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Free Liberal: Coordinating towards higher values

Free Liberal

Coordinating towards higher values

A Wolf in Banker's Clothing

By Fred Foldvary

President Bush has nominated Paul Wolfowitz to be the next president of the World Bank. Many commentators around the world are opposed to this appointment for two reasons. First, he has little experience in economic development. Second, as deputy secretary of the Department of War, he was a major influence on the war in Iraq and did not prevent the massive corruption and policy errors there. Third, some fear that his neoconservative views are not suited to the mission of the World Bank.

Paul Wolfowitz has experience in military matters and diplomacy. He was once a professor of political science. That he is not an economist or a banker may not such a bad thing. Conventional, mainstream economics promotes bad policies. The policy of the World Bank has been iatrogenic, a disease caused by the doctor. The Bank has condoned massive corruption, and even budgets for it. This contributes to corruption. Massive projects - big dams, highways -- financed by the World Bank have often destroyed the environment (fortunately, the WB has reduced spending for such behemoths). Laden with unproductive projects, the developing country ends up in debt, paying out interest while the people gain nothing.

A non-economist with no experience in economic development, who has not been brainwashed by dysfunctional conventions, may be just what is needed. Of course the best option would be to appoint a geoclassical economist, but that is beyond the bounds of imagination. Second best is a World Bank wolf whose wits are not spoiled by bad doctrines. Wolfowitz did say that the oil of Iraq is the property of the Iraqi people. Will he generalize that to all natural resources, and will he recognize the corollary, that a worker's labor is not the property of all the people? Wolfowitz also declared that the best policy is freedom. We will see what he means by that.

As to bringing a war wolf into economic development, what opponents of war are overlooking is that this appointment gets him out of the Pentagon! What is worse: messing up some third-world economies, or engaging in war?

As to his neoconservative views, first of all, the World Bank is essentially multilateral, and the policies that could be carried out unilaterally by the U.S. military are not possible for economic development. More importantly, if being conservative implies being pro-business, how can an economy operate if the policy is opposed to private enterprise?

So this appointment may not be such a bad thing. Perhaps Paul W. always wanted to be a banker, and how his dream has come true. Perhaps President Bush wishes to make some adjustment in the Iraq policy, and this is a brilliant move to get a possible obstacle out of the way. Perhaps the deer and the antelope developing countries need a wolf to keep them alert.

We have to realize, of course, that the world does not need a World Bank at all. The U.K., the U.S., and Japan developed without any World Bank. An underdeveloped economy presents profit opportunities for investors. Cheap labor provides a comparative advantage. All that is needed for rapid growth is for the government to avoid stifling it with taxes and restrictions.

But, the reality is that the World Bank exists, and is going to meddle in development. The $20 billion in annual lending will always generate a moral hazard, meaning that the governments of developing economies will indulge in corruption, huge welfare-state programs, and mismanagement, because uncle WB will pay for it. When the time comes to pay back, they will cut education, medical care, and security to squeeze out the interest payments. Then the country will default anyway, and like Argentina, pay back pennies to the dollar or euro.

The best outcome would be if an angel were to descend from heaven and, verily verily, say to Dr. Wolfowitz: "Go, and tell the governments that they shall receive no loan unless they shift taxes from wages and sales to land value. They shall eliminate restrictions on enterprise, and tax pollution and the land. Then shall economies develop rapidly with private investment. Use thy clout to make them change to economic freedom, with the benefits of natural resources going to all the people, not just an elite. And thou shalt not finance any project tainted with corruption! T'aint right!"

But that is only a dream. There is no angel. There is only a wolf in charge of the sheep. The wolf is a banker, so he will not kill the sheep, but only fleece them. That's the way the world works. It would work that way no matter who is the World Bank president, so it may be good to explicitly recognize that any head of the World Bank will be a wolf in banker's clothing.

This article first appeared in the Progress Report, www.progress.org. Reprinted with permission.

Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.



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