Underlying Human, Social, and
Structural Problems Must Be Addressed

You will hear later about some of the causes of the Asian crisis; you will hear about some of the steps that might be taken to ensure that such crises don’t occur in the future; and if they do occur, steps that can be taken quickly to deal with them. You will learn that in the new international order we must have transparency, we must have rules that are understood, we must have similar accounting practices, and we must caution countries against being reliant on short-term flows. You will learn of the need for better integration in the international financial community-linkages between the BIS, the IMF, the World Bank, and other international institutions, such as the regional banks. From all this will emerge a dream and vision of a new financial order.

All these issues are, of course, extraordinarily important. But thus far, you have not heard a word about people. You have not heard a word about the underlying social and structural problems. I would like to take a few minutes to talk about these problems which, I think, are fundamental both to the management of economies and certainly to the resolution of the sort of crises with which we have been confronted.

People, Stability, Peace, the Environment: Fundamental for Any Architecture
What is the basis of some of these issues? We have a world of 5.8 billion people; 4.8 billion of them live in either transition or developing economies; 3 billion of them live on under two dollars a day; 1.3 billion live on under a dollar a day. Approximately 2 billion of them do not have access to any form of power; 1.3 billion do not have access to clean water; 3 billion do not have access to sanitation. Hundreds of thousands of kids are not in school and too many are street children. We look forward in the next 25 years to adding another 2 billion people to the world. The probability is that we will have not 4.8 billion people in development, but 6.5 billion people in development.

There is an environmental crisis. We are losing forests at the rate of an acre a second and have been doing so for 20 or 30 years. Our environment is not in great shape. Witness the debate about carbon emissions. You can argue the science, but the impact on weather patterns and on the environment is probably clear to most of you. By the middle of the next century we will need double the food that we have now with the same amount of land, and will have increased pressure on water, so that water for our children will be the sort of issue that oil was some years ago.

These are not trivial issues. They are not readily apparent on a daily basis. They are slowly evolving issues. They are not headlines.

The gap between rich and poor—between countries and within countries—is not diminishing, it is increasing. We are doing a lousy job in terms of the emancipation and the education of women. We have made a major effort to get girls into school, which is critical to deal with the issues of gender and absolutely central to the whole issue of development. Many greater people than I have said, “If you educate a man, you educate a man; if you educate a woman, you educate a family and a nation.”

The simple fact is that these issues will affect everyone in the Trilateral countries. The developing and transitional world is now 18 percent of the world’s GDP; in another 25 years it will be 30 percent. It is the fastest growing sector of the world. It is the fastest growing market for those of you in business. But you will not have a fast-growing market if we do not have stability. And as we have seen from instability in Korea, Thailand, Indonesia, Brazil, Russia, Pakistan and many other countries, the linkage through financial markets today is not slow—it’s instant, as is the linkage through trade affecting stability. Kofi Annan told me the other day that we have about 35 wars going on at the present time.

According to the statistics, the GDP growth rate next year is going to drop to 1.9 percent in the developing and transitional world, with variations between areas. But at the base there is a fundamental problem that relates to people, stability, peace, and the environment. It is fundamental to any architecture that we might construct. If you do not have the base right, we can build using our architecture but the building will fall.

I say this having grown up in the world of many of you. I say it as somebody who has come from the private sector. But I have now been to 85 countries and I can tell you that the issues that I see every day in villages, slums, dense urban populations, and rural areas without services are such that we are looking at a world which is gradually getting worse and worse and worse. This is not hopeless, but it is inevitable if we do nothing about it. Most importantly, it is an issue for your children. This is not our issue. Most of us can retire happily without confronting this issue, but our children will not be able to do that. If we are to be responsible we need to do something now and we can only do it if we do it collectively.

The Other Side of the Balance Sheet
Let me address some of the issues that I think one needs to think about alongside fiscal and monetary policy, financial architecture, and the global monetary system. Let me give you the other side of the balance sheet.

You have to deal with governance, with the ability of countries to govern themselves and to have adequate and clean governance. We have to confront corruption and recognize that corruption is an issue not just for the developing countries, but for us too. After an enormous amount of work we have just signed an OECD convention to criminalize corrupt practices. In some developed countries bribery is still deductible for tax purposes. It is difficult to convince somebody in a developing country that bribery does not help their economy when we are bribing them and getting a subsidy from our governments.

The second thing we have to support in these countries is a legal system. You have to protect property rights. You have to protect contracts. You have to protect weak people. With a legal system you need a justice system that works. In too many of the countries that I go to the justice system is corrupt. If you do not have a justice system that can administer justice, having a set of laws is not an enormous help.

