World Economic Situation (Perspectives and Prospects)

A.Asım Arar (*)

After a growth rate of 4.1 % in 2004, the strongest and broadest in the world economy for a number of years, the global expansion has registered a slow-down in the first half of 2005. This deceleretion is particularly due to higher prices in crude oil and other commodities and widening imbalances across regions. However, the global economic policies remain receptive to growth and therefore, The Gross World Product (GWP) is expected to expand by more than 3 % annualy in 2005-2006. The 1.9 % decrease in the growth rate when compared to the previous period, will be the result of an expected deterioration concentrated almost entirely in the developed countries, as their performance is still the main determinant of overall growth. Therefore, the expansion by 3% annualy in 2005-2006, should partially be attribuable to the evolving patterns of international trade and to the role played by a positive domestic demand in the developing countries and economies in transition.

Indeed, the number of developing countries in which the output per capita rose by more than 3 % doubled between 2002-2004. These countries account for over 80% of the developing world population. Sub-Saharan Africa, land-locked and least developed countries and small island developing States are all demonstrating an improvement in growth. This positive evolution should not hide the fact that, the least developed countries-2/3 of which are in Africa- represent the most vulnerable segment of humanity. Extreme poverty, limited human, institutional and productive capacity, susceptibility to external economic shocks, external debt, natural and man made disasters and communicable diseases, often compounded by geographical handicaps, hamper efforts to improve the quality of life of their people.

Again in 2004, the volume of world trade increased by almost 11%. However a fall to about 8% is expected for 2005 which might be stabilized around this figure in 2006. A deceleration in the demand of major importers will be the decisive factor of this decrease. The growing budget and current account deficit (app. 4% and 6% of the national income respectively) in the US where the State savings are in continuous decline, is indicative for lesser demand in imports.

The recent dynamism that the world trade has registered can be analysed through the further deepening of the international division of labour in production. Chinese championship in attracting Foreign Direct Investments during the recent years was also the demostration of the fact that this country was chosen as the relocation for global manufacturing. Manufacturing has grown Chinese trade at about 30% annually for 2003-2004, accounting for almost 1/5th of the growth of global trade in 2004. The general Asian rise in domestic comsumption, due to better income, has generated further increases in the demand for energy and raw materials, further amplifying the growth of exports, hence Gross Domestic Product (GDP) of many developing countries.

Nevertheless, the fragility imposed by major developed countries on the growing trade share of the developing world remains a reality, as, without the former’s demand for final consumption and without a long lasting dispute settlement among them on trade matters, the dynamics of international trade would evaporate. Although the Uruguay Round trade agreements lowered over-all tariff rates, relatively high import tariffs are still levied on goods strategically important to developing countries, such as textiles, clothing and farm products. Tariffs are not the only barrier to developing country exports. Government subsidies to agricultural producers in developed countries provide an unfair advantage against imports. While total financial support provided in developed countries as a share of GDP steadily declined between 1990 and 2003, the latest year for which data is available, the amount of support has remained about $350 billion per year during the same period. Other barriers such as the misuse of phyto-sanitary and technical barriers also hinder the exports of developing countries.

Present oil prices, which are 3 times higher than what they should normally be, could adopt a smoother track towards the end of 2005 but an important decrease should not be desired, as an important fall down in oil prices could bring together tighter supply which will have negative effects on the manufacturing capacities and consumption trends of the developing countries. Therefore a healthy demand/supply equation should be respected. A calmer Iraqi situation might be an occasion for the oil prices to go down to their previous levels. As for the general increase in non-oil commodity prices, it will not be wrong to state that this was due to the multiplication of demand deriving from the developing world in general, China and India to start with. However, the expected decrease in the Gross World Product in 2005-2006 should register a decline in such commodity prices for the same years.

Conditions for many developing countries have also improved in international financial markets. Financial flows to developing countries are increasing, their costs are low as they were never before and non-debt-creating flows, notably the Foreign Direct Investments (FDI), are assuming greater importance. Indeed, FDI remains the largest source of net private financial inflows to developing countries, but continues to be unevenly distributed and concentrated in a few key countries. In 2003, for example, the top 10 recipients accounted for almost ¾ of total flows to developing countries. In general, economies with robust growth, solid infrastructure, skilled and productive labour, and adequate regulatory frameworks, support institutions and services attracted larger FDI flows. Equally important are measures to increase the benefits of the presence of foreign firms for the domestic economy, in terms of technology transfers, employment and domestic value added.

