title: GlobalEconomicProspectsandtheDevelopingCountries2000

author:publisher: WorldBank

isbn10|asin: 0821345508printisbn13: 9780821345504ebookisbn13: 9780585223865

language: English

subject

Economicforecasting--Developingcountries,Developingcountries--Economicconditions,Economicforecasting,Economichistory--1990-,Internationaltrade,Internationaleconomicrelations.

publicationdate: 2000lcc: HC59.69.G5852000ebddc: 330.91724

Economicforecasting--Developingcountries,Developingcountries--Economic

subject: conditions,Economicforecasting,Economichistory--1990-,Internationaltrade,Internationaleconomicrelations.

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GlobalEconomicProspectsandtheDevelopingCountries

Pageii

Copyright(c)2000bytheInternationalBankforReconstructionandDevelopment/TheWorldBank1818HStreet,NW,Washington,DC20433,USA

AllrightsreservedManufacturedintheUnitedStatesofAmericaFirstprintingDecember1999

ThispublicationhasbeencompiledbythestaffoftheDevelopmentProspectsGroupoftheWorldBank'sDevelopmentEconomicsVicePresidency.TheWorldBankdoesnotacceptresponsibilityfortheaccuracyorcompletenessofthispublication.AnyjudgmentsexpressedarethoseofWorldBankstafforconsultantsanddonotnecessarilyreflecttheviewsoftheBoardofExecutiveDirectorsorthegovernmentstheyrepresent.

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ISBN0-8213-4550-8ISSN1014-8906LibraryofCongresscatalogcardnumber:91-6-440001(serial)

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Contents

Foreword vii

Summary ix

Abbreviations,Acronyms,andDataNotes xv

Chapter1ProspectsforGrowthandPovertyReductioninDevelopingCountries

1

TheExternalEnvironmentforDevelopingCountriesIsImproving

3

TheOutlookforDevelopingCountriesin1999-2001SuggestsSignificantAcceleration

17

ProjectionsforGrowthinDevelopingCountriesintheLongTermAreLower

22

RecentTrendsandProspectsforPovertyinDevelopingCountries

28

RiskstotheForecastandaLow-CaseScenario 36

Notes 42

References 44

Chapter2ExternalShocks,FinancialCrises,andPovertyinDevelopingCountries

47

ExternalShocksandPovertyinDevelopingCountries 48

IncomePovertyandInequalityduringtheEastAsian 51

Crisis

BeyondCurrentIncomeEffectsoftheEastAsianCrisis 62

FosteringSustainedGrowthandReducingtheSocialCostsofVolatilityandCrises

65

Notes 67

References 68

Chapter3AsianRestructuring:FromCyclicalRecoverytoSustainableGrowth

73

TheUnevenRecovery 74

TheFocalPointofRestructuring:TheFinancialSector 84

CorporateRestructuring:SomeProgress,butaLongWaytoGo

91

Notes 98

References 99

Chapter4ManagingtheRecentCommodityPriceCycle

103

KeyIssuesConfrontingPrimaryCommodityExporters 104

TheSavingsResponsetoCommodityPriceCycles 108

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TheSavingsResponsebyOilExportingCountriestotheRecentSwinginOilPrices

110

TheSavingsResponsebyNon-OilCommodityExportingCountriesofSub-SaharanAfrica

119

Notes 127

References 130

Appendix1RegionalEconomicProspects

133

Appendix2GlobalEconomicIndicators

151

ClassificationofEconomies 169

Figures

1.1Worldindustrialproduction

4

1.2U.SPrivateSavingsRateandCurrentAccountBalance

6

1.3G-3ConsumerPrices,1997-99

8

1.4Short-termInterestRates,1998-99

9

1.5WorldImportVolumeGrowth

10

1.6SpreadsonBradyBonds

15

1.7 17

RealGDPGrowthforDevelopingCountries

1.8IndexofFinancialConditionsSinceJune1997

18

1.9GrowthofU.S.employmentandproductivityinmanufacturing

22

1.10Long-termTrendsinCommodityPrices,1990-2008

25

2.1TermsofTradeandGDPGrowthVolatility,1961-97

49

2.2UnemploymentinEastAsiaduringthecrisis

59

2.3PovertyandSpendingonSocialSafetyNetsinEastAsia,1996-98

60

2.4Changeingrossdomesticsavings,1997-98

62

2.5RelativePriceofFoodsduringtheCrisis

63

3.1NontradableProductionbeforeandafterCrises

75

3.2IndustrialProductionbeforeandafterCrises

76

3.3ProductionIndexinKoreabyIndustry

77

3.4ThaiNonperformingLoansandInterestRates,June1998-

79

September1999

3.5ChangeinBankDepositsandLendingtothePrivateSector,December1998-July1999

81

3.6TotalInvestmentinEastAsia

81

3.7Cross-borderMergersandAcquisitions,Ql1997-Q21999

95

4.1PrimaryCommodityPricesversusManufacturesUnitValueIndex,1960-98

105

4.2ThedeclineincommoditypricesduetotheEastAsiancrisis

108

4.3CurrentandPreviousPriceDeclinesofNonenergyCommodities

109

4.4Mexico'sCurrentAccount,1970-82

115

4.5SharesofMerchandiseExportsofSub-SaharanAfricaNon-oilCommodityExporters,1990-97

119

4.6AgriculturalExporters'TradePrices,1993-98

120

4.7MetalsandMineralsExporters'TradePrices,1993-98

121

4.8RealIncome,Savings,andAidduringBooms

125

4.9ChangeinSavingsRatesduringBoomComparedwithBasePeriods

126

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Tables

1.1Globalconditionsaffectinggrowthindevelopingcountries,1998-2001

2

1.2Worldoutputgrowth,1998-2001

5

1.3Contributionstoworldimportgrowth

10

1.4U.S.importpricesofmanufacturedgoods,1999

11

1.5Annualpercentagechangeinoilandnon-oilcommodityprices

14

1.6Averagemonthlygrosscapitalmarketflowstodevelopingcountries

14

1.7Worldgrowth,1981-2008

23

1.8aPopulationlivingbelow$1perdayindevelopingandtransitioneconomies,1987-98

29

1.8bPopulationlivingbelow$2perdayindevelopingandtransitioneconomies,1987-98

29

1.9ProjectedgrowthratesinrealpercapitaprivateconsumptionandchangesinGinicoefficientsfor1998-

30

2008

1.10aPopulationlivingbelow$1perdayindevelopingandtransitioneconomiesfor1998-2008underscenariosofslowgrowthandrisinginequality(ScenarioA)andinclusivegrowth(ScenarioB)

33

1.10bPopulationlivingbelow$2perdayindevelopingandtransitioneconomiesfor1998-2008underscenariosofslowgrowthandrisinginequality(ScenarioA)andinclusivegrowth(ScenarioB)

33

1.11Populationestimatesandprojections,1998and2008

35

1.12World,industrial,anddevelopingcountriesinthelow-casescenario

37

2.1Growth,povertyrates,andGinicoefficientsinEastAsia,1996-98

53

2.2EmploymentandrealwagesinEastAsiaduringthecrisis

57

2.3Publicspendingonhealthandeducation

64

3.1Financialdistress,pastandprojected,1995-2002

77

3.2Rationofnonperformingloanstototalloans,December1998-September1999

78

3.3PublicdebtandrecapitalizationcostsasshareofGDP,1998

84

3.4Institutionalarrangementsforcorporateandfinancialrestructuring

85

3.5Structuralchangesinthefinancialsystem

85

3.6Estimatedrecapitalizationcostsforcommercialbanks,mid-October1999

87

3.7Restructuring:out-of-courtandin-courtprogress,August1999

91

3.8Illustrativepostcrisispolicyreformsincrisiscountries

96

3.9FDIflowsinEastAsia,1992-99

97

4.1Savings,investment,andrealincomechanges,selectedcountrygroups,1996-97

111

4.2Capitalflowstooilexportersandenergyprices,1970-97

114

4.3RatiosofpublicandprivatesavingstoGDP,1996-98

115

4.4Economicperformanceofmajoroilexportersandothercountries,1980-97

117

4.5Shareofoilandnon-oilcommoditiesinmerchandiseexports,1980andmostrecentyear

118

4.6PolicyperformanceandGDP,savings,andrealincomeduringboomperiods

122

4.7Exportsandterms-of-tradechanges,boomcomparedtobaseperiod

123

4.8Changesinsavingsandrealincomerelativetobaseperiods

123

4.9Economicperformance

126

4.10Decompositionofrealincomechanges

127

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Boxes

1.1SectoralandregionaleffectsoftheEastAsiancrisis

12-13

1.2Prospectsforanewroundofmultilateraltradenegotiations

26-27

1.3Technicaldiscussionofassumptions

34

1.4Cantheinternationaldevelopmenttargetforreducingincomepovertybeachieved?

37

1.5FailingtoforecasttheseverityoftheEastAsiancrisis

38-39

1.6ThepossibleimpactoftheY2Kbugondevelopingcountries

40-41

2.1Volatility,growth,andpoverty

51

2.2ExternalshocksandfluctuationsinpovertyinMexico

52-53

3.1Whydistresscanpersist

80

3.2Redeploymentofassets:lessonsfromJapan

92-93

4.1Counterfactualscenarios

112

4.2Publicsectorexpendituresduringtheoilpriceboom

116

4.3FiscaladjustmentinSaudiArabiaandVenezuela

117

4.4Savingsandrealincomesduringthecommoditypricecycle

124

4.5RealincomesinBeninduringthecommoditypricecycle

127

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ForewordDevelopingcountriesarenowrecoveringfromtheworstravagesofthefinancialcrisisof1997-98.Buttherecoveryisunevenandfragile.Growthremainswellbelowtheprecrisistrendsinmanycountries,somuchsothattheaveragepercapitaincomeofdevelopingcountriesoutsideofAsiaisexpectedtofallin1999.Long-termprojectionsforgrowthindevelopingcountries(excludingthetransitioneconomies)suggestthatitislikelytobelowerin2002-2008thanintheprecrisis1990s.Theexperienceofthepastyearhasunderscoredhowfinancialvolatilitycanincreasepovertysignificantlyintheshorttomediumterm.Asaresult,thereisagrowingconsensusthatinordertomaximizethepositiveeffectsofgrowththatcancomewithopenness,theinternationalcommunitymustfindwaystoreducethefrequencyandseverityofeconomiccrises.

Forthefirsttime,thisyear'sGlobalEconomicProspectsanalyzesthetrendsinpovertylevelsindevelopingcountries.Progressonpovertyreductioninmanydevelopingcountriesislikelytoremainslowandbelowpoverty-reductiontargetsrecentlyadoptedbytheinternationalcommunity.

Thisyear'sreportalsoconsidersthreeareaswherethecrisishashadamajorimpactongrowthandwelfareinthedevelopingworld.

First,thecrisishasincreasedpovertyintheEastAsiancrisiscountries,Brazil,andRussia.Notonlyhastheincreaseinpovertybeensignificant,whethermeasuredbylevelsofincomeorconsumption,butthecrisishasengenderedlargecostlymovementsofpopulationsandsharpdeclinesinstandardsoflivingforthemiddleclasses.Urbanpovertyincreasedinallcountries,particularlytheRepublicofKorea.Althougheffortsweremadetomaintainspending

onsocialservices,realpublicexpendituresonhealthandeducationfellinthecrisiscountries,withaparticularlysevereimpactonaccesstoservicesinIndonesia.

Second,thoughtheEastAsiancrisiscountriesareexperiencingacyclicalrecovery,severestructuralproblemsremain.Thelevelofnonperformingloansremainshigh,andalargeshareoffirmsareinsolvent.Weakfirmshaveoperatedonthinmarginsandtheirinabilitytopayinterest,followingtheonsetofthecrisis,hasaddedtotheirdebtburden.Suchfirmsconstituteasignificantportionofeachofthecrisiseconomiesandtheappetitetoinvestinthemisextremelylimited.Theywillcontinuetoactasadragoninvestmentandgrowthuntilsuchtimeasthefinancialclaimsonthemareresolvedandeithertheiroperationsreturntoadequateprofitabilityortheirassetsareredeployed.Withoutvigorouscorporateandfinancialrestructuring,thereturntoasustainablegrowthpathwilllikelytakelonger,thecostsofthecrisiscouldrise,andtheseeconomieswillremainvulnerabletonewexternalandinternalshocks.

Finally,theexchangeratedepreciationsanddeclinesindemandinEastAsiahaveexacerbatedthefallinprimarycommoditypricesthatbeganin1996.Countriesthatdependonprimarycommoditieshavefacedanenormouschallengeinsmoothingconsumptioninthefaceofboomsandbustsincommoditypricesduringthe1990s.Somecommodity-dependentcountries

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copewiththewideswingsincommoditypricesmoresuccessfullythanothers.Intheoilexportingcountries,weakpolicyenvironmentsledtomixedsavingsperformanceandlowerinvestmentovertheoilpricecycle.Thesecountrieshavegenerallybeenunsuccessfulinreducingtheirdependenceonoilrevenues,andthefallininvestmentwillfurtherimpedeprogress.Bycontrast,thecommoditypricecycleofthe1990sdoesnotappeartohaveadverselyaffectedtheprospectsforgrowthinthenon-oilexportingcountriesofSub-SaharanAfrica.Changesinrealincomesweregenerallysmallerthanintheoilexportingcountries,andimprovementsinpoliciesinseveralcountriesenabledthemtoincreasesavingsandinvestmentratesduringbothcommodity-priceboomsandbusts.

Overall,then,GlobalEconomicProspects2000showsamixedpicture,withanumberofextraordinarychallengesconfrontingdevelopingcountriesintheireffortstofurthereconomicprogressandreducepoverty.WehopethatthisreportwillservebothtosharpentheWorldBank'sworkinsupportingourclients,andtoinformtheinternationalcommunityaboutthecriticaldevelopmentissuesoftheday.

JOSEPHE.STIGLITZSENIORVICEPRESIDENTANDCHIEFECONOMISTTHEWORLDBANKNOVEMBER1999

ThisreportwaspreparedbytheDevelopmentProspectsGroup,anddrewfromresourcesthroughtouttheDevelopmentEconomicsVicePresidency,thePovertyReductionBoard,theEastAsiaRegionalVicePresidency,andotherWorldBankregions.TheprincipalauthorofthereportwasMustaphaNabli,assistedby

WilliamShaw,withdirectionbyUriDadush.ThechapterauthorswereMickRiordan(chapter1),MustaphaNabli(chapter2),AshokaMody(chapter3),andWilliamShaw(chapter4).ThereportwaspreparedunderthegeneraldirectionofJosephStiglitz.

ThereportdrewoninputsbyotherstaffoftheDevelopmentExonomicsVicePresidencyandfromthroughouttheBank.CarolineFarah,HimmatKalsi,RobertKeyfitz,AnnetteI.Deutedtotheanalysisofglobaleconomictrendsandprospectsinchapter1.GiovannaPrennushi,ShaohuaChen,MartinRavallion,andMichaelWaltonwrotethesectiononpoverty.CarolGabyzonandAlanWinterscontributedtochapter2,andPeterFallonandJenilKlugmlanprovidedbackgroundpapers.EungJuKim,ShokoNegishi,andVivakSuricontributedtochapter3.AndIbrahimAl-Ghelaiqah,GholamAzarbayejani,JohnBraffes,BettyDow,ShamyaS.Jayasuriya,RobertKeyfitz,DonaldMitchell,andShaneStreifelcontributedtochapter4.

ManyothersfrominsideandoutsidetheBankprovidedcomments,guidance,inputsandsupportatvariousstagesofthereport'spublication.PaulCollier,NoraLustig,FrankLysy,andJohnPageservedasdiscussantsattheBankwidereview.WewouldparticularlyliketothankSaraCalvo,GerardCaprio,ConstantijinClaessens,DavidDollar,AlanGelb,ArvindGupta,JamesHanson,HomiKharas,DanielaKlingebiel,IraLileberman,PanayotisVarangis,andJoachimvonAmsbergfortheirhelpfulcomments.TheDevelopmentDataGroupcontributedtothemanageddissminationfromtheDevelopmentprospectsGroup,andPhilHaymanagedmediaarrangements.SydnellaKpundehservedasthe

principalassistanttotheteam.Bookdesign,editing,andproductionweredirectedandmanagedbytheProductionServicesUnitoftheWorldBank'sOfficeofthePublisher.

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SummaryDevelopingCountriesarenowRecoveringfromtheworstravagesofthefinancialcrisisof1997-98.TheEastAsianeconomiesarereboundingfromlastyear'scollapseinoutput.Improvedprospectsandaneasingofmonetaryconditionsinmanypartsofthedevelopingworldhaveboostedemergingequitymarketsandreducedinterestratesfromthesky-highlevelsofmid-1998.Developingcountriesalsoarebenefitingfromtheaccelerationofgrowthandinterestratereductionsinindustrialcountries.

However,therecoveryisbothunevenandfragile,andmanycountriescontinuetostruggleintheaftermathofthecrisis.SeveralcountriesinAfrica,LatinAmerica,andEasternEuropefacedeclinesinoutputin1999,andoutsideofAsiadevelopingcountries'percapitaincomeisexpectedtofall.Continuedimbalancesinindustrialcountriesmarkedlyincreasetheriskspresentedbytheinternationaleconomicenvironment.Furthermore,thecyclicalrecoveryinEastAsiahasnotaddressedseveredifficultiesthatwereeithercausedorexacerbatedbythecrisis.Inadditiontoareviewofinternationaleconomicdevelopmentsandprospects,GlobalEconomicProspects2000considersthreeareaswherethecrisishashadamajorimpactongrowthandwelfareinthedevelopingworld.

First,thecrisishasincreasedpovertyintheEastAsiancrisiscountries,Brazil,andtheRussianFederation,andelsewhere.Chapter2reviewstheevidenceonthecrisis'socialimpactonEastAsiaandotherdevelopingcountriesandaddressesthebroaderissueoftheimpactofexternalshocksonpovertyindevelopingcountries.

Second,thoughtheEastAsiancrisiscountriesareexperiencingastrongcyclicalrecovery,severestructuralproblemsremain,notably

thebankingsystems'highlevelsofnonperformingloansandthelargeshareofinsolventfirms.Chapter3outlinesthedepthoftheproblemsfacedbythecorporateandfinancialsectorsoftheseeconomies,analyzesthechallengesfacingtherestructuringprocess,anddiscussestheappropriateroleofgovernmentinsupportingrestructuringandreducingsystemicrisk.

Third,exchangeratedepreciationsanddeclinesindemandinEastAsiaexacerbatedthefallinprimarycommoditypricesthatbeganin1996.Countriesthatdependonprimarycommoditieshavefacedanenormouschallengeinsmoothingconsumptioninthefaceofboomsandbustsincommoditypricesandadjustingtotheseculardeclineincommoditypricesrelativetomanufactures.Chapter4examineshowthemostcommodity-dependenteconomiesintheworld-themajoroilexportingcountriesandthenon-oilexportersofSub-SaharanAfrica-haveadjustedtothecommoditypricecycle.

ProspectsforGrowthandPovertyReductioninDevelopingCountries

Theeffectsofthecrisesof1997-99,fromEastAsiatoRussiaandBrazil,persistinmanyaspects.Inmostdevelopingcountriesgrowthremainsweakandwellbelowtheprecrisistrends.Socialdislocationsaresevereandprogressinpovertyreductionhasstalled.Atthesametime,recentdevelopmentsintheglobaleconomyhavebeenlargelyencourag-

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ing,withsignsofstronginitialrecoveryintheEastAsiancrisiseconomiesandcontinuedexpansionintheindustrialcountriesleadingtoabottoming-outofworldindustrialproductionandtrade.

RecenteventshaveconfirmedtheimportanceofthefactorsidentifiedinGlobalDevelopmentFinance(March1999)asshapingtheglobalrecovery,notablytheeasingofmacroeconomicpoliciesinindustrialcountries,earlysignsofrecoveryintheEastAsiancrisiscountries,andeasierfinancialconditionsindevelopingcountries.Butthemagnitudeoftheseeffectshasbeenmuchlargerthananticipated,andrecentevidencehasyieldedsomesurprisingdevelopments:adjustmentinsomeoftheworst-hitcountries,suchasRussiaandBrazil,hasbeenmuchmorefavorablethanexpectedinMarch,andasharpincreaseinoilprices,followingthedecisionoftheOrganizationofPetroleumExportingCountries(OPEC)inApril1999tocurtailoilsupplies,hasbenefiteddevelopingcountriesthatdependheavilyonoilexports.

ThepositiveevidencehasbeenstrongenoughtosupportanupwardrevisionoftheMarchprojectionsforgrowth.GrowthfortheG-7countriesthisyearislikelytoregister2.6percent,0.9percentagepointshigherthantheforecastmadesixmonthsago.ContinuedstronggrowthintheUnitedStatesistheprincipalfactorintherevision,butJapan'sperformanceinthefirsthalfof1999(3.2percentannualizedGDPgrowth),whichwasmuchbetterthananticipated,alsocontributestothechange.Europe,whichhadbeenhamperedbyinventoryoverhang,isnowshowingsignsofastrongrevival.Reflectingthesedevelopments,worldindustrialproductionappearstobeonanacceleratingpath.Fordevelopingcountries,GDPgrowthfor1999isexpectedtobe2.7percentarevisionof1.2percentagepointsfromtheMarchforecasts-andtheoutlookfor2000hasbeenupgradedby0.5percentagepoints.

Positiveastheserevisionsare,theymasktheconsiderablefragilityofdevelopingcountries,whichhaveyettorecoverfullyfromthefinancialcrisesof1997-99,nordotheyreflectthemarkedlydifferentpatternsofgrowthandrecoveryamongregions.ExceptforEastAsiaandSouthAsia(regionsbolsteredbygrowthinChinaandIndia),aggregaterealpercapitaincomesin1999areexpectedtodeclineorstagnateinseveraldevelopingregions.Further,thenewssinceMarchhasnotbeenallgood.Thetighteningofoilsupplyhasmeanthigherimportbillsformanydevelopingandindustrialcountries.Andthefavorablefinancialconditionshavenotmadeinternationalinvestorslessrisk-averse,asshownbythehighlevelsofinterestratespreads.Internationalcapitalflowstodevelopingcountrieshavefallenmuchmoresharplythananticipated.

Althoughimproving,theexternalenvironmentfordevelopingcountriesremainssubjecttoahighdegreeofuncertainty.

Theunderpinningsofgrowth,especiallyinthedevelopingcountries,remainfragile.Capitalflowstoemergingmarketscontinuetobescarceandexpensive.Insuchanenvironment,theprospectiveunwindingoflargeimbalancesintheindustrialcountriespresentspotentialrisksfortheseprojections.Chiefamongtheserisksaretheconsumptionboom(drivenbythestockmarket)andwideningexternaldeficitintheUnitedStates,andtheuncertainoutlookforJapan.

OnepotentialscenarioassumesatighteningofmonetarypolicyintheUnitedStates(inresponsetosignsofincreasedinflation),whichsharplyreducesequityprices,resultinginslowgrowthintheUnitedStatesandEuropeandarelapseintorecessioninJapan.Fordevelopingcountries,effectsaretransmittedthroughafurtherslowinginexportmarketgrowth,declinesinoilandnon-oilcommoditypricesbecauseofdeterioratingdemandconditions,andincreasedriskaversioninfinancialmarkets.Althoughpolicyresponsestothese

externalcircumstanceswouldvarywidelyacrossdevelopingcountriesdependingoncurrentconditions,mostcountrieswouldbeobligedtoadjustthroughacompressionofdomesticdemandandimports.Anassumed

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closureofthefinancinggaponthedemandside(almost$100billion)resultsinalossof2percentagepointsofgrowthfordevelopingcountriesasagroupinboth2000and2001,implyingalossofnominalGDPofsome$260billion.

Long-termprojectionsforgrowthindevelopingcountrieshavebeendowngradedbysome0.3percentagepoints,suggestingthatgrowthforthegroup(excludingthetransitioneconomies)in2002-2008islikelytobelowerthanintheprecrisis1990s.

Thisestimatereflectsseveralfactors,includingasomewhatlessfavorableexternalenvironmentand,importantly,prospectsforaprotractedwork-outofstructuralweaknessesindevelopingcountries-particularlyinfinancialsystemsandfiscalpositions-whichhavebecomemoreapparentinthewakeofthecrisis.Oneimplicationoflowerlong-termprojectionsisthatprogressonpovertyreductionwillbeslower.Forsomeregions,includingSub-SaharanAfricaandLatinAmericaandtheCaribbean,reductionsinpovertyarelikelytoremainbelowthetargetsrecentlyadoptedbytheinternationalcommunity.Effectivepolicyactionstoencouragerapidandequitablegrowthareessentialtoreducepoverty.

ExternalShocks,FinancialCrises,andPovertyinDevelopingCountries

Thefinancialcrisishasunderlinedhowglobalization,especiallyfinancialintegration,exposesdevelopingcountriestoexternalshocks.

Externalshockscanreducethegainsinpovertyreductionfromopennessandincreasepovertysignificantlyintheshorttomediumterm.Thisfactunderscorestheimportanceofaddressingtheissueofvolatilityinordertomaximizethepositiveeffectsofgrowthonpovertyreduction.ThecountriesmostaffectedbytheEastAsiancrisisillustratetheasymmetricimpactofchangesinpercapitaincome

onpovertyandthenegativeeffectsofvolatilityongrowth.

Anydevelopmentstrategyforstableandsustainablegrowthmustincludebothadequatesafetynetsandappropriatepoliciesandinstitutionsdesignedtopreventfinancialcrises,andtorespondwhencrisesoccur.Prospectsforpovertyreductiondependnotonlyonfuturegrowthbutalsooncountries'capacitytomanagevolatilityandreducegrowthfluctuations.

Thoughlessdramaticthanearlypredictionssuggestedandveryheterogeneous,thenegativesocialimpactoftheEastAsiancrisisandconsequentcrisesinRussiaandBrazilhasbeenenormous.

Theincreaseinincomeorconsumptionpovertyhasbeensignificant.Inaddition,thecrisishasengenderedcostly,largereallocationsofpeopleandsharpdeclinesinmiddle-classstandardsofliving.UnlikethesituationinLatinAmerica,whereincomeinequalityincreasedsignificantlyduringcrises,inEastAsiatheeffectsonincomedistributionhavebeensmallandhighlydifferentiated.Theextentoftheseeffectsdependsonthecountry'sincomelevelandtheimpactofthecrisisondifferenteconomicsectors.

Urbanpovertyincreasedinallcountries,particularlyKorea,wheretotalemploymentdeclinedandopenunemploymentgrewmorethaninothercountriesintheregion.Fallingrealwagesintheurbanformalsectoraffectedmostlyhigh-incomegroups.InThailandtheimpactwasfeltmostlyinruralareasbecauseofthelargeinflowsofworkersfromurbanareasandtherelativelysmallincreasesinagriculturalprices.

TheseverityofthecrisisinIndonesiaisreflectedinthestrongresponsesofhouseholdstoincreaseconsumptionasashareofincome,adjusttheirassetholdings,andincreasetheshareofstaplefoodsintheirconsumptionbaskets.InKoreaandMalaysiatheresponseofhouseholdswastoincreasethesavingsrate.The

compositionofconsumptionexpenditureschangedsignificantly.Householdsspentmore,primarilyonessentialitemssuchasfood,fuel,housing,health,andeducation.

Thecrisisdemonstratedtheflexibilityoflabormarketsindevelopingcountries.These

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marketshelpabsorbtheeffectsofshocksthroughreducedwagesandlabormobilitywithinandbetweenurbanandruralareas.

WagesfellsharplyduringtheEastAsiancrisis,withparticularlyspectaculardeclinesinIndonesia.Wagedeclinesmoderatedtheimpactoftherecessiononemployment.ThusthedeclineintotalemploymentinThailandandMalaysiawaslimited,andemploymentactuallyroseinIndonesia.Laborwasreallocatedfromtheformal(urban)sectortootheractivities,particularlytheinformalsectorandagriculture,whereexchangeratedepreciationsimprovedincentives.

Realpublicexpendituresoneducationandhealthfellinthecrisiscountries,althougheffortsweremadetoincreasespendingonsafetynets.

Theextenttowhichhouseholdswereabletoadjusttheirspendingtooffsetthisdeclinevariedacrosscountriesaswellasincomegroups.InThailand,familiesandgovernmentprogramsactedtocushiontheimpactofthecrisisinordertoavoiddeclinesinschoolenrollmentratesorinaccesstohealthservices.InIndonesia,however,theseverityofthecrisisledtosignificantdeclinesinpoorhouseholds'accesstobotheducationandhealthservices,particularlyinurbanareas.Suchsetbackscanhaveirreversibleeffectsonhumandevelopment.

Evenwherepublicspendingonsafetynetsincreasedsignificantly,theimpactonpovertywaslimitedforseveralreasons.Theseincludedtheabsenceofsafetynetsbeforethecrisis,responselags,institutionalproblems,andlowlevelsofspendingrelativetothescaleofpoverty.Insomecases,evidencesuggeststhatwellfunctioningprogramswereunderfundedrelativetothepotentialimpactofshocksonpoverty.

AsianRestructuring:FromRecoverytoSustainableGrowth

TheaftereffectsoftheexternallytriggeredliquiditycrisisinIndonesia,Korea,Malaysia,andThailandindiscriminatelysubmergedbothstrongandweakproducersandfinanciers.Therisingtideisliftingthestrong,butthefinanciallyweakcontinuetostrugglebecauseofbothcrisis-inducedandlongstandingvulnerabilities.

SincetheonsetoftheEastAsiancrisismorethantwoyearsago,thecorporatesectorsandfinancialsystemsinthecrisiseconomieshaveremainedinseveredistress.Thebankingsystems'nonperformingloanshaveskyrocketedtounprecedentedlevels:nonperformingloansrangebetweenapproximately30percentofGDPforKoreaandMalaysiato60percentofGDPforThailand.Incontrast,nonperformingloansinothermajoremergingmarketcrises(Chileintheearly1980sandMexicoin1995)werelessthan20percentofGDP.IntheScandinavianbankingcrisesduringtheearly1990s,nonperformingloansamountedtoapproximately5percentofGDP.

EastAsia'sheavyrelianceonbank-basedfinancialsystemsandthehighdebt-equityratiosofcorporationshavemadetheeconomicdistressespeciallyacute.WeakfirmsinEastAsiaoperatedonthinmarginsintheyearsleadinguptothecrisis,andtheirinabilitytopayinterestfollowingtheonsetofthecrisishasaddedtotheirdebtburden.Suchfirmsconstituteasignificantportionofthecorporatesectorineachofthecrisiseconomies,andtheappetitetoinvestinthemisextremelylimited.Theywillcontinuetoactasadragoninvestmentandgrowthuntilthefinancialclaimsonthemareresolved,andeithertheiroperationsreturntoadequateprofitabilityortheirassetsareredeployed.

Withoutvigorouscorporateandfinancialrestructuring,thereturntosustainablegrowthwilllikelytakelonger,thefiscalcostsofthecrisiscouldrise,andtheeconomieswillremainvulnerabletonewexternalandinternalshocks.

Recognizingtheurgency,EastAsiangovernmentswerequickto

createaninstitutionalstructureforcorporateandfinancialrestructuring;theyalsoearmarkedfundsforbankrecapitalization.Thepoliticalmomentumfor

Pagexiii

reformhas,however,sloweddown,inpartbecausethedeeperstructuralproblemsnowneedtobeaddressed.Experiencefromothereconomies,includingJapan's,showsthataslackeningofthereformeffortcanundoprogress.

Governmentrestructuringpoliciesneedtobeguidedbytwoprincipalconsiderations:limitingthelikelihoodofsystemicdisruptionwhilealsocontainingfiscalcosts;andclarifyingfinancialclaimsandbuildinganenvironmentconducivetoassetreallocation.Basedonthesetwoprinciples,fiscalcostscomeprincipallyfromthegovernment'ssocialcontracttoprotectbankdepositorsandtopreventsystemicfailure.Governmentfundsarenotrequiredforcorporaterestructuring.

Bankrestructuringisimportantbecauseitcontributestobothpolicyobjectives.Expeditiouslyrestoringthehealthofthebankingsystemisrequired,buttheprocessofrestructuringitselfcanbedisruptive.

Restructuringisnecessarybecauseapoorlycapitalizedbankingsectorcreatescontinuedsystemicrisksandgrowingfiscalliabilitiesforgovernments.Healthybanksarealsobestpositionedtoenforceclaimsandtopursuecorporaterestructuring.Butrestructuringshouldbeundertakeninamannerthatensurestheintegrityandtheorganizationalcapitalofthefinancialsystemsothatprudentlendingtobusinessesandhouseholdsmaycontinue.Achievingthisobjectiverequiresmakingdifficultchoices.Havingprovidedimplicitorexplicitguarantees,governmentscaneithermoveaheadrapidlybytakingfiscalresponsibilityforthecostsofthecrisis,ortheycanencourageprivateresolutionofthedistresswhileapplyingregulatoryforbearance.Waitingtoresolveproblemsislikelytomakethemworse.However,expeditiousandtransparentactionshouldbeaccompaniedbymarket-basedmeasurestorecoupfiscalcostsandtosignalacrediblecommitmenttoseverelyrestrictguaranteesand

bailoutsinthefuture.

Corporaterestructuringneedstodealfirstwiththedelineationandallocationoflosses.

Improvementsinaccountingstandardsandbankruptcyregimescanhelpsupportthisprocess.However,intheabsenceofeffectivebankruptcyprocedures,out-of-courtproceduresofferamechanismforresolution.Oncefinancialclaimsareresolved,corporaterestructuringcanbeexpectedtooccurthroughnaturalmarketforces,exceptwhereamajorimpedimentpreventssuchforcesfromworking.Governmentscanfacilitateassetmobilitybycreatingtheframeworkforeffectivedomesticandcross-bordermergersandacquisitions.TheJapaneseexperiencecautionsthat,withoutanadequateinfrastructureforresolvingclaimsandforfosteringassetmobility,fundamentalcorporaterestructuringcanbeinterminablydeferredatahigheconomiccosteveninasophisticatedeconomy.

ManagingtheRecentCommodityPriceCycle

Primarycommoditypriceshaveundergoneapronouncedcyclesincethemid-1990s,drivenbybothtemporaryandsecularfactors.

Primarycommoditypricescontinuetobemorevolatilethanthepricesofmanufactures.Energypriceshavebeenespeciallyvolatile.Crudeoilpricesrose74percentfromearly1994throughtheendof1996,thenfell56percentbytheendof1998,andin1999recoverednearlytheentiredeclineoftheprevioustwoyears.Averagenon-oilcommoditypricesroseby46percentfromthemonthlylowinmid-1993tomid-1997,andthendropped30percentbylate1999.Thecycleinprimarycommoditypriceswasdrivenbychangesinglobaldemand,weather-relatedsupplyshocks,supplyresponsestothehighpricesoftheearly1990s,technologicalinnovationsthathavereducedproductioncosts,andexchangeratedepreciationsamonglargecommodityexporterslinkedtotheEastAsiancrisis.

Suchvolatilityposesrealchallengestodevelopingcountriesthatdependonprimarycommoditiesforasubstantialshareoftheirexportrevenues.Countrieswhereconsump-

Pagexiv

tionriseswithrealincomesduringcommoditypriceboomsmayfaceeitherpainfulreductionsinconsumptionordeclinesininvestmentthatreducelong-termgrowthwhenpricesfall.Countries'savingsandinvestmentbehaviordifferedmarkedlyovertherecentcommoditypricecycle;thesedifferencesprimarilyreflectedthequalityofpoliciesratherthanshiftsinthetermsoftrade.

Intheoilexportingcountriesweakpolicyenvironmentsledtomixedsavingsperformanceandlowerinvestmentovertheoilpricecycle.Onaverage,countriesallocatedtoincreasedconsumptionabouthalfoftheaverage5percentofGDPimprovementinrealincomesduringtheupswinginoilprices(1996-97).Duringthe1998dropinoilprices,however,consumptiondidnotdecline,implyingthatsavingsfellbythefullamountofthedeclineinrealincomes.Countries'performancesvariedgreatly,dependingontheirspecificpoliticalandeconomiccircumstances.

Oilexportingcountries'investmentfellrelativetooutputoverthecommoditypricecycle.Thedeclineininvestmentwasactuallygreaterthanthedeclineindomesticsavings,sothecurrentaccountdeficitfell.Themajoroilexportingcountrieshavegenerallyfailedtoreducetheirdependenceonoilrevenues,andthefallininvestmentwillfurtherimpedeprogress.Atthesametime,severalofthesecountriesfacehighlevelsofunemployment,continuedslowgrowth,andrapidlyexpandingpopulations.Theyneedtostrengthentheirpoliciestoencouragegreaterprivatesector(andnon-oil)activitiesandtoimprovetheinstitutionalenvironment.

Thecommoditypricecycleofthe1990sdoesnotappeartohaveadverselyaffectedtheprospectsforgrowthinthenon-oilexportingcountriesofSub-SaharanAfrica.Changesinrealincomesweregenerallysmallerthanintheoilexportingcountriesbecausethepriceoftheircommodityexportschangedbylessthanthepriceofoil,and

thelossesfromdecliningexportpriceswerepartiallyoffsetbygainsfromlowerimportprices,particularlyenergyprices.Moreimportant,however,improvementsinpoliciesinseveralcountriesenabledthemtoincreasesavingsandinvestmentratesduringbothcommoditypriceboomsandbusts.Manycountriescuttheirfiscaldeficitsinanefforttoreininthegrowthofdebtandtoreduceinflation,whileprivatesavingsroseinresponsetoimprovedpoliciesthatincreasedthereturntoinvestment,particularlyinexportsectors.Countrieswithbetterpolicies,asmeasuredbytheWorldBank,achievedlargerincreasesinsavingsandhighergrowthofGDPthancountrieswithworsepolicies,despitesmallerincreasesinrealincomesintheformergroup.

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Abbreviations,Acronyms,andDataNotes

ASEAN AssociationofSoutheastAsianNations

ASEAN-4

Indonesia,Malaysia,Philippines,andThailand

BIS BankforInternationalSettlements

CFA CommunauteFinanciereAfricaine

CIS CommonwealthofIndependentStates

CPI Consumerpriceindex

EastAsia-5

Indonesia,Malaysia,thePhilippines,theRepublicofKorea,andThailand

ECB EuropeanCentralBank

ECLAC UnitedNations:EconomicCommissionforLatinAmericaandtheCaribbean

EMU EuropeanMonetaryUnion

ERM Exchangeratemechanism

EU EuropeanUnion(formerlytheEC)

EU-4 France,Germany,Italy,andtheUnitedKingdom

EU-12 Belgium,Denmark,France,Germany,Greece,Ireland,Italy,Luxembourg,theNetherlands,Portugal,Spain,andtheUnitedKingdom

EU-15 Austria,Belgium,Denmark,Finland,France,Germany,Greece,Ireland,Italy,Luxembourg,theNetherlands,

Portugal,Spain,Sweden,andtheUnitedKingdom

FDI Foreigndirectinvestment

G-3 Germany,Japan,andtheUnitedStates

G-5 France,Germany,Japan,theUnitedKingdom,andtheUnitedStates

G-7 Canada,France,Germany,Italy,Japan,theUnitedKingdom,andtheUnitedStates

G-8 Canada,France,Germany,Italy,Japan,Russia,theUnitedKingdom,andtheUnitedStates

G-10 Belgium,Canada,France,Germany,Italy,Japan,theNetherlands,Sweden,theUnitedKingdom,andtheUnitedStates(andsometimesSwitzerlandisinvolved)

G-22 Argentina,Australia,Brazil,Canada,China,France,Germany,HongKong(China),India,Indonesia,Italy,Japan,Korea,Malaysia,Mexico,Poland,Russia,Singapore,SouthAfrica,Thailand,theUnitedKingdom,andtheUnitedStates

Pagexvi

GCC GulfCooperationCouncil

GDP Grossdomesticproduct

GTAP GlobalTradeAnalysisProject

HIPC Heavilyindebtedpoorcountries

ILO InternationalLabourOrganisation

IMF InternationalMonetaryFund

LIBOR Londoninterbankofferedrate

M2 AmeasureofbroadmoneysupplyintheUnitedStates

Mercosur LatinAmericaSouthernConetradebloc(Argentina,Brazil,Paraguay,andUruguay)

MUV Manufacturesunitvalueindex

NIE Newlyindustrializingeconomy

ODA Officialdevelopmentassistance

OECD OrganisationforEconomicCooperationandDevelopment

OPEC OrganizationofPetroleumExportingCountries

UNCTADUnitedNationsConferenceonTradeandDevelopment

DataNotes

The''classificationofeconomies"tablesattheendofthisvolumeclassifyeconomiesbyincome,region,exportcategory,andindebtedness.Unlessotherwiseindicated,theterm"developingcountries"asusedinthisvolumecoversalllow-andmiddle-income

countries,includingthetransitioneconomies.

Thefollowingnormsareusedthroughout.

Billionis1,000million.

AlldollarfiguresareU.S.dollars.

Ingeneral,dataforperiodsthrough1997areactual,datafor1998areestimated,anddatafor1999onwardareprojected.

Page1

1ProspectsforGrowthandPovertyReductioninDevelopingCountriesTheeffectsofthecrisesof1997-99,fromEastAsiatoRussiaandBrazil,persistinmanyaspects.Inmostdevelopingcountriesgrowthremainsweakandwellbelowprecrisistrends.Socialdislocationsaresevere,andhaveincreasednotonlyinAsiabutalsoinotheraffectedcountries.Progressinpovertyreductionhasstalledinthedevelopingworldattheendofthe1990s,andthenumberofpoorisrisinginmostregions.Atthesametime,recentdevelopmentsintheglobaleconomyhavebeenencouraging,withsignsofstronginitialrecoveryintheEastAsiancrisiseconomiesandcontinuedexpansionintheindustrialcountriesleadingtoabottoming-outofworldindustrialproductionandtrade.

ForcountriesattheepicenterofthecrisisinEastAsia,corporaterestructuringandarestorationofsoundfinancialinstitutionswillneedtobeaddressedinanaggressivemannerforgrowthtobroadenandattainsustainability.Aswell,manycommodityandoil-dependentcountries,especiallyinSub-SaharanAfrica,havebeenaffectedbyextremevolatilityincommoditypricesandmorerecentweaknessinpricesoftropicalproducts.Thisreportreviewstheevidenceofthesocialimpactoftherecentcrisis,andmorebroadlyofexternalshocks,withaparticularfocusonthepoorinchapter2.TheintertwinedissuesofcorporateandfinancialrestructuringandtheirsignificanceforgrowthrecoveryanditssustainabilityinEastAsiaareassessedinchapter3.Chapter4exploreshowtwoofthegroupsofcountriesmostaffectedbyrecentboom-bustcyclesincommodityprices,themajoroilexportingandSub-Saharancountries,haveadjustedandassessestheimplicationsfortheirgrowthprospects.

InforecastspreparedinMarch,thegrowthratefordevelopingcountrieswasestimatedat1.5percentfor1999-whichwouldhavemarkedtheweakestperformanceforthesecountriessincethedebtcrisisoftheearly1980s.

1Butagradualbuild-upinthemomentumofdevelopingcountrygrowththrough2001wasanticipatedtobedrivenbyseveralfactors:theeffectsofpolicymeasuresundertakeninmajorindustrialcountries(includinginterestratereductionsintheUnitedStatesandEurope,andlargefiscalstimulusmeasuresinJapan);earlysignsofrecoveryinthecrisiscountriesofEastAsia,especiallyapparentintheRepublicofKorea,Malaysia,andThailand;andmorebroadly,aneasingoffinancialconditionsindevelopingcountries,evidencedinwidespreaddeclinesindomesticinterestratesandrisingequitymarkets.Privatecapitalflowstoemergingmarketswereanticipatedtofallwellbelowlevelsof1998,buttoshowagradualimprovementoverthecourseoftheyear.

TheimportanceofthefactorsidentifiedintheMarchforecastsinshapingtheglobalrecoveryhasgenerallybeenconfirmed-butthemagnitudeoftheseeffectshavebeenmuchlargerthananticipated,especiallywithrespect

tothestrengthofAsianrecovery.Additionally,evidencefromthesecondandthirdquartersof1999hasrevealedtwosurprisingdevelopments.First,theadjustmentinsomeoftheworst-hitcountries,includingRussiaandBrazil,hasbeenmuchmorefavorablethanexpected.Second,asharpincreaseinoilpricesfollowedthedecisionoftheOrganizationofPetroleumExportingCountries(OPEC)inApril1999tocurtailoilsupplies,benefitingdevelopingcountriesthatdependheavilyonoilexports.

ThepositiveevidencehasbeenstrongenoughtosupportasubstantialupwardrevisionoftheMarchprojectionsforgrowth,notonlyfordevelopingcountriesbutalsofortheworldeconomy.Developingcountrygrowthisexpectedtobesignificantlyhigherfor1999andmoderatelyhigherfor2000.Thegrowthratefor2001isexpectedtoremainatabouttheMarchlevel(table1.1).Globalgrowthisnowexpectedtoaccelerateto2.6percentin1999and2.9percentin2000,markingupwardrevisionsof0.8and0.5percentagepointsrespectivelyfromearlierprojections.Fordevelopingcountries,GDPgrowthfor1999isexpectedtobe2.7percentarevisionof1.2percentagepointsfromtheMarchforecasts-andtheoutlookfor2000hasbeenupgradedby0.5percentagepoints.

Table1.1Globalconditionsaffectinggrowthindevelopingcountries,1998-2001(percentagechangefrompreviousyear,exceptLIBOR)

CurrentGlobalDevelopment

Finance1999Estimate Forecasts Forecasts1998 199920002001 1999 2000

WorldGDPgrowth 1.9 2.6 2.9 2.8 1.8 2.4G-7countriesa 1.8 2.6 2.4 2.1 1.7 1.9Low-andmiddle-incomecountries 1.6 2.7 4.2 4.5 1.5 3.7ExcludingEasternEuropeandCIS 2.1 3.0 1.5 4.8 2.1 4.0MemoitemLow-andmiddle-incomecountriespercapitaGDP

0.1 1.2 2.8 3.1 0.0 2.2

Worldtradevolume 4.2 5.0 6.4 6.3 4.2 5.8

Inflation(consumerprices)G-7countriesa,b 1.4 1.3 1.6 1.8 1.4 1.8UnitedStates 1.6 2.2 2.5 2.5 2.3 2.6

Commodityprices(nominalU.S.dollars)Commodityprices,exceptoil -15.7 -11.2 2.8 4.2 -6.3 1.7Oilprice(weightedaverage) -31.9 -37.8 2.8 -2.7 -8.2 25.0Manufacturesexportunitvaluec -3.9 -0.6 2.5 2.5 1.3 2.6

InterestratesSix-monthLIBOR(U.S.dollars,percentperannum)

5.6 5.5 6.0 6.0 5.0 6.0

ExchangesratesdU.S.dollarperGermanmark -1.7 - - - - -U.S.dollarperJapaneseyen -7.6 - - - - -

-Notapplicable.a.Canada,France,Germany,Italy,Japan,theUnitedKingdom,andtheUnitedStates.b.Inlocalcurrency,aggregatedusing1988-90GDPweights.c.UnitvalueindexofmanufacturesexportsfromG-5todevelopingcountries,expressedinU.S.dollars.d.Positivefigureisappreciationoflocalcurrencyversusdollar.Note:TheRepublicofKoreahasbeenreclassifiedasanupper-middleincomecountry.Source:WorldBank,GlobalDevelopmentFinance1999;WorldBankDevelopmentProspectsGroup,November1999.

Page3

Positiveastheserevisionsare,theymasktheconsiderablefragilityofdevelopingcountries,whichhaveyettorecoverfullyfromthefinancialcrisesof1997-99.Nordotheaggregatesreflecttheveryunevenpatternsofgrowthandrecoveryamongregions.SaveforEastAsiaandSouthAsia(regionsbolsteredbygrowthinChinaandIndia),aggregaterealpercapitaincomesin1999areexpectedtodeclineorstagnateinseveraldevelopingregions.

2Further,thenewssinceMarchhasnotbeenallgood.Thetighteningofoilsupplyhasmeanthigherimportbillsformanydevelopingcountriesandincreasedimportpricesinsomeindustrialeconomies,wheregrowthhasbeenoutstrippingestimatedpotential.Andthefavorablefinancialconditionshavenotmadeinternationalinvestorslessriskaverse,asevidencedininterestratespreadsathighlevels.Internationalcapitalflowstodevelopingcountrieshavefallenmuchmoresharplythananticipated.

Long-termprojectionsforgrowthindevelopingcountries(presentedattheendofthechapter)havebeendowngradedby0.3percentagepointsfromforecastsofoneyearago,suggestingthatgrowthindevelopingcountriesasagroupin2002-2008islikelytobelowerthanintheprecrisis1990s.Thisestimatereflectsseveralfactors,includingasomewhatlessfavorableexternalenvironment;and,importantly,prospectsforaprotractedwork-outofstructuralweaknessesindevelopingcountries-particularlyinfinancialsystemsandfiscalpositions-thathavebecomemoreapparentinthewakeofthecrisis.Oneimplicationoflowerlong-termprojectionsisthatprogressonpovertyreductionwillbeslower.Andforsomeregions,includingSub-SaharanAfricaandLatinAmericaandtheCaribbean,reductionsinpovertyarelikelytoremainbelowthetargetsrecentlyadoptedbytheinternationalcommunity.

TheExternalEnvironmentforDevelopingCountriesIsImproving

Theexternalenvironmentfordevelopingcountriesisexpectedtoimprovefurtherin2000and2001.Growthamongthethreeindustrial-countrycentersisexpectedtobemorebalanced.PoliciesgearedtowardachievingasoftlandingintheUnitedStates,stemmingdeflationarytendenciesandshiftingtheimpetusforgrowthfromthepublictotheprivatesectorinJapan,andfosteringbusinessactivityintheEuropeanUnion(EU)willsupportthisshift.Oneresultofthesetransitions-shouldtheyoccursmoothly-wouldbeabroadeningofthelocusof'locomotivepower'fortheworldeconomyfromtheUnitedStatestoincludeEurope.AmodestincreaseininternationalinterestratesislikelytoaccompanyeffortstoslowthemomentumoftheU.S.economy.Butfordevelopingcountries,thebenefitsofasmoothtransitiontomoresustainablegrowthintheUnitedStatesclearlyoutweighthepotentialcostofahardlanding,andwouldlikelybereflectedinreducedriskperceptions.

Exchangeratedevelopmentsthatoccurredin1998-99willexertsomeinfluenceontheglobaldistributionofdemandin2000and2001.InparticulartheinitialweakeningoftheeuroagainstthedollarandtheyenshouldprovideaboosttoEuropeanexports,supportmanufacturinginGermanyandItaly,andstimulategrowthmorebroadlyintheEuroArea.Ontheotherhand,thestrengtheningoftheyenposessomerisktothenascentrecoveryinJapan.

StrongergrowthintheEUandstabilizationinJapanwillhelpfirmupexportmarketsformanydevelopingcountries.Inparticular,CentralandEasternEurope,theMaghrebcountries,andSub-SaharanAfricawillbenefitfromanupturninEuropeanimportdemand.ResumedgrowthinJapaneseimportswillfurtherboostexpandingintraregionaltradeinEastAsia.AlthoughgrowthinU.S.importsislikelytoslowfromitsrecenthighs,itshouldremainstrongenoughtoprovideLatinAmericanandAsianexporterswithopportunitiesforcontinued

marketexpansion.

Developmentsinglobalcommoditymarketsarelikelytohavestronglydifferentiated

Page4

effectsacrossdevelopingcountries.Non-oilcommodityprices,whichbottomedoutduring1999,shouldundergoamoderatefirmingthatwillhelpbolsterexportrevenuesformanycountriesinSub-SaharanAfrica,LatinAmerica,andEastAsia.Inaddition,thelikelihoodofonlymodestnear-termchangesindollar-basedG-7manufacturespriceswilltendtoimprovethetermsoftradeforalllow-andmiddle-incomecountries.Butifthesharpriseinpetroleumpricesissustained,itwillpartiallyorcompletelyoffsetthesedevelopmentsinmanyoil-importingcountries.Oilexporters,manyofwhichareincrisis,aretheclearestbeneficiariesofrecenttrends.

GrowthintheIndustrialCountriesHasbeenFasterThanExpected

GrowthfortheG-7countriesthisyearislikelytoregister2.6percent,0.9percentagepointshigherthantheforecastmadesixmonthsago(table1.2).ContinuedstronggrowthintheUnitedStatesistheprincipalfactorintherevision,butJapan'sperformanceinthefirsthalfof1999(3.2percentannualizedGDPgrowth),whichwasmuchbetterthananticipated,alsocontributestothechange.Europe,whichhadbeenhamperedbyinventoryoverhang,isnowshowingsignsofastrongrevival.Reflectingthesedevelopments,worldindustrialproductionappearstobeonanacceleratingpath,reaching2.5percentyear-on-yearadvancesinAugust,fromdeclinesatthestartof1999(figure1.1).

UnitedStates.Theremarkablegrowthperformanceof

theUnitedStatesplayedamajorroleinpreventingaworldrecessionfollowingtheoutbreakoftheEastAsianfinancialcrisis.GDPincreasedanaverageof4percentduring1997-98,drivenbyprivateconsumptionandinvestmentspending.Coupledwithastrongdollarthisgrowthsupporteda25percentcumulativeincreaseinU.S.importvolumesoverthesameperiodandprovidedafoundationforworldexportsastheAsianmarketssank.TheU.S.expansionwasbolstered

bythreefactors:

therestraininginfluenceoninflationoffallingpricesforcommodityandmanufacturesimports;

lowerlong-terminterestrates,whichreflectareturnofprivatecapitalfromemergingmarkets;and

the75basis-pointreductioninpolicyinterestratesinlate1998.

Figure1.1Worldindustrialproduction

Note:Figuresarethreemonthmovingaverages.Figurebasedonsampleofcountriescomprising85percentofworldGDP.Source:Datastream;WorldBankstaffestimates.

Page5

Table1.2Worldoutputgrowth,1998-2001(percent)

CurrentGlobalDevelopment

Finance1999Estimate Forecasts Forecasts1998 199920002001 1999 2000

Worldtotal 1.9 2.6 2.9 2.8 2.4High-incomecountries 2.0 2.6 2.5 2.3 1.8 2.0

OECDhigh-income 2.0 2.6 2.5 2.3 1.8 2.0G-7 1.8 2.6 2.4 2.1 1.7 1.9

G-4Europe 2.2 1.6 2.7 2.8 1.6 2.6Otherindustrial 3.7 2.9 3.1 3.1 2.7 2.7EuroArea 2.7 2.0 2.9 2.9 2.2 2.7

Non-OECDhigh-income 1.2 3.0 4.0 4.6 1.3 3.6AsianNIEs 1.8 3.6 4.9 5.2 2.0 4.3

Low-andmiddle-incomecountriesa 1.6 2.7 4.2 4.5 1.5 3.7ExcludingCentralandEasternEuropeandCIS

2.1 3.0 4.5 4.8 2.1 4.0

Sub-SaharanAfrica 2.4 2.3 3.1 3.4 2.5 4.0ExcludingSouthAfricaandNigeria

3.6 3.2 3.6 3.9 3.6 4.5

AsiaandPacific 1.6 5.4 6.0 5.9 3.8 5.1EastAsiaandPacificb 0.1 5.5 6.2 6.2 3.6 5.2

ExcludingChina -7.6 4.3 5.3 5.1 0.3 3.4SouthAsia 5.1 5.4 5.5 5.3 4.4 4.8

EuropeandCentralAsia -0.2 0.3 2.5 3.3 -1.5 2.3CentralandEasternEurope 2.3 1.0 3.2 4.3 2.3 3.8CIS -2.7 0.7 1.3 2.3 -5.5 0.6

MiddleEastandNorthAfrica 3.2 2.0 3.2 3.5 0.6 2.5Maghreb 4.8 2.6 4.0 4.1 2.8 3.9Mashreq 3.1 3.2 4.6 4.2 3.2 3.6DevelopingGCCc 1.0 -0.3 1.7 2.1 -2.4 0.6

LatinAmericaandtheCaribbean 2.1 -0.6 2.7 3.5 -0.8 2.5Memoitems

EastAsiaCrisis-5d -7.9 4.4 5.3 5.1 0.3 3.5Low-andmiddle-income,excludingEastAsiaCrisis-5d

3.3 2.4 4.0 4.4 1.7 3.8

a.IncludingCentralandEasternEuropeancountriesandstatesoftheCIS.b.IncludingtheRepublicofKorea.c.GulfCooperationCouncil(Bahrain,Oman,andSaudiArabia).d.Indonesia,Malaysia,thePhilippines,theRepublicofKorea,andThailand.Source:WorldBank,GlobalDevelopmentFinance1999;WorldBankDevelopmentProspectsGroup,November1999.

During1999theU.S.expansionhascontinuedtoshowresilience,witharecentstrongpickupinexportscomplementingrobustconsumerandinvestmentspending.Buttheeconomyalsoshowsthewideningimbalancesthathaveresultedfromthesustainedperiodofrapidexpansion,includinganegativehouse-holdsavingrate(-1.5percent)

3,acurrentaccountdeficitapproaching4percentofGDP,potentiallyovervaluedequitymarkets,andmodestsignsofincipientinflationarypressures(figure1.2).

Fearsthathigheroilpricesandimprovingconditionsinforeignmarketswouldreinforceincipientinflationarypressuresinthedomesticmarketmayhavecontributedtoarecentriseinlong-terminterestrates.Partlyoffsettingthesefearswasevidenceofacceleratinggrowthinproductivity,whichcouldenable-ifsustained-ahigherpathofoutput

Page6

Figure1.2U.S.privatesavingsrateandcurrentaccountbalance

Source:InternationalMonetaryFund;U.S.SurveyfoCurrentBusiness;Datastream

growthwithrestrainedinflationinthecontextoftightlabormarkets.

Againstthebackgroundofthreemodestinterestrateincreasesin1999,GDPgrowthisexpectedtoslowfrom3.8percentin1999to2.8percentin2000.Asthepaceofdomesticdemandgrowtheasesinresponsetofurtherinterestratesincreases,GDPcouldslowto2.2percentby2001.Inflationisexpectedtoriseonlymodestly.Thecurrentaccountdeficitwillwidenfurther,risingfrom$315billionto$350billionasimportdemandslowsgradually,exportsrespondwithsomelagtooverseasrecovery,andhigheroilpricesinflatetheimportbill.Theriskofasharperslowdownremainssubstantial,however.Thepotentialformoredramaticcorrectionsofcurrentimbalances-throughasharpadjustmentofthedollarorafallinequitymarkets,forexample-areelementsofconcerninthenearterm,whichwouldalsohavesignificanteffectsondevelopingcountriesmostdependentonU.S.marketsandinternationalcapitalflows(seethesectionRisksto

theforecast).

Japan.Startinginthelastmonthsof1997,Japan'seconomyregisteredfiveconsecutivequartersofnegativegrowth.Uncertaintiesinthecountry'sfinancialsystem,risingunemployment,andfallingwagesplacedadamperonconsumerspending.Businessinvestmentoutlayscontinuedtodeclineinthefaceoffallingdomesticdemandandmassiveover-capacity.Japan'slargelydomestic-basedrecessionandtheresultingdeclineinimportsofsome7.7percentin1998significantlyaggravatedtheregionalcrisis(seebox1.5).

Duringthefirstquarterof1999theeffectsoflarge-scalepublicinvestmentspendingborefruit,however.GDPgrowthof8.1percent(annualized)wasdrivenbya10percentquarter-to-quartersurgeinpublicinvestmentoutlays.Butprivateconsumption,residentialinvestment,andfixedbusinessinvestmentalsoincreasedatratesthatweremuchstrongerthanhadbeenanticipated.Surprisingsecond-quartergrowthof0.4percent(annualized)wasclearlyledbyhouseholds,asbothpublicandprivateinvestmentspendingdeclinedsharply.MorerecentlyJapan,liketheUnitedStates,hasbeenbenefitingfromthestrongrecoveryingrowthinEastAsia.ApronouncedincreaseinexportshipmentshassupportedgainsinJapaneseproduction.

AlthoughrecentdevelopmentscouldmarktheendofJapan'ssecond-longestpostwarrecession,recoveryinprivatedemandisnotyet

Page7

self-sustaining.Theriskofrelapseremains,forseveralreasons:

Retailspendingcontinuestodisplayvolatility,andconsumersentimentmayfalterinthefaceofdecliningincomesandfurtherweaknessinlabormarkets.

Publicloanguaranteeshaveproppedupinvestmentinhousingandbusinessmarkets,helpingincreaseliquidityinthesesectors.

Investmentremainsconcentratedamongsmall-andmedium-sizedenterpriseswhilelargercorporationsaresaddledwithsubstantialexcessproductioncapacity.

Thesharpappreciationoftheyenmayrestrainprospectiveexportperformance.

DeflationhasemergedacrossallsegmentsoftheJapaneseeconomy,addingtodebtburdens.

Thesefactorssuggestnotonlythatfurtherrecoverywilllikelybeofmodestproportionsbutalsothatitiscontingentoncontinuedpublicsectorsupport-whichisbecomingincreasinglydifficulttosustain.Againstthisbackground,itappearslikelythatJapanwillregisterpositivegrowthontheorderof1.3percentthisyear-amarkedimprovementovertheMarchassessment.Butgrowthmayfadeto0.9in2000iffiscalstimulusislargelywithdrawnfromtheeconomy.Theprivatesectorrecoverywillneedtobecomeself-sustainingsoonsincetheconsolidatedpublicdeficitwillapproachorexceed10percentofGDPin2000.

Europe.AlthoughconsumersentimentandspendinghavebeenbuoyantinEurope,weaknessintheindustrialsector(particularlyinGermanyandItaly)checkedearlierexpectationsforstrongergrowthduring1999.Inpart,thisweaknessisafurthermanifestationoftheEastAsianandRussiancrises.Sharpdeteriorationintheperformance

ofGermanandItalianexportsinemergingmarketsdampenedbusinesssentiment,increasinginventoryoverhang,depressingindustrialproduction,andultimatelyrestrainingtradewithintheEU.Uncertaintyinthebusinesssectormayhavecontributedtothe10percentfallinthevalueoftheeuroagainstthedollarthroughJune1999,andthispromptedtheEuropeanCentralBank(ECB)toimplementa50basis-pointeasingofpolicyinterestrates.Despitearatereversalintheautumn,theeurocontinuedtodeclineagainstthedollar,tonearparitybyearlyDecember.GDPintheEuroAreaslowedfrom2.7percentin1998to1.8percentannualizedduringthefirsthalfof1999.

Businesssurveysthatwereconductedinthefirsthalfof1999reportedwidespreadimprovementsincurrentandprospectiveconditions.FiguresforindustrialproductioninFrance(1.5percentmonth-to-monthinJuly)andGermany(1.2percentinAugust)arenowconfirmingtheseexpectations.Thepotentialforareboundinproductioninthesecondhalfoftheyearisnowmuchstronger,asevidencedbyrisingexportordersandshipments,continuedfirmconsumerdemand,anddiminishinginventoryoverhang.ThegrowthslowdownintheUnitedKingdominlate1998andearly1999appearstohavepassed,withconsumerspendingrisingatanimpressive4percentannualrateinrecentmonths,productionupby1.7percent,andunemploymentatrecordlowlevels.Ontheexternalfront,GermanandU.K.exportstocountriesoutsidetheEUarenowrisingfairlyrapidly.TheUnitedKingdom's15percentannualizedexportvolumegrowthrateduringthesummermonthsof1999reflectsnotonlycontinuedstrengthintheUnitedStatesbutalsoanupswinginemergingmarketdemand.ThesefactorsaugurwellforareboundinEUgrowththatcouldreach2.9percentin2000-2001.Anaccelerationofimportdemandfromrecentlowsof2.5percentto6.5percentovertheperiodwillhelppickupsomeslackfromslowingU.S.demandandsupporttheadvanceofworldtradeatratesnearthe20-year

average.

InflationandInterestRatestoRemainModerate

Inflationslowedsignificantlyintheindustrialcountriesin1998and1999,fallingfromaG-7averageof2.1percentin1996to1.4per-

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centin1998.Morerecently,inflationtrendsacrossthemajorcountrieshavedisplayeddifferentdynamics,theresultofdevelopmentsintheglobalenvironmentaswellasinthedomesticarena(figure1.3).ContinuedmoderateinflationinEuropecoupledwithdeflationarytrendsinJapanislikelytokeepanyincreaseininternationalpricesin2000-2001tomodestproportions.

IntheUnitedStatesseveralelementsconvergedtoslowand5eventuallystabilizeinflationover1997-98.Theseincluded:

theonsetoftheAsiancrisis,whichinteractedwiththestrongdollartocausesubstantialdeclinesinthepricesofimportedgoods;

theresultingincreaseincompetitionfromimportedproducts,whichrestrainedtheabilityofdomesticproducerstoraiseprices;and

underlyingimprovementsinproductivitygrowth(aswellaslargeadditionstomanufacturingcapacity),whichkeptunitlaborcostsundercontrol.

Assomeofthefavorableinternationalinfluenceswanedandsignsofmoderatelyincreasingwagepressuresemerged,U.S.consumerpriceinflationaccelerated.Inflationclimbedabovethe2percentmarkinmid-1999andmayincreasetoward2.5percentinthenextyears.

InGermany,andmorebroadlyacrossEurope,similarinternationalinfluenceshavebeenatwork.Butcontinuedmodestinflation(lessthan1percentinGermanyduring1999)owesmoretothesluggishnessofeconomicactivityandlargeoutputgapswithintheEuroArea.Imminentrecoveryinactivity,togetherwiththeeuro'snear-termweakness,shouldplacesomemodestupwardpressureonEuropeaninflationmovingin2000-2001.Atthesametime,Japanhasbeenbesetwithaboutofdeflationthatmayrequiresometimetodissipate.Fallingconsumerdemand,excesscapacityinindustry,andthestrengthoftheyenallcontributetothisphenomenon.

Shiftsininterestratesintheindustrialcountriesarelikelytobemoderateoverthenext12months,reflectingexpecteddevelopmentsineconomicactivityandinflation.Thecumulative75basis-pointtighteningbytheFederalReserveoverthesecondhalfof1999maybefollowedbyfurthermodestincrementalincreasesinratesbeyondthecurrent5.5

Figure1.3G-3consumerprices,1997-99

Note:Figuresarethree-monthmovingaverages.Source:IMF,InternationalFinancialStatistics.

Page9

percentlevelforFedFunds(figure1.4).FollowingitsrecentincreaseinpolicyratestheECBmaywaitforstrongerconfirmationofthereboundinEuroAreaactivitybeforeimplementingfurtherrateincreases,designedtoshiftthestanceofmonetarypolicyfromloosetoneutral.Japanwilllikelymaintaineffectivezerolevelsoftheuncollateralizedovernightcallrateuntilprivatedemandstabilizesandbeginstogrowsustainably.

WorldTradeIsLikelytoContinuetoAccelerate

Worldtradegrowthhasacceleratedfromabout4percentin1998to5percentin1999andisprojectedtoaveragenearly6.5percentin2000-2001.Buttheseapparentlymodestchangesinaveragegrowthratesmaskboththesharpintrayeardownturnsofthelasttwoyears,andsignificantshiftsinthegeographicdistributionofdemand.

Throughout1998worldtradeslowedsharplyasthecombinedeffectsoftheEastAsian,Russian,andBraziliancrisescontributedtoasteepdownturninimportdemandinAsia,LatinAmerica,andtheeconomiesoftheCommonwealthofIndependentStates(CIS)(figure1.5).Duringthesecondhalfof1998worldimportgrowthaveraged2percentatannualrates.Increasesof8-10percentinNorthAmericanandEUimportswereoffsetbya5percentdropindemandindevelopingcountries.

Boththepaceandpatternofgrowthhaveshifteddramaticallyduring1999.Recentmomentumindicatorssuggestamovementtoward6percentgrowth,amidfurtherchangesinthegeographicmixofdemandinlate1999.DeclineinLatinAmericaisbeingoffsetbyfirmingtrendsinWesternEurope,thenewlyindustrializingeconomies(NIEs)inAsia,andtheoilexportingcountries,whoseforeigncurrencyreceiptshavesurgedinrecentmonths.

TherapidrecoveryinEastAsiahasbeenthemostimportantfactorin

theaccelerationofworldtrade.TheshiftfromalargedeclineinimportvolumesinAsia(includingJapanandtheNIEs)in1998tomoderategrowthprojectedin1999willaddabout4.6percentagepointstoworldimportsthisyear(table1.3).TheAsianimportrecoveryhashelpedstimulateactivityaroundtheworld,especiallyinthoseeconomiesinWesternEuropeandwithinAsiaitselfthatarehighlydependent

Figure1.4Short-terminterestrates,1998-99

Source:InternationalMonetaryFund.

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Figure1.5Worldimportvolumegrowth

Note:EstimatefordevelopingcountriesisbasedonU.S.dollardatadeflectedbyworldimportpriceindex.

Source:WorldBankstaffestimates.

onexports.Growthinworldimportvolumeisexpectedtorisetoward6.5percentoverthenexttwoyears.Thisrateisnearthe20-yeartrendbutisstillbelowwhatmightbeexpectedinacyclicalrecoveryperiodfollowingasharpslowdown.

