Regaining Power over Money to Serve the Common Good
Publication date: 01/30/2018
The queen raised the right question: why did nobody notice it? Many thought that we had found the recipe for everlasting and shared prosperity. We believed that with the progress of finance we had found the way to propel the world if not to save it. To understand what happened, we need to think back a few years and remind ourselves what it was like to be at the dawn of the third millennium. And then we must try to answer the question: what went wrong? This is the objective of the first five chapters. Chapter 1 focuses on the years before the financial crisis and questions why it did not turn out according to the plan set up in New York in September 2000. It describes the environment that allowed the crisis to happen and against which finance needs to be rethought. Finance and its reform cannot be condensed in isolation.
The dawn of the third millennium filled us with great hope. The last decade of the 20th century had left everyone feeling a bit lost, vacillating between the highs of the fall of the Berlin Wall and the Soviet Empire, and the lows of the Gulf War and the debate in many nations about globalization that seemed “delightful” to some and “horrific” to others. Development, public aid, and the mobilization of nations were faltering at the starting line. The symbolic arrival of a new millennium created a historic opportunity to reset the counter to zero.
The 189 member states of the UN seized upon this positive mood to reaffirm their faith that lasting peace and international security can be possible only by guaranteeing the economic and social well-being of all people. The leaders of the member states hoped to define and implement a new strategy of cooperation, adjusted to the realities and changing needs of the 21st century.
The leaders met on September 5, 2000, in New York, in what was the largest meeting of heads of state and government the world had ever seen, the Millennium Summit. Guided by the idea that every program should focus on humanity to construct a global community that leaves no one behind, this Millennium Summit concluded with the unanimous adoption of a solemn declaration, the Millennium Declaration: eight objectives for fair and lasting development, created and promoted in large part by Kofi Annan, the secretary-general of the UN at the time, to be achieved within the next 15 years.
The Millennium Declaration was a turning point. For the first time in history, humankind gave itself unified and measurable goals in a form different in substance from the usual declarations or the previous “consensuses.” The resolution brought together in a single text all the objectives that had been set at various international conferences in the previous decade. “It is a vastly useful initiative,” noted our working group in 2004, focused on water. “The odds are most [heads of state] have forgotten these goals. It covers the whole of the tasks set out for the nations of the world—North and South combined—for the human community. They should be taught in every school and posted at every town hall.”1
The Millennium Development Goals (MDGs) set eight grand principles and concrete objectives that constituted a global plan of action broken down into 20 quantifiable tasks, each measured by 60 statistical indicators. The plan offered precise, quantifiable measures in the fight against extreme poverty in all its dimensions. In theory each country’s budget would reflect these priorities, because they flowed from a “respect for the fundamental goals of the entire human family” (see the box on the next page).
The Millennium Development Goals were still focused on public action, public influence, and public methods. That would change at the UN conference in Monterrey, Mexico, in 2002, but cooperation wasn’t yet thought of as truly multidimensional, spanning businesses, financial institutions, and civil society. It remained confined to the relationships among individual nations—but the idea of partnership was gradually gaining traction. Development funding focused on financial transfers from northern countries to southern countries, according to the principle of solidarity reaffirmed by the UN, in which there are bilateral transfers of public funds balanced out by the cancellation of a share of the debt of the countries receiving aid.
This public mobilization to serve the common good appeared to be unquestioned, at least while the global economy remained strong. We were still in the era of “Great Moderation,” as later economists called it, and global growth was supported by an international financial system that seemed incredibly efficient in terms of the wealth it was able to create and redistribute. The challenge of achieving the MDGs was foremost a challenge to increase state and international institutions’ contributions to official development assistance (ODA).2
Could humanity get there? It was up to the public sector to answer that question.
Fifteen Years Later—Did We Do It?
