Friday March 13th World Bank London Office, 12th Floor Millbank House, SW1 11.30am – 12.15pm MR. ZOELLICK: I want to start by thanking Prime Minister Brown because I came over this morning because we co-chair a global health task force, and I think this is important at a time when we have the rest of the economic crisis, to focus on some of these issues the Millennium Development Goals and there are a series of working groups that have been put together, that I think we are going to have a meeting again in May in France to try to feed this into some of the work done by the G8 and then the UN.
But obviously, then, towards this afternoon, I am here for the G20 Finance Ministers meeting.
In my view, 2009 is shaping up to be a very dangerous year. I think we need to expect that we will face waves of challenges.
Unfortunately, 2009 is also a year of firsts. It will be the first global GDP decline since World War II. It will be the first trade decline of this size in 80 years, and it is the first time that recovery must be global.
The danger now is doing too little too late, incrementalism will prolong and increase risk. So far, the stimulus packages are short of the IMF target of 2 percent of GDP, the assessments so far show about 1.4 percent, and increasingly important, the possibility of withdrawal of stimulus in 2010.
Stimulus packages alone are not enough. The IMF research of some 122 financial and economic crises shows that turnaround can't happen unless you clean up the bad assets and recapitalize the banks, and if you don't take on the banking issue, the stimulus is just like a sugar high. It pushes some energy through the system, but then you get the letdown unless you reopen the credit markets.
Poor countries are blameless, but they are the ones that will be suffering more. Millions will be falling into poverty, and we estimate that with the growth slowdown that 200- to 400,000 more babies will die each year.
My view is that this G20 Finance Ministers meeting is really a preparatory session for the leaders. So I think we will have the discussion of the elements to build into the April 2nd Summit. I believe it will be a positive sign if the G20 supports expanding IMF resources, condemns protectionism, and endorses a series of targeted practical solutions, including for developing countries.
I believe the IMF should review the stimulus packages and the banking workouts, so as to make this an ongoing process. The WTO should monitor protectionist actions and make them public. And it is most important to have a coordinated global response, and that's where the G20 meeting is important.
I also believe that other networks and groupings can be important in giving momentum. For example, I wrote a piece in The Washington Post last week with Justin Lin, our Chief Economist, about the critical role of the United States and China, a "G2".
The best way to reassure the market is with practical, timely, and do-able goals. Part of this includes strengthening financial regulations. It is my belief we should focus on practical steps, not on grand statements or designs.
From the perspective of the World Bank, our role is to keep the poor country interest front and center, and help anticipate and provide practical initiatives and advice.
Over the past month, I have been working with the head of the EBRD, Thomas Mirow, particularly on Central and Eastern Europe. In some ways, there is some similarity to the Latin American debt crisis that I worked on with Secretary Baker and the Treasury in the 1980s, in that this Central and Eastern European issue depends heavily on keeping about 12 key banks in the market. So it is unlike some of the other ones who were involved in securities market.
In this one, if we can get support from governments in Western Europe, the multilateral financial institutions but also private banks, I think that we can help strengthen the situation.
I have also called for a vulnerability fund. My idea was that developed countries should devote 0.7 percent of their stimulus packages to try to support safety nets, including a rapid social response effort. This can support infrastructure, agriculture, small- to medium-size enterprises, and micro finance.
I noted that when the Prime Minister gave his speech recently, he was very supportive of this. I've talked with the Canadians, I think they have been supportive for building broader interests. On the part of the World Bank resources, we are trying to lean forward. We can triple our lending to $100 billion over the next three years, and those are for the low middle-income and middle-income countries. For the 80 poorest countries, we have $42 billion of what is called IDA, the International Development Association. Those are either grants or long-term credits without interest. So we will try to front-load that, and then through IFC, our private sector arm, we can have $30 billion-plus over the next three years.
We are trying to use these resources to mobilize others. So, in particular, we are working with the G20 to try to push forward a trade finance initiative but also areas in the work of infrastructure and recapitalizing banks in poor countries.
