Since the mid-1990s, the world economy has expanded remarkably, propelled mainly by the introduction of advanced information and communication technologies. In fact, according to the IMF's recent World Economic Outlook, global output grew 3.4 percent in 1999 and is expected to accelerate to 4.7 percent this year.

Can we predict that trend will continue into 2001 and beyond?

In a period of such strong economic growth, the growing downside risks should not be overlooked.

The first risk is related to the "twin deficits" of the world economy. The first deficit, needless to say, is the growing U.S. current account deficit.

As the world's largest debtor nation, the U.S. continues to accumulate debt through its negative current balance, which amounts to roughly 4.3 percent of its GDP this year, according to IMF estimates.

Thanks to massive capital inflows, however, the U.S. has been able to finance the goods and services imbalance because U.S. industries, which have a leading role in the IT revolution, have attracted foreign capital. In fact, many European and Japanese firms have purchased U.S. companies that have IT technology. However, judging from the more recent collapse of high-tech share prices on the Nasdaq index, we should not overestimate or be too optimistic about IT industries. Accordingly, the U.S. may not be able to expect further inflows of foreign capital. In such an economic environment, the risk of a sharp surge in U.S. interest rates, as well as sharp declines in share prices, will grow and negatively impact the world economy.

The other deficit is the Japanese government's fiscal position, which is best described as "desperate."

Here, I would cite just a few words from the Nov. 4-10 issue of The Economist.

"Everybody but the LDP (the Liberal Democratic Party), it seems, can see the awful train wreck that lies ahead for the government's dreadful finances."

Under these circumstances, even the LDP-led coalition government will not be able to expand public expenditures to support the economy. Furthermore, unless the economy is on a steady recovery track, Asian neighbors will not be able to divert their exports from the U.S. to Japan, which could possibly force these developing nations into another recession.

The second risk is to the "Old Economy," or traditional industries. As the IT revolution continues, the "New Economy" is attracting more attention and absorbing more managerial resources, such as human capital. Media reports abound about entrepreneurs in the IT sector accumulating billions of dollars in wealth.

But it should be noted that mainstream industries still play important roles in the world economy.

We should have recognized the necessity of reforming these industries to make them more efficient before they were hit by the steep rise in crude oil prices. One of the major reasons behind the recent slump in the New York stock market is the damage being caused by higher oil prices.

The third downside risk concerns politics.

The final outcome of the U.S. presidential election remains unclear, but when the new president takes office in January, he may face questions about the legitimacy of his presidency and therefore not be able to exhibit strong political leadership domestically or abroad.

In Japan, any hope of drastic economic reform -- the only path to pulling this economy out of the doldrums -- may have been lost when Mr. Koichi Kato's revolt against Prime Minister Yoshiro Mori failed.

In fact, the LDP old guard, in an attempt to shore up sagging share prices in Tokyo, has reverted to its traditional pressure tactics to steer banks away from unwinding their vast blocks of cross-held stocks. This "gyosei shido," or administrative guidance, has long been a symbol of Japan's old and opaque style of decision-making. Even today, LDP leaders do not seem to understand that the most effective way to lift share prices is to implement fundamental economic reforms.

In Europe, politicians are seeking even now to strike a balance between individual countries' national interests and the broader interests of the European Union, as illustrated by the British and their reluctance to join the monetary union.

Furthermore, both the Council of Economic and Financial Ministers, which is the EU's decision-making body on financial affairs, and the European Central Bank have not implemented effective measures to stop the euro's depreciation. One of the reasons for that might be the difficulty they face in coordinating foreign exchange policies among member countries, since some governments want to devalue the euro further to boost their economies while others want to steady it amid mounting inflationary pressures.

Amid this kind of global political instability and lack of leadership, key international negotiations on various issues have ended up nowhere, a situation reflected by the failure in Seattle to launch a new round of multilateral trade talks and the breakdown of the COP 6 global climate talks in The Hague last month.

In view of these factors and risks, we cannot be optimistic about the future. The world economy will inevitably face deceleration in 2001.