The World Bank under Wolfowitz

June 7, 2005

Unedited transcript prepared from a tape recording.

Proceedings:
MR. LACHMAN:  I think we'll start this afternoon's seminar.  My name is Desmond Lachman, and I'm a resident fellow at the AEI, and it's my pleasure to welcome you to this afternoon's seminar on the World Bank under Mr. Wolfowitz.

This is the first of a series of seminars that we're planning on holding on the World Bank since Mr. Wolfowitz has assumed the presidency of that organization.  At this afternoon's seminar, the start off seminar, is intended to be rather broad in its scope, looking at whether there's a need for reform of the World Bank and what reform might be, what are the directions the World Bank might be going in.  Subsequent seminars we're intending to be on more specific issues at the World Bank and look at the specific challenges that Mr. Wolfowitz can expect to face during his period as president of the World Bank.

At a time of change of leadership of any major organization, it really is a good time to reflect on whether or not that organization's strategy and operations are consistent with its goals.  I think in the case of the World Bank this couldn't be more so the case given how much the world has changed over the past 10 years under Mr. Wolfensohn's stewardship.

If we look at the more positive changes in the world over the past 10 years as far as development economics goes, it has to be the emergence of India and China, the two most populist economies in the developing world.  It seems to be clear that both of those economies have emerged in a very significant way and have succeeded in lifting a lot of people out of poverty.  I think what's interesting about India and China is that along with a group of other middle-income countries--and I'm thinking now of places like Brazil, Mexico, Russia, South Africa--China and India have very easy access to international capital markets and indeed international capital markets provide them with a multiple of what they can expect to get from the multilateral institutions.  I think that this really raises basic questions as to what is the rationale for the World Bank continuing to lend to middle income countries or whether the focus shouldn't be on the poorer countries of the world, and it also raises questions on how the World Bank should be engaging, providing its expertise to middle-income countries.

Among the more disappointing developments over the past 10 years during Mr. Wolfensohn's tenure at the World Bank has to be the fact that the poorer countries of the global economy haven't done particularly well in general, and those in African haven't done well at all in particular.

Many of those countries are handicapped by poor governance.  They're handicapped by very weak institutions, and they're saddled by massive amount of debt.  This I think raises questions as to what the World Bank should be really doing about these countries.  It raises questions as to whether or not debt should be forgiven.  It raises questions as to whether or not one should really be moving more in the direction of grants rather than loans, and it also raises questions on conditionality.

There are many other issues on the World Bank that could be raised.  I would just raise one more, and that is really the role of the IFC, the arm of the Bank, that lends to private sectors and what it does is it lends a lot of money to private sector in middle-income countries and this again raises question as to why is the Bank doing this given that these private sectors have access to international capital markets.  It seems to be an unnecessary duplication and that the World Bank could be better focused.

I've put a number of questions on the table and we're fortunate this afternoon to have real experts who can answer those questions, and I would introduce them in the order in which they'll be speaking.

Nancy Birdsall is probably well known to a lot of people in this audience.  She's presently president of the Center for Global Development based in Washington, a research institute, and she was the co-author of a recent publication, "The Hottest Job in the World: Five New Tasks for the World Bank President."  Ms. Birdsall has wide experience in development institutions.  She was the first executive vice president of the Inter-American Development Bank for a number of years, and she has been on the World Bank's staff for many years.

David de Ferranti, too, is a policy insider with very much experience, 25 years experience, at the World Bank, and most recently head of an important--one of the most important--departments in the World Bank, the Latin America and Caribbean Department, which is responsible for operations throughout the Western Hemisphere.

Lastly, it's my pleasure to introduce my colleague, Allan Meltzer, who's probably needs no introduction, but he is a professor of political economy at Carnegie Mellon University and in the context of today's discussion, he is the--was the principal author of the Meltzer Commission Report in 2000 looking at the multilateral institutions, what kind of reforms they would need.

So with that introduction, I'll turn it over to Nancy Birdsall.

MS. BIRDSALL:  Thank you very much, Desmond.  I'm supposed to talk for no more than 15 minutes.  So you'll start waving at me.

It's a pleasure to be here and to see all of you.  I feel  a little bit as though this is not kosher, but I'd like to mention because of this report, which the AEI kindly included in your folders, that we will have on Thursday at the Center a discussion of this report more fully than I can give you in 15 minutes.  And I'd like to introduce my colleague, Milan Vashnov, who's here.  You can ask him about it.  He was key to the completion of this report, "The Hardest Job in the World."  I love the way Desmond said it, with his excellent British accent, it sounded like the hottest job in the world.

So this report lays out five--what we call five--crucial tasks for Paul Wolfowitz, and what I'd like to do today is mention one of those, with a nod to Allan because I think he would endorse this one, and has indeed endorsed it, and then spend a little bit more time talking about a second of the five tasks, which is the one that Desmond addressed briefly, where I think we'll find there's some disagreement between our report, many of you who may be here and certainly disagreement between me and I know from prior discussions between me and Allan.

So let me start on one of the crucial tasks, which is for Paul Wolfowitz to take leadership on ensuring that we, the global community, create some sort of an independent entity for selective evaluation not only of World Bank finance programs but of donor financed programs in general and indeed of program development investments that developing countries themselves make.

I'll just give you a hint of the idea.  We suggest that there be created--and it would require leadership from someone like Wolfowitz, from the World Bank, there be created a kind of club, with members, who would join voluntarily, pay some dues, and then be part of this kind of consortium for selecting and deciding on what sorts of projects should have independent evaluation.  The focus would be on the impact of specific interventions, and the idea is to learn from an improve the way these interventions operate.  The idea also would be to create some credibility around those investments that are working, that actually produce results.

And this is important because I tried to think of a quick example.  I would guess that in a sector like education in the last 30, 20 years, say, donors have spent $5 billion a year on education.  Over 20 years, then we're talking about $100 billion.  And it's matched by at least a trillion dollars on the part of developing country governments for educational investments.  And how much do we really know about what has actually worked?

Let me go to the second of the crucial tasks that I wanted to talk about, and that is the following: it is that Wolfowitz take leadership in revitalizing the Bank's role in China, India, and the middle-income countries.

There's no disagreement, as Desmond suggested, about the Bank's role in Africa and the other poorest countries.  There's worry about its effectiveness, but there's no disagreement that the Bank needs to be doing something in those places.

And that is a vision of the Bank as a development agency.  I'd like to suggest here a vision of the Bank as itself a kind of club, with government members, in which one would hope that all the members, including China, India, Brazil, Turkey, et cetera have some sense of affiliation and ownership and use the World Bank as a global forum in which to address global problems, which include reducing poverty and dealing with their internal problems themselves, keeping in mind that 70 percent of the world's poor live in these countries, with, admittedly, access to capital markets of some sort.

So as background, let me say that it is clear that borrowing from those countries has declined.  We say from on a--excluding the ramp up at the time of the Asian financial crisis, this group of countries has--was borrowing about $18 billion a year in the '90s, and in the last year or so borrowed about $11 billion.  So it looks as though these big borrowers and middle-income borrowers agree in a sense with the ideas of Allan Meltzer and what Desmond himself suggested.