Now, in doing this, one of the most critical aspects will be that government money, international financial institution money is not enough. So we have to leverage to try to get private capital back in the markets, and this comes up very clearly in a report that we issued recently where we estimated that the financing gap for 129 developing countries for 2009 ranges between $270 billion to $700 billion, and the variability in the estimate depends on whether to the degree you get a rollover of private lending and the degree to which you get capital plight.
And so what we are trying to do is figure out in both the trade finance in the Central and Eastern European area, how we can leverage and provide additional confidence to the private sector to keep the capital in, and that would include being able to roll over their debt and gain time for less disruptive adjustment.
Looking ahead, one can't just rely on the old models of economic recovery. U.S. consumption alone will no longer rescue the world. One will have to have a new model that must be broader and include the developing world.
For the first time in a global crisis, we are trying to develop specific measures to cushion the poor. If you go back and you look at the Latin American debt crisis in the '80s or you look at the East Asian crisis in the '90s or the Russian crisis in the '90s, the support went for balance of payments and financial packages. This is the first time that we are trying to focus on safety nets in poor countries, and it is my recommendation to the finance ministers and the heads of government in the G20 that just as they are thinking of structural reforms, to have an early warning system through the IMF and just as they are thinking of structural reforms to give the IMF more resources to head off problems, and just as they are thinking of structural reforms with regulatory systems, we need to think of a structural reform to build in support for the most vulnerable in developing countries.
So I see this effort that we have undertaken as not only dealing with today's crisis but improving global governance. At the same time, I think we need to approach all these issues with a degree of humility. These are tough issues. No one has all the answers, and we need to recognize there will be a constant set of actions and adjustment and action and adjustment. So it is the responsibility of public officials, including myself, to try to anticipate but be alert to changes and be able to adjust to the waves of issues and challenges that will still be hitting us in 2009 and likely into 2010 as well.  MODERATOR: Okay. Thank you very much. If I could just ask as we go into Q&A, if you could just identify yourself and who you are with when you ask your first question, please.  And over to you.  INTERVIEWER: [name omitted] for The Independent.  I wonder if I could ask you, when you talk about 2010 being possibly a more physical and challenging year because you don't want to see all the fiscal stimuli that are being placed now reversed and almost every government talks about a road map back to fiscal sustainability, raising taxes, cutting back public spending, and isn't that inevitable? Is there anything that the British government can do about that?  MR. ZOELLICK: I do think it is important to show fiscal sustainability over time, and so I think it is important for governments that are putting in stimulus programs to show that they have a plan to get back to control of the budget because, if you don't, you can undermine confidence in your currency and decrease borrowing costs.  My point is that I think that in this particular crisis, we are going to see these issues extended beyond 2009. I think difficulties will extend to 2010.  So, if you simply look at the stimulus programs that have been passed so far, you see that you get a reversal of stimulus in 2010, and so you have seen some of the discussion in the newspapers of Europe and the United States about stimulus. I think that the IMF has set a good standard with the seeking a 2-percent stimulus package.  I think there is a debate about what's the right composition of stimulus and taxes and spending, and these are debatable points, and I don't think anybody can know the outcome with definiteness.  So it is common sense to me that you want to monitor it--that is one of the things the IMF could do--and have frequent reports back to the G20 and others, and what I would suggest is that if there is a difference in the view on stimulus among Europe and the United States right now, that they keep monitoring it and be prepared to do--take additional steps and not withdraw stimulus in 2010.  Now, if the world economy turns around more quickly, well, then you don't need to do that.  INTERVIEWER: So you think the governments should be prepared to carry on the stimuli and carry on cutting taxes and raising public spending right into 2010 and maybe on if it is necessary?  MR. ZOELLICK: If necessary but at the same time within a framework of fiscal responsibility.  Let me give you an example. China put in a stimulus program. Premier Wen Jiabao talked in March about the possibility of the second stimulus program. They haven't moved it forward yet because they had the first two months. They had some good statistics.  