As Americans debated whether to spend nearly $800 billion to rescue their own economy from financial crisis this winter, World Bank president Robert Zoellick took to the pages of The New York Times to rattle the tin cup on behalf of far harder-hit countries. President Obama, he suggested, should promote “a stimulus package for the world.” Zoellick argued that industrialized nations should devote 0.7% of their stimulus packages — around $6 billion in the case of the United States — to a “vulnerability fund” that would help stabilize the poorest of the poor. “Poor people in Africa should not pay the price for a crisis that originated in America,” he wrote.
The initiative did not appear in the stimulus package signed into law last month — not even among the 9,000 earmarks. But, speaking recently at the University of Pennsylvania — where he headlined a moderated discussion as part of the Huntsman Program in International Studies and Business — Zoellick was still on the case, explaining why the crisis is so devastating well beyond the countries whose banks helped to derail the global economy. He argued that wealthier countries would find it in their best interests to prevent large chunks of the world from giving up on the free market. “I believe that globalization has brought a lot of benefits to people.”
Zoellick, a former managing director of Goldman Sachs, was U.S. trade representative and then deputy secretary of state when President George W. Bush nominated him in 2007 to replace World Bank president Paul Wolfowitz. A graduate of Swarthmore College, Harvard Law and the Kennedy School of Government, Zoellick was a veteran of three Republican administrations. His announced plans upon taking office at the World Bank reflected the mood of the Bush years, with talk of increasing cooperation among countries in the name of spreading free-market economics.
Today, the theme of cooperation is especially important, as is tailoring the Bank’s offerings to specific regions. “We are in a period of extreme uncertainty in the global economy,” he said. “How do we customize [our] services for each of these groups and practices? … The real need is to figure out how to mobilize other players.”
Huge Challenge in Europe
Though his Times op-ed article argued passionately on behalf of strife-torn nations like Sierra Leone, Zoellick said the region most exposed to the global economic crisis is Central Europe, whose formerly Communist economies are in a uniquely vulnerable spot. Central European states are now sufficiently connected to the international economy that the past year’s decline in trade and remittances has done major damage to their own markets. But the countries aren’t wealthy enough to have some of the cushions that Western Europe, the U.S. or Japan enjoy — especially because, while transitioning to the euro, their currencies are in flux.
Zoellick noted that the World Bank is working with the European Bank for Reconstruction and Development “to put together a fund … to support some of the key Western European banks that provide a lot of the banking structure for Central and Eastern Europe. But this won’t work unless the European governments also provide the overall structure and framework.” Keeping the region stable and free-market oriented would be important for all involved, he said.
Noting fears in the industrialized world that the global crisis might dissuade emerging countries from liberalizing their economies, Zoellick said: “It’s a time of great flux with these issues. Given the diversity of the world, you get countries that are turning to different answers.” Ecuador’s recent imposition of import restrictions is not likely to succeed, he said. “But … some of the East Asian countries are realizing that this may be a time to continue to move forward with reforms, to try to achieve greater flexibility of markets.”
Towards that end, the World Bank will focus on lessons learned from the Asian financial crisis of 1997-98, Zoellick noted. Instead of reconfiguring entire economies, countries should focus instead on key pieces, such as social safety nets for the poor. About a dozen moderate-income countries had made advances in conditional cash-transfer programs, but still poorer countries in Sub-Saharan Africa lack the resources to expand welfare efforts. “We’re trying to learn what has worked with food-for-work programs or school feeding programs … that would send some food home to the family as well.” Such efforts were more effective at reaching the needy than, say, increasing civil service salaries or trying to improve the overall wage structure, Zoellick pointed out.
The Bank is also encouraging poorer countries to focus on helping the small- and medium-sized business sector, because it is a driver of job growth and often the first victim during economic contraction. But the effort is a tricky one for the Bank, Zoellick said, because the issues of small businesses in Ukraine and those in Southeast Asia can be very different. “One of the challenges for us as the World Bank is … to make sure the analysts see themselves as problem-solvers within this broader political and social context.”
Relative Success in Africa
According to Zoellick, Africa has been a relative development success, with two-thirds of its countries growing at a significant rate. “The problem, in part, was the missing third” — often countries racked by civil war or other devastating conflict. Statistics show that countries with war-torn neighbors also see their own economic growth suffer. “One thing that would be a real tragedy of the crisis would be if we lose faith in African development,” he said.
Still, he worries that African nations that have made the best strides may find themselves endangered precisely because they have successfully tied themselves to the global economy. Above all, he added, African states need help developing trade programs with each other and building laws and institutions to sustain their growth. “I would argue, in the case of Africa, that while you do want to provide targeted assistance — for example, in a social safety net — you don’t want to lose the opportunity to build the future basis of growth.” Some of that growth could be spurred by improving transportation across the continent, he said.
Asked which metrics he would focus on to determine whether the crisis was easing, Zoellick advised watching the impact of various countries’ stimulus efforts. But the spending would be “like a sugar high” unless countries fixed their banking systems, recapitalizing the institutions, he warned. Credit markets must be sustained while banks remain in crisis, too. “The Federal Reserve has actually used its balance sheet to provide a secondary market by buying commercial paper, mortgages and other assets.” He suggested other central banks follow the Fed’s lead.
Zoellick noted that he is focused on other dangers lurking in the global economy. His top concern is the collapse of a major currency, which could send new shock waves around the globe. He called for doubling the resources of the International Monetary Fund, the Bank’s sister institution which was established to intervene in such instances. Reiterating his faith in free trade, he also said he was worried about the return of protectionism, noting that countries look very closely at the U.S. and could view Americans as hypocrites because of recent policy overtures like the “buy America” proposal that was part of the Obama administration’s original stimulus package.
Finally, Zoellick warned that when the economy operates on a global scale but governance remains national, the world’s political system may not be able to coordinate responses to an unprecedented situation. “As we get further into increasing unemployment rates, do you start to see … countries … point fingers at one another as opposed to trying to work together? I think that’s something that I would watch very closely during the course of 2009. As the leader of one of the international institutions, I can try to play a modest role in identifying these. But part of the challenge in the whole system is … based on nation-states. That’s the political basis. Those are where decisions are made. People still have to be responsible to the citizenry. But the issues are transnational. So how do you interconnect those things?”