Wednesday, December 11, 2002
MS. ANSTEY: Good morning. I am Caroline Anstey, World Bank Chief Spokesperson and Director of Media Relations. Thank you for coming to this year's launch of Global Economic Prospects 2003.
Presenting the report today we have, to my left, Nick Stern, World Bank Chief Economist and Senior Vice President for Development Economics; Uri Dadush, Director of our Trade Department and Director for Economic Policy and Development Prospects; and to his left is Richard Newfarmer, Economic Advisor for Economic Policy and Development Prospects, and the report's lead author.
MR. STERN: The recovery in rich countries has been much more hesitant and uneven than expected. It is fragile. The consequences for poor countries: slower growth in rich countries will impede poverty reduction in developing countries. Therefore, action to remove barriers to trade and investment that hurt poor people in developing countries is becoming increasingly urgent. Thus, it is very worrying that international trade talks, which hold the promise for medium-term growth, have shown signs of bogging down.
In getting growth going in poor countries, growth and open markets in rich countries are of great importance. The investment climate in the developing countries themselves is also crucial for the level and productivity of domestic investment--which accounts for 90 percent of investment in developing countries--and for foreign direct investment, which brings technology and know-how. Investment climate involves especially those things that enable small and medium-size enterprises to function--stable macro environment, functioning infrastructure, effective bureaucracy not riddled with corruption.
Fluctuations in global capital flows point up the importance of foreign direct investment relative to other types of flows. Repayment to private and official creditors now exceeds fresh lending, i.e., debt flows are now negative. Surely the reversal of these flows since the mid-1990s must make developing countries cautious about relying on debt financing. We can no longer see them as the main driver of development finance. Foreign direct investment has been much more stable, although it has fallen in the last three years. Raising foreign direct investment and keeping it up is vital and will require both global growth and improvements in the investment climate in developing countries. Keeping conditions strong for foreign direct investment, the same policies that will keep conditions strong for domestic investment, is a very important policy challenge in this period of slower growth in rich countries, an important policy challenge in the poor countries.
Finally, the report focuses in some detail, and I think very helpful detail, on some of the issues around the WTO in the WTO discussions. These include particularly the role of investment policy and of competition policy.
Now, the point I want to make here and to emphasize is that the key issues--the key issues--for opportunities for poor countries in these negotiations on the WTO concern bringing down the trade barriers: first, bringing down the trade barriers in the rich countries, all the barriers that you're familiar with: tariffs, quotas, antidumping, of great importance, agricultural subsidies, and so on. The key issues concern first bringing down the barriers to opportunities for the poor countries which are associated with all those protectionist measures of the rich countries. That's the first key issue. And the second key issue is bringing down the barriers which developing countries themselves erect. And I spoke out strongly in India just ten years or so ago also on the importance of bringing down the barriers in the poor countries. Those are the key issues.
There are issues of some substance in investment policy and competition policy, but we must not let them divert attention from these central issues which are so important to opportunities, growth, and poverty reduction in developing countries. And that's one of the key messages of this report. Important as investment policy and competition policy are, we must not let them divert attention from the really big issues. So at that point, let me pass to my left and ask Uri Dadush to introduce the report.
MR. DADUSH: Thank you.
We have four main points on the prospects, and the first is that there's a slowing of the recovery that we've observed since the middle of the year. However, we feel that growth will resume in the course of the next three months or so, leading to, as Nick mentioned, indeed the assertion of recovery, although a relatively subdued one, and one characterized by considerable risk. That's the second point.
The third point is that we remain convinced that the long-term outlook for developing countries is promising, is really quite positive, and I'll illustrate that.
And the fourth main point is that the Millennium Poverty Goals are likely to be reached in most regions, but not in Africa.
These are the four main points of the prospects section, and now I'm going to briefly illustrate them.
This chart shows you the momentum of industrial production. It shows that this momentum shows sharp slowing in recent months. It also illustrates the relatively rapid acceleration that was seen at the beginning of the year. That acceleration was prompted by the recovery in high technology at the end of the stock-(?) and policy stimulus. However, the deceleration we see now reflects, on the one hand, the failure of investment to pick up and, on the other, the fading of the high-tech stimulus.
