Foundations for a More Stable Global System
                                                                  99965

Remarks at the Symposium on
Global Finance and Development
(prepared text)


by
James D. Wolfensohn
President
The World Bank Group

Tokyo, March 1, 1999

For over eighteen months we have all been witness to an extraordinary
period of global financial turmoil. This has imposed huge social and
economic costs on the countries affected. It has also shown us just how
truly global and thoroughly interconnected our world is now. Crises in a
number of countries have created risks for the entire global financial
system.

And so we have focused in recent months on the causes of this
instability, and on what we might do to prevent and deal with such crises
in future. We are engaged in a debate about what is being called "the
global financial architecture": we are revisiting our blueprints.

As the attendance at this seminar attests, our debate continues and I
believe we all recognize its seriousness and the very different world
that is the context for our deliberations. Many big ideas have been
canvassed and there are proposals out there for radical institutional
reforms. But behind this a good deal of common ground has emerged on the
more pragmatic steps that should be taken to reduce future risks, to
handle crises better when they happen, and to help countries recovering
from crisis.

What I want to address today, as we think about financial architecture,
is the need for us to establish really solid foundations to underpin that
architecture. To create solid foundations on which something lasting
might be built, I think you need to address a whole set of issues which
are not typically addressed in the financial analysis alone. A stable
financial architecture cannot be achieved without the proper structural,
institutional, social and human foundations needed to make a modern
market economy work. Without these underpinnings, our building will
collapse. It will also collapse if we are not joined in our labors by
hands and voices from every corner of the globe. Our architecture must be
one for developing countries too; a plan to include the most vulnerable
and those who, most recently, have felt the greatest pain.

And let me add right at the start what I believe our goal to be in all of
this. Why do we want a stable financial architecture or, as I am arguing,
a more complex and inclusive foundation on which to build this and all
the other elements we need to sustain our world? Simply because we want
to fight poverty with passion, to establish equitable development,
stability and peace right across our world. I cannot think of it any
other way, nor believe it should be otherwise.

What do I mean by foundations?

If there is a single cross-cutting lesson that we have learned over the
past eighteen months and more, it is not simply one of getting the
macroeconomic numbers right or of ensuring transparency or of revising
the way in which capital flows are regulated. It is all of these and they
are important but it is also much, much more.

It is a lesson of how deep and complex our foundations need to be. It is
a lesson of how interconnected each and every element is in our building
process. And it is a lesson of how inclusive we must be in consulting not
just an elite group of architects but the widest possible spectrum of a
global society, each and every element of which now matters as never
before. If we do not learn these lessons - and now is surely the time to
show that we can - our foundations will be shallow and our house insecure
and at risk.

So it is not just a matter of getting exchange rates right or fixing
fiscal or monetary policy. As important as these are, in some ways they
make up the easy part of the agenda although I do not intend to
trivialize them. The hard part is recognizing what it takes beyond a
macroeconomic fix and then putting in place the real foundations.

I am talking about the institutional underpinnings of a market economy
that advanced countries take for granted. In the countries of the
developed world these took generations to put in place; they were
wrestled out of the lessons learned at the cost of financial and economic
catastrophes. And still these institutional underpinnings need constant
maintenance and improvement as the working of our world evolves and
changes. And I do not want anyone to take away from this thought the idea
that the developed world has it exclusively right. You need only consider
the banking disasters of the Scandinavian countries and of the US with
the Savings & Loans debacle to find examples of the fact that there will
be crises as a matter of fact. But what made them a little easier to
handle in both these instances were the institutional underpinnings that
were in place, that facilitated recovery and protected vulnerable
citizens.

So let us look at what it takes. My list is not exhaustive but I do want
to identify the range of the vision that we need, so forgive me if I fail
to name some of the particularities. There are many different elements
involved and some will concern and interest some of you more than others.
That is fine too as long as between us we do not overlook or neglect a
layer in the foundation that will find us wanting in the future.

A global framework, with global rules and standards in which we all have
a part, is just as important for the security of an individual country as
is the sum of functioning national parts to the security of the global
whole. It is clear to me that my list might too easily be seen as an
agenda for individual countries. And surely I am identifying elements
that should helpfully guide the choices of national governments and the
work that international institutions can do to assist them. But we cannot
have a well-managed global whole if we do not have viable national - and
regional - entities. If the crises and contagions of East Asia, Russia
and Brazil have taught us anything, it is surely that we must be able to
think both globally and nationally. This is not something about which we
should be having a turf battle, not when we consider that 2 billion
people will swell our total numbers over the next quarter century.

