Only minor improvements in near-term

by Chakravarthi Raghavan

Geneva, 1 July -- After two years of financial turbulence, the world economy is no longer weakening, but for the majority of countries, for the foreseeable future, growth will fall far short of that necessary to effect substantial improvement in living standards or reducing numbers living in poverty, the UN said Thursday.

In a report on the World Economy in 1999, by the UN Department of Economic and Social Affairs, the UN said for the majority of developing and transition economies, growth in 1999 remains inadequate, and the outlook for rest of 1999 and beyond suggests only a minor overall improvement.

Gross world output is forecast to rise only 2 percent in 1999, almost the same as in 1998, and by only 2-1/2 percent in 2000, the UN report says in its near-term outlook.

Growth of output in developing economies is expected to recover only gradually from the sharp deceleration of 1998 - to reach rates of 2-1/2 percent in 1999 and 4-1/2 in 2000. And while a number of afflicted developing countries and transition economies show signs of slow recovery, others are expected to remain in, or enter into, economic recession.

The recession which swept over several countries of S.E.Asia in late 1997 and 1998, and hit a number of Latin American countries in late 1998, is expected to persist, but moderate, in 1999, with growth returning in 2000.

While S.E.Asian developing countries have begun to recover from their financial crises, none is likely to return in the near future to the high growth rates before the crisis. China is expected to decelerate, but remain in the 7-8 percent range, while India's strong growth should continue.

African developing countries are expected to post a three percent growth on average, but due to fast population growth, substantial gains in per capita output is unlikely.

While Caribbean and Central American economies would have overcome the damage inflicted by the El Nino and severe hurricanes, Latin America as a whole is experiencing a recession in 1999, owing to adjustment measures in Brazil and other countries.

Not only is this pace of expansion far from satisfactory for many countries, but in addition some serious downside risks remain, arising from globalization, says the UN.

These risks aren't necesarily associated with a group of countries, but can stem from a national problem that, because of today's integrated world economy, has global consequences. The forecasts are, thus subject to errors (producing slower or faster growth), but with a preponderance of downside risks.

The worst such would be a hard landing for the US - either because of a stock-market fall or authorities reacting to a sign of inflationary pressure and tightening of monetary policy sharply to produce deceleration of output -- which would mean main stimulus for world growth could go into reverse.

[But the US Federal Reserve's latest announcement putting up a 1/4 percent rate rise has been combined with indications of a neutral stance for rest of the year - and no sharp increases.]

But there are also several downside risks in developing and transition economies says the UN - in Brazil which still has a formidable task of addressing large fiscal sector imbalance, China where export sector growth is declining faster than expected and consumer demand is weak, and a further decline in output in the Russian Federation.

A simulation exercise, by Project LINK, of a possible impact of another major financial crisis, suggests that in such an event world growth could slow down markedly, with a further contraction in global trade. The impact on developing countries would be particularly pronounced, while the transition economies would experience a sharp drop also.

In 1998, the UN said, of 95 developing countries for which reliable data are available, those experiencing decline in per capita output numbered 40 - more than double the 18 in 1997.

About one in four in the developing world, or roughly 1.2 billion people, live in countries that suffered a decline in per capital output in 1998 - as compared to 160 million people or less than 4 percent of the population of developing regions.

For developing world a minimum 3% per capita output growth is needed to allow some progress in raising living standards and reducing poverty.

Only 23 countries in 1998 met this criteria, as against 39 in 1996.

And only 13, including China, will have a per capita output growth of more than three percent in 1999 - one in Latin America (nine in 1996), 6 in South and East Asia (13 in 1996), and 6 in Africa (14 in 1996).

These data show that adjustments in real economic sectors will take a much longer period of time to be implemented and to bear fruit, than changes in monetary and financial indicators.

And resumption in employment and real wages, and reversing social setbacks of the crisis, will trail well behind resumption of output growth.

And while there appears to be a consensus on need to reform the architecture of the international financial and monetary systems, progress to date has been limited. And, "without successful systemic reforms, the global economy remains highly vulnerable to future international crises."

With an average growth of only 1.7 percent in 1998 well below that of developed countries, and for the first time since the 1980s and the 5% growth achieved earlier in 1990s.

Only China and India were able to sustain rapid growth in 1998, and are expected to continue to do so in 1999 - auguring well for the large proportion of the world's poorest who are citizens of these two countries.

With the reversal in the growth rates, the disparity between levels of living and personal incomes in developed countries and the rest of the world widened.

Since the Asian currency crisis, not only has growth in the developing world been slower than in developed,but the shift in relative prices "has amplified the deterioration in the position of the average person in the developing and transition countries: average output has fallen and average incomes have fallen even more."

And the average consumer in the developed countries has not been affected by the international financial crisis: output growth has slowed, but per capita output has continued to rise and, due to changes in relative prices, real incomes have increased faster than real output.

"Individual consumers in most developed countries have benefited directly from lower prices for primary commodities and imports of manufactured goods."

And in addition to the increased income gap, developing and transition economies have also to confront the social consequences.

Liberalization and globalization should have resulted in an increase in numbers entering formal employment, paying taxes to government, getting loans from the financial system to expand their business and providing employment to those in the informal sector.

Instead, the crises has delayed or pushed back movement of people from poverty to more modern commercial sectors, and in Asia and Russia the continued expansion of the more modern sector in these countries has been put at risk.

In recent years, while many of the developed countries were able to take advantage of globalization, the effects on developing and transition countries have been perverse. Referring to the financial crisis that first struck South East Asia in 1997, and the responses, and controversies on macro- economic and financial policies to meet them, the UN report underlines that there is now some agreement that the extent of fiscal austerity initially pursued by the Asian economies was inappropriate.

In Asia, where neither monetary nor fiscal policy excesses were the cause of the crises, increasing the fiscal deficit was an appropriate response. In Russia and Brazil, widening fiscal deficits was one of the causes of the crises, and the deficits were structural -- while in Asia they were cyclical and it was appropriate to stimulate the economy.

And for countries integrated into the world financial markets, the room for manoeuvre in using fiscal policy is limited - because of the need to balance domestic needs with perceptions of markets.

An internationally coordinated plan to cut interest rates in major industrialized economies and increase official transfers to the crisis-hit Asian economies would have had a better response. And while the major European countries did stimulate consumption through interest rate cuts, it was belated and an indirect response to the crisis, whereas if it had been taken earlier, the slowdown in their economies would probably not have occurred. And even the cuts in the European rates were only coordinated within the euro zone, and not globally.

Underscoring the need to address social and human dimensions of the crisis, the report argues that the experience of the recent crisis shows that social dimension has to be integrated into the formulation of economic policies - by ensuring consistency between short-term economic objectives, like financial stability, and longer-term social and developmental goals such as poverty eradication. And social protection measures are more effective if they are in place before a crisis, and not when hastily put together after.

"The social dimension therefore needs to be incorporated in economic policy as a matter of course." (SUNS4468)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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