PRESS CONFERENCE ON 2004 GLOBAL ECONOMIC OUTLOOK

Press conference on 2004 global economic outlook

Despite the current turbulent world situation, things were, from an economic point of view, looking better for the near-term with the world economy expected to grow by 3.7 per cent this year, Nobel Laureate Lawrence Klein, founder of project LINK, told correspondents this morning.

Speaking at the Headquarters launch of Global Economic Outlook 2004, a projection of growth in the global and regional economies, Mr. Klein said he fully expected that 2004 would be better for the world than 2003, and 2005 would be in the neighbourhood of 2004 but not extraordinarily better.

LINK, a non-governmental international research activity that integrates independently developed national econometric models into a global projection, is jointly coordinated by the United Nations Department of Economic and Social Affairs (DESA) and the Project LINK Research Centre at the University of Toronto.

Joining Mr. Klein was Peter Pauly, Associate Dean, Rotman School of Management, University of Toronto, and main coordinator of project LINK, as well as Ian Kinniburgh, Director, Development Policy and Planning Office, DESA.

Mr. Klein highlighted three new centres of economic activity, China, India and the Russian Federation, and said the latter was now emerging as “a country to be reckoned with”.  It was better, he noted, for the world economy to be diversified among more leaders than a few.  There had also been a pick-up in world trade, with an increase of over 7 per cent in world trade volume.  He added that inflation was not an issue at the present time.

Asked about the effects of the war in Iraq on the world economy, Mr. Klein said that the war, as well as terrorism, disturbed people’s minds and made them uncertain.  There was a great deal of political and security uncertainty, which was not healthy for the world economy.  That affected the spending decisions of people and the investment decisions of businesses.  It also diverted a large amount of resources to the military sector, which was not the main sector of the economy.  The peace dividend, associated with the end of the cold war and which was good for the world economy, was gone, he stated.

A lot of people, he said, did not want to associate what was going on now with Viet Nam.  President Johnson, he noted, did not want to pay for Viet Nam as it was unfolding, despite advice from his economists to pay for it.  When he did pay for it, the inflationary pressure was so high that its impact was felt for decades.  That was what had to be borne in mind now.  Looking ahead five years, he said, the United States would be faced with some of the same problems unless it did something about curbing its twin deficits.

He noted that oil prices were high and that was related to the fact that the world’s number two source was not back in business yet.  That affected all the oil importing countries, the biggest of which was the United States.  War always caused uncertainty in the minds of people and that affected their attitude towards the future and towards spending.  The rebuilding of Iraq would take a long time and would be very expensive for the world.

Among the developing countries, he added, there were some that were doing very well.  But those in the Middle East were doing only fairly well, not great.  The non-oil exporting countries of the Middle East were not doing well.

Among the most serious risks to the projection, Mr. Klein cited current imbalances, such as the twin deficit in the United States.  The United States deficit needed financing, which meant that the international flow of funds must accommodate those deficits.  The dollar had depreciated a lot in the past year, he noted, at least 25 per cent against some currencies.

Other risks included economies which he described as “down in the dumps”, such as Mexico, which had a slower economy and had not met the ambitious goals of President Vicente Fox.  Public health was also a factor, as illustrated by the Severe Acute Respiratory Syndrome (SARS) scare last year and the impact of HIV/AIDS, and could affect the projections.  Countries with poor public health could not sustain economic growth.

Japan, Mr. Pauly noted, had also been gaining strength over the past year and was on the right track to achieving a 3 per cent growth rate and contributing to world growth.  The only area in the world falling behind a little were the continental European countries, which were growing at half the pace of North American economies.  Any concern was with the European economies.

There were a number of factors for that, he continued.  The structural reforms that were taking place elsewhere in the world had been slower in Europe.  European labour markets were less flexible than those in the United States, for example.  Also, there were still disparities of economic performance that could not be addressed by the common policy under the euro arrangement.  European countries had, in the foreseeable future, a slightly lower potential growth rate than North American countries.  Their current growth level was way below the potential.

Responding to a question on what would happen if the Federal Reserve rate increased sooner than expected, Mr. Klein said that high interest rates would not stimulate the economy and were “very awkward” in the middle of an election campaign, especially in an election that looked close.  It was awkward because the Federal Reserve should be non-political.  Some people said that the Federal Reserve would not take the ultimate action it needed to take until after the election.  A full per cent increase in the Federal Reserve operational rate would hold back growth and it might hold it back 3 or 4 per cent.

On the issue of economic growth and the achievement of the Millennium Development Goals, Mr. Kinniburgh said that sound and sustained economic growth was necessary, but not necessarily sufficient to tackle the first Goal of poverty reduction.  The recovery now under way was good news for reducing poverty, while not sufficient.  The other Goals presented broader challenges.  Growth should ease some fiscal pressures and contribute to the achievement of those Goals, as well.

Responding to a question about the impact of free trade agreements between the United States and other countries on the European economies, Mr. Pauly said that European and North American economies competed on all markets around the world.  Trade was positive for the world economy.  There was no direct threat to European economies from the United States entering into bilateral agreements with other countries, particularly because many of those agreements were structured as open agreements, so others could join.

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