Press Roundtable - Robert B. Zoellick, President, World Bank Group

SPEAKER:  Mr. Zoellick will do some brief remarks, and then we'll go to your questions and answer, and you can identify yourself, please, for your questions. Okay?

MR. ZOELLICK:  Well, thank you all for joining us, and I first want to thank our Brazilian hosts.  I had an opportunity to come in yesterday and have some meetings with the private sector and with Governor Serra, and then also some bilaterals. And this is an excellent session to appreciate and better understand the range of perspectives given what's going on.

  Having attended many of these meetings over the years, perhaps too many of them, it was actually a very, very good discussion.  A lot came out of this.  All of us know it's a meeting at a time of historic challenge.  The food and fuel crises of the recent year have now been supplemented by the blow of a financial crisis.  Virtually no country has escaped.  Many developing countries fortunately have put in very sound macro and fiscal policies including Brazil.

  But all countries are moving into a new danger zone with heightened risks to exports and investment in those industries, credit, banking systems, budgets, balance of payments, and particularly those that threaten the most vulnerable. And in many parts of the world remittances are also drying up, creating a real problem.

  These global challenges require global solutions.  We need to modernize multilateral systems to bring in important developing country voices such as Brazil, and to connect it to issues as diverse as finance, trade, energy, development, and climate change, and I think over the next two years, we are going to see some real changes in the global system.

 Now, these meetings are important because they will help lay the groundwork for the November 15 summit, and those that occur beyond. Obviously, they won't come up with all the answers either in this meeting or the summit, but I think this has helped put some good ideas on the table, and it will then be important to have tangible follow‑up actions with report‑backs.

  So, the ministerial and the summit G‑20 meetings can be very useful, particularly coupled with other groupings of global actors, can help make up a network of a new multilateral system that is more attuned to the economic realities of the 21^st century.

  In particular, a point that I have been stressing, is we need to make sure that the financial crisis doesn't become a human crisis.  If you look at the composition of the G‑20, while you have a number of developing countries with developed countries, you really don't have the poorest countries of the world as part of this group, and I wanted to stress the dangers that this crisis causes to the "bottom billion" because this crisis will push more poor people further into poverty; and, because of that, there is a particular need for the developed countries to honor their Gleneagles commitment to significantly scale up their aid and double aid to Africa. We are some $39 billion per year short of the 2010 Gleneagles targets.

  Now, institutions like the World Bank Group can help with financing, advice, analysis.  Next week, we will be coming out with our new economic forecast.  The IMF was talking about the ones they just released, and they, together, are going to show that the World Economic Outlook has worsened significantly, including for developing countries.  So, as many of you know, the financial crisis first hit the developed countries.  You had the food and fuel problems in developing countries in particular, but the events of September and October have had a dramatic effect on the developing countries as well.  And next week, we hope to announce a significant expansion of the World Bank Group financial support. Today, I tried to talk about some of the particular areas where we could help the developing country clients.

  But going forward, these meetings need to fit into a broader global conversation.  We need to stay focused on modernizing multilateral institutions and markets.  There are different ways.  I have argued that one should embrace flexible networks so we will be able to draw on different institutions and, in doing so, to include greater voice for emerging markets.  We need to respond quickly to current challenges while at the same time putting in place new structures, policies, and norms for the longer term.  The World Bank Group itself must also adapt more quickly to meet the new needs of our clients as well as the interests of our shareholders, and we need to better align our governance with the realities of the 21^st century.

  As some of you may know, at our Annual Meetings which occurred just a month or so ago, we reached an agreement on an initial reform package on voice, participation, and responsibility.  It added an African chair, and we now have a majority of developing country seats on our Board. It moved up the share of developing country shareholders to 44 percent at the IBRD, the traditional World Bank, and the 48 percent at IDA, which is the 78 poorest countries.

This is a start, but we need to go further, and precisely for that reason I asked former President of Mexico Ernesto Zedillo to chair a high level commission to consider the modernization of the World Bank Group governance, so we can operate more dynamically, effectively, efficiently, and inclusively in a transformed global and political economy.

