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Impact of the Global Financial Crisis on Developing Nations

Speakers: Nancy Birdsall, Center for Global Development, and Danny M. Leipziger, World Bank Group
Presider: Gerald F. Seib, The Wall Street Journal
December 12, 2008
Council on Foreign Relations

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GERALD F. SEIB:  Thank you all for being here.  My name is Jerry Seib.  I'm the executive Washington editor of The Wall Street Journal and appreciate everybody showing up on a cold day to discuss an important topic.

Before we get started, I do have to do the requisite housekeeper's duties, the first of which is to remind you all to turn off, not just turn off the ringers on but actually turn off BlackBerrys and cellphones, not merely so the ring doesn't interrupt us but so that the buzzing doesn't interfere with the sound system here.

So thank you very much.  And as a reminder to everybody here, this meeting is being held on the record.  I'm happy to be here, to moderate, because I do think this is an extraordinarily important topic.

You know, with all the attention that's been lavished on the economic problem/crisis of the day and the financial market meltdown, there's been an enormous amount of attention lavished on those subjects.  I think there has been relatively little attention paid to the subject that we're here to discuss today, which is the effect of that crisis on the developing world, on developing nations.

I think it's a hugely important topic but one that, because of the obvious and understandable focus on what's happening on our shores, has probably gotten relatively little attention.  And so maybe this conversation is a way to start redressing that balance in the policy debate in the U.S.

Happily we have two wonderful experts here to discuss it with us -- Nancy Birdsall, who's president of the Center for Global Development, and Danny Leipziger, who is vice president for Poverty Reduction and Economic Management at the World Bank.

What we're going to do is, I'm going to start this off by asking Nancy and Danny a couple of questions, mostly to just draw them out a little bit.  And as you know, if you've been to past council events, about halfway through this hour, we will turn the switch and let you all do the questioning.  And I'm sure there's no shortage of topics to address.

Danny, let me start with you.  You know, it did seem, at the beginning of this crisis, whenever you want to say the beginning was but earlier this year, that the developing world might get sort of a pass, that this looked like an industrialized, maybe an American-only or maybe an industrialized-world-only economic crisis.

That's clearly not the case.  And now the developing world seems to be getting a double whammy.  There is the ripple effect from the financial markets meltdown in and of itself.  And there's the global recession that seems to be reducing demand for all kinds of commodities, on which so many of these companies depend for their own livelihood.

I guess the question that I wanted to pose, to you, is twofold.  How bad is this now, in the developing world?  And has it reached the bottom there yet?  Or are we yet to see the bottom in months to come?

DANNY M. LEIPZIGER:  Well, I guess, my answer would be that we haven't hit bottom yet for developing countries.  It is true that they are being buffeted both by the financial crisis and the impending recession.  But you also have to step back six months and realize that the food and fuel situation earlier, in 2008, left a lot of developing countries quite vulnerable, particularly on the fiscal side.  And I want to come back to that, because a lot of countries managed to shelter part of the past, through very high food prices and very high fuel prices, through fiscal means.

And so now we're in a situation where the problems that you describe are in the financial sector.  There's problems of trade finance.  And trade volumes have suffered as a result.  So going into the fourth quarter, there are countries, larger emerging market countries that are worried about rollover risks.

But for the majority, 2009 is going to be the big hit, because we know that growth rates are going to be extremely low, probably 1 percent globally at best, negative in the OECD, being held up by China, which might be six if the fiscal stimulus works.

But that leaves developing countries with a pretty poor outlook.  And so they're going to have to deal with this, in some respects, with fiscal means.  So again, you know, what space do developing countries have to do something countercyclically?  Not that much.

What space do they have to make up for capital inflows, particularly into infrastructure investments that are going to dry up?  And what space do they have to increase safety nets, for those that are going to be affected by the recession, in 2009, cascading onto them and through safety net programs.

So all of these things add up to fiscal cost.  So the biggest concern for, I would think, most finance ministers is, how are they going to get through 2009?

SEIB:  Nancy, you've seen, we've seen a reaction by the world community, by the financial institutions, by the developing world, by the developed world.  But it seemed to some to be a little sporadic, maybe a little haphazard and maybe not totally coherent at this point.

I'm wondering, from your point of view, whether there are things that the IFIs could be doing, that the G-20 countries could be doing, that the U.S. could be doing, in policy terms, to redress the balance in the developing nations, that haven't been done yet.

Is there a to-do list for countries that are observing what's happening in the developing world?

NANCY BIRDSALL:  Yes, I think, there's definitely a to-do list.

On the positive side, the G-20 meeting was a start at ensuring there's reasonable coordination.  But some people -- you know, I would include myself -- were disappointed that there wasn't more clarity on some kind of an announcement, across the G-20, for those countries able to do a stimulus package, of what would be a target, you know, overall at the global level.

On the other hand, it was good that the G-20 met.  I think it's worth noting that maybe, that we're in the last stages of having something called the G-7.  So that already bodes well for how the former or existing G-7 are responding, in terms of ensuring more discussion, more coordination with some of the major emerging markets.

