Address to the National Press Club. by James D. Wolfensohn President The World Bank Group Washington, D.C., March 25, 1998

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Address to the National Press Club by James D. Wolfensohn President The World Bank Group Washington, D.C., March 25, MR. HARBRECHT: James Wolfensohn is considered by many to be a renaissance man. Throughout his career, Wolfensohn has been closely involved in a wide range of cultural and volunteer activities, such as when he was elected chair of New York's Carnegie Hall. In 1990 Mr. Wolfensohn became chairman of the board of trustees of the John F. Kennedy Center for the Performing Arts right here in Washington. A pilot in the Australian Air Force, a former member of the Australian Olympic fencing team, an accomplished cellist -- all describe our speaker today. But that's not why he's here. Mr. Wolfensohn is President of the World Bank, which lends money to developing nations around the world. And since taking the helm of the Bank in June of 1995, he has embarked on a daunting task: restructuring an enterprise that everyone in Washington, it seems, loves to hate. Liberals assail the Bank for financing progrowth development that has raped the environment and driven peasants from their homes. Conservatives gripe that this is a financial dinosaur that underwrites inefficient state-run enterprises that would better compete for funds in private capital markets. Wolfensohn has set out to change all that. His goals? Revamp the most criticized aspects of the Bank's operation, cut its size, improve its focus and its impact on helping the world's poor and the global environment. He has recently visited Indonesia, South Korea, Malaysia, Philippines, Singapore, and Thailand, so he can give us a front-line perspective on the Asian financial crisis. He certainly knows of what he speaks; Wolfensohn was an international investment banker on Wall Street for many years. In 1981 he founded his own firm, James Wolfensohn, Inc., to advise major U.S. and international corporations. He's held senior positions with Salomon Brothers in New York. He was also executive deputy chair and managing director of Schroders Limited in London and managing director of Darling and Company of Australia. Born in Australia, Mr. Wolfensohn is a naturalized U.S. citizen. He holds a B.A. and law degrees from the University of Sydney and an MBA from the Harvard Graduate School of Business. He and his wife, Elaine -- to my left -- an education specialist and a graduate of Wellesley and Columbia University, have three children. Our guest today has another distinction. The Costa Rica Biodiversity Institute recently named a beetle after him -- which is now called

2 Metamasius wolfensohni. This is a tribute for lending for environmental issues in Costa Rica. The question, Mr. Wolfensohn, is, will this beetle ever fly to Washington through NAFTA? Ladies and gentlemen, please join me in a warm National Press Club welcome to Mr. James Wolfensohn, President of the World Bank Group, for his first appearance today. MR. WOLFENSOHN: Thank you very much, Mr. Chairman. And I'd like to tell you it's a really wonderful beetle. It's highly intelligent, sensitive, good to its mother, and I have no doubt that it will one day be President of the World Bank. We're all very happy, all my colleagues and I from the World Bank, to have a chance to be here today, particularly given your introduction and characterization of the institution. The institution is not everything you have just heard. I'm happy to say that in our history of 53 years, the Bank has, in fact, been a pivotal factor in development around the world. It's been going for 53 years, and our activities have really, I think, made a significant difference to the development of those parts of the world where we find poverty. The interest that you are all show in Asia is quite obvious. We at the Bank have shared that interest for many years. And as I was preparing my remarks, I was thinking about what I would have said if I had been speaking to you a year ago. I remind you that the crisis in Asia really started in July of last year, with the emergence of the Thailand crisis. And a year ago, I would have told you, as I indeed tell you today, that the history of Asian economic and social development has been one of enormous achievement. I remind you that the area includes 1.7 billion people out of a world population of 5.6; nearly a third of the world. A billion two hundred of them are in China. Two hundred million of them are in Indonesia, and the remainder in the other countries in Asia. And what a history there has been in the last 30 years. If we start with poverty, which is the issue with which we at the Bank are most particularly concerned, given that our objective is to alleviate poverty within an environment that's sustainable and healthy for all the world, we've had an experience since 1975 of reducing the people in poverty from 700 million to 340 million. That's no small achievement. Reducing poverty from 60 percent of the population in the region to roughly 20 percent. That is truly a remarkable achievement. We also know that generally in the area, for 30 years, they've had 5 percent GDP growth, in real terms. That also is a remarkable achievement. And as you look at population growth, it's at 1.3 percent -- much, much less than many of the other developing countries around the world. So, the growth has been real. Life expectancy has gone up 10 years in the area. Infant mortality is down significantly. And when you look at education, on which so much of

