Transcript

Managing Director, International Monetary Fund
Washington DC, January 16, 2007

Participants:
Rodrigo de Rato
IMF Managing Director
John Lipsky
IMF First Deputy Managing Director
Masood Ahmed
IMF External Relations Department Director

MR. AHMED: Good morning and welcome to our briefing. I would like to welcome particularly those of you who are participating through the internet and encourage you to send in your questions. I am Masood Ahmed. We will start off with opening remarks by the Managing Director, and then both the Managing Director and the First Deputy Managing Director will be ready to answer your questions.

MR. DE RATO: Thank you very much. Good morning to certainly all of you here but also, as Masood said, especially those watching us on the web. I am very grateful to have this chance to meet you at the beginning of the year and follow up what I announced last year that I will have regular press briefings with you to outline our agenda.

This is going to be a busy year for the International Monetary Fund in making progress with our Medium-Term Strategy as I will take a few minutes to explain to you and, of course, take your questions about it. But first, let me make some reference to the global economy.

After four consecutive years of strong growth, what we expect is that global growth will remain solid in 2007, approaching 5 percent. This represents certainly a very significant expansion of the global economy and probably the longest — if not the longest, one of the longest — sustained periods of growth in the post-Bretton Woods era, that is, after the Second World War. In that respect, while the U.S. economy has slowed down in large part because of the continued weaker housing market, what I can say now is that a soft landing seems more sure as lower energy prices have supported employment growth and consumption. Also, we see the decrease in the housing market to be bottoming out.

At the same time, and this is an important issue that makes comparison with 2000 different, spillovers to other economies from a slower U.S. growth have been minimal. Economic recovery in Europe has broadened at the same time as we were seeing the U.S. slow down, and growth in Japan is broadly on track after an earlier soft patch.

As we all know, expansion in emerging markets continues with very strong expansion in India and China but also in others. Developing countries are also recording significant rates of growth which is good and is certainly very necessary to reduce poverty. I was in Africa last week in two countries, Gabon and Cameroon, and there are many countries in sub-Saharan Africa having strong growth right now. It is true that some of that growth is related to commodity prices especially oil, but nevertheless this is an opportunity for the region to really face a reduction in poverty.

Downside risks to this benign global scenario are less threatening now than they were only a few months ago. Part of this is because declining oil prices have eased inflation, and that has reduced risk on growth although we should say that on oil prices, we might see some volatility down the road.

There are signs, as I said before, that the U.S. housing correction may be reaching a turning point, but nevertheless we see the need that authorities and policymakers and regulators, monetary authorities especially, should remain vigilant.

Monetary policy in advanced economies must continue to maintain an appropriate balance between risk on a sharper than expected slowdown and a possible resurgence of inflation as output gaps and labor markets are very tight. But also inflationary pressures and care with inflation because of that is equally important in emerging economies.

With respect to global imbalances, they might be less imminent, but there is still a significant risk to the world economy if disorderly adjustment were to occur. In that respect, I would like to flag the risks for protectionism seems to be on the rise in comparison to the others.

Overall, the global environment, as I said, looks quite favorable, and this provides in some cases a unique opportunity for all countries to advance structural reforms and fiscal consolidation to face future challenges. I have to say that we see some cases of fiscal consolidation, but we don't see so many cases of structural reform. In that respect, in particular, emerging markets and developing economies need to reduce vulnerabilities, implement market-oriented reforms, and certainly make strong efforts to ensure that these very clear benefits of growth are shared broadly in their populations. This is also a very time to underscore that there is a shared responsibility among all countries but in particular larger economies, both industrialized and developing economies, to bring the Doha Round to a successful conclusion. This would be the most important step to limit protectionism in the world.

Now, allow me to come to the Institution. The goal of the Fund is certainly to support policies among our members that will maintain this benign global environment and that will help promote growth and encourage a reduction in global poverty. This is our main objective in our Medium-Term Strategy to continue to respond to the needs of our members in a time of a globalized economy in the 21st Century.

In September, 2005, we embarked on a wide-ranging program to modernize the Institution, called the Medium-Term Strategy, and that was approved by the Governors in those Annual Meetings here in Washington. So let me now briefly mention how things are moving in that agenda.

