World Economic Outlook - Trade and Finance
September 2002

Transcript of a Press Conference Call on the World Economic Outlook Analytic Chapters

Other issues of the World Economic Outlook

Research at the IMF

The WEO Database,
September 2002, will be made available on September 25

Transcripts of video presentations on the analytical chapters of the September 2002 World Economic Outlook
by Kenneth Rogoff, Tamin Bayoumi, Stephen Tokarick, Luis Catão and Thomas Helbling

Transcript of a video presentation by Kenneth Rogoff,
Economic Counselor and Director of the Research Department, on the analytical chapters of the September 2002 World Economic Outlook
Washington, D.C., September 12, 2002

Greetings, I am Kenneth Rogoff, Economic Counselor and Director of the Research Department at the International Monetary Fund.

Welcome to our video presentations on the analytic chapters of the World Economic Outlook. Since you are already on our webpage, you probably also know we are charged with helping to maintain global financial stability and growth. As part of these efforts, the IMF publishes, twice a year, the World Economic Outlook. The first chapter, as usual, gives our forecasts for the global economy and our assessment of policies and prospects across the membership. Each issue also includes analytical pieces that provide long-term background research on the issues we cover.

In this issue, the spotlight is on international trade and its links with finance. In our view, these links are critical. Obviously, if a country substantially shuts itself off from international trade, it is going to have a hard time borrowing, since creditors know it will be pressed to come up with hard currency to pay its debts. On the other hand, anyone who has ever tried to conduct trade in a country with heavy exchange and capital controls or excessive bank regulation knows that it's really difficult.

Let me just say a word or two about the individual analytical pieces. In one essay, we study in depth why we think that the current nexus of global current account imbalances among the industrialized countries cannot last indefinitely.

Another essay looks at the huge benefits that could be reaped—well over a hundred billion dollars—by liberalizing heavily regulated world markets for agricultural goods. We conclude that industrialized countries—who on average give their farmers 30 cents for every dollar they earn—have the responsibility for taking the lead in this area. That said, the costs to developing countries of their own obstacles to trade are even greater than those imposed by industrial country protection.

Another essay looks at how firms and corporations have adopted their financial structure in response to increased globalization. It concludes that countries at an intermediate level of financial development are the most vulnerable, and need to be monitored.

Finally, we have an extensive chapter on trade and financial integration. We find that over the course of history, the two have often gone hand in hand and, with good reason. Openness to trade reduces the risk of financial crisis, and financial market openness reduces output volatility, thereby expanding trade. But there are risks when the growth in trade and finance becomes uneven, particularly when financial integration gets too far ahead of trade integration, something that is usually policy driven since it is not the natural state of affairs.

By the way, in case you were wondering, we at the IMF tend to agree with the widespread view of economist that trade and financial integration are largely a force for the benefit of mankind: globalization has done far more good than harm. Nevertheless, problems can arise if we do not constantly work to improve the process. Studies such as this one help us understand the issues and, at the end of the day, help us how to make the system work better for the benefit of all.

So there you have it. We hope you enjoy the video presentations.

Transcript of a video presentation by Tamim Bayoumi,
Chief of the World Economic Studies Division in the Research Department, on the first essay of Chapter II of the September 2002 World Economic Outlook
Washington, D.C., September 10, 2002

Hello, my name is Tamim Bayoumi and I want to talk to you about the essay "How Worrisome are External Imbalances" I wrote with Marco Terrones in this WEO.

What is the essay about? Well, you are probably aware that the U.S. is running a large current account deficit—actually its at a historical record, leading to questions as to whether the dollar is overvalued. Because one countries' deficit is another countries' surplus, however, deficits in the U.S. and other countries, such as the U.K., imply surpluses elsewhere, most notably in continental Europe and Japan. Indeed, for every $100 produced, the surplus countries spend only about $97, while the deficit countries spend around $103. We assess the risks that these imbalances will unwind quickly, resulting in potentially disruptive exchange rate movements across the major currencies and dislocations to the global economy.

The first issue we deal with is whether policymakers should be concerned about current accounts at all. There is a view out there that the current account is an outmoded concept in an increasingly interlinked world. We do not agree. Despite all the talk about globalization, levels of trade between countries are moderate, so an adjustment of just a few percent of GDP in the trade balance implies significant changes to the tradable good sector and large exchange rate movements.

We then ask why external deficits and surpluses have expanded from near balance in 1990 to their current levels. Part of the reason is that the deficit countries have been growing faster than those in surplus. But we also find that the financial excesses of the IT revolution drew investment from abroad that allowed the real exchange rate to appreciate in the deficit countries, facilitating large current account deficits. We argue that existing current account deficits and surpluses not are viable over the medium term, largely because they imply deficit countries such as the U.S. and U.K. will become ever larger debtors to the rest of the world, and surplus countries such as Japan ever larger creditors.

