The post September 11 events, the US corporate scandals and an impending war in Iraq had affected economies. Following the US recession in 2001, much of the world seemed to believe that alternative locomotives of growth might haul the world economy forward in 2002.

Japan stayed mired in slum, Europe sputtered to a near halt under the heavy burden of the stability and growth pact and structural weaknesses, and most of the emerging world merely restated its US dependency.

The US itself, which recorded growth of close to 3 per cent last year, was once again the outperformer. Led by a surging housing market, more interest rate cuts and a ballooning budget deficit, demand growth rumbled one.

The IMF forecast euro area, the GDP to grow by 0.75 per cent in 2002 and by 2 per cent in 2003. Inflation was expected to recede next year to about 1.5 per cent. Growth in Germany, Europe’s largest economy was weak.

With the prospects of a slower recovery abroad and an appreciated euro curtailing external demand, sustaining growth requires a strengthening of domestic demand. Historically, however, domestic demand has tended to follow rather than lead recoveries.

The IMF report said that the scope for boosting the euro area’s potential output through structural reforms remains large. While productivity levels in Europe are fairly high in absolute terms, per capita income is much lower - about two-thirds the level of the United States. And this difference, in terms of the productivity performance versus the per capita income performance, is really rooted in different rates of utilization of labour, pointing to the need for European to focus much more on labour market reforms.

With respect to the trade policies of the EU. Directors emphasized that, given its prominent role in world trade, the EU has a special responsibility to pursues liberal trade policies, including in agricultural products; improve access to developing country exports; and advance the agenda of multilateral trade liberalization.

In 2002 consumer spending has risen due to a combination of powerful monetary and fiscal stimulus. Business investment fell just about everywhere in the developed world and international trade has been weak.

Corporate borrowing, which peaked at a deficit of 6 per cent of output for non-financial companies in the first quarter of 2000, is now running below 2 per cent. The S&P 500’s prospective price/earnings ration - based on consensus forecast earnings - which peaked at 24 in 2000, is now down to 16.

In the euro-zone, the monetary stimulus has been much weaken, real interest rates are still positive, unlike in the US.

In Japan, meanwhile, short-term interest rates are already, in effect, at zero, and the chronic weakness of the public finances makes further stimulus impossible. The consequence is that the US remains the engine of the world economy and the huge US current account deficits, worth about 5 per cent of the GDP last year, is getting bigger still.

The steady decline in the dollar during the past year will not do much to close the gap. For that, America’s export markets will need to grow faster than the US for a while; a prospect which still seems some way off. While the US current account deficit requires $2 billion or so of capital every working day to finance it, the downward pressure on the dollar will persist.

Turkey

Turkey has made progress on economic front, by following extensive structural reforms. It has achieved tough fiscal targets and a $40 billion clean up of the banking sector. Of this, $16 billion was spent on the insolvent private banks and $9 billion for loans taken out by their shareholders and never repaid. The government has seized 20 banks. Some of these banks were seized because their losses had exceeded their funds and financial weakness was threatening depositors rights as well as the safety and soundness of the financial system. Foreign investment inflows in turkey have been sluggish.

This is reflected in the figures. Between 1980 and 2001 foreign companies invested $17 billion in Turkey, an annual average of $850 million. The inflow of foreign investment between 1995 and June 2002 was $9 billion to Poland, $21 billion to the Czech Republic and $14 billion to Hungary over the same period.

Last year’s $3 billion was an exception, but it was not a trend reversal. The upsurge was due to a large licence fee paid by the Telecom Italia to operate Aria, the cellular telephone company, and the HSBC’s purchase of a local bank. The Telecom Italia is Turkey’s biggest investors ever and was expected to be a good advertisement for the country.

In the last couple of years, the World Bank has begun a programme to improve the investment environment.

It brought together the Foreign Investment Association (Yased) - a grouping of foreign companies with investments in Turkey — the large business chambers and associations and the relevant government agencies, including the Treasury and the ministry of finance. Over the past five years Turkey has gone from electricity shortage to glut. Supply has outstripped demand because a number of large plants have come on stream while recession has caused a drop in demand.