Transcript

April 9, 2003
International Monetary Fund
Washington, D.C.

View this press briefing using Media Player.

Participants:
Kenneth Rogoff, Economic Counsellor and Director of Research
David J. Robinson, Deputy Director of Research
Graham Hacche, Deputy Director of External Relations
Jonathan Ostry, Assistant Director of Research and Chief of the World Economic Studies Division

MR. HACCHE: Good morning, and welcome to this press briefing on the IMF's latest report on the World Economic Outlook. Simultaneous interpretation is available through the headsets provided, with Spanish on Channel 1, French on Channel 2, and English on Channel 4.

The contents of the WEO Report and the press briefing are under embargo until 11 o'clock this morning Washington time.

I am Graham Hacche, Deputy Director of the External Relations Department at the IMF. And to my right to answer your questions are Kenneth Rogoff, Economic Counsellor and Director of the Research Department. To Ken's right is David Robinson, Deputy Director of the Research Department. And to David's right is Jonathan Ostry, Assistant Director of the Research Department.

WEO Press Conference

Before turning to Ken Rogoff for his introductory remarks, I remind you that tomorrow morning at 10:30 the Managing Director, Horst Köhler, will give his press conference ahead of the weekend meetings, following a press conference by Mr. Wolfensohn at 9 o'clock.

I will now turn to Mr. Rogoff for his opening remarks before asking for questions.

MR. ROGOFF: Thank you, Graham.

Ladies and Gentlemen, greetings, and thank you for coming.

I am here today with my colleagues David Robinson and Jonathan Ostry to present the latest issue of the International Monetary Fund's twice per year publication The World Economic Outlook: Prospects and Policy Issues.

For the past three months, concerns over conflict in the Middle East have weighed heavily on the global economy, through oil prices, through confidence effects and through financial markets. As near-term uncertainties over the conflict recede, the question of the hour is whether present sputtering global growth will suddenly lunge ahead into an immediate strong recovery. Perhaps, but our baseline here is for subnormal growth of 3.2 percent (1.1 trillion dollars) in 2003, rising to 4.1 percent in 2004. This baseline assumes a tepid global recovery with normal growth only resuming sometime during the first half of 2004. It is possible things could turn around more quickly, if war jitters have indeed been single-handedly forestalling the recovery, if oil prices turn out to be significantly lower than our baseline, and if global productivity growth turns out to be even more robust than we project. Overall, the chances of such an outcome are higher than they were just a month or two ago. But, in our view, it is not just the war -- a number of other risks weigh on the outlook. These risks include the continuing unwinding of the equity price bubble, the emerging risk of a housing price bubble in some regions (see WEO Chapter 2), financial imbalances around the globe including the present patently unsustainable constellation of current accounts, structural weaknesses in Japan and Europe (especially Germany; see Box 1.3 and Chapter 4) continuing security concerns that put sand in the wheels of globalization, as well as a variety of sundry further risks including fragilities in emerging markets and SARS. While projected 2003 growth is distinctly sub-normal, there is still a reasonable amount of padding above the near recession levels of growth reached in 2001.

Across the major regions, the United States, which accounts for just over 1/5 of global GDP, is projected to have 2.2 percent growth in 2003 -- not yet enough to make a meaningful dent in unemployment -- and 3.6 percent growth in 2004. Growth in the euro area (roughly 1/6^th of global GDP) is again lackluster at 1.1 percent in 2003 and 2.3 percent in 2004. Japan remains mired in a slump at 0.8 percent growth for 2003 and 1.0 percent for 2004. Emerging Asia is in fact the strongest growing region of the world at 6.0 percent for 2003 and 6.3 percent for 2004, though we do not view this recovery as self-sustaining if the rest of the world slumps. Moreover, the effects of the incipient SARS epidemic are likely to have an adverse impact (of perhaps about 0.4 percent if the epidemic lasts for one quarter).

Our core assessment of global prospects is laid out in the World Economic Outlook, which you have before you. Let me add only a couple points here.

First, even if near-term war-related uncertainties are abating, one has to recognize the distinct possibility that perceptions of the global security situation may not return to pre-September 11 levels for decades to come, implying higher costs for insurance, weaker confidence, higher trade costs, and a slower pace of global economic integration. True, we do not see the adverse effects of heightened insecurity nearly offsetting the benefits of the 1990s global technology revolution originating in the United States (see WEO Box 1.2). However, heightened security risks may still have long-term insidious effects that could ultimately reduce our notion of "normal" global growth from 4 percent to, say, 3.75 percent. It should be noted that good policies, such as broad-based structural and institutional reforms, could counteract this effect many times over; see, for example, Chapter 3 of the WEO on the potential for institutional reform to promote growth in Africa, the Middle East and Developing Asia. Absent such reform, however, some markdown seems appropriate. All in all, after the events of September 11, we appear to be witnessing at least a partial rollback of the peace dividend of the 1990s.

