A proposed shift in the World Bank’s procurement policy is expected to have major ramifications in Asia and is causing concern in Washington. When incoming World Bank President Paul Wolfowitz reported for duty on June 1, waiting in his inbox was a strong letter from Richard Lugar, the Indiana Republican who chairs the powerful Foreign Relations Committee of the U.S. Senate. In his letter, the senator asked Mr. Wolfowitz to investigate — and report back — concerns that the bank’s staff is considering a major change to its currently stringent procurement policies that, critics assert, could open its contract awards to corruption. “My sincere hope is that any future World Bank policies strengthen, not undermine, the World Bank’s effort to thwart corruption related to its funding,” Mr. Lugar declared.

The bank is considering financing 10 pilot projects without insisting on the usual strict audit and management-supervision requirements being enforced by its in-house procurement officials. Instead, the idea is that local officials would be trusted to award these contracts in an effort to push recipient countries into bringing their own procurement systems in line with the bank’s rigorous standards of transparency.

While officials say they haven’t yet identified which countries’ procurement regimes might be clean enough to qualify, names that are being bandied about within the bank include Poland, Turkey, Brazil, Chile and China. In Asia, India and China — or at least selected “world class” Indian and Chinese procurement agencies — are likely to come under serious initial consideration. Even selected procurement agencies in Asian countries like the Philippines that are hardly paragons of good governance would be considered, if they can convince bank officials that they can be trusted not to take the money and run.

This proposed shift in procurement policy at the World Bank is a big deal. Each year, the bank finances some $6-7 billion worth of investment projects world-wide that are open to international bidding. In Asia, it has particularly wide ramifications since the Manila-based Asian Development Bank last month announced that it would follow the World Bank’s lead and consider a similar change in its procurement policy. The ADB puts out an estimated $1.25 billion in annual contracts for international bidding.

“Our policy is that if a country’s policies are equal to ours, okay; otherwise, we won’t do it,” says Armando Araujo, the World Bank’s director of procurement policy, explaining the new approach. “If a country does not carry out its promises, it will be caught in the audit to follow.” Such audits would be expected to be conducted within two or three years of the initial contract awards.

That’s too little, too late, complain critics who range from anti-corruption watchdogs at Transparency International to influential U.S. business organizations like the National Foreign Trade Council, which has also written a strong letter to Mr. Wolfowitz. The NFTC’s members include major exporters like General Electric and Oracle, as well as many smaller enterprises. The corporate types worry that they would be cut out of lucrative contracts by local officials who would not have to worry about the advance close scrutiny by World Bank procurement officials, who currently hover over recipient countries (who in turn chafe at the conditions imposed by the “Nanny Bank”). “We believe the proposal is counter to current anti-corruption efforts, and will open the door to less transparency, less competition, and increasing costs of bidding for contracts,” explains Mary Irace, the NFTC’s vice president for trade and export finance.

American corporate consultant Diane Willkens represents clients world-wide who bid on projects that are funded by the World Bank and its sister lending institutions. An important part of Ms. Willkens’ job description is to work with the international civil servants to scrutinize the often-devilish details buried deep in local contracts — looking for evidence of bid-rigging, bribery, and so-called “lock-out” specifications that are written to benefit only one company in the world. “Currently, if a bidder sees that another bidder doesn’t have the equipment, it can go to World Bank or ADB officials and get the offender disqualified,” Ms. Willkens explains. “But if local country procurement systems are used, the banks will only come in later and evaluate what happened.”

In Manila, ADB officials decline to be drawn into a discussion of which Asian countries they consider clean enough to qualify. No wonder. A cursory review of Transparency International’s rankings of the most corrupt countries in the world — China, India, Thailand, Vietnam, Bangladesh, the Philippines — suggests ample reasons for apprehension. Even the relatively clean Malaysia (by regional standards, at least) has refused to sign onto the World Trade Organization’s Government Procurement Agreement, whereby signatories pledge to increase transparency in contract awards.

