Transcript

Transcript of the Press Conference on the Release of the April 2017 World Economic Outlook

April 18, 2017

Maurice Obstfeld
Economic Counsellor and Director of the Research Department
Gian Maria Milesi‑Ferretti
Deputy Director, Research Department
Oya Celasun
Chief of the World Economic Studies Division, Research Department
Olga Stankova
Special Assistant to the Director, Communications Department

Ms. Stankova ‑ Good morning, everybody, and good afternoon to those who are joining us from other parts of the world. Welcome to the Press Conference on the release of the World Economic Outlook. The report is entitled “Gaining Momentum?”

At the press conference, we have Maurice Obstfeld, Economic Counsellor and Director of the Research Department. To his left is Oya Celasun, Chief of the World Economic Studies Division. To Maurice’s right is Gian Maria Milesi‑Ferretti, Deputy Director in the Research Department. He oversees the production of the World Economic Outlook.

Now I will pass the microphone over to Maurice Obstfeld for his opening remarks, and then we will take your questions.

Mr. Obstfeld ‑ Than you, Olga, and for everyone here, welcome. For those of you coming from outside of Washington, enjoy the beautiful spring day.

Momentum in the global economy has been building since the middle of last year, allowing us to reaffirm our earlier forecasts of higher global growth this year and next.

We project the world economy to grow at a pace of 3.5 percent in 2017, up from 3.1 percent last year, and at a pace of 3.6 percent in 2018. Acceleration will be broad‑based across advanced, emerging and low‑income countries, building on gains we have seen in both manufacturing and trade.

Our new projection for 2017 is marginally higher than what we expected in our last update back in January. This improvement comes primarily from good economic news for Europe and Asia, as well as our continuing expectation for higher growth this year in the US. Despite these signs of strength, many other countries will continue to struggle this year, with growth rates significantly lower than past readings.

Commodity prices have firmed since early 2016, but at low levels, and many commodity exporters remain challenged, notably in the Middle East, Africa, and Latin America. At the same time, a combination of adverse weather conditions and civil unrest threatens several low‑income countries with mass starvation. In sub‑Saharan Africa, income growth could fall slightly short of population growth, though not by nearly as much as last year, in our estimation.

Whether the current momentum will be sustained remains a question mark. There are clearly upside possibilities. Consumer and business confidence in advanced economies could rise further, though confidence indicators are already at elevated levels, relatively speaking.

On the other hand, the world economy still faces headwinds. For one thing, trend productivity growth remains subdued across the world economy for complex reasons that we have explored in a recent paper and that seem likely to persist for some time. In addition, several prominent downside risks threaten our baseline forecast.

One set of uncertainties stems from macroeconomic policies in the two largest economies. In the US, the Federal Reserve has embarked on monetary normalization and may soon begin to scale back the size of its balance sheet. Given the faster US recovery, we could see more upward pressure on the dollar, as interest rate hikes are not yet imminent for the Bank of Japan or the European Central Bank.

At the same time, however, US fiscal policy still seems likely to turn more expansionary over the next couple of years. If the slack remaining in the US economy is small, the result could be inflation and a faster‑than‑expected pace of interest rate rises, reinforcing dollar strength and possibly causing difficulties for emerging and some developing economies, especially those with dollar pegs or extensive dollar‑denominated debts.

As for China, the other big economy, its desirable rebalancing process continues, as seen in a declining current account surplus and an increased GDP share of services, and yet growth has remained reliant on domestic credit expansion so rapid that it may cause financial stability problems down the road. These problems could, in turn, spill over to other countries.

Aside from the conjunctural policy uncertainties, a distinct set of threats comes from growth in advanced economies of domestic political movements skeptical of international economic integration no matter if integration is promoted through multilateral, rules‑based systems for the governance of trade, through more ambitious regional arrangements such as the euro or the European Union, or through globally agreed standards for financial regulation.

A broad withdrawal from multilateralism could lead to such self‑inflicted wounds as widespread protectionism or a competitive race to the bottom in financial oversight, a struggle of each against all that will leave all countries worse off.

The world economy may be getting momentum, but we cannot be sure that we are out of the woods. How can countries safeguard and nurture the global recovery? There is no universal policy prescription for diverse economies at different conjunctural stages. Deflationary pressures have generally receded, but monetary accommodation should continue where inflation remains stubbornly below target levels.

