The Ugly American Bank

The New York Times
March 18, 2005

The Ugly American Bank
By PAUL KRUGMAN

You can say this about Paul Wolfowitz's qualifications to lead the World Bank: He has been closely associated with America's largest foreign aid and economic development project since the Marshall Plan.

I'm talking, of course, about reconstruction in Iraq. Unfortunately, what happened there is likely to make countries distrust any economic advice Mr. Wolfowitz might give.

Let's not focus on mismanagement. Instead, let's talk about ideology.

Before the Iraq war, Pentagon hawks shut the State Department out of planning. This excluded anyone with development experience. As a result, the administration went into Iraq determined to demonstrate the virtues of radical free-market economics, with nobody warning about the likely problems.

Journalists who spoke to Paul Bremer when he was running Iraq remarked on his passion when he spoke about privatizing state enterprises. They didn't note a comparable passion for a rapid democratization.

In fact, economic ideology may explain why U.S. officials didn't move quickly after the fall of Baghdad to hold elections - even though assuring Iraqis that we didn't intend to install a puppet regime might have headed off the insurgency. Jay Garner, the first Iraq administrator, wanted elections as quickly as possible, but the White House wanted to put a "template" in place by privatizing oil and other industries before handing over control.

The oil fields never did get privatized. Nonetheless, the attempt to turn Iraq into a laissez-faire showpiece was, in its own way, as much an in-your-face rejection of world opinion as the decision to go to war. Dogmatic views about the universal superiority of free markets have been losing ground around the world.

Latin Americans are the most disillusioned. Through much of the 1990's, they bought into the "Washington consensus" - which we should note came from Clinton administration officials as well as from Wall Street economists and conservative think tanks - which said that privatization, deregulation and free trade would lead to economic takeoff. Instead, growth remained sluggish, inequality increased, and the region was struck by a series of economic crises.

The result has been the rise of governments that, to varying degrees, reject policies they perceive as made in America. Venezuela's leader is the most obstreperous. But the most dramatic example of the backlash is Argentina, once the darling of Wall Street and the think tanks. Today, after a devastating recession, the country is run by a populist who often blames foreigners for the country's economic problems, and has forced Argentina's foreign creditors to accept a settlement that gives them only 32 cents on the dollar.

And the backlash has reached our closest neighbor. Mexico's current president, Vicente Fox, a former Coca-Cola executive, is a firm believer in free markets. But his administration is widely considered a failure. Meanwhile, Mexico City's leftist mayor, Manuel López Obrador, has become immensely popular. And his populist rhetoric has raised fears that if he becomes president he will roll back the free-market and free-trade policies of the past two decades.

Mr. Fox is trying to use a minor violation of the law to keep Mr. López off the presidential ballot. If he succeeds, many Mexicans will believe that democracy was sacrificed on the altar of foreign capital.

Not long ago, the growing alienation of Latin America from the United States would have been considered a major foreign policy setback. So much has gone wrong lately that we've defined disaster down, but it's still not a good thing.

Where does Mr. Wolfowitz fit into all this? The advice that the World Bank gives is as important as the money it lends - but only if governments take that advice. And given the ideological rigidity the Pentagon showed in Iraq, they probably won't. If Mr. Wolfowitz says that some free-market policy will help economic growth, he'll be greeted with as much skepticism as if he declared that some country has weapons of mass destruction.

Moisés Naím, editor of Foreign Policy, says that the Wolfowitz nomination turns the World Bank into the American Bank. Make that ugly American bank: rightly or not, developing countries will see Mr. Wolfowitz's selection as a sign that we're still trying to impose policies they believe have failed.

E-mail: krugman@nytimes.com