Of course, the spreading uncertainties in the financial sectors which have been widely discussed and which affect countries around the world, including most recently, of course, the United States, the effects on demand of the adjustment in the stock market and the accounting scandals and so on, and on confidence because of the accounting scandals, and the induced failure, therefore, of corporate profits to recover, all these help explain the weakness in investment.
Nevertheless, our projection is that growth is likely to resume, and we're already seeing some signs of this at the moment. What are the main forces behind the recovery? First of all, policy stimulus. Short-term interest rates in the United States are about 400 basis points lower than they were two years ago. They are now at a 40-year low, and there's been a 2 percent of GDP fiscal expansion in the United States since 2000. More recently, European interest rate cuts. Fiscal policy also remains --although not as stimulative--somewhat stimulative in the United States. And the Japanese authorities are doing what they can under very, very heavy constraint to alleviate the credit crunch in that country.
The second factor is that there are signs that business health is improving, and the third point to bear in mind is that productivity growth has been remarkably strong in this country. And, in general, there are some centers of, let's call them supply-side strength, and we would put certainly the United States in that list but, of course, also the enormous advances that we're seeing in China and the associated periphery, which is now large enough to have a real effect on global activity in Asia and, by implication, on the rest of the world.
Nevertheless, this is a distinctly subdued recovery that we're looking at. We are reaching quite rapidly the limits of what policy stimulus can do. The European countries are running against a 3 percent Maastricht target. They have committed to some fiscal tightening over the next year or two. Interest rates are already very low. As I mentioned, Japan is running out of room in terms of fiscal stimulus. The weakness in investment spending is likely to persist for some time, and the recent slowing of growth in trade and production that we have observed in recent months is likely to take some time to reverse.
So for these reasons, the projection is for relatively subdued growth, and the risks are significant. Things could be quite a bit worse. In the low-case scenario that is developed in the report, the recovery in growth in the year 2003 that is in the base case is delayed by one year, and there are three elements of risk that are highlighted in the report. First of all, the potential for resumed or continued turbulence in global financial markets which would affect investment is an important factor. Second, a re-heightening of emerging market financial tensions. Some emerging markets are quite vulnerable, of course. And the, third, is the risk of higher oil prices associated with a war or potential of a war in the Middle East.
All these elements could work either independently or cumulatively, which is what is assumed in the low-case scenario. We assume that all these three things happen at the same time. This would then mean cumulatively a one-percentage-point loss in output growth in 2003-2004, 2 percent lower trade growth, and a half-point reduction in inflation and 100 basis points easing in international interest rates. It's Latin America and East Asia that would likely be the regions most adversely affected.
This shows you the numbers by region. I don't have time to go into them, just to point to the fact that East Asia continues to do relatively well in the base case projection. Especially notable is the performance in Latin America. But there's going to be a separate press conference on that. We are, nevertheless, assuming some stabilization and possibly growth in Latin America next year.
A word about the long term. We remain optimistic on the long term. Especially notable in those numbers is the turnaround in Europe and Central Asia. We are not at the end of transition, but we are at the beginning of the end of transition or approaching the end of transition, maybe. And these countries are now growing at fairly rapid rates. That's really the spectacular change.
In the other regions you see acceleration, significant acceleration in Sub-Saharan Africa, still very disappointing in terms of poverty objectives, which I'll talk about in a moment. But, nevertheless, this would be a big improvement, 1.5 percent income per capita growth in Sub-Saharan Africa relative to the last ten years. And the other thing to note is there is one region that shows lower growth in the projections than the last ten years, and that's East Asia. But it's still very, very high growth by any standard.
Now, let me say a word finally about our poverty projections. This is where we stood in 1999. The outlier is Sub-Saharan Africa, 50 percent head count poverty ratio, people living on less than $1 a day. At the other end of the spectrum are Eastern Europe, Middle East/North Africa, that have less than 10 percent or even 5 percent of people living on less than $1 a day. Of course, most of the people living on less than $1 a day are in East Asia and South Asia, reflecting just simply the the size of the population in those regions.