So we don't agree.  We think that something needs to be done, and I'm going to talk briefly about why the Bank should lend to these countries, about why are they borrowing less, about why does it matter for the Bank, adding a little to what I already said, and then what the Bank should do and what Paul Wolfowitz should do if he agrees with us.

So let me start with why lend and mention three reasons.  One is that many of these middle-income countries do have problematic access to private capital markets.  For them, it can be costly.  Prices can be volatile.  There can be rapid withdrawal of access even for Brazil and Turkey.  And, by the way, it's reasonable to have some worries about Brazil and Turkey in the event that the commodity boom at the global level disappears, in the event that interest rates go up in high quality U.S. and other markets.

So they face risks indeed on sovereign borrowing because they have shallow financial and banking sectors, and they face risks in--on the currency side because of great volatility for some of them in their own exchange rates when they borrow--do sovereign borrowing on foreign capital markets.

Don't forget that amongst the middle-income countries, we're not just the newly emerging rising Asia, but Kazakhstan, Paraguay, the Philippines, Sri Lanka where they can have problems.

Now, what the World Bank offers is longer term and somewhat cheaper loans to finance investments that have high social and economic returns, but relatively low and sometime no financial returns.

So that access to that borrowing can complement access to private capital markets and can help encourage countries to make the public investments that are critical to crowding in private investment.

A second reason is that it is in the interests of the U.S. and the other rich non-borrowers, non-borrowing members at the World Bank, to promote equitable pro-poor growth.  That is the established, agreed idea of an institution like the World Bank.  And that is, in part, why the U.S. is there.  And the fact is that in many middle-income countries and even in China, it is not politically attractive to commit resources to the kinds of investments that are, say, pro-poor.

So this creates an incentive at somewhat lower price with all kinds of advice and so on for those countries to take steps, generally led by reformers who appreciate the potential to use the leverage that the international community exercises through the World Bank to press their own governments on certain kinds of investments.

And then there are also security interests of the U.S. and the other big non-borrowers in encouraging middle-income countries and countries like China and India to address some of the local issues, which unaddressed create to global public bads.  Let's say in the case of greenhouse gas emissions; in the case of financial markets which can--where these countries can actually have an impact themselves on the system.  So you want them at the table, and you want them to be encouraged, say, to borrow to improve prudential regulation, banking supervision.  You may want them at the table on money laundering and so on, and all of those things require investments by those governments to address within their countries their contribution or lack thereof to those problems.

The third reason has to do with the bundle, and I think this is a case where it's very hard to convey to people who have not had familiarity with what actually happens in the mysterious building, that big building, that is the World Bank.  But the concept of the bundle is that the money provides a vehicle.  The money is less important actually given access to private markets at least sometimes, but it provides a vehicle for dialogue, for policy advice.  Many people might argue that the policy advice and the dialogue are lousy.  And there can be disagreements about the nature of that advice, but the fact is if you talk to the finance ministers of China, of Turkey, in Eastern Europe, in Latin America, they say they want the Bank's intervention not necessarily because they agree with what Bank staff are telling them, but because it helps them promote a discussion internally.

So, you know, you think of the Chinese want to do pension reform or develop a better social safety net.  They want World Bank staff there telling them what Eastern Europe did, what Chile did, what the U.S. is doing, what the U.K. did.  The same is true for reducing corruption in procurement processes, et cetera, et cetera.

Okay.  So that's why do it.  Why are these countries borrowing less?  Why has their borrowing declined?  We suggest and you can only have anecdotal evidence that there are two major reasons.

One has to do with hassle, which I'll describe, and the second has to do with the incredibly limited products that the Bank offers these countries, essentially the sovereign--the loan that must be guaranteed by the sovereign borrower.  That's it since 1948.

There are other things--IFC, FIAS, guarantees that are not used.  But it's a very limited set of products.

So what do I mean by hassle?  I don't mean only the safeguards for dealing with environment and social issues.  I mean also a whole set of accounting and fiduciary issues.  At least two years often, at least historically, between a government would ask for a loan and get the loan.  Multiple missions.  Multiple discussions.

So it's an elapsed time problem, an administrative burden, and the endless discussion also in some cases over the safeguards.

On the limited products, we have, you know, the need for the sovereign guarantee, pricing of the Bank's guarantees in a manner that makes them unattractive to countries, very little emphasis on developing new products to minimize risk, to address insurance problems.  These are things for which the private sector has some appetite.  But for various reasons, the private sector also is not meeting all the needs of these countries.

And, of course, the problem that the countries have to assume the currency risk associated with borrowing from the Bank.

So what to do?  We have--I'll mention four suggestions to Mr. Wolfowitz for how to address this set of issues.

One is to actually go the governors through the Board of the Bank and say let us revisit the whole issue of the counter guarantee, the sovereign guarantee, required, the whole issue of the separation of the balance sheet between the IFC and the World Bank, the role of FIAS with which some of you may be familiar.  It is interesting that the regional development banks don't have these same restrictions, and I believe in particular that the IDB has been much more innovative in finding ways to meet the needs of these countries who are most interested in how to catalyze healthy private sector investment at the lowest possible cost in terms of their public budgets and the guarantees or the, you know, well, yes, the guarantees that they provide often in the context particularly of major infrastructure projects.

So that's one.  And we don't really go too far beyond saying there ought to be these products that are more attuned to the demands of the countries.  We say at least begin a serious exploration of the issue after more than 50 years.  It's worth revisiting whether that particular aspect of the initial charter of the bank still makes sense.

The second thing we say is think even under the existing constraints about new products, in particular about the pricing of the guarantee product, about whether the Bank should be doing much more borrowing in local capital markets so that it could lend to countries in their own currency, and developing a basket of products that has the equivalent benefit.

Third, we suggest that the Bank develop a little bit a la the Meltzer Commission's suggestions in another arena a new loan product, and the Bank is moving in that direction, but there isn't much oomph behind it, which would be much more automatic.  Once countries, like Brazil and Turkey, had demonstrated reasonable economic management, met reasonable criteria for their own, say, approach on environmental safeguards and so on, this would make it possible to assume that you don't need Bank agronomists and engineers advising the Brazilian engineers and agronomists in the case of a new agriculture project or a new electricity distribution project; that the Bank--that the Brazilians would a little bit more like you and me, if you're a member of a credit union, you know, you have a record.  You're creditworthy.  You have some deposits, say, in the case of China already, in the Bank, and at least in certain sectors, you go to your credit union type operation--in this case the World Bank--and you don't have to go through the two years and the many different cover reports before you can borrow.

And fourth, we recommend that there be instituted differential pricing as a function of each country--each borrower's per capita income.  This would mean that richer countries, like Brazil, would borrow at a higher cost than poorer middle-income countries like Paraguay.

