Press Briefing: The Global Economy and Its Effects on Europe and Central Asia

Shigeo Katsu, Pradeep Mitra, and Paloma Casero
Washington , DC
Wednesday, April 9, 2008

PROCEEDINGS

MR. KIRCHER:   Good afternoon, everybody, and welcome to this press briefing on the global economy and its effects on Europe and Central Asia.   My name is Andrew Kircher.   I work as the communications advisor for this Region at the World Bank.   Let me introduce the panelists to my left.

Shigeo Katsu, the Vice President for the ECA region, Pradeep Mitra, who is the Chief Economist for the ECA region, and Paloma Casero, who is a Senior Economist and author of the forthcoming productivity report that the ECA region is putting out next month.

What we'd like to do is first turn to Shigeo and then we'll have a short Q&A session. After Shigeo, Pradeep will talk about the effects of the global economy on ECA countries, and then Paloma will give a few early findings of the productivity report.   So without further ado let me turn to Shigeo

MR. KATSU:   Thank you, Andy.   And good afternoon, everybody.   And thank you for joining us for this press briefing this afternoon.   I know that there are many competing demands, so I do appreciate that you are here with us.

I'm going to be very short because my role is sort of to give you just the very broad, broad stroke message and the message is that basically in spite of all the recent tumultuous developments in the markets, the fundamentals of the ECA economy are pretty good.

The years of reforms have created much more resilient economies, and obviously there is no room for being smug.   There's no room for complacency.   Indeed, the tightening international environment does mandate that the countries stick to the reforms.

In addition, obviously, in ECA, like in other regions, there are strong inflationary pressures that have come both through energy price increases but also food price increases.   And it will be very important for the governments to adopt timely measures, and while maintaining the growth momentum and the reform momentum, to also make sure that the poorest segment of the populations are considered and proper targeted provisions are being applied.

We should really not forget that since the Russian crisis that happened just ten years ago, more than about 50+ million people have been lifted out of proverty in ECA, which is a great achievement. It's more than 12 percent of the population.   And in that context, these hard-earned gains, obviously we all want to make sure that they're being consolidated and that we don't see a backsliding.

So this is a broad picture.   I am happy to respond to any specific questions.   Maybe what we should do is rather than entering right now into Q&As, maybe ask Pradeep to make his presentation and then we can talk.

MR. KIRCHER:   Pradeep?

MR. MITRA:   Thank you very much.   I'm going to talk about the recent shocks, and by that I mean three things.   One is financial market volatility, number two, the increase in food prices, and number three, the rise in energy prices, and how this is affecting the countries of our region.

I'm going to make four points.   The first thing to observe is that a number of our countries are indeed vulnerable to the volatility in global financial markets.   Number two, that as Mr. Katsu mentioned, these countries have embarked on reforms since the transition started.   And so a lot of structure reform has been done, which means that their fundamentals in most cases are quite good.   And while, so far, the adjustments they've undertaken to the turbulence in global financial markets has been smooth, one cannot rule out the possibility of a disorderly adjustment taking over.

And the third point I'm going to make is what are some of the structural reforms which are important for countries to continue with to lessen their vulnerability to these shocks.   And the fourth, I'm going to talk specifically about the way in which food and energy prices are affecting countries of our region and what are some of the policy implications of that.

So those are the four points.   This chart, what it does is it groups the countries for global financial market volatility.   It really makes sense only to talk about middle income countries which have access to financial markets.   So in that chart we don't look at any of the low income countries.   The first one -- the first group here -- and let me explain what their group is -- those are countries in the European Union that have fixed exchange rates.

So we are talking about the Baltics, Estonia, Latvia, Lithuania, and Bulgaria.   And we have added to that Croatia, which does not have a fixed exchange rate, but manages its float very tightly, so it has many of the same properties as if it had a fixed exchange rate.   And then we have Southeastern Europe, which includes Romania and Turkey.  

Let's look at the third one, the EU 10 floating exchange rates.   Those are member countries which do not have fixed exchange rates.   We're talking about the Czech Republic, Hungary, Poland, Romania, Slovac Republic, and Slovenia.   We have in Southeastern Europe some of the middle income countries, Turkey most prominently, but also Serbia, Macedonia, Bosnia, and Albania.   We have in the middle income CIS group, essentially Kazakhstan and Ukraine.   We take out Russia because it's systemically important.

