Global Development Finance 2001

Washington, DC, April 10, 2001

PROCEEDINGS

MR. HAY: Let me just say good morning, everyone. Thanks very much for coming along to our launch this morning of Global Development Finance 2001. Let's start off with the obvious and just remind you that it's embargoed until 2:00 p.m. Eastern this afternoon, and having said that, let's start off with some introductions. On my immediate left is the by now very familiar Nick Stern. To Nick's left is Hans Timmer, who is one of the co-authors of the GDF this year, and on his left is Ashoka Mody, who is the principal author of this morning's report.

So without any further ado, let me hand proceedings over to Nick.

MR. STERN: Thank you very much, Phil. Let me add my welcome to Phil's. It's very nice to see you again. What I'm going to do is just to pick up one or two highlights which I take from this report before handing over to, as Phil has mentioned, the principal authors of this report, Ashoka and Hans.

Now, the first thing that I take away from this is that we're about to enter a decade -- indeed, this process has already started -- where per capita income in developing countries is growing faster than per capita income in developed countries. And I think that's a very important change. In the 1990s, they were very close, the growth rates for per capita income in the developed and developing countries, but now, I think we're seeing a slight gap, quite a small gap opening up with developing countries' per capita income a little higher than developed.

Now, this acceleration of growth in developing countries has, I think, is clearly rooted in better policies. We have seen better macro policies. We've seen better trade policies. And as I'll argue in just a moment, we've seen better structural policies associated with creating the right climate for investment, and those policies are reaping their rewards.

The picture is very far from uniform; very different in different countries, but as a broad generalization, we can say that.

At the same time, I think we have to recognize that the world economy this year is slowing, and that's something I think that we're well aware of. We do think that it will start to pick up again next year. As ever, the most difficult part of the economist's task is spotting turning points, and just when you date the turning point and the pick-up is something which is really quite a hard call, but we do think that sometime toward the end of this year, the slowing down will stop, and it will start to pick up again. As I say, big prizes to those who can tell us exactly when that turnaround and pick-up is going to start, but we do think that towards the end of the year, that is likely to be the case.

Now, the next point I wanted to raise was concerning foreign direct investment, because I think there is quite a strong lesson from the behavior of foreign direct investment. We have seen first that it has been much more stable than portfolio investment, and I think that is encouraging in the sense that it shows that investors are prepared to continue making long-term commitments in developing countries. It has -- it did go down a bit after the Asia crises, but I think that it has shown some resilience, and that's encouraging.

There also is a warning there, of course, in terms of the volatility of portfolio flows, and I think we understand that that is a problem, and the way in which portfolio flows dropped after the Asia crises I think is a lesson on the volatility of those particular flows and the need for care.

Now, that's, as it were, the broad picture of foreign direct investment. Also, I think if you start to look at the detail of foreign direct investment, you realize that it goes where the investment climate is strongest, and that is something that is a very important lesson for the international financial institutions. It's our job to work with the countries where we work in developing countries to try to improve governance and the investment climate; policies and institutions that underpin the investment climate to try to make them stronger in terms of investment opportunities, stronger first, of course, for domestic investors, but when one strengthens the picture for domestic investors, one also strengthens the picture for foreign investors.

That is a key part of the work of the international financial institutions to create that climate for growth and further, of course, to create opportunities for poor people to participate in that growth. So when you look at the picture that emerges from the numbers, and this is a number-intensive publication, I think you do see important lessons there. And as many of you know, I've lived and worked in one particular Indian village for the last 27 years. I lived in it an extended period in 1974 and have been going back ever since, and those lessons on the investment climate and the importance of people participating in the growth process are very strong right down at that local micro level.

Investment climate is important to agriculturalists; it's important to small firms in rural areas; it's important to small firms in towns; it's important to big firms in towns. It's a fundamental aspect of the development process.

I have to say I spent a fair bit of my time since I got here -- I'm still moderately new. I'm told I can get away with describing myself as new for at least a year, so I've got another three months of that to go, but I have traveled a lot. I've been on the road in South America and South Africa, East Asia, South Asia and most recently a couple of weeks ago, I got back last week from India and Pakistan, and I have to say the realization in the countries where we're working of the importance of the issues I've just described concerning the investment climate and the foundation for growth together with the participation of poor people in that process, that realization is strong and clear, and it's very encouraging, and I think it's an indication of the way in which policies and institutions in developing countries are improving. It's an indication of what's underlying this small but significant acceleration in growth which we've seen and are seeing in the first decade of this century in developing countries relative to the last decade of the last century.

