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ECONOMY: IMF Warns Protectionism Risks Global Growth

Emad Mekay

WASHINGTON, Apr 19 2006 (IPS) - The International Monetary Fund (IMF), a leading patron of the current global economic system, forecast Wednesday that there will be world growth of 4.9 percent this year, while launching a spirited defence of corporate-led globalisation and an attack on rising protectionist sentiments.

“The world economy is in the midst of an extraordinary purple patch, with what looks like a third year of significantly above-trend growth,” the IMF said in its semi-annual forecast, “World Economic Outlook” (WEO).

Despite higher oil prices and natural disasters, the Washington-based institution said global growth is projected at 4.9 percent in 2006, 0.6 percent higher than expected last September.

Global Gross Domestic Product (GDP) growth last year was estimated at 4.8 percent, 0.5 percent higher than projected originally. The IMF predicted the rate will recede to 4.7 percent in 2007.

It said that the United States remains the main engine of growth, with its economy expanding by 3.4 percent next year. Japan will grow by 2.8 percent. There are signs of a more sustained recovery in the European Union, although domestic demand remains subdued, with the forecast showing growth at 2.0 percent.

The forecast said that most of the global growth, however, will be due to activity in China, India, and Russia – which together accounted for two-thirds of the upward revision in 2005.

In Asia, China and India will grow at rates of 9.5 and 7.3 percent in 2006, respectively, driven by strong domestic demand, and in China, by a rising current account surplus.

GDP growth in sub-Saharan Africa is estimated at 5.5 percent in 2005, rising to 5.8 percent in 2006 – the highest in over three decades, the IMF said. It attributed the positive growth levels in Africa to the rise in non-fuel commodity prices, particularly metals, and the start of oil production in African countries like Chad.

However, the lender warned that while the upward trend in growth in Africa was encouraging, achievement of the so-called Millennium Development Goals, which seek to half poverty levels by 2015, remains far off.

In Latin America, growth remains solid, aided by booming commodity prices, and was set at 4.3 percent.

In the Middle East, rising oil prices continue to boost revenues, with spending behaviour generally more guarded than in past periods of rising prices. The region will grow at a rate of 5.7 percent this year.

The IMF, however, called for correction of exchange rates over the medium term, with the U.S. dollar needing to depreciate considerably from current levels, and currencies in surplus countries – including in parts of Asia and among oil producers – to appreciate.

It warned that oil prices remain high and volatile, especially with looming crises in Iran, as the United States turns up the political heat over Tehran’s nuclear programme, and in Iraq, coupled with threats to oil production in Nigeria.

“With excess capacity still very low, the market remains vulnerable to shocks – indeed, with the recent increase in geopolitical uncertainties in the Middle East, options market data suggest risks are slanted to the upside,” said the IMF.

The IMF argued that one of the main risks to global growth is backpedaling on globalisation and the implementation of the liberalisation agenda advocated by the IMF, the World Bank and the private sector.

The lender, which is accused by development campaigners of working to benefit corporations based in industrialised countries at the expense of the poor in developing nations by demanding market liberalisation, warned that protectionism and slowing policy reforms in fact impose a threat to global growth.

In the face of greater scrutiny of corporate and Western-led globalisation, the Washington-based lender said increasing globalisation has been an engine of growth and has helped restrain inflation in a number of countries.

“An important reason for this good performance has been greater flows of goods, services, and capital across the world, a phenomenon known colloquially as globalisation,” said the IMF chief economist Raghuram Rajan.

“Unfortunately, the rapidity with which globalisation is advancing seems to worry citizens,” he added.

“Instead of facing the implementation deficit squarely, politicians everywhere are aiming at soft targets, like the foreigner who supposedly competes unfairly or the immigrant who works too hard and for too little, hoping that by shooting the messengers they will somehow avoid the competitive challenges posed by globalisation,” he told reporters.

Rajan acknowledged that multilateralism was in retreat everywhere and urged finance and trade players to work on creating innovative and new frameworks that would enhance greater dialogue and keep corporate globalisation as a main engine of the current economic system.

“These are the best of times but they are also the most dangerous of times,” he said.

The IMF’s defence of corporate-led globalisation can be viewed against recent forceful arguments in industrialised nations, worried about losing their grip on the global economy, that the institution has become weak and ineffective as more and more developing nations shun its policy advice.

Argentina and Brazil recently paid off all their debts to the IMF, and other nations have indicated an intention to follow suit, leaving the lender in a potential financial crunch. Since 2003, the IMF’s total outstanding loans have fallen from 106.9 billion dollars to 33.9 billion dollars – meaning lower fee incomes.

Finance ministers and central bank officials who will be gathering here for the Spring meetings of the IMF and its sister institution the World Bank will be discussing planned reforms for the Fund, which they say will have to pass if the IMF is to remain relevant.