Transcript of the World Economic Outlook Press Briefing, IMF

April 19, 2006

International Monetary Fund
April 19, 2006

Raghuram Rajan, Economic Counsellor and Director
Research Department
David Robinson, Deputy Director, Research Department
Timothy Callen, Chief, World Economic Studies Division
Research Department
Graham Hacche, Deputy Director, External Relations Department

View a Webcast of the Press Conference

(From left to right) Mr. Callen, Mr. Robinson, Mr. Rajan (From left to right) Mr. Callen, Mr. Robinson, Mr. Rajan


MR. HACCHE: Good morning, and welcome to this press briefing on the IMF's latest report on the World Economic Outlook. I am Graham Hacche, Deputy Director of the IMF's External Relations Department. To my right are Mr. Raghu Rajan, Economic Counselor and Director of the Research Department; David Robinson, Deputy Director of the Research Department; and Tim Callen, Chief the World Economic Studies Division.

Before turning to Mr. Rajan for his opening remarks, I would remind you that tomorrow morning at 9:30, the Managing Director, Rodrigo de Rato, will hold a press briefing here previewing the meetings of the next few days.

MR. RAJAN: Thank you, thank you for being here, and good morning.

We have revised global growth for 2006 up by 0.6 percentage points to 4.9 percent. I should remind you that this is the fourth year in a row of about 4 percent growth. Upward revisions for China, Russia, and India account for two thirds of the revisions, but prospects in Japan have also improved noticeably while hope is growing for the Euro Area. We expect the U.S. economy to slow in the second half, but growth should remain above trend. These signs of a rebalancing in world growth are particularly welcome.

Risks to the strong central forecasts are tilted to the downside. They include possible inflationary and growth consequences of the still-high and volatile oil prices, rising real interest rates, and possible exchange rate volatility. To these must be added the hard-to-quantify risk of a global avian flu pandemic. Perhaps my greatest concern at this point is of a growing implementation deficit. This period of strong growth is the perfect time to address the medium-term problems that every economy faces, including those of adjusting to a more competitive integrated world.

Unfortunately, far too little is being done in far too many places. Serious policy reform has gone into remission. Instead of facing the implementation deficit squarely, politicians everywhere are aiming at soft targets, like the foreigner who supposedly competes unfairly or the immigrant who works too hard and for too little, hoping that by shooting the messengers they will somehow avoid the competitive challenges posed by globalization. Precious time is being lost, leaving far too much to be done in less favorable times. With that preamble, let me discuss the conjuncture.

In the United States, first quarter GDP growth will likely rebound from last year's slow fourth quarter and then slow to trend. The primary risk is of a greater slowing of house price growth than anticipated. We estimate that the effect of house prices staying flat as opposed to growing by about 5 percent could lop 1 percentage point off U.S. growth.

Turning to policy priorities, the United States deserves to be complimented for setting a medium-term target for fiscal consolidation. However, its consolidation plans somehow succeed in being both overoptimistic and unambitious at the same time. Going forward, it will be particularly important to rein in the runaway costs of healthcare entitlements even while providing health insurance to all, especially the 8 million children who remain uninsured.

In the Euro Area, forward-looking indicators such as business confidence continue to signal that the recovery in Europe is strengthening, but this is yet to be confirmed by concurrent data. Also, consumption is still weak. Nonetheless, we remain optimistic that euro growth will pick up to about 2 percent in 2006 and that pick-up will be broad-based. Europe's challenge still remains to increase its potential growth rate to a level that enables its citizens to continue to enjoy their enviable blend of work and leisure. More insecurity in the workplace may well be the price that has to be paid to obtain more security for the European way of life.

In Japan, the economic tide continues to rise, lifting inflation, land prices, and bank lending. Improving labor market conditions are likely to support consumption growth. For Japan, the challenge is how to normalize monetary and fiscal policies without setting back the ongoing recovery even while coming to terms with a rapidly aging population.

