99945
Address to the National Press Club




by
James D. Wolfensohn
President
The World Bank Group
Washington, D.C., March 25, 1998

MR. HARBRECHT: James Wolfensohn is considered by many to be a renaissance
man. Throughout his career, Wolfensohn has been closely involved in a
wide range of cultural and volunteer activities, such as when he was
elected chair of New York's Carnegie Hall. In 1990 Mr. Wolfensohn became
chairman of the board of trustees of the John F. Kennedy Center for the
Performing Arts right here in Washington. A pilot in the Australian Air
Force, a former member of the Australian Olympic fencing team, an
accomplished cellist -- all describe our speaker today.

But that's not why he's here. Mr. Wolfensohn is President of the World
Bank, which lends money to developing nations around the world. And since
taking the helm of the Bank in June of 1995, he has embarked on a
daunting task: restructuring an enterprise that everyone in Washington,
it seems, loves to hate. Liberals assail the Bank for financing pro-
growth development that has raped the environment and driven peasants
from their homes. Conservatives gripe that this is a financial dinosaur
that underwrites inefficient state-run enterprises that would better
compete for funds in private capital markets.

Wolfensohn has set out to change all that. His goals? Revamp the most
criticized aspects of the Bank's operation, cut its size, improve its
focus and its impact on helping the world's poor and the global
environment.

He has recently visited Indonesia, South Korea, Malaysia, Philippines,
Singapore, and Thailand, so he can give us a front-line perspective on
the Asian financial crisis. He certainly knows of what he speaks;
Wolfensohn was an international investment banker on Wall Street for many
years. In 1981 he founded his own firm, James Wolfensohn, Inc., to advise
major U.S. and international corporations. He's held senior positions
with Salomon Brothers in New York. He was also executive deputy chair and
managing director of Schroders Limited in London and managing director of
Darling and Company of Australia.

Born in Australia, Mr. Wolfensohn is a naturalized U.S. citizen. He holds
a B.A. and law degrees from the University of Sydney and an MBA from the
Harvard Graduate School of Business. He and his wife, Elaine -- to my
left -- an education specialist and a graduate of Wellesley and Columbia
University, have three children.

Our guest today has another distinction. The Costa Rica Biodiversity
Institute recently named a beetle after him -- which is now called
Metamasius wolfensohni. This is a tribute for lending for environmental
issues in Costa Rica. The question, Mr. Wolfensohn, is, will this beetle
ever fly to Washington through NAFTA?

Ladies and gentlemen, please join me in a warm National Press Club
welcome to Mr. James Wolfensohn, President of the World Bank Group, for
his first appearance today.

MR. WOLFENSOHN: Thank you very much, Mr. Chairman. And I'd like to tell
you it's a really wonderful beetle. It's highly intelligent, sensitive,
good to its mother, and I have no doubt that it will one day be President
of the World Bank.

We're all very happy, all my colleagues and I from the World Bank, to
have a chance to be here today, particularly given your introduction and
characterization of the institution.

The institution is not everything you have just heard. I'm happy to say
that in our history of 53 years, the Bank has, in fact, been a pivotal
factor in development around the world. It's been going for 53 years, and
our activities have really, I think, made a significant difference to the
development of those parts of the world where we find poverty.

The interest that you are all show in Asia is quite obvious. We at the
Bank have shared that interest for many years. And as I was preparing my
remarks, I was thinking about what I would have said if I had been
speaking to you a year ago. I remind you that the crisis in Asia really
started in July of last year, with the emergence of the Thailand crisis.
And a year ago, I would have told you, as I indeed tell you today, that
the history of Asian economic and social development has been one of
enormous achievement.

I remind you that the area includes 1.7 billion people out of a world
population of 5.6; nearly a third of the world. A billion two hundred of
them are in China. Two hundred million of them are in Indonesia, and the
remainder in the other countries in Asia.

And what a history there has been in the last 30 years. If we start with
poverty, which is the issue with which we at the Bank are most
particularly concerned, given that our objective is to alleviate poverty
within an environment that's sustainable and healthy for all the world,
we've had an experience since 1975 of reducing the people in poverty from
700 million to 340 million. That's no small achievement. Reducing poverty
from 60 percent of the population in the region to roughly 20 percent.
That is truly a remarkable achievement.

We also know that generally in the area, for 30 years, they've had 5
percent GDP growth, in real terms. That also is a remarkable achievement.
And as you look at population growth, it's at 1.3 percent -- much, much
less than many of the other developing countries around the world. So,
the growth has been real.

Life expectancy has gone up 10 years in the area. Infant mortality is
down significantly. And when you look at education, on which so much of
this has been based, you find, for primary school education, 99 percent,
100 percent, 100 percent, 99 percent enrollments; the least being
Thailand at 88 percent. These are numbers that, in any developing country
around the world, would be both startling and highly effective. And
secondary school enrollment has gone up, and there is a very, very strong
mood in terms of education at the tertiary level and at the technical
level.

