Nemat Shafik Interview: Conversations with History; Institute of International Studies, UC Berkeley

The World Bank and Private Sector Development: Conversation with Nemat Shafik, Vice President, The World Bank; 11/13/01 by Harry Kreisler

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The World Bank

You taught briefly at Wharton, but then you went into the World Bank. Talk a little about that choice.

That choice was something that I struggled with all along. I've always had one foot in academia and one foot in more operational and policy work. I taught at Georgetown for six years. I taught at Wharton, often in parallel to working at the World Bank, so I was literally straddling the fence on a daily basis. I loved the teaching and in some ways that was my mother's side, because of the immediacy of seeing students learn and how gratifying that was. But I also loved systemic change, and doing things that were operational and policy-related meant that you could change whole systems rather than changing the lives of a few individuals. So I went back and forth and I did both until about two years ago, when I took on this job where the managerial responsibilities were so vast that there was really no way that I could continue to teach and do this job. So I've kind of hung my hat on the systemic change hook.

The World Bank is one of the outstanding international institutions created in the post - World War II world, but it's had to change its mission as the world has changed, and especially after the collapse of communism and the emergence of a post - Cold War world. Problems were seen from different lenses. Talk a little about that and how that fits into your portfolio, namely a different perspective on the private sector's role in development.

The origins of the World Bank were really in post - World War reconstruction. Many people forget that our first loan was actually to France, and it was very much oriented toward major public sector infrastructure projects which were basically to rebuild war-torn economies. We've come such a long way since then. We now don't lend to the industrial countries and really only lend to the developing countries. And we still finance infrastructure. Infrastructure is actually a big part of my portfolio. We do still about $6 billion of infrastructure lending every year.

Explain what infrastructure means.

It's funny, in Arabic, the word for "infrastructure" is "the foundation." It's the foundation of an economy. Its water, power, transport, roads, bridges, ports -- all the stuff that underlies economic activity and makes it possible. In the past, virtually all of that work was done and financed by the public sector. But I think, as you implied, after the collapse of the Soviet Union and also with the kind of revolution in thinking in economics, we suddenly realized that so much of our activity could actually be financed by the private sector and in many ways better managed by the private sector. It started off with manufacturing. In many developing countries even the most basic things like the production of garments and food was done by state owned- enterprises, and the early to mid-eighties was a time when we began thinking about privatizing those enterprises, because many of them were so inefficient. But the privatization revolution then extended beyond just manufacturing and moved towards sectors like infrastructure. Increasingly, things like water and power, roads, are being provided by the private sector as we've realized that private sector actors are sometimes more efficient -- very often more efficient -- and also frankly have much greater financial resources than the public sector.

There's a third phrase now in what I've read,book cover namely you're even going beyond that to look at privatization of public services like health and education.

It's true, and it's come again with the realization that if we neglect that issue we're not doing justice to development.We found that in some of the poorest parts of Africa, 80 percent of the population gets it health services from the private sector, from small clinics, local doctors. And here when I talk about the private sector, I'm not talking about the big multinationals, I'm talking about small businesses, farms, that kind of thing. We realized that unless we started to think creatively about how to improve the quality of services of those small providers -- such as midwives, or small local private health clinics -- we would be missing a huge part of the health needs of the poor.

How do you reach the sector that you're talking about? Obviously if it's a big company they're easier to find, but if you're talking about an association of midwives or health facilities at the local level, what is the intermediary -- or is there one, or do you deal directly with them?

It varies. I can give you two examples, one in the electricity sector and one in the health sector. In electricity say in a country like Yemen, we found that it was virtually impossible. It's a highly mountainous country, a bit like Afghanistan, highly mountainous, very isolated communities. There was no way that the government could have an electricity grid to provide electricity to all these poor communities. And so what the government did, quite wisely, was to have free entry and said, "Anybody who wants to buy a power generator and string up a wire and sell to his neighbors can do that." And so now Yemen has a penetration rate of 75 percent. It means 75 percent of the population of this country where income is only $200 per capita, have access to electricity. Typically in most parts of Africa with a similar level of development, only 25 percent have access. So simply by allowing free entry, by saying small providers can enter the market, it's not forbidden, you don't have to be plugged into the utility, that alone was enough to make this possible.