China's economy is expected to continue to grow at a blistering pace of 9.5 percent. The underpinnings of growth, however, need to move from investment in net exports toward consumption. It is therefore good news that the People's Congress wants to promote health and education spending, and build social safety nets—all measures that should increase consumption in the medium term. As we have consistently argued, such steps will be most effective if supported by financial sector reforms and more exchange rate appreciation.

India, too, is growing rapidly and important steps are being taken to improve the infrastructure. Reform of the labor laws are urgently needed if jobs are to be created in labor-intensive sectors, and I note the Prime Minister supported this today. Opportunities for higher education also need to be expanded if India is to maintain its competitiveness in skill-intensive sectors.

The rest of emerging Asia has benefited from China and Japan's good performance, and from the recovery of the information technology sector. The outlook remains positive, even though investment continues to lag. Growth in Eastern Europe has also been very strong, but high current account deficits and rapid credit growth in many countries need to be monitored.

In the Middle East and many Central Asian countries, a key challenge will be to channel the high oil export receipts into productive investment. High commodity prices also support many economies in Latin America, permitting very welcome reductions in external debt levels and accumulation of foreign currency reserves. Most heartening is sub-Saharan Africa's recent performance, where real growth exceeded 5 percent for the second consecutive year. For 2006, we project African growth to attain its highest level in 30 years.

Mr. Rajan Mr. Rajan

In sum, it would be fair to say to the world, "You have never had it so good," but challenges are building in the background. For instance, global competition may not continue to be a supportive crutch for central bankers in holding down inflation. Spare capacity is decreasing worldwide, as evidenced most recently by rising commodity prices. These are increasingly being seen as permanent and more will be passed through into final goods prices. Tight domestic labor markets in a number of industrial countries, including the United States and Japan, will also attenuate the effects of global competition on wages. That inflationary expectations remain well anchored suggest markets expect central bankers to justify the credibility they have. With less support from the forces of globalization, their job will indeed become more difficult in the period ahead.

Plentiful global liquidity, in part because of the commutative policy stance of important central banks, has prompted a global search for yield that has held down long rates and risk premia. With the change in Japanese monetary policy, the liquidity cycle is turning. In addition, with growth opportunities and pricing par improving, corporations are likely to invest more. The reduction in corporate excess savings will be another factor pushing real interest rates higher. High real rates will further slow the search for yield, and the extreme tolerance for risk that we have seen in financial markets is likely to dissipate.

All this should be seen as a normalization of financial conditions from the current extremely benign ones. Nevertheless, an environment of rising interest rates and risk spreads—however normal—should be of concern in markets where asset prices are inflated, such as housing in some countries.

Finally, this brings me to the global current account imbalances. As the U.S. deficit continues to be financed easily, the optimists who think there is nothing to worry about are graining ground over the pessimists who think that an abrupt and costly adjustment is likely. But the optimists have to be right every day while the pessimists need to be right only once. Since adjustment is inevitable, would a risk management approach not suggest putting in place a multilateral policy framework to support smooth private sector-led narrowing of the imbalances over the medium term?

Such a framework encompassing all the major players in the world would have two additional effects. First, it will reassure financial markets that a policy framework supporting adjustment is in place, thus limiting the risk of an abrupt and costly market-induced adjustment. Second, it would indicate that the imbalances are a shared responsibility and help prevent concerns about the imbalances degenerating into protectionism, and protectionism is a very real danger in the world today.

The tremendous pace of private sector globalization has prompted a public sector reaction. Some governments see their role increasingly as pandering to vociferous interest groups by obstructing change rather than educating citizens to accept it. Economic patriotism is protectionist old wine in a mislabeled new bottle and is all the more dangerous in this interconnected world. The beggar-thy-neighbor policies being contemplated by some countries in the capital account—that is, shielding large portions of their own economy from corporate takeovers while encouraging their own companies to take advantage of the continued openness of others—deserves to be roundly condemned.

