Thirty First Lecture - Robert B. Zoellick

Robert B. Zoellick

Thirty First Lecture - December 8, 2008

"A Conversation on the Inter-American Agenda"

Speaker: Robert B. Zoellick, President of the World Bank Group

THE INTERVIEWER (Mr. Bernard Aronson): It is a great pleasure to be in this historic chamber, which has witnessed so much history that was vital to our hemisphere, and it is a particular pleasure to be with my old friend and former colleague, Bob Zoellick.

You have already seen his distinguished résumé. I would just add one point. From the time we had together, on every matter that was vital to Latin America during the time I was Assistant Secretary of State, whether it was resolving the conflicts in Central America, negotiating the North American Free-Trade Agreement (NAFTA), promoting debt reduction or promoting democracy, Bob was always an extremely strong supporter and ally of this hemisphere. He remains so today in his new position as President of the World Bank.

So, Bob, let me start by looking backwards and looking ahead. When you and I were in government together from 1989 to 1992, Latin America had just suffered a lost decade; hyperinflation was raging in many economies; most of the major economies were suffering from a debt crisis. From that vantage point, the region has made enormous progress. Today, most of the economies are boasting fiscal and trade accounts surpluses. Hyperinflation does not exist though there are a few places where it’s present, but it has largely been controlled. Economies have been growing in most part, so a lot of progress has been made.

On the other hand, the development gap that still exists, not just between Latin America and the Caribbean and the United States, but even with the Asian countries, persists. The region doesn’t have the same growth rates or savings rates, so I’d ask you two questions: Do you see the glasses half full or half empty with regards to this hemisphere? And how do you see this hemisphere closing that development gap and what’s the role of the World Bank in that process?

THE PRESIDENT OF THE WORLD BANK (Mr. Robert Zoellick): Thank you, Bernie. Let me just thank the Secretary General for his kind invitation to be here with all of you. I’ve been in this Hall many times before on different occasions, so it’s a real honor to be invited back as part of these series. Thank you, Ambassador, for your introduction.

I can’t help at this point, Bernie, but be very focused on the months to come. My major message, which I think everyone now recognizes, is that we’re in a very difficult period that started out as a financial crisis and then became an economic crisis. I’m afraid in 2009 it will be an unemployment crisis.

There are elements still dating back to the food and fuel problems that make it very much a human crisis. And so, you are correct that the region has made very important strides over the past decade, but I’m afraid this is going to be a particularly stressful period that we are headed into.

Looking beyond that, I would say that as everyone here knows, you really have to disaggregate into regions. So, you have some countries in Latin America that have very much strengthened their fiscal and debt positions, have had relatively open economies, flexibility in exchange rates. Those are the countries that are best positioned to deal with the turmoil to come, although many of them have been major commodities exporters, and so, they are going to have to deal with what looks like to be a big turnaround of commodities prices.

You have other countries that have not gone as far in taking on the challenges. They have more rigidities, and those countries, I think, are going to face more difficult days ahead.

Central America, which has been very much linked to growth in North America based on remittances and on trade patterns, has less room to maneuver the monetary or fiscal policy. I’m particularly concerned about the Caribbean countries, because with the drop-off in remittances and tourism, I think, they are going to be under special strains.

But implicit in your question is the idea—one that I have always liked—which is: Can you take a moment of challenge like this and make it into an opportunity? And you were, I think, properly making an observation that I often make to my friends in Latin America and the Caribbean when I work in this region—since my career takes me to all regions of the world; in fact, later this week I’m heading to China—which is that they need to look beyond this, the Western Hemisphere, because much of the competitive challenge is global. While many countries in the region have strengthened their fiscal and monetary positions and their effort against inflation, there are two major challenges that still have to be undertaken and would help in a point like this. One is some of the structural challenges to allow a more flexible, adaptative, competitive economy; and the other is the investment in social development, education, some of the basic health care. I think the challenge for the upcoming generation of leaders in the region will be how to go beyond this crisis and look to continue to invest in those foundations for future growth.

There’s no doubt that there have been some very significant developments. You can see it in poverty reduction in Brazil, Chile, Mexico Peru, and others. We’ve learned some things from this. For example, the program that Mexico launched on the conditional cash transfers called the Oportunidades program. In Brazil, it’s the Bolsa Família. There are versions of these in Chile and Peru, and elsewhere. In this crisis, we are now looking with some Central American countries to see how one can apply it.

Those programs are vital whether in good or bad times. In good times, they help give a broader segment of the society a feeling that they can climb the ladder of opportunity because, as many people know, those programs direct cash transfers to those most in need, but they link it to sending kids to school and basic health check-ups, which are very important for women in particular. But, in a moment like this, they also become the vehicles to try to put in support for those under stress.

