Global Development Finance 1999

Washington, D.C., Tuesday, May 22, 2001

PROCEEDINGS

MR. HAY: Good morning, everyone, and welcome to our press launch this morning of Global Development Finance 1999. This particular annual publication comes out every year, and it tracks the movement of international capital flows to developing countries.

Let me just, before we get underway, remind you of the embargo which is for 3 o'clock this afternoon, Washington time, which is 1900 GMT. Let me point out not to measure the embargo from this clock here, which, as you can see, we've failed to fix, so the time is actually a few minutes after 10:00 and not after 9 o'clock. We'll fix that later.

Let's kick off with a few quick introductions. Up here on my immediate left, Uri Dadush, who is Director of the Development Economics Prospects Group and the man who brings us these global economic prospects and other thoroughbred publications each year. On his left is Bill Shaw, the lead author of the GDF this year, and a senior economist in his own right. So, without any further ado, let me call on Uri to kick us off, and then we'll go on to Bill. Uri?

MR. DADUSH: Good morning. Thank you. Thank you very much, Phil, and I'm glad to be able to introduce this year's issue of the Global Development Finance Report.

Bill has a more formal presentation, but I just wanted to highlight maybe two or three of the points that seem to be critical to me, and then hand over to him.

The first message we're trying to give in this report is that, although there have been some encouraging signs of late with respect to recovery in Asia and also with the way that things have been going recently in Brazil, Latin America, and so on, that, in fact, we view this crisis as not over yet, and we anticipate the crisis to be more protracted and deeper than we anticipated even three or four months ago. And that's not trying to be pessimistic or sort of spoil the party, but it's simply trying to convey the message that this continues to be a very difficult situation throughout the emerging world, the emerging markets, throughout the developing countries, and really there is no room for complacency either on the part of policymakers in some of the developing countries which are seeing the beginnings of recovery nor, to be frank, in the industrial countries where, as you know, in Europe and in Japan we have, well, a more or less difficult situation with respect to policy measures that need to be taken in the short term to maintain aggregate demand and set the stage for longer-term recovery.

That's one very important message. The two other messages Bill will elaborate more upon. The first of these is that our analysis illustrates vividly, I think, how different the behavior of different parts of the capital flow to developing countries have been during this very difficult period of the last 18 months, and, in particular, how much more stable foreign direct investment has been compared to other sources of capital flow. And so Bill will elaborate on that.

The third message that seems to be very important to me in this report is that, despite the fact that we are in this difficult global conjuncture from the point of view of the developing countries, in particular--and they've certainly been hit much harder than the industrial countries have--despite these difficulties and despite the fact that we see so many signs of improvement in the policy stance in institutions in developing countries, aid flows continue on the long-term path of decline. And we anticipate that this is going to make it even more difficult with respect to poverty conditions around the world and also make it more difficult to integrate some of these lagging developing countries into the global economy.

These are the three points that I wanted to underline, and Bill will elaborate more formally.

MR. SHAW: Thank you, Uri.

I'd just like to review some of the main messages of Global Development Finance 1999, and I'll begin with the deterioration in the international economic environment, cover the sharp decline in private capital flows, and then turn to the issue Uri just stated on the decline in aid, and finish up with a discussion of the rescue packages and debt restructuring in the crisis countries.

The international environment facing developing countries has deteriorated significantly. World trade decelerated in dollar terms throughout 1998, and by the end of the year, it actually declined compared to the period in the previous year. And commodity prices have fallen steadily since 1996 or 1997. In 1998, the average price of developing countries' non-oil commodity prices fell 16 percent in dollar terms, and oil prices fell by 32 percent.

At the same time, developing countries' access to external finance declined. The aggregate current account deficit of developing countries dropped by $30 billion in 1998 to about $54 billion, and as you can see on the slide, this reflects a massive shift towards surplus in some of the East Asian countries. The East Asian crisis countries shifted by about over $80 billion towards surplus in 1998.

All in all, if you take the fall in the terms of trade, reduced growth in export volumes, and lower external finance, they together have reduced aggregate demand in developing countries by 3 to 4 percent in 1998, and this has resulted in a substantial decline in their growth rates. Developing countries' average GDP growth in 1998 fell to 1.9 percent, which is down from 4.8 percent in 1997, and it is clear in this slide the deceleration in growth in developing countries was much more marked than that of growth in industrial economies.

The global output slowdown in 1999 is now expected to be even slower than we anticipated just a few months ago in the Global Economic Prospects document. Our forecast is that growth in developing countries will average 1.5 percent in 1999, and that would be one percentage point less than we thought in Global Economic Prospects, and it would be the lowest rate of growth that developing countries have averaged essentially since the 1982 global economic recession. And the recovery is expected to be slow as well, particularly as recessions are just starting in some countries, for example, in some Latin American countries.

