ECONOMY: Emerging Markets Will Grow But Risks Remain – IMF

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Sep 26 2002 (IPS) - A possible U.S. attack on Iraq, subdued recovery in the United States, spiralling oil prices and faltering ’emerging’ markets are among the reasons global economic growth will be sluggish this year and in 2003, the International Monetary Fund (IMF) forecast Wednesday.

“Global growth in the second half of 2002 and in 2003 will be weaker than earlier expected, and the risks to the outlook are primarily on the downside,” the IMF said in its semi-annual World Economic Outlook report.

The Washington-based institution calculates that global growth will reach 2..8 percent in 2002 – as it forecast in April – then rise to 3.7 percent in 2003, down from the four percent it predicted earlier this year.

The grim report was released in advance of this weekend’s annual meetings of the 182-nation IMF and the World Bank, where civil society groups from throughout the world will protest the policies and operations of the sister institutions for further impoverishing the world’s poor.

On Wednesday, spokespeople from those groups said they object to the Bank and IMF simply because they ôput profits before people”.

In its report, the IMF said that gross domestic product (GDP) growth in Africa has held up “surprisingly well”, supported by improved macroeconomic policies, fewer conflicts, and debt relief under the IMF’s HIPC (heavily indebted poor countries) initiative.

But it warned that serious problems exist in certain parts of the continent – most importantly, a deepening famine in southern Africa. Growth in 2003 is projected to rise to 4.2 percent, aided by stronger commodity prices.

The IMF, whose policies are often blamed for helping to create today’s economic turmoil in Latin America, said that risks in emerging markets, in particular South America and Turkey, have increased and could get even worse.

“Were problems in South America to intensify – especially if accompanied by weaker growth in industrial countries – the potential for a more widespread impact on the emerging market asset class, including through cross-border bank lending, would increase significantly,” it said.

The outlook for the major emerging markets – developing countries that are seen as favourable to free-market policies – has become increasingly diverse, the report said.

In Latin America, the outlook has seriously deteriorated, and output is expected to decline in 2002. Output there contracted by 2.5 percent in the first quarter of 2002 (compared with the final quarter of 2001).

Risks of inflation have sharply increased in many countries in Latin America, especially Argentina, whose economy has almost collapsed and where a “sustainable monetary framework is not yet in place”, said the report.

Uruguay faces serious difficulties, and the outlook for Brazil, Venezuela, and a number of smaller countries have deteriorated markedly as well, it added.

But the Fund says that growth is accelerating in Mexico, and is expected to follow in Chile: “both countries are relatively open and have strong credit ratings,” it said, meaning they comply with the Fund’s own free-market prescriptions.

The recovery in some Asian emerging markets has been stronger than expected, driven by the rebound in global trade, a nascent recovery in information technology and, in some countries – notably China, India, and Korea – growing domestic demand, the IMF said.

Asia’s growth is projected to increase to six percent in 2002 and to remain at that level in 2003, but the Fund said recovery there remains dependent on external demand, and the prospect of a weaker global recovery adds to downside risks.

The IMF’s outlook for the Middle East has changed little despite improving prospects for oil prices. The ôdifficult security situation” will affect growth in Israel and its neighbours.

The outlook for the so-called “countries in transition” remains solid, aided by strong growth in Russia, the Ukraine, and in central and Eastern Europe and by buoyant foreign direct investment.

On the risks side, the Fund cautioned that oil prices could spike sharply if the security situation in the Middle East were to deteriorate further – a reference to a possible war in the region.

“Depending on its extent and duration, this increase could have a significant negative effect on global growth both directly and indirectly through its effects on confidence. It would also increase the likelihood of other risks to the outlook occurring, and exacerbate their impact,” it said.

Another threat to the world economy is that the increasingly linked equity markets – especially of industrialised countries – could plummet further.

“While a considerable portion of the irrational exuberance that characterised stock valuations in the late 1990s may now have been eliminated, recent accounting and auditing scandals have seriously weakened confidence,” the Fund said.

IMF critics, many of them gathering here this week, have previously faulted the agency’s surveillance of global economic developments as too awkward and politically manipulated to be helpful in promoting the Fund’s policies.

In October 1997, as the financial typhoon lashed Asia’s power-house economies, the Fund ventured the prediction that world output would pick up to 4.3 percent in 1998. Instead, it fell to 2.5 percent.

Others have said that the Fund is still obsessed with financial markets and statistical figures but its documents remain short on information about the homes, farms and factories that make up the world’s real economy.