Debate: What Now? The World Beyond The Crisis

Annual Meetings 2009
PROGRAM OF SEMINARS
DEBATE: WHAT NOW? THE WORLD BEYOND THE CRISIS
October 2, 2009
Transcript

MR. KAHANE: Well, first of all, let me thank you all for being here with us today, and just before we begin our recording, I want to inform you that this debate will be divided into three parts. The first two parts will take about 42 minutes altogether, they will be recorded, and added over the weekend on France 24 and across areas of coverage across the world.

We'll have to mark a pause in between these first two parts that will allow a break for our news bulletin, which of course you won't see here. And then, in the final part, our speakers will take questions from the audience and Internet views. We've got a pretty big room here, so I'll those of you who want to ask questions to write them on cards and I will read them out in front of the audience and the panel in the final part starting in about 45 minutes from now.

Well, thank you so much for joining us at the Annual Meetings of the World Bank in Istanbul, and to those of you watching us at home on Franz 24, welcome. In recent days, we've seen new evidence of an economic recovery, however subdued it may be. We're here together today to try to take a step back and think about what the world will look like once we emerge from this crisis.

With a balance of power shifting away from U.S. and Europe, new economic centers are emerging and they grow stronger by the day, but this new generation of investors, political leaders, and also innovators are all facing great challenges. What are these challenges and how will they be addressed? The World Bank and Franz 24 today bring together a panel of decisionmakers to debate these leadership challenges and to try to better understand the shifting power dynamics.

I would like to welcome our panelists, but first let me take this opportunity to express our support for Indonesian Finance Minister Sri Mulyani. She was to take part in this debate, but couldn't make it because of the floods that struck Indonesia. We all extend our heartfelt sympathy to her and her country in these tragic events.

Now, joining us today is Eleni Gabre-Madhin. She's the CEO of the Ethiopia Stock Exchange.

Thank you for joining us today.

Also with us today is Paul Collier. He is a professor at Oxford University. He is also the author of a book called "The Bottom Billion," many of you probably know already.

Also here with us today is Mahmoud Mohieldin. He is the Minister of Investment of Egypt.

Guillermo Ortiz, the Governor of the Central Bank of Mexico.

And our host today, President Robert Zoellick from the World Bank.

Now, to start, I would like to ask a first question to Eleni Gabre-Madhin.

What are the prospects for a global recovery to this crisis?

MS. GABRE-MADHIN: Well, I think that the prospects, obviously, are on the rise, and if I were to focus a little bit on my continent, Africa, I think Africa was relatively insulated from the financial crisis with the relatively less open state of our financial sector, but on the other hand, Africa faced a very significant commodity and food crisis that I think has had a significant shock on our economy, and particularly on the state of poverty. So, that is something that we are still weathering, starting from the very high price shocks and then, actually, now, the reverse, where commodity prices are falling and therefore our export performance is actually down.

So, we have really been buffeted by both sides on these crises.

MR. KAHANE: Mahmoud Mohieldin, before we came here on stage, you were talking about the effect of this food crisis and fuel crisis, saying this probably had even more impact for many countries than the financial crisis last year.

MR. MOHIELDIN: Right. During the last three-four years, the small open economies were exposed to a variety of shocks, and I consider the food crisis the worst of them all. It may not have the same kind of big publicity on the news, but if you compare it really to the financial crisis or the food crisis, for the countries who have some net exports of fuel, I think the food crisis was the worst, on the low-income groups, on the poverty profile, on the measures that had to be undertaken in order to deal with some of them, and some of them do have some negative impacts on business environment and the like, but the issue of recovery, which was basically your first question, I think it is basically we have to put it in a context: Recovery from what and to what, exactly?

Because even with the interesting signs of growth in some countries, improvement in investments, improvement in the capital markets, they are basically coming from very low levels compared to the pre-crisis levels. So, the output is still lower, the consumption, aggregate demand, effective demand is going to be very much reduced because of the lack of credit and the expensive capital there.

So, really, the issue of recovery, I really don't see it there, yet, especially as well as I was talking with the Governor a few seconds ago that some of the measures undertaken by some of the OECD countries are going to be making this crisis not really as banks to fall or financial institutions to collapse, but basically through the rise of protectionism, the resistance to capital flows, the huge budget deficits that are going to be crowding out finance from developing countries and emerging markets to the United States and Western Europe. It is going to be making our life very difficult in the future, especially with the decline of net private capital flows by almost 85 percent during the last two years.

So, the talk of recovery, especially if you take it from this context and the impact on the real economy, the high unemployment rate, the high poverty levels, I think we shouldn't really be congratulating ourselves for international coordination a bit too early, and we need to continue the efforts, especially with the real economy into consideration.

MR. KAHANE: Do you get the same feeling seeing banks from Mexico, Guillermo Ortiz?
And specifically, do you think that the financial part of this crisis is now over?

MR. ORTIZ: Well, it is certainly better than it was a year ago, but I think we still have some ways to go. I think that most of the, let's say, difficult situations in terms of financial institutions and banking sectors in the developed world are on the mend, but this has taken very extraordinary measures.

Central banks have gone into unattractive territories. They have not only supported the banks, but they have also gone well beyond the traditional parameters of central banks, supporting also the non-banking sector, intervening directly in the market, and stretching the traditional function of lender of last resort.

On the other hand, governments have also extended the safety net for depositors and for bondholders of banking and non-banking sectors, so the intervention of both central banks and the public sector was certainly very helpful, obviously, in avoiding a financial collapse that one year ago we were very close to that possibility.

But then, we have to see what is the likely financial landscape that will emerge of all this. Part of the support of central banks and governments are, in a way, aggravating the circumstances that led to the crisis in the sense that there are few institutions more concentrated, more protected, but ultimately by taxpayers, and the problem of the so-called "too big to fail" has rather intensified than diminished.

