“Poverty in one place is poverty everywhere,” says James Wolfensohn. It is a truism that the charismatic head of the World Bank knows well. Since becoming president of the Bank in 1995, Mr. Wolfensohn has traveled to more than 100 countries, to gain a measure of the challenges facing the Bank and the least developed countries, in which poverty is systemic and resentment is, in many countries, pandemic.
The man who has the formidable challenge of eradicating poverty and kindling hope is himself a formidable personality. A pilot in the Australian air force and a member of Australia’s 1956 Olympic fencing team, Mr. Wolfensohn established himself as a successful investment banker, first in his native Australia, and then in the United Kingdom, (where he established the market for the Euro dollar, the forerunner of the Euro), and later in the United States. In 1981, Mr. Wolfensohn established his own investment banking boutique, which he later sold to Banker’s Trust. A self-taught cellist, Mr. Wolfensohn has directed his considerable energy and passion for the arts by serving as Chairman of the Board of both Carnegie Hall and the Kennedy Centre for the Performing Arts. He is currently the Chairman of the Board of the Institute for Advanced Study at Princeton University.
Mr. Wolfensohn was re-elected to serve a second five-year term that began on June 1, 2000. Though he has democratized and humanized as once-aloof institution, Mr. Wolfensohn is criticized, even damned, at times for doing too much, at other times for doing too little. Unarguably, however, he has recognized and built bridges to many NGOs, institutionalized the belief that globalization must be an instrument of opportunity and inclusion, and made it a matter of policy that “development must not be done to poor people but by them.” Ivey Business Journal spoke with Mr. Wolfensohn in his office at the World Bank’s headquarters in Washington DC.
JOURNAL: If I may, I’d like to start with something that’s very much at the top of the Bank’s agenda. Perhaps you could tell me what progress you’re making in the reconstruction of Afghanistan?
JAMES WOLFENSOHN: We – the World Bank, the UNDP (United Nations Development Program) and the Asian Development Bank – have just completed a Preliminary Needs Assessment. We have determined the parameters of the problem in terms of financial support, and we will be meeting this weekend in Tokyo with the four leaders, who are the chairmanship of Japan, the United States and the European Union and Saudi Arabia, and many other potential donors, and with the Afghans themselves, to discuss how it might be implemented. (Editor’s note: This interview took place on Jan. 16, several days before the Tokyo conference, where the Bank and its member countries pledged $500 million for the reconstruction of Afghanistan.)
We will do a further needs assessment in April, but based on the one we just completed, we know that reconstruction efforts will be based on four principles. First, we believe that all stages of the reconstruction process, from planning to implementation, should be led by Afghan men and women. Second, appropriate policy and institutional frameworks must be in place at both the national and local levels to support investments in rehabilitation and reconstruction. Third, substantial institutional support will be needed for local communities and emerging public institutions. We will need the experience and expertise of bilateral agencies as well as NGOs and community-based organizations. And fourth, groups that are vulnerable, such as women and children, returning refugees and internally displaced people, must be protected and provided with considerable support.
Next week, the Bank will have another 10 people going into Kabul and we’ll open an office there. We’ve had a tremendous amount of experience in post-conflict situations, from Africa to East Timor, and what we hope to do is to put our top team on Afghanistan. We expect that there’ll be a need in the order of $5 billion in the next two-and-a-half years. It’s crucial that we get them started. The big worry in all of these enterprises is to get the first money in and get things set up. No country needs it more than Afghanistan, which has nothing there. It’s a very formidable challenge.
I must say, however, that the first thing we want to see is peace and an opportunity for the Afghan people to fulfill themselves. With a life expectancy of 44 years, with only 38 per cent of boys in school, and three per cent of girls in school, with women having been pushed out of society, with limited roads and only one-third of the people or even less having access to water, you can see that there are many goals that we would like to achieve.
There’s one more very important thing about Afghanistan. The events of September 11 have made what appeared to some people to be overseas commitments, or charitable commitments to overseas development, into domestic issues. And if the world has not learned after September 11 that poverty, wherever it may be, is a domestic issue for developed countries, then we are in deep trouble. Afghanistan is the first country where we can expand our development assistance and support, and have the world recognize that this assistance and support are not part of the commitments that the developed countries have already made to foreign aid, the roughly .23 per cent of their GNP.
