Global Solutions for the Global Economic Crisis

Monday, February 28, 2011

World Bank's Justin Yifu Lin outlines how domestic policies such as reduced capital outflow and increased investment in infrastructure, can hinder a rapid recovery for the global economy.

RICHARD H. CLARIDA: Good afternoon. Good afternoon, hi. My name is Richard Clarida, I'm the Lowell Harriss Professor of Economics at Columbia University and a member of the Council on Foreign Relations. And I'll be moderating this session this afternoon with Justin Lin. A couple of introductory remarks. They have a little script for me up here, so I'll stay on script.

Please do turn off your cell phones and BlackBerrys, and I've set a good example, I've turned mine off. And I'd like to remind everyone that this session is on -- is on the record. Let me just provide a brief introduction of our featured guest today.

Justin Lin, as your program indicates, is the World Bank's chief economist and senior vice president for development economics. And in this capacity, he guides the Bank's leadership and plays a key role in shaping economic research agenda of the institution. I should say that this is based upon, really, a very remarkable and distinguished career in China as one of China's leading economists.

Indeed, for 15 years, he directed a very successful China Center for Economic Research, which I had the pleasure to visit in 2005, when we first met. So I'm very much looking forward to this session. So the format of our session will be some opening remarks by Dr. Lin. And then after those remarks, I'll come on to the stage and we'll have a conversation for 20 or 30 minutes and then throw it open to the floor for questions.

I've also been instructed to indicate that there are some upcoming CFR meetings. Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City will be here on March 2nd for breakfast. And on March 9th, there will be a McKinsey Series breakfast on international economics and Chinese trade imbalances with Edward (sic/Eswar) Prasad, Peter Schiff and Shang-Jin Wei, with George Chen (ph) presiding.

So, Dr. Lin? (Applause.)

JUSTIN YIFU LIN: Well, thank you very much for this nice introduction. And it's an extremely honor for me to have the opportunity to speak in this very prestigious forum and to see so many distinguished participants. And I'm especially delighted to see my professor, Jack Barr-Franco (ph), who taught everything I need to know about economics at the University of Chicago 30 years ago.

And also, very happy to see Professor Bakwadi (ph). He wrote a very strong recommendation letters when I was considered a position of chief economist of the World Bank about three years ago. And certainly today, my topic is about the global economy.

We know that the global economy is recovering from the worst crisis since the Great Depression in 1929. And according to the data we know, last year, the world GDP increased about 3.9 percent -- 3.9 percent. And this year, according to our forecast, the recovery will continue at a rate of 3.3 percent. Certainly, we can say recovery is on the way.

However, there are several uncertainties there. One, everyone knows. The high unemployment rate in high-income country, including U.S., European country and to some extent, also Japan. And the second one is the sovereign debt in European country, but also the state government debt in the U.S. and are cause some concern in the financial market.

And a third one is large capital inflow -- short-term capital inflow to a number of middle-income country emerging markets that cause the pressure of currency appreciation and also the danger of equity market bubble -- real estate bubble. And the fourth one is the high food, commodity, fuel prices. And that can cause some kind of social tension as well as slow down the recovery or the growth in the middle-income country.

All of those are the problems on the process of the recovery. And if it turned into (rain or storm ?), certainly, it can derail the recovery. And so if you want to have a sustained global recovery, you need to have address both kind of issues. And what are the risks of those issues? From what I see, I often said, before the financial crisis, the root of the problem in the global economy was in the financial sector. Excess liquidity due to high leveraging because of lack of regulation provision in the (Asian ?) monetary policy that's starting in the early 2000s.

But up to the financial crisis, I argue the root of the problem is in the (real ?) sectors. Specifically, large underutilization of capacities. In almost all the high-income country, in spite of the recovery in the past two-and-a-half years, but we see the high-income country -- their capacity utilization rate is still about 10 percent below the capacity utilization rate in 2008.

And in effect, high unemployment rate is a reflection of underutilization of capacities. And because of high unemployment rate, certainly consumption will be under pressure. But at the same time, because the large underutilization of capacity, it's hard to find good investment opportunities. And often, you have slower growth in consumption and investment, you are going to have sluggish recovery.

And a sluggish recovery, there is a high unemployment rate. On the one hand, the government need to increase social spending. On the other hand, the government revenue reduced and that turn into the debt issue in the local government here and in some sovereign country in the European country.

And to solve the issue, suddenly, high-income country will adopt some kind of low interest rate, a policy as a countercyclical measures. But domestically, you don't have good investment opportunities so those kind of low interest rate -- it encourage large capital outflow to the middle-income country, turning into the currency appreciation pressure or even bubbles in the equity market and then some of them also contribute to the food price increase, fuel price increase and so on.

