My book



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THE CONTENTS OF VOICE AND NOISE

Introduction
 The World Bank Group? (WBG)/ The Executive Directors?/ The Nongovernmental Organizations? / The Millennium Development Goals?/ 205 Development Topics! —listed on the World Bank Web site

My ED trips 1
Airport #1/ Airport #2/ An encounter with NGOs / Market driven visas? / Quality certifications! / 

The First Country [Vietnam]: Gender; A rural road to the town; Motorbikes; Are we few track minded?; Death penalty for corruption!; A luxurious hospital / The Second Country / Airport #3/ The Third Country [Samoa]: As far as you can go / The fourth country [Tanzania]: Honorable Accountability; Strategic Plan; Trains and privatizations;  Environmental disasters; AIDS vs. Malaria; Questions and answers / A fifth country—while an ED but not as one. [China]: The Chinese of China / Small memories from my Central America: Visas; Global info confusion; The new frontiers of product development; The social contract of Teotihuacan  / Small memories from my transitional hometown: Assaulted / Washington and the GPS (Global Positioning System) / Snowing in Washington / This would never have happened to John Wayne / A monument to transparency / A photo album

The Debt Sustainability Analysis 23
Why was it such an issue for me?/ A word of caution about Financial Leverage/ An Unsustainable Sustainability/ Odious Debt/ Odious Credit

BASEL—Regulating for what? 37
Puritanism in banking/ A warning/ About the Global Bank Insolvency Initiative/ Some comments at a Risk Management Workshop for Regulators / Let the Bank Stand Up/ BASEL and microfinance / The mutual admiration club of firefighters in Basel / Towards a counter cyclical Basel? / A new breed of systemic errors

The debate about using Country Systems 55
Why did I spend so much time on this issue?/ Let them bike/ About El Zamorano and the use of country systems/ Lost in the water of globalization

My very private fight for better privatizations 65
Where do I come from?/ Transmission and Distribution—T & D/ Electricity for Brazil—and Isla de Margarita what?/ Pay now and pray for the light/ Hit in the head by the SENECA sale/ The present value and short circuits/ Reform fatigue opportunities/ Fiscal Space—Public or Private

A bit on some other indexes 95
The through-the-eye-of-the-needle index/ The index of perceived Corruption/ Today, let us talk about the bribers/ A dangerously failed index/ How good or bad is your municipality?

EIR & Environment 107
My answer to the NGOs/ The Amazon/ Our quixotic windmills/ Earth, the cooperative/ A better alternative than a hybrid

Oil 121
About an Oil Market Update/ It’s an oil boom, stupid!/ Kohlenweiss 1979/ The search for transparency in an oil-consuming world/ We need the world price of gasoline (petrol)/ Sovereignty/ The Oil Referendum/ Why do they point their finger only at us?/ About accountability in energy planning

Trade, agriculture, services, and growth 135
On the road to Cancun…with new proposals/ Place us next to something profitable…/ Time to cover up?/ An encore on nudism and WTO negotiations/ Hosting the spirit of free trade/ Time to scratch each other’s backs/ Of Mangos and Bananas / Local strawberries in season

About remittances and immigration 147
The nature of remittances/ Remittance fees: The tip of the tip of the tip of the iceberg/ What GDP?/ Family Remittances/ Some notes on the securitization of remittances/ Safeguarding resources/ Scaling up imagination about immigration/ The Skin of the United States/ A de-facto USA enlargement

About cross-border services and emigration 165
The prisoners, the old, and the sick/ A wide spectrum of services for the elderly/ The ethics of solving the shortage of caretakers/ Are we truly a World Bank?/ Get moving!

On our own governance 181
A real choir of voices/ Voices, Board Effectiveness, and 60 Years/ WB-IMF Collaboration on Public Expenditure issues/ The Normal Distribution Function is missing/ Board Effectiveness and the ticking clock/ WBG’s fight against corruption/ The Annual Meetings Development Committee Communiqué/ Hurrah for the Queen/ Diversity/ About the board and the staff/ A very local World Bank or…the not in my backyard syndrome

Budgets & Costs 193
 On the urgency and the inertia of our business/ Medium Term Strategy and Finance Plan/ Unbudgeted costs/ Budget tools/ The remuneration of our President/ About our central travel agency

On some varied homespun issues 209
 The Poverty Reduction Strategy/ There should be life beyond 2015/ There should be new life beyond HIPC/ We need to make more transparent our harmonization/ Transparently Understandable Debt Management/ The Financial Sector Assessment Handbook —a postscript/ Too sophisticated/ About the addiction of guarantees to Municipalities/ About risks and the opportunities/ Financial Outlook and Risks

Some political incorrect Private-Sector Issues 219
Is the private sector the same private sector everywhere?/ Private vs. local investors/ Some thoughts about financial good governance/ What is lacking in the Sarbanes-Oxley Act./ Too well tuned?/ Alternative Millennium Development Goals

Communications 225
Communications in a polarized world/ Some other global communication issues/ Red and blue, or, red or blue?—a postscript

Some admittedly lite pieces 237
The World Bank Special / Thou shall not PowerPoint / Deep pondering on labels / To write or not to write…by hand / Three bullets on punctuality

On common goods and some global issues 247
Towards World Laboratories/ Daddy…the original or the copy?/ The rights of intellectual property user/ Who can enforce it better?/ Moisés Naím’s Illicit—a postscript/ Global Tax/ Labor standards and Unions

A mixed bag of stand-alone issues 259
My insecurities about the social security debate/ About the SEC, the human factor, and laughing/ Roping in the herd/ A paradise of customs illegalities/ Human genetics made inhuman / Justice needs to begin with just prisons - McPrisons/ Real or virtual universities?/ Brief thoughts on Europe/ Some spins on the US economy/ Is inflation really measuring inflation?

