Transcript

Transcript of a Press Briefing on the World Economic Outlook, by Kenneth Rogoff, Economic Counsellor and Director, Research Department, IMF

September 25, 2002

MR. HACCHE: Good morning and welcome to this press briefing on the IMF's latest report on the World Economic Outlook. And I'll note that for the first time the report is available in full-color glossy format in time for the press briefing thanks not only to technical progress but to the hard work of some IMF staff.

I am Graham Hacche, Deputy Director of External Relations at the IMF. To my right to answer your questions are: first, Kenneth Rogoff, Economic Counselor and Director of the Research Department; to Ken's right is David Robinson, Deputy Director of the Research Department; and to David's right is Tamim Bayoumi, Chief of the World Economic Studies Division.

Before turning to Mr. Rogoff for his introductory remarks, let me remind you of a couple of other press events. This afternoon at 2 o'clock the staff of the IMF's Independent Evaluation Office will be giving a briefing here on their first report, which is on the prolonged use of IMF resources, and also tomorrow morning at 9 o'clock, the Managing Director will give his press conference ahead of the Annual Meetings. I will now turn to Mr. Rogoff for his opening remarks before asking for your questions. Ken?

MR. ROGOFF: Ladies and gentlemen, greetings. I'm here today with my colleagues David Robinson and Tamim Bayoumi to present the latest issue of the IMF's World Economic Outlook: Prospects and Policy Issues.

Although our baseline is still for a global recovery, it's likely to be less strong than we had earlier anticipated. Our projection for 2002 global growth is 2.6 percent—2.8 percent, excuse me, exactly the same as we had last April. For 2003, however, our global estimate has been marked down to 3.7 percent, three-tenths of a percent lower than we thought five months ago. This is against a background of a sell-off in global equity markets, a decline in investor risk appetite, softer than expected indicators of activity for the past few months, further turmoil in parts of Latin America, and heightened risk of uncertainty and conflict.

While perhaps disappointing, 3.7 percent is near the potential growth rate for the global economy and far above the 2.2 percent reached in 2001. Our expectations of a recovery are based on the still substantial monetary stimulus in the pipeline and a continuing inventory rebound.

Importantly, despite the slow recovery, we still read the evidence as supportive of the view that the productivity boom resulting from the tech revolution is real.

World trade growth of only 2.2 percent this year represents a setback in the pace of global economic integration, far below the heady days of 12.6 percent growth in 2000. Still, for 2003, we project trade growth to return to a more normal level of 6.1 percent.

A week ago, we released the analytic background chapters to the World Economic Outlook which featured in-depth analyses of goods and capital markets as well as an analysis of sustainability—or, should I say, unsustainability—of the present constellation of global current account imbalances. Also included were essays on the cost of agricultural protection and financial market vulnerabilities in emerging markets.

World inflation is projected at a modern-era low of 1.4 percent in 2002 for the industrialized countries and 1.7 percent in 2003. Taking into account various technical factors, this is virtually the moral equivalent of zero inflation.

Whereas we do not think it likely that the kind of deflation Japan has experienced will be widespread and the baseline is for inflation, positive inflation, in most countries, the risks are more balanced than at any time in recent memory. However, to quote the great American novelist Mark Twain, rumors of the death of inflation are greatly exaggerated, and the world central banks need to remain vigilant to the possibility of a steady, slow increase in inflation over the coming years. For developing countries, inflation is projected at 5.6 percent in 2002 and 6 percent in 2003, higher than in the industrialized countries, but still reasonably low.

Turning to regional growth projections, growth in the United States is projected at 2.2 percent in 2002 and 2.6 percent in 2003, with the latter being at the low end of market expectations. We note the still low level of consumer sentiment, the sharp drop in equity prices, uncertainty over conflagration in the Middle East, and still weak evidence of an eventual recovery in business fixed investment. We agree with the Federal Reserve's current policy stance that indicates a bias towards easing. On fiscal policy, medium-term budget consolidation should now be the central goal, a prescription that increasingly applies across much of the globe, as even countries with relatively strong fiscal positions have seen them weaken during the course of the recent downturn.

For the euro area, our forecast is for growth of 0.9 percent in 2002 and 2.3 percent in 2003. The main short-term concern in Europe is that domestic demand is extremely weak and insufficient to fuel the recovery. Europe has enormous potential for growth and, in fact, the phenomenon of the U.S. having higher productivity growth is a relatively recent one post-1995, as we look at in the World Economic Outlook.