Table1.3Contributionstoworldimportgrowth(percentyear-on-year)

199819992000Worldimportgrowth 3.7 5.8 6.6ContributionstoworldgrowthaG-7countries 3.9 3.4 2.9

NorthAmerica 2.1 2.1 1.5Japan -0.4 0.4 0.2G-4Europe 2.1 0.8 1.2

Otherindustrialcountries 1.6 1.2 0.9AsianNIEs -0.5 0.2 0.6Developingcountries -1.3 1.0 2.2EastAsia -1.6 1.3 1.0LatinAmerica 0.8 -0.2 0.5EasternEurope 0.7 0.0 0.2

CIS -0.2 -0.5 0.2a.Shareofworldtradetimesimportgrowth.Source:WorldBankstaffestimates.

Asworldtradevolumesincreasein1999,thesteepdeclineindollar-basedtradepricesof1998islikelytoslow,partlyreflectingthedeclineoftheU.S.currencyvis-`-vistheyen.Thesharpfallinpricesofbothmanufacturesexportsandcommoditiesin1998causedadeclineinthedollar-basedglobaltradedeflatorofsome7percent.Butthelargeupswinginoilpricesandimprovementinpricesofmanufacturesexportscouldboosttheworlddeflatortogainsof2percentin1999.IftheU.S.dollarsoftensmoderatelyinthelastmonthsof1999(assuggestedbyfuturesmarkets),pricesformanufacturedgoodsmayflattenout.Table1.4showstheperformanceofthesepricesinthefirstthreequartersof1999.AflatteningoutofimportpriceswouldallowglobaltradeflowsexpressedindollarstoriseforthefirsttimesincetheonsetoftheAsiancrisis.Thispossibilityisgoodnewsformanyoftheheavilyindebteddevelopingcountries,whosedebtsaredenominatedprimarilyindollars.However,primarycommodityexporterswillnolongerbenefitfromdeclinesinthepricesofimportedmanufactures-declinesthathavehelpedsupporttheirterms

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Table1.4U.S.importpricesofmanufacturedgoods,1999(percentagechange,year-on-year)

ImportsfromPercentageoftotalU.S.

importsDec.1998

April1999

July1999

August1999

Japan 16.6 -3.0 -1.1 0.6 1.0Canada 16.5 -1.8 -1.6 0.2 0.2EuropeanUnion

16.4 0.5 0.9 -0.1 0.3

AsianNIEs 10.9 -8.4 -6.5 -3.6 -3.4LatinAmerica 10.4 -3.8 -1.7 -0.6 0.7World 100.0 -3.0 -2.0 -0.7 -0.3MemoitemsU.S.importprice

-6.3 -1.7 1.3 2.7

Worldimportprice

-4.0 -3.3 -0.9 ..

..Notavailable.Source:U.S.BureauofLaborStatistics;WorldBankstaffestimates.

oftradeduringtherecentprolongedweaknessincommodityprices.

Asnotedintheintroduction,theEastAsiancrisishadimportantadverseeffectsonglobaltradevolumesandcommodityprices,whicharenowunwinding.Box1.1offersananalysisoftheprice,sectoral,andregionaleffectsofthecrisis.

CommodityPricesAreUnlikelytoReboundSharply.

Thedeclineincommoditypricesduringthepastthreeyearshasbeenoneofthesharpestonrecord,withnonenergycommoditypricesfalling29percentfromtheirpeakandpetroleumpricesfalling56percentinthetwoyearsthatendedinDecember1998(seechapter4).Sincethelowsoflate1998andearly1999,somecommoditypriceshavebeguntorecover,butmostlybecausesupplieshavebeenreduced.Todate,therehasnotbeenasubstantialrecoveryindemand.

Facedwithcollapsingpetroleumprices,OPECagreedtosharpcutsinproductioninMarchandhasshownitsresolvetoadheretothesecuts.Thisdevelopmenthascausedpetroleumpricestorecoverfullyfromtheirdecline.Metalspriceshaverecoveredaboutone-fourthoftheirdeclinesinceearly1999ashigh-costminesandsmelterseitherclosedorbeganoperatingatreducedcapacities.Demandforprimarycommoditieshasbeguntorisesomewhat,spurredbytheunexpectedlypositiveeconomicoutcomesfortheEastAsiancountries,sustainedrapidgrowthintheUnitedStates,andsignsofrevivingeconomicactivityinEurope.Stockpilesofmetalshavenowbeguntodecline,anddemandformetalshasshownsignsofincreasinginAsia.

Agriculturalpriceshaveyettoshowclearsignsofrecovery.Suppliescontinuetoincrease,addingtoalreadylargestocks.Unlikemetalsorpetroleum,suppliesofagriculturalcommoditiesdependontheweather,andin1999theweatherhashelpedgeneratelargeoutputgains.Sugarproductionisexpectedtoexceedconsumptionforthefourthconsecutiveyear,andsoybeanandtotaloilseedproductionareexpectedtoreacharecordlevels.Grainproductionhasfalleninresponsetolowprices,butnotenoughtotightenmarketsandraiseprices.

Thenear-termoutlookforcommoditypricesissomewhatmixed,withenergypricesexpectedtoremainstrongbecauseofOPEC'sdeterminationtolimitsupplieswhileothercommoditypricesareexpectedtoremainweak(table1.5).Realnonenergycommoditypricesareexpectedtofall10.5percentin1999andthenbegintorecovermoderatelyin2000.Agriculturalpricesarelikelytorecovermoreslowlythanpricesforothercommoditiesbecauseoftheabundantstocksthathaveaccumulatedandacontinuedweaksupplyresponse

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Box1.1SectoralandregionaleffectsoftheEastAsiancrisis

Aglobalgeneralequilibriummodel

4wasemployedtotracetherealimpactsofthecrisisineffects.5TheexercisewasdesignedtoisolatetheimpactsoftehobservedoputputdelinesinthefiveEastAsiancrisiseconomies(EA-5)andJapan,includingthecurrentaccountreversal,whichonaggregatewereover$100billion.Thesereversalswereallocatedtotheindustrialeconomies,withtheUnitedStatesaccountingforthelargestshareoftheincreasedcurrentaccountdeficit-ontheassumptionthatcredittodevelopingcountrieswasconstrainedattheprecrisislevel.Thusthefinanialshockfordevelopingcountries-intheformofchangesincapitalflows-wasconfinedtotheEA-5countries,withanexplicitassumptionthattheotherdevelopingcountrieswereabletomaintainprecrisiscurrentaccountbalances.TheresultsofthecrisissimulationarecomparedtoabaselinesimulationthatcalibratesgrowthratesinthecrisiseconomiesandJapantoprecrisisgrowthforecastsandfixedcurrentaccountbalancesattheirprecrisislevels.6

Theanalysissuggeststhefollowingconclusions:

ThemaintransmissionchannelofthedemandshockinEastAsiaandJapanondevelopingcountries-isolatedfromotherobservedshocks-isthroughalargefallinexportprices,7reflectingthedevaluationofcurrenciesandthedeclineindomesticdemand,withthestrongestnegatriveeffectsoncommodityprices.Theanalysisinsomesenseprovidesan

upperboundonpriceeffectsowingtotheassumptionoffreelyflexiblepricesembeddedinthemodel.Thedemandshockcouldhavebeenacatalystfornewcrisesinothercountries,particularlycommodity-dependenteconomiesandthosewithfragilefinances.

ExportvolumesfromdevelopingcountriestoEastAsiadeclineunambiguously,thoughthiseffectsislargelyoffsetbygrowthinimportdemandintheindustrialcountries.

Thedevelopingcountryexportsectorsmostadverselyaffectedbythecrisisincludecommodities(othercrops,mining,andcrudeoil),commodity-dependentdownstreamsectors(processedfoods,refinedoil,andironandsteel),andmanufacturingsectorscharacterizedbyfiercepricecompeitivepressures(textilesandapparel,machinery)andsomeservices.

Tradeeffects.ThecrisissimulationhasitsstrongestimpactsoninvestmentandimportdemandintheEA-5countries,withonlyamodestincreaseinexports.Thedropininvestmentaffectsmostlydemandforcapitalgoods,includingmachineryandtransportationequipment,andconstruction,withmultipliereffectsinthenonmentalicmineralssecot.Income-sensitivesectors,suchasmotorvehicles,arealsohithard,withtheleastaffectedsectorsbeingfoodandclothingand,toalesserextent,energy-thatis,basicnecessities.8Whentranslatedintochangesinimportdemandthelargestreductionsfalloncapitalgoodsandmototvehicles.OtherdevelopingcountriessufferanunambiguousdropinthevolumeofexportstotheEA-5countriesandJapan,ontheorderofmagnitudeof$30billionand$13billion,resepctively.

Inthesimulation,aggregateimportvolumeintothe

industrialcountriesincreasesbyover2percent,morethantheincreaseinindustrialcountryaggregatedemand(0.5percent).Changesinrelativepricesplayalargeroleinfosterindemandforimports.Inpercentageterms,someofthelargestincreasesinimportdemandintheindustrialcountriesareinrice,sugar,oil,textilesandapparel,lightmanufacturing,motorvehicles,othertransportationequipment,andelectronics,Exportvolumestoindustrialcountriesfromthenoncrisisdevelopingcountriesrisesome$40billion,largelycounterbalancingthedropinexportvolumetowardtheEA-5andJanpan.

Priceeffects.Thelossinnetexportsissmallinvolumeterms($1.3billion)fornoncrisisdevelop-

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Box1.1(continued)

ingcountries.However,invalueterms,thereductionismuchlarger($34billion),makingtheeffectoftheAsiancrisisequivalenttoacapitalaccountreversalof$34billion.WhilethedeclineinexportpricesismuchhigherfortheEA-5countriesthanfortheotherdevelopingcountries,thelatternonethlesssufferfromanaveragedeclineinexportpricesof2.1percen.tThelargestdeclinesoccurinthosesectorswherecommoditiesaremostsubstitutable(forexample,crudeandrefinedoil),orsectorswherethetworegionsaresignificantcompetitorswherethetworegionsaresignificantcompetitors(suchastextileandapparel,ironandsteel,andmachinery).

9

Netimpactonexports.Thefigureinthisboxdepictsthedecompositionofnettradeeffectsforthetwodevelopingregionsintofourvolumeeffects-oneforeachregionofdestination-andonepriceeffect,capturingtheessentialstory.ThevolumeeffectsclearlyshowthenegativeimpactofimportdemandintheEA-5andJapanandthepositiveeffectinindustrialcountries.(ThefigurealosshowstheincreasedmarketshareoftheEA-5inotherdevelopingcountriesandthelackofchangeinintraregionaltrade.)ThebalanceofthevolumeeffectsarepositivefortheEA-5countries(+5.7percent)andmildlynegativefortheotherdevelopingcountries(-0.1percent).However,thenegativepriceeffectsleadtoanincreaseinexportvalueofonly0.8percentfortheEA-5countriesandadeclineof-2.1percentfortheotherdevelopingcountries.Onbalancetheprimary

transmissionchannelfornoncrisisdevelopingcountriesisadropinexportprices,sothatthenegativeimportvolumeeffectinthecrisiscountriesislargelyoffsetbypositiveimportvolumeeffectsintheindustrialcountries.

Thesimulationisusefulinillustratingthepriceeffectsonsectoralandregionaldemandundertheassumptionofflexiblepricesandinstantaneousadjustmentofbothpricesandvolumes.Inreality,in1998exportvolumesofdevelopingcountries(excludingtheEA-5),slowedsharply,astheriseinimportsoftheindustrialcountrieswasnotnearlysufficienttooffsetthedemandcollapseinAsia.

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Table1.5Annualpercentagechangeinoilandnon-oilcommodityprices(WorldBankcommoditypriceindexes,nominalU.S.dollars)

Trends ForecastCommoditygroup 1981-90 1991-95 1997 1998 1999 2000 2001Non-oilcommodities -2.3 4.1 2.2 -15.7 -11.2 2.8 4.2

Food -3.3 3.2 -6.1 -9.6 -14.0 2.9 4.0Grains -2.9 3.8 -13.9 -9.6 -13.9 5.7 7.8

Beverages -5.8 8.6 35.2 -17.6 -25.7 -0.7 4.9Rawmaterials -0.5 6.2 -10.5 -23.2 .2 3.9 4.7Fertilizers -2.5 0.7 -0.1 2.0 -6.4 -4.2 -2.2Metalsandminerals 0.5 0.3 1.2 -16.1 -3.2 6.0 4.0

Petroleum -4.7 -5.6 -6.2 -31.9 37.8 2.8 -2.7G-5manufacturesunitvalueindex 3.3 3.6 -5.1 -3.9 -0.6 2.5 2.5Source:WorldBankDevelopmentProspectsGroup.

tofallingprices.Realenergypricesareanticipatedtoincrease38percentin1999andtostabilizeinthesetermsin2000.TheforecastassumesthatOPECwillraiseproductionofficiallyorunofficiallyduringthewinterandpreventpricesfrombeingsustainedmuchabove$20/bbl.ButuntilsuchtimeasOPECdoesraiseproduction,speculativedemandonfuturesmarketscouldtakepriceswellabove$20/bbl.

PrivateCapitalFlowstoDevelopingCountriesAreLikelytoRecoverOnlyModestlyintheShortTerm

Theenvironmentforprivatecapitalflowstoemergingmarketsisworsethanwasexpectedsixmonthsago.GrossprivateflowsforJanuary-August1999werealmostathirdlowerthantheywereayearearlier(table1.6).Flowsgeneratedbybondissueswere25percentlower.IssuesfromEuropeandCentralAsia(ECA)andLatinAmericaplunged56percentand17percentrespectively.Banklendingcommitmentsdropped25percentduringtheperiod,withECAandLatinAmericaagainregisteringlargedrops(more

than50percent).Internationalequityplacementsdidincreaseoverthisperiod,largelyreflectingprivatizationreceiptsinKoreaandThailand.EastAsianequityandothermarketshaverisensharplyfromtheirlowsinlate-1998.

Table1.6Averagemonthlygrosscapitalmarketflowstodevelopingcountries(billionsofU.S.dollars)

1997 1998 1999TotalTotal Jan.-July July-Dec. Jan.-June July August

Alldevelopingcountries 24.2 16.2 19.9 12.5 13.9 10.3EastAsiaandPacific 6.2 3.0 3.2 2.7 3.6 3.4EuropeandCentralAsia 4.3 4.4 3.3 1.4LatinAmericaandtheCaribbean 10.1 7.4 9.8 5.0 6.5 3.6MiddleEastandNorthAfrica 1.7 1.0 1.0 1.1 0.7 0.3SouthAsia 1.0 0.4 0.7 0.1 0.4 0.1Sub-SaharanAfrica 0.9 0.5 0.7 0.4 1.6 1.6Note:Grosscapitalmarketflowsincludebondissues,syndicatedloancommitments,andequityissuses,basedonreportsfromtheinternationalcapitalmarkets.Source:Euromoney;WorldBankstaffestimates.

Page15

Buttheprimaryreasonfortheirrecoveryappearstobetheresponseofdomesticinvestorstorisingliquidityandfallinginterestrates,andtosomedegreeastemmingofcapitalflight.Sofarthereislittleevidenceoflargeinflowsfromabroad.

WhiletherecoveryinEastAsiahelpedreviveconfidenceinemergingmarketstoamodestextent,offsettingeventsoccurred.FollowingtheBraziliandevaluationinJanuary1999,secondarymarketbondspreadsincreasedformostofthemajordevelopingcountryborrowers.However,contagionfromBrazilwasrestrictedandrelativelyshort-lived.TheaveragespreadonBradybonds-anindexthatisheavilyweightedtowardLatinAmerica-droppedto890basispointsinAprilfromover1,300basispointsattheendofJanuary(figure1.6).Withsomesignsofstabilizingmarketconditionsinthesecondquarter,grosscapitalflowsincreasedsignificantly,bolsteredbya33percentincreaseinbondissuanceandaneardoublingofbanklendingcommitmentscomparedwiththefirstquarter.TheEastAsiancrisiseconomiesshowedincreasingstrengthinthebondmarkets,andLatinAmericanborrowerssecuredsignificantamountsofcommercialbankcredit.Still,marketaccessremainedrestrictedtothemostcreditworthyborrowers.

Duringthethirdquarter,tighteningU.S.monetarypolicy,theDaewoorestructuring,andEcuador'sdifficultiesagaindeterredinvestors.Grosscapitalflowsfellsharply,andsecondarybondmarketsbecameilliquidasthevolumeoftransactionsdroppedsharply.EcuadorianBradybondspreadssoaredtoaround4,000basispoints,butLatinAmericanspreadswerenotaffectedsignificantly.BytheendofAugustaveragesecondarymarketspreadsoninternationalbondsstoodatlowerlevelsthantheir1998averagesbutremainedwellabove1997levels.Investorconcernmanifesteditselfbothinlimitedaccessandhighinterestratespreads.

Despitefallingvolumesofprivatemarketflows,foreigndirectinvestment(FDI)hasremainedresilientandislikelytobetheprimarysourceoffinancefordevelopingcountriesfortheforeseeablefuture.TheglobalcrisishascontributedtoreducedgrowthprospectsevenforFDI,however.PreliminarydataindicatesomereductioninFDIflowsin1999.InEastAsianewFDIprojectsapprovedin1999have

Figure1.6SpreadsonBradybonds

Source:Bloomberg;WorldBank

Page16

fallensharplyinIndonesia,China,andThailand.

10AlthoughthedownturnmaybepartiallyoffsetbyanincreaseinKorea,overallflowsinEastAsiamaycontinuetodeclinemoderatelyinthemediumterm.FDItoLatinAmericamayincreasesomewhatin1999owingtoBrazil'sprivatizationprojects,buttheselevelsmaybedifficulttomaintainin2000-2001.FlowstoECAshouldremainstableintheneartermandarelikelytogrowinthemediumtermasmajorrecipientsproceedwithprivatizationprogramsandinvestorsareattractedbytheprospectofEUaccession.OnbalancethesetrendssuggestthattotalFDIflowstodevelopingcountriesmayremainbelowthepeaklevelsof1997overthenextfewyears.

OnthebackoftheeconomicrecoveryinAsiaandanexpectedbottoming-outoftherecessioninLatinAmerica,flowsfrominternationalcapitalmarkets(bonds,equity,andbankloans)areexpectedtostageamodestreboundduring2000-2001buttoremainwellbelowprecrisislevels.Severalfactorssuggestthattheseflowstoemergingmarketswillincreaseonlyslowly.FinancingrequirementsinAsiahavebeencutdrasticallyascountrieshavemovedtolargecurrentaccountsurplus.Investorsarelikelytocontinuetoshyawayfromtheperceivedrisksofemergingmarketsinthenearterm,andthistendencywillimproveonlygraduallyinthemediumterm.SincetheEastAsiancrisis,peggedcurrencieshavegivenwaytoflexibleexchangeratesinmanycases,increasingtheriskofborrowinginforeigncurrency.TherestructuringofcorporationsandbankshasnotprogressedasexpectedinmanyAsiancountries,andotherproblems(suchasthesituationwithDaewoo)haveresurfacedtodampeninvestorenthusiasm.Otheremergingeconomiesalsohavestructuralproblemsthathaveproventobepoliticallyintractable,leadingtodifficultieswith-ordefaultson-internationalpayments(asinEcuador,

Pakistan,andRussia).Policymakersareencouraginggreatersupervisionoffinancialmarketsandbanksandactivelydebatingthenotionofburden-sharingbyprivateinvestors.

TheOutlookforOfficialFlowsImproves

Netofficialflowsreceivedbydevelopingcountriesrosefrom$39billionin1997to$48billionin1998,largelybecauseofnonconcessionaldisbursementsunderrescuepackagesforcountriesmostaffectedbythefinancialcrisis.PreliminarydatareportedbydonorcountriesfromtheDevelopmentAssistanceCommitteeoftheOrganisationforEconomicCo-operationandDevelopment(OECD)showsomewelcomerelieffromthedecliningtrendinnetofficialdevelopmentassistance(ODA)flows.NetODAflowstodevelopingcountriesandmultilateraldevelopmentagenciesregisteredanincreaseof8.9percentinrealtermsin1998,comparedwitha21percentcumulativedeclinefrom1992to1997.Theriseinnetdevelopmentassistanceistheresultinpartofincreasedconcessionalflowstocountriesaffectedbythefinancialcrises.Butitalsoreflectsincreasedawarenessonthepartofseveraldonorcountriesoftheneedtosustainaidlevelsinordertoachievelong-termdevelopmentobjectives.

SignificantenhancementsweremadetotheDebtInitiativeforHeavilyIndebtedPoorCountries(HIPC)followingabroadconsultativereviewbytheWorldBank,InternationalMonetaryFund(IMF),andtheCologneSummit.Theenhancedinitiativecallsfordeepeningdebtreliefbytargetingittobringthenetpresentvalueofdebtdownto1.5timesexportearnings(asofthedecisionpoint).Thistargetismuchmoreaccommodativethanthetargetintheoriginalinitiative(2.5timesexports,asofthecompletionpoint).TheenhancedHIPCalsolowersthethresholdsforthefiscalburdenofdebtandoffersfasterdebtrelief.11Debtreliefwillnowbeinitiatedassoonasacountryqualifiesatthedecisionpointaswellaswhenitreachesthecompletionpoint.Thenumberofeligiblecountrieswill

alsorisefrom29to36ormore.

Thenewframeworkisexpectedtoprovide$27billioninrelief(innetpresentvalueterms)-morethandoublethe$12.5billionoftheoriginalframework.Morethan$5billionwillbeprovidedondebtsowedtothe

Page17

WorldBank.ReliefondebtowedtotheIMFisestimatedataround$3billion,whichwillbefundedbyarevaluationofaportionoftheIMF'sgoldreserves.Donorcountrieshaveindicatedthattheywillbesteppinguptheircontributionstohelpfunddebtreliefundertheenhancedinitiative.InadditionG-7leadersagreedattheCologneSummittocanceltheirofficialdevelopmentassistancedebt,andsomecountrieshaveannouncedthattheycouldgobeyondthistoincludesomenonconcessionalloansforqualifyingHIPCs.

TheOutlookforDevelopingCountriesin1999-2001SuggestsSignificantAcceleration

Improvementsintheexternalenvironment,favorablepolicytrendsinemergingmarkets,andincreasingconfidenceamongbothdomesticandforeigninvestorsshouldhelpspurgrowthindevelopingcountriesoverthenexttwoyears.However,growthwillvarymarkedlyacrossregions(table1.2above).Growthof2.7percentfordevelopingcountriesasagroupisprojectedin1999,acceleratingto4.2percentin2000,andfurtherto4.5percentby2001-stillbelowtheprecrisislevelinthenon-transitiondevelopingcountries(figure1.7).

Capitalflowstodevelopingcountrieshaveremainedverylowcomparedwiththelevelsthatprevailedinthemid-1990s.Butmanyemergingmarketshaveseenasubstantiallooseningofliquidityconditionssincetheturnoftheyear,includinglowerdomesticinterestrates,risingequityprices,andinsomeinstances,upwardpressureoncurrencies.Theseimprovementsarehighlightedinfigure1.8,whichdisplayschangesinanindexoffinancialconditions-asimpleaverageofthepercentagechangeininterestrates,equityprices,andexchangerates-forasampleofemergingmarkets.

12

Improvementsindomesticinvestors'confidencereflectinpartthemorefavorableglobaloutlook(incontrasttothenear-panicinworldmarketsfollowingthecollapseofRussiaandthehedgefundLongTermCapitalManagementlastfall).Aswell,inmanycountriesappropriateadjustmentpoliciesarebeingadopted,includingmeasuresaimedatrecapitalizingbankingsystems.

Figure1.7RealGDPgrowthfordevelopingcountries

Source:WorldBank,GlobalDevelopmentFinance1999;WorldBankbaselineforecast.

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Figure1.8IndexoffinancialconditionssinceJune1997

Source:WorldBankStaffestimates.

Importantpolicyassumptionsarebuiltintotheprojectionsforeachdevelopingregion:

InEastAsiadeclininginterestratesandothermeasurestosupportdomesticdemand,includingfiscalstimulusandstepstorecapitalizebanks,havehelpedrestoreinvestorconfidence.Thesepolicymeasuresareexpectedtocombinewithimprovedexportperformance(basedonthe20-25percentrealdepreciationincurrenciessincetheonsetofthecrisisandtheincipientrevivalofworldtrade)toconsolidatetherecoveryinthenearterm.However,asustainablegrowthpathrequiresfurtherandmoredeterminedbankandcorporaterestructuring(seechapter3).

FiscalconsolidationwillbeessentialinanumberofLatinAmericancountriesinordertoreassureinvestors,encouragearesumptionofcapitalflowstotheprivateandpublicsectors,facilitateexchangeratestability,andbringinterestratesdownfurther.

Russiaisexpectedtoenhanceitsstabilizationbymakingfurtherprogressonboththefiscalandinflationfrontinthenearterm.ThisscenariowouldimproveprospectsforseveralcountriesintheECAregion,particularlyneighboringstatesoftheCIS.SeveralCentralandEastEuropeancountriesareworkingtomeetEUaccessioncriteriaandareexpectedtoadoptpoliciesthatwillraisestandardsandinstitutionstoEUnorms,whichwillhavepositivespillovereffectsontheregion.

IntheMiddleEastandNorthAfrica,recentevents-includingthe1998dropinoilprices(nowreversed)-andtheneedtoprogressonimplementationofEuroMediterraneanAgreements-havecreatedasenseofurgencywithrespecttogrowthandefficiency-enhancingstrategies.Asaresultmanycountriesareexpectedtointensifytheireffortstopromotebothtradeandfinancialintegration.Theseeffortsincludemoreextensiveprivatizationprograms,theliberalizationofcapitalmarkets,andvariousmeasuresdesignedtostrengthentheproductivityofdomesticindustryinordertoenhanceexportperformance.

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InSub-SaharanAfricastructuralreformshavebecomemorewidespreadsincethemid-1980s,includingtaxandpublicexpenditurereforms,therestructuringandprivatization,ofparastatals,tradeliberalization,andderegulationofinternalmarkets.Suchreformshaveworkedtopromoteexportsandinvestmentinmanycountries.Theresulthasbeenfasteroutputgrowthalready,especiallywhenpolicyreformhasbeensupportedbydebtrelief.

InSouthAsiatheresolutionofpoliticaluncertaintiesinmanycountriesmayhelptosustaingrowthinthenearterm.DomesticbusinessconfidenceinIndiaisstrong,andbothmajorpoliticalpartiesarecommittedtoabroadrangeofeconomicreforms.Butthefiscaldeficitremainsaseriousconcern.Theprojectionsassumeprogressinmacroeconomicstabilizationandconflictresolutionthroughouttheregion

Near-termgrowthisexpectedtoimproveEastAsia.AlthoughmostEastAsianeconomiesexperiencedvirtuallynogrowthin1998,GDPisprojectedtoincreaseby5.5percentin1999.Thisincreaseincludesadramaticturnaroundforthefivecrisiseconomies,whichshouldseegrowthrisefrom-7.9percenttoaround4.5percent.Currencydepreciationandthecontinuedstrengthoftheyenhavecontributedtostrongexportactivityforthegroup.StrongergrowthinJapanandintraregionaltradearereinforcingthisrecovery.Asupportivepolicyenvironmentisbeginningtogenerategainsinprivateconsumption.Expectationsforcapitalspendingarelessoptimisticbecauseofsignificantexcesscapacity,thewidespreaduncertaintiesassociatedwithbadloansinthebankingsystem,andtheneedforfasterprogressoncorporaterestructuring.

TheeconomicproblemsinChinahavebecomemoreapparent.Consumerpriceshavebeeninasteadydeclineforsometime.Consumerdemandisweak(inpartbecauseofuncertainemployment

conditions),andinventoriesofunwantedgoodsarerising.Thebankingsector'sweakness,whichhasgrownmoreevident,isrelatedtothecontinuedpoorperformanceofstate-ownedenterprises(SOEs).Extensivepublicinvestmentprojectshavesupportedgrowththusfar,butthegovernment'sresourcesarerelativelylimited,andthefiscalexpansioncannotbesustainedindefinitely.Afterlaggingthroughthefirsthalfof1999,however,acombinationoffactorsarenowbuttressingChineseexports,includingrenewedgrowthinEastAsiaandcontinuedimportgrowthintheUnitedStates.

Theoutlookfor2000and2001forEastAsiaispositive-6.2percentGDPgrowth-withmorebalancedadvancesacrossfinaldemandcomponentsandcountries.Withinflationincheck,monetarypolicywillremainrelativelyloose,supportingconsumerdemand.Loosermonetaryconditions,thenarrowingoftheoutputgap,anemergingrecoveryofcashflowandimprovingbankingbalancesheetsshouldleadtoamodestrecoveryofinvestmentactivity,thoughtheregionisunlikelytoseeareturntoprecrisisinvestmentratesintheforeseeablefuture.Apickupinworldeconomicactivityandstrongintraregionallinkagesshouldsupportcontinuedexportgrowth.Importswillrisefurther,leadingtoanarrowingofpresentlylargecurrentaccountsurpluses.Failuretopursuefinancialandcorporaterestructuring,however,coulddampeninvestors'enthusiasm,possiblygeneratinganotherboutoffinancialandexchangeratedifficulties(seechapter3).ButEastAsianeconomiesareinamuchbetterpositionfortheneartermthantheywereayearago,withstrongcurrentaccountbalances,muchlowershort-termexternalliabilities,andimprovedreservepositions.

LatinAmerica.OutputfortheLatinAmericaandCaribbeanregionhasdeclinedanestimated0.6percentin1999,fallingfroma2.1percentadvancein1998,despitefavorablegrowthperformanceinMexico.EconomicdownturnsdeepenedinmanycountriesinthewakeoftheRussiancrisisofAugust1998.Inbroaderterms,adverse

termsoftradeandareductionincapitalflowstotheregion(the

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resultofconcernsaboutthefundamentalsinseverallargecountries)contributedtoarecessioninthelastquarterof1998.Forsomecountries,particularlyBrazilandEcuador,therecessionwasthereflectionofhome-grownimbalances,thoughtheglobalcrisisaffectedtimingandseverity.Butforothercountries(Argentina,Chile,Colombia)thecausalfactorsweretiedmorecloselytotheongoingdeteriorationintheexternalenvironment.Althoughthefinancialcontagionwasmuchlessthanfeared,theBraziliandevaluationatthebeginningof1999wasafurthershocktotheregion.Pricesofkeycommodityexportstumbled(especiallyforcountriesinCentralAmericaandtheCaribbean),intraregionaltradeslowedsharply,andprivatecapitalflowsdeclinedfurtherfromtheir1997and1998levels.

BrazilhasemergedfromitsJanuary1999fiscalcrisisanddevaluationshowinggreaterresiliencethanwasenvisionedsixmonthsago.Butgrowthinanumberofothercountriesworsenedasthedeterioratingglobalenvironmentfinallytookitstoll,yieldingonnetonlyamarginalchangeintheregion'spreviousgrowthforecastof-0.8percentfor1999.InvestoruncertaintyhasincreasedrecentlywiththeshiftinmonetarystanceintheUnitedStatesandchangesinthepoliticaladministrationsinseveralcountriesintheregion,especiallyVenezuela(in1998)andArgentinaandChileinlate1999.Thebeginningofamodestrecoveryofgrowthintheregioncanbeexpectedaroundtheturnoftheyearandshouldreflecttheimprovementintheglobaloutlook,amoderationofpoliticaluncertainties,andamodestrecoveryinanticipatedcapitalflowsfor2000.However,thesmallislandstatesintheeasternCaribbeanwillfaceadifficulttransitionperiodfromtheirpotentiallossofpreferentialaccesstotheEUforbananaexports.

EuropeandCentralAsia.TheregionhasexperiencedwidespreadrepercussionsfromRussia'sAugust1998devaluationanddebtdefault.Russia'ssharpimportcompressionhasaffectedneighboring

CIScountriesandTurkey,andtoalesserdegreePolandandotherCentralEuropeancountries.Russianoutputdeclineshavebeenlimitedbygainsindomesticproductionforimportsubstitution,thoughnotyetbyarecoveryofnon-oilexports.However,exportandgovernmentrevenueshavebeengreatlyenhancedbytherecenthikeinoilprices.Therehasalsobeenprogressindebtrestructuring,andimprovementonthepolicyfronthasalsopavedthewayforgaininganadditionalroundoffundingfromtheIMF.GDPisexpectedtoregisterpositivegrowthof0.7percentintheCIScountriesfor1999,animprovementovertheprojected5.5percentfallanticipatedinMarch.InadditiontodevelopmentsinRussia,theincreaseisfurthersupportedbythebeneficialeffectsofhigherpetroleumpricesonhydrocarbonexportersintheCaucasusandCentralAsia.Incontrast,growthinCentralandEasternEuropehasslowedmorethanexpected(to1percent),reflectingtheearliersluggishnessoftheEUeconomyandweakenedimportdemandfacingcountriessuchasPoland,Hungary,theCzechRepublic,andTurkey.GrowthinTurkeyhasbeenparticularlyaffected.TradewithRussiahascollapsed,andthecountry'sprospectshavebeendimmedtemporarilybytheeffectsoftheearthquakeinAugust1999.

ThewarinKosovohadsubstantialeffectsonthewiderBalkanregion.RefugeesstreamedintoAlbaniaandMacedonia.Bothdirectandtransittradeintheareaweredisrupted,impactingnotonlythosecountriesengagedintheconflictbutalsoneighboringRomaniaandBulgaria.Tourismreceiptsalsodroppedsharply,especiallyinCroatia.Growthin2000and2001isexpectedtorecovermarkedlyinCentralandEasternEurope,risingto3.2percentin2000and4.3percentin2001,spurredlargelybystrongergrowthintheEU.AmongthestatesoftheCIStheturnaroundisexpectedtobemoregradual,aspoliticaluncertaintyinRussiabeforetheDecember1999parliamentaryandJune2000presidentialelectionsconstrainsthecountry'sabilitytoaddressfurtherdebtrestructuringandbudgetaryissues.Consequently,

GDPfortheregionasawholeisanticipatedtorecoveronlygraduallyto2.5percentin2000and3.3percentin2001.

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MiddleEastandNorthAfrica.Theregionhasbeenpositivelyaffectedbyrecentdevelopmentsinoilmarkets.ButithasalsobeennegativelyaffectedbyslowgrowthintheEU-themajorexportmarketfortheregion'sdiversifiedeconomies.Somedecelerationofgrowthfromthe1998rateof3.2percentisexpected,and1999growthisprojectedtoreachonly2percent.Earlierdeclinesinoilpriceshadasignificantnegativeimpactonoilexportingcountries,forcinggovernmentstotightenfiscalpolicies,adjustordefendexchangerates,andfundhigherexternalimbalanceswithforeignreservesandnewborrowing(seechapter4).ThetighteningofOPECquotasinApril1999ledtohigheroilprices,butrestrictedproduction(andexportvolumes),andthis,combinedwithtighterfiscalconstraints,hascontributedtolower1999growthratesforoilexporters.

Intheshorttermthesharpriseinoilpricesin1999shouldcontinuetocontributetoarecoveryandbegintoeasethefinancialshortfall.However,oilexportersstillfaceafiscalconstraintandwillneedtoexercisetightcontrolonspending,especiallyonsubsidies.Improvedgrowthinoilexportersfavorsthenon-oilexportingcountriesoftheregionthatreceivesignificanttransfersintheformofworkerremittances.(ThesetransfershavedeclinedasGDPgrowthfallsinoil-exportingcountries.)Anotablepositivetrend,particularlyamongtheMaghrebcountries,isaccelerationofprivatizationandrestructuringprogramsthatcontributedtohigherinflowsofforeigncapital,particularlyintheformofdirectinvestment.ThesereformsandaresurgenceofgrowthinEuropeinlate1999andearly2000shouldleadtosolidgrowthinexportsandstrongergainsinprivateinvestment.Growthinthebroaderregionisanticipatedtoriseto3.2and3.5percentin2000and2001respectively.

Sub-SaharanAfrica.Despitecontinuedimprovementsinpoliticalandeconomicfundamentals,GDPgrowthfor1999hasbeenreviseddownwardmodestlyto2.3percentfromthe2.5percentanticipatedin

March.

Whilestrongeroilpricesarebenefitingasmallnumberofcountries,theyadverselyaffectthetermsoftradeformost.Meanwhilelowpricesfornon-oilcommodities,poorweather,civilstrifeandturbulencerelatedtotheEastAsiancrisis(particularlyaffectingSouthAfrica)haveworsenednear-termprospectsforthemajorityofcountriesintheregion.Recentperformancefallswellshortofwhatisneededtomakeinroadsagainstpoverty,andpercapitaincomeswilldeclineforasecondsuccessiveyear(-0.2percent)in1999.

Atthesametime,however,developmentsin1999augurwellfornear-termprospects,andgrowthisexpectedtoriseto3.1percentin2000.Apick-upinexportsin2000and2001shouldsetthestageforamodestrecovery.Thisexpectationisbasedonseveralfactors,includinghigherpricesforoilandothercommodities,therecoveryinEastAsia,andrevivingdemandintheEU.Followingadeclineof0.3percentin1998,merchandiseexportvolumesareexpectedtoriseby3.8percentin1999and6.3percentin2000.ExcludingSouthAfricaandNigeria,exportgrowthfortheregionisprojectedtoaverage4.8percentin1999and2000.

Morecriticaltomedium-andlong-termprospects,however,istheongoingstructuraladjustmentthroughouttheregion,whichhasopenedmarketsandhadamajorimpactonproductivity,exports,andinvestment.ManySub-Saharancountriesarelikelytobenefitfromdebtrelief,allowingmoneytobespentonimportsratherthanondebtservicing.Ofthe36countrieseligiblefordebtreliefundertheenhancedHIPCInitiative,30areinSub-SaharanAfrica.

SouthAsia.OutputgainsinIndiahavebeenbetterthananticipatedin1999,bothinmanufacturingandinagriculture.Thesegains,plusthefactthattheregion'slargestcountrysufferedfeweffectsfromtheEastAsiancrisis,makeitpossibletoupgradeprojectionsby1percentagepointin1999and0.7percentin2000.Growthintheregionis

expectedtoaccelerateto5.4percentin1999(from5.1percent)andtoconsolidatefurtherin2000,

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largelybecauseofdevelopmentsinIndia.ThedirecteffectsoftheEastAsiancrisiswerelimitedtotheregion'ssmaller,moreopeneconomies.Bangladesh,Pakistan,andSriLankasharedintheglobalcrisisduring1998-99,partlyreflectingtheweaknessinworldtradeandcommodityprices.However,inthesecountries,too,theeconomicoutcomeowedmoretodomesticthaninternationalfactors.Fiscalandbroaderfinancialsectordifficulties,sanctions,andtheoutbreakofhostilitiesinKashmiraffectedPakistan,whileseverefloodingandpoliticaluncertaintytookatollonoutputgrowthinBangladesh.Inthenearterm,allcountriesoftheregionwillbeadverselyaffectedbythesurgeinoilprices,buttheyshouldbenefitfromajumpinexternaldemand,especiallyinEuropeand,moregenerally,inAsia.

ProjectionsforGrowthinDevelopingCountriesintheLongTermAreLower

Thedisruptionstoglobaleconomicactivity,trade,commodity,andfinancialmarketscausedbytheEastAsiancrisisarelikelytohavediminishedby2001,withworldoutputgrowthtrendingtoward2.8percentfrom1.9percentin1998.Buttwoissuesthataffectgrowthindevelopingcountriesremain.First,theexternalenvironmentisprojectedtobesomewhatlessfavorablethanintheprecrisisperiodandalsomorefragile-thatis,itcoulddeteriorateagain.Second,thecrisishasaccentuatedstructuralweaknessesindevelopingcountries,especiallywithrespecttothefinancialsectorandthegovernmentbalancesheet(oratleasthasledtoamorerealisticappreciationoftheproblems).Principallyforthesereasons,thelong-term(2002-2008)forecastforgrowthindevelopingcountrieshasbeenreducedto4.9percentfrom5.2percent(seetable1.7forthelastlong-termprojection,whichwascompletedayearago).

13Evenwiththisdownwardrevision,theprojectedfiguresrepresentasignificantincreasefrom1991-98levelsfordevelopingcountriesasa

group.However,thisgrowthisfueledmainlybyincreasedgrowthinthetransitioneconomies.Excludingthetransitioncountries,developingcountries'growthratesareprojected

Figure1.9GrowthofU.S.employmentandproductivityinmanufacturing

Note:Quarterlygrowthratesareseasonallyadjustedatannualizedrates.

Table1.7Worldgrowth,1981-2008(annualpercentagechangeinrealGDP)

GlobalEconomicProspects2000GlobalEconomicProspects1998/99

Estimate ForecastsRegion 1981-

901991-98

1998 1999200020012002-2008

Worldtotal 3.1 2.5 1.9 2.6 2.9 2.8 3.2High-incomecountries 3.0 2.3 2.0 2.6 2.5 2.3 2.7

OECDcountries 3.0 2.2 2.0 2.6 2.5 2.3 2.6Non-OECDcountries 5.2 5.7 1.2 3.0 4.0 4.6 5.2

Developingcountries 3.3 3.2 1.6 2.7 4.2 4.5 4.9EastAsiaandPacifica 8.1 8.5 0.1 5.5 6.2 6.2 6.3EuropeandCentralAsia 2.7 -4.0 -0.2 0.3 2.5 3.3 4.0LatinAmericaandtheCaribbean 1.6 3.6 2.1 -0.6 2.7 3.5 4.2MiddleEastandNorthAfrica 0.7 2.9 3.2 2.0 3.2 3.5 3.7SouthAsia 5.7 5.8 5.1 5.4 5.5 5.3 5.1Sub-SaharanAfrica 1.8 2.8 2.4 2.3 3.1 3.4 3.6

MemoitemsEastAsiancrisis-5b 6.9 6.0 -7.9 4.4 5.3 5.1 5.3TransitioncountriesofEuropeandCentralAsia 2.5 -5.1 -0.8 0.8 2.1 3.1 3.7Developingcountries,excludingthetransitioncountries 3.6 5.3 2.1 3.0 4.5 4.8 5.0a.EastAsiaandPacificincludestheRepublicofKorea.b.Indonesia,Malaysia,thePhilippines,theRepublicofKorea,andThailand.Note:GDPismeasuredatmarketpricesandexpressedin1987pricesandexchangerates.GrowthratesoverhistoricintervalsarecomputedusingleastsquaresmethodSource:WorldBankstaffestimates,November1999.

todeclinefrom5.3percentin1991-98to5percentin2002-2008.

TheExternalEnvironment

Long-termprojectionsassumeslightlystrongergrowthfortheindustrialcountries-

2.5percentG-7growthcontrastedwith2.4percentgainsinearlierforecasts.GrowthprospectsfortheUnitedStatesandtheEuroAreahavebeenupgraded,butamoresubstantialdowngradingofpotentialGDPgrowthinJapanwilloffsettheseincreases.

UnitedStates.Productivitygrowthhaspickedupfrom1percentannuallyduringthe1980sto1.5percentoverthelastfiveyears,risingto2.2percentin1998.Inthemanufacturingsectorproductivitygainshaveaveraged4.3percentoverthelastthreeyears-nearlydoublethe2.3percentrateofthe1980s.Outputperhourinthemanufacturingsectorrosebyanannualrateof7.5percentinthefourthquarterof1998(figure1.9).Whiletheevidenceonthesustainabilityoftheseadvancesremainsopentoquestion,itappearstojustifyamodestupgradingoflong-termgrowthratesto2.7percentfromthe2.5percentrateestimatedinGlobalEconomicProspects1998/99.

Europe.Severalfactorssuggestthatgrowthmaybeconsiderablymorerobustthanthe1.8percentpaceexperiencedduringthe1990s,andthe2.7percentlong-termgrowthrateforecastfortheEuroAreainlastyear'sGlobalEconomicProspectsbeenrevised

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upward0.2percentagepoints.ThevolatilityofEuropeangrowthduringtheearly1990s,whichwastiedtotheimbalancescausedbyunificationofEurope'slargesteconomy,hasgraduallyfaded.Therehasbeenconsiderableprogressininflationreductionandfiscalconsolidation.Efficiencygainsassociatedwiththeadventoftheeuro(reducedtransactionscosts,deeperfinancialmarkets,andindustryconsolidationtoservethelargermarket)arelikelytoemergewithtime.Labormarketandotherregulatoryreforms,intandemwithstrongerinvestmentinhightechnology-thatwillallowEuropeovertimetocatchuptotheUnitedStatesinthisarea-couldsupportfurtherproductivitygrowth.Anddespitesubstantialtransitioncosts,theaccessiontotheEUoffivetotenCentralandEasternEuropeancountrieswillbolsterreformsinthenewentrantsandincreasetheEUconsumermarketbysome100millionpeople.

Japan.Theprospectsforaresumptionofrapidlong-termgrowthinJapanappeardim.Theongoingeffortstoovercometheeconomy'sdeeper-seatedstructuralproblemsareunlikelytobearfruitforanumberofyears.Successivegovernmentstimuluspackagesduringthe1990shaveaddedtothedebtburdenbutfailedtospurgrowth:GDPhasgrownbyanaverageofonly1.3percentoverthe1990stodate,comparedwith4percentinthe1980s.Thefiscalbalancehasballoonedfromasurplusof2.9percentofGDPin1990toanestimateddeficitof9percentin1999,increasinggrossgovernmentliabilitiesrelativetooutputby40percentagepointstoover100percent.Inthemediumtermfiscalconsolidationisunavoidable,especiallyinlightoftheincreasingdemandsbeingmadeonthepublicpensionsystembyanagingpopulation.Recentprogressinstabilizingtheprivatefinancialsectorandthelarge-scalecorporaterestructuringthatwillalleviateexcesscapacityandrestorefinancialviabilitywillneedtocontinue.Theseadjustmentsarelikelytoresultinaperiodofsluggishoutputgrowthinboththepublicandprivatesectors,and

projectionsfortrendgrowthhavebeenreviseddownwardby0.6percentagepointsto1.9percent.

InflationintheG-7countriesislikelytoremainlow.Economy-wideefficiencygainsintheUnitedStatesandEurope,expectationsformoderationinfiscalbalances(inthelatter,owingtoconstraintsimposedbyMaastrichtcriteriaandtheStabilityPact),andmoderateactivityinJapanshouldkeepinflationbelow2.5percentinthemediumtolong-term.Intandemwithlowinflationanddiminishingpressureoncapitalmarketsfromthepublicsector,reallong-terminterestratesareexpectedtodeclinegraduallyfromtheircurrenthighlevelsof4-4.5percenttonearasecularaverageof3-3.5percent.

Worldtradegrowth.DespitestrongeroutputgainsintheUnitedStatesandEurope,projectionsforworldtradegrowthhavenotbeenrevisedmarkedly(anupgradeof0.1percentagepointto6.4percent).TheprojectionsreflectalowgrowthprofileinEastAsiarelativetoprecrisistrendsandtighterexternalfinancingconstraintsonmanyemergingmarkets.Theseconstraintsmaylimitemergingmarkets'abilitytoimportatrapidratesoveranextendedperiod.

Long-termtrendsintradewillalsobeshapedbytheeventualoutcomesoftheprospectiveMillenniumRoundoftheWorldTradeOrganization(WTO),forwhichframeworkdiscussionscommencedinlate1999(box1.2).Developingcountrieshavesubstantiallyreformedtheirtraderegimesinthelasttwodecadesandnowhaveamuchgreaterstakeinadvancingtradereformsthantheyhavehadinanypreviousround.ThoughtheAsiancrisisanditsaftermathhavehadaprofoundeffectonglobaltradeandinvestment,ithasnotledtomajorreversalsintradepolicy.Thereis,however,littlereasontobecomplacent.Significanttradeimbalancesstillexistthatcouldgeneratemuchdeepertradetensionsiftheyareleftunresolved.Moreover,acceleratingtheintegrationoftheleast-developedcountriesintotheglobaleconomywillsignificantlyenhancetheirprospectsforlong-

termgrowth.

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CommodityPrices.Theprospectsforasharprecoveryincommoditypricesarenotbright.Non-oilcommoditypriceswillincreaseonlyanaverageof3percentinnominalterms(0.5percentinrealterms)andarenotlikelytoreachandmaintaintheir1995-96peaksoverthe10-yearforecastperiod(figure1.10).Increaseddemandinindustrialcountrieswillprovidesomesupportforhigherprices,butsupplieswillcontinuetooutpacedemand.Technologicalimprovementshavereducedtheproductioncostsofmanycommodities,andcurrencydevaluationinmanyimportantcommodity-exportingcountrieswillcontributetoincreasedglobalsupplies.

EvenifOPECcontinuestowithholdoutputinthemediumtermtokeeppricesnear$20/bbl,oilpriceswillbeunderalmostconstantdownwardpressurebecauseoflimitedgrowthinthedemandforOPEC'scrudeoilandincreasingcompetitionfrombothoilandnon-oilenergyproducers.Productioncostsareexpectedtocontinuetodeclinebecauseoffurtheradvancesintechnology(oilsandsdevelopment,forinstance),includingthoseforcompetingfuelssuchasliquefiednaturalgas.Thisdevelopmenteffectivelyputsaceilingonoilpricesofaround$20perbarrelfortheforeseeablefuture.

Privatecapitalflows.Through2008netprivatecapitalflowsasashareofGDPareunlikelytoexceedtheirprecrisishighsofaround6percentformiddle-incomedevelopingcountries(''emergingmarkets").Butthereareanumberofreasonsprivatecapitalflowsshouldrecoverfromcurrentlevels.Technologicalimprovementsincommunicationsandinformationprocessing,financialinnovation,anddeeperfinancialintermediationshouldcontinuetobepropitiousforinternationalcapitalflows.Aresumptionoffastergrowthindevelopingcountrieswillgenerateincreasedopportunitiesforinvestmentandhencedemandforcapital.Prospectsformedium-termimprovementintheU.S.currentaccountbalance,sustainedcurrentaccountsurplusesindevelopedEurope,andadeclineinrealinterest

ratesshouldincreasethesupplyoffundsavailableforoverseasinvestment,whileAsiancurrentaccountsurplusesareverylikelytodecline.Inthelongtermtheglobalsupplyofsavingsshouldincreasewiththeagingofindustrialcountrypopulations.

Figure1.10Long-termtrendsincommodityprices,1990-20

Source:WorldBank.

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Box1.2Prospectsforanewroundofmultilateraltradenegotiations

TheWorldTradeOrganization(WTO)isonthevergeofinitiatinganewroundofmultilateraltradenegotiations.Thelastround-knownastheUruguayRound-wascompletedfiveyearsago.Whiletheresultingagreementmarkedsomnesignificantachievements,awiderangeoftrade-relatedissuesrangeoftrade-relatedissuesremaintobediscussedinanewround.

Pastachievementsandtheroleofdevelopingcountries

TheUruguayRoundAgreementledtofourbroadachivements:

1.furtherreformsoftraditionaltradebarriers,notablyintextileandapparel,services,andagriculture;

2.theestablishmentofframeworksfordealingwithlesstraditionaltradebarrierssuchasintelluctualpropertyrightsandtechnicalandsanitarystandards;

3.creationoftheWTO,withitsstrongdisputeresolutionmechanismandstrictdiscipline;and

4.increasinginfluenceofdevelopingcountries.

14

TheUruguayRoundAgreementwasperhapsmoreimportantthegeneralframeworkfordealingwithtrade-relatedissuesthanitwasforthequantiatativereductionsitmadeintradebarriers.Andtherehasbeensomeconcernregardingbacksliding-forexample,"dirty

tariffication"andback-loadingoftheMulti-FibreAgreement(MFA)reforms.Moreover,developingcountries,particularlythepoorest,havebeenslowtoimplementmanyelementsoftheagreementowinginparttoalackofeitherhumanorfinancialresources.Replacinglostfiscalrevenues,newreportingrequirements,andrequiredmodificationsofdomesticregulationsandprocedureshaveproventobeasignificant-andoftenoverlooked-burden.However,progresshasbeenmadeinsomeofthesectoralnegotiationssincetheendoftheUruguayRound,withagreementsintelecommunications,financialservices,andinformationtechnology.AnextensionoftheInformationTechnologyAgreementhasbeenpostponed,alongwiththetalksonlibealizingmaritimeservices(inwhichdevelopingcountrieshaveaconsiderablestake).

Abuilt-inagendaforfuturenegotiations.Apotentialagendaforthenextroundcouldeasilyincludetwodozentopicsbutwillnecessarilybepareddowntoashorter,moremanageablelist.Theso-calledbuilt-inagendawasessentiallydeterminedbytheUruguayRoundAgreement.Specifi-

Theriseinflowsfrominternationalcapitalmarketsislikelytobegradual,however.Theexperienceofthefinancialcrisisandtheshiftfromfixedtofloatingexchangerateregimesmayencouragebothborrowersandlenderstotakeamorecautiousapproach.Somedevelopingcountriesarelikelytomoveslowlytowardcapitalaccountliberalization,andthosewithfullconvertibilityarelikelytoimplementprudentialcontrolsandregulations.Greaterburdensharingwithprivateinvestorsreducesmoralhazardandincreasesinvestor'sriskperceptionswithrespecttoinvestinginemergingmarkets.

StricterregulationsforbanksintheBIS-areaafterthelossesofrecentyears,anddiminishedprospectsoffurtherderegulationofinstitutionalinvestmentindevelopingcountriesarealsolikelytodampenflowstoemergingmarkets.Significantvolatilityincapitalmarketflowscanbeexpected,withthemajorrisksarisingfromuncertaintiesintheworldeconomicenvironment,particularlytheperformanceoftheU.S.economyanddevelopmentsinJapan.

Policiesarelikelytobemoreencouragingforforeigndirectinvestmentascountriescontinuetovieforforeigncapitalandskills.Effortsarebeingmadetopromotelong-terminvestmentsratherthanshort-termflows.Somecountries,includingIndonesiaandKo-

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Box1.2(continued)

cally,itcallsforarenewalofnegotiationsintheagriculturalandservicesectors.Thereiswide-spreadagreement-thoughwithsomedissentingvoices-that

industrialtariffswillbeincluded,bothbecausetheyarestillatsignificantlevelsinmanysectorsandregionsandbecauseincludingthemofferstobroader,deeperreforms.Afutureroundwillmostlikelyconcentrateonreducingtradebarriersratherthanonreformingtheinstitutionalframeworksetupinthepreviousround.

Reachingconsensusonotheragendaitemsmayprovemoredifficult.Developingcountriesareparticularlywaryofenteringintonewagreementswheretheburdenofimplementationislikelytobeheavy-forexample,oncustomsvaluation.Theyarealsodisinclinedtoopenregotiationsinareasthatareperceivedtointroducenewbarrierstosubjectswhereobtainingagreementwillbedifficulttoachieveforassortedreasons,forexample,governmentprocurementandstatetradingrules,trade-relatedinvestmentmeasures(TRIMs),andtrade-relatedintellectualproperty(TRIPS).

Developingcountryinterests.Theinterestsofdevelopingcountriesgenerallylieinafewareas.Amongtheseare:

broad-basedreductionintariffandnon-tariffbarriers,thoughwithamorespecificconcerntolimitthescopeofescalatingandpeaktariffs;

oppositiontoanybacktrackingontheMFAphase-out;

obtainingcreditforpastunilateralliberalization;and

ensuringcommitmentstogreatermovementofpersons(socalled"mode4"liberalizationallowing,forexample,easiermovementofconstruction-relkatedlaborservices.

Ofgreaterrelativeimportancefortheleast-developedcountriesbuilding,implementationofexistingagreements,erosionofpreferences,andspecialanddifferentialtreatment.Differencesarelikelytoappearatthesectorallevel,mostparticularlyinagriculture.Agriculturalexporters,notablythosebelongingtotheCairnsGroup,willwanttoseefurtherprogressonagriculturaltradereform.Foodimporters,however,willbeconcernedabouttheimpactofreducedagriculturalexportsubsidiesonthetermsoftrade.

15

rea,haveimprovedexistingframeworksorestablishednewonestopromotedirectinvestmentandincreaseincentivesformergers,acquisitions,andcorporaterestructuring.Furtherprogresscanbeexpectedinprivatizationprograms.Easingownershiprestrictionsandopeningupprotectedcoresectorssuchastelecommunicationsandfinancetoforeigninvestorswillfurtherencourageforeigninvestment.Inadditiondevelopingrealfinancialandregulatoryinfrastructureshouldencouragelong-termstrategicinvestments.Forthesereasons,foreigndirectinvestmentislikelytoincreaseinlinewithGDPgrowth.

StructuralWeaknesses

Thefinancialcrisishasunveiledprofoundweaknessesnotonlyinthefinancialsystemsofdevelopingcountriesbutalsointheirabilitytointermediatedomesticsavingsandlargeforeigncapitalinflows.Thecrisishascontributeddirectlytotheriseinbadloans,weakened

thousandsofindividualfirms,andcreatedmanydirectandcontingentgovernmentliabilities.Thesizeoftheseliabilitiesislikelytoincreasebeforeitstartsdeclining.Thefundamentalsthatsupportgrowthinsomelargerdevelopingcountriesthusoffermorecauseforconcerntodaythantheydidbeforethecrisis.

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Developingcountriesfacemorethanneartermadjustmentmeasuresintheireffortstoestablishsoundfinancialmarketsandastrongerunderpinningforsustainablegrowth.Domesticsavingandinvestmentneedtobeencouraged.Thefiscalcostsofthecrisiswillneedtoberecovered,whileatthesametimeresourceswillberequiredtoboostthequalityofhumancapitalandphysicalinfrastructurenecessarytosustaingrowth,andinstitutionscapableofimplementingreformswillneedtobestrengthened.Areviewofthesefactorsforseverallargedevelopingcountrieshasledtosomedowngrading(0.3percentagepoints)ofassessmentsforlong-termgrowthfromtheprojectionspreparedayearago.TheserevisionsrangefromafullpercentagepointinECA,0.5pointsinSub-SaharanAfrica,and0.4pointsinSouthAsiato0.2pointsinLatinAmerica.Comparedwithactualgrowthintheprecrisisperiod,thelargestreductioningrowthprospectsisinEastAsia,whilemostotherdevelopingregionsareexpectedtoseefastergrowth(table1.7above).

AlthoughRussiaachievedstabilizationmorequicklythananticipatedin1999,recentdynamicsinthefundamentalsrequiredtosupportlong-termgrowthhavedeteriorated.RevisionsforSub-SaharanAfricatakeintoaccountthelikelihoodofamoreprotractedpathtoachievinglong-termgrowthpotentialinSouthAfrica.TherevisedforecastsforLatinAmericaarebasedonincreasingevidenceof"reformfatigue"inanumberofcountriesandtheneedforlonger-termfiscaladjustmentinBrazil.Moredetailedinformationonthelong-termforecastsforeachregioncanbefoundinappendix1.

RecentTrendsandProspectsforPovertyinDevelopingCountries

Recenttrends.Thepicturethatemergesattheturnofthecenturyisoneofstalledprogressforthepoorandofrisingnumbersofpoorpeopleinmostdevelopingregions.AccordingtorecentWorldBankestimates(WorldBank1999),thenumberofpeopleintheworld

livingonlessthan$1perdayin1998-1.2billion-wasvirtuallythesameasin1987.However,somechangesdidtakeplaceduringthisperiod.Thenumberofpoorroseto1.3billionintheearly1990s,butthendeclinedtoabout1.2billionin1996.Thepoorasashareofpopulationandthenumberofpeoplelivingonlessthan$1perdayhadbothdeclinedsubstantiallyinthemid-1990s.

16Theglobalfinancialcrisishaltedthisdecline,andpreliminaryestimatesfor1998indicatethatnofurtherdecreasehastakenplacesince1996(tables1.8and1.9).17

ThelargestchangeintrendoccurredinEastAsiaandPacific,theregionatthecenterofthecrisis.Thenumberofpeopleinpovertyintheregionhadfallensharplybeforethefinancialcrisis,from432millionin1993to265millionin1996.Thecrisisputanendtoalongperiodofrapidgrowthandledtosignificantincreasesinpovertyinthemostaffectedcountries(seechapter2).Whilethecrisiscountriesarenowshowingclearsignsofrecovery,itistoosoontoassesstheimplicationsforpoverty.

China-whichaccountedfor82percentofEastAsia'spoorestin1996-continuedtogrowthrough1998.Thenumberofruralpoorfellfromanestimated358millionin1990to208millionin1997,animpressiveachievement.However,surveydatafor1998showaslightincrease-from211to213million-inthetotalnumberofpoorinChinabetween1996and1998.

InSouthAsia,theincidenceofpoverty(theshareofthepopulationlivinginpoverty)declinedmoderatelythroughthe1990s,butnotsufficientlytoreducetheabsolutenumberofpoor.Theactualnumberofpoorpeopleintheregionhasbeenrisingfairlysteadilysince1987.InIndia,hometoalmosthalfoftheworld'spoor,therateofpovertyreductionappearstohaveslowedinthe1990s,particularlyinruralareas.Inaddition,thegapbetweensomeofIndia'slargestandpoorest

statesandthericherstatesisgrowing.India'spooreststatesexhibitslowprogressinhumande-

Table1.8aPopulationlivingbelow$1perdayindevelopingandtransitioneconomics,1987-98Populationcoveredbyatleastonesurvey

(percent)

Numberofpeoplelivingonlessthan$1aday(millions)

Headcountindex

Region 1987 1990 1993 19961998

Estimate19871990EastAsiaandPacific

90.8 417.5 452.4 431.9 265.1 278.3 26.6 27.6

ExcludingChina

114.1 92.0 83.5 55.1 65.1 23.9 18.5

EasternEuropeandCentralAsia

81.7 1.1 7.1 18.3 23.8 24.0 0.2 1.6

LatinAmericaandtheCaribbean

88.0 63.7 73.8 70.8 76.0 78.2 15.3 16.8

MiddleEastandNorthAfrica

52.5 9.3 5.7 4.9 5.0 55 4.3 2.4

SouthAsia 97.9 474.4 495.1 505.1 531.7 522.0 44.9 44.0Sub-SaharanAfrica

72.9 217.2 242.3 273.3 289.0 290.9 46.6 47.7

Total 88.1 1,173.21,276.41,304.31,190.6 1,198.9 28.3 29.0ExcludingChina

879.8 915.9 955.9 980.5 985.7 28.5 28.1

Table1.8bPopulationlivingbelow$2perdayindevelopingandtransitioneconomies,1987-98Populationcoveredbyatleastonesurvey(percent)

Numberofpeoplelivingonlessthan$2aday(millions)

Region 1987 1990 1993 19961998

Estimate19871990EastAsiaandPacific

90.8 1,052.31,084.41,035.8 863.9 66.1

Excluding 299.9 294.9 271.6 236.3 260.1 62.9 57.3

ChinaEasternEuropeandCentralAsia

81.7 16.3 43.8 79.4 92.7 92.9 3.6

LatinAmericaandtheCaribbean

88.0 147.6 167.2 162.2 179.8 182.9 35.5 38.1

MiddleEastandNorthAfrica

52.5 65.1 58.7 61.7 60.6 62.4 30.0 24.8

SouthAsia 97.9 911.0 976.0 1,017.81,069.5 1,095.9 86.3 86.8Sub-SaharanAfrica

72.9 356.6 388.2 427.8 457.7 474.8 76.5 76.4

Total 88.1 2,549.02,718.42,784.82,724.1 2,801.0 61.0 61.7ExcludingChina

1,796.61,918.82,020.52,096.5 2,168.9 58.2 58.8

Note:Thenumbersareestimatedfromthosecountriesineachregionforwhichatleastonehouseholdsurveywasavailableduringtheperiod1985ndash;98(formanycountriesmorethanonesurveywasavailable).Theproportionofthepopulationcoveredbysuchsurveysisgiveninthefirstcolulmn.Surveydatesoftendonotcoincidewiththedatesintheabovetable.tolineupwiththeabovedates,thesurveyestimateswereadjustedusingtheclosestavailablesurveysforeachcountryandapplyingtheconsumptiongrowthratefromthenationalaccounts.Usingtheassumptionthatthesampleofcountriescoveredbysurveysisrepresentativeoftheregionasawhole,thenumbersofpoorarethenestimatedbyregion.Thisassumptionisobviouslylessreliableintheregionswiththelowersurveycoverage.Theheadcountindexisthepercentageofthepopulationbelowthepovertyline.FurtherdetailsondataandmethodologycanbefoundinWorldBank(forthcoming-a)andChenandRavallion(forthcoming).

velopmentindicators,includinghealthandeducationindicators;lowgrowthrates,particularlyintheagriculturesector;inadequateinfrastructure;andweakandfragmentedinstitutions.Basedonexperience,thesestateswillnotseemuchimpactonpovertyevenwithhighergrowthrates.Ifpresenttrendscontinue,thebulkofthepoorinthesestateswillbeunabletoparticipateinfuturegrowth(RavallionandDatt1999).

ThenewWorldBankestimatesindicatethatAfricaisnowtheregionwiththelargest

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Table1.9ProjectedgrowthratesinrealpercapitaprivateconsumptionandchangesinGinicoefficientsfor1999-2008

ScenarioASlowgrowthandrisinginequality

ScenarioBInclusivegrowth

Region

Growthrate(percentperannum)

Changeininequality(percent)

Growthrate(percentperannum)

Changeininequality(percent)

EastAsiaandPacific

4.0 +10 4.9 0

EasternEuropeandCentralAsia

2.7 +20 3.7 0

LatinAmericaandtheCaribbean

0.6 +10 1.7 0

MiddleEastandNorthAfrica

0.4 +10 1.5 0

SouthAsia 2.4 +20 4.0 0Sub-SaharanAfrica

-0.1 +10 1.0 0

Source:WorldBank.

shareofpeoplelivingonlessthan$1perday,andprospectsforimprovementremaindim.Whileaveragegrowthratesroseduringthe1990sinmanyAfricancountries,theyremainbelowlevelssufficienttoreducethenumberofpoorpeople.InotherAfricancountrieseconomicgrowthremainedlowbecauseoftheproliferationofconflict,politicalinstability,and,insomecases,adverseweather.

InLatinAmericaandtheCaribbeanthepovertyratehasremainedroughlyconstantinthe1990s,despitetheaccelerationineconomicgrowthinmanycountriesinthemid1990s,andthenumberofpoorincreased.However,whiletheincidenceofincomepoverty(materialdeprivationasmeasuredbypercapitaconsumption)hasnotdeclined,socialindicatorshaveimproved:adultliteracy,lifeexpectancy,accesstosafewater,andinfantmortalityarenowatlevelsconsistentwithwhatwouldbeexpected

infantmortalityarenowatlevelsconsistentwithwhatwouldbeexpectedgiventheregion'slevelofeconomicdevelopment.

InBrazilpovertyfellbyabout30percentinthetwoyearsfollowingeconomicstabilizationin1994.PovertyindicatorsthenroseintheaftermathoftheAsiancrisis.ThisnegativetrendcontinuedaftertheRussiancrisis,andwillalmostcertainlyhaveworsenedduring1999.ThemostrecentpovertymeasurementsavailablefromthemonthlyemploymentsurveyshowthattheheadcountrateinmetropolitanareasinFebruary1999was10percenthigherthanbeforetheonsetoftheAsiancrisis.One-thirdofthegainsinpovertyreductionachievedaftertheRealPlanhavebeenundone.Brazilhasasignificantnumberofsocialprotectionprogramsthatprovidesomecompensationformanyofthoseaffectedbythecrisis,butmanyofthemostvulnerable,especiallythoseintheinformalsector,arenotprotected.Theunemploymentrateshowedaworrisomeincrease,reaching,andnowlevelingoffat,historicallyhighlevelsof7to8percentsince1998,comparedwith3to4percentin1993-96.Realwages,however,didnotdeclinesignificantlyuntilthefirstquarterof1999.

InCentralandEasternEuropeandCentralAsiatheindicationsarethattheupwardtrendintheincidenceofpovertyhasleveledoffinlinewiththelevelingoffofthedownwardtrendinGDP,althoughtheestimatesfor1998aretentative.InthecountriesoftheformerSovietblocpovertyrosemarkedlyfrom1990to1996.Chronicpovertyisemergingasavitalconcernintheregion,becauseevenincountrieswitharobustrecentgrowthrecordthegroupofchronicallypoorappearstobegrowing.

RealGDPpercapitainRussiacollapsedinthe1990s,decliningby41percentfrom1990to1999.Furthermore,inequality-asmeasuredbytheGiniindex-increasedsharplyfrom0.24to0.39fromthelate1980stothe

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mid-1990s(Rutkowski1999).Thenumberofpeoplelivinginpovertyrosedramaticallyasaresultofthesetwoforces.Theprofileofpovertyalsochangedduringthetransitionperiod,withlargenumbersofworkingandunemployedadultsandtheirchildrenjoiningtheranksofthe"oldpoor"frombeforethetransition(KlugmanandBraithwaite1998;Milanovic1999).

Prospectsforpovertyreduction.Whataretheprospectsforreducingpovertyinthemediumterm?Thissectionexploreswhatmightoccurunderdifferentassumptionswithrespecttoincomepoverty.Theshareofpeoplewhowillbelivingonlessthan$1or$2perdayinthefuturedependsonhowmuchpercapitaconsumptionlevelswillchangeandwhetherchangeswillaffectpeoplewithdifferentlevelsofconsumptionequallyorwillaffectsomegroupsmorethanothers.Forexample,ifaveragepercapitaconsumptionlevelsincreaseequallyforall-thepooraswellastherich-thentheshareofthoseconsuminglessthanthethresholdwilldecline.However,ifconsumptionlevelsincreasefortherichonly,thentheshareofthepoorwillremainunchanged.Theprocessesthataffecthowchangesinaggregateconsumptionlevelsaredistributedacrossthepopulationarenotwellunderstood,soformingajudgmentonhowmanypeoplewillbelivinginpovertyinthefutureisdifficult.

