5:27 AM Apr 28, 1997

ROSY IMF PICTURE NEEDS ROSIER TINTED GLASSES

Geneva 27 Apr (Chakravarthi Raghavan) -- The International Monetary Fund's spring annual projections of world output prospects for the next two years was described in most media reports as "rosy", while the IMF chief, Michel Camdessus, spoke of it as a case "rational exuberance".

But looking at the IMF prognostications for 1997 and 1998 and comparing it with those from other institutions - some already published and others in the process -- suggest that one needs a "rosier tinted glass" than that of the IMF staff to find such an optimistic outlook.

Media reports of the projection in the IMF's semi-annual World Economic Outlook spoke of a four percent growth in world output in 1996 and projected a 4.4 percent for 1997 and 1998.

Over the last several years, the IMF makes some optimist projections for the spring meetings of the Interim and Development Committees and these generally get revised downwards in the autumn.

Even more, perhaps some of the assumptions behind the 4.4 percent world output growth now projected, as usual with such surveys, is in some footnotes which the media has ignored in reporting.

But anyway, the projection seems to not fully take into account the effects on the US economy as a result of the tightening of the monetary policy (by the Federal Reserve's nudging up of interest rates), the deflationary effect in Europe with all EU members preoccupied with the Maastricht criteria for the EMU, and the problems faced in Japan where there is a shift of fiscal policy towards restriction (thus dampening public infrastructure investments) and higher sales taxes restraining private consumptions.

Few if any of the reports on the IMF projection brought out that the growth is on the basis of the socalled purchasing power parity (PPP), and not the dollar value of various national outputs (in local currencies) converted at the market exchange rates.

Projections based on the market exchange rate dollar values, such as the Link Model, used within the UN system, as well as by other forecasters (private and public) give a figure of 2.9% output growth for the world in 1997.

The IMF adopted the PPP method a couple of years ago to project the output growths, giving a larger weight to the developing world, particularly of Asia, where there has been a faster growth than in the industrial countries.

Stung by the public criticisms of NGOs and others about the poor performance of developing countries and transition economies under a decade of structural adjustment and reforms under the tutelage of the Fund and the Bank, the institutions began using the PPP values as an indicator that countries are in fact doing better.

Some of the developing countries, like India and China, did raise within the executive boards of these institutions some questions about the new methodology, though it was more based on their worries that it was an effort to graduate them out of "poverty level" and thus deny them concessional loans and funding.

But the use of PPP for projecting country, and world gross domestic product growth, and per capitas, has many pitfalls and could be quite misleading, economists in other institutions note.

The PPP approach (calculating the cost in national currency in each country for buying a common basket of goods and services, and comparing it to the cost of the similar basket in the United States), whatever its merits to judge relative quality of life in countries, is controversial enough among economists for estimating world output.

This is more so when other equally relevant statistical data are expressed in terms of the market exchange dollar values -- whether it be the trade data and shares of countries, reserves of countries and calculations of balance-of-payments.

When the IMF staff first introduced the PPP measure, it had no answer to the question of economists in other institutions, why the PPP is to be used only for world output calculations, and not for trade and other measures, and even more in calculating the voting weights and quota allocations of countries in the IMF and its decision-making processes.

When the IMF began using the PPP for world output and growth rates, the Asian Development Bank, took the IMF valuations in its 1993 World Economic Outlook, and brought out that the GDP share of developing countries in market exchange dollar values was 17.4 percent, while the IMF's PPP values gave them a weight of 34.5 percent

Within the developing world, the GDP share of the Asian developing countries in market exchange dollar value was 7.4 percent, while the in PPP terms it became 17.7 percent. The respective percentage shares in world GDP of other developing regions also changed, with the PPP shares shown in parenthesis: Africa 1.7 (4.1), Latin America 4.2 (8.2) and Middle East and Europe 4.1 (4.5). The shares of Eastern Europe and the Former Soviet Union too changed from 8.9 in dollar terms to 11 in PPP terms.

The share of the industrial countries went down from a 73.7 percent to 54.5 percent. The US share itself changed from 24.8 to 22.5, but that of Japan fell from 14.6 to 7.6, of Germany's from 6.9 to 4.3, of Canada from 2.6 to 2.2, of France from 5.3 to 3.5, of that of the UK from 4.3 to 3.5, of Italy from 4.7 to 3.4 and of the rest of industrial countries from 10.7 to 7.5.

By using the PPP, to give greater weight to the fast growing Asian developing economies, the IMF projection has achieved a "rational exuberance" in the growth outlook.

But leaving this statistical jugglery aside, there are a number of policy stances in the major industrial nations that are clear and which clearly would affect the outlook.

No one undertaking a projection could ignore the efforts being made in Europe to meet the Maastricht criteria (budget deficit of 3 percent of GDP) and keep inflation at or below two percent.

Based on national statistical data, the UN's regional Economic Commission for Europe (ECE), in its latest economic survey published just a week earlier (than the IMF's) has projected for the industrial countries as a group a 2.3 percent growth in 1997. World output growth, the ECE then went on to say, is also expected to remain more or less unchanged in 1997, with developing countries as a whole maintaining more or less the same growth as in 1996, "but a major acceleration is not expected."

The ECE tempered the growth prospects, by noting that efforts in Europe to fulfil Maastricht criteria (even with a reasonably flexible interpretation of the criteria) could mean a lower rate than projected.

For Japan, the ECE has projected a major deceleration (because of a restrictive fiscal policy and higher sales tax restraining private consumption). And a further tightening of US monetary policy (being encouraged by the IMF) could trigger a large correction of equity prices and dampen both consumer demand and business investment.

The ECE then went on to say that world output growth is also expected to remain more or less unchanged in 1997, with developing countries as a whole maintaining more or less the same growth as in 1996, "but a major acceleration is not expected."