My Venezuelan blend 283
A Proposal for a New Way of Congressional Elections/ Let’s all whakapohane!/ We enjoyed/ Hugo, the Revolution, and I/ April 11-13, 2002/ To the opposition/ Synthesizing my current messages to my fellow countrymen/ 167-to-0—a postscript/ What is the financial world to do with Venezuela?/ Massachusetts, please show some dignity!/ Colombia & Venezuela

My Farewell Speech on October 28, 2004 299

 Did the Minister do right? 305

 And now what? 307

 The President’s succession 309

 My thoughts on the issue/ The OK Corral and the World Bank/ A letter to an another new American World Bank President

On some current books, a movie, and a future book 315
The World’s Banker by Sebastian Mallaby/ The End of Poverty by Jeffrey Sachs/ The Elusive Quest for Growth by William Russell Easterly/ The World Is Flat by Thomas L. Friedman/ The Pentagon’s New Map by Thomas P. M. Barnett/ And the Money kept Rolling In (and Out) by Paul Blustein/ Confessions of an Economic Hit Man by John Perkins/ The Constant Gardener and the UN/ The future very last book about Harry Potter

 The last items in my outgoing tray 329

 Pray for us, Karol/ We must aim higher!

List of my fellow passengers who also dined at the captains table 333



Shutting down 353

 Keep in touch/ The Buck Stops Here

In search of a title

1/24th

By

One of twenty four Executive Directors of the World Bank Group

November 2002–October 2004


Some respectfully irreverent questions and suggestions about a great multilateral financial public-sector institution that the world needs more than ever to be a lean and mean poverty-fighting machine and that at sixty years of age should perhaps be renewing its vows in order to move up from “knowledge” into wisdom and instead of trying to advance impossible agenda like justice and social responsibility might do better settling for fights much easier to monitor against injustices and social irresponsibility … all made by a perhaps a somewhat naive but very well-intentioned former executive director equipped only with his long private-sector experience, and his willingness to speak out … sort of.

Or

HAVE THINK-TANK, WILL TRAVEL

Or

ANOTHER MOUSE WHO TRIED TO ROAR

Or

Mr. KUROWSKI GOES TO WASHINGTON (My daughter’s suggestion)

Or
VOICE AND NOISE


That’s it!

 

VOICE AND NOISE


Having an opinion and voicing it is what Voice is all about. Putting together thousands of perfectly pure voices might synthesize into a harmonious symphony but, without some noise, it will never ring true and that is what Noise is all about.

The world I remember when I was young moved forward on carrots and hope in the belief that it was going to be a better place, while today’s drivers are more the sticks and despairs of those looking only to hang onto what they’ve got.

To stand a chance of a better tomorrow, we need the Voice to recreate our dreams but also the Noise to make us want them come true. 

A shrinking world that makes isolation impossible presents the human race with the challenge of really having to get along. If we resist facing this challenge, the world will be a much-saddened place: let me get off. However, if on the contrary we truly try to make it work, we will at least have some beautiful dreams again.

This book with all its simplicities and contradictions is but an effort to put my voice and noise on the table. All yours are needed too.

P.S. After having decided on the title I found on the Web an article by Ingo R. Titze, Ph.D., titled “Noise in the Voice” that originally appeared in the 2005 May/June issue of the Journal of Singing. It reassures me a lot, as it argues that “A little noise, turned on at the right time, can go a long way toward enlarging the interpretive tool."

The Chinese of China

I traveled to China and was mesmerized. I assure you that, as a leisure trip, if you manage to get a bargain-priced ticket, there is nothing like it. When visiting the Great Wall of China, I took a local bus with only Chinese passengers, who sang in Chinese with the help of a karaoke-style video that underscored each Chinese character. But more than all these, for me everything was Chinese.

Nowadays in China, the majority of families have just one child. What does this mean to society? Could Latin families retain their characteristic traits with families of just one offspring? 

It is precisely when a country is getting out of poverty and seeks to position itself in an intermediate level that any improvement, such as going from a bicycle to a motorcycle and from a motorcycle to a car demands a tremendous amount of energy. Is there enough energy and oil in the world to satisfy China’s growth? 

China’s current model for economic growth seems to be taking the country in record time from being a rural country to a country where its citizens are all sardine-like packed in gigantic cities, and we presume that such a move is not good or sustainable. When we observe that recent cutting-edge technological advances in the world allow even the most isolated countryman to be present, almost live, right in the center of the Empire’s capital, we have to ask ourselves, are there really no other better and newer options? 

