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SUNDAY POUCH

Wake up world, it's your economy stupid!

Ashfaqur Rahman
SO this weekend, central bankers, finance ministers, journalists and analysts are gathering from around the world
in Washington. About 10,000 such people are descending for the annual International Monetary Fund (IMF) and the World Bank meeting. Our finance minister has also flown there leading a delegation.
What is expected by Bangladesh? TWo major issues are likely to be discussed with the World Bank. The first is the financing of the Padma Bridge. It has been reported that progress has stalled, fuelled by allegations of graft on granting the supervisory job to a Canadian company against monetary consideration. Muhith will try to untie the knot.
Second, Bangladesh is expecting budgetary support of $1 billion from the Bank. Perhaps the minister will try to get this money, so essential for economic growth.
But what about the world economy? In the IMF and World Bank meetings, the bankers and the finance ministers from around the globe will address the worsening economic situation that is bedeviling growth.
According to the chief economist of the IMF, the global economy has entered "a dangerous new phase." As a result, this international lending agency has "sharply downgraded its economic oudook for the USA and Europe, through the end of next year."
To begin with, US economy will grow by 1.5 % in 2011 and by 1.8 % next year. But it was only this June that IMF had itself forecast growth to be 2.5% this year and 2.7% in the next year.
The IMF has also predicted that 17 countries that use the Euro as their currency will be growing at 1.6% this year and 1.1% next year. This is much lower than 2% growth predicted in
June for 2011 and 1.7% next year.
The low growth forecast is based on worries that these European economies will not be able to check their debt crises. Destabilisation seems to have taken hold of these economies. Look at the riots and demonstrations taking place in Greece and Spain as well as in Italy.
But this is not so in India, China, Brazil and developing countries like Bangladesh. Here economic growth will be higher. We already know that our growth would exceed 6 % this year.
But slow growth and financial turmoil in USA and Europe will offset any economic gains made elsewhere.
Add to this is the sharp drop in stock markets in the USA This has affected consumer and business confidence. All this is likely to reduce spending. Investors there are abandoning stocks and moving into safer investments like Treasury bonds.
The real way out for the economies of countries like the USA and Europe is to seriously bring down their unbelievable high budget deficits.
Banks in Europe have purposefully moved out of investing in stocks, lest they get exposed to debts of countries like Greece and Italy.
The USA also has other economic concerns like high unemployment. There, the entrepreneurs are not creating new jobs. The pay of those already employed is not increasing either. The banks are also not lending there.
Hence, these economies are shrinking as there is little consumer spending and consequendy more unemployment.
The global economy therefore seems to be spiraling downwards. In a survey of 1,000 global experts, half of them are pessimistic of the future, while another one quarter feels that there would be serious economic disruption next year.
The world economy many say now lacks global leadership. Others predict societal upheaval. What is greatly troubling is not just lack of confidence in the global economy, but also lack of confidence in global governance. This is more troubling.
The new leader of IMF, former French Finance Minister Christine Lagarde, has commented that "the downside risks in the global economy are rising and unusual steps must now be considered." She urges policy makers to take action now without losing any more time.
But let us also look at some other big economies like China where, in spite of growth, there are other issues. The policy planners are concerned about rising inflation. Having injected the Chinese economy with a $ 586 billion stimulus package, the government now has to deal with the consequences. China has set 4% as the target for consumer inflation for 2012, up from 3% this year.
Looking at India, one big worry is again inflation. Another is impact of rising capital on Indian currency. But as India encounters the new "goods and services tax" this could be a game changer.
The economies of the Middle East are also facing challenges. On one side is the UAE, especially the economy of
Dubai, which is coming out of its debt woes. But there are other economies in that region that are looking at business with cautious optimism. Only two countries enjoy fast growth — Qatar and Saudi Arabia.
The countries that have recently faced political changes like Egypt, Libya and Morocco are now in the throes of economic uncertainty. There are considerable shortages of resources in those countries. Ultimately, inflation will curtail growth.
So what should the annual meeting of the IMF and the World Bank prescribe as the world clock ticks away?
The IMF is expected to advise the 187 member nations to control government spending (reduce their fiscal deficit). They would also be asked to limit their national debts. It would also suggest that European banks take to "recapitalisation" so that it can minimise risks. They need to exchange one form of debt for another, like trading stocks for bonds that are much less volatile.
Somebody said that the world is now a loud, emotional market. Can the hard hit economies of Europe and the USA maintain the discipline that they are being asked to by the IMF and the World Bank?
They unfortunately have to. It is their economy they need to fix. Any stupid person can understand this.
Yet no one can accurately predict the future. In economics things can take longer to happen than you think, and they can happen faster than you thought they could.
But the bottom line is this. The prediction of doom continues until a comprehensive, credible plan is announced. Will the IMF and the World Bank be able to come up with such a plan for their member states this week end ?
But again that would mean bold leadership.
The writer is a former Ambassador and Chairman of the Centre for Foreign Affairs Studies.
E-mail: ashfaq303@hotmail.com
***The world economy many say now lacks global leadership. Others predict societal upheaval. What is greatly troubling is not just lack of confidence in the global economy, but also lack of confidence in global governance. This is more troubling.****