 In 1944, the architects of the Bretton Woods system seized the moment to build for a changed future, and I believe we must be no less ambitious today.

 So, happy to take your questions.

  MODERATOR: Thank you, Mr. Zoellick.

  And your question, please. Can you identify yourself, please.

  QUESTION:  From AFP - can we get a sense of the discussions here?  You said last month that a G‑20 would be somewhat unwieldy as sort of a steering group for the global economy.  Where do you see this headed, and your proposal for a steering committee of G-7 plus some additional countries? Do you think that's moving forward, or‑‑there seemed to be a lot of different voices on where we go.

  MR. ZOELLICK: Well, let me break your question into two pieces.

  First, the chairs, I think, organized the discussion very well because it focused first on the conditions that countries are encountering around the world, and there was a very strong sense that I tried to summarize here about the fact that developing countries are now also getting hit significantly by the downturn.  There was some discussion about what actions, financial institutions--the public financial institutions are taking. This is a somewhat unusual meeting compared to some because you have central bankers as well as finance ministers, so you had a lot of the banking authorities, and they were talking about the effect they had taken to try to increase credit markets.

  But there was also a good discussion about the interest in expanding fiscal policy.  And, in particular, some members mentioned that, about a month ago‑‑you know, a month ago when we met for the Annual Meetings and there was the IMFC meeting and the Development Committee meeting, that the focus was on trying to provide liquidity and monetary policy. But this time there was a sense of a need for supportive fiscal expansion, and that was discussed in the context of both the developed and developing world.

 But there was some cautions by some of the developing country central bankers because they noted the inflationary pressures that still exist; and, depending on the country, they may have less room for a fiscal expansion.

  This then also led to an interesting exchange about how these problems interact not only today, but the second-order effects.  And just to give you one that I mentioned, but others did as well, many people looking at the causes of the present crisis talk about the ample liquidity in the financial system, starting with the easy monetary policies after the Internet bubble in 2000 and 2001.  Well, if you ask yourself about liquidity today, you would have to suggest we're all awash in it. So, at some point, when the velocity of money, when it turns over more quickly, you could have a replication of the problems that we saw come out of that period in a number of years in the future unless you are watchful of financial supervision and regulation and monetary policies.

  So, in that sense, what I found in this discussion compared to the one a month ago was there was a better sense of trying to understand some of the second- and third-order effects.  Or another one that I raised that there was concern about, a lot of developed countries have guaranteed a lot of bank and financial sector paper; it's understandable, but it's changed the markets because you have a lot of government-guaranteed paper, and it makes it harder for developing countries to be able to access those markets. So, those countries that have guaranteed the paper will have to think at some point about exit strategy.

  So, there was a richer exchange about those dimensions, and because you have developing countries that are in different postures‑‑for example, China is in a very good position to have a strong fiscal expansion, and the Chinese authorities talked about moving towards a strong fiscal expansion, and some other countries they have got more limits because of the budget posture. So, you got a sense of the variations.

  And then for your second question about the‑‑and then some of it is leading to the idea of how do you help build the international system. So, another one that comes up a lot is this discussion you probably heard about of the financial stability forum which has done very good work under the leadership of Mario Draghi, the head of the Bank of Italy, but it's limited in its membership, and so people talked about how that might interact with the further work on financial supervision with the Basel Committee and the IMF.

 Mr. Draghi emphasized that it should be opened to more members, it would be welcome to have developing country members, and there was some discussion of how a more expanded FSF could help develop policies in this area, and then help operationalize and monitor them through the IMF system.

 So, these are some of the discussions you see moving forward that will probably get further discussed in the summit and then thereafter.

  Now, as for your second question, I think it's too early to say.  I think this will come out of the‑‑there will be further discussion of this at the G‑20 summit leaders' level, and there are a host of ideas that have been floating around about sort of the right mix. The Italians will be also chairing the G‑7 and G‑8, and they've had ideas about expanding that mechanism.

 So, I think this is one of those fluid periods where people are trying to get a sense about the right mix of countries and institutions to be able to solve problems in a way that that is effective but also legitimate.

