Rome, Feb. 13, 2009
PRESIDENT ZOELLICK: [In progress]--hosted by Donald Kaberuka President of the African Development Bank, but we also has Asian, Inter-American, EBRD, and European Investment Bank. And then this morning, I started out at the World Food Programme, where I met the board and talked about some of the cooperative ventures, and then I just had a session with a U.S. Italian group.
Coming into this meeting, I think what I'm going to be focusing on, the G7, G8, is this is a particularly--remains a very dangerous time, and what began as a financial crisis has become an economic crisis and is now becoming an unemployment crisis; and without concrete action, it will become a human crisis on a global scale.
The World Bank released some estimates yesterday for 2009 that suggest that lower growth rates would trap an additional 46 million people into poverty, and that's on top of the 130- to 155 million people pushed into poverty last year because of the soaring food and fuel prices.
This is obviously going to have an effect on the Millennium Development Goals, and just to take one example of infant mortality, we estimate that as a result of the sharply lower economic growth rates, that between 200,000 and 400,000 more children a year may die, and that's out of a total of about 1.4- to 2.8 million children that perish each year.
We did an analysis of some 107 developing countries, and the report that we released yesterday mentioned that some 40 percent of these countries are already highly exposed to the poverty effects of the crisis, with the remainder moderately exposed, and only 10 percent facing little risk. So we clearly have a global crisis.
Unlike developed countries, three-quarters of these countries cannot raise funds domestically or internationally to finance programs to curb the effects of the downturn. This will not only affect the ability to achieve the Millennium Development Goals, but as the crisis hits developing countries, I expect you will see a second wave that will reverberate back on developed country shores, and then, of course, that could come back to developing countries. So decoupling is dead.
Not stepping in to assist developing countries will be shortsighted in another sense, because the developing countries could help to provide a growth platform to pull us out of this crisis, and if you take away that platform, you're removing one of the vital planks for a global recovery.
It's natural that all publics in developed countries are looking close to home. Many of them want to have their money stay at home, but in this environment, economic nationalism is neither economic nor nationalist because a backyard backlash will pull everybody into a downward spiral.
So I'm hoping that this generation of leaders doesn't heed the siren song of short-term protectionist fixes, whether for trade or stimulus or for bail-outs. This will be the time for truthfulness, and politically correct solutions may not be--or are likely to be economically incorrect.
But just because we live in a globalized economy doesn't mean that we're powerless to tame or shape it. Governments need to cooperate on a fiscal stimulus expansion within a framework of budget discipline. They need to agree on plans to reopen the credit markets, address bad loans so that the banks can be recapitalized, and agree on reforms for regulation and supervision.
But the message that I will be bringing to the G7 is that if we stop there without taking into account the needs of developing countries or having their voices at the table, we're only going to prolong the depth and length of this crisis, and the solutions will be half-baked.
Now, poor countries need three interventions in particular: first, safety net programs to help cushion the downturn on the poor, and that's one reason we're working closely with the World Food Programme because a number of their school feeding programs and food-for-work programs are important for countries that have little capacity; second, investment in infrastructure, which can help provide a foundation for productivity, while putting people to work; and third, finance for small- and medium-sized enterprises to create jobs, and a big component of that is making sure that micro finance continues to be available to those small enterprises.
To help meet these needs, I propose that developed countries agree to devote 0.7 percent of their stimulus packages to a Vulnerability Fund to support the most needy, and I believe this is doable and could be a very concrete outcome from the G20 meeting in London on April 2nd.
As I mentioned, I just came from a meeting of the heads with the Regional Development Banks, and all of them endorsed this Vulnerability Fund proposal because each institution can clearly see the toll that the crisis is taking in their own regions. Each institution is stretching with their current resources to meet the needs of developing country clients, but we need developed countries to scale up their support.
