Transcript of WEO Analytical Chapters Press Conference
September 28, 2012Washington, D.C.
Thursday, September 27, 2012
Jörg Decressin, Deputy Director, IMF Research Department
Abdul Abiad, Deputy Division Chief, IMF Research Department
John Simon, Senior Economist, IMF Research Department
Gita Bhatt, EXR External Relations Department
|Webcast of the press conference|
MS. BHATT: Welcome to this press briefing on the Analytical Chapters of the World Economic Outlook, Chapters 3 and 4. With us on the panel is John Simon to the far right. He is a Senior Economist in the Research Department who is the lead author of Chapter 3 on " The Good, the Bad, and the Ugly: 100 Years of Dealing with Public Debt Overhangs." And we have Abdul Abiad who is the Deputy Division Chief in the Research Department who is the lead author of Chapter 4 --"Resilience in Emerging Markets and Developing Economies: Will It Last."
I want to remind you that Chapters 1 and 2 of the World Economic Outlook, which includes the latest forecasts, will be released in Tokyo on October 9 just ahead of the Annual Meetings. This press briefing focuses only on the contents of these two chapters. The embargo on the press briefing lifts at 10:30 a.m.
Let me turn it over to Mr. Jörg Decressin who is the Deputy Director of the Research Department who will make some brief introductory remarks, and then we'll hear some of the main messages from our chapter team leaders. Thank you.
MR. DECRESSIN: Thank you, Gita. Good morning, ladies and gentlemen. The analytical chapters discuss two topics, government debt in advanced economies and economic performance in emerging and developing economies. Chapter 3 is titled "The Good, the Bad, and the Ugly: 100 Years of Dealing with Public Debt Overhangs”. The chapter focuses on the lessons that history can teach us about dealing with high debt burdens such as those countries are facing today. The lessons are sobering. Reducing debt burdens has proven very difficult. The historical record also shows that countries have successfully dealt with debt burdens that are as high or even higher than those we observe today. I will let John provide more details on how countries have dealt with these debt burdens and how they've been successful and how others have not been so successful.
Chapter 4 is entitled "Resilience in Emerging Market and Developing Economies: Will It Last." The chapter analyzes expansions and downturns in emerging and developing economies to help shed light on the past, present and prospective resilience to -- shocks. This is of particular interest now since these economies have accounted for the bulk of economic growth over the past couple of years, but they face significant risks on account of domestic and external shocks. Abdul will provide more details on that chapter. So without further ado, John, can you fill us in on Chapter 3?
MR. SIMON: Certainly. High debt is not a new phenomenon. There is a long historical experience in advanced economies of high debt. We analyzed this experience and draw three major conclusions in our chapter. First, debt reduction takes time. It is a marathon and not a sprint. Furthermore, successful debt reduction requires fiscal consolidation and a policy mix that supports growth. Key elements that we emphasize in the chapter and illustrate with particular case studies are supportive support monetary policy and measures to address structural weaknesses. For example, repairing the financial sector of an economy. Furthermore, because it's a marathon and not a sprint, fiscal consolidation must emphasize persistent structural reforms to finances over short-lived measures and fiscal institutions can help lock in gains achieved. Today we emphasize that the first priority must be to complement fiscal consolidation with measures to support growth, especially supportive monetary policy.
To step back a bit, and give you the background of how we reached these conclusions, what we do is we look at this historical record and then look at countries where debt rose above 100 percent of GDP and then ask “what happened next?”. We don't just focus on very large reductions. Indeed, what we find is that some of the more illuminating examples and lessons come from those countries that didn't reduce debt. Then when we look at those examples, we draw a few conclusions, and what I'll sketch out for you here is the conclusions in a couple of the case studies where they are illustrated clearly, but the lessons come throughout each of the case studies—just in differing degrees and with different emphasis. For example, the importance of monetary support. For that, if you look at the U.K. in the interwar period, you'll see they operated very tight monetary policy and very tight fiscal policy. Despite primary surpluses of 5 to 10 percent for many years, debt actually continued to increase over this period. The consequence of the tight monetary policy was deflation and very low growth and that is what ultimately undermined their debt reduction efforts. In contrast, the U.S. after World War II operated a very loose monetary policy and a tight fiscal policy and they were much more successful. Obviously that is drawing a very broad brush approach, many things were going on, but that contrast illustrates how we support the conclusion about monetary policy support.
