11:55 AM Jul 1, 1997

UNITED NATIONS: WORLD ECONOMY TO GROW BY 3% IN 1997

Geneva, 2 July (Chakravarthi Raghavan) -- Presenting an upbeat view, the United Nations in its annual World Economic and Social survey projects a 3% growth rate for the world economy in 1997.

Developing nations, who in this decade have registered overall faster growth than the industrialized nations, are expected to continue this trend in 1997 - with a 6% growth rate compared to the 5.7 of 1996.

But the acceleration in growth rates of developing nations, is due to a broadening of the number of growing countries than to faster rates of growth in a limited number of countries. Of the 95 countries for the preparation of the survey, only eleven failed to increase per capita output in 1996, compared to 24 in 1995.

Overall, this is the third year in the most recent four in which world output growth has reached that level and, says the UN, it appears to be a sustainable growth trend - in that inflation rates have fallen in most countries and are being further reduced in others, while excessive fiscal deficits have been broadly curtailed.

The survey underlines that to create employment at a faster rate than the increase in labour force, so as to be able to absorb of the unemployed and under-employed, developing countries need to have an annual per capital growth of three percent.

While presenting an upbeat view of continuing this sustainable growth trend, a careful reading of the survey suggests that the authors have some question marks -- not least the fact that the African growth is due to some temporary factors -- the relatively high commodity prices of the mid-decade, good weather and relatively high petroleum prices.

Other elements of uncertainty relate to the fact that while the Latin American and Caribbean region have shown a recovery of domestic activity and resumption of international capital flows, the region remains vulnerable to sudden reversal of these flows, as happened in 1994 when the interest rates in the US rose unexpectedly (due to the Federal Reserve's pre-emptive strike against possible inflation); and some of the consequences of the recession in Argentina and Mexico (after the 1994 peso crisis) persist - little progress has been made in reducing the unemployment, accentuated by natural increase in labour force.

Poverty in Latin America and Caribbean still affects over two-fifths of the population or about 200 million, and affecting them more than ever before. And an important feature of urban poverty is that it affects not only the larger share of workers in low-productivity informal jobs, but also high percent of unskilled labour in the formal economy. Between 30 to 50 percent of salaried workers in low-skill jobs in the private sector live in households with incomes below poverty line.

While the macro-economic reforms implemented in the 1990s have placed much of the region in a stronger macro-economic position, and have set in motion a structural transformation of the economies of the region, the Survey warns: "the slow realization of the 'reform dividend' is making voters increasingly sceptical of the rationale behind these policies.... Continued popular support for current economic strategies is not unconditional and dissatisfaction is beginning to build."

In Eastern and Southern Asia region, while rapid economic expansion continues, there has been a deceleration in 1996 and growth in the region in 1997 is expected to be at about the same rate.

Two consecutive years of slower growth have raised questions whether it is a temporary setback or a longer-term trend. The situation highlights the importance of continued technological upgrading for production and economic reform, particularly of financial institutions. Sustained high rates of growth will depend on a continued high rate of investment in human as well as physical capital and the ability to assimilate technological and managerial expertise from more advanced countries, adds the Survey.

And in the industrialized world, the survey while noting the expectations of acceleration of growth in Europe, as well as in the US, points that despite the successes as a result of the policy stances of reducing inflation and fiscal deficits, medium-term prospects remain uncertain and recent growth has not been accompanied by sufficient increases in employment.

The survey very gingerly looks at the debates and controversies in Europe in relation to the Maastricht criteria and focus of countries of the European Union in reducing fiscal deficits to quality for the EMU -- issues that are being debated as arcane economic technicalities.

The survey notes that the convergence criteria laid down in the Maastricht treaty was related to what was actually prevailing. For e.g. the 60% reference point for debt to GDP was close to the average ratio of debt to GDP (61.7%) of the countries that composed the EC in 1991, while the 3% of GDP target was below the 1991 average of 4.3%.

"Economics as a discipline," the Survey says, "has no general prescription for the appropriate level of public debt or for the ratio of public debt to GDP," and goes on to discuss some interesting theoretical issues -- perhaps of some value to academics, but may appear arcane to policy-makers and decision-makers.

Elsewhere in the report, in discussing economic prospects, the survey notes that in many EU members, efforts to meet the fiscal criteria for entry into the EMU have hampered growth and exacerbated unemployment. If a better measure of fiscal deficits had been adopted, it would have improved countries' prospects for entry and allowed them more room for manoeuvre on domestic issues.

On a more general analysis of fiscal targets and country policies, the UN economists argue that long-term, rigidly defined fiscal targets may jeopardise social cohesion, while not necessarily achieving stated objectives. In developed, developing and transition countries, deficit correction should be part of a political process of choosing, rather than evading, policy priorities, and should take place within a broader adjustment programme geared to overall social and economic objectives.

While there is frequently a need to reduce deficits, there is no economic value in forcing them to zero.