Now, on the face of it, this would seem to suggest that it would reduce demand still further from the largest borrowers.  The idea behind this is that the reason for reduced demand is not the price of these loans, but the limited products and the hassle factor.  And the logic of introducing differential pricing is to signal that there should be at some point graduation.  But there's no reason to impose a quantity-based rule that when you get to X or Y per capita income or X or Y apparent access to private capital markets, that's when you are deemed ineligible to borrow from the World Bank.  Let that be a decision of the member in the face of the price that is set in a much more market friendly way.

So let me make one more remark, and then I'm sure I've used more than my 15 minutes, which is another--I just want to say because Desmond mentioned grants--that that is like evaluation, what I would presume another area of strong agreement; that in this report we recommend that Mr. Wolfowitz work with the member governments of the Bank to open in effect a third window in the IDA setting for grants-only transfers to countries below some fixed per capita income, who have, because they're per capita income is still very low in effect told us that they have not figured out how to grow, and that they, therefore, may not become creditworthy even for cheap IDA loans for some long period.  Thank you, Desmond.

MR. LACHMAN:  Thank you very much, Nancy.  That really provides quite a menu of recommendations, and I'd ask David to react to that.

MR. DE FERRANTI:  Thank you, Desmond.  I have 10 points I'd like to make, so I will have to move through some of them fairly quickly in order to try and keep within the 15.

I just want to list them first in case time gets short.  One is on the monitoring, which was Nancy's first point.

The second is going to be about focusing the Bank's work more in general and specifically in relation to efforts on global public goods.

Third is taking good advantage of two important opportunities that exist now to make the Bank leaner and to realize some budget savings.

Fourth is conditioning of assistance to countries based on their performance.

Fifth is where are we, where should be heading on low-income countries.

Sixth, very related, is Africa.

Seventh is the middle-income countries.

And eighth is modernizing the financial instruments of the Bank.  That's very much related to what Nancy was just emphasizing.

Ninth is priorities across different region in the world.

Tenth is how the seats and the voting shares of the Board are divided.

And at the end of it all, I want to suggest that this is an important moment for Paul Wolfowitz to come to an explicit agreement with the shareholders on a program that they and he would sign up to going forward.  And I should mention also linking Desmond's introduction to what you may read in the program, I as someone who is retired from the Bank and in some sense got my First Amendment rights back will be commenting not as someone on behalf of, in favor of, against, defending, attacking the Bank, but rather as a--reflecting what I based on years of experience inside, but an inside independent voice I feel is important.

Independent monitoring I completely agree, so I won't spend time on that.  I think we could have a discussion about the mechanics to do that.  I think that one needs to be very careful in setting up any monitoring and evaluation not to have a monopoly, but I think that we--I should move on because there's plenty of agreement there.

And I think that this is important.  It is the time, and I think it's a great moment for Paul Wolfowitz to send a signal by embracing the independent monitoring idea.

Second, on focusing the Bank's work more and restructuring the efforts on the global public goods, I support that.  That's another recommendation of Nancy's report.  I think not phrased in exactly that way, but the elements I agree with.

And I think that it's possible to simplify the internal structure of the Bank in ways that would make it better placed to focus more selectively on priorities where it can have an important impact, and that the role that the Bank can play in choosing well and advancing some important global issues is one that needs to be used effectively.  More to say on that.

But let me go to the third point, which is taking good advantage of two opportunities now to make the Bank leaner and to realize some budget savings.  The two opportunities are first the simplifying of the internal structure in the way that the global issues are dealt with I think can be done in a way that would be not only simpler but not be quite so demanding in terms of the numbers of staff.  And I could go into that.

The second opportunity is the following: the way that the Bank and for that matter most any other organization that works on these kinds of issues operates is first to identify what the strategy is, together with the country--consultation with all sectors and constituencies; and then having determined the strategy, then to implement it, which may involve designing and carrying out steps in education or health or so on.

I think a lot more mileage could be gained from--in that implementation step--from warmly embracing the wheels that others have invented rather than inventing a new wheel by staff inside the institution every time a new project is brought forward, and whether the others, the partners, are other development institutions or are enterprises or NGOs--there's an operation now called Development Marketplace that brings together--the last one was just a week ago inside the Bank--it brings together efforts from the grassroots--of organizations that are wrestling with problems.  There are very good ideas there.

So I think that there is savings from building on other people's good ideas, and that could make the Bank leaner and realize some savings.

The fourth point on conditioning of assistance to countries based on their performance, I agree with that.  I think both Nancy and Allan in his previous writing probably also would agree with that, so I'm mentioning it to indicate some consensus.

And all I think I would add, although there are many, many points that could be elaborated on this, is a comment on why is it so hard.  Why has there not been?  Actually, there is quite a bit of conditioning of assistance on the basis of which countries are performing and which aren't.  But why isn't there more, and why is it harder?

And here I would look to the shareholders to recognize that the pressure that comes on the Bank's management and staff from countries to make exceptions to every rule isn't helpful.  So here's part of the pact that I think a new president of the World Bank and the shareholders could usefully enter into together to say we not only believe in words that conditioning is important, but we, the shareholders, through our Board, will recognize that that will be hard decisions in effect saying when all the pressure is on to increase or continue support in not favorable circumstances that that needs to be resisted, that kind of pressure.

The low-income countries--this is my fifth point--I think the way we are effectively the world and the World Bank is effectively moving is towards grants.  It is towards--I mean IDA 14 just concluded could reach 40 to 50 countries on a grants only basis, which is most of Africa.  And further developments on those lines would take the practice in the direction that some--and I would agree--have been recommending.

And in regard to Africa, which flows naturally--this is my next point, which is my sixth point--I think in addition to the grants and the conditioning, I think that it's terrific that the world recognizes that Africa needs help, needs more help; terrific that the world sees that that should be on terms that will result in good progress; terrific that tough problems like AIDS are being addressed, but I think it's important for the leadership of the Bank--it's important for leaders everywhere, but I think Paul Wolfowitz should take himself--take this on himself--to not lose sight and not let the world lose sight of the fact that solving Africa's problems is not an overnight thing.  It is going to be a very long haul, and to the extent that expectations get aroused, as the urgency--we must get more money on the table now--to the extent that that leads to, well, we'll get it on the money now, and then next year it will be finished, those are unrealistic expectations.  We're talking decades here I think, and that needs--somebody needs to speak out quite honesty about that.

I think it's also important not to forget that as increased resources come Africa's way that one needs to be careful not to just throw money at projects, and some things just take time.  There is a real absorptive capacity problem.  Those are tough messages to convey, but they're realistic ones.

Now, on the middle-income, I come down--we have I think two different views on the table here--I come down in favor of the view that the Bank should stay involved and engaged.  I agree with what Nancy's report sets out, with a few points to add.

First of all, as I read the data--and here I admit to being somewhat parochial perhaps--the Bank's lending to Latin America has not declined.  It is running close to $5.8 billion a year, and that's a little higher than it was in the early '90s.  So there's a story in the fact that in some middle-income countries, it's not declining, and in others it is.

