I’d like to express my appreciation to the Baker Institute for Public Policy for welcoming me to Rice University. It is a privilege to be here at an institute shaped by Secretary James Baker, my mentor and former boss.
As I near the end of my tenure as President of the World Bank on June 1, it is fulfilling to give remarks this evening on international development – especially after a meeting this morning with Secretary Baker, who led much of my early work on economics and finance and made so many contributions to world freedom.
I worked for Secretary Baker at both the Treasury and State Departments from 1986-1993 as a Deputy Assistant Secretary. Working for a very active cabinet secretary, I had the great good fortune to work on many topics that were critical then and are still relevant – including the debt limit, tax rate reduction, the link between currencies and central banks, the debt crisis in developing countries, the capitalization of the IMF, World Bank and Inter-American Development Bank, the savings and loan bank crisis, trade bills, CFIUS reforms on foreign investment in technology, and the trade agreements with Mexico, Canada, Israel, and Chile – to name a few.
Many of the leadership techniques I use came from Secretary Baker. They won’t be news, but they are well worth repeating. Hard work. Prior preparation. Attention to detail. Each one has a good story, which I’ll save for another time.
And, since many current and future leaders are in the audience, let me mention one more of his management techniques, the importance of action-forcing events and individual initiative. These are particularly relevant in a world that seems adrift. I’ve just participated in two long sets of G7 meetings in Japan – first with finance ministers in Niigata, then with leaders in Hiroshima. Leaders are confronted with endless information and consequential challenges, but the temptation of large organizations is to let things slide.
To move the needle on global affairs, there must be someone taking action. Secretary Baker created movement by focusing on action forcing events. He would require memos, meetings, and conversations to state at the outset what action was needed or possible. This had at least two benefits. First, it forced his hundreds of staff to refine the question and present options succinctly. And second, by forcing the organizations to think through an issue from the standpoint of action, more decisions could be made earlier. It encouraged people to take initiative. This broke through the inertia that faces governments and international organizations around the world.
Looking back, I often wonder which period was more tumultuous, then or now. In my years of working for Secretary Baker, we confronted several problems similar to those today:
- Rapid increases in government spending and debt marked by very difficult political battles to increase the debt limit; recall that Europe and Japan face the same problem of unrestrained government growth.
- A debt crisis that engulfed developing countries; recall the severity of the Latin debt crisis we tackled in the 1980s and the current still-to-be-resolved crisis in as many as 60 countries at high risk of debt distress. Many of these are in Africa, which faces rapid population growth amid numerous additional challenges.
- Trade battles still divide us. In the 1980s, Japan was the feared trade threat and was forced into so-called “voluntary” restraints on exports to the U.S. In Hiroshima on Saturday, there was substantial discussion of the paralysis at the World Trade Organization, the overreliance on China, and the conflicts between subsidies, trade, and ESG standards.
- Importantly, the instability of currencies then and now dominates the inflation and market outlook amid the fear that the dollar could lose out to foreign competitors. In those days, the Plaza and Louvre accord addressed the fluctuations in the dollar, yen, and euro. I addressed similar currency problems directly in my work at the U.S. Treasury in 2017 through the G7 and G20 communique language on currency stability and my congressional testimonies in 2017 and 2018. Currency stability through 2021 contributed to stronger growth and investment, but we now face new challenges including bitcoin and expanded use of China’s yuan.
Secretary Baker and President Reagan took many consequential decisions to restore growth through spending, tax, and regulatory policy reforms and stabilization of the dollar. The doctrine of peace through strength defeated the Soviet Union, leaving it in collapse.
Today’s tumult might be even harder to solve. China is a markedly different challenge than the Soviet Union – something I know the Baker Institute has worked on extensively. China is controlled by single-party communism, as was the Soviet Union, but much of China’s economy uses prices to allocate goods and services. China’s engineers and scientists – many trained in the U.S. – have highly advanced skills applicable to commerce. The Tiananmen square disaster led to a decisive policy of currency stability, the opposite of the Soviet Union, which had no usable currency for 70 years.
Today’s fiscal and monetary stress is also fundamentally harder than in the 1980s. The national debts in the advanced economies have grown by an order of magnitude –in the U.S. from 50% of GDP to a looming 200% of GDP in CBO’s projections – not counting the excessive debt of some state and local governments and their non-transparent public pension liabilities. Governments in Japan and Europe also have monumental debts, which are especially troubling given their declining populations. This raises doubts about whether private sectors around the world can produce enough to carry these debt burdens. The central banks in advanced economies have helped delay the financial effects of the debt buildup through post-monetarism – borrowing from the private sector to buy trillions in government bonds. But the anti-growth consequence is that global capital is being allocated away from small businesses and toward bond issuers, especially governments and big corporate bond issuers.
Thus, while the 1980s were marked by accelerating growth and interest rates that could decline from a very high level, the current environment risks an extended period of dangerously low growth as an increasing portion of global capital flows to governments as interest rates rise to normal.
The question of whether the tumult today is worse than the 1980s or ends as well will take years to assess. All we can say with confidence is that today’s problems are urgent, and the outcome depends on actions and individual initiative by leaders like Secretary Baker.
Let me touch on three topics facing the developing world today.
First, for developing countries, the prospect of dangerously slow global growth, high debt burdens, the huge drawdown of global capital by advanced economies, and the upward shift in interest rates, is creating sharp reversals in development. This was discussed among G7 leaders and partners over the weekend at the Hiroshima Summit, but I’m discouraged by the lack of resolve or action on growth. Poorer countries face political and social pressure on their governments, consternation about inaction as China’s soft power grows, and for some countries, rising hunger and violent, externally funded insurgencies.
Second, declining access to energy and electricity is one of the dominate challenges facing development. There was substantial discussion at the G7 meetings of the importance of allowing natural gas as a transition fuel, adding gas and nuclear power to stabilize electricity grids weakened by the intermittency of renewables, ways to harmonize ESG standards and carbon prices, and the ultimate goal of creating infrastructure as an asset class.
Lastly, after serving more than four years as President of the World Bank Group, I believe the World Bank Group can help with each of these problems but can’t solve them. I’m proud to leave the Bank financially sustainable and able to work quickly. I’ll mention just a few of many examples. The Bank’s COVID-19 response; rapid ongoing support for Ukraine – which President Zelensky commended to me on Saturday in Hiroshima; the traumatic evacuation from Afghanistan and now Sudan; and our daily efforts to counter the fragility and violence in the Sahel and the Middle East, and our huge support for Africa as it faces shortages of food, fertilizer, and electricity, heavy debt burdens, and the outflow of capital.
Over the past four years, the World Bank Group has provided $440 billion in financing, an expansion of 35%, while maintaining budget discipline. From providing record financing to developing countries, promoting debt transparency and sustainability, strengthening management, warning of global weakness, and more than doubling the amount and impact of our climate finance, I’m proud of the accomplishments during my tenure.
I’ll conclude with this cautionary point. We should be very aware of the severity of the crisis facing development. I’ve advocated a full rethinking of many core global policies including the policies that are crowding out developing countries and their private sectors from energy, food and capital and deepening their fragility.
I’ll leave it there and look forward to our discussion. Thank you.