People tend to dismiss these as minor frictions, sand in the gears of the globalization juggernaut. History, however, suggests there is a short distance from economic patriotism to unbridled nationalism. This is why the multilateral discussions in meetings like this are so important. They help ensure we continue to benefit from globalization in an atmosphere of mutual responsibility and shared destiny.

MR. HACCHE: Turning to questions, would you please wait for the microphone to come to you, and state your name and affiliation in the usual way.

QUESTIONER: Mr. Rajan, I would like to ask you how does Brazil figure in what you mention as your main concern in the implementation of the policies that would address the structural dilemmas in our economy?

MR. RAJAN: In many ways, Latin America, and Brazil specifically, have made major strides on the macro policy front. In Brazil, inflation is well contained; inflationary expectations are also pretty well set and low; and the fiscal policy is very reasonable. The issue now is to undertake the structural reforms which are needed to make Brazil more competitive. Clearly, a variety of reforms suggest themselves, including financial sector reforms in order to reduce the enormous spread on interest rates in Brazil, but also reforms in improving the ability of people to open businesses. Reducing the bureaucratic costs, various components of reducing barriers to entry in enterprise, I think those are very important in Brazil. Brazil has many successes; it has been enormously productive in agriculture. I think these also need to spread to other areas and that would be very important.

QUESTIONER: Just a follow-up on that. The forecast of GDP growth for Brazil, according to the IMF, is at least 30 percent less optimistic than the one that the government of Brazil is putting out. Would you care to comment on that?

MR. ROBINSON: Well, I cannot comment precisely on the forecast of the government of Brazil. What I can say about growth in Brazil is that clearly it was somewhat weak in 2005; it was around 2.3 percent. There are a number of specific reasons for that. There was an inventory correction, a drought, and perhaps political uncertainties contributed to some degree. So, we are in fact projecting a fairly solid pick-up to 3.5 percent in 2006 as the effects of those factors drop and reflecting, as Mr. Rajan has just said, some fairly solid and well-managed macroeconomic policies. I think the fundamental questions in Brazil are the ones that Mr. Rajan just addressed, how to get medium-term growth going rather than perhaps the timing and extent of the cyclical pick-up. It is the structural factors that are really going to be important in Brazil.

QUESTIONER: Mr. Rajan, you are fairly optimistic about Europe and yet Germany always seems to stay on the sidelines, especially for 2007. Could you comment on what is lacking, what needs to be done? I wonder whether you could say something on the depreciation of the dollar that you seemed to be asking for.

MR. RAJAN: Well, let me start with the second. I am not asking for a depreciation of the dollar by any means. I think the exchange markets do what they do and what is important is to allow them to do what they do, which is remove rigidities in areas where those rigidities exist so exchange rates can support the adjustment, but by no means am I asking for a depreciation at this point.

The problem in Europe more generally than Germany, but certainly with Germany also, is some reforms have taken place but other complementary reforms are needed. For example, reforms on the unemployment front have taken place, which has possibly freed up more labor supply. We need, in a sense, more jobs to be created in Germany, which means a variety of structural reforms in the product market, in services; there are some barriers to entry into services which need to be brought down, for example. Also, we need to some extent—and this is the point I was trying to make in my opening remarks—we need more labor market flexibility, an easier sort of ability for firms to adjust their size, for instance, especially as the world is becoming more competitive. You cannot hire people for life nowadays and we need more flexibility there, which would create more employment. Now, it has to be done in a way that is fair and that is perceived by labor to be fair, but you need that.

Similarly, in terms of wage bargaining, you need differentiation across funds. You cannot have an across-the-board wage bargain because different firms are in different competitive positions. So, those are the kinds of structural reforms that Germany needs in order to rebuild the dynamism, which clearly the export sector is showing right now. So, more needs to be done, but it is not by any means a task which is beyond Germany's capability.