So it's middle income CIS ex-Russia and Russia.   And what we're doing here is saying current account balances are pretty large in these groups.   It's the highest in the countries which have fixed exchange rates and which other things being equal are more vulnerable, less so in the floating exchange rate countries.   And what you see in Southeastern Europe is driven essentially by Turkey and Serbia.

So that's the picture on the current account balance in the last two years, 2006, 2007. And what we show is the external indebtedness of this group of countries over here.   So some of these numbers are pretty large.   And the reason we focus on this is because external capital flows are made possible with the large current account emphasis.   And we're going to look at the rapid expansion in credit in these countries.   So these are sources of vulnerability.

Let's move on to the next slide.   And here what I show for these same country groups is the increase in private sector credit growth.   Now, what we measure up on the Y-axis is the domestic credit through the private sector as a proportion of GDP. And these are the years.   And what you can see is in these groups a fairly rapid increase from around here to these numbers.

One thing we need to remember is that, because of their history, our countries had fairly undeveloped financial sectors.   So this is consistent with a process of financial sector deepening in all the countries.   However, the pace at which it had occurred over a fairly short period raises some questions about the kinds of projects that the credit growth is financing – whether there's been time to do the adequate due diligence on the part of banks and financial institutions in extending the credit.   But overall, to remember that the level of credit to the private sector as a proportion of GDP in many of our countries are not out of line with what one finds in middle income countries in other parts of the world.

Now, so much for just looking at numbers. When we then ask what's the market's perception of risks in our countries.   And for a few of the countries what we show is the credit default swap.   And you find that the credit default swap, the prices are just trending upwards quite rapidly from around here, which is the fall of 2007, through to March of 2008.   So you see some fairly large increases, indicating that the markets perceive some of our countries as being quite risky.

The next slide, to sense another picture, which is looking at the EMBIs, the EMBI global spread, and they show the same picture.   So these are two slightly different measures, but overall they reinforce the observation that the market perceptions are that our countries are risky.

Let's move on to the next slide.

And that says, look, our countries are adjusting.   If you look at growth rates, which have been very high in some of our countries, you see slowing in Estonia, Hungary, Latvia, Turkey, Ukraine.   Expected to slow down in 2008 are Croatia, Czech Republic, Kazakhstan, Poland, Slovakia, and Slovenia.   And the issue is that with the exception of Hungary, growth rates have been very robust in most of these countries.   And if a certain amount of slowdown is necessary in order to adjust to the tighter global financial markets, that probably is not a bad thing so long as that slowdown in growth is a fairly orderly event.

Therefore the second bullet says that so far, if you look at the adjustments for example that Latvia has done in the last year, some adjustment in Turkey, adjustment in Hungary in the last 18 months, it's been fairly orderly, notwithstanding the market perceptions of risks.   However, simply because the financial requirements are so large, the current account deficits are large.   A lot of the current account deficits in the Baltic states is financed by lending from parent banks to subsidiary banks in the country.   So there's always the possibility that financial market contagion, if it was to spread to the parent bank, this is not something on which currently there is evidence, but if it were to happen there may be a sharper slowdown that we would see in our countries.

Now on the policy side, which is the third message, what can the countries do in order to reduce the vulnerability, to reduce the probability of a disorderly slowdown?   We focus on three things.   One is there are countries where fiscal policy during the good times has been quite relaxed. Fiscal policy should have been tightened in the good times because it's easier, but it wasn't.   And so fiscal policy does need to be tightened in order to prevent a disorderly adjustment.   Otherwise there's too much burden on monetary policy and all the problems that has, especially in some of our countries which are very heavily Euro-ized anyway.

Intensify banking supervision.   This is the point about the very rapid credit growths and the fundamental reforms that our countries have been doing since the beginning of the transition to improve the investment climate and attract foreign direct investment.   So that's the part of the presentation that deals with global financial market volatility.  

Just to recap, number one, a number of our countries are quite vulnerable; number two, they've already begun to adjust and the adjustment so far has been smoothed, one cannot rule out the possibility of a disorderly adjustment; and number three, what is the reform agenda that needs to be pursued in order for the slowdown in growth to be smooth without the possibility of a hard landing.

I just now want to move on to the last part of the presentation, which is about food and energy prices.   Here what we've done for the latest year, which is 2007, is divide the countries a little bit differently.   The first bar refers to the new member states of the European Union, all of them.   This one refers to Southeastern Europe.   That's Western Balkans.   And the third one refers to the middle income CIS.   That's Belarus, Kazakhstan, Russia and Ukraine.   And the last one is the low income CIS. That's all the Stans minus Kazakhstan and Armenia, Azerbaijan, Georgia, and  Moldova.