Growth‑friendly fiscal measures, especially where there is fiscal space, can support demand where that is still needed and contribute to expanding supply and reducing external imbalances. All countries have opportunities for structural reforms that can raise potential output as well as resilience to shocks, although specific reform priorities differ across economies.

Avoiding the damage from protectionist measures will require a renewed multilateral commitment to support trade paired with national initiatives that can help workers adversely affected by a range of structural economic transformations, including those due to trade.

Trade has been an engine of growth promoting impressive per capita income gains and declines in poverty throughout the world, especially in poorer countries, but its benefits have not always been equally shared within countries. Political support for trade will continue to erode unless governments step up to invest in their workforces and aid the adjustment dislocations.

Another recent paper of ours co‑authored with the World Bank and the World Trade Organization surveys possible policy approaches. Importantly, such measures not only support trade but aid adjustment to a range of structural changes, including those from rapid technology change. They can also raise potential output.

International growth and stability rely on multilateral collaboration across a range of problems that spill over national borders, not just trade. The challenges include financial oversight, tax avoidance, climate, disease, refugee policy and famine relief.

Historically, inclusive cooperative approaches to interdependence have worked best. National policymakers, however, must do the hard work to ensure that the gains from harnessing interdependence, which are substantial, are also broadly shared.

With that, we will move on to your questions.

Question ‑ You have been predicting for some time that there is going to be a pickup in growth, but then it has not materialized. Why do you think this time is different?

Mr. Obstfeld ‑ We are very happy to see the long‑awaited pickup finally come to pass. In fact, not only is there a significant pickup this year relative to last, but our assessment of how big that pickup will be is slightly higher than it was in the past. It does reflect a stream of continuing positive data that we began to see in the middle of 2016.

If you recall, the first half of 2016 was by beset by considerable turbulence in financial markets, very low commodity prices, and very low confidence about the future. That turbulence receded and since then we have seen a pickup in not only actual growth but also purchasing manager indices very widely shared across countries in manufacturing, industrial production, trade. Everything seems to have been going in the right direction. So, that is fueling our confidence that this year and next year are going to be substantially better than last year was.

Question ‑ You mentioned that there is some upside potential here that the economy could overperform your expectations. I was just wondering what leads you to believe that and what are the conditions that could prompt that.

Also, you do have some expectations that the Trump Administration will be able to pass some kind of a tax reform fiscal stimulus program. If that is unsuccessful, though, how much of a pullback would we get?

Mr. Obstfeld ‑ We definitely see upsides in terms of possible increases in confidence and investment worldwide. Even in this first quarter, we have seen positive surprises from China, Japan, even Brazil last month.

There is the possibility of beating our expectations. Our projection is our projection until we revise it in July. We will continue to monitor the data and update as needed at that time.

Our US projection does build in some degree of fiscal stimulus coming from the tax reform process. Again, if that does not materialize as expected, we would have to revise. The fiscal stimulus as of now is work in progress. We do not know what the elements will be. There are many components being debated.

As you saw yesterday, Secretary Mnuchin suggested that it might take longer to get a tax bill than previously thought. Again, that is a situation we will keep monitoring and we will come back with another assessment in July.

Question ‑ The report says that China needs to unwind or reverse its fiscal stimulus down the road. Do you see that coming, and, maybe more generally, how to balance keeping the growth momentum and reining in debt?

Mr. Obstfeld ‑ When that fiscal consolidation will occur is hard to predict. It will depend on the decisions of the leadership and their judgment about when consolidation is best. I think what we can say is that the longer the wait before fiscal consolidation occurs, the sharper fiscal consolidation may have to be. We do see considerable strength in China now. As I just mentioned, incoming data are very much on the upside.

There is a general concern that China’s very important rebalancing process will be more sustainable if it is accompanied by reforms to put state‑owned enterprises on a hard budget constraint basis, to upgrade financial regulation, and to rein in domestic credit growth.

Obviously, the leadership has made impressive reforms, but more needs to be done. With those reforms, we are confident in China maintaining stability down the road.

Question ‑ First, can you elaborate on the emerging market risks in terms of their debt and how acute is that? Secondly, your long‑term forecast keeps growth capped well under 4 percent, well below the pre‑crisis rates above 5 percent. Is that healthy, is that appropriate, or is that aspiring to something too weak?

