Wolfowitz in the World Bank: Do not go native!
This is a rather personal blog. I am a World Bank alumnus. I worked there between 1975 and 1980, when Robert McNamara was President. After I left the ''Bank” (there was only one), I did occasional consultancy work not only on specific projects but also on broader policy issues. In 1982, I wrote an essay on the long McNamara reign and the challenges facing the two Bretton Woods institutions in the era of the crushing developing countries debt. All this to say that I have a long standing interest in Bank matters and held strong views on those.
Thus I believe that the World Bank has long lost its conceptual leadership and policy influence. Its words and deeds are increasingly irrelevant to the major challenges facing the developing world.
This may sound like an exaggeration. After all, Bank’s lending program is growing, as are its profits. Bank’s pronouncement receive large press coverage and its senior staff is treated with all due respect by media and the policy establishment. Yet, like in an old gold-mining town, this is little more than a make-believe façade, behind which the structure is slowly but surely crumbling.
Lest you think this is just a rant of a reactionary old-timer, consider the following. McNamara, widely seen as the best President in the history, defined in the late 1970s rehabilitation of Africa and poverty eradication as the two priorities of the Bank. A quarter of a century later, the outgoing President James Wolfensohn spelled out the two major global development issues: Africa and poverty elimination. Despite all the efforts of “the best and the brightest” among the Bank staff (and they are really smart and dedicated), innumerable reports, high-level meetings and impressive studies, on the ground, where it really counts, few concrete results can be claimed. Actually, not only Africa’s growth continues to lag but its human right record worsened considerably (Rwanda genocide is the worst since the World War II and Congo remains a mass slaughterhouse) and AIDS exploded from an epidemic into a pandemic, threatening the very social fabric of South Africa.
As for the conceptual leadership, it would seem that over the last few years James Wolfensohn did little more than to cling to the coattails of Bono and Bob Geldof. Their words are heartfelt and their involvement can only be praiseworthy. However, it is doubtful whether the development policy should be reduced to debt reduction and increase in official assistance.

It should be clear by now that the problem goes well beyond the shortsightedness of governments and the general egoism of the Western public opinion. It is the entire international development policy apparatus that is structurally deficient. The Bretton Woods set-up of international financial institutions, including the IMF, the World Bank and the regional development banks, has long outlived its usefulness. Paradoxically, this view is both widely shared and commonly ignored.
The great and the good generally recognize the magnitude of changes in the world economy. Trade, monetary and capital flows are now largely unimpeded and broadly integrated. Private direct investment and financial inflows dwarf public aid and official assistance. They reach practically every corner of the globe in all sectors and all business sizes. Information about and knowledge of opportunities and risks in the developing world is no longer confined to few official institutions and elite universities but it is widely distributed across financial sector, NGOs, specialized service providers, academia and, last but not the least, global and local medias. Yet somehow, our cognoscenti have curious blind spot when it comes to drawing specific conclusions about the international financial institutions. Some seven years ago, I asked Larry Summers, then a Treasury Secretary, during a small policy seminar, whether the time has not come for a root-branch re-appraisal of the IMF and the World Bank. He told me that this was not the time as the global financial system was in crisis and crisis management took precedence. Yet he knew as well as anybody that the inadequacy of the two institutions contributed to and most likely exacerbated the crisis. And since our “exchange”, things have not improved: financial crisis remain endemic and international financial institutions under sustained fire from ever increasing army of critics.

There is no convincing explanation for this blind spot. After all, international financial institutions are controlled by financial authorities, which have overseen not one but a whole series of fundamental reforms of financial services. Today’s commercial and investment banks as well as financial markets bear little resemblance to their forebears of fifty years ago. There is no logical reason why the development banks should have remained the same.

What is urgently needed is not just another reorganization, a traditional gambit of any new Bank President, but a fundamental re-appraisal of the international financial institutions set up: the questioning of their basic objectives, their positioning within the global financial system, their governance and their modus operandi. Here are some of the key questions that need to be addressed:
- Is the rationale for a separate existence of IMF and the World Bank? Why not merge the two organizations?
- What are the respective role and responsibilities of global and regional development institutions? What can be done to transform them into a coherent network?
- What can be done to make international institutions more cost-effective? This is not just a question of staff costs but also of the whole administrative oversight by present shareholders.
- What lessons can be learned from the tsunami solidarity movement? At the least, it demonstrated that public opinion can be rapidly and massively mobilized for a development cause.
- How to integrate the notion of political development into the strategies and operations of international financial institutions (EBRD experience could provide an useful guide in this area).

