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China: Conversation with World Bank Group President Zoellick at the Boao Forum for Asia Annual Conference 2012




World Bank Group President, Robert B. Zoellick; Moderator: Ambassador Zhou Wenzhong, Boao Forum for Asia Secretary General The Boao Forum for Asia Annual Conference 2012 Boao, China
ZHOU WENZHONG: …[introduction…..] so – Today we will focus on his experiences with the World Bank. So let me quote something. He sets up six strategic themes as guidance of the World Bank Group, among which he put top priority on helping underdeveloped countries to overcome poverty and to spur sustainable growth. In the past five years, the World Bank, under his leadership input US $247 billion in projects around the world in a fight against poverty. This is quite an achievement.
So, I think today’s conversation, dialogue, will focus on what he has done during his term(s) at the World Bank and – so we all know that he will leave at the end of his term, so look back on what he has to say to his successor. But I think that I will begin with asking him a question about the world economic situation.
I hope we haven’t worked you too hard. Actually, there will be a lunch today and the theme of the lunch – subject of the lunch is, certainty and uncertainty. So that’s about the world economics are changing. We have invited him to be on the panel and unfortunately he couldn’t do it. He will have to leave right after this dialogue.
So let’s take advantage of this opportunity of hearing your views with regard to the – how do you view the global economy in the coming two years? Because the World Bank has made available some forecasts and the forecasts are not optimistic. So…
MR. ZOELLICK: Well first, let me thank all of you for getting up so early. That shows a lot of fortitude. This is a very hardworking forum, I noticed, that people start early and go late. And I want to thank Ambassador Zhou for the invitation to be here. This is my first time at the Forum and I’ve learned a lot in a brief time. I think it’s an extraordinary event and so I compliment him and the other members of the Forum who have advanced this so far.
For the economy going forward, I think over the past six to nine months countries have used an extraordinary set of policies, particularly in the monetary area, to avoid what I call the tail risk – the extraordinary events that could set the economy back in a very serious way. But I try to anticipate what I might see as the next problem, and so what I’m focusing on these days, is that most of the steps that countries have taken since the crisis began have focused on so-called macroeconomic stability, so countries have tried to deal with their fiscal problems, their spending and their debt. And we’ve had some truly abnormal monetary policies, particularly by the US and the European Union.
I’m not being critical of those policies. I think those were actually very important. Hank Paulson had a chance yesterday to talk about some of them and the effects. But I think it’s important to recognize those policies don’t solve the fundamental problems. They just buy time.
So what I think is, we’re now in a stage where it’s important for all countries, developing and developed, to focus on the structural reforms that will drive future growth, as part of what we discussed with China, with the China 2030 report. It’s part of what Hank talked about a little bit yesterday with the United States. It’s part of what Mario Monti talked about yesterday at the Plenary.
But the reason why that’s so critical, is all of us know those are hard. They take particular political will. And if countries are slow in making those reforms, I suspect what you would see is ongoing pressure for the monetary authorities to try to continue the highly unusual policies. In a sense, it’s like a tool that doesn’t really fit the problem, it’s a solution that doesn’t fit, that they’d be under pressure. Then we run the risk of planting the seeds of future problems, and the nature of asset price bubbles is that it’s always difficult to ascertain them in advance.
So, central banks say well we don’t see much in the way of inflation rate. But remember, they said that before the asset price bubble that led to the crisis. And just to give you one example, because I think it’s important to keep an eye on these around the world, if you look at farmland prices in the United States, in real terms they’re higher than they were at their peak in the late ’70s and early ’80s. Now the situation isn’t quite as risky because the farmers haven’t leveraged up as much. But they are basically assuming cash flows that are based on very high farm prices.
Now that may hold. We may see a secular shift in demand. But it’s one of those risk factors, that I expect we would see all throughout the world in different markets, if monetary policies have to be relied on as the primary tool.
So again, I’m not being critical of the monetary authorities. What I’m really emphasizing is – the message, for example, at our World Bank- Fund meeting in April, you will see there will be a lot of talk about stabilization funds and that’s all to the good. But the fundamentals of structural growth, I think, are going to be the critical aspect going forward.
ZHOU WENZHONG: Thank you for the forecast. And I think the other – and the follow up question is, when the financial crisis hit in 2008, I think countries around the world worked very hard and together and, we can characterize the kind of cooperation using one – phrase, Chinese phrase – that is – we are in the same boat. So I think that’s the spirit at that time. But do you think we’re losing that kind of spirit?
MR. ZOELLICK: Well, the American analogy was one that, I think from Ben Franklin which is, at the time of our Revolution we said “you can either all hang together or hang separately.” And I think it’s natural that at a time of crisis, when countries really have their backs to the wall, it’s most likely that you’d get a coordinated response.
And second – I know this will be a shock to this audience – but it’s sometimes easier for politicians to spend money than it is for them to pull back money. So you had big stimulus programs in the United States, China and elsewhere. So I think the challenge, for example, for the G20, will be having a balance of dealing with the remaining risk. I think Europe is a significant one. Oil prices are causing some concern as well. But then to try to do what they can to press forward these structural reforms.
Let me just emphasize, one of the most powerful tools to work together on structural reforms- is to open markets for trade. Trade is frankly microeconomic reform. You lower your barriers, the other countries lower their barriers and it improves the overall efficiency in productivity.