  MODERATOR: More questions?

 .

  QUESTION:  From Associated Press. I guess I just want to follow on that thread right there, whether it's going to be a G‑8 or G‑14 or a steering group or the G‑20.

  I mean it seems to me there's a lot of rhetoric going on, and I wonder what the risk here is essentially that it's going to present into political infighting over what the composition of this group has.  It really seems like everyone is jockeying for power right now, and, I mean, the Canadians are coming out and saying, well, it's not time to form a new group; that's going to take too long.  Brazil is saying no, maybe we need it‑‑it's not going to be the G-15.  Maybe it needs the G‑20. Can you add the political risk‑‑your sense of the political risk too?

  MR. ZOELLICK:  Well, I think there is a strong sense from the countries and institutions around the table that one can and must do multiple things at once.  So the debate that both of you have asked about is certainly alive, and there are certainly countries jockeying for position in a larger group.  But I think it would be misleading if you came away with the sense that that diverted from the types of other subjects that were the first part of the question.  There is a clear recognition about various steps to improve financial regulation and supervision.  The EU put forward a paper with basic principles, so people are contributing to this. Mario Draghi had a very good report from the Financial Stability Forum which developed its work through various working groups.

  And my best estimate would be what you'll see first is to take some of the institutions that are working in priority areas like the FSF and say, well, should we broaden the membership?  And I think the direction of that will be yes.  And then how should we connect it to the work that goes on with the Basel Committee and the IMF?  And, frankly, for that matter, the World Bank does a lot of work in the financial sector areas as well, so we and the IMF do financial sector reviews. So I think that one will move forward.

  Then these other discussions that were quite important about monetary policy and fiscal policy will be done, obviously, by national authorities, but just to give you a sense of some the topics that I've mentioned that I'll talk more about next week, you have this huge drop-off in trade.  I mean, it is a stunning drop in trade.  And we believe that you could find in 2009 that you could have an actual decline in world trade, which would be the first time since 1982.  One of the primary drivers of this is the credit crunch.  It's not just the lack of demand for the product, but there's a big gap in trade finance and, it appears, even working capital for some of the shipping firms. So, we at the World Bank had already expanded a trade finance facility that's a pool to $1.5 billion, and we're looking about expanding that.

 So, that's the type of issues that you see front and center to try to deal with the current problems, and there are others of those people who were talking about infrastructure and sort of other issues related to how do you deal with a fiscal policy now that might have an investment for the future.

  Now, the last point coming back, though, to your question, the key theme that I tried to emphasize in the speech I gave a couple of months ago was the notion of a network, and I think what you'll see is, one way or another, it will move in that direction.  You have a lot of very sophisticated questions and subjects and, sort of, if you want, it's a managing of complex interdependence, so you have got energy issues, how they're connected to climate change, you've got food policy, fiscal policy, monetary policy, banking supervision. I don't think any one institution is going to be able to manage all those.

 So, the challenge will be to have various groups‑‑World Bank does some, Fund does others--IMF--the regional development banks, UN agencies, and then how do those get connected in a network fashion so people see the interdependencies of those.

  And that does bring you back, though, to this question of G‑7, G‑8, steering group, G‑20, because probably something like that would play a role in interconnecting a number of the elements.  But one has to keep in mind, even with the G‑20, the World Bank, we have 185 members, so all those countries that aren't here feel they have a say in these issues, too. That's one reason why I've urged this network approach, though, because then you see‑‑you can go back through the existing institutions‑‑IMF, World Bank, regional banks, UN‑‑and you build in broader legitimacy.

  So, I'm not trying to duck your question.  I'm saying that I honestly think that some of these issues‑‑you're right, there's a lot of maneuvering to be part of that group, but I think that some of them are still very much in play. But however they work out, you're going to need to have a system that is network interdependence.

  MODERATOR: Folha Sao Paulo and afterwards Reuters.

  QUESTION: [In Portuguese –inaudible]: How can we move ahead with global financial regulation? What is the Bank’s view on more regulation for global financial markets? What in your view is the role of the hedge funds in the crisis and can they be effectively regulated?]