3 this has been based, you find, for primary school education, 99 percent, 100 percent, 100 percent, 99 percent enrollments; the least being Thailand at 88 percent. These are numbers that, in any developing country around the world, would be both startling and highly effective. And secondary school enrollment has gone up, and there is a very, very strong mood in terms of education at the tertiary level and at the technical level. In terms of fiscal management, the area has been quite remarkable. This is not a crisis that you could have predicted in terms of government financing. Government financing has been very good. They've had fiscal surpluses, something that's not been too common in our own country, but they've had 1.3 or 1.6 percent. A savings rate of 30 percent -- about double what we have in our country. So, if I had been speaking a year ago, I would have been speaking, as I speak now, of 30 years of remarkable economic achievements in a country that is a third of the world and of remarkable social achievements. If I'd been speaking of Indonesia, I would have told you that poverty had reduced from 60 percent to 11 percent in that period of time. And there are equivalent numbers in other parts of Asia. So, what changed? Why is it we are now talking of a crisis? Why is it that we're talking of myths? Why is it we're saying, "Finally that balloon is pricked, the air is coming out?" What has happened to Asia? Well, what has happened to Asia is that we have an immediate crisis which has been caused not by government policy, but by the private sector excesses; not by government action, but to a degree by government inaction in terms of supervising and controlling the financial and corporate sectors. This is what has happened, and let me tell you how it developed. I can't cover the whole of the area, but let me give you some high spots. Thailand in July of last year was experiencing a reduction in its exports. It was finding as in other parts of Asia that it was becoming less competitive. The dollar, to which they had tied the currency, had appreciated. It was becoming stronger. Labor rates were going up. And so you had a situation in Thailand which was marked, as in many other countries in the region, by less competitiveness, higher rates in terms of the dollar, and a fixed currency, because people were trying to keep the currency parity the same with the dollar. And what happened in that environment? In that environment, people, banks and private sector went out to try and see how they could finance the growth, because everybody thought growth would continue forever. After all, it was a miracle. It was something that everybody was talking about. If you went to the area you knew that the skyscrapers would continue to go up and growth would continue. But what happened was that companies and banks borrowed. And they borrowed extremely heavily, so heavily that in Thailand the foreign liabilities increased in the banking system from 3 percent in 1990 to 20 percent in That means that that economy and the other economies

4 were going out into the international markets and borrowing money at lower rates, and they were borrowing them in dollars. And they were coming back and they were putting it out not in long-term, incomeproducing activities that would generate dollars, but frequently into real estate and into non-productive areas. That would be the same as if you were to finance your house on the basis of short-term borrowings from the bank or if you were to finance your investments on the basis of short-term borrowings from the bank. But even worse, if you were doing it in the United States, you would be borrowing in dollars and investing in dollars. But what was happening in East Asia is that they were borrowing in dollars and investing in their local currency. And so they started to get hit. And there was a deterioration of the macroeconomic situation. And what happened? The foreigners started to lose confidence. They said, "Give me back my short-term money." And the locals then had to rush to try and convert their money into dollar currency, and they discovered that there were not enough reserves and they started bidding up the prices. And the sort of things that happened were that throughout the region, the value of the local currency was not kept solid with the dollar, but depreciated 80 percent percent -- throughout the five major countries affected in the region. In the case of Indonesia, just to give you one example, people had been used to getting 2,500 rupiah to the dollar and buying a dollar for 2,500 rupiah. Now they found, all of a sudden, that they had to repay at 10,000 rupiah to the dollar. It means it cost them, in local currency, four times as much as it cost them previously just a few months before. That is a real crisis, and that is a crisis that was brought about by an outflow of funds, by a lack of confidence, and by an immediate rush to the door to try and get the money out. So it's been a financial crisis. It's been a crisis that has affected the banks and has affected the private sector. And in the case of Korea and Thailand, most of the money went through the banks, though not all. And in the case of Indonesia, there is an enormous amount of short-term debt plus billion dollars -- that is lent directly to companies. And as a result of these developments everybody is saying what's happened to the Asian system? And what happened to the Asian system was that it got out of control; it got out of control for several reasons. The first reason was that there was very little control on the part of bank regulators. In this country, as you know, we have a Federal Reserve System and Comptroller of Currency who monitor what is going on in the banks. And we're accustomed, as bankers and financial institutions, to report what is going on. And the regulators are accustomed to saying, "We want to cut down lending in real estate, or we think this should be cut a little bit." When I was running a bank in England, you'd get invited around to the Bank of England for a cup of tea and the governor would say, "I think you might go a little bit lighter on this." -- he wouldn't just be seeing me, he'd be seeing a group of bankers -- and you took that as an order, so you did it.