In terms of fiscal management, the area has been quite remarkable. This
is not a crisis that you could have predicted in terms of government
financing. Government financing has been very good. They've had fiscal
surpluses, something that's not been too common in our own country, but
they've had 1.3 or 1.6 percent. A savings rate of 30 percent -- about
double what we have in our country.

So, if I had been speaking a year ago, I would have been speaking, as I
speak now, of 30 years of remarkable economic achievements in a country
that is a third of the world and of remarkable social achievements. If
I'd been speaking of Indonesia, I would have told you that poverty had
reduced from 60 percent to 11 percent in that period of time. And there
are equivalent numbers in other parts of Asia.

So, what changed? Why is it we are now talking of a crisis? Why is it
that we're talking of myths? Why is it we're saying, "Finally that
balloon is pricked, the air is coming out?" What has happened to Asia?

Well, what has happened to Asia is that we have an immediate crisis which
has been caused not by government policy, but by the private sector
excesses; not by government action, but to a degree by government
inaction in terms of supervising and controlling the financial and
corporate sectors. This is what has happened, and let me tell you how it
developed. I can't cover the whole of the area, but let me give you some
high spots.

Thailand in July of last year was experiencing a reduction in its
exports. It was finding as in other parts of Asia that it was becoming
less competitive. The dollar, to which they had tied the currency, had
appreciated. It was becoming stronger. Labor rates were going up. And so
you had a situation in Thailand which was marked, as in many other
countries in the region, by less competitiveness, higher rates in terms
of the dollar, and a fixed currency, because people were trying to keep
the currency parity the same with the dollar.

And what happened in that environment? In that environment, people, banks
and private sector went out to try and see how they could finance the
growth, because everybody thought growth would continue forever. After
all, it was a miracle. It was something that everybody was talking about.
If you went to the area you knew that the skyscrapers would continue to
go up and growth would continue.

But what happened was that companies and banks borrowed. And they
borrowed extremely heavily, so heavily that in Thailand the foreign
liabilities increased in the banking system from 3 percent in 1990 to 20
percent in 1997. That means that that economy and the other economies
were going out into the international markets and borrowing money at
lower rates, and they were borrowing them in dollars. And they were
coming back and they were putting it out not in long-term, income-
producing activities that would generate dollars, but frequently into
real estate and into non-productive areas. That would be the same as if
you were to finance your house on the basis of short-term borrowings from
the bank or if you were to finance your investments on the basis of
short-term borrowings from the bank. But even worse, if you were doing it
in the United States, you would be borrowing in dollars and investing in
dollars. But what was happening in East Asia is that they were borrowing
in dollars and investing in their local currency.

And so they started to get hit. And there was a deterioration of the
macroeconomic situation. And what happened? The foreigners started to
lose confidence. They said, "Give me back my short-term money." And the
locals then had to rush to try and convert their money into dollar
currency, and they discovered that there were not enough reserves and
they started bidding up the prices.

And the sort of things that happened were that throughout the region, the
value of the local currency was not kept solid with the dollar, but
depreciated 80 percent -- 80 percent -- throughout the five major
countries affected in the region. In the case of Indonesia, just to give
you one example, people had been used to getting 2,500 rupiah to the
dollar and buying a dollar for 2,500 rupiah. Now they found, all of a
sudden, that they had to repay at 10,000 rupiah to the dollar. It means
it cost them, in local currency, four times as much as it cost them
previously just a few months before. That is a real crisis, and that is a
crisis that was brought about by an outflow of funds, by a lack of
confidence, and by an immediate rush to the door to try and get the money
out.

So it's been a financial crisis. It's been a crisis that has affected the
banks and has affected the private sector. And in the case of Korea and
Thailand, most of the money went through the banks, though not all. And
in the case of Indonesia, there is an enormous amount of short-term debt
-- 60-plus billion dollars -- that is lent directly to companies.

And as a result of these developments everybody is saying what's happened
to the Asian system? And what happened to the Asian system was that it
got out of control; it got out of control for several reasons. The first
reason was that there was very little control on the part of bank
regulators. In this country, as you know, we have a Federal Reserve
System and Comptroller of Currency who monitor what is going on in the
banks. And we're accustomed, as bankers and financial institutions, to
report what is going on. And the regulators are accustomed to saying, "We
want to cut down lending in real estate, or we think this should be cut a
little bit." When I was running a bank in England, you'd get invited
around to the Bank of England for a cup of tea and the governor would
say, "I think you might go a little bit lighter on this." -- he wouldn't
just be seeing me, he'd be seeing a group of bankers -- and you took that
as an order, so you did it.
That is not the tradition in Asia. In fact, the tradition was that there
was very little supervision. There was nominal supervision, but in-depth
supervision there wasn't. And in the case of corporations, there is very
little tradition of disclosing the full facts. There are not the same
accounting principles that there are in our country. There is not the
same SEC. There are not regulatory procedures to make sure that the facts
are out there.

