WorldEconomicOutlook 1999 10

WORLD ECONOMIC AND FINANCIAL SURVEYS
WORLD ECONOMIC
OUTLOOK
October 1999
A Survey by the Staff of the
International Monetary Fund
I N T E R N AT I O N A L M O N E TA RY F U N D
Wa s h i n g t o n , D C
1999 International Monetary Fund

Production: IMF Graphics Section
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World economic outlook (International Monetary Fund)

World economic outlook: a survey by the staff of the International
Monetary Fund.1980 Washington, D.C.: The Fund, 1980
v.; 28 cm.(198184: Occasional paper/International Monetary Fund
ISSN 0251-6365)
Annual.
Has occasional updates, 1984
ISSN 0258-7440 = World economic and financial surveys
ISSN 0256-6877 = World economic outlook (Washington)
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Contents
Page
Assumptions and Conventions
vii
Further Information and Data
viii
Preface
ix
Chapter I. World Economic Outlook and the Challenges of Global Adjustment
Macroeconomic Stability and the Forces of Globalization: Lessons

from the 1990s
The Inevitable U.S. Slowdown and Adjustment
Japan: Recovery in Sight?
Securing a Lasting Revival of Growth in Europe
Emerging Market Economies in Asia and Latin America: Ensuring
Sustainable Recoveries
Middle East and Africa: Varying Responses to Adjustment Pressures
After a Decade of Transition: Widening Gaps Between Strong
and Weak Performers
Appendix: Year 2000 Contingency Planning
Chapter II. From Crisis to Recovery in the Emerging Market Economies
Improving Financial Conditions
Patterns of Recovery in Asia and Latin America
Structural Reform Requirements in Crisis-Hit Asian Economies:
Conditions for a Durable Recovery
Russia and Neighboring Countries in Transition: Prospects for Recovery
and Reform
Chapter III. Growth Divergences in the United States, Europe, and Japan:
Trend or Cyclical?
3
9
11
15
19
23
27
29
36
36
43
54
62
72
Assessing the Sustainable Level of Output

The United States: Will the Good Times Endure?
Japan: Why the Decade of Lost Growth May Be an Aberration
Can Europe Grow Faster?
Alternative Scenarios: Harder Landing or Higher World Growth?
74
77
81
84
88
Chapter IV. Safeguarding Macroeconomic Stability at Low Inflation
92
The Achievement of Reasonable Price Stability

Can Inflation Be Too Low?
Price Stability and Macroeconomic Stability
Asset Prices and Monetary Policy
Chapter V. Trends and Issues in the Global Trading System
Trends in Trade and Policies
Current Issues and the New Round
92
95
107
113
127
127
133
iii
CONTENTS
Chapter VI. Growth in Sub-Saharan Africa: Performance, Impediments, and

Policy Requirements
Past Growth in SSA Countries and Its Relationship to Policies
Improving SSAs Growth Performance Further
The Path to Sustained Growth
136
136
145
150
Annex. Summing Up by the Chairman
152
Statistical Appendix
156
Assumptions
Data and Conventions
Classification of Countries
List of Tables
Output (Tables 17)
Inflation (Tables 813)
Financial Policies (Tables 1421)
Foreign Trade (Tables 2226)
Current Account Transactions (Tables 2732)
Balance of Payments and External Financing (Tables 3337)
External Debt and Debt Service (Tables 3843)
Flow of Funds (Table 44)
Medium-Term Baseline Scenario (Tables 4546)
156
156
157
167
169
180
188
197
205
217
228
238
243
Boxes
1.1 Australia and New Zealand: Divergences, Prospects, and Vulnerabilities
1.2 Policy Assumptions Underlying the Projections for Selected
Advanced Economies
1.3 Comparing G-7 Fiscal PositionsWho Has a Debt Problem?
1.4 Oil Price Assumptions and the World Economic Outlook
1.5 The Regional Economic Impact of the Kosovo Crisis
2.1 The Emerging Market Crises and South Africa
2.2 Capital Flows to Emerging Market Economies: Composition
and Volatility
2.3 Structural Reforms in Latin America: The Case of Argentina
2.4 Malaysias Response to the Financial Crisis: How Unorthodox Was It?
2.5 Financial Sector Restructuring in Indonesia, Korea, Malaysia,
and Thailand
2.6 Counting the Costs of the Recent Crises
4.1 The Effects of Downward Rigidity of Nominal Wages
on (Un)employment: Selected Simulation Results
4.2 The Effects of a Zero Floor for Nominal Interest Rates on Real Output:
Selected Simulation Results
4.3 Recent Episodes of Negative Inflation
4.4 Global Liquidity
6.1 Africa and World Trends in Military Spending
6
13
16
24
30
40
49
52
54
60
64
98
102
108
118
138
Tables
1.1 Overview of the World Economic Outlook Projections
1.2 Selected Economies: Current Account Positions
1.3 Advanced Economies: Real GDP, Consumer Prices,
and Unemployment
1.4 Major Industrial Countries: General Government Fiscal
Balances and Debt
1.5 Selected Developing Countries: Real GDP and Consumer Prices
1.6 Countries in Transition: Real GDP and Consumer Prices
1.7 Developing and Transition Economies: Y2K Scenario Results
iv
2
4
10
12
20
28
34
Contents
2.1
2.2
2.3
2.4
2.5
2.6
2.7
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
5.1
6.1
6.2
6.3
6.4
6.5
Gross Private Financing to Emerging Market Economies

Emerging Market Economies: Net Capital Flows
Financial Sector Restructuring
Russian Federation: Macroeconomic Indicators, 199699
Countries in Transition: Average Annual Growth Rates in 199498, and
1998 GDP Per Capita in U.S. Dollar Purchasing Power Parity Terms
Countries in Transition: Structural Reform Indicators, 199498 Averages
Countries in Transition: Indicators of Export Performance and Labor
Productivity in Industry, 199498 Averages
United States, the Euro Area, and Japan: Estimates of Potential
Output Growth
Selected European Economies: General Government Structural Balances
and Long-Term Interest Rates
Harder Landing Scenario
Accelerated Adjustment Scenario
Selected Countries: Measurement Bias in the Consumer Price Index
Deflation and Output Growth
Pronounced Changes in Real Equity Prices
Selected Countries: Illustrative Examples of Potential Stock Market
Overvaluation (First Quarter, 1999)
Selected Countries: Correlation of Equity Price Inflation and Goods
Price Inflation
Intraregional Export Shares, 199098
Sub-Saharan Africa and Other Developing Country Groups: Education
and Health
Sub-Saharan Africa and Other Developing Country Groups:
External Performance
Sub-Saharan Africa and Other Developing Country Groups: Quality of
Governance, Institutions, and Public Services
Sub-Saharan Africa and Other Developing Country Groups: Financial and
Infrastructure Indicators
Sub-Saharan Africa: Selected Debt Sustainability Indicators
43
44
58
62
68
69
70
74
87
90
91
94
106
112
122
123
129
141
144
146
148
149
Figures
1.1 Global Indicators
1.2 Financing Conditions for Emerging Markets
1.3 Selected European Countries, Japan, and the United States: Indicators
of Consumer and Business Confidence
1.4 Y2K Interest Rate Spike
2.1 Selected Emerging Market Economies: Short-Term Interest Rates
2.2 Selected Emerging Market Economies: Bilateral U.S. Dollar
Exchange Rates
2.3 Emerging Market Economies: Equity Prices
2.4 Selected Emerging Market Countries: Eurobond Yield Spreads and
Brady Bond Spreads
2.5 Selected Emerging Market Economies: Real GDP
2.6 Selected Asian and Latin American Economies: Real Effective
Exchange Rates
2.7 Selected East Asian and Latin American Countries: Bank Credit to the
Private Sector and Total External Debt, 1998
2.8 Selected East Asian Countries: Progress with Corporate
Sector Restructuring
3.1 United States, the Euro Area, and Japan: Economic Performance Indicators
3.2 United States, the Euro Area, and Japan: Vintages of Potential Output
Growth and Output Gaps
3.3 United States, the Euro Area, and Japan: Output Per Employee and
Per Head of Population
3
5
15
32
37
38
39
42
46
47
48
59
72
73
76
CONTENTS
3.4 United States: Output, Labor Productivity, and Inflation

in Recent Expansions
3.5 United States: Policy and Demand Indicators
3.6 United States, the Euro Area, and Japan: Changes in WEO Export
Market Growth Assumptions
3.7 United States: Selected Price Indices
3.8 Japan: Policy and Demand Indicators
3.9 Euro Area: Policy and Demand Indicators
3.10 Euro Area: Economic Performance Indicators
3.11 Euro Area: Convergence of Output Per Worker
3.12 United States, the Euro Area, and Japan: Household and National
Saving Rates
4.1 Industrial Countries: Consumer Price Inflation
4.2 Hypothetical Distribution of Nominal Wage Increases
4.3 Selected Countries: Short-Term Interest Rates
4.4 Industrial Countries: Output Gap and Inflation
4.5 Comparison of Two Stock Market Crashes
4.6 Selected Countries: Stock Prices
4.7 Selected Countries: Measures of Stock Market Valuation
4.8 Selected Countries: Net Financial Balances
5.1 Exports of Goods
5.2 Developing Countries and Countries in Transition: Average
Annual Growth of Exports, 198898
5.3 World Merchandise and Services Exports
6.1 Sub-Saharan Africa and Other Developing Country Groups: Growth,
Investment, and Saving
6.2 Sub-Saharan Africa and Other Developing Country Groups: Inflation
and Fiscal Balance
World Economic Outlook and Staff Studies for the World Economic Outlook,
Selected Topics, 199299
vi
77
78
79
80
83
84
86
88
89
92
95
100
111
114
115
116
117
127
128
130
137
143
246
Assumptions and Conventions
A number of assumptions have been adopted for the projections presented in the World
Economic Outlook. It has been assumed that real effective exchange rates will remain constant
at their average levels during July 26August 16, 1999 except for the bilateral rates among the
European exchange rate mechanism (ERM) currencies, which are assumed to remain constant
in nominal terms; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary polices in industrial countries, see Box 1.2); that
the average price of oil will be $16.70 a barrel in 1999 and $18.00 a barrel in 2000, and remain
unchanged in real terms over the medium term; and that the six-month London interbank offered rate (LIBOR) on U.S. dollar deposits will average 5.4 percent in 1999 and 6.1 percent in
2000. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would in any event be involved in the projections. The estimates and projections are based on statistical information available in early
September 1999.
The following conventions have been used throughout the World Economic Outlook:
...
to indicate that data are not available or not applicable;
to indicate that the figure is zero or negligible;
between years or months (for example, 199798 or JanuaryJune) to indicate the years
or months covered, including the beginning and ending years or months;
between years or months (for example, 1997/98) to indicate a fiscal or financial year.
Billion means a thousand million; trillion means a thousand billion.

Basis points refer to hundredths of 1 percentage point (for example, 25 basis points are
equivalent to !/4 of 1 percentage point).
In figures and tables, shaded areas indicate IMF staff projections.
Minor discrepancies between sums of constituent figures and totals shown are due to rounding.
As used in this report, the term country does not in all cases refer to a territorial entity that
is a state as understood by international law and practice. As used here, the term also covers
some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
vii
Further Information and Data
This report on the World Economic Outlook is available in full on the IMFs Internet site,
www.imf.org. Accompanying it on the website is a larger compilation of data from the WEO
database than in the report itself, consisting of files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.
Inquiries about the content of the World Economic Outlook and the WEO database should
be sent by mail, electronic mail, or telefax (telephone inquiries cannot be accepted) to:
World Economic Studies Division
Research Department
700 19th Street, N.W.
Washington, D.C. 20431, U.S.A.
E-mail: weo@imf.org
Telefax: (202) 623-6343
viii
Preface
The projections and analysis contained in the World Economic Outlook are an integral element of the IMFs ongoing surveillance of economic developments and policies in its member
countries and of the global economic system. The IMF has published the World Economic
Outlook annually from 1980 through 1983 and biannually since 1984.
The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff
gathers through its consultations with member countries. These consultations are carried out in
particular by the IMFs area departments together with the Policy Development and Review
Department and the Fiscal Affairs Department.
The country projections are prepared by the IMFs area departments on the basis of internationally consistent assumptions about world activity, exchange rates, and conditions in international financial and commodity markets. For approximately 50 of the largest economies
accounting for 90 percent of world outputthe projections are updated for each World
Economic Outlook exercise. For smaller countries, the projections are based on those prepared
at the time of the IMFs regular Article IV consultations with those countries or in connection
with the use of IMF resources; for these countries, the projections used in the World Economic
Outlook are incrementally adjusted to reflect changes in assumptions and global economic
conditions.
The analysis in the World Economic Outlook draws extensively on the ongoing work of the
IMFs area and specialized departments, and is coordinated in the Research Department under
the general direction of Michael Mussa, Economic Counsellor and Director of Research. The
World Economic Outlook project is directed by Flemming Larsen, Deputy Director of the
Research Department, together with Graham Hacche, Assistant Director for the World
Economic Studies Division.
Primary contributors to the current issue include Francesco Caramazza, John H. Green,
Maitland MacFarlan, Peter Sturm, Luis Cato, Mark De Broeck, Luca Ricci, Ranil Salgado,
Cathy Wright, and Harm Zebregs; and Robert Sharer, Marc Auboin, and Bradley McDonald of
the Trade Policy Division of the Policy Development and Review Department who prepared
Chapter V. Other contributors include Sanjeev Gupta, Richard Hemming, Kalpana Kochhar,
Arvind Subramanian, Steven Symansky, Subhash Thakur, and Andrew Tweedie. The Fiscal
Analysis Division of the Fiscal Affairs Department computed the structural budget and fiscal
impulse measures. Gretchen Byrne, Mandy Hemmati, Yutong Li, and Anthony G. Turner provided research assistance. Allen Cobler, Nicholas Dopuch, Isabella Dymarskia, Yasoma
Liyanarchchi, Olga Plagie, and Irim Siddiqui processed the data and managed the computer
systems. Susan Duff, Caroline Bagworth, and Lisa Nugent were responsible for word processing. James McEuen of the External Relations Department edited the manuscript and coordinated production of the publication.
The analysis has benefited from comments and suggestions by staff from other IMF departments, as well as by Executive Directors following their discussion of the World Economic
Outlook on September 1 and 3, 1999 (see Annex). However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to
their national authorities.
ix
I
World Economic Outlook and the
Challenges of Global Adjustment
been the mildest of the four slowdowns in the world
economy in the past three decades, even though some
countries have suffered particularly severe recessions
(Figure 1.1).
However, a great deal of uncertainty still attaches to
the world economic outlook for the next couple of
years. It is clear that the U.S. expansion has played a
critically important role in moderating the global
slowdown;1 but it is also clear that to forestall a buildup of domestic inflationary pressures and to contain
the external current account deficit, the rate of growth
in the United States will need to slow. The staffs baseline projections assume a soft landinga slowing of
growth to sustainable rates with little friction or disruptionbut this cannot be taken for granted. The
generously valued stock market, the sharp decline in
household saving in recent years into negative territory, high business capital outlays, the heavy reliance
on foreign saving, and the high exchange value of the
dollar relative to medium-term fundamentals all point
to strains and imbalances that may lead to a more
abrupt slowing of domestic demand. This in turn raises
the question of whether demand in Japan and the euro
area will strengthen sufficiently to compensate for a
slowdown in the United States and to support activity
at home and globally. A strengthening of economic
conditions outside the United States would help to improve the U.S. current account balance, but it would
also tend to reduce international investors appetite for
dollar-denominated assets; it might thus increase the
risk of a sharp correction in the dollar relative to the
other major currencies, a risk arising from the imbalances in current accounts among the United States,
Japan, and the euro area (Table 1.2). These imbalances
might also further increase trade tensions.
If growth were to weaken significantly in the United
States without offsets in Japan and Europe, there would
also be reason for concern about the sustainability of
the recoveries underway in the Asian economies recently in crisis, and much of Latin America would be
particularly vulnerable under such a scenario. While
conditions in emerging financial markets have im-
lobal economic and financial conditions have improved markedly after the turbulence in emerging
markets in 199798, which gave rise to fears of a
widespread credit crunch and global recession, and
most of the economies recently in crisis have begun to
recover. But many challenges remain to be addressed
to ensure that these recoveries are sustainable, and to
foster stronger and more stable growth in the world
economy in the next decade. There is particular reason
for concern about the unbalanced pattern of growth
observed recently among the major industrial countries and about the economic and financial consequences worldwide if the eventual demand slowdown
in the United States turns out to be sharper than is generally expected at present. While the return to broad
price stability remains an important policy achievement, macroeconomic instability has persisted in
much of the world economy, continuing to pose challenges for, and in many ways making new demands
on, economic policies.
The world economy appears to be on the mend following the global slowdown in 1998 in the wake of the
Asian crisis and the further bouts of financial turbulence and contagion associated with the Russian and
Brazilian crises. Financial market confidence has been
returning in most of the emerging market economies
affected by the crises, allowing monetary conditions to
ease and setting the stage for economic recovery. For
all the Asian crisis economies, growth projections for
1999 have been revised up significantly, and the economic downturns in Brazil and Russia have been shallower than expected earlier. Oil prices have recovered,
and declines in many other commodity prices have
been arrested, providing relief for some commodityexporting countries affected by the ripple effects of the
slowdown. There has also been an upward revision of
growth in Japan, where there was a significant rise in
activity in the first half of 1999 following the steep contraction during 199798. And the projected strengthening of growth in Europe seems to be materializing,
while the impressive U.S. expansion has continued,
amid few signs of emerging price or wage pressures.
The many upward revisions to the earlier projections now point to global growth of about 3 percent in
1999, #/4 of 1 percentage point higher than in the May
1999 World Economic Outlook (Table 1.1). Global
growth thus appears to have bottomed out at 2!/2 percent in 1998, in what the projections suggest will have
1If real domestic demand in the United States had expanded in

line with potential growth in 199899 (rather than at the 5.3 percent
rate registered in 1998 and the 4.9 percent increase projected for
1999) world growth would have been about !/2 of 1 percentage point
weaker in both years.
WORLD ECONOMIC OUTLOOK AND CHALLENGES OF GLOBAL ADJUSTMENT
Table 1.1. Overview of the World Economic Outlook Projections

(Annual percent change unless otherwise noted)
Current
Projections
________________
1999
2000
Differences from
May 1999
Projections
________________
1999
2000
1997
1998
World output
Advanced economies
Major industrial countries
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Other advanced economies
Memorandum
Industrial countries
Euro area
Newly industrialized Asian economies
4.2
3.2
2.9
3.9
1.4
1.8
2.3
1.5
3.5
4.0
4.2
2.5
2.2
2.2
3.9
2.8
2.3
3.2
1.3
2.2
3.1
2.1
3.0
2.8
2.6
3.7
1.0
1.4
2.5
1.2
1.1
3.6
3.5
3.5
2.7
2.4
2.6
1.5
2.5
3.0
2.4
2.4
2.6
3.6
0.7
0.8
0.7
0.4
2.4
0.1
0.3
0.3
0.4
1.0
1.0
0.1
0.4
0.4
0.4
1.2
0.3
0.1
0.0
0.3
0.1
0.2
3.0
2.4
5.8
2.4
2.8
1.8
2.6
2.1
5.2
2.5
2.8
5.1
0.6
0.1
3.1
0.3
0.1
0.6
Developing countries
Africa
Asia
China
India
ASEAN-41
Middle East and Europe
Western Hemisphere
Brazil
5.8
3.1
6.6
8.8
5.5
3.6
4.5
5.3
3.7
3.2
3.4
3.7
7.8
5.8
9.8
3.2
2.2
0.1
3.5
3.1
5.3
6.6
5.7
1.4
1.8
0.1
1.0
4.8
5.0
5.4
6.0
5.5
3.6
3.1
3.9
4.0
0.4
0.1
0.6
0.0
0.5
2.5
0.2
0.6
2.8
0.1
0.1
0.3
1.0
0.4
0.6
0.2
0.4
0.3
Countries in transition
Central and eastern Europe
Excluding Belarus and Ukraine
Russia
Transcaucasus and central Asia
World trade volume (goods and services)
Imports
Advanced economies
Exports
Advanced economies
Commodity prices
Oil2
In SDRs
In U.S. dollars
Nonfuel3
In SDRs
In U.S. dollars
Consumer prices
Advanced economies
Six-month LIBOR (in percent) 4
On U.S. dollar deposits
On Japanese yen deposits
On euro deposits
2.2
3.0
3.4
0.9
2.5
9.9
0.2
2.2
2.3
4.6
2.2
3.6
0.8
1.0
1.7
0.0
2.0
3.7
2.8
3.3
4.0
2.0
2.9
6.2
1.7
1.0
1.3
7.0
0.2
0.1
0.3
0.4
0.6
2.0
0.2
0.4
9.2
11.4
7.0
4.8
1.3
2.9
5.9
1.1
2.7
5.9
7.2
8.2
0.9
1.5
2.5
0.2
0.4
2.0
10.3
11.4
5.0
3.2
4.9
5.9
3.0
2.4
2.7
6.2
5.6
7.2
0.2
2.2
3.7
0.6
0.1
0.6
0.2
5.4
31.2
32.1
27.2
27.7
7.4
7.8
36.4
36.0
6.0
5.6
2.0
3.3
13.5
14.8
7.6
7.2
3.0
3.4
2.7
3.2
1.1
1.6
2.1
9.2
28.2
1.5
10.3
20.9
1.4
6.7
39.3
1.8
5.8
18.1
0.0
1.9
1.6
0.1
1.7
5.7
5.8
0.7
3.5
5.5
0.6
3.7
5.4
0.2
3.0
6.1
0.2
3.5
0.2
0.0
0.0
0.9
0.1
0.4
Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during July
26August 16, 1999.
1Indonesia, Malaysia, the Philippines, and Thailand.
2Simple average of spot prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. The average
price of oil in U.S. dollars a barrel was $13.07 in 1998; the assumed price is $16.70 in 1999 and $18.00 in
2000.
3Average, based on world commodity export weights.
4London interbank offered rate.
Macroeconomic Stability and the Forces of Globalization: Lessons from the 1990s
proved since the Brazilian crisis, some emerging market economies remain fragile and vulnerable to shifts in
market sentiment. In fact, sentiment toward emerging
markets has remained more adverse than in most of
199697 and much of 1998, with yield spreads remaining wide and volatile for many countries, reflecting the greater recognition of the risks attached to
emerging market investments (Figure 1.2).
An additional risk factor relates to potential financial market reactions to actual or perceived Y2K compliance problems in emerging markets (see the
Appendix to this Chapter). To contain the risk of capital flow reversals triggered by uncertainty about potential Y2K-related difficulties, it is essential that
countries be fully transparent both about their preparedness and about contingency plans to cope with
any system failure in sensitive areas.
Many problems and risks therefore remain. Global
adjustment of uneven growth and payments imbalances
is now perhaps the key challenge, and it is the theme
running through much of this report. The achievement
of a soft landing in the United States, sustained recoveries in the emerging market economies recently in crisis and in Japan, and a sustained strengthening of
growth in Europe, as in the staffs baseline projections,
are clearly feasible, but there is also a serious risk of
worse scenarios. Economic policies will have an important bearing on the outcome and on the degree of
macroeconomic and financial stability that will be associated with the adjustment process.
Figure 1.1. Global Indicators1

(Annual percent change unless otherwise noted)
For the world economy as a whole, the recent slowdown in growth
appears to have been the mildest of the four that have occurred in the
past three decades.
8 Growth of World
Real GDP
Real Commodity
Prices
(1990 = 100)
400
300
6
Average, 197098
Non-oil
commodity
prices
200
100
2
Oil prices
1970 75 80 85 90 95 2000
9 World Real Long-Term

6
Macroeconomic Stability and the Forces of

Globalization: Lessons from the 1990s
Interest Rate 2
(percent)
1970 75 80 85 90 95 2000
Inflation
(consumer prices,
median)
20
15
3
10
The current global adjustment challenge has its

roots in the uneven and, in many countries, highly unstable macroeconomic conditions that have characterized much of the 1990s. Globally, macroeconomic instability has been reflected in two significant
slowdowns in less than a decadein 199193 and
again in 199899and in an average growth rate of
world output in the 1990s of only 3 percent, below the
average growth rates of the 1980s (3!/2 percent) and the
1970s (4!/2 percent).
The instability has included a large number of currency crises (from the ERM crises to the Mexican,
Asian, Russian, and Brazilian crises); substantial
swings in exchange rates among the major currencies,
especially the yen/dollar rate; run-ups in asset prices
followed by pronounced asset price deflations (notably in Japan, the Nordic countries, and the Asian
emerging markets); and banking crises in almost all
regions of the worldoften, though not always,
linked to asset price collapses. The U.S. economy is
perhaps the most striking, though not the only, exception to the instability of the past decade: the U.S. recession in 199091 was unusually mild and the subse-
0
3
6
1970 75 80 85 90 95 2000
Advanced
economies
(GDP deflator)
1970 75 80 85 90 95 2000
1Shaded areas indicate IMF staff projections. Aggregates are computed on the basis of purchasing-power-parity (PPP) weights unless
otherwise indicated.
2GDP-weighted average of ten-year (or nearest maturity) government bond yields less inflation rates for the United States, Japan,
Germany, France, Italy, the United Kingdom, and Canada. Excluding
Italy prior to 1972.
Table 1.2. Selected Economies:

Current Account Positions
quent expansion will become the countrys longest period of sustained growth on record if it continues
through early next year. Other economies have also
enjoyed comparatively strong and stable growth in the
1990s, including Australia (see Box 1.1), China, India,
Ireland, the Netherlands, Norway, and Taiwan
Province of China. Nevertheless, in surprisingly many
industrial and emerging market countries, economic
performance in the 1990s has tended to be weak or unstable or both.
It is unclear whether macroeconomic instability
generally has been increasing. However, the mere fact
that it has remained pervasive may be considered surprising given the general improvement in macroeconomic policies in most countries compared with the
two preceding decadessuggested, in particular, by
declines in inflation and better containment of fiscal
imbalancesand the substantial progress worldwide
with structural reforms that have increased the scope
for market forces to guide the allocation of resources
within and across countries. Why, then, has the frequency of crises and episodes of macroeconomic instability not clearly diminished?
Analysis of the role of any particular factors in contributing to changes in economic performance is generally difficult because typically many changes occur
simultaneously, and this has been the case in the
1990s. The global economic and financial system
today is dramatically different in many respects from
that of the 1980s or any earlier period. Four of the
most significant changes are the following:
First, as a major policy achievement, world inflation
has been brought down to its lowest level in 40 years.
Associated with this, the dispersion of inflation rates
across countries has also diminished. These developments reflect the strengthened international consensus
among monetary authorities on the need to focus on the
goal of low inflationa consensus fostered by experience of the alternative and also by peer pressure and
demonstration effects among countries. The strengthening of fiscal discipline in many countries has also
contributed to monetary discipline and the decline in
actual and expected inflation. Although hard to substantiate or measure, it seems likely that factors such as
trade liberalization, extensive deregulation in many industries, the privatization of many state-owned enterprises, the reduced willingness of governments to bail
out uncompetitive enterprises and sectors, and enhanced information about price developments across
countries have also been contributing to the general
convergence toward price stability worldwide.
The effect on inflation of this last set of factors
which operate essentially on the price level rather than
its rate of changemay be expected to wane over
time, and it remains to be seen if price stability will be
maintained on a lasting basis. But at least for the moment, low inflation has reduced the risk of one potential source of cyclical instabilitythe emergence of
(Percent of GDP)
1997
1998
1999
2000
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
1.8
2.2
0.1
2.8
2.8
0.8
1.6
2.6
3.2
0.2
2.8
1.7
0.2
1.8
3.5
3.4
0.0
2.6
1.6
1.3
1.0
3.5
3.1
0.2
2.8
1.7
1.6
0.9
Australia
Austria
Finland
Greece
Hong Kong SAR1
Ireland
Israel
Korea
New Zealand
Norway
Singapore
Spain
Sweden
Switzerland
Taiwan Province of China
3.1
2.4
5.6
2.6
3.2
2.5
3.4
1.7
7.1
5.2
15.7
0.4
2.8
8.9
2.7
4.8
2.1
5.8
2.7
0.7
0.9
0.7
12.5
6.1
0.8
20.9
0.2
1.9
8.4
1.3
6.0
1.8
5.3
2.3
1.5
0.6
2.6
5.9
6.7
0.6
21.1
0.6
1.1
8.0
2.6
5.2
1.5
5.4
2.4
2.4
0.4
2.8
3.4
5.8
3.2
20.4
0.7
1.4
8.3
3.0
1.7
1.3
1.2
1.4
7.2
4.1
4.1
2.8
5.4
3.8
4.8
0.2
1.3
1.8
5.1
1.9
4.9
5.6
5.3
0.2
1.5
2.0
1.4
0.9
1.9
4.9
4.3
2.7
6.2
3.4
4.5
3.0
1.0
4.0
12.9
3.8
8.4
2.7
2.0
11.1
1.6
12.8
0.9
2.0
0.1
4.0
3.8
4.3
2.6
1.3
3.6
3.5
1.3
2.4
11.7
2.3
14.3
2.7
2.2
4.6
0.6
8.8
0.6
3.7
0.8
3.6
3.1
3.3
3.7
1.1
3.5
3.7
1.5
0.7
5.1
3.0
5.5
1.7
0.8
4.6
0.8
5.9
1.8
2.7
6.0
13.3
2.1
5.1
10.2
3.0
0.7
10.1
2.7
1.9
8.7
4.8
9.5
12.1
4.2
0.8
10.1
3.0
1.5
8.2
5.5
8.4
11.1
6.5
7.8
4.9
2.3
1.9
9.2
5.1
7.7
9.9
6.5
4.8
2.3
1.8
Memorandum
Euro area
Algeria
Argentina
Brazil
Cameroon
Chile
China
Cte dIvoire
Egypt
India
Indonesia
Malaysia
Mexico
Nigeria
Pakistan
Philippines
Saudi Arabia
South Africa
Thailand
Turkey
Uganda
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland2
Russia
Slovak Republic
Ukraine
1Data
include only goods and nonfactor services.

on data for the current balance, including a surplus on unrecorded trade transactions, as estimated by IMF staff.
2Based
price pressures in the late stages of an economic upswing that ultimately necessitate a significant tightening of monetary conditions. In fact, the concerns of
monetary authorities in some countries recentlyfor
example, China and Japanhave focused on the risk
of falling prices, or deflation (see Box 4.3). This may
also add to macroeconomic instability, partly owing to
the reduced ability of monetary policy to stabilize output at negative inflation rates because of the difficulties of pushing nominal interest rates below zero.
But even while inflation in product markets (for example, CPI inflation) has been very subdued, asset
prices have continued to display considerable volatility, with a number of significant spikes since the mid1980s. This volatility in asset prices (especially stock
market and real estate prices) has contributed significantly to macroeconomic instability in several countries, raising anew questions about the weight monetary authorities should attach in their policy decisions
to asset market developments.
The second striking development of the 1990s is the
rapid international integration of financial markets that
has followed the general trend toward financial market
liberalization in the industrial countries in the 1970s and
1980s and the reduction in capital and exchange controls
in emerging market countries more recently. As a result,
the 1990s have witnessed private capital flows to emerging market countries unprecedented in scale (relative to
economic activity) at least since the first world war. The
secular rise in gross capital flows can be explained to a
large extent by market integration and the appetite of international investors for high yields and portfolio diversification. However, the large flows into emerging market countries during the buildup to the recent emerging
market crises, in gross and, more particularly, net terms,
also reflected, in part, unsustainable developments in the
recipient countries (including explicit and implicit exchange rate guarantees), together with a low demand for
capital in Japan and western Europe associated with the
weakness of activity in those economies in much of the
1990s. Following the Asian crisis, a growing share of
Japans and Europes saving surpluses has flowed into
the United States. This suggests, somewhat paradoxically, that strong cyclical recoveries in Europe, Japan,
and the Asian emerging market economies might make
it more difficult for the U.S. expansion to sustain its momentum.
Third, as illustrated by the last point, economic and
financial linkages and policy transmission mechanisms across countries have become more complex in
the 1990s, warranting a further reassessment of key relationships. Historically, the developing countries
economic cycle was mostly positively correlated with
that of the industrial countries due to the impulses
transmitted through trade and commodity prices. In
the early 1990s, however, when the industrial countries went through successive episodes of cyclical
weakness, growth actually accelerated in many emerg-
Figure 1.2. Financing Conditions

for Emerging Markets
Financing conditions for emerging markets have improved since the
Brazilian crisis, but they remain less favorable than prior to the
Russian crisis.
Bond Spread1
(percentage points)
Indonesia/IMF
agreement
Attack on
Revised
Mexican Hong Kong SAR
currency
program
Thai
agreement
with IMF
Mexico
devalues
Brazil
floats
currency
Revised
Brazil
program
Russia
devalues
24
20
16
12
Thailand
devalues
Announcement of IMF/U.S.
financial package for Mexico
1994
95
96
97
Korea/
IMF
agreement
98
Sep. 10,
99
400
Gross Private Financing 2

(billions of U.S. dollars)
Total issuance
300
200
Asia
100
Western Hemisphere
1994
95
96
97
98
Sep. 10,
99
Sources: Bloomberg Financial Markets, LP; and IMF staff estimates.