A frequently leveled accusation against Wolfowitz is that he is not a bona fide member of the development policy establishment. In light of the track record, both conceptual and operational, of the latter, this is not necessarily a liability. I would even venture to say that this is actually an asset. In the past, Wolfowitz has shown the willingness to challenge the conventional wisdom and question long-established and widely held views and approaches. Let’s hope that he will not succumb to temptation to “go native” and retain his ability as a change agent.

You don’t have to be Catholic to venerate John Paul II
The debate about the role of John Paul II in history is only starting and is likely to be very controversial. For many people, this is an abstract question. For me, it is very personal: I am a Jew of Polish origin. And I already reached a definitive conclusion: John Paul II is the defining personality of the twentieth century: by his actions, words and personality, he has changed its very essence and meaning. Three of his contributions stand out: the destruction of the totalitarian illusion; the reconciliation of Catholicism and Judaism; the redefinition of the contribution of the religion to social progress.
He contributed decisively to the demise of the communism, not only as political system but more importantly as a set of beliefs. He demolished the lethal illusion of communism being the irreversible force of history.
Neo-revisionists, such as Guy Verhofstadt, Belgium Prime Minster, have been trying to rewrite the history of the fall of the Soviet Union by attributing some magic dissolving properties to the Helsinki process, started in 1975. But for an objective and attentive observer, far enough from Poland not to be lost in details but close enough to be reasonably well-informed, the beginning of the tidal wave that uprooted the “democratic socialism” and rolled back what was broadly acknowledged by the ruling elites of the West between 1950s and 1980s to be the unmovable status quo of Soviet domination, was the first Pope’s visit to Poland in July 1979. A year later, in the summer 1980, and by no coincidence whatsoever, Solidarity movement launched the Gdansk strike. The liberation process was far from smooth, it was marked by the declaration of the State of War on December 13, 1981 but in the end, after less than ten years, for the first time in the history of communist regimes since 1917, a ruling Communist Party agreed to free elections and to a peaceful transfer of power to a non-communist opposition. This agreement, reached during the Roundtable negotiations in spring 1989 and followed by the appointed of a non-Communist Mazowiecki government in September, preceded by few months the fall of the Berlin Wall. It triggered the collapse of the entire Soviet empire by conclusively demonstrating the feasibility of a peaceful transition. The pope did more than inspire this process, he guided it and intervened at crucial junctures. His rallying cry “do not be afraid” inspired millions and exposed the moral bankruptcy of the communist rule.
Communist party and its security apparatus knew from the beginning what a mortal danger to them the Pope represented. The 1981 attempt to kill him was in all probability masterminded by the KGB. Nor it is an accident that the best known victim of the Polish State of War was a priest, Jerzy Popieluszko. The reconciliation of the Catholic Church and the Judaism may be a more discrete achievement of John Paul II but it is one that touched me most profoundly and directly. This Pope not only declared anti-Semitism alien to the Catholic spirit and the Church teaching, established diplomatic relations with Israel and engaged a sustained dialogue with Jewish clergy and intellectuals. He tirelessly worked to extirpate the anti-Semitic stance deeply engrained in Polish catholic clergy’s views and attitudes. His personal intervention in the dispute between Carmelite nuns and Jewish organizations about the location of their convent in Auschwitz is just one example of his close attention to this topic. Relationships between Poles and Jews are very rich, very old, very complex and very painful. John Paul II reminded us of the vitality of the tradition of openness and support which goes back to Kazimir the Great in XVth century and continues with Kosciusko, Mickewicz and, closer to us, with Pilsudski and Wladyslaw Bartoszewski (Zegota). Anti-Semitism is far from dead in Poland but it lost any pretense of theological justification and therefore it is at present devoid of all legitimacy.
For those of us, who were brought up in Poland after the World War and then hounded out as the Fifth Column in the 1960s, Karol Wojtyla gave us something more precious than a right of return: he restored our roots and a sense of a distinct but proud tradition.
The third contribution of John Paul is certainly the most controversial but also the longest-lasting: he forces us to fundamentally reconsider the role of the religion in our society. The perception prevailing for the most of the twentieth century was that of all religion as backward and peripheral. Religion was the “opium of the masses,” fodder for the poor and uneducated. As societies were getting richer and more enlightened, faith was becoming less relevant.
This pope made the relationship between science and religion the centerpiece of his philosophical inquiries (and he was a philosophy teacher long before he became Pope). He was also very attentive to the relationship between technology, mass media and religion.
But his papacy poses an even more daunting conceptual challenge. His action shows the power of religion as a force for social change, for democracy and freedom. In Poland, left-wing intellectuals such as Kuron and Michnik, brought up in a strongly atheist even anti-clerical tradition, radically revised their views in the late 1970s and decided to closely co-operate with the Church and the grass-root worker movement, inspired by the Church, in their efforts to peacefully change the system. This alliance was at the core of the Solidarity movement.
To make the conceptual challenge even more taxing, John Paul II combined his message of social change and democracy with a conservative posture on personal life – anti-abortion, anti-contraception, anti-moral relativism. Many people see this combination as a paradoxical even contradictory. Yet, for Pope, it was necessary: to effect a wide-ranging social change, one needs a strong anchor of personal morality.
John Paul II put the religion back at the center of the social and political debate. If one looks at current political events in the Middle-East (Iraq, Iran or Israel) or in the United States, they cannot be understood without due consideration to the religious ideas and institutions. It is only in the “old Europe” that our rulers continue to pretend that the religion is peripheral: there is no reference to religious tradition in the project of the European “Constitution,” This may be the reason why this project generates so much popular “enthusiasm.”

