Predatory lending

George B.N. Ayittey
May 4, 2007

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.

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