WORLD BANK ANNUAL MEETINGS World Bank Chief Economist Justin Lin Briefing Saturday, October 11, 2008 12:00 p.m. HQ 1 B-610 P R O C E E D I N G S
MS. TUCK: Hello, everyone.
I am Merrell Tuck, and I'm a Senior Communications Officer in the Development Economics Vice Presidency, and I am very pleased today to introduce Justin Lin, our Chief Economist and Senior Vice President. We also have two other colleagues here who are experts. We have Celestin Monga, who is a Lead Economist for Mr. Lin, and also Alan Gelb, who is our Director for Policy Research. What we wanted to do is we want to give Justin the option of keeping some parts of this on background unless he states otherwise, and he may want to make an announcement as well at the outset, so we'll be clear with you what the terms are in which he is speaking, but please assume as the default that he's speaking on background unless he states otherwise. We'll let him open up with a short statement, but then we really do want to have some give-and-take and get to hear your questions and answer them to the best that we can. So, without further ado, let me open it up and give it over to Justin. QUESTION: Merrell, is the statement on the record? MS. TUCK: Yes, the statement is on the record. I think you got at your places a statement about creation of a Council of Chief Economists, and that is on the record. MR. LIN: Merrell, thank you very much, and thank you very much for coming to this informal meeting. I think there are so many important and challenging developments outside, so I am truly grateful for you to come here. I understand since I took office on June 2, there have been quite a number of requests for interviews, but I was unable to do that because for me, I think I needed to spend time to understand the institution. And also, luckily or unluckily, since I took the job, there have been so many crises--the food crisis, fuel crisis, financial crisis--and that has required a lot of time for me to study, to understand and so on. So I am delighted to have this opportunity today, finally, to meet you all here. Certainly, I am the first one from a developing country to take the job of Chief Economist, and people have some expectations of me. In fact, I also have a lot of expectations of myself. My concern is to think what I can contribute to this institution and to the mission of the World Bank--a world free of poverty. We know that Africa is the last frontier for our development efforts, and it is also the first item in the six strategic themes of the World Bank. So, since I took the job on June 2, I have been to Africa twice. The first time was on June 7 through June 18, exactly one week after I took the job. And the second time was on August 26 through September 5. I went to Rwanda and Ethiopia on the first trip and to Ghana and Nigeria on the second trip. After I had those two visits, it touched my mind and also inspired me. It touched my mind because when I went to those countries, I went to the countryside to see the farmers, and I went to the factories to see the workers, and for me, it was a kind of homecoming in the sense that their situation was the situation I myself experienced when I was a young child in Taiwan and when I was 27, 28 years ago a student in Mainland China. And I could see from their eyes they had a very strong desire to do their best for themselves and for their children. I also had an opportunity to have a lot of consultations and discussions with intellectuals in those countries, and I could see they had the same motivation as myself--to make a contribution to economic development in their countries. I also came back with some kind of understanding of the constraints and pragmatic approaches to tap into the opportunities. I'm sure that African constraints can be transformed into another pole of growth in the coming decades. Just like in the 1960s, 1970s, 1980s, no one expected East Asia to become a pole of growth, I am sure that with the effort of the people there, the government there, international organizations, support and effort, they can change their destiny. But certainly I know that today the focus is the financial crisis, and for this, certainly, it is a surprise in a sense. Although people expected the sub-prime crisis and so on, it is going to have some real effect, but I guess not that many people really expected the speed and the depth would be so much. I remember that at the end of August, I participated in the Jackson Hole meeting, and I had the opportunity to have dinner with a group of central bankers from the developed countries and also a number of very influential intellectuals there. The topic was to discuss 30 years from now, will people still remember this crisis. And at that time, I think most people had the confidence that maybe 30 years from now, most people, common people, will not remember this crisis at all. Maybe at the most, it will be just a case study in a textbook of financial economies. At that time, I asked why most people had this kind of confidence, and the answer was: We know the cause of the Great Depression. We are not going to commit the same mistakes. We know the cause of the Japanese crisis in the 1990s. We are not going to commit the same mistakes. We know the cause of the East Asian financial crisis in 1997-1998. We are not going to commit the same mistakes. And I raised the question that, however, when we look back, each time the crisis was caused by new factors, new causes. Certainly, we can prevent