Is John Paul II irrelevant?
It may be my personal bias: I live in Europe and I am of Polish origin (although definitely not a Catholic as my name shows). Over here, John Paul, his life and his legacy, is REALLY big news. Yet, on my favorite blog, nothing… This reminds me of the derisive question by Joseph Stalin: “Pope? How many division he has?” We know the answer now: many, many more than the sinister “Oncle Joe”. It is the Polish pope, who decisively contributed to the fall of the Soviet Union and its empire.
Shall we then ask a question: “Pope? How many terabytes?” or “What is his Google ranking”? Interestingly, “Vatican” is No 10 on today’s Yahoo! Buzz Index. More seriously, how relevant is the Pope to our universe of modern technology, networked universe and entrepreneurship?
I think that he is highly relevant. For one thing, we may not have noticed him but he definitely noticed us. He actually wrote a message in 1999, entitled “Mass Media: Friendly Companion,” in which he said: “With the recent explosion of information technology, the possibility for communication between individuals and groups in every part of the world has never been greater. Yet, paradoxically, the very forces which can lead to better communication can also lead to increasing self-centeredness and alienation. We find ourselves therefore in a time of both threat and promise “.
He was not only an attentive observer of the new technology. He was also a very skilled practitioner. No, I did not receive any e-mail from him but as a matter of fact, he was sending a daily text—message prayer to the faithful on their cell phones. Vatican web site was set up in late 1995 and in 2004 was receiving over two million hits a day. And in terms of media image management and event staging, no rock star let alone a politician comes even close to the man from Krakow.
But beyond his attention and his use of modern technology, John Paul touches us a deeper and more lasting way. He challenges us to reconsider the role of religion in the modern society and economy. Last November, most of my American friends were mourning the result of US elections as the advent of new “Dark Ages” and decrying the pernicious influence of religion on the US politics. For them, as for many ‘enlightened’ Europeans, as people grow richer and more educated, they leave religion behind. And yet, as Central Europe vividly demonstrated, religion can be an incredibly powerful force for positive change. Closer to us, in Iraq, the ultimate hope for democracy lies with Sistani and his vision of Islam. As technology overwhelms us, we ask questions about the new ethics, new morals, new spirituality. Ultimately those are religious questions we cannot run away from.

