The Optimist

A Better Bank

Why President Obama's curious nomination for the new chief of the World Bank could turn out to be a smart pick -- and an interesting indication of how aid lending is changing for good.

Barack Obama's administration announced Jim Yong Kim, president of Dartmouth College, as its nominee for the next president of the World Bank on Friday, March 23. With that nomination, the White House has stuck to the archaic principle that the leadership of the World Bank should be reserved for a U.S. citizen -- Kim was born in South Korea, but he has been in the United States since he was five. On the plus side, however, the White House's selection suggests an interest in moving the World Bank further toward a new operating model, something that is sorely needed in a rapidly changing world.

If common sense prevailed, Kim's nomination would be judged equally against the candidate nominated by Nigeria and South Africa -- the corruption-fighting, fuel-subsidy-slashing Nigerian Finance Minister Ngozi Okonjo-Iweala. Beyond her experience in government, she previously held a No. 2 role at the World Bank as managing director, and before that, as a teenager during Nigeria's civil war, she carried her sister on her back for 6 miles to get her lifesaving treatment against malaria. But thanks to the traditional carve-up that gives the International Monetary Fund's leadership to Europe and the World Bank's to the United States (recently cemented by the appointment of Christine Lagarde as managing director of the IMF), Kim is almost certain to get the job in the end.

Still, Friday's announcement did at least (mostly) turn around a conventional wisdom in the United States that the White House was completely bungling the nomination process, stuck between candidates who didn't want the job and candidates likely to stir up controversy. Immediate plaudits were forthcoming even from a competitor for the post -- Jeffrey Sachs.

Perhaps most interesting is what the pick suggests about changing Washington perceptions regarding what the World Bank is actually for these days. Look at the list of former World Bank presidents: a couple of politicians, a CEO turned defense secretary, and the rest bankers. That reflects the traditional role of the World Bank -- borrowing money on international markets to finance investment projects.

Kim, by contrast, is a medical doctor and holds a Ph.D. in anthropology. With Paul Farmer, he founded Partners in Health -- an NGO committed to grassroots health care and the force behind advances in treating drug-resistant tuberculosis. Before running Dartmouth, he was director of the HIV/AIDS department at the World Health Organization. Doubtless Kim has walked down Wall Street, but he has never had a corner office in one of the buildings there. Instead, he has spent his life thinking about global challenges like AIDS and innovative responses like new TB treatment regimes. Given the changing nature of the world's development challenges, the White House is right that understanding innovation and issues like global disease is of far more use to a World Bank president than an intimate knowledge of the Eurobond market.

It used to be that the primary role for development organizations was seen as providing hard currency (dollars, pounds, euros) to support country investment programs central to economic growth. That's the model that World Bank assistance is based on, but beyond being distinctly out of favor with economists, it's a model that's growing irrelevant to an increasing number of the world's developing countries.

Consider this: The average aid-recipient country gets donor funding worth less than 1 percent of its income. Additionally, data from the World Development Indicators for 2008 suggest that only 31 percent of total aid flows went to countries where aid accounted for a third or more of investment (excluding Afghanistan, this number drops to 23 percent). This suggests that for most recipient countries, as well as most aid flows, aid accounts for a very small proportion of investment. In part that's because of the phenomenal economic performance of the developing world over the past decade. As a result, there are a declining number of low-income countries where aid is still a significant source of financing. The number of countries where average incomes are below $1,005 per person per year dropped from 63 to 35 over the last 10 years.

For those 35 low-income countries that remain, it is important to note that aid is still a major source of finance -- accounting for an average of about 10 percent of gross national income. And countries just above the low-income cutoff, where the average income per person is still below $3 a day -- about one-quarter of the poverty line in the United States -- are still very poor. So there is still a considerable general financing role for the World Bank to play, particularly through the International Development Association, the arm of the World Bank that gives very low-income loans to poorer countries.

But most of the developing world has different needs from those of that dwindling number of very poor countries. For the majority of recipients, the traditional model of development assistance and World Bank support makes increasingly little sense. Instead, what the World Bank can still offer to countries with international reserves that dwarf any potential lending flows is ideas -- new approaches to old problems and leverage to address global challenges like disease and climate change.

The institution's leadership has long recognized the need for a shift toward new approaches. James Wolfensohn called for the World Bank to evolve into a "knowledge bank" a decade and a half ago. While progress has been halting, the Bank does have increasingly interesting things to say about what works in development, for example, thanks to a stronger focus on evaluating projects and initiatives.

