Keynote address by James D. Wolfensohn, President : INSEAD international council meeting

INSEAD International Council Meeting 99966 Keynote Address by James D. Wolfensohn President The World Bank Group Fontainebleau, France, March 6, 1999 I have just visited Asia where I was reviewing what has been happening in Thailand, Korea and Indonesia and also in Japan. What is fascinating in that situation is that after 18 months of discussion about finance, about economics, about the issues that are typically spoken of in economic and financial discussions - the level of exchange rates, fiscal and monetary policy, the size of the package, the growth of the foreign exchange reserves, the movement in trade - all those things seem, generally, to be going well in Korea, in Thailand, and a little less well in Indonesia. But in each of those countries - and this is also true of Brazil and of Russia - there are the issues which are not spoken of, not really spoken of: the human issues, the social issues, the structural issues. And in fact the success of the arrangements in Korea and in Thailand and in Indonesia, will not be determined by the economics, although that will be an important element; but the real issue today in those countries, is the social and structural. This is something I think we all need to understand in the business community and in the community at large: too often the analysis and the decision making, in terms of what one does to boost confidence and to develop a better scenario for the future, has an unlimited focus on the financial. All the headlines at the time of crisis, were about 17 billion dollar packages and 58 billion dollar packages. All the references were about whether the policy should be inflationary or deflationary, whether you should defend or not defend the exchange rate. Beyond that, when we consider countries generally, all of us - me included - generally go to the balance sheet and say let’s take a look at the budget, let’s take a look at the fiscal balance, let’s look at monetary policy. Occasionally we throw in a few social indicators, but the basic language of analysing and reviewing both ongoing development matters and, particularly, situations of crisis, is financial. If I ever needed confirmation of my view that the other side of the balance sheet is equally important, I got it just now in Seoul and in Tokyo, reviewing the situation in Asia. During this trip I have also been in conversation with the Brazilian leadership about how that country’s budget is going to be prioritised in terms of social and environmental spending, in particular social spending. And I discovered that in Korea we now have close to 9 percent unemployment and 15 percent poverty in urban areas, roughly double what it was before the crisis. In Indonesia poverty has increased, as measured by those living on less than a dollar a day. It is not a very good measure but it is adequate for this purpose and it does tell us that 15 million more people have moved into poverty. In Brazil, the real question we face is whether the government will halve support to poverty programs in order to meet the level that is being demanded by the International Monetary Fund for fiscal balance. We have all tended to look first and foremost at the financial and economic situations when we look at these crises; we have looked at one side of the balance sheet. And what we are trying to do in the World Bank now, is to confirm, to assert that there is another side. That other side is crucially important to business, crucially important to stability, crucially important to peace - that other side embodies the issues of structure and of social considerations. Let me sketch for you some of the things we need to consider at the same time as we think of the financial. The first is governance and corruption. You can have a fantastic financial program, but if you lack adequate governance in a country and the place is torn apart by corrupt practice, you are not going to achieve real balance in your development program. The second is a legal system that works and a justice system that works. We saw in Thailand, Korea and Indonesia when we began the reorganisation that there was no adequate bankruptcy law, for example. And there was no real contract law that would protect rights, either commercial rights or human rights. And in many of the countries in which we are operating, even if you have a law - and we now have a law in Indonesia for bankruptcy - you have courts that, may I say, are doubtful, and in many countries blatantly corrupt. So if you are seeking to bring about development in a country, and you ensure that there is an extensive legal system, you had better ensure too that you have a justice system that works. This another highly crucial element and its absence will undermine the stability and growth of the country. The third thing you need, which is obvious, is a financial system to supervise and monitor what is going on in the banks and in the financial sector. If you ever needed proof of how crucial that is, and recent proof, again take a look at Thailand and Korea and Indonesia. In the case of Indonesia, 60 billion dollars plus was loaned by foreign banks to Indonesian companies. There was no real set of controls, there was huge dependence on short-term flows in all three of those countries and there was no real supervision. In many instances there were