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TAD/INF/2712
25 August 1997
EMBARGO
The contents of this Report must not be quoted or
summarized in the press, on radio, or on television,
before 15 September 1997
22:00 hrs. GMT
WORLD ECONOMY STILL IN LOW GEAR,
DESPITE BRIGHT SPOTS IN NORTH AND SOUTH
Growth in the world economy this year will again continue to be
too slow to make a significant dent in poverty in the South and
unemployment in the North, UNCTAD forecasts in its annual Trade and
Development Report 1997 (1) (216 pages). Despite success in reducing
inflation almost everywhere, expectations of faster growth have so far
not been fulfilled. Since 1990, the world economy has been growing
slower than in the previous decade, and the outlook is for a
continuation of slow growth. Meanwhile, global trade imbalances similar
to those of the 1980s have reappeared.
Output growth picked up slightly in 1996, reaching 2.8 per cent.
The improvement was achieved despite a sharp reduction in the growth of
world trade (from 8.5 per cent in 1995 to 4 per cent in 1996).
Developing countries again led the way, posting an overall growth rate
of 5.6 per cent.
The slight acceleration over the 2.4 per cent figure achieved in
1995 was largely due to recoveries in Japan and Latin America. However,
these were partly offset by slower growth in Asia and in the European
Union. Prospects for 1997 suggest little change in performance
in either developed or developing countries.
Growth in the South - sufficient and sustainable?
Despite somewhat slower growth, to 6.9 per cent compared with
7.3 per cent in 1995, Asia continued to perform well in 1996. Although
little change is expected for the region in 1997, restrictive policies
intended to safeguard external balances in a number of these countries
have introduced an element of uncertainty into short-term regional
prospects.
Growth was affected last year by a sharp drop in exports from the
first-tier newly industrialized economies (NIEs) (Hong Kong Special
Administrative Region of China, Republic of Korea, Singapore and
Taiwan Province of China), as well as from Malaysia, Thailand and China.
In some countries, export expansion has been difficult to sustain now
that the relatively easy stages of labour-intensive production for export
have been completed. To maintain momentum, technological upgrading and
productivity growth are now required.
China, which continued to grow at an impressive rate of close to
10 per cent, is expected to sustain high rates of growth in 1997. It
appears headed for a soft landing, as inflation has been brought down
to a single-digit rate. This should allow policy-makers to focus
attention on structural economic deficiencies in agriculture and
infrastructure.
Unlike East and South-East Asia, West Asia saw faster growth in
1996, largely due to favourable movements in oil prices. Growth also
remained robust in South Asia.
The economic recovery continued in Africa in 1996. It also became
more widespread, extending to a number of least developed countries.
At 3.9 per cent, the overall growth rate was the second fastest in the
world economy, lagging only behind Asia. And the trend is expected to
continue in 1997.
In 11 countries, growth reached, or surpassed, 6 per cent and, in
a further 28, it ranged from 3 to 6 per cent. This should be seen
against the target of an average real growth rate of at least 6 per cent
per annum for the decade, set in 1991 by the United Nations in its
New Agenda for the Development of Africa (UN-NADAF). Helped by
favourable commodity price movements, strong agricultural growth
at 5.2 per cent in 1996 led the way. Spirited industrial growth,
meanwhile, helped a number of North African countries to build up
momentum last year.
Latin America has recovered from the depressed conditions of
the post-Mexican crisis, but its growth remained at a modest 3.3
per cent in 1996. Output growth is expected to accelerate further
in 1997.
The Latin American recovery has primarily been due to the upturn
in Argentina and Mexico, in both cases driven by strong export growth.
Elsewhere in the region (notably in Brazil, Costa Rica, Paraguay, Peru)
trade has also played an important role, on account of both unilateral
trade liberalization and the strengthening of regional trade.
However, in many countries the recovery has sucked in imports at an
even faster pace than in 1995; the growth of import volume for the region
in 1996 was 9.5 per cent, almost double that in the previous year.
As a consequence, the region's dependence on capital inflows is unabated.
Reconciling external equilibrium and competitive exchange rates with
growth and price stability still remains the main challenge for most
Latin American countries, UNCTAD says.
Improvements in overall economic performance have thus been
recorded in many parts of the developing world. But the verdict over
whether more sustained growth will take hold remains unclear.
Vulnerability to swings in capital flows remains high in a number of
countries with large external deficits. Moreover, UNCTAD argues that,
for many developing countries, a speedy and flexible implementation of
the IMF/World Bank Debt Initiative for Highly Indebted Poor Countries
could play a significant role in ensuring sustainable growth.
"One of the lessons of the debt crisis of the 1980s", it warns,
"is that muddling through raises costs to both debtors and creditors".
Uncertainty in Central and Eastern Europe
Inflation has been contained in most of the transition economies.
