James Lamont, the Financial Times’ south Asia bureau chief, interviewed Robert Zoellick, the president of the World Bank, in Singapore on 11 November 2009 ahead of his visit to India in December. Below is an edited transcript of the interview.

FT: Asian economies are showing signs of revival in the post- financial crisis period. What are the implications for the region and the wider economic order?

Zoellick: The good news is that financial markets have broken the fall. There’s a sense of revival in those markets. We are seeing the signs of growth though most expectations are for a slow growth process.

I’m relatively comfortable with prospects for this year. But when I look at 2010 if there is large-scale unemployment remaining of 10 per cent as it is in the US, you are going to see feedback effects in different waves as we’ve already seen in this crisis. It’s going to increase delinquency for credit card debt, for consumer loans, in the US some commercial real estate is quite soft and that’s going to flow back into the banking system. You will see some financial institutions doing very well but if they are dealing with the consumer retail market they will continue to be hit by those losses.

A second issue that is a question mark is the hand-off from the public stimulus to the private sector. Much of the stimulus package that the US launched really takes hold at end of this year and beginning of next year. So you need to look closely to see if you get the private sector pick up in the course of 2010.

Then third, it’s hard to believe that US consumers will play the role they played in past recoveries because the US consumer has to deleverage and has to rebuild savings. So where are the additional sources of demand? This is one of the opportunities for Asia’s larger role in the recovery. It’s a role for the World Bank because unlike the 1990s many developing countries have paid down debt. They have the fiscal space to take expansionary programmes. Some should be safety net programmes to deal with the most vulnerable. Some should be infrastructure to build for future productivity and growth. But they need financing. This is one reason that across different arms of the World Bank to September 30 we’ve done about $70bn of activity.

There’s one other issue for this region. One has to expect that the recovery globally is not going to be symmetrical. It will be at different paces. As the crisis was intensifying, central banks expanded liquidity. But the real challenge was counter party risk. It was lack of counterparties. So as that confidence has returned you have a world that is awash with liquidity.

In the US and Europe, where conditions are difficult, that may be an acceptable position. I have some concerns as I look at some East Asian economies that are starting to return to the growth path that if you aren’t careful you could start to create asset bubbles in particular markets. That could present challenges for central bank governors of this region. Traditionally, they would follow the Federal Reserve in part because of currency policy linked to export policy. If they do that this time they run the risk of inflationary effects and possible asset bubbles. They could take a crisis coming out of a recovery and create some other dangers.

FT: At what point should fiscal stimulus measures be rolled back across Asia?

Zoellick: I wouldn’t suggest they be rolled back. They will follow through 2010. The tone across the world at the G20 meeting in St Andrews, Scotland, was that people need to be prepared for next stage but there are still some effects. This question of hand off to the private sector is very hard to calculate in any analytical fashion because it deals with confidence. If you are in the European market place today a lot of focus is on looking back at the crisis and understandable issues of bonuses, compensation and regulation. What’s very important to add to the global debate is the voices in East Asia about what do we have to do in structural reforms to create greater opportunities for growth in the future.

FT: How big an ingredient is infrastructure spending for returning to the growth path?

Zoellick: You can look at numbers analytically and say you need this for energy, water and transport. The numbers are so staggeringly large that you can’t possibly deal with this with public financial resources. So people say ‘Let’s have public-private partnerships’. It’s almost a mantra. But to get these to work is a huge challenge. You are often having to integrate three different funding sources: some government money, some private sector money, and some assistance from multilateral bodies or foreign aid. Integrating those financial flows is often more of a challenge that one would think.

The second aspect is that traditionally infrastructure would be implemented by a public works department. You would have engineers who would decide these plans for the road. But they are not financial experts. The model would be they start to build something that won’t work if you are trying to bring in private finance.

A third one is that you sometimes have capacity constraints within the country. Sometimes it’s construction firms, sometimes engineering talent. Infrastructure projects are particularly prone to corruption. We’ve seen around the world the dangers of cartels in the construction of roads.

