Transcript

Transcript of a Press Conference on the IMF's World Economic Outlook

September 19, 2000

Michael Mussa, Economic Counsellor and Director, Research Deptartment
David Robinson, Assistant Director, Research Deptartment
Graham Hacche, Deputy Director, External Relations Deptartment

David Robinson and Michael Mussa

Mr. Hacche: Good morning. Welcome to this first press briefing of our 2000 Annual Meetings here in Prague- the briefing on the IMF's latest report on the World Economic Outlook. I am Graham Hacche, Deputy Director of the IMF's External Relations Department.

To introduce the speakers this morning, to my immediate right is Michael Mussa, Economic Counsellor and Director of Research at the IMF, under whose general direction the World Economic Outlook is coordinated. To Mr. Mussa's right is David Robinson, Assistant Director in the Research Department, who directs the World Economic Outlook. To my left is David Hawley, Chief of the Fund's Media Relations Division.

I understand that Mr. Mussa has some introductory remarks, after which we will turn to questions. Mr. Mussa.

Mr. Mussa: Thank you, Graham. It is a little strange to have you on the left-hand side of me. Mr. Hacche used to direct the World Economic Outlook, so if we run short of answers, we will call on him to help us out.

The world economy in the first year of the new millennium is enjoying the strongest growth in more than a decade and, despite recent increases in oil prices that have kicked up headline inflation rates in industrial countries, on the whole inflation in the world economy remains very well contained.

Strong growth is being recorded in virtually all of the world's major regions, led of course by the U.S. Economy, which has been enjoying particularly rapid advances in productivities that have kept real output growth strong and inflation well contained and, also, in several other cyclically advanced economies, the United Kingdom, Australia, Canada, Ireland and a couple of others. The European Union, particularly the euro area, saw growth strengthen in 1999 and strengthen further this year.

Japan does now appear to be on the course to recovery. Emerging Asia came back strongly from the crisis of 1997-98 last year and is turning in stronger growth even this year. Latin America, which had a tough year in 1999, is performing much better this year. The transition economies are turning in their strongest growth performance since the start of the transition, led by the rapid recovery of the Russian economy from the severe crisis of the autumn of 1998.

Other developing countries around the world, with some exceptions, are generally doing quite well. The World Economic Outlook forecasts that world economic growth will be sustained at better than 4 per cent next year as well. However, I would say that that forecast, which was completed before the recent runup in oil prices of about $5 or $6 a barrel, may be at some risk now. We may return to that issue if there are questions. But there is some downside risk from oil prices.

There are also other important sources of risks which are outlined in Chapter 2 of the WEO. Mr. Robinson, whom I will call on in a moment, will say a little more about Chapter 2 of the World Economic Outlook and, also, the special topic this year, which deals with the transition economies, their experience over the past decade, and also looking forward particularly for those who will be candidates for entry into the European Union.

Let me stop there and call on Mr. Robinson briefly and then take your questions.

Mr. Robinson: Thank you, Mike. Since it is now just over a decade since the transition process in Europe got under way and, of course, in the Commonwealth of Independent States and with the annual meetings being held in Prague, it did seem appropriate for this World Economic Outlook to focus on the transition economies. We have two chapters. The first chapter looks at the overall experience with transition, and it does not just cover Europe and the CIS but also looks at the Asian economies, including China. The main questions it asks are what has been achieved so far, what lessons have we learned from the experience, and what are the policies now needed to move the process forward.

I say one striking feature of the transition process has been the generally better performance of the countries that are now applying for membership of the European Union. While that importantly reflects the initial conditions they faced, which were rather more favorable, I would say, than the Commonwealth of Independent States, it also reflects the better progress that they have generally made with structural and institutional reform.

I think an important reason for that, which is discussed in detail in the chapter, is their desire to join the European Union, which has sort of impelled the reform process forward. In China we are seeing the World Trade Organization membership perhaps playing a similar role.

The second chapter looks in more detail at the European enlargement process from the perspective both of the accession countries and the European Union itself. Among the issues it looks at are what are the gains from accession, what are the potential pressures and risks for accession countries in the accession process, and the issues related to the timetable for accession both for EU membership and, later on, membership of the euro zone.