similar mistakes, but it will be very hard to prevent some kind of unexpected factors, and now this seems to be the case. And there are a lot of predictions about what will be the effects on the developed countries and on the developing countries. Certainly, it is early to say whether we can really control and manage the crisis or not, but I think that gradually, we can come to a consensus. Some kind of international coordination, some kind of comprehensive, systematic and decisive actions are necessary, and with that, certainly, we hope the crisis will be managed. But no matter how soon we are going to deal with this crisis, I think the impact on the developing countries will be substantial, and a slowdown of the developing countries will be unavoidable. The hope of decoupling will be unattainable. So, under this kind of situation for the World Bank, I think we have the obligation to make some preparation--when some vulnerable country needs to have some help, we need to be ready for that kind of help, both financially and also in the policy advice, in order to help the poor people, the most vulnerable people, because we know that every time there is a crisis, there is going to be a huge setback in our fight against poverty; every time there is some crisis, the poor people, the children, the women, are always the groups to be hurt the most. And if the World Bank is being requested to help, we need to gear our policy advice into support to the developing country, to the hit country. So, you have that vulnerable group of people to prevent to suffer not only now but future opportunities, and to do that, certainly, the World Bank alone will not be enough. We need to have the government and the people there, we need to have the multilateral development institutions, we also need to have the NGOs work together. With that spirit, I and Olivier Blanchard propose to form a Council of Chief Economists of Multilateral Institutions, and the purpose of the Council is to meet regularly to exchange our notes and our understanding and our policy design, policy work, and to help each other. Certainly, the crisis will also give an opportunity for us to work together closely to understand the reasons for this crisis and to prevent similar crises occurring. But as I mentioned, crisis is often triggered by different reasons. I hope that next time there is some kind of hit or crisis, we will know earlier, and we will be able to prepare better. We also need to consider in this current crisis those vulnerable countries, vulnerable groups of people Also, as with other experiences in the past there are certain things we should do, and some things we should not do. Among the things we should do, there are more effective ways of acting in a way consistent with long-term economic growth and consistent with the goals of the MDGs. We need to study those kinds of experiences, and that will be the goal of this new Council of Chief Economists of Multilateral Development Institutions. With this, I welcome your questions. MS. TUCK: Thank you. Let's start over here; yes--if you could identify yourself, and I don't know if that mike can be moved, but if you can speak into the mike, because we will prepare a transcript for our own background. Thank you. QUESTION: Hi, there. I just had a question about China. You spoke about the most vulnerable countries, but what kind of position do you think this question is going to put China in, because on the one hand, it is obviously very dependent on growth in developing countries; on the other hand, it has huge amounts of cash in reserves that it can use to potentially extend its influence and protect itself against its own financial problems if it has any. So I just wonder if you could break it down a bit and talk about the financial and economic impact on China--and of course, anything on the record would be very helpful. MR. LIN: Yes. Certainly this is a very important question not only for China but also for the world now. My-- MS. TUCK: And let him know if it's on the record or on facts-- MR. LIN: --I think it's on the record; that's fine-- MS. TUCK: Thank you. MR. LIN: --my overall position is that certainly China will be affected, because export is a very important part of China's economic growth. However, China may be able to weather through this crisis in a much better shape than many other developing countries. The main reason for my confidence is that, first, as you know, China has such large foreign reserves; and secondly, China has capital controls, so China in a way can insulate itself by building a firewall against the contagion. And third, China has a very strong fiscal position, because in the past four years, the Government has run quite a substantial fiscal surplus. So, with this kind of strong position, China can turn to stimulate the domestic economy by, first, infrastructure investment in the rural sector, and also, China is a middle-income country so the scope for the investment in industrial upgrading is large; third, China can also improve its social and human development, such as education and healthcare, which the government has put on the agenda for some time. QUESTION: Could I just have a tiny follow-up to that? I suppose every crisis has its winners, and I just wondered whether China might in fact come out of this somewhat strengthened, because if everyone around you is collapsing, and you have bags of cash, presumably, you can extend your influence and invest also in other countries and help