March looks like it is going to be pretty tough. So, as I emphasized in another piece, I think the United States and China are going to be very important as the major developed and developing world. So you might need a second stimulus package in China.  But coming to your point, when I wrote this opinion piece in The Washington Post, I emphasized that for understandable reasons but that raises a long-term sustainability issue, the U.S. stimulus relies heavily on consumption, and the Chinese stimulus relies heavily on investment and building capacity, and if you look at the structural imbalance that helped contribute to this problem, we had the United States not saving enough, we have China with a very, very high degree of savings.  So my suggestion was at the same time that you are focusing on stimulus packages, one needs to actually have the United States and China look to be able to shift over time, so the United States will save more, and China will be able to consume more, and then the article suggested some ways to look at that.  So your point is exactly right. You can't only look at this month by month, but what I am suggesting is that this is serious enough and dangerous enough that you need to build a feedback mechanism, and you may not want to be having stimulus packages sort of withdrawing domestic demand in 2010.  MODERATOR: [name omitted]  INTERVIEWER: You were talking about Eastern Europe, Mr. Zoellick. Could you just expand on how serious you think the situation in Eastern Europe has become and to what extent and sort of worse case scenarios you fear could escalate?  MR. ZOELLICK: Well, first, Central and Eastern Europe, in some ways, has been hit hardest because it had a growth model over the past 20 years of integrating with the European economy and the world economy.  That means that as trade fell off, as foreign direct investment fell off, as remittances from workers fell off, it was more vulnerable than parts of the world that were less integrated with the international economy.  Now, regions like Africa have less cushion and lower income, but in terms of vulnerability to this huge pullback in the global economy, Central and Eastern Europe ranks very high.  On top of that, you have roughly 80 percent of the assets, of the banking assets in Central and Eastern Europe owned by Western European banks, and so, if those Western European banks are compelled either for business reasons or for political reasons to pull back, you create an additional vulnerability.  Now, some leaders have mentioned the Czechs, the Poles, Slovenia, Slovakia, that their economic growth has left them more stable, and that's correct. You have to differentiate among Central and Eastern European players.  However, one still has to recognize that you have a regional economy, and over the past 20 years, one of the great successes of politics has been to integrate Central and Eastern Europe with Western Europe in the world economy.  So there is no escaping that if you get, for example, major devaluations of currencies and you have already seen substantial declines in Central and Eastern Europe, and if many household assets are denominated in Western European currencies such as the euro or the Swiss franc, you are going to get that it is going to be harder for people to pay back those loans, and you may get increase in defaults, and that weakens the banking system.  So, based on that, I was very pleased. We at the World Bank, both IFC, our private sector side, and our World Bank, our public sector side, worked with the EBRD and the European Investment Bank to put together this fund to help recapitalize and support some of the banks in Central and Eastern Europe on the order of about $31- $32 billion, but if you link it to the other point that I made in my opening statement, that is not enough. That has to help the banks--and there's about 8 - 12 banks--stay in the market.  Now, it is my impression that a number of those banks want to stay in the market. So we also need not only their continued, in a sense, credit and capital, but we also need Western European governments to signal that they don't want those Western European banks to be pulling capital out because you get various accounts that, you know, is there a sense of the prime minister has called about sort of, you know, a financial protectionist.  So it is a good example of where you are going to need the three players--government, international finance institutions, and also the private sector--to continue to work on the problem.  Now, you also have to look. You have got countries that are considered in Central and Eastern Europe, they are being more stressed, like Ukraine. So I have been working with both the President and Prime Minister of Ukraine because they need to put together a budgetary program that can get them additional IMF resources. Then there's other resources that we would have to flow, but it is an election year. There's divisions in the Rada.  So, in a way, all these are political economy issues. So you got finance involved, but you got difficult decisions being made, and if you think back in historical terms, while each Central and Eastern European country, of course, likes to see itself as separate, at times when they have ignored their collective interests is when they have been made more vulnerable to events politically and economically.  