3-Dapice-Global Economic Slowdown-English

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					Fulbright Economics Teaching Program   Economics Executive Education Program   Global Economic Slowdown
2001-2002                                                                              and Its Implications

      The Global Economic Slowdown and Its Implications
                                        By David Dapice

     1. Current Conditions: The US and Japan are in recession and the EU is near zero-
        level growth. Rich nations that saw real GDP growth of 3-4% in 1999 and 2000
        will grow only about 1% a year in 2001 and 2002.

     2. Most forecasters expect a turnaround later this year followed by a moderate
        recovery. Growth slower than past recoveries is expected, but above the long-term
        trend growth of 2-3% a year for the rich nations.

     3. The reasons for expecting a rebound include strongly expansionary monetary and
        fiscal policies in the US, a considerable amount of inventory reductions, lower oil
        prices (act like a tax cut), and initial signs of recovery in several key sectors.

     4. The reasons for expecting a slow recovery include high levels of debt in the US
        among both companies and families, a slow EU policy response in both monetary
        and structural policies, and continuing problems in Japan. Behind all of this is a
        long-term demographic shift in which low birth rates are also reducing future
        workforce growth, unless immigration increases.

     5. For Vietnam, the major impact of global economic fluctuations shows up in its
        export earnings. A recession-prone world economy will influence prices of raw
        materials and mainly quantities of manufactured goods. Refer to the table that
        describes expected GDP and trade growth from a recent World Bank study. In any
        case, if mainstream expectations are correct, trade should begin growing normally
        by 2003, after a below-par but improving 2002.

     6. The other major impact of world economic fluctuations is on short-term capital
        flows such as bank loans. These are not very important to Vietnam. Indeed,
        Vietnam has a large amount of its bank deposits held in off-shore banks because
        of structural problems in lending even what is saved domestically. Its main capital
        sources are remittances, ODA, and FDI. None of these sources are heavily reliant
        on the general business climate. For example, FDI to less developed nations has
        remained around $150 billion a year from 1995-2001.

     7. FDI flows to Vietnam depend more on the local investment environment and
        treaties gaining market access (such as the BTA) than on world economic
        fluctuations. ODA flows depend more on the ability to move pledged aid than on
        the ability of rich nations to fund loans at present levels.

     8. However, the record of forecasters in predicting turning points is not good, though
        they do fairly well with trend growth. It is often more helpful to think in strategic
        terms and identify possible outcomes and attach probabilities to each of them.

David Dapice                                                                                             1
Fulbright Economics Teaching Program   Economics Executive Education Program   Global Economic Slowdown
2001-2002                                                                              and Its Implications

          This allows contingency planning and a better sense of the likelihood of any
          particular problem or situation.

     9. At this point and even in general, the short-term economic fluctuations have more
        of an impact at the firm level than the government level. Except for changing the
        exchange rate, it is difficult to use monetary policy because of structural lending
        problems, and it is hard to spend more when current aid cannot easily be spent as
        pledged. Thus, the ability of the government to influence the macro-economy is
        limited, though it can respond to floods, price drops in a single commodity, etc.

     10. A more important concern for government policy is related to the longer-term
         shape of the world economy. If export-led growth is taken as the major strategy,
         what could go wrong over the next 10-20 years? There are four possible

               a.   Creeping Protectionism
               b.   The Development of Exclusive Trade Zones
               c.   Macro-economic Turbulence marked by competitive devaluations
               d.   The Rise of Terrorism or Major Oil Disruptions

     11. Creeping protectionism refers to the actions taken by nations, even if legal under
         current trade rules, to interfere with exports of other nations. The catfish labeling
         dispute is one example. Others are anti-dumping penalties, the use of health or
         safety rules (no UK beef is imported by France, even now!) to stop competition,
         and the imposition of inappropriately high minimum wages or labor standards.
         These actions already exist and are likely to be an irritant, which could get worse
         if the world falls into a long period of slow growth.

     12. The EU is in the process of expanding into Eastern Europe and ultimately may
         include Turkey and parts of Africa in its trade zone. The US already is part of
         NAFTA and might expand this to include the entire western hemisphere. Vietnam
         is part of AFTA but that is weak. Japan is not a dynamic importer, China wants a
         free trade zone with ASEAN, but this faces many delays and uncertainties. It is
         possible that Vietnam could be left out of EU and US markets, at least compared
         to other developing nations in Latin America and Africa. The best way to resist
         this is to get China and other Asian nations to push for market opening measures
         in the US and EU. These, however, would have to be matched by reciprocal trade
         openings in Asia. This could be a difficult process.

     13. Japan has already begun depreciating the yen from 116 to 132 to the $ in the last
         year. At around 140 yen to the $, both Korea and Taiwan will probably take
         action and depreciate their currencies. At or before 150 yen to the $, China could
         well take similar action. These competitive devaluations create much uncertainty
         about real competitive advantage and end up doing more harm than good. They
         could end up creating instability in the entire Asian region. If they caused China
         to reconsider its WTO stance, that would be a major shift in world trade.

David Dapice                                                                                             2
Fulbright Economics Teaching Program         Economics Executive Education Program   Global Economic Slowdown
2001-2002                                                                                    and Its Implications

     14. A rise in terrorism (such as dirty radioactive bombs in shipping containers) that
         greatly raised inspection costs would act as a massive tariff increase and slow or
         reverse the growth of world trade. It would also cause many “soft” targets such as
         dams or refineries or nuclear plants to require very high security or dismantling. A
         variation on this scenario is a series of radical regimes taking over the Middle
         East and driving oil prices up to very high levels, causing a world recession.

     15. In terms of probabilities, the first three are likely to occur in some degree. The
         question is how severely. Creeping protectionism will likely be a minor irritant.
         Trade zones will require diplomacy and negotiation, but not undermine real
         comparative advantages in Asia. The currency turbulence is present and has a
         moderate chance of becoming worse. The terrorism scenario is low but not zero.

     16. Overall, there is probably a 60% chance of trend growth in exports, with adequate
         access for Vietnam. There is a 30% chance that things will go slightly better or
         worse than trend, but not so much that a different strategy is needed. It is the 10%
         chance of very slow trade growth that needs to be considered. However, with the
         size of Vietnam in manufactured exports ($5 billion in a world market of $5000
         billion), it is likely that rapid growth could continue for two decades before
         Vietnam’s manufactured exports reached the current level of Singapore’s. Thus,
         even with slow global export growth, Vietnam has some insulation from its size.

                           Projected GDP and Export Growth to 2003

                                       2000 2001          2002      2003
GDP Growth:
Rich Nations                           3.4%      0.9%     1.1%      3.5%
Developing East Asia                   7.5%      4.6%     4.9%      6.8%
(of which, Crisis-5)                   7.1%      2.3%     3.4%      5.4%
All Developing Nations                 5.5%      2.9%     3.7%      5.2%

Export Volume Growth
World                                  13.5% 0.3% 3.7% 10.3%
Developing East Asia                   25.5% 0.5% 6.4% 11.5%

Source: World Bank, December 2001, Prospects for Developing Countries
The “Crisis 5” are South Korea, Philippines, Thailand, Malaysia, and Indonesia.

David Dapice                                                                                                   3