Second, we do not agree with observers who say that monetary policy has reached its limit, but a change in communication strategies is needed. Surely the time has come for the ECB, the BOJ and the Fed to be more transparent about their inflation objectives. More transparency on inflation would risk little while greatly enhancing central banks' capacity to fend off deflation, which is already present in Japan, and at least an outside risk in Europe and the United States (see Box 1.1 of the WEO).

In Japan, more aggressive quantitative easing--still sorely needed--would be considerably more effective if anchored by a communication strategy stating that the BOJ intends to end deflation in the near term, and has the capacity to do so. Of course, the risks to this strategy would be reduced, and the benefits magnified considerably, if determined monetary easing were accompanied by comprehensive bank and corporate restructuring. In Europe, it would be desirable to move to an inflation target that is at once more transparent and more symmetric. As the ECB reconsiders its monetary strategy, it should also consider adopting a higher central target inflation rate of, say, 2.5 percent. A higher central inflation objective would reduce the likelihood of deflation prospects in weaker economies, currently Germany. If and when accession countries join the euro, economic divergence will be even greater, and an even higher central inflation rate might be contemplated. Finally, even acknowledging the consistent outstanding performance of the United States Federal Reserve, it is hard to see the arguments for remaining less than completely transparent about the Fed's broad medium-term inflation goals. In the admittedly unlikely event deflation were to set in, having a communication strategy already in place would make reversing the process far easier, and substantially alleviate the need for the kind of exotic measures now being vetted. In addition, more transparency on inflation would alleviate anxiety over any eventual transition to a post-Greenspan era. (A transition I, for one, hope does not come for a long time.) Overall, across the three regions, one can only surmise that some central banks view enhanced inflation transparency as placing them on a slippery slope towards rigid inflation targeting--which would indeed be a less than ideal arrangement--but on balance, the risks do not seem so great as to justify persisting with current communication strategies.

Finally, on fiscal policy: all the major industrialized countries face serious aging problems over the coming years, with pension and health care sustainability problems arising in the very near term in Japan and in many countries across Europe. Given current low birth rates, it is just not possible for people to go on indefinitely living longer and retiring earlier, happy as that thought may be. (For many industrialized countries, age-related government expenditure is expected to rise by 5-10 percent of GDP by 2040, a number that swamps much current budget arithmetic.) Raising the age of retirement has to be one piece of any solution, and implementing such a policy is as important as any measure most industrialized countries could take towards achieving medium term fiscal sustainability.

With this, I conclude and am happy to take your questions.

MR. HACCHE: Can I please ask you to wait for the microphone to be brought to you, and for you to identify yourselves by stating your name and the publication to which you are affiliated. First question there, please.

QUESTION: I will not ask if you were a student of Professor Ben Bernanke, but I will ask if you think the United States is one of the places which is having a housing bubble, that the long-time balance of trade problem is going to come home to roost in the immediate future, and whether the economy needs a stimulus of some kind, and if so, what kind?

MR. ROGOFF: Well, first of all, I was a colleague of Professor Ben Bernanke at Princeton at one time. But in answer to your question, we do believe that housing prices in the United States have risen markedly. They're up 27 percent in real terms above--that is in terms of price appreciation above inflation--since the last peak. This is smaller than the appreciation we've seen in some other countries, such as the United Kingdom, almost 70 percent; Ireland with over 100 percent. But on the other hand, it passes the threshold for what we find as a boom in our statistical study in Chapter 2, and therefore the chances of a subsequent bust are notable. Overall, across the OECD when countries enter boom territory, the probability of a subsequent bust is about 40 percent.

On your last question, I'll defer till we get a more specific question about what you mean by "stimulus policy."

MR. HACCHE: There's a question here in the front row.

QUESTION: Could you elaborate on your view of the situation in Germany and what is desperately needed to turn things around?

MR. ROGOFF: Well, certainly the situation in Germany is difficult. Some of it certainly stems from the ongoing costs of dealing with German reunification which began in the early 1990s and hasn't been fully absorbed yet, and it's perhaps not going as quickly and smoothly as some optimists had hoped. Productivity differentials across the two regions, East and West Germany, were closing initially, but have not been for several years.

I think the fundamental problem in Germany is that it has not been able to recover strongly at any point over the last several years, and I think it's reached the point where we can safely say that major structural reforms are needed. And first among those we would list labor market reforms. We have a study in the World Economic Outlook that looks at this issue. We find that across the Euro zone if labor market institutions including practices such as unemployment insurance, benefits, labor taxes, if labor institutions in Europe were brought to the levels of the United States, our study suggests that unemployment in the Euro zone would fall by 3 percent, consumption and investment would rise by 5 percent, and if product markets were deregulated to U.S. levels, the gain in output effects would double to almost 10 percent. In fact, one might say that the typical European worker is seeing four weeks a year pay sucked into a black hole through these various inefficiencies.

