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Stimulus in a Volatile Financial World

Speaker: Justin Yifu Lin, Chief Economist and Senior Vice President, The World Bank
Presider: Harry G. Broadman, Managing Director, Albright Stonebridge Group; Chief Economist, Albright Capital Management, LLC
January 14, 2010, Washington D.C.
Council on Foreign Relations

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HARRY G. BROADMAN: Good evening everyone. I'd like to welcome you all to a conversation with Dr. Justin Lin this evening. I think it will be a very interesting meeting of the Council on Foreign Relations.

A few housekeeping rules. I would like everyone to turn off all of your electronic communications equipment of every sort, not just put them on vibrate. (Scattered laughter.) This is important because it interferes with the sound system. And I also want to remind everyone that this meeting of the council is on the record.

You all have before you a biography of Dr. Lin. I'll just say a few words. I knew Justin going back to the early 1990s when I first started working in China for the World Bank. And even then, Justin was a leading light of the Chinese economy and how the Chinese economy, how it operated in the globalized world and the implications thereof. He was always someone when you went on mission that you contacted. Very thoughtful, and he continues to be quite thoughtful.

And as you see from the biography, he recently joined the World Bank as the first chief economist from a developing country. And we are very delighted to have him here tonight to speak with the council.

What I thought we would do is have Justin give some introductory remarks for 10 minutes. I will then ask him some questions. And then at 7:00, we will open it up for Q&A and close the meeting at 7:30.

Dr. Lin.

JUSTIN YIFU LIN: Well, thank you very much for the introduction. And to frame the conversation, I'll just share with you some of my worries about the global economy and my tentative recommendations for solutions.

And my worry certainly is recovery -- is about whether we are going to have a sustainable recovery. In other words, I'd like to say, the foundation for the recovery is very fragile, and there's a possibility, and the possibility is real, we may have a double dip, the first one.

The second is that if you look, you know, beyond the immediate term, we may find that we are going into a period of quite uncertain or even volatile global economy and also maybe foreign relations.

Those are two of my worries. And certainly, I'd like to recommend some way out. The reason why I'm sure to be pessimistic about the global recovery is that certainly this so-called great recession would be -- look, when it first hit, in the first six months, the reduction in the industrial production, the reduction in the international trade as well as the collapse of the equity market and so on, they were almost as serious as the Great Depression.

But luckily, we learned a lesson from the Great Depression. The government immediately came to the rescue of the financial institutions so we avoided the worst scenarios. At the same time, the government, you know, introduced the fiscal stimulus accommodative monetary policies to boost the demand. And as well as we have the inventory cycles. So we see the recovery has started to appear in the emerging markets, you know, in the second quarter of last year and in the -- (inaudible) -- countries in the second half of last year. Certainly, those kind of things made us very happy.

But -- I mean, look, the trouble of the global recovery, I would say clearly is the excess capacity in the world. And those kind of excess capacities will be there for a long time to come with us. And according to our studies, the excess capacity, underutilization of capacity may be with us up to 2014 if the recovery is (small ?).

And with those kind of excess capacities, we need to have some kind of demand in order to maintain the momentum of the recovery. But if you look into the demand for maintaining the momentum, the forces will not be there.

The first one, about the inventory cycle -- and also, according to our studies, yes, it was very important for we to pull up the sharp dip. But according to data, we find the industrial production in the high-income countries, the growth rate, started to decelerate in August last year. And in the emerging markets, it started to decelerate.

Certainly, you still had growth, but the growth rate was declining in September last year. And those kind of decelerations came much earlier than we expected. And it reflects the inventory cycle may be coming to an end.

And the other force will rely on the fiscal stimulus, but we know the fiscal stimulus may result in the debt accumulation. And that's how some countries may exit from fiscal stimulus. And if that, certainly demand will be reduced.

Even if the country maintains the fiscal stimulus, but they cannot increase the intensity. So that means what? In the second half of last year, one of the reasons for the economic recovery to come was because of fiscal stimulus, so the growth rate appeared to be a little bit higher. And even if we maintain the fiscal stimulus at the same intensity, the second half of this year will appear to be slowdown in the growth rate.

So if you put that whole scenario into -- you know, together, I think a second dip is a very likely scenario. This is the first message I'd like to share with you, my first worry.

