Speaker: Sebastian Mallaby, author, "The World's Banker"; editorial writer, The Washington Post
Moderator: Marcus Brauchli, global news editor, The Wall Street Journal
Council on Foreign Relations
New York, N.Y.
October 13, 2004
MARCUS BRAUCHLI: Good morning. Thank you for coming. I'm Marcus Brauchli. I've been asked to preside this morning. I've also been asked to ask you to please turn off your cell phones, beepers, and any other electronic attachments that you don't depend on for survival.
I'm pleased to be here this morning with Sebastian Mallaby, who works for The Washington Post and has written— I think you've seen his biography. He's also written a book, which I suspect most of you haven't seen. It's only been out a couple of weeks, but I gather even in that time it's already become a bestseller in Washington, everywhere except for the World Bank bookstore— [laughter]--where I'm told it is available, if you ask, behind the shelf; that they, out of deference to the boss, don't display it. I read almost the entire book and was interrupted last night by my daughter, so I don't know what happens at the end. [Laughter.]
The book is called "The World's Banker," and it's a fascinating account of how one of the great institutions of the postwar era has morphed in the face of myriad challenges. And it weaves in a wonderful and inevitably colorful profile of Jim Wolfensohn, who is, as many of you must know, the Bank's inevitable and colorful president for much of the last decade. And Wolfensohn is really the vehicle— a key vehicle that Sebastian uses in describing the Bank.
But I thought it would be useful, perhaps, since most of you presumably have not read the book, to begin by asking how it was that you came to do this book, what the genesis of it was and what your thinking behind the structure of the book is.
SEBASTIAN MALLABY: OK. Well, thank you coming to this— the third round in the presidential debates. [Laughter.]
The genesis of the book is basically that I've been interested for a long time in development, going back to sort of traveling around Latin America and South Asia 20 years ago; being The Economist magazine's Africa correspondent in the late '80s based in Zimbabwe; being outside [anti-apartheid advocate] Nelson Mandela's jail as he walked free. My career has been downhill ever since. There's nothing as exciting since then as that moment. And even going to Japan for a while, I was sort of inspired by the fact that in that post-apartheid period, which I was covering, you had the gatherings in Johannesburg conference centers collecting everybody from township activists, to big business leaders, to visiting academics, discussing kind of tabula rasa, now that Mandela has come out jail and everything is on the table and we can do anything we want, what development model shall we embrace? And it was evident that those who were not advocating a kind of Anglo-American type of model were talking about East Asia. And so in going to Japan and studying that model, covering South Korea for The Economist, I was partly fueling that interest in development models, sort of how you turn a tiny fraction of the rich world's wealth into progress against global poverty. So that's been an interest of mine for a long time.
And after 9/11 it felt to me as though we were going through one of these cycles, which happens, I guess, you know, every 25 or so years, or something like that, where the geopolitical kaleidoscope shifts a little bit and suddenly development becomes the interest not merely of sort of a committed minority, but of the broader foreign-policy community.
And so I'm thinking now in 1944, at the Bretton Woods Conference [meeting to set new rules for the international monetary system], when the World Bank was founded, along with the International Monetary Fund— clearly the genesis was that in the 1930s you'd seen economic breakdown, high unemployment and hyper-inflation in Europe leading to fascism and war. So desperation had led to desperate-isms, and the World Bank's creation was an attempt to fight that. So, very much, strategic interests were at the core.
Again, in 1960, when the World Bank was expanded with the tacking on of the soft-loan window, IDA [International Development Association]--the genesis was 1959, Cuban revolution, and the sense that, you know, if you didn't do more to help poor countries, they would fall into the Communist column. [Economic historian] Walt Rostow's famous book at the time, which was kind of the classic development text book, was called "Stages of Economic Growth," and the subtitle was "A Non-Communist Manifesto." So again, sort of strategic interest drove the concern in development.
And after 9/11 it seemed to me that, again, you know, suddenly we understood that failed states, whether it was Sudan harboring al Qaeda or then Afghanistan harboring al Qaeda, or just the fact that in West Africa you can move conflict diamonds across borders— that this interest in failed states was going to lead to a broader interest in development. And so this would be a good time for a book that explored an interest which has been, you know, in my head for a long time, and maybe in the general public's head less commonly— perhaps now is the kind of breakthrough moment.
And then I came across— I understood that Jim Wolfensohn's style and personality and record at the Bank was the perfect kind of literary vehicle to get this story across, because this is a guy who is, you know, by any definition, whether you like him or you don't like him, he isn't boring. I mean, he is a guy who not only made north of a 100 million [dollars] in finance, but he represented his country in the Olympics, he plays on the stage of Carnegie Hall on his birthday every 10 years with the likes of [cellist] Yo-Yo Ma. He has a rolodex which goes from Harrison Ford to the Dalai Lama.You know, he's not a boring guy.
And when I was considering this project and I said I wanted to get some access to him and spend some time with him, I was told absolutely, "You know, you should go to Canterbury [England] next Thursday." And I thought it was a bit odd: I'm in The Washington Post; he's in Washington at the Bank. Why don't we meet in Washington? But I was told, "No, no, go to Canterbury." So I flew to London and went to Canterbury, and there, sort of in the shadow of the cathedral courtyard, [was] a little seminar room. So I walked in, and there's Jim Wolfensohn up at the table next to the archbishop of Canterbury in his purple shirt, and next to the archbishop there is Shree Swami Agnivesh, a Hindu mystic, in an orange turban, and then next to the orange turban there is, of course, [lead singer for the pop group U2] Bono in his black shades. And I think that anybody who can put a coalition like this together is worth writing a book about. [Laughter.] So those are sort of some of the elements that, when I mixed them all together, I felt like I had a book inside me.