Nevertheless, we do believe the recovery will come. Developing countries' GDP growth is now forecast to increase by 3.7 percent in the year 2000, although even this rate of growth is well below the 5 percent average rate of growth from 1990 to 1997 if you exclude transition economies.

The outlook for 1999 is also highly differentiated. Output in some of the East Asian crisis countries is now bottoming out, and some of these countries will see positive growth rates this year. Growth in China and in South Asia is likely to decelerate only moderately from the relatively high rates of growth in 1998. But output is forecast to decline in absolute terms in several of the oil-exporting countries and, on average, in Latin America and in Europe and Central Asia.

I'll turn to the story for private capital flows. Flows from international capital markets, which are comprised of bonds, syndicated loans from banks, and portfolio equity, were cut nearly in half in 1998, falling to $72 billion to developing countries as a group. And this decline in large part reflects a sharp fall in gross flows following the Russian debt moratorium in August. Investors deserted emerging market instruments for safer, more liquid assets, and also liquidated holdings in emerging markets to help rebuild balance sheets that were damaged by the write-down of Russian obligations.

The decline in developing countries' access to international capital market is also reflected in a very sharp rise in secondary market spreads, which is--I don't know if you can see it. In the far right there's that huge jump in the top line which reflects the increase in Brady bond spreads in August of 1998. These are levels that really have not been seen--had not been since the Mexican peso crisis back in early 1995.

At the same time, bond and international equity issues from developing countries essentially collapsed, and access became largely restricted to the prime sovereign borrowers. Lending to corporate borrowers was cut nearly in half after August.

Flows to developing countries recovered somewhat in the last quarter of 1998. So far, the contagion effects of the Brazil crisis have been limited, but, nevertheless, flows over the last five to six months remain well below pre-crisis levels.

Turning to the future for capital market flows, the underlying determinants of the 1990 surge in capital flows, including improved policies in developing countries and differences in factor endowments between industrial and developing economies, these remain largely in place. But the near-term prospects for flows will depend very much on the recovery in global economic activity and also on the situation in Brazil. And the crisis has underscored the risks associated with capital flows for both creditors and debtors, so that a substantial rise in flows to developing countries is likely to take considerable time.

Now, as Uri pointed out, the story for foreign direct investment is quite different from that of capital market financing. Essentially, FDI was resilient in the face of the financial crisis. FDI flows to developing countries as a group fell only moderately from $163 billion in 1997 to $155 billion in 1998. And perhaps a little bit to our surprise, FDI flows held up very well to most of the East Asian crisis countries, rising in some of them. The only exception was Indonesia, which is the red line on the chart, where FDI flows did fall both in 1997 and 1998.

The factors which did tend to lower FDI flows to East Asian crisis countries included the decline in market size, expressed in foreign currency, reduced growth prospects, and, to some extent, the recession in Japan, which accounts for about 30 percent of the FDI flows to these countries. But these factors were overbalanced by other considerations which helped to attract FDI flows, including the very substantial depreciation of these currencies, declines in asset values, improvements in the domestic policy environment facing foreign direct investment in some of the countries, and the opportunity to profit from corporate restructuring.

FDI is likely to remain the dominant source of finance for developing countries over the foreseeable future, although the recent deterioration in the global economic environment may have reduced prospects for FDI flows compared to earlier years.

Now I'll turn to the story for aid, which certainly remains depressed and has fallen significantly over the last few years.

This chart shows net official development assistance from the OECD donor countries, and the line at the top represents the ratio of these countries' aid to their own GNP, and this ratio declined to 0.22 percent in 1997 compared to over 0.3 percent in the early 1990s. This level is the lowest level that we've ever reported since we've been collecting this data. And aid remained roughly at the same level, or if not, just a little lower, in 1998.

It is, further, difficult to perceive any marked improvement in the prospects for aid as some countries continued to cut their aid budgets last year. Nevertheless, 1998 did show some positive developments in aid, including the agreement on the replenishment of the World Bank's soft lending window, the International Development Association, as well as funding for the African Development Bank. There was also progress in the HIPC Initiative as Uganda and Bolivia received debt relief amounting to about $800 million in net present value terms.

Ironically, the decline in aid to the poorest countries comes at a time when several of them are improving their policies, and recent studies have shown that aid can promote development only in a favorable policy environment. So it is a tragic story, I think, now that aid continues to fall when many developing countries are making a great effort to make sure that it's used effectively.