1J.P. Morgans Emerging Market Bond Index (EMBI) spread relative to the theoretical U.S. zero-coupon yield curve, and secondary
market yield spreads on U.S. dollar-denominated Eurobonds.
2Excludes interbank flows. Three-month moving averages; annualized.
Box 1.1. Australia and New Zealand: Divergences, Prospects, and Vulnerabilities
New Zealand, of almost 30 percent between 1993 and
mid-1997, which worsened net exports. Furthermore,
share prices in Australia largely maintained their earlier
gains during and after 1997, supporting private sector
confidence and demand, while in New Zealand, the stock
market fell sharply after mid-1997losing around onethird of its value in the following year before a more recent correction.
Looking ahead, output in Australia is projected to grow
by 4 percent in 1999 and 3 percent in 2000. The slowdown in 1999 is attributable mainly to weaker private investment, especially in the mining sector as a result of
low commodity prices, and also to a much-reduced contribution from stockbuilding (which provided 1.7 percentage points of growth in 1998). The further slowing in
2000 reflects a broader-based decrease in consumption
growth, partly offset by a pickup in exports (especially
tourism receipts, including for the 2000 Olympic Games).
An increase is expected in inflation in 2000 associated
with the introduction of a new value added-type goods
and services tax (GST), but inflation excluding the GST
effect is expected to be around the middle of the Reserve
Bank of Australias medium-term target of 23 percent.
In New Zealand, growth has resumed after the recession in the first half of 1998supported by a substantial
easing in monetary conditionsand is projected to reach
around 2!/2 percent in 1999 and 3!/4 percent in 2000.
Improvements in household and business confidence have
contributed to a pickup in consumption and investment,
while export growth has been underpinned by improvements in export markets and the 20 percent decline in the
real effective exchange rate since mid-1997. Inflation is
expected to remain below 2 percent.
The main area of vulnerability in both economies is in
their external imbalances. Current account deficits are
projected to increase to about 6 percent of GDP in
Australia in 1999, and closer to 7 percent in New
Zealand, before declining in 2000 (see figure). Persistent
deficits have generated a high level of net external liabilitiesamounting to around 60 percent of GDP in
Australia and nearly 100 percent of GDP in New Zealand.
Reflecting this, net investment income outflows have
been equivalent to around 34 percent of GDP in
Australia in recent years, and 78 percent of GDP in New
Economic performance differed sharply between

Australia and New Zealand in 1998, the former growing
at a strong 5 percent rate while the latter slipped briefly
into recession, with output falling by !/4 of 1 percent in the
year as a whole. This divergence may at first seem surprising, given the strong trade and financial links between
these countries and the fact that their economic fundamentals are similar in many respects: their common
strengths include low and declining levels of public debt,
low inflation, sound financial systems, and good records
of structural reforms; while on the negative side, both
countries have very low household saving rates, relatively
wide current account deficits, and substantial trade exposures to the crisis-affected economies of Asia.
The explanation for the divergence between the two
economies in 1998 lies partly in some notable differences
in economic performance in the lead-up to the Asian
crises. Exports grew much more strongly in Australia
than in New Zealand during 199597, by 9 percent a year
(in volume terms) in the former compared with 3!/2 percent in the latter. Australias relatively strong export
performance, combined with the renegotiation of export
contracts by some commodity suppliers at relatively favorable prices before the crisis broke, provided Australia
with a cushion against the subsequent slowdown in trade
that New Zealand lacked. Also contributing to the economic slowdown in New Zealand was a severe drought,
which led to a substantial fall in agricultural output in
1998. Another important factor was the conduct of monetary policy. Following an extended period of substantial
inflationary pressure stemming from strong output
growth, immigration inflows, and buoyant residential real
estate markets, the Reserve Bank of New Zealand eased
monetary conditions only gradually in 199697. In
Australia, by contrast, with asset prices rising at a more
moderate pace and inflation subdued, the central bank
eased monetary policy more substantially in 1996. Partly
reflecting these developments, private consumption and
investment picked up strongly in Australia after 1996, but
weakened in New Zealand. For example, residential construction in Australia increased in 1997 and 1998 after declining in the two previous years, whereas construction
declined sharply in New Zealand in 1998. Also notable is
the substantial appreciation in the real exchange rate in
ing market economies, fueled by the rapid growth of

trade among them (especially in Asia) as well as by
substantial capital inflows.
More recently, in the wake of the Asian crisis, all industrial countries with significant trade links with Asia
would have been expected to experience adverse effects on growth. In fact, however, while Japan and, to
a lesser extent, Europe were negatively affected, the
United States economic expansion appears to have
gained further momentum. A flight to dollar-denominated assets helped to sustain the U.S. expansion by
boosting domestic demand through lower interest rates
and the dampening effect on prices of an appreciating

dollar, notwithstanding the negative impact on U.S.
exports.
In both examples, the integration of financial markets appears to have contributed to a tendency for
global financial resources to move to whichever countries and regions are relatively dynamic at the time. In
principle, such reallocations of financial resources are
beneficial for the recipient countries and also for
global growth and efficiency. However, as experience
shows, large net capital flows into strongly expanding
economies may exacerbate risks of overheating and
ities in Australia and nearly 50 percent in New Zealand.

FDI is a relatively stable form of foreign financing (as
shown by recent experiences in emerging markets), and
also tends to produce a flow of reinvested earnings. There
are other important considerations: much of the debt
(around 40 percent in Australia and 50 percent in New
Zealand) is denominated in the local currency; and a
large share of short-term debt is owed by banks, which
have high credit ratings and, in the case of New Zealand,
significant foreign ownership. Both countries strong
records with macroeconomic and structural policies have
provided them with another important buffer against the
recent turmoil in international financial markets.
Reflecting this, market sentiment has remained favorable,
there has been a significant narrowing since the mid1990s in spreads on long-term bond yields over comparable U.S. yields, and Standard and Poors has recently
upgraded Australias credit rating to AA+ (the same as for
New Zealand).
Nevertheless, high and rising foreign indebtedness
significantly increases the exposure of Australia and
New Zealand to external shocks. While there appears to
be little risk at present of a significant downturn in investor sentiment, the possibility of future reversals
should not be entirely discounted. Were they to occur,
such reversals could well be sharp rather than smooth,
and cause substantial exchange rate depreciations. But
the structure of foreign liabilities in both countries
would probably make such an adjustment much less disruptive than that seen, for example, in some of the Asian
crisis nations. Current account deficits are projected to
decline in Australia and New Zealand over the medium
term, supported by recent depreciations in real effective
exchange rates, rising budget surpluses, and the expected
recovery in commodity prices and in trading partners imports. This adjustment may well take place over an extended time period, however. Hence, further efforts to increase national saving are needed over the medium term
in order to reduce risks of a change in market sentiment.
Reforms in the social welfare system (such as those currently underway in New Zealand) could help in this regard, as could changes in the tax system to raise the share
of indirect taxation (as in the recent tax package in
Australia).
Current Account Developments1

(Percent of GDP)
4
2
Australia
Goods and services
0
2
4
Net investment income
1990
92
94
Current account
96
98
2000
Goods and services
4
2
Current account
0
2
4
New Zealand
Net investment income

1990
1Shaded
92
94
6
8
10
96
98
2000
6
8
10
areas indicate IMF staff projections.
Zealand; in the latter case, these outflows have tended to

move procyclically, and account for much of the deficits
recent change.
Assessing the sustainability of these deficits is not
straightforward.1 For example, potential mitigating factors include the high level of foreign direct investment in
each countryamounting to 27 percent of foreign liabil-
1See, for example, the discussions of current account sustainability in the World Economic Outlook of May 1998 (Box 8, pp.
8687) and May 1999 (pp. 3844).
asset market bubbles, while rapid reversals of such

flows can severely strain weak financial systems and
lead to destabilizing currency movements.
And fourth, flexible exchange rates have become increasingly prevalent. During the 1990s, a number of
key emerging market currencies have been floated,
often to resolve crises associated in part with unsustainable exchange rate pegs. While the adoption of a
single currency in the euro area together with a handful
of quite successful currency board arrangements (those
in Argentina and Hong Kong SAR being the most
prominent) stand out as exceptions, the trend world-
wide since the breakdown of the Bretton Woods system

has been toward exchange rate flexibility. As a result,
exchange rates have been allowed to reflect more
clearly differences in policies and investment opportunities. In the 1990s, short-term exchange rate volatility
has remained high with no clear trend, which is somewhat surprising in view of the decline in worldwide inflation. But while the need for nominal exchange rate
fluctuations to compensate for international differences
in inflation has diminished as inflation rates have converged toward low levels, forces making for movements in real exchange ratessuch as cyclical diver-
gencesmay well have increased in many cases, as

suggested by the cyclical instability mentioned earlier,
the increased integration of financial markets, and the
greater prevalence of floating exchange rates.
A related development in the 1990s has been the increased understanding among policymakers and observers that cyclically driven movements in exchange
rates can be beneficial, by helping to damp economic
cycles, provided that the resulting deviations from
long-run fundamental equilibrium exchange rates
(FEERs) do not become lasting misalignments or exacerbate inflationary (or deflationary) pressures. This
more positive attitude toward exchange rate movements is observed mainly in larger countries, however;
the preferencemore prevalent, for various reasons,
in smaller economiesfor an exchange rate anchor
may in some cases lead to future reforms of regimes
that are now floating, such as the adoption of regional
currency unions (as in the euro area), currency boards,
or one of the major international currencies as the domestic currency (as with dollarization).
Is there any link between these developments and the
pervasive macroeconomic instability experienced in
the 1990s? It is clear that the achievement of broad
price stability in most of the world economy has not
been sufficient to eliminate macroeconomic instability.
But the factors that have contributed to continued instability are complex. Some observers have argued that
market forces (capitalism) are prone to generate excesses and instability. And others have suggested that
although low inflation may be necessary for maximum
sustainable growth, it may also provide fertile soil for
asset market instability since it may induce investors to
take excessive risks in their search for high yields:
Although further research into these issues is

needed, there does seem to be a basis for several hypotheses about the working of todays global economic and financial system and the likely implications
for economic policies:
(i) If indeed there are features of the global economy that help to dampen inflation in product
markets, there may be an increased need for
vigilance toward other evidence of macroeconomic imbalance and potential inflationary
pressureincluding in asset markets and sectoral financial balances. In particular, financial
(saving-investment) balances for the household sector, the financial sector, and the nonfinancial corporate sector, as well as the balance of payments, may display signs of strain
and vulnerability to shocks in the late stages of
an economic upswing even when inflation is
low. Such financial imbalances may be closely
related to runups in asset prices, which helps
to explain why asset price inflation followed
by asset price corrections can be particularly
destabilizing.
(ii) The international integration of financial markets carries significant implications for policy
spillovers. Cyclical slack and easy monetary
conditions tend to foster capital outflows toward economies with stronger growth performance and prospects. If these capital flows are
large relative to the size of the recipient
economies, they may well be destabilizing for
them, unless policies are appropriately adjusted
to take account of, and to some extent offset,
the extra stimulus being imported from the rest
of the world, and unless the domestic financial
system is sound.
(iii) Conversely, in countries with weak economic
growth and an absence of inflationary pressures
(or perhaps experiencing deflation), capital
market integration and the associated potential
for capital outflows make it even more important that an expansionary monetary stance be
accompanied by sufficient progress in tackling
structural obstacles to growth (such as labor
market rigidities and other structural deficiencies) for the expansionary policy to be effective
in boosting domestic demand and activity.
(iv) Overheating in asset markets may call for
monetary tightening, not only when it threatens an undesirable increase in product-price
inflation through its effects on aggregate demand, but also when there is strong evidence
that asset prices are rising to more and more
unsustainable levelsgenerating correspondingly higher risks of a correction that would be
significantly destabilizing for the economy and
the financial system. In the latter case, monetary authorities are confronted with one of
As recent experience attests, a prolonged period of price

stability does help to foster economic stability. But, as we
have also observed over several years, as have others in
times past, such a benign economic environment can induce investors to take on more risk and drive asset prices
to unsustainable levels. (Alan Greenspan, testimony before Joint Economic Committee of Congress, June 17,
1999).
This may help to explain the surge in capital flows

to emerging market countries that occurred when inflation was abating in the mature markets. Partly on
the basis of the conclusions of some contemporary
economists studying the events that preceded the interwar depression, it has also been suggested that efforts
by monetary authorities to keep inflation (moderately)
positive in the face of strong productivity gains that
otherwise would lead to price declines and increase
the purchasing power of nominal incomes may generate false profit signals, fuel asset price inflation, and
exacerbate risks of instability.2
2Beyond Price Stability: A Reconsideration of Monetary Policy
in a Period of Low Inflation, Federal Reserve Bank of Cleveland,
Annual Report, 1998.
The Inevitable U.S. Slowdown and Adjustment
their most difficult challenges: there is inevitably uncertainty about whether a rise in
asset prices is in fact sustainable, since it may
have arisen from a lasting change in wealthholders portfolio preferences or a lasting rise
in the rate of return on capital; and furthermore, the effect of monetary tightening on
asset prices is uncertain. Moreover, acting to
slow or arrest a run-up in asset prices that may
be generally popular is likely to be politically
difficult, particularly for central banks whose
independence is based on a mandate to control
CPI inflation. But such action may be necessary to minimize the risks of macroeconomic
and financial instability that may carry greater
costs. And it should be viewed as symmetrical
to the responsibility of monetary authorities to
provide liquidity and ease monetary conditions
in the face of sharp declines in asset prices that
threaten disruption of the financial and payment system. Fiscal policy may also have a
role, of course, when asset markets are overheating; and, especially when capital inflows
are already exerting upward pressure on the
exchange rate, it may be preferable to tighten
fiscal policy to dampen demand pressures.
Taken together, developments in the global economy
in the 1990s and the hypotheses to which they give rise
are not particularly reassuring. They point to a global
economic and financial system with great potential for
allocating resources more efficiently within and among
countries, but also with a potential for excesses to develop in asset markets and the private sector, and therefore for recurrent macroeconomic instability even
when macroeconomic policies are reasonably well disciplined, as in the 1990s. Despite the success in taming
inflation, and also the success of many countries in
putting their public finances on a sounder footing, the
task of macroeconomic stabilization has not gone away
and in some respects may even have become more demanding, as illustrated by the dilemmas and challenges
now facing policymakers around the globe.
of a cyclical expansion. This seems to be related partly

to the rapid expansion of fixed investment and the capital stock in recent years, and partly to faster technical
progress. The more rapid productivity growth and
more importantly a reappraisal of past data have led
IMF staff this year to revise upwards the assumed
growth rate for U.S. productive potential to about 2#/4
percent, from 2!/4 percent previously.
The expansion has been remarkable also for the behavior of inflation, which has shown no significant
sustained increase as resource utilization has risen in
the economy as a whole. During 1999, consumer price
inflation has risen somewhat from the rate of about 1!/2
percent experienced in 1998, mainly owing to increases in oil and other commodity prices. There is
still little evidence of any sustained rise in wage inflation even though unemployment has fallen to about
4!/4 percent, its lowest level in almost three decades.
The IMF staffs current estimate of the NAIRU (nonaccelerating-inflation rate of unemployment) is about
5 percent compared with nearly 6 percent at the beginning of the expansion.
The recent impressive performance of the U.S.
economy is, in large part, testimony to laudable policies. These include the turnaround in the fiscal balance
from deficit to surplus (a structural improvement
equivalent to roughly 3!/2 percent of GDP since 1993);
the agile management of monetary conditions by the
Federal Reserve in achieving and maintaining low inflation, in helping to maintain stable growth and also in
helping to calm global financial turbulence; and structural policies that have continued to foster the flexible
working of markets. But in spite of the economys evident strengths, there is no doubt that in the period
ahead a significant slowdown to sustainable levels will
be necessary. Only the timing is in question.
Estimates for the second quarter indicate that GDP
growth slowed to 1.8 percent at an annual rate, but
with domestic demand, especially by the private sector, still growing significantly faster than most estimates of potential. Declines in commodity prices and
the rise of the dollar have helped to maintain low inflation in recent years, with nominal wage increases
being restrained partly by the associated real wage
gains (see Chapter III). As these forces wane and go
into reverse, resource pressures are likely to reassert
themselves and cause inflation to rise unless slower
growth is maintained. And the slowdown will need to
help contain the external current account deficit,
which has recently risen above 3 percent of GDP and
is approaching the historic peaks of the mid-1980s.
Thus the growth of domestic demand will need to slow
more significantly, from its recent rate of about 5 percent (4 percent in the second quarter excluding inventory accumulation). This adjustment is assumed in the
projections to occur smoothly.
The main risks to the smooth slowdown or softlanding scenario represented in the baseline are four-
The Inevitable U.S. Slowdown

and Adjustment
The strength of demand and activity in the United
States continued to exceed expectations in the first half
of 1999, and it now seems likely that for the third successive year output growth in 1999 as a whole will be
almost 4 percent (Table 1.3). If, as projected, the expansion continues into 2000, it will next February become the longest since at least the middle of the 19th
century, when comparable data began. The expansion
is notable not only for its duration. There has also been
an increase in the growth of labor productivity in the
past two years, which is unusual for the mature phase
Table 1.3. Advanced Economies: Real GDP, Consumer Prices, and Unemployment
(Annual percent change and percent of labor force)
Real GDP
______________________________
Consumer Prices
_____________________________
Unemployment
______________________________
1997
1998
1999
2000
1997
1998
1999
2000
1997
1998
1999
2000
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom1
Canada
3.2
2.9
3.9
1.4
1.8
2.3
1.5
3.5
4.0
2.2
2.2
3.9
2.8
2.3
3.2
1.3
2.2
3.1
2.8
2.6
3.7
1.0
1.4
2.5
1.2
1.1
3.6
2.7
2.4
2.6
1.5
2.5
3.0
2.4
2.4
2.6
2.1
2.0
2.3
1.7
1.5
1.3
1.7
2.8
1.4
1.5
1.3
1.6
0.6
0.6
0.7
1.7
2.7
1.0
1.4
1.4
2.2
0.4
0.4
0.5
1.5
2.3
1.5
1.8
1.7
2.5
0.0
0.8
1.1
1.6
2.2
1.7
6.8
6.5
4.9
3.4
9.9
12.5
11.7
5.7
9.2
6.7
6.2
4.5
4.1
9.4
11.6
11.8
4.7
8.3
6.5
6.2
4.3
5.0
9.1
11.3
11.7
4.8
8.0
6.5
6.4
4.5
5.8
8.6
10.7
11.4
5.3
8.1

Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Luxembourg
4.2
3.7
3.6
3.0
1.8
2.5
3.1
5.6
3.2
3.8
10.7
4.8
2.1
4.0
3.8
2.9
2.6
3.3
2.9
5.6
3.7
3.9
8.9
5.7
3.5
3.4
2.6
1.4
3.2
2.0
1.3
3.6
3.3
3.0
7.5
3.5
3.6
3.5
2.5
2.5
3.0
2.5
1.5
3.8
3.6
3.2
7.0
4.4
2.4
1.9
2.2
1.5
0.5
1.2
2.2
1.2
5.4
2.2
1.5
1.4
2.5
1.8
2.0
0.9
0.1
0.8
1.7
1.3
4.5
2.8
2.4
1.0
1.4
2.1
2.3
1.1
0.2
0.7
2.5
1.3
2.3
2.3
2.0
0.7
2.1
2.1
2.1
1.2
1.0
0.9
2.5
2.3
2.2
2.2
2.0
1.4
7.8
20.8
5.5
9.4
8.0
4.4
7.7
12.6
10.3
6.7
9.8
3.4
8.1
18.8
4.1
9.5
6.5
4.7
6.3
11.4
10.1
5.0
7.7
3.1
7.5
15.7
3.6
9.2
5.4
4.3
6.0
10.3
10.3
4.6
6.5
2.9
6.9
14.0
3.7
9.2
5.1
4.2
6.2
9.2
10.2
4.6
6.2
2.8
Switzerland
Norway
Israel
Iceland
1.7
4.3
2.7
5.4
2.1
2.1
2.0
5.1
1.2
1.0
1.7
5.6
1.9
2.8
3.0
4.7
0.5
2.6
9.1
1.8
0.1
2.3
5.4
1.7
0.8
2.3
5.5
3.5
1.0
2.3
4.6
3.2
5.2
4.1
7.7
3.7
3.9
3.2
8.6
3.0
3.0
3.6
9.3
1.7
2.9
4.0
8.8
1.7
Korea
Australia2
Hong Kong SAR
Singapore
New Zealand2
5.0
3.9
6.8
5.3
9.0
2.1
5.8
5.1
4.9
5.1
0.3
0.3
6.5
4.0
5.0
1.2
4.5
2.6
5.5
3.0
5.1
3.6
5.0
3.3
4.4
1.7
0.9
5.7
2.0
1.7
7.5
1.6
1.7
2.6
0.3
1.5
0.7
1.8
1.0
3.1
0.2
1.3
2.8
3.8
1.2
1.0
0.6
1.9
2.6
8.5
2.7
2.2
1.8
6.6
6.8
8.0
2.8
4.7
3.2
7.5
7.0
7.2
3.0
6.1
4.3
7.2
6.0
7.0
2.7
5.4
4.2
7.0
2.6
2.4
2.7
2.8
2.0
2.1
2.7
2.8
1.8
1.6
1.4
1.2
1.3
1.0
1.5
1.3
10.4
11.7
9.6
10.9
9.1
10.3
8.8
9.7
Memorandum
European Union
Euro area
1Consumer
2Consumer
prices are based on the retail price index excluding mortgage interest.
prices excluding interest rate components; for Australia, also excluding other volatile items.
fold and interrelated. One is that significant inflationary pressures could emerge and prompt a substantial
monetary tightening. The second is that the dollar,
whose exchange value is well above the levels estimated to be consistent with medium-term fundamentals, could come under downward pressure, perhaps
because investors become more wary of the United
States increasing external debt or find more attractive
havens for their investments in other economies that
may be enjoying renewed growth. Marked depreciation of the dollar would increase price pressures, potentially leading again to a substantial rise in interest
rates. The third risk, of a significant decline in stock
market prices, could be associated with either of the
first two, or it could materialize independently as a result of a reassessment by investors of profit prospects
or equity valuations. As with the increases in interest
rates in the other risk scenarios, it would tend to lead
to a more abrupt slowdown of private spending and
growth than in the baseline projections, with an associated correction of the private sectors unprecedented
shortfall recently of saving relative to investment. The
fourth risk is that a large tax cut could further boost
private consumption, while crowding out private investment and net exports through higher interest rates
and a stronger dollar. While these developments
might add further momentum to the expansion in the
short run, they would exacerbate existing imbalances
and increase the risk of a harder landing later on.
How can policies help to minimize these risks? It is
mainly the task of monetary policy to prevent a rise in
inflation, through forward-looking policy actions. The
Federal Reserves actions to raise short-term interest
rates in June and August, which partly reversed the
cuts that played an important role in helping to stabilize international financial markets late last year, were
appropriate steps. Together with the increases in
longer-term interest rates in recent months, this will
10
help to slow the growth of domestic demand. But further steps may well be needed to prevent the emergence of inflationary pressures. It will therefore be important for the Federal Reserve to continue to be
forward-looking in its conduct of policy, to respond
again promptly if domestic demand growth fails to
abate or if prospective inflationary pressures persist, to
be particularly alert to repercussions in the economy
of the rise in the stock market as well as to any sign
that it is broadening to a wider range of asset prices,
and to provide consistent signals to financial markets
of its intention to rein in demand growth. It is through
such forward-looking actions that the risks of further
overheating and a hard landing are most likely to be
minimized.
Fiscal policy has also helped to restrain demand
growth in the current expansion, as can be inferred
from the budgets swing into surpluswhich is likely
to reach about 1!/2 percent of GDP in 1999 in terms of
the general government balance, compared with a
deficit of 3!/2 percent of GDP in 1993.3 Continuing
budget surpluses are projected on the basis of current
policies, and their realization will be important not
only to contribute to demand restraint given the economys cyclical position and the external deficit, but
also to prepare for the increase in unfunded liabilities
associated with population aging in the decades ahead
(Box 1.2). By contrast, eating into the surpluses
through tax cuts or spending increases would exacerbate the risk of overheating. The maintenance of surpluses would also provide more room for a moderate
easing of fiscal policy to help stabilize the economy in
the event of a sharp slowdown in domestic demand.
The strong U.S. expansion has contributed importantly to Canadas recent robust growth performance.
Growth in Canada has exceeded potential for most of
the period since mid-1996, and following the slowdown of late 1997 and early 1998 associated with the
Asian crisis and weakness of commodity prices, it has
strengthened again. Unemployment has recently fallen
to below 8 percent, its lowest level for a decade, while
core consumer price inflation has remained close to
the lower end of the 13 percent target range. There
has been further progress in reducing the public sector
debt burden, and the strengthening of the public finances will allow the automatic stabilizers to be used
in the event of a significant slowdown. Signs that the
economic expansion is gaining strength and that inflation has bottomed out may point to a need for a gradual move back to a somewhat less accommodative
monetary stance, though the anticipated slowdown in
U.S. growth would lessen potential inflation risks.

