Global Development Finance 2003

Wednesday, April 2, 2003
Washington, D.C.

PROCEEDINGS

MR. MILVERTON:  I think we might kick off.  It looks like we've got the full corps, so thanks all very much for coming along.  We know it's a very busy time in the news cycle right now.

Just before I pass over to Phil Suttle to get into the presentation of the latest GDF, I'll just very quickly run through a couple of housekeeping matters with the Spring Meetings coming up, which, as you know, begin next week.  Just to note that the registration for the media will close on April 9th, so if you haven't as yet, just go to imf.org and go the registration posted there.  I'm sure all of you are familiar with it, if you haven't done it already.

On the order of events, just a few of the highlights coming up.  The release of the Development Committee papers will be accompanied by a press conference that we'll have next Monday, April 7th, at 3 o'clock in the afternoon.  So if you're free, we'd love to have you over so we can just quickly discuss the agenda.  Attending that will be Senior Adviser Amar Bhattacharya and Tom Bernes, who's the Executive Secretary of the Development Committee.  So we'll be able to go over the issues that will be discussed at the meeting.

Thursday, April 10th, will be President Wolfensohn's press conference.  That will be at 9 o'clock in the morning, April 10th.

Friday, April 11th, at 10:00 a.m.--and this will be of great interest to many of you, I would imagine--will be a presentation on the Middle East and North Africa Region by World Bank Vice President for Middle East-North Africa, Jean-Louis Sarbib.  That will be at 10 o'clock in the morning on Friday, the 11th.

Finally, Sunday, April 13th, at noon, we will be launching the World Development Indicators.  Chief Economist Nick Stern will be presenting there.  And at 3:45 on Sunday, April 13th, will be the Development Committee press conference, which is traditionally how we wrap up the meetings.

QUESTION:  May we could get a copy of that?

MR. MILVERTON:  Oh, yes.  It's on the web.  You'll be able to find the full schedule.  This is just for highlights only.

Okay.  So let me pass it over now to Phil Suttle, who's the Manager of our International Finance Team, to give you the presentation of the Global Development Finance Report for 2003.  Phil?

MR. SUTTLE:  Great.  Thanks, Damian.

I want to leave as much time as I can for questions.  We're doing it in a slightly different room, as many of you noticed, this year.  I hope it works, and I hope you can both hear me and see the slide show.  But if you're having any difficulty hearing me, please speak up.

We're going to touch on four basic themes quickly before we get into the Q&A session.

The first, as is usual with the GDF, we're going to update you on what we think about the global economy.  Clearly, that's a major issue at the current time.

Second, we're going to address near-term trends in financial flows to developing countries, which is really what the GDF focuses in on.

Third, we're going to take a step back and look a little bit at the broader context of financing for developing countries.

And then, fourth, spend just a few moments picking up on a chapter that we have, Chapter 7 in the publication, on workers' remittances.  We think this is a subject that people haven't spent too much time looking at recently, and the growing significance of them is, I think, noteworthy.

So let me begin with the global outlook.  I think it's fair to say that the war and its impact on the global economy is very much what's on everyone's mind.  What we've had the opportunity to do in this publication is integrate some preliminary estimates of the impact of the war.  Clearly, we have no great wisdom about how this is going to play out, but we have come up with some early judgments it's going to have on the global economy.

The routes or the channels through which the war is affecting the global economy or through which we've assumed it affects the global economy are highlighted here:  oil prices, business and especially consumer confidence, volatility in financial markets, and fiscal stimulus.  The first three are clear negatives certainly to date; the fourth is about the only good thing you can say that's out there in terms of its impact on the global economy.

Now, what I've done is highlight for you what we've assumed in the forecasts that are in this book for oil prices, which I think is the best way of capturing the spirit of what we're saying about how this conflict plays out.  And the way I characterize it is to say that for the next three months we expect oil prices to remain around where they are today, which is around $28, $29 a barrel, but then drop significantly in the second half of the year.  I leave it for you to interpret sort of what that means about what we're saying about how the conflict plays out, but I think it's fair to say that you wouldn't get that sort of oil price if we got into a messy morass in the Middle East and beyond.

