Mumbai: Opening up to your environment entails being more aware of it - keeping up with it, so that you can adapt to it. The more India opens up to the global economic environment, the more crucial it is that Indians remain informed about where other economies are headed. In the end, our fates are connected; economies have to co-evolve.

It is good to hear, then, that things seem to be looking up for the global economy. Edwin M Truman, a senior fellow at the Institute for International Economics (IIE), Washington, DC, is not the only economist with such a prognosis, but he is one - albeit one who acknowledges that there are doubts about the sustainability of the present positive turn.

At a brief talk at the American Centre in Mumbai on 5 November he outlined his outlook on the global macroeconomic scenario. Having worked at senior levels at both the US Treasury and the US Federal Reserve (at the latter as director and staff director of the division of international finance of the board of directors) over the last few decades, and having been a member of several G-7, G-10 and G-22 working groups, Truman has a considerable amount of experience at such prognostication.

Good times ahead
Having grown at a barely 2-per cent rate annually in the first half of the year, he believes the global economy will grow at a rate of more than 4 per cent over the next year. His colleague at the IIE, Michael Mussa, had made a similar forecast back in September 2003. Like Mussa, Truman also thinks that the engines of this growth will be the US and Asia.

The US economy, which, as Truman noted, accounts for around 20-30 per cent of the world gross domestic product (GDP), is certainly showing some encouraging signs of a strong upturn. The GDP growth for the third quarter was a surprisingly strong 7.2 per cent (the highest in 19 years). The growth of productivity in that country has astounded economists for several quarters - there was an 8.5-per cent growth in productivity in the third quarter, though the rate will most likely come down in the next quarter.

While this has meant that unemployment has not eased much, as businesses become more profitable and expand, hiring could increase over the next year if the GDP growth remains around the 4-per cent mark. The US job market is already showing signs of a recovery. This will mean more consumer demand and, therefore, a stronger recovery.

Asia, especially China, the biggest economy in Asia, seems likely to rebound from the slowdown in economic growth that was caused during the first half of this year by the SARS epidemic.

A good monsoon in India will also mean that its growth prospects are good for this year (considerably better than last year, when several areas experienced severe drought). Especially if the Reserve Bank of India continues to keep the interest rates low.

Truman believes that Japan and Western Europe will be pulled up along with the rest of Asia and the US. Latin America should be able to recover slowly from its miserable state, Eastern Europe will show good growth, and Africa will experience a modest growth.

Another plus, said Truman, is that the inflation rates are low across most of the world. This has allowed central banks to keep the interest rates low in countries like the US and India.

Or are they?
"The question is, how sustainable is this current global positive turn?" he asked. Several factors conspire to make the outlook somewhat uncertain.

The most significant of these are the question marks over the sustainability of US growth. Because of the low inflation rates, the US Fed has been able to keep the interest rates low. But with growth starting to pick up, the Fed might raise the interest rates and this might slow growth somewhat.

And this might cause a ripple of increasing interest rates across the globe. "This," said Truman, "will be a jolt."

However, Fed Chairman Alan Greenspan seems to be aware of these dangers. Speaking at America's Securities Industry Association annual meeting in Florida, USA, on 6 November, he allayed people's fears by reminding them about the low inflation rates that allowed monetary policy "to be more patient."

Another concern about the US economy is the fiscal situation, especially in the longer term. The fiscal deficit is likely to widen over the next few years, according to Truman, because "we cannot expect too much progress in deficit reduction."

A big uncertainty is how adjustments will be made to address the US' unsustainable current account situation. The US is facing a current account deficit of around $550 billion. The depreciation of the US dollar will have to continue. When and how it is done, how long it takes and how messy it is will have an impact on global growth.

In the US this adjustment can potentially slow down rates of capital growth and eventually the GDP growth. In the rest of the world, currencies will have to be adjusted and European and other countries will have to absorb some more of the global economic activity.

Another important factor making things uncertain is the lingering doubt over Latin America. Argentina and Venezuela are causes for concern, even though it does look as if Argentina will recover from its troubles. Chile, Truman said, is the bright spot in the region.

Other countries that Truman is concerned about include Turkey, which Truman said is suffering from some "reform fatigue" and is plagued by high levels of debt, and the Philippines, where growth is slow and, again, debt is high.

There is also a slight concern about the threat of higher commodity prices, higher oil prices and the not-so-likely prospect of another boom and bust in equity prices.

China's exchange rate policy
Some politicians in the US and Bush administration officials have been expressing their concerns about China's policy of artificially holding down the value of its currency. This, they say, is leading to job losses in the US manufacturing sector because Chinese exports are artificially cheap and thus flooding the world's markets.

Truman pointed out that such fears when coming from the US are highly exaggerated. The US has a current account deficit of around $550 billion and an appreciation of the renminbi by the Chinese might at the most reduce this deficit by $50 billion, which will not nearly be enough.

But, said Truman, there are good reasons for the Chinese authorities to appreciate the value of their currency. Not only will it be good for the global economy that this distortion is corrected, it will also be good for the Chinese economy.