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Transcript of a Press Conference Ahead of the 2004 Spring Meetings of the International Monetary Fund's International Monetary and Financial Committee
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MR. DAWSON: Good morning, everyone, and welcome to the traditional Spring Meetings IMF press conference. Anne Krueger, the Acting Managing Director, will conduct the press conference. She will have a brief opening statement, and then we will be happy to take your questions. We are, of course, on the record.
MS. KRUEGER: Good morning, ladies and gentlemen, and thank you, Tom. I would like to welcome you to Washington and to the International Monetary Fund on the occasion of our Spring Meetings. I am sure you all have plenty of questions lined up, but I would first like to speak a few remarks.
I know I don't have to tell you that these meetings are taking place in somewhat unusual circumstances. Horst Köhler's resignation last month came as quite a surprise, but his nomination for the presidency of the Federal Republic of Germany was a great honor for him and for the IMF. Given the suddenness of his departure in March, we were very pleased last week to have the chance to bid Horst and his wife a proper farewell when they returned for a visit to Washington.
Like all of you, we await the appointment of a new Managing Director to succeed Horst. I hope I can save us some valuable time by making it clear now that I have no more information than you about when the Executive Board will make its decision; we get our rumors from the newspapers. I will have nothing further to say on this subject today.
We would like to think that the Fund plays an important role for the international economy, but we recognize that economic activity does not come to a halt during periods of institutional transition. So, during the interregnum it is business as usual for the Fund. We have a full agenda for the next couple of days and basically, in that regard, we are keeping things going just as we would, because there are the important issues and the international economy needs the attention.
We are doing so and having this meeting against a welcome improvement in the global economic outlook. Many of you will have been at Mr. Rajan's press conference yesterday morning. I am sure the rest of you are, by now, aware of our latest forecasts in the new WEO. The strengthening global economy is encouraging; it is also brings an opportunity that, I believe, is vital to seize.
In recent years, many industrial and developing countries have undertaken economic reforms, sometimes politically difficult, and many countries have started to see the benefits that well-directed reform can bring. The current upturn in economic activity around the world offers a chance to press ahead with reforms that are already underway or, in some cases, tackle problems that have been postponed for too long.
It is always tempting at times of greater economic optimism to postpone change, but in recent years governments have come to recognize that putting off reforms simply stores up trouble. Whether it is structural change in Europe, or macroeconomic reform in Latin America and Africa, or tackling financial problems in Asia, recent experience has reinforced the point that problems are more difficult to confront and far more painful to implement at a time of a global economic slowdown. The current upturn offers the best possible hope for putting in place macroeconomic frameworks and their institutional underpinnings that will deliver sustainable economic growth that, in turn, will raise living standards and reduce poverty.
Macroeconomic stability, accompanied by appropriate structural reform, offers individual countries the best hope of reducing their vulnerability to economic shocks and makes them more resilient, more able to withstand the effects of a global downturn in demand. Of course, the more resilient individual countries are and the more they can use countercyclical fiscal policies, the more sustainable the global recovery will be.
Sustainability is, in a sense, the core of much of the Fund's work. Our surveillance work has been strengthened. We now pay a great deal of attention to debt sustainability and to the underlying health of the financial sector. This enables us both to help countries reduce their vulnerability and to identify potential problems at an earlier stage.
As you know, the Fund has placed greater emphasis in recent years on helping our low-income members. Our concern is primarily with the macroeconomy, and it is worth noting that even in Africa some countries are making significant progress in moving toward macroeconomic stability that is a prerequisite for accelerated growth and, in turn, poverty reduction. Inflation is down, and growth performance is improving in several African countries as the benefits of reform begin to show through. The adoption of sound policies must accompany increased aid flows from donors if we want to see progress toward the Millennium Development Goals.
The Bretton Woods institutions will shortly be celebrating their 60th birthday. I think if you look at the Fund's Articles of Agreement, you will see that our core purposes have remained remarkably consistent over the years. The challenges are different, of course, and so are our responses to those challenges. But we remain committed to promoting economic growth through the expansion of trade and the maintenance of international financial stability. This weekend's meetings will, I hope, help us maintain a clear focus on how best we can carry on our work.
Now, I am sure you have plenty of questions, so I will hand it back to Tom, who is going to act as moderator.