Finally, I'd like to turn to the role that official support to countries in crisis and debt restructuring has played in alleviating systemic risk.

From August 1997 to December 1998, the international community pledged $190 billion to Indonesia, Korea, Thailand, Brazil, and Russia, and of this amount, some $63 billion was disbursed.

This slide shows that disbursements of the rescue packages depended critically on progress in policy reform. The countries that had strong policy implementation--Korea and Thailand--disbursed a relatively large share of the amounts that were pledged, while disbursements were slow to Indonesia because of delays in policy reform and were halted entirely so far to Russia.

Progress in debt restructuring in countries also differed considerably also by the type of debt. The restructuring of banking system debt proceeded rapidly, for example, in Korea and Thailand. However, the private creditors of these countries' banking systems escaped with relatively limited losses, particularly if you compare to equity holders, for example. And this may have led to some increase in moral hazard, at least for specific segments of borrowers and lenders.

By contrast, there was little progress made in corporate debt restructuring, for example, in Indonesia, and in Russia, debt restructuring has been limited and creditor losses were massive, with very substantial contagion effects for the rest of the developing world. This varied experience emphasizes the need to achieve a better balance between avoiding contagion and assisting crisis countries on the one hand and limiting moral hazard effects on the other.

Thank you very much.

MR. HAY: Okay. Thanks, Bill. Let's throw it open to questions. Basic housekeeping: There are microphones in the aisleways if you'd wait until the microphone gets to you, and let us know which media organization you're with.

A hand in the middle was up first. It's equidistant, isn't it?

FLOOR QUESTION: (?) from Mexican News Agency. I have two specific questions on Latin America.

First, on the idea of the Argentina Government to use the dollar as the currency to help countries against problems like the crisis in Brazil.

And the second one, how do you see the financial situation in Mexico taking the fact that the corruption in the banking system is still a big problem for the Mexican Government?

MR. HAY: Okay. I think Uri's our man on Mexico.

MR. DADUSH: Okay. Dollarization, I'm not sure actually there is a Bank view on dollarization, but I'll share you with my own perceptions.

The dollarization of an economy obviously is a very, very serious step, and in many ways a non-reversible one--or one very difficult to reverse, anyway. I think the main considerations in effectively adopting the U.S. currency has to be whether these economies are subject to the same sorts of shocks as the United States, whether, in other words, as economists call it, Argentina and the United States or other countries in Latin America and the United States represent an optimal currency area.

And while the dollarization can be understood in the current context as a move forward in terms of strengthening confidence in the shorter term, I think a serious question has to be raised about whether giving up monetary policy for good and, therefore, subjecting oneself to the same regime as an economy that has very different characteristics, is subject to very different shocks, I think is a serious question.

So I have doubts about that, but as I said, that is a personal view.

I can't comment specifically on the corruption you're alleging in the financial system in Mexico. I'm not familiar with the situation. However, in terms of the macro picture, I think we have been all very impressed by the way that the Mexican economy has so far weathered this very difficult sequence of shocks, the most recent of which has come from the largest country in Latin America. And I think that Mexico is now reaping the benefits of the NAFTA agreement, the closer integration with the United States, the fact that the United States economy has been performing remarkably well, and the fact that, in fact, the trade links between Mexico and Brazil are very, very small.

So in this regard, I think Mexico has weathered the crisis extremely well and has uncoupled, in a sense, from some of the problems in the other emerging markets. They're obviously important issues and important weaknesses, but when you look at the macroeconomic aggregates in Brazil--in Mexico over the last three years since the crisis, there has been a remarkable improvement along just about every dimension that you can think of.

MR. HAY: Okay. Here in the middle.

FLOOR QUESTION: Jim Cason from La Journada (ph) Newspaper. I guess I had a follow-up on your Mexico question, because a lot of us write for popular newspapers, and you all are actually delivering some pretty grim news, particularly in terms of Latin America, as I read your tables, negative 0.8 percent economic growth in 1999 for the region.

Countries like Mexico, maybe it's weathered the storm, but the people in Mexico keep getting letters to our paper asking when is the storm going to be over. You're essentially saying not for several more years. I wonder if you could comment on the threat that you mention in your press release of a reversion to protectionist policies in various countries in Latin America, and how you see that this can be handled, particularly in the case of countries like Mexico, and how much of a threat, I guess, you see that political combination.

MR. DADUSH: Yes. The idea that you quoted for Latin America reflects the very serious recession that is expected in Brazil this year that is already happening to a large extent, and also very substantial slowdowns or declines in output in other Latin American countries such as even Ecuador and others.

Mexico actually in our projections continues to have reasonable moderate growth over 1999 and 2000 in the region of 2.5, 3 percent.

