WORLD ECONOMY WILL GROW AT THREE PER CENT RATE IN 1996 SAY ECONOMIC EXPERTS MEETING AT HEADQUARTERS

Press Release
DEV/2106

WORLD ECONOMY WILL GROW AT THREE PER CENT RATE IN 1996 SAY ECONOMIC EXPERTS MEETING AT HEADQUARTERS

NEW YORK, 4 April (DESIPA) -- Rebounding sightly from a generally lacklustre performance in 1995, especially in the second half of the year, the world economy is expected to grow at roughly 3 per cent in 1996, an increase over the 1995 rate of 2.3 per cent according to a forecast made at the Spring 1996 meeting of Project LINK, held at United Nations Headquarters from 25 to 28 March. Project LINK brings together more than 100 international experts whose independently developed forecasts for their economies are harmonized to create a consistent picture of global economic prospects. Founded in 1968, Project LINK is now under the joint responsibility of the 1980 Nobel Laureate, Lawrence Klein, as well as Professor Peter Pauly of the University of Toronto, and the United Nations Department of Economic and Social Information and Policy Analysis (DESIPA).

A number of premises underlie the forecast of moderate improvement in world output growth: a revival in the United States economy after two quarters of slow growth in the second half of 1995; signs of recovery in Japan; a turnaround in several Latin American economies; and continued strong growth in many of the countries of South and East Asia. Such growth as will take place is expected to be fuelled in many countries, in large part, by relatively buoyant world trade, with world exports continuing to expand at a faster pace than output in 1996, as was the case in 1995.

The experts were most optimistic on inflation. The projections prepared for the meeting suggested that inflation would remain moderate in most Organisation for Economic Cooperation and Development (OECD) countries in the foreseeable future. Moreover, inflation appeared generally lower in at least two other major areas in 1995 than in 1994. Hence, not only were there remarkable reductions in inflation in Latin America as a whole, but the prognosis remained good if current policies were maintained. Similarly, in the economies in transition of central and eastern Europe, as well as in the Russian Federation, substantial progress had been made in bringing down inflation.

Despite that hopeful note, several concerns were expressed by the members of the LINK team. Apprehensions were expressed throughout the discussions regarding high rates of unemployment and growing income

inequality. In particular, a concern was expressed as to how the industrialized economies would react to current policies calling for fiscal consolidation. The experts pointed out that growth had been weak throughout western Europe last year, the United States had just started to rebound from a slow-down, while the Japanese economy was only just beginning to show signs of a gradual recovery. Hence, they said efforts to curtail government spending, as well as an undue focus on restraining inflation, might be premature, at best, and recessionary, at worst. The pivotal role given to monetary policy in the wake of fiscal consolidation was also a source of worry to some participants, who pointed out that it was difficult to fine-tune an economy using monetary policy alone.

At a special presentation on "Challenges for the Global Trading System", Robert Lawrence of Harvard University pointed out that great strides had been made in the direction of multilateralism in the past few years. Those were exemplified both by the successful conclusion of the Uruguay Round Agreement and by progress being made toward the establishment of a number of regional free trade arrangements, including APEC and the Free Trade Area of the Americas initiative.

Nevertheless, he continued, there were also clouds on the world trading horizon. Those threats to an open, liberal trading system were currently to be found largely in developed countries and were, in the main, in a response to their poor labour market situations. Thus, average wage growth in North America had been slow and there has been increasing income inequality since the 1980s. While more skilled, more educated labour was doing well, that was not true of less skilled, blue collar workers. In Europe, he said, there was less wage dispersion, but more unemployment. Hence, political forces were mobilizing and arguing that the poor labour-market performance was due to increasing globalization. Moreover, as the global trading system shifted toward deeper integration, items previously viewed as purely domestic -- such as labour standards or environmental issues -- were increasingly cropping up as part of trade negotiations, rendering them more and more sensitive.

Concern was also expressed by the participants with the ability of a number of European economies to achieve the conditions required for full monetary union by 1999 without precipitating recessionary conditions. Attention focused on the two Maastricht fiscal criteria -- namely, that the government deficit to gross domestic product (GDP) and debt to GDP ratios not exceed 3 and 60 per cent, respectively. In a special session devoted to "Fiscal Consolidation in Europe", papers were presented by Robert Wescott of the INF, by André Dramais of the Commission of the European Union, by Ray Barrell of the National Institute of Economic and Social Research, and by the Project LINK team.

