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OPINION

Davos: Robert Zoellick on the World's Challenges

January 23, 2011


R. M. Schneiderman Newsweek



Over the past year, emerging markets such as China, India, and Brazil have continued to drive economic growth, while the developed world, namely the United States and parts of Europe, have remained mired in debt and unemployment. In the lead-up to the World Economic Forum in Davos, NEWSWEEK's R. M. Schneiderman interviewed World Bank president Robert B. Zoellick about the future of the global economy.

What is the biggest challenge facing the developing world in 2011?

The biggest challenge facing most developing countries is the risk of a big boost in food prices. Food accounts for a large and increasingly volatile share of family budgets for poor and urban families. When prices of staple foods soar, poor countries and poor people bear the brunt. France's President Sarkozy, Chair of the G-8 and G-20 this year, has rightly identified this issue as a priority.

How can the globe assure food security in the face of rising prices?

There are two interrelated challenges. First, we need to increase food productivity and production in developing countries, especially in sub-Saharan Africa and with small-holder farmers. To do so, we need to fix problems all along the "value chain": property rights; R&D for seeds and inputs; irrigation; fertilizer; agricultural extension; credit; rural infrastructure; storage; and connection to markets. The World Bank Group manages a Global Agriculture and Food Security Program, with contributions from six countries as of now and the Bill & Melinda Gates Foundation, to help promote investments in small-holder farmers. In 2011, I hope we can get more contributions. Separately, the World Bank Group is boosting investment in agriculture to about $6-8 billion a year through our lending and investment projects.

The second problem is the volatility of food prices, often because of events outside poor countries' control. An interconnected combination of steps could help ensure that the most vulnerable countries and people get the nutrition they need. For example, we can increase public information on the quality and quantity of grain stocks to reassure markets and calm panic-induced price spikes. We can improve long-range weather forecasting and monitoring, especially in Africa, to better prepare for dangers. Export bans exacerbate panic pricing, so we need a code of conduct that at least exempts humanitarian purchases from bans.

We can help small-holder farmers become a bigger part of the solution for food security through tenders from humanitarian purchasers such as the World Food Program. We need financial and other tools to help farmers and their governments manage risk, whether of rainfall, prices of inputs such as energy, or others. We may need small, regional humanitarian food reserves, too, in disaster-prone, infrastructure-poor areas. We should also ensure effective, targeted social safety nets so that we protect the most vulnerable populations, such as pregnant and lactating women and children under two. The bottom line: The G-20 should agree to "Put Food First."

What about the world economy?

For the world economy as a whole, the macro challenge is managing and enhancing a modest multispeed recovery that must steer clear of various shoals: for major emerging markets, avoiding overheating or bubbles in certain sectors; for the EU, navigating through sovereign debt icebergs that could puncture big holes in the financial sector; for the US, creating jobs today while breaking the wave of structural spending and debt increases; for all, setting course to make structural reforms suited to each economy to boost growth and a rebalanced international economy.

What do you think will be the most contentious economic issue this year and why?

The contention flows from the tension in resolving challenges without burdening others. Because money is the medium that interconnects economies, differences will be reflected in complaints about the international monetary system; exchange rates for currencies; large and perhaps volatile shifts of capital; and domestic monetary policies that could have international effects.

These differences could spill over to other channels of interaction, such as protectionism in trade, uncompetitive favoritism of national companies and workers, or export bans of agricultural products. On the other hand, sustainable growth, with a rebalancing of demand both between domestic sources and trade, and across countries at various stages of recovery and development, could create win-win opportunities that ease tension.

What has been the biggest economic success story of 2010 and who appears poised to do well in 2011?

The growth in developing countries has been a particular bright spot. In fact, a key difference between this downturn and past ones is that developing countries stepped up to fill the gap. Developing countries now represent about half of global growth. This is a very different world from even ten years ago. It certainly is a stark contrast to the international economic crises in the 1970s, '80s, and '90s, sparked by problems in developing countries. Today, developing economies provide an important source of demand for exports from developed countries. And developing countries offer opportunities within a changing international economy: new, multiple poles of growth; investments and profits; better educated workforces that can add to innovation and productivity; more talent to solve problems; and sharing of responsibilities. Yet the adjustment process to a modernized multilateralism will be a constant and continuing challenge.

