SUNS 4338 Friday 4 December 1998
DEVELOPMENT: WORLD BANK FORECASTS RECESSION, FAULTS IMF
Washington, Dec 2 (IPS/Abid Aslam) -- The World Bank, eyeing the "substantial risk" of a global recession, has faulted the International Monetary Fund's (IMF) initial response to the Asian financial crisis.
The Bank's report - 'Global Economic Prospects and the Developing Countries 1998/99', released Wednesday - warned that poor countries were in for their worst time since the 1980s debt crisis and
recommended caution in liberalising financial markets.
"Excessive zeal in deregulation" in countries lacking strong institutions and policies to manage private capital flows was largely to blame for the financial crises that began in Asia in 1997 and spread to Russia and Latin America, said Bank chief economist Joseph Stiglitz.
Chile's system of taxing short-term investments to limit volatility in capital flows could be "a useful intervention tool" for other countries seeking to convert untamed speculation into a source of productivity, Stiglitz told reporters.
Chile earlier this year dropped the tax in a bid to attract foreign capital rendered scarce by investor panic about emerging markets. This demonstrated the system's flexibility, he said.
"When they need inflows, as is now the case, they can drop the tax rate to zero, but it remains an intervention tool to stabilise short-term flows."
Although massive capital outflows were blamed for unleashing chaos in the global economy, large inflows made it difficult for countries to set their own economic policy in the first place, according to the former chairman of U.S. President Bill Clinton's council of economic advisers.
Stiglitz, who has been under fire from officials at the Bank, the IMF and the U.S. Treasury for his attacks on their positions, added that "there must not be a swing of the pendulum on the policy side"
completely away from liberalisation.
Likewise, the Bank was careful not to single out the IMF, its Bretton Woods sibling. But its report noted that high interest rates and deficit-reducing spending cuts imposed in exchange for financial
bail-outs have had "contractionary consequences" in crisis-stricken countries.
Those prescriptions were aimed at protecting countries' currencies and generating savings with which to help finance Fund-designed structural adjustment.
"One of the great surprises in East Asia was how little immediate effect the initial policy responses appeared to have in reducing pressure on currencies or stabilising investor confidence," the Bank
report said. "To the contrary, much or even most of the depreciation in currencies occurred after these measures were taken."
Events have forced the Fund to ease up on some of its demands and have led the United States and some European countries to lower their interest rates. Those moves, along with developments such as the Japanese-led, 30-billion-dollar aid package for Asia, offer hope of recovery in the medium term, the report said.
However, "policies take time to work and the short-term outlook remains precarious," said the report. "The risks of the current slowdown accelerating into a world recession remain substantial."
The Bank forecast 1.9 percent world economic growth in 1999 after 1.8 percent this year and 3.2 percent in 1997. It defined "recession" as growth of less than one percent.
The IMF, which uses different methods in making its projections, in September expected world growth to rise to 2.5 percent next year from 2.0 percent in 1998. The Fund has revised its projections downward every few months since mid-1997.
The Bank expected developing economies to grow 2.7 percent next year, compared with two percent this year. But contraction in some 36 countries - including Indonesia, Brazil and Russia - meant that one out of every four people in developing and transition countries would see their incomes fall. Last year, with economic crisis in its early stages and largely limited to Asia, fewer than one in 14 people were hit with that fate.
Latin America would suffer the most, with growth falling from five percent in 1997 to 2.5 percent this year and 0.6 percent in 1999. The region was suffering "drastic cutbacks" in international capital flows, falling commodity prices, and a sharp slowdown in world trade growth.
Sub-Saharan Africa would see its long-awaited recovery cut short. The region's per capita income began to grow again in 1993, after more than a decade of decline. Growth reached 4.2 percent in 1996 but slowed to 3.5 percent in 1997 and could bottom out at 2.1- 2.4 percent this year.
Effects of the Asian crisis would be felt most strongly by the region's largest oil exporters - Nigeria, Angola and Gabon - because of lost Asian demand and falling prices for their principal foreign exchange earners. Elsewhere in the region, foreign direct investment - which had grown since 1990 but remained heavily concentrated in minerals and metals - likely would also decline as the global economy slowed.
Oil exporters in the Middle East and North Africa likewise "are experiencing the largest terms of trade shocks related to the Asian crisis," the Bank said. As a consequence, economic growth would slow to two percent this year from 3.1 percent in 1997 and "recover only modestly in 1999."
The East Asian crisis had made itself felt in South Asia through trade and foreign direct investment but "the financial effects have been muted," according to the Bank.
One reason: "the modest rather than complete relaxation of capital controls has meant little external exposure for banks (with Indian banks having little short-term foreign debt)."
Pakistani capital controls, however, could backfire. "Imposed to stem capital flight and preserve scarce foreign reserves in the immediate term, these measures will discourage worker remittances and inhibit domestic and foreign investment, with potentially harmful effects on longer-term growth," the report said.
The Bank predicted region-wide growth would slow from five percent in 1997 to 4.6 percent this year. It blamed this on depressed export markets in East Asia and Japan, tougher competition from these countries in other markets, and international sanctions following this year's Indian and Pakistani nuclear tests.