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Global Development Finance 2002

Washington, DC, March 13, 2002


MS. ANSTEY: Thank you very much for coming out on this grim Wednesday morning. This, as you know, is the press conference for the release of Global Development Finance, Financing the Poor Countries, which we released early this year in the run-up to the Monterrey conference which opens next week.

The panel are, to my left--I think you know many of them, Nick Stern, the Bank's Senior Vice President and Chief Economist, will make some opening remarks. He'll be followed by Hans Timmer, who is the Manager of the Global Trends Team and the Bank's Development Prospects Group, and he'll be followed, on the extreme left, by Bill Shaw, who is a Lead Economist in the World Bank's Development Prospects Group and the principal author of Global Development Finance.

After they've made their introductions, we will take questions. If you could, for the sake of the transcript, which we will post, state your name and media outlet, and just remember that there is an embargo, which is 1 o'clock this afternoon.

So, without further ado, I will hand it over to Nick.

MR. STERN: Thanks very much, Caroline.

Let me add my own welcome to that of Caroline. Thank you very much for coming.

This is an annual publication, but as with most of our annual publications, like the Global Economic Prospects, we have a particular theme. And this publication is oriented around some of the questions and issues that will come to Monterrey. So, for example, the financial flows to developing countries--foreign direct investment is one particular emphasis of this report--will be at the center of the discussion and the presentation which you'll hear.

Thinking about the prospects now and what's been happening in developing countries, there's no doubt, as you'll hear from Hans Timmer, that this has been a difficult year for developing countries, associated, of course, with the reduction in global growth that's taken place, and the impact of that on developing countries has been serious and significant. But that's something which Hans Timmer will discuss.

But there are some good points. Foreign direct investment to developing countries has actually stayed up at a time when foreign direct investment overall has fallen. And that's a very good sign and a tribute to the progress that developing countries have made in improving their policies over the past 10 or 15 years.

Obviously there are some uncertainties going forward, but the fact it has stayed up in these difficult times is significant.

And underlining that is the relationship which we find in the report between foreign direct investment and the investment climate or the conditions for investment. Developing countries that work to improve their policies get, first and foremost, more efficient investment, entrepreneurship, job creation domestically. But they also get more foreign direct investment, and that result comes through strongly from this report, and Bill Shaw will be emphasizing that. So improving policies leads to more investment, entrepreneurship, productivity, job creation, and that's a very significant message, one that we've been emphasizing in the Bank for some considerable time, and again comes through strongly in the results in this report.

Now, looking forward to Monterrey, because as Caroline said, the timing is brought forward a little this year to be a useful input into the discussions at Monterrey.

Now, the key challenges of Monterrey are to deepen the partnership for development, and that partnership has three key elements to it. First and foremost is the policies, institutions, and governance in developing countries themselves. That's the first part of the story. And we've seen strong progress in the last 10 or 15 years on that front. That is the developing country side of the bargain, and they're delivering on that side of the bargain in large measure. And they've seen increases in growth and poverty reduction as a result of the measures they've taken themselves. That's the first part of the partnership for development.

The second part of partnership for development is the trade and market access. We did see a major step forward in Doha, but that was just the opening of the door. The difficult stuff lies ahead. But the commitment of Doha was very encouraging, and we look forward to that part of the bargain, getting extra momentum in Monterrey. That's particularly market access in the rich countries; agricultural subsidies which stand, as we've remarked a number of times before, at well over $300 billion a year, around six times the aid flows; very big barriers on the non-tariff side, and also tariff barriers. So market access of the rich countries is an important part of the Monterrey story coming from Doha, and that is a key second part of this partnership for development.

We should note that developing countries themselves have quite high barriers between each other, and we also would want to see those barriers being lowered, too.

The final part of the bargain or the partnership is aid itself, and as you know, Jim Wolfensohn has argued for a stepping up of aid to $10 billion or so a year over the next five years from the current level of around $50-55 billion a year.

We believe that things are moving. We're optimistic about that in the sense that we know the policies in developing countries have been improving. We see the declaration involved in Doha, and we believe that there's also momentum building behind an increase in aid. But let's see this as a partnership, let's see it as being three crucial elements in that partnership.

So what I'd like to do now is to hand over to my two colleagues--Hans Timmer, who will be talking about the prospects, and Bill Shaw, who will be talking about the FDI financial flow part of the report, the main body of the report.

Hans, please.