We welcome the recent initiatives of Chancellor Schroeder on labor market reform. They certainly go in the right direction and, if adopted, they will certainly go some measure towards alleviating these problems. We will need to see more specifics on how far they're adopted.

David, did you want to add anything?

MR. ROBINSON: No.

MR. HACCHE: On the third row there.

QUESTION: If I can try and ask a specific question about stimulus in the U.S., do you think the onus has now shifted from monetary to fiscal policy to stimulate the U.S. economy? And with regard to that, and more generally, what do you think of the size and composition of the administration's proposed tax cut?

MR. ROGOFF: Okay. First of all, I am sympathetic to the idea that it's important to eliminate the double debt taxation of dividends, and that over the long term that might enhance growth. However, the timing of the tax package is awkward, given the open ended nature of potential costs stemming from the war in Iraq and that country's eventual reconstruction.

Let's suppose for a minute that we were talking about a developing country that had gaping current account deficits year after year, as far as the eye can see, of five percent or more, with budget ink spinning from black into red, with the likely deficit to GDP ratio for general government debt exceeding five percent this year, open-ended security costs, and a real exchange rate that had been inflated by capital inflows, with all that, I think it's fair to say we would be pretty concerned.

Well, the U.S. is not an emerging market. It is, in fact, the greatest engine of economic growth in the history of the modern world. But I still think it's fair to say that at least a little bit of that calculus still applies.

I think, from the narrow perspective of the United States, the administration and Congress can decide what best serves United States goals. But from the perspective of the global economy, more balanced demand with Continental Europe and Japan growing faster--economic growth in both regions has been missing in action in recent years--would certainly be a better way to stimulate global demand.

Overall, from the point of view of the global economy, the tax cut, or an increase in the budget deficit, on top of that implied by the ongoing security expenditures, seems awkwardly timed. If the tax cuts were accompanied, say, by expenditure cuts or planned expenditure cuts, or perhaps some type of pension reform, such as phasing in higher retirement ages, if these could be slotted in simultaneously, then I think our concern about the medium-term sustainability would be a lot less.

David, did you want to add specifics?

MR. ROBINSON: Just to reiterate, I think, the point about medium-term sustainability and aging. The aging of the population is less of a problem in the United States than it is in many other countries, including Europe and Japan. But it is still a problem. I think one of the concerns is that this package will result in a higher deficit sustained over the medium term than certainly we think is desirable, given those aging problems. We have always argued that the U.S. should aim for a balanced budget over the cycle, excluding Social Security. This, I think, will not get to it.

I guess another potential concern which is being raised by the CBO--and I think we would share--is that these higher deficits could lead to higher interest rates over the longer term, and that could offset, in CBO's view more than offset the growth-inducing effects of lower taxation of dividends and a lower taxation rate in general.

MR. HACCHE: Can we go to the gentleman in the front row there, please.

QUESTION: Mr. Rogoff, I have a question regarding the projections of the Mexican government for the GDP of this year. Last night the Prime Minister of Mexico said it's going to be three percent for sure. In your report it is 2.3 percent.

My question to you, what is the difference on this projection between the Mexican government and the IMF? Do you think it's something to do with politics or population by President Fox?

MR. ROGOFF: I can't comment on what underlies the projections of the Mexican government. I can comment on ours.

Certainly Mexico's performance has been very good throughout the slowdown. Spreads on Mexican debt have been falling. However, it is still vulnerable to what happens with its major trading partner, the United States. Its fiscal revenues are also vulnerable to global oil prices and perhaps overly sensitive to them. So there are still some risks and vulnerabilities.

David or Jonathan, do you want to add something?

MR. ROBINSON: I would just add one thing. I don't know what assumption the Mexican authorities are making about growth in the United States, but that clearly is very important. Our projection for growth in the United States is somewhat below the consensus for the reasons that Ken outlined in his opening statement, and that may very well be feeding through into our lower projection than Mexico's.

MR. HACCHE: The gentleman in the back there on the left.

QUESTION: This time the IMF recommended that Japan state clearly it will do whatever is necessary to end deflation and target a sufficiently positive inflation rate. Do you have any specific measures that the BOJ should take, and if you have any specific inflation rate that BOJ should target, would you tell me that?

MR. ROGOFF: First on the specific measures, I think what we would say to the BOJ applies to all the major central banks, which is the time has come to have a more transparent policy towards central banks' inflation goals.

