Hopeful sign: a convergence of growth

When the powerful economic policymakers and financial leaders of the major industrial nations met in Dubai last month, they vowed to stoke the fires of world economic growth.

Guess what? Economic flames have already been flaring up. The world's three most important powerhouses are growing significantly - a convergence not seen in 20 years. And stock markets have reacted accordingly, finally giving investors around the globe something to smile about.

While it's too soon to call these developments a boom, it's beginning to look as though the expansionary policies of governments and central banks in the United States, Japan, and Europe are bearing fruit.

What can keep the growth going? Economic reform, finds a new study. Over the long time, efforts by nations to adapt "best economic practices" in business regulation and social policies may speed world economic progress.

At the moment, what is significant for the world economy is that the current economic revival includes the United States, Japan, and probably the laggard members of the 12-nation European Monetary Union (EMU). It's a synchronous world expansion.

"The world economy may have turned the corner," says Horst Köhler, managing director of the International Monetary Fund.

After three years of doldrums, world gross domestic product (GDP) - the output of all goods and services in every nation - looks poised to reach a record $32.2 trillion this year. That's roughly a 2.2 percent growth spurt, up from last year's 2 percent growth.

Next year, the picture looks even better. World GDP should grow about 3 percent in real terms, predicts Nariman Behravesh, chief economist of Global Insight, a consulting firm in Waltham, Mass.

A heartening turnaround

That's quite a turnaround. Japan's economy has been in the doldrums for a decade. Germany, France, and Italy have been close to a recession. Their economies had been restrained by a tight central bank monetary policy - loosened somewhat recently.

"We are probably past the worst," says Richard Reid, an economist in London with Citigroup, a major investment bank.

Germany, Europe's biggest economy, should have 2 percent real growth next year, forecasts Ralph Solzeen, an econo-mist with Commerzbank in Frankfurt. That upturn will partly be due to several national holidays falling on weekends in 2004, rather than work days.

The nations of the European Monetary Union, with the euro as a common currency, will grow 1.5 percent next year, says Mr. Behravesh.

Britain, outside the EMU, should enjoy 2.5 to 3 percent real growth, predicts Mr. Reid. The British economy is already performing well, with a jobless rate at a 50-year low of 3.2 percent.

Japan's economy has been growing about as fast as that of the US this year, though Behravesh wonders if Japanese statistics overstate growth and the amount of deflation.

Growth is also popping up elsewhere. Non-Japan Asia could grow at a 5 to 7 percent clip. Canada, Australia, and Central and Eastern Europe should continue to see respectable growth. Latin America should pick up, as Argentina rebounds after four years of trouble, Brazil recovers from recession, Venezuela halts its downhill plunge, and Mexico benefits from the US recovery.

It's "a global rebalancing," with the US role less dominant, says Stephen Roach, chief economist for Morgan Stanley, a Wall Street investment firm. This shift is encouraged by the weakness in the US dollar, which fell to fresh three-year lows against the Japanese yen last week, despite efforts by the Bank of Japan to prevent this from happening.

Deficit woes

Some economists have been concerned that the huge twin US deficits - about $400 billion in the federal budget and $550 billion in the international current account - could drag the American economy back down next year. The argument is that the stimulative impact of a better trade balance brought about by a weaker dollar could be offset by higher interest rates arising from the need to finance the massive balance of payments deficit.

Nonetheless, most economists figure the US will grow at close to a 4 percent annual rate next year. That may bring down unemployment a little in time for the fall election.

In Europe, economic performance differs considerably between nations. The key to long-term outperformance, maintains Reid, are "a competitive [foreign] exchange rate, flexible labor and product markets, and investment in high-growth technologies."

With those factors in mind, he sees Finland and Ireland as best placed in Europe to surge ahead. But regulatory and social reforms are being pushed ahead in several European nations. Regulatory reforms are key to hearty long-term growth, finds a new report from the World Bank.

In Germany, for instance, Mr. Solzeen expects to see measures to trim unemployment benefits, health- insurance costs, and social security payments that may encourage business expansion and the creation of new jobs. At the moment, Germany has 9.5 percent of its labor force unemployed, according to its own statistics, 8.5 percent by an international measure.

France is considering shrinking its large government bureaucracy. Italy, faced with a rapidly aging population, is considering trimming the costs of its pension system.

The Swiss economy, by contrast, has performed poorly in recent years. Reid blames this on a slow pace of economic and regulatory reforms, plus a less competitive foreign exchange rate.

Regulation that works

"Heavier regulation is associated with poor economic outcomes in both rich and poor countries," says Caralee McLiesh, coauthor of the study by the World Bank and its affiliate, the International Finance Corporation.

Her study outlines the most effective laws and regulations in 130 countries concerning starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business. The hope is that this information will stimulate reforms around the world.

Some reforms could be accomplished in developing or developed countries in months; others, involving new laws, could take years to work through legislatures.

Economists have found in recent decades that speeding economic progress in poor countries has been difficult. By offering national "benchmarks" showing what methods have worked best, the study's authors suspect they will encourage more rapid reforms and thus faster economic growth.

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