The chart also shows the Millennium Development Goals. They are calculated as half the rate of poverty in 1990, which is why you see that a region like East Asia and another region, Middle East, have essentially reached the Millennium Poverty Goals. There is quite a way to go for South Asia, and very large way to go in Sub-Saharan Africa. In fact, in Sub-Saharan Africa, the current level of poverty is more than twice the Millennium Development Goal, reflecting the fact that poverty has increased in Sub-Saharan Africa since 1990.
Now, here's our projection based on the long-term numbers. The diamond shows the projection. East Asia widely exceeds the poverty reduction target. South Asia also meets it. In fact, all the other regions meet it, but not Sub-Saharan Africa where the forecast is for ratios to remain somewhere near current levels, and so for the poverty objective to be missed quite totally. And this is the projection and obviously raises a lot of questions about policies and issues.
But I'll leave it at that and let Richard talk about the structural aspects.
MR. NEWFARMER: Thank you, Uri.
Turning to the thematic and structural parts of the report, we wanted to ask three questions particularly relevant to developing countries and to the discussions going on in the global debate on trade issues.
The first question was: How are changes in the global economy affecting opportunities for developing countries, and I should also mention also affecting risks to developing countries?
Secondly, what can developing countries do to improve their investment climate? And by that we mean the macroeconomic policy framework, the protection of property rights, those issues that attract investment and propel investment, both foreign direct investment and domestic firms as well.
And then, finally, how can the international community help developing countries with their investment climate?
Turning first to the changes in the global economy, as Nick mentioned, foreign direct investment flows have been the mainstay of financial transfers to developing countries for now two decades. One of the things we're seeing in recent years, however, is tail-off, partly reflecting the end of the bubble economy in the OECD countries, also affecting higher risk premium. Because of the rising risk premium globally, much of the investment in infrastructure is considerably down. That's because these are long-gestation projects that have their returns at the end of the period and, thus, with rising risk, investment in power, for example, and transport is substantially less, some 20 percent. Overall foreign direct investment flows are down some 15 percent relative to their peaks in 1998.
Within this graph is an important change that's going on and has been for some years, which is the shift increasingly towards services investment in foreign direct investment. In fact, the pace of service sector investment by foreign investors greatly exceeds that of all manufacturing industries. Here I'm talking about financial services, telecommunications, retail and wholesale trade. These are becoming increasingly important and represent a real opportunity for developing countries to expand the number of competitors in those sectors.
The final point that I'd mention, we see in recent years, particularly the last two, is an increasing sensitivity on the part of foreign director investors as they scan the globe to look for countries with good investment climates, that is, with good, sound macro policies, with good protection of property rights and the like.
If those are changes in the global economy, how can developing countries take advantage of those changes, raise the level of investment that they have, and increase the productivity of investment domestic investment as well as foreign direct investment? The issue is not only so much the level of investment because we know from the historical experience of countries like the ex-Soviet Union, it's easy sometimes to generate a lot of investment, but the trick is to make that investment productive.
So we focused on two issues here. The first is lowering policy barriers that restrict competition. What do I mean by policy barriers that restrict competition? Imports, for example, restrict the number of competitors in the market. Restrictions on incoming foreign direct investment restrict the number of competitors in the market. Administrative barriers restrict the number of domestic firms that might otherwise come into the market. These are the kind of things that are analyzed in some detail in the report.
Also, we focused on improving the investment in public goods, the supply of public goods. It turns out things like education are extremely important for raising the productivity of foreign direct investment. Those countries that invest more in schooling and have higher levels of educational attainment get a bigger bang for their foreign direct investment dollar than countries that do not.
Let me illustrate the policy barriers to competition with a couple of slides. Import barriers are really very important for driving productivity. This graph shows on the back line the average tariff rate in Korea, Malaysia, China, and India. And as you can see, with higher levels of tariffs, there is correspondingly lower levels of average productivity of firms. This is based on surveys of some 5,000 enterprises which the World Bank has conducted. And it's for that reason that countries like China have progressively over the last decade brought down their levels of external protection to drive productivity changes within the economy. And membership in the WTO there I think is very important. When we do more sophisticated statistical studies, this relationship tends to be quite strong.
