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Slowing U.S. economy threat to developing world

Ashley Seager

DEVELOPING COUNTRIES could suffer greatly from a slowing United States economy, particularly if other developed countries such as Japan and Germany did not take action to stimulate domestic demand in their economies and reduce the huge global economic imbalances, a United Nations agency warned on Thursday.

The latest report of the United Nations Conference on Trade and Development (UNCTAD) says the U.S. economy, which now looks as if it is faltering, can no longer be expected to be the main locomotive for the global economy.

The counterpart of the huge U.S. trade deficit, the report says, is surpluses not just in China and other emerging Asian economies but in Japan and Germany, the world's second and third largest economies.

"The flexibility and pragmatism of U.S. macroeconomic policy that so far has prevented deficiencies in the global trading system from leading to outright deflation and recession — that has limited the damage `only' to huge trade imbalances — cannot and will not go on forever," said Heiner Flassbeck, one of the report's authors.

In the absence of other developed nations picking up the baton from the U.S., he added, many developing nations could find themselves unable to export so much to rich countries and could suffer a reversal of the development progress of recent years.

Given the lack of a multilateral financial system, Mr. Flassbeck said, these countries often had little choice but to follow this path as a way of boosting investment and growth.

The report concludes that the unwinding of these global imbalances needs a multilateral approach, which could allow developing countries to preserve the recent improvements in their growth rates. —

© Guardian Newspapers Limited 2006

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