DEVELOPMENT: US Dragging World Economy Down, Says UNCTAD

By Gustavo Capdevila Reprint | | Print |

Gustavo Capdevila

GENEVA, Apr 24 2001 (IPS) - Hard times are on the horizon for the global economyincluding serious problems for developing countriesas a result of the contraction of the US economy, warns the United Nations Conference on Trade and Development (UNCTAD).

Other factors that accentuate developing nations’ risk come from European hesitance and Japan’s inability to help reactivate of the global economy, according to the Trade and Development Report 2001, released Tuesday by the Geneva-based UN agency.

The first part of the report examines global trends and prospects, and then goes on to cover the question of reforming the architecture of the international financial sector – and there are troublesome indicators in both contexts that demand responses from the international community, says UNCTAD.

But so far, such responses are not forthcoming and there is a need to raise awareness about the challenges ahead and the need for appropriate policy responses, said Carlos Fortín, UNCTAD assistant secretary-general.

“The worries stem from the slowdown in the United States, which dramatically changes the optimistic outlook for the world economy that prevailed until last year’s fourth quarter,” he said.

Until then, all signs indicated “a very rosy set of prospects, with the only cloud on the horizon being the question of oil prices.”

But, contrary to all predictions, petroleum prices have remained relatively low and are forecast to continue on the decline for the rest of 2001. Meanwhile, the US economy began to decelerate at an unexpected pace.

UNCTAD analysts have indicated that they agree with the formula the United States Federal Reserve chose, warding off danger through conventional monetary and fiscal corrections.

The US institution, the equivalent of a central bank, has reduced its interest rates four times in just a few months – for a total of two percentage points – in hopes of jump-starting an economic recovery.

But Fortín pointed out that stimulating growth through a monetary approach has its limits if the United States is alone in implementing such measures.

The European Central Bank could contribute by cutting its interest rates without the risk of creating inflation, commented the economist, but there appears to be little enthusiasm to do so.

UNCTAD calculates that the potential growth of the European bloc reaches four percent annually, while the Central Bank reduces the forecast to between 2.0 and 2.5 percent.

According to the UN agency, the US economic conditions are “more serious than the current consensus might accept,” because there has been a significant drop in investment, a loss of consumer confidence, and growing fears about job losses.

Given this panorama, the US economy alone cannot continue to bear the burden of the world economy’s dynamism, other major players need to assume their roles, says UNCTAD.

But only Europe can act with a certain amount of security because it would not suffer serious consequences, in terms of trade, from the US downturn.

Japan, the other major economic power, has been ruled out due to its internal difficulties. Reinvigorating domestic demand through fiscal expansion is impossible in this Asian country, where the public debt now surpasses 100 percent of its gross domestic product (GDP).

As a result, the contraction of the US economy poses serious risks for developing countries and economies in transition, according to UNCTAD.

The negative effects are transmitted primarily through trade flows, and will clearly affect Latin America, especially Central America and Mexico, Fortín pointed out.

The UNCTAD report indicates that the Mexican economy did very well last year with its noteworthy growth rate of seven percent, though that was essentially the result of expanding economic activity in the United States at the time.

“Mexico exports up to 90 percent of its total surplus to the United States,” the UNCTAD official explained.

East Asia will also suffer the consequences of the US slowdown. Malaysia in particular is vulnerable because it is highly dependent on the North American giant, as 20 percent of its exports are destined for the United States.

Africa, however, is quite a different case because it does not rely as heavily on the United States as a destination for its exports, but faces troubles in the area of commodity prices and terms of trade, which are deeply affected by the US deceleration.

As far as reforming the international financial structure, UNCTAD proposes a more symmetrical treatment of debtors and creditors, and providing conditions that are not so burdensome for the economies of developing countries.

The report advocates more effective multilateral monitoring of the macroeconomic policies of the leading industrialised economies and enacting bolder initiatives to stabilise currency reserves.

The International Monetary Fund, for example, is dedicated to keeping its eye on poor countries and does not interfere with industrialised nations, commented Fortín at Tuesday’s presentation of the UNCTAD report.