But what you're saying is correct in terms of the effects on real wages in Mexico. I mean, real wages in Mexico have fallen very substantially in the wake of the crisis and are down, I think, with respect to, for example, 1990. So this has been a very difficult adjustment in Mexico.

On the other hand, I think that the policies that have been undertaken in the course of the last two to three years have set the conditions for an acceleration of growth in the medium term, and the policy and the adjustments that took place were very necessary in light of the debt burden and the history, the economic history, of that country.

There was another question you asked--protectionism, yes.

FLOOR QUESTION: [inaudible] of the elections in 2000 in Mexico.

MR. DADUSH: The point about protectionism which is in the press release does not actually refer in particular to protectionism, as you mentioned, in Latin America or in any other country. It's a concern about the--it expresses a concern about the imbalanced nature of world growth at the moment.

If you look over the last 18 months or so, something like half of the addition--or over half of the addition to world GNP has originated in the United States, and the very large shift into surplus, into current account surplus of the countries in Asia in the wake of the crisis are reflected almost completely in a deterioration in the current account deficit in the United States. So that world growth has become extremely dependent on domestic demand in the United States.

As you know--I don't want to go too long in this answer, but it's an important point. As you know, domestic demand in the United States is partly fueled at the moment by very large stock market gains. When you add that all up, that doesn't look to us like being a very healthy situation. And one of the risks associated with that is what happens if there is a significant slowdown in the United States at a time when Europe is slowing down, when Japan is--the Japanese economy is extremely weak at the moment, as you know, and many of the developing countries are having to cut back because of the reversal of capital flows. So that's one of the concerns we have.

The other concern we have is that whenever you have a situation where a country is running very large current account deficits, then the potential exists for trade frictions. And, of course, we are seeing this at the moment in all sorts of different areas, but so far I think partly because of extremely responsible policies on the part of the key people concerned, this problem has been kept under control. But it worries us, and we are concerned about what would happen to protectionist pressures in the event of a significant slowdown and the beginnings of a rise in unemployment in the United States, a loosening of the labor market, when you have such large current account deficits.

MR. HAY: Let's go up to the back. Right in the back.

FLOOR QUESTION: Thank you. Al Bien- (?) from AFX News. This question is for Mr. Shaw, and I'm referring to the table on page 7 of the report. I just want to see if I have a clear sense of the overview and the changes of your forecast.

You slightly lowered your forecast for world economic growth this year, and if I understand what I'm looking at correctly, this is principally a result of the sharp decline in--the revision in the forecast for the low- and middle-income countries, which is significantly offset by an upturn in your outlook for the G-7 countries, and in particular the United States. I'm just wondering if maybe you could elaborate, to confirm, to begin with, that my reading of the overview is correct.

MR. SHAW: Well, there has been some improvement in the forecast for the United States, that's right, and certainly our growth forecast for the developing countries is significantly--is one percentage point lower, I believe, or approximately one percentage point lower than it was sometime ago. So I think you're right about that.

MR. HAY: Okay. Down here?

FLOOR QUESTION: My name is Vladimir Kocherha (ph) from Estione (?), the financial newspaper of Peru, and my question has to do with something Mr. Dadush mentioned regarding Mexico. You said that the Mexican economy was trying to uncouple or has been effective in uncoupling from the problems in other emerging markets, particularly Brazil. And regarding this year's growth, Mexico, Chile, and Peru are supposed to be the three countries in Latin America which are kind of going to fare better than the rest of the Latin American countries.

Recently, in the Paris IDB meeting, Chile and Peru announced that they will be seeking to issue bonds for $500 million each, and the question is: Do you think this is a good moment for Peru in this case to try the bond market? And what effects do you see happening in countries like Peru and Chile, which are trying to uncouple from this regional crisis?

MR. SHAW: On the bond market, I think we are going to see some improvement in access gradually. Whether this is the optimum time for Peru to go with a particular bond issue, I don't have a comment on.

Was there another part of the question?

MR. DADUSH: There was another part of the question.

FLOOR QUESTION: The other part would be these countries that are trying to uncouple, differentiate themselves--countries are trying to differentiate themselves from the regional, what recommendations do you have for them? What do they have to do, and whether this is going to work, after all, to distinguish Peru from Brazil, Chile from, let's say, Ecuador, or something like that?

MR. DADUSH: Well, yes, I mean, obviously our hope, like everybody else's, is that one doesn't need to do too much differentiation in the future and that the Brazilian situation will stabilize and improve, and this will bring up the confidence throughout Latin America and would also help emerging markets.