Let me start with surveillance which is a core function of the Institution. In today's globalized economy where the economic and financial policies of one country may affect other countries in a much stronger way than before, international cooperation is, if anything, as important or more important than before. We need a clear mechanism in place to monitor economic development in each country as well as on a global scale. The Fund is a global institution with a global membership, and certainly it provides many instruments to guarantee that international cooperation can be achieved through economic surveillance. So, in that respect, strengthening surveillance has to be at the center of our modernization.

Last April at the Spring Meetings, we launched the first multilateral consultation which addresses global imbalances. Discussions under this consultation are proceeding, and the First Deputy Managing Director is leading that process. I will report to the Finance Ministers and Central Bank Governors next April here in the IMFC on the evolution of those consultations.

At the same time continuing with surveillance and improving the quality of our exchange rate surveillance, we have extended to the currencies of major emerging market economies the analysis that the Fund has in the past carried out only for industrial country currencies. We are also strengthening our analysis of financial markets and financial sector issues and also working to integrate that analysis into our overall assessment of economic policies, that is, in Article IV consultations. We have made some important changes inside the Institution to address that.

Finally, we are strengthening our multilateral surveillance work through more systemic coverage of regional issues through publication of regional economic outlooks. This is important, so that each of our members is better able to draw useful lessons from among and within the Fund's near universal membership.

But looking into surveillance, we still have a very broad agenda to complete. We are right now in the middle of a review of our 30-year old Executive Board decision that established the basis of our surveillance, and we believe there is scope to update the framework of surveillance to bring it more in line with best practices and the needs of our members. We are, as I said, working on all the other questions regarding surveillance that I mentioned.

Now, let me turn to governance. For a public institution, as much as or more for an international public institution like the Fund, the credibility and effectiveness of us is a function of our governance and our perceived legitimacy. I believe this is very clear in our agenda. Last September in 2006 at the Annual Meetings in Singapore, 90 percent of the vote endorsed a two-year program to modernize and reform quotas and voice in the Institution. You know that the first movement included an ad hoc increase of the votes of China, Korea, Mexico, and Turkey, and we are now working on implementing the two-year agenda. Let me mention the historic decision in this respect that was made in Singapore to increase first and to protect later the voting interests of low income countries and also to give Chairs of the Board with very broad constituencies more voice and capacity.

Beyond strengthening surveillance and reform of quotas, we are also pursuing other areas to which I would like to call your attention. Crisis prevention, there has been an important and extensive program of outreach to define better what kind of financial instruments could help us to respond best to the financial needs of emerging market members, and there will be a discussion about this in the IMFC in April. Also, in the next few weeks, we will have two very important reports being brought to us, one regarding the income of the Fund by the group led by Andrew Crockett and the other on the relationship between the World Bank and the Fund by a group led by Pedro Malan. Both of them, of course, will be made public the moment we receive them, and I think both of them are a very good opportunity to address important questions regarding this institution.

Certainly, another priority in 2006 that will continue in 2007 will be to make us more effective in helping low income countries to move towards the Millennium Development Goals, and in that respect we are focusing more and more on what we do best and on the task that we can make a greater contribution to countries and to poverty reduction. But at the same time, we realize that we have to have a comparative position and a comparative approach with the brother community of international actors and partners in development.

Finally but not less important, we will continue to make efforts on technical assistance and capacity-building to give countries a better footing in their institutions, and in that respect let me just mention that I was in Africa to participate in the launching of our Third Technical Assistance Center for Central Africa in Libreville. We just came out of a pretty busy year, but we are going to have a very busy 2007, and I believe that that is what the Institution should do be able to respond to the challenges of its members. We have a new member for 2007 which is the 185th member, Montenegro, which will become a member later this week if I understand correctly.

Thank you very much for your attention and for your patience, and now John and myself are open to your questions. Thank you.

MR. AHMED: Thank you very much. We will now take questions. Please identify yourself. Let me also encourage people who are participating through the internet to send in their questions early. Let me also just mention that unlike our usual press briefings, this is no embargoed; this is going out live.