The last one is that if you get the packages right and funding right how do you make them more liquid as assets? Here’s another challenge. Many financial markets in the developing world are still not liquid enough or deep enough. They don’t have local currency bond financing. Some of the work we’ve been doing to create markets in the developing world could be linked with this.

FT: Is there private capital out there looking for investments in infrastructure?

Zoellick: My feeling is that in part because of the liquidity people are interested. Looking out a little further, people see some significant growth opportunities. One of the things that are a striking observation compared to past crises is the role the developing countries can play in the short term to supply some of the demand to replace the missing US consumers but in the longer term creating multiple poles of growth.

In the late 1990s in the crisis in East Asia and Latin America the focus was on China simply holding the currency peg. That was the big question every day. But now it’s ‘What China’s growth outlook?’ China’s has been transformed from stabiliser in a more narrow sense to a potential growth engine. It’s true for India. It’s going to be the same for south East Asia, the Middle East and some countries in Latin America. It’s healthy to have multiple poles of growth.

We’ve started to see that some longer term investors – sovereign funds and pension funds – are saying ‘The developed world can be risky too’. The developing world has some pretty good long term growth opportunities but we investors don’t know how to tap them. One of the initiatives at the International Finance Corporation is to create a new asset management corporation. This is to create a model of intermediation. Traditionally, the IFC would raise debt, make loans or equity investments. What we are going to is use our platforms, whether for equity investments in Africa and Latin America or for infrastructure, or for bank capital and tap these different sources of funding. People recognise there are growth opportunities but information and transaction costs are too high in these markets. We can come in quite nicely because we have experience in these markets.

FT: What are the key messages with the World Bank’s new urban strategy?

Zoellick: To get people to recognise the importance of economic geography and the criticality of urban areas for the future. One of the areas we think needs more attention is secondary cities. The attention goes to megalopolises around the world. There are cities in China that people in North America and Europe haven’t heard about but they are bigger than their own cities. Depending on the location of a city there is a particular challenge for rural and urban integration. The Chinese government has chosen Chongqing and Chengdu to test these issues.

Second one is a topic you hear a lot about in Singapore and that is connectivity. How these cities are connected to each other whether with transport links and communication.

Water is going to be an increasingly important topic. Singapore has done something else quite interesting. There has always been sensitivity about the reservoirs supplying Singapore. Singapore has now developed filtering technology. All the water gets collected. With a filtering system, it can be self-sufficient in water. Given the climatic changes, water is going to be critical. It goes to health issues too. There are still millions of people in the world without proper sanitation.

We’ve been working on some urban audits. You can audit some of the cities to understand the questions. We are using some mapping techniques to be able to focus on some of the targeted issues of poverty and dealing with slums. But as we’ve seen in some cities in US and Europe, if you don’t have an overall concept you get an urban sprawl. That sprawl might be making assumptions about the use of automobiles, environmental pollution; the housing stock is going to be affected. It simply makes sense to have some concepts to allow urban planners to decide where they want to go. What we see in developing countries is that the pace of change is so much more rapid than in the past. We are seeing cities move to urbanisation in 10 years where they would have taken 100 years in North America and Europe. If you don’t move early the decisions get made for you.

Half the world’s population comes from urban areas it makes sense to look at that in a coherent fashion.

FT: Do you view green technology as a global public good?

Zoellick: Environment is clearly a public good. The question is can we support the faster diffusion of technology? We believe we can and should. We created a series of climate investment funds not only to understand some of these initiatives but to help the negotiations on climate change at the UN. One is often not talking about technology that is the most cutting edge. It’s a question often of getting current technology readily available and employed in larger systems and design.

One of our early projects is dealing with Mexico City to use energy efficiency in technology and a combination of buses, light rail or other aspects to improve liveability but also cut costs for energy. This is not whizz bang technology. It’s the question of developing the system to integrate the technology.

