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PROCEEDINGSMR. STEPHENS: Good morning, ladies and gentlemen. It is ten o'clock and it's always unfair to penalize those who are here on time. I know you've got a busy day today. So I would like to welcome you to this briefing.
I want to introduce the vice presidents to my left. You probably know each of them, if not by face, at least by name.
To my left is Mr. Johannes Linn, who is the Vice President for ECA, our Europe and Central Asia region. To his left is Mr. Jean-Michel Severino, who is the Vice President for East Asia and the Pacific. And to his left is Mr. Javed Burki, who is the Vice President for Latin America and the Caribbean.
While I'm on the introductions, if I could just point out two people to you, who you may know. I work on East Asia and the Pacific, but I have colleagues here. Jan Pakulski, who is behind me, works on the Europe and Central Asia Region, and Elena Serrano, over to the left there, who is the External Affairs Officer for Latin America and the Caribbean. We three will be around and available afterwards to handle any follow-up inquiries you might have.
I would also say there is a press background, which I believe most of you have. If you haven't, you can again get that. Also, I would encourage you to pursue this and any other briefing materials that are on the World Bank website, where we're posting all transcripts and so on throughout the spring meetings.
The format of this is going to be a brief statement by each of the Vice Presidents, probably about five to eight minutes. We're going to be doing it in sort of chronological/crisis order, if you like, where it began in East Asia and was elegantly handed off, without so much as a hiccup, to our colleagues in the Europe and Central Asia Regions, and then to Latin America.
After that, I would encourage you to ask any questions you might have, and if we have time afterwards, there will be an opportunity for you to talk and ask specific regional questions with each of the Vice Presidents before they leave.
I won't go into any more detail, except to say that I think there is a lot of talk at the moment--I have just returned from about six of the past eight weeks in East Asia, and there is a lot of talk at the moment about the crisis being over. I can tell you, from the people I was seeing in parts of Indonesia and parts of Vietnam, and even Korea, that the crisis may be over in terms of free fall, but it is not over, by any means, in terms of their living standards and their lives. That is something that I'm sure you will hear a good deal about this morning.
The only other point I would make is that the Bank, in terms of managing crises, has a very unique and distinct role, vis-a-vis the IMF. They, as you know, tend to coordinate a lot of the crisis management packages, whereas the World Bank, with its strong relationships in each of the countries, and with its emphasis on the structural and social agendas, plays very much a leading role in the long-term recovery efforts.
With that, let me hand off to Mr. Severino, to begin the discussion of the crisis and beyond. Jean-Michel. MR. SEVERINO: I'm happy to be with you this morning, even if it is a Sunday morning, so let's try to have a little bit of fun this morning.
Actually, I can be short because Peter has said most of what I intended to say. It is fair to say that there is financial stabilization in East Asia. You see it through a lot of financial indicators. But the recovery is extremely fragile. Exports are growing very slowly, and the domestic demand is still very fragile.
This is because of the evolution of the world demand. There is not much growth in the system around the world, and the fragility is also compounded by the social and political concerns that exist in the region. Everybody is aware of the situation in Indonesia, of course. But for many people in Thailand, Korea and Malaysia, the situation is getting worse, even in 1999. We expect some further deterioration of the social indicators this year, even if there was added recovery because of the impacts of the restructuring of the corporate sector that would probably create more unemployment.
The financial and corporate restructuring is also proceeding at a relatively slow pace, which is understandable, given the magnitude of everything that has to be done within each bank, within each corporation, or at the global level. But in terms of economic consequences, it has an impact on the pace of growth. This year, in 1999, we expect growth in the region to be around, flat growth, around zero.
Some countries will probably do a little bit better. Some countries will do a little bit less. Indonesia definitely will be on the wrong side, and nobody expects positive growth in that country.
But even with a flat growth, or even a little bit of positive growth, we have to be careful about all the social consequences and the further deterioration of the indicators this year.
I would just add that, if the focus is, and rightly so, on the so-called "crisis countries", there is a lot at stake at what is happening in Vietnam and China. These two countries, which are very large ones, especially as far as China is concerned, account for a very important part of the regional production and demand. At the same time, they have to continue their reform program, as they have a very important impact on the overall progress of the economies in the region.
As a concluding point, let me say that, even if in the Bank we bring some nuance to the upbeat assessment that many make about East Asia, and even if we focus on the necessity for the countries to continue the reform process, especially in the banking, financial and corporate sectors, as the only entrance they can really buy in the world of financial instability, we do think that the medium and long-term perspective for the regions are very good.
All the factors that created the astounding progress of East Asia in the past 20 years are still there. So our feeling is not a gloomy one. It is a signal that one has to continue focusing on the progress of reforms on the governance issues, on the financial restructuring, on industrial restructuring, with all the major policy decisions that need to be done in the coming months.