BRAUCHLI: Can you talk a bit about what it was like at the Bank when you bring in this larger-than-life, private-sector guy to this public-sector institution, which has some larger-than-life problems and challenges, and what his mission was and how it collided with, in some ways, the World Bank's sense of itself?
MALLABY: Sure. I mean, the World Bank is a proud institution, and with some reason. I mean, it is, I think, the premier sort of center of thinking and practice on development. That doesn't mean it succeeds all the time, because development is notoriously difficult, and so it has lots and lots of failures; but it's still better than the rivals, both in terms of its sophistication of its intellectual output and in— I think in also probably the quality of its projects.
And so it's a proud institution: 10,000 people, maybe 2,000 have economics Ph.D.s from the top campuses around the world. And when an outsider who has done some development charity work in his past but is basically, you know, a kind of Renaissance man, sort of, you know, [a] financier arrives and says, "You guys are doing it all wrong," as Jim Wolfensohn said when he arrived in 1995, you do have kind of unstoppable force meeting an immovable object. You have this collision, and it was not always pretty to behold. I mean, Wolfensohn would walk down the corridor in his early days and sort of pick some random guy and say, "I'm surprised you're still here." And then he couldn't go figure out if he'd been fired or what, and this is not what you're used to in a public-sector institution. I mean, it was one thing.
And Wolfensohn, I spoke to him for hours and hours and hours as I was doing this book, for which I am very grateful, and 20 hours of that was on the record. And one of his stories was, you know, how he'd been in the Salomon Brothers— you know, partners meeting every morning— in the late '70s and early '80s, when he did— he led the Chrysler bailout in that period, which is how he really, I think, broke through as a banker. And he— you know, he was used to an environment where, you know, you spill your coffee all over the place, the cigar smoke is flying, you know, you're so insane and you call each other total, you know, unprintable names which I won't repeat here, and this is sort of fine. And you could do that to everybody because ultimately, when you came to bonus time, the bonus was in, you know, large numbers of figures. But when you arrive at the World Bank and you're dealing with people who don't get a bonus but do have quite a lot of self-esteem, you can't treat them like that. And so there was a bit of an explosion.
BRAUCHLI: Specifically, what were— what were the issues that Jim Wolfensohn brought to the Bank that he wanted to tackle that caused the greatest amount of friction within the Bank?
MALLABY: Yeah, well, I mean, he came in 1995, and the kind of framing episode at the World Bank just before his arrival was the Madrid annual meeting of the World Bank in 1994, which was the 50th anniversary meeting. And although we didn't have the term, then, of anti-globalization protest, that's pretty much what there was. I mean, there was this massive, you know, set of demonstrations outside the building. You couldn't get into the conference center. When Lew Preston, the previous head of the World Bank, got up to make his keynote speech, you know, dollar bills were fluttering on the audience, dropped by protesters in the ceiling, saying "World Bankenstein" and all this stuff.
And so Jim Wolfensohn's No. 1 priority when he arrived at the World Bank was to break out of this encirclement by civil society critics and to kind of build bridges. And this is a guy, you know, he's a relationship banker, he's good at relationships, and so he spent a long time forcing a rather sort of inward-looking institution to look outside the door, to build relationships with critics.
So that people like Bruce Rich, an environmentalist with the Environmental Defense Fund, who had been the subject of, you know, vilification by World Bank spokesmen before Wolfensohn arrived, was suddenly invited to Wolfensohn's home for dinner, you know, made to sit next to him; there would be three vice presidents, quietly listening— World Bank vice presidents— quietly listening to everything that Bruce Rich had to say, so that when he walked out at the end, you felt, well, after this dinner we can't be enemies anymore, we have to be frienemies— friendly enemies. [Laughter.]
And so Wolfensohn made a big effort with the charm offensive side, but there was a substantive side, too, of changing the World Bank's agenda, embracing stuff like debt relief, which had been a taboo at the Bank. And he came in and said, you know, "What do you mean? These debts are not being repaid. Well, obviously we should recognize that. That's good banking practice. We should write them down." And, you know, this overturned an absolute taboo in the Bank. So that was another change he made.
He put corruption on the agenda, which NGOs [nongovernmental organizations] and critics of the Bank had been rightly attacking it for not talking about corruption. And the line at the World Bank had been, "Well, we're an economic institution, and corruption is politics; we can't address corruption." And Wolfensohn said, "Well, I'm going to talk about corruption." And he was told by his staff, "You can't do that, that's against the Articles of Agreement." And he said, "Well, I'm the president of the World Bank; I'll do it."
And so he pushed the Bank both to reach out to its critics, to change substantively the policy to give NGOs more input into Bank thinking and into development strategies, and he broke some of the sort of taboos which had kind of backed the Bank into a corner, on stuff like debt relief, corruption, but also the wider development agenda, which had been, you know, the Washington consensus, macroeconomic focus of, you know, get your price signals right, control your budget deficit, fix hyperinflation. That sort of economic prescription which had dominated Bank advice to poor countries through the '80s and early '90s, he redefined that or at least presided over a redefinition which was broader, included the quality of institutions and more political understanding of what it takes to get development to work.
BRAUCHLI: Some critics say that in fact the World Bank has— there's been mission creep, that the World Bank has gone beyond its original mission and maybe beyond its capabilities. Is that a fair criticism?
MALLABY: Yeah. I mean, one of the sort of most noted pieces of writing about the World Bank in the last few years was a piece in Foreign Affairs by Jessica Einhorn, the dean of SAIS [the School for Advanced International Studies at Johns Hopkins University] in Washington, who spent a large part of her career at the Bank and was the managing director and was in the No. 2 position. And she came out of the Bank and wrote this piece about mission creep, basically saying that, you know, the World Bank, in its 60 year history, has accumulated all these different approaches to the problem of development.