One point I would make about this whole sort of build-up in financial markets to a conflict that, after all, has only been under way now for a couple of weeks, is that when you look at the oil price as your key benchmark for how it's affected the world, clearly markets have in some sense been pricing in the war for many months, and the oil price has risen very sharply from mid-November.

What I think to us is very striking is that if you take the aggregate of developing countries, at least the middle-income countries that are market borrowers, and look at them through the spectrum, through the prism of the so-called EMBI (Emerging Market Bond Index) spread, which is the bond market spread between their bonds and U.S. Treasury bonds, what I think is striking is that, as oil prices went up, the EMBI spread actually continued to fall, to tighten, which I think is a reflection that for many developing countries--certainly not all--financial strains, at least to date, of the war have been surprisingly muted.

I would note--which is what the box that suddenly popped up at the bottom of this slide does highlight--that specific countries have been under clearly significant increased stress, most particularly Turkey, which is right in the neighborhood.  Other smaller economies have obviously suffered and will continue to suffer, especially those dependent on tourism.  Tourism is a major industry to suffer at the current time from what is happening with the war.

But as we take these assumptions and put them into our global growth forecasts, this slide summarizes a couple of key points about what we're saying about the world in 2003.

The first point is that in recent months we've continued to trim away at our global growth forecasts.  We've taken down the global growth forecast for 2003 by about a quarter percentage point over the last two to three months.  Now, that isn't just the effect of the war because--excuse me.  The effects of the war in these numbers isn't just in that quarter-point reduction because in the December 2002 forecast that we came out with in the last GEP (Global Economic Prospects), we'd already had some run-up in oil prices.  So there was already some impact there.

But you can see the second point, aside from that modest further trimming that we've undertaken, is that we've been consistently cutting our global growth forecast for the past year for 2003.  I think it's very important in all the uncertainties surrounding the war not to lose sight of this basic fact that generalized confidence in the recovery in 2003 just keeps slipping.

If you try and quantify, at least so far, what impact we think the war is having on global GDP, what we've got embodied in these numbers, when you add it all up, is the best estimate that so far it's going to take something like a half percentage point of global GDP in the first half of 2003.  That's a hit that we would quantify as somewhat similar to the September 11th shock.  Clearly, it could be worse, and we'll come to that topic in a moment.

If you're quantifying it in dollar terms, it's not a small amount.  It's probably global GDP lost of the order of $75 (billion) to $100 billion, and especially as it's focused on a number of countries that are not well prepared to deal with it.  It's not a trivial hit.  But certainly from a global perspective, it's not overwhelming.

As far as looking beyond the next few quarters and months is concerned, this is the forecast that you'll find in the publication.  Once again, the theme to stress here is one of a muted acceleration in growth, and I think what I take away from these numbers is not necessarily a great deal of optimism, although growth does keep hedging up.  I think the right message to take away is it remains very surprising how muted the recovery, the global expansion is, in view of all the stimulus that policymakers, especially in the G7 countries, are throwing at the global economy.  There's a lot pushing the global economy up at the current time, but the response we're getting is surprisingly muted.

Just to finish on the global outlook story, here are the regional growth rates that you'll find in the publication.  I'd just like to highlight--there's obviously many topics we could talk about in the Q&A session, but I'd just like to highlight two quick points here.

The first is that the outlook for East Asia and the Pacific Region remains the brightest amongst the six groups of developing countries we look at.  It's not that East Asia and the Pacific accelerate further from here.  In fact, we do see some slowing from the strong recovery in 2002.  But the durability of the expansion there is impressive and clearly led by China.

I would also note that these forecasts have had no opportunity to take into account the recent SARS (Severe Acute Respiratory Syndrome) problem in the region, and that is an unambiguous negative to growth.  We obviously have no real sense of how it's going to play out, but I would emphasize that these numbers have not had opportunity to reflect that.

The second point to stress is that, as you look at the turn in conditions, global economic conditions as they apply to developing countries, the area where we're seeing the biggest transformation in our forecast over the next year or so is in Latin America and the Caribbean.  That's in a sense not hard because this was the region that was weakest and hardest hit in 2002, and in some sense a lot of what we're seeing is the natural rebound under way.  But in many ways, it ties into something we'll talk about in a moment, which is some of the shifts going on in global capital market conditions independent of what is happening in the war.