I'd say, on the negative side, that the crisis revealed the weaknesses particularly of the IMF and to some extent of the multilateral banks.  On the IMF, I think, we saw first that the day -- there's some controversy about this -- but that the day that the Fed announced swaps, with four major countries, that same day, the IMF approved a liquidity shock facility.  And there's some disagreement, among insiders, about the extent to which there was or wasn't coordination or just passing of information from the U.S. side to the IMF officials.

Danny might know more about that.  And I don't know if it's worth worrying about it, in retrospect, because the main point is that the swap facility did come quickly from the Fed, in a way that in the past, you would have thought, well, in principle, the IMF as an institution would be doing that.  And then there was a lot of discussion about whether the IMF has sufficient capital.

Last night, Michel Camdessus at a meeting said in effect that he doesn't think it has enough, by a long shot, and that even at the time of the Asian financial crisis, they discussed doing a special agreement or NAB.

I forget what it stands for.

SEIB:  New agreement to borrow.

BIRDSALL:  New agreement to borrow, going for 200 billion then.  So, you know, if you translate that into today's needs, you'd be at a trillion (dollars), at least.  So there's a resources problem.

But there's also a stigma problem.  We see that a lot of the emerging markets are not wanting to go to the IMF.  And so that reflects a long-time -- well, it's two things.  One is the concern that it'll be a message to the markets.  But it -- there's also the theory, anyway, that they don't like to go to the IMF because it's onerous, it takes a long time, and conditionality and so on.

So I think the response at the institutional level through the major -- the G-7 and other countries -- some of it has to be revisiting, in the short run, financing questions at the IMF.  And then there are a lot of issues at the World Bank as well, about instruments and lack of use.

I think the IDB, just to make one last point -- I don't want to go on too long, because many people in the room know more about this than I do -- but one very interesting thing was, at the IDB, they very quickly issued a $6 billion credit facility.  The only thing that's unfortunate is that it was -- they only had the 6 billion (dollars) because of existing internal financial rules that they could use for this sort of rapid response.  So it's only relevant for the smallest countries in Latin America.  I mean, $6 billion doesn't begin to address the likely needs in Latin America as a whole.

SEIB:  I'd love to come back in a few minutes to the question of whether this crisis also presents an opportunity to revisit the structure of the international financial community.  But let's set that aside for a second and deal with the kind of higher-plane question first, Danny.

I mean, obviously the impact of a crisis like this is not uniform and even across the board.  There are some regions that suffer more, some less, I assume, some that suffer in different ways than others.

Could you just look around the globe a bit and talk about what you think are the regional and varying regional impacts of this crisis to this point, and maybe country by country to some extent as well?

LEIPZIGER:  Well, I think the biggest concern is going to be in Africa, because since 2000 there's been a lot of progress in terms of countries that actually generated 5 percent or more growth, and poverty, you know, was beginning to fall.

For countries like -- for regions such as East Asia and South Asia, which had been doing pretty well in terms of macro and poverty reduction, they're better positioned to withstand shocks.  And in general, developing countries are better positioned now.  The -- that's the good news.

The bad news is, the shock is much larger than we've ever seen in the last 80 years.  So I think, in terms of growth rates, we're looking at, you know, most regions of the world having their growth rates cut in half in the developing world; East Asia less than that, because of China.

I think the concern in Latin America -- I was in Colombia and talked with President Uribe yesterday morning, and you know, his main concern is, you know, what's going to happen to Mexico and Brazil?  And what's going to happen to my neighbors?  And what growth rates are you and the World Bank projecting, given that the OECD is going to be negative?

So I think it'll vary by country, how much fiscal space they have.  I think one indicator that we used to use, which was reserves, is no longer such a great indicator, I believe, because once markets begin to worry about your ability to roll over, there is -- the level of reserves is not much protection.

So coming back to Nancy's point on the IMF, I think the short-term liquidity facility, which gives you up to 500 percent of quota, is, however, a very short-term facility.  It's three months, which can rolled over twice.  Supposedly certain countries are eligible because their macroeconomics is good, but there's no list that says, you know, you're automatically eligible.  So countries don't particularly want to go there and --

SEIB:  Yeah.

LEIPZIGER:  -- and be examined before deciding on this.  So I think --

BIRDSALL:  It's too bad they can't do -- the way Paulson did and tell some countries -- like he told the banks you must take, you know, a certain amount.  And that would eliminate the --

SEIB:  Because of a stigma, (of course you mean ?).

BIRDSALL:  Yeah.  Yeah.

LEIPZIGER:  Yeah, I mean, I think --

BIRDSALL:  But it's expensive.  It's an expensive --

LEIPZIGER:  Well, it's expensive.  It's short-term.

Your point is right about the lack of overall volumes.  I mean, the amount that the Fund has could easily be eaten up.  I mean, the first few programs -- Iceland, Hungary, Ukraine -- have chewed up, you know, probably 20 (billion dollars) to 30 billion (dollars) right there.  And that's about a quarter of what they have, in terms of usable resources.

I should say, on the World Bank side, that we are, fortunately, very well capitalized these days, and in part because emerging markets were borrowing less, we have more space to lend.  So Bob Zoellick has indicated that we can easily see ourselves doubling lending on IBRD, which is the normal window, in 2009, and that if necessary we could go up to a hundred billion (dollars) of lending over the next three years.

So we have the space.  It'll depend, of course, on individual countries, what they want to borrow.