So it began by doing infrastructure. So that was physical capital. Then it moved into sort of health and education, and that was human capital. And now it's doing institutions, corruption, you know, the quality— whether you're transparent or not— this is kind of social capital. And it accumulates all these different approaches without throwing any of the other ones away. And at the end of the day, you've got an institution who's trying to do everything, and you can't do that. And you can't be a focused and effective organization if you're that broad. So there's some truth in this. There is an organizational cost to this diversity.
But at the same time, the fact is that development is a complex, interlocking challenge. You can't progress, really, if you've got a bottleneck. And the bottleneck could be anything from, you know, you've got no electricity in your economy, so you can't make a factory work. Or the bottleneck could be nobody can read, and so you also can't make the factory work. Or it could be that there are no roads, and so you can't export the factory's produce to the local— I mean, you know, there's anything, [any] number of things. Or it could be that you have corruption, so the factory works fine, but then it gets expropriated, and nobody, you know, well, what, so you can't ignore any of these challenges.
And so when the World Bank says, "Well, we're doing this other thing because it's important," it's— they're right, it is important. And furthermore, there isn't normally another organization out there that's better than the World Bank at tackling this new challenge it's taking on.
So you know, a classic example is primary education. When the leaders of the world met in 2000 and said, "We want all kids to go to school, to primary school; we want to aim for a hundred percent enrollment," and then they looked around and said, "Well, who should be the kind of executive secretariat of this ambition? Who should implement this thing?" You know, it could have picked UNESCO [United Nations Educational, Social, and Cultural Organization]. But if you did UNESCO, you know, no government would give a billion dollars to this undertaking, because UNESCO would not be trusted to manage the money correctly. So it wound up picking the World Bank.
So this is mission creep, driven by popular demand, because there is no better organization. And that's my concern with— and that's another reason for writing this book. I think the World Bank, you know, does often wind up being the best organization we have to try to make a start, at least, at tackling the toughest problems in the world. And if we don't understand that, you know, we'll do things which erode its ability to take on those challenges.
BRAUCHLI: As it's taken on new challenges and as Jim Wolfensohn has pushed things like corruption to the forefront, how has the relationship between the World Bank and client countries changed, from the perspective perhaps of the client countries?
MALLABY: Well, one of the big themes of this period has been that the client countries should be, quote, unquote, in the driving seat; that you shouldn't have prescriptions— economic prescriptions or other prescriptions— you know, imposed from Washington, on developing countries. And the reason is that if you do that, they won't be implemented.
I mean, you have to have— development is really driven by the developing country's government. If they don't believe in what they're trying to do, you know, it won't work. You won't implement it. So you may kid yourself that you will say, you know, "Here's a very large loan of 100 million [dollars],Uganda, but you only get it if you follow— if you sign on to the following 72 promises about how you're going to use this money." They just sign it and then they don't do it because domestic political pressures to do whatever it is they were doing before are way more insistent and powerful than the external pressures created by the World Bank in Washington, and after you've signed the loan, you've promised to give the money.
So this conditionality was a vastly overused tool in the '80s and early '90s. And what the Bank figured out in Wolfensohn's period— and I think Wolfensohn kind of instinctively got it early on because he is a relationship banker by background, he believed in doing what the client wanted— is to ask the client, "What do you want to do?" And then, provided they make sense to you, you'd give them the money and you kind of support them. But you don't— you're not the sort of scolding teacher saying, "Now do this, do this, do this." You're more the supportive partner.
BRAUCHLI: How are NGOs changing that, though? While I agree with what you say, I can think of this example in Qinghai in China, where the World Bank wanted to do a relocation project, move a bunch of people from one part of Qinghai to another part of Qinghai, and it became caught up in all kinds of NGO politics. The NGOs basically put pressure— they can apply political pressure on the World Bank in this country, but they can also— there are domestic or other NGOs, say in China, they can apply a different kind of pressure on China to do something. And I wonder how the NGOs play into this game now in a way that they didn't before, and whether the political pressures that the domestic— the country may feel domestically might not be in conflict with the political pressures that the World Bank finds, and if that isn't going to create more difficulties in getting certain kinds of projects done in certain countries in particular?
MALLABY: Right, right. I think that you touch on a theme. One of the things in my book, which is making me rather unpopular, is that I do go after the NGOs, the northern NGOs, in some specific examples for creating pressures on the World Bank to do things or more often not to do things which I think, you know, the NGO is simply wrong about.
And I mean, one example I give in the— right at the front of the book is a dam project in Uganda which— Uganda has a terrific electricity shortage that is a bottleneck to creating more growth, more jobs, and so there was a plan to do a hydroelectric project. And if you were a journalist in the United States, you would be contacted by the International Rivers Network in California, whose— where the idea of an electricity crisis is a few summer blackouts, and you'd be told, look, this is terrible because there's going to be this big dam and, you know, the Ugandan environmental movement hates it because it's going to be terrible. And furthermore, there's all these people around the dam who are going to be relocated and they're not going to be compensated. It's going to be awful for them, too.
So I was in Uganda. I went to see the Ugandan environmental movement, which is a partner organization for the International Rivers Network. And after chatting politely with this very nice character, I said, "Well, you know, how many— what kind of organization is this?" [And he said it was a] membership organization. "How many members?" So the man goes to his desk, gets out his book. You know, he's got all the members written out in handwriting, and he counts it. Twenty-five. So 25 members is the basis for opposing electricity for millions of people. I mean, it's insane. And so the sort of— the claim that you got if you were a journalist operating in the United States, without the ability to check the claims of the NGO, was simply totally misleading.
And then I went to the dam area with a sociologist, a Ugandan sociologist, who translated for me. We interviewed people all around the dam site, and said, "Sir, are you upset about this project?" And they said, "No, it's fine, and you know, we've been offered all this money to relocate; we'll be able to buy better land if we move over there."
And the only people we could find who really hated this project were living outside the perimeter of the project, because they hadn't been offered the chance to move in exchange for compensation. So it's just— I mean, the facts were wrong [inaudible]. And yet the opposition from the NGOs was part of the reason why— not the only reason— part of the reason why this project had been delayed for a long time.