MR. TIMMER: Thank you very much, Nick, and good morning, everybody.

Let me summarize the global macroeconomic environment and the outlook in four points.

The first point recognizes that last year, in 2001, we experienced the sharpest global slowdown, in almost 30 years. Developing countries could not escape the downturn that started in the United States.

But now the recovery has started, and that's the second point, in the United States, in East Asia, and in high-tech markets. The recovery will be driven by inventory-investment cycles, but at the moment is fueled by the low interest rates in the United States and by the expansionary policy also in the United States.

As a third point, we would like to draw attention to the position of non-oil commodity exporters in Sub-Saharan Africa. In 2000, they suffered from the high oil prices, and then when last year the oil prices softened somewhat, also the non-oil commodity prices fell further--8 percent in real terms last year. And although we foresee some recovery of the prices, it will not be enough to compensate the recent losses.

The last point is that the main downside risks to our baseline scenario are to be found in the financial markets.

Let's go back to the global cycle. In the first graph, global GDP growth shown by bars in this graph decelerated from almost 4 percent growth in 2000 to slightly above 1 percent in 2001. And the deceleration was equally large for industrial countries and developing countries, both shown as solid lines in this graph.

Most hit in the industrial world were the United States, where the slowdown started, and Japan, that suffered from deflation and the mounting bad loans. Hardest hit in the developing world were Eastern Europe and the Central Asian Region and Latin America, as the crisis in Turkey and in Argentina came on top of the global slowdown for those regions.

We have to go back to the mid-'70s, the beginning of the first oil crisis, to see a deceleration in global GDP as sharp as the recent one. And in both cases, the deceleration occurred almost simultaneously for all regions in the world, which is a very rare phenomenon. And in the beginning of the '70s, that was mainly because of a common external shock: the sudden jump in oil prices. Now it was also, to some extent, common external shocks: again, the oil price and the burst of bubbles in many of the financial markets in the world. But we think it's also a reflection of the integration of the global economy that you see a synchronous cycle at the moment.

The United States and high-tech emerging markets in Asia are leading the recovery, as I said before, a recovery that probably will peak in 2003 after we which--we expect some moderation of growth. But annual growth in 2002 will be still very limited, despite the fact that within the year we expect a strong recovery, strong growth, but it will be very difficult given the quarterly pattern in 2001 to have an average level in 2002 that is significantly above 2001. In technical terms, we call that negative spillover from 2001. It will be very difficult to have high growth rates this year, but the real recovery will show in 2003 growth rates.

Some developing economies will lag in the rebound. Obviously, for Argentina it will take some time to recover, but also countries that suffer from the fall in tourism will suffer probably somewhat longer than just the first couple of months after September 11th. And another example is oil exporters that will have to cope with the very volatile oil prices and, in our view, a downward trend in the somewhat longer run.

Nevertheless, the general picture will be one of a simultaneous cycle, not only in the downturn but also in the upturn, where developing countries are affected by the business cycle in the industrial world, through trade flows, through commodity prices, and through financial markets.

Let's have a quick look at the trade flows. This graph shows growth of total exports of high-tech emerging countries in East Asia, and that's the bar on the right-hand; and also the same growth rates for all other developing countries, and that's the first five bars.

The graph shows the years '99 to 2003. While global trade decelerated last year from 13 percent in 2000 to slightly negative, the deceleration was even sharper for the high-tech emerging countries in East Asia. We see here a deceleration from 20 percent to minus 3 percent. And also it's the expectation that the upswing, the rebound will be sharper than on average in the global economy, although for several reasons we do not think that the boom in high-tech sector, as we saw in 2000, will be repeated.

Let us shift now quickly to the commodity prices. This graph shows commodity prices in real terms for the last 20 years, and we see that on top of a secular decline that's always there in the commodity markets of the relative prices, there was a sharp decline, additional decline since the Asian crisis. And as I said before, it was a decline of 8 percent last year. And we see that the decline for Sub-Saharan Africa is even sharper, and it seems that the composition of African countries is such that they are more vulnerable to global slowdowns. And that means that for those poor countries, the transmission of the slowdown is not just volumes of exports, but it's also through the prices.