I think there are a lot of factors there, which we don't have time to get into.  I agree that the hassle, the two that Nancy mentioned are good ones.  They're not the only ones.  The hassle factor and the limited products.

About the hassle factor, I'd like to say at least from where I sit it's not a story of--and I don't Nancy was implying this, although maybe she'll correct me--that bureaucrats are wasting time.  These requirements--judiciary, financial, procurement, environmental, social safeguards--reflect the collective's, namely the 184 member countries, decisions but what's important, and they're important points.  But they add up to something very, very heavy.  And the shareholders need to make a decision.  Nancy mentioned a hassle free or a lower hassle for the better performing middle-income countries.  That's very close to my heart.  I labored hard to get that adopted.  And what emerged was a very watered down thing called the deferred debt draw down--deferred draw down option.  I would like to see some ownership from all the shareholders in a much stronger option.

I have a lot more to say on middle-income, but I should move towards the end here.

Modernizing the financial instruments, which is also Nancy had comments on, terrifically important.  And actually some of these challenges are not as hard as they may have been advertised to be.  The sovereign guarantee and separation of the balance sheets of the IFC and the World Bank--actually, there may be a way of making some progress on that without changing the Articles of Agreement.  The lawyers have been looking at this, and there may be--and they may be coming up with some white smoke.

So there's--and there are a few other things that can be done.  But the core of it is, the core of the issue is, that the--here I as again, some of my former colleagues may not want me to put it this way--but the leadership of the financial part of the Bank needs to embrace enthusiastically the Bank's opportunity, potential, and role to innovate and to learn from others institutions, including those on Wall Street, who are far ahead, instead of always resisting change.  And I think that in regard to financial products, there has been a tendency to behave somewhat like the librarian who would much prefer that no library books actually left the library, when, in fact, we should be thinking of creative ways to get the resources to those who need them.

Should I skip to the end?  When you asked to chair--one last point?

Okay.  I'll skip nine and the voting shares, where I also agree with Nancy's points.  I said that I think that it's critical for Paul Wolfowitz to sit down with the shareholders and come to some agreements on some key issues.  I see that as vital.  Now is the opportunity, the window.  It's not easy, because there are issues that he and the shareholders are dealing with, but it is a period at the start when he can show his commitment and the shareholder's can to aggressively in a positive way addressing some fundamental issues.

And what I have in mind here is understandings and commitments that the shareholders would feel happy about, such as the one I mentioned--independent monitoring, focusing the Bank's work more, realizing those budget savings--those two opportunities--and where the leader of the Bank would feel happy and would be greatly strengthened if the shareholders would also stand up around a few issues, and one of them is not to press for more lending.

Lending pressure comes up as an issue.  It's not enough for the president of the World Bank to say don't worry staff.  There's no lending pressure.

If the Board, if the shareholders, are basically sending messages look either lend more or we don't think you're doing very well, it's very hard for anybody to resist that.

There are several other issues also where if the shareholders signed up together with the president both, and the Bank could make a lot of progress.

MR. LACHMAN:  Thank you, David.  There will be opportunity during question and answer time to come back to some of the points that you might have left out.

I'll turn now to Allan Meltzer for his view on where the Bank needs to be reformed.

MR. MELTZER:  Yes.  Does the Bank need to be reformed was the question.  The answer to that is absolutely.  Absolutely.

And I think we're making slow but encouraging progress.  I was listening.  I listened to Nancy and David.  I can remember some of the scars that I bore five years ago in making suggestions that we needed more grants and less--and how much resistance there was in the Bank to the idea of grants--how much resistance there was when John Taylor presented that idea to the G7.  The French, for example--I had an interview with the French ministry.  They said, well, perhaps five percent of the money--I mean but that was clearly, you know, just give them that to shut them up.  There was not a lot of support for it.  We see support for it now.  And I think it's very encouraging to see that so many African countries are now in the grants program so that we won't be talking about debt forgiveness forever.

Second, or in addition, we have monitoring.  There seems to be agreement that we need better and more monitoring; that we need--that the Bank lacks focus.  That's--gee, I was--my heart was warmed when one of the groups in the bank, one of the six groups in the Bank wrote a letter to President Wolfensohn saying this Bank lacks focus, and the main problem is you.  I thought that was very encouraging and foolhardy at the same time; and that we want a condition on performance.  I think those are things which the Bank is now beginning to do or doing, and we all agree that that's something that should be done.  So that's encouraging.  Let's now begin to think about some more steps.

I just want to say that yesterday--this is not the only time--but yesterday, as I was coming to Washington, I got an e-mail from a member of the Bank's staff.  He says he was looking forward to hearing this presentation, but he's not going to be around.  However, he wants to say I cannot agree with you more that the Bank faces plenty of challenges.  It is a dysfunctional organization.  It has in its ranks some of the most knowledgeable people in the development area.  What it lacks is effective leadership, and I agree with that completely.  The Bank has very good people working at it.  The problem with the Bank is not that there is an absence of ideas about what needs to be done.  There's really just an absence of leadership to get them done.  The Bank is dysfunctional mainly because the president of the Bank had the idea that anything that drew more than 100 people in the world to support was worth supporting, and, therefore, was a part of this program.  The letter to me goes on and says while the former president Wolfensohn deserves credit for putting the cancer of corruption at the center of the development agenda--we haven't used the word corruption, but it's a big problem--at the center of the development agenda, too often under his leadership, the Bank's actions belied his words.  Basically, the Bank failed to adequately resolve some of the fundamental dilemmas in development.  It does not make a clear distinction between institutional counterparts, client governments, and the true clients--the people--who are governed.  Amen.

I mean I read that because, of course, I agree with it.  But it's--but I also want to point out that I get letters like that from the Bank periodically, not as much now as I did three or four years ago, or four or five years ago, but there are lot of people in the Bank who agree that the Bank is a dysfunctional organization.

What's wrong with the Bank?  In a word: the word is incentives, both internal and external.  The Bank does not have good incentives internally or externally.  I'm not the first person, nor will I be the last person to point that out, and let me just talk about some of the external problems.

The Bank needs an audit, a performance audit.  It needs to find out what does it do well and what does it do not well.  It ought to either improve the things that it doesn't do well or get rid of them and concentrate on the things that it does well.  I made that suggestion to President Wolfensohn.  He rejected it completely.  In his usual charming way, he didn't like the idea at all.

Second, and we saw this in some of the comments today, we need performance-based outcomes.  We need to know that to use a simple example, if we're going to do education, we don't want to know that there are bricks put into schools.  We want to know that people can read and write and do sums.  And that's not an impossible task.  It takes a while to find that out.  We have those problems here.  It's not a problem which occurs only in the developing countries.  Developed countries have that problem, too, but we're making progress presumably here.  We need to make progress there.  We need to find out can they read and write.  Is there water in the village?  Why in the hell is it that in the 21st century we don't have water and sanitary facilities in most of these countries?  I mean if the Bank is spending billions of dollars every year, it needs to have a better explanation than it has for why it isn't that they have--why they don't have potable water, why they don't have sanitary facilities and so on.