And so I think that if you want to have a sustained recovery, we need to address how to stop those kind of excess capacity that exist simultaneously in almost every single high-income country. In order to answer, we need to understand. Where is the excess capacities? I argue that in a high-income country, the excess capacity of manufacturing sectors, mainly in the (capital ?) sectors.

And if you want to absorb those kind of excess capacity, the way out should be encourage investment globally. But the concept -- people all say -- (inaudible) -- ideas of stimulus and the people all say it will not work because we know under these kind of situation, you want to use fiscal stimulus to encourage investment, you may encounter the other force parallel from Professor Franco (ph) -- Jack Barr-Franco (ph), so-called Ricardian equivalence.

Governments spend money to make investment and create job. The people worry about, you know, future. They need to pay back their debt, so they increase their consumption as a result. Equity and money not increase, but government increase a lot. And it was some kind of situation you observed in Japan since the 1990s.

But I will say, it's not the only option. It depends on how you make the investment. You make the investment in areas which increase productivities, creating a bottleneck of growth. Then in the short-term, you create job. You create a demand. You absorb the excess capacity, you increase employment for some time.

You increase the government revenue in the futures. They can pay back the debt now and all the issue I just describe can be mitigated or addressed. And I think that those kind of investment opportunity actually exist.

Just this morning, I came from Washington, D.C., and I took the fastest train in the U.S. -- the Amtrak. (Laughter.) And it traveled 220 miles. It took me two hour and 46 seconds -- minutes -- two hours and 46 minutes. But for those 220 miles, if you had a high-speed train -- like they're building everywhere in China -- it will be less than one hour.

But not only in the railway, in transportation. I live in Washington, D.C., now. Whenever we have a strong wind, we have blackout. (Laughter.) Whenever we have a thunderstorm, we have a blackout. It remind me the situation I had in China in early 1980s. If you're making investment in most area, I think it's a good investment increasing productivity to create job now and growth in the future. But certainly, not only the infrastructure. Also to bring growth and so on.

But certainly, I would like to say. Only high-income country, investment in its -- in the infrastructure that bring growth will not be enough to solve this large excess capacity exists simultaneously in the whole world. We also need to have the developing country to do that. And in developing country, there are many good opportunities.

(Inaudible) -- started to show. If African countries can have similar level of infrastructure like (in Malaysia ?) the African income can be increased 2.1 percentage point per year. And if they reach the level of Korea, the growth rate of African income can be increased 2.7 percent per year, not only in Africa.

In India, if their electricity can reach the level as in Hong Kong or Israel, their growth in the per capita income can increase 1.7 percent. Not only in South Asia, but also in Latin America. According to another study, if Argentina, their (railway ?) system intensity can reach the same level as you, Korea or Taiwan, their growth rate of per capita income can increase 1.4 percentage point.

So I think that we are now -- it's in a crossroad. On the one hand, you may reach -- but Richard mentioned -- new normal. In high-income country, you have high unemployment rate, you cannot find good investment opportunities. There's a lot of uncertainties. That's the new normal.

But you have another opportunity. I call it new new normal. If you can make an investment in the U.S., in the European country, in other developing country, to create the amount to digest the excess capacity in the capital sectors in the high-income country, you can help high-income country to return to the norm of the growth but at the same time, enhance the growth in a developing country so there will be a new new normal.

And I'd like to say, this is not theory. This can be a reality because I observed that in 1998, when there was the East Asian financial crisis, China encounters -- (inaudible) -- the Asian, but similar to what there is now. And China adopted the fiscal stimulus for five years from '98 to 2002. And in those five years, most of the fiscal stimulus was used for employment of the highway system, of the railway system, of the electronic grid and so on.

And as a result, not only the growth (do it ?) in five-year time, growth five-year time was (amended ?) about 8 percent. But also the improvement in the infrastructure. For example, highway. In 1997, the highway system in China was only 4,700 kilometers. By the time of 2002, it was increased five times to 25,100 kilometers.

Because of that improvement, the growth rate in China was enhanced. From '79 to 2002, the growth rate in China, on the average, was 9.6 percent. But from 2003 to 2010, last year, the average growth rate increased 1.3 percent, reached 10.9 percent. And because of the increase in the high growth rate -- high growth rate, the government revenue increased.

Deficit by the government declines from about 75 percent in the early 2000s down to 2008, before the crisis, 23 percent. So it can be done. And I think there's a lot of opportunities, but certainly, we need to create the conditions.

We need to have funds for the developing country to make those kind of investment because according to our studies, developing country, each year, their requirement for infrastructure investment is about 900 billion (dollars) but they can only generate half of that for themselves. There's a gap.