The second lesson is that you can’t look at climate change and development in separate boxes. The key is how you leverage the funding. With our environment funds we have managed to leverage the funding 10 to one. This covers everything alternative energies, solar technologies, wind, improvement of energy efficiency.

If one is going to deal with climate change in an economically efficient way we have to learn a lot more about deforestation, agriculture, land use. There is a tremendous need to connect development and economic thinking to the larger green house gases issue. This has been evidenced by the carbon trade where you have an opportunity to support development but a country has to have the capacity to use the carbon trade.

FT: How confident are you that there will be agreement at the UN’s talks on climate change in Copenhagen?

Zoellick: My own read of the situation is that probably the optimum that you can expect coming out of Copenhagen is a political framework given further directions for a treaty. I don’t think they will get a complex treaty. The questions will deal with overall green house gases levels and financing mechanism. The financing mechanism will be highly contentious. We are trying to help as the Bank to opt for one option to connect this to development.

People have understandably focussed on the Copenhagen meeting as a key event. But the main message I would try to get across is that climate change is so large and so significant for the environment and economy that you are going to have to see this as an ongoing process.

FT: In recent speeches you have talked about the “new normal” world order. What does it look like?

Zoellick: I think you can no longer expect the US consumer and the US to be the engine of demand that it has been in the past. It’s still going to be a very important part of the world economy and demand. But you are going to have to create better balance. Some of the imbalance may have created conditions for the crisis we have just been living through. So one of the aspects will be whether you can create additional sources of domestic demand from countries that have have export-led growth. This will be an important part of balance. If you create investments, including infrastructure, in many developing countries to make them additional poles of growth you will get multi-polarity of growth and that will be a better balance of growth

There are particular issues that get raised between the US and China about the savings-consumption imbalance. I hope the ‘new normal’ will build on some of the wonderful successes of the past 20 years including a more open trading system, and openness to capital and investment and movement of ideas and people. These are aspects of an open society I wouldn’t want to lose.

The real question in the ‘new normal’ is how you move from over-reliance on the US consumer demand.

FT: In the “new normal” are there alternatives to the US dollar as a reserve currency?

Zoellick: Well there may be. The role of the US dollar as a reserve currency is relatively secure. All you have to look at is what happened to the dollar in the crisis, people turned to it as a store of safe value.

One should not take this for granted. If you are in my line of work, where you see countries struggling with their financing, the ability that the US has to print money and issue bonds is an incredible benefit. If one doesn’t run sound monetary and fiscal policy it could be at risk some time.

What that depends on is alternatives. It’s one thing to say people may lose confidence in the dollar, but then you have to decide where are they going to put their money. You’ve seen some people moving to gold but gold is not exactly a liquid easily transferrable product

FT: So what are the alternatives?

Zoellick: One would be the euro. I think the euro and the work of Jean-Claude Trichet was very well received and its benefit as a store of value has improved but in the long term that will depend on the liquidity and flexibility of European financial markets and growth prospects.

People obviously talk about the renminbi. Well today the Chinese currency doesn’t have an open capital account. So you are not easily going to be able to use that. But as I try to pars through the changes in China – the swap arrangements in trade, some of changes in bond market and allowing foreign investors in the equity market – I believe over 10-15 years you will see the Chinese currency becoming more internationalised and eventually moving to an open capital account and it will provide an alternative. That doesn’t mean that it will replace the dollar but you may have multiplicity of exchange rates. That’s not going to happen in the near term as the Chinese authorities are sensitive about controlling the capital account because they see it as part of overall security and stability.

But overtime it’s part of my view of China. You could look at the yen … you could see where Japan never really developed the yen as a significant alternative reserve currency. I think that China’s growth pattern and global role is likely to make the renminbi over 10-15, 20 years an alternative.