And the second worry is that we may go into some kind of an unchartered waters, uncertainty for if a new volatility. Well, three reasons

The first reason is because of the excess capacity in the high-income countries, certainly also in the emerging market -- (inaudible) -- unemployment will continue to rise. Under that kind of situation, the government in high-income countries will continue this very relaxed monetary policy, interest rates will maintain at a low level. In fact, the U.S. is close to zero.

And we know that if you maintain a low interest rate, the purpose is to stimulate the economy. In 2001 and in 2006, during that period of time, low interest rate, you know, result in about six years of prosperity, because low interest rate stimulated housing demand -- (inaudible.)

But this time, because of excess capacity, even if you have low interest rates, the private sector will not come into-- (inaudible). And it's another kind of situation. Most of the liquidity will go into speculative type of activity. We see the boon in the equity market, but without a real activation of the excess capacity situation, the corporate profit in -- (inaudible) -- will be an issue, and so there tends to be a bubble.

And this bubble is likely to be a short life, some kind of (real sensitivity ?) to any kind of shock.

And my second reason is that the excess capacity means that you're going to have non-performing loan in -- you know, loans related to the euro's fate, loan related to the corporate sector's -- (inaudible). So andother kind situation, the banking sector's problem has not fundamentally addressed yet. We are going to hear sporadical, you know, news about the collapse of banking sectors maybe in high-income countries and also in the emerging markets even in the working countries. Some story like Dubai or -- (inaudible) -- those kind of things may come, you know, here and there. And we do not know how market worries about those kind of situations.

And a third thing to make our futures uncertain is likely if protectionism may arise because of excess capacity, because of unemployment issues. And if you look into the data, you know, the incidence of -- (inaudible) -- and those kind of things increased about 36 percent in 2008 compared to 2007.

In the first three quarters of 2009, on top of the high incidence in 2008, increased another 31 percent. And unemployment, if it continues, we can expect this kind of protectionism may rise.

And certainly so far, most countries, most countries still engage in this kind of protectionism within the -- (inaudible) -- framework. And the value of trade -- (inaudible) -- is very small.

But as long as you have those kind of incidents, it may cause some kind of tension bilaterally. And that is also another concern.

So I think that we need to expect some kind of very uncertain or even volatile global economy for, you know, for -- (inaudible).

And under this kind of situation, how to get out of that. Well, certainly, it's a financial crisis, and many people talk about the need to improve, to have better regulation for that, certainly. But from my remarks you will see. From what I see, the real trouble now is in real sectors. The real trouble is in the excess capacity situation. And unless we address this, otherwise the foundation for a sustainable growth will be very weak.

And how to get out of this excess capacity situation I think to maintain fiscal stimulus is very important. But as I mentioned, to maintain fiscal stimulus will cause debt to accumulate. And how do we get out of that?

I think the debt will be an issue only because the spending will not increase productivity. But if those kind of fiscal stimulus can increase productivity in the future, then -- (inaudible) -- create jobs in the future, gross increase, government get more revenue, then it's not a problem.

And -- (inaudible) -- I see more important at this stage is not to talk about the need to exit because of the debt. I think the more important is to find ways to improve the efficiency of fiscal stimulus and put that in an area which can enhance productivity.

Well, in high-income countries, you know, green economy is one area. In emerging markets, it will be easier. They have the financial resources, and they have the bottleneck in many areas, so they can make those kind of investments.

Low-income countries, they also have a lot of projects for improved productivity, but the trouble is that they may not have funds, so we need to find a solution to channel funds to the low-income countries. And I think it will be good for the low-income countries and also for the global economy.

(Inaudible) -- one or two more points. And it's also very important, because unemployment issue, the country needs to carry out reform to create jobs. And also, job protection is also a very important issue; otherwise, it will cause social tension.

So let me stop here.

BROADMAN: Great, thank you very much. I wonder -- a couple of points that I'd like to put on the table. I think you've articulated nicely your concerns about the prospects for a double dip. I wonder if you could unbundle for us a little bit more where within the world geography you see the risks most pronounced that would engender a double dip -- that is to say between the advanced countries and the emerging markets and the developing countries and the dynamics between those different parts of the world that would give rise or forestall such a double dip.