China’s present growth rate is colossal, and from what we can gather there will be great disparities among those who get on board today’s developed consumerism and those who lag behind with no chance of having even a peek at this new millennium. Any progress entails risks and may even require leaving behind some victims in its passing, but if injustices turn out to be too vast then those passed by are sure to complain. Could China achieve in some decades what previously took centuries to achieve, and still be China? 

Please forgive my political indiscretion, but in the early morning just as the red flags were hoisted in Tiananmen Square and I saw how human masses were mobilized and kept in certain order only when instructed by the guards’ blaring voices, I, discreetly, had to ask myself whether it could be possible to run China in the long run just like current à la mode democracies.

Finally, while climbing the Great Wall aboard a little yellow cart that looked just like an old and retired Disney theme park ride trying to make its way slowly through the crowds, I kept asking myself, will it withstand?

The Nongovernmental Organizations? (NGOs)

Some words about the nongovernmental organizations. They include all those frequently opinionated groups from the civil society (whatever that now means) that participate intensively in the debates about development and other issues, expressing their many different concerns, for example, on the protection of the environment. The NGOs can be a one-man show, I for instance, or extremely well-organized and well-funded groups. In general terms, you could classify them into three types: the seriously concerned and truly interested, the bona fide NGOs; the self-interested NGOs (there are plenty of money and business or consultancy opportunities in development); and, finally the groupies, those who just get a kick in life out of hanging around. 

The NGOs and similar entities like the WBG fight a lot, but in fact their fights are normally more like husband-and-wife quarrels, as they need each other just as much. I have an immense respect for many of them and for the role they can play in modern society as our volunteer corps of ombudsmen, which is exactly why I am frequently critical of some of them. Many NGOs in the developing countries are frequently totally subordinated to sophisticated NGOs from developed countries, and I find this very sad. Also, from the very start, I decided not to name any single individual NGO in this book … If that makes me somewhat of a coward, so be it! I might be in enough trouble as is.

An Unsustainable Sustainability

The latest fashion in the academic world of international finance is to calculate what is known as the Sustainable Debt Level (SDL). As you may have guessed, it has to do with the level of public debt a country can sustain without entering into a crisis. Normally the SDL is calculated based on the size of the economy (GNP) or on a country’s exports.

Whatever scientific approach is given to the SDL issue, it sure seems somewhat obscene to the citizenry of countries where it is evident that public debt engenders low or even no productivity.

If a credit is granted properly, the credit is repaid and then debt levels never become a problem. It is only the bad or mediocre loans that accumulate—those that do not generate their own repayment. So it could be said that what is really being calculated with the SDL is the level of bad debt that a country can get saddled with. Quite frankly, a developing country with real needs cannot afford the luxury of canceling even one cent in interest on a debt level arising from a series of credits that are nonproductive on the average.


From this perspective and since what we really mean is sustaining something that is unsustainable, this question remains: wouldn’t it be better to skip calculating this debt level and try to free ourselves once and for all from these mortgages, instead of condemning future generations to live forever under the weight of an SDL that has been perfectly calculated? How much torture can the torture victim take before passing out?


And who encouraged these countries to go into debt? Ask those who are well-acquainted with the temptation that credits pose to politicians. In China, they say that you wish for your enemies to live in interesting times. In Argentina, because of the suffering provoked by excessive debt, it would seem that what their enemies could have wished upon them was the trust and confidence of international markets.


On the day that our country Venezuela firmly and irrevocably sets upon the path of totally canceling its debt, on this day an enormous opportunity will open for all those private and collective initiatives that need financial oxygen. Unfortunately, it will not be easy, since our politicians, while condemning past debts, have mastered the magic of simultaneously preaching the benefits of new credits.


From El Universal, Caracas, June 5, 2003



Three bullets on punctuality

Time and human rights


I have no intention of putting the right to punctuality in the same category as the right to education, security, health care, food, and work. 


However, in a country such as ours (Venezuela) where we because of sheer lack of punctuality can easily lose up to three hours per week waiting for something or another, this, over our average active life span of 55 years, adds up to around one year. As civil-rights organizations normally go ballistic whenever anyone is arrested without justification even for a couple of hours, I wonder how they let this pass.


There can be no doubt that the majority of our countrymen do, without any remorse whatsoever, blithely ignore the existence and purpose of the clock, and so it is evident that in terms of punctuality we need a total reform of our civil society. How do we achieve this? 


One alternative would be the creation of a “Punctual Venezuela,” parallel to the actual one. For example, if we start to use a little symbol that could be printed on all invitations to those activities that really require punctuality at the risk of being either excluded from the event or publicly chastised, we could possibly begin to create some semblance of civility. This symbol could be a watch, but I’d rather leave that up to the specialists in advertising.


The interesting part of this alternative is that it would allow us to impose, as of today, a heavy public and social sanction for those who lack punctuality without having to request that “notorious and incurable sinners” kick the habit cold-turkey. Also, maintaining the option of a not punctual Venezuela alive would allow us to continue to humor those foreign visitors who with a tropical flare that rivals our best take every chance they get to free themselves from the yoke of punctuality.


From The Daily Journal, Caracas, June 11, 1999


###

About parallels and meridians


We have recently witnessed public spectacles such as the fight the United States has sustained with Europe about bananas. Perhaps the effect of global warming has been much greater than we suspect as it seems to have moved the parallels normally identified with Banana Republics northward.