crooked relationships between banks, politicians and industry. This was not as viewed by us, at the Bank, but as stated by President Kim Dae-Jung in Korea, as demonstrated by the Indonesian people when they overthrew their government and as shown in Thailand in statements that come even from the King. So these issues of structure become extraordinarily important and when you think about them logically, you have to say to yourself that if these conditions are not in place, it is very hard to have an economic and financial program which is likely to take hold or to work. And then you need a fourth thing, which is a social system that works to protect people who are out of work, the aged, children, the disabled, persons that are vulnerable. It does not have to be a western social system, it can be a family-based system or it can be a tribal system. But you need some system of social underpinning. These four things - governance, a legal system, financial supervision, a social system - are rarely talked about. But if you just stand back for a minute and think about it: indeed if you think about what happened to Russia where we sought to privatise companies before we had any of this in place. We found that what you got as a result was some privatisation, a concentration of companies with people being put out of work, no social underpinning, no legal system that worked, no supervision, increased corruption and now great social instability. If you think about it for two minutes it becomes obvious, but we have not given it the two minutes thought. The immediate reaction of financiers and finance ministers is to jump to the financial without thinking about the structural and the social. Then there are other things you need to have if you are going to achieve any medium-term development for the 4.8 billion people out of a total of 5.8 billion on the planet. The 4.8 billion are those people in transition economies or developing countries and 3 billion of them live under 2 dollars a day, 1.3 billion live under a dollar a day, 1.3 billion people don’t have clean water, 3 billion people don’t have sanitation, 2 billion people don’t have access to power. These are not trivial statistics. This is the state of the world in which we are living and we are adding 86 thousand people a day and in another 25 years we will have another 2 billion people on the planet and the 4.8 billion will probably be 6 and a half billion, and the 3 billion people living under 2 dollars a day, will be at least 4 and a half billion. You can say that surely by the middle of the next century we will need twice the amount of food, we will need to expand water supplies to at least double, which might well be a cause of conflict. We also have to deal with power. But if we are going to try to tackle any of these things we have to start first with education. Education at all odds. Education for boys and for girls, particularly for girls because the future of our planet really depends on enfranchising women. You train girls for two reasons: both to bring them on stream so that they may contribute and because educated women limit the size of families, and that is the most effective measure in controlling the population explosion. And then you need healthcare, you need roads, you need knowledge transfer. And knowledge transfer can be quite dramatic. I was in the Côte d’Ivoire recently looking at questions of corruption, looking at the questions of poverty and poverty eradication in development. This is a country that has 45 percent of its exports in cocoa and coffee and up to now, the intermediaries - friends, typically, of the government - have taken all the profit using a fixed price. So the Bank came along and said, let’s have a non-monopolistic situation here, let’s have competition. We tried to break the monopoly and then we discovered that the two and a half million farmers really had no knowledge of what price they should sell at. I went to a jungle area, where I met the farmers in the morning, went into a village, where they happily made me a chief, with my black hat and gold robes - I looked very beautiful, I must tell you! I should have worn it today to impress you all. I sat with my brother chiefs in the village and then we went to a building and in a room were two young Ivorians, sitting in front of two computers. One of them showed me how they weighed in the coffee and the cocoa, tested it for the quality and gave computer print-outs. And the other young Ivorian, really sitting in the middle of nowhere, was plugged into Internet, getting a Reuters service arranged by the World Bank providing coffee and cocoa prices and linked to the Chicago Board of Trade, to London and to Paris. And he used a cellular telephone to get this information out to the farmers. And then I went back to meet with my brother chiefs and we started to talk about hedging and forward contracts in Chicago and the difference between Paris prices and London prices. This drama of knowledge, this fantastic capacity to bridge 100 years with the use of computers which, in this case, we have achieved through a joint activity with a Canadian non-governmental organisation which supports the computers and trains the people. We have dozens and dozens and dozens of examples of the importance of knowledge and the importance of technology. So we have a list of things here from education and health to communications to rural