The next one about persistent fiscal reforms over temporary or short-lived measures is illustrated clearly in the case of Canada where they had two phases of consolidation. In the first phase of consolidation, they applied broad brush, across the board cuts looking to get X percent gains out of each -- but they didn't emphasize structural reforms. In a second phase which was much more successful, they actually looked at particular programs, unemployment, pensions, and thought about structural sustainability of these programs going forward and changed them in such a way that the changes they made were persistent and enduring which means that instead of in the first case the gains fading after a few years as it got hard to keep grinding down year after year by making those structural changes it was much more resilient and enduring change which helped them get the debt down over the -- decades.
Finally, fiscal repair and debt reduction takes time. The clearest example of this might be in the case of Belgium who spent approximately 10 years to move from a primary deficit to a primary surplus and the speed they did this which was about 1 percentage point per year is among the fastest that countries have achieved, but this goes to emphasize that if you're starting from a primary deficit, it can take you a long time to turn that around before you can even start thinking about the debt coming down which requires those primary surpluses. So this is to emphasize that it takes time.
To summarize the findings, we emphasize that you need to support growth through both monetary and structural measures, and of course debt reduction takes time, fiscal efforts need to be enduring. Thank you.
MR. ABIAD: Chapter 4 of the upcoming WEO is on the resilience of emerging market and developing economies. The chapter discusses how resilience—which we measure by these economies’ ability to sustain their economic expansions and how quickly they can recover from downturns—how that resilience has evolved over time. We also look at what factors have supported their strong performance, and whether we should expect this strong performance to continue. As Jörg mentioned, this is particularly relevant at present because the global recovery remains slow and bumpy, and there are many risks facing emerging and developing economies, both external and domestic.
To shed light on the resilience of these economies, the chapter looks at expansions and downturns in more than 100 emerging and developing economies over the past six decades. What we find is that the resilience of these economies is not a recent development, but rather, the result of steady gains in performance over the past two decades. These economies are now spending more time in expansion, and their downturns and recoveries have become shallower and shorter, as you can see in Figure 1 of your press points, and in the chart up here on the screen. In fact, the past decade was the first time that emerging and developing economies spent more time in expansion and had shallower downturns than advanced economies. It's important to note that it's not just large emerging markets like China and India, or commodity exporting countries like Brazil, Chile and Russia, that are driving these results. The improvement in performance, as we note in the chapter, is pretty broad based. You see it in low-income countries as well, and you also see it in non-commodity exporters.
This doesn't mean that emerging and developing economies have become immune to shocks, however, whether external or domestic shocks. Among external shocks, we find that recessions in advanced economies and sudden stops in capital flows both double the likelihood that expansions in emerging and developing economies will come to an end. The effect of domestic shocks is just as strong, if not stronger—credit booms make it twice as likely and banking crises make it thrice as likely that an expansion will become a downturn in the following year.
So if shocks can easily derail expansions in emerging and developing economies, what accounts for their improved performance over the past few decades? What the chapter finds is that the bulk, about three-fifths, of the improved performance is due to better policies, and more room to adjust policies, what we refer to as “policy space;” you can see this in Figure 2 in the press points and up here on the screen. Simply put, many emerging market and developing economies have become better at policymaking. More have adopted inflation targeting and flexible exchange rates, for example, and their fiscal and monetary policies are now more “countercyclical” than in the past, and by that we mean that they stimulate the economy when it's weak and they rein it in when it's overheating. These economies have also built up more room to adjust policies, thanks to lower inflation and better fiscal and external positions than they had in the past. These together suggest that some optimism about the prospects of these economies is warranted.