So the final slide to throw up here on the global outlook side are the downside risk issues.  I mentioned earlier that the war could turn out clearly worse than we're assuming.  We have no reason to really put a note on that.  It's just that clearly the risks there are on the downside.  But I would emphasize that it's not just the war that offers downside risks to the global outlook.

Two other points to make.

Number one, this expansion is not only anemic, but it's incredibly unbalanced, and a good indicator of that is the size of the U.S. current account deficit going into the expansion.  It's unprecedented to have a current account deficit in the world's largest economy this large, and it is a reflection of the fact that the U.S. consumer in some sense has carried the global economy for much of the past couple of years.  So there's really very limited scope for that to continue, and that's a risk.

The second phenomenon that's concerning is that high debt levels remain a problem across many parts of the global economy, not just in the developing world but also in the developed world.  And we've seen in recent years real problems that can develop quickly when these heavy debt loads are difficult to roll over in the marketplace.

So let me quickly move to the second set of themes I want to address--near-term financial flows--and I'm going to do this by focusing on this table, which summarizes from the report the numbers reflecting flows into as well as from developing countries.  And I want to make four quick points.

The first point is that for developing countries as a whole it does seem that in 2003 we are going to see an improvement in private sector debt flows.  For the last two years, private sector creditors on the debt side have been taking money out of developing countries.  It was especially true in 2002 in Latin America.  And there are some early signs in the numbers--and certainly our forecasts project this--that that process will end in 2003, that we'll see modest improvements.

The second point is that when you kind of look down this table, the big flows are very much concentrated in the FDI category, and we'll see a little later on that this is an important underlying story in terms of development finance.  But I would emphasize that looking to 2003 we do expect FDI flows to developing countries to remain quite high.

The third point from this table is that grant aid, aid in the form of foreign exchange flows to developing countries, picked up a little in 2002, and we expect it to generally hold those levels in 2003.  This is all part of the G-7 and OECD countries meeting some of the early part of the Monterrey commitments and is something very much to be encouraged and welcomed from our perspective.

And then the fourth point that comes through from this table is that when you look at not so much capital flows to developing countries but capital flows from developing countries in the form of both official reserve accumulation and private sector asset accumulation, together they sum to a very, very large number.  In 2002, that number was over $200 billion.  In 2003, we expect it to remain quite high.

And in a sense, when you add it all up, what you're left with is, I think, quite a striking message, which is that, in aggregate, developing countries are actually net capital exporters to the high-income world.  I mean, that's certainly not something I grew up learning to be the normal state of the world.  We normally think of the high-income countries exporting capital to developing countries.  But I think it's important to note that the trend is now the other way.  And, clearly, you know, frankly, that's probably not something that's consistent over time with the long-run realization of the Millennium Development Goals.

So let me quickly move to the third topic that I want to address, which is the broader perspective for these capital flows.  We've talked a little bit about where they've been in the past year and where they're going for the next year.  Let's put it into some context.

I always like to say that a picture tells a thousand words, and I actually think--you're journalists, so I don't want to put you out of business.  Your words are your trade.  But I think this picture says a huge amount about the nature of capital flows, private sector capital flows to developing countries in recent years.

If you go back to the early 1990s, the mid-1990s, what we were really looking at was a development process that was financed largely by debt, by debt inflows, with FDI flows remaining--with FDI flows being quite healthy and generally on the rise.

Since the onset of the Asian crisis, we've had a series of rolling debt difficulties that I think can be best summarized by a developing world that is suffering a consistent hemorrhaging of debt from private creditors.  At the same time that that's happened, we're seeing FDI flows hold up remarkably well.

Why has this rotation happened?  I think this rotation is one of these things that when you look at it in the numbers it's obvious, but we just don't hear enough people, I think, talking about it.  Why is it happening?  Well, as with most things in economics, there's a demand story and a supply story.

On the demand side, we're seeing countries realizing that dependence on external debt can be a very dangerous thing.  Particularly countries in East Asia, since the debt crisis of 1997-98, have sort of said, "Never again," and even though they can borrow have decided not to borrow and have very consciously shied away from this method of financing development and have become a lot more focused on attracting FDI.

