Senior Fellow Kevin A. Hassett

Earlier this year, World Bank employees started a mutiny against then bank President Paul Wolfowitz. An independent panel of experts headed by Paul Volcker has just issued a report that suggests the revolt may well have been payback for Wolfowitz's anticorruption efforts.

Volcker and his team were investigating the actions of the World Bank's own Institutional Integrity Department, or INT as it's known. Last spring, amid the hubbub over the job that Wolfowitz's girlfriend held at the bank, his supporters argued that the staff was hyping the issue because their president was trying to root out widespread graft within the bank.

Bank apologists suggested that an out-of-control Wolfowitz, along with his INT shock troops, were politicizing a noble institution. (Full disclosure: Wolfowitz is now my colleague at the American Enterprise Institute, but I haven't discussed this issue with him.)

The Volcker report suggests that corruption is worse than even the most strident Wolfowitz supporter could have dreamed. New World Bank President Robert Zoellick issued a statement that was, for the diplomatically gifted Zoellick, unusually blunt: "The Volcker report makes clear the serious challenges ahead in overcoming the cancer of corruption in operations supported by the bank."

Cancer might not be the correct word. Cancers sometimes are localized and easy to treat. The problem looks more like sepsis, a whole-body inflammatory state caused by infection, and the 10th-leading cause of death among Americans.

Companies Sanctioned

The facts detailed boggle the imagination. The report says, "more than 2,000 external cases of alleged fraud, corruption or misconduct have been investigated by the bank since 1999, and more than 330 companies and individuals have been publicly sanctioned."

Of course, corruption is often a problem in developing countries, yet the crisis isn't just a matter of suspicious external contractors. Again from the report: "From fiscal 2003 to 2007, INT's internal team opened an average of 123 cases each year involving allegations of staff misconduct." The report adds that about half those cases involved accusations of some form of fraud or corruption.

Most troubling, while INT was attempting to clean up the bank, some on the staff did everything they could to interfere and obstruct. The Volcker team found "there was then, and remains now, resistance among important parts of the bank staff and some of its leadership to the work of INT." This suggests that the existing cases may well have been only the tip of the iceberg.

Obstacle to Growth

So while corruption was siphoning money away from the world's neediest people, bureaucrats in Washington worked to obstruct the efforts of those attempting to fix the problem.

One can't overstate the harm that corrupt World Bank practices have done to the world's poor. Dating back to a pioneering paper by Harvard economist Robert Barro, students of economic growth have known that corruption is a leading obstacle to economic growth. Advances in the rule of law, Barro found, have a powerful positive impact on the economic prospects of a country.

For some time, it has been a puzzle to economists that development efforts by agencies such as the World Bank have been so ineffective. Now we have a better idea why. As the bank was spreading billions of dollars around the developing world on economic-development projects, it was planting seeds of corruption as well. While the individual projects might have looked good on paper, the money from them likely advanced corruption, offsetting some of the possible positive economic effects of the projects themselves.

Unacceptable

This state of affairs is unacceptable to all fair-minded people, and there have already been calls for Congress to step in. On Sept. 6, the Senate approved an amendment introduced by Evan Bayh calling for the Government Accountability Office to oversee the effectiveness of the bank's development projects.

Bayh, an Indiana Democrat, explained, "There is a real question as to whether the bank, as currently constituted, is an effective instrument for alleviating poverty."

Those calls are premature. Zoellick is precisely the right man to leverage the report into real progress. The former deputy secretary of state is an artist at operating within a large organization. With his strong comments, he signaled he will use those skills to enact the Volcker commission's recommendations. Congress should give him a chance to do his job.

Easy First Step

Of course, visible progress is required if Congress is to stay out of this mess for long. For that, Zoellick has an easy first step.

The report indicates that bank employees, even senior management, have interfered with the work of the INT. The committee couldn't have written such a statement without ample specific evidence. To restore confidence in the bank and clear the way for his own actions, Zoellick needs to publicly identify the culprits, and fire them.

The World Bank could be one of the most powerful forces for good on the planet. The good news is that we now understand why it wasn't that in the past, and what needs to be done to fix it.

Kevin A. Hassett is a senior fellow at AEI.