Although we clearly could have done better, the extraordinary momentum with which the world united in 2000 pushed us to achieve an unprecedented number of goals in the 15 years. In less than one generation, developed nations increased their ODA by two-thirds, from $81 billion to over $130 billion.3 Debt–service ratios dropped to one-fourth of their 2000 levels, thus reducing the financial burden on developing nations, even if not always to a sustainable point.4
1. Eradicate Extreme Hunger and Poverty
a. Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day.
b. Halve, between 1990 and 2015, the proportion of people who suffer from hunger.
2. Achieve Universal Primary Education
a. Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.
3. Promote Gender Equality and Empower Women
a. Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015.
4. Reduce Child Mortality
a. Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.
5. Improve Maternal Health
a. Reduce by three-quarters, between 1990 and 2015, the maternal mortality rate.
6. Combat HIV/AIDS, Malaria, and Other Diseases
a. Have halted by 2015 and begun to reverse the spread of HIV/AIDS.
b. Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases.
a. Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources.
b. Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation.
c. Have achieved by 2020 a significant improvement in the lives of at least 100 million slum dwellers.
8. Develop a Global Partnership for Development
a. Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system.
b. Address the special needs of the Least Developed Countries (LDCs).
c. Address the special needs of landlocked developing countries and small island developing states.
d. Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term.
e. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth.
f. In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries.
g. In cooperation with the private sector, make the benefits of new technologies, especially information and communications technology, available to all.
This historic progress can be attributed to a long list of factors, led by economic growth, most spectacularly that in China. Because of this, many development problems are now on track for resolution. For instance, by 2013 the number of individuals living below the international poverty line had fallen by 500 million.5 By 2008 real advances had occurred in the wider availability of AIDS treatments, increased agricultural productivity, higher education rates, and greater access to clean water and sanitation.6 By 2010 the rate of people without
access to improved drinking water had been reduced by half. In 2012 the UN confirmed that it would be able to reach its goal of reducing poverty worldwide by 2015. Some 200 million people living in slums had already seen an improvement in their living conditions—exceeding the goal. In 2012 equality in primary education between boys and girls was also achieved.7 This is the glass half full.
Of course, major challenges remain, beginning with the great disparities we still see between countries and among the various populations within individual countries. China achieved rapid economic growth, but progress was uneven in Africa, less developed countries, landlocked countries, and small isolated developing states. Some MDGs have not yet been achieved: those in maternal, neonatal, and infant health, and in the eradication of hunger. In 2013 one out of eight people still went to bed hungry.8 Despite concerted efforts, ODA has not yet reached the target level, 0.7 percent of the gross national product (GNP) of every developed nation, identified more than 40 years ago. This is the glass half empty.
Humans Planning and Realities Intervening
The first 15 years of the new millennium did not unfold according to plan. The world become much more complex, and events took some dramatic turns. We are still not sure where those transformations will take us. The changes that touched us are multiple and profound, and their effects are still being felt.
A New Economic Cartography: The Rise of the Emerging World
The first major change completely redrew the global economic map. While packing for my move from Paris to Washington in early 2013, I came across a box of papers that contained notes from classes I had taken in preparation to attend business school. In 1985 and 1986, we were still talking about Soviet planning and the reforms of Stalin and Brezhnev. These subjects seem outlandish today! At that time, only the four Asian Tigers (South Korea, Hong Kong, Singapore, and Taiwan) and Japan were thought of as economic powers by the West: China was in the background, India was considered a lost cause, and the running joke about Brazil was that it was a country “with potential” but no energy. The G7 (Group of Seven) nations dominated the world, and the European Union was ascendant. For the years leading up to 2000, we walked a well-trodden path—at the time, we didn’t even have the acronym BRIC (Brazil, Russia, India, and China; coined in 2001, it became BRICS in 2011 with the addition of South Africa). Today we take for granted the emergence of powerful economic competitors to the traditional economic powers—but who would have believed, even in 2000, that China could in the foreseeable future surpass the United States as the top world economy?9 Who would have believed that France would have to bitterly settle for a ninth-place ranking behind the two economic giants, followed by India, Japan, Russia, Germany, Brazil, and even Indonesia?10 And who would have believed that in 2012 India would attain a GNP so large that, added to China’s, the two would be expected to quickly surpass the total for the combined G7 economies?11 This transformation of the world economic map, created by the growing power of emerging economies, could have large and severe repercussions on development funding.