So let me stop there by way of introduction. I'll hand over to the people who really did the work on this, Hans Timmer and Ashoka Mody.

MR. TIMMER: Thank you very much, Nick. My name is Hans Timmer. Let me introduce the short-term macroeconomic outlook. The short-term growth prospects have deteriorated rapidly during the last couple of months, but like Nick said, a quick rebound is still likely, and the medium-term outlook is not bad at all.

In Chapter One of this report, we try to analyze the impact of the current slowdown on developing economies, and with four graphs, I would like to illustrate some of the main messages of that analysis. In the first graph, we see growth rates of GDP from 1997 onwards, including forecasts till 2003. The bars indicate the world as a whole, and the yellow line refers to developing countries, and the pink one to the United States.

The Asian crisis was followed last year by the best performance in over a decade, but this year, we expect for the world as a whole a growth rate of around 2 percent, and that is very similar to the one during the trough of the Asian crisis. However, the regional composition of that growth is quite different. While the Asian crisis was mainly an emerging economy phenomenon, the current slowdown is mainly originating in the United States. Yet, there is a similarity. While the Asian crisis was triggered by a reassessment in financial markets about long-term profitability, also, the sharpening of the slowdown in the United States toward the end of last year was related to a reversal of sentiment in financial markets, reacting to huge imbalances in the United States like the negative saving rates of the households; overinvestment; the high-tech boom and all cumulating in the widening gap of current accounts.

And that reversal in sentiment was reflected in sharp movements in the Nasdaq; the spread from high-yield bonds and even the dollar. These recent developments are yet again an illustration of the increased importance of financial markets in the world economy.

What are the prospects for developing regions in this environment? The second graph shows the growth rates last year and the expected growth this year for six developing regions. The impact of the slowdown on developing regions is quite diverse. Those that are specialized in high-tech products or those that have a large export share to the United States are hit hardest. On the other hand, for others, especially those with a large debt service, the lower interest rates mitigate the impact of the slowdown, and also, the value of the dollar is an important factor. For several developing economies, it's likely that they will benefit from the expected weakening of the dollar.

Let me go through the six regions. In East Asia, we find most of the countries that are specialized in semiconductors and related products, and those are the countries that are hit hardest, and the still-solid growth in China of about 7 percent keeps the regional growth rate about 5 percent.

South Asia is only moderately affected by the slowdown and will not, in our forecast, show a large difference in growth rates. And within Latin America, the performance is quite diverse. Mexico is experiencing a sharp decline in exports, with 75 or 80 percent of their exports going to the United States, but others, like, for example, Brazil, they already benefit from the lower interest rates, or they are still in the upward phase of the business cycle.

The sharp decline in Europe and Central Asia that you see there is mainly due to Russia and Turkey that are unlikely to repeat last year's growth performance. The Middle East is expected to translate the higher oil price of the last two years into somewhat higher growth, and Africa, mainly oriented towards Europe where the slowdown is much more moderate, might experience a slight rebound after several years of bad weather, and also, in Africa there are a couple of large oil exporters.

Let us turn to world trade. This graph shows the volume growth of world trade and volume growth of the sales of the global semiconductor market. World growth is expected to drop from the record 13 percent last year to around 5.5 percent this year, and trade and high-tech products have been an important factor behind the large swings in world trade. For example, in 1999 -- that's the most recent year for which we have detailed data on trade -- the contribution of high-tech products to the growth of exports in value terms was between 85 and 100 percent for East Asia; for Europe and for the United States, and for example, in East Asia, the export share of high-tech products as share of total exports has risen from 14 percent in the beginning of the last decade to almost 35 percent now.

The importance of the high-tech markets is one of the reasons why we expect a quick rebounds. The high-tech markets, they tend to rebound quickly, and that's mainly because of the character of those products. There is hardly any scope for a long inventory cycle. Chips and other high-tech devices, they become quickly obsolete, and old inventory has to be replaced by new production. But this is only one of the reasons why we expect a quick rebound. Other important ones are, of course, the low inflation in industrial countries and the improved fiscal position in the United States and Europe, which creates a scope of further interest rate cuts and tax cuts.