TheWorldDevelopmentReport1990onpoverty(WDR1990)(WorldBank1990)madeprojectionsfor2000oftheproportionsofthepopulationthatwouldbelivingonlessthan$1perdayin1985PurchasingPowerParitytermsundertheassumptionthat"thestrategyrecommendedinthereportgainedwideracceptance"(WorldBank1990,138).Underthisassumption,thereportforecastthattheglobalpovertyratewouldfallfrom32.7percentin1985to18.0percentin2000,representingacompoundrateofdeclineof3.9percentperyear.TheBank'slatestestimatesindicateafallinthepovertyratefrom28.3percentin1987to24.0percentin1998,implyingacompoundrateof

reductioninpovertyofonly1.5percentperyear.SotheWDR1990projectionsoverestimatedthesubsequentrateofpovertyreduction,althoughthereportdidstatethat"itwouldbepossibletodosomewhatbetter-ormuchworse"(p.138).

WhereweretheWDR1990projectionswrong?Intermsoftheaggregatenumbers,ChinaandIndiahavethegreatestweight,andbothexperiencedaslowerpaceofpovertyreductionthananticipated,eventhoughgrowthwasactuallyhigherthanpredicted.ThemainreasonswererisinginequalityinChinaandadiscrepancybetweengrowthratesinconsumptionasmeasuredbythenationalaccountsandbyhouseholdsurveysinIndia,withsurveyconsumptiongrowingmuchlessthannationalaccountsconsumption,andconsequentlyfarlesspovertyreductionthanexpected.

18IntherestoftheworldCentralandEasternEuropeandtheformerSovietUnionexperiencednegativegrowthandrisinginequality,whileLatinAmericaandtheCaribbean,theMiddleEastandNorthAfrica,andSub-SaharanAfricaexperiencedunexpectedlylowgrowth.

ThecaseofIndiaisworthhighlighting.Duringthe1990sthegrowthratesofconsumptionexpenditureperpersonfromtheIndianNationalSampleSurveyhavebeenappreciablylowerthanimpliedbytheconsumptioncomponentofthenationalaccounts.Possiblythiscapturesactualdevelopments(reflectingtheunderlyingdifferencesintheconsumptionconceptsusedbysurveysversusnationalaccounts).Morelikelyitstemsfromdataproblemsinoneorbothsources.Forexample,ifsurveydatafailtocapturegrowthinexpendituresatthehighendofthedistribution,theyunderestimategrowthinbothaverageexpenditureandinequality.

Thescenariosforpovertyin2008containedinthisreportfollowamethodologysimilartothatemployedintheWDR1990,buttheunderlyingassumptionsincorporatethelessonslearnedfromthat

experience.Thesescenariosarealsobasedonsurveyinformationformanymorecountries:96comparedwith22atthetimeofthe1990projections.

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However,theprojectionsshouldnotbetreatedasforecasts,butratherasrepresentingaplausiblerangeofpossibleoutcomesforpovertybasedonalternativeassumptionsaboutgrowthandinequality.Ourunderstandingofthequantitativedynamicsofchangesinpovertyandinequalityremainsincomplete(seetheendofthischapterforadiscussionoftheuncertaintiesinherentinprojectinggrowth).Therearealsolargeuncertaintiesabouttherelationshipbetweengrowthandinequalityandaboutchangesininequalitybecauseofthecomplexityoftheforcesatwork.Whilemostcountrieshaveexperiencedlittlechangeinaggregateinequalityovertime,thisisgenerallytheresultofpowerfulcountervailingforces.Totakeoneareaofinteraction,mostgrowingcountriesexperiencebothariseintherelativedemandforskillsandariseintherelativesupplyofskillsaseducationexpandsthatcanleadtosmallornegligiblechangesininequalityastheseeffectsbalanceout.

19

Wedeveloptwoscenariosforthenextdecade.ScenarioA-slowgrowthandrisinginequality-entailslittleprogressinreducingthetotalnumberofpoorinkeepingwiththeexperienceofthelastdecade.Scenariob-inclusivegrowth-triestocapturewhatisachievableiftherightcombinationofpoliciesandinterventionsleadstosustainedgrowthwithoutincreasesininequality.

InscenarioAallregionsexperiencerelativelylowgrowthratesbecauseofcyclicalboomandbustepisodes,andinequalityincreases.Therecentexperienceoflargevolatilityingrowthratesindevelopingcountries(seechapter2),togetherwithsubstantialneartermriskstotheoutlook,centeredintheindustrialcountries,suggestthatlonger-termgrowthratescouldbelowerthanprojectedinthebasecasediscussedearlier,especiallyamongthedevelopingcountries.This

growthscenariocombineselementsoftheneartermriskscenario-a"hardlanding"fortheU.S.economyandattendantspillovereffects-withapatternofmedium-termrecoveryandsubsequentrelapseofglobalgrowth(table1.10).Thedevelopingregionsmostadverselyaffectedarethosewithahighdependenceoncommodityexports(theMiddleEastandNorthAfricaandSub-SaharanAfrica)orarelianceonforeigncapitalflows(LatinAmericaandtheCaribbean).Moreover,althoughlessexposedtoexternaldevelopments,fiscalandfinancialdifficultiesinChinaandIndiaareheightened,spurringremedialpolicyresponsesthatdampengrowthfurtherduringthedownturns.

ScenarioAalsoassumesthatinequalityincreasesfromcurrentlevels(currentlevelsarebasedonthedistributionofconsumptionfromthelatestavailablesurveysforeachcountry).Whileinequalityhasshownamarkedrecenttendencytoincreaseinthetransitioneconomies,thishasnotbeentrueofalldevelopingcountries:inequalityhasincreasedinsome,buthasfalleninothers.However,scenarioAcapturesthewidespreadconcernaboutupwardpressureoninequalityacrossthedevelopingworldbybuildinginrisinginequalityinvaryingamountsbyregion.TheGinicoefficientisassumedtoincreaseby10percentinallregionsexceptCentralandEasternEuropeandtheformerSovietUnionandSouthAsia,whereitincreasesby20percent.InCentralandEasternEuropeandtheformerSovietUnionthisisconsistentwithrecentexperience(althoughtheincreaseininequalityappe

arstobelevelingoff).20InSouthAsiathe20percentincreaseisinkeepingwiththerisinginequalityobservedinsomecountriesintheregion,suchasBangladesh.ForIndiaweassumethattheweakereffectsofgrowthonpovertyobservedinthe1990salsostemfromrisinginequalitythatthesurveydatadonotfullycapture.Underthisscenario,inequalityinSouthAsiareachesthelevelsfoundinregionsofmediuminequality,suchasEastAsiaandtheMiddleEastand

NorthAfrica.LatinAmericaandtheCaribbeanandSub-SaharanAfricaremainthetworegionswiththehighestaverageinequality.Notethatthisscenarioimpliesincreasinginequalityalsoinregionswithverylowornegativegrowthrates(LatinAmerica,theMiddleEastandNorthAfrica,andSub-SaharanAfrica).AstherecentexampleofRussiaindicates,thesocialimplica-

Table1.10aPopulationlivingbelow$1perdayindevelopingandtransitioneconomiesfor1998-2008underscenariosofslowgrowthandrisinginequality(ScenarioA)andinclusivegrowth(ScenarioB)

Numberofpoor(millions)

Headcountindex(percent)

1998 2008 1998 2008Region Estimate Scenario

AScenario

BEstimate Scenario

AScenario

EastAsiaandPacific 278.3 182.8 72.1 15.3 9.2ExcludingChina 65.1 58.3 18.2 11.3 9.2

EasternEuropeandCentralAsia

24.0 45.7 7.4 5.1 9.6

LatinAmericaandtheCaribbean

78.2 130.8 74.7 15.6 22.9

MiddleEastandNorthAfrica 5.5 11.4 4.7 1.9 3.3SouthAsia 522.0 465.0 205.9 40.0 31.0Sub-SaharanAfrica 290.9 406.2 329.8 46.3 51.5Total 1,198.9 1,241.8 694.7 24.0 21.9

ExcludingChina 985.7 1,117.3 640.8 26.2 25.9

Table1.10bPopulationlivingbelow$2perdayindevelopingandtransitioneconomiesfor1998-2008underscenariosofslowgrowthandrisinginequality(ScenarioA)andinclusivegrowth(ScenarioB)

Numberofpoor(millions)

Headcountindex(percent)

1998 2008 1998 2008Region EstimateScenario

AScenarioB

EstimateScenarioA

ScenarioB

EastAsiaandPacific 892.2 632.0 482.7 49.1 31.8 24.3ExcludingChina 260.1 218.3 169.8 45.0 34.5 26.8

EasternEuropeandCentralAsia

92.9 100.8 46.3 19.9 21.2

LatinAmericaandtheCaribbean

182.9 227.3 183.9 36.4 39.8 32.2

MiddleEastandNorthAfrica 62.4 74.7 47.8 21.9 21.7 13.9

SouthAsia 1,095.9 1,083.0 945.4 84.0 72.2 63.0Sub-SaharanAfrica 474.8 604.2 568.0 75.6 76.6 72.0Total 2,801.0 2,721.9 2,274.1 56.0 48.0 40.1

ExcludingChina 2,168.9 2,308.2 1,961.2 57.6 53.5 45.5Note:ScenarioA-slowgrowthandrisinginequality-entailslittleprogressinreducingthetotalnumberofpoor,inkeepingwiththeexperienceofthelastdecade.ScenarioB-inclusivegrowth-triestocapturewhatisachievableiftherightcombinationofpoliciesandinterventionsleadstosustainedgrowthwithoutincreasesininequality.Source:WorldBank.

tionsofrisinginequalityinthecontextofworseningstandardsoflivingaremuchmoreworrisomethaniftheyareaccompaniedbyageneralincreaseinlivingstandards.

ScenarioBusesthegrowthforecastsinthebasecasediscussedearlier.Thebasecasepositsafairlysmoothgrowthpathforbothindustrialanddevelopingcountries,beyondnear-termrecoveryfromtherecentepisodeoffinancialcrises,towardpotentialgrowthratesbytheendofthe10-yearforecasthorizon.Contrarytocurrentconcerns,scenarioBassumesthatinequalityremainsunchanged,ashasbeenthecaseinmanycountriesoverlongperiods,andeveninthecountriesoftheformerSovietUnionrecentevidencesuggeststhat

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inequalityisstabilizing.Thusthescenariodescribeswhatcouldbeachievedifcountriesadoptedpoliciesandinterventionsthatfosteredinclusion,sothatallbenefitedequallyfromgrowth.(Seebox1.3formoredetailontheassumptionsunderlyingthetwoscenarios.)

Box1.3Technicaldiscussionofassumptions

Thisboxprovidescommentsontheassumptionsunderlyingthepovertyprojections.First,theprojectionsdonotallowforanycorrelationbetweengrowthratesandchangesininequality,forexample,higherinequalityaccompanyinghighergrowth.Experiencedoesnotsuggestthatastatisticallysignificantcorrelationexistsacrossdevelopingcountriesasawhole(RevallionandChen1997).Inreality,mostcountrieshavegrownwithoutexperiencinganylong-termincreaseininequality.TheWorldDevelopmentReport2000/01(WorldBankforthcoming-b)willexploreinmoredepththelinkagesbetweeninequalityandgrowth.

Second,theprojectionsarebasedonanassumptionabouttheprecisewayinequalitychanges,namely,thatthedistributionofpercapitaexpenditures(theLorenzcurve)shiftsbyanequalproportionatallpoints.Thisisonlyonewayinwhichinequalitymaychange.Forexample,anincreaseininequalitymayaffectonlythenonpoor,inwhichcasethepoorwouldmaintaintheirshareofincome,andpovertywoulddeclinejustasitwouldwithnochangeininequality.Povertyprojectionscanbesensitivetothewayinequalitychanges.

21Thiscanbeaseriousproblemwhenthepovertyrateislow,becauseestimatesatthetailsofthedistributioncan

naturallybequitesensitive.Forthebulkofthedevelopingcountries,however,thepovertyratesareasafedistancefromthetails.

Third,theimpactofchangesingrowthandinequalityontheincidenceofpovertyisprojectedusingamodelofthedistributionofconsumptionfittedtothedataforeachcountryateachbasedata,ratherthanusingfixedgrowthandinequalityelasticitiesofpoverty.22Researchershavefoundthattheseelasticitiescanchangesubstantiallyovertime,andtheyvaryfromcountrytocountry;thus,themodelusedletstheelasticitiesvaryovertimeandbetweencountriesconsistentlywiththedata.Forexample,theelasticityofpovertytogrowthtendstobelower(inabsolutevalue)inhigh-in-equalitycountries(Ravallion1997).Therateofpovertyreductionatanygivenrateofgrowthwillthenbelowerincountrieswithinitiallymoreun-equaldistributions,anditwilltendtofallwheninequalityincreases.

Theassumptionsunderlyingthetwoscenariosarereportedintable1.10.Tables1.8and1.10showtheresultingpovertyprojectionsfor$1and$2perday.Foreaseofreference,table1.11reportspopulationfigures.

Theresultsofthetwoscenariosareverydifferent.UnderscenarioAthenumberofpeoplelivinginpovertywouldremainvirtuallyunchanged,asintheexperienceofthepastdecade.In2008,1.2billionpeoplewouldstillbelivingonlessthan$1perday.Theregionalcomposition,however,wouldchangeconsiderably.ThenumberofpoorinSub-SaharanAfricawouldincreasedramaticallyfrom291to406millionpeople-almost52percentoftheregion'spopulation-andnumberswouldalsoincreaseelsewhereexceptinEastandSouth

Asia.Similarly,morethan2.7billionpeoplewouldstillbelivingonlessthan$2perday,morethanabillionofwhomwouldbelivinginSouthAsiaalone,withabout600millionmoreinSub-SaharanAfricaand400millioninChina.InLatinAmerica,CentralandEasternEurope,andCentralAsia,boththeincidenceofpovertyandthenumbersofpoorwouldincrease,whileintheMiddleEastandNorthAfricaaminorreductioninincidencewouldbeinadequatetoreducethenumbersofpoor.

ScenarioByieldsabrighterpicture.Thedifferenceislarge:thenumberofpeoplelivingonlessthan$1perdaydeclinestoabout700millionby2008,andthenumberofthoselivingonlessthan$2perdaytoabout2.3

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Table1.11Populationestimatesandprojections,1998and2008

Population(millions)

Region1998

estimated2008

projectedEastAsiaandPacific 1,817.1 1,987.4

ExcludingChina 578.5 632.7EasternEuropeandCentralAsia

466.1 475.5

LatinAmericaandtheCaribbean

501.9 571.1

MiddleEastandNorthAfrica 285.1 344.1SouthAsia 1,305.3 1,500SubSaharanAfrica 628.3 788.7Total 5,003.8 5,666.9

ExcludingChina 3,765.2 4,312.2

billion(asmallerdeclinethaninthenumberofthoselivingonlessthan$1perday).However,evenunderthemoreoptimisticassumptionsunderlyingthisscenario,progressinLatinAmericaandtheCaribbean,andespeciallyinSubSaharanAfrica,isinadequatetomakesignificantinroadsintothenumbersofthepoor,withacontinuedincreaseinnumbersinSubSaharanAfricainparticular.

Acomparisonofthetwoscenariosillustratesthehighdegreeofuncertaintyaboutwhetherthefuturepatternofdevelopmentwillbeaccompaniedbyseriousprogressinreducingpovertyandthesignificantriskthattheinternationaldevelopmenttargetforreducingincomepovertywillnotbeachieved(seebox1.4).Inaddition,therangeofwhatmightreasonablyoccurisevenlargerthanportrayed.OnecouldarguethatifstructuralandsocialproblemsarenoteffectivelytackledinSouthAsiaandEastAsiatherelativelyrobust

growthnowforecastunderthemorepessimisticscenariowouldbereducedfurther.However,basedonexperiencefromacrossthedevelopingworld,morerapidgrowthandreductionsininequalityare,inprinciple,achievableinLatinAmericaandtheCaribbeanandSubSaharanAfrica,aswellaselsewhere.

Thefundamentalmessageofthescenariosisthecentralityofeffectivepublicactionattheinternationalandcountrylevelstodeveloptheinstitutionsandpoliciesthatwillbringaboutinclusivegrowth.Thedownsiderisksaredevastatingfortheprospectsofmillionsofpeopleinthedevelopingworld,thosenowlivingindesperatelypoorconditions;thosewhowouldbebornintoalifeofpoverty;andthoseatriskoffallingintopovertybecauseofthenational,local,andpersonalrisksthatwillcertainlypersist.

Whatpoliciesandinterventionscouldleadtoapatternofrapidandequitablegrowth?ThisisoneofthecentraltopicsoftheforthcomingWorldDevelopmentReport2000/01(WorldBankforthcoming-b)onpovertyanddevelopmentandtheissuescanonlybetouchedonhere.Whilesignificantuncertaintysurroundsthequantitativedimensionsoffuturechangesinpoverty,weknowagreatdealaboutthekindsofpublicactionthatareeffectiveinachievinginclusivedevelopment.Attheinternationallevelmeasurestoensuresteadygrowthindemandforproductsproducedbythedevelopingworldarecrucial.Thiscanbefosteredthroughsustainedgrowthintheindustrialcountries;openingoftrade,especiallyinagriculture,butalsoinotherlabor-intensiveactivities;actionsthatreducevolatility;and,ofgreatimportanceforlowincome,aid-dependentcountries,theeffectiveimplementationofanenhancedHIPCInitiativewithintheframeworkofanoverallpoverty-orientedprogramofinternationalassistance.

Atthenationallevel,rapidinclusivegrowthrequiresinstitutionsandpoliciesthatbothencouragehighlevelsofprivateandpublicinvestmenttocreatejobs,services,andtheinfrastructurenecessaryto

expandopportunitiesforthepoorandleadstogainsintheirhumanandphysicalassets.Examplesarepoliciesthatreducedisparitiesingrowthratesbetweenurbanandruralareasbyfosteringthedevelopmentoftheruralnonfarmsector,policiesthatensureaccesstogoodqualityeducationforallandanequitabledistributionofproductiveassetssuchasland,measuresthattackletheeconomicandphysicalinsecuritythatthepoorface,andpoliciesthat

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fostermechanismsthatgiveavoicetothepooratthelocallevelandensurethatformalinstitutionsrespondeffectivelytotheirdemands.

ManyobserverswouldjudgethatIndia,forexample,whichiscentraltotheglobalpictureofpoverty,isvulnerabletopressuresforrisinginequalityeven,orperhapsespecially,ifitundergoesrapidoverallgrowth.Forstructuralandinstitutionalreasonsthepoormaybeparticularlyill-equippedtoparticipateinsuchgrowth,notablybecauseoflowlevelsofeducationandhealth,andbecausemanyarelivinginstateswithweakinstitutions,aheritageofdistortedpolicies,andcomplexanddeepsocialdivisions.Toincludethepoorinthegrowthprocess,thegovernmentwouldhavetoconfrontthelargedifferencesbetweenrapidlygrowingandlaggardstatesandthedismalstateoftheeducationsystemandotherpublicservices,especiallyinthepoorerstates,andensurethatlocalelitesdidnotcapturedecentralizationprocesses.InChinathegovernmentwouldhavetoconfrontpovertyinthemorebackwardregionsandamongminoritygroups.Ifequitablegrowthwereachieved,thenumberofpoorpeopleinSouthAsiawouldbecutbymorethanhalfandinChinatoafourthofcurrentlevels.

Asnotedearlier,inSub-SaharanAfricaandLatinAmericaeventhecombinationofasmoothtransitiontopotentialgrowthandnoincreaseininequalityinscenarioBwouldnotleadtoareductioninthenumberofthepoor.Fastergrowthratesandareductionininequalitywouldbeneeded.InLatinAmericaareductionininequalityoftheorderof10percentcouldreducethenumberofpeoplelivingonlessthan$2perdayfrom184to142million.InSub-SaharanAfricathatwouldnotbesufficient:adeclineininequalityof10percentormoreandanincreaseingrowthratesof20percentormoreabovetheassumptionsofscenarioBwouldbeneededjusttokeepthenumberofpoorpeopleconstant.

IfEastAsiaandSouthAsiaachievetheratesofgrowthandchangesininequalityexploredabove,theregionalcompositionofpovertywouldchangemarkedly,withalargeriseinSub-SaharanAfrica'sshareoftheworld'spoor.

Notethatwehaveonlyexaminedtheimplicationsoftheexpectedgrowthratesforthetotalnumberandshareoftheincomepoor.Thishidesmanyissues.Evenwhentheaggregatepovertyrateisfalling,therewilltypicallybebothlosersandgainersamongthepoor,reflectingheterogeneityinthecircumstancesofpoorpeople.Evenwhentheincomesofpoorfamiliesarerisingrapidly,theymaynotbeabletogetadequatehealthcareorschoolingfortheirchildren,becausenotenoughoftheeconomy'sgrowthisbeingusedtoimprovekeypublicservices,withfurtherimplicationsforthesustainabilityoftheincomepovertyreduction.Conversely,evenwithslowgrowthinincomepoverty,effectivepublicactioncanresultingainsinotherdimensionsofwellbeing.Theresultspresentedheregiveusabroadpicture,butmoredetailedmicroeconomicanalysisisneededtounderstandsuchdiverseimpactsandcompletetheoverallpictureofhowthelivingconditionsofthepoorareevolving.

RiskstotheForecastandaLow-CaseScenario

Inlightofthevolatilityoftheinternationalenvironment,themacroeconomicforecastsdiscussedabovearesubjecttovariousrisks.AnanalysisoftheforecastingerrorsthatoccurredinrelationtotheonsetandeventualdepthofthecrisisinEastAsiaillustratesthesignificanceoftheserisksinanenvironmentofdeeperfinancialintegration(box1.3).Alow-casescenarioisdevelopedtohighlighttheprincipalrisksattachedtothebaselineforecast.Thepotentialforeconomicdisruptionsduetothe''millenniumbug"isdiscussedinbox1.4.

Recentsignsofrecoveryfromtheglobaleconomiccrisesof1997-98areencouragingbutobviousvulnerabilitiesremain.Asiaisbeginning

torecover,butitsstructuralweaknesspersists.LatinAmericaisstillinrecession,andseveralcrisiscountriesremainexposed

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Box1.4Cantheinternationaldevelopmenttargetforreducingincomepovertybeachieved?

TheInternationaldevelopmenttargetforincomepoverty,oneofthetargetsoftheInternationalDevelopmentGoals,istoreducetheproportionofpeopleinabsolutepovertybyhalfbetween1990and2015.

25Atagloballevel,thisisinterpretedasreducingtheshareofpeoplelivingbelow$1perday(atthenationallevelusingnationalpovertylineswouldbeappropriate).Theprojectionexerciseundertakenforthisreportdoesnotexplicitlyassesstheachievabilityofthistarget(seeDemeryandWalton1988).However,theimplicationsofthescenarioexerciseareillustrative.Underascenariowithaplausible,butpessimistic,rangeofassumptionsongrowthandinequalitychanges(scenarioA),theworldwouldnotbeontracktoachievethetarget.OnlyEastAsiaandPacific(undertheassumptionsofrelativefastgrowthinthatregion)wouldextentitsgreatgainsforthe1990sandclearlyreachthegoal.Bycontrast,ifthescenarioofmorerapidandinclusivegrowthweretooccur(scenarioB),thetargetcouldbealsobeachievedinSouthAsiaandintheworldbeontracktoreachthetarget.Asnoted,thesefindingsarenotpredictions,butareinclusivedevelopmentinallcountriesandthemagnitudeofthechallengeinregionswithweakerprospects,especiallySub-SaharanAfrica.

toasuddenchangeinsentiment.Themostlikelyglobalscenarioinvolvesanupturningrowthforbothindustrialanddevelopingcountriesoverthe

nextfewyears.Buttheunderpinningsofgrowth,especiallyinthedevelopingcountries,remainfragile.Capitalflowstoemergingmarketscontinuetobescarceandexpensive.Insuchanenvironment,theprospectiveunwindingoflargeimbalancesintheindustrialcountriespresenttheclearestpotentialrisksfortheseprojections.Chiefamongtheserisksaretheconsumptionboom(whichisbeingdrivenbythestockmarket)andwideningexternaldeficitintheUnitedStates,andthecontinuinguncertainoutlookforJapan.

Table1.12World,industrial,anddevelopingcountriesinthelow-casescenario(annualpercentagechange)

EstimateLow-casescenarioBase-casescenarioIndicator 1999 2000 2001 2002 2000 2001Realoutput(followingadjustment)World 2.6 1.2 1.2 2.9 2.9 2.8

G-7countries 2.6 0.6 0.4 2.2 2.4 2.1Developingcountries 2.7 2.3 2.9 4.8 4.2 4.5

Sub-SaharanAfrica 2.3 2.0 2.4 3.1 3.1 3.4EastAsia 5.5 4.5 4.3 6.4 6.2 6.2

ASEAN-4a 1.6 2.4 2.5 5.6 4.4 4.8SouthAsia 5.4 3.9 3.9 4.6 5.5 5.3EuropeandCentralAsia 0.3 1.0 2.3 3.9 2.5 3.3LatinAmericaandtheCaribbean -0.6 -0.3 0.3 4.1 2.7 3.5MiddleEastandNorthAfrica 2.0 1.4 2.1 3.5 3.2 3.5

a.Indonesia,Malaysia,thePhilippines,andThailand.Source:WorldBankstaffestimates,November1999.

Box1.5FailingtoforecasttheseverityoftheEastAsiancrisis

24

MuchhasbeenwrittenaboutthefailuretopredicttheoutbreakoftheEastAsiancrisis,butthevirtuallyuniversalfailuretoanticipatetheseverityofthecrisisonceithaderuptedmayhavebeenevengreatershortcoming.ThissectionattemptstoidentifythemainsourcesoferrorinWorldBankforecastscompletedattheendof1997,whenthecrisishadalreadyspreadthroughoutSoutheastAsiaandKorea.Theseforecastsmeshtogetherviewsdevelopedbyregionaleconomicspecialistswithamoresystematiclarge-scaleglobalmacroeconomicmodel.Asignificantportionofthefailureisassignedtotheinadequaterepresentationoffinancialmarketsinmacroeconomicmodels,whetherexplicitlyformulatedorrepresentingthewayeconomistsinterpretedevents.

AJanuary199825analysisofthelikelymacroeconomicconsequencesofthemostcountriesandwasabletoanticipatesomeofthemainfeaturesofthesubsequentworldcrisis.Butitbadlymissedthemagnitudeofchangeacrossanumberofimportantmacroeconomicdimensions(seetablebelow).Chiefamongthesewere:

theextentofthedeclineindomesticdemand,especiallythemassivedropininvestment;

theunexpectedlysevere18percentdeclineinimportvolumes;

weakergrowthinexportvolumes26andthesharpdeclineindollarexportprices,whichledtooverestimationofexportvaluesexpressedindollars;and

thelargeshifttocurrentaccountsurplus(theexpectationthattheywouldcometonearbalancein1998turnedouttobewidelyoffthemark).

Severalofthecrisiscountrieshadenjoyedavirtuallyuninterruptedperiodofgrowth(inthe6-8percentrange)fornearly30years.Thus,aforecastthatGDPwoulddecline,albeitmodestly,rep-

Analysisofforecasterrorsfor1998,EastAsia-5

Estimate Actual

GDPgrowth(percent) -0.2 -7.7

Domesticdemand -6.0 -15.0

Totalinvestment -13.5 -31.3

ExportsGNFSvolumea 18.0 10.6

ImportsGNFSvolumea -0.8 -18.0

Currentaccountbalance(billionsofU.S.dollars)

7.3 66.2

PercentageofGDP 0.8 10.8

Merchandiseexports(billionsofU.S.dollars) 392.5 329.6

Merchandiseimports(billionsofU.S.dollars) 362.8 268.8

Balanceoftrade(billionsofU.S.dollars) 29.7 60.8

ExportpriceinU.S.dollars(percent) -5.9 -15.8

ImportpriceinU.S.dollars(percent) 1.2 -8.2

Termsoftrade(percent) -7.0 -8.3

a.GNFS-goodsandnonfactorservices.

Source:WorldBankstaffestimates.

Box1.5(continued)

resentedaseriousdeviationfromthetrendgrowthrate.ItisclearinhindsightthattheassessmentsfailedtoincorporatesomeimportantfeaturesoftheAsianeconomiesandofthechannelsfortransmittingthecrisistocountriesbothwithinandoutsidetheregion.Theforecasterrorsmaybetracedtothreeinterrelatedfactors:

Theinteractionsofforeigncreditandthedomesticfinancialsystem.Theextentofthereversalofcapitalflowsandthefinancialpanicinducedbyfearsofacurrencydevaluationwerenotadequatelyanticipated.Eveniftheyhadbeen,theimplicationsoftheselargechangesinthecorporateandhouseholdbalancesheetsoninvestmentandconsumptionwouldnothavebeeneasytoquantify.Thustheprofoundeffectsofthecreditsqueezewerenotpredicted.Curtailmentofworkingcapitalandexportcredit-whichwerenotreflectedinthemodel-appeartohavecontributedtothemutingoftheexportsupplyresponse.

Spillovereffects.TheextentandrapidityofspillovereffectsfromThailandtoneighboringcountriesandKoreacontributedtounderestimatesofthedepthoftherecssioningeneralandtheweakerthanexpectedperformanceofexportsinparticular.Themechanismsthroughwhichsomeofthesespillovereffectsaffectinternationalfinancialmarketsarenotclearlyunderstood,andtheyarenotmodeledbeyondthestandardlinkagesthroughinternationaltrade,prices,andinterestrates.Evenwherebilateraltradelinkagesweresmall,theThaidevaluationwasseenasawarningthatcountriesinsimilarpositioncouldbehit.

Theregionaldownturn.First,inaregioninwhich50percentoftradeisconductedamongregionalpartners(includingJapan),thesimultaneousdownturninimportantexportmarketsandcurrencydevaluationoffsetsomeoftheanticipatedboosttocompetitivenessandexportgrowth.Second,theextentofthedeclineindollar-exportpricesfromtheregionplacedadditionalconstrainsondollarrevenues,pushingmoreadjustmentofthecurrentaccounttotheimportside.Third,despitereneweduncertainties.Japanwasanticipatedtogrowatmore

orless1percentin1998,wheninfactGDPcontractedbyalmost3percent.TherecessioninJapanisestimatedtohaveresultedinaswingtothenegativeofabout5percentagepointsinexportgrowthforthefiveEastAsiancrisiscountries.

AheuristicdecompositionofGDPgrowthforecasterrors,1998(percent)

ThailandMalaysia Rep.of

Korea

Indonesia

GDPgrowthforecasterror -4.5 -10.4 -6.0 -12.3

EffectsofJapanrecession -0.8 -1.5 -0.5 -0.8

Effectsofregionaldownturn -1.0~ -2.8 -0.5 -0.8

Termsoftrade(percentageofGDP)

-0.7 -0.5 -1.0 -0.5

Residualeffects -2.0 -5.6 -4.0 -10.2

Memoitems

ProportionexplainedbyJapan,regionaldownturn,andtermsoftrade 55 45 33 17

Proportionattributabletobalancesheetandfurthercontagioneffects 45 55 66 83

Source:Dadush,Riordan,andWolfeforthcoming.

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Box1.6ThepossibleimpactoftheY2Kbugondevelopingcountries

Onerisktotheshort-termforecastisthepotentialimpactoftheY2Kbug,acomputermalfunctionthatmayaffectdata-sensitivecomputerprograms.Fortwodecadescomputerprogrammersusedonlytwodigitstorefertocalendaryears.Thispracticesavedpreciousmemoryandincreasedprocessingspeedbutmademanyprogramssusceptibletofailureintheyear2000,sincecomputersmightintrpretthedigits"00"as1900ratherthan2000.Thisproblemcouldhaveadrasticimpactonoperationssupportedbycomputers,causinganythingfromthetransmissionofincorrectdatatothecompletecollapseofessentialsystems.Theactualprovisionofcriticalservicessuchaspower,water,andtelecommunicationsisnotonlyverydependentondates,andtheseserviceswerethefirsttargetsofremediationefforts.Severeinterruptionsintheseareasarenotlikely.Problemsaremorelikelytooccurinsupportoperations(suchasbuildingandrepairsystems)thatcouldrequiretime-consumingrepairsanddegradeservicesovertime.

30

Governmentsandprivatesectorfirmsintheindustrialcountrieshavemadeextensiveeffortstocorrectaffectedsoftwareprogramsandimbeddedchips,andseveralrecentpapersreportalowprobabilityofmajordisruptionsineconomicactivityinthenewyear.31TheUnitedStatesmayhaveresolvednearlyallY2Kproblemsinfinancialinstitutions,electricutilities,

aviation,telecommunications,andthefederalgovernment.However,problemsremaininlocalgovernment,healthcare,educationandsmallbusiness.32Similarly,mostoftheindustrialcountriesreportthatbyDecember1999Y2Krelatedproblemswillbefixedinmostsectors,particularlythekeysectorsoffinance,energyandairtransport.33However,theInternationalY2KCooperationCenterreportsthaterrorsinbusinessoperations(suchasinbilling)maycreasedbacklogsanddelaysinoperationsandincreasedbusinesscosts.ForecastsoftheimpactoftheY2Kbugaresubjecttoconsiderableuncertainty,giventheimmensenumbersofsystemsaffected,thedifficultiesinfindingallpotentialproblemsandintestingsystemsthathavebeenfixed,andtheinevitablerelianceonself-reportingratherthanindendentverification.

Manyalternativescenariosforglobalgrowthandfinancialflowsarepossible.Anextremeyetplausible"downside"caseillustratespotentialchangesinthefinancingrequirementsofdevelopingcountrieswithinaglobalenvironmentofcrisis-triggeredinthiscasebydevelopmentsintheindustrialcountries.

OnepotentialscenarioenvisagescontinuedrapidgrowthinU.S.domesticdemandovertheremainderof1999andearly2000,fuelledinlargepartbyequitymarketgains.Inthecontextoftightlabormarkets,globalrecovery,andfirmingcommodityprices,thisgrowthclearlysignalsthatinflationwillaccelerate.Intheearlymonthsof2000,theFederalReserverespondsassertivelytothepotentialupturnininflationbyincreasingtheFedFundsrateby100basispoints.Marketparticipantsoverreactintheirreassessmentofequityvaluationlevelsinlightofchangesintheprospectivegrowthenvironment,andequitypricesfallbysome30percent.Inasecondandensuing

response,theFederalReservelowersratesbysome200basispointstorestoremarketconfidence,andthedollarfallsby15percentagainstmajorpartnercurrencies.Inconsequence:

Thesedevelopmentsaretransmittedrapidlytoequitymarkets,andtheeffectoneconomicactivityinEuropeandJapanisimmediate.Wealtheffectsinallthreeblocsdampenconsumptiongrowth,especially

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Box1.6(continued)

Alreadythereareindicationsthatthemillenniumbugishavingsomeimpactonfinancialmarkets,anddevelopingcountries'accesstoexternalcapitalhasbeenadverselyaffectedastheyearendapproaches.Themarketsarepricinginaliquidityshortageinthenewyear,sinceforwardcurvesanticipateariseof50basispointsintheU.S.dollarLIBORinJanuary2000.ThissituationmayreflectthepotentialforY2Kdisruptionsorconcernthatpublicanxietyoverthemillenniumbugcouldincreasethedemandforcash.

Remedialmeasuresindevelopingcountriesappeartobelesscomplete.Awarenessoftherisksposedbythemillenniumbughascomelaterthaninindustrialcountries.InthelasttwoyearsgovernmentsinafewofthelargercountriesandtheWorldBank(throughtheinfoDevprogram)havehadsomesuccessinincreasingawarenessoftheY2Kprobleminthedevelopingworld.Developingcountriesarelessreliantoncomputersystemsthanindustrialcountries,buttheyhavedevotedfewerresourcestofixingtheirsystems,inpartbecauseworkerswiththerequiredexpertisearescarce,andmanyhavebeenattractedbyboomingdemandfortheirskillsinindustrialcountries.

InAugust1999mostofthe72developingcountriesrespondingtoquestionsonY2Kreadinessreportedonlylimitedvulnerability.

34AllproblemswouldberesolvedbyDecember1999.TheU.S.StateDepartmenthascarriedoutanevaluation

ofpotential(whichrepresnt87percentoftotalGDPinthedevelopingworld),focusingontheprospectsforkeysectors.Countriesaccountingfor32percentofthesampleGDPhadalowriskofeconomicdisruptions,countrieswith57percentofsampleGDPmoderaterisk,andcountrieswith10percentofsampleGDPhighrisk.35TheregionswiththemostcountrieswithhighriskwereECAandSub-SaharanAfrica.BycontrastseveraloftheLatinAmericancountrieshadlowrisk,andonlyafewmoderaterisk.ItisimpossibletotranslatethesesubjectiveimpressionsoftheriskofeconomicdisruptionsintoplausibleforecastsoftheimpactofY2Kondevelopingcountries'growth.TherisksofY2Kcausinganeconomicdownturnindevelopingcountriesasagroupappeartoberemote,butneverthelessitisprudenttoanticipatesignificantproblemwiththenewyear.

intheUnitedStates,andinvestmentslowssharply.27TheincipientEuropeanrecoveryismuted,whileJapan'slackoffiscalheadroomleadstoarelapseintorecessionaryconditions.GrowthintheG7falls1.8and1.7percentagepointsbelowthebaselinein2000and2001respectively,whilesG-7importdemanddrops4and3.5percentagepointsbelowbaseinthesameyears.

Fordevelopingcountries,effectsaretransmittedthroughafurtherslowinginexportmarketgrowth,declinesinoilandnon-oilcommoditypricesbecauseofdeterioratingdemandconditions,andincreasedriskaversioninfinancialmarkets.Riskaversionreducesemergingmarkets'

accesstofinancingfromsourcesotherthandirectinvestment.Forlow-andmiddle-incomecountries,thesedevelopmentsopenanex

antefinancinggap-thatis,anincreasedneedforadditionalfinancingtomaintaindomesticdemandinthefaceofadverseexternalshocks.Thatneedpeaksatsome$100billionin2001.28Additionally,asimulationofthesupplysideofinternationalcapitalmarkets,usingtheassumptionsofthelow-casescenario,suggestsareductioninflowsof$75billionversusbaselinelevels.29Ineffect,theimbalancebetweensupplyanddemandinexternalfinancingfordevelopingcountrieswidensto$175billionagainstthebaseline.

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Althoughpolicyresponsestotheseexternalcircumstanceswouldvarywidelyacrossdevelopingcountriesdependingoncurrentconditions,mostcountrieswouldbeobligedtoadjustthroughacompressionofdomesticdemandandimports.Anassumedclosureofthefinancinggaponthedemandside(almost$100billion)resultsinalossof2percentagepointsofgrowthfordevelopingcountriesasagroupinboth2000and2001,implyingalossofnominalGDPofsome$260billion.LatinAmericaandtheCaribbeanishardesthit,andcontinuesinrecessionwithgrowthrates3percentagepointslower,whilethenascentrecoveryintheEastAsiancrisiscountriesslowsconsiderably(table1.12).

WorldGDPgrowthat1.2percentin2000(intechnicalterms,nearlyaglobalrecession)undersuchascenariowouldmarktheweakestperformancesincethecrisisyearsof1982-83,whenhighinterestratesanddebtstalledtheworldeconomy.Andrecoveryofworldtradeandactivitywouldlikelybeprotractedthrough2002,aspolicyresponsesintheindustrialcountriestakeeffectwithsomelag.Duringthisinterval,anddespitemacroeconomicadjustmenteffortsamongdevelopingcountriestostemwideningcurrentaccountdeficits,a$75billionshortfallinexternalfinancingpersists(thereductionofprivateflowsfromthesupplyside).Thisgapwouldneedbefilledbysomecombinationofreservedraw-downsamongdevelopingcountries,substantialincreasesincounter-cyclicalfundingfromofficialsources,bothmultilateralandbilateral,aswellasadditionalexpostmacroeconomicadjustmenteffortsbydevelopingcountries.

Notes

1.GlobalDevelopmentFinance.April1999.DevelopmentProspectsGroup,WorldBank,Washington,D.C.

2.Aggregaterealpercapitaincomesin1999areexpectedtodecline

orstagnateparticularlyinLatinAmerica,Sub-SaharanAfrica,andtheformerSovietUnion,aswellasinselectedoilexportingcountries.

3.Thoughrecentdataanddefinitionalrevisionshavebroughtthehouseholdsavingratetopositiveterritory.

4.Calibratedtothe1995GlobalTradeAnalysisProject(GTAP)database.

5.SeeMcKibbinandMartin(1999)forasimilaranalysisthatalsoincludestheeffectsoffinancialtransmission.

6.ThedemandshockinEA-5andJapanwassimulatedbyshockingfactorproductivity.

7.Relativepricechangesarewithrespecttothepriceofindustrialcountries'manufacturingexports.

8.Evidencesuggeststhattherewasmoreadjustmentinso-callednecessitiesthanthisanalysisindicates.Inparticular,itappearsthathouseholdsadjustedconsumptionpatternstopreserveeducationalexpenditures,whichunfortunatelyarenotidentifiedseparatelyinthehouseholdconsumptionbasket.

9.Chapter4containsabroaderdiscussionoftheimpactofthecrisisoncommoditymarkets.

10.FDIapprovalsdeclined80percentfromtheir1998levelsinIndonesiainthefirstquarterof1999,21percentinChinaduringJanuary-July1999,and17percentinThailandduringJanuary-May1999.

11.Formoreinformation,seethewebsitefortheinitiativeat(www.worldbank.org/hipc).

12.Inthisindexoffinancialconditionsinemergingmarkets,acurrencyappreciationistakenasindicativeoflooserfinancialconditions,reflectingreducedcapitaloutflowsorincreasedinflows.

13.WorldBank1998,Chapter1.

14.Membership,asofNovember15,1999,standsat135countries-overthree-quartersofthemdevelopingeconomies.Forty-fivehavejoinedsincethestartoftheUruguayRoundnegotiationsinthemid1980s.WiththerecentlandmarktradeagreementbetweenChinaandtheUnitedStates,theformerisexpectedtojointheWTObyearly2000.

15.TheWorldBankisactivelyassistingdevelopingcountriesintheirpreparationsforthenexttradenegotiationround.ForfurtherinformationontheseactivitiesandtheWorldBank'sbroaderresearchagendaontrade,see(www.worldbank.org/trade).

16.Whenshiftingfrom1985to1993PurchasingPowerParityterms,thepovertylineshadtoberecalculated.Asinthepast,thelowerlinewassetatthelevelofthelowestpovertylinesinlow-incomecountries.Thelinesusedforthenewestimatesareequalto$1.08perdayand$2.15perdayin1993PPPterms(referredtosyntheticallyas$1and$2perdayinthetext),correspondingtothemedianofthe10lowestpovertylinesinlow-incomecountries,anddoublethatlevel.SeeChenandRavallion(forthcoming)andtheSeptember1999globalpovertyfigures(WorldBank1999).

Page43

17.Thefiguresfor1998arepreliminaryestimatesbasedonsurveysforthatyearforahandfulofcountriesandonoldersurveydata,updatedusingestimatedgrowthratesinrealprivateconsumptionpercapita,forthemajorityofcountries.

18.NotethaturbansurveydataforChinadonotincludemigrantsfromruralareastothecities.Thisprobablyleadstoanunderestimationoftherateofpovertyreduction.MeasurementmethodsintheofficialtabulationsfromthesurveydataforruralChinaarealsobelievedtooverestimatetherateofincreaseininequality(RavallionandChen1999).

19.Moreover,therelationshipbetweeninequalitiesinthereturntoskillsandinequalitiesinoverallincomeorconsumptionisalsohighlycomplex,anddependsonpatternsoflaborforceparticipation,householdcomposition,andtransfers,amongotherfactors.

20.Notallcountriesintheregionhaveexperiencedsignificantincreasesininequality.CountriessuchasHungaryandPolandhavenot,butotherssuchasRussiahaveexperiencedsignificantincreases.

21.Toexplainthisassumptioninmoredetail,weneedtoconsidertheLorenzcurve,giving(ontheverticalaxis)theshareoftotalincome,L(p),heldbythepoorestpfractionofpeople(onthehorizontalaxis).TheprojectionsassumethattheLorenzcurveshiftsinoroutbythesameproportionatallpoints,relativetothelineofequality(inwhicheveryonehasthesameincome,thatis,L(p)=p).SothenewLorenzcurveisgivenbyL(p)-g.(p-L(p)whereL(p)istheoldLorenzcurveandgistheproportionateincreaseintheGiniindex(Kakwani1993).Thisassumption,whichiscomputationallyconvenient,iscommonlymadeindistributionalanalysis,butrepresentsonlyoneofthepossiblewaysinwhichinequalitymaychange.PovertyprojectionscanbesensitivetoseeminglysubtledifferencesinhowtheLorenzcurveshiftsovertime(Ravallion1999).Asmentionedinthetext,thiscan

beaseriousproblemwhenthepovertyrateislowbecauseestimatesatthetailsofthedistributioncannaturallybequitesensitive,butforthebulkofthedevelopingcountriesthepovertyratesareasafedistancefromthetails.HowmuchofadifferencethiswouldmakeforaggregatepovertynumbersisunclearErrorsinonedirectioninonecountrycouldbeoffsettosomeextentbyerrorsintheotherdirectionelsewhere.

22.ThemodelusesflexiblefunctionalformsfortheLorenzcurve,andthemodelspassthroughaseriesofteststoassurethattheyfitwellandsatisfythepropertiesrequiredofvalidLorenzcurves.

23.ForinformationontheInternationalDevelopmentGoalsandtheothertargetsforimprovingwellbeing,see(http://www.oecd.org/dac/Indicators).

24.Thisboxisbasedon"SomeLessonsfromForecastingErrorsintheRecentCrisis."Dadush,Riordan,andWolfeforthcoming.

25.GlobalEconomicProspectsandtheDevelopingCountriesShort-TermUpdate1998,internaldocument.

26.ExportperformanceisbiasedupwardbyKorea'sstronggainduringtheyear.ExportvolumegrowthfortheaffectedASEANcountriesaveragedabout5percent.

27.Thereisevidencethatthewealtheffectsofstockmarketchangescanbesmall.Somestudies(BraytonandTinsely1996)haveshownthatfortheUnitedStatesthemarginalpropensitytoconsumethatisgeneratedbyachangeincorporateequitywealthisonly0.3,withameanresponselagof2years.Yettheriseintheshareofhouseholdsowningequity(40percentin1995-andhigherin1999-contrastedwith32percentin1989)clearlyamplifiestheseeffects.Moreover,theeffectsonconfidenceofastockmarketcorrectionofthemagnitudeassumedinthescenario(withintheglobalcontext)couldbeespeciallyadverse.ConcernsaboutthestateofJapan'seconomyand

thepossibilityofsignificantdifficultiesamongfinancialinstitutionsattachmoresystemicrisktotheunfoldingofthescenario.

28.Theexantefinancinggapisthemeasuredchangeinaggregatecurrentaccountbalanceforthedevelopingcountries(fromthebaselineprojections)beforeanyoffsettingpolicyresponseatthecountrylevel.

29.Thesimulationofthebehaviorofprivatecapitalflowsinthislow-casescenarioisbasedonamodelofthepastbehavioroffinancialnetflows(otherthanforeigndirectinvestment)todevelopingcountriesbetween1979and1998.Theyarealsobasedonassumptionsfromtheglobaleconomicmodelaboutexpectedgrowthinworldtrade,worldGDP,developingcountryGDP,worldinterestrates,andanindexofriskaversion,relativetothebaselinescenario.

30.McConnell1999.

31.Thisisbynomeansaunanimousview.EveryshadeofopiniononY2Kcanbefoundontheinternet;compendiumsoflinksonY2Kinclude(http://home.att.net/~year2k),and(www.y2klinks.net/Y2Kgen.htm).

32.ThirdQuarterlyreportonUSReadinessforYear2000issuedbythePresident'sCouncilonY2KConversionislocatedon(www.y2k.gov).

33.TheInternationalY2KCooperationCenter(atwww.iy2kcc.org)andGartnerGroupsurvey.

34.ThesurveywascarriedoutbytheInternationalY2KCooperationCenter.

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35.ThegroupingofcountrieswascarriedoutbytheWorldBank,basedonthewordingofthecountryevaluationsfromtheU.S.StateDepartment.Thesectorscoveredweretransportation,energy,telecommunications,health,finance,localgovernment,andwaterandwastewater.TheindividualcountryinformationcanbefoundattheU.S.StateDepartment'sBureauofConsularAffairsinternetsite(http://travel.state.gov/y2kca.html).

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Klugman,Jeni,andJeanineBraithwaite.1998."PovertyinRussiaduringtheTransition:AnOverview."WorldBankResearchObserver,13(1):3758.

Krueger,AnneO.1999."TheDevelopingCountriesandtheNextRoundofMultilateralTradeNegotiations."PolicyResearchWorkingPaper2118.WorldBank:Washington,D.C.

Londoño,JuanLuis,andMiguelSzékely.1997."PersistentPovertyandExcessInequality:LatinAmerica197095."WorkingPaper357.Washington,D.C.:Inter-AmericanDevelopmentBank.

Martin,Will,andL.AlanWinters,eds.1996.TheUruguayRoundandtheDevelopingCountries.Cambridge:CambridgeUniversityPress.

McConnell,BruceW.1999."Y2K:TheTextureoftheImpact."Pressrelease,InternationalY2KCooperationCenter.September22.

McKibbin,Warwick,andWillMartin.1999."TheEastAsianCrisis:InvestigatingCausesandPolicyResponses."PolicyResearchWorkingPaper2172.WorldBank,Washington,D.C.

Michalopoulos,Constantine.1999."DevelopingCountryGoalsandStrategiesfortheMillenniumRound."PolicyResearchWorkingPaper2147.WorldBank,Washington,D.C.

Milanovic,Branko.1999."TrueWorldIncomeDistribution,1988and1993:FirstCalculationBasedonHouseholdSurveysAlone."WorldBank,Washington,D.C.

Ravallion,Martin.1997."CanHighInequalityDevelopingCountriesEscapeAbsolutePoverty?"EconomicsLetters56:51-57.

_____.1999."OnDecomposingPovertyintoGrowthandRedistributionComponents."WorldBank,DevelopmentResearchGroup,Washington,D.C.

Ravallion,Martin,andShaohuaChen.1997."WhatCanNewSurveyDataTellUsaboutRecentChangesinPovertyandDistribution?"WorldBankEconomicReview11:357-82.

_____.1999."WhenEconomicReformIsFasterthanStatisticalReform:MeasuringandExplainingInequalityinRuralChina."OxfordBulletinofEconomicsandStatistics61:33-56.

Ravallion,Martin,andGauravDatt.1999."WhenIsGrowthPro-Poor?EvidencefromtheDiverseExperienceofIndia'sStates."PolicyResearchWorkingPaper,WorldBank,Washington,D.C.

Rutkowski,Michael,ed.1999.Russia'sSocialProtectionMalaise:KeyReformPrioritiesasaResponsetothePresentCrisis.SPDiscussionPaper9909.Washington,D.C.:WorldBank.

StandardandPoorsDRI.1999."TheU.S.ForecastSummary:RaisingtheSpeedLimit."DavidWyss.May.

WorldBank.1990.WorldDevelopmentReport:Poverty.NewYork:OxfordUniversityPress.

_____.1998.GlobalEconomicProspects1998/99.Washington,D.C.

_____.1999.PovertyTrendsandVoicesofthePoor.Washington,D.C.:WorldBank.Alsoavailable

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on(http://www.worldbank.org/poverty/data/trends/index.htm).

_____.Forthcoming-a.PovertyReductionandtheWorldBank:ProgressinFiscalYear1999.Washington,D.C.

_____.Forthcoming-b.WorldDevelopmentReport2000/01.NewYork:OxfordUniversityPress.

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2ExternalShocks,FinancialCrises,andPovertyinDevelopingCountriesDevelopingCountrieshavebecomeincreasinglyintegratedintoglobalgoodsandfinancialmarketsoverthelastdecade.Theirexportvolumeincreasedby9percentperyearduringthe1990s,upfrom2percentduringthe1980s.Netlong-termcapitalflows,evenafterdecliningin1998,remainedalmostthreetimesthe1990level.AsdiscussedinpreviousissuesofGlobalEconomicProspects(WorldBank1993,1997,1999a),globalizationprovidesdevelopingcountrieswithsignificantbenefitsandspurseconomicprogress.GDPgrowthindevelopingcountries(excludingthetransitioneconomies)averaged5percentduringthe1990s,comparedwith3percentduringthe1980s.Poverty-thenumberofpeoplelivingonlessthan$1aday-fellfrom29percentin1990toanestimated24percentin1996.Butthefinancialcrisisof1997-99hasalsoshownhowglobalization,andinparticulargreateropennesstoexternalcapitalflows,canexposedevelopingcountriestoincreasedvolatilityfrominternationalfinancialandgoodsmarkets.Thepoorareespeciallyvulnerabletothisvolatility.

Thischapterreviewstheevidenceabouttheimpactonpovertyoftheexternalshocksandvolatilitytowhichdevelopingcountriesareexposed.Itthenpresentsandassessesevidenceoftheimpactofthe1997-98financialcrisisonpovertyinthemostaffectedEastAsiancountries.Finally,itdiscusseslessonsandpolicyconclusions.

Thechapterreachesthefollowingconclusions:

Thefinancialcrisishasunderlinedhowglobalization,especiallyfinancialintegration,exposesdevelopingcountriestoexternalshocks.Theseshocksoftenreducethegainsinpovertyreductionfrom

opennessandincreasepovertysignificantlyintheshorttomediumterm.Thisfactunderscorestheimportanceofaddressingtheissueofvolatilityinordertomaximizethepositiveeffectsofgrowthonpovertyreduction.

ThecountriesmostaffectedbytheEastAsiancrisisillustratetheasymmetricimpactofchangesinpercapitaincomeonpovertyandthenegativeeffectsofvolatilityongrowth.Thoughlessdramaticthanearlypredictionssuggestedandveryheterogeneous,thenegativesocialimpactoftheEastAsiancrisisandconsequentcrisesinRussiaandBrazilhasbeenenormous.Theincreaseinconsumptionpovertyhasbeensignificant.Inaddition,thecrisishasresultedinlargeandcostlyreallocationsofpeopleandsharpdeclinesinmiddle-classstandardsofliving.UnlikethesituationinLatinAmericawhereincomeinequalityincreasedsignificantlyduringcrises,inEastAsiatheeffectsonincomedistributionhavebeensmallandhighlydifferentiated.Theextentoftheseeffectsdependsonthecountry'sincome

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levelandtheimpactofthecrisisondifferenteconomicsectors.

Urbanpovertyincreasedinallcountries,particularlytheRepublicofKorea,wheretotalemploymentdeclinedandopenunemploymentgrewmorethaninothercountriesintheregion.Fallingrealwagesintheurbanformalsectoraffectedmostlyhigh-incomegroups.InThailandtheimpactwasfeltmostlyinruralareasbecauseofthelargeinflowsofworkersfromurbanareasandtherelativelysmallincreasesinagriculturalprices.

Thecrisisdemonstratedtheflexibilityoflabormarketsindevelopingcountries.Thesemarketshelpabsorbtheeffectsofshocksthroughreducedwagesandlabormobilitywithinandbetweenurbanandruralareas.ThusthedeclineintotalemploymentinThailandandMalaysiawaslimited,andemploymentactuallyroseinIndonesia.Laborwasreallocatedfromtheformal(urban)sectortootheractivities,particularlytheinformalsectorandagriculture,whereexchangeratedepreciationsimprovedincentives.

Evenwherepublicspendingonsafetynetsincreasedsignificantly,theimpactonpovertywaslimitedforseveralreasons.Theseincludedtheabsenceofsafetynetsbeforethecrisis,responselags,institutionalproblems,andlowlevelsofspendingrelativetothescaleofpoverty.Insomecasesevidencesuggeststhatwellfunctioningprogramswereunderfundedrelativetothepotentialimpactofshocksonpoverty.

TheseverityofthecrisisinIndonesiaisreflectedinthestrongresponsesofhouseholdstoincreaseconsumptionasashareofincome,adjusttheirassetholdings,andincreasetheshareofstaplefoodsintheirconsumptionbasketstocopewiththeshock.IntheRepublicofKoreaandMalaysiatheresponseofhouseholdswastoincreasethesavingsrate.Thecompositionofconsumptionexpenditureschangedsignificantly.Householdsspentmore,pri-marilyonessentialitemssuchasfood,fuel,housing,health,and

education.

Realpublicexpendituresoneducationandhealthfellinmostcountries.Theextenttowhichhouseholdswereabletoadjusttheirspendingtooffsetthisdeclinevariedacrosscountriesaswellasincomegroups.InThailandfamiliesandgovernmentprogramsactedtocushiontheimpactofthecrisisinordertoavoiddeclinesinschoolenrollmentratesorinaccesstohealthservices.InIndonesia,however,theseverityofthecrisisledtosignificantdeclinesinpoorhouseholds'accesstobotheducationandhealthservices,particularlyinurbanareas.Suchsetbackscanhaveirreversibleeffectsonhumandevelopment.

Anydevelopmentstrategyforstableandsustainablegrowthmustincludebothadequatesafetynetsandappropriatepoliciesandinstitutionsdesignedtopreventfinancialcrisesandrespondwhencrisesdooccur.Prospectsforpovertyreductiondependnotonlyonfuturegrowthbutalsooncountries'capacitytomanagevolatilityandreducegrowthfluctuations.

ExternalShocksandPovertyinDevelopingCountries

Discussionsofthelinkbetweengrowthandpovertyreductionindevelopingcountriesimplicitlytaketheviewthatlong-termgrowth(andthereforepovertyreduction)isastableprocess.Butasthefinancialcrisisof1997-99shows,theprocessofgrowthisneithersmoothnorlinearandisoftensubjecttosharpchanges(especiallymajorslowdownsandrecessions)fromavarietyofexternalorinternalshocks(WorldBank1999a).Theasymmetriceffectsofincomegrowthonpovertyduringexpansionsanddownturns,however,implythatthesechangesoftenhaveprofound,long-lastingeffectsonthepoor.Adeclineinpercapitaincometendstohaveanegativeeffectonpovertythatismuchgreaterthantheimprovementgeneratedbyanequivalentincrease.

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Whileeconomiccriseshurtbothpoorandrich,thepoorhavelessleewaytorespondtothecrises.Ifdomesticcapitalmarketswereperfectandtheeconomicdownturntemporary,alleconomicagentscouldborrowtosmoothconsumptionandmaintainwelfare.Butcapitalmarketsareimperfectandsegmented.Creditorinsuranceistypicallynotavailabletothepoor.Withfewsavingsandloworsubsistenceincomes,thepoorbecomeevenmorevulnerabletoshocks.Crisesandrecessionscanresultinirreversiblenegativeeffectsonthepoorthroughtheirimpactsonhealth,schooling,andnutrition.Volatilityingrowthalsotendstocreatemoreuncertaintyandriskforinvestors.Thatfactalonetendstoreducetherateofeconomicgrowth,furtherdimmingprospectsforpovertyreduction.Thusthevolatilityofthegrowthprocessindevelopingcountriesmattersagreatdealforbothimmediateandlong-termpovertyreductionandincomedistribution.

Ingeneral,thegrowthprocessismuchmorevolatileindevelopingcountriesthaninindustrialcountries.Suddenreversalsandotherchangesininternationalfinancialflowsareonlyonesource(albeitanimportantone)ofexternalshocksthatcanleadtocrisesandrecessionsindevelopingcountries.Fluctuationsinthetermsoftradeareanotherimportantandlong-standingsource,reflectingdevelopingcountries'relianceonprimarycommodityexportsandpricevariabilityininternationalmarkets.Volatilityinthetermsoftradewasalmostthreetimesgreaterindevelopingcountriesthaninindustrialcountriesduring1961-97(Pritchett1998;Easterly,Islam,andStiglitz1999)(figure2.1).VolatilityisparticularlysignificantfortheMiddleEastandNorthAfrica,LatinAmerica,andSub-SaharanAfrica.Usingsimulationmodelsthatreplicatetherangeofobservedeconomicfluctuations,Mendoza(1995)findsthatdisturbancesinthetermsoftradeaccountforaboutone-halfoftheobservedvariabilityinGDPandrealexchangerates,andthattheshareisgreaterfordeveloping

countriesthanforindustrialcountries.Policiestomitigateandcopewithvolatilityingrowthandtheconsequenteffectsonthepoorarethereforeessentialinalldevelopingcountries.

Figure2.1TermsoftradeandGDPgrowthvolatility,1961-97

Note:Unweightedaverageofcountries'standarddeviationsofrelativedistancefromHodrick-Prescottfiltertrend.Source:WorldBankstaffcalculations.

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ExternalShocks,Long-TermGrowth,andPoverty

Externalshocks,suchasvariationsinthetermsoftrade,volumeoftrade,andexternalfinance,arehighlycorrelatedwithvariationsinGDPgrowth.Theyaccountforasignificantshareofthevolatilityindevelopingcountries(Easterly,Islam,andStiglitz1999).AccordingtoHausmannandGavin(1995)externalshocksexplain30percentofcrosscountryvariationinGDPvolatilityinLatinAmerica.Whentermsoftrade,exportvolumes,externalfinance,andinterestrateshocksaretakenintoaccount,developingcountriesexperiencemoreandlargerexternalshocksthanindustrialeconomies.Theincidenceofsmallandmedium-sizeshocksisaboutthesameforboth(WorldBank1993).Duringthe1970sand1980sitwasnotunusualfordevelopingcountriestosufferunfavorableshocksequivalentto4percentofGDPormore.

Volatilityofgrowthandothermacroeconomicvariablesisalsomuchlargerindevelopingcountriesthaninindustrialcountries(Pritchett1998;Easterly,Islam,andStiglitz1999).Figure2.1showsthatvolatilityinGDPgrowthismorethantwiceashighindevelopingcountriesasitisinhigh-incomecountriesoftheOrganisationforEconomicCo-operationandDevelopment(OECD).ThevolatilityofGDPgrowthishigherforalldevelopingregions,exceptforSouthAsia,anditismorethanthreetimeshigherfortheMiddleEastandNorthAfrica.GDPgrowthindevelopingcountriesishighlyunstable,withlargeshiftsovertimeandlowcorrelationofpercapitagrowthratesacrossdecades(Easterlyandothers1993;Pritchett1998).

Volatilityhasanegativeimpactonpovertyinpartbecauseitreduceslong-termgrowth(box2.1).Forinstance,alargedegreeofvolatilitymakes''stopandgo"policiesmorelikely,slowinggrowthandleadingtolowqualitypoliciessuchasthoseinSub-SaharanAfrica,especiallyduringthe1970sand1980s.(Guillaumont,Jeanneney,andBrun

1999).Externalnegativeshockscanalsointeractwithsocialconflictsandweakdomesticinstitutionsforconflictmanagementtoproducegrowthcollapses(Rodrik1998).Aftercontrollingforotherfactors,HausmannandGavin(1995)findthatahigherstandardeviationofrealGDPisassociatedwithhigherratesofpoverty.TheyestimatethatifLatinAmericancountrieshadthesameGDPvolatilityasindustrialcountries,povertywoulddecreaseby7percentagepoints.

ExternalVolatilityandFluctuationsinPoverty

Volatilitydoesmorethansimplyincreasepoverty.Short-termfluctuationsinincomegrowthalsocausesharpvariancesintheincidenceofpoverty,evenintheshorttomediumterm.Forexample,inVenezuelapovertydecreasedby10percentagepointsbetween1989and1991,roseby20percentagepointsbetween1991and1994,thenfellagainin1995androsein1996(LustigandDeutsch1998).Mexicoisanotherstrikingexampleofthiseffect,asbox2.2describes.

Fluctuationsincommoditypricesmayinduceshorttomedium-termchangesinbothgrowthandpoverty.Duringtheboomyearsgrowthisfasterandpovertydeclines,butduringbusts,whichareusuallymoresudden,povertyincreases.Fluctuationsincommoditypriceshaveasignificant,directimpactonpersonalincomesandanindirectimpactongovernmentsocialexpendituresandGDP.EarlierstudiesarguedthatcommoditypriceboomsdonotsignificantlyaffectrealGDP(Cuddington1988;GelbandAssociates1988).Butmorerecentempiricalworkhasshownthatchangesintermsoftradehavesignificanteffectsonrealoutputgrowth.

1Decliningtrendsinrealcommoditypriceshaveanegativeeffectonrealincomegrowthinthelongtermindevelopingcountries(seechapter4).2Inaddition,aslowdowningrowthinthebustyearsmaybecomemoresevereasinvestmentsmadeduringtheboomyearsareoftenlessproductive(CollierandGunning1996).

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Box2.1Volatililty,growth,andpoverty

Whengrowthproceedssmoothlyovertimeandincomeinequlaityimproves(oratleastdoesnotworsendramatically),povertydeclinesaspercapitaincomeandrealwagesrise.Theelasityofpoverty,asmesuredbytheheadcountindex-forexample,withrespectotthegrwothofpercapitaincome

3-isestimatedtobebetween-1.5adn-3.5.4Thesizeoftheeffectisgreaterincountrieswhereincomeismoreeventlydistributed(Ravllion1997).5

Totheextentthatvolatilitycreatesincertainlyithasnegativeeffectsongrowthandthereforeonpoverty,Recentempiricalevidencesupportsthisviewandcontradictstheearlyliterature.Usingbalancedpaneldataforasampleof92countriesfor1960-85,RameyandRamey(1995)findthataunitincreaseinthestandarddeviationofinnovationinGDP(innovationtoGDPgrowthisusedasameasureofuncertainty)imploesalowerGDPpercapitagrowthof0.26Similarlyfromagrowthregressionof130countriesfor1960-95,EasterlyandKraay(1999)findthatthestandarddeviationofgrowthhasastrongnegativeeffect(-0.18)onaverageofgrowth(aftercontrollingforothervariables)

Therearethreelikelyexplanationsforthenegativelinkbetweenvolatilityandgrowth.First,irreversibilitiesof

asymmetircadjustmentcostsininvestmentsincreaseuncetaintlyandlowerinvestment(pindyck1991;AizenmanandMarion1999).7secondcostsincrease

becauseproductivefactorsmoveamongsectorsinresponsetomorefrequentshiftinpricesignals.Andthird,theriskofinappropriatemonetary,fiscal,trade,andfinancialpoliciesincreases.

Terms-of-tradevolatililtyhasbeentohavetonegativeeffectonlong-termgrowthindevelopingcountries.Commoditypriceuncertainty,asmeasuredbythestandarddeviationofforecasterrorsfromsomestatisticalmodels,reducegrowthrages(DehnandGilbert1999).8Mostempiricalstudieshaveuseddirectvolatilityoftermsoftradeasaproxyforuncertaintyandhavefoundanegativeeffectsonlong-termgrowth(Mendoza1994;HausmannandGavin1995;Guillaumont,JeanneneyandBrun1999;EasterlyandKraay1999)9.

Theoverallevidencealsoindicatesthatoverthelongrunthedependenceofmanydevelopingcountriesoncommoditieswithvolatilepriceshasanegativeimpactonlong-termgrowthandthereforeonpoverty.DehnandGilbert(1999)findasignificantlynegativeeffectofcommoditypriceuncertainlyonpoverty,asmeasuredbyinfantmortality.

Empiricalfindingsalsosupportthenotionthateconomiccycleshaveanasymmetriceffectonpoverty.Theyshowthatacontractionwillhaveagreaterimpactonthepovertyratethananexpansionofthesamesize(Morley1994;LondoñoandSzékely1997a;DeJanvryandSadoulet1998).10Ithasbeenestimatedthata1percentdeclineinpercapitaincomeduringrecessionaryepisodesinLatinAmericainthe1980sreducedearliergainsby3.4percentofpercapitaincomegrowthinurbanareasand2.2percentinruralareas(DeJanvryandSadoulet1998).Oneexplanationforthisphenomenonisthatduringrecessionstheunskilledarethefirsttolosetheirjobs,becausefirms

tendtohoardtheirskilledemployees.Asaresult,incomedistributionbecomesmoreinequitable,amplifyingtheeffectofdecliningincomesonpoverty(Agenor1998).

IncomePovertyandInequalityduringtheEastAsianCrisis

TherecentcrisisinEastAsiahasunderlinedtherisksfordevelopingcountriesofreversalsinprivatecapitalflowsandthedramaticsocialimpactoftheresultingfinancialcrises.TheEastAsiancrisishadasubstantialimpactonoutputandpovertyin1998,althoughtheseeffectsbegantolessenin1999.

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Box2.2ExternalshocksandfluctuationsinpovertyinMexico

Mexico'sexpriencesincethe1970sshowshowpovertydeclinesduringperiodsofeconomicgrowthandincreaseduringperiodsofcrisisandadjustment.Externalshockscontributetothesevariations.

