The Hindu Business Line : `Warning signal' on world economy

THE UN Conference on Trade & Development (Unctad) has said that as the world economy is still expanding, there are serious risks of a setback with the moderation in growth over the first half of 2005 serving as "a warning".

In its 2005 Trade & Development Report (TDR) released worldwide on Friday, the Geneva-based UN body said the world economy grew by 4 per cent last year, the best performance since 2000. Even Africa, excluded many years from the benefits of globalisation, posted a 4.5 per cent growth rate and is likely to reach 5 per cent this year.

While global expansion has continued into 2005 albeit at a slower pace, developing countries as a whole are likely to grow between 5 and 5.5 per cent in 2005, down from 6.5 per cent last year.

Unctad economists contend that global current-account imbalances — with the US deficit being counterpart to two thirds of the global surplus — have to be tackled in "a coordinated, multilateral way if recent progress towards achieving the millennium development goals is not to be squandered".

It said for redressing economic imbalances it is necessary to avoid recession and slowdown — both in the developed world, where growth has depended excessively on the US economy, and in the developing world, where economies and currencies are fragile.

The report cautioned against correction especially to the external deficit of the US through massive exchange rate appreciation in China and other Asian developing countries, which would have a deflationary impact on the world economy.

This could be precluded only if domestic demand in the euro area and Japan recovers markedly.

Another disturbing feature is that oil prices have doubled since mid-2002 and reached around $60 barrel in July 2005. These are not the result of a large crimp in supply but of a gradual increase in demand, mainly from fast-growing economies elsewhere in the world.

Even as some countries have been able to finance their increasing oil costs with higher export earnings, oil bills in many of these rapidly industrialising countries, not to mention some poorer oil-dependent ones are higher now than in the past. And the possibility of inadequate policy responses remains," it added.

Stating that demand from China and India spurs world economic growth, the report said that the East and South Asian region is well established as a new growth pole for the global economy, mainly due to the progress achieved by China and India.

Their rapid growth has been a key cause of the recent surge in primary commodity prices.

"The windfall profits being reaped by many developing countries as a result of surging economic growth in China and India should be used to diversify those countries' economies and prepare them for more stable economic development in the future," the report said.

Despite their strong income growth, China and India still have a long way to go to reach the per capita income levels of the world's leading economies. While China's per capita purchasing power in 2003 was around 10 per cent that of the US, the figure for India was even lower.

Besides, both the countries are highly dependent on imports of fuels and industrial raw materials and their imports of food are also likely to escalate.

Unctad urged further productivity gains and technological upgrading in manufacturing in China and a shift towards manufacturing in India, if the two nations are to sustain their impressive economic performance. It would be crucial for both to ensure all sectors of their populations participate in income growth.

The report states that China's weight in the international markets might contribute to a decline in export prices of manufactures that are also produced and exported by other developing countries, such as clothing, footwear and certain types of information technology and communication products.

For developing countries with abundant oil and mining industries, the distribution of export revenues out of them between the different domestic actors and foreign investors needs careful consideration with a view to establishing an effective export-investment nexus.

These countries should aim at reaping higher revenues from royalties, joint ventures and public ownership of firms operating in the oil and mining sectors.

Unctad favours cooperation between oil and mineral-exporting countries in the formulation of some generally agreed norms on the fiscal treatment of foreign investors.

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