On May 31, 2005 James Wolfensohn will complete his 10-year tenure as President of the World Bank. Although this job does not rank as highly as the cabinet level appointments the Bush administration has been making, from an international perspective it is a very significant position. The U.S. government is actively considering the candidate it will propose to the Bank's other key shareholders, in particular the Europeans and Japanese. The gentlemen's agreement that the World Bank President should be an American carries with it the responsibility to propose a well-qualified leader for this important institution.
The incoming President will have a unique opportunity to set the strategy and priorities of the World Bank Group's four entities charged with specialized roles in promoting economic development and poverty reduction. The World Bank Group has clout-both financially and by influencing the policies of more than 100 client countries. Since its founding in 1944 the Bank and its affiliates it have provided over $600 billion in direct financial support in the form of loans to governments for specific projects across a wide range of sectors from infrastructure and agriculture to health and education. The Group's private sector affiliates-the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA)-have invested and mobilized capital for thousands of private companies.
Over the past decade, private capital flows to the developing economies have increased sharply and now surpass the financial support provided by the Bank Group and other multilateral lenders. However, there is a huge and growing backlog of infrastructure projects in Latin America, Asia, Africa and Central/Eastern Europe that are not being financed. Across the Bank Group institutions, there are both financial constraints and idle capacity. The Bank's direct lending to governments has stagnated while the private entities-IFC and MIGA-have experienced a major expansion in their activities. At some point they will be facing capital constraints.
While the World Bank's financial support for social programs has been ramped up sharply, its lending for productive sectors and infrastructure has fallen dramatically. Bank lending for infrastructure peaked in 1989 and currently is at 50 percent of that level, while support for social sectors has increased 20-fold.
The emphasis on the social dimension of development under Wolfensohn is to be applauded. However the central question remains: What is the best way for the Bank to actually reduce poverty? Individual incomes stem from job creation. Improving economic efficiency leads to higher overall growth. No doubt healthy and better-educated people can be more productive. However the challenges faced by developing countries joining and trying to compete in the global economy also calls for direct support of market economy policies and approaches, and investment in critical areas such as infrastructure.
We are seeing an unprecedented increase in trade opportunities with the expansion of the WTO and regional agreements such as NAFTA, and the new trade pacts for Central America and several Andean countries. At the same time, many countries in Latin America, Asia, Africa and Central/Eastern Europe are facing bottlenecks and constraints in the road transportation, ports and power systems that prevent them from taking full advantage of these opportunities.
As trade agreements open up more of the worlds' economy to competition, the developing economies will face the need to improve their own efficiency if they wish to gain new export markets. They will also need to become more efficient to protect their own markets. More broadly, the picture should not be seen as merely a contest between industrialized countries and emerging market economies. In fact, "South to South" trade is growing dramatically as China, in particular, becomes the fastest growing importer of commodities and raw materials. The economic benefit of this development is certainly being felt in the exporting countries of Asia and Latin America. In turn, their economies are importing more manufactured and capital goods from industrialized countries. This closes the circle with infrastructure investing as orders for transportation and power equipment are on the rise.
The World Bank Group is in a unique position to marshal finance and advice to address the infrastructure needs of the developing countries, which underpin the expansion of production and trade. This can be done without compromising its broader mandate to promote economic growth that is sustainable environmentally and provides assistance to the poorest.
