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2 September 2005, 17:00 GMT
The world economy is still expanding, but there are serious risks of a setback, and the moderation of growth over the first half of 2005 should serve as a warning, cautions UNCTAD´s Trade and Development Report 2005 (1), released today. The Report says that the main engine of growth, the US economy, may run out of steam before other countries or regions are able to take over that role. The countries of the European Monetary Union have been unable to pull out of a long economic stagnation and Japan, despite some improvement, is still struggling with deflation. Instead, several populous Asian countries, in particular China and India, have emerged as new engines of economic growth. Thanks to their vigorous expansion and their appetite for natural resources, many of their developing-country trade partners have - for the first time in 20 years - reaped windfall profits from rising commodity prices and from surging demand for intermediate products. UNCTAD economists contend that global current-account imbalances - with the US deficit being the counterpart to two thirds of the global surplus - have to be tackled in a coordinated, multilateral way if recent progress towards achieving the Millennium Development Goals (MDGs) is not to be squandered.
The world economy grew by almost 4% in 2004, according to the Report - the best performance since 2000. Even Africa - for many years excluded from the benefits of globalization - posted a 4.5% growth rate for 2004 and is expected to approach 5% this year. The global expansion has continued into 2005, but at a slower pace, and the growth rate is forecast to be around 3% for the year as a whole. Most of this deceleration is attributable to a slowdown in developed-country economic performance, although some developing countries are also showing signs of losing momentum. Developing countries as a whole are expected to grow between 5% and 5.5% in 2005, down from 6.5% last year.
Some dark clouds are looming over this rather rosy horizon. Oil prices are historically high and place a huge burden on many developing countries. And there has been no multilateral action that might gently defuse global current-account imbalances.
First of all, oil prices have doubled since mid-2002. They reached around US$ 60 per barrel in July 2005, despite flexible supply adjustments introduced by oil producers. The good news is that surging oil prices have not depressed economic activity and have not fuelled inflation in developed countries, as happened in the 1970s. Developed countries are now much less oil-dependent: they use energy more efficiently, and industry, with its heavy reliance on energy, makes up a smaller proportion of their economies, which are now dominated by the services sector. In addition, the wage and monetary policy responses of these countries have been measured; there have been no "second-round" effects on inflation and interest rates that could jeopardize growth and employment. Another important factor is that recent oil price increases are not the result of a large crimp in supply but of a gradual increase in demand, mainly from fast-growing economies elsewhere in the world. These countries have been able to finance their increasing oil costs with higher export earnings. Still, oil bills in many of these rapidly industrializing countries, not to mention some poorer oil-dependent countries, are higher now than they were during former energy crises in developed countries. And the possibility of inadequate policy responses remains.
Secondly, global current-account imbalances have led to mounting political pressure on some surplus countries to allow their currencies to appreciate. This pressure remains despite China´s decision in July to adjust its exchange rate regime. The willingness of many central banks in the developing world, particularly in Asia, to maintain stable exchange rates through intervention in the currency market is regarded as one of the major hindrances to a smooth unwinding of the imbalances. Most countries that intervene in this way are trying explicitly to protect the international competitiveness of their producers from currency appreciation and from speculative capital inflows. The UNCTAD report contends that a multilateral exchange-rate system that meets the concerns of small, open and underdeveloped economies is needed to address the problem.
For redressing economic imbalances it is essential to avoid recession and slowdown, the Report argues - both in the developed world, where growth has depended excessively on the US economy, and in the developing world, where economies and currencies are fragile. If a correction, especially to the external deficit of the United States, is sought through massive exchange-rate appreciation in China and other Asian developing countries, a deflationary impact on the world economy will be inevitable. Such a development would not only complicate China´s attempt to integrate a vast pool of rural workers into its modernizing urban economy - and so threaten the country´s progress in reducing poverty - but would also set back efforts by other developing countries to achieve the MDGs.
Deflationary effects stemming from an adjustment to global imbalances can be avoided only if domestic demand in the euro area and Japan recovers markedly, the Report warns. The bulk of the counterpart to the gigantic US external deficit is to be found in the surpluses of the euro area and Japan. These surpluses are growing rapidly despite rising import bills for oil and other primary commodities. Japan and Germany together accounted for US$ 268 billion, or about 30%, of the combined global current-account surplus for 2004. This is to be compared with an overall current-account surplus of US$ 193 billion for East and South Asia. China, the country that has come under the most intense pressure for revaluation, accounts for less than 8% of the global current-account surplus.
The Trade and Development Report recommends that international initiatives to alleviate poverty and reach the MDGs should not ignore the importance of a smooth unwinding of global economic imbalances that will allow the "Asian Miracle" to continue, along with its positive repercussions for other less wealthy countries. The catching-up process in China and India has had positive economic effects for most developing countries, enabling them also to make progress towards the MDGs. Any disruption of the process would risk sharpening global price competition for manufactures exported by developing countries, while weakening the economic growth resulting from this mounting Asian demand.