Global Policy Forum

By David R. Francis

As the advanced economies reach new pinnacles of prosperity, poor ones sink further. Can the wealth spread?

Nearly two years after Asia's economic crisis almost ignited a global recession, the world has become both richer and poorer. The richest nations soared to new economic heights while at least a billion people in developing nations have gotten poorer.

The new disparity of wealth has economic experts looking at ways to avoid a repeat of the crisis. They would also like to reduce the income gap - or at least the effects of it - that has come about because economic output has been outpaced by population growth.

For now, those with money are enjoying the ride. In the industrial nations, corporate stocks have risen nearly $7 trillion in value since last October, shooting shareholders to new prosperity. That amount easily exceeds the $5 trillion gross domestic product of developing nations where most people live. And what financiers call "market capitalization" has hit $25 trillion, a record. "This must rank as one of the great equity-market rallies in history," says J. Paul Horne, an economist in London with Salomon Smith Barney, a major investment firm.The $7 trillion gain in paper wealth comes close to matching the $8.6 trillion annual output of real goods and services in the United States' strong - and still-growing - economy.

The mood in industrial nations is cheerier than after Russia's debt default last summer. "The crisis has abated," said Lawrence Summers, deputy Treasury secretary, last week. "But ... profound challenges remain." A United Nations draft report, reviewed in New York yesterday by economists from 79 nations and regions, sees the world economy "overcoming gradually the traumatic shocks of the recent international financial crisis." But "personal incomes and living standards for a large proportion of the world's population are declining or stagnating," it adds.

"A year ago we confidently predicted that the international development goals of halving poverty, cutting infant and child mortality by two-thirds, and enrolling all children in primary education could be met," World Bank President James Wolfensohn noted last week. "Now those goals are at risk."

In China and the Indian subcontinent, where 2.4 billion of the world's 6 billion people live, the economies are making progress. But in the five Asian crisis economies - Thailand, Indonesia, South Korea, Malaysia, and Hong Kong - economic losses, carrying social costs, have not been regained, notes UN economist Jozef Van Brabant. In many poor countries, he says, the government does not provide such "safety nets" as unemployment insurance.

Africa, which had been enjoying 5 percent annual gains in output earlier this decade, is slipping to a 2.6 percent growth rate. Per capita incomes will decline.

Latin American economies have been shaken by the crisis in Brazil, the region's dominant economy. The UN report sees mild recession, with a 0.3 percent dip in the region and worse in Brazil, Argentina, and Venezuela. The outlook for countries in transition from communism to free enterprise "remains discouraging," the UN report finds. In 1989, about 14 million people in the former Soviet Union countries were living under a poverty line of $4 a day. That, says the World Bank, has grown to 147 million, or 1 person in 3.

In Washington last week, finance ministers and central bankers from around the world assembled to tackle the globe's financial and economic troubles.This meeting of the 182-nation International Monetary Fund (IMF) and the World Bank produced some developments:

Russia. The IMF and Russia reached agreement on a $4.6 billion loan, conditioned on Russia's parliament approving banking, tax, and other reforms. The sum is merely enough to repay what Russia owes the IMF this year. Russia may never see the money. It will be a bookkeeping loan rollover. But it will enable Russia to avoid defaulting on its IMF loans. And the loan would unlock $3 billion in World Bank and Japanese loans.

Debt relief. The IMF's policymaking body, the Interim Committee, last Tuesday pledged to do more to help 41 highly indebted poor nations. It also agreed that the IMF itself should sell some of its 103 million ounces of gold reserves. The proceeds would be used to cancel some debts owed the IMF and to pay for a lending program for poor countries.

Richard Cooper, an economist at Harvard University in Cambridge, Mass., is concerned that indiscriminate debt relief could "blow away the difference between loans and income grants." "But it may be the only sensible thing to do for some of these countries," he adds. That's especially the case because of a huge recent decline in foreign aid.

Structural reform. The executive directors of the IMF approved a new contingent credit line aimed at "forestalling and resolving" future financial crises. If a country is pursuing "sound and sustainable policies to maintain stability," it could seek an IMF credit line to resist any attack on its currency in the foreign-exchange markets. David DeRosa, a finance teacher at the Yale School of Management, in New Haven, Conn., is skeptical. None of Asia's five crisis economies would have qualified for a credit line, he says. And nations that apply may signal financial markets of potential trouble, creating real trouble.

Another IMF project is to complete a "transparency" code. The thesis: a financial crisis is less likely if more is known about the financial position of financial institutions and central banks.

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