September 18, 2002
Greetings, welcome, and thanks to all the participants in this conference call. As you know, the IMF publishes, twice a year, the World Economic Outlook. In the current issue, as usual, the first chapter gives our forecasts for the global economy and our assessment of policies and prospects across the membership. In addition, the September 2002 version of the World Economic Outlook (WEO) contains two chapters on trade and its links with finance.
Why so much focus on trade in what is, after all, a quintessentially macroeconomic publication? A narrow explanation would be that forecasts of world trade have always been a central element of the WEO. But our real reasons for concentrating more on trade and finance run much deeper. In our view, these linkages are inseparable. We also believe that you will find the issues timely, given renewed concern about the international debt problems facing some relatively closed emerging markets, the continuing multilateral negotiations on lowering trade barriers under the Doha round, and heightened concerns that prolonged exchange rate misalignments may be exacerbating protectionist pressures in some major countries.
Let me just say a word or two about the individual chapters. In the first essay of Chapter II, we study in depth, whether or not the current constellation of global current account imbalances among the industrialized countries is sustainable. We find that if history is any guide, it clearly is not. There has been much attention focused on the U.S. current account deficit of around 4 percentage points of U.S. GDP. However, as one country's deficit is another country's surplus, we think it is best to look at this issue from a broader multilateral perspective. There is now a gap of some 2½ percent of global GDP between the current account surpluses of continental Europe and east Asia (dominated by the euro area and Japan, respectively) and the deficit countries, dominated by the United States. Indeed, relative to the size of trade flows, the present nexus of current account imbalances has risen to levels almost never seen in industrial countries in the post-war era. We do not view this as a problem specific to deficit countries, or to surplus countries, rather it is a problem of the system as a whole. The essay assesses the risks that these imbalances will unwind quickly, resulting in a larger, and potentially disruptive, short-term exchange rate movements than if the imbalances unwind slowly. There is no easy prescription for mitigating these risks, though these concerns strengthen the case for policymakers in deficit countries to pursue medium-term fiscal consolidation, and for policymakers in surplus countries to press ahead rapidly with structural reforms to make their economies more flexible and to boost growth.
The second essay in Chapter II 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, $300 billion total, 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 countries.
The third and last essay in Chapter II looks at how firms and corporations have adapted 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. It also shows that there are some ways in which financial openness can reduce the vulnerability of corporate balance sheets, by allowing firms more opportunities to float equity and by improving their chances to lengthen the maturity of their debt.
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 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 economists 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 understand how to make the system work better for the benefit of all.
So there you have it, and we welcome your questions.
QUESTION: I have a question on the chapter, but before that, just—to return to what my previous colleague just said, isn't there a bit of a mea culpa in this chapter about financial integration running ahead of trade integration? My question on agriculture is this: all your advice or the analysis and the advice sounds pretty familiar. We have heard this before. So I would like to ask you, Mr. Rogoff, what is new particularly in the analysis and what are the consequences of not following the advice if, for instance, neither the current round of trade negotiations at WTO does not achieve what or at least part of what you are advising in terms of liberalization of agricultural markets?
MR. ROGOFF: I'll say one word and then allow David Robinson to expand. The main thing that's new here is looking at it from a global perspective and asking what happens if everyone liberalizes at once, and trying to look at it quantitatively, and yes, that's not necessarily introducing a new policy idea, but just getting a grip on the magnitude, what the numbers are, I think it forms a policy debate, understanding that the industrialized countries pay out 30 cents in subsidies for every dollar that farmers earn, understanding the magnitudes of the gains that West Africa and the CIF countries would have if cotton trade were liberalized, we feel would help inform the debate. David?