Duringthe1970sMexicoexperiencedrelativelyhighandsustainedgrowth.TheIncreaseinrealGDPpercapitaaveraged3.8percentperyear,despitetheshort-livedfinancialcrisisof1976(seeboxfigure).Incomeinequalitydeclined:theGiniindexdroppedfrom0.58in1970to0.51in1977(LondoñoandSzékely1997b).Totalpovertyfellsignificantlydroppingfrom49percentin1968to34percentin1977,orfrom23.3to21.3million.furthergainswererealizedduringthesecondhalfofthepage(reflectedinthenumbersfor1977-84),spurredpartlybyfavourableterms-of-tradeshocksandrisingoilproduction.

Intheearly1980stheinternationalenvironmentbecameunfavorableformexico.Thecountry'stermsoftradedeclinedandrealinternationalinterestratesincreased.Theresultingdebtcrisistheadjustmentofthe1980sandthecollapseofoilpricesin1986resultedinasharpdeclineinincomes.Between1982and1988realGDPpercapitagrowthaveragedanegative1.9percentperyear,andrealwagesfellby36-46percentfrom1983-88.Thisdeclineinincomescontributedtoadramaticincreaseinpoverty(Lustig1998).Inequalityincreasedsharplyinthelate1980sreachingaGiniindexof0.54in1989thatremainedunchangeduntil1996(Székely1998).Totalpovertyrosefromitslowestpoint28percentin1984to36percentin

1989,orfrom20.7to29.6millionpoor.Infactandpreschoolmortalitycausedbynutritionaldeficienciesincreasedfrom1982onward,andeducationalindicatorsforthepoordeteriorated(Lustig1998).

From1989to1994growthresumed,largelyduetoeconomicandfinancialliberalization,realpercapitaGDPgrowthaveraged2percent.Althoughthetotalpovertyheadcountindexhaddeclinedslightlyto34percentby1994.thenumberofpoorhadincreasedto30.7million(LustingandSzékely1998;Székely1999a).AccordingtoSzékely(1999b)86percentoftheriseinpovertytrendsinMexicofrom1984to1994resultedfromtheincreaseininequality,whiletherestwastheresultofthedropinGDPpercapita.

From1989-94povertyroseamongruralworkersintheprimarysectorandinthesouthernandsoutheasternregions.Thisincreasewastheresultoftheappreciationofthepesoandthedeclineininstitutionalsupportforagriculture,includingthelossofsubsidies,thecollapseofguaranteedpricesofmajorcropsandhighinterestrates(LustigandSzékely1998).ThefinancialcrisisthathitMexicoattheendof1994hadconsiderablerepercussionsforgrowthandtotal

TheImpactoftheCrisisonPoverty

Incomepovertyalmostinvariablyincreasesduringacrisis.HouseholdsurveysconductedinLatinAmericaduringrecessionaryperiodsinthe1980sand1990sprovideevidenceofthiseffect.Theyshowthattheincidenceofpovertyincreasedduringthefirstyearoftherecessionin9outof11cases,andremainedhigherforoneormoreyearsaftertherecessionin19outof21episodes(Lustig1999).

Povertyalsoincreasedduringthefirstyearofthecrisisinthemost

affectedEastAsiancountries(table2.1).EvidencefromKoreaillustratestheasymmetricimpactofcrisesonpoverty.Duringstablegrowthin1990-97,theestimatedelasticityofthepercentageofpoorwithrespecttopercapitaGDPwas-3.5(KakwaniandPrescott1999).Butduringthecrisisin1998theincidenceofpovertyincreasedby123percent.RealpercapitaGDPdeclinedby6.7percent,andconsumptionpercapitadeclinedby10.4percent.InIndonesiaaswell,therateofincreaseinpovertywasabout10timestherateofthedeclineincon-

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Box2.2(Continued)

poverty.Realgrowthdeclinedtoanegative6.2percentin1995andaveraged2.6percentfrom1995to1998.Totalpovertyincreaseddramaticallyrisingto45percentin1996,or41.7million(Székely1999a).Mexicohasadjustedtothecrisesprimarlythroughdownwardflexibilityinrealwagesratherthanthroughincreasesinunemployment.

Table2.1Growth,povertyrates,andGinicoefficientsinEastAsia,1996-98IndonesiaMalaysia Rep.of

KoreaThailand

RealpercapitaGDPgrowth(percent)1997 2.9 5.4 4.5 -1.41998 -15.1 -9.2 -6.7 -10.3

Realpercapitaconsumptiongrowth(percent)

1998 -5.5 -12.4 -10.4 -11.6Headcountpovertyindexa National National Urban National

1996 11.3 - 9.6 11.41997b 11.0 8.2 8.6 9.8

1998 16.7 - 19.2 12.9Giniindex 0.380 - -: 0.477

1997 - 0.496 0.290 -1998 0.370 - 0.294 0.481

-Notavailable.a.FiguresforIndonesiaarebasedonconsumptionexpenditures,withanationalpovertylineequivalenttoabout$1adayin1985internationalpurchasingparity(IPP)dollars;dataarefromFebruary1996andDecember1998.FiguresfortheRepublicofKoreaarebasedonconsumptionexpenditures,withanationalpovertylineequivalenttoabout$4adayin1985IPPdollars.FiguresforThailandreflectnationalincomepoverty,measuredataround$2aday.FiguresforMalaysiareflectincomepoverty.b.The1997figuresforIndonesiaandThailandareestimatesbasedonprecrisistrendsindeclinesinpoverty.Source:Kakwani1999;KakwaniandPrescott1999;WorldBankstaffcalculations.

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sumptionper-muchhigherthantheusualelasticityduringexpansions.Whiletheselosseshavebeenreversedsomewhatsince1999,theextentandsustainabilityoftherecoveryremainstobeseen(seechapter3).Evenreturningtotheprecrisislevelofpoverty,however,islikelytorequiremoretimeandincomegrowth.

TheseverityoftheimpactoftheEastAsiancrisisvariedacrosscountries.Differencesinnationalpovertylevelsandthedistributionoftheincomeofthepooraroundtheselevelsmayexplainsomeofthevariances.Forinstance,inKoreathepovertylineisaround$4perday,whileinIndonesiaitisaround$1perday.IftheindividualswhoseincomesdroppedsignificantlyareclusteredabovethepovertylineinKoreaandbelowthepovertylineinIndonesia,theimpactofthecrisisonpovertymaywellappearlowerinIndonesia.Butotherfactorsarealsoresponsibleforthesedifferences.

Korea'sexperiencewasstrikinglydifferentfromtheothers.Koreahadthelargestincreaseinopenunemployment,adeclineintheeconomicallyactivepopulation,andalargedropinrealwagesthatwassecondonlytoIndonesia's.Labormobilityfromtheinformalsectorwasalsomorelimitedthaninothercountries.KoreaisalsothemosturbanizedEastAsiancountry,andthenegativeimpactofrecessionshasbeenfoundtobemostdevastatingforpoorurbandwellers(Morley1994;LustigandDeutsch1998;DeJanvryandSadoulet1998).Theincreaseinurbanpovertyin1998washugeinKorea:theheadcountindex,basedonconsumptionexpenditures,reached19.2percent,anincreaseofmorethan10percentagepoints.

11Theincreasewasevengreater(15percentagepoints)betweenthefirstquarterof1997andthe

thirdquarterof1998-thelowest(7.5percent)andhighestpoints(23

percent),respectively(KakwaniandPrescott1999).Theincidenceofpovertydeclinedto15.8percentinthelastquarterof1998.

Inothercountriestheincreasesweresmallerthanhadbeenanticipated,giventhemagnitudeofthecrisis(table2.1).InIndonesiatheimpactofthecrisisonpovertywasstillsignificant.EstimatesforMalaysiaarenotavailable,butwelfaredeclineswerewide-spread,presumablyleadingtoincreasesinpovertyinbothurbanareasandtraditionallypoorruralstates.

UrbanandRuralPoverty.

Urbanpovertyincreasesduringcrisesowingtoacombinationoflowerrealwages,higherunemployment,andincreasesintherelativepriceoffoods.Theimpactofacrisisonpovertywillbesmallerifworkerscanmoveeasilyfromtheformalsectortootheractivities,particularlyagriculture,andifexchangeratedepreciationsleadtoimprovedincentivesforagriculture.Evenunderthoseconditions,however,itisstilllikelythaturbanpovertywillincrease.

TherelativeimpactonurbanandruralareaswasdifferentinIndonesiaandThailand.InIndonesiathecrisishadastrongurbanbias,eventhoughthepercentagechangesinpovertyratesweresimilarinurbanandruralareas.Povertyinurbanareasrosefrom9.7percentin1996to15.4percentin1998,andinruralareasclimbedfrom12.3percentto17.6percent.Averagepercapitaspendinginurbanareasfell34percentinrealterms,whereasruralexpendituresfellonly13percent.Asurveyofexpertrespondentviewssuggeststhaturbanareaswere,onaverage,muchharderhitthanruralareas(Poppele,Sumarto,andPritchett1999).Ofthe20hardest-hitareas,14wereurban,whileofthe20thatsufferedtheleastimpact,13wererural.Innearlyeveryprovince,region,andisland,thenegativeimpactofthecrisiswasconsistentlyhigherforurbanthanforruralareas.InThailand,however,theimpactonpovertywasmoresevereinruralareasthaninurban.Povertyratesrosefrom11.8to17.2percentin

ruralareas,butonlyfrom1.2to1.5percentinurbansettings.12OnepossibleexplanationforthedifferenceintheimpactofthecrisisonthetwocountriesisthehigherpriceincentivesforagriculturalproductioninIndonesia,whichstimulatedproduction.

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RegionalEffects.

Theimpactofthecrisisvariedconsiderablyacrosssubnationalregions.InthenorthernregionofThailand,forexample,thepovertyratioactuallydroppedfrom10.2percentin1997to9.2percentin1998.Inthenortheasternandsouthernregionsitrosedramatically,climbingfromaround15percentto23.2percentandfrom8.6to14.8percent,respectively.InIndonesiapercapitarealexpendituresdeclinedby42percentinWestJavaandby30percentinJakarta,regionsthatwerebetteroffbeforethecrisis.Butrealexpendituresdeclinedbetween10and20percentinotherregions.Thesedifferencesaremostlikelylinkedtothebehaviorofproducerprices.InIndonesia,areasthatproducedexportcropsbenefitedfromthesharpexchangeratedepreciation.Thisfactcombinedwithseveralreforms(suchasclovemarketing)toputmorebenefitsinthehandsoffarmers.

13Similarly,inThailandthepoorperformanceofthesouthernregionmaybelinkedtothe

fallinrubberpricesduringthecrisisperiod.AnimportantaspectofthecrisisinIndonesiaisthatitdoesnotappeartohaveaffectedpoorareasdisproportionately.Rather,theimpactvariedinbothwell-offandpoorareas.

TheImpactonIncomeDistribution

GiventhesignificantdropinGDPnormallyassociatedwitheconomiccrises,povertyrateswillincreaseunlessthereisamassivereductionininequality.Butincomedistributiontendstoworsenduringcrises.InequalityinhouseholdincomesorconsumptionincreasedinmostofthecountriesinLatinAmericaduringcrisesandrecessionsinthe1980s(WorldBank1999a).For10recessionepisodesforwhichdata

areavailableinLatinAmerica,inequalityrosein6casesduringtherecessionyear(Lustig1999).InArgentinatheGinicoefficientforthegreaterBuenosAiresareaincreasedfrom0.44to0.53duringtherecessionof1989.Inequalitywashigheraftertherecessionthanithadbeenbeforein15outof22episodes.InChiletheGinicoefficientontotalhouseholdincomesisestimatedtohaveincreasedfrom0.52in1979to0.55in1984becauseoftheimpactofhighopenunemploymentand(bysomemeasures)deeprealwagecuts.However,theGinicoefficientinChilehaddeclinedto0.53by1988(Riveros1994).

InBrazilincomeinequalityincreased,despiteasuccessfuldefenseofrealwagesintheformalsectorandlittleincreaseinopenunemployment,inpartbecauseofinflationanddecliningincomesintheinformalandagriculturalsectors(Fox,Amadeo,andCamargo1994).InArgentinaaveragerealwagesoscillatedwildlywithepisodesofinflationduringthe1980s,thoughunemploymentwasnothigh.However,thegapinearningsbetweenthetopandbottomdecilesofincomeearnersinBuenosAireswidenedsteadilyfrom1980through1988asyoungeradultsincreasinglyenteredtheinformalsector(RiverosandSanchez1994).

Analysesoftheeffectsofcrisesonincomedistributionsuggestedthattheimpactdifferedinmiddle-andlow-incomecountries(Bourguignon,deMelo,andSuwa1991).Duringmosteconomiccrisesandsubsequentstructuraladjustmentsinmiddle-incomecountries,incomedistributionworsensbecausewagecutsandlayoffsintheformalsectortendtobebiasedtowardunskilledworkers.Theimpactofcrisesoninequalityinlow-incomecountriesismoredifficulttopredict.Wageandemploymentlossesintheurbanformalsectoraffectworkerswithrelativelyhighincomes,andtheriseinfoodpriceshurtstheurbanpoor.Buttheruralareaswheremostofthepoorlivetendtogainbecauseofcurrencydepreciationandhigherpricesforagriculturalgoods.Bourguignon,deMelo,andSuwa(1991,359)

find,fromsimulations,that"inthestandardadjustmentpackage,inequalityincreasedsignificantlyfortheLatinAmericanarchetypebutdecreasedsignificantlyfortheAfricanarchetype."Amajorreasonforthisdifferenceisthattherearefewformalsectorwageearnersinthebottomhalfoftheincomedistributionladderinverypoorcountries-forinstance,thoseinmuchofSub-SaharanAfrica.Becausecriseshittheformalsectorhardest,thepoorarelessaffected.InLatin

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America,however,whereformalsectorworkerscomefromallincomebrackets,poorpeoplearehitmoredirectlyinacrisis.

ComparedwithLatinAmericainthe1980s,thedistributionalimpactoftheEastAsiancrisiswaslimitedforhigh-incomecountries(Korea),upper-middle-incomecountries(Malaysia),andlower-middle-incomecountries(IndonesiaandThailand).Changesinoverallinequality,asmeasuredbytheGinicoefficient,wereminorbetween1996and1998(table2.1).

14InThailandtheremayhavebeenweakredistributionfrommiddle-tohigh-incomegroups(Kakwani1999).ButearlystudiesforKoreaandThailandsuggestthatthoseatthebottomoftheincomedistributionladder-the"ultrapoor"-werehitharderthanotherswithincomesbelowthepovertyline(Kakwani1999;KakwaniandPrescott1999).TheevidenceismoremixedforIndonesia(Poppele,Sumarto,andPritchett1999).

LaborIncomes

Toalargeextenttheimpactofthecrisisonconsumptionpovertyreflectschangesintherealincomesofhouseholds.Thechannelsthroughwhichtheimpactofacrisisreacheshouseholdscanbetracedtothesourcesofhouseholdincome-thatis,wages,returnsonassets,profitsfromself-employment,andtransfers(Ferreira,Prennushi,andRavallion1999).Thesesourcestendtovarywithhouseholdincomelevel-forexample,poorhouseholdstendtodependonself-employmentincomesandtransfers,whereastherichreceivemuchoftheirincomefromassets.Forthisreason,changesintheoverallcompositionofnationalincomecanmovehouseholdsupordownthedistributionladder.

Labormarketshavethemostprofoundeffectsonpoverty,however.

Labordemandshockshurthouseholdsbyloweringrealwages,increasingunemployment,andreducingself-employmentearnings.Whilereducedlabordemandalmostalwaysraisestheincidenceofpoverty,differentkindsoflabordemand-shockshavedifferenteffectsonincomeinequality.Inarecession,realwagesfall.

Householdsatthelowendofthedistributionladderindevelopingcountriesareaffectedtheleast,becausetheyreceivelittleornowageincome.Butlabordemandshockshaveastrongimpactonthoseformalsectorworkerswiththelowestskills,whoaremorelikelytolosetheirjobsthantheirmoreskilledcounterparts15Theytheneitherbecomeunemployedormovetotheinformalsector,wheretheirearningsarelikelytobelower.Asaresulthouseholdsatthemiddletolower-middlerangeoftheincomedistributionladderarepushedfurtherdown,swellingthenumbersofhouseholdswithlowincomes.

ThecrisesinEastAsiafollowedapatternsimilartothoseseenearlierinothercountriesfacedwithsharpreversalsofexternalcapitalflows.Acomparativeanalysisoftheimpactofsimilarcrisesonlabormarketsoffersthefollowingconclusions(FallonandLucas1999):

Wagesfallsharplyduringthecrisisorinensuingyears,usuallybymorethantheGDP.In22recessionaryepisodesinLatinAmericaduringthe1980sand1990s,realwagesfellin16casesduringtheyearofrecession,andin18casesremainedlowerthanprecrisislevelsaftertwoyears(Lustig1999).ThiswagedropwasalsoastrikingfeatureoftheEastAsiancrisis.

Totalemploymentgrowthdropsinthecrisisyear,butusuallybylessthanthedeclineinGDPgrowth.

Employmentinmanufacturingisalwaysadverselyaffected,thoughlessspectacularlythanarewages.

Theeffectsonagriculturalemploymentaremoremuted.Insomecases(forexample,Indonesiain1998andTurkeyin1994),

employmentincreaseddespiteanabsolutedeclineinGDP.

Risingunemploymentisanimportantfeatureofmanycrises.InLatinAmericaunemploymentincreasedduringtheyearofrecessionin24of31episodesandremainedhigherin24casestwoyearsintotherecession(Lustig1999).Themostsig-

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nificantincreaseswereinArgentinain1995(6percentagepoints)andChilein1982(11percentagepoints).

ExperiencethusfarinEastAsiabroadlysupportstheseconclusions.Realwagegrowthdroppedsharplyin1998andbecamenegativeinallaffectedcountries(table2.2).Indonesiasawparticularlyspectacularwagedeclinesthatwerebroadlysimilaracrosssectors.Althoughwagecutscanmoderatetheimpactofarecessiononemployment,duringtheEastAsiancrisisnonagriculturalemploymentfellinallcountries.OnlyinIndonesia,whereagriculturalemploymentincreasedconsiderably,didoverallemploymentrise.Theconstructionsectorwasthemostaffected,withadramaticdropinemploymentof15to35percent,butmanufacturingemploymentalsofellsignificantly.WiththeexceptionofKorea,however,fallsinemploymentin1998werenotlargedespitesubstantialdecreasesinGDP.(Koreasawalargedeclineinemploymentaswellasinrealwages.)Theinactivepopulationincreasedby9percentbetweenthesecondquarterof1997andthefourthquarter1998,withwomenrepresentingthreefourthsoftheincrease.InThailand18.5percentoftheoveralldeclineinpercapitaincomewastheresultofwagecuts,whereasonly2.7percentwasattributabletohigherunemployment(Kakwani1998).

Table2.2EmploymentandrealwagesinEastAsiaduringthecrisis(percentagechange)

Indonesia Malaysia Rep.ofKorea

Thailand

1997 1998 19971998 1997 1998 19971998Employment,totala 1.8 2.6 4.6 -2.7 1.4 -5.8 1.8 -3.0

Agricultural -4.7 13.3 -0.6 -5.3 -3.4 0.0 1.3 -1.8Nonagricultural 6.8 -4.7 5.8 -2.2 2.4 -6.5 2.2 -3.9Manufacturing 4.1 -9.8 7.6 -2.9 -4.3 -13.1 -0.1 -1.9Construction 10.6 -15.9 8.9 -13.4 1.7 -26.4 -5.6 -33.6

Realconsumptionwage,totalb

8.6 -41.0 - - - - 5.7 -1.5

Agricultural 4.1 -35.0 - - - - 10.0 -8.9Nonagricultural 9.9c -42.0c - - 2.6 -10.0 5.0 -0.5Manufacturing 11.1 -44.0 6.0 -2.4 0.7 -10.6 7.1 -4.5Construction 8.5 -42.0 - - 3.3 -14.7 3.8 -2.2

-Notavailable.a.FiguresfortheRepublicofKoreaarefromQ4toQ4.FiguresforThailandarecalculationsbyWorldBankstaffbasedontheLaborForceSurvey,NationalStatisticalOffice,andsurveysofnationalemploymentforFebruaryandAugust.b.FiguresforIndonesiaareforAugust1998andaverage1997.FiguresfortheRepublicofKoreaareseasonallyadjusted.FiguresforThailandarecalculationsbyWorldBankstaffbasedontheLaborForceSurvey,NationalStatisticalOffice,andaveragewages(excludingfringebenefits)ofFebruaryandAugustsurveys.c.Urbanareas.Source:Employment-Islamandothers1999;Mansorandothers1999;Shin1999;WorldBankstaffcalculations.Realwages-Datastream;Islamandothers1999.

LaborForceMobility.

Tosomedegree,theimpactofthecrisisonemploymentwaslessenedbythemobilityavailabletoindividualworkerswithinandbetweentheurbanandruralsectors.Inthefirstyearofacrisissignificantrealexchangeratedepreciationusuallyresultsthatcanraisethepriceoftradablegoodsrelativetothoseofnontradables,withimportantimplicationsforrealhouseholdincomesandpoverty.Criseshittheurbanformalsectorfirstand,asnotedabove,canleadtoareallocationoflaborfromtheurbantotheruralsector.Butintheabsenceofanyincentivetoincreaseagriculturalproduction,thisreallocationofhumanresourcesmaydolittlemorethanraiseruralpovertyinsteadofurbanpoverty.Inprincipleexchangeratedepreciationcansupplytheneededincentive.Intheabsenceof

interventionindomesticmarkets,itraisesthepriceofexportcropsrelativeto

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thepricesofothercommodities.Inruralareashigherfoodpricesspuragriculturalproduction,andtheimpactonpovertywilldependonthestrengthofthelinkbetweenagriculturalproductionandthepoor.Insofarassmallfarmersbenefit,thelinktopovertymaybestrong.Butinsofarasexportcropproductionisconcentratedamonglargefarmers,theimpactdependsonwhetherthedemandforagriculturalworkersincreasessufficientlytooffsetthegrowingsupplyofrurallabor.

InIndonesiaaround2.5millionworkers,or3percentofthetotalworkforce,weredisplacedbythecrisisinthefirstyear.Joblossesoccurredinallsectorsoftheeconomyexceptagricultureandthesmalltransportationandcommunicationsectors.Themanufacturingsectoraccountedfornearlyhalfofalljoblosses,followedbyconstruction.Lossesweresomewhatsmallerinthemining,trade,andservicesectors.Aboutthree-quartersofthejobslostinthesesectorswereinruralareas.Inurbanareasmanyworkersdisplacedfromthemanufacturingandconstructionsectorsenteredthetradeandotherservicesectors.Urbanemploymentactuallygrewfrom29.4to30.3millionpersons(Islamandothers1999).Incontrast,displacedworkersinruralareashadfeweropportunities,andmanywereforcedtotakeupagriculturalemployment.

16AgriculturalemploymentroseinIndonesiain1998despiteseveredroughtconditionsinsomeareas.Whilelaborreallocationwasgreaterinruralthaninurbanareas,theincreaseinpovertywasgreaterinurbanareasduetotheincidence(althoughlimited)ofunemployment,thegreaterdeclineinwagesinmanufacturingandconstruction,andthefallininformalsectorincomesasmorecrowdingoccurred.

InThailandthecrisisgreatlyaffectedtheflowoflaborbetweenurbanandruralareas.Theprincipalreasonfortheincreaseinpovertyinthe

ruralareas,particularlyinthenortheast,wastheintegrationoftheruralandBangkoklabormarketsthroughmigration.ThecrisisdramaticallycurtailedtheregularflowofworkerstoBangkok,particularlyfrom

thenortheast,increasingtherurallaborsupplybeyondwhatitwouldotherwisehavebeen.ThenumberofrecentmigrantstoBangkok(thosearrivinginthepastyear)haddropped50percentbyFebruary1998fromthelevelsofayearearlier,andthesharecomingfromthenortheastfellfrom68percentto38percent.ThetypesofworkerswhomovedtoBangkokalsochangeddramatically.InFebruary1997,25percentofallmigrantstoBangkokhadlessthananelementaryeducationandonly28percenthadasecondaryorhighereducation.Oneyearlaterthesenumberswere13.5percentandover41percentrespectively.TheseresultsindicatethatunskilledworkersstoppedgoingtoBangkok,whereasthosewithhigherskillscontinuedtomigrate.InIndonesiathereisevidenceofsignificantreturnurban-ruralmigration.Around1millionurbanworkersenteredtheagriculturalsector,althoughtheirfamiliesstayedinurbanareas.

OtherLaborMarketDevelopments.

Laborforcemobilityandfewerworkopportunitieswereaccompaniedbyotherlabormarketdevelopments.First,hoursworkedperweekfellasworkerscrowdedintotheurbaninformalandruralsectors.InIndonesia,theshareofemployeesworkingfewerthan35hoursperweekincreasedfrom30.6percentin1997to34.3percentin1998,withthetrendtowardshorterhoursgreaterinurbanareas.InKorea,averagehoursdroppedfrom46.6hoursperweekto46.0,withtheshorterworkingweekmostprevalentinmanufacturing.Second,thecompositionofemploymentchanged,shiftingawayfromwageemployment.InIndonesia,theproportionofworkersoutsidewageemploymentrosefrom55.1percentin1997to58.9percentin1998.Third,inKoreaatleast,thenumberofhighlyskilledworkersroseasa

shareofemployment.Forinstance,theshareofmanagersandprofessionalshadincreasedfrom17.1percentattheendof1997to21.1percentbytheendofMarch1999.

WiththeexceptionofKorea,wheretheagriculturalsectorismuchsmallerthaninthe

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otherEastAsianeconomiesandtotalemploymentdecreasedsubstantially,theincreaseinunemploymentin1998wasnotparticularlylarge(figure2.2).InKorea,theunemploymentratepeakedat8.7percentinFebruary1999,anincreaseof6.4percentagepointsoverthelowof2.3percentinJune1997.

17Buttheratehadfallento6.2percentbyJuneofthesameyear.Underutilizationoflaborwasgreaterthanthedataonunemploymentindicated,asformalsectorworkinghoursfellinallcountriesduringtherecession.InThailandtotalunemploymentincreasedby2.5percentagepointsduringthecrisisandremainedhighduringthefirsthalfof1999.InMalaysiaopenunemploymentincreasedbymuchlessthanexpected,risingfrom2.7to3.2percent.Itpeakedat4.5percentinMarch1999,bothbecauseproductivity-basedwagesallowedrealwagecutsandbecausemigrantworkersemployedinconstruction,thehardest-hitsector,leftthecountry.

Itisstilltooearlytoassesshowthecrisisaffectedtheincidenceofunemploymentindifferentgroups.InKoreaunemploymentseemstohaverisenmoreamongmenthanamongwomen,possiblybecausethefemaleparticipationratedroppedasthecrisisintensified.Thenumberofregularfemaleemployeesfellbyaround20percentbetweenOctober1997andOctober1998.Layoffsintheformalsectorinitiallyraisedunemploymentamongolderagegroups,butunemploymentamongtheyoungisundoubtedlyrisingintheabsenceofjobcreation.Thelesseducatedandlessskilledwerethehardesthit.Forthosewithnohighschooldiploma,unemploymentincreasedfrom1.2percentinJune1997to5.8percentinJune1998,andforthosewithhighschooldiplomasitclimbedfrom2.8percentto8.4percent(NaandMoon1999).

GovernmentSafetyNetsandPovertyAlleviation

Raisingtransferscanoffsetincreasesinincomepovertycausedbydeclinesinlabordemand.Forthisreasonsomegovernmentshavetriedtostrengthensafetynets,orincometransferprograms.Thesuccessoftheseeffortsdependsonseveralfactors:theexistenceofwell-functioningprograms,theinstitutionalanddeliverycapacityofcentralandlocalagencies,thesizeofbudgetallocationsandtheseverityoffiscalconstraints,andthepoliticaleconomy

Figure2.2UnemploymentinEastAsiaduringthecrisis

Note:FiguresfortheRepublicofKoreaareforurbanunemployment,andthosefor1998are

fromthesecondhalfoftheyear.FiguresforIndonesiaarefromAugustofeachyear.Figures

forThailandreflectunemploymentasapercentageofthecurrentlaborforceandarean

averageofFebruaryandAugustforeachyear.Source:Shin1999;Islamandothers1999;MalaysianLabourForceSurvey;

WorldBank1999d.

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affectingredistributiveandpovertyalleviationefforts.

Itisstilltooearlytoassessfullytheimpactofeffortstoprovidesafetynetsduringthecrisis.However,theavailableevidencesuggeststhateventhoughlevelsofpublicspendingonsafetynetsincreasedsignificantly,theimpactonpovertywaslimited.Ananalysisofcountryexperiencessuggeststhatthislimitedeffectcanbetracedtoarangeoffactors,includingresponselags,institutionalproblems,andlowlevelsofspendingrelativetothescaleofpoverty.

ThegovernmentsofEastAsiagenerallydidincreasethebudgetaryshareofincometransferssignificantlyinresponsetothecrisis.However,spendingasashareofnationalincomeremainslowbyinternationalstandardsandhasincreasedinonlytwocountries(Klugman1999)(figure2.3).Koreahadthelargestproportionateincrease,withspendingonsafetynetsrisingfromzeroto5percentofthebudget,followedbyIndonesia,wherethebudgetarysharerosefromzeroto3.6percent.InMalaysiathesafetynetasashareofgovernmentexpenditureheldsteadyatalow0.16

Figure2.3PovertyandspendingonsocialsafetynetsinEastAsia,1996-98.

Source:WorldBankstaffestimates.

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percentduringtheperiod.SpendingonsafetynetsasashareofnationalincomerosequitesteeplyinKoreaandIndonesia,thoughexpenditureswerelowtobeginwith.ThesetrendscontrastwiththoseobservedinEuropeandCentralAsia,whereexpendituresonsafetynetsdeclinedsignificantlyacrossallcountries(Milanovic1998).

Korea.

ThecentralresponseoftheKoreangovernmentwastointroduceapublicworksschemethatgrewenormouslyduringthecrisisperiod,risingto200,000participantsinJanuary1999and410,000inmid-1999.Theschemepaidwageslowerthantheprevailingwageforunskilledworkersinordertoattractonlythosetrulyinneedofemployment.Theschemealsowassupposedtoguaranteeajobforallwhowantedone,althoughtherewassignificantexcessdemandforthenumberofplacesavailablebylate1998.(Therewere700,000applicantsinJanuary1999.)

ThebudgetaryshareofsafetynetsinKoreadidincreaseduringthecrisis,butrecentanalyseshaveshownthattheincrementalbudgetandprogramcoveragein1998wereinadequatetomeetthecountry'sneeds.Safetynetprogramscoveredonly7percentofthe''new"poorin1998.Overallcoverageofthepoor(oldandnew)droppedfromalmostone-thirdpriortothecrisistoabout17percentin1998,anditisexpectedtofallfurther(to16percent)during1999(Subbarao1999).

18Thereisevidencethatwomenhavebeenexcludedfrompublicworks,andthereareaccusationsofmismanagementandalackofusefuloutput.Still,whathasbeendonereflectstwoimportantlessons:keepingthewagesharehigh-around70percent-createsmorejobsperwonspent;anddiversifyingthejobsmenutoincludemorethanengineeringworks(forinstance,workinlibraries)increasesjob

opportunities.SomeotherEastAsiangovernmentsarejustbeginningtolearntheselessons.

Thailand.

InThailandgovernmentsafetynetsdidnotfillmuchofthegapleftbyinformaltransfersatleastuntil1998.Overallsafetynetexpendituresincreasedduringthecrisis,especiallyduring1999,thoughsomeincometransfersappeartohavebeenprocyclical-thatis,contractingwiththeeconomyratherthanexpanding.Thissituationwastheresultofconflictingpressuresandthegovernment'sreluctancetounderminetheinformalsafetynet.Forexample,socialpensionsandfamilyallowancesinruralThailandappeartobewelltargeted,buttheyareunderfunded(Prescott1999).Thebenefitvalueislessthanone-thirdofsubsistencerequirementsandreachesonlyone-thirdofthetargetgroup.Further,therealvalueofthebenefittransfersinThailandhasbeenfallingovertimebecauseofthegovernment'sfailuretoadjustthemforinflation.OneprogramthatexpandedinresponsetothecrisisinThailandwastheMinistryofHealth'sprogramprovidinglow-incomegroupswithaccesstopublichealthservices.Underthestimuluspackage,jobcreationforthepoorunemployedwasapriority.

Indonesia.

ThemajornewsafetynetprogramsintroducedinIndonesiaasaresultofthecrisiswerearicedistributionscheme(knownasOPK)andapublicworksscheme(PadatKarya).Earlyevidencesuggeststhattheircoverageofthepoorandtheirimpactonpovertyhavebeenlimited.TheOPKmakes10kilogramsofmedium-gradericeavailabletoselectedhouseholdseverymonthatsubsidizedprices.Onaverage,thisamountrepresentslessthan30percentoftheincomeofasingleindividuallivingatthepovertylineandlessthan6percentoftheincomeofahouseholdoffive.OPKusesanindicator-basedtargetingsystemwithminimumstandardsforfoodintake,housing,clothing,

andmedicalexpenditures.

Evaluationsoftheseprogramssuggestthatjustoverone-thirdofallpoorhouseholdshaveparticipatedintheIndonesianpublicworksprogram.Theleakageofbenefitstothenonpoorhasbeensignificant,however.InJakarta,9percentofthepoorhouseholdsworkedonceonthescheme,comparedwith30percentofthemiddleincomehouseholds.InMedanonly5outofover400poorhouseholdsparticipatedinPadatKarya,becausethecontractorusedhisownworkers.

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OtherExperiences.

DeclinesinpublicspendingandafailuretoreachthepoorhaveunderminedsafetynetprogramsinRussiaandCentralAsia.Russiaprovidesastrikingexampleofthefailureofsafetynetprogramstoalleviatepoverty.Spendingonsocialassistancedeclinedthroughoutthetransition,amountingtoonly4percentofthepovertygapin1997,whiletheincidenceofpovertymorethantripled.Thisshortfallcanbeattributedinparttotheconcurrentcollapseofthetaxrevenuesystem(UNICEF1998),butitisalsotheresultofanapparentfailuretoidentifyandimplementprogramsthatreachthepoorandthathavesufficientpoliticalandelectoralsupport.

Inaddition,thesafetynetinRussiaisnotwelltargeted.MostRussianhouseholdsreceivesometypeofgovernmenttransfer,butasignificantproportionoftheverypoor(almost3outof10)andofthepoor(1outof5)receivenobenefits.Atthesametimealmostfouroutoffivehouseholdsthatarenotpoordoreceivepublictransfers(FoleyandKlugman1997).Evenso,thedeclineinbudgetallocationsforpublictransfers,coupledwithwidespreaddelaysinpayments,hasmeantaclearweakeningintheimpactoftransfersonpovertyovertime.Thereductioninthepovertyheadcountattributabletopublictransfersfellfrom29to24percentagepointsbetween1994and1996(KlugmanandKolev1999).

BeyondCurrentIncomeEffectsoftheEastAsianCrisis

Standardpovertymeasuresbasedonincomesandhouseholdexpenditurescaptureonlysomeaspectsofthesocialimpactanddistresscrisescause.Householdsusevariousmechanismstocopewithshocksfromcrises.Theseresponsesmayhelpmitigatetheimmediateimpact,buttheymayalsohaveimportantimplicationsforfuturepovertyandvulnerabilitytoshocks.Crisesalsocreatepressures

ongovernmentsforfiscalausteritywhichmayexacerbatethenegativesocialimpacts,butappropriatefiscalpolicymayalsohelpalleviatesomeoftheseeffects.

BehavioralResponsesandAssetAccumulationduringCrises

Financialcrisesaffectnotonlycurrentincomesbutalsothevalueofhouseholdassets.Inflation,forinstance,hasbeenfoundtobeoneofthemostsignificantdeterminingfactorsofpoverty(DattandRavallion1997;Agenor1998;EasterlyandFischer1999).Iterodesthevalueoffixed-denominationassetssuchasmoney,whichistheprimaryassetofthepoorandnear-poor.Thesegroupshavelittlescopeforhedging.

Astheydotolabormarketshocks,householdsrespondinvarietyofwaystotheincome,wealth,andrelativepriceeffectsofacrisis.Theseresponsesincludeconsumptionsmoothing,changingthecompositionoftheconsumptionbasket,sellingexistingphysicalassets,andacquiringfewernewones.

SavingsBehaviorduringtheEastAsianCrisis.

Changesinhouseholdsavingspatternsduringthecrisisvariedsignificantlyacrosscountries.ThesavingsratechangedlittleinThailand.InIndonesiathesavingsratedeclinedsharply,fallingabout8percentagepointsofGDP(figure2.4).Thesavingsresponsehelpedreducetheimpactofthecrisis

Figure2.4Changeingrossdomesticsavings,1997-98SourceWorldBankstaffcalculations.

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onconsumptionamongpoorhouseholds,butthereductionsincapitalaccumulationreflecttheseverityofthecrisis.

InKoreaandMalaysiathedeclineinpercapitaconsumptionwasmuchgreaterthanthedeclineinpercapitaGDPbetween1997and1998(table2.1).InKoreathesavingsraterose,buttheincreasereflectsprimarilythebehaviorofhigh-incomegroups.

19Totalgrossdomesticsavingsincreasedbymorethan4percentagepointsofGDP.Privatesavingsincreasedatanevengreaterrate,especiallyinlightoftheincreaseinthegovernmentdeficit.Savingsdeclinedfrom16.3percentto11.6percentamongthe20percentofhouseholdswiththelowestincomes,however(KakwaniandPrescott1999).BecauseofthedeclineintheconsumptionratioandthevariedeffectsonincomedistributioninKorea,theincidenceofincomepovertyincreasedmuchlessthanpovertybasedonconsumption(discussedabove,table2.1),risingfrom2.6percentin1997to7.3percentin1998.

ChangesinAssetHoldingsandtheCompositionoftheConsumptionBasket.

Informationaboutchangesinassetholdingsinthecrisiscountriesislimited.Someevidenceis

availableforIndonesiashowingthatpeopleinthemostaffectedregions,suchasJava,soldsomeoftheirassets(Poppele,Sumarto,andPritchett1999).Butmorecompleteevidenceisavailableonchangesintheconsumptionbasket.Risingfoodpricesareespeciallyimportantindeterminingchangesinthecompositionofconsumption,becausehigherpricesreducetherealincomesofhouseholdswithrelativelyhighfoodexpenditures-mainlytheurbanpoor.Foodpricesroserelativetoothercommoditiesinallcountriesafterthecrisis

(figure2.5).However,theeffectwassmallexceptinIndonesia,whererelativefoodpricesroseby40percentbetweenmid-1997andmid-1998.Theeffectisreflectedinthedramaticchangesinthecompositionofexpenditures:theshareofstaplefoodsincreasedfrom23.1to31.7percent,whilethatofmeatsandnon-fooditems(includinghealthandeducation)declined(Poppele,Sumarto,andPritchett1999).

Between1996and1998householdsinThailand,particularlythosewithlowincomes,increasedessentialrealexpendituressuchasfood,fuel,medicalsupplies,shelter,andeducationbutreducedotherexpenditures(World

Figure2.5Relativepriceoffoodsduringthecrisis

Source:Datastream.

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Bank1999d).Koreanhouseholdshadadifferentresponse.Thesharesoffood,clothing,andfurnitureintotalexpendituresactuallydeclined,butspendingforeducationandhealthincreased(KakwaniandPrescott1999).

FiscalAusterityandHouseholdDemandforHealthandEducation

TheEastAsianeconomieseventuallywidenedtheirfiscaldeficittargetstocountertherecessionaryeffectsofthecrisis.YetrealgovernmentconsumptionexpendituresfellinallcountriesexceptThailandin1998.InIndonesiathedeclineoutpacedthefallinGDP.AsaproportionofGDP,healthexpendituresremainedrelativelyunchangedduringthelasthalfofthe1990s,includingthefirstyearoftherecession(table2.3).EducationexpendituresfellrelativetoGDPwhenthecrisisstruckinMalaysiaandKorea,butroseinThailand.

Table2.3Publicspendingonhealthandeducation(percentofGDP)

1994-95 1995-96 1996-97 1997-98 1998-99Health

Indonesia 0.7 0.6 0.6 0.6 0.6Korea,Rep.of 0.5 0.5 0.5 0.6 0.6Malaysia 1.3 1.3 1.4 1.4 1.3Thailand 1.1 1.1 1.2 1.4 1.3

EducationIndonesia 1.4 1.2 1.4 0.7 0.7Korea,Rep.of 5.0 5.0 5.1 4.3 4.0Malaysia 5.3 4.9 4.0 4.7 4.3Thailand 3.4 3.3 3.1 3.4 4.2

Note:Publicexpendituresincludenationalandlocalgovernment.Source:Baptist1999.

Changesinpublicspendingoneducationandhealthaffectsboththeavailabilityoftheseservicesand,becausetheservicesmaybecome

moreexpensive,households'decisionstousethem.Thefullimpactofthecrisisonpublicservicesremainsunclearbecauseofthedifferencesinfiscalpolicyresponsesandthelimitedinformationavailableonchangesinthecompositionofpublicexpenditures.SomedataareavailableforKorea,Thailand,andIndonesia,however.

Korea.

In1998householdsspentlessonitemssuchasclothingandrecreationbutmaintainedspendinglevelsoneducationandhealth.Theratesofdeclineforeducation(9percent)andhealth(14percent)expenditureswerelowerthanthedeclineintotalexpenditures(18percent)(KakwaniandPrescott1999).

Thailand.

Familiesandgovernmentprogramsactedtocushiontheimpactofthecrisisoneducationandhealth(WorldBank1999c).Sofarthecrisishasnothadanegativeeffectoneducation.Intheyearfollowingtheonsetofthecrisis,totalgrossenrollmentsinprimaryandgeneraluppersecondaryschoolsincreasedfrom74.8percentto75.5percent.Thedropoutratio-childrenofschoolagenotattendingschool-continuedtodeclinebetween1996and1998.Familiesemployedavarietyofstrategiestokeeptheirchildreninschool.First,householdsspentlessonnonessentialconsumablessuchasalcohol,tobacco,clothing,footwear,householdgoods,transportation,andcommunications.Second,familiesusedsavingsorborrowedfrominformalsourcestofinanceeducation,sothatrealspendingoneducationroseforboththepoorandnonpoor.Third,fornontertiaryeducationfamiliesshiftedtheirchildrenfromprivatetopublicschoolsastherelativecostofattendingprivateschoolsincreased.Finally,families

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madegreateruseofgovernmentscholarshipandloanprograms.

Governmentpoliciesandprogramsalsosupportedcontinuedinvestmentineducation.Realexpendituresoneducationremainedconstantbetween1997and1998,andtheshareofeducationincreasedintotalexpenditures.Anumberofprogramsandmeasureswereintroducedtoprotecteducationalopportunitiesforthevulnerable.Theseincludedallowingparentstopaytuitionfeesininstallments,permittingschoolstowaivetuitionfeesonacaseby-casebasis,introducingscholarships,expandingtheeducationloanprogram,encouragingprivateschoolstoextendpaymentdeadlines,andprovidingvoucherstoprivateschoolchildren(intheBangkokmetropolitanarea).Theseachievementsareremarkablebutmaybedifficulttosustain,astherecoveryremainsweakandtheeffectsofthecrisiscontinuetobesevere.Households,particularlythepoor,maybelessabletoshiftmoreresourcestoeducationandsustainhigherdebts.

Thereisalsonoevidenceofanegativeeffectonnationalhealthoutcomes.Forinstance,thenumberofreportedcasesofmalnutritioncontinuedonadownwardtrendin1998.Households'realexpendituresonbothprivateandpublichealthservicesdeclinedsignificantly.Out-of-pocketrealexpendituresonmedicalandinstitutionalcarewere36percentlowerin1998thanin1996,whereasspendingonself-medicationincreasedby12percent.Thedeclineinexpenditureswaslowerforthepoor,whoundoubtedlytriedtosustainessentialhealthexpendituresandwhoalsobenefitedfrompublichealthservices.Thegovernmentmaintaineditslevelofinvestmentinhealth,withrealexpendituresonhealthdownby5percentin1998from1997levelsbutstill11percenthigherthantheywerein1996.Thedeclinemainlyaffectedinvestmentexpenditures.Thegovernmentenlargeditshealthsafetynetbyincreasingthecoverageofpublichealthinsurance.Useofpublichealthservicesincreasedbetween1996and1998,withthenumberofoutpatientvisitsrisingby22

percent.

Indonesia.

Theseverityoftheshockandfallinglivingstandardsledtoadeclineinschoolenrollmentrates(Frankenberg,Thomas,andBeegle1999).Thisdeclinewasmuchlargeratthesecondarylevel-some4to5percentagepointsofenrollmentrates

20-thanattheprimarylevel.Consistentwiththeurbanbiasintheeffectsofthecrisisonincomes,thedeclineinschoolenrollmentwaslargestinurbanareas,particularlyJakarta.Thepopulationwiththelowestpercapitaexpenditureshadthehighestratesofdeclineinschoolenrollment:morethan5percentagepointsforthe13-19agegroupforthelowesttwoquartiles,andmorethan6percentagepointsforthe7-12agegroupforthelowestquartile.Becausetheyhadtoincreasefoodexpendituresduringthecrisis,familieshadadifficulttimemaintainingexpendituresoneducation,anditsshareintotalexpendituresdeclinedfrom3.5percentin1997to2.9percentin1998.

Theeffectsofthecrisisonhealthwerecomplexandheterogeneousbutclearlynegative.Theshareofhouseholdexpendituresonhealthdeclinedfrom1.4percentin1997to1percentin1998.Theuseofpublichealthservicesfollowingthecrisisdeclinedby1.8percentagepoints(from7.2to5.4percent)foradultsandbymorethan7.1percentagepointsforchildren.Theproportionofvisitsmadetotraditionalpractitionersnearlydoubled.In1997nearlyone-half(46.7percent)ofallchildrenundertheageoffivehadvisitedacommunityhealthpostinthemonthbeforethesurvey,butthisratedeclinedtoaboutonequarter(27.7percent)in1998.

FosteringSustainedGrowthandReducingtheSocialCostsofVolatilityandCrises

Financialcriseshavelargesocialcostsandtendtoretardoreven

reversegainsinpovertyreductionforsignificantperiodsoftime,eveninthemostsuccessfulcountries.Policiesandinstitutionsthatreducetheserisks,helppreventfinancialcrises,andminimizetheiref-

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fectswhentheydooccurcanhelpsmooththegrowthprocessandmaximizethepositiveeffectsofgrowthonpovertyalleviation(WorldBank1999a;Ferreira,Prennushi,andRavallion1999;Lustig1999).Realizingthelong-termbenefitsofopenness,reducingpovertyoverthelongrunandavoidingtemporarysetbacksinpovertyreductionrequiresappropriatenationalandinternationalpolicies.Thesepoliciesmustminimizetherisksofexternalvolatilityandimprovethecapacitytomanageitatbothlevels.Safetynetsarepartofanybroad-basedstrategyforlimitingtheimpactofcrisesandnegativeshocksonpoverty.

PreventingCrises.

Avoidingcrisesisclearlythemosteffectivewaytoachievestableandsustainablegrowth.Macroeconomicandfinancialpoliciesthatavoidprofligatefiscalandmonetarypolicies,seriouslyovervaluedexchangerates,andunsustainablecurrentaccountdeficitsarenecessarytopreventcrises(WorldBank1999a;Lustig1999).Moreflexibleexchangerates,greaterrelianceonfiscalpolicy,andbetterandtighterdomesticfinancialregulationareoftenneededtoreduceexcessivecapitalinflowsanddomesticlendingbooms(WorldBank1999a).Financialsectorliberalizationmustproceedcarefullyandinstepwiththecapacityofcountriestoenforcetighterregulationandsupervision.Effortstoimproveprudentialsafeguardsandbankingoperationsneedtobeacceleratedinmostdevelopingcountries.Theopeningofthecapitalaccount,particularlytothemorevolatilecapitalflows,needstobecarefullyorchestratedtomatchthecapacityofcountriestomanagerisk(WorldBank1999a;StiglitzandBhattacharya1999).Otherimportantpoliciesmustfocusonimprovingcorporategovernance,increasingtransparency,andbuildingsupportiveinstitutions.

SociallySensitiveCrisisManagement.

Macroeconomicpolicyresponsestocrisesneedtobedesignedtominimizethesocialcostsandavoidlargedeclinesinaggregatedemandandemployment(WorldBank1999a;Lustig1999).Monetarypolicyshouldalwaysavoidhighinflationaswellasexcessiveincreasesininterestrates,bothofwhichworsenanycontractioninaggregatedemand.Policyresponsesaimedatreducingthesocialimpactofcrisesshouldmakefiscalpolicycountercyclicalinordertoreducetheextentofcontraction.However,developingcountriestypicallyhaveprocyclicalfiscalpoliciesthattendtoaggravatetheimpactofdownturns(Easterly,Islam,andStiglitz1999).Thisphenomenonistheresultofthehighsensitivityoftaxreceiptstochangesinincomes,underdevelopeddomesticfinancialmarkets,limitedaccesstoforeigncapitalmarkets,andtheriskoflosinginvestorconfidence.Thesefactorsmakepursuingcountercyclicalfiscalpoliciesdifficult.Establishingeffectivecountercyclicalfiscalpoliciesrequiresthatpublicfinancesbemanagedwellduringgoodtimes,sothatthereisroomforexpansionarypoliciesduringnegativeshocks.Theadequatewell-institutionalizeduseofstabilizationfundsmayalsobehelpful(Lustig1999).ButevenEastAsiancountriesthathadresponsiblefiscalpoliciesbeforethecrisishavefounditdifficulttoachievethelooserfiscalobjectives.

Fiscaladjustmentsshouldalsoprotecttheexpendituresthataremostimportantforthepoor,suchasemploymentandhumandevelopmentprogramsandtargetedsubsidies.Wherecrisesresultinhighunemployment,thefiscalstimulusneedstobedirectedtolabor-intensiveactivities.

ManagingVolatility.

Inthelongrundevelopingcountriesstandtomakegainsingrowthandtoreducepovertythroughopentradepoliciesandintegrationintotheworldeconomy.Butexternalshocks,suchascapitalflowreversals

andcollapsesincommodityprices,maycausetemporaryincreasesinpovertythataredifficulttoreverse.Developingcountriesmustdevelopthecapacitytomanageincreasedexternalandinternalvolatilitythroughbettereconomicmanagement,morerobustinstitutionsformanagingrisks(suchasbanks),andimprovedsafetynets.

SafetyNets.

Beforeacrisis,safetynetscanspurproductivityandgrowthbyprovidingthe

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insurancenecessaryforhouseholdstomakeriskychoiceswithhigherpotentialreturns.Safetynetsalsohelpensurethatcrisesdonothaltdevelopment.Theyhelpmaintainessentialhouseholdinvestmentsineducationandhealthandeliminatetheneedforthepoortodivestthemselvesofphysicalcapital.Settingupsafetynetsduringtimesofeconomicgrowthmaybetheonlyeffectivewaytoprotectthepoorduringcrises(Ferreira,Prennushi,andRavallion1999).Theneedforredistributioninevitablyincreasesduringcrises,evenifmostpeople'sincomesfall.Althoughthenewlypoorgeneratemostoftheincreaseinneed,policiesneednotdistinguishbetweentheoldandnewpoor.

Asaresponsetoatemporaryshock,increasesinspendingonsocialsafetynetsareideallyfinancedovertime,bothpastandfuture.Despitethislogic(orindeed,becauseofit)countriesusuallyhavetoadoptpolicieswiththelowestbudgetarycosts.Targetingbenefitsisonedesirablemeansofkeepingcostslow.Self-selectionmechanismssuchaspublicworksareanimportantmeansofreducingthebudgetarycostsofredistributivepoliciesandofestablishinginstitutionstodelivertransfers.Establishingwell-functioninginstitutionsmaybeoneofthelargestsetupcostscountriesincurinresponsetodeepcrises.Ideally,ofcourse,suchinvestmentsprecedeacrisis.Recentinternationalexperienceconfirmsthatopenandtransparentinstitutionsoperatinginanoncorruptwayareasimportanttotheestablishmentofsafetynetsastheyaretootherareasofpublicaction.

Thepossibilityofmakingaguaranteeoflow-wageworkoncommunity-initiatedprojectsthecentralelementofasafetynetmaybelimited.Ifthereisaninstitutionalbasisforsignificantlyexpandingworkfareprograms,withcentralandlocalagenciesoperatinginatransparentandnoncorruptfashion,thentheseschemescouldplayasignificantroleinalleviatingpoverty.Thecontributionofpublicworkstopovertyreductiontendstobelargerincountriessuchas

Korea,wherethesocialcostsofcriseshaveprimarilytakentheformofhighunemployment.Publicworksaremoreeffectiveatreducingpovertyinthesecountriesbecausetheopportunitycostsofparticipatinginpublicworksprojectsarelowerforthejoblessthanfortheworkingpoor.Publicworksareanimportantandusefuloptionforreducingpovertyduringcrises,especiallyindevelopingcountriesinneedofinfrastructureinvestments.However,theyarebestimplementedalongsideotherprogramsforboththeable-bodiedpopulationandthoseunabletowork.

Notes

1.Easterlyandothers(1993);Lutz(1994);Mendoza(1994);HausmannandGavin(1995);SpataforaandWarner(1995);DeatonandMiller(1995);CollierandGunning(1996);Guillaumont,Jeanneney,andBrun(1999);LundbergandSquire(1999).TheevidenceconcernsGDPandoutputgrowthanddoesnotaccountforthedirectrealincomegrowththatresultsfromincreasedpurchasingpoweroninternationalmarkets.

2.DeatonandMiller(1995)suggestthatincountriesthataremarginalproducersofcommodities,wherelaboraccountsforasignificantshareofcosts,povertyitselfmayexplainwhyrealcommoditypricesdonotincreaseinthelongrun.Thesepricescannotriseaslongasthereareunlimitedsuppliesoflaboratthesubsistencewage.Long-termmarginalcostsaresetbypovertyintropicalcountries,andcommoditytradecannotcontributetoreducingit.Incentivesfortechnicalprogressareweak,andevenwhenprogressoccursittendstomakepricesfallwhilerealwagesremainatthesubsistencelevel.

3.Theheadcountindexistheproportionofindividualsinthepopulationwhoseincomeorconsumptionexpendituresfallbelowthepovertyline.

4.Theelasticityforothermeasuresofpoverty,suchasthepoverty

gap,areusuallyhigher.SeeLiptonandRavallion(1995).

5.Foralower-endGiniindexof0.25,theelasticitywouldbe-3.3.Itis-1.82forahigherindexof0.59(Ravallion1997).

6.AizenmanandMarion(1999)findsimilarresults.

7.Thisresultholdsunderriskneutrality,butitalsorequiressomedegreeofimperfectcompetition(Caballero1991).

8.Theauthorsalsofindthatforeignaidandgoodpoliciescanoffsetthisvulnerability.

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9.ThisfindingiscontrarytoearlierfindingsbyMcBean(1966)thatexportinstabilityhasnoeffectongrowth.

10.Theasymmetrynotionisalsosupportedbyfindingsabouttherelationshipbetweentheheadcountpovertyindexandmeancountryincome(Ravallion1997).Moregenerallythepovertyheadcountwill,foragivenabsolutedecreaseinincome,increasemoreforapoorthanforawealthycountry(Milanovic1998).

11.PovertyfiguresfortheruralareasarenotavailableforKorea.

12.Thefiguresusedfor1997areestimatesbasedonthedecliningpovertytrendsbeforethecrisis.

13.Ruralareasgainediftheywerenotprimarilyriceproducingandwerenotaffectedbydrought(pricesremainedlowintheseareasuntilAugust1998).Someareasalsohadnaturaldisastersduringthecrisis.Thedroughtof1997-98wasnotasbadonJavaashadbeenfeared,butitdidhithardintheEasternIslands,onthewestcoastofSumatra,andinpartsofSulawesi.EastKalimantansufferedanecologicaldisasterwhenthedroughtinteractedwithwildfires.

14.ThemeasuredGinicoefficientsareeitherbasedonconsumptionexpendituresorincomes.Inthelattercasetheyalsomaybebiased,astheydonotreflectadequatelyallincomesandchangesofassetvalues.

15.Thisresultholdstrueeveninindustrialcountries.SeeFarber(1993),andLayard,Nickell,andJackman(1994).

16.Therewasashiftfromruralnonagriculturaltoagriculturaljobs.Ruralemploymentincreasedfrom56.05to57.37million,whileagriculturalemploymentincreasedfrom34.8to39.4million.

17.Amongthecrisis-hitcountries,Koreaistheonlyonethathadanunemploymentinsurancescheme,andhadextendeditspotentialcoverage.

18.BudgetaryallocationstosupporttheunemployedinKoreaweretodoubleinApril1999toincreasetheprogram'scoverageofthepoor.

19.ThesavingsresponseinKoreaandMalaysia,whichhavehigherincomesthantheothercrisis-affectedcountries,mayreflectgreaterwealtheffectsfromthecrisis.

20.Theaverageenrollmentrateforthe13-19agegroupwasaround60percentin1997.

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3AsianRestructuring:FromCyclicalRecoverytoSustainableGrowthSincetheonsetoftheEastAsaincrisismorethantwoyearsago,thecorporatesectorsandfinancialsystemsinthecrisiseconomieshaveremainedinseveredistress.Nonperformingloans(loansmadebythefinancialsystemthatarenotbeingfullyrepaid)haveskyrocketedtounprecedentedlevels:19percentofallloansand27percentofgrossdomesticproduct(GDP)intheRepublicofKorea,20percentofallloansand30percentofGDPinMalaysia,45percentofallloansand60percentofGDPinThailand,andover50percentofallloansand25percentofGDPinIndonesia.Incontrast,nonperformingloansinothermajoremergingmarketcrises(Chileintheearly1980sandMexicoin1995)werelessthan20percentofGDP.IntheScandinavianbankingcrisesduringtheearly1990s,nonperformingloansamountedtoapproximately5percentofGDP.EastAsia'sheavyrelianceonbank-basedfinancialsystemsandthehighdebt-equityratiosofcorporationshavemadetheeconomicdistressespeciallyacute.

Nonetheless,recoveryhasbegun.Thisrecovery,alongwiththemajorpolicymeasuresusedtoresolvethedistress,raisesthepossibilitythattheprocessmaynowworkinreverse:arisingtidemayliftallboats.Thatwelcomepossibility,however,cannotbepresumed.Whileastrongcyclicalrecoverymaycontinue,theaftereffectsofthefinancialshockwillpersist,andcontinuedrestructuringisessentialbothtoreinforcethatrecoveryandtoreducefuturevulnerabilities.

ThischapterreviewstheevidenceontheextentofcorporateandfinancialdistressinEastAsia'scrisiscountriesandthesignificant

progressmadetoresolvethatdistress.Itdiscussestherelativerolesofpositivemacroeconomictrendsandfinancialrestructuringforcontinuedrecoveryandsustainablegrowth.Italsodrawspolicylessonsformanagingcorporateandfinancialdistress.

Thechapterreachesthefollowingconclusions:

Theongoingrecoveryisstillfragileanduneven.Theexternallytriggeredliquiditycrisisduringthesecondhalfof1997indiscriminatelysubmergedbothstrongandweakproducersandfinanciers.Therisingtideisliftingthestrong,especiallythosebenefitingfromtradegrowthinelectronicsproducts,butthefinanciallyweakcontinuetostruggleonaccountofbothcrisis-inducedandlongstandingvulnerabilities.

Withoutvigorouscorporateandfinancialrestructuring,thereturntosustainablegrowthwilllikelytakelonger,thefiscalcostsofthecrisiscouldrise,andtheeconomieswillremainvulnerabletonewexternalandinternalshocks.WeakfirmsinEastAsiaoperatedonthinmarginsintheyearsleadinguptothecrisis,andtheirinabilitytopayinterestfollowingtheonsetofthecrisishasaddedtotheirdebtburden.Suchfirmsconstituteasignificant

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portionofthecorporatesectorineachofthecrisiseconomies,andtheappetitetoinvestinthemisextremelylimited.Theywillcontinuetoactasadragoninvestmentandgrowthuntilthefinancialclaimsonthesefirmsareresolved,andeithertheiroperationsreturntoadequateprofitabilityortheirassetsareredeployed.

Recognizingtheurgency,EastAsiangovernmentswerequicktocreateaninstitutionalstructureforcorporateandfinancialrestructuring;theyalsoearmarkedfundsforbankrecapitalization.Thepoliticalmomentumforreformhas,however,sloweddown,inpartbecausethedeeperstructuralproblemsnowneedtobeaddressed.Experiencefromothereconomies,includingJapan,showsthataslackeningofthereformeffortcanundoprogress.

Governmentrestructuringinitiatives-thoughrequiredonmanyfronts-needtobeguidedbytwopolicyconsiderations:limitingthelikelihoodofsystemicdisruption;andclarifyingfinancialclaimswhilealsofacilitatingassetreallocation.Tocontainfiscaloutlays,theseinitiativesshouldbedirectedprincipallytohonorthesocialcontracttoprotectbankdepositorsand,wherenecessary,topreservethepaymentssystemandtheorderlyflowofcredit.Governmentfundsshouldnotnormallyberequiredforcorporaterestructuring.

Bankrestructuringisimportantbecauseitcontributestobothpolicyobjectives.Expeditiouslyrestoringthehealthofthebankingsystemisrequiredbecauseapoorlycapitalizedbankingsectorcreatescontinuedsystemicrisksandgrowingfiscalliabilitiesforgovernments.Healthybanksarealsobestpositionedtoenforceclaimsandtopursuecorporaterestructuring.

Theprocessofrestructuringcanitselfbedisruptiveifitisnotcarefullymanaged.Restructuringshouldbeundertakeninamannerthatensurestheintegrityandtheorganizationalcapitalofthefinancialsystemsothatprudentlendingtobusinessesandhouseholdsmay

continue.Achievingthisobjectiverequiresdifficultchoices.Havingprovidedimplicitorexplicitguarantees,governmentscaneithermoveaheadrapidlybytakingfiscalresponsibilityforthecostsofthecrisis,ortheycanencourageprivateresolutionofthedistresswhileapplyingregulatoryforbearance.Waitingtoresolveproblemsislikelytomakethemworse.However,expeditiousandtransparentactionshouldbeaccompaniedbymarket-basedmeasurestorecoupfiscalcostsandtosignalcrediblyacommitmenttoseverelyrestrictguaranteesandbailoutsinthefuture.

Corporaterestructuringneedstodealfirstwiththedelineationandallocationoflosses.Improvementsinaccountingstandardsandbankruptcyregimescanhelpsupportthisprocess.However,intheabsenceofeffectivebankruptcyprocedures,out-of-courtproceduresofferamechanismforresolution.Oncefinancialclaimsareresolved,corporaterestructuringcanbeexpectedtooccurthroughnaturalmarketforces,exceptwheremajorimpedimentspreventsuchforcesfromworking.Governmentscanfacilitateassetmobilitybycreatingaframeworkforeffectivedomesticandcross-bordermergersandacquisitions.TheJapaneseexperiencecautionsthat,withoutanadequateframeworkforresolvingclaimsandforfosteringassetmobility,fundamentalcorporaterestructuringcanbeindefinitelydeferredatahigheconomiccosteveninasophisticatedeconomy.

TheUnevenRecovery

AstrongcyclicalrecoveryistakingplaceinthecrisiseconomiesofEastAsia,raisingthepossibilitythatgrowthmayalleviateoreveneliminatethecorporateandfinancialdistress.Althoughthesharprecoveryfromthedepression-likeconditionsisexpectedtocon-

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tinueovertheshorttomediumterm(seechapter1),itstransformationintohighandsustainablegrowthwillrequiremorethanthepresenttemporarystimuli:thebuildupininventories,lowinterestrates,andgainsfromcurrencydepreciation.Therecoveryhasbeenuneventhusfar,withrapidgrowthinthehightechnologysectorsbutmoremodestgrowth,andevencontinueddecline,inimportantsegmentsoftheAsianeconomies.Bankingsystems,therefore,remainseverelydistressed.Thecorporateandfinancialdistresscanpersist,absentvigorousrestructuring,becausetheincentivestoacceptandallocatelossesareweak.Thatdelay,inturn,canhampergrowthbyrestraininginvestmentandraisingthefiscalcostsofresolution.

TheSourcesofUnevenness

Theobservedunevennessinrecoveryisnotsurprising."Creativedestruction"permitstheatrophyoftheweakandtheshiftofresourcestohigherproductivitysectors(Harberger1998).Forinstance,withcurrenciesstillbelowprecrisislevels,aperiodofslowgrowthinthenontradablesectorscanbeexpected.Thecrisishasalsoemphasizedweaknessesinthecompetitiveabilityoftraditionalmanufacturingandhashaddisproportionateeffectsonsmall-andmedium-sizefirms.

1Thoughtheunevennessisnotsurprising,itisimportant,sinceweakproductionperformancecontributestothealreadymassivefinancialsectordistressand,inturn,hampersgrowth.

NontradableSectors.

Theaftermathofthecrisishasseenasharpdeclineinthenontradedsectors,whereproductionremainsbelowprecrisislevels(figure3.1).Thisistobeexpectedbecausecurrencydepreciations,whichfavortradedgoods,reducetheincentivetoinvestinthenontradedgoodssectors.Thepoorperformanceofnontradedsectorswasalsoafeature

ofMexico'srevivalfromitscrisis(KruegerandTornell1999).Mexicannontradedproductiontookalmostthreeyearstoreachprecrisislevels.

Asdiscussedbelow,theshareoffirmsunabletopaytheirdebtsissignificantlyhigherinthenontradablesectorsthaninthetradablesectors.InMalaysiaaboutthree-quartersofthenonperformingloansaretoenterprisesinthenontradablesectors.Thehighdistressreflectsendemiccharacteristics.Evenpriorto

Figure3.1Nontradableproductionbeforeandaftercrises

Note:Theindexisathree-quartermovingaverage.Source:Datastream.

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thecrisis,thenontradablesectorshadbeencharacterizedbyovercapacityandlowproductivity(Crafts1999),reflectinglocalmonopoliesinsectorssuchasretailtradeanddistribution.TheJapaneseexperienceshowsthatderegulationofdomestictradeisimportanttospurcompetitionandtoincreaseproductivity(Alexander1999).Lowproductivityalsoreflectsexcesscapacityintherealestatesector.

WeaknessesinTraditionalManufacturing.

Ofallthecrisiscountries,Korea'sindustrialproductionhasrecoveredthefastest,risingaboveprecrisislevels(figure3.2).ThemorerapidrecoveryinKoreareflectsinpartitsgreaterstrengthsinsectorssuchaselectronics,computers,andtelecommunications(figure3.3).Koreanfirmshavealsodonewellinthetransportequipmentsector,whereasMalaysianandThaifirmsinthissectorhavesuffered.Traditionalmanufacturingsectorswouldhavebeenexpectedtoleadthewaytorecoveryinthelowerwagecrisiscountries.InThailandthetextilessectorgrewrapidlyfollowingthedepreciation,butoutputhasfallenbacktoprecrisislevelsasthecurrencyhasappreciated.Thaiproductsarehavingahardtimecompetinginexportmarkets(EIU1999b).TraditionalmanufacturinginKoreareboundedonlyslightlyafterthecrisis,reinforcingaseculardeclinethatsignificantlypredatesthecrisis(figure3.3).

EffectsonSmallandMedium-SizeFirms.

Smallandmedium-sizefirmsaresufferingdisproportionately.WhileaggregateKoreanindustrialproductionbottomedoutinlate1998,productionbysmallfirmscontinuedtofallinabsolutetermsuntilJuly1999,resultinginadeclineofaboutone-thirdfromprecrisisproductionlevels.Inothercountries,wheresmallandmedium-sizefirmshaveagreaterindustrialpresence,theirfinancialinabilitytowithstandcrisishasprovedmoreofaneconomy-widesetback(see

DomacandFerri1998forKorea;Domac1999andEIU1999aforMalaysia;Mako1999forThailand).Forexample,morethan50,000smallfirmsand400,000householdsthroughoutThailandaccountforabout50percentofthecountry'snonperformingloans(Mako1999).Theinabilitytorestructurethesedebtseffectivelycontributestofinancialsectorproblems,whichfeedbackintocontinuedfinancialdifficultiesforsmallfirms.

2

Figure3.2IndustrialproductionbeforeandaftercrisesNote:Theindexisathree-monthaverage.

Source:Datastream.

Figure3.3ProductionindexinKoreabyindustry

Source:Datastream.

Eventhoughlargefirmshavebeenthedriversofrecovery,they-especiallythelargeconglomerates-alsoposesystemicrisks.InKoreatheonsetofthecrisiswas,inpart,associatedwiththecollapseoftwoconglomerates,HanboSteelandKia.InThailandthefinancialtroublesofThaiPetrochemicalssymbolizedoverinvestmentincapacityandexcessiverelianceonexternaldebt.Throughouttheregiondiversifiedconglomerateswereinitiallyregardedastoobigtofail,asdemonstratedintheKoreanandMalaysiangovernments'earlyeffortstosupportthesurvivaloftheirlargestbusinessgroups.However,thatperceptionmaybechanging,especiallyinKorea,astroubleshavemountedatthechaebolDaewoo,whereacreditor-ledrestructuringisongoing.

