Wolfowitz resigns from World Bank

World Bank President Paul D. Wolfowitz announced Thursday that he would resign effective June 30, after weeks of controversy over accusations that he had arranged a job transfer and substantial salary increases for his companion, who was a bank official.

His decision to step down -- though he acknowledged no wrongdoing -- probably brings to an end the government career of the man considered by many to be the intellectual architect of President Bush’s foreign policy, especially the war in Iraq.

It also sets up a struggle over the future of the World Bank and other international financial institutions established at the end of World War II. Critics have said the bank is overdue for reform, particularly in the way its president is chosen.

“I regret that it’s come to this,” Bush said Thursday morning, signaling an end to his unqualified support for his former deputy Defense secretary. “I admire Paul Wolfowitz. I admire his heart. And I particularly admired his focus on helping the poor.”

Wolfowitz’s controversial two years as bank president and his ungainly departure are expected to intensify discussions over whether it is time to change the tradition by which the United States, as the bank’s largest shareholder, gets to choose its president. The White House moved quickly to quell such speculation, with spokesman Tony Fratto saying, “The president will have a candidate to announce soon.”

Bush is expected to pick someone with more experience as a manager and financier. Potential candidates include Robert B. Zoellick, who served the Bush administration as deputy secretary of State and U.S. trade representative; Robert M. Kimmitt, who is deputy Treasury secretary; Stanley Fischer, a former International Monetary Fund official who is a governor of the Bank of Israel; and Paul A. Volcker, who was chairman of the Federal Reserve from 1979 to 1987.

The Wolfowitz controversy involved allegations that he had improperly arranged a promotion and raises for Shaha Ali Riza, a bank employee with whom he had been involved for several years before Bush named him to the institution’s top job. As he was negotiating his contract, he notified officials about the relationship and sought advice from the bank’s ethics committee.

To avoid a conflict of interest, Riza had to leave the bank and take a temporary assignment at the State Department, although she remained on the bank’s payroll. As part of the deal, Wolfowitz arranged a series of promotions and raises that brought her annual salary to about $194,000 -- more than that of most senior administration officials, including the secretary of State.

A statement by the bank’s board of directors Thursday did not address the effect of Wolfowitz’s resignation on Riza’s job status.

Critics say that Wolfowitz, whose tenure as World Bank president was marked by a high-profile campaign against corruption, lost considerable credibility because of the appearance of favoritism.

Once the details became public, he refused to resign unless the bank’s board accepted his argument that he had acted in good faith based on unclear advice from the ethics committee.

In the end, the board’s carefully worded statement made only passing reference to the controversy. Instead it praised Wolfowitz’s tenure and added, “He assured us that he acted ethically and in good faith in what he believed were the best interests of the institution, and we accept that.”

In his statement, Wolfowitz said, “I have concluded that it is in the best interests of those whom this institution serves for that mission to be carried forward under new leadership.”

Sebastian Mallaby, a senior fellow at the Council on Foreign Relations and author of a 2004 book about the World Bank and its travails, described Wolfowitz’s resignation as “a good outcome.”

“I’m very pleased he left the bank, because his presence had become utterly toxic,” Mallaby said.

“But I’m also pleased that he doesn’t have to be labeled for the rest of his life as a bad guy.”

He said Wolfowitz’s actions in the Riza case appeared to result more from bureaucratic incompetence than corruption.

Bank staff members, who had pressed hard behind the scenes to oust the unpopular president, expressed dismay, especially with the length of time -- six weeks -- before Wolfowitz leaves.

“While Mr. Wolfowitz has finally done the necessary thing by resigning, he has damaged the institution and continues to damage it every day that he remains as its president,” the World Bank Group Staff Assn. said in a statement. “He has demeaned the bank, insulted the staff, diminished its clients and dragged this institution through the mud.”

Bea Edwards, international director of the Government Accountability Project, the whistle-blower protection group that released much of the early information about Wolfowitz’s relationship with Riza, said the bank’s staff was terrified by the retaliation they thought he might seek in his remaining weeks.

A spokesman for the staff association said members would use all of their connections with the bank’s 24-member board to get Wolfowitz out the door immediately.

The June 30 exit date was negotiated with the bank’s governing board.

Before he took the top job at the bank, Wolfowitz was the intellectual energy and chief architect of the war in Iraq, arguing within the Bush administration that it was in the long-term foreign policy interest of the United States to depose Saddam Hussein and work to democratize the Middle East.

As the war devolved into sectarian conflict, Wolfowitz left the Pentagon under a cloud, his grand vision of Middle East democracy obscured by the ongoing violence in Iraq.

Wolfowitz’s longtime interest in development and poverty issues led Bush to name him president of the World Bank in 2005.

By tradition, the United States picks the head of the World Bank, which focuses on lending to alleviate poverty and foster development, and European governments name the head of the International Monetary Fund, which works to stabilize international financial markets.

Although most bank officials say they generally supported Wolfowitz’s focus on corruption, many contend that he enforced it selectively, focusing on countries whose foreign policy was at odds with the Bush administration and giving a pass to administration allies.

Wolfowitz has been criticized for working to open World Bank offices in Baghdad, a move seen as an attempt to use what is supposed to be a nonpartisan institution to assist the administration’s foreign policy objectives.

I.M. Destler, a professor of international security and economic policy at the University of Maryland, said he did not think Wolfowitz’s departure would significantly affect the bank’s anti-corruption efforts.

“It’s easy to say we shouldn’t deal with corrupt leaders, but then the question becomes how you implement that,” Destler said.

“Wolfowitz’s own impact was mostly at the margins. His effort to make a difference was hindered by his having a horrific relationship with most, if not all, parts of the bank.”

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maura.reynolds@latimes.com

joel.havemann@latimes.com