MR. ROBINSON: Okay. Let me just add a couple of comments to that in terms of what are the consequences of not doing it? Well, I think that the clear message is that there are substantial costs to the global economy of maintaining agricultural protection at really astonishingly high levels. I mean I think that the 30 cents of every dollar subsidy of the income of farmers in industrial countries is a really quite extraordinary statistic. And the numbers we produce here show that there are substantial gains, and I think particularly the point that comes out, which is really worth flagging, is that removing your own restrictions gives you the biggest gain. Now, that being said, I think we also believe very strongly that the industrial countries have a special responsibility to move forward first because they are richer; they're more able to deal with the transitional costs, but that doesn't mean to say that developing countries should not move forward as well. One other, I think, new point beyond those that Ken mentioned, we do point out that there are a few losers from trade liberalization, people who are presently importing goods. Now, that's not a huge worry, but it is a concern that's out there, and I think there are two conclusions from that. One, it's much better if everyone does it together. That takes you back to multilateral trade liberalization, and the losers tend to disappear. And second, well, it may be a case for finding some way of compensating those losers, particularly the very poorest, perhaps through higher aid flow. So thank you very much. Let's maybe move on to the next question.
QUESTION: Going back about this so-called mea culpa, the IMF in '97 in Hong Kong, from then on it was insisting on an inclusion of [inaudible] capital account in the articles of agreement. So I wonder again, is this somehow a recognition that it was a policy mistake on the part of the IMF during these last 5 years or 6 years. And second, about these South American countries going ahead with financial liberalization rather than trade liberalization. For the future, how can these countries, from now on, have better policy in terms of financial and trade, finance and trade.
MR. ROGOFF: Well, certainly in terms of trying to understand capital control, I certainly think that we acknowledge and not simply here, but in several of the past previous World Economic Outlooks, but this is an issue that needs studies, that one needs to distinguish between different kinds of capital controls. There's quite a hybrid in what their effects are. One needs to distinguish between whether they're temporary or permanent, and I think the possibility that there's a role for light-handed and temporary capital controls is something that's been mentioned in many IMF publications over the years. The Research Department, which is heavily represented in this room, has done many studies on this in recent years, and reached I think a much more nuanced conclusion than one has had previously, but maybe "conclusion" is the word for it, nuanced findings. I'd simply say that this is an area where—that requires further study. These chapter give us, and what we've done in the recent World Economic Outlook, give some progress in this dimension. But we need to do further work and we welcome the research that others are doing on the outside, also contributing to a better understanding of this problem.
QUESTION: On the advice for countries in South American that also are heavily dollarized, how they should conduct their financial policies from now on.
MR. ROBINSON: This is David Robinson. Let me talk a bit about two of the conclusions we see for policies in Latin America. The first—and this is also something that we discussed in the previous WEO—we wrote an essay on why is Latin America different as far as debt, is I think increasing trade openness. Now, a couple of points here. First, Latin America has made a lot of progress in reducing its trade restrictions. Indeed, they're slightly below the average for developing countries, but partly because it's further away from its trading partners than the average developing country, and this is something we discuss in Chapter 3. The share of trade is still pretty small relative to the share of debt of the financial liberalization going ahead of the trade liberalization. And I think more progress on trade liberalization is really important for Latin America.
The second is developing domestic financial markets, reducing dependence on external saving. That's clearly a conclusion that comes out. But one of the point that would come from the essay in Chapter 2 on this is that when you do that, there will be more borrowing by corporates domestically. That could increase leverage. And while it doesn't mean you shouldn't develop your financial markets, it means you have to make sure that financial supervision goes hand in hand with that to reduce the potential risk. So thank you very much. Let's move on to the next question.
QUESTION: To what extent has the momentum toward agricultural policy reform been undermined by the recent U.S. farm subsidy legislation, and do you expect this issue to be addressed in any way at the meetings later this month?
MR. ROBINSON: Let me comment briefly on that. I mean I think, as our Managing Director said on a number of occasions, the U.S. Farm Bill was indeed a disappointing development. I think more encouragingly, however, we've had a couple of positive things more recently. The U.S. has put forward a proposal for agricultural liberalization. So has the European Commission, and of course, Congress has passed fast-track legislation for trade. So I think those are very positive steps, and we're encouraged by them, and I'm sure that these issues will indeed be discussed at the interim committee. Thanks very much. Let's move on to the next question.