And what you find here is the following. That if you look just at the food price inflation, food price inflation has been pretty difficult in the CIS countries.  That's what the first set of charts shows you.  And this one shows that energy price inflation has also been particularly large in the CIS, particularly in the low income CIS countries.

This averages food, energy, and other components of the CPI to say what's the overall inflation been.  And again, if you just look on the right-hand side we're saying that in the CIS last year, inflation was about of the order of 15 percent.  Some countries higher, other countries lower.  So inflation is back.  It was something which countries thought they had put behind them, but not only is it back, it's back in double digits, often for reasons that the countries themselves, certainly the oil importers, are not in a position to control.

Let me show you one side of the impact of food price increases.  For example, you saw that low income Central Asia is one of the more affected countries.  This is all the Stans minus Kazakhstan. 50 to 60 percent of a household's consumption basket goes on food, because obviously the poorer the country the higher their proportion.  And some calculations that we've done suggest that a 5 percent increase in food prices relative to the CPI increases poverty rates by 2 to 3 percentage points in some of the low income CIS countries.

Now, here we're talking about absolute poverty and the footnote says $2.15 a day at 2,000 purchasing par parity.  2 to 3 percentage points is not a small number.  And the reason we have this – this is a kind of ECA-specific phenomenon – is that a lot of the poor in low income CIS countries are pretty close to the poverty line.  So a little change in prices can tip them in the wrong direction, so it is something that causes concern.

On energy prices it's not that our countries have been disproportionally affected compared to other regions of the world, but traditionally our countries have had fairly low levels of energy efficiency.  So the top is higher, but you could argue and indeed we do argue that given the scope for improving energy efficiency, a healthy program of adjustment would certainly reduce this particular vulnerability.

And so to the last slide on the policy implications of rising food and energy prices is saying that given what we know about the impact of food price increases on poverty, it is important that countries top up their targeting social assistance schemes.  A number of countries in our region have fairly well-functioning social assistance schemes. It's important that they top up whatever assistance is necessary in order to help the poor.

An important point I want to make, we're not suggesting that there be a loosening of the fiscal stance.  That's already not very tight in a number of our countries.  But given the importance of poverty reduction, what we're saying is that public expenditures should be restructured to create room in the budget for topping up social assistance expenditures.

The second bullet, it is very tempting and politically often for reasons one can perfectly well understand, countries tend to impose export restrictions to hold prices down.  Typically they don't succeed because it's very hard to implement. But also since food price increases according to most global projections are here to stay and it's not a onetime blip, it's important that we not dis-incentivize agriculture food producers by holding prices under control.

And finally, on energy price and food, it's complicated the task of managing inflation for central banks in every country.  And so it's important that they stay focused on inflation targeting and that they refrain from imposing controls on trade because that, as I said, would be counterproductive medium term for food supply; and also to have a full pass-through of food price increases accompanied, as we said earlier, by topping up the targeted social assistance scheme, full pass-through of energy price increases, because if that is not done it simply adds to the quasi-fiscal deficit in the energy sector and countries will find it more difficult to adjust the larger that gets because the need for adjustment will become greater.

I think I'll stop there.

MR. KIRCHER:  Thank you, Pradeep.  Paloma, can we go to you next?  And by the way, we will have copies of Pradeep's Power Point to give out to you after this, and also the press release containing some of the things we've said so far.  So please, Paloma.

MS. CASERO:  Good afternoon.  Thank you very much for being here.  This will be a very brief presentation to give you some preliminary messages coming from our report that will be launched later on in May.  Basically I will cover three main points. One is why is it that productivity matters, what we found about productivity in the region, and what are the challenges ahead.

And one part that is actually linking to the discussion we had about vulnerabilities in the region given the global financial turmoil is that what we see is that economies have actually now more resilience in the region, and we see this is because productivity allows these economies to have more room to adjust.  And productivity also can raise long term growth, which is also good to make these economies resilient to any shocks that they would have in the future.  Before I continue, just for those that do not know what productivity is, it's basically the amount of output that every worker will produce in a period of time.

Productivity is also good because it can raise incomes and living standards.  In the region, for example, from 1999 to 2005, thanks to productivity increases, income has doubled.  Income per capita doubled and that raised living standards and lifted about 50 million people out of poverty.  And productivity actually is good for firms because they can then enjoy higher profits, pay higher wages, create better jobs and invest in new technologies.