QUESTIONER: I wanted to have your assessment of the discussion started in the Fund about public investments and national accounts; I know that you had at least two discussions already. Could you give us your assessment of that; what are the possible practical lines that discussion would lead to in terms of new developments; what is feasible, what is not? Second, when do you think that will become part of the formal agenda, if at all? Thirdly, why have you not released the paper that informed that discussion?
MS. KRUEGER: Obviously, getting good infrastructure is important for economic growth, and this is something that everybody recognizes. There can, however, also be some projects that are not necessarily so good. So, the first step always is to check and make sure that what is currently being undertaken is, indeed, the highest-return sorts of activities. There are some cases that I can—but won't—name, where that is clearly not true.
That much said, the second thing is that, also for growth, macroeconomic stability is important. Obviously, in cases where there is room and there is financing available, and where there are no macroeconomic difficulties of either two kinds—and I will come back to that in a minute—then there is no problem. The problem arises in countries where either there is already enough macroeconomic pressure or where there is a debt sustainability issue and where, for whatever set of reasons, countries cannot raise taxes or find other room within their budget to finance the appropriate infrastructure.
Now, the trouble is that, of course, if you increase infrastructure and you destabilize the macroeconomy, you might gain a little bit of growth on the one hand, but you lose probably a lot over here by the time you have to restabilize it. So, the question is, in circumstances where a country's debt is sufficiently high so that, even though it could borrow, it would do so only at the risk of getting its debt situation worse, what is the appropriate balance? That is where we have been grappling. We are trying to look and see if we can't find more ways to be constructive in terms of redirecting expenditures to other things within the fiscal accounts.
The one thing that is being specifically looked at in more detail is public-private partnerships. Now, the—and this gets even to the formal framework because it is an implicit answer, but it gets there—the real problem with public-private partnerships is that public-private partnerships can be very, very different. On the one hand, the government could pay somebody to build something and then operate it itself, taking all the financial risks, in which case this is a public activity and has no business being treated as something outside the public sector budget.
At the other extreme, the government could give someone a contract to build and operate something for 30 years and then transfer it, where that someone had to operate it regardless of losses and the private company would take the losses, in which case it could be treated as a commercial enterprise. The truth of the matter almost always lies somewhere in between, so the hard part is judging exactly where.
This is the problem with which we have been groping. We have been having discussions on these issues. I think we are making progress. At the moment there is no formal statement because we are not quite there yet in the sense that there is not an international consensus along these lines. I think the discussion is progressing well. I think there was—I am trying to remember where it was—there was a seminar last week that apparently went very well. So, I think we are making progress with it. The timetable is to get the formal thing done as soon as we think we have enough consensus and enough agreement on the underlying issues. When the paper will be released, I cannot tell you. I was under the impression that it had been.
MR. DAWSON: I think it is being reviewed in light of the comments both at the original informal Board seminar and then there was something we call an outreach seminar that took place that a number of officials, including Brazil, attended. But it will be out shortly.
QUESTIONER: The slogan of the IMF in almost all cases is macroeconomic reform, financial sector reforms, and structural reforms. In the context of India, what are the most urgent needs? Secondly, not in your capacity as Acting Managing Director but in your individual capacity, do you have any opinions on the freezing of the power structure in the World Bank and the IMF power structure is frozen while the world has changed and everyone has changed?
MS. KRUEGER: Let me turn to the first question, first. I think everybody knows that India's economic performance has been very, very good recently. The growth rate is, I think, probably at an all- time high or very close to it. A little bit of that is due to the reversal of the monsoon, but much of that is obviously due to some of the changes that have already been undertaken in India.
I think in the Indian case, however, many of us would argue that the fiscal situation is not sustainable, and I think the Indian government has already accepted that. I believe—but you know better than I—that the Fiscal Responsibility Law has been passed, and there are efforts being made to tackle the fiscal problem. I think most observers of India would think that that was the most important single issue. Obviously, as in every country in the world, there are many other things that need doing, but addressing that would be of critical importance.
As to the second question, in my official capacity, I cannot think about that issue, so in my personal capacity I don't.
QUESTIONER: Ms. Krueger, are we facing a crisis in social expenditure because of the level of indebtedness of the emerging countries, and I am specifically thinking about Latin America?