Real GDP in Japan surprisingly rose by an extraordinarily strong 2.0 percent in the first quarter of 1999,
after five consecutive quarters of decline, raising hopes
that the economy had finally emerged from recession.
One half of this GDP increase came from public investment, reflecting the fiscal stimulus packages put in
place in 1998, but more noteworthy was the growth in
private demand. Although growth subsequently moderated in the second quarter, in part because of a decline
in public investment, there are increasing signs indicating a turnaround. Moreover, concerns about deflation
and the health of the financial system appear to have
abated. At the same time, there are still many weaknesses and uncertainties in the current economic situation. Household confidence is still fragile in a context
of falling incomes and fears of job losses, and many
businesses, particularly those less exposed to international competition and pressures for restructuring, are
still suffering from large debt burdens and excess capacity built up during the asset price bubble of the late
1980s and early 1990s. There is also a danger that public investment will fall further in the second half of this
fiscal year as the effects of earlier stimulus packages
wear off. Net exports will benefit from the economic
recovery in the Asia region, but the strengthening of the
yen in late 1998 and so far in 1999 is likely to limit the
impetus to growth from the external sector.
Despite these concerns, growth projections have
been revised up significantly from those in the May
1999 World Economic Outlook. Positive growth of 1
percent is now projected for 1999, rising to 1!/2 percent
in 2000, and there is clearly the potential for a stronger
pickup next year if private sector confidence strengthens further. At the same time, there are continuing
downside risks, related in part to the needed restructuring of the corporate sector that is in progress.
Unemployment is projected to increase further in
2000, with inflation remaining close to zero.
Macroeconomic policies in Japan continue to face
formidable challenges. These involve not just questions about the degree and form of further support to
nurture the emerging recovery, but also the balance to
be struck between these short-term requirements and
longer-term policy objectives. These judgments are
particularly difficult in the case of fiscal policy. On
current policies the general government deficit (excluding social security) is projected to rise to almost
10 percent of GDP in 1999 (from 7.5 percent in 1998),
and to remain around this level in 2000. Given the
need to support domestic demand and economic adjustment, it is important to ensure that the level of
stimulus is maintained as long as the recovery in private demand has not firmly taken hold. But Japan also
faces a critical task of fiscal consolidation over the
medium term. Public debt has increased rapidly as a
result of the large deficits incurred during the current
3Of the 5.2 percentage points of GDP decline in the fiscal deficit
since 1993, approximately two-thirds is due to policy actions (Table
1.4).
11
Table 1.4. Major Industrial Countries: General Government Fiscal Balances and Debt1
(Percent of GDP)
198292
Actual balance
Output gap
Structural balance
United States
Actual balance
Output gap
Structural balance
Net debt
Gross debt
Japan
Actual balance
Output gap
Structural balance
Net debt
Gross debt
Memorandum
Actual balance excluding
social security
Structural balance excluding
social security
Germany2
Actual balance
Output gap
Structural balance
Net debt
Gross debt
France
Actual balance
Output gap
Structural balance
Net debt3
Gross debt
Italy
Actual balance
Output gap
Structural balance
Net debt
Gross debt
United Kingdom
Actual balance
Output gap
Structural balance
Net debt
Gross debt
Canada
Actual balance
Output gap
Structural balance
Net debt
Gross debt
1993
1994
1995
1996
1997
1998
1999
2000
2004
3.0
0.9
2.6
4.3
2.7
3.0
3.5
2.2
2.4
3.4
2.3
2.4
2.7
1.7
1.9
1.2
1.2
0.6
0.8
1.3
0.2
1.0
1.0
0.5
0.6
0.8
0.1
0.8
0.4
0.7
2.9
1.7
2.4
39.3
53.5
3.6
3.6
2.2
54.2
68.5
2.3
2.8
1.2
54.9
67.8
1.9
3.2
0.8
54.5
67.9
0.9
2.5
0.0
54.1
67.9
0.4
1.3
0.8
51.4
65.9
1.3
0.1
1.3
48.4
62.1
1.6
0.9
1.3
45.0
57.7
2.0
0.8
1.7
41.5
53.2
2.3
0.4
2.2
27.6
35.4
0.3
0.2
0.0
18.4
68.0
1.6
0.4
1.5
5.2
75.1
2.3
1.7
1.8
7.7
82.2
3.6
1.9
3.0
13.0
89.7
4.2
1.1
4.6
16.4
94.4
3.4
0.4
3.5
19.5
101.1
5.3
4.1
3.8
30.5
117.9
7.3
4.2
5.7
37.6
127.8
7.1
3.7
5.6
44.3
137.2
1.4
1.1
1.8
52.2
149.9
3.3
4.8
5.1
6.5
6.8
5.9
7.5
9.5
9.3
4.1
3.4
4.7
4.7
6.0
7.1
6.0
6.5
8.5
8.4
4.4
2.1
1.3
1.6
22.0
41.3
3.1
0.2
3.0
35.5
48.0
2.4
0.0
2.3
40.6
50.2
3.2
0.3
3.0
49.4
58.3
3.4
1.6
2.3
52.1
60.8
2.6
1.9
1.3
52.8
61.5
2.0
1.8
0.7
52.4
61.1
1.9
2.4
0.4
51.9
60.6
1.1
2.0
0.0
50.9
59.6
0.3
0.0
0.3
44.6
53.3
2.4
0.3
2.6
19.4
31.5
5.9
3.8
3.4
34.4
45.2
5.8
3.0
3.7
40.2
48.3
5.5
2.7
3.6
43.6
52.5
4.1
3.3
1.9
46.3
55.4
3.0
3.2
0.9
48.1
57.8
2.7
2.2
1.3
48.4
58.2
2.4
2.1
1.1
48.9
58.7
1.8
1.4
0.9
48.7
58.5
0.1
0.0
0.1
45.7
55.4
10.9
0.3
10.9
77.4
84.7
9.4
2.6
8.2
111.8
118.1
9.1
2.5
7.9
117.2
123.8
7.7
1.1
7.0
116.6
123.2
7.0
2.0
6.0
116.0
122.5
2.8
2.3
1.7
113.8
120.1
2.7
2.8
1.5
112.4
118.7
2.4
3.4
1.0
109.6
115.7
1.6
2.8
0.4
104.3
110.2
0.1
0.1
0.1
89.2
94.2
2.4
1.1
1.7
34.4
55.0
8.0
4.0
4.8
32.7
61.8
6.8
2.2
4.4
33.0
59.4
5.8
1.1
4.6
39.1
64.5
4.4
0.9
3.7
41.6
64.8
2.1
0.6
2.1
43.9
65.8
0.3
0.6
0.3
44.8
65.8
0.4
1.1
0.5
42.9
62.6
0.6
0.9
0.1
41.9
61.0
0.7
0.0
0.6
36.0
51.2
5.3
0.9
4.8
36.1
68.4
7.6
4.3
4.6
66.2
98.8
5.6
2.1
4.1
68.7
99.4
4.3
1.9
3.1
70.2
102.2
1.8
2.9
0.1
69.8
101.8
0.8
1.9
1.8
65.5
97.7
0.9
1.4
1.6
62.3
95.8
1.5
0.3
1.7
57.8
90.0
1.2
0.2
1.3
54.3
85.2
1.8
0.1
1.8
39.5
65.7
Note: The budget projections are based on information available through mid-September 1999. The specific assumptions for each country
are set out in Box 1.2.
1The output gap is actual less potential output, as a percent of potential output. Structural balances are expressed as a percent of potential output. The structural budget balance is the budgetary position that would be observed if the level of actual output coincided with potential output. Changes in the structural budget balance consequently include effects of temporary fiscal measures, the impact of fluctuations in interest
rates and debt-service costs, and other noncyclical fluctuations in the budget balance. The computations of structural budget balances are based
on IMF staff estimates of potential GDP and revenue and expenditure elasticities (see the October 1993 World Economic Outlook, Annex I).
Net debt is defined as gross debt less financial assets of the general government, which include assets held by the social security insurance system. Debt data refer to end of year; for the United Kingdom they refer to end of March. Estimates of the output gap and of the structural budget balance are subject to significant margins of uncertainty.
2Data before 1990 refer to west Germany. For net debt, the first column refers to 198692. Beginning in 1995, the debt and debt-service obligations of the Treuhandanstalt (and of various other agencies) were taken over by the general government. This debt is equivalent to 8 percent
of GDP, and the associated debt service to !/2 of 1 percent of GDP.
3Figure for 198292 is average of 198493.
12
Box 1.2. Policy Assumptions Underlying the Projections for Selected Advanced Economies
For 2000 and the medium term, the IMF staffs projections incorporate the effects of the income tax reform
package approved by Parliament in March 1999, and assume implementation of the governments fiscal consolidation and tax reform package announced in June 1999.
Fiscal policy assumptions for the short term are based on

official budgets adjusted for any deviations in outturns as
estimated by IMF staff and also for differences in economic assumptions between IMF staff and national authorities. The assumptions for the medium term take into
account future policy measures that are judged likely to
be implemented. Both projections and policy assumptions are generally based on information available
through September 1999. In cases where future budget
intentions have not been announced with sufficient specificity to permit a judgment about the feasibility of their
implementation, an unchanged structural primary balance
is assumed, unless otherwise indicated. For the larger advanced economies, the specific assumptions adopted are
as follows (see Tables 1416 in the Statistical Appendix
for the projected implications of these assumptions).
France. The projections are in line with announced

fiscal targets, adjusted for differences between the IMF
staffs macroeconomic assumptions and those of the
French administration. For 1999, the projection assumes
a revenue performance that still benefits from the robust
growth in 1998; for 2000 and beyond, the path of the public finances is broadly consistent with the government
Stability Program.
Italy. The fiscal projections are based on the authorities projections for 1999, adjusted for the most recent developments and interest rate forecasts; and on the
medium-term fiscal plan covering the period 200003,
adjusted for differences in macroeconomic assumptions.
For 200003, announced measures are assumed to be implemented fully and to have the impact as indicated in the
medium-term government plan. Details on the measures
for 2000 will be unveiled in the Budget Law to be submitted to parliament in September.
United States. The fiscal projections are based on the

Administrations June 1999 Mid-Session Review of the
FY 2000 Budget (including the Social Security reform
proposal). The projections are adjusted for differences between the IMF staffs and the Administrations macroeconomic assumptions. State and local government fiscal balances are assumed to remain constant as a percent of GDP.
Japan. The projections take account of the FY 1999 initial budget, and the 24 trillion stimulus package announced in November 1998. This November package is
assumed to raise public investment by 4 trillion through
1999, mostly in the first half of the year. Local governments are projected to largely offset their share in jointly
financed projects in the stimulus package with cuts in
own-account expenditures elsewhere. Of the 9.3 trillion
in tax cuts included in the November package, #/4 trillion
is assumed to have occurred in the first quarter of 1999,
with the bulk of the remainder taking place over the rest of
1999 and the first quarter of 2000. The projection also assumes a 520 billion supplementary budget for FY 1999.
United Kingdom. The budgeted revenue targets and

spending ceilings for FY 1999/00 (AprilMarch) are assumed to be observed. Thereafter, current expenditure is
assumed to grow in line with potential output, and capital expenditure in line with the new expenditure plans announced in the 1999/2000 Budget. For revenues, the projections assume an income elasticity of one over the
medium term, but also incorporate previous budgets tax
commitments that are expected to continue during the
projection period.
Canada. Federal government outlays for departmental
spending and business subsidies are assumed to conform
to the commitments announced in the February 1999
budget. Following a reduction of 15 cents in the employment insurance premium effective in January 1999,
Germany. For 1999, the IMF staff projection of the

general government deficit (1.9 percent of GDP) is based
on the Financial Planning Council projection of June
1999 adjusted for different macroeconomic assumptions.
(continued on next page)
downturn, and financial market concerns about the

sustainability of this trend have already been reflected
in upward pressure on long-term interest rates. By
most measures, Japans public debt is significantly
larger than in most other major industrial countries
(Box 1.3). With Japan facing age-related pressures
relatively early in the next century, fiscal reforms and
other measures to improve the viability of the public
pension system are all the more important. Legislation
to address this issue was submitted to the Diet in July.
Monetary policy is also very supportive, with
overnight interest rates effectively zero since March.
The Bank of Japans stated commitment to maintain
this policy until the threat of deflation disappears, com-
bined with the resumed purchase of long-term government bonds by the Trust Fund Bureau, have helped to
lower long-term interest rates since February, although
they have risen again since May as hopes of recovery
have encouraged expectations that monetary policy
will start to be tightened sooner than earlier thought.
The main monetary policy levers still available involve
liquidity injections to the banking system through, for
example, open-market operations, and exchange market intervention. The Bank of Japan has expanded the
range and maturities of assets it purchases to inject liquidity, and there is scope for further moves in this direction, provided that funds are supplied only to creditworthy entities and that they do not ease pressures for
13
Box 1.2 (concluded)

are not covered by the governments fiscal policy framework.
Spain. The projections for 1999 assume that the budget (including a reform of personal income taxes) is implemented as approved, allowing for differences in
macroeconomic assumptions. Projections for 2000 and
beyond are based on unchanged policies.
the staff assumes further gradual cuts in the rate from

2000 on, which would reduce it to $2.20 per $100 of taxable employee earnings by 2004. Other revenue and outlays are assumed to evolve in line with the IMFs staff
macroeconomic projections. After FY 1998/99, it is assumed that the federal government will be able to maintain budget surpluses which would reach 1 percent of
GDP. The consolidated fiscal position of the provinces is
assumed to be consistent with their stated medium-term
targets.
Australia. The fiscal outlook is based on the authorities May 1999 Budget projections of ratios of expenditure and revenue to GDP until FY 2002/03 (JulyJune),
with these ratios assumed to remain constant thereafter.
The budget projections reflect the impact of the tax reform package to be introduced in 2000.
Switzerland. The 1999 projections are based on the official budget, adjusted for slower growth and extraordinary expenditures. The projections for 200001 are in line
with present official estimates and incorporate announced
fiscal measures to balance the Confederations budget by
2001. Beyond 2001, the general governments structural
budget balance is assumed to remain unchanged.
Monetary policy assumptions are based on the established framework for monetary policy in each country. In
most cases this implies a nonaccommodative stance over
the business cycle, so that official interest rates will firm
when economic indicators suggest that inflation will rise
above its acceptable rate or range, and ease when indicators suggest that prospective inflation will not exceed the
acceptable rate or range, that prospective output growth is
below its potential rate, and that the margin of slack in the
economy is significant. On this basis, the London interbank offered rate (LIBOR) on six-month U.S. dollar deposits is assumed to average 5.4 percent in 1999 (20 basis
points more than projected in the May 1999 World
Economic Outlook) and 6.1 percent in 2000. The projected path for U.S. dollar short-term interest rates reflects the assumption that the Federal Reserve will raise
the target federal funds rate by in total 75 basis points before the end of the first quarter of 2000, which is consistent with market expectations in early August. The rate on
six-month Japanese yen deposits is assumed to average
0.2 percent in 1999 (the same as in the May 1999 World
Economic Outlook) and also in 2000. The rate on sixmonth euro deposits is assumed to average 3.0 percent in
1999 and 3.5 percent in 2000. Changes in interest rate assumptions compared with the May 1999 World Economic
Outlook are summarized in Table 1.1.
Belgium. For 1999, the fiscal deficit is based on the

budget, adjusted for the difference between the staffs
and the authorities growth projections. For the medium
term, fiscal projections incorporate a slight decline in the
structural primary balance, in line with the 19992002
Stability Program.
Korea. The projections for 1999 are based on the supplementary budget announced in June 1999. Tax revenues
are projected to grow 1 percent faster than nominal GDP,
while other revenues are projected to increase in line with
GDP. Noninterest current spending is assumed to rise by
5 percent in real terms. Capital spending as a ratio of
GDP is projected to be gradually reduced to 199697 levels by 2002.
Netherlands. The projections for 1999 are based on
the budget and the supplementary budget, adjusted for
the staffs macroeconomic projections. Projections for
20002004 primarily reflect the governments rulesbased approach to fiscal policy, by taking into account
the authorities expenditure norms and baseline path for
revenue (which incorporates planned tax reform in
2001). The governments projections have been adjusted
to reflect the slightly higher growth projected by IMF
staff and to include revenue and expenditure items that
bank and enterprise restructuring. Since early July, the

yen has appreciated significantly, notwithstanding reported intervention in the foreign exchange market to
limit an overly rapid appreciation.
While macroeconomic policies can provide important short-term support to the economy, structural reforms will determine how durable and resilient the recovery will be. The framework for dealing with the
banking sectors problems is largely in place, and the
emphasis now must be on implementation. The need
for rapid restructuring and the rebuilding of confidence is made all the more urgent by the prospective
replacement in March 2001 of blanket deposit insurance with limited coverage. Preconditions for restruc-
turing are certainly evident: recapitalization of viable

institutions and nationalization of failed banks are proceeding; prudential supervision and bank accounting
standards appear to have improved, driven in part by
the new Financial Supervisory Agency; and new tax
incentives and the establishment of the Resolution and
Collection Corporation should help with the disposal
of bad loans. Nevertheless, several concerns and potential weaknesses remain. The full extent of banks
balance sheet problems may still not have been recognized, including additional bad loans incurred during
the recent recession. The banking sector is still large
relative to the size of the economy, and there is a risk
that the recapitalization program may be reducing
14
pressures for restructuring. In this regard, the authorities need to use the leverage provided by public capital participation in banks to promote consolidation, ensure a focus on core profitability, and push through
changes in ownership and management when needed.
Progress also has to be made in reprivatizing nationalized banks, or at least their marketable assets.
Other reforms in the financial services sector are generally well-advanced, although direct public sector involvement in the provision of financial services (for example through the post office savings system) needs to
be reduced, and tighter supervision along with pressures for reform need to be applied to the troubled life
insurance industry. Corporate sector restructuring
should be helped by measures introduced in June 1999
to provide greater scope for debt-equity swaps by banks
and ease the way for large-scale mergers. Improvements in the bankruptcy code will be considered by the
Diet later in 1999, and further reforms are also being
considered for the legal framework and tax system to
encourage firms to implement restructuring measures,
and to facilitate ownership changes. Progress in other
areas has been uneven. Firms in manufacturing appear
to be generally well-advanced in improving their balance sheets, whereas among firms oriented to the domestic market the lack of competition is slowing restructuring and discouraging business start-ups. Thus,
only limited progress has been made with deregulation
and liberalization in the transportation, telecommunications, retail, and agriculture sectors, which continue to
be largely shielded from foreign competition.
Figure 1.3. Selected European Countries, Japan,

and the United States: Indicators of Consumer
and Business Confidence1
Business confidence has recently picked up in several major industrial
countries. Consumer confidence generally remains strong, although it
has weakened somewhat in Germany and France.
140
130
120
110
20
15
Consumer Confidence
10
United States
(left scale)
United Kingdom
(right scale) 2
100
90
5
10
Germany
(right scale) 2
80
70
15
20
60
50
France
(right scale) 2
40
30
Securing a Lasting Revival of Growth

in Europe
60
1990
91
92
93
94
Business Confidence
96
97
98
United Kingdom
(right scale) 2
Germany
(right scale) 2
40
35
30
France
(right scale) 2
Japan
(right scale)
25
20
1990
91
92
93
35
Aug.
99
60
50
40
50
45
30
United States
(left scale)
55
Following the marked slowing of growth in much of

western Europe in the latter part of 1998, there have
been indications in recent months that expansions have
begun to pick up again. As in the May 1999 World
Economic Outlook, growth is projected to recover to
above-potential rates in the second half of 1999, and in
2000 as a whole should average 2#/4 percent in the euro
area after this years slowdown to 2 percent.4 But since
the earlier assessment, downside risks have been reduced by the improvements in the external economic
environment; the easing of the European Central
Banks official interest rates by 50 basis points in
April; reductions in official interest rates in several
European countries outside the euro area; a modest upturn in business sentiment; and signs that the pickup is
broadening. Consumer confidence has remained at
high levels, partly reflecting further, albeit modest, declines in unemployment (Figure 1.3).
95
25
94
95
96
97
98
30
20
10
0
10
20
30
40
50
60
Aug.
99
Sources: Consumer confidencefor the United States, the Conference Board; for European countries, the European Commission.
Business confidencefor the United States, the U.S. Department of
Commerce, Purchasing Managers Composite Diffusion Index; for
European countries, the European Commission; for Japan, Bank of
Japan.
1Indicators are not comparable across countries.
2Percent of respondents expecting an improvement in their situation
minus percent expecting a deterioration.
4During the phased transition to the new European System of

Accounts (ESA 95) beginning in 1999, more than the usual degree of
uncertainty surrounds the interpretation of national accounts data.
15
Box 1.3. Comparing G-7 Fiscal PositionsWho Has a Debt Problem?

countries, with gross debt of 119 percent and 118
percent of GDP respectively at the end of 1998.
Net debt including social security assets subtracts
all government financial assets from gross debt, including assets of the social security system, often in
the form of government debt. Japan is the only G-7
country where the latter is sizable. When social security assets are included in government debt, Japan,
with net debt of about 30 percent of GDP in 1998, is
found to be the least indebted G-7 country. The corresponding figure for Italy is about 112 percent of
GDP, which is again the highest; it is only slightly
less than the gross debt because the social security
system holds no assets. However, including the social security assets in net debt without also taking
into account the future claims of the social security
system against government assets may be considered
also to give a misleading measure of the governments true financial situation.
Net debt excluding social security partly addresses
the social security issue by assuming that the social
security system is independent, so that the government debt that it holds should not be treated as a government asset. According to this indicator, Japans
net debt in 1998 was 79 percent of GDP, making it,
The fiscal policy advice that the IMF gives member countries depends on both longer-term debt sustainability considerations and short-term aggregate demand conditions.
In many cases, there is no ambiguity about the appropriate advice, at least in qualitative terms. There are instances, however, where longer-term and short-term considerations point to conflicting advice. Japan has recently
been a case in point, with the IMF recommending significant short-term fiscal stimulus to counter weakness in
aggregate demand, even though Japan is among the most
indebted of the major industrial countries. A high level of
gross debt and a rapidly aging population suggest that
long-term sustainability is a key issue in Japan, and that
there is a need to return to fiscal consolidation as soon as
conditions permit. However, other debt indicators, and in
particular net debt rather than gross debt, point to Japans
debt position being less worrisome. This box discusses
the debt indicators that are used to assess debt sustainability in formulating fiscal policy advice. Estimates for
1998 are reported in the table for the G-7 countries.
Gross debt refers to the governments stock of outstanding financial liabilities. According to this indicator, Italy and Japan are the most indebted G-7
General Government Fiscal Indicators, 19981

(In percent of GDP)
Gross debt
Net debt including social security assets
Net debt excluding social security assets2
Overall balance including social security
Overall balance excluding social security
Structural balance including social security
Canada
France
Germany
Italy
Japan
United
Kingdom
United
States
95.8
62.3
62.3
58.2
48.4
48.4
61.1
52.4
52.4
118.7
112.4
112.4
117.9
30.5
79.1
62.2
42.4
42.4
62.1
48.4
56.1
0.9
2.9
1.6
2.7
2.6
1.3
2.0
2.3
0.7
2.7
1.3
1.5
5.3
7.5
3.8
0.3
...
0.3
1.3
1.7
1.3
1All
data are from the World Economic Outlook database unless it is indicated otherwise.
security assets are assumed to be zero in countries with pay-as-you-go social security systems. For Japan and the United States,
data on social security assets are taken from official sources.
2Social
The depreciation of the euro since its introduction at

the beginning of the yearby 10 percent in terms of
the dollar and 6 percent in nominal effective terms,
after taking into account some recovery in late July
has added significantly to the support for demand and
activity in the euro area. In the context of the areas recent cyclical weakness, the depreciation has been
helpful, and it has not threatened the objective of keeping inflation below 2 percent: inflation in the area has
recently been running at about 1 percent and is still
projected to remain within the ECBs definition of
price stability in 19992000. However, the euros decline has taken it to values significantly below those
estimated to be consistent with medium-term fundamentalsalthough probably not inconsistent with current cyclical conditionsand the euro may be expected to strengthen further in the period ahead as
growth in the area picks up and the U.S. economy
slows. This prospective appreciation is reflected in interest differentials favoring assets denominated in
most non-euro currencies except the yen and the Swiss
franc.
Monetary conditions in the euro area are clearly
supportive of recovery at present. Moreover, given the
still significant margin of slack in the area as a whole
and its dampening effect on inflation, official interest
16
on this measure, the second most indebted G-7 country behind Italy (where net debt was 112 percent of
GDP both including and excluding social security).
For other G-7 countries, this debt indicator is in the
range of 4065 percent of GDP.
An alternative approach would be to add net future
public pension liabilitiesequal to the present value
of future pension liabilities less the assets of the public pension systemto net debt excluding social security to produce a comprehensive measure of net
debt including future public pension liabilities.
The most up-to-date, comparable estimates of future
public pension liabilities for G-7 countries are those
of Chand and Jaeger (1996).1 However, these refer to
the period 19952020, and therefore do not reflect
significant public pension reforms undertaken since
1995 or the impact of different demographic developments across G-7 countries after 2020. For these
reasons, it would be inappropriate to report a comprehensive measure of net debt based on these estimates. But broadly speaking, future public pension
liabilities are at present significantly higher in
France, Germany, and Japan than in other G-7 countries, in each case exceeding 100 percent of GDP according to Chand and Jaeger. Italy and Japan would
remain the most indebted G-7 countries using the
comprehensive measure of net debt, although it is
unclear which of these countries would have the
larger debt.
Gross and Net Debt

(Percent of GDP)
1998
2004
180
Gross Debt
120
60
Canada
France Germany
Italy
Japan
United United
Kingdom States
0
180
Net Debt Including Social Security Assets
120
60
Canada
France Germany
Italy
Japan
United United
Kingdom States
0
180
Net Debt Excluding Social Security Assets
120
60
Canada
A significant shortcoming of all the debt indicators discussed above is that they ignore the implications of the
projected profile of fiscal deficits for future levels of debt.
As the table also indicates, the G-7 countries start with
very different fiscal balances and cyclical positions and,
according to WEO projections, these will not evolve in
the same way across countries. The figure shows how
gross debt, net debt including social security, and net debt
France Germany
Italy
Japan
United United
Kingdom States
excluding social security in 2004 compare with 1998. In

each case, the debt increases significantly in Japan, despite the projection that the large structural deficit in 1998
will narrow significantly. Gross debt reaches more than
150 percent of GDP, making Japan by a considerable
margin the most indebted G-7 country in 2004. Net debt
also increases, and net debt excluding social security in
Japan is the highest by 2004. For other G-7 countries,
each debt indicator declines between 1998 and 2004.
1See Sheetal K. Chand and Albert Jaeger, Aging Populations

and Public Pension Schemes, IMF Occasional Paper No. 146
(December 1996).
rates can probably be maintained at present levels at

least through the remainder of this year. Of course, the
appropriate stance of monetary policy may need to be
adjusted during the course of next year depending on
the strength of economic growth, conditions in labor
markets, developments in foreign exchange markets,
and other factors likely to have bearing on inflation
and the sustainability of the expansion.
With the ECBs monetary policy being determined
by developments in the euro area as a whole, cyclical
divergences in growth performance and inflationary
pressures within the areanotable among which are
the relatively strong growth and overheating risks evi-
dent in Ireland, the Netherlands, Portugal, and Spain,

the relatively solid expansion under way in France,
and the contrasting recent sluggishness of activity in
Germany and Italyhave to be dealt with by national
fiscal and structural policies. But here there is also an
unfinished agenda of longstanding problems to be
tackled.
In most of the euro area, there has been little further
progress with fiscal consolidation since the Maastricht
treaty test year of 1997, and tax burdens are at or close
to historic peaks. To put government finances on a
sound footing and to improve prospects for a lasting
revival of growth, most countries need progressively to
17
eliminate their structural deficits, and some countries

with particularly heavy debt burdens or particularly
adverse demographic prospects need to aim for structural surpluses. In relation to these needs, several
countries medium-term fiscal programs, which envisage deficits remaining through 2002, are insufficiently
ambitious. Assuming that a sustainable recovery materializes, all countries in the area should ensure that
their programs are strong enough to produce fiscal positions close to balance or in surplus by 2002, and also
strong enough to create room for reducing Europes
debilitating tax rates. In this regard, the recent German
consolidation package is particularly welcome: it includes appropriately targeted expenditure restraint and
income tax reforms that together are expected to
achieve both a broadly balanced medium-term fiscal
position and a lower tax burden. The additional measures needed to achieve medium-term fiscal balance in
Austria, France, Italy, and Portugal amount to 11!/2
percent of GDP. Elsewhere the adjustment needed is
smaller, but in Ireland, the Netherlands, and Spain additional fiscal consolidation would have the benefit of
helping to moderate inflationary pressures and reduce
the risks of a subsequent hard landingconsiderations
that also add force to the argument for budgetary tightening in Portugal. In the countries experiencing relatively weak growth, there is room to allow the automatic stabilizers to operate as long as the 3 percent
deficit limit of the Stability and Growth Pact is not put
at risk.
The further reduction of structural budget deficits,
together with the reduction of tax burdens needed to
improve incentives for employment and job creation,
will require wide-ranging reforms to contain the
growth of expenditures, especially spending on subsidies, pensions, and welfare payments. But structural
fiscal imbalances are also related to the problem of
structural unemployment. The labor market reforms
needed to achieve a substantial reduction of unemployment in Europe were discussed in the May 1999
World Economic Outlook. They include reforms of unemployment benefit and labor taxation systems, the
liberalization of job protection legislation, and reform
of the wage determination process. In addition, questionable policies such as statutory reductions in working time need to be implemented flexibly if they cannot be avoided. The employment pact agreed at the
Cologne European Council in early June 1999, which
added a dialogue on macroeconomic developments
(involving governments, the ECB, trade unions, the
Commission, and employers organizations) to existing processes focusing on national reform programs,
seems unlikely to add sufficiently to pressures for
meaningful and long overdue reforms.
Outside the euro area also, there have been increasing indications in some cases that growth has begun to
strengthen in recent months. In the United Kingdom,
growth slowed virtually to a halt in late 1998 and early
1999 largely owing to a marked decline in net exports,

which reflected the strength of sterling as well as the
weakening of external demand. More recent dataincluding a moderate pickup in growth in the second
quartersuggest that the economy has bottomed out
without a recession, and the projections show growth
picking up through 1999 and reaching its potential rate
early next year. This apparent soft landing has been
made possible partly by subdued inflation at the peak
of the cyclesince April it has been below its 2!/2 percent target ratewhich has in turn partly reflected
markedly improved labor market performance as well
as skillful management of monetary policy. The
growth of labor earnings moderated further during the
recent slowdown of growth, facilitating further declines in unemployment to 19-year lows. The Bank of
England lowered official interest rates in two steps in
April and June to 5 percent and, then, in view of
strengthening consumer demand, raised rates by !/4 of
1 percent in September. Looking ahead, the appropriate direction and timing of subsequent changes will
depend on the strength of the recovery, movements in
sterling, and other influences on prospective inflation.
In Sweden, the benefits of macroeconomic and
structural reforms introduced in response to the severe
economic difficulties of the early 1990s have been apparent in the form of robust growth, projected to remain around 3 percent in 1999 and 2000, combined not
only with declining unemployment, but also fiscal surpluses and negligible inflation. Fiscal policy needs to
remain firm to consolidate these gains, achieve further
reductions in public debt, still high at around 70 percent of GDP, and further reduce the size of the public
sector.5 Additional labor market reforms are also
needed to improve growth in private sector employment. In both Denmark and Norway, by contrast,
growth is projected to slow to less than 1!/2 percent in
1999 before picking up again in 2000. The slowdowns
this year are partly the result of firmer macroeconomic
policies introduced to stem signs of overheating that
emerged in 1998, although in Norway the main factor
has been a large contraction in investment following
many years of rapid growth. Continued fiscal restraint
would be appropriate in Norway to take pressure off
interest rates, which have been relatively high by
European standards. Growth in Switzerland, which had
picked up in 199798 after several years of stagnation,
slowed again late last year as exports weakened. With
the Swiss franc broadly stable against the euro since
the beginning of the year, monetary conditions are now
supporting a strengthening of growth, but structural reforms, especially in product markets, are needed to improve medium-term growth prospects.
5The share of general government expenditure in GDP has fallen

from 70 percent in 1993 to a projected 59 percent in 1999, still the
highest among the industrial countries.
18
Emerging Market Economies in Asia and Latin America: Ensuring Sustainable Recoveries
workout procedure for the other large and midsize