SEIB:  And by the way, do you have, at the Bank, a projection about how long this phase, this cycle we're in, actually lasts?  When does it hit bottom?  When does the arrow start to turn up, in your estimate?

LEIPZIGER:  Yeah.  Well, we have these projections, but then we change them every couple of weeks, because things just keep getting worse. (Laughter.) --

SEIB:  (Chuckles.)  That's all right.  Just the latest one's all we need.  (Chuckles.)

LEIPZIGER:  Well, I think -- here there are two ways to look at it.  The evidence that one has is historical, okay?  So historically, recessions last about three quarters.  If you have a recession combined with a housing or some other equity-market crunch, it's two to three times that term -- in terms of length.  So I think we're talking about six quarters at a minimum.

The other question is, you know, what is the speed of recovery?  So, you know, is it a V?  Is it a U?  Is it a prolonged flat period?

BIRDSALL:  L.

LEIPZIGER:  L.  (Laughter.)  It's --

SEIB:  L would be bad.

LEIPZIGER:  Hopefully not an L.  (Laughter.)

So I would say, 2009, a, you know, very bad year for everyone.  The question is, will there be recovery in 2010, and if so, when?  The fiscal stimulus point is right.  There are only a few developing countries and emerging-market economies that matter in terms of fiscal stimulus.

China has acted -- if we look around -- coming back to your question about regional differentiation, if you look in East Asia, most of the major economies in addition to China -- if you look at Korea, Thailand, Malaysia -- they've all announced fiscal stimulus packages of somewhere between 1 and 2 percent of GDP.  So I think East Asia will try what it can.

Latin America, some countries are positioned to do something, but traditionally the fear of inflation -- and rightly so -- would stop them from being too aggressive in terms of fiscal stimulus.

SEIB:  Nancy, are there regions, countries that you worry about, particularly -- particularly soft spots at this point that are going to go deeper and have a hard time coming back up, in your estimation?

BIRDSALL:  Well, instead of giving a direct answer, let me just say about Africa and Latin America.

On Africa, it's very interesting.  Someone who's worked -- a senior fellow at the center who is not an economist but a political scientist said yesterday that the decline in commodity prices may be a good thing, overall, for Africa, with the following caveat, that it doesn't -- they don't go down a whole lot more, because of China -- China's growth being not even what Danny was suggesting.  So there's a lot at stake around what happens in China.

But the reason he said that is that -- what Danny mentioned earlier, that the food and -- the food and oil price hikes really hit some African economies very hard on the fiscal side, and so they are having a little period of relief.  And the volatility for oil exporters in Africa or the price hikes is also very problematic from the point of view of governance and corruption and inability to cope with the ups and downs of prices.  And so I think it's very interesting to note that these commodity prices -- although they've fallen from the peaks in the spring -- are still relatively high compared to five years ago, 10 -- well, maybe not five years ago but certainly 10 years ago and 20 years ago.  And that's true for food as well.

So that's very interesting to me, in the sense that one of the big risks in Africa is going to come on the social and political side.  There were a lot -- there were a lot of social problems, a lot of urban rioting or close to it, at the times of the food hike -- price hike in particular.

Then, on Latin America, it's very interesting.  Apparently, because of sound fundamentals in the last five, six, seven years and because commodity prices have stayed -- you know, they're down, but they're not down that much, which is a benefit for Latin American commodity exporters -- the initial financial hit has been -- well, I don't want to say decoupling, because, you know, that's probably an exaggeration.  But it is -- it does seem that it's possible for the governments to be -- because they in the last five years extended the maturities on their sovereign debt, that they're doing okay and they can wait before going, say, instantly to the IMF.  And they seem to be counting on -- if there's still a problem in six months or nine months when they may have to do some rollover of debt, that's when they're going to start talking to the World Bank.

So that's kind of an interesting twist, that again has to have you a little bit worried about the traditional role of the IMF as -- with liquidity and the -- what's going to happen at the World Bank and the IDB and the regional banks.  And I think that's an interesting thing to hear from some people who know about these issues, whether the MDBs should have some adjustment in their traditional mission that allows for -- sort of make more transparent the fact of countercyclical financing, given that we live in a world where there are deeper, you know, ups and downs, bigger booms and busts and that the only time they've done countercyclical financing, really, is when there have been emergencies.  And it's always really seen as substituting or complementing IMF money.  It's not really, down the line, what was the original intention and mission of these banks.  So that goes a little bit to your --

SEIB:  But is -- but is there -- is there much happening in that countercyclical space right now?  Is -- are people doing that, or are you talking about that as a void in the current situation, mostly?

BIRDSALL:  No, no, not -- no.  I think even though there isn't a lot happening yet, it's confidence-building that the World Bank can say, we have a hundred billion dollars.

SEIB:  Well, when we --

BIRDSALL:  And there's a sense in which countries that are able to weather, in the short run, this are thinking of going to the World Bank.

LEIPZIGER:  I would say that during our annual meetings in October, we got quite a lot of exploratory demand, I would call it, for countries that want to make sure that they can cover some contingencies.  I think the --

BIRDSALL:  Maybe -- maybe you could even say something about this deeper --

LEIPZIGER:  For a drawdown option -- yeah, we --

BIRDSALL:  -- and whey there isn't more --

LEIPZIGER:  Well, I think we have one instrument, which is called a DDO -- Deferred Drawdown Option -- which is basically you get a commitment from the World Bank based on your policies that you can borrow at some point in the future if needed.  So it's -- it's a line.  And these -- the condition, if you want, is that you maintain your macro policy over that period of time.