A key question that arises is if spending falls in the deficit countries as the external deficit comes down, will this shortfall in spending will be made up by higher spending in the surplus countries or by lower world growth. We argue that existing structural impediments in much of Europe and east Asia may make it difficult for these regions to increase their demand rapidly, so there is a danger that a rapid unwinding of the imbalances could lead to a slowing of global output.

What does all of this mean for policy makers? Given that exchange rates are so unpredictable, macroeconomic policies should not be directed to a specific current account balance, but policies should be set to minimize the risk of rapid current account adjustments, particularly if this achieves other desirable medium-term objectives. In the deficit countries, this reinforces the argument for credible plans for medium-term fiscal consolidation as our analysis indicates that a tighter fiscal policy appears to diminish the likelihood of a rapid adjustment of large current account deficits. In the surplus countries, the main policy imperative is to press ahead rapidly with needed structural reforms, for example to make labor markets more flexible in continental Europe and the banking sector more efficient in Japan. By creating a more dynamic environment, such reforms would increase the likelihood of a smooth rotation of demand from the deficit countries to the surplus countries.

Transcript of a video presentation by Stephen Tokarick,
Senior Economist in the World Economic Studies Division of the Research Department, on the second essay of Chapter II of the September 2002 World Economic Outlook
Washington, D.C., September 12, 2002

My name is Stephen Tokarick and I want to give you a preview of the contents of the essay titled "How Do Industrial Country Agricultural Policies Affect Developing Countries?"

There has been a great deal of discussion recently regarding how rich countries can help poor countries develop more rapidly. In this context, agricultural support policies in industrial countries have come under intense scrutiny because of the impact they have on farmers in poor countries. Such support by rich countries encourages excess production by their farmers, lowering world food prices and hurting farmers in poor countries. Liberalization of agricultural trade will feature prominently in the current round of multilateral trade negotiations—the Doha Round.

Support provided to farmers in industrial countries is extremely high, amounting to over 30 percent of farmers' income in 2001. It is generally highest in food importers, such as Japan, Korea, and Switzerland, and lowest in food exporters, especially Australia and New Zealand. The United States and the European Union fall between these two extremes.

Removal of agricultural support in industrial countries would raise real income in the world by at least $100 billion a year—and possibly 2 or 3 times that—with most of the gains accruing to industrial countries—illustrating the well-known result that most of the gains from trade liberalization accrue to the liberalizers themselves. Developing countries would also gain, in an amount equal to one sixth of aid flows. The gains are particularly large for food exporting regions such as sub-Saharan Africa (where many of the world's poorest live) and Latin America. Only one region, the Middle East and North Africa, loses mildly as it is a large importer of food.

Removing agricultural support by developing countries provides even larger benefits to the developing world. This result underlined the importance of removing support in a multilateral manner, such as under the Doha Round. Indeed, if agricultural support were removed in all countries simultaneously, all regions of the world would be better off.

The effects of liberalization vary by commodity and country. For example, removing industrial-country support to the cotton sector benefits some poor countries in Africa and the former Soviet Union, while liberalization of grains, such as corn and wheat, would hurt many poor countries, as they are importers. Indeed, a limited number of countries that are significant importers of food may be harmed by the increase in world food prices following liberalization. This concern arose in the context of the last round of multilateral trade negotiations—the Uruguay Round—and special provision was made for these countries through greater aid.

What are the policy implications? Industrial countries are clearly best placed to take the lead in agricultural trade liberalization, given their wealth and the small size of their agricultural sectors. Liberalization by industrial countries would also provide a strong signal to developing countries about the importance of removing their own barriers to trade. Elimination of such support, of course, will involve difficult political decisions, as some will benefit and some will be hurt. Reforms are best achieved in a multilateral setting, although if this is not possible, unilateral liberalization could provide significant benefits.

Transcript of a video presentation by Luis Catão,
Senior Economist in the World Economic Studies Division of the Research Department, on the third essay of Chapter II of the September 2002 World Economic Outlook
Washington, D.C., September 10, 2002

My name is Luis Catão and I would like to use this opportunity to talk about some of the findings of my work on "Corporate Financial Structure Across Emerging Markets" co-authored with my colleague Hali Edison and featuring in chapter II of this WEO.

As the various financial crises of recent years have shown with a vengeance, the health of a country's corporate sector is a key ingredient to the economy's capacity to weather periods of financial difficulties or even of political instability. Against this background, this essay looks at several indicators of corporate health and performance in 18 emerging market economies and tries to explain some of the main observed differences across countries and regions.

