World Economy Is Solid As Japan, Europe Gain
Good news for Clinton; but poorest nations appear stuck
High on the world's economic ladder, where rich nations perch, consumers are about to climb another rung.
Economies of the industrial nations, after a shaky start this past winter, are expected to post stronger growth in the second half of the year. Forecasters predict continued moderate growth and no recession in the United States, a strengthening recovery in Japan, and, following a surprising slump, a pickup in Europe. This is good news for almost everyone: more exports, more jobs, and quite possibly more votes for world leaders (like President Clinton) who face re-election this fall.
In emerging countries such as Malaysia and Taiwan, consumers are climbing the ladder of prosperity, on average, three times faster than their counterparts in nations near the top of the ladder. There are plenty of signs of economic convergence: American entrepreneurs roaming Eastern Europe, McDonald's restaurants in Moscow and Mexico City, Japanese cars zipping around the third world.
But at the bottom of the ladder, something has gone terribly wrong.
The world's poorest nations, mostly in Africa, are stuck. The gap between the richest and poorest nations is widening.
"The western world has been doing well, in general," says Joseph Stiglitz, chairman of the White House Council of Economic Advisers. "Emerging markets have been a major source of demand. [But] Africa remains one of the biggest challenges."
The development gap mirrors the growing income gap between rich and poor in the US and other industrialized nations. "The poor countries are getting relatively poorer as the poor in [America] are getting poorer and poorer," says James Wolfensohn, president of the World Bank.
It was not supposed to happen this way. After the fall of communism and trade barriers during the late 1980s and early 1990s, many of the world's less-developed nations hoped to advance rapidly by throwing open their markets to private competition and foreign goods. Several succeeded, such as India and Korea. Outside of Asia, development proved more difficult.
Mexico is a prime example. After negotiating the North American Free Trade Agreement with the US and Canada in 1993, then Mexican President Carlos Salinas de Gortari told his countrymen they had joined the first world. With easy access to credit, Mexicans began to buy like first worlders. But a currency crisis squelched the domestic lending boom and plunged Mexico into an economic tailspin.
The country's economy shrank an alarming 6.9 percent last year, according to the International Monetary Fund (IMF). For a time, the crisis threatened to pull down other Latin America economies as foreign investors grew nervous. The result was that the entire region hardly grew at all last year.
This year, the region's prospects look better. The IMF expects Mexico to grow a respectable 3 percent this year. Roque Fernandez, the governor of Argentina's central bank, sounds optimistic after last year's economic turmoil: "Most of the countries at the bottom are moving upward," he says.
In the developed world, prospects are brightening for moderate growth. The IMF forecasts the US economy will grow 1.8 percent this year; Canada, 1.9 percent; and Japan, 2.7 percent - triple last year's growth rate. The better America's trading partners do, the more American products they're likely to buy, economists point out.
The US trade deficit is already showing some improvement. It narrowed in February to $8.2 billion, the Commerce Department reported last week, a 17 percent decline from January's figure, once adjusted for seasonal variations. Experts predict the gap will continue to shrink for the balance of the year, an important economic trend that President Clinton may point to as he campaigns for reelection.
The big question mark is western Europe, which suffered a major slump late last year. As a result, the IMF has trimmed its growth estimates for Germany to 1 percent and France to 1.3 percent for the year. J. Paul Horne, international economist at investment firm Smith Barney, forecasts that the five largest Western European countries will see their annual growth rate accelerate from less than 1 percent this spring to somewhere between 2 to 2.5 percent in the second half of the year. But Germany's six leading economic institutes Monday said the country's ailing economy will grow by only 0.75 percent this year.
As for the poorest nations, "the prospects are worsening," says Ernest Aryeetey, an economist at the University of Ghana in Legon. "Africa is being marginalized."
IMF member countries, meeting last week in Washington, agreed that something has to be done. Depending on who's counting, eight to 20 of these countries are so overburdened with foreign debt that they can't possibly repay it. There is broad consensus that the debts must be rescheduled, although the IMF put off developing a specific rescue package until the fall.
Another debtor nation, Russia, was given 25 years to repay $40 billion by the so-called Paris Club of creditor countries, the group said yesterday. The move is a boost to President Boris Yeltsin, seeking reelection in June.