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Economia politica

'99 global Economy World Economy at a Crossroads
di Li Changjiu
in "Beijing Review", 42(1999), n. 1

The world economy is now at a crossroads. Whether the economy will continue to grow steadily or if it will go into a global decline has become the focus of the international community.

A recent estimation by the International Monetary Fund (IMF) showed that the growth rate of the world economy would drop from 4.1 percent in 1997 to 2 percent in 1998. Except the European Union (EU), whose economic growth rate increased from 2.6 percent to 2.9 percent, the economy in other countries and regions either slowed down or experienced negative growth. The IMF predicted that the economic growth rate of the United States would drop from 3.9 percent to 3.5 percent, while that of Latin America and Africa would fall respectively from 5.5 percent to 2.8 percent and from 4.5 percent to 3.8 percent. The Middle East and some of the European countries would see their economic growth rate drop from 4.7 percent to 2.8 percent. The Russian economy would turn from a 0.9 percent growth rate to a negative 6 percent. Of the 17 countries and regions in East Asia, six have witnessed a negative economic growth. The negative growth rate of Japan, it was estimated, would rise from 0.7 percent to between 1.8 and 2.6 percent. The economy of Thailand, the Republic of Korea (ROK) and Malaysia would decrease by 6 percent to 7 percent. The Indonesian economy, in particular, would decline by 16 percent. Meanwhile, China's economy would have an 8 percent economic growth rate.

IMF also predicted that the general economic growth rate of the world would reach 2.5 percent in 1999. The economic growth rate of the United States, however, would drop to 2 percent. The European Commission has recently reduced its planned economic growth rate in 15 EU countries from 3 percent to 2.4 percent. The Japanese economy might see a 0.5 to 1 percent rise or continue to grow negatively. A 0.7 percent economic growth could be expected in the ROK, China's Hong Kong Special Administrative Region (HKSAR) and East Asian newly industrialized countries or regions such as Singapore. The Chinese economy would maintain a high growth rate. The Latin American and African economy would keep the same pace or would speed up slightly over the previous year. The Russian economy would continue its negative growth. A commentary from the British The Economist September 5-11, 1998 issue pointed out the risks of a deep global recession are increasing. Paul Anthony Samuelson, a world famous economist, published an article on October 12, 1998, saying that the US economy seems to have gone into a recession.

At present, there are both restricting and favorable factors in developing the world economy. Whether it will continue to grow slowly or go into a global decline depends on the economic policies taken by developed and developing countries and adjustments and reforms in international economic institutions, systems and order.

First, the global foreign exchange market should have transparency and order.

Le Parlement, a German Weekly in February 26, 1998 stated that from 1990 to 1995, the world commodity production increased by one-third; exports rose by 50 percent and the exchange volume in the financial market increased by 230 percent. The volumes of these three fields were respectively 7, 12 and 43 times those in 1972. The Bank for International Settlements (BIS) stationed in Basel, Switzerland, published an investigative report on October 18, 1998, showing that the current daily exchange volume in the global foreign exchange market has increased from US$1,000 billion in 1992 to US$1,500 billion. Calculated every 250 days, the exchange volume a year will reach US$375, 000 billion, while the trade volume of commodities and services per year add up to no more than US$7,000 billion. That is to say, less than 2 percent of the global foreign exchange volume was brought about by foreign trade, while the other 98 percent was on all kinds of speculation. Amartya Sen, the economic Nobel Prize winner of 1998 from India, pointed out that to some degree, the world economy is controlled by speculators. For years, speculation has been one of the major characteristics of the market economy.

It is mainly hedge funds that have been stirring up trouble in the global foreign exchange market. The British pound crisis in 1992, the Mexican financial crisis in 1994 and the East Asian and Russian financial crisis in 1997 and 1998 all resulted from the speculation of hedge funds controlled by international scalpers such as George Soros. Hedge funds are mainly found in American and European countries. The 4,200 institutions in the United States have a total capital of only just over US$300 billion, but they can draw on as much as over US$1,000 billion through bank loans. Using all the money, they attack some countries, greatly disturbing the international financial order. After America's Long-Term Capital Management Fund fell to the verge of collapse because of excessive speculation, four hedge funds under the control of Soros again got into trouble. Speculation and its dangers has alarmed different countries and regions. Since the hedge fund is usually on a large-scale and not transparent, one country or region alone cannot cope with it. On October 30, 1998, financial ministers and central bank presidents of the Group of Seven (G-7) issued the London Declaration emphasizing the transparency. The declaration proposed that relevant commissions of the BIS should coordinate with newly-developed market countries, authorities of each country and other private or public institutions concerned in studying the standard of an appropriate transparency and open information for the private financial institutions participating in international capital flow, such as the investment bank, hedge fund and other institutional investment. If the foreign exchange market has transparency and investment and trade is ordered, then the global financial risk can be avoided.

Second, prevent a new "bubble economy" from forming.

According to the combined issue of French Les Echos September 11-12, 1998, the cross-border trade volume of stocks and bonds accounted for less than 5 percent of the gross domestic product (GDP) in the United States, Germany and Japan in 1972. But in 1996, the percentage went up to 15.2 percent, 19.7 percent and 8.3 percent respectively in these three countries. The Japanese stock market and real estate prices rose sharply, forming a kind of "bubble economy." At the beginning of the 1990s, the bubble broke. Encumbered by bad accounts, the Japanese economy was in deep trouble. To date, the bad accounts in Japanese banks have reached US$1,200 billion. The Japanese government was caught in the dilemma of either solving the problem of bad accounting or stimulating the economy. At the East Asia Economic Symposium held in Singapore in mid October 1998, a chief economist of Nnomura Comprehensive Research Institute said that Japan could not adjust both the capital and structure of its banks during one period, and that one cannot chase after two rabbits, otherwise both will escape. One of the important reasons for the financial crisis in the developing countries in East Asia is that a large sum of short-term capital flew into stock markets and real estate, thereby forming the "bubble economy."