However, as long as Europe fails to adequately reinvigorate its inflexible labor markets and better prepare to deal with the consequences of its rapidly aging population, its growth rate will likely continue to lag. From a global perspective, especially with respect to reducing risk to global current account imbalances, faster growth in Europe would be highly desirable.

Right now, the slowest-growing major economy is Japan where growth is projected at minus 0.5 percent for 2002 and plus 1.1 percent for 2003. Japan appears to be emerging from its third recession in a decade. However, there is no guarantee against another similarly bad decade, absent a determined effort to address the nation's core economic problems, the need for profound bank and corporate restructuring, together with decisive steps to finally end a historic period of deflation unprecedented among industrialized countries since World War II. To reinvigorate the Japanese economy on a lasting basis, banks' loan portfolios need to be cleaned up quickly and fully, and corporate reforms need to pick up a pace, and more aggressive monetary easing to deal with the problem of deflation is still needed.

Growth in developing countries is expected to recover to 4.2 percent this year and to 5.2 percent next year. Clearly, these projections, especially the one for next year, rest on continuing recovery in the industrial countries, and slower than anticipated growth in the major economies would dampen prospects for developing countries.

Downside risks are greatest in Latin America where financial markets have been rocked by political developments and renewed concerns about longstanding macroeconomic vulnerabilities. The persisting economic difficulties in most countries in the region and their continuing vulnerability to external financial crisis underscores at least one basic fact: that there is no elixir that, if applied, will easily restore its sustained high growth.

At the same time, important lessons can also be drawn. Developing sound institutions helps economic performance. Weak institutions dampen it. Also, openness to trade is important for long-term growth.

Financial integration is also important, not least to support trade, but there are nuances. Foreign direct investment and portfolio flows are unambiguously beneficial for growth. Debt-creating capital inflows, however, particularly those of a short-term nature, can increase an economy's vulnerability to financial crisis. Indeed, experience over the past decade with surges and sudden stops in short-term capital flows suggests that a rethink of what constitutes prudent debt levels may be in order.

Overall, we are cautiously optimistic about a global recovery, with the emphasis on caution.

Finally, a word to the protesters who will soon be lining our streets, we pray, in peace. We recognize your idealism and your passion for a fairer and more just world. If you care to listen, you will probably find that we share some of your ideas about improving the process of globalization. You might even find that you share some of ours, such as the need for finding a dramatically better way of helping countries resolve unsustainable debt burdens.

At the same time, one must also acknowledge that anarchy does not breed prosperity, nor does a retreat into statism and autarchy. Surely, the experience of the last century should have shattered that illusion. Excessive economic isolationism and state intervention imply poverty for the masses and privilege for the few. The process of globalization needs to be strengthened, its benefits broadened, but it should not be reversed.

And now we will take your questions on the World Economic Outlook.

QUESTIONER: Good morning. Mr. Rogoff, two questions, one on Germany and Europe and the other on Argentina.

On Germany, you stated, along with the rest of Europe, that clearly labor market reforms and pension reform are key, not news to Europe, that statement. European markets have collapsed since the narrow Schroeder victory because everyone in Europe in the private sector and in the stock markets is convinced that Schroeder's victory means there will be no structural reforms; there will be only rhetoric and no action as long as Schroeder is in power in this situation.

So, given that circumstance, why should anyone have any hope that Germany will act to take any real action when it's considered nonsense in Europe that there would be any action by a weak Schroeder government that has gone to the far left? Question one.

Question two, Argentina. Last night we saw Economy Minister Lavagna in a public spat with the IMF, with the IMF and Mr. Lavagna exchanging—the IMF being more diplomatic than Mr. Lavagna, but Mr. Lavagna clearly stating, "We will default on our obligations to the IMF and the World Bank and other institutions within the next"—November, I believe—"unless you give us the money now," and the IMF, through Mr. Köhler and others, saying, "You know you're supposed to reform your provinces." The same story. How do you react to an Argentina that is openly defying the IMF?

