The world economy has defied predictions of a deep recession following the events of 11 September. However, with much still riding on the performance of the United States economy, a more balanced global growth path appears doubtful. A strong demand stimulus from all the major industrial countries is needed for the recovery to gain impetus and for developing countries to avoid difficulties in reaching their growth and development goals, argues UNCTAD´s Trade and Development Report 2002(1), released today.
Growth in the world economy slowed sharply in 2001, falling to 1.3% from 3.8% in 2000. Following the downturn in the United States, performance weakened in all the important economic regions in the developed world, and spillover effects on developing countries were stronger than in previous downturns. International trade played a major role in transmitting the slowdown in the industrial world to developing countries. After growing by 14% in 2000, export volumes for developing countries grew by less than 1% in 2001. For developing countries as a whole, growth was 2.1%, down from 5.4% the previous year.
Several emerging-market economies, notably in East Asia and Latin America, entered into recession. China and India resisted the downward pressure, with growth in the latter rising slightly above the 2000 figure. Africa remained stable, albeit at too low a growth rate. The sharp deceleration in the growth of trade wiped out most of the current account surplus attained by developing countries as a whole in 2000. And unlike the recession of the early 1990s, the relaxation of monetary policy in the advanced countries has not triggered a shift of capital to emerging markets. Indeed, the Report worries that the rise in the 1990s is looking like a one-off surge.
But despite the continued paucity of capital flows to emerging markets, which dropped further after 11 September, exchange rates have been fairly stable. The major exceptions were Argentina and Turkey; in the former, the end of the fixed-rate regime has been associated with a much broader economic crisis and a sharp currency devaluation. The Argentine experience stands as a warning against the use of simple rules in the search for lasting stability.
The concerted response from the world´s most important central banks since 11 September notwithstanding, only in the US has policy been consistently focused on limiting the impact of the slowdown on employment and real income. The Stability and Growth Pact of the Euro area has led to the pursuit of deficit targets with insufficient regard to the cyclical positions of the region, and monetary policy has not reacted aggressively. While a weak euro has helped maintain foreign demand, from a global perspective, economic policy in the Euro area has been restrictive. In Japan, hopes also seem to be pinned on a weaker currency igniting an export-led recovery. But according to the Report, a sustained recovery in both regions hinges on rising business and consumer confidence translating into higher investment and consumer spending; monetary policy alone is unlikely to give the required stimulus.
A good deal is hanging on the strength of the US recovery. So far, stronger-than-expected consumer spending, boosted by relatively buoyant labour market conditions and improving consumer confidence, has limited the drop in output and signalled a turnaround. However, for a strong and lasting recovery, consumer spending has to be sufficiently strong to convince producers that they need to increase investment. A high level of indebtedness of private households and a low-capacity utilization in industry may pose problems in this connection. Although there are concerns about a double-dip recession, a more likely outcome is that the US economy will stabilize at a low, but positive, rate of growth. That would have only limited knock-on effects for Europe and Japan, both of which are still dependent on an export-led upturn. Moreover, if the dollar remains strong at the same time as growth in Europe and Japan is sluggish, the current-account deficit of the US will widen even further, with the danger of heightened protectionist pressures in that country and a risk that a large eventual dollar devaluation may usher in a period of more generalized currency instability.
As a result of active policies to stimulate domestic demand, most Asian economies returned to positive growth in the last quarter of 2001. Some Latin American economies also showed signs of recovery towards the end of the year. However, growth in the industrial world must return quickly to 3% to allow for vigorous increases in employmentand income across the developing world. Reaching such an objective requires substantial increases in demand for developing-country exports, a major recovery in commodity prices and a strong increase in capital flows.
In a context of slow global growth, improved market access could provide a useful boost to activity in developing countries. At the WTO Ministerial Conference in Doha, the concerns of developing countries first raised in Seattle were acknowledged. The challenge now is to make the multilateral trading system more development-friendly. According to the Report, the outcome will be judged by the extent to which developing countries achieve greater market access without their policy options being unduly restricted. In the meantime, greater use of regional trade and financing mechanisms may provide some relief from external constraints and protection against financial instability. Nevertheless, many developing countries will continue to require substantial official financial support. Finance for development has achieved greater prominence after the Monterrey conference. But without coherence in and across economic, financial, trade and development issues, the promises of globalization will remain elusive.