So let me get to my list and begin by naming first good governance,
strong public institutions and a system that fights corruption. If you do
not have good governance and you have corruption, your financial
architecture will not save you. And just as countries need this element,
surely our interconnected world is improved by getting this right.

Second, you need a strong legal system and a justice system able to
guarantee the execution of those laws. This applies equally to the laws
which allow a vigorous business sector to flourish as it does to the laws
which protect citizens, strong and weak alike. This is good for
countries; it is good for the world.

A third element, which relates most closely perhaps to financial
architecture proper, is a robust and well-regulated financial
superstructure in which there is supervision of banks, of capital
markets, of stock exchanges, of financial institutions that are not
banks. This too is good for all of us, internationally, in developed
countries and in developing countries. And financial sector regulation is
of course only part of the story here. Stability requires a sound
corporate sector based on strong corporate governance and legal systems
and accounting systems that work. No country is going to have a sound
financial system without company accounts that make sense, rules of
company behavior and disclosure that are applied, legal systems and
bankruptcy procedures that work. Governments, especially in the
developing world, would do well in this respect too to develop a private
sector strategy that assists the efforts of their business people as they
go out into the world.

These are all elements of the mix for the foundations of a market economy
that will enable developing countries to multiply the opportunities of
the global marketplace. Equally, their absence will multiply the risks of
crises in the new financial environment.

And now my list turns to the social agenda and I do ask here that we get
beyond the set pieces that have us thinking of the numbers as "hard
stuff" and the social as "soft". I have traveled to too many countries
now - 84 in my three and a half years at the World Bank - and seen the
images of poverty too starkly etched to imagine that we can successfully
relegate the social to the second rung on the agenda.

Our social agenda should begin with those elements at the very heart of
ensuring an opportunity at all levels of society: a good health system
and an education system available to boys and girls equally, that is
unconstrained by the borders of a single country, that is linked to our
wealth of global knowledge. It is not at all soft to argue that these are
fundamental to our foundations and that it is not too much of a leap to
make a connection between decent health and education systems and the
stability we are all seeking to reduce the global risks of financial
turbulence.

There seem to me such obvious linkages, too, to all the other elements
needed to secure the equitable development of society. Like
communications systems, from the most high-tech satellite connections to
the simple rural road along which the farmer takes his goods to the
market. Like clean water, accessible clean water to free the millions of
developing country women who spend four to five hours each day fetching
this commodity. The same point can be made about power. Presently 2
billion people have no access to power; 1.3 billion have no clean water.

The environment is a crucial element in our foundation that most seem to
accept now has both global and domestic implications. And so does the
need for urban strategies as cities grow to bursting beyond their
capacity; and rural strategies as countrysides feel pressure and food
security threatens in the years ahead. In the next three decades the
world will have to double its current food production. And lastly, and I
mean this very seriously, as we globalize let us also not forget our
legacies, let us have strategies to protect our cultures so that we might
preserve their riches for our children. There can be no real development
without cultural continuity and enrichment.

If our goal is equitable development and peace, what we must have learned
recently is that stability also requires action to protect the most
vulnerable. And because we are not going to be able to install all the
elements I have just listed overnight, or even over the next decade, we
need social safety nets that are in place for times of crisis. In
addition, each society needs some form of permanent social protection to
take care of the elderly, the disabled and the children and those that do
not have work. These are also institutional underpinnings that we must
consider when we examine the institutions we need to secure a functioning
global economy. When you look at the transition economies one way you
might see a list of successful privatizations. But look at them another
way and you see where the social safety nets provided by the lumbering
state corporation of old have been stripped away and not always replaced.
This creates extreme vulnerabilities which can lead to political
disturbance and a dangerous sense of disillusion among those left out in
the cold. We have seen elements of a backlash against globalization and
there are real and deeply human reasons people feel this way. Social
systems can vary across societies and history - they can be governmental,
tribal or based on family.

I name all these elements not to beat a path away from our engaging
debate on the financial architecture which we surely must attend to. I
name them because I believe they should be an integral part of our debate
as we seek solutions. And in so many of the areas I have identified, it
is helpful to proceed by defining international standards and principles
of best practice. These efforts should not be seen as prescriptions.
Indeed, the major contributors to our global store of knowledge as we
develop and reassess our principles should be the very countries with
which we work.