And equally, you bring up Qinghai. I mean, Qinghai— this was a project where you're going to take 58,000 very, very poor farmers who were literally— I mean, they couldn't grow enough food to support their families. And they were going to be moved to an area where the soil was less degraded, and you could actually plant some food, and it would grow. And you'd go from— you know, these people are living on 50 cents a day or something. I mean, dirt, dirt poor. And the Chinese have done project after project of relocating people from degraded land. It had always worked. It would reduce poverty. And the Bank was going to do the 32 one or the 33 one or something.
And then suddenly, this great storm of protest arises in America because the project is going to hurt Tibetans. And important Tibetans like [American actor] Richard Gere get very upset and lobby Congress. And [U.S. Representative and House Democratic leader] Nancy Pelosi is absolutely on the side, and just to be bipartisan about this, [representative] Chris Cox, Republican of California, is absolutely on the side of the Tibetan people, and they lobby. And the Clinton Treasury [Department] initially doesn't want to listen to this, but then finally reckons that it can't fight this, the Tibetan lobby is just too strong. And the U.S. says it can't support the project. And so the project never happened, with the Bank's help anyway. And the twist is that it wasn't in Tibet. I mean, it was Qinghai, not in Tibet. It wasn't going to hurt Tibetans. There are about one in five people living in Shanghai [that] are Tibetan ethnically. But it wasn't— you know, the whole premise was wrong. And what happened was that the Bank, because of this NGO firestorm, was forced out of the project. And then the Chinese turned around and said "Well, we'll do it ourselves without the stupid World Bank." And they relocated twice as many people, which made this thing environmentally unsustainable in the move-in area, because if you move in 120,000 rather than 58,000, you're going to have new soil erosion in the new site.
So it was bad for the environment and bad for human— I mean, you know, just all around ridiculous. And that's because we as consumers of NGO campaigns don't always pause to check whether the allegations are true or false. It's like, you know, any, I mean, there are some great NGOs, but some of them just are wrong on the facts. And if we just assume that they're small groups, good-guy groups, feisty, committed, idealistic, and we kind of, you know, whether we're staff members in Congress or journalists or anybody else, we just need to exercise due skepticism.
BRAUCHLI: But, I mean, it's ironic that an institution as powerful and large as the World Bank should be defeated by an organization of— if they were defeated— of 25 people in Uganda, for example, or that, you know, the NGOs in the Tibet movement should block a project that clearly had economic benefit and didn't have, I think, probably much cultural impact, wouldn't have had much cultural impact. Are there third-rail projects, are there third-rail issues that the World Bank now simply can't touch—
BRAUCHLI: --because the politics in the U.S., in particular, or maybe in Western Europe, is too strong?
MALLABY: I mean, yes. The answer is that the effects of this kind of NGO pressure is to push the World Bank out of doing infrastructure, because infrastructure is where you have environmental questions, it's where you're going to relocate people because you're building some enormous sort of road or whatever it is, and those relocated people will become the objects of sort of indigenous people lobby sympathy. And so it's much easier to go and do, you know, create social development where you're running gender-awareness clinics, or something, which is fine, but it's— that's the result, I mean that's— the consequences of pressure is that, you know, stuff involving concrete is less likely to get done.
Now, I think that's a problem because, as I said earlier, I think that all these aspects of development matter. And the fact that, you know, girls don't get to go to school is a huge issue. But if you think about, well, what kind of small aid organizations do fairly easily, what's not difficult to do technically, the answer is, you know, building a school room is pretty easy. You know, teach people to know about AIDS; that's pretty easy.
But doing a big dam where you need to do an engineering assessment, you know, the environmental assessment, social impact assessment, the long-term financial figuring about whether the net present value of the expected electricity is worth this or that— I mean, that's exactly what you need the World Bank for. It's a technically difficult thing, multi-sectoral challenge, often multinational because the electricity will be for a region, and so a multinational organization is well placed to manage that.
But I think the niche of the World Bank, if there is a niche, is in fact precisely in the concrete, away from which it is being pushed by the NGOs.
I mean— but just one other thing about that is that, you know, your question raised the point about how come a 25-person organization beats a 10,000-person World Bank. Well, it's kind of like how does a 527 [tax-exempt group organized to raise money for political activities] in this election campaign, which may have four people and a bunch of money, defeat a large, organized party, or at least sort of? And it's kind of the prisoner-of-Lilliput phenomenon. I mean, the big, lumbering giant can be tied down by lots of little guys with bows and arrows. And especially in the Internet era. I mean, in the mid-'90s, we were told that these nimble, entrepreneurial dot-coms were going to run rings around the big, established, bricks-and-mortar companies, and that turned out to be a bit exaggerated. But I think in the public sector, ironically, it may be more true. Maybe the private sector story was exaggerated, but in the public sector, if you've got three people and a strong computer, you can generate the appearance of a mass campaign. And the receivers of the campaign don't know if you've got three people or 3,000.
BRAUCHLI: This is the part where we move to the free market of questions. And I forgot to mention at the beginning that this meeting is on the record. So I will open it up now to questions from the floor, and please tell us who you are and who you're affiliated with, if you have an affiliation, when you ask a question. Sir?
QUESTIONER: Hello. My name is Kevin Kelly. I'm the U.S. correspondent for The Nation Media Group in Kenya. I have a question about East Africa, Africa in general, if you will, regarding corruption. Do you think that Wolfensohn's campaign has been effective? And if you don't think it has been effective, what should the Bank be doing that it's not doing to make governance a more predictable and more fastidiously observed condition of its lending?