As Hank mentioned yesterday, I think the Doha Round is in kind of in the deep freeze. But I think it’s very important that we look at other opportunities. Carlos Gutierrez is here from the US Commerce Department. People are talking about sectoral reform. One aspect of service – of productivity and structure reform – is in the service sector. This is particularly true in China. It was true actually in Japan, 10 or 20 years ago, and still could have some additional liberalization.
Because service sectors are an increasingly important part of the world economy, of any economy, and yet you can see that they tend to be harder to negotiate, because negotiators are used to things like tariffs or quotas and yet, the opening of competition in the logistics market or a telecommunications market involves ministries that are used to domestic control. So I think what we’ve seen around the world is, when you open services markets you create new jobs, you add to productivity, you create additional basis for competition.
So I think the challenge going forward will be for the G20 to focus on those issues and on those that are for the most vulnerable. So for example, in past summits – and I think there is an effort under Mexico to focus on this – to take advantage of the higher food prices, to help poor countries expand their productivity and production. That is a way of meeting a need, but also a way of increasing income.
So I guess my bottom line is we’re not out of the woods yet, and I think it will be important for groups like the G20 not to go off in the direction of national policies under political pressure.
ZHOU WENZHONG: I agree with what you have said. That is, we really need to focus on doing more in terms of structural reform. But of course, the difficulty is you need to find the right time to introduce the kind of measures necessary for more structural reform and now, of course, some people here are sort of forecasting that we will see – some kind of competition between the notion of FTA versus TPP. What do you think? How should we relate an FTA to the TPP?
MR. ZOELLICK: Well, I’ve always believed that the best way to fight protectionism is an offense, as opposed to a defense. In other words, there will be interest groups in all countries that will come up with justifications for protection and during my tenure, and Carlos and Hank also pursued this, I thought it was very important to have the executive branch lead a marketed opening effort, because otherwise you spend all your time trying to fight those that are closed markets.
So I believe that it is important to work bilaterally, regionally, globally as well. I think they can be complimentary. One does have to be careful. Sometimes the difference between a customs union and a free trade agreement is a customs union actually raises barriers to outsiders and so one has to be careful that, in trying to create regional integration, you don’t do it at the expense of a global economy. We talked about this a little bit last night in the Asia context.
But what I’ve seen over the world economy over 25 years is, it’s natural to have deeper regional integration. You’re seeing that in Asia. You’re seeing companies drive it through their logistics chains and supply chains. So I think there is a lot that can be done, not only in formal border barriers. But at the World Bank we’ve looked at lot at the informal restrictions, for example, customs systems, how long it takes to get through the port. We work with companies to help poor countries be able to develop one stop border posts, so you can bring things through more quickly.
It relates to the infrastructure agenda. Because if you don’t have the ports, if you don’t have the ability to get things to intermodal transportation… -This is one of the issues I was discussing in India, India has a number of transportation bottlenecks, but in particular the intermodal connections of sea and air and land need to be improved.
So I think, frankly, I would use a combination and I think that in the case of the Asia-Pacific, I would emphasize – I was around and one of the starters of APEC in 1989, help bring China in in ’91 and ’92, – and I think one of the benefits of APEC is it recognizes that it’s truly an Asia-Pacific economy. So I would continue to look for ways that, whether they’re in formal trade negotiations or types of things to improve the movements of goods and services and people, I might add, then you can continue the process of liberalization. It’s best that they can be done at a global level. But as we saw in the case of Doha, it’s hard to get 150 countries to agree all at once.
ZHOU WENZHONG: This annual meeting is designed to help Asian countries, all countries in the region to figure out what to do, under the current circumstances, in order to adapt themselves to changes. So in your view, can you share with us some of the – some of World Bank’s insights on the internal, external risks in the Asian market? This is also a follow up question to the previous question, actually.
MR. ZOELLICK: Well, I think, as most people in this audience have seen, because of the slowdown in the developed economies, you’ve seen a slowdown in the trade sector. Another aspect that we’re watching closely at the World Bank is, as banks around the world, particularly the European banks, go through a de-leveraging process, you’re seeing some pull back of credit in some of the traditional structured transactions or credit arrangements.
In the case of the Asia-Pacific, fortunately, some of the rising Asian banks have filled some of the need and you’re seeing the rise of portfolio lending and foreign direct investment. That actually underscores a point that Hank Paulson made yesterday, and I discussed with [Governor Zhou] separately, and that is, it will be important for China to broaden its financial services market, to deepen the capital market, because if you rely solely on bank lending and there are troubles in the bank sector then you run the risk of a credit contraction that follows from banking.
I think you are going to see this, by the way, in Europe too, I think as the banks actually de leverage you are going to start to see a greater reliance on securities markets, as you have in the United States. So, you have the trade area. You have some of the capital areas. I think that in – again, the prospect of oil prices hovers over all the economies.
The good news is – and this is a compliment to the stewards of Asian economies, if you look at most of their fundamentals-current accounts, surpluses, they’ve re established their fiscal position, they have reasonably good reserves. So they’re in a reasonable position to deal with some of the uncertainties. But, to connect the points that I’ve been making, and as I discussed a little bit last night, I think it’s important to look ahead. And what I see ahead in the Asian economies is – as Executive Vice-Premier Li Keqiang mentioned for China – you’re going to need to move increasingly to domestic demand.