Grants I've talked about.  But the word about the grants is not grants.  It's not grants replacing loans.  It's monitored grants.  We pay for performance.  We want to know how many children were inoculated.  We go to the vendors and we say bid o this project of inoculating children against measles.  And when we award the bid--

[END OF TAPE 1, SIDE A; BEGIN SIDE B]

MR. MELTZER:  [In progress.]  to find out how many were inoculated.  Now, that doesn't seem to be such a horrendous idea.  Why was it that the Bank fought that for so long?  The simple idea that we're going to have a performance-monitored grant that's going to go out and do these simple tests?  Now, not all the tests are as easy as inoculating against measles.  The big tests are, of course, institution building.  And those are much more difficult to do that way.

But we can do a lot even in countries where the government is corrupt and doesn't give a damn about what happens to the people in the country.  We can still go around them or try to go around them by going in and doing these things with private vendors who do these things on performance basis.  We need the government's acquiescence, but we don't need to send the money to the government and have it stolen or misappropriated.

So grants, monitored grants.  We need--and here we seem to disagree--we need graduation.  We need an effective program for graduation.  I mean it's wrong, in my opinion, simply wrong to say well, we give money of to China because China--China can borrow $60 or $70 billion a year in the capital markets.  It can finance any project that it wants.  Money is fungible.  The fact that we give them the money to say--because they say we're going to do this for a social purpose, they present us with the ones that they think we'll finance.  And they use the money for some marginal project.  Who knows what it is?  The Bank doesn't know.  It's not easy to know.

So it's just not true that China needs the money.  We need to take that money and instead of having some grandiose scheme called the Marshall Plan for Africa, what we need to do is reallocate the money that's now being spent into projects which are more worthwhile and make sure, through the performance criteria, that they actually turn out to be more worthwhile.  So graduation, that's important.

Corruption.  We need independent evaluation at the Bank.  The Bank has made some progress.  The evaluation office of the Bank is better.  But it's not an independent office the way the, for example, the independent evaluation office that Montek [inaudible] has started at the Fund does, where it actually comes in and said we're going to look at what you did, and we're going to tell you how it could have been improved; and has a dialogue with the management of the Bank about those things I think that's a great step forward.  And I think the Bank really badly needs something like the independent evaluation office and someone of the stature of Montek Alawi [ph.] or someone like that to get it off the ground so that we really have the beginnings of something which says this works and that doesn't work.  So either make it work or get rid of it.  It may be a very valuable thing to talk about, but if it doesn't work, then we shouldn't be doing it.

Now, what do we know?  There are a lot of things we don't know about economic development, but there's one thing that we do know.  In the last 20 years, the Chinese have lifted about 400 million from a dollar a day.  You know, they didn't do that on World Bank grants, although there were World Bank grants.  But I think anybody who seriously evaluates what went on in China, they'll say, well, it was the openings of the market, the encouragement of private investment from corporations, the fact that they have something that approaches the rule of law, that they have something which protects property rights, that they have opened their economy to trade, fairly well to investment, and that those are the things that work.  So let's see whether we can't get that kind of institutional change.  That's the hardest part of the development program.  But, boy, we're in the early stages in the many of the poor countries in getting it.

Now, you say, well, suppose the country doesn't want to do it?  Well, if the country doesn't want to do it, then it doesn't want to develop, and we should not give them any money.  We should give the money to those countries or lend the money to those countries that really want to do the development, and that means now it means they have to be willing to seriously begin to make the institutional changes which are the heart of a development program.

Well, while the 400 million in China were being lifted in 2o years from a dollar a day, what was happening in the rest of the world?  Not a damn thing.  None of them.  I mean the number is about the same.  There are more people so the proportion is down a little bit, but when Jim Wolfensohn used to hand out his card with the number who were living on a dollar a day, if you looked at those cards over time, the number didn't go down.  So that tells us a lot of what we need to do.

So those are the external incentives.  Property rights.  Open economy.  Rule of law.  Monitoring.  Those are the things which will get reformed.  I mean this is serious business.  And we ought not to treat it as if it were just a, you know, giving at the back of our hand, not paying attention to it.  It's hard.  I mean in years of discussing this in the U.S. Congress, I mean, they're all interested in the International Monetary Fund, but they're hardly at all interested in the Bank.  They don't see the Bank.  They see the International Monetary Fund because the International Monetary Fund, for example, well, you can get the Senator from Nebraska to be in favor of the International Monetary Fund because it helps export wheat.  But what does the Bank do for wheat?  Very little, and very little here.  So not much interest.

But we really want to be serious about that.  That's the one thing on which I agree with the British.  We need to be serious about Africa, and we need to be serious about seeing that we do our best in Africa.

Finally, let me say something about the internal incentives.  I am not the first, and undoubtedly will not be the last to point out, including people like the Wappenhans [ph.] report in the Bank, that the Bank has a lending culture.  It needs to have a performance culture.  We need to reward people not on the basis of how many loans they make.  My friends at the Bank have told me over and over again, you know, if I didn't make loans, I would be called in on the carpet and told why didn't you make more loans.  Well, that's not a very sensible way to go about it.  It's not how much money you give out.  That puts the emphasis, I mean the economists certainly should understand that puts the emphasis on the inputs and not on the outputs.

What we need to do is to get the incentives over so there's something to do with the output.  That's where the independent evaluation office can be important in telling us, you know, your damn program didn't work.  You know, tell us why it didn't work.  We spent, you know, so many dollars, and it didn't work.

So we need to get over to incentives, internal incentives, where these people who are well meaning, mostly well intentioned, seriously devoted to the idea of economic development and improvement in the standards of living in the countries that they work on that we get them to not only have those serious interests, but to be effective at implementing them.

MR. LACHMAN:  Thank you very much, Allan.  I'd like to throw it open for questions, and I'd ask people, you know, just to identify themselves.  But before doing that, I think that's going--maybe I'd ask Nancy and David just to clarify what it is that they really are wanting to do about lending to middle-income countries.  You know, there seems to be agreement about the need for better evaluation, better monitoring.  But I seem to hear Nancy suggest that the World Bank should really be targeting to raise the amount it lends to middle-income countries from $11 billion to $18 billion before; whereas, Allan seems to be suggesting that China--you know, sitting on $650 billion or reserves and being able to get to the market really doesn't need [inaudible] fund.

Maybe you want to say something, and then we'll turn it over to the floor.

MS. BIRDSALL:  Yeah, thanks, Desmond.  I wouldn't say that there should be any target for the amount of lending to middle-income countries and to China and India.  The view that we take is quite different.  You have to sort of have a whole mindset that changes.  If China, which, by the way, has high reserves because of its own internal political reasons--it wants to keep its exchange rate low--you know, et cetera, that has to do with employment, whatever--if China as member of this club wants to borrow even a small amount of money to get advice and some small amount of funds to deal with their pension problem, so be it.  China is an incredibly poor country.  There are 400 million lifted out of poverty, but there's still another 400 million who are extraordinarily poor.