So, there is, of course, a lot of work that is being done in different fora, G20 and so forth, to try to correct the macro and micro imbalances that caused the crisis, but this is still a project, and it is too early to know what the landscape will be.

MR. KAHANE: President Zoellick, do you think that the too big to fail concept might now have some dire consequences on the future of world finance, and would you also say that the financial institutions and the supranational institutions, actually, were really changed by this crisis?

MR. ZOELLICK: Well, I think one lesson that ought to be crystal clear after this crisis is that what happens in any of these markets affects the rest of the world. So, what happens in New York financial markets or European financial markets echoes in Mexico and Ethiopia and Egypt and everywhere else, and I do think that means that these old institutions that were created at Bretton Woods in 1994, particularly the IMF, the World Bank, the World Trade Organization, which evolved out of the early trading regime, have to be retooled to deal with a very different international economy.

Now, one of the biggest dimensions of that is the rising emerging economies. In the financial crisis in the late 1990s, if you talked about China, it was just, would China hold the currency peg, because you remember what happened with the Thai baht and Indonesian currencies and others. Well, now, you can't open up a business page without people looking, well, is the Chinese growing, how fast it's going to grow, and India is close behind.

And I believe over time there are opportunities to have multiple poles of growth, which I think would be a steadying aspect of the international system. And the question is, how do these international institutions like the World Bank adjust their roles, whether it is for the poorest countries, post-conflict and fragile states, rising economies, and connect them with the developed world.

MR. KAHANE: Now, Paul Collier, has this--and probably the answer is, yes, but I would like you to elaborate on this. Has this financial crisis shifted the balance of power between developed and developing economies?

MR. COLLIER: Well, I think it is no longer sensible to talk about developing economies. The developing world is diverged into a large group of emerging market economies that are growing pretty fast over the course of the last two decades, and a group of countries at the bottom, the bottom billion, that have become progressively more marginal.

So, the key development challenge is to get that group at the bottom to converge, to catch up, on the rest of mankind. Now, if I could just pick up on the themes that we've already taken up, often, the actions of the developed countries have inadvertent damaging consequences on the bottom billion.

I mean, let's take the food crisis which was more devastating for Ethiopia and Egypt--

MR. MOHIELDIN: And for Egypt, yeah.

MR. COLLIER: --than the financial crisis.

Now, what was at the bottom of the food crisis? It was foolish, careless policies in America and Europe concerning agriculture, concerning food. It was the American fantasy of biofuels in which about a third of American grain are diverted into energy production, and it was the European fantasy that genetically modified crops were dangerous, which they obviously were not, and the ban on GM crops in Europe and the subsidies of biofuels in America that collectively really quite substantially reduced world food supply and made countries like Egypt and Ethiopia much more vulnerable to these food shocks.

And who suffers in these countries? It is the poorest urban consumers, it is the children of the poor. If they go without sufficient nutrition for more than two years at a time, they are stunted. Stunting is an irreversible condition, and it has mental as well as physical effects.

If we could just turn to the financial crisis, it obviously had nothing to do with the bottom billion, and yet they have been made to suffer because one response to the financial crisis was a panicked reduction in the appetite for risk. The countries at the bottom billion are seen as the riskiest environments on earth, and so banks and investors run away from the bottom billion.

We see it in trade finance. Trade finance overall in the world is down, but trade finance to Africa is drastically down. It has cut manufactured exports by something over 50 percent, because you can't get letters of credit anymore.

The collapse in investment to Africa has collided with a structural problem that Africa already is woefully short of investment. It is investing typically around 20 percent of GDP. Asia is investing 40 percent of GDP, and so Africa is diverging further and further behind emerging Asia. It needs to get a big financial inflow to finance investment, and yet private capital is running away.

MR. MOHIELDIN: This goes back to Bob Zoellick's point about how integrated the world is. One does not normally think that the poorest countries of the bottom billion--

MR. COLLIER: Are being affected by what's happening in Wall Street.

MR. MOHIELDIN: --is interconnected with the financial--but it is, and I think this is very much a case in point.

The difference between emerging market crisis, and we have had lots of emerging market crises, and this one is that the emerging markets basically hurt themselves and their neighbors, but this was at the epicenter of the financial sector--has had devastating consequences in the world.

MR. KAHANE: As the CEO of the Ethiopia Stock Exchange, what do you see in terms of direct investment? What has been the impact of the crisis on investors and what are the means to get them back?

MS. GABRE-MAHDIN: Well, I think first of all, on commodities--and actually, the commodity exchange in our case is only about a year old, and already in this year, we have seen, because of the crisis, much lower incentives as Paul was saying to export coffee. Our coffee performance went down significantly because of the credit crunch on this side.

But I actually wanted to pick up on some of the points and really emphasize that I think if there is one lesson that seems to be coming out is the need not to neglect domestic demand-driven growth and domestic markets and also regional markets. And I think from where we sit, from commodities as well as capital markets, we are looking to the region as something that seems to be on the rise, and also looking at South markets. So, we are looking very actively at China and India as sources of investment as well as commodity export markets.

MR. KAHANE: Robert Zoellick, you have insisted many times in the past in the importance of South-South trade. Can you...

MR. ZOELLICK: Well, if you build on this, crises also present opportunities, and the changing system with emerging powers also creates opportunities for the bottom billion.

So, one of the interesting lesions that I have seen over the past year is some of the sovereign funds that have developed capital whether due to the oil rents or because of their large reserves, as well as some pension funds in Europe are now saying, well, developed markets are risky, too. Maybe we could actually invest in developing markets, but they often don't have the investment platforms. And so, this is again the adaptation we, through IFC, our private sector arm, have created a new asset management operation, and probably over the course of the next few weeks will be putting together our first fund with some investors from the Gulf, from Asia, and from Europe, to invest in equities in Africa and in some of the smaller Latin American countries, but you can take this more broadly.