On the supply side, when you look at the supply of capital to developing countries, what we're really talking about here is a generalized reduction in the willingness on the part of investors to hold developing country debt, especially for the riskiest economies.  And you see it both in the bond markets, where there's tremendous segmentation--if you're a high-risk bond issuer in the developing world, it's actually impossible pretty much to raise money these days.  You also see it in the banking markets, where the banks, the major banks around the world, are pulling back from involvement in the developing world.  And the latest round of that is the European banks, especially led by the German banks.

Will this rotation continue?  Our best guess is probably yes, for three basic reasons.  One is that many countries still have very high debt loads that need paying down.  So although you saw many countries have already through those negative debt numbers paid down considerable amounts of debt, there are still plenty of countries with high debt loads that are still a problem.

The other angle to it is there is plenty of room, we think, for FDI flows to continue to be strong.  You know, again, abstracting from all the short-run issues relating to the war, I think the globalization process is something that we expect to continue over time, and businesses expect to see most of their growth coming in or from developing countries.

And then the third point to stress here is that it's basically a positive development.  It is, we think, a good thing to the extent that what you're seeing is development finance being put on a more stable basis, because at the end of the day the financial properties of FDI are inherently much more stable than those of debt.

If you look at the countries that have succeeded, especially in the Latin American Region in recent years, it's been countries like Mexico and Chile that have got themselves away from debt and towards equity rather than the more heavily indebted economies of the region, most spectacularly Argentina.

Now, just to finish, I just want to throw up a few slides on this issue of workers' remittances because I think it is important.  They obviously are a slightly different aspect to development finance to some of those that we've been talking about so far.  But I think this table gives a very clear picture of the shift in the importance of workers' remittances globally.

In 1995, they amounted to only one-third of debt flows.  Last year, they completely dwarfed debt flows, and those debt flows include flows from both private and public creditors.

When you look at where they're coming from, clearly one of the major sources and one of the growing sources of remittances in the 1990s was the United States.  Historically, Saudi Arabia used to be the largest remittance provider to the developing world.  But the U.S. labor market boom of the late 1990s meant that it replaced Saudi Arabia.

Where they're going, well, this chart I think makes it clear that distribution of remittances is fairly broad, and that, in fact, is one of the key positives of remittance flows from a development perspective.  They go broadly across the world.  They're very stable.  And there's a tremendous shift of them to low-income economies, which is very positive, especially in the Central American region.  You can see that Latin America remains by far the largest regional recipient of these funds at $25 billion in 2002.

But without--I should end on a more somber note, if you like, for this remittance theme, which is that having seen consistent gains in recent years, there are some downside vulnerabilities that have popped up recently.  In a sense, I'll go from the bottom up here because the Iraq war is on everyone's mind.  Clearly, that does represent a vulnerability to remittance flows, especially coming out of the Middle East to other Middle Eastern countries, and Jordan is, I think, particularly at risk here.

Second, there are security issues that have come up, especially--not so much in the war environment but in the post-September 11th situation.  And that will, I think, dampen the underlying migration flows that are very important to these remittance flows.

And then, finally, these remittance flows are inherently tied into the performance of labor markets in developed countries, as you saw especially in the United States.  And to the extent that we're now seeing a phase of weakness in labor markets in the high-income countries, that is something that I think will act as somewhat of a strike against remittance flows looking ahead.

So just to conclude, there's a huge amount in the GDF, and I really do suggest that you not only look at it in the next day or two, but actually keep it on your shelf as a very useful reference document.  But the four themes, the four strands that we're drawing out from it for the work today:

Number one, when you look at the global outlook, I think the right take-away is to say that the war has added a negative, but it's a negative that came on top of an already anemic and uneven global recovery.

Second, external financing conditions facing most developing countries are actually improving a little bit, especially in Latin America, from the weakest points in the middle and third quarter of 2002.  But that improvement is a gradual one, and developing countries importantly remain net capital exporters.

Third, when you take a step back and look at the fundamental shifts that have been under way in development finance, there has been this very important rotation from debt to equity to FDI, which helps you explain a lot about what has happened to development and development finance in recent years.  And the bottom line here is that rotation is probably not over.