In India, they need -- they plan 1 trillion investment in infrastructure for the five year from 2012 to 2017. They can generate half of that for themselves. They have a gap of 100 billion. And I think this is a good investment opportunity. (Inaudible) -- to see, you know, this kind of idea has been accepted or entertained.

For example, in the Seoul summit, they have a development consensus. And the first item in the Seoul development consensus for Asia growth is infrastructure. And if we can really mobilize our resources -- (inaudible) -- fund, pension fund, private fund, a government fund together, then we can really turn this crisis from a new normal to a new new normal.

But I think people like you here, a government like the U.S. need to play the leadership role. We know that after the Second World War, the world had a danger post-war recession. At that time, U.S., domestically, invest aggressively, interstate highway.

And in (growth support ?) Marshall Plan for the reconstruction in the U.S. and help the U.S. to avoid the post-war recession and also help the world to have a golden era of 1950s and 1960s. And the choice is here and we need your help to make this, not a dream, a reality. Thank you.


CLARIDA: Okay, Justin, very good.

Well, there's a lot I could ask, so I think I'll follow up with your opening remarks. And the numbers that you cite are impressive and you talk about leadership. And obviously, I think we're all in favor of that. But if you could discuss a bit potential market imperfections or challenges in either product or financial markets that would get in the way of the infrastructure projects that you discuss, and more focus on what the role of leadership is?

LIN: I think that certainly, you know, if you want to make those kind of opportunity realized, (quantity ?) is one issue, but you need to improve the governance. You need to improve the ability to select the right project and also to implement by project, who operate the project.

But luckily, in the world, we have a lot of institution now equipped with those kind of capacity. We have the -- (inaudible) -- development banks. And their mission -- their mandate -- are exactly the reconstruction. At the same time, certainly, we see a lot of fund there for -- (inaudible) -- (sovereign wealth ?) fund, pension fund, private capital and then so on.

But they want to enter into that market is a long-term investment. Certainly, you need to have some kind of facilities to provide the confidence. And I can see those kind of arrangement is also emerging.

For example, last November, the World Bank and Singaporean government organized Infrastructure Finance Summit in Singapore and come up with some kind of facilities to encourage, you know, public fund as well as private fund to go into that direction. Today, in the Financial Times, I read another report.

The EU -- the European Commission come up with a paper to recommend European infrastructure development fund for the year up to 2020. And it's quite ambitious. It will be about 1.5 trillion to 2 trillion euro for the year up to 2020.

And certainly, they'd like to encourage private investment into those areas to buy the (bond ?) and so they are making some kind of recommendation if -- use the, you know, European Commission and also European Investment Bank to guarantee those kind of investment. So we have those kind of facility.

On the one hand, improve the governance, improve the implementation and improve the private sector's confidence. You know, I think that will be a good opportunity of any situation for now and for the future for high-income country and also for the developing country.

CLARIDA: Well, I think it's a good point and I think it's increasingly recognized that there are, I would say, innovative in a positive context, innovative things that can be done in terms of financing, backstopping, you know, public-private partnerships that are noteworthy in this regard.

And I guess one final point on this before we move on to my other questions, and I'm sure the audience -- is whether or not you think existing institutions are capable of providing this leadership. If I hear you correctly, it sounds like that's what you're saying. Or are you suggesting that we actually need a new set of institutions to encourage this?

LIN: I would think the best way is allow all kind of institution to take up these opportunities. For example, at the World Bank, we have in our capital -- recapitalization, increase our capital so we can increase the financial loan -- the infrastructure loan. We just have the IDA replacement.

They will also give us the loan to you know, support the low-income countries. And we can even use those kind of IDA grant as a leverage to guarantee private investment. So I can increase the fund. And certainly, we can encourage bilateral, you know, arrangement and more trilateral investment.

At a regional level, just like what it was considered in Singapore, the -- (inaudible) -- for East Asia. But we can also have other region like in the EU or globally. (Inaudible) -- this is a time whenever you can encourage more investment, then it will help, now and in the future. Whoever do that should be welcomed.

CLARIDA: Okay. Well, let's move on. Mr. Zoellick, of course, who you work for, has recently written and I think very effectively, about what he calls the new multipolarity in the global economy and that can mean different things to different people. But I think one thing it clearly means is different parts of the global economy now are growing more rapidly than others.

And certainly, Asia, where you're from, is in that category. And so I would ask you your broad perspective, now, on the economic boom in Asia. Is it becoming less dependent on export? Is there a risk of overheating? Obviously, leading the way in the global recovery. So how would you assess those issues right now?

LIN: First, I mean, we have to say in the past two years and so on, East Asian economy led the global recovery. The high growth rate in China, high growth in India, you know, and also the global high growth rate in the whole East Asian region was a very important force for the global recovery.