We wouldn't necessarily advocate any narrow inflation targets or any extreme interpretation of this. I think, in fact, in the case of Japan, it is going to be very difficult initially to target a narrow band for inflation. Getting out of the current situation where conventional monetary policy is ineffective and interest rates are zero is very difficult. It's like being caught in a sand trap in golf. You have to hit the ball pretty hard to get it out of the sand trap. If you're Tiger Woods, you can get it on to the green in one shot, but for most others might wander off a ways at first.

But if you have a clear communication strategy, saying where you would like a general range for inflation to be in the medium term, that will help anchor expectations.

Jonathan, did you want to add anything?

MR. OSTRY: Maybe just two things.

I think some of the work we have done at the Fund on the prospects for getting rid of deflation in Japan appeals to the historical experience, including Sweden and the United States in the Great Depression. I think that makes us somewhat more confident that a vigorous strategy of quantitative easing could indeed have an impact on prices and the deflation process that we've had for some time now in Japan.

As to your question on the level of the inflation rate, again some of the work that we've done suggests that when you target inflation rates below two percent, the risks of getting into a deflationary situation are magnified significantly. So certainly I think there is a case for having targets that are two percent or above.

MR. HACCHE: Could we go to the second row, please?

QUESTION: I wonder if you could elaborate on why you seem to reject the arguments of some--I mean, forecasters seem to be roughly divided in half, from what I can tell. There are the people who look at things like inventories and say the economy, particularly the U.S. economy, but the global economy perhaps more broadly, excluding Japan at least, is poised for a fairly rapid rebound once the war uncertainties abate. And there are those who argue that--The comment I have heard from both sides of this argument is that there is not a heck of a lot of evidence to support either argument.

I am wondering what evidence you see that makes you tend toward the pessimistic side.

MR. ROGOFF: First of all, I'm not sure we tend towards the pessimistic side. I would describe our presentation as balanced. But that said--[Laughter.]

That said, I think there is no question that there has been some collateral damage to the global economy from the uncertainties surrounding the long run up to the war in Iraq, not to mention the war itself. The uncertainty has impacted consumer confidence, business confidence, oil prices and financial markets.

Now that that uncertainty has been reduced, it has lifted a cloud over the economy. But some of the problems still linger, and we listed them.

We see, especially as you look across the globe, not just in the United States, lingering problems from the bursting of the equity price bubble, especially in Europe. Weak corporate balance sheets still weigh on investment. We have a chapter on this and we estimate that investment may have been as much as two-and-a-half or three percent of GDP lower in 2002 than it would have been absent these balance sheet effects.

Banks in some regions are weak, notably Germany. I wouldn't put German banks in par with the problems of Japanese banks. Going back to my golf analogy, if the Japanese banking system is in a sand trap or maybe even in a water hazard, the German banking system is in the rough and a good swing can still get it back on to the green. But there are problems there. Also in the insurance industry, in pensions. So we see lingering problems.

Also, simply the fact that the recovery has been delayed has brought on some other problems and heightened some of these concerns. So we do see very real upside risks here, and I highlighted them in my opening statement, especially that oil prices might turn out to be lower than we projected, that things might snap back quicker, as you say. But we're looking at the whole globe and not just at the United States.

David?

MR. ROBINSON: Just maybe to add a couple of things. One thing that we point out in the WEO, which I think is very relevant here, is that the growth outlook for the world is still very heavily dependent on the United States, and were growth in the U.S. to turn out to be significantly lower than we project, for whatever reason--there are a number of risks that Ken has gone through--it's not obvious that there's anyone else at this point that could take up the slack, so there is a real vulnerability there. That is why we've been pressing so hard for Japan and Europe to move ahead with structural reforms.

MR. ROGOFF: Let me just add to that.

Clearly, China is growing very strongly, and we project Chinese growth to be 7-1/2 percent in both 2003 and 2004. It's possible that the SARS epidemic will reduce that maybe by .2 percent if it lasts for only a quarter.

But China is still relatively small in world trade, accounting for maybe five percent of exports and imports, so China alone is not likely to provide an engine. So there is a concern about the imbalanced recovery tracing just to the United States.

QUESTION: Since you said global recovery depends heavily on the U.S.--you talked about Germany and weak corporate balance sheets in Europe, but what about the lingering effects of the bursting of the bubble in the U.S. and why you think that's still such a problem?

MR. ROGOFF: I think we see all the same effects in the United States, but much more muted. Our study on corporate balance sheets finds some lingering effects on corporate balance sheets, but it is an order of magnitude less than we find in Europe.

The housing price boom is a concern. There are some sectors where there is still over-capacity, such as energy, autos, airlines and perhaps one or two others. So we're not exactly sure when we're going to see business, fixed investment, snap back.

I think just fundamentally, in answer to your question, Paul, there is a lot of uncertainty surrounding the current conjuncture, so some note of caution seems appropriate.