And so, when the crisis hit, we all discovered that the supervisory
mechanism was not functioning effectively and that in terms of companies,
they were not reporting; in fact, quite the contrary. The whole history
in Asia has been a history, first, of family corporations and then of
networks of companies and banks, which are very closely interlinked. And
you used name, and you loaned on the basis of name. You loaned on the
basis that you knew they were okay. They were strong. They were reliable.
They were members of the inner group. And that was the basis on which
trust and familial loyalty was created in Asia. But then they became --
having been relatively conservative in the Asian context -- they become
part of the global market. Where the needs and the demands are different.

And I might remind you that no one forced the foreign banks to lend. The
foreign banks themselves, banks which are regulated, made the independent
decisions to lend $60 billion, $70 billion, $80 billion to Indonesian
companies without adequate reports. Banks in Thailand and Korea were able
to borrow on the basis of their balance sheets but without adequate
attention being given by the foreign banks that were lending to them.

So it is not a one-way problem; this is a two-way error. It's an error,
if you like, in terms of an expansion without adequate supervision and
control, and it's an error by creditors because they loaned without
adequate understanding of that to which they were lending. That is the
crisis.

Now what's happened as a result of this crisis? The crisis is not now
just limited to banks and finance companies. The impact of the crisis
with which we are most deeply concerned in the institution, is the social
impact, because very many of the people who have come out of poverty --
we use a dollar a day as the poverty level -- are just above the poverty
level; $2, $3 a day in terms of income. And many parts of Asia have also
been hit by drought.

So the impact of the economic adjustment is not just a numbers game. The
real impact of this crisis is on the people; on the 70% or so of people
who live in rural areas, on the people in the cities who have lost jobs.

And we are trying to focus on two things:

The first is a reformation of the financial system, in terms of trying to
get regulation and control, that is now being demanded by the Asian
authorities themselves. This is not an imposition; this is a recognition
by Asian leaders that it's necessary for them, in their self-interest, to
have greater supervision, greater transparency. And they're all demanding
it now. And we're in the process of trying to do that. And we're seeking
to assist them. And we at the bank have built up a capacity, far beyond
what we've ever had before, to work on just that area.

And we're reforming the legal systems. If you don't have a bankruptcy
law, how do you reorganize companies? And so we're drafting bankruptcy
laws. And if you have a legal system that takes three or four years to
get a case completed, no one has any belief in the legal system. So we're
working on legal systems. We're working on commercial codes. These are
all things that are now being done to stabilize the situation.

But it is a major sociological change, because you are having people who
for generations have not disclosed, have not told you willingly how much
money they have or how much they owed, all of a sudden saying, "We want
now to meet international standards." So we are working on those areas.

But the second area, which is often missed, is the impact on the people.
If you have 11 percent of people in Indonesia who are under the poverty
line and that may go to 20, that's another 18 million people who are
going to be in poverty within a very short time. Or if you have 40
million people just hanging precariously above the poverty line. To you
and me and to the bankers, if your income comes down 10 percent or 20
percent or drops a dollar or so, you can absorb it. But if you're living
on the margin, it really pushes you back into poverty. And the people
that we are dealing with are the people on the margins.

And these are the people who have a significant need for social
underpinning. But social underpinnings have not been part of the growth
patterns of Asia. The growth pattern of Asia has been built on family.
It's the family that looks after you if you get into trouble.

And so all of a sudden at the social level we're finding enormous
impacts. Workers who have been working overseas, a million of Indonesians
or more in Malaysia who have lost their jobs and are now finding that
they don't want to do the jobs that are being offered to them, so they
have to return. People in the cities are going to the country. And what
we're finding with our social assessments is that village life is being
disrupted because people are coming back to the villages, because that's
where their social underpinning is, but once they get there they have no
job. Crime is increasing. Child prostitution is increasing. Violence is
increasing. The threat to the social structure in Asia, in many of these
countries, is enormous, and something has to be done.

And so we're working with the governments not just on the financial issue
and on the governance questions, but most specifically on the issues of
poverty, on the issues of people, on the issues which don't get many
headlines.

They're the issues of how you create jobs, how you keep food on the
table, how you keep distribution going, how you keep kids at school, how
you keep medical supplies adequate. These are the sorts of things that
make the difference between a country that will be able to work its way
through a crisis or a country that will go to anarchy and to the streets.
These are the crucial issues for the World Bank. And we're forging
partnerships with the governments to try and ensure that that work is
continuing. If we can get that done, and if the financial restructuring
can be achieved, along with the admirable work of the Fund in terms of
putting together an emergency package which can seek to restore
confidence, then, maybe three years' time, I can come and talk to you
about a new miracle in Asia. If it is a new miracle, it's likely to be a
miracle that has a sounder base, a sounder base in the sense that it'll
be more open, it'll be more transparent, and it'll be more governed in
terms of international standards of finance.

To get there we have to be certain that we can achieve a stable social
base. And, indeed, the current issues in Indonesia, where we're seeing
some outbursts in the 6,000 inhabited islands -- and imagine what it's
like to run a country that is spread in 6,000 islands -- what we have to
be certain of is that you can get the distribution, you can get the
security of food, you can get the security of medical supplies so that
people can have hope and can get through this period.

That is a quick overview of Asia. It's difficult to encompass it in 20
minutes. But I want you to go away knowing that this area of the world, a
third of the people on our planet, has had a kick. Its progress has been
arrested for the moment. It's a crisis that we understand. The remedial
measures are possible. The reconstruction of the financial system is
underway. A crucial question is to ensure that you have adequate
stability in terms of the social arena. And if you have that, I have no
doubt there will be a resumption of growth.

I should say just one thing parenthetically before I stop, and that is
China.

China, with the largest population by far -- a billion two hundred
million people -- has gone through this with its stock market down last
night, as against last July, by only 4 percent, and with its currency the
same as it was last July. China has managed to get through this period
with a relatively small impact on its exports and with itself intact.
It's our belief that China will be able to get through. And at the last
Party Congress, Zhu Rongji, in fact, called for a reduction of the number
of people in government, for a reaffirmation of efficient industry, and
for raising $32 billion to strengthen the banks.

I raise China because you cannot finish a discussion of Asia just
thinking of Korea, Thailand and Indonesia; China is fundamental. Our view
is that China will make it. It has good leadership.

And if you put all that together, I hope that three years from now,
you'll be able to call me back and talk not about a renewed miracle,
because I don't think it's a miracle, but the impact of hard work, good
management, intelligent people, educated people with infrastructure,
because that's what you have in Asia.

I wouldn't give up on Asia. I think you should be watching with interest
how it goes and, frankly, you should be watching with hope because an
active Asia means an active United States in terms of exports and in
terms of stability in our globe, and that is what the World Bank is
doing.

That is a slightly better description than the one you gave of the World
Bank at the introduction, and I hope you're all now absolutely convinced
that you can't live without the World Bank. (Laughter.) Thank you very
much.

MR. HARBRECHT: Okay, for our first question today: Will Asia's financial
crisis lead to an outright global economic recession, in your view? If
so, how bad? If not, why not?

MR. WOLFENSOHN: The answer is no, I don't think it will. Our estimates
are that the developing world GDP will perhaps drop by 1 or 2 percent.
The interlinkage between East Asia and other parts of the world can be
affected by a reduction of funds. Perhaps Russia and Brazil are at the
moment facing it the most because they've had to push their interest
rates up to over 20 percent in order to retain funds. That slows things
down. Europe, I think, will be affected to a modest degree by its
exposure in banking.

But I think in terms of trade, our estimates, which we've just published,
do not lead us to think that it's more than a small adjustment.

And -- I guess I'm being quoted here, but -- (laughter) -- my guess is
that, to go out on a limb now I'm out this far, is that this will not
lead to an international crisis. It is a crisis, we can get through it,
but I hope very much that it can be contained.

MR. HARBRECHT: How long will the crisis last, in your view? (Laughter.)

MR. WOLFENSOHN: I thought the Press Club would really be asking these
sorts of general questions. (Laughter.) It's not a momentary crisis. It's
not going to be solved tomorrow. But I think you can measure getting
through it in a short number of years on the fundamentals, but I think
you'll find before that that confidence will return much earlier. It's
very likely that Korea will enter the public markets within a very short
space of time, something that three months ago looked totally impossible.
And so I think you'll see a restoration of confidence. You'll find people
coming in to make investments very much more quickly, but I do think it
will take a little time to get through the overhanging short-term debt
and the reconstruction of companies, which is really significant in the
case of Korea, Thailand and Indonesia.

The one hopeful thing is that I think we have good governments in
Thailand and Korea which we now have gotten to know. There is a new
government in Indonesia which we still have to get to know. I do know
that the Fund is there now negotiating. It would be my hope that there
will be an agreement before too long, and then on the basis of that, I
believe we can move forward again in Indonesia.

So I think the substantive problems of restructuring the banks and
corporations is a matter of a short number of years, but the restoration
of confidence is likely to be much quicker.
MR. HARBRECHT: The Bank seems to be lending an awful lot of money to
Korea and Indonesia, and the loans are hardly traditional Bank
development loans. Are you worried that the Bank is being used to sort of
piggy-bank to back up the International Monetary Fund in this crisis?

MR. WOLFENSOHN: No, I'm not. (Laughter.) I guess if I thought we were
doing that, my colleagues wouldn't let me come into the Bank. We are, in
fact, lending to Indonesia and Thailand on the basis of an expansion of
our ongoing activities. Some of the loans are to help them with
liquidity, but the basic thrust of what we're doing is still
developmental, either in terms of the financial systems or in terms of
the social sector.

In the case of Korea, Korea had graduated as a borrower from the Bank in
1994. It had got to a $10,000 per year per capita income and had become
the 11th largest economy in the world. But with the reduction of its
exchange rate and taking advantage of an agreement which we had with them
that they could come back to us if they wanted to, it was pretty clear at
that stage that Korea was in trouble. And so a $55 billion package was
put together. We came in for $10 billion over two years, $5 billion of
which we will probably get done this year.

The work that we're doing with that $5 billion relates, again,
principally to employment, social systems and the restructuring of the
financial system. And the reason we did it was that we thought if Korea
went, if there was not help for Korea, that would really depress the
entire area.

But let me add that we came into to this crisis not just because we love
Korea and we love the Koreans, but we also did it because we thought that
if there was a disaster in Korea, then the whole area would be really
adversely affected, and that's why we felt we should step in.

We are not a firefighter in the sense that the Monetary Fund is. It is
the Fund's job to provide short-term liquidity. It's our job to deal with
longer-term reconstruction and development, and we think we've reached
the balance pretty well.

MR. HARBRECHT: How can the Bank act so quickly in these instances when
normal Bank loans take years to reach approval stage? How is it that the
World Bank has so much cash on hand?

MR. WOLFENSOHN: Well, I go in and count it every day. And when I reached
14 billion, I thought we'd better give some out. (Laughter.)

That, in fact, is not the case. We have raised $14 billion in the last 10
weeks, because the Bank is a AAA borrower in the market. As you know, we
are owned by 180 countries, we are a very solid institution. And our
access to the market is not to go to Congress to give us money, or go to
the governments of any other country; our access is in the public
markets. We put out bonds -- we've just done the largest bond issue in
history -- a $4 billion issue in the last days, so we have plenty of
access to the market.
The question for us is not access. The question is what should the proper
balance be, like anybody should have in their investment portfolio. So we
made a decision that we could do it, and that we could do it well within
traditional bounds. How we did it so quickly is that I have a lot of very
efficient colleagues, contrary to what was said earlier. (Laughter.)

MR. HARBRECHT: Mr. Wolfensohn, you have won plaudits for taking up at the
World Bank the issue of corruption around the world and fighting
corruption. How has your approach changed towards Indonesia since you
introduced this anti-corruption policy at the World Bank? Indonesia, of
course, is known world-wide for a corruption problem.

MR. WOLFENSOHN: Well, the second speech I made on corruption was in
Indonesia, and that was 18 months ago. So, my approach on corruption has
not changed. We have a very clear point of view on the issue of
corruption. We think it is the most corrosive factor that there is in
terms of international investing, or domestic investing. That's very
straightforward, it's very simple.

And we've got a lot of evidence to demonstrate that. Wherever you have
corruption, you have a misallocation of resources. And so we came in, and
we said -- contrary to 50 years of avoiding talking about the subject
because it was conceived as a political issue, and as you know we are not
allowed to talk about political issues-- we said: "It's not a political
issue. It's the largest economic and social issue which exists."

So both Camdessus and I brought this out in our annual-meeting speeches a
couple of years ago. The amazing thing about it is that, having then
mentioned it for the first time, 12 months later at the Annual Meetings
of the Bank, it was the central item on the agenda for the ministers to
discuss, including the finance minister of Indonesia.

Now how you deal with it in each country differs. And when I was in
Indonesia, I got severely criticized by NGOs and by some critics of the
government: "Why doesn't the Bank just stop lending to Indonesia? You
know that things aren't as straight as they ought to be, or at least
you've heard that. If you're so keen on corruption, why don't you just
stop?"

We didn't stop because we have been working mainly on social programs.
But what we also didn't stop was trying to talk to the government about
reform of the regulatory system and constant pressure to ensure that
every international contract, and particularly contracts done by the
World Bank, were clean as a whistle. We were anxious to ensure that if
there was any element of corruption in anything we did, we'd just cancel
it, we'd close the project, we'd blacklist the people. And we increased
the system of auditing.

I think that we have had, already, a significant impact in Indonesia. And
the interesting thing is that the last time I was there, contrary to the
time I was there 12, 15 months ago, I met with civil society, talking
about the corruption issue publicly, in front of the press, television
cameras. That is a huge change in 15 months.
And the one thing that I have learned is that it is not for the World
Bank to change the behavior of a country. I am not an elected
representative. I am not the government of any country. But what we can
do at the Bank is to give a lead. And that unlocks, in a significant way,
the emotions of the people. I am not saying it is the only thing, but it
becomes a symbolic act and means we are a very real partner for the
critics to have. And what I think you can see, now emerging from your
press, is that there is now a reaction in Indonesia to this. It is a
public subject for discussion, and I think the Indonesians will fix
corruption in the way that some other countries have fixed it. It is not
for the Bank to do, but I think we have been about as forceful as anybody
could be, and it was not easy to talk about it the first time that I did
in Indonesia. It was a little easier this time. But it's for the
Indonesians to fix, not for us.

MR. HARBRECHT: How dangerous would it be for Indonesia to establish a
currency board in the near future? Is this still a possibility?

MR. WOLFENSOHN: I don't think it is a possibility. The government
announced that they've dropped the plan. And it's not because of, I
think, international pressure, although I think there was a great deal of
it. (Laughter.) I think there was an overload of the long-distance from
heads of state calling just to give a little friendly advice. You
couldn't get a seat to go down there for the number of advisers that were
going down.

I think in the end they realized that as a technique you need to have an
adequate supply of dollars to match your currency. And I think in the end
it was perceived that the actual technique didn't fit the current
situation in Indonesia, that it would push interest rates through the
roof because of inadequate credit that would then be available. And I
think it is because of their own analysis that they've dropped it, not
because of a response to international pressure. And I think in the end
wiser heads prevailed. And my understanding of the last position was that
they've dropped the idea.

MR. HARBRECHT: Former Australian Prime Minister Paul Keating said in a
speech last night that the market reaction to the Indonesian economy had
been overdone because President Suharto had been demonized. Do you agree
with that?

MR. WOLFENSOHN: I don't know whether President Suharto has been demonized
or not. I think actually in financial markets people are fairly cold-
blooded. (Laughter.) I don't think that they're making the decisions on
Indonesia because of the demonization personally of President Suharto. I
think what they're looking at first are the facts.

The facts are that between $60-$80 billion of short-term borrowings are
coming due -- have come due. And there has been this holiday period to
try and bring about an understanding between the Indonesian companies and
the bankers that loaned to them to try and spread it out in terms of
repayment. What has happened in the last few days is that the rupiah has
strengthened from 10,000 to today 8,300. So there's some evidence that
there is some restoration of confidence.

But the thing that   you all have to watch is what happens in the next
couple of weeks in   terms of reaching an agreement on short-term debt.
It's as if you are   getting called on a bank loan. You go bankrupt if you
can't work out how   to pay them back more slowly.

And if you multiply that by 60 billion, that's what you have in
Indonesia. And so that is going on now. That is the reason for the lack
of confidence, not a demonization of the president.

But there was something to do with the president that I think maybe was a
big contributing factor, and I've said this to Keating myself. That is
that the policy was not clear. There was a negotiation with the Fund. It
looked as though it was going fine. Then there was a change of
government. The president put into the government some very good people,
also some very good friends, also his daughter. These are signs to the
international economy. If we knew what Suharto was going to do, it might
be fine, but the signals have not been clear.

I think what is happening now is that the Fund is taking the lead in
trying to get the signals clear, and I hope that that will happen very
shortly. It's certainly necessary. But I would say that it's not the
demonization of Suharto; it is a lack of clarity in policies and the
facts of the current situation.

There's one other thing which the Australian government is very concerned
about, and that is the possible shortage of food and medical supplies.
That would be the thing that would worry me the most -- that if you don't
have adequate food and medical supplies, you'll have civil unrest.
Indonesia does not have the most glorious history in terms of its last
problems with civil unrest, where there was conflict between the native
Indonesians and the 4 percent of Chinese that represent a very large
economic factor in the economy. As you know, a very large number of
people were killed last time. I think it is the concern about civil
unrest that is making people worry at the moment, rather than a
demonization of Suharto.

MR. HARBRECHT: Mr. Wolfensohn, in the United States many analysts say
that the Asian financial turmoil has proved to be the fault of the
Japanese economic model, such as the lack of transparency, cronyism, and
so on. Do you agree with this view?

MR. WOLFENSOHN: Well, I think as you analyze Japan -- and I've done this
with some of my Japanese friends -- you would, I think agree that there
are some common themes in terms of Japan's economic crisis and the crisis
in the region: over-extension of credit on the part of the banks, a real
estate boom with over-extension of credit on the part of the banks who
were themselves monitored, lending to industrial groups on the basis of
name rather than on the basis of substance.

I think the Japanese at this moment are pausing to think about the issue
of transparency, the issue of regulation, the issue of direction of
credit, misallocation of credit; and they're the things that I talked
about earlier. So there is some parallel between Japan and the other
areas.

I would doubt that there was a direct link in many of the countries with
the Japanese model. I think they developed generally as national models.
Korea does not naturally follow Japan. Thailand does not naturally follow
Japan. But they follow their own themes, and themes throughout the region
have been built on family, groups, trust, centralized control, linkage
between private sector and government, lack of clear lines, always, in
terms of influence. They have developed in a parallel way. I doubt very
much that any of the authorities in the countries I've mentioned went to
Japan to copy it. There are similarities, but I don't think it's because
of seeking to follow the Japanese model.

MR. HARBRECHT: In the '60s and '70s, the World Bank provided enormous
financial assistance to military governments in South America, and
projects were funded of questionable need. Does the World Bank base any
of its financial assistance today on a nation's human rights record? And
how does the World Bank respond to countries that violate human rights of
its religious or ethnic minorities, such as China, which persecutes
Christians, for example?

MR. WOLFENSOHN: I don't know whether that's a question or a statement,
but let me try and deal with it in its segments. Yes, we do take great
account of military expenditures, and we don't lend for military
expenditures. And where a country is investing too much of its GNP in
military expenditures, we don't make a political statement about it,
because we're not allowed to, but we do take a look at the national
income and the budgetary statistics and say, "Don't you think you're
putting too much money into that sector rather than into some other
sectors?" And so we're able to have an economic debate on it. Our
position on it is very well-known, and it is for us a very essential
element in good governance.

Secondly, on human rights and on religious belief. You may be interested
to know that I have in the last year been three times to the Vatican, and
a month ago, with the Archbishop of Canterbury, we convened a meeting in
London of 12 religious leaders -- Muslims, Buddhists, Sikhs, Jews,
Catholics, Jains, Taoists. Why you might ask. Because we believe at the
Bank that there is a very strong linkage between human values, culture,
human rights and development. I personally don't think that you can have
development without strong elements of cultural integrity, historic
integrity, and values. In fact, if you don't have community of values,
pumping money into a country makes it just go down the tubes.

So contrary to the belief of many, it is, in fact, a central item on our
agenda. I spent two days talking about this. And just this week we've had
a follow-up with working parties. So we are taking up front a very strong
view that culture, values and human rights are crucial.

The one thing that we are not allowed to do, since we're owned by the
countries that we're trying to address, is to enter into their political
scene. I cannot go out and demonstrate on human rights in a country. I'm
not allowed to do it. But I can talk about human rights, I can talk about
culture, I can talk about freedom, economic opportunity, social
opportunity, educational opportunity. And so what I can do is to address
the issues from the side.

I'm very proud of the record we have, but we are not, unfortunately, a
non-governmental organization that can go out and speak. We have to in
our actions be as supportive as we can. And I can assure you, Mr.
Chairman, that we know as much about human rights and values as anybody
else. There are 10,000 committed individuals in the institution. I don't
think you'll find our moral standards any less good than any of our
critics.

MR. HARBRECHT: Congress is considering the U.S. commitment to the
International Monetary Fund right now. The U.S. public is skeptical, or
at least many law makers are skeptical. Can you provide a one-sentence
response to this question -- (laughter) -- why is it in the U.S.'s own
interest to renew its commitment to the IMF?

MR. WOLFENSOHN: Well, the U.S. is the biggest power on earth,
economically and politically. And if you have disruptions in the
international financial systems and they don't work, that will directly
and manifestly impact the United States.

In terms of self-interest, I think there is a singular and simple case,
and my answer would be that the Congress should approve it. They are not
throwing money away, they're putting money into a fund that will be
repaid, so that it is not as though we're wasting money in our country if
we put money into the Fund. The money is needed for part of the liquidity
of the system, and it will come back. In fact, on Mexico, the United
States made money. And I remember the furor about the monies that were
putting into Mexico and the criticisms that Bob Rubin and the President
had to sustain.

I see no arguments for not putting money in.

But there is one other argument that I would like to make. You cannot be
a world power and claim to the be the leading power of the world, without
giving leadership. It's just not possible. The United States cannot
support a free system, cannot support international trading, cannot
support equity around the globe, cannot support stability, without
fulfilling its undertakings. And I think if we want to lead the world,
with a $7 trillion economy, we had better lead the world. And I don't
think it's an option. I feel very strongly about it. (Applause.)

MR. HARBRECHT: Could you talk about the progress that you've made at the
World Bank concerning cutting the size of the Bank and streamlining its
operations?

MR. WOLFENSOHN: We have made a lot of progress in reorganizing. Many of
us felt that, after 53 years, we had become a bit too bureaucratic. And
we also found that the situation had changed. The big changes are that
the private sector has now become the biggest partner that we have. From
the document we put out yesterday, you'll know that in last seven years,
private-sector investing in the developing world, including U.S. private-
sector investing, has gone from $30 billion to $260 billion. And the rate
of overseas development assistance has gone from $60 billion to $37
billion. So we've gone done, and the private sector has gone up.

That means that we have to be much more geared through the Bank -- IFC,
which is our corporate arm that invests in equities and MIGA, our
insurance company -- we have to change to do that.

The second thing is that with democracy and with freedom and an increase
in the marketplace, where we now have 5 billion people in a market
economy, not 1 billion, and three out of four countries in democracy,
you've had an enormous rise in civil society. We must relate to the trade
unions, to NGOs, to civil society, to the religions, in order to be
effective.

And so what we're doing is to try and readjust ourselves to work as a
partner. That does not necessarily translate into a reduction of people.
It translates into a different attitude on the part of the institution;
and with less funds, looking much more at the effectiveness of what we
do. We are well into that program, and I think that we have every reason
to be proud, as a team, of what we're doing to change the institution.

MR. HARBRECHT: Mr. Wolfensohn, President Clinton is on a swing through
Africa right now. I wonder if you could address the World Bank's role in
Africa.

MR. WOLFENSOHN: I said very soon after I came in that the success of the
Bank will be measured by what we do in Africa. I was in Africa 12 days
after I had taken my job. I've just come back from a Uganda meeting with
President Museveni and 12 presidents, to talk to them about the future of
Africa. I spent a day and a half with them. And in June President Diouf
of Senegal is bringing 23 more presidents for another two-day meeting.

We're dealing with the following things:

First, what is the strategy for Africa? And I'm saying to the African
leadership, "It's not our strategy, it's your strategy. The future of
Africa doesn't depend on us, it depends on African leadership. If
together we can decide on what it is that will make the difference, we
can help you."

And so what we're working on are what are the key factors in Africa:
education, health, rural roads, rural development, effective justice
systems, effective financial systems; increase in infrastructure, in
terms of water and power. And we've established a set of basic
priorities. The activities of the Bank are geared to that sense of
priorities.

And we have got a thousand people working in Africa. We're doing capacity
building. We're putting in classrooms, so that we can do distance
learning. We have 11 countries in which we're doing university education,
with a virtual university that's been set up by us. We're working with
governments to try and strengthen their governance. I think that we're
being about as effective as anyone can be.

But the real test is the leadership in Africa. And I have to say that the
real change in the three years I've been in the job is that you can now
see in Africa an emergence of new, committed leadership. And we're very
positive about it. I believe the President will come back with a similar
message.

MR. HARBRECHT: Would you comment, please, on the banking system emerging
in Russia?

MR. WOLFENSOHN: Yes. I don't know what it is today.(Laughter.) But I can
tell you that, first of all, we're working with the Russian government,
in terms of the supervision and control. It is a difficult process
because you have to get into banks which, in the extreme, were lending to
government corporations, and so the quality of the assets, in terms of
government banks lending to government corporations, was subject to some
doubt.

Since then we've seen a gradual improvement in terms of the quality of
the assets and a strengthening of the banks. We're trying to build
alliances between the Russian banks and foreign banks. So they not only
get capital, they get know-how. We're working on training with the
Russian institutions.

Can I tell you that we give it a triple-A seal of approval? I guess the
S&P and Moody's don't yet do it, but I do say that they're improving. It
is a point of vulnerability, but it is also a point of progress. And it's
my expectation and hope that that system will strengthen. And when we
know where the new government is, we'll continue to work with them and
talk to them. We are the major lenders now to the former Soviet Union.

MR. HARBRECHT: Well, before I ask the last question today I have a few
gifts here for you. One is a certificate of appreciation for coming
today. Thank you very much.

MR. WOLFENSOHN: Thank you.

MR. HARBRECHT: This being our 90th anniversary year, we now have a
history of the National Press Club, and you as a renaissance man I'm sure
will appreciate this. (Laughter.) And, of course, the National Press Club
mug for drinking coffee on those long trips overseas. (Laughter.)

MR. WOLFENSOHN: Thank you very much. (Applause.)

MR. HARBRECHT: For our last question today -- I find this hard to
believe, but apparently it's true: you don't have an airplane. When is
the World Bank going to buy you an airplane for those long trips to Asia
and Africa? (Laughter.)

MR. WOLFENSOHN: As soon as the press and the media support the idea.
(Laughter)
MR. HARBRECHT: Well, we're honored to have you here today, Mr.
Wolfensohn. Thank you very much.