My main caution for the US when facing your budget deficit issues and others you don’t take fort granted that this incredible blessing the US earned through hard work over first 200 years of the country.

FT: You have said China needed to become a “responsible stakeholder” in the international system. What does the scorecard look like?

Zoellick: I think China has come a very long long way. I have a special perspective because I was living in Hong Kong in 1980. I went to Guangdong province right after Deng Xiaoping started the reform process. All you have to do is compare the China of that era and the China of today. It’s so startling.

It’s important to recognise that China still remains a country of many poor people and with many development challenges. But as I’ve suggested to the Chinese authorities is that as an offshoot of its success it has systemic interests. It can be the trading system, the environment, in security and therefore what is important to discuss with China is not only a narrow view of national interest but how its national interests are served by systemic topics.

China for the first time in the current World Bank funding round for the 79 poorest countries made a small but symbolic contribution that it was going to play a role.

What’s more important is working with China to share some of its lessons but also its investment possiblities in other countries. People have talked about this for Africa and natural resources and infrastructure.

There is not only willingness but strong interest in some in China and I’ve discussed with the minister of commerce, Chen Deming, that there may be possibilities of moving some of the lower value manufacturing facilities to sub-Saharan Africa – toys or footwear – if you can create the right industrial zones. So it brings it back to some of the hard and soft infrastructure issues. If you have the power and transportation, and soft infrastructure like customs rules so you can make sure you can get the product in an out.

This can be quite significant. As one of the challenges for Africa if you want to follow a model of growth of East Asia or South Asia is starting a manufacturing platform. Some of these Chinese industries have the benefit of knowing how to do more labour intensive manufacturing and they have the marketing networks and this is always a challenge when you start an operation about who to sell it to and what connections you have.

My sense is that this is an ongoing process and one of the reasons why the development of groups like the G20 is very important. You want to get the emerging economy players China, India, Brazil, Mexico and others into a system where they feel the benefit from the system, they have a voice in the system, but they also have responsibilities in the system.

FT: Can the G20 reach out to the others that aren’t part of it?

Zoellick: There’s an interesting development as part of the G20 and that is you have some countries that are representative of groups. So Thailand has been there as chair of Asean. You have Ethiopia as a representative of the African Union. So part of it is a regional association. The other way this can be handled is to make sure the G20 operates in larger network and relies on some of the existing institutions. I refer to the World Bank as G186 because we have 186 members. So my suggestion is that the G20 to be effective and more legitimate it can play a role as a steering group in trying to come up with commonalities of position but it then needs to execute them through existing structures of the WTO, IMF, World Bank, some of the UN agencies. That way the issues will come back. To use the institutions. Goodness, they are there. They need to be overhauled, modernised. It gives everyone an opportunity to have a voice in the process.

In contrast, sometimes when people create new institutions they overburden them creating secretariats and sub-staffs that will I’m afraid will lead to a loss of what these groups can really do which is to create greater political inter-reaction at the political level among ministers.

FT: You have told American students that the upheavals of the future will not be those of the past. What would you say they would be?

Zoellick: We can’t predict the upheavals of the future but we know they will be there. How you have to have institutions and international systems that can be flexible enough to deal with uncertainties. One of my big beliefs is the importance of multilateralism but not too heavily structured systems. It’s a tendency in economics and finance to look backwards at past experiences. That can be helpful. But you have to create anticipatory systems to watch what is happening.

I think it’s important at this point that people start to think about the asset bubble question. As I look at the world economy, I see a gradual recovery but I see it based on confidence and I ask myself ‘What could undermine confidence?’ Having some asset bubbles in certain regions could create some slipback. It could undermine confidence and that could have some economic effects.

I’m not  predicting it. I’m not saying doom is near. It’s important for public officials to think in a probalistic way. I look at conditions and say this is something people ought to be watching. It gets connected to exchange rate issues and to central bank policies.

Esta matéria foi publicada orignalmente pelo jornal Financial Times, em 02/12/2009.