Senior Fellow Kevin A. Hassett

The struggle over World Bank President Paul Wolfowitz is the most important moment in the institution's history since its founding in 1944. The good news for developing nations is this: The status quo at the bank is going to lose, no matter what happens to Wolfowitz.

The background of the story is a bad dream. When Wolfowitz was negotiating his employment contract with the World Bank, he disclosed that he was in a relationship with Shaha Riza, an employee of the institution.

He offered to recuse himself from all decisions regarding her career, provided she be allowed to stay at the bank, but an ethics committee refused his proposal. The panel decided Riza couldn't remain employed at the bank.

This latter ruling was clearly a blow to Riza. She was in the middle of a successful career at the bank and was being told she would have to give it up. Under such circumstances, healthy compensation for the damaged party is par for the course. Because the ethics committee failed to provide clear guidelines on how Riza's compensation was to be determined, Wolfowitz crafted a generous pay package as she was transferred to the U.S. State Department.

That package was likely so generous because Wolfowitz said he feared that Riza may have litigated over her departure. Still, the appearances were quite bad, as Wolfowitz himself was involved in the negotiations.

Last week, public calls for Wolfowitz to resign resounded from the World Bank staff.

Catch-22

So, we have been treated to a spectacle wherein a man asks a bureaucracy what to do, follows its advice, and is subsequently pilloried by the same bureaucracy. Talk about a Catch-22. I wonder where he would be today if he had ignored their advice?

Which brings up the million-dollar question: Why is the staff so eager to get Wolfowitz fired?

This is where the story gets really interesting. Wolfowitz has made cleaning up corruption his primary objective at the bank, and in recent months, his efforts have made tremendous progress.

His trusted deputy, Suzanne Rich Folsom, took over the Department of Institutional Integrity, known as INT, and began the first serious crackdown on corruption in bank history.

Folsom remarked on the change in a recent Web chat: "There were rumors that in the past INT's reports weren't taken as seriously as they should have been. I can tell you that President Wolfowitz has made it a priority." The change has made a difference: in the past two years, 22 staff members have either been terminated or barred from being rehired and 11 others have been disciplined, she said.

Labor Trouble

While most of the World Bank staff are, of course, honorable professionals, these steps introduce a level of accountability that was previously unknown and created a serious labor-relations issue for those used to absolute job security. At the same time, Wolfowitz obstructed the flow of funds to countries that he viewed as corrupt, often disregarding staff judgments. This heightened the staff feeling of resentment.

In the same chat, Folsom said the fight isn't over: "It's still a struggle, though, to be honest. There are still a small number who don't value the work of this department."

Is it any wonder that delicious details about Wolfowitz and his girlfriend are being leaked to the press?

Yet the connection to a corruption investigation raises red flags. Why are the staff and the board so worried about Wolfowitz's anticorruption campaign? There are two main possibilities.

Tip of the Iceberg?

The first is that an unscrutinized bureaucracy in charge of billions of dollars has, for many years, been up to no good. In this scenario, the Folsom investigations have hit the tip of the iceberg, and something along the lines of the United Nations "Oil-for-Food" scandal will eventually emerge.

The second (and more likely) possibility is that the staff and the board simply want to avoid embarrassment over their unwillingness to deal effectively with corruption in the past.

Adam Lerrick, my colleague at the American Enterprise Institute who was senior adviser to the chairman of a commission that took a critical look at international financial institutions, put it this way to me: "The bank doesn't want to know the answers to these questions. They view a project as completed if the money is out the door. Their goal is to keep the money flowing, and the money flow to poor countries will slow to a trickle if they worry about corruption."

To be sure, Wolfowitz has made some missteps. But the coordinated effort to harm him has revealed to polite society in Washington that something at the World Bank is seriously wrong.

Polite society has both Democratic and Republican members. The bureaucrats at the bank might have their way and they might get Wolfowitz's head. But if they do, they can be assured that the U.S. is going to focus even more intently on corruption at the bank.

The effort to discredit Wolfowitz has raised the stakes immeasurably. It seems unlikely the World Bank will ever be the same.

Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI.