Stern test for new man at World Bank

With broken china still littering the office of the World Bank’s chief economist, Nicolas Stern finally arrived this July to start picking up the pieces. Stern, a mild-mannered man with degrees from Oxford and Cambridge, comes to Washington after six years as chief economist at the European Bank for Reconstruction and Development. His predecessor, the celebrated and unconventional Joseph Stiglitz, raised an unprecedented ruckus during his brief but stormy tenure in the job. His final controversy was the manner of Stern’s appointment to succeed him. So what is Stern’s agenda now, asks James Smalhout

Joseph Stiglitz, a former chairman of President Clinton's Council of Economic Advisors, was perhaps best known for his scathing blasts at the World Bank's sister institution, the IMF, and the Fund's interest rate policies in Asia's crisis countries. But as chief economist at the World Bank he committed a multitude of other sins in the eyes of the so-called "Washington Consensus".

Stiglitz: disagreed with the IMF

Stiglitz, for example, had the gall to lambast privatization in eastern Europe and Africa, arguing that legal systems, among other factors, weren't ready to support the change.
He told countries to go slowly when they started to think about liberalizing their capital markets - one of the keys to globalization. And he turned thumbs down at the increasingly successful movement to set up funded, individual retirement accounts, an idea that even US presidential candidate Al Gore recently found a way to endorse.
Somebody at the US treasury Finally decided that too much was enough and Stiglitz was sent packing at the end of last year. He has returned to a teaching post at Stanford University in California.
But that didn't close the book on the Stiglitz story. World Bank President James Wolfensohn decided that the wayward iconoclast should have the last word in his showdown with the US Treasury. So, he put Stiglitz in charge of the committee that recruited the Bank's new chief economist. "That may have been Wolfensohn's way of saying that he wanted another Joe," says Sebastian Edwards, who served as chief economist for the Bank's Latin America and Caribbean Department from 1993 to 1996.
Any choice with a Stiglitz imprimatur, of course, was bound to raise hackles. In the case of Nicolas Stern, the World Bank Staff Association spoke out, objecting on the ground that Stern's brother serves as the Bank's vice president for human resources. That broke a standing rule against nepotism. Stiglitz conceded the need to avoid giving unfair advantages to the relatives of Bank employees. "It is absolutely imperative to make sure that arm's length procedures are in place," Stiglitz told Euromoney, "whenever the rule is broken."
Three people served on the selection committee - two of them from outside the Bank.
Stern's brother recused himself from the process. "My response to the charge is that our task, as a committee, was very simple, but difficult," Stiglitz Fires back. "We were told to Find the best people for the job and not many could Fill the bill. Safeguards were in place and we fulfilled our mandate."
Stern takes charge of the intellectual part of the Bank within months of in-coming IMF managing director Horst Köhler's arrival and at a time when bad blood remains between the two institutions as a result of positions taken by Stiglitz. Stern served briefly under Köhler at the EBRD and observers are watching to see whether the previous relations between the two will affect relations between the Bank and the Fund.
For his part, Stiglitz simply assumed that conflict with the Fund would be inevitable. It is, after all, a different institution with a very different mandate and different policy advice, so the argument goes, will Flow from that mandate. The Bank's priority is to reduce poverty and promote growth. The Fund's major focus is economic stability. Stiglitz thought that it was only natural to oppose high interest rate policies that the IMF pursued in many countries because they choked off growth and hurt poor people. "Many of these differences run very deep in the two organizations," says Stiglitz.
Stiglitz also chafed at the understanding worked out between the Bank and the Fund whereby they get together and give countries joint advice. The institutions aim for a united front out of fear that open discussion about policy might be confusing. Stiglitz, on the other hand, took the view that mission teams should present a debate so that countries can make choices with more knowledge. "Where there are legitimate differences in views, large uncertainties about the results of policies and differences in consequences for distribution," he argues, "those discussions should not go on behind closed doors. I think that undermines democratic values."
Controversy surrounding this year's World Development Report presents Stern with yet another messy situation just as he arrives.
Ravi Kanbur, director responsible for the report, resigned in June over policy differences. Kanbur was critical of the push to emphasize growth at the expense of policies designed to promote greater equality. He set an unwelcome precedent. No WDR director had resigned in the past, and next year the WDR director will report to Stern.
Stiglitz had been redesigning the WDR in recent years based on the view that economists don't have all the answers and the answers that they published in earlier WDRs often turned out to be wrong. But that didn't prevent the Bank from using the WDR to send powerful messages. The 1997 WDR, for example, said that the Bank didn't know how to stop corruption, but that it was a serious problem that deserved lots of attention. And last year's WDR pointed out that over 50% of the people in developing countries are going to live in urban centres, signaling a major change in the nature of the Bank's work over the decades ahead. "We attempted to shift the WDR from what were crisp pabulum messages, orthodox messages," said Stiglitz, "to use it as a vehicle for opening up debate on a higher level. A lot of people resented that."
There's no shortage of challenges to greet Nick Stern.
Chief economists at the IMF have often stayed for 10 years or more. Chief economists at the World Bank recently have averaged two-and-a-half or three years in the job. What impact do you think you can have, given this tradition of outsiders who only stay for a few years?
I certainly expect to stay a good time, but I can't tell you what that is. I spent six years as chief economist of the European Bank for Reconstruction&Development. Some of my predecessors were here for much longer than two or three years. Hollis Chenery, I think, stayed for 11. At the same time, some of my predecessors have shown that you can indeed achieve things in a reasonably short time frame. I think that deepening the involvement of the developed economics group in operations and strategy is something that can start now and be effective quite quickly. Some research programmes, you can get moving in a year or two and produce results. So, I think that you can be quite effective within a time horizon of two or three years even though that would be shorter than I would intend.
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