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Speeches & TranscriptsApril 6, 2023

The Way Forward: A Conversation with Dr. Mohamed El-Erian

MR. DAVID MALPASS:  Morning, everybody.  Great to see this group.  Great to see the online audience.  
Mohamed, we are really happy to have you.  The world's at a critical spot.  First, welcome back to the World Bank. 
Mohamed is President of Queens College and has had a long and very successful 15-year career with PIMCO Asset Management, with academia, a long career at the IMF.  But before that, the starting point was right here at the World Bank. 
Welcome back.  Tell us about that.  How did you make the transition from the World Bank to IMF?
DR. MOHAMED EL-ERIAN:  So, I was a graduate student.  Let me just say, I am so happy to be back and I'm happy to see people I haven't seen for decades here.  It's wonderful to be back. 
So, first year, doing my Ph.D., and I decided to apply for summer intern at the World Bank. 
MR. MALPASS:  The prestigious World Bank. 
DR. EL-ERIAN:  The prestigious World Bank.  And they accepted me, and I had the honor of working in what was called at the time the Senior Vice President's Office, Operation, Ernie Stern.  
And my job, I was telling David, was to put together a book on bilateral donors, because the World Bank was looking at co-financing.  And I spent a wonderful three months, here.  I also joined the World Bank/IMF Bridge Club.  So, I was playing once and someone asked me, "What are you doing here?"  I said, "I'm a summer intern."  He said, "Where?"  I said, "The World Bank."  He said, "Why the World Bank?  Why not the IMF?"  And I said, "What's the IMF?"
DR. EL-ERIAN:  And he said, "Come and see me tomorrow."
So, I went to see him tomorrow and, next thing I know, I got offered a summer job at the IMF for the next summer. And that is how I ended up across the street. 
MR. MALPASS:  You know, we're still trying to recruit talented people from around the world.  I'm just back from a trip to Africa.  In Togo, we have an MOU with universities in the U.S. with the idea of trying to get more and more educational exchange, and then that goes into research exchange.  That, we hope, ends up with talented staff that end up going back to countries and working there, as well. Capacity constraints are a big challenge for countries.  How do they have enough talent to staff central banks and finance ministries and education ministries, the whole range? 
Turning to the challenges of the world, we'll jump right in. We are at a stressful macroeconomic time.  Interest rates are rising.  Inflation has been sticky.  As we look at where the developing world is going, I've expressed concern about the outlook.  We have a report that came out last week that showed that investment levels are low.  If you plot out the mathematics of it, it's not going to work in terms of the GDP growth needed to keep up with populations, but, more important, with any increase in prosperity, which, of course, is a core goal of the Bank. 
So, how do you assess the situation, and what could be done today that would allow the world to grow faster into the future?
DR. EL-ERIAN:  First, try to be concerned. 
The good news is, I think if we were sitting here in 2020 and had postulated the following: that we would have a significant disruption to global economic growth, that we would have significant disruptions to markets, that we would have a commodity shock, energy and food, and we would have the most accelerated interest rate cycle by the Federal Reserve, I think certainly I would have said, all that will equal a developing country crisis.  So, the good news is that didn't happen, and that didn't happen because the Bank and the Fund took important measures because the countries themselves learned from past mistakes and then wait to adjust. 
The problem, it's a little bit like building a sand mound on a beach, that you keep on adding particles of sand and nothing changes and you think you're fine.  And then, suddenly, there is some critical issue that happens and then the whole thing changes at once.  And I worry that, on the present course, we are heading towards a big problem that will have a growth aspect, a debt aspect.  And then, with that, comes a social and governance problem. 
I've been lucky enough for the last two-and-a-half years, I started during COVID with calls every two weeks with two people I respect greatly: Michael Spence, the Nobel Prize winner who's done a ton of work on growth in developing countries.  He was head of the Growth Commission, and his knowledge of growth is amazing.  And then, Gordon Brown, who was the Prime Minister, who did a lot of work on not just domestic policy formulation, but also multilateral policy formulation. 
And when you look at how you solve for this, you really come down to three issues.  One, covered by the World Bank report, which is a sobering read.  I would encourage a lot of people to read it.  The notion that growth potential is coming down is of real concern and we need not accept it.  One is growth models.  We need to rethink growth models.  We have a golden opportunity to do so because of major transitions: energy being one; digital being second; science being third.  So, we have a golden opportunity to rethink growth models.  And if we don't rethink growth models, we get nowhere.  That's issue number one. 
Issue number two is domestic economic management.  We are learning a lot about what to do and what not to do, but we're not incorporating these lessons fast enough.  
