The IMF and World Bank

Transcript

MR. ROBERT LITAN: I'm Bob Litan. I'm director of Economic Studies at Brookings. And in anticipation of the IMF-World Bank meetings next week, we thought it would be useful to give a backgrounder from several different perspectives of people that are at Brookings or who have been affiliated with Brookings in one manner or the other. And we have four very distinguished experts to offer their views.

And the format's going to be this:

We're just going to have three or four minutes of opening remarks from each person, and then, unless anybody feels strongly compelled to disagree with their colleagues up here, what we're going to do is just open it to you and have a dialogue, so that we can get your questions answered.

We're going to start with Ralph Bryant, who is one of our experts on international finance. And he is finishing a book right now that hopefully will be available in the fall, on international financial architecture.

Then we're going to go to Carol Graham, who is a specialist in Latin America and also developing—(off mike)—director of our Center on Social and Economic Dynamics at Brookings.

I'll offer my own thoughts at the end.

Then we're going to go to Karin Lissakers. Karin—actually, I just learned Friday was her last day on the job as the U.S. executive director of the IMF. So she is ideally positioned to discuss what she thinks will be on the agenda for next week's meetings.

And finally, we have Shang-Jin Wei from Brookings, who is our expert on global corruption. And it's a new hot topic that he has written extensively about.

And in fact, on that note, we have several policy briefs in your packet, two of them—one of them from Carol, one from Shang-Jin, on subjects that they're going to talk about. They're in draft form. And finally, you have a policy brief that I co-authored on responding to worker anxiety here in the United States.

So with that introduction, let's start with Ralph and go right down the row.

MR. RALPH BRYANT: My conjecture about spring meetings is that lots of the discussion will be about the world economic situation, do we face a world slowdown or not, et cetera, et cetera. There are plenty of hot spots in the world economy. We could think about Japan and Argentina, Turkey. We could make a long list.

I didn't think I would try to say anything about that, but we can all respond to questions on that subject. But that's probably one of the main things that will get discussed.

The other main set of issues have to do with what's come to be termed "international financial architecture." Many of the topics under that broad heading have to do with financial standards and codes, and the prudential oversight of financial institutions and financial systems.

Within nations, we take it for granted that that we need a governmental and legal infrastructure, if I can use that term, to establish financial standards and to be sure that we implement prudential oversight of financial institutions.

Substantial effort in the last several years has gone into nurturing the beginnings of infrastructures for the world as a whole. I think progress has been genuine and more significant than most people realize, and it's proceeded on a multiplicity of institutional fronts. There are, of course, many very difficult issues to be resolved, and some of those are on the agenda for these meetings.

The second broad category of topics is about the management of financial crises. I think you can probably expect to hear something in particular about—again, the jargon used here is "involving the private financial sector in the management of crises." That has to do with whether if there is lending by institutions like the IMF that "bails out"—to use the provocative term—private lenders and, hence, leads to moral hazard issues, or can we "bail in" the private lenders in some way, being sure that they participate in concerted lending and help with resolution of financial crises, if they do occur.

Then the third broad category of issues, which is on the agenda too, falls under the heading of the surveillance of national economic policies and the terms and conditions associated with IMF and World Bank lending. And a particular subject there is the conditionality that gets associated with IMF lending; can we do something to streamline and improve conditionality, for example.

The way I think about surveillance, that broad set of issues, is I use the analogy of the activities of fire-fighting departments in local governments who are charged with extinguishing unexpected damaging blazes; that's crisis management. In contrast, surveillance over the economic financial policies of the national government is more like the monitoring and enforcement activities of local police departments and local traffic regulators. Super-national surveillance, especially by the international institutions, seeks to encourage countries' compliance with evolving international norms, it monitors cross-border traffic regulations, and it's appropriate in non-crisis conditions as well as crisis conditions.

The philosophy about surveillance you can think of as related to that old venerable catechism about what sailors should do in a hurricane. If you ask, "What do you do if you find yourself to the windward of an island in a hurricane," the venerable response is always, "You do not find yourself to the windward of an island in a hurricane." So a lot of the focus of surveillance is to try to prevent crises from emerging.

I think I'm going to go on to a more general set of remarks, but if there are questions about any of those areas of architecture, we could come back and I can try to answer them there.

I wanted to just say something in general about the IMF and whose institution it really is. I think you can look backwards over the last several decades and see a drift in the IMF; it's increasingly become engaged in the promotion of growth, in structural reform, and in reduction of poverty in developing nations, and that's led many people to see the IMF, I'm afraid, especially in the United States, as an institution whose clients are just the developing nation. That misimpression, I think, is very unfortunate, and it leads to a mistaken corollary that somehow the IMF exists because the large wealthy nations contribute their resources to it. And then a still more simple-minded and unfortunate caricature is that the IMF is a charity run by the wealthy nations for the benefit of poor nations.

The caricature that the only nations benefiting from the assistance of the IMF are the developing nations is fundamentally wrong because it fails to recognize all the other activities of institutions like the IMF, particularly crisis management and supranational surveillance.

And I think the worst thing about this caricature of these institutions is that they're—you know, it's a badly distorted view about what the selfish interests are of the industrial nations themselves. I believe that the wealthiest nations have the most to gain from a healthy, stable evolution of the world economy, and I think that's what these international institutions like the Fund and the Bank are trying to promote.

We have in the United States the most to lose if the world economy functions very badly. So nurturing a gradual strengthening of collective surveillance over these policies is really important. And that requires countries like the United States to have an increased and more thoughtful support of the IMF, not at all some of the very critical things that you can hear, for example, in the U.S. Congress.

I stop there. I think there are many things one could say about all these questions, but let's go on to you, Carol.

MS. CAROL GRAHAM: Thanks.

I guess I'm going to focus on a slightly different aspect of the meetings, which is all the talk about the protests around the meetings or potential protests around these meetings, around past meetings. And really, I think, the underlying concern is not whether there are teenagers protesting on the streets of D.C. or Quebec, but basically the extent to which these protests really reflect broader and more widely held sentiment against globalization in the public—in publics at large. I think in the U.S., one of the primary fears about globalization has to do with worker dislocation and trade-related adjustments. Bob, I think, will probably address that, or if not, he has certainly addressed it in his policy brief.