MR. ROGOFF: Let me start with your question about Germany. Clearly, Germany's growth has been weak, domestic demand has been weak, and there are concerns about whether its recovery will be self-sustaining, and these are expressed in the WEO. And at the same time, it's also clear that over the longer term there are many actions needed to sustain stronger growth: having more flexible labor markets, more possibility for differentiation of wages across regions. The problem of the aging population with its concomitant higher tax burdens will raise the burden of taxes, thereby also potentially lowering growth. And, simply put, these are problems that need to be dealt with, and I think people in Germany recognize that. In our dialogue with the German authorities, that is recognized, and I am sure it will continue to be.

And then your second question on Argentina. Clearly, Argentina is in the midst of an unprecedented and tragic crisis. By the end of this year, its GDP will have fallen by—over the past four years by roughly 20 percent, twice the fall during the Great Depression. And all I can say in answer to your other question is the IMF is actively engaged with authorities in trying to put together a sustainable program for Argentina to help Argentina get back on its feet, and the key elements that will make it sustainable are well known. They include finding a monetary anchor, finding a transparent and uniform way to deal with the banking sector problem, and a fiscal framework that achieves sustainability in the medium term, and that continues to be our position.

QUESTIONER: In relation to Brazil, the real has declined in value sharply against the dollar, mostly in the last week. I'd like to have your reading on that. The report says that after the package agreed with Brazil, the markets had found some stability, and I would like to know, number one, what you see as a result of this depreciation; and, number two, if you can go to that, what will be the cause of this sharp depreciation of the real?

MR. ROGOFF: Well, clearly, overall, markets believe that there are heightened risks. I mean, looking forward, clearly the policy priority in Brazil over the long term is to reduce its debt burden, and the authorities need to focus on fiscal adjustment and structural reforms to broaden sources of growth. These include fiscal reforms, potentially opening to trade, which is—more to trade, which is something we picked up in the last World Economic Outlook.

But over the medium term, it is essential that the debt burden gradually be brought down, and there are several elements of achieving this. One way to do it is through—of course, through fiscal—a strong fiscal program as Brazil has adopted, and this certainly requires a great deal of social and political consensus, and it's certainly not easy because the high debt burden itself generates high interest rates. Another important element, a second important element certainly is achieving sustained growth to help bring down the debt-to-GDP ratios.

QUESTIONER: Dr. Rogoff, I'm wondering, why do you think the IMF should be in the business of forecasting, of doing the types of things that are in Chapter 1? That's a serious question. I mean, you mentioned that you share the goal of the protesters helping countries—finding a dramatic way of helping countries resolve unsustainable debt burdens. Why shouldn't your economists be spending more time on those types of things, given the plethora of forecasters there are? Goldman Sachs, all the investment banks on Wall Street, other international organizations do forecasting. Why do you think the IMF should be doing, not just once but twice a year?

And my second question is: In the WEO you say that the overvaluation of the dollar has not yet been corrected. I'm wondering where you see fair value for the dollar against the euro and the yen.

MR. ROGOFF: I think our role in giving these forecasts twice a year is an essential part of our surveillance and policy advice. We need to have forecasts of what's going on in the global economy for many reasons.

First of all, our membership, including not just the industrialized countries but the developing countries, need to rely on having forecasts for policy purposes, and we bring a global view to it that you don't see from many other places. And I might add, we're not selling stocks. We just try to give an objective assessment of what we think growth is. And I'm not saying everyone else doesn't, but we have somewhat different incentives.

We also need them in our advice to industrialized countries in terms of what policies they should follow and having a collaborative approach towards dealing with the global economy. These forecasts, if we didn't give them to the public, we would be working just as hard because our membership needs them for virtually every issue we address. In interests of transparency, since we're going through this process and we're thinking about these forecasts, we, of course, want to share them with the world.

In answer to your second question, I'm not going to try to say where the dollar is going to go in the short term because I firmly believe that that's extremely difficult to predict. But certainly we do see the need for an adjustment in global current account imbalances with the deficit countries, where the United States is the largest but by no means the only one, many of them having been in sustained deficit for a while; and, conversely, many of the surplus countries having been in sustained surplus. And if there is an adjustment in this, which almost certainly will take place at some point over the medium term, that will likely bring about some changes in exchange rates, relatively mild and gradual adjustment if the current account adjustment is mild. On the other hand, if the current account reversals are quick, the exchange rate changes could be much sharper and more severe.

