GLOBAL SITUATION

The world economy stumbled in 2015 and only a modest improvement is projected for 2016/17 as
a number of cyclical and structural headwinds persist. Global growth is estimated at a mere 2.4
per cent in 2015, marking a downward revision by 0.4 percentage points from the UN forecasts
presented six months ago. Amid lower commodity prices, large capital outflows and increased
financial market volatility, growth in developing and transition economies has slowed to its weakest
pace since the global financial crisis of 2008/2009. Given the much anticipated slowdown in China
and persistently weak economic performances in other large emerging economies, notably the
Russian Federation and Brazil, the pivot of global growth is partially shifting again towards
developed economies.
After a growth rate of 4.1 % in 2004, the strongest and broadest in the world economy for a
number of years, the global expansion has registered a slow-down in the first half of 2005. This
deceleretion is particularly due to higher prices in crude oil and other commodities and widening
imbalances across regions. However, the global economic policies remain receptive to growth and
therefore, The Gross World Product (GWP) is expected to expand by more than 3 % annualy in
2005-2006. The 1.9 % decrease in the growth rate when compared to the previous period, will be
the result of an expected deterioration concentrated almost entirely in the developed countries, as
their performance is still the main determinant of overall growth. Therefore, the expansion by 3%
annualy in 2005-2006, should partially be attribuable to the evolving patterns of international
trade and to the role played by a positive domestic demand in the developing countries and
economies in transition.
Indeed, the number of developing countries in which the output per capita rose by more than 3 %
doubled between 2002-2004. These countries account for over 80% of the developing world
population. Sub-Saharan Africa, land-locked and least developed countries and small island
developing States are all demonstrating an improvement in growth. This positive evolution should
not hide the fact that, the least developed countries-2/3 of which are in Africa- represent the most
vulnerable segment of humanity. Extreme poverty, limited human, institutional and productive
capacity, susceptibility to external economic shocks, external debt, natural and man made
disasters and communicable diseases, often compounded by geographical handicaps, hamper
efforts to improve the quality of life of their people.
Again in 2004, the volume of world trade increased by almost 11%. However a fall to about 8% is
expected for 2005 which might be stabilized around this figure in 2006. A deceleration in the
demand of major importers will be the decisive factor of this decrease. The growing budget and
current account deficit (app. 4% and 6% of the national income respectively) in the US where the
State savings are in continuous decline, is indicative for lesser demand in imports.
The recent dynamism that the world trade has registered can be analysed through the further
deepening of the international division of labour in production. Chinese championship in
attracting Foreign Direct Investments during the recent years was also the demostration of the fact
that this country was chosen as the relocation for global manufacturing. Manufacturing has grown
Chinese trade at about 30% annually for 2003-2004, accounting for almost 1/5th of the growth of
global trade in 2004. The general Asian rise in domestic comsumption, due to better income, has
generated further increases in the demand for energy and raw materials, further amplifying the
growth of exports, hence Gross Domestic Product (GDP) of many developing countries.
Nevertheless, the fragility imposed by major developed countries on the growing trade share of the
developing world remains a reality, as, without the formers demand for final consumption and
without a long lasting dispute settlement among them on trade matters, the dynamics of

international trade would evaporate. Although the Uruguay Round trade agreements lowered
over-all tariff rates, relatively high import tariffs are still levied on goods strategically important to
developing countries, such as textiles, clothing and farm products. Tariffs are not the only barrier
to developing country exports. Government subsidies to agricultural producers in developed
countries provide an unfair advantage against imports. While total financial support provided in
developed countries as a share of GDP steadily declined between 1990 and 2003, the latest year for
which data is available, the amount of support has remained about $350 billion per year during
the same period. Other barriers such as the misuse of phyto-sanitary and technical barriers also
hinder the exports of developing countries.
Present oil prices, which are 3 times higher than what they should normally be, could adopt a
smoother track towards the end of 2005 but an important decrease should not be desired, as an
important fall down in oil prices could bring together tighter supply which will have negative
effects on the manufacturing capacities and consumption trends of the developing countries.
Therefore a healthy demand/supply equation should be respected. A calmer Iraqi situation might
be an occasion for the oil prices to go down to their previous levels. As for the general increase in
non-oil commodity prices, it will not be wrong to state that this was due to the multiplication of
demand deriving from the developing world in general, China and India to start with. However,
the expected decrease in the Gross World Product in 2005-2006 should register a decline in such
commodity prices for the same years.
Conditions for many developing countries have also improved in international financial markets.
Financial flows to developing countries are increasing, their costs are low as they were never before
and non-debt-creating flows, notably the Foreign Direct Investments (FDI), are assuming greater
importance. Indeed, FDI remains the largest source of net private financial inflows to developing
countries, but continues to be unevenly distributed and concentrated in a few key countries. In
2003, for example, the top 10 recipients accounted for almost of total flows to developing
countries. In general, economies with robust growth, solid infrastructure, skilled and productive
labour, and adequate regulatory frameworks, support institutions and services attracted larger FDI
flows. Equally important are measures to increase the benefits of the presence of foreign firms for
the domestic economy, in terms of technology transfers, employment and domestic value added.
For countries without access to international financial markets, Official Development Assistance
(ODA) is a critical source of external financing. As committements began to be translated into
disbursments, ODA has recovered from its decline in the 1990s, reaching $78.6 billion in 2004, a
4.6% rise in real terms. While that recovery is encouraging, it is normally expected that ODA
should provide new cash resources that allow recipient countries to increase development
spending. However a large portion of the increases in ODA has taken the form of expenditures on
security and emergency relief. Therefore, with efforts to increase the level of ODA, there is also an
urgent need to improve its quality. That involves the way aid is dispursed and utilized. Several
donors have announced their intention to provide more aid in less transaction-intensive forms,
such as budget and sector support. Currently, less than 30% of total ODA reaches developing
countries budgets. There is also the need to provide more predictable and multi-year
commitments on aid flows; overcome weaknesses in partner countries institutional capacities to
develop and implement results-driven national development strategies. Despite these
improvements, the increase in the net transfer of resources out of almost all developing countries
and economies in transition has reached a record level of over 300 billion dollars. The fact that
these transfers did not bring together a slow down in economic growth due to a compression of
domestic demand, can however be interpreted as a demonstration of the fact that this time, they
are mostly drawn from the export revenues of the countries concerned rather than capital
outflows.

As formerly mentioned, another negative aspect of the present world economic situation is the
widening of the global external imbalances since 2004 with the current account deficit of the
United States which is expected to rise over 700 billion dollars in 2005 and to remain in that range
in 2006. As long as the large US deficit persists there will be a risk of adverse reactions, either by
policy makers or by markets. There are, for example, dangers of increasing protectionism in some
areas. In financial markets, there is the persistent possibility of a new wave of weakening of the
dollar , including the chance that it could take place in a disorderly manner. Such disorderly
adjustment would have severly disruptive effects on world trade, global financial markets and,
ultimately, global economic growth.