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In an interview promoting his recently published book about the World Bank Steve Berkman, a 16-year veteran of the Bank and former head of its anti-corruption department, asserts that the World Bank is corrupt. As one of his many pieces of evidence he cites the forced resignation or firing of Paul Wolfowitz as World Bank President in the spring of 2007 over allegations that Wolfowitz had improperly employed his girl friend and increased her salary in contravention of Bank policy. Berkman asserts that this was just a pretext to get rid of Wolfowitz who had held up the funding for several projects in India and other countries pending corruption investigations by the Bank.

Since Wolfowitz was a key architect of the United States' Iraq war and war on terrorism in his position as Deputy Secretary of Defense under Donald Rumsfeld there are no doubt any number of reasons why his tenure at the World Bank was opposed by the Bank's member countries and management. So while this makes great headlines for marketing Berkman's book the real story is the Bank itself and the numerous stories of corruption at the World Bank which Berkman discusses. This will come as no surprise to libertarians and Austrian economists who know all too well the sad legacy of the corrupting influence of government money and the squandering of capital whether in a rich or poor country. Government enterprises are inherently flawed since in addition to being morally wrong (they are redistributors of wealth forcibly taken from private taxpayers) they invest and provide funding for businesses and projects the private sector avoids which necessarily indicates these are bad businesses or projects for investment.

The World Bank was created July 1, 1944 as part of the agreements reached at Bretton Woods to provide for reconstruction and development of post-war Europe and Asia. The Bank now provides financial and technical assistance to developing countries in Africa, South America and Asia. The Bank provides low-interest loans, interest-free credit and grants to developing countries (primarily governments) for education, health, infrastructure, communications and other purposes while its affiliate, the International Finance Corporation (IFC), provides debt and equity capital to private sector businesses. The Bank is headquartered in Washington, D.C. with an international staff of over 10,000 employees deployed in offices around the world. The Bank is funded through the sale of bonds and from contributions by its 185 member countries. The Bank consists of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD focuses on middle income and creditworthy poor countries, while IDA focuses on the poorest countries in the world. Affiliated with the World Bank and making up what is referred to as the World Bank Group are the IFC, the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).

The current President of the Bank as well as President of the IFC and the Bank's affiliates is Robert B. Zoellick who was elected by the Bank's Board of Governors July 1, 2007 following the resignation of Paul Wolfowitz. Before taking on these roles with the World Bank Group Zoellick was an investment banker with Goldman Sachs, worked in the US State Department, was the US Trade Representative, was an Executive Vice President of Fannie Mae and worked in the Treasury Department. He is also a member of the Council on Foreign Relations. Prior to Wolfowitz the President of the World Bank was an Australian, James D. Wolfensohm, an investment banker with Salomon Brothers, Schroeders (of London) and Darling & Co (Australia) as well as being a director of the Rockefeller Foundation, the Brookings Institute and also a member of the Council on Foreign Relations. From its earliest days most of the Presidents of the Bank have come out of the United States' banking community along with some senior political appointees. Murray Rothbard has described in some detail the relationship which exists between the commercial banking community and American foreign policy including the United States' participation in the World Bank.

In contrast to his predecessor and successor Wolfowitz is not an investment banker but is an academic and has been in the employ of the Pentagon during most of his government service which began in the early 1970s. The Bank needs projects to fund in order to create the rationale for issuance of its bonds which are sold through investment bankers thereby serving as the source of funding for its investment bankers and the many consultants, suppliers and contractors retained for its projects. Wolfowitz's hold on the funding of certain projects created a great deal of resentment within the Bank as well as those to be benefitted from the funding of these projects by the Bank. Thus, it is not surprising that such a controversial President would soon be pushed out by the bureaucrats and board members of the Bank.

The World Bank forms only part of the network of government sponsored multilateral agencies which exist not only in the US (e.g. Overseas Private Investment Corporation and Export-Import Bank of the United States) but in other countries as well; in addition to regional development banks such as the Asian Development Bank headquartered in Manila. The purpose of all these agencies is to promote international development by governments through direct grants as well as loans, guarantees of loans, provision of political risk insurance and similar programs for private sector businesses and projects. The Bank (as well as these multilateral agencies) redistributes money from the taxpayers of its member countries to the beneficiaries receiving funding. These are businesses and development projects that the private sector would not otherwise fund due to the risk (political or economic) or uneconomic nature of the project or enterprise. Thus, inherent in the provision of any government funding by the World Bank (whether in the form of grants, loans or equity investment) or insurance coverage is the uneconomic nature of the investment i.e. they are malinvestments and thus represent a waste of precious capital (forcibly taken from private taxpayers). This is not dissimilar from the malinvestment scheme currently being promoted by Lehman Brothers' Felix Rohatyn for the United States.

