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September 18, 2006 3:13 pm

Setback for Wolfowitz on anti-graft plan

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Paul Wolfowitz, the World Bank president, suffered a setback on Monday when the Bank’s shareholder governments insisted that they would have the final say on implementing his flagship anti-corruption strategy.

The decision by the Development Committee, the World Bank’s governing body, is a victory for European states and developing countries anxious to ensure that the policy is not applied in an arbitrary fashion by the Bank’s management.

Mr Wolfowitz on Monday stressed that he secured approval from the Committee for his anti-corruption paper, which was revised several times in a bid to meet shareholder concerns.

He said there was “a lot accomplished” at the Development Committee, which also endorsed plans to revitalise the Bank’s lending and risk-management services for middle income countries.

However, while the Committee endorsed the anti-corruption paper, it made it clear that this was not the final word, and asked Mr Wolfowitz to report again to shareholders in the Spring.

The communiqué declared “Given the importance of this issues, we stressed the importance of the Board oversight of the strategy as it is further developed and then implemented.”

Hilary Benn, the UK development minister, said the shareholders had now gained control of the Bank’s governance policies. “What’s very clear is that the Board is now going to oversee further development and then implementation of policy – and that’s the outcome,” he said.

However, a senior Bank official disputed this, saying the outcome was nothing more than the “normal process – collaborative, consultative, co-operative.”

Some at the Bank believe that Mr Benn is seeking to exploit Mr Wolfowitz’s unpopularity for domestic political advantage.

Mr Wolfowitz said the Bank management would need “some flexibility to work day to day” on corruption and governance.

But he conceded that “there are some very important principles involved.” He said the board, which represents shareholder governments, would want to take a “strong view” on when to suspend lending.

He said the Bank had to ensure its money was well spent if it was to demand additional funds from taxpayers in donor countries.

But he tried to reassure shareholders by saying that the Bank has no intention of changing the formula by which it allocates concessional loans to the poorest countries.

France, Germany and Italy as well as the UK pushed for strong board oversight at the Development Committee. Hank Paulson, who issued a statement supporting Mr Wolfowitz, did not attend the meeting.

The Committtee also called for “predictability, transparency and consistent and equal treatment across member countries.”

This reflected both European demands for objective criteria and developing country insistence on equal treatment.

China, for instance, insisted that the Bank abide by the “principle of non-politicisation” and respect country ownership of governance strategies.

South Africa said the anti-corruption agenda “should not compromise the Bank’s core mission of poverty reduction.”

However, a second Bank official said the mandated principles could contradict each other in practice, since applying objective standards to different countries would lead to unequal results.

He said suggestions that the Bank should “further develop” ways of measuring corruption and governance were delaying tactics.

Separately, the Bank joined the Group of Seven leading economies and the International Monetary Fund in voicing concern over “excessive borrowing after [debt] relief, which may lead to re-emergence of debt distress”.

Advanced countries are particularly concerned about China’s activities in Africa, lending money in return to access to raw materials.

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