them get over their crises. Do you have a sense of what role China might play in helping everyone else? MR. LIN: I think that for China, it is better for all other countries to also grow dynamically so that China can have a much better position to grow. As we can look in the past five years, the average annual growth rate in China has been around 11 percent. And when the crises occurred in other countries, although China was in better shape, it is likely the growth rate will drop down to between 8 and 9 percent. So, compared to other countries, certainly 8 or 9 percent is still dynamic and very strong, but compared to 12 percent or 11 percent, it is a substantial reduction. So I'm sure that for China, like in any other country, we hope to have prosperity in the whole world, and that will create more opportunity for everyone. MS. TUCK: Yes, [REPORTER]? QUSTION: The role of the state came very much to the fore in the current crisis, and you have a lot of experience of that, of course, in China. I was wondering how you see that developing during and after the crisis--I mean, what form should it take, I'm talking about now--mainly in the developed world, where there seem to be an increasing role for the state, but also in some developing countries, I suppose. MR. LIN: Yes. I think that-- MS. TUCK: You need to let him know if you are going to be on the record or off the record. MR. LIN: Okay, that's fine; it's on the record. For the economy to work, I think we need to have both factors. Certainly we need to have the market institutions, competition, free entry, and so on. But we know there are many incidences of information asymmetry in the financial sector, and also in other activities such as emissions of CO2 and so on, there exists some kind of externality there. Since there are information asymmetry and externality in the market activities, to prevent moral hazard and ensure the smooth function of market, the government needs to perform the functions of regulation and supervision. I think both market and government are important for the smooth functioning of an economy. This is especially important for a developing country in the process of economic development. The developing country not only lags behind in technology and industry, but also lags behind in both physical infrastructure, like roads, like telecommunications, but also other legal and financial infrastructures. And for the development of infrastructures, both in physical and in legal and financial, there is a lot of externality there. Individual firms cannot internalize all those development. So, under this kind of situation, some kind of coordination, some kind of provisions from the government are necessary for the developing countries to have dynamic growth. So my position is that we need to have both. We should not neglect any factor. QUESTION: I was also--I'm sorry--referring to the role of the state as an owner of either the financial institution or the means of production. MR. LIN: I think that certainly under the current crisis situation, in an extraordinary time, to recapitalize the financial institutions, it may be necessary for the government to play an active role, and I think it will be welcome, especially regarding the restoring of confidence. But after the crisis is over, how much of a role should the government play in ownership of financial institutions, and so on? I think we need to deal with this issue pragmatically. There are some kinds of positive benefits there, and there are some kinds of cultural factors there. They may also be related to the stage of development there. So my answer is that we don't have one-size-fits-all recommendations, and as long as our financial institutions can mobilize the financial resources, allocate the financial resources, manage the risk and build up the confidence, that kind of financial institution is a good institution. MS. TUCK: Over here. QUESTION: Hi --you were talking about in your statement that you saw sort of a consensus forming on comprehensive, systematic and decisive action-- MR. LIN: Yes. QUESTION: --but when I look at it, I don't see that at all. I see with the G-7 that each of the countries say they will do a lot, but they don't do it in a coordinated fashion. So, why do you think this consensus is forming, and do you think that the kind of ad hoc adaptation--ad hoc answers--that different countries have had have lessened the impact that they might have had otherwise? MR. LIN: Good questions. I think I see a consensus among the people, the policy intellectuals, and we understand that this time, we are in globalized world, financial flows are cross-border, and if we do not have a coordinated, systematic way to deal with this kind of issue, then it will be hard to restore confidence. And crisis in a country will have a kind of contagion effect on other countries. To prevent this kind of situation from happening, we need to have some kind of coordinated effort. Certainly it takes time for people to realize that, but we do see the signs, because we see that several countries' central banks have taken efforts to reduce the interest rates in the countries. I think that is a sign toward the direction that I just mentioned. QUESTION: And what about the second part of the question--do you think that one of the reasons the market reaction has been so bad is because of the lack of obvious clear coordination? MR. LIN: I think that the market confidence is something that is hard to predict. Certainly, now