Another example is removing regulatory barriers to competition, and here we focus a lot on the privatized industries. As many of you know, privatization has been increasingly common in our client countries. It makes a big difference whether you privatize into a monopoly environment or you privatize into a competitive environment and allow for not only increased competition in the market but also regulatory measures that might allow the poor to have access to services.
Let me show you just an example here. This graph comes from a study of a fixed-line telephone communication in the 1990s. What we find is that in regulatory environments that introduce some element of competition, the rate of growth tends to be about double the rate of growth of other privatized telephone companies without competition. And, similarly, if we look at productivity gains, productivity is much higher in the regulatory environments that have some element of competition.
The third question: How can the international community help enhance investment and competition policy? The report goes into several forms of international collaboration, but we also focus rather squarely on the discussions at the WTO. WTO Ministers are going to take up two new issues in Cancun next year: the possibility of some sort of international investment agreement and the possibility of some new multilateral rules on competition policy. Let me just take each one of those and say a few words about them.
What we want to do, what we had wanted to do when we look at these issues is we want to ask what's the largest development payoff to international collaboration, to international agreements in this area. As regards an international investment agreement, two things we think potentially that we examine in the report could have impact. The first is liberalizing market access for foreign direct investment. As I mentioned before, easing entry can raise productivity by increasing the number of competitors in the market.
If you stand back and do a deeper analysis, of course, you find that much of the restrictions around the world on incoming foreign direct investment in manufacturing have been lifted. Governments everywhere are seeking more foreign direct investment in manufacturing. Most of the remaining restrictions pertain to service sector investments. And here there is already a global agreement, a multilateral agreement on liberalization of services, and a reciprocal negotiating forum for that is the General Agreement on Trade in Services. This lowers, in our view, the urgency of proceeding with an international agreement, at least as regards this dimension.
Another possibility that an international agreement could include is new protections for foreign directors investors. And here we ask the question: Will new protections increase the flow of foreign direct investment into developing countries?
We come to the conclusion after some analysis that that is unlikely to be the case based on historical experience. Why is that? Well, first of all, much of foreign direct investment is already covered by bilateral investment treaties as distinct from the multilateral discussions now underway. Bilateral investment treaties now cover some 50 percent of all foreign direct investment globally.
When we do a detailed analysis of the impact of signing those bilateral investment treaties, we find very little relationship between signing the agreement and subsequent increases in foreign direct investment. It turns out foreign director investors in the most part are looking to other elements in the domestic investment climate to provide protection to their investment.
A third point here is that multilateral accords are likely to be weaker than multilateral accords in this regard, and we can go into that in the questions and answers if you wish. This suggests that for purposes of these two elements, at least, an investment agreement that would embody these is somewhat less urgent than perhaps the other big issues on the agenda.
So let's look at competition briefly. The discussion on competition seems like to take up the issue of illegal international cartels. The report goes into an analysis of the impact that colluding enterprises, most of which are based in rich countries, can have on the prices charged to developing countries. Cartels that have been discovered and confirmed and fined by the U.S. antitrust authorities and the OECD antitrust authorities--sorry, the EU antitrust authorities have been--we estimate raised prices to developing countries by some $7 billion during the 1990s. This is an important number and, therefore, we recommend that developing countries be allowed to bring suit before the U.S. antitrust authorities or the EU antitrust authorities to be able to discipline better these international cartels.
Exemptions from antitrust law do not appear to be on the agenda at Doha, but we think ought to be on the agenda. Why is that? Well, national export cartels, which are allowed under certain laws, do allow firms in the same home country to come together and raise prices to allocate markets among themselves. We don't know the impact of these simply because these are shrouded in secrecy. These agreements are not made public. A first step, we think, is an inventory of these arrangements and making them public, somewhat like was done in the 1970s.
Maritime transport exemptions to antitrust legislation are also important. In our last year's GEP, we estimated that these types of cartel arrangements that emerge in this area result in raising prices of transported products from developing countries, particularly Africa, to the rich countries by some $2 billion. So these two require, we think, eliminating the exemptions to these antitrust laws and thereby make trade a little bit more efficient.