But there are major risks to this forecast also and especially in the financial markets, and this last graph, the bars in this last graph, they show the recent rise in debt associated to delinquencies and bankruptcies in the United States and Japan, and the lines, they refer to equity prices. And the resulting weaknesses in domestic banking sectors, that may reduce the effectiveness of easing of monetary policy.

The lower interest rates that we see and that we expect further, they could be counteracted by tighter lending conditions, and similar dangers are already observable in East Asia. So the continued weaknesses of domestic banks could jeopardize the quick rebound in the high tech sector.

Another risk associated to this forecast is that the probability of isolated crises has increased. Even if the ultimate cost is a domestic one, a worsening of the external environment can always be the final trigger.

Before we go to Ashoka Mody for the analysis of the international capital markets, let me quickly summarize the main macroeconomic story line. We currently experience a sharpening of the slowdown beyond what we would call a smooth, soft landing, especially in the United States and East Asia. The impact of that slowdown on developing countries is quite diverse: some hit hard, some hit milder. At the same time, we wouldn't call this a hard landing. A hard landing can still be avoided, and that's because an early recovery, in our opinion, in the second half of this year is still possible. It's driven by lower interest rates, by lower taxes and by the character of high-tech products that change the characteristics of the business cycle.

And finally, there are significant downside risks, mainly associated to the vulnerability of domestic banks. Thank you very much.

Ashoka Mody?

MR. MODY: Thank you. Thank you, Hans.

In addition to the short-term outlook, our reports also focus on a set of policy questions that are of urgent interest, and this year's report has been guided by recent experiences that have called into question a long-held view that international resource transfers, both public and private, work primarily to accelerate growth and raise the living standards of the poor.

Much of the thinking on global finance recently has focused on the causes and consequences of financial crisis. The memories of the East Asian and Russian crisis have not yet faded. Not only have private capital flows come to be associated with financial upheavals; additionally, some have raised a more fundamental question: do these flows, indeed, can these flows stimulate economic development?

At the same time, the role of official aid has also come under scrutiny. On the decline through much of the decade, aid has been criticized by some as being ineffective. These concerns relate to some urgent policy issues; for example, the design of the international financial architecture and the feasibility of achieving the international development goals, especially the reduction of poverty in half by 2015.

This report concludes that international financial flows to developing countries are perhaps more valuable than traditionally thought and that the prospects for using them effectively continue to improve. These flows work to transfer resources across national borders from rich to poor countries and to create and realize investment opportunities. But they can have an even greater influence on development by stimulating improvements in developing countries policies and institutions. They can thus reinforce domestic initiatives to step up productivity and efficiency in the economy.

Clearly, however, as the events of the past few months have demonstrated, considerable uncertainties are likely to remain with us. With the stock market decline and the accentuated downturn in the United States, we once again see evidence of the powerful interaction between financial markets and the real economy. This chart shows that volatility in financial markets can be transmitted remarkably quickly across borders. When emerging market stocks gyrated in 1997 and 1998, so did markets in the United States. Today, arguably, the ups and downs of the U.S. markets are causing emerging market stocks to fluctuate pretty wildly.

As a consequence, trends in private capital flows to developing countries continue to remain uncertain. Our base case scenario is that long-term private capital flows to developing countries will indeed rise further in the next few years, following their rise this year to US$257 billion. But as this next chart shows, the rise in private capital flows since the Asian and Russian crisis has not kept pace with economic recovery, so capital flows are down in relationship to GDP and trade. Flows are likely to remain volatile, and the expected moderate increase will imply that the ratio of private capital to GDP and trade of recipient countries will remain below the peaks attained in the mid-1990s.

But this moderation in flows may be a good thing. Some part of this slowdown in capital flows stems from the decline in speculative short-term flows and reflects, therefore, an improvement in the quality of capital flows going to developing countries. The moderation in flows and also the repayment and restructuring of some part of the debt implies that debt burdens have declined. In particular, debt to export rations have fallen for virtually all developing countries.

After the exuberance of the midnineties, it appears as though a cleansing process is ongoing. Viewed over the medium term, the report reaches an optimistic prognosis on the developmental role of international resource transfers. In this respect, the report considers four topics: the impact of private international capital flows on developing country growth; trends and implications of external aid; progress in debt relief; and the first quantitative overview of a new topic, international financing of global public goods. I will briefly report on each of these.