  MR. ZOELLICK:  I'm not sure I totally got this. So, I will try to answer, and then if I miss something, you let me know.

 As for the first question, in financial regulation and supervision, I think you'll see that countries will want to retain their national authorities, but they will want to have common principles and practices and standards to be developed by a larger multinational group, and perhaps monitored by a multinational group.

And so one possibility would be to have a broader membership in the Financial Stability Forum, help develop those--and the Financial Stability Forum has as members the IMF and the World Bank and Basel, which is where the central bankers meet, and you've probably heard about the Basel Standards for Capital--and then perhaps to have the IMF play a supportive role in the monitoring and supervision.

  So, this is what people will have to determine in the coming years, but what I sense is that there is a balance to be struck. I don't think that any one country is willing to cede all its financial regulation to a super-national body, but on the other hand they understand the interdependencies of that.

  I think your second question was about the developing countries on this‑‑oh, with the hedge funds? Oh.

  I think there is‑‑for most of the participants that I recall, there is a sense that all the financial institutions need some form of supervision and oversight and, perhaps, regulation, but it's a matter of degree.  So, if you look at the European statement‑‑this is one of their principles‑‑I think most of the speakers that I recall believe you have to have some oversight, but you'll get degrees of sensitivity about how heavy you regulate. And let me just give you a small point again, just so you have a sense of the type of discussion.

  I was talking about the key role of safety net programs particularly for the most vulnerable, and I mentioned that this whole adjustment process is going to mean the loss of jobs in a lot of countries, and the best safety net program is to help somebody get a new job, and that often happens through small‑ and medium‑sized enterprises. But what we've seen at the World Bank is that small and medium‑sized enterprises are often in a harder position to get financing than the bigger industries.

  So, I said that, as you think about financial regulation and supervision, you don't want to have a tightening that precludes microfinance and the ability to finance small‑ and medium‑sized enterprises.  Instead, you probably want to make a special effort so you can expand credit or what we found in the developing world is it's often groups like women that get pushed out of the market, if they're allowed in it in the first place. They might not even have the legal rights.

 So, we need to, at the same time you're trying to regulate and supervise and control some types of financial activities, you probably want to open up others.

  QUESTION: From Reuters.

  Yesterday, the BRIC countries put out for the first time a joint statement about their desire to increase their roles in multilateral organizations.  I'm just wondering if you got a sense today and being involved in it that there's a growing sense of unity amongst the big developing nations to play a larger role?  It seems for the longest time that they've had various (inaudible) interests. People have talked about BRIC and so on, but it's seems very unusual for them to suddenly realize that suddenly they have common interest.

  MR. ZOELLICK: Yes, it was intriguing to me because BRIC actually was invented by a Goldman economic analyst, so it's interesting to see how the world of investment banking is shaping policy here.

  First off, I read the statement.  I thought it was a good statement.  And actually in some of my comments, they drew attention to some these trade finance issues and the WTO and other issues. So I thought it was a good statement.

 I think you'll find a balance in this, as well, in that when you listen around the room, the economic positions, of China, India, Brazil, and Russia are somewhat different, and indeed, Minister Kudrin even mentioned that he was more concerned about global economic prospects than some of his BRIC colleagues. So, you will get differences of viewers.

 And the nature of their policy response will be different because, as I mentioned, China is in a position where, given a very strong current account surplus but also the way it manages its budget, it can have a big fiscal expansion. That may be a little harder for some of the other countries.

  And so--and even as you listen to their concerns about inflationary effects or others, you have different tones in this.  But I think that they will‑‑they may over time try, as any group does, to reconcile some of the differences and make some broader statements, and it's in my view, a signal of why I was calling for the steering group idea is that this is a group of countries that clearly wields influence in the international economy. So frankly, rather than having a G‑7 group and a BRIC group and a “this” group, it probably would be better to have them engage together.

  MODERATOR: The question for Estado de Sao Paulo was first.