Finally, I would just like to draw your attention to Chapter 2 of the WEO, which contains a number of shorter pieces on issues of interest. I think two that you may find useful and perhaps interesting are the first, which looks at the evidence for the new economy in the United States and elsewhere and some of the implications for policies; and the last, which discusses developments in commodity prices, including oil. You will find in that last section a set of ready-reckoners which you can use to broadly calculate the impact of changes in the oil price, which, as Mike has said, are now very different from the assumptions in the WEO on output inflation and so on.

Mr. Hacche: To accommodate as many questions as possible, I would ask you, please, to be brief with your questions.

Questioner: Since you have talked for a second time already about a scenario for a hard landing, and you actually present a couple of inflationary scenarios-reflation in the United States, et cetera-I wonder what is the probability distribution of these various scenarios.

Mr. Mussa: It is difficult to be extremely precise on probabilities. The baseline scenario in the WEO is an extremely soft landing, with U.S. GDP growth slowing next year on a fourth quarter-to-fourth quarter basis to just about 3  per cent, which is a little bit under the estimate of potential growth, and the unemployment rate rising very modestly, but enough to contain any significant further rise of inflationary pressures in the United States.

I think a scenario similar to that is still the most likely. We are getting some spillover from the effect of oil, which I think probably tilts things down in terms of real output growth for the U.S. as well as the world economy, and certainly tilts up headline inflation going forward relative to the baseline WEO forecast.

For the U.S., I would probably at this stage knock back the growth forecast at least a quarter of a percentage point on a year-over-year basis, perhaps somewhat more on a fourth quarter-to-fourth quarter basis.

That being said, it is of course possible that the U.S. economy could once again surprise us on the upside. Productivity growth has been remarkably strong and that rapid productivity growth, which has meant very many attractive investment opportunities, has kept investment very strong in the U.S. Economy, and strong investment, a still quite strong stock market, and very high employment have kept the consumer happy and buoyant in his mood. So one should not exclude the possibility we would see next year another 4 to 5 per cent growth outcome in the U.S. I think that is not a particularly likely scenario, but there certainly is potential on the upside.

I think there's probably a little more risk on the downside, and in the WEO we describe an alternative scenario at the end of Chapter 1. It is not really a hard landing in the sense of a recession-certainly not a steep recession-but a substantial slowing of growth below the WEO baseline forecast where GDP growth in the U.S. next year would fall two percentage points or a little more below the baseline. This would be triggered in part by a decline in equity values that would affect consumer wealth and consumer spending, and probably also investment spending, perhaps also from slightly more tightening of monetary policy in the alternative scenario. However, this particular alternative emphasizes more channels other than the tightening of monetary policy.

Of course, significantly worse outcomes are conceivable as well, where we would see the U.S. economy actually fall into recession some time beginning after the first quarter of next year. But I think that that is a relatively low probability event at this stage.  Normally, if you are in expansion up to the end of year X, the probability you would enter a recession during the next 12 months in the postwar data is about 20 per cent. I do not think we are much above that for the 12 months beginning October 1. I think we are probably somewhat above that for the 12 months beginning April 1 of next year.

Questioner: Mr. Mussa, if we think of the unemployment policy and the social security systems in euro countries, especially in Germany, do you see any deficiencies in structural reforms and political reforms on this system that might weaken world economic growth?

Mr. Mussa: The structural reform agenda for Western Europe generally-and Germany is not an exception in this regard-is a long one. Important progress has been made in a number of countries in a number of important areas, including in Germany. We have had important tax reform in Germany, also now in France. There have been significant product market liberalizations, privatizations, demonopolizations. There have also been some reforms in the labor market area, but if there is one area of structural reform that tends to be lagging behind the others in much of continental Europe-and this includes Germany-it is in the area of labor market reform.

Unemployment rates have come down, of course, in continental Europe quite significantly as economic growth has picked up over the past two years, but there is still the problem of a hard core of longer-term older workers. They represent a particularly difficult problem for economic policy.

But also I think a matter of considerable disappointment is we have not seen the increases in labor force participation in much of continental Europe that have characterized the long sustained recoveries in North America, the United Kingdom and a couple of the euro area countries. So it is not just a problem of older workers who have lost their jobs; it is also a problem of the flexibility of the economy in creating new jobs for new workers who would ordinarily be expected to enter the labor force as the business cycle proceeds upward.

