PRESS BRIEFING ON PROJECT LINK

Press Briefing

PRESS BRIEFING ON PROJECT LINK

The Asian problem had probably touched bottom, Lawrence R. Klein, Nobel Laureate in Economics and Professor of Economics at the University of Pennsylvania, said this morning at a Headquarters press briefing on the short- and medium-term prospects of the world economy on the occasion of the current Spring meeting of Project LINK. "This year, 1998, will be a very difficult year", he added. Next year would likely be the beginning of the recovery.

Project LINK is a cooperative, non-governmental international research activity supported by the United Nations Department of Economic and Social Affairs (DESA). The project integrates independently developed national econometric models into a global econometric model.

Project LINK organizes two meetings annually at which more than 100 economists discuss emerging world economic issues. They explore the short-term forecasts prepared using the LINK model and debate economic policy assumptions and emerging issues such as the impacts of the Asian financial crisis.

The Project was initiated 30 years ago under the auspices of the Social Science Research Council of the United States. The project encompasses 78 country models, including developing countries and regions.

Participating on the panel with Mr. Klein were Chikashi Moriguchi, Professor of Economics at Tezukayama, Japan; Maria Socorro Zingapan, Director of National Planning, National Economic and Development Authority of the Philippines; Sam Olofin, Professor of Economics at the University of Ibadan, Nigeria; Pedro Sainz, Director, Economic Projections Centre for Latin America and the Caribbean, Economic Commission for Latin America and the Caribbean (ECLAC), Santiago, Chile; Raymond J. Barrel, Senior Research Fellow, National Institute of Economic and Social Research, and Visiting Professor of Economics, Imperial College, London; and Wladyslaw Welfe, Professor of Economics, University of Lodz, Poland.

At the beginning of the briefing, Professor Klein said that LINK was not an acronym -- it really meant what it said. The Project tried to link the countries of the world together. Every Spring since 1976, LINK had met to fashion that particular year's economic outlook for the world. Representatives from the World Bank, the International Monetary Fund (IMF) and the European Union were among the participants in this year's Spring meeting.

The meeting this week was particularly sensitive, he said. That sensitivity underscored the reason that last year LINK had felt it necessary to make three forecasts, instead of two: The eruption of the problem in Asia, otherwise called the "Asian Contagion" or the Asian Financial Crisis, which referred, in particular, to East Asia, was the reason for the third.

There were at least two other very significant issues for LINK this year, he said. One was the march of the European nations towards a common currency and common central bank. Another was the second phase of the end of the cold war and opening up of economies in Eastern Europe and the former Soviet Union to more international involvement -- an incomplete process that had greatly occupied LINK in recent years. The long standing problems of Africa, the Middle East oil market and Latin America were also being taken up.

Professor Klein stressed that the recovery for Asia that was being projected by LINK did not bring the East Asian economies back to where they had been before the trouble began. But it was an important step towards recovery.

For some years, the developing countries of the world had been expanding faster than the industrial countries, he said. That trend still held in spite of the problems in Asia, but the gap was narrower than it had been, because the United States, and North America, in general had performed extremely well. Also, the European countries were beginning to be more expansive, having made strides towards the formation of a common central bank and currency. On the other hand, Asian problems -- at least for the period of 1998 to 1999 -- offset some of those gains.

A great deal of attention had been paid at yesterday's meeting to the issue of world commodity prices, he continued. The main commodity of interest had been oil. For the United States, the real price of oil -- or gasoline -- was lower than it had been at the beginning of the first oil shock in the 1970's. Agricultural prices were also receding. In general, when oil prices were low, the world economy as a whole was expanding.

LINK's general forecast was not for a world collapse, he said. Last year, the concept of world deflation and collapse had been circulating. That was not happening.

Chikashi Moriguchi, Professor of Economic at Tezukayama, Japan, said that the Japanese economy had been fighting against the heavy pressure of non- performing loans. One of the main questions Japan faced was how soon that problem could be resolved -- a question that had been discussed yesterday. Another problem in Japan was that there was a sharp division between the manufacturing sector, which was performing rather well, and the non- manufacturing sector.

Negative growth for Japan's economy seemed unavoidable this year, he said. It had been triggered by the rapid shift of the Government's fiscal stance from an expansionary stance to one of restraint in April 1997. That had been followed by the bankruptcy of several Japanese financial institutions, as well as the Asian economic crisis. Japanese fiscal policy was now under rearrangement, but it would take some time to re-stimulate the economy.

Project LINK Briefing - 3 - 17 March 1998

Maria Socorro Zingapan, Director, National Planning, National Economic and Development Authority of the Philippines, said that the prospects for developing Asia in 1998 and beyond were largely overshadowed by current events in East Asia. The crisis had dragged on for nine months now, and while stability had set in for the Republic of Korea, Thailand, Malaysia and the Philippines, the situation was still precarious as business confidence in those economies was affected by developments in Indonesia.