However the meridians might have gone haywire as well. I often take my daughters to parties that begin at midnight, which to me simply seems like a real and crude version, in cinéma vérité, of Saturday Night Fever. I cannot but suspect that their generation has simply decided to substitute the East Coast’s meridian for that of the West Coast. Some of the television channels seem also to suffer from the same syndrome. Somehow, I always seem to go to bed at night watching their afternoon comics while, if I am not careful, my daughters could wake up with their XXX-rated after midnight material.


From The Daily Journal, Caracas, June 11, 1999

###

My daughter’s cult

She is rarely late but she is absolutely never ever a minute early. She follows that Just-In-Time cult that drives us inhumanely nuts.

###

My wife’s cult

She is never late, but she is absolutely never ever just in time. She follows that better-early-than-late cult that has made us use years of our life waiting in airport departure halls.

###

My reality

Being squeezed between the just-in-time cult and the better-early-than-late cult is probably one of the reasons why I have been harassed into developing a radical middle mumbo-jumbo philosophy.




 

 

My book, Amazon’s profits and the value of its shares

I am including below “Virtual Tulipomania in New York City,” an article that I wrote in April 1999 for the following reasons:

When I started to write this book in 2004, I fretted over having to invest tremendous efforts in getting a publisher interested and, if successful, then having to negotiate lengthily in order to defend my copyright interests. 

Then I discovered the existence of some new publishing facilities that allow a rookie book writer like me to outsource. As these new facilities print the book “on demand,” there is no need to invest piles of money in printing too many copies that would reflect the author’s general sense of optimism and that could only later end up as tombstones in memory of shattered dreams. Well, it so happens that the new-wave publisher I chose was recently acquired by Amazon and as the article has to do with that company, I also found the perfect excuse to include it … for a very worthy reason … that of shameless self-promotion.


As a financial analyst (which is what an economist frequently does for a living) I am especially proud of this article since it evidences how I managed and dared to question the whole dot.com boom, at its peak, just by doing some thinking on my own. Of course, now, with the profits Amazon should expect from its new investment … and my book, I guess that once again the sky should be the limit for them.


###

One brief note though about these new “on demand” one-at-a-time printing methods. With them it seems that what we know as “editions” first, second, third, will in fact disappear and this might negatively impact book collectors and rare-book stores. Will they disappear?


Not necessarily, since this method could make collection even more challenging as you could view each individual book as an individual edition and therefore be able to improve your collection by moving up few slots at the time, perhaps from the 12.834th to the 235th edition. Whatever, just in case, you better hedge your bets and rush out and buy a second copy of an early edition of this book. 


Given that it is so easy and inexpensive to make changes to the book by using this publishing system, we could also have an incredible number of different editions which might make debates about the book much more interesting—in one, I would write in yellow, and in another, in blue, and so I might finally reach the green I am looking for— by seeding confusion. Then rare-book stores would have unlimited access to rarities.

###


VIRTUAL TULIPOMANIA IN New York City


The tulips planted all along Park Avenue were in full bloom in a kaleidoscope of colors as I read that the share price of one particular firm reached the skies in New York. Both things conspired to remind me of a book by John Kenneth Galbraith, A Short History of Financial Euphoria.


In the chapter “Tulipomania,” we read: “Speculation, it has been noted, comes when popular imagination settles on something seemingly new in the field of commerce or finance.” “. . . by 1636, a bulb of no previously apparent worth might be exchanged for ‘a new carriage, two grey horses and a complete harness.’” The value of one particular bulb, the Semper Augustus, would be the equivalent of US$ 50,000 at today’s prices! Everyone, from nobles to servants, speculated, cashing in their property and investing in flowers. Capital inflow inundated Holland. “In 1637, came the end.”


Now, April 1999, in New York, the share price of a company which initiated operations in 1995, has never registered a profit, has (according to management itself) no short-term possibility of doing so either, does not possess any major tangible assets, and has issued a management report in accordance to SEC rules and regulations in which it makes known a series of risks that would make any investor’s hair stand on end, trades at US$ 200 per share, up from US$ 10, only a year ago.


Evidently, the company that I believe has joined the rank and files of the “tulipomanias” sells books through Internet and to conclude as much it should suffice to analyze some of the risks the firm itself has enumerated in various reports.


The Internet is above all else a medium for the transfer of information and in this context, developing technology known as “shopping agents” will permit clients to quickly compare one company’s prices to those of its competition. This would seem to presage an eventual but fierce price war, an environment that is not exactly the breeding ground for profits that back the market valuation we are observing.  The low cost of entry and the probability that sooner or later some efforts will be aimed at prohibiting any monopolistic controls of the Web are also factors which can make the advantages created by an early incursion disappear in a flash. 


All this has nothing to do with the company itself and all that I’ve read about it makes me believe it is well managed and that it most probably has a brilliant future. The problem lies solely in the market’s irrational expectations. The company reported in 1998 total sales of US$ 610 million, a net loss of US$ 124 million and a book value (assets less liabilities) as of the 31st of December 1998 of only US$ 139 million. Today’s market value of the firm, equivalent to the share price times the amount of the shares issued surpasses US$ 33 billion.