Questioner: You list a number of reasons for the euro weakness. I was wondering if you could tell us what you think it will take for this weakness to be reversed, to take just one of these factors or all of them to change the signs for euro weakness to be reverted. I would like to know if you think that intervention may help at some point.

Mr. Mussa: There is a box in the WEO that discusses a number of reasons why the euro has weakened since its inception in the beginning of January of 1999. My own judgment is you put all those things together and you explain why the euro went from 1.16 to a dollar. Why it went from a dollar to 84 cents is, I think, much more difficult to find a plausible explanation for in terms of the behavior of economic fundamentals.

It is true that Europe has been growing more slowly than the United States. It is true, also, that structural reform has not proceeded as rapidly as one would have liked. There are a number of things you could list as reasons why perhaps the euro has weakened on the basis of fundamentals. Also, part of the story is not simply the weak euro. It is also the strong dollar and the remarkable performance of the U.S. Economy, the continuation of quite rapid productivity growth, and the attractiveness therefore of investment in the U.S. economy to both domestic and especially to foreign investors pulling in capital and helping to appreciate the dollar. That is also part of the story.

The fact that many around the world, not just in the euro area, have found it useful and convenient to denominate their debt issues in euros rather than in dollars has probably also been a factor that has tended to keep the euro somewhat weak.

As I say, put all those things together and you get an explanation for only half the depreciation of the euro. The reversal of some of those factors  - the U.S. economy at some point will slow down, denomination of debt issues will probably shift back towards more dollar denomination, the productivity growth in the U.S. and the capital inflow that the U.S. has been experiencing may also slow down at some point.

The other piece of it is you may recall from the WEO press conference in April of 1995, that is when we had the dollar at 79.5 yen and, when we had the dollar/deutschmark exchange rate at 1.34  - the deutschmark is now at 2.30 to the dollar. I said at that time the market's gone a little bit nuts in pushing the dollar down and I think we have the sort of manic depressive nature of the market. It now has shifted from depressive on the dollar to manic, and the market has pushed the euro somewhat too low, I think, relative to a plausible assessment of fundamentals.

You asked about the role of intervention. I think the circumstances in which the major countries would want to use intervention to attempt to influence exchange rates are relatively rare, but they do arise from time to time and one would sort of have to ask if not now, when?

Questioner: I would like to take you up on your invitation to comment more on what the oil price rise is going to do for the world economy. Can anything be done about it?

Mr. Mussa: Of course, the World Economic Outlook for which the forecasts were put together basically on a baseline of early to mid August already incorporated a significant increase in the world oil price from where it was at its low point of around $10 to $12 a barrel in early 1999 up to, for this year, about $26 a barrel, and projected next year to decline to about $23 a barrel. So that is already sort of built into the analysis and so forth.

Oil prices have gone up another $6 or $7 a barrel and futures markets indicate that that amount of increase, $5 or $6 a barrel, would probably be sustained into next year as well.

Global oil production is running now just under 30 billion barrels per year, so the increase in the world price of that energy production is $170 billion, thereabouts. In addition to oil, other energy products-liquefied petroleum gas, natural gas, and to some extent coal, although not very much-have also been pushed up. So the world energy bill has been increased $200 billion, or a little bit more, by the increase in oil prices that we have seen since the summer.

We want to assess what is the likely impact of that on the global economy. Well, it is clearly translating into higher energy prices. Some of that has been delayed or deterred because some companies have kept prices down while they are still selling out of existing stocks. To some extent, that price increase has also been magnified, because there are a number of countries that have very heavy taxes on energy and energy products and many of those taxes are ad valorem; that is to say, it is a percentage of value rather than so much per gallon. When you have an ad valorem tax, then you sort of multiply the price increase by the tax coefficient.

So the impact on the global price level direct from the increase in energy prices-just a straight back-of-the-envelope computation-says it is half a percentage point to three-quarters of a percentage point, something of that order of magnitude.

Then there is the question of what is the impact on global growth. An increase in energy prices, other things equal, makes energy consumers' real incomes go down, and it makes energy producers' real incomes go up. Now, why should that income transfer affect the overall level of global demand? Well, in part, because the indications are that those who own energy resources and benefit from the rise in real income do not spend-at least in the short term-all, or almost all, of their real income gains, whereas consumers lose real incomes from a rise in energy prices. That tends to impact their consumption spending more or less, not quite, one for one. That is the theory. The facts also tell us that whenever we have had substantial oil price increases in the past, it has had a negative effect on overall global demand for real goods and services, and has tended to have a depressive effect on world activity.