chaebol are critical.
In Malaysia, a strong economic recovery is also
now underway in response to fiscal and monetary
stimulus and the pegging of the exchange rate at a
competitive level. Output growth for the year, currently projected at about 2!/2 percent, may well need to
be revised upward. Continuing excess capacity in the
economy has been reflected in declining inflation as
well as a large trade surplus. Capital controls, introduced in September 1998, remain in effect, but have
been modified. Financial and corporate sector restructuring is continuing; with bank recapitalization and
purchases of nonperforming loans (NPLs) essentially
completed, the current focus is on disposal of NPLs
and consolidation of the banking system. As the recovery progresses, the authorities will need to review
the exchange rate peg and remaining capital controls.
In Thailand also the recovery has strengthened. A
range of indicators point to an increase in consumer
spending, and net exports have also picked up; but
with capacity utilization still low, investment has remained weak. Fiscal and monetary policies continue
to support the recovery. The overall public sector
deficit, including the costs of financial sector restructuring, is projected to exceed 7 percent of GDP in the
1998/99 fiscal year before declining steadily with the
recovery in economic activity. Overnight interest rates
have recently been as low as 1 percent, compared with
over 10 percent in the run-up to the crisis. Financial
sector restructuring is broadly on track, with banks
now focused on raising additional capital to meet
higher prudential standards, and the bank privatization
program is moving ahead after some initial delays.
The framework for corporate restructuring is largely in
place, strengthened by recent passage of bankruptcy
and foreclosure laws; this framework now needs to be
implemented.
The hardest-hit crisis economy in Asia, Indonesia,
now also seems to have turned around, and although
real GDP is still projected to decline a little further in
1999 as a whole, positive growth resumed in the first
half. Inflation is expected to reach single digits on a
12-month basis by the end of the year. However, the
scandal surrounding Bank Bali and the crisis in East
Timor risk setting back prospects of an early return to
financial stability and sustained growth. While the recovery so far has been driven by improvements in agricultural output and exports, Indonesia still faces deepseated structural problems that must be addressed for
a robust recovery to take hold. High levels of nonperforming loans (which amounted to around 55 percent
of total loans at end-April, but declined to 40 percent
after some were transferred to the bank restructuring
agency) have increased the extent of bank insolvency
and the costs of rehabilitation. While a coherent recovery strategy is in place, it has yet to be firmly implemented. To contain bank restructuring costs, in-
Emerging Market Economies in Asia

and Latin America: Ensuring
Sustainable Recoveries
The macroeconomic performance of the crisis-hit
economies in Asia has continued to improve in recent
months. Positive GDP growth is expected in almost
all countries in the region in 1999 as a whole, with
projections in some cases revised up substantially
(Table 1.5). Exports have generally increased, supported by competitive exchange rates and improved
growth in regional trading partners. The bottoming
out of some commodity prices and an upturn in the
electronics industry have also helped to underpin the
recovery. The partial recovery of capital inflows has
eased financing constraints in most cases, and the rise
in confidence, along with declining inflation, has permitted further monetary easing. Fiscal policy also
continues to play an important supportive role. A resumption of inventory accumulation is being felt as
well, while weather-related turnarounds in agriculture
are also contributing to growth in Indonesia and the
Philippinesan influence also apparent in India.
Stronger growth is projected for 2000 in most countries as the recent improvements in economic confidence and activity are followed by a broader-based
pickup in domestic demand. For the recovery to be
sustainable, however, there is an agenda of structural
reforms still to be completed. Plans for financial sector restructuring are generally well advanced, with
more stringent prudential standards in place, bank recapitalization proceeding, and plans adopted for the
privatization of state-owned institutions. But reforms
in the corporate sector are lagging behind in all the
crisis countries, and past experience from many other
countries points to the risk that losses in this sector,
rather than being borne by corporate shareholders,
may be largely shifted to the financial system and ultimately to taxpayers through repeated recapitalizations of banks.
Korea has been recovering at a surprisingly fast
pace from the sharp contraction of 1998, backed by
supportive macroeconomic policiesincluding interest rates below precrisis levels and an expansionary
fiscal stance; low inflation; and a competitive exchange rate. The large current account surplus and
strong capital inflows have led to some strengthening
of the won, although the Bank of Korea has intervened
to slow the pace of appreciation and to rebuild reserves. The sustainability of Koreas growth, however,
depends on decisive and comprehensive actions to
tackle the unfinished agenda of reforms in the financial and corporate sectors. In the financial sector, the
focus of attention needs to turn from the banking sectorwhere restructuring is well advancedto nonbank financial intermediaries. In the corporate sector,
rapid and equitable resolution of the Daewoo situation
and, more generally, strengthening the corporate
19
Table 1.5. Selected Developing Countries: Real GDP and Consumer Prices
(Annual percent change)
Real GDP
_______________________________
Consumer Prices1
_______________________________
1997
1998
1999
2000
1997
1998
1999
2000
5.8
3.2
3.5
4.8
9.2
10.3
6.7
5.8
4.1
3.5
3.7
4.4
6.2
5.3
4.3
4.0
3.1
1.1
5.1
6.0
4.2
2.1
2.0
3.1
2.5
6.7
3.5
5.4
5.2
3.4
4.7
5.0
5.4
4.6
1.5
6.3
1.9
0.5
5.0
3.3
5.1
5.5
3.1
4.6
4.4
5.5
5.5
2.1
0.6
0.5
0.7
5.5
3.9
5.5
7.0
5.0
5.4
4.8
5.8
6.0
3.5
5.1
3.3
3.5
5.2
5.1
6.5
7.0
11.1
6.8
5.2
5.6
28.8
11.2
1.0
8.5
8.6
46.7
16.1
3.7
7.8
8.7
6.2
2.8
4.5
19.3
6.6
2.7
10.0
6.9
17.0
12.6
3.6
5.8
9.0
5.3
2.0
2.5
10.0
5.0
2.0
12.5
6.5
16.9
7.8
3.6
5.0
6.9
5.0
2.0
2.5
6.4
5.0
2.5
12.5
5.5
9.0
5.1
3.5
5.0
5.2
5.1
4.6
4.9
5.6
4.5
5.8
5.3
8.0
4.4
7.7
3.6
5.9
2.7
4.3
2.5
6.6
5.2
8.8
5.5
4.7
7.7
1.2
5.2
1.3
8.2
3.7
4.8
7.8
5.8
13.7
6.7
3.3
0.5
9.4
3.5
5.3
4.5
6.6
5.7
0.8
2.4
3.1
2.2
4.0
3.5
5.4
4.5
6.0
5.5
2.6
6.5
4.0
3.5
4.0
4.5
4.8
4.8
2.8
7.2
6.6
2.7
12.5
6.0
5.6
3.2
8.0
7.9
0.8
13.0
59.6
5.3
7.8
9.7
8.1
7.7
3.1
7.9
1.5
6.5
22.7
3.0
6.1
8.5
0.5
7.6
3.5
7.0
1.5
7.2
5.7
2.4
6.5
6.0
2.0
6.0

Egypt
Iran, Islamic Republic of
Jordan
Kuwait
Saudi Arabia
Turkey
4.5
5.0
3.0
1.3
2.5
2.7
7.6
3.2
5.4
1.7
2.2
2.2
1.6
2.8
1.8
6.0
1.0
2.0
1.1
2.0
1.2
3.1
5.4
2.5
2.5
0.7
1.1
2.6
23.1
6.2
17.3
3.0
0.7
0.4
85.7
23.6
3.8
22.0
4.5
0.5
0.2
84.6
18.3
3.7
15.0
1.9
0.9
1.5
60.4
13.1
4.0
10.0
2.8
1.7
1.1
38.2
Western Hemisphere
Argentina
Brazil
Chile
Colombia
Dominican Republic
Ecuador
Guatemala
Mexico
Peru
Uruguay
Venezuela
5.3
8.1
3.7
7.6
2.8
8.2
3.5
4.1
7.0
7.2
5.1
5.9
2.2
3.9
0.1
3.4
0.6
7.3
0.4
4.9
4.6
0.7
4.5
0.7
0.1
3.0
1.0
0.4
0.0
7.0
7.0
3.9
3.0
3.0
2.0
7.6
3.9
1.5
4.0
5.5
2.6
7.0
1.5
4.5
5.0
5.5
2.5
1.6
13.2
0.8
6.0
6.1
18.5
8.3
30.6
7.1
20.6
8.5
19.8
50.0
10.6
0.9
3.8
5.1
18.7
4.8
36.1
7.5
16.7
7.3
10.8
35.8
9.8
0.8
4.6
4.0
11.7
7.8
55.1
6.5
17.1
4.4
6.0
24.4
7.6
0.6
4.8
3.3
10.8
4.2
36.2
6.0
11.2
5.3
3.0
17.3
Median
Africa
Algeria
Cameroon
Cte dIvoire
Ghana
Kenya
Morocco
Nigeria
South Africa
Sudan
Tanzania
Tunisia
Uganda
SAF/ESAF countries2
CFA countries
Asia
Bangladesh
China
India
Indonesia
Malaysia
Pakistan
Philippines
Thailand
Vietnam
1In accordance with standard practice in the World Economic Outlook, movements in consumer prices are
indicated as annual averages, rather than as December/December changes during the year as is the practice
in some countries.
2African countries that had arrangements, as of the end of 1997, under the IMFs Structural Adjustment
Facility (SAF) or Enhanced Structural Adjustment Facility (ESAF).
creased loan recovery from major corporate debtors is

essential. There is also a need for improved implementation of the newly amended bankruptcy law, the
fully effective introduction of anticorruption legislation, and a wide range of reforms to strengthen corporate governance.
In the Philippines, a turnaround in agriculture and

rising exports are supporting a broader pickup in domestic output and spending. Improvements in confidence, together with declines in inflation, have helped
interest rates to fall below precrisis levels. Financial
sector reforms are generally on track; however, more
20
Emerging Market Economies in Asia and Latin America: Ensuring Sustainable Recoveries
rapid progress is needed in several areas of public sector reform.

Following the weakening of activity in 1998, a
strong economic recovery is under way in Singapore,
with growth of 45 percent expected in 19992000.
Helping to support activity has been a substantial easing of fiscal policyan appropriate response given the
countrys particularly strong record of fiscal discipline
and its large external assetsand a recovery of exports
of electronic products. Notwithstanding the easing of
monetary policy following the outbreak of the regional
economic crisis, inflation has remained near zero.
There are also recent signs of an economic turnaround in Hong Kong SAR. Led by a rebound in private consumption, output rose sharply in the second
quarter this year after five consecutive quarters of decline. While the decline in exports appears to have bottomed out, private investment remains sluggish.
Financial market developments have been encouraging, with stock market and real estate prices recovering, downward pressures on the currency receding,
and interest rates declining close to rates on U.S. dollar-denominated assets. However, with the price level
continuing to decline, real interest rates are still relatively high. The banking sector remains strong,
notwithstanding recent increases in nonperforming
loans and exposures of some banks (and their clients)
to potential difficulties in China.
China has weathered the effects of the Asian crisis
relatively well, aided by fiscal stimulus in mid-1998,
and also by its relatively strong external position. GDP
growth, while slowing, has remained rapid by most
standards. The appreciation of regional currencies and
deflation in China have also reversed the real effective
appreciation of the renminbi in the initial stage of the
crisis. Nevertheless, strains on the economy are showing, reflected in weak private demand, deflationary
pressures, capital outflows, and higher unemployment.
Against this background, the authorities intention to
ease fiscal policies further in 1999 is appropriate especially to the extent that this can be used to strengthen
social safety nets and foster restructuring. Following
recent reductions in interest rates, however, the scope
for further monetary easing may be constrained given
the emergence of significant differentials in favor of
foreign rates. On the structural side, the key challenge
remains to accelerate reforms in the state enterprise
and financial sectors and to strengthen the revenue effort over the medium term. The welcome establishment of Asset Management Companies will need to be
accompanied by the development of a strong credit
culture and further enterprise restructuring to prevent
new losses in the future. Given the likely costs of bank
and enterprise restructuring, it will also be important
to strengthen the fiscal position over the medium term,
including through further revenue mobilization.
Economic activity in India held up relatively well
throughout the financial crisis in Asia, supported in
part by earlier structural reforms that contributed to

growth rates of over 7 percent in the mid-1990s, and
current indicators suggest that GDP growth should remain strong at around 5!/2 to 6 percent in 1999 and
2000. The increase in agricultural incomes is providing a boost to domestic demand, and with exports also
recovering, industrial production has begun to revive.
Inflationary pressures, meanwhile, have declined, with
wholesale prices increasing at their slowest rate in
over a decade; this decline largely reflects the easing
of supply problems in a number of key agricultural
commodities. However, to establish the conditions for
strong sustainable growth over the medium term, policy action is needed on a number of fronts. A key concern is the large public sector deficit, which is expected to rise to almost 10 percent of GDP in
1999/2000, resulting in a high level of public sector
debt, and is adversely affecting investment. The priority for the new government to be formed in October
will be to establish an ambitious and well-specified
medium-term fiscal adjustment program, coupled with
commitments to build on the progress already evident
in a number of areas of structural reform. In addition
to the public sector reforms needed for fiscal consolidation, prospects for meaningful growth in per capita
income would be greatly improved through faster
progress with the privatization of state-owned banks,
combined with measures to increase labor market flexibility, deregulate product markets, and liberalize the
trade regime.
In Pakistan, the external position strengthened in the
first half of 1999, with international reserves recovering from a precariously low level at the turn of the
year. This reflected the resumption of financial support
from the IMF, an associated rescheduling of debt to official bilateral creditors, and a strengthening of economic policies, especially steps to reinforce the budget
and the unification of the exchange rate. Sustained improvement in the external position and a recovery of
growth will require more determined implementation
than in the past of wide-ranging structural reforms, especially fiscal reforms aimed at broadening the tax
base and improving tax collection.
Recent developments in Latin America have been
very mixed, contributing to divergent revisions in economic projections. For the region as a whole, real GDP
is now expected to be flat in 1999, and the growth projection for 2000 has been revised up to 4 percent.
Upward revisions to growth projections for Brazil and
Mexico, however, have been partly offset by downward revisions for Argentina, Chile, Colombia,
Ecuador, and Venezuela. The downside risks remain
substantial, given the policy challenges that many
countries continue to face, the heavy political calendar
in the region, and the fragility of financial sentiment,
which was demonstrated again by turbulence in early
July. The possibility of a cyclical slowdown in the
United States is also a risk factor.
21
Underpinning the faster-than-expected recovery in

Brazil has been the firm implementation of stabilization policies, which has led to a rapid rebuilding of
economic confidence since March. With the exchange
rate having stabilized after its initial overshooting, and
the pass-through effects on inflation having been well
contained, the monetary authorities have been able to
reduce interest rates steadily. Higher tax revenues and
firm expenditure controls have kept the primary budget surplus above its 1999 target and this, combined
with lower interest rates and the stronger exchange
rate, has begun to reverse the rapid buildup of net public debt of recent years. External trade has been weak,
with exports declining by 14 percent and imports by
17 percent in the first half of 1999. However, substantial gains in export market share are expected in the
period ahead, following the 35 percent decline in the
real effective exchange rate in the first half of 1999.
Further progress in strengthening the macroeconomic
frameworkincluding improved control of public
spending and effective implementation of the new inflation-targeting framework for monetary policy
along with structural reforms, is needed to support the
recovery and reduce the countrys high risk premium
still apparent in real interest rates.
The economic outlook in Mexico has also improved,
led by stronger exports and industrial production and a
more recent pickup in private consumption, and reflecting the buoyancy of growth in the countrys main
trading partners in North America. Financial market
indicators also signal a rise in confidence since the end
of 1998; the exchange rate and the stock market have
both strengthened, and interest rates have fallenalbeit with partial mid-year reversals linked to U.S. interest rate developments. Fiscal policy remains firm,
although further measures to reduce the budgets dependence on oil-related revenues would be desirable.
The monetary authorities are gradually shifting toward
an inflation-targeting framework that should help in
reducing inflation further. The banking sector remains
weak following the 199495 financial crisis, with low
profitability, undercapitalization, a substantial burden
of nonperforming loans, and continued credit disintermediation. Much more rapid progress with bank restructuring is required. The authorities have recently
announced new measures to strengthen the regulatory
framework including tougher rules on capital and
loan-loss provision requirements to establish conditions necessary for the dismantling of the universal deposit insurance guarantee, implemented earlier this
year, by the end of 2002. Draft legislation to reform
the bankruptcy law is also expected to be presented to
congress later this year to improve creditor-borrower
relations and support a resumption of credit extension
to the private sector.
Since late 1998, economic activity in Argentina has
declined more sharply than previously expected, and
GDP is now projected to fall by 3 percent in 1999, with
continued downside risks to the projected recovery.

Tight financial conditions and a worsening of the terms
of trade (stemming from lower agricultural commodity
prices) have contributed to weak domestic demand;
this has led to a large fall in imports, recently down by
as much as one-fourth on a 12-month basis. The recession has also contributed to a weakening of the fiscal
position. Firm macroeconomic management and a
clear commitment to further structural reforms will be
called for from the government that emerges from the
October elections. In Chile, the slowdown that began
in 1998 also continued in the first half of 1999. While
exports have declined owing to poor external market
conditions, weak domestic demand has led to a sharper
fall in imports and a reduction in the current account
deficit. These developments, together with continuing
low inflation and rising unemployment, have permitted
a lowering of the central banks real interest rate target
by over 3 percentage points since the beginning of the
year; they also prompted the authorities to introduce an
expansionary fiscal package.
Colombia, Ecuador, and Venezuela have all been experiencing severe economic difficulties in recent
months, with sizeable contractions in output projected
for Ecuador and Venezuela in 1999 and only modest
recoveries expected in 2000. While inflation in
Venezuela has declined since 1998, it remains high and
has resulted in a significant appreciation of the real
exchange rate. The increase in oil prices in recent
months has contributed to substantial improvements in
Venezuelas external balance and fiscal position, but
the public sector deficit is expected to remain at about
5 percent of GDP in 1999. While the authorities have
taken steps to stem the fiscal slippage, including limiting public sector wage increases, additional reforms
are needed to improve the quality of fiscal adjustment.
Over the longer term, there is a need for reforms directed at strengthening the non-oil sector of the economy. The economy of Ecuador is particularly fragile,
with inflation rising, a large part of the banking sector
in crisis, and the fiscal position deteriorating. Inflation
is expected to increase further, driven by monetary expansion following the central banks provision of liquidity support to troubled banks, combined with the
large exchange rate depreciation earlier in the year.
Monetary control needs to be rapidly reestablished,
implementation of a credible strategy for resolving the
banking crisis is also urgently required, and structural
improvements in the public finances are needed as
well.
After many years of relative macroeconomic stability and steady growth, Colombia has recently been
suffering its most severe recession since the 1930s,
with unemployment reaching a record high of 20 percent and the banking sector in acute crisis. The peso
was devalued by about 12 percent in late June to halt
the depletion of international reserves. Policies
adopted subsequently to strengthen the public finances
22
and restructure the banking sector are essential to return Colombia to a path of sustainable growth.
For Africa as a whole, projected growth has been revised down slightly, with GDP now expected to grow
by around 3 percent in 1999 and 5 percent in 2000.
However, this aggregate picture masks the fact that
Algeria and many of the smaller countriesincluding
Cameroon, Cte dIvoire, Ghana, Mozambique, Sudan,
Tanzania, Tunisia, and Ugandahave been performing rather well in macroeconomic terms: growth of
45!/2 percent is projected for most of these countries
in 1999, with some further strengthening expected in
2000, and inflation has generally been held at low-tomoderate single-digit levels. This relatively strong performance may be attributed in part to continued appropriate macroeconomic policies and, in some cases,
markedly more favorable weather conditions. For
Ghana, Mozambique, and Uganda, their recent strong
performance is a continuation of sustained growth
since the early 1990s. In Algeria, fiscal and monetary
policies were tightened in 1999 to counter the deterioration in the external environment caused by the decline in oil prices, and an extensive program of structural reforms has been implemented since 1995. In
Tunisia, consistently strong growth is projected to continue in 1999 and 2000, driven by strong export performance and supported by fiscal consolidation and a
flexibly managed exchange rate regime.
On the other hand, economic activity has been
much weaker in three of the other largest African
economies. In South Africa, growth is expected to
strengthen somewhat in 1999 following the slowdown
in 1998, supported by renewed financial market confidence, much lower interest rates, and improved
prospects for exports (especially to Asia). While further modest reductions in interest rates may be appropriate as inflation continues to decline and a firm fiscal position is maintained, the scope for interest rate
declines is limited by the need to safeguard the external position and thus help reduce the net open forward
position of the Reserve Bank. This would reduce the
South African risk premium and boost the trend rate
of growth. Rapid implementation of structural reforms would also underpin prospects for stronger
growth in 2000 and over the medium term. GDP in
Nigeria is projected to grow by only !/2 of 1 percent in
1999, combined with budget and current account
deficits of around 8 percent and 14 percent of GDP,
respectively. While these adverse developments are
partly attributable to lower oil prices in 1998 and
early 1999 and the subsequent sharp reduction in oil
production associated with lower OPEC quotas
non-oil GDP is expected to increase by 3 percent in
1999 compared with a 4 percent decline in oil GDP
slippages in fiscal and monetary policies in the first
quarter of 1999 have exacerbated the situation. These
problems have since been partially corrected, with
higher oil prices also improving export and public
sector revenues. However, to revive economic growth
over the medium term, there is a need for further fis-
Middle East and Africa: Varying Responses

to Adjustment Pressures
The economies of the Middle East and Africa have
recently been influenced by three developments. First
were movements in commodity prices. The increase in
oil prices since March is helping to improve the external balances, fiscal positions, and short-term growth
prospects of oil-exporting countries, while the persistent weakness of non-oil commodity prices continues
to constrain growth in many other countries, especially in Africa (Box 1.4). Second, pressures for structural reforms have increased, in some cases because
of the economic difficulties brought on by depressed
commodity prices in recent years. Thus, increased official attention has been given to preparations for, and
in some cases the implementation of, the privatization
of public utility and transportation companies (in
many of the 20 sub-Saharan African ESAF countries,
including Cameroon, Cte dIvoire, Ghana, Mozambique, Senegal, and Tanzania, and also in Algeria,
Jordan, Kuwait, Saudi Arabia, and South Africa); and
to public sector reforms and other structural measures
intended to improve fiscal control (in all ESAF countries in sub-Saharan Africa) or to improve the business and investment environment (for example, in
Morocco). The full implementation of such reforms
would have substantial benefits for the two regions
longer-term economic prospects. Third, the economic
outlook is also being shaped by various improvements
in trade and political cooperation. Several positive
developments can be cited, including the common
external tariff being implemented by the West African
Economic and Monetary Union; tariff reductions
introduced under the Pan-Arab Free Trade Agreement; trade agreements with the EU concluded by
Morocco, Tunisia, and South Africa, together with a
range of other bilateral trade liberalization measures;
plans for establishing free-trade areas in 2000 in the
Common Market for Eastern and Southern Africa and
also in the Southern African Development Community; and renewed momentum in the Middle East
peace process. Another important development is
that some countries, particularly in Africa, are beginning to benefit from the reductions in their external
debt overhang stemming mainly from the HIPC
Initiative. Countries obtaining debt relief under this
initiative have used the resources freed up to increase
public spending on anti-poverty programs. On the
other hand, the military conflicts that involve, directly
or indirectly, around one-third of the countries of
sub-Saharan Africa represent a major impediment
to building political and economic stability (see
Chapter VI).
23
Box 1.4. Oil Price Assumptions and the World Economic Outlook
judgmental or model-based. Near-term projectionsup
to eight quarters aheadare determined by futures quotations, averaged over five trading sessions to reduce any
undue impact of day-to-day volatility.1 Beyond eight
quarters, prices in the baseline are assumed constant in
real terms, using as a deflator the projection for export
unit values for manufactured goods from the most recent
World Economic Outlook.
The oil price assumption used in this World Economic
Outlook was set on August 18, 1999 along with other
global economic assumptions such as prices for other
commodities, exchange rates, and interest rates for the
major currencies. The baseline oil price for 1999, $16.70,
reflects actual prices during the first seven months of the
year, including a low of less than $11 a barrel in February,
and the prices in futures markets (in the five trading days
prior to August 18) for oil to be delivered through the remaining months of the year (see first figure). The assumption for 2000, $18.00, is based entirely on futures
prices and reflects the downward slope in the term structure of futures prices for delivery through the year.
After the global economic assumptions for the World
Economic Outlook were set in mid-August, spot and nearterm future oil prices rose to $23 a barrel in midSeptember. This change in market conditions, if sustained,
would suggest an upward revision to the oil price baseline
of about 7 to 8 percent for 19992000 if a revision were
to be made at the time of writing. The revision in 2001 is
in the 3 to 4 percent range; it is smaller because of the tendency for futures prices at longer delivery dates to be less
influenced by day-to-day shifts in the spot market and anchored more, albeit loosely, to past average oil prices.
A change in the price of oil affects the world economy
through several channels and review of these can provide
an indication of how the macroeconomic projections may
be affected by a revised assumption. The following analysis and accompanying tables and figures assume a 10 percent increase in the price of oil, about the same increase
that has occurred in markets since the baseline assumption was set.
A rise in oil prices would cause a transfer of income
from oil consumers to oil producers. For instance, if
oil prices increase by 10 percent, or about $2 a barrel at current prices, oil-producing countries would
gain about $16 billion in export revenue, if the price
The price of oil has continued to fluctuate widely in recent years (see first figure). After reaching a peak of
nearly $25 a barrel in early 1997, oil prices fell sharply,
to below $11 a barrel in early 1999, as the global economic slowdown weakened oil demand at the same time
global production continued to increase. Since March
1998, there have been efforts by oil-producing countries
to raise prices by constraining supply. These efforts
proved unsuccessful until they were intensified in March
1999, around the time that global demand for oil began to
pick up. Oil prices subsequently rose sharply, and pushed
above $21 a barrel in August. With this recent rise, petroleum prices are now above their 10-year average.
As with other commodity prices, the future path of oil
prices is an essential assumption underlying projections
in the World Economic Outlook. The methodology used
to set the oil price assumption is technical rather than
World Oil Markets: Production,

Consumption, and Prices1
1.5
30
Production-Consumption Balance and Prices2

Production less consumption
(left scale; millions of barrels a day)
1.0
27
0.5
24
0.0
21
18
0.5
Oil prices
(right scale; U.S. dollars a barrel)
1.0
1.5
1984
86
88
90
92
94
15
96
98
26
Oil Price Assumption

(U.S. dollars per barrel)
Assumption 3
1996
1997
1998
12
1999
2000
2001
24
22
20
18
16
14
12
10
Sources: Bloomberg Financial Markets, LP; International

Energy Agency; and IMF staff estimates.
1Simple average of U.K. Brent, Dubai, and West Texas
Intermediate spot prices.
2For 1999, the production-consumption balance is an estimate. The oil price is the WEO assumption.
3Based on oil price futures as of August 18, 1999.
1Projections based on oil futures prices appear to have been

more accurate than projections based on a random walk model,
which is essentially an assumption that the best projection of future oil prices is given by their most recent level. Random walk
models are often used as a benchmark against which alternative
forecasting methods are tested. See Manmohan Kumar, The
Forecasting Accuracy of Crude Oil Futures Prices, IMF Staff
Papers (June 1992), pp. 43261.
cal consolidation, reductions in the high rate of inflation compared with other countries in the region, and
determined implementation of the new governments
plans for privatization, deregulation, and other structural reforms. Weak growth in Morocco in 1999 is
partly the result of a drought-related decline in agri-
24
Impact of a 10 Percent Increase in Oil Prices1

First Round Effects on External Current Account
Balances of 10 Percent Oil Price Increase
(Billions of U.S. dollars)
20
Oil-Exporting Countries
15
10
5
A
sia
Tr
e c an
on s i
om tio
ie n
A s
e c dv
on an
om ce
ie d
s
em W
isp este
he r n
re
H
A
fri
c
W
or
ld
M
a n i dd
d le
Eu E
ro ast
pe
CPI Inflation
0.1
0.1
0.1
0.1
0.2
0.1
0.2
0.1
0.2
Oil-Importing Developing
Countries2
Africa
Asia
Western Hemisphere
0.2
0.3
0.4
0.3
Source: Major industrial countries: MULTIMOD simulation.

Developing country regions: IMF staff estimates.
1Deviation from baseline.
2Weighted average of the larger economies in each region that
are not major oil exporters. The Middle East and Europe region
is not shown because of the importance of oil in this region.
Oil-Importing Countries
Real GDP
Major Industrial Countries
United States
Japan
Euro area
United Kingdom
Canada
0
5
10
15
import costs, as trade in oil is mostly balanced across

emerging economies on a regional basis, except for
the Middle East.
For the industrial countries, a 10 percent rise in oil
prices would tend to raise inflation rates and reduce
real output slightly (see first table). The estimated reduction in output and rise in inflation are smaller
than the experiences of the 1970s and early 1980s
would suggest because the ratio of oil consumed to
GDP in these countries has declined considerably
since then owing to greater efficiency in the use of
oil. The estimated impact on inflation is also muted
because the monetary authorities in the major industrial countries are assumed to target inflation and
therefore tighten policies with the rise in oil prices.
For oil-exporting developing countries, a 10 percent
rise in oil prices would lead to an increase in export
and tax revenue that could improve government
balances (see second table). How governments react,
and the extent to which higher real incomes are
passed on to the private sector, may depend partly on
the countrys past access to external financing.
Countries such as Saudi Arabia and Kuwait that have
traditionally been net creditor countries may choose
to replenish reserves. In these cases, a rise in oil
prices may have little immediate impact on the domestic economy. Alternatively, they may use the additional revenue to ease spending restraints adopted
as oil prices declined, and contribute to a pickup in
domestic demand. For other oil exporters that in the
past have been net debtors, such as Mexico, Nigeria,
A
sia
Tr
ec an
on si
om tio
ie n
A s
ec dv
on an
om ce
ie d
s
em W
isp este
he rn
re
fri
ca
A
M
an idd
d le
Eu E
ro ast
pe
W
or
ld
20
15
10
5
0
5
10
15
A
sia
Tr
ec an
on si
om tio
ie n
A s
ec dv
on an
om ce
ie d
s
em W
isp este
he rn
re
H
a
fri
c
A
M
an idd
d le
Eu E
ro ast
pe
W
or
ld
Total Effect
Source: IMF staff estimates.
rise were to be sustained for a full year and the volume of oil trade were unchanged (see second figure).
Oil-importing countries would see their import bills
rise by the same amount. On a regional basis, countries in the Middle East would gain about $10 billion,
or about 2 percent of their aggregate GDP. Other regions would see smaller gains. Oil-importing advanced economies would pay the bulk of the higher
cultural output, and a rebound is expected in 2000.

