The Telegraph
Since 1st March, 1999
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The persistent slowdown in trade and investment and rising unemployment continue to hold back world economic growth. The recession has also stunted the hopes for significant progress on poverty reduction in the developing and least developed countries, despite the easing of geopolitical uncertainties that sidetracked a once-promising global economic recovery. This is the principal conclusion of the annual World Economic and Social Welfare Survey of the United Nations department of economic and social affairs. The survey was presented to international policy-makers at the UN economic and social council meeting convened in Geneva in June 2003.

The main cause of recession in the world market has been the war waged by the United States of America and its allies in Afghanistan and in Iraq during 2002 and 2003 respectively. The US spent close to $150 billion in the two wars and this is one of the reasons behind the recovery of the developing countries’ currency against the US dollar.

Overall, the global economy is expected to grow only by 2.5 per cent in 2003, following a 2 per cent growth over the course of 2002. Trade is also expected to pick up incrementally to a 4 per cent growth in 2003.

Silver lining

With attenuated demand globally, the overcapacity created by excessive investment in the Nineties, especially in the information technology and communication sector, has been reduced more slowly than expected. Besides, the geo-political shocks of the past year have resulted in a slack in other sectors, most notably in the travel and tourism industry. “Overcapacity will continue to have a dampening effect on business investment that is necessary to sustain recovery”, said the UN report. Even then, “most of the negative consequences of the earlier geo-political uncertainties are expected to dissipate by the third quarter of 2003”.

The survey said several of the elements of a return to robust growth remain in place. In a low-inflation world environment, policy-makers have been able to launch simulative macroeconomic and fiscal policies. But the reduced inventories brought on by protracted weakness since the period 2000-01 need to be replenished. Many developing countries are benefiting from improved commodity prices, even though they are quite low. Those developing countries that are able to borrow from global capital markets are able to take advantage of low interest rates. The developing countries should take full advantage of the low interest rates to boost their foreign trade.

Dollar dilemma

But a complicating factor in the recovery is the long-anticipated decline in the value of the dollar — mainly because of the ballooning US external deficit. The trade-weighted index of the dollar dropped sharply from its 2001 peak. The depreciated dollar tends to reduce US imports and increase competitive advantage of its products against exports of other countries.

Thus the stimulus which trade provides to the world economy is reduced. Continued depreciation would have a negative impact on US financial markets, as it reduces the return of foreign investors on dollar denominated financial assets. Given the influence a large economy like that of the US has on the world financial markets, continuing depreciation of the dollar will affect the world market adversely.

A depreciating dollar is among the reasons why a robust global recovery would need to be built on a broader base than just the US economy. The need for widespread growth adds urgency to fulfillment of “the new development commitment” that was forged in 2001 in Doha and in 2002 in Monterrey, Mexico.

The developed world has an important role to play in the path to recovery. The survey has urged the developed world to kick-start negotiations in alignment with international development principles. These countries have been urged to step up official development assistance for sustaining and supporting the growth momentum in the developing world.

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