5 That is not the tradition in Asia. In fact, the tradition was that there was very little supervision. There was nominal supervision, but in-depth supervision there wasn't. And in the case of corporations, there is very little tradition of disclosing the full facts. There are not the same accounting principles that there are in our country. There is not the same SEC. There are not regulatory procedures to make sure that the facts are out there. And so, when the crisis hit, we all discovered that the supervisory mechanism was not functioning effectively and that in terms of companies, they were not reporting; in fact, quite the contrary. The whole history in Asia has been a history, first, of family corporations and then of networks of companies and banks, which are very closely interlinked. And you used name, and you loaned on the basis of name. You loaned on the basis that you knew they were okay. They were strong. They were reliable. They were members of the inner group. And that was the basis on which trust and familial loyalty was created in Asia. But then they became -- having been relatively conservative in the Asian context -- they become part of the global market. Where the needs and the demands are different. And I might remind you that no one forced the foreign banks to lend. The foreign banks themselves, banks which are regulated, made the independent decisions to lend $60 billion, $70 billion, $80 billion to Indonesian companies without adequate reports. Banks in Thailand and Korea were able to borrow on the basis of their balance sheets but without adequate attention being given by the foreign banks that were lending to them. So it is not a one-way problem; this is a two-way error. It's an error, if you like, in terms of an expansion without adequate supervision and control, and it's an error by creditors because they loaned without adequate understanding of that to which they were lending. That is the crisis. Now what's happened as a result of this crisis? The crisis is not now just limited to banks and finance companies. The impact of the crisis with which we are most deeply concerned in the institution, is the social impact, because very many of the people who have come out of poverty -- we use a dollar a day as the poverty level -- are just above the poverty level; $2, $3 a day in terms of income. And many parts of Asia have also been hit by drought. So the impact of the economic adjustment is not just a numbers game. The real impact of this crisis is on the people; on the 70% or so of people who live in rural areas, on the people in the cities who have lost jobs. And we are trying to focus on two things: The first is a reformation of the financial system, in terms of trying to get regulation and control, that is now being demanded by the Asian authorities themselves. This is not an imposition; this is a recognition by Asian leaders that it's necessary for them, in their self-interest, to have greater supervision, greater transparency. And they're all demanding it now. And we're in the process of trying to do that. And we're seeking

6 to assist them. And we at the bank have built up a capacity, far beyond what we've ever had before, to work on just that area. And we're reforming the legal systems. If you don't have a bankruptcy law, how do you reorganize companies? And so we're drafting bankruptcy laws. And if you have a legal system that takes three or four years to get a case completed, no one has any belief in the legal system. So we're working on legal systems. We're working on commercial codes. These are all things that are now being done to stabilize the situation. But it is a major sociological change, because you are having people who for generations have not disclosed, have not told you willingly how much money they have or how much they owed, all of a sudden saying, "We want now to meet international standards." So we are working on those areas. But the second area, which is often missed, is the impact on the people. If you have 11 percent of people in Indonesia who are under the poverty line and that may go to 20, that's another 18 million people who are going to be in poverty within a very short time. Or if you have 40 million people just hanging precariously above the poverty line. To you and me and to the bankers, if your income comes down 10 percent or 20 percent or drops a dollar or so, you can absorb it. But if you're living on the margin, it really pushes you back into poverty. And the people that we are dealing with are the people on the margins. And these are the people who have a significant need for social underpinning. But social underpinnings have not been part of the growth patterns of Asia. The growth pattern of Asia has been built on family. It's the family that looks after you if you get into trouble. And so all of a sudden at the social level we're finding enormous impacts. Workers who have been working overseas, a million of Indonesians or more in Malaysia who have lost their jobs and are now finding that they don't want to do the jobs that are being offered to them, so they have to return. People in the cities are going to the country. And what we're finding with our social assessments is that village life is being disrupted because people are coming back to the villages, because that's where their social underpinning is, but once they get there they have no job. Crime is increasing. Child prostitution is increasing. Violence is increasing. The threat to the social structure in Asia, in many of these countries, is enormous, and something has to be done. And so we're working with the governments not just on the financial issue and on the governance questions, but most specifically on the issues of poverty, on the issues of people, on the issues which don't get many headlines. They're the issues of how you create jobs, how you keep food on the table, how you keep distribution going, how you keep kids at school, how you keep medical supplies adequate. These are the sorts of things that make the difference between a country that will be able to work its way through a crisis or a country that will go to anarchy and to the streets.