Various models produce various estimates of what the impact is likely to be. In terms of global growth at the low end, estimates suggest two-tenths of a percentage point off global growth next year. I think that is too low, that a better number is probably something in the order of half a  percentage point off of global growth year over year for 2001. So rather than four-and-a-quarter next year, we think of three-and-three-quarters, assuming that the increase in oil prices does recede gradually over the course of next year. If oil prices were to stay at $35 a barrel throughout 2001, or if they were to escalate, as some people have talked about, to $40 a barrel or more, then of course the impact on inflation and global growth would be more significant, but I think an impact now somewhere between a quarter per cent and half a  per cent negative is about the best guess that one can have.

Questioner: A two-part question on the euro. You said, when asked about intervention, I think, circumstances where major countries would intervene are relatively rare but you have to ask, "If not now, when?" Therefore, the follow-up question to that is: In your view, saying "if not now, when?" could intervention be effective in your opinion? And the second part of that question is, moving beyond the intervention, what are the economic risks of the euro, which at its current level or at a weaker level-it is at 84.8 this morning, a record low-what are the actual risks or consequences?

Mr. Mussa: There have been a large number of studies of the effectiveness of official intervention in influencing exchange rates, and I think the best conclusion from all that evidence is that official intervention, in particular so-called sterilized intervention-that is to say, intervention that does not involve any change in monetary policies in the countries involved in the intervention-has not zero but, on the whole, relatively limited effects. It does tend to be significantly more effective when that intervention is coordinated among the major countries and when those countries, in effect, send the signal that it is their joint judgment that markets have taken exchange rates substantially away from fundamentals and that some correction is warranted. I think it also tends to be significantly more effective when there is some signal that monetary policy in one or more of the major areas is likely to be supportive of the intervention.

In terms of the impact of the very weak euro, I used to say it is more of an embarrassment than a problem. But I think recently it has become more of a problem that is a source of concern going forward in all of the major currency areas. In Japan, we have the yen on a multilateral basis at essentially an all-time peak, not because it is at an all-time peak vis-a-vis the dollar, which has been the traditional problem with an overly strong yen, but because the yen is at an all-time peak against the euro. There is a concern that a yen that is too strong could undermine the Japanese recovery that is attempting to gain momentum.

In the United States at the moment, the strong dollar is not an immediate concern, because, among other things, it helps to keep inflation down when otherwise inflation might be picking up. But you have a very large current account deficit, a very strong reason to believe the dollar is really not sustainable at its present level. If the dollar were to correct sharply downward at the wrong time-that is to say, in a circumstance where the U.S. economy was perhaps kind of weak and monetary policy might otherwise be eased, but you suddenly see a drop in the dollar kick your inflation rate up-that would put the Federal Reserve in a tough position.

So further strengthening of the dollar from its present level, which would I think complicates dealing with that problem in the future, is not desirable from a U.S. perspective.

I think most importantly the weakness of the euro from a euro perspective is complicating the task for the management of monetary policy. The European Central Bank has raised short-term interest rates 200 basis points over the past year and, judging by short-term interest rates, has moved the stance of monetary policy from quite an accommodative stance to, I would say, a broadly neutral stance as measured by interest rates.

But when you take account of the weakness of the euro, the overall stance of monetary conditions in the euro area remains significantly accommodative. We do not think that is a problem at the present moment, because we think there is still another year's worth of slack left in the euro economy. But unemployment rates have been falling fairly rapidly over the past two years and, by the end of next year, we think at current rates of growth that most of the slack would be exhausted and the European Central Bank will need probably to tighten overall monetary conditions further.

If they do that by raising interest rates to offset the very weak exchange rate, we could end up in a situation where interest rates get pushed up and then the euro turns around and we have both relatively high interest rates and a stronger currency and then the stance of monetary policy could suddenly become too restrictive. So the European Central Bank needs to take measured actions with respect to interest rates not to get too far out in front of itself. But I think it is in a position where it can signal that certainly monetary policy in the euro area can be supportive of official intervention to attempt to correct some of the excessive depreciation of the euro at this stage and thereby offset the risks that we might get into a circumstance where, if the euro turns suddenly later, we could have policy which is too restrictive rather than too easy.

