Slow Economic Recovery in 2002

Article excerpt

Recovery from the economic downturn that began early in 2001 and was aggravated by the 11 September terrorist attacks is likely to take place slowly in the year ahead, and adverse effects of the continuing slowdown are hitting economies hardest in East Asia and Latin America, according to a United Nations report released in January 2002. The weakness in the world economy has become widespread, with more than a dozen economies in recession and more than three quarters growing less than a year previously. The International Conference on Financing for Development, to be held in Monterrey, Mexico in March 2002, is presented as one opportunity where progress can be made on these and related issues.

The World Economic Situation and Prospects 2002 projects growth of only 1.5 per cent in gross world product (GWP) in 2002- compared to 1.3 per cent last year-and suggests that this modest improvement is hostage to a number of economic uncertainties, notably the high dependency of the global economy on the recovery of the United States. This involves risks because of the country's still-high equity prices, low savings rate, high level of private sector debt and external deficits. The difficulties in Japan and the uncertainties surrounding the situation in Argentina are additional frailties.

The double-barrelled impact of GWP growth that lags behind world population growth in 2001 and 2002 poses particular difficulties for the developing countries. Several experienced a fall in output in 2001 and, on a per capita basis, there was a setback in East and West Asia and in Latin America and the Caribbean. Those reversals compound the challenge of reducing the number of people living in poverty.

Developing countries and economies in transition face a frail international economic environment, according to the report. This includes lacklustre growth of international trade, weak international prices for primary commodities and difficult access to and higher costs of external financing. Their recovery is to a large extent dependent upon and must wait for recovery in the developed economies to improve the global environment.

Stagnation in international trade was the key factor in transmitting the slowdown to the developing countries and economies in transition. "A few countries, notably Argentina and Turkey, suffered from a combination of and interaction between domestic and international financial difficulties", but "external shocks through international financial channels in 2001 were smaller than in the 1997-1998 international financial crises", the report says. Nevertheless, net private capital flows to developing countries and economies in transition, down in 2001, are expected to decline further in 2002.

Foreign direct investment (FDI) flows to developing countries, which had remained relatively stable during the crisis years of 1997-1998, fell last year and are expected to drop further in 2002, despite increases to such countries as China, Mexico and South Africa. …