Disturbing News on the World Economy


The recent UN report, World Economic Situation and Prospects, 2006, has come out with disquieting tidings for the world in general and developing countries in particular. If carefully reflected on, the political and social implications are going to be more worrying in the days and months to come.

To begin with, the overall world economic growth is not going to accelerate in 2006. In 2004, the world economy grew at the rate of 4 per cent, but, in 2005, it could grow only at 3.2 per cent. In 2006, the rate of growth is, in all probability, going to hover around 3 per cent. If we exclude China and India, most developing countries are to witness deceleration in their economic growth. Consequently, as the report underlines, these economies may face larger challenges during the current year. The growth in average per capita income will not enable them to progress towards the Millennium Development Goal of halving the incidence of extreme poverty by 2015. As the Executive Summary of the report states: “Much of the economic buoyancy of developing countries has resulted from high export commodity prices, which may not be sustainable in the longer run. In contrast, developing countries and Least Developed Countries that are net importers of oil and agricultural products have been hurt by the high cost of oil and food imports.”

The situation on the employment front is going to be very perturbing. The slow down in the growth is partially responsible for this. For years, the creation of jobs has been lagging behind the addition to labour supply. In many developing countries, unemployment rates are still higher than the levels witnessed before the global downturn of 2000-01. In a number of developing countries, high levels of structural unemployment and underemployment have complicated the task of poverty reduction. In a number of African countries the official unemployment rate is 10 per cent or more. Scrapping of Agreement on Textiles and Clothing (ATS) has led to a decline in textile exports, which has, in turn, resulted in the loss of thousands of jobs in Kenya, Lesotho, Madagascar, Malawi, Mauritius, Swaziland and South Africa. In South Asia, in spite of relatively high rate of growth in India, the formal sector has been unable to absorb new entrants to labour force. As a result, the number of job seekers has increased. Not only in South Asia but also in other developing countries the worst hit have been the youth.

The report has highlighted the reverse transfer of resources from developing countries to the developed ones. To quote: “Over an extended period of nearly ten years, the international financial system has seen net transfer of financial resources from developing to developed countries. Net transfers are the net flow of financial resources less net interest and investment income payments. The magnitude of these transfers has risen steadily from an estimated $8.1 billion in 1997 to $483.4 billion in 2005. The net transfer of resources from economies in transition has also followed a similar pattern since 1999, reaching an estimated $95.5 billion in 2005.”

Further, “The most important destination of the net onward transfer of financial resources from developing countries as a whole has been to the United States of America, and has more than offset the net outward transfer from other major developed countries, namely the European Union (EU) countries and Japan, to developing countries.”

Looking at the table in the report, it becomes shockingly clear that, since 2000, Africa has shown negative net transfer of resources. Year wise figures of net transfer of resources to Africa in billions of dollars are as follows: 2000: (-) 28.5, 2001: (-) 16.0, 2002: (-) 4.9, 2003: (-) 19.6, 2004: (-) 32.4, and 2005: (-) 55.6. If we take all the developing countries the negative net transfer of resources adds up to 1909.2 billions during 1997-2005.

In this connection, one may recall the “Drain Theory”, propounded by Dadabhai Naoroji in the second half of the 19th century. Naoroji was a prominent leader of the Indian National Congress, who presided over its annual sessions a number of times. He was also a member of British House of Commons. He, in his book, Poverty and Un-British Rule in India, had a paper, which underlined that India was not poor because it lacked wealth and resources, but its wealth and resources were drained away by the British colonial government on various pretexts through a well-designed mechanism. He had documented his thesis by citing official documents. More or less the same phenomenon is repeating itself, albeit in the context of the entire developing world.   

The UN report has underlined that the IMF has drained away more resources from developing countries than it has transferred to them. How this has happed has been described as follows: “International Monetary Fund (IMF) support lending to developing countries continued to decline sharply in 2004, producing a net inflow of financial resources from developing countries to the IMF of $7.6 billion. This represents the reversal of a three-year trend begun in 2001. In 2003, the IMF was still a net provider of resources, transferring $4.6 billion to developing countries. One reason for the shift in the IMF’s position from net provider to net recipient of financial flows from the developing countries in 2004 was fact that the IMF provided loans that were smaller in size, on average, to relatively fewer countries, resulting in lower levels of disbursements that were outpaced by the higher volume of repayments to the IMF.”

Crocodile tears are quite often shed for the poorest countries in sub-Saharan region of Africa. Though net transfers to them are still positive, yet they are on the decline. They came down from $7.5 billion in 1997 to $2 billion in 2005 and they are going to decline further in the current year.

Long ago, it was agreed upon that developed countries would provide 0.7 per cent of their GDP by way of official development assistance (ODA) to developing countries. If one adds the official development assistance by the developed nations, it comes to just 0.26 per cent of their GDP, far blow 0.7 per cent. Even by 2010, it is not going to exceed 0.36 per cent of their GDP. It is needless to add that, in view of this callousness, the Millennium Development Goals stand no chance of being achieved by 2015. Only the last year, developed countries reiterated their commitment to raise official development assistance to 0.7 of their GDP. One may look up the documents pertaining to World Summit Outcome to gauge the extent of hypocrisy on the part of developed countries, led by the USA. In view of the prospect for the highly indebted poor countries appears to be extremely bleak. There does not seem to be any enthusiasm in practice to free them from the crushing debt burden, though there is plenty of verbiage in the media. To quote the report, “The forecast increase in ODA to $97.2 billion which, according to some estimates, would be needed each year by developing countries to meet the Millennium Development Goals (MDG) by 2015.” Already the indications are that most donors are not going to strive towards making up this amount on one pretext or the other. A number of them may choose the compulsion to maintain fiscal balances.

Obviously, rhetoric apart, not many developed countries do not seem really interested in helping developing countries grow economically and become politically and socially stable. In the years to come, if their plight worsens because of rising prices of oil, growing indebtedness and declining non-oil commodity prices, it should cause no surprise.

       Girish Mishra,
       E-mail: gmishra@girishmishra.com

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