Wolfowitz's new agenda

Experts say the war hawk's fealty to the oil industry could derail the World Bank's mission to reduce poverty.

Published April 26, 2005 4:08PM (EDT)

On the same day that Goldman Sachs predicted world oil shortages could spike the price of oil to $105 a barrel, Paul Wolfowitz was confirmed as the World Bank's next president. The confirmation of Wolfowitz on March 31 turned around what might otherwise have been a bad-news day for the White House. Now, a leading architect of U.S. foreign policy would be in a position to pressure the world's largest public financial institution to help pay for the exploration, drilling and transport of America's most coveted natural resource.

Of course, it's too early to know for sure what Wolfowitz will do. But experts who've followed the bank's troubled history in financing the oil, gas and mining industries around the world have real concerns about how the soon to be ex-deputy secretary of defense will balance his long-touted commitments to a "new American century" with the very different ones he'll assume on June 1 at the World Bank. Although Wolfowitz has assured his critics that he believes deeply in the bank's aim of reducing poverty, calling it "a noble mission and a matter of enlightened self-interest," U.S. foreign policy, forged under Wolfowitz's strong hand, has been dedicated to American hegemony, energy security and the opening of foreign markets to U.S. business -- goals that are often in conflict with the bank's mission.

Whether the bank's next leader can reconcile his old beliefs with his new position is a burning question among longtime critics of the World Bank's financial support for companies like Halliburton, ChevronTexaco and ExxonMobil (among the bank's biggest private beneficiaries), supposedly in the interest of alleviating poverty. Decades' worth of studies, often performed by the bank's own experts, have shown that oil, gas and other so-called extractive-industry projects have done little to promote growth in poor countries. On the contrary, countries that depend economically on oil exports tend to have slow growth, deep-seated corruption, repressive governments and frequent conflict. The phenomenon is so widely known it has a name -- the resource curse. And it has led experts across the political spectrum to claim that the bank has been derelict in its duty to the world's poor, employing policies that make poor countries even more dependent on selling their finite natural resources to the highest foreign bidder.

In response to mounting pressure, the bank commissioned an independent study in July 2001, which after two years of exhaustive research worldwide concluded that the bank should impose stringent standards and stronger safeguards on oil and gas projects and, by 2008, stop supporting oil production altogether. Ultimately, the bank's top brass would not agree to stop financing oil industry projects, but they did promise future reforms aimed at curbing corruption and ensuring that oil profits reach countries' poor.

It will now be up to Wolfowitz to carry out those reforms. But some are skeptical that he'll be able to shed his Pentagon perspective enough to genuinely pursue the bank's antipoverty mission. Indeed, some believe he was placed in his new post precisely to pursue U.S. policy objectives. Wolfowitz's appointment "strongly suggests that President Bush has something specific in mind for the bank -- to be an instrument of U.S. power," says William Easterly, a former World Bank economist who now teaches at New York University.

Easterly is not alone in that view, and over the years, Wolfowitz himself has made it clear how he believes U.S. power should be exercised. "In the Middle East and Southwest Asia," Wolfowitz wrote in a draft Defense Planning Guidance document in February 1992, leaked to the New York Times, "our overall objective is to remain the predominant outside power in the region and preserve U.S. and Western access to the region's oil."

Those sorts of statements are now causing serious concern. "I worry that Wolfowitz will be more concerned about increasing global fuel production, and less concerned about whether or not such projects actually contribute to economic development and poverty alleviation in oil-producing countries," says Michael Ross, a UCLA politics professor who advised the World Bank's extractive-industries review chairman.

Manish Bapna, director of the Bank Information Center, a watchdog group, warns that Wolfowitz's past concern with U.S. oil security is in direct conflict with his more recent statements about promoting democracy. "The focus on strengthening democracy would seem to support requiring strong governance standards before providing financial support to countries to develop their oil resources. But much of the oil development in the world today is in countries which are not democratic and whose governments are not accountable to international norms. How will those objectives be reconciled?"