Mr. Obstfeld ‑ Let me start with emerging markets. If we look across emerging markets, of course, it is a very heterogeneous and diverse situation. For example, some in Latin America are struggling more. But there is a general concern that financial tightening could adversely affect them by raising the cost of servicing debt and by increasing the balance sheet pressures when dollar‑denominated debts rise in local currency terms, for example, as the dollar strengthens.

We believe in general that exchange rate flexibility provides a useful buffer and that emerging markets have made important steps forward and are probably less vulnerable in the past. Nonetheless, history provides several examples of situations in which financial tightening has led to problems in emerging markets. We are certainly going to remain vigilant here in the Fund.

On potential growth, this was one of the topics of the paper that I mentioned in my opening remarks. Trend growth in productivity across the world appears to be lower since the crisis. It may reflect trends that began before the crisis. For example, in the US, clearly the benefits of the ICT revolution began to fade before the crisis hit.

It may be that some of our estimates of potential growth for some countries were artificially high, because the 2000s was such a strong decade for various reasons. We are seeming to converge on what our Managing Director has called a new mediocre of lower long‑term growth driven by lower productivity growth.

Now, we certainly do not think that that is necessarily our destiny. Part of what the paper discussed was a range of policy initiatives that have the possibility at least to raise longer‑term growth rates. Some of these simply allow the economy to use its resources more efficiently, and that gives a temporary boost to productivity growth as the economy moves to a more efficient allocation.

For example, more investment in R&D, more effective educational investment could raise growth rates on a long‑term basis. Even small increases in annual growth rates, if sustained, add up to big increases in income over time.

That being said, there is no magic recipe economists know about to increase long‑term growth rates. Most of the policies that we recommend, for example, educational investment, actually serves several ends.

They certainly raise the level of productivity and may raise growth, but they also equip workers to better handle a changing global economy where trade, technology, and other factors can lead to the need for a nimble, more adjustable workforce. The short answer is no magic bullets, but there is a range of policies that we think could be effective.

Mr. Milesi‑Ferretti ‑ Maybe I can add a quick recall on a comparison with pre‑crisis. We also have lower growth in the labor force, in part because of demographics, sort of declining fertility also in a number of emerging economies, and, of course, population aging. If you are looking in per capita terms, there are differences, as Maurice underscored, because of lower trend productivity growth. There are also differences in the growth rate of populations and especially of the labor force.

Question ‑ The IMF says that the world [..sound cut off, inaudible..] expects for the Brazilian recovery. The economic recovery of Brazil depends on less political certainty, a decrease in interest rates, some structural reforms. However, we have a lot of political uncertainty in Brazil that would even damage the prospects for Social Security reform this year. Can you say more about this subject?

Ms. Celasun ‑ Thank you for that question. As you know, there are ongoing investigations, a probe into corruption allegations in Brazil and that constitutes a source of uncertainty for the political environment in which the government is operating.

They have so far pressed ahead with the necessary reforms. They have recently this week, at the highest level, reaffirmed their determination to continue with the reforms, pressing ahead with pension reform, in particular.

If they are successful in implementing that, that should set the stage for returning fiscal finances to a much healthier setting and also putting a strong foundation for a return to stronger growth in Brazil.

As Mr. Obstfeld just mentioned, we have had some good news recently. Activity indicators for the first two months of the year have come in strong, which is quite positive news for the outlook.

Question ‑ [THROUGH INTERPRETER] I will be addressing you in French.

Central bank reserves in the CEMAC area have dropped significantly due to a number of things that are affecting the mines in the area. We have war, the price drop for hydrocarbons and other things, also the drought, that are affecting economies. Financial inclusion in this area is a myth, because a number of individuals do not have bank accounts. I would like to know if the global economy recovery could have an impact in this area.

Mr. Obstfeld ‑ I will let Oya expand if she wants to. We are heavily engaged with the CEMAC countries at the moment. We will probably defer most of your question to the African Regional Briefing that will happen later this week. The more positive growth prospects in the global economy, especially what we have seen in Europe, can only benefit the CEMAC countries, but there are obviously challenges ahead such as those you have described. But we will mostly defer to the regional experts at the end of the week.