There wasn't a huge amount of interest in this instrument over the last few years, because we were in a -- in a boom part of the cycle.  There is a lot more interest in it now.  So actually, when we tallied up the potential interest or the potential additional demand coming out of our annual meetings in October, we got to a number that was pretty close to 15 billion (dollars.)  But --

SEIB:  Fifteen billion (dollars) is --

LEIPZIGER:  Additional to what we normally lend.  But this is exploratory demand, is the way I described it.  This is not we're ready to --

SEIB:  Right.

LEIPZIGER:  -- to borrow.

BIRDSALL:  It has a sort of value as --

LEIPZIGER:  But countries, I think --

SEIB:  But your point is this is a psychological value, to knowing that that's there even if it's not now.

LEIPZIGER:  Yeah.  And some countries are being prudent and setting up essentially a safety-net line of lenders, including the bank, but also perhaps central banks that have surpluses, like China or Japan, that might step in if the markets don't begin to loosen up.  I think that's the big issue, which is, how long does it take the credit markets to loosen up?

It's true that countries have extended their -- maturity of their debt, and so a lot of them are not as desperate.  But once you go past six months, you know, things come due, and you've got to refinance.

SEIB:  So are we looking at a wave of refinancing and of -- you know, a bigger parade to the window at the IFIs six months from now than we're seeing today?

BIRDSALL:  I think it's entirely possible if things are really still difficult.

SEIB:  So that in that sense, we may not have seen --

BIRDSALL:  I don't know --

SEIB:  -- you don't see at the front end the worst of it.

LEIPZIGER:  Right.  I think --

BIRDSALL:  Yeah, I would say six to nine months.

LEIPZIGER:  I think part of it is, we look a lot at sovereign debt.  We don't look that much at corporate debt.

SEIB:  Yeah.

LEIPZIGER:  And for countries like Mexico, Brazil, Indonesia --

BIRDSALL:  It's already a problem.

LEIPZIGER:  -- it's already a problem, and as you saw in the U.S., if your big corporates begin to have trouble, you know, governments tend to step in.  And I think they will.

BIRDSALL:  Right.  So then it'll be socialized -- (inaudible).

SEIB:  Danny, I think you at the -- in your opening remarks talked about trade flows.

LEIPZIGER:  Yeah.

SEIB:  You know, you do worry about declining trade flows at a time like this.  You also worry about nationalism and protectionism.  Are we starting to see that yet?

Nancy, let me start with you.  Are you starting to see that kind of reflexive reaction in a way that troubles you yet, or is that not happening, or is it prospective?

BIRDSALL:  I think we're starting to see it.  I think sort of within a week after Sarkozy returned from the October -- no, the November --

MR.     :  The G-20.

BIRDSALL:  -- the G-20 summit, there was some discussion of industrial protection, subsidies, or doing something in France.  And even -- you know, some people would say the discussion here on the auto industry is going to be seen in other parts of the world, potentially -- well, it's a two-edged sword.  I mean, obviously the markets we know today don't like the fact that it's not clear that something will happen.  And so sovereigns aren't going to like it either, because it's affecting the overall environment.

SEIB:  Right.

BIRDSALL:  At the same time, it's an interesting question, since the -- we have been saying to developing countries for years -- in a sense, we've been restricting their policy space, sometimes with good reason, to ensure better policies and, you know, more discipline and so on.  But now we see in industrial countries, particularly if you have the dollar, which is a big advantage, and you can borrow more easily longer and go deeper into debt -- that we're going to see something like some industrial policy emerging in the U.S.  And I think it'll be very hard to resist it in the other G-7 countries.  It's very tough politically.

So that's another big issue in terms of -- the line between the state and the market, I think, will be redrawn, and where it lands and whether it lands in sort of a healthy way or in a protectionist way is up in the air.

SEIB:  It's a good question, right?

Danny, what do you think?

LEIPZIGER:  Well, I think the evidence is not yet in, but it's going to -- it's beginning to trickle in, where countries are putting higher tariffs on or are more likely to file anti-dumping suits, et cetera.  So I think it's inevitable, given the size of the recession, that you will see more protectionist actions, one way or the other.

The fact that Pascal Lamy has not been able to get the trade round restarted is not good.  I think the U.S. has traditionally been the most open of the OECD markets.  And so I think what happens here will send a strong signal.  I mean, the French may do what they normally do, but at the end of the day, how the U.S. deals with it, I think, will set the tone.

A lot there has to do with China.  I mean, the approach of trying to use domestic consumption to build -- boost aggregate demand when exports falter is -- you know, is a smart strategy, particularly given their needs to employ people.  But what happens to the Chinese exchange rate also matters.

SEIB:  Yeah.

BIRDSALL:  And the latest is that they are going to delay any further appreciation.

MR.     :  Appreciation.

BIRDSALL:  On this policy space, Danny reminded me of something, you know, that's quite interesting, which is that the last round in the trade negotiations, at least what I read in the papers, is that it broke down in part because the U.S. did not want to let India, among other countries, retain a certain level of safeguards against a surge in agricultural imports.