What I wanted to say a few words about today was what do we know about what publics in the developing countries think about globalization, or what are their opinions? Do their opinions about globalization reflect those of the protesters?

I think as a starting point, it's important to note that in the past decade, that the majority of voters in both Latin America and Eastern Europe have repeatedly endorsed market reforms and integration into the world economy in election after election, and that basically it's the outliers that are voting governments that support market policies out. That said, there are some new concerns about support for globalization market reforms in some of these economies. Case in point is the rather unexpected but, unfortunately, quite strong support for Alan Garcia in Peru, and Peru being one of the countries in Latin America that's gone the furthest in implementing market reforms and integrating into the global economy.

So I would say that the electoral record thus far has been to support countries' integrations into the global economy, but there are some causes for concern. Argentina, which Ralph mentioned, is another one.

That said, what's really happening on the ground with globalization in these countries, and what are people thinking? First of all, the protesters claim that globalization is bad for poor people in poor countries, yet the evidence suggests exactly the opposite. So, why the discrepancy?

I think one reason is that actually the results are mixed, in the sense that some income groups and some sectors of the economy do better than others, and so there are winners and losers. But certainly the poor in general fare very, very well with market reforms and globalization. And there are three reasons for this.

First of all, the poor were least able to afford the costs of high inflation, fiscal mismanagement, the sort of pre-reform policies in a lot of countries. Secondly, merely by introducing market incentives in a lot of these countries into things like labor markets and credit markets, you often are able to remove distortions that were blocking low-income and small-scale users. And thirdly, and I think the most important, is that ultimately growth is a necessary, if not a sufficient, condition for poverty reduction. And from what we know across country evidence, globalization is good for growth in developing economies.

That said, it's clear that the turn to the market and globalization creates new opportunities for low-income people to move up the income ladder. And in my brief, I discuss in detail exactly how extensive these opportunities are, and they're actually quite impressive if you look at the evidence. But there are also both old and new vulnerabilities. There are other people that, due to changes in the economy, fall back, and often they're people in the middle-income sectors rather than the poor. So here are the mixed results that drive some of the concerns about the effects of globalization.

Related to that, another part of the story, is increasing disparities to skilled and unskilled labor. A secondary education in many developing countries no longer guarantees a stable middle-class existence, something that a decade ago was indeed the case. And now the rewards, with the turn to the market and integration in the global economy, are to higher-skilled workers; people with a university education. And we're seeing large gaps between people that finish secondary school and people that finish university. And at this point, people that finish secondary school do about as well as people that finish primary school. So there's a new—sort of a new kind of reward and changes in rewards to different education groups that's having a significant impact on how people fare in developing economies.

Another part of the story is top driven inequality. If you look at developing countries, and particularly Latin America, what drives the inequality in these countries is the difference between the top decile and the rest of the distribution; it's not sort of inequality throughout the distribution. So we see very large rewards to people at the very top, and it's people at the middle that are most aware of this.

Okay, the last topic, and I guess sort of the crux of this, is what do people in developing countries think about all of these trends, what are their perceptions? Well, we did a couple of surveys in Peru and in Russia, two emerging market economies that are quite different, but we got very similar results, and what we found was very surprising. We found that at least half of the people in our surveys with the most upward mobility, in other words, the people that did the best in income terms, that moved the furtherest up the income ladder, at least half of them reported that their current situation, compared to the past, was negative or very negative. So basically, the people doing the best are—at least half of them are very negative as they assess their current situation.

So we looked at them a bit more closely; what are their characteristics? Well, they have—these "frustrated achievers," as we call them, tend to have near average incomes; they're not the poor, they're actually in the middle of the income distribution. And they tend to be more urban, so they're integrated into the global economy. What are the implications of their frustrations? Well, in a broader sample where we did a larger survey, a Latin America-wide survey, and also we included Russians in this survey, we found that respondents that report negative satisfaction with their economic conditions, and their life more generally, tend to be less favorable towards democracy and less favorable towards the market. So, given that our frustrated achievers vote, these people with negative assessments of how they're doing in the global economy, we think this should create some cause for concern.

I think their frustrations are driven by two things, among others. One is an ever-increasing reference norm or reference bar. With globalization, people are much more aware of how other people are doing, both within their countries and outside. And there is also this top-driven inequality that I mentioned, so that people in the middle are very well aware of how the very wealthy are doing. And this creates a reference bar that's increasing, so that even if you're doing well, your reference bar has risen.

And secondly is the whole issue of insecurity, insecurity about security of employment, insecurity about what the macroeconomy will do. If you think about the Tequila crisis in Mexico, the Brazil crisis, the Turkish crisis now, and global information, people are aware of the fact that there are these periodic crises and that they have spillover effects. And again, with global information, people are also well aware that a crisis in Turkey can affect the economy in Argentina. And this is affecting, I think, people's assessments of how they're doing and creating insecurity.

Finally, what role for policy with all of this? What can we do to manage both what's driving these frustrations and to better manage volatility in the global economy? I'll raise just three things. There are obviously several others, but I'll focus on three.

One is improving access to better-quality and higher levels of education in developing countries. This is a fairly boring policy recommendation, but it's a genuinely needed objective. It takes time, it takes resources, and it takes institutional change. S o it's not going to happen tomorrow, but it needs to be done.

Secondly is the whole issue of addressing distortions in markets. Privatizing is not enough, as we know from, say, the Russia example. If you privatize without an adequate regulatory framework to level the playing field, you're going to get perverse outcomes. And this, again, affects how publics perceive the whole market process.

Related to that, excessive inequality is also a distortion. It's a distortion which is costly for growth, and it's certainly a distortion that affects people's perceptions about how they're faring or doing in the market economy.

And finally, we also need more and more permanent kinds of safety nets. And these are of two kinds. One is of a social insurance nature. Why is fear of unemployment so high in a lot of these countries? Because most developing economies don't have unemployment insurance of any kind. So that means that people try and legislate job security through the labor market, which creates distortions and very rigid labor markets that discourage hiring. So we need to move towards more European or U.S. kind of unemployment insurance in a lot of these countries. This is a complex issue that, again, won't happen overnight, but it's something where we need to make progress.

