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Wolfowitz at the World Bank: A New Leaf?

[The author has been a senior official in this field and must withhold his identity. — Ed.]

I believe in redemption.  Never give up on anyone.  And besides, like many of us, I was told that Paul Wolfowitz might turn out to be another McNamara (well . . . ).  On June 1, Mr. Wolfowitz addressed the World Bank staff and did say (when prompted by a question) that he believed in the Bank as a politically neutral and objective institution (and “. . . I will do everything in my power to preserve that objectivity”). 

So, I have waited with an open mind for his first acts.  The first few acts by a new World Bank President tend to be public relations minded, i.e. worthy humanitarian moves (the previous President, James Wolfensohn, announced a poverty initiative and an environmental focus; Robert McNamara tried to highlight “basic needs” for the poor, “redistribution with growth,” and land reform).

Now we have Mr. Wolfowitz’s first major public act.  Let us not rush to judgment, but the first sign is ominous.  It also requires commentary.

Just recently, the international media (such as the New York Times, the Financial Times, Dow Jones, and Agence France Presse among others) informed us that the President Wolfowitz was freezing World Bank loans to Ecuador, ostensibly to punish the government for revising the rules of the special Fund established from its oil revenues.1 Nearly all the money from this fund was to go to repaying the debt owed to foreign banks.  A Schoolgirl in EcuadorApparently, Mr. Wolfowitz objects to a new Ecuadorian law (passed after careful debate in Parliament) under which 20% of the Fund would now go towards social needs and 10% for national development in science and technology.  When the special Fund was first established, Ecuador’s oil was sold for $18 p/barrel.  Today it is 400% more.  Without this change, almost all of the windfall will be paid to the foreign banks.

Of course, for the World Bank President to suspend a loan approved by the governments in the Bank governing board is a drastic punitive step (and such a step always requires the personal approval of the President). But in this case, is it a departure from previous practice at the Bank?  Is it “justified” by the usual criteria applied by previous World Bank Presidents? 

Sadly, from a close examination of the evidence, it would appear that, in this case, suspending the assistance to Ecuador has elements of an extraordinary, perhaps unprecedented move. If repeated and extended on a larger scale, such a policy change may sharply alter the role of the Bank, at the expense of people in the affected countries.  Four points clearly emerge:

  • Mr. Wolfowitz has initiated actions in obvious violation of the long standing policies and procedures of the Bank, as established by the governmental bodies that are legally meant to oversee the Bank President;
  • The stated evidence for that action has been distorted and the analysis of the Bank and IMF’s own experts has been overridden;
  • Mr. Wolfowitz’s actions may be motivated by interests legally outside the Bank’s mandate and inconsistent with its multilateral character (and can be usefully contrasted with his subsequent announcement of equally extraordinary treatment for Pakistan); 
  • These actions are likely to result in greater, and entirely unnecessary, human suffering. 

Violating World Bank Rules and Procedures

Enforcing the repayment of external debt has been the near-exclusive jurisdiction of the IMF — with the World Bank limited to a subsidiary, supportive role (often in the form of what is called “co-financing loans”).  This constitutional separation of powers was first clearly demarcated in 1989 in an agreement considered so sacred that it is simply called “The Concordat,” even in official World Bank documents.

The Concordat — which places the IMF and NOT the World Bank President in charge of external debt issues — is so fundamental to determining the scope of legitimate action by the President of the World Bank that its contents have been repeated and detailed every several years by previous Bank Presidents in a formal document submitted for approval to the governments.2  This was last done by Mr. Wolfowitz’s predecessor just a year ago.3

Thus, in this specific case of Ecuador, the original agreement for this particular WB loan was part of an IMF-led package (first signed with the IMF in March 2003 by ex-President Lucio Gutierrez). The IMF Standby Agreement ran through April 2004 and was then succeeded by an IMF Intensified Surveillance Mechanism (ISM). The World Bank loan document makes clear the IMF’s ISM will be providing the main monitoring role for assessing deviations from the original loan program.4 The document also makes clear the IMF’s lead role for the issues the Bank is questioning,5 and the same point was made in official document for the previous World Bank share of the same IMF-led package.6 In short, it was the role of the IMF — and not Mr. Wolfowitz — to signal any need to freeze the package.

Misrepresenting or Ignoring the Analysis of Experts

The government of Ecuador has accused the Bank of violating the terms of the international agreement since the exact percentages in allocating their own oil revenue was only stipulated through September 2004 and, in any event, these were relatively small changes.7 So how does the Bank maintain that it is not violating the norms and agreements of the international community?