  QUESTION: [In Portuguese – [inaudible] At the G-20 discussions, what is your sense – was there consensus on increasing government expenditures to help mitigate the impact of the financial crisis?]

  MR. ZOELLICK:  Well, first, let me tell you what I mentioned about fiscal expansion with developing countries.  First, I mentioned that it depends on the circumstances; but, second, I was trying to suggest that if a country did undertake fiscal expansion, they needed to discipline it because one of the hard-fought achievements in this region and others over the past decade is to have greater budgetary stability and fiscal stability. So, if you look at the effect of this financial crisis on, say, Brazil - compared with 10 years ago, or Mexico - it's a huge difference because of the hard-fought efforts.

 The second I was trying to suggest areas, so I was emphasizing social development as one area, and this point that our research has shown that if you have priorities set for under 1 percent of GDP, a country can have a pretty good social safety net program. And Brazil is a good example of this, along with Mexico , with these conditional cash transfer programs. In Mexico, it's the Oportunidades program; here it's the Bolsa Familia program.

 But third, I was emphasizing infrastructure because, if you look at China at the time of 1998‑99, they faced more of a deflationary environment, and they were very wise in doing a big expansion of the infrastructure. So the road network in China has grown from about 10,000 kilometers to 50,000 kilometers, second only to the U.S.

 As for your particular question about Brazil, I noticed it seems to be a subject of discussion among the Brazilian participants, so I best not wade into it.

MODERATOR: We will have time for two questions, with The New York Times first.

QUESTION: Mr. Zoellick, I just sort of want to follow on what Reuters asked, on the discussion of BRICs and then what you discuss in your own paper here, or your speech, I guess, from last month about the rising powers, you know, wanting to be heard.

What is the sense you are getting from this meeting about whether there is sort of the moment now as President Lula said today, you know, these sort of crisis creates opportunities. What kind of opportunity do you really see for some of these developing countries to actually break through and have a greater voice, sort of in policy making or regulation that might shape, you know, the recovery of this financial crisis?

MR. ZOELLICK:  I think it's a real opportunity.  I think it will happen. And a lot of the discussion in question is how it will happen.

And as a reference, when I worked closely with China in the U.S. Government, I coined the phrase of "responsible stakeholder," and I was emphasizing how China had benefited from the open international system had become a stakeholder in it, but also had responsibilities in it.  And a lot of the discussion around the table are the balance of perspectives, responsibilities, wanting to be heard, and this shows up in many ways.  So it shows up in the institution like the World Bank with things like voting shares, but it also shows up in terms of the developing country saying‑‑and this was very interesting‑‑China was very complimentary of the work of the Financial Stability Forum, but it's not a member.  And so, to me, that's a win‑win because if you expand what people think is a good‑performing operation, you can bring more players into it but also build its legitimacy. But I think it will vary.

And one other point I was trying represent on behalf of the Bank is the one I mentioned is that you have the poorest countries that aren't really represented even in the G‑20, and so it will be important however this network system works, that‑‑now, you may not go to them for financial resources, but on the other hand, you know, you do want to make sure that their voice is part of the process.

Now, more particularly, I'll give you an example:  We have a fund for the poorest called "IDA," the International Development Association, which uses grants or no‑interest loans, like 40‑year loans, and we have to raise that every three years because it's grants and very long‑term loans, and last year we completed the 15^th IDA, and it was, say, about $41.7 billion for the next three years. And we're going to try to use that to frontload it to help some of the poorest countries.

Well, for the first time China contributed, even though it's a developing country; it was a very modest amount. Brazil is a bigger contributor to IDA.

Now, their amounts are quite small compared to, I think, the biggest contributor was the UK, which was about $4.2 billion over three years, in the U.S. about $3.7 billion. The Chinese amount was, I think, under 50 million; and Brazil was in the hundreds of millions of dollars.  But, to me, it's an encouraging sign because you're getting developing countries starting to have a sense of a responsibility for the system as a whole.  And at the World Bank we are trying to connect South‑South development.  This isn't just North‑South in all of it. And Brazil has an interest in this as well as China and India.

