UN: Recession in North to spill over into South

by Mithre J Sandrasagra

New York, 11 Apr 2001 (IPS) -- United Nations economists are warning that the current economic slowdown in the United States and other large economies will severely affect the developing world.

“Falling demand from developed countries will drastically impact developing countries’ exports over the next year,” forecasters from over 60 countries predicted in a report released at the end of three days of consultations here Wednesday. The 32-page report, the latest Global Economic Output - prepared in conjunction with Project LINK, an international group of economic researchers - projects that “the world economic growth in 2001 will slow to 2.4 percent from four percent in 2000”.

“The output for developing countries is forecast to decline from 5.7 percent in 2000 to 4.4 percent in 2001,” said Jozef M. van Brabant, Chief of the Economic Assessment and Outlook Branch of the UN Department of Economic and Social Affairs (DESA).

The transmission of the economic slowdown from the industrialised world to the developing world is occurring through several channels besides declining industrial demand. Stagnant capital flows into the developing world, weakening commodity prices as output demand flags, and fluctuations in international and local investors’ risk aversion behaviour are also contributing, according to the report.

Countries that had been most severely affected by the Asian financial crisis of 1997 and 1998 find themselves in the stickiest situation because they can no longer use exports to support strong sustainable growth while domestic demand revives.

“Thailand and Malaysia, which rely heavily on Information and Communication Technology (ICT) exports to the US, are experiencing significant drops in their gross domestic products (GDPs),” Peter Pauly of the University of Toronto Economics Department told IPS Tuesday.

“The precipitous drop in demand has seriously affected Malaysia’s export economy, of which 46 percent is accounted for by ICT exports to the US and Japan,” van Brabant emphasised.

Industrial production, particularly ICT related production, in the export-oriented economies of the Republic of Korea and Taiwan have also suffered.

“Asian countries seemed to be recovering quite well last year and the year before, but now one Asian country after the other is experiencing some degree of export difficulty and that is associated with the weakening of the US economy’s demand,” Lawrence Klein a Nobel Laureate in Economic Sciences told reporters at a press conference here.

“We had hoped that we would see some strength in the Japanese economy - the number two world economy in terms of production - but unfortunately due to Japan’s longstanding recessionary problem, help is not coming from that quarter,” van Brabant said.

In Latin America, “Mexico will almost require that the US recover in order to get back on track to its goal of seven percent growth in 2001”, according to Klein’s estimates.

Sub-Saharan Africa is not doing well partly due to the problems associated with poor manufacturing base, but mostly due to the erosion of human capital as a result of the HIV/AIDS pandemic.

GDP growth in Africa increased marginally from 2.9 percent in 1999 to just over three percent in 2000, which is well below earlier estimates forecasters said Wednesday, emphasising that growth in 2001, expected to reach approximately four percent, will not reach levels necessary to reduce poverty by a significant margin.

Furthermore, economic activities in a number of African countries were severely disrupted by military conflicts and political instability in 2000, the war between Ethiopia and Eritrea and the civil war in the Democratic Republic of the Congo being examples.

Meanwhile, the report indicates that Sri Lanka, Bangladesh, Nepal and Pakistan will suffer a range of economic hurdles in 2001 including declining exports and dampened rural income from 2000 crop failures that will lead to a decline of growth of one to two percentage points in 2001.

On the other hand “China is doing quite well,” Klein said, “and can expect seven to eight percent growth in 2001.”

“India was doing very well and there was a time we thought India could aim for seven percent growth,” Klein continued emphasising that these two countries are home to over one-third of the 6 billion people on the planet.

Meanwhile, high oil prices have benefited the oil-exporting economies in Africa which include Algeria, Angola, Libya, Nigeria and the Sudan.

“We must help to engineer a soft-landing of the US economy,” Pauly said. A prolonged growth reduction in the United States will spill over into the rest of the world with the poorest countries being affected first, he continued.

For this soft landing to occur, immediate and “decisive monetary policy action is required in the US and in Europe as well as quite fundamental structural change in Japan”, Pauly stressed.

The history of the United States since its Civil War indicates that expansions have been much longer than contractions. Though this was not true during the Great Depression of the 1930s, generally there have been long growth periods leading to sharp falls followed by revival. After concluding their sessions here Wednesday the expert group of international economists expressed hope that the 2002/2003 period will bear better prospects for the world economy.

“It is very unlikely that the US economy will not pick up ... the slow down will not last so long,” Klein said.

Wednesday’s report shows a rebound of the global growth rate to about three percent in 2002.

[c] 2001, SUNS - All rights reserved. May not be reproduced, reprinted or posted to any system or service without specific permission from SUNS. This limitation includes incorporation into a database, distribution via Usenet News, bulletin board systems, mailing lists, print media or broadcast. For information about reproduction or multi-user subscriptions please contact: suns@igc.org