Let me stop here and thank you again.
MR. STEPHENS: Johannes, I think it now goes to you.
MR. LINN: Thank you very much. Good morning to everybody.
I am in charge of the World Bank's operations in Europe and Central Asia, which includes all of Central Europe, the former Soviet Union, and Turkey. From our perspective, this region will face a protracted crisis of economic, social, and now most recently, of course, the security situation. Indeed, we expect the next 12 months to be quite difficult for many of the countries in the region.
Let me quickly run you through some of the key countries in terms of the situation they face, and then summarize very briefly what we in the World Bank are doing to assist in the situation, as difficult as it is.
If you start with the two largest countries in the former Soviet Union, Russia and Ukraine, it is clear they still face severe economic difficulties, with continued expected decline in output and uncertain political outlook due to the elections which are coming up this year and next year.
The social situation in these countries is fragile, since incomes are continuing to decline and social support systems are continuing to weaken. Poverty is on the rise. In Russia, for example, we now estimate almost 20 percent of the population is in extreme poverty. We, of course, also see a situation where structural and social reforms are incomplete and are proceeding only very slowly, with limited political support.
Now, the Russia crisis, turning to the next group of countries, the Russia crisis has been spilling over quite severely to other countries in the former Soviet Union. Especially Central Asia, the Caucuses and Moldova have been very severely affected by the fallout from the crisis.
Reduced trade, reduced investment, reduced remittances and higher cost of external borrowing have affected all the countries concerned. With this, of course, has come reduced growth prospects and employment, increased pressures on budgets, and balance of payments.
Now, the good news here is that these countries had actually put in place, at least many of them, had actually put in place reasonable reform programs and have, in fact, seen two or three years of growth recovery and had, thus, reduced their vulnerability to the Russia shock. But overall, the impact is to be seen clearly in the ways I indicated, and the countries face difficulty this year and probably next year.
Turning then to the Balkans, you are all aware, of course, of the Kosovo crisis, with over half a million refugees now in Albania, Macedonia and also Bosnia. The direct cost and the indirect economic impact is very severe on the countries concerned. Quite apart from the refugee crisis is the impact on trade, investment, financial flow and tourism, and also for a country like Croatia, it is quite severe. So Croatia, Romania and Bulgaria also are affected by the crisis.
The IMF and we have tried to make a preliminary assessment of what are the economic impacts, measured in terms of particular balance of payments impacts, and at the moment we estimated around $1.5 billion. But, of course, this can be significantly higher, and it does not include the damage and recovery and reconstruction required in Yugoslavia.
This is a particular unfortunate event in the area of the Balkans because we actually had seen quite successful reconstruction. In Bosnia we had seen reasonable stability and recovery, and in Albania, and similarly remarkable stability and recovery also in Macedonia. So this is particularly, against that background, unfortunate that these countries have now been hit by the economic fallout, social fallout, of the Balkan crisis.
Perhaps the best news we see in the region is Central Europe, which has been relatively stable and the impact of the world financial crisis is relatively limited. Indeed, the biggest challenge these countries now face is to make a relatively quick and steady transition to EU accession, which will not always be easy but provides, of course, an umbrella, if you wish, of investors, security and credibility that has helped a lot.
Finally, let me mention Turkey. Turkey has made significant progress in stabilizing its economy over the last two years, and actually has weathered the world financial crisis remarkably well. But it does face significant financial pressures in the months to come. What will be key then is the commitment of the newly, to be formed government to fiscal stability and social and structural reforms.
With this as background, let me tell you a little bit about the Bank's response.
In Russia, we've had an intensive dialogue with the government about reviving the reform momentum in connection with three ongoing structural adjustment loans: one, the so-called SALIII, Structural Adjustment Loan No. 3, which supports the reform of the private sector environment for supporting a better investment climate, a Coal Sector Adjustment Loan that supports coal sector reform, and a Social Protection Adjustment Loan, which supports reform of the social protection system.
For all three of these areas, we have made quite good progress in our discussions and negotiations with the government, and we hope to take to our Board in the next few weeks the restructured loans, so that we can look forward to a disbursement over the next 12 to 18 months of the already-committed but still undisbursed $1.85 billion that is still available under those loans.
We also have been engaged in very active dialogue with the government on how to deal with the social problems. There is actually a paper there that you may want to pick up on our assessment of the social impact of the crisis. We are preparing a so-called Local Social Protection Delivery Project. That is a project which will assist particular oblasts and districts in dealing with the social problems, but also in the health and education sector, with projects on AIDS and TB. The fight against AIDS and TB, that is now very high on our list of priorities.