Let us now have a look at its potential. Total book sales in the United States during 1998 were worth close to US$ 23 billion. If we assume that a profit margin of 8% would be reasonable, this would mean that there would be US$ 1.8 billion available to reimburse capital invested, both equity as well as debt financing.  If we then, for the sake of simplicity assume an overall return of 10%, we can estimate the global value of companies that sell books in the United States in the order of US$ 18 billion. If our company that today commands less than 3% of market share eventually attains a whooping 20%, its value could then reach US$ 3.6 billion. Now double that to take into account the rest of the world and then double that again to take into account of its declared intention of adding other products to its line of products, and we will still reach only about a third of its current value.


As this Financial Euphoria seems to have infected many firms associated with the Internet, I conclude that this must be a modern version of the speculative Dutch tulips. I also conclude that both these and the real tulips thrive in New York in spring.

From The Daily Journal, Caracas, April 30, 1999


An encore on the BIG capital increase for IFC

“But really, if IFC is not in need of capital to grow at this moment, why should we increase its capital? Is it not enough just to ask IFC to grow more and take more risks?” 

Yes, you could go that very timid route if you wish, but what I am proposing is to give IFC a completely revised new mandate for growth, and there’s no better way to do that than putting the big money on the table, up front. “But what if IFC does not want that capital increase and refuses to accept it?” 

Then perhaps that would be all for the better, since we could create an IFC II with access to all the know-how of IFC I, and then have them compete!

The immense needs, the ample resources, the more-than-reasonable results seen in IFC, our endlessly repeated talk about the role of the private sector—they are all out there, and so, why don’t we put our money where our mouth is? Might it be because we also are comfortable with the current level of efforts? If so, shame on us!

Let us scale up the IFC

Dear Colleagues,

Do Ministers, the representatives of the WBG shareholders, agree that the World Bank should make a capital contribution of five billion dollars to the IFC, our private-sector lending institution, fully paid in cash? That is a question I believe we should raise in the next meeting of the Development Committee. 

Why? Even though we regularly speak about the role of the Private Sector, the outstanding credits of the World Bank to governments are currently ten times those of IFC credits to the private sector. 

The Bank has entered into a somewhat stagnant mode from which it will not be able to pull itself out, until it is better able to focus its activities. With so many things going on, it is very hard to see where capital and budgets should be allocated to get the best results, and there should be no better stimulant for getting the house in order than to see important capital resources diverted to a sister institution.

Currently the World Bank has, according to its own finance department, an unused borrowing capacity of over 40 billion dollars at rates lower than Libor rates (Libor being the rate the best banks pay for deposits in US dollars, in London), and that only seems to be growing, and so to dedicate a small fraction of it for an increase of IFC’s equity does not seem at all incompatible with our constant declarations about the importance of the private sector. 

***

My Editor’s Q: Do you mean that the World Bank has to pay interest? I thought that much of the money it lends comes from outright grants from donor countries. I thought much comes from successful countries repaying earlier loans. Surely the World Bank has good credit. If the World Bank were in a financial pinch, wouldn’t the United States government lend it billions interest-free? 

My answer: Jim, the world has put about 12,000 million dollars into the bank, plus the promise of an additional 178,000 million—if needed. In addition, the WB[i] has been able to accumulate 24,000 million dollars in profits over the sixty years of its existence. On the basis of these resources the WB borrows around 110,000 million dollars from the market and lends about 110,000 million to the developing countries, keeping its own 36,000 million dollars in income-generating reserves. If the World Bank gets in a financial pinch, it is not that the United States and the rest of the world would assist it with interest-free loans; it is that they would have to cough up an important part of the 178,000 million in subscribed, but not paid for, equity. Of course, a normal bank would have to pay in the capital before authorities were to treat it as capital, but this is no normal bank, as you should have gathered by now. The IFC, on the other hand, has a fully paid equity of about 2,360 million dollars plus retained profits of another 5,420 million. They also borrow in the markets, but in their case they do not have a huge reserve of unpaid subscribed capital as the World Bank does, which is also one of the reasons I am proposing to put some substantial new equity, in the form of cash, into the IFC. 

***

The IFC might not feel that it really needs capital at this stage, because it is doing fine and is not thinking about really expanding. In this respect, a substantial capital injection, thereby clearly signaling the wish of its shareholders, would perhaps force a quite naturally somewhat comfortable and thereby somewhat reluctant IFC to come up with a substantial growth strategy. 

The IFC would perhaps reply that it does not need more capital in order to sustain growth, given its strong balance sheet. This might be true, but the fact is that its loan and equity investments of 10,279 million dollars are primarily financed with their own equity resources, 7,780 million dollars. In fact, were the IFC to adopt IFRS (International Finance Reporting Standards) and adjust its probably excessive loss reserves, its equity would be even higher and their ratio of loans and investment to equity would almost reach 1 to 1.

Since almost all of the IFC’s current borrowings go to maintain the financial “hoopla” (liquidity) that makes up more than 50% of its balance sheet, and the loans and investments are financed almost completely with their equity, then, whether we like it or not, there might be no other way to accelerate the IFC’s credit growth substantially than through a substantial capital injection.

“If it ain’t broke don’t fix it.” That might very well be so, but the fact is that IFC’s mission is to take risks in order to assist the private sector in generating sustainable economic growth in the world, and not just to avoid risks in order to guarantee the sustainability of some initial capital contribution and some private development jobs. 