Questioner: Back in April the WEO described the government's fiscal policy in Britain as regrettably pro cyclical. The assessment this time seems to have been toned down a bit and I wondered why that was. In particular, if you could provide some discussion of the U.K. interest rate outlook, given the rising oil prices and the depreciation of the pound against the dollar.

Mr. Mussa: Maybe I will ask David to answer this question.

Let me comment more generally about this issue. Not only in the U.K., but also in a number of industrial and some developing and emerging market countries, we have seen situations where in an economy that is relatively cyclically advanced, fiscal policy, rather than exerting a restraining influence on demand growth, is actually contributing a positive impetus to demand growth. That is happening now in the United Kingdom. It is happening now in a number of the continental European economies.

It happened in Mexico just before the presidential election. There are a number of examples of this phenomenon and I think, as a general matter, I regard it as regrettable when it happens. Often, there are good reasons for doing it. The management of fiscal policy is subject to a number of influences other than the effort to manage the behavior of the macro economy. So, for example, the tax reform in Germany, this is politically the right moment to undertake that action. Perhaps it would have been, from a macro policy management standpoint, better if it had been done two years ago rather than now, but the reform is sufficiently important and it does not represent a serious destabilization of the macro situation that it is better to proceed with it than to attempt to delay it further. I think I will ask David to comment on the situation in the UK .

Mr. Robinson: Let me add a couple of points. I think, first of all, one has to recognize that the U.K., like other European countries, has achieved an enormous improvement in the fiscal position over the past eight years and, also, that the U.K. has one of the largest structural surpluses. By that I mean the surplus when you adjust for the cyclical position of the economy of the major industrial countries. Part of that was because the outturn in 1999 was so good.

Now, the 2000 budget, as we pointed out in April, did imply a reduction in that structural surplus and that, other things being equal, does put some additional pressure on demand. As again we said at that time, ideally, I think there would have been a case for fiscal policy to lean somewhat against the wind, because demand pressures in the UK have been an issue. I think that, broadly speaking, remains our judgment.

Questioner: If one adds all the scenarios and all your assessments so far, where is the weakest point? Where is the biggest threat for the next crisis? Is it the complacency in structural reform in the emerging market countries? Is it maybe coming from the financial system that is not so stabilized? Is it coming from capital flows? Is it coming from a different perception of the U.S. current account position, or is it coming from something in Wall Street, that the new economy will be crash landing? Where, in your personal view, would be the next crisis?

Mr. Mussa: I remember once I was at a conference and I was asked, "What is the job of the IMF? How well are you doing at that job?" I said, well, somewhat tongue in cheek, "Our job is to help manage financial crises and, so far, we have managed to have a lot of them."

That being said, I am not looking forward to a major financial crisis next year. If it does come, what are the most likely sources? Well, in 1997-98, the crises in the global economy mainly involved, and came from, the emerging market economies. It was not just in those economies; it was also a crisis of global capital flows to those economies which first went too high and then reversed, partly because of conditions outside of those economies and broader developments in the world economy.

Now, I think if there is a significant problem in the next year or two, it is more likely to come at the emerging markets from the rest of the global economy, rather than from the emerging markets toward the rest of the world economy.

That, of course, is leaving aside the issue of the increase in the oil price. There, I think, the responsibility is to some extent shared with OPEC, which for a period of time, to push the price up, cut back on production and then shortened up on global inventories. It is the very low level of global inventories now that is producing the primary tension in the world market. But also global demand for energy has risen significantly as the world economy has recovered, and OPEC has now reversed more than all of the production cuts that it undertook to firm oil prices in 1999.

There are other aspects of the management of energy policy in the industrial countries that I think also have contributed to the very tense supply situation. Clearly, we are seeing an important problem at present in terms of a high level and worries about further increases in oil prices. I would certainly put that on the agenda of difficulties.

Then I think there is the concern about the imbalances that exist among the major economies: the very large U.S. current account deficit, the very strong dollar, and the possibility that that could be reversed. If at some point asset holders around the world become somehow less optimistic about investment in the United States and those immense capital flows begin to slow down, then we would see the dollar move downward perhaps in a circumstance where the U.S. economy would be slowing significantly. That represents a potential risk.