It is not surprising with so much money being thrown at politicians and bureaucrats that there is corruption — it would be surprising if there were not. As Berkman says the Bank enriches the government elites of the Third World while creating massive amounts of debt which cannot be repaid. "[T]he Bank pretends it is lending for noble purposes, while the borrowers pretend they will put the money to good use," says Berkman. Instead the money is put into the hands of government officials and leaders who historically have looted their national treasuries. Ten percent of the $20 billion disbursed by the Bank each year is lost to corruption and it is estimated that 25 to 35% of total lending is lost to corruption. While the corruption takes many forms of course here are just a few examples:

Shell companies paid for goods and services that were never delivered

Tainted pharmaceuticals bought by the Bank for distribution to the public

Faulty AIDS testing kits bought by the Bank

Bank benchmark certification achievement for a hospital built with Bank funds when in fact all that existed was a hole in the ground

Bribes and kickbacks being paid to senior government officials while suppliers go unpaid

Farmers aid programs billed for hundreds of thousands of dollars for office furniture, vehicles, lodging, air conditioners, fencing, household furniture rather than aid to the farmers

As important as it is to weed out corruption it is equally important to understand the inherent mismanagement and malinvestment (along with corruption) which occurs in the Bank's funding process. I say inherent because the basic premise for the Bank's existence — to invest in projects the private sector would not touch — is flawed and thus with $20 billion of someone else's money (taxpayers money or central-bank-created fiat money) to be distributed annually by a large political bureaucracy in countries around the world for allocation to projects which are inherently malinvestments (not investments seeking a market financial return) there can be no other result than corruption, mismanagement and malinvestment.

A case study of the Ivory Coast will suffice to paint the picture of how the World Banku2018s process works and the manner in which the government and the ruling elite of a country (this can be applied to any country not just the one in the case study) operate in their dealings with the Bank. After a generation of relative success (8% annual growth rates) following World War II due to a relatively competitive free enterprise system the Ivory Coast experienced a slump from which it has yet to pull out. Notwithstanding its recognition of the problem the World Bank was powerless to assist the country despite it being the country's largest creditor.

Following the Ivory Coast's post-war economic success the government extended its authority over the economy and allocation of resources as it began to develop large inefficient infrastructure projects which were financed by the World Bank. The World Bank did not require that their loans provide a financial return. The ruling elite withdrew (legally and illegally) sizeable percentages of the capital loaned by the Bank to the government. The loans eventually represented as much as 85% of the country's GDP. The country became dominated and controlled by a small governing minority acting as intermediary between the populace and the international marketplace and community (as well as intermediary domestically) similar to the social and governing structure which existed during the period of French colonialism.

The concentration of more power in the central government allowed the urban elite to keep its grasp on power by holding back rural development. The primary means for this control was the central purchasing authority for the nation's coffee and cocoa production. Since it had the government granted monopoly this authority purchased all the coffee and cocoa production of the country and then resold it on the world market. Since the government was the sole purchaser of coffee and cocoa production in the country it could dictate prices to the producers which it did at rates representing only 37% of the world prices. Natually, the government reaped substantial revenues from such an arrangement in addition to controlling the primary export market of the Ivory Coast.

Originally the World Bank's analysis supported the government's interventionist model which declared that the success of the country was due to the government's intervention in the economy and the implementation of the government's economic policies. Thus, the Bank's objective was to strengthen the state in order to promote more coherent economic policies. This centralized planning by a one-party state allowed the government to control the allocation of resources and distribution of wealth within the country which became an obstacle to economic growth and improvement in the prosperity of the country's citizens. The World Bank was, wittingly or unwittingly, a co-conspirator in this gradual destruction of the Ivory Coast's economy as it continued to provide funding to meet the growing budgetary deficits of the government.