Now, maybe it's more complicated.  There are people in the room that know a lot more about these trade negotiations than I do.  But compare that, you know, to the problem now in the U.S., which is also about protecting people and jobs.

SEIB:  Right.

BIRDSALL:  So I think one of the problems we have for the medium term is that even the rich countries and certainly most developing countries have very limited instruments to deal with this kind of vulnerability and volatility.  And we saw that with the food price hike; that in the absence of adequate arrangements for unemployment insurance and food stamps and so on, a lot of countries restricted -- if they were food producers, restricted exports.

SEIB:  Yeah.

BIRDSALL:  And of course those who were importers eliminated their tariffs, which was -- seemed okay at the time, then.  You know, you have these distortions that come in part because of the lack of the ideal way to protect people.

SEIB:  Yeah.

LEIPZIGER:  Just on the Doha breakdown, a slightly different twist on it, I mean, Nancy's right that the final breaking point involved the U.S., China and India about special measures.  But interestingly, if you look at the Pew Foundation survey last year on whether or not the public believes that free trade is a good thing, the percentage of Americans who thought that had fallen from something like 78 percent five years before to 53 (percent), I think, whereas the number was 91 (percent) in China and 87 percent in India.  So these are countries that are benefitting from the open trading system that -- where the public really supports it, and then you have others where globalization is seen as being connected with all the ills of the economy.

So I think there was a solution to that particular impasse at Doha that would have been possible, but I think it's very instructive that the three countries that at the end couldn't agree have authorizing environments from their citizenry which is quite different.

SEIB:  Yeah.

QUESTIONER:  (Off mike.)

SEIB:  Is that -- we'll -- we should turn to -- there -- just one thought before we turn to questions.  Is that -- there's also an interesting question about the moral authority of the voice from the U.S. and the West, that it -- you know, if the model that you espouse doesn't seem to work all that well and if you yourself are edging away from reliance on markets and free trade, I'm not sure that the messages are going to get through very clearly in this environment, but maybe that's for a later discussion.

I would love to turn this over to questions.  Just a couple of things.  We have microphones that are floating about.  Raise your hand, and I'll call on you.  I'd ask that you stand up -- we'll start here -- state your name and your affiliation.  Make the questions short and direct, so we can get as many in as possible.  And if you want to direct it specifically to Nancy or Danny, let us know that as well.

QUESTIONER:  Thank you.  My name is Arturo Porzecanski, with American University.

And I'm wondering if we've struck the right tone here because, of course, a year from now things are going to feel a lot worse than now, here and there, because the recession is happening as we speak so the fallout from that will be probably quite severe all around.

But let's look back.  I mean, during all those years when commodity prices skyrocketed, we didn't see that many developing countries that were commodity importers going belly-up.  And the financial markets started to change for the worse a year and a half ago, and the fallback has been -- fallout has been pretty limited.  And commodity prices, of course, have sunk already six months, and yet -- in other words, the Pakistans and the Ukraines and so on, I would say those were accidents waiting to happen; but in terms of the systemically important countries, and a lot of others too, the surprise is we don't have that many victims yet.

SEIB:  Danny, do you want to respond?

LEIPZIGER:  Well, I think there is an element of truth to what you're saying, which is that a number of the countries, particularly bigger ones, are better managed; had more to fall back on; had higher reserves, lower inflation, et cetera, et cetera.  I also agree that there were certain economies that were out of whack before, and the crisis just tipped them over the edge.

Nevertheless, I think if you sat in on any of the G20 meetings, as I have, you would be surprised how worried policymakers in well managed emerging market economies are.  And they read the same newspapers and they see the same projections and they have the same information.

So they know that this is a shock, or a series of shocks that is unprecedented.  They know they don't have that much to fall back on and that at the end of the day, if you've been running a fiscal deficit of three percent of GDP and you know that for a recession that's going to last one to two years you need to spend another one percent on safety nets, another one or two percent to keep infrastructure projects going because capital flows have dried up.  And you have to put money into, potentially, banks that may be affected because the OECD banks are pulling back their credit.  I wouldn't be quite so sanguine about it, frankly.

SEIB:  Nancy?

BIRDSALL:  Yeah, I'm sort of with Danny on this one.  Just thinking, we didn't go very much on specifics when Jerry asked, but if you think of Central America:  very reliant on remittances.  They're just drying up, and there we're sometimes talking about substantial -- two, three, four percent of GDP.

I think, you know, despite what my colleague said about Africa on commodity prices, that the difficulty in Africa is that you don't need -- you need at least two or three percent growth, just to stay where you are on the escalator.  And if China collapses, which is a risk, then that's really a big problem in Africa.  And you are going to be reading about very large increases in the number of people who are poor, partly because the $1-a-day or $2-a-day line -- there's so many people, you know, at 2.50 (dollars) and $3 a day that this is just going to be very big changes.  And that then has social and political risks that I don't think we've ever seen, in terms of the change in expectations for people.

So, you know, I think it's -- I would go with what Danny said in the beginning, which is we haven't seen the bottom.  And I think there's a lot of fear of what the bottom will be in countries that have a lot of poor people, very few instruments, et cetera.

SEIB:  Let's go here first, and then I'll come back over to you next.

QUESTIONER:  Paula Stern, with the Stern Group.