So my--our report doesn't say do a lot of lending.  It says there are risks in the growing irrelevance of the Bank as a global institution for a huge group of countries that represent a huge part of the global population that contribute to all kinds of systemic risks whom we want at the table, who are interested in using the brain trust that the Bank represents.  Whether that boils down to $10 billion, $15 billion, $3 billion, I don't think is that important.  If, in fact, the Bank had the right products and it reduced the hassle and lending fell, fine.  What it would mean is that we'd have a real signal of the demand for the services that the Bank provides as a brain trust.  The risks of all these countries gradually abandoning the Bank is you get adverse selection.  The Bank won't be able to--it will have a much riskier portfolio, if it only has Paraguay, Guatemala, right; et cetera--the poorest of the middle-income countries.  They will then face higher borrowing costs.  You get lost opportunities for the transfer of experience, and you actually reduce your net income, which, by the way, is helping finance the lending to Africa and the grants to Africa.  The net income of the Bank is not completely irrelevant.  You know, you could have a continuous flow of contributions, but I think as part of this club concept if you could get the Chinese and the Brazilians to say, yeah, we want to be at the table because some of the net income from our borrowing is affecting the global system, and we want to be at the table as donors indirectly in dealing with the great challenges in regions like Africa.

MR. DE FERRANTI:  I agree.  There are reasons from the standpoint of the countries themselves.  Over two-thirds of the world's poor and some would say even higher than that are actually in these countries.  And if it's in the interest of the world to attack rural poverty, you can't leave those countries out.  There are interests of the rich countries, indeed all the countries if they have priorities of their own to ensure that the World Bank is indeed a World Bank and is not limited down to only a small number, and the ability of the Bank to financially serve well the low-income countries is important not only through the one that Nancy mentioned, which is the net income, but also through the credit rating and, therefore, the costs at which the Bank can lend to others.

No target.  Relieve the lending pressure.  Remember that was one of my key points.  And let these middle-income countries vote with their feet.  Now, we've seen that some are voting, and fine.  But take a country like Mexico which is a country that wouldn't need to borrow from the Bank.  They chose to do so and quite consciously because from their perspective when they're borrowing, which they need to do for their regular operations, they have a number of factors that they have to keep into mind.  They want a portfolio where they get their resources from.  They want to buy the--they appreciate the help--this is what they say--you can read the statement of Paco Hill and the minister of finance at the last development committee meeting--and they do buy--this gets to the point about why not sell these analytical services.  They are paying substantially now for services that--and they are initiating on their own, including Paco Hill, the Minister of Finance, wanted the Bank's significant involvement in restructuring his own ministry.

MR. MELTZER:  You know, there are poor people everywhere, and we don't think that, for example, that we should borrow from the World Bank or that France, which has plenty of poor people, should borrow from the World Bank, and I don't think that the argument.  Sure, advice?  Absolutely, the Bank should give advice.  Most consultants sell their advice.  The Bank now sells some of its advice.  I think that's a step forward and one which I certainly laud.  But you don't have to make loans as part of the advice.  Usually, people in the consulting business charge.  They don't subsidize their advice.  The Bank could well take a message from that.

The arguments that are usually made--that have been made here--are, in my opinion, wrong.  The Bank's credit risk would go up?  Not at all.  The Bank's credit risk depends upon its untapped borrowing from the developed countries.  It has a line of credit.  It can call upon the United States, Britain, France, and so on to supply that credit as long as it doesn't get its loans above the amount of its undrawn borrowings--and it's careful not to do that--then it has a triple-A credit rating.  As soon as it goes above that, its triple-A credit rating will go away, because then it will be risky.  The reason it isn't risky now is because it doesn't have to go hat in hand to the market to borrow.  If it gets into problem, it can go to the developed countries and say ante up.  You've only paid 10 percent I believe it is of your quota.  The other 90 percent is there on hold for us, and now we're calling on--

MS. BIRDSALL:  I used to believe that, Allan, but I don't believe it anymore, not since Argentina, frankly.

MR. MELTZER:  That's the fact.  And the other canard which is circulating which the Bank circulates and which is not true is that it earns income on its loans, which help finance the development of the poor.  It earns very little income net on its loans and it finances its development from appropriations by the various countries for IDA and on the fact that it gets that money and it has a stock of funds which it has and investments them and that stock of funds finances part of the Bank's cost.  The additional, for example, when we in the United States make an allocation for IDA, the Bank holds some of that money and pays it out over time.  During the period which it holds it, it earns interest on it.  That's a source of revenue to the Bank and those are the principal sources of revenue to the Bank, and I believe that that's a fact.  We've been over that fact with the former treasurer of the Bank, when he was the Treasurer of the Bank, he agreed to what that was; that the sources of their income have nothing to do; that they can continue to do everything that they're doing.  If they change to a grants program, they wouldn't be any worse off than they are now.

MR. LACHMAN:  Thank you.  I'll throw it open to the floor.  If you could just identify yourself, and if I could also ask you to keep the questions short.

MR. ROSENBLUM:  Thank you very much.  David Rosenblum [ph.] with Development Finance International.  First of all, thank you very much to the panel today--great discussion on some sensitive and pressing issues.

The president comes in at a time where there is kind of an internal debate within the Bank on another sensitive issue and that is whether and to what degree the World Bank is going to embrace country systems for procurement.  Some folks think that this will help a lot of the emerging markets develop their systems for other non-bank procurement, and other folks seem to think that this is just going to codify a lax and corrupt system.  I'd like to hear some of your thoughts on that.

MR. DE FERRANTI:  I'll take that.  I think the right way to start on that issue is to recognize that implementation of country systems for procurement could take one of two different forms:  effectively letting too many countries that are not yet ready move to the country systems or a much more stringent application of the criteria which ensures that you are--only those countries who have adequate systems in place.  It's the latter way that the Bank should go, and I think is going.

And I think it makes--I mean ultimately the problem with the system now is you are after the fact trying to clean up something, when it would be much better way upstream to focus on the systems that are generating either good or bad behavior, and then strengthen them, and reward those who are strengthened incentives.  So I think it is heading that way, and there should be greater support for that.

MS. BIRDSALL:  Absolutely.  I mean, as Allan said, money is fungible.  What difference does it make in many countries if the Bank is having these incredibly high standards for adequate procurement arrangements and minimizing corruption for two percent of a government's investments?  I mean it's much more fundamental to create an incentive for countries to upgrade the whole system.

This is the same issue on environmental safeguards.  What good does it do to have an external group going project by project?  The whole purpose of the Bank needs to be fundamentally to improve governance and upgrade the conduct and management of public investments as well as revenue collection, et cetera, et cetera.