Question ‑ France is holding its presidential election this week and several leading candidates have adopted a very strong anti‑globalization and anti‑European stance. How concerned are you by these trends and by the potential outcome of the election?

Mr. Obstfeld ‑ Well, obviously it will be up to the French people to determine who will be the next President. There is a very lively debate, with a wide diversity of political and economic programs on offer.

I think our view on globalization is quite clear. We believe that trade, in particular, has been an important engine of growth. It has lifted millions out of poverty. It has led to economic miracles in a number of countries, some of which now have attained high‑income status.

At the same time, it has been associated with dislocations that come in addition to the very significant dislocations that technology has caused in labor markets in advanced countries.

We think a better approach than cutting off trade or managing trade heavily is to embrace trade and the productive enhancements it brings, but also to make sure that the people who are negatively affected are not left behind.

That being said, the Fund will clearly work with whatever is the new government in France in the interest of the French people and the global economy.

Question ‑ Today the Prime Minister of Britain announced the general election and I wondered if you felt that that was a new uncertainty which might impact on your forecast which you have made. That is the first question.

Secondly, there has been great concern in Britain about a so‑called credit bubble building up and the savings rate has dropped to a very low level. I just wondered if that was something you shared.

Mr. Obstfeld ‑ I think it is up to the British government to decide if they need a renewed mandate to undertake the very complicated and difficult negotiation. They are entering now with the other 27 EU countries on Brexit. It will be up to the British people to determine what kind of mandate that will be.

I think it is a general view that more uncertainty is not good, but I think there was already uncertainty over how the negotiation would go and what its final outlines would be. It may be that this is a tradeoff of a little more uncertainty before June 8th for less uncertainty later. I do not think there is a clear prediction that we would make about the effects of this in terms of economic uncertainty and activity.

In terms of the UK economy, there has been a concern for a while about housing prices certainly in some areas. The UK authorities have been taking steps to ensure macroeconomic stability.

The Bank of England, in particular, is a very effective overseer, as are the financial stability authorities. I do not think we have a particular worry about that. That sort of phenomenon is generically always a concern.

Mr. Milesi‑Ferretti ‑ The mirror image of what you are saying has been the resilience of the recovery. The recovery has surprises on the upside and the strength of the economy has surprised us primarily on account of strong product consumption. Of course, the mirror image of that has been a decline in the saving rate.

We do think that eventually consumption will adjust. Prices have risen, with the depreciation of the currency. That has an impact on real incomes. We do expect some slowdown in consumption, some recovery in saving and, hence, lower growth going forward.

Question ‑ My question is, after Mar‑a‑Lago, the meeting of Trump and the Chinese President, they put a hundred‑day clock on trade negotiations. There is deep concern in Shanghai of the impact this will have on Chinese companies. What do you see as the impact and which sectors do you think will be most affected both for the US and China, and maybe if there is a global spillover?

Mr. Obstfeld ‑ I think it is totally unclear what the outcome of those negotiations will be and what sectors will be affected. I know that the US has longstanding requests of China in terms of market access. China has requested the US in terms of FDI. I assume all of those things are going to be on the table.

US and China have long, since it was initiated by Secretary Paulson under the George W. Bush Administration, had a strategic and economic dialogue where these things have been regularly discussed.

I do not know if there is really that much to say here in terms of new developments. I think these issues are again going to be discussed with the new U.S. Administration. I assume that there will be some outcome. I do not think it is going to be something that we can predict.

Question ‑ How do you see Asia in this context in your 2017 projections and forecasts, given the turbulence and also tension in the region?

Mr. Obstfeld ‑ In general, as a general broad statement, Asia has been doing well. The region has been doing well. We see particular strength in Japan and China. We see some resilience of the Indian economy after the demonetization episode. Those facts give us confidence. There is certainly geopolitical tension in the region, and we certainly hope that will abate rather than intensify.

Generally, economies in the region are doing pretty well. Sri Lanka is in a program with the IMF at the moment and we expect that to have good results. We think this resilience will enable the region to resist the geopolitical tensions or the fall in confidence that those might cause. That being said, we would not want a sharp intensification of the current sets of issues.