First, the ongoing process of global financial integration offers the possibility of a growth dividend, but such a dividend is not automatic. It has to be earned. In the 1990s, countries with above-average capital flows also experienced above-average growth rates, but these better-performing countries also had stronger investment climates, better educated work forces, better infrastructure, less red tape and were more open to international trade. Private flows go to countries that have a favorable business environment, and in those settings, they reinforce the growth process.

Thus, clearly, since the 1990s, countries pay a higher price for weak investment climates. This chart shows that while capital flows to developing countries increased over the 1990s -- that's the yellow bar -- they grew exponentially to developed countries. That large, yawning gap that you see in the chart is capital being sucked particularly into the United States as that country grew at unprecedented rates in the latter part of the decade. Most developing countries did participate in the global increase of capital flows in the 1990s; however, the share of private capital going to low-income countries fell from already low levels as, indeed, did their growth rates in the 1990s relative to the 1980s.

In contrast, the share of private capital going to the top 10 recipients increased over that time, and their growth rates also rose. Thus, private capital flows operated in a differentiated manner across countries, reinforcing growth in favorable settings.

Where capital flows are volatile, growth is reduced. This chart shows that higher average volatility is associated with lower average growth. Some part of the volatility is home-grown. It comes from inconsistent domestic policies. But the volatility also arises from sudden and unexpected shifts in market sentiments. Thus, taking advantage of the potential of private capital flows requires a significant domestic policy effort to upgrade the investment climate which is valuable in and of itself. A specific aspect of this environment that is of importance is the financial sector that directly or indirectly mediates foreign capital flows. A more robust financial sector helps spur growth and also dampens the volatility that accompanies foreign capital.

The report's second main finding relates to official flows. For the first time in a decade, the prospect of more official aid and more effective aid are both real possibilities. But vigilance is required to sustain them. Official aid has increased modestly since 1997, reversing the decline from the early part of the decade. The increase to date is largely explained by temporary factors, in particular, by the increase in Japanese flows to East Asian economies following the financial crisis in that region. Other donors, however, have signalled significant commitments to increased aid levels.

Commitments to higher levels of aid have been helped by improvements in the domestic policy environment across a broad range of recipient countries, making more aid more effective. Lower inflation; better-educated work forces; generally sounder fiscal situations; and more recently, lower burdens of debt all contribute to permitting more vigorous action for poverty reduction. Also, increasing allocation of aid to countries with better policies has made aid more productive in reducing poverty.

For the first time in a decade, therefore, the prospect exists for more aid and more effective aid. Continuation of these strengths is essential to achieving the goal of reducing poverty in half by 2015. Though these calculations are only illustrated, even the rise in aid from the present quarter-percent of country GNP to one-third percent of their GNPs could generate almost an extra US$20 billion and go a long way to achieving the international development goals.

Third, debt relief under the Heavily Indebted Poor Countries Initiative was stepped up, and relief delivered in the past year was more than in all of the prior years of the implementation combined. For the 22 countries that have already begun to receive relief, the ratios of debt service to exports and debt service to fiscal revenues as shown in this chart will fall significantly over the next few years. The momentum to deliver relief to other eligible countries is clearly strong.

Now that debt relief is well underway, attention must focus on achieving growth and implementing strategies for accelerated poverty reduction. The HIPC initiative is noteworthy also because it embodies some of the leading-edge approaches to delivering aid effectiveness: greater domestic ownership of necessary policy reform; a shift from financing individual projects to more programmatic assistance; and hence, more effectiveness of aid through potentially better donor coordination.

And finally, international donors and private foundations have provided increased funding to such international public goods as health, environment, knowledge and safeguarding of peace. Our estimates, the first such comprehensive attempt, show that the official donor community and private foundations provide about US$5 billion toward the financing of global and regional public goods with an additional US$11 billion toward complementary country-based programs that help the effective domestic absorption of these international public goods.

This final chart focuses on concessional aid that goes toward the financing of international public goods. The top line in this chart shows the decline in average levels of aid that occurred in the second half of the nineties. However, the bars show that despite the decline in overall levels of aid, the share of aid going to these international public goods actually increased over the same period.

Clearly, more resources are needed for international public goods, and in recent days, a number of proposals have been suggested to that end. But just more money will not do it. That money needs to be well-spent. Since success depends on the actions of many parties, a more far-reaching consideration is establishing stronger incentives for responsible action, particularly for protecting the environment and ensuring financial stability. These, in turn, require greater efforts at international cooperation through the establishment of standards, agreements on treaties and supporting regulations.