7 These are the crucial issues for the World Bank. And we're forging partnerships with the governments to try and ensure that that work is continuing. If we can get that done, and if the financial restructuring can be achieved, along with the admirable work of the Fund in terms of putting together an emergency package which can seek to restore confidence, then, maybe three years' time, I can come and talk to you about a new miracle in Asia. If it is a new miracle, it's likely to be a miracle that has a sounder base, a sounder base in the sense that it'll be more open, it'll be more transparent, and it'll be more governed in terms of international standards of finance. To get there we have to be certain that we can achieve a stable social base. And, indeed, the current issues in Indonesia, where we're seeing some outbursts in the 6,000 inhabited islands -- and imagine what it's like to run a country that is spread in 6,000 islands -- what we have to be certain of is that you can get the distribution, you can get the security of food, you can get the security of medical supplies so that people can have hope and can get through this period. That is a quick overview of Asia. It's difficult to encompass it in 20 minutes. But I want you to go away knowing that this area of the world, a third of the people on our planet, has had a kick. Its progress has been arrested for the moment. It's a crisis that we understand. The remedial measures are possible. The reconstruction of the financial system is underway. A crucial question is to ensure that you have adequate stability in terms of the social arena. And if you have that, I have no doubt there will be a resumption of growth. I should say just one thing parenthetically before I stop, and that is China. China, with the largest population by far -- a billion two hundred million people -- has gone through this with its stock market down last night, as against last July, by only 4 percent, and with its currency the same as it was last July. China has managed to get through this period with a relatively small impact on its exports and with itself intact. It's our belief that China will be able to get through. And at the last Party Congress, Zhu Rongji, in fact, called for a reduction of the number of people in government, for a reaffirmation of efficient industry, and for raising $32 billion to strengthen the banks. I raise China because you cannot finish a discussion of Asia just thinking of Korea, Thailand and Indonesia; China is fundamental. Our view is that China will make it. It has good leadership. And if you put all that together, I hope that three years from now, you'll be able to call me back and talk not about a renewed miracle, because I don't think it's a miracle, but the impact of hard work, good management, intelligent people, educated people with infrastructure, because that's what you have in Asia. I wouldn't give up on Asia. I think you should be watching with interest how it goes and, frankly, you should be watching with hope because an active Asia means an active United States in terms of exports and in

8 terms of stability in our globe, and that is what the World Bank is doing. That is a slightly better description than the one you gave of the World Bank at the introduction, and I hope you're all now absolutely convinced that you can't live without the World Bank. (Laughter.) Thank you very much. MR. HARBRECHT: Okay, for our first question today: Will Asia's financial crisis lead to an outright global economic recession, in your view? If so, how bad? If not, why not? MR. WOLFENSOHN: The answer is no, I don't think it will. Our estimates are that the developing world GDP will perhaps drop by 1 or 2 percent. The interlinkage between East Asia and other parts of the world can be affected by a reduction of funds. Perhaps Russia and Brazil are at the moment facing it the most because they've had to push their interest rates up to over 20 percent in order to retain funds. That slows things down. Europe, I think, will be affected to a modest degree by its exposure in banking. But I think in terms of trade, our estimates, which we've just published, do not lead us to think that it's more than a small adjustment. And -- I guess I'm being quoted here, but -- (laughter) -- my guess is that, to go out on a limb now I'm out this far, is that this will not lead to an international crisis. It is a crisis, we can get through it, but I hope very much that it can be contained. MR. HARBRECHT: How long will the crisis last, in your view? (Laughter.) MR. WOLFENSOHN: I thought the Press Club would really be asking these sorts of general questions. (Laughter.) It's not a momentary crisis. It's not going to be solved tomorrow. But I think you can measure getting through it in a short number of years on the fundamentals, but I think you'll find before that that confidence will return much earlier. It's very likely that Korea will enter the public markets within a very short space of time, something that three months ago looked totally impossible. And so I think you'll see a restoration of confidence. You'll find people coming in to make investments very much more quickly, but I do think it will take a little time to get through the overhanging short-term debt and the reconstruction of companies, which is really significant in the case of Korea, Thailand and Indonesia. The one hopeful thing is that I think we have good governments in Thailand and Korea which we now have gotten to know. There is a new government in Indonesia which we still have to get to know. I do know that the Fund is there now negotiating. It would be my hope that there will be an agreement before too long, and then on the basis of that, I believe we can move forward again in Indonesia. So I think the substantive problems of restructuring the banks and corporations is a matter of a short number of years, but the restoration of confidence is likely to be much quicker.

