Two hefty economic forces are competing for the world´s attention today: the promise of a "new economy" underpinned by new technologies, and growing instability linked to market-driven globalization. And despite healthy signs in the world economy this year, large imbalances in growth, external payments and capital flows remain. With adjustment of these imbalances falling on monetary policy alone, a smooth correction is not guaranteed. These concerns set the stage for UNCTAD´s Trade and Development Report, 2000(1), released today.
Big economies still not in sync
The world economy pulled itself back from the brink last year, largely due to unexpected events, including the continued strength of the United States economy. The immediate prospects for this year have improved, with growth expected to exceed 3%. But according to the Report, much depends on whether the economy in the US can land safely and whether the fitful performances of Europe and Japan can be converted into something more dependable.
The United States - described in the Report as "buyer of last resort" and "white knight to the global economy" - continued its longest period of expansion in modern history, helped both by massive capital inflows, short and long, and by new technologies. Unemployment dipped below 4% in early 2000 and inflation remains subdued. But economic growth above 4% and imports rising by 12% are now unsustainable. According to the Report the combination of dwindling private savings, rising private debt, mounting current-account deficits and the bubble in technology stocks, whilst providing a Keynesian fillip to the United States economy, could end "with much more abrupt changes than either needed or desirable". Events of the 1970s and 1980s showed how abruptly the willingness of overseas investors to hold dollar-denominated assets can disappear.
According to the Report, Europe stumbled last year as differential growth performance inside Euroland complicated the search for a common monetary stance and the European Central Bank (ECB) struggled to find an independent policy position against the backdrop of closely integrated global financial markets. Japan picked up in 1999, helped by recovery in East Asia. Although prospects look healthier still this year, private spending remains fragile, leaving a lot hanging on exports and public spending. Growth in both Europe and Japan is vulnerable to any hike in US interest rates and a sharp slowdown in that economy. Recent US experience holds important policy lessons for reducing unemployment in Europe and managing the budget deficit in Japan, the Report also suggests.
Oil, inflation and growth
The Report takes considerable encouragement from the way the world economy has shrugged off the sharp rise in oil prices from mid-1999 and from the return of some normalcy to financial markets. Simulations suggest that the impact of oil prices on global growth will be limited and confined mostly to oil-importing developing countries.
The oil price hike helped world trade values pick up in 1999, with only the transition economies missing out. Strong import growth in China, Japan and the United States kept markets buoyant, and developing countries posted a big turnaround in exports, growing over 8% compared with a contraction of 7% in 1998. However, unfavourable trends for non-oil commodities hit prices, particularly in cotton, sugar, cocoa and coffee, with adverse consequences for many developing countries.
Stability returned to financial markets and net private inflows to developing countries and transition economies increased, albeit only marginally above the 1998 figures. The principal gains were in equity and FDI flows, where privatizations and M&As have been the driving forces. By contrast, net private capital inflows in the form of debt to developing countries declined sharply in 1999. Regional variation was considerable, East Asia making most gains. The outlook for 2000 is still uncertain, particularly with equity investments in emerging markets again showing considerable volatility.
Developing country prospects
Conditions deteriorated in Latin America in 1999, with per capita income contracting for the first time since 1990. However, Mexico, with close links to the US economy, bucked this trend, and some of the smaller Caribbean economies posted healthy growth. Elsewhere, weak commodity prices, excessively tight macroeconomic policies and the collapse in regional trade tipped some countries into recession. Things would have been worse for the region had Brazil not weathered its financial storm far better than expected, growing at close to 1%, after the collapse of its currency. Argentina, on the other hand, fell into a deep recession after the successful defence of its dollar peg.
Africa too saw growth stagnate in 1999. Weak prices for some commodities, political conflicts and the weather proved too much of a burden across many parts of the continent. However, the Report does note some positive signs in North and East Africa, where growth was above the regional trend, and the worst appears to be over in Nigeria and South Africa. Still, for sub-Saharan Africa the basic policy challenge remains how to raise investment to hit 6% growth in the face of savings and foreign exchange constraints (see also TAD/INF/050 of 14 July).
The transition economies posted their highest growth in a decade, some 2.4%. However, variation around the average is considerable. Central Europe managed to shrug off the contagion from the Russian crisis in the second half. More surprising has been the turnaround in Russia itself, where growth in 1999 surpassed 3%, thanks to the sharp rise in oil prices. By contrast, the Baltic States were hit hard by the Russian crisis. And despite the end of open conflict in southeastern Europe, the macroeconomic situation remains fragile and economic prospects bleak. According to the Report, "the challenges for these countries are not unlike those in much of the developing world, and again the response of the developed countries has so far been insufficient".
Asia was the big success in 1999. Growth turned strongly upwards, exceeding 5%. The big economies of India and China, where growth was around 7%, performed above average, but it was the sharp recovery in East Asia that caught most eyes. The rebound in the Republic of Korea was exceptional. Malaysian growth has reached double-digit figures in the first months of 2000, with little assistance from multilateral financial institutions. Indonesia is facing a more uncertain future and the downside risks remain considerable. But overall growth in East Asia this year is expected to be more balanced, and policy makers across the region will be watching China´s accession talks with the WTO very closely.
Through a glass darkly
According to the Report, not only are the root causes that led to the fear of recession during 1998-1999 still with us, but "further fault lines have emerged". Prospects for the developing countries could rapidly deteriorate if the major industrial countries continue to set their policies without regard for their global repercussions.
The factors that helped the United States economy surge ahead have added to financial fragility and global imbalances. The fact that these imbalances are now associated with private rather than public sector deficits makes the situation all the more fragile, notes the Report, and interest rates are too blunt an instrument to make the needed corrections. European and Japanese transnational corporations´ efforts to jump into new technologies through cross-border mergers and acquisitions have added to the imbalances. An optimistic global scenario hinges on a soft US landing, stronger growth in Europe and Japan, a levelling-off in oil prices and interest rates and a gradual realignment of the dollar. But according to the Report, trust in market forces and monetary policy alone will not carry the day. Increased international cooperation will be needed, and a much bolder international leadership of the kind which heralded the last Golden Age.