policy to urban policy and, most importantly, a policy for business. Investment has become a crucial area in development, in both developing and transition economies. The statistics you probably know. Ten years ago investment to developing and transition economies ran at about 30 billion dollars a year. Transfer of funds from the World Bank and people like us, ran at 60 billion, so we were twice the size. In 1997, private sector transfers were 300 billion and transfers from official institutions were 39 billion. From being half the size, private sector, which includes bank transfers and direct investments of around 110 billion a year, has gone to 6 or 7 times the size. So the private sector and its involvement in developing and transition economies has moved from being important to being dominant. And this is true in terms of the creation of jobs and the transfer of technology and knowledge. And we have not really adjusted to these great shifts which suggest a whole different methodology. Our objectives are clear, the structural and social issues I have just outlined but the way in which we help governments has become far different than it was when the Bank was started 50 years ago and had the kind of money and even arrogance to dominate the agenda. That is not the case today. We now need a four-way partnership between the governments of the countries, between the multilateral institutions which now go way beyond the World Bank to include regional development banks; a partnership with bilateral institutions and of course with civil society which has grown enormously with greater freedoms in many countries. Ten years ago, one in four countries had a democratic framework and a billion people lived in a market economy. Today, it is 5 billion people and three-quarters of the countries have some form of democratic government, and when that happens you have a burgeoning of freedom and you have a growth of civil society and we have to adjust to that. And we have not, not adequately. And then we have the business community and there is a curious distance between business, in terms of its sense of social responsibility, and what is being done in the development arena. There is a lack of knowledge, and many companies turn their back on it. What is crucial is that the leading companies are now recognising what is absolutely true, which is that social peace and development is absolutely critical to business. At present 18 percent of the world’s GDP is in that 4.8 billion people and in another 25 years it will be 30 percent of the world’s GDP, growing at twice the rate of the OECD countries. So it is not just a question of moral and social responsibility, or feeling good, it is a question that if world business is to see a stable world, and if our kids are to live in a peaceful world, then there has to be a unity of objective and a coming together of business with international institutions and with governments, to really shoulder responsibilities in the social and structural sector. I say this not because I have the job at the Bank. I have lived and worked with all of you for 30 years and I understand the private sector very well. I made my career in the private sector. But I say to you now, as someone who has visited 85 countries within the past three and a half years and been in more slums and villages and projects than I thought existed, that the true importance of your responsibility in the social sector is not adequately understood. The leading companies are doing a fantastic job and it is my hope that perhaps with INSEAD and this group, we could get some leadership - where it’s not there already - in terms of recognition that the future is dependent on peace and on social development. We are not making much of a success of it. Poverty is in fact increasing. The distance between rich people and poor people is increasing. The environment is being degraded at the rate of one acre of forest per second, the bio-diversity being ruined at the rate of a hundred species a day and the environment, in terms of carbon emissions, is, at least in my judgement, highly threatening. We can do something. But, it is not a moment too soon, to do something. And I look to institutions such as INSEAD, not just in terms of the leadership that’s here - and I am very happy to see the next generation here - to recognise that the challenge we are facing is not just the financial challenge, the simplified challenge of fiscal and monetary policy, the quick summary in terms of country analysis. We need to go beyond that and look at the structural and social. This is not some wild- eyed green talking to you. I have actually made a living advising many of you, and I know the corporate sector, and I tell you that you just have to think about this and we have to act. There needs to be a change in terms of social outlook. This is not a distant issue. This is a bottom- line issue. It is an issue of peace and it is an issue of security, and for the next generation, it is an issue of the sort of world that we are going to live in. If we can stop revolutions happening, and if we can stop crises, that’s a hell of a lot easier than trying to fix them. Fixing them is very, very difficult, as I have learned. Preventing them and anticipating them is really what we must be doing, and it is not as gripping for the headlines, but it is the key that we need to address. We at the Bank have