In Ukraine, the situation is in many ways quite similar to Russia. We are supporting ongoing efforts to maintain reforms through ongoing adjustment operations, especially in the enterprise and financial sector, as well as public education reforms.
For the FSU countries, we have managed, through a special donor mobilization effort in December, to raise an additional $200 million of support for the poor countries, the IDA countries in the FSU area, and we are also supporting the continued support of adjustment reforms and maintain social expenditures and safety nets in all the countries concerned, always, of course, in close coordination with the IMF.
For Kosovo, we have been preparing two quick disbursing credits, emergency credits, for Albania and Macedonia, and we also expect to top up already planned operations, adjustment operations, for Bosnia, which would add still, next month, a total of an additional $100 million in quick disbursing support.
We also have mobilized grants from our post-conflict fund for Albania and Macedonia, one million dollars each in emergency assistance to refugees, channeled through NGOs, and we are very active in resource mobilization efforts for all neighboring countries through special, country-specific consultative group meetings, such as the one that was just completed on the 21st, last Wednesday, in Brussels for Bulgaria. Others are planned in early to mid-May for the other countries.
We also are working closely with the UN relief agencies, but as you probably know, we ourselves are not directly involved in humanitarian or refugee relief. We have started organizing regionwide information exchange meetings with all donors concerned to get an overall assessment of the regional impact and possible responses. We had just meetings during the IBRD meetings in connection with the Brussels meeting on Bulgaria, and there will be a major meeting on Tuesday afternoon with the delegations attending the Interim Committee and Development Committee meetings.
We will see how the regional approach shapes up. We in the World Bank stand ready to, of course, support, over and above the country-specific approaches, any region-wide approach that the international community may engage in.
In Central Europe, our major focus is on assisting the Central European countries with EU accession. In Turkey, we will be working closely with the new government and the IMF to see where the next band of support for reform stabilization and structural reforms can be mobilized to assist the country over the next few months and the next couple of years.
In sum, it's a difficult year ahead, I think, for our countries. We are very heavily engaged with our partners in virtually every one of the trouble spots. But, of course, it is a difficult environment and will be a difficult environment. Perhaps the best one can say is that it's perhaps not as bad as one had reason to expect, at least on the downside, some time late last year. So in some ways the news is not as bad as it could have been. In the end, one has to be hopeful that the recovery will also set in in the region, as it has now begun to set in in East Asia and the Pacific.
Thank you.
MR. STEPHENS: Thank you, Johannes.
Now can we hear from Mr. Burki. Javed.
MR. BURKI: Good morning.
I would like to echo what my colleagues have said, that 1999 is a very difficult year for the Latin America region, as it is going to be for East Asia and Europe and Central Asia.
We expect the growth rate in 1999 to decline to something like minus 0.5 to minus 0.8 percent. This is the first time in several years that Latin America is likely to experience a negative growth rate.
That notwithstanding, I would like to suggest that at this point it appears that the Latin America region has turned the corner. This is largely because of some very positive developments in Brazil. Most of these developments are the result of changes in market perception. I think it is important to underscore that various fundamentals take a long time to change. It is extraordinary how quickly market perceptions can alter.
Palpably, I saw this happen very clearly when we were all in Paris at the time of the annual meeting of the Inter American Bank, when feelings of the market's impression about Brazil changed quite remarkably. That happened because the Brazilians were able to present a very credible program of reforms, and were also able to demonstrate that they had the political will to implement the reform program.
A number of things look positive for Brazil at this point. For instance, it was felt that, because of the very sharp devaluation of the currency, there might be a severe inflationary impact on the country. Fortunately, that is not materializing. In March, consumer prices in Brazil increased at the rate of 1.28 percent, a rate equal to the one in February, which means that prices are not accelerating. If anything, the increase in prices seems to be decelerating.
Several informed economic observers are now predicting that Brazil will end the year with an inflation rate of 10 percent or slightly below. Ten percent, that's a very positive development.
Policy-determined interest rates have also declined, from 45 percent to three [sic] percent, and this has been achieved over a relatively short period of six weeks.
The expectation that Brazil will not be able to access the foreign capital market for a long time has also not materialized. It appears that Brazil will successfully tap the foreign markets, both for sovereign borrowing as well as corporate borrowing.
Finally, there was an expectation, only a few weeks ago--and this was included in the Fund's projection-- that the economy might decline by something like 3.5 to 4 percent in 1999. But the Brazilian Central Bank is now expecting that the decline may be less than three percent, of the order of about 2.8 percent.
Having said that, I would like to underscore what Jean-Michel and Johannes were saying, that whereas things may be pointing in the right direction, what is happening in my group of countries in Latin America and the Caribbean seems to suggest that it will take quite a while before complete economic health gets restored to these countries. And this is so for both strong economies as well as weak economies. It is very interesting how the global financial difficulties in 1997 and 1998 have affected both groups of countries.
