Riding the waves

SPUTTERlNG growth has been a characteristic feature of the world economy in recent times. Yet there are encouraging indicators of a major upswing that can sustain it over a relatively long period. The developing countries of Asia and Latin America are shedding institutional shackles that restricted their growth in the past while in the developed economies, growth has backfired after a period of painful reconstruction in the '80s. The economies of North America, Australia and New Zealand have demonstrated unusual vitality in recent years. But the Trade and Development Report reflects what have actually been the disappointments of the '90s.

The upturn in the world economy in 1993 virtually ended by the beginning of 1995. There have been several indicators of this throughout the world. Volumes of capital flowed out when Latin America suffered from the debacle in Mexico. Short-term forecasts had suggested that growth will slow down from 3.7 per cent in 1994 to two per cent in 1995. The us has been living beyond its means since the Reagan era and was caught in a trap produced by the expanding costs of social security and declining contributions from tax collections. Consequently, the rate of growth decreased from 3.1 per cent in 1994 to 2.5 per cent in 1995. Worse still, western Europe has been unable to contain the galloping costs of welfare as a result of its aging population. Much of Europe's growth of 2.8 per cent in 1994 - which could be accounted for by the expanding demand from other countries - will decline with the decreased pace of the world.

Exceptions to this trend have been the countries of East and South Asia which have survived several setbacks suffered by the world economy. In these regions, policymakers have learnt from the past and continue to work with familiar tools to cope with a changed context. Productivity gains are being realised with the maturity of information technology. The growth rates that are possible with growing consumer demand have gone up without triggering inflation.

In the us, productivity growth at 4.9 percent has not been as strong since the '60s (which was like achieving five per cent growth per annurn without a defrimental effect on prices). The country's Central Bank, on the other hand, prespmed a growth of 2.5 per cent, as the ceiling. Over that rai 'e, the Federal Bank began to squeeze growth by lowering the supply of money and raised the rate of interest. In the integrated financial markets, transmission of higher interest rate to western Europe had a negative influence there as well.

Latin America's long history of financial catastrophes is not over despite the strenuous efforts made by multilateral institutions to retire its huge international debt. Its domestic financial institutions are not yet sturdy enough to attract the savings of its own people. Therefore, Latin America had to supplement its investment requirements by inflows of overseas capital. Consequently, the region has not been able to defend itself against the whims of contrary movements of financial capital. In the early '90s, it was able to draw huge amounts of capital as interest rates declined in the us. However, Mexico was vulnerable to the back flow of capital when the Federal Reserve Bank raised the interest rates. Such financial instability discourages investors from making long-term investments in plant and equipment. The Trade and Development Report shows that most investments in Latin America in the early '90s were made in estate residential construction rather than in riskier ventures like setting up infrastructural facilities.

Lower barriers to trade have been a strong impetus to growth but outcries against cheaper imports have become louder specially in those developed countries which have low levels of skilled labour. In countries like those of Europe - that are more unionised - wages have not declined to absorb the unemployed. On the other hand, displaced labour in North America and UK finds employment in low- skilled jobs at lower wages. Increasingly, developed countries will have to cope with the political backlash caused by a disenchanted and downwardly- mobile labour force.

Ironically, social pathos is much too evident even as the world economy takes a first but false step to recover from a long period of stagnation.