So it's the right direction.  My understanding is they'll do an incredibly carefully.  There will be an incredible amount of scrutiny.  There will be an incredible amount of worry.  I, you know--I mean and there are risks in everything you do.  In this country, we have been coping with problems in Pentagon procurement arrangements for decades.  So let's not expect that everything will be perfect everywhere, even when the World Bank is watching.

MR.    :  [Off mike.]  [Inaudible.]

MS. BIRDSALL:  I'll go first this time.  I'll be quicker.  I think it' a great question on the content and goals of the Bank's program.  What we say in this report is it should be--we believe in a world full of equitable growth.  So, you know, growth that is equitable, and that's what's politically challenging in most of the countries where the Bank is working.  And part of the problem of globalization in the last decade has been that there have been too many losers relative to the winners within many countries and so the Bank should be helping countries and pushing them and encouraging them to have growth that is reasonably shared; that creates equal opportunities; that creates Allan's incentives and so on.

What about net income?  I think it's true too much is--the whole set of financial policies of the Bank needs to be scrutinized.  David mentioned the bureaucrats in that one instance.  The fact is that my sense, when I was at the Inter-American Development Bank--is that on the financial side, there is this unhealthy competition about how few basis points can we borrow at in the IDB, in the Asian Development Bank, in the World Bank.  The IDB doesn't want to be more than three or four basis points more costly when it goes to the markets than is the World Bank, and the World Bank financial staff they want to be, you know, negative basis points compared to LIBOR.  That's why they tell you over and over and again that there have to be high reserves; that you have to have guarantees priced and provisioned against in the same way as loans; that it's impossible to consider new products that would be more innovative.  That's part of the problem, and that's an area where the shareholders need to create healthy pressure to make the Bank's--willing--the bureaucracies more willing to innovate.

MR. DE FERRANTI:  Growth is key.  But growth alone is not enough.  It's very healthy to revisit that debate all the time.  Probably now is a good time to emphasize growth, but it's not the only thing.  I agree with the way Nancy articulated.

I also agree on the second point, and basically what's needed in the Bank on the whole financial side now is a signal of leadership to use the assets and not just the financial but the assets in the sense of the capabilities of the Bank to be more effective in helping development in more modern ways.  And it's just waiting there to be taken as an opportunity.

MS. BIRDSALL:  Could I just say one more thing on this?  It's the United States and the other guarantors that Allan mentioned were the Bank to get in trouble who like best extremely conservative financial policies, who would just as soon sleep better at night than have the Bank, you know, have to borrow at slightly higher basis points to take a few risks.

MR. LACHMAN:  Could I ask is there some sort of conflict between pressing for equitable growth and reducing the hassle factor of the Bank.  You know, would this not be just another reason why countries might prefer to be borrowing in the markets?  You know that if you're going to be adding another condition to the loan that it has to be direct to debt equity, you know rather than just the project itself?

MS. BIRDSALL:  Yeah.  I think that's absolutely right.  I think that goes back to Allan's point that it's very difficult to be effective in countries that aren't adopting the right policies.  But the way to proceed here is as many middle-income countries are managing their economies better, they--Lula does care about his problem of poverty in Brazil.  The many competent African governments desperately care about their HIV problem.  So they have vested interests just as we do, against which they are in constant conflict and battle.  So the question is does the World Bank support for certain kinds of policies and certain kinds of investments help them find that line that's so difficult politically to find where they're doing adequate growth policies that are reaching--creating opportunities for as large a community as possible.

MR. MELTZER:  Yeah.  My goals for the Bank aren't very different from the Bank's alleged goals.  I would probably go about achieving them in a different way.  I would say that there are two goals that I would want to put down:  poverty reduction achieved by strong incentives for growth where that's possible, but it's not going to be possible everywhere.  So I would want to improve the quality of life in countries where it's not possible to grow.  That would be the grants program, the idea of water in the villages, and that sort of thing, where the government, for various reasons, it may be that the government, political, tribal, various things--the country may not be ready or willing to adopt the kinds of things which would be required for growth.  Therefore, we ought not to leave those people aside, because they're a big part of our problem.  We should try to get programs which will do.

As far as equitable growth is concerned, let me say the Bank's problem is poverty reduction.  The distribution of income within the country is none of their business.

MS. DE FERRANTI:  A point needs to be added, Desmond, on your question if I may about the hassle, because the dialogue with countries and the decisions about when to provide additional support and when not are important, and they, you know, sometimes don't lead to immediate agreement, and that's the nature of it.  But the hassle doesn't come from that; hassle in the sense of the length of procedures and so on.  It comes from well intentioned but difficult environmental, social, financial, procurement things.  So it's a different thing.  And the concept that Nancy put of for well performing countries can there be a less hassle intensive is a good one. I tried hard.  I would hope the shareholders would sign up to it.

MR. CHOCK:  I'm Senehu Chock [ph.].  I'm a former Bank staff member.  This question is to David de Ferranti.

The Bank has some 35,000 million dollars of liquid capital.  Eleven billion is from paid-in capital; $24 billion is retained earnings.  You, some 15 years ago, and so the Bank could do a great deal more to deal with multilateral debt, especially in Africa using its own balance sheet as Allan and the Meltzer Commission and others have pointed out.  So 15 years ago, you got funds from the Pew Charitable Trust.  You ran a project of the Bank looking at the debt problem in Southern Africa, and you obviously came up with many ideas like debt for development swaps and so on.  And for the past six years, you've been meeting every week with the Bank president since you've been a vice president.  The chief--the top financial person at the Bank was somebody Mr. Wolfensohn brought from his old firm.  What I'm saying is that you had really the top-level access, as well as--and Mr. Wolfensohn also had, you know, pretty much total control of the top of the bureaucracy.

Yet, there has been so little innovation.  So little has happened in the area of multi-lateral debt, especially for Africa, and unless something significant is done, wouldn't the fungible grants go to pay off the--got to what's debt service?

So my question is really, what impedes innovation at the Bank?  Is there a structural issue?  What can Mr. Wolfowitz do that Mr. Wolfensohn could not?

MR. LACHMAN:  At this stage, I'd like just to collect a few questions, and then, you know, we'll go to the panelists.  So I'll note the questions as we go along.

MR. PREEG:  Ernie Preeg.  Am I on?  Am I on?  Yeah.  Manufacturers Alliance.

My question is about this middle-income grouping and graduation in particular.  I think it's a misleading term, middle-income, if it ranges from, you know, Paraguay to China.  It's everybody except the poorest countries.  But I think the Bank is so vulnerable with China in particular, with the reserves, the growing current account surplus, the high military spending growth, et cetera, et cetera, that is just doesn't--you just can't convince anybody that they deserve to get loans from the World Bank.  There should be a donor.

So my question really is to Allan, because you're the only one that seemed to support a graduation initiative.  What might be the form and the specifics of really putting graduation up front?  Admittedly, China is number one in line, but it would have to be more than that.

MR. LACHMAN:  Thanks.

MR. MEAZALA:  My name is Mike Meazala [ph.].  I was at the Heritage Foundation this morning.  It was a seminar about EU Constitutional Treaty.  One of the panelists said the recent results of the voting in France and Netherlands represent the victory for anti-free trade, anti-globalization forces.