ContinuedHighLevelsofCorporateandFinancialDistress

Theunevenrecoveryisreflectedincontinuedcorporateandfinancialdistress.Twomeasures

Table3.1Corporatedistress,pastandprojected,1995-2002(percentageoffirmsunabletomeetcurrentdebtrepayments)

1995199619971998 1999(Q2) 2000-2002

Country TotalTotalTotalTotalTotalManufacturingServicesRealestate TotalIndonesia 12.6 17.9 40.3 58.2 63.8 41.8 66.8 86.9 52.9Korea,Rep.of 8.5 11.2 24.3 33.8 26.7 19.6 28.1 43.9 17.2Malaysiac 3.4 5.6 17.1 34.3 26.3 39.3 33.3 52.8 13.8Thailand 6.7 10.4 32.6 30.4 28.3 21.8 29.4 46.9 22.3a.Estimate,basedontheassumptionthatinterestratesstayattheircurrentlevelthroughouttheperiod.b.Estimate,basedontheassumptionthatinterestratesregaintheir1990-95averages.c.Malaysianfirmsinagricultureandutilitiesbringdowntheaverageforallfirmsin1999.Note:Growthratesassumedthrough2002arebasedonIMFprojections(IMF1998).Source:Claessens,Djankov,andKlingebiel1999;sectoralestimatesprovidedbyClaessens,Djankov,andKlingebielforthispublication.

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ofdistressarefirms'inabilitytomeettheirdebtobligationsandthemirrorimageofthatinabilityinnonperformingloansonthebalancesheetofbanks.Thesemeasuresrankthelevelofcountrydistresssimilarly.Indonesiahasthehighestleveloffinancialdistress,whereasKoreaandMalaysiahavethelowest.

3Thedistressinallfourcountriesis,however,historicallyseverewhencomparedwithothercountriesthathaveexperiencedfinancialcrises,becauseofthehighlevelsofbankcreditto-GDPratiosandhighcorporatedebt-to-equityratios(WorldBank1999).Whilethesharplylowerinterestratesshouldproviderelief,severalfactors,whicharelikelytopersist,havekeptthedistressathighlevels.

InterestRatesandFiscalDistress.

Lowerinterestratesareunlikelytosufficeineliminatingdistress.Basedonfinancialstatementsoffirmslistedonstockexchanges,theabilityoffirmstomeettheircurrentinterestpaymentobligationscanbeestimated(table3.1).Theseestimatesneedtobeinterpretedcarefullybecausetheyaretypicallybasedonasmallsampleoflistedfirmsforwhichthemostcompleteinformationisavailable.

Inallcountries,thelevelofdistresshadbeenbuildingsince1995.In1996,evenwhengrowthwasstillbooming,morethan10percentoffirms(exceptinMalaysia)werealreadyunabletoservicetheirdebt.Theestimatesshowthatinthesecondquarterof1999morethanaquarteroflistedfirmsinKoreaandMalaysiawereunabletoservicetheircurrentdebtrepayments.InIndonesiaalmosttwo-thirdsofallfirmswereundersevereliquiditystress(table3.1).Inallcountries,distresswasespeciallyhighinthenontradedsectors(servicesandrealestate),ascouldbeexpectedfromthetrendsinnontradedproductiondescribedintheprevioussection.

Thecrisisof1997movedmanymarginalfirmsintoilliquidity.

Thecrisisof1997movedmanymarginalfirmsintoilliquidity.Moreover,suchfirmshaveaccumulateddebtsincethecrisisbecausetheyhavebeenunabletomakeinterestpayments.Thissuggeststhatmanyfirmsthathaverecentlyemergedfromtheworsteffectsofthecrisisarestillinaprecarioussituationandarevulnerabletofurthershocks.Projectionsfor2000-2002showthat,oncurrentassumptionsofgrowthratesintherespectivecountries,asignificantportionofthefirmswillremainindistress.Ifinterestratesrisefromtheirpresentlowlevelstotheir1990-95averages,thedistresswillbeevengreater.

InterestRatesandNonperformingLoans.

Nonperformingloansincreasedinthefirsthalfof1999despitedeclininginterestrates,andarestubbornlyhigh-athistoricallyunprecedentedlevels(table3.2).4InThailandtheproblemsnowcenteraroundthecommercialbanksbecause,followingtheirclosureafterthecrisis,theassetsinnonbankfinancecompanieshaveshrunktoasmallfractionoffinancialsystemassets.However,inKoreaandMalaysia,thenoncommercialbanksector(in-

Table3.2Ratioofnonperformingloanstototalloans,December1998-September1999(percent)

Malaysia Rep.ofKorea ThailandDec.1998

June1999

Dec.1998

June1999

Dec.1998

Sept.1999

Commercialbanks 13.0 12.8 7.4 8.7 42.9 44.6Merchantbanks 30.6 31.6 20.0 11.9 - -Otherfinancialinstitutions

26.8 23.9 13.1 14.5 70.2 62.3

Assetmanagementcompanies

100.0 100.0 100.0 100.0 - -

Totalfinancialsystem 19.7 21.2 16.8 19.2 45.0 45.3-Notapplicable.Note:Nonperformingloansaremeasuredonagross,three-monthbasisandincludeassetscarvedoutforsalebytheassetmanagementcompanies,whichbydefinitionhave100percentoftheirloansnonperforming.Thestepstowardsalesofnonperformingloansarediscussedlaterinthischapter.

ofnonperformingloansarediscussedlaterinthischapter.Source:FinancialSupervisoryServices(RepublicofKorea),BankNegara(Malaysia),andBankofThailand.

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Figure3.4Thainonperforminloansandinterestrates,June1998-September1999

Source:BankofThailand.

RisksofaLow-LevelEquilibrium

surancecompaniesandinvestmentandtrustcompaniesinKorea,andfinancecompaniesandmerchantbanksinMalaysia)continuestoaccountforaboutaquarterofthenonperformingloans.Projectionsofcontinuedgrowthinnonperformingloansstemlargelyfromthelikelyincreaseofsuchloansinthenonbankfinancialinstitutions(see,forexample,Xie1999).

Thedeclineininterestrateshasnotbeensufficienttoprovideimmediaterelief.Onthecontrary,especiallyinThailand,butalsoinIndonesiaandKorea,nonperformingloansroseevenasinterestratesfell(figure3.4).

5Fragilefirms,operatingonthinmargins,experiencedaseveredeclineintheirnetworthwheninterestratesrosesharply.Thesharpfallinoutputfurtheraggravatedtheproblem.Recoveryforthe

distressedfirmswilllikelybeslow.Experienceshowsthateconomicdownturnsassociatedwithfinancialcriseshavemoreenduringconsequencesthandownturnscaused,forexample,byinventory-drivenbusinesscycles(FurmanandStiglitz1998).

Givenenoughtime,financialinstitutionsandcorporationscanovercometheirdistressasstakeholdersresolvetheirclaimsonassets,evenintheabsenceofformalbankruptcyprocedures,andasrestructuringisinducedbymarketpressures.Withoutadditionalshocks,theeconomieswouldthenreturntotheirnewlong-termsustainablegrowthpath,whichcouldbelowerthantheprecrisislevel(WorldBank1999).Theimportantissueis:howmuchtime?Thatis,canbettermanagementoftherestructuringprocessreducethecostsofthecrisisandthelengthoftheperiodina"lowlevelequilibrium"?

Aslowdownormismanagementoftherestructuringprocessraisestwoconcerns.First,continueddistresslowersinvestment,whichlowersgrowth,andinturnfurthercontributestononperformingloansandreducedinvestmentandgrowthprospects.Whilerapidrecoverymaycounteractthisnegativedynamic,theevidencecautionsagainstsuchapresumption.Nonperformingloansarelikelytoremainhigh,andinvestmentrateshavefallensharply,loweringgrowthprospectsintheshortrun.Second,strongincentivesexistforallpartiestowaitratherthantoresolvetheirproblems(box3.1).Failuretoassessandallocatethelossescouldleadtotheirsocializationandrisingfiscalcosts.

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Box3.1Whydistresscanpersist

Thecombinationofhighcorporatefinancialdistress,unabtedbankingsectorproblems,lowlevelsofinvestment,andreducedgrowthratescancausedistresstopersist.Inagoodequlibrium,severalfactorsgotogether,includinghighgrowth,highdemand,risingpropertyvalues,andanappropriatelevelofcreditfromthefinancialsystem.Inabadequilibrium,poorcorporateperformancecontributestobanks'nonperformingloans,reducingboththeircapacityandwillingnesstolend.Whenpropertyrepresentsalargeproportionofthecorporatebalancesheetorimportantcollateralforloans,asinmanypartsofEastAsia,adeclineinpropertypricesfurtherweighsdownrecovery.

Theprivateincentivestowaithampertheresolutionofthelosses.Fordebtorswhohaveexperiencedlargelossesintheirequityholdings,thereislittledownsidetowaiting.Theycannotlosemuchmore.Forcreditors,acknowledgingthelossesrequiresraisingnewcapital,whichisnoteasilyforthcoming.Theproblemisaggravatedbecausethoseindistresshaveanincentivetoundertakefurtherriskyinvestments.Theirrisksarenogreaterthanwhentheyweremerelywaitingfortheresolutionofpastproblems.Forbothcreditorsanddebtors,thereiusthehopethattheproblemswilljustgoaawaywhengrowthresumesorifthegovernmentbailsthemout.

Asfirmsandbankswaitfortheirfortunestoimprove,debtcontinuestoaccumulate.Thelongerthatinterestpaymentsaredeferredandcapitalized,thehigherfuture

growthmustbeforacompanytoemergeformnegativetopositivecashflows.Theproblemreducesdemandbyloweringthepurchasesofinputsandbyreducingconsumerconfidence,furtherincreasingthestrainoncorporatecashflowandbalancesheets.Continuedrestructuringisrequiredtocounteractsuchanegativefeedbackloop.

NonperformingLoansinEastAsia.

InThailandnonperformingloanshavedeclinedmodestlyfromtheirpeaklevels.Inothercountries,however,datauptoJune1999showcontinuedgrowthinnonperformingloans.Anumberoffactorscontributetothehighlevelofnonperformingloansandthepossibilitythattheymayactuallygrowintheshortandmediumterm.First,theaccountingmethodsinplacehavenotrevealedthefullextentofnonperformingloans,especiallyinKoreaandMalaysia,wherenonbankfinancialcompaniesareespeciallyimportant.Pooraccountingandfaultycreditanalysismaskedborrowerswhowereoftenconnectedtothelendinginstitutionsandwhocouldnotpaybutwereneverthelessabletoborrowrepeatedlytomeettheirdebtobligations.Whilemanyofthesenonperformingborrowershavebeenrevealed,someobserversbelieve,forexample,thatKoreannonperformingloanscouldgrowbyoverathirdfromtheirpresentlevelsbeforetheystartfalling(WarburgDillonRead1999).

Second,manyfirmswiththinoperatingmarginsandhighdebtlevelsareendemicallyweak,andthushavebeenunabletoservicetheirdebtdespitetherecovery.Becauseofthecapitalizationofinterest,theirdebtlevelshavegrownandwillremainaboveprecrisislevelsforanumberofyears,evenunderoptimisticgrowthscenarios.

Third,announcementsofrestructuringagreementsledtotheexpectationthatnonperformingloanswouldfallasashareoftotal

bankloans.However,mostagreementsarejustthat-agreementsinprinciple-andwilltaketimetobecomeeffective.Moreimportant,andasdiscussedbelow,restructuringagreementshavemainlytakentheformofdeferreddebtpayments,andthereislittleevidencetosuggestthatassetshavebeenfundamentallyrepositioned.Assuch,someagreementshaveprovedunsustainable.

Fourth,exceptinKorea,therehasbeenvirtuallynonewlending,implyingthatbanksarenotlikelytogrowoutoftheirbaddebt

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Figure3.5Changeinbankdepositsandlendingtotheprivatesector.

Note:June1999isusedfortheRepublicofKorea.Source:IMF,InternationalFinancialStatistics.

problemsoon.InIndonesiaandMalaysia,depositshavegrownsignificantlyin1999(figure3.5),reflectingaconfidenceinthebankingsystems,oratleastinthegovernments'abilitytomeettheirobligationstoinsureddepositors.Increaseddeposits,inturn,haveimprovedbanks'liquidity,butthathasnotledtoincreasedlendingtotheprivatesector.

Korea,theonlycrisiscountrytoexperienceacreditexpansion,hasalsohadthestrongestrecovery.SuchcreditexpansionwillcontinuetobenecessaryasKoreanfirmsstopdestockingandstartrebuildingtheirinventories.However,withmostofthebankingsystemnowownedandcontrolledbythegovernment,thequalityofthelendingremains

Figure3.6TotalinvestmentinEastAsia

Source:Datastream;IMF,InternationalFinancialStatistics.

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aconcern.Koreanbanksholdsignificantdeposissstsinthefinanciallyfragileinvestmentandtrustcompaniesandhavebeenundersomepressuretoretainthesedeposits.

EstimatesalsosuggestthatincomegeneratedfromthedifferencebetweenlendinganddepositinterestrateswillnottobeenoughtodealwiththenonperformingloansandtherecapitalizationofbanksinIndonesiaandThailand(Claessens,Djankov,andKlingebiel1999).InKoreaandMalaysia,thebetterbanksarepositionedtogrowoutoftheirproblems.However,eveninthosecountries,significantdistressedsegmentswillrequirecontinuedrestructuringandinfusionofcapital.Koreanbanks,forexample,areexpectedtolose4trillionwonin1999toprovisionagainststringentassetclassificationstandardsandbecauseofincreasedexposuretononperformingloans.

Fifth,somefractionofnonperformingloansarestrategic-thatis,borrowerscanrepay,butchoosenottobecausetheycannoteasilybepursuedbytheircreditors.Accordingtoinformalestimates,theshareofstrategicdefaultersinThailandisbetweenafifthandathirdofalldefaulters.Thisaddstotheburdenonbanks.

Distress,Investment,andGrowth.

Ahighlevelofdistresslowersinvestmentandgrowthprospects.Investmentrateshavefallensharplysincetheonsetofthecrisis(figure3.6).Relativetotheaverageof1992-97,theinvestmentrateinthesecondquarterof1999wasdownbyabout57percentinIndonesia,40percentinThailand,and30percentinKorea.Theextentofthefallininvestmentisgreaterwheretheratioofnonperformingloansishigher.Thus,distressedfirms,unabletomeettheirdebtserviceobligations,havebeenunabletoobtaincreditandtoundertakenewinvestment.Healthyfirmshavecontinuedtoinvest,includinginrestructuringtorepositionandinsulatethemselvesfromfuturecrises.TheextentofthedeclineininvestmentinMalaysiaisgreaterthan

mayhavebeenanticipatedbytherelativelylowlevelofnonperformingloansandbythelowexposureofMalaysianbanksandcompaniestoforeigncurrencydebt.

Whereinvestmentwasinitiallyexcessiveandmisdirected,thefallininvestmentisdesirable.However,aprolongeddroughtininvestmentcouldcontinuetodepressgrowthintheshortrunanderodecompetitiveabilityinthelongrun.Moreover,theevidenceshowsthatadeclineininvestmentspendingisassociatedwithreducedconsumerconfidenceandreducedconsumerspending,thecumulativeeffectofwhichistoreducegrowthsignificantly.

Thefallininterestratesfromthehighpostcrisislevelsshouldhelpstimulateinvestment,thoughshort-termprospectsaredampenedbyarecentriseinthecostsofcapital.Duringthesecondquarterof1999theinvestmentrateactuallyincreasedinKoreaandMalaysia(figure3.6).However,lowlevelsofinvestmentcanbeexpectedtocontinueintheshortterm,becausesignificantcapacityliesunused,corporatedistressisstillwidespread,andcontinueduncertaintiesremain.Inaddition,thelargefluctuationsinstockmarketindicessincethepeaksreachedearlierintheyear(seechapter1)andthecontinuingupwardpressureongovernmentbondyieldsimplyarisingcostofcapitalandahigherdiscountingoffuturegrowthprospects.

Anegativefeedbacklooppotentiallyoperates:distressedfirmsweighdowngrowthprospects,butitisgrowththathelpsthefirmemergefromitsfinancialtroubles.Forexample,afirmthatisjustabletoserviceitsdebtbeforeashockandthen,followingtheshock,missesayear'sdebtservicefindsitselfindeepertroubleattheendoftheyearastheinterestiscapitalized.Tomeetitshigherdebtserviceobligation,thefirmmustgrowsignificantlyfasterthantherateofinterest.Forafirmwithhighdependenceondebt,agrowthratedoubletheinterestrate,continuouslyfortwoorthreeyears,mayberequiredtoachievepositivecashflowsnetofinterestpayments.

InternationalExperiencewithRestructuring.

Internationalexperiencesuggeststhatdelayingrestructuringiscostly.Studiesoffinancialcrisesshowthattheaveragerecovery

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timebacktotrendgrowthratesis2.8yearsforbankingcrisesand1.5yearsforcurrencycrises(IMF1998).ThetimerequiredtoresolvebankingcrisesinLatinAmericahasbeenlonger,approximatelyfourtofiveyears(RojasSuarezandWeisrod1996).

TheMexicanexperiencein1995andtheChileanexperiencein1982offerusefullessonsforEastAsia.TheMexicanrecoverybenefitedfromthecountry'sparticipationintheNorthAmericanFreeTradeAgreementandfromafavorableinternationaleconomy.Mexicoalsotookstepsearlyontoresolveitsbankingcrisis.Thegovernmentcarvedoutasubstantialfractionofbadloansinthesystemandplacedtheminaspecialagency,theFundfortheProtectionofBankSavings(FOBAPROA),tobemanagedandsold.

However,despiteitsearlyandimpressiverecoveryfromthecrisis,Mexico'sgrowthperformancesincethattimehasbeenmodest,especiallyin1999.Growthhasbeenweigheddownespeciallybythesluggishnessinthedomesticeconomy,includingthenontradablesector,andbytheunwillingnessandinabilityofthebankstolend.FOBAPROAwasunabletosellvirtuallyanyoftheassetsithadacquired.Moreimportant,thebankingsector'sproblemswerenotfullyresolvedandnonperformingloanscontinuedtoincrease.KruegerandTornell(1999,33-34)findthat''nonperformingloansareunlikelytodisappearontheirown,evenunderahighGDPgrowthscenario."Thecontinuedpresenceofnonperformingloanshashurttheabilityofthebanksectortoperformitsfunctionsadequately,withcreditespeciallyconstrainedtoproducerssellinginthedomesticmarket.Theauthorsdrawthreelessonsfromtheirfindings.First,theMexicanauthoritiescouldhavebeenmoreambitiousinextractingproblemloansfromthebankingsystem.Second,thegovernmentdidnottakesufficientstepstosubsequentlydisciplinethebankingsector,leavingopentheprospectoffurtherbailouts.Finally,Mexico'sbankruptcyproceduresarestillineffective,renderingrestructuring

problematic.

IncomparisonwithMexico'srecovery,Chile'srecoverywasmuchslower.Yet,despitetheslowrecovery,Chilehasenjoyedrobustandsustainedgrowth.Whatexplainsthedifference?First,althoughinitiallyslowtorecognizethefullextentoftheproblem,Chileanauthoritiespersistedintheireffortstoresolvetheproblemsofthebankingsector,includingundertakingmeasurestodisciplineit.Second,Chileundertookfar-reachingreformstofostercapitalmarketdevelopmentandtoencouragegreatercompetitionintheeconomy,especiallyinnontradablesectorssuchasinfrastructure.

MountingFiscalCosts

Thefiscalcostsofthecrisisarelarge(table3.3).Theseestimatedcostsareillustrativeanddependuponanumberofassumptions,includingtheextentofnonperformingloansattheirpeak,thedegreetowhichthenonperformingloanswillhavesomefuturevalue,andtheinterestratethatthegovernmentswillneedtopayfortherecapitalizationfunds(asdescribedinmoredetailinthenextsection,table3.7).Keepinginviewtheselimitations,inallcountriesplausiblescenariosindicatethatthebankrecapitalizationcostsaresignificantlylargeinrelationtoexistingpublicdebt.Onceagain,theextentofKorea'sproblemislargebutstillmodestinrelationtothatofothers,whileIndonesia'sproblemisthemostsevere.Koreahashadlowpublicdebtand,whilerecapitalizationcostsaresignificantandmayevengrow,theinterestburdenismodest.ThereportedMalaysianrecapitalizationcostsarerelativelysmallbecauseitisassumedthatsignificantrepaymentscanbecollectedfromexistingnonperformingloans.Withouttheabilitytocollectonnonperformingloans,however,Malaysiandebtlevelswillactuallybehigher.

Thesehigherdebtlevelscanreducegrowthprospectsthroughdifferentchannels.Byincreasingthegovernmentdemandforfunds,theyraiseinterestratesand,hence,crowdoutprivateinvestment.

Governmentflexibilitytoactinacountercyclicalmanner

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Table3.3PublicdebtandrecapitalizationcostsasshareofGDP,1998(percent)

IndonesiaMalaysia Rep.ofKorea

Thailand

Publicdebt,1996 23.9 35.3 8.0 3.7Publicdebt,1998a 72.5 33.3 10.5 14.6Estimatedrecapitalizationcostsa,b

58.3 10.0 16.0 31.9

Fundsdisbursed 10.6 4.2 12.5 23.9Expectedadditionalcosts 47.7 5.8 3.6 8.0

Estimateddebtafterrecapitalization

106.6 43.3 26.5 46.6

Totalinterestpayment 16.7 3.1 1.9 5.0Portionforrecapitalization 9.2 0.7 1.2 3.4

Fiscalsurplus/deficit,1998a 1.4 -1.6 -2.9 -2.8Governmentbondyield(percent)c

15.7 7.3 7.2 10.8

a.1997dataisusedforIndonesia.b.Fordetailsonrecapitalizationcosts,seetable3.6.ForThailand,thefiscalcostsinthistableincludethenetcostsincurredforthefinancecompanies(B600billion)lessprivateresourcesraised(B250billion).c.ThebanklendingrateisusedforMalaysia.Source:IMF,InternationalFinancialStatistics.

isreduced.Higherincomeandcorporatetaxratesreduceincentivestoinvestwhilehighertradetaxescanleadtomisallocationofresources.Notealsothatrecentanalysishascalledintoquestionthereportedbudgetdeficitestimatesinthecrisiscountries(KharasandMishra1999).Theanalysisindicatesthatthetruebudgetdeficitshavebeenlargerthanreportedbecauseactivitieswithsignificantfinancialimplicationshavebeenundertakenoffbudget.Insuchacontext,theriseinthedebtlevelscouldhaveamoreseriousimpactoninterestrates,governmentflexibility,andtaxrates.

TheFocalPointofRestructuring:TheFinancialSector

Incontrasttocorporaterestructuring,whichshouldbeledbytheprivatesector,financialsectorrestructuringismorethegovernment'sresponsibility.Majorsystemwideconcerns(safeguardingthepaymentssystemandrestoringcreditavailability)andthepotentiallylargefiscalcostsarecenteredaroundbanksandotherdistressedsegmentsofthefinancialsystems.Moreover,throughrestructuringthefinancialsystem,governmentscanfacilitatecorporaterestructuring:healthyandsoundlymanagedfinancialintermediariesarebetterpositionedtonegotiatewithborrowersandtoencouragecorporaterestructuringthanaregovernments.Governmentscanalsoassistcorporaterestructuringbyimplementingpoliciesthatclarifyandenforcefinancialclaims,asdiscussedinthenextsection.

GovernmentsinEastAsiatookearlystepstocontainthecrisisbyextendinginsurancetodepositorsandcreditors.Asthecrisisspreadanddeepened,thiswasfollowedbytheestablishmentofaninstitutionalstructureformanagingtherestructuringprocessandbyclosing,merging,andnationalizingseveralbanksandnonbankfinancialcompanies.Significantrecapitalizationfundswerecommitted,someofwhichhavesincebeendisbursed.

Thelessonofthiscrisis,aswellasofpastcrises,isthatthemomentumofgovernmentactionneedstobemaintained,whileensuring,wheneverpossible,thattheinformationalandorganizationalcapitalofthefinancialsystemispreserved.Forbearancehasbeenusedtopermitthegraduatedattainmentofprudentialstandards,andthiscanhavesomeimportantbenefits.Judgingbyexperience,however,continuedgeneralizedforbearancerunstheriskofincreasingthescaleoffutureproblems.Becausegovernmentshaveprovidedextensiveguaranteestobankdepositorsandcreditors,

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Table3.4InstitutionalarrangementsforcorporateandfinancialrestructuringVoluntarycorporateworkout

Assetresolutioncompany Agencyforbankrecapitalization

IndonesiaJakartaInitiativeTaskForce

IndonesianBankRestructuringAuthority

IndonesianBankRestructuringAuthority

Korea,Rep.of

CorporateRestructuringCoordinationCommittee

KoreaAssetManagementCorporation

KoreaDepositInsuranceCorporation

Malaysia CorporateDebtRestructuringCommittee

Danaharta Danamodal

Thailand CorporateDebtRestructuringAdvisoryCommittee

FinancialSectorRestructuringAuthorityandAssetManagementCorporation(fornonbankfinancecompanies)

FinancialRestructuringAdvisoryCommittee(fundedbytheFinancialInstitutionsDevelopmentFund)

Source:IMF1999;WorldBankstaff.

onbalance,itisdesirableforgovernmentstoassumeearlyresponsibilityforrecapitalization.Atthesametime,measurestocontainthefiscalburdenshouldbeusedtosignalacommitmentthatthegovernmentisseriousaboutlimitingfurtherexposurethroughexplicitorimplicitguarantees.Thesemeasuresincludesharingintheupsideofnonperformingassetsthataresold,makingitworthwhileforbankstorecoupfromdefaultingdebtorswhennonperformingloansareleftwithbanks,andprivatizingacquiredbanks.

EarlyandStrongGovernmentInvolvement

TheEastAsianeconomieswerequicktobegindealingwiththebankingsectorcrisisbycreatingnewinstitutions,reorganizingthefinancialsector,andcreatingmechanismsforassetresolutionandtherecapitalizationof

andcreatingmechanismsforassetresolutionandtherecapitalizationofbanks.

InstitutionsforRestructuring.

Animpressivearrayofinstitutionshasbeenputinplacetodealwithcorporateandfinancialrestructuring(table3.4).Theagenciesforvoluntary

Table3.5StructuralchangesinthefinancialsystemClosures Statetakeovers Mergers

Indonesia64banks(18percent)

12commercialbanks(20percent)

4of7statebankstobemergedintoasinglebank(54percent)

Korea,Rep.of

5commercialbanks,17merchantbanks,andmorethan100nonbankfinancialinstitutions(15percent)

4commercialbanks(25percent)

9banksand2merchantbankstocreate4newcommercialbanks(15percent)

Malaysia None 1commercialbank,1merchantbank,and3financialcompaniesundercentralbankcontrol(12percent)

6mergersoffinancecompaniesandcommercialbanks(2percent)

Thailand 57financecompanies(11percent)and1commercialbank(2percent)

7commercialbanks(13-15percent)and12financecompanies(2.2percent)

5commercialbanksand13financecompaniesinto3banks(20percent)

Note:Figuresinparenthesesrefertopercentageofassetsinthefinancialsector.Source:IMF1999;WorldBankcountryreports.

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corporateworkoutsandassetresolutionhaveallbeenestablishedsincethecrisis.InMalaysiatheagencyforbankrecapitalization,Danamodal,isalsonew.Recapitalizationagenciesintheothercountrieshavebeenadaptedtodealwiththecrisis.ThecontrastwithJapanisespeciallystriking.InJapan,recognizingtheproblemtookmuchlonger,butinthecrisiscountriesofEastAsia,theproblemsweretooseveretowait.

ReorganizationoftheFinancialSector.

Eventhoughtheinstitutionalstructuresfordealingwiththecrisisaresimilar,thedifferentcountrieshavechosenquitedifferentrestructuringoptions.Theseoptionsrangefromclosingnonviablefinancialinstitutionsearlyonanddisposingoftheirassets,toretainingtheinstitutionsbutfosteringstrengththroughmergers.

Theearlyclosureoptionhasbeenemployedinseveralcountries.InThailandvirtuallytheentiresegmentoffinancecompanieswasclosed;inKoreaselectfinancecompaniesandcommercialbanks,andmanysmallbankswereclosed;andinIndonesiaseveralweakbankswereclosed(table3.5).However,inIndonesiamorethan170banksremainevenaftertheclosures.Malaysiahasnotclosedanyofthefinancialinstitutionsandisrelyinginsteadonextensivemergersoffinancialinstitutions;thegovernmentexpectsmergerswithgoodbankstohelpresolvetheproblemsofthepoorlyperformingbanks.TheMalaysianplantomandatethereconstitutionoftheentirefinancialsectorintosixgroupshasgivenwaytoamoreflexible,butasyetevolvingapproach.

WhileThailandhaslargelydismantleditsnonbankfinancialinstitutionsandMalaysiahasdecidedtomergethemintomoreviable,oftenparent,banks,Koreahasyettodevelopastrategyforthissegmentofthefinancialsector.TheclosetiesbetweenthenonbankfinancialinstitutionsandtheKoreanchaebolshascomplicatedand

aggravatedtherestructuringtask.Forexample,theabsenceofearlyrestructuringatthesecondlargestchaebol,Daewoo,ledtoasignificantdeteriorationinthefinancialstatusofnonbankfinancialcompanies.Theseinstitutions,moreover,werenotsubjectedtothenecessarydisciplineandcontinuedtolendtoDaewoo,evenwhileitsviabilitywasinquestion.Therevelationofthatdebt'sunsustainabilitycaststhemainshadowonKorea'srecovery.

Sincegovernmentshavebecomesubstantialownersofthebankingsystemsthroughtheirdirecttakeoversandrecapitalizationinitiatives,thereprivatizationoftheseinstitutionsposesamajorchallengethatwillinfluencethelong-termstructureandperformanceofthefinancialsectors.Sofar,effortsatprivatizationhaveencounteredproblems,partlyasaresultofthecontinuedgrowthofnonperformingloans,whichnewacquirershavedifficultyvaluing.Therecentexperiencesuggeststhatdifferencesinperceptionsofvaluecanbelarge.TheprotractednegotiationsforthesaleofKoreaFirstBankcenteredaroundthevaluationofnonperformingloansthathadnotbeencarvedoutorrevealedandontheextentofcontinuedgovernmentobligationstoassumenonperformingloansfollowingtheprivatization.WithDaewooasaprincipalclientofKoreaFirstBank,theuncertaintiesinvaluationwerenotaltogethersurprising.ThesaleofSeoulBankhas,forthepresent,beendeferred.InIndonesiaandalsoinThailand,salesofbankshavestalledforsimilarreasons.WhileseveralpossibilitiesexistinThailand,sofarin1999twosmallnationalizedbankshavebeensold,withsubstantialgovernmentinjectionoffundsorcommitmenttoassumeresponsibilityforfurthergrowthinnonperformingloans.

AssetResolutionMechanisms.

Thetwoextremechoicesforassetmanagementstrategiesincludesettingupagovernmentagencywiththefullresponsibilityofacquiring,restructuring,andsellingtheassetsorlettingbanksmanage

theirownnonperformingassets.Aspecializedagencymayberequiredwhenthetaskofdealingwithnonperformingloansisfundamentallydifferentfromthatofmakingnewloansandbankspossesslimitedmanagementcapacitywithacomparativeadvantageinnewlending.However,justification

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forthatagencytobegovernment-ownedand-operatedariseseitherwhenextrajudicialpowersarerequiredtodealwiththenonperformingloansproblem,orwhenthereexistsignificanteconomiesofscaleinassetmanagementthatcannotberealizedbyprivatecontracting.IntermediateapproachesincludethoseemployedinThailandwiththegovernmentprincipallyactingasanintermediaryforthemarket-basedsalesofnonperformingassetsorfacilitatingprivateassetmanagementthroughtaxincentives.

Governmentsremovedasignificantshareofnonperformingloansfromthefinancialsystemandtransferredthemtogovernmentagencies:26percent($37billion)inKorea,66percent($28billion)inIndonesia,and50percent($11billion)inMalaysia(Claessens,Djankov,andKlingebiel1999).

6InThailand,theentireassetsof57nonbankfinancecompanies(over$20billion)weretransferredtotheFinancialSectorRestructuringAuthority,followedbytheonlysignificantsubsequentresaleofnonperformingassets.However,theThaigovernmenthasnotacquiredthenonperformingassetsofcommercialbanks.

Governmentownershipormanagementofaspecializedassetmanagementcompanymaybejustifiedifitisgivenadministrativepowersthatovercomethehighertransactioncostsoftheregularbankruptcyandjudicialsystem.InIndonesiaandMalaysia,theIndonesianBankRestructuringAuthorityandDanaharta,respectively,haveextrajudicialpowerstoreceivecompensationfromdebtors.Malaysia'sDanahartaalsoplanstotakeamoreactiveroleinrestructuringassetsbeforesellingthem.Throughrestructuringoftheassetspriortotheirsale,theexpectationisthatvaluewillbeenhanced.Theevidenceonsuccessfulrestructuringbyagovernment-runassetmanagementcompanyforloansotherthanforrealestateis,however,weak(Klingebiel1999).TherealizationratebyMexico'sFOBAPROAisexpectedtobeinthelowsingledigits.Theresourcesandskillsrequiredforsuccessrestructuringofassetsaredemanding.Infact,governmentagencies

successrestructuringofassetsaredemanding.Infact,governmentagenciescanreducetheeffectivenessofmarket-basedsolutions.ThetermsofferedbyDanahartatobanks-forexample,specialprovisioningrequirementsandgenerousshareofrecoveredamounts-hasimpliedthatprivatebuyersofdistresseddebthaveessentiallybeenpricedout,thusreducingthespaceformarket-orientedrestructuring.

InKorea,andespeciallyinThailand,alternativemarket-basedapproachesarebeingattempted.ThespeedatwhichtheFinancialSectorRestructuringAuthorityinThailandoperatedwasnoteworthy.Therealizationrateof25percentwaslow,butthereisnoevidencethatwaitingwouldhaveincreasedit.InKorea,theKoreaAssetManagementCompany,whichacquiresthenonperformingloans,expectstodelegatethetaskofmanagingand

Table3.6Estimatedrecapitalizationcostsforcommercialbanks,mid-October1999Amountdisbursed Remainingfiscalcostsas

percentageofGDPEstimatedcosts

Localcurrency

U.S.dollars

PercentageofGDP

Indonesia 550trillionrupiah

100trillion

14billion

11 48

Korea,Rep.of

72trillionwon

54trillion 47billion

13 4

Malaysiaa31billionringgit

13billion 3.4billion

4 6

Thailandb1,121billionbaht

751billion

11billion

16 8

a.EstimatedcostsincludethosetobeincurredbyDanahartaforpuchasingnonperformingloans(15billionringgit)andrecapitalizationfundsinjectedbyDanamodal(16billionringgit).b.Amountdisbursedincludessignificantprivatesectorfundingofrecapitalization,asdiscussedinthetext.Note:Theseareillustrativenumbersbasedonvaryingassumptionsofrecoveryofnonperformingloans,asdiscussedinthetext.Source:Centralbankdata.

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sellingtheseloanstoprivatecontractors.ForcommercialbanksinThailandthegovernmentisprovidingspecialtaxincentivestoprivatelyrunassetmanagementcompanies.

RecapitalizationofCommercialBanks.

Allthecrisiscountrieshavetakensignificantinitiativestowardinjectingnewfundsintotheirbankingsystems(table3.6).ExceptinThailand,governmentshavebeenthedominantsourceoffunds.Inallcountries,however,muchremainstobedone.

Reportedestimatesofrecapitalizationcostsvarysignificantly,inpartbecausethestrategiesarecomplex,butalsobecauseimportantjudgmentsarerequiredtoarriveatafinalnumber.First,ajudgmentisrequiredonwhethernonperformingloanswillcontinuetoincrease.SomeestimatessuggestthattheywillinbothKoreaandMalaysia,buthavereachedtheirpeakinIndonesiaandThailand(WarburgDillonRead1999).Second,ajudgmentisrequiredonwhatfractionofthenonperformingloanswilleventuallyberecovered.Thisjudgmentisperhapsmoredifficulttomakethanthefirst.Theestimatesofrecapitalizationcostsintable3.6,whicharebasedonofficialcountrysources,assumethattherecoveryrateonnonperformingloanswillbearound50percentinKoreaandThailand,about70percentinMalaysia,andlessthan25percentinIndonesia.Therangereflectsassumptionsabouteconomicgrowthandinterestratesandalsoabouttheintrinsicworthofthoseassets.AuctionsofdistressedassetsconductedinKoreaandThailandcautionthattherealizationratesmaybelowerthancurrentlyanticipated.Inbothcountriesrealestateloanshavesoldforabout50percentoftheoriginalvalueoftheloan.Loansbasedonautomobilehire-purchasecontractshavebeensimilarlydiscounted.Commercialorbusinessloanshavefaredsubstantiallyworse,withrealizationlevelstypicallyinthe20percentrange.Whenallloanssoldareaddedup,therealizationratein

Thailandhasbeenapproximately25percent.

ThepressureonThaifiscalresourceshasbeenmitigatedthroughprivateeffortstoraisecapital,whichhasamountedtoaboutB250billion,oraboutone-thirdtheamountsofardisbursed.TheThaigovernmenthassetasideB300billioninaschemetoprovidematchingfundsforprivatelyraisedcapital.However,onlyB32.5billionhavebeenusedbyprivatebanksbecausethegovernmentfundingwastiedtomanagementchanges,whichhasledtoprivatesolutions.Privatelyfundedrecapitalizationthroughequityissuesandinnovativedebtinstrumentshas,therefore,beenmoreextensiveinThailandthanelsewhere.Whilesuchprivatesolutionsaredesirable,thusfartheyhaveresultedinhighcostsoffunding,whichisunlikelytohealthecashflowsofthealreadydistressedbanks.

GovernmentfundsforaugmentingthebalancesheetsofbankshavebeenthesmallestinMalaysia,whereaboutRM13billion(4percentofGDP)weredisbursedbyJuly1999throughDanaharta'spurchaseofnonperformingloansandthroughcapitalinjectionsviaDanamodal.Malaysia'ssmallercostsinrelationtoGDPreflectboththesmallershockMalaysia'sfinancialsystemfacesrelativetoothercountriesandtheprecrisislevelsofcapitalization,whichwere,onaverage,higherthanintheothercrisiscountries.However,costswillbegreaterifthenonperformingloanscontinuetorise,assomeobserversexpect,andalsoiftherealizationratesontheseloansarelowerthanthosecurrentlyassumed.Forfundingtherecapitalization,Malaysiahasreliedonzero-couponbonds-thatis,onbondsthatpaynointerestonanongoingbasis.Whilethisalleviatesshort-termfiscalcosts,therepaymentswillbebunchedand,therefore,presumeeithersignificanteconomicgrowthorthecontinuedabilitytorolloverthedebt.

ComplexTradeoffsforPolicymakers

Whiletheachievementsthusfarhavebeensignificant,majorchallengesremain.Largesegmentsofthebankingsystemsremain

undercapitalizedand,exceptinKorea,bankshavebeenreluctantorunabletoincreasetheirstockofloans.Theinstitutionalstructurecreatedtodealwiththecrisishasfew"sticks"to

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forcethepaceandhas,consequently,notcounteractedcreditors'anddebtors'naturaltendencytowait(box3.1).Withfiscalcostsrisingandsomeofthemoredifficultproblemsstillahead,governmentsfacethecomplextaskofmanagingtheirfiscalcostswhilealsoensuringthecontinuedintegrityof,andinsomecasesthestrengtheningof,theircountries'financialsystems.Yetexperiencehasshownthatalossofpoliticalmomentumindealingwiththeproblemsisonlylikelytoaggravatethem.

Forbearanceversusrecapitalization.Inthewakeofacrisis,theobjectiveofbankrestructuringshouldbetomaintaintheflowofcreditwhileensuringthatthenewlendingisprudent(Stiglitz1999).Achievingthisobjectivepresentsdifferentoptions.Lendingcouldbeencouragedbyexercisingregulatoryforbearance.However,theevidencedoesnotsuggestthatsimplyencouragingvoluntaryworkoutswhileengaginginregulatoryforbearanceleadstoaresumptionoflending.Infact,theexperiencefrompastsystemiccriseswarnsthatforbearancewithouttightoversightcouldmakemattersworse.Atthesametime,thealternativestrategyofgovernmentfinancedrecapitalizationcouldstimulatenewlending,butmayentaillargefiscalcostsandmayreduceincentivesforprudentlending.Bothforbearanceandgovernmentbailoutsmayunderminetheregulatorychallengeofbuildingasoundandcompetitivefinancialsystem.

Whileallcountrieshaveupdatedtheirfinancialsectorregulatorysystemstobemoreinlinewithinternationalreportingstandardsandprudentialnorms,varyingdegreesofregulatoryforbearanceareinplacetopermitagraduatedachievementofthesenorms.Theseapply,forexample,tothefollowing:

Lessstringentrecognitionofnonperformingloans(asinMalaysia,whereloansareconsiderednonperformingiftheyhavenotbeen

servicedforsixmonthsratherthanthreemonthselsewhere)

7

Relaxedprovisioningagainstthenonperformingloans(asinKorea,whereloansconsideredrestructuredhaveverylowprovisioningwhen,infact,theyremainextremelyrisky)

Breathingroomtoachievecapitaladequacystandards(especiallyinIndonesiaandThailand).

Thereareimportantreasonsforexercisingforbearance.First,bankrestructuringandcorporaterestructuringthroughaworkoutprogramareinextricablytiedtoeachotherwithrespecttoincentives.Thebanksneedtohaveincentivestotakethedebtorsthroughtheworkoutprocess,whichisoftendifficult,protracted,andcostly.Also,workoutsoftentakeplacewhilethebankitselfisundergoingrestructuringandisunderseverepressuretomeetcapitaladequacyratiorequirements.Banksneedtobeencouragedtoreacharestructuringagreementwiththedebtorthatisrealisticandthatmatchesthedebtor'sabilitytorepay.Reassurancesfromregulatoryauthoritiesofcapitaladequacyforbearancecanhelp.Otherwise,bankswillbetemptedtopaperovertheiragreementswiththeirdebtorsandnottorecognizethetrueextentofpotentialportfoliolosses.Assuch,initialforbearancemayhavebeenthemostrealisticresponsetosystemiccrisisandsimultaneousdistressamonghundredsoflargecorporationsandthousandsofsmallerones.Second,intheabsenceofforbearance,thealternativemaybetoclosedownaninstitution,whichcreatesabankruptcycost-thatis,theconstituentelementsofaclosedinstitutionmaysellforlessthantheinstitution'svalueasanongoingentity.

However,theevidencesuggeststhat,whileselectiveforbearanceofrelativelysoundbanksandsecuritizedtransactionsmaybe

appropriate,continuedgeneralizedforbearancecouldultimatelyprovecostly.Thetimelyadoptionofmorestringentaccountingstandardsforrestructureddebtisneeded.Forbearancedoesnotcreatestrongerbalancesheets,whicharerequiredtomeetthenewworkingcapitalneedsoffirmsindistress.Rather,itdilutesthebanks'incentivestonegotiatemoreforcefullywith

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thecontrollingshareholdersofdistressedcorporationsandleadstoanunrealisticassessmentofrecapitalizationneeds.Theoverwhelminginternationalexperienceisthatforbearance,onbalance,workstodelay,butnottoheal(Kane1989;Brinkmann,Horvitz,andHuang1996;andSheng1996).

Governmentfinancedrecapitalizationalsopresentsdifficulttradeoffs.Earlyrecapitalizationcanreleasecapacityfornewlendingthatpermitsabroad-basedrecovery."Anessentialelementofbankingreformisrecapitalizationofthebankswithenoughincomeearningassetstoleaveaprudentialcapitalbaseinplaceafterprovisioningforbadloans"(vanWijnbergen1998,11).However,recapitalizationofthefinancialsystemgeneratesnotonlyimmediatefiscalcosts,butalsocreatesamoralhazardforthefuture.Earlyresolutionoftheproblemsisfavored,becausethedilemmacantypicallybeexpectedtoworsen.Firmswithheavydebtburdens,unabletoobtainnewfinancingandhenceunabletogrow,findtheirdebtburdenincreasingovertime,therebyincreasingtheextentandseverityofnonperformingloansatbanks(Stiglitz1999).Delaysmayalsocontributetoacultureofdebtdefault,furtheraggravatingboththesizeoftheproblemandtheuncertaintiesinthetimingofgovernmentoutlays.

Underthecircumstances,anearlyrecognitionofthegovernments'fiscalobligationsisneedednotjusttohonortheircommitmentstodepositors,butalsotocreatethebasisformarket-ledrestructuring.Toprotectdepositors,bankscan,forexample,be"paid"withgovernmentbonds,theinterestonwhichcanbecombinedwithaportionofthenetearningstoservicetheinterestclaimsofdepositors.Bondsshouldalsobetradabletopermitrepaymentwheredepositorsdecidetotaketheirsavingselsewhere.Atthesametime,assafeassets,thebondsonthebalancesheetofthebankswouldgreatlyimprovethecapitalofthebanks.Thisshouldimprovetheincentivesofbankstorecognizelosseswithoutfearofdepletingcapitaltoanunsustainablelevel.Such

recognitionshould,inturn,improvetheefficiencyofthecorporaterestructuringprocess.Inaddition,ifgovernmentscancrediblycommittorefrainfromfurtherbailouts,incentivesforfurtherriskylendingwoulddecline.

RecoveringRecapitalizationCost.

Thecostofrecapitalizationcanbeloweredthroughincentivestoencourageincreasedreflowsfromthenonperformingassets.Governmentsupportcouldbeconditionaloncontractualprovisionsthatshareinthesuccessifassetvaluesrecover.Forexample,whenChryslerCorporationwasbailedoutintheUnitedStates,thegovernmentobtainedwarrantsasaquidproquothatcouldbeexercisedatfavorablevalueintheeventofarecovery.Similarly,whenabankretainsanonperformingloantobenefitfromgovernmentrecapitalization,theproceedsfromanyrecoverycouldbesharedwiththebankmanagingtheloan.SuchaprovisionwasusedinChile.Finally,theprivatizationofgovernment-acquiredbankinginstitutionsremainsapriority,bothtorecoverfiscaloutlaysandtolaythefoundationforprivateriskbearing.EspeciallyinMalaysia,whichenvisagesanextensivemergerprogram,butalsoinothercountriestheobjectiveofcontainingfiscalcostsandrestructuringthebankingsectormaybecombined.Inplaceofadministrativelymandatedmergers,governmentscouldusethesaleoftheirownershipstakestopromotemarket-basedmergers.

TheRoleofDepositInsuranceRoleinCrisisSituations.

8

Anexplicitsystemofdepositinsuranceputinplacewhenthebankingsystemisinsoundhealthshould,intheeventofacrisis,dealwithitsobligationsearlytocontainthecrisis.However,extendingthesystemofdepositinsuranceaftertheonsetofacrisiscreatesbadincentives

(Garcia1999).InIndonesiaunconditionalandcomprehensiveguaranteeswereextendedtoallpartsofthesystem,whichwassoonrevealedtohavedeep-seatedproblems.Guaranteeswereevenextendedtosomedepositorsofthe16banksthathadbeencloseddownbeforetheguaranteeschemewasannounced.InThailandaJuly1997cabinetdecisionpartiallyguaranteeddepositorsandcreditorsofthe57financecompaniesthatwere

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subsequentlycloseddown;thiswasfollowedbyablanketguaranteecoveringalldepositorsandcreditorsoftheremainingfinancecompaniesandcommercialbanks(IMF1999).Evidencefromotherpostcrisissituationssuggeststhatimposinglossesondepositorsandcreditorsneednotleadtopanicsandbankruns.

9

CorporateRestructuring:SomeProgress,butaLongWaytoGo

Governmentfundsarenotrequiredforcorporaterestructuring,andtheirsupplymayevenhinderprivateresolutionasstakeholdersareinducedtoseekthesesubsidies.Theproperroleforgovernmentsistofacilitateresolutionoffinancialclaimsandfosterthereallocationandmobilityofassets.Intheabsenceofefficientlyfunctioningsystemstoresolvefinancialclaims,governmentsinallthecrisiscountrieshaveinstitutedout-of-courtmechanismstoencouragefinancialsettlements.Beyondtheseimmediatemeasures,butalsoaidingintheshortterm,areongoingeffortstoachieveeffectivebankruptcyregimesandimprovedaccountingstandards.Oncefinancialpropertyrightshavebeenclarified,themarketsystemandtheprivatesectorshouldbeinapositiontoundertaketherequiredreallocationsofproductiveassets,butgovernmentscanplayanimportantroleinpermittinggreaterassetmobility.TheJapaneseexperienceshowsthatwithoutfundamentalreformstofosterassetmobilitythroughbankruptcyprocessesandmergersandacquisitionspolicies,corporationsmaybeslowtoundertakesignificantrestructuring(box3.2).Thatexperience,though,alsoshowsthatsuccessrequirescontinuingproceduralinnovationandadaptationtomeettheevolvingneedsofthecorporatesector.

SlowResolutionofFinancialClaims

Immediatelyfollowingthecrisis,governmentsinthecrisiscountrieshelpedestablishout-ofcourtmechanisms(seetable3.4)thatcouldspeedupthe

settlementoffinancialclaimsintheabsenceofbankruptcyregimesabletohandlethelarge-scaledistress.Thesemechanismshavebeenslowtoproduceresults,inpartbecausetheydependonmoralsuasion.However,progresshasbeenachievedinKoreaandMalaysia.Atthesametime,account-

Table3.7Restructuring:out-of-courtandin-courtprogress,August1999IndonesiaMalaysia Rep.of

KoreaThailand

Out-of-courtproceduresAllorthemajorityoffinancialinstitutionssignedontoaccord

No Yes Yes

Formalprocessofarbitrationexists,withdeadlines

No Yes No

Provisionofpenaltiesfornoncompliance No No NoOut-of-courtrestructurings

Numberofregisteredcases 234 53 92Numberofcasesstarted 157 27 83Numberofrestructuredcases 22 10 46Percentageofrestructureddebtintotaldebt 13 32 40

In-courtrestructuringsNumberofregisteredcases 88 52 48Numberofcasesstarted 78 34 27Numberofrestructuredcases 8 12 19Percentageofrestructureddebtintotaldebt 4 .. 8

..Notavailablea.InThailand,penaltiesfornoncompliancewereintroducedinAugust1999forcreditorswhohadsignedintercreditoragreements.Source:Claessens,Djankov,andKlingebiel1999.

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Box3.2Redeploymentofassets:lessonsfromJapan

RestructuringinJapanisfinallybeginningundertheimmensepressuresofalongrecession,butitisbeinghelpedbyimprovedregulationsgoverningbankruptcyandmergersandacquisitions.Japanesebusinessesarerestructuringatafasterpacethanduringpasteconomicdownturns.MergersandacquisitionsareoccurringinnumbersunprecedentedforJapan,whilethedebtassociatedwithbankruptcieshasalsohitnewhighs.Theunemploymentrateisatapostwarpeak,withmorethan1millionjobslostinthelast18monthsalone.Thiscontrastswiththe1990-91recession,whenJapanesefirmsweremuchmorereluctanttoreducetheirworkforce.Companiesarealsosheddingcross-heldsharesandmajorcorporationsareshuttingdownsubsidiaries,closingoperations,andsellingoffunprofitablebusinesses.

TheJapaneseexperienceoffersseverallessons.Delaysinrestructuringweakbanksandcorporationscancontributetolongperiodsoflowgrowth.Absentactivegovernmentaleffort,andinadquateinstitutionalinfrastructureforresolvingfinancialclaimscanpersisteveninanindustrialcountry.Moreover,effectiveredeploymentofassetsthroughbankruptcyprocessesandmergersandacquisitionsrequiresanongoingadaptationofregulations,andchangesinbusinesspractices,ascontraintsarerevealed.

Bankruptcy.Untiltheearly1990s,approximately15percentofbroadlydefinedbusinessfailuresinvolvedformalbankruptcyproceedings.Theproportionhasrisen

inrecentyearsto30percent,aslargerfirmsarenowfailing.Thesefirmsaremorelikelytoprefertheprotectionsandsafeguardsofcourtsoverthecheaperandfasterproceedingsofprivatenegotiations.Forsmallfirms,privateprocedurestypicallyimpliedafreezingofcreditandthecessationofoperations,whichistheworstpossiblesocialoutcome.

GatekeepingproceduresinJapaneselawandregualtionsactasabarrierstocourtactions.Advancedepositsforcourtcostsareespeciallyonerousforsmallfirms.Japanesecourtscantakeafewmonthstodetermineifabankruptcypetitionmeetscertainconditions,andtheydonotissueandautomaticstay,renderingfirmsvulnerabletoraidingbycreditors.

Severalchangesarebeingproposedtomakebankruptcyproceduresmoreefficient.InApril1998theJusticeMinistryproposedrevisionstointegratethefivelawsgoverningcorporatebankruptcyintoasinglelaw.Manyofthechangesareaimedatmakingformalbankrupcymoreaccessibletosmallfirms.Officialshavesoughttoenhancetheprospectsofreorganizationratherthanliquidation.Thecurrentlawpermitsapplicationsforreorganizationonlyafterafirmisvirtuallyinsolvent,favorchangein

ingstandardsandbankruptcysystems,whereneeded,havebeenreformed,whichmayalsohelpresolutionoffinancialclaimsintheshortrunandmayprovideasounderbasisforimprovedcorporategovernanceinthelongrun.

VoluntaryWorkoutMechanisms.

Voluntarymechanismsrelyontheso-calledLondonApproachand

provideaframeworkwithinwhichclaimscanbesettled.

10Whilethedetailsvaryacrosscountries,theirmainfeaturesinclude:bindingagreementsonthepartofbankstoparticipateinandhonortheagreements,withsomepossibilityofpenaltiesifagreementsarenotadheredto;timetablestoachieveresolution;andstandardizedagreementsbetweendebtorsandcreditorsand,equallyimportant,betweencreditorsthemselves.Themaincharacteristicsofsuchmechanismsacrosscountriesandtheirachievementsaredescribedintable3.7.

KoreaandMalaysiaappeartohavebenefitedthemostfromtheseout-of-courtmechanisms,inpartbecausetheyhavemorebindingagreementsamongbanks.InKorea,penaltiesexistfornoncompliance,whileMalaysiahaswell-definedimplementationschedules.Thaiprocedures,thoughsimilartothoseofMalaysia,haveachievedless,reflectingthedeeper

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Box3.2(continued)

management,andrequiresareorganizationplanataboutthesametimeasthebankruptcypetition.Undertheproposedapproach,companiescouldapplytothecourtsforprotectionwithmoreoftheirassetsintact,keeptheirmanagementinplace,andreceivemoretimetodrawupaturnaroundplan.Alsoincludedintheporposalistheshorteningoftheperiodofassetassessmentfromthecurrentthreetosevenmonthstoonemonth.Otherchangescallforgreaterinformationdisclosureandremovalofbarrierstosellingpartsofacompany.

Mergersandacquisitions.MergersandacquisitionsareontheriseinJapan,thoughtheirimportancetotheeconomyisstillasmallfractionofthatintheUnitedKingdomortheUnitedStates.ThevalueofforeigntakeoversinJapanrosefrom$1.1billionin1997to$6,9billionin1998,andthenshotupto$7.1billioninjustthefirstquarterof1999.Similarly,domesticmergersandacquisitionshavealsorisenbriskly.

Foryears,mergersandacquisitionswereamarkoffailureassociatedwithcompaniesonthevergeofbankruptcy,buttherewerealsorealeconomicbarriers.Thelackoftransparencyinthebooksofpotentialtargetswasaseriousproblem.Forexample,adepartmentstorewithastrongfranchiseandsubstantialrealestitateassetsfoundnobuyersbecausethescaleofoff-balancesheetguaranteesprovidedbythestorewaslargeanduncertain.Anotherproblemwasthewidespreadsystemofcross-shareholding.Thepracticeofmutualshareholding,initiatedinthe1970s,wasdesignedexplicitlytoward

offundesiredacquisitions.

However,economicforcesareerodingbarrierstomergersandacquisitions,aidedbythedeclinincross-shareholdingsandfacilitatedbyregulatorychanges.ManyJapanesecompanies,especiallyfamily-ownedbusinessesestablishedintheearlypostwarperiod,areseekinginjectionsofcapital,asoperatinglossesandwrite-offsofbadassetshavebeenadrain.Cross-shareholdingsarebeingeliminated,asthereturnsontheseequityholdingshavebeenpersistentlylowornegative.Atthesametime,manyregulatoryconstraintsonbusinessactivitiesarebeingremoved,andspecificmeasurestofacilitatemergersandacquisitionsarebeinginstituted.Forinstance,a1997amendmentoftheCommercialCodebytheJapaneseDietreducesthenumberofshareholdermeetingstoapprovemergers.TheHoldingCompanyLawof1997removesconstrainsoncarvingoutsubsidiariesforsaleandallowsbuyersmorefreedominstructuringtheiracquisitions.ThesecuritiestransactiontaxformerlyrequiredwhenanacquisitioninvolvedsharepurchaseswasdiscardedinApril1999.Inaddition,themovestointernationalaccountingprinciplesand,inparticular,consolidatedreporting,arebringingmoretransparencytotheoperationofsubsidiaries.

Source:Alexander1999.

problemsofThairestructuringandtherelativeweaknessofthebankruptcyregimeinthatcountry.StrongerproceduresrecentlyincludedinThailand-penaltiesfornoncompliancebycreditorswhohavesignedintercreditoragreements-shouldhelpforcethepace.

Whiletheprogressachievedissignificant,itisprematuretojudgethequalityoftheserestructuringsandtheimpactthattheywillhaveonthedebtresolutionproblems.Awaitingstrategyisreflectedintheuseofinstrumentsthatpostponetherepaymentofdebtandhasbeenespeciallyevidentin,thoughnotconfinedto,Malaysia.TheMalaysianCorporateDebtRestructuringCommittee,whichoverseesthevoluntarydebtworkoutprogram,had,byJune1999,helpedrescheduleapproximatelyRM11billionofdebt(EIU1999a).Ofthatamount,RM8.5involvedtheissuanceofaseven-yearzero-couponbondtopurchasetheexistingdebtofRenongCorporationanditssubsidiary,UnitedEngineersMalaysia.TheRatingsAgencyofMalaysiahasassessedthatRenongandUnitedEngineersMalaysiawillbeunabletopaythedebtandwould,consequently,needtorefinance60percentofthedebtoutstandingatthetimethebondmatures.AccordingtoClaessens,Djankov,and

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Klingebiel(1999),two-thirdsoftherestructuringagreementsinKoreainvolveacombinationofinterestratereduction,capitalizationoftheinterestrate,andlongergraceperiods.

11InThailandthequalityoftherestructuringagreementshasbeensuchthat13percentoftherestructureddebtshavealreadyrevertedtononperformingstatus.Notealsothatreportednonperformingloansdonotyetregistertheimpactofagreements.Thismaypartlyreflectastatisticalreportinglag,becausenonperformingloandatamaynotyethavebeenupdatedtoreflecttheagreements,orbecauseweaknessesexistintheagreementsthemselves.

BankruptcyReform.

Bycreatingalegalbasisandorderlymechanismsfortheresolutionofdebtdefaults,bankruptcyprocedurescanprovidethestickthatcomplementsvoluntaryrestructuringinitiativesinthecrisiscountries.Effectivebankruptcysystemsshouldresolvetheconflictingclaimsofstakeholdersontheassetsofinsolventcorporations.Theyshouldhelppreserveandquicklyrestructureviablefirmsasongoingentitiesandshouldresultintheexpeditiousliquidationofnonviablefirms.

IndonesiaandThailandhaveimplementedsignificantlegislativechangessincetheonsetofthecrisis.KoreaandMalaysia,incontrast,haverelativelysophisticatedbankruptcycodes.InKorea,thelaw,thoughwellestablished,isalsothoughttobecomplexinitsimplementationandtofavordebtorsexcessively(seeTheEconomist1999).Thus,exceptinMalaysia,thebankruptcyprocessisunlikelytoplayasignificantroleinresolvingthepresentdebtoverhang.

Toagreaterextentthaninothercountries,proceduralcapacityinIndonesiaremainsabottlenecktotheeffectiveenforcementofinsolvencylaws.InAugust1998Indonesiaamendeditsbankruptcy

legislation,creating,inparticular,aspecializedcommercialcourtwithjurisdictionoverallbankruptcy-relatedmattersandsubjecttoreviewonlybytheSupremeCourt(MojdehiandIto1998).TheamendmentalsocreatedexpeditedtimetablesandintroducedastayprovisionsimilartothatundertheU.S.BankruptcyCode.Atthesametime,thevoluntaryworkoutmechanismundertheJakartaInitiativeTaskForce(seetable3.4)ishelpingtodevelopprecedentsfordealingwithcomplexdebtrenegotiations.Inpractice,however,theamendedbankruptcylawhasnotsucceededinalleviatingthewidespreadcorporateandfinancialdistress.Realistically,thebankruptcycourtcanhelponlymodestlyinthepresentcrisisbypronouncinginaconsistentmanneronaselectnumberofcases.Thevastmajorityofthe15,000nonperformingloanswillbesettledoutofcourt.

Theearlyworkingsofanewbankruptcyregimeisexpectedtobefrustrating.Inadoptingacomprehensivebankruptcylaw,Hungaryexperiencedacrushinthetumultoftheearlypostcommunistyears.Duetoanautomatictriggerthatrequiredallfirmswitharrearsofmorethan90daystofileforeitherreorganizationorliquidation,Hungariancourtswereoverwhelmedbysome22,000bankruptcycasessoonafterthelaw'senactment(Gray,Schlorke,andSzanyi1996,425).Whiletheexperience''indisputablyspurredinstitutionbuildinginthecourts,thetrusteeprofession,andthebanks,"duringacrisis,theformaljudicialprocesswillclearlybeoverwhelmedinmostdevelopingandtransitioncountries.

TheThaiexperience,however,showsthat,despitethemanyconstraints,pushingaheadwithimprovementsinbankruptcycodeprocedurescanbringbenefits.InThailandacontroversialpieceoflegislationhassoughttoenforcetherightsofcreditorsmoreforcefully,includingenforcingrightstopersonalguaranteesthatservedascollateral.AstudyexaminedtherelationshipbetweentheprogressofThaibankruptcylegislationandtheequityvaluationoffinancialandnonfinancialcompanies(Foley1999).Announcements

indicatingapotentialstrengtheningofbankruptcylawsenhancedtheequityvaluesforbothdebtorsandcreditors.Inotherwords,marketparticipantsdonotviewastrongerbankruptcylawasazero-sumoutcomewherecreditorsgainandequityholderslose.Rather,bothcan

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gain,thoughcreditorsarelikelytobenefitmore.Thepositivegainforallpartiesimpliesthatinefficientandprotractedbankruptcyproceedingshavearealeconomiccost.

Ashort-termagendaforbankruptcyreformrequiresfurtherdevelopmentofinformal,extrajudiciaryprocessestoresolveproblems,inparallelwithandasacomplementto,theformalinsolvencyprocess.Inadditiontothegovernment-sponsoredworkoutmechanisms,prepackagedbankruptcyprocedurescanspeedthingsup.Underprepackaging,thepartiesinvolvedagreetothetermsoftheworkout,andthecourtthenusesanexpeditedproceduretobindadissentingminorityandtoformalizetheagreement.Perhapsmoresothaninindustrialcountries,outof-courtsettlementsmayalsoincludemethodsforauctioningtherightstothefirm(seeBebchuk1996;HauchandRamachandran1999).Auctionprocedurescanhelpbothtomaintainseniorityamongcreditorsandtorevealthevalueofthefirm.

Thebankruptcyprocessisespeciallypronetofraud,andtheabsenceofadequateaccountingstandardsmakesthedifficultproblemofassetvaluationevenmorecomplex.Thisunderscorestheurgentneedforaccountingandcorporategovernancereforms.Amoreimmediatetaskmaybetocreategreatertransparencyintheappointmentofjudgesandtorequirethepublicationofdecisionsalongwithdetailedrationalesforthosedecisions.

EnhancedAssetMobility

Oncethefinancialclaimsonacompanyareresolved,market-drivenmechanismswillprobablyreallocatetheresourcestotheirbestuses.Additionalgovernmentinterventionsmay,however,bejustifiedbytheexistenceofinstitutionalandmarketfailures,suchasmonopoliesandweakcompetition,cross-holdingsandconnectedlending,orlabormarketrigidities.Theseimperfections,whichwereoftenthesourceofresourcemisallocationspriortothecrisis,alsonowhinderthe

requiredprocessofreallocation.

12

Ofspecialimportancearepoliciesfacilitatingmergersandacquisitionsandencouragingforeigndirectinvestment.EastAsiangovernmentshavetakenseveralstepstoencouragemergers,bothinternationalanddomestic.Also,foreigninvestmenthasbeenliberalizedinallthecountries,thoughtovary-

Figure3.7Cross-bordermergersandacquisitions,Q11997-Q21999Note:Cross-bordertransactionsinvolvemajorityownership.

Source:SecuritiesDatacompany.

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Table3.8IIIustrativepostcrisispolicyreformsincrisiscountriesCorporategovernance Lossallocationand

transferFactormobility

IndonesiaPresenceofacorporatesecretarytoimprovedisclosureBankruptcyLawupdated(August1998)Codeofbestpracticeforcorporategovernance(inprogress)

Taxexemptionsforloan-lossreservesheldbybanks(March1998)

Relaxationofforeignownershiprestrictions(September1997)Taxexemptionsofupto8yearsfornewinvestmentsin22industries(January1999)

Korea,Rep.of

Restrictionsoncross-debtguarantees(April1998)Enhancinginstitutionalvoterrights(June1998)Introductionofinternationalaccountingstandards(August1999)Loweringtheminimumequityholdingrequirementtoexerciseshareholder'srights(1999)

Revaluationandadjustmentofcapitalandforeignexchangelosses(August1999)

IntroductionofForeignInvestmentPromotionAct(November1998)

Malaysia CreationofHigh-levelFinanceCommitteeonCorporateGovernanceCodeontakeoversandmergerswithstricterdisclosurestandards(January1999)

Reductionofcorporatetaxratefrom30percentto28percent(October1997)TaxexemptiononinterestfromNPLs(effectivefor1999and2000)

Reductionofrealpropertygainstaxratefrom30percentto5percentfornonresidentsonthesaleofaprospertyheldforaminimumoffiveyears(October1997)Exemptionofrealpropertygainstaxonmergersoffinancialinstitutions(October1998)

Thailand Financialstatementsofpubliccompaniesandfinancialinstitutionstobeinaccordwithinternationalbestpractices(1999)

Elimination/deferralofincometaxandtaxesonassettransferandunpaidinterest(January

AlienBusinessLaw(August1998,revisedinOctober1999)Tax-freemergersandacquisitionsincasesof100

Requirementofboardauditcommittee(1999)Bankruptcyandforeclosurelawsamended(March1999)

1999)Introductionofnewassetdepreciationmethod(March1999)

percentmergers(January1999)IntroductionofEquityFund,ThailandRecoveryFundforlarge-andmedium-scalecompanies,andVentureCapitalFundforsmallandmedium-sizeenterprises(March1999)Reductionofrealestatetransferfeefrom2to0.01percentoftheappraisedvalue(March1999)

ingdegrees.Aswithbunkruptcy,successofmergersandacquisitionsdependsheavilyonproceduralsimplicityandclarity(seebox3.2ontheJapaneseevolutioninthisrespect).Reformsfollowingthecrisisalsoincludedshort-termtaxmeasurestofacilitateassettransactionsand,moreimportantlyfromalong-termperspective,betteraccountingstandards,whichshouldcontributetoimprovedcorporategovernancethroughbetterevaluationoffinancialassetsandliabilities(table3.8).

Mergersandacquisitions.Sincetheircrisesin1997,KoreaandThailandhaveintroducedvariousmeasurestoencouragebusinessconsolidation,leadingtoarapidriseincrossbordermergersandacquisitionsinthesetwocountries(figure3.7).TheKoreangovernment

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releasedanewlegislativeframeworkinJuly1999toreducetransaction-relatedtaxesincurredincorporatemergers,acquisitions,andrestructurings.Fordomestictransactions,thegovernmenthasprovidedtaxexemptionsanddeferralsoncapitalgainsfromsocalled"bigdeals"-thatis,exchangeofbusinessesthroughthetransferofshares.ThailandapprovedasetofnewmeasuresinJanuary1999,includingtemporarymeasures(expiringonDecember31,1999)tolowertaxesongainstodebtorsfromthewrite-offofdebtsandonassettransfersfromdebtorstocreditors.PermanentmeasuresinThailandaredesignedtofacilitatemergersandbusinessreorganization.

UnlikeinKoreaandThailandwherecrossbordermergershaveshotup,inMalaysiacrossbordermergersandacquisitionshavebeenlowcomparedtojustpriortothecrisis.Malaysiahas,however,hadhighlevelsofdomesticmergersandacquisitions.

13Malaysia'sPromotionofInvestmentActof1986andothermeasuresprovidevarioustaxincentives,includinginvestmenttaxallowancesintheservicessector.ThehighlevelofdomesticmergerandacquisitionsactivityinMalaysiasuggeststhatthepolicyregimeisbasicallyafriendlyone.Crossborderactivityhasbeenrelativelylow,possiblyonaccountofrestrictionsontherepatriationofearnings(thoughthelong-termeffectsoftheserestrictionsawaitfurtherempiricalexamination).14

Incontrast,theIndonesiansystemappearsnottofavormergersandacquisitions.Gainsfromtransfersofassetsincorporatereorganizationsaretaxable,andcompaniescannottransfertaxlossesinaliquidationprocess,merger,oracquisition(AsiaLaw1998).Certainexceptionsapplyonlytobanks,financialinstitutions,andcompaniesgoingpublic.Mergerandacquisitionsactivityhasremainedatextremelylowlevels.