But there are also some reasons to temper that optimism somewhat. As you can see from the figure, less frequent external and domestic shocks account for the remainder, about two-fifths, of the improved performance. And there is no guarantee that the relative calm these economies have enjoyed over the past few years will continue. There's a significant risk that advanced economies could experience another downturn, for example, and in such an event, emerging market and developing economies will likely end up “recoupling” with advanced economies, much as they did during the Great Recession. Domestic vulnerabilities could also reemerge—in fact, you're already seeing a slowdown in some key emerging markets.
To guard against such risks, these economies need to rebuild their buffers. One reason these economies did well in the global downturn in 2009 was that they appropriately used their policy space—many countries increased spending and lowered interest rates to support economic activity. That policy space needs to be restored, by reducing fiscal deficits and keeping inflation in check. In addition, these economies will be more resilient to new shocks if the improvements in their policy frameworks—things like greater exchange rate flexibility and more countercyclical macroeconomic policies—is maintained in the coming years. Thank you.
MS. BHATT: Thank you, Abdul. With that we'll open it for questions and I will be taking a few questions online as well. Do we have any questions?
QUESTIONER: I have a question first for Mr. Simon about -- policy in the United States. Just now you said fiscal repair and debt reduction take time, but the United States has urgent needs to address the fiscal cliff which looms ahead at the year's end. On one hand -- contraction is good for the United States to reduce its high public debt and put it onto a more sustainable path. But on the other hand, such significant -- contraction could pose a threat to its economic recovery. What do you think the United States needs to do to avoid the devastating effects of the fiscal cliff? Thank you.
MR. SIMON: On the specifics of the U.S., that's something that is probably best thought about in terms of Chapters 1 and 2 release because that looks very much at the current conjuncture. But more broadly speaking, what we have emphasized is that supportive monetary policy is important and you notice in the U.S. that monetary policy is very supportive so we say that this is a good thing. We've also emphasized that it takes time. We didn't go into the details of each given country what the particular year to year timing was, we just observed that over a run of 10 years moving at about 1 percentage point per year was about what countries achieved, but that of course allows for many variations along the road whereby you might do more in one year and less in another. What we do emphasize, however, is that fiscal consolidation is needed and when you do that fiscal consolidation we emphasize that you need to do that in a growth supportive way so that means looking at structural reforms as I said in the case of Canada. When you think about the ongoing sustainability of various programs you have and by doing it in that way you can ensure that this is a gain that keeps on giving as you go forward. So those points would be the suggestions we've had in the case of the U.S.
MR. DECRESSIN: And maybe to add here, our Managing Director has recently given a very clear message on the fiscal cliff. Obviously we do not want the U.S., so to speak, to jump over the fiscal cliff. There needs to be fiscal adjustment at a reasonable pace and there is also an urgent need for a medium-term fiscal plan, but the fiscal cliff should be avoided at all costs.
QUESTIONER: I was wondering -- whether you looked at some of the cases where there has been this kind of debt overhang in advanced economies and how long it takes for them to come back and to repair their balance sheets. Have you looked at anything on that?
MR. SIMON: If you look at one of the early figures in the chapter you'll see what we show what the experience is by looking at all the cases and looking at what happens on average and we find that the median experience over 15 years is for actually a modest reduction, about 10 percentage points lower at the end of 15 years. Within that median experience there is obviously a very wide range of what's gone on. You have some countries in that you'll see U.K. between the wars where debt kept increasing. In other cases, for example, the U.S. after World War II debt decreased quite dramatically. What we see in those cases is even for example in the case of the U.K. which actually didn't get its debt down to pre-World War I levels until the 1990s or at least it got it back down to a level approaching that, it spent much of the 20th century with very high debt, it managed to do that. Other countries were more successful. What we are also emphasizing is high debt levels have been dealt with in the past successfully even though they were at high levels than today.
