Economic policymakers are gathered in Prague this week to make sense of the international economy. The mood is mixed, and rightly so. While the global economy has recovered from the scare of 1998 and has registered strong growth ever since, the recovery is fragile. It could be derailed by, say, high energy prices, triggered, ironically enough, by the strong growth of the last two years. Or there could be real crisis — a bank collapse or a loss of confidence in the U.S. stock market — that then ripples across the globe. The uncertainty would seem to put a premium on crisis-management mechanisms. Yet it is precisely here that governments seem most divided and unable to take action.
In its semiannual World Economic Outlook released last week, the International Monetary Fund projected 4.7 percent growth worldwide, a 0.5 percentage-point upward revision from April and the highest level in 12 years. That follows a 3.4 percent expansion this year, and the IMF forecasts 4.2 percent growth in 2001.
Even though the outlook is good, there is little celebrating in Prague. Delegates have been dodging protests against globalization that seem more practiced and better-organized at every such conference. Both demonstrators and delegates are concerned about the inequality that is widening even as the global economy continues its impressive performance.
The United Nations estimates that in 1960, 20 percent of the world’s richest people in the richest countries had 30 times the income of the poorest 20 percent; by 1997, that figure had tripled to 74 times. It is reckoned that 1.2 billion people lived on less than $1 day in 1987; there are around 1.5 billion today and if current trends continue, the number will reach 1.9 billion by 2015. Just as troubling are widening inequalities within countries. Mr. James Wolfensohn, president of the World Bank, has called the situation intolerable and unsustainable.
Unfortunately, agreeing on solutions is proving more difficult than agreeing on the problems. Debt relief for the poorest countries has been a popular cause, and a striking number of supporters have rallied to it. But a debt-relief program already exists; implementation has been slow. So far, only 10 of the 41 targeted countries have been included in the IMF’s debt initiative for Highly Indebted Poor Countries. The IMF last week promised to double that number by the end of the year.
Delegates can also point to steps they have taken to reduce the volatility of the international economy. They have discouraged governments from pegging their currencies to the dollar, a link that helped transmit the 1997 financial crisis through Asia. There has been a concerted push to strengthen national financial systems and increase transparency in national accounts. Both the World Bank and the IMF have looked hard at their operating procedures in the wake of criticism that followed their handling of the 1997-1998 crises and have tried to refocus on their main objectives.
But there is very little agreement on what to do when a crisis hits. The developed world has no enthusiasm for bailing out lenders or companies that threaten to go under. The crippling effects of the austerity packages imposed by the IMF have left a bitter legacy among the borrowing nations.
Nor can the world afford to be complacent. The IMF has pointed out that sustained high energy prices of $35 a barrel could trim one percentage point from global growth this year. There are growing signs that the recovery in nations hard-hit by the crisis three years ago — identified by Mr. Wolfensohn as South Korea, Indonesia and Thailand — has encouraged complacency and derailed needed economic reforms.
And then there is the euro. Although Europe is forecast to have 3.5 percent growth this year, and 3 percent in 2001, there are fears that the continued weakness of the euro could spark inflation in Europe, which would force the European Central Bank to intervene. Raising interest rates is politically risky, given the euro-zone’s high levels of unemployment. Just as important are the doubts its weakness casts over the entire European unification project. Those fears obliged the G7 nations last weekend to make their first concerted intervention in currency markets since 1995. They moved to support the euro, temporarily providing a floor for the currency that has lost 28 percent of its value since its launch in January 1999.
The effects of that intervention will prove temporary without the restoration of confidence in European governments. Confidence will also be the key if there is the long-feared correction in U.S. stock markets. All of that is even more reason for the finance officials gathered this week in Prague to move beyond the problems and focus on solutions.
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