But certainly, you know, East Asian -- now, they face some concern about inflation rate and so they may have to, you know, slow down a little bit, another reason why I think we need to look beyond East Asia, although I'm still confident East Asian plus South Asian will still be the highest growth region in the world. But if you want to generate enough demand for the investment goods in the world, we need to have the growth in high-income country as well as other regions.

CLARIDA: Well, that's right. So if I could press you a little bit more on policy responses, obviously, it's been -- it's been asserted by some that, for example, quantitative easing in the U.S. has spilled over into the global economy through currency, through commodity prices, through inflation. So, any discussion or any perspective on the -- either appropriate or likely policy response that we may see in those countries so effected.

LIN: Yeah, well, you know, as I mentioned, as long as the growth is sluggish, certainly, the government in the high-income country will adopt countercyclical measures. Fiscal policy, there is some constraint and so monetary policy is likely to be -- (inaudible) -- there. So I expect it continue to have low interest rate.

And it will encourage capital outflow and that will put on some pressure. But we can channel the fund in the right direction. Then it will help the investment in a developing country. And so it's very important to see this as an opportunity for investment now for the future. And that's how -- you know, I like to take a more positive approach.

CLARIDA: Certainly. In terms of policy response that we have seen, obviously, it depends on the country. We have seen people adjusting exchange rates, others adjusting interest rates, reserve requirements.

But certainly, one thing that is -- if not back in fashion, certainly is under discussion is the use by some countries of putting on controls on capital inflows. So what is your assessment of that as a policy response? How do you see countries proceeding? And what is the role of any of the multilateral institutions in, if you will, refereeing that process?

LIN: Well, I think that in going to the purview of my sister institution, IMF, and I like to use their response to your questions. And recently, they have a review of -- about capital control. And now, I think they are more flexible about that. It depends on the country's situation, their domestic institution and so on. And if it is (available ?) and necessary, they do, you know, recommend that might be one option for capital control.

CLARIDA: Well, certainly. And I guess I would follow up on that from the perspective of countries that you have visited or that you know. How do countries -- what would be a way for a country to think about balancing the use of capital controls versus allowing the exchange rate to adjust or adjusting interest rates? Would you see it as a first resort, as a last resort? Somewhere in the middle?

LIN: I think that really look into the situation in country by country. You know, for some country, they may not have the possibility of capital control because they -- has been integrate with the global market and also their currency is convertible. And for some country, they may still have that opportunity because the institution is still there, the regulation framework is still there and the government has the capacity to intervene.

So overall, I will say we need to look into each country's individual cases. And certainly, to handle this well is very important because we know if you have a large capital inflow, and it's short-term, it may, you know, on the one hand, push up the appreciation, reduce your export competitiveness, may slow down your real economy and on the other hand, may push up your, you know, bubble in real estate, in equity market, but we know bubble will burst some day.

And if your bubble burst, then you're going to have large capital -- short-term capital outflow. And those kind of large inflow and outflow certainly can be damaging. And so the government need to be very carefully watch about the situation. And I think a way that, you know, can mitigate the damage at the same time to encourage the fund into some more long-term use.

So we see that back in Latin American country. Although they don't have the ability to total control the capital inflow, but they levy some kind of Tobin tax. And by that, it encouraged the capital inflow to turn from a short one, short-term into a longer term.

And that will be, in a way, less worrisome and may channel those money into a long-term and productive -- (inaudible) -- type of investment. So I think that that -- there's many lesson we can learn from other country, but this is something certainly, you know, the government need to be watch -- watch -- watching very carefully.

CLARIDA: I'm going to turn it away from economics a little bit. When I was first invited to do this session, the events that have been transpiring in the Middle East weren't even on our radar screen. But obviously, now, we're going through, I think, a very historic period. So what are the -- what are the challenges and potentially opportunities, you know, these events present, you know, to the global outlook?

Obviously, the most impact is oil prices, but more broadly, the potential to really transform a region of the world which presumably from the World Bank's perspective is quite an opportunity. So how does this fit into the three- or five-year development agenda?

LIN: Certainly, we pay a lot of attention to the situation in Middle East and we pay attention to the vulnerable group of people there. And this, you know, social unrest and so on, uncertainties certainly may slow down their growth for some time. And we need to gear up our effort to help the people there, to provide some kind of, you know, short-term support when the government has this kind of request.

And to -- for the social -- (inaudible) -- and both issue. But more importantly, that we need to have an agenda for long-term prosperity there. You know, you need to create a job for the young people. That's the big issue. And they need to improve their governance so they can improve the justice and the security and so on. And in fact, I was personally, you know, in a way -- my visit to Egypt two years ago, I could give you a story.

CLARIDA: Please.

LIN: And I went to their -- certainly, I see a lot of unemployed young people and they were educated, you know, from Cairo University and so on. But they cannot find a meaningful job. But at the same time, as someone just from China I saw a lot of opportunity for creating job there. I went to the local market and I purchase some small stuff.