We have all around the world-we point particularly to the United States, but we have all around the world-quite generally very high equity valuations relative to earnings and other traditional measures of equity values. We may be at some risk that those markets could correct downward. That could happen if there are disappointments about earnings growth. Or it could be that inflationary pressures under the surface in the U.S. and other economies are actually stronger than recent evidence has really suggested or confirmed, and that further monetary tightening-beyond the modest amount that is anticipated-in the United States might need to be undertaken. As I say, we do not have any indication that that is likely to happen at this stage, but it remains a risk.

So those are the types of disturbances that I think are most likely to create problems in the relatively near term for the global economy. It is true that the pace of structural reform, particularly financial and corporate restructuring in a number of the crisis economies of the past couple of years, has not proceeded as rapidly as one would like to see, though I would say more rapidly than has been the case in many industrial countries when they have experienced similar problems. But I think that that is unlikely to produce in the near term a re-emergence of crisis. It may be a barrier to growth and recovery in the medium term and it could, down the road, lay the basis for a more severe crisis, but I do not think it is so much of an immediate threat.

Questioner: I would like your comments on the prospects for sub-Saharan Africa generally, and in light of the AIDS pandemic.

Mr. Mussa: I am going to ask David to take that question.

Mr. Robinson: Let me start with the overall prospects for Africa and sub-Saharan Africa. As Mike said at the very beginning, we have a pickup in growth in just about every area of the world, and Africa is no exception, with growth expected to rise from the 2.2 per cent in 1999 to 3.4 per cent in 2000, with some pickup in Nigeria, and indeed South Africa.

I think the picture in sub-Saharan Africa in general though is quite mixed and, if you look at the second chapter, there is quite a detailed discussion of the impact of commodity prices on sub-Saharan African countries. Those countries that export oil-and there are quite a number of them-are doing quite well. But those countries that are dependent on non-oil commodity exports have really suffered a double whammy, because the prices of their exports have remained very weak while oil prices have, of course, risen sharply. Many of those countries have suffered substantial terms-of-trade losses. So there is a dichotomy in sub-Saharan Africa related to commodity prices in general.

Let me just say a brief word on the impact of the AIDS crisis. There is a box at the end of Chapter 1 which sets out some information on the economic impact of AIDS in sub-Saharan Africa. It is indeed extremely serious, and if you just look at the numbers on HIV prevalence in the population, with many countries having over 20 per cent of the adult population infected by HIV/AIDS, I think that alone gives you some sense of the huge human and economic magnitude of the problems these countries are going to face.

I think that this is an area where the countries themselves clearly can do certain things and, while the World Bank is the expert agency on this, those countries that have engaged in preventative measures-and I think one of the obvious examples is Uganda-have managed to keep the HIV prevalence ratio much lower than in other countries. In those countries where the HIV prevalence ratio is very high, however, I think there will be a need for not only preventative measures but additional international assistance to help them deal with this problem.

Questioner: Are you concerned at the slow pace of progress towards eastward expansion of the European Union and, if so, what should be done about it?

Mr. Mussa: I am going to call on Mr. Robinson again. We do have a chapter in the World Economic Outlook that deals with the EU accession process. I would just say as an initial comment that I do not regard that process as slow at this stage. We are concerned that it may become slow, but that is a concern more for the future than for what has been accomplished up to this point .

Mr. Robinson: To add a little bit more on the detail, and there is much more in the WEO in Chapter 4, I think there is a great deal of work to be done, both on the side of the EU and on the side of the accession countries themselves. Briefly, in terms of the EU of course, the immediate next step is the intergovernmental conference which will need to address a whole variety of issues related to reforming the voting arrangements and other procedural aspects of the EU so that it can manage enlargement properly.

I think, also, there will be decisions that will need to be taken about the future of the common agricultural policy and how it applies to these countries and, of course, the extent of structural funds that they are going to receive from the EU budget, and issues related to labor mobility.

On the side of the accession countries, there is also a great deal of work to be done. They are in the process of negotiating with the EU the 31 chapters of the acquis communitaire. I think, in most cases, about a third to half of the chapters' negotiations have been completed, so there is a lot to do, including in many of the most difficult areas such as agriculture and labor mobility. The acquis itself requires an enormous amount of legal changes in the accession countries themselves. So, all in all, I think that accession is moving forward but there is a great deal still to be done.