had to change. I must tell you that I found an institution which was full of remarkable people, ten thousand of them, but rather stiff and rather arrogant and not really anxious to change very much. Like most international processes, the Bank’s system was based on the approval of projects and on convincing 180-odd member governments that we should invest in something. There was very little accountability, if any, in terms of performance. That, by the way, is very characteristic of the international field. And I came to this group and it was not easy. So I turned immediately to the notion that we should re-educate and so I took the decision that we would create a course, which would be run by Harvard, Stanford, the Kennedy School and INSEAD, in terms of training my top 400 people. We have now put 400 people through a six-week management course and we have had in each of the courses, 25 percent outsiders, so that we were not just talking to ourselves. The outsiders were critics, clients, corporations and it has been a fantastic development. I am very grateful to INSEAD for its contribution and I know some of the professors that have taught the course are around. The next thing I did was to have everybody in senior positions at the Bank spend a week living in a village or a slum. 120 people have now done that. 119 of them have loved it, the 120th was a poor lady who nearly died of dysentery and she didn’t enjoy it very much. But thank God she lived and she has been promoted for her remarkable service! But, it is very difficult as you know, to bring about change in an organisation, cultural change. But it is something that we are really trying to do and in the most effective way we can and we are using education. And while I am on education, let me add that we are trying to bring together our organisation in a way that is different and that takes advantage of the new technologies. By the end of the year, our 100 offices will be linked by satellite with voice data and video. We have 400 video conferences a week now. I am in the studios probably about 3 or 4 times a week. By the middle of the year 2000, we will have 50 classrooms, of 30 people spread around the world, for distance learning. We are operating a university in Africa in 14 countries called the African Virtual University. We are just graduating some of our first students and those are courses taught from Canada, Dublin, and from the eastern United States. We have linked over 400 high schools on Internet in a programme called Worldlink, where we are linking northern schools with southern high schools and where they set up their own programmes of joint research and teaching. We are providing courses in 30 different subjects in 3 languages, French, Spanish and in English, with teaching guides and everything that goes with them. We are also running courses for governments and we can have discussions with our own staff around the world. We have renamed the Bank: it is not just a money bank, but a knowledge bank. We’re putting 40 million dollars into trying to capture the best practise and the worst practise so that if you are interested in building a pavement, you can now come in and get best practice on building a pavement. If you then want to talk to people who have built pavements, we can put you in touch with the specialists in Washington. But we can also link with someone in Nepal, or in Bolivia or in the Côte d’Ivoire, in real time to have discussion in our field offices. This communications development, this sense of globalisation which you are now demonstrating in Singapore, is really a way of the future in which we all need to work with each other. I am very hopeful that as you develop your Singapore campus, we can also work together on distance learning and take advantage of courses that you might give, so that you can extend courses, not just to your campus in Singapore, but work with us in running courses for our people around the world. It is a new world, but it is one in which we also need the assistance of business and you can help in countries overseas. If you have computers and young people to teach the locals how to use them, do so; give them a chance. Open up in terms of technology and knowledge. Run courses in management. Make a contribution in terms of trying to build the community. These are things that are not costly, but which will ensure you a reception in terms of your continuity overseas. There is a real need for us to come together now in ways that we have not come together before. I am not pessimistic about the world, but I am apprehensive. I think we are at a point of enormous opportunity but we are also at a point of considerable danger. I think that it is within our power to be able to deal with it, but not alone. We have to bring business, civil society, government and the multilaterals and bilaterals together in ways that we have not done before. In fact, in terms of a new initiative we call the comprehensive development framework, we have picked a dozen countries, in which we are trying to bring in new methodologies for connecting business, civil society and government. I will probably be approaching some of you at different times, or my colleagues will approach you in various countries to see whether we can, together, develop new patterns in which we can bring about the setting of goals and objectives to try and build a more stable future for us all.