Coordination among donors and coalitions with other stakeholders take on a special urgency in this context. A challenging policy agenda lies ahead.

Thank you.

MR. HAY: Ashoka Mody, thanks very much.

Let me just say with the spring meetings coming up very fast, April 26 to 30, this week is the final week where you can apply for accreditation. So, love to see you there, so go onto the Web if you're not already registered for accreditation.

Let's open it up for questions. Gentleman right at the back in the back row.

MR. DRAJEM: Thank you; Mark Drajem from Bloomberg News. On page 11 of your report, you mentioned that there are a number of developing countries that have domestic imbalances that put them at greater risk because of the global slowdown. What imbalances are you talking about, and what countries in particular are you referring to there?

MR. TIMMER: Okay; there are a couple of imbalances that we were thinking about when writing this. The first one is on the exchange rates. There are still quite some countries which perhaps don't have overvalued exchange rates but have a danger of having an overvalued exchange rate, and they're not free from possible attacks to that. That's mainly in Eastern Europe and Latin America. And there, the situation is completely different from East Asia.

Other possible dangers are for some of the oil exporting countries that spend a lot of their oil revenues, so when the oil prices are going down, that could generate domestic problems; just a couple of those examples, yes.

MR. HAY: Okay; let's go -- gentleman here down the left, and then, we'll -- wait for the mike and then identify who you are, Mark.

MR. EGAN: Mark Egan with Reuters. A question for Mr. Stern. You say in the report that the possibility of the low-case scenario, talking specifically with the United States, has deteriorated rapidly in recent times. Nowhere in the report do you tell us what the low-case scenario is, so if you could maybe expand on what the worst-case scenario is in your opinion for the United States.

And also, how much confidence can you actually have in this forecast? You said, you know, for any economist, it's difficult to predict a shift, and in the U.S. example, your prediction is two full percentage points lower than it was just five months ago, so, I mean, it seems to be a rapidly changing situation, and how confident can you be that there will, in fact, be a rebound in the second half?

MR. STERN: There is always -- the greatest difficulty for economists in forecasting is predicting just when a turnaround is going to be. It's predicting, if you like, when a trend is going to shift from one direction to another, and those turning points are always the toughest part.

But Hans Timmer set out the reasons for believing that this downturn will not be prolonged, but we can't say, of course, with any great confidence just when that turnaround will occur. But if you do look at the situation relative to, say, the East Asia crisis, you do get a very different picture. The origins here are in the United States, and there are reasons to believe that that turnaround will come reasonably soon. There is a lot of scope for monetary and fiscal policy reaction, and because of the nature of the investment now, which is at a much shorter inventory cycle because of its high-tech, IT orientation, you also get, I think, a reason for thinking that this slowdown will be fairly short-lived.

But no one can say with great confidence just how big it's going to be and when the turnaround is going to be. Obviously, we make the best effort.

But, Hans, if you would like to take up the particular question of the details of the low-case scenario?

MR. TIMMER: Just a factual point: the low-case scenario that we are referring to is a low case that we had developed in the Global Economic Prospects that was presented last December, so it's not one that we have developed for this publication.

And that was a scenario in which we had a longer downturn in the United States. We had a much sharper decline in the dollar, and we had a reversal of capital flows away from the United States. And that is, for the United States itself, a more pessimistic scenario; and also, for some of the developing countries, it would remain a longer period of low growth with all of the consequences of that. So the current forecast is not that that low-case scenario will be realized.

But since we have adjusted our baseline scenario towards the low case, it's indeed one or two steps closer to that low case scenario.

MR. HAY: Okay; let's go to the gentleman here. Then, we'll come to you and come back here.

MR. BARERRO: Ruben Barerro with the Mexican news agency Notimex.

This is a question for Mr. Stern. In the report, you say, in talking about Latin America and the Caribbean, you say it's highly probable that in the future, the flow of capital investment toward that region will increase, but, I mean, you do not put any number or any projection. I was wondering, you know, if you can help us a little bit on that.