If you stand back from these two questions of investment and competition and say what are the really big problems that developing countries have with investment and competition in the global perspective, we would have to say it's really barriers to their exports. Why do we say this? Well, if you think about it, trade barriers abroad discourage investment in developing countries' industries. Consider the case of Chilean tomatoes and tariff escalation in the United States tariff code. If a Chilean producer wishes to sell tomatoes, fresh tomatoes to the United States, he pays a tariff of about 2 percent. If he puts it in a package and dries the tomatoes and sends it off to the United States, he'll have to pay a tariff of almost 9 percent. If he in turn takes those fresh tomatoes and makes them into salsa or into ketchup, the tariff rate is almost 12 percent. So that escalation discourages investment in forward processing in the Chilean industry.
Similarly, the big competition problem that developing countries have are barriers to their external trade. Let me just illustrate this. Nick mentioned several of the categories of trade restrictions, and we did a detailed analysis of that last year.
This graph shows simply as one illustration among many the effects of external tariff barriers to an exporter, one based in rich countries and one based in developing countries. The average exporter in a developing country pays an external tariff of something over 6 percent, whereas an exporter in rich countries pays something on the order of 4 percent.
When you add to this quote arrangements, antidumping arrangements, agricultural subsidies, the distortions become even greater. The big competition problems and the big investment problems are trade barriers.
What's the conclusion here? Well, as Uri has summarized, the global environment is indeed precarious, underscoring the concerns that we have for the most vulnerable economies. Secondly, developing countries can do much on their own with their own domestic policies, and they really shouldn't wait for a Doha agreement to improve their domestic investment climate; that is, lowering those policy barriers to competition to drive productivity gains.
And then, finally, moving ahead with Doha is indeed crucial, but the emphasis has to be on the big development issues.
MS. ANSTEY: Thank you very much, Richard.
We'll throw it open to questions. Let me remind you that we always do a transcript and post it on our Web, so if you can identify yourself and your media outlet, it helps the transcribers. Thanks.
QUESTION: My name is Adu Asari (ph), reporter for Africanewscast.com. I have a problem with the suggestion that maybe if the private sector in the Africa region improved competition in the non-manufacturing area, it might help the economy. Do I understand you to be saying that, Mr. Newfarmer? An issue saying--how can a region of the world where most people are poor have the capacity to develop the private sector?
MR. STERN: Let me come in first, and then Richard. One of the big problems of Sub-Saharan Africa is capital flight, and that's a measure of the lack of confidence of the people of Africa in making investments in their own country.
Now, if the climate for investment gets better, that affects most importantly and quickly small and medium-size firms--people who are fixing cars or fixing bicycles, people organizing basic transport, the ordinary kind of retail activities, the kind of activities that support agriculture and so on. People start to make investments in those areas, small farmers and small entrepreneurs, and those things can be very significant in driving growth. And if you look at the way in which growth has picked up in Mozambique and Uganda, for example, and the way in which growth has declined in countries like Zimbabwe and Cote d'Ivoire, you see the importance of the confidence of the ordinary people in their own economy and their own environment. It is a big issue, and people make investments everywhere, however poor they are. The poor are amongst the most entrepreneurial people.
So I think that the question of the investment climate in the poor countries is absolutely fundamental, and that's just as important in Africa as anywhere else.
MS. ANSTEY: Can we go back--yes?
QUESTION: During the immediate post-independence period in Africa, the tendency for governments was to use the power of the state to mobilize national resources for distribution among the populace. About maybe since the 1970s, this tendency stopped, and as a result probably most certainly of inputs from the multilateral institutions, switched from that direction to what you're describing now. And Africa has been worse for it. Would you agree with me?
MR. STERN: I would certainly agree with you that the period from the mid-1960s to the mid-1970s was a period of quite strong growth in much of Africa, and since 1975-80, that has started to unwind.