QUESTIONER: Good morning. Turkey is facing two major elections this year, and the government recently decided to delay privatization of the country's electricity grids citing the recent elections in November as a reason. Now, first, would you please comment on this, and secondly, are you concerned that the Turkish Authorities could deviate from the program on the way to the elections?

MR. DE RATO: First of all, I want to say that the Turkish program has been very successful and has been very broad and deep. There have been a lot of changes, not only in the fiscal environment of Turkey but also in the structural reform of the country, and many of them have been carried out. It is true that on the way to elections, the government is taking some decisions. I think we should not over-dramatize or exaggerate. All governments in the world have very conscious decision-making when they are running to elections. I don't think that we should point out to any in particular. I have all confidence that not only the government but the Turkish society is aware of the advantages that economic reform and macroeconomic stability have brought to the country. We certainly keep engaged with the authorities, and we will, of course, be open and ready to collaborate with the next government.

QUESTIONER: I was wondering if there was a chance we will be able to have more insight on what is going on with the multilateral consultations. Before, you said you would be providing an update. I guess that would be in April at the spring meetings. Since we are in January, is there any chance we will be getting more information before then? We usually hear a little bit at the bimonthly press briefings, but it has not been a lot.

MR. DE RATO: Well, first of all, let me say that these consultations are a very unique instrument that was launched in April. I think it has been a very transparent process. We announced then what we were going to do. We announced in June which countries will be part of that process. We always said that that was a process inside the IMF which means inside the international community. As I just announced, we will be bringing this issue to the IMFC. That means to the Board before that. So that means the IMFC is in April, and we will have a discussion in the Board before that. Let me also add that we want to thank the participants for their engagement. I think I had the chance of saying it before, and I think John and Masood probably have too, to underscore that we have been working with participants that are very much engaged in the discussion. They see the discussion as fruitful and important. Maybe John could add something more to this.

MR. LIPSKY: Indeed, although it probably won't be completely satisfying in this sense. The discussions are ongoing and hopefully are proving to be, I think they are proving to be useful to the participants. There is really no interim report to be given. After all, as the Managing Director said, the process itself was unique and has been evolving as we move forward since it really has no exact precedent.

So we will be carrying it forward as long as it seems to be fruitful, and we will be providing an interim report for the spring meetings but before that to the Board. I presume at that time, we will have a bit more to say. Thank you.

QUESTIONER: If I may further on the multilateral consultations, clearly we all understand the unique nature of the process that you have put in place, but nonetheless we are some way down the track now, at least we ought to be according to the time lines that you have laid out. So I wonder if you could be a little bit more specific about where we are actually making progress as a result of these discussions. What has actually changed as a result of these discussions, whether there are substantive discussions taking place about policy remedies as well as about the broad sharing of insights into the nature of the problem of imbalances? Separately, can you confirm whether there will a specific set of recommendations or findings presented to the IMFC in April and if so whether that will be made public?

MR. DE RATO: First of all, I would like to say that, as you mentioned, there has been an initial process in which there has been a discussion to find if there was a shared view of the problem. It might look easy to you, but it is not that easy to find an international arena to share views of issues. You could give me a lot of examples of that.

I think we have advanced. We have moved toward a shared view of the problem of global imbalances. Now we are in the discussion of what are the policies that each participant sees as fit to address that problem. Of course, those policies are not only of each participant but how participant sees the others — that is exactly where we are — and that would be the nature of our report to the IMFC and to the Board, and that would be part of my press conference to the IMFC. It is very clear this is going to be a transparent process.

QUESTIONER: If I may, sir, will you be presenting recommendations or merely, if you like, a sort of summary?

MR. DE RATO: I will tell you that in April.

QUESTIONER: (off mike)

MR. DE RATO: Oil prices have been, in general, as we have mentioned, a risk for the global economy in terms of growth and inflation. That risk has not materialized as fully as in previous occasions although we have gone through a very substantial increase in oil prices. Now we see a drop in oil prices although, as I said before, we might see volatility in oil prices down the road because there are different explanations for the drop in oil prices and the future markets, as you all are aware, are predicting an oil price of around $58. So that is where we are.