Again, however, there is a need for additional fiscal
consolidation and structural reforms; progress in
these areas would enhance the potential benefits to be

derived from the important trade liberalization measures that were recently introduced.
25
Box 1.4 (concluded)

Selected Oil-Exporting Developing and Transition Countries: First-Year Impact
of a 10 Percent Increase in Oil Prices on Public Sector Revenues1
199798 Averages
_____________________________________________________
Fiscal position
________________
Estimated Impact on
Government Revenue
(percent of GDP)
Oil revenue as a percent of

total public sector revenue
Overall balance
(percent of GDP)
Africa
Algeria
Angola
Cameroon
Congo, Rep. of
Gabon
Nigeria
18.4
75.0
25.3
68.5
58.9
77.8
0.8
17.4
1.4
10.3
5.0
5.7
1.4
6.0
0.4
1.2
1.4
1.9
Asia
Brunei Darussalam
80.0
16.2
6.4

Bahrain
Egypt
Iran
Kuwait
Oman
Qatar
Saudi Arabia
Syrian Arab Rep.
55.4
8.1
54.0
59.8
74.1
57.6
67.2
39.3
5.1
1.2
2.7
13.4
1.4
9.2
6.5
3.2
1.1
0.1
1.1
1.4
1.3
0.6
1.0
0.8
Western Hemisphere
Mexico
Trinidad and Tobago
Venezuela
34.7
11.2
69.3
1.1
0.7
2.4
0.4
0.4
1.2
Countries in Transition
Kazakhstan
Russia
10.0
4.0
7.5
7.9
0.2
0.1

1Countries classified as fuel exporters. See Statistical Appendix Table C for the full classification of countries by major export.
near term lead to lower non-oil imports, to the extent

that oil demand is more price-inelastic than other
imported goods and that additional external financing of higher oil imports is not available (see first
table). Real income would be reduced through the
adverse shift in the terms of trade, and output would
likely fall. The estimated impact on output in developing countries is small because some of the larger
countries in each region produce oil (and therefore
are less dependent on oil imports), although they are
not classified as fuel exporters. In addition, several
developing countries, for example Egypt and the
South Asian countries, are dependent on trade with
oil producers and could benefit from higher oil
prices as oil producers increase their imports from
these countries.
and Venezuela, a rise in oil prices could not only increase export earnings and real incomes, but also
lower external borrowing costs on the assumption
that higher oil prices would reduce the risk premia
charged these countries as their expected future export earnings rose. The impact on GDP in oil-exporting countries would depend on how the increase
in oil prices came about: if it is due to a rise in world
demand, then oil production and therefore total GDP
could increase compared to the base case; if it is due
to a reduction in supply, oil production and GDP
could fall below baseline levels. In the current conjuncture, the oil production restrictions put in place
have lowered overall output.
In oil-importing developing countries, higher world
oil prices would raise domestic prices, and in the
In the Middle East, moderate economic growth is

projected to continue, although Saudi Arabia and
Kuwait may experience negative growth this year on
account of lower oil output. In Egypt, growth is expected to remain relatively strong in 1999, with inflation stable around 4 percent. Some recent develop-
26
After a Decade of Transition: Widening Gaps Between Strong and Weak Performers
ments, however, have underscored that further

progress with economic reforms and liberalization will
be needed to sustain this strong performance. The external current account position has moved from a
slight surplus in 1996/97 to a moderate deficit in
1998/99, driven in part by strong expansion of domestic credit; and external reserves have been declining
while interest rates have remained relatively low, leading to the use of central bank financing to fund the
government deficit. In the I.R. of Iran, following the
sharp deterioration in most economic indicators in
1998, the authorities have begun to implement an important program of macroeconomic consolidation and
structural reforms aimed at reducing some of the large
distortions in the economy and fostering stronger
growth in the medium term. The goals include sharply
reducing the budget deficit; lowering inflation by halving the rate of money growth and restoring positive
real interest rates; and liberalizing the foreign exchange market and domestic prices. Following last
years oil price decline, the authorities in Saudi Arabia
and Kuwait also moved to tighten fiscal policy, including through measures designed to strengthen expenditure control and broaden the tax base, and accelerated
plans for the privatization of some large state enterprises. With the recent recovery in oil prices, domestic
demand is expected to pick up in the period ahead.
Following the contraction that began in the second
quarter of 1998, before the devastating recent earthquake, economic activity in Turkey appeared to have
bottomed out.6 The newly elected government has signaled its commitment to economic adjustment and reform, which are needed to address the substantial uncertainties surrounding the short- to medium-term
outlook, associated in turn with the precarious macroeconomic environment and the effects of persistently
high inflation. Fiscal policy was relaxed in the run-up
to the elections in April 1999, adding pressures to
debt-servicing costs which had increased sharply following the rise in interest rates in the second half of
1998. Without adjustment, the operational public sector deficit could reach 10 percent of GDP in 1999.
After declining to its lowest level this decade, inflation
has been threatening to pick up again. The rate of currency depreciation, after being increased in the after-
math of the Russian crisis from around 2!/2 percent to

45 percent a month, has more recently been reduced
to 33!/2 percent. A much firmer macroeconomic policy framework, involving a commitment to fiscal discipline and a renewed focus on disinflation, is needed
to safeguard economic and financial stability. This
needs to be supported by wide-ranging reforms in such
areas as the pension system, agricultural policies, and
the financial sector.
After a Decade of Transition: Widening

Gaps Between Strong and Weak Performers
The recent crises in emerging markets have widened
the differences between the stronger and weaker transition economies. Exports have slowed throughout the
region, most strongly in countries with substantial
trade links with Russia, but there have been marked
differences in countries resilience and policy responses in the face of this and other related shocks.
Currency depreciations in Russia and its neighbors
may help their adjustment, but concerns about economic policies and prospects in a number of these
countries may have prolonged exchange rate volatility
and have probably delayed the reduction in interest
rate risk premia. In other cases, macroeconomic credibility has been enhanced by policies conducive to a
much greater degree of exchange rate stability. Structural conditions have also been critical in determining
how countries performed under recent pressures.
Countries that entered the recent crises with weak
banking systems and unrestructured enterprises found
their problems further aggravated by the subsequent
economic downturn. And foreign investment flows
have also become more discriminating. In southeastern Europe, economic prospects have been adversely affected by the conflict in Kosovo (Box 1.5).
After some modest growth in 1997 and early 1998
for the first time since transition began, economic activity in Russia again weakened in the wake of the
1998 financial crisis. Continuing economic and political uncertainties have led to further capital flight and
a sharp decline in foreign direct investment compared
with precrisis levels. Nevertheless, some recent developments suggest that the economic decline is
being reversed. Industrial output has picked up,
reaching a level above that of a year earlier. This is
apparently the result in part of increased import substitution following the large depreciation of the ruble.
Higher oil prices have had a positive effect on the current account balance and on government revenues.
Monetary policy has remained reasonably firm, with
limited resort to monetary expansion to fund the budget deficit. As a result, inflation has slowed to around
3 percent a month or less, gross foreign reserves have
increased, and the ruble has been broadly stable since
April.
6The projections for Turkey were prepared prior to the August

earthquake. Based on preliminary estimates of earthquake damage
prepared by the World Bank, the IMF staff estimates that GDP could
decline by !/2 to #/4 of 1 percent in 1999 relative to the baseline projection, and could be 1 to 1!/4 percent higher than the baseline in
2000 as a result of the reconstruction effort. The current account
deficit is expected to widen, especially in 2000 as constructionrelated activity picks up. Furthermore, recent indicators suggest that
the downturn in 199899 was deeper than earlier assumed, but that
the economy was recovering rapidly before the earthquake hit.
Taking these developments and the earthquakes impact into account, GDP is now expected to contract by nearly 1 percent in 1999,
and to grow by just over 5 percent in 2000.
27
Table 1.6. Countries in Transition: Real GDP and Consumer Prices

Real GDP
________________________________________
1997
1998
1999
2000
2.2
0.2
0.8
3.5
3.0
3.4
7.0
11.4
30.0
7.0
6.5
3.7
2.2
2.3
8.0
8.3
18.0
3.5
2.3
1.8
1.0
1.7
8.0
2.0
8.0
1.5
2.0
Czech Republic
Estonia
Hungary
Latvia
Lithuania
0.3
10.6
4.6
6.5
7.3
2.3
4.0
5.1
3.8
5.1
Macedonia, former Yugoslav Rep. of

Moldova
Poland
Romania
Slovak Republic
1.5
1.3
6.8
6.9
6.5
Slovenia
Ukraine
Median
Albania
Belarus
Bosnia and Herzegovina
Bulgaria
Croatia
Russia
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
Consumer Prices
_______________________________________
1997
1998
1999
2000
2.8
28
21
39
18
3.7
3.3
4.0
8.0
0.0
14.0
4.0
2.5
15
37
39
32
64
14
1,082
4
10
18
15
21
73
10
22
6
8
21
9
7
320
5
1
4
6
16
6
6
250
3
4
3
0.0
0.5
3.7
2.0
0.5
1.5
5.0
4.5
4.0
4.0
8
11
18
8
9
11
8
14
5
5
3
4
9
2
2
5
3
8
3
3
2.9
8.6
4.8
7.3
4.4
4.0
5.0
3.7
3.5
0.7
3.0
1.0
5.0
2.5
4.9
2
12
15
155
6
1
8
12
59
7
2
28
7
40
9
2
6
5
17
7
4.6
3.0
3.9
1.7
3.0
2.5
3.8
0.0
8
16
8
11
5
26
5
15
0.9
4.6
0.0
2.0
15
28
88
23
2.5
3.1
5.8
11.0
2.0
9.9
2.2
7.2
10.0
2.9
2.5
2.0
2.0
3.5
3.8
2.0
1.5
2.7
2.9
5.0
2.8
5.0
3.0
3.5
37
14
4
7
17
26
15
9
1
4
7
12
16
3
5
22
7
32
15
8
4
5
11
16
4.0
1.7
25.9
2.4
3.5
5.3
5.0
3.3
3.5
5.5
18.5
2.1
4.0
6.0
1.0
2.0
37
88
84
71
9
43
17
29
9
15
27
28
6
7
54
22
Taking recent developments into account and assuming the implementation of a coherent stabilization and
reform program, IMF staff now project zero growth in
1999 as a whole, followed by growth of 2 percent in
2000 (Table 1.6). Major policy challenges still lie
ahead. The recently approved IMF program includes a
fiscal plan to deliver a 2 percent primary surplus, and to
meet this target, along with other macroeconomic objectives, full implementation of a wide range of reform
measures is needed. Without such action, the fiscal position would again deteriorate, pressures for increased
central bank funding of the deficit could increase, and
the fragile economic situation could quickly deteriorate.
There has been some, albeit limited, progress with
banking sector reforms: a bank restructuring agency has
been set up, and the authorities have revoked the licenses of 6 of the 18 large Moscow-based banks.
Indeed, many of the large banks are insolvent, a few
have been closed, and there appears to have been widespread asset-stripping from problem banks. While the
legal frameworks for bankruptcies and for the opera-
tions of the bank restructuring agency have now largely

been put in place, corporate restructuring and many
other reforms are also needed.
The Russian crisis has led to a general downgrading
of growth projections for neighboring countries. In
most countries in the region, exchange rates have depreciated, inflation has increased, and fiscal positions
have deteriorated. However, there have been notable
differences in countries responses to these developments. In Ukraine, for example, additional measures
have been taken to improve tax collection, control
public spending, and help put fiscal performance back
on track; firm monetary policies have been maintained; and some reform momentum has been maintained in a number of key areas including banking
sector reforms. In contrast, in Belarus, where the
economy remains largely centrally planned and unreformed, there has been rapid credit expansion because
of support provided to the housing and agricultural
sectors. The exchange rate has continued to fall and inflation remains high.
28
While most of the Baltic countries exports now go

to western Europe, difficulties arising from their still
substantial exposures to eastern markets have contributed to significant slowdowns in growth and increases in fiscal deficits. External current account
deficits, although still high, have shown some signs of
improvement under the impact of slower growth.
These countries monetary frameworks, based on formal or de facto currency boards, have remained robust,
helping to maintain low inflation and foreign investor
confidence; banking sectors, although facing periodic
pressures, are well supervised and sufficiently capitalized (although some Latvian banks may need further
recapitalization); and other structural reforms are generally well advanced, with privatization programs
movingalbeit with delays in some casesinto more
complex areas such as energy and transportation.
Growth in the Baltic countries is therefore projected to
recover relatively soon.
Bulgarias recent experience illustrates how a country can recover from a domestic economic crisis and
withstand external difficulties if it pursues disciplined
macroeconomic and structural policies. The economy
has not been immune to the regions recent problems:
exports have declined and the current account deficit
has increased including as a result of the Kosovo conflict. Thus, following the rebound in growth in 1998,
GDP is expected to show a more modest pickup in
1999. Fiscal performance has been strong, and with
the exchange rate stable under the currency board
arrangement, inflation and interest rates have fallen to
their lowest levels of the decade. There has also been
important progress in restructuring the state-owned
banks and enterprises. In Romania, the economy contracted by around 14 percent in 19971998, and a further decline in activity is projected this year. Sustained
implementation of the recently adopted Fund-supported programinvolving fiscal consolidation and
accelerated structural reformis critical to reduce imbalances in the economy and improve access to international finance. While the pace of privatization has
increased, a great deal of banking and corporate sector
restructuring is still needed.
Growth in Hungary and Poland has continued to
hold up relatively well, although export growth has
slowed and current account deficits have increased as
a result of the Russian crisis and weaker EU growth.
Despite some weakening earlier in the year, these
countries currencies have generally remained in the
top half of their exchange market trading bands, supported partly by strong inflows of foreign direct investment. Underpinning economic confidence are
strong and well-regulated banking sectors, and the
generally advanced state of corporate restructuring.
Fiscal consolidation is important to reduce current account deficits and provide scope for further monetary
easing. The slowdown in economic activity has been
more severe in the Czech and Slovak Republics, with
GDP continuing to decline in early 1999 in the former

following the sharp contraction in 1998. While weaker
export markets have contributed to these economic
downturns, the main influences have been domestic.
Economic policies began to be tightened in the Czech
Republic in 1997 and in Slovakia in early 1999 in response to rising fiscal and external imbalances. The
core of the difficulties, however, is the poor financial
condition of much of these countries banking sectors
and the slow pace of restructuring in some large industrial enterprises.
***

As this century draws to a close, computers and
other systems with embedded microprocessors may
begin to confuse the year 2000 with the year 1900, potentially causing some failures of these systems
around the world. The so-called Year 2000 (Y2K)
computer bug is a legacy of a computer programming
shortcut that involves using two digits instead of four
to identify the year in computer programs. It originated in the early days of computing when computer
memory was much more expensive than today.
Programmers at that time may have thought that their
work would become obsolete well before the year
2000, but unfortunately, the practice continued until
recently, despite dramatic reductions in computer
memory costs. Because of the critical role of computer
systems in finance, power generation and distribution,
other utilities, industry, commerce, communications,
transportation, health, education, research, and governmenti.e., all sectors of a modern economythe
potential economic impact of the Y2K bug, had it gone
unaddressed, could have been substantial.
Fortunately, there has been considerable progress in
preparing computer systems for the year 2000, which
should mitigate most problems. Many businesses, financial institutions, and government agencies
throughout the world have been aware of the problem
for some time and have been testing, repairing, and replacing computers and software to bring them up to
date. At the international level, trade associations, governments, and international organizations, including
the Bank for International Settlements (BIS), the
United Nations, the World Bank, and the IMF, have
worked to promote Y2K awareness, and the relevant
institutions have provided technical assistance including for the preparation of contingency plans. The
World Bank has made special loans available to help
developing countries prepare for Y2K, while several
groups, including the BIS (particularly through its role
in coordinating the Joint Year 2000 Council) and the
United Nations, have been monitoring Y2K readiness
across a large number of countries. The Joint Year
29
Box 1.5. The Regional Economic Impact of the Kosovo Crisis

of intensity. Partially offsetting these effects in the period ahead, however, will be the positive impact on
growth that is expected as reconstruction activity in the
region picks up.
The most visible effect of the conflict was the large influx of refugees from Kosovo to neighboring countries.
At its peak, the number of refugees reached almost one
million.3 These were absorbed primarily by Albania and
FYR of Macedonia in numbers equivalent to 13 percent
of the local populations of these countries. BosniaHerzegovina also received large numbers of refugees.
The direct cost of providing humanitarian relief to the
refugeesin the forms of food, shelter, medicines, and
clothingwas assumed largely by foreign aid agencies,
but a significant part was also borne by the budgets of the
host countries, putting pressure on their already weak fiscal positions. The presence of large numbers of refugees
also required increased spending on internal security for
law and order to be maintained. The influx of refugees
and humanitarian relief efforts strained the economic infrastructure in host countries, causing congestion and reduced levels of economic activity and foreign trade in
several cases. The repatriation of the majority of the
refugees during the summer relieved most of these pressures on the host countries fiscal and balance of payments positions. However, in the case of Albania, continued budgetary support is required for the refugees that are
likely to remain with host families during the coming
winter and to cover restorations and repair costs while, in
FYR of Macedonia, besides the continuing negative impact of the crisis on budget revenue, spending on security
is expected to remain high.
To some degree, all six economies have been affected
by disruptions to their foreign trade, whether through the
suspension of direct trade links with FRY, or the reduction in transit trade to third countries (primarily in the
European Union) previously routed through FRY. The
closing of the border with FRY has had its most severe
impact on FYR of Macedonia as direct and transit trade
through FRY represented over two-thirds of that countrys exports. Bosnia-Herzegovina has also been affected
substantially as FRY is a major export market. Bulgaria
and Romania, countries with little direct trade with FRY,
have been affected through the disruption of transit trade
caused by damage to transport and storage infrastructure
The conflict associated with the crisis in the Kosovo

province of the Federal Republic of Yugoslavia (SerbiaMontenegro) (FRY) between late March and early June
1999 has had a major impact on neighboring countries,
although exposure to the crisis and the channels of transmission have varied among them. While the FRY is not
a member of the IMF, the member countries most affected have been Albania, Bosnia and Herzegovina,
Bulgaria, Croatia, the Former Yugoslav Republic of
Macedonia (FYR of Macedonia), and Romania.1 In each
of these six countries, the conflict has generated balance
of payments and budgetary gaps that, to varying degrees,
have beenor will befilled by international donors
and through domestic policy adjustments. This box discusses the channels through which the economies of
these countries have been affected by the crisis in
Kosovo, and the resulting aggregate balance of payments
and budgetary implications.2
The main channels of transmission of the crisis have
been through the influx of refugees, disruption to international trade in goods and services, the closing of transportation routes through FRY, damage to consumer and
investor confidence, reduced access to international capital markets, and adverse effects on the process of structural reform and development, including weakened governance. Although the conflict ended in early June, the
impact on several of the affected countries is likely to be
felt well beyond 1999though at much reduced levels
1Ukraine and Moldova have also experienced adverse effects,
the former primarily on account of lost shipping revenues and
the latter reflecting reduced exports to Romania. Owing to their
geographic location and strong trade links with the most affected neighboring countries, the economies of Austria, Greece,
Hungary, Italy, Slovenia, and Turkey have also been somewhat
affected, as have been the budgets of the countries that financed
the military campaign.
2Reliable information about the economic situation in the
FRY is limited. It is clear, nevertheless, that the conflict has resulted in considerable damage to infrastructure and productive
capacity and a severe setback to economic activity, exacerbating
the effects of a prolonged period of stagnation and high inflation, which in turn has reflected a number of factors such as a
failure of earlier stabilization efforts, a lack of economic reforms, and the impact of UN sanctions. The economic dislocation in the FRY and the disruption to its transportation network
have had a significant impact on neighboring countries because
the FRY provides important transit routes, besides having been
a major trading partner of some of the neighboring countries.
3This
2000 Council is also creating and enhancing channels

to coordinate international communication about Y2K
developments among financial sector authorities, including central banks and banking, securities, and insurance supervisors and regulators.
Despite all of these efforts, however, there remains
a degree of uncertainty about the actual state of readiness among countries and sectors and about the poten-
excludes refugees within Serbia and Montenegro.
tial economic and financial ramifications. Actual or

perceived Y2K-related difficulties could affect an
economy both through direct effects on the real economy and through shifts in financial market sentiment.
Y2K failures could have direct real effects on economic activity through possible disruptions to production in key sectors. Similar problems in trading partner
countries could cut export demand, hinder delivery of
30
in FRY and along the Danube, requiring that such trade

be rerouted. This disruption, which has resulted in congestion and delays along alternative trade routes, increases in transportation costs, and some loss in export
markets, is expected to persist into 2000.
Security concerns led to the widespread cancellation
of tourism bookings in the region at the outset of the
conflict, most notably in Croatia where tourism is a
major source of foreign exchange earnings. Furthermore,
foreign tourism failed to recover fully when the conflict
ended since the summer holiday season was already in
progress, thereby contributing to large external financing
gaps in the affected countries. Reduced investor confidence during the conflict also led to postponements of
foreign direct investmentincluding privatizationand
higher foreign borrowing costs, causing several countries to delay approaches to international capital markets.
These factors have all had a negative effect on economic growth in most of the affected countries, with the
impact sufficiently large in some cases to cause output to
contract. While there has been some offsetting impact on
imports from lower domestic income and expenditure, on
balance the disruption to trade in goods and services, as
well as some weakening in the capital account, resulted
in an aggregate balance of payments gap for the countries
concerned of about $1 billion for 1999. Budgetary gaps
totaling $450 million have also arisen from lost revenuesas a result of lower incomes and imports, and disruptions to customs collectionsand from refugeerelated expenditures that are not covered by humanitarian
aid, as well as increased spending for defense and public
order.
The IMF, in cooperation with the World Bank and
other relevant agencies, has taken the lead in providing
regional economic assessments and projections of external financing needs in the wake of the Kosovo crisis and
in coordinating the international communitys response
to the economic and financial challenges posed by the
crisis.4 Along with policy advice and technical assistance,
the Fund has also provided additional financial support

under its various facilities to the countries most severely
affected by the crisis, notably Albania, Bosnia and
Herzegovina, and FYR of Macedonia.
Aid commitments for Albania, Bosnia and Herzegovina, Bulgaria, and FYR of Macedonia have helped to
narrow their balance of payments gaps. To coordinate financial assistance to the Balkan region, a high-level
steering group has been set up comprising the leading industrial countries and international organizations, including the IMF and the World Bank. The group held a first
meetingorganized to raise funds for humanitarian aid
and civil administration in Kosovoat the end of July.
Additional donor meetings are planned to address
broader reconstruction and development needs.
The Balkan region faces major economic challenges.
Following the peace agreement, attention has shifted to
reconstruction, especially in Kosovo. This process is
being coordinated by the United Nations Interim Administration Mission in Kosovo (UNMIK), which was set up
in accordance with a UN Security Council resolution authorizing the Secretary-General to establish an international civil presence in Kosovo. As a province of a nonIMF member, Kosovo is not eligible to use the Funds
resources. However, at the request of the UNMIK, the
Executive Board of the Fund has recently approved the
provision of technical assistance to Kosovo in the areas of
budgeting, tax and customs administration, and the payments system.
Economic performance in the region had been disappointing even prior to the Kosovo conflict, reflecting
slow progress with economic restructuring and institution
building. In addition to addressing their immediate reconstruction needs, the Balkan countries need to step up
their efforts to achieve a successful transition to marketbased economies so as to foster economic stability and
growth, which in turn should help to reduce the risk of renewed conflict. Achieving these goals will also require
sustained external assistance and further integration with
the rest of Europe and the global economy. Intensified intraregional cooperation, including through liberalization
and promotion of trade among the Balkan countries, has
an important role to play. The process of reform and development in the region and its integration into the global
economy is set to receive an impetus under the Stability
Pact for Southeastern Europe, adopted at the Cologne
summit in June 1999 and inaugurated at the Sarajevo
summit in July 1999.
4See The Economic Consequences of the Kosovo Crisis

Preliminary Assessment of External Financing Needs and the
Roles of the IMF and World Bank in the International
Response, by the staffs of the IMF and the World Bank, April
16, 1999, and The Economic Consequences of the Kosovo
CrisisAn Updated Assessment, IMF, May 25, 1999
(http://www.imf.org/external/pubs/ft/kosovo/052599.htm).
critical imports, or cause price spikes. Possible demand effects include precautionary behavior induced
by the anticipation of potential supply disruptions,
which may lead consumers and businesses to stockpile
goods before the end of this year and subsequently reduce inventories early next year. Additional demand
effects could come from the purchases of computers
and computer services as enterprises and government
agencies replace or repair their systems to make them

Y2K compliant. Spending in these areas has already
increased, although it is hard to separate the direct
Y2K impact from other factors affecting the demand
for computers. Financial market repercussions could
arise from anticipation of potential Y2K problems, including self-reinforcing expectations of portfolio
shifts because of precautionary behavior. As a result,
31
investors might seek to reduce their exposure to risk

and shift investments to international financial centers
and into assets regarded as being safer or more liquid,
such as assets denominated in reserve currencies. This
could potentially lead to turbulence in financial markets and pressures on a countrys external capital account. This risk is probably greater for emerging market countries. However, even among the mature
economies, precautionary portfolio shifts may affect
the demand for currency and relative risk premia
across classes of financial assets.
According to survey evidence, most industrial and
many developing and transition economies have been
making significant strides towards Y2K compliance,
and most key sectors are expected to be ready for
Y2K.7 Supply disruptions therefore seem likely to be
limited, especially in the industrial countries. There is,
however, considerable uncertainty about the reliability
of the available information concerning the actual
level of preparedness because of the breadth and complexity of the repair effort, and because information
about readiness often depends on self-reporting assessments, in which respondents may have an incentive to overstate their true level of preparedness.
Nevertheless, even if supply disruptions are limited,
because of perceptions of potential Y2K problems,
rather than necessarily the problems themselves, there
could still be significant precautionary demand effects
as well as a tendency for financial investors to favor
liquid assets denominated in reserve currencies as the
end of 1999 approaches.
This uncertainty about Y2K can already be observed
in financial markets where, for example, euro-dollar
forward markets show a sharp rise in short-term interest rates toward the end of 1999 that falls off in early
2000 (Figure 1.4). This Y2K spike is being widely
interpreted to indicate that investors expect a considerable increase in the demand for liquidity around the
end of the year. Liquidity conditions generally tighten
at year end as institutions adjust their balance sheets
for reporting purposes, but the rise in forward interest
rates for end-1999 is far greater than in the past. In recent months, year-end forward rates have also been increasing. Similar evidence can be found in some
otherbut not allmature and emerging financial
markets.8 In addition, part of the recent rise in corpo-
Figure 1.4. Y2K Interest Rate Spike1

(Percent)
Concerns about potential Y2K problems are reflected in a significant
premium on liquidity by the end of 1999.
7.5
7.0
6.5
August
1999
September
1999
6.0
June
1999
5.5
March
1999
Oct.
Nov. Dec.
1999
Jan.
Feb.
Mar.
Apr. May Jun.