MALLABY: That's a good question. One of my experiences as a correspondent in Africa was going to Kenya, actually, and going to see the economic consul at the German Embassy and saying, so, your job is to encourage investment in Kenya. How's it going? And the guy said to me, well, as soon as a businessman comes to me from Dusseldorf or Frankfurt, I tell him to get on the plane and get out of here as fast as possible, because his investment in this country would all be stolen.
Then my next call was at the World Bank. I said, what's going on here? And they said, well, it's great. We've got, you know, macroeconomic indicators down, inflation is under control. I said, what about corruption? And literally this was the answer: The guy looks at his shoes and doesn't answer. He looks at his shoes, like this. And after a very long silence, he looked out of the window. I mean, [he] just couldn't talk about corruption. This was, like, 1990.
And Wolfensohn definitely changed that. I mean, he got up in front of the biggest audience the World Bank gets, at its annual meeting, and said that the cancer of corruption, this is the key to development. But the question that you're raising is: So what do you do? And that is not a trivial or easy question.
And I tell a story in my book about Indonesia as the kind of case study in this question, because— and Marcus wrote about this very eloquently and effectively for The Wall Street Journal, and before I even knew him. I cite his piece in my book. It was a moment when the World Bank was experiencing, quote, death by The Wall Street Journal, because a series of hard-hitting pieces exposed the extent to which World Bank money being lent to Indonesia was being stolen. And there was corruption, the Bank knew about it and wasn't talking about it openly.
And— but the issue was, look— Indonesia, until 1997 and the Asian crisis, was reducing poverty by millions of people. I mean, you know, it was a textbook case of poverty reduction. Oxfam had produced in the mid-1990s a great big study about how— you know, the Indonesian model of poverty reduction. I mean, it was not just the World Bank that thought Indonesia was fantastic; it was Oxfam as well. It was, you know, widely regarded in that light.
Now the question was, they were also very corrupt. The World Bank was estimating that maybe a third or something of the money it was giving in project lending and so forth was being pocketed and ripped off and so forth.
So what do you do? I mean, do you say to these people, well, you're totally corrupt, so we're out of here, we're not going to give you any more money; when in fact the 70 percent of the money that was going to the right cause was probably reducing poverty by more than if you gave it to India or something, where maybe there was only a 10 percent rip-off, but the other bit was just inefficiently dissipated? I mean, that was the issue.
And there was a debate in the Indonesia country team following Wolfensohn's anti-corruption speech, saying, "So? How do we apply that?" This was— he made the speech in 1996, and there was a nine-month window between that and the onset of the Asian financial crisis, when the whole thing blew up.
And essentially, the conclusion of the people at the coal face was, corruption is an issue, it's all very nice to talk about it, but frankly, you know, it's not up there so that we're going to walk out. I mean, there's too much right that's going on here. And so if you'd like, think about it in this way. You know, if you have hyperinflation in the country, it's a fairly safe bet that any money you put into it is going to be wasted, it won't be effective, and so you should pull out if there's hyperinflation.
But on the other hand, if there's a problem in the education policy, that they're spending too much money on universities and not enough on primary schooling, and that's on balance bad for human capital formation, that's the kind of second-order challenge that you wouldn't pull out of the country for. You would kind of advise them to do it differently. And where does corruption fit on that spectrum? Well, it was kind of more towards, you know, the sort of excusable error, the livable-with error, than the kind of systemic mess that wrecks everything else.
Now, was that the right call by the country team in Indonesia? In retrospect, it wasn't. It was the wrong call. And you saw that when the Asian financial crisis broke, and every attempt to control the crisis through economic policy means was subverted by the corruption. You try to control the money supply and tell the central bank to rein in the money supply, and they're just funneling cash out the back door to [former Indonesian President] Suharto's cronies. So it didn't work.
The corruption did turn out to be something which is so important, that cut across everything and basically wrecked the whole development model, at least briefly.
But you know, in East Africa today, is it at that level? Well, Uganda has been quite corrupt in the 1990s and still cut poverty by 40 percent in that decade. Should the World Bank have pulled out? No, I don't think it should have. Now we're beyond the '90s, and Uganda continues to be pretty corrupt. Should it pull out now? Well, maybe in retrospect, in three years' or four years' time, I'll be saying yeah, it should have pulled out. But you can't— calling the tipping point is incredibly difficult.
BRAUCHLI: Yes, ma'am?
QUESTIONER: Thank you very much for writing a book about President Wolfensohn. I think it's long overdue. I'm Natalie Hahn. I worked with the U.N. for 30 years, mostly in Africa and very closely with the World Bank.
The title of your book is about the world's poor, and I'm hoping maybe you could give a few more positive stories about the World Bank. And even though the rest of the U.N. system perhaps wasn't doing, in many cases, as well, the fact is that Wolfensohn on girls' education, on HIV/AIDS, has made a phenomenal impact.
And I would argue that they're not easy cases. If you have in many African countries 50 percent of the kids out of school, an educational campaign means a lot of money, or 30 percent of the people that [are] HIV-positive— so I would welcome, as the title of your book indicates, more of the positive stories and the amount of money with the World Bank profile— that is 30 billion [dollars] a year.
Secondly, I think some of the other things that Wolfensohn has done is much more closely work with the private sector, bringing in the best of the expertise of the international private sector; secondly, better coordination among the U.N. systems; and thirdly, a decentralization of staff and negotiation with [Microsoft Chairman] Bill Gates, with [philanthropist George] Soros, in leveraging and bringing in a lot more money, particularly from the international philanthropists.
MALLABY: They're all good points. The decentralization is absolutely true. In— I mean, in general, I think management was not Wolfensohn's strongest suit. I think he arrived with the idea that, you know, you could bring in private-sector techniques to a public-sector institution and make it much more efficient. And what he learned was that when you're running an organization with a board that meets twice a week and is, you know, providing kind of micromanagement oversight on a level that no private-sector company would possibly tolerate, you know, trying to replicate private-sector efficiency is simply impossible.