Take Chile, for instance. Chile is suffering, not because of bad management or bad policies, but because of changes external to Chile. Exogenous factors are important for Chile. There has been a very sharp decline in Brazilian exports to Asia--I'm sorry, Chilean exports to Asia, and Chile is also suffering because of the sharp drop in commodity prices. Consequently, over the last five months, we have seen drops in industrial activity in Chile. So the Chilean problems are related to exogenous factors.
On the other hand, for a weak economy such as Ecuador, a combination of exogenous problems as well as internal problems have posed for the country's leaders some very serious problems, very serious issues, that need to be addressed. At this point it seems that Ecuador, along with Venezuela, will probably be the weakest economies of the region.
I would also like to underscore that during economic crises, there is always a very sharp impact on social development. I like to look at poverty and divide the poor into two groups of people: one who are indigent poor--in other words, those that take a very long time in order to get out of poverty--and there's another group of poor, about 50 percent of the total, who can climb up the poverty line and fall below it, very quickly, depending upon the state of economic activity.
We have seen this happen repeatedly in Latin America, where an economic downturn can have a very severe impact on the second group of poor. They fall below the poverty line, but it takes a long time for them to go back again.
For Brazil, our estimate is that for every one percent decline in GDP, Brazil adds about one million people to its pool of poverty. So if there is a decline of about three percent in GDP in Brazil, we can expect three to four million people added to the pool of poverty.
The relationship is symmetric. The social consequences emerge very quickly, but it takes a long time to reverse those actions, which is why the World Bank is focusing on providing protection to the poor, providing some kind of safety net which can protect this group of poor from falling below the poverty line.
In most of the programs that we have in place in the major economies of Latin America, in Mexico, Brazil and Argentina, we are focusing a great deal on strengthening the social safety nets in order to provide some comfort to the people who are going to suffer and are already suffering as a result of loss of employment and a sharp decline in real wages.
So our emphasis over the next several months will be on providing this kind of protection as a part of the concerted international action that has been taken in a number of these countries.
Thank you.
MR. STEPHENS: Thank you very much, Javed.
Before we move to questions, I think there are three points that are worth drawing out of that, that may not have come through quite clearly enough to you all.
The first is that the crisis across each of these regions has changed fundamentally the way the Bank has done a lot of its work, in terms of the work we are now doing with other agencies, whether it be the IMF or the Regional Development Banks or foundations and NGOs. It has been a fundamental shift in the Bank's work and something that, again, I hope comes out in questions.
The other is the emphasis now on new areas, which again came through in what each of the three Vice Presidents had to say. The Bank is now doing a great deal more in areas like financial and corporate restructuring than it ever did in the past.
Finally, the emphasis on social safety nets on the social side is something which, in a decentralized World Bank, has become very, very much at the forefront of our activity. Again, each of the Vice Presidents here is intimately involved in this and will be happy to take your questions.
Could I just ask that, when you do ask a question, that you give your name and your affiliation, so that everybody is aware of who you are.
QUESTION: Jeremy Poloski with Bloomberg.
I wondered if you could each give us a sense--the Board approved a new pilot program to guarantee bonds for countries as they are trying to seek funds from the international capital markets, to partially back those bonds.
I'm curious as to what countries do you see in your particular regions that might likely use this avenue to raise funds to service their debts, et cetera. That would be great. Thanks.
MR. LINN: At the moment there is sort of a demand side and supply side, if you wish, to this.
We at the moment have one country, Kazakhstan, where we're actively engaged in exploring this, but it is premature to say whether, indeed, it is something the country wants or that we're able to provide, given the rather clear stringent criteria. So that's for now the most, I think, advanced country thinking.
I should also say we have fairly active programs of political risk guarantee that are more focusing on imports and investments directly, the traditional kind, in a number of our countries. So this is just an additional tool that we see potentially useful. So far, Kazakhstan is the only country where that is explicitly being explored.
MR. SEVERINO: In East Asia, the response to the question is going to depend quite a lot from the speed of recovery. If things go relatively fast, they will probably be few clients for this product. If growth is, rather, on the more pessimistic side of the forecast, then we may have more clients. In any case, our expectation is that the product will be more for the upper end client who at this stage--countries like Korea, Thailand and Malaysia. But all those might be possible as well.
MR. BURKI: In our case, we are working on the possibility of putting together some kind of a guarantee instrument for Brazil, where various affiliates of the World Bank Group--IBRD, ISD and MEGA--might come together to guarantee access by upper tier countries to the capital markets. But as John-Michel was saying, much of it would depend on how successful these companies and how successful Brazil is without this kind of guarantee on accessing the markets.