So what are the main findings about productivity in the region?  There are basically four or five main messages that we would like you to take away today.  One of them is that productivity boosted growth in the region.  And as we will say, this is particularly through the ECA Region much more than other regions of the world.

The dynamism of firms were really at the core of this productivity search.  As we will see, vibrant businesses were really important agents in making these economies stronger and more resilient. Domestic policies and global integration, trade and foreign direct investment also boosted productivity. But there are still challenges ahead, and there is no room for complacency, as our earlier panelists mentioned because there is still much to catch up with the income levels of the EU 15, which is basically the Western European countries of the European Union.

So the policy agenda will defer across countries and what we've tried to do is there is a lot of heterogeneity in the Region, but we tried to divide the Region into two broad groups.  One has to do with the earlier reformers.  And for that we refer to the New Member States and Turkey, which one of the key priorities going forward would be to focus on innovation and firm expansion in order to sustain productivity and growth in the years to come.

The other groups of countries are what we call the late reformers and basically cover all the CIS countries and the Southern European countries – those countries that are still dealing with the legacy of transition.  They need to emphasize policies that can remove barriers to firm entry and exit and allow new, more productive firms in the market.

This slide shows the decomposition of output growth in ECA and then the subgroups of countries we just referred to.  So as you can see here it's a decomposition of total output growth into three main components.  The first one is actually productivity; the second, this red one, is labor force participation, the contribution of labor accumulation in total growth; and the third one is capital stock accumulations.

So we do see something that is very striking in this, that for the region as a whole over 80 percent of total output growth is actually explained by productivity gains.  If you compare that to, for example, East Asia, you see that, relatively speaking, capital stock and labor contributed much less.

Why?  There's a number of reasons.  Mostly because after the collapse of the Soviet Union, what we saw is that capital stock was idle and so it took a while for firms to utilize this idle capital and so they didn't really invest in new capital.  Also, in the labor force we know that the region is going through a demographic challenge whereby labor force is actually decreasing and aging.  So that's another reason why you see relatively less contribution of labor to total output growth.

But the main story here is that really productivity was the main driver of output growth in the region, which is pretty impressive.  When we look at the drivers of the productivity, one needs to talk about firms.  Those are the economic agents that can create wealth ultimately.  And what the report shows is that productivity growth can be decomposed into three main components, and I will try to explain.

The first one, it has to do with existing firms that are being more productive.  And this is because they are investing in new technologies, they are investing in new workers, they are getting more integrated into global production chains.  There are many reasons why these firms have been more productive.  But that's one main component of productivity growth, is for the existing firms becoming more productive.  And that's the blue shaded area that's called "within firm."

The second component of productivity growth is actually the entry of new more productive firms displacing obsolete ones.  And that's the yellow shaded area. 

And the third one is actually the reallocation of workers, workers that are moving from low to high productivity jobs.  So for example, workers moving from traditional industries that were declining towards more innovative industries such as electronics or parts of cars that make these industries be more integrated in the global economy and they have a spillover.

So what we see here are two patterns.  The first is that if you were to look at the late reformers, to start here, what we see, this is a typical pattern of firms in this group of countries in here.  What we see is that a large part of the productivity growth is actually explained by this movement of workers across sectors, which is actually typical of transition economies.  What you see is workers moving away from sometimes agriculture, low productive jobs, and they move into higher productive jobs in manufacturing and services.

When you look at the second group, the early reformers – and again, just to remind you, that's the New Member States and Turkey – what you see is that there's a much smaller role for reallocation, and productivity is mostly driven by firm productivity, because these firms are becoming more innovative, because they are investing in new technologies, they're investing in their workers' skills.  And you also have a greater role for the entry of new vibrant businesses into the market covering market niches that were not there before, and also the exit of some obsolete ones.

So what is the implication for these two patterns?  It's that on the early reformers one can conclude now than the transition is over because these patterns actually mirror the patterns of more advanced market economies.  In more advanced market economies in the U.S. and in other countries you would probably see patterns very similar to this chart to the left, so the implication here is actually promoting innovation and firm expansion, all policies that could help those two goals, whereas when you look at the late reformers they still are completing transition. Those are still transition economies.  They've made a lot of reforms and a lot of progress, but they still have quite a challenge in ensuring worker mobility and also in fostering firm entry and allowing for firm exit.

