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The World Bank in Crisis

Analysts say the institution has been "severely weakened" by the Wolfowitz controversy and the recent scrutiny of its unwieldy bureaucracy

The ugly showdown at the World Bank has all the signs of a no-win situation. And if the standoff between embattled bank President Paul Wolfowitz and its board of directors isn't resolved soon, analysts say that continuing American leadership of the 62-year-old institution could be in jeopardy. The bank itself could face lasting damage.

"This is the biggest crisis of leadership that the bank has ever had," says Sebastian Mallaby, a senior fellow at the Council on Foreign Relations and the author of an acclaimed history of the bank. "If this was a private company, its stock price would be down 25% and its board would say it needs a new and effective leader."

But the World Bank is not a private company, and the Byzantine political machinations of recent weeks have exposed a difficult-to-govern organization that's scarred by internal battles. Its staff has demanded Wolfowitz's departure. The European Union parliament has called on him to step down. An investigative committee of the bank declared that he was guilty of a conflict of interest in a pay-raise-and-promotion case involving his girlfriend. And on May 7, a top Wolfowitz aide, Kevin Kellums, abruptly resigned. Kellums had previously served as Vice-President Dick Cheney's communications director. "Given the current environment surrounding the leadership of the World Bank group, it is very difficult to be effective," he said in a written statement.

Steady Drip

The Wolfowitz situation has turned a harsh light on a little-understood organization governed by 24 international representatives. Never in its history has the politically-charged board fired a chief executive. And thus far, the board, which plans to meet on May 9, has been unwilling to sack the former U.S. deputy defense secretary.

Instead, internal critics have subjected Wolfowitz to a drip, drip, drip of anonymous news leaks, including assertions that the historical American leadership of the bank could come to an end if President George W. Bush doesn't ease Wolfowitz out of the job. "The votes are there" to oust Wolfowitz, says Colin Bradford, a senior fellow at the Brookings Institution. "But everybody [on the board] wants to settle out of court, so to speak," through a contrite resignation.

Two problems: Neither Wolfowitz nor Bush are prone to respond well to outside pressure, particularly from Europeans. The combative Wolfowitz continues to insist he won't resign. And Bush continues to stand behind his man, while international economic analysts are parsing every comment emanating from the White House to determine whether that commitment is weakening. "The President supports him," Bush spokesman Tony Snow repeated on May 8.

"Does the Administration still have the same confidence it had two weeks ago?" he was asked at his daily briefing.

"Yes," replied Snow, "it still has confidence."

Damaged Image

Wolfowitz's attorney, Robert Bennett, has ratcheted up the rhetoric by accusing the bank of being "terribly unfair" in its deliberations to date, adding that some people are "prejudging the outcome of the process." And the process, Bennett says in a direct attack on the governing board, "weakens bank governance."

Whatever the eventual outcome, it's becoming clear that all of the warring factions will end up losers. The U.S. could lose its continuous control of the presidency, first held by Washington Post publisher Eugene Meyer in 1946, if the piqued European representatives convince other board colleagues that Bush and Wolfowitz have damaged the institution.

The World Bank's reputation, nicked by Wolfowitz's yearlong effort to spotlight and reduce corruption, has been further harmed by the public attention paid to its unwieldy bureaucracy. If the European Union decides that the World Bank controversies are too much of a distraction, it could funnel more of its development loans through its own institutions, depriving the World Bank of capital to replenish its development fund.

Replacement Rumors

Already, China is preparing more multilateral development deals, and Venezuela's anti-American President, Hugo Chavez, is talking of expanding his oil-rich nation's aid programs in Latin America and the Caribbean. "The [World] Bank is being severely weakened by this [Wolfowitz controversy]," says Brookings' Bradford. "The longer this goes on, the worse it is for the bank."

Even though Wolfowitz is showing no signs of surrender, bank insiders are discussing names of possible replacements. The contenders include Robert Hormats, vice-chairman of Goldman Sachs (GS) and a former aide to ex-Secretary of State Henry Kissinger; Martin Feldstein, the Harvard economist and former chair of the White House Council of Economic Advisers; and Stanley Fischer, a Zambian-born economist, former International Monetary Fund official, Citigroup (C) vice-chair, and current governor of the Bank of Israel.

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