Mr. Araujo says that he understands the concerns, but insists that the proposal is misunderstood. Responding to my hypothetical about the worries of turning over control of multi-million dollar contracts to officials in such notoriously corruption-ridden countries like the Philippines, he said that the World Bank is ready to help if officials in such countries can show they have really cleaned up their act. Mr. Araujo praised the Philippines for “accepting our criticisms” and recently enacting anti-corruption legislation. “If we can provide incentives this may be one way, with caution, with a restrictive framework, to encourage moves in the right direction.” Mr. Araujo stated.

So how should Mr. Wolfowitz respond to Sen. Lugar and the critics? One idea comes from business consultant Diane Willkens. If the World Bank wants to provide incentives to Third World countries that want to showcase their world-class procurement agencies, why not first publicize any demonstrable examples of procurement successes? She asks. “Find any place where it has gone well, and give out a gold star, perhaps a President of the World Bank award.” Until the World Bank and its sister development institutions can identify in public the specific countries that have contracting agencies that can pass the good governance test, why take the risks of loosening the present stringent procurement controls?

Clinton’s Trade Choice

posted by
on February 7, 2005

Those with some interest in where the U.S. Democratic Party stands today on free trade should try to follow a two-day conference this week in Phnom Penh. Bill Clinton will address the meeting by videoconference on Thursday and should give some indication of where the fault line lies in his party regarding this matter. Not for the first time, the former president straddles both wings of the U.S. Democrats.

The little-known conference has a ho-hum name — Seizing the Global Opportunity: A Growth Strategy for Cambodia in an Era of Free Trade — but will also attract other big names, including President James Wolfensohn of the World Bank, one of its sponsors. It will look at Cambodia’s uncertain future as an exporter of garments. But what it says about the future direction of America’s trade debate may be more interesting.

Will Mr. Clinton side with pro-trade New Democrats who make the moral and economic case that rich countries like the United States should dismantle their remaining barriers to imports of clothing from the Third World? Or will he side with Old Democrats like John Sweeney, leader of the AFL-CIO union federation and a die-hard protectionist who has never seen a tariff that he dislikes? Stay tuned, as the former president declined to respond to an invitation to reveal in advance what he will tell the folks who will convene in Phnom Penh.

Whatever political signals Mr. Clinton sends will be watched closely far beyond Cambodia. In Washington, D.C., trade aficionados will be looking for insights into where the Democrats — still licking their wounds from their electoral failures last year — are headed on trade policy. In 2004 they went down with John Kerry, who stuck to the unimaginative Old Democrat protectionist line. But Democrats are trying to reinvent themselves this year. Government officials and clothing exporters in such impoverished countries as Bangladesh, Sri Lanka, and Indonesia will be looking for indications as to whether they might be affected by Cambodia’s willingness to serve as a showcase for the “workers rights” agenda of the U.S. labor movement and its Democratic allies in Washington, D.C.

During his presidency, Mr. Clinton cut a deal on behalf of the unions, in which Cambodia agreed to open its clothing factories to international labor inspectors, in return for generous quotas that guaranteed access to U.S. markets. The experiment worked, at least up to a point. Brand name investors like Nike and the Gap came in, eager to buy “social responsibility” brownie buttons to fend off their vociferous anti-globalist critics. Cambodia’s exports of clothing expanded from the negligible in the late 1990s to the impressive. In 2003 (the last year for which reliable numbers are available), 200-plus Cambodian garment factories employing more than 200,000 workers exported $1.2 billion worth of clothing to the United States.

But now that those quotas have expired for all members of the World Trade Organization as of Jan. 1, the otherwise competitively challenged Cambodia is hoping it can hold on to its niche market by selling “politically correct” clothes that will pass the anti-sweatshop test and keep its big-name foreign investors interested. Both Nike and the Gap plan to send executives to Phnom Penh this week.

