Paul Volcker: How to Fix the World Bank

In a world of cheap credit and double-digit growth in China and India, the role of the World Bank had been a subject of some concern even before Paul Wolfowitz's brief and unhappy tenure as president. The scandal over Wolfowitz's perceived favoritism toward his girlfriend and his subsequent resignation served to expose those worries, and cast an ironic note over the ongoing investigation into its anticorruption efforts. Paul A. Volcker, the former chairman of the Federal Reserve and the head of the Bank's investigation committee, released a report Thursday that argued for greater transparency and a renewed push to prevent corruption in Bank projects. He spoke to NEWSWEEK's Barrett Sheridan about the report and the Bank's place in the world. Excerpts:

NEWSWEEK: Many Bank staffers, including some on the board of directors, oppose fighting corruption. Why?
Paul A. Volcker:
I think the principal problem is that it's something [the World Bank] hasn't historically taken account of. I'm exaggerating a bit, but up until 10 years ago they did not officially recognize corruption. When it comes to corruption in their own programs, it's obviously an uncomfortable situation.

Wolfowitz made corruption a priority, but as your report indicates, corruption is a sensitive topic at the Bank. Do your findings vindicate his efforts?
There were great complaints and uneasiness about his operating style and the way he went about it, not just in corruption, but in other areas. It was an unfortunate combination of circumstances where discontent with his management got all mixed up with the anticorruption effort.

Corruption and high growth coexist in many countries today, including China and India. Isn't that a sign that we shouldn't overemphasize corruption?
It's hard to overemphasize corruption, in my opinion. There is more and more evidence that corruption is an obstacle to growth. That doesn't mean that some countries with particular advantages can't grow with corruption, but they might grow faster without it.

Poor countries have alternatives to the Bank. Africa, for instance, receives much investment from China. If the Bank fights corruption too fiercely, isn't there the risk that countries will bypass it altogether?
I don't think that's a reason for not pushing anticorruption programs. If China's willing to put money into Africa, the World Bank can hardly object to that. But [China] is beginning to recognize that they need to pay attention to corruption, too. The Chinese certainly make a big story about corruption at home. They argue that they're making vigorous efforts to deal with it, and they recognize that it is an obstacle to social development and cohesion.

The report urges the Bank to be more transparent. Isn't the Bank hypocritical in urging greater transparency on its clients while resisting efforts to become more transparent itself?
The problem is that disclosure, particularly in the context of the Bank, raises a lot of awkward questions and affects relationships with borrowing countries. The Bank should overcome the awkwardness of having to tell a country and its officials that they're corrupt, and the presumption for disclosure should be greater.

Do you think your calls for reform will have an impact on the Bank's bureaucracy?
I'm rather optimistic. There's been a lot of anticipation at the Bank, a lot of unhappiness, a lot of conflict, as well as a certain uneasiness about their role, because money is so freely available, and a lot of the borrowers aren't as dependent on the World Bank as they once were. This conflict has just exacerbated everything. I hope that they see [the report] as a reasonable diagram of how they can get their act together and act more cohesively.

Since borrowers can get their money elsewhere, and the Bank is suffering from internal turmoil, is the Bank less relevant today than it used to be?
There certainly are those concerns. Statistically, their lending is a much smaller fraction of the flow of funds to the developing world. China and India can go out and borrow in the market anytime they want. There are a lot of countries in Africa where that is not true. I have argued before that, yes, they continue to have a role in lending to countries if they bring some value beyond money. And that could be value in environmental policies, engineering expertise, so forth and so on. But I would like to think that one of the values they could bring is success in minimizing corruption.

The report notes that the Bank's culture "favors seeking out lending opportunities rather than simply responding to borrowing countries' initiatives and needs." This sounds like a larger and more pervasive issue than the tension caused by anticorruption efforts.
They go together. Some outside reviewers said, "The most important part of your report is where you emphasize the need for leadership and common understanding in the Bank." The Bank's been in a certain amount of turmoil, to say the least. I think a lot of people in the Bank must be sick and tired of that. I hope they'd like to turn the page, so to speak.