If one is counting on trade, investment and aid to lead the world away from recession -- one must wait a lot longer. That is the underlying message of the World Bank's annual report on Global Development Finance, released in Washington in April 1999.
International capital markets will continue to shun developing countries because of a lack in transparency, corruption, cronyism and too much bureaucracy, trade will continue to slump, and commodity prices will remain weak, the Bank says.
Meanwhile, aid remains at the lowest levels since the Bank began tracking it. As a result, average growth rates in the developing world and the former Soviet Union will likely fall to just 1.5 percent this year, down from 1998's 1.9 percent and 4.8 percent in 1997 -- the year the "Asian financial crisis" broke.
This will make 1999 the slowest-growth year since 1982, says the Bank -- reaffirming its warning in December 1998 that poor countries were in for their worst time since the 1980s debt crisis. It will be the year 2001 before growth is restored to 4.5- to 5 percent, according to the Bank.
Wealthy nations appear to have saved themselves and calmed fears of a "deep global recession" by cutting interest rates and stimulating their economies but "the crisis is likely to deepen and persist in emerging markets for longer than had been predicted earlier," the Bank says. Although much attention is drawn by the "dominoes" of global economic turmoil -- East Asia, Russia, and Brazil -- falling real wages in countries such as Mexico also are a concern, Bank officials say.
Also worrying are growing protectionist pressures in the United States, on which the world increasingly depends to provide the consumer demand needed to power production and commerce, according to Uri Dadush, director of the Bank's Development Prospects Group. World trade growth slowed to 4.6 percent in 1998, compared with 10 percent in 1997, oil prices are down 32 percent and other primary commodities fetched 16 percent less in 1998 on world markets than they did in 1997.
Investors in bonds, portfolio equity and long-term bank loans have shunned the Third World's "emerging markets". International capital markets risked only US$72 billion in the South last year, down from $136 billion in 1997. Middle Eastern and North African countries have bucked the trend, turning in a three-fold increase, to $10 billion, in capital market flows, but mainly because they have an important commodity to sell to the west--petroleum.
That shows investors' willingness to lend to relatively wealthy developing nations with substantial overseas assets. For their part, the oil exporters have sought to borrow to limit the impact on their expenditure of the fall in oil prices.
"Many developing countries are trying to borrow more to compensate for falling exports," says Dadush. Cash is in abundance but "the supply of funds to the countries is constrained by risk perceptions."
East Asia and Latin America have suffered the most from investors' loss of confidence. New lending by capital markets has fallen by nearly half over 1998. Such loans as are now being made come with much higher interest charges than in the past. By contrast, foreign direct investment (FDI) is proving "more resilient", the Bank reports.
FDI -- relatively stable because it involves long-term ownership of or investment in factories and other physical assets that cannot easily be dumped -- has fell from around US$163 billion in 1997 to $155 billion in 1998. It "is likely to remain the dominant source of finance for developing countries in the foreseeable future", although probably at slightly depressed levels, says William Shaw, principal author of the Bank report.
In Thailand and South Korea, FDI actually increased in the aftermath of financial turmoil, says Shaw. Much of that upswing actually reflects mergers and acquisitions rather than new productive investment, he acknowledged. The number of such deals increases as overseas investors obtain Thai and Korean assets at bargain-basement prices. The slow-down in trade spells increased tension in global commerce. Trans-Atlantic trade relations, for example, have been badly bruised by a US-European face-off over banana export rules.
A World Trade Organisation (WTO) dispute settlement panel reportedly ruled in favour of the United States. It remains to be seen whether the sides can come to an understanding or whether Washington will slap a 100 percent duty on many goods from Europe. US officials repeatedly had to reassert their commitment to global free trade while reassuring the home crowd that they would not permit a flood of cheap imports to swamp threatened domestic industries. Vulnerable sectors include semiconductors, auto parts, machine tools, electronics, textiles and steel -- all sources of high-skill, relatively well-paid jobs.
Demand for imports to the United States remained strong because of a bullish stock market.
"This does not strike us as a healthy situation," says Dadush. The stock market could slow, he notes, and Europe and Japan are in no position to take up the ensuing slack in demand. Interest rate reductions by the Federal Reserve have helped "but it worries us" that the US labour market could begin to show the strain of large trade deficits with other countries.