PRESS CONFERENCE ON WORLD ECONOMIC OUTLOOK - PROJECT LINK

Press Briefing

PRESS CONFERENCE ON WORLD ECONOMIC OUTLOOK - PROJECT LINK

While the world was not in fine economic shape, it was not falling uncontrollably, and some Asian and Latin American economies were starting to recover, Lawrence Klein, Nobel Laureate in economics and Emeritus Professor of the University of Pennsylvania, told correspondents at a Headquarters press conference today.

That was the collective feeling of the approximately 100 economists gathered at the Expert Group Meeting on the World Economic Outlook that commenced yesterday at Headquarters, he explained. Those experts met twice a year, as part of Project LINK.

Project LINK was the cooperative venture of about 60 macroeconomists, many in government, academia and regional organizations, Jozef van Brabant, Chief of the Economic Assessment Branch of the United Nations Department of Economic and Social Affairs, explained. They each ran national or regional econometric models which were subsequently linked by Project LINK at its Link Centre in New York, to allow for globally consistent short-term economic forecasting.

That was the Project's thirtieth anniversary, he continued, and the United Nations had been involved in the Project since the mid-1980s.

Mr. Klein said that the Project LINK experts had assembled right after the outbreak of the Asian financial crisis in 1997. That marked the beginning of a period of great economic turbulence, which persisted in 1998. Now, finally, it was the collective feeling of these experts, based on an examination of pooled evidence, that the economic pattern had stabilized in 1999.

For a long time a feature of the experts' analysis had been that production and growth in developing countries were expanding faster than in industrial economies, he said. One of the big consequences of the 1998 economic turbulence was that this ceased to be the case. No country had done marvellously in the crisis, except perhaps the United States, but growth in the developing world had fallen behind that in industrial countries.

Projections developed yesterday showed that one of the features of the current recovery was that developing countries were again catching up, Mr. Klein continued. On a per capita basis, 1998 was so bad that the developing world overall had a highly unusual negative growth pattern. However, according to Project LINK's projections for 1999, developing countries rates would be about equal, on average, with those of the industrial economies. If the projection was extended further into the future, the old pattern resumed, with developing countries expanding faster than the industrial countries.

Mr. Klein emphasized that the recovery would not be complete. The point to which those economies would recover was slightly lower -- in some cases a good bit lower -- than they had realized in the past. Many developing countries had outstanding rates prior to the turbulence of between 8 and 10 per cent per year -- Republic of Korea and China for example. Now the growth pattern was expected to be on average about 5 or 6 per cent.

The big locomotive for the world economy was North America, he continued. There was concern about whether the United States would keep growing fast and absorbing imports from the rest of the world on the current enormous scale. China was also a source of economic stability, although it was not growing as fast as the United States. Imports into the United States would be a feature of the recovery of the developing world, as developing countries started exporting again.

World inflation -- a serious problem from the 1970s to the beginning of the 1990s -- was quite low, he said. Anti-inflationary policies -- some perhaps too extreme -- had conquered inflation throughout the world.

Among the most troubling features of the international economy at present were low commodity prices, he said. Many developing countries were primary producers. The most visible of those were oil-producing countries. There had been an improvement in oil prices over the last month. The forecasts suggested that oil price would return to about $20 per barrel -- a more comfortable price for most oil exporters. However, no clear improvement could be seen in prices for minerals and other raw materials.

By way of a summary, he said, the world economy was probably recovering slightly. It was definitely not falling, and the assembled economists were not predicting a fresh round of economic turbulence, but rather a small but steady improvement.

Peter Pauly of the University of Toronto, a co-director with Mr. Brabant of Project LINK, said that the experts were moderately optimistic for the world economy. However, for their predictions to materialize, a number of pieces of the puzzle had to fall in place. For some time the world economy had been "flying on one engine" -- the strong economy of the United States was absorbing the world's imports.

The United States would remain strong, but would inevitably slow down over the next year of two, he said, and therefore it was important that other parts of the world economy grew stronger. The three areas the economists were looking to as sources of this strength were Japan, the European Union and developing countries themselves. A modest recovery in Japan with a pick up in private demand was needed, as was a reasonably strong growth pattern in Europe. These two industrial sectors would then be able to pick up part of the United States' role in purchasing imports.