The second major structural change, closely linked to the first despite how often we underestimate the connection, was the toppling of the balance of world demographics. Today, there are 1 billion more of us than in 2000, a total of 7 billion inhabitants on earth; another 1 billion inhabitants are forecast for 2030. This demographic explosion, however, has not been evenly distributed: some countries are aging while others are getting younger; some populations are dwindling while others are exploding. These changes in demographics are redefining the relationships between the global economic powers. Aging populations mean lower average incomes with higher health expenses, which put a strain on GNP, reducing innovation and resulting in slower growth for the nation—not to mention a smaller army, which weakens the sphere of influence militarily.
Older industrial nations like Japan and nations in Europe, and perhaps soon the United States should it choose to build barriers to immigration, are seeing demographic decline and risk being overtaken by countries with younger populations, such as Indonesia, Brazil, Mexico, or Turkey; thinking more long term, they could also be overtaken by countries in sub-Saharan Africa, which are in the middle of a population boom (by 2100, the continent will make up over one-fourth of the world’s population). The intermediate case, China, is interesting: this emerging power could age out before it becomes wealthy, given the reduction of its active population in the past two years resulting from 35 years of having a single-child policy (now officially ended).12 Immigration restrictions are also having an impact in China, as they have to a lesser extent in the United States and Europe. Will emerging markets be able to reverse this trend? The outcome is less than certain. The Chinese will have to transform their demographic “weight” into demographic “dividends”—meaning they will have to succeed in attracting more working-age adults than children under the care of adults—in order to support their economic growth. One thing is certain: in the space of a single generation, these demographic trends have already begun to reshape the global hierarchy.
Another consequence of the demographic explosion, in itself a fundamental change from the past 15 years, is the rampant urbanization and emergence of metropolises that is redefining the sovereignty of space in the United States and beyond. “Who knows of this city?” asked the three directors of McKinsey Global Institute,13 evoking the case of Kumasi, a city in Ghana most people had never heard of, with a population in the millions. Like Kumasi, cities with more than 1 million inhabitants are cropping up like mushrooms in the emerging areas of the world with such speed that we no longer have the time to even learn their names. China alone has more than 40 cities, such as Luoyang, with more than 2 million inhabitants.14 Africa now boasts more than 50 large cities. And while more than half of humankind has lived in cities for a long time, a growing proportion is concentrating in these unknown metropolises, which are starting to compete for power with national governments. The McKinsey authors postulate that by 2025, a single regional city in China, Tianjin, will have a GNP equal to that of Sweden, and that in the decades that follow, half of the world’s economic growth will come from 440 cities, like Kumasi or Santa Catarina, Brazil. This boom of “subsovereigns,” to use the international jargon, has a major significance with respect to the architecture of regional and global power, in economic, political, and even cultural terms. My wife discovered this after driving two hours from Shanghai to deliver a speech at a brand new, gigantic university that partners with Duke University (Duke Kunshan University); the world no longer revolves around just the Sorbonne, Oxford, and Harvard.
Another major issue in urbanization is the sustainable development of cities and their ability to accommodate population booms with adequate infrastructure and measures to combat inequality. The concentration of humanity requires modernization and rationalization, in other words, which require considerable investments that not all cities are able to make, even if they know where to begin. For example, I had an interesting and emotional conversation on this topic with M. Y. Nawandish, the mayor of Kabul, whose population today numbers a shocking 7 million and 1 million cars (compared to 600,000 inhabitants and a few dozen cars in 2002, when America entered Afghanistan). How can a city absorb such an influx when it has practically no paved roads and unstable access to water and electricity, and people are not safe on its streets? Which fix should be the first priority?
