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Last Updated: Friday, 18 May 2007, 10:35 GMT 11:35 UK
The World Bank after Wolfowitz
By Steve Schifferes
BBC News economics reporter

Paul Wolfowitz
Paul Wolfowitz was a controversial figure from the beginning
The departure of Paul Wolfowitz as president of the World Bank has cast a cloud over the organisation and the way that it is governed.

Mr Wolfowitz, who was accused of favouritism, was a leading advocate of the fight against corruption.

Now the Bank will have to re-examine its priorities and heal the splits that emerged between the US and Europe.

And it will have to move quickly to find a new leader who commands respect among rich and poor countries alike.

Undemocratic process

Mr Wolfowitz was never going to be a popular choice among development agencies and many Europeans, with his background at the Pentagon as a key architect of the US invasion of Iraq.

If the outdated convention (of leadership selection) is not abandoned, the leadership crisis at the World Bank is unlikely to be fully resolved even if Paul Wolfowitz decides to resign
Open letter by 200 development experts
But the manner of his departure has rekindled a broader debate about how the World Bank, and its sister institution, the International Monetary Fund, are run.

By tradition, the World Bank president has always been appointed by the US government, while the Europeans have had the right to nominate the head of the IMF.

Robert Zoellick
Robert Zoellick: Former US trade representative and US Deputy Secretary of State
Paul Volker: Former chairman of the Federal Reserve, investigated corruption at UN
Stanley Fisher: Former World Bank and IMF official, now head of Bank of Israel
Robert Kimmitt: Deputy US Treasury Secretary
Andrew Natsios: former director of USAID

Now this convention is under attack.

In a letter to the World Bank, 200 leading development organisations have called for and open process for selecting the new leader that includes "transparency of process, and competence of prospective leadership without regard to national origin".

"If the outdated convention is not abandoned, the leadership crisis at the World Bank is unlikely to be fully resolved even if Paul Wolfowitz decides to resign," they said.

Oxfam's Barbara Stocking said "the US and other rich countries must now show that they are serious about good governance by reforming the recruitment process to allow the next head of the Bank to be appointed on merit and commitment to alleviate poverty".

Japan, the World Bank's second largest donor, has also called for the Bank make a selection without restricting itself to an American.

"The nationality of the successor is a governance matter for the World Bank," Japan's Chief Cabinet Secretary Yasuhisa Shiozaki said.

But it is not clear that either the Europeans or especially the US are prepared to abandon their tacit agreement, and give more power to other countries in the selection process.

Leading candidates

Already speculation is rife in Washington about who President George W Bush is likely to appoint as Mr Wolfowitz's replacement in six weeks' time.

Children wait for food distribution in the village in Niger
Poor countries want a bigger role in the Bank

The leading contender appears to be Robert Zoellick, the former US trade representative who reportedly has been lobbying hard for the role after quitting his job at the State Department last year.

Other candidates include Paul Volker, the chairman of the Federal Reserve before Alan Greenspan, who is a respected figure in Washington but rather old for the job; Stanley Fisher, a key official in the 1990s at the Bank and the Fund, but seen as very much part of the Clinton Administration era, and former USAID director Andrew Natsios.

Nancy Birdsall, director of the Center for Global Development, said the crisis was a real opportunity for the World Bank to reform itself.

"I wish the Bush administration would announce its support for an open, competitive and merit-based process," she said.

"This whole mess illustrates the need for change in how the nations of the world oversee the bank."

Voices of the poor?

One reason why the Europeans may be reluctant to open the selection debate is that it is linked to the broader issue of who runs the Bank and the Fund.

Chinese men on bicycles
China was given more voting power at the Bank

Currently the votes on the executive board of the Bank and the Fund are based on the size of a country's economy, not its population.

The US, with the world's largest economy, has around 17% of the votes, enough to give it veto power as key decisions require an 85% majority.

But relative to the size of their economy, the EU is over-represented on the Bank's board, and developing countries, such as India and China, are under-represented.

Last September, the Bank and the Fund moved to increase the quotas, and the voting rights, of fast-growing developing countries like India, China and South Korea.

But many observers believe that a more radical redistribution of power is needed, with either independent directors, or more representation for developing countries who are the main clients of the Bank.

The countries of sub-Saharan Africa, for example, have only 5% of the Bank votes.

Battle over corruption

Mr Wolfowitz arrived at the World Bank at a key moment in its development, with renewed calls for Western commitment to end poverty in Africa and tackle climate change.

But Mr Wolfowitz's most controversial policy was aimed at tackling corruption and ensuring good governance.

We know that when governments don't work, the development assistance we provide to governments doesn't work either.
Paul Wolfowitz

Mr Wolfowitz sought to develop an index of corruption for each country, which would show how easy it was for the private sector to do business.

But it was his arbitrary actions in suspending development aid without consulting the Executive Board that caused the most friction.

Mr Wolfowitz argued that "when governments don't work, the development assistance we provide to governments doesn't work either".

It was unclear, however, what criteria he used in deciding when to suspend World Bank projects.

Now his successor will have to rebuild the image of the Bank and reassure its clients that it is living up to its own ethical principles.

Funding development

The most important reason that Paul Wolfowitz had to go, however, may not have been the corruption issue.

Rather, the controversy over his role was threatening the future of the World Bank's development funding.

The Bank lends about $10bn (5bn) per year to poor countries under its IDA programme interest-free, but it relies on rich countries to replenish its funding for IDA every few years.

This year, key negotiations about IDA replenishment have just begun, and it had become increasingly clear that European governments were reluctant to pledge additional funds while Mr Wolfowitz was still in charge.

This would threaten the ability of the Bank to meet its development goals.

It was this fact that led the Bank, and Mr Wolfowitz himself, to conclude that "the poorest people of the world, especially in sub-Saharan Africa, deserve the very best we can deliver".

"I have concluded that it is the best interests of those whom this institution serves for that mission to be carried forward under new leadership."

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