And then, third is multilateral.  Most of the issues we face are common to many countries.  And if you try to solve them country-by-country, you're simply not going to be able to solve them.  
So, the solution lies in these three elements.  It's hard, it's really hard, but the alternative is so much worse. 
MR. MALPASS:  So, let's stay on that. We can look at advanced economies and then developing economies and then maybe the role of the institutions.  
I want to challenge you a little bit on what learning processes are going on within the advanced economies.  And even if you learned from the causes of inflation or the causes of slower growth, how would you get out of the trap that we're in?  That is, the huge levels of debt in the advanced economies, and the central banks that have already bought massive amounts of bonds.  They've been duration buyers.  Whatever protection you could have given from central banks into the various markets has already been provided.  There's got to be some back-tracking in order to get us to a sustainable, steady, state.  What do you think? 
DR. EL-ERIAN:  So, I completely agree.  I've been unusually critical of the Federal Reserve and people have sort of said, why so critical?  Because the flow problem is adding to the stock problem.  
So, when you have a stock problem, the last thing you want is the flow problem to make the stock problem worse, and that's where we are today.  And it matters what the U.S. does.  You know, we've all bought into a system where the U.S. is at the core of the global system.  The U.S. has tremendous privileges because it supplies the public global goods: the reserve currency, a financial system that intermediates everybody's savings, et cetera.  But against that, the whole implicit contract is that you run the system responsibly because if you run the core irresponsibly, the periphery then gets incredibly volatile. 
And what we've had, unfortunately, for the last two years, is problems especially at the Federal Reserve that have made the core unstable. 
MR. MALPASS:  Meaning late to rise.  I mean, I think that's accepted, that the Fed was behind the curve. 
DR. EL-ERIAN:  So, number one is the complete mischaracterization of inflation for most of 2021.  Number two is, once they recognized that they had mischaracterized it, the last day of November when Chair Powell went to Congress and retired--his phrase, "retired"--transitory--the phrase--dangerous, very dangerous.  Never use the word "transitory," because if you tell someone something is transitory, you're telling them it's reversible and it's temporary.  If you tell them it's reversible and it's temporary, you tell them don't do anything about it.  
So, the whole world fell in love with this notion that inflation was transitory, so we didn't do enough about it.  So, when we retired it in November 2021, you'd think that we would have done something about it.  In reality, March, the Fed was still injecting liquidity into the system.  The Fed was still having interest rate at zero.  So, we lost tremendous time.  So, if you are driving a car down a foggy highway and you keep on calling the fog transitory and you don't slow down and then the fog thickens.  And then, you realize it's no longer transitory, so you changed your characterization but you still don't slow down.  And then, you realize you're in real trouble and then you slam on the brakes, fastest increase in interest rates that we've seen in many, many decades, you will cause accidents.  And we are causing economic and financial accidents. 
MR. MALPASS:  I want to bring in fiscal policy, but also deposit insurance and the banking system.  That will bring us into developing countries.  
What about the role of fiscal policy?  It also was stimulative right to the end and, in fact, in many of the advanced economies, the fiscal deficits are still running very large. 
DR. EL-ERIAN:  It was.  I mean, you had both too much fiscal and too much monetary.  And the idea was that there was no speed limit, that you could do this as long as you want because the world lived in deficient aggregate demand. 
MR. MALPASS:  Modern Monetary Theory was that you could go ahead and spend. 
DR. EL-ERIAN:  And but, that was the whole view that, coming out of the global financial crisis, we had a demand problem, not a supply problem.  So, if you have a demand problem, inflation is not an issue and you flood the system.  
What happened in 2022, 2020, and 2021 is we started having a supply problem, way beyond the pandemic--way beyond.  We have first a critical energy transition that we need to do.  That is inherently inflationary.  We have to do it, but it's inherently inflationary.  We had labor markets where the labor force participation came down.  We had geopolitical tension that changed globalization, started fragmenting it.  And then, you had companies that realized that they need more resilience.  Just-in-time became also just-in-case.  So, when you rewire the supply chains, that is inherently inflationary.  So, the whole paradigm changed and now we're trying to deal with that.  Unfortunately, the flow problem has added to the stock problem. 
MR. MALPASS:  The stock problem being debt and duration held by central banks.
I think we're in what I call "post-monetarism."  There are excess reserves at all the major central banks.  You can't call the system a monetarist system.  We're beyond that.  Whatever name to put on it, post-monetarism, meaning the central banks borrow from banks and buy bonds.  The Fed actually is projecting that it will restart that process because the banking system needs excess reserves.  I know you kind of span and sit above academia plus asset management and multilateralism.  Give us some sense: Is the academic community on board with the idea that central banks have to supply HQLA, High-Quality Liquid Assets, the backbone of the banking system?  That is going to bring us straight to the failure of banks in the U.S.
DR. EL-ERIAN:  So, the academic community is growing towards the notion that, if you try to exit that regime, you not just deal with a dilemma; you deal with a trilemma. 
MR. MALPASS:  The regime is central banks having really big balance sheets. 
DR. EL-ERIAN:  Huge balance sheets, almost 9 trillion in the case of the Fed; almost 8 trillion in the case of the World Bank--
DR. EL-ERIAN:  ECB, I'm sorry. 
MR. MALPASS:  We don't have that.  Our balance sheet is $640 billion, but a lot of it has been lent on very long terms to very poor countries.  So, it's a balance sheet to be proud of. 
DR. EL-ERIAN:  I just gave you seven-and-a-half trillion more.  
DR. EL-ERIAN:  ECB.  So, there is a notion that exiting this is not just a problem in terms of trying to maintain growth and trying to maintain price stability, but also a problem in terms of trying to maintain financial stability.  So, dealing with this trilemma is really difficult, which means policy mistakes are more likely. 
Then, you have a second problem, which is you've distorted market signals completely, and you've created a problem for the real economy and you've created a problem for the financial economy.  The problem for the real economy is the allocation of resources, the so-called "zombification" of the real economy, which means productivity becomes more of an issue.  The problem for the financial economy is you don't get adjustments in time. 
You know, we had the case of Silicon Valley Bank.  And there was a wonderful, resilient CEO who said to Bloomberg that any intern in his bank would have recognized the interest rate mismatch that Silicon Valley Bank had, and what was the Fed doing looking at it and not recognizing it?  And the reality is that the market signals failed, and they failed because so many bonds are owned by central banks.  
So, I'll give you a very simple example.  You know, I make these things very simple.  When I was at PIMCO, a major investment management company--now, suppose, David, you come in and try to convince us to invest in a particular country, in a particular company, we would grill you on balance sheet robustness, on management, on business outlook, on the resilience, on the agility.  And suppose you convinced us, for all this, it's not enough.  It's necessary but not sufficient.  The next question would be, who will buy after us?   
Because the subsequent buyer does two things: First, they validate your purchase.  If you buy an apartment in an apartment building, the minute you finish, you want ten more people looking to buy.  But they also provide you liquidity, as you know, in case you have to change your mind.  So, if I tell you the subsequent buyer is a central bank with a printing press in the basement, an infinite willingness to use it, and they're noncommercial--the don't care about price--you will not just buy one unit of this; you will buy multiple units of that. 
MR. MALPASS:  So, the world was willing to take duration risk. 
DR. EL-ERIAN:  Right. 
MR. MALPASS:  And so, this misallocation of capital or the flow of capital went to things that it wouldn't normally have gone to.  And I've been critical of that because it doesn't go to smaller businesses; it doesn't go to working capital.  It goes to wealthier people within all the world, that people that can afford to own duration--so, bond owners were advantaged by that system.  
We've seen the inequality widen in the world.  This is, of course, a core underpinning of the challenge for developing countries that there's not convergence going on.  It's not as if the gap between the advanced and the developing countries is narrowing.  What we would like to see is much faster growth in the developing countries than the advanced economies.  
But right now, there's not a channel and I'm worried about the challenges to deposit insurance, also challenging, banking, in general.  So, I think one of the things the world needs to do is robustly support the idea that there needs to be short-term capital, working capital, trade finance.  With IFC, the International Finance Corporation, we've tripled our trade finance during this shortage and that helps companies stay afloat. 
But as we look forward, there has to be long-term growth prospects for the countries.  So, how do we rectify this?  My worry is, once you've built a big balance sheet in the central banks--well, I've advocated that they shrink their balance sheets, but explain it in terms of, that will provide more capital for--that will allow banks to make more small business loans.  
So, be very direct.  The reason we can shrink our balance sheet, we don't have to own the long-term bonds that are sitting right now on central bank balance sheets.  Other people can own those and we want banks to go lend into this slow-growth environment. 
DR. EL-ERIAN:  So, we're going to go the opposite way.  I think what you're going to see is banks becoming more risk-averse and lending less because of what has happened with the--I don't call it a crisis, but with what happened with the various tremors, with three U.S. banks failing, fourth one, First Republic, being on the ropes. 
But you know, all this reminds me, this is the '70s and the '80s.  The '70s, we had a recycling problem and the '80s we had a debt problem.  So, the one thing is when the surpluses are in the wrong place and how do you recycle them to the right places?  We had that with the OPEC surpluses of the '70s, and we now have that now.
And the second problem is, what do you do with countries whose stock issues-—and I know you've been working on this and the IMF has been working on this and it's really important—what do you do with countries right now who have accumulated so much debt that it's in everybody's interest, including the creditors, to have a preemptive debt solution, because ex-post debt solutions are really messy.  They're very, very messy and they hurt, in particular, the very poor.  So, we have exactly the same issues as we did in the '70s and the '80s.  
The surpluses are in different places, the debt problems are in different places. But fundamentally, analytically, they're exactly the same. 
MR. MALPASS:  Yeah. Having been a misallocation of capital and then how do you get it to the right spots.
DR. EL-ERIAN:  So, let me ask you a question. I think preemptively dealing with debt problems is important.  There is a massive incentive to free ride right now.  If you're a private creditor, you just free ride.  If you're a certain bilateral, you just free ride. And in the meantime, countries reallocate resources from social sectors to debt service that ultimately doesn't buy them very much.  
So, how do we solve this? 
MR. MALPASS:  Yeah, these are big problems.  To be specific on that, the countries—even the poorest countries—are still paying massive amounts to creditors. Here you've got a situation where creditors who, by and large, have much more money than the people they're lending to, they are taking high interest rates from debtors.  
So, what I've advocated and pushed really hard for is more transparency in the debts themselves.  A starting point is to know what you owe and who you owe it to.  That reconciliation process is still going slowly.  The World Bank has big efforts to try to collect the data.  The G7 has provided the data, but other countries, not so much.  So, we're still looking to have a better, earlier reconciliation process.  
We've started a debt roundtable.  We had the first meeting at the G20 meeting in India in February.  And we'll have another important follow-up meeting next week of the debt roundtable to concretely discuss with the private sector, with all of the creditors, China included with the Paris Club creditors.  And then, also, bring the debtor country in early.  In the previous process, there's been a temptation by the creditors to say, "We're just going to talk among ourselves and figure out what to do with the debt of countries that have become unsustainable in their debt levels.”  
We need a more inclusive process; we're trying to achieve that.  But the reality is, the process has stalled, and what it has meant is, year after year, even through COVID, the amounts of debt grew rapidly.  They're also growing—and it's a challenge—, due to penalty interest and interest compounding on interest, so you're in a debt cycle trap.  
The World Bank did a big report—one that we're proud of— in December 2019 called, "Four Waves of Debt," or global waves of debt It went back to the Latin debt crisis and came forward and said, you know, we're doing the same thing over and over again: allowing a lot of lending in a system that's non-transparent and then trying to resolve it.  So, we are clearly—
DR. EL-ERIAN:  Why don't we learn from our mistakes? I mean, it fascinates me that we make the same mistakes over and over again.  
MR. MALPASS:  Not to be too critical of lenders and borrowers, they both have self-interest in doing it.  The lenders don't want to be very transparent in the loans.  They want to charge a lot of interest and they want to oversell the creditworthiness of the country.  
I worry about that on the municipal bond side in the U.S.  There's not a lot of transparency in what the debtor/creditor relationship is.  And everyone inside the system wants to keep it going.  There’re underwriters.  The lender likes it because they're getting a good rate of interest.  The borrower likes it because they don't end up with the consequences down the line.  
Think of a developing country. You're the head of government.  It looks very attractive to borrow now, use it for some public purposes, and then let someone else think about the interest that's being charged.  I think the solution is clear: much more transparency and also some rules of the game or guardrails within the instruments. In this case euro bond instruments, but also bilateral creditor instruments that allow them to be restructured more quickly. That would get us away from the moral hazard. Right now, the moral hazard is, each time there's a debt problem, the creditors do pretty well in that debt problem.  It's the people of the developing country that end up in shortage.  
DR. EL-ERIAN: Right.
MR. MALPASS:  And I'm very worried about that going on. I was just in French West Africa. There are challenges: -as the London markets close, the bond markets that they've been borrowing from close.  Then, they look into their internal markets, and there's just not enough capital to keep the cycle going.  
DR. EL-ERIAN:  No, totally.  And I think what people also forget is the composition on the private side.  I always used to joke—and I saw this firsthand—that when you have these massive flows of bond financing to developing countries, normally because something has happened to the developed countries that pushes the capital. It literally pushes the capital out. 
You have two types of investors, what I call the resident and the tourist.  The residents are the ones who understand the developing country. They know that things go wrong and they're there for the long term.  The tourists are literally like those who picked up a brochure, saw sun, decided to go, and then something goes wrong, and they immediately want to go to the airport.  
So, what you get is overshooting both on the way in and on the way out.  And that dynamic in itself creates a lot of other problems there.  
MR. MALPASS:  Well, that goes back to what you were saying about the willingness to take risk on duration.  Clearly, that must have been going on over the last three years. It looked like there was an exit, because the central banks were buying so many bonds.  So that meant it was safe to go into an otherwise risky situation. 
DR. EL-ERIAN:  Right. 
MR. MALPASS:   And one thing that's underpinning this, our worry about the next ten years—the report that came out last week—is that the investment is now taking place in the country.  And in fact, the international capital is flowing out.  And  I've advocated and I did in a big speech last week and the week before: there has to be a renewed effort by the developing countries to have private sectors that are attractive.  So, make the changes that you can now, because it doesn't look as if the international situation will relent, will soften or be more attractive to developing countries. 
So, this may take a few years to have asset prices adjust. In the meantime, countries—the world markets—will look to see which countries are making positive changes. 
Can I ask you about countries? 
DR. EL-ERIAN:  Sure, sure. 
MR. MALPASS:  Any countries that you like? Let me phrase it the other way.  We're seeing pressure on currencies in quite a few countries, and then I'll name some and any reactions.  Pressures on currencies in Nigeria and Egypt.  Ethiopia is facing challenges—and these are really important countries to the world—and South Africa.   I've gone around the tips of Africa. Theye are facing challenges—and  really global. But of those four, can there be progress made? 
DR. EL-ERIAN:   In some of the four, Egypt being an example, the currency is not only overshooting but it's creating its own dynamics to overshoot further, and that's really worrisome.  And the reason why it's overshooting is that if you impose all the burden on the currency without 1) having clarity on what the actual and potential demand is for foreign exchange; 2) without making reforms elsewhere, then the exchange market is not going to be able to cope with this.  And then, you create the dynamics that become really frightening.  There's nothing worse than multiple equilibria where one overshoot makes the next overshoot more likely, because it's very hard to break. 
MR. MALPASS:  Can I flip that the other way?  Positive side is, if you make the change, then your own local investors have their capital outside the country. They've been the exiting, they can come back in quickly with a positive change. 
DR. EL-ERIAN:  Absolutely, but there's a difference between journey and destination.
I remember when I used to take my daughter to Disneyland.  We're really excited about the destination, and we'd forget about the journey.  And then, we'd get in the car, it would be the typical California traffic jam.  I would hear a hundred times, "Are we there, yet?  Are we there, yet?"  I'd get irritated then if we'd stop/go, she'd get sick in the back of the car, and we would mismanage the journey so much that a destination was not enjoyable. 
The problem with the overshoot is, in the process of the journey, you are going to hit the poor really hard.  That inflation really hits the poor very, very hard. You're going to shrink the middle class in the process.  So, yes, you get to a point where the currency is so cheap that lots of capital comes in, but the journey itself has all number of costs. 
MR. MALPASS:  I want to zero in on this.  Economists have developed a concept of market-based exchange rates where the level of the currency doesn't matter.  You just described that it really does matter.  And so, we should have a more clear vision in the world that responsible governments should be trying to create a system where their currencies are stable.
That means there has to be some fiscal viability of the country.  You can't monetize your fiscal deficit through your central banks.  And we just aren’t there.  In academic theory, there's been this neutrality about the currency.  Economists express everything--you probably started it when you were at the World Bank as an intern--looking at the real value of things.  Well, that jumps you away--the real value doesn't work for poor people, because they're the ones that get hit hardest by the inflation.  So, the real growth rates for a country is good for an average.  But we saw periods where Brazil, for example, could show positive real growth for years and years and years, and yet people on the bottom were getting poorer and poorer.  That was in the '70s and '80s.  
I really think we have to break back toward viewing the world in nominal terms. At the World Bank, we are desperately trying to alleviate poverty within countries.  But as the currencies devalue, poverty spreads.  That's the real world we see. 
DR. EL-ERIAN:  So, I think our profession has sort of--should be more open-minded to three viewpoints.  One is that transitions matter.  You can't just assume you're going to from one bad equilibrium to a good equilibrium without figuring out what the journey looks like.  Because otherwise, you create the multiple equilibria problem; that's issue number one.  
Issue number two is behavioral science.  We have to understand better why is that policies don't impact people the way we expect policies to impact people.  When they don't, we just do more of the same; it's called active inertia.  If I’m speaking to you in a language you don’t understand, and you don't hear me, the answer is I shouldn't speak louder.  The answer is, I should change the language.  So, behavioral doesn’t come in again. 
And then, the third is the role of finance.  We don't take enough into account the feedback loops from finance to real economy. 
MR. MALPASS:  Yeah. 
