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Thursday, 18 April, 2002, 01:35 GMT 02:35 UK
IMF chief upbeat on economic growth
IMF Managing Director Horst Koehler
Koehler: Earlier predictions were too cautious
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By David Schepp
BBC News Online's North America Business Reporter
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The International Monetary Fund (IMF) has revised its expectations for global economic growth upward in part due to the resurgent US economy.

Speaking on Wednesday, IMF Managing Director Horst Koehler said he now expects the world's economy to expand by 2.8% in 2002, a 0.2% rise from previous estimates.


I am deeply convinced that we need not less but more integration of economies

Horst Koehler
He also said the IMF predicts the US economy to grow by a revised 2.3% - significantly higher than previous IMF forecasts of less than 1%.

The upward revision is a source of good-natured ribbing between Mr Koehler and US Treasury Secretary Paul O'Neill.

Speaking last autumn, Mr Koehler predicted the US economy would grow by just 0.7%. Mr O'Neill vehemently disagreed and bet Mr Koehler a dinner "that he's off by a lot".

On Wednesday, Mr Koehler said it was time he admit Mr O'Neill was correct and "treat" the treasury secretary to dinner.

"His faith in a relatively early turnaround of the US economy has prevailed over my more cautious assessment," Mr Koehler said. "And, of course, I am happy about that."

Effect of terror attacks

Mr Koehler noted the economies of the world - most especially the US - had recouped from the 11 September attacks with unexpected aplomb.

Paul O'Neill
O'Neill now stands to get a free dinner
He said "bold decisions" by the US central bank, the Federal Reserve, to act decisively in lowering interest rates propelled the US economy upward, despite the anticipated serious impacts of the destruction of the Twin Trade towers in New York.

"A recovery is under way now in the United States," Mr Koehler said. "And this is already beginning to have a positive impact on the economies in other regions."

Nevertheless, he cautioned events in the Middle East, including the Israeli-Palestinian conflict and surging oil prices, pose a threat to the robustness of the US recovery.

Deficit spending

"Such a situation does not call for frantic action," Mr Koehler said. "What is needed is vigilance and a firm policy hand to make the recovery robust and more dynamic."

He said the US, home to the world's largest economy, "must pay special attention to preventing the re-emergence of the twin deficits - fiscal and external - of the '80s".

The resurfacing of such deficits under US President George W Bush is the source of much criticism by his Democratic opponents in the US Congress.

They have condemned the president for pushing through tax cuts and calling for further cuts even as the US falls into deficit spending.

In his comments in Washington, Mr Koehler said the other developed nations of the world - particularly those in Europe - "can and must contribute to the reduction of the global imbalance related to the US current account deficit".

More integration

Mr Koehler said the countries of Latin America are especially vulnerable to downturns in other nations' economies.

Latin American countries are far more integrated with other world economies, he said, making them less able to shake off the effects of slowdowns elsewhere because their indebtedness rises far more quickly than the exports from which they derive income.

Mr Koehler suggested one solution was to further open world markets to goods from Latin American nations as a way to for them to boost exports.

"I am deeply convinced that we need not less but more integration of economies to foster growth in the global economy, not least to fight world poverty," he said.

Working with the US

The IMF director also called a proposal by the Bush administration to make it easier for countries in financial turmoil to renegotiate repayment terms a positive sign.

The US president's proposal would allow for a mere majority of creditors to agree to less than full value of the bonds they hold. Current policies call for unanimous agreement.

Nevertheless, Mr Koehler noted that much still has to be done to resolve the crises that develop when poor nations default on debt.

Mr Koehler's spoke ahead of the release on Thursday of the World Economic Outlook, a publication of the IMF that assesses the state of nations' economies around the globe.

The publication of the WEO, as it is called, coincides with the annual spring meetings of the IMF and its sister institution, the World Bank.

While some protesters are expected, law enforcement officials are not expecting the thousands of anti-globalisation demonstrators seen at recent events held in the Canadian cities of Quebec City and Ottawa.

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IMF Managing Director Horst Koehler
"The US economy is recovering even stronger than expected"
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