ForeignDirectInvestment.

Foreigndirectinvestment(FDI)inflowstoKoreaandThailand

Foreigndirectinvestment(FDI)inflowstoKoreaandThailandincreasedin1998by82percentand26percent,respectively,andflowstothesecountriescontinuedathighlevelsin1999(table3.9).Bothcountrieshavetakeneffectivemeasurestoderegulateandliberalizetheirforeigninvestmentpoliciessincelate1997.Note,however,FDIincludesmergersandacquisitionsinvolvingexistingenterprisesaswellasnew,orgreenfield,investments.TheFDItrends,therefore,reflectinpartthetrendsincrossbordermergersandacquisitionsdescribedintheprevioussection(figure3.6).

KoreahasopenedseveralsectorstoforeigninvestorssinceApril1998,includingvariouspropertybusinesses,securitiesdealings,andotherfinancingbusinesses.TheceilingonforeignstockinvestmentwasabolishedasofMay1998,grantingforeigninvestorstherighttopurchaseallthesharesofadomesticfirm.Meanwhile,theForeignInvestmentPromotionActofNovember1998affordsprotectionforforeigndirectinvestmentthroughnationaltreatment,thereductionandexemptionofcertaincorporatetaxes,theprovisionoffinancialsupportforlocalgovernmentstoattractforeigndirectinvestment,andtheestablishmentofforeigninvestmentzones.

InThailandtheBoardofInvestmenthaseaseditsregulationstopromoteforeignpar-

Table3.9FDIflowsinEastAsia,1992-99(billionsofU.S.dollars)

1992 1993 1994 1995 1996 1997 1998 Q11999 Q21999Indonesia 1.8 2.0 2.1 4.4 6.2 4.7 -0.4 -0.03 -Korea,Rep.of 0.7 0.6 0.8 1.8 2.3 2.8 5.1 1.0 1.8Malaysia 5.2 5.0 4.3 4.1 5.1 5.1 5.0 - -Thailand 2.1 1.8 1.4 2.1 2.3 3.8 6.8 1.0 2.2-Notavailable.Source:WorldBankDebtorReportingSystem;IMF,InternationalFinancialStatistics.

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ticipationintheeconomy.The20-year-oldAlienBusinessLawwasreplacedinAugust1998(andhassincebeenrevisedagaininOctober1999)toincorporatesectoralliberalizationmeasures.UndertheAugust1998provisions,foreignfirmsareallowedtoholdupto100percentequityinbanksandinfinancecompaniesforupto10years,and39sectorshavebeenopenedforincreasedforeignparticipation,includingtransportationandpharmaceuticalsproduction.PolicyliberalizationincludesatemporarymeasureintroducedinNovember1998(expiringinDecember1999)allowingforeignfirmstoownamajoritystakeinjointventuresthatreceivedfavorablepolicytreatment,andauthorizingthemtodistributetheirproductsdomestically.Inthemeantime,theproposedcutbackofimporttariffsisexpectedtohelpreduceproductioncostsforbothdomesticandforeignfirmsdependentonimportedrawmaterialsandintermediateproducts.

Mirroringthetrendsoncross-bordermergersandacquisitions,foreigndirectinvestmentinflowsintoMalaysia,thoughtraditionallyhigh,havenotrespondedastheyhaveinKoreaorThailand,andflowshavefallensharplyinIndonesia.InMalaysianeweffortstoattractforeigninvestmentshavebeenundertaken;forexample,restrictionsonforeignholdingsinnewexport-orientedmanufacturingprojectshavebeensuspendeduntil2000andforeignownershiplimitshavebeenrelaxed.However,thevalueofapprovedprojectsduringJanuary-May1999atRM6.4billionremainedatthesameannualizedrateasin1998;thevalueofnewFDIapplicationsfelloverthesixmonthperiodtoRM3billion,comparedwithRM12.6billionforcalendar1998.InIndonesiathevalueofapprovedandrealizedforeigndirectinvestmentdeclinedby80percentinthefirstquarterof1999.Indonesiahasrecentlystartedtoimplementnewincentivestoattractforeigninvestors.Foreignownershipofupto99percentofbankshasformallybeeneffectivesinceMay1999.InJune1999anewdecree

wasannouncedtoallowshareholdingsupto100percentinexistingestablishmentsandtoprovideaclearerlegalframeworkfortheconversionofbondsissuedlocallyintoequity.

Notes

1.AlthoughEastAsianfirms,includingthoseinthecrisiscountries,havebeenadeptatadoptingnewmanufacturingtechniques,theyhavefacedcontinuingchallengesbothfromlow-wageproducersandfromJapan(seeMody,Suri,andSanders1992).

2.Suchafinancialacceleratorhasbeendocumented,forexample,byBernanke,Gertler,andGilchrist(1996,2)whoconclude:"Afallintheborrower'snetworth,byraisingthepremiumonexternalfinanceandincreasingtheamountofexternalfinancerequired,reducestheborrower'sspendingandproduction.Thislastresultistheheartofthefinancialaccelerator:Totheextentthatnegativeshockstotheeconomyreducethenetworthofborrowers(orpositiveshocksincreasethenetworth),thespendingandproductioneffectsoftheinitialshockwillbeamplified."Smallfirmsareespeciallypronetothedownwardspiralofthefinancialaccelerator,butlarge,credit-constrainedfirmsoperatingonthinmarginsmaybeequallyvulnerable.

3.WhileThailand'srelativepositiononthetwoscalesisthesame,theshareofThaifirmsunabletopaydebt,28.3percent,ismuchlowerthanthe45percentofnonperformingloansinThailand,unlikecountrieswheretheratiosarequitesimilar.Thismayreflect,inpart,thephenomenonofThaistrategicdefaulters-thatis,thoseableto,butnotpaying,theirdebts.Inaddition,small,unlistedfirmscontributeheavilytoThainonperformingloans.However,Mako(1999)reportsthatevenamonglistedfirms,abouthalfwereunabletopaytheirdebt,aratiomoreconsistentwithnonperformingloans.

4.IntheScandinavianbankingcrisesofthelate1980sandearly

1990s,theshareofnonperformingloansrangedfrom5to7percent,andtheseloansmainlyrepresentedfailedrealestatelending.EveninChile,attheonsetoftheearly1980scrisis,nonperformingloanswereabout5percentofallloans.

5.OfficialnumbersonnonperformingloansarelessreadilyavailableforIndonesia.However,thepercentageisgenerallyregardedasintherangeof50percentandisexpectedtorisetomorethan60percentbeforefalling.

6.InMalaysia,unlikeintheothercountries,Danahartahasnotonlypurchasedsomeofthenonperformingassets,butalsoisamanagementagentfortherestructuringofnonperformingassets.

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7.Themorestringentdefinitionofnonperformingloansis,however,stillusedforsupervision.

8.Theprinciplesforcreatingacompetitivebutsoundfinancialsystemcenteraroundtheappropriateroleofdepositinsurance,bankcapital,anddiversityandcompetitioninthefinancialsector(see,forexample,Greenspan1998;Hellmann,Murdock,andStiglitz1998).

9.SeeDziobekandPazarbasioglu(1998)forexperienceinCôted'lvoire,Latvia,andSpain;DreesandPazarbasioglu(1998)fortheNorwegianexperience;

BaerandKlingebiel(1995)foravarietyofhistoricalepisodes.

10.TheLondonApproachoperatesundertheauspicesoftheBankofEnglandandhasbeenusedforcorporateworkoutsinrecessionaryperiodswhennormalbankruptcyprocedureshaveprovedinsufficient(seeKent1997).

11.AsofearlyNovember1999discussionsofDaewoo'sdebtrestructuringalsoincludedasignificantcomponentofdeferreddebtpayments(theWallStreetJournal,Novemer2,1999).

12.Forareviewofthepostcrisisindustrialpolicyagenda,seeMody(1999).

13.Thetotalnumberofdomesticmergersandacquisitionshasbeenabout50to70perquarterinMalaysiain1997-99,whileitremainedlow(intherangeof4to10)intheothercountries(seeSecuritiesDataCompany1999).

14.SurveyresultsofJapaneseinvestorsintheearly1990sshowthemtobesensitiveintheirinvestmentdecisionstorestrictionsonprofitrepatriation(seeMody,Dasgupta,andSinha1999).

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Mako,WilliamP.1999."ThailandCorporateRestructuring."WorldBank,Washington,D.C.Processed.Draft.

Mody,Ashoka.1999."IndustrialPolicyaftertheEastAsianCrisis:FromOutwardOrientationtoNewInternalCapabilities."PolicyResearchWorkingPaper2112.WorldBank,Washington,D.C.

Mody,Ashoka,RajanSuri,andJerrySanders.1992."KeepingPacewithChange:OrganizationandTechnologicalImperatives."WorldDevelopment20(12):1797-1816.

Mody,Ashoka,SusmitaDasgupta,andSarbajitSinha.1999."JapaneseMultinationalsinAsia:DriversandAttractors."OxfordDevelopmentStudies27(2):149-64.

Mojdehi,AliM.M.,andPeterW.Ito.1998."IndonesianInsolvency:NewReformLawDesignedtoRestoreConfidence."LosAngelesDailyJournal,December22,p.7.

RojasSuarez,Liliana,andStevenR.Weisrod.1996."BankingCrisesinLatinAmerica:ExperiencesandIssues."InBankingCrisesinLatinAmerica,editedbyRicardoHaussmannandLilianaRojasSuarez.Washington,D.C.:Inter-AmericanDevelopmentBank.

SecuritiesDataCompany.1999.SDCPlatinum2.1-MergersandAcquisitionsDatabase.

Sheng,Andrew,ed.1996.BankRestructuring:Lessonsfromthe1980s.WashingtonD.C.:WorldBank.

Stiglitz,JosephE.1999."PrinciplesofFinancialRegulation:ADynamic,PortfolioApproach."WorldBank,Washington,D.C.Draft.

vanWijnbergen,Sweder.1998."BankRestructuringandEnterpriseReform."WorkingPaper29.EuropeanBankforReconstructionandDevelopment,London.

Xie,Andy.1999."Korea:AnotherFinancialCrisis?"(http://www.msdw.com)

WarburgDillonRead.1999."AsianEconomicandStrategy

Perspectives."September.

WorldBank.1999.GlobalEconomicProspectsandtheDevelopingCountries1998/99:BeyondFinancialCrisis.Washington,D.C.

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4ManagingtheRecentCommodityPriceCycleThepastfewyearshaveseensharpvariationsinprimarycommodityprices.Energypriceswereespeciallyvolatile.Crudeoilpricesrose74percentfromearly1994throughtheendof1996,thenfell56percentbytheendof1998,andin1999recoverednearlytheentiredeclineoftheprevioustwoyears.Averagenon-oilcommoditypricesroseby46percentfromthemonthlylowinmid-1993tomid-1997,andthendropped30percentbylate1999.Thevariationofindividualcommoditypriceswassharperstill.Suchvolatilityposesrealchallengesfordevelopingcountriesthatdependonprimarycommoditiesforasubstantialshareoftheirexportrevenues.Countrieswhereconsumptionriseswithrealincomesduringcommoditypriceboomswillfaceadifficultadjustmentwhenpricesfall.Theabilitytosustainconsumptionbyborrowingorrunningdownassetsmaybelimited.Cuttingbackoninvestmentwilldepresslong-termgrowth,andsharpreductionsinconsumptioncanbeextremelypainfulfortheindividualsmostaffected,oftenthepoorestmembersofsociety,andmayrequirecostlyreallocationsoflaborandcapital.

1Thus,effortstosmoothconsumptionoverthecommoditypricecyclecanbecriticaltowelfare,efficiency,andgrowthoverthelongterm.

Twogroupsofdevelopingcountriesweremostaffectedbythecommoditypricecycle:themajoroilexportingcountries(countrieswhereoilaccountsformorethan50percentofmerchandiseexports)andthenon-oilexportingcountriesofSubSaharanAfrica,wherenon-oilprimarycommodities,onaverage,makeup80percentofexports.

Thesecountriesareamongthemostdependentoncommodityprices.Thischapterwilldiscusshowthesecommodity-dependenteconomieshaveadjustedtotheswingsinrealincomesgeneratedbyrecentcommoditypricevolatility,focusingontheirsuccessinsmoothingconsumptionoverthepricecycleandtheimplicationsforgrowthprospects.

Themainmessageisthatcountries'savingsandinvestmentbehaviordifferedmarkedlyoverthecommoditypricecycleandthatthesedifferencesprimarilyreflectedthequalityofpoliciesratherthanshiftsinthetermsoftrade.Thepolicyenvironmentwasimprovinginthenon-oilexportingcountriesofSubSaharanAfrica,andtheyachievedincreasesinsavingsandinvestmentoverthecommoditypricecycle.Intheoilexportingcountries,weakpolicyenvironmentsledtomixedsavingsperformanceandtolowerinvestmentovertheoilpricecycle.

Thischapterreachesthefollowingconclusions:

Thepronouncedcycleinprimarycommoditypricessincethemid-1990swasdrivenbychangesinglobaldemand,weather-relatedsupplyshocks,supplyresponsestothehighpricesoftheearly1990s,technologicalinnovationsthat

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havereducedproductioncosts,andexchangeratedepreciationsamonglargecommodityexporterslinkedtotheAsiancrisis.Primarycommoditypriceshavebeenmorevolatilethanthepricesofmanufacturesinthelasttwodecades,andbothoilpricesandnon-oilcommoditypriceshavefallenrelativetothepricesofmanufactures.

Themajoroilexportingcountrieshadmixedsuccessinsmoothingconsumptionovertherecentoilpricecycle.Onaverage,countriesallocatedtoincreasedconsumptionabouthalfoftheaverage5percentofgrossdomesticproduct(GDP)improvementinrealincomesduringtheupswinginoilprices(1996-97).Duringthe1998dropinoilprices,however,consumptiondidnotdecline,implyingthatsavingsfellbythefullamountofthedeclineinrealincomes.Countries'performancesvariedgreatly,dependingontheirspecificpoliticalandeconomiccircumstances.

Oilexportingcountries'investmentfellrelativetooutputoverthecommoditypricecycle.Thedeclineininvestmentwasactuallygreaterthanthedeclineindomesticsavings,sothecurrentaccountdeficitfell.Themajoroilexportingcountrieshavegenerallyfailedtoreducetheirdependenceonoilrevenues,andthefallininvestmentwillfurtherimpedeprogress.Atthesametime,severalofthesecountriesfacehighlevelsofunemployment,continuedslowgrowth,andrapidlyexpandingpopulations.Theyneedtostrengthentheirpoliciestoencouragegreaterprivatesector(andnonoil)activitiesandtoimprovetheinstitutionalenvironment.

Thecommoditypricecycleofthe1990sdoesnotappeartohaveadverselyaffectedtheprospectsforgrowthinthenon-oilexportingcountriesofSub-SaharanAfrica.Changesinrealincomesweregenerallysmallerthanintheoilexportingcountriesbecausethepriceoftheircommodityexportschangedbylessthanthepriceofoil,andthelossesfromdecliningexportpriceswerepartiallyoffsetbygains

fromlowerimportprices,particularlyenergyprices.Moreimportant,however,improvedpoliciesinseveralcountriesenabledthemtoincreasetheirsavingsandinvestmentratesbothduringcommoditypriceboomsandbusts.Manycountriescuttheirfiscaldeficitsinanefforttoreininthegrowthofdebtandtoreduceinflation,whileprivatesavingsroseinresponsetoimprovedpoliciesthatincreasedthereturntoinvestment,particularlyinexportsectors.Countrieswithbetterpolicies,asmeasuredbytheWorldBank,achievedlargerincreasesinsavingsandhighergrowthofGDPthancountrieswithworsepolicies,despitesmallerincreasesinrealincomesintheformergroup.

KeyIssuesConfrontingPrimaryCommodityExporters

Theheavydependenceofmanydevelopingcountriesonprimarycommoditiesforthebulkoftheirexportreceiptscancreatesubstantialproblemsforeconomicmanagement.Primarycommoditypricestendtobevolatile,andaresubjecttolong-termcyclesaswellastoshort-termboomsandbusts.Commoditypriceshavealsodeclinedrelativetomanufactures'pricesduringthepasttwodecades.

DependenceonPrimaryCommodities

Primarycommoditiesaccountedfor42percentofdevelopingcountries'totalmerchandiseexportsin1997,comparedwith19percentforhigh-incomecountries.InSub-SaharanAfrica,primarycommoditiesaccountedforabout75percentoftotalexports,andtheshareofcommoditiesintheexportsofindividualcountriesoftenexceeded90percent.Thehighvolatilityofcommoditypricesthusoftenleadstohighvolatilityofexportearnings.However,manyofthesecountriesalsoimportsignifi-

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cantamountsofprimarycommodities,andcommoditypricestendtobehighlycorrelated.Deflatedbythemanufacturesunitvalueindex,thecorrelationcoefficientsofthepriceindexesofagriculture,energy,andmetalsfrom1960to1998areall0.79orhigher.Thusprimarycommodityexporters'termsoftradetendtobelessvolatilethanthepriceoftheircommodityexports.

TheVolatilityofPrimaryCommodityPrices

ThevolatilityofprimarycommoditypricesincreasedsharplyfollowingthecollapseoftheBrettonWoodssystemintheearly1970s(figure4.1)andhasremainedhigh(Maizels1994;ReinhartandWickham1994).Thestandarddeviationoftheabsolutevalueoftheyear-on-yearchangesinthenonenergycommoditypriceindexduring1970-98was11.5,comparedwith5.7forthemanufacturesunitvalueindexduringthesameperiod.

2Energypriceshavebeenparticularlyvolatile.MeasuredinU.S.dollars,thecoefficientofvariationofenergypriceswasatleasttwicethatofmanufacturesineachdecade.

Thesemeasuresofvolatilitymayexaggeratetheextentofuncertaintycausedbycommoditypricechangesbecausemanyseriesexhibittrendsandsomeofthevariationispredictable.ResultsbyDehnandGilbert(1999)showthatoilexportingcountriesfacethegreatestuncertainty.3Exportersoftheotherthreecommoditygroups(agriculturalfoodstuffs,agriculturalnonfoods,andmetalsandminerals)faceonlyslightlysmallerlevelsofuncertainty.

Primarycommoditypricesarevolatileforanumberofreasons.Suppliesofagriculturalcommoditiesaredependentontheweather,asisthedemandforoil.Thedemandformostcommoditiesislessprice-elasticthanformanufactures,andthiscausessupplyvariabilityto

leadtogreaterpricevariability.Supplyisalsooftenveryinelasticintheshortterm(especiallywhenthecommodityisperishable,thecostsofinventoryarehigh,ortheproductiontakesconsiderabletime,forexample,treecrops)sothatshiftsindemandhavealargeimpactonprices.Inaddition,producers'organizations,suchastheOrganizationofPetroleumExportingCountries(OPEC),haveat

Figure4.1Primarycommoditypricesversusmanufacturesunitvalueindex(MUV),1960-

98Source:WorldBankstaffcalculations.

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timescontributedtovolatilitythroughlargeshiftsinsupply.

TheSecularDeclineinCommodityPrices

Commoditypriceshavedeclinedrelativetomanufactures'pricesduringthepasttwodecades.The

realpriceindexes(nominalpriceindexesdividedbythemanufacturesunitvalueindex)ofbothagricultureandmetalsandmineralsfellbyabout45percentduring1980-98.Energypriceshavefallenby76percentinrealtermssince1980andin1998werelessthanhalfthelevelreachedafterthefirstoilpricerisein1973-74.Evenwiththerecoveryin1999,therealenergypriceindexlikelywillremainatonly55percentofthe1974level.Researchershaveconcludedthatthedeclineintheratioofthepriceofprimaryproductstomanufacturesisstatisticallysignificant(BleaneyandGreenaway1993;SapsfordandBalasubramanyam1994).

Theviewthatthetermsoftradeofprimarycommodityexportersshowaseculardeteriorationdatesatleastfromthe1950s(Prebisch1950;Singer1950).

4Theinitialanalysisofthisissueraisedahostofmethodologicalanddataquestions(Spraos1980),andlaterresearchersfocusedoncompilingbetterandlongertimeseries(GrilliandYang1988)andonbringingmoresophisticatedstatisticaltechniquestobear.5Mostofthesewritersfoundthatcommoditypricesfollowedclosetoarandomwalk(wherethebestpredictoroftomorrow'svalueistoday'svalue),butwithlarge,predominantlynegativeshocksthattendedtopersist.Thus,thedeclineincommoditypriceshasbeenduetoaseriesofrandomshocksthatweremorenegativethanpositive,ratherthanaconsistent,andthereforepredictable,trend.

Thedeclineincommoditypricesrelativetomanufacturesdependson

theindexusedformanufacturesaswellasforcommodities.Lipsey(1994)arguesthattheincreaseinmanufacturespriceshasbeenoverestimatedbyroughlyonepercentagepointperyearbecauseofthefailuretoadjustforchangesinthequalityandmixofmanufacturesovertime.Since1980realcommoditypriceshavedeclinedbyabout45percent.Adjustingforqualitychangesintheindexofmanufactures,thedeclineinrealcommoditypriceswouldfallto27percent.

TheRecentBoomandBustinCommodityPrices

Commoditypricesappeartoexhibitlongcyclesdrivenbytechnologicalimprovements,aswellasshort-runboomsorbusts,whichhaveoccurredeverytenyearsorsoduringthelastfivedecades(Varangis,Akiyama,andMitchell1995).Themostrecentboomwasfrom1994to1997,followedbyabustfrom1997throughearly1999.Energyandnonenergypricesfollowedsimilarpaths,withminordifferences.Nonenergycommoditypricesroseby46percentfromthemonthlylowinmid-1993tomid-1997,beforefalling30percentbylate1999.Energypricesrose74percentfromearly1994totheendof1996andthenfell56percentbyearly1999.Individualcommoditieswereevenmorevolatile.Forexample,thepriceofrobustacoffee(exportedprimarilyfromAfricaandAsia)roseby390percentfrom1992to1994,fell66percentfrom1995to1996,andthenroseagainby48percentin1997.

Thedeclineinprimarycommoditypricessince1997wasinpartaresponsetoanunusuallylargeincreaseinsupply.Therateofgrowthofworldproductionofagriculturalcommoditiesrosefrom1percentperyearin1990-94to2.6percentin1994-98,whereasworldproductionofmetalsandmineralswasflatin1990-94,butincreasedby3.5percentperyearin1994-98.6Theaccelerationofconsumptionofprimarycommoditiesbetweenthetwoperiodswasmuchless.Increasedproductionwasinpartaresponsetothehighpricesthat

prevailedduring1993-95.Inthecaseofagriculture,favorableweatherconditionsalsoledtohigheryields,andglobalagriculturalproductionsurgedin1996and1997.Forexample,worldgrainproductionincreased5percentperyearandworldsoybeanproduc-

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tionby6.4percentperyearfrom1995to1997,comparedwithaverageannualproductiongrowthratesof1.4percentand3.3percent,respectively,for1980through1994.

Thesupplyincreaseswerewidespreadandwerenotconfinedtoafewcommoditiesorafewcountries.

7Theincreasesweremostrapidindevelopingcountries.TheFoodandAgricultureOrganizationoftheUnitedNation's(FAO's)indexofthevolumeofagriculturalproductionroseby3.8percentperyearforalldevelopingcountriesfrom1990to1997.Theglobalsuppliesofmetalsandmineralsalsoincreasedrapidlyfollowingthesharppriceincreasesofthemid-1990sandtheinvestmentsmadeinthelate1980sandearly1990s.Aluminumproductionincreasedby5percentperyearduring1995-97,whileconsumptiongrewbyonly3percentperyear.Copperproductiongrewby6percentfrom1995to1997,whileconsumptiongrewby4percent.Nickelproductionincreasedbymorethan5percentfrom1995to1997,whileconsumptionfellslightly.

Thesurgeincommoditysupplieswasdueinparttoimprovedtechnology.Technologicaladvanceshavetakenmanyforms,includingincreasedcomputerizationinmanyareas,expandeduseofandrefinementstoleachingandsolventextractiontechniquesinmining,horizontaldrilling,three-dimensionalcomputerseismology,progressindeepwatertechnologyinoil,andimprovedseedsinagriculture.

Policyreformsandincreasedprivatizationhavealsoboostedproductioninsomedevelopingcountries.Forexample,inArgentinaderegulationoftheportsandthemaritimesectorin1992ledtoheavyinvestmentandreducedthecostofloadinggrainfrom$10/tonto$2/ton,accordingtotheInternationalGrainsCouncil.Thismade

Argentinaamorecompetitiveexporter,andmaizeexportstripledinvolumetermsfrom1993-94to1997-98.SriLankaprivatizedthemanagementofteaestatesin1992,andtheprivatesectorwasallowedtotakelong-termleasesin1995,therebycontributingtohigherinvestmentandbettermanagement.Teayieldsincreased46percentfrom1990-92to1996-98,andproductionincreased25percent,despitea15percentdeclineingrowingareaasunprofitablefieldsweretakenoutoftea.Asaresult,exportsincreasedby25percent.ManyAfricancountrieshavealsoundertakenimportantliberalizationeffortsinthelastdecade,especiallyincommoditiesthatearnforeignexchange,suchascoffee,cocoa,andcotton.Forexample,Ugandareformeditscoffeesectorfollowingthepoliticalturmoilofthe1970sand1980s,andaverageannualexportvolumesin1994-97were50percenthigherthanin1980-93.

TheAsiancrisiscontributedtothefallincommodityprices.Declinesinincomesandthesteepcurrencydevaluationssignificantlyreduceddemandforcommodities,withasignificantimpactonthepricesofcommoditieswhereEastAsiahadalargeshareofworldconsumption.Forexample,EastAsia,includingJapan,accountedfor21percentofworldcrudeoilconsumptionin1997,andEastAsianimportsofoildroppedby4percentin1998.Productioncontinuedtorise,stockssoared,andpricesfellby56percentfromNovember1997toalowpointinthefirstquarterof1999.Furthermore,theEastAsianeconomieshadaccountedforasignificantshareoftheincreaseinworldconsumptionofsomecommoditiesinrecentyears.Investmentsinproduction,whichgenerallytakeafewyearstocomeonstream,aretypicallybasedondemandforecasts,whichpriortothecrisiswouldhaveincludedhealthyincreasesinconsumptioninEastAsia.Thus,thecrisissubstantiallyreduceddemandbelowthelevelsthatcouldbeproducedgivenrecentinvestments,furtherexacerbatingpricedeclines.Forexample,thefivecrisiscountriesandJapanaccountedforaboutone-fifthoftheincreaseinworldcopperconsumptionfrom

1994to1996.Whenthesecountries'copperconsumptionfellin1998,copperconsumptionwassome500,000tonsbelowexpectedlevels,orabout4percentofworlddemand.Becausesupplyishighlyinelasticintheshortterm,productionlevelsdid

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notfallaspricesdeclined.ThefallindemandfromAsiathuscontributedtothe44percentdropincopperpricesfromJune1997toDecember1998.OthercommoditieshitbythedeclineinEastAsiandemandincludedaluminum,maize,sugar,andcotton.

Thecrisisalsohadimportanteffectsonthesupplyside.Currencydevaluationsincreasedthecompetitivenessofthecrisiscountries,therebycontributingtoincreasesinsupplyinseveralcommodities.Forexample,Indonesia,Malaysia,andThailandaccountfor70percentoftheglobalexportsofnaturalrubber,andpricesforthiscommodityfellbynearlyone-thirdinthetwoyearsfollowingthestartoftheAsiancrisisinJuly1997(althoughnaturalrubberpriceshadalreadynearlyhalvedinthetwoyearspriortoJuly1997).ThepricesoflogsfromMalaysia(40percentofworldexports)andricefromThailand(23percentofworldexports)alsodroppedsharplyafterJuly1997.

Theresultsofsimulationsusingacomputablegeneralequilibriummodelindicatethatthecrisis-inducedfallindemandfromEastAsiaandtheincreasedsupplyfromtheEastAsianexchangeratedevaluationshadasubstantialroleinreducingcommodityprices(seechapter1foranexplanationofthemethodologyused).ThecommoditiesexportedbyEastAsiancountrieswerethehardesthit.Selectedagriculturalpricesfellby10percent,mineralpricesfellby6percent,andoilpricesfellby8percent(figure4.2).Thedeclineinaveragenon-oilcommodityexportpricesforotherdevelopingcountrieswasjustunder2percent.

Figure4.2ThedeclineincommoditypricesduetotheEastAsiancrisis

Note:EastAsia-5includesIndonesia,Malaysia,thePhilippines,theRepublicofKorea,andThailand.

Source:Datastream.

Note,however,thatthecyclicaldeclineincommoditypriceshadalreadybegunwhenthecrisishit.TheWorldBank'sfoodpriceindexpeakedinApril1996andhaddeclined12.7percentbyJune1997.TheindexofmetalsandmineralpricespeakedinAugust1995andhaddeclined11percentbyJune1997.Petroleumpriceshaddeclined24.1percentbyJune1997fromtheirpeakinDecember1996.Beverageprices(coffee,cocoa,andtea)fellmorethan40percentsincetheirpeakinMay1997,duetolargesupplyincreasesfromSouthAmerica.

ThedeclineinnonenergycommoditypricessinceMay1996hasnowexceededpreviousdeclinesandhaslastedslightlylonger.Followingthe1980and1988pricepeaks,commoditypricesdeclinedforanaverageof35monthsandbyanaverageof25percentbeforepriceseitherstabilizedorincreased(figure4.3).Currently,nonenergycommoditypriceshavedeclinedby30percentover37monthsandhavesincereboundedslightly.

TheSavingsResponsetoCommodityPriceCycles

Heavydependenceonhighlyvolatilecommoditypricescanimposesignificantcostsonaneconomy(WorldBank1994).Thepotentialformassivechangesinrelativeprices,inrealincomes,andinthelevelofeconomicactivitycanincreaseuncertaintyandcanhaveanegativeimpactonperformanceandpoverty.(Theevidenceisdiscussedfurtherinchapter2).

Economistshavelongknownthathouseholdstendtosmooththeimpactofvolatilepricesonconsumption(Harberger1950).Therelationshipbetweentermsoftradeandsav-

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Figure4.3Currentandpreviouspricedeclinesofnonenergycommodities

Source:WorldBankstaffcalculations.

ingsdependsontheexpecteddurationofthetermsoftradeshock.Iftheriseinpriceisviewedaspermanent,consumptionincreasestothehigherlevelofincome,butifpricesriseonlytemporarily,savingsrisetocushionthefallinincomewhenthepricedeclines(Sachs1981;SvenssonandRazin1983;OstryandReinhart1992).Bothcasestudyandeconometricevidenceindicatethatprivateagentswilltendtosavesubstantialportionsoftemporarycommoditypricewindfalls.

8

Theriseinconsumptionexpendituresfromatemporarycommoditypriceriseshouldbeextremelysmallifconsumptionisbasedonpermanentincome.Witharealrateofinterestof5percent,thewarrantedincreaseinconsumptionofatemporaryboomisonly5percentofthepresentvalueofthewindfallgain,assuminganinfiniteplanninghorizon(Cuddington1988).Forexample,ifoilpriceswere

expectedtodoubleinrealterms(thelargestpercentageincreasethatoccurredinasingleyearfrom1960to1998)andthentoreturntotheirformerlevelafteroneyear,acountrywhoseoilexportsequalabout40percentofGDP-forexample,SaudiArabia-shouldincreaseconsumptionbyonly2percentofGDP,orone-twentiethoftheinitialincreaseinexportearnings.

Savingsbehaviorshouldtakeintoaccountthepossibilitythatwhatmaylooklikeatemporarydeclineinpricesactuallyrepresentsamedium-termtrend.Ifpricesareonadecliningtrend,thentheriseinsavingsduringboomsshouldbehigher(andthedeclineinsavingsduringbustslower)thanifpricesareexpectedtoreturntoalong-termaverage.Thisasymmetricapproachtomanagingcommoditypricevolatilitywouldminimizethecostovertimeofadjustingtoaseculardeclineinprimarycommodityprices.

Savingsdecisionsincountriesthatexportnonrenewableresources,suchasoilorminerals,shouldalsotakeintoaccountthepotentialdeclineintheseresourcesovertime.TheexportofanonrenewableresourceiscountedasanadditiontoGDP(andthustosavings)innationalincomeaccounts.However,thisexportactuallyrepresentstheliquidationofanassetratherthananincreaseinsavings.Calculationsof''genuinesavings"reducerecordedsavingsbytheextentofnaturalre

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sourcedepletion,amongotherfactors.Thereductioninsavingsin1997inthemajoroilexportingcountriesrequiredtoreflectthedepletionofenergyresourcesrangedfrom2percentofGDPto44percent(WorldBank1999).CalculationsofgenuinesavingsintheMiddleEastandNorthAfricaarestronglynegativefrom1980to1993(HamiltonandClemens1999),whilesavingsrecordedinthenationalaccountsaveraged23percentduringthisperiod.

9Countrieswhereprovenoilreservesareloworproductionisdecliningmayneedtoachieverelativelyhighsavingstosustainpermanentincomeinthemediumterm.

Economiesmaynotgenerateadequatelevelsofsavingstosmoothconsumptioninthefaceofvolatilerealincomesforseveralreasons.Mostimportant,distinguishingbetweentemporaryandpermanentshockstocommoditypricescanbeextraordinarilydifficult.Theswingsincommoditypricescanbetoolargeanduncertaintoascertaintheircausesandnature(DeatonandMiller1995).Thedegreeofuncertaintyaboutthedurationofapriceshockvaries.Forexample,marketparticipantscouldseethatthesharpjumpincoffeepricescausedbytheBrazilianfrostof1994waslikelytobereversed,assumingareturntomorenormalweather.Bycontrast,mostanalystsassumedthatthehighoilpricesduringthemid-1970sandearly1980swouldlastindefinitely.10

Second,revenuesfromsomeprimarycommodityexports(particularlyoilandmetalsandminerals)arechanneledthroughthepublicsector,andthepublicsectoroftencapturesthesegainsthroughtaxation.Politicalandsocialpressuresoftenleadgovernmentstoincreaseexpendituresduringcommoditybooms.Forexample,thecommodityboominthe1970sresultedinincreasedpublicexpendituresinmanySub-SaharanAfricancountries(Bevan,Collier,andGunning

1990;Wetzel1992;AlpineandPickett1993;andLittleandothers1993).11Insomecases,boomrevenuesinvestedinexternalassetsbyresponsiblegovernmentshavebeendissipatedlaterbylessresponsibleones.Analternativeistotransferpublicsectorrevenuestotheprivatesector,althoughthiscanbedifficulttoachieveinatransparentandefficientway(Stauffer1999).

Evenresponsiblegovernmentsthatattempttocapturethegainsfromcommodityboomsandtochannelthisincometotheprivatesectormaycreatedifficulties.Publicsectorinterventionsmayobscurethesourceoftheriseinincome.Thismakesitmoredifficultfortheprivatesectortodeterminewhethertheincreaseintheirrealincomesistemporaryorpermanent.Collier,Gunning,andAssociates(1999)foundthatsavingsratesoutofpositiveshockstendedtobehigherwheneconomicagentswerethedirectbeneficiariesofincreasedpricesthanwhentheriseinincomeswasintermediatedbythegovernment,forexample,bytaxingexportersandreallocatingfundstoothergroupsintheeconomy.Oneimportantroleforgovernmentistoensurethatadequateinformationonthecauses(and,ifpossible,thelikelyduration)ofpriceboomsandbustsisdisseminatedwidelysothatprivateagentscanmakeappropriatedecisionsaboutsavingsbehaviorandresourceallocation.

Finally,acountrymaybeunabletosmoothconsumptionbecauseoflimitedaccesstointernationalfinancialmarkets(seebelow).

TheSavingsResponsebyOilExportingCountriestotheRecentSwinginOilPrices

Themajoroilexportingcountries,whichareamongthemostcommodity-dependenteconomiesinthedevelopingworld,facedsubstantialdifficultiesinsmoothingconsumptionoverthecommoditypricecycle.12Twothirdsofthesecountriesreceivemorethan80percentofexportrevenuesfromfuels.Theavailabilityoflargeoilreservesinafewcountriesandthehugedifferencebetweenthe

averageproductioncostandthesellingpricehaveencouragedspecializationinoil.AccordingtotheUnitedNationsConferenceonTradeandDevelopment,halfofthecountriesreporting

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(includingdevelopingandhigh-incomecountries)thathadexportconcentrationratiosofmorethan50percentwereoilexporters.

13

Implicationsofthe1990sSwinginEnergyPrices

Thesharpswingsinthepriceoffuelsfrom1996to1998hadanenormousimpactonexportrevenues,economicactivity,andrealincomeinthemajoroilexportingcountries.14

Duringthe1996-97priceboom,exportrevenuesfor11majoroilexportersroseby45percentof1993-95imports,andduringthe1998collapseinoilprices,exportrevenuesfellby14percentofbase-yearimports.Onaverage,changesinthetermsoftradeincreasedrealincomeintheoilexportingcountriesby4.6percentofGDPperyearin1996-97comparedwith1993-95,andreducedrealincomeby5.4percentin1998(relativeto1993-95)(table4.1).15Theaveragedata,however,maskconsiderabledifferencesamongcountries.Countrieswhereoilaccountedforthelargestshareofexportrevenues,andwheretheexportswerelargerelativetoimportsandGDP,experiencedthesharpestswingsinrealincomes.Forexample,inAngolaandNigeriafuelsaccountformorethan90percentofexportrevenues,andthe1996-97realincomegainswere14and8percentofGDP,respectively.InOman,exportswere40percentlargerthanimportsandalmosthalfthesizeofGDP,andthe1996-97realincomegainwas8.5percentofGDP.Thecompositionofimportsalsohadanimportantimpactonthesizeofrealincomegains.TrinidadandTobago'simportpriceindexincreased10.5percentin1996becauseofthejumpinrawmaterialsprices,andrealincomerosebyonly0.2percentin1996-97.

Ifasubstantialportionofthechangeinoilpricesrepresentedtemporarydeviationsfromtrend,basingconsumptiononpermanentincomewould

haveimpliedthatsavingsshouldhaveincreasedsignificantlyduringtheboomin1996-97andthenfallenduringthe1998pricedecline.16Duringtheboomtheaveragesavingsratedidincreasebyslightlymorethanhalftheriseinrealincome,measuredasapercentageofbase-yearGDP,andafewcountriesactuallyincreasedtheirsavingsratesbymorethantheincreaseinrealincome.Thegroup'saveragewasreducedbythedeclineinsavingsratesinAngola,theIslamicRepublicofIran,andTrinidadandTobagobecauseofeconomicorpoliticaldifficulties.However,duringthebustsavingsratesfellbythefullamountofthedeclineinrealincomes.Ofthe11countries,6reducedtheirsavingsratesbymorethanthefallinrealincomes,and3othersreducedtheirsavingsratesbymorethan70percentofthedeclineinrealincomes.Inotherwords,mostofthemajoroilexportersactedasifthelosswasalmostentirelytemporary.Thisexperiencehasdisturbingimplicationsforthefutureifoilpricescontinuetofall,ascountrieswouldfailtoadjustoverthecourseofthecycletothepermanentlylower

Table4.1Savings,investments,andrealincomechanges,selectedcountrygroups,1996-98(PercentageofGDP)

Savings Investment ForeignSavings Realincome1996-97 1998 1996-97 1998 1996-97 1998 1996-97 1998

Alloilexporters 2.5 -5.3 -2.5 -3.4 -5.1 1.9 4.6 -5.4Middle-income 2.2 -5.0 -2.4 -3.6 -4.6 1.4 4.2 -5.3

Debtors 2.1 -4.2 -3.9 -5.8 -6.0 -1.6 3.4 -3.5Creditors 2.4 -6.6 0.5 0.5 -1.8 7.0 5.6 -8.6

Low-income 6.5 -8.0 -4.5 -0.1 -11.0 7.9 9.3 -7.0Note:SavingsandinvestmentrefertotheaverageratiotoGDPduringtheperiodshown,minustheaverageratioin1993-95.Realincomereferstothechangeinrealincomefrom1993to1995causedbychangesinthetermsoftrade,asashareof1993-95GDP.Allgroupsaveragesareweighedbybase-periodGDP.Source:WorldBankstaffcalculations.

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levelofoilprices.Ananalysisofalongerperiod(1980-96)thattakesotherdeterminantsofsavingsbehaviorintoaccountalsoindicatesthatoilexportingcountrieshavetendedtotreatchangesinthetermsoftradeastemporary(seebelow).

Usinghistoricaldataonsavingsandrealincometoanalyzetheextentofadjustmenttocommoditypricecycleshaslimitations.Thewindfallgainsandlossesaremeasuredbychangesinoilpricesrelativetotrend,anddeterminingthetrenddependsonarbitraryjudgments,suchastheperiodoverwhichthetrendisestimated.Thus,thewindfallelementsofchangesinthetermsoftrademaynotbeaccuratelymeasured.Box4.1describescounterfactualscenariosofsavingsbehavior,whichprovideanadditionalestimateoftheextentofsavingsoutofwindfallincome.Thesescenariosgenerallyconfirmtheconclusionsreachedearlier.

InvestmentandForeignSavingsduringtheSwinginFuelPrices

Oilexportingcountries'investmentfellrelativetooutputoverthecommoditypricecycle.Thedeclineininvestmentwasactuallygreaterthanthedeclineindomesticsavings,sothecurrentaccountdeficitfell.Duringtheboominoilprices,theaverageratioofinvestmenttoGDPintheoilexportingcountrieswas2.5percentagepointslowerthanduringthe1993-95baseperiod,andduringthebustinvestmentwas3.4percentagepointslowerthaninthebaseperiod(table4.1).Ofthe11countries,7experiencedadeclineininvestment

Box4.1Counterfactualscenarios

Simplecounterfactualscenariosgenerallyconfirmtheconclusionthatthesavingsofoilexportingcountriesdeclinedrelativetopermanentincomeovertheoilpricecycle.Thescenariosshowahypotheticalmeasurementofwindfallgain(orloss)fromoilbasedonthedeviationoftheoilpricefrom

oilbasedonthedeviationoftheoilpricefromtrend.

17.Ifeconomicagentsconsiderthewindfallastemporary,thensavingsshouldrisebythefullamountofthewindfallgainduringtheboom,andfallbytheamountofthelossduringthebust.18Thetableshowsthechangeintheactualandhypotheticalsavingsratesfromthebaseyearinsixoftheoilexportersduringtheoilpricecycleofthelate1990s.19

Thescenarioresultsprovideonemeasurementofthedeviationofactualsavingsbehaviorfromdesiredsavingsbehavior.Whenoilpriceswerehigh(in1996-97),oilexportingcountriesonaveragesavedonlyaportionofthewindfallgain.Bycontrast,inAlgeria,Nigeria,andVenezuelasavingsratesrosebymorethanthehypotheticalincrease.In1998allofthecountries(exceptAlgeria)dessavedbysignificantlymorethanthewindfallloss.

ChangeinratioofsavingstoGDPfrombaseyears,selectedcountries,1996-98(Percentagepoints)

1996-97 1998

Actual Hypothetical Actual Hypothetical

Algeria 5.8 4.0 5.6 -2.3

Iran,IslamicRep.of -2.9 2.9 -6.8 -1.6

Nigeria 8.0 3.5 -7.9 -1.8

SaudiArabia 2.4 5.0 -6.3 -3.0

TrinidadandTobago -6.2 3.0 -13.1 -1.7

Venezuela 7.7 4.6 -6.0 -2.8

Source:WorldBankstaffcalculations.

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ratesduringbothbaseandboomperiods.Thedeclineininvestmentoverthecommoditypricecycleislikelytoimpedeeffortstoimproveoilexportingcountries'disappointinggrowthperformance.

Thedeclineininvestmentinthemajoroilexportingcountriesappearstobeconcentratedintheprivatesector,astheaverageratioofprivateinvestmenttoGDPfellby2percentagepointsduringtheboom,whiletheratioofpublicinvestmenttoGDPdeclinedbyonly0.5percentagepoints.

20However,thedataonprivateinvestmentincludestateenterprises.Therefore,theallocationofpublicandprivateinvestmentmayreflectdecisionsconcerningthetransferofresourcesbetweenstateenterprisesandthecentralgovernment,ratherthandifferentinvestmentbehaviorbythepublicandprivatesectors.Also,incountrieswithasubstantialinfluenceoverprice,investmentinthestateenterpriseresponsibleforoilexplorationmaydeclineduringboomsiftheauthoritiesanticipatethatoutputreductionswillberequiredtoestablishmoreprofitablepricelevels.Giventhecommandingroleofthepublicsectorinmanyoftheoilexportingcountries,evendeclinesinprivateinvestmentratesmaylargelyreflectpublicsectordecisions.

Increasingpublicinvestmentsubstantiallyduringacommoditypriceboommaynotbeadvisable,becausethereturnonpublicinvestmentcandeclineduringbooms(seebox4.2).Also,centralgovernmentinvestmentexpenditurestendtofallmoreheavilyonnontradablecapitalgoods,suchasbuildings,thanprivateinvestment,andtheriseindemandfornontradablecapitalgoodsduringaboomwilltendtoincreasetheirprice.Bycontrast,thepricesoftradablecapitalgoodsaresetinglobalmarketsand,therefore,willberelativelyunaffectedbydemandconditionsinanindividualcountry.In12of14case

studiesreportedinCollier,Gunning,andAssociates(1999),therelativepriceofnontradablecapitalgoodsroseduringthecommoditypriceboomandfellthereafter.Thus,itmaymakesenseforthecentralgovernmenttodelayaportionoftheinvestmentofrealincomegainsuntilaftertheboomisoverandthepriceofnontradablecapitalgoodshasdeclined.

Thedeclineininvestmentwaslargeenoughtocausecountriestoreducetheirrelianceonforeignsavings,whichfellbyacumulative12percentofGDPduringthetwo-yearboominoilprices.Thus,asignificantportionofthe1996-97boominexportreceiptswasallocatedtoreserves.21Foreignsavingsalsoincreasedsomewhatduringthe1998fallinoilprices.

Mostoftheoilexportingcountriesrelyheavilyonsalesofexternalassetstoadjusttodeclinesinrealincomebecauseexternalfinancehasoftennotbeenavailabletohelpsmoothconsumptioninthefaceofdecliningcommodityprices.Developingcountriesaresubjecttocreditconstraintsthatgenerallybecomemorebindinginthefaceofadverseshocks,andcapitalflowsareoftenprocyclicalformarginallycreditworthyborrowers(DadushandDasgupta1999).Mostofthemiddle-incomedebtorsamongtheoilexportingcountrieseitherhavespeculativegradecreditratings(Bahrain,theIslamicRepublicofIran,TrinidadandTobago,andVenezuela)orarenotrated.Oftheoilexportingdevelopingcountries,onlyOmanandSaudiArabiahaveinvestment-graderatings.Increasesinoilpricescanhelpmakethemarginallycreditworthycountrieseligibleforloansfromtheinternationalcapitalmarkets(thusfacilitatingspendingthewindfallorevenmorethanthewindfall),butsharpdeclinesinoilpricescanmeanthataccessisreducedorevenshutoff.

Althoughmanyconsiderationsinfluencethelevelofflowsfromprivatecapitalmarkets,someevidenceindicatesthatprivatelendingtotheoilexportershasbeenpositivelyrelatedtochangesintheoil

price.Inperiodswherethepriceofoil(relativetotheaveragepriceofmanufacturesexportsfromindustrialcountries)wasfalling,long-termgrossdisbursementsfromprivatecreditorshavegenerallydeclined,whilegrossdisbursementshaverisenwhenrealoilpriceswereonthe

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upswing(table4.2).Therealoilpricewassignificantlyandpositivelyrelatedtodisbursementstotheoilexportingcountriesduring1972-97,althoughtheoilpriceexplainsonly22percentofthevariationindisbursements.

22However,theprocyclicaleffectofcapitalflowshadonlyalimitedimpactduringthemostrecentcommoditypricecycle.Grossdisbursementstothenetdebtorsincreasedby$3billionduringthemostrecentoilpriceboom(table4.2),whichisconsistentwithsomeimprovementinaccess.Nevertheless,netdisbursementsaveragednegative$1billionperyearduringthisperiod(comparedwithanaverageof$700millionperyearin1990-95)becauseofthelargerepaymentsdueonexistingdebt.Thus,relianceonforeignsavingsfellduringtheriseinoilprices,asindicatedintable4.1.

Mexico'sexperiencepriortothe1982debtcrisis,whenoilaccountedforthree-quartersofexportrevenues,providesamoredramaticillustrationoftheprocyclicalnatureofinternationalcapitalflows(figure4.4).Mexico'scurrentaccountdeficittoGDPratiomorethandoubledfollowingtheoilpriceriseof1973-74andremainedhighthrough1976.Theratiofellin1977asoilpricesremainedflatandthenmorethandoubledagainfollowingthe1979-80pricerise,despitethesharpincreasesinexportrevenuesalongwiththepriceofoil.Clearlythemajorfactordrivingthedeficitwasincreasedborrowinginresponsetotheimprovedaccesstointernationalcapitalmarkets.Mexico'sdebt-to-GDPratiorosefrom14percentin1973to53percentin1982,whenthecountrycouldnolongerserviceitscommercialbankdebt.

FiscalPolicyandAdjustmenttotheOilPriceSwings.

Oilrevenuesareusuallychanneledthroughthepublicsectorsothat

publicsectorpolicieshaveanimportantinfluenceonthepatternsofadjustmentobservedduringtheoilpricecycle.Inthepast,manyoilexportingcountrieshavegreatlyincreasedfiscalexpendituresinresponsetoincreasesinfuelprices.Somegovernmentshaveusedtheirnew-foundaccesstocapitalmarketstoborrow,ineffectspendingtheiranticipatedfuturewealthtoday.Thespendingofwhatturnedouttobetemporaryincreasesinfuelrevenuesresultedinaneedforsharpreductionsinexpendituresoncefuelpricesdeclined.Inseveralcountries,theefficiencyoftheselargeincreasesinexpenditureswasquestionable(seebox4.2).

Thefiscalpositionsofgovernmentsinoilexportingcountriesdeterioratedsomewhatoverthecommoditypricecycle.TheaverageratioofthecurrentbudgetbalancetoGDPimprovedby3.6percentagepointsduringthe1996-97boom(comparedwith1993-95),slightlylessthantherealincomegain(table4.3).23Bycontrast,privatesavingsdeclined.24Subsequently,publicsavingsdroppedbyalmost6percentofGDPduringthebustin1998.Furthermore,severalcountrieshadhighfiscaldeficitsduringthebaseperiod.Forexample,inAngolathecurrentbudgetbalancein1993-95averaged17percentofGDP,

Table4.2Capitalflowstooilexportersandenergyprices,1970-971970-80

1980-86

1986-90

1990-95

1995-97

Changeingrossdisbursements(millionsofU.S.dollars)a 9,658 -2,897 410 -3,249 2,956Percentagechangeinrealoilpriceb

962 -65 29 -37 23

a.Changeingrossdisbursementsoflong-termflowsfrominternationalcapitalmarketsfrombeginningtoendofperiod.b.Percentagechangeinoilpricerelativetomanufacturesunitvalueindex.Note:ThecountriesincludedareAlgeria,Gabon,theIslamicRepublicofIran,Nigeria,Oman,RepublicoftheCongo,TrinidadandTobago,

andVenezuela.

Source:WorldBankstaffcalculations.

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Figure4.4Mexico'scurrentaccount,1970-82

andVenezuelaexperiencedaforeignexchangecrisisin1995-96asaresultofthehighgovernmentdeficitandtriple-digitinflation(seebox4.3).Also,theriseinpublicsavingsin1996-97insevenofthetencountriesreflectedasharpimprovementin1996,followedbysomedeteriorationinthefiscalbalancein1997,largelyduetoasignificantriseinexpenditures.

25Thedeteriorationinthefiscalpositionin1998(relativetohighdeficitsin1993-95),therefore,isamatterforseriousconcerninsomeoftheoilexportingcountries.

Table4.3RatiosofpublicandprivatesavingstoGDP,1996-98(changefrom1993-95average)

1996-97 1998Public Private Public Private

Allcountries 3.6 -1.1 -5.6 0.3Middle-income 3.6 -1.4 -5.2 0.1

Debtors 2.4 -0.3 -9.2 5.0Creditors 5.8 -3.5 2.4 -9.0

Low-income 3.7 2.7 -10.8 2.2Source:WorldBankstaffcalculations.

Long-TermEconomicPerformance

Theriseinconsumptionandthefallinprivateinvestmentduringtheoilpricecycleofthe1990shascomplicatedeffortstoreversetheweakeconomicperformanceofmanyoilexportingcountriessincethequadruplingofoilpricesin1974.Althoughoutputgrowthwasrapidinthe1970s,growthslowedduring1980-97to2.1percentperyear,belowthe2.8percentannualgrowthindevelopingcountriesasagroup.26OutputandinvestmentperformanceintheoilexportingcountrieswassubstantiallypoorercomparedwithothercountriesinthesameregioninLatinAmericaandtheMiddleEastandNorthAfrica,whileperformancewasslightlybetteramongtheoilexportersinSub-SaharanAfrica(table4.4).

Pooreconomicperformancesince1980hasbeenattributedtothesharpdeclineandhighlevelofvolatilityofoilprices,aswellastoamixedrecordofpolicyreform.Somecountrieshavemadesubstantialeffortstoimproveincentivesforprivatesectoractivities.Nevertheless,policyregimesinsomeoilexportingcountrieshavebeencharacterizedbyinadequatemacroeconomicenvironments;poor

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Box4.2Publicsectorexpendituresduringtheoilpriceboom

Thelowefficiencyofpublicsectorexpendituresinseveraloilexportingcountrieshasimpairedeconomicperformance.Inallthesecountries,thepublicsectoristhemainowneroffuelsresourcesandaccountsforsignificantshareofeconomicactivity.In1996publicsectorexpendituresaverageabout30percentofGDPinthemajoroilexporters,comparedwithlessthan20percent,onaverage,forthedevelopingcountries.

Particularproblemshavebeenevidentintheefficiencyofpublicinvestmentundertakenduringbooms.Duringthepastthreedecadesmanyoilexportingcountrieshavesquanderedalargeportionoftheincomefromoilrevenueincreasesincreasesonlow-returnpublicinvestmentprojects(GelbandAssociates1988).Hugeinvestmentsinstate-ownedenterprisesandhumanskillsunsuitedtotoday'sglobalmarketplaceresultedinrelativelylowproductiveusesofoilrevenuesinseveralcountriesoftheMiddleEastofNorthAfrica(Page1999).Investmentsduringtheoilpriceboomalsofrequentlygenerateddisappointingresultsbecauseoftransportbottlenecksresultingfromafloodofinvestmentsandinabilitytofund,whenpricesretreated,therecurrentcostsrequiredforprojectsucess.Particularlyunsuccessfulexamplesofinvestmentincludetheestablishmentofstateenterprisesinthemanufacturingsector.Forexample,inNigeriaandTrinidadandTobago,suchenterprisestookupsubstantialportionsoftheboomrevenuesandlefta

legacyofdebtandlossesinpost-boomyearsthatcontributedtofiscaldeficits(McMahon1997).Capitaloutputratiosinoilexportingdevelopingcountriesincreasedduringthe1970s,inpartrefelctingheabyinvestmentsinlonggestationprojectsininfrastructureandhumancapitalformation,aswellascapital-intensivehydrocarbonsinvestments.However,thereductioninefficiencyalsostemmedfromill-conceivedinvestments,plannedtoohastilyandsubjecttoenormousconstraintsonimplementation(Ahmed1984).

Onepopularuseofoilwindfallsinvolvedeffortstodiversifyintoresource-basedindustries,forexamplemineralprocessing(ironoreintosteel,bauxiteintoaluminum,andhydrocarbonsintopetrochemicals).Ultimatelytheseeffortshaddisappointingresults,largelybecausetheprojectswerestraintsandastrongimpetustowarddiversification,feasibilitystudiesgreatlyoverestimatedfuturedemand.Bythemid-1980spriceswerebetweentwo-thirdsandhalfthelevelsprojected,andpotentialrentswereminimal,evenforeffectivelyimplementedresource-basedindustrialprojects.Lowcapacityutilizationcombinedwithhighlevelsofdebtandrisinginterestratestogreatreducetheprofitabilityofresource-basedindustrialprojects(Auty1988).

investmentdecisions;andthefrequentuseofproducerandconsumersubsidies,pricecontrols,andtraderestrictions(GelbandAssociates1988;McMahon1997).TheWorldBank'scountryperformanceratingsforoilexportingcountriesare0.5pointsbelowtheaveragefordevelopingcountries(onascaleof1to5).Ratingsdonebyprivateservicesalsoindicatethatsomeoilexportingcountriesareperceivedasworsethantheaverageofdevelopingeconomiesintermsof

corruption,tradepolicy,andtheenvironmentforforeigndirectinvestment.

27

Inappropriatepolicyregimesmayhaveimpededthediversificationofproductiontowardnon-oilactivitiesthatcouldsupportfastergrowthinthewakeoftheseculardeclineinoilprices.Forthemostpart,themajoroilexportingcountrieshavebeenslowertodiversifytheirexports(toeitherotherprimarycommoditiesormanufactures)thanotherdevelopingcountries.Ofthe12countrieswhereoilaccountedformorethan80percentofexportsin1980,only2hadreducedtheirshareoffuelexportsbelow80percentby1997(table4.5),despitea65percentde-

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Box4.3FiscaladjustmentinVenezuelaandSaudiArabia

Venezurla'sexperienceillustratesthedangersofincreasingexpendituresasaresultofacommodityboom.Thegovernmenthadadoptedastabilizationprogramin1996inresponsetoinflationof103percentanddeficitof7percentofGDP.Higherinternationaloilprices,increasedtaxrevenues,increasedfuelproductionbecauseoftheinvestmentdriveinitiatedearlierinthedecade,andacutbackincivilservicewagesinrealtermsachievedamassiveshiftofthefiscalbalancetoasurplusof7.25pecentofGDPin1996.

However,thegovernment'sbalancedeterioratedto1.5percentofGDPin1997becauseofwageincreasesthataveragedabout90percent,transferstolocalgovernmentsanddecentralizedpublicsectoragenciestotaling2.75percentofGDP,andarealappreciationthatreducedthecontrubutionofdollar-denominatedoilreceiptstothebudget.Despiteeffortstorestrainexpendituresinthefirsthalfof1998,thedeficitofthenonfinancialpublicsectorisestimatedat6percentofGDP.Almosttheentiredeficitwasfinancedbytheliquidationofassets,includingthroughprivatization,liquidationofexternalassets,andasharpdeclineingovernmentcashbalances.TheTsesoreriaNacionalbeganin1998withabalanceofBs1.2billion($2.35billion)butendedtheyearwithonlyBs362billion,about$600million.Thus,bytheendof1998,thegovernmenthadspentalloftheextraordinaryrevenuefromtheriseinthepriceofpetroleum,andwasleftwith

ahigherpublicsectorwagebillandhighexternalamortizationpayments.

Bycontrast,SaudiArabiadevotedasignificantportionoftheriseinoilrevenuesinthemid1990storetiringdebt,whichhelpedtoeaseitsadjustmenttotheoilpricefallin1998.In1996thegovernmentpaidSR22billion($5.9billion)todomesticcreditors,largelytocoverarrearsfromunpaidbills,suchastheinsuranceofagriculturalcertificatestofarmersinlieuofcashforthe1993-94harvest.Thesepaymentsincreasedtotalexpendituresspentaportionoftheunanticipatedriseinrevenuesfromhigheroilpricesonclearingarrears,leavinggovernmentfinancesinastrongerpositiontoaccommodatethe1998fallinrevenues.Whileexpenditureswerecutandgovernmentfinancesinastrongerpositiontoaccommodatethe1998fallinrevenues.Whileexpenditureswerecutandgovernmentpaymentstocontractorsandsupplierswerestretchedtothe180-daylimit,mostpublicagenciesmaintainedcurrentpayments,andgovernmentalsocontinuedtoredeempastarrears(Kemp1998).

Table4.4Economicperformanceofmajoroilexportersandothercountries,1980-97(percentageperyear)

GDPgrowth

Investmentgrowth

MiddleEastandNorthAfrica

Oilexporters 2.2 1.3Othercountries 4.1 1.9

Sub-SaharanAfricaOilexporters 2.1 0.2

Othercountries 1.8 -0.9LatinAmericaandtheCaribbean

Oilexporters 1.5 -1.1Othercountries 2.2 0.7

Source:WorldBankstaffcalculations.

clineinthepriceofoilrelativetomanufacturesfrom1980to1997.Bycontrast,ofthe27countrieswheretheshareofnonfuelcommoditiesexceeded80percentin1980,8countriesmanagedtoreducetheirnonfuelcommoditysharebelow80percent.Thegreatersuccessindiversificationofnonfuelcommoditiesexportersisnotcomparableforlessextremeexportconcentrations.Almostallthecountrieswherefuelsaccountedformorethan50percent,butbelow80percent,ofexportsin1980hadreducedthissharebelow50percentbythelate1990s.

Thefailuretodiversifyislikelytohampergrowthoverthemediumterm.Oil-dependenteconomiesremainsubjecttothedepressed

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Table4.5Shareofoilandnon-oilcommoditiesinmerchandiseexports,1980andmostrecentyear(numberofcountries)

Between50percentand80percentofmerchandiseexports

Morethan80percentofmerchandiseexports

1980 Mostrecentyeara 1980 MostrecentyearNon-oilexporters

28 18 27 19b

Oilexporters

7 1 12 10c

a.Onlycoversthosecountriesincludedinthecolumntotheleft.Figuresforoilexportersarefrom1997;figuresfornon-oilexportersvaryfrom1993to1997.b.Oftheeightcountriesthatreducedtheirshareofnon-oilexportsbelow80percentfrom1980,allremainedwithsharesabove50percentinthemostrecentyear.c.Thetwocountriesthatreducedtheirshareofoilexportsbelow80percentfrom1980remainedwithexportssharesabove50percentinthemostrecentyear.Note:Excludescountrieswheredatawerenotavailableineitherorthemid-1990s.Source:WorldBank1999;WorldBankstaffcalculations.

levelofoilpricesrelativetomanufacturesandtoslowgrowthindemand.Theseeconomieswillcontinuetosufferfromtheadverseimpactofcommoditypricevolatilityoninvestmentandwelfare(discussedinchapter2).Also,theexistenceoflargegovernment-controlledrentsineconomiesdependentonoilexportsencouragesrentseekingbehaviorthattendstoleadtoinefficientexpenditures(seeLaneandTornell1995).Thelackofdiversificationalsomeansthateconomiesfailtocapturethebenefitsofmanufacturesproduction.Manufacturingischaracterizedbypositiveexternalities,thatis,benefitstotheeconomythatarenotcapturedbythefirm.Forexample,skillstrainingprovidedeitherformallyorthroughlearningbydoingtosuppliersandemployeesisreadilytransferabletootheractivities(Matsuyama1992;Mayer1996).Also,increasingreturnsto

scalemayexistinmanufacturingorintheeducationandjobtrainingthatisappropriateformanufactures(SachsandWarner1999).Thus,increasingtheproductionofmanufacturesmayraisethetotalproductivityofthe

theproductionofmanufacturesmayraisethetotalproductivityoftheeconomy.

Slowoutputgrowthcoupledwithhighpopulationgrowthposesenormouschallengesformanyoilexporters.Projectionsindicatethatthelaborforceinoilexportingcountrieswillincreaseby54percentby2010,comparedwith23percentfordevelopingcountriesasagroup.Inaddition,unemploymentisalreadyhighinseveralcountries.Forexample,approximately40percentoftheSaudiArabianpopulationisyoungerthan14yearsofage,anditisthereforeanticipatedthatnewentrantstothelaborforcewilltotalalmost4millionpeopleoverthenextdecade,ortwo-thirdsofthecurrentlaborforce.Giventhehighrateoflaborforcegrowth,evenemploymentgrowthof5percentperyearfrom2000to2015wouldmakeonlylimitedprogressinreducingunemploymentbytheendoftheperiod.Theunemploymentprobleminoilexportingcountriesisexacerbatedbecausethebulkofthelaborforceisemployedinthenontradedsector.Theoilsectorisanenclavethatgeneratesfewjobsdirectly.Largepartsofthenontradedsectorareexposedtolimitedcompetition,oftenimplyinglimitationsonthegrowthofoutputandlabordemand.

Improvementsinpolicyregimestostrengthenincentivesfornon-oilproductionandtoremoveconstraintsoncompetitionareessentialinseveralcountriestoavoidgrowingunemploymentanddeterioratinglivingstandards.Inparticular,somegovernmentsneedtoconsiderloweringtaxesandremovingbarrierstoemploymentthatrestricttheflexibilityofusinglabor.Forexample,inAlgeriafirmspay24percentofthewagebillintaxesandfacesignificantseveranceandadministrativecostswhenlayingoffemployees(Ruppert1996).Itshouldbenotedthatinsomecountriesattitudesareshiftingtowardmoremarket-orientedpolicies,whichprovideshopeforanaccelerationofgrowth.

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TheSavingsResponsebyNon-OilCommodityExportingCountriesofSub-SaharanAfrica

Non-oilprimarycommoditypricesunderwentapronouncedcycle,similartooilprices,duringthe1990s.However,thecommoditypricecycledoesnotappeartohaveadverselyaffectedtheprospectsforgrowthinthenon-oilexportingcountriesofSub-SaharanAfricafortworeasons.First,changesinthetermsoftradeandrealincomesweregenerallysmallerthanintheoilexportingcountries.Second,improvementsinpoliciesenabledcountriestoachieveincreasesinsavingsandinvestmentratesduringbothboomsandbustsincommodityprices.

Nexttotheoilexporters,thenon-oilexportersofSub-SaharanAfricaarethemostdependentonprimarycommodities.

27Non-oilprimarycommoditiesaccountedfor80percentofmerchandiseexportsfromthesecountriesin1997,whichisaboutthesameasin1990(figure4.5).Bycontrast,non-oilprimarycommoditiesaccountedfor15percentofmerchandiseexportsfromEastAsiaandPacific,35percentfromLatinAmericaandtheCaribbean,and21percentfromSouthAsia.

TheCommodityPriceCycleandtheTermsofTrade

Theglobalmarketpricesofnon-oilprimarycommoditieshaveundergonesharpchangessince1993.Agriculturalprices,weightedbytheshareofexportsfromSub-SaharanAfricaduring1987-89,increasedby52percentin1994-95beforefallingby19percentduringthenextthreeyears(figure4.6).However,the1994-95increaseinthesecountries'exportdeflatorswassignificantlylessthantheriseintheglobalmarketpricesofagriculturalproducts,andtheaverageexportdeflatorremainedbelowthecommoditypriceindex

through1998.Inpart,thisreflectedthe23percentshareofmanufacturesinthesecountries'exports(manufacturesexportpricesrosebyonly4percentin1994).28Thereisaconsiderablelagbetweenchangesinmarketpricesandchangesinthepricesactuallyreceivedbyexporters,owingtotheexistenceoffixedpricecontracts.Also,theglobalcommoditypriceindexesarebasedonaveragepricesquotedininternationalmarketsthroughouttheyear,whileexportdeflatorsreflectpricesatthedatesofsale,whicharelimitedtocertaintimesoftheyearforagriculturalcommodities.For

Figure4.5SharesofmerchandiseexportsofSub-SaharanAfricanon-oilcommodity

exporters,1990-97Note:Thelistofcountriesincludedinthedataforthisfigureisgiveninfootnote

28.Coverageoftradesharesexcludedbecauseofthelackofdata.

SourceComtrade.

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Figure4.6Agriculturalexporters'tradeprices,1993-98

Source:WorldBankstaffcalculations.

example,onereasonthattheaverageexportpricedeflatorrosemuchlessthantheinternationalmarketpricein1994wasthatcoffeepricesjumpedinJulywhenfrostdamagedtheBraziliancrop,butcoffeesalesareusuallymadefromNovembertoMarch,andbythenpriceshaddroppedsignificantly.Therefore,theaverageinternationalmarketpriceforcoffeein1994wasmuchhigherthanthepricethatwasactuallyreceivedbymostdevelopingcountries.

29

Theaverageriseinthetermsoftradeduring1994-95wasevenlessthantheincreaseinexportprices,becausethesecountriesalsoimportsubstantialamountsofprimarycommodities(aboutone-fifthoftotalimports,equaltoone-thirdthesizeofprimarycommodityexports).Higherpricesforthesecountries'agriculturalandfuelimportsthuspartiallyoffsettheirhigherexportprices.Conversely,in1998export

pricesfellbylessthanthepriceofimportedproducts,particularlyfuels,andthetermsoftraderoseby8percent.Thegaininrealincomeduringboomsaveraged1.5percentofbaseperiodGDPfortheagriculturalexporters,whilerealincomewasroughlyequaltothebaseperiodduringbusts.Boomandbustperiodswerechosenforeachcountrybasedonwhenagriculturalpricesandexportrevenueswererising.30

Whilethetermsoftradeandrealincomesroseonlymodestlyduringthecommoditypriceboom,exportrevenuessoared,increasingbyanaverageof12percentperyear.Aportionoftheriseinexportrevenuesmaystemfromincreasedreportingratherthanactualincreasesinexports,astheliberalizationoftradeandforeignexchangeregimesreducedincentivestoevadetariffs.Thisstrongexportperformancereflectedsomewhathigherpricesandsharpincreasesinvolumesasworldtradeincreased.Severalcountriesimprovedincentivesforagriculturalproductionbyremovingpricecontrols,bydismantlinggovernment-runboardsthatmonopolizedthepurchaseofkeyexportcrops,andbyestablishingmarket-basedexchangerates.