To some extent, the decline in prices is the reflection of the increase in productivity, and this graph shows output in agriculture for all developing countries per capita, a rough approximation of productivity in agriculture, and it also shows productivity in agriculture in Sub-Saharan Africa. And there we see that, on average for developing countries, there is an increase in productivity that enables developing countries to increase the wages in agriculture, despite the fact that there is a secular decline in prices. However, for Sub-Saharan Africa, there was no increase over the last 20 years in productivity, and that means that every decline in prices, and also the additional declines because of the global slowdown, immediately translate in lower incomes.

In the past, we have talked about trade policies and agricultural policies in industrial countries. And it's clear that in a downturn, with agricultural subsidies, price guarantees, or even additional import remedies--you can try to prevent a decline in the income of farmers in the industrial world. But at the same time, all those measures, tend to decrease the price in the global markets. And as I said, a decline in the global market immediately translates, not in lower increase in income, but absolute lower income in developing countries, especially Africa.

The last point is about the main risks to the baseline that we have. Although there are no signs of contagion from the default in Argentina, it's still early to grasp all the consequences of the huge default in that country. Another example of tensions in the financial markets related to accumulated debt are the still growing amount of bad debts in the Japanese banking system, combined with deflation that remains a very unpredictable factor.

Also, the large private sector debt in the United States could lead at some point to financing problems, to some kind of a reversal in financial markets, as we mentioned before. And we already observe less willingness of foreign investors to invest in U.S. equity and FDI.

So while the developments in trade and commodity prices are relatively clear--there was a sharp downturn and we see a recovery happening--the situation in financial markets is much more mixed. A rebound in capital flows in a low-interest-rate environment is possible, but it could be clouded by severe tensions in the financial markets.

Actually, with that, I have more or less laid the bridge to the main part of this report, which is about the financial markets, and is about the poor countries. So I would like to turn to Bill Shaw.

MR. SHAW: Thank you, Hans. I'd first like to start with the discussion of private capital flows to developing countries as a group, and there are three main messages. The first is that the global slowdown depressed capital market flows to developing countries in 2001, but FDI flows to developing countries remain resilient and that the contagion from the Argentine crisis was limited.

Capital market flows which are bond issues, bank lending, and international equity issues to developing countries fell from $228 billion in 2000 to only $178 billion in 2001, and since the peak in 1997, as you can see in the graph, the capital market commitments have fallen from almost 5 percent of developing country GDP to under 3 percent last year.

Now the global economic slowdown in 2001 reduced developing countries' export revenues and therefore their capacity to borrow, although this impact was at least partially mitigated by the drop in interest rates. But the slowdown also increased uncertainty and reduced investors' appetite for risk. This reduced the demand for risky assets, resulting in a decline in capital flows to developing countries, most of which are speculative grade or viewed as relatively risky by the international community. Thus, for many developing countries, capital market flows were procyclical. Decline in finance actually exacerbated the impact of the global economic slowdown on their economies, rather than serving as some sort of cushion. The decline in flows in 2001 was also partially explained by a fall in demand of some of the more credit-worthy borrowers.

By contrast, foreign direct investment was stable. Net flows equaled $168 billion in 2001 or just about exactly the same number as in 2000 when global flows were falling, as Nick had mentioned. Changes in the level of FDI to developing countries last year actually reflected a few large individual transactions in a couple of countries, as well as changes in domestic economic environment, for example, the crisis in Argentina, the boom in FDI to China, which came with the accession to the World Trade Organization. So these were essentially factors affecting individual countries, not kind of global determinants of FDI.

These declines in global FDI, along with stability in FDI to developing countries, meant their share of global FDI flows actually increased significantly in 2001, which partially reversed the substantial fall of their share, which had occurred in the late 1990s.

Turning to contagion from Argentina. In contrast to the crises of the late 1990s, the impact on other emerging markets of the Argentine crisis was quite limited. The table shows that increases in spreads in Argentina during important crises episodes, that during the same time increases in spreads to other emerging markets were either relatively small or nonexistent, and this is in sharp contrast to what happened in 1997 and '98, with the crises in East Asia and Russia.

Now why was contagion so much less than the '90s? One reason is that the Argentine crisis was largely anticipated by many market participants. It was less of a shock, and therefore had less immediate impact. But I think a more important reason is that developing countries have developed more prudent financial policies, they had achieved lower inflation rates, they moved towards more flexible exchange rates, foreign exchange levels are higher, short-term debt levels are lower than they were back in the late '90s, and this has helped to insulate them from any impact.

