PRESS CONFERENCE ON 2002 GLOBAL ECONOMIC OUTLOOK

PRESS CONFERENCE ON 2002 GLOBAL ECONOMIC OUTLOOK

Next year would be a better year, economically speaking, provided that big contingencies did not occur -– that the war in Afghanistan and other parts of the world did not escalate, that the United States was able to sustain its recovery, and that energy prices did not spin out of control, correspondents were told today at a Headquarters press conference, upon the release of the 2002 Global Economic Outlook.

So said Lawrence Klein, 1980 Nobel Laureate in Economics, Emeritus Professor at the University of Pennsylvania, and founder of LINK, an international network of more than 60 national and international economic research institutions.  He was joined at the podium by Ian Kinniburgh, Director, United Nations Division for Economic Policy and Development, United Nations Department of Economic and Social Affairs, and Professor Peter Pauly, Institute for Policy Analysis, University of Toronto. 

Economists from around the world were meeting at the United Nations this week to discuss the world economy, as well as regional and national economies, as part of LINK.  The decades-old network provides global, regional and national economic forecasts and economic policy analysis based on an integrated econometric model.  Information from its economists was used as the basis for much of the reporting that went into the flagship economic publication of the United Nations, the World Economic and Social Survey, which was issued in early July, during the meetings of the Economic and Social Council.

In his opening remarks, Mr. Klein said that LINK was not an acronym.  The direct meaning of the word was that the economies of the world were strongly linked, and the Project tried to unravel the consequences of that linkage.  One year ago, when it last met at United Nations Headquarters, the fact that the United States was slowing down had been emphasized.  That slowdown had been called a recession by some, and a growth recession or slowdown, by others.  But, that was an outstanding event of 2001, which was felt around the world.  Countries depended upon the United States market to absorb their exports, and that had become difficult during the rest of 2001.

The year 2002 was a recovery period, he added.  There was no doubt that the outbreak of terrorism had set back the United States economy.  Indeed, it brought it "almost" to a very serious recession, but the United States economy had a lot of resilience, and it was on the mend at the moment.  Throughout the world, some countries were falling and some were not.  There were very few that escaped the influence of the "slackening" of economic activity during 2001.  People had highlighted the fact that Canada was doing a bit better than the United States, Australia was doing a little better, but there were difficulties everywhere he looked.  Also, there was a turbulent military environment at present, and that had consequences for the economic outlook. 

He said that the main projections were that the United States would recover, but not in a "V-shaped" pattern; it would be a much more gradual recovery.  Western European industrial nations had finally consolidated the introduction of the new currency and the common central bank, and they were still growing only moderately and the unemployment rate had not fallen by much

in Europe.  In the developing world, the deterioration in Latin America was significant.  Indeed, it was hard to find an optimistic area in Latin America.

There was a recovery in East Asia, following the crisis in 1997 to 1998, he went on.  As the United States slipped, however, some countries in East Asia also slipped.  Singapore declared last summer that it was in recession, and Tapei/Taiwan, which had been one of the vigorous economies in East Asia, also fell into a recession.  But, the Republic of Korea was doing rather well and, in some sense, the world's two biggest countries -– China and India -- had done reasonably well and were areas of stability in the world.  In the Middle East, everything was "mixed and confounded" by the ongoing military operations.  

In the United States, presently, the situation changed greatly as a result of terrorism.  It used to run big fiscal surpluses at the central government and people were worrying how to spend the trillions of dollars of surplus, which had now turned into deficit.  There had also been a very significant increase in military expenditures.  The United States economy was strong and coming back to a better place than in 2001, but that was "not a complete turnaround" and it was not what people had expected before the terrorist attack of last September.

There had been a lot of media controversy about whether China was growing as fast as it said it was.  But, the Chinese numbers were quite reasonable and the criticism had been taken much too far.  It had also been expected that the liberalization of India would have put it on a solid growth path again.  China was better off in terms of economic performance than many developing countries, but it was not up to the maximum that had been anticipated.  It was thought that India would pose a challenge to China's numbers, but India was not that strong.

There were still problems of income distribution, which had become more unequal throughout the world.  Also, unemployment remained high.  Nevertheless, there had been an improvement.  The countries in transition in Eastern Europe and the former Soviet Union were performing better economically -- not fabulously strong, but steady and not particularly problematic. 

In LINK's meetings, issues to be watched were being discussed, he said.  Those included the price of crude oil, which had been much lower in the last few years and was now in what was called a "trading range" between $22 to $23 per barrel up to $27 or $28 per barrel.  But, there were many threats and contingencies in that field.  One had to be careful of inflationary pressures or inconveniences to living standards if oil was used more as a weapon than at present.

He said that the countries of East Asia had gotten some of the structural readjustments in place to stabilize their financial systems.  For example, the Republic of Korea had recovered very quickly after 1998, but then it slipped again and was now strong in terms of East Asian performance.  So, it was a mixed picture and better growth was still needed in Africa and Latin America.  "It was not a terrible outlook, but it's got some uncertainties at the moment", he said.

Asked about whether the economic situations in Japan and Europe had been discussed at the meetings, Mr. Klein said that was just being discussed today, as he left the meeting.  The Japanese presentation was pessimistic.  Looking beyond 2003, Japan would fare better, but in 2001-2003, the Japanese performance was lagging. 

Mr. Pauly added that one of the issues being discussed this morning was that, at the moment, there was insufficient support for the North American-led recovery from Europe and Japan.  The assessment for Europe was not as optimistic as for North America, and little indication that that would pick up any time soon.  For Japan, it was even more sobering.  So, at the moment, the relatively optimistic assessment for 2003 very much rested on the success of the North American economies, with not enough support from Europe and Japan.

Another correspondent asked about Mr. Klein's reference to the "military climate" in the United States and whether that helped or hurt spending there.  Referring to the concept of "military Keynesianism", Mr. Klein said that when countries had significant increases in military spending, that was a stimulus, as with other spending, especially in the short-term.  But, that did not create productive capital for the longer run.  A presentation yesterday stated that a good part of what was underpinning Europe's economy was military spending. 

There was no doubt that military expenditures had increased in the United States, and no doubt that the daily cost of operations in Afghanistan was significant, he added.  That was not a preferred way of improving economic performance, but it worked out that way.  Upgrading the military, in terms of salaries, calling up reserves, and producing more equipment, were adding to economic activity in the United States.  In the short-run, he was seeing the effects of "military Keynesianism". 

How would a possible military attack against Iraq by the United States and the North Atlantic Treaty Organization (NATO) affect the global economy? another correspondent asked.  Mr. Klein said that economists were not political analysts, but a military operation against Iraq, which was politically controversial, certainly made the forecast for the oil price more uncertain in the direction of higher prices than was seen at the moment.

Mr. Pauly added that during yesterday's discussion, an assessment had been made that such an attack would potentially put about 6 to 8 million barrels per day of oil supply at risk.  There was thus a substantial potential for a significant price rise in the short term.  No one knew how that would work out, but there was a substantial risk to oil prices if that military action materialized, he said.

Referring to a point made in the report on the possibility of the Middle East crisis worsening, a correspondent asked how that might play out.  Mr. Klein said that that would mean the military operations would be more costly in different countries, depending on how they "lined up".  In terms of the United States, that would prolong and enhance the increase in military expenditures.  Certainly, the United States was a contestant in expanded military operation in the Middle East.  There was also the big arms trade, both illicit and open.  All of that was very bad for the world economy. 

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