In particular at this meeting, I expect to be talking about the need for scaled-up trade finance because we've seen that in addition to the big drop because of slow-down in demand that companies are having a hard time getting letter of credit, and that even where we have expanded some of our Guarantee Facilities, there is a liquidity issue. So that's something that I and my colleagues are working on it real time.
And also, a special attention to the problem of banks in central and eastern Europe. Many of the banks in central and eastern Europe are western European banks. They've withdrawn the liquidity. Sometimes governments encourage them to bring back their money, and so what is a region that has already been particularly vulnerable to shifts in trade and investment and remittances could be hurt much further if the banking system isn't sustained.
And finally, I hope the G7 leaders will make clear a clear commitment not only to shun protectionism in favor of reaching global and cooperative solutions, but will hold themselves accountable for that process.
So our forefathers and foremothers experienced the lessons the hard way in the '30s. We have the advantage of their history, and we should learn from it.
Over to you.
MODERATOR: Questions? Yes, sir.
Question: [Inaudible] you mentioned the [inaudible] trade finance which is very serious for a lot of countries [inaudible] developed countries as well. Could you detail what concrete action the Bank is taking on its own or with other institutions, what sort of contacts you have had particularly with WTO on this issue?
PRESIDENT ZOELLICK: Well, first, we're trying to stay current on information on the problem, and I mention that because I'm working very closely with Pascal Lamy, of the WTO. We're also sharing information with the OECD.
The first step that we took was that IFC, which is the private sector arm of the Bank, increased a Trade Guarantee Facility from $1.5 billion to $3 billion. So we were trying to offer more support.
As I alluded in my opening comments, we found that some $1.2 billion of that has been taken up, but the problem now is increasingly one of liquidity. So a Guarantee Facility requires the loans, the export lending to be there, and then we help back it to make sure that it moves forward.
So we're now looking at a process, looking at ideas whereby we and some combination of governments, maybe export credit agencies, could work with a number of major banks in each region of the world to try to make sure that we provide much larger amounts of liquidity of a shorter term tenor, about 180 days, and have a revolving fund.
So this has a number of appealing features. One is where we can, we want to try to leverage our resources, and so where some of the banks have pulled back, if we can get the banks to reengage, that's a plus.
A number of the government export credit agencies have longer term financing for their projects to help boost their exports, and we're talking with governments about whether we can get some shorter term financing, and we're talking with some governments about some additional support.
I will probably have some discussions with some of them even this weekend on the side of these session, and as I left for Tunis, Prime Minister Brown invited Strauss-Kahn and I next week to come to London to talk about this and other issues, and so I know it's one that's on his screen as well.
So my hope is based on what we have started to do and what I have got moving, that by the time of the G20 meeting, we may be able to supplement our Guarantee Program with a pooled system, with our funds and others, and as we develop that, we need to bring it to our board, but that's one of the issues I think we have scheduled for late March. So we will try to keep it on track ahead of the G20.
MODERATOR: Yes, sir.
Question: [Inaudible.] President Zoellick, up to now, did you get any positive answers to your 0.7 proposal of a Vulnerability Fund?
PRESIDENT ZOELLICK: Well, from the start, Prime Minister Brown and I had talked about this idea, and I think it's one that he has encouraged.
I was in Germany last week, and I had been working with the Germans at the end of last year to try to see if they could support some of the particular programs that we've launched, and the German government put within their stimulus package, €100 million to subsidize some KfW lending programs so that we could produce about $500 millions of subsidized lending for infrastructure support.
And part of the logic here is with a number of these developing countries, we've seen infrastructure projects that are viable and, in fact, in process lose their finance because of the credit crunch. So you encounter debate when you talk about infrastructure: do people have the blueprints? are they ready to go?
We have viable projects that are losing money in midstream. So, if we can get these projects moving, it will help create jobs. Drawing from the Chinese experience in '97, '98, it's also a good basis for building future productivity, whether it be roads, ports, or other aspects.
And then the third aspect that appealed to the Germans was the idea that we would have--they would have to boost some of their capital good exports.