QUESTION: Roland Miller from the Express in London.
At the time of the G-7 last autumn, the buzz word was the balance of the risk was very much considered to be on the downside. What you seem to be saying now is that, although you're relatively upbeat about looking perhaps to next year and beyond, what are you saying about this year? Are you still very much concerned that a lot of the market feeling is that the worst is overdone and that we should still be very, very cautious?
MR. BURKI: I think the market has a tendency to overdo, in both directions, at least for Latin America and the Caribbean region. When Brazil came under pressure, I think the market overreacted to some political events. Now the market seems to be also much more optimistic than I would say would be indicated by changes in the basic fundamentals.
As I indicated, we do expect 1999 to be a fairly poorly performing year for the region, with aggregate GDP declining by 0.5 to 0.8 percent. But the market sentiment has changed quite dramatically, and it is also reflected in the way some of these countries are now being able to access the markets.
MR. SEVERINO: I would agree completely with what you have said, and also with what Javed has said, in terms of the overreaction of markets.
In the case of East Asia, you have three groups of countries. Basically on one side you have Indonesia, which is definitely looked at more under the political angle than an economic angle, and everybody would agree that whatever the social progress that is made in this country, which is real in many respects, political stabilization has to come first.
Then you have China and Vietnam. These two countries will probably enjoy a positive rate of growth--in the case of China, quite high. But there we are talking about long-term reforms and transition to market economies, with a different pace of growth. Even if probably the economic crisis in the region and worldwide--you know, the rather moderately optimistic outlook forecast for 1999 worldwide will make it more difficult for these countries, so they will have to work in more adverse conditions than in the past five years, say.
Finally, for the crisis countries, definitely the market is making a positive assessment that it might be a risky one, if it didn't take into account all the efforts that these countries have to make in order to remain on the right path. There is huge work still to be done in improving the governance system, and especially the corporate governance system. There is very important restructuring work to be done on the financial and corporate sides.
Finally, as I mentioned earlier, the social situation has to be watched very closely, and the impacts of poverty have to be monitored and monitored if one doesn't want to have some kind of social crisis spreading. So recovery can be there, but it requires a lot of active management and involvement, and the real question is whether this involvement will remain, as to what we've seen before, and the governance in the region should be encouraged in that direction.
MR. LINN: I think for the ECA region, the watch word is differentiation, in terms of country outlook, as well as the market sentiment. Central Europe overall clearly has long-term prospects that are very good, and that has been reflected in the market assessment.
But, of course, even within Central Europe, there are differences between Romania on the one extreme, facing civil difficulties and the lack of market confidence, as against Hungary or Poland. But overall, I think for Central Europe the prospects and market sentiment overall have remained reasonably stable.
In the CIS, as I mentioned, of course, with Russia, and Ukraine in particular, it is continuing on the downside with effectively no market access. The overall picture is not good. But even here one needs to distinguish Kazakhstan as a country that, in principle, can and should see access to the markets and some reasonable confidence. So one has to distinguish here. I think differentiation is something that, within an overall context of a difficult environment, will be very important for the markets.
MR. STEPHENS: Thank you, Johannes.
A question in the back.
QUESTION: [Inaudible.] I would like to know from the global perspective and then in each of your areas how much the world economy in the area needs to grow for that to be a reversal in the increase of the number of poor people.
MR. STEPHENS: Javed, would you like to take that one?
MR. BURKI: I think, in order to have an impact on the levels of poverty, it is extremely important for the countries to have the right set of policies.
I have been using a rule-of-thumb, which is that to have a significant impact on the level of poverty, an economy should grow at roughly two to three times the rate of growth of the population. So if you talk about Latin America, where the population is increasing at the rate of about 1.6 percent, then we should have rates of growth between 3 to 5 percent a year in order to have a meaningful impact on the levels of poverty.
The ranges are wide because poverty alleviation depends to some considerable extent on income disparities. The larger the income disparity, the higher the rate of growth required in order to reach the poor. And in the Latin American region, income disparities are about the worst in the world. So for growth to have an impact, it has to be much larger than, say, in East Asia, where growth rates about twice the rate of population growth can have a meaningful impact.
I just want to come back to the point I was making earlier on, that in thinking about poverty, it is extremely useful to distinguish between the extreme poor, people who are absolutely poor, and those who migrate up and down the poverty line. It is the second class which gets very severely affected as a result of an upturn or downturn in the economy.
Our great concern at this moment is that the improvements that have been made over the last ten years in reducing the level of poverty in Latin America don't get reversed as a result of this downturn. So essentially, the answer to your question is that it is domestic policies and domestic rates of growth that are extremely important in order to have an impact on the levels and incidence of poverty.