I want to see if Tamim Bayoumi wanted to add anything on the current account issue to what I just said.

MR. BAYOUMI: I would mention that there is an essay in Chapter 2 in this very issue, and that I think outlines our views about why in the medium term we still believe the dollar is overvalued.

QUESTIONER: Mr. Rogoff, in your list of suggested actions for the Japanese authorities to take, I note you didn't include going into the equity markets and buying up stocks. I wonder if you've got any comment on the recent announcement by the Bank of Japan.

MR. ROGOFF: Well, first of all, I don't think we have adequate information to really give a firm assessment. I will say that I think the Bank of Japan's actions at least deserve some credit for showing a willingness to think outside the box.

Of course, given that, it's not clear to me that the Bank of Japan's actions standing in isolation will be sufficient to address what we see as the two major problems in Japan, which is the ongoing deflation and the need to deal decisively with banking and corporate restructuring.

I might add that there has been a lot of contention about the extent of the loan problem, the bad loan problem or so-called NPL problem in Japan, and many outside analysts, including the Fund, have questioned the official figures, suggesting that perhaps the true nature of the NPL problem is greater than they suggest. The IMF, of course, has a financial sector services assessment, an FSAP, ongoing and coming soon in Japan. But we also note that the Bank of Japan is engaged in its own review of the NPL problem, and we welcome that.

QUESTIONER: I was wondering how you did the focus for Argentina? If you took into account a default with the multilaterals or not?

MR. ROGOFF: Our forecasts for Argentina certainly reflect many risks in the global economy and its neighbors in Latin America. Clearly, it's very difficult, as we noted last time, to do forecasts in such an unusual environment. We didn't do it this time, but last time we actually included a band around our forecasts for Argentina which was highly unusual, but we did our forecasts in a normal way.

I'm going to see if David Robinson wants to add anything to what I've said.

MR. ROBINSON: No, I think that's basically right, Ken. We are not assuming any really abnormal events such as that.

QUESTIONER: Mr. Rogoff, you explained to the previous question the necessity for forecasting on behalf of the Fund in developing this WEO, this World Outlook, and over the last two to three years, Latin America has really dominated in terms of the crisis that you have often cited, but what about the developing countries, particularly Africa, sub-Sahara Africa? It's an issue that never seems to reach the table. It didn't seem to get any public discussion, but very extensively within the WEO treatise or the booklet, it's talked about, and it's talked about in different areas of sustainability and the different areas that are in crisis.

So, could you give us what the short-term concerns are for Africa, reemphasize for us, as well, Latin America, and the last question is does there seem to be a formula of rebellion? When the uprisings occur in Latin America, it becomes a crisis, it becomes news, and it's often shared, and the outlook is always talked about. But what about sub-Sahara Africa? What about the Caribbean? We don't hear this, but they have some of the same problems, a little more extensive, but we never hear it focused on, and I wanted to get your views on that, and what are those short-term concerns in Africa?

MR. ROGOFF: Well, I first want to say we at the IMF spent an enormous amount of time on issues related to Africa. The Managing Director has gone there, I think, three times now, more than to any other region, outside his home country, Germany. I just went in May to give a presentation of the World Economic Outlook where we adapted it especially to Africa. It was the first time that the World Economic Outlook had been presented in Africa, I acknowledge.

However, we are planning to do it on a more regular basis and hope to do so again, soon. So certainly the issues of Africa are enormously important to our work at the Fund. I can't speak to press coverage or how the press chooses to cover it, but if you look at our home page and look at how many issues about Africa and speeches about Africa and poverty, look at our publications, look at Finance and Development, which is an IMF publication that draws on a lot of IMF research and people.

There are whole issues devoted to poverty in Africa. In our research department, we just started a new division, devoted to looking at problems of poverty, particularly in Africa, and this is a much broader issue in the Fund. So I mean I wouldn't agree with the representation that it doesn't.

QUESTIONER: I wasn't talking about the press aspect. I'm talking about you not representing this here on the panel. Every year we come here. We don't hear it said, and that's what I'm saying. The other question was the short-term concern, short-term concerns for Africa?

MR. ROGOFF: Well, I mean I've only been here a year, so I can't say what you hear year after year, although I've looked over the World Economic Outlook coverage, but I believe it's been very significant.