And also, on the issue of Mexico, the report says that Mexico will be the country that will have the highest impact of the slowdown in the U.S., but assessment, Mexico, Brazil and Chile are pointed as three of the countries in Latin America that could have a greater benefit from this increase in capital flows, so I was wondering also, you know, if this was going to be the ultimate assessment; I mean, if Mexico, Brazil and Chile will stand as the countries which most benefit from these flows?

And lastly, in Mexico in particular, I wonder: you say that also in the report that these high increases in capital flows will be due in part to more inversions in new areas. I was wondering if you could, you know, be precise as to what areas you are talking about.

MR. STERN: Let me begin, and I'll hand over to my colleagues. Obviously, the biggest economies in Latin America are Mexico and Brazil; Chile also very important. So if you're talking about the prospects for Latin America as a whole as you say in your question, you're really talking about particularly Mexico and Brazil as being the biggest economies in that region. Both economies have really made strong progress in the last years in improving the overall climate for investment, and including in that prudent macroeconomic control.

Now, that is basically the reason that we think that the flows to those countries, and we can include Chile here, would increase. Precisely how much they're going to increase, I mean, frankly, we don't know. But what we're doing is looking at the underlying causes, the underlying real phenomena, structural reforms in those countries and saying that they have already been yielding strong benefits in terms of growth and flows and that we expect those to continue.

Again, as you point out, particularly Mexico is going to be affected by the slowdown in the U.S., but what we're doing here in making those kinds of assessments going forward is thinking of the next, the coming decade and what the prospects for the coming decade are.

But Hans, Ashoka, is there anything you'd like to add?

MR. MODY: Yes; we do actually have, for better or worse, a forecast for capital flows to developing countries. It's on page 56 of the report. But for Latin America, our forecast, our baseline is that it would increase by about $20 billion over last year. I should say that -- reemphasize what Mr. Stern has said, that when we look at capital flows, we look at both domestic factors that attract capital flows to a country as well as the conditions of international financial markets.

While we feel optimistic on the domestic creditworthiness factors which have improved quite considerably over the last couple of years, we are somewhat less optimistic on the conditions in the international financial markets, which continue to remain very volatile, and that volatility has, in fact, been the cause of constraining flows to Latin America even during this year, and just looking at the very early reports on flows that have occurred in the first quarter of this year, it's likely that this estimate is somewhat optimistic.

However, we do expect that over the medium term, capital flows to Latin America as to other developing countries will continue to grow.

MR. HAY: Stefan, gentleman with the blue tie, fourth row.

MR. ANSTEY: Chris Anstey with AFX News.

I'm interested in hearing your views on to what extent the growth forecast for East Asia and prospects generally for East Asia will be affected by a continued depreciation of the yen. This was mentioned in some forums in East Asia recently. One number that has been bandied about is that if dollar-yen rises above 130, the Chinese will start to look again at devaluation. This will have knock-on effects for the region.

To what extent does this represent a threat, and to what extent do you think it actually will become a threat?

MR. STERN: Obviously, in understanding the way in which trade is likely to move and competitiveness and so on, you have to look at both the price and aggregate quantity effects. The price effects associated with real exchange rates on the aggregate demand side is associated particularly with the incomes of the people who are doing the importing.

I think that the East Asian economies, including China, are still pretty competitive at existing exchange rates. So in looking forward, we were placing greater emphasis on, as it were, the aggregate demand side and incomes in the U.S. and in Japan. So I think that if you're looking over the next year or two at what the likely effects are going to be on East Asia, it's those sort of aggregate demand side things rather than the price competitive effects.

Of course, they are important, and I don't want to minimize them, but I think it was really this aggregate income side that we were placing greater emphasis on, and the competitiveness, I think, is not too bad.

MR. HAY: Gentleman just down here in the front.

MR. SITOV: Hi, my name is Andrei Sitov. I am with TASS, with the Russian News Agency. I have a question on Russia and the region. I understand you to not subdivide the projects for particular countries.

But still, you say that the region as a whole will have the lowest growth rates. You mentioned that specifically Russia and Turkey were to blame for that, so the question is how do you explain that? The Russian Government seems to be very optimistic about their program. I know for a fact that many people here were or had been optimistic, very optimistic, about the Turkish economic program. So basically, if it's a matter of failed policies, then, what was wrong with the policies when they were formulated and when they were heartily supported by the Bank and the Fund?

And I also had a question for Mr. Mody: how important, in your view, an impediment for growth for that region is the burden of debt for them?