9 MR. HARBRECHT: The Bank seems to be lending an awful lot of money to Korea and Indonesia, and the loans are hardly traditional Bank development loans. Are you worried that the Bank is being used to sort of piggy-bank to back up the International Monetary Fund in this crisis? MR. WOLFENSOHN: No, I'm not. (Laughter.) I guess if I thought we were doing that, my colleagues wouldn't let me come into the Bank. We are, in fact, lending to Indonesia and Thailand on the basis of an expansion of our ongoing activities. Some of the loans are to help them with liquidity, but the basic thrust of what we're doing is still developmental, either in terms of the financial systems or in terms of the social sector. In the case of Korea, Korea had graduated as a borrower from the Bank in It had got to a $10,000 per year per capita income and had become the 11th largest economy in the world. But with the reduction of its exchange rate and taking advantage of an agreement which we had with them that they could come back to us if they wanted to, it was pretty clear at that stage that Korea was in trouble. And so a $55 billion package was put together. We came in for $10 billion over two years, $5 billion of which we will probably get done this year. The work that we're doing with that $5 billion relates, again, principally to employment, social systems and the restructuring of the financial system. And the reason we did it was that we thought if Korea went, if there was not help for Korea, that would really depress the entire area. But let me add that we came into to this crisis not just because we love Korea and we love the Koreans, but we also did it because we thought that if there was a disaster in Korea, then the whole area would be really adversely affected, and that's why we felt we should step in. We are not a firefighter in the sense that the Monetary Fund is. It is the Fund's job to provide short-term liquidity. It's our job to deal with longer-term reconstruction and development, and we think we've reached the balance pretty well. MR. HARBRECHT: How can the Bank act so quickly in these instances when normal Bank loans take years to reach approval stage? How is it that the World Bank has so much cash on hand? MR. WOLFENSOHN: Well, I go in and count it every day. And when I reached 14 billion, I thought we'd better give some out. (Laughter.) That, in fact, is not the case. We have raised $14 billion in the last 10 weeks, because the Bank is a AAA borrower in the market. As you know, we are owned by 180 countries, we are a very solid institution. And our access to the market is not to go to Congress to give us money, or go to the governments of any other country; our access is in the public markets. We put out bonds -- we've just done the largest bond issue in history -- a $4 billion issue in the last days, so we have plenty of access to the market.

10 The question for us is not access. The question is what should the proper balance be, like anybody should have in their investment portfolio. So we made a decision that we could do it, and that we could do it well within traditional bounds. How we did it so quickly is that I have a lot of very efficient colleagues, contrary to what was said earlier. (Laughter.) MR. HARBRECHT: Mr. Wolfensohn, you have won plaudits for taking up at the World Bank the issue of corruption around the world and fighting corruption. How has your approach changed towards Indonesia since you introduced this anti-corruption policy at the World Bank? Indonesia, of course, is known world-wide for a corruption problem. MR. WOLFENSOHN: Well, the second speech I made on corruption was in Indonesia, and that was 18 months ago. So, my approach on corruption has not changed. We have a very clear point of view on the issue of corruption. We think it is the most corrosive factor that there is in terms of international investing, or domestic investing. That's very straightforward, it's very simple. And we've got a lot of evidence to demonstrate that. Wherever you have corruption, you have a misallocation of resources. And so we came in, and we said -- contrary to 50 years of avoiding talking about the subject because it was conceived as a political issue, and as you know we are not allowed to talk about political issues-- we said: "It's not a political issue. It's the largest economic and social issue which exists." So both Camdessus and I brought this out in our annual-meeting speeches a couple of years ago. The amazing thing about it is that, having then mentioned it for the first time, 12 months later at the Annual Meetings of the Bank, it was the central item on the agenda for the ministers to discuss, including the finance minister of Indonesia. Now how you deal with it in each country differs. And when I was in Indonesia, I got severely criticized by NGOs and by some critics of the government: "Why doesn't the Bank just stop lending to Indonesia? You know that things aren't as straight as they ought to be, or at least you've heard that. If you're so keen on corruption, why don't you just stop?" We didn't stop because we have been working mainly on social programs. But what we also didn't stop was trying to talk to the government about reform of the regulatory system and constant pressure to ensure that every international contract, and particularly contracts done by the World Bank, were clean as a whistle. We were anxious to ensure that if there was any element of corruption in anything we did, we'd just cancel it, we'd close the project, we'd blacklist the people. And we increased the system of auditing. I think that we have had, already, a significant impact in Indonesia. And the interesting thing is that the last time I was there, contrary to the time I was there 12, 15 months ago, I met with civil society, talking about the corruption issue publicly, in front of the press, television cameras. That is a huge change in 15 months.

