UN Chronicle | The State of the World: Slow Economic Recovery Forecast

The State of the World
Slow Economic Recovery Forecast
By Nuchhi R. Currier, for the Chronicle

Article

The world economy is in the process of a slow recovery, but impediments to growth remain in the form of overcapacity, overvalued asset prices, shaky investor confidence and macroeconomic imbalances, according to two recent economic reports of the United Nations Conference on Trade and Development (UNCTAD): "World Economic Situation and Prospects 2003", a joint publication with the United Nations Department of Economic and Social Affairs; and World Investment Report 2002.

Uncertainties associated with geopolitical tensions resulting in higher oil prices, hesitant business capital spending, slow hiring of workers and lower equity prices, coupled with large external imbalances, fragility of the international financial system and the domestic corporate sector in some countries, and other structural problems, portend substantial vulnerability for the world economy in the medium term.

The two reports call for greater macroeconomic policy coordination among the major economies. They also advocate lowering of protectionism and a reduction of tariffs and subsidies among developed nations to enable developing economies to exploit their comparative advantages fully by securing better access for their local goods and services. The ultimate aim of enhanced export competitiveness, according to UNCTAD, should remain long-term development gains. "At the top of the agenda should be the development of domestic capabilities, as this helps not only to attract quality foreign direct investment (FDI) but also to upgrade existing activities", states Rubens Ricupero, Secretary-General of UNCTAD.

The increase in corporate scandals, particularly in the United States, the worsening fiscal and external debt problems in several Latin American economies, and severe floods and droughts in other countries exacerbated previous weaknesses in world economy, but were mitigated somewhat by key supportive factors, such as monetary and fiscal policy stimuli, resilient consumer spending and inventory restocking. In today's more globalized constellation of production, trade and financing, individual economies have become more dependent on aggregate demand worldwide. This applies in particular to the high-technology sector. The persistent loss of employment, as well as benign inflation, is contributing to the weakness of global economic recovery, posing a long-term policy challenge and key hurdle to poverty reduction.

The gross world product (GWP) is estimated to have grown by 1.7 per cent in 2002, only marginally better than the previous year, which was the weakest in a decade. World trade, which had declined in 2001, recovered slightly with a 2-per-cent increase. Only a handful of developing economies increased their per capita output by more than 3 per cent in the past two years. This anaemic global growth is a result of two consecutive years of decline in per capita income and is a major setback for the fulfilment of the millennium development goal of reducing global poverty.

Improvement in the global economic situation will only come with a reduction of overcapacity in developed economies, along with a boost in domestic demand in developing countries where high-technology products and services have an enormous potential.

The forecast for world trade growth is 6 per cent for 2003, compared to 2 per cent in 2002 and a decline in 2001. Prices of non-oil commodities are expected to continue their decline, and private capital inflows are expected to remain low due to the crisis in investor confidence resulting in over six consecutive years of net outward transfer of financial resources from developing countries. FDI to developing countries, down by more than a quarter in 2002, dropped to about $540 billion, as per UNCTAD figures.

Trade among nations is a prerequisite for sustained economic growth and development. For developing nations to grow out of their cycle of deprivation and poverty, they have to become active participants in the global economy, and one way of achieving this is through expansion and diversification of exports. Transnational corporations (TNCs) play the role of facilitators in this process, providing resources, technology and access to new markets.

TNCs continue to grow and, according to the World Investment Report 2002, there are 65,000 TNCs today, with 850,000 foreign affiliates, accounting for one tenth of world gross domestic product and one third of world exports. The world's largest TNCs dominate the field in both sales and employment figures, becoming progressively larger each year due to mergers and acquisitions (M&As). In 2001 alone, foreign affiliates accounted for about 54 million employees, compared to 24 million in 1990; their sales of almost $19 trillion were more than twice as high as world exports in 2001, compared to 1990 when both were roughly equal.

The global economic slowdown in 2001 resulted in a drop in the value of cross-border M&As-its total value ($594 billion) in 2001 was only half that of 2000. As a result, the decline in FDI inflows was mainly concentrated in developed economies, shrinking almost by 59 per cent, compared to 14 per cent in developing economies. World inflows of FDI amounted to $735 billion, of which $503 billion went to developed economies, $205 billion to developing economies, and the remaining $27 billion to economies in transition of Central and Eastern Europe.

According to UNCTAD, a record five firms, headquartered in developing countries, made it to the top 100 list for the year 2000. These companies, based in Hong Kong, China, Mexico, Venezuela and the Republic of Korea, have been driving the continued transnationalization of the top 50 companies from developing countries.

The shares of developing countries and of Central and Eastern Europe in global FDI inflows reached 28 and 4 per cent in 2001, respectively, compared to an average of 18 and 2 per cent in the preceding two years. The 49 least developed countries remain marginal recipients, with only 2 per cent of all FDI to developing countries, or 0.5 per cent of the global total.

The United States remained the world's largest investor, with countries of the European Union as its main trading partners and its North American Free Trade Agreement partners also benefiting from their special relationship. Despite the weakened demand in the largest global economies, the longer-term prospects for FDI remain promising.

Improved export competitiveness helps countries develop and increase their international market share by diversifying the export basket, upgrading technological and skill content, and expanding the base of domestic firms to raise productivity and living standards. TNCs can help raise competitiveness in developing countries and in economies in transition. Sustaining export competitiveness as wages rise and market conditions change is, however, not an easy accomplishment. Coherent and consistent policy support is essential as part of a broader national strategy, seeing it as a means to an end—that of development.

The most dynamic products in world trade are found mainly in non-resource-based manufacturers, particularly electronics, automotive and apparel; and TNCs have played an important role in the export expansion of these products.

International production systems have three critical elements: governance, global value chains and geographic configuration. Changing corporate strategies and production systems open new possibilities for developing economies to enter technology-intensive and export-oriented activities, thus becoming part of the international production systems. The inherent disadvantage in this is the raising of barriers to market entry for smaller and newer suppliers from transition economies who do not possess competitive advantages that modern production systems require.

Global Snapshots

A rebound in Asian economies is expected to continue among the developing economies as long as the developed ones hold up. African countries are expected to grow by 4 per cent or higher, due mainly to stronger domestic factors, but many are not expected to show any tangible growth in per capita income. Most western Asian oil-exporting economies will only experience a limited benefit from increasing oil prices. Latin American prospects remain unpromising following an outright decline in their gross domestic product (GDP) in 2002.

Among the developed economies, Japan and Western Europe continue to suffer from weak domestic demand, resulting in tightly constrained economies; Australia, Canada and New Zealand have fared better. Economies in transition are showing strengthened domestic demand resulting from fiscal policy stimuli and the cumulative benefits of recent structural reforms. Entry into the European Union promises to provide some stimulus. Central and Eastern European economies are suffering from external deficits and fiscal constraints, while the Commonwealth of Independent States remain constrained by supply bottlenecks.

The United States remains the locomotive of international economic growth, but its recovery is expected to be anaemic, thus its burgeoning trade and government deficits and the declining value of the dollar pose downside risks of global proportions. The only other major economy exerting influence and providing impetus to economies within its region is China, which for the first time surpassed the United States as the largest recipient of foreign direct investment in 2002.

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