Uri Dadush, Director of the International Trade Department, World Bank

Uri Dadush, a French citizen, is Director of the International Trade Department and of the Development Prospects Group at the World Bank. He is also Chairman of the Migration Working Group. In these capacities, Uri deals with the main aspects of international economic integration (trade, financial flows, commodities, migration and remittances, and technology diffusion) and their implications for developing countries.

In prior work, Uri was the Bank's Director of Economic Policy. He spent about half of his career in the private sector, where he worked for Mc Kinsey, DRI/Mc Graw-Hill, and the Economist group. From 1986 to 1992 he was President of the Economist Intelligence Unit.

Bruck Shewareged interviewed Dr. Dadush while he was here in Addis. Excerpts:  

What would be the impact of the current financial turmoil on the world economy, and specially on developing countries?

The financial turmoil is a serious problem which is having a significant effect particularly on US economy and to a lesser extent in Europe. It occurs against the background of exceptionally rapid growth in the world and in developing countries in particular.

Together with the more fundamental problems of housing crisis in the US and over construction in some other parts of the world, it helps explain a significant slowdown in world economy activity which we are observing today. The impact on developing countries so far has been really quite limited.

How come?

There are a number of reasons. First, developing countries have for the last I would say close to twenty years seen a gradual acceleration in their growth rate which is now twice as that in industrialized countries. This reflects improved fundamentals in the developing countries ie, better macro economy stability, much better integration into  the global market, greater reliance on the market and the private sector and much better financial management including less foreign debt and high reserves.

Another reason is that the source of the financial turmoil is not in the developing countries. It is initially in the US. The problem in the US sub-prime mortgage market has had spill-over effects on, particularly, Europe where many of the banks hold the securities.

Over the past several weeks, oil prices have remained above the hundred dollars mark. How long can the world economy, and developing countries in particular, sustain such a high price of oil?

One of the effects of the economic slowdown will be that we will see somewhat lower oil prices. They are not going to go back to the very low level several years ago. They will come down from current peaks, maybe twenty percent down. But they will still remain high by historical standards.
There was probably twenty years of under-investment in oil exploration or developments of oil fields. With the acceleration of world growth combined with under-investments in oil exploration can explain why prices are so high. On top of that, there is reason to believe that more and more of the resources of the oil reserve are concentrated in particular developing countries. So the decision of how much to produce and explore is very often a political decision. It isn't just a market decision alone.

But can oil importing developing countries like Ethiopia sustain their growth in the face of such big oil prices?

First point I want to make is that for developing countries, in total, high oil price is good because  developing countries, in total, are exporters of oil, like Nigeria, Gabon, Angola, Libya etc.

But they are in a minority compared to the whole developing countries?
There are many oil importing developing countries and high oil prices is a serious problem. In fact, developing countries are very often more affected by higher oil prices than industrialized countries not just because they are relatively poor countries and vulnerable to shocks, but also because many of them consume more oil as a share of GDP than the industrial countries. So it has more serious effect on oil importing developing countries.

But many of oil importing developing countries have had off-setting gains because they export commodities whose prices have increased significantly. I'm not sure what the case is for Ethiopia but I know that many countries in Africa have benefited from higher metal and agricultural commodities prices, for example. And  this has been enough to offset the adverse effect of high oil pieces.

What is the solution?

There are no easy solutions. One of the things that can help is to develop alternative sources of energy. For example, there is a lot of potential in Ethiopia for hydro-electric energy. The second thing to do is to avoid overly subsidizing energy for the consumers. I know this is a difficult message because consumers don't want to pay higher oil pieces. But the point is that if you subsidize energy that will have destabilizing effect on government finances on the one hand, and on the other, it reduces incentive on people to conserve energy.

How does higher food price play in the global market?

Many developing economies benefit from higher food prices because they export food. By and large the real income effect of higher food prices is much smaller on the food importers than oil prices are for oil importers because food takes the smaller part of imports. Most countries produce the food that they consume.

There are two serious effects of higher food prices, though. One is that because food in many developing countries is an important part of the basket that people consume, it can contribute to inflation. The inflationary effect of higher food prices can be significant because the domestic producers of food will adjust their prices to reflect what is happening in the international market.

The second serious effect is that while many poor producers benefit from higher food prices, there are also many segments of poor people who are badly hurt by high price.

For example, if you are a poor person living in Addis Ababa, living on very little and with no particular link to the countryside, the cost food to you is going to go up while your income will not. So it is going to have a very bad effect on segments of the poor. Well,  how do you deal with that?

Probably it is easier said than done. It is not easy to deal with. Probably the best way to deal with it is to try to find ways of compensating these people with cash transfers, with income support, and trying to avoid stopping exports of food or subsiding food prices because this will have many other bad effect.

Big economies subsidize agricultural products. President Bush signed into law an Act to subsidize US farmers in his first year in the White House. In EU countries, a single cow is subsidized by about two euros per day. So how on earth can the high food prices have positive effect on poor producers while their export potential is effectively blocked by protectionist measures in the big economies?