I was equally touched by a trip I took to Jakarta that offered a window into an Indonesia with mind-boggling economic growth but still massive inequality: the contrast between the worst slums, which I visited in the morning, and the huge Maserati retailer displaying his goods in the city center a few hours later next to a Bell & Ross boutique was striking. It shook up my take on the MDGs: although we had technically achieved goal 7.c (“Have achieved by 2020 a significant improvement in the lives of at least 100 million slum dwellers”), urbanization has progressed so fast that we have not improved conditions for many other people.15
A First Hint of the Global Financial Crisis
Another change that has made the situation more complex in recent years is the 2007–2008 financial and economic crisis, the magnitude of which no one in 2000 could have imagined. We will get into this in greater detail in Chapter 2. For now, let’s just remember that the crisis has been shown to be possibly more significant than the one in 1929, which led us into one of our darkest times. Truly, in 2007–2008 we feared we were just a step away from the collapse of the global financial system. Once we saw that the system would hold, the cards were reshuffled: from a debt-based system dominated by banks, the world has turned to a system more and more dominated by institutional investors and asset owners like pension funds. This is a major change in terms of its implications for the funding of economies and development, monetary policy, investment techniques, and more. The crisis also created a system that appears to defy reason, where up to one-third of global public debt has at one time been contracted at negative interest rates, and “central banks” have lived up to their names better than ever. In short, the financial phase of the crisis set in motion a long cycle of global recession and threatened many of the development goals set in 2000. For example, the jobs deficit, affecting youth in particular, grew by 67 million around the world between 2007–2008 and 2013.16 ODA growth slowed over the long term, a reduction that primarily threatens those countries that are already the most fragile.
Private Initiatives Everywhere
The developments in the first decade of the 21st century brought about another decisive change, this one much more positive in my eyes: recognition not of the “end of history” but of the role of the private sector and the market economy in development. This is likely one of the most significant and least visible changes since 2000. Although the MDG strategy leaned heavily on ODA growth, in 15 years, this has actually declined relative to other sources of funding, such as foreign direct investment, funds transfers (remittances), and, more broadly, the influx of private North–South and South–South investment. We are seeing a real seesaw movement: compare the $135 billion that ODA had reached, year in and year out, by 2015 to the $435 billion of funds transfers initiated in 2014 by migrants. This impressive total, which grows every year, is fragile in nature: migrants from Georgia, Kazakhstan, and Central Asia who worked in the petroleum industry in Russia lost their jobs with the drop in oil prices, and many find themselves unable to send money back to their home countries. We should watch this issue closely, since some countries have become dependent upon this source of funding: funds transfers by migrants represent 42 percent of GNP for Tajikistan, 32 percent of GNP for Kyrgyzstan, 29 percent for Nepal, and 25 percent for Moldova.17 This kind of reversal requires that the situation be reconsidered: What role could ODA play here? How can these precious dollars best be used? How can we transform these public transfers into catalysts?