China. Everybody is focused on Chinese investment in resources and infrastructure in Africa. When I was in China five or six weeks ago, there was a follow-up by some of the early comments in the crisis by some Chinese leaders, particularly the Party Secretary in Guangdong, Wang Yang, who said, well, maybe after this crisis, some of the most basic manufacturing industries, the toys, the footwear, maybe that should move out of China. And now, they are looking to the possibility of moving it to Africa, but to make it work in Africa, they need energy, they need infrastructure, they need regional integration of markets. And so, we're going to try to help develop industrial zones in that.

And so, this point that you heard about regional integration is really quite significant. If you look at a lot of those African markets. They are too small, there are customs barriers, there are transport barriers. If we can help create regional integration, you will be able to expand the production for those markets but also for export and also create investment.

MR. KAHANE: We now have to make a short break.

For those of us watching us on France 24, please do stay with us, we will be right back after the news bulletin.

MR. KAHANE: Can we resume our debate?

Thank you again for joining us today here in Istanbul at the Annual Meetings and having this debate about the future of the world economy.

Robert Zoellick, you were just talking about the new realities facing the world economy, and you said something very interesting also, and maybe you want to react to what Robert Zoellick has just said--

MS. GABRE-MADHIN: Yes.

MR. KAHANE: --but you said we have to rely more on our domestic consumption. Is it to say that the U.S. consumer cannot be the main driver to world economic growth anymore?

MS. GABRE-MADHIN: No, not to say that, but I think that looking at other emerging markets, and particularly the China/India effect is very real, and in Africa, we were definitely seeing that--

MR. KAHANE: I'm just sorry to interrupt. I'm being told by our technical staff here that we'll have to go again on the second part of this debate--just go back to the beginning, and I'll ask you exactly the same questions, so don't be surprised. These things happen.

MR. COLLIER: I want to come in on Bob [inaudible] when you get the chance--when I get the chance.

MS. GABRE-MADHIN: Okay.

MR. KAHANE: The first half was recorded; don't be worried.

[Laughter.]

MR. KAHANE: You just couldn't catch up without these.

MR. : Not from the very beginning; just the few last seconds.

MS. GABRE-MADHIN: Very good.

MR. KAHANE: Well, thank you for being back with us here in Istanbul for the Annual Meetings of the World Bank. We are having this debate today about the future of the world economy.

I wanted to bounce back on what you said earlier about the future of domestic--and the importance of domestic consumption for internal growth.
MS. GABRE-MADHIN: Yes. I think maybe the pendulum swung a little too far on the export orientation because--on commodities in particular, since that's a little bit more my area--but we are looking now at the tremendous opportunities within our own economies and within the regional nearby markets.

To give you an example and just following up on what Bob was saying a minute ago, with IFC, actually, our Exchange just signed an agreement to set up commodity warehouse receipt financing, because if you think about it, the biggest asset we have is our own commodity, sitting in granaries and small warehouses in the back yards of the farmers. So if we can turn commodity into asset through standardizing it, grading it, storing it, and turning it into a financial instrument, then we actually can mobilize--in our case, we have a $1.7 billion commodity market, and that is a much more significant source of capital than many of the other sources that we have been pursuing.

So this is something that I think we need to think about much more concretely and really set up the instruments and the support systems to make that happen.
MR. KAHANE: Paul Collier, what kind of instrument and support systems do you think will make that happen?

MR. COLLIER: Well, I think Bob Zoellick has it absolutely right that what has been missing are the institutions which can channel both finance and jobs into Africa. Africa needs to diversify out of commodities. It is over-dependent on commodities.

As China has these dramatic increases in real wages, which it will have over the next decade, that creates an opportunity for Africa to break in at the bottom. Established Chinese firms moving to Africa is one obvious thing to make that happen in the sense of the manufacturing firms themselves, but the finance for that needs to come.

Now, the rate of return on private investment is higher in Africa than any other Region, yet money has not flowed in. So it is the institutions that have been missing, and it is the old institutions like the World Bank that need to reinvent themselves as platforms to channel t his financing to the Region.
MR. MOHIELDIN: I have a couple of points if I may.

First, on the issue of the financial institutions and trade, we still have some serious problems with many of the financial institutions which were bailed out, and in the words of James Baker, some of these institutions do not really deserve to exist, and they call them the "financial zombies." It is not just the issue of "too big to fail" but "too small to go under" as well. So there is a great deal of confusion of applying a market mechanism of getting some institutions out.

It is very hard to implement any of these exits now, because it is going to be confusing everybody again, and it is going to be reminding us of similar days like that but last year. But we have to be making sure that reliance on some of the old financial institutions is not going to be there with us, and we have to be creating new financial instruments. Those private capital flows should be replaced, and unfortunately, they cannot really be replaced easily, because all of the funding that comes from the international financial institutions and bilateral donors and the like is only around $40 to $50 billion per annum, while the private capital flows reach only $700 to $800 billion.

The issue of relying on domestic consumption, yes, we forgot that a great deal of time, but it needs funding , and with domestic savings that are very low in Africa, 10 to 15 percent, you need to really consider some of the funding mechanisms for the overall consumption.

The issue of China is very important, and I have spotted in many cases that the Chinese are doing well in that regard--fixing the problems of trade imbalances with investments. In the last four years, we have seen an increase in the number of Chinese companies in Egypt to around 900 companies. Eighty percent of them were just established during the last four years, and they are getting into these kinds of products that are now imported from China, but they could be produced and manufactured by some African and Egyptian value-added.