I want to go and talk about the other institution which hasn't been mentioned of the Bretton Woods Institutions, which is the World Trade Organization.  We've talked about the Doha Round, but there are provisions which I'm wondering whether you think can be attended to in this crisis.

And I'm talking about financing of trade, the inability to get letters of credit, the whole -- as you talked about, the general drying up of trade and what the World Bank, the World Trade Organization and others might do as they think about reforming their organizations long-term, but also short-term right now, in terms of trade financing.

And my second question with regard to WTO is what should be done now, knowing that we've got like an automobile industrial policy race going on that could make the Airbus dispute, that's been around for three decades at least, look really small politically compared to when the automobile industry starts to race for subsidies and industrial help.  And so I'm interested in how you can -- institutionally can kind of step forward on these two big issues, I think.

LEIPZIGER:  Maybe I can take a crack at it.  The trade finance one, there's no doubt that there is a policy intervention that is waiting to happen.  And we have some facility through the IFC where we do trade finance through banks, and we've doubled it from one-and-a-half to three billion, but that's a drop in the bucket.

BIRDSALL:  Right, that's small.

LEIPZIGER:  I wouldn't particularly go with the WTO for this.  I think that that's not the right institution.  On the other hand, I would try to get money out of China and Japan and other surplus countries to do trade finance because, A, trade finance is pretty -- pretty safe, provided that you don't have a counterparty risk and people don't pay at the end.  It's pretty short term:  six months.  And it's in the interests of both countries, because otherwise -- take the case of China -- you know, exports dry up even faster.

SEIB:  What would be the path for getting that money out the door?

LEIPZIGER:  Well, we've -- the IFC has been talking to people, whether they want to join that platform.

But it's not clear that, you know, this is the only platform that's out there.  I think central banks could do it, provided that they ensure that once the money flows into the central bank and is given to banks, they actually use it for trade finance.

I mean, one of the problems is banks are holding onto their liquidity.  And you can give them all the money you want.  It's not going out the door.  So, I think there, you're right, that there's an absolute need, and there's actually a solution, which is not that complicated in a way.

On the auto one, I think that's interesting -- on the previous question as to whether or not we see evidence of protectionism.  I mean, I saw just this morning that the Russians have put a 30 percent tariffs on imported cars.  Not fun.  (Laughter.)

LEIPZIGER:  So I think you are going to see a cascading of activity around cars, as the example you raise.  And I think it's how they -- also how the WTO, in the absence of a solution on the Doha Round deals with these things, I think, will really set the tone.

On turf facilitation, there are a lot of things we can do with the World Bank but they're not amenable to the three-month crisis solution.  I mean, there are things on logistics and, you know, we have a lot of programs that are, in normal times, good and, for 2010, they will be great.

The problem is getting through 2009.

SEIB:  Yeah.

Nancy, anything on trade, financial, auto works?

BIRDSALL:  Just on the trade finance, it's very interesting that the IFC, even though the amounts are too small, that it's the IFC and the IDB that came through rather quickly.  And I don't know whether it's the -- it's probably the private sector window in the IDB.  I'm not really sure if anybody here knows better.

But my point is that this is an interesting example where the government-to-government lending that has been the traditional mission of the multilateral banks, that the secular trend is down, you know.  It's going to be up for a couple of years, but the long-run trend is the demand is falling.  And it is the banks, either their private sector arms or a bank like the IDB that has the private sector loans on its balance sheet, that have responded more quickly.

So, it's something about, going back to the point I made earlier, that there may be time to rethink the role of the MDBs.  Are they too constrained by this government guaranteed country loan which takes time?  They should still be doing that and in the medium term for some countries, but should they have other instruments?

For example, we have a book coming out by Guillermo Perry, who was the Chief Economist for Latin America at the World Bank, that -- and we had a great meeting actually that was in this room some time ago.  And his point is the multilateral banks should be making markets in insurance so that when you have a problem, you are already insured against it.  And the low-income countries are much more vulnerable to terms of trade shocks, to natural disasters, and they don't have these insurance products available to them.

Most of them, after a natural disaster can get an emergency loan, but then they're taking on debt.  And we don't do that.  We have insurance against our house burning down or against -- some of us -- against a health catastrophe.

SEIB:  I think the next question is over here.

Q    Nancy Burke (sp), given the current situation and predictive that you're talking about with -- particularly with the poverty increasing in a lot of countries, what should the next government do to help mitigate that?

SEIB:  In which country?

Q   The United States.  I'm sorry.  Our incoming administration.

BIRDSALL:  Jessica, who's a good board member, is reminding me that we have a book which we published about a month or two ago called "The White House And The World:  A Global Development Agenda for the Next President."  And it addresses that question across a range of issues, not just a aid, what could be done in trade.

I'll mention quickly, you know, we're advocating that the Obama administration pick a group of countries worthy and poor and small in absolute size, many of which already have some trade preferences and say duty-free, quota-free access permanently.  These could be MCC countries, for those of you who know about that Bush aid program in Angola, countries in Sub-Saharan Africa and so on.  So, anyway, trade, climate change, across the board.

But I think it's a very important question, and I encourage all of you to ask us for the book.  At least note the kinds of issues that we cover.  Maybe one more thing I'll say which is that there are ways to spend considerable amounts of money inside the U.S. that would be extremely valuable for the low-income developing countries and the poorest people within them.