MR. SEVERINO: I think Javed has given a very good response that also encompasses East Asia. So I will just add that, in the case of this region, I would agree fully with what he has said.
I would add that, in the case of East Asia, we have been fortunate enough to have policies that, starting in the spring of '98, have been much more positively oriented in terms of poverty alleviation. The macro-economic policies have moved towards and into a more open direction, especially with the improvement in fiscal deficits. This has allowed the protection of the basic social services, especially health and education, to the poorest. Very large social safety net programs have been developed.
The World Bank has been extremely involved, both in the macro debate that has led to this new fiscal stance, and on the debate for restructuring of the social expenditures, so that it could alleviate the impact of the crisis on poverty.
That doesn't mean the impact is not large. Javed's answer is perfectly right. But the quality of the domestic response in the middle of the crisis, and whether the countries have or don't have fiscal room to maneuver at the outset of the crisis to address these social concerns, is a very important part of their response.
MR. LINN: For the ECA region, like for the other regions that we just heard about, the domestic policy approach and the form of maintenance is probably the key that determines internal domestic growth and recovery. And then, of course, dealing with poverty.
But since you asked specifically about the external context, for the region it is not so much global growth, per se. For Central Europe, particularly Western European growth, the recent slowdown in Western European growth has affected particularly Poland, Hungary and other Central European countries, and also Turkey quite significantly. So this is the major external impact, and the revival in this context, the somewhat easier monetary policy in Western Europe, I think now has some hope for a revival and growth, although much will also depend on structural policies in the Western European countries. So West Europe is the key external factor now for Central European countries.
For the CIS, in the case of Russia, the most important external factors are, of course, commodity prices, especially oil. The price in the recent recoveries has been helpful in that regard, but still, of course, it is historically quite low prices. That's true also for some of the other oil-exporting countries, Kazakhstan and Caspian Sea and neighboring countries.
For the other countries in the region, external conditions are really all that important, except the situation in Russia and Ukraine as important neighbors. So if Russia could recover, and recover quickly, this would have major beneficial impacts on all the countries around Russia and have a significant effect.
So it is not the global perspective, per se, that is the overriding importance here. It is really sort of the regional factors that I just mentioned.
QUESTION: Robert Lyle from Radio Free Europe.
You commented in your opening remarks, Mr. Linn, that the whole CIS area faces a tough year ahead. In your release here, you mention that the peak of the crisis is expected to come in about 12 months rather than now, which makes it sounds like it's going to get a lot worse.
Is that true?
MR. LINN: That paper and that release specifically address the social situation in Russia. There our paper, which is at the exit for you to pick up, goes through some of the reasons why we think that is the case. It basically has to do with the fact that the impact from the crisis, as it works itself through the system, starting with the most severely affected--it actually was the merging urban middle income groups that had actually benefitted most from the recent previous expansion in the private sector activities and modern service sectors.
Those were most immediately affected, but probably also the ones that, at least in the short term, were able to absorb through their own safety nets, families and whatever, some of the shock.
The key that is now looking forward, that is determining the medium term poverty impact and social impact, is how it works through fiscal mechanisms, particularly in terms of further reducing social expenditures, pensions, et cetera, number one; number two, through the growth and employment impact, how the further reduction in growth, instead of the recovery we had originally foreseen for 1998 and '99 and year 2000, now with a further decline, of course, means reduced incomes and employment. Further arrears in the enterprise financial settlements, as well as government waste and so on, all of this will add up cumulatively to making the social impact more dramatic and significant over the next few months.
Indeed, it wasn't so much this winter in which we saw potential serious trouble in that regard, but it's probably next winter which may be more severe and one has to be quite worried about.
MR. STEPHENS: We have one question here.
QUESTION: Janet [inaudible] from Reuters. I have another Russia question.
You were talking about resuming lending this year. How much thought has been given to Russia's ability to repay? You also said that over the next couple of years the grace period ends and the money starts coming back.
I mean, Russia is trying to reschedule every single debt it's got. Are you being responsible to be talking about lending them more when you've already got a pretty big exposure? How big is your actual exposure?
MR. LINN: Current exposure is $6.5 billion.
Let me just say by way of background, we have, since August of last year, we have had no quick disbursing adjustment loan operations at all, so there has been no balance of payments or budget support for Russia in those six to nine months.
We have disbursed, on our ongoing investment projects, but even those have slowed down, simply because of difficulties of maintaining the implementation process, although we have taken steps to make sure the projects will stay on line. So, just looking back since the crisis hit, we have actually significantly limited growth in our exposure.
The additional growth of particularly the balance of payments and budget support will only happen if the Russians, in fact, take what are very significant steps of restructuring reforms. Also, it will only happen if the IMF program is, in fact, revived. So there are some rather significant steps to, in fact, deal with what is obviously an important risk issue. We will control our exposure growth, the growth of exposure, in line with whether or not Russia will, indeed, take the necessary steps to establish and maintain its creditworthiness, vis-a-vis us.