If we view all these elements as necessary to our foundations, which I do
believe they are, then we have ourselves a very broad agenda. These
things cannot be tackled in isolation and they will not be achieved
quickly. Although our architectural metaphor suggests we should have
blueprints, we must resist a one-size-fits-all approach. If you think
about applying this framework at the country or regional level, it is
obvious developing countries face enormous challenges. We have to look
with extreme sensitivity at the sequencing of reform and the pace at
which we urge a country to integrate into the global markets. Entry into
the global financial capital system takes managing, for example. Our
architecture has to allow for the differences that exist across and
between countries.

At the World Bank we think of this a comprehensive development framework.
But it is not just an agenda for the developing world. It is a key to
reducing risk and ensuring greater stability that should make sense to
all of us.

What needs to be done to reduce the risk?

Let me distill the message I take from viewing our challenge in this
holistic way: the actions needed to bring about greater global stability
are the very same actions needed for successful development. And that of
course is the heart of the Banks mandate, and these are subjects, the
structural and the social, where the Bank is already working, and has
experience and expertise. So, if we are here to formulate an
international response to the crises we see around us, it is right for
the Bank to be at the heart of the response, along with our partners.
Sometimes the Bank can lead an initiative, sometimes it should follow and
on other occasions be content to leave the task to others better suited
to the issue at hand.

Let us think about what we need to begin putting in place some of the
items on my list. We need international guidelines and benchmarks to help
policymakers go about building the institutions I have suggested. And
different institutions need to participate. In some areas, for example,
the IMF should take the lead, in others the Bank, in others still,
various international bodies. In all cases, however, the decision as to
organization should be taken by Governments which must be in the drivers
seat. This is a learning process for all of us. In our searches for
global best practice and benchmarks so far, the area of macroeconomics
got the earliest attention. Now we need to concentrate too on the
institutional framework needed to buttress our global world, be this in
good, fair labor standards that we help hammer out with the ILO or in
solid accounting practices, the soundness of which we can all recognize,
from Tokyo to New York, from Harare to La Paz.

As you know, the Bank was asked by the G7 to draft a set of principles of
good social policy. We are not reinventing the wheel here. We are mining
the very good work done by the UN through its series of broadly
consultative conferences and we are looking at development goals and
indicators as established cooperatively between ourselves, the OECD and
UN agencies.

We expect existing international agreements on development goals, service
provision, social protection, employment and labor standards and social
development will provide the underlying basis for our work. Crucial to me
in all of this, though, is that we commit ourselves to developing these
principles as a result of our dialogue with our client countries. We will
have achieved nothing if these principles cannot be embraced by the very
countries they are meant to assist. They will also mean nothing if they
are seen as a set of new conditions for World Bank credits and loans. Our
work so far is acutely aware of the fact that how these principles are
used and applied - and by whom - is at least as important as their
content. We intend to put a draft to the Development Committee at the
Spring meetings but this must be seen as a work in progress if it is to
be at all meaningful. I am pleased to tell you that our working group is
consulting widely from the UN, G7, and OECD partners to the union
movement, client countries and NGOs.

The Bank is also at the table on standards of corporate governance for
which we are participating in the OECD Advisory Committee to produce
guidelines and a companion paper which focuses on principles and
practices in developing countries. You will have all noticed and welcomed
the entry into force of the OECD Anti-Bribery Convention just two weeks
ago.

A number of groups in which we are involved are looking at financial
management issues like disclosure, financial accounting, auditing and
reporting. It is critical to develop new standards appropriate for
governments and private firms in developing countries as they grapple
with globalization and both the opportunities and the shocks that this
means.

We have to acknowledge though that no matter how good our benchmarks and
no matter how much consensus we have gathered to support them, the long-
term task of institution building lies with each and every country. The
countries themselves must make the choices. And we will support them. In
this area of social and institutional reform and development, we really
are at the core of the Banks work. The crises have made us focus on our
mandate with even greater urgency but it is going to take solid and
effective partnerships with our clients to put these long-term
institutions in place. There are really no quick fixes here.

One of the instruments we are developing to help us in our work with
partner countries is the Social and Structural Policy Review. This will
help us to inventory a countrys "stock" of social and structural assets.
It will also guide our Country Assistance Strategy in focusing on exactly
where to help a country put its social and structural underpinnings in
place. In the wake of crisis we obviously look at corporate and financial
restructuring, we look at corporate governance, competition policies,
accounting and legal systems.

But all of these worthy and important things will mean little by
themselves. If we do not see them as part of the greater whole and if we
do not assist in looking after not just the financial and the structural
but the people too. Before the crisis, East Asia had made unrivaled gains
in reducing poverty from about six in every 10 people in 1970 to two in
10 in the 1990s. Now, looking at Indonesia, for example, we are expecting
poverty rates to slide from 10 percent to 15 percent. This is less than
was initially expected but let us not celebrate: 30 million Indonesians
will be in poverty. Unemployment is a very serious problem.