Well, that’s going to vary. In China there’s a focus on increasing consumption. In a country like the Philippines, you could have domestic demand from investment which would be important for some of the infrastructure aspects. So that’s one aspect to look for the future. A second one is actually this trade issue. You know, what’s interesting from my experience as a trade negotiator is the developing countries urged the developed countries to lower their barriers, appropriately so, but the barriers among developing countries are also still relatively high.
What we’ve seen discussed here at this forum is increasingly you’re going to see south -south trade, south- south investment, south- south tourism, so it would be useful, whether through formal or informal arrangements, to reduce some of the trade and investment barriers among developing countries. And then I think, this is true for all countries, but particularly as the Asian countries try to get through that middle income trap, they’ll have to become more effective at how they use their public expenditures.
Another area that we work on at the Bank is nobody wants to waste money, you have to invest money in health and education. That’s your future, your human capital. But we’re learning a lot about how to do that more effectively. And again, I would think in this region and in South Asia, there is a potential plus – if it’s done right – which is the urbanization process. In China, as Vice-Premier Li Keqiang mentioned yesterday, you now have 50 percent of the people in urban areas.
The World Bank estimates that by 2030 that’ll be 70 percent. In India, it’s about 40 percent today and it’ll go up to 60 percent. That presents huge issues of the infrastructure, water and sanitation needs – a whole series of aspects, but if done properly, what we’ve seen is the benefits of urbanization are that there are spill-over economic effects, the training of people, the mobility of people. And so in some ways, it’s like the way China used clusters quite effectively so that you would have a series of industries together, and they would be able to benefit from a common platform and some of the training.
So these are some of the structural or microeconomic aspects that if done improperly will create a difficulty. You’ll have a lot of people in cities that may be near oceans with rising water from climate change and environmental issues. But if done properly, can create sort of the foundations for future growth. So I know – of course, I first came to Asia in 1980 on a fellowship to Hong Kong and it was my first chance to visit China, so I’ve seen, with my own eyes, the changes in China, and having seen that over 32 years, you could not help but be bullish.
But what you do recognize is that as countries start to climb up the scale of development, it gets harder to maintain that growth rate. I had reason to look at this recently, but in 1960, there were 101 countries that were classified as middle income. By 2008, only 13 of those had made it to high income. So, as you start to have to move to the technological frontier, as you start to move beyond the early task of moving people from agriculture to manufacturing, the challenge gets harder.
That doesn’t mean by any means it’s impossible but it means you need to think ahead. And just to close this point, and connect it to the report we did with the DRC and we announced last month in China- I personally think it’s very far-sighted for the leaders of China to be thinking about the adjustment that China needs to make and its growth model. And to put this in an international context, it would be very easy for the leaders in China – and I’m sure there are voices in China that say, we’ve grown 10 percent a year for 30 years, let’s just keep doing it until we have a problem.
And if you look at the United States and Europe, there’s much more good reason to be making structural reforms. But I think the fact that –at least, it seems a critical mass of leaders in China’s saying, no, we’ve got to switch from export- and investment-led growth to the domestic demand and consumption – is a very encouraging sign. But of course there’ll be voices that say, I liked it the old way. So part of my point is, while you’ll see most of the newspapers focus on simply the macroeconomic aspects, ultimately it’s the structural aspects, and microeconomic aspects that drive productivity and growth.
ZHOU WENZHONG: Thank you. Let’s move onto Europe, because European countries are important – some of them – important contributors as far as the World Bank is concerned. I think the economy there is still in the woods, so under the circumstances, how do you view the current European debt crisis? Will it become a long-term problem that can stall the economy of growth of Europe, and furthermore, the public debt problem in some of the other countries, will that be a problem for the World Bank in terms of getting help?
MR. ZOELLICK: I think the reason why people are struggling with this problem is it’s really three interconnected problems. You have an issue of sovereign debt, as you mentioned. You have an issue of the banks because the banks were owners of a lot of the sovereign debt, so as the sovereign debt lost value it undercut the capital of the banks, they had to deleverage. Then third, for some countries you have a competitiveness problem. Since Europe shares a common currency, you’ve got different rates of productivity growth, so some countries have to struggle to be able to compete.
As following on my earlier remarks, I think the European Central Bank has taken some extraordinary actions to remove some of the risks, but I think we’re now in a phase where the politics of reform will be as important as the economics of reform.
Here I have to compliment Prime Minister Monti and it was wonderful you could bring him here, because I think he described quite well the position of Italy dealing first with fiscal stabilization but then talking about a pension and labor reform.
If I were going to focus on the heart of the issue for this year and next, I’d focus on Italy and Spain. Greece is 2 percent of the economy. It’s been kind of put aside, it’ll be managed. Ireland is smaller and again has gone through some of the adjustment. Portugal’s somewhere between. Those countries are not big enough to shape the European economy. Spain and Italy are.
Now, the good news is that the governments in Spain and Italy are trying to undertake the fiscal reform, and the structural reform, as Prime Minister Monti mentioned. The difficult news is, we’ve talked about structural reform in China and the United States or Japan. It’s very hard to do structural reform in an environment of no growth, very hard. So the politics have to – or the political will – have to be a key component. And my concern is that again, some of the focus on things like this firewall are okay, but frankly it would be important to figure out some ways to get some additional demand or investment in Europe that would support the structural changes.
Let me just give you one example that’s rarely talked about. There’s something called the European Investment Bank. The European Investment Bank, because of its ownership by European countries, is actually having to shrink its lending. Frankly, rather than talk about another $100 billion to the firewall fund, if you simply took $5 billion or $10 billion and added it to the capital of the European Investment Bank, it could invest in infrastructure and other projects that would support the types of reforms that Spain and Italy and others are making.
Another example is, Europe has what are called cohesion and structural funds to help countries with adjustment. Frankly, they’re very slow in the distribution of those funds. So frankly, if I were running the show, I’d be cracking the whip in Brussels to make sure I got some of those funds out.
And a third aspect that fits well is, the heart of Europe was the single market. The more that you expand that market for movement of people, for services – Germany for example has done a lot of things very well. Its services market is still not as open as it could be.
You open those markets, you start to create the opportunity for more growth, and growth will support the reforms. So I think the key going forward for Europe will be, can you sustain the politics of reforms, particularly in Spain and Italy, and it would help those leaders if people took steps like these to boost growth.
Again, I think that Mario Monti focused on the right issue coming to China in that people have talked about, well, China put in you know large sums of money into the stabilisation fund. I’ve always thought that was a pipe dream. The per capita income in China’s about $4,000 a person, it’s $38,000 in Europe how are you going to explain that to your people? But to have CIC do some investments in Italy at the time that they’re making structural reforms, that’s a win-win opportunity.
ZHOU WENZHONG: One of the important aims of the World Bank is to eliminate global poverty. Since the global financial crisis in 2008, some less developed nations have endured some hardships while the aids from developed nations have gradually reduced. So in the post-crisis era, what are some of the new challenges World Bank faces in poverty alleviation? So what are your new policies and new problems?
MR. ZOELLICK: Well, the key policy is one that I’ve tried to pursue consistently since I came to the Bank. It’s a little different one that you would hear from some of the expert debate, and it’s quite interesting. In the succession process for the Bank President, you had a lot of op-eds and people discussing this, And some scholars and experts say, the Bank should just focus on two or three things. So Jeff Sachs said they should focus on certain diseases, and they should focus on food security, and they should focus on ICT.
I frankly think that is a backward-looking view because 20 or 30 years ago you had expert people at Columbia and Harvard and MIT say, ‘developing countries should do this’. My approach is to say, developing countries are clients. So let’s talk to the client before we tell them what to do. Let’s understand the nature of the problem. So the challenges in China are different to the challenges in India and they’re different from the challenges in Rwanda or Cote d’Ivoire or others.