11 And the one thing that I have learned is that it is not for the World Bank to change the behavior of a country. I am not an elected representative. I am not the government of any country. But what we can do at the Bank is to give a lead. And that unlocks, in a significant way, the emotions of the people. I am not saying it is the only thing, but it becomes a symbolic act and means we are a very real partner for the critics to have. And what I think you can see, now emerging from your press, is that there is now a reaction in Indonesia to this. It is a public subject for discussion, and I think the Indonesians will fix corruption in the way that some other countries have fixed it. It is not for the Bank to do, but I think we have been about as forceful as anybody could be, and it was not easy to talk about it the first time that I did in Indonesia. It was a little easier this time. But it's for the Indonesians to fix, not for us. MR. HARBRECHT: How dangerous would it be for Indonesia to establish a currency board in the near future? Is this still a possibility? MR. WOLFENSOHN: I don't think it is a possibility. The government announced that they've dropped the plan. And it's not because of, I think, international pressure, although I think there was a great deal of it. (Laughter.) I think there was an overload of the long-distance from heads of state calling just to give a little friendly advice. You couldn't get a seat to go down there for the number of advisers that were going down. I think in the end they realized that as a technique you need to have an adequate supply of dollars to match your currency. And I think in the end it was perceived that the actual technique didn't fit the current situation in Indonesia, that it would push interest rates through the roof because of inadequate credit that would then be available. And I think it is because of their own analysis that they've dropped it, not because of a response to international pressure. And I think in the end wiser heads prevailed. And my understanding of the last position was that they've dropped the idea. MR. HARBRECHT: Former Australian Prime Minister Paul Keating said in a speech last night that the market reaction to the Indonesian economy had been overdone because President Suharto had been demonized. Do you agree with that? MR. WOLFENSOHN: I don't know whether President Suharto has been demonized or not. I think actually in financial markets people are fairly coldblooded. (Laughter.) I don't think that they're making the decisions on Indonesia because of the demonization personally of President Suharto. I think what they're looking at first are the facts. The facts are that between $60-$80 billion of short-term borrowings are coming due -- have come due. And there has been this holiday period to try and bring about an understanding between the Indonesian companies and the bankers that loaned to them to try and spread it out in terms of repayment. What has happened in the last few days is that the rupiah has

12 strengthened from 10,000 to today 8,300. So there's some evidence that there is some restoration of confidence. But the thing that you all have to watch is what happens in the next couple of weeks in terms of reaching an agreement on short-term debt. It's as if you are getting called on a bank loan. You go bankrupt if you can't work out how to pay them back more slowly. And if you multiply that by 60 billion, that's what you have in Indonesia. And so that is going on now. That is the reason for the lack of confidence, not a demonization of the president. But there was something to do with the president that I think maybe was a big contributing factor, and I've said this to Keating myself. That is that the policy was not clear. There was a negotiation with the Fund. It looked as though it was going fine. Then there was a change of government. The president put into the government some very good people, also some very good friends, also his daughter. These are signs to the international economy. If we knew what Suharto was going to do, it might be fine, but the signals have not been clear. I think what is happening now is that the Fund is taking the lead in trying to get the signals clear, and I hope that that will happen very shortly. It's certainly necessary. But I would say that it's not the demonization of Suharto; it is a lack of clarity in policies and the facts of the current situation. There's one other thing which the Australian government is very concerned about, and that is the possible shortage of food and medical supplies. That would be the thing that would worry me the most -- that if you don't have adequate food and medical supplies, you'll have civil unrest. Indonesia does not have the most glorious history in terms of its last problems with civil unrest, where there was conflict between the native Indonesians and the 4 percent of Chinese that represent a very large economic factor in the economy. As you know, a very large number of people were killed last time. I think it is the concern about civil unrest that is making people worry at the moment, rather than a demonization of Suharto. MR. HARBRECHT: Mr. Wolfensohn, in the United States many analysts say that the Asian financial turmoil has proved to be the fault of the Japanese economic model, such as the lack of transparency, cronyism, and so on. Do you agree with this view? MR. WOLFENSOHN: Well, I think as you analyze Japan -- and I've done this with some of my Japanese friends -- you would, I think agree that there are some common themes in terms of Japan's economic crisis and the crisis in the region: over-extension of credit on the part of the banks, a real estate boom with over-extension of credit on the part of the banks who were themselves monitored, lending to industrial groups on the basis of name rather than on the basis of substance. I think the Japanese at this moment are pausing to think about the issue of transparency, the issue of regulation, the issue of direction of

