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World Bank predicts recession next year

THERE IS a "substantial risk" that the world will plunge into recession next year, according to a gloomy new forecast from the World Bank.

The sister organisation to the International Monetary Fund warns that sharp stockmarket falls in the US and Europe, or a continuing pause in international capital flows, could bring global growth to a halt in 1999.

Even taking a more optimistic outlook, the developing countries face their worst growth prospects since the third world debt crisis nearly 20 years ago, it says.

Controversially, the new report also recommends that some developing countries should restrict or tax "hot money" capital flows to safeguard against future crises.

Joseph Stiglitz, the World Bank's chief economist, concludes that the recent crises reveal fundamental weaknesses in the international financial system.

"When a single car has an accident on a bend in the highway, one might infer something about the driver or his car. But when, at the same bend, there are accidents day in and day out, the presumption changes - there is probably something wrong with the road," he writes.

The bank welcomes the recent US interest rate cuts and Japanese fiscal package but calls for further measures to avert a deep global slump. The risk of a worsening recession in Japan and slower growth in the US and Europe if share prices suffer a sharp correction make prospects for 1999 precarious, the report warns.

It forecasts that global growth will nearly halve from 3.2 per cent in 1997 to 1.8 per cent in 1999, and puts a high probability on zero growth next year. The crisis-ridden Asian economies are likely to have seen an 8 per cent drop in GDP this year, with no growth in prospect next year.

Developing countries will be hit hardest. Brazil, Indonesia, Russia and other countries, accounting for a quarter of world demand, have suffered a decline in GDP per head this year.

The report argues for an expansion in demand, a better social safety net, and injections of public funds for banking reform in the crisis countries. It estimates that the cost will amount to 20 to 30 per cent of their GDP. "Continuing financial support from the international community is vital," it says.

The report comes out in favour of restrictions on the more volatile short- term capital flows in future to reduce the risk of repeat crises.