For countries without access to international financial markets, Official Development Assistance (ODA) is a critical source of external financing. As committements began to be translated into disbursments, ODA has recovered from its decline in the 1990s, reaching $78.6 billion in 2004, a 4.6% rise in real terms. While that recovery is encouraging, it is normally expected that ODA should provide new cash resources that allow recipient countries to increase development spending. However a large portion of the increases in ODA has taken the form of expenditures on security and emergency relief. Therefore, with efforts to increase the level of ODA, there is also an urgent need to improve its quality. That involves the way aid is dispursed and utilized. Several donors have announced their intention to provide more aid in less transaction-intensive forms, such as budget and sector support. Currently, less than 30% of total ODA reaches developing countries’ budgets. There is also the need to provide more predictable and multi-year commitments on aid flows; overcome weaknesses in partner countries’ institutional capacities to develop and implement results-driven national development strategies. Despite these improvements, the increase in the net transfer of resources out of almost all developing countries and economies in transition has reached a record level of over 300 billion dollars. The fact that these transfers did not bring together a slow down in economic growth due to a compression of domestic demand, can however be interpreted as a demonstration of the fact that this time, they are mostly drawn from the export revenues of the countries concerned rather than capital outflows.

As formerly mentioned, another negative aspect of the present world economic situation is the widening of the global external imbalances since 2004 with the current account deficit of the United States which is expected to rise over 700 billion dollars in 2005 and to remain in that range in 2006. As long as the large US deficit persists there will be a risk of adverse reactions, either by policy makers or by markets. There are, for example, dangers of increasing protectionism in some areas. In financial markets, there is the persistent possibility of a new wave of weakening of the dollar , including the chance that it could take place in a disorderly manner. Such disorderly adjustment would have severly disruptive effects on world trade, global financial markets and, ultimately, global economic growth.

Of particular concern is the danger of a protectionist backlash because of the competitive pressures emanating from misaligned exchange rates or their uneven correction, as in the case of the Euro at present. There could be a reversion to such policies as anti-dumping measures and other forms of non –tariff trade barriers. Some domestic constituencies in the United States are already raising concerns about the trade deficit, as reflected in an increasing number of anti-dumping actions against Asian countries and efforts to encourage some of these countries to revalue their currencies. Moreover, such policies may extend to non-trade measures, including intervention to manage the exchange rate of floating currencies in order to ensure export competitiveness. In Europe,for example, there are concerns about the degree of appreciation of the Euro and its effects on exports and calls for currency market intervention.

A more comprehensive and long-term set of measures is therefore required. Importantly, these measures should involve both deficit and surplus countries and should above all, avoid contradictory effects on developing countries. To achieve these objectives there is a need for more concrete international economic coordination specifically aimed at rectifying the imbalances. A preferable approach would be to address the imbalances from a global perspective in which the goal should not necessarily be to achieve overall balance in a short period of time. In any event, the various structural and institutional differences between the deficit and surplus countries suggest that it is unlikely to be possible to reduce the imbalances to a sustainable level in the short term. . The over-riding need is not to focus directly on correcting the trade imbalances but rather to rebalance the global pattern of growth and of savings and investment. As in all cases of adjustment, attention should not be focused on exclusively on the country or region that has a trade or savings deficit because experience suggests that such an approach is likely to be excessively contradictory. Among the surplus countries or regions, all should participate in the adjustment process so that the burden does not fall on one country or region alone.

Increasing interdependence of national economies in a globalizing world and the emergence of rule-based regimes for international economic relations mean that the space for national economic policy i.e., the scope for domestic policies, especially in the areas of trade, investment and industrial development, is now often framed by international disciplines, commitments and global market considerations. Therefore, Governments need to evaluate the trade-off between the benefits of accepting international rules and commitments and the constraints posed by the loss of policy space and pursue an appropriate balance between national development agendas and international disciplines and commitments. National development strategies incorporating the agreed goals should become the basis for implementation strategies. Trade, aid and debt agenda should be built around the national development strategies with clear support for them from all development partners, including multilateral financial institutions.

(*) Daire Başkanı, Çok Taraflı Ekonomik İşler Genel Müdür Yardımcılığı, Dışişleri Bakanlığı