So the key is to try to help clients solve problems, and then we try to take the skills and knowledge that the Bank has uniquely from global experience, and help them solve problems. Now, in that context – obviously we’ll work with what countries emphasise – but what I see evolving are a few: One, infrastructure, as we’ve talked about. Now, one of the reasons the World Bank – we created a special hub in Singapore because to really develop infrastructure effectively, I think the public-private partnership market could be developed much further than it has.
And it’s interesting with a lot of middle income countries, they’re not interested in public-private partnerships so much for the money, but they feel that they are better-designed, they’re better-operated, they’re better-managed. But we’re still doing public-private infrastructure as a series of one-offs. So we’re trying to figure out based on some of the Asian experience, how we can get a better flow in infrastructure, and we’re actually working with the Government of Singapore then to build an infrastructure fund and other private parties would join us in that.
A second area – and that’s obviously related to things like urbanization and some of the other aspects I’ve mentioned, or integration. A second aspect is – this whole discussion has suggested how uncertain the world is. Some people say, let’s deal with uncertainty by controlling food prices or oil prices. I don’t think that’s going to work. But what I do think is important is that every country should have a basic, efficient, effective safety net. Now, here again we draw from experience in developing countries.
Mexico and Brazil started something called conditional cash transfers where they give money to the very poorest people in a community, it covers maybe 10 percent, 15 percent, 20 percent of the population, on the condition that the children have to go to school, and people in the community have to get health check-ups. It’s probably done more for women’s health than anything in the history of Mexico. We at the World Bank have taken that successful model and expanded it to some 40 different countries. Now, for some poor countries that don’t have the capacity, you may need a different model.
You may use schools, and a feeding and nutrition centre, but the point is that you need to do this in a way that doesn’t bust your budget. Mexico and Brazil do this for about a half of one percent of GDP. Compare that to US or European entitlement programs. So one of the things that I’ve been pushing at the Bank is to customize safety nets to help those at the bottom with whatever vicissitude strikes.
A third area – again, this conference represents it – is what can we do to boost the private sector? You know, what can we do, not only in infrastructure, small- and medium-size enterprises, service sector, financial arrangements, and IFC, our private sector arm, has been very innovative in trying to leverage our funding and support in that area.
A fourth really deals with a specific category. There was a book written a couple of years ago called The Bottom Billion, by Paul Collier. And it focused on the special problem of – it’s actually about a billion and a half people living in post-conflict states. So you have these – it’s Afghanistan, it’s Cote d’Ivoire, it’s Liberia, but it’s also Timor-Leste and others in this region. There we’re trying to, in a sense, break the mould by combining security, governance and economic development more effectively than in the past.
And the last area that I think is, in some ways, the underappreciated issue is gender in development. People often overlook that women are 50 percent of the population, but in a lot of societies they’re not integrated effectively as a potential source of growth.
So we had a World Development Report that looked at this issue and highlighted the principle that gender equality is actually smart economics, and not all of this involves money.
Just to give you one example. In Ethiopia we worked with the government to change the land titling system so that there were opportunities for two names on the land titles. All of a sudden women started to become co-ownerships of land in Ethiopia and that meant they could start to get credit, they could start to get the inputs. And women are the primary farmers in Sub-Saharan Africa. And this is one – whether it’s developed or developing economies – there’s huge potential. And in some ways it requires some adjustment because, if women want to take time off and be at home with their children, how do you make it easier for them to come back into the workforce? This is something the US and Europe also could do some things on.
So part of what, again, when we focus on a structural agenda you should try to look for those things that people might have overlooked that can boost growth. So those are some of the categories that we’re focusing on today.
ZHOU WENZHONG: I think you have said – have talked about the need to “modernize” multilateralism. So looking to the future – well, what do you mean by modernizing multilateralism or modernize the World Bank?
MR. ZOELLICK: Well let me speak at this at the broadest level and then mention it for the Bank.
The World Bank and the IMF and the GATT, which became the WTO, were really invented in 1944 because World War II was ending. I think it’s important to have the perspective in mind. In a sense, these very wise men said, well, let’s understand some of the causes of the conflict in the ’20s and ’30s, the protectionism, the beggar-thy-neighbor policies, the economic conflict that led to the Great Depression, the collapse of politics so you lost economics. They said, how do we avoid that problem? So they built these institutions to try to deal with currency and monetary affairs, reconstruction and growth and development, and trade.
It’s interesting, if you reflect on those topics, those remain very valid topics. But of course the world has changed. So the challenge is, how do you modernize these institutions for a world where the developing world, much of which were colonies at the time of 1945, is now two thirds of global growth in the course of this downturn.
So, I – this is a fight that Hank and Carlos and I always had with others in the United States. Sometimes people see the multilateral institutions and they see their flaws and weaknesses. There is no doubt, they are there. Sometimes they’re frustrating to move. But this is a very thin tissue that connects all our international economies. So my view is, let’s try to modernize it and make it work better.
Now in the case of the Bank – there’s a lot that’s been involved, but just to give you a flavour. One point is the one I’ve mentioned. Work with countries as clients. Don’t expect that it’s North-South, somebody at Colombia University telling everybody what to do. I think there’s a lot of smart people that I’ve discovered in developing countries. How can we share the knowledge about – from other countries, about how they are involved?
The second – and this is – for people from the private sector here this would be obvious but sometimes it doesn’t work this way in the public sector – is good intentions are not enough. So how do you measure your results? This may seem obvious but a lot of people have been fighting poverty. They’re very committed. They want to believe that what they’re doing works, but you need an honesty and an integrity to say, did it really work? If not, what do we need to do to fix it?
So Hank, yesterday, emphasized transparency. That’s the other part. You need results, transparency and openness and ultimately, accountability. So one of the things that I’ve done at the Bank that maybe the most lasting legacy is, we created an open information policy that’s the most modern of any multilateral institution to make information available. We’ve opened up our data sets, over 7000 data sets going back 40 years. So it allows people to interact with us on a whole series of projects.
You can now go on the web and you can look at a map and you can ask where any individual project that the Bank is doing and get the information on the project. Before long, we’re going to have it interactive so that we might have a project in a certain area and somebody in the village can say, well this is what you think it’s doing but let me tell you what it’s really doing.
So there’s huge possibilities to combine openness, results, transparency and accountability.
A third is, you obviously need financial resources. So I was pleased that we were able to get the first capital increase for the World Bank in some 22 years. It was interesting how we did this. We actually did it with a package and we got over half the contributions from developing countries. So this is an idea about how you modernize the system. As developing countries grow they can also contribute more in the process.
Then for the very poorest countries we have something called IDA. This is – we were able to raise some $90 billion through two replenishments over that. And just to give you another little example. Obviously the US and Britain are the biggest contributors to this, but with China – China used to be an IDA beneficiary. So I worked with the Chinese authorities and others to say, how about if you prepay some of your IDA. You don’t have to contribute, but prepay it. We used that to bring over a billion dollars in.
So there’s ways where you can use what the experts call special and differential treatment to try to integrate things more effectively.
So I guess the last point would be, and it fits on the problem solving. We need to continue to innovate to come up with solutions. So in this crisis we noticed that trade finance was drying up. So we ended up creating a leverage trade liquidity facility. In the case of Indonesia the finance ministry wanted to have an expansion program but they weren’t sure they could have access to the markets. So we worked with the Asian Development Bank, Australia and Japan to create a backstop facility.
So part of our role as a sophisticated financial institution is, how can we use some of those ideas to be able to overall strengthen the performance, and increasingly – this goes back to the point – we have to think in more South-South terms. I think if we’re here five years from now there’ll be a lot more discussion about the cross-investment among developing countries than there is today, and that’s going to cover the full range of development issues.
ZHOU WENZHONG: Yes, that’s a very good point. [inaudible]…well I think from the announced candidates we’ll hear this. [laughter]