QUESTIONER: You mentioned on several occasions in the report that the external environment -- you say countries should -- expectations -- percentage points per year for instance. My second question would be you have some -- and saying you can only make limited progress until some action is taken -- could you -- exactly what you see will make a difference --
MR. SIMON: On the first question, perhaps the case of Italy in the 1990s is the most apposite what you see there is that they didn't have the support of the external environment. Their growth was quite low. They didn't get the trade benefits. But they still managed to reduce their debt from about 120 percent to about 100 percent over the course of about 10 years. So that's to say that even when you don't have that supportive environment, you can still expect to make progress on reducing debt. Obviously it would be nicer if you had a much more supportive external environment and there you might hope for much greater gains, but that is at least a suggestion that debt can be reduced in those circumstances. For peripheral Europe I think the point to emphasize is the three points we've made, that the recipe in general always looks very similar for these countries that are successful. There are particular circumstances that mean that each case has unique features that need to be accounted for so obviously in the case of peripheral Europe and the monetary union this adds a wrinkle to things. But supportive monetary, structural reforms and fixing structural issues with the economy are all good things to be done and would suggest that those are also just as applicable to peripheral Europe today as they were to the U.K. in the 1920s and so on.
MS. BHATT: Do you have a follow-up?
MS. RASTELLO: It's just that it's broad but it's not very precise. My question -- in general because you have this average that you mentioned -- would you say the average that we saw is something realistic in the current circumstances? Also -- external environment I take it is global demand, global growth --
MR. SIMON: I think you've got it right on the external environment, and what we observed when we looked at for example changes in primary deficits we saw that over a 10 year period the fastest improvements in that happened at about 1 percentage point per year. So if the history is a guide, that strikes me as something that is attainable. The reason why you have this pace is that for example recessions happened that year seven or eight, so it's not a case that in any given year one can't go faster than 1 percent, it's just that a sustainable change we see if you look at 10 year periods rather than on the short term, we saw that in the case of Belgium this was among the fastest. Italy also managed to do that in a similar period of time about 10 percentage point change in the primary balance over 10 years. That is what happened historically and strikes me as something that would be a good benchmark to think about it but it doesn't mean over 2 or 3 years one might not go faster, just that one shouldn't expect to continue going at that kind of pace over a decade.
MS. BHATT: I'll take a question online for Abdul. The question: I'm interested in views on the response among major emerging markets to their slowdown. Should they be doing more and doing it faster? Is more cyclical stimulus in order? Is this likely to slow momentum for underlying reform in favor of short-term measures?
MR. ABIAD: Emerging markets are a pretty varied group, and for our specific policy recommendations for specific countries I would refer the question to the Chapter 1 press conference on October 9. Let me say more generally that the reason that these economies are doing better is because they've become better at policymaking, they've been able to avoid some domestic and external shocks, and they've had policy space to respond. They still have that policy space, but the amount of available policy space varies from country to country. Generally speaking, you see that fiscal balances in emerging and developing economies are still lower, or deficits are larger, than they were prior to the global crisis; and interest rates are lower. In general, they have less space. Some countries have a bit more space, some have less, but the general message is that these countries should still continue to rebuild their policy space so that if growth slows more dramatically than expected than desired, they can respond. Again, it does vary from country to country.
QUESTIONER: My question is on the impact of the quantitative easing on emerging markets -- bring down the unemployment rate in the United States and also stimulate its economy, but at the same time it's going to bring -- to the emerging markets such as the hike in commodity prices -- what do you think are the major impacts brought by QE3 and other easing policies on emerging markets including China? What can they do to minimize those risks? Thank you.
MR. ABIAD: It's true that monetary easing in advanced economies both in the U.S. and Europe has many effects. In general I think the Fund's view is that monetary easing in these economies, to the extent that they help avoid a downturn in the advanced economies, is a net plus for the global outlook. One of the key results in our chapter is that recessions in advanced economies double the likelihood that expansions in emerging and developing economies will come to an end. So to the extent that you can avoid a downturn in advanced economies, that's a big advantage. And given that many advanced economies don't have room on the fiscal front and they need to consolidate, many households need to rebuild their balance sheets, and the banking sectors are weak, monetary policy is one of the few levers they have to boost growth and to avoid the downturn.
