The Hindu : Uncertainty in global economy

Online edition of India's National Newspaper
Thursday, Dec 12, 2002

Opinion

Opinion - Editorials

Uncertainty in global economy

A YEAR AFTER the 2001 recession was supposed to have ended, the outlook for the global economy remains gloomy, with a risk of the current hesitant recovery being stopped in its tracks. This is the message from the 2003 edition of Global Economic Prospects, the annual World Bank report which assesses the short and medium-term outlook for the world economy and its constituents. The main uncertainty is about investment, with companies in developed and developing countries less than certain about business prospects in the domestic and international economies.

The global economy is now projected to grow by just 2.5 per cent in 2003, considerably slower than the 3.6 per cent rate of growth that had been forecast earlier. This will also be a deceleration compared to the pace of growth in 2002 and will affect both the developed and developing economies. A measure of acceleration is forecast for 2004, but considering that frequent revisions are made of the forecasts of medium-term growth this recovery is too far in the future to be taken with any certainty. The key to a sustained recovery lies in reviving investment. This is taking longer to recover after the technology boom went bust in 2000. In the advanced economies the wave of corporate scandals and the subsequent financial uncertainty has kept fixed investment low. In a globalised world, the effects of this dampening of investment have been transmitted to a number of developing economies. The World Bank report estimates that net capital flows to the developing countries have declined globally from $228 billion in 2000 to $140 billion in 2002. Net foreign direct investment flows in the world have also been declining steadily in recent years and now stand at just $145 billion, with the World Bank describing the fall in developing countries as the most marked since the 1980s. Not all countries have been experiencing the same pace of falling foreign investment inflows. Asia (especially east and south east Asia) is an exception. But the overall scenario is clear. In an uncertain environment, private investment declines and accompanying this fall is a decline in foreign capital flows. The fall in investment activity has affected the infrastructure sector in particular, where a combination of factors (a higher risk premium on developing country investments and the failure to honour some existing contracts) has reduced fresh foreign outlays in the developing countries. In this context, the World Bank study surprisingly calls for a measure of revival of public investment in infrastructure to fill the gap created by the withdrawal of foreign investment. The World Bank is, however, optimistic that in the medium-term growth can be accelerated in the developing countries provided two important changes are effected. One is introducing greater competition in the domestic economies; the other is for the world trading system to be more open to developing country exports of agricultural and manufactured products. The first is an unexceptional observation; the second is more wishful thinking going by the current state of negotiations in the World Trade Organisation.

The South Asian economies have not escaped the global downturn, though the effects here have been milder. The World Bank sees 2002 ending with GDP growth of 4.6 per cent in the region, compared to a 5.3 per cent growth forecast a year ago. A recovery is expected in 2003, but the expectations are modest with growth accelerating to 5.4 per cent next year. But even this recovery depends on four factors: improved weather conditions, political stability, better external security and larger trade volumes. It is somewhat unusual for the World Bank to make such a clear reference to conflicts affecting the prospects for more rapid economic growth. But it is obvious that strains between and within the economies of South Asia have been holding back GDP growth and will continue to do so until the security scenario shows an improvement.

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