DR. EL-ERIAN:  You know, there are attempts in academia to do all three, but don't underestimate how hard that is. 
MR. MALPASS:  I do want to somehow find optimism.  You mentioned at the beginning the optimism that comes out of technology and so on.
DR. EL-ERIAN:  Oh, I have lots of optimism when we get to it. 
MR. MALPASS:  And one part of optimism is markets look ahead and so they look at the environment.  And they can come back quickly if there's a chance of finding good investment. 
DR. EL-ERIAN:  Let me tell you, if we wanted to be optimistic, which we should, one is we have golden opportunities with this massive transformation going on.  Green, digital, science--these are massive transformations that allow countries to leapfrog, and it is a massive opportunity.  And if we don't take that opportunity, then the deconvergence is going to be even worse.  
Second is we learned a ton during the pandemic about private-public partnerships.  The vaccine development was one of the most powerful public-private partnerships because people thought in risk space.  Instead of just, I'm going to co-finance, they thought, which tranche--which risk tranche--is catastrophic for the private sector?  And if I can take that tranche out--which means I don't finance the whole ladder, I just finance the catastrophic--and then, the private sector can fill in the other risks that they can price.  It is very hard to price catastrophic risks.  So we've learned a lot about private-public partnerships, how can they work.  And a lot of what we're looking at will require private-public partnership because of where the capital is.  
And we're starting to learn more about growth models, and we've also learned how we need multilateral policy coordination.  My hope is we step back and say, yes, we’re not in a good place, but we’ve learned so much over the last few years. Let's apply that to get to a better place. 
MR. MALPASS:  Yes, though I have to say on that, the ability or the estimates of duration risk versus credit risk got confused and still are being confused in this environment.  That undercuts the ability to make good choices within that investment spectrum.  I keep coming back to, there has to be some kind of solution or starting point from the advanced economies that frees up some of the capital that's getting trapped.  Then, the positive points that you laid out can have more impact. 
But come to the role of the Bank.  How can the Bank help with that, and the IMF?  If we think about the world institutions, what positive changes can we make?
DR. EL-ERIAN:  I grew up in a world in which, before you argue for any public institution, you better have a clarity of where the market and institutional failures are.  Otherwise, that public institution is going to struggle.  When the World Bank and the IMF were formed, it was very clear what the market failures were, what the institutional failures were. It was very, very clear. It was mostly in capital, and the IMF and the World Bank played a critical role.  
Today, on the IDA side, you still have that problem.  On the non-IDA side, you've got to evolve a lot, because you are competing with other people who can deliver capital in a quicker way--maybe not as efficient, but in a quicker way--and people will opt for speed over quality.  That's just a reality of what people do. 
In the staff you have, your edge is in identifying all these transformations coming in and being literally the conductor for something that everybody is going to try to do on their own.  And imagine that you are listening to an orchestra where people have music that somehow sounds the same but is not exactly the same; they're not quite sure how to play it.  And if you lack a conductor, that orchestra is going to sound absolutely awful.  
For the non-IDA side, it is beyond financial flows.  It really is beyond financial flows.  Now, that is hard to do.  I told David that the IMF has a structural advantage over you, which is the Article 4 consultations.  He didn't like that.  
MR. MALPASS:  No, but that's true. 
DR. EL-ERIAN:  The Article 4 consultations basically forces 190 countries to have annual discussions in a manner that forces multilateralism. 
MR. MALPASS:  Article 4 is when the IMF examines each country, including the advanced economies, and gives them a dialogue-type advice on what they can do.
DR. EL-ERIAN:  And discusses them in a multilateral forum, right?  And that is a structural advantage. And I always say, if structure can do the heavy lifting, I would love to have a development Article 4 issue, where not only do you have the development dialogue with individual developing countries, but you have them in the advanced economies.  I always tell people, you can't be a good house in a poor neighborhood; it just doesn't work.  You've got to care about the neighborhood. 
MR. MALPASS:  We engage in quite a dialogue with the developing countries, and we work closely with the IMF.  One of the challenges is the incentive structures.  And you're right, you're saying the non-IDA parts of the Bank--being specific, the IBRD, International Bank for Reconstruction and Development; the IFC; and MIGA--all work together to try to help countries create an environment that's attractive to capital coming in.  This is middle-income countries. But that's done in competition with other lender sources or investor sources that the countries may attract.  One of the challenges that we face is we have to do it efficiently within the World Bank Group in order to really attract the country toward that dialogue.  We do that through fiscal discipline, through having an attractive lending package that's available to the countries, and, hopefully, as a conductor.  I guess I think of it as a big role in project and reform management that the Bank can do over a period of years.  