Where there is literally nothing, and particularly where there’s almost no legacy of a managerial class, I’m interested to know how you build the human infrastructure that’s needed to manage the physical assets that the Bank is going to build?
Coming from where you do, you must be committed to the notion that training and capacity-building are essential. We are surely committed to that notion. But it’s not just in the private sector that we have to start to build. Here, it’s capacity-building at all levels of government, from the central government down to local government. There has been a form of governance, as there is in most societies when you have an absence of government, in the form of warlords or local groups that get together. So there is an informal framework that already exists for the provision of services and the meeting of human needs, supplemented by non-governmental organizations. So there is something there but there is no organized framework as a nation. But we have to start by helping them on really fundamental things – capacity-building first.
Parallel to that, we need to establish a legal and judicial system that can recognize and protect rights, be they property rights or human rights.
Thirdly, we must establish a financial system which can provide financing in a fair, equitable and transparent way, from industry down to micro-credits. Subsequently, you will have extensions of that in more exotic schemes of leasing and insurance, but that’s some way down the line. Then, most importantly, we must get a system going where corruption is not at the core. If you don’t have those four things – capacity, the legal and judicial systems, the financial systems and anti-corruption – you can pour a lot of money into a country and give them a lot of assistance that will get wasted. So there are those sort of four preconditions that you really need to establish with the government, and the one thing that you have to do is to make sure that it’s government-owned and government-led, not designed in Washington or Ottawa or some other place.
And then beyond that you then have the more normal framework of the program that you need to establish in education, health, infrastructure, rules, strategy, urban strategy and so on. And we start in Afghanistan, where as I’ve mentioned, 3 per cent of girls and 38 per cent of boys are in school. So that gives you an idea of the starkness of the issue, but you have to start with people and building capacity. But also the minimum framework in terms of legal, financial, and most particularly corruption.
With respect to corruption, it’s hardly a phenomenon that’s particular to Afghanistan. But corruption frightens capital or investors away. How do you deal with that, whether in Afghanistan or other developing countries?
I think there are many things that would frighten away capital in Afghanistan and corruption would be one of them. But let’s shift to South Asia or Africa or Latin America. There’s no doubt that the biggest single inhibitor of investment, domestic reinvestment and foreign investment, is corruption. It’s a thing that scares people. But it’s also a thing that for many years nobody would talk about. In fact, until 10 to 15 years ago, everybody was saying, “You can’t do anything about it, you just have to accept it.” And then organizations like Transparency International, which in fact was spun out of the Bank by individuals who wanted to do something about it, and I would say more recently the Bank itself, have done a huge amount of work on this in the last six months. We’ve come to recognize that this is not just something that you have to accept, it’s something you have to fight.
And we’ve also discovered that the single most popular political issue in a country is in fact getting rid of corruption, because people don’t like being poor. They hate being poor if it’s at the expense of someone getting rich in an improper way. So I would say that in my period, during the last six years, there has been a huge change in the approach to corruption, both at a government level, in the transparency sense, and in the sense of opening the debate in countries. People want to get rid of corruption.
I’d like to switch topics, if I may. On May 14th last year you said that problems that are endemic to countries halfway around the world have a way of showing up on your doorstep. Then you had the horror of September 11th, which had a lot to do with the problem of worldwide poverty and people on the outside looking in. In your mind, what was the connection between poverty and what happened on September 11th?
What I said in May I’ve been saying for a long time. We have to recognize that the old division between developed and developing countries, or that there’s a wall between them, or the notion that in the United States or Canada, dealing with the developing world is a luxury and a small fraction of your considerations because it doesn’t hurt you at home…all that traditional way of looking at things is nonsense. We’re living in a society where whether it be the environment or health or crime or drugs or terror or finance or trading, it’s a global issue and it has a global impact. What I said in May was very simply that the issues and problems which emerge in some part of the world that you don’t know have an impact on what happens at home, in the most developed countries.
If ever you needed a visible example of that, it was provided on September 11th, when Afghanistan landed on Wall Street, or if you like, the problem of an extreme form of fundamentalism from Central Asia, housed in Afghanistan, came to Wall Street and to the Pentagon. These were the two symbols of capitalism and the system.
