The List

5 Ways Jim Yong Kim Can Save the World Bank

If it really wants to reduce poverty, the bank will have to slaughter some of its sacred cows.

Jim Yong Kim, selected  as the World Bank's new leader on Monday, has his work cut out for him. Sure, the bank has helped halve the poverty in the developing world over the past two decades -- part of the first Millennium Development Goals -- but progress in South Asia has dwarfed that in Africa, and 1 billion people will still live below the poverty line by 2015. And there's more bad news for Kim: The World Bank's narrow economic approach to poverty eradication simply will not work today, because the root causes of certain types of poverty are as structural as they are economic. This means the global health expert and former Dartmouth College president will have to think about international development in innovative, outside-the-box ways.

Here are five ideas that Kim could implement to make the bank more effective in its mission to "help reduce poverty:"

1. Forget about growth

One of the World Bank's purposes is to "promote private foreign investment ... for the development of the productive resources of members," and its priority lending goes to "financial and private-sector development." Criticisms in the 1990s (from Kim, among others) of this growth-centered approach led the bank to shift its focus to "inclusive" growth -- growth that purported to take into account health, education, and environmental concerns. But if the bank is indeed interested in health, education, and the environment, it's far from clear why it's so intent on increasing productivity. In his inaugural address in 2007, outgoing World Bank President Robert Zoellick admitted that economic growth could only do so much to alleviate poverty:

Nearly 300 million people have escaped extreme poverty [as a result of economic growth].

Yet many remain on the fringes and some are falling further behind ... Their exclusion has many causes -- including conflicts, poor governance and corruption, discrimination, lack of basic human needs, disease, the absence of infrastructure, weak economic management and incentives, lack of property rights and rule of law, and even geography and weather.

Many of these causes have nothing to do with economic growth. If poverty reduction is truly the mission of the Bank, it needs to focus more on sectors such as education and health and reflect that reorientation in its investments.

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2.  Address poverty's root causes

Although economic growth (in terms of increased productivity or GDP) has reduced the headcount of those in poverty, it has done little for those who face social and cultural barriers to opportunity, such as religious discrimination and racial oppression. Social change, of course, is a topic approached with caution by the World Bank, given the wide variety of societies in which it operates.

One problem is that, in countries such as Ethiopia and Yemen, the bank works through central governments that often perpetuate and ultimately benefit from structural inequality. Yet reducing poverty for the most vulnerable and marginalized will be impossible without confronting topics such as gender parity in the Middle East, the caste system in India and Bangladesh, and the plight of those with physical and mental disabilities the world over.

To its credit, the bank is implementing policies aimed at "social development, gender, and inclusion." At the same time, to get an idea of the level of priority the bank gives such initiatives, we need look no further than its budgetary allotments: In 2011, its investment in financial and private sector development was nine times its investment in social inclusion, and in 2010 the ratio was more than 18:1. To improve life outcomes for the poor, it's high time the bank bring issues of oppression and structural racism out of the dark and into the limelight.

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3. Get rid of money

Cash-based economies harm the poor by heightening the risks they face when carrying money and fueling government corruption and inefficiency. So why not eliminate cash altogether? When governments electronically transfer money to beneficiaries of public benefit programs, it decreases administrative costs, diverts more of the money budgeted for the programs to the poor, and reduces the chance that recipients will be robbed. Depositing public benefits such as pensions into poor households' bank accounts, as is done in Peru, also enables them to reliably save money and better prepare for emergencies. What's more, in the context of international development assistance, electronically transferring funds directly to beneficiaries, as opposed to foreign governments or aid agencies, decreases corruption and thus has a greater impact on the people we aim to help.

USAID recently announced its intention to be a leader in this realm, but the World Bank has been slower to embrace the concept. Many of the bank's programs rely heavily on physical currency, such as its Primary Education Stipend Project in Bangladesh and its Child Support Program in Pakistan. Luckily, as a start, the bank recently conceded that "program operators, financial institutions, and IT innovators have developed a wide range of strategies to deliver transfers effectively ... [and] cut fraud and achieve wider coverage."

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4. Don't focus (only) on the poor

The World Bank was a pioneer and early supporter of cash-transfer programs for the poor. It currently supports more than three dozen countries with such programs, and is working to improve their efficacy and impact in contexts ranging from low- and middle-income countries to fragile and post-conflict states.

While these programs that target poor households have been widely hailed as key components of poverty reduction, in many contexts they often don't get widespread support precisely because they target a small portion of the population. As the bank has acknowledged, "both the public and politicians tend to support universal programs since they benefit the entire population." Though universal programs are more expensive than targeted ones, the former mobilize a broader base, which translates into larger budgets as successive administrations try to capitalize on the popularity of the programs. If the bank hopes to build support within a given country for public benefits, it should start with a program the general population is most likely to back.

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5. Institute a meritocracy, starting with yourself

Although Jim Yong Kim's selection as World Bank president was nominally contested, the opaque and essentially non-competitive process of appointing the U.S. nominee to the post is outdated and counterproductive. While the system may have been justified when Washington was the main supplier of the bank's capital, that time has passed.

An open election for the World Bank presidency would give the victor a clear mandate to implement his vision for how the bank ought to operate. For true development to be implemented and sustained, change must occur within each country and, ultimately, within the hearts and minds of its people. Without a say in who leads the institution, developing countries and their citizens are more likely to resist the type of radical change that is necessary to actually make eradicating poverty possible. One suggestion that Kim should consider is to implement voting structures in the World Bank that mirror those of regional development banks, in which the outcome of votes is determined by the majority if countries as opposed to simply the largest stakeholders.

When he was interviewed for the position, Kim told the World Bank executive board that he is someone "who asks hard questions about the status quo and is not afraid to challenge existing orthodoxies." As he takes over a loan portfolio of over $250 billion, he'll have to upset the status quo to fulfill the World Bank's goals. An institution predicated on economic growth does not easily shake its focus, an institution working with cash does not easily abandon it, and an institution that derives legitimacy from state power does not easily confront it. Kim is the first person of color and non-economist to head the 68-year-old institution. Let's hope that he's ready to break a few more molds.


The List

How to Seize an Oil Company

Argentina's fiery president, Cristina Fernández de Kirchner, summarily took control of the country's biggest oil company. Here's a five-step guide for would-be dictators and leftists.

The global energy industry is in an uproar today after Argentine President Cristina Fernández de Kirchner's announcement that her government plans to seize a majority stake in YPF, the country's largest oil company. The Spanish government has threatened retaliatory action -- Spanish energy giant Repsol is currently YPF's largest shareholder -- for what's being called the largest oil nationalization since the Russian government's takeover of Mikhail Khodorkovsky's Yukos in 2003. Repsol shares are down 7.2 percent today.

While the hostile state takeover of a $7.7 billion company is making waves, such nationalizations are hardly unprecedented, particularly in Latin America. Today, government-controlled oil companies, many of which acquired their holdings through takeovers like Argentina's, control 85 percent of the world's oil reserves and 55 percent of production. Here's a quick look at the anatomy of a government takeover:

Step 1: Choose your moment

Research has shown that oil nationalizations happen most typically while oil prices are high and political institutions are weak. Nationalizations in countries -- from Iraq to Libya -- relatively common during the 1970s, then nearly unheard of during the 1980s and 1990s. They then returned with a vengeance in the last decade, with major seizures in Bolivia, Ecuador, Venezuela, and Russia.

Oil has never just been a commodity; it's a strategic asset as well, and forced nationalizations are as old as the oil industry itself. In 1938, the Mexican government expropriated half a billion dollars worth of foreign oil assets after the companies failed to come to an agreement with labor unions over working conditions. The seizure set off a war of words with Standard Oil and many countries chose to boycott Mexican petroleum products, but the government stuck to its guns, creating what is now known as the state oil monopoly Pemex, the world's second-largest non-public company after Saudi Aramco, as of 2006.

Many recent post-Soviet and Latin American oil seizures have actually been "re-nationalizations," state takeovers of energy resources that had been privatized during the free-market reforms of the 1990s. This includes YPF, which was originally a state monopoly privatized in 1993.

Step 2: Build your case

It's usually wise to set up some kind of legal framework before you start seizing private property. In 2001, two years after he took power, Venezuelan President Hugo Chávez passed a new hydrocarbon law increasing the amount of royalties paid by foreign oil companies and increasing direct state control over the national oil company PdVSA, which had operated as relatively independent entity under previous administrations.

Over the next several years, Chavez built up his rhetorical case against the foreign oil companies until he finally began seizing their assets in 2007. As he put it at the time, "To God what is God's, and to Caesar what is Caesar's.... Today we also say: to the people what is the people's!"

Fernandez presented the YPF takeover in similar terms. "We are the only country in Latin America, and I would say in practically the entire world, that doesn't manage its own natural resources," she said.

Step 3: Make them an offer they can't refuse

Most oil company nationalizations aren't outright seizures -- governments at least go through the motions of compensating the former owners for their lost assets. Surprisingly, the United Nations has even weighed in on the reimbursement issue: A General Assembly Resolution passed in 1962 decrees that in cases of nationalization carried out "on grounds or reasons of public utility, security or the national interest ... the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law."

Of course, no one really listens to the United Nations and there's generally disagreement as to exactly how much the previous owner's stake is worth. Repsol estimates the value of what was its 57 percent share in YPF at around $18 billion. The Argentinean government is required by law to compensate them, but the exact amount will be determined by a government tribunal, which could take years to decide, and will likely be substantially less than the company feels it is owed.  

Beyond the legal ramifications of just booting out the old owners, it can sometimes be useful to allow them to continue to play some role in your country's oil industry -- after all, they probably know what they are doing. After Venezuela's state-owned PdVSA took over several multi-billion dollar projects in the oil-rich Orinoco belt in 2007, Chevron, BP, Total, and Statoil signed agreements that allowed them to continue operating in the region as minority stakeholders. Conocco Phillips and Exxon Mobil refused.

Oil productivity fell by nearly a quarter following Chávez's nationalization.

Step 4: Put the boot down

It's always preferable to handle these sorts of things with a boardroom handshake, but sometimes a firmer hand is needed. In 2009, Chávez mobilized troops to assist in the seizure of 60 oil service companies as part of his gradual takeover of the oil industry.

In 2006, Bolivian President Evo Morales ordered foreign oil companies -- including Repsol -- to renegotiate their contracts with the government within six months or leave the country. Just to make his point clear, he sent troops to occupy 56 oil and gas sites throughout the country.

Argentina has wasted no time. The government representative on YPF's board reportedly arrived at work early today with a list of Spanish executives who had been banned from the company's headquarters. 

Step 4a: The Putin method

Another, often cheaper, method of nationalization is to build a criminal case against the management team of an oil company and take it apart, bit by bit. In the case of the Kremlin's prosecution of former Yukos CEO Mikhail Khodorkovsky, this had the added benefit of removing a troublesome political rival.

Yukos had been the first fully privatized Russian oil company of the post-Soviet era. But following a number of disputes between Khodorkovsky and the Kremlin -- over state control of the pipeline industry, the planned sale of big shares to American oil companies, as well as his own political ambitions -- he was arrested and charged with tax evasion in 2003. Over the next two years, Yukos was ordered to pay billions of dollars in back taxes and forced into bankruptcy.

The last of its assets were seized in 2005 and eventually acquired indirectly by state energy monopoly Gazprom. 

Step 5: Don't get overthrown

Seizing international companies may score populist points with voters, but it can also make some powerful enemies in a hurry. Two years after Iran nationalized the Anglo-Iranian Oil Company, Prime Minister Mohammed Mossadegh was overthrown in a CIA-backed coup, returning the Shah Mohammed Reza Palavi to power. The Shah's government paid $70,000,000 in compensation to Anglo-Iranian in 1954.

Chávez survived a coup attempt just months after the passage of his controversial hydrocarbons law.

Fernández's nationalization of YPF seems like the latest in a series of provocative international gestures, including efforts to reassert control over the Falkland Islands. While she's clearly counting on the political benefits of these bold movements making up for the international backlash, she's entering very dangerous waters.