World economy gets up off mat

Production lines whir again from Seoul to Ruhr Valley, but rich-poor gap persists.

By , Staff writer of The Christian Science Monitor

The world economy, just a few years ago beset by financial crisis from Tokyo to Braslia, is entering a new century in the best shape in more than a decade.

Most of Asia's "emerging" economies are snapping out of a funk. After a decade-long slump, the Japanese economy may be restarting. Even Russia, shaky from its 1998 ruble devaluation, is expected to grow modestly. And rocketship USA continues to defy gravity - to the worry of the Federal Reserve.

"The most powerful boom since 1988," says Stephen Roach, chief economist of Morgan Stanley, a New York investment firm.

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On top of all this, inflation is running at extremely low levels in most of the world, including the developing countries. The EC predicts inflation in Europe at below 2 percent.

"A remarkable turnaround from the weak and uncertain outlook that prevailed a year ago," notes the International Monetary Fund (IMF) in a spring look at the global economy.

That's the rosy picture the world's top finance ministers and central bankers will discuss this weekend and Monday at the IMF and World Bank's spring session in Washington.

But it is a lopsided growth pattern. The IMF report notes "a persistent failure to break the cycle of stagnation and poverty in the poorest countries."

Some 1.2 billion to 1.3 billion people - about one-fifth of the world's population - are living on a dollar or less per day. Per-capita incomes have actually slipped in some poor nations in the past 25 to 30 years.

"As a result, the world is entering the 21st century with the largest divergence ever recorded between rich and poor," the report notes.

Many find this widening gap disturbing. Demonstrators have promised to disrupt the meeting. They charge the multilateral institutions with doing damage to the world, particularly developing nations, by promoting globalization and insisting on tough remedies for financial difficulties.

The IMF has a different view. "Retreats from globalization are very costly and are especially harmful for the poor," its spring report maintains.

"Most of these demonstrators - their hearts are in the right place, but they lack some understanding of how the global economy works and what produces a higher standard of living," says Cynthia Latta, an economist with Standard & Poor's DRI, a Lexington, Mass., consulting firm.

The chairmen of key committees at the IMF-World Bank session will travel Tuesday to the United Nations in New York for a discussion of world economic challenges with the ambassadors of the 54-nation Economic and Social Council. Topics include reform of the world's financial structure, poverty reduction, and debt relief.

The IMF predicts world output growing at a handsome 4.2 percent rate after inflation this year and 3.9 percent in 2001. Last year, world growth reached an estimated 3.3 percent.

The United Nations, in a draft world economic review, sees 3.5 percent annual growth over three years. "Highest growth rate in a decade," says Jozef van Brabant, chief economist of the World Economic and Social Survey.

Merrill Lynch chief economist Bruce Steinberg sounds even cheerier. He sees the "tech revolution transforming the world economy," producing an annual growth rate of at least 3.5 percent, possibly even 4 percent, for the next five years.

That compares with 3 percent a year from 1995 to 1999, a period pulled down by the global financial crisis and weakness in Japan.

The brokerage house economist expects the technology revolution that has raised productivity, lowered inflation, and boosted wages in the US to be "at least partially replicated elsewhere."

As usual, the IMF economists offer some policy advice to member nations. It calls on the US to "contain excess demand pressures" - not cut taxes or raise government spending substantially.

They expect the US economy to grow 4.3 percent this year and slow to 3 percent next year. But an alternative hard-landing scenario speculates that if US output doesn't slow, the Federal Reserve would have to press its anti-inflation brakes harder, the stock market might collapse, and a mild recession occur in 2001.

So the Fund economists call on the Fed "to move progressively but prudently to a tighter monetary stance."

Contrariwise, Morgan Stanley's Mr. Roach calls on the Fed to make "a larger move" than the 0.25 percentage point jumps in short-term interest rates it has made five times since last June.

Europe, for its part, has "more room to maintain relatively easy monetary policies," the Fund report says. The statement implies that the European Central Bank, which has been raising interest rates, partially to support the value of its new currency, the euro, should not boost rates further.

The IMF economists are also bothered by "high stock market valuations around the world." And they are concerned with the massive international payments deficits of the US - running at a $400 billion rate at the end of last year - and the persistently large surpluses in Japan's current account balances.

With oil becoming a less important factor in the world economy since the 1970s, the OPEC boost in oil prices will likely have a "benign effect" on global activity - unless prices continue to increase, the Fund report says.

Several recent reports on the world economy offer similar pictures for other parts of the globe.

*Africa is recovering, but not at the pace many would like.

*China's economy is forecast to grow 7 percent this year - not enough for the Chinese regime.

*The Indian economy is expected to slow to 6.3 percent.

*Latin America should experience a "broadening recovery."

*The Russian economy will slow a bit - from a 3.2 percent rate last year to 2.5 percent this year, according to the UN.

(c) Copyright 2000. The Christian Science Publishing Society

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