QUESTIONER: I have two questions about your assessment of the Russian economy. First, you wrote that the expansion is being driven by private consumption. The question is, what do you think is wrong? The second one is you wrote that without allowing for greater nominal exchange rate appreciation, it is unlikely that the central bank would be able to meet its 2006 inflation target. Could you comment on that as well?

MR. RAJAN: Let me start with the first one. In some sense, there is nothing wrong with consumption growth provided investment is also pretty solid. The problem I think in Russia is investment has been somewhat more muted than we would like and part of that is the investment climate, which needs to be improved. Some of that would require a greater sense that the government in a sense tolerates private business, has more respect for private property rights, and so on, and that credibility needs further strengthening. I think an improvement in the business climate could certainly increase private investment, which I think would be an important factor.

Would you like to comment on inflation?

MR. CALLEN: Your inflation is still running in double-digit levels; the target is 8 1/2 at the end of the year. Given your consumption is growing strongly, with the lack of investment we see capacity constraints beginning to bite in some areas. We think without a tightening of policy, it is very unlikely that the inflation target is going to be met.

QUESTIONER: You said that policy reform has gone into remission. I wonder if you could comment in particular in the case of France, where the government backpedaled on the labor market reforms, and also in the case of Italy, where elections produced a very slim majority, so if you think this government will be able to do the necessary reforms and which ones; also, if you think there is a serious chance that some commentators have observed that Italy leaves the euro, is that a concern of yours?

MR. RAJAN: Let me start backwards. I think and I hope that there is very little chance that Italy will leave the euro, so I think at this point it is just speculation and I do not see a strong basis for it. In terms of the new government, it is still very early days to see what it is capable of and what it can do. Nevertheless, the policy challenges facing Italy are tremendous and need to be taken up almost in a war footing.

You have a very substantial fiscal deficit; the public debt is extremely high; and Italy has been steadily losing competitiveness over the last few years. There is an important need for both macro policy reform but also structural reforms in Italy to increase the level of competitiveness across the board, all the things we have talked about, product markets, service sector, financial sector. Serious reform is needed in Italy and so I am hopeful that the new government will seize the policy opportunities and do far more, but, of course, we have to wait and see.

In France, undoubtedly the government understands that job creation is very important. France has sort of developed a little bit into an insider/outsider society, with immigrants, and so on, at the margin and insiders better protected. So, this needs some change and the government understands the need to reduce youth unemployment and increase elderly participation. The question is how to do it in a way that is perceived as fair and has greater consensus.

Interestingly, the CME contract that was put in place for small and medium enterprises seems to be working, at least from preliminary reports, reasonably well. It is interesting that the CPE contract, which attempts to do the same thing more widely, met with tremendous resistance. I think it reflects the need to think about the overall fairness of the entire employment system in France, think more widely about labor market institutions, and think about how to bring flexibility into that system which is very much needed, but in a way that is perceived by people as fair.

Certainly, more flexibility should be accompanied by more services, for example to facilitate job search and matching, and perhaps retraining, active training of people. Also, this should be accompanied by everything we have said before, product market reforms, service sector reforms to expand job opportunities. You can create flexibility, but flexibility is not much solace to people who are fired unless there are new jobs they can go to. So, you need dynamism in job creation also, and that is a very important part of European reforms.

QUESTIONER: Mr. Rajan, would you say more, please, about what shape this multilateral policy framework for remedying global imbalances might be, because I am puzzled by your response earlier saying that you do not advocate a dollar devaluation of valuation, but you speak of inevitable adjustment. What, then, about the converse of that; what about a Chinese revaluation? This is, after all, not a market-determined exchange rate. Would you then be more forthright or why are you not saying that the Chinese should revalue, or other Asians as well?

MR. RAJAN: First, whenever we talk about exchange rates, you understand the need for me to be careful. The dollar will have to depreciate over the medium term in order to facilitate the adjustment of the imbalances. That is just plain simple economics. With a 7 percent current account deficit, some depreciation will have to accompany the narrowing. When that takes place and how that takes place is hard to foretell, but any economist worth his salt would tell you some depreciation has to take place.