MR. HACCHE: The gentleman there in the corner.

QUESTION: [Off microphone.] Secondly, this year you have pointed out that it is possible for developing countries to grow out of poverty by good governance. Would you kindly elaborate on that?

My first question was on the Indian economy.

MR. ROGOFF: David, would you like to answer that?

MR. ROBINSON: Okay. Let me start with the Indian economy. I can answer a little bit about the problems there, and Ken will then talk on good governance.

I think that in India we have seen growth decelerate a bit this year because of the drought, but in general, the macroeconomic situation, particularly the external situation, remains relatively comfortable--high levels of reserves, no major external risks.

I think there are two big issues in India. First is how to get growth up to the rates that are necessary to reduce poverty over the medium term, and that is perhaps the single most critical issue. Second relates to the very large fiscal deficit that we still see in India. Of course, these two things are related. To get the sustained level of growth we need, the fiscal deficit needs to be brought down.

Above and beyond that, I think there still is a lot of room for structural reforms in India. The government has made quite a lot of progress on petroleum pricing, opening to direct foreign investment and so on. But other reforms have gone less far, particularly privatization, the passage of legislation for fiscal responsibility and so on.

Fundamentally, I think a key issue is--and it has been for a very long time--the high level of the government deficit, around 10 percent of GDP or so, and the high level of public debt and how to bring that down to a sustainable level to allow more room for the private sector to become the engine of growth.

MR. ROGOFF: Answering your second question, we have a Chapter 3 in the World Economic Outlook that was actually released last week, which tries to look, quantitatively, at what role institutions--corruption, governance, political rights and other factors--might play in holding growth in developing countries.

I want to emphasize that we pick on everyone in the WEO if you look at the different chapters. But this chapter focuses especially on developing countries.

We find that if institutions in Sub-Saharan Africa, which are the weakest across the globe by the measures that we use, if they were to come up, say, to developing Asia, which is a notch above, it would raise per capita GDP in Africa from about $800 to $1400 per annum and raise growth rates by two percent.

The Middle East is just a little bit above Sub-Saharan Africa. It, in fact, has had the poorest growth performance over the last two decades, with per capita GDP declining by 1.6 percent, versus a growth of three percent in developing countries as a whole. Again, in the Middle East, improving institutions, dealing with corruption, governance and other issues, would lead to an enormous rise in income and in growth potential.

We are not saying that this is the only thing that needs to be done. We strongly endorse higher aid flows to developing economies. We think it's terribly important that industrialized countries open up their agricultural markets to the poor countries of the world so that they have a chance to trade. But we do try to capture quantitatively some of these institutional issues that have been talked about but really no numbers put on them.

MR. HACCHE: The second row, the gentleman with glasses.

QUESTION: I'm based in Frankfurt and I wanted to ask a couple of questions on the Euro Zone. Firstly on the ECB. You mentioned a 2.5 percent symmetrical inflation target. I imagine some of the ECB members would be quite concerned by that, that that would sort of, to their minds, entrench inflation expectations. They do comment a lot about the wages and second round effects. So why is it 2.5 percent, why do you pick that?

On the ECB, I think you're saying quite clearly that you feel monetary policy is an engine that can be used for growth, because fiscal policy is constrained. How much further do you think they could cut interest rates.

A third question, just to come back to German banking, do you see a credit crunch developing in Germany?

MR. ROGOFF: Okay. First on the 2.5 percent, the Euro Zone is less integrated economically than, say, the States are, the United States. It has changed dramatically in recent decades, but if you look at things like labor mobility, capital market and banking integration, it is much less than the United States.

First and foremost, there isn't a sharing of fiscal revenues to anywhere near the way there is among the States. As a consequence of this, the developing growth gaps among European countries are larger than one sees in the United States. This is normal. This will persist for many years to come.

As a consequence, a monetary policy which is appropriate for the region as a whole may be quite deflationary for some of the weaker countries. In fact, certainly, if the ECB were to look only at Germany--and I'm not arguing that it should--but if it did look only at Germany, then by standard measures monetary policy looks pretty tight and inflation is pretty low, and there is some risk of deflation.

If you factor in the accession countries possibly coming in later, being even more different, I think there's a case for having a higher inflation rate.

Fundamentally, we have viewed the costs of deflation as being quite serious and something one wants to avoid, so to have a slightly higher inflation target tries to minimize the risks of that across regions.

As for monetary policy being able to single-handedly pull Europe out of its doldrums, we would never argue that. I think more and more we have reached the point where structural reforms are the first line of defense, as we discussed. And in terms of budget policy, really long-term budget policy dealing with the pension problems, that's what is really needed to achieve medium-term sustainability.