And I'm thinking of clean energy.  I'm thinking of a commitment that would give an incentive to our very, you know, sophisticated agricultural and agro-industrial firms to do R&D in areas that would be particularly helpful in tropical countries with dry land soils and so on, and those kinds of commitments that would give incentives to pharmaceutical firms to look for and find a malaria vaccine.  So these are things that could be included as has been so much discussed in a different way, even in a stimulus package, at least a medium if it's going to go over a year or more.  So, it's not just about aid.

LEIPZIGER:  I think the biggest thing is to get the recovery started one or two quarters earlier.  I think most of the numbers coming out of the World Bank say that -- and taking it with a margin of error -- but one percent lower growth in developing countries is at least 20 million more poor.  And that doesn't count the people that are already below the poverty line that are just pushed further down.  And we're not even counting that.

So, it's definitely, definitely an underestimate.  We also know from research that Guillermo and his group did years ago, that the poor are very vulnerable.  And once you drop below the poverty line, it's very hard to get back out.  You've sold whatever asset you have, and you're probably stuck.

So, I would say -- without wanting to appear flip -- that the most important thing for the U.S. is to get its act together and to get together with the other OECD countries and get the growth stimulus package moving and restore confidence in these financial markets.

LEIPZIGER:  In the back?  (Off mike.)

QUESTIONER:  Thank you.  My name is -- (name inaudible) -- European Broadcasting System.  I was wondering if the panel can make some comments on the idea of reshaping international institutions according to the last meeting of the G20 last November.  Thank you.

LEIPZIGER:  Yeah.  Thank you.  I wanted to get back to that.  This is a good opportunity.

Nancy, you want to start?

BIRDSALL:  Well, yes, it's a big issue.  I think they're -- unfortunate that I happen to go to this meeting last night where Michel Comdecu (sp) was speaking.  And there is a group that is being headed by Trevor Manuel who's the finance minister in South Africa -- many of you know -- with other distinguished members including Comdecu (sp).

And he made quite an astonishing speech last night, saying there should be major, you know, refinance -- more money put into the IMF, that there should be a complete re-overhaul of the governance structure in which there would be some sort of a supreme council that would actually make policy.  That would either be finance ministers -- there was a lot of discussion about that --  rather than the current situation where apparently the board actually does make policy, at least in principle.

And, of course, there's the question of votes and quota reform.  And a lot of people, including Comdecu (sp), were quite clear that it's absolutely critical to what I would call a non-marginal change.  The IMF has on the table marginal fixes on votes and governance and so on.  So I think that the opportunity that will arise from this crisis may be for a much more serious and more radical -- in a good sense -- thinking at the highest levels about particularly the IMF.  And that will then redound to the World Bank.

My own simple view on the World Bank, among other reforms, is that it should have added to its mission a mandate to deal with global public goods including climate change.  And that's very important in terms of visibility and the members saying this to the World Bank because at the moment the Bank doesn't really have an instrument to deal with global public goods.  It has the country loan, as it's -- of course, it has other things going on, bits and pieces, but it's quite ad hoc.

So, you know, that would be another sort of fundamental change.  But I think most people are focused now on what should be done at the IMF because of the financial crisis.

LEIPZIGER:  Well, I think we have an opportunity.  The G20 is a very interesting group, which has suddenly taken on great importance.  I wouldn't quite agree with Nancy that the G7 is dead because that would upset the Italians with a chair who is coming --

BIRDSALL:  Dying to chair it.

LEIPZIGER:  -- here.

BIRDSALL:  There will be a few more meetings.  (Chuckles.)

LEIPZIGER:  But the G20 is more representative.  But we also have to be clear that it is not perfectly representative.  It was set up also in an ad hoc way.  And you can argue with a number of members who are in the G20 as to why, you know, they are there and others are not.

But that being said,  I think there's a lot of potential in that forum, provided that the countries take it seriously.  I think the issue about the IMF in the past, you know, five or 10 years -- apart from ideology and how they behave -- is that there were two big disequilibria in the world over the last five or 10 years:  the U.S. deficit and the Chinese exchange rate.

They're both financial balance of payments-related issues.  The IMF is the world's institution to deal with those issues.  And the IMF was incapable of dealing with it because those particular countries, as well as some others, were not willing to take them seriously.  So, the IMF did report faithfully that there were big imbalances and that the major cause, you know, rebounded basically on the U.S. and China.  They were not able to do it.

So in this reform, whether it comes out of the Trevor Manuel Commission, we have something similar under Bob Zoellick which is the Zedillo Commission, so if you're an emerging market -- if you're a BRIC, you're in high demand these days for commission chairmanships, if nothing else.

BIRDSALL:  You're a BRIC finance minister, (reformer ?) or head of state.

LEIPZIGER:  Exactly.  Exactly right.  But whether or not what either Trevor or Ernesto come up with really holds water, depends very much on the willingness of major countries to have international institutions tell them when they're out of line.  And so far, that hasn't happened.  Whether or not we can get the financial stability forum / IMF to do improvements in the way we regulate, is another big challenge because the regulators have been a number of steps behind market innovation.   So, we'll have to see whether or not they can get up to the curve if not ahead of the curve.