So this is a time where I think there is an important role for the European Union most of all, but for international institutions like ours, we can play a supportive role.  MODERATOR: [name omitted]  INTERVIEWER: Yes. [name omitted] Mr. Zoellick, you talked about this weekend's meeting, being preparatory for your meeting with some G20 support for the IMF condemnation of protectionism and that is an impractical solution. Can you talk more about the latter? The first two, I think we all know what happened, but in the practical solutions, where do you see actual progress?  MR. ZOELLICK: Well, I am not sure exactly what you put in your codicil, though we all know. I think, for example, here you are seeing increased movement now on additional IMF resources, and so you saw Secretary Geithner's statements that basically are going beyond the idea of $250 billion. So I think that will be--that's very practical resources as important.  Second, I think there will be some discussion of some of the particular instruments that can make that more flexible and usable in a precautionary way.  Third and perhaps most practical is this idea that I have been trying to advance on trade finance, where if we put in some money from IFC, our private sector side, if we get some government support--we have been talking with 8 to 10 major international banks and regional banks where I think that we can risk-share with them and engage them further in the trade finance market, and if we can get that going with an initial start, we could maybe get 20-, 30-, $40 billion of trade finance liquidity.  And the reason this is important is that a month or two ago, when I tried to expand a guarantee facility we had from IFC, we learned that there was--the major constraint was liquidity. In other words, guarantee means somebody else has put in the money, you are just giving is assurance, and so we need to provide liquidity in finance.  Building on that, we have been in touch with some of the export credit agencies. A number of export credit agencies of governments have various limitations. They tend to do long-term financing of their own country's exports. So you have to go through each one and figure out where they have got some of the flexibility, and we have been talking in particular with the United States and Britain on that, and so there is another stage. And my friend Pascal Lamy is actually having a meeting on March 18th with the export credit agencies.  So I would like very much to get an endorsement of this trade finance facility. I am bringing it to my board on May 31st. If I can get additional investment to complement ours, then we get the private banks, then we've got something, you know, that, 20, 30, 40--  INTERVIEWER: You are going to get that this weekend in the plan?  MR. ZOELLICK: I am trying to set it up for the--oh, okay. Well, I got asked this morning. That for example, we have been talking with Standard Charter Bank, Standard Bank for Africa, Rabobank, particularly for the agriculture sector.  So these are some international banks that have pulled back or they have limits on what they can do in trade finance. In part, because some of the Basel II rules that made it harder, they have to put more capital towards it.  So, frankly, our idea would be we might be able to risk-share on a 40/60 basis, so we put in 40 percent, they put in 60 percent, but that shows you can leverage up whatever resources we have. So that is another practical step.  Another one is the vulnerability fund that I have been talking about. As I mentioned, I think we have some good interest from Britain and Canada and others, and here, I am trying to match donor needs with--or donor, sort of, political base with developing country needs.  So Britain has been particularly interested in a rapid social response fund, and they basically, I think, share the idea that we need a structural reform to help those that are most vulnerable through safety net programs.  The United States may be able to do more to help institutions like the World Food Program, which does safety nets and food assistance.  The Germans have already started to help us with an infrastructure fund, and that is important because this can create additional jobs in developing countries, while creating the basis for future growth. So that is another, in my view, practical step, and we talked a little bit about Central and Eastern Europe.  So, to give you a little sense of how I perceive my role in these meetings, since I am not a finance minister, is that I try to share a perspective of what is happening globally from a multinational as opposed to a national position, but I am trying to come up with practical solutions, you know, trade finance, Central and Eastern European banks, a vulnerability fund, so that there are both accomplishments but also I think we can build on to help fight the crisis.  MODERATOR: We will take yours and one more.
INTERVIEWER: Okay. Well, since we are in London on this wonderful spring day, perhaps you could give us a few words on what you think the prospects for the U.K. are immediately.
MR. ZOELLICK:Â You know, I focus on developing countries.
INTERVIEWER:Â Maybe.
MR. ZOELLICK:Â I think the UK has kind of moved beyond that.
I really can't comment on the domestic economy. All I can comment on is the fact that I think that the Prime Minister has done some pretty important work.