Mr. Wolfowitz has been unwilling to make an open official statement explaining the legality of his actions.  However, financial reporters in the major media have cited Mr. Wolfowitz’s staff as saying (apparently without permitting direct attribution) that the punitive move was justified because he received expert analysis that the recent revisions in the Fund for the oil revenues would destabilize Ecuador’s financial situation.  Is this what the analysts truly reported to Mr. Wolfowitz, or is this a false and/or gross misrepresentation of the analysis Mr. Wolfowitz received? 

Here is a brief look at three points that seem to undermine Mr. Wolfowitz’ position:

  • the simple facts themselves;
  • the IMF analysis available to Mr. Wolfowitz;
  • the text of analysis actually provided by the World Bank itself.

First, the facts themselves — as presented by the World Bank — do present a clear picture.  Last year, the Fund in question (the Fund controls most of Ecuador’s oil revenues and is known by its Spanish acronym FEIREP) received some $640 million. Women Protest in EcuadorLess than a paltry $50 million went to social investment (of which an absurd $0.3 million was actually disbursed on social needs, which may help explain the social unrest that brought down last year’s President).8 The new President and his new Finance Minister have proposed increasing the proportion devoted to social investment (from some 10% to some 20% of the Fund) along with a new effort in science and technology for the long-term development of Ecuador (to be 10% of the fund). 

These modest amounts, if used wisely, could have an important beneficial impact in their narrow fields, but it is hardly credible to say that in themselves they will destabilize the national economy.  By comparison, the Bank’s own analysis projects next year’s national economy to be over $35 Billion,that oil revenues will be $5 Billion and government income from the oil revenues alone will be $2.4 Billion.9  But, this comfortable picture was based on oil prices at $18 p/b and projected to decline.  At the time Mr. Wolfowitz provoked the crisis, Ecuador would be receiving over $60 p/b for its oil!  With this large windfall, it is hard to imagine how such small changes in one Fund could result in the dire consequences Mr. Wolfowitz contends, or that competent experts would so advise him.

Indeed the facts also show that the international financial community itself saw no such threat to its profits.  The standard measure of “country risk” (JP Morgan’s Emerging Market Bond Index which is what the World Bank itself uses) not only showed a long-term improvement and medium-term stability but actually had improved by some 100 basis points in the month before the World Bank provoked the crisis.10  Is it likely that Mr. Wolfowitz found a risk to their profits that the entire world financial community overlooked?

One should point out that the international financial community (most of whom currently own the bonds for speculative reasons)11 already receives a form of extra protection: in the 2000 restructuring they were given a unique “principal reinstatement provision” (the first time such a special privilege was granted) which guarantees the holder new additional long-term bonds in the event of any default before 2010.12

The IMF’s Analysis

After careful review, it is now also clear that in fact the IMF did not provide the type of analysis that Mr. Wolfowitz apparently says he received.  Just after the government announced its intentions, the IMF sent a team to Ecuador that undertook a thorough review.  This team issued a press release pointing to the exact opposite conclusion — that no abrupt break in loan assistance was justified by the facts.  The IMF approach pointed to working with the new government to ensure that the revisions to the fund are accompanied by other measures (e.g. prioritization of overall expenditures) so that traditional IMF/World Bank goals of limited overall spending and consistency in fiscal policy would be maintained.  Far from considering the new law a radical break, the IMF said, “At the end of the visit, the staff team agreed with the Ecuadorian authorities to maintain a close and cooperative relationship. . . . We look forward to continue helping Ecuador achieve its economic and social objectives,” and agreed to a system for closer, quarterly monitoring.13 

This view, so different from what Wolfowitz seems to maintain, is also clear from the IMF’s previous assessments of the situation including no less than a recent visit to Ecuador by the head of the IMF himself (see his press release14) and the comprehensive IMF review of Ecuador that is provided through the so-called Article IV Consultations.15 Even during the crisis that Wolfowitz has created, the IMF spokesperson has declined to issue a statement of support for his actions.16

The World Bank’s Own Analysis

One must also point out that Mr. Wolfowitz’s apparent assertions of the evidence (that financial stability is jeopardized) cannot even be squared with the World Bank’s own analysis — from either the official or the previously confidential record.  Reference has already been made to the (previously classified confidential) document for the loan.  It is replete with analysis showing no possible financial crisis from the modest move made by the Ecuadorian government.  For example, the section entitled “Medium Term Outlook” begins with the sentence: “Over the medium term, the Bank expects Ecuador to preserve stability and growth at about 4.0 percent from 2005 onward.”17 And, of course, prices today for Ecuador’s oil are 400% higher than what was assumed by the Bank experts at that time.  The same view pervades all other recent World Bank documents such as the Bank’s comprehensive analysis exercise contained in the Country Assistance Strategy document.18