MS. BHATT: On a related theme, there's a question online from Brazil: How important was the build-up of massive foreign reserves for making emerging markets more resilient to external shocks?
MR. ABIAD: In our chapter we do find that better external balances have helped these economies. One interesting fact is the improvement in external positions and reserve positions wasn't limited to just the Asian countries that we often hear about. You also see this improvement in low-income countries, for example; reserve levels have gone up there as well, so in general it has helped. I would like to point out two other things though. In some countries, reserve levels and external positions are such that they have more than sufficient buffers, so that increasing policy space along that dimension is not really needed. In fact, we've called for countries which have particularly large surpluses to help in global rebalancing, and that's something that will be discussed on October 9. The other is that there are also costs to accumulating too much reserves, so that that is something that also needs to be taken into account.
QUESTIONER: On the European Union and the way it's dealing with its debt and deficit reduction, do you feel that where we stand right now that the balance has been struck correctly in terms of the pace of getting the debt and deficits down? And is there light at the end of the tunnel?
MR. SIMON: I think questions about the current conjuncture are always tricky. What our research shows is that there is a tricky balance to be forged, but I think history does suggest that there is a light at the end of the tunnel in the sense that countries have dealt with debt burdens similar to today, that they've dealt with debt burdens in circumstances similar to today and they have successfully dealt with them. The debt has come down. What we take from this is I think there are grounds for optimism that this will pass, but for the specifics or any individual program right or wrong, that's very much a more specific question for either the outlook or for the particular teams working on those countries.
QUESTIONER: My question is about Greece -- is there space for optimism about the efforts of this country to reduce its debt burden based on the fact that circumstances are not so good and there is a very deep recessions in the country?
MR. SIMON: Perhaps I should emphasize that debt reduction in the historical record is not an easy or painless path, but it is a path that exists. So grounds for optimism? I think one can talk about that one can foresee successful resolution of the problems. That doesn't mean however that one can foresee it being done without pain. If you look at the U.K., they had a long period during the 1920s when they had very high unemployment, practically no growth, their debt kept on climbing, it got worse with World War II, but ultimately they did get their debt down. So I think this says that these problems can be surmounted, but they can't be surmounted easily.
MS. BHATT: I'm going back to a question online. What are the effects on the global economy if emerging economies' expansion period is halted? What are the odds that advanced economies have backed into a downturn -- basis for Chapter 4? How should emerging markets build their policy buffers?
MR. ABIAD: On the first point, Figure 1 of the chapter shows that emerging and developing economies account for the bulk of global growth now, so if there is a substantial slowdown in emerging and developing economies, this doesn't bode well for the global recovery. On the question of how should emerging markets build their policy buffers, there are several dimensions to this. On the fiscal front, fiscal deficits now are still higher than they were prior to the crisis, and basically there's the need to bring down these deficits; this is more true in some regions than in others, but there's the need to improve fiscal balances so that they have room to respond should a negative shock materialize. On the inflation front, inflation is under control in many of these regions and there it's a matter of being vigilant. Many of these economies have paused their easing cycles. Credit growth is a worry in some economies that have had rapid credit growth in the past years, and there our message is really that they should keep credit growth at moderate levels and be vigilant to risks to financial stability. Lastly, one important point is on the structural front—that in many of these economies there is still room to boost domestic demand and in some emerging economies such as China, the key is basically to boost consumption and in others the more critical aspect is boosting investment.
QUESTIONER: I want to follow-up on the other questions. Is it not true that during a time of crisis -- slowdown that it is more difficult those changes and that countries are more in a kind of crisis prevention mode than they are about strengthening their economies? Can you talk a little bit about that shift that has to happen? Also the idea a lot of these economies especially in Asia have been reliant on exports. When that slows down, what did you learn from the financial crisis in turning that --
MR. DECRESSIN: If you look at growth rates in the emerging economies and what we've projected, for example, in our July 2012 WEO update, the growth rates are still higher than what they were on average in the 10 years before the crisis, so there's pretty solid growth still. It's important that these economies rebuild buffers for dealing with bigger shocks again so that's why we think that it's still appropriate, on average, for these economies to bring their fiscal balances back to where they were before the crisis and to strengthen their financial systems, many of which have seen a rapid increase in credit over the last few years. So that's the message for the typical emerging or developing economy. That leaves them still monetary policy as a tool to do something about the economy. And obviously the situation differs from one emerging economy to another. Some have more fiscal room, others have more room on monetary policy. That depends.