You know certainly we're encouraged by some developments in Africa. Certainly, the reduction in conflict has been important. There are many countries that have lower inflation. And actually, during the downturn, growth in Africa was stronger than in many other regions, but it still needs to be much stronger in order to achieve a sustained reduction in poverty.

Maybe I'll turn it over to Tamim Bayoumi to see a little more.

MR. BAYOUMI: Thank you, Ken. Yes. I think if one looks at the short-term issues, one of the encouraging things has been the move towards macroeconomic stability at the same time, and there are conflicts, although they have been reducing. Of course, the other big issue in Africa at this point is the drought in southern Africa, and in particular, this is not only related to the weather, but also to lots of issues in specific countries.

And so it's been a combination both of the weather and of government policies, but this is obviously an area where the international community as well as Africa itself needs to be involved.

Finally, I'd mention that, of course, a very encouraging move in Africa has been the new NEPAD initiative, which is an initiative where the African governments have got together and pushed a really domestically-based program with structural reforms, and we're very, very pleased about this, and we think that this is a very good basis to move forward.

QUESTIONER: Two questions. First, what would the impact be of a war against Iraq on your forecast? And secondly, you mentioned that you think central banks should be vigilant towards the risks of inflation. Do you think they should be equally vigilant or more vigilant towards the risks of deflation, particularly in the industrial world?

MR. ROGOFF: Let me go in reverse to your questions. We addressed this in the last World Economic Outlook, and certainly concluded that there is an asymmetry between the costs of deflation and the costs of inflation, and it stems from many factors, one of which is that it's more wages and prices are not downwardly flexible in many countries. Also, from the fact that monetary policy is more difficult to navigate in a deflation. So it certainly is something that the monetary authorities need to be attentive to.

That said, it is not an insurmountable problem. When interest rates go to zero, you can still have negative real interest rates by generating inflation. You can engage in quantitative easing, as the IMF has forcefully recommended for some time for the Bank of Japan as one approach.

Let me turn to your first question. We certainly list a number of downside risks in our global outlook, and uncertainty, the possibility of conflagration, for example, in the Middle East, is certainly one of those risks, although certainly terrorism is also something we've worried about more since we had the tragic events of September 11 last year.

But it's very difficult for us to evaluate the impact, because we don't have all the information. Wars are fundamentally not a decision about economics. We do know that during the Gulf War, oil prices spiked, and again in our World Economic Outlook, we show that a rise in oil prices of $15, if sustained for a year, would lead to a fall in global output of about one percent, although that does not take into account effects on consumer and business confidence.

I'll add that we do see a great deal of uncertainty in the global outlook at this part, uncertainty over when business fixed investment will pick up. There's been the drop in equity prices. There's heightened risk aversion and uncertainty over conflagration interacts with these risks, and potentially magnifies them. So it's certainly a serious issue, and also clearly steps to bring a greater degree of global peace would be a very good thing for the world economy.

QUESTIONER: I have a question, Mr. Rogoff, on the policy-mix in euro land? On the one side, you have a monetary policy which is expansive in the definition of ECB with money supply figures above value and so on. On the other side, you have an output gap and the fiscal policy. Today's European Commission reported that stability goals can be delayed from 2004 to 2006. Does this mean that the fiscal policy is and can be expansive over Stability Pact.

What is your conclusion about policy-mix now and for the foreseeable future for the ECB and the fiscal policies in the euro land?

MR. ROGOFF: Okay. That's a big question. Let me start with the ECB. Certainly, as we say in the report, we view that there should be a bias towards easing in the ECB's policy, and that reflects our belief that the risks are tilted to the downside.

That said, if you also look at our report and look at how strong productivity growth was in Europe, higher than that in the United States, up through 1995, and how it's become weaker over the last seven years, not fully exploiting the tech revolution, the question stands how can Europe grow more strongly going forward?

The ECB plays an important role, but there are limits to how much monetary policy can do on a sustained basis in combating long-term growth problems. To use an analogy, you can have a car with a weak engine, and you can make it run better by putting in better gasoline, but in the long term, you need to fix the engine if you want it to run better.

Turning to fiscal policy, we view the Growth and Stability Pact as having played a valuable role and continuing to play a valuable role in controlling budget deficits in Europe. That said, we think the emphasis over the longer term should be looking at the structural balance rather than necessarily focusing on the nominal balance. That's what is really important.

