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Last Updated: Saturday, 20 September, 2003, 00:59 GMT 01:59 UK
IMF head sees turnaround

By Andrew Walker
BBC economics correspondent in Dubai

IMF managing director Horst Koehler
Koehler is optimistic but calls for reform

The International Monetary Fund's managing director, Horst Koehler, is more optimistic about the world economy than he has been for while ahead of the IMF and World Bank annual meetings.

There was a sharp slowdown in 2001. The IMF does not count it as a recession - although others do.

Growth last year and the first half of this has been below par, so the signs of stronger recovery are a cause for celebration.

He says there is good news from the United States, robust growth in Asia, and signs of a turnaround in Latin America.

All this means, he says, that it seems we have now turned the corner.

He was even distinctly upbeat about Japan, which has suffered more than a decade of near stagnation.


Perhaps the bad times are over. He says that there is now a "good chance that the situation has bottomed out".

But as you might expect from an economist, his forecasts are hedged.

He seems to believe that only cautious optimism is justified. He says there is a degree of fragility and it needs attention.

Kabul street children, AP

The US authorities have helped themselves and the global economy, by cutting interest rates and increasing government borrowing.

But over the longer term, he says they need to turn their attention to underlying problems - what some call the twin deficits, in the government finances and trade with the rest of the world.

He says Japan needs to continue to reform its banks and corporations which are laden with debt problems.

There is also a concern about developing countries with debt problems.

There has not been a full-blown developing country crisis since Argentina nearly two years ago, and he says he does not see an imminent crisis happening.

"We should not panic," he says, "but there is an issue which needs to be tackled".

'Unsustainable debt'

Some countries have debts equivalent to 100% of annual production for the whole economy, or GNP - even higher in some cases.

Our experience tells that these kinds of debt ratios are not sustainable, he says.

He does not name the countries, although he does refer to one region, Latin America.

There is a lack of ambition to improve the structural fundamentals in Europe
Horst Koehler

The countries need to improve government finances and concentrate even more on promoting economic growth.

If they do this, they we should not be too worried, he says.

As a European, Mr Koehler is sad to say that in the global economic picture, Europe is the laggard.

"There is a lack of ambition to improve the structural fundamentals," he says.

He does not spell them out, but he has in mind the jobs market - lower hiring and firing costs for employers - and stronger government finances over the longer term.

But he does see encouraging signs in recent reforms - in Germany, France and Italy. He says there is momentum in these large countries.

Cancun disappointment

On balance he sees "the glass as almost a bit more than half full. It is at least not half empty".

He declares himself disappointed by he outcome of the World Trade Organisation meeting in Cancun, a few days ago, which tried and failed to inject new momentum into a becalmed round of trade liberalisation talks.

But he hopes it will make people "take stock and think about what went wrong".

"They can all only gain if the negotiations end successfully and they will all lose, the advanced countries and in particular, the poor countries, if the round can't be completed," he says.

He takes some comfort from his belief that "the basic assumption that trade is good for growth in poor countries and in advanced countries, is not questioned".

He says if the world is serious about poverty reduction, the rich countries have to understand that better market access and reductions in trade-distorting subsidies (a reference to agriculture) have to go further than was offered in Cancun.

The poor countries should also understand they should do much more to get rid of obstacles to trade among themselves.

He sees trade as having a central role in tackling poverty.

He has often lambasted the rich countries agricultural policies in the past - and he is sure to do it again.

IMF head cautiously optimistic
11 Mar 03  |  Business

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