If this interpretation is appropriate and if anti-globalization forces are gaining momentum in Europe, then this could cause yet another challenge for the World Bank.  Do you have any advice or suggestions to make to Paul Wolfensohn?

MR. LACHMAN:  Thanks.  If we could--

MR. RAJAPATIRANA:  Sarath Rajapatirana from the American Enterprise Institute.  I just want to take up the issue of China and India as cases of first graduation and first selection.  So why would one worry when those two countries borrow less?  Isn't it something to sort of be happy about; that the country [inaudible] that it has reached a level of development on its own and [inaudible] selection basis has said we are not going to borrow more.

So my question is that then why worry about the poor people in those countries in the sense that the country itself is not doing much about it.  But if you look at our own numbers, of course, China has 400 million people now getting about $1 a day.  Why don't we think that the process will continue if they're continuing with the same policies that they have followed in the last 10 years?

MR. LACHMAN:  Okay.  I'll just take one last question at the back.

MS. HUDAS:  Karen Hudas [ph.], current staff member at the Bank, and my question is to what extent do the various recommendations have support from the other stakeholders in the Bank, and what would the Millennium Development Goals have to do with any of these recommendations?

MR. LACHMAN:  Okay.  David, would you like to address the question on the innovation?

MR. DE FERRANTI:  The first question?  You asked what does Paul Wolfowitz need to do now?  He should have a leader for the--chief financial officer who is passionately committed to using the resources, the balance sheet, of the Bank prudently, but in the service of development, thinking about the interests of all of the shareholders, particularly the developing countries, and not just, as Nancy was saying, getting a few more basis points downward.  That I think is the key thing.

I would also comment the trade question.  I think what the Bank should do is be a source of good analysis, transparently distributed and it's disseminated and discussed on what trade means, particularly when others are not so forthcoming.

There was a question on the recommendations, do they have basic support within the stakeholders?  It's such a diverse institution I think there are views all over the map.  But I guess I feel that for many of these things that we've been talking about, although you've heard quite a range, so there's not necessarily consensus up here, there is considerable support.  What does it have to do with the MDGs?  We, the world, are not on track to achieve all of the MDGs.  I think some of these steps would help.

I also want to close and here I probably would disagree with Allan.  I think Jim Wolfensohn did a great deal of good for the Bank.  Nobody's perfect, especially in a job like that.  But I think the Bank of 10 years ago and the Bank of today, there's no comparisons.  So I don't agree with Allan to the-it's funny, not funny, but it's interesting.  We come out at the same in many cases ideas for what needs to go--what needs to be done going forward.  But I don't share that same degree that everything in the past has been dysfunctional or dismal.

MR. MELTZER:  Not everything.

MR. LACHMAN:  Did you want another one?

MR. MELTZER:  Yes.  In the Commission Report of five and half years ago, we recommended graduation at $4,000 per capita income and investment grade status.  Now, maybe those numbers are wrong, but that sort of puts you in the ballpark.  Maybe it should be $5,000 per capita income, but it's somewhere along there.  Another Commission which Nancy was the administrative head, but not a member, reconsidered those issues--

MS. BIRDSALL:  I was a member.

MR. MELTZER:  Oh, I'm sorry--and was a member.  Sorry.  Sorry.  Yeah, $4,000 PPT.  Yeah.  Real income, yeah.  Yeah.

MR.       :  China is way over 4,000.

MR. MELTZER:  Oh, yeah.  Anyway, another Commission looked at that same question.  They also believed in graduation, and they came up with what I think is, in fact, a good scheme, which was raise the interest rate until they get to market rates and then cut them off.  And where do you start that?  Well, 4,000 per capita is a good place.  And investment grade status.  Investment grade status means that they're really a reliable--they have reason to believe that they'll be able to borrow in the market most of the time.

To Sarath, I would say to close right.  It will.  That is if they continue the policy that they have, then they're going to move more and more people will move out of poverty.  But what is China's problem as the Chinese see it?  I mean we talk about China's problem here as if was the exchange rate, but as the Chinese see the problem, there are two things that seem to be of paramount importance to them:  one is 150 million people for whom they would like to find jobs and who would like to find jobs, and to prevent riots and social unrest during the period in which they don't have jobs.  And that explains a lot of how the Chinese behave and if they continue to do what they're doing and grow even close to how they've grown over the last 10 years, they will absorb a great many of those people in the labor force.  But they need to make substantial reforms, reforms which the Bank could help them with, they really do need.  I mean they need a financial system.  They need to do something about the terrible systems of wasting all the capital that they do on projects which have no--which have zero marginal product--things of that kind.  I mean they're not so rich they can afford to waste as much capital as they do.  So there's a lot that could be done there, and the Bank can provide advice really requires political will to carry out most of those.

MR. LACHMAN:  Thank you, Allan.  Nancy, would you like the last word?

MS. BIRDSALL:  Sure.  I think that the EU question about globalization is important and interesting, but we still don't know yet really what was the nature or the reasoning for the big no votes.  I think it just puts the Bank back in that awkward middle between, you know, being pro-globalization, but aware that the benefits need to be as widespread as possible.

On Sarath's question and on Allan's comments, I just don't understand the logic from economists of having a quantity based rule.  You know, a quantity based rule.  At 4,000 per capita, you're out.  The fact is I don't know what Korea's PPP income was.  I'm sure it was a lot more than $4,000 per year at the time of the Asian crisis, when, of course, it needed resources of an IMF type.  But do note it went to the World Bank because it wanted assistance and some resources to deal with the question of should it have an unemployment policy exactly, et cetera.

On other stakeholders in the Bank interested in recommendations.  It's very interesting to me, we didn't really talk about our recommendations on reforming the governance of the Bank.  We recommend that in Paul Wolfowitz's honeymoon period, he actually go to the U.S. and the other influential shareholders and reinstitute a process for developing a more open transparent selection process for the next president.  This is the time to do that, when he has some voice in the Bush Administration, and he's at least five years away from what might be the next arrangement.

The second thing we recommend is that he also work with the shareholders to improve the representation of the developing countries in the Bank.  At the moment, why would China, you know, it' a miracle that China still borrows a little.  China needs to be at the table.  It needs to be at the table in a discussion of what are priorities for global public goods.  It needs to be at the table on what are priorities for financial policies of the Bank.  It needs to be at the table demanding that the Bank be more responsive to it and other borrowers that are growing but still want some services just like you, many of you, with lots of money in your bank still might go and take out a mortgage or take out a car loan.  You have your reasons.  You want your portfolio that you're a member in a sense and a stakeholder in an institution no matter what your assets.  You might still go to borrow something.  Thanks a lot.

MR. LACHMAN:  Thank you.  I think I--you know, I'm judged on performance, and I've overrun this by five minutes, so I'm rather worried, but I would want you to join me in thanking our panelists for an interesting discussion.

[Applause.]