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Mr Nout Wellink, Chairman of the board of directors and President of the BIS, while addressing the representatives of more than 100 central banks, stressed the importance of structural reforms in achieving stronger and sustainable growth in major economies.

NEW DELHI, July 8

THE Bank for International Settlements (BIS) has said that the simultaneous slowdown of growth in industrial and emerging market economies last year, coming after two years of concurrent expansion, has highlighted the importance of international economic and financial linkages.

"The global economy and financial system showed enormous resilience in the face of successive shocks over last year. Yet there were still considerable risks and uncertainties affecting the economic outlook'', the Bank said in its annual report released in Basle today.

Mr Nout Wellink, Chairman of the board of directors and President of the BIS, while addressing the representatives of more than 100 central banks and international institutions drew attention to the risk that an abrupt correction in some overvalued asset prices could weaken or delay recovery and put some strain on the financial system.

The recent demise of several large corporations after the disclosure of accounting irregularities underscored the need for effective measures to improve corporate reporting, he said.

He also stressed the importance of structural reforms in achieving stronger and sustainable growth in major economies. The BIS report said the slowdown in the industrial countries caused world trade to decline last year, following an expansion of over 12 per cent in 2000. As a result, real output in those emerging market economies that are highly open decelerated sharply. In Singapore, Hong Kong (China) and Malaysia, the decline was as much as 8-12 percentage points, while Korea and Taiwan (China) also encountered sharp swings in output growth.

In contrast, growth in the more closed economies of India and China, BIS said, remained relatively high, driven primarily by domestic factors. Pointing out that the performance of the emerging market economies was also strongly swayed by the direction and composition of trade last year, it said Asian and several Latin American economies with strong bilateral trade ties with the US experienced an unusually sharp decline in growth and export demand.

BIS said several Asian countries, hit by the drop in external demand — Korea, Malaysia and Thailand — as well as the more closed economies of China and India have adopted expansionary domestic policies which stimulated household consumption, residential construction or public investment.

Fiscal stimulus and weaker household savings led to a reduction in total savings in these countries. But the scope for fiscal stimulus was much more limited in India, where a Central Government budget deficit of over 5.5 per cent of GDP "overshot'' the target by a wide margin. With budget deficits of the State Governments also remaining large, worries about fiscal risks and their implications for real interest rates have resurfaced in India, the Bank observed.

The incipient recovery in the industrial countries is not expected to lead to a quick rebound in capital flows to the emerging markets in 2002 with banks likely to be cautious, given the increasing level of bad loans on their balance sheets. The synchronous downturn in the global economy and the apparent common recovery have been interpreted by some as evidence of increased globalisation. At the same time, BIS said, developments in emerging markets had many "idiosyncratic'' features, some for the better and others for the worse. The former would certainly include the sustained rapid growth in China and the slower but still substantial expansion in India.

At the other end of the spectrum, the economic crises affecting Turkey and Argentina were both very costly but they exhibited some differences as well as fundamental similarities.

Nevertheless, the picture emerging late in the first half of 2002 is that the downturn was relatively mild and that a broad-based global recovery may already be under way. One reason for the positive economic outturn was the resilience of the global financial system.

BIS report said two other features of recent events also underline the resilience of the global financial system. First, was the extent to which consumers in many industrial countries gained greater access to consumer and mortgage credit. They availed themselves of such credit to pay down more expensive debt as well as to increase consumer expenditure.

While significantly less well advanced, a similar pattern has arisen in a number of large emerging market economies, including China, India, Korea and Mexico. The second remarkable aspect of recent financial events was also related to global capital flows.

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