Head of World Bank Fraud Unit Resigns

By STEVEN R. WEISMAN

Published: January 17, 2008

WASHINGTON — Six months after taking over as president of the World Bank, Robert B. Zoellick faced new turmoil on Wednesday over a campaign against corruption in bank lending, with the resignation of the chief of the bank’s antifraud unit.

Bank officials said that despite Mr. Zoellick’s efforts to heal the wounds left from the stormy tenure of his predecessor, Paul D. Wolfowitz, the resignation of Suzanne Rich Folsom, Mr. Wolfowitz’s top deputy in his anticorruption campaign, was stirring new bitterness. They said that several of Ms. Folsom’s aides were also resigning.

Mr. Wolfowitz, who had made the battle against corruption a priority, was ousted as bank president last year after the disclosure that he had arranged a pay increase and promotion for his companion, a bank employee, in 2005.

“There is just a lot of bad blood,” said a bank official, speaking on the condition of anonymity in order to discuss internal matters. He added that many in the bank remained “allergic” to efforts to prosecute cases of fraud. Another official said that ties between Ms. Folsom and the bank had been on a “downward spiral” in recent months.

Associates of Ms. Folsom said she had decided to leave her job because she had accomplished the goal of making the battle against corruption a major priority, but realized that opposition to her work by others had made it difficult for her to go on.

News of her departure stirred mixed reactions within the bank, where many welcomed her decision, saying she had been selective in her prosecutions or overly aggressive, while others said she had done much to combat complacency.

Relations between Mr. Zoellick and Ms. Folsom, which were positive in the beginning, were described by many inside the bank as increasingly frayed in recent weeks, especially after editorials in The Wall Street Journal cited internal investigations and suggested that Ms. Folsom was being undercut and driven out.

A spokesman for Mr. Zoellick, Marwan Muasher, a senior vice president for external affairs, said that Ms. Folsom had not been pushed out and that Mr. Zoellick had been entirely supportive.

“He did not force her out in any way, shape or form,” Mr. Muasher said of Mr. Zoellick, adding that when Ms. Folsom told Mr. Zoellick last year that she wanted to leave for a job in private business, he offered her a different job at the bank and then asked her to stay until the bank completed its investigation of corruption in India.

The report on India was released Friday, and it found extensive corruption in several Indian lending programs. The report was filled with pictures of shoddy construction work at hospitals, clinics and other facilities that had been certified as adequate. It also contained pledges by India to work with the bank on improving its procedures, but some officials in the bank said these were similar to ones made and not kept in the past.

Ms. Folsom’s resignation was announced Wednesday morning in a posting in the bank’s internal Web site, without a statement praising her from Mr. Zoellick.

Mr. Zoellick’s office initially said he would make no comment about her departure so as not to interject himself into the matter, but later in the afternoon an aide issued a statement from him saying: “Suzanne has done a tremendous amount to push the anticorruption agenda forward, and I’m grateful for her service.”

Mr. Zoellick’s aides say that, like Mr. Wolfowitz, he believes corruption is a high priority but that he intends to pursue the issue in a less divisive or confrontational way than had been the case in the past.

Corruption is widely described as a problem in the bank’s $30 billion annual lending programs for poor countries, but the extent is in dispute. Last September, an outside panel led by Paul A. Volcker, the former Federal Reserve chairman, found weak management, distrust and internal resistance to combating fraud at the bank.

Mr. Zoellick, according to his aides, has sought to carry out broad changes in the way Ms. Folsom’s unit interacts with other bank officials, and to install procedures on competitive bidding, inspections and disclosure that would prevent corruption instead of just prosecuting cases after the fact.

“It’s all very well to talk about corruption and to have these reports,” said Ngozi Okonjo-Iweala, a managing director at the bank and former finance minister of Nigeria, who negotiated the India agreement. “Bob Zoellick is geared toward implementation, and how we sustain this and embed it in a country.”

