- The Washington Times - Sunday, June 29, 2003

Ian Kinniburgh, 58, director of development policy and planning for the United Nations and lead author of the “2003 World Economic and Social Survey,” was interviewed by telephone last week for The Washington Times by John Zaracostas in Geneva.

Question: The just-published U.N. economic survey does not project a rosy outlook for the world economy. It forecasts growth in world output of 2 percent this year and 3 percent in 2004. Is that sufficient for the world economy to pick up steam?

Answer: I think the last phrase is very appropriate. The world economy is beginning to pick up steam, but at the moment it’s not in very good shape. We’ve [been in] a period of slow growth for some years. But we do expect it to pick up steam from now onwards, particularly from the second half of 2003 and well into 2004. But it is true that we do not expect it to reach its long-term trend rate of growth until towards the end of 2004.

Q: The United States continues to be the main locomotive for the world economy. Can this situation continue, with Japan in deep contraction for nearly 12 years now, and Western Europe — in particular major economies like Germany in recession or on the verge of recession? Are we back to where we were back in the 1970s?

A: I don’t think we’re back to where we were in the ‘70s. The world economy has changed dramatically since then. But it’s true in the current situation that Japan is growing very slowly, if at all. And now that problem has been compounded from the global perspective by the slowness in Europe, and we find that Europe was even slower in 2002 than it was in the poor year of 2001, and we find that Germany is probably in recession at the current moment.

So that does lead us to the conclusion, at least for the time being, in the short term, for the next few months, the United States is going to have to be the main engine of growth in the world economy. But if the United States plays that role and with the interest-rate cuts made in the last few months we see a lot of policy stimulus in the pipeline in the United States. So we do expect the recovery to start in the United States, hopefully to spill over and, as we say, pull the other major industrial-country economies along.

Q: One of the bright aspects of your survey is that you’re very bullish in your projections for China. You’re projecting growth of 7 percent this year and 8 percent in 2004, and a very domestic-led growth. Does this augur well for the whole Asia-Pacific region?

A: Yes, it does indeed. It’s precise to note there is a lot of domestic stimulus in the Chinese economy, and China is acting in its region as a locomotive. So there is a lot of intra-Asian growth. So you see the whole region is growing very rapidly. It is the most rapidly growing region in the world, and China is very much the locomotive in the region.

Q: You also mention that China is likely to benefit from any continued depreciation of the dollar, because it’s pegged to the U.S. dollar and isn’t affected in its access to the U.S. market, the way, say, European exporters are with a 30 percent appreciation of the euro against the dollar. Is the Chinese currency intentionally undervalued, given the level of reserves China has and the dynamism of its economy?

A: Well, this is a very difficult question. I mean, we have to remember it’s only a few years ago that there was talk whether the Chinese currency was overvalued. So this is a very tricky question.

But the Chinese authorities have kept their currency pegged to the U.S. dollar, and that is a policy which, from experience, has served them well.

Q: There are benefits for American manufacturers and U.S. exporters, but you also flag concern that devalued dollars could harm investors in the U.S. markets down the road. Does devaluation of the dollar come to a stop?

A: I think there are two issues here.

First of all as we just alluded to, the depreciation of the dollar had an immediate impact on the trade of other countries whose currencies are appreciating vis-a-vis the dollar. The Japanese and the Europeans will find it more difficult to export, faced with increased competition in the U.S. market.

The other aspect is, and as we know from experience this hasn’t happened yet vis-a-vis the dollar, but international financial markets can be rather fickle, and have herd instincts. We saw this even in the case of developed countries, in the case, for example, of the European Monetary System, some of the currencies there in the early 1990s.

There is a very slight risk that there could be what we call a “disorderly depreciation of the dollar.” So far, I would argue, the dollar has gone down in a rather relatively orderly fashion and has not gone down as dramatically it did in the 1980s.

So far it’s been orderly, but with international financial markets — if there is a sudden rapid loss of confidence of the dollar — it could have these implications in financial markets.

Q: Do you think the situation can be managed?

A: I think it can be managed. But as we all know very well, financial markets can be very fickle and move very, very quickly. And it’s important to remember the United States is a large debtor nation, so it has a lot of creditors out there who could move funds around very quickly.

Not all of them can, of course. Foreign investment does not flow out overnight or anything like that. But some of the money is liquid.

Q: For most of the postwar era, and during the oil shocks of the 1970s and 1980s, inflation was the nightmare for most governments. Now we see deflation mentioned as the worst nightmare for policy-makers. How serious is the threat of deflation to the world economy?

A: I think you have to take seriousness from two points of view.

Serious is in the sense if it happens, is it a big problem? And the answer to that is yes. And I think we see from the Japanese experience that once deflation takes hold, it can be very difficult to stop. Probably more difficult to stop than inflation. As a phenomenon it’s something to worry about.

