James Wolfensohn

This is not a good time to be president of the World Bank. The left accuses the bank of forcing underdeveloped countries to march to the rich world’s tune. The right accuses it of acting as a crutch to corrupt and incompetent governments. And even non-ideological critics wonder if the surge in private investment in emerging markets is rendering the bank irrelevant.

James D. Wolfensohn, the bank’s ninth president, looks remarkably chipper for a man who runs such a besieged organization. Married with three grown children, he has the puckish grin and easy manner of somebody who has chosen to take early retirement rather than to run a global organization. Dig a little deeper, however, and you find his casual air conceals an iron belief that he and his 10,000 employees (including field staff) are doing the best they can for the world’s poor.

This is not to say he is complacent. The 63-year-old Wolfensohn has launched three substantial initiatives since coming into office two years ago, convinced the bank needs to revitalize itself if it is to remain the flagship of international development agencies. He has tried to crack down on corruption. He has started lobbying rich countries to forgive billions of dollars of debt to the world’s most heavily indebted nations, largely in Africa. He has begun to reform the bank’s cumbersome bureaucracy.

By background, Wolfensohn is perhaps best prepared for the third of his tasks. He spent most of his life on Wall Street, working for both Salomon Bros. and Schroders before setting up his own company, and accumulating a large fortune, as well as a private jet and a vacation home in Jackson Hole, Wyo. He later transformed himself and honed his administrative skills by chairing the boards of many prestigious nonprofit organizations, including the Princeton Institute for Advanced Research and the John F. Kennedy Center for the Performing Arts. But it is on the subject of debt forgiveness that Wolfensohn is at his most passionate.

How successful has he been? Corruption, or the lack of it, is notoriously hard to measure. The campaign for debt forgiveness will not bear fruit for another two or three years. But his drive to reform the bank is already producing tangible results. Wolfensohn’s critics charge he has made the bank even more inward looking than it was already. They say he is a little too keen on the management science he learned as an MBA student at Harvard.

But he has shaken the World Bank out of its torpor. He has forced Washington-based bureaucrats to spend at least some time out in the field. He has weaned the bank off the mega-projects that used to be its signature, focusing on smaller projects, mixing private and public money and involving locals in solving their own problems.

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Question: Does the recent turmoil in Asian currencies and stock markets suggest that the “Asian economic miracle” was really just a mirage?

Answer: Absolutely not. What you’ve seen in recent times is a forceful realignment that has been forged by fundamental economic forces which can hit any economy. It hit Thailand brutally because their exports were down. Their currency was misaligned. There was excessive dependence on foreign borrowings and the banks were poorly supervised. But these are all issues which can be fixed. What you still have is a very educated people, now needing to readjust in terms of what they do for exports. . . . I’m fundamentally very optimistic about Asia.

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Q: Will some of this turbulence continue, and will China be exempt from these problems?

A: I don’t think you can say that any country is exempt from the possibility. The United States, after all, had it in the savings-and-loan crisis, which no one anticipated. I don’t think that it is a mark of infamy that you have a financial problem. What is important is that you get through it and that you can deal with it. What I’ve seen in China . . . is a government that is aware of the problems, that is seeking to deal with them directly with Zhu Rongji as vice premier and possibly as premier. You have someone of immense experience in the financial management and economic management. And my guess is that he’d be someone who could lead China through the difficulties.

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Q: Do you think any of these Asian problems have specific implications for California?

A: Of course they do in the short run. You’ve got $58 billion of California exports going to the Asia Pacific markets, and if you have a slowdown in those markets, you’ll probably have a slowdown in exports . . . . But I think that it’s a one- or two-year disruption. It doesn’t disrupt everybody, and I think that you’ll see a resurgence of growth in Asia. The thing you have to understand is that it’s a highly educated work force, they’ve got significant savings rates, their financial systems have gotten into trouble, but they can be fixed and we and other people are helping them to restore supervision and capacity in the banking system.

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Q: The World Bank has been fairly criticized in the past for funding big projects that are out of kilter with local economies. Is this changing, and if so, how?

A: I’m sure in some cases it was true, but it was never done without the concurrence of the local government. So we all may have made some mistakes . . . .

I think the bank can also be pretty proud of what it’s done, because there is infrastructure in these countries, which is an essential part of development. But what you have to look at today is a greater recognition of social issues, about the impact of projects and about the scale of projects . . . . Many people would say that there is a greater emphasis on smaller projects, scaled to the communities, than on larger projects, but I don’t start with any religious prejudice on that.

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Q. What is the bank doing to help people help themselves?

A: A tremendous amount . . . . If you talk about people helping themselves, I guess the first thing is investing in education and health. If you don’t have that as a prerequisite, you don’t have people with the ability to help themselves . . . . The second thing to do is to try and make sure that there’s an adequate infrastructure to allow them to have mobility . . . . And, finally, and most important, making sure that women have equal access to opportunities. Because if you bring the women and the girls along, you really have an opportunity of building a cohesive family structure, and you’re introducing the notion of the family supporting itself, an extra bread winner, as well as someone who has access to economic opportunity.

