World Economic Review: The high fuel prices have slowed the pace of global economy
Dr. Tanvir Orakzai
May 13, 2006
In 2005, world economy reached its zenith and the gross world product increased by 4 percent compared to 2004, with a forecast of 3 ? percent. Growth in the developing countries was fast in the last two decades. The high fuel prices have slowed the pace of global economy, influencing the commodities prices, however the upward drift of interest rates will ease the economic growth in many countries. US and China being the engines of global economy are complementing each other in several areas and boosting the world economy in many areas.
The higher growth in 2004/2005 reflects that there has been collective progress in economic conditions except in the South Asian and Common Wealth Countries, where growth slowed down, yet remained at 6 and 7 percent. The growth in the developing countries mainly occurred in the manufacturing, with continuous growth in 2005. In the developed countries the economic performance remained mixed. North America growth was strong, with moderate growth in Japan, however the pace remained slow in Europe, with the exception of new EU members.
The world economy has slowed down due to a number of reasons. The basic reasons have been the sudden and un-expected shocks in 2004, such as Tsunami in Asia and the latest stun is the increase in oil prices by 60 percent in first ten months, although it eased at the end of year (oil prices are still affecting markets).
A much more greater surprise was the fluctuating exchange rate among difference currencies with Euro and Yen appreciating by 14 and 11 percent respectively. The last surprise was the increase in commodity prices due to increase in oil prices, especially in developing countries.
One major problem in today?s world economy is unemployment and the under employment which is prevalent in developing counties. Unless unemployment is reduced, it is hard to reduce poverty. East Asia, which is the fastest developing region, is facing the problem of un-employment. For example in China, millions are jobless and the state owned agriculture enterprise needs to absorb these jobless people. In Latin America, there has been increase in employment, yet it needs to be sustained to achieve a consistent economic growth. In US and Japan, joblessness is recovering slowly, however Europe is yet trying hard to gain new jobs.
In 2004 the oil prices increased by more than fifty percent and continued to swell in 2005 and 2006 as well. There has been rise in oil price since 1970s, but that was due to reduced supplies; this time the increase is due to a stronger demand. The oil price fell at the end of 2004, however the oil price will hike up for the reason of greater demand. In developed countries oil price did not add to core inflation; but in developing countries, such as Indonesia and India there were wide spread protests against the hike in oil price.
The flow of FDI (foreign direct investment) to developing countries lingered in the last three years, except a few instances of successful deals. Much of the cash flow in developing countries was focused on emergency relief, rather than economic aid for development. The over all flow of cash remained lower than 2003, for the reason of non-payment from the developing countries. Few developing countries were not able to streamline their financial institutes especially private sector, nor any thing was done to diminish the external debt or boost the foreign exchange.
The Sub-Saharan countries economies remained in transition and experienced a negative growth, while the US trade deficit remained went up to US$650 billion, equaling five percent of GDP. Many countries including the large and developed countries are in fiscal deficits. The oil prices over all have affected world net economic growth and it is clear that the global growth has slowed down due to oil prices hike. G8 finance ministers earlier in June 2005 announced a debt relief package for world poor countries, as these countries were unable to pay their debt. The move was hailed as a progressive step to alleviate poverty, there is little doubt that the rich world is still unmoved by the suffering of the poor countries in Asia, Africa and South America.
The recent WTO summit in Hong Kong finally reached a deal in Hong Kong to resolve numerous issues, such as the US and EU agreed to slash the export grant by 2013, and EU committed to reduce tariff by 2010. However there is some good news for developing countries as well, such as US agreed to end cotton export subsidies, which is considered an achievement for African countries. The main success of the recent summit was to allow the 32 least developed countries quota and access to the developed countries market.
The world as whole has become richer with each passing decade and things may have changed in the developed countries. The gap between rich and poor in developing countries is widening every day. About 810 million people go to bed hungry everyday, while more than 500 million people in developed countries are over weight due to over eating.
The higher growth in 2004/2005 reflects that there has been collective progress in economic conditions except in the South Asian and Common Wealth Countries, where growth slowed down, yet remained at 6 and 7 percent. The growth in the developing countries mainly occurred in the manufacturing, with continuous growth in 2005. In the developed countries the economic performance remained mixed. North America growth was strong, with moderate growth in Japan, however the pace remained slow in Europe, with the exception of new EU members.
The world economy has slowed down due to a number of reasons. The basic reasons have been the sudden and un-expected shocks in 2004, such as Tsunami in Asia and the latest stun is the increase in oil prices by 60 percent in first ten months, although it eased at the end of year (oil prices are still affecting markets).
A much more greater surprise was the fluctuating exchange rate among difference currencies with Euro and Yen appreciating by 14 and 11 percent respectively. The last surprise was the increase in commodity prices due to increase in oil prices, especially in developing countries.
One major problem in today?s world economy is unemployment and the under employment which is prevalent in developing counties. Unless unemployment is reduced, it is hard to reduce poverty. East Asia, which is the fastest developing region, is facing the problem of un-employment. For example in China, millions are jobless and the state owned agriculture enterprise needs to absorb these jobless people. In Latin America, there has been increase in employment, yet it needs to be sustained to achieve a consistent economic growth. In US and Japan, joblessness is recovering slowly, however Europe is yet trying hard to gain new jobs.
In 2004 the oil prices increased by more than fifty percent and continued to swell in 2005 and 2006 as well. There has been rise in oil price since 1970s, but that was due to reduced supplies; this time the increase is due to a stronger demand. The oil price fell at the end of 2004, however the oil price will hike up for the reason of greater demand. In developed countries oil price did not add to core inflation; but in developing countries, such as Indonesia and India there were wide spread protests against the hike in oil price.
The flow of FDI (foreign direct investment) to developing countries lingered in the last three years, except a few instances of successful deals. Much of the cash flow in developing countries was focused on emergency relief, rather than economic aid for development. The over all flow of cash remained lower than 2003, for the reason of non-payment from the developing countries. Few developing countries were not able to streamline their financial institutes especially private sector, nor any thing was done to diminish the external debt or boost the foreign exchange.
The Sub-Saharan countries economies remained in transition and experienced a negative growth, while the US trade deficit remained went up to US$650 billion, equaling five percent of GDP. Many countries including the large and developed countries are in fiscal deficits. The oil prices over all have affected world net economic growth and it is clear that the global growth has slowed down due to oil prices hike. G8 finance ministers earlier in June 2005 announced a debt relief package for world poor countries, as these countries were unable to pay their debt. The move was hailed as a progressive step to alleviate poverty, there is little doubt that the rich world is still unmoved by the suffering of the poor countries in Asia, Africa and South America.
The recent WTO summit in Hong Kong finally reached a deal in Hong Kong to resolve numerous issues, such as the US and EU agreed to slash the export grant by 2013, and EU committed to reduce tariff by 2010. However there is some good news for developing countries as well, such as US agreed to end cotton export subsidies, which is considered an achievement for African countries. The main success of the recent summit was to allow the 32 least developed countries quota and access to the developed countries market.
The world as whole has become richer with each passing decade and things may have changed in the developed countries. The gap between rich and poor in developing countries is widening every day. About 810 million people go to bed hungry everyday, while more than 500 million people in developed countries are over weight due to over eating.