Source: Annual Report

IMF Warns Countries About Emerging Market Debt

Emerging market economies are on the verge of acute public debt problems unless they rein in their spending and increase taxes, the IMF warned. The Washington-based lender said that public debt in these countries has risen sharply as governments have issued domestic debt at market interest rates in record quantities, lured by low market interest rates. During a conference call to discuss initial chapters of the Fund’s World Economic Outlook, which was released on October 2, Kenneth Rogoff, outgoing chief economist for the IMF, said, "This study should be viewed, at the very least, as a yellow warning light." Latin America and Asia saw the biggest increase in debt. The Fund noted the stiff cost of recent debt defaults and restructurings in such emerging markets as Argentina, Ecuador, Pakistan, Russia, Ukraine, and Uruguay. According to the IMF, this is a worry given that the revenue base of the average emerging market government is much smaller than that in the industrial countries and that most debt crises of the past ten years have involved domestic debt. At current levels emerging market nations’ public debt is unsustainable, and fiscal policies will be insufficient to ensure that the debts are repaid. The Fund said that large cuts in public debt ratios were possible, often in conjunction with a debt restructuring program. A combination of strong growth and fiscal consolidation has also brought down public debt without recourse to debt restructuring. Bulgaria and Hungary had had success with this strategy.

IFC Posts a Huge Earnings Jump

The operating income of the International Finance Corporation (IFC), the arm of the World Bank that lends money to private companies and is investing in such risky areas as the Chinese banking sector, rose to $528 million during fiscal year 2003, more than triple the level of the previous fiscal year. IFC’s net income was $487 million, up from $215 million in fiscal year 2002, according to the Corporation’s annual report. The big increase in profitability mainly reflects IFC’s exposure to Argentina’s financial crisis in fiscal year 2002, which caused portfolio losses and affected IFC’s bottom line. In addition, this year’s financial results got a boost from falling interest rates worldwide, which helped some companies reduce their debt burdens.

New IFC loans and investments soared 89 percent in Europe and Central Asia, where the Corporation invested in projects such as a new energy company in Tajikistan. IFC committed about $35 million to finance a project to sell about $1.3 billion in bad Chinese bank loans. The China Huarong Asset Management Company, one of four firms the Chinese government has set up to handle bad debt, sold the loans to a consortium led by investment bank Morgan Stanley. To date IFC has invested about $130 million in four Chinese banks. In the coming year, in addition to the banking sector IFC will focus on China’s power generation and distribution, education, and health care sectors. As one way to raise financing for its commitments in China, the World Bank said it planned to issue a yuan-denominated bond.

François Bourguignon Becomes the World Bank’s New Chief Economist

The World Bank has appointed Francois Bourguignon as its new chief economist and senior vice president, replacing Nicholas Stern, who is leaving to work for the U.K. Treasury. In a statement, World Bank President James Wolfensohn noted that "Bourguignon is internationally recognized as an intellectual leader in the economics of public policy, inequality, and economic growth and development. He also has considerable practical experience of the Bank and its interaction with developing countries and other partners." A paper Bourguignon presented at the Bank’s annual development economics conference three years ago argued that there was no intrinsic trade-off between equity and efficiency in developing countries and that reducing inequality could, in some circumstances, boost growth.

Bourguignon has advised many developing countries, the OECD, the United Nations, and the European Commission. He was professor of economics at the School of Higher Education in Social Sciences in Paris, where he founded and directed the DELTA research unit in theoretical and applied economics. He has also held academic positions with the University of Chile in Santiago and the University of Toronto. Bourguignon, a French national, was named director of the Development Research Group, part of the Development Economics Vice Presidency, in April. He previously served as managing editor of the World Bank Economic Review. The London based Financial Times commended his appointment.

World Bank Warns of AIDS Epidemic in Eastern Europe and Central Asia

The World Bank has said that governments in Eastern Europe and Central Asia must make a greater political commitment to avert a potentially catastrophic HIV/AIDS epidemic. A newly released report, Averting AIDS Crises in Eastern Europe and Central Asia, is intended to make politicians and other decisionmakers aware of just how extensively the epidemic could affect economies and social stability if not confronted adequately. The region already has a million HIV-positive inhabitants, and even optimists put this figure above 8 million by the end of the decade. This currently translates to 500 deaths each month in Russia alone, increasing to 20,000 a month by 2020. However, Russia’s current AIDS budget is 1 percent of that spent in the United Kingdom, even though the problem in Russia is 20 times as severe.

