Interest rate cuts have been unable to shake the US economy out of its slump. The Japanese economy is experiencing a downturn, as is the European economy—which has wanted to replace the US in its role as center of the world economy—especially with the influence of the recession in Germany.

The recession in the US, Europe and Japan is influencing world economy, leading to a worldwide decline for the first time in the past decade. The combined GDP of these three core economies accounts for 80 percent of the world total. Hence, economic problems in these core economies affect the rest of the world, thus placing the world economy at the crossroads.

The UN Economic and Social Council (ESOSOC) predicted that the world economic growth rate would fall to 2.5 percent this year. In addition, some research institutes predicted a world economic growth rate of 2.4 percent, or even less than 2 percent, thus indicating a declining world economy.

The Slowdown of the US, European and Japanese Economies

Although economic growth was unbalanced in the US, Europe and Japan, which helped minimized adverse impact on the world economy during the 1980s and 90s, at least one of the economies was booming. But all of them are now undergoing a recession. The US Federal Reserve Board (FRB) issued an economic investigation report on August 8, stating that the US economy continued to suffer a slow growth, or even a standstill in the past two months because the slump in retail and manufacturing industries had affected other industries.

The weak US economy is also evident from the decline in business and consumer demand for loans, the raising of loan standards by banking institutions, and a drop in the quality of current loans. As globalization is intensifying the connection between various economies, the recession in the US affects the rest of the world.

Since economic indicators of Japan during the first half of this year show a worsening economy, the International Monetary Fund (IMF) has adjusted its forecast to a negative growth rate of 0.2 percent from a 0.6 percent growth. The Japanese minister of finance recently predicted that Japan’s economy will have a low growth rate in the next two to three years, and suggested that Japan should strive for a growth rate of zero, so as to avoid contraction.

During the last half of 2000, the EU’s economic growth exceeded that of the US However, it has been slowing down this year, thus reducing Europe’s chances of replacing the US as the driving force behind the global economy. The European central bank has adjusted its prediction of the euro area’s economic growth from 2.6 percent-3.0 percent to between 2.2-2.8 percent, and finally to 2.8 percent. The downturn in Europe’s economy resulted from the economic recession of the USand that of Germany, its own economic power.

Since countries of the Commonwealth of Independent States (CIS), including Russia, and the Eastern European countries, do not have close trade relations with the US and Japan, the recovery of Russia’s economy will not be greatly affected by the conditions of these economies, provided there is no abrupt drop in energy prices. Statistics for the first half of this year, issued by the Russian Ministry of Economy, indicated a 5.4 percent increase in Russia’s GDP, a 5.5 percent rise in its industrial production and a 4.2 percent increase in its agricultural production. In addition, the number of employed rose to 65 million, up 1 million.

Russia’s average salary reached 3,300 roubles in June, an increase of 18 percent over last year’s same period, while real cash income of residents increased by 4.4 percent. However, the surplus of foreign trade decreased by US$27.3 billion in the first half of this year. As other CIS countries and Eastern Europe maintain close trade relations with Russia and the EU countries, the world recession may not affect their economies, as long as the Russian economic situation continues to improve and the EU economy stops worsening.

The Russian National Statistics Bureau indicated an 18 percent increase in Ukraine’s industrial output value, a 13.5 percent increase in that of Tajikistan, an 11.6 percent increase in that of Kazakhstan, a 9.9 percent increase in that of Moldova, and a 6.8 percent increase in that of Kyrgyzstan during the first five months of this year. Georgia was the only country that suffered a 6.2 percent decrease in its industrial output value. The ESOSOC predicted that countries undergoing economic transition would witness a 3.6 percent of growth this year, and the trend will hopefully continue.

Varying Impact on Latin America and Africa

The simultaneous recessions in the US, Europe and Japan have a varying impact on the economies of developing countries and regions. Latin America, for instance, is known as the backyard of the US Its exports to the US account for 60 percent of its total exports, while Mexico’s exports to the US account for 88 percent of its total. Hence, the decline in the US economy and a drop in its imports have greatly affected Latin American economies, thus leading to a constantly rising debt—a serious problem plaguing Latin American countries.