MR. STERN: Let me start that off, and I'll hand over to my colleagues.

I think the prospects for growth in Russia, obviously, are going to be affected in part by oil prices. You know, Russia is, as you know, a very strong exporter of natural resource-oriented exports. And as we know, oil prices have been falling, and we expect them to fall a little more over the coming years. So that's one part of the story.

I think a second part of the story in Russia is the importance of pushing forward in structural reforms, and I think President Putin has recognized that very clearly in his recent statements. I think that it's been recognized very clearly by the economics team in Russia, and the challenge, of course, is pushing ahead with those structural reforms, and I think the economic analysis within Russia -- i'm sure you know them better than I do -- would share that assessment that we have seen a lot of stabilizing in the political environment in Russia. We have seen growth associated with the real devaluation which took place after the end of 1998. But what's going to drive things in the future is the quality of the structural reforms and how fast they go, and I think we all know that there is a lot to do in that direction.

But if my colleagues would like to add

something --

MR. TIMMER: There is a lot to do in that direction, but the changing growth rate that you see is not at all a sign of a negative assessment of the current policies. It mainly has to do with the very high growth rate that Russia experienced last year that was over 7.5 percent, and it was a combination of a couple of very beneficial factors. First of all, we benefitted from the higher oil prices, so they reduced the problems domestically. They were in the rebound after their own crisis, and they benefitted from the depreciation of the ruble.

So that ended up in a growth rate of 7.6 percent, I think. What we are seeing is that growth rate is likely to go down to more sustainable growth.

The growth rate of Turkey last year was 6 percent, so that's also difficult to repeat that this year.

MR. MODY: On the debt, as I mentioned in my remarks, the level of debt in relation to exports has come down pretty much in every region of the world, and this has been due partly because some part of the debt has been repaid, but essentially due to the fact that exports have grown very rapidly in 2000. So if you take the overall picture for developing countries and especially for the ECA region, the Europe and Central Asia region, the debt ratios are down considerably.

So in one sense, the debt problem is less severe than it was before. However, the questions of timing of debt repayments; the structuring of debt; the composition of debt, these are all important, ongoing policy questions, and while I don't want to comment in detail on them, these are the kinds of policy questions that relate to the broader development of the international financial architecture.

MR. HAY: Stefan, gentleman with the very bright yellow tie.

MR. FIDLER: It's Steve Fidler from the Financial Times.

I have a question about investment flows and to what extent the investment flows to developing countries are driven by the push factors you mentioned, and what proportion is influenced by the pull factors, the policies in the receiving country and whether the rise in FDI that we've seen to developing countries in the 1990s could be merely a reflection of things that won't be repeated in the next decade, such as very strong financial markets and that kind of thing and the prospects in reality for FDI to developing countries and other types of investment to developing countries are actually much less rosy for the next decade than they have been in the previous decade.

MR. STERN: I think that the process of improving the investment environment and the attractiveness of the investment environment in developing countries is underway, but it's got a very long way to go. And so, I don't see that the trend of the 1990s in terms of FDI will stop, and as Ashoka has already pointed out, you've got the table on page 56, which gives some suggestions of -- on the quantitative side with, I think, a US$20 billion increase for Latin America, a US$20 billion increase for Asia. So those are significant increases.

But let me just give you one example where I think that the potential could be very strong. Currently, in India, the FDI as a fraction of GDP is about a half a percent, whereas, in China, it's about 5 percent, and given that the Chinese GDP is probably roughly twice India's, there's a ratio there of about 20 FDI to China, about 20 times what it is to India.

I think India is growing as a destination for -- in terms of attractiveness for investment. There is obviously a lot more that the Indian authorities could do, a lot more to make it more attractive, and those issues are under very strong discussion in India. The same is true with other developing countries also. And if you then think -- what you've got is the situation in developing countries improving. If you don't think of their relatively small share of total FDI that they have, then, the potential for switching FDI to the developing countries as that investment climate improves is really very big.

So I think that the trends that we saw in the nineties will actually get stronger in the coming decade. There are, of course, uncertainties and circumspection born of the crises of the second half of the nineties, and I think people are being more analytical, more careful in making investments. That is no bad thing. I think that adjustment has been made so that as the investment climate improves, you are going to see stronger FDI in the coming decade.

