, as documents were leaked showing that bank officials had not been informed about the size of the raise, Kellems declined to repeat his assertion. He issued a written statement yesterday explaining his departure: "Given the current environment surrounding the leadership of the World Bank group, it is very difficult to be effective."

Kellems previously worked for Wolfowitz as a special adviser at the Pentagon during planning for the Iraq war. He later served as communications director for Vice President Cheney and was one of a handful of senior advisers Wolfowitz brought to the World Bank, provoking complaints among staff that the new president was using the institution to further the Bush administration's agenda.

Yesterday, Wolfowitz reviewed a report written by a bank committee investigating his role in the pay raise for his companion, Shaha Riza, said senior bank officials. In technical language, the report finds that Wolfowitz breached multiple ethics rules, the officials said, but contains no explicit recommendations about what should happen next.

Wolfowitz has until late today to respond. His comments are to be forwarded with the report to the bank's executive board, which could begin deliberating as soon as tomorrow. The 24-member board could censure Wolfowitz, urge him to resign, declare a lack of confidence in his leadership or fire him.

"We've requested additional time," said Wolfowitz's lawyer, Robert S. Bennett. "It's not fair to require him to answer within 48 hours."

Uncertainty is paralyzing the bank, officials said, warning that the longer the leadership crisis continues, the greater the chance it will harm its coffers.

The World Bank president leads a campaign to replenish the International Development Association (IDA), a program that offers grants and low- or no-interest loans to the world's poorest countries. The development fund directs more than half its money to Africa, home to 300 million of the world's poorest people.

Wolfowitz has aimed to raise a fresh $20 billion for the IDA by early next year. The fund has about $10 billion but has reserved that money for loans over the coming year. In seeking replenishment, Wolfowitz must court some of the very governments, notably in Europe, now publicly calling for him to quit.

Some African leaders, noting Wolfowitz's focus on the continent, support him. But European officials have suggested that, as long as he remains, they may withhold funds, perhaps funneling more aid through the European Union, which has historically been less focused than the World Bank on helping Africa.

"That would be very bad," said Faida Mitifu, Congo's ambassador to the United States, whose government received $365 million in IDA loans last year.

In the best circumstances, World Bank presidents struggle to raise funds, making it harder than ever for Wolfowitz to do so with this cloud over his head, development experts said.

"The great danger is that this will spill over into the IDA negotiations, that the board will leave this unresolved and that the shareholders will take it out on IDA," said Dennis de Tray, a vice president at the Center for Global Development in Washington. He worried that donors would "treat the World Bank and IDA as an extension of the United States."

Analysts say a funding shortage could weaken the bank's already waning influence at a time when Venezuela's president, Hugo Chávez, is widening his reach in Latin America with aid and populist rhetoric, and as China distributes loans and grants across Africa in pursuit of energy and commodities.

The World Bank's largess often comes with strings, requiring recipient governments to adopt controversial policies such as privatizing state industries. Other loans have fewer obligations, making them more attractive to many leaders.

Wolfowitz asserts the bank would be best served by an end to what he has called the "smear campaign" against him.

"I have worked very hard to build support for IDA," Wolfowitz told the investigating committee. "If I am forced out in a circus-like process, it will only give those who are already looking for a reason not to contribute . . . the excuse they are seeking."

The investigating committee concluded that Wolfowitz broke ethics rules in engineering a job transfer and raise for his girlfriend, a bank official. Wolfowitz has maintained he did nothing wrong, acting with the guidance of the ethics committee by finding her another job to avoid a conflict of interest and compensating her for the career disruption .

The European parliament has called for Wolfowitz to resign. Last week, five former finance ministers from Latin American nations said he must go. But while the bank's executive board has the power to end the president's tenure, some analysts doubt it has the political will.

Under an agreed-upon arrangement that has lasted since the inception of the bank six decades ago, the U.S. president selects the president of the World Bank while Europe decides who runs the bank's sister institution, the International Monetary Fund. President Bush has said he wants Wolfowitz to stay. If the board overrides his wishes, it will jeopardize Europe's claims on the IMF, said a senior administration official.

Analysts surmise that the conflict will ultimately end with a negotiated outcome and not a decisive board vote because no one is sure what would happen were a vote held. The board traditionally operates on consensus. Its members take direction from the foreign governments they represent, for whom the leadership of the World Bank is but a minor foreign-policy issue. In interviews this week, bank officials and analysts said even the governments opposing Wolfowitz were unlikely to authorize their executive directors to vote to remove him, which would risk a fresh imbroglio with the Bush administration.

Most executive directors represent multiple countries. If countries within the blocs are split, that could force the executive director to abstain, making the outcome even more uncertain.

"The executive directors are not going to want to have a decisive vote," said Ralph C. Bryant, a senior fellow at the Brookings Institution who has served as an adviser to the World Bank. "Everybody would like to have somebody else make the hard decision."

Most analysts assume the bank's board will try to finesse the issue, perhaps approving a vote of no confidence in hopes Wolfowitz would then resign. Some argue that if the risks of a vote are large, the damage if the board backs down could be greater.

"If they want to have a multilateral institution, they have to have the gumption to do this and vote," said Colin I. Bradford, a former chief economist at the United States Agency for International Development. "If they don't, you have a double crisis. You not only have a dysfunctional president and a dead replenishment of IDA, you also have a dysfunctional board. You've severely weakened the bank."

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