“If it ain’t broke don’t fix it” is clearly irrelevant in IFC’s case since, as we look to its general performance, it is not that they are broke; just the opposite, it is that they are doing too well for them not to be forced to expand. 

There have been some calls for flat budgets and, in the IFC’s case, this policy would quite obviously produce something much worse than suboptimal results. As for those colleagues who in any circumstances are hooked on a flat-budget concept, let me remind them that this goal could be obtained equally by letting some entities grow strongly, compensated by the slower growth of others. This is the way equity and budget resources are, and should be, allocated in the real world, year after year, and so perhaps we should think about adopting some external best practice. If for instance, the World Bank were formed by five regional subsidiaries, perhaps the pressure for results, to validate the fight for resources, would provide us with a very stimulating competitive environment. 

Friends, when I see the challenges of the PPPs, (Private Public Partnerships) the MDGs, the immense market and needs of sub-sovereign lending, all the regional initiatives just waiting for support, and all the South-South investment and private-sector business waiting for help and guidance, and I place all these needs in the perspective of IFC’s results, my conclusion is that we are obliged to provide IFC with much more long-term development resources. Would our ministers agree?

Real fresh capital increases take ages to negotiate, a check from the World Bank to the IFC could be negotiated in months—hopefully even before our ED group leaves.

While management has the task of budgeting for the best use of resources allocated to each entity, the Board has the responsibility for channeling the resources to the most productive entities. Actively shifting resources from low-productivity entities into higher ones is an absolute requirement to achieve productivity increases, and we may have been doing this insufficiently.

Per

The Multilateral Investment Guarantee Agency—MIGA

And we really did not hit it off … many were the reasons, and at one moment I even told my colleagues that if we were the shareholders of a private MIGA, we would have long ago asked for the keys—to close its doors. Let me try to explain my reasons for such misgivings.

MIGA’s purpose is to provide various political-risk insurance so that investors will be willing to invest in developing countries where they, or the markets, perceive that the risks of misdoings, such as illegal expropriations, are too high. This mission sounds all very well and has in fact been partially carried out by all those official export agencies through which governments of developed countries have tried to assist their exporters in selling their goods to difficult markets.

But and this is just the first big but, the developing countries that are being guaranteed through MIGA are themselves shareholders of MIGA, and so this leads to some very strange and incestuous relations that are hard or impossible to administrate. Think of it as a grandchild selling insurance against the risk that any of his grandfather’s misdoings might cause. If the grandchild tells the world his grandfather is OK, which he should, then no one will buy the insurance at the rate he is quoting; but, it would not be right either to tell the world that his grandfather is not that OK, just to sell the insurance at the right price. The perversity of having to signal to the market low risks but not too low rates, without any reference price available, represents for MIGA, in my opinion an unsolvable conflict of interest.

My second but takes off from where the previous one ended. Because the grandchild, having two grandfathers, can also not be seen as telling the world that one of them is worse than the other, in terms of the political mischief he could do, this now leads to the need for absolute confidentiality about the pricing. Now, you tell me, applying the most generous version of Murphy’s Law, where will an organization end up if the price of the products it is selling must be kept confidential, even to their Directors. 

Once, when I wanted to understand a specific MIGA request better, I was forced to sign all types of confidentiality agreements, but even then, just being able to analyze one case at a time, without being able to place it in any perspective by comparing it to the other cases, it turned out to be a quite useless exercise. By the way, I was told that I was only the second ED of MIGA who had ever looked at the specifics of case. In fact, because of the confidentiality issue, the EDs never approve any operation of MIGA and they have to settle for a “we concur,” a sort of blind man’s consent. As confidentiality goes squarely against the transparency which the WBG so much preaches, I guess that this is also an unsolvable conflict.

My third but has to do with whom MIGA can provide with insurance. Although the finance that is provided with a guarantee against political risks by the export agencies must be related to goods and services provided from the agencies’ own country, the buyers can be anyone. MIGA though can only offer its political-risk insurance to foreign investors, thereby giving them an additional competitive advantage in relation to the local investors, as clearly the insurance provides access to cheaper financing. It is clear that differences in relative competitiveness will always exist but perhaps it should not be for the WBG to stoke that fire. At least in theory this but could be solved by amending the statutes of incorporation: if the Bank preaches globalization, then it should treat all investors as equals. 

My fourth but is a minor but, but still a relevant one. In order perhaps to calm any of the previous doubts, MIGA always makes a big splash about guaranteeing that its guarantees promote development and growth. That might very well happen, but there is no way MIGA can guarantee it. The premiums charged by MIGA does simply not allow for any major analytical effort, and in reality, it is the client who in his application form describes his development impact, and the government, of the county being guaranteed against political misbehavior, that attests that this is so. As I do not know of any comparable export-credit agencies that would be required or have the resources to do the assessments of development impact, profitability or environmental effects before extending its coverage, there is perhaps nothing to do about this, except saving the costs of the charade.

So, should there be a future for MIGA? I am not really sure, but as it sometimes harder to kill these organizations than create new ones, perhaps MIGA could start to look into alternative specializations such as sub-sovereign financing or international mortgage finance.