Finally, the latest BRICS Summit made a decision, that is to set up a South-South development bank. So our focus is still very new and the detail yet to be developed. So what is your response to that? Now how do you visualize the kind of relationship between World Bank and South-South development?
MR. ZOELLICK: Well, as you said Ambassador Zhou, the – it’s still at the stage where the finance ministers are analyzing it to go forward. As a general principle, my view would be, if the countries want to develop it, then we should work with it. We work with the regional development banks, I actually created a series of partnerships with the Islamic Development Bank, the Arab Development Bank, and those institutions were probably more like the BRIC bank in they’d probably be more of a financing vehicle than a knowledge and experience vehicle. The World Bank (over) has taken 60 years to build the staff and capability.
So part of the strategy I’ve had at the Bank is to network and partner with NGOs, private sector, other institutions. Now I have to say, forming a bank is not an easy venture. So there’ll be some sensitive issues as to who’s the President of the Bank, and where it’s located, and where the capital will be. It will have to get a rating. We have a AAA rating, which influences your overall financing.
But I was joking when I was asked this in India, I said, look, I’m enough of an economist, I’m not a monopolist. So if somebody formed such an institution we should work with it.
But one last point on this. I think it’s important for people to try to understand what’s driving this. People often jump to an issue and they don’t step back and think about what’s driving it. I think you have different motivations for countries. In India it’s very much a concern that they want more multilateral financing. Their needs for infrastructure financing are very great. They’ve drawn on the Bank support over years. I think our total outstandings are about $38 billion from different sources in India. Frankly, we’ve been somewhat limited about what we can do in India going forward, in part because our shareholders say, well, you don’t want too much to one country and so on and so forth.
I’ve actually tried to push against that. I increased the single borrowing limit for India, and I’m trying to look for innovative ways we can leverage our financing with guarantees and others. But it’s important to recognize if you can’t serve the country effectively, well then, they’re going to look elsewhere.
My guess is, in China, obviously it’s not so much a financing vehicle. It may be a way to further internationalize their renminbi and transactions to be supportive of other countries.
I think Brazil, which has a very big development bank, sees it as more a kind of a positioning for Brazil.
I think Russia’s position’s a little bit uncertain.
So those will be issues that’ll have to be worked out. But, at least my political economic philosophy for the Bank is, we should be open to work with any we can and it’s based on this idea that, if others can bring capital, if others can bring knowledge, and we work with foundations – and we should figure out in some ways to support them, and there’s other ways we can be a catalyst. But we need to be open and the heart is, how do you solve a problem?
ZHOU WENZHONG: With your permission, shall we go to the audience and invite them to ask one or two questions. So who would like to ? Yes please.
REPORTER: [inaudible] I have a question for Mr. Zoellick. Many Chinese scholars just got the World Bank’s report on China, especially on the privatization of the state-owned enterprises such as the banks. But I think that the US and Europe didn’t make a good example for China. I’m wondering why you suggest to China to follow the examples of them and what do you think of the [inaudible] from China. Thank you.
MR. ZOELLICK: Did you get up early yesterday to hear Secretary Paulson, because he gave a good answer to this question which I’ll just cross reference. So let me answer this more broadly, in part because of the reporting on what’s a very long report, some people just focus on individual items.