we know that one ad hoc approach will not work, and we need to take more, more decisively. I think people now have that understanding. MS. TUCK: Yes, here, and then there. Maybe we'll take two questions this time, and hopefully, the lunch will roll in soon. QUESTION: The sovereign wealth funds have been rather quiet this time. I'd like to know if you think they have a possible role, what kind of role--and if you could answer on the record. MR. LIN: That's also a very good question--what kind of role the sovereign wealth funds can play. I think that certainly, they have their capital, and now we have a situation where we need to recapitalize some financial institutions. So, certainly, the sovereign wealth funds can play some function. But whether it is the best way for the sovereign wealth funds to make their investment, I think the decision will be up to the fund itself. Some sovereign wealth funds, as we know, in the recapitalization of Citibank, already play some role, and I expect they can play more role in the future, but it does not mean that every sovereign wealth fund will move in that direction. MS. TUCK: Let's take this question, and then maybe I can invite people after this question if you want to go up and serve yourself, there are sandwiches at the back, and I apologize for the delay in the food. QUESTION: Thank you very much, Merrell. I wanted to ask about the issue of commodities, both fuel commodities and food commodities, which obviously has been a huge issue for developing countries and emerging countries. It seems that, obviously, there have been a lot of price falls recently, and I was wondering what your outlook was for commodity prices--I know there can't be one figure, but what your outlook was for those two categories--and how you saw that playing out in terms of winners and losers. MR. LIN: Yes. Good question. That is a big issue. In April, at that time, there was a lot of effort to try to deal with the crisis triggered by the high food prices and high fuel crisis, and one positive side of this global slowdown is that demand for fuel and the demand for commodities will be reduced, so the prices certainly will drop down. According to our new tentative projection, in 2009, oil prices may be in the range of US$79 per barrel, and commodity prices will be reduced by about 19 percent from the current level, and so on. This is good news for the importing countries, because I think in April and in the summer, one big concern was fighting against inflation, and a lot of inflation in developing countries is imported inflation due to the high food and fuel prices. Now, with the dropping down of the prices, inflation pressure is reduced, and when the country encounters a slowdown in their economy and a reduction of the inflation pressure, certainly it gives the government much larger room for monetary policy to stimulate economic growth. So the winners will be the importing countries, and the losers certainly the exporting countries. MS. TUCK: [REPORTER], go ahead with your question, and people who want to get up and have a sandwich, please help yourselves. Go ahead. QUESTION: Again, I'm hoping this is on the record. If you look around the world, there in emerging markets are we seeing the stress points? There has been talk about, for instance, there could be some balance-of-payments problems that are erupting in certain countries, yet that doesn't seem to be the case in one of the large emerging markets. We also so Dominique Strauss-Kahn show a graphic over the last day or two showing that Western Africa and other countries in Africa in fact may suffer the least financial turbulence from this crisis. So, where is the concern? MR. LIN: I think--and this can be on the record--that for the developing countries, emerging markets and so on, whether they are vulnerable or their degree of vulnerability I think depends on several things. One is how strong is their current account position. If their current account is weak, and their growth in the past relied on huge inflows of capital, then they may be vulnerable. Secondly is how large are their foreign reserves. If they have a very large foreign reserved, then they are in a much better position. And third is their fiscal position. If, before the crisis, their fiscal position was very strong, then the scope for the government to take countercyclical policy will be large, and they will be in a much better position. If, before the crisis, they already had a very stressful fiscal situation, then the scope for the government to take action will be very small. And I will use this as a criterion to diagnose which countries might be on the vulnerable list--and I understand the Bank has identified about 30 countries that might be on a watch list. QUESTION: As a result of the financial crisis? MR. LIN: Yes, yes. MS. TUCK: Thank you. If you could identify yourself; thanks. QUESTION: The so-called Washington Consensus--I think we're sitting in the basement of the building that would be the home address of that Washington Consensus-- MR. LIN: Yes. QUESTION: --do the actions and the developments of the last fortnight, including the U.S. bailouts, erode or even shatter the Washington Consensus in your view? Will the developing world listen again to these institutions and the advice coming out of Washington? MR. LIN: It's a very good question. I think on the Washington Consensus, if you look into those ten recommendations, its recommendations will be desirable for a well-functioning