So when one thinks about which reforms really help in promoting firm productivity, the report shows five key reform areas, which are reforms that these countries have undertaken for quite a while and they've made progress and this is reflected in the productivity gains.

So, first, is government's market solubility, and here also we mention competition.  It's basically reducing transaction costs for firms.  It's ensuring a stable economic environment so that firms can be more productive.  On the labor arena, the main policies that help firms be more productive were training of workers so that they can absorb new technologies, as well as policies that helped invest in information and communication technologies, and also research and development, again, to allow these firms to become more innovative over time.

On infrastructure, we found that three key areas helped firms in becoming more productive.  They are telecom, because a modern telecommunication infrastructure can help firms be more integrated into the global economy; transport, because being cheaper and more efficient transport helped producers to actually export their goods faster; and energy, because they need a reliable power network again in order to get their products and stay competitive.  The final area is finance.  And here it is both access to finance for small and medium enterprises, but it's also more sophisticated financial tools that actually help finance innovation.

So having said that and having seen that this Region made a lot of effort towards ensuring higher productivity of its firms, we cannot have room for complacency. 

As you can see, there is a main challenge still ahead of us.  And let me just go a second to explain to you.  What you see here is you have the blue bar which refers to the per capita income of this group of countries in the region.  And the red dots basically refer to the ratio of that income to the average income of the EU 15 countries.

So what is this telling you?   The first messages you see of why the disparity of incomes in the low income CIS countries compared to the EU 10, which are the New Member States, there is quite a disparity and a lot to catch up on within the Region.  We also see that even among the best reformers, the EU 10 are at less than half percent the average income of the Western European countries, the EU 15 countries.  So that means that these countries need to keep up their efforts to sustain productivity in order to catch up and increase convergence.

So what is the policy agenda moving forward?  What we see is again, going back to the slide about the firms, we saw that late reformers have already made quite a lot of effort, but they still have to complete the transition to a market economy.  And so therefore they need to remove the red tape and barriers to firm entry and exit, basically increase dynamism in these economies, whereas Turkey and the EU 10 have to focus on promoting innovation in order to be able to compete globally.

Just to conclude, I just wanted to restate the comments that were raised earlier.  These economies are now more resilient than they were ten years ago, partly because of these gains in productivity.  And also that while policymakers are now focusing, and rightly so, on the short-term challenge of inflation, as our earlier panelists were raising, it's important not to lose sight of the medium term challenge of increasing productivity so that long- run growth can be sustained.  Thank you.

MR. KIRCHER:  Thank you very much, Paloma. So let's open it up to the audience here.  If I would just call on you, when you do, if you could please identify yourself and which news organization you're with and please also identify which of the panelists you would like to ask the question of.  Sir, over there.

SPEAKER 1:  This is …., Turkish Television.  My question is for Mr. Katsu. Thanks for the great presentation for all presenters. But could you just elaborate more on Turkey.  In short, is Turkey heading for a new financial crisis?

MR. KATSU:  Let me maybe thank you for the question, but let me also state that I'm not in the business of forecasting – looking into a crystal ball.  I think Turkey is much more resilient than in the past.  Through the efforts that have been undertaken over the last six and a half years quite a consistent set of reforms have paid off.  And we see therefore as everybody has been saying a much more resilient economy.

Now, having said that, yes, there are signs of areas that the pace of reforms have slowed down. And we certainly do encourage the authorities to go through, in particular, with reforms that relate to social security reform areas, areas that are very important to reestablish or establish the longer run fiscal viability, but also continue to pursue measures that will flexibilize labor markets, bring down the levels of informality, labor market reforms and so on, and that will allow also a good investment climate to create the necessary jobs that Turkey so much needs.

MR. KIRCHER:  Thanks.  Barry back there in the back?

SPEAKER 2:  Barry Wood from Voice of America.  Ms. Casero, if it's 45 percent or 44 percent of per capita GDP for the best, fastest reformers in the East Baltics and the Central Europeans, what was that figure like four or five years ago?  I thought it was also about 44 percent.  I guess my question is will they ever catch up to Western Europe standards or, assuming you want to answer yes, they have to grow, I suppose, at twice the rate of the West Europeans to do so?

MR. KIRCHER:  Thanks, Barry.