I think that it has been quite surprising how relatively moderate the financial contagion effects of the Brazilian crisis have been on much of the rest of Latin America so far. If we compare with the chart that Bill showed, if you compare the reaction of the spreads in the wake of the Russian crisis with what happened since January of this year, I think it has been very, very positive. I mean, you can quality that a little bit by saying that maybe the spreads would have come down by more than they have in Latin America had the Brazilian crisis not happened. But we don't know whether that's the case or not.

With regard to what to do so as to limit the effects of contagion, you know, this is a very long story. We wrote a whole report on that. And I would say that one point is that sometimes, you know, when a crisis hits, your history counts for a lot. In other words, there are situations where you can't do very much by the time that the crisis has come. And I think if you look at Chile--I'm more familiar with Chile than I am with the situation in Peru--there is a very, very long history of reforms and improvement of macroeconomic stability, opening up of markets, reforms of the financial system in Chile, which go back to the time that Chile had a very similar crisis to that of East Asia and was the first example of this type of crisis at the beginning of the 1980s. And they have put the mechanisms in place, I think, to weather--including having a more flexible currency--to weather these kinds of shocks better.

Once the shocks hit, then I think that history counts for a lot, and it's much more difficult if you haven't followed those kinds of policies. And there are other things I could talk about in terms of crisis response, but that would take me a little too far afield.

MR. HAY: Bill, you wanted to jump in.

MR. SHAW: Yes, I was just given some useful data, I think, which would help describe the situation a little better. In Latin America, bond issues were about $223 million in January, and they improved to $4.5 billion in February, $6.8 billion in March. And you see a fairly wide--at least six or seven countries that have issued in March, the largest being Argentina. So we do see now really a significant recovery. I think these levels may still be certainly below the surge period of pre-crisis, but there certainly is a trend of improving access evident right now.

MR. HAY: Okay. Let's cross the Atlantic over to Eastern Europe here with Bob Lyle.

FLOOR QUESTION: Robert Lyle from Radio Free Europe News. I wonder if you would comment a bit further on your Europe and Central Asia section. You give a forecast for the region as a whole, yet you acknowledge that there are some vast differences within the countries in that region from some of--from Russia and some of the former Soviet countries to those in Central Europe. And, secondly, what is the impact on your forecast from situations we have going on right today where we've got two countries, at least--Kazakhstan and Kyrgyz Republic--both going through serious currency crises just at the moment.

Could I just get your comments?

MR. DADUSH: Yes. As you indicated, the picture for Europe and Central Asia, although difficult in the aggregate, is a very varied one. You will see from our numbers that we are seeing in 1999 on the aggregate a moderate fall in output of about 1.5 percent, with a slow recovery going into 2000 and 2001. Much of the fall of output in 1999 is, in fact, concentrated in the countries of the former Soviet Union, with, of course, the Russian economy in crisis, and also in other--in a few other countries with severe difficulties such as Romania, for example.

Most of the countries in Central Europe I think have so far--again, are among those that have weathered this crisis relatively well, and this was certainly the case--very, very clearly the case until the Russian crisis hit us in August of last year. Until that time, the Central European economies, particularly the ones on an accelerated path of accession to the European Union, were benefiting from rapid growth in European input demand and also a surge in foreign direct investment in expectation for the accession.

Since the Russian crisis hit, one of the things we've learned in this crisis is that, even when trade relationships are relatively small--and Russia was not a big importer from a lot of these countries--even when you have a situation like that, when the economy that is the object of the crisis contracts its imports by 50 percent, then arithmetically, even though it's a small proportion of the total, it has a very large effect. And the massive nature of the import contraction in Russia, just as happened in the economies of Southeast Asia, which represented only 7 percent of world trade at the beginning of the crisis, have been sufficient to have significant spillover effects not only on the Central European countries but also on Western European countries, including Germany.

And then, of course, you've had a substantial slowdown in Europe, in Western Europe in the fourth quarter of last year, and combined then with the general decline in confidence in international financial markets, this has contributed to a significant slowdown, which is now affecting the Central European countries as well.

However, we are feeling reasonably confident because we accept the forecast made by most people with respect to Europe that this slowdown that materialized in the fourth quarter of last year is likely to be a short-lived slowdown, largely the result of an inventory correction and the trade effects that I have been talking about, which should dissipate in the second half of 1999. And that should help the Central European countries have a much better year in 2000.

MR. HAY: Okay. In the last row--

FLOOR QUESTION: In Appendix 5, the last table about the aggregate flows, it seems that comparing 1998 to 1997, close to all the five regions here have declined, except for one region, to the Middle East and North Africa where it doubled. So I would like to hear some explanation for that, and I would like you to elaborate a little bit more about the moral hazards concerning international private creditors.

