By Berta Gomez
Washington File Staff Writer

Washington -- The world economy is showing early signs of strong and "likely to be sustained" U.S.-led growth of about 4 percent in 2002, but ongoing economic stagnation in Japan remains a danger, says C. Fred Bergsten, president of the Institute for International Economics.

Speaking April 12 to the Global Advisory Board of The George Washington University in Washington, Bergsten said that 2001 saw the first "global synchronized recession" in 30 years and probably the first ever in which all major economies experienced a turndown.

Just as the slowdown was led by the United States, the recovery will be ignited by a "very sharp expansion" in the U.S. economy in the current year, he said.

"The largest single threat to the world economic system" is the situation in Japan, Bergsten said. The Japanese economy has experienced a decade of zero growth due to "one massive policy error after another" and is now in the throes of a "deflation spiral" with falling prices leading to even greater numbers of loan defaults.

At the heart of Japan's problems is a "bankrupt financial system," which is staggering under the weight of non-performing loans, Bergsten said. He urged Japanese officials to declare a bank holiday, shut down the system, and liquidate the bad loans. "A long weekend would probably be long enough," he said.

Asked why economic turmoil in Argentina had not posed a similar threat to surrounding economies or to the broader financial system, Bergsten said that the country is "not very internationally integrated" and suggested that its immediate neighbors managed to protect themselves through floating exchange rates.

Argentina defaulted on its foreign debt and devalued its currency after the International Monetary Fund (IMF) refused to extend new loans to the country in December 2001.

Bergsten said the Argentine crisis had been "widely anticipated" -- by some analysts for at least two years -- leading many investors to transfer money elsewhere, mostly to Mexico. Indeed, the infusion of money kept the Mexican peso strong despite the global recession of 2001, he said.

He blamed the IMF for not having cracked down on Argentina and for providing new loans even after it was clear that the Argentine government would fail to adopt appropriate economic reforms. The IMF "was much too soft" on Argentina, Bergsten said.

In general, he said, there is near universal agreement on the need for some sort of sovereign debt restructuring mechanism for cases in which government debt becomes unsustainable.

Turning to trade issues and to the prospects for greater liberalization, Bergsten indicated that U.S. leadership in trade would require congressional approval of trade promotion authority (TPA) for the president.

TPA, also known as "fast track," allows presidents to submit trade deals to Congress for up-or-down votes, without amendments and within a certain time period. The last grant of TPA expired in 1994, and efforts to renew it have failed due to disputes over labor and environmental issues.

Bergsten said that former President Clinton described the lack of fast track as one of the most frustrating aspects of his job and lamented his inability to win support for trade from key elements of his own Democratic party.

President Bush now faces an equally daunting challenge. The most recent effort to revive TPA passed in the House of Representatives earlier in December by 215-214 "and is now hung up in the Senate," Bergsten said. "The greatest threat to globalization is here at home," he said. "There is very strong opposition within our own economy."