One of the value propositions--the IMF has Article 4.  The Bank has a long relationship with the country, and so can really stay the course over a 10-year period where we can find leaders around the world that think in terms of a long time frame.  They want their country to do well, their people to do well, and are willing to really make that--what did you call it?--the voyage.
DR. EL-ERIAN:  The journey.
MR. MALPASS:  The journey.  So, the journey is going to go on for a while, in order to have fiscal responsibility, in order to have monetary responsibility, regulatory and trade openings in countries.  
The challenge is, at each point, it's tempting for governments to say, that's really hard, and I've got this easier path in the short run.  And that really is what we're facing, I think, over and over again, that the short-term path that benefits some of the people in the country is easier for the country than the long-term path where the Bank is going to be engaged.  
We offer that explicitly to countries.  We'll be here for 10 years if we can make progress on this trade barrier or on this investment barrier, this blockage to private sector.  They look at it and say, you know, we've got a lot of people that are dependent on this blockage, so we'll decline.  
But what do you think?  How could we break through that?  
DR. EL-ERIAN:  First, let me say that realigning incentives is really important and we should do a lot more thinking on this.   
I've spent over four decades literally defending in front of government people and nongovernment people the role of the IMF and the World Bank.  It's getting harder, because if you don't also address the macro issues--voice, representation, governance--it's not credible.  It's simply not credible.  Because we go in there--and I say "we," because I still feel part of the process--and we argue for accountability, we argue for all sorts of things, and then they look around and ask a few questions that we can't answer.  We literally cannot answer, because some of our practices don't make any sense at all. 
And they say, well, who are you really representing? And don't underestimate how problematic that issue is.  It's in the interests of the whole membership to take seriously the voice, representation, and governance issues.  Otherwise, at the micro level, people will not buy in, because they're going to ask, is there a hidden agenda I don't know about? 
And the minute you put that idea in someone's mind, when it gets hard, they'll abandon your path and they'll go for the easy path.  The realignment of incentives has to happen at the micro level, but also has to have an envelope that encourages people to stick the course on that.   
And I know that this is really tough, and I shouldn't raise issues like this, but I think that these organizations play a really critical role.  And the irony of it is, we could not today recreate these organizations.  We have to cherish them because they are very special. In today's environment, the world is fragmenting, right?  And so, it's really important to preserve these institutions. 
MR. MALPASS:  To tackle tough issues, there's been the push to, say, reinvent Bretton Woods: IMF and World Bank.  I think of it in terms of reinventing development, and that means on the principles that we've talked about some. 
I think stable currencies are a core starting point. Central banks that actually operate within some kind of framework is important. Fiscal discipline by the countries is important, because otherwise, you're taking capital away from--either you're borrowing from the future or taking it from private sector and growth parts of your economy, so that's a principle.  And then, having some kind of recognition that jobs are going to come from investors that actually put money to work in countries.  
We start with that as a framework and then push it, encourage it, and really try to build it.  The point that we're at in the world is the countries look at that and say, boy, that will take a long time.  I don't think I'm in it for the long run. 
DR. EL-ERIAN:  I just say, come to the World Bank headquarters, I walked in today and--poor security person--I said, can I take a picture of this? And he said, a picture of what? I said, what's written on the wall, here.  And he didn't quite know what to say to me, so I said, look, it's public.  And it is a vision: a world without poverty.  You know how powerful that is?  
MR. MALPASS:  Yeah. 
DR. EL-ERIAN:  That's incredible, incredibly powerful.  And every time I walk in, I look at this, because I think that is so incredibly powerful.
MR. MALPASS:  Yeah, and that still motivates the institution of saying, let's have some data--and we do that worldwide--of where there's poverty; recognition that it's not just in the poorest countries, but also poverty in middle-income countries; and what's our plan to get at it?  And there is a lot of energy and effort to identifying that.  We just had an in-depth discussion with Management and Board on the evolution of the Bank, and it goes to this issue of, are we reinventing Bretton Woods institutions, or are we really trying to find better ways to interact with poverty. A strong reaffirmation by the Board that that's a core mission, that rising shared prosperity, meaning that middle-income poor, the bottom half, needs to go up really faster than the top half, or both go up in a positive direction.  And also an awareness of the public goods that surround all this.  People all around the world are interconnected and therefore there has to be full consciousness of that.  