But if you look at the reasons for that, it has to do, I would suggest, with the quality of governance, with conflict, and broadly the kind of issues we're describing about the quality of the investment climate and the confidence, therefore, that ordinary African people were able to have in their own economies. So I think that the key issue was the decline from the mid-1970s to 1980 in the quality of governance.
A second issue, of course, an issue that's been very important, particularly in the 1990s, is the growth of HIV/AIDS, which has had enormous economic consequences. That's been particularly strong in the 1990s. But in the 1980s, you saw a very strong unraveling of the quality of governance and an increase in conflict, and that has been, I think, fundamental to the story.
MS. ANSTEY: Can we go to the back there?
QUESTION: Anna Willard from Reuters. In the press release, it says there's a significant risk that the world could slip back into recession. Does that mean you thought the global economy was in recession last year? Or when it says "back into recession," what do you mean?
And, secondly, do you think the U.S. industrial tariff proposals are wholly advantageous for poor countries?
MR. STERN: Let me reply initially, then pass on to my colleagues. If you look at the table in the press release on the second page of the press release, you'll get the basic growth--you'll see the basic growth numbers, and you'll see that if you look at 2001, you get the aggregate for the high-income countries of 0.7 percent. So that's not actually negative, but it's very slow, and it was actually negative in Japan, the growth rate, and negative in the non-OECD high-income countries.
So, in retrospect, I think we see 2001 as a year of quite dramatic slowdown. You're talking world growth rates of about 3 percent, if my memory is correct--my colleagues can correct me--in 2000. So the particular dramatic slowdown came in 2001, and that is the language which we should be using here, the language of a dramatic slowdown.
QUESTION: Not a recession?
MR. STERN: Well, in some countries it was indeed a recession. I mean--
QUESTION: Talking about the world economy, so it's not--
MR. STERN: I prefer to use the language of a dramatic slowdown, because 0.7 percent is positive, not negative.
The second part of the question was?
MS. ANSTEY: It was the Zoellick proposals.
MR. STERN: Yes. I think that we should welcome the proposals to reduce manufacturing tariffs to zero. But we should also recognize some key elements there. Protection is not just about tariff reduction. We've seen the importance of antidumping activity, for example. We know about non-tariff barriers, and the barriers are particularly severe for developing countries in agriculture.
So the first point is that there are lots more barriers than tariffs, and the second point is that that is a manufacturing proposal, and it doesn't cover agriculture where the barriers are of particular importance.
So those two, I think, are extremely important in bearing that in mind, in understanding the proposal and evaluating it.
The third aspect is that you have to remember that this would involve for developing countries a much bigger cut in tariffs. Manufacturing tariffs are already pretty low in rich countries. So for developing countries themselves, that would involve a much bigger change, and we have to bear that in mind in thinking about the pace at which those things can be done. So a warm welcome, but the three points that I've made should be borne in mind and are very important in putting that welcome into context and its meaning for developing countries.
MS. ANSTEY: Yes, in the front row here. I think a microphone is coming.
QUESTION: Ruben Barrera with the Mexican News Agency, Notimex. In the report when you talk about prospects for oil market, you say that the near term for oil markets will depend heavily on developments on Iraq and production decisions. My question is: What is the likely impact, if any, of the current situation in Venezuela, the third largest oil producer, when we are seeing that the oil production has almost stopped? And I wonder if you foresee any impact not only in terms of prices but also in terms of supply since some countries in Central America and the Caribbean depend heavily on Venezuelan oil.
MR. STERN: Clearly, the oil market in the next few months is quite hard to predict given the uncertainties of the kind that you describe. But let me just make two points.
The first is that given those uncertainties, the world users of oil have been preparing, so there's been some kind of protection built up of stocks and so on in preparation for those uncertainties. OPEC is meeting tomorrow, I understand, so that will, of course, have an important influence on what happens. So I think that basically the prospects for the coming months, given the uncertainties you mentioned, are quite difficult to forecast. But remember that those stocks are there.
I think in the medium term, we have to see the likelihood for oil prices being under $20 a barrel rather than above, as they have been for some time. But also let me remind you that there is a press conference following this one concerned particularly with Latin America.
I don't know if my colleagues want to add anything.
