2: What's Next for the Global Economy?

A mild U.S. recovery will be a bright spot in a world fraught with risk

The 16-hour waits for trucks are gone at the busy Ambassador Bridge linking Detroit to Windsor, evidence that the $1.2 billion-a-day trade between the U.S. and Canada is back to normal. Outside Paris, tourists again are flocking to the Euro Disney theme park, and a second phase of the park is on schedule to open in March. And near Lower Manhattan's Ground Zero, the Ritz-Carlton chain has just opened a new luxury hotel.

As the global economy enters 2002, the good news is that the worst fears about the impact on business from September 11 have not materialized. Most signs point to a U.S. recovery by spring, buoying hopes from Mexico to Germany. In South Korea and Taiwan, electronics exporters report orders already are picking up.

But how strong a recovery? And how broadly will it be felt around the world? On these questions, the outlook remains hazy. "Japan continues to spiral down, Argentina's a mess, Europe is slow. There aren't many bright spots out there," says Maurice Greenberg, chairman of insurance giant American International Group.

These are only the immediate worries. Try looking further out, and you encounter a great irony. In terms of global security, the U.S.-led war on terrorism has provided world leaders with a strong sense of common mission. But such clarity no longer exists on the future shape of the global economy. A decade ago, the march toward open markets for goods and capital consumed U.S. foreign policy. Now, in place of certainty are only questions: Can a new consensus be built for freer trade amid a growing disillusionment with the fruits of globalization? Will much of Southeast Asia, Latin America, and Africa be left behind? Can borders be secured from future terrorist attack without jeopardizing the openness vital for just-in-time commerce? "There is a feeling of fragility now in the world," says Accenture International Vice-Chairman Vernon Ellis. "A lot of issues have to be managed very carefully."

How such challenges are handled could determine whether or not 2002 marks a return to sustained global prosperity. The World Bank projects global growth in 2002 of just 1.6%--only a shade better than last year and far below 2000's 4% clip. Factor in population growth, and that is akin to no rise in global per capita income. The International Monetary Fund predicts world trade--a global growth engine in the 1990s--will expand by just 2.2%. That's little better than 2001, the worst year for trade in a decade. And if the U.S. recovery sputters, warns Morgan Stanley Dean Witter & Co. global strategist Stephen R. Roach, "the world will be a tough place." He figures the U.S. has accounted for 40% of global growth since 1996. "The world economy has become overdependent on the U.S.," Roach says.

Here's a quick look at 2002's top challenges:

Commercial Security: Beefed-up staffing and better shipping documentation quickly cleared up snarls at U.S. border crossings. But the larger issue remains: "How does the U.S. defend a 4,000-mile border and not damage its economy?" asks Kevin Smith, customs administration director for General Motors Corp. (GM ) Technology will be one key. The U.S. and Canada are developing systems to monitor goods, trucks, and drivers electronically before they arrive at borders, cutting the need for physical checks. "We want a smart border, one that is seamless as well as secure," says Canadian International Trade Minister Pierre S. Pettigrew. That goal depends on whether Congress will spend the billions needed to bring U.S. Customs into the 21st century.

Japan's Crisis: The $1 trillion question is whether Tokyo's financial system will really blow up this year. But assume Japan Inc. muddles through again. There's still little stopping the yen's slide, down one-third in two years to around 134 to the U.S. dollar. If it falls below 140, South Korea, Taiwan, and export-led neighbors may devalue. Should Beijing follow suit, "that will create enormous storms in Asia," frets Chang Il Hyung, senior vice-president at Korea's Samsung Electronics (SSNLF ).

A by-product of cheaper Asian currencies may be deflation. As it is, prices of Asian exports have fallen sharply since mid-2001, notes economist Chen Zhao of Montreal-based Bank Credit Analysis Research Group Ltd. "For companies, it could mean a profitless recovery," says Chen.

The Developing World: A U.S. recovery would help Mexico, which shed 380,000 workers last year due to the slowdown, and East Asian exporters. But for most other developing nations, 2002 looks like another year of stagnation. Though rates on emerging-market debt have dropped from the stratosphere after Argentina's default, new credit remains scarce. "Bankers now know the IMF can't solve all problems," says Joseph E. Vaez, head of credit-risk management for auditor KPMG LLP.

If there's a positive outcome of September 11, it's the higher sense of urgency in the West about the severe poverty of terrorist hotbeds like Afghanistan and Pakistan. "Globalization is allowing the free movement of people, money, and information," says Mark Malloch Brown, boss of the United Nations Development Programme. "But there's a concomitant risk if you let half of the globe be unduly poor and underprivileged." Hundreds of corporations now support campaigns to fight tropical disease and promote literacy. The U.N., World Bank, IMF, and World Trade Organization are hammering out a common plan to help the 1 billion people living on $1 a day or less. "There is a tremendous coming together of what must be done to deal with poverty," asserts World Bank Vice-President Mats Karlsson. But the Bush Administration already has signalled it won't endorse one key goal: a $50 billion annual boost in foreign aid by rich countries.

Free Trade: China's WTO entry and the Qatar agreement to start new global trade talks were big victories. But what these talks will achieve is unclear. President Bush has promised to protect U.S. farm, textile, and steel interests. Europe aims to keep lavish agriculture subsidies. And poor nations are more united in pushing their own agendas. Says Indian Commerce & Industry Minister Murasoli Maran: "From now on, developing countries will think hard before signing any multilateral treaty." As a result, there are new calls in Asia for a regional trade bloc. And in Latin America, support for the Free Trade Area of the Americas championed by Bush is fading fast. "Entire regions are moving in different directions," warns George Friedman, chairman of Dallas-based risk consultancy Stratfor Inc. "That can cause huge frictions between countries."

That's one possibility, but it's not inevitable. To build a healthy global economy will require management, diplomacy, resources, and optimism--a feeling in short supply in the world these days.

By Pete Engardio in New York, with bureau reports

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