Question ‑ What is your view on the debt burden for the Greek economy? How much does it need to be restructured? Do you have any indication that the Europeans are willing to accept the level of debt relief that you are suggesting? Also, how realistic is it for Greece to be asked to achieve and maintain a high primary surplus?

Mr. Obstfeld ‑ I think we have made pretty clear, including in some blogs of which I am a co‑author, that we do think some degree of debt restructuring is necessary and that there are limits to the amount of primary surplus that Greece should be asked to maintain over the long term.

The precise numbers and the modalities depend on the Debt Sustainability Analysis and what the incoming data tell us about the likely path of the Greek economy. I would not want to go into further details than that. I do not think it is really possible to tie down numbers at this stage.

We are, of course, in discussions with Europe about how best to proceed. I would defer to the European Regional Briefing for further details.

Ms. Stankova ‑ Let me go to our online audience. We have a question on Mexico.

What is the main downside risk for Mexico’s GDP, which maintains its growth estimate at 1.7 percent in 2017?

Mr. Milesi‑Ferretti ‑ We had an initial reaction in terms of confidence reflected in the behavior of the exchange rate, for instance, reflected in the behavior of spreads after the US election, which has obviously taken a toll on the Mexican economy and has led the central bank to act appropriately but aggressively to raise interest rates to limit the extent of depreciation.

Now, a lot of that decline in confidence and increased concerns about potential trade disruptions vis‑à‑vis the US have receded. Indeed, the Mexican peso has come back to its pre‑US election levels.

But you have a general economic situation in which financial conditions are quite a bit tighter than they were a few months ago, and that is going to take a toll on economic activity. Hence, our growth forecast is not as optimistic as it was a few months before.

Of course, this improvement in confidence is more persistent if there is a stronger recovery materializing in the United States without disruptions on the trade front. Then the prospects for the Mexican economy can improve further relative to our current forecast.

Ms. Stankova ‑ I will stay for a second with our online audience and on Latin America. This is a question on Argentina.

The Central Bank of Argentina estimated the inflation rate of 12‑17 percent for this year. The WEO estimates this year that the inflation rate will be at 25.6 percent. Why is there a difference in your assessment?

Ms. Celasun ‑ For Argentina, it is indeed true that our forecast for inflation is closer to 25, 26 percent. That is actually only a 1 percentage point difference than what we had in October, so it is not a very new forecast.

The reason for that being somewhat higher than what the target is a view on how persistent the inflation process is, the persistence in wage formation and only a gradual reduction in inertia there, and also the extent of pass‑through from earlier tariff hikes into prices.

Ms. Stankova ‑ Let me take one more question from online. This is moving to Canada.

Why is there such a big gap between the IMF’s Canadian GDP growth forecast for 2017, which is 1.9 percent, and the Bank of Canada’s 2.6 percent released last week?

Mr. Milesi‑Ferretti ‑ Well, there has been very strong data released on monthly GDP in early 2017 for Canada, which bodes very well for growth in the early part of the year, that has a big impact on growth for the year as a whole. That data release has come after our forecast was closed. So, with a stronger base, there are clearly upside risks to our forecast for Canada.

I would say a word on [..sound cut off, inaudible..] compare numbers on inflation, which is that we have to look at over what period we are assessing the inflation rate. The inflation rate that was cited, 25 percent, refers to the average inflation rate during the year.

Our forecast for inflation by the end of the year, which would be closer to the authorities’ inflation forecast, is lower than that. I think it is close to 20 percent or just above 20 percent, but lower than 25. The gap is smaller than these other headlines would suggest.

Question ‑ Your report mentions several political risks. Could you address, in particular, the risk of a breakup in the euro, considering the coming French election and elections later in the year in Germany and possibly in Italy? Do you feel that markets are too complacent about this?

Mr. Obstfeld ‑ It is an interesting fact that if we look at emerging markets, spreads, which jumped up after the US election, have fallen quite a bit. In Europe, we do see some of the tensions you mentioned reflected in spreads. We have particularly seen this in France.

I would not say that the markets are complacent, but I also think that extrapolating from the current situation to something as cataclysmic as a euro area breakup is valid. It is certainly true that we see some politicians running in Europe on a platform that is hostile to the euro, but going from there to a euro breakup requires several steps that become increasingly less probable, in our view. I think it is important not to exaggerate the short‑run impact of such fears

Question ‑ What about the countries in the Middle East facing the problem of the refugees now, like Lebanon, Jordan? It is a main issue for us in the Middle East.