Ms. Okonjo-Iweala negotiated the arrangement with India to set up ways to rid programs of fraud. By contrast, Mr. Wolfowitz abruptly suspended aid to India after accusations of fraud in 2005, and that suspension angered board members and helped pave the way for his downfall, many bank officials say.

Mr. Volcker praised Ms. Folsom and the integrity unit she headed last year, when he issued his report, but he also recommended changes in the way the unit functioned.

Several bank officials said, however, that Mr. Volcker privately recommended to Ms. Folsom that since her work had been largely vindicated, she should consider resigning as a way of easing the toxic atmosphere left behind by Mr. Wolfowitz and by the fights between her department and others at the bank.

Instead, Ms. Folsom stayed on, though associates say she had been pursuing possibilities of working outside the bank. Ms. Folsom declined to comment.

Mr. Zoellick appointed an acting director to run the integrity unit, and his office said he would conduct a thorough search for a successor. One reason Ms. Folsom incurred the anger of bank staff was that she had served as an adviser to Mr. Wolfowitz before he appointed her over others recommended by a search committee.

Ms. Folsom, a onetime activist in Republican Party politics, had been a partner in a law firm specializing in ethics issues. Defenders and critics said that she had considerable difficulties overcoming the perception in the bank, where employees tend to be liberal in their politics, that she was part of a coterie of conservative advisers around Mr. Wolfowitz.

Bankers go to Baghdad

By Patrick Bond

The World Bank and International Monetary Fund's annual meeting in Washington earlier this month witnessed the members' rejection of two big ideas - debt cancellation and institutional democratisation. No surprise. There wasn't much pressure from either Third World finance ministers or the US branch of the global justice movement (apparently in hibernation until 3 November).

However, important financial developments are now unfolding, reflective of Washington's geopolitical imperatives in Iraq. Bank and IMF activity there was relegitimised at the annual meeting, but in a contradictory and untenable manner.

A recent IMF report on Iraq claimed that 'macroeconomic stability' has been achieved and the economy will have grown 52% in 2004. This was in part justification for the IMF's recent $436 million loan to the Washington-imposed Baghdad regime. The report also revealed that the IMF has been coordinating macroeconomic technical assistance, drawing together a team from the Bank, US Treasury, US AID, the British Department for International Development and the Bank of England.

Another IMF justification was that after the invasion, 'A number of important policy reforms then began to be implemented to facilitate progress toward a more market-oriented economy. These reforms included the completion of a national currency exchange, the approval of new central bank and commercial bank laws, the liberalization of interest rates, approval of a foreign direct investment law, the establishment of the Trade Bank of Iraq, the passage of the Financial Management Law and a new tax law, and the simplification of the trade regime.'

These measures, introduced by viceroy Paul Bremer, not only represent legalized looting, but also appear totally ineffectual for the attraction of foreign investment, as is brilliantly documented in Naomi Klein's new Harpers magazine article 'Baghdad Year Zero: Pillaging Iraq in pursuit of a neocon utopia' (http://www.harpers.org/BaghdadYearZero.html).

Also last week, speaking at the UN Economic Commission on Africa in Addis Ababa, Bank president James Wolfensohn predicted his institution would push more than $400 million to the US-imposed Baghdad regime by the end of 2004: 'Obviously all of this is to some extent held up by the situation on the ground because it is not easy to operate. So far as the lending from the Bank is concerned, which will be $5 billion, the Iraqis are looking at grants first because if they can get grants, it is money for nothing and does not increase the debt burden, which is already very high at about $120 billion.'

As an aside, that vast debt burden was being unevenly reduced by the efforts of US special envoy James Baker - until, that is, Klein blew the whistle through her investigative report in Britain's Guardian newspaper, also last week. Baker's Carlyle Group was then forced to withdraw from a consortium which sneakily offered to help Kuwait reclaim $27 billion from the Iraqi people at the same time Baker was trying to get French, German and Russian debt relief for Iraq. A more blatant scam could hardly be found, outside a Paul Erdman novel.