At the session it was agreed that fiscal consolidation was painful in the short-run. At the very least, serious short-run effects on employment

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could be anticipated. Hence, there were misgivings that fiscal retrenchment - - especially in western Europe, in conjunction with the area's high unemployment -- might further weaken consumer confidence, making those economies dangerously recession-prone over the next few years.

On an optimistic note, it was pointed out by the participants that two sets of countries had achieved positive growth rates for their economies in 1995 for the first time in several years. Thus, in many of the transition economies, the period of declining output was over, as growth accelerated in 1995. However, the return of growth in 1995 and 1996 was not universal, but rather was heavily concentrated in central and eastern Europe and the Baltic States. Last year, output declined in the two largest Commonwealth of Independent States (CIS) economies -- Russia and Ukraine -- by roughly 4 per cent and 12 per cent, respectively. Those declines in output appeared to have bottomed out somewhat and, combined with the fact that inflation had somewhat receded, suggested that 1996 might see a turnabout.

The experts also noted that Africa was experiencing the fastest economic growth since the start of the decade. Not only was output growth, at just over 2.5 per cent, about equal to the population growth rate in 1995, but the continent as a whole was expected to see a significant increase in GDP per capita in the current year for the first time since 1985. The improvement in 1995 was rather broadly based, moreover, as more than a dozen countries recorded output growth rates of 5 per cent or more. Nevertheless, long-term structural constraints to development remained, including a lack of institutions, poor infrastructure, low levels of human resource development and unequal distribution of, and access to, financial and other resources.

According to LINK experts, developing Asia recorded another year of impressive economic performance, achieving overall real GDP growth of roughly 7 per cent, while inflation declined from its double digit levels of 1994. While the participants questioned the long-run sustainability of such rates of growth, the assessment was generally optimistic, with possible average growth rates of over 6.5 per cent to the end of the decade, if the necessary cross- border flows of capital, labour and technology took place. China, in that scenario, continued to be one of the fastest-growing economies in the world and was expected to grow at close to 9 per cent in 1996 and 8 per cent, or more, the following year.

LINK participants noted that the prior convergence of the growth rates of the economies in Latin America and the Caribbean was broken in 1995, in the wake of the Mexican financial crisis. Regional GDP was estimated to have grown under 1.5 per cent in 1995, as Argentina and Mexico suffered recessions. Nevertheless, not all economies in the region were affected. Brazil, Chile, Colombia and Peru managed modest to high growth. Moreover, the near-term LINK forecast was cautiously optimistic, with economic growth in 1996 expected to exceed that of 1995 and to increase further thereafter.

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In a special session devoted to discussing "Capital Flows to Developing Countries", Albert Fishlow of the Council on Foreign Relations and the University of California at Berkeley, noted among other things, that there appeared to be less macroeconomic policy coordination today than was the case in the 1980s. Evidence for that could be found in the fact that Japan was still suffering from a recession, whereas the United States had begun to emerge from its slow-down. Europe's circumstances remained very contingent on the situation in Germany. A key question, therefore, was how to recreate greater degrees of developed country coordination.

Of the more than 100 LINK experts attending last week's meeting, a substantial number came from developing countries. There was also notable representation from a wide array of United Nations institutions, including the World Bank, the International Monetary Fund (IMF), the Regional Commissions and the United Nations Conference on Trade and Development (UNCTAD). Missions to the United Nations were also invited to attend and some participated actively. The next meeting of Project LINK will take place in September in Switzerland.

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Project LINK Estimates and Projections for World Economy

1995 1996a 1997b

World GDP growth (per cent) 2.3 2.7 3.3

Developed market economies 1.8 2.1 2.7 European Union 2.3 2.1 2.9 Japan 0.5 2.0 2.6 North America 2.1 2.0 2.4

Developing Countries 4.9 5.5 5.9 Latin America and the Caribbean 0.8 2.7 4.6 Africa 2.6 3.4 3.4 South and East Asia 6.8 6.6 6.7 West Asia 1.9 4.8 4.4 China 10.2 8.9 8.4

Eastern Europe 5.6 4.9 4.7

Russia -4.0 -2.0 2.0

World trade volume growth 10.0 8.0 7.0

Inflation in developed market economies (per cent) 1.8 2.0 2.0

Unemployment rates (per cent)

European Union 13.1 12.7 12.2 Japan 3.5 3.2 3.0 North America 5.8 5.8 5.9

a Estimate b Projection

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