Questioner: I would like to ask this question in Spanish, with your permission of course. Mr. Mussa, basically, in Mexico we have the concern that Mexico was not growing, and now we are concerned that it is growing too much, too quickly, and too strongly at 7 per cent. My question is specific. In your Fund studies do you calculate it as an effect of the heating of the Mexican economy? Will that have repercussions on an overvaluation of the Mexican peso, which will cause problems in this transition period from one government to another? And will it not regenerate crises that occurred in the past and have a snowball effect in Latin America?

Mr. Mussa: Of course, it is either too hot or too cold. I think there is a concern at present that the Mexican economy is growing a little bit too rapidly and that demand in the Mexican economy is expanding too rapidly, and that that is contributing some concern on the inflation side; not a great deal of concern on the inflation side at this stage, but more concern that, over time, the current account deficit will grow, especially vis-a-vis the United States, which of course, is Mexico's predominant trading partner.

The situation in this regard is not too different from that of the United States, where very rapid growth of demand also has manifested itself more in terms of enlargement of the current account deficit than in terms of actual explicit inflationary pressures. At this stage, and this has been true really only quite recently, there is a degree of concern that demand in Mexico is growing too rapidly. It does need to slow down, and policy needs to be better oriented. Not just monetary policy, which the Bank de Mexico has tightened, but also fiscal policy needs to become part of the solution to the overheating problem.

That being said, I do not think that Mexico is building up to the type of crisis problem that confronted the Mexican economy in late 1994 and early 1995. The current account deficit remains well below 8 per cent of GDP. Also, particularly important, Mexico is operating an inflation targeting framework for its monetary policy, not a pegged exchange rate. It is true the exchange rate has appreciated in real terms as Mexican inflation has continued to be modestly above that in the United States. In nominal terms the peso has been quite stable, around between 9 and 9.6 or 9.7. But with the exchange rate floating, if at some point doubts emerge about problems in the Mexican economy, and capital flows, which are predominantly foreign and direct investment at this stage, are somehow to slow down, the exchange rate will naturally correct in a downward direction without provoking the type of crisis that occurred at the time of devaluation of the peso in December of 1994.

Also, it is particularly noteworthy that, in contrast to the situation that prevailed in 1994, there is very little foreign currency-denominated debt, particularly of the Mexican private sector but also of the Mexican government. That was an important source of difficulty at the time of the Tequila Crisis. So, yes, there is some concern that the Mexican economy is overheating and policies need to adapt to contain that problem, but I think the circumstances are such that there is much less risk of the type of severe financial crisis that we saw in Mexico in late 1994 and 1995.

Questioner: What is your outlook for the prospects of growth in Russia? Are you optimistic or pessimistic about that?

Mr. Mussa: Russia has enjoyed a strong recovery from the crisis of the autumn of 1998. This has been somewhat of a bone of contention inside the Fund, since it tends to be my view that these episodes are V-shaped, where a V has a sharp leg down followed by a sharp leg up. We seem not to be able to forecast either the down leg or the up leg. In Russia we certainly saw the down leg and now we are seeing the up leg.

Recovery is being assisted by a very much depreciated ruble in real terms that has made many imported products very expensive and a number of Russian industries much more competitive in producing substitutes for imports.

There is some effect also on the export side, but it has been largely stimulus to domestic production of import substitutes.

There has also been a great fiscal bonanza from the rise in global oil prices that has raised real incomes in Russia and also contributed to a massive improvement in the fiscal situation at all levels of the Russian government. That has permitted the Russian government both to undertake higher levels of spending, including spending in some key social areas, and the cleaning up of arrears. Because it gets more revenue from various forms of taxes, the government also has been able to move the Russian budget into a substantial primary surplus, and probably now an actual overall surplus going forward. So those factors have clearly helped.

In addition, it appears to be the case that, after many years of sort of dithering and delay, important areas of structural reform are beginning to move forward in Russia. It remains to be seen how the Russian President's program is implemented, but certainly there is a much better basis for hope of meaningful and relatively rapid progress in Russia on key structural reform issues than there has been in quite some time. That, too, is probably a factor that is contributing something now to the recovery of growth and will be particularly important in the medium and longer term to keep the growth process moving forward.