MR. DADUSH: Only that OPEC countries produced nearly 3 million barrels a day above quota in October, with countries such as Saudi Arabia above quota by 15 percent, Algeria above quota by 32 percent, and Iraq's production also has doubled since April. So there are offsetting influences, significant offsetting influences, and the concern is about--from a pure market point of view, is about oversupply of oil at the moment rather than the opposite.
Of course, as Nick mentioned, the situation might change if we have a deterioration of the situation in the Middle East.
MS. ANSTEY: Thank you. Yes, in the third row, Mark?
QUESTION: Hi, Mark Drajem from Bloomberg. I have two questions based on Mr. Dadush's presentation.
One, you said that in Japan there's not much room for fiscal stimulus. Do you think there's room in the U.S. for fiscal stimulus?
And, secondly, your forecasts for Africa are particularly dire and, you said, raise a lot of questions. What are some of those questions, and what are some of the answers?
MR. STERN: Let me begin and pass on to Uri. It's not for us to tell the U.S. economy how to run itself or whether to make fiscal stimuluses or not. What we're pointing to in this report is the importance of growth in the rich countries for the poor countries, and so how growth is managed in the rich countries is of great importance for growth and poverty reduction in developing countries.
The second thing, as was emphasized, is that there's quite a lot of stimulus already in the system from measures that have been taken in the past. But, Uri, is there anything you'd like to add to that one?
MR. DADUSH: Well, just that assuming that the downside risks do not materialize if you just go with our base forecast, we should be seeing some moderate acceleration in growth in that circumstance, and we're beginning to see some of that happening at the moment, or at least the very early signs.
In that kind of scenario, given the fact that we've already used up a lot of the available room on the fiscal side in the United States, viewed from the standpoint of developing countries, which is where we're coming from, it might be a good idea to keep the powder dry, so to speak, you know, because what happens is you stimulate but you lose room for maneuver down the road.
And the other point I would make is that what is really critical today from the point of view of overall economic activity in the world is the climate of uncertainty and how the issues in the Middle East, et cetera, will be resolved. And the quicker we get a favorable, positive (inaudible) which, of course, you know, is not necessarily in one or the other camp's hands, the faster you'll see uncertainties and volatility, I think, in the financial markets also improve.
MR. STERN: Sir, could you repeat your second question.
QUESTION: I said that the predictions--Mr. Dadush had said it raised a lot of questions, the dire predictions for Africa. I just want to know what those questions and answers are from the World Bank side.
MR. STERN: Yes, if you look at the per capita growth rate that's forecast, it's much lower than the 5 percent or more that would be required to meet the Millennium Development Goals. So the challenge, I think, for the development community to support growth and poverty reduction in Africa is a very important one.
Since Monterrey, and before, we've been discussing what those issues really are in terms of policy. Opening up markets, of course, is a big part of the story. Cotton subsidies in the United States obviously have a profound influence on opportunities of cotton producers in West Africa. So the opening up of trade is a big part of the policy options we're talking about.
But also, I think the flows of aid to Africa are a very important part of that story as well, getting growth going.
And, thirdly, the kind of policies which the African leaders have been promoting in NEPAD in terms of the quality of governance in Africa, as we've been discussing earlier, where there are some examples where things have improved and examples where things have gotten worse, as I gave a little earlier. So I think we have to look at policies and options in terms of issues like trade and aid, coming from the development community, and we have to look at the policies from African countries themselves.
But let me emphasize, as I did before, the importance of that fast action on AIDS because what we've seen in Africa in the 1990s is a reversal of the rising life expectancy that we've been seeing in developing countries around the world. In the last 30 years or so, life expectancy in developing countries went up by around 20 years, from the mid 40s to the mid 60s. In the 1990s, in Africa it fell. And that is a major challenge to growth as well.
So those are the main policy options I would underline for Africa.
MR. NEWFARMER: Just to underscore Nick's point about external protection, one thing that Africa has been hit particularly hard by is external commodity prices. And even though we've seen an increase since the third quarter of last year, levels today are still some 30 percent lower, commodity prices, relative to what they were in the 1997-98 period. And if you look at a trend line period, you see even sharper declines.