For example, the mobile phone cases and so on. It's so simple. They produce leathers. But they imported it from China. And I went to the pyramids and certainly, I went to see the -- (inaudible). And I could see a lot of -- (inaudible) -- certainly very pretty, but they were all imported from China. It's so simple. It's so labor-intensive. It did not require much technology and investment.

And the way to rate it in China, China currently per capita income is about 4,000 (dollars). (Inaudible) is about 2,000 (dollars). And it's (much better ?) in China, it's much higher.

And so they should have the competitive advantage in producing -- (inaudible) -- for goods. To me, they have domestic demand that create jobs for the young people. But it is not actually that. And so I gave a talk. I say that as a Chinese I am proud to see so many goods imported from China. But as the world bank chief economist, concerning about job creation, I will recommend you to rethink your development models.

And I was very happy to see that, the message will pick up. About a month ago, one officials from Cairo came to the World Bank. And he did not attend my speech. But he told me, he remembered the message from other colleagues. But he was a little bit too late. But it's later -- you know, it's better to be late than never, right?


LIN: So I hope the new government in Egypt, in Tunis, in North Africa or other part of the world, can think of job creation and think about the income distribution, justice, those kinds of problems, carefully. And I think if we can turn Egypt, Tunis -- is a lesson for themselves and then for other parts of the world, certainly, that would be consistent with our mandate and our goal.

CLARIDA: I have one more question, and then we're going to leave plenty of time for Q&A from our distinguished audience. And certainly, with the number of experts here on trade, my focus is on finance. But certainly, equally and probably much more important to the global economy is free flow of trade -- world trade. Obviously, in the last 40 or 50 years, enormous advances in different rounds of trade agreements and the WTO -- but obviously here it's been some time since a major multilateral agreement on trade.

What is your view of the prospects, if not for a grand agreement, then on the way in which countries reach agreements on maintaining and opening trade?

LIN: I think that is a very important issue because for example, we, you know, avoided the worst scenario this time. And one of the reasons was all the leaders committed to free trade. And it was at the Washington G-20 summit. And although you heard here and there some kind of tension, some kind of pressure for protectionism, but overall free trade in the system has been -- has been hailed as the best principle. And that is a very good sign.

And that secondly now, there are some concerns about Doha. And we know that the leaders said that they hope to conclude this negotiation, this round, and hope that it will be completed, although that also requires some kind of leadership.

CLARIDA: Indeed.

I think at this point, we have about 20, 25 minutes or so for questions. So why don't we begin right there? And I guess there will be a microphone that will be distributed. And please identify yourself.

QUESTIONER: Hi. My name is Khalid Azim. Doctor, you, I think, had mentioned that the economic crisis was predicated on the financial crisis. What's your view on some of the Basel III proposals to shore up the financial system?

LIN: Certainly for the long term sustainability, stability of the system, those kind of reform is very important. And by saying now the root of the problem is in -- (inaudible) -- sectors, I do not mean those kinds of reform is not necessary. But you know that if you want to strengthen -- (inaudible) -- regulation as a (whole ?), credit will become tighter. And then the investment consumption may slow down even further. For the health in the future, that is required.

So unless you can really have other programs to boost the demand in investment, create the jobs, increase the confidence for consumption, demand for housing and so on, otherwise that alone may slow down the global recovery. So you know, I think we need to have both programs.

CLARIDA: Dan? Right here up front.

QUESTIONER: Ben Steel, Council on Foreign Relations. I'd like to tease you out a little bit on your presentation with regard to developing countries. I'm sure you'd acknowledge that there's nothing particularly unusual about a World Bank official calling for rich countries to finance increased infrastructure development in poor -- (audio break) -- obviously advocating that line for over four decades. So I'd like you to sort of tease out a bit what's new about what you're proposing, because you're specifically linking it to the crisis.

And second, with regard to the United States, presumably the increased infrastructure investment that you'd like to see take place has to be financed one of two ways, either increasing our deficit spending, as advocated by some prominent economists like Paul Krugman, or cutting spending in other areas in order to generate these funds. And if that's what you're advocating, could you indicate what areas you would like to be cut in order to support your ambitious ideas?

LIN: There are several areas which is new from the World Bank side. In the past, we argued for grants. But this time, what I've said is investment. It's investment opportunity for the developing country. But it's an investment opportunity for the global financial market. If you're looking into those managers of pension funds, those managers of sovereign-wealth funds, where would be the good investment opportunity under the current situation?

I think that the long-term infrastructure investment with good management, good, you know, implementation and with some kind of guarantee -- (inaudible) -- could be a very good investment opportunity. So that's one difference.