When it comes to cross-border challenges such as climate change, the World Bank Group as a whole financed over $3.5 billion in low-carbon energy projects in the 2010 fiscal year. At the nexus of innovation and support for global sustainability, the World Bank developed a prototype global fund designed to trade credits to emit carbon. It followed the model set in the United States where power plants trade permits that give the right to emit a certain quantity of sulfur dioxide -- though admittedly the experiment has stalled thanks to the failure of global climate talks.

Jim Yong Kim may not be the best nominee. There are questions about his experience outside the health sector. He co-authored a book that slams World Bank lending and reform programs as responsible for worsening health in developing countries. (That might lead to a few awkward moments when he meets staff at the institution.) There are concerns over the outcomes of some initiatives he championed at the World Health Organization. Finally, there is the righteous fury over a process skewed so completely toward the consideration of nationality over qualifications.

Nonetheless, Friday's nomination could still be a hopeful sign. It would be great news if the White House's choice of candidate signals that the World Bank Group will move further in the direction of innovating, discovering, and cataloging what works in development, as well as protecting the global commons from the climate to cod stocks -- alongside its more traditional role in financing investment in the world's poorest countries. All that, and Kim can sort of dance too.

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The Optimist

We're All the 1 Percent

The U.S. middle class is still incredibly wealthy by international standards.

After 30 years of greed being good and rising tides lifting all boats, inequality -- or "class warfare," if you prefer -- is back on the political agenda.

The Occupiers who camped out in central squares from Melbourne to Oakland, denouncing the "1 percent" for its supposedly ill-gotten gains, have a point: Inequality is out of control. But these mainly middle-class complainers are an incredibly coddled bunch by any international reckoning. This is good news, because we're going to need to tax them more if we're ever going to solve the world's real inequality problem: the estimated 900 million people who live on less than $1.25 a day.

First things first: America's rich are really, really rich. U.S. Census data suggest every man, woman, and child in the top 1 percent of U.S. households gets about $1,500 to live on each day, every day. By contrast, the average U.S. household is scraping by on around $55 per person per day. But the global average is about a fifth of that.

So by global standards, America's middle class is also really, really rich. To make it into the richest 1 percent globally, all you need is an income of around $34,000, according to World Bank economist Branko Milanovic. The average family in the United States has more than three times the income of those living in poverty in America, and nearly 50 times that of the world's poorest. Many of America's 99 percenters, and the West's, are really 1 percenters on a global level.

Nor did the Western 99 percent "earn" most of their wealth, any more than the top 1 percent "earned" theirs. It's the luck of where you're born, according to the late Nobel Prize-winning economist Herbert Simon, who estimated that the benefits of living in a well-functioning economy probably account for 90 percent of individual income. "On moral grounds," he wrote, "we could argue for a flat income tax of 90 percent to return that wealth to its real owners" -- i.e., everyone else in the country. That radical suggestion makes the Occupy Wall Street crowd look like a bunch of free-market libertarians.

Western middle classes actually get back a good deal more from government than they pay in. Political scientists Vincent Mahler, David Jesuit, and Piotr Paradowski examined the benefits -- from pensions to child welfare payments -- that taxpayers, rich and poor, in 12 European countries and the United States received. They found that the middle 60 percent of the population had a larger income share after taxes and transfers than before. Thanks to the good folks at the Internal Revenue Service, the broad slice of the U.S. middle class gets 3 percent more of the income pie after taxes and transfers. And that doesn't account for a range of state subsidies for public goods like colleges and universities that disproportionately benefit the middle classes.

Billionaire investor and philanthropist Warren Buffett thinks he has a plan to right the ship: tax people making $1 million a year at 30 percent and those making $10 million at 35 percent. But that's not going to cut it. A 30 percent income tax for 2008's top 1 percent would have raked in $281 billion for the U.S. government -- still not enough to plug the $400 billion-plus deficit that year. Plus, taxing the West's obscenely rich to help a Western middle class that is merely very rich doesn't seem like the highest of priorities, frankly. We need to deal with inequality all the way down to the bottom of the income pyramid, for everyone's sake.

IMF research suggests that countries with high levels of inequality are far more likely to fall into financial crisis and far less likely to sustain economic growth. But this is not just about taxing the richest 1 percent to help the middle 60. It's about taxing the middle 60 to help the bottom 20. And ensuring that rich and poor alike worldwide have access to basic health care and education, with their well-documented effects on income and productivity, will work to the benefit of the Western middle class. If Americans and Europeans want to export their way out of recession, they need rich consumers elsewhere.

So stop whining, Occupiers. It is high time for the richest 1 percent to help the rest catch up. But don't fool yourself -- if you live in the West, you probably are that 1 percent.

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