But the one good thing about the management, the clearest progress, is that the number of country directors, who are the kind of key managers, who manage the budget— the number who are actually living in the countries they were directing the programs for— went from nothing to two-thirds of the ones who are now decentralized. And the ones who remain in Washington tend to be people like, you know, the kind of director for the Caribbean, because if you want to get around the Caribbean, you might as well do it— you can fly almost as easily from Washington as you can from, you know, one— and then that's sort of the argument. So there are some exceptions, but basically decentralization has been good, dramatic, and I totally agree with you.
On HIV/AIDS, I think there's a sort of mixed story there, actually. I think the Bank was very slow in the 1990s to face up to the challenge. It continued to be slow in the first years under Wolfensohn, and he admits this, actually. And then it turned around in about 1999, after he'd been there four years. And then he did become very passionate about it. And in the last few years, he's made a big effort.
But it's a huge challenge, and you know, it— the challenge— I have a whole chapter on this, and the challenge with HIV has been that, you know, the classic case was what I was talking about before. If the country doesn't want to do it, you can't force them to. You can't just say, OK, here's the money. Here are the conditions with the money. Now go and do what we tell you. If they don't want to do an AIDS project because they think it's— they want to talk about the fact that they have, like the Russians, a population of injecting drug users, a huge, you know, TB [tuberculosis] issue in their prisons— the Russians had all sorts of reasons not to face up to the TB/AIDS epidemics, to take one example. And it took the World Bank five years of work in Russia to persuade them to even sign on for a loan, let alone start disbursing it. And you can't spend five years in every project in your portfolio, sort of arguing with people about why they should accept your money.
Now on AIDS, it was so kind of overridingly important that it was worth spending five years with the Russians to persuade them to face up to the fact, getting past the fact that the Russian pharmaceutical lobby didn't want to do a project with the World Bank, because that would open up the country to Western medicines, which would treat TB more effectively and sort of, you know, leave the Russian TB medical establishment— which has kind of redundant 1950s approaches to TB— high and dry. So there are all kinds of lobbies and reasons why it's hard for the World Bank to do the sensitive stuff, like AIDS and so forth. And so the record has been mixed, although it's not entirely Wolfensohn's fault that it's been mixed.
You raised another issue at the start, I think, sort of the progress against poverty and positive examples. One of the issues about the World Bank and one of the reasons why it's perpetually encircled by critics is that it's very hard to point specifically to something that went right, where you're sure it was the World Bank that did it right, because most of the time, as I keep on saying, it's the developing country that does it right and the World Bank is a useful partner.
So if you say, well, Uganda cut poverty by 40 percent, that's great; the World Bank must have, you know, done that. No, of course it didn't do it. I have a chapter again about this where, you know, the central figure who did Uganda right is this six-foot-four, hulking, great, kind of hard-drinking, tough Ugandan who was the key economic technocrat in the Finance Ministry in this period. And whenever, you know, the army wanted more money to spend on itself, he just kind of wiped them out because he was so forceful, such an amazing personality. He had the total backing of the president, and so he basically drove an extraordinary economic reform program which delivered this 40 percent cut in poverty. He deserves the credit, and the World Bank helped him. But you know, isolating what the World Bank did is very difficult.
Now I spent a long time talking to every World Bank person who worked on Uganda and every Ugandan person who dealt with the World Bank, and you can isolate some specific examples of what the Bank did, and I'll give you one. There was an issue with where the education budget had gone up, but local schools were not reporting higher enrollment. Where did the money go? You know, the money was out, but there weren't more kids. So the World Bank had the idea of doing a survey where you figure out from the central government's budget how much money each school is supposed to get, then you go and send survey teams to the schools and say, well, how much did you get? And the median school in this survey got 0 percent— 0 percent of what it was supposed to get. It had all been ripped off by the middlemen in the government at the district government level.
And you couldn't have done that survey without the World Bank kind of having— sending out the kind of spreadsheet wizards who could, you know, do the Excel stuff and crunch the numbers, design the survey in a scientific fashion. You needed the World Bank to do that and had the idea to do it, and some World Bank technical money to pay for the cost of doing the study.
And then it was up to the Ugandan government to say, OK, how do we use the results? And they had the smart idea of posting on the notice board of each school how much money they were supposed to have gotten from the central government. And then, guess what? The parents see this; they say, well, where's the money? They start putting pressure on the principal; the principal puts pressure on the central, on the district government. They re-surveyed a few days later and, you know, the median school had gone from 0 percent collection to 60 or 70 percent or something.
So that's a very discreet example of how corruption with the ripping off of money was radically reduced by a World Bank study. But you have to mine very carefully to find that kind of clear example. Most the time what you've got is a partnership between the country and the Bank.
QUESTIONER: Ralph Buultjens, New York University. Having studied the World Bank, how would you rate Wolfensohn's performance in comparison to his predecessors? And I'm talking as much of style as of substance, because there has been a lot of criticism of the fact that his high profile focus kind of detracts from performance, or he raises expectations which cannot be met, and that he's excessively focused on his own personality and on securing publicity for his own approach.
MALLABY: Well, I mean, when it comes to Jim Wolfensohn, there's never a simple answer, and that's why he's such a fascinating character to study. And, you know, I would go do these interviews with people and sometimes I would be presented with a 20-minute riff on how he is the most amazing and wonderful person ever, and so brilliant and passionate about the cause of reducing poverty. And basically, all of it would be 100 percent true because he is all those things, right?
And then you'd go see somebody else who would say, you know, the guy's a maniac, his ego is out of control, he puts his ego in the way of making the right call sometimes in management questions. He treats his staff badly; he explodes at them all the time. And that's all true too. All right?
