LONDON - 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 US 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".
"Much of the slower growth in Europe and
Japan is the result of the US deficit," says
Detlef Kotte, co-author of the report. "The US
government is aware of the problems they have with
the deficit ... it is also true that the US
economy can afford such a deficit simply because
they can pay for their exports with currency they
can print themselves, not an option most other
countries in the world have, because they have to
earn or borrow foreign exchange to finance their
imports."
Questions have inevitably arisen
on how big the US deficit can become before an
adjustment is necessary, he said. "It is very
difficult to determine precisely how big the US
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 US 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 US 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. Also, with
rising oil prices, all 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 10, 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 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% in 2004, its best performance
since 2000. The growth rate this year is forecast
to be around 3% for the year as a whole. But
developing countries as a whole are expected to
grow 5-5.5%. 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 US 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."