And then, finally, don't lose sight of remittances.  They've become an increasingly important flow of cross-border development finance.  And whilst they may not keep going up forever, they certainly are something that we should pay a lot more attention to.

Thank you very much, and I guess now it's over to questions.

MR. MILVERTON:  Absolutely.  Just the usual protocol, which I, of course, didn't observe at the beginning, which is to state your name and your organization.  I'm Damian Milverton, for those of you who don't know me, from the External Affairs Unit.

So I'll throw it open to the floor.

QUESTION:  Alan Beattie from the Financial Times.  Philip, looking at the magnitude of the effects of the war, am I right in assuming from what you said that the war is the only thing that's causing you to revise down global growth, and that level of growth would, in fact, have increased were it not for the war?

MR. SUTTLE:  Well, that's actually a great question.  The problem with doing a global growth forecast is it's a bit like a plate-spinning exercise.  There are so many things going on at the same time, some of them positive, some of them negative.

I think if one says what has changed in the last three or four months that's for the positive, the most significant development is actually in the interest rate and credit markets where we had a whole new round of easing from central banks in the late fall of last year.  And, you know, as that EMBI spread chart made very clear, we've had a very powerful response in global credit markets.  It's actually not just true of the developing world.  It's also true in the high-income world where the so-called junk market or sub-investment grade market has shown a tremendous improvement from the lows of--in particular, from the lows of September of last year.

So that variable as it affects global growth has become unambiguously more positive.  So that's one thing to take into account.

Obviously, the war effects showed up through higher oil prices, but then you have another problem because how much of the high oil prices was, for example, a reflection of the strike in Venezuela or, even more recently, disruptions in Nigeria?  And, of course, as those variables fade, especially now that Venezuela's output is rising back towards more normal levels and there's some sign of normalization in Nigeria, that will play out through the oil price.

So I think sort of pretending that you can separate out war effects from other things is, I think, very, very difficult, and we're not trying to do that.  What we're trying to give you is our best sense as of today of a sort of central case of how this will play out.

I think as a development institution that is in a sense paid to worry about things that can go wrong, we worry more about the downside risks to this than we worry about the upside risks at the current time.

QUESTION:  Shihoko Goto, UPI.  You mentioned the war against Iraq.  This war is actually more--less a war on Iraq but more a war on terrorism, in which case even if there is a decisive victory in Iraq, the war efforts will continue.  And at the same time, you're saying that FDI is one of the pillars of growth.  Do you think there will be a differentiation, a greater differentiation of where FDI will go?  For instance, a lot of industrialized countries will avoid higher-risk Muslim countries such as Indonesia or Turkey, Egypt.

MR. SUTTLE:  Well, on that last part, I wouldn't like to make a judgment on how businesses are going to make their plans.  But I do think, you know, the first part of your question is a very--it's a very relevant issue in the sense that the war on terror clearly has affected in particular the costs of doing business across border in a number of important ways.

Now, you could argue that actually promotes the case for FDI because it's more difficult to move goods across borders, so better to go and move your production facilities.  But I think one thing that we find quite encouraging, in fact, is that the recovery in world trade that took place--sorry.  There was a recovery in world trade in 2002.  You know, I think if you go back to September the 11th, you know, what we were all thinking back then, not only were we, I think, probably over-pessimistic, most of us, in our assessment of what would happen in the early months of 2002--so that's a salutary reminder of the hazards of forecasting--but we also, I think, you know, emphasized that one of the durable effects of September 11th would be to make trade much more expensive, largely through the cost of all the, you know, extra administration.  Clearly, that effect is there and it's hindering trade, but it doesn't seem to have stopped the process.

Personally, I happen to think that there's so many other specific variables that are important to not just trade but, in particular, to FDI, and we think it's very important for countries not to lose sight of the message that the best thing they can do to promote FDI is to promote their domestic investment climate.  Probably outside of the war, the biggest negative that we saw for FDI last year were some of the developments coming out of Argentina where some of the ways that foreign investors were treated in terms of shifting rules of the game, et cetera, et cetera, were really quite negative and had, frankly, I think, spillover effects across much of the rest of the region.

