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Predatory Lending
By GEORGE B.N. AYITTEY
The Wall Street Journal, May 4, 2007; p. A14
In the flap over Paul Wolfowitz's "sweetheart deal" for Shaha
Riza, World Bank staffers are demanding his resignation to
protect the "credibility" of the Bank. This is rich.
The Bank's credibility was in tatters well before Mr. Wolfowitz
arrived in 2005. Indeed, Mr. Wolfowitz's anti-corruption
campaign was intended to restore its credibility, a campaign
seen as a threat by Bank staffers long-accustomed to advancing
their careers by shoveling money out the door. But it resonated
with newly elected African ministers. Back in August 2004, the
African Union estimated that corruption cost Africa $148 billion
a year -- a figure 10 times more than what the Bank gives Africa
annually in loans.
In its 40-year involvement in Africa, the Bank scandalously
wasted tens of billions in failed programs to spur economic
growth, promote democracy and good governance. In the 1960s and
1970s, Bank lending was project specific: roads, dams for
generating electrical power, telecommunications, and other
public goods with large externalities in agriculture, health
care, education and industry. By the mid-1990s, more than 2,200
projects had been undertaken but nearly all were seriously
undermined by poor Bank supervision, lack of domestic
maintenance or
neglect. In 1989, the Bank itself admitted to numerous examples
of badly chosen and poorly designed public investments it had
funded. Half of its development projects in Africa failed,
according to its own evaluation report.
The Bank then shifted from project financing to policy reform,
but that brought little redemption. Between 1981 and 1991, it
loaned more than $25 billion to sponsor "Structural Adjustment
Programs" (SAPs) in 29 African countries. The object was to
dismantle statist, interventionist behemoths and establish
market-based economies. (It was the Bank that funded these
statist structures in the 1960s and 1970s in the first place.)
But in 1994, the Bank found only six of the 29 adjusting
countries -- Gambia, Burkina Faso, Ghana, Nigeria, Tanzania and
Zimbabwe
-- to have performed marginally well. Even worse, this tiny list
of "success stories" mysteriously started turning into "black
holes." By 1996, Gambia, Nigeria, Tanzania, and Zimbabwe had
vanished from the list. And in 2002, the outgoing Bank resident
director in Ghana flatly admitted that the Bank erred in tagging
Ghana an "economic success story."
The spectacular failure of SAPs was noted in 1998 by the United
Nations
Conference on Trade and Development, which wrote: "Despite many
years of
policy reform, barely any country in the region [Africa] has
successfully completed its adjustment program with a return to
sustained growth." Yet, the Bank kept trotting out a phantom
list of African "success stories." The four new countries --
Guinea, Lesotho, Eritrea and Uganda -- hailed by the Bank in
1998 have also vanished.
In 2000, the Bank again admitted failure, unveiling a new
approach in a 335-page report. It noted that even after a decade
in which socialist economies were dismantled and trade and
global investment reached record levels, 24% of the world's
population still lived on incomes of less than $1 a day. But the
report, the result of a two-year effort by the Bank's research
economists and field interviews, generated heated debate within
the Bank over why past policies failed when the reasons should
have been obvious.
The Bank knew that up to 30% of its loans were embezzled for
personal use. It also knew that nearly 40% of the aggregate
wealth created in Africa fled to foreign shores. Even funds
earmarked to fight HIV/AIDS, tuberculosis and malaria were not
spared. Yet, no public official was held accountable or
prosecuted until September 2000, when Victor Selormey, Ghana's
former finance minister, was jailed for eight years for
embezzling $1.2 million of a Bank loan, granted for the
computerization of Ghana's court system. In 2003, police found
Zambia's former finance minister, Katele Kalumba, hiding in a
tree and charged him with theft of some $33 million. And last
June, Ugandan top officials were indicted for siphoning off tens
of millions in grants from the Geneva-based Global Fund for
AIDS. Stultifying bureaucratic incompetence and theft also
doomed the Bank's ambitious campaign, launched in 1994, to halve
malaria deaths by 2010. Malaria cases have risen in recent
years.
To help carry out its wasteful and ineffective programs, the
Bank employs a huge staff of 7,000 bureaucrats, plus a fleet of
some 7,000 more consultants. In a feeble attempt at reform the
Bank quietly eliminated 600 positions at its Washington, D.C.,
headquarters in July 1997, to save $96 million over two years.
But even this miniscule "adjustment" was fiercely resisted by
Bank staff. In 1998, the staff
howled when an internal investigation uncovered "alarming
information" about kickbacks and embezzlement. Indeed, in 2000,
a Nigerian probe panel indicted six Bank officials for allegedly
conniving with agricultural ministry officials to defraud the
government of project funds to the tune of $2 million.
The real scandal at the Bank is that the brouhaha over Mr.
Wolfowitz's so-called sweetheart deal detracts from the
housecleaning the Bank itself so desperately needs.
Mr. Ayittey, a native of Ghana, is Distinguished Economist at
American
University and author of "Africa Unchained" (Palgrave/MacMillan,
2005).
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