That, of course, means that in terms of inflationary pressures, there is going to be less inflationary pressures. As I mentioned in many countries and also in many countries in Latin America, inflationary pressures are also fueled by capacity constraints, and I see in many Latin American countries the need for structural reforms including increasing the Central Bank's autonomy to make those capacity constraints and anti-inflationary policies more credible.

Certainly, from the point of view of oil-producers, there has been a very important amount of windfall revenues because of this situation. Although oil prices have dropped from the peak of $70-something, I mean they are still substantially strong. We are talking about $55, $52, $58 per barrel, so there are a lot of opportunities for oil-producing countries. I think in Latin America, that of course is giving opportunities, but it should be a base for change in structure and for transparency to be enhanced. At the same time, all commodity prices are also dropping, and that might pose some challenges for some Latin American countries.

But overall, we see the growth in the region strong. The region has certainly benefited very much from commodity prices but also from a very benign financial scenario or financial conditions in the world that are useful for all countries and offer opportunities to all countries but also especially for Latin American countries. Last year, growth in Latin America was about 5 percent. This is the most vigorous expansion in the region since the 1970s, and in that respect we see the need for Latin American countries to take advantage of this situation. As I said before, one of the challenges for many emerging economies is not only to strengthen and reduce their macroeconomic vulnerabilities but also to make this growth more broadly shared in social terms, and this is certainly a very important challenge in Latin America.

Specifically to Brazil, we have seen a very strong performance of Brazil in terms of macroeconomic stability and the reduction of inflationary pressures. I think we all share the view that the agenda of Brazil is to increase its growth, maintain macroeconomic stability, so as to get Brazil in the long-term growth prospect of sustained growth with macroeconomic stability. Structural reform should play a very important role there and at the same time not only the fiscal adjustment that Brazil has done but also the quality of fiscal policy in terms of social expenditure and infrastructure expenditure. It is a challenge, and we are, of course, working with the authorities through our Article IV consultations to address and to look into to all those issues.

MR. AHMED: Let me, at this point, introduce one of the questions that has come in through the internet. The question he has for the Managing Director is:

"I would like to have your opinion on the latest budget recently passed by the Italian Government. How urgent is retirement reform in this adjustment process?"

MR. DE RATO: Thank you very much. First of all, I think that the 2007 budget could reduce and should reduce deficits below the 3 percent of GDP threshold, and I think that is a very important question. We have seen a better than expected outcome of the 2006 budget, many of it related to an increase in revenues more than anticipated but also in, I think, the efforts that the previous government and the acting government have done in its budgetary policy although we should all be aware that expenditure has overshot targets of the 2006 budget. So that means how challenging and important is expenditure reform in the budgetary policy of Italy.

We believe that the 2007 budget contains initial measures that could over time contribute to containing expenditure pressures, but more needs to be done; considerably more needs to be done. Let me just mention some structural reforms in spending areas: civil service reform, the strengthening of the so-called domestic stability pact, pension reform, and the health pact that should be rigorously implemented. At the same time, we see that there is no fiscal conservation without growth. So, in that respect, lately the liberalization agenda of Italy, opening the products and services market to greater competition, and making potential growth in Italy higher is a key question in looking forward.

QUESTIONER: My question will take you back to Latin America. As you know, a new President has taken office in Ecuador yesterday. He is one of six leftist leaders that have been elected or reelected for office in little more than a year. The new Ecuadorian President announced that he is going to renegotiate the Ecuadorian debt, and also he would be eliminating the independence of the Central Bank. My question is: What is the role, if any, the IMF will play in a renegotiation of the Ecuadorian debt? My second question is: How important for a country is it to have an independent Central Bank?

MR. DE RATO: Let me tell you that, first of all, I want to congratulate President Correa for his election, and we have already started a dialogue with the new government even before yesterday. So I think that we will have a very close relationship with the new Ecuadorian Authorities. I welcome the decision of the government to prepay the IMF on [$33 million], and we look forward to maintaining a very good relationship. We have already met with the team, and I don't think this is the moment to speculate on my side on what would be their policy. We will, of course, look at each on its own merit.

