The president of the World Bank speaks about the changing chellenges the institution faces in dealing with global poverty. By Adele Ferguson
James Wolfensohn is only half joking when he says he must be mad to agree to a second five-year term as president of the World Bank. As leader of one of the most influential institutions in the world his task is to make the bank relevant during the most turbulent period in its 55-year history.
The task is daunting. “At the World Bank I’m privileged to work with the future of the planet. I don’t say that in any grandiose way; that is what we are doing,” he says.
Wolfensohn has assumed responsibility for lifting poor countries out of poverty during the most turbulent period since the Industrial Revolution. “I think the next five years will be the biggest change for the world since the Industrial Revolution, because you have the Digital Revolution and you have changing demographics and many shifts in politics. The real challenge is what will happen with Russia or China, let alone the problem of what will happen in India and Pakistan. Then, closer to home, what is going to happen in Indonesia? I am in the middle, trying to help,” he says.
Whatever the challenges, Wolfensohn believes he can make a difference. An Australian by birth, Wolfensohn studied law at the University of Sydney and later obtained an MBA from the Harvard School of Business. Before joining the World Bank, he held senior positions at Schroders and Salomon Brothers and then established his own investment bank in the United States in 1981. He was appointed president of the World Bank in 1995.
Wolfensohn spent the first 16 months of his first term at the World Bank improving the bank’s external relations with client and shareholder governments and tackling a large internal reorganisation. The thrust of the transformation was to turn the bank into a customer-oriented, knowledge-based institution.
He realised early on that, if the bank was to remain relevant in a globalising world, it needed to concentrate on how it carried out its business before deciding what that business was. To this end, he overhauled the bank’s administration, changed its culture and dismantled its bureaucratic nature. These changes have made life a lot easier for the bank today because, as any good leader knows, if an organisation is properly run, it can easily change its strategy to adapt to external forces.
Wolfensohn managed all this change through his famous Strategic Compact, which was an agreement between the bank and its 180 shareholders designed to improve its effectiveness. The compact involved shifting resources to front-line lending and operations and away from bureaucracy and personal fiefdoms. This cost $US250 million over two and a half years.
One of the management initiatives was to sack up to 700 employees out of a staff total of 10,000. About 150 line managers were removed from their jobs and asked to reapply, either for their own jobs or for positions elsewhere in the organisation. And 300 of his top managers were sent to Harvard Business School for six weeks to help them focus more on customer satisfaction as opposed to a narrow preoccupation with how many loans got approved.
In terms of internal accountability and responsibility, the bank introduced 360-degree personnel evaluations at all levels of management. “I think the first level of achievement, which I share with my management colleagues, is quite a significant one,” Wolfensohn says.
He has tackled corruption in the bank by launching an internal corruption probe and he has initiated a civil lawsuit in the US to recover money taken in bribes by a former employee. At the time of the lawsuit, Wolfensohn made it clear that it was necessary that the bank held itself to high standards if it was to maintain integrity when campaigning against corruption in its debtor nations.
Other initiatives included redeploying many staff from the Washington head office to field offices to help them better understand poverty and how to tackle it. The aim was to make staff think more in human terms. One advanced management course included a taste of poverty; living a week in a slum or village. The aim was to give poverty centre stage in all the bank does.
The bank has just released a study called Voices of the Poor, presenting detailed accounts from more than 60,000 men and women in 60 countries about the realities of living in poverty and what the poor need to improve their lives. The study chronicles the daily struggles of the poor, and how their lives are shaped by common hardships such as hunger, powerlessness, social isolation, state corruption, gender inequality, and the rudeness of local officials. According to many in the book, poverty is more than a lack of income: it also means having no voice in making decisions that affect their lives and lacking representation in state and national political institutions.
Wolfensohn says such a study is invaluable because it keeps the bank trained on its core focus: reducing poverty. “Our core mission is to help poor people succeed in their own efforts, and the book raises major challenges for our institutions and for all of us concerned about poverty. We are prepared to hold ourselves accountable, to make the effort to respond to these voices.”
The bank has embraced the key findings of the report, and in particular, “community-driven development”. This refers to projects that give community groups greater authority and control over national allocations of money and resources thereby guarding against corruption and a more powerful voice in the institutions whose decisions affect their families livelihoods.
Wolfensohn says the study has spurred the bank’s regional field operators to increase their support and funding for community-driven programs in client countries, employing social investment funds in local rural initiatives to improve water and sanitation facilities, and to upgrade slum housing in urban areas.
Deepa Narayan, the author of Voices of the Poor and a principal senior social development specialist at the World Bank, says: “The central challenge of the 21st century is to create governance systems from local to global levels that include and respond to the priorities and concerns of the poor. This requires investment in their organisations so they can negotiate directly with governments.”
The bank has also become a “central knowledge bank” on development issues. The central knowledge bank emerged from a 1997 annual meeting of the World Bank, at which Wolfensohn said his goal was to make the bank “the first port of call when people need knowledge about development”. To this end, the bank has been installing interactive classrooms, video-conferencing systems and computer links to make it easier for clients to tap into its information bases.
