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World Economy Struggled Through 2002

The world economy in 2002 rebounded from recession, but at the end of the year there were signs of deceleration and fears that 2003 may not be as strong as the 2.5 percent growth predicted by many economists.

World stock markets with just a few exceptions were down again in 2002, the third year of declines in western Europe and the United States. Business leaders said there was still too much excess capacity from the high tech and telecommunications investment boom of the 1990s. There were significant bankruptcies in America, Europe and Japan.

In September Horst Koehler, the managing director of the International Monetary Fund, was cautiously optimistic about the economic outlook. Mr. Koehler spoke to reporters after a meeting in Washington with finance ministers from industrial and developing countries.

"I was encouraged because there was no doom and gloom discussion, but a differentiated analysis and some realistic confidence that the recovery will continue," he said.

2002 was a recovery year from the 2001 downturn that had been deepened by the September 11 terrorist attacks on the United States.

The U.S. economy, which accounts for over 25 percent of global output, expanded by about two and a half percent in 2002. Stronger growth was expected for 2003. But David Berson, chief economist at Fannie Mae the agency that supports the housing market in the United States, in December scaled back his 2003 forecast.

"Even if the economy picks up next year, it is still going to be a more modest expansion that we would expect to see," Mr. Berson said. "In part because the parts of the economy we would expect to see just boom as we start an economic expansion housing and autos probably won't boom, in part because they've already been booming. There was no bust for housing and autos, and when the economy picks up speed there is not going to be a corresponding boom."

But even though the U.S. economy experienced a sub-par recovery, its performance was considerably better than Japan and Germany, the world's second and third biggest economies. Jim Smith, a professor of finance at the University of North Carolina, says Japan and Germany can't be expected to contribute much to a global pickup.

"The state of the world today is very much like it was in 1990 and 1991," he said. "Japan hit a wall on December 31, 1989. Europe was weak in 1990, 1991."

Japan ends the year stuck in a deflation as prices have declined for three consecutive years. Several Japanese banks are technically insolvent. The economy is declining and there is little hope of improvement in 2003. Economist Clyde Prestowitz, an expert on Japan, says the Japanese model of state directed growth so admired in the 1980s no longer works.

"Japan had a winning formula from about 1950 to about 1980. It was such a good formula that they couldn't bear to get rid of it," he said. "And since 1980 they keep trying to patch up the old formula, but it is not an appropriate formula for the circumstances and it increasingly just doesn't work."

Remarkable as it seems, some economists now describe Japan as a declining power that is losing out to the new competitive threat posed by fast growing China. China registered over seven percent growth this year and expects to grow at the same pace next year. China has displaced Japan as the biggest Asian exporter to the United States. China is attracting huge volumes of foreign direct investment, by some measures over 50 percent of the all the foreign investment in Asia.

Russia, which for a decade had a rough transition to a market economy, similarly registered signficant growth in 2002. The Russian economy grew by 4.5 percent, its third consecutive year of robust expansion.

Latin America and Africa did poorly. Brazil tottered on the brink of recession as it balanced the demands for more government spending against the fiscal restraint required to service its huge debt. Africa registered three percent growth but the burden of the AIDS crisis and war translated into only modest gains in per capita income.

At year's end the dollar was 10 percent weaker than it was at the beginning of the year. Gold which often rises during periods of turmoil - was at a five-year high. And oil had risen to more than $30 a barrel because of unrest in Venezuela and the possibility of war in Iraq.

Part of VOA's Yearend Series