MR. SHAW: Yes. On the flows, borrowing certainly did increase in Middle East and North Africa, and that really reflects some of the developing countries, but relatively higher-income oil exporters that have substantial external assets. So they retained access to international markets during this period.

They saw a sharp decline in their export revenues in the fall in the price of oil, and quite sensibly, they increased their borrowing to try to smooth the cut to their expenditures that would occur. So that is a very different story, actually, from most of the other regions, which saw a very sharp decline in their access to international capital markets.

I am sorry. I did not quite understand the question on moral hazard.

FLOOR QUESTION: I wonder if you could elaborate a little bit about the moral hazard.

MR. SHAW: Well, I guess I could say that whenever you are engaged in providing official support to an economy, there is always a tradeoff between trying to help that economy get over a rough time, on the one hand; on the other hand, making sure that you do not create the expectation that in the future, the support will always be forthcoming and therefore to encourage imprudent lending by creditors.

I think the way the package was structured was critical that the disbursements were dependent on progress in policy reform, so that you could get a result where improved policies would return these countries to general access and improve confidence of financial markets in their economies. So you can essentially get a good result with official support playing a role in the transition period to reduce the fall in consumption and outputs as necessary to achieve it.

At the same time, if you have an economy that is nor reforming, is not following a regime that is going to return it to normal conditions, then official support can really play a little role in helping to recover.

MR. DADUSH: Can I just elaborate on one point?

On the moral hazard, I think it is also very important to distinguish between the moral hazard as it applies to different types of flows and different types of circumstances, and I think you would find it difficult to convince a portfolio equity investor in East Asia that he is the subject of moral hazard in some way. These are people that lost very large amounts of money as a result of the crisis, and lost it very, very quickly.

Similarly, a lot of bond-holders--and this is pointed out in the report--a lot of bond-holders also took some very large losses in terms of their capital values, at least notional paper losses in terms of the capital values of the bonds that they had.

So, when you look at it across the board, as others have pointed out in the past, including our colleagues in the International Monetary Fund, where the moral hazard appears to be disproportionately concentrated is in some of the Bank lending.

Actual Bank losses, particularly on inter-Bank lending, have been actually very limited in the crisis, even though we point to the shift in short-term Bank lending as having been by far the most volatile component of these capital flows. Yet, that is where the least losses were incurred.

So, if you are looking for where the moral hazard might be disproportionately large, it is probably in that particular area, with the exception of corporate lending to Indonesia. Actually, Bank losses overall have been relatively small.

MR. HAY: Okay. The lady in the white jacket there. Wait for the mike, if you would.

FLOOR QUESTION: Oh, I am sorry.

Sarah Bryant with the U.S. Department of Treasury.

I was wondering if China can sustain its growth, and particularly it was mentioned earlier, given the continued government financing of most of its growth.

MR. DADUSH: Yes. I understand the sense of your question. I certainly also share concerns about what happens to growth as these fiscal stimulus effects begin to wane, and this is a pertinent question not only in the case of China, but in my mind, even more so in the case of Japan where I think that the underlying structural problems in the financial systems are even more severe and more serious than in the case of China. So I think this is a good question.

We feel that even as the stimulus begins to wane, should it have to wane, because they do have some room in China--there is quite a lot of room to do more--then this will probably be occurring against a background with the rest of the Asian economy stabilizing.

One of the important features in our forecast is the stabilization and the resumption of moderate growth in the rest of Asia. This has very large effects on world economic activities for the simple reason--again, it is an arithmetic fact. If you have a part of the world which is an important part of the world, where imports fell 30 percent or 20 percent, 25 percent in 1998, and then you move to a situation where they are growing a little, that change has a very large effect on world economic activity, and it has, among others, an effect on China's exports which have slowed very dramatically in the wake of the crisis.

So I think this will occur against a better international background, and I need not rehearse all of the underlying strengths in the Chinese economy. There are some fantastic dynamics that we have seen in the course of the last 30 years, the high savings rate, the international competitiveness, the dynamism, all of its entrepreneurial classes. So all of those factors will also play.

MR. HAY: The gent down here in the leather jacket. Wait for the mike, if you will.

FLOOR QUESTION: What do you think will be the impact on the crisis in Kosovo on the merchant markets in this region, in the Balkan region?

MR. HAY: It may be a bit soon to say, but perhaps you can look at it from the macro perspective.

MR. DADUSH: Yes. We have not done any analysis on this, but my guess is that from the macro point of view, the effects will be largely confined to, let's call them, the former Yugoslavia. These are relatively small effects, and the trade links with the rest of the Europe and Central Asia region are relatively modest.