QUESTION: Just like on current account. I know you say that policy makers shouldn't target current accounts as such, but nonetheless, I think one of the implications from your study is that current account is evidence of demand getting well ahead of supply. Do you think that they ought to incorporate them more systematically in the way that monetary and fiscal policy is set, even if they don't target them directly? And is this somehow—does the U.S. current account in particular, somehow tell us something about the way that policy has been set in the U.S. over the last decade?
MR. BAYOUMI: The presumption of the chapter is not that current account deficits or surpluses are per se a problem. In fact, as we know from the last period of globalization, large imbalances across countries were sustained for a long time in the classical gold standard. The issue that we sort of confront is therefore not is there a deficit per se or a surplus per se a problem, but rather do we see it as being sustainable, and for the reasons that we lay out in the chapter in some detail, mainly associated with the implied path of the net foreign assets, and the experience of other countries running these kind of deficits. We do not see these as sustainable. So it's not that a deficit is always wrong. It's that in these particular circumstances we believe that these imbalances will be difficult to sustain over the medium term.
MR. ROGOFF: I just might add to that, I mean, any given level of the current account, deficit or surplus, is not an end in itself. The goal of policy is to raise growth and the welfare of citizens in the country and in the world. That said, the current account imbalances, especially when sustained current account imbalances lead to a large negative or positive net foreign assets position, there's a risk that they'll be reversed rapidly and lead to large changes in financial markets that could have broader consequences. So it's a risk to bear in mind. It's something to look at when you set policy. In the chapter we've particularly emphasized medium term fiscal policy, but it's certainly not the sole goal of policy.
QUESTION: Yes. I'd like a little help in understanding pages 80 and 81 in the—it's on the farm issue. You talk about the average support in '01 is 31 percent. Could someone say what the U.S. number is for that year and the EU number? You say about 35 and U.S. about 20, but if you have an actual number for that. And then just help understanding Figure 2.7, could you say what the beginning of—the top of the arrow is for the U.S. and what we got down to, and do you have an estimate on where the Farm Bill will take that number? Thank you.
MR. ROBINSON: Well, let me try and say something brief on that, and if we don't satisfy you, since it's rather technical, we'll be happy to take it up bilaterally afterwards. But to explain the chart, on the bottom scale we have the producer support estimate. That's the share of producer income that comes basically from the various forms of subsidies and support. On the scale that goes—the vertical scale, we have the share of that, the support provided by countries which distorts price. So basically as you move to the right you have bigger subsidies as a share of income, and as you move upward, more of those subsidies affect prices, and they're more distorting. So you want to move down to the bottom left. And if you're up in the top right, then you're in the worse possible situation.
QUESTION: Is that global prices or just is that the share, distorting global prices on the right-hand axis?
MR. ROBINSON: It's distorting—well, distortion global agricultural prices, yeah. Now, the top of the arrow shows where each country was average in 1986 to 1988. The bottom of the arrow shows where each country was average 1999 to 2001. So if the arrow moves down into the left. If it moves up and to the right, they've got worse. And most of them have moved down and to the left. And in terms of the numbers you asked for, we'll supply them bilaterally. But if you look at the head of the arrow for the United States, for example, you can see that it was around 35 or so percent average for 1999 to 2001 for the share of price base support and the share of income going to—from substantive farmers was around 22 or so. But we can provide you those numbers bilaterally.
QUESTION: Thank you.
MR. ROBINSON: Thanks very much. Let's move on to the next question. QUESTION: Good morning. My question is about Mexico, of course. Is Mexico in a dangerous situation about compassion from Brazil and Argentina? What can we do here in Mexico, I mean the authorities, about [inaudible] our economy while we wait for they do some recovery.
MR. ROBINSON: Well, I'm afraid that that really is a question about the conjunction. I would ask you to maybe come back on Wednesday and ask—next Wednesday and ask that question again. I don't think we would want to address it until Chapter 1 is available. I'm sorry. So let's move on to the next question.
QUESTION: Good morning. Brazil has been suffering a financial crisis for the last 4 years. If you consider the post debt crisis in 1982, Brazil went to the IMF for help 6 times in the period. In the case of Brazil, what do you think about it, is there a lack of trade liberalization or a lack of financial liberalization?