Now, it would help if that depreciation took place a lot more uniformly across the major currencies of the world rather than rigidities in some areas so that it does not depreciate. One of those currencies is the renminbi. Now, as I said earlier, it is in China's own interest to allow the renminbi to appreciate; they get more monetary control. The investment decisions in China are a lot more sensible than they would be now. And consumption possibilities for their own people increase as the renminbi appreciates. So, in that sense, there is sort of a win-win in allowing more upward flexibility in the renminbi. Similarly, other currencies that have too strong a peg with the dollar when, in fact, there are considerable pressures for appreciation, it would be good if they undertook some appreciation.

More generally, however, I think we have been advocating at the Fund a set of policies. Global imbalances are not going to be solved simply by renminbi appreciation; let us get that straight. Currency appreciation by one country is not—this is a shared responsibility and many countries have to work at this. What we are suggesting is, you know, we have a fairly well accepted plan, a broad plan of who does what and how much needs to be done; that is, the U.S. increasing savings, structural reforms in Europe and Japan, and also in some countries in emerging Asia and the oil producers, and greater exchange rate flexibility in some of the areas we just talked about.

So, what would be useful is to have more details on this plan and to monitor it over time, follow the plan over time to make sure that people are understanding the responsibilities and moving a little in the right direction. That, I think, would be very useful both in reassuring markets that the large players are seized of the issue and in a sense to tell everybody that this is a shared problem, that you cannot solve it by just a unilateral action either voluntarily or by threat on one side, that all players need to take action. That is really what we are trying to do.

Mr. Rajan Mr. Rajan

QUESTIONER: You are forecasting very high growth for the world economy but based on $60 dollars a barrel for oil prices. Could you comment on what will happen to global economic growth if prices stay at the current level of $70+? My second question is about the Spanish economy. You are forecasting a very high current account deficit for Spain; it is one of the highest in the OECD countries. What does that mean for the Spanish economy? Do you see any risk of a sharp slowdown of the economy because of that?

If I may, a third question. On the ECB, you say that there is no rush for an increase in the rate of the euro, but the ECB is signaling an increase in June and probably another one later in the year. Would you characterize that as a mistake?

MR. RAJAN: Again, as far as oil and the global economy goes—David, I will turn this question over to you—clearly high oil prices have an effect on growth. They have much less of an effect than we used to anticipate three or four years ago, for a variety of reasons, including the fact that other inflationary pressures have been relatively well contained through the process of globalization. It is not to say that oil has no effect. If in fact oil prices stay at the current level, which is about $10 dollars a barrel embedded in our forecast, it will have some possible effects on growth.

Our back-of-the envelope estimate is that about a 10 percent increase in the price of oil lops off about 0.1 to 0.15 percent of world growth. So, you could think of some moderation if this persisted for a significant period of time over our forecast. As I have said, our forecasts are tilted, the risks are tilted to the downside. How long this current price will prevail? Clearly, the concerns right now are more supply-related: Niger Delta, Iran, Iraq; this accounts for a significant portion of world oil supplies. If any one of these becomes a more serious problem, with the very limited spare capacity we have right now we could see oil prices go higher.

Because they are supply-related rather than demand-related, last year and the year before oil prices were being pushed up because of much higher demand, so growth itself was pushing up oil prices. That was less of a concern than when supply is actually constraining and, therefore, pushing up oil prices. In that sense, it is a danger; it is a risk. We are watching it very closely and urging everybody—oil producers, oil consumers—to do their part in trying to reduce the effects as much as possible.

On the ECB itself, we think that the survey data, the leading indicators in the Euro Area are very positive and suggest that a fairly strong rebound is underway from the very weak fourth quarter last year. However, there are still causes for concern. There is some dependence on net exports, especially in some countries like Germany. There is still fairly weak consumption, and employment has not picked up strongly enough, we think, in Europe.