The second issue I would say is that we need to understand that it is not poverty directly which knocked down the World Trade Center. But if you have a world where half the population lives on less than $2 a day, and you have a world that in the next 25 years will grow by two billion people, with all of them except for 50 million being born in developing countries, then you have a problem in which the lack of hope, the lack of a future, fuels the formation of a whole new substrata of people that have malevolent aims. If there is no hope, you do something that gives you some possibility of action. That is true for refugees in Gaza West Bank, it’s true for refugees in Burundi, it’s true for people in Central Asia who feel that they’ve been left behind. So it’s not just poverty, it is the creation of conditions under which people, either out of absolute frustration or with more malevolent political instincts or religious objectives, can find a home. And these are people who just don’t care whether they die or live, because there’s no difference. Living is death! So I think that poverty and peace are coincident issues, that if you can’t deal with the question of poverty, you won’t have peace. For me, it’s that simple.
The greatest long-term challenge for the world community is fighting poverty and promoting inclusion worldwide. This is even more imperative now, when we know that because of the terrorist attacks, growth in developing countries will falter, pushing millions more into poverty and causing tens of thousands of children to die from malnutrition, disease and deprivation. Poverty in itself does not immediately and directly lead to conflict, let alone terrorism. In fact, rather than responding to deprivation by lashing out at others, the vast majority of poor people around the world devote their energy to the day-in, day-out struggle to secure income, food and opportunities for their children.
Nevertheless, there is a lot of resentment. How do you quell it? How do you give people hope?
The first thing you have to do is help them develop a better life. At the monetary level, 80 per cent of the world has 20 per cent of the income, and within those least-developed countries there is again another huge division between rich and poor. So there’s no doubt that you have extremes of poverty, one billion people who live on less than $1 a day, with no hope or with limited hope.
The first thing you have to do is take it on as an issue, and that’s why we’ve been saying that it’s crucial that we increase development assistance, it’s crucial that we open markets, so that those countries can access modern markets. But it’s also important that it not be one way and that the governments of those countries carry out their responsibilities of the type I described in Afghanistan, which is that they have to be sensible governments, honest governments, and have to try and pass it on. So it’s a two-way thing, it’s a partnership between the developed and developing.
But I would add one other point, and that is that it’s not just money. It’s also, in my judgment, a vitally important element of respect and knowledge and understanding. I don’t know about the Canadian primary-school system, but my guess is, if it was anything like the Australian one that I grew up in, we didn’t learn a hell of a lot about Islam or Central Asia or the 45 countries in Africa or India, or China for that matter, which has 1.2 billion people, or its history. We cannot continue to be both ignorant and so self-interested that we don’t understand or try to understand that the issues of today are global issues.
We need to understand indigenous people and their cultures. We need to reach out and look behind the people that we’re dealing with, to try and be more open. We also need to deal with people in poverty. We’ve just done a study of 60,000 poor people. We found that they want a safe life for themselves, a future for their kids, and freedom from violence. The women we interviewed do not want to be beaten up. And all the people we talked to want a chance, not charity. We must reach out to these people. If we don’t reach out to people in poverty and create a better sense of equity, there won’t be hope. It’s very simple.
You mentioned trade and the fact that developing countries should open their markets. Well, many developing countries do open their markets, but it appears that no sooner do they do that than the developed countries, like the OECD countries, for example, offer agricultural subsidies to domestic producers, or the Americans put up protectionist tariffs, on goods like textiles. It seems hypocritical of the developing countries, because on the one hand they ask the least-developed countries to open their markets while on the other, they throw up tariffs that make it impossible for them to sell their goods in their markets.
I don’t know whether to call it hypocritical or a crime or simply being blind, but the one thing I’m certain of is that the developed countries must open up their markets. It makes no logical sense to try and help developing countries develop their productive capacity and then deny them access to markets. It makes no sense to spend $300 billion a year on agricultural subsidies for farmers in developed countries and pass $50 billion a year as the totality of development assistance to developing countries. It just makes no sense. And so that wrong needs to be righted. It is difficult and it needs to be done over time, but we need to open markets so that the countries can develop their capacities to export, their quality of exports, and really have a chance. So I am one of those who is vigorous in the fight not about opening markets in developing countries but about opening markets in developed countries.