MR. ROBINSON: Well, let me say something general, because I think again you're trespassing a little bit on a Chapter 1 issue, and the analytical chapters are not so much about individual countries themselves, but more about region. You know, in the last World Economic Outlook, we had a piece on why the Latin American debt crisis—Latin American debt was different from elsewhere, and I think that the conclusions in that apply broadly to Brazil, that there's a relatively high level of public—of foreign exchange link back, and that as you said, financial liberalization has gone ahead of trade liberalization. And so the broad policy conclusions that follow from that I think are relatively straightforward, that there's a need to reduce the level of the public debt as a percentage of GDP, obviously. That's what the present program is designed to do, and more generally, I think for Brazil to become, to make efforts to become more open, including through further trade liberalization.
MR. ROGOFF: I might just add to that that in the current World Economic Outlook and the chapter that compares corporate and their leverage in East Asia and Latin America, the findings actually when you look at the private sector, the leverage is much lower in Latin America than it is in East Asia. It's actually the borrowing. The leverage is coming from the public sector.
MR. ROBINSON: Thank you very much. Let's move to the next question.
QUESTION: Mr. Rogoff, I just wanted—you opened your statement by saying that looking at current account imbalances from a global perspective strengthened your premise that the—that large imbalances are unsustainable over time. Can you just explain why that's the case?
MR. ROGOFF: There are several things that we learn by looking at it from a global perspective. One issue which is emphasized in the chapter is that if the U.S. current account were to shrink suddenly, that it could lead to a lowering in global demand absent strong improvement in underlying medium growth in Europe and Japan, that a sudden change in the United States, it might not be possible to pick up the demand right away in Europe and Japan due to structural rigidities of those two. And we partly got that by looking at a multi-country model and looking at the global analysis. Looking at it from a global perspective, particularly important when thinking about the United States, because the United States, which is one of the [inaudible] countries we look at, is large. And the earlier examples that we have of countries running sustained current account deficits of 4 percent for 3 years and more are almost exclusively smaller countries, where they're not affecting the world interest rate when they have big shifts in their policy. When the United States has a big change, it affects world market and you have to take it into account, and that turns out to make the sustainability more problematic. I think that shouldn't be particularly surprising that when a small country like New Zealand has met external negative liabilities that are well over 60 percent, perhaps even 80 percent of GDP, but it's very small, it's not moving world market, whereas United States, when it has a number of 20 percent and it rises to 25 percent, has a much bigger impact on world market and we take those into account in our analysis. Tam Bayoumi, did you want to add to that?
MR. BAYOUMI: Well, I think the other thing that we probably gained from looking at the multinational analysis is the importance of looking at relative rather than absolute movements since they've been [inaudible]. As you know, the current accounts is parallel [inaudible] investment within countries. And there's been a tendency, particularly in the U.S., to look at development in, for example, U.S. saving on its own. But of course, a current account has two people involved. And in order to really look at what's going on, you have to really look at what's happening to one country versus another, and that's something we do. And that issue comes out with some significantly disparate looking results than if you just look at a country like the U.S. on its own, and in particular it does point to, you know, the role of investment and more recently private savings in the sense of being the driving forces for some of the imbalance.
MR. ROBINSON: Thank you. Let's move to the next question.
QUESTION: Yes. Just to follow up, you talked about a small number of countries that would be hurt, food-importing countries that would be hurt from agricultural liberalization. And you said ways to offset that. I couldn't hear what you were saying were recommended ways to offset the harm.
MR. ROBINSON: I said two things basically. One that, as we show in the essay, as everybody liberalizes, there's much less of a problem of losers, so countries should also liberalize their own trade restrictions, say, in the case where they lose from others. And second, you know, the industrial countries gain a lot from agricultural trade liberalization as we show here. And in connection with the general recommendation that the United Nations have made of increasing aid developing countries, I think there will be room for some additional aid, particularly to the poorest losers to compensate.
QUESTION: Thank you.
[End of teleconference.]
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