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By Ann Pettifor  Director, Jubilee Research at the New Economics Foundation

Ann Pettifor is Editor of “Outlook – 2003” to be published by Palgrave Macmillan, September, 2003. “Outlook – 2003” will shadow the IMF’s “World Economic Outlook”.  

Its difficult to find optimists amongst private economic forecasters. Not so at the World Bank, whose economists predict higher rates of economic growth for both rich and developing countries in 2003. Bank staff are singing two songs from their hymn sheet. The first is that foreign direct investment, not borrowing, will boost growth in LDCs. (Debt flows have turned negative since 1998; in other words countries are paying more in debt service than they are receiving in aid or new loans; and so, argues the Bank, borrowing is no longer viable for developing countries). The second “key issue” for economic growth, say the Bank’s forecasters, is the removal of trade barriers.

If we look at the fundamentals, private sector pessimism is well justified. The UK and the US, which until the 1970s were major exporters of capital, have since become major importers of capital. According to research undertaken by the New Economics Foundation^[1], the US now needs about $4bn a day to finance its trade deficit, and its foreign liabilities. This reversal of flows is one of the main features of the phenomenon of “globalisation”, and explains, in part, flows of capital away from developing countries, and subsequent impoverishment. (The US still attracts more capital inflows than China). 

What worries pessimists like Prof. Wynne Godley and Stephen Roach of Morgan Stanley, is that the US’s dependence on foreign capital inflows has hindered the growth of domestic savings in the US. Without its own savings fuelling economic growth, the US is therefore vulnerable to foreign sentiment, and the threat of capital withdrawal. A flow of funds out of the US would lower the value of the dollar, and there are signs of this already happening. The White House, too, may favour a weak dollar. A lower dollar will intensify export competition between nations (while helping to reduce the US deficit) and will exacerbate the threat of global deflation. Under these circumstances rich countries are likely to become more protectionist, not less; making the achievement of one of the Bank’s “key issues” less likely. 

At the same time, however, a weaker dollar will lower the value of the foreign debts owed by developing countries. 

How would the US respond to the considerable instability caused by a massive outflow of capital? Could capital controls once again become fashionable? Watch this space. 

If capital flows out of the US, where will it turn? To developing countries? We believe the Bank is unduly optimistic. Some flows from the US are already moving into the EU, where the profitability of companies is higher. But sluggish growth in the EU, and the mis-named “growth and stability pact” are likely to make the EU less attractive to foreign investors. China is another magnet. David Hale of Hale Advisors LLS, believes investors might turn to the safe haven of gold. This would bode well for developing countries like Ghana and South Africa, and for some transition economies too. 

Another fundamental imbalance in the global economy is the massive growth of credit since the liberalisation of capital flows in the late 1970s. One economist^[2] estimates that there is $100 trillion of debt in a world in which global income, or GDP, is estimated at about $30 trillion. This credit bubble (the creature of free market de-regulators in central banks, finance ministries and the IMF) has in turn financed the asset bubbles now bursting (new technology, stocks and property). It has also financed the unsustainable debts of countries like Argentina, Brazil and Pakistan. The effective bankruptcy of countries like Argentina and of big corporations like Enron and WorldCom signals that the credit bubble is bursting. However, while there are economic interventions for managing different stages of the business cycle; there are no known cures for the collapse of a credit cycle – except the massive destruction of value. 

Another major threat to developing countries, is of course the threat posed by war and political instability. This has already led to the rise of oil prices - bad news for non oil producing developing countries. 

So, no, we do not share the Bank’s view that the “outlook for developing countries is promising, is really quite positive”. While there are opportunities for LDCs in economic instability, there are also severe threats.  
 
 


[1] “The United States as a HIPC – heavily indebted prosperous country” a report by Jubilee Research at NEF, by Romilly Greenhill and Ann Pettifor, April 2002. 

[2] Peter Warburton, author of “Debt and Delusion” Penguin, 200.