So it's that sort of event, I think, that is as important as some of the other things we've been talking about.

QUESTION:  Hans Weber, Agence France Presse.  Regarding this table on net capital flows, the IIF (Institute of International Finance) is forecasting an net flow from--2004.  Do you have a projection for 2004 to complement this table?

MR. SUTTLE:  Well, I confess, we're not as ambitious as the IIF in making projections beyond this year.  If you can tell me how global capital market conditions are going to play out, I'd be very happy to do that.

I would point out that we do compare our forecasts to the latest IIF projections in a box in Chapter 1 of the publication, which you might find useful.  And in addition, one point I think is important to make, is that the sample of countries we look at, I guess because we are the World Bank, is much, much larger than the IIF.  The IIF look at only about 30 major countries.  We look at what, 138 countries, so our--the numbers are naturally going to be a bit different because our coverage is much larger.

QUESTION:  But the trend here seems to be towards a neutral or negative flow next year.

MR. SUTTLE:  Well, the number you're pointing to is the public creditor number.  Just for those--

QUESTION:  From (garbled) and bilaterals?

MR. SUTTLE:  Yeah.  One of the things that's happens there is that the public creditors, I mean they're such nice people of course.  We tend to be buffers.  We tend to be buffers to what's going on in the rest of the world.  So when the private creditors are pulling out their money, we tend to be putting ours in.  And I say "we."  It's especially true of our neighbors across the street there at the IMF.  And the big increases in public capital flows in 2001 and 2002 really reflected the IMF disbursements into these emergency programs.  And you can see by implication, one of the things we are assuming about 2003 is that we will not have any, frankly, any more major debt crises with any more major new IMF programs.

Now, that I think is a fully consistent assumption with the view that private capital flows are coming back a little bit.  Obviously, if we don't get plus 5 on the private side and get minus 20, then almost certainly the public number's going to be different.  Do you see what I'm saying?

QUESTION:  Yes, thanks.

QUESTION:  Jim Tyson with Bloomberg.  You mentioned a high U.S. current account deficit.  What are some of the other imbalances that concern you, and what could the G7 do next week to correct these imbalances?  What would be your expert--

MR. SUTTLE:  Sure.  I think the broader point to make here on the imbalances is, I mean, it's almost the U.S. current account deficit captures so much, because it not only captures what's been going on in the United States, but it also captures the weakness of demand abroad.  And I think, frankly, that's at the end of the day probably the biggest problem for the global economy, how do you get the second and the third largest economies in the global economy, i.e., the Euro area and Japan, to increase that domestic demand at rates consistent with tolerable global growth?  Because one of the sort of striking features to us about the recovery so far is that when the U.S. goes up, it kind of drags everyone else up.  Everyone else gets a bit more optimistic.  You see it in the markets as well.  But when the U.S. begins to fade, everyone else seems to fade even quicker.  And that's very concerning.

Now, one of the imbalances behind that--I think maybe imbalances isn't always the right word.  I mean in Europe there are many structural issues that need addressing, and now's not the time necessarily to go into that.  But I think there are also major inhibitors in the form of excesses from previous expansions, especially these debt loads that we didn't go into, but I think are very important.  In Japan, most conspicuously, we're not just working off the debt loads of the problem of the 1990s as we are in most countries.  We're working off the excesses and the bubbles of the 1980s.  And I think Japan for us is a very salutary lesson across the global economy of what happens when you delay debt restructuring.

QUESTION:  Ruben Barrera, Mexico.  You say that, or you point out that you expect some impact on remittance in the Middle East because of the war with Iraq.  I wonder, have you given any consideration to the possibility that if we'll see also an impact from remittance from U.S. to other countries, especially Latin America, since we have been seeing, you know, a more tough approach to attack illegal immigration in this country?

And also, you point in your report that the fact that the cost of sending money is very high.  I wonder if--I mean you've related this is the time for a more--to import maybe better controls on these--who send money, and also if you can give us a flavor, you know, to which area is more expensive to send money?  Let's say, from U.S. to Latin America or from U.S. to the Middle East?

