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As War Winds Down, World Bank & IMF are Hopeful - 2003-04-17

With the war in Iraq winding down and a new phase of reconstruction largely underway, the outlook for global economic growth is improving. Economics correspondent Barry Wood has more on this.

For several months the uncertainty over whether there would be war in Iraq unsettled the world economy. Oil prices shot up. Consumer and business confidence declined. There were signs that Europe and America would go back into recession.

But with the war effectively over, the Iraqi oil fields relatively free of damage, and the prospect of oil prices coming down—perhaps sharply, pessimism is turning to optimism. Horst Koehler is the managing director of the International Monetary Fund.

“And that also means that the risks of war on the global economy has remained contained and in particular, the concerns about sharply rising oil prices have not materialised "

The IMF, which held its semi-annual meeting of finance ministers last week here in Washington, says global growth will be about 3.2% this year, improving to four percent in 2004. China and the United States continue to be relative bright spots. But there is trouble in Japan and Europe, particularly Germany. IMF Chief Economist Kenneth Rogoff says Germany’s economy is too heavily regulated and needs far-reaching reform.

“I think the fundamental problem in Germany is that it has not been able to recover strongly at any point over the last several years, and I think it’s reached the point where we can safely say that major structural reforms are needed. And first among those we would list labor market reforms.”

It’s hard to hire or fire workers in Germany and generous social welfare benefits mean there are weak incentives for the unemployed to seek work. Germany alone accounts for 30% of European output.

The IMF and World Bank are hopeful that by the time of their next meeting in Dubai in September global economic activity will have substantially picked up.