But while some have enjoyed recoveries in recent years, others are still
searching for economic stability and balance. For the near future,
monetary and fiscal austerity is likely to keep a tight lid on
growth prospects in most transition economies.
In Central and Eastern Europe, the strong growth performance in
1995 has not been carried over to 1996, dropping back 1.6 percentage
points to 4 per cent per annum. Despite quite fast growth in 1996,
prospects in the Czech Republic have dimmed, given its serious
external imbalances and dependence on capital inflows. Economic
conditions worsened considerably in Romania and Bulgaria. Contrary to
earlier expectations, output continued to decline in the Ukraine and
the Russian Federation. Poland, by contrast, continued its strong
growth performance in 1996, becoming the first transitional economy
to exceed its 1989 output level.
United States continues to expand, but restrictive fiscal policies
dampen growth in Europe
The United States posted almost inflation-free growth in 1996
(2.5 per cent) for the sixth consecutive year, adding 12 million jobs
to the economy since 1992 and helping to reduce the fiscal deficit to
around 1.5 per cent of GDP. Contrary to many predictions, prices
remained stable, even as unemployment dipped below 5 per cent in early
1997. This performance lends support to the proposal made in UNCTAD's
Trade and Development Report 1995 that, in order to help solve the
unemployment problem, central banks in the industrialized world must
test their assumptions about potential growth rates and levels of
employment compatible with stable inflation. "The Federal Reserve
appears to be showing such a willingness", UNCTAD says in
its 1997 Report.
Despite its strong performance relative to other countries in
the North, the United States average growth rate during the decade
remains below that achieved in the 1980s. Moreover, until this year,
average wages fell in almost every year of the recovery.
Productivity gains have been captured by profits which have reached
levels unseen since the 1960s.
Prospects for Western Europe are currently surrounded by
uncertainty. The average growth rate again fell in 1996, to
1.5 per cent. Of the larger economies, only the United
Kingdom maintained respectable growth although at a somewhat slower
pace than in 1995. In some other countries, slow growth and high
unemployment have remained a problem. Current restrictive fiscal
policies to achieve the targets set for the third phase of European
Monetary Union render difficult the adoption of counter-cyclical
policies capable of stimulating growth and fighting unemployment.
UNCTAD considers that there is room for flexibility. Monetary
and exchange rate stability has already been achieved. However,
although the fiscal targets are not being met, prolonging the debate
over these targets is provoking volatility in financial and currency
markets, further hindering recovery.
Governments in the European Union are increasingly confronted by
a major challenge: reconciling growth and employment with the
achievement of fiscal targets. As UNCTAD has previously argued
(in its Trade and Development Report 1994), perhaps the best solution is
to cut the Gordian knot of fiscal convergence and to proceed directly
to monetary union as soon as possible.
Strong export growth reinforced by a budget stimulus made Japan
the fastest growing member of the G7 last year. Along with the
investment recovery which began in 1995, these forces led to an overall
expansion of 3.5 per cent. However, Japanese profits and investment
remain too centred on exports, and are thus subject to the behaviour
of the exchange rate, which creates some uncertainty regarding the
sustainability of the recovery.
The risks of global imbalances for developing countries
Disparities in demand growth among the major industrial countries
lie behind a growing trade deficit in the United States and growing
surpluses in Western Europe and Japan. The burden of adjustment,
UNCTAD says, must be borne by surplus countries; Europe and Japan
should therefore expand demand if there is to be a return to a more
sustainable pattern of global demand and trade balances.
Unless the upward pressure to the dollar can be eased, trade
imbalances will worsen, UNCTAD warns, increasing the danger of trade
frictions. For developing countries, the consequences of a combination
of such frictions, dollar appreciation, and an eventual hike
in international interest rates would be more serious and widespread
than in the 1980s, in view of their increased integration into the
global trading and financial system, and in light of their greater
dependence on highly liquid capital inflows.
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(1) The Trade and Development Report, 1997 (Sales No. E.97.II.D.8) may
be obtained at the price of US$48, from United Nations Publications/Sales
Section, Palais des Nations, CH-1211 Geneva 10, Switzerland,
fax: 41 22 917 0027, e-mail: unpubli@un.org,
Internet: http://www.un.org/publications; or from
United Nations Publications, Two UN Plaza, Room DC2-853,
Dept. PRES, New York, N.Y. 10017, U.S.A.,
telephone: 1 212 963 83 02 or 1 800 253 96 46,
fax: 1 212 963 34 89, e-mail: publications@un.org.
For more information, please contact Yilmaz AkyĆz, Chief,
Macroeconomic Section, Division on Globalization and Development
Strategies, UNCTAD, on telephone: 41 22 907 5841, fax: 41 22 907 0274,
or e-mail: yilmaz.akyuz@unctad.org;
or Carine Richard-Van Maele, Senior Press Officer of UNCTAD,
on telephone: 41 22 9075816/28, fax: 41 22 9070043;
or e-mail: press@unctad.org.
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