The staff paid a courtesy visit to Minister-designate Patino, and I think I can characterize the conversation as constructive. At that meeting, Mr. Patino stressed to us that no decision on debt management has been taken. So that is what I can tell you.

On the Central Bank's independence, I can only say what I have seen, and what I have seen is that Central Bank independence has paid very well to countries who have increased Central Bank independence. Low inflation has rewarded, and inflation is a bad element of economic policy, but it is especially a very bad element for the poor. I see the success on inflation in Mexico or in Brazil or in Colombia are good examples of inflation policy or inflation reduction in Latin America.

So my institutional and personal advice, and I have seen it in many countries, is that Central Bank independence is a very important element of good governance and good government in countries and provides a very important instrument to practice stability, and practicing stability is key for sustained growth.

QUESTIONER: Thank you. A little over a year ago, the IMF approved a $685 million loan for Iraq. I was wondering what the status of that loan, how much of it has been dispersed at this point, the status of any programs you have in Iraq, and with the ongoing violence and the hopes going forward if this could have any chance of being successful.

MR. DE RATO: Let me say that the discussions between us and the Iraqi Authorities toward completing the next review under the stand-by arrangement are right now going. So we are in the middle of seeing that review, and I cannot give you a specific date when that review will be completed.

We see as positive steps the strengthening of the dinar and certainly a more effective use of monetary policy because inflation has reached very high inflations in 2006 as you all know, and in that respect we were urging the authorities to move into tighter monetary policy. Nevertheless, of course, security considerations in Iraq are crucial. As I said before, I can't give you right now a specific date of when we will complete the review, but I can tell you we are in the middle of it. There is no disbursement because this is a precautionary program, so there have not been any disbursements by us.

QUESTIONER: On the Japanese economy, I believe you gave an optimistic overview, but I was wondering if you could expand on that and maybe talk about the challenges the Japanese economy faces at this point and also if you think it is a good idea for the Bank of Japan to raise its interest rates this month. Thank you.

MR. DE RATO: On growth, as I said in my initial words, we expect expansion to continue over the near term. So it is true that the last data of last year, especially the third quarter, were soft, but we believe that underlying fundamentals are supportive. Certainly, the key question would be to increase private consumption. In that respect, improving the labor market and strong business sentiment and profits will be key for the evolution of a better outlook for private consumption.

The risks to the downside are mainly external, and that I related, for instance, to a U.S. slowdown. As I said before, we believe that we are facing with a soft landing in the U.S., and I think that is good news for the U.S., but it also good news for Japan. Also, a disorderly adjustment of global imbalances, that as I said before right now doesn't look like an eminent risk to the global economy although a very significant one still. The reduction in oil prices is also important for the Japanese economy, not only because of inflationary pressures but also for growth effects.

On monetary policy, we see inflationary pressures virtually non-existent. So in that respect the removal of accommodation of the monetary stimulus should be gradual. I cannot give you a judgment on the decisions of this week, I believe, by the Bank of Japan. I don't think it would be appropriate for me to do that, but we certainly see that with no inflationary pressures, the removal of the accommodation of the monetary situation should be gradually moving forward. With inflation around 0.2, even with a very weak yen, and earnings inflation expectations declining through the summer, that is the view we see of monetary policy in Japan.

QUESTIONER: The United States has recently imposed sanctions on several Iranian banks and financial institutions, citing their connections with the country's WMD programs. The Iranian officials naturally strongly disagreed with that step, and I think, if I am not mistaken, at some point they announced their intention to appeal this decision. They want the IMF to interfere into this dispute. I am wondering if Tehran has, in fact, asked you to do something about this, to interfere into this dispute, and if that is in fact is true, what you are going to do.

MR. DE RATO: The Iranian Authorities, of course, are free to take decisions, and we will react to them but not at this moment.

QUESTIONER: Another question on Latin America; I would like to know if you have any comment on the nationalization announced by Hugo Chavez last week in Venezuela.