LIN: Yeah, I think that's a good question. You know, it very much depends on whether the country has the ability to carry out the second fiscal stimulus.

As I mentioned, if you exit from fiscal stimulus, you are going to have a dip. If you maintain the stability of a fiscal stimulus, it may not be intensity of the existing may not be enough. And if a country has ability to introduce a second fiscal stimulus, certainly they will be able to maintain the growth -- (inaudible) -- they achieve now.

And you look into the possibilities. I think the emerging markets maybe in a better situation, especially those emerging markets that have some fiscal production as well as large external, you know, reserve. And under that kind of situation, certainly they have the room to engage in the second stimulus.

But for the high-income countries, you know, I think it's very hard to increase the intensity. So under the current situation, I think a slowdown in the growth may be likely. And in other developing countries, you know, if the external situation did not improve, then the ability to make stimulus is quite limited. And as long as the global economy is slowed down, it will also be hit.

BROADMAN: So from your analysis, I'm trying to understand whether your risks arise from the coupling notion or de-coupling notion changing as a result of this crisis, or whether you see this as a secular phenomenon.

LIN: Well, I think that regarding the coupling or -- you know, coupling, in this kind of globalized world, you cannot fully recover, because in a globalized world, external demands, trade, external finance flow are all very important for country development, especially for the developing countries.

So you know, you have a slowdown in the global economy, we also see that the growth rate in the developing countries slows down. But the developing countries, including especially emerging markets, certainly, their growth rate is likely to be higher than the rest of the world.

And I think the main reason is because they have the resources for making investments. They also have the scope for productivity in -- (inaudible) -- type of development.

Now, take China as an example. Before 2008, the average growth rate in China between 2003 and 2007, it was 11 percent. And now they've dropped down to about 8.4 percent for 2009. Again, it was a 3 percent reduction, right? So that means that China does not fully decouple from the global economy, but a trend rate in China certainly is much higher than the high-income countries -- but decoupling in a trend rate but not in the overall rate.

BROADMAN: Another issue I'd like to raise is, I think a lot of people would agree with you that there remains a problem in the financial sector.

LIN: Yeah.

BROADMAN: Not surprisingly perhaps, I think, to those of us who follow the Chinese economy, there are concerns about the strength of some of the Chinese banks because of some of the lending that goes on between the state-owned banks and the state-owned enterprises.

I listened carefully about the kinds of regions that you were speaking about in terms of the financial integrity going forward, and I just wondered, you know, what your view is about how China might figure in in this double-dip scenario that you worry about, I should say.

LIN: Well, the Chinese case, you know, if you look into last year, the rebound was very strong, and that was partly because of the government fiscal stimulus and partly because of huge expansion in credit. And in a way, it caused some kind of overheating, especially in the real estate market and so on. And now you can see the Chinese government tried to, you know, reduce those kind of hits and start to raise interest rates and so on.

And so with that scenario, it's likely that the credit expansion, you know, will be restrained. And that means what? That means the investment growth rate certainly will be slowed down.

And now, from what I see for the growth rate for a whole year, China should be able to maintain 8 percent or even a little bit higher. And the reason was because the first six months of last year, the growth rate was relatively low. And so under this situation, the first six months of this year, the growth rate will appear to be high. But because of, you know, the reduction in the expansion of credit, even a fiscal stimulus maintained at the same rate, the second half of this year, the growth rate will appear to be lower. Although for the whole year, average growth rate, I think, for China maintained at 8 percent should not be a problem from what I see.

But the trend rate may appear to be slowed down. And that, you know, is what I worry about for a second dip.

BROADMAN: And what about the banking sector?

LIN: Well, the banking sector is -- you know, so far the nonperforming loan in China was quite low. And the investment, if you look into, you know, first six months of investment, mostly they go to the infrastructure. And for that, it's a long-term investment. As long as China maintains a high growth rate, the demand for that will be high, it should be -- but generally high and not returning.

And the concern about the bubble in the real estate market, if you look into the real estate market, you know, you need to segregate the market into the major cities or the hinterland, the second-tier city and so on.

For the second-tier city and so on, the price did not increase so much. And so for those areas, I think that it's not a big issue. And in the major cities, the price increased a lot in, you know, the second half, especially September, October last year it increased quite sharply.

