Robert Watts / Money / The Telegraph – 2005-04-04 23:29:03
LONDON (April 3, 2005) — The appointment of Paul Wolfowitz, the US deputy defence secretary, as president of the World Bank will provoke ‘significant negative reactions’ from governments of powerful emerging economies, according to an influential executive at the world’s largest bond fund manager.
Mohamed El-Erian, a managing director at Pacific Investment Management Company (Pimco), fears a “possible backlash” for the “complete lack of consultation with Asian countries, for instance”, and points out that the purchase of US treasury bills by China’s central bank is one of the main ways America finances its trade deficit.
Wolfowitz’s Appointment: ‘an Act of Provocation’
“Emerging markets have become major buyers of securities issued by industrialised countries,” he said, in an interview with Liam Halligan, economics correspondent of Channel 4 News. “Decisions by Asian central banks, particularly China’s, over whether to continue buying US T-bills massively affect US interest and mortgage rates and the US consumer.”
El-Erian, one of the world’s leading emerging market analysts, raised the prospect of Asian governments limiting such purchases “in retaliation” over the Wolfowitz appointment.
“If Asia decides to do its own thing, the implications will be felt in the US and UK too in terms of higher interest rates, lower consumption and fewer jobs,” he said.
He claimed that China will be “particularly annoyed” by reports that one of Europe’s conditions for accepting Wolfowitz was that a European be installed as World Bank vice president.
China Stands to Lose
“This won’t help the Chinese feel they are being taken seriously,” he said. “The current World Bank number two is from China and was appointed on merit. He may now be displaced just because Europe wants the slot on the basis of nationality.”
El-Erian described Wolfowitz’s appointment as “an act of provocation for those who believe the World Bank should be run by somebody with a background in what it actually does”.
“Wolfowitz has no grounding in development economics or finance. His appointment confirms that important international jobs are dished out on geographic entitlement, not merit, and that the process is biased against most countries.”
A Western-trained economist of Egyptian origin, El-Erian manages $14bn of investments in emerging market bonds. Pimco controls assets exceeding $400bn.
He spoke out after Wolfowitz, perhaps the leading intellectual architect of the Iraq war, was approved by European leaders and confirmed as World Bank President last week.
Before joining Pimco, El-Erian spent 15 years at the International Monetary Fund, and has previously been nominated by developing countries as a candidate to run the IMF.
He said “backdoor deals between Europe and America” don’t acknowledge that emerging markets are now “one of the major locomotives” of global growth.
“They contributed more last year, in terms of growth and employment, than the industrialised countries,” he said.
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