All that said, given our projections for Europe, and that we see the balance of risk to the downside, we certainly would see a case for an interest rate cut still in Europe, although I think getting the communication strategy right is a more important issue.

I will let David comment on the banking issue.

QUESTION: I did ask you specifically by how much the interest rates should be cut. [Inaudible].

MR. ROGOFF: There is so much uncertainty, changing week to week in the outlook, I think I wouldn't want to peg a number on it right now where I would change my mind in a week. Some "wait and see" attitude on the exact size of it seems appropriate.

MR. HACCHE: The gentleman here in the front row. Sorry, David. Did you want to add something?

MR. ROBINSON: I was going to say something on the credit crunch. I'll be very brief.

There is box, Box 1.3, which discusses some of this in the WEO, so I will just say very briefly that, yes, credit growth in Germany has been slower than the rest of the Euro Zone, partly, of course, because growth itself has been slower. But we do find in this box evidence that, when you include measures of the weakness of the banking system in the determinants for credit growth, that they help explain the slow down in credit growth.

I would not say there is a credit crunch in Germany. I think that's too strong. But I think the banking sector weaknesses have contributed some to the slow down in credit growth we have seen.

QUESTION: Good morning. You predict the rate of inflation in Brazil at 14 percent. The Brazilian government gives the rate between 8.5 to 11 percent. My question is, what do you know that they don't?

Secondly, you predict the inflow of capital to the western hemisphere jumping from 27.6 billion in 2003 to 59.4 billion in 2004. I would like to know if you could give us an idea of how much of that would be directed to Brazil, in your opinion?

MR. ROGOFF: Okay. I will leave it to David to answer the specific question about inflation, but let me sort of frame the answer in terms of some general remarks about Brazil.

First, I think we have to give credit where credit is due, that the Lula administration has appointed a world class economic team which follows a world class economic team that the Cardoso administration had appointed. In fact, one might say that Brazil seems to be able to field world class economic teams as readily as it fields world class football teams.

I also think the Lula administration has to be given credit for tackling some of the most difficult structural problems up front, including tax and pension reform, and certainly the early performance is very good. We're seeing a performance which is outstanding and perhaps some day might be judged historic.

That said, I think some note of caution is in order--and this speaks to some of your questions. First, spreads on emerging market debt in general have declined. Some of the reasons have to do with surprisingly good policy, which I think would be what markets would say about Brazil. But it also has to do with, in some sense, the low returns that we have in industrialized countries. There are very low returns on bonds, equity performance has been poor. So we see investment capital going to emerging markets and, indeed, some repatriation of capital flight.

These factors have happened before historically, and they can reverse. Debt-to-GDP ratios don't change overnight, but the spreads can change very quickly, so there are vulnerabilities. Second, capital flows overall to emerging markets are not strong, and I think that's a serious issue in a global economy. They are particularly weak to Latin America. Our FDI projection for 2003 is something like 40 percent down from the peak in 1999. If we don't see significant reflows to Latin America, to South America, to emerging markets, that is going to make the task of countries with high debt-to-GDP ratios that much more difficult.

All that said, it is quite important--although debt-to-GDP ratios have come down somewhat in Brazil--it is important still to steer for safer ground over the medium term to bring down debt-to-GDP ratios further. Countries in general in emerging markets which have a record of serial default and restructuring over the past two centuries are more vulnerable to the whims of markets, and I think it's important, as the Brazilian economy goes forward, to try to bring down the debt-to-GDP ratio in the medium term.

David, did you want to add to that?

MR. ROBINSON: Just a couple of words on inflation.

First of all, I think the two numbers you're quoting are not comparable, because in the WEO, the number for inflation we put is always the yearly average. I think the 8-1/2 percent target that you quoted for Brazil is probably the inflation rate at the end of the year, where it will be in December, as opposed to the yearly average. Obviously, right now inflation's higher because we've seen the impact of the depreciation of the real, for instance, feeding through. So I'm not sure there's an inconsistency here.

MR. HACCHE: The second row here on the right.

QUESTION: On the U.S. Federal Reserve, you called for more transparency in their inflation policy. Are you advocating inflation targeting specifically in the United States, and if so, are you advocating that it be done before Chairman Greenspan retires or resigns? If you are calling for that, what would an appropriate rate or band be for the United States?

MR. ROGOFF: What I'm calling for now, Mark, is more transparency about the Federal Reserve's broad medium-term inflation goals. I actually do not believe that the stricter versions of inflation targeting are well advised. In fact, it's possible that some of the world's central banks are reluctant to be more transparent about their inflation targets because they believe it will be a slippery slope towards more rigid inflation targeting.