Finding answers to these questions is even more important because we now understand that the private sector (large companies and small-and medium-size businesses alike), far from being the devil, is actually the engine for growth. The World Bank estimates that 600 million jobs must be created in the next 15 years, or more than 3 million each month, to keep up with population growth. Civil service jobs certainly won’t fill all this need! My trips to Africa support this statement: The primary problem for heads of sub-Saharan states, whose employment markets grow more abundant each year by the hundreds of thousands, and even by millions of youths, is how to create enough jobs for them. The question is even more crucial in countries like Côte d’Ivoire, which is coming out of a decade of civil war and needs to rehabilitate and reintroduce thousands of child soldiers into society. When the World Bank sets up training programs for masonry, carpentry, hairdressing, and similar occupations, the graduates must be able to use their training to find a job and to integrate into a real economy, or else we condemn these youths to picking up arms again. Interestingly enough, one of the keys to promoting this environment is an emphasis on a favorable climate for investment, good governance, and business.18
The Digital Revolution: On Its Way
Finally, let us not forget the pervasiveness of the digital revolution, among the great global transformations that have occurred since 2000, with all the opportunities and pitfalls it brings. When we entered the third millennium, obsessed as we were by the fear of a worldwide year 2000 (Y2K) bug, we still wondered what the Internet might become besides just another shiny gadget. Fifteen years later, many companies bear witness to its effects: like Kodak, many went under, unable to adapt to the new world in which any smartphone has a hundred times the horsepower of the 1969 NASA supercomputer that got us to the moon. So many things have changed in the span of a single generation, so much of a “new kind of human” has developed, vividly referred to as “Thumbelina” by Michel Serres: our children and grandchildren are now digital natives, who “no longer have the same bodies, life expectancies, or means of communication, they no longer perceive the world the same, no longer live in the same environment, no longer occupy the same space.”19 For this generation, “the language has changed, labor has mutated.”20 The number of cell phones sold has risen from fewer than 1 billion to more than 6 billion in just a few years!21
This revolution has fed many hopes that we would never have dared dream of 15 years ago. Today’s information technology and communications, by supporting access to knowledge and global interdependence of business, has the potential to accelerate human progress, reduce inequality, and give birth to communities of learning. It greatly stimulates scientific and technological innovation in fields as varied as medicine, energy, automobile manufacturing, and agriculture. In this digital age, we might have the capability to resolve the issue of world hunger, because every day we know with greater precision how to improve our soil, where we should irrigate, and when is the best moment to harvest; but more importantly, we know how to store, distribute, and trade what is produced. Humankind has never been able to interact so easily or rapidly, and we have never had so much choice in how we do so.
At the same time, we have entered into an era in which companies are panicked by the thought of being “Uberized” by the likes of Google, Facebook, Amazon, Airbnb, and of course by Uber itself. Such “exponential organizations” (ExOs), to borrow Salim Ismail’s term,22 were able to create a competitive advantage from available data and the network effect to build a disruptive model with 10 times the impact of organizations founded on the old linear model. These organizations were able to use the global economic displacement better than anyone to implement a paradigm shift from politics-based change to one based on consumer freedom—yet another consequence of the digital revolution that must be accounted for in matters of finance as well as government, as intertwined as the two are. Incumbent financial actors are also threatened by digital changes best felt with the emergence of “fintech” (financial technology) and the changes led by the blockchain. It is too early to say, but business models are likely to be transformed profoundly and at an unprecedented scale.
The Emergence of New Global Concerns
The emergence of new global preoccupations, as well as new questions that go beyond the traditional global public goods, also forces us to consider the world with new eyes. Take, for instance, the concerns with climate change and with refugees. In 2000 climate change was still debatable, but now it’s widely accepted as fact, and we know that people living in poverty are the first to be affected, and most lastingly affected, by global warming. There is no more room for debate—we have to treat this at the global level, in coordination with the local, regional, and national levels, even if the decision by President Trump to withdraw the United States from the Paris climate change agreement has reignited some discussion. Similarly, the issue of refugees affects the entire international community and cannot be resolved by building walls (except where those stand as indicators of the most barefaced of demagogues). These issues affect the financial model that has persisted to this day.
Women Moving Up the Ladder: The Right Thing as Well as the Smart Thing
In 2000 I never would have had the unforgettable experience I had as a leader of the World Bank, on assignment in Dakar, Senegal, for International Women’s Day. After attending a dinner with a group of 50 women from a variety of professions (including journalists, lawyers, and civil servants), we were shown a film in which Senegalese people, including two young women miming levels on a ladder, expressed their hope to someday reach the same level as men. My reaction was, How horrible that we are still there! I dream of a world in which it is women, holding firm to the ladder, who reach down to bring men up to their level. Diversity—and I mean that in both senses—is an inestimable wealth. I can’t imagine a world that is composed of only men, or only women. This was rarely a matter for discussion at the beginning of the 21st century, despite an important international agenda. Now, as I discuss in Chapter 14, we are seeing the slow spread of an approach to finance through the prism of gender.