Project Link Press Conference - 3 - 4 May 1999

There were also encouraging signs in a number of emerging economies, particularly in Asia, he continued. The most recent data showed that financial conditions in Asia were beginning to improve, and there were signs that financial flows into some countries had resumed. The experts predicted a fairly significant recovery in the developing world over the next year, particularly in the Asian economies, and this improvement would constitute the third element needed to offset the likely reduction in the pace of the United States' economic expansion.

Asked which countries or regions had started to recover, Mr. Klein said that recovery had commenced in the Republic of Korea, in Mexico and in Thailand. The turbulence may have hit Mexico first, in December 1994, and the Republic of Korea and Thailand had been hit soon after. The three were now among the most outstanding prospects for recovery.

Mr. Pauly added that growth rates in Asia prior to the shock had been between 6 and 8 per cent on average. They had dropped to minus 2 per cent last year. The consensus forecast was that they would recover to at least plus 2.5 to 3 per cent this year, and would move back up to rates of about 4 to 5 per cent in subsequent years. This meant they would not reach the pre- shock levels of growth, but it also meant that once again developing economies would be growing faster, on average, than industrial countries.

In economists' terms, this was a reasonably fast recovery, he said. Serious concerns still existed about the economies of some developing countries, such as Indonesia, but on the whole the gathered economists were reasonably optimistic for most of the Asian developing countries.

Asked about the prognosis for Central Europe, Mr. Klein said that, since the opening up of the former Warsaw Pact countries, Poland had probably performed best economically. There were periods when its economy was growing at 6 or 7 per cent. In 1997, Poland grew at 6.7 per cent, and its growth rate was at 4.8 per cent for 1998. This was very good. Poland would get back to 7 per cent growth again by 2002, according to the projections. Hungary had done almost as well, and was expected to be just a point or so below Poland, especially after the year 2000. The Czech Republic had started out strongly, but had gone into significant recession in 1998. Projections showed a gradual recovery would take place there. For Romania, the economic projections were pessimistic.

The slowdown in Poland and Hungary this year was largely a result of the slowdown in the European Union, Mr. Brabant said, as roughly two thirds of their trade was with the Union. About 40 per cent was with Germany, so the dramatic slowdown in Germany in the last quarter of 1998 and the first quarter of 1999 had a powerful effect on both countries. Hungary had also been affected by the Kosovo conflict, because its access to southern Europe by land and via the Black Sea had been cut.

Project Link Press Conference - 4 - 4 May 1999

The Baltic States were much more affected by the Russian crisis, he continued. Their trading links with Russia were stronger than those of the eastern and central European countries. The forecasts for Estonia, Latvia and Lithuania this year were for dramatic slowdowns.

Estonia fell to about a 4 per cent growth rate in 1998 from a previous high of 8 per cent, he continued, and the forecast suggested the figure would drop to about 3 per cent in 1999. While the declines expected for Latvia and Lithuania were slightly smaller, they would still be substantial. The Baltic States' efforts to reroute their trade through the European Union had been adversely effected by the slowdown in the Union economy.

Responding to a question about international hedge funds and Hong Kong Special Administrative Region of China, Mr. Klein said some minor controls on short-term capital inflows had been put in place, and hedge funds were now largely absent. Hong Kong could do that because it had very large reserves, a solid banking system and probably some moral support from China.

Asked about the outlook for Mexico, Mr. Klein said that the country had experienced a one-year recession from December 1994. That was about half the length of its previous recession, as a consequence of the North American Free Trade Association (NAFTA) and changed rules which made the country a more attractive host for foreign investors.

In 1995 growth had been about minus 5 per cent, which in gross domestic product (GDP) terms was "a walloping", but things were not so bad now, he said. The rate was expected to recover to about 3 to 4 per cent. Inflation had been stabilized and was, perhaps, declining. The exchange rate had also stabilized. Brazil's trouble had made Mexico nervous, but the Brazilian problems had not spilled over into Mexico, and the prospects looked quite decent for Mexico.

Concluding the briefing, Mr. Brabant invited correspondents to attend Project LINK meetings and offered to arrange one-on-one interviews with experts wherever possible on request.

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