And lastly, we need to think more about safety-net mechanisms that are more permanent in nature. Until now, the approach to safety nets in a lot of these countries has been to implement policies after the fact, after the Mexico crisis, after the Brazil crisis. After whatever crisis, there's a lot of talk and finally some kind of program is implemented to deal with the cost of the crisis. But if we want to think about better managing volatility, which we know is a constant in the global economy, we need to have permanent systems in place that can—that are basically—that can be sort of faded in and faded out, and in anticipation of crises, and not after the fact, and therefore reduce both the social cost and also public insecurity about crisis.

And with that, I'll stop.

MR. LITAN: Okay. We're going to move to Karin, and she's going to give us some thoughts about what may happen next week. And I warned her that one issue that I'd like her to address that I'm sure some of you will ask—and hopefully she'll answer in advance—is how aggressively will the United States push the so-called Meltzer reform agenda on the IMF and the World Bank at the next meetings.

So, Karin —

MS. KARIN LISSAKERS: Thank you.

Well, on the official agenda, I think Ralph Bryant pretty much took you through it. There will obviously be a lot of discussion about the state of the global outlook and first of all the question mark over how severe the slowdown in the U.S. economy will be, but also, I think, more a discussion about the spillover effect. I think the initial reaction to the slowdown in the U.S. has been, in certain other countries, in some other countries, that "Well, it's happening in the U.S., but it's not going to have a major impact on us." And one now sees some signs of slowing in Europe. Japan continues to be problematic. Canada has slowed down a bit. So that will be obviously a topic of discussion.

From the institutions' point of view, well, I would say that there are no overarching issues right now that the members or a subset of members are driving. I don't see this as being an annual meeting where there will be a very sharp focus on one or two controversial issues, but more, perhaps, a bit of stock-taking on issues that have been under debate for some time.

From the institutions' point of view, it is, of course, an opportunity to update the governors, the ministers, on what the institutions have been doing and how management and the boards see the agenda going forward.

Certainly the new managing director, Horst Koehler, will want to bring attention to his initiative to deepen the Fund's expertise in the area of capital markets and financial market vulnerability and stability issues. He has already announced that he will create a new capital markets department to try to concentrate resources and also to bring in some capital markets expertise.

There has been a running debate about conditionality, and certainly a lot of external criticism of the Fund—the scope, the reach of Fund conditionality in some of the Asian programs, for example, during the Asian crisis. And the members have considered these criticisms and the manageability of our programs, so there is certainly a move afoot to streamline conditionality to some extent.

There is a continuing debate about exactly what the Fund's role should be in the area of structural conditionality, having program elements that go into long-term institutional change and, in addition to our standards, macroeconomic prescriptions regarding fiscal and monetary policy. I think that many members feel deeply that the experience of the 1980s showed that the gains from macroeconomic stabilization efforts could be quickly wiped out if more permanent institutional change didn't follow. And so I certainly think there will be a continuing mission for the Fund in the structural reform area and in consultation with and surveillance of members.

Part of this debate, obviously, has to do with division of labor among international institutions, and particularly between the Fund and the World Bank. And the Bank is undergoing some internal reviews about how it designs its own programs and its own facilities. There has been a bit of a mismatch between the Fund and the Bank in terms of the time frame and the design of programs. Sometimes the Fund finds itself in a position of saying, all right, you know, here's the macro-elements of the program, here are the—clearly the kinds of institutional reforms that are needed to stabilize the situation, whether it's in—you can name any number of countries—permanent improvements in banking supervision and oversight, establishment of bankruptcy codes and enforceability of contracts reform, of the judicial system, the whole array of governance issues and so on and we say, well, clearly, many of these—a social safety net—many of these really fall in the World Bank's ambit rather than ours. But the World Bank traditionally has taken a much more project-oriented approach, with a very different time frame, where projects take longer to get started, there's a very complex review and bidding process, there is this conditionality in the sense that the Fund has conditionality, with, you know, targets and performance criteria and turning on and off the financing. So that one can look sometimes and see that the Fund's program will already have run its course before the Bank's part of what we see of the package is starting to get up and running. So members have been having a debate about this. I mean, we have the same membership in both institutions, obviously. So I would say if there's a reform debate currently, it is more focused on the World Bank than on the Fund at the moment.

On the question of what the new administration will do, I think that's a question best addressed to the new officials in the U.S. Treasury and to my eventual successor. My own sense is that—my brief interaction in working with the new team is that they, while the Bush administration, I think, is probably somewhat—comes in with a somewhat skeptical and questioning mindset, I have not seen evidence of a deep polemic or ideological approach, but rather a very thoughtful and a very questioning approach to the issues that have arisen in the time that I have interacted with the new team.

Now, the Treasury is not fully staffed out yet, so it remains to be seen who else will be there, but certainly the senior people who have appeared have been, I think, very cautious and thoughtful. And I think they recognize also that while the U.S. is the largest shareholder, it, contrary to rumor, doesn't have 85 percent of the vote, it only has 17 percent of the vote, so it's necessary for any U.S. government to pay attention to what other shareholders think as well.

And also I would say in terms of the U.S.—the Meltzer-type reforms, even Professor Meltzer himself has said with regard to the Fund that he thinks many of the—that the institution has responded to many of the criticisms that were directed at the Fund. We have shortened maturities. We have established significant interest premia for large-scale access to Fund resources. We have shattered the notion that bondholders will be held harmless in an international balance-of-payments crisis. We've established a policy that in the event the country is trying to work cooperatively with foreign—with private creditors but they do not have an agreement, under certain circumstances the Fund and the Bank will lend, even though they may—the country may not be paying—servicing its private-sector debts, including bonds. So I think the private sector gets it, the investors get it. That's partly reflected in the very large spreads on emerging market debt.

So there is what we call PSI, which is our approach to private sector involvement in crisis. It may not be fully framed yet, and there are debates about how far we should go, how aggressive the approach should be. But we've certainly made significant headway in that area as well, and I think that's one of the reasons to have people like Meltzer say, "Well, you know, the Fund really has done a lot to change its trajectory."