MODERATOR: Financial Times.

QUESTION: I was going to ask you a very similar question, but I will ask it anyway.

Brazil, President Lula made it quite clear this morning that he thinks the role of the developed nations have to come up with a solution is almost the sort of thing "you broke it, you fix it."  What would be--if there is an agreement on that, and developed countries that need to go to fix the immediate problem, what's the role of the emerging nations?  What's the [inaudible] voice? What is their role in making things better in the future?

MR. ZOELLICK:  Well, it depends how big you cast the net in looking at the issue.  So, if you start with getting out of the financial crisis, there is a role that the developed countries are undertaking with monetary policies and liquidity and credit markets.  I think you will have a debate about whether you have fiscal expansion. The United States had one fiscal expansion.  I'd be willing to hazard a guess that President‑elect Obama will have another fiscal expansion.  And that is part of the overall stimulus. There are discussions in Europe . Japan has had a second fiscal expansion.  So, it will be a combination of the monetary and fiscal policy, but then one has to deal with the follow‑up on financial supervision and regulation, which we've talked about‑‑I mentioned the FSF and IMF‑‑but you also have what I call some of the second‑order effects. Recall I mentioned as one of the steps that the developed countries have taken has been to guarantee a lot of bank paper, but that could have a negative effect in terms of some of the developing countries able to rate.

Now, another issue‑‑the steps that I mentioned from developed countries are ones to get their own economies going.  There's discussion around the table about for certain developed countries need to keep up their aid commitments. Obviously I said, since we're relying on this almost $42 billion of IDA for the poorest countries, I emphasized the needs they follow through on their pledges.  But we at the World Bank and the IMF have been in discussions with other countries to try to offer other support for the multilateral institutions. So, some of the things I'll be talking about next week, whether infrastructure, trade finance, banking capitalization, we might get some support from developed countries, and some of the major developing countries might also support that.

So, there was a discussion on the part of Indonesia in particular, but also India about additional financing to help some of the developing countries get through this--not just the poorest--with direct aid, but some these mechanisms.

Now, I'll give you another good example what I thought was pretty creative. You saw Brazil and Mexico and some others get hit with some of the issues in the currency derivative markets.  The developed countries have swap lines, so they can almost automatically get access to reserve currencies, and people don't think much about it. I frankly think it was innovative for the Federal Reserve to offer those swap lines to South Korea, Singapore, Brazil, and Mexico .  IMF has tried to create something slightly similar for perhaps a broader group.  So, whether it's the multilateral institutions or the developed institutions--or developed countries, I think people are trying to be innovative and come up with various tools.  But coming back to the point that President Lula made, there are other issues where you've got to have everybody come in. So he made a passionate statement about the Doha Round, which obviously I think would also be very good, to complete it, which involves over 150 economies, developed and developing.

So, this notion of shared‑‑my own sense is that most of the discussion wasn't so much pointing fingers as it is trying to have a sense of shared responsibility. And, of course, that there will undoubtedly be negotiations over who does what.

MODERATOR:  We don't have more time. Were some Brazilian colleagues, take the (unintelligible).

QUESTION: Mr. Zoellick [in Portuguese, paraphrase, are you still as emphatic as you were in your speech about developing countries participation?].

MR. ZOELLICK:  Yes, definitely.  Yes, definitely. But I actually referred to a steering group as opposed to a particular group formulation.  And the reason I did that was I think it's important to have some flexibility built into the system.  You might find going back to the FT's question that some countries start to assume greater responsibilities. Well, then you would want them in the system.

You know, you could go the other way in the sense that there are some in the European Union that want to bring together more countries under one European rubric; well, then you might have fewer representation. So you have the Central European central Bank is now under John Claude Trichet is the primary spokesperson for most of the central Banks.

So, I was trying to suggest some flexibility in the arrangements, in part, to avoid some of this endless debating about who is in, who is out. But the concept of bringing in major developing countries, I think, is critical for the reasons we've talked about, is that not only they have an interest, but they can help contribute to addressing the problems.

MODERATOR: Thank you very much.