I guess the last thing I will say that is particularly distinct about this region is that, as you and I worked on some of the issues of democracy, which are at the heart of the OAS and others, I think the structure reforms relate not only to the economics but opening up to society. What we saw was a more open political process, but many groups that have been cut out, not just for years or decades, but for centuries, particularly indigenous people, didn’t feel they had that ladder of opportunity. This created some dangers that I think could be exacerbated under periods of economic stress.

I was just in Haiti not long ago. Here is a country that was one of the first to show the threat of high food prices on social disruption. Then, it was hit by four hurricanes. Since it is the least-developed country in the Hemisphere, in some ways that’s a warning sign of what could happen to others if this difficulty persists. My main thought today would be that 2009 is going to be a difficult year. No one knows how deep this is going to run, and no one knows exactly how the recovery is going to come about, and so, one has to be prepared for dangers.

THE INTERVIEWER (Mr. Bernard Aronson): So, if I am a Finance Minister who accepts your diagnosis and your prescription for the agenda of social development and market and trade opening, how does the World Bank fit into that? How do other multilateral development organizations fit into that agenda? What were you involved in and what are you focusing on these days?

THE PRESIDENT OF THE WORLD BANK (Mr. Robert Zoellick): One of the most important elements is that, fortunately, we had already changed some of our lending policies for the middle-income countries, which is what most of the countries in the region are, to lower some of the prices, make it simpler, make the maturities more flexible, do local currency financing. What we are finding now is that even some of the economies that have done an excellent job of maintaining their fiscal position and having very well-run budgets over the past five or ten years are finding it hard to get access to international finance, in part because many of the developed countries have put so many government guarantees out there that it’s going to be hard to be able to access money for budgets if you have to go to international markets.

If you combine that danger with the fact that one of the lessons of the 97-98 financial crisis is to try to help countries avoid contractionary policies, you find countries—Mexico would be one example; Indonesia is another—where they may want to run very modest budget deficits as a percentage of the GDP. Mexico is still looking at, I think, about 1.8% of the GDP. It is similar for a country like Indonesia. However, they are not certain that they can get the borrowing to run that deficit. They are not really in a position where they need to go to the IMF’s help.

We have various lending products. Some of them are contingency lending products that we will use to increase our lending with Mexico, Indonesia and other countries in the region. In Brazil, we’re expanding some of the lending with the states, which are part of Brazil’s broadening of its reform process, but what is important for people to recognize is that many people associate the World Bank with money, because it’s called “bank”. In reality, what the Bank does best is try to help bring and bridge knowledge and learning from around the world. It may be conditional cash transfer programs; it may be microfinance programs; it may be governance and anticorruption programs; it may be fiscal management programs as we’re using in some Brazilian states. And then, combine that with projects that have reached beyond individual projects. So, how can we build markets, institutions, and capacity? That may be covert markets; it may be microfinance markets. We are working with a number of countries in the region to build their own local currency bond markets, so they have those accesses. And then, we do bring capital to the game as well.

Let me bring this again home since it looks like you’ve got a folder that looks like it is from Colombia. One of the things that we did recently with Colombia was take advantage of the fact that we have longer terms for some of our lending and local currency to help finance a student loan program for poor students. And so, by having the maturity of our loans match the maturity of student loans, you didn’t have to worry about an asset liability mismatch. By funding it in local currency, we avoided the foreign exchange risk. So, this is an aspect of a social development program that is also investing in the future, and so, we have a number of those tools available.

In the Caribbean and in Mexico, we have developed, under various models, insurance products for a natural catastrophe. So, whether it’s a hurricane and wind and rain in the Caribbean and Mexico, whether it’s an earthquake, as your experience shows and as a lot of people in this region would know, they can do a very good job as some countries in Central America did, but they would be extremely vulnerable to an earthquake that could set them back in the course of years.

We also put in some special projects trying to deal with the stress of safety net programs for food, and we have used that in a number of countries in the region, starting with Haiti.

In general, what we’re trying to do at the Bank is understand our clients’ needs and then approach these as a problem-solving exercise as opposed to just an analytic one, and try to match the range of projects, whether they be knowledge transfer, financing, or different models. This includes not only the formal work that we do through the public sector side, but also the International Finance Corporation (IFC). If you look at our private sector work in IFC, you will see that we are trying to expand, for example, trade finance facilities now, because you’ve seen a big drying up of that credit.

One of the things that people have to be alert to is the nature of the problem in the current environment. It is one that you can’t always predict, so you saw a trade drop-off because of demand, but all of a sudden you also saw people have a hard time paying their credit due to the credit contraction. So, we are trying to move quickly with various partners to deal with that sort of issue. Another area would be infrastructure projects.

One of the lessons again of the 97-98 financial crisis was infrastructure projects can be good to not only keep people at work, but they also set the foundation for future growth. We discovered a lot of viable infrastructure projects. We are running out of funding mid-stream, so we’re trying to set up a facility, through the IFC and also on our public sector side, to try to support some of those projects.

Full Speech