market economy. So, on the Washington Consensus, my position is that we should treat that as a goal of the developing countries to go--but we also need to understand that if there are some deviations from the consensus on those ten recommendations now, that means there are some distortions to the market, and those distortions in effect are not exogenous. Those distortions are endogenous--in a sense, they serve some purpose. And since they are endogenous, unless we deal with the cause for them to have those kinds of distortions; otherwise, if you want to remove those distortions immediately, then you may turn in to use economic jargon, from the second-best situation to the third-best situation. So, under this kind of situation and understanding, I think we need to be pragmatic in terms of how to move from the deviation from the ideal situation and move gradually to a well-functioning market as prescribed in the Washington Consensus. So, to me, I think the Washington Consensus should be a goal for our effort, but it should not be a prescription that we need to adopt all those recommendations immediately. When we apply our policy reform and so on, we need to look into the opportunities and the constraints and move in a pragmatic way. MS. TUCK: Yes, over here, please. QUESTION: A follow-up question about the Washington Consensus. So, what can we do to ensure a well-functioning economy, as you suggested before? I think, as the gentleman said, maybe this crisis has shaken the confidence in the well-functioning market economy; so, what can we do, and what kinds of emergency, ad hoc programs and solutions to guarantee a well-functioning economy? MR. LIN: Since now the issue is confidence, confidence requires some kind of comprehensive, decisive and coordinated action, and once those kinds of actions have been put in place, confidence will come back, and the market will start to function well. And on what kind of coordinated, systemic and decisive action do we need, I think it is in three areas. One is to provide liquidity. The second one is to deal with those toxic assets, and the third one is to recapitalize the financial institutions. I think the government needs to do these three types of work, and not in an individual country way; we need to have a coordinated way. Hopefully with this, we can recover the confidence of the market, and things will return to a more normal situation. I think I can only take one more question now. MS. TUCK: Yes, I think we only have time for one more question. QUESTION: There is some argument in the United States media that blames the root cause of the current financial turmoil on the high savings rate in some emerging markets, especially in China. MR. LIN: High? MS. TUCK: Savings rate. MR. LIN: Savings rate. QUESTION: Yes, the high savings rate in some emerging markets, especially in China, that provide easy money for the developed countries, especially the United States. Do you think this kind of argument is fair? MR. LIN: Well, everything has two sides, right? If someone saves more, that means other people are willing to consume more. I think it is not time to point fingers--it is time to solve the issues. That's one thing. Secondly, China certainly--if you look into any developing country in the rapid economic growth period, they tend to export more, with a larger current account surplus. I think that may be due to several reasons. One is that in their industrial upgrading process, they need to invest, and because of the advantage of backwardness, they know which industries to invest in, so under that kind of situation, their industrial upgrading will be fast, their economic growth will be fast. But secondly, you are going to encounter several transitions. One is the transition from rural to urban areas. The migrants from rural areas need to save for their housing in urban areas. Also, we know that for rapidly growing countries, in general, they will also encounter some kind of demographic changes. Population growth rate, birth rate, will drop, and in that kind of situation, people need to prepare for their old age. So, due to all those reasons, they are going to save more. I think that's a natural process. At the same time, for the high-income countries, we know that they are entering the aging stages. As they grow older, the elderly will de-save. So I do think there is some kind of balance there, and that is a natural process. So the global imbalance--certainly there are some excessive factors there, but overall, I think we need to look at global balance in a more comprehensive and also in an intergenerational framework, instead of just looking into spot analysis. MS. TUCK: Thank you. MR. LIN: Thank you. MS. TUCK: Mr. Lin is going to have to go to another meeting now, but obviously, I would encourage you to please stay. I know the sandwiches aren't all that big, but there are sandwiches and drinks at the back, so help yourselves. And I'm sure that my colleagues, Alan and Celestin, might be happy to stay here a little longer if we want to continue the discussion; but Mr. Lin does have a meeting to go to. I thank everybody for coming. It was good to hear from you. If you have any follow-up questions, do let me know, and we'll get a transcript of this which I'm sure will indicate which parts are on and off the record. Thank you very much. MR. LIN: Thank you very much. I appreciate having had the opportunity and hope to see you in the future. |
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