MR. DE RATO: First of all, let me tell you that the details of that announcement have not been disclosed, and I think it is my responsibility to react to specific details and questions, not to make political judgments which I don't think I am entitled to do. This is not for us an ideological discussion. Of course, we understand the ideological implications, but I don't think the Fund has any mandate and any capacity to make an ideological discussion.

This is, for us, only a question of economic efficiency. What is at stake is not so much who owns what, if it is the state or it is the private sector, but the stability of decisions. We still don't know if these new measures will effectively change the framework provided by the Hydrocarbon Law, for instance, which passed in 2001. We will advise the authorities to keep investment conditions stable.

If the government decides to change the ownership of means of production, of course, from our point of view what is clear is that has to be an orderly process. Governments have to take into consideration that short-term decisions, for instance increased revenues, can contradict medium-term decisions to increase investment. From the point of growth, investment could be a much more important element. So in that respect if the government decides to change the ownership of some means of production, investment climate should be a primary consideration of that government. But as I said on this issue, we don't know the details, and I think it would be reasonable from my point of view to make any judgment.

I want to emphasize also that on monetary policy and Central Bank independence, what I just said to some of your colleagues before, we truly believe that is a very important element of the credibility of macroeconomic stability in any country.

On Venezuela, our Article IV consultations have been delayed, and we are certainly hoping that we can hold them at an early date, and of course that will depend on the new government when it is established.

QUESTIONER: You mentioned earlier on that the U.S. housing correction may be reaching a turning point. Could you please tell me whether you think the worst of the housing slump is behind for the United States?

MR. DE RATO: What we see right now is that the price correction could be bottoming out, so I think we still have to look at the data. I think it would be maybe too early to rule out future corrections. I mean these things take some time to settle, but the data that we have seen up to the end of the year, if I am correct, is that the reduction of prices is not increasing. So then, of course, I think we will have to meet sometime to confirm that view.

But overall, given not only the effect of the housing correction but also the effect of other issues like profits and private consumption, as I said, we see a scenario of a soft landing for the U.S. economy. Do you want to add something?

MR. LIPSKY: Yes, of course, in the housing sector, one of the interesting recent data points have been the increase in mortgage applications, but again, as the Managing Director said, it would be far too premature to reach any particular conclusion. Long-term interest rates have remained low. The recent decline in oil prices, although in the longer term may have a more ambiguous impact, in the short term it does increase the real income of consumers. So there are important cross currents that we will want to take a look at.

At the same time, it should be clear even if the housing sector were to bottom out in the sense we are talking about here, housing would represent a significant drag in terms of GDP growth for the next couple of quarters. So we are certainly not saying it is suddenly going to turn positive for growth in the near term, quite the contrary, even if demand has stabilized.

QUESTIONER: You said in December that you were about to lower your forecast for the global growth this year, 2007. Actually, you are not doing it because you said it was slightly less than 5 percent. So it is still 4.9 percent?

My second question was about the quota formula. Apparently, you had the discussion already during the Board recently, and you plan to have another one before the April assembly. I was wondering what was the conclusion or was the flavor of the last discussion and what is the date of the next discussion.

MR. DE RATO: The flavor of the last discussion was a broad discussion. I think that we already have a schedule, though I don't have a specific date, but we will have another one here in the next few weeks. I still don't think that second discussion will be a decision-making moment. I think that this is a complex question in which, of course, different views have to be narrowed down. The staff is working on options that were put on the table for different countries, and that could narrow down differences. I think it will take a few discussions, but I envision to move forward on this issue because it is a key question. I think all countries understand that we not only need a new formula, but also we need to apply a second ad hoc increase of more dynamic economics to really make the most dynamic economies but specifically emerging economies a bigger voice in the Institution.

At the same time, what we will have is probably a much more advanced discussion in the next few weeks on low income countries' basic votes — on basic votes not only for low income countries but basic votes that will effect mainly low income countries. that will be a more advanced discussion.

But as you know, the agreement in Singapore is that there is a package. Everything will have to be decided at the end at the same time. What I see right now is that on basic votes, we probably will arrive to a definitive line fairly soon, and we will keep the momentum on the discussion of the formula.