MR. SUTTLE:  Okay.  Let me--I think there are three points to respond to there.  The first would be sort of on the impact of the war, et cetera, et cetera.  I would say that the--again, it's one of these points, it's very hard to distinguish between the effects on remittances to Latin America, and Central America for the effects of the war versus all the other things that are going on.

The most powerful driver, in my opinion, is simply labor market conditions in the United States, and obviously, they in turn are driven by developments related to the war.

But one of the things I find very striking about recent developments in U.S. labor market data--and you may, when you go to a Bureau of Labor Statistics briefing, you may want to ask them this question--is how you reconcile the extreme weakness in U.S. payrolls--and by the way, we get another number on that on Friday--how you reconcile that weakness with the, frankly, the failure of the U.S. unemployment rate to rise very much.  They're taken from two different surveys.  And the way I reconcile it, it's quite likely what's going on here is that quite a bit of the payroll weakness that we're seeing is actually showing up in the form probably of reduced employment of either illegal workers or migrant workers who are choosing to maybe go back home when things aren't so good.

So the failure of the unemployment rate in the U.S. to rise off extreme weakness in employment, I mean, could be--and I emphasize the word "could"--could be an early sign of the underlying income payments that go into remittance is taking a hit.  Now, what's causing that, whether it's war or something else, I think obviously is very difficult to determine.  So that would be one point to make.

Actually, one point I would make, coming back to the Middle East, is that Saudi Arabia is the major provider of remittances in the Middle East.  One interesting feature of what's going on, of course, is that Saudi Arabia is actually enjoying a windfall gain in terms of income, high-oil volumes and high oil prices.  So it's quite plausible that in fact income payments in Saudi Arabia are rising rather than falling at the current time, so that may help.

But if I can--I said there were three points.  Maybe I can just come to the cost point.  Let me just address that, because I see there are other questions.  I actually think, you know, we're not experts on transaction costs, transmission issues, but I think what's key here is to recognize that the informal routes, certainly for Central America, do seem to be quite costly.  There's an interesting contrast here with the Middle East, where the informal routes, we've been told certainly by our colleagues in the region, are quite efficient, the so-called "hawala" transactions.  The problem there of course is that they all get wrapped up in the security issues.  So there's an effort to move away from those, which isn't necessarily, you know, from a cost reducing perspective great, but certainly in the Central American region, it does appear that the informal routes have been quite expensive.

So one way of, I think, affecting cleaner and cheaper transactions is to bring more of them through the banking system.  So the more we can do to promote retail banking activity, in both sending and especially in recipient countries, the better that is, and you'll find in the chapter some interesting points in that direction.  It actually even ties back to the FDI point, because one of the bright areas for FDI in the last few months has actually been American banks showing a lot of interest in buying, for example, banks in Mexico.  I mentioned BanaMex and Citibank, but Bank of America, who pulled out of Brazil, have actually moved into Mexico, bought a chunk of Sofin [ph], reflecting their interest in this activity.

QUESTION:  Greg Ip, Wall Street Journal.  Does the World Bank have any sense of what the reconstruction needs of Iraq will be and how they ought to be financed?

MR. SUTTLE:  Well, I would say that's a question that will be addressed at the April 11th briefing.  Obviously, we're looking at it from a global perspective here, rather than an Iraq-specific perspective.

QUESTION:  [Off microphone] -- with the German Press Agency.  I would like to know about remittance direct Latin America.  In that chapter you point out--you mentioned some studies about how remittances affect the distribution of income, and it seems that they are very contrary, that specifically the study about Mexico seems to show that in that particular country, it is favorable.  It's good for making distribution better.  Would it be safe to say that in Latin America the fact that usually it's the low income workers and the workers, not specialized workers, who are the major flow of migration to the U.S., so they send money to their families who are low income, is the reason why this is the case in Latin America it's better for distribution, than let's say from the Middle East, where more specialized workers are the ones who migrate because it's--

MR. SUTTLE:  I understand.  I mean it's an appealing idea, but I honestly don't think we have the appropriate--to kind of say that.  I think, you know, we need to know a little bit more about the nature of these labor flows, you know.  And to pretend that all Latin migration is from, you know, ill-educated poor people, and all Asian immigration is from high-educated doctors, I think that would be very wrong.