QUESTION: [Inaudible.]
MR. SEVERINO: Well, if you talk about crisis prevention, I think there is no doubt that better management of the very early stages of the crisis would have completely changed the evolution of the crisis, and might even have avoided completely the kind of pure financial turmoil that we have seen in Asia.
There are technical steps that should have been taken in Thailand, in terms of monetary management, that have not been taken. That can be considered as responsible for the way the crisis has started and spread.
This being said, the real roots of the crisis are much more structural. The factors that are the root of the crisis, the overexposure of the banking and corporate sector, the ties to pegged regimes, the flows in the governance, in the structure of the governance in many of the Asian countries, this could have been addressed much earlier.
And definitely not only the countries themselves but also the international community, and also the international institutions such as ours, which carry some part of the responsibility for not having seen the way all of these factors might interact and come to--to build a kind of vulnerability to what had been a great success story for many years. I think this has been in depth for the past month and, as far as we are concerned, we have taken a lot of lessons in terms of policy lines, in terms of do's and don't's that one has to focus on in very open economies.
I think the core lesson that has been learned is the management of liberalization processes in the financial sector, what it takes in order to have a successful liberalization process, especially in terms of institutions, and the links with the macroeconomic policies. This is probably the core issues.
Now, beyond that, there is all the huge area of governance and the relationship between governance, institutions at large, and macroeconomic management and development, which is not specifically this crisis but has been highlighted even more by what has happened in the past months.
MR. LINN: Let me maybe start also with the prevention part of the crisis management.
If you compare the experience of Hungary immediately after the aftermath of the Mexico financial crisis of 1995--is that the year?
MR. BURKI: '94 and '95.
MR. LINN: --'94 and '95--Hungary at that time was quite weak domestically, in terms of fiscal policy, and quite exposed and suffered, in fact, some rather severe shock of investor confidence and external credibility. It nearly came to grief itself.
In the Asian-Russia crisis, while there was some impacts on the financial markets in Hungary, overall growth has hardly been affected. The credibility of the country was never really at stake, and there never was a serious risk that Hungary would be drawn into the financial crisis of the day. It's a fundamental reflection that during the period between the country had dramatically reduced its vulnerability to external shocks through very clear and very well implemented fiscal policies, structural reforms and so on.
So, clearly, that is a very good example of how important the domestic policy frame work is. It also helped, of course, that Hungary has become more closely aligned with the European Union. Its accession provides sort of an umbrella for the medium term of credible policy reforms going forward.
Now, in terms of more specific lessons of how to prevent and manage crises, I think, as we have also recently seen the G-7 apparently coming to the conclusion that pegged exchange rates, unless it's in a very clearly and rigidly defined context of currency boards, in fact can be very difficult and lead to a very severe financial crisis, as in the case of Russia.
The Ukraine is a good example where, in fact, they had a rather sensible management and getting away in time from a pegged exchange rate. It has, in fact, prevented the kind of meltdown that we have seen in Russia.
I think the weakness of banking systems and supervisions, linking this, of course, also with the exposure of short-term debts, inappropriate foreign exchange positions--again, Russia being a good example--are another very important lesson that we're drawing for our region, with much more work and attention by all concerned has to be given.
Third, public sector administration and governance are key issues in our region. It's one of the reasons why we're focusing on this issue now in virtually all of our countries--I mentioned specifically the case of Ukraine, but it's also true for Russia and for many of the other countries.
Fourth, the weak social systems. Clearly if you have, as in Russia, as the paper points out that's been circulated, very weak social protection systems to start with, when a crisis hits you are much less able to deal with the social fallout of the crisis. So had all of us, the Russians in particular--because we actually had difficulty in engaging the Russians on through 1996 in an active dialogue on social reforms, and still have difficulty in the Ukraine today--early attention to the social system and the reforms of social systems, and then more significant action, would have also helped in the crisis response.
Finally, I think a--how should I put it--a reasonably coherent and cohesive reform-oriented policy on political consensus in the country is terribly important. If you compare Bulgaria and Romania, where Bulgaria now has, in fact, recovered from a severe financial crisis only two years ago--because, in fact, it has pursued a consistent and comprehensive reform process and stabilization process--based on a reasonably clear and sustainable political consensus between the Present, the government and parliament and wide segments in the population.
Romania, in contrast, has had considerable difficulties that one can trace back, I think, to the lack of political consensus and difficulty of forming a clear political underpinning for reform and stabilization. We are hopeful that, in looking forward, Romania can find a more consensus-oriented reform process. Indeed, Romania is one of the pilot countries for the comprehensive development framework, where we will focus very much under the leadership and with the leadership of the president on trying to help build this broad consensus, so that, to me, is a very important lesson.