And a second difference is the scale. I mentioned that in the European Commission report, they are calling for 1.5 trillion to 2 trillion euro investment in European countries alone. And so for the world, I think we need, you know -- (inaudible) -- other developing countries of similar magnitude. And in the U.S. alone, you can also see there's a lot of requirements. And I think that in this kind of downturn with excess capacity, this is a very good opportunity for doing this kind of productivity-enhancing -- (inaudible) -- region type of investment. And so the second difference is the magnitude.

The third difference, that in the past we only talked about developing countries. But this time, we also encourage investment in high-income countries. I think that high-income country also need to enhance their infrastructure to increase their productivity, to maintain their competitiveness.

CLARIDA: I'm going to just weigh in quickly on that because I've heard it twice. And I think -- I think there's a lot -- there's an appeal to public-private partnerships when guarantees are involved. But I would only urge, at least in the experience in the U.S., that it's very important that any guarantees that are used to encourage private capital to these projects be properly and transparently accounted for because one of the incentives governments have for guarantees as opposed to outright financing is more creative accounting as possible guarantees. (Laughter.) So I would -- I would urge that the World Bank stand behind the best accounting for that.

Let's see --

LIN: We agree with that. And so that's why I think we need to have people like you who know the tricks. (Laughter.)

CLARIDA: Back there.

QUESTIONER: Dave Denoon from New York University. You didn't discuss current account imbalances. And since 1997, there's been a growing pattern of mercantilistic behavior by middle- and low-income countries seeking to peg their exchange rates at artificially low rates. My question is, do you think this is a serious issue? And if you do think it's serious, what do you think should be done about it?

LIN: Well, I think that the current account imbalance reflects the structural issue, regarding, you know, (saving, your ?) consumption, regarding your domestic production and domestic absorption. And if your domestic absorption, no matter if it's in investment or in consumption, if it's higher than your domestic production, you are going to have current account deficits. If your domestic production is higher than your domestic absorption, you're going to current account, you know, surplus. So I think that that accentuates, may play some role. But fundamentally, it's a structural issue. That's my first point.

And the second, more important, if you want to get out of this global crisis -- although it's accompanied by the global imbalance -- but if you want to get out of this global crisis, what is the root of the problem now, as I mentioned, is the underutilization of capacity in the capital-goods sectors in high-income countries. So more important is how to promote investment to create a demand for your exports.

And therefore that is what I just mentioned: We need to have a grand vision to think that underutilization of capacity certainly, on the one hand, is an issue for the sustainable global recovery. But on the other hand, it could turn into an opportunity for enhanced growth potential in high-income countries as well as in a developing country. And to overcome, you know, the dangers of new normal, (let Japan inspire ?) -- (inaudible) -- into a new opportunity for higher growth for the whole world. I would treat this issue in that way.

CLARIDA: I think over here. And then we'll get to you, sir.

QUESTIONER: Chris Faulkner-MacDonagh with Ziff Brothers Investments.

As a classically trained economist, I kind of have a lot of sympathy with your prescription about what should happen. However, as an investor, you also need to grapple with -- and we're grappling now with the sort of range of things and a range of uncertainty about what might happen. So I guess this is -- it's a two-sided question.

The first is, have you -- how do you assess the risks of what would happen if this infrastructure buildup does not occur? Again, I have a lot of sympathy, as I should. But that -- if you go to the streets of Jakarta, you'll see plenty of reasons why there should be increased infrastructure investment in Jakarta, and yet there's not, for a whole host of reasons. That just gets replicated across the EM, even in the United States.

But the second flip-side is, what if you're right, right? And that is, we do get the infrastructure investment, but it tends to be very commodity-intensive, right? So you know, Australia already is seeing a surge in commodity prices. There is potential shortages of commodities because they're only produced in Africa, say. Things -- I mean, how do you assess the risks around those as well?

LIN: Well, the first thing, certainly, you have all kinds of risk. Every option has a risk. But we need to consider the risk of inaction, and also the risk of action. The risk of inaction is the new normal, and likely, a lost decade. But the risk of action certainly can cause other adjustment. But we need to have the vision to understand what is the options that we can, you know, come up with all kinds of mechanisms to smooth the possible dangers.

You know, I agree -- if you increase the investment substantially, on the one hand, you will create a demand for capital goods. But it can be resource-intensive, so the prices will increase. And how to couple world price increases, we need to -- (inaudible) -- them. Right?

And so there are some other ways -- improve, increase the supply because we know that the resources of each country, they also like to see the global economy, you know, the growth can be sustained. And so we can increase the investment there, increase the supply there. And they are -- (inaudible). You know, the possibility of increasing the supply is also pretty large. And that's how that just -- you know, all kind of option put there. And then welcome to the discussion table and come up with some kind of coordination. A global crisis certainly requires some kind of global coordination in the responses.