In addition, last week, KfW agreed to join us in creating a $500-million pool of financing for micro finance, and so one of the things we learned in micro finance is they haven't had the bad debt problems that other banks have had, but a number of those institutions who rely on cross-border borrowing have dried up. And so, again, we're trying to provide a liquidity facility.
Third, the Japanese government, a week or two ago, sealed with us a $2-billion contribution to a fund we created to help recapitalize banks in poor countries. So we had put in a billion dollars from IFC. They put in $2 billion, and that is important because in Europe or the United States, you need to recapitalize banks, you can turn to your legislature for the money, but in many developing countries, they don't have the funding.
So those are the sort of initial efforts, and I hope it'll show a pattern. And you can see part of what I'm trying to encourage here is if one just asks for general foreign aid in this environment, it's very hard to get it, but for some countries, some are interested in infrastructure, some are interested in micro finance. My suspicion is the U.S. traditionally has been more supportive of some programs like the World Food Programme has on the humanitarian side.
So the concept of the Vulnerability Fund is not to create a new structure. It's saying we've got mechanisms in the UN system, our system, Regional Development Banks. Let's try to coordinate this, and maybe some will go for additional trade finance, but I want to try to use the G7 meetings and the G20 meetings to try to build more support.
Question: From the New York Times.
A lot of people here are speaking about the importance of the United States reinvigorating its economy by dealing with [inaudible] of creating a sense of improved confidence in the world. From the perspective of you being the main representative of the world's economy, how do you think the administration is doing so far, as they try to, I think in the world economy, assess that it is taking the necessary steps? And I guess I would point to the stimulus package, as well as the attempts to develop a [inaudible] finder.
PRESIDENT ZOELLICK: I think they are focusing on the right issues, and the point that I made to U.S. leaders, but also ones around the world, are that I hope that the G8 and G20 will focus on six things. One is stimulus packages where you've got the physical space to do so. Second is getting the credit system working, even while the banks aren't working. Third is in--there are different ways to do it, but resolve your bad asset problem and get banks recapitalized. Fourth is the financial regulation supervision fix that needs to be made, and--I thought I had another. Oh, fifth is support trade in open markets, resist protectionism, and sixth, the one I am trying to get on the screen, is the developing world, and don't forget them.
So, if I look through that list, one has to recognize that I think the administration has been in office, what, about two and a half weeks or something? And I know from multiple experiences, how challenging that is. People don't have their feet in place, and they are trying to run at 100 miles an hour.
So they are moving on the stimulus plan, and you can debate the components of it, but I think that was a very important step. I think Secretary Geithner has put out the structure for the banking sector, and now they have got to follow through, but within the first two weeks, I think that was important to do.
The credit system, I think has primarily been an example of the Federal Reserve's innovation, and I think some of that was touched on by Secretary Geithner, but if you want a good overview of it, the speech that Bernanke gave at the London School of Economics a couple of weeks ago, it will give you a good sense of what they are doing to, in a sense, create an alternative credit market.
ATTENDEE: A follow-up. And there is a lot of criticism about this in the U.K., but you are seeing it with regards to the U.S. too is the accumulation of debt, the result going to have problems in the long run, just for people to say in those areas [inaudible].
You know that as well as anyone that [inaudible] huge problem in developing countries, [inaudible].
PRESIDENT ZOELLICK: Well, that is one point when I said was in a framework of budget discipline, and I think if you look at the causes of this challenge and this came up, actually with the group I just spoke to, people saw an imbalance in the larger system between U.S. consumers and Chinese savers.
So, while I personally believe you do need a strong stimulus package, over time you are going to have to get at that imbalance too.
Now, knowing a little bit about the American political system while it moves in fits and start, I think one of the reasons that the stimulus package ran into some of the debate was a recognition that people have that they're going to have to come back and get at that budget discipline. Now, time will tell whether that's addressed, but I think people are focused on the issue.