Mr. Obstfeld ‑ We have mentioned this at some of the prior press briefings that there has been a lot of focus on the refugee situation in Europe. If you look at the countries that are actually closer to the problem, which would include Lebanon, Jordan, Turkey, there is less focus, notwithstanding the incredible burden on these countries that such large bodies of refugees place in terms of the fiscal resources needed to house them, the possibilities for absorption into labor forces, and so on.

We have certainly been working at the Fund with countries in the region to try to aid them as much as possible within our competence in this area, but it is a remarkably high burden that we should not lose sight of.

Question ‑ In the US, there is a discussion about the border adjustment tax. You are criticizing this in the report, saying that it might be against WTO rules. Could you elaborate a little bit more on that, especially as the opinion here is somewhat that it might be just another form of VAT that many other countries have?

The second short question is, have you been too negative about the Brexit, as you changed the outlook for Great Britain upward very strongly?

Mr. Obstfeld ‑ On the border adjustment tax proposal, I am not a lawyer. I am an economist. I have listened to lawyers discuss this and it is an incredibly complex question. Frankly, even after listening to lawyers, I could not explain to you the distinctions that seem to be inherent in the WTO’s rules.

I think we would really have to wait for a WTO ruling to know for sure about compliance. From the conversations I have heard, there does seem to be a question which really revolves around the difference between direct and indirect taxes. I am not going to say any more, because I will surely get into trouble if I do that.

On Brexit, the scenarios we looked at before the actual vote, which I think were still the right scenarios, were multiple. In one of those scenarios markets, financial markets reacted with equanimity, in part because central banks did the right things, but there were also possible scenarios in which financial markets would not have reacted so well. I recall that the vote was occurring right in mid‑2016, at the end of a six‑month period in which we had seen considerable market turbulence.

Our view is that, in that pessimistic scenario of a very severe market reaction, world output could suffer and British output, in particular, could suffer, just as we in fact saw global growth slowing in the first half of 2016.

That negative outcome did not occur. In fact, what we have seen, as Gian Maria mentioned, is considerable resilience of the British consumer, notwithstanding a very significant depreciation of sterling and the uncertainties about how the final Brexit settlement will look.

It is still our belief, though, that there could be some supply side effects on the British economy which will play out over time, for example, from part of the financial sector moving elsewhere in Europe which would affect business activity, tax revenues, etc., and that these effects will be something that we will see over time.

We certainly did not see the sharp fall in consumption. On the contrary, the data we have seen toward the end of 2016 led us, along with the Bank of England, to upgrade our forecast for this year for the UK economy.

We still think that the uncertainty over Brexit is a negative. We hope that the final outcome will be one that resolves the uncertainty in a way that also minimizes the resulting trade barriers between the UK and Europe. If that happens, that would be a relatively good outcome for both of the negotiating partners.

Question ‑ What is the risk and what should be the policy response from developing countries like Ghana, looking at threats to the oil price because of what is going to happen in Asia, that possibly the U.S. Administration should strike North Korea and also in Syria as well?

Ms. Celasun ‑ You mentioned the need for adjustment in many low‑income economies that export commodities essentially. It is a difficult adjustment. It requires a coherent set of policies. Fiscal policy has to adjust to the new reality, in many cases by focusing more on domestic revenue mobilization, to some extent also rationalizing expenditures.

Where feasible, where exchange rate regimes allow, the adjustment could also benefit very much from exchange rate flexibility, which helps to restore the value of revenues in domestic currency and thereby avoid deeper cuts in real spending.

Also in many of these economies, there is a broader, longer‑term need to diversify the economy away from commodity‑based sources of growth into other activities. The requirements in every country differ from one another, but it is a common need.

Question ‑ Mongolia is coming to an EFF I think shortly at end of this month, after the Board of Directors approve it here. I have seen the conditions compared with Greece, almost the same conditions demanding an increase of taxes on the private sector in certain consumptions.

The question is, after all this turmoil/crisis in the country, why would the suggestion be to increase the burden of the private sector? How can the economy survive through all these things when the private sector is to pay more taxes? What is the approach of the IMF to the competitiveness of the private sector when you are suggesting to increase the taxes on the private sector?