One way of reading this data is that, with the right policies, contagion is not inevitable, but even this conclusion is quite tentative because global conditions in 2001 were really quite different than they were in 1997 and 1998. Last year, with the recession in major industrial countries, the alternatives to investments in developing countries were not quite as attractive, so there was less impetus to take flows out of developing countries. Therefore, we shouldn't really take the events of the last year to mean that capital market flows can serve necessarily as a stable source of development finance over the long term.

I would now like to turn to one of the main focuses of the report, which is the poor countries' international financial transactions. And the poor countries we're talking about here, we're defining as the IDA-only countries or essentially the low-income countries that, excluding just a few who can borrow from the World Bank's nonconcessional window, and thus have some access to capital market flows. These are the countries who essentially have no market access.

The main message that I want to emphasize is that the poor countries' integration with the global economy increased during the '90s. Poor countries with good policies saw very significant increases in FDI flows, and the level of capital outflows depends on policies.

It is well known that middle-income emerging markets became more integrated in the global economy through the booming capital flows in the '90s. What is less recognized is that the poorest developing countries participated in this process. The poor countries' principal source of private capital is foreign direct investment, and the ratio of FDI to GDP in their economies doubled during the 1990s to essentially the same level as in the middle-income countries, which you can see on the left-hand side of the chart.

Poor countries also experienced a sharp rise in the participation of foreign banks in their financial systems, which boosted competition, improved access to credit, and helped reduce the cost of financial intermediation.

Improvements in the investment climate in the poor countries, including declines in inflation, lower budget deficits, reduced restrictions on foreign investment and progress in both health and education indicators, helped them benefit from a global surge in FDI flows. Poor countries with better policies, for example, Bolivia, Uganda or Ghana, attracted the largest increases in FDI. The chart shows that the ratio of FDI to GDP, in the best performers in 1995, actually rose by 9 percent per year in the subsequent four years, while FDI to GDP levels in the worst performers essentially stagnated.

Capital outflows are another way that the poor countries are integrated with the rest of the world, and they are quite large. The stock of poor countries' outflows in 1999 equaled about 17 percent of GDP. Again, the quality of the investment climate is the main determinant of levels of outflows from poor countries.

Countries whose policies were worse than average, had six times the level of outflows relative to the GDP than countries with better policies. These high levels of outflows from poor countries, despite pervasive capital controls, underlines again the importance of a good investment climate. In poor countries with worse policies, outflows equal about one-third of aid and one-fifth of domestic savings and has constituted a very large drain on investment resources.

I would like to turn now to official aid, and there's two main messages I would like to emphasize; one is that aid fell in 2001, and the other is that countries with good policies can continue to absorb more aid productively.

The chart shows a slight decline in official aid to developing countries in 2001, but if you look over the longer run, since 1990, aid flows have declined by more than 20 percent in real terms. Preliminary estimates indicated that a doubling of aid flows, coupled with improved developing countries policies and increased allocation of aid to countries with good policies, will be required to meet the Millennium Development Goals, including a halving of poverty and improvements in health and education indicators by 2015.

One major thrust of the report is that countries with good policies should be able to absorb increased aid resources productively. Aid does not, in general, increase the volatility of government resources, and appropriate policies can limit the contribution of aid through inflationary pressures and exchange rate appreciation.

It is true that even in many countries with good policies, a lack of administrative capacity, a scarcity of talented civil servants, can lower the marginal productivity of aid when aid levels rise. However, recent research indicates that aid levels to most countries with strong economic policies are well below the threshold where aid would become ineffective.

MS. ANSTEY: Thank you very much.

I will throw it open to questions. There are some mikes around the room.

Yes, the gentleman in the second row. Can I just mind you to state your name and media outlet for the transcriber.

QUESTION: Chris Anstey with AFX News.

I had a question on the size of the global downturn. In the report it says, "Exceptionally broad and deep, the worst recession in 30 years." But if you look at the U.S., GDP peak to trough, only down .3 percent. Mildest recession, in fact, in 30 years. If you look at Europe, I think they'll have--Euroland has one contracting quarter of GDP, Japan is obviously a different situation, but in big emerging markets, India is growing, China is growing, Brazil hasn't gone down.

I just don't see how, you know, beyond the raw statistics, where do you see the basis for this being the worst recession in 30 years?

MR. STERN: I'll ask Hans to take that.

