Praise for Britain, and indirectly for the July Budget presented by Gordon Brown, the Chancellor of the Exchequer, is somewhat overshadowed by the gushing review of the achievements of the Clinton administration, which has combined "prudent macroeconomics policies together with an exceptionally dynamic private sector and a responsive labour market" to achieve "solid growth of output and employment with low inflation and a diminishing fiscal imbalance".
The massive engine of the United States economy is helping to power the world economy, which is projected to grow by 4 per cent this year and 4.5 per cent next year, and the IMF believes this impressive level of growth can be sustained into the next decade. These levels of growth compare with the average 3.75 per cent rate of expansion since 1970.
Japan and the continental European countries are proving to be a disappointment, leading to a reduction in growth forecasts by the IMF. Japan's economy is now only expected to expand by 1.1 per cent this year and 2.1 per cent in 1998. This is a virtual halving of estimates and reflects unexpectedly weak domestic demand and the knock-on effect of the financial crisis in South-east Asia which has reduced demand for Japanese goods.
The economies of Germany, France and Italy are picking up, but slowly. None of them is expected to match the growth of the British economy which is forecast to grow in real terms by 3.3 per cent this year and 2.6 per cent the following year.
Flemming Larsen, director of the IMF's report project, said he was more concerned about micro-economic fundamentals in Europe than the problems of fiscal convergence which was needed if European monetary union was to be achieved. He said the biggest worry was that, unlike Britain, the continental European countries were not placing sufficient emphasis on making labour markets more flexible.
The IMF argues that Britain and the United States are creating more jobs and reducing unemployment by having taken tough measures to create a flexible labour force. In practise this means the loss of job security, the removal of demarcation lines and less state protection against redundancy. According to the IMF the pressure against reform comes from "insiders" who have jobs and are effectively blocking those who do not from gaining employment. It dismisses innovations such as work sharing and early retirement as either exacerbating or masking the fundamental problems.
The report says that 8 to 9 per cent of the labour force in continental Europe's three largest countries suffer from structural employment, which is 3 to 3.5 percentage points more that might be attributed to normal mismatches in the labour market. The root cause, says the IMF, is "elaborate job and income protection arrangements that raise the cost of labour and discourage job creation".
The IMF forecasts were issued ahead of the World Bank/IMF meetings which are likely to be overshadowed by the financial crisis among the neighbours of Hong Kong where the meetings are being held.
Michael Mussa, head of the IMF's research department, stressed that despite these problems, Asia, led by a strong performance from China, was likely to continue registering the world's highest economic growth levels even though the South-east Asian countries would see their rates of growth halved in the next two years.
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