But whether that will cause some kind of financial problem or not, well, certainly, we need to wait and see. But if you look into the past experiences, because a lot of those kind of investment demands, they are not with bank lending, not with the high leverage of the investor, you know. Because of income distribution issue in China and so on, you have quite a number of, you know, 5 percent or 10 percent of rich people in China will be -- (inaudible) -- numbered. And they tend to come to buy the housing and so on in the big cities.

In the past, some investors from abroad, and they do not follow everything in the banking sector domestic for those kind of investments. So the bubble itself may be a concern, but it may not translate into a (bubble ?) in the banking sector.

BROADMAN: Another issue that you raise that you're concerned about is something that I think most of us I think who are trade economists also are very worried about, which is the protectionism.

LIN: Right.

BROADMAN: What I wanted you to think about aloud for us is, again, the texture of that protectionism, is it North-North protectionism, is it North-South protectionism, or is it South-South protectionism that gives rise to your worries?

LIN: I think that more likely it's in the North because especially in the deficit countries you have a high deficit you also have an unemployment issue. Under that kind of situation, certainly it's easier to turn into the protectionist (mode ?).

And between the South countries, as long as unemployment is there, they will certainly also have those kind of temptations. But really, most concern is in the -- you know, in the North countries because their share in the global trade is much larger. If they have more protectionism, then its impact will be much larger.

BROADMAN: One last question before I open it up. To end on a high note, the solutions --

LIN: Yeah.

BROADMAN: -- what is the role for the bank obviously with respect to the emerging markets and developing countries? Obviously, some of the developing countries are quite constrained fiscally to put in place stimulus programs. And I know that Bob and others have been worried about this.

I wonder, given your worries and the scenarios that you're playing out, what are the implications therefore going forward about what the role of the bank or the fund or other multilateral institutions should play?

LIN: I think that is a very important question, because, as I mentioned, emerging markets, they have their own financial resources. High-income countries, although they have debt, but, you know, they have currency, so they can increase their debt to finance the fiscal stimulus.

And for the low-income country, first two countries, the first one is domestic fiscal resources. The second one is, you make a stimulus, it increases domestic demand, they also need to increase imports. They may if it's another country, and that is where -- (inaudible).

And under this kind of situation, I think international financial institutions, like the World Bank or -- (inaudible) -- if they can increase their lending to those countries, they cannot trace the country in a physical space and also the Foreign Reserve. And so that's a reason why it's very important to increase the ability for the multilateral development institutions to provide support for the developing countries at this global, you know, scenario.

BROADMAN: Let's open it up for some questions, if you have some questions for Dr. Lin. Please identify yourself, and it would be great if you can actually state a question rather than make a statement. And I want to remind you that we are on the record.

QUESTIONER: Thank you very much. Hi. Good evening. I'm Mark Finley with BP. I'd be interested in your views on -- you mentioned concerns about protectionism, and you also mentioned globalization. And I'd be interested in your perspective on, more broadly, risks to globalization. And I'm thinking in particular about a backlash against market liberalization and market ideology, emergence of state capitalism, et cetera. I mean, do you perceive a broader risk to the economic system?

LIN: That's an extremely good question. I just had one article in the Project Syndicate to address that issue. Because some people, you know, because of this global crisis and you cannot fully decouple and so the countries were hit during this globalized process, and that we have some thought about the globalization.

But I'd like to say, if you look -- if a country is trying to turn away from globalization -- (inaudible) -- across the economy, and the situation will be even worse.

And secondly, you know, if you look into the country, certainly they are hit. But as long as you maintain, you know, some fiscal -- (inaudible) -- as well as, you know, a sound external account, and under this kind of global crisis, you will have the ability to engage in the countercyclical intervention. And especially for the developing countries, if they can use this opportunity to make investments in projects it will relieve their bottleneck for growth, for example, like infrastructure.

Another kind of situation, you know, they can use this crisis to prepare the foundation for their long-term growth. So under this kind of situation, it's not to doubt about (the ability ?) of globalization. I think that the more important things are how to maintain economic growth during the, you know, normal time and to improve the fiscal (position ?) as well as your external account. And under that kind of situation, you can enjoy high growth in normal time and also relatively high growth during the crisis time.