MS. KRUEGER: I think we are facing a slightly different crisis, which is to say a crisis in which we learn how better to manage and to direct and to target social expenditures to the relevant groups and how better all of us to manage government activities so that they are more cost-effective and achieve their desired goals. I think in Brazil's case, for example, yes, debt is an issue but, if I recall correctly, tax revenues to GDP are about 33 percent. Quite clearly, there are a lot of things that are being already spent that do not have to do with the debt and where there is room for reallocation and doing other things as well. I think some of that has to be done.
There are many countries in the world where programs are put in place that are intended—with good intentions—for social expenditures where, in fact, researchers can document that a very high percentage of the expenditures actually benefit the upper parts of the income distribution. I think we, and even more importantly the World Bank, are learning how to target more effectively, are learning how to alert those well-intentioned lawmakers that, if you do it that way, why you will be getting the benefits to not those you intend and otherwise improve the situation. My answer would be that not only the Fund, but the entire world is learning as we get more concerned with these issues, and I think we do need to focus more on getting appropriate targeted expenditures.
I find it very hard to say that the debt did it, in part because some of that debt was accumulated in order to finance the expenditures that everybody wanted at the time. Secondly, as I said, even in the more highly indebted countries, interest expenditures as a percent of the total are not that high.
QUESTIONER: You are urging countries not to postpone change. Do you see signs that this is happening? If so, where is it happening? Could you be a bit more specific on what needs to be done in particular countries, especially Germany?
MS. KRUEGER: Well, when I say they are postponing change, in many cases this is simply not doing it as rapidly as might be desirable. Obviously, one could go with structural reform more rapidly or more slowly, and the question is what is the ideal. You can't do everything at once; the question is what is the ideal rate at which you address the issues confronting you. As I was responding, for example, to the question about India earlier, India has a large fiscal deficit. They are addressing it, but it is still very large. In my judgment, the Indian economy, the Indian people, the Indian poor would be better off if that problem were more rapidly address.
So, it is not that they are not doing it; it's just too slow. Of course, when these problems aren't addressed, and especially where debt levels are high, what then happens is that in the next downturn there is no room for maneuver; there is no significant possibility for countercyclical fiscal policy, which then accentuates the downturn. So, we have some issues which if we could resolve, the whole world would be better off.
Therefore, we are urging, I suppose you could say in most cases, more speed with reforms. In Germany, we certainly urged that the structural deficit should be reduced at one-half percentage point per year. We have urged more rapidly addressing other things in the structural area. All of those are available on our website in connection with our Article IV consultations with Germany; they are public.
QUESTIONER: I would like to know what are the chances, in your opinion, of having a new emerging market crisis in the style of the 1990s? With the beginning of the rise in interest rates, some people in the private sector have raised that.
MS. KRUEGER: Well, we have been saying, also, that one of the reasons for addressing the issues now in terms of fiscal stance and debt levels, and so on, is precisely because the world economy is in a very good time and this gives an opportunity to, so to speak, batten down the hatches before the next upturn in interest rates.
Now, many countries, in addition to reducing their debt levels, have appropriately worked hard to restructure their debt, by which I do not mean a debt restructuring in the sense of redoing it with the private creditors; I mean that, as debt matures, instead of replacing it with two years, they replace it with four years. Instead of replacing it with foreign exchange-denominated, they replace it with domestic debt. As these things happen, the structures of the debt in many countries are getting more robust, the result of which is that the same increase in interest rates will not have the same effect immediately and will give more time for judgment.
So, in my judgment, the likely increase in worldwide interest rates will be fairly gradual. There will be time to adjust. There are a few countries whose debt levels are very high and who may not be taking appropriate measures, but of a generalized debt crisis of the kind you are describing that happened in the 1990s, which was not, I don't think, interest rate-driven anyway—
QUESTIONER: The 1980s.
MS. KRUEGER: Well, the 1980s was the oil price and that was a different issue yet again, and that was official debt also, by the way. In any event, I don't think that my worries are so much about that; my worries are much more individual countries and their abilities to get their fiscal balances where they can target much more of what they are doing toward the social, the infrastructure, and the other things that we all agree are priorities over the longer term.
QUESTIONER: With all the talk about fiscal deficits, to what extent are the twin deficits of the United States and their future projections of concern to your other members?