But that said, going forward, Europe has problems of dealing with its aging population. Europe has inflexible labor markets which are not allowing it to enjoy the benefits of the tech revolution. There is enormous potential for growth in Europe that needs to be unlocked and maybe not to put too fine a point on it, but over the coming decade Europe needs to decide whether it's going to be a locomotive in the world economy or a caboose.

QUESTIONER: Last week you told us to repeat this question today. And that's why I come. The problem in Mexico is we have a mix in monetary and fiscal policy coming through and maybe linked to the—no, not maybe—surely linked to the U.S. business cycle.

But what's happened in just a few weeks or a few days ago, we experimented, a very huge devaluation, just thinking about three years before, and we know Latin America in general, its increasing risk aversion, especially Brazil, but there is some kind of contamination in the investment grade sovereigns, even in Europe or in Asia. What's going on in emerging markets? Is there a confronting credit crunch possibility?

MR. ROGOFF: Yes, first of all, we don't see a credit crunch yet in the sense that their markets are drying up. Markets remain generally liquid, although in some case the spreads are high, but focusing on what I'm sure is your concern is Mexico, that thus far the contagion has been rather limited. There has been some depreciation in the peso, but on the other hand, the peso had appreciated quite a bit before, so I don't know that that's overly a concern.

Mexico has had a strong record of policy performance, and I think that's recognized in its investment grade status. It's something that will stand it well in the future, and clearly it needs to stick with what it's been doing, but strengthen what structural reforms it's engaged in.

David, is that something you want to add to?

MR. ROBINSON: I just have one brief remark. I mean as Ken said, I think that the very strong policy framework in Mexico has been a big plus. One aspect, of course, is the inflation targeting system, and another aspect is on the fiscal side. Here the authorities have a sensible target, I think, under the Pronafide Plan of moving the deficit down by 2006, and I think doing that and being seen to do that will be one of the important things that will maintain confidence in markets.

I think the authority has done a good job that way. Over the next few years, in order to get to that target, one of the key things will be to build on the tax reforms that were started earlier this year and to strengthen them. That will be an important policy action, working with the Congress, of course. Thank you.

QUESTIONER: I want to come back to the subject of Brazil. A few days ago, the Deputy Managing Director said that after the election, she expected the situation to calm down there once the uncertainty was resolved. But since that time, the markets have deteriorated rather markedly, and if anything the markets seem to be delivering the verdict that the uncertainty has been resolved.

They think Lula will win, and they expect the country to default. Now, my question is it reasonable given what's happen to expect markets to settle down after the election, and is not some sort of self-fulfilling prophecy happening here that's being forced on Brazil by the markets, and what does that say about the effectiveness of Fund programs in this sort of situation, traditional Fund programs where all you do is throw money at the country and lay down a bunch of conditions?

MR. ROGOFF: At this time I don't have a lot to add to what the First Deputy Managing Director said, and clearly we'll know more after the election than we know now. I think, I can only repeat that over the medium-term it's very important to bring down Brazil's debt/GDP ratio, and that there are several ways to do this.

One element in reducing its debt burden is to generate fiscal surpluses and use the extra cash to pay down debt. This is a painful undertaking, especially since interest rates are high, precisely because the debt is so high. And also that such an undertaking requires a great deal of social consensus and political support. And another supporting element of a strategy would be to include deep structural reforms to boost growth so that the economy can grow out of its debt problems.

QUESTIONER: I would like to have the outlook for Eastern Europe, especially for Slovakia after the elections, and what I would like to know is how long should the war in Iraq last that it should influence the economy, and wouldn't to take to the recession?

MR. ROGOFF: Dave, did you want to take that? Tam. I'm sorry. Tam.

MR. BAYOUMI: Yes. Well, in Eastern Europe in general—I'm not going to discuss Slovakia in detail—but in EU accession candidates, growth has been relatively well maintained over the slowdown, and growth in this year is likely to be similar to that of last year before accelerating a little or not.

If you're looking around the region, Poland remains rather weaker than the rest of the region. The main needs for the region are for fiscal restraint and supportive structural measures to increase the attractiveness of EU accession, where some very important decisions will be made in the coming months.