The survey however notes that unlike in the United States (with its Federal relationships between the US government and those of the States, which do not have to worry about fiscal policies), in the EU - with monetary policy determined by the independent EU central bank, and with member-countries having to give up the traditional source of fiscal revenue, the 'seigniorage' in the issuance of currency and money-supply, and the option of an 'inflation tax', a country in the EMU with a strong recessionary economic shock would receive relatively little in the way of automatic stabilizer transfers from the centre. "Countries in the EMU will have very limited opportunity to employ fiscal policy, but may someday need it."

In plainer language, this perhaps means that fiscal, monetary and macro-economic policy and stances ultimately imply willingness of the people to continue to undergo hardships and sacrifices, and straight-jacketing of public policy would have some political consequences -- as some recent elections have shown. "The purpose of the survey is not to draw policy conclusions or recommendations of the UN Secretariat, and these can be found in other documents," UN Under-secretary-General for Economic and Social Affairs, Nitin Desai told a press briefing in response to complaints that the survey seemed to be fighting shy of drawing focused conclusions.

Replying to what has now become a standard question from Anglo-Saxon media about the costs of the UN reports and whether they are needed, Desai said: "The UN and its system have a number of flag-ship reports and we are now in the process of looking at all of them to see what we need to do to avoid duplication... But the survey, the oldest in the UN system, provides a lot of data that have been assembled by the UN Statistical Division, and most other reports draw on these data base. And unlike reports of the IMF or World Bank or OECD (which are negotiated documents of their boards), the UN reports are the views of the secretariat and thus independent. The UN earns money through the sale of the survey, and if it does not come out, the amounts saved in producing will be much less than the revenues lost.

"The UNCTAD's Trade and Development Report," Desai added, "deals with international economic issues and provides a focused analysis, and there is no need for us to duplicate it. We can quote it or draw upon it whenever needed."

The Survey projects developing economies growing by 6% this year (up from 5.7% in 1996), thus enabling world economy to keep growing by 3% for the second straight year.

By contrast, the industrialised nations are estimated to grow by 2.5% as against 2.4% last year; the "transitional economies" of the former Soviet bloc are projected to recover from their decline of 0.9% in 1996, to achieve a 2% growth for 1997.

But the survey is wary of some of the consequences that such neo-liberal and deficit-cutting trends have provoked. In particular, the report criticises the high rates of unemployment that continue to rise even in many European countries, and levels of absolute poverty which the survey calls "intolerably high."

The survey notes that Africa achieved its highest rate of economic growth for about two decades, with a 1996 growth rate of 4.3%, and expected to remain slightly lower, at about 4% in 1997.

"More importantly, this improvement in Africa covered almost the whole of the continent: at least seven out of every eight Africans lived in countries with rising per capita output in 1996," says the Survey. "This is unprecedented in recent memory... A continuation of these new developments could be the most hopeful sign in a long time."

Some 22 African countries had a GDP growth in excess of 5 percent, with agricultural output rising in both Northern Africa and the Southern African nations (which are recovering from drought); mineral output increased in Zambia, Zimbabwe and the former Zaire (now the Democratic Republic of the Congo), while inflation also fell in many of the African nations, especially among Francophone nations tied to the CFA franc.

But liberalisation, the survey notes, has left concerns about high unemployment in Africa, especially among the young. National unemployment rates hit double digits last year in Algeria, Morocco, South Africa, Zambia and Zimbabwe. In Latin America, regional economic performance was boosted by economic recoveries in Mexico and Argentina, both of which rebounded with increased manufacturing exports. But in Mexico, the report adds, real incomes have fallen by one-fifth since the peso was devalued in 1994, with disparities increasing between the growing export sector and other sectors of the economy, which remain depressed.

Asian economies continue to perform well, although the report says growth is cooling in some of the most rapidly growing countries, notably Indonesia, South Korea, Malaysia, Singapore, and Thailand. Eastern and Southern Asia, led by India and China, is expected to maintain its 1996 growth rate of 6.5 percent.

India's prospects, the survey says, have been buoyed by its 1997 budget's "emphasis on economic growth with social justice and...support for continued economic liberalisation".

China, is also praised for seeking a "soft landing" to its booming economy. The survey says China's efforts to reduce consumer price inflation have succeeded, with the inflation rate declining from 24% in 1994 to 8.3% last year. Meanwhile, the report projects that China's economy will grow by 10% this year, for its fourth, double-digit growth rate in five years.

Middle Eastern countries grew by 5% last year and are expected to improve on that level slightly this year because of Iraq's limited ability to renew oil sales through a UN 'oil-for-food' deal.

The UN-Iraq deal, now renewed until December, allows Iraq to sell 2 billion dollars of oil every six months. This, the report says should yield trade benefits as well for Lebanon and Jordan.

Perhaps the most bleak picture remains for the Commonwealth of Independent States (CIS) and Eastern Europe. Throughout the CIS, consumer prices continue to spiral up, with 1996 inflation rates at 48 percent for Russia, 80 percent for Ukraine, 91 percent for the rump Yugoslavia, 123 percent for Bulgaria, 175 percent for Armenia, and 422 percent for Tajikistan.