5:41 PM Sep 6, 1995

WORLD ECONOMY LOSING STEAM

Geneva 11 Sep (Chakravarthi Raghavan) -- The world economy has been losing steam -- with growth slowing down in 1995 in Latin America and the OECD countries, but accelerating in developing Asia and continued advance in some countries in Central and Eastern Europe, according to the UN Conference on Trade and Development.

In its annual Trade and Development Report (TDR) published today, the secretariat (in its short-term outlook, which it views as subject to considerable uncertainty) projects the world economy to lose some of its momentum and grow at 2.9% in 1995.

While developing world as a whole is projected to grow at about 4.4% accelerated growth achieved in 1994, it will be uneven. Latin American growth is set to fall from 3.7% last year to 2.0%, nearer to Africa's rate. The Latin American region, still dependent on substantial inflows of capital to finance investment are seen as vulnerable to the volatility of such flows, and capital flows into the region likely to be reduced or even dry up.

The OECD economies are slowing down in part due to cyclical deceleration in the US, and partly due to decline in value of dollar and import cuts in Latin America, weakening demand for exports of Western Europe and Japan.

However, growth in developing Asia will accelerate, while a number of countries of Central and Eastern Europe will also show continued advance, UNCTAD projects.

However, commodity prices will on the whole be considerably below their 1994 levels.

In 1994, tempo of world economic growth quickened - increasing from the 1.7 percent of 1993 to 3.1 percent. Most regions participated in this, particularly in Western Europe where cyclical recovery from recession helped double the economic growth of OECD economies as a whole.

While all three developing regions also did better than in 1993, growth was faster in Asia while Africa lagged -- with population growth outstripping income growth. China's expansion was trimmed a little, though still extremely rapid, while several countries of Central and Eastern Europe registered impressive advances.

International trade also grew faster than world output. Both US and Western Europe received strong impetus from exports, especially to rest of the world -- developing countries in East and South-East Asia and Latin America. In Latin America, this was largely due to its consumer-driven import boom, while in East and South-East Asia the import boom was alongside relocation of production driven by foreign direct investment, mostly from within the region.

But for many structural factors restraining growth remained stubborn. In Japan, debt deflation continued to reinforce that country's chronic under-consumption. Stimulative action was too little and too late for a genuine recovery.

In Africa, SAPs continued to bring in only a modest improvement in growth rates. Long-term development remained depressed by commodity dependence, poor infrastructure, over-indebtedness, low levels of domestic investment and caution by foreign investors, as well as political instability and conflicts.

Among the uncertainties facing the world economy and its prospects, UNCTAD says, is "over-cautiousness" by monetary authorities in the OECD countries that could seriously shorten the current expansionary phase of recovery in the world economy.

External financing continues to be concentrated among a relatively few developing countries and economies in transition - with commercial bank lending decreasing to Africa, West Asia and Eastern Europe.

And while the Paris Club of official creditors have taken some significant step forward in adopting new Naples terms, the implementation has been very hesitant and results have fallen far short of expectations, says the TDR.

While the Naples terms (for rescheduling and debt write off) for low income countries) may significantly reduce the debt service ratio for over half of the 33 low-income countries, the ratio for many others will remain too high.

An important reason is the heavy weight of multilateral debt. While the IMF and the World Bank have taken some steps to provide relief, in effect by refinancing hard loans with concessional funds, they have not been sufficient to resolve the problem of arrears or preventing multilateral debt service burden in some countries from increasing at a dangerous pace.

The current schemes of these institutions could be improved, TDR says, by allowing interest payments on arrears and current debt service obligations to be suspended (during their programs of rights accumulation approach).

But even these, TDR says, would not be sufficient and the main constraint will remain funding. Some recent proposals like sale of a portion of IMF gold reserves, a new SDR allocation with a portion used to alleviate multilateral debt, and drawing on reserves and loan-loss provisions of multilateral financial institutions deserve urgent and sympathetic consideration.