We have found too that our help is needed not just among the poor in
crisis-hit countries. In Jakarta and Indonesias other urban centers the
non-poor are bearing the brunt of it with, for example, teenage girls
dropping out of school at rates of up to 20 percent. That is not just a
tragedy for today, it is a tragedy for Indonesias future. The Bank is
supporting the Governments Stay in School Program with scholarships to
some 2.6 million junior secondary students. In countries of crisis we
must not only provide safety nets but do everything that we can to defend
the gains made in health and education. Our lending to the region has
nearly doubled in FY98 to $9 billion and we expect similar numbers in
this financial year.


In Brazil, a good example of response to crisis is our part of a $4.2
billion program which focuses directly on social protection and
structural elements of social security. It is designed specifically to
protect the expenditures on the poor and on those groups made vulnerable
by the crisis. These are children in poor families, the retired and
disabled, children in primary school, families that need health care and
those for whom the crisis has meant unemployment.

While we focus on crisis and while we seek ways to strengthen our systems
and soften the blows that will surely fall in the future, we must look
too beyond the emerging market countries of our focus and consider those
which are not yet part of the global system. Many of these countries are
in Africa and our foundations must include them, too, for if not, we will
build a lopsided house. The experiences we are gaining now will of course
provide valuable lessons for these countries as they integrate into the
global economy. But there are many which are not on that threshold yet.
We must not allow the global crisis to distract us from addressing the
pressing development needs of these countries, both with development
assistance and with special policies to tackle particular categories of
problems like post-conflict reconstruction and the debt relief program,
HIPC.

Partnerships and co-operation between institutions

Whether we are talking about our problems and their fixes on a global
scale or whether we address these issues at the level of individual
countries - and I think we have to do both as I have repeated here - it
is very clear to me that the countries of our world must take the lead.
International institutions like the World Bank, the IMF and others
represented among us stand best as strong partners, supporters and
advisors to the agendas in which countries, alone and collectively, find
and take the lead. This seems an obvious insurance for both greater
stability and also more successful development. Each country is
responsible for its own decisions.

Having seen the path that contagion can take in the case of the Asian
crisis, following last August in Russia and now watching Brazil carefully
as we all are, countries have a stake in their neighborssuccesses. And
beyond the immediate neighborhood, all countries have a stake in the
success of others. East Asia has shown us how events that started in a
few emerging market countries can have a truly global impact. This is a
new dimension to our world and demonstrates that managing the world
economy can no longer be a matter involving only a small number of
advanced countries. We have a number of fora in which we work together
quite well and often a lot better than the media would have us believe.
But we need to make sure that these meeting places of our planning and
our work are truly inclusive. Are we satisfied that the emerging market
economies have an equal seat at the table? And if not, let us fix that
because there cannot be happy outsiders in a global world.

What is most striking to me about the agenda I have laid out - the
foundation mix if you like - is how rich a mix it is and how
interconnected all the elements of it are. Preventing future crises and
handling them when they happen - and they will - involves getting all
these elements right, not just some of them. This is not an agenda for
the short term either. There are elements that may be put into place
faster than others but this is long-term work.

And because it is so long term and because the elements are so
interconnected, tackling them requires new kinds of co-operation between
institutions and between institutions and those partners on center stage,
governments. In all our areas of work we are finding we need to cooperate
more closely with other institutions and to explore partnerships with
less traditional friends like NGOs. I have given some examples above of
our work with the IMF, and BIS, on a range of financial sector issues. I
mentioned the OECD where we are exploring corporate governance standards
but of course through the DAC our organizations are deeply linked. There
is ILO on labor standards, other multilateral development banks and of
course the various agencies of the UN. It makes a good headline when we
quibble as often we do but it is heartening when you run down the list of
our working relations to see just how much partnership there is going on.
We need to build confidence in that.

And we need to show this face of partnership to the world. Each of us
brings distinct sets of knowledge and experience to the table. You just
cannot sensibly get good macroeconomic policy advice from one institution
and a good structural plan from another without a lively cross-cutting
dialogue. We have all seen the social pain created by policies applied in
a vacuum and we cannot afford that anymore. The cost is too high, the
human cost and we owe it to our children to tackle the complex issues in
new, broad and cooperative ways not envisaged in earlier approaches to
financial crisis.