Not everybody lacks faith in Wolfowitz's ability to shift focus. David Victor, a senior fellow at the Council on Foreign Relations and director of the Program on Energy and Sustainable Development at Stanford University, a project funded substantially by BP and the Electric Power Research Institute (created and supported by the major utility companies), says the appointment of Wolfowitz "offers the opportunity for the administration to extend to the bank a philosophy of development that focuses on underlying fundamentals -- good fiscal management, rule of law, openness to trade -- that have been shown to drive whether countries actually make good use of development dollars. I would be pretty confident this will be a big part of the philosophy at the bank: setting the conditions for sustainable development rather than just putting money into projects."

Perhaps, but many industry experts note that supporting large oil and gas projects almost always comes into conflict with fighting corruption and promoting sustainable development. As UCLA's Ross and others have shown, oil production often distorts the economy, exacerbates corruption and inhibits the development of true democracy. And the bank can easily become part of the problem, because large multinational corporations that borrow from the bank to invest in developing countries usually contract with national governments, which are typically in charge of the countries' oil and gas industries. As a result, huge amounts of money often are funneled to corrupt, antidemocratic or repressive governments. With little incentive to insist on transparency or democratic reform, a corporation financed by the bank essentially ends up propping up a corrupt government and becoming a critical part of the corruption.

Allan Meltzer, professor of political economy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute, doesn't think the problem of corruption is the fault of the oil industry per se but the result of years' worth of financial support provided to corrupt governments. "The obvious thing is to say we're not going to give money to countries that are corrupt," he says. And he predicts that Wolfowitz -- coming from the same administration that created the Millennium Challenge Account, a foreign-aid program designed to target aid toward well-functioning governments -- may well try to institute such a reform.

Wolfowitz has certainly promised to crack down on corruption at the World Bank. And he touts his experience in Indonesia as an example of his interest in third-world development. But to many, his past actions don't inspire confidence. After leaving his ambassador's post, Wolfowitz used his Indonesian contacts to help found the U.S.-Indonesia Society, a private organization funded by oil and mining companies to press U.S. business interests in Indonesia, even though those companies knowingly financed the notoriously corrupt and abusive military-backed regime of President Suharto. The society's most active members included New Orleans-based mining giant Freeport-McMoRan, one of the largest American investors in Indonesia, which generated billions of dollars for the Suharto government while so brutalizing the environment and endangering local residents that it lost its U.S.-backed political risk insurance in 1995.

And Wolfowitz was strangely silent on the Suharto government's cronyism, even reporting to Congress in 1997 that Suharto provided "strong and remarkable leadership," notwithstanding vast human rights abuses in East Timor. "He didn't seem to look at who was really benefiting most from gross corruption in Indonesia," says Ian Gary, an advisor on extractive industries for Catholic Relief Services. "For me, the question is whether Wolfowitz will make the intellectual connection between the role that natural resources and particularly oil have played in fueling corruption -- by concentrating power in the hands of the elite few -- and what he says is his interest in good government."

Until now, Wolfowitz has expressed great faith in the capacity of oil to bail out developing nations. In fact, he said it would be the key to postwar development in Iraq. Iraq's oil revenues "could bring between $50 [billion] and $100 billion over the course of the next two or three years," Wolfowitz told the House Budget Committee in February 2003. "We are dealing with a country that can really finance its own reconstruction and relatively soon."

But experts were already warning that the Pentagon's faith in oil was folly. "His miscalculation on Iraq was appalling," says Youssef Ibrahim, managing director of the Dubai-based Strategic Energy Investment Group and former energy editor for the Wall Street Journal. "Before the invasion, Iraq exported to the outside world 3.5 million barrels of oil a day. Today, on a lucky day, Iraq exports maybe 1.4 million barrels. Not only did he completely miscalculate what Iraqi production would be after the war, but in fact the world has lost nearly 2 million barrels a day of Iraqi oil."

What's more, even if oil does provide vast revenues to a government, many believe a public multilateral institution dedicated to fighting poverty ought not be financing the projects of private oil companies, which would be likely to invest in oil-rich developing countries anyway. "Oil is not an industry that is in need of any capital," says Ibrahim, a consultant to major oil companies. "I'm concerned that he would divert funds from worthwhile projects to things like looking for oil, which are pretty much within the hands of major multinational oil companies (which have very deep pockets). This would be squandering the World Bank's funds, and a misallocation of public resources."