13 credit, misallocation of credit; and they're the things that I talked about earlier. So there is some parallel between Japan and the other areas. I would doubt that there was a direct link in many of the countries with the Japanese model. I think they developed generally as national models. Korea does not naturally follow Japan. Thailand does not naturally follow Japan. But they follow their own themes, and themes throughout the region have been built on family, groups, trust, centralized control, linkage between private sector and government, lack of clear lines, always, in terms of influence. They have developed in a parallel way. I doubt very much that any of the authorities in the countries I've mentioned went to Japan to copy it. There are similarities, but I don't think it's because of seeking to follow the Japanese model. MR. HARBRECHT: In the '60s and '70s, the World Bank provided enormous financial assistance to military governments in South America, and projects were funded of questionable need. Does the World Bank base any of its financial assistance today on a nation's human rights record? And how does the World Bank respond to countries that violate human rights of its religious or ethnic minorities, such as China, which persecutes Christians, for example? MR. WOLFENSOHN: I don't know whether that's a question or a statement, but let me try and deal with it in its segments. Yes, we do take great account of military expenditures, and we don't lend for military expenditures. And where a country is investing too much of its GNP in military expenditures, we don't make a political statement about it, because we're not allowed to, but we do take a look at the national income and the budgetary statistics and say, "Don't you think you're putting too much money into that sector rather than into some other sectors?" And so we're able to have an economic debate on it. Our position on it is very well-known, and it is for us a very essential element in good governance. Secondly, on human rights and on religious belief. You may be interested to know that I have in the last year been three times to the Vatican, and a month ago, with the Archbishop of Canterbury, we convened a meeting in London of 12 religious leaders -- Muslims, Buddhists, Sikhs, Jews, Catholics, Jains, Taoists. Why you might ask. Because we believe at the Bank that there is a very strong linkage between human values, culture, human rights and development. I personally don't think that you can have development without strong elements of cultural integrity, historic integrity, and values. In fact, if you don't have community of values, pumping money into a country makes it just go down the tubes. So contrary to the belief of many, it is, in fact, a central item on our agenda. I spent two days talking about this. And just this week we've had a follow-up with working parties. So we are taking up front a very strong view that culture, values and human rights are crucial. The one thing that we are not allowed to do, since we're owned by the countries that we're trying to address, is to enter into their political scene. I cannot go out and demonstrate on human rights in a country. I'm

14 not allowed to do it. But I can talk about human rights, I can talk about culture, I can talk about freedom, economic opportunity, social opportunity, educational opportunity. And so what I can do is to address the issues from the side. I'm very proud of the record we have, but we are not, unfortunately, a non-governmental organization that can go out and speak. We have to in our actions be as supportive as we can. And I can assure you, Mr. Chairman, that we know as much about human rights and values as anybody else. There are 10,000 committed individuals in the institution. I don't think you'll find our moral standards any less good than any of our critics. MR. HARBRECHT: Congress is considering the U.S. commitment to the International Monetary Fund right now. The U.S. public is skeptical, or at least many law makers are skeptical. Can you provide a one-sentence response to this question -- (laughter) -- why is it in the U.S.'s own interest to renew its commitment to the IMF? MR. WOLFENSOHN: Well, the U.S. is the biggest power on earth, economically and politically. And if you have disruptions in the international financial systems and they don't work, that will directly and manifestly impact the United States. In terms of self-interest, I think there is a singular and simple case, and my answer would be that the Congress should approve it. They are not throwing money away, they're putting money into a fund that will be repaid, so that it is not as though we're wasting money in our country if we put money into the Fund. The money is needed for part of the liquidity of the system, and it will come back. In fact, on Mexico, the United States made money. And I remember the furor about the monies that were putting into Mexico and the criticisms that Bob Rubin and the President had to sustain. I see no arguments for not putting money in. But there is one other argument that I would like to make. You cannot be a world power and claim to the be the leading power of the world, without giving leadership. It's just not possible. The United States cannot support a free system, cannot support international trading, cannot support equity around the globe, cannot support stability, without fulfilling its undertakings. And I think if we want to lead the world, with a $7 trillion economy, we had better lead the world. And I don't think it's an option. I feel very strongly about it. (Applause.) MR. HARBRECHT: Could you talk about the progress that you've made at the World Bank concerning cutting the size of the Bank and streamlining its operations? MR. WOLFENSOHN: We have made a lot of progress in reorganizing. Many of us felt that, after 53 years, we had become a bit too bureaucratic. And we also found that the situation had changed. The big changes are that the private sector has now become the biggest partner that we have. From the document we put out yesterday, you'll know that in last seven years,