Again and finally, on the issue of infrastructure, the infrastructure is very, very poor not just for international trade, but for God's sake, for regional trade within some countries in Africa. Here, you need to get some serious investments into them. The creation of local markets for local currency funding long term, the application of public-private partnership schemes, the sponsorship of some of these new ideas through some work by the World Bank, the IFC, and some regional banks at the beginning is very useful. The new mechanism under the World Bank like the GEMLOC, which is basically trying to encourage long-term finance in local currency to minimize the foreign exchange risk is very useful. But again, we need to work very, very hard and to capitalize on this opportunity mentioned by Mr. Zoellick on what comes with the crisis, not just the damage but the opportunities of trying to think differently from the past.

MR. KAHANE: What sort of friendly market environment can international institutions contribute to create, and what is the limit of their role?

MR. ZOELLICK: Well, you have heard around this discussion that part of our support would be to help create markets for everything from microfinance--which in this crisis performed well, but because most of them are not depositories, require cross-border finance, so we stepped in to support that; the local currency bond markets; the equity; infrastructure. And if you listen closely, this is not all going to be done with public money. There frankly isn't enough public money to do all this. So partly, how can you create the environment, say, for public-private infrastructure projects or some private sector infrastructure projects. Climate change--how do you make carbon markets work?

About a month ago, I was in the Democratic Republic of Congo, and I flew over Virunga National Forest, which is the second national park after Yellowstone--it is about half the size of Belgium--and I met the chief park ranger, and he was saying that for $3 million, he thought he could help substitute charcoal, or have an alternative for charcoal, for local needs, and this might be a game-changer in terms of preserving the forests, which is also where the mountain gorillas are.

So, part of what we do as an institution is not just individual projects, but projects that can leverage to try to create markets and institutions and capacity. Obviously, the IMF does that in a different role at the macroeconomic level, and I think part of what I guess I see coming out of this crisis and going back to your very first question is it is in the developed countries' interest that we do this, not only because you can have plagues and immigration and other things from the "bottom billion." But frankly, where do you expect some of this demand to come from in the international system?

So it will be a healthier system--it's like a portfolio investor if you have more portfolios with potential growth. And obviously, when people in Egypt or Mexico start to expand their infrastructure, well, they will buy capital goods from Europe.

So this is to show how, while the interconnections can pull you down as they did in the financial crisis, they can also pull you back up.

MR. KAHANE: Guillermo Ortiz, who can ensure that private initiatives effectively leverage on public intervention?

MR. ORTIZ: Well, I think--

MR. KAHANE: Do central bankers contribute to create that environment with stable currencies? That's probably not enough.

MR. ORTIZ: Well, we would like to think so.

I think central banks' main function, of course, is to provide price and financial stability--and this is a big topic, because sometimes by providing price stability, you don't necessarily provide the environment for financial stability, as this crisis has demonstrated--

MR. KAHANE: But it can create a friendly environment for foreign investors.

MR. ORTIZ: By all means. I think we are very much aware that low inflation is not an end in itself. It is a pre-condition to removing some uncertainties that facilitate investment, that facilitate entrepreneurship, so I think it is fundamental, and I think this is well-understood, and there is really very little discussion today as to the merits of having a little bit more inflation, perhaps, and that may ease some constraints on investments and so on. I think that debate is pretty much over. You can argue that not everybody needs to have 2 percent inflation, but the old debate that with higher inflation in the order of 15, 20, 25 percent, you are okay--that's pretty much done.

But going back to your first point, I think the key is to--at least, I think this is the experience in Latin America--once you begin to create the conditions or the incentives for these private-public partnerships and investments, you move on to creating a critical mass. I think this is a key point, because you have a few examples, a few successful examples, and if you have several of them like the ones that Bob was talking about, that really changes the mentality and leaps forward. So I think that even if it seems anecdotal, I think it is very important.

MR. KAHANE: Mahmoud Mohieldin wants to say something.

MR. MOHIELDIN: Well, I agree with the Governor. The issue of price stability and financial stability are very much crucial for the economy to grow, especially for the smaller enterprises which cannot really hedge against inflation or high risk. But at the same time, there are many positive things that could be conducted from the financial sector to help the small and medium enterprises further forward. The public-private partnerships are going to be having these huge positive externalities for small traders and small manufacturers. But in the case of Egypt, with collaboration with the World Bank, now we are providing micro insurance for the small and medium enterprises and the micro enterprises. Through some sort of knowledge transfer, we learn what is happening in Korea and South Africa to establish a sort of small cap stock exchange for the medium enterprises. The Governor of our central bank did something very useful to deal with the reserve requirements, to give some kind of incentive for the banks to provide more credit to the small and medium enterprises without creating distortion, because there is heavy concentration in the portfolios. He did that just six months ago, and it is working.

So these things, in addition, of course, to the main thing that we require of price stability and financial stability, these new instruments that were not thought of just a couple of years ago, many developing countries and emerging markets are very useful to be pushed further.

MR. ZOELLICK: Can I just come in on a point that, actually, from a European perspective I think has been underappreciated?
Twenty years ago, you did have a revolution in Europe where you created a Europe whole and free again, and the European Union expanded. Part of that new Europe was creating an institution--the euro and the European Central Bank.

If you look at past economic crises, they often led European countries to split apart. Those that were stronger, Germany, the deutschemark, went one way; those--I won't mention--that weren't as strong went another way. And it actually created economic conflict.
MR. KAHANE: You see spreads between government bonds widening.

MR. ZOELLICK: Definitely, and then that creates problems with their budgets, it creates problems with their safety net policies.
At the start of this crisis, some of us were quite worried about the situation in Central and Eastern Europe. It varied by countries, but there were some issues related to some of the currency mismatches for their assets, so you had Western European banks--would they pull out?

I frankly think the European Bank for Reconstruction and Development and the European Investment Bank--and the European Commission came in on this--but also, Jean-Claude Trichet and the euro ended up laying a key role in stabilizing. They provided swap lines to provide support for some of these countries. And coming out of this--you watch--there is going to be an interest of some of those smaller countries to get the security of the euro, so you'll have more of them coming into the euro.
So it is an interesting factor about how an institution that was created after one crisis really rose to the challenge, and I think it will be important for Europe's future going forward.