Finally, I should make clear that my concerns about MIGA as an institution should not be construed as a criticism of those working there, as I much commiserate with any management expected to carry out such a crazy and confusing mandate.

Disclosing the IDA Country-Performance Ratings

The World Bank manages a very large pool of donated development resources from the International Development Agency, IDA. To allocate these resources among the countries and also to decide whether these resources should be given out as loans or grants, they use a methodology that reviews many different variables and ends up in a product known as CPIA. These Country Performance Index Assessments had previously been disclosed in a sort of fussy way (with countries being classified in quintiles), but now there was strong pressure from most of the donors that these Country Performance Index figures should be disclosed in much more detail—I guess to reward the good countries and shame the others. 

Nothing wrong with that, except if you thought that those performance indexes, though probably a good approximation of the reality, did not reflect all the difficult aspects of development and could also, if taken on their own and erroneously interpreted, make development more difficult. 

I had had enough with organizations publishing indexes that were later appropriated by the selfish interests of others, making them mean more than they really do, without the originator responding clearly enough—as it was honored just by the attention given to its index and did not want to hurt a member of its fan club. And so the table was set to ignite my devil’s advocate genes. 

A first round of comments

As so many of us invest much of our hopes for a better tomorrow in achieving a more transparent society, it is important that we always remind ourselves that there is nothing so nontransparent as a half-truth, said at the wrong time, at the wrong place, and not in a fully comprehensible way.

But, in a world that frequently demands that information be transmitted through easily digestible means, such as oversimplified rankings, we would rather have the World Bank (WB) doing it than any of the many not-accountable-to-anyone rating agents that frequently pursue undisclosed agenda. That said, it is not an easy decision for the WB to get into the rating game, and much care is needed. 

It is by definition an impossible task to compress in an adequate way all the very complex realities of a country into a simple index or rating, and in doing so it is absolutely certain that many mistakes will be made. On the other hand, one also needs a simple, comprehensive and understandable tool to be able to convey results powerfully, and a simple index or rating can do just that. The balancing of all the various elements and contradictions needs to be done with much concerned carefulness. If a minor agent such as an NGO would go wrong, there might not be much to it but if it is the knowledge Bank that puts forward the impreciseness, this could be leveraged into extremely negative consequences.

If we were to use only the term of an “IDA Resource Allocation Index” this would make the whole disclosure more transparent and honest, as this would indicate that when monitoring results and performance, it takes two to tango, the evaluated and the evaluator, and anyone—or both—could make mistakes. We should ban, forever, the use of the very arrogant and error-prone term “Country Performance Ratings.”

Friends, it is just because we believe in disclosure that we should strive to find the right disclosure.

Development alchemy

Somewhere in the documentation the “Weighting Procedure” is described as taking four parts of CPIA and one part of ARPP (I don’t remember what ARPP stands for but I guess that is not so important either) and multiplying this by a “governance factor that is calculated by dividing the average rating of these seven criteria by 3.5 (the midpoint of the 1—6 rating scale) and applying an exponent of 1.5 to this ratio.” Friends, whatever it means, this sounds just too much like a “Potteresque” development alchemy that even a studious Hermione would find difficult to understand. 

Excuse the jest, my colleagues, but we could encounter some serious risks to our reputation. For instance, the Credit-Rating Agencies—at least with respect to sovereign credits—refuse to describe their methodology in too much detail, and they officially justify this refusal by stating that they do not wish the countries to know about how to get a great rating—although I truly suspect that they just don’t want to be called on their bluff. In our case we might be expected to come up with a more substantial explanation than the mixing of the potion above—and what if we can’t? 

Confusion

I have heard that “ratings should depend on actual policies, rather than intentions,” which sounds quite right, especially remembering that the road to hell is paved with good intentions. However, I have also heard that “the criteria are focused on policies and institutional arrangements, the key elements that are within the country’s control, rather than on actual outcomes.” Simplifying arithmetically both possibilities, it would seem to me that we could end up with a rating system that depends on policies rather than results. This, although perhaps quite acceptable to a private charity, seems a bit out of place for the World Bank. But then again, I might just be confused.

About the Panel of Experts

Dear Colleagues,

With respect to the Terms of Reference (TR) for the Panel of Experts—I would like to make the following brief comments.

To begin with, I believe we should avoid qualifying the panel as a “Panel of Experts,” as clearly the whole issue of rating, in this case of development adequacy, is governed by subjectivities and not by that kind of know-how that permits anyone to represent himself or herself as an “expert” without being deemed presumptuous. A reference to “experts” may also convey an unearned sense of precision that might backfire.

Reading through our methodology manual, we understand that if the Panel is to review whether the criteria used in the ranking provide an adequate basis to asses the quality of policies and institutions and, at the same time, the quality referred to means the degree to which a country’s framework is conducive to growth and poverty reduction, then, in all logic, it would seem that the Panel is supposed to review the whole effectiveness of the current development strategy of IDA. Although this could perhaps be a welcome exercise we find it hard, if not again presumptuous, to believe that it could be done during just 48 hours in March, unless of course the Panel is just called to apply freely any preconceptions of their own.