QUESTIONER: I wanted to return a little bit to the question of global imbalances. You said that the risks in the short term seem to be a little less. I just wanted to know that this week there seemed to be news that the foreign reserves of China achieved the one trillion dollar level which many people feel is significant. I wonder if you could just comment a little bit on going forward, what your discussions might be vis-à-vis China, whether you think China is doing its part to help lessen these global imbalance risks.

MR. DE RATO: China has been a significant part of what we see as historical growth in the world. So that has to be said at the start. China's contribution to world growth has been very important and still is. We see the growth of China averaging 10 percent or 10 and something percent this year which, as you all know, is the average of the last 15 years, 20 years. So I mean China is a very important element of world growth, and also it is a country that is changing its own economy very quickly.

What we see is that in that growth, investment is still a very dominant factor. Our view is that a reduction in the rate of growth of investment will be advisable to avoid mistakes on that investment down the road will cost reduction of prices, reduction of profits, and non-performing loans. To do that, therefore, it has moved to use administrative measures that have had a limited impact as we foresaw at the time. We believe that monetary policy should be used more effectively, and of course to do that, they need to increase the liberalization of their financial system but also to use more forcefully their own exchange rate regime to allow market forces to determine prices, allocations of resources in the Chinese economy more freely.

We think that to target effectively exchange rate movements in China and have that reflect reality would be very helpful for China, not only in the near but in the medium term. That, of course, given the size of China will play a very important role in the global economy.

John, do you want to add something?

MR. LIPSKY: Sure; I can expand more broadly on this. I think the remarks on China are appropriate. More broadly on the issue of global imbalances, there is a strategy endorsed by the IMFC that carries collective responsibilities for sustaining. It has been, after all, unexpectedly by terms of the consensus views, unexpectedly favorable, period, of global economic performance. After all, if the World Economic Outlook forecast is more or less correct for this year, we will have enjoyed the fastest five-year period of growth in three decades. With relative inflation stability or relatively low core inflation, this has been a success and not a failure.

The goal is to make sure that this favorable environment is sustained and that policies are put in place that will continue that progress, strong growth, relatively balanced growth, and low inflation. That strategy involves an increase in the savings rate in the U.S., a shift towards stronger domestic demand in other industrial countries enjoying surpluses, a shift in policy in those Asian countries involved that have had limited exchange rate flexibility toward more flexible policies, and in general structural reforms that will strengthen domestic demand growth; and in the oil and other basic commodity exporters, a strength in investment in the energy sector and other appropriate sectors, and in general an increase in absorption. I think over the past year, we can see that the tendencies seem to be moving in the right direction.

Now, it was never anticipated or expected that these imbalances, for example, that are the sign of uneven growth in domestic demand in the global economy were going to be eliminated or reversed in an abrupt fashion. In fact, that could be worrisome.

What is important is that there is a perception and a reality that policies are being moved in a direction that is supportive of sustained good incomes. So far, happily, our forecast suggests that that favorable outlook remains appropriate, and at the same time financial markets, broadly put, seem today consistent with that favorable expectation. The importance is to make sure that constellation is sustained by appropriate action.

QUESTIONER: Asian currencies have been appreciating when Thailand introduced capital restrictions in December. Do you see any similar risks that we had 10 years ago?

MR. DE RATO: First of all, I think that the Thailand circumstances have not at all moved into a regional impact, so that developments in Thailand have had a very limited effect in regional policies and I think any regional market reaction. At the same time, it is clear that greater flexibility of the Thai baht will have very important consequences on the region and will help the region to maintain more flexible exchange rates. The majority of the currencies in the region have appreciated in nominal terms against the U.S. dollar during the last year between 1 and 13 percent, but at the same time we have seen export growth continue. So that shows that the region is competitive and that heavy reliance on the exchange rate to maintain competitiveness is not necessarily.

Our view is that the maintenance of flexible exchange rates and at the same time loosening restrictions on capital flows and completing structural reforms to improve the investment climate, not the least to improve financial integration, will certainly contribute to the competitiveness of the area.

MR. AHMED: Thank you all very much. As I said, this is live, and you can now pick up copies on your way out of the initial opening remarks of the Managing Director as well. Thank you.