MR. LITAN: Okay. Final issue. Shang-Jin will address an old issue, which is corruption, but it's become a new issue, because it's surfaced on the international agenda. Shang-Jin?

MR. SHANG-JIN WEI: Thank you.

The spring meeting of the IMF and World Bank guarantees us another occasion to hear more criticisms of the Fund and the Bank, and one of the criticisms is going to be that the Fund and the Bank, but the Fund in particular, have overstepped its mandate. And this includes in that it has imposed excessively many conditions on its loans to borrowing countries. And one of the conditions that's under heavy criticism is the anti-corruption measures the Fund has increasingly incorporated in its negotiation with the borrowing governments.

While not in general favoring the Fund to acquire ever—increasing list of conditions, I'm not in favoring of a Fund with sort of obesity problems, but I—however, I am in favor—I would argue that in fact anti-corruption is very much consistent with the IMF's core mission.

What is the IMF's core mission? The very first of IMF's Articles of Agreement says, among other things, the Fund is set up to promote high levels of income and employment, and the Fund is set up to shorten the duration and minimize the disequilibrium in the international financial system.

And the research I've been doing at Brookings suggests that in fact the corruption issue has very much to do with the likelihood a country might run into a crisis, the likelihood a country might experience a large disturbance in the national financial market. I mean, in some more concrete language, the corruption tends to hinder a country's ability to attract relatively stable foreign direct investment. As a consequence, countries with severe corruption problems have to rely on a more volatile type of capital flow, such as borrowing from international banks. In the event of tiny bad news about economy in a country, or even bad news about a different economy, you know, what Carol said, that some bad news in Turkey could negatively impact on countries like, you know, Thailand, and so on, so this highly volatile capital flows is going to hit countries with corruption problems particularly severely and, therefore, the corruption problems is very much related to the country's vulnerability to financial crisis. In fact, when a country is having a crisis, the problem is not just limited to the country, therefore it is very much the business of the international financial system, and very much the business of IMF to take measures to prevent it, to minimize such a possibility.

The other way to say this is, you know, we say the world economy is increasingly globalized. This is not just cliche, of course, it's a fact of life. But globalization brings a lot of benefits to people all over the world, particularly people in poor countries. You know, trade and foreign investment brings new jobs and better-paying jobs for people in poor countries. But a country with severe corruption problems tends to see less of such benefits of globalization, and that benefits is one of the things the IMF is set up to promote.

Aside from that, globalization also brings new risks to the world. You know, we've mentioned about possibly high volatility of international capital markets, sudden reverse of capital flows could cause some countries to experience a currency crisis. It is precisely those countries with severe corruption problems that are much more likely to run into a crisis. Therefore, corruption also tends to increase the risk of globalization for those countries that have this problem.

So as the world gets increasingly more globalized, the gap between countries that can manage to tackle corruption problems and those that cannot is going to be widening over time. So it is this sense that encouraging borrowing country to undertake antic-corruption measures is very much consistent with the core business of the IMF.

Now, to actually undertake anti-corruption reform obviously is not simple. Across the world, we often observe that anti-corruption reforms are more often announced than actually commenced, more often suspended than actually sustained.

And often, you know, there are at least two or three reasons why countries find it difficult to undertake reforms. One is anti-corruption reform can be politically risky. That we know even for a reform-minded government to remove inefficient price subsidies sometimes will cause a prime minister or finance minister to lose his or her job. Removing corrupt officials potentially is much more risky. That's one. And the other thing is just financial affordability. You know, we see one of the things countries need to do to tackle this corruption problem is to pay civil servants a decent salary, but it's precisely those countries that have corruption problems that have trouble collecting taxes in the first place, and therefore are having trouble to really take serious civil service reform.

And in my policy brief that's been circulated, I actually have a proposal for those countries that they can do even without the prodding of IMF or other international institutions. And that proposal is for them to think about starting something I call "special governance zone," which is a city or region in a country that can experiment with comprehensive reform. So a special governance zone is very much like a special economic zone, export processing zone, which is very common and politically accepted in many developing countries, including those that have corruption problems.

It is a zone that you can do comprehensive reforms because it's contained; therefore, the political risk should be much smaller for the leaders. And because it's small, even a very poor country should be able to pay civil servants in one area, one city, a decent salary.

And once such a thing gets rolling, the success of such a zone, we believe, anti-corruption is going to bring benefits to the economy in terms of expanding the tax basis, more taxes, faster growth, more jobs and so on. This idea of special governance zone, in fact, is self-paying. The extra taxes can be considered sort of dividends of anti-corruption that can be rolled back to the funds to support the next special governance zone.

So, to summarize, anti-corruption actually is important all the time, but it's particularly important in the ever-globalizing economy. Anti-corruption is not easy, but special governance zone is a good place to start.

MR. LITAN: Okay, let's go to questions. I think my only rule is, we've got a mike over here. We want you to announce who you are, and then proceed with your question. And I'm going to try to be fair about going back and forth. We're going to start over here, this gentleman right here. And I guess we have two mikes, so we'll start.

Q: Chris Anstey with AFX News.

I'm kind of struck by the difference in tenor of the panel's presentations compared to another panel we had here this morning with the National Press Club, Charles Filarar of the IIF, who kind of painted a very stark picture, said that the global economic situation at the moment is perhaps the most challenging since the 1970s with outlook for growth in the U.S. uncertain, a grave situation in Japan, and a slowing forecast for European growth. He predicted decline in new capital flows to emerging markets this year, said that there's urgent need for action by the IMF and its members to address crisis prevention and crisis management. He made a number of recommendations that his group has repeated several times.

I'm just struck by, do you think, does the panel think, Professor Lissakers, do you think that here's an urgent need for action on this front at the moment, or do you think there's been sufficient progress in the area of crisis prevention and crisis management for us to be somewhat—you know, that we feel like we've done a lot, there's some more incremental things to do, but we've done most of the things we need to. And do you think that there will be any decisions coming up at the IMF Spring Meetings on either of these fronts?

MR. LITAN: That's an excellent opening question. Do you have a short answer?