2000
Jul. Aug.
5.0
1Each curve represents the forward interest rates implied by prevailing U.S. LIBOR rates at the beginning of the month indicated for
instruments with duration of one to twelve months.
7According to survey data prepared by the Gartner Group, the

major industrial countries are well prepared, with an average score
of 3.8 out of a possible 4.0 (a score of 4.0 indicates only isolated and
minor disruptions). Preparedness in developing countries is lower,
2!/2 on average, with scores ranging from 1 (moderate to severe
widespread disruptions) to 3 (isolated, moderate disruptions). A survey of self-assessed readiness compiled by the United Nations indicates that most of the approximately 100 developing countries surveyed reported that they will have Y2K repairs completed before
January 1, 2000.
8See, for example, Elaine Buckberg and John Montgomery,
Global: Y2K and Emerging MarketsFinancial Risk Dominates,
Morgan Stanley, Dean Witter (New York, 1999).
32
rate and emerging market bond spreads has been attributed to Y2K concerns by some analysts, although
other factors are clearly also important. The effects of
uncertainty on financial markets underscore the importance of full disclosure whenever possible and the
need to plan for contingencies, even when countries
are thought to be well prepared for the technical aspects of Y2K.
Central banks have already developed or are developing contingency plans to correct or minimize potential disruptions in the financial sector. Generally, central banks hold a large reserve of banknotes to meet
public demand in peak periods (such as during holiday
seasons) and for unusual circumstances (such as bad
weather) and also provide liquidity to the banking sector, particularly under extraordinary situations, in their
role as lenders of last resort. In preparation for Y2K,
many central banks are in the process of building stocks
of banknotes should the public respond to potential
Y2K problems by hoarding cash, and are planning to
provide additional liquidity to the banking sector
through existing or special facilities should it be needed
to ensure the normal operations of credit markets.
For example, the Hong Kong Monetary Authority
will increase banknotes in reserve to HK$150 billion
(compared to a circulation of about HK$90 billion),
the Bank of Japan to 40 trillion yen (compared to a circulation of about 56 trillion yen), the Swedish
Riksbank to 90 billion kronor (compared to a circulation of about 80 billion kronor), while the U.S. Federal
Reserve is increasing its reserve stock of currency by
$50 billion to a total of $200 billion (compared to a
circulation outside of banks of about $475 billion).
In addition, the U.S. Federal Reserve has announced
a Century Date Change Special Liquidity Facility that
will provide exceptional, but temporary financing
(with no restrictions on the use and duration of loans
from October 1, 1999 to April 7, 2000, but with an interest rate surcharge of 150 basis points) to depository
institutions to ensure adequate liquidity to meet any
unusual demands in the period around the century date
change, while a number of central banks in emerging
market countries, such as El Salvador, Hungary, India,
and Korea, have announced similar special liquidity
facilities. Many other central banks plan to monitor
credit market developments particularly carefully
around year end and, if needed, are prepared to respond effectively and quickly by providing additional
liquidity to financial institutions. Many central banks
have also developed backup plans to ensure the proper
operation of payment and settlements systems, in case
of Y2K failures outside the financial system, including
disruptions in power and communications.
As mentioned earlier, multilateral agencies are also
developing plans to minimize potential disruptions because of the impact of Y2K. At the IMF, in recent
months the staff has been trying to assess the potential
economic and financial consequences of the computer
bug in case studies for a significant number of member

countries under a hypothetical scenario that a significant number of computer systems might fail and that
international investor sentiment would deteriorate. The
scenario case studies cover a total of 17 representative
developing and transition economies (accounting for
almost 60 percent of output in developing and transition countries), including a range of systemically important countries, several economies that export key
commodities (for example, oil), and some smaller
countries. The countries that were examined are diverse, varying in size, level of development, openness
to trade, export diversification, exposure to international capital markets, and level of external debt.
In constructing the scenarios, it was assumed that
the number of system failures because of Y2K would
be largely (inversely) related to the level of Y2K compliance within the member country. More generalized
assumptions were adopted about potential demand effects and changes in investor sentiment, including on a
global scale. These global assumptions include an acceleration of world output growth in the second half of
1999 and world trade growth (relative to the WEO
baseline) because of an assumed precautionary inventory buildup, followed by a slightly more pronounced
slowdown in output and trade growth in the first half
of 2000 (because of destocking and some Y2K disruptions). Some commodity prices, particularly oil prices,
were assumed to rise as well (compared to the WEO
baseline) in the first half of 2000 because of supply
disruptions. Moreover, a deterioration in international
investor sentiment would lead to increased risk aversion in international capital markets and a flight to
quality, which would result in a stronger U.S. dollar.
Other countries would tend to suffer some currency
depreciation, losses of international reserves, or higher
domestic interest rates, depending on the responses of
the national authorities. For emerging markets, the
flight to quality and liquidity would result in higher
risk premia, reduced rates of rollover of short-term
credits, and losses of international reserves.
Country-specific assumptions about the vulnerability to Y2K problems were based on a careful assessment of risks through a sector-by-sector analysis using
information gathered from international and countryspecific sources by comparing Y2K readiness to exposure. Exposure to Y2K largely depends on the level of
computerization of the economy and the ability and
ease of switching to backup manual systems, if
needed. Y2K readiness depends on the extent and
progress of the compliance effort, including testing,
remediation, and contingency planning. These assessments of exposure and preparedness benefited heavily
from interaction with sectoral experts from the World
Bank, who have much more detailed knowledge about
many sectors than IMF staff. In contrast, assessments
were made directly by IMF staff regarding Y2K compliance in central banks and the fiscal sectors. It needs
33
Table 1.7. Developing and Transition Economies:

Y2K Scenario Results1
to be emphasized, of course, that any such assessment

is subject to a wide margin of uncertainty because of
the lack of reliable information on the scale of Y2K
problems, on countries preparedness, and the potential economic consequences of system failures in critical areas.
With these caveats in mind, the sector-by-sector
analysis generally suggested that the most exposed
sectors are also likely to be the best prepared for Y2K.
This makes it reasonable to assume that supply disruptions will be limited in most cases. The financial
sectors, including central banks, payment and settlement systems, commercial banks, and other financial
institutions, are considered to be quite well prepared in
general with, in many cases, repairs and testing almost
complete. In only a few countries do the financial sectors appear to be lagging in the compliance effort, but
even in these, the repair efforts are more advanced
than in most other domestic sectors. In many of these
cases, backup manual systems are expected to be readily available because computerization is fairly recent,
or since power failures unrelated to Y2K have been
routine in the past.
Other sectors appear on average to be somewhat less
well prepared but also less exposed to Y2K. Major
risks, however, seem to exist in several countries
power generation and distribution sectors where Y2K
exposure is relatively high but preparations appear to
be relatively weak. Because of linkages to other sectors, failures in the power sector could lead to economy-wide disruptions. In a few countries, some risks
are also present in the communications and transport
sectors, which also have substantial linkages to other
parts of the economy. There are also concerns about
the state of readiness in some nonfinancial private
firms, particularly small and medium-sized ones, government services, and public sector enterprises. In
general, public and private sector oil producers are
considered to be relatively well prepared but concerns
remain about oil and natural gas distribution, largely
because of potential problems in transportation, including ports and pipelines.
On the basis of the admittedly relatively pessimistic
scenario assumptions outlined above, those developing
and transition economies that would be affected by the
Y2K problem could face a temporary slowdown in
GDP growth in 2000 of almost 2 percentage points on
average (Table 1.7). Precautionary stock building in
1999 and consequent destocking in 2000 would account for some of the negative output effect next year.
Inflation rates would rise by about 1 percentage point
on average, reflecting higher global commodity prices
as well as local supply disruptions. Fiscal balances
would deteriorate in many countries because of the
negative impact on output, but the fiscal situation
could improve in some oil-exporting countries with
the temporary rise in world oil prices more than offsetting the revenue effects of production disruptions.
(Deviation from World Economic Outlook baseline, in percent)

Average
Standard
Impact
______________________
GDP growth
Inflation
Fiscal balance
(percent of GDP)
Current account
(percent of GDP)
Reserves
(percent of total reserves)
Deviation
_____________________
1999
2000
1999
2000
0.2
0.3
0.1
1.9
1.2
0.3
0.4
0.4
0.2
0.8
1.1
1.2
0.1
0.0
0.5
1.3
6.7
13.0
7.8
13.5
1The 17 scenario countries comprise about 60 percent of GDP in

developing and transition economies. However, because the sample
was chosen to include a range of countries depending on level of development, source of major export earnings, and systemic importance and was not drawn at random, aggregate results should be seen
as indicative only. The high standard deviationsin many cases
greater than the average impactunderscore the illustrative nature
of this exercise. The small sample size precludes meaningful analysis at the regional level.
2Weighted by country size, using WEO purchasing-power-parity
weights.
3Unweighted standard deviation for individual country scenario
results.
The impact on the external current account balances

across the sample countries would be largely offsetting, again because of the positive impact of higher oil
prices in the oil-exporting countries. The scenario exercise implies that capital outflows associated with a
possible flight to quality could be relatively large, and
the estimated reduction in international reserves would
be on average close to 15 percent of total reserves in
2000; but some countries could be significantly more
affected. The wide margin of uncertainty attached to
this illustrative exercise and the wide differences for
individual scenario countries should again be emphasized as underscored by the relatively high standard
deviations presented in Table 1.7.
The average impact estimates in the contingency
scenarios suggest that the consequences of the Y2K
bug could be relatively serious but probably still manageable in most cases. The more advanced developing
and transition economies are generally thought to be
more reliant on computer technologies, but these
countries, in addition to being generally better prepared for Y2K, were also found to have more resourcesboth domestically and in terms of the financial ability to importto address Y2K disruptions.
Some of these countries, however, may be susceptible
to significant capital outflows because of potentially
self-reinforcing perceptions of Y2K difficulties, rather
than actual problems. In these cases, even though the
effects on market sentiment may be less serious than
has been assumed in this scenario, there is added risk
stemming from potential financial contagion. Indeed,
34
this applies also to countries that may be relatively

well prepared but nevertheless may be perceived otherwise in an environment of pervasive uncertainty. The
less advanced developing and transition economies,
while less reliant on computer technologies, may paradoxically be subject to more severe and longer lasting
supply disruptions because progress in Y2K compliance has been limited so far and because financial and
human resource limitations will constrain repair efforts in the period ahead.
Overall, notwithstanding the uncertainties that necessarily characterize this issue, including the reliance
on self-reporting assessments of Y2K preparedness in
many cases, it seems reasonable to assume that most
countries are relatively well prepared by having addressed Y2K problems or by having put in place contingency plans to deal with potential problems. Even
under relatively pessimistic alternative assumptions,
the contingency scenarios suggest that for most of the
countries that might be experiencing problemseither
in the form of real sector effects or through financial
market repercussionsthe potential difficulties should
be manageable and in any case are unlikely to be prolonged. Nevertheless, it clearly cannot be excluded that
a few countries would be more severely affected, espe-
cially through potential turbulence in financial markets. In such cases, there could be a need for the IMF
to provide supplementary financial assistance to help
alleviate pressure on a countrys foreign reserves, enhance confidence, and limit contagion.
Against this background, the IMF has established a
temporary lending facility designed to provide shortterm financing to countries facing Y2K-related balance
of payments difficulties. The new Y2K Facility, which
is set to expire on March 31, 2000, will make available
funds for six months at a surcharge of 300 basis points
above the standard IMF interest rate (and, if necessary,
for an additional six months at a 350 basis point surcharge) to countries facing balance of payments pressures that can be distinguished as Y2K-related. Access
is limited to 50 percent of a countrys quota unless
there are exceptional circumstances. To make use of
the facility, countries will need to demonstrate that
they are pursuing generally sound economic policies,
are cooperating with the Fund, and are moving vigorously to deal with their Y2K problems. The facility
provides additional assurance to member countries and
investors that any pressures in international financial
markets in response to perceived Y2K problemsthat
may or may not materializewill be contained.
35
II
From Crisis to Recovery in the Emerging
Market Economies
been less severe than feared, but considerable uncertainties remain about contagion in Latin America and
about the speed and strength of the recovery in the region. Some countries in the region have continued to
show considerable vulnerability, partly reflecting longstanding fiscal and external imbalances that have been
exacerbated during the crises. Among the transition
countries, even the more advanced reformers in central
and eastern Europe have been affected by the recent
crises, the Russian turmoil in particular, but they have
shown some resilience. The vulnerabilities of the slow
reformers have, by contrast, been openly exposed, underscoring the growing divergences in economic performance among the transition countries.
This chapter focuses on the countries that were at
the center of the recent crises in emerging markets
the east Asian countries, Russia, and Brazilas well
as the countries which have been most affected by
spillover effects from the crises, those in Latin
America and among the transition economies in particular. While this chapter also delves into the experience of some countries which have weathered the recent crises reasonably wellincluding the interesting
case of South Africa (Box 2.1)other emerging market economies that have also suffered from spillover
effects are not covered beyond a brief discussion of
significant domestic financial market developments
since the spring.
he emerging market economies have experienced

a great deal of financial volatility and macroeconomic instability in the 1990s. For many of them, especially in Asia but to some extent also in Latin
America, the first part of the decade was characterized
by considerable optimism and buoyant growth. During
a period when growth was lackluster in many industrial countries and yields on investments relatively low,
increasingly integrated financial markets helped channel financial resources from Japan and Europe, in particular, toward greener pastures in emerging markets.
The subsequent financial crises, beginning with
Mexico in 199495, the Asian crisis of 199798, and
the crises in Russia, Brazil, and several other Latin
American countries in 199899 led to reversals of capital flows, portfolio and banking flows in particular,
away from emerging markets toward the now most dynamic economy in the world, the United States.
Looking ahead, the global economic environment in
which the emerging market economies will be recovering from their recent recessions is likely to undergo
substantial changes. Much will depend on the timing
and extent of the cyclical slowdown likely to occur in
the United States, and on the ability of Japan and
Europe to sustain stronger growth of domestic demand
and thereby support global activity. During the adjustment process, the emerging market economies will
have a substantial impact on each other as trade among
them continues to expand and also on the overall performance of the world economy. If they again become
the recipients of substantial capital inflows, it is essential that the lessons from earlier excesses and the recent financial turbulence be reflected in stronger policies and institutions, and especially stronger financial
systems.
While the worst of the emerging market crisis seems
to be over, risks of setbacks cannot be excluded given
the vulnerability of systemically important countries
and the still widespread need for structural reform. In
east Asia, confidence is being rebuilt and output
growth has resumed, with relatively strong fundamentals, especially high private sector saving rates, providing support for what could well turn out to be relatively
vigorous recoveries. Favorable macroeconomic developments, however, could weaken the impetus to push
ahead with structural reforms, which are needed to sustain reasonably strong growth over the medium term.
In Brazil, the recession associated with the crises has

Reflecting the improved economic outlook and recovery in investor confidence, domestic financial markets and asset prices in many emerging market
economies continued their rebound through mid-July.
In a number of countries, interest rates fell near or
below precrisis levels (Figure 2.1). The currencies of
Indonesia, Korea, Thailand, and the main central and
eastern European countries strengthened, while, with a
few exceptions, exchange rates in other countries, including Brazil and Russia, stabilized. Emerging equity
markets, in east Asia and Russia in particular, extended the rally seen in the early months of the year,
outpacing the gains in the fastest rising industrial
country equity markets. The rebound in domestic financial markets and asset prices was, however, not
paralleled by a comparable narrowing of yield spreads
36
Figure 2.1. Selected Emerging Market Economies:

Short-Term Interest Rates
in international credit markets, which even tended to

widen again in early July for countries such as Brazil
and Argentina. Since the middle of July, sentiment has
turned mixed in the major emerging financial markets
on concerns about higher U.S. interest rates and country-specific developments. A number of currencies
have come under renewed downward pressure, and equity markets have given up some of their previous
gains.
With returning confidence and declines in inflation
creating room to ease monetary policy without putting
pressure on exchange rates, central banks in a number
of emerging market economies have cut policy interest
rates further in recent months. In Asia, official interest
rates have been brought down significantly since the
beginning of April in Indonesia, Malaysia, the
Philippines, and Thailand. In Korea, on the other hand,
the central bank in early May announced that its key
policy interest rate, which by then had been brought
down to 4#/4 percent, would be put on hold, in spite of
strong upward pressure on the won. China in early
June cut deposit and lending rates, in some cases to
below comparable U.S. rates, in an effort to stimulate
economic growth. A trend toward lower official interest rates was also observed in the Western Hemisphere
where, as inflation fears eased, the Central Bank of
Brazil has gradually lowered the benchmark SELIC
rate from 45 percent in early March to 19!/2 percent by
the end of July, the lowest level since September 1998.
In Chile, a cumulative reduction of 200 basis points in
the central banks real overnight reference rate during
the second quarter was motivated by the countrys
deepening recession. In South Africa, the repurchase
rate of the Reserve Bank was brought down to around
13.1 percent by the middle of September, some 875
basis points below its October 1998 peak. Among the
countries in transition, the Central Bank of Russia
lowered its refinancing rate in June to 55 percent from
60 percent, the first such reduction since July 1998,
while declines in inflation gave the Czech Republic
and Hungary room to lower benchmark official interest rates in successive steps by 150 and 125 basis
points, respectively, since the end of March.
In foreign exchange markets, the Indonesian rupiah
and the Korean won were subject to significant upward pressure during the second quarter of 1999. The
rupiah appreciated by more than 30 percent against the
U.S. dollar, reflecting progress with policy implementation, the improved economic outlook, and reduced
political uncertainty (Figure 2.2). The appreciation of
the won, however, was much more limited as the authorities took steps to absorb the pressure, including
through official intervention and measures to raise foreign exchange holdings in the banking sector. Both
currencies came under downward pressure in
JulyAugust, in particular the rupiah, which depreciated by more than 10 percent in this period, mainly as
a result of setbacks in banking sector reform. The ex-
(Percent)
Interest rates in most emerging market countries have come down
significantly since the Brazilian crisis.
50
50
Indonesia1
40
30
20
Thailand
Philippines
Taiwan
Province
of China
40
Hong Kong
SAR
30
Singapore
20
Korea
10
10
Malaysia
1996
97
98
Sep. 10,
99
1996
97
30
20
Sep. 10,
99
50
50
40
98
Brazil
Mexico
40
India 2
South
Africa
China
Pakistan
30
20
Chile
10
10
0
Argentina
1996
50
97
98
Sep. 10,
99
1996
97
98
0
Sep. 10,
99
Russia 3
40
30
Hungary
Poland
20
10
0
Czech Republic
1996
97
98
Sep. 10,
99
Sources: Bloomberg Financial Markets, LP; and IMF, International

Financial Statistics. Three-month interbank rate or, if unavailable, comparable market-determined short-term rate.
1The Indonesian short-term rate in the first half of September 1998
averaged 70.6 percent.
2The mid-rate in the overnight call money market.
3Three-month interbank transactions were suspended on August 17,
1998, when interest rates reached 127.6 percent, and they resumed on
February 26, 1999 with an interest rate of 55.1 percent.
37
II
FROM CRISIS TO RECOVERY IN THE EMERGING MARKET ECONOMIES
change rates of the other three former crisis countries

in east Asia were broadly unchanged during the second quarter, and, in the cases of the Philippine peso
and Thai baht, depreciated moderately thereafter. In
Latin America, the Brazilian real strengthened in the
second half of April and early May, and then broadly
stabilized in the 1.751.85 reais per U.S. dollar range,
roughly 20 percent appreciated from its March nadir.
The Mexican peso also stabilized in the second half of
June, after weakening in late May and early June as interest rates rose in the United States. The currencies of
Colombia and Ecuador came under significant pressure in the same period, reflecting economic and financial sector difficulties. In late June, the Colombian
authorities devalued the peso against the U.S. dollar by
9 percent in terms of the central parity of its trading
band and widened the trading band from 14 to 20 percent. Latin American currencies generally came under
renewed downward pressure in mid-July, in part because of increased concerns about Argentina. Both the
Brazilian real and the Colombian peso faced further
downward pressure in August, but the real recovered
to around 1.851.90 per U.S. dollar in the first half of
September. Elsewhere in Latin America, in early
September Chile suspended the trading bands around
the peso, effectively introducing a free-floating exchange rate system. In the Europe and Middle East region, in recent months, the Turkish lira has continued
to depreciate in nominal terms broadly in line with inflation. The Czech koruna and Polish zloty strengthened significantly against the euro and somewhat more
moderately in effective terms during the second quarter and through midJuly, recovering from the losses
incurred earlier in the year. The zloty began to depreciate again in the second half of July, falling temporarily below its central parity in early September as
Polands growth and current account outlook turned
less favorable. The Russian ruble stabilized at around
24.5 per U.S. dollar in the middle of May, in part reflecting the effects of foreign exchange restrictions, including a dual exchange rate system, a ban on the use
of ruble balances in foreign banks correspondent accounts for purchasing foreign currencyboth eliminated at the end of Juneand an export receipt surrender requirement. The ruble weakened again in early
September following the central banks announcement
it would let the currency depreciate broadly in line
with inflation.
By the middle of September, emerging equity markets had on average strengthened by more than 30
percent in U.S. dollar terms since the beginning of the
year.1 Equity markets in east Asia, and also in Russia,
have performed particularly strongly (Figure 2.3).
Among the former crisis countries in east Asia, stock
Figure 2.2. Selected Emerging Market Economies:

Bilateral U.S. Dollar Exchange Rates
(U.S. dollars per currency unit; January 5, 1996 = 100)
Exchange rates in Indonesia and, to a lesser extent, Korea have
appreciated since the middle of 1998. The Brazilian currency
recovered in MarchApril but has gradually depreciated since then.
110
100
90
80
70
60
50
40
30
20
10
Malaysia
Hong Kong SAR 1

Singapore
Taiwan
Province
of China
Thailand
Indonesia
1996
97
98
Sep. 10,
99
110
China
100
90
India
80
70 South Africa
60
Pakistan
50
40
1996
110
100
90
80
70
60
50
40
30
20
10
Korea
Philippines
97
98
Sep. 10,
99
1996
97
98
Sep. 10,
99
Argentina1
Mexico
Chile
Brazil
1996
97
98
110
100
90
80
70
60
50
40
30
20
10
110
100
90
80
70
60
50
40
Sep. 10,
99
Czech Republic
Poland
Hungary
Russia
1996
97
98
Sep. 10,
99
Sources: Bloomberg Financial Markets, LP; and WEFA, Inc.

to U.S. dollar.
1Pegged
1Stock market prices in U.S. dollar terms are measured by the corresponding composite, regional, and country IFC Investable
Indices.
38
market prices in U.S dollar terms rose in the year

through mid-September by around 90 percent in
Korea and by around 45 percent in Indonesia. Chinese
stocks staged a sharp rally in June, following the reductions in official interest rates and also in part as a
result of government measures to stimulate equity investment, and they recorded a 60 percent gain in the
year through mid-September. Emerging equity markets in the Western Hemisphere continued their firstquarter recovery until the beginning of July, on average gaining around 15 percent in U.S. dollar terms
during the second quarter. Equity prices in Latin
America weakened again in early July, as investor
sentiment toward the region turned more negative.
Mexico was relatively little affected, and there, equity
prices by the middle of September had strengthened
by more than 30 percent in U.S. dollar terms from the
beginning of the year, outperforming other emerging
markets in the Western Hemisphere. Among other
emerging market economies, equity prices in the
Czech Republic, Hungary, and the Slovak Republic
rebounded from lows registered in FebruaryMarch
amid renewed foreign investor interest, but continued
to lag other emerging equity markets in the region.
These include, in particular, the Turkish market,
which strengthened on improved prospects for macroeconomic stabilization, and also the Polish market,
which experienced a sustained increase in prices from
early March through mid-July, and the South African
market, which was virtually unscathed by the
Brazilian crisis last January and where prices rose by
around 20 percent in the year through mid-September.
The Russian stock exchange staged a sharp rally from
February through July, supported by higher oil prices,
abundant liquidity in the banking sector, and an absence of alternative investment opportunities in domestic fixed income markets. Following a correction
owing to increased political and financial uncertainties, the Russian market in mid-September was still
up by around 110 percent in U.S. dollar terms from
the beginning of the year.
The recovery in domestic financial markets and exchange rates in the emerging market economies in the
first half of 1999 has only partly extended to conditions in international capital markets, including the
terms of private market access offered to borrowers
and the volume of private capital flows to recipient
countries. These conditions reflect a combination of
economic and financial factors in both the recipient
and capital exporting countries.2 In the first half of
1999, these factors were conducive to some recovery
Figure 2.3. Emerging Market Economies:

Equity Prices
(U.S. dollar terms; logarithmic scale; January 1996 = 100)
Equity prices in emerging market economies have strengthened
considerably since the beginning of 1999. The gains in Asia have been
particularly strong.
200
Europe
140
Latin America
100
80
Middle East
and Africa
Developing
countries
(IFC composite)
Asia
20
1996
97
98
Sep. 10,
99
Source: International Finance Corporation (IFC), Emerging Markets Database.
2For an overview of these factors, see Michael Mussa and

Anthony Richards, Capital Flows in the 1990s Before and After the
Asian Crisis, paper presented at the World Bank/International
Monetary Fund/World Trade Organization Conference on Capital
Flows, Financial Crises, and Policies, April 156, 1999
(Washington: World Bank).
39
II
Box 2.1. The Emerging Market Crises and South Africa

Financial markets in South Africa were first affected by
the recent emerging market crises in October 1997, when
the Asia crisis erupted in full force. Domestic long-term
bond yields rose by 105 basis points, share prices declined by about 14 percent, and the rand depreciated
against the U.S. dollar by 3 percent (see figure). The limited extent of the impact, in spite of South Africas relatively open capital account, is attributable partly to favorable initial conditionsincluding a floating exchange
rate that was not seriously misaligned (the rand had depreciated in real effective terms by about 12 percent in
the year through October 1997), a modest current account
deficit (1.5 percent of GDP in 1997), a sound and wellregulated banking system, and an ongoing process of fiscal consolidationand partly to an appropriate policy response during the crisis, which involved allowing the
rand to depreciate and market interest rates to rise in response to tighter liquidity conditions.
In early May 1998, investor confidence weakened
again, with a new bout of contagion, despite favorable
initial conditions. The impact on South Africa was more
severe than in the previous episode, reflecting in part the
strength of the contagion, but also the policy response.
Initially, the authorities intervened heavily in the foreign
exchange market, leading to a rise of nearly US$10 billion in the net foreign exchange liabilities of the South
African Reserve Bank, also known as its net open forward position (NOFP).1 This was combined with an uneven monetary policy response, related in part to technical difficulties with the new repurchase system for
influencing domestic liquidity conditions, which led to
large swings in the repo rate. Together, these actions may
have contributed to uncertainty about exchange rate policy and affected investor sentiment. Subsequently, the authorities raised interest rates substantially and maintained
tight policy until clear signs emerged that the pressures
had subsided. Between end-May and end-August, when
the impact on South African financial markets reached a
peak, at the time of the Russian crisis, the rand depreciated by 25 percent against the U.S. dollar, interest rates
rose by about 670 basis points, and share prices declined
by close to 50 percent in U.S. dollar terms.
Since September 1998, financial market conditions have
improved considerably. Neither the crisis in Brazil nor the
South African presidential elections had a significant im-
South Africa: Impact of Emerging Market Crises,

September 1997July 19991
Rand/U.S. dollar 140
exchange rate (right scale;
October 22, 1997 = 100)
22 Interest Rates and
20
18
Exchange Rates
(percent a year unless
otherwise noted)
130
Official
interest rate
(left scale)
120
110
16
14
12
Sep. Dec.
1997
Mar.
Jun.
Sep.
Dec.
98
120 Gold and Share Prices, and NOFP

110
100
Yield on long-term
government bonds
(left scale)
(October 22, 1997 = 100,

unless otherwise
noted)
Mar. Jun.
99
90
NOFP
24
(right scale; billions
of U.S. dollars)
22
Gold price in
U.S. dollars
(left scale)
100
20
90
18
80
16
Share prices
in local currency
(left scale)
70
60
Sep. Dec.
1997
Mar.
Jun.
Sep.
98
Dec.
Mar. Jun.
99
14
12
Sources: Reuters; and net open forward position of the

Reserve Bank (NOFP), South African Authorities.
1The vertical lines refer to the three stages of the
emerging market crises.
1 The NOFP is defined as net forward foreign exchange liabilities less net international spot reserves.
of flows, but their volume nevertheless remained

lower than before the Asian crisis and the terms of financing less favorable. Subsequently, the gross flows
slowed anew in the JulyAugust period. In emerging
markets, many borrowers, sovereigns in particular,
have reduced their external financing needs since the
crises erupted. Other borrowers have lost access to in-
ternational markets altogether; these include the

Russian and Ukrainian sovereigns and private companies undergoing restructuring in the former crisis
countries of east Asia. Also, the abandonment of currency pegs in Brazil and several east Asian countries
appears to have led to a more realistic perception of
currency risk. In mature markets, investors attention
40
addition, in recent months, higher long-term interest

rates in the United States have helped to make mature
capital markets relatively more attractive.
Reflecting these factors, the terms and conditions
of primary market access for emerging market borrowers in the first eight months of 1999, while improved compared with late 1998, continued to be generally less favorable than prior to the Russian crisis.
This was the case for Latin America borrowers in particular, with international bond markets beginning to
show saturation for regional issues in recent months.
However, with increased differentiation by investors
according to credit quality, Hungary, Mexico,
Uruguay, and the Philippines were able in the first
half of 1999 to issue sovereign bonds at terms comparable with those issued a year earlier. Chile and
South Africa were also successful in regaining access
to international financial markets at relatively favorable terms, as evidenced by bond issues at spreads of
about 180 and 370 basis points, respectively, in the
second quarter.
In secondary markets, yield spreads have come
down since the beginning of the year, but they remain
above levels in early 1998, between the peaks of the
Asian and Russian crises. Average spreads (as commonly measured by the JP Morgan EMBI + index) fell
from more than 1500 basis points in mid-January,
1999 to the 10501250 basis point range in
JuneAugust, well above the 450600 basis point
range observed in the first half of 1998. As a further indication of investor differentiation, however, spreads
for some instrumentssuch as sovereign bonds issued
by Korea, Mexico, and Thailandhave narrowed to
below early-1998 levels, while spreads for South
American countries remained relatively high in the
first half of 1999 and tended to increase again in
JulyAugust, reflecting higher U.S. interest rates, increased political uncertainties, and fiscal policy concerns (Figure 2.4). At the same time, the average differential between secondary and primary market
yields remains wide, at around 600 basis points, suggesting that some potential borrowers have been facing availability constraints at prevailing primary market interest rates. This is the case for private and
unrated borrowers in particular.
Associated with the less favorable pricing conditions, gross private financing flows (not including
foreign direct investment (FDI) or interbank flows)
to emerging market economies remained subdued
in the first eight months of 1999, at around $157 billion at an annual rate, $40 billion higher than the
low reached in the second half of 1998, but still
only somewhat more than half the level recorded
in 1997 (Table 2.1). Recoveries in financing flows
in the first eight months of 1999 were observed in
three out of the four major regions, Asia in particular,
but not in the European emerging markets, owing
in part to Russias loss of access in the wake of the
pact on financial markets. A strong fiscal performance

in 1998/99 and a prudent budget for 1999/2000, despite
pressures in advance of the elections, have helped consolidate policy credibility. Capital inflows have resumed, with net purchases of bonds and equities by
nonresidents amounting to US$3.5 billion during the
first half of 1999 compared with a sale of US$0.5 billion during the second half of 1998. Two successful
global bond issues by the South African Government at
an average spread of about 370 basis points above
benchmark paper, a turnaround in the current account
balance, and privatization receipts from the partial selloff of South African Airways have helped strengthen the
external position. This resulted in a decline in the NOFP
to US$17.5 billion by end-July 1999. Official interest
rates recently have been below their pre-1998 crisis levels, while the rand has traded in the R66.3 per U.S.
dollar range during the last 12 months.
Apart from the emerging market crises, South
African financial markets have also been adversely affected since 1997 by the decline in the price of gold
the countrys main export commodityand its large
net official foreign exchange liability position. Nevertheless, during the period, interest rate increases and
the depreciation of the currency were smaller than in
many other emerging market countries, and the required adjustment in the current account was also considerably less. These relatively muted effects partly reflect the favorable initial conditions and flexible
exchange rate policy: the greatest pressures appear to
have been experienced during the brief episode of
heavy intervention by the authorities in the foreign exchange markets, which heightened uncertainty about
its exchange rate policy. The impact on economic activity has also been muted. Real GDP, which grew by
1 percent in the year through mid-1998, declined in the
second half of 1998 by about 1 percent. Output appears
to have turned up in early 1999, and by the fourth quarter it is projected to be 2!/2 percent higher than a year
earlier, but its growth in 1999 as a whole is projected
at only #/4 of 1 percent. In spite of the limited impact of
the crises, South African economic activity has therefore generally remained weak, and a reinvigoration of
structural reforms, notably in relation to the labor market, privatization, and trade, is essential to boost the
trend growth rate of the economy to levels that can
make a dent in the unemployment problem, increase
incentives to save and invest, and reduce the countrys
vulnerability to adverse external developments.
to risk appears to have increased significantly in the

wake of the crises, as reflected in an increasing differentiation among instruments and borrowers.3 In
3See International Capital Markets: Developments, Prospects,
and Key Policy Issues, Chapter III (Washington: International
Monetary Fund, 1999).
41
II
August 1998 crisis. Following an upturn in the first

half of 1999, flows to Western Hemisphere countries
fell back significantly in JulyAugust as conditions
facing these countries deteriorated. The composition
of flows also changed noticeably between the second
half of 1998 and the first eight months of 1999.
Issuance of bonds increased by 80 percent to reach
$87 billion at an annual rate, or around 55 percent of
the total, while syndicated loan commitments contracted by 20 percent to $47 billion or less than one
third of total flows, accelerating a decade long decline
in the share of syndicated loans in emerging market
financing.
In line with the evolution of gross flows in the first
eight months of the year, the volume of net private capital flows to emerging market economies is projected to
remain stable at some $6570 billion in 1999, less than
one-third of the decades high of $214 billion recorded
in 1996 (Table 2.2). A more substantial recovery is projected for next year as growth is expected to accelerate
in many emerging market economies, but to weaken
somewhat in the industrial countries. The projections
show considerable variation across the major components and emerging market regions (see Box 2.2). Net
direct investment is expected to be somewhat below
199798 levels in both 1999 and 2000, reflecting lower
projected flows to Brazil and China, while net portfolio investment is projected to decline further this year,
but then to rebound in 2000. Other net investment
flows are projected to turn less negative both this year
and next, as repayments to commercial banks are expected to slow. On a regional basis, net inflows into the
Western Hemisphere are projected to fall in 1999 as a
whole but to rebound in 2000. The emerging market
economies of Asia, on the other hand, are expected to
see net outflows slow in 1999 and outflows broadly
balance inflows in 2000, with only the former crisis
countries continuing to experience net outflows next
year. These five countries are also projected to add further to their international reserves both this year and
next.
In part reflecting the still reduced availability of
private financing, the combined current account
deficit of the emerging market economies is projected
to fall to a decade low of around $25 billion in 1999
from $42 billion in 1998, before increasing, as financing constraints ease, to around $45 billion in
2000, still well below the levels of 1995 to 1997. The
projected evolution of the combined current account
position of the emerging market economies reflects
the significant narrowing of surpluses in Asia in both
1999 and 2000,4 which this yearbut not nextis
Figure 2.4. Selected Emerging Market Countries:

