Growth in the world economy this year will again continue to be too slow to make a significant dent in poverty in the South and unemployment in the North, UNCTAD forecasts in its annual Trade and Development Report 1997(1) (216 pages). Despite success in reducing inflation almost everywhere, expectations of faster growth have so far not been fulfilled. Since 1990, the world economy has been growing slower than in the previous decade, and the outlook is for a continuation of slow growth. Meanwhile, global trade imbalances similar to those of the 1980s have reappeared.
Output growth picked up slightly in 1996, reaching 2.8 per cent. The improvement was achieved despite a sharp reduction in the growth of world trade (from 8.5 per cent in 1995 to 4 per cent in 1996). Developing countries again led the way, posting an overall growth rate of 5.6 per cent.
The slight acceleration over the 2.4 per cent figure achieved in 1995 was largely due to recoveries in Japan and Latin America. However, these were partly offset by slower growth in Asia and in the European Union. Prospects for 1997 suggest little change in performance in either developed or developing countries.
Growth in the South - sufficient and sustainable?
Despite somewhat slower growth, to 6.9 per cent compared with 7.3 per cent in 1995, Asia continued to perform well in 1996. Although little change is expected for the region in 1997, restrictive policies intended to safeguard external balances in a number of these countries have introduced an element of uncertainty into short-term regional prospects.
Growth was affected last year by a sharp drop in exports from the first-tier newly industrialized economies (NIEs) (Hong Kong Special Administrative Region of China, Republic of Korea, Singapore and Taiwan Province of China), as well as from Malaysia, Thailand and China. In some countries, export expansion has been difficult to sustain now that the relatively easy stages of labour-intensive production for export have been completed. To maintain momentum, technological upgrading and productivity growth are now required.
China, which continued to grow at an impressive rate of close to 10 per cent, is expected to sustain high rates of growth in 1997. It appears headed for a soft landing, as inflation has been brought down to a single-digit rate. This should allow policy-makers to focus attention on structural economic deficiencies in agriculture and infrastructure.
Unlike East and South-East Asia, West Asia saw faster growth in 1996, largely due to favourable movements in oil prices. Growth also remained robust in South Asia.
The economic recovery continued in Africa in 1996. It also became more widespread, extending to a number of least developed countries. At 3.9 per cent, the overall growth rate was the second fastest in the world economy, lagging only behind Asia. And the trend is expected to continue in 1997.
In 11 countries, growth reached, or surpassed, 6 per cent and, in a further 28, it ranged from 3 to 6 per cent. This should be seen against the target of an average real growth rate of at least 6 per cent per annum for the decade, set in 1991 by the United Nations in its New Agenda for the Development of Africa (UN-NADAF). Helped by favourable commodity price movements, strong agricultural growth -- at 5.2 per cent in 1996 -- led the way. Spirited industrial growth, meanwhile, helped a number of North African countries to build up momentum last year.
Latin America has recovered from the depressed conditions of the post-Mexican crisis, but its growth remained at a modest 3.3 per cent in 1996. Output growth is expected to accelerate further in 1997.
The Latin American recovery has primarily been due to the upturn in Argentina and Mexico, in both cases driven by strong export growth. Elsewhere in the region (notably in Brazil, Costa Rica, Paraguay, Peru) trade has also played an important role, on account of both unilateral trade liberalization and the strengthening of regional trade.
However, in many countries the recovery has sucked in imports at an even faster pace than in 1995; the growth of import volume for the region in 1996 was 9.5 per cent, almost double that in the previous year. As a consequence, the region´s dependence on capital inflows is unabated. Reconciling external equilibrium and competitive exchange rates with growth and price stability still remains the main challenge for most Latin American countries, UNCTAD says.
Improvements in overall economic performance have thus been recorded in many parts of the developing world. But the verdict over whether more sustained growth will take hold remains unclear. Vulnerability to swings in capital flows remains high in a number of countries with large external deficits. Moreover, UNCTAD argues that, for many developing countries, a speedy and flexible implementation of the IMF/World Bank Debt Initiative for Highly Indebted Poor Countries could play a significant role in ensuring sustainable growth. "One of the lessons of the debt crisis of the 1980s", it warns, "is that muddling through raises costs to both debtors and creditors".