MS. LISSAKERS: Well, it's not clear to me whether you are suggesting that the global economy is in crisis. I don't think that the underlying data would support that conclusion, certainly at the moment, as I say, there is a lot of debate among economists, as you know, about how the downturn, and how protected the downturn in the U.S. will be. And there are also questions about what the spillover effects will be. Europe is still expecting—while Europe may not have as strong growth as expected a few months ago, will still certainly be in the strongly positive territory. You know, we just had the manufacturers' numbers for March in the U.S., which showed to everybody's surprise manufacturing output up, rising.

The many emerging markets are clearly affected by the very high spreads on their financing. The extent to which that's—it's hard to draw a direct connection between that and the global slow down, the other factors. There are certainly individual countries that are under more severe stress than others. But, again, you look, Mexico just had its biggest inflow of foreign direct investment in the first quarter of this year ever in its history. So, you know, it's a very mixed picture, and I would be very surprised if the ministers concluded that the global economy was in crisis.

There is certainly a lot of discussion about our crisis management, and our ability to foresee and, therefore, prevent crisis and instability. I don't think anyone has a magic bullet. Part of the managing director's interest in beefing up the capital markets expertise is precisely for us to have a better, earlier grasp of market forces, and how investors, the investment community, private financial institutions view the outlook, and how they are responding, both to individual countries, and what they see as the global trend. So there is a little more interaction and feed back between the official sector, between the fund and its economists and the private market people.

MR. BRYANT: I would just add to what Karin said, that I don't think you should see us as a panel unconcerned about the possibility of an excessive slowdown on world economic activity, but I think Karin's phrase is a good one, the outlook is very mixed, and people are at sixes and sevens trying to see exactly what the situation is now. But I would disagree with Charles' statement as you summarized it, that somehow this is the worst situation since 1970. You only have to go back to September and October of 1998, I think, to see a much more fragile world situation where the Russians devalued and defaulted, long-term capital management threatened to fail and spreads widened enormously. And I think that came closer to a systemic world financial crisis than something we can now foresee.

I'm very worried about the Japanese situation, and I think the market isn't pessimistic enough about Japan. But the last point you should keep in mind is, if the situation, macro economically, is threatening to be excessive in the slowdown, the primary responsibility, indeed almost the exclusive responsibility for that has to be with the monitoring fiscal policies of the nations themselves, international institutions aren't in a position to do something approximately to deal with that. They can monitor, they can exercise surveillance and be contingency planning should crises occur.

So you would want to, just to pick and example, criticize the European Central Bank if you think it should have lowered interest rates last week when it didn't because the forecasts in Europe are being marked down too rapidly. You can criticize the administration here, I would, for proposing an excessive tax cut, which isn't backloaded to the current situation, and so on. But that's where you should direct concern and criticism, at things, if you think the forecasts like Charles' is the right one.

MR. LITAN: Okay. I'm going to make just two quick points. Number one is, since 1998, a number of countries that were formerly on hedge exchange rates are no longer there, so that there's less susceptibility to a crisis than there was then.

And point two. I predict that the Bush administration will use the claimed weakness of the world economy, notwithstanding the comments that have been made, and I fully agree there is a mixed situation, but nonetheless I think the message coming out in the media will likely be the world economy is not doing that well. It's not facing crisis, but it's slowing down. Recovery depends on the United States. I predict the Bush administration will argue, ergo, we need a big tax cut. And I think they will make political use out of the situation.

Over here.

Q: A question to Carol. How do you go about establishing wider social safety nets without then creating distortions in the an economy of the very sort that the IMF has been trying to iron out. That is, incentives to stay unemployed and use welfare, incentives to retire early and rely on public pension funds.

And the next two questions are for Ms. Lissakers, the CCL seems to have dipped below the radar screen again. Is there any thought that the contingent credit line may actually advance in some fashion at this meeting, and by that I actually mean either get some takers, or some sort of concrete steps taken in that regard. And secondly, for you, what's your own impression of the conditionality streamlining that's going on at the moment? If we had had the model that's envisaged at the moment the consensus seems to be building around what would packages in Mexico in '95 have looked like, or in Indonesia in '97 and '98 looked like? What are some of the sort of key differences and do you think that they have value?

MR. LITAN: Carol, do the safety nets first.

MS. GRAHAM: Just I think one thing that needs to be remembered both about the world economy and about safety nets is that there's been a tremendous learning process in a lot of these countries, both about macroeconomic fundamentals and about having public expenditures that are fiscally sustainable. And that learning has also, I think, translated to social policy, and social policies need to be sustainable and they need to not distort the market, and not introduce disincentives to things like working. But I think we're a far cry in most of these countries from having overly excessive safety nets.

And we've also learned a lot about introducing market incentives and things like individual contributions, community contributions into the implementation of safety nets, as well as making sure that the wages are below market wages so that you don't create distortions in terms of implementing safety nets. But the current situation is one where precisely because there is an absence of well functioning social insurance systems, that you have incentives for unions, for example, to bargain for rigidity in labor markets and make it very difficult for companies to fire workers once they've hired them, because there is no fall-back.

Now, in the developed economies you have things like unemployment insurance to make labor markets function better, not to distort them, and I think that the same applies with a tremendous amount of lessons from the field in the past ten years in how to implement effective safety net policies.

MR. LITAN: Karin?

MS. LISSAKERS: Yes, just on that point I agree exactly with that. The absence of what we define as social safety nets leads to, in many cases, equally distorted social safety nets in the forms of lifetime employment, or in job creation by the public sector, basically, to keep the social lid on, not because people are needed for any particular job. So I think we're working—policymakers are working towards striking the right balance between social safety nets and maintaining flexibility and adjustability in economies.

On the CCL, I'd like to respond to that by raising something that Ralph Bryant mentioned, which is codes and standards. There's something very important going on below the horizon, which is both the development, the formulation of a series of internationally recognized, accepted best practices in financial sector supervision, in fiscal management, in monetary policy including the independence of the central bank. The Fund is certainly a central institution, that's exercised but by no means alone. And you have the Basil Banking Supervisor Group, and you have the Financial Stability Forum. And you have a lot of regional groupings working in this area.