15 private-sector investing in the developing world, including U.S. privatesector investing, has gone from $30 billion to $260 billion. And the rate of overseas development assistance has gone from $60 billion to $37 billion. So we've gone done, and the private sector has gone up. That means that we have to be much more geared through the Bank -- IFC, which is our corporate arm that invests in equities and MIGA, our insurance company -- we have to change to do that. The second thing is that with democracy and with freedom and an increase in the marketplace, where we now have 5 billion people in a market economy, not 1 billion, and three out of four countries in democracy, you've had an enormous rise in civil society. We must relate to the trade unions, to NGOs, to civil society, to the religions, in order to be effective. And so what we're doing is to try and readjust ourselves to work as a partner. That does not necessarily translate into a reduction of people. It translates into a different attitude on the part of the institution; and with less funds, looking much more at the effectiveness of what we do. We are well into that program, and I think that we have every reason to be proud, as a team, of what we're doing to change the institution. MR. HARBRECHT: Mr. Wolfensohn, President Clinton is on a swing through Africa right now. I wonder if you could address the World Bank's role in Africa. MR. WOLFENSOHN: I said very soon after I came in that the success of the Bank will be measured by what we do in Africa. I was in Africa 12 days after I had taken my job. I've just come back from a Uganda meeting with President Museveni and 12 presidents, to talk to them about the future of Africa. I spent a day and a half with them. And in June President Diouf of Senegal is bringing 23 more presidents for another two-day meeting. We're dealing with the following things: First, what is the strategy for Africa? And I'm saying to the African leadership, "It's not our strategy, it's your strategy. The future of Africa doesn't depend on us, it depends on African leadership. If together we can decide on what it is that will make the difference, we can help you." And so what we're working on are what are the key factors in Africa: education, health, rural roads, rural development, effective justice systems, effective financial systems; increase in infrastructure, in terms of water and power. And we've established a set of basic priorities. The activities of the Bank are geared to that sense of priorities. And we have got a thousand people working in Africa. We're doing capacity building. We're putting in classrooms, so that we can do distance learning. We have 11 countries in which we're doing university education, with a virtual university that's been set up by us. We're working with

16 governments to try and strengthen their governance. I think that we're being about as effective as anyone can be. But the real test is the leadership in Africa. And I have to say that the real change in the three years I've been in the job is that you can now see in Africa an emergence of new, committed leadership. And we're very positive about it. I believe the President will come back with a similar message. MR. HARBRECHT: Would you comment, please, on the banking system emerging in Russia? MR. WOLFENSOHN: Yes. I don't know what it is today.(laughter.) But I can tell you that, first of all, we're working with the Russian government, in terms of the supervision and control. It is a difficult process because you have to get into banks which, in the extreme, were lending to government corporations, and so the quality of the assets, in terms of government banks lending to government corporations, was subject to some doubt. Since then we've seen a gradual improvement in terms of the quality of the assets and a strengthening of the banks. We're trying to build alliances between the Russian banks and foreign banks. So they not only get capital, they get know-how. We're working on training with the Russian institutions. Can I tell you that we give it a triple-a seal of approval? I guess the S&P and Moody's don't yet do it, but I do say that they're improving. It is a point of vulnerability, but it is also a point of progress. And it's my expectation and hope that that system will strengthen. And when we know where the new government is, we'll continue to work with them and talk to them. We are the major lenders now to the former Soviet Union. MR. HARBRECHT: Well, before I ask the last question today I have a few gifts here for you. One is a certificate of appreciation for coming today. Thank you very much. MR. WOLFENSOHN: Thank you. MR. HARBRECHT: This being our 90th anniversary year, we now have a history of the National Press Club, and you as a renaissance man I'm sure will appreciate this. (Laughter.) And, of course, the National Press Club mug for drinking coffee on those long trips overseas. (Laughter.) MR. WOLFENSOHN: Thank you very much. (Applause.) MR. HARBRECHT: For our last question today -- I find this hard to believe, but apparently it's true: you don't have an airplane. When is the World Bank going to buy you an airplane for those long trips to Asia and Africa? (Laughter.) MR. WOLFENSOHN: As soon as the press and the media support the idea. (Laughter)

17 MR. HARBRECHT: Well, we're honored to have you here today, Mr. Wolfensohn. Thank you very much.