Motivations that May Extend outside the Legal Mandate of the World Bank

If the facts do not support Mr. Wolfowitz, what then were his motives? Mr. Wolfowitz declined to go on the record and shortly left Washington for Pakistan and his second major public act: just after arrival in Lahore, he announced a snap decision to increase lending to Pakistan by $1.5 billion.19  Most troubling, it appears that (for a second time) his sudden move is in contradiction to World Bank procedures and prior analysis.20

In the absence of a formal statement before his departure for Pakistan, one can only speculate on Mr. Wolfowitz’s motives for treating Ecuador so harshly and Pakistan so favorably.  But, if one relies on the major financial media, Mr. Wolfowitz has put forward some motives through the “unattributed source” technique of Washington. These sources also largely concur with the analysis of the Ecuadorian media21 (and the media reports certainly have not been denied by Mr. Wolfowitz).  Two factors particularly stand out — both are strictly outside the mandate of a multilateral lending institution and they appear to relate to the more unilateral interests of the current U.S. administration.

Ecuador’s Relations with Occidental Petroleum

The Ecuadorian government has had a long-running dispute with Occidental Petroleum over non-performance of its contract to operate Ecuadorian oilfields and over non-payment of taxes ($75 million).  In the new government, the left-leaning Finance Minister (Rafael Correa, a U.S.-trained Professor of Economics) indicated that since Occidental has been intransigent he will move to rescind their control of the oilfields, in accordance with the terms of their contract.  The U.S. administration has responded with alacrity, including threatening to terminate all of Ecuador’s trade quotas and exclude Ecuador from the upcoming Free Trade Pact with the Andean countries, along with other, unspecified, consequences.

Mr. Wolfowitz has had little previous involvement with international development or Latin American economic issues.22 However, he has had a deep involvement with Occidental Petroleum (who upon the withdrawal of Texaco from the Andean region became the principle U.S. oil company in the region).  In addition, Mr. Wolfowitz “launched” his reputation in the 1970s by advocating the overriding need for the U.S. to secure its access to overseas oil (he was the principal author of the U.S. Defense Department’s landmark Limited Contingency Study23).  Secure access, for the U.S., to foreign sources of petroleum has been one of his strongest policy pre-occupations for the last 30 years. 

Occidental Petroleum was granted control of large oilfields in neighboring Colombia, including control of Cano Limon (which is one of the largest oilfields in the world) and the lengthy pipeline leading from it.  Both are situated in the jungle that is the heart of the Colombia’s conflict zone.  Protecting Occidental’s holdings has been one of highest Latin American priorities of the Defense Department with Mr. Wolfowitz as its Deputy Secretary.  He helped form what Mr. Wolfowitz calls “the Pipeline Brigade,”24 a Columbian brigade backed by U.S. Special Forces on the ground with about $150 million in special Defense Department spending and U.S. intelligence support.  Their sole purpose is to defend the Cano Limon assets, fighting alongside the private forces of Occidental itself.

Ecuador’s decision to rescind Occidental Petroleum’s contract was announced by the head of the national oil company on August 2nd — two days before Mr. Wolfowitz’s abrupt and unforeseen decision to suspend Ecuador’s loan assistance on the alleged grounds of financial instability (Occidental received formal notification a few days earlier).  In reporting the news the next day, the Houston Chronicle (well known for petroleum matters) said:

With oil prices above $60 per barrel, Wall Street sees no immediate threat to the country’s finances if the contract is ended.

Three Ecuadorean presidents have been ousted before their terms ended since 1997, most recently in April.25

Naturally, Mr. Wolfowitz’s decision provoked a crisis in the government of President Alfredo Palacio who, especially with a weak government, has indicated his reluctance to confront the United States.  After discussions with the President, Finance Minister Correa was obliged to resign and the head of the national petroleum company has been sacked.  The new head of the petroleum company, Luis Roman, held the same post in the 1990s and helped Occidental into its current position. In fact, he is a supporter of further privatizing the oil fields.26

Ecuador’s Relations with Venezuela

A second motive for Mr. Wolfowitz’ sudden move was also widely cited in the press.  They point out that the now departed Finance Minister was on the verge of negotiating a $300 million bond deal with Venezuela over which the White House was said to be “furious”27 and the State Department said to be “worried,”28 a deal that “triggered increasing concern in Washington.”29 Many reports point out that because of Wolfowitz’s intervention and the political changes he helped force in Ecuador, the deal may ultimately be impeded. 