European exchanges: fighting the last war
The battle for the control of the London Stock Exchange is far from over. Although Deutsche Börse has been rebuffed by the LSE and its own shareholders, as long as Mr Seifert is in charge, its comeback cannot be ruled out. For its part, Euronext and its canny CEO J-F Théodore, see LSE as the ultimate prize of its international strategy of exchanges federation. They actively are looking for a magic formula that would reconcile shareholder value, British sensitivity to the French and a workable governance structure. Even in the case, not unlikely, that LSE remains independent, one should expect a serious shake-out of both its management and its strategy: the gap between the LSE’s market potential, (in terms of trading and true liquidity, LSE is far ahead of its European counterparts) and its market value of the LSE is just too huge for shareholders not to explore more aggressive approaches to value building and materialisation.
Yet, as one looks at strategies of exchanges as well as comments of analysts and learned observers about the LSE battle, one cannot prevent a feeling of retroversion. The prevailing discourse is about exchanges consolidation and market concentration, thus implying a stable and mature realm, without any new entrants. The battle of European exchanger resembles World War I - well-defined battlefield, entrenched positions, predictable moves...
Yet, isn't it possible that the protagonists are missing a big part of the picture, that their analysis of the battlefield and its underlying dynamics is misguided? What if beneath the apparent stability, strong pressures for widespread change even upheaval were building up? What if consolidation of financial markets was accompanied by a countervailing force of fragmentation? What if the main battlefield was among exchanges but between exchanges, on the one hand, and their main customers and erstwhile shareholders - large financial institutions, on the other hand? It may well be that the World War II, a war of shifting battlefields, bold movements and brusque position reversals, is a more appropriate comparison.
This alternative view is not far-fetched at all. As a matter of fact, it is considerably closer to the reality than the conventional wisdom of static consolidation. If one looks at the recent evolution of the US financial markets, the two marking and interrelated trends are:
- Continuing erosion of the market share of the two main equity markets, NYSE and NASDAQ. The case of NASDAQ is well-known and quite striking. In 2003, less than 20% of NASDAQ-listed stocks were actually traded on NASDAQ. This is despite (or maybe because of) the introduction in 2002 of a system, SuperMontage, which was intended as a killer of NASDAQ competitors (electronic communication networks, ECNs). The loss of market share by NYSE has been considerably smaller, held back by regulatory obstacles and aggressive strategy of Richard Grasso, long-time leader of NYSE. However, in the last two years, NYSE competitors have increased their share of trading from some 20% to 25% and it is expected that this trend will continue and may even accelerate
- Striking success of new entrants: Archipelago in equities, ISE in options, ICE in commodities. Archipelago was launched in late 1996 as one of the first ECNs. In mid-2004, it merged with Pacific Stock Exchange. By late 2004, it attracted over a quarter of transactions in NASDAQ listed stocks and some 3% of NYSE stocks’ transactions. The success of International Securities Exchange (ISE) is even more spectacular. Launched in March 2000, ISE has become the largest options exchange, ahead of such well-established exchanges as CBOE or Amex. InterContinental Exchange (ICE) was also launched in March 2000 to trade derivatives in energy and other industrial commodities. In 2001, ICE acquired the International Petroleum Exchange in London. This enumeration is far from exhaustive: several other new markets were launched in equities and fixed-income.
To be sure, the launch of new markets is accompanied by waves of mergers and acquisitions. More broadly, the market for financial markets is very active:
- IPOs (ArcaEx, ISE and ICE (filed on March 22, 2005)
- Intense interest in MTS and Instinet
The combined effect of these trends is the profound evolution of market structure and architecture. Within the emerging structure, NYSE and NASDAQ will remain important poles but their relative position is likely to change significantly.
The new architecture of financial markets is characterised by a “networked fragmentation”, a simultaneous proliferation and integration of market venues. If this architecture resembles that of the Internet, of a “network of network,” this resemblance is not coincidental, it is driven by the same technological and economic logic.
It is difficult to believe that European financial markets will not follow the same logic. As important as the LSE battle is, we need to look for the signs of the emerging new structure and architecture. Entrepreneurs should actively explore opportunities for new market entry and policy makers ensure that their efforts are not hampered by overzealous regulators.