Uncertainty in Central and Eastern Europe
Inflation has been contained in most of the transition economies. But while some have enjoyed recoveries in recent years, others are still searching for economic stability and balance. For the near future, monetary and fiscal austerity is likely to keep a tight lid on growth prospects in most transition economies.
In Central and Eastern Europe, the strong growth performance in 1995 has not been carried over to 1996, dropping back 1.6 percentage points to 4 per cent per annum. Despite quite fast growth in 1996, prospects in the Czech Republic have dimmed, given its serious external imbalances and dependence on capital inflows. Economic conditions worsened considerably in Romania and Bulgaria. Contrary to earlier expectations, output continued to decline in the Ukraine and the Russian Federation. Poland, by contrast, continued its strong growth performance in 1996, becoming the first transitional economy to exceed its 1989 output level.
United States continues to expand, but restrictive fiscal policies dampen growth in Europe
The United States posted almost inflation-free growth in 1996 (2.5 per cent) for the sixth consecutive year, adding 12 million jobs to the economy since 1992 and helping to reduce the fiscal deficit to around 1.5 per cent of GDP. Contrary to many predictions, prices remained stable, even as unemployment dipped below 5 per cent in early 1997. This performance lends support to the proposal made in UNCTAD´s Trade and Development Report 1995 that, in order to help solve the unemployment problem, central banks in the industrialized world must test their assumptions about potential growth rates and levels of employment compatible with stable inflation. "The Federal Reserve appears to be showing such a willingness", UNCTAD says in its 1997 Report.
Despite its strong performance relative to other countries in the North, the United States average growth rate during the decade remains below that achieved in the 1980s. Moreover, until this year, average wages fell in almost every year of the recovery. Productivity gains have been captured by profits which have reached levels unseen since the 1960s.
Prospects for Western Europe are currently surrounded by uncertainty. The average growth rate again fell in 1996, to 1.5 per cent. Of the larger economies, only the United Kingdom maintained respectable growth although at a somewhat slower pace than in 1995. In some other countries, slow growth and high unemployment have remained a problem. Current restrictive fiscal policies to achieve the targets set for the third phase of European Monetary Union render difficult the adoption of counter-cyclical policies capable of stimulating growth and fighting unemployment.
UNCTAD considers that there is room for flexibility. Monetary and exchange rate stability has already been achieved. However, although the fiscal targets are not being met, prolonging the debate over these targets is provoking volatility in financial and currency markets, further hindering recovery.
Governments in the European Union are increasingly confronted by a major challenge: reconciling growth and employment with the achievement of fiscal targets. As UNCTAD has previously argued (in its Trade and Development Report 1994), perhaps the best solution is to cut the Gordian knot of fiscal convergence and to proceed directly to monetary union as soon as possible.
Strong export growth reinforced by a budget stimulus made Japan the fastest growing member of the G7 last year. Along with the investment recovery which began in 1995, these forces led to an overall expansion of 3.5 per cent. However, Japanese profits and investment remain too centred on exports, and are thus subject to the behaviour of the exchange rate, which creates some uncertainty regarding the sustainability of the recovery.
The risks of global imbalances for developing countries
Disparities in demand growth among the major industrial countries lie behind a growing trade deficit in the United States and growing surpluses in Western Europe and Japan. The burden of adjustment, UNCTAD says, must be borne by surplus countries; Europe and Japan should therefore expand demand if there is to be a return to a more sustainable pattern of global demand and trade balances.
Unless the upward pressure to the dollar can be eased, trade imbalances will worsen, UNCTAD warns, increasing the danger of trade frictions. For developing countries, the consequences of a combination of such frictions, dollar appreciation, and an eventual hike in international interest rates would be more serious and widespread than in the 1980s, in view of their increased integration into the global trading and financial system, and in light of their greater dependence on highly liquid capital inflows.