MR. KAHANE: Paul Collier, let me be provocative here. Can we expect market forces to the sole driving source to lead the "bottom billion" out of poverty?

MR. COLLIER: No, of course not. There is a huge need for bigger public investment, and there is a need for rebalancing of regulation. Typically, financial markets have been under-regulated, whereas in Africa, real markets have been overregulated. So the regulatory challenge is to stiffen up regulation of the financial sector and liberalize regulation on the real economy.

For example, the World Bank does an annual index called the "Doing Business Survey" which measures the ease of doing business around the world. Now, I have been investigating that, and I have found that the better you perform on that Doing Business Survey, the less adverse impact do negative commodity shocks have on the economy. If you can open up a new business, close down and bury an old one quickly, then you are better-placed to cope with the shocks that have been hitting.
It is possible to improve policies that move you up that Doing Business Survey very fast. The Government of Rwanda has rocketed up that index. It is now higher than several European economies.

MR. KAHANE: Yes, very impressive performance.

MR. ZOELLICK: But look at the telecommunications industry. This is a good example--whether it be Afghanistan or many of the African countries. Because they created the appropriate regulatory structure and the opportunity for investment, this has opened up a whole new sector. That creates jobs, it creates interconnections for people in commodity markets and other aspects. We need to do the same in transportation and some of the other service sectors, too.

MR. ORTIZ: This is a common thing of formal emerging markets, not just the African countries that we are talking about. The excessive regulation and bureaucracy which is obviously very, I would say, embedded and defended by specific interests is a huge impediment to economic growth. If you want to increase the speed of a ship, the first thing you do is you throw out the extra weight and then just start looking at the propeller and then the engine. But the fact is that we are, pretty much all of us, carrying a lot of extra weight.

MS. GABRE-MADHIN: If I may jump in, and since this is a debate, I'm going to be a bit provocative, because Paul emphatically said no, of course not, markets won't drive growth; but actually, our discussion, including his subsequently, really to me has highlighted that in fact markets should drive economic growth, but the question is what kind of markets--better, not more, regulated markets and markets that are nimble, flexible, adaptive and creative. And I think that is really our challenge moving forward--it's not so much to go back into the old paradigm of less government or more, but really, what kind of government and what kind of intervention. Certainly, the crisis has shown that some intervention is inevitable, so I think there has to be an explicit recognition that this is a public-private undertaking--

MR. MOHIELDIN: This is a very important point, and we'll come back again to this issue, because it could be taken, especially with countries with a very long history of state intervention, like: Well, markets collapse, and let's go now and do the old tricks of intervention and help the poor and all of that.
MR. ZOELLICK: Garagistes [ph.], some would say.

MR. MOHIELDIN: Yes, absolutely.

Now I think that this is not really what I understood from Professor Collier, that markets to some extent could help, but you need to help the markets to help you eventually. Infrastructure, effective regulations, and to have free access to the markets, as I mentioned, through the Doing Business Reports, which we are doing well, incidentally, and then during the last four years.

But at the same time, even if you are going to be providing that level playing field, and access to everything, and great opportunities, there are always going to be some vulnerable groups that need to be helped. There are always going to be the orphans and the needy and the like that you need to help as well. The markets, even if they are effectively regulated and very benign as well to everybody, they cannot really do good for very big segments of our society.

MR. KAHANE: What are the limits to the private sector?

MR. MOHIELDIN: I would say the sky is the limit, but really get the opportunity there for them to see the floor, or the land, and the sky at the same time.
There is the issue--and I think Prime Minister Brown in his old days when he was a shadow Chancellor of the Exchequer was talking about efficiency of markets and effective regulations. And I think the crisis that we are in, we always forget one of the two pillars. Either the markets are not very efficient because of lack of reliable information, deception and corruption. In some other cases, you don't really see anybody who is monitoring these markets. And without those efficiency rules and effectiveness of regulation, you cannot really get the private sector to compete well and do what you are expecting them to do.

MR. ZOELLICK: Yes. Let me take this a different twist. I think whether it's a developed or developing countries, you have to help people adjust to change.
What we see in this globalized environment is rapid change, whether it be disease moving across borders or financial flows or trade or movement of people, and this can move too quickly for some people.

And so, you see that, for example, in safety net programs, one of the lessons we learned from the '90s was if we didn’t protect some of the nutrition needs, if we didn't protect some of those at the very bottom, you could pay the price for a generation.

And so, we've tried to do things. Mexico has a very, very innovative one, a conditional cash-transfer program called Oportunidades that helps modest payments to the poorest families through the women, I might add, because it emphasizes that they've spent the money better, and that they have to send their kids to school and get health checkups.

In some African countries it might be more of a school feeding program or some other mother-to-child nutrition programs.

But it's true in developed countries, too. Look at the healthcare debate in the United States. One of the causes of that is is that healthcare in the United States was connected to your job. So, you lose a job, you lose your healthcare.

It's a double whammy, and so one of the ideas that people are talking about is how can you separate those two in developed economies.
So, there's a role for the public sector in trying to help people who find themselves in a difficult circumstance, but part of what I guess we're suggesting is the public sector also has to think afresh about efficient, effective way that you get results.

MR. MOHIELDIN: In delivery.

MR. COLLIER: In resource-rich economies, the government has a fundamental role to manage the discovery process for those resources, capture the revenues for the society, for the government, so effective taxation; and then spend them well on investment, because as it depletes a natural asset, it needs to build up an offsetting--
MR. MOHIELDIN: Another asset.

MR. COLLIER: --real asset. Now many governments have been very, very bad at that whole decision chain.

MR. MOHIELDIN: Yes.