My sense is there's been a pretty full recognition that there is an importance of the role, and then the challenge is, how do you get enough resources? Constantly, people come back, “Well, there should be a tripling of World Bank resources.” Within the capital structure that we have, we are expanding that. We managed to do 30 percent more with the existing staff, the existing payroll, during COVID and during the food crisis that we're facing right now, which is good.  If you measured productivity from the World Bank, it would be a pretty strong positive indicator.  But then, as you go forward, if you want to then double it from there, you've really got to be thinking about some kind of new capital structure or new relationship with countries. We’ve looked under all stones trying to find where there are ways.  We are going to expand our leverage, and the shareholders have decided that they're willing to take a little more risk than they were before.  
I want to raise a problem or a challenge for you.  As we make more loans to countries on the margin, the composition of our portfolio actually changes in a way that allows less leverage.  One of the challenges that we’ve run into, as we’ve tried to leverage higher, the new lending goes to countries that are more marginal and it doesn't allow the leveraging. 
DR. EL-ERIAN:  Let me just say--and I know that you're thinking about that--there's lots of stuff you can do with your balance sheet that doesn't threaten your AAA status, and I would never threaten your AAA status. That is really, really important. 
But I think ultimately if we look forward 10 to 20 years, and the Bank and the IMF do not achieve what they're capable of, it won't be because of resources.  And here's a hypothesis.  It will be because of the inability to get buy-in about the changes that are needed.  There's been an incredible work done by Don Sull, a behavioral scientist at MIT, asking the question, why do successful companies fail?  
Why is that IBM, on the eve of the PC revolution, that had every reason to succeed, failed?  It was almost bankrupt two years later.  It is not because they have a blind spot.  It is not because they reframe and look for confirmation bias.  It is because they fall into this trap in middle management and below of active inertia.  
Let's take the example of IBM.  IBM recognized that the PC revolution was incredibly disruptive to its model, that it could no longer be the brand in tech, having incredibly profitable, huge R&D, if it didn't evolve what it did.  And what it did is mainframe.  And it realized that the PC would come in, would take some customers away, would bring more customers here, so if you are Management, what you want to do is occupy this space, and then, take your mainframe upstream, charge premium pricing, and maintain profit margin. The absolutely right approach, absolutely right. 
Management put it forward to the board, the board approved it, and they were going to go from what's called a bulleted approach to a barbelled approach.  Businesses try this all the time.  Two years later, IBM was almost bankrupt and wouldn't exist today if they hadn't reinvented themselves.   
Why?  Because they didn't explain enough what they were trying to do.  As you went down the organization, you were telling people, I'm taking you out of your comfort zone, I'm taking you to places where you haven't been before, and they didn't quite understand why it is they were doing this.  What did they do?  What all of us do is we go back to our comfort zone and you end up in the muddled middle.  
And I think that the main challenge for a lot of these organizations that have to evolve, that have every attribute that allows them to evolve successfully, is to think in terms of, oh, it's an external issue, it's a resource issue, as opposed what is the strategy, why are we doing it? Let's socialize it. Let's buy in.  Otherwise, you end up by relaxing what you think are the external constraints and you never relax the internal constraints.  
MR. MALPASS:  I'll mention two thoughts on that. 
One is, we're trying to do that, just as you said, with the private capital enabling.  As the Bank and the IFC and MIGA--various arms--worked, it was relegated to a spot, and we're trying to bring that into the mainstream.  I hope, for the Bank people that are here, everybody feels comfortable or tries to get comfortable with the idea that a principle mainstream framework for the World Bank Group is to enable private capital to come into countries, private investment to take place, because there's not going to be the ability to depend on outside capital the way maybe that was possible over the past 10 or 15 years.  So, that's one.
And then, on climate change, same thing going on.  It's an effort.  We've organized it around these CCDRs, the Country Climate Development Reviews, that give a framework for country programs and for regional programs.  But implementing that is a big change for the way people operate within the World Bank Group, necessary, but I hope that can come together, not in the barbell that you described for IBM, but in a successful way that there's a smooth transition to that. 
MR. MALPASS:  Well, I'll just thank Mohamed for joining us in great conversation.  And we discussed a lot of tough issues, starting with advanced economies and their role, which is so big in the world.  And then, this challenge; I think it's an immense challenge facing development.  How can it be restarted and where is the new investment--let's call it the investment on the ground--going to come from?  The world has got a super challenge going on.  I think this is really useful to talk about it, and thanks for joining us.
DR. EL-ERIAN:  So, it's for me to thank you, and then to thank you all.  You may not be sufficient for a better world, but you're very necessary for a better world. 
MR. MALPASS:  Great, let's phrase that--from the world's standpoint, it may not be fully sufficient but it's necessary.  It's a starting point, and then add on to that. 
DR. EL-ERIAN:  So, I would add "fully necessary."  Fully necessary.  Thank you very much for everything you do. 
MR. MALPASS:  Great, thank you. 


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