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April 18, 2001 Global Economy Faces Biggest Challenges Since the Mid-70s Oil Crisis, Experts Say

By MICHAEL M. PHILLIPS Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- The global economy appears to be in the most precarious position it has seen since the 1973-74 oil crisis, as bad news in industrialized countries feeds bad news in the developing world, according to a research group affiliated with the world's largest financial institutions.

With the U.S. economy balanced on the edge of recession, Europe slowing and Japan in a perpetual slump, developing countries are confronting a drop in foreign investment and anemic export markets, Charles Dallara, managing director of the Institute of International Finance, said Tuesday.

"Perhaps we're facing the most challenging economic environment that we've seen in many, many years," Mr. Dallara told reporters.

The institute, which conducts research on behalf of Citigroup Inc., Merrill Lynch & Co., Barclays PLC's Barclays Bank and more than 300 other financial institutions, expects net private capital flows from wealthy to developing nations to drop to below $150 billion this year from a healthy annual average of $210 billion over the past five years. Such financial flows provide the lifeblood of many emerging-market nations, and officials in the developing world are concerned that the flood will slow to a trickle.

Investor confidence in emerging-market-portfolio investments fell off during the Asian crisis of the late 1990s, with money flowing out of developing-world stocks and bonds and Western banks cutting their exposure to volatile markets. "My sense is the pendulum is going to take some time to get its center again," said Chilean Finance Minister Nicolas Eyzaguirre. Investors troubled by the Asian crisis and, more recently, the collapse of the dot-com boom are "going to remain cautious for some time," Mr. Eyzaguirre said in an interview.

During the 1990s financial crisis, direct investment from developed to emerging-market countries -- the purchase of plants, companies and offices abroad -- tended to hold steady because investors were generally confident in the long-term prospects of countries such as Brazil, South Korea and Mexico.

But these days, investors worry, in part, that the future may not be much brighter than the present in some developing nations. "I do see global investors and multinational corporations increasingly aware of the political fragility that exists in many emerging-market economies," Mr. Dallara said. He specifically noted the missteps of Turkish authorities, whose political disputes helped spark the country's recent financial turmoil.

In addition, the slowdown in industrialized nations is cramping exports from the developing world. Exports from Asian and Pacific countries will grow just 5% this year, after jumping 23% in 2000, the institute said. Similarly, Latin America's sales abroad will increase only 7% this year, down from 22% growth last year.

While there is some hope that the worst is over for the U.S. economy, American firms are "very much in a world of earnings disappointments," Mr. Dallara said. Europe's strong growth in 2000 has faded, with Germany likely to grow just 2% this year.

Institute economists also have "grave concerns" about Japan's economy. "It is urgent for Japan, it is urgent for Asia, it is urgent for the global economy that decisive steps be taken," Mr. Dallara said. In particular, economists believe Japan must cleanse its banking system of bad loans.

http://interactive.wsj.com/archive/retrieve.cgi?id=SB987547596706802425.djm&template=printing.tmpl

-- Martin Thompson (mthom1927@aol.com), April 18, 2001

Answers

Dry rot.

-- Billiver (billiver@aol.com), April 18, 2001.