CLARIDA: I think the gentleman right there, yeah.

QUESTIONER: Hi, Phil Revzin from Bloomberg. Can I ask you about food? Mr. Zoellick talked a little bit about food prices last week, which by the UN measure are at a record high. Well, it seems to me there's sort of two really good developments adding up to a really bad development, and that there's the highest production ever and there's the highest consumption ever, as more and more people kind of get in -- are able to consume this sort of food. Where do you see that going?

LIN: Well, I think that certainly, it's one of our prime concerns because food security is related to social stability. So we need to pay a lot of attention to that. And so we would like to say President Zoellick and the World Bank has been on top of the issue since 2008. And for this time, certainly, we observed that food price increase sharply in the last seven months.

And according to our statistics, it reached a level only 3 percent below the June 2008. And that was in a historical height. And I found out the reason for that -- I think you read the report. It has the demand side issue because the income in a developing country continued to grow. But for the price surge, certainly, it also has some issue related to the supply shock in Russia and in Ukraine and also the major production forecast in the U.S.

And its low interest rate encourage the people, maybe, to hold more and -- or even to speculate. Well, those are all the issue. Now how to curb the issue in the futures? I think the most important thing, on the one hand, we need to increase the production yield, because we know the population in the world will continue to grow up to maybe, from now, 7 billion to about 9 billion in 2050. And the income will increase, so demand for food, for grain, will increase.

But that's a long-term issue, right? We need to cope with the short-term issue. The short-term issue, from the past experience, as we know, whenever you have some kind of shock and trade policy become very important. if I'm going resort to some kind of trade protection embargo -- (inaudible) -- you are going to send the prices to skyrocketing.

So we need to advocate for a better, more transparency, free trade. We need to have a better understanding of the stock, and we also need to keep some kind of strategic reserve for the most vulnerable group of people.

You know, President Zoellick -- Bob Zoellick, he published an article -- an op-ed in the Financial Times -- (inaudible) -- and I fully support that.

CLARIDA: Let's see, that gentleman right in the middle and the one moving around.

QUESTIONER: Hi, Richard Thoman, Corporate Perspectives and Columbia University. In my life, my previous life, I've been a senior officer in a number of Fortune 50 companies, including CEO of one of them. And I've always found that investment programs work very well with great leadership and fail miserably without it. And in your talk about infrastructure investment, I didn't hear the word leadership.

And in this -- in this economy, we have an administration which is not clear that it understands and respects -- admires the private sector, and we have a private-sector leadership that for 10 years has progressively forgotten how to lead because it has learned that it is difficult for it to lead because if you make a mistake, you can easily lose your job. If you look at the poll -- the surveys of occupational hazards, CEOs and congressmen are the two lowest groups above the criminal classes in the United States. (Laughter). And so how does your infrastructure program work with the absence of leadership? Or maybe you have a new recipe I don't know about.

LIN: Well, I have more confidence on the U.S. than you do. (Laughter.) I learned all my trick from my professor in Chicago -- many of them are American, although frankly, it's a rarity. And the people in the Wall Street are the most innovative, talented people in the world. As long as you have the vision come with -- come with the possibility, I'm sure you can come up with all kind of ways, because money is there, investment opportunity is there, and you only need to have some kind of intermediation for that. I think American people have all kind of innovative capacity to tap into the opportunities.

CLARIDA: There and then back there.

QUESTIONER: I'm Steve Robert, chairman of the Source of Hope Foundation. I want to come to the question of -- that you started with, with the lack of capacity utilization.

LIN: Yeah.

QUESTIONER: It seems that the lack of capacity utilization in the developed countries has a lot to do with slower-than-normal demand.

LIN: Right.

QUESTIONER: A key reason for the slower-than-normal demand is very, very large amounts of debt. The consumer debt, for instance, in the United States as a percent of disposable income is at very, very high levels, based on history. The government debt we all know about -- I think we have a government deficit of around 10 percent or so of GDP.

So how are we going to get demand up if we don't get the debt down so that there's more savings?

LIN: Well, I have a two-sector model. One sector is the capital goods, one sector is the consumption good. And in the U.S. manufacturing mainly in capital goods sectors. The consumption-good sectors are more often in developing countries. That's one thing.

And then secondly, if you look into -- in the last one year, and that's all, the U.S. consumption actually rebounds quite substantially. But whenever you see the consumption rebound, you increase import from China, from Asia, from other developing countries. That is the issue.

And as for now, I think that more important is that you can see there the demand for capital goods. And that's -- require investment. And investment, you know that government stimulus is one possibility. Private sector investment is another possibility. (Inaudible) -- sector investment is another possibility in the U.S. But we know -- (inaudible) -- also in actual supply, private-sector investment, without good arrangement, will be in a manufacturing sectors -- by the manufacturing sectors. It's already in excess capacity situation.