This G20 has obviously got more players than the G7, G8 process, and I actually spoke to him after the health care financing meeting meeting when we compared notes on some of these things that I was just talking about. So I think he is trying to reach out to the different players. I think he said he was going to speak to Chancellor Merkel again soon.
And just to give you--this goes back to one of the other questions, one of you mentioned. Prime Minister Rudd of Australia has an interesting idea to try to focus on this bank bad asset problem I have talked about and the recapitalization and, in a sense, try to create a framework that you could have the G20 with the IMF and World Bank continue to review the process of that, just like you have a stimulus program.
And so, in that sense, I appreciate the Prime Minister's leadership, and this meeting this weekend, obviously, gives the Chancellor of the Excheqeur an opportunity to try to pull a more diverse group together.
MODERATOR: Okay. [name omitted]?
INTERVIEWER:Â Just talking about the banks and bad assets, you said the stimulus program without action on bad assets would be like a sugar high, but you didn't say whether you feel right at the moment, we are like having a sugar high or whether actually we are getting coordinated and consistent action on bad assets.
MR. ZOELLICK: I think that there is more work to do in terms of reconciling the bad assets and putting capital in. All you have to do is look at the markets we are in, the equity markets for financial institutions.
There's a range of possibilities from the good bank/bad bank to some of the steps that Britain and the U.S. took to try to isolate assets on the balance sheet with, it's called a "ring-fence" [inaudible at 26:18] guarantee. I think the U.S. has tried to come up with an in-between idea with this structure of getting private capital in, financing most likely from the Federal Reserve, and this is--while it is easy to write op-ed pieces on this, it is hard to do, in fact, because you have to decide if you are going to buy the bad assets, at what price, and you have to be ready to recapitalize the institutions, and you need--if you are going to buy the assets, you need up-front money, and frankly, most parliaments and congresses have been weary of giving money to banks.
So that is one reason why I think you see people coming up with ideas like you've have had in the U.S., but they still have to be executed. So I think by making the point about the sugar high, what I am saying is, is that you have to see these as partnership efforts. The stimulus alone won't be enough.
At the G7/G8 Finance Ministers meeting in Rome, there was a discussion of this. I think all countries are struggling with it, but they are going to have to move it forward if we are going to be able to get out of this hole.
 MODERATOR: We can have one more.  INTERVIEWER: Two kind of related points. First of all, there is a great deal of concern that the situation could escalate into social unrest and political conflict, some of the vulnerable countries that you deal with could be de-stabilized. How worried about that is the Bank and are you, and in that context, do you think there is a degree of complacency about the escalation of this crisis being forecast, keep getting revised and worse and worse outcomes? Do you think that the measures that are being discussed at the G20 and beyond are radical enough? Are people thinking outside the conventional box enough?  MR. ZOELLICK: Well, first, I am concerned. As last year when we had the high food and fuel prices, we counted some 30 incidents of serious social unrest from the food and fuel prices.  In many poor countries, the food prices have not come down as much. The price of rice is still about 100 percent above what it was in 2005, and corn or maize, as you may call it, is about 40 percent higher. So, in many of those countries, you still had stress in urban populations, and now with the financial crisis going into an economic crisis, going into an unemployment crisis, you are going to have human and social dimensions of that.  So I am not making a specific prediction or forecast, but historically, you have seen that these undermine the political and social fabric, and so you can see the tensions, whether with Haiti last year or Ukraine or some of the Baltic countries now.  I have a strong interest in history. You don't have to go back too far and you start to see when you have serious economic downturns, it puts pressure on political systems, and the thing that I am most worried about is the fact that as you get into higher unemployment in the course of 2009 and publics put pressure on their leaders to do something, if the leaders feel that they are running out of constructive tools, well, then they will start to point fingers and take protectionist and isolationist factions. And those are the negative spiral of events that you saw in the '30s.  I am not predicting the '30s, but cooperative responses, avoiding protectionism, and taking positive actions together on the things we have talked about, trade finance, stimulus, banking recapitalization, it will put you on a track to at least get on an upward spiral as opposed to the downward.  MODERATOR: Okay. Thank you very much, everybody. |
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