MR. TIMMER: Thank you. There is a difference between the level of the growth rates, which is often the source for the definition of recessions and a change in the growth rates, a deceleration that we were talking about. And, indeed, the level of the growth rate is not exceptionally low in the United States, 1 percent. There have been years that it was negative. But a deceleration was from more than 4 percent to 1 percent. So a 3-percentage point deceleration, and even for the United States, that's a very sharp decline.

So you have to recall that the last five years the gross costs if the United States was much higher than they used to have, and that means that lower growth rates are relatively low at the moment.

A second point is that even if the deceleration for individual countries is perhaps not always historically correct, then still, if you sum everything up to the global economy, then the fall is very sharp because it's so simultaneous. Because all of the regions are falling at the same time, we see a falling global GDP of almost 3 percentage points, between 2.5 and 3 percentage points, a fall in the growth rate.

And that fall in the growth rate that only happened in 1975, according to our records, which start in 1916. So you could say that this is the second time in 40 years that we see such a sharp fall in the growth rates, and actually it's the change, the adjustment that's often so painful for countries.

MS. ANSTEY: Yes, in the back row there. I'm sorry. The lights are very bright. It's hard to see.

QUESTION: Peter Goldstein from the Kiplinger Publications.

Mr. Shaw, you mentioned the importance of China in terms of retaining the level of FDI last year. A lot of observers have suggested that China, a lot of FDI is actually being redirected to China from other countries, and I'm wondering whether you've observed, perhaps, particularly other countries in Asia are having difficulty attracting the same levels of FDI, considering so much is going to China?

MR. STERN: MR. SHAW: No, I wouldn't put it that way. Certainly, there are a few countries in East Asia that have trouble attracting FDI right now. Indonesia is seeing FDI outflows. But I think, in general, what you see are reactions to individual countries' domestic policies.

You have to remember that the global FDI flows were a little under $800 billion in 2001, even though a lot of that is boosted by mergers and acquisition transactions. I don't think there's any issue that there's not FDI to go around, and so China is taking too large a share. FDI has increased very significantly in the developing countries since the early '90s, and many countries have participated in that surge.

MS. ANSTEY: Yes, Mark?

QUESTION: Mark Drajem, Bloomberg News.

I am interested in your findings or the lessons you've drawn from Argentina, specifically, one of the findings. I just am interested in hearing you say here, as opposed to from the report, what those findings were, specifically, on the success of loans requiring more or stronger adjustment.

Right now one of the things that we're hearing from Argentina is that they are saying it's too hard right now to take on some of these difficult tasks of adjustment and that really we need aid first and then adjustment will come later. I am interested in hearing your response to that idea.


MR. STERN: The key challenges in Argentina in the very immediate future are three, really:

Reforming the banks, which have clearly been hit very hard by the happenings over these last few months.

The second is getting a credible fiscal system in place, and both of those are areas where our colleagues at the IMF are, of course, working very closely with the Argentinean authorities. We, too, are talking closely with the Argentinean authorities on those issues, but it's the IMF that's in the lead, and it's really important to see movements on those issues before really any loan could be credible.

The third thing, and it's of particular importance for the Bank's work with our Argentinean partners, and that is on the social side, and it's very important at this time to keep the kids in schools, to keep the clinics stocked with medicines, and that's a very high priority for us, and we've recently provided $100 million as the World Bank for those purposes.

So I would identify those three areas as the key ones, and as policies are worked out on these areas, I think support will be coming. You've seen, of course, the support which we have already been bringing on the social side. But as I said, it's our IMF colleagues who are working particularly on the banking and fiscal side, and it's very important to get some progress there.

QUESTION: Jean-Louis Doublet, Agence France-Presse. A question for Mr. Timmer. You highlighted the fact that there was no increase in productivity in sub-Saharan Africa for the last 20 years. What's the correlation with HIV/AIDS?

MR. TIMMER: We haven't looked specifically into the impact of AIDS on the productivity in the agricultural sector in this report, but clearly, overall for the economy, it's one of the factors that keeps growth in sub-Saharan Africa down, not only because of the fact that it increases the costs for health care, for other nonproductive sectors, but especially because it's mainly the people in the productive ages that are affected in Africa.

MS. ANSTEY: I think, just to add to that, we do have some work, and we can get it to you, on productivity and AIDS from our Human Development Department, particularly looking at things like the effect on agricultural workers and the effect upon teachers. As you know, teachers are dying of AIDS more quickly than they can be recruited and trained, so we will get that to you.

