Outlook remains gloomy on global growth

Leading economist warns of another wave of crises, this time from China.


Shahbaz Rana October 07, 2012

NEW YORK: “The era of phenomenal growth in international trade is over and the world is entering a new period in which growth will be slower,” says leading economist Jose Antonio Ocampo. Ocampo – who was an aspirant for the post of president of the World Bank – spoke to journalists here at Columbia University on the current global economic situation and its implications for developing countries. 

Ocampo’s views highlight the dangers that lie ahead for developing nations that rely on export-oriented growth models and use export earnings to finance their current account deficit – the gap between flows of foreign exchange in and out of a country.

“My analysis is that [the period of] phenomenal growth in international trade is a bygone era,” he said.  Ocampo predicts that international trade will grow by about 3%, as compared to an average annual growth rate of 7% over the last twenty years; reliance on trade, therefore, is no longer an option.

Ocampo said that contagion from the economic crisis was transmitting to developing countries through three channels: lower remittances, a reduction in aid and, most importantly, the ‘trade shock’.

While providing an insight into historical trends in international trade, Ocampo said that there was huge expansion in trade during the first phase in international trade – from 1947 to 1973 – during which period it grew more than 7% annually. That phase culminated into the ‘oil shock’, which impacted trade for around 15 years, during which trade grew at an annual rate of more than 3%.

Then, from 1986 to 2007, there was large expansion in international trade, recording an annual growth rate of more than 7%. Ocampo said that the latest expansion in trade was significantly different from the expansion witnessed during the 1950s, as it was not only associated with fast growth of the world economy, but also with elastic demand.

However, he said the global GDP will grow slower, and has already started decelerating since 2007. At the same time, production in domestic economies will move closer to consumption. He put a big question mark on claims of an economic recovery starting from next year, basing his scepticism on the deep financial crisis in the West and problems surfacing in China.

He said that Western countries do not have breathing space for fiscal stimulus, and there is a persistent lack of consensus for expansionary policies. The US has had weak recovery due to an increasingly worsening fiscal position, and this will lead to a recession next year, he warned.

“China is very important for developing countries, because it is the main determinant of commodity prices. Any change taking place in China will affect other countries,” he added. “Bad news of an impending depression, which has not come as yet, may come from China,” he warned, “because of various factors that may have implications on international trade.”

He said the impending change of leadership has made the Chinese government do nothing in the run-up to the stimulus measures that are going to expire by end of this year. Structural imbalances in the Chinese economy also pose significant risks, he said. While taking these factors into account, the “possibility of China being near a slowdown in the short-term is very high,” he added.

While leading economists have suggested that difficulties in international trade will arise – mainly due to crises both in the US and Europe – Pakistan has nonetheless forecast close to double-digit growth in exports, despite witnessing a negative trend in the last financial year.

Pakistani authorities have set an ambitious export target of $25.8 billion for the current fiscal year, as against $23.6 billion earned in fiscal 2012.

Independent experts warn that the likely missing of the export target will significantly erode the country’s foreign exchange reserves, as authorities do not seem prepared to control the import bill. Islamabad is also set to pay back $3 billion for an International Monetary Fund loan during the current fiscal year, as repayment for a $11.3 billion bailout package.

Published in The Express Tribune, October 8th, 2012.

COMMENTS (4)

usman786 | 11 years ago | Reply

@Abreez: You seem to be a retired army officer who talks sense. But we Pakistanis do not want anything logical. GoP and GoB both donot have time And will to solve problems of people. When the world avg was 7%, why ours was half. We could have more had we continued to plan well. Someone call Shaukat Aziz and put him accountable for failure In good times which is more serious than Mush's crime as it effected 180 million people. Mush decisions effected only few politicians and sardars rest were in his bandwagon.

Rameez | 11 years ago | Reply

The reason why Pakistan exports is growing is first of all Pakistan footprint in global market is close to nothing so therefore outside world has less impact, secondly Pakistan's rupee is declining which means you get more from exporting goods.

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