And the way to do that actually is to further a refund and to allow the economy to grow according to their -- (inaudible) -- advantages. If they can do that, they will have high growth during normal time, and they will have a better fiscal (position ?) in the external account.

QUESTIONER: Hi. Barbara Matthews with BCM International Regulatory Analytics. But my question is not regulatory. This week in the FT, Desmond Lachman made the argument that Greece is becoming Argentina. And the following day, Martin Wolf made the argument that either the U.S. or China or possibly both are becoming Japan. One, do you agree?

Two, regardless of whether you agree, if they are right, can the global economy handle that?

LIN: Well, you know, I think that that is a very interesting article and also raises a lot of concerns, as I have. I think that if we do not get out of the excess capacity situation, certainly it's going to be a -- (inaudible). And I think that it can be a concern in the U.S., it can be a concern for the global economy. That's one thing.

And secondly, Martin Wolf's paper related, you know, to China, he said, China, you know, enjoyed a period of high growth, just like Japan before the 1980s, a period of high growth. And now, whether China is also going to, you know, fall into the same trap as in Japan, I'm not so pessimistic. It's not because I'm Chinese. (Laughter.)

The main reason I think that China is different Japan is that in Japan they encounter the (burst of the ?) bubble in '91. And they had a sharp drop in demand, excess capacity situation.

So then when I -- (inaudible) -- on fiscal stimulus, but Japan is a high-income country, so their infrastructure was mature already. And so when they did the fiscal stimulus -- I had a friend in Japan during that time, and he told me that, you know, he stayed in Japan for four years. And there's a road in front of his apartment. It was digged out and paved, digged out and paved six times in four years. Those kind of fiscal stimulus would not improve the productivity. And of course, the government debt to accumulate.

And as people worry about the future of debt in the (south ?), you know, they will not be able to increase the consumption and all those so-called -- (inaudible) -- consideration.

Before China is an emerging market, it was a developing country. The scope for improving the infrastructure is still very large. Those kind of bottleneck for growth is still abundant. And I think the emerging market certainly in China can always make investments in those kind of productivity enhancing type of projects. In other words, create certain demand and also pave a foundation for the long-term growth.

So I think that emerging markets, including China, are unlikely to be trapped into the similar scenario. And that also (gives ?) to, you know, my recommendation. We are in a global village. And globally, we have excess capacity. And we need to get out of the excess capacity in order to return to normal growth.

And under that kind of situation, the low-income countries, the developing countries have a lot of opportunity for those type of productivity enhancing type of project investments. Making investment in those areas can create a short-term demand, create a job in the low-income countries and also create a demand for their -- (inaudible) -- you know, goods produced in high-income countries.

So that remains a situation for the low-income countries and for high-income countries. But also, it remains a situation for now and the future, right? If the low-income countries can increase those kind of investments, their foundation for growth will be higher, and we can have a more increased growth after we get out of this global situation.

And to support, the World Bank, in multilateral, the World Bank, in order to increase their ability to assist those low-income countries at this stage of time, is crucial.

BROADMAN: Right there. Yes -- no, right behind.

QUESTIONER: Thank you. (Name and affiliation inaudible.) I'd like to ask about the efficiency or productivity of the government stimulus investment. So many countries are investing in green economy -- solar, windmill or biofuels. First of all, what do you think of the productivity efficiency or efficiency of those government investments?

And secondly, so many countries do the same, so how about overcapacity of green things?

LIN: Well, the government financed projects, whether it's with high, you you know, return or low return. Certainly that's subject to evaluation. But if you look into the, you know, evidence, like Korea this time, 80 percent of their fiscal stimulus was used in the green economy. And so far, the effects seem to be quite good. Korea was one of the first countries to pull out of this negative growth rate and to have a recovery. And I'm sure that, you know, after the crisis, the environment will be improved.

And I think the scope for the high-income countries to do that certainly will be very high. We know that global warming is there, we need to do something. And we need to make some investments, either now or in the future, right? And a lot of those investments certainly need to come from the government. The private sector can do something, but the government also needs to do something.

If that is something the government needs to do now or in the future, I would say to do now is much better, because it can stimulate short-term demand.

