The glistening bank

Diane Coyle on fat cats in lean times; Masters of Illusion: the World Bank and the poverty of nations by Catherine Caulfield, Macmillan, pounds

The cocktail party that marks the start of the annual meetings of the World Bank and International Monetary Fund is one of the most arresting spectacles I have ever seen. You walk from the nearest Metro station in filthy, sticky Washington DC, past a stretch limo jam to the Sheraton Hotel. A tide of dignitaries wafts you down long corridors and up an escalator that feeds on to a landing above the hotel's ballroom. The gilded aircraft hangar below is packed with the global representatives of money and power, drifting in a sort of jostling Brownian motion with glass in one hand and canape in the other. This opulent celebration has, apparently, been cut back in an austerity drive. The ice sculptures and champagne have been axed.

The contrast between the glossy wealth of the World Bank and the poverty of its clients in the world's poorest countries has become a cliche. The uproar among staff over the ban on flying first class and staying in five- star hotels is well known - so passe that the bank's newish president, James Wolfensohn, is seeking to increase spending on staff and administration again.

Its luxury is one of many things the World Bank can be criticised for, and this book by the campaigning journalist Catherine Caulfield lists pretty much every one in damning detail. Two, in particular, condemn the bank on its own terms. First, in the half-century since the Second World War, only one country - South Korea - has "graduated" from the World Bank. Every other one of its clients still borrows money, and has not yet grown rich enough to become a lender.

Secondly, at the end of the Eighties a study by Unicef found that in more than half the countries adjusting economic policies to qualify for World Bank loans, the amount of food per person had fallen. Patently, the bank has not vanquished poverty.

The strength of this book is that it puts this failure into historical context. The World Bank was the child of two economists, the American Harry Dexter White and the Briton John Maynard Keynes, and their fervent good intentions to construct a new post-war economic system. The institution has scarcely changed, making it a throwback to a discredited corporatism. At its best, it is paternalistic; at worst, bureaucratic and corrupt. The most telling sign of paternalism is the phrase bank staff have for visiting one of their client countries. They go "on mission". Like all missionaries, they have faith in their beliefs and in their superiority.

These beliefs changed dramatically with the Reagan era. President Reagan's budget director, David Stockman, described the Bank as "infested with socialist error" - a phrase that recalls White's destruction by the House Un-American Activities Committee in 1948. As payer of the piper, the Reagan administration converted the bank to an ardent version of free-market economics. This has created the paradox of a bureaucratic behemoth, funded by government, preaching private enterprise.

The ideology has made the bank more overtly political than ever. Its loans require borrowers to adopt Reaganomics or Thatcherism - deregulation, privatisation, abolition of social protections. As free marketry swept the Washington HQ, the vice-president, Shahid Husain, admitted: "These loans do go to the heart of the political management of an economy." An adviser to the Indian government described Bank staff as the "new maharajas."

Caulfield, like many progressive critics of the World Bank, objects to its insistence - as one of the world's most bloated bureaucracies - on converting other countries to an extreme market capitalism that its shareholders have failed to implement themselves. But she has no prescription for what the bank should do instead. Some critics, like the charities and lobby groups in the "50 Years is Enough" campaign, would like to shut it down. Others still want to see an institution which channels cheap loans from the rich to the poor.

As the critical debate rages, the bank has perhaps found the way forward at last. Without abandoning the free market, James Wolfensohn has begun to emphasise the importance of good government and sound legal systems, the need to stamp out corruption, the importance of educating women, and of small-scale local projects rather than new dams.

There are circumstances where large, cheap loans have worked, have lifted peoples out of poverty and set them on the path of development. Marshall Aid, after the war, succeeded in rebuilding western Europe. By contrast, European Union aid to Italy's southern Mezzogiorno has scarcely improved the region's standard of living or its economic viability. Financial capital does not work unless it builds on social capital - or "trust", as Francis Fukuyama would put it.

Wolfensohn is right to emphasise the social and political construction that must precede economic development. He has little choice. The World Bank has tried pretty much everything else.