MR. COLLIER: So they've under regulated, underperformed on that whole chain of decisions around natural resources whilst jamming up the rest of the private economy with over-regulation.

MR. ZOELLICK: Or the real thing is they take in the benefits for their own pockets.

MR. MOHIELDIN: Mm-hmm.

MR. COLLIER: One could say that. The most sensational figures I've just come across is the DRC, where export of gold are believed to be about a billion dollars a year, and revenues flowing into the treasury from gold are $37,000.

MR. MOHIELDIN: Yes. And this is generous.

MR. KAHANE: I want to say something importantly. This will probably be the last words for this; yes.

MS. GABRE-MADHIN: Okay. Well, but basically on the safety nets, again, I think, you know, we are talking about what is the appropriate state role and how to structure government intervention, and I think on safety nets and going back to our colleague from Egypt's point about insurance, for example, now that's the type of smart safety net that is still market-oriented.

And similarly, in our--in Ethiopia, we've been implementing a productive safety nets program, which was really combining the labor market with safety net transfers.
So, in some sense, I think this--still, I think, would support the thesis that markets are fundamentally important.

MR. KAHANE: Obviously, there's no one-size-fits-all approach.

Well, that's now the end of our--the broadcast part of our program.

I'd like to thank the panelists and also our viewers on France 24 for watching this debate.

I hope you enjoyed it as much as I did. Stay with us for another edition of our news bulletin on France 24.

[Applause.]

MR. KAHANE: Now, it is not over.

For our audience in the room, you have heard what our speakers had to say, now it is your turn to ask them questions. The second part of this debate, we'll take questions from both the audience and also viewers on the Internet. I think we have gathered some questions through the first half of this debate.

Yes, we will just mark a short break, three or four minutes.

[Pause.]

MR. KAHANE: I think we can probably move forward with our questions from the Internet, though. We already had them.

So, I would like to ask you this question, Guillermo Ortiz from one of our viewers from Peru.

He says, "Why, in some developing countries, has the impact of the crisis been so mild compared to the 1998 crisis?"

MR. ORTIZ: Well, I think that--and this is an interesting question--none of the Asian or Latin American countries have had a financial crisis in the 1990s. The Asian crisis was in 1997-1998 and Latin America crisis was distributed along the 1990s and early 2000s. None of these countries had a domestic financial crisis and, I mean, as a consequence of this global crisis, which means that we did learn something from our own financial crisis.

We learned, for example, that banks need to be well capitalized. We learned that we need to know what banks are doing. They are not doing off-balance sheet operations, they are not swallowing toxic assets, they are not incurring currency mismatches as some of the banks did in Eastern Europe. So, we did learn from our mistakes, and this gives me hope that the regulators and those who conduct monetary policy and financial policy in general in the more developed countries will also learn, so there is hope for them.

MR. MOHIELDIN: Well, this case could be extended to other developing countries, when the crisis of 2007-2008 had to hit us, the financial sectors in most developing countries were basically either under scrutiny, learning from past mistakes, or compliant with the FSAP rules that unfortunately many developed and OECD member countries didn't comply fully and even didn't bother to check the lists of what they have to be doing in order to get their financial systems in order, and indeed, they learned as well that they have to diversify better and not to get into high-risk financial assets.

But at the same time, we shouldn't really celebrate that too much, because we do not really have the financial sector just to be sound and safe and abiding by the rules. There is an important role for that, the basic, classic rule of any financial institution: mobilize savings domestically or abroad and to allocate them for investment to employ people. And this function in many cases, had been forgotten.

And actually, you can check some of the banks doing great, even after the crisis, netting returns on equity, 25 percent, 30 percent, and you can see the level of financial intermediation, opening up new opportunities for work, even the simplest thing, encouraging retained finances, very limited, because the opportunity there, capital is scarce, they can just do some cream skimming, and they can actually learn from the governments that had some huge budget deficits and go back to their shareholders with 25-30 percent.

You need to put new rules of competition, of opportunities to get the enterprises funded, and then we can really consider this financial sector as an integral part of an economy that needs, not just to have it as a safe and sound or possibly efficient--and getting some good returns for the shareholders.
MR. KAHANE: Now, there's another question.

President Zoellick, in your speech at Johns Hopkins this week--I guess it was the past week--it was earlier this week--you warned that the U.S. should brace itself for the dollar to be in difficulty as the world's main reserve currency. A number of countries, and most developing economies have dollarized. What would this mean for these economies?

MR. ZOELLICK: Well, first, to be precise about what I said about the dollar, I noted first that, when the crisis hit, for all the talk about the uncertainty about the dollar, the value of the dollar went up. And so, what that suggested was that was seen as a safe haven, and I don't see that changing in the near term.
However, the point I was trying to make was that the American public and American political leaders take for granted the unique status of having a reserve currency, which makes it a lot easier if you need to print money or raise debt.

And if they take that for granted and continue to run large budget deficits, have spending that's out of control, and if the, coming out of this crisis, they don't deal with the removal of some of the liquidity in a way that avoids inflation, you could lose what is an incredible, incredible thing to have. So, that's the key point.

Now, as for the effect of economies that have dollarized, it is part of the same change that you're seeing in the world. I think that the reserve currencies depend on, what's your alternative. I think the euro will come out of this stronger, but I think that part of that will depend on what happens in European markets. Will they have the appropriate financial regulation, but still have it be creative, innovative, liquid? How good of a growth prospect is Europe, which goes to some of the other issues that we've talked about?

I tried to identify China as a country where I think the Chinese are going to keep control over their currency for some period, but I noted some of the reasons why, over time, I think that you'll see the Chinese currency play a larger influence. And what will happen for those smaller countries that are linked to these currencies is they are going to have to be ready to have more volatility and may lead them to have more balanced portfolios, which is why some people talk about the SDR, Special Drawing Rights, because that's nothing more than a portfolio of some of the major currencies.