Does the Bank have anyone as unethical and hardnosed as a Baker, Richard Armitage or John Negroponte to guide the vast sums of new loans to their primary destination: US contractor profits? And will a future democratic government in Baghdad have the guts to formally declare today's Bank and IMF loans 'odious' - just as odious as Saddam's debts - and hence not liable for repayment?

(Notwithstanding South African president Thabo Mbeki's stance against reparations for odious apartheid-era lending, the country's Jubilee campaigners continue making the same plea, in the ongoing lawsuits against US and European bankers.)

Hypocrisy on debt relief - Iraq gets waves, Africa only trickles - worries not only excellent groups like Jubilee South and the 50 Years is Enough network, who insist on 100% cancellation. In early October even Malawi's neoliberal finance minister Goodal Gondwe complained of double standards during the IMF/Bank meetings: 'What I am afraid of is that putting Nigeria together with Iraq we may emphasize for sentimental reasons that are currently in the air politically, that talking about Iraq could be at the expense of Nigeria.'

The man the Bank chose for loan-pushing in a highly risky Baghdad environment is Christiaan Poortman, vice president for the Middle East and North Africa region, and a former Bank country director in the Balkans. I came across Poortman in Zimbabwe, and am compelled to pass along some warnings to Iraqi readers of ZNet about his work there as Resident Representative during the early 1990s, especially if the Bank also takes on more 'donor coordination' functions.

Poortman, after all, already runs the multi-donor Iraq Trust Fund and disbursed $60 million in grants for school building and repair last week. He pledged $150 million in resources for water and sanitation, and, according to the Bank press office, 'also said he wants to turn some of the money pledged into financing for electrical and water projects that will be left unfunded because of the transfer of funds earmarked by the US for reconstruction to security spending.'

A year ago, the Bank and United Nations estimated that $35.8 billion would be required to meet Iraqi needs. Typical advice in their 'Joint Iraq Needs Assessment' was 'to encourage private sector participation in the State Owned Enterpises (SOEs) along with separating the ownership responsibilities of government from its policy and operating responsibilities. SOEs that are internationally viable will eventually be able to shoulder higher input prices as trade liberalization frees controls on their output prices. Other

SOEs will ultimately face adjustment pressures from the hardened budget constraints.'

Zimbabweans will recognise this sort of language. The country's health minister during the 1990s, Dr Timothy Stamps, reported that spending on health was down by 37% per person from 1990-93, because Poortman considered health a social expenditure which 'had to be cut'. The government of Robert Mugabe had become 'so miserly that we are killing ourselves because we want to save a few cents,' Stamps admitted.

This was just one of several problems Poortman faced winning hearts and minds in Harare. When the IMF and World Bank insisted on tighter monetary policy in 1991, interest rates on certain government securities rose from 27% to 44% in a single day, which shattered business confidence and caused stock market and property sector crashes.

Hence even conservatives grew fed up with the ineffectual 'economic structural adjustment policy' (termed ESAP) imposed from Washington. Financial Times correspondent Tony Hawkins - also head of the local university's business school - condemned Poortman's dubious macroeconomic analysis in 1993: 'Every year, the World Bank officials dutifully prepare invariably over-optimistic assessments designed to show the worst is past and that the client state, whose economy is under the microscope, is on the brink of sustained recovery.'

Hawkins renewed his criticism in 1995: 'The World Bank's conduct in the Zimbabwean case raises a very serious issue. If the Bank had done its job properly, then Zimbabwe's budget and public sector crises need not have reached the dimensions that they have since. The debt burden would be less; the new taxes to be imposed would be less severe and the public spending cuts less drastic... The Bank has needlessly delivered 11 million Zimbabweans into the hands of harsher austerity than should have been necessary'.

The editor of a local business paper, Iden Wetherell, agreed: 'Everybody repeats the official mythology that the recent drought has slightly derailed ESAP, while insisting (the wish being father to the thought) that economic reform is otherwise on course. The most notable representative of this starry-eyed approach is the World Bank's chief in Harare, Mr Christiaan Poortman. His emollient statements over the past 18 months reflect the devotion of a faith unmoved by facts.'

