Slow Economic Recovery in 2002

Recovery from the economic downturn that began early in 2001 and was aggravated by the 11 September terrorist attacks is likely to take place slowly in the year ahead, and adverse effects of the continuing slowdown are hitting economies hardest in East Asia and Latin America, according to a United Nations report released in January 2002. The weakness in the world economy has become widespread, with more than a dozen economies in recession and more than three quarters growing less than a year previously. The International Conference on Financing for Development, held in Monterrey, Mexico in March 2002, was presented as one opportunity where progress could be made on these and related issues.

The World Economic Situation and Prospects 2002 projects growth of only 1.5 per cent in gross world product (GWP) in 2002 - compared to 1.3 per cent last year - and suggests that this modest improvement is hostage to a number of economic uncertainties, notably the high dependency of the global economy on the recovery of the United States. This involves risks because of the country’s still-high equity prices, low savings rate, high level of private sector debt and external deficits. The difficulties in Japan and the uncertainties surrounding the situation in Argentina are additional frailties.

The double-barrelled impact of GWP growth that lags behind world population growth in 2001 and 2002 poses particular difficulties for the developing countries. Several experienced a fall in output in 2001 and, on a per capita basis, there was a setback in East and West Asia and in Latin America and the Caribbean. Those reversals compound the challenge of reducing the number of people living in poverty.

Developing countries and economies in transition face a frail international economic environment, according to the report. This includes lacklustre growth of international trade, weak international prices for primary commodities and difficult access to and higher costs of external financing. Their recovery is to a large extent dependent upon and must wait for recovery in the developed economies to improve the global environment.

Stagnation in international trade was the key factor in transmitting the slowdown to the developing countries and economies in transition. “A few countries, notably Argentina and Turkey, suffered from a combination of and interaction between domestic and international financial difficulties”, but “external shocks through international financial channels in 2001 were smaller than in the 1997-1998 international financial crises”, the report says. Nevertheless, net private capital flows to developing countries and economies in transition, down in 2001, are expected to decline further in 2002.

Foreign direct investment (FDI) flows to developing countries, which had remained relatively stable during the crisis years of 1997-1998, fell last year and are expected to drop further in 2002, despite increases to such countries as China, Mexico and South Africa. The key to restoring FDI flows to developing countries remains economic growth, since “the basic factors determining these flows have not changed” and “the potential for FDI is far from exhausted in many developing countries”, the report argues.

As transnational corporations reposition themselves for the more price-driven environment created by the slow-down of the world economy, and as developing countries liberalize their regulatory frameworks further, there may be a redistribution of FDI towards developing countries, particularly since reinvested earnings are increasing. The report also shows that flows of FDI among developed countries declined dramatically in 2001, mainly because of the halving of cross-border mergers and acquisitions. Those flows are likely to pick up again when consumer confidence is restored, but are unlikely to fully recoup the ground lost.

The World Economic Situation and Prospects 2002 notes hopeful signs on the economic horizon. By the end of last year, monetary policy in many major developed countries had become more accommodative; fiscal stimuli were beginning to take effect; prices of energy had softened; and there was a tentative rebound in equity markets. The impact of those developments is expected to build momentum gradually in 2002, leading to a restoration of consumer and business confidence, and a revival of private sector activity.

The current challenge for policymakers worldwide is not only to continue taking immediate steps to extricate the global economy from its current slowdown, the report indicates. The volatility in the global economy in recent years, it maintains, has had an asymmetric impact, with most developing countries “tending to benefit less than the leading developed economies in the upturns, but suffering equally, or more so, in the downturns”. It is therefore important to “sustain the longer-term agenda that seeks to ensure that developing countries can participate more effectively in the globalized world economy”.

The report highlights the need for further progress in resolving the debt problems of developing countries, through the Heavily Indebted Poor Countries (HIPC) Initiative and through better arrangements for private sector involvement in middle-income countries. Commending the work programme drawn up at the Doha Ministerial Meeting of the World Trade Organization in November 2001, it also calls for strengthening the capacity of developing countries to participate in trade negotiations and implement the outcomes.


Links:
IMF: World Economic Outlook