MR. KAHANE: Eleni, there is another question.

How will tighter regulations in the world's financial system affect the flow of investment to the developing world and emerging markets?

MS. GABRE-MADHIN: Well, I think Paul already touched on the fact that more risky markets, despite the fact that we have higher returns in many of our emerging economies and the newly emerging economies, the risk might prohibit financial transfers and investment flows. So, that is a very real issue that I think creating special windows, as was proposed at G20, and other mechanisms would be very much warranted.

MR. ZOELLICK: Can I just connect, though, a couple of dots here.

We talked about the fact that a lot of developed country governments, Europe, United States, and Japan, guaranteed a heck of a lot of paper out there as part of their building stability. What I pointed out, as this crisis started, that was going to inevitably have an effect on developing countries' ability to borrow, because all of a sudden people will go to this developed country guaranteed paper.

As you move out of this crisis, we also have to try to think about, well, then, where will they get the financing?

Now, Mahmoud also made the point that a lot of the banks in those countries say, hey, that's a good business. We'll just lend to the government. One of the reasons that institutions like the World Bank play a critical role is we want the financing for the demand, but we don't want to crowd out their private sectors. If we provide some of the lending to the government, the banks may be able to provide some of the financing to the private sectors. We, as we also talked about, can also create some intermediation.

So, this is a good example of how, as people come out of the crisis, they need to see--they've either planted seeds for big problems, cutting out the developing countries, or they planted some seeds to be able to create new channels of intermediation which could become new sources of growth.

MR. KAHANE: Yes, that was the dire consequences of bailout plans and also the economic stimulus package that led to soaring budget deficits; however, there is also the impact of tighter regulation.

MR. ZOELLICK: Yes, and part of it is, you know, any time you have a crisis, it is understandable people will take certain actions, but it is really important that you think about the second- and third-order effects, and we're at a point in this crisis now where you can see it in the papers. People are saying, oh, a little relief, things are coming back, so on and so forth, but complacency could be the biggest danger now, and some of the seeds for trouble that we planted could really grow into serious problems if we don't act on them.

MR. MOHIELDIN: There's another point here.

I mean, what kind of financial system will emerge out of all this? And it will be a financial system that probably will be more concentrated. It will be less leveraged and there will be much tougher liquidity provisions. That means that, for a number of markets, the tolerance for risk going forward, meaning smaller profits for large institutions and so on and so forth, is likely to be lower.

So, I think that we have to, as Bob was saying, think about the second and third derivative of all of these changes, and I'm not sure about that, what will ultimately emerge that will be, let's say, more inclined to invest and to take risks in emerging markets, particularly in those emerging markets that are, let's say, relatively less developed. I think we have to think through this question and see what is the role of international organizations, what is the role of international cooperation in this specific matter.

MS. GABRE-MADHIN: May I jump in. We're all jumping in.

It just seems to me that one issue, of course, is underwriting or guaranteeing the risk, but the other is a consequence that I think should emerge, that we'd like to see, is risk mitigation in the developing countries themselves. So, in other words, really thinking about how the international institutions can support interventions that will actually reduce the riskiness of doing business in these new countries.

MR. ZOELLICK: Well, this is where financial innovation actually can create new possibilities.

One of the things that we've done at the World Bank, but AXA, a French insurance company, did the same, is to use a weather derivative. I think AXA did it with Ethiopia, we've done it with Malawi, where, if you don't have irrigated agriculture, the rainfall determines whether you have a good year or not.

Well, you can use derivatives that basically give payments if the rainfall isn't above a certain level. And so, these are ways where you can help countries mitigate some of the risks using some of these new instruments.

In the Caribbean, we've done one with hurricane insurance where, again, if you look at many of the smaller countries in the Caribbean or Central America, the biggest factor in their debt increase or that throws them off are these natural disasters. So, you can start to ensure against natural disasters.

MR. COLLIER: The Governor is surely right, but because the appetite for risk has collapsed, the flow of private finance to the weakest countries is going to be jeopardized, and so there's a role--now, the response to the financial crisis in terms of public capital was that the public capital was in the form of--not of aid, but of SDRs and expanded IBRD. And traditionally, neither of those have been channels for finance for the lowest-income countries. And so, the challenge now is to make IBRD SDRs work for the countries at the bottom.

Ethiopia needs to be able to borrow safely from IBRD, and for that, there needs to be a lot done within Ethiopia that ensures, first, that all that money borrowed is used for investment rather than consumption, and secondly, that it is invested productively and not squandered. Once those systems are put in place--I call it an agenda for "investing in investing," raising the capacity to invest--then you can really scale up IBRD flows to the countries that--anyway, IBRD was designed to help, really, pretty poor countries get into the world economy. Now, it has become the confine of middle-income countries and you need to reengineer it so that the countries at the bottom can break in.

MR. MOHIELDIN: Well, if I may--just to go back to one of your earlier questions and to link them to what we are discussing now, the issue of the international financial system and the international monetary system, and the future role of the dollar, earlier we talked about the issue of reliance on U.S. consumption. This cannot really be there forever and we talked about the possibilities of alternatives.

Then, the idea of the changing balances in the world and a bigger role for China, India, and other emerging markets. This is coming with very different financial instruments with them that, when you approach a Chinese firm, it may come with some financial solutions like deferred payments, like arrangements to hedge the risk with some sort of bilateral agreements, and this is basically minimizing reliance on borrowing for purchase of particular intermediate goods.

At the same time, this is going to be having an implication on the demand on the dollar that there is a medium of exchange and as a reserve currency.
I agree with Mr. Zoellick that the dollar is going to be with us for a long time, but as I got it, as a form of understanding from his speech earlier and today, that alternatives are being there, as well, the role of the European Central Bank, possibilities of China not just as a provider of a currency, but through all of these interesting SWAp arrangements, and eventually--they said, actually, officially, by 2020 they are thinking of full convertibility of the currency.