Again, without having that analysis, I think that we should remember sometimes, unfortunately, one of the effects of a lot of military activity can actually be to stimulate demands in other countries, although they are going to have very negative adverse effects in the countries in conflict.

MR. HAY: One thing just to add on that, the World Bank and the Government of Macedonia are talking about a $40-million IDA loan to help Macedonia with vital imports to tide them through their humanitarian crisis at the moment. If you want more details on that, I can give it to you later, but that is certainly something to add on to that.

FLOOR QUESTION: You mentioned that three countries have been able to weather the storm, China, India, and Mexico. I was wondering whether there is any common thread in them because each of them has got different economies in their foreign policies, and yet, they have done well.

Secondly, you also mentioned that India needs more reforms. If you are doing so well as it is, why do we need more reforms?

MR. HAY: That is a very good question, and Uri is poised to answer it.

MR. DADUSH: We are in the reform business.

[Laughter.]

MR. DADUSH: We sell reform all the time, and we want reform everywhere. We want reform in the United States, too.

Are there common threads between those three economies? The answer is some, but as I said, the situation in Mexico is very particular. I indicated very strong links with the United States, the fact that they have just gone through a major crisis and that they have taken major steps and so on.

Actually, there is an interesting contrast which can be brought out between the situation in Mexico and China and India. I would say that China and India have been sheltered from the crisis, in my view, for two main reasons. One, they are continent-sized economies, and so just generally less dependent on the rest of the world, more dependent on their huge domestic demand for their goal. So they are just naturally more resilient economies to external shocks.

But the second reason is that these are countries that have continued to practice, have been, let's say, among the later ones in terms of capital account liberalization. So that, in effect, the financial contagion effects have simply been less important, reflecting the fact that their financial markets, particularly their capital markets, are less integrated into the world system than were those of a lot of emerging markets.

The contrast with Mexico, which I want to bring out, is that actually Mexico is a little bit in the opposite extreme in that Mexico in fact is highly integrated in the international financial markets and, of course, has a long history of capital account liberalization with a long history of problems with it, also, but the reason I think that Mexico was able to weather the crisis so much better this time is that in fact, in a way, the Mexican institutions and the Mexican policies and so on have learned to live and to adapt to this increased integration in the financial markets. This is one of the reasons that we see less financial contagion in Latin America than we have seen in East Asia. That is, the firms in Latin America that have been absorbing a lot of the private flows are actually less leveraged than the firms in East Asia, and they have generally been much more careful about incurring large exposures of short-term debt in foreign currency. That is because Latin America has had a long history of mistakes in this area.

So I think your question about Mexico vis-a-vis China and India actually brings out some very interesting contrasts of countries that, on the one hand, have been weathered in the crisis because they have delayed the capital account liberalization; on the other, a country that has weathered the crisis because it has learned to live with capital account liberalization.

MR. HAY: Okay, great. A very patient woman in red, third row in the middle. Wait for the mike, if you will.

FLOOR QUESTION: I wondered if you gentlemen, whoever is more familiar with the Venezuela situation, would have a forecast for Venezuela in the short and middle ground. How much of the Brazilian financial contagion with OPEC is Venezuela going to feel?

Thank you.

MR. HAY: Okay. I do not think Bill--and I am certainly not an expert on Venezuela. I would just tell you roughly what we have.

We have a significant decline of output in 1999 following the decline in output in 1998, with only a very gradual recovery in the year 2000 and 2001. The main point that I would make about Venezuela is that the Venezuelan economy has been very badly affected by one very important aspect of this crisis, which is the collapse in oil prices. In that sense, it is a sui generis case in Latin America. It may be these forecasts did not include the most recent OPEC agreement, which leads us to revise our oil price forecast upwards by about $2.50 in 1999. This would imply somewhat faster growth in Venezuela.

But the combination of dependence on oil, on the one hand, and large-scale financial integration without solid banking institutions and policies can be a very dangerous combination, as we have seen in a number of countries now.

We see them as relatively secondary so far, relatively minor so far, because as I have said the financial contagion effects on the rest of Latin America, there had been some. I am not saying they are not financial. They are, but they had been relatively muted.

Since Venezuela's main export commodity is a world commodity, the export to world markets, the effects of the Brazilian crisis in Venezuela are largely confined to the effects of the Brazilian crisis on world oil demand, and that is relatively small.

MR. HAY: Okay. We have time for a few more questions. Right at the back in the middle.

FLOOR QUESTION: My name is Marie Gonzalez with the Newspaper Reforma from Mexico.