The Human Cost

Aside from the arbitrary and possibly retaliatory nature of Mr. Wolfowitz’s moves, it is important to bear in mind that he has gone to such lengths not to battle corruption or dictatorship.  Rather it seems that rules were broken, due process undermined, technical analysis misrepresented for the immediate (if not ultimate) purpose of denying the constitutional government the ability to spend more on the human needs of its people — through the normal exercise of democratic process.30

It has been pointed out that the Ecuadorian government’s initiative to better meet the human needs of its people is readily affordable — this is incontestable, given Ecuador’s oil windfall.  It is also desperately needed.  As the World Bank’s own reports admit, Ecuador has one of the worst records for addressing these problems in all of Latin America (see graph).  In fact, Ecuador’s spending for human needs (as a proportion of GDP) had so declined during the 1990’s that it would take far more than this modest increase just to reverse the deterioration of the 1990s. 

Social Investment Per Capita in Latin America

Nearly 70 per cent of Ecuador’s 4.8 million children live in poverty, as defined by the World Bank. This year, 300,000 babies were born in Ecuador.  8,000 died before they reached age five; nearly 15% are suffering severe or moderate malnutrition; one fourth are suffering severe or moderate stunting; 40% do not receive a full elementary school education; 10% receive no education at all.  Seven out of ten children under one year of age and 60 per cent of pregnant women are anaemic.  The picture is just as dismal in all other aspects of social development and the numbers are far worse when one focuses on the poor or the inidgenous population.

Poor Children in Ecuador

As the World Bank itself points out, much of this suffering is entirely unnecessary, particularly when one looks at comparable Latin American countries.  Should redressing these sufferings — a readily achievable goal — really be stopped (apparently) because of extraneous political and commercial interests?

Everyone should be given a second chance and we should always be careful about making judgments from just one or two initial examples.  At the same time, there is beginning to emerge a clear and convincing danger that the World Bank may embark on a new phase — marked by a yet more highly ideological and confrontational set of objectives.  And the world will be poorer if it does.  At some point, the world may have to say . . . “Fooled me once, shame on you; Fooled me twice, shame on me.”

 

1 FT.com, “World Bank Poised to Suspend Loan to Ecuador” (New York Times, 4 August 2005); Hal Weitzman, “Ecuador Finance Minister Quits over Loan Dispute” (Financial Times, 6 August 2005); and World Bank Press Reviews, “World Bank Set to Suspend Loan after Ecuador Changes Oil Fund” (5 August 2005).

2 For a full history, see Annex (“History of Bank-Fund Cooperation on Conditionality”) to International Monetary Fund and World Bank, “Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality” (23 August 2001).

3 International Monetary Fund and World Bank, “Strengthening IMF-World Bank Collaboration on Country Programs and Conditionality — A Progress Report” (24 February 2004).

4 Document of the World Bank, Number 31516-EC, “Project Document for a Proposed Second Fiscal Consolidation and Competitive Growth Structural Adjustment Loan in the Amount of US$100 Million to the Republic of Ecuador” (14 February 2005). See especially paras. 4 and 23 and the IMF Assesment Letter in Annex B.

5 Ibid. See Annex Q.

6 Document of the World Bank, Number 25786-EC, “Project Document for a Proposed Second Fiscal Consolidation and Competitive Growth Structural Adjustment Loan in the Amount of US$50.0 Million to the Republic of Ecuador” (28 April 2003).

7 FT.com, “World Bank Poised to Suspend Loan to Ecuador” (New York Times, 4 August 2005).

8 Document of the World Bank, Number 31516-EC, op. cit. See Annex J “The Status of FEREIP and Public Debt.”

9 Document of the World Bank, Number 31516-EC, op. cit. See Annex F “Debt Sustainability Analysis.”

10 JP Morgan EMBI [Emerging Markets Bond Index] Ecuador found at the Central Bank of Ecuador.

11 These bonds have mostly long passed from the original investors to players in the speculative secondary market; Ecuador has re-collateralized them twice, first in the mid 90s with the Brady Bonds and then in mid-2000.

12 Luis Ignacio Jácome, “The Late 1990s Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization at Work,” IMF Working Paper No. 04/12 (1 January 2004).

13 IMF Press Release No. 05/131, “Statement by IMF Staff Mission to Ecuador” (4 June 2005).

14 IMF Press Release No. 05/34, “IMF Managing Director Rodrigo de Rato’s Statement at the Conclusion of his Visit to Ecuador” (17 February 2005).

15 IMF Country Report No. 03/90, “Ecuador: 2003 Article IV Consultation, Request for a Standby Agreement, and Approval of an Exchange Restriction” (April 2003).