And so the best metaphor— as I say, one key— World Bank key economics metaphor for describing this man is that he's sort of like, you know, the current account surplus. I mean, he's got— you know, he's net positive, right, he's net positive, but he's the difference between two enormous big numbers up here, you know, lots of negatives and lots of positives. He's quite Clintonian in that he has these sort of flamboyant talents, but also some rather obvious and startling weaknesses. And I think it's not a coincidence that they got on so well, and within a few months— they met for the first time in March of 1995 when Wolfensohn went for his interview to get the job. And in August of 1995, guess what? Clinton is celebrating his birthday at Wolfensohn's home, and he did the same thing again the next year. And these guys bonded like that, and I think it's quite revealing.
And so I think that there's some truth to what you say, that there are times when his ego got in the way of doing a good job; times when he did over-promise. I think, you know, part of the issue is the World Bank is not a proxy for world government, and if it sets itself up as being the savior that's going to fix everything in the world, it won't fix everything in the world, and then the critics of the World Bank will have ammunition to shoot at it. So there's a bit of that.
But he's also— I mean, relative to past presidents, he's easily the best communicator since [former President of the World Bank] Robert McNamara. I mean, McNamara, you know, over-expanded the Bank and sort of broadened the mission very aggressively, and was then faulted for some things. But he was a terrific sort of spokesman. He coined the phrase absolute poverty. He would have people in tears when he was giving his speeches. He ran the Bank from '68 to '81, a dominant figure.
Then the next three figures, who each served just one term, were far less effective at communicating. And Wolfensohn, I think, stands with McNamara as a sort of, you know, really larger-than-life figure tackling these larger-than-life problems out there in the world, and being able to kind of communicate the sense of the passion and the excitement of the development mission.
MALLABY: Well, you know, that question is relevant because his term is up in June. And so there will be a contest to succeed him, and one of the people who wants to succeed Jim Wolfensohn is Jim Wolfensohn. And he would like to do it, maybe not least because, you know, if he can do another couple of years he will equal Bob McNamara, as he would quite like to get even with or, you know, be on the same— have the same lengthy record. I think it would be fine for the Bank if he did it for a bit longer, because I think his sort of hand-grenade phase, as people describe it to me, of managing— of the thinking that he could, you know, turn the whole place upside down, bring in new techniques, you know, revolutionize it and make it altogether more efficient, which was a sort of delusion— he's through that now, and so he is a more stable leader.
If he doesn't like the Bank, it's his Bank. He's been there 10 years and, you know, all the senior management are the people that he has promoted to those positions. But he's kind of relaxed into the job a bit. He remains a great communicator. He's a bit wacky still sometimes in some of the sort of extra-peripheral crusades that he takes on. He's very keen at the moment on the issue of youth. He talked about youth and what— what it— anyway, he talked about— now— and then there's the kind of— you know, he went recently to the Circus Maximus in Rome and appeared on the stage with, you know, [actress] Angelina Jolie. And I can see that anyone wants to appear on the stage with Angelina Jolie, but you know, quite what that brought to the development mission is questionable. But no, nonetheless, I think, you know, he's— he has terrific communication talent, and I think it would be fine if he did it for a bit longer.
BRAUCHLI: You think it— is the management of the World Bank, is the World Bank right now more effective than it was when he took over? Is it stronger or weaker?
MALLABY: You know, I wrestled with that for a long time, and that's one of the hardest things to get a handle on because what data is there really to show how well an organization is managed? In the private sector, I think we often use as a proxy for good management, you know, did the stock price go up? But then we see, you know, there's a crash and the stock price goes down and it's the same management team in the company. Did they suddenly become— no. I mean, the point is that we never really know from the outside, I don't think, how well. And even if you spend a lot time on the inside— I interviewed 200 people at huge length and I got all sorts of conflicting reads on this.
In the end of the day, the clear thing that you could point to is decentralization, which I think is a great improvement. And beyond that, is it smoother? I think I'm clear about the fact that for a long time under Wolfensohn it was worse, because he tried to change everything and he couldn't decide on having a clear number two. He had this kind of, you know, rotating— he's a sort of network guy. He has this amazing Rolodex. And whenever he faces a problem, you know, he gets on the phone to 17 of his best friends and they all give him 17 bits of advice and he comes out and says OK, right, well, we're going to do this. And you know— and you know, then it changes for the next month. So there was a bit of this sort of— because he didn't really know when he arrived what he wanted to do. And so therefore, he spent some time discovering that. So there was this period of sort of sturm und drang where this was. But I think now it has settled down. I'd say it's probably as good as it was before he arrived, but I'm admitting that that's an impression, not a scientific observation.
QUESTIONER: Eleanor Fox, New York University. I wonder if you will say a few words on freer markets as serving the needs of the poorer countries in development. Of course, you've been talking a lot about the investment of money in very important infrastructure, education, et cetera. Do you think the World Bank has a role to pursue an agenda, such as [Peruvian economist] Hernando de Soto's in "The Other Path," in getting rid of regulation, getting the informal sector into the main sector, and enabling people to participate in the markets— and the relationship to— the extent to which the market focus could be even more helpful than some of the loan focus, or as helpful.
MALLABY: Yeah. And I think the answer is that the market focus is crucial— I mean, absolutely central. And I guess I was wrong in not emphasizing that in my initial point. I mean, I sort of think sometimes that it's taken for granted because the Washington Consensus phase of the World Bank [which held that the problems of developing nations largely flowed from their own failure to adhere to market principles] is so famous, even infamous, that, you know, this is what the World Bank does, spends a lot of its time doing, is basically preaching— you know, getting your price signals right, privatizing inefficient state-run firms, you know, getting rid of your coffee marketing board, which is manipulating prices, and freeing those prices so that farmers actually get the income, you know.
All that stuff is, I think, absolutely central to what the World Bank should be doing, and is in fact doing. And Hernando de Soto has a great sort of riff about codifying property rights. I'm sure he's right about that. I think the World Bank itself does some of that work and should continue to do so. So I think that's been central, is central, will continue to be central.