But here, I think these dynamics are going to be resulting in something completely different and we are seeing the beginning of a turning point of the international monetary system, how to benefit from these changes as a developing country or an emerging market, this is something else.

MR. KAHANE: To follow up on these questions about the role of the dollar as the world's main reserve currency, someone is asking us--someone from the audience is asking us if--is there any possibility to step back to gold standard monetary system.

Guillermo Ortiz.

MR. ORTIZ: Well, I know there is some gold fans around and, I mean, I frankly, just to briefly, I think this is very unrealistic. I mean, the reason why the world got out of the dollar standard was that, in essence, that it was a straitjacket, but not necessarily for loose monetary policy and all that, but I think that the advance to fiat money was one of the good financial innovations. Not all innovations have been good particularly in the financial field, but this one I'm sure of.

MR. KAHANE: Robert Zoellick, one question about the divide between emerging economies and low-income countries, what can be done to channel these surplus savings of rapidly growing economies to countries where much investment in infrastructure is needed?

MR. ZOELLICK: Well, this connects to the point I alluded to briefly, which is that some of the countries in the emerging markets have built very large reserves. Some of them have created sovereign funds.

What we are trying to create is an opportunity for them to invest in other developing countries, including in Sub-Saharan Africa, recognizing that market economics assumes no transactions costs and perfect information; those are two pretty big assumptions.

So, to help people come into these markets, they may see possibilities, but they don't have investment teams on the ground. They don't really know the risks that they're assessing. Through IFC, our private sector arm, we have operations in 100 of these countries, and we've actually had a rate of return over the past 15 years of about 20 percent. So, it's a very good rate of return, while helping developed private sectors in developing countries.

So, we can help apply that platform, if you will, to investments in infrastructure, but it doesn't only have to be infrastructure. That's the point, is that we can talk about local currency bond markets.

One of the other reasons you didn’t see some of the ripple effects in this crisis is a number of the middle-income countries had developed their local bond market so they didn't have to borrow in dollars or euros. So, with big changes in currency, they didn't get hammered to the same degree. So, it deepens their own borrowing power for private as well as public sector. So, this is exactly the types of new intermediation that I think we need to try to encourage.

And from the point of view of the World Bank, we don't want to just do it ourselves, we want to draw others into the system. So, we are investing sometimes in private equity funds to do this.

One that surprises a lot of people, and particularly in a European context, we did some work with the Gates Foundation, and about 50 to 60 percent of the healthcare in Sub-Saharan Africa is provided by the private sector, in India, it is about 90 percent. So, you ignore that sector, you're really dooming a lot of people to even worse healthcare, because the public sector just doesn't provide it. And these aren't top end services.

So, we're trying to work to try to invest at the same time we're trying to upgrade some of those healthcare services. You should do it with the public sector. It is, again, an example of the public-private connection.

So, part of what I think we're all talking about here is, can we take some of the shock effects and wave effects of this thing and channel it into a more constructive direction.

MR. MOHIELDIN: But on this issue of investment to infrastructure and the PPPs and the new funding mechanisms, have to be linked, as one recent World Bank report mentioned, to growth and inclusive development. And we have to learn from the lessons, as Africans, from the old days of the 19th century and the 20th century when the whole infrastructure was basically built to serve some particular commodities to be exported.

And under some particular pressure and with the new rise of the eastern hemisphere, we don't really like to build the new facilities for that. And actually, one of the issues that was basically an outcome of the continuous failure of the Doha Round, we didn't think beyond that, that we need to think of regional integration--Mr. Zoellick mentioned something about that earlier. And the issues related to integrating different neighboring countries together, intra-regional trade in many African subregions doesn't exceed 5 to 10 percent, even if you are very generous with the statistics.

So, you need first--and here, the World Bank can play a very important role before getting the IFC in through the IBRD--in helping these countries understanding or actually supervising some of the projects in infrastructure developments. They have already one good plan for infrastructure development, linked with growth and inclusive development.

And then, the issue of funding and to build that bridge or that port or this power station could come as a second stage.

MR. ZOELLICK: Just think about infrastructure as being soft as well as hard.

About a month ago, when I was visiting Uganda, which is a landlocked country, I visited a border post that we had worked with Kenya and Uganda to create a one-stop border post. It used to take two days, two days, for trucks to cross the border, which meant they couldn't get to the sea unless they went through that border post. Now, with a combination of, in a sense, changing the information technology and business systems and incentives, it is under two hours. So, there is a tremendous amount you can do in reducing costs and logistics change, customs rules. By the way, this will also probably get rid of some of the corruption issues that take money out of the system.

So, infrastructure should be seen in a broader context.

MS. GABRE-MADHIN: May I follow up on that point, because I think that one thing we haven't talked a lot about is food security, but certainly I think that is part of the groundwork that we need to lay.

And when we talk about food security and specifically on infrastructure, I think we need to not narrowly think about even hard infrastructure as power and telecommunications and roads, but also storage. I think we have really neglected storage as a very, very important--

MR. ZOELLICK: About 40 percent of the losses in Sub-Saharan Africa is through poor storage.

MS. GABRE-MADHIN: Absolutely, absolutely. Post-harvest handling losses, and the fact that--

MR. MOHIELDIN: Transporting [inaudible].

MS. GABRE-MADHIN: --our reserves are very, very weak, partly because the private sector has no incentives.

MR. KAHANE: Well, I guess we have to leave it there, I'm afraid. That's all we have time for.

I'd like to thank all our panelists for being here today in this very interesting debate, and I'd like to thank our audience also for your attention and the questions that we received.

Thank you very much.

MR. ZOELLICK: Thank you.

[Whereupon, at 2:37 p.m., the seminar was concluded.]