MR. BURKI: I have a slightly different take on this issue. My belief is that we need to change our vocabulary a little bit and stop talking about crises and start talking about extreme volatility.
When you look at the experience of Latin America and the Caribbean over the last 15 years, you notice a crisis in 1981, in 1988 and then 1995. Then a theory began to be developed that a crisis appeared every seven years, like the El Nino weather pattern. The current crisis started in 1997, so people began to say maybe the frequency has shortened quite a bit.
My belief is that what we are seeing is a very fundamental change in the global economic system in which, because of demographic changes in the developed countries, because of the way developed countries are managing their social security system, we now have an enormous amount of liquidity in the system looking for high rates of return. These high rates of return are available in the developing countries, more in the developing countries than in the mature economies of Europe and North America.
So the markets are going to be looking for those opportunities, but in looking for those opportunities, the markets are also going to be extremely sensitive to the way these economies are managed and the way these political systems are run. So the markets will be focusing not only on economic factors but also on political and social factors.
I see in the years ahead an enormous amount of money available for investment in developing countries by people who will be watching very carefully what's happening in these countries. And if one country does something which the markets don't like, whether it is economic, political or social, the money will pull out very fast. It might have some consequences. It might have some contagion given the size of the country. But I think volatility will be focused on that particular country.
Essentially, what I think we should be preparing ourselves for is the perpetual state of volatility rather than a recurring crisis, and by changing our vocabulary, I think we will also begin to think in different ways of responding to that situation.
QUESTION: I am Chu Curry from the South China Morning Press. I have a question for Mr. Severino.
You mentioned in your introductory remarks that it was still quite important, in terms of the region's general progress this year on developments in Vietnam and in China. I think you also mentioned in response to a question how perhaps the markets were misreading the actual impact of the crisis on the region, and perhaps were being a little too optimistic.
Could you just explain or give us your impression of the level of the downside, the risk--the amount of downside risk there is, particularly in relation to how Vietnam and China progress in their own sort of structural reform challenges that they face.
MR. SEVERINO: Let's take China first. Actually, this may be the exception. We have a more positive assessment of China than many in the markets. We think that many, many good things are happening in China. The rate of growth, even if there is a debate here and there on how accurate it is, it has been high last year, and will probably remain high this year, around seven percent.
China is making a lot of progress in structural reforms, continuously. Even if some people feel there are important social risks in China, especially because of the restructuring of the state-owned enterprises sector, there is also a bright side of these social risks, which is that China is really trying to get to the bottom of financial and state-owned enterprises reform. So there are a lot of good things to say about China.
We still think that the likelihood they will devalue the jun is very, very low. Our analysis is that they have no interest in doing so, joining exactly their own analysis.
Finally, a successful end in the WTO negotiations would bring further growth in the system in China and would probably push ahead the reform process in the state enterprises one step further. And now we know, after Mr. Rongji's visit to the United States, that the likelihood of a happy end to this negotiation has I think increased by quite a lot.
So the only real question for us is whether the government is going to continue pushing ahead the way it is right now, in the same direction, and I think that the odds are there to bet they will. So our general assessment is very positive.
Regarding Vietnam, there is clearly a need in this country to accelerate the reform process. This is exactly what we are discussing now with them. We have been in the negotiations process with the IMF on an ESAF and SAC, the Structural Adjustment Credit--sorry--on our side for now quite some time, and have made a lot of progress. But we will think that the Vietnamese government has to make some steps further to build a credible reform program.
It is not that the evolution is frozen in Vietnam. Many things have been happening, and it shows in the rate of growth. But now this country is faced with a lot of challenges. It is faced with lower demand in East Asia, and growth is impacted by this lower demand for its exports. It is faced with very important structural problems in its agricultural system. The core issue of the financial sector in state-owned enterprises is still on the table.
So we think that this country, in order to be able to continue on a high growth path, should make several steps further.
We remain optimistic that they will make these steps, though. The recent conversations that we have had with them lead us to some optimism, and if we would make a bet today, we would bet that we'll finalize these negotiations this calendar year and, therefore, allow Vietnam to access more money for especially it's budget proposed, and get into a new phase of reform, especially in this co-nexus of the financial and corporate sector.
MR. STEPHENS: I think we have time for one more global question. There will be a brief opportunity to talk to each of the Vice Presidents on their way out, if you're quick enough to get to the door before them. Otherwise, let's just take global questioning and close the meeting.
There being no global questions, I will leave it to you to talk individually with the Vice Presidents.
Thank you.
[The press briefing concluded at 11:03 a.m.]