Mr. Hacche: Two more questions.

Questioner: Do you all foresee the collapse of several least developed countries-the United Nations has identified about four to six of them-for the following reasons: there has been no real impact of the economic growth in the developed countries; official development assistance has been reduced; the Heavily Indebted Poor Countries(HIPC) initiative is moving at a very slow rate, a snail's pace; high debt service rates continue to be high; low commodity prices; and now, worst of all, high oil prices?

Mr. Mussa: As we indicate in the World Economic Outlook and in a supplement that will be released together with the Managing Director's statement on the World Economic Outlook for the meeting of the IMFC, the increase in world oil prices is certainly a factor that is having a very strong negative effect on a number of very poor countries that are commodity exporters but export commodities other than oil. As Mr. Robinson indicated, we also have the AIDS crisis, which is a severe problem, particularly in sub-Saharan Africa. But there are some Asian countries that are also quite severely affected by this problem.

One of the factors you did not mention, but which is also important, is that in a number of countries we have civil conflict and outright war, which is very destructive of any economic progress. The number of countries that are affected by all these problems is quite significant.

That is the downside. In some sense, the upside, to the extent there is an upside to all of this, is that, fortunately, most of those countries have relatively small populations, and when we look at the global economy on a population-weighted basis and we look at how the developing countries are doing on that basis, then the picture is indeed much brighter. Because you have over one billion people in China and approaching one billion people in India, and both those economies are growing quite strongly and are expected to do so.

Nigeria, which is the largest country in terms of population by far in sub-Saharan Africa, is benefiting from the rise in oil prices and, we hope, from the return of civilian government and so forth. But, as you say, there are a substantial number of these very poor countries that are the victims both of problems that have come at them from the rest of the global economy and, also, in a number of important cases, victims of difficulties that they have helped to manufacture for themselves.

On the HIPC initiative, there is concern about the pace of progress. The Managing Director will be here at a press conference tomorrow. I think I will let him deal with that issue. I am sure the question will come up.

Mr. Hacche: Last question, please.

Questioner: Mr. Mussa, why is the Argentine economy not growing too much, despite the government having tightened the fiscal policy?

Mr. Mussa: Argentina had a very difficult year in 1999, and we are anticipating that, as with other South American economies that had these difficulties last year, we would have a relatively more buoyant recovery this year, more in the order of 4 per cent growth. Now it appears that growth this year will be disappointing at around 2 per cent or thereabouts.

Because of the sluggish growth of the Argentine economy, fiscal revenues have come in well below forecast, and there also have been some increases in various categories of spending that tend to rise when the economy does poorly. As a consequence of that, the fiscal deficit in Argentina has widened, not so much up to this point, but is expected to widen in the second half of the year. This has occurred despite a number of measures that have been adopted to limit the increase in the fiscal deficit.

Now, the short-term effect of those measures to restrain the growth of the fiscal deficit is usually not to stimulate economic activity and domestic demand. If anything, they tend to operate in the other direction.

The problem is that, with the situation in Argentina-where there is the commitment to the convertibility plan and the pegged exchange rate, and where the current account deficit, while not threateningly large is nevertheless significant-it is not really prudent to allow the fiscal deficit to enlarge too much. It makes the creditors of the Argentine government, domestic and foreign, nervous, and tends to push up interest rate spreads.

We have seen the interest rate spread for the Argentine sovereign move from below that of Brazil at the beginning of the year to now 100 or 150 basis points higher. So it has been necessary to undertake these fiscal policy corrections.

The Fund just went through its periodic review of the Argentine program and we think that, in a difficult situation- and it needs to be admitted that this is a difficult situation-the Argentine authorities are managing quite well. It does need to be emphasized that there are a number of things that are happening that are improving the situation from a medium-term perspective. The inflation rate in Argentina is actually negative; wage inflation is even more negative; and the competitive position of the Argentine economy is improving gradually as a consequence of these developments and improvements in productivity.

So it is going to be a tough period now and for the next six months to a year, and there is really no constructive alternative but to fight through it. As the improvement in competitiveness comes more into being, these problems should gradually be ameliorated. But we are not anticipating a quick fix to this difficulty, nor do we think there is the basis for a kind of cumulative financial crisis. It is going to be a hard slog for the next few quarters.

Mr. Hacche: Thank you, Mr. Mussa.