PRESS BRIEFING BY DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS

PRESS BRIEFING BY DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS

In an inauspicious start to the new millennium, the turnaround in the world economy, following a precipitous decline in growth in 2001, was not expected to be either rapid or synchronized in 2002, Ian C. Kinniburgh, Director of the Development Policy Analysis Division in the Department of Economic and Social Affairs, told correspondents this morning.

Presenting the reportWorld Economy in 2002 (theWorld Economy in 2002 is the first chapter of the upcoming publication, United Nations World Economic and Social Survey, 2002) at a Headquarters press briefing, he explained that the document was being released prior to the start of the high-level session of the Economic and Social Council next Monday, which would open with a policy debate on the state of the world economy.  Senior officials of the Bretton Woods institutions and the World Trade Organization (WTO) were expected to participate.

The recent steep slowdown -- world economic growth had decelerated from

4 per cent in 2000 to 1.3 per cent in 2001 -- had affected many countries simultaneously, he said.  In contrast with the downturn, however, the recovery would lack synchronicity.  As the United States led the upturn, with Europe and Japan following suit, the recovery in each of those economies was not expected to be as vigorous as the preceding decline.

Another important aspect of the situation was the adverse effect of the slowdown on the developing world, he said.  Having originated in the developed world -- primarily in the United States -- the downturn had cost the developing countries over 3 per cent in growth in 2001, as much as they had lost during the recent financial crisis in Asia.  Not until 2003 that a return to growth comparable to that in 2000 be projected. 

Among the factors contributing to the slowdown, the report lists a collapse in the information and communication technology (ICT) sector and a bursting of the bubble in equity prices, especially in ICT-related stocks.  Noting that recovery in ICT would be gradual in the absence of another wave of innovation, the document says “another boom in the ICT sector is unlikely to serve as the driving force for recovery”.  However, “monetary policy ... should continue to stimulate the nascent economic recovery”.

The report emphasizes the role of the United States in the world economy’s “quick-drop, slow-rebound” scenario.  Those countries, depending on that country’s market, had fared the worst in 2001, as had those with the strongest ICT sector.  Among the nations most severely affected were Latin American, East Asian and South-East Asian countries, including the Republic of Korea and Singapore.  The United States recovery in 2002 was expected to be modest, and the stimulus it provided to the rest of the world through imports would be correspondingly limited.  “The shift in growth of over 13 per cent in United States imports in 2000 to a decline of 3 per cent in 2001 was a major factor in the global slowdown”, the World Economy in 2002 states. 

Mr. Kinniburgh said the good sign for the world economy was that the large economies of India and China continued to grow rapidly.  The mixed news was that

the African countries, a source of particular concern at the United Nations, had suffered relatively little effect from the slowdown.  However, their economies continued to grow at only about 3 per cent.  Compared with the 2 per cent population growth in the region, such an increase had a negligible effect on development.

He also pointed out that the figures contained in the report were not significantly different from the preliminary forecast released last April.  However, since the conclusion of the work on the report, in recent weeks, the world had witnessed important developments, which could have an impact on the economy.  Some new risks had come to the fore, among them, the risk of a correction in the United States.  The United Nations had warned about that for some time in connection with that country’s large external trade deficits, which were unsustainable in the long term.  Such a correction could exacerbate the difficulties that the world economy was experiencing.

Another aspect of the recent developments, he added, was that previous optimism regarding the lack of contagion from the Argentine crisis earlier in the year was proving to be premature.  That crisis was now affecting other countries in Latin America.

Asked to explain the success of India and China -- countries with different economic and social models -– Mr. Kinniburgh said he did not think that those models were necessarily a major factor.  What mattered was the size of the economy, which involved, in particular, solid domestic demand in India.  China had continued the process of economic reforms and had adapted well to the changing economic circumstances.

Responding to several questions about the impact of recent developments -- including fluctuations on the New York Stock Exchange, the crisis in the Middle East and the India-Pakistan conflict -- on the world economic situation and the prospects for recovery, he replied that the behaviour of the United States stock markets, which were reacting to such events as the recent Enron scandal, and the behaviour of that country’s economy itself were “two different phenomena”.  While various factors had been affecting confidence in the financial markets at the beginning of the year, there had been a solid recovery in “the real economy” in the United States.  To some extent, the stock markets could influence consumer confidence and investment by businesses; that remained to be seen in the near future.  While recent events could have some dampening effect, at this point he was optimistic that they would not cause an absolute downturn in the world economy.

Another contributing factor that had emerged in recent weeks was the depreciation of the dollar, he said.  While it had been on the horizon for some time, it could have an effect on United States imports.  The country had been importing goods on credit, with the trade deficit constituting some 4 per cent of the gross domestic product (GDP).  Eventually, that situation must be corrected and the change in the value of the dollar was part of that correction.  With imports becoming more expensive, however, the United States was expected to import less, and that, in turn, would affect the world economy.  The world economic situation also depended on the extent to which individual governments were prepared to tighten or relax their monetary policies.

In general, it was important to accept the high degree of uncertainty in the world situation today, he stressed.  The main impact of political tensions and an increased number of conflicts in the world could be felt directly in the regions involved.  As for the Middle East crisis, it was unlikely to have a negative impact on oil prices.  The conflict between India and Pakistan was having a horrendous effect on the people in the region, but did not have the same implications internationally.  The same had been true of events in Afghanistan.  However, it was hard to predict the broader political consequences.

In response to a question regarding the forecast value of the dollar in the future, he said it seemed to be moving towards parity with the euro.

Asked about the likelihood of the Argentine crisis spreading to such countries as Brazil and Uruguay, Mr. Kinniburgh replied that initially there had been no such contagion in the region, and the economists had been hopeful that the situation would have been addressed by the international community.  The fact that the crisis had dragged on had increased the potential for contagion, not only through finance, but also through the real sector.  Argentina’s imports, for example, had ground to a halt.  At the moment, there was no plan to deal with the crisis.

What could the International Monetary Fund (IMF) and other financial institutions do to help Argentina out of its crisis? a correspondent asked.

He replied that, as a broad matter of principle, the IMF was there to address such financial crises as had occurred in Argentina.  It was unfortunate that it had not been successfully addressed, so far.

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