QUESTIONER: Thank you. Sergio Galvis. Two things, or two questions. You haven't commented on the IFC [International Finance Commission]. If you could talk a little bit about what impact Wolfensohn had on the transformation, if any, of the IFC and its mission.
And secondly, just looking forward, you paint a pretty worrisome picture in terms of the potential negative role of certain NGOs, and there's been other evidence. The NGOs— certain NGOs almost got the World Bank out of the business of financing natural resource projects, for example, some claim were responsible for getting rid of a reformist president in Bolivia. If you could fast forward five, 10 years from now, how do you see that battle playing out?
MALLABY: They're very good questions. I think on the IFC, which is the part of the World Bank which can invest in private sector projects, the World Bank basically only makes loans to governments, but the IFC, which is part of the World Bank group, can loan directly to a consortium doing an oil project or whatever it is.
What the story [is] there is that Wolfensohn came in very excited about the IFC and wanted to kind of integrate it more into the World Bank's structure properly. He had a management shuffle. One of the many management shuffles was an attempt to integrate it more. And then he kind of took his eye off the ball, because in the '90s, you know, we were in this sort of private-equity boom and the perception was that, look, if you're talking about investment in private-sector projects in Argentina in telecoms or whatever it is, the private sector is doing that. So we can try and do a little bit of help and whatever, but essentially this is marginal to our role. And so Wolfensohn pulled the Bank much more towards this kind of soft loan helping Africa, the LDCs [least developed countries], you know, education and health projects. That became much more his focus, and to the consternation of some of his staff, who said things like, we thought we were getting a hard-headed Wall Street investment banker, and in fact, we've got the chairman of the Kennedy Center, you know, the charitable philanthropist type.
And I think taking the eye off the ball on the IFC side was a mistake because, you know, the private-equity flows obviously are volatile. And also, you can crowd private equity in as well as out.
And I tell a story in my book about this Chad-Cameroon pipeline, which is an example of a project which would not have happened, I don't think— I mean, I know, actually, that Exxon could not borrow money from commercial Banks unless it had World Bank participation, because the World Bank participation would provide two kinds of protection. First of all, it would increase the political cost to the government of nationalizing or over-taxing or basically trying to expropriate the proceeds the investment. That if you had the biggest donor in your project, if you're Exxon, and all the donors are going to walk out of Chad if the Chadian government messes with you, you know, that feels pretty good. So they wanted the World Bank in for that political risk thing.
And they also wanted the World Bank in because of the NGOs. The NGOs were going to attack this oil project. There was going to be a pipeline going through miles of rain forest. There were gorillas, there were pygmies, there was all sorts of stuff. And there's going to be an NGO swarm attacking this project, and you needed the World Bank to kind of certify that the environmental side is being properly looked at, and the social impacts have been properly looked at. And the World Bank kind of became, you know, the decoy, so that the heat-seeking missile went for the hot decoy, the World Bank, as opposed to for Exxon or the commercial banks that were financing the project. And the Bank took that on and did it, and the combination of a sort of determined private-sector actor in the form of Exxon, which arrived in this broken down country, Chad. It's incredibly difficult to get anything done; there's no communications. You can't get from the oil fields to the capital unless you're prepared to spend all of a day in a truck going on a highway which doesn't— I mean, it's basically a sand highway. So, you know, Exxon arrives and creates a private air connection between the two. I mean, any problem, logistical or otherwise, that it faces: No road to get from A to B, so it they build a road.
The power of private money arriving in this sort of completely poor, underdeveloped country, it's like you take a magic carpet from somewhere outside Houston, with all these sort of oil derricks and, you know, big guys [with] twangy accents, and you fly the whole thing, this piece of Texas, and you land it in the middle of Chad with all the same infrastructure, the same, you know, literally the yellow school bus from Texas to carry people around from one porter cabin to the other porter cabin. And so you had that kind of private-sector, goal-focused energy together with the World Bank's ability to do the kind of political and social stuff around the edges that made a project salable. So I think that's a good example of the partnership that you were asking about.
BRAUCHLI: We have time for perhaps one short question, or maybe a short answer.
MALLABY: OK, short answer.
QUESTIONER: Thank you. I'm Bruce Schearer from Synergos Institute. I think given the dismal state of poverty in the world today and the lack of economic development in Africa, sluggishness and really no growth in Latin America, in most countries, one has to be very disappointed looking at the Bank's performance. If you start back at Bretton Woods and you look at the hopes for what the Bank would do, it certainly hasn't delivered at that level, it seems to me. And the whole premise that giving loans will stimulate economic development, thereby giving the wherewithal to repay the loans, isn't working very well.
What's your prescription for the next term of the Bank if there is a new president? Would you continue on the old model? Do you think the Bretton Woods foundations of the Bank make sense?
MALLABY: I do, actually, think they make sense. And I'm going to go after your premise a bit because to me, to say— yes, there are 3 billion people, half of all humanity, live on 2 [dollars] a day. This is unbelievable and horrible. And the fact that the chief doctor at the bedside has this patient which is obviously not doing terribly well, then blame the doctor is sort of the thesis. But that's a bit like saying we should blame cancer on the oncologist. I mean, you know, the challenge is incredibly difficult to fix, and you shouldn't blame the World Bank for the lack of fixing it.
That said, there's been progress, actually. I mean, we are on track to halve the rate of global poverty in the 25 years between 1990 and 2015. Halve global poverty. So there is progress happening. And to the extent that there isn't progress, I'm not sure it's really fair to blame one institution.
BRAUCHLI: With that, I think we have to conclude, Sebastian. I think Sebastian's eloquent and very descriptive book is— what he said today gives some indication of how eloquent and descriptive his book is, and I hope that you will take a look at it. I think it's for sale here in the other room. Appreciate your coming this morning. Enjoyed talking with you.
MALLABY: Thanks. [Applause.]
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