That said, many central banks around the world do this now. The costs really don't seem to be that great. I don't think it pins down policy that much. So yes, it is something that I think would make sense to begin sooner rather than later, but I'm not prescribing certainly a particular target. In fact, I think that would be the wrong way to approach the problem, but just some more general information on thinking about inflation--although ideally moving towards expressing some central ranges for inflation, but certainly not strict inflation targeting.

MR. HACCHE: The gentleman in that back there.

QUESTION: I've got a question about Russian economy. Currently, you are more conservative about your projections with Russian economy than the Putin government, and if your report is very balanced, it was balanced as well last year. But I don't remember the word, "non-oil weakness", but I read it now. So what's wrong with the Russian economy? I have concern about it, and I appreciate your comments. Thanks.

MR. ROGOFF: Well, I think the core issue in Russia is how to make growth more balanced across the oil and energy-producing sector and the rest of the economy. There certainly is some sense that structural reform had stalled in the past year, dealing with public administration, banking administration, banking supervision, and the energy sector. And these structural reforms I think are important in order to have more balanced growth, so that the Russian economy is not so dependent on oil, so that fiscal revenues are not so dependent on oil.

I again, can't try to guess why our predictions are different, although clearly oil prices have been extremely volatile, and Russian output is fairly sensitive to oil projections. I think the ones we have now are fairly realistic.

David or Jonathan?

MR. OSTRY: Our projection is basically of growth this year of 4 percent and slowing to 3-1/2 next year. You're correct in suggesting this is something of a slowdown relative to what we've seen in the past couple of years. And the issues that we've identified as being the main proximate cause is basically a slowing--a slow down in the implementation of structural reforms and its impact on investment.

So the issues that Ken mentioned in terms of reforming the natural monopolies to get domestic energy prices close to market levels, trade liberalization with an eye to WTO accession. These are the sorts of things that we think would get the non-oil part of the economy more in line with Russia's potential.

The other thing I think that we see as helping the Russian economy to grow better in the future would be the sorts of fiscal reforms that Ken mentioned briefly, in particular some kind of institutional mechanism to delink fiscal policy from oil prices, something like an oil stabilization fund, and also a longer-term fiscal rule that would target a balanced budget at a long-run average oil price.

MR. HACCHE: Lady there on the left in the fourth row.

QUESTION: I have a question on the Balkans. There is that lingering problem with corruption and organized crime, and informal markets in the Balkans. Do you see any chance or hope that this will be soon overcome?

MR. ROGOFF: Jonathan?

MR. OSTRY: I think what I'd like to say on that issue is again to highlight the chapter that we have on growth and institutions, and to amplify a little bit on what Ken said earlier, which is that countries are not stuck with institutions, either by virtue of their history or their geography. Institutions can and do change, and policies that promote competition, transparency, liberalization of exchange rates, prices, credit allocation, are all elements of a package that can spur institutional growth and improve governance.

MR. HACCHE: Second row here in the center.

QUESTION: I have a question on Latin America. It seems Latin America is not going to have [inaudible] in the current IMF meeting after two or three meetings in a row. Argentina, according to your report, is already worse. What is your main concern on Latin America in this meeting? Is your concern in the political field or economic field?

MR. ROGOFF: Well, let me speak to the World Economic Outlook because the ministers have not met yet, and they of course will decide what their main concerns are, but I think our main concern in Latin America really has to be that it got on a sustainable growth path. Growth performance for Latin America was, I think, slightly above zero last year, which is very weak, much weaker than the region's potential. It's had fits and starts over the last couple decades, and it's important that growth be restored. Maybe the most important thing has to do with labor market reforms, fiscal policy reforms, especially opening up further to trade. I think they are all measures that would enhance growth in Latin America.

On the debt front, it is important to move to safer ground. Again, countries that have records of serial default and restructuring are much more vulnerable to the whims of international capital markets than countries which have stronger credit histories, and it's important not to build up debt again. Indeed, if we look across Latin America, and more broadly, across emerging markets, there was a sharp real average build up of debts in the 1990s, and especially domestic debt. Financial liberalization, the removal or reduction of capital controls, has increased the incidence of domestic debt problems relative to external debt problems, and these two are also more linked. I think that's an important challenge.

And finally, on Argentina, clearly it has a hiatus at the moment from its long economic fall. We saw a recession where output cumulatively fell by more than 20 percent, which is a much larger than one sees almost anywhere over the past century outside conflict zones, and at the same time, Argentina had an enormous real depreciation of its exchange rate, 40 to 60 percent depending on how you measure it. And they've been given the rollover of IFI debts, and the temporary nonpayment of debts to the private sector. This has provided some reprieve for growth, but it's very important that after the elections in the spring, that there be movement on many issues such as establishing a sustainable fiscal situation, on banking reform, on having a monetary anchor, issues which are certainly in the forefront of policy. So I think there are many concerns, but it is true that particularly due to events in Brazil--and let's not forget that Brazil accounts for 50 percent of South America's output--the concerns for the moment about South America and Latin America are somewhat less, but I listed a number of reasons why we should still worry about it, not least that some of the drop in emerging market spreads has to do with search for higher yields from investors who see low bond returns in the industrialized countries' weak equity markets, and that could change.