But this report is a very interesting effort, so let me just take a moment to explain it. The World Bank has worked with China over the years on analytical projects. There was a major sort of floating seminar down the Yangtze River in 1985 that was very informative for the Chinese policy makers at that time.
There was another one in 1997. This shows actually the changing role of the Bank, it’s not providing finance, it’s providing analytical services. So for the 30th anniversary of the World Bank relations with China, which have been very mutually beneficial, starting with McNamara and Deng Xiaoping, actually some Chinese associates suggested that I suggest to the leadership this sort of report. So I did and the leadership embraced it, and asked us to work with the DRC under the State Council. Executive Vice Premier Li Keqiang I think was particularly interested in driving it forward. And so the look at the economy is really quite comprehensive.
So number one, we focus on the process of moving from state to market. In land for example, this is the question, should farmers have greater rental rights or ability to transfer land. In labor it’s the transition of the hukou system so that poor people don’t move from the provinces to work in the coastal areas and lose their education for their children or other social services. And then there’s the enterprises, to move from state-owned enterprises.
The second area is innovation. Within five years there’ll be more people leaving the labor force in China than coming in. So you can see the wage rates increasing. Well, that’s not going to work well unless you increase productivity, so what can you do to increase innovation. So these are areas that we talk about some world class universities linked for example to venture capital – so another point that Hank and I have made about how you want to try to adapt the financial system.
A third one is the area of social safety nets. In this I very much enjoyed the conversation with our Chinese colleagues, because basically the message was look, we don’t want to have a European style safety net, that’s too expensive, that won’t work. So how can we use flex- security and create opportunity so all people of China can have a chance to benefit?
Fourth is the environmental area. I mean, all you have to do is look around China and see the costs that have been incurred in air and water pollution. But also, how can you make this into an area of opportunity going forward?
Fifth is fiscal relations. This one will be hard but I think it could be one of the most important. As you know, in China you often hear stories about the frustration people have when they lose their land. Well, that’s often because local authorities have no revenue source, so they’ve got expenditure responsibilities and they pay for it by taking people’s land. So this is the idea that you try to match revenue and expenditures.
The sixth element was how to try to deal with the – how all this affects the international context. So when you talk about the banking system, I mean just to paraphrase I think what Hank mentioned yesterday, don’t draw the wrong lessons. The United States made mistakes and I think it’s important to have a good supervisory system, well-capitalized, keep focused on liquidity. But if you stick with your current system what you’ll have is a number of big state-owned banks that pay depositors very little, so you as a saver, as Hank mentioned, will not be an investor. They use that money to finance state-owned enterprises that often have competitively advantageous positions; they make huge sums of money, which they haven’t retained earnings. So at a minimum I would think that those retained earnings could go back to the people of China to support some of the social safety net programs.
Now the last point that I’ll make about this is that: any project like this you can say well, is it a study, is it real? What was interesting is we worked with our Chinese colleagues to actually talk about steps to implement it over time, in how you build support. So my own view is one shouldn’t expect a big bang. It’s not going to wake up in 2013 and all these policies are going to be implemented. If you look at the history of Chinese development over the past 30 years, people start with pilots; one province starts something. So I was in Guangdong a month ago and Wang Yang has already started something that is kind of a variation of the hukou system. He’s using a variation of the US Green Card system to have people sort of have points to be able to become members of – to move from provinces.
So I think the key point will be – 2012 is a year of transition in China. So will these ideas and debate stimulate a process so that for the next leadership group they can pick up on some of these ideas? But the last point is, remember where I started this whole conversation. This is not only about China. The United States should have a 2030 report and I hope the United States starts working on some of its structural reforms.
ZHOU WENZHONG: One more question. Yes, please.
REPORTER: Thank you. I’m from, and my question is that the BRIC countries, they are calling for improvements of the transparency in selecting the next World Bank President and how would you respond there? Thank you.
MR. ZOELLICK: Well I think the process has become more transparent. You have three candidates and I’m encouraged that I think all three are very good candidates. This was somewhat by chance but I also think it’s useful that the candidates reflect different backgrounds. And so in the debate of those candidates I think people are discussing some of the topics that I just discussed with Ambassador Zhou about the role of the Bank, so I think that’s healthy. I think that the Board – I don’t unfortunately get to select my successor –[laughter] – the Board was going to interview those candidates and I think they are going to try to make the choice before the Spring Meeting which will be in a couple of weeks. I also feel that it’s my responsibility to help with the transition and I’ve also tried to build a team of people that will support whoever the next leader is.
But let me discuss that point a moment. Sometimes people just focus on the leader of the Bank. One of the things I’ve tried to do with the Bank is bring in more people from the developing world. We have the first chief economist from the developing world, Justin Lin of China; Sri Mulyani Indrawati, very successful Finance Minister in Indonesia has come in as a Managing Director. One of the candidates, Ngozi Okonjo-Iweala, was a person who I recruited back to the Bank as a Managing Director. It’s true for women too actually. We now have over half the officers are women. Interestingly enough at lower levels of management the percentages aren’t that high, so it emphasises you really have to keep focusing on this. So part of my view of how the Bank modernises in this, it’s not just the presidential, it’s the staffing, it’s treating countries as clients, it’s the transparency.
Now, let me close with the last point which you were courteous enough not to ask but I’ll deal with it frankly- is that people say well, should an American always be the head of the Bank? I’ve tried to create an opportunity here where you have talented people who’ve risen through the system. And Ngozi Okonjo-Iweala would be a very strong candidate; I think Dr. Kim would bring a lot to the Bank.
But let me give you one slight perspective on this. I’ve been in the US government in different capacities within the past 25 or 30 years. It’s not so easy to keep the United States engaged in multilateral institutions, whether it be trade or Bank or others. So I think it’s useful for the United States to have the responsibility of running some of these institutions. It may not be the World Bank. But let’s be fair in looking at how the world works. There’s never been a US head of the IMF.
There’s never been a US head of the WTO, there’ve been Europeans and developing countries. There’s never a UN Secretary-General who’s United States. The regional Banks all go to others.
So I’m not saying it has to be the World Bank. But I hope Americans aren’t disqualified from this, (laughter) because you know the United States is still 20 to 25 percent of the world economy and trust me, you don’t want the United States pulling back from this.
ZHOU WENZHONG: So with that, I would like to conclude this dialogue because you have to catch a flight, so I wish you…
MR. ZOELLICK: To go back to my workplace.