In the health sector, what we've been trying to do to reach some of these smaller-scale providers, is we saw a very interesting example in Bangladesh. We didn't do it, a local NGO in Bangladesh did it, called BRAC. Children die of diarrhea all the time in Bangladesh, and they wanted to find ways to teach mothers how to give children who had diarrhea oral rehydration salts, basically a saline solution which enables them to recover. So the NGO had extension workers, midwife-type women who went out and taught mothers how to use this stuff. What they did, which was very clever, was they said to these private providers, "We'll pay you, not for every household you visit, but we're going to go back after you visit these households and test whether the mother knows how to mix the solution, and we'll physically test the solution and watch her do it." And by doing it this way they increased the ability of the mothers to give the medicine properly and reduce the rate of infant mortality very dramatically. They didn't do it through the traditional way of using the public sector, the local Ministry of Health; they did it with using these private providers, but also having it very incentive-based so it was in the incentive of these midwives to make sure that the mothers didn't just hear them, but actually learned.

So then what is the role of government and what is your relationship to government now as you move in this direction?

It changes. The work of government becomes one of regulating and setting of rules and also still financing, because for these midwives to go out and actually teach the mothers how to use this new medicine, someone had to actually pay them an amount. And so the government can still provide a role in financing the services, but they don't necessarily have to employ the workers who deliver the services.

Clearly there is in many of these countries a problem of corruption. When you're talking about corruption, is government part of the problem or can it be made part of the solution because of its relationship with you?

Corruption takes two to tango, so to speak; corruption in government is often one side of the problem and usually the private sector is on the other side. I think we're tackling corruption much more frontally than ever before. We now have anti-corruption programs in about ninety countries. What we've learned is that the problem of corruption is multi-dimensional -- it's a cliché to say, but I'll give you real examples. The big money tends to be lost in public procurement -- big public contracts that get padded and money exchanges hands. So one of the biggest and most important things we can do to solve corruption is to help governments run public procurement on a competitive and transparent basis. So we've been doing that. It sounds incredibly boring; it's incredibly important for eliminating corruption.

But it also takes errorts on several other fronts to root out corruption. One of the things we've been doing is training investigative journalists, because unless you've got investigative journalists watching both the public and private sectors, corruption doesn't get revealed. We've also found that competition is a very good way to get rid of corruption because monopolies tend to be very corrupt, so by liberalizing telecommunications or electricity markets for example, then those providers or those services can't ration the services and get extra funds. And then of course, decent public salaries are critical, because if the tax collector's underpaid he has a huge incentive to extract something from you so that he doesn't report you to his bosses. So we've had a harder time with successful civil service reform because it's so deeply political, but until we resolve that issue of decently paid civil servants, that's always a vulnerability.

It sounds to me like you're saying that the World Bank's mission is to set up a creative dynamic between the newly energized private sector and government, but then you've just spoken of the civil society, so it's really all three.

Absolutely. And that's a really new way of working for us. It's come from an appreciation of both the complexity of the development process and also an appreciation of how vast the resources are that are needed. I mean, we are considered a big global player. We lend roughly $20 billion a year, more or less. Last year, which was not a big year for private investment in developing countries, but still, last year private investment in developing countries was $250 billion. That's many times more than what we provide -- all aid to all the developing world is about $50 billion. When you take all the countries that give aid in the world, that's really a drop in the bucket. So unless the resources of the private sector and the energies and talents of civil society are brought to bear on the problem, we're never going to really solve the problem of poverty.

How does the World Bank itself adapt as the world changes and new problems emerge. What is the key to its changing its perspective?

It's partly a function of the business. We see what's happening, what are our clients are demanding of us, what are countries are asking for. In the old days, developing countries would come to us and say, "Help us build schools and dams." Today they're asking us things like "How do we become a knowledge economy?" Very different question! And so then we have to figure out how we answer that question. The other way we adapt is leadership from our shareholders. They have views about what we should be focusing on, so some of the issues that are on our agenda now had been pushed by some of our shareholders -- issues of global warming, HIV, that kind of thing.

By shareholders, you mean countries.

Countries, that's right. And then our critics. Sometimes it's uncomfortable, but I think our critics have played a very useful role in forcing us to move in different directions, to be more open and to tackle new issues.

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