Much of the credit for the conference in Phnom Penh would go to a Washington lobbyist named Karen Tramontano, who also heads a D.C.-based non-profit called the Global Fairness Initiative. Ms. Tramontano, who draws no salary from the organization she launched two years ago, is a former chief of staff to the AFL-CIO’s John Sweeney, and from 1997-2000 was a senior presidential adviser for labor issues in the Clinton White House. Mr. Clinton chairs the Global Fairness Initiative, and Mr. Sweeney sits on the board and is listed as treasurer. The outfit has put out the word that it is looking for “fresh ideas” to promote “free trade” with “ethical standards.”

“The Global Fairness Initiative does not shrink from difficult challenges,” the organization’s fund-raising appeal declares. “Our very purpose is to take on the toughest issues in globalization.” Ms. Tramontano, who also advises the International Labor Organization, sung the praises of Mr. Clinton’s Cambodia experiment in a recent op-ed column for the Washington Post. “Because of the anti-sweatshop movement and the campaign against child labor, many retailers are looking to buy goods in countries that can provide `brand security,’ affording protection against charges of social irresponsibility,” the Democratic operative wrote.

But when I asked her about the Global Fairness Initiative’s views on the impact of high U.S. tariffs on clothing and shoes upon poor countries like Cambodia, Ms. Tremonton declined to take the bait. “GFI is not in the business of taking positions,” she explained. “We try to approach situations and issues as an honest broker, bringing all the stakeholders to the issue.”

Within the Democratic Party, the other major “stakeholders” are found at the Progressive Policy Institute, the think tank for the party’s pro-trade New Democrat wing. (“Call them the pro-corporate wing,” quips dryly Thea Lea, the AFL-CIO’s top international trade economist.) By whatever label, the PPI has long been regarded as a major ideas factory for Mr. Clinton. And when those ideas turn to clothing tariffs, the New Democrats make a compelling moral and economic case that they should be eliminated. No wonder.

U.S. tariffs on various items of clothing that poor countries like Bangladesh and Cambodia sell to rich countries like America hover in the 15% range, to more than twice that. By contrast, the U.S. hardly taxes higher-end imports from rich countries like Singapore and France — everything from airplanes and computers to surgical equipment. Singapore’s exports are taxed at 0.6%, France pays 1.1%, while Bangladesh and Cambodia respectively pay 14.1% and 15.8%, on average. All together, struggling Asian countries are hit with U.S. tariff rates as much as 30 times higher than those for the likes of Singapore, Japan, and the Europeans.

Translated into human terms, the statistics are burdensome on Third World working women who are trying to sew their way out of poverty. They also hit lower-end American consumers in the form of higher prices for the clothes on their backs: single mothers spend a larger proportion of their income on clothes than executives. “In short, the facts are rather devastating,” observes Edward Gresser, the director of PPI’s project on trade who has authored a series of rather devastating analyses on the topic in the last three years.

“These inequitable tariffs should be eliminated,” asserts Mr. Gresser. Who could disagree?

Well, for openers, too many ostensibly pro-free trade Republicans on Capitol Hill to name in one line. Appeasing the politically powerful U.S. textile lobby — which vehemently plans to hide behind protectionist tariff walls in perpetuity — is a bipartisan sport in Washington.

U.S. President George W. Bush has an equally Clintonesque position. On one hand, the president has a record of pandering to domestic textile interests; on the other, his outgoing U.S. trade negotiator, Robert Zoellick, has called for the elimination of all industrial tariffs. While that would include clothing tariffs, Mr. Bush hasn’t exactly been sounding this particular free-trade trumpet.

Mr. Clinton might consider challenging his successor with a variation of the line that Ronald Reagan once hurled at the Soviet Union’s Mikhail Gorbachev on the Berlin Wall. “Tear down those tariff walls,” Mr. Clinton could declare.