When the Strategic Compact was released, morale slumped to new lows. The bank has had a long and unhappy history of seismic internal restructuring. So, when Wolfensohn took the top job in 1995, the last thing staff wanted was another human-resources reshuffle. At the time, staff described the reform of the bank’s HR policy as “fraught with risks”, and that there was a danger of “further alienating an increasingly anxious and sceptical workforce”.
However, five years on, morale has improved and staff say the bank has a strong culture and is more in tune with its role to combat poverty and stimulate development. This is quite an achievement given that the bank is operating at a time when many groups, including the US Congress, are questioning the relevance of the bank in an era when the private sector is dominating capital inflows and outflows to poor nations.
The bank has changed and continues to change. By the late 1990s, the financial and social sectors absorbed about a quarter each of total annual World Bank lending, up from around 5% during the early 1980s.
But Wolfensohn says that the challenges ahead will be just as great. “We have approximately three billion people living on less than $US2 a day. About 1.3 billion or 1.4 billion of them live on less than $US1 a day. That’s out of a total world population of six billion, which will increase to some eight billion in 25 year’s time. Half of those could well be living on less than $US2 a day.”
He says the next five years will be the biggest change for the world since the Industrial Revolution. But he says the first thing to do is to set goals to reverse the trend towards poverty, the trend towards greater inequality between rich and poor, and the trend towards degradation of the environment.
He is tackling this through the Comprehensive Development Framework (CDF), which was launched early last year. Instead of pushing countries into policies designed only to produce growth, the CDF recognises that there are many key players in the development process and that they need to work together as part of a coherent strategy. The CDF works closely with the major stakeholders in the societies they work in to produce their own national development strategies. “The CDF is about setting clear priorities with countries as to what they believe they should do,” Wolfensohn says.
To this end, the bank has changed its focus from investing in big infrastructure projects such as dams (something the private sector is happy to fund) to increasing the support and funding for community-driven programs in poor countries. For instance, in Bolivia, where the bank worked closely with communities in the construction and operation of rural health facilities, child mortality has fallen more than 40% over other areas without these community-designed and run facilities.
The bank has moved beyond simply financing development projects to the task of tackling broader issues such as human and social development, governance and institutions. The need for a more comprehensive framework of this kind has become apparent. The CDF approach calls for a development plan focused on a long-term vision of the results to be achieved and supported by strong partnerships among governments, donors, civil society, the private sector and other development actors.
In launching the CDF, the bank focused attention on what it saw as the essential building blocks for effective development:
- Structural: good governance and clean government, an effective legal and judicial system, a well-organised and supervised financial system, and safety-net programs.
- Physical: water and sewerage, energy, roads, transport and telecommunications, the environment and culture.
- Specific strategies: for rural, urban, and private-sector development.
Wolfensohn says that the CDF is essentially a process, a new way of doing business. In the short run, the CDF establishes mechanisms to bring people together and build consensus. In the long term, the hope is that the CDF will enhance development effectiveness and contribute toward the central goal of poverty reduction.
Like most organisations trying to adapt to a global economy, the bank is forming strategic alliances. It is forming partnerships with the United Nations, regional banks, other multilateral institutions, the private sector and civil society.
This is particularly crucial because, in the global economy, no institution can go it alone. Alliances are crucial to the success of the CDF.
Forming close working relationships with the private sector is also imperative to the future relevance of the bank. Ten years ago the flow of funds to developing countries was $US30 billion from private funds, compared with $US60 billion from official development assistance. Today, the private sector invests more than $US300 billion a year in developing countries, and official development assistance is $US45 billion.
The Asian and Russian crises showed how volatile capital inflows and outflows can be. When hedge funds bailed out of Russia, the country almost collapsed. This prompted the World Bank to increase its role in the stability of financial systems and to work with the private sector to educate it into taking responsibility for its actions.
The goal is to help the private sector understand that social responsibility is an important element in ensuring the safety of their investments. To achieve this, Wolfensohn is trying to educate the private sector into understanding that it is in their interest to help create social stability.
But the private sector is discerning in where it sends its money. More than 100 poor countries never get a whiff of private capital flows. This means that the World Bank and the International Monetary Fund still have a role to play in helping these countries to develop. Wolfensohn’s aim is to finance the reforms (achieve financial stability, the elimination of corruption, standardise accounting procedures) that then enable the private sector to come in and finance the infrastructure.
Wolfensohn’s challenges in the new millennium will be many. Besides grappling with issues that most companies have to deal with: globalisation, the new economy, creating a strong, flexible culture and a central knowledge-management system; he must also deal with the politics of the incumbent government of its biggest shareholder, the US. On Capital Hill, an anti-multilateral caucus on the right of the Republican Party is lobbying to close down the World Bank and the IMF. If the Republicans win the US presidential election in November, the pressure on these institutions will mount. However, Wolfensohn, renowned as one of the best managers in the world, will use his acumen to continue to improve the bank.