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Q: What are you doing to make sure your money is spent on your customers rather than on the system itself?

A: Starting at home, we want to make sure that our own procedures are economic, efficient and directed not to the bureaucracy but to the effectiveness of projects. When you get your own house in order, you can then insist on it in new clients. And so we’re doing a great deal more in terms of the delivery, using not just governments, but where governments agree, members of civil society, who very often are less expensive.

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Q: Over the last few years, we’ve seen a substantial increase in the amount of private capital flowing into “emerging markets.” Where does that leave the bank? Is it making you irrelevant?

A: I would be grateful if we were made irrelevant, because it would mean poverty would be gone . . . . The numbers are that today, the private sector is putting $245 billion into the developing world, as against official contributions that add up to $45 billion. But the private sector invests in projects that are income-generating. So they’ll go into a good power station, they’ll go into managing a water-supply system, they’ll go into telecommunications or port management, all of which is deeply needed. But you don’t see them in education, you don’t see them in health, you don’t see them in training judges, you don’t see them in regulatory reform . . . . Secondly, 80% of their money goes to 12 countries, while 140 countries get less than 5% of private-sector financing and sub-Saharan Africa gets 1% . . . . It’s very unlikely that, in my lifetime, either the bank or bilateral institutions or regional banks are going to become unnecessary.

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Q: One of your biggest initiatives is the war on corruption. But among some of your clients--I’m thinking particularly of Nigeria--corruption is so pervasive that one almost can’t imagine the system working without it. How how do you deal with that?

A: You deal with it forcefully and modestly. We’re a World Bank, but not a world government. What we can ensure is that we don’t lend to corrupt projects, and that we support those institutions in a country that want to bring about action on corruption . . . . It is clear that corruption is the single strongest issue on the minds of voters. It is also the single most inhibiting factor for investment, not just foreign but domestic. So I think that the world is getting fed up with corruption. Poor people can stand being poor but not if someone else is getting rich at their expense. There are enough of these people now in developing countries, and with an infusion of democracy people are screaming about it. So I would guess that the next decade will see a significant reduction. I would love to say a complete eradication, but I think that would be excessive.

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Q: Another of your passions is debt relief for heavily indebted countries. But doesn’t debt relief reward countries that have pursued misguided or even corrupt policies? Won’t debt forgiveness just shore up the elites that have brought the countries into their current desperate states?

A: That is the so-called moral hazard. And, of course, we’ve given a lot of thought to it. Our program is not just related to forgiving money to people who have done bad things in the past; it’s a program designed to take over good governance today and to reward current good governance. And, in fact, the programs are all related to bringing countries back to a sensible debt limit, provided their management of the countries is equitable, straightforward and honest. There is no sense in forgiving debts to someone who is a thief or corrupt, because they’re going to get into the same problem next time. What you’ve got to do is look for good governments and reward them. And whatever the origin of many of these debts, the simple fact is, many countries cannot survive unless you do something about it.

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Q: Is the World Bank formula for economic reform--macroeconomic stability and free markets--the best possible formula for all countries at all times?

A: I don’t think there is any best formula for all countries at all times, any more than there is the best formula for every individual about how he conducts himself at all times. But I do think there are some lessons that we’ve learned and that should be explored in the case of every country.

One of them is that sound economic management is a precursor, a necessary precondition for, poverty alleviation and growth. What we’re talking about in terms of macroeconomic management is trying to get countries to manage intelligently their economy. Don’t spend too much. Spend it on the right things. Put it into education, not into tanks . . . .

The second thing is that, typically, if you hide behind trade tariffs, the country falls back because it makes it less able to adjust in terms of developing its own competitive advantage. But the point is in what time frame do you give? I have now been in many countries, and I don’t go in pounding the table and saying, “Tomorrow free up your markets, tomorrow open everything up.” You’ve got to look at it within the context of the country . . . .

But the decision that’s taken by most countries now is that the market system works. It wasn’t the World Bank that talked about the collapse of socialism; it was a decision on the part of the voters that they wanted to buy into it. And it isn’t the World Bank that is getting developing countries to work with the World Trade Organization. They’re coming to the WTO because, over time, they know that they’ve got to go outside their own markets, both to have access to other markets and also to benefit in terms of lower-cost products . . . .

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Q: Has the World Bank become obsessed with management reform and highfalutin management ideas under your presidency?

A: I don’t think I’ve got a highfalutin management thing. I’m actually rather basic about it. I don’t think there’s anything wrong in cutting five steps for approval of a project to two. I don’t think there is anything wrong in holding people personally accountable for what they do. I don’t think there’s anything wrong in putting decision-making authority in the field so that people can be closer to their clients. I don’t think there’s anything wrong in recognizing that the private sector of civil society has a greater role to play. If you call that highfalutin management science, then I am a highfalutin management scientist. But what I’m doing is fundamentally sound.