But, there is a movement to create standards that are voluntary standards, they are not legally binding but they give countries that want to reform, that want to integrate successfully in the global economy, they give them a target, give them a model to shoot for. And many countries are actively engaged in doing just that. We have had a huge increase in the fund, for example, in something called financial sector assessment program, where countries ask the Fund, which also brings with it a lot of experts from member countries, to do a diagnostic of the condition of the financial sector. And they get a report delivered, and countries were very nervous, members were very nervous about even the whole idea, because this is going to be another set of conditionality, and we're going to be found wanting, and it's going to be awful, it's going to be embarrassing, going to be destabilizing.

But, the experience has been that first we had one or two countries that didn't—some industrial countries have tried to lead the parade to show that it doesn't—the fact that you're doing it is not a sign of weakness. And now more and more countries are beginning to recognize the value of these kinds of assessments, which are not limited there, they're also getting fiscal policy and monetary policy assessments. And once you've come close to meeting these best practices and these standards, and you in effect get a positive review, you are—the country will be eligible for a CCL, a CCL is one of the prizes, if you will, that a country can achieve. And I would be very surprised if sometime in the next year or two several countries do not, in fact, apply for a CCL, because they've done the ground work of really strengthening their internal policies, and management, and institutional framework, and that's very positive. It is much better, and that's really what the CCL is about, to have ex-anti-conditionality, which is self driven reform, self generated reform, rather than crisis driven reform with a lot of programs and conditionalities imposed, in effect, from outside.

MR. LITAN: Okay. I promised to go to the other side. Over here, and then we'll go back.

Q: Yes, I'm Paul Blustein with The Washington Post. You've addressed some of the things the Fund has done respond to the criticisms raised by Alan Meltzer from the right. I wonder if you could talk about what the fund has done to address the criticisms that have been raised form the left, and also as it pertains to the bank on both sides, when these guys tell us, we've really changed, we're so much different than we were a couple of years ago, to what extent—depending on whether you're looking at it from the criticisms that have been raised from either side of the political spectrum, and I'm not talking about the truly wild eyed criticism, but the reasonably respectable criticisms that have been raised on the left and on the right.

MR. LITAN: Karin?

MS. LISSAKERS: Yes, just on that point I agree exactly with that. The absence of what we define as social safety nets leads to, in many cases, equally distorted social safety nets in the forms of lifetime employment, or in job creation by the public sector, basically, to keep the social lid on, not because people are needed for any particular job. So I think we're working—policymakers are working towards striking the right balance between social safety nets and maintaining flexibility and adjustability in economies.

On the CCL, I'd like to respond to that by raising something that Ralph Bryant mentioned, which is codes and standards. There's something very important going on below the horizon, which is both the development, the formulation of a series of internationally recognized, accepted best practices in financial sector supervision, in fiscal management, in monetary policy including the independence of the central bank. The Fund is certainly a central institution, that's exercised but by no means alone. And you have the Basil Banking Supervisor Group, and you have the Financial Stability Forum. And you have a lot of regional groupings working in this area.

But, there is a movement to create standards that are voluntary standards, they are not legally binding but they give countries that want to reform, that want to integrate successfully in the global economy, they give them a target, give them a model to shoot for. And many countries are actively engaged in doing just that. We have had a huge increase in the fund, for example, in something called financial sector assessment program, where countries ask the Fund, which also brings with it a lot of experts from member countries, to do a diagnostic of the condition of the financial sector. And they get a report delivered, and countries were very nervous, members were very nervous about even the whole idea, because this is going to be another set of conditionality, and we're going to be found wanting, and it's going to be awful, it's going to be embarrassing, going to be destabilizing.

But, the experience has been that first we had one or two countries that didn't—some industrial countries have tried to lead the parade to show that it doesn't—the fact that you're doing it is not a sign of weakness. And now more and more countries are beginning to recognize the value of these kinds of assessments, which are not limited there, they're also getting fiscal policy and monetary policy assessments. And once you've come close to meeting these best practices and these standards, and you in effect get a positive review, you are—the country will be eligible for a CCL, a CCL is one of the prizes, if you will, that a country can achieve. And I would be very surprised if sometime in the next year or two several countries do not, in fact, apply for a CCL, because they've done the ground work of really strengthening their internal policies, and management, and institutional framework, and that's very positive. It is much better, and that's really what the CCL is about, to have ex-anti-conditionality, which is self driven reform, self generated reform, rather than crisis driven reform with a lot of programs and conditionalities imposed, in effect, from outside.

MR. LITAN: Okay. I promised to go to the other side. Over here, and then we'll go back.

Q: Yes, I'm Paul Blustein with The Washington Post. You've addressed some of the things the Fund has done respond to the criticisms raised by Alan Meltzer from the right. I wonder if you could talk about what the fund has done to address the criticisms that have been raised form the left, and also as it pertains to the bank on both sides, when these guys tell us, we've really changed, we're so much different than we were a couple of years ago, to what extent—depending on whether you're looking at it from the criticisms that have been raised from either side of the political spectrum, and I'm not talking about the truly wild eyed criticism, but the reasonably respectable criticisms that have been raised on the left and on the right.

MR. LITAN: Karin?

MS. LISSAKERS: Well, I think there have been a lot of significant changes. One very important one is the increase in transparency in both institutions. Whether you're from the left or the right, you can now look at both the policy documents that are now under discussion, and the program and the conditionality that's being designed, and the policy advice that's being given to individual member countries by the fund and by the bank. You can draw your own conclusions so the information is out there and everybody can shoot at it. I think that is very healthy, not just for the critics, it's healthy for the institutions, because it means we have—we get a lot more input into our own policy information—into the institution's policies.

I do think that also you have to recognize that there is much more effort, much more sensitivity in trying to cushion the impact of financial crises on the poorest people in the countries that are affected by financial instability, whether it's to try to build in social safety nets, to make sure that any fiscal adjustments that comes, any cuts in spending doesn't fall on healthcare and education and programs that most significantly affect the poorest members of the population.