MS. KRUEGER: Well, I think there is concern among all of our members about what we call global imbalances. Now, those imbalances originate in significant part because the United States has been growing rapidly while the rest of the world has had very slow growth. In those circumstances, there has been a capital inflow to the United States and capital outflows from places where there are fewer investment opportunities.
On the other hand, the world economy would be far healthier if the Japanese and the Europeans were growing more rapidly as well. So, we have been urging the structural reforms, and so on, that we just talked about, in part to achieve that rebalancing that way. If that happens, I think that would automatically go some distance toward addressing the issue. I don't think anybody says that the American current account can or should be balanced in the short run, but some reduction in the current account deficit would clearly move in the right direction when spurred by accelerated growth in other parts of the world.
With regard to the American fiscal deficit, I think the really interesting question which is hard to answer is, what would have happened to the world economy had the Americans not had the rapid pick-up in growth over the past year or two? In a sense, instead of worrying about the past, I think the question is going forward; given that that did provide an important stimulus, how then does that get withdrawn, because I think there is nobody even in the American administration who says that the current fiscal position is sustainable over the medium term.
QUESTIONER: Coming back to the questions on the fiscal surplus and the social expenditure, in the case of Argentina there is this debate now about increasing the fiscal surplus, but the Argentine government is resisting this idea because of the social problems. How do you see the relationship between the social problems in Argentina and the payment of their debt?
MS. KRUEGER: Well, clearly both things came out of the Argentine social crisis earlier in the sense that there was a debt problem, and meanwhile one of the reasons that real GDP plummeted as rapidly as it did, especially in 2002, was precisely because of the default on the debt. So, in that sense, they are related in causation.
I guess if I have a disagreement with the Argentine authorities, I believe that in addressing the issue of poverty and social needs, the most important thing that can happen—not the only thing; social programs are important, and so on—but a very important thing is, of course, to get accelerated growth on a sustainable basis. I believe that getting a resolution of the difficulties with the debtors is going to be critical, because Argentina is going to need to increase investment as it goes forward if it is to sustain anything like its current growth rates, simply because it has had excess capacity and, as that capacity goes down, bottlenecks will appear without that investment.
So, I see addressing the issues, getting the debt issue behind, getting a stronger primary surplus, as related in the sense that that is what will give better assurance of the sustainability of growth. The authorities talk about these as being contradictory and then we look at, for example, Turkey, where they had a crisis that, in many respects, was as severe as Argentina, and they chose to maintain debt service and, in so doing, have been running a primary surplus of 6 1/2 percent of GDP while getting growth rates at around 8 percent and getting their inflation rate way down. It seems to me the record is not that these are opposing objectives but that getting economic growth back on a sustainable footing is an objective that requires, on the one hand, addressing the debt issue and, on the other hand, enables the alleviation of poverty.
QUESTIONER: It is quite common in Latin America that we hear analysts saying that Argentina went to a huge crisis after spending a decade in the 1990s as the darling of the international financial markets and international institutions. On the other hand, the same analysts say that some emerging markets in Asia that did not really follow the advice of the IMF and did not adopt particularly contractionist policies after the 1990s crisis are doing quite well now. This year, also, the IMF proposes or advises quite a few structural reforms and policies. Do you think that with this recent contemporary, this recent past, the IMF or international institutions' advisors are with their credibility at stake at any extent?
MS. KRUEGER: I am not quite sure how well that goes together. Obviously, the IMF is here as an official institution to lend into situations where private markets have not been willing to support countries and, in so doing, obviously there is an element of risk. My guess is that if we always got it exactly or if we always ex-post looked like we had it exactly right, we would have been too conservative and not been willing to take risks enough. On the other hand, there is such a thing as too much and I do think that judgment has to come into it.
As to Argentina in the 1990s, obviously there were a number of reforms that were undertaken and there were several years of very good growth. There was a fiscal problem that was not addressed and that came back to bite the Argentines big time, as we all know. So, it wasn't that everything was perfect but that there was a fair amount that had been done, it did have a payoff, and one of the lessons we learned from that is the importance of stressing sustainability.
QUESTIONER: You said the Bretton Woods institutions will have their 60th birthday shortly. What, in your view, is the major achievement of the IMF in all those years?