Aside from crises in the financial sector, those economies had to contend with contractionary effects which brought in unemployment problems and social problems related to adjustment measures, she said. A perennial adjustment measure in the region was adjustment in expenditures. Shrinking demand in Japan was another problem, as was a suspected slow-down of the growth rate of the United States economy. So there were both internal as well as external problems that the regional economies had to contend with. Economic growth in South and East Asia was expected to slow down from 5.3 per cent in 1997 to 3.5 per cent in 1998.

A correspondent asked to what extent Africa was a part of LINK's scenario -- that country had not been mentioned during the briefing.

Mr. Klein said that a typical projection of LINK for several years had been that South and East Asia were very strong, and Africa was very weak. In the last three or four years Africa had improved considerably. However, if African output was adjusted by population growth, was it negative or positive growth? For a long time sub-Saharan Africa had shown negative growth on a per capita basis, although during the last few years it had turned slightly positive -- a very good sign. Africa would have some difficulty in a contemporary environment.

Sam Olofin, Professor of Economics at the University of Ibadan, Nigeria, said most of the economies in Africa were still characterized by fragile market structures. They were still largely dependent on primary commodity exports, which made them vulnerable to external shocks. There were skill shortages, rudimentary institutional structures, capital shortages and high rates of population growth. These had remained basic fundamental problems, such that significant changes could be the result of short-term reactions to developments in other parts of the world.

He said that 1994-1995 had been very favourable years. But since 1997, things appeared to be back to what they had used to be. Unfavourable climatic factors, the general decline of commodity prices and political unrest had contributed to the setback. The prospects were not very bright at the moment. Much would depend, in the near future, on the ability of countries to improve on investment climate -- which would require a reduction in conflicts.

Project LINK Briefing - 4 - 17 March 1998

On Mr. Klein's earlier comment on the reduction in the real price of oil, a correspondent asked if the gap between the North and the South since 1972 had grown or shrunk. "The gap has narrowed for this year", Mr. Klein said. His guess was that it would be the same for 1998.

Asked to make a forecast for unemployment rates in East Asia, Ms. Zingapan said that for the Philippines an unemployment rate of 9.1 per cent was expected -- up from 8.7 per cent last year. Thailand and Indonesia were experiencing massive lay-offs. The situation in the Republic of Korea was not as bad as had been feared last December. Fears of massive lay-offs of migrant workers from the Philippines had not as yet materialized.

Asked to comment on the effects of the Asian crisis in Latin America, Pedro Sainz, Director of the Economic Projections Centre for Latin America and the Caribbean, ECLAC said that the impact up to now had been rather small. Growth was expected to decrease from 5.3 per cent in 1997 to around 3 per cent. That reduction was not entirely due to the Asian crisis. Argentina and Mexico had had extraordinary performances in 1997. The impact of the crisis on the rate of growth had been around 1 per cent.

Professor Klein asked Mr. Sainz if Latin American countries still wished to emulate East Asia. Mr. Sainz said that while there had been a discussion of whether or not that model was the one to follow, it had not been mechanically accepted. After the Asian crisis it had become clear that it was very difficult to copy a model of another region.

Responding to another question, Professor Klein said that world investors liked political stability. The instability of the political situation in Mexico had been a problem in 1994. The Asian capital flow had been realized for many years as capital flowing inward, and the political situation had not sent it away. Investors tended to stay away if they thought the political situation was going to be erratic.

Asked to comment on LINK's methods, Professor Klein said LINK's statistical models were used for forecasting and for simulation. Recommendations were made by simulation. Further addressing the question, Raymond J. Barrel, Senior Research Fellow, National Institute of Economic and Social Research, London, said LINK had thought a lot about issues in East Asia for some time. A year or so ago a number of LINK's members had become convinced that a number of Asian economies had been overvalued, partly because of their choice to link with the United States dollar.

In terms of recommendations, Professor Barrel said there was a lot to learn from East Asia for a lot of countries. High levels of productive investment were very good for growth. The extent of market liberalization, however, should perhaps be considered carefully. Slow processes of evolution were more sensible than rapid processes of liberalization.

Project LINK Briefing - 5 - 17 March 1998

Wladyslaw Welfe, Professor of Economics, University of Lodz, Poland, asked by Professor Klein to speak on transition economies, said the situation in the transition economies was quite diversified. Poland belonged to the group of countries which had been successful in achieving strong economic growth -- with a rate of growth exceeding 6 per cent or 7 per cent a year and a significant decline in the rate of inflation -- and were hoping to join the European Union.

On the other hand, he said, there were countries that were behind. For example, economic reforms had not always meant positive changes in management techniques. The Russian Federation and Ukraine were just at the beginning of their recovery. Other countries of the former Soviet Union were experiencing promising growth.

* *** *