MS. CASERO:  This actually is a question that Spain, Portugal, and Ireland posed themselves when they were at the very bottom of the income level of the brother members in the European Union.  It is true that it will take a while to catch up.  Whether or not they will catch up and when, as Shigeo mentioned, we don't have a crystal ball.  But definitely by having the right set of policy reforms, what they can do is accelerate convergence.  That would be my answer to your question.

MR. MITRA:  I think just to follow up on what Paloma is saying, when there was the southern enlargement of the EU, Spain, Portugal, and Greece, the proportion of GDP per capita they had was that EU 15 was actually higher than the eastern enlargement.  And so there was a big difference even at the beginning. That's number one.  It's going to take time to catch up.

But the point to notice is that poorer countries generally grow faster than richer countries everywhere.  And that's what we've observed with the New Member States.  Secondly is to differentiate even within the New Member States the Baltics have grown very, very rapidly and Central Europe, by which I mean Czech Republic, Hungary, Poland, Slovakia, and Slovenia, have grown less rapidly.  So even within the new member states there's a process of catching up of the poorer to the less poor.

So you have in effect something of a ladder.  But I think the basic answer is that there is no “get rich quick” scheme.  It hasn't worked like that anywhere.  And the only thing you can advise countries is if they continue to do the reforms that many of our New Member States have been doing, the gap is going to close simply because the growth rate in those countries is faster than the growth rates in Western Europe.

MR. KIRCHER:  Thank you, Pradeep.  Do we have any other questions from the audience?  Yes, sir. Please.

SPEAKER 3:  Thank you.  My name is Dmitri Zlodric.  I am from the the ITAR/TASS News Agency of Russia.  And my question is for Mr. Katsu.  I have a question on Kosovo.  In anticipation of Kosovo's independence, do you plan to use World Bank resources for helping Kosovo?  I mean, not humanitarian, but others.  And in such situation aren't you afraid for World Bank reputation in such case?  Thank you.

MR. KATSU:  We are entering into a new phase on the ground in Kosovo since it declared independence on February 17, and as of today there are almost 40 countries that have recognized it.  And as you've also seen, I'm sure you know, a new constitution was also declared and signed by the Kosovo authorities.

Now, what does it add up to?  I think it adds up to a new phase of realities on the ground. And I think the international community is grappling with how to deal with it.  In our case we have in the past and until now been active in Kosovo through a series of development-oriented interventions that were provided for on an exceptional basis, as you know.

Now, it is up to our shareholders to decide in a way on how we should go forward.  As you know, Kosovo is at present not a member.  It first will have to apply for membership with the IMF.  And it's only then that on the World Bank side a process will ensue. The point is that the activities right now will be continuing.  New activities will be very much based on a view that our shareholders will express.

SPEAKER 3:  Do you plan to discuss this problem on this meeting?

MR. KATSU:  As far as I understand it is not on the agenda for the development committee.  But I'm sure, such as with many other issues that engage us all today, it will probably come up sometime along the sidelines of the meetings.

MR. KIRCHER:  Thanks.  Yes, sir.  Over there to the left.

SPEAKER 4:  …, Turkish Daily Hurriyet.  Besides the global volatility there's also a political crisis brewing in Turkey.  The governing party might close within this year.  How would that affect the Turkish economy?

MR. KATSU:  Well, I should take out my crystal ball.  But as I said we are obviously following with great interest the developments.  I think the impact on the market is already in some ways priced in, if you want to say that.  It seems that the market has already absorbed part of the announcements.  Everybody knows that the constitutional court, for also procedural reasons, accepted the request to hear.  And of course we will have to all find out what's going to happen.

In the meantime, our advice to the authorities is make sure that the reform agenda is continued to be pursued.  And certainly to make sure that the efforts that have tried to create a more investment-friendly Turkey are going to be pursued.

MR. KIRCHER:  Thank you.  Sir, over here. You had a question.

SPEAKER 5:  …., Croatian News Agency.  A question for Mr. Katsu.  You have a meeting with the Croatian Minister of Finance on Friday.  So my question is how do you evaluate the quality of the economic and fiscal policy of Croatia regarding this actual pressure of financial markets and projection of the slowing growth and rise of inflation and food prices, energy prices?

Are there adequate answers on the side of the Croatian government on that?  Because the living standard is improving very slowly, so the path of structural reforms are slow.  So there are expectations on the side of population, but the projections are not so good.  What are you going to recommend to the Minister of Finance on Friday?