MS. KRUEGER: Well, let us just look back at all those years since, let's say 1948, something like that—or since 1944 if you want to take the 60 years—all of that includes the last couple of post-war years, which is what makes me a little more concerned. But if you take that period of time, the world economy as a whole has enjoyed a rate of economic growth never before realized in world history. We have had growth of international trade, we have had liberalization of trade which has spurred that growth. We have had living standards, life expectancies, any measure you name, not just incomes but life expectancies, educational attainments, and that has been closely associated with the achievement of, I think, a better framework internationally where international financial stability is important.
You can go further and talk about the inflation problems that many countries faced. I can recall in the early 1970s, when economists took it for granted that inflation had been rising throughout the world and would be rising gradually forever. I don't know how that was going to work out, but never mind. You can look now at price stability. It seems to me that the appreciation and understanding of macro stability, the opening of the international trading system, and the accompanying measures, even though we still have many poor people, even we have a lot to do, what we are forgetting is where things were at 50 years ago.
QUESTIONER: I wanted to ask you about oil and other commodities. Your growth forecasts are based on, I think, a US$30-barrel oil this year; US$27 for 2005. How do you rate the risks that growth in places especially like China and Asia will perhaps cause oil to be much more expensive than your price target, and how would that affect your rosy outlook for the world economy? The second question is with commodities as well: how important are high world commodities prices to continued economic growth, particularly in Latin America, Argentina and Brazil in particular?
MS. KRUEGER: Turning to oil first, of course there is some concern about rising oil prices. Our rule of thumb is to find the dollar increase in the price of oil probably takes 3/10 of a percentage point of world GDP off the growth rate. How likely we are to have something like that is, I think, very hard to judge. I think the Chinese recognize at the moment and have already taken some measures to try and somewhat cool down without freezing their growth so that they are trying to get back to what they would view as a more sustainable rate; the other Asian countries, also. So, I guess if I am worried about oil price, I am not quite so worried about it just because of Asia but because of other exogenous shocks along the way that might happen.
High commodity prices are quite clearly part of the good benign background against which everything is happening right now, so clearly they are a factor. They are not the only factor. To give you an example, I think it was last year where both Russia and Ukraine had very high rates of growth and everyone said, well, the Russian growth rate is because of the oil price. Well, what made that interesting is, of course, Ukraine is an oil importer and had almost exactly the same rate of growth. So, those things are there in the background. They are not the only things. They are more important, of course, for some countries than others.
QUESTIONER: In your report released yesterday, you said Venezuela is going to be the leading country in Latin America in economic growth this year, but next year is going to be the worst; from 8.8, Venezuela is free-falling to 1.1 for the next year. You also hint Venezuela as a potential country for popular unrest, and also you mentioned other countries in Latin America as a potential focus for that kind of political unrest. My question is what is wrong in Venezuela and how concerned are you for political unrest in Latin America?
MS. KRUEGER: That is a broad question; it goes over a lot of territory. I think it is well-known that in Venezuela there is a big argument under way currently, including the courts and everybody else, as to whether there should be a referendum as to the recall of the President after, I think, August 27th. There are a number of issues. There has been before resort to the streets there and, quite clearly, on the political side, I think one just has to read the news to know that there are some issues there.
As to the economics, they got a bounce-back this year. Remember last year, during that period of unrest, there was a period when oil production fell greatly. So, this year's very high rate growth has bounced back from that very bad part of last year, which is why we are not calling for that much more growth next year, given that we would had that much happening this year. So, this year's rate of growth is really the recovery, if you like, from last year.
As to other Latin American countries, I think it is well known that some of them had been experiencing difficulties. Some of them there is very little support for the current regimes. There have been street demonstrations, and other things. I think there have been four democratically-elected Presidents who have been removed from office in the past year, I think. So, in fact there is a great deal of evidence to suggest that there is some political unrest in a number of countries. That political unrest has political consequences, but it also has economic consequences in that when investors are uncertain and when people don't know where the government is going to go in terms of its regulations, that does serve as a deterrent to economic activity.
MR. DAWSON: Thank you very much. We will have the closing briefing on Saturday evening, and we will let you know the time. I would also note that Mr. Wolfensohn will have his briefing later today here in this room. Thank you very much.
[End of press conference.]
IMF EXTERNAL RELATIONS DEPARTMENT