One of the findings of the essay is that corporations in east Asian emerging markets depend more on debt - i.e. they have a substantially higher ratio of debt to assets and debt to equity —than is the case among Latin American and Emerging European corporates. Looking at individual countries outside Asia, we also find that reliance on debt increased considerably in Argentina and Turkey in the late 1990s, i.e., in the run-up to the economic difficulties the two countries are currently experiencing. Moreover, we also find that East Asian firms rely relatively more on short-term debt, even though this reliance has also increased in some other countries outside Asia in recent years. As some of you may know well, reliance on debt and particularly on shorter-term debt was a main source of problems during the 1997/98 Asian financial crisis, since it tends to put considerable strain on one's finances during periods of business downturns. In these circumstances, it sometimes follows that a large number of firms are unlikely to be able to meet their debt obligations, with adverse effects on the health of banks and, indirectly, on the public finances too.

So, a key question is why the corporate sector in some countries tends to rely more on debt. In this WEO chapter, we highlight two main reasons. One is that as the financial system develops rapidly— i.e., banks are flooded with household savings and become more agile in lending money—corporates find easier to borrow and indebtedness tends to increase. This is in principle a good thing since firms invest more and create more jobs, but it may—and in practice it commonly does—lead into excesses. To avoid these excesses, it is therefore important that policy makers pay special attention to strengthening banking supervision and prudential regulations and, whenever possible, avoid overheating of the economy. This is an important policy implication of our study.

The other factor that we also find to help increase excessive resilience on debt, and in particular on short-term debt, is when the economy is close to foreign investment. In other words, if an emerging market economy is more open to foreign investors, firms in that economy tend to find it easier to sell equity and reduce their dependence on shorter-term domestic debt. So, in this sense, greater openness tends to contribute positively to corporate health. This is another main policy implication arising from our research.

A more comprehensive discussion of these and other related issues is provided in the WEO chapter. I hope you will enjoy reading it.

Transcript of a video presentation by Thomas Helbling,
Senior Economist in the World Economic Studies Division of the Research Department, on Chapter III of the September 2002 World Economic Outlook
Washington, D.C., September 10, 2002

Hello, my name is Thomas Helbling and I want to talk to you about the Chapter on "Trade and Financial Integration" in this WEO. A team headed by James Morsink and including Silvia Sgherri and myself wrote the chapter.

What is the chapter about? It is all about the interaction between trade and financial integration. What was the motivation? First, it is a timely topic at a time when the costs and benefits of international economic integration—or globalization in short—are the subject of fierce debate. Second, we were intrigued by the observation that the rapid increase in international trade and financial transactions compared with national incomes is not unique to the current wave of globalization but a typical pattern. Historical experience suggests that international trade integration and international financial integration are complementary; they tend to move together over time and across countries.

A first issue we look at is that of why trade and financial integration are complementary. At a basic level, the complementarity is intuitive. International trade is accompanied by international financial flows, so that greater trade increases the demand for cross-border financial transactions. At the same time, greater financial integration among countries facilitates international trade transactions. More fundamentally, there are two basic forces driving integration across the two spheres—policy liberalization and technology. In the last major episode of globalization, which economic historians usually date from 1870 to 1914, technological advances in transportation and communication technology were the most important factor behind international economic integration. In contrast, in the current period of globalization, integration has been driven mostly by the reduction of policy-related barriers to trade and financial integration, in short, by policy liberalization.

If integration is largely driven by policy liberalization, as in the current period, the sequencing of policy reforms matters. Specifically, we find that integration in both the trade and financial domains is necessary to reap the full benefits of globalization. Countries with balanced patterns of integration—that is, countries that are open to both trade and finance—have smaller risks of external financial crises and lower macroeconomic volatility compared with countries that are less integrated in both spheres.

The recent experience clearly illustrates the risk of imbalanced integration, especially for the case of financial integration leaping ahead of trade integration. Countries that are open to international finance but are relatively closed to trade remain subject to significant risks of an external financial crisis, as trade may not generate sufficient foreign exchange to counter volatile capital flows. Many countries in Latin America fit into this category, which explains in part the increased frequency of financial crises or financial market turmoil more generally in this region.

This recent experience with uneven integration dynamics begs the question of why some countries are more integrated into the world trade system than others are. In a detailed empirical analysis, we look at the role of the main factors in determining levels of merchandise trade. The factors include geography, especially the distance to trading partners, the level of development, as richer countries tend to trade more with each other because their demand is more diverse, and, of course, policies The results indicate that both geography and development are important determinants of trade levels. In addition, however, artificial barriers to trade remain a serious impediment to trade integration in most developing regions, especially in Latin America, the Middle East and North Africa, and South Asia.

What does all of this mean for policy makers? With the launch of the Doha round last November, and the recent approval of "fast-track authority" in the United States, trade liberalization is rightly once again a central focus of international economic policy. Indeed, some illustrative calculations in the chapter show that the removal of all remaining trade barriers in all countries would increase world trade flows substantially. Nevertheless, focusing only on trade liberalization would be shortsighted. All evidence points to the fact that trade and financial integration tend to reinforce each other so that the full benefits of globalization come from liberalizing both trade and finance. As in so many other areas of economic policy, a comprehensive approach to opening up to the rest of the world produces the best results.