But if you want to increase the private sector, it's to go into the long-term infrastructure investment. You need to have public-private partnership. You need to have some kind of new facilities to make that feasible. (Inaudible) -- is the main income stream for the high-income country to tap into the potential of excess capacity in their capital goods sectors.

CLARIDA: I think back there, yes. And then we'll come to you. Mm-hmm.

QUESTIONER: (Inaudible) -- from Columbia University. I really appreciated your emphasis on the underutilization of capacity. And it's a question, it's a curiosity: What would happen if we used models where unemployment is not seen simply as unemployment, a drag on the economy, such a -- but also as an underutilization of capacity? And I wonder also whether, in the World Bank, which is full of brilliant staff economists and sociologists and anthropologists, if anybody is working on this kind of question.

LIN: The -- you know, I'm sorry, I did not fully get the issue you tried to ask. I apologize for that.

QUESTIONER: In your analysis, underutilization of existing capacity (is such ?) a drag, et cetera, and how do we get it? We raise productivity. That raises employment.

LIN: Yeah.

QUESTIONER: But the originating activator --

LIN: Yeah.

QUESTIONER: -- of economic growth comes from that side of the economy.

LIN: Yeah.

QUESTIONER: And while we deal with education, with talent, et cetera, but still --

LIN: Okay.

QUESTIONER: -- but what would happen if we re-designated or remarked another algorithm for the question of unemployment and we also saw that as potentially an activator of economic growth, rather than simply a drag? Because right now, it always is a belittled tale which is --

(Cross talk.)

QUESTIONER: -- in the back.

LIN: Okay, I see. Yeah, yeah. I think that is also very good. You know, I argue for long-term productivity, enhancement (ph) type of investment, okay. And now you have underemployed or unemployable force. They are part of this excess capacity. They are the fragment. The excess capacity, in the real-time -- in the -- (inaudible) -- but they are also idle, right? And under that kind of situation, one way out is to make investment to enhance their employment abilities -- their education, their skill -- and for new job, like, we say, the green growth, green investment or new innovation.

And that is also -- can be considered as a long-term investment for the economy. And understand, you said the leadership -- Obama did have those kind of idea, right? He said investment in infrastructure, investment in the green growth, investment in the innovation, in investment in education. He said that we need to cut the budget to reduce the deficit, but we cannot cut the productivity growth for our futures. I do see the leadership there.

CLARIDA: I think we have time for one more, right there, and then we'll want to finish right on time. Hi, Carole.

QUESTIONER: Thank you very much. I'd like to get very practical. I served as U.S. executive director on the board of the bank from 2001-2005.

LIN: Very good.

QUESTIONER: And when I came to the bank, infrastructure was a dirty word. We talked about social investments, and I worked with several of my colleagues on the board to get infrastructure back mainstreamed. And we did not even have an infrastructure department at that time. It was just lumped into something else. So congratulations and well done.

So I'd like to ask a very practical question. To those who don't know the bank, every country who is a borrower from the bank, there's a country strategy that sets the lending envelope for three years. And that lending envelope usually is heavily negotiated among all the different departments of the bank. So you do a little bit on social spending, a little bit on mothers, a little bit on this, a little bit on that.

Is what you're saying that if I am Indonesia and I want to spend 80 percent of the money that I'm able to borrow from the World Bank over a three-year period and say, I just want to get sewers in Jakarta and in my major cities or I want to do roads, and over the next 10 years, this is where I want to spend most of my money, are you saying the bank now is going to be open to leveraging those financings with private-sector financing? Or is it -- is this going to be a whole new lending envelope that doesn't have anything to do with the existing structure?

LIN: Very good question, very good question. And the -- you know, the World Bank does respond to the needs and to new opportunities. You know, in the last two years -- (inaudible) -- our lending. And a substantial portion of that now went to the infrastructure investment. And not only the World Bank tried to use the fund we have, we had the IFC, International Financial Corporations -- they have set up some kind of infrastructural facilities and encouraged the -- (inaudible) -- wealth fund, probably pension fund, other private capitals to work with the capital we had to leverage the investment in the developing country.

So if, you know, Indonesia or other country, they come to the World Bank for infrastructure project, not only from IDA (ph), from IBRB (ph). They can also get that from IFC. And we also now try to set up a new facility as I just mentioned in the Singapore World Bank Infrastructural Finance Summit to come up with new facilities for this purpose.

CLARIDA: Well, I think on that excellent question, we will conclude just so we can stay right on time. I'd like to thank Dr. Lin for a very stimulating discussion. (Applause.) And thank you all for coming out.

LIN: Thank you very much.











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