So I think, in answer to your question, that there's a lot of hope in the internal reforms and changes in governance, but at the end of the day it's very easy to pick on the governance structure of the Fund or Bank.  And I think one can certainly do that because the reforms have involved only a few percentage points of votes.  But it's really put to the test when other than just complaining about whether or not there are one or two chairs, countries actually are obliged to follow some international rules where the externalities of their not following these rules are major.  And we've seen a great example of this, unfortunately, in the last year.

BIRDSALL:  Yeah, absolutely.  If I can make a quick comment on that?  There are some ideas around because that -- there's no way really in the end to discipline individual members of a multilateral institution who are very powerful in their own right.  So something about the reforms has to recognize that tough reality.

And some of the ideas include a little bit more emphasis on naming and chaining.  So the IMF published those reports but it doesn't really -- about the U.S. and its fiscal problems and about the Chinese and exchange rate problems -- but I think it's all a little bit nuanced and careful.  So that's a question in itself.  To what extent should the staff and management of the IMF have more quasi-independence on at least transparency of the technical views, given that it's very difficult ever, fundamentally, to discipline your most powerful members, no matter what the governance structure?

LEIPZIGER:  I agree.

SEIB:  We have time for one last question, way in the back.

QUESTIONER:  I'm Chuck Weiss (ph) from Georgetown University.  I used to be the scientific adviser to the Bank a long time ago.  I wanted to put together two things that Nancy Birdsall said.  First, that the Bank ought to be specifically charged with looking at global public goods, and second that there's a big need for new science and technology in energy and health, which she said could be done in the United States.  As long as you're thinking broadly about what the Bank should be doing, how about giving it a major mandate to manage a major program in science and technology, energy and health would be a great place to begin, in collaboration with governments and in collaboration with private industry?

BIRDSALL:  Absolutely, good idea.

(Laughter.)

SEIB:  It'll be in your next book.

BIRDSALL:  Yeah.  I think it's a matter of -- you're taking a step closer to how to do it and how you would make this operational.  So, terrific.  We'll get back to you.  See how we can make that more real.

SEIB:  The question is the answer.  I think we can probably do one more.  Somebody else had their hand up.  Here.  Right there.

MR.     :  They shut us down.  This is off the record now.  (Laughter.)

SEIB:  No, it's still on the record.  But this is the last question.

QUESTIONER:  Good afternoon.  I'm honored to be here. My name is Kunar Dibatini (ph) from EIR news service.  My question has to do with policy, monetary policy right now.

If you look at what's (going on ?) with Lehman Brothers, AIG and all the investment banks, whatever, you could see now that the same people who were willing to engage in the so-called -- (a dismissal ?) called free trade market or whatever -- I mean one thing that has to be realized right now is that derivatives, hedge funds right now the depth of the (gauges ?) of these derivatives and hedge funds right now are worth over quad-trillions of dollars right now.  And the world's GDP is worth $40 trillion dollars and there's no way right now, no matter how much money that Paulson or whatever, the incoming administration, is willing to bailout these so-called bankers or whatever.

The majority of the bailout money is going to the banks.  And also, the banks are also using this money to bailout the so-called debt because there's no money right now it's willing to lend out any money because there's no one right now who is willing to take back bad debt.  So what you're looking at right now is the recycle of the whole problem.

One has to reconsider the debt obligations of the hedge funds and derivatives.  They don't engage in anything -- (inaudible) -- the economy.  All that they do is make money out of nothing.  So that's something that people have to consider.

Secondly, since there's no denying the fact that we're in a global breakdown crisis all over the world, if Africa, Asia, Europe and America are going to survive this global breakdown crisis we have to have a new international monetary system.  And I think the idea of bringing the four powers: United States, Russia, China and India to set up a new international monetary system, to really reconsider this and to think about it and to make sure that with these four powers you could have other nations joining in, set exchange rates and other policies that will also benefit -- (inaudible).

LEIPZIGER:  Well two things you said I think are worth thinking about.  One is rather than worry about the global default I would take a look at a case like Iceland, which does illustrate your point, which is that if you leverage yourself and take unimaginable risks you can end up with liabilities that exceed your ability to pay.  I'm reminded, since I used to work on Korea, that -- you were talking about the hedge funds and leveraging.  And, you know, everyone knows hedge funds were leveraged 20-to-1.  And as you say, they weren't doing anything particularly useful except finding discrepancies in the market which they thought they could capitalize on, which is fine.

But Korean Chaebol, the conglomerates, used to be leveraged at three-to-one, when U.S. firms were basically one-to-one in the stock market and everyone dumped on the Koreans.  You know, they were so irresponsible and we just can't believe how much risk they were taking and this is a terrible thing.  But they were leveraged three-to-one producing Hyundais and Kias, you know.  They weren't leveraged at 20-to-1 looking for market imperfection.  So I think you do have a point, which is that one has to be a little careful before one is too critical of others when one's own financial sector may have some flaws.

SEIB:  I think we'll make that the last note.  Thank you all very much for coming.  I want to mention one thing in conclusion, that beginning in January, you may or may not know, the Council will be moving into its new building at 1777 F St. NW.  So in the future I hope we all see you there.  I hope you'll join me in thanking Danny and Nancy for a great (talk ?).

(Applause.)

.STX

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