And also regarding to the global warming, you know, we know the earlier you do it, the lower the cost. So under that kind of situation, I will say the challenge for the government to have effective intervention in a green economy in high-income countries is very high.

And certainly, you can find some kind of way other than that -- (inaudible). Hopefully, the press and (our wisdom ?) can help us to overcome those kind of challenges.

QUESTIONER: This is Jessica Ni (ph) with -- (inaudible) -- of Taiwan. Dr. Lin, we would like to know your opinion on the economic cooperation between China and Taiwan, because it's going to be discussed this month. And it could be seen as a stimulus to some sectors of Taiwan industry. Particularly, we're interested at the life insurance sectors and the banking sector because these are sectors that Taiwan has advantages of. Do you think that if the economic cooperation between Taiwan and China, these sectors that could -- I mean, Taiwan, as they're having the advantages, might replace or even merge their counterparts in -- (inaudible) -- in China. And in that context, do you think that will damage China's independence to some degree? Thank you.

LIN: Well, I think that cross-strait cooperation, you know, certainly is good for both mainland part and for Taiwan part. And we already observed some positive impact, you know, like increases in the tourism, increases in the import of agriculture products from Taiwan to mainland. And that benefited Taiwan. And certainly, mainland part also benefited a lot from the investment in electronic sectors, in the computer sector and so on.

So certainly, I'd like to see that this cross-strait cooperation to be enhanced. And Taiwan and mainland are in different stage of deployment. Further cooperation certainly will benefit mainland as well as Taiwan.

And I do see, you know, both sides are moving towards that direction. And further cooperation certainly depends on the agreement on both sides' governments. And I hope this kind of issue can be, you know, reached, this kind of (vision ?) can be realized as soon as possible.

BROADMAN: Yes, the gentleman right there.

QUESTIONER: Thank you. It's Dominick Chilcott from the British embassy. My question concerns the G-20 which I think has performed above expectations in responding to the international economic and financial crisis. But going forward, given that you've identified excess capacity really as the root of future problems, do you think the G-20 is a suitable forum to tackle the issue of excess capacity and the other things that worry about the future of the global economy?

LIN: I think that, you know, it's a good multilateral international architectures and -- to allow the developing countries and the representatives of developing countries to sit at the same table to discuss the challenges.

And I think that in coping with this great recession, it already performed very good function. For example, the need to have fiscal stimulus, the need to, you know, to have a financial rescue, the need to maintain free trade and so on. Those kind of principles, you know, have been discussed and agreed in the G-20.

And I think in the future we are going to meet other challenges. One thing is that, as I mentioned, excess capacity may be with us for some years to come. And we still need to have a global forum to, you know, discuss those kind of issues and to come up with some kind of consensus, coordination of effort.

And in addition with that, I think that development, meeting with NPG (ph) and so on -- and also we need to have a global forum. Certainly, U.N. is important, but G-20 is also very important institution for discussing those kind of issues. And I hope, you know, this kind of institutional arrangement can be formalized to discuss the issues that are faced by the high-income countries and the developing countries.

BROADMAN: The gentleman behind the gentleman who just asked the question.

QUESTIONER: Thank you. Frank Fanelli with the Carlyle Group. Dr. Lin, we appreciate your comments. I wonder if you would provide us some perspective on currencies and, in particular, the U.S. dollar, given the need to finance huge fiscal deficits; the euro, given the very different outlook and situation in Spain, Greece versus Germany, for example; and then in China also with the RMB and the capital surpluses dealing there.

LIN: Well, I think that, you know, currently with excess capacity situation, and that means the global demand will be lower. And under that kind of situation, you know, exchange rate or monetary policy, if you lower the exchange rate in one country, you may expand your market but you will reduce the market of others.

So under that kind of situation, you know, I think we -- better to focus on the, you know, fiscal stimulus instead of using the exchange rate policy as a way to expand the demand -- (inaudible).

BROADMAN: And then the gentleman to the right of the gentleman who just asked the question. This is like a great chess game.

QUESTIONER: My name is Jerry Thompson with RLJ Equity Partners. I'm very interested in -- you started the conversation off talking about the low-interest-rate environment as well as the accumulation of debt in the U.S. Could you talk about how we get around a scenario of potential currency devaluation and how you ultimately pay off the debt without having substantial increases in interest rates.