Given that inflation is still relatively well contained, inflationary expectations are well contained and whatever blips you see in inflation come from one-off VAT increases, and so on, we think that at least from an inflation perspective, there is no strong need at this point to raise interest rates. So, our advice, if you will, to the ECB is let us not rush at this point; let us see the data confirm this strong recovery. Certainly, the ECB has, if you sort of accept what the press is reading into the ECB's statements, has given itself more room to watch the recovery and see what might happen, and I think that is perfectly appropriate.

MR. ROBINSON: A couple of brief words on Spain. Spain has had continued solid growth but, as you pointed out, I think the issue is that that growth is becoming unbalanced, that it is too dependent on domestic demand, which is growing quite rapidly. On the other side, competitiveness is weakening. One of the consequences of that, of course, we see in a fairly strong housing market and inflation that is somewhat above the euro area average.

So, the task for the authorities is how to rebalance demand. Obviously, Spain does not have an independent monetary policy, being a member of the euro area. What is left is a combination of fiscal and structural policies. Spain's fiscal policies are actually in surplus, so there may be room to do somewhat more and that would certainly help on the demand side.

I think the other key issue, and it is familiar from some of the issues that we have already been discussing, is how to improve competitiveness. There are a number of areas where I think Spain needs to do more, including in the labor market in particular, but also I think in the area of product market reforms as well. There is a national reform program underway and clearly that needs to be strongly implemented.

QUESTIONER: My question pertains to global imbalances as well. You have said that the U.S. medium-term fiscal target is both overoptimistic and unambitious. Would you then say that there is now a greater share of the responsibility on shoulders of other nations, particularly in Asia, to do more at their end to protect themselves against the consequences of an eventual correction or should there be a sudden correction in the imbalances either by way of finding alternative avenues to park their savings or to be less resistant to the appreciation of the currencies? That is my first question.

The second question is how high or serious do you think is the risk that we may see a sudden, a more sudden correction in the global imbalances through the currency markets? There seems to be some concern among some Asian Finance Ministers; we saw mention of this at the ASEAN meetings a couple of weeks ago. Would you comment on that?

MR. RAJAN: I think the U.S. should do more. I mean, I think all parties should do more than they are doing, but certainly the U.S. should also do its bit. When I say overoptimistic, I mean that there is not enough accounting for the expenditures, say from the hurricane-related expenditure and not enough accounting for the effects of war, which will also contribute to expenditures, and perhaps the sense of overoptimism on shrinking the entitlements, and so on; there is not that much room to shrink. So, we think that some of what needs to be done is revenue-enhancing measures in the United States. That is the overoptimism part.

The unambitious is we would like the United States to reach budget balance without social security by about 2010 and what it has targeted is really halving the budget deficit by 2009, so a substantial difference of what our ambitions are. We think that the pressures are just going to get more over time. There is the tremendous amount of spending needed on Medicare and Medicaid, the medical-entitled programs. Some of it has to be fixed. There is a tremendous outlay involved. We also have social security which has a large gap. Both these imply that, if you go into these problems without a relatively balanced budget, you are really pushing problems into the future, so more has to be done.

On the side of whether countries have to take measures, clearly the more every country does, the less the risk is. Certainly, we would advocate some exchange rate appreciation in the countries that have not appreciated in Asia. Also, I think we need to think about—and this is where I come back to my point about implementation deficit—structural reforms that are needed in part to deal with the challenges that would come if, in fact, there is an abrupt adjustment of exchange rates. That implies you should have the flexibility to move resources from areas which are now uncompetitive at current exchange rates, to areas where you are more competitive at the prevailing exchange rate, which means flexibility on the product market side; some companies should be allowed to go out of business. The financial sector should be able to do that and reallocate resources elsewhere. Similarly, labor markets, you should be able to move people from one area to another. So, this globalized competitive economy needs flexibility and it is across the board.

