The Hindu Business Line : Getting back on the growth path

What the developed world needs to do is to "coordinate" monetary policy, which will bring about stability in capital flows and an orderly realignment in exchange rates but only if it is "combined with coordinated fiscal expansion".

ASIAN economies have fared well in 2002 (and in forecasts for 2003) in a generally gloomy environment because of two basic reasons. According to the UNCTAD Trade and Development Report 2003, East Asian economies in particular have prospered, comparatively speaking, because of the low dependence on capital inflows and, secondly, buoyant intra-regional trade.

The result of this in terms of performance has been that many of these countries have been able to notch up growth rates of 5 per cent to 8 per cent in 2002 at a time when Latin America (for the first time since the 1980s) saw its output decline mainly because of "a sharp drop in growth or outright recession in most of the major economies". On the other hand, as the TDR-03 points out, the African and transition economies fared somewhat better — maintaining 3 per cent and 4 per cent growth rates, respectively — because they were less affected by the global slowdown.

Statistically, the average of the world's output figures (percentage change over previous year) declined from 3.4 in 1997 to 1.9 in 2002 (44 per cent), the respective figures for the US being 4.5 and 2.4, Japan 1.8 and 0.3, and the EU 2.5 and 1.0. Among the EU countries, German output declined by 85.7, Italian by 80, British by 47 and French by 36.8. The corresponding fall in the American and Japanese output growth was 46.6 and 83.3, respectively.

On the other hand, output in the transition economies grew by 4 per cent in 2002 against 1.9 in 1997, representing a growth of 110.5, while developing countries recorded output growth rates of 3.3 and 5.1 in the two years, indicating a decline of 35.3 per cent over the five-year period. The respective figures for developing countries excluding China were: 2.3, 4.5 and a decline of 48.9 per cent. The corresponding figures for Chinese and Indian GDP growth during the five-year period 1997-2002 are 8 (in 2002), 8.8 (in 1997), 10 (decline) and (for India) 4.5, 4.4 and 2.3 (increase).

The UNCTAD report does not indicate an improved scenario for the year ahead. It says clearly that a global growth rate of more than the 2 per cent attained in 2002 is unlikely because of movements in the first half of 2003. More specifically, it points to the fact that the prospect of reaching a 3 per cent growth rate — "the rate that is generally considered to be the minimum necessary to provide employment for the expanding population of the developing world and to provide the resources needed to attain the Millennium Development Goals" — are bleak.

So what needs to be done to get the growth rate back to the 3 per cent-plus level? Drawing broad strokes, the report says that a "more vigorous and balanced recovery than during the sustained expansion of the nineties" is necessary, the operative part being that all developed and "major developing countries" will have to be involved in the effort.

An interesting point which the report draws attention to is that there is a growing gap between, as the report puts it, "the developing East and the developing West". Why has this happened? The analysis is as follows. First, Asia was directly affected by the "end of the IT boom" in the US, mainly because of "its closer trading and production linkages, particularly in the supply of high-tech and consumer electronic products, and the emergence of China as a major trading partner of the United States". Then came the SARS assault. But the impact of all this (specially the fall in external demand) was leavened in these economies by the leeway afforded by the "strong external position" for counter-cyclical economic policy. Public deficits have been increased and interest rates have been brought down; private consumption expenditure has also increased because of rising wages and employment. The result has been an expansion in domestic demand in the major regional economies, supported by "regional integration and the expansion of intra-regional trade".

In Latin America, on the other hand, only a "handful" of economies was able to counter the decline in global demand with policy changes which, however, as the report says, were not always effective. Apart from Chile, Mexico, Peru and Ecuador, the rest of the Latin American economy, generally speaking, was unable to handle the crisis effectively, mainly because the global downturn came on top of financial difficulties which the principal economies of the region were already facing at the time.

The TDR says that East Asia is expected to continue growing faster than Latin America in 2003, thus further widening the gap between developing economies in the east and west.

As far as Latin America is concerned, the recovery there will be "weak and fragile", driven by "some improvement in financial conditions rather than by strong export growth". As regards Africa, the report says that it is more or less insulated from developments in the rest of the world other than demand movements in Europe. The transitional economies have been buoyed up by large capital inflows mainly because of relatively high nominal interest rates and "optimism generated by the agreements on accession to the EU".

What, according to the TDR-03, should be the recipe for a recovery? To begin with, the point is made that when the US engine of growth is sputtering, the alternative power-houses, such as Europe and Japan, should step in. But they have not. On the contrary, domestic demand in these areas has continued to contract, their growth rates even falling below the US performance. The report says that changes in currency movements will not be able to provide a long-term solution to the problem: they will merely "redistribute the deflationary gap and unemployment among countries without bringing much support to global recovery".

Does this mean that, generally speaking, international economic planning and coordination of policies on a multilateral scale are on their way out and that bilateralism and regionalism are on their way in? It is perhaps too early to take a clear stand on the issue, but the fact remains that the signs are ominous for those who have the "one world" concept close to their heart.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Coasting on cross-subsidies

After the battle in Iraq .... Is the war on Asian currencies right?

Getting back on the growth path

Bellwether for 2004?

Why no future for interest rate futures

Industrial policy options — Going beyond mere reforms

India and Asean

Promotion policies