Themetalsandmineralsexportersalsoexperiencedsharpchangesinthemarketpricesofthecommoditiestheyexported,butrelativelysmallmovementinthetermsoftrade.Globalmetalsandmineralspricesroseby43

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percentduring1994-95,onlysomewhatlessthanthepricesofagriculturalgoods(figure4.7).However,thesecountries'exportpricedeflatorincreasedbyonly2percentin1994andby6percentin1995.

31By1998theexportpricedeflatorandthetermsoftradewerenotsignificantlydifferentfromtheir1994levels.Duringboomperiods,thechangeinrealincomecausedbychangesintradedgoodspricesaveraged0.5percentofbaseyearGDP,andduringbustperiods,realincomesfellby0.6percent.32Thesecountries'exportvolumesincreasedbyanaverageof3.4percentperyearduringboomperiods,comparedwith7.7percentfortheagriculturalexporters.

PoliciesandCountryPerformance

Improvedpolicyperformanceenabledmanyofthenon-oilexportingcountriesofSubSaharanAfricatoincreasetheirsavingsandinvestmentratesoverthecommoditypricecycle.SeveralcountriesinSubSaharanAfricaadoptedmoreprudentmacroeconomicpolicies,establishedmarket-determinedexchangerates,reducedquantitativerestrictionsonimports,reducedtariffrates,introducedgreaterprivatesectorparticipationintheeconomythroughprivatizationandthedismantlingofmarketingboards,removedpricecontrolsandsomeotherrestrictionsonprivatesectoreconomicactivity,andtookstepstoimprovetheefficiencyandsoundnessoftheirfinancialsectors.

Thesepolicyreformsusuallyincreasedsavingsthroughanumberofchannels.First,onegoalofseveralprogramswastoraisepublicsavingsdirectlythroughincreasesinrevenuesandthroughimprovedcontrolovercurrentexpenditures,inparttostrengthenmacroeconomicmanagementandinparttomakenecessaryincreasesinpublicinvestment.Second,reducedinflationandtheestablishmentofmoreefficientfinancialsystemsincreasedthereturnonholding

savingsdomestically,whichmayhavehadsomeimpactonprivatesavingsbehavior.Finally,policyreformsincreasedtheexpectedreturnoninvestment,particularlyforexporters,becauseakeyelementofreformprogramsinvolvedreducingbiasesagainstexports.Realinvestmentincreasedstronglyinmanyofthesecountries.Sincetheylackaccesstoprivatecapital

Figure4.7Metalsandmineralsexporters'tradeprices,1993-98

Source:WorldBankstaffcalculations.

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marketsandofficialflowshavedeclinedduringthe1990s,theriseininvestmenthadtobefinancedbyincreaseddomesticsavings.

Thelinkbetweenpoliciesandperformancecanbestbeseenbygroupingthesampleofnon-oilcommodityexportersintermsofratingsoftheirpolicies(table4.6).

33Countrieswithratingsofmorethan3.5(1isworst,and5isbest)increasedtheirGDPby5percentperyearduringtheboom,whilecountrieswithratingsof3.5orlessincreasedtheirGDPbyonly3percentperyear.Policyperformancewasbyfarabetterpredictorofsavingsbehaviorthanchangesinrealincome.Thecountrieswithbetterpoliciesincreasedsavingsratesbymorethanthosewithrelativelypoorerpolicies(almost7percentofGDPoverthebaseperiodversus3percentofGDP).However,theaverageriseinrealincomeinthecountrieswithbetterpolicieswaslessthaninthecountrieswithpoorerpolicies(1percentofGDPversus2percent).34

Table4.6PolicyperformanceandGDP,savings,andrealincomeduringboomperiods(averageannualpercentagechangefrombaseperiod)Averagepolicyperformanceratinga GDPSavings

Realincome

Above3.5 5.3 6.7 1.23.5orbelow 3.2 3.1 1.9a.BasedonasurveyofWorldBankcountryeconomists.Note:Onlyboomperiodsareshownbecausenoneofthegoodperformershadbustperiods.Source:WorldBankstaffcalculations.

NotethatthisisabiasedsampleofSubSaharannon-oilcommodity

exporters.Toanalyzemacroeconomicadjustmentoverthecommoditypricecycle,countrieswithseverecivilconflictsandcountrieswithinadequatedatawereexcluded.Boththesegroupsofcountriestendtohavelowerperformanceratingsthancountrieswithcivilpeaceandmoredevelopedstatisticalservices.Theaverageperformanceratingofthecountriesinthesampleis3.4,whiletheaverageperformanceratingofthenon-oilcommodityexportingcountriesinSubSaharanAfricaexcludedfromthesampleisonly2.7.Thustheimprovementsinsavings,outputgrowth,andinvestmentforthesampleareprobablylargerthanfortheSubSaharanAfricannon-oilcommodityexportersasawhole.

Savings,RealIncomeChanges,andtheCommodityPriceCycle

Policyperformancewastheprimaryreasonfordifferencesinsavingsperformance.Bycontrast,changesinrealincomecausedbychangesintradedgoodspriceshadamorelimitedimpactonsavingsduringthecommoditypricecycle.Toanalyzeadjustmenttorealincomechangesduringthecommoditypricecycle,ausefulapproachistogroupthesampleofthenon-oilexportingcountriesbythepercentagechangeinexportrevenuesandthetermsoftradeintheboomrelativetothebaseperiodforeachcountry(table4.7).

Thetwogroupswithmorethanonecountryexperiencedsubstantialincreasesinsavingsratesduringbothboomsandbusts,despitethedifferentmagnitudesofchangesinrealincome(table4.8).Thegroupwithflattermsoftradeandrelativelysmallchangesinrealincomesactuallyincreaseditssavingsratesbymorethanthegroupwithlargetermsoftradeandrealincomegains.Savingsratesremainedabovebaseperiodlevelsduringthedeclineincommodityprices.Bothgroups'savingsperformancewasmuchgreaterthanthatachievedbytheoilexportingcountriesduringtheboomandbustofoilpricesandwaslargerthantheaveragesavingsoutofwindfallincomes(aboutone-half)recordedinotherstudiesofsavingsfromcommodityprice

windfalls(Collier,Gunning,andAssociates1999).AnanalysisofsavingsbehaviorinSubSaharanAfricancountriesoveralongerperiod,from1980to1996,thattakesotherdeterminantsofsavingsintoaccountalsofindsthatsavingswerenotcloselytiedtochangesinrealincomes(box4.4).

ThesharpincreaseinsavingsratesduringboomperiodsenabledtheSubSaharanAfricannon-oilcommodityexporterstoincreaseinvestmentratescomparedwiththebaseperiodby1.1percentagepointsinthegroupwith

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Table4.7Exportsandterms-of-tradechanges,boomcomparedtobaseperiodLargeincreaseintermsoftrade

Littlechangeintermsoftrade

Largedecreaseintermsoftrade

Largeincreaseinexportrevenues

Benin CentralAfricanRepublic

Togo

Botswana Côted'IvoireChad GhanaEthiopia GuineaGhana MadagascarKenya MaliMalawi SenegalTanzania ZimbabweUganda

Littlechangeinexportrevenues

Mauritania Niger Zambia

Note:Thecutoffforlargeincreasesisplusorminus5percentforexportrevenuesand3percentforthetermsoftrade(peryear).Theboomandbustperiodswerechosenforeachcountrybasedonmovementsinexportprices,thetermsoftrade,andexportrevenuesduring1994-98,withthethreeyearspriortothebeginningoftheboomasthebaseperiod.Mostoftheboomperiodsare1995-97,1994-97,or1994-98.Source:WorldBankstaffcalculations.

largeterms-of-tradegainsandby3.8percentagepointsinthegroupwithonlysmallimprovementsinthetermsoftrade.Savingsandinvestmentincreasedbymuchlessduringbusts,butstillrosebymorethanthenegligiblechangeinrealincome.Thisexperiencecontrastssharplywiththatoftheoilexportingcountries,whereinvestmentratesfelloverthecommoditypricecycle.Thenon-oilexportersofSub-SaharanAfricaalsoallocatedaportionoftheriseindomesticsavingstoreducetheirrelianceonforeignsavings,whichfellbymorethan2percentofGDPinbothgroupsduringboomsandby1percentofGDPduringbusts.

Thedifferenceinsavingsperformancebetweenthegroupsispartially

relatedtochangesinaidflows.Mostofthesecountriesexperiencedadeclineinnetconcessionalflowsduringboomperiods(dataarenotyetavailableonnetflowsduringbusts,whichtookplacein1998formostcountries),reflectingthegeneraldeclineinaidsincetheearly1990s.However,thecountriesinthefirstgroup(withthesmallestriseinsavingsratesdespitethelargestriseinrealincome)sawadeclineintheratioofaidtoGDPof5percentagepointsintheboomcomparedwiththebaseperiod.Bycontrast,thegroupofcountrieswiththe

Table4.8Changesinsavingsandrealincomerelativetobaseperiods(percentageofGDP)Countrygroup SavingsInvestment Foreign

savingsRealincome

DuringboomLargeincreasesinexportsandintermsoftrade

3.5 1.1 -2.4 2.3

Largeincreasesinexports,flattermsoftrade

6.5 3.8 -2.7 0.6

Duringbusta 1.5 0.4 -1.0 0.1a.Thisincludesonlyfourcountries,becauseseveralcountriesdidnotexperienceadeclineinexportrevenuesorrealincome,sothattheboomcontinuesthrough1998.Note:SavingsindicatesanaveragechangeintheratioofsavingstoGDPinboomorbustperiodsrelativetothebaseperiod.Realincomeindicatesaveragechangeinrealincome(asapercentageofthebaseperiodGDP)causedbychangesinexportandimportprices.Base,boom,andbustperiodsdifferbycountrydependingontheevolutionofexportprices,revenues,andtermsoftrade.GroupaveragesreflecttheweightofGDPinthebaseperiod.Source:WorldBankstaffcalculations.

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Box4.4Savingsandrealincomesduringthecommoditypricecycle

Themaintextshowsthatchangesinrealincomesbecauseofshiftsinthetermsoftradehavenotplayedamajorroleindeterminingsavingsbenaviorinthenon-oilexportersinSub-SaharanAfrica.Thisboxattemptstocontrolforotherdeterminatsofsavingswhenmeasuringtheimpactofchangesinrealincomes.Theeconomicsliteraturecitiesseveraldeterminatsofsavings:(a)higherGDPgrowthisassociatedwithhighersavings,(b)countrieswithhigherpercapitaincomesnormallyhavehighersavingsrates,(c)highlevelsofinflationdiscouragesavingsbyreducingtherealvalueofsomefinancialassets,(d)countrieswithahigheragedependencyratio(shareofpopulationeitherveryyoungorveryold)generallysaveless,and(e)increasesinforeignsavingsandofficialaidareassociatedwithreducedsavings(GhuraandHadjimichael1995;Ostry,andReinhart1995;Dayal-GulatiandThiman1997;Loayza,serven,andSchmidt-Herbbel1999).Thetableshowstheestimatedimpactonsavingsofupswingsanddownswingsinthetermsoftradeduring1980-96aftercontrollingfortheseotherdeterminantsofsavings.

35

Theregressionresultsareroughlyconsistentwithtwoofthemajorfindingspresentedinthischapter,eventhoughtheregressionsaccountmorefullyforotherdeterminantsofsavingsandcoveralongerperiod.First,therelationshipbetweensavingsandthetermsoftradevariesconsiderablyamongcountrygroups.Thisrelationshipispositiveand

significantforoilexportersinbothupswingsanddownswingsandformetalsandmineralsproducersduringupswings(butnotdownswings),butisnosignificantforagriculturalproducers.Notethattherelationshipbetweensavingsandthetermsoftradeisthesameintheupswingasitisinthedownswingduring1980-96.Inthemostrecentcycle,however,oilexportingcountriestendedtosavelessthantheriseinrealincomeduringtheupswinganddissavedthefullamountofthefallinrealincomeduringthedownswing(seemaintext).Itisunclearwhetherthisdifferencesstemsfromthelongertimeperiodanddifferentcountrycoverageoftheregressions,orifitreflectsamoreaccuratemeasurementoftheimpactofterms-of-tradechangesafteraccountingforotherdeterminatsofsavings.Second,whilechangesinthetermsoftradearenotsignificantlyrelatedtosavingsbytheSub-SaharanAfricanagriculturalprodecers,atimetrendispositiveandsignificant.Thisresultisatleastconsistentwiththeviewthatpolicyimprovementsundertakeninseveralcountriessincethe1980shavehadamoreimportantimpactonsavingsthanchangesinthetermsoftrade.

Terms-of-tradeshocksandsavings

Impactonsavingsrates(numberofobservations)

Term-of-trade

upswing

Terms-of-trade

downswing Time

Oilexportingcountriesa(120)

0.143* 0.131*

MetalsandmineralsproducersinSub-SaharanAfricab(78) 0.196** 0.110

AgriculturalproducersinSub-SaharanAfricac(207) 0.038 0.022

0.004*

a.Algeria,EquatorialGuinea,Gabon,theIslamicRepublicofIran,Nigeria,RepublicoftheCongo,RussianFederation,TrinidadandTobago,Venezuela,andtheRepublicofYemen.

b.Botswana,Guinea,Mauritania,Niger,Togo,andZambia.

c.CentralAfricanRepublic,Chad,Côted'Ivoire,Ethiopia,Ghana,Kenya,Madagascar,Malawi,Mali,Senegal,Uganda,andZimbabwe.

Note:Asterisksindicatesignificanceata1percent(*)or10percent(**)level.Estimationisbasedonpaneldatawithcountry-fixedeffectsandinstrumentalvariablesestimators.

Source:WorldBankstaffcalculations.

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largestincreaseinsavingsratesexperiencedadeclineintheratioofaidtoGDPofonly1percentagepoint.Therelationshipbetweensavings,realincomes,andaidflowsonacountrybasisisrepresentedinfigure4.8,whichshowsdataonchangesinrealincomeandsavings(asashareofGDP)duringboomperiodscomparedwithbaseperiods.Allthecountrieswithrealincomegainsthatwerelargerthansaverage(1percentofGDP),butwhichhadincreasesinsavingsthatweresmallerthanaverage(5percentofGDP),hadlargedeclinesinaidflows.

Boththeprivateandpublicsectorscontributedtotheriseinsavingsratesduringtheboom.

36Strongermacroeconomicpolicieswerereflectedinimprovementsingovernmentcurrentbalancesforbothgroups.Nationalaccountdatashowthatprivatesavingsalsoincreasedsignificantlyduringtheboom,by2.8percentofGDPinthosecountrieswithflattermsoftradeandby1.7percentofGDPintheothergroup(figure4.9).

ImprovedpolicyperformanceledtoanaccelerationofGDPgrowth,whichrosesharplyduringbooms,averaging3.8and4.6percentperyearinthetwogroups(table4.9).

Theterms-of-tradeeffectsaccountforonlyasmallfractionoftheincreaseinGDPgrowth.BasedonestimatesbyDeatonandMiller(1995),theincomegainswouldhaveincreasedGDPgrowthonaverageby1.2and0.3percentagepointsduringtheboomperiodsforthetwogroups.37Theseresultsdonotimplythatthechangesinrealincomesdidnothaveanimpactongrowthrates.CountriesexperiencingabustdidseeslowerratesofGDPgrowth(by2to3percentperyear)thancountriesexperiencingaboomincommodityprices.38

TheCommodityPriceCycleandtheInternalDistributionofIncome

Thecommoditypricecyclehadasignificantimpactontheinternaldistributionofincomeinmanyofthenon-oilcommodityexporters,includingsomecountriesthatdidnotexperienceasharpchangeinaggregaterealincome.Table4.10decomposesthechangeinrealincomebetweenchangesthatresultedfrommovementsinexportpricesandfrommovementsofimportprices.Thecountrieswithlittlechangeinthetermsoftradeexperiencedaninternalshiftinrealincomewhencommod-

Figure4.8Realincome,savings,andaidduringbooms

Source:WorldBankstaffcalculations.

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Figure4.9Changeinsavingsratesduringboomcomparedwithbaseperiods

Source:WorldBankstaffcalculations.

itypriceswerehigh.Twofactorslaybehindthisshift.Firmsandhouseholdsthatearntheirincomefromexportssawagainofupto2percentofGDPbecauseofhigherprices,whilefirmsandhouseholdsthatdependlargelyonimportedgoodslostasmuchas1.4percentofGDP.

39Inmanyofthesecountries,higherexportpricesincreasedincomesinruralareas,whereexportcropsareproducedandwherepeopletendtoconsumelocallyproducedfood,buthigherimportpricesreducedincomesintheurbanareasthataredependentonimportedfood.Beninprovidesaninterestingexampleoftheinternaldistributionofrealincomechanges(box4.5).

Conclusion.

Therecentswingincommoditypricesposedasignificantchallengeto

economicmanagementinthosedevelopingcountriesthataredependentoncommodityexports,andthequalityofeconomicpoliciesplayedanimportantroleindeterminingcountries'responses.Policieshavebeenweakinseveraloilexportingcountries,andmanyofthecountriesexperiencedadeteriorationof

Table4.9Economicperformance(averageannualpercentagechangefrombaseperiod)Countrygroup GDPInvestment Export

volumesDuringboom

Largeincreasesinexportsandintermsoftrade

4.6 5.3 6.4

Largeincreasesinexports,flattermsoftrade 3.8 7.1 7.4Duringbusta 1.7 1.7 5.2a.Countrycoveragedifferssubstantiallybetweenboomandbustperiods.Note:Datashowchangeinrealincomecausedbyexportandimportprices.Anegativesignindicatesafallinrealincome,eitherfromlowerexportpricesorhigherimportprices.Seenotestotable4.8Source:WorldBankstaffcalculations.

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Table4.10Decompositionofrealincomechanges(percentageofbaseyearGDP)Countrygroup Realincomechangecausedby:

Exportprices ImportpricesDuringboom:Largeincreasesinexportsandtermsoftrade 2.7 -0.4:Largeincreasesinexports,flattermsoftrade 2.0 -1.4Duringbusta -0.3 0.2a.Countrycoveragedifferssubstantiallybetweenboomandbustperiods.Note:Datashowchangeinrealincomecausedbyexportandimportprices.Anegativesignindicatesafallinrealincome,eitherfromlowerexportpricesorhigherimportprices.Seenotestotable4.8Source:WorldBankstaffcalculations.

savingsandinvestmentperformanceduringthecommoditypricecycle.Bycontrast,thepastfewyearshaveseensubstantialimprovementsinpoliciesinmanyofthenon-oilexportingcountriesofSub-SaharanAfrica,andthesecountries'savingsandinvestmentratesincreased.

Notes1.Theimpactofvolatilityonthepoorisdiscussedinchapter2.

2.Somemeasuresofcommoditypricevolatilitydeclinedafterthemid-1980s,butremainedhigherthaninthe1970s(DehnandGilbert1999).

3.DehnandGilbert(1999)usedarecursiveforecastmodeltoevaluatethedegreeofuncertaintyor

Box4.5RealincomesinBeninduringthecommoditypricecycle

BeninexperiencedsharpchangesinthedistributionofincomeasaresultofthecommoditypricecycleandtheCFAFrancdevaluationduringthemid-1990s.During1994-96theU.Sdollarpriceofcotton,whichaccountfor80percentofBenin'smerchandiseexports,roseby48percentfromits1992-93level.Alsoin1994,the50percentdevaluationoftheCFAFrancgreatlyincreasedthepricesofexportsandimportsinlocalcurrency.By1996thecottonproducerpricehadrisentotwiceits1992-93levelCFAfrancterms,andtheboosttorealincomeduring1994-96fromtheriseinexportpricewas7percentof1992-93GDP.Importpricesalsoincreasedsharply,however,becauseofthedevaluationandtheriseinthedolarpriceofprimarycommodityimports.ImportpricesinCFAfranctermsdoubledduring1994-96comparedwith1992-93,equivalenttoalossof20percentofGDP.Importswerealmostthreetimesthesizeofexports(excludingre-exports)during1992-93,sothelossfromtheriseinimportpriceswasmuchgreaterthanthegainfromexports.Thenetlosstotheeconomywasabout13percentofGDPduring1994-96comparedwith1992-93.

Ruralareassawanincreaseincomesandlabordemandasthepriceriseencouragedgreatercottonproduction(theareaundercottoncultivationalmostdoubledfrom1993-94to1996-97).

40Urbanworkers,however,experiencedadeclineinlivingstandarsfollowingthedevaluationasthecostoflivingincreaseexceededtheriseinwages.A46percentriseinthesalaireminimuminterprofessionalgarantiwasincreaseintheconsumerpriceindex.Moreover,actualearningsdidnotfullyreflecttheincreaseinwagerates

asthegovernmentwassubstantiallyinarrearspayingwageincreases.Finally,manyworkers,particularlythemorevulnerable,lower-incomeones,wereemployedintheinformalsectorwhereincomesprobablydidnotkeeppacewiththeriseinlivingcosts.

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unpredictabilityincommodityprices,whereuncertaintywasmeasuredbythestandarddeviationoftheforecasterror.

4.Selectedcommodityprices(coffee,cotton,gold,andcopper)haveremainedroughlyflatrelativetoU.S.inflationsince1900.Ataminimum,ownersofaconstantflowofoneofthesecommoditieswouldnothaveseenmuchgrowthinrealincomeduringthetwentiethcentury(Deaton1999).

5.StatisticalanalysesofcommoditypriceseriescanbefoundinCuddingtonandUrzúa1989;Cuddington1992;DeatonandLaroque1992;ReinhartandWickham1994;LeonandSoto1997;andCashin,Liang,andMcDermott1999.

6.Thesedataarebasedonalimitedsampleofcommodities.Theagriculturalproductsincludedarecocoa,coffee,tea,fatsandoils,cotton,sugar,rubber,soybeans,maize,rice,andwheat.Themetalsandmineralsarealuminum,copper,gold,andsteel.

7.However,theseincreasesdidnotoccurinthecountriesoftheformerSovietUnion,whereproductioncontinuedtofall.AccordingtotheFoodandAgricultureOrganizationoftheUnitedNations,agriculturalproductionintransitioneconomiesfellby35percentfrom1990to1998.Thispartiallyoffsetgainsinothercountries.

8.CasestudiesaregiveninCollier,Gunning,andAssociates(1999),Ingham(1973),andPaxson(1992).EconometricstudiesincludeDayal-GulatiandThimann(1997)andLoayza,Serven,andSchmidtHebbel(1999).Studieshavealsofoundthatconsumptionbehaviorinsomedevelopingcountriesiscloselyrelatedtopermanentincome(OstryandReinhart1992;GhoshandOstry1993;Borenszteinandothers1994).

9.TheMiddleEastandNorthAfricaregionhasmanyoilexporters.Notethattheseestimatesofthesizeofresourcedepletionare

probablyoverstated.Estimatesofdepletionshouldreflectthepriceoftheresourceminusthemarginalcostofextraction.Inpractice,dataonmarginalextractioncostsaregenerallynotavailable,sothataverageproductioncostsareused.Thispracticeoverstatesdepletion,andhenceunderstateslevelsofgenuinesavings.

10.See,forexample,theU.S.DepartmentofEnergy'sAnnualEnergyOutlook,variousissues.TheWorldBank'sforecastsalsoenvisionedcontinuedhighenergypricesintheearly1980s.

11.However,manySub-SaharanAfricancountrieshaveliberalizedmarketingarrangementsandreducedexporttaxessincethe1970s,whichhasreducedthegovernment'sroleinallocatingcommoditypricewindfalls.

12.Thissectioncovers11developingcountrieswhereoilexceeded50percentofexportsin1997,namely:Algeria,Gabon,theIslamicRepublicofIran,Oman,TrinidadandTobago,andVenezuela(middleincomedebtors);BahrainandSaudiArabia(middleincomecreditors);andAngola,RepublicofCongo,andNigeria(lowincome).Thesecountriesaccountfor93percentofthetotaloilexportsofthemajoroilexportingdevelopingcountries.EquatorialGuinea,Iraq,Libya,theRepublicofYemen,andsomeofthetransitioneconomiesareexcludedduetolackofsufficientdata.

13.Theconcentrationindexrangesfromzerotoone,withonerepresentingthemostextremeconcentration(UNCTAD1994).

14.Forthepurposeofthisanalysis,thefuelspriceboomisdatedas1996-97(whenpriceswereabovetrend)andthebustas1998(whenpricesfellbelowtrend).Thetrendiscalculatedbeginningin1986toexcludethelastmajorcollapseofoilprices.

15.ThemethodologyusedintheIMF(1998)wasusedtomeasurethelossinrealincomesduetotermsoftradechanges.Theformulais[(PXt+1-PXt)*Xt-(PMt+1-PMt)Mt)]/GDPt,wherePXandPMare

priceindexesforexportsandimports,XandMareexportandimportvolumes,andGDPisatcurrentprices.Thiscalculationignoreschangesinthevolumeofexportsandimports.Totheextentthatchangesinvolumesareinresponsetochangesinprices,theformulafailstoreflectthefullimpactofpricechangesonrealincomes.

16.Theflexibilityofconsumptionlevelsinresponsetoterms-of-tradechangesislimitedinsomecountriesbecauseoftheunstablesecurityenvironment(militaryexpendituresaretypicallycountedasconsumptioninthenationalaccounts).

17.Permanentincomefromoilwascalculatedassumingthatproductionwasconstant(theextentofdepletionofoilreserveswasnotviewedasanimportantconsiderationoverashorttimeperiod)andthattherealoilpricewasequaltothetrend.Permanentincomeinthenon-oilsectorwassetequaltotheactuallevelduringtheperiod.

18.Thisisanextremeassumption,astypicallyproducerswillviewaportionoftheriseinpriceaspermanent.

19.Thenumberofcountriesislimitedbasedontheavailabilityofdatafor1998andonestimatesfornon-oilGDP.

20.Thiscalculationisbasedonasampleofsevencountries,determinedbydataavailability.Thedatarefertofixedinvestment,whilethedataontotalinvestmentincludechangesinstocks.

21.Thereweresubstantialdifferencesbetweenthemagnitudeofchangesinforeignsavingsasshown

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innationalincomeaccountsandinthecurrentaccountofthebalanceofpayments,partlybecauseofdatadiscrepanciesbetweenthetwosourcesandpartlybecauseofmovementsinfactorincomeandothercurrentaccountitems.

22.Theregressionequationisdisbursements=6.6+.66*oilprice,whereallvariablesareexpressedinnaturallogarithms.Thecoefficientoftheoilpriceissignificantatthe1percentlevel.

23.Themeasurementofthechangeinrealincomereferstotheeconomyasawhole,nottothegovernment.Determiningthegovernment'sshareoftherealincomegainisdifficult.Typically,thegovernment,orthepublicsectorasawhole,directlycapturesthebulkoftheriseinoilprices,butdatatomeasuretheimpactofchangesinimportpricesongovernmentincomesarenotavailable.

24.Privatesectorsavingsarecalculatedbysubtractingthegovernment'scurrentbalancefromtheeconomy'stotalsavings.Thus,publicenterprisesareclassifiedundertheprivatesector,whichforsomecountriesreducestheaccuracyofthesedataasindicatorsofprivatesectorbehavior.Also,discrepanciesinnationalincomeaccountscoulddistortthedataonprivatesectorsavings.

25.Dataonpublicsavingsin1998arenotavailablefortheRepublicoftheCongo.Therefore,table4.3coversonly10countries(comparedwith11countriesfortable4.1).

26.Outputgrowthisnotareliableindicatorofeconomicperformanceforsomeofthemajoroilexportingcountriesbecauseitreflects,inpart,changesinthevolumeofoilproductioninlinewitheffortstosupportprices.Also,thehugeshiftsinoilpricessincethe1970smakeinterpretinglong-termchangesinconstantpricedatadifficult.Growthinnon-oiloutputisabetterindicatorofperformance,butsufficienthistoricaldataareavailableforonlyalimitednumberofcountries.

27.InternationalCountryRiskGuide1999.

28.ThecountriesdiscussedinthissectionincludetheagriculturalexportersBenin,CentralAfricanRepublic,Chad,Côted'lvoire,Ethiopia,TheGambia,Ghana,Kenya,Madagascar,Malawi,Mali,Senegal,Tanzania,Uganda,andZimbabwe.MineralsexportersareBotswana,Guinea,Mauritania,Niger,Togo,andZambia.Burundi,DemocraticRepublicoftheCongo,Liberia,Mozambique,Rwanda,SierraLeone,Somalia,andSudanareexcludedbecauseofcivilstrife.BurkinaFaso,CapeVerde,Comoros,Djibouti,Eritrea,GuineaBissau,Lesotho,Namibia,SãoToméandPrincipe,Seychelles,andSwazilandareexcludedbecauseofthelackofdata.Thesamplecountriesaccountforapproximately75percentofthetotalGDPofthenon-oilcommodityexportersofSub-SaharanAfrica.

29.However,asubstantialportionofthesecountries'manufacturedexportsrepresentsagriculturalgoodswithlimitedprocessing,whosepricesprobablymovecloselywithprimarycommodities.Theexportpricedeflatorroughlyfollowedtheaveragedeflatorofthelargesttwocommoditiesfromeachcountry.

30.Thecommoditypriceindexalsomaydifferfromexportpricedeflatorsbecausethefixedweightsusedintheformermaynotreflecttheexportcompositionofthecountriesinoursampleduringthe1990s.Forexample,coffeeandcocoaprices,whichaccountforalmosthalfoftheSub-SaharanAfricaagriculturepriceindexusing1987-89weights,increasedmorerapidlythantotalagriculturalpricesduring1990-97,butexportsofcoffeeandcocoafromtheprincipalproducersincreasedmoreslowlythanthegroup'stotalexports.Therefore,inthiscasetheweightofthemorerapidlygrowingcommoditiesamongtheexportpricedeflatorswouldhavedeclinedrelativetothefixedweightindex.

31.Thesampleofcountrieswithbustperiodsissmallerthanthesamplewithboomperiodsbecauseinsomecountriesexportrevenues

andpricesneverfellsignificantly.

32.Thepriceindexformetalsandmineralsdoesnotcoveralltherelevantgoodsexportedbythesecountries.Forexample,theaveragecommoditypriceformetalsandmineralsdoesnotincludediamonds,whichisanimportantexportofBotswana,becauseofthelackofdata.

33.Thecountrycompositionduringboomandbustperiodsdiffers,becausesomecountriesneverexperiencedabust.

34.TheratingsarepreparedbyWorldBankcountryeconomists,basedontheirevaluationofmacroeconomicpolicies,structuralpolicies,reductionofinequality,andpublicsectormanagement.

35.Wediscusslaterhowdifferencesinsavingsperformancedependedinpartonaidflows.Notethatchangesinaidflowsdonotexplainthedifferencesinperformanceofthetwogroups,astheyexperiencedalmostthesamedeclineinaidflowsduringboomperiods.

36.ThedependentvariableissavingsdividedbyGDP.Thetermsoftradevariablesareconstructedinthreesteps.First,anindexofthetermsoftradeismultipliedbytheratioofexportstoGDPandthegrowthrateiscalculated.Second,dummyvariablesareconstructedtorepresentupswingsanddownswingsinthetermsoftrade.Avalueof1or0isassignedtoeachyearandcountry,basedonananalysisoftheevolutionofpricesandrevenueofeachcountry'scommodityexports.

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Finally,thedummyvariablesaremultipliedbythegrowthrateofthetermsoftradevariable.

37.Dataarenotyetavailabletodistinguishbetweenpublicandprivatesavingsduringbustperiods,whichoccurredin1998formostcountries.

38.DearonandMiller(1995)estimatethata1percentgaininGDPfromtermsoftradewouldaddaboutonehalfof1percentinGDPgrowthduringtheboom,inadditiontotherealincomeeffects.

39.Thecountrycompositionissubstantiallydifferentbetweenboomandbustperiods.Thustheconclusioncannotbedrawnthatoutputinindividualcountriesnecessarilygrewmoreslowlyduringthebust.

40.Exportersmaydependonimportedinputs,andfirmsinthetradedgoodssectorthatdependonimportedinputsmayhavebenefitedfromincreasedoutputprices.Thus,neithergroupexperiencedthefullamountofgainorlossrepresentedbythechangeinexportandimportprices.

41.However,producers'pricesrosebyconsiderablylessthanwhatwouldbeimpliedbytheincreaseininternationalpricesandtheCFAfrancdevaluation.Therefore,themarketingboardorthegovernmentreapedalargeportionofthegain.

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Appendix1-RegionalEconomicProspects

EastAsiaandPacific

RecentDevelopments

GROWTHFORMOSTOFTHEEASTASIAANDPacificregionin1999,asanticipatedearlierthisyear,willrevivefromthedeepcrisis-inducedrecessionsof1998.Theturnaroundhasbeenmuchstrongerthaninitiallyanticipated.Whereastheearlierforecastforthefivecrisiseconomies

1sawgrowthreboundingto0.2percentin1999,comparedwitha7.9percentdeclinein1998,thisyear'sperformancenowlookstobeinthevicinityof4.5percent(tableA1.1).Growthhasbeenunevenacrossthefiveeconomies,withtheRepublicofKoreanoticeablyleadingthegroup.Undercurrentprojections,KoreaandthePhilippineswillreturntotheirprecrisisGDPlevelsthisyear,followedbyMalaysiain2000,andThailand,justbarely,in2001.Incontrast,Indonesia'soutputin2001couldstillbesome7percentlowerthanprecrisislevels.

Financialmarketshaveimprovedmarkedlyoverthepastyear(figureA1.1).Currencieshaveappreciatedbetween10and20percentsincethelowpointoflate1998,

FigureA1.1Stockindex,exchangerate,inflation,andinterestrateforEastAsia-4

Note:EastAsia-4includesMalaysia,thePhilippines,theRepublicofKorea,andThailand.

Averagesarecalculatedassimplearithmeticmeansforthefourcountries.Inflationisthethree-monthmovingaverageoftheyear-on-yearinflation.

Source:Datastream.

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withtheexceptionofIndonesiawheretheappreciationhasbeenover100percent.

2Strongercurrencieshavebeenabettedbyincreasingreservelevelsanddeclininglevelsofshort-termdebt.Priceshavebeensubduedthroughout1999,providingscopeforreducedinterestratesandarelatedfallinpublicandprivatedebtservicing.

Chinaisconfrontingseveraleconomicproblems.Theuncertaintiessurroundingrestructuringofstate-ownedenterprises(SOEs)andofemploymentprospects,coupledwithalmosttwoyearsofmonthlydeflation,havedampenedconsumerdemand.Thishasledtoasignificantincreaseinunsoldgoodsandhasexacerbatedthecostsofcorporaterestructuring.Governmenteffortstospurdemandthroughpublicinvestmentprogramswerepartiallysuccessfulastemporarymeasures,andwillbepursuedtomaintaingrowth.Thegovernmenthastakenavarietyofmeasurestospurdemand,butearlyevidenceindicatesthatthesemeasureshaveledtoincreasedliquidityinequitymarkets,withoutmarkedlyaffectingpersonalconsumption.Thus,growthinChinaisexpectedtoslowcomparedwith1998,from7.8percentto6.5percent.

Afterlaggingthroughthefirsthalfof1999acombinationoffactorsarebuttressingChineseexports,includingrenewedgrowthinEastAsiaandcontinuedimportgrowthintheUnitedStates.China'simprovinginternationalcompetitiveness,spurredbystrengtheningEastAsiancurrencies,domesticdeflation,andexport-linkedtaxrebates,hasalsobeenafactor.Recordedimportshaverisensubstantiallythisyear,thoughthisismainlyattributabletoacrackdownonsmuggling.Thetradebalanceislikelytonarrow,butwillremainpositiveonaggregate.

Amongthenewlyindustrializingeconomies(NIEs),bothSingaporeandTaiwan(China)havebenefitedfromtheimprovingregionaleconomyand

theglobalelectronicsboom.Becauseofitsstrongerintegrationwiththecrisiseconomies,SingaporewasmoredeeplyaffectedthanTaiwan(China)bytheregionaldownturn.HongKong's(SAR,China)adjustmenttothecrisishasbeenmorepainful.ThecurrencypeghasforceddownassetpricesandrealwagesasHongKongattemptstoremaincompetitive,andhasdepressedinvestmentthroughhighinterestrates.Butretailsalesarefinallypickingup,touristarrivals

TableA1.1EastAsiaandPacificforecastsummary(percentperyear)

BaselineforecastGrowthrates/ratios 1989-9819971998199920002001 1999-2008RealGDPgrowth 7.5 6.6 0.1 5.5 6.2 6.2

Consumptionpercapita 5.2 3.0 -4.0 4.2 4.3 4.7GDPpercapita 6.1 5.4 -1.1 4.3 5.1 5.1

Population 1.3 1.2 1.1 1.1 1.0 1.0Medianinflationa 6.3 3.8 8.7 4.5 3.7 3.1Grossdomesticinvestment/GDP 35.0 36.2 31.0 32.6 33.9 34.6 35.3Centralgovernmentbudgetdeficit/GDP -0.6 -0.3 -2.2 -2.6 -3.0 -2.8 -2.4Exportvolumeb 11.9 17.6 7.0 7.9 8.1 7.8Currentaccount/GDP -0.5 0.2 5.6 3.5 2.8 2.1MemoitemsGDPofregion,excludingChina 5.7 4.4 -7.6 4.3 5.3 5.1GDPofEastAsiaCrisis-5countriesc 5.7 4.5 -7.9 4.4 5.3 5.1a.GDPdeflator.b.Goodandnonfactorservices.c.Indonesia,Malaysia,thePhilippines,theRepublicofKorea,andThailand.Source:WorldBankDevelopmentProspectsGroup,November1999.

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areincreasing,andrenewedChineseexportswillrevivetrade-relatedactivities.

Near-TermOutlook

Forthecrisiscountriesimprovingmacroeconomicconditionsabettedbyfiscalmeasuresshouldsetthestageforafurtherconsolidationofgrowth,averaging5percentormorein2000and2001.Inflation,whichhadbeenaveraging4.5-6percentbeforethecrisis,peakedinmostofthecrisiscountriesatlessthan11percent(exceptforIndonesia).Theaverageyear-on-yearinflationrateisrunningatlessthan2percentintheEastAsia-4(Malaysia,thePhilippines,Korea,andThailand)andisinsingledigitsinIndonesiaafterpeakingat80percentattheendof1998.Interestrateshavefallencontinuouslysincereachinghighsin1998.OvernightcallratesinKorea,Malaysia,andThailandarenowwellbelowprecrisislevels.

Theinitialcatalystforgrowthwasarevivalinexports-ledbyelectronics-drivenbybetterthananticipatedimportgrowthintheUnitedStatesandJapan,andintraregionalmultipliers.Lowinterestrates,risingassetprices,theendoftheinventorycycle,andanimprovingnear-termemploymentoutlook,especiallyinKorea,havehelpedtobroadengrowth.Currentaccountbalancesarelikelytoremaincomfortablypositive,thoughnarrowing,asimportsgrowintandemwithconsumption,production,andtheendoftheinventorycycle.Growthintheneartermwillbebuttressedbystrengtheningconsumerdemandandinventoryreplenishment,withinvestmentkickinginfurtherdowntheroadascapacityutilizationimproves.

Onthedownside,therecouldbeaslowdownintheelectronicssectorinthesecondhalfof1999andperhapsinto2000.Equitypriceshaveslumpedmorerecentlyandtheywillhavetorelyonrenewedgrowthincorporateprofitsratherthanonliquidity.Interestrateshavemostlikelyreachedafloor,andinvestmentcouldcontinuetolagifbanks'

balancesheetsfailtoimprove.Progressinthelatterareahasbeenuneventodate,andnonperformingloan(NPL)levelsremainneartheirpeaks.InIndonesiaNPLsareestimatedtorangefrom60to80percentofoutstandingloansandarecloseto50percentinThailand.InKoreaandMalaysia,theyareamuchmoremanageable10-15percent.Failuretoachievemoresubstantialprogressonrestructuringcouldleadtorenewedfinancialinstabilityandcoulddampennear-termgrowthprospects(seechapter3).

Expansionaryfiscalpoliciesareexpectedtofadeout,thoughtheremainingoff-budgetdeficitwilltakelongertoeliminate,andcouldaccumulatefurther.TherapidlygrowingpublicdebtinEastAsiacouldposeathreattorecoverydowntheroad,buthistoricallylowdebtlevelsallowforadegreeofflexibility.Nonetheless,Indonesia(withahistoryofhighdebtlevels,politicalinstability,andcorruption),andtoalesserextentThailand(withapersistentlyhighlevelofNPLs),areinsignificantlymoreprecariouspositions.

Long-TermProspects

Despitethecurrentrapidrateofgrowthinthecrisiscountrieslong-termprospectsforEastAsiahavenotbeenrevisedsinceforecastsofoneyearago.LackofupwardrevisionreflectstheongoingdifficultiesinIndonesiaand,importantly,prospectiveindustrialrestructuringinChina.Inparticular,thecostofrestructuringtheIndonesianbankbalancesheetshasrisendramatically,andtroubleswithChinesecommercialbanksandtheirlinkswithailingSOEshaveemergedmoresharplythisyear.InwardinvestmentinChinahasalsobeennegativelyinfluencedbythewell-publicizedcollapseofseveralfinancialinstitutions.Despitetheweakperformanceofthedomesticeconomy,ChinaseemsdeterminedtopursueitsdomesticreformsandtojointheWorldTradeOrganization(WTO).WTOmembershipisexpectedtobenefitChina,notwithstandingintensifiedcompetitivepressuresonprotectedsectors.Beyondtheone-timeefficiencygains

fromreducingtradebarriers,Chinacouldanticipateaboostinforeigndirectinvestmentandimproved

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accesstoforeignmarkets.Fortheregionasawhole,long-termgrowthisexpectedtoaverage6.3percentbetween2002and2008,withthefivecrisiscountriesgrowingat5.3percent.

SuccesswithregardtohumancapitalgrowthwillbolsterlongertermproductivitygainsinEastAsia.Educationalachievementsoverthelastdecadeshavebeenimpressive,withprimaryschoolenrollmentnearlyuniversalandsecondaryschoolenrollmentathighrates(forexample,50-60percentinThailandandIndonesia,andover70percentinChina).Evidencefromthehardesthitcrisiscountriessuggeststhattheseachievementswerenotreversedduringthecrisis.Governmentsmadeeffortstomaintainexpendituresoneducation(relativetoGDPandtotalexpenditures),andhouseholdsadjustedconsumptionpatternstoensurecontinuedschoolenrollment(seechapter2).WiththeexceptionofKorea,whichwasahigh-incomecountrybeforethecrisis,countriesinEastAsia-withpercapitaincomesrangingfrom$800to$4,500,andanaveragecloseto$1,000-stillhavesignificantpotentialformovingtowardNIEorindustrialcountryincomelevels.

EuropeandCentralAsia

RecentDevelopments

Economicoutputcontractedby0.2percentin1998fortheEuropeandCentralAsia(ECA)regionasawhole,largelyreflectingRussia'sliquiditycrisisinAugust1998andsubsequentregionalcontagion.TheensuingeconomicdownwardspiralinRussiareverberatedthroughouttheCommonwealthofIndependentStates(CIS),astheseeconomiesinparticularretainstrongtradelinkswiththeRussianmarket.Trade-financeandpaymentssystemsarrangementswereinterruptedandtradedeclinedsharplyasRussiandemandcollapsed(figureA1.2a)CentralandEasternEuropeancountries(CEECs)

exportsandbalanceofpaymentsdeterioratedaswell,assluggishgrowthinWesternEuropetranslatedintoweakexternaldemandforthemorediversifiedregionalexporters,dampeningtheinternaldynamicsoftheregion(figureA1.2b).

Theregion'sweakgrowthperformanceislikelytoimproveduring1999.ThefirmingofoilpricesisimprovingprospectsforthepetroleumexportingcountriesofRussiaandtheCaspianSeabasin.Whileoilimporters,

FigureA2.2aRussianimportsandpartnerexports

Note:Figuresarethree-monthmovingaveragesinU.S.dollars.Source:Datastream.

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FigureA1.2bGermanimportsandCentralandEasternEuropeanexports

Note:Figuresarethree-monthmovingaveragesinU.S.dollars.Source:Datastream.

suchasTurkeyandtheCentralEuropeancountries,areexperiencingsometermsoftradelosses,manyofthesecountriesarebenefitingfromtheincipientstrengtheningofdemandinWesternEurope.TheendofthewarintheFederalRepublicofYugoslavia(Serbia/Montenegro)hasallowedreconstructioneffortstobeginandcross-bordertradetoresume,albeitconstrainedbytheneedtorebuildthetransportationinfrastructure.RussiahasmadesomeprogressondebtrestructuringandongaininganotherroundoffundingfromtheInternationalMonetaryFund(IMF).Inflationarypressureshavebeenreducedsignificantly,suchthatmonthlyinflationhasslowedto1.4percentinSeptemberfrom11percentinDecember1998.Bondspreadsthroughouttheregioninsecondarymarketshavegenerallynarrowed,whichisareflectionofimprovinginternationalfinancialmarketsentiment.Forexample,Poland'sspreadreturnedtoearly1998precrisislevels.ThemoststrikingexceptiontothistrendisUkraine,

wheretheeconomyremainsvulnerableandEurobondspreadsarestillelevatedatcloseto8,300basispointsinmid-November1999,upfromabout3,000pointsinJune1999.SpreadsforRussiaremainedabove2,300basispointsinNovember1999,downfrom5,200basispointsinApril1999.

EstimatesforgrowthintheECAregionfor1999havebeenrevisedupward,fromthe1.5percentdeclineexpectedinGlobalDevelopmentFinance(GDF)1999toplus0.3percent.RussianGDPisnowforecasttoincreasebycloseto1.0percent(comparedwiththe5percentcontractionanticipatedinGDF1999),duelargelytohigherthanexpectedoilpricesandincreasedproductionforimportsubstitution.WhileGDPandindustrialproductioncontractedinthefirstquarterof1999,bothpostedgainsinthesecondandthirdquarters.Withpositivespillovereffectsanticipatedinneighboringcountries,theforecastforgrowthintheCommonwealthofIndependentStates(CIS)hasbeenrevisedfromminus5.5percenttoa0.7percentadvance.Themostnotableexceptiontotheregion'sgenerallylacklusteroutputisTurkmenistan,wheredouble-digitgrowthisexpectedasalargenaturalgasprojectcomesonstream.IncontrasttotheCIS,expectationsforgrowthin1999intheCentralEasternEuropeancoun-

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trieshavebeenreviseddownward,from2.3percentto1percent,reflectingweakerthananticipatedgrowthinEuropeandhigherpricesforthesecountries'energyimports.Also,thewarinKosovohasgreatlyreducedeconomicprospectsintheBalkans.Notonlymusttheregionbearthedirectconsequencesofthedestructionanddisruptioninthetheaterofconflict,butitmustalsoabsorbtheimpactofthemovementofrefugeesintoneighboringcountries,thedisruptionofregionalandtransittrade,andasharpfallintourismrevenues.

Near-TermOutlook

AcceleratingworldtradeandstabilizingcommoditypricesshouldcontributetoastrongerrecoveryintheECAregionin2000,andrealGDPisexpectedtoincreaseby2.5percent.Arecenthistoryofhighrealinvestmentgrowth(indoubledigitsforsomecountriessincethemid-1990s),boostedbystrongFDIinflows(albeittiedinparttoone-offprivatizationsales),shouldprovideadditionalimpetusforfuturegrowthintheCEECsandtheBalticcountries.GreaterintegrationwiththeEuropeanUnion,astheCEECsprogressatvaryingstagestowardEUmembership,willalsoimprovegrowthprospects.AveragenationalproductiongrowthfortheCEECsisforecastat3.2percentin2000.OutputinmostCIScountriesisprojectedtorecovermoregradually,owingtoexpectedslowgrowthinRussia,wheretheaggressiveimplementationofstructuralreformsislikelytoawaittheresultsoftheJune2000presidentialelections.Nevertheless,thedepreciationoftherubleandofotherCIScountries'currenciesisexpectedtoboosttheirexportstoadegreewhich,combinedwithmorepositiveexternaldemandandsustainedhigheroilprices,shouldcontributetomorepositivegrowthof1.3percentin2000(tableA1.2).

Long-TermProspects

Thelong-termgrowthforecast(2002-2008)fortheECAregionhasbeenreducedfrom5percentperannumto4percent.ThischangeisduelargelytoadownwardrevisiontotheprojectionsforRussia,whichcontinuesto

underperformrelativetoitsunderlyingpotential.Despitestabilizingmorequicklythananticipatedin1999aftertheAugust1998

financialcollapse,thefundamentalsrequired

TableA1.2EuropeandCentralAsiaforecastsummary(percentperyear)

BaselineforecastGrowthrates/ratios 1989-9819971998199920002001 1999-2008RealGDPgrowth -3.5 2.7 -0.2 0.3 2.5 3.3

Comsumptionpercapita -2.1 3.4 1.0 1.4 3.0 3.1GDPpercapita -3.8 2.6 -0.4 1.0 3.2 3.1

Population 0.3 0.1 0.1 -0.7 -0.7 0.2Medianinflationa 37.0 50.0 12.3 8.4 7.4 7.5Grossdomesticinvestment/GDP 27.2 24.4 23.0 22.4 22.5 22.9 23.5Centralgovernmentbudgetdeficit/GDP -7.3 -5.5 -5.3 -5.2 -4.3 -4.0 -4.2Exportvolumeb 0.5 11.5 6.1 -0.3 4.9 6.6Currentaccount/GDP 0.7 -0.5 -1.1 -1.0 -1.5 -1.7 -1.5MemoitemsGDPofmiddle-incomeWesternEurope 4.2 7.5 2.9 -2.2 4.6 4.3GDPofCentralandEasternEurope -0.8 2.6 2.1 1.0 3.2 4.3GDPofCISstates -6.3 1.4 -2.7 0.7 1.3 2.3a.GDPdeflator.b.Goodsandnonfactorservices.Source:WorldBankDevelopmentProspectsGroup,November1999.

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tosupportlongertermgrowthhavedeteriorated.Savingsandinvestmentrateshavefallen;thefinancialsectorandstateenterprisesareinneedofsignificantrestructuring;thelevelofFDIremainsconstrained;andcapitaloutflowscontinue.Populationgrowthisprojectedtocontinuetofallby0.3percentperyear,withthelaborforcecontractingby0.5percent.Whilefiscalandmonetarypoliciesarelikelytoimproveinthecomingyears,thedegreeofsupportforimplementingfar-reachingreformstoaddressthemanyimbalancesintheeconomyisuncertain.

Riskstotheforecastaremainlyonthedownsideandareprimarilylinked,withintheregion,toachievingasustainablerecoveryinRussia,wherethesituationremainsfragile.AfurtherdownturninRussiawouldhavesignificantnegativerepercussionsintherestoftheCISandinTurkey,inparticular,asoccurredintheaftermathofthe1998crisis.TheeconomicsituationinbothUkraineandRomaniaistenuous,reflectinghighdebtservicingpayments.Turkeyalsofacessignificanteconomicchallenges,asitseconomyissufferingfromasharpslowdowningrowth,agrowingbudgetdeficit,andhighshort-termdebtturnoverrequirements.ThedisruptionoftheAugustearthquake(estimatedtocostbetween2.5percentand5percentofGDP)hascompoundedthesituation.Throughouttheregion,slippageinreformsandfailuretoaddresssignificantfinancialandenterprisesectorproblemsrepresentanongoingrisk.ECA'srelationshipswiththeEUposebothopportunitiesandchallenges.AslowdowninEuropecouldweakengrowthinECA,especiallyintheCEECs.Inthelongerterm,however,favorableprospectsforseveralcountriesaretiedtoEUenlargement.

LatinAmericaandtheCaribbean

RecentDevelopments

TheinitialimpactoftheEastAsiancrisisonLatinAmericancountrieswasnotlarge.Mosteconomieswereatthepeakoftheirbusinesscycles.Nonetheless,theadverseimpactoftheEastAsiancrisisontheglobalenvironment-throughfallingworldexportpricesandvolumes,andreducedcapitalflowstodevelopingcountries-eventuallytookitstollonLatinAmericancountries.In1998theregion'stermsoftradefellbyabout4percent(alossequivalentto0.6percentofGDP)andexportvolumegrowthslowedfrom11.5percentin1997to5.6percent,wideningtheregion'scurrentaccountdeficitby$22billion.

Mexico,whichbenefitedfromstrongU.S.import-demandgrowthandwhichhadaflexibleexchangerate,wastheleastaffectedbytheslowdowninworldtrade.ExcludingMexico,theregion'sexportvolumegrowthslowedfrom9.5percentin1997to3.3percentin1998,duetoworseningcompetitiveness.Thecountrieswithtargetedexchangeratessawtheirrealeffectiveexchangeratesrisebyanaverage17percentabovetheir1990-96levels(beforetheEastAsiancrisis),comparedwithadeclineof25percentintheEastAsiancrisiscountries.CapitalflowsfrominternationalmarketsdriedupinthewakeoftheRussiandefaultofAugust1998,causinggrossnewflowstofall25percentin1998comparedto1997levels.Thisprecipitatedamassivecreditsqueezeandasharpreductionincurrentaccountdeficitsinseveralcountries.ThecontagioneffectfromtheRussiancrisismadeitimpossibleforcountriestofinancethepartofthetradeshockthatcouldbetreatedastemporary.EvenChile,acountrywithsolidcreditratings,experiencedspeculativeattacksandwaseventuallyforcedtofloatitscurrency.

Thecombinationofadeteriorationintheexternalenvironment,highinitialdebtlevels,alargedependenceonforeignsavings,andtightmonetarypolicies-aimedatpreservingexistingexchangerateregimesduringanelectionyearformanylargecountries-causedregionalGDPgrowthtoslowfrom5.4percentin1997to2.1percentin1998.By

thefourthquarterof1998Argentina,Brazil,Chile,Colombia,Ecuador,Peru,andVenezuelawereallexperiencingrecessions.InBrazil,Colombia,Ecuador,andVenezuelahighdo-

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mesticinterestratesinthesecondhalfof1998addedtogovernmentdebtserviceand,alongsidelowertaxrevenuesinthewakeoftheeconomicslowdown,widenedfiscaldeficitsandputpressureonexchangerates.WiththeexceptionofVenezuela,thesecountrieswereeventuallyforcedtoabandontargetingtheirexchangerate,withtheBrazilianandEcuadoriandevaluationsbeingthemostacute,aftermassivelossesofreserves.InthecaseofColombia(andChile),thedecisiontofloatcurrencieswasnotaccompaniedbylargedevaluationbecausereserveswerestillatreasonablelevels.Asinothercases(RussiaandTurkey),theEastAsiancrisismaynothavebeenthefundamentalcauseofthedownturnthatensued,butitwasacontributingfactorandtriggeredareactiontomoredeep-seatedproblems.Byandlarge,countrieswherepoliciesaresounder(ChileandperhapsMexico)avoidedtheworst.

Brazil'sdevaluation,uncertaintiesintherun-uptoelections,andtighterU.S.monetarypolicyhelpedspreadtheeconomicdownturnintheregionin1999.TheBraziliandevaluationworsenedtheexternalenvironmentformanycountriesintheregion,thoughtoamuchlesserextentthantheRussiancrisis.PricesofkeycommoditiesexportedbyBrazil(coffee,soybeans,andsugar)fellsharplyinthefirsthalfoftheyearatthesametimethatBrazilianimportdemandcollapsed,significantlyreducingexportrevenuesinanumberofcountries.ForthcomingelectionsinArgentinaandChile,coupledwithincreasingcivilresistancetofurtherfiscaltighteninginsomecountries(Colombia,Ecuador,andVenezuela),ledtogreateruncertaintyonthepartofdomesticinvestors.ThetighteningofU.S.monetarypolicyinmid-year,inconjunctionwiththedebateoverincreasingtheburden-sharingofinternationalbondholders,contributedtoareductioninthesupplyofprivatecapitalavailabletotheregionfrominternationalmarkets.Ecuador'sprospectivedefaultonitsBradybondsandcallsfordebtrestructuringinVenezuelaadded

totheuncertaintythatprivateinvestorsfaced.Thenetresultwasthespreadoftheeconomicdownturnwithintheregion,withGDPin1999fallinginninecountries,comparedwithonlyfourcountriesin1998.However,theexpectedeconomicoutcomeforBrazilwilllikelybemuchbetterthanenvisionedsixmonthsago(nogrowthnowversus-3.9percentthen)andshouldkeepthedeclineintheregion'sGDPtoabout-0.6percent.Theregion'scurrentaccountdeficitnarrowedbyabout$33billionin1999,duetoacontractioninimportsof2.6percent.

GrowthinpercapitaincomeoftheCaribbeancountriesaveraged2.2percentin1999buteconomicperformancevariedwidely,andgrowthprospectsareexpectedtoremaindiverse.PercapitaGDPgrowthin1999averaged3-4percentinBarbados,DominicanRepublic,andTrinidad&Tobago;2-3percentintheLeewardandWindwardislands;0-1percentinGuyanaandHaiti;butwasnegativeinJamaicaforthethirdconsecutiveyear.Movementsinthetermsoftradeexplainpartofthisdiversityingrowthperformance-thefastergrowingeconomiesrelymoreontourismandoilforexportrevenueswhilemostoftheothersdependheavilyonexportsofbananasandsugar,whosepricesonworldmarketsfell12and30percent,respectively.

Near-TermOutlook

Economicrecoveryin2000-2001islikelytobegradual,asfurtherfiscaltighteningisnecessaryinmanycountriesandreformfatigueisbecomingwidespread.Recoveryshouldbeginbythefourthquarterandinto2000formanyofthecountriesexperiencingrecessionin1999(figureA1.3).Externalfactorsbehindthereboundinclude:anaccelerationofworldtrade;thestabilizationofcommoditypricesandtheriseinsome(forexample,oilandmetals);aslowrecoveryofcapitalflows;greaterexchangerateflexibilityinmanycountries;andlessexternaldebtamortizationin2000.Domestically,theendingof

destockingfacilitatedbyimprovedfinancialconditions(lowerdomesticinterestrates,higherstockmarketvaluations)shouldsupportastabilizationandconsequentupturninproduction.

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FigureA1.3LatinAmericaandtheCaribbeanquarterlyGDP

Source:WorldBankstaffestimates.

However,thereareanumberofreasonswhytheeconomicrecoveryin2000isexpectedtobemodestcomparedwith1996(postMexicocrisis).First,fiscaltighteningisrequiredinanumberofcountriestosustaininvestorconfidenceandhelpexchangeratestability(Argentina,Colombia,Ecuador,Venezuela,andpossiblyBrazil).Implementationoffurtherfiscaltighteningcouldencounterresistance,especiallysinceunemploymentratesarehigh.Second,politicaluncertaintiesarelikelytopersistinto2000asMexicoandPeruelectnewpresidentsandmanynewadministrationslackclearmajoritiesintheirrespectivecongresses(Brazil,Colombia,andEcuador).Thisuncertaintyislikelytoresultininvestorwariness.Inaddition,theexpectedslowdownintheUnitedStatesin2000-2001couldrestrainLatinAmerica'sexportgrowth.Thecombinationofthesefactorsislikelytoleadtoamoderateeconomicrecovery,withtheregion'sGDPgrowingby2.7percentin2000beforeacceleratingtoward3.5percentin2001.Thecurrentaccountdeficitduringthenexttwoyearsis

expectedtorisetoarangeof$60to$70billionfromthe1999levelof$56billion.

Near-TermUncertainties.

Ifprivatecapitalinflowsremainweakinto2000,orcapitaloutflowsincreasesharplyinresponsetopoliticaldevelopments,pressuresonsomecurrenciescouldincrease.AlthoughthebaselinescenarioassumesthatArgentinawillimplementfiscaladjustmentandobtainsufficientexternalsupportforfinancingitsfiscaldeficitandexternalpaymentobligations,risksremainthattheprocesswillnotbesmooth.TightermonetaryconditionsintheindustrialcountriesarelikelytokeepArgentina'scostofcapitalrelativelyhighandthevolumeofcapitalinflowsmodest.Venezuelahaspersistedinmaintainingacrawlingexchangerateband,eventhoughthecountry'srealeffectiveexchangerateisnow50percenthigherthanits1990-96average.AlthoughVenezuelahasbeenabletofendoffspeculativeexchangerateattacksinthepast,andtheriseinoilpriceswillhelpwithpotentialfutureepisodes,uncertaintyonthepolicyfrontcouldleadtocapitalflightonascalebeyondtheadministration'sabilitytocounteract.BothChileandColombia,withahistoryofmuchbettermacroeconomicmanagementwereforcedtomovetowardanexchangeratefloatin1999.

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TableA1.3LatinAmericaandtheCaribbeanforecastsummary(percentperyear)

BaselineforecastGrowthrates/ratios 1989-98199719981999200020011999-2008RealGDPgrowth 2.9 5.4 2.1 -0.6 2.7 3.5 3.5

Consumptionpercapita 1.6 4.0 1.5 -3.6 0.2 1.4 1.3GDPpercapita 1.1 3.7 0.5 -2.2 1.1 2.0 2.0

Population 1.8 1.7 1.6 1.6 1.6 1.5 1.4Medianinflationa 17.0 8.5 7.9 8.3 7.9 6.8 6.3Grossdomesticinvestment/GDP 22.1 24.2 24.0 22.8 23.5 24.1 24.6Centralgovernmentbudgetdeficit/GDP -2.8 -1.8 -3.7 -2.8 -1.6 -1.4 -1.3Exportvolumeb 8.0 8.9 5.6 3.8 6.9 6.0 6.5Currentaccount/GDP -2.4 -3.3 -4.5 -3.1 -3.3 -3.5 -3.4a.GDPdeflator.b.Goodsandnonfactorservices.Source:WorldBankDevelopmentProspectsGroup,November1999.

Long-TermProspects

Outputgrowthfortheregioninthelongterm(2002-2008)isnowprojectedtoaverage4.2percent(2.8percentinpercapitaterms),whichisareductionof0.2percentagepointscomparedtoGlobalEconomicProspects1998/99(tableA1.3).Thelowerforecastisbasedonseveralfactorswhich,althoughcharacteristicoftheregionformanyyears,havebecomemoreevidentduring1999.Nationalsavingratesinseverallargecountrieshavenotriseninthe1990sandmostcontinuetorelyonforeignsavingstoaccommodateincreasesininvestment.Highexternalindebtednesshasincreasedrelianceoninternationalcapitalmarketstofinancedebtrepayments,andthereisincreasingevidenceofreformfatigueinanumberofcountries.InBrazilthelargeincreaseindomesticdebtover1997-99andacontinuedlowsavingratewillrequireastrongandsustainedfiscaladjustment,whichhasbeenencounteringpublicresistance.AsimilarsituationexistsinArgentina,wheresavingsremain

insufficientforsustainablegrowth.GDPpercapitagrowthfortheCaribbeancountriesislikelytoaverage2.5percentayearreflectingthedifficultstructuraltransitionthatthesecountrieswillhavetoundergointhefaceofincreasingglobalcompetitionofcommodityexportstotraditionalmarkets.

Despitetheseuncertainties,longertermgrowthprospects-contrastedwiththe1980sand1990s-arefavorable,asefficiencygainsfrompastreformsarerealized.Growthintotalfactorproductivity,regionwide,islikelytocontinueitsupwardtrendasBrazil,thelastofthelargeeconomiesintheregiontoembarkonliberalization,overcomescurrentdifficulties.Theprivatizationoflargestateenterprisesinthewater,electricity,transportation,andtelecommunicationssectorsshouldbegintobearfruitintothefirstdecadeofthe2000s.Privatization,combinedwiththeincreasingmarketpoweroftheSouthernConecountriesthroughMercosur,shouldencourageFDIinflows,andthenatureofFDIshouldshiftfromacquiringexistingcapitalstockthroughprivatizationtoinvestmentinnewcapacityintheservicesandmanufacturingsectors.

MiddleEastandNorthAfrica

RecentDevelopments

Thehistoricallylowoilpricesof1998depressedgrowthintheMiddleEastandNorthAfrica(MENA)region(seechapter4).Currentaccountimbalancesgrewandgovernmentrevenuescameunderseverepressure(figureA1.4).Thelowabsorptionoilexporters(Bahrain,Oman,andSaudiArabia)utilized

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FigureA1.4Termsoftrade,currentaccountbalance,andfiscaldeficitsintheMiddleEast

andNorthAfrica,1990-98Source:WorldBank.

foreignreservesandexternalportfoliostofinancethedeteriorationoffiscaldeficitsandtradebalancesintheshortterm.Otheroilexporters,suchasAlgeria,theIslamicRepublicofIran,andtheRepublicofYemenhadsimilarpressuresbutfacedtighterfinancingconstraints.Thisledtoadifferentadjustmentpath,includingdeeperexpenditurecuts,exchangeratedevaluation,reschedulingofexternaldebt,and,inthecaseoftheIslamicRepublicofIran,importcompressionandliquiditystressasforeignreservesdeclinedandimportcoverfell.Thenetoilimportersbenefitedfromloweroilprices,althoughsomecountriesexperiencedafallinworkers'remittancereceiptsfromtheoilexportingcountries.ThelowlevelofregionalintegrationintoglobalcapitalmarketsensuredsomeprotectionagainsttheworsteffectsoftheEastAsiancrisis.

GDPgrowthintheregionaveraged2percentin1999,1.4percentagepointshigherthananticipatedearlierintheyear,duetostrongerthan

expectedoilpricesandhigherdomesticinvestmentinthediversifiedexporters.Thetermsoftradeofoilexportersroseby35percent(equivalenttonearly9percentofGDP),boostinggovernmentrevenuesandcontributingtoaneasingoffiscalconstraints.Nevertheless,therestrictionofexportvolumesinordertosupportoilprices(OPECcutproductionby2millionbarrelsadayinApril1999)limitedtherealoutputrecoveryintheoilexportingcountries.

GDPgrowthinthemorediversifiedexporters(theArabRepublicofEgypt,Jordan,Morocco,theSyrianArabRepublic,andTunisia)slowedto3percentin1999,from3.5percentin1998.Thedeclineinactivityinoilexportingcountries,aswellasslowergrowthinEurope,putdownwardpressureonreceiptsfromworkerremittances.Thosecountrieswithexchangeratespeggedtothedollarexperiencedslowerexportgrowth,inpartasthevalueofthedollarincreasedandasthecompetitivenessofEastAsianexportersintextiles,clothing,andmachineryimproved.Droughtconditionsinseveralcountries(Jordan,Morocco,andSyria)ledtoadeclineinagriculturalincomes,aswellastofurtherpressuresinurbanlabormarketsandhigherfoodimportbills.

Near-TermOutlook

GDPgrowthintheregionshouldaccelerateto3.2percentin2000.Therecoveryinoilprices

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TableA1.4MiddleEastandNorthAfricaforecastsummary(percentperyear)

BaselineforecastGrowthrates/ratios 1989-

9819971998199920002001 1999-

2008RealGDPgrowth 3.0 3.7 3.2 2.0 3.2 3.5 3.4

Consumptionpercapita -0.1 0.3 1.8 0.8 1.3 1.3 1.4GDPpercapita 0.6 1.5 1.2 -0.1 1.1 1.5 1.4

Population 2.4 2.1 2.1 2.1 2.1 2.1 2.0Medianinflationa 8.7 4.9 3.3 5.3 4.9 4.9 4.5Grossdomesticinvestment/GDP 22.8 23.9 23.7 23.8 23.9 24.1 24.7Centralgovernmentbudgetdeficit/GDP

-5.2 -2.6 -4.5 -3.6 -3.3 -2.9 -2.2

Exportvolumeb 4.5 5.0 2.6 1.4 3.4 4.0 3.9Currentaccount/GDP -2.2 3.8 -1.5 4.2 4.5 3.6 2.2MemoitemsGDPofoildominanteconomies 3.6 2.9 1.6 1.1 2.2 3.0 2.9GDPofdiversifiedexporters 3.7 3.1 3.5 3.0 4.5 4.4 4.4a.GDPdeflator.b.Goodsandnonfactorservices.Source:WorldBankDevelopmentProspectsGroup,November1999.

inmid-1999,followingtheimplementationoftheOPECoilquotasandthehighlevelofcompliancethusfar,pointstoastabilizationofeconomicactivityinoilexportingcountries,andGDPgrowthforthisgroupisexpectedtorangebetween2.5-3percentin2000-2001.Outputgrowthwillcontinuetobeconstrainedbyquotasonoilproductionandtheneedtocontainfiscaldeficitsandpublicdebtlevels.Recentincreasesinsalestaxandutilitychargesandcutsinsubsidiesintheoilexportingcountriesareexpectedtohavemodestinflationaryimpact.Butcentralbanksinthelowabsorptionoilexportersarelikelytomaintaintightmonetarypoliciestohelpkeepinflationlowandmaintainexchangeratestability.Inflationislikelyto

bemoreofaproblemintheRepublicofYemenandtheIslamicRepublicofIran.Thediversifiedexportersarelikelytogrowby4.7percentin2000,asgrowthinpartnerimportsimproves,thereneweddriveforreforminseveralcountriesencouragesdomesticinvestment,theeffectsofdroughtconditionsfade,andtourismreceiptsrise(tableA1.4).