16 “Transcript of a Press Briefing with Thomas Dawson, Director of External Relations Department, International Monetary Fund” (23 June 2005) and “Transcript of a Press Briefing with Thomas Dawson, Director of External Relations Department, International Monetary Fund” (3 August 2005).

17 Document of the World Bank, Number 31516-EC, op. cit. See page 27.

18 Document of the World Bank, Number 25817 EC, “Country Assistance Strategy for the Republic of Ecuador” (29 April 2003).

19 Reuters, “World Bank Raises Pakistan Aid after Economic Progress” (17 August 2005).

20 This massive increase for Pakistan had not had prior approval by the governments meant to govern the World Bank and runs exactly contrary to what the technical analysts had stipulated was merited (by need or “performance” criteria) — as reviewed and documented by the World Bank itself just a few months before Mr. Wolfowitz took office.  In June 2002 and again in April 2004, the Bank went through an extensive and official process of evaluating and planning its assistance to Pakistan. A “high case” scenario of some $200 million to $900 million in loans were defined, depending on Pakistan meeting certain “performance” criteria. Throughout this period many of those targets have not been met (e.g. in human development) but high levels of funding flowed.  Mr. Wolfowitz’s sudden decision, apparently done without process or technical assessment, now further raises Pakistan’s planned levels for 2005, 2006, and 2007 assistance somewhere between 150% and 700% above what was considered justified and then approved.  It also seems to make NO reference to performance criteria, nor is it documented by any official process or even a report. See “A Country Assistance Strategy Progress Report for the Islamic Republic of Pakistan,” Report No. 28262-PAK (April 2004) and “Pakistan: Country Assistance Strategy” (2002).

21 FT.com, Weitzman, and World Bank Press Reviews, op. cit. See, also, Financial Times, “Ecuador’s Deal with Chávez Infuriates the White House” (MSN Money, 9 August 2005); “La geopolitica de Correa” (El Commercio [Quito], 8 August 2005); “Magdalena Barreiro reemplaza a Correa” (El Universo [Quito], 9 August 2005); “Nueva Ministra de Economia” (El Financiero [Quito], 8 August 2005); and various, (Hoy [Quito], 4-9 August 2005).

22 Earlier in his career, he did have one deep involvement with Latin American political issues as one of the chief architects of Reagan Administration policy in the war in El Salvador (see for example Karen DeYoung, “El Salvador: Where Reagan Draws the Line; Reagan ‘Sends a Message to Moscow’ via El Salvador,” The Washington Post, 9 March 1981, p. A1).

23 The study helped shift U.S. cold war focus from Europe and Asia to securing U.S. oil supplies in the third world, especially the Middle East.  See, inter alia, James Mann, The Rise of the Vulcans (NY: Viking Press, 2004). Mann is “Author in Residence” at the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University, which Wolfowitz headed.

24 See the San Francisco Chronicle interview with Wolfowitz posted on U.S. Defense Department Web site.

25 “Ecuador Insists on End to U.S. Oil Company’s Contract” (Houston Chronicle, 3 August 2005).

26 Alex Emery, “Ecuador Government Names Roman PetroEcuador President (Update1)” (Bloomberg, 5 August 2005); US Energy Information Administration, Country Analysis Brief, “Ecuador” (December 1997); and “Luis Roman Named President of Ecuador’s Petroecuador” (Schlumberger, 8 August 2005).

27 Financial Times, “Ecuador’s Deal with Chávez Infuriates the White House,” op. cit.

28 Hal Weitzman, “Ecuador’s Remote-control Politics Signals Weakness” (Financial Times, 10 August 2005).

29 Richard Lapper, “Chávez Uses Nation’s Oil to Extend Regional Clout” (Miami Herald, 11 August 2005).

30 Space prohibits documenting the impact of Wolfowitz’s move on efforts to promote democratic processes in Ecuador.  Army Moves in to Stop ProtestsOne immediate political consequence should be mentioned: popular groups continue to find the electoral system has little actual authority over the major assets of their country and thus once again took to the street. Large numbers of people in the two oil-producing provinces, apparently even joined by local Mayors, held massive demonstrations.  In addition, the national oil pipelines were disconnected or dynamited; the airports were seized and roads blocked.  The resultant oil shutdown alone will mean more money was simply lost than the amount Mr. Wolfowitz said the country could not afford to invest.  As of this writing, the situation is still being negotiated.  See Hugh Bronstein, “UPDATE 1: Ecuador Close to Deal with Oil Protesters — Mediator” (Reuters, 23 August 2005).


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