Mr. Obstfeld ‑ Since this press conference is devoted to the outlook and that is a specific program question, I am going to defer that to the Asia Regional Outlook Press Conference. I am sure they will be more than happy to take that up.

Question ‑ You mentioned that mass starvation is affecting the economic growth of many countries, and Northern Nigeria is one of the countries facing mass starvation right now, and also South Sudan, Kenya, Somalia. What is the economic outlook for many of these countries facing mass starvation, and which African countries do you think is doing very well this year?

Mr. Obstfeld ‑ Generally, these conditions come with either security shocks or economic shocks that do cloud the outlook considerably. In the case of Nigeria, the issue is security, Boko Haram. Yemen is also a country not in Africa but a Middle Eastern country also facing these conditions for similar reasons.

So, inherently, economic prospects are not good. Unfortunately, also, for some of these countries, our ability to engage with financial assistance is very limited either because of existing arrears or because of conflict situations, which really make it impossible for us to work there.

So, it is hard to be optimistic and we do try to engage in the Fund in the ways we can; for example, giving capacity development assistance in Somalia. We also have been working with Chad and Uganda on supporting refugees who are coming from these countries.

But this is an amazingly tragic situation. I cannot really overstate how bad it is and how many people are affected. The international community needs to step up. This is why in my opening statement I mentioned famine as one of the big challenges for multilateral action.

Having said that, Africa remains incredibly diverse in terms of economic performance. While every country has its challenges, some parts of Africa are doing quite well, particularly those that have benefited from lower oil prices, lower commodity prices generally.

Others, particularly some of the big exporting countries, particularly oil‑exporting countries, Nigeria Angola, also South Africa as a big commodity exporter, are facing difficulties. It is a very complex and challenging continent.

Question ‑ I wonder if I might ask you a question about the relevance of your chapter on wages to a country like Spain. I mean, Spain bucks the trend on inequality and declining wages for a long period before the crisis. Now it is one of the star‑performing European economies, but that has coincided with an explosive increase in inequality.

To what extent is that going to threaten Spain’s potential growth in the future if the present levels of wage inequality are maintained?

In the chapter on wages, some of the things that you mentioned as a possible cause for the decline in wages are the dismantling of collective agreements, a weakening role of trade unions, and yet they seemed to be precisely the kind of policies, IMF’s recommendations for Spain on the labor market being put forward. That seems to be a bit of a contradiction.

Mr. Milesi‑Ferretti ‑ Spain underwent a wrenching downturn after with the global financial crisis. It had very strong growth before. Clearly, a housing bubble built and there were overoptimistic expectations about the future growth both on the part of Spain and on the part of lenders, and so very large current account deficits, very large external imbalances.

Clearly, when the crisis came, there was a very, very deep adjustment, a very stark rise in unemployment. A consequence of that is typically that inequality would tend to increase. A lot of people at the low wage end of the distribution lost their jobs in construction, for instance. That is clearly taking a heavy toll.

I think the recovery that Spain is experiencing in the past two years is a big positive. When unemployment declines, typically you have some reversal of these trends. There is still a lot of ground to be covered, given that the level of unemployment is still very high, but I think progress has been made.

You made a reference to the recommendation for Spain in terms of the structure of the labor market. One of the concerns with Spain was that Spain had accumulated very large net external liabilities by running very large current account deficits.

In many countries that have an independent monetary policy, when you have the type of shock that Spain suffered, what you would see is a very large depreciation of the exchange rate, which should make domestic goods more competitive, which should make imported goods less desirable, and would facilitate the external adjustment. Spain is in a monetary union and does not have that avenue of adjustment. The only way for the Spanish economy to regain the competitiveness that was lost with way above average inflation and wage growth pre‑crisis was to have a significant and very costly for the workers involved adjustment in relative prices, in relative wages compared to, say, Germany and other trading partners.

Clearly, that adjustment of the labor market was essential in order to restore some employment growth in a country that was suffering from extremely high unemployment and big tensions between protected workers and workers on temporary contracts. I would defer a full discussion to the consultation of the Article IV for Spain and, of course, to the regional briefings, but these are the broad lines I would highlight.

Ms. Stankova ‑ Thank you. You will have many opportunities to raise additional questions during the Spring Meetings. Have a good day.