You need a financial supervisory system that works at the level of banking, but also beyond banking. It needs to go to capital markets. It needs to go to corporations. It needs commonly accepted accounting principles and supervisory bodies. In many of the countries we are talking about—including Korea, Thailand, and Indonesia—we have neither a deep group of supervisors nor, in banks and corporations, people used to being supervised. So a transition into a system that works internationally, in many cases, is a huge cultural change.

And we need a social system that works. We have to deal with people that are out of work and people that are poor. The issue of the child is an enormous and growing issue of significant proportions. We have to deal with the disabled. We have to deal with all the things that most of us expect in a social system. It does not have to be our sort of social system—it can be a familial system, it can be a tribal system—but you must have a social system that works.

In the countries of those 4.8 billion people, that basic structure is very, very spotty. In some cases it is exemplary; in other cases it is a disaster. And so one cannot just talk of architecture without looking at the sands on which you are building.

With regard to equity and development, in the long-term the issue of education and knowledge is key. I was recently in the Côte d’Ivoire looking at cocoa and coffee, which make up 45 percent of that country’s exports. The farmers, 2.5 million of them, have sold their cocoa and coffee, typically, to monopolistic intermediaries who get their licenses from the government. If the production cost is 500 and the selling price is 1,000, they get 500 and the intermediaries get 500. That’s not terribly good for income distribution. So we decided to break the monopoly as a condition of some of our lending. Then we discovered that the farmers had no idea of the price. In a village in Côte d’Ivoire just a few weeks ago, I went into a meeting and in a little room were two computers, with an Ivoirian sitting in front of each. The first Ivoirian showed me how they now weigh in the coffee and the cocoa and give a receipt. The second is linked through the internet to a service supported by the World Bank, which gives prices in Chicago, Paris, and London. I went back to talk with the chiefs after I had seen this and they didn’t stop talking about hedging and foreign exchange, how Chicago is ahead of Paris or Paris is ahead of London. And yet most of these people are illiterate.

So, the impact of education and knowledge is quite remarkable. Education and knowledge are central; as is health; as is the issue of communication—physical and telephonic and electronic; and power; and water; and sewage; and rural development; and urban development; and the capacity of the private sector.

This is an agenda which is rarely talked about. It is implicit in your decision-making about investment. It is as important for investment decision-making as fiscal and monetary policy. It is the basis of security. It stops physical violence and crime. It creates an environment in which you can have stable growth. And yet too little attention is given to this agenda. You cannot have discussions of finance without thinking of the other side of the balance sheet, yet it happens all the time.

The Importance of the Private Sector Has Risen Dramatically
Dealing with those issues is not just the work of the do-gooder organizations. It is not just an issue for governments, which lack capacity in many cases, or for the World Bank or the regional banks.

The Bank started over 50 years ago. We and the Fund, the Bretton Woods twins, were established to try to bring stability after World War II. The Bank subsequently mutated into a development institution, adding IDA and the IFC and MIGA for the private sector. We have been joined by regional banks and bilateral aid programs; and we all constantly fall over each other, even though we do try to cooperate better.

There are two other major changes in the background for ODA. First, you no longer have a Cold War. You no longer have to provide funding to developing countries because some others might if we did not. That changed the dynamic.

The other thing that has changed is, of course, globalization. With globalization has come the development of overseas investment. In 1987, the level of overseas investment going to developing countries was just over $20 billion a year; in 1997 it was $300 billion. In 1987, ODA was over $40 billion, twice the size of private-sector flows; ten years later, official assistance at $40 billion is one-sixth or one-seventh of the size, in 1997, of private-sector investment flows.

So the importance of the private sector has changed dramatically. There is a need for social responsibility and participation by the private sector. There is no free ride in the development of markets from 18 percent to 30 percent of the world’s GDP unless there is socially responsible behavior and partnership. There are dozens of things that the private sector can do. And you now have dynamic public groups in civil society, from small villages to international NGOs with whom you can engage.

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To put in place this whole mosaic of the financial and the structural and the social and the human, you have the governments of the countries themselves. You have the multilaterals and the bilaterals. You have the private sector and you have civil society. It is crucial for the four to come together in a way that can allow us to face the issues that are before us.

If we do not come together we are going to lose the battle. With the pace of development today, with the population added every day at the rate of ten thousand an hour, we have a problem and an opportunity facing us that can only be met if we change our thinking. We need to take a new view of our responsibility. It is a joint responsibility among the governments of the countries, the people of the countries, multilateral and bilateral institutions, civil society, and the private sector. And the only thing I can say to you in closing is that if we do not come together, in 25 years when our children will be sitting here, the issues are going to be deeper, more difficult, and more intractable than they are today.