You were saying that Mexico has learned to adopt. In Mexico, there are going to be elections in 2000, and the history tells us that every 6 years, there is a crisis in Mexico.

So my question is, if they have learned to adopt, if they are doing things better, are you forecasting that there is not going to be a crisis?

MR. HAY: Well, you have got Harry Dumfey from Associated Press down here wondering about the 6-year cycle.

Uri?

MR. DADUSH: Yes, that is what we are forecasting.

MR. HAY: So well done.

Okay. In the middle here. We have got time for about another two or three, if we are quick. So, Chris, just in the middle in here.

FLOOR QUESTION: I am Maria Lulul [ph] from Argentina.

I was wondering whether Argentina, for its links of trade with Brazil, will be the most affected country in the region with the Brazilian crisis.

Then, you said before that, hopefully, Brazil will recovery and stabilize. Do you really think that is going to happen in the short term?

MR. DADUSH: The answer is yes. Argentina is--I do not know if it is the most affected. Maybe some of the MERCOSUR, Uruguay, Paraguay, are also severely affected to the trade links with Brazil.

I think these effects are significant. They are important. It is true that they are confined to certain segments of Argentinian exports, not all segments, some of which are commodities and have world markets. Nevertheless, the extent of the import slowdown in Brazil is such, and the extent of the linkages are such that they will have substantial effects both through Argentine exports, but also by improving the competitiveness of certain Brazilian exports and therefore increasing import pressure on Argentina.

Do we think that the crisis in Brazil will play out positively? We very much hope so. That is what is incorporated in our baseline projections. There is a lot of positive news recently, as you know. The real has improved. The stock market has risen very substantially. Interest rates have been coming down. They are under 40 percent this week, and a number of new bond issues are expected to come on streams successfully in April.

So all of these are positive factors, but we do not mean in any way, as I said in my opening remarks, to understate or underplay the risks that are inherent in several parts of the world at the moment. I have tried to highlight several of them as we went a long.

In Brazil, the fiscal deficit in 1999 is likely to be in excess of 10 percent versus 8 percent in 1998. Government debt is large and rising rapidly to probably 50 percent of GNP by the year 2000. There are going to be very large foreign debt servicing obligations in 1999. Unemployment is expected to rise significantly in the wake of the crisis. All of this creates pressures, and it will be very, very important to maintain the very strong path towards fiscal reform and the emphasis that I think has been very well places by the authorities, particularly with the election of the new Central Bank Governor to emphasize the fight against inflation to avoid the specter of inflation emerging again in Brazil, which it is not that we have a religion against inflation, but in the Brazilian context, inflation will spell a loss of confidence, a loss of investor confidence, and this must be avoided. It is very important to avoid debt.

So I think that is the main message. No, we are not out of the woods. We are not at all out of the woods. We are not saying that, but we think that there are good chances to make it through with very concerted and determined policy action.

MR. HAY: Bill is going to jump in briefly, and then the lucky last question goes to the man from Bloomberg at the Bank.

MR. SHAW: Yes. Just one point on the situation in Argentina. One hopeful sign is that they have issued about $4 billion in bonds in February and March on the international markets. So at least some of the contagion effects in financial terms in Argentina look to be very limited right now.

MR. HAY: Okay, great.

FLOOR QUESTION: Jeremy Polaski from Bloomberg.

I was just looking at some of the notes at the bottom of your chart, and on East Asia, your estimate for growth excludes Korea, or at least that is what the footnote says.

I am curious why that is when Korea seems to be one of the few countries that is going to have a rather rapid pace of growth this year, and does this estimate exclude Japan as well? Are there other countries, major industrial countries not in these estimates that we should know of?

MR. SHAW: Yes. I think you are referring to the table on page 7. The section you are talking about is on the developing economies, and Korea, technically, by the World Bank's definition, is a high-income economy. It is no longer a developing economy.

So it is included in the section under high-income countries, on the higher part of that chart, where, of course, Japan is as well.

FLOOR QUESTION: I am sorry. I am looking at Appendix 5 that we were given juste as we walked in the door. It has a page, 155 maybe. It has 4.0, expected growth, and it excludes Korea.

MR. SHAW: Yes. It is the same story. The appendices relate to the developing countries, and Korea is a high-income economy. Japan is also out of that. It is only the developing East Asia that is referred to there.

MR. HAY: Okay. Jeremy, are you happy with that? Great.

Okay, folks. Thanks very much, indeed, for joining us.

Let me just, as you go, draw your attention to the web site, the GDF-dedicated web site, with the URL coordinates at the bottom of your press release.

[Whereupon, at 11:04 a.m., the press briefing concluded.]