Of course, in the Czech Republic, there is the issue of the floods which have had quite a significant impact. The costs are estimated to be four percent of GDP. However, as with many natural disasters, the impact on growth is going to be minimal. That is because although you have disruption due to the floods, you also have reconstruction, and in a flow sense, GDP is not much affected. On the other hand, of course, there is still a loss in wealth.

QUESTIONER: What about the second question, the duration of a war in Iraq?

MR. ROGOFF: I'm not sure we have anything to add to what I said earlier about it.

QUESTIONER: Just a point you've already touched on, if you could just narrow it down to the Middle East. First of all, if you could talk a little bit about the prospects in Middle East and North Africa, and could you talk about the prospects in light of the current crisis? If there is a war and oil markets start to act funny, how do you see those prospects for the Middle East and North Africa? Thank you.

MR. ROGOFF: Well, I noted that it's extremely difficult to do any kind of economic forecasting under that scenario, and that the only easy thing we can point out is that there would likely be a rise in oil prices, and we can try to analyze that.

More specifically, on the Middle East, I don't know if, Tam, you wanted to just say what the forecast was?

MR. BAYOUMI: Yes, well, I mean the forecast for the Middle East is for growth to be reasonably well maintained. It's gone down in some major countries due to cuts in OPEC production quotas, but, of course, activity will be supported by higher oil prices.

Obviously, the regional security situation is very important for the region, as it has been up until now, although a rather different form of security uncertainties. But it's probably not very useful to speculate on what a war in Iraq would do since the uncertainties about how that outcome would occur is just too large to make it useful.

QUESTIONER: I have a rather complex question. In my view, we might want to scale back our expectations for the growth this year, because it seems to me that the world is really rejecting IMF policy in general. You know you have Argentina which is collapsing and perhaps collapsed. Brazil, Lula is gaining ground there and openly describing the IMF policies as a mistake and misguided. And, of course, Japanese politicians and German politicians refuse to really accept your advice.

And, of course, the Middle East war, the prospect of the Middle East war, could spike oil prices up. So this to me seems like we've got some rather, well, to put it mildly, a rather dangerous situation, and I don't see anybody here today discussing this with the degree of frankness I would like to see.

MR. ROGOFF: Well, I can't tell if you're agreeing with our forecasts or disagreeing with our forecasts, because we give our baseline forecast, which incorporates many of these issues, and we emphasize downside risks, and the downside risks include potentially slower growth in Japan and Germany as being an issue, something we're concerned about. They include the possibility of turmoil, the turmoil in emerging markets and its systemic implications.

They include that we're concerned about heightened risk of conflagration in the Middle East. That's, you know, central to our presentation of our forecasts. I mean I'm not sure, you know, how frank you want us to get, but we go over in the publication if you read it, and I apologize if I didn't emphasize it enough in what probably most of you thought was an already long opening remark, but we certainly view the downside risks as serious.

I want to say, there is not a total absence of upside risk in the global economy, and in particular, not just based on what we see in short-term data, but looking at long-term data, many other studies. We really do see supporting evidence of the productivity boom, so that long-term growth trends, not just in industrialized countries, but eventually transmitting to the developing world, probably are quite positive.

I mean one small way this is reflected is our forecast for the United States, which as I said, is somewhat below consensus, has a somewhat higher unemployment rate for 2003. I think we have 6.3 percent precisely because we believe the potential growth rate of the economy is continuing to rise.

QUESTIONER: You said before you agree with the assessment of the Federal Reserve in relationship with the American economy. My question would be so what? I mean could you elaborate a little bit more, the risk of double dip and so? Thank you.

MR. ROGOFF: Sure. We certainly see risk to the downside in the economy, and certainly compared to the last consensus forecast, we're a bit lower. So, for example, that would have implications, if you're forecasting the federal funds rate based on the consensus forecast as opposed to ours. We would think there to be somewhat higher chance of a rate cut than one otherwise would say.

I can't say if that means that that's necessarily true about the federal funds futures, because they're based not necessarily on the consensus forecast, and they're not so far out of line with what we see as some downside possibility that there be a need for a rate cut.

But that said, I think that the baseline that we have, while it's not vibrant growth—it's tepid growth—it is growth. And so having an action of sort of waiting in order to get more information seems quite reasonable to us.

MR. HACCHE: Thank you. And thank you all very much for coming.

[Whereupon, at 10:00 a.m., the press conference was concluded.]