At the end of 2000, the total cumulative foreign debt of Latin American countries increased to US$750.86 billion from US$9.3 billion in 1974, of which debts of Mexico, Brazil and Argentina combined to total US$545.2 billion, accounting for 72.6 percent of Latin America’s total foreign debt. Since this March, American banks offered loans worth US$12 billion, US$24 billion and US$18 billion to Argentina, Brazil and Mexico, respectively. In addition, the IMF provided loans worth US$ 14 billion to Argentina last year, and will offer loans worth US$6-9 billion to Argentina this year.

However, these loans cannot extricate these countries from their debt and financial crises. Although Argentina is the most developed country in South America, it is trapped in a more severe recession than Mexico and Brazil, and had a growth rate of zero last year. In fact, financial aid from the US and the IMF is out of concern over possible problems the debt and financial crises in these centuries may create for the Latin American countries, and for the US itself.

Africa has a population of more than 700 million, accounting for 11 percent of the world total. While its GDP accounts for only 1 percent of the world GDP, its foreign trade makes up only two percent of the world total. In 2000, Africa introduced US$10 billion in foreign direct investment—less than one percent of global total transnational direct investment.

To rejuvenate their economies and prevent a recession, African countries need to realize peace and stability, and strengthen regional cooperation. In addition, the creditor nations should reduce or remit African debt, and aid to African countries should be increased.

Negative Impact on Asia

The US and Japan are the two largest markets for Asian exports, and also hold the largest investment amounts in Asia. Therefore, Asian economies are deeply affected by the US and Japanese economic development trends and policy adjustment. Besides internal causes, the fall in the exchange rate between the yen and the US dollar, and the decrease in imports of electronic products in both countries were causes of the 1997 Asian financial crisis.

In 1999, the economies of some Asian countries recovered rapidly, which, to a great extent, was influenced by the high economic growth and increased imports of the US However, a recession in both the US and Japan is putting the economies of Asian countries through the fire again.

Asia depends heavily on the US and Japanese markets, particularly the East Asian countries. In 2000, the IT products export of East Asian countries and regions to the US contributed 40 percent to their respective GDP growth.

From 1996 to 2000, Thailand’s dependence on exports rose from 39 percent to 66 percent, with a sharp increase in electronic product exports. However, from January to May this year, new US orders for electronic products decreased by one-third, greatly affecting the exports of East Asian countries and regions. In the first half of last year, the exports of East Asia—excluding China—rose sharply by 30 percent, compared to the previous year, while exports fell by 10 percent in the first half of this year. It is estimated that semiconductor chip exports of the Republic of Korea (ROK) will decrease 30-40 percent this year, compared with last year’s US$26 billion worth of exports. A decrease in exports has resulted in a general downturn in the economic growth of the East Asian countries and regions. The economic growth of the ROK will fall from 9 percent of last year to 2 percent, that of Singapore will fall to 0.5-1.5 percent and that of the Chin’s Taiwan will be reduced to 1.1 percent—the lowest level in 30 years.

Despite an 8.8 increase in the first half of this year, China’s exports, compared to last June, decreased by 0.6 percent—the first downward trend this year. This indicates that the joint effects of the weak US, European and Japanese economies, as well as shrinking world markets, are adversely affecting China’s exports. However, continued improvement in the investment environment and implementation of western development strategy have led to a considerable increase in foreign investment.

New foreign-funded businesses numbered 11,973 in the first half of this year, up 18.5 percent from last year; contractual foreign capital reached US$33.41 billion, up 28.2 percent, and foreign capital actually used amounted to US$20.99 billion, up 20.5 percent. It is estimated that China’s GDP grows by 0.3-0.4 percentage points on average for every 1 percent increase of foreign direct investment. While its GDP increased by 7.9 percent in the first half of this year, it may slow down in the second half.

Related international institutions and varied states are adopting active measures to strengthen coordination and cooperation to cushion negative effects of the recession in the US, Japan and Europe on the rest of the world.

(Beijing Review 09/20/2001)