QUESTION: Jean-Louis Doublet, Agence France-Presse. If I could just make my question a little more clear, it is the report does not identify HIV/AIDS as the main factor behind the lack of productivity growth in sub-Saharan Africa over the last 20 years.

MR. STERN: I think that you would have to regard it as one of the factors behind the lack of productivity growth. It's really quite difficult to identify the separate causes. We do know that in many sub-Saharan African countries, there's been a great deal of conflict, and conflict is very bad for most investment activities. Agriculture is, in its essence, an investment activity, where you have to put in a lot of work before the harvest, and in a climate of conflict, that's extremely difficult. So it really is a combination of factors, of which HIV/AIDS is certainly one of the important ones.

MS. ANSTEY: Yes, Anna?

QUESTION: Anna Willard from Reuters.

I just came from a briefing by Nancy Birdsall, who said there was a real prospect that nothing will be achieved in Monterrey, and with the U.S. commitment to helping countries, there's a big question mark.

Do you agree with that at all?

MS. ANSTEY: Nick, we'll let you take that one.


MR. STERN: There's always a possibility that nothing much will come out of the gathering. The question is what are we looking for? What are we hoping for? I can't forecast with certainty, obviously, what will come out, but I tried to describe at the beginning what we are looking for, and it's a deepening in the partnership. I think what we have seen, if we look back over the last year and a half, we have seen a very important move forward in an understanding and commitment to a partnership for international development.

I think the adoption of the MDGs, Millennium Development Goals, a year and a half ago was a very important step forward in the U.N. The Doha just a few months ago was an important step forward. You can see the way in which, and we described it in a number of our publications, the policies of the developing countries are a step forward. You can see it in NPAD, the New Partnership for African Development, where the African leaders are committing themselves to improving the policies and recognizing that it's for them to take the lead on policies, and governance and so on. These are all very important moves forward.

And what I would hope from Monterrey is that partnership is deepened, that these are not just straws in the wind, they're something that's really coming together in a positive way along with three things that I described: Policies, governance, institutions in developing countries, number one; market access, trade, number two; and number three is increasing resources, and we should look to Monterrey for movement ahead and an understanding of the importance of these three things and not judge it simply in terms of who stands up and commits to what in aid. It's much deeper than that.

The aid is the third part of the trio of activities in the partnership I described. It is important. It has fallen. We do hope that that fall will be reversed, but it's one part of the story, and the other two parts of the story I emphasized are extremely important.

MS. ANSTEY: That said, I think we do want to move beyond Monterrey at Monterrey. Certainly, if there was action by the Europeans, who are meeting this weekend on aid levels, it would be extremely welcome, as would action from the U.S. Government.

Yes, sir?

QUESTION: I'm Nakano [?], Japan's World News Services.

Mr. Timmer, you mentioned Japan's banking program, and do you think it's necessary for Japanese Government to inject public money into private banking sector again; do you think so?


MR. TIMMER: I'm not directly in a position to give policy advice to the Japanese Government. I would rather focus on the developing countries, but it is clear that the banking problem is the main problem in Japan and that there are not a lot of options left to solve that problem.

Clearly, what has to happen is the restructuring of the banking sector itself, and what the government can do is very much push the banking sector in the direction and create as favorable an environment as possible for that. One of the things that they can try to do is to reduce deflation in the economy because, for every banking system, it's very difficult to manage debts in a deflationary situation. It's very difficult to get profitable in a deflationary situation. So what's being done at the moment with monetary policy is promising, trying to combat with monetary policy deflation.

The other thing is indeed that, at some point, recapitalization will be needed, not as the main policy that will solve everything, but as accompanying policies in the big reform.

MS. ANSTEY: Shihoko?

QUESTION: Shihoko Goto at United Press International. Two very unrelated questions.

Firstly, on your findings on Argentina, one of the things that you cautioned against is a pegged overvalued exchange rate. I am reading that as being pegged and overruled. If it were pegged, but undervalued, for instance, in the case of Malaysia, would you say that that is actually an effective way, an effective currency regime? That's the first question.

The second question is more broad and perhaps more in scope with the World Bank. The United Nations has found that population growth over the next 50 years will actually not be as high as once expected and that birth rates, even in developing countries, is going down considerably. Admittedly, this is a finding over the next 50 years, but do you think that sort of decrease in overall population would be a good thing for developing countries over the next three years?

