G-20 Should Supplant the G-7

James Wolfensohn was president of the World Bank from 1995 to 2005. He spoke with NPQ editor Nathan Gardels in November.

NPQ | There is a lot of talk about the need for a “new Bretton Woods”—the set of arrangements and institutions such as the World Bank and the International Monetary Fund put in place to stabilize the economy after World War II.

Is there a need for new institutions to deal with the global financial crisis and spreading recession, or will the old ones do?

James Wolfensohn | I agree with the current World Bank president, Bob Zoellick, that the bank has a very real role to play in this current crisis, but it needs to be adjusted in terms of governance and financial support in light of the shifting balance of economic power in the world and the current dire economic climate.

The current ownership and voting structure of the World Bank reflect the powers that reigned in 1944 with some amendments. But the world is changing.

The fact that a g-20 instead of a g-7 gathered in November and will gather again in April to decide the fate of the world economy is a reflection of the fact that the balance has changed. In the next 20 to 30 years, China may well be the world’s leading economic power. That has to be reflected institutionally.

We need to remember that the World Bank was set up originally as a kind of paternalistic institution to help the less fortunate world by those who controlled 85 percent of the world economy more than a half-century ago. By 2050, what we have known as the “rich” countries will only control 35 percent of the world economy.

NPQ | What is the key issue on the global economic agenda at this moment?

Wolfensohn | This current crisis has emanated from the most developed countries, where there has been excessive use of credit, leverage and lack of savings that has led the castle to tumble.

As much as this has caused relative suffering, such as home foreclosures, in the United States, the people who live in the poorest countries are having their very lives and livelihoods challenged because of lack of resources.

It is one thing to fall from a $40,000 to a $30,000 annual income. It is another thing entirely to fall from an income of $2 a day to 50 cents a day. There are still 3 billion people on this planet who live under $2 a day.

In this context, the World Bank is going to need greater capitalization, and the IDA (International Development Association within the World Bank) will have to expand its concessionary lending to the poorest.

Certainly Africa, which is at the bottom end of the pile, has been hit the worst. There are a billion people there divided into 53 countries, not an ideal model for managing any economic program.

In Asia, China and India have gone a long way in reducing the number of people living in absolute poverty. But it is there that the largest number of people still live under $2 a day.

An economic downturn will stop that climb out of poverty—something the Chinese government is clearly worried about given the $600 billion size of the stimulus package announced in November.

In Asia, the top priority must be to protect the advances that have been made. That is going to be difficult in the short run.

NPQ | You have also spent much of your career in private finance. What do you make of the statist-oriented proposals of French President Nicolas Sarkozy that call for a global body to regulate finance “across all territories,” develop common accounting rules and standards and register securities-rating agencies?

Wolfensohn | It may be a great thing to design a new ship when you are sinking, but the more practical thing to do is to repair your ship so it doesn’t go under.

I have no doubt that, with time and reflection, we can design a better system. But the changes we are talking about now are responsive to a crisis that has emerged only since the first week of September. There is no way to get the global community to agree to a common financial structure in such a short period of time. They don’t agree about what to do within the existing structures.

To talk about the reorganization of the world institutions is a worthy thought. But for now we need pragmatism and leadership by people who understand the realities.

NPQ | What are one or two things that should come in the near term out of the g-20 approach?

Wolfensohn | We should build on the already existing close relationships among the central banks. They are a model of how international cooperation can and should be done. It has been done without any legislation or fuss. They meet monthly.

What is needed is for the key finance ministers of the g-20 to come together and try to design a forum of cooperation that will not only deal with the rich world but recognize as well that the developing world is increasingly vulnerable.

My experience in the past has been that when you get only the g-7 or g-8 together there may well be some recognition of the concerns of the developing world, but it is very hard for these leaders to focus their attention and political capital on the fortunes of those who aren’t their constituencies. This is particularly true in economic hard times when their people are suffering relatively.

But the rest of the world has to be included in the plans of those shaping the economic order globally. So, my hope is that the g-20 will replace the old g-7/8 format of global governance.