ZHOU WENZHONG: Thank you for coming.

Top Stories

Leon Black step downs as Apollo CEO after review of Epstein ties



Leon Black step downs as Apollo CEO after review of Epstein ties 1

By Mike Spector and Chibuike Oguh

NEW YORK (Reuters) – Leon Black said on Monday he would step down as chief executive at Apollo Global Management Inc, following an independent review of his ties to the late financier and convicted sex offender Jeffrey Epstein.

While Black, whose net worth is pegged by Forbes at $8.2 billion, will remain Apollo’s chairman, his decision to step down illustrates how doing business with Epstein weighed on the reputation of one of Wall Street’s most prominent investment firms. Black co-founded Apollo 31 years ago.

Apollo said it plans to change its corporate governance structure, doing away with shares with special voting rights that currently give Black and other co-founders effective control of the firm.

The independent review, conducted by law firm Dechert LLP, found Black was not involved in any way with Epstein’s criminal activities. Black paid Epstein $158 million for advice on tax and estate planning and related services between 2012 and 2017, according to the review.

Black, 69, said that although the review confirmed he did not engage in any wrongdoing, he “deeply” regretted his involvement with Epstein.

“I hope that the results of the review, and related enhancements … will reaffirm to you that Apollo is dedicated to the highest levels of transparency and governance,” Black wrote in a note to Apollo fund investors. He will step down as CEO no later than July 31.

Apollo co-founder Marc Rowan, 58, will take over as CEO.

Rowan has often kept a low-key profile compared with Apollo’s other co-founder, Joshua Harris, 56, and spearheaded many initiatives that turned Apollo into a credit investment giant, including the permanent capital base the firm enjoys through its ties to reinsurer Athene Holding Ltd.

The revelations of Black’s ties to Epstein took a toll on Apollo, which Black turned into one of the world’s largest private equity groups. Apollo executives had warned in October that some investors had paused their commitments to the buyout firm’s funds as they awaited the review’s findings.

Apollo shares are down 1% since the New York Times reported on Oct. 12 that Black paid at least $50 million to Epstein for advice and services, when most of his clients had deserted him.

Over the same period, shares of peers Blackstone Group Inc, KKR & Co Inc and Carlyle Group Inc are up 19%, 10% and 23%, respectively.

“We think a large number of (Apollo fund investors) took a ‘pause’, and we believe the outcome (of the review) and changes today will cause most of them to return to allocating to future Apollo funds,” Credit Suisse analysts wrote in a research note.

Apollo shares jumped 4% to $47.65 in after-hours trading on Monday.

“We continue to follow these events closely and will evaluate how Apollo addresses its issues,” the California State Teachers’ Retirement System, one of the largest U.S. public pension funds and an Apollo investor, said in a statement.

Epstein was found dead at age 66 in August 2019 in a Manhattan jail, while awaiting trial on sex trafficking charges for allegedly abusing dozens of underage girls in Manhattan and Florida from 2002 to 2005. New York City’s chief medical examiner ruled that the cause of death was suicide by hanging.


Black previously said he had paid millions of dollars to Epstein, but the exact size of his payments was revealed for the first time on Monday. Beyond the $158 million in payments, Black made two loans to Epstein totaling $30.5 million in early 2017.

Dechert said in its report that Black’s social ties with Epstein, who built his fortune by endearing himself to powerful figures in high society, went back to the mid-1990s.

Epstein won Black’s trust by resolving an estate tax issue for him in 2012 potentially worth at least $500 million, the report said. He ended up advising Black on various aspects of his personal financial affairs, from his family office and airplane to his yacht and artwork.