LIN: Yeah. You know, that's a good question, and that's the reason why I say it's very important when you do the fiscal stimulus -- I mentioned at first, monetary policy may not be so effective under this kind of scenario. Just like a -- (inaudible) -- you rely more on fiscal stimulus.

But a conventional fiscal stimulus, according to Keynes, is that if you dig a hole, you pave a hole, and it's a stimulus. And for that, it may not be effective because you need to pay back the debt in the future.

But because those kinds of interventions would not increase productivity, so people need to pay more taxes, either by inflation or by increasing the tax rate. And if that is the situation, people will be conservative in their spending now. So the multiplier effect will not be large.

But if the stimulus is used in areas which can enhance productivity, under that kind of situation, the project -- (inaudible) -- the project can generally -- (inaudible). And then, you know, we do not have to worry about the debt accumulation.

So that's the reason why I think, you know, I say at this stage it's more important to discuss how to improve the, you know, quality of the project instead of to talk about the excess of fiscal stimulus. Because in high-income countries, certainly green economy is area with growth potential, but overall in the high-income countries, those kind of productivity enhancing projects, opportunity is more limited than in the emerging markets, than in the low-income countries. So it's very important for us to find a possibility, to channel more funds from the high-income countries, from the -- (inaudible) -- country to help those low-income countries to, you know, make investment in those kind of production-enhancement type of projects.

If they can do that, it's good for their country. It's also good for the world. It's good for the country providing the, you know, funds. It's also good for the country receiving the funds.

BROADMAN: And the point that Dr. Lin is making about the composition of the stimulus is a very, very, you know, important one.

This gentleman right here.

QUESTIONER: Danny Assaf from law firm Bennett Jones in Toronto. And Dr. Lin, thank you for your remarks. And I think your points on why this may not be over are very compelling. And my question had to do with, in addition to what governments are going to do or other multilateral organizations in terms of stimulus, but do you also see a bright side in this and coming out of this and seeing sort of the global market and its own dynamics and basically three potentially positive factors that could bring us out of this?

And I wanted to get your take on these. Number one, in terms of excess capacity, even in the short term, independent market players realizing that, feeling the pain, and consolidation to take that capacity out to return to profitability.

Secondly, in terms of the emerging markets and just the human dynamic of people seeing opportunity, that internal kind of development, competition within communities of, I want that. The democratization of economic opportunity is hard to squelch with all these large populations that are just rising.

And thirdly, with the market dynamics behind this transformational technology or opportunity in terms of green technology and the necessity of market solutions for that.

LIN: I think those three, you know, points are very good. So that gives us hope. And it's not as pessimistic as -- (inaudible). So you know, including the U.S. and the global economy, we may get out of this great recession much earlier than the last decade in Japan.

BROADMAN: Please wait for the mike.

QUESTIONER: Allen Wendt. In view of the conditions of the world economy as you've described them, do you see an enhanced role in these circumstances for the IFC? Should they be increasing their lending, or should they just try to keep it more or less where it is?

LIN: I think the IFC certainly is very important to provide the funds to the private sector in developing countries, you know, because if you provide the capital through the developing countries, they make investments, it creates a short-term return, short-term demand and creates a job.

At the same time, we know that the developing countries, you know, they have a scope for investment infrastructure, because they have a lot of bottleneck in those other productivity enhancing type of projects I mentioned.

And secondly, they also have a much larger scope for industrial upgrading. And if you provide one to assist them to make those kind of investments, certainly that will also facilitate their long-term growth.

So I think IFC, like any other multilateral financial institution, can play very important role during this period of time.

BROADMAN: The back row.

QUESTIONER: Doctor, thank you very much. I'm Jim Gilmore from the Free Congress Foundation. Let me ask you a question about stimulus itself and the concept of it. Stimulus is certainly being used in the United States, and you're offering it through the World Bank. Doesn't that just artificially build up demand which then maintains overcapacity, and then sooner or later we're going to run out of stimulus money, which is taxpayer money, and then, only then, will the overcapacity begin to diminish?

Right now, stimulus money is just chasing the overcapacity. And then when the stimulus is done, the resources will still be reallocated to something that's more proper. The only difference is that then at that point we're suffering under giant public debt.