MR. KATSU:  As you are from Croatia, you're probably also very thoroughly familiar with probably the PAL 2 agenda.  And what we would certainly discuss with Minister Suker is to hear a little bit about the progress that's been undertaken in terms of implementing that important agenda and to have an exchange on the current year's and next year's budgetary framework.

It's always a little bit difficult after elections to reconcile budgetary realities and of course promises that were made during the electoral campaign or in the process of forming coalitions.  So we need to figure out how those will be reconciled. But overall, again, the message is Croatia is not yet touched.  It has opportunities to adjust and anticipate even for the international pressures.  So use the time wisely.

MR. KIRCHER:  Barry, I think you had another question.

SPEAKER 2:  Thanks.  Barry Wood again.  In terms of Kosovo, when do you anticipate they'll be a member of the Bank, and when do you foresee that the donors conference will take place?  Will it be as early as June?  And finally, what kind of growth do you think Kosovo can achieve in the years ahead?

MR. KATSU:  I would stay away from speculating as to when we expect a membership for Kosovo it's purely up to our shareholders.  So we need to simply see how on both sides of 19th Street, IMF and World Bank, our shareholders are going to feel in terms of Kosovo.

Now, having said that in parallel, you're absolutely right, there are efforts underway to continue.  And those efforts had started for – it's a continuum of activities and preparations to organize a donors meeting in Brussels.  You mentioned June.  I don't know.  It may be June.  It may be July, depending on how the consensus evolves, I guess.

MR. KIRCHER:  Sir.  Right there.

SPEAKER 6:  …, Voice of America. A question for Mr. Katsu.  For Croatia, maybe the biggest obstacle is foreign debt, it's more than $40 billion?  And also a question about Bosnia Herzegovina.  The political situation is very unsafe. Unemployment is extremely high.  But the prediction for growth is around 6 percent.  What does this mean for Bosnia?  How can Bosnia catch something like that? Thank you.

MR. KATSU:  Croatia has had a long sort of legacy of high external debt.  As it has managed itself more prudently in more repeat years and gradually started to build it down, the level of foreign non-debt creating investments, foreign inflows has increased.  So we see this in more countries that are in the pre-accession phase, that they tend to attract a lot of investment.  So I personally think that the external debt is much more manageable than it used to be.

In Bosnia, the three parties, the three broad groups have to learn to work together.  Over the first ten years it was within the framework that was much more imposed from the outside. I think now gradually we are moving towards a system where they have to learn among themselves.  And this is going to cause a little bit more delays.  But in the end, as you said, business realities is business dealings, investments.  And so will actually carry the day.  So I am quite optimistic.

(Question inaudible.)

Well, but what I tried to convey is, yes, it would be desirable to accelerate reforms.  And that's what we certainly would encourage.  But at the same time we should not forget that the market and the investment community looks at Bosnia Herzegovina as part of broader Southeast Europe.  And there is an anticipation hopefully Kosovo and all the issues may be put behind us sooner rather than later.  But there is a clear sense that there is a European perspective. And that is going to be a key driver for investment.

MR. KIRCHER:  I think we have to wrap it up.  So I'll give the last question to you, Dan.

SPEAKER 7:  Dan Bases for Reuters.  Two questions, really.  One on Russia.  You know, inflation is rising rapidly there as it is across the region.  But I'm just curious if you feel that a place like Russia if the reforms of the government – do you feel that the state control over industry is hampering their reform drive?  I mean, certainly they have a lot of oil, a lot of money, minerals, but is that masking some pretty ugly stuff beneath the surface?  That's one question.

And secondly, on Turkey, the political fallout, you know, we've seen, as you say, the market has pretty much voiced its concern.  But I'm curious to know if you had discussions with government ministers from Turkey whether at this meeting so far if they've arrived or in the run-up to it if you've gotten any sense from them as to how they might weather this and whether or not there is the reform agenda I guess is felt in all parties in Turkey, whether they be the MHP or others besides the AKP party.  Thank you.

MR. KATSU:  Well, maybe I should also invite Pradeep's views because he has been in Russia more recently than I was.  And so maybe he may also give you his views.  Your question in terms of Russia is sort of their increasing sort of thrust of the State clawing back control over a broad span of central activities, economic activities, is that hampering growth?

If you listen to the incoming president, Medvedev, the President-elect's own statements, he has said that definitely the State should roll back, the State should define what its areas of interests are and allow the private sector to further develop.  But he also stressed, therefore, very much that in that context rule of law is going to be extremely important.  But also the role of the public sector and public service is going to be very important.

