Business & Money

China, India, Russia advance as U.S. economy loses steam

By Abid Aslam | Last updated: Nov 1, 2007 - 10:20:00 AM

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WASHINGTON (IPS/GIN)—China, India, Russia and other developing countries will propel the world economy in the year ahead, the International Monetary Fund said Oct. 17 in its latest World Economic Outlook report.

In contrast, it predicted that advanced economies—hobbled by financial turmoil that originated in poorly regulated recesses of their capital markets—will continue to lose steam.

China and India have emerged as the top two contributors to world production and, along with Russia, “accounted for one-half of global growth over the past year,” the International Monetary Fund (IMF) said.

“Other emerging markets and developing countries have also maintained robust expansions,” it added, thanks to buoyant commodity prices, strong domestic demand, stout currency reserves and reduced debt.

Governments in developing countries have said their importance to the world economy merits a fundamental shift in the balance of power between rich and poor at the IMF and in other organs of global economic governance.

Additionally, the fund’s assertion that lighter debt burdens have boosted economic performance likely will not be lost on debt-relief campaigners and the governments of heavily indebted poor countries, most of which are in Africa.

The fund’s acknowledgment that inequality rose alongside wealth and could imperil future progress also might chime with anti-poverty activists.

“Technological advances have contributed the most to the recent rise in inequality, but increased financial globalization—and foreign direct investment in particular—has also played a role,” the IMF said.

Nevertheless, “contrary to popular belief, increased trade globalization is actually associated with a decline in inequality,” it added.

In any event, the fund said, “it is important that policies help ensure that the gains from globalization and technological change are more broadly shared across the population.”

The IMF went on to echo the demands of those who want to see poverty fought with a combination of more education and microcredit and fewer barriers to poor countries’ agricultural exports.

“Reforms to strengthen education and training would help to ensure that workers have the appropriate skills for the emerging ‘knowledge-based’ global economy,” it said. “Policies that increase the availability of finance to the poor would also help, as would further trade liberalization that boosts agricultural exports from developing countries.”

If balance sheets are anything to go by, and if IMF forecasts are not proven optimistic, there will be plenty to redistribute, despite a slight overall slowdown.

China is likely to chalk up 11.5 percent growth this year and India is likely to record 8.9 percent this year, according to the fund. It predicted that China’s economy will grow by another 10 percent next year and India’s will expand by an additional 8.4 percent.

Emerging markets and developing countries will have grown by 8.1 percent this year and should lift output by another 7.4 percent next year.

In contrast, the advanced economies—including the United States, Britain, Japan and Canada, as well as other European and Asian countries—could end the year with a collective growth rate of 2.5 percent and go on to post a sluggish 2.2 percent in 2008.

Overall, world output growth should amount to 5.2 percent in 2007. This would be in keeping with projections issued in July, the fund said.

“But we have marked down our projection for global growth in 2008 by almost half a percentage point to 4.8 percent, in the wake of recent turmoil, largely reflecting lower growth expectations for advanced economies,” said Simon Johnson, the IMF’s chief economist.

In particular, the IMF marked down its U.S. growth forecast for 2008 by nearly a full percentage point to 1.9 percent. This reflected ongoing credit problems, as well as dampened consumer spending amid weaker housing prices, rising energy prices and sluggish job growth.

Dodgy home loans and financial speculation on securities backed by the sub-standard mortgages sparked a fire that has swept through U.S. and European credit markets and banking sectors, and it remains impossible to predict when the trouble might end.

“At this stage, we still do not know precisely how the losses from the U.S. subprime mortgage market will be distributed or whether credit conditions will tighten further as expectations of losses affect bank behavior,” Johnson said.

“Like a forest that has not seen a fire in many years, a benign financial environment, including low volatility and unusually narrow risk spreads, had built up a sizeable underbrush of risky loans, relaxed lending standards and high leverage in certain areas,” he added. “When problems ignited in the U.S. subprime mortgage market, the fire ‘jumped’ in somewhat surprising ways to other areas.”

Chances of a U.S. recession have risen, the IMF said in its report, but the world’s largest economy likely will see a prolonged period of listlessness rather than contraction.

The fund forecasted the following growth in the coming year: 5.7 percent in 2007 and 6.5 percent in 2008 for Africa; 6.1 percent in 2007 and 6.8 percent in 2008 for sub-Saharan Africa; 5.8 percent and 5.2 percent for Central and Eastern Europe; 7.8 percent and then 7 percent for the Commonwealth of Independent States; 9.8 percent and then 8.8 percent for developing Asian countries; 5.9 percent and then 5.9 percent for the Middle East; 5.0 percent and then 4.3 percent for Latin America and the Caribbean; 4.4 percent and then 4 percent for Brazil; and 2.9 percent and then 3 percent for Mexico.