Will we see bubbles in any of the major emerging markets?

The developing world has been a source of strength, by and large. But the major emerging markets--China, India, Brazil, Southeast Asia--are starting to level off to avoid overheating or bubbles in some sectors. In some countries, this adjustment will prove a challenge--because of influences from the international economy or supply-side bottlenecks at home. The good news is that almost all are alert to the dangers and most seem able to manage them.

Looking ahead, we need to recognize there is no longer a "Third World." Developing countries vary enormously. Yet they can learn from one another, invest in one another, trade with one another, and especially within geographical regions, increasingly integrate with one another. The "Third World" mindset assumed a "North-South" transfer; our new multipolarity will see South-South, and even South-North transfers of goods, capital, and ideas, along with North-South and North-North exchanges.

This shift multiplies possibilities. But it will challenge policymakers in both developed and developing countries to adjust and shape new cooperative systems. The private sector is already doing so. And modernized multilateral institutions such as the World Bank Group need to adapt, too.

How can we reduce currency tensions between the U.S. and China?

There will be tensions, as monetary (and therefore currency) relations are a principal source of intermediation amidst the tectonic shifts to a new multipolar economy, even as we cope with the current great upheaval. Yet the currency issues should not divert attention from the underlying, fundamental challenges: rebalancing global demand and creating new opportunities for growth.

China and the U.S. are the two biggest economies, one developed and one developing. While I believe the Chinese should appreciate their currency over time, that change will not be a silver bullet. China needs structural changes to increase domestic demand through increasing consumption and lowering savings, especially the retained earnings of favored companies with low cost financing and limited competition. China will be pointing in this direction with its next (the 12th) Five Year Plan, but the shift won't be easy.

The U.S. faces the reverse shift: It needs relatively higher savings and lower consumption. So the US will need structural reforms to cut the rate of increases in government spending and debt, while fostering incentives for growth and increases in productivity, innovation, and opportunity.

Similarly, other countries and regions need to face the structural and pro-growth challenges most important to their circumstances. This will not be easy, especially in economies with many unemployed, because political systems will strain under the pressures. Yet if countries slide into conflicts--instead of cooperating to find common but differentiated solutions - dangers could spiral downward.

Would a return to the gold standard be beneficial?

I think gold is already being viewed as an alternative monetary asset because holders of money perceive uncertain prospects in all countries and currencies other than China, and the renminbi is not free for exchange and investment. The antidote is for major economies to pursue sustainable, pro-growth policies based on structural reforms, open trade, and sound money. This is not the same as a gold standard, nor would I recommend a return to that standard or the old Bretton Woods system. We need to move toward flexible exchange rates and autonomous monetary policies for major economies in a new multipolar, international economy. This world economy is likely to evolve toward multiple reserve currencies, with the U.S. dollar still dominant, but not exclusive. This system will need norms of monetary and broader economic behavior with the IMF as a "referee," [and] gold might be an informational, not operational, tool to assess markets' confidence in underlying growth and monetary policies.

How can the U.S. reconcile the return of growth with persistent unemployment?

The demand for U.S. goods and services--whether from at home or abroad--has not been high enough to create sufficient new jobs. Yet at this point in the recovery, if big increases in demand were to come through much larger government spending and debt, private companies and individuals may become more cautious because of the fear of huge future costs.

Therefore, the U.S. needs a careful "handoff" to demand led by the private sector. Many bigger U.S. companies are profitable, productive, and have available cash. With the right policies on government spending, taxes, regulations, trade, and longer-term structural growth, these companies will invest, create more private sector jobs, and enhance America's competitive strength. The same policies would assist small businesses, which have less leeway and a harder time getting credit. Even as the U.S. steers toward a recovery with more "demand," it needs to foster the incentives, innovation, education, and investment to boost the medium- and long-term growth path.

In the absence of a true global climate accord, what role can the World Bank play to reduce emissions?

It would be a big mistake to wait for 195 countries to reach a huge new treaty on climate change. After the 2009 Copenhagen Summit, the World Bank Group worked with Mexico and others to advance key building blocks to address climate change. These included: curbing emissions from deforestation and forest degradation; energy efficiency; alternative energies; technology development; carbon market development; carbon finance; adaptation; and relatively untapped tools such as soil carbon linked to better agriculture.