Black believed that Epstein provided advice over the years that conferred between $1 billion and $2 billion in value to him, according to the Dechert report. Black said in his note to investors that he had paid Epstein a fee equivalent to 5% of the value he generated on an after-tax basis, and not tied to hourly rates.

Black and Epstein’s relationship deteriorated after Epstein failed to repay $20 million of the loans and Black refused to pay tens of millions of dollars in fees that Epstein demanded, according to the Dechert report.

They severed ties in October 2018, according to the report. Black knew Epstein had been convicted in Florida a decade earlier for soliciting prostitution from a minor, the Dechert report said, but there was no evidence suggesting Black had knowledge of the other alleged crimes before they were publicly reported in late 2018, culminating in Epstein’s July 2019 arrest.

On Monday, Black pledged $200 million toward “initiatives that seek to achieve gender equality and protect and empower women,” as well as helping survivors of domestic violence, sexual assault and human trafficking.

Apollo said it would pursue a “one share, one vote” corporate governance structure that would do away with shares with special voting rights. It said the move could qualify it for listing on the S&P Global indices.

Apollo also said it would seek to give its board more authority to oversee its business, eroding the power of its executive committee led by Black.

The board will be expanded to include four new independent directors, including Avid Partners founder Pamela Joyner and physician and scientist Siddhartha Mukherjee, Apollo said. Apollo co-Presidents Scott Kleinman and James Zelter will join the board and take on increased responsibility running day-to-day operations.

Apollo had about $433 billion in assets under management as of the end of September.

(Reporting by Mike Spector and Chibuike Oguh; Additional reporting by Lawrence Delevigne and Jessica DiNapoli in New York; Editing by Sonya Hepinstall, Leslie Adler and Kim Coghill)

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Top Stories

EU sees no cliff-edge ending for COVID fiscal stimulus



EU sees no cliff-edge ending for COVID fiscal stimulus 2

BRUSSELS (Reuters) – European governments will not need to abruptly end fiscal support for their economies after the pandemic, top officials said on Monday, noting that any withdrawal of stimulus would be carried out gradually and only once the economy has recovered.

Euro zone public debt rose sharply during 2020 and is likely to exceed 100% of GDP this year as governments borrow to help individuals and businesses survive lockdowns.

The higher debt raises concern about how to deal with it down the road and when to start cutting it again, since the EU last year suspended its rules limiting budget deficits and debt, known as the Stability and Growth Pact (SGP).

EU finance ministers are to discuss when to reintroduce any borrowing limits in the second quarter of this year.

“I believe it important that finance ministers debate and reach a common understanding on the appropriate fiscal stance by the summer. This can then serve as guidance for the preparation of their draft budgetary plans for 2022,” the chairman of the euro zone’s group of finance ministers, Paschal Donohoe, said on Monday.

“To avoid any misunderstanding, let me stress that this is not about an imminent withdrawal of fiscal stimulus,” he told the economic committee of the European Parliament.

“We all agree that our immediate priority is to shield our citizens, in particular younger cohorts and those most exposed to the crisis. There must be no cliff-edges,” he said.

Joao Leao, the finance minister of Portugal which holds the rotating presidency of the EU and therefore sets the agenda for EU finance ministers’ work until June, was equally cautious.

“We should not withdraw stimulus too early. We need to make sure the suspension clause for the SGP remains in force at least until we return to pre-crisis economic figures,” he told the committee. “We need to make sure jobs are maintained as well as the production capacity of companies.”

He said first cash from the EU’s 750 billion euro post-COVID economic recovery programme should reach the economy in the first half of the year.

“Real funding should be getting to the economy before the summer or in early part of the summer,” he said.

(Reporting by Jan Strupczewski; Editing by Giles Elgood)

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IMF to intensify focus on climate change’s economic impact, Georgieva



IMF to intensify focus on climate change's economic impact, Georgieva 3

By Andrea Shalal

WASHINGTON (Reuters) – The International Monetary Fund views climate change as a fundamental risk to economic and financial stability, its chief said on Monday, mapping out the IMF’s plans to help focus investments in green technologies that will boost global growth.

IMF Managing Director Kristalina Georgieva told the Climate Adaptation Summit that global economic output could expand by an average 0.7% annually over the next 15 years and millions of jobs could be created if carbon prices rose steadily and investments expanded in green infrastructure.

“We see climate as a fundamental risk for economic and financial stability, and we see climate action as an opportunity to reinvigorate growth, especially after the pandemic, and to generate new green jobs,” Georgieva said.

She said the IMF was taking action in four areas to accelerate the transition to a new low-carbon and climate-resilient economy.

Georgieva said the Fund would launch a new “Climate Change Dashboard” this year to track the economic impact of climate risks and the measures taken to mitigate them, a key step to ensuring the needed shift.

“Climate resilience is a critical priority,” she said. “This is why we place it at the heart of what do, this year and (in) the years to come.”

The Fund is also integrating climate factors into its annual economic country assessments, also known as Article IV consultations, focusing on adaptation in highly vulnerable countries, and carbon pricing in its assessment of large emitters, Georgieva said.

In addition, she said the IMF is adopting enhanced stress tests and standardizing disclosure of climate-related financial stability risks in its financial-sector surveys, and expanding its training and support to help central banks and finance ministries take climate considerations into account.

The World Bank, the largest multilateral funder of climate finance, boosted funding for adaptation projects to 50% of its total climate finance over the past four years, and plans to maintain that percentage for the next five years, World Bank President David Malpass told the same event on Monday.

In addition to funding projects addressing coastal erosion, increasing crop yields and building cyclone-resistant infrastructure, the Bank was also investing in early warning and evacuation systems, better social protection, and weather observation, he said.

(Reporting by Andrea Shalal; Editing by Paul Simao)

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