With respect to globalization, you have said the challenge is to make globalization an instrument of opportunity and inclusion. From a practical point of view, how do you do that?
I think that first of all, demonstrations in the streets to turn back globalization are like turning back the tides. If you think of globalization as a more interdependent world, it is already there and it is growing every day, and there’s a great deal of evidence that people who try and stay out of that world don’t grow, and countries that do, adjust and grow. If you look at the Asian Tigers, if you look at those countries in sub-Saharan Africa that have developed, be they South Africa or Mozambique, or if you look at the Latin American countries that have developed, it’s very clear that if you join the global community, you have a far greater chance of improving the standard of living in your country than if you try and stay out. So when I talk about inclusion and opportunity, it is to try and assist countries in development to join that group, and to assist them in the transition phase, so that if they’re going to have to give up manufacturing certain products, for example, they can substitute other products. If you look at what India is doing, for example, in technology, in manufacturing, and if you think of the quality of their goods today compared to 25 years ago, if you look at their computer industry…this is what I mean by inclusion and benefiting from globalization instead of turning your back on it.
What more, or in fact, just what could the private sector be doing to help eliminate poverty?
I think it can do a lot, and we’re seeing that many corporations are taking their global social responsibilities far more seriously, as well as their investment opportunities. I don’t think the private sector makes investments for social purposes, but if it decides to invest in countries, then I think social responsibility comes with it. And I think that we’re seeing that first and foremost, that many of the infrastructure projects, be they in power or in water or in telephone or in communications, generally have moved from the public sector to the private sector. So it’s clear that there are big opportunities, from toll roads to private airports. You’re seeing the private sector looking for opportunities and grasping them. That is wonderful because there’s no way that the public sector can meet the needs of development without private-sector participation.
On the other hand, if private firms go to developing countries and make investments of that type, then I think there are many things that the leadership of those companies can do to engage the population. I’m not referring only to providing services for the people that work with them, but just as an example, those firms could run training courses for people using their computers in the community at night, they can provide education programs for kids, they can work in the health sector, they can give scholarships and they can have programs for training the workers. There are a hundred different ways that an enlightened management team can help. It’s also extraordinarily fulfilling, particularly for young people in the companies, who can try out their skills and try and convey their educated background to people in these countries. I’ve seen that in many countries, and the reward is not financial but human. It creates an environment in which those companies are more likely to flourish than to have their factories go down. So it makes a lot of sense.
On the topic of foreign aid, the G20 allocate, I believe, an average of .25 per cent of their GDP to foreign aid. The ideal, as set by the UN and perhaps the Bank itself is .7 per cent of GDP. How do you ask or even get countries to increase their commitments, given the widespread corruption or, in quite a few cases, the nebulous effects of debt relief?
Let me start by addressing the issue of debt relief and that’s it not seeming to work. In fact, it does work very well. The so-called HIPC program [Heavily Indebted Poor Country, a debt-relief model that Wolfensohn developed in 1996]), which is designed to give debt relief to the poorest countries, is only made available when they have a clear, visible and monitorable poverty-reduction strategy. We have now gone to 23 such countries with these programs and they’re using the debt relief that they’ve got for social purposes. It’s one of the clear successes of the last few years.
So debt relief is working, at least in my judgment it is. As for the question of how you get the level of foreign aid up, I don’t think it’s corruption which is stopping people, because I think you can circumvent that and you can make funds available in a pretty, not wholly reliable, but considerably reliable way. I think the inhibition is much less on that [foreign aid] than it is on domestic budgets and downturns in the domestic economy. Countries are looking at their own fiscal situation in terms of domestic programs, and where they’re seeing increases in unemployment and downturns in the economy, they’re saying, “How can we increase monies going abroad?” The answer, in my judgment, is not that simple. As I said before, there isn’t a division between problems at home and those abroad. If you want to create a problem for your kids by not dealing with these issues now, you can do it. Then those over 60 will not have a problem, but our kids will. I regard that as an imperative that I need to keep talking about. That’s where leadership comes in, and it’s the sort of thing that I hope that Mr. Chrétien will be able to lead his colleagues to understand at the next G20 summit meeting in Canada.