QUESTION:  Right, yes.  It's just in talking about trends, and possible it's the nations to the studies which are very--

MR. SUTTLE:  It would be appealing, but I don't think we'd want to say yes, that's the factor.

QUESTION:  Thank you.

QUESTION:  Rich Miller of Business Week.  I want to ask two disparate questions.  The first one is, is there any sort of monetary assumptions, interest rate assumptions built into the global forecast in response to the war?

And on the FDI point, ex-China, does the picture change?  If you ex- out China does the picture change a lot?

MR. SUTTLE:  well, on the first point--and obviously it's not our area of specific expertise to make calls on monetary policy, but we do have--I mean frankly--well, the Japanese can't ease any more, so that's easy.  We've got the Fed essentially on hold through the next year or so.  We do have more easing in Europe in our forecast, which I think is the--I characterize all those views as in line with market consensus.  Obviously going if--big "if"--if the war, as reflected in our oil price assumption, turns out to be a lot worse, we have no doubt that the Fed would ease further, but as of now I think it's fair to say we're sticking with the one and one-quarter (percent) view.

On the second point, I think the big difference if you take China out of the numbers is that they all drop by approximately $50 billion, which is, you know, a fact of life.

QUESTION:  Well, maybe this sort of optimistic picture that you've painted about the shift from FDI to--

MR. SUTTLE:  No.  No, it doesn't--you know, in particular this composition will shift.  I mean I would actually highlight Brazil as a great illustration here.  You go back to the mid to late '90s and Brazil was essentially financing its large current account deficit through significant debt inflows, and then what happened in the late '90s really with the sort of successful implementation of the real program, was that Brazil rotated itself from debt to equity and picked up FDI.  Its problem, in a sense, is that it had been so dependent on debt for so long, that it sort of left itself with a volatile stock, so it sort of got caught up at the end of the whole debt, the leveraging process.

But, you know, because in some sense it had made this rotation early on, reasonably early on, it was sort of lost in the debt crisis, sort of a spectrum if you like, rather than early.

Mexico is another country where I think--I've been consistently impressed in recent years in a sense how you know durable this commitment that Mexico has made to sort of staying off debt.  You know, Mexico for sort of, well, over 100 years, every time the debt markets opened, sort of rushed back in.  And what I think is so impressive in a sense, after the '95 crisis, was how Mexican authorities resisted that temptation in a sense.  You know, they're obviously helped by NAFTA and all the benefits that that brought in the form of enhanced FDI flows.

QUESTION:  Anna Willard from Reuters.  You said that the impact on GDP would be 75 billion to 100 billion dollars--but is that for the whole year or overall or just for--

MR. SUTTLE:  I can get kind of technical and precise if you like.  I said that we think global growth's going to be down by about half a percent through the first half of 2003, maybe actually extending a little bit into Q3.  Global GDP, roughly and readily, is 33-34 trillion dollars.  So you take a point off that.  It's a lot more.  So you take a half point off that for a whole year, it's more than the number that I threw out to you.

QUESTION:  And what was that number?

MR. SUTTLE:  Well, that number would be $150 billion-$170 billion, but (that's) if you took it off for a whole year.  If you take it out for the 6 months, you're down closer to--a little bit more than 6 months, you're down closer to 100 billion.

QUESTION:  And how much of that would be on--

MR. SUTTLE:  I don't want to leave sort of confused by these numbers.

QUESTION:  And how much of that would be on U.S. GDP?

MR. SUTTLE:  Good question, which I don't know off the top of my head.  Can I make another point actually?  Some of you may have seen that our president (James Wolfensohn) this morning talked--in Japan--where he talked about the hit-to as being up between a half and 1 percent.  And what he was really doing there, I think, is articulating a sort of central view, and the downside risks.  So it's not a case of sort of singing from different hymn books here.  You know, there are obviously, on our minds, downside risks to the sort of forecast that we're putting out there.

MR. MILVERTON:  Any other questions?

Okay.  Thank you very much.  Just one quick note.  If you drop your badges either here on the table or the security desk on your way out.  Our security guards are getting ever more eager.

[Whereupon, at 10:55 a.m., the press conference concluded.]