I think on the trade and protectionism, to continue it, I think that the "Buy America" provisions that particularly were in the Senate version were particularly dangerous, and I think that that has heightened attention, but I personally believe one has to always keep focused on that because there is nationalist impulses in all countries that are going to plead to protectionism.
I've started to talk with some people in the administration about some of these ideas on the developing country side, and I think that Secretary Geithner will get some chance to get exposed to some of that this week.
So I think they are focusing on the key issues, and the demanding part would be in the delivery, which is partly the policies and partly the issues that affect the larger world economy.
Question: From the Spanish News Agency, EFE.
You were trying to focus on developing countries. I would like to know what is your diagnosis on South America and Latin America and Caribbean, and those countries, some of them have had healthy budget policy, and you were talking about that as well. And another thing [inaudible] World Bank [inaudible] focus on that region.
PRESIDENT ZOELLICK: Well, obviously, there is in any region some significant variety and diversity. But one of the effects of the economic crisis has been that countries that had pretty good fiscal programs, like Mexico--or in another part of world, Indonesia, but Colombia--have found themselves in a position where they were less certain that they could have the resources to run maybe a very modest deficit, such as 2 percent of GDP. The European rules are 3 percent. U.S. is deeper than that.
And they want to be able to spend that either for social safety net programs or for infrastructure programs, and so this is where the World Bank has tried to fill some of the gap.
We are vastly expanding our lending. I announced that we had the capital to do about another $100 billion of lending over 3 years, about $35 billion this year. And I forget precisely but we can check on it, I think in Latin America, we were looking at about $13 billion of loans this year of lending.
And a good example is Mexico, where I met with Minister Carstens just last week, and we have a product that is a deferred draw-down option, which is very attractive, which means that they can get us to commit, and then if they have trouble getting the borrowing in international markets, that we will--they can get the loan. So they pay a very small fee; in a sense they have an insurance policy for a deferred draw-down option. So this reflects some of the different financial options that were offered.
Now, I think the strain is going to continue. We are expanding some of our lending operations in Brazil, as well, and so for some of the bigger countries--we've continued in Argentina. Chile may need some modest increase. We're trying to be there, working with the Inter-American Development Bank.
Now, you mentioned the Caribbean. Jamaica, for example, has had a government that has been trying to deal with a very large debt problem. So we've been working to try to help restructure the debt in Jamaica, working with the Inter-American Development Bank and others, and I think we have about a $100-million loan going to Jamaica.
But in some countries like Central America, you're going to have particular problems. So, in some of the poor ones like Nicaragua and Honduras, we used a rapid financing facility that we created last year with the high food prices to help provide some modest sums of money for some of the safety net programs or seeds and fertilizer programs on the agricultural side.
So, if anything, I would think that our Latin American clients have been rather quick to try to use the overall Bank's resources. And just so people have a frame of reference here, because I know you wouldn't cover this regularly, the IBRD part of the World Bank lends at basically our AAA borrowing rate with a slight increase, and that's for countries that are middle income or low and middle income.
For the 80 poorest countries, we have something called IDA, International Development Association, and those countries get either grants or long-term loans with no interest rate, and that we have to raise every three years. And so last year, we finished the pledges for IDA-15, and we have $42 billion of commitments for the next three years. So I have $42 billion for those poorest countries.
And then IFC, our private sector arm, does about 30--probably about $30 billion worth of business over the next three years.
So what I was talking about with some of these other aspects are ways I try to leverage on top of that.
MODERATOR: We have time for one more quick question.
PRESIDENT ZOELLICK: Well, as I've said, I think you're going to see a decline in Millennium Development Goals. The target date is 2015, and so I don't think people should pull back in terms of trying, and you've seen different regions of the world move faster than others.
I continue to think those goals are good goals for us to be pursuing, but there's no doubt that this crisis, as I gave you a particular example of infant mortality, is moving the wrong way.
MODERATOR: Great. Thank you very much.