Myopically, in a review of the Bank's impact during Poortman's stint, an internal reported boasted that Poortman had 'fostered an awareness of the need for a broad-based economic policy reform'. Indeed, 'informal work and advice provided by the Resident Mission was instrumental' in shaping ESAP even prior to Poortman's arrival.

The following promises were extracted from Mugabe by the Bank and IMF in the 1991 design of ESAP: by the end of 1995 there would be a 25% cut in the civil service, and the demise of all labour restrictions, price controls, exchange controls, interest rate controls, investment regulations, import restrictions, and government subsidies. Most were accomplished. By 1995 'rapid privatisation of the key parastatals' providing telecommunications, electricity, water and transportation had become one of the Bank's central demands.

The Bank's 1995 Project Completion Report for ESAP gave the best possible final grade for the first stage of the utterly failed programme: 'highly satisfactory.' The Bank acknowledged playing 'a key role in the dissemination of the programme and in building support amongst the wider donor community.' Hence Bank staff also rated their own performance as 'highly satisfactory' (again, top marks) for identification and appraisal, and 'satisfactory' for preparation assistance and supervision.

In the book Zimbabwe's Plunge (Merlin Press, 2003), my coauthor Simba Manyanya and I looked back a decade on Poortman's role, and argued that ESAP fatally weakened the state's developmental capacities. Social desperation worsened - Poortman's reign included the first of several major 'IMF Riots' in Harare - and ESAP was, in any case, unsuccessful in stimulating investment and capital accumulation.

All indicators of economic activity and social progress worsened during Poortman's stay. Zimbabwe's exemplary social policy during the 1980s - reducing infant mortality from 86 to 49 per 1,000 live births, raising the immunisation rate from 25% to 80% and life expectancy from 56 to 62 years, doubling primary school enrollment, etc - witnessed ominous reversals.

In turn, Poortman and his colleagues created the conditions under which an official opposition based on the urban poor and workers emerged finally in 1999, leading Mugabe to zig-zag into left-rhetorical authoritarianism in early 2000, as he desperately sought to retain power and patronage within a crumbling economy.

Simba was chief economist in Zimbabwe's finance ministry but by the end of the 1990s became so fed up with Mugabe's blunders and awful 'advice' imposed from Washington that he quit to work for Morgan Tsvangirai's Zimbabwe Congress of Trade Union Unions. (Framed by Mugabe allies in early 2002, Tsvangirai was acquitted on a trumped up treason charge last week. But his Movement for Democratic Change appears still intent on boycotting the March 2005 parliamentary vote due to Zimbabwe's Florida-style electoral conditions.)

What was the popular reaction to Poortman and ESAP? Sidney Malunga, a progressive ruling-party MP until his suspicious 1994 death in a car accident, was brutally honest: 'To the masses of Zimbabwe, the poor people of Zimbabwe, the sum total of ESAP can best be described as a loathsome economic monster which is ravaging and destroying decent lives by incapacitating the poor and further condemning them to abject poverty.'

According to a survey of 200 poor people by the Africa Community Publishing and Development Trust at the end of Poortman's Harare gig, 'ESAP was listed as a cause of poverty even more often than drought and the shortage of land. The combination of retrenchment on a large scale, with a sharp increase in the price of basic goods and having to pay for health and education, has driven many families into poverty.'

'Deep down,' Zimbabwe's great novelist Chengerai Hove divulged in 1994, 'I harbour fear, a persistent fear which, like an ominous shadow, refused to abandon me. There is the smell of the Structural Adjustment Programme in the wind, with its flags swamping those of political independence. "Sure Advice to Poverty" local pub humorists have nicknamed this World Bank-IMF economic beverage. It tastes sour from the beginning, a cartoonist once wrote as he watched friends and foes losing jobs in Harare's industries under the banner of die today so as to live tomorrow.'

It's a fear that the wretched people of Iraq can now add to so many others.

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