As far as the risk of an abrupt adjustment of global imbalances go, I think that risk is there and I think the longer the imbalances continue, the higher the probability of their risk. It is, nevertheless, a fairly low probability still, but we should do everything to reduce it because it can be a very costly adjustment process if it happens very quickly, and this is what we need to do.

QUESTIONER: I just wonder whether you could say a bit more about this multilateral policy framework, who you think should take up the challenge, because we already have multilateral policy frameworks; the IMF is one and the G-7 is another. Surely, the problem is not lack of a framework but a lack of willingness on the part of policymakers to actually take heed of what the IMF has been saying about the imbalances for the last five years. What has actually happened is that you have been saying these imbalances are getting bigger and dangerous, and the policymakers have been ignoring it. It is not the lack of a framework; it is a lack of willingness to actually act, is it not?

MR. RAJAN: Well, I would not say that they have been completely ignoring us; they have done some things. Certainly, we have seen a little bit of movement. The U.S. has committed to a framework, even if it is not as strong as we would like. Similarly, we have some movement on exchange rates. If you look at structural reforms in Asia, they have been taking place. Efforts to increase consumption, which is what many economies are focused on, have actually increased. So, I would say that it is not a completely bleak landscape as far as actions go. Nevertheless, it is far below what we want.

In a sense, what I am urging is that they all come together and recognize that it is a mutual problem. They sort of—we have been urged by a number of our members, but collective urging that we actually pursue this and bring more peer support or peer pressure to bear on this process, with everybody sort of weighing in if the others do not do enough of their bit.

So, this is really a multilateral problem. We have, as you said, been talking about it for some time. It is now very important that our member countries come together and say, yes, this a problem we want to solve, and we sort of urge you to push ahead and try and bring us all together repeatedly to try and attempt to solve this. One channel through which this framework could operate is the Managing Director's new proposal for multilateral consultations, which would bring together important parties, as and when needed, in order to discuss particular problems that crop up. That could be a vehicle that is used in this process of trying to reduce the imbalances over time.

So, we have been doing some of this. What we would suggest is a more formal framework in which this is done so we actually have some traction on this process.

QUESTIONER: Just one clarification and one question. On the U.S., when you say revenue-enhancing measures, I guess you mean tax increases. My question is average real wages in the U.S. have fallen for two consecutive years, I understand for the first time in any expansionary cycle in history, despite record profits as a percent of GDP—the highest since the mid-60s, I think—robust growth, and productivity, and rapid increases of income at high income level.

Now, the IMF, as I understand it, in its analysis and research presumably is pursuing the interests of the average citizen both in the U.S. and in the rest of the world. These trends in terms of income inequality seemed to be spreading out from the U.S. to areas like Europe. The only explanation that several economists give is the decline of collective bargaining and the decline of union strength. Yet in the World Economic Outlook there is absolutely no reference to this as being a problem and, in fact, your only advice to the Europeans seems to be to actually dismantle collective bargaining.

Now, this is not J.P. Morgan or Goldman Sachs giving us this advice; it is the IMF. I wonder if you can tell me why you do not address these issues?

MR. RAJAN: You are absolutely right in that what we care about is really the well-being of the citizens. The question is how best is that achieved. In a competitive world, can you sort of, in a sense, erect barriers against competition, protect existing wage structures, or do you have to sort of go with the flow in a sense and find other ways to sort of compensate? The point is, if you have unrealistic wage protections and flexibility barely, the consequences can be very detrimental.

In a sense, I do not want to put all the blame on labor for what is happening to the U.S. or to industry, but that is an area where very inflexible practices have contributed, I would think, to the decline of that industry. Clearly, other factors also matter, but labor rigidity has been part of the problem.

