The Hindu Business Line : World economy on a crawl

THE world economy has been on drift in 2002, as geopolitical uncertainty over possible war with Iraq, recurrent terrorist strikes, turbulence in financial markets, volatile movements in oil prices, decline in investor and consumer confidence and a rise in unemployment thwarted any sort of recovery from the recession that gripped major industrial nations in 2001.

A highly unsettled world enters the New Year amidst new tensions arising out of North Korea's disclosure of its nuclear weapons programme and Iran also building its nuclear facilities. Under continuous threat from terrorists, the world's superpower is engaged in a global campaign to exterminate terrorism, by forging a coalition of countries committed to the cause. But the al-Qaeda leader, Osama bin Laden, having outmanoeuvred the US forces in Afghanistan, is still at large and issuing fresh warnings.

According to the World Bank, the global economy failed to make the expected recovery in the latter half of 2002 and the outlook for the next 12-18 months remains grim.

The Bank does not rule out the possibility of a double-dip recession at this juncture. Weakening business confidence and a fall in corporate profits have been reflected in the collapse of equity markets, which suffered an estimated $8 trillion depletion in asset prices. The IMF says that the cumulative impact of the market declines has weakened the balance-sheet of financial institutions, corporations and households.

After two years of slowdown, growing by a mere 1.1 per cent (2001) and 1.7 per cent (2002), the world economy may at best register a 2.5 per cent growth in 2003. A major reason for this is the structural imbalances in the two leading economies — the US and Japan — with weak recovery in the former and stagnation in the latter. Vulnerability to external shocks, such as financial market turmoil, has increased for all regions. The World Bank's economists point out that the weakening of industrial country growth and the negative impact on developing countries would seriously block the creation of new jobs and opportunities for the poor, thus jeopardising the Millennium Social Goal of reducing the number of absolute poor by half.

Equally worrisome is the dim prospects of a successful completion of the Doha Development Round of multilateral trade negotiations, which are bogged down by issues related to agriculture (heavily subsidised by the richer countries) and trade in manufactured goods (where developing countries face external barriers). There was hardly any progress this year to warrant a belief that the key issues would be resolved to the satisfaction of the developing countries in the WTO by end-2004, the deadline set in the Doha Declaration.

Apart from the visible reversal of expectations generated by the Doha Round there are also question marks over transfer of resources to low-income countries on the lines embodied in the declaration at the `UN Summit on Development Financing' at Monterrey (Mexico) in March. This year, both trade and investment flows declined sharply. Trade grew at 2-2.5 per cent and foreign direct investments to emerging markets were down to an estimated $145 billion from an average of $l70 billion in the previous two years, reflecting thereby greater aversion to risk by both investors and financial intermediaries. The economic slowdown of the past two years has led to a significant rise in unemployment the world over, seriously affecting social stability in both the industrial and developing nations. The terrorist attacks in different parts of the world have hit the travel and tourism industry the most. While the US' unemployment rate has peaked at 6 per cent of labour force, Japan recorded the highest post-war jobless rate of 5.5 per cent. Unemployment in the European Union, especially Germany and France, continues to be high. According to the OECD, for advanced nations, there is unlikely to be any respite on the jobs front in 2003.

Overcharged as it is with bringing down the Saddam Hussein regime in Iraq, the Bush Administration is realising lately that the ailing US economy needs to be propped up, the confidence of both businessmen and consumers restored, and the workers made to feel more secure. Paradoxically, far from being a fiscal stimulus, the 2001 tax cuts have begun to nudge the federal budget from surplus to deficit

But with a string of bankruptcies of giant corporates, unemployment peaking and business confidence at its lowest, Mr Bush decided it was time to entrust the economy to a new set of advisers. He replaced Treasury Secretary, Mr Paul O' Neill, and Chief Economic Adviser, Mr Larry Lindsey, with Mr John Snow and Mr Stephen Friedman respectively — those backing Mr Bush's planned fiscal incentives, perhaps.

With Republicans gaining control of the Senate as well in the November elections, Mr Bush must find it easier to get the okay for not only his immediate plans for the economy but also the Budget for fiscal 2004. The Congress has already cleared the Terrorism Insurance Bill, which provides government support to insurance companies for damage caused by terrorist attacks. In the developing world, the financial turmoil in Latin America has taken a heavy toll on the economies, throwing tens of thousands out of jobs and adding to the number of poor. According to the World Bank, the region's growth this year may shrink by 1.1 per cent. The crisis in Argentina drags on, the beleaguered economy was unable to meet IMF conditionalties for a new bail-out package and the situation worsened when it defaulted on a World Bank loan in October.

Given the US' stakes in Latin America, the IMF extended a $30-billion loan to Brazil in the wake of financial turmoil and loss of investor confidence, despite political uncertainties surrounding the election of a leftist President who will take over on January 1, 2003. These middle-income countries dependent on capital from abroad have been at risk given the falls in net capital flows to emerging markets.

Barring China, growth in the Asian region will also be moderate on account of the slowdown in the world economy, despite a rebound in exports benefiting some of them. The countries hit by the Asian financial crisis of l997, including Indonesia which also faced terrorist attacks, are vulnerable to downside risks from unstable financial markets and structural weaknesses. While China will grow at around 8 per cent and attract the maximum of FDI flows to developing countries, which was $50 billion in 2002, India seems set to record a lower growth rate of 5 per cent. But the region as a whole faces a shortfall in capital inflows.

(The author is former Chief News Editor, PTI.)

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