I'd say the other big reform is in the transformation of our so-called ESAF, our concessional program for the poorest members to the poverty reduction and growth facility. Now it just sounds Ike you replace one set of acronyms with another. But, I think one of the critical differences between the two programs that a government draw up a poverty reduction program for itself through a process of public consultation. Some countries are doing this better and more seriously than others But, it is a strongly held principle, there is a threshold, you have countries that want these programs. And since these programs are also an integral part of debt relief, there is a lot of leverage, if you will, on this to get governments to reach out to grassroots groups and community groups to get their input in policy formation, And that I think will make a big difference it will make a big difference on governance, because it increases the accountability of the government, how it spends the money, how it uses the resources that are freed up from debt relief, or that are provided by donors, and by the Bank, and the Fund, and should produce better policies. And I think you can see the countries that have gone furthest in this, like Uganda, where now there is a really well developed grassroots system that poverty is declining, all sorts of indicators, health indicators, AIDS indicators are improving significantly. And it's in very large part a self-generated effort, but with the inspiration and encouragement from the multilateral institutions.

MR. LITAN: Okay. Right here.

Q: I'm Mark Egan with Reuters News Service. Also a question for Karin Lissakers. In the time that you dealt with the new Bush team, what was your impression of how they're going to differ in their approach to the IMF, and the IMF's role in bail-outs. And also, what can we read into the seeming sluggishness in the IMF and others in coming up with fresh cash for Turkey, and does the new Bush approach feed into that in any way?

MS. LISSAKERS: Well, as I said, I think it's very soon to draw any conclusions about how the new administration will approach these issues, and approach the IMF, and so on. As I said, my experience is that they're very thoughtful, I assume they come in with a somewhat more critical or skeptical attitude. But, I think they recognize that the U.S. is not the only member, for one thing, I've seen every indication that they're prepared to work very cooperatively with other members and with management of the institution, as did the previous administration. In Turkey, I wouldn't call it sluggishness; it's a very complex problem. The Turkish government is taking the lead in forming its policies. Some o the changes they want to make will obviously involve legislative action, that's not something that happens overnight. The fund, I think, has been very active in advising them in which way to go. So I wouldn't call the process sluggish.

MR. LITAN: Okay. Anything on this side?

Q: Bill Belamet Sui USA. Paul O'Neill has expressed a desire to see the IMF serve as a sort of early warning system, and publicly announcing its concerns about problems in emerging market countries. How do you see that developing?

MR. LITAN: Is that for Ralph or Karin?

MR. BRYANT: I'll take that one. I'm not clear enough on exactly what Secretary O'Neill had in mind to either criticize or support his particular statement that you quoted. I think the issue of early warning indicators is much more complex than that statement seems to apply, and many others. And the most controversial thing about the continent credit line, which Karin was talking to earlier, was whether pre-qualification for a loan will work or not. I think there are things to be said on both sides of the balance sheet about that. There are risks, but some advantages. I think the Fund has been paying a lot of attention to that balance. I don't know what the new administration's position will be on that sort of thing. But, I'm pretty sure from the research that I'm seeing on early warning indicators that it's not like falling off a log to produce a short list of indicators that will tell you whether a country is going to get in trouble or not, and then it's certainly not so clear you want the IMF making pronouncements about this. There is a case for it, but there's a very strong case against it, too.

MR. LITAN: Over here.

Q: Diana Gregg with BNA. A question for Karin Lissakers, of all the reforms that we saw Congress push after the IMF replenishment, which did you find the most difficult for the U.S. to promote in the fund, I mean where it encountered the most opposition from other countries?

MS. LISSAKERS: Probably the most difficult, not because one disagrees with the objective, but because of the question of mandates, were the policies, the labor related policy issues, because while we do get into labor market flexibility issues on a number of bases, the legislation was quite specific on core labor rights. It covered a lot of labor issues that a minority of members did not view as legitimate issues for subjects for either fund conditionality or surveillance as being beyond the scope of the fund's mandate, and its expertise.

MR. LITAN: That answer does not surprise me. Over here, anything? Otherwise we'll go back over here, there were still some hands. Back there.

Q: Hi, my name is Herman Pan, and I'm with Taiwan Central News Agency. I do have a question. If we break it down to the individual countries, over the past several years the number one beneficiary of World Bank should be China. And I wonder how the panelists are reading to the fact that China's economy actually over the past 10 years is growing at an average of 10 percent, while the rest of the world are growing at 5 percent. Some countries never get the benefit from the World Bank, but China got the biggest share. I wondered how you cared to comment about that.

MR. LITAN: Shang-Jin, you want to touch that one?

MR. WEI: Sure, I think Chinese growth performance for the last two decades, in fact, is a very good illustration that countries who are willing to embrace globalization, particularly a poor country, can benefit enormously from that process. And it's not the case just that a few people get super rich and the rest of the people get left behind. China certainly is not an example of that. If anything, China is an example in which all people, virtually people from all strata of society benefit from that, including very poor peasants, people who require new skills and new jobs. That's one thing.

The other thing I want to mention, in connection with the very first question, which was about what would happen to the world, or is the world economy in terrible shape. I want to mention in connection that, in fact, in addition to the fact that Europe is doing okay, the imminent WTO membership of China will offer more opportunity for the rest of the world, as well. Remember, at PPP adjusted—its purchasing power parity adjusted to GNP, China is the world's third largest economy after the U.S. and Japan. And that WTO membership involving mostly China taking down its barriers to trade, its barrier to investment from countries, mostly U.S. and European, and Japanese companies will provide very good stimulus to growth in those economies, as well. And that's I guess the second thing one can say.

The third thing, because China is also an example that illustrates the importance of social safety nets. The WTO session also caused a huge amount of anxiety within the country, the newspaper—those who have relatives in China it's not surprising, to those who have not maybe it is surprising, that there's a very lively debate of various views about whether it's wise for China to particular in globalization. People in the country, no the Internet, as well as in published books and papers denouncing WTO, critical even to U.S., another unpatriotic treaties like the old China did in the 19th Century. Of course there are others who think it's a great opportunity for another lift to the standard of living, and I hold that view as well. But, the anxiety illustrates the importance for the country to establish and perfect its social safety nets. And I think that this is a lesson that's generally applicable to all developing countries, probably developed countries, as well.