We can make progress and learn lessons on the ground while others negotiate texts. We can build support for addressing greenhouse gases by more countries--developing and developed--by putting concepts into practice. We can assist smaller and less powerful states--such as small island countries, poor mountain states, and sub-Saharan Africa--that otherwise feel ignored, perhaps tempting some to obstruct negotiations that they think do not take account of their interests. We can use our new Climate Investment Funds to leverage other sources of public and private funding--we are raising about $8 for every $1 we invest--to help developing countries move toward low carbon growth and adaptation through practical projects. We can try to ensure that the "perfect" isn't the enemy of the "good."

How important are cities to the climate change debate?

Cities are significant players in all aspects of climate change debate, with important policy choices to make. A recent World Bank report outlined that residents of cities around the world are responsible for as much as 80 percent of global greenhouse gas emissions while at the same time facing significant impacts from climate change, such as bearing the majority of $80-$100 billion per year climate adaptation costs.

Many major cities--such as New York, Mexico City, Amman, and Sao Paulo--are not waiting for a comprehensive and global climate deal. They are already acting on climate change by addressing mitigation and adaptation, connected to the delivery of basic urban services and overcoming poverty through local initiatives.

Cities have a unique position in confronting climate change because they are the optimum scale for action: large enough to enact meaningful pilots and introduce "first responder" programs, yet sufficiently close to the communities.

Cities need to draw ideas from one another, gain the support of their national governments, and leverage international partners. The World Bank Group is providing targeted assistance in urban areas such as Mexico City, Cairo, and Bangkok; it is also preparing detailed vulnerability assessments for several coastal cities. Together with the United Nations Environment Program and UN-Habit, the World Bank Group has jointly developed a work plan to provide faster and more coordinated assistance to cities.

What do you expect to come out of the meeting at Davos?

I expect attendees will discuss: the global recovery and its risks; food prices and food security; international monetary issues; opportunities to open markets to trade; gender and development; helping states coming out of conflict or disaster; and next steps on climate change. I hope participants will look "over the horizon" to try to anticipate what other issues policy-makers and business leaders should be addressing.

Davos is a forum to generate and discuss ideas. The actions will need to come from the G-20, international organizations, other fora, and from private sector institutions and individuals who can help solve problems. The seeds of ideas planted in Davos can be harvested elsewhere.

Who do you think will become the next major emerging economies?

I think all developing regions offer opportunities. To underscore this point, I believe that Africa can be a global pole of growth in coming years. Sub-Saharan Africa has already outpaced the global trend in 2010, with output at 4.7 percent, compared with a global increase of 3.9 percent. Looking forward, sub-Saharan Africa is projected to grow at 5-6 percent in coming year.

Africa is a continent of great diversity, so it's hard to generalize. But we have a dynamic of roughly three different groups. First, about a third of the population is experiencing good growth. For them the challenges are access to energy, more infrastructure and agriculture investments, greater regional integration linked to global markets, and a stronger private sector. Another third of the people live in energy resource-rich countries. These countries need better governance, anti-corruption, and inclusive growth policies while avoiding the trap of enclave economies. Finally, another third lives in states paralyzed by conflict. The people in those countries need greater security, better governance, and longer-term support to promote peace and help restore a stable development path.

Before the crisis, African economies were growing at 5 percent a year for over a decade, accelerating to over 6 percent for the last three years. Poverty was declining by about one percentage point a year--a rate faster than in India. Before the crisis, primary school enrolment rates were rising faster than in any other continent. And in just 4 years, child mortality rates fell by 25 percent in about 13 countries.

Of course there is another side to that story--the nearly 400 million Africans who live on $1.25 a day; the massive infrastructure deficit that leaves only one in four with access to electricity--and even fewer with access to clean water and sanitation. There are other political and security challenges, such as recent breakdown in Cote d'Ivoire.

With the right policies and good governance, with support for infrastructure and skills-training, Africa can attract investment--to mutual benefit. With a sensible policy framework, the private sector has invested over $56 billion in mobile networks on the African continent, boosting the number of mobile subscribers in the region from 4 million to over 400 million.

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