MR. HACCHE: I think we can take a couple more. There's one in the fourth row on the left.

QUESTION: Just on the issue of world economic growth and the Iraq war and possible further military conflict, you seem to be optimistic with the resolution of the conflict in Iraq we'll see the end of war [inaudible] as you put it. I just wondered in the interest of sort of preemptive economic analysis, whether you could make a few comments on the dangers for the world economies of further military conflict of this, in Syria, Iran, North Korea. If you feel that in the event that were a scenario, which some people in Washington do believe it to be a reasonable scenario, how serious would that be for world economic growth over the next year? Thanks.

MR. ROGOFF: Well, heightened security concerns post September 11th are something which I think may well be with us in peaks and troughs, but also for quite some time to come, and it's going to have an impact on the global economy through confidence, through trade, through trade costs or insurance costs. So at a bare minimum these heightened security concerns--and I think it's difficult to predict what events will be--are themselves something of a drag on the global economy. I don't think they offset the benefits of the tech revolution, but they are something which may downgrade our view a bit of what normal growth is, and it's difficult to put a number on it, but maybe by something like a quarter a percent, not for this year, but I'm really looking at it to 2005, 2006 and beyond.

I'm very concerned about the potential impacts on global trade. Although there is much controversy about the benefits of globalization, our reading of the evidence is that for trade especially, the benefits have been overwhelming. We normally have trade growth at 6 percent, 7 percent a year. In fact, if all barriers to trade in the industrialized countries (not least) were removed, we'd see trade growth much larger, maybe 9 or 10 percent. And there are enormous benefits of this we've seen in China and elsewhere.

However, these higher security costs are undoubtedly going to somewhat impede the free flow of people, of ideas, of goods, to some extent, depending on how the course events take and what policy measures are taken. And it is a bit of a drag.

So I think the big picture is really this--and that's the point I'd want to emphasize, rather than trying to guess what some particular conflict or problem might lead to.

MR. HACCHE: Last question here please on the right, second row.

QUESTION: I wonder if I could follow up on that. You said the impact could be a quarter percent on global growth. What's your estimate of the impact on potential growth in the U.S. from these concerns you just spoke about? Why haven't we seen that yet? Because presumably there's been a large ratcheting up of security costs, and yet U.S. productivity growth, as most people would argue, has been stellar since September 11th.

And why would some people say, yes, the impact on productivity, there might be an impact, but it would be a one-time cost, admittedly over a couple years, rather than your implication seems to be a sort of a long lasting impact?

MR. ROGOFF: Well, starting with--well, let me start with the first part of your question. The effects on productivity may take some time to play out. There are long lags between these changes and when you actually see the impact. For example, many people believe that investment in technology in the early 1990s led later to the boom that we saw later in the 1990s in the United States. And parenthetically, I might say, we believe for that reason that Britain may enjoy stronger productivity growth over the next five to 10 years than it has previously, because its technology investment really started about five years later than the United States. So there are lags in these things.

As to whether it would be one time change or a factor of growth, I think that one can think of it as a tax in some ways, these security costs. And I think it would more likely not just to have a one-time effect, but an effect on growth. For instance, tax effects can act through their effects on investment. I mean, this is sort of getting technical, but I mean maybe after 100 years it would have played out and the level effect would have been reached, but the growth effect would last for a long time.

As to the order of magnitude it would be for the United States, I think it would be similar to what I projected for the world. To give you some direction that might matter for the United States that we don't see yet elsewhere, the United States benefits enormously by skimming the cream off the rest of the world through its university system. Many students come here. They stay. They become very productive members of the economy. And if it becomes more difficult to get work permits, if it becomes more difficult for foreign students to come and stay on, that will be certainly a significant loss in terms of innovation and growth to the United States, albeit, it may be a gain to some of the countries where they come from, who will be able to retain these students.

David--oh, I'm sorry.

QUESTION: Where would you put the potential growth rate in the U.S.? I guess most people would sort of put it at sort of 3 to 3-1/2 percent. Given your quarter percent ratcheting down, I mean would you be in that consensus range of 3 to 3-1/2 percent?

MR. ROGOFF: Well, we're talking about a ways out, but, yes, we'd still be in that consensus, right.

David, did you want to add anything?

MR. ROBINSON: No.

MR. HACCHE: My apologies to those of you we didn't get to this time. Can I remind you again please of the 11 o'clock embargo? And thank you very much for coming.