There is a conference on debt relief in Mexico in February, and I believe that Mexican delegate plans to table a motion that says that HIPC is “not providing the promised, robust exit from poverty-inducing levels of sustainable debt.” Yet you still feel that debt relief is working?
Debt relief is not a panacea for poverty, it is a component. What is behind that statement you mentioned is a desire to see debt relief increased so that it can be, if you like, a panacea, because the billion-and-a-half dollars a year which is currently flowing to 23 countries is not adequate. But I don’t believe that anyone is saying that the program itself is not making a very positive contribution. They’re saying that it’s not an adequate contribution, that it needs to be bigger. I think that this is part of the pressure which you will see in Monterrey between the developing countries and the developed countries, or the debtors and the creditors, as part of the negotiation of how HIPC will work. So I think it is less about the function than it is the adequacy of the system.
With respect to that adequacy, could debt relief ever become debt elimination?
I don’t think so, because you’ve got $2 trillion of debt, and if you do that then you’d need to ask all your investors, for example in World Bank bonds, where we have $180 billion outstanding, not to accept repayment from us because we’ve just forgiven a $180-billion debt. So I think that for intermediary institutions like the World Bank, we can forgive debt to the extent of our capital, but to the extent that we borrow, we have to repay it, so there is a natural limit. In the case of IDA [International Development Agency], which is the agency that we run for the poorest countries, we have roughly $80 billion of loans outstanding. We could forgive all of those loans and not have a problem because that’s money that’s been donated to us. But then we’d have no money coming back to make loans the next time around, and that would mean that Canada and other countries would have to double their contributions to IDA. So the limit is not willed, the limit is the capacity of nations to put up money for that purpose, and I don’t see it being done in today’s environment.
You’re the head of an institution that’s dependent on the capital markets and the capital markets’ willingness to fund. Do you ever worry that that funding will be withdrawn for whatever reason?
I don’t expect that the Bank will be in that situation if we manage it well, because we have capital of $25 billion, but we have more than $100 billion in uncalled capital from triple-A or double-A countries. Secondly, the loans that we make are always the number-one loan that countries repay. So the history is that we’re a triple-A credit rating because of the history, and because of the relatively conservative leverage in the Bank that’s running around 5-to-1 at the moment, in a pretty good book, and large uncalled capital. So I don’t expect that for us capital will be a problem. But I would say that if you had a sequence of collapses like Argentina – and hopefully they’ll get through that – and the international system is shaken because foreign bonds are no longer seen as a good investment, I would understand it if you’d have a contraction of the foreign bond market. What’s interesting in the case of Argentina, though, is that it has not affected Brazil or Mexico. There has been no infection because it’s perceived to be sui generis, only an Argentinean problem. It’s a bit like the bond market in the United States or in Canada. You’ll have those that don’t do well but I don’t think that means that the bond market will disappear. I think you’ll find adjustments are made. And I surely hope and pray that it won’t happen to the Bank, and certainly not until I retire.
Your retirement is still several years away, but I wonder if you could tell us what you consider to be one of your most important achievements?
One of the most important achievements is the Poverty Reduction Strategy Paper [PRSP] approach that we implemented two years ago. The approach is rooted in the concept that countries themselves and their citizens need to own their poverty-reduction strategies. It is also based on the concept of partnerships – partnerships within countries, among governments, NGOs, the private sector and the local communities where many of the poor people live, together with partnerships between countries and their external supporters, but always with the particular country in the lead. The approach is posited on the concept that strategies need to be comprehensive, long-term and focused on tangible results for their intended beneficiaries. These ideas are at the heart of the Comprehensive Development Framework which I had begun to advocate a year or so before the PRSP approach was developed.
The PRSP approach has, in turn, achieved three goals. First, this concept of country ownership founded on broad-based participation has led to a more open and widely diffused policy debate about priorities and how to realize them. Groups that were previously under-represented in policy discussions – civil society organizations, women and poor people – are now involved. Secondly, the PRSP approach has made poverty reduction a national goal in many countries. And as well, the international donor community has really gotten behind the PRSP approach and is showing a real commitment to making it work. So when you look at what the Bank has done over the last few years, the PRSP approach stands out as one of its most important achievements.
I thank you very much for your time today.