Should we worry about it now in the major economies outside Japan? I think the answer to that is probably no. In the United States, there has been talk of deflation in recent months, but I think — with the acceleration of growth we anticipate in the country and the policy measures that have been taken in the last few months — deflation is not really a threat in the United States. And certainly, policy-makers are very alert to the possibility, so are taking measures to ensure it doesn’t happen.

Deflation, nevertheless, persists to some extent in Japan and has afflicted other countries but for brief periods of time. So I don’t think we would put this as a major threat on the global scale in the current circumstances.

Q: What are the main threats to the world economy?

A: Well, that’s a difficult question, because the main threat is the one we can’t see. I think [its like those] we’ve experienced in the last few years, like the shock of 9/11, the shock of the prospect of war in Iraq and — very briefly, hopefully — the shock of SARS.

These noneconomic shocks have had substantial implications for the world economy as a whole. They’re not economic in nature, but they’ve had economic consequences through their impacts on poverty, trade and so on. So we have to be aware: It’s the things that we don’t know that could possibly have the greatest negative impacts on the world economy.

Q: With most of the world economy integrated more and more, are the safety valves adequate to cope with any systemic shocks? You remember, there were all these preparations about the Y2K [threat] that never materialized. Is the system in place adequate to cope with unforeseen developments that could shake the system to its foundations?

A: I had forgotten about the Y2K fears, but I think it’s a good example the extent to which policy-makers are trying to anticipate these various shocks, and I think the system by and large does cope with most of these shocks. I think the response in the case of SARS was very appropriate. Governments took very prompt action. I think after September 11, again there was very prompt action by the financial authorities. There were immediate cuts in interest rates.

Q: Concerning post-9/11, there have been estimates that the extra security requirements for goods and services, and moving trade is adding an extra cost to doing business — up to 4 percent of the total cost. Could this slow down the economic pickup?

A: It’s certainly true that these costs exist. They’re a kind of tax on business and raise the cost of business, and inevitably this will slow things down somewhat. But we also have to remember we are also operating in a very new environment. These measures have been put in place to counter the new threats of terrorism.

This is now recognized as a possibility that has to be considered, and as long as that possibility is there, it’s appropriate for policy-makers to take what they consider to be necessary actions. If these measures were not taken and these costs were not incurred, the damage to the world economy might have been all that much greater.

Say, if people are worried about terrorism, if they think it’s a real threat, they will reduce spending, trade flows will be cut back, people will travel less, business will slow down. So while we face these costs, they are something which is necessary to maintain, in fact, a good business environment under the new circumstances.

Q: Your report says there are a lot of sectors with excess capacity in the world economy. The automobile industry is one, and we have seen a lot of excess capacity in the airline industry. The steel industry, for example, is mentioned as one that has excess capacity on a world scale. Is the world creating too much capacity amid insufficient demand?

A: Certainly, the whole concept of excess capacity does mean there’s more capacity than demand. So one can look at it from two points of view.

With the world economy growing so slowly, we think the problem is one of inadequate demand, and policy-makers are hopefully taking measures to address that — including raising demand, making scope for demand in the developing countries where most of the world’s people live, and there is big potential there if these countries can get moving again. So that’s one aspect of it.

The other aspect of it is, of course, inevitably, there’s always going to be change in the world. So that the situation in the steel industry, I would argue, is different to the situation in the airline industry. The steel industry is a long-term structural problem where there’s inadequate demand on the one hand but also shifting locations of production where different countries have newly emerging comparative advantage. The airline industry did suffer, as we said, some very extreme short-term shocks. It may be that in the long term, under this new situation, there is excess capacity.

But in the short term, it’s probably necessary to take slightly different measures in the airline industry to deal with those problems, which in the short term are generated by a shock, than the longer-term structural problems in the industry, which should be allowed to work themselves out over time.

Q: Looking at the world economy, what do you see as the bright spots? What are the new winners out there?

A: Well, I think some of the bright spots are, as we mentioned earlier, that we’ve got good growth going on not only in China, but also in India and also in some other developing countries. And we must not forget what we call “economies in transition,” essentially the economies of the former Soviet bloc, which everybody knows had a very hard time in the 1990s but are now showing remarkably good growth and have recovered from the setbacks and are certainly on the path of recovery.

So I think that’s very good news for the world economy. Those countries are increasingly integrated into the world economy, growing well, overcoming their past problems.

We do see some small rays of recovery also in another area that’s been set back: mainly Africa. But as everybody knows, the situation in Africa is extremely mixed.

So, on the one hand, we have some countries, which despite the difficulties, despite everything else, have managed to achieve growth of over 3 percent in the last couple of years, even in a slow-growing world economy, which is quite encouraging.

And hopefully we see some rise in commodity prices over the next few years, which will consolidate that growth.

At the same time, we have to see [that] the bad news that comes [out] of Africa continues. Not only AIDS, but the resurgence of conflict in some parts of Africa. And this, of course, has devastating consequences not only in humanitarian terms, but also in term of confidence, in terms of economic growth and, of course, in terms of overall development. That offset some of the better news that came out of Africa recently.



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