So, let's wait and see for the new President to arrive and see whether he's going to implement what he has indicated he would.

MR. MITRA:  On Russia, I was there last week.  The first part of your question, there's a very lively debate going on about the resurgence of inflation and what the government might do.  And essentially the debate has to do with how much of the additional oil money should be spent internally as opposed to being deposited in the oil fund.  And there are two points of view saying we've got the money now, let's spend it on necessary infrastructure, innovation and various other skills upgradation.

And the other point of view is that the risks of doing that with oil money, spending it too rapidly on non-traded goods, has not been happy anywhere in the world.  And I think so far the authorities have done a very credible job of holding the line on not letting public expenditures spin out of control.  But one has to recognize that at the end of the day there's a political process that determines that, just as it does in any other country.

Now, the other question you had on Russia about the State control, now, where you see State control is primarily in oil and gas.  And if you look at the non-oil and gas part of the Russian economy, it's beginning to attract FDI.  There are a lot of deals being done.  There is perhaps even some risk of overheating just as there is elsewhere in the economy.

But I think what we see is that perceptions of the investment climate are not significantly worse as a result of the State wanting to have a bigger share in the oil and gas sector.  Now, if that weren't there perhaps the investment climate would be better. But I think fundamentally one has to be fairly optimistic about the economic prospects of Russia because there are too many things, if you like, that are going right as opposed to some things that may not be.

MR. KIRCHER:  Thanks, Pradeep.  Sir, in the back, let's give you the last question before we wrap up here.

SPEAKER 8:  My question is about Mr. Katsu’s crystal ball.  I'm just kidding.  My question is for Mr. Mitra.  This book says there has been some productivity growth in the countries in the region, but it doesn't concern Uzbekistan.  If you were appointed a chief advisor, economic advisor, to Karimov, while this position is not a real one, but that Uzbekistan is real, Karimov is real, its economy is real, what would you do, what policies would you pursue to revive or to transform Uzbek’s economy?

MR. KIRCHER:  Thank you.  I think you just got a promotion, Pradeep.

MR. MITRA:  Yes.  I was trying to think what one would do in that happy event.  And if you look at the Uzbek economy, obviously there's been a decision made at a very high level that the so-called gradualist path will be followed.  If you look at the developments, there is increasing share of the private sector at a very slow pace.  There are fairly tight restrictions on the trade regime and on the ability to attract FDI.

And here's the issue.  One might be tempted to say you should change everything, but that's just not politically feasible in most countries.  Therefore, I think one has to look for some entry points.  And I would look at two entry points.  One is to begin to liberalize the trade regime so that Uzbekistan has access to the learning that comes with external trade and FDI.  There's plenty of evidence in the region that the beneficial spillovers from FDI and up gradation of trade is quite significant.  And that is certainly something which could be accomplished without, in some sense, a calling into question the bigger development strategy that the country has chosen to pursue.  That's number one.

Number two, I think that there have been very encouraging results as a result of doing some reforms in the cotton sector and generally in the rural enterprise area.  And I think to broaden the scope of that does carry the prospect of benefiting a large number of people in agriculture who are fairly poor.

So those are two examples where you could actually make a significant difference without saying we need to revisit Uzbekistan 's development strategy.

MR. KATSU:  I just want to add one more point maybe.  If we would be the economic advisors, in that happy event, as Pradeep had mentioned, we would probably as one of the third entry point, encourage the Uzbek authorities to enter into enhanced cooperation with the neighbors.

There are many regional cooperation and integration opportunities there that have been discussed over the years and simply the implementation of translating some of these ideas into concrete arrangements, allowing people to move around, for instance, across border flows, trade flows as well, reinforced by the behind the border reforms that Pradeep mentioned.  All of these would give not just Uzbekistan, but the whole regional economy a big boost.

MR. KIRCHER:  Did you also want to respond on Dan's question on Turkey?

MR. KATSU:  Yes.  On the political currents, obviously when the authorities will be here I will listen to them and to the delegation's views on how the recent political events are going to impact. In terms of the basic sort of economic strategy or the anchors, my sense is that while there may be degrees of differences between the different parties, the sense that doing the reforms, not just because of EU accession, but rather because a lot of these reforms are good for Turkey, that basic tenet is going to hold.

MR. KIRCHER:  All right.  Thanks everybody for coming.  You can pick up the press release and the handouts on the way out.  Thanks.