MR. MODY: Nick has really answered the question. I would just say three things: first, in the short run, the private international markets play a very influential role in determining how much capital goes to developing countries. So the external factors are very important in the short run, and we are seeing that now as we speak. However, I think what Nick has pointed out is that the long-run potential is significant, and that long-run premise is that returns to investment in developing countries will be higher over the long run, because they are short of capital.

But that premise and that promise will be realized only if the investment climate is upgraded to be able to take advantage of that, and so, if we look ahead, we see that with the new technologies coming on stream; with the new innovations, a lot of that will be extremely beneficial to developing countries in both growth prospects as well as capital flow prospects. So it's a mixed picture in the short and the medium term.

MR. HAY: Okay; the gentleman here in the middle and then very patient lady there whom I promised.

MR. MATSUDA: In your projections, you are now projecting a 0.6 percent increase of growth for Japan and afterwards growing somewhat better, and considering that Japanese political uncertainty and indecisiveness has the economy languishing over a decade, don't you think it's still an optimistic projection, even if you consider, even if you take account of recent emergency economic measures and recent Bank of Japan policy measures?

MR. STERN: I think that in analyzing what's going to happen in Japan over the next decade, I think you have to take a long run perspective. If you go up to the end of the 1980s, what you saw was a very long period of growth, a lot of it catching up with productivity in richer countries. And that, as we see from economic history, those processes of catch-up in productivity eventually stop. And then, the lead countries are not usually the fastest-growing countries; the richest countries are not usually the fastest-growing countries.

The second thing is the great financial bubble which was associated -- and the bursting of that around that time also, and the third thing is very -- and, well, the financial sector has taken a long time to adjust, as we know -- and the third thing is the aging process in Japan, which obviously is placing a lot of strain on people's savings. They're looking out and wondering how you're going to manage the whole situation of a much higher fraction of the population in retirement.

So I think if you take those three factors and take a long-term structural view of Japan, I think you can see that those three things are gradually playing themselves out, so that Japan could start a fairly extended period of growth. But it wouldn't be rapid, for the reasons I have argued that Japan is now one of the most productive countries in the world, so you would expect it to grow at the same rate as some of the other most productive countries in the world, which, as I have said, is not usually the fastest. It's countries which are catching up which grow the fastest.

So I think if you take a structural view, I think you have a moderately optimistic view of Japan over the next decade or so, but it does depend on unwinding of those things which are described and particularly reform in the financial sector. But I think in the medium term, we would have a moderately optimistic view.

MR. HAY: Okay; last view, very patient lady here in the second row.

[Laughter.]

MS. BARON: I am Anna Baron from Argentina, Clarin.

In the report, you say that one of the factors which contributed to the war in international capital markets about Argentina is the credibility on the fixed exchange rate regime. I was wondering: first of all, as you know, Cavallo is promising to change this regime to a basket of currencies. Do you think that this could be a way to solve the problem, or do you think that really, Argentina should start thinking of making the exchange rate floating? That's the first question.

And the second is to arrive to the conclusion that Latin America is going to grow 3.8 percent, what is the forecast for Argentina? Are you thinking that Argentina is going to recover very quickly or not?

MR. STERN: I think that the issue in Argentina is largely one of confidence. Argentina did pretty well with the fixed exchange rates over an extended period in the early part of the nineties. It ran into difficulties with the appreciating dollar, with devaluation from your neighbor, and those were, I think, the underlying causes of the difficulties at the end of the 1990s.

Now, I think the way out of that is increase confidence in the investment environment and not moving away from the fixed exchange rate. Argentina has established a lot of credibility in that. It's been hard-won, and I think that Argentina is likely to stick to it, and I think that we have to see how the economic package develops over the next weeks, but I do think that there is a growing confidence in the markets in Argentina.

There's a lot of confidence, as you know, in Mr. Cavallo's past record in economic management, so I think that we have to look forward, obviously with some caution but also with some optimism. But on the specifics, I'd leave that to my colleagues.

Anything you'd like to add?

MR. TIMMER: We never give the forecast for individual countries, but Argentina's GDP declined in 1999 by 3 percent, and there was also a slight decline last year, and compared to that, we expect an improvement.

MR. HAY: Okay; thanks very much indeed, everyone, for coming along. If you have questions for Hans or Ashoka, please feel free to come on up. Nick, I'm afraid, has to go fairly quickly.

[Whereupon, at 11:03 a.m., the briefing was concluded.]