Long-TermProspects

Despiteananticipatednear-termrevivalofactivity,forecastsforlong-termoutputgrowth(2002-2008)havenotbeenrevisedfromearlierprojectionsat3.7percent.Oilpricesarelikelytoremainunderdownwardpressureinthelongerterm(seechapter1),whichwillconstrainoilexportingcountries'fiscalandforeignexchangerevenues.Butthediversifiedexportersareexpectedtomaintainagrowthrateof4.6percent,supportedbycontinuedstructuralreformsandthelinkagesthataredevelopingasaresultoftheEuro-Mediterraneanagreements.SeveralNorthAfricancountriesareimplementingrestructuringprogramsinlinewiththeirassociationagreementstoboostefficiencyinpreparationforopencompetitionfromEuropeanfirms.PrivatizationprogramsinEgypt,Jordan,Morocco,andTunisia,inconjunctionwithadeepeningofcapitalmarkets,areattractingforeigninvestment.Programsareinplacetotransferpublicenterprisestotheprivatesector,andnewprojectsinmineralsandinfrastructurearebeingimplementedunderprivatecontractsoronabuild-own-operate-transferbasis.Largepublicenterprisessuchasutilitiesandtelecommunicationsarebeingsoldorcorporatizedpriortosale.Abeneficialby-productofdivestmentofpublicenterpriseswillbetheloweringoffiscaldeficitsandpublicdebt.

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Additionally,thepeaceprocessintheMiddleEast,whichappearstobebearingfruit,maycontributetoaloweringofriskperceptions,particularlyintheMashreqcountries,andmayprovideanopportunityforincreaseddynamismintradeandcapitalflows.

SouthAsia

RecentDevelopments

In1999,forasecondconsecutiveyear,SouthAsiawasthefastestgrowingdevelopingregion,averaging5.4percentGDPgrowth.Negativeexternalfactorsthatslowedgrowthelsewherehadasmallereffectontheregion.Amongdomesticfactors,themostpositivewasafavorableIndianmonsoon,whichledtoimpressiveagriculturalsectorperformance,whileamongthesmallereconomiesdomesticfactorsledtolower-than-trendgrowth.Theaftereffectsof1998floodsinBangladeshandPakistan'sstabilizationprogramdampenedgrowthinthosetwocountries.

RelativeindependencefromexternalinfluencesisaconstantstructuralfeatureoftheIndianeconomy,andIndiaexperiencedonlymoderatespill-overeffectsfromtheseriesofcrisesin1997-99.Thecountry'smainexportmarketsareinEuropeandtheUnitedStates,sothecrisisdidnotgreatlyreducedemandforIndia'sexports.Aswell,financialliberalizationinIndiahasbeenlimited,andthecountrywasnotsubjecttocapitalaccountreversals.However,severalothercountriesoftheregionwereadverselyaffected.Bangladesh,Pakistan,andSriLankawerehitbyweakexternalmarketsandfallingcommodityprices,particularlyfortea,rubber,andcotton.

Pakistan'seconomydeceleratedsharplyin1998and1999duetoawiderangeofcauses.Manyofthesecauseswererelatedtodeeperseatedstructuralimbalances,especiallytiedtofiscalperformanceandshortfallsinprivatesavings.Theresultwasanemergingbalanceofpaymentscrisis,compoundedbythesanctionsthatfollowednucleartestingin1998.

Bangladeshsufferedaneconomicdownturnin1998,duetoextensivefloodingwhichdestroyedfoodcrops,cutexportvolume,increasedimportsoffood,anddamagedinfrastructure.Expenditurethroughouttheeconomywasaffectedasruralincomeswerecut.TheEastAsiancrisismayhaveweakeneddemandforready-to-weargarmentsmanufacturedinBangladesh.GDPgrowthdroppedfrom5.7percentin1998to3.5percentin1999.SriLanka,themostopenoftheSouthAsianeconomies,exports37percentofitsGDP.Itdependsonexportstoprovideamarketforitsmanufacturesandonstrongworlddemandtosustainpricesfortea,rubber,and

TableA1.5SouthAsiaforecastsummary(percentperyear)

BaselineforecastGrowthrates/ratios 1989-98199719981999200020011999-2008RealGDPgrowth 5.5 4.7 5.1 5.4 5.5 5.3 5.2

Consumptionpercapita 3.3 2.1 3.1 3.2 3.3 3.5 3.6GDPpercapita 3.5 3.0 3.3 3.5 3.6 3.6 3.7

Population 1.9 1.8 1.8 1.9 1.8 1.7 1.5Medianinflationa 9.5 9.1 7.6 7.2 1.8 1.7 1.5Grossdomesticinvestment/GDP 22.0 22.9 23.2 23.3 23.5 23.6 23.5Centralgovernmentbudgetdeficit/GDP -6.3 -4.4 -3.1 -3.0 -2.9 -2.8 -3.1Exportvolumeb 9.8 2.6 1.9 6.0 7.7 7.8 7.7Currentaccount/GDP -1.9 -1.2 -1.8 -2.0 -2.1 -2.3 -2.5a.GDPdeflator.b.Goodsandnonfactorservices.Source:WorldBankDevelopmentProspectsGroup,November1999.

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othermaterials.Theslowdowninworlddemandwasimportantinkeepingteaandrubberpriceslowandreducingexportreceipts(tableA1.5).

NearTermOutlook

Lookingahead,severalpositivefactorswillhelpIndiasustaingrowthin2000and2001.Theseincludeahighlevelofprivatesectorbusinessconfidenceandacommitmentinprinciplebybothmajorpoliticalpartiestoabroadrangeofeconomicreforms.Buttherearealsoforcesthatcouldrestraingrowth,includingtwinfiscalandbalanceofpaymentsdeficits,thedeterioratingstateofinfrastructure,andalargepublicsectordeficit.Substantiallyfastergrowthwouldrequireincreasedfixedcapitalformationandsaving,andforeigndirectinvestmentwouldbeacrucialelementoffinancing.Absentpolicychanges,prospectsforBangladeshandPakistanarenotparticularlyencouraging.Animprovementinexternalconditions,includinganaccelerationofworldtradegrowthandthestabilizationofcommodityprices,wouldbehelpfulinthenearterm,buttherecentsurgeinpetroleumpriceswillexactatollonfragileimportbillsforbothcountries.TheimplicationsforeconomicgrowthoftherecentcoupinPakistanarenotyetclear.ForBangladesh,mostoftheflooddamagehasbeenrepaired,thewaterlevelhasfallen,andcropswerereplantedforthe2000harvest.Conditionsshouldallowtheeconomytorevivetoward5percentgrowthin2000.SriLankaiswellsituatedtobenefitfromanaccelerationinworldtradegrowthin2000andanincreaseincommoditypricesoverthesameperiod.

Long-TermProspects

Despitecautiousoptimismconcerninganeartermincreaseineconomicactivityintheregion,prospectscovering2002-2008havebeendowngradedfrompreviousprojections.Themainrequirementforastronglong-termoutlookiseconomicreform:inPakistan,the

implementationofkeyreformsinbanking,power,taxation,andpublicspending;andinBangladesh,theimprovementofmacroeconomicmanagement,governance,andinfrastructure.Butcritically,India'slong-termpotentialoutputgrowthislinkedtopolicyactions,whichmustredressthecurrentfiscaldeficit(over6percentofGDP),continuedhigh(andincreasing)tariffbarriers,andincreasesinnonperformingloansandotherstructuralproblemsinthebankingsystem.

Sub-SaharanAfrica

RecentDevelopments

Sub-SaharanAfrica'seconomicgrowthslowedprogressivelyfrom4.7percentin1996tolessthan2.5percentin1998-99.Severalfactorswereresponsible.Asteepfallinoilpricesin1997-98hurtcountriesthatexportsignificantamountsofoilandotherhydrocarbons.

3Numerousconflicts-manyofwhichhadappearedtobemovingtowardresolution-flaredup,includinginAngola,DemocraticRepublicofCongo,EthiopiaandEritrea,Guinea-Bissau,Lesotho,andSierraLeone.PoorweatherdisruptedagricultureandtourismthroughouteasternandsouthernAfricaandheavyrainsdamagedinfrastructure.Finally,SouthAfrica,theregion'slargestandmostopeneconomy,wascaughtintheturbulenceoftheEastAsiancrisisasareversalofcapitalinflowsinmid-1998sentinterestratessharplyhigheranddampenedinterest-sensitivesectorsthroughthefirsthalfof1999.

Despitetheseadversedevelopments,promarketreforms,tradeliberalization,andbettergovernancesustainedgrowthelsewhereintheregion-inMozambique,Uganda,andgenerallythroughouttheCFAzone,wherethedevaluationoftheCFAfrancin1994triggeredasustainedboomininvestmentandexports.Moreover,developments

in1999augurwellforneartermprospects.EspeciallyencouraginghavebeenthesmoothpoliticaltransitioninNigeria;renewedprospectsforpeaceinSierraLeone,Liberia,andtheDemocraticRepublicofCongo,andaswiftreturnofinternationalinvestorstoSouthAfrica.

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Near-TermOutlook

Growthin1999willbenearthepaceachievedin1998-around2.3percent,or3.2percentexcludingSouthAfricaandNigeria.Thisfallsshortofwhatisneededtorecoverthegroundlostinrecentyears,andpercapitaincomeswilldeclinemodestlyforasecondsuccessiveyear.Nevertheless,agradualrecoveryfromtheslowdownappearstobeunderway.Growthisanticipatedtoriseto3.3percentover2000-2001.Underpinningthestrongerperformancewillbeapick-upinexportsoverthenext12-24months,basedonsharpgainsinoilprices,theunexpectedstrengthoftherecoveryinEastAsia,andtheeuro'sweaknessagainsttheU.S.dollar,whichwillfurtherboostthecompetitivenessofCFAzonecountries.Followingadeclineof0.3percentin1998,merchandiseexportsareexpectedtogrowby3.8percentin1999,6.3percentin2000,and4.7percentin2001.Ontopofthebroaderrecovery,exportperformancein2000willreflecttherevivalofNigeria'shydrocarbonsector,andespeciallythecommencementofliquidnaturalgasshipmentsfromthenewBonnyIslandfacility.ExcludingSouthAfricaandNigeria,Sub-Saharanexportgrowthispredictedtoreach4.3percentin1999and4.6percentin2000-2001.

Importgrowthwillnotkeeppacewithexports,allowingthecurrentaccountdeficittoshrinkfromanunsustainable$14.2billion(4.6percentofGDP)in1998.Fortheregionasawhole,thecurrentaccountdeficitisprojectedtonarrowto2.8percentofGDPin1999and2.6percentin2000.Whilefallingshortofthelevelofperformancein1997-98,importgrowthwillremainadequatetosupportpurchasesofcapitalandintermediategoodsforproductionandinvestmentneeds.Meanwhile,theforecastanticipatesacontinuationofpolicyreformsandamoveawayfromtheinward-lookingtraderegimesthatcontributedtoSub-SaharanAfrica'srelativeisolationoverthepast25years.Overall,tradewillcontinueto

outpaceGDPgrowth,resultinginhighertradesharesandincreasingopenness(figureA1.5).

Long-TermProspects

Outputfortheregionisexpectedtoachievegrowthof3.6percentfrom2002-2008(figureA1.5).Thatrepresentsa0.5percentagepointdownwardrevisionfromlastyear'sGlo-

FigureA1.5RealGDPgrowthbyanalyticalgroupsforSub-SaharanAfrica

Source:WorldBankbaselineforecasts.

TableA1.6Sub-SaharanAfricaforecastsummary(percentperyear)

Base:BaselineforecastGrowthrates/ratios 1989-

9819971998199920002001

RealGDPgrowth 2.4 3.7 2.4 2.3 3.1 3.4Consumptionpercapita -0.4 2.5 1.0 -0.8 -0.1 0.5GDPpercapita -0.3 0.8 -0.2 -0.2 0.6 0.9

Population 2.8 2.9 2.6 2.6 2.5 2.5Medianinflationa 9.7 8.2 6.5 8.1 5.5 5.4Grossdomesticinvestment/GDP 16.8 17.0 17.4 17.5 17.7 17.9Centralgovernmentbudgetdeficit/GDP -5.3 -3.3 -3.6 -4.1 -4.0 -4.1Exportvolumeb 4.3 5.6 -0.3 4.1 6.1 4.8Currentaccount/GDP -0.2 -2.8 -4.6 -2.8 -2.6 -2.6MemoitemsGDPofmajoroilexportersc 2.9 4.2 1.3 1.3 3.4 3.6GDPofregion,excludingSouthAfricaandoilexporters

3.1 4.6 4.0 3.3 3.6 3.9

a.GDPdeflator.b.Goodsandnonfactorservices.c.Angola,Gabon,andNigeria.Source:WorldBankDevelopmentProspectsGroup,November1999

balEconomicProspectsandreflectsgreaterpessimismaboutprospectsincommodityandfinancialmarkets,aswellasanassessmentthatSouthAfricawillrequireamoreextendedperiodtoreachitslong-runpotentialoutputgrowth.Asustained3.6percentexpansionofGDP,togetherwithagradualslowingoftheregion'spopulationgrowth(fromcurrentratesof2.6toward2.4percent),willpermitamoderateriseinpercapitaincomesof1.3percentperyearoverthelong-termforecastperiod.Theabilitytoencourageprivateinvestmentwillbethekeytostrongerperformance,andthosecountrieswithbetterpolicyenvironments,effectiveexportstrategies,andmorediversifiedeconomieswilltendtodobetter(tableA1.6).

Despitethedownwardrevision,theoutlookremainsforasubstantialimprovementoverthe2percentaveragegrowthachievedduringthepasttwodecades.Manyoftheregion'sintractableconflictsarelikelytoberesolved,andtherehasbeenabroad-basedtransitiontodemocraticruleandmoreresponsiblegovernance.Anaccumulationofevidenceindicatesthatthesedevelopmentsareproducingresults-forinstance,theyhavecontributedtotheriseininvestmentandexportsduringthe1994-97growthcycle(seechapter4).However,thesefactorswillbeoffsetbyotherlessfavorabletrends:commoditypricesofcriticalimportancetotheregionareexpectedtoshowonlyweakadvances,puttingadamperoninvestmentandexports;apooroutlookforforeignaidandnegativeforeigninvestorsentimentwillsqueezecurrentaccountbalancesandcompressimports;fallingbudgetsupportislikelytocutintosocialspending,reducingthegrowthrateofhumancapital.Finally,theextentoftheAIDSepidemicisbecomingclearer,andwithittheinevitabilityofasustained,negativeimpactoneconomicperformance.Medium-termprojectedpopulationgrowthintheworstaffectedcountrieshasbeenloweredbyasmuchas1-percentannuallycomparedtowhatwouldhavebeenexpectedwithoutAIDS.Moreover,sincethediseasepreponderantlyaffectsbettereducatedandmoreproductiveurbanworkers,outputgrowthinthesecountrieswillslowbyasubstantiallyhigheramount.Fortheregionasawhole,areductioninpercapitagrowthof0.3percenttiedtothisdevelopmentseemslikely.

Page149

Especiallygiventhelacklusterexpectationsforcommoditypricesandthepoorclimateforforeignaid,countrieswillneedtocontinuediversifyingandopeningtheireconomiestosustainadequategrowth.Ongoingstructuraladjustmentovertheforecastperiodshouldraisedomesticsavingsandinvestment,aswellasmakeSub-SaharanAfricamoreattractivetopotentialforeigninvestors.FDIisincreasinglybeingattractednotonlytoextractiveandresource-basedsectors,butalsototelecommunications,transportation,andutilitiessectorsastheyareprivatizedandderegulated.Meanwhile,thoughprospectsforforeignaidarenotpromising,manySub-SaharancountriesstandtobenefitfromdebtreliefunderenhancedtermsoftheHeavilyIndebtedPoorCountriesInitiative(HIPC),improvingthesustainabilityofcurrentaccountpositions.Ofthe36countrieseligibleundertheenhancedframework,30areinSub-SaharanAfrica,andtheregionstandstoreceiveover80percentofthereliefworth$27billioninnetpresentvalueterms.Notonlywilltherebeatransferofrealresourcesforpovertyreductionandotherpurposes,butstrongerbalancesheetsandimprovedcreditworthinesswillfacilitatetheintegrationofrecipientcountriesintotheworldeconomy.

Notes1.Indonesia,Malaysia,thePhilippines,theRepublicofKorea,andThailand.

2.SinceJulythecurrencieshavebeendriftingsomewhatdownwardforanumberofreasons-restructuringproblemsinKorea;corruptionandconflictinEastTimorinIndonesia;andtensionsbetweenTaiwan(China)andChinahaveaffectedtheformer.

3.Angola,Cameroon,Congo(Brazzaville),EquatorialGuinea,Gabon,andNigeria.

Page151

Appendix2GlobalEconomicIndicators

TableA2.1GrowthofrealGDP,1966-2008(GDPin1987pricesandexchangerates-averageannualpercentagegrowth)

GDP(currentbillionsofU.S.dollars)

1966-73

1974-90

1991-98 1998

Estimate1999

World 28,445 5.2 3.0 2.5 1.9 2.6High-incomeeconomies 22,200 5.0 2.8 2.3 2.0 2.6

Industrial 21,505 5.0 2.7 2.2 2.0 2.6G-7 18,425 5.0 2.8 2.2 1.8 2.6

UnitedStates 8,510 3.2 2.7 3.0 3.9 3.8Japan 3,790 10.0 3.8 1.5 -2.9 1.3G-4Europe 6,130 4.4 2.3 1.7 2.2 1.6

Germanya 6,130 4.3 2.0 1.8 2.0 1.3EuroArea 6,465 5.0 2.3 1.7 2.7 2.0Otherindustrial 3,080 5.0 2.3 2.3 3.7 2.9

Otherhigh-income 695 8.5 5.5 5.7 1.2 3.0AsianNIEs 515 9.6 8.1 6.0 1.8 3.6

Low-andmiddle-incomeeconomies

6,245 6.2 3.8 3.2 1.6 2.7

ExcludingEasternEuropeandCIS

5,390 6.0 3.7 5.3 2.1 3.0

Asia 2,360 5.8 6.5 7.6 1.6 5.4EastAsiaandPacific

1,800 7.8 7.5 8.5 0.1 5.5

China 960 8.4 8.7 11.4 7.8 6.5Korea,Rep.of 320 11.2 8.5 6.3 -5.8 8.0Indonesia 95 6.4 6.7 5.8 -13.2 0.0

SouthAsia 560 3.6 5.0 5.9 5.2 5.4India 430 3.8 4.9 6.1 5.1 6.0

LatinAmericaandtheCaribbean

2,000 6.2 2.6 3.6 2.1 -0.6

Brazil 775 9.5 3.6 3.1 0.2 -0.4Mexico 425 6.3 3.2 2.6 4.8 3.2Argentina 340 4.3 0.4 5.2 3.9 -3.5

EuropeandCentral 1,040 6.2 4.2 -0.4 -0.2 0.3

AsiaRussianFederationb

337 6.6 5.2 -7.8 -4.6 1.0

Turkey 190 1.9 4.2 4.2 2.9 -2.2Poland 145 7.3 0.3 4.2 4.8 3.5

MiddleEastandNorthAfrica

535 7.8 1.4 2.9 3.2 2.0

SaudiArabia 130 8.5 0.9 1.6 1.6 -0.4Iran,IslamicRep.

120 10.2 -0.3 3.6 2.1 1.2

Egypt,ArabRep.

83 3.7 7.1 4.1 4.9 4.9

Sub-SaharanAfrica 310 4.5 2.1 2.8 2.4 2.3RepublicofSouthAfrica

115 4.9 2.1 1.5 0.1 1.0

Nigeria 35 6.5 1.1 2.5 2.3 1.0Note:Growthratesoverintervalsarecomputedusingleastsquaresmethod.a.Datapriorto1991coversWestGermany.b.Datapriorto1992coverstheformerSovietUnion.Source:WorldBankdataandstaffestimates.

FigureA2.1RealGDPgrowth,1989-2008

TableA2.2GrowthofrealpercapitaGDP,1966-2008(GDPin1987pricesandexchangerates-averageannualpercentagegrowth)

1998GDPpercapita(currentU.S.

dollar)1966-73

1974-90

1991-98 1998

Estimate

1999World 5,020 3.1 1.2 1.0 0.6 1.4High-incomeeconomies 25,245 4.1 2.1 1.6 1.5 2.3

Industrial 25,720 4.1 2.1 2.1 1.6 1.6G-7 26,929 4.0 2.2 1.5 1.3 2.2

UnitedStates 31,520 2.1 1.7 1.9 3.0 3.2Japan 29,995 8.7 3.0 1.2 -3.1 1.2G-4Europe 23,795 3.8 2.1 1.3 2.0 1.5

Germanya 25,960 3.7 2.0 1.3 1.9 1.2EuroArea 20,300 4.1 1.7 1.8 3.3 2.7Otherindustrial 20,300 4.1 1.7 1.8 3.3 2.7

Otherhigh-income 16,055 5.8 3.3 4.0 -0.5 1.6AsianNIEs 16,165 7.2 6.3 4.7 0.4 2.7

Low-andmiddle-incomeeconomies

1,300 3.7 1.8 1.6 0.1 1.2

ExcludingEasternEuropeandCIS

1,220 3.3 1.5 3.5 0.4 1.3

Asia 790 3.1 4.5 6.0 0.2 4.0EastAsiaandPacific 1,060 5.1 5.8 7.1 -1.1 4.3

China 775 5.6 7.1 10.2 6.8 5.5Korea,Rep.of 6,910 8.8 7.0 5.2 -6.7 7.2Indonesia 460 3.9 4.6 4.1 -14.6 -1.6SouthAsia 435 1.2 2.6 3.9 3.3 3.5India 440 1.4 2.6 4.3 3.3 4.0

LatinAmericaandtheCaribean

4,115 3.5 0.4 1.8 0.5 -2.2

Brazil 4,680 6.8 1.4 1.6 -1.1 -1.7Mexico 4,410 2.9 0.8 0.8 3.0 1.6Argentina 9,350 2.7 -1.0 3.8 2.6 -4.7

EuropeandCentralAsia

2,260 5.1 3.2 -4.2 -0.4 1.0

RussianFederationb

2,300 5.6 4.3 -7.9 -4.1 0.8

Turkey 3,030 -0.7 1.8 2.7 1.3 -3.6Poland 3,775 6.5 -0.5 4.0 4.8 3.4

MiddleEastandNorthAfrica

1,950 4.9 -1.7 0.6 1.1 -0.1

SaudiArabia 6,215 4.3 -4.3 -1.9 -1.7 -4.0Iran,IslamicRep. 1,950 7.0 -3.6 1.9 0.5 -0.5Egypt,ArabRep. 1,350 1.5 4.5 2.1 3.1 3.2

Sub-SaharanAfrica 510 1.8 -0.8 0.1 -0.2 -0.2RepublicofSouthAfrica

2,825 2.7 -0.5 -0.5 -1.6 -0.6

Nigeria 305 3.6 -1.9 -0.4 -0.5 -1.7Note:Growthratesoverintervalsarecomputedusingleastsquaresmethod.a.Datapriorto1991coversWestGermany.b.Datapriorto1992coversformerSovietUnion.Source:WorldBankdataandstaffestimates.

FigureA2.2RealpercapitaGDPgrowth,1989-2008

Page154

TableA2.3Inflation:GDPdeflators,1966-2008(percentagechangea)

1966-731974-901991-981998Estimate1999

Forecast1999-2008

World 5.4 7.8 4.2 2.5 2.5High-incomeeconomies 5.5 7.0 2.3 1.1 1.2

Industrial 5.5 6.8 2.2 1.1 1.2G-7 5.3 6.5 2.1 1.0 0.9

UnitedStates 4.8 6.3 2.2 1.0 1.3Japan 5.8 3.6 0.3 0.4 -0.4G-4Europe 5.4 8.3 3.3 1.6 1.3

Germanyb 4.9 3.5 3.1 0.9 1.2EuroArea 5.6 7.9 3.2 1.6 1.4Otherindustrial 6.4 8.4 2.9 1.6 3.0

Otherhigh-income 5.5 22.2 4.3 1.5 1.2AsianNIEs 5.6 6.9 3.7 1.6 1.4

Low-andmiddle-incomeeconomies 4.7 11.1 11.3 7.6 7.3ExcludingEasternEuropeandCIS 4.8 11.4 10.1 6.5 7.2

Asia 6.7 9.2 7.2 8.2 5.6EastAsiaandPacific 6.7 8.2 6.1 8.7 4.5

China -2.0 3.8 9.6 -1.3 -0.9Korea,Rep.of 14.3 12.1 5.6 13.4 4.5Indonesia 65.0 13.3 12.3 73.1 38.1

SouthAsia 6.9 10.6 9.4 7.6 7.2India 7.6 8.1 8.7 7.6 9.8

LatinAmericaandtheCaribbean 6.1 10.0 14.4 7.9 8.3Brazil 23.2 145.0 348.0 3.8 11.0Mexico 6.4 48.0 19.5 15.9 16.8Argentina 24.0 203.0 9.8 -2.0 3.2

EuropeandCentralAsia 2.0 6.5 41.4 12.3 8.9RussianFederationc 0.9 1.2 250.0 11.6 56.0Turkey 7.3 44.5 79.3 69.2 60.0

MiddleEastandNorthAfrica 3.6 11.0 6.2 3.1 4.7

SaudiArabia 11.4 4.0 1.4 -13.4 4.0Iran,IslamicRep. 5.6 17.0 28.3 15.7 11.1Egypt,ArabRep. 2.3 12.4 9.8 4.2 4.0

Sub-SaharanAfrica 4.2 10.6 10.5 6.5 7.9RepublicofSouthAfrica 10.7 14.5 38.8 10.0 13.1Nigeria 10.7 14.5 38.8 10.0 13.1

Note:Deflatorsareinlocalcurrencyunits;1987=100.Growthratesoverintervalsarecomputedusingleastsquaresmethod.a.High-incomegroupinflationratesareGDP-weightedaveragesoflocalcurrencyinflation.Low-andmiddle-incomegroupsaremedians.WorldisGDP-weightedaverageofthetwogroups.b.Datapriorto1991coversWestGermany.c.Datapriorto1992coversformerSovietUnion.Source:WorldBankdataandstaffestimates.

FigureA2.3GDPinflation,1989-2008

TableA2.4Currentaccountbalances,1970-2008(percentageofGDP)

1998currentaccount(billionsofU.S.

dollars)1970-80

1981-90

1991-98 1998

Estimate1999

World -33.3 0.1 -0.4 -0.1 -0.1 -0.3High-incomeeconomies -0.8 0.1 -0.2 0.2 0.0 -0.4

Industrial -24.7 0.0 -0.5 0.1 -0.1 -0.6G-7 -50.8 0.2 -0.4 0.0 -0.3 -0.8

UnitedStates -232.5 0.0 -2.0 -1.5 -2.7 -3.5Japan 118.8 0.7 2.4 2.5 3.1 2.7G-4Europe 62.9 0.2 0.3 0.1 1.0 0.7

Germanya -4.9 0.5 2.6 -0.7 -0.2 -0.2EuroArea 88.1 0.0 0.4 0.5 1.4 1.0Otherindustrial 26.1 -0.9 -0.9 0.9 0.8 0.7

Otherhigh-income 23.9 7.2 9.8 3.1 3.4 5.0AsianNIEs 21.8 0.1 6.8 4.4 4.3 5.2

Low-andmiddle-incomeeconomies

-32.5 0.0 -0.8 -1.3 -0.5 -0.2

ExcludingEasternEuropeandCIS

-19.3 -0.6 -2.1 -1.8 -0.4 0.4

Asia 90.5 -1.1 -1.4 -0.8 3.8 2.2EastAsiaandPacific

100.7 -1.4 -1.1 -0.5 5.6 3.5

China 29.6 -0.4 0.1 1.4 3.1 1.6Korea,Rep.of

40.6 -6.1 0.7 -0.1 12.6 5.2

Indonesia 4.0 -1.4 -3.1 -1.6 4.2 3.8SouthAsia -10.2 -0.5 -2.0 -1.7 -1.8 -2.0

India -6.9 0.3 -1.7 -1.2 -1.6 -2.0LatinAmericaandtheCaribbean

-89.4 -2.6 -1.8 -2.9 -4.5 -3.1

Brazil -34.6 -4.1 -1.6 -1.7 -4.5 -4.3Mexico -16.3 -3.1 -0.7 -3.9 -3.9 -2.8

Argentina -14.6 -0.3 -2.1 -2.7 -4.3 -3.5EuropeandCentralAsia

-11.3 0.5 2.2 0.4 -1.1 -1.0

RussianFederationb

1.7 2.0 3.6 2.1 0.5 4.3

Turkey 1.9 -2.0 -1.3 -0.6 1.0 1.0Poland -7.5 -0.9 -1.4 -2.9 -5.1 -7.2

MiddleEastandNorthAfrica

-8.1 6.6 -3.5 -2.3 -1.5 4.2

SaudiArabia -6.7 19.8 -7.2 -7.7 -5.2 6.0Iran,IslamicRep.

-1.7 2.4 -0.4 -1.4 -1.4 2.2

Egypt,ArabRep.

-2.6 -4.9 -3.4 2.2 -3.1 -2.7

Sub-SaharanAfrica -14.2 -1.9 -2.8 -2.3 -4.6 -2.8RepublicofSouthAfrica

-2.3 -1.7 0.6 -0.3 -1.9 -2.0

Nigeria -5.8 0.8 -0.7 -1.9 -15.7 -3.0Note:Currentaccountafterofficialtransfers.Sharesoverintervalsareperiodaverages.a.Datapriorto1991coversWestGermany.b.Datapriorto1992coversformerSovietUnion.Source:WorldBankdataandstaffestimates.

FigureA2.4RatioofcurrentaccountbalancetoGDP,1989-2008

TableA2.5Exportsofgoods,1997(percent)

Merchandiseexports(US$millions)

Averageannualgrowth

1987-97

Effectivemarketgrowth1987-

97a

Merchandiseexports(US$millions)

Averageannualgrowth

1987-97

Effectivemarketgrowth1987-

97aWorld 5,537,918 6.6 6.6 LatinAmerica

andtheCaribbean

(continued)

MiddleEastandNorthAfrica

Alldevelopingeconomies

1,369,615 7.7 6.9 Uruguay 2,726 2.8 9.0 SaudiArabia

Venezuela 21,624 5.1 6.7 SyrianArabRep.

Asia 599,225 12.9 8.2 EuropeandCentralAsia

255,721 2.2 4.5 Tunisia

Yemen,Rep.EastAsiaandPacific

546,173 13.2 8.4 Armenia 233 .. 4.0

Azerbaijan 781 .. 5.0 Sub-SaharanAfrica

China 182,877 13.2 9.4 Belarus 7,301 .. 3.0Fiji 590 9.3 7.0 Bulgaria 4,950 -14.5 3.1 AngolaIndonesia 53,443 14.1 8.3 Czech 22,746 .. 8.3 BotswanaKorea,Rep. 136,164 10.3 7.7 Republic CameroonMalaysia 78,740 16.6 9.3 Estonia 2,924 .. 5.0 CoreMyanmar 866 12.0 11.4 Georgia 372 .. 3.0 d'IvoirePapuaNewGuinea

2,149 6.4 7.5 Hungary 18,374 1.3 3.5 Ethiopia

Philippines 25,088 12.6 7.5 Kyrgyz 531 .. 4.0 GhanaThailand 57,388 14.4 7.7 Republic KenyaVietnam 7,337 .. .. Latvia 1,672 .. 5.0 Madagascar

Lithuania 3,860 .. 5.0 NigeriaSouthAsia 53,052 10.0 6.8 Moldova 805 .. 4.0 SengalBangladesh 3,778 11.9 6.4 Poland 25,751 7.1 3.9 SouthAfricaIndia 35,108 12.0 6.7 Romania 8,431 -6.2 3.9 SudanNepal 402 9.3 5.7 Russian

Federation88,326 ¨ 5.1 Zambia

Pakistan 8,918 1.7 7.3 ZimbabweSriLanka 4,633 11.1 6.2 Slovak

Republic8,254 ¨ 8.3 High-income

economiesLatinAmericaandtheCaribbean

276,068 6.4 7.1 Tajikistan 770 ¨ 3.0

TFYRMacedonia

1,147 ¨ 1.7

Argentina 26,370 7.5 IndustrialBolivia 1,167 10.3 10.6 Turkmenistan 1,628 ¨ 3.0Brazil 52,990 4.8 7.4 Turkey 26,245 5.8 5.6 G-7Chile 16,663 8.4 7.9 Ukraine 14,232 ¨ 4.5 FranceColombia 11,522 12.6 6.4 Uzbekistan 3,781 ¨ 4.0 GermanyCostaRica 4,268 14.1 6.1 ItalyDominicanRepublic

882 -0.6 5.9 MiddleEastandNorthAfrica

153,003 2.6 7.2 Japan

UnitedKingdom

Ecuador 5,264 6.8 6.9 Algeria 14,833 1.9 6.1ElSalvador 1,359 10.4 6.7 Bahrain 4,384 8.3 UnitedStatesGuatemala 2,344 4.9 6.9 Egypt,Arb

Rep.3,921 -1.0 5.5

Mexico 110,431 12.7 6.5 Iran,IslamicRep.

18,381 2.0 7.4 Otherindustrial

Paraguay 1,089 9.5 9.5 Iraq 8,179 -19.1 6.1 AustraliaPeru 6,841 9.0 7.2 Jordan 1,836 4.3 6.2 AustriaTrinidadLandTobago

2,542 2.8 5.6 Morocco 7,032 3.6 6.3 Beligium

Oman 7,630 9.6 9.8 Denmark

TableA2.5Exportsofgoods,1997(continues)

(percent)Merchandiscexports(US$

millions)

Averageannualgrowth1987-97

Effectivemarketgrowth1987-97a

Merchandiscexports(US$millions)

Averageannualgrowth1987-97

Effectivemarketgrowth1987-97a

Otherindustrial

(continued)

Otherindustrial

(continued)Otherhighincome

Finland 39,316 7.7 5.5 Sweden 82,802 7.5 5.9Greece 8,626 5.3 5.4 Switzerland 72,493 6.4 6.6 KuwaitIceland 1,852 0.7 5.5 QatarIreland 53,512 11.6 5.8 Otherhigh

income516,480 10.1 7.9 Singapore

Netherland 194,905 6.3 5.7 Taiwan,NewZealand

Brunei 2,329 2.2 ¨ China

Norway 48,542 6.0 5.7 HongKong,China

188,059 12.8 8.1 UnitedArabEmirates

Spain 104,359 11.0 5.9 Israel 22,503 8.1 6.6¨Notavailable.a.Effectivemarketgrowthisaweightedaverageofimportvolumegrowthinthecountry'sexportmarkets.b.LuxembourgNote:Merchandiseexportsaref.o.b.incurrentU.S.dollars.Growthratesareforexportvolumes.Growthratesoverintervalsarecomputedusingleastsquaresmethod.Source:seeTechnicalNotes.

FigureA2.5aMerchandiseexportsasashareofGDP,1997

FigureA2.5bAverageannualgrowthrateofexportvolumes,1987-97

TableA2.6Importsofgoods,1997(percent)

Merchandiseimports(US$millions)

Annualaveragegrowth1987-96

Merchandiseimports/GDP

Merchandiseimports(US$millions)

Annualaveragegrowth1987-96

Merchandiseimports/GDP

World 5,541,179 6.4 19.2 LatinAmericaandtheCaribbean

(continued)Alldevelopingeconomies

1,385,216 9.6 20.9 Uruguay 3,716 12.0 16.6

Asia 600,510 12.0 24.2 Venezuela 14,606 2.4 11.3EastAsiaandPacific

536,592 12.8 27.2 EuropeandCentralAsia 316,545 9.0 25.0

China 142,189 11.1 15.5 Armenia 892 .. 52.6Fiji 965 6.1 46.8 Azerbaijan 794 .. 26.3

Indonesia 41,694 12.3 20.0 Belarus 8,689 .. 30.7Korea,Rep. 144,616 12.3 31.6 Bulgaria 4,559 -15.1 46.6Malaysia 79,030 18.1 80.1 CzechRepublic 28,540 .. 58.5

Myanmar 2,037 21.7 10.9 Estonia 4,429 .. 68.9PaupaNewGuinea

1,697 2.1 37.5 Georgia 686 .. 14.0

Phillipines 38,662 16.0 41.5 Hungary 20,668 4.4 34.7Thailand 62,854 14.4 49.2 Kazakhstan 4,301 .. 19.1Vietnam 10,481 .. 39.8 KyrgyzRepublic 894 .. 50.7SouthAsia 63,918 7.3 12.6 Latvia 2,721 .. 42.0Bangladesh 6,898 9.3 15.6 Lithuania 5,644 .. 47.6India 37,375 6.1 9.8 Moldova 1,079 .. 57.6Nepal 1,720 8.4 29.3 Poland 42,308 15.4 27.4Pakistan 11,863 7.2 19.8 Romania 11,280 1.4 32.8SriLanka 5,851 10.1 36.1 RussianFederation 73,613 .. 15.4LatinAmericaandtheCaribbean

270,280 12.3 13.4 SlovakRepublic 10,774 .. 58.7

Bolivia 1,851 9.3 20.5 Tajkistan 808 .. 73.5Brazil 65,007 13.7 6.9 TFYRMacedonia 1,464 .. 66.5Chile 19,662 10.9 23.1 Turkmenistan 1,173 .. 29.3Colombia 15,378 8.7 14.3 Turkey 48,585 9.9 23.0

CostaRica 4,924 10.9 45.2 Ukraine 17,114 .. 37.5DominicanRepublic

4,821 7.7 27.4 Uzbekistan 4,712 .. 19.3

Ecuador 4,955 7.7 19.9MiddleEastandNorthAfrica

121,628 2.6 23.2

ElSalvador 2,973 9.8 23.7 Algeria 9,280 -0.3 19.3Guatemala 3,852 12.5 17.7 Bahrain 4,026 1.1 77.6Jamaica 3,132 6.9 71.7 Egypt,ArabRep. 13,321 4.1 17.2Mexico 114,846 16.3 23.2 Iran,IslamicRep. 14,165 2.4 14.5Panama 3,000 12.2 31.7 Iraq 790 -27.6 1.3

Paraguay 3,403 22.4 33.5Peru 10,264 9.6 14.8TrinidadandTobago

2,990 4.8 36.4

TableA2.6Importsofgoods,1997(continued)

(percent)Merchandiseimports(US$millions)

Annualaveragegrowth1987-96

Merchandiseimports/GDP

Merchandiseimports(US$millions)

Annualaveragegrowth1987-96

Merchandiseimports/GDP

Otherindustrial

961,124 5.1 32.7 Otherindustrial

(continued) Otherhigh-income

Australia 65,892 5.9 16.1 NewZealand

14,518 3.9 22.6 HongKong,China

Austria 64,766 5.1 32.7 Norway 35,709 3.9 23.2 IsraelBelgiuma 166,639 4.3 66.9 Portugal 33,823 6.3 33.7 Kuwait

Denmark 44,039 4.5 26.1 Spain 122,711 8.2 22.9 QatarFinland 29,784 2.6 24.4 Sweden 65,020 6.2 29.4 SingaporeGreece 27,799 8.8 22.8 Switzerland 71,064 -0.1 29.2 Taiwan,

ChinaIceland 1,992 -1.5 27.5 Otherhigh

income525,735 10.8 71.4

Ireland 39,238 8.3 46.5 UnitedArabEmirates

Netherland 178,130 5.6 49.7 Brunei 2,000 10.6 37.0..Notavailablea.IncludesLuxembourgNote:Merchandiseimportsarec.i.f.incurrentU.S.dollars.Growthratesareforimportvolumes.Growthratesoverintervalsarecomputedusingleastsquaresmethod.Source:seeTechnicalNotes.

FigureA2.6aMerchandiseimportsasashareofGDP,1997

FigureA2.6bAverageannualgrowthrateofimportvolumes,1987-97

TableA2.7Directionofmerchandisetrade,1997a(percentageofworldtrade)

High-incomeimporters Low-andmiddle-incomeimporters

SourceofexportsUnitedStates

EU-15 Japan

Otherindustrial

Allindustrial

Otherhigh-income

Allhigh-income

Sub-SaharanAfrica

EastAsiaandPacific

SouthAsia

EuropeandCentralAsia

MiddleEastand

High-incomeeconomies

8.4 30.1 5.5 8.2 52.3 7.3 59.7 0.9 6.2 0.7 2.7

Industrial 6.8 28.5 3.6 7.7 46.6 5.3 52.0 0.9 4.0 0.5 2.5UnitedStates ... 2.8 2.1 3.5 8.4 2.2 10.7 0.3 1.4 0.2 0.2

EU-15 2.5 20.8 1.2 3.4 27.9 1.5 29.4 0.5 1.1 0.2 2.1Japan 8.8 9.1 ... 5.3 8.1 8.5 8.2 1.6 12.7 3.9 3.4

Otherindustrial 3.1 4.1 0.3 0.4 7.9 0.4 8.4 0.1 0.3 0.0 0.2Otherhigh-incomeb

1.6 1.7 1.9 0.5 5.7 2.0 7.7 0.1 2.2 0.1 0.2

Low-andmiddle-incomeeconomies

3.9 7.1 2.0 0.9 13.9 4.0 17.9 0.4 1.4 0.2 2.1

Sub-SaharanAfrica 0.1 0.5 0.1 0.0 0.8 0.2 0.9 0.2 0.1 0.0 0.0EastAsiaandPacific

0.8 1.0 1.3 0.3 3.4 2.7 6.2 0.1 0.8 0.1 0.1

SouthAsia 0.1 0.3 0.1 0.1 0.5 0.3 0.8 0.0 0.1 0.0 0.0EuropeandCentralAsia

0.2 3.3 0.1 0.2 3.8 0.3 4.0 0.0 0.1 0.0 1.8

MiddleEastandNorthAfrica

0.3 1.0 0.1 0.1 1.6 0.2 1.8 0.0 0.2 0.0 0.1

LatinAmericaandCaribbean

2.4 1.0 0.4 0.2 3.9 0.4 4.2 0.0 0.1 0.0 0.1

World 12.3 37.3 7.5 9.2 66.3 11.3 77.6 1.3 7.6 0.9 4.8a.Expressedasashare(percent)oftotalworldexports.Worldmerchandiseexportsin1997amountedtosome$5,500billion.b.Otherhigh-incomegroupincludestheAsiannewlyindustrializingeconomies,severaloilexportersoftheGulfregion,andIsrael.Source:IMF,DirectionofTradeStatistics.

TableA2.8Growthofcurrentdollarmerchandisetrade,bydirection,1987-97(averageannualpercentagegrowth)

High-incomeimporters Low-andmiddle-incomeimporters

Sourceofexports

UnitedStates

EU-15 Japan

Otherindustrial

Allindustrial

Otherhigh-income

Allhighncome

Sub-SaharanAfrica

EastAsiaand

PacificSouthAsia

High-incomeeconomies

9.5 6.8 5.3 10.4 7.5 9.8 7.7 5.2 15.8 11.6

Industrial 9.0 6.5 3.6 10.2 7.1 8.0 7.2 4.6 15.6 10.7UnitedStates

... 5.9 3.4 9.2 6.3 6.6 6.4 7.2 18.5 13.0

EU-15 8.4 5.8 4.5 12.3 6.6 10.0 6.7 3.8 16.3 11.0Japan 8.8 9.1 ... 5.3 8.1 8.5 8.2 1.6 12.7 3.9

Otherindustrial

9.5 11.1 2.2 12.1 9.9 9.0 9.8 3.8 16.4 9.9

Otherhigh-income

12.2 12.3 9.6 12.2 11.3 17.3 12.5 16.5 16.1 16.2

Low-andmiddle-incomeeconomies

13.1 9.6 9.3 8.0 10.3 17.5 11.5 12.1 15.2 9.6

Sulb-SaharanAfrica

7.0 2.6 -1.9 6.5 2.8 9.7 3.7 12.4 10.6 15.2

EastAsiaandPacific

16.4 13.9 14.3 11.5 14.3 20.3 16.5 13.7 21.3 20.0

SouthAsia

7.7 4.7 0.3 9.1 4.8 12.8 7.0 23.9 4.6 12.4

Europeand

9.9 13.4 1.7 6.9 12.3 19.5 12.6 5.3 7.8 -0.2

CentralAsiaMiddleEastandNorthAfrica

6.9 4.7 0.9 4.3 4.6 7.0 4.9 13.0 7.5 6.6

LatlinAmericaandCaribbean

14.4 9.7 9.5 6.5 12.0 18.2 12.4 10.1 26.9 33.0

World 10.5 7.2 6.2 10.1 8.0 11.9 8.5 6.8 15.7 11.1Note:Growthratesarecompoundaverages.Source:IMF,DirectionofTradeStatistics.

TableA2.9Structureoflong-termpublicandpubliclyguaranteed(PPG)debt,1997(percentageoflong-termPPGdebt)

Nonconcessional NonconcessionalConcessional Variable Fixed Concessional Variable

Alldevelopingeconomies

28.0 33.8 38.1EuropeandCentralAsia

(continued)

Asia 35.4 26.4 38.2Bulgaria 2.2 81.5EastAsiaandPacific

25.8 29.9 44.3CzechRepublic 0.7 32.7

China 16.5 37.4 46.1Estonia 16.8 49.4Indonesia 43.2 32.9 23.9Georgia 53.6 11.1Korea,Rep. 3.6 30.1 66.3Hungary 3.0 21.7Malaysia 12.1 23.7 64.3Latvia 24.1 58.8Myanmar 88.1 0.0 11.9Lithuania 11.0 44.7PapuaNewGuinea

57.1 19.8 23.2Moldova 24.8 41.9

Philippines 38.5 26.9 34.5Poland 22.5 61.0Thailand 29.6 17.6 52.8Romania 6.3 30.1Vietnam 17.0 18.3 64.6Russian

Federation26.2 56.6

SouthAsia 58.0 18.4 23.6SlovakRepublic

5.7 30.3

Bangladesh 98.9 0.2 0.9Tajikistan 83.4 13.9India 48.4 19.4 32.2Turkmenistan 3.2 75.3Nepal 97.8 0.0 2.2Turkey 12.2 23.6Pakistan 62.4 27.6 10.0Ukraine 3.0 71.7SriLanka 90.6 3.7 5.8 MiddleEast

andNorthAftrica

39.1 32.7

LatinAmericaandtheCaribbean

14.0 40.5 45.4Algeria 10.9 53.4

Argentina 3.5 32.9 63.6Egypt,Arab 84.4 4.5

Rep.Bolivia 70.3 90. 20.7Jordan 50.2 23.4Brazil 1.8 59.7 38.6Morocco 31.5 38.0Chile 8.0 74.3 17.7Oman 21.9 45.0Colombia 5.9 42.3 51.8SyrianArab

Rep.92.2 0.0

CostaRica 25.7 24.9 49.4Tunisia 27.9 23.3DominicanRepublic

44.9 26.3 28.8Yemen,Rep. 89.7 2.3

Ecuador 15.0 50.4 34.6ElSalvador 49.5 23.2 27.3Sub-Saharan

Africa51.1 13.1

Guatemala 44.8 19.3 35.9Angola 21.1 14.1Jamaica 37.8 24.8 37.3Botswana 55.7 12.2Mexico 1.7 34.6 63.7Cód'lvoire 43.3 41.8Panama 8.0 52.8 39.2Cameroon 54.2 11.5Paraguay 60.3 10.2 29.5Ethiopia 91.6 0.3Peru 27.0 45.3 27.8Gabon 24.4 12.5TrinidadandTobago

0.9 52.6 46.5Ghana 79.1 0.6

Uruguay 5.1 48.5 46.4Kenya 70.7 5.9Venezuela 0.3 58.1 41.6Madagascar 67.8 6.4EuropeandCentralAsia

16.8 48.9 34.3Senegal 76.4 6.0

Armenia 50.6 35.0 14.4Sudan 50.9 14.4Azerbaijan 81.2 18.8 0.0Zambia 65.7 12.3Belarus 13.2 66.8 20.1Zimbabwe 44.4 15.7Note:NonconcessionaldebtdataareavailableonlyforcountrieswhichreporttotheWorldBank'sDebtorReportingSystem.Foraggregatefigures,missingvaluesareassumedtohavethesameaveragevalueastheavailabledata.Source:WorldBankdata.

Page163

FigureA2.9aStructureoflong-termPPGdebt,bygroup,1997

FigureA2.9bStructureoflong-termPPGdebt,byregion,1997

FigureA2.9cToptenratiosofnonconcessionaldebttoGDP,1997

TableA2.10Long-termnetresourceflowstodevelopingcountries,1997(millionsofU.S.dollars)

Private

TotalPercentageofGDP Total

Netdebtflows FDI Portfolio Total

Alldevelopingcountries

338,047 5.49 298,953 105,340163,423 30,19139,094

Asia 137,295 6.86 115,367 34,751 68,946 11,67021,928EastAsiaandPacific 122,594 8.20 104,257 30,780 64,284 9,19318,337China 65,370 7.28 60.828 8,128 44,236 8,457 4,542Indonesia 11,581 5.39 10,863 5,888 4,677 298 718Korea,Rep. 17,465 3.67 13,069 8,968 2,844 1,257 4,396Malaysia 9,151 9.35 9,312 4,695 5,106 -489 -161Myanmar 242 1.94 180 102 80 -2PapuaNewGuinea 325 7.01 143 -57 200 0 183Philippines 4,459 5.43 4,164 2,869 1,222 73 295Thailand 9,452 6.34 3,444 7 3,745 -308 6,008Vietnam 2,621 9.94 1,994 287 1,800 -94 627SouthAsia 14,702 2.90 11,110 3,971 4,662 2,477 3,592Bangladesh 1,004 2.37 118 -28 135 11 886India 8,506 2.23 8,307 2,839 3,351 2,116 199Nepal 323 6.56 12 -11 23 0 311Pakistan 3,058 4.88 2,097 1,132 713 252 961SriLanka 984 6.52 575 47 430 98 410LatinAmericaandtheCaribbean

115,987 5.74 118,918 47,399 61,573 9,947 -2,931

Argentina 19,751 6.08 19,835 10,954 6,645 2,236 -84Bolivia 1,320 16.54 812 210 601 0 508Brazil 41,620 5.07 43,377 19,890 19,652 3,835 -1,757Chile 9,296 12.06 9,637 3,734 5,417 486 -340Colombia 9,780 10.21 10,151 4,053 5,982 116 -371CostaRica 85 0.89 104 47 57 0 -19

DominicanRepublic 357 2.37 401 -4 405 0 -45Ecuador 888 4.49 829 252 577 0ElSalvador 330 2.93 61 50 11 0 269Guatemala 373 2.10 166 76 90 0 207Jamaica 166 4.02 377 240 137 0 -211Mexico 15,998 3.97 20,533 6,003 12,477 2,052 -4,534Panama 1,572 17.90 1,443 411 1,030 2 129Paraguay 480 5.02 273 23 250 0 207Peru 4,279 6.70 3,094 373 2,030 692 1,184TrinidadandTobago 53 0.89 96 -244 340 0 -44Uruguay 828 4.15 632 471 160 2 196Venezuela 6,039 6.90 6,282 765 5,087 429 -243EuropeandCentralAsia

59,052 4.66 49,874 22,753 22,314 4,808 9,178

Armenia 185 11.33 51 0 51 0 134Azerbaijan 713 19.52 658 8 650 0Belarus 238 1.05 169 -31 200 0Bulgaria 621 6.16 569 -59 498 130CzechRepublic 1,804 3.47 1,818 516 1,286 16 -14Estonia 404 8.63 347 79 266 1Georgia 183 3.73 50 0 50 0 133Hungary 2,567 5.61 2,605 -1,284 2,079 1,810 -39Kazakhstan 2,636 11.89 2,158 786 1,321 50 478KyrgyzRepublic 236 13.40 50 0 50 0 186Latvia 670 12.12 559 12 521 26 111Lithuania 765 7.98 637 283 355 0 128Moldova 311 16.59 257 196 60 0Poland 7,077 5.22 6,787 934 4,908 944 291Romania 2,980 8.55 2,274 1,059 1,215 0 706RussianFederation 15,149 3.39 12,453 5,006 6,241 1,206 2,696SlovakRepublic 1,343 6.90 1,074 862 165 48 269Tajikistan 101 9.16 20 0 20 0Turkmenistan 878 21.95 847 762 85 0Turkey 12,211 6.43 12,221 10,840 805 577 -10

Ukraine 1,496 3.01 1,419 796 623 0Uzbekistan 476 1.95 435 150 285 0

TableA2.10Long-termnetresourceflowstodevelopingcountries,1997(continued)(millionsofU.S.dollars)

Private

TotalPercentageof

GDP TotalNetdebtflows FDI Portfolio Total

MiddleEastandNorthAfrica

6,921 1.32 8,120 493 5,368 2,259 -1,199

Egypt,ArabRep. 3,521 4.66 2,595 -109 891 1,813 926Iran,IslamicRep. -4,297 -3.82 -303 -353 50 0 -3,993Jordan 620 8.84 61 -31 22 70 559Morocco 818 2.44 1,303 -141 1,200 243 -484Oman 102 0.65 118 -9 90 38 -16SyrianArabRep. -108 2.12 69 -11 80 0 -176Tunisia 1,141 6.03 903 587 316 0 239Yemen,Rep. 83 1.47 -138 0 -138 0 221Sub-SaharanAfrica 18,792 5.49 6,674 -56 5,222 1,50712,118Angola 247 3.28 -24 -374 350 0 271Botswana 87 1.73 95 -5 100 0 -8Côted'Ivoire 64 0.62 -91 -436 327 18 154Cameroon 171 1.87 16 -29 45 0 155Ethiopia 530 8.30 28 23 5 0 501Gabon -65 -1.26 -105 -5 -100 0 40Ghana 671 9.74 203 27 130 46 468Kenya 73 0.69 -87 -119 20 12 160Madagascar 792 22.33 13 -1 14 0 779Nigeria 1,032 2.59 1,285 -258 1,539 4 -253Senegal 406 8.96 44 14 30 0 362Sudan 140 1.39 0 0 0 0 140Zambia 395 10.05 79 9 70 0 316Zimbabwe 285 3.32 32 -48 70 10 253Source:WorldBankdata.

FigureA2.10aDistributionoflong-termnetrsourcesflows,1977

FigureA2.10bChangeinshareofprivatelong-termflows,1990-97

TableA2.11Manufacturesunitvalue,LIBOR,andcommodityprices,selectedyears,1965-991965 1970 1975 1976 1977 1978 1979

G-5unitvalueindexofmanufacturesa

21.6 25.1 45.2 45.8 50.4 57.9

LIBORb 5.0 8.9 7.7 6.1 6.4 9.2Commoditypriceindexes,currentdollarterms

(1990=100)Weights(percent)

Petroleum 6 5 46 51 55 57Nonfuelcommodities 40 44 75 88 108 101

Agriculture 69.1 42 46 81 99 127 116Food 29.4 42 47 101 87 90 99Beverages 16.9 46 57 81 156 267 198Rawmaterials 22.8 37 36 55 72 72 76

Metalsandminerals 28.1 38 41 53 61 66 68Fertilizers 2.7 39 30 158 76 75 73

Commodityprices,currentdollars UnitsAgricultureCocoa cents/kg 37 67 125 204 379 340Coffee cents/kg 100 115 144 315 517 359Tea cents/kg 100 83 114 119 195 141Sugar cents/kg 5 8 45 26 18 17Banana $/mt 159 165 247 257 275 287Beef (cents/kg) 88 130 133 158 151 214Wheat $/mt 59 55 149 133 103 128Rice $/mt 119 126 341 235 252 346Maize $/mt 55 58 120 112 95 101Coconutoil $/mt 348 397 394 418 578 683Palmoil $/mt 273 260 434 407 530 600Soybeansoil $/mt 270 286 563 438 580 607Soybeans $/mt 117 117 220 231 280 268

Cotton cents/kg 63 63 116 169 155 157Rubber cents/kg 50 41 56 77 81 99OtherLogs $/cm 35 43 68 92 93 97Sawnwood $/cm 157 175 223 264 265 272Urea $/cm .. 48 198 112 127 145MetalsandmineralsCopper $/mt1,2901,4131,2371,4011,3101,9852,182Aluminum $/mt 474 556 797 8961,0501,0881,230Nickel $/mt1,7352,8464,5704,9745,2034,6105,986Gold ($/toz) 35 36 161 125 148 193Phosphaterock $/mt 13 11 67 36 31 29Steelproductsindex

1990=100 25 31 52 54 53 68EnergyCrudepetroleum $/bbl 1.4 1.2 10.4 11.6 12.6 12.9Coal $/mt .. .. .. .. 33.4 39.6a.UnitvalueindexinU.S.dollarterms(1990=100)ofmanufacturesexportedfromtheG-5countries(France,Germany,Japan,UnitedKingdom,andUnitedStates)weightedbythecountry'sexportstodevelopingcountries.

FigureA2.11aPriceindexesrelativetomanufacturesunitvalueindex,1985-99

TableA2.11Manufacturesunitvalue,LIBOR,andcommodityprices,selectedyears,1965-99(continued)1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 199668.1 68.6 80.9 88.8 95.3 94.7 100.0 102.2 106.6 106.3 110.2 119.2 114.211.3 8.6 6.8 7.3 8.1 9.3 8.4 6.1 3.9 3.4 5.1 6.1 5.6125 119 63 79 64 78 100 85 83 74 69 75 89104 91 92 93 110 106 100 98 94 99 123 131 125117 100 103 99 110 106 100 98 94 99 123 131 125107 86 77 84 107 108 100 99 100 99 107 117 124175 164 194 135 140 114 100 93 77 83 148 151 12687 71 70 90 91 97 100 99 98 110 126 135 12774 70 65 78 114 111 100 89 86 74 85 102 8998 89 89 94 109 106 100 102 96 84 83 104 120240 225 207 199 158 124 127 120 110 112 140 143 146319 323 429 251 303 239 197 187 141 156 331 333 269274 175 166 165 158 182 206 167 160 161 149 149 16611 9 13 15 52 28 28 20 20 22 27 29 26370 380 382 393 478 547 541 560 473 443 439 445 470227 215 209 239 252 257 256 266 245 262 233 191 179152 136 115 113 145 169 136 129 151 140 150 177 208232 197 186 215 277 299 271 293 268 235 268 321 339136 112 88 76 107 112 109 107 104 102 108 123 166

1,155 590 297 442 565 517 337 433 578 450 608 670 752729 501 257 343 437 350 290 339 394 378 528 628 531724 572 342 334 463 432 447 454 429 480 616 625 552282 224 208 16 304 275 247 240 236 255 252 259 305179 132 106 165 140 167 180 168 128 128 176 213 17796 76 81 98 118 97 86 83 86 83 113 158 139157 128 139 202 201 191 177 191 210 390 308 256 252352 307 329 401 402 485 533 553 607 758 821 740 741171 127 80 96 132 108 131 151 123 94 131 194 187

1,377 1,417 1,374 1,783 2,602 2,848 2,662 2,339 2,281 1,913 2,307 2,936 2,2951,251 1,041 1,150 1,565 2,551 1,951 1,639 1,302 1,254 1,139 1,477 1,806 1,506

4,752 4,899 3,881 4,87213,77813,3088,864 8,156 7,001 5,293 6,340 8,228 7,501360 318 364 446 437 381 383 362 344 360 384 384 38838 34 34 31 36 41 41 43 42 33 33 35 3970 61 62 72 94 106 100 99 88 91 93 107 96

28.6 27.2 14.4 18.2 14.7 17.8 22.9 19.4 19.0 16.8 15.9 17.2 20.448.6 46.6 43.9 37.1 36.2 40.5 41.7 41.5 40.6 38.0 36.5 39.2 37.2

b.Londoninterbankofferrateonsix-monthU.S.dollardeposits.Fordetaileddescriptionsofthepricesseries,seethewebsitehttp://www.worldbank.org/prospects/pinksheets.

FigureA2.11bPriceindexesrelativetomanufacturersunitvalueindex,1985-99

Page168

TechnicalNotesTheprincipalsourcesforthedatainthisappendixaretheWorldBank'scentraldatabases.

Regionalaggregatesarebasedontheclassificationofeconomiesbyincomegroupandregion,followingtheBank'sstandarddefinitions(seecountryclassificationtablesthatfollow).Debtandfinancedatarefertothe138countriesthatreporttotheBank'sDebtorReportingSystem(seetheWorldBank'sGlobalDevelopmentFinance1999).Smalleconomieshavegenerallybeenomittedfromthetablesbutareincludedintheregionaltotals.

CurrentpricedataarereportedinU.S.dollars.

Notesontables

TablesA2-1throughA2-4.ProjectionsareconsistentwiththosehighlightedinChapter1andAppendix1.

TablesA2-5andA2-6.Merchandiseexportsandimportsexcludetradeinservices.Importsarereportedonac.i.f.basis.Growthratesarebasedonconstantpricedata,whicharederivedfromcurrentvaluesdeflatedbyrelevantpriceindexes.Effectivemarketgrowthistheexport-weightedimportgrowthrateofthecountry'stradingpartners.TheUNCTADtradedatabaseistheprincipalsourcefordatathrough1995;insomecasesthesedatahavebeensupplementedbyIMFandUNComtradedatabasesorbyWorldBankstaffestimates.TradefiguresforcountriesoftheformerSovietUnionnowreflectthetotalofnon-CISandintra-CISexportsandimports.

TablesA2-7andA2-8.Growthratesarecompoundaveragesandarecomputedforcurrentdollarmeasuresoftrade.

TableA2-9.Long-termdebtcoverspublicandpubliclyguaranteedexternaldebtbutexcludesIMFcredits.Concessionaldebtisdebtwithanoriginalgrantelementof25percentormore.Nonconcessionalvariableinterestratedebtincludesallpublicandpubliclyguaranteedlong-termdebtwithanoriginalgrantelementoflessthan25percentwhosetermsdependonmovementsofakeymarketrate.Thisitemconveysinformationabouttheborrower'sexposuretochangesininternationalinterestrates.Forcompletedefinitions,seeGlobalDevelopmentFinance1999.

TableA2-10.Long-termnetresourceflowsarethesumofnetresourceflowsonlong-termdebt(excludingIMF)plusnon-debt-creatingflows.Foreigndirectinvestmentreferstothenetinflowsofinvestmentfromabroad.Portfolioequityflowsarethesumofcountryfunds,depositoryreceipts,anddirectpurchasesofsharesbyforeigninvestors.Forcompletedefinitions,seeGlobalDevelopmentFinance1999.

TableA2-11.CommoditypricedataarecollectedbytheDevelopmentProspectsGroupoftheWorldBank.WorldBankcommoditypriceseriesforwheat,rice,rubber,sawnwood,andcrudepetroleumwererevisedinApril1995.Asaresult,commoditypriceindexesarenotstrictlycomparabletoeditionsofGlobalEconomicProspectspublishedbefore1995.

Page169

ClassificationofEconomies

Table1Classificationofeconomiesbyincomeandregion,July1999

Sub-SaharanAfrica Asia EuropeandCentral

Incomegroup

Sub-group

EastandSouthernAfrica WestAfrica

EastAsiaandPacific SouthAsia

EasternEuropeandCentralAsia

RestofEurope

Low-income

AngolaBurundiComorosCongo,Dem.Rep.EritreaEthiopiaKenyaLesothoMadagascarMalawiMozambiqueRwandaSomaliaSudanTanzaniaUgandaZambiaZimbabwe

BeninBurkinaFasoCameroonCentralAfricanRepublicChadCongo,Rep.Côted'IvoireGambia,TheGhanaGuineaGuinea-BissauLiberiaMaliMauritaniaNigerNigeriaSãoToméandprincipeSenegalSierraLeoneTogo

CambodiaChinaIndonesiaKorea,Dem.Rep.LaoPDRMongoliaMyanmarSolomonIslandsVietnam

AfghanistanBangladeshBhutanIndiaNepalPakistan

ArmeniaAzerbaijanKyrgyzRepublicMoldovaTajikistanTurkmenistan

Djibouti CapeVerde Fiji Maldives Albania

Middle-income Lower

NamibiaSouthAfricaSwaziland

EquatorialGuniea

KiribatiMarshallIslandsMIcronesiaFed.Sts.PapuaNewGuineaPhilipinesSamoaThailandTongaVanuatu

SriLanka BelarusBosniaandHerzegovinaBulgariaGeorgiaKazakhstanLatviaMacedonia,FYRaRomaniaRussianFederationUkraineUzbekistanYougoslavia,Fed.Rep.b

Upper

BotswanaMauritiusMayotteSeychelles

Gobon AmericanSamoaKorea,Rep.MalaysiaPalau

CroatiaCzechRepublicEstoniaHungaryPolandSlovakRepublic

IsleofManTurkey

Table1Classificationofeconomiesbyincomeandregion,July1999(continued)

Sub-SaharanAfrica Asia EuropeandCentralAsia

Incomegroup

Sub-group

EastandSouthernAfrica

WestAfrica

EastAsiaandPacific

SouthAsia

EasternEuropeandCentralAsia

RestofEurope

High-income

OECD

AustraliaJapanNewZealand

AustriaBelgiumDenmarkFinlandFranceGermanyGreeceIcelandIrelandItalyLuxembourgNetherlandsNorwayPortugalSpainSwedenSwitzerlandUnitedKingdom

Non-OECD

Réunion BruneiFrenchPolynesiaGuamHongKong,ChinacMacaoNewCaledoniaN.MarianaIslandsSingaporeTaiwan,China

Slovenia AndorraChannelIslandsCyprusFaeroeIslandsGreenlandLiechten-steinMonaco

Total 211 27 23 35 8 27 27a.FormerYugoslavRepublicofMacedonia.b.FederalRepublicofYugoslavia(Serbia/Montenegro).c.On1July1997ChinaresumeditssovereigntyoverHongKong.Source:WorldBankdata.DefinitionsofgroupsForoperationalandanalyticalpurposes,theWorldBank'smaincriterionforclassifyingeconomiesisgrossnationalproduct(GNP)percapita.Everyeconomyisclassifiedaslow-income,middle-income(subdividedintolower-middleandupper-middle),orhigh-income.Otheranalyticalgroups,basedongeographicregionsandlevelsofexternaldebt,arealsoused.Low-incomeandmiddle-incomeeconomiesaresometimesreferredtoasdevelopingeconomies.Theuseofthetermisconvenient;itisnotintendedtoimplythatalleconomiesinthegroupareexperiencingsimilardevelopmentorthatothereconomieshavereachedapreferredorfinalstageofdevelopment.Classificationbyincomedoesnotnecessarilyreflectdevelopmentstatus.ThistableclassifiesallWorldBankmembereconomieswithpopulationsofmorethan30,000.Economiesaredividedamongincomegroupsaccordingto1998GNPpercapita,calculatedusingtheWorldBankAtlasmethod.Thegroupsare:low-income,$760orless;lower-middle-income,$761-3,030;upper-middle-income,$3,031-9,360;andhigh-income,$9,361ormore.

Table2Classificationofeconomiesbyincomeandindebtedness,July1999Incomegroup Subgroup Severelyindebted

Moderatelyindebted Lessindebted

LowIncome Lower

AfghanistanAngolaBurkinaFasoBurundiCameroonCentralAfricanRepublicCongo,Dem.Rep.Congo,Rep.Côted'IvoireEthiopiaGhanaGuineaGuinea-BissauHaitiHondurasIndonesiaMadagascar

MalawiMaliMauritaniaMozambiqueMyanmarNicaraguaNigerNigeriaRwandaSãoToméandPrincipeSierraLeoneSomaliaSudanTanzaniaUgandaVietnamZambia

BangladeshBeninCambodiaChadComorosGambia,TheIndiaKenyaLaoPDRPakistanSenegalTogoYemen,Rep.Zimbabwe

ArmeniaAzerbaijanBhutanChinaEritreaKorea,Dem.Rep.KyrgyzRepublicLesothoMoldovaMongoliaNepalSolomonIslandsTajikistanTurkmenistan

BoliviaBosinaandHerzegovinaBulgariaCubaEcuadorGuyanaIraqJamaica

AlgeriaBelizeColombiaDominicaEquatorialGuineaGeorgiaMacedonia,FYRaMorocco

AlbeniaBelarusCapeVerdeCostaRicaDjiboutiDominicanRepublicEgypt,ArabRep.

NamibiaPapuaNewGuineaParaguayRomaniaRussianFedarationSamoa

Middle-income

JordanPeruSyrianArabRepublic

PhilippinesSt.VincentandtheGrenadinesThailandTunisia

ElSalvadorFijiGuatemalaIran,IslamicRep.KazakhstanKiribatiLatviaLithuaniaMaldives

SouthAfricaSriLankaSurinameSwazilandTongaUkraineUzbekistanVanuatuYugoslavia,Fed.Rep.

Upper

ArgentinaBrazilGabon

ChileHungaryMalaysiaMauritiusPanamaSlovakRepublicTurkeyUruguayVenezuela

AntiguaandBarbudaBahrainBarbadosBotswanaCroatiaCzechRepublicEstoniaGrenadaKorea,Rep.LebanonLibyaMexico

SaudiArabiaSeychellesSt.KittsandNevisSt.LuciaTrinidadandTobago