This underscores the importance of rich country protection in these areas because, of course, if there is a slowdown, the adjustment is pushed on to poor countries as rich countries maintain levels of production through protection and subsidies.
MS. ANSTEY: Thank you, Richard.
Yes, in the fourth row?
QUESTION: Diana Gregg with BNA. I believe it was Mr. Dadush that in terms of the signs why you think growth will resume or--you said there were signs of business recovery. I'm wondering could you address that, where those signs are. Are you talking about specific industries, regions? Could you just elaborate a bit on that?
MS. ANSTEY: Uri?
MR. DADUSH: Yes, the main signals recently are coming from, I would say, the stabilization and recovery in the equity markets, and that is, I would say, the most important signal.
The purchasing managers index have improved slowly, a little bit, in Europe. In the U.S. we've seen some improvement in recent months. Retail sales over the Thanksgiving period were up, although they were only very moderately up. So the signals are not of any sharp change but a stabilization and the beginnings of an improvement.
MS. ANSTEY: Yes, towards the back there?
QUESTION: My name is John Donnelly from the Boston Globe. In the press release, Richard Newfarmer, you're quoted as saying, "We're looking at the most sustained fall in foreign direct investment in developing countries since the global recession of 1981-83." Could you talk about the impact of that, especially since I think earlier you said that 90 percent of all investment is domestic, and also you're projecting recoveries different region to region throughout the world?
MR. NEWFARMER: I think the impact is that there's less foreign direct investment going around the world to developing countries than there was in the late 1990s in the boom period. And while we do foresee a recovery of trend line growth in investment in the next year or so, because foreign direct investment is very sensitive to growth in developing countries as well, it does mean that developing countries have to focus on their own policy environments.
As I said much earlier, investors are becoming much more sensitive to macroeconomic stability issues; they're becoming much more sensitive to regulatory quality; they're becoming much more sensitive to political stability than they were in the 1990s when coffers of corporations were rich. What that means is that developing countries have to lift their policy game, as it were, if they wish to attract investment.
Linking to your point about domestic investment, I think the good news is here what's good for foreign investors tends to be good for domestic investment as well. And it's for that reason really to get overall investment up and moving, both of small entrepreneurs and medium-size enterprises, and to raise the productivity of investment that developing countries have to look to their domestic policy regimes.
MS. ANSTEY: In the second row, and I think that will be our last question.
QUESTION: In your news release, there is the words, "Uncertainties in global financial markets have sapped the momentum of the modest recovery." Do you think it's a major reason for the slowdown, there is a significant risk? And there are a lot of debates about financial markets impact on the real economy. But people are not very sure about in which degree, how it's impacted. Could you talk about that?
MR. STERN: Yes. I'll also ask my other colleagues to come in. Uncertainty and the sharp declines in the stock markets of the rich world have been an important part of the slowdown in growth in the rich world, and it means that--and it also has put a cloud over the pace of recovery.
As we emphasized, we are seeing a recovery. Growth this year is faster than growth last year, but it's fragile, and part of that fragility comes from the uncertainties in the financial markets of the rich world, stock markets being one example.
Other parts of uncertainty in the financial markets is the behavior of corporations, as we've seen around Enron, and that clouds, as it were, the horizons for people, makes them more uncertain.
A third form of uncertainty that's of significance is in the capital flows. We've seen debt finance flows turn from very strong and positive--from rich countries to poor countries, turn from very strong and positive in the mid-1990s to actually negative now. And, again, that's a kind of uncertainty which makes life very difficult. We've seen the debt positions in a number of middle-income countries become rather difficult over these last years.
So these are all examples of uncertainties in financial markets which directly or indirectly slow growth and add to volatility.
QUESTION: Did you comment on the zero [inaudible]?
MS. ANSTEY: Yes, we commented on that earlier. That was an earlier question from the back.
Thank you very much. We'll take a break for about five minutes, and then those who are interested in staying to hear Guillermo Perry and Richard brief on Latin America, that will take place here. Thank you.
[Whereupon, at 11:06 a.m., the press conference was concluded.]