LIN: Well, I think that is also a very important question. You know, the concept is that we are in a Keynesian type of world. You have excess capacity, it means that you have unutilized production, equipment, available floor space. And if you will not use them, they just lay idle, and people become unemployed. And if people become unemployed, you need to provide them some means of living, right, and you also need to pay Social Security -- a social safety net and so on.

But if you use the stimulus, that means you use those kind of idle resources. And if you turn those kind of idle resources, especially if you turn that into an investment in projects which will be, you know, providing the basis for long-term growth. And under that kind of situation it's one stone killing two birds, right?

And that's the reason why we need to have Keynesian economy -- economics, but we need to look beyond Keynes. You know, it's not only dig a hole, pave a hole that's a stimulus. You need to find a project which can employ workers now, which can use our resources now, but is an investment for long-term growth. Green economy is one example.

But in the developing countries, a lot of the infrastructure is through those kinds of examples. You know, suppose you go to Mexico or Latin American country or you go to African country or any other developing country, you can see they have a shortage of power, they have congestion in the roads, and they have lack of access to, you know, clean water and so on. And they need to have that -- and they need to overcome that for long-term growth, right?

And I think it's a good time to make investment in those kind of projects. (Inaudible.) If you make investment in those kind of projects, it creates jobs now, but also it will make the growth potential in the future higher.

And as long as the growth in the future is higher, you can generate much larger tax revenue to pay for that. And that's how -- you know, it's not as you say, well, in the future it becomes a debt burden and then you need to raise taxes. Well, with this kind of scenario you don't need to raise the tax burden. And I do have some examples to show that.

If you look in 1998 when East Asian financial crisis occurred, at that time, China was also hit with a similar situation -- you know, so there was excess capacity situation domestically. And at that time, China used the opportunity to make investment in the highway system. Before '98, highway system in China was only less than 5,000 kilometers.

And from '98 to 2002, the highway system in China increased about five times, from less than 5,000 kilometers, it creased to about 25,000. And those kind of improvements in the infrastructure increased China's growth potential.

Now, before '98, the average growth rate in China was only about 9.7 percent a year. But during the period of 2003 to 2007, the average growth rate in China increased to about 11.4 percent. And the reason why the growth rate can be enhanced is simply because those kind of bottlenecks have been removed.

And not only so -- certainly, from '98 to 2002, the government deficit increased because of those kind of stimulus. You know, in 1998, the government debt as a percentage of GDP was about 20 percent, and it increased to about 36 percent by the time of 2002. But because of the growth rate, it has been increased. So now the government debt, cumulative debt, as a percentage of GDP dropped down to 20 percent again.

So that is the, what I say, you know, those productivity enhancing type of fiscal stimulus. And if we can find ways to support those kind of stimulus, it's good for now, it's also good for the future.

BROADMAN: Great Keynesian lesson for those of you who don't know Keynesian economics.

We have time for one last question. This is the lucky gentleman right here. And I want to remind you once again everyone that this has been on the right.

QUESTIONER: Hi. Jamie Moran. You've talked very eloquently about the arguments for focusing on green technology in the high-income countries as part of stimulus. In many of those countries, the initial debate about what sort of fiscal stimulus to put in place was very heavily shaped by concerns about rapid effect of that stimulus spending. And one of the criticisms of green investment was it was likely to take longer to reach the economy. How do you balance those concerns now in 2010?

LIN: Well, the first one, the situation now, compared to, you know, early 2009, certainly is different. Two thousand nine, at that time, we see, you know, a (free ?) drop in industrial production and so on, and we need to take action quickly to get jobs quickly.

And now we have a recovery. And the issue is how to sustain the recovery. In a sustainable recovery, as I say, excess capacity is still there. If we -- (inaudible) -- exit from fiscal stimulus, very likely we are going to have a dip. And under that kind of situation, we need to, you know, maintain the intensity of stimulus or even we need to increase the intensity of the stimulus.

But now we have more time to consider, we have more time to plan. And so, you know, to argue for the green stimulus, I think that this is the right time now.

BROADMAN: Great. Thank you all for coming. Please join me in thanking Dr. Lin for his global perspective.

(Applause.)

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