April 26, 2001


According to the latest International Monetary Fund forecast of world economic conditions, the world economy is expected to grow 3.2 percent this year before rebounding by 3.9 percent next year. This is substantially slower than the nearly 4.5 percent world growth that occurred last year. However, their outlook remains strong once the U.S. and Japan are excluded from the picture.

I hope their forecast is on the mark. Unfortunately, I am afraid my hopes will not be realized.

About a month ago, the Turkish economy stumbled as budgetary reform was shelved by the ruling party. The lira was cut in half , but even that did not restore confidence. Inflation now is rampant in Turkey and the economy remains seriously damaged.

Last week, the problem was Argentina. A sale of Argentine treasury bills was postponed. Because Argentina's currency is tied to the dollar, no devaluation occurred there, but their stock market plummeted. The next day, currencies and stock markets in Chile and Brazil also tumbled.

Part of the Argentine problem is a conflict over monetary policy. Their central bank president has been requiring unusually high percentages of each bank loan to be set aside by the banks for reserves.

Because the growth of reserves in Argentina depends upon U.S. monetary policy and the competitiveness of Argentine businesses, the high reserve requirements reduce the availability of bank liquidity. After three years of recession, the Argentina government does not want such restraint upon bank liquidity.

Conditions in Argentina now have stabilized as the central bank head is apparently being replaced. Hopefully, this will allow the Argentina government to resume debt offerings. Nevertheless, the event shows how fragile economic expansion currently is in South America.

Partially because of U.S. weakness, the Mexican government now has revised its forecasts to less than 4 percent growth. This compares with more than 7 percent a year ago, and further downward revisions are likely.

Then there is Western Europe. Tax cuts and the stimulative impact of sharp currency devaluations pushed growth past 3 percent in 2000. The hope was for a repeat performance in 2001. Unfortunately, business confidence is eroding rapidly, especially in Germany. Recent growth rates already have slowed to 2 percent and further weakness is possible.

Moreover, the European Central Bank (ECB) appears to be fighting the inflation created by energy and currency devaluation rather than worrying about the rapidly slowing growth in economic activity. Without economic growth, however, investors continue to ship their assets to the United States. The result is a weakening euro, which adds to the inflation that the ECB is trying to fight.

Without some easing of this restrictive monetary policy in Europe, all the reforms and tax cuts will be washed away by economic weakness. European recession still appears to be unlikely, but serious slowing already is apparent.

Of course, there are some hopeful signs as well.

Japan will have a new prime minister with stronger desires for reform than some previous administrations. If he can encourage Japanese consumers to spend (possibly by suspending that consumer tax that was approved several years ago) and the banks to look for opportunities and forget about their previous loan problems, then some real changes might develop there. The optimism is not yet infectious in Japan, but some hope could be justified.

Also, while farmers may not like the prices, the world may produce more feedstuffs, grains and cotton than ever before in its history. If we can solve the political and infrastructure problems that confront too many parts of the world, we certainly can feed and clothe all the people who currently are on this globe.

But reality must intervene. We will not adequately distribute those foodstuffs and we will not get the policies that we need in the countries that have the capacity to make changes. Therefore, more world economic crises probably will surface


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