That said, it is not to say that the U.S. does everything needed on the labor side. For example, in my opening remarks, I talked about insurance. In a globally-competitive economy, it is very important that you insure the individual. You have a safety net for the individual because of the serious risks of losing your job, and so on. Do not protect the company; do not protect the job; but protect the individual. That is the kind of mantra we should have in this situation, which means you have to have some form of universal healthcare. It is very, very hard in this competitive economy for so many, 40 million plus Americans to be uninsured, of which 8 million are children. So, you need universal healthcare and you need strong educational systems. The challenge of improving education in the United States, especially in poor areas, is extremely important.

So, the point I am trying to make is that it is not so much about protecting those jobs that we should be focused on, but protecting the opportunity, the ability of individuals to have that opportunity and to have a safety net to fall back on. In a sense, our policies are toward advocating that kind of a more flexible system rather than a rigid system which will hold up for some time, protect a few and then collapse, leaving people without recourse.

QUESTIONER: You mentioned in our opening remarks the dangers of protectionism. I would like to have your assessment on the current situation of the negotiations in the Doha Round, and what would be the consequences for the global economy of a failure that seems each day more likely?

MR. RAJAN: Well, like you, I have followed with apprehension the newspaper reports which suggest that things are not proceeding toward a conclusion before the April deadline. Deadlines have been missed before. I am hopeful that good sense prevails. I think that a failure of the Doha Round, though not catastrophic, would be a very important setback and, coupled with all the noises about protectionism that are emerging, would just contribute to the strong anti-globalization mood.


Mr. Rajan Mr. Rajan


We have to remember that much of the good fortune we have right now is because of the forces of globalization. Because of an integrated world product market, we have managed to keep inflation down; because of an integrated savings pool, interest rates are so low. So, to have protectionism come back at this point would be to lose many of the benefits we have gained. I think a slowdown in the process of trade opening, which a failure of Doha Round would mean, would contribute to these forces. So, it would be a very important setback if the Doha Round fails. But I am hopeful. We have seen deadlines missed before, and I am hopeful that this deadline is met. But even if it is not met, I am hopeful that good sense prevails over time and last-minute bargaining gets us where we want to be, an ambitious Doha Round.

QUESTIONER: You were saying in your remarks earlier that sub-Saharan Africa has experienced 5 percent real growth this past year. What would you attribute this growth to? What are the factors that have led to this? Is this stability, privatization? And if I can ask you the question you have just been asked more directly for sub-Saharan Africa and Africa generally, what impact do you think these setbacks, for instance like this Doha Round, will have on this growth, particularly for some countries in that region that have ambitions of growing their economies by between 6 and 8 percent for this year, countries like South Africa for instance?

MR. CALLEN: There are three main factors supporting the strong growth in sub-Saharan Africa in recent years. First, clearly the strong global economic environment has helped tremendously. Second, a number of countries have been experiencing increases in oil production, which has boosted their growth. Thirdly, and most importantly, the countries are generally benefiting from improved policies in recent years. We have seen inflation reduced substantially, fiscal position improved. As we documented in the September 2005 WEO, we have seen a number of important institutional transformations recently where countries have improved things such as legal structure, property rights, freedom to trade, and this has been very important behind the improved performance. Looking forward, clearly more of the same is needed; there is still clearly much further to go in terms of institutional strengthening.

On the Doha Round, I think clearly a good outcome on the Doha Round would be beneficial to trade in Africa and beneficial to growth.

MR. RAJAN: Just to add on that. Part of the benefit of trade is that it empowers groups in the country who are competitive, who really want to push ahead competition. I think one of the sort of side effects of a failure of expanding trade is you disempower these groups and it has more substantial spillover effects on reforms, sets back reform more generally. So, this is yet another reason, especially in the countries of sub-Saharan Africa, that a good outcome for the Doha Round would expand opportunities, both directly but also indirectly in pushing ahead reform.

MR. HACCHE: We need to wrap it up there. Apologies to those of you we did not get to this time, and thank you all for coming.

[Conclusion of Press Conference.]


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