The report estimates that total funding available to tackle the epidemic in the region is $300 million. It recommends that this be increased to $1.5 billion by 2007. While other international agencies can help on the ground, the World Bank sees its role as promoting the exchange of information, helping to improve data collection, and providing estimates and planning for the social and economic impacts of the growing epidemic. Among the more severely effected areas are the Baltic states, the Russian Federation, Belarus, and Moldova.

Suggested Priorities for Russia to Fight AIDS

In a commentary in the Financial Times, John Tedstrom, president of Transatlantic Partners Against Aids, writes that Russia’s priority should be as follows:

• To dramatically expand its own resource allocation for combating HIV/AIDS. Russia’s federal AIDS budget for 2003 is only $3.9 million and its draft federal budget for 2004 does not increase HIV-targeted resources.

• To meet the surging demand for treatment that will soon arise, Russia must begin to train doctors and give them the skill to treat AIDS patients.

• To provide vastly increased supplies of antiretroviral medication to the thousands of new AIDS patients that will soon emerge. Compulsory licensing, production of generic drugs, and procurement of drugs at significantly reduced prices are all options for expanding treatment in a manner that is fair, efficient, and sustainable.

• To acknowledge that, for the foreseeable future, injecting drug use will remain an important channel of new infection. Needle exchange and substitution therapy programs reduce HIV transmission among drug users. These programs should be legalized and supported alongside other education initiatives aimed at reducing drug use.

New Business Model Needed in Eastern Europe and Central Asia

Shigeo Katsu, the World Bank’s new vice president for Europe and Central Asia, is quoted in Germany’s Frankfurter Allgemeine Zeitung newspaper as saying that "in order to remain attractive, the World Bank needs a new business model, which allows us to react spontaneously." The additional value that the World Bank could bring in areas of the environment, HIV/AIDS, minorities, and regional development has to be better marketed. Even if most EU accession countries are no longer loan takers, the Bank still have a lot to offer them, he said, because market and economic institutions are weak in many places. Both for the Balkans and Central Asia, Katsu envisions mixed financing that combines World Bank money and concessionary IDA funds.

World Bank President James Wolfensohn Calls for New Balance Between Rich and Poor

In his opening speech to the World Bank/IMF annual meetings in Dubai in September, James Wolfensohn said that the collapse of trade talks in Cancun, Mexico, reflected the forces causing imbalance between the world’s rich and poor. Two-third of the world’s poor people depend on agriculture for their livelihoods. As the developing nations see it, rich nations put forward proposals that did not respond to the developing countries’ central demands in this crucial area, said Wolfensohn. "We need a new global equilibrium, a new balance in the relationship between rich and poor nations," he added. Rich countries are spending $56 billion a year on assistance to the poor, compared with the $300 billion they spend on agricultural subsidies and $600 billion on defense. But Wolfensohn also slammed the poor countries for spending a total of $200 billion on defense, more than what they spend on education.

Poor Nations Want IMF and World Bank Reforms

Developing countries want a louder voice in the workings of the IMF and the World Bank reports BBC Online. They want to see changes in staffing, top management, and the voting system. South African Finance Minister Trevor Manuel said the two institutions suffered from a "deficit of democracy." Zambia’s Finance Minister Ng’andu Peter Magande complained that a continent the size of Africa has only two seats on the executive boards of the two institutions, which each have a total of 24 board members. The voting systems in the two institutions do not do any favors for the poorest countries either, he asserted. World Bank President James Wolfensohn said he would review the proposals on reform and offer an intermediate report in February 2004.

Unequal Access to Education in China

On a recent mission to China, Katarina Tomasevski, UN rapporteur for the right to education, observed a growing gap between the elite, who have access to state-of-the-art schools, and the poorest peasants, for whom education presents a cost they cannot afford. Thus millions of school-age children, especially girls, are prevented from attending school in a country where school is mandatory and universal for nine years. Today China spends less than 2 percent of its GDP on education, when UNESCO recommends at least 6 percent. Moreover, only 53 percent of total spending on education comes from public funds, with the central government being responsible for only 8 percent of this amount, leaving the remainder to be footed by local authorities who, when they lack funds, ask parents for money. The rest of the spending on education comes from private funds.