Eurobond Yield Spreads and Brady Bond Spreads
Yield spreads have come down since the Brazilian crisis. In east Asia
they have generally fallen below levels preceding the Russian crisis,
while in Latin America they remain considerably higher.
3000
Eurobond Yield Spreads1

(basis points)
2500
Korea
(Nov./2003)
Indonesia
(Aug./2006)
2000
1500
Philippines
(Oct./2016)
1000
500
Thailand (Apr./2007)
1998
Sep. 10,
99
3000
Brady Bond Spreads 2

(basis points)
2500
Brazil
2000
Venezuela
1500
1000
500
Argentina
1998
Mexico
Sep. 10,
99
Sources: Bloomberg Financial Markets, LP; Reuters; and Salomon

Brothers.
1Spreads are calculated relative to a U.S. treasury bond of comparable maturity.
2Stripped yields are adjusted to exclude both the value of collateral
held as security against repayment of the bond and the value of coupon
payments. Spreads are calculated relative to a U.S. treasury bond of
comparable maturity.
4In view of the tension in the global current account projections,

which show a widening in the negative discrepancy that is unlikely
to materialize, the actual surpluses of the east Asian countries may
turn out to be significantly larger, and the discrepancy accordingly
smaller, than those projected in the baseline scenario.
42
Table 2.1. Gross Private Financing to Emerging Market Economies

1998
________________________________
1999
_______________________________
1996
1997
1998
Q1
Q2
Q3
Q4
Q1
Q2
July
Aug.
Total
Asia
Europe
Middle East and Africa
Western Hemisphere
218.4
118.5
21.3
15.5
63.1
286.1
127.5
37.5
30.8
90.3
148.5
34.1
36.1
13.7
64.6
39.5
7.1
7.5
3.3
21.7
50.9
14.1
12.7
2.4
21.8
30.5
5.5
9.9
4.9
10.2
27.2
7.5
6.1
3.2
10.5
32.6
11.9
3.1
4.4
13.2
49.7
15.3
7.8
6.8
19.8
14.6
7.1
4.8
0.7
3.4
6.7
3.9
4.8
3.5
1.6
Bond issues
Asia
Western Hemisphere
Other regions
101.9
43.1
47.2
11.6
128.1
45.5
54.4
28.2
77.7
11.5
38.3
27.9
25.3
2.7
14.8
7.8
28.0
6.7
13.3
8.1
14.1
0.3
5.1
8.7
10.3
1.8
5.2
3.3
21.8
7.0
10.8
4.1
25.5
6.3
13.1
7.1
6.1
2.4
3.2
0.6
3.4
1.7
1.1
0.6
Other fixed income

Asia
Western Hemisphere
Other regions
9.4
9.4
10.0
9.8
0.2
0.5
0.5
0.1
0.1
0.4
0.4
Loan commitments
Asia
Western Hemisphere
Other regions
90.7
56.2
12.3
22.2
123.2
58.9
30.9
33.4
60.4
17.7
26.1
16.6
11.0
2.5
6.9
1.5
18.7
5.0
8.5
5.2
16.2
5.2
5.0
6.0
14.2
4.9
5.3
4.0
8.4
3.5
2.2
2.7
17.6
5.1
6.7
5.8
3.4
2.3
0.1
0.9
2.2
1.1
0.4
0.6
Equity issues
Asia
Western Hemisphere
Other regions
16.4
9.8
3.7
3.0
24.8
13.2
5.1
6.5
9.9
4.4
0.2
5.3
3.1
1.7
1.4
3.7
1.9
0.1
1.7
0.2
0.1
0.2
2.8
0.7
2.0
2.4
1.4
0.2
0.8
6.6
5.6
0.9
5.1
2.4
0.1
2.6
1.2
1.0
0.2
0.1
Source: Capital Data Loanware and Bondware.
been quite diverse. Output bottomed out in the east

Asian crisis countries and also in Singapore in the second half of 1998. Four-quarter growth rates turned
positive in the first quarter of 1999 in Korea, where the
rebound has been particularly strong, and also in the
Philippines, Singapore, and Thailand (Figure 2.5). In
Hong Kong SAR, output bottomed out in early 1999
and, on a year-on-year basis, real GDP growth turned
positive in the second quarter. China and Taiwan
Province of China both experienced moderate decelerations of activity in 1998 and continued to register
positive growth through early 1999.
In Latin America, in spite of the contagion from the
Asian crisis, growth did not begin to weaken significantly in most cases until mid-1998, but marked
contractions followed in several countries. This was
the case in Argentina, where the decline in real GDP
continued through the second quarter of 1999 and
where industrial production in AprilMay was 10!/2
percent lower than a year earlier. In Brazil, real GDP
bottomed out in the last quarter of 1998 and output
began to recover in the first half of 1999a much better outcome than expected in the aftermath of the
January crisis. In Chile, the index of economic activity in the first five months of 1999 was 3.1 percent
lower than a year earlier. In Venezuela, output is expected to contract further in 1999 despite the recent
uptick in oil prices. Ecuador has continued to suffer
financial instability in the wake of its financial crisis
in February, and Colombia devalued its currency in
offset in part by reductions in the deficits of the

emerging market economies of the Western Hemisphere and the Middle East and Europe and of the
countries in transition. The current account position
of the African countries is projected to be broadly unchanged.
The narrowing of surpluses in Asia is accounted for
mainly by Korea, whose surplus is projected to fall by
around $16 billion to $24 billion in 1999, owing to the
recovery of domestic demand and the appreciation of
the won from its lows, and China, whose $33 billion
surplus in 1998 is projected to narrow to around $13
billion in 1999, owing to a weakening of export performance. The projected improvement in the overall
current account position of the emerging market
economies of the Western Hemisphere in 1999, though
quite widespread, is largely due to reductions in the
current account deficits of Brazil and Mexico, mainly
reflecting in the former case the depreciation of the
real and the compression of domestic demand, and in
the latter case higher oil prices and continued strong
U.S. import demand.
Patterns of Recovery in Asia

and Latin America
While economic activity in most of the emerging
market economies affected by the recent crises has
begun to turn around, the patterns of recovery have
43
II
Table 2.2. Emerging Market Economies: Net Capital Flows1

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Total
Net private capital flows2
Net direct investment
Net portfolio investment
Other net investment
Net official flows
Change in reserves3
118.1
31.5
24.7
62.0
36.0
51.2
120.6
35.3
55.6
29.7
23.1
58.8
176.3
57.9
98.7
19.6
19.1
70.3
143.4
84.7
104.9
46.3
8.6
64.0
192.9
93.0
38.3
61.7
28.8
118.0
213.8
113.5
74.0
26.4
17.9
108.7
148.8
142.6
66.7
60.5
24.4
74.2
66.2
132.4
27.1
93.3
43.6
49.9
68.3
118.5
21.6
71.8
9.4
51.1
118.5
128.4
40.2
50.1
2.4
76.1
Memorandum
Current account4
85.1
75.4
115.7
73.3
85.8
92.1
77.2
42.0
24.7
45.2
Africa
Net official flows
Change in reserves3
6.1
2.1
2.0
6.1
9.1
3.0
3.4
0.6
1.3
1.6
12.1
0.3
9.7
1.9
1.6
9.4
8.3
2.2
3.5
2.3
2.3
1.2
13.5
5.6
2.6
2.1
6.6
6.1
11.7
0.7
9.2
4.7
3.1
1.4
0.2
10.1
19.4
7.4
4.1
7.9
4.7
14.2
13.2
4.8
6.6
1.7
2.2
2.5
11.7
8.4
2.4
0.9
4.8
1.4
18.3
8.7
4.7
4.8
3.5
8.2
Memorandum
Current account4
7.4
10.3
11.6
11.9
16.1
6.2
7.1
18.8
18.8
15.2
24.8
6.2
3.2
15.4
4.4
8.3
29.0
7.3
6.4
15.3
2.0
18.1
31.8
7.6
17.2
7.0
0.6
20.6
36.1
8.8
9.9
17.4
0.3
6.1
60.6
7.5
17.4
35.7
0.7
18.3
62.9
8.4
20.3
34.2
4.6
5.4
22.1
10.3
12.9
45.3
30.4
30.5
29.6
9.7
7.3
32.0
20.2
52.1
18.1
9.4
4.5
32.0
4.5
39.9
8.2
8.4
5.6
22.2
0.6
29.9
Memorandum
Current account4
25.2
16.1
13.5
23.2
40.5
53.4
24.3
68.8
49.3
29.4
Other Asian emerging markets

Net official flows
Change in reserves3
7.4
8.3
2.0
1.2
6.5
31.5
9.4
8.4
2.6
20.4
8.3
7.8
24.6
26.3
4.5
6.2
7.9
17.9
27.7
38.8
1.1
12.2
10.2
48.3
30.2
41.1
6.1
4.7
6.0
26.9
39.3
45.8
8.3
1.8
4.1
43.6
25.4
50.9
11.8
13.8
0.4
46.5
14.7
46.9
12.3
49.2
7.3
17.6
11.5
32.2
12.8
30.8
4.1
2.3
4.9
34.7
8.5
21.3
2.9
17.4
23.7
14.0
8.2
16.8
16.2
17.8
43.9
43.2
26.2
26.4
Asia5
Crisis countries6
Net official flows
Change in reserves3
Memorandum
Current account4
tivity.5 In 199798, the decline in world prices of

these countries main export products together with
faltering import demand in the regions crisis-hit
economies hampered export growth and placed the
burden of current account adjustment in the region
mostly on the import side.6 By the same token, more
recently, with the general recovery throughout Asia,
sustained improvements in competitiveness, the bottoming out of world commodity prices (Figure 2.6),
late June in response to strong exchange rate pressures. In contrast with most of Latin America, Mexico
has weathered the international financial turmoil well
over the past two years, and output continued to
expand in the first half of 1999, albeit at a decelerating pace.
The divergences in cyclical patterns between and
within the two regions stem not only from the differences in the timing of their financial crises and
in contagion, but also from a number of other factors
relating to the economic characteristics of the countries concerned. A first set of factors pertains to
differences in financial and trade linkages and external competitiveness. In Asia, a relatively high degree of openness to foreign trade and close intra-regional trade linksimportant contributors to the
regions successful growth recordexacerbated the
effects of financial market contagion on economic ac-
5For a discussion of international financial contagion, see Chapter

III of the May 1999 World Economic Outlook.
6Intra-regional exports accounted for about 50 percent of east
Asias total exports just prior to the 1997 crisis. In some economies,
such as Indonesia and Taiwan Province of China, the share of intraregional exports in total exports was significantly higher, at 58 and
63 percent, respectively. See World Bank, East Asia: Road to
Recovery, Chapter II (1998).
44
Table 2.2 (concluded)

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
65.7
1.2
10.8
53.7
3.9
3.9
38.8
0.9
14.9
22.9
1.2
9.0
29.1
4.1
8.8
16.1
2.2
1.0
16.1
6.0
9.0
1.1
1.5
1.8
8.0
5.4
2.4
0.1
1.5
9.1
6.4
2.0
1.8
2.6
1.1
20.9
17.0
2.8
3.7
10.4
0.8
19.7
10.3
2.6
8.6
16.3
1.1
11.5
17.4
3.8
6.5
7.1
1.7
6.8
11.1
9.5
6.2
4.7
2.0
5.1
Memorandum
Current account4
64.2
26.7
31.1
7.2
5.4
5.1
3.3
20.9
8.9
9.2
Western Hemisphere
Net official flows
Change in reserves3
24.1
11.3
14.7
2.0
2.7
17.4
55.7
13.9
30.3
11.4
1.7
22.6
61.4
12.0
61.1
11.7
0.7
21.3
44.1
23.4
61.8
41.1
3.4
4.2
46.7
23.1
4.6
18.9
21.1
25.5
79.7
38.9
37.9
2.9
14.1
28.1
86.1
51.3
36.2
1.4
8.4
14.5
73.8
48.1
39.7
14.0
4.1
12.9
47.2
42.8
12.0
7.7
4.8
6.7
62.7
43.1
23.6
4.0
0.1
4.1
Memorandum
Current account4
16.9
34.5
45.8
51.6
37.0
38.7
66.7
89.1
56.5
56.5
Net official flows
Change in reserves3
9.9
2.4
12.3
9.3
13.0
3.1
4.2
0.1
1.1
3.6
1.6
19.7
6.0
8.7
5.0
0.7
9.3
15.9
5.4
20.6
10.1
10.5
6.4
44.8
13.6
13.3
17.8
9.1
37.6
16.3
13.7
19.1
16.4
2.4
0.6
23.1
19.8
21.5
18.3
8.2
9.8
13.2
20.3
9.0
16.1
10.8
2.1
21.6
21.9
9.0
9.3
1.9
7.4
29.7
23.9
8.6
2.8
1.1
11.5
4.9
1.7
5.4
3.8
2.9
16.7
26.3
25.1
16.1
20.2
Middle East and Europe7

Net official flows
Change in reserves3
Memorandum
Current account4
1Net capital flows comprise net direct investment, net portfolio investment, and other long- and short-term net investment flows, including
official and private borrowing. Emerging markets include developing countries, countries in transition, Korea, Singapore, Taiwan Province of
China, and Israel. No data for Hong Kong SAR are available.
2Because of data limitations, other net investment may include some official flows.
3A minus sign indicates an increase.
4The sum of the current account balance, net private capital flows, net official flows, and the change in reserves equals, with the opposite
sign, the sum of the capital account and errors and omissions.
5Includes Korea, Singapore, and Taiwan Province of China. No data for Hong Kong SAR are available.
6Indonesia, Korea, Malaysia, the Philippines, and Thailand.
7Includes Israel.
ness of world copper prices.7 In Mexico, exports account for a higher share of GDP (about 27 percent),
but over 80 percent of the total is traded within
NAFTA. Pulled by buoyant demand in the U.S. and
Canada, Mexicos exports have continued to grow
through 1998 and the first half of 1999.
The second set of factors that helps explain the
different recovery patterns is the strength of economic
fundamentals at the onset of the crisis. In most of
Asia, relatively strong fiscal positions allowed
governments to pursue counter-cyclical policies in
and continuing buoyant demand from North America,

exports from China, Korea, Malaysia, Singapore, and
Taiwan Province of China have begun to recover.
Also, several of the Asian economies depend strongly
on the electronics industry and benefit from the upturn in the global electronics sector. And data on overall export orders point to a further strengthening of
demand in the second half of the year.
In Latin America, by contrast, intra-regional trade
has generally played a more limited role as a business
cycle transmission mechanism. While the bilateral
trade links between Argentina and Brazil are extensive, and may have played a role in economic
spillovers and financial contagion between the two
economies, in both countries exports account for only
some 810 percent of GDP. In the case of Chile, with
copper accounting for 40 percent of exports and 9 percent of GDP, the key development emanating partly
from the emerging market crisis has been the weak-
7Between 1996 and the first quarter of 1999, copper prices declined by 39 percent in U.S. dollar terms; they are projected to decline further in the second half of 1999, but to gradually recover in
2000. For an analysis of the impact of copper prices on the Chilean
economy, see Antonio Spilimbergo, Copper and the Chilean
Economy: 19601998, IMF Working Paper 99/57 (Washington:
International Monetary Fund, April 1999).
45
II
Figure 2.5. Selected Emerging Market Economies: Real GDP

(Percent change from four quarters earlier)
Crisis and recovery patterns have been diverse across Asia. In Latin America the crisis came later, but it had a significant impact in the main emerging
markets in the region with the exception of Mexico.
20
20
Indonesia
Hong Kong SAR
China
15
10
5
0
15
10
5
0
5
10
15
20
5
10
15
20
20
1994
95
96
97
98
99:
Q2
1994
95
96
97
98
99:
Q2
95
96
97
98
99:
Q2
20
Thailand
Korea
Malaysia
1994
15
10
5
0
15
10
5
0
5
10
15
20
5
10
15
20
20
15
10
5
0
5
10
15
20
1994
95
96
97
98
99:
Q2
95
95
96
97
98
99:
Q2
96
97
98
99:
Q2
1994
1994
95
96
97
98
99:
Q2
Mexico
Brazil
Argentina
1994
1994
95
96
46
97
98
99:
Q2
1994
95
96
97
98
99:
Q2
20
15
10
5
0
5
10
15
20
Figure 2.6. Selected Asian and Latin American Economies: Real Effective Exchange Rates1
(June 1997 = 100)
Real effective exchange rates in Asia remain below precrisis levels.
120
120
Indonesia
Hong Kong SAR
China
100
100
80
80
60
120
1994
95
96
97
98
Aug.
99
1994
95
96
97
98
Aug.
99
95
96
97
98
60
Aug.
99
120
Thailand
Korea
Malaysia
1994
100
100
80
80
60
120
1994
95
96
97
98
Aug.
99
1994
95
96
97
98
Aug.
99
95
96
97
98
60
Aug.
99
120
Mexico
Brazil
Argentina
1994
100
100
80
80
60
1994
95
96
97
98
Aug.
99
1994
95
96
97

1Defined in terms of relative consumer prices based on 198890 trade weights.
47
98
Aug.
99
1994
95
96
97
98
60
Aug.
99
II
the wake of the crises and to commit large public

funds to recapitalize banking systems and speed up
financial sector restructuring. The strength of economic fundamentals nevertheless varied widely
across the region. In Singapore, a long tradition of
prudent fiscal management had been accompanied by
a strong external position and a well capitalized and
regulated banking system. In Korea, a favorable fiscal
position and a moderate current account deficit on the
eve of the crisis made room for subsequent fiscal expansion and noninflationary financing of banking and
corporate restructuring. By contrast, in Indonesia and
Thailand, combinations of large current account
deficits and poorly regulated banking sectors contributed both to the greater severity of the 1998 downturns and to more subdued recoveries relative to
Korea. While possessing a well-regulated and capitalized banking system, Hong Kong SAR was particularly vulnerable to the slowdown in regional trade,
and the need to keep interest rates high at times to
defend the peg exacerbated the negative impact from
trade.
In Latin America, there are broad differences in economic fundamentals by comparison with Asia, and the
strength of economic fundamentals has varied more
widely across countries. Well-capitalized and significantly smaller (than in Asia) banking sectors in
Argentina, Brazil, and Chile, combined with low levels
of private sector indebtedness (Figure 2.7) helped mitigate contagion from the 1997 Asian crisis. But external current account deficits in excess of 4 percent of
GDP in all three countries, together with sizable external and public sector debt in Argentina and Brazil, and
the latters large fiscal deficit rendered the region vulnerable to financial pressures. In Chile, the strength of
public finances and the financial system, and benign
private sector debt profiles all bode well for robust recovery, but in Brazil, large, albeit declining, fiscal imbalances have kept real interest rates high and also prevented the use of fiscal policy to support demand. In
Argentina, concerns about the current account deficit
and relatively high public sector financing needs in
1999 and 2000 have also restrained the use of fiscal
policy as a counter-cyclical instrument, while an expansionary monetary policy is ruled out by the currency board arrangement, and monetary conditions
more broadly have been kept tight by the strength of
the dollar.
Third, wherever room for maneuver was provided
by initial fundamentals, macroeconomic and structural policies have had an important role in fostering
recovery. The role of structural policies is discussed
below in the context of east Asia, and is in addition illustrated by the example of Argentina (Box 2.3). With
regard to monetary policy, the recovery has tended to
proceed faster in countries that could lower interest
rates without weakening the exchange rate. In an effort to stabilize the exchange rate and prevent a de-
Figure 2.7. Selected East Asian and Latin American

Countries: Bank Credit to the Private Sector
and Total External Debt, 1998
(Percent of GDP)
Private sector indebtedness is generally lower in Latin America than in
most Asian countries, while differences in external debt positions in
the most indebted countries in both regions are less marked.
Domestic bank
credit to private sector
Total external debt
China1
Hong Kong SAR2
Indonesia
Korea
Malaysia
Philippines
Singapore3
Thailand
Argentina
Brazil
Chile
Mexico
20
40 60
80 100 120 140 160 180
Sources: IMF, International Financial Statistics, and IMF staff estimates.

1In China, bank credit to private sector includes lending to state
owned enterprises and collectively owned enterprises.
2Total external debt data are not available.
3External debt only covers external bank and trade-related non-bank
claims of the Bank of International Settlements (BIS) reporting countries.
48
Box 2.2. Capital Flows to Emerging Market Economies: Composition and Volatility
Net international capital flows (private and official) to
emerging market economies have increased sharply in
absolute terms since the 1970s (see figure). The increased
supply of foreign financing has enlarged the resources
available to these countries for capital accumulation and
economic growth. On the other hand, the increase in net
capital flows to emerging market economies has rendered
the recipients more vulnerable to volatility in these flows.
The financial crises that have erupted in emerging market
economies in recent years have again raised the question
of whether large exposure to international capital flows,
in particular short-term flows, should be avoided because
of their volatile nature.
The theoretical distinction between short-term and
long-term capital flows is usually intended to differentiate between flows that are easily reversible and sensitive
to fluctuations in expected risk-adjusted international
yield differentialsflows that are sometimes referred to
as speculative or hot moneyand flows that are not
easily reversible and that are determined more by longerterm fundamentals. In practice, in balance of payments
statistics, the distinction between short-term and longterm flowsa distinction drawn for other net investments, which excludes foreign direct investment (FDI)
and portfolio flowsis based on the maturity of the instrument or asset involved, with short-term flows relating
to instruments with a maturity of less than one year.1
However, such a definition fails to capture the notional
distinction between short- and long-term flows: thus
short-term loans are often rolled over repeatedly. And
there is some debate in the literature about whether portfolio or short-term capital flows are more volatile than
FDI and other long-term flows. 2 Thus although the usual
categories of capital flow may give useful information
about the maturity and type of the underlying assets, they
may be of limited use in distinguishing between volatile
and more stable flows. To illustrate, the table shows some
summary statistics measuring the mean and volatility of
net capital flows in recent decades. It indicates that while
FDI has in most cases been the least volatile category of
Emerging Market Economies: Net Foreign

Financing and Its Composition
All developing
countries
160
140
120
100
Western
80
Hemisphere
60
ASEAN-4
Countries
40
plus Korea1
in transition
20
0
20
Billions of U.S. Dollars
(period averages)
Africa
1970s 80s 90s 70s 80s 90s 70s 80s 90s 70s 80s 90s 70s 80s 90s
FDI
Portfolio
Percent of GDP
(period averages)
Other Long-term
Short-term
ASEAN-4
plus Korea1
Western
Hemisphere Countries
in transition
All developing
Africa
countries
5
4
3
2
1
0
1970s 80s 90s
70s 80s 90s
1For ASEAN-4
70s 80s 90s
70s 80s 90s
70s 80s 90s
plus Korea, the 1970s do not include 1970.
flow, other flows classified as long-term have been just

as volatile as those classified as short-term. For example, for developing countries as a whole other long-term
investment flows have been more volatile than short-term
investment flows in the 1990s, as measured by the standard deviation in percent of GDP, the coefficient of variation, and the number of sign changes.
FDI and portfolio flows account for the larger part of
the increase in net capital flows to developing countries
as a whole since the 1970s, and to the main regional
groups. FDI has shown a steep increase and it is now the
single largest component of long-term capital flows in
many developing countries. The growing importance of
FDI as a source of foreign financing has been the result
of a number of factors, such as macroeconomic and trade
reforms, which have made many emerging market countries more attractive destinations for foreign investment;
privatization; and advances in information technology,
1Balance of Payments Manual: Fifth Edition (Washington,

DC: IMF, 1993).
2Stijn Claessens, Michael P. Dooley, and Andrew Warner,
Portfolio Capital Flows: Hot or Cold? World Bank Economic
Review, Vol. 9 (January 1995), pp. 153174, found in most of the
cases they examined that short-term capital flows were not more
volatile than other capital flows. For empirical evidence in support of the contention that short-term flows are more volatile
than long-term flows see, for example, Philip Turner, Capital
Flows in the 1980s: A Survey of Major Trends, BIS Economic
Papers 30 (Basle: Bank for International Settlements, Monetary
and Economic Department, April 1991), or Chapter 1 of World
Bank, Private Capital Flows to Developing Countries: The Road
to Financial Integration (Washington: World Bank, 1997).
preciation-inflation spiral, monetary policy was tightened in a number of Asian countries between late
1997 and early 1998. But once it became clearer that
the pass-through of earlier devaluations onto prices

would be limited, that the risks of further exchange
rate instability dissipated, and as foreign exchange re-
49
II
Box 2.2 (concluded)

Emerging Market Economies: Volatility of Net Capital Flows1
Volatility
___________________________________________________________________
Coefficient
Number of
Mean
_________________
Standard deviation
__________________
of variation2
_________________
sign changes
__________________
1980s
1980s
1980s
1980s
1990s
1990s
1990s
(In percent of GDP)
1990s
(Ratio)
FDI
Africa
ASEAN-4 plus Korea
Latin America
Transition economies
0.4
0.3
0.6
0.7
0.0
1.5
0.9
1.1
1.5
1.3
0.1
0.2
0.3
0.2
0.0
0.6
0.5
0.3
0.8
0.8
0.3
0.6
0.5
0.3
...
0.4
0.5
0.2
0.5
0.6
0
2
0
0
2
0
0
0
0
1
Portfolio
Africa
ASEAN-4 plus Korea
Latin America
0.2
0.2
0.3
0.1
0.0
1.0
0.1
0.9
1.8
1.5
0.1
0.1
0.3
0.3
0.0
0.6
0.3
0.9
1.0
1.2
0.7
0.8
1.0
5.3
...
0.6
2.8
0.9
0.6
0.8
0
2
4
2
0
0
3
2
0
2
Other net investment3

Africa
ASEAN-4 plus Korea4
Latin America
1.3
2.9
2.0
1.5
0.2
0.5
2.5
1.0
0.3
0.4
0.5
1.0
2.0
1.7
0.2
1.2
1.6
3.0
1.0
1.4
0.4
0.3
1.0
1.2
1.4
2.4
0.7
3.1
3.7
3.4
0
0
2
1
3
3
0
1
4
7
Of which:
Other long-term5
Africa
ASEAN-4 plus Korea
Latin America
1.2
2.6
1.5
1.5
0.5
0.2
2.3
0.0
0.3
0.3
0.5
1.0
1.1
1.1
0.3
0.8
1.8
1.3
1.1
1.4
0.4
0.4
0.7
0.8
0.5
3.6
0.8
...
3.5
5.4
1
0
2
1
0
4
0
5
6
2
Short-term
Africa
ASEAN-4 plus Korea
Latin America
0.2
0.3
0.5
0.0
0.4
0.3
0.2
0.9
0.0
0.2
0.4
0.5
1.1
1.3
0.1
0.6
2.2
3.3
0.6
0.4
2.5
1.7
2.4
...
0.3
2.2
9.8
3.5
...
2.6
4
3
2
4
0
1
4
1
1
7
Total net flow

Africa
ASEAN-4 plus Korea
Latin America
1.9
3.0
2.9
2.2
0.2
3.0
3.6
3.0
3.0
2.4
0.4
1.0
2.2
1.9
0.3
1.0
1.0
3.2
0.9
1.5
0.2
0.3
0.8
0.9
1.3
0.3
0.3
1.1
0.3
0.6
0
0
2
0
1
0
0
1
0
2
1Categories of capital flow are in accordance with Balance of Payments Manual: Fifth Edition (Washington, DC: International
Monetary Fund, 1993).
2Standard deviation divided by mean.
3Is a residential category including financing from official and private sources. Instruments in this category are usually not traded in
secondary markets, in contrast to instruments classified with portfolio investment.
4The ASEAN-4 countries are Indonesia, Malaysia, the Philippines, and Thailand.
5Includes financing from official and private sources.
which have made it easier for foreign investors to acquire

information about investment opportunities around the
world, and which has also facilitated the control that
multinational enterprises can exert over their subsidiaries
abroad. Net portfolio flows have grown considerably

since the 1980s reflecting, in addition to the above factors, the development of stock markets in a number of
emerging market economies, but this has been less im-
serves recovered, successive cuts in central bank target rates followed. In Korea, by mid-1999 the Central
Banks call rate had been lowered to around 5 percent
and real interest rates were below precrisis levels.

Meanwhile, the won strengthened from its lows, reflecting the rising current account surpluses, restored
50
below 1 percent from 20 percent in early 1998.