I have to mention two points first. First of all, it is not clear that subsidizing food in the industrialized countries actually makes this particular problem worse.  

My point is that the poor farmers may not benefit at all from food price increase. . .

First of all, the World Bank believes that these subsidies are very bad mistakes. In the end, these subsidies hurt poor people around the world. They need to be reduced, and we hope that one day subsidies are eliminated.
But also as a development economist, I need to tell you that the effects of subsidies in the North may very well be, at this point, to actually increase production in the world and keep prices lower, which does not, of course, justify subsidies.

What is the outlook for the developing economies?

We are quite optimistic

Despite the current financial turmoil?

We remain optimistic. We think that there is a good chance that developing countries will continue to grow. Their pace of growth will slow down. But they are going at fast rates despite the slowdown. So we are quite optimistic.

But if demand in the big economies slows down, wouldn't they be affected?

They will be affected. For example, we think that in our base-line scenario, we will see half or three quarters of percentage point less growth in the world in 2008 compared to 2007. And developing economies will also slow down by three quarters of percentage point. They will slow down from about 7 percent to a little above 6 percent of growth. And 6 percent is a very high growth rate by historical standards.

One of the things to bear in mind when you are examining what drives growth in developing countries is to look at the levels where they are.

A lot of developing countries are at incomes per capita which are one-tenth in the industrialized countries. Some of the poorest countries of the world are much less than that, say, one twentieth, one thirtieth.

A very important part of the reason that you have this gap is that technology in developing countries is at much lower level compared to industrialized countries. Technology is at the heart of modern economic growth.

But what we are observing is that once developing countries establish the fundamentals ie, peace, macro-economic stability, reliance on the market, openness etc. they typically will be absorbing technology at a very rapid rate. They are benefiting from this catching up. It is happening at different paces at different places. In countries like China and India, it is happening very rapidly. Ethiopia, in the last three or four years, is doing a lot of catching up.

I'm not aware whether the World Bank studied the effects of US- African Growth Opportunity Act (AGOA) or EU's Every thing But Arms (EBA) on African economies. But if your office conducted the study, what are your findings?

We have studied that. And AGOA has done more than the EBA. The main reason is that AGOA has had relatively liberal rules of origin. So it's been much easier to export garment, in particular, from African countries to the US.

 Lesotho, for example, is one of the big beneficiaries of AGOA. Although Lesotho is a tiny country, it has become the biggest exporter of garments to the United States.

EBA has done less well for the poor countries in Africa, in part, because of the rules of origin. Now these rules of origin have been revised in the EU in the Economic Partnership Agreements (EPA). One element of that is more liberal rules of origin in garments.

For some, it is ironic that oil rich Middle Eastern countries, for all their wealth, do not seem to have much effect on the global economy. Rather, Russia with less oil compared to these countries seemed to have a visible effect on its European neighbors. Why is that?

I think you may be over-estimating the effect of Russia on the European economies. Well some of them, former Soviet republics, I think, have seen some benefits from Russian oil. You see a lot of workers that moved to Russia that are sending back remittances. The Russians are also buying from their neighbors. So there is some positive effect from Russia. But it is not as large as you seem to suggest.

With respect to the Gulf countries, we have actually seen quite an important impact of how oil prices have performance in the rest of the Arab world economies. There are quite a strong connections there partly because workers from other Arab countries go there and send back remittances, and partly because people from the Gulf travel to Beirut, Cairo or other places, and partly because they increase their investments. So there is some effect from the Gulf as well as Russia.

But why isn't it bigger? The best answer I can give you is that it is a big world and these countries are a small part of the world.

Let's say, if you are a wealthy sovereign wealth fund, and you have hundreds of dollars to invest, where do you think you are going to put in your money? You would put most of your money in the big safe markets like the US and Europe. If you have to buy something with your oil money, you may buy something from Morocco, Yemen or Ethiopia. You will buy some. But you will buy a lot from Germany, the US and so on.

Is the current financial turmoil in the US mortage market going to get worse or better?  Some fear that with the world's biggest single economy, i.e, US economy in trouble, others could seriously be affected.

The US economy is not as important as some people think any more. Many people think that the whole world hinges  on the United States. If you take the imports of the whole developing countries, it is twice as much as that of the US. That's the first point.

The second point is because the developing countries like India and China are on a much faster growth path they have much more growth of import than the United States.

I just want to underline the fact that the dynamics of the world are no longer completely dominated by the United States.

You ask whether there is a very bad scenario where things could really go bad. The answer is yes. There is a very bad scenario. Financial markets, by nature, are volatile. They can go into euphoria and tailspins. The financial market can affect the economy, and vice versa. There is a possibility.

We don't think that is going to happen, though. We believe that is unlikely to happen because the fundamentals are strong. And the policymakers in the US have been reacting, short term interest rates have been reduced very significantly. That is going to help keep things in balance.