Proper Governance: The New Name of the Game
Before I end this admittedly nonexhaustive summary of the first decade and a half of our century, I want to mention something else new: the increase in expectations more often based on issues of governance. In 2000 this word, in its current meaning, barely existed; we spoke more often of government. The emergence of this idea of governance reflects a radical new approach to the management of globalization. As our water group said in 2004,
Governance is a management method and not a system of government. . . . Governance is a triangle defined by public powers, private interests (industrial, agricultural, commercial), and the civil community formed by consumers and users. The triangle’s size varies according to whether it is measured at the municipal, national, or international level. . . . It indicates that . . . public powers have been stripped of their role as sole representative of the general interest. They . . . no longer represent solely the interests of the State, its budget, and its sovereign powers.23
In other words, in the space of one generation, we have moved away from living in only a Westphalian world, one that is dominated by state power, to living in a much more complicated world in which the private sector and civil society both participate in decision making. We are now part of a world in which we were able to come to an agreement between nations on common goals, a world much harder to control, in which we have to completely reframe our discussions to find efficiency without harm to legitimacy. All this is anything but obvious, and in Chapters 9 and 10, we will see how the government/governance interplay is often painful and leads to disagreements.
In 2015, the global community reached the deadline for achieving our Millennium Development Goals. Despite remarkable progress, we are far from eradicating the ills of the world. New problems have also arisen. We have never been less certain about the future of globalization.
Even though our world has been radically transformed since 2000, we do not need to give up on improving our global community. Our perspectives may have shifted and reshifted, but that does not mean we have to abandon our ideas. When world leaders met in Rio de Janeiro in 2012 for the United Nations Conference on Sustainable Development, they set new common goals for 2030 to define the big picture of international cooperation. If nothing else, this has given us a compass, with one priority left unchanged: eradicating extreme poverty across our planet. Natural trends and evolution are not enough, but the means, and the willingness, are there. Like Kennedy choosing to go to the moon in 1960, I have a dream: that we choose to do the things necessary to eradicate extreme poverty, not because they are easy but because they are hard.
That said, we cannot ignore the world’s recent upheavals and emerging expectations. It seems inconceivable to begin again as we did in 2000 to plan for a worldwide commitment to support development. The UN knowledge group emphasized this point:
To fulfill our vision of promoting sustainable development, we must go beyond the MDGs. They did not focus enough on reaching the very poorest and most excluded people. They were silent on the devastating effects of conflict and violence on development. The importance to development of good governance and institutions that guarantee the rule of law, free speech and open and accountable government was not included, nor the need for inclusive growth to provide jobs. Most seriously, the MDGs fell short by not integrating the economic, social, and environmental aspects of sustainable development as envisaged in the Millennium Declaration, and by not addressing the need to promote sustainable patterns of consumption and production. The result was that environment and development were never properly brought together. People were working hard—but often separately—on interlinked problems.24
How can we get the world reengaged in a viable action plan? How can we provide the means to reach our goals, and how can we fund them in the first place when we still depend upon a system of international cooperation that so heavily draws on what we inherited from the 20th century, with all its obvious limitations and how close it came to collapse? And can we avoid having to completely reinvent the system? Can we transition seamlessly? Obviously, as we will see in more detail in Chapter 3, finance as it was organized not only did not save the world but contributed to almost bringing it down. Future development of finance will have to take into consideration the changes discussed in this chapter: the role of emerging powers, the digital changes, as well as the new needs and the new actors.
To avoid a repeat, we need to be able to look to the financial system. This will help us answer the question we face today, which echoes a line from William Butler Yeats’s “The Second Coming”: will the center hold? And beyond that: can the center reinvent itself?
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