Frankly, when I thought about a panel in this matter, I never visualized a team able to reconstruct or even evaluate a methodology and a ranking that have been developed over many years, and I believe that for that purpose we already have other more appropriate procedures that we are already paying for and that work fulltime. 

No, I thought we were talking of a Panel that could advise us on how to design and communicate and control the interpretations of the rankings, so as to maximize their potential benefits and minimize the risks, for all, of this extremely hazardous activity.

The questions for such a panel are almost infinite; for instance, how do we make sure that the ratings are not used for any wrong purpose, which could even conspire against our development mission? Is the ranking a proprietary good to be controlled and marketed? Do we allow any media to report on the ratings out of context, or perhaps even redesign their presentation, for instance by cutting the axis and thus seeming to have the WB endorsing erroneous interpretations? What are the market implications of putting the whole credibility of the WB behind a rating? Will the other raters only follow us? Will this only reinforce the cyclical nature of capital flows creating “the Mother of all systemic risks”? If it does not work, can we pull out?

With respect to the list of the named “experts” not knowing them, I cannot endorse or object. Nonetheless, I sincerely hope that the list does not include any ranking fanatics, but includes more the well-intentioned healthy ranking skeptics who, aware of the needs for rankings, are also conscious of the risks. In other words, I hope the panel does not end up being a panel of “formula builders” but a panel of people who know why, when, and how to use the ranking formulas. 

Some follow up comments

It is symptomatic of the many difficulties with rating that the request by the Panel for more analytic work in relation to the weighting system was answered by the Bank with a very basic equal weighting, backed by some correlation analysis. Equal weighting could very well be the best answer, at least in simplicity, but it is also a very normal and transparent way of admitting to not-having-a-clue. In the area of the CPIA ratings, we are indeed walking on very loose sand, and we need to be very careful, come disclosure time.

When thinking about all the suggested CPIA criteria, I would have many fewer problems with fully disclosing the exact information on each of these fifteen criteria, than with having them all stirred into a murky and totally nontransparent cocktail.

I saw that some Panel members noted that once the disclosures occur, “The Bank should closely monitor any potentially adverse impacts on borrowers, such as misinterpretation of ratings by financial markets, any impact on foreign direct investment, and/or the abuse of ratings for political gains.” This is all well said but, in today’s world of rapid and active communication, those are the things you analyze before you communicate and not after. We wonder whether now is not the appropriate time to leave out the economists, and call in some experts on communication. 

Let us never forget that the rankings, unfortunately, say almost as much about the one doing the ranking as they do about the one being ranked.

Just as an example of rankings gone haywire, let me refer to the Globalization Index published some months ago by A. T. Kearney and Foreign Policy. Their ranking method assigns globalization points to countries by measuring the number of internet users, hosts, and secure servers, without even bothering about what contents are transmitted over them and similar media. Who is more global, a family of a rich country with ten televisions for ten local sitcoms, or a family of a poor country with only one TV, but who mostly have to watch foreign programming, and many of whose family members are working abroad? 

Let me again illustrate three risks that I believe have not been sufficiently considered.

· When discussing Argentina we heard comments as to how it changed (almost overnight) from being A Golden Poster Boy into an Ugly Duckling. This begs the question of what could have happened to the reputation of the Bank if our ratings had officially indicated very good results over a long period and then, suddenly, something went wrong. Would creditors sue us? Would credit rating agencies sue us?

· There is always a risk present when good ratings are thrown in the face of crude realities of poverty, since the hope of food for today is not easily appeased by the promise of food in a year or a decade.

· The risk that bad ratings could in fact be turned against the interests of furthering development, for instance when bad ratings are brought forward by bad governments as an evidence of their ability to defend their “true” sovereignty. 

In the very little which our Panel of Experts (mercifully not eminent persons) mentions about disclosure, it urges for the preparation of adequate information to help the public interpret the ratings. This recommendation stands, at least in terms of transparency, in stark contrast with the other recommendation “that the write-ups that accompany the ratings should not be disclosed—as this might discourage candid assessment by staff.” We do not believe that in this respect you should be able to have your cake and eat it too, and so, if you are prepare to disclose a rating, you must be willing to disclose fully how you got it.

About our own accountability

Of course I agree with the recommendation that the disclosures of any results should always include a statement indicating that the ratings are the product of “staff judgment.” That said, and given the importance of checks and balances, and accountability, we would like to know a little about the foreseen consequences to staff. This is no minor issue as their judgments, if wrong, and even if right, could foreseeable bring down governments and also stoke anti–World Bank sentiments. I need to bring this up, as the debate reminded me of the note I wrote about the US GAO Report on the IMF.

What if they rank us?

Finally, as we see in the documents on the IDA disclosure policy that this exercise generates a normal distribution curve where we can point out the best and the worst performers, I cannot but reflect on the fact that within the Bank, for its own internal evaluation purposes, it seems impossible to gain acceptance for this sort of useful ranking tool. In fact, in most internal evaluations that are presented to the Board, we have not even reached a name disclosure by quintiles and have been basically limited to a binary grading (satisfactory or not), mostly without really even knowing who belongs to any of those groups. Just think about our reactions if some NGO would start to rank the performance of our own country teams and to disclose the results on the www, with three-decimal precision, and arguing that, given the utmost importance of the WB’s poverty-fighting mission, this should be quite helpful


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