Then in 1982 the World Bank's analysis changed. Government intervention along with the centralized purchasing agency was viewed as the problem not the cure. The price controls of the central purchasing authority were recognized by the Bank as a primary cause of the income inequality in the country. The more interventionist (e.g. taxes and regulations) the slower the economic growth and the more unequal the distribution of incomes. The World Bank began to propose market-oriented reforms which of course were viewed by the government and the ruling elite as a threat to their continued authority and accumulation of wealth at the expense of the rest of the populace. The government and the ruling elite ignored the Bank's proposals for reform while the Bank kept lending the country money. Why and how this happened is a case study in the functioning of bureaucracies especially government bureaucracies.

As the World Bank's reform proposals began to be pressed with the ruling elite the reaction was typical Third-World spin. The World Bank was said to be an instrument of the rich Western nations which wanted to keep the Ivory Coast poor (this was the unintended consequence of the Bank's funding of this malinvestment). The ruling elite said the World Bank wanted to keep the country dependent on coffee and cocoa at the expense of the country industrializing. Lastly, the government used its support of the Western countries in Africa as extortion to maintain the flow of World Bank funds.

At the personnel level the government bureaucrats who manage these programs were relatively senior and part of the ruling elite. They had a vested interest in making sure taxes were collected and expenditures paid. They were not penalized for expenditures exceeding tax collections. Thus, the government bureaucrats were only interested in getting more funding to make up the government's budget deficits. On the other side the Bank personnel were rewarded with the continuation of their employment with the Bank and advancement within the Bank by increasing the number and a size of their loan portfolio — there was no incentive based on financial returns. The Bank's loan officers were only interested in keeping the funding flowing to the government for as long as possible. Thus, despite the analysis by the Bank's analysts (the analysts operated independently of the loan administrators) pointing out the negative effects of the state's interventionist policies and the detrimental effects of the central purchasing authority the Ivory Coast kept borrowing and the World Bank kept lending. Eventually, in 1990 the Bank stopped its loans to the Ivory Coast and soon after the country slipped into civil war among its competing political groups.

The World Bank will never be able to assist nations such as the Ivory Coast to transition from poverty to prosperity — first, because it fails the basic premise of investment in that it is not a private wealth-generating institution whose objective is to make a return commensurate with the risk of its investments but merely operates as a wealth transfer and redistribution intermediary taking wealth from the taxpayers of one country to redistribute to the ruling elite of another country and second, because it is not willing to adopt the Rothbard Plan and embrace the radical conversion of its client countries to the free market as a condition to any funding by the Bank (moreover the Rothbard Plan would reject any loans from the Bank).

The dimensions of the proffered Rothbard Plan for desocialization should now be clear: (1) Enormous and drastic reductions in taxes, government employment, and government spending. (2) Complete privatization of government assets: where possible to return them to the original expropriated owners or their heirs; failing that, granting shares to productive workers and peasants who had worked on these assets. (3) Honoring complete and secure property rights for all owners of private property. Since full property rights imply the complete freedom to make exchanges and transfer property rights, there must be no government interference in such exchanges. (4) Depriving the government of the power to create money, best done by a fundamental that at one and the same time liquidates the central bank and uses its gold to redeem its notes and deposits at a newly defined unit of gold weight of existing currencies. All this could and should be done in one day, although the monetary reform could be done in steps taking a few days.

Even if the World Bank bureaucrats could accept the concepts of the Rothbard Plan they could never agree to the timetable for its immediate implementation preferring instead a period of transition over months or even years; but as Rothbard explains time is of the essence and critical to its success since the free market is an interconnected web of lattice-work; it is made of innumerable parts which intricately mesh together through a network of producers and entrepreneurs exchanging property titles. Holding back, freeing only a few areas at a time, will only impose continuous distortions that will cripple the workings of the market and discredit it in the already fearful and suspicious public.

Thus, the only solution for poor countries desiring prosperity is adoption of the Rothbard Plan, avoidance of funding by multilateral agencies such as the World Bank and the liquidation or privatization of the World Bank (and other multilateral agencies) to stop its continuous legacy of inherent corruption, mismanagement and malinvestment which keeps the populace of the Bank's clients poor while enriching their governments and ruling elites.

August 16, 2008

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