Wolfowitz's long-standing support for privatization raises more concerns. He was one of the leading proponents of early privatization of state-owned enterprises in Iraq, including the oil industry, which likely would have been a violation of international law. Some watching the World Bank worry that as head of the world's largest public lending institution, he'll press governments to privatize their industries to make them available for U.S. investment, regardless of whether that's in their best interests. They also worry that he'll emphasize foreign corporate investment over government-run antipoverty programs, channeling more money toward the arm of the bank that lends to corporations and less toward poor countries' governments. "Many of us fear that Wolfowitz will yank the World Bank away from a growing emphasis on programs that reach the poor and cast it back onto these giant infrastructure projects which primarily help big companies," says John Cavanagh, president of the Institute for Policy Studies in Washington, which has tracked a recent significant shift by the bank away from financing governments and toward financing corporations in the oil and gas sector. (Altogether, the World Bank has put up more than $11 billion for oil, gas and coal projects since 1992.)

It was the last World Bank president to come from the Pentagon -- Robert McNamara -- who originally concentrated bank lending on huge infrastructure projects such as highways, ports and dams. Many of these projects, which some critics believe were chosen for supporting U.S. foreign policy interests rather than because of their suitability as development projects, in retrospect are viewed as environmental, social and economic disasters.

Wolfowitz will face another controversial policy debate at the bank -- whether it should provide grants rather than loans to the poorest countries, a reform the Bush administration has pushed. While grants have the virtue of not encumbering poor governments with more debt, they make the bank more dependent on its member countries for replenishment of the unpaid money, and some of those countries face serious political obstacles to providing additional funds. The result, some fear, could be an overall shrinking of the bank's investments in poor governments and an increasing dependence on multinational corporations, rather than democratic governments, to drive third-world development.

Now, some of the standards those companies must follow are at risk of being jettisoned. The International Finance Corporation, part of the World Bank, is currently reevaluating the environmental and social safeguards it requires of all World Bank-sponsored projects. These minimum standards ensure that companies borrowing from the bank employ modern environmental protections and consult with communities adversely affected -- forced to move, for example -- by bank projects. The bank's requirements have been adopted by many major commercial banks and now set the standard for about 80 percent of the major infrastructure projects financed worldwide. Early drafts of the IFC's proposed changes suggest the bank may water down those standards significantly.

"I worry that Wolfowitz will take advantage of lax safeguards at the IFC being created to promote a business agenda, as he did in Indonesia and has been done in Iraq, in a way that someone less oriented toward big business might not," says Steve Kretzmann, founder of Oil Change, a new nonprofit focusing on petro-politics. As oil prices rise, shortages loom and the United States faces growing competition for oil supplies from emerging superpowers like China, the pressure to put American business interests first will only grow.

In the end, how Wolfowitz conducts his World Bank presidency will come down to whether he carries the resource curse into his new job. Can he shift his focus from the United States' unilateral foreign policy objectives to the very different antipoverty mission of the most economically powerful multilateral institution in the world?

"Wolfowitz has instincts that are a sort of coercive utopian idealism, where American power, and now maybe World Bank financial muscle, are used to force the American version of utopian ideals like democracy and free-market opportunity on the rest of the world," says Easterly, the former World Bank economist. "I actually believe in those ideals myself, but I don't think they can be forced on anybody from the outside, and I don't think that their current American incarnation represents some perfect model that everybody else should follow."

Since all indications are that Wolfowitz wants the rest of the world to follow where America leads, his biggest challenge may be adapting his unqualified American utopianism to the murky realities of the developing world.

By Daphne Eviatar

Daphne Eviatar, a 2005 Alicia Patterson fellow, has written about international development for the New York Times Magazine, Newsweek, the Nation and others. She received research support for this story from the Nation Institute.

MORE FROM Daphne Eviatar

Related Topics ------------------------------------------