MR. LITAN: I'm going to ask the final—do you want to ask one question?

Q: Damien Milberton (sp) has left, but I did want to re-ask I think his third question that Ms. Lissakers never got around to answering, probably because he asked three questions. But he asked, how conditionality for Mexico and Korea would have been different, or Mexico and Indonesia. So, since he's gone, I would like to ask Korea and Indonesia, and also have you had any—I mean, I guess the question is, how those sorts of programs would be done differently today, and as someone who is sitting in the IMF Executive Board presenting the U.S. view, have you had any second thoughts about how those—what the conditionality was in those programs?

MR. LITAN: You think she's going to tell you a couple of days after leaving, or maybe wait for her memoirs.

Go ahead.

MS. LISSAKERS: In terms of the scope of those programs, people point to individual features in the Indonesia program, for example, getting rid of the sunflower seed monopoly, you know, what does that have to do with the fund. But I think you have to step back and look at what was the large issue we were trying to get at, or one of the large issues, one obviously was financial sector, but you had a whole array of subsidies and distortions in many sectors in the economy and some significant part of this was enabled through the governance issues, so that when the fund came into the picture, the technocrats, the formers in the Indonesian government itself had a long list of things that they thought were absolutely essential to get control over in order to right the public sector finances and elimination distortions from the private sector.

So, you could say, well, this one, you know, obviously, we shouldn't have done, and that one we shouldn't have obviously done, but they were really part of a larger effort, which was to change, maybe it was too ambitious, but it was largely an Indonesian driven, by some sectors in the Indonesian government, to put Indonesia on a different course. And the Fund program was the vehicle to do it.

I think we probably would have had the more slimmed down set of conditions. Now, many of these were, by the way, so-called structural benchmarks, not performance criteria. That is to say, you could, even if you missed the benchmarks, you could draw the resources. So there's conditionality, and then there's conditionality. But, probably we would have been more sparse in some of these sectors, which I think would have been right. What I hope won't happen is that we back away from tough structural conditionality, including addressing corruption issues forthrightly in programs in the future, because I think that is the only way you get permanent stability and the basis for prosperity and growth in many of the countries where we're doing it.

MR. LITAN: Can I just add one thing on conditionality? I mean, I think in defense of the Fund, if you put yourself back in their shoes at the time of the crisis, and the hysteria that was going on, imagine if they hadn't put a lot of these micro-conditions on, Indonesia then sank. I'm sure that there would have been plenty of people in Congress who would have said, we just threw billions and billions of dollars down a rat hole to a corrupt country, and we didn't even lift a finger to try to stop the corruption in some of these projects.

So, I mean, I'm convinced that criticism would have been there. Now, in retrospect, with 20/20 hindsight, it's easy to say, yes, the whole thing was probably too ambitious, and maybe the fund bit off more than they could chew, and that's what people are now saying. But in the atmosphere of the time, you have to recognize there was that danger of equal, if not greater dimension, it seems to me, it had to be running through people's minds.

MS. GRAHAM: Just another word on conditionality, if you think about some of these very difficult reforms, such as closing down the sunflower industry, or attacking corruption, that often just the existence of the IMF or the World Bank as external factors actually provide policy makers and politicians within these countries with an excuse or whatever or somebody to blame for some of what is—for implementing very difficult reforms that would be otherwise, I think, politically impossible domestically. So that there's a sort of an additional role that conditionality plays, it doesn't always work, but it can be very valuable on this front.

MR. LITAN: Any wrap up questions? This will be the final question, and then you can see us afterwards, so don't worry, you'll get your question answered on the record for people afterwards.

Yes.

Q: Hiro Shisugo (sp) Nikkei Newspaper. I would like to ask about the Japanese economy. Mr. Bryant, you mentioned about the Japanese economy, and you have mentioned great concern about the Japanese economy. And many people expect that the Japanese government will take great steps to restructure the Japanese banking system, or the Japanese financial restructure, but I think many people are a little bit tired of the discussion that we have been discussing the same discussion for 10 years. And that but I think we need much more time because out Liberal Democratic Party in Japan is now in the process of the election of a new process, and who will be the prime minister in the new cabinet in Japan.

And my question is, if Japanese new government under new cabinet fails to restructure or reform the Japanese banking system, and they continue to be in favor of a weaker yen to improve economic conditions in Japan, what kind of difference will happen in Asian financial market, and in the global financial markets?

MR. BRYANT: Well, that's a very difficult set of questions. And before I try to comment, I don't want to give a miss impression that somehow I'm very knowledgeable about the Japanese economy. It's a very complex situation, especially politically, but also economically. My pessimism is in part based on the fact that structural reforms in the financial structure for the banks and insurance companies has been promised or a long time, the rhetoric says it's needed, but very little has happened, or not nearly enough has happened. I would site the statement by the government, the week before last was it, the very recent statement, which says a lot of the right things, but you look for concrete specification of what's going to happen, and it's all to be worked out.

Now, with the political situation, of course, the government has great difficulty in doing that, but some things, like the marking to market of the portfolios of financial institutions began on April 1st, and the clock is ticking, and by, say, the end of September, when those balance sheet reports come in, it could look, and it will be clearer than it is today that the situation is very dire. And I'm just worried that there's not lots and lots of time. There are not several more years. The Japanese economy has been languishing for a long time, so I'm quite nervous about financial markets suddenly saying, this just looks terrible, and the Japanese stock market is already down badly, the yen has weakened some. Let's imagine that the yen were to weaken sharply further. I'm certainly not predicting that that could happen, but it's within the realm of imagination. That puts pressure on China's exchange rate policy, and some of the Asian countries. So, it's possible, if one is very pessimistic, to think of a scenario where not merely Japan, but the rest of Asia is in some financial distress. And so, it's a worrisome aspect of the world economic situation.

MR. LITAN: And I think in fairness, it should also be pointed out, there are a lot of other people other than Ralph, I think, who are just as worried as he is about the condition of the Japanese economy. I think many people in Japan are worried about it for all the reasons that he said.

I want to thank you all very much, and hopefully we've provided some edification, and we look forward to seeing you on a future occasion.

Thank you.