Interview: Time to rebuild fiscal buffer to weather global slowdowns: World Bank chief economist

Countries should take advantage of the cheap oil prices to put their fiscal house in order to tackle the slowing world economy, the World Bank Chief Economist Kaushik Basu said Wednesday, cautioning that many countries would fall short of fiscal ammunition if hit by a deeper crisis.

"The overall growth is not very cheerful," Basu told Xinhua in an interview. In his view, the U.S. economy is good and the Chinese economy is doing reasonably well. However, eurozone's slowdown is worse than anticipated, and Germany, the former growth engine, is close to a standstill.

What worries Basu most is the fact that unlike in 2008 when most countries were fiscally strong to stimulate economic activity during the crisis, many countries are now grappling with high public and private debts.

"You have to build up that fiscal space if once again we get into a deep crisis," Basu said.

Plunging oil prices may offer a good opportunity. In the latest edition of Global Economic Prospects, the World Bank said as oil prices sank below 50 dollars a barrel, oil importing countries could lower fuel subsidies and emerging economies should invest in infrastructure and support social schemes.

He singled out China's sovereign debt which had increased from 20 percent of its Gross Domestic Product (GDP) to about 50 percent since 2007. "There are window opportunities for China frankly," he noted.

According to the economist, China's above-7-percent growth might be bad compared with the country's past, but is better than any other countries. "China can afford to take a little bit risks at this point of time to put its fiscal house in greater order," he added.

UPBEAT U.S. ECONOMY

Amid the cloudy global economic outlook, Basu singled out the U. S. economy as a bright spot.

"I do expect the U.S. economy to do well. Its labor market is fairly open...Its monetary and fiscal policies are pretty good," he said. In the medium term, Basu expected the U.S. economy to play a positive role for the world.

As the Federal Reserve is widely expected to raise the interest rate in the middle of this year, Basu said it will cause "some trauma" for developing economies, but overall it will be a good thing. The Fed will raise the rates when the U.S. economy is doing well, so that will bode well for developing countries' exports, he added.

Basu also noted that it would be highly possible for the Fed to postpone raising interest rates due to the deflation pressure brought by the low oil prices.

LESS BUOYANT TRADE

Global trade expanded by less than 3.5 percent in 2012 and 2013, well below the pre-crisis average annual rate of 7 percent due to weak import demand mostly from high-income countries, according to the Global Economic Prospect report.

Basu explained that while trade is less buoyant, the global economy continues expanding because people are consuming products made by their own country more than in the past.

The report cited China and United States as the two primary countries leading the trade slowdown. It did not surprise Basu as he found "China probably is going to be a self-reliant economy producing for itself and consuming itself."

The chief economist believed that the route China took in its history-making trade as its primary driver of growth may not be there for sub-Saharan African countries. Endite