MR. STERN: Perhaps I'll take the question on population, and Hans will say something about, or Bill, on the exchange rates.

On population, you have to recognize that it's the population growth rates which are not as high as people thought 10 or 15 years ago. There has been striking progress in many developing countries in fertility rates for women. For example, Bangladesh, it fell over about 20 years from around seven children per woman to just over three, a remarkable change in about 20 or 30 years.

But it's the growth rates that have come down. We still an extra 2 billion or so people in the world over the next 25 or 30 years, and most of those, in fact, nearly all of those, will be in the developing countries. So the population of the developing countries will move from roughly 5 billion to roughly 7 billion. That is a very big increase to accommodate, even though it's smaller than it might have been relative to earlier estimates of growth rates.

So it's a very big adjustment for developing countries to make. The challenges of food production, for example, will be very serious. The challenges of water will be serious. The challenges of fragile land will be serious, and we'll analytically we'll be looking at those in the World Development Report that's coming, to be published in August, ahead of the Johannesburg Conference.

So, whilst those population increases are less than we might have thought, they are still going to be very large, and they're still going to be almost entirely in developing countries.

Hans or Bill, do you want to comment?

MR. SHAW: Yes, it is correct. We were speaking of the dangers of a pegged exchange rate that is overvalued.

Now, as to the more general form of question of whether fixed or flexible exchange rates are the best policies to undertake, that has been a question that has been debated by economists, and before there were economists, for centuries.


MR. SHAW: I don't think we are going to make a large contribution in that debate.

One of the things we were saying, though, in the report is that, in the current circumstances, particularly in a highly integrated global economy, given the experience of the last five years or since the late 1990s, there are certainly issues relating to fixed exchange rates. On the other hand, some countries have very successful fixed exchange rate regimes. That exists now.

So we are not taking a position on that question, but nevertheless we do think that recent experiences underline some of the potential pitfalls in having a very fixed exchanged rate.

MR. STERN: If I could just add to that, I agree entirely with what Bill has said. If you look at what has changed over the last 10, 15, 20 years, it has been capital mobility. So the risks associated with a fixed, overvalued exchange rate have gone up over time.

So any evaluation of flexible versus fixed has to factor that change into the story, and if you like, the punishment for having a fixed, overvalued exchange rate has gone up along with the mobility of capital over the last 10 or 15 years.

MS. ANSTEY: I think that seems to be it. We will call it a day, unless….you have one last question, sir, in the middle there.

QUESTION: Thanks. Michael Kitchen from UN Wire.

I just wanted to ask, when you were talking about sub-Saharan African commodities, exporters, in terms of--well, first, I wanted to ask whether you felt optimistic. You said that Doha was the opening of the door, but do you feel that there is a momentum right now to drop trade barriers in commodities?

And, also, how big a part or perhaps better to say how important or how much of a problem is it, in terms of trying to diversify those economies into secondary and tertiary industries?

MR. STERN: I said that Doha opened the door, and it's very encouraging that it opened the door, but the difficult work likes ahead. We do know that the barriers in rich countries to the exports of the poor countries are very high. We do know that agricultural subsidies are well over $300 billion a year in rich countries. I emphasize we do know that there are lots and lots of nontariff barriers: anti-dumping, phytosanitary, and so on. Those are all very damaging to the interests of developing countries and contribute to the low level and the volatility of the prices for agricultural goods.

So progress on agriculture and textiles is absolutely fundamental. We'll keep on speaking out on that issue. It is hypocritical of the rich countries to encourage policy change, including trade liberalization in the poor countries, and all of the changes, the costs of change that are of course in doing that, without being able to face up to the costs of change themselves. We are going to continue to speak up strongly on that.

In terms of working for trade liberalization, which we have been in this Bank for a long time, and we did at Doha, and that's why we were encouraged by Doha, in terms of the work for that--which all of us, many of us have, not just the World Bank, many people around the world have been doing--that work is not helped I think by the tariffs on steel. It's a setback, I think we would all recognize that, in the process of liberalization.

But as I've said, the crucial area for developing countries are agriculture and textiles, and we must be sure that this setback doesn't grow, that we keep the momentum going on trade liberalization, particularly in agriculture and textiles.

MS. ANSTEY: Thank you, ladies and gentlemen, very much. I think that is it. It is 11 o'clock, you can try and door stop Nick, Hans or Bill on the way out.

[Whereupon, at 10:55 a.m., the proceedings were concluded.]

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