ECONOMY: The West Could Be Slowing The World Down

By Sanjay Suri Reprint | | Print |

Sanjay Suri

LONDON, Sep 2 2005 (IPS) - The world economy faces ”serious risks of a setback,” Unctad warns in its annual trade and development report.

The report from Unctad (United Nations Conference on Trade and Development) says the world economy is still expanding, but the moderation of growth over the first half of 2005 should serve as a warning.

Unctad warns that ”the main engine of growth, the U.S. economy, may run out of steam before other countries or regions are able to take over that role. The countries of the European Monetary Union have been unable to pull out of a long economic stagnation and Japan, despite some improvement, is still struggling with deflation.”

Instead, several populous Asian countries, ”in particular China and India, have emerged as new engines of economic growth,” the report says.

”Much of the slower growth in Europe and Japan is the result of the United States deficit,” co-author of the report Detlef Kotte told IPS in an interview from Vienna.

”The U.S. government is aware of the problems they have with the deficit,” he said. ”It is also true that the U.S. economy can afford such a deficit simply because they can pay for their exports with currency they can print themselves, not an advantage most other countries in the world have, because they have to earn or borrow the foreign exchange to finance their imports.”

Questions have inevitably arisen how big the U.S. deficit can become before an adjustment is necessary, he said. ”It is very difficult to determine precisely how big the U.S. deficit can be; the only thing we can say is that it cannot increase for ever.”

The driving factors behind the deficit are both the low growth of exports, and the rising imports due to fast rising domestic consumption, he said.

”Domestic consumption in the United States has been very high for many years and in fact it is not the first time we have warned that there is a risk that U.S. consumption cannot be maintained at that level, simply because the private households savings rate is negative, and the households are highly indebted,” Kotte said.

”At one point this can put the functioning of the domestic banking system at risk, and so interest rates would have to be raised,” he said. ”Also, with rising oil prices, all the indebted households will be in trouble to service their debt.”

The picture for China and India on the other hand looks quite good, he said. ”These two countries have not only had higher growth rates than the average of the world economy and the average of developing countries, but they have maintained these for many years,” he said

”In many countries in Latin America during the eighties and during the nineties you also had high growth rates, but these were boom and bust cycles, whereas the sustained growth in many Asian countries, particularly these two big economies shows that economic structures are developing very well,” Kotte said.

There are big differences between China and India ”simply because India in its industrial development is ten, 15 years behind China,” he said. ”Much of the development in India and China has been in the services sector, but if you look at China closely, you see that the services sector has also expanded; only, its industry has expanded even faster, which is not the case in India.”

But both these countries have become very important players,” Kotte said. ”They have become very important markets for primary commodities and much of the increase in oil prices and also in the prices of other industrial raw material is due to the demand from these two countries.”

The Unctad report says the world economy grew by almost 4 percent in 2004, the best performance since 2000. The growth rate this year is forecast to be around 3 percent for the year as a whole. But developing countries as a whole are expected to grow between 5 percent and 5.5 percent.

The report does warn, however, of some ”dark clouds” above developing countries. ”Oil prices are historically high and place a huge burden on many developing countries,” the report says. ”And there has been no multilateral action that might gently defuse global current account imbalances.”

Developed countries are now much less oil-dependent, the report says. ”They use energy more efficiently, and industry, with its heavy reliance on energy, makes up a smaller proportion of their economies, which are now dominated by the services sector.”

For redressing economic imbalances the report argues it is essential to avoid recession and slowdown ”both in the developed world where growth has depended excessively on the U.S. economy, and in the developing world where economies and currencies are fragile.”

The report recommends that international initiatives to alleviate poverty and reach the millennium development goals ”should not ignore the importance of a smooth unwinding of global economic imbalances that will allow the ‘Asian Miracle’ to continue, along with its positive repercussions for other less wealthy countries.”