In 1997, the gross national product (GNP) of the United States was US$7,690 billion, about one-fourth of the world's total, forming the biggest market in the world. Therefore, the US economy has a great influence on the world economy. The major risk is the soaring stock index though there are some fluctuations. On July 17, 1998, the Dow Jones 30 Industrials Average rose to 9,337.97 points after its slump to nearly 2,000 points in 1987 Wall Streets stock market, which was called an "irrational advance" by Alan Greenspan, chairman of the Board of Governors of the Federal Reserve System (FRS). Induced by psychological factors relating to the East Asian and Russian financial crisis, the US stock index fell by a large amount several times. On October 8, it fell to 7,500 points, and then bounced back strongly. By November 23, the Dow Jones Stock Index went up to a record 9,374.27 points. The economic structure of the United States and its general operation are both in a good state, quite different from the "bubble economy" seen in Japan at the end of 1980s. At present, about 45 percent of US families have entered the stock market directly or by joining various funds. The movement of stock indexes will greatly affect the income and consumption of these stock holders. The bubble inflation and big rises and falls of stock index have aroused the concern of the FRS. From September to November 1998, the FRS reduced its interest rate three times. As a result, the Federal Fund Rate decreased from 5.5 percent to 4.75 percent. The FRS proved itself to have a strong ability to make adjustments. Led by the FRS, European countries such as Denmark, Portugal, Spain, Sweden and Great Britain successively decreased their Central Bank interests. Major stock indexes across the globe bounced back. If the United States and other economic powers strengthen macro-control over the economy, there will be neither a "bubble economy" nor a sharp fall in stock indexes. Consequently, a global stock market disaster will not occur in the near future.

Third, economic globalization calls for international rules.

The East Asian and Russian financial crisis has swept across the global exchange and stock market and has affected the world economy. With the acceleration of economic globalization, the inter-penetration, inter-dependence and mutual influence between countries and regions are becoming more and more intense. According to the French Les Echos, from 1980 to 1994, the portion of cross-country direct investment in the world GDP increased from 4.8 percent to 9.6 percent. From 1989 to 1996, the cross-border commodity and service trade saw an annual increase of 6.2 percent, while the world GDP average annual growth was only 3.2 percent. Because of the unfair and flawed international program, we have no international rules in some important fields. Even Western economists point out that the totally free flow of trade and capital is impossible; and that only within regional groups composed of countries combining with each other economically and politically and having similar economic and social development stages, can such a freedom be achieved. They also say that a world economy, without any practical adjusting system and developed under an environment with no order, will sooner or later get into trouble.

J P Morgan, an American bank, calculated by exchange rate that 80.5 percent of the 1996 total global output value was created by 29 countries of the Organization for Economic Cooperation and Development, which possess only 20 percent of the world's population. Due to a big difference in economic strength, industrial structure and competitive capability between countries and regions, the opportunities and challenges are not the same in the process of economic globalization. To developed countries, advantages surpassed disadvantages. To most developing countries, opportunities and challenges stand side by side. To newly industrialized countries and regions, the economic globalization is also a "two-edged sword." The Trap of Globalization, an article by US theorists Alvin and Heidi Toffler published on November 2, 1998 Japanese Yomiuri Shimbun, said that economic globalization could not evenly bring advantages to everyone. A large sum of US dollars, called "idle funds," flew unscrupulously to small newly-rising markets and were immediately withdrawn by speculators in trouble, thus plunging several countries with a continuously growing economy into an unprecedented crisis. Forty-eight countries are facing the danger of being excluded from the world economy. These countries have 10 percent of the world's population, but their output value accounts for no more than 1 percent of the world's total. The portion of their foreign trade in world's total has declined to 0.4 percent from 0.8 percent 20 years ago. Multinational corporations make few investments here.

Since the financial crisis broke out in Asia over one year ago, the developing countries have been proposing in international and regional conferences the adjustment and reform of the current international organizations and system, urging the United Nations to pay more attention to the global economy and really solve the problem of the widening gap between the rich and the poor. They call for the World Trade Organization (WTO) to consider their capacity and interests while working out rules to promote trade, investment and financial freedom process. They especially call for reforms of the World Bank and IMF. The G-7 London Declaration also proposed the reform of international financial agencies such as the IMF. Other proposals include the establishment of an IMF financial credit institution and an World Bank emergency credit institution.

The major contents of the reform of international financial institutions such as the IMF and the establishment and perfection of international rules should include: First, set up a pre-warning system. Transparency is requested in the flow of short-term capital, especially in the movement of the hedge fund. In this way, we can improve the accuracy of forecasts and then take preventive measures; Second, establish and strengthen supervising systems and restrain the excessive speculation on the foreign exchange markets; Third, set up a fair and effective coordinating system, guarantee the effective participation of developing countries in making new international rules, and the new international rules should protect the economic security and interests of all countries; Fourth, enhance the cooperative system. Neither international institutions nor developed countries should add harsh conditions to their supply of aid, nor should they obtain special rights or interests from it. Starting from the national conditions of aid-receiving countries, the aid-providing countries should respect their sovereignty, economic security and interests.

To sum up, the world economy has not deteriorated beyond help. If relevant international institutions can introduce speedy and effective reforms and if countries enhance their coordination and cooperation, a global economic recession can be avoided and the world economy can continue to grow in the 21st century