QUESTIONER: May I follow-up on that? On the monetary policy when you've got a slowdown in the global economy plus you've got higher food prices coming up which we've seen -- how does that --
MR. DECRESSIN: On this we have a WEO chapter in September 2011, and the message there is very clear. It says that central banks should look through the variability that comes from food prices for national price levels. Food prices or other commodity prices are very variable. You do not want to have monetary policy being held hostage to very volatile prices. So you want to look through these price increases and, at the same, clarify that if food price increases threaten to lead to generalized price increases, then there will be monetary tightening to avoid that there is broad based inflation.
MS. BHATT: I have a question online. Please could you speak a little more about the impacts of a slowdown of investments -- China to emerging markets especially to Brazil.
MR. ABIAD: We actually have a special section, a box, in our chapter that deals precisely with this issue of what kind of impact would an investment slowdown in China have on other emerging and developing economies. What that box finds is that there are two emerging and developing economy groups that would be particularly hard hit. One includes economies in Asia that are tightly linked in the regional supply chain. These include economies like Korea, Malaysia and Taiwan Province of China. What the box finds is that a 1 percentage point decline in Chinese investment growth has a substantial impact on growth in these economies, on the order of half a percentage point to three-fourths of a percentage point. The other group that would be substantially impacted by a slowdown in investment in China are commodity exporters, and among this group it's particularly the mineral exporters and especially those which have less diversified production bases and which have a higher share of exports to China that would be most affected. Growth there might decline by about a third of a percentage point for a 1 percentage point decline in Chinese investment growth.
MS. BHATT: This is a related online question on Chapter 4. Question: Brazil does not enjoy a growth rate as robust as others. Forecasts for this year are already under 2 percent. To what extent can this erode its resilience and what other factors can?
MR. ABIAD: I guess the question here is when there's a substantial slowdown, does that make economies less resilient? Is there something like -- that we have found in the chapter -- growth so low that the economy goes into a dive. What I'd say there is the fact that some key emerging markets including Brazil are are slowing -- it’s something that we need to watch very closely. What is true however, as we emphasize in the chapter, is that these countries have established a track record over recent years of responding when the economy slows down more than expected. In addition, Brazil and these other economies still have some policy space to respond, again, if the slowdown is sharper than expected. So, it’s in that sense that we are cautiously optimistic that the slow downs that we’re seeing in these economies is a soft landing—a gradual slow down from pretty high growth rates—rather than a hard landing.
MS. BHATT: Any questions from the floor? We have one more online: “Given your analysis, could you comment on Portugal, the debt GDP of 124 percent in 2013, low growth export, exports concentrated in the eurozone, weak financial system, high private and public interest rates also resulting from impaired monetary transmission mechanism. How likely is some kind of restructuring?” We may not be able to answer specifically to Portugal but maybe John can say something more general on this?
MR. SIMON: I think as I’ve emphasized in those circumstances you can’t expect dramatic reductions but the case of Italy, they were at 120 percent; they managed to reduce it in an environment of low growth and relatively high interest rates at first are down to about 100 percent over the course of a decade so this suggests that if you get that monetary support, if you get enduring fiscal changes, you can expect that imporovements will be made. The specifics of Portugal -- I’m sure there are many other factors that one would have to consider but I’m just saying that on that sketch of the facts there are other countries that have dealt with problems that have looked very similar successfully.
Mr. DECRESSIN: And let me just clarify, you’re talking about the experience of Italy in the 1990s?
MR. SIMON: Yes.
MS. BHATT: Any other final questions? If not, thank you all for coming. Hope to see many of you in Tokyo. And thank you to the chapter team leaders.