However, partly because of the high incidence of
problem loans in the financial system and banks
more cautious attitude toward new lending, lending
rates have fallen by much less, to around 10 percent.
Interest rates have also been lowered considerably in
Singapore.
In each of these cases, external capital accounts remained broadly open and foreign ownership rules were
liberalized so as to attract foreign investment into the financial and corporate sectors and help rebuild investor
confidence. A somewhat different path was followed by
Malaysia: selective capital controls were introduced in
September 1998, following which monetary policy was
eased (see Box 2.4). In addition, a ceiling on loan
spreads was imposed on banks, and targets for credit
growth were set for the banking system as a whole.
However, as the maximum loan spread failed to reflect
banks risk assessments and because institutions with
capitalization problems had difficulties in extending
new credit, the measures fell well short of achieving the
targets for credit growth.
A combination of interest rate cuts and tighter
capital controls was also adopted in China. Deposit
rates were reduced by 1!/4 percentage points in 1998
and by a further 1 percentage point in June 1999, with
the benchmark one-year interest rate falling some
3!/2 percentage points below corresponding U.S. dollar ratesa differential made possible by stringent
capital controls. In Hong Kong SAR, the maintenance of the currency board arrangement entailed
significant increases in interest rates at various times
of turbulence in the past two years. The general improvement in investor sentiment toward the region has
permitted an easing of monetary conditions since late
1998, but, with inflation negative, real interest rates
have remained the highest in the region. In Indonesia,
owing to a combination of political turbulence and extreme financial system weaknesses, it took longer to
stabilize the rupiah and lower interest rates.
Fiscal policy, which was initially restrictive after the
eruption of the crises partly owing to underestimation
of their contractionary impact, was subsequently eased
considerably in all countries in the region.8 The most
significant shifts in fiscal stance took place in
Indonesia, Korea, Singapore, and Thailand.
Among emerging market economies in the Western
Hemisphere, monetary conditions in Argentina tightened considerably in the wake of the Russian crisis.
As in Hong Kong SAR, the real economy has been
adjusting to a combination of tighter financing conditions and a fixed exchange rate against a strong U.S.
portant than the increase in FDI. Other short-term

flows to developing countries as a whole have also increased in this period, but this increase is largely accounted for by the east Asian crisis economiesthe
ASEAN-4 plus Korea. In most other regions, other
short-term flows have declined since the 1970s.
The change in the composition of net capital flows
to developing countries appears to have had no significant, systematic effect on the volatility of total net
flows: in some groups of countries (the ASEAN-4
plus Korea, and the countries in transition), the increases in the shares of FDI and portfolio flows have
coincided with increases in the volatility of total net
flows, whereas in other groups of countries (notably,
Latin America) they have coincided with more stable
net foreign financing.3 FDI flows are historically the
least volatile category of international capital flows
as indicated in the table, both in terms of variation
around the mean of the flow (the coefficient of variation) and in terms of the number of sign changes in the
net flowand an increase in their share in the total
might be expected to result in less volatile foreign financing. The fact that this has not generally been the
case may suggest, for instance, that FDI flows are correlated with more volatile other short-term flows,
for example, because foreign investors are hedging
their earnings.4
Some support for this explanation is provided by
the data. As the table shows, FDI and portfolio flows
in percent of GDP increased in all regions in the
1990s, but short-term flows increased only in the
ASEAN-4 plus Korea, where the increase in FDI was
associated with an increase in the volatility of total net
flows.5 It is unclear whether the increase in short-term
flows to the east Asian crisis economies has been
causally linked to the increase in FDI flows, but this
experience demonstrates that increases in FDI flows
do not automatically lead to more stable net foreign financing.
3Compare the standard deviations in percent of GDP, the
coefficients of variation, and the number of sign changes of
the total net flow for the different groups of countries between the 1980s and 1990s in the table.
4See also Box 2.2 of the 1998 International Capital
Markets Report (Washington, DC: IMF, 1998) for a discussion on the stability of FDI flows and hedging.
5Annual data, not shown here, indicate that the volatility of
net foreign financing fell in all regions in the early 1990s, but
that it rose again in the east Asian crisis economies with the
sharp reversal of short-term flows in the second half of the
decade. Volatility of net foreign financing also increased in
Africa in the second half of the 1990s, which appears to be
associated with the growing share of private sources in total
financing.
credibility in macroeconomic policy, and the substantial progress in banking sector restructuring. Similarly
in Thailand, the overnight interbank rate has fallen
8Timothy Lane et al., IMF-Supported Programs in Indonesia,

Korea, and Thailand: A Preliminary Assessment, Occasional Paper
178 (Washington: International Monetary Fund, July 1999).
51
II
Box 2.3. Structural Reforms in Latin America: The Case of Argentina

program. In the following years, unprecedented progress
was made on three important fronts. On public sector reform, virtually all state enterprises were privatized and
the social security system reformed; together with widespread deregulation, and simplification and enforcement
of the taxation system, this helped lower significantly the
share of general government expenditure in GDP and
bring the central government deficit down to under 2 percent of GDP in 199394, from double-digit levels in
198990. On the external front, capital account restrictions were eliminated and average import tariff rates lowered to around 10 percent,3 helping to increase trade and
financial integration with the world economy. In the area
of banking sector reform, capital adequacy requirements
were tightened, regulations on reserve and liquidity requirements were rationalized and enforced, and the transparency of financial institutions enhanced through the
obligation of making public their monthly balances as
well as periodical ratings from authorized agencies; at the
same time, a number of undercapitalized private institutions were closed, several provincial public banks were
privatized, and the participation of large international
banks in domestic credit markets has become larger than
that of local banks, thereby helping to strengthen confidence in the financial system.
By enhancing the credibility of the governments stabilization program, promoting competition in goods and
credit markets, and attracting substantial capital flows
into the country, the reforms boosted productivity, and
real GDP expanded by 5!/4 percent a year on average between 1990 and 1995, despite the severity of the 1995
tequila crisis. At the same time, institutional support
for the overall tightening of macroeconomic policies
made possible by the reforms helped to reduce inflation
and firm up confidence in the currency board regime.
These major strides were followed by several measures
to strengthen further the banking system in the aftermath
of the tequila crisis, and by the passage in late 1998 of
a well-balanced tax reform which, inter alia, has made
The severe macroeconomic crises in Latin America during the 1980s brought into sharp relief the need for deepseated reforms to restore fiscal and monetary discipline
and increase reliance on market mechanisms for resource
allocation. Starting in the late 1980s, most countries in
the region embarked on ambitious reform agendas, which
ranged from streamlining the public sector and liberalizing foreign trade and financial markets, to increasing the
flexibility of labor markets and improving governance.
Since then substantial progress has been made in downsizing the state through deregulation and privatization,
lowering trade barriers, and promoting the internationalization of domestic capital markets. Total factor productivity has risen significantly in most reformed countries,
in some cases drastically reversing previous trends toward stagnation of per capita income levels.1
Notwithstanding these advances, the reform agenda in
most of Latin America is far from complete. Close
scrutiny of particular reform areas across different countries indicates that the reform process has been quite uneven: progress in labor market reform and in key areas of
fiscal reform has lagged behind considerably in most
cases, while progress with banking sector reforms has
been far more substantial in some countries than others.2
Argentina is one of the countries where structural reforms have advanced the most. Having started in
1989/90, the reform process gained momentum from
1991 with the introduction of a currency board arrangementthe centerpiece of the governments stabilization
1For evidence on the correlation between structural reforms
and the growth of total factor productivity, see Pablo Fajnzylber
and Daniel Lederman, Economic Reforms and Total Factor
Productivity Growth in Latin America and the Caribbean,
19501995: An Empirical Note, World Bank, Policy Research
Working Paper 2114 (Washington: 1998).
2For a broad review of recent progress in these different reform areas across Latin America and the Caribbean, see
Norman Loyaza and Luisa Palacios, Economic Reform and
Progress in Latin America and the Caribbean (Washington:
World Bank, 1997). For a review of advances in trade reforms
across the region in the 1990s, see Claudio Loser and Martine
Guerguil, Trade and Trade Reform in Latin America and the
Caribbean in the 1990s, Journal of Applied Economics, Vol. II
(1999), pp. 6196.
3See Marcelo Garriga and Pablo Sanguinetti, Es el Mercosur

un bloque natural? Efectos de la politica comercial y la geografia sobre el intercambio regional, Estudios, XVII, No. 73,
April/June 1995.
dollar through lower activity and deflation (Figure

2.5). In contrast, monetary policy has been eased considerably in Brazil and Chile since early 1999, as
noted earlier. In Chile, the easing of monetary policy
has been warranted by the marked weakening in
economic activity and declining inflation since late
1998, while in Brazil, the so-far limited pass-through
of the January 1999 devaluation onto prices and some
tightening of the fiscal stance have enabled the authorities to lower interest rates without fueling inflation. Yet, monetary easing in both Brazil and Chile
started from much higher levels of interest rates in

nominal and real terms in the second half of 1998,
and its full effects on economic activity could take
some time to be felt. Monetary policy in Mexico has
been kept tight during 1999, reflecting the countrys
relatively good growth performance and the need to
lower inflation from the double-digit rates experienced recently.
Fiscal policy has also been eased in Argentina and
Chile but only modestly. In Chile, a deficit of 1.7 percent of GDP is projected for 1999, compared with a
52
given the currency depreciations in trading partners and

terms of trade shocks that have occurred in the past two
years, rendering the country more vulnerable to
contagion.6
The long-term viability of the currency board arrangement in Argentina depends not only on labor market
flexibility but also on institutional arrangements that effectively restrict public indebtedness and reduce the incentive to default or inflate the debt away. In early August
1999, a law to cap the size of budget deficits (the socalled fiscal convertibility law) was approved by congress calling for a gradual decline in the fiscal deficit,
leading to a balanced budget in 2003. The law only covers the central government, and as the Argentine fiscal
system is highly decentralized as far as spending is concerned (with nearly half of total noninterest spending
being managed by the provinces), it is crucial that checks
and incentives for fiscal discipline apply to the provincial
government level as well. At present, most revenues
continue to be raised and transferred from the federal
government to the provinces through a predetermined
formula that provides little incentive for provincial governments to increase their own revenue base or limit their
spending accordingly. Moreover, the present revenuesharing scheme includes a minimum floor to the transfers
that limits the provinces revenue losses during recessions. This tends to strain central government finances
during cyclical downswings (as a larger share of total revenues is transferred to the provinces to maintain the minimum revenue floor), while also reducing incentives for
fiscal discipline by provincial administrations.
In sum, Argentina has implemented far-reaching structural reforms in the 1990s. While overall progress has
been impressive, advances in key areasnotably the fiscal relations between federal and provincial governments, and labor market reformhave fallen short of
what would be desirable. Substantial progress still needs
to be made on these fronts, if satisfactory economic
growth and the currency board regime are to be compatible and sustainable in the longer term.
some room for a reduction in payroll taxes (see below).

Nevertheless, reforms in labor legislation and in institutional arrangements to ensure fiscal discipline in the
longer term have fallen well short of expectations.
Flexible labor markets are an essential condition for the
smooth functioning of a fixed exchange rate regime and
yet Argentinas labor market legislation continues to be
characterized by a centralized bargaining process, high
dismissal costs, and a host of payroll taxes and contributions that, even taking into account the reductions scheduled for the remainder of 1999, impose a mark-up of
close to 60 percent on net wages.4 Although a new labor
law introduced in 1998 goes some way toward reducing
dismissal costs, it has effectively increased the rigidity of
the collective bargaining process, restricted considerably
the scope for temporary contracts and apprenticeship programs, and failed to eliminate certain mandatory contributions that add to the wage bill. There is evidence that
the coexistence of rapid output growth and double-digit
unemployment rates in recent years (see Figure 2.5 and
figure in Box 2.6) has been due not only to transitional
factors pertaining to economic liberalization and industrial restructuring, but also to the high cost of labor relative to capital resulting from high payroll taxes and some
other payroll contributions, as well as from the stringent
constraints to hiring and firing perpetuated by the existing legislation.5 The adverse effects of insufficient labor
market flexibility on external competitiveness and the
trade balance have also been significant, particularly
4See FIEL, El Empleo en la Argentina. El rol de las instituiciones laborales, Fundacion de Investigaciones Economicas
Latinoamericas (Buenos Aires, 1997), pp. 4344. The above estimate has been adjusted for the 6 percentage point reduction in
payroll tax rates introduced in the first three quarters of 1999 and
by an additional 4 percentage point reduction scheduled for
December, which were not taken into account in the FIEL (1997)
estimate.
5For a comprehensive discussion of labor market developments and determinants of unemployment in Argentina in recent
years, see, for instance, Pessino, Corrola, Argentina: The Labor
Market During the Economic Transition, in Sebastian Edwards
and Nora C. Lustig, eds., Labor Markets in Latin America:
Combining Social Protection With Market Flexibility
(Washington: Brookings Institution, 1997), pp. 151200.
6See Luis Cato and Elisabetta Falcetti, Determinants of

Argentinas External Trade, IMF Working Paper (forthcoming,
1999).
0.1 percent surplus last year.9 In Argentina, the projected increase in central government deficit to 1.8 percent of GDP in 1999, from 1.3 percent in 1998, represents a significant tightening of the fiscal stance given
the sizable contraction of economic activity. In Brazil,
there has been a sharp rise in interest expenditures
stemming from the combination of higher interest
rates in the past year and the composition of the countrys public debt, which makes interest payments very
sensitive to changes in short-term interest rates and the
exchange value of the U.S. dollar. A number of new
revenue and spending measures have therefore been
needed to secure an increased primary surplus, and this
has imparted a negative fiscal impulse to the economy.
In Mexico, despite the projected slowdown in economic activity in 1999, the government deficit is budgeted to remain unchanged at 1.3 percent of GDP, entailing some tightening in the stance of policy.
9Figures are based on staff projections which treat the use of the
copper stabilization fund as a financing item, rather than an abovethe-line component as in the official figures.
53
II
Box 2.4. Malaysias Response to the Financial Crisis: How Unorthodox Was It?
The imposition of capital controls in Malaysia in
September 1998they were partially relaxed in
February 1999has been characterized by many observers as marking the choice of a distinctly different
and unorthodox response to the Asian financial crisis.
This box examines the differences in Malaysias policy
approach and in the macroeconomic outcomes to date.
It concludes that, with the exception of the capital controls, the policies implemented in Malaysia were broadly
similar to those in the other crisis countries. Likewise,
while yield spreads for Malaysia have remained higher,
relative to Korea and Thailand, than before the imposition of controls, and capital inflows have been relatively subdued, macroeconomic developments to date
in Malaysia and the other crisis countries have been
broadly similar, making it difficult to identify, at least in
the short time that has elapsed since the imposition of
the controls, any effects that they may have had. This
may be considered not altogether surprising, both because capital outflows had abated markedly by the time
the controls were imposed, and because the effects of
such controls can usually be judged only over a longer
period.
severe losses in investor confidence and large capital

outflows, which resulted in sharp declines in reserves,
stock market collapses, and currency depreciations. The
immediate policy responses to the crisis were also similar in the affected countries, and included defensive intervention in foreign exchange markets coupled with
hikes in interest rates, followed by the floating of currencies. Some countries also tightened capital and exchange controls, particularly on forward or derivative
transactions and their financing. These actions, which
were generally inadequate to restore investor confidence
and stem capital outflows, were followed by the adoption of adjustment packages that included tight monetary
and fiscal policies and wide-ranging programs of structural reforms.
Although the monetary policy responses in Malaysia
were broadly similar to the rest of the crisis countries, in
the sense that nominal interest rates were increased,
there were also some important differences. In particular, Korea and Thailand initially raised interest rates
more sharply and maintained them at higher levels for
some time, but were able to bring them down earlier and
more rapidly. In contrast, nominal interest rates peaked
later and reached a lower peak in Malaysia than in other
countries. The downward movement in interest rates
began in March 1998 in Korea and Thailand, while
Malaysia began lowering interest rates in August 1998.
Furthermore, interest rates in Korea and Thailand were
brought down to precrisis levels earlier than in
Malaysia.
With respect to fiscal policy responsesmeasured by
changes in the planned central government balances
in 1998all countries shifted from initially planned
surpluses to sizable deficits, as the depth of the output
collapse in 1998 came to be appreciated. The shift toward deficits to provide a stimulus to economic activity
took place as early as February and March 1998 in the
case of Korea, Thailand, and the Philippines. In
Indonesia and Malaysia, the shifts in fiscal policy toward
stimulus took place somewhat laterin April and July
1998, respectively.
Initial conditions in Malaysia were stronger than in the

other crisis countries in some respects, but there were
also common signs of weakness
At the time the crisis hit, the Malaysian economy had
many strengths, includingin comparison with its regional neighborsa high national saving rate, large fiscal surpluses, relatively low external debt, and low inflation (see figure). Indicators of banking system
soundnesssuch as nonperforming loans and capitalization levels and corporate sector vulnerability measured
by ratios of debt to equityalso suggested greater
strength than in its neighbors. However, there were also
areas where Malaysia, like Thailand and Korea, showed
signs of vulnerability, such as high rates of private sector
credit growth, a large external current account deficit, an
overheating economy as evidenced by a negative output gap, and asset price inflation, in both real estate and
equities.
Malaysia kept pace with the other crisis countries in

structural reforms
Malaysias initial interest rate policies were not as

aggressive as those in the other crisis countries, while the
fiscal policy responses were similar
Another common feature of the adjustment efforts in

all countries was the focus on structural reforms aimed
at strengthening the financial sector and improving the
efficiency of financial intermediation. Measures in-
The initial manifestations of the crisis were similar

across all the crisis countries. Each country experienced
Thus, in comparison with Asia, where both monetary and fiscal policies have been clearly countercyclical since the middle of 1998, in Latin America,
partly because of the constraints imposed by less
favorable initial fundamentals, there has only been
limited scope for macroeconomic policies to support aggregate demand and speed up economic
recovery.
Structural Reform Requirements in

Crisis-Hit Asian Economies: Conditions
for a Durable Recovery
While it is clear that a significant recovery in
economic activity is now underway in most Asian
countries, the extent to which the underlying structural problems in these economies have been ad-
54
Structural Reform Requirements in Crisis-Hit Asian Economies: Conditions for a Durable Recovery
Asian Crisis Economies: Macroeconomic Indicators, 199498

20
Inflation
(percent)
16
12
50
National Saving
(percent of GDP)
Indonesia 1
Malaysia
Korea
Philippines
50
40
30
20
95
1994
20
Korea
96
97
98
Sovereign Bond Spreads

(basis points)
1994
95
Indonesia
1200
96
97
10
98
160
Exchange Rates (domestic

currency per U.S. dollar;
January 1998 = 100)
1500
140
Indonesia
Philippines
Malaysia
Korea
80
Thailand
Philippines
Aug.
99
95
96
97
98
Industrial Production
(percent change
from a year
earlier)
Korea
10
20
10
0
Malaysia
100
300
Thailand
1994
120
Malaysia
900
1998
Korea
Philippines
Malaysia
60
Malaysia
600
Thailand
70
Indonesia
1800
30
80
Thailand
Thailand
40
External Debt
(percent of GDP)
Indonesia
Philippines
10
20
Thailand
Philippines
Korea
1998
Aug.
99
60
30
1998
Aug.
99
Sources: Deutsche Bank, Asian Economic Weekly; IMF staff estimates; and WEFA, Inc.
1In 1998, Indonesias inflation reached 59.6 percent.
volved tightening prudential regulations, including loan

classification and provisioning guidelines and capital adequacy standards; enhancing transparency with regard to
the disclosure of key economic, financial, and corporate
sector information; and strengthening the social safety
net. Efforts to restructure corporate sector debt were also
made, but they were begun later than the financial sector
reforms. Despite a later start than in the other crisis
countries, Malaysia has kept pace with Korea and
Thailand in implementing structural reforms, especially
with respect to the purchase of nonperforming loans and
bank recapitalization.
The role of capital controls in Malaysia

By JulyAugust 1998, some measure of stability had
returned to financial markets in the crisis countries. By
that time, currency and stock markets had broadly stabilized after another round of severe instability in
AprilMay 1998, resulting primarily from the political
turmoil in Indonesia, the fall in the Japanese yen, and
fears of a devaluation of the renminbi. Sovereign bond
spreads had peaked for Korea, Thailand, and the
Philippines, and in Malaysia and Thailand, the offshore
swap differential was clearly trending down. Importantly,
dressed is more difficult to assess, and there are fewer

indications of clear progress. Structural reforms
take time to design and implement. Their initial
impact may well be painful for those that have benefited from the many distortions that the reforms seek
to remove, while their benefits may be more dispersed, less apparent, and spread over a longer time
frame. As a result, significant political courage is
often needed to see such a reform process through to

its conclusion.
Of particular concern is that recent favorable macroeconomic developments could weaken support for the
reform agenda, and that the poor banking and corporate sector practices at the root of the crisis could continue. Public sector deficits and debt have increased
substantially as authorities have taken action to boost
55
II
Box 2.4 (concluded)

lized in the fourth quarter of 1998, and, in the first half of
1999, all currencies except the ringgit experienced modest appreciations. Foreign exchange reserves in each of
those countries rose markedly during this period, reflecting not only large current account surpluses but also, in
varying degrees, capital inflows. The timing and extent of
the recovery in stock markets since about September
1998 and through June 1999 was also broadly similar in
all countries, and since then Malaysia has been outperformed by Korea.
One difference between Malaysia and the other crisis
countries has been with respect to the volume of recent
capital inflows. With Malaysia remaining out of key international investment indices, portfolio investment flows
have remained subdued relative to the other countries.
Furthermore, preliminary data indicate that FDI inflows
have failed to recover to earlier levels and have declined
relative to Korea and Thailand. Although this difference
in the volume of inflows has not yet had a major impact
in Malaysia, looking ahead it could be a key factor that
distinguishes Malaysia unfavorably from the rest of the
region.
the currencies remained stable even as interest rates were

gradually being lowered, and capital outflows had abated
markedly.
In September 1998, Malaysia imposed capital controls
aimed primarily at drying up the offshore ringgit market.
Although the ringgit had remained broadly stable when
monetary policy was eased beginning in August, the authorities remained concerned about the existence of a significant offshore market for the ringgit that they believed
was instrumental in fueling speculative outflows of ringgit and constraining their ability to bring interest rates
down more rapidly. Consequently, controls were imposed, requiring all ringgit funds abroad to be brought
onshore by end-September 1998. A one-year holding period was imposed on all funds in these accounts. Care
was taken from the start to exempt bona fide current account transactions and transactions related to FDI flows.
The capital controls were accompanied by the pegging of
the exchange rate at the rate of RM 3.8/$, implying an appreciation of the ringgit relative to the then-prevailing
market rate. The controls were modified in February
1999, with the shift from a mandatory holding period on
the principal amount of capital inflows to a system of
graduated exit levies.
This review suggests (1) that Malaysias policy response

has, in most respects, not been unorthodox and (2) that
its economic performance, at least to date, has been
broadly similar to that of the other crisis countries
With the exception of foreign capital inflows, economic

outcomes to date have been broadly similar in Malaysia
to the other crisis countries
The imposition of controls does not yet appear to have

made a substantial differencepositive or negativeto
economic developments, at least in the short time that has
elapsed since their introduction. This seems to be partly
because the effects of the controls were limited by the
timing of their imposition: capital outflows had already
abated following the return of investor confidence to the
region in late 1998. The stabilization of the currencies in
the region and the undervaluation of the ringgit, together
with large current account surpluses, further boosted confidence to the benefit of the capital account. More important, however, Malaysia has made good progress in financial and corporate sector restructuring, strengthening
regulation and supervision of financial markets, and implementing corporate governance reforms. Thus any negative impact of the capital controls may have been offset
by the increase in confidence from the acceleration of
structural reforms and by generally sound macroeconomic management. However, Malaysias interest rate
spreads remain relatively wide, and the recovery of capital inflows relatively subdued.
In many respects, the evolution of key economic variables has been similar across the crisis countries. Growth
declined sharply in 1998, but since the fourth quarter of
1998, there have been signs of recovery, of varying
strengths, in all of them. Reflecting the collapse of
domestic demand, inflationary pressures have been all but
nonexistent (except in Indonesia, where they have abated
markedly in recent months), notwithstanding the very large
nominal exchange rate depreciations between mid-1997
and mid-1998. Private sector credit growth fell sharply in
all cases in 1998, and is only very recently showing signs
of revival in Korea, Thailand, and Malaysia.
In the fourth quarter of 1998, signs of returning investor confidence began to emerge in all countries. Bond
spreads, which peaked in August for Korea, Thailand,
and the Philippines and in September for Malaysia and
Indonesia, have since come down, although, in contrast to
the period prior to the imposition of capital controls, the
premium for Malaysia is higher than that for Thailand
and Korea. The exchange rates in all the countries stabi-
domestic demand and rehabilitate banking sectors.

While these countries generally strong public finances
at the onset of the crisis gave them scope for providing
such support, the room for maneuver in this regard has
certainly narrowed. With the costs of the crises and
their aftermath still unclear, the authorities could face
difficulties in containing the fiscal impact and ultimate
costs to taxpayers if publicly funded support had to be
maintained at a high level. Financial sector reforms

need to be combined with government efforts to recover a significant share of the cost of bank recapitalization from privatizations, through the disposal of
non-performing assets, and, where possible, from previous owners.
A longer-run question concerns the extent to which
the east Asian economies can again reach and sustain
56
the high growth rates that prevailed before the recent

crisis. In this regard, it would be unrealistic to expect
a return to growth based largely on a rapid rate of capital accumulation, given the financial and corporate
sector weaknesses that have been uncovered. As discussed in the October 1998 World Economic Outlook,
Chapter III, there is still substantial scope for productivity catch-up in these economies. But this potential
can be realized only if wide-ranging structural reforms
are implemented.
compliance with prudential standards has been substantially improved.

With improved regulatory frameworks largely in
place, the momentum of restructuring itself has increased. Nevertheless, substantial diversity is apparent
both across countries, and, within each country, across
different parts of the financial sector. Some details of
bank restructuring in the four countries most affected
by the 1997 crisis are provided in Box 2.5. Indonesia
has faced the severest problems in terms of banking
sector insolvency and recapitalization requirements
(Table 2.3). The main area of concern is with the state
banks and those taken over by the Indonesia Bank
Restructuring Agency: together, these account for
around 70 percent of total liabilities and nearly all of
the systems insolvency. While some initial steps have
been taken toward reorganizing these publicly controlled institutions, much remains to be done to restore
their financial viability and prepare their privatization.
Moreover, with ongoing operational losses, declining
loan recovery rates, and increasing estimates of nonperforming loans, the cost of the restructuring process
has continued to climb. Current estimates suggest that
public bond issues equivalent to around 47 percent of
GDP may be needed to rehabilitate the banking sector,
but considerable uncertaintyand probably upside
riskssurround such estimates.
Elsewhere in Asia, financial sector restructuring is
generally on track, although, as noted in Box 2.5, the
full costs of recapitalization are still unclear. In
Korea, Malaysia, and Thailand, a large number of institutions, holding around 40 percent of system assets,
have been merged, closed, or otherwise subject to official intervention (Table 2.3). Recapitalization (at
end-March 1999) ranged from 31 percent of estimated total requirements in Korea to 51 percent in
Thailand. The remaining financial institutionsespecially the banksare generally well capitalized,
many have access to private as well as public funds,
and they appear to be subject to a credible threat of intervention by the supervisory authorities if they are
unable to meet the strengthened prudential standards.
Nevertheless, progress is still required in several
areas. The bank privatization programs in Korea and
Thailand have been slower than earlier envisaged, although several sales are expected to be concluded in
the second half of 1999. Due in part to prioritization
in the reform strategy, reforms among nonbank financial intermediaries have been taking place at a slower
pace than in banks. For example, in Korea, reforms
now need to focus on investment trust companies, insurance companies, and leasing companies. While
publicly owned asset management companies have
been fulfilling their assigned role in purchasing impaired assets from financial institutions, the slow pace
of selling these assets back to the private sector may
delay the overall realignment of asset prices and other
aspects of restructuring.
The Financial Sector

The economic crisis in Asia exposed major weaknesses not just in the balance sheets and operations of
the regions financial institutions but also in the supervisory and regulatory regimes under which they functioned. Improving regulatory frameworks has therefore
been a key element in the reform process and a prerequisite for the needed restructuring. In this respect, the
design of reforms is generally well advanced. The authority and independence of supervisory authorities
have been strengthened, with more harmonized systems
of supervision across all financial institutions. In Korea,
for example, a Financial Supervisory Commission
(FSC) was established in 1998 to take full responsibility for the supervision, restructuring and (more recently) licensing of all bank and non-bank financial institutions, including the power to revoke licenses. In
Indonesia, Malaysia, and Thailand, supervisory responsibilities remain with the central banks, with new legislation in place (in Indonesia10) or being prepared
(Thailand) to enhance their authority in this area.
Prudential regulations, including minimum capital adequacy ratios, rules for classifying and provisioning
against nonperforming loans, and exposure limits have
generally been strengthened in terms of their stringency, coverage, and enforcement.11 The Philippines,
while less hard-hit by the financial crisis, has also taken
steps to enhance banks ability to withstand shocks,
strengthen the prudential and regulatory framework,
and streamline the resolution process in the case of
troubled banks. There have also been moves (for example, in Malaysia) toward conducting supervision on a
consolidated basis across all the activities of each financial institution. With accounting and disclosure
standards being brought closer to international best
practices, the ability of supervisory authorities to assess
10A second phase of the comprehensive review of the banking law

and related regulations in Indonesia is to be completed by end1999.
11Going against the regional trend, as discussed above, and in the
December 1998, World Economic and International Capital
Markets Interim Assessment, Malaysia relaxed certain loan classification and provisioning requirements in September 1998; however,
it appears that most financial institutions in Malaysia meet the more
stringent international standards.
57
II
Table 2.3. Financial Sector Restructuring

(End-March 1999 or latest available datapercent unless otherwise indicated)
Indonesia
Korea
Malaysia
Thailand
Capitalization
NPLs/Total loans1
NPLs/GDP
Provisions/NPLs2
System capitalization2
55
22
22
29
16
23
13
29
24
35
43
12
52
53
25
15
Financial Restructuring
NPLs sold to AMC/Total NPLs
Average discount of NPL purchase3
51
100
42
55/97
23
40
...
...
System recapitalization/GDP
Of which: Public funds
System recapitalization/Est. recap. requirement4
35
33
8
8
31
2
2
40
14
7
51
Number of merged institutions5

Number of intervened institutions6
Number of closed institutions7
5
93
66
4
59
44
12
9
18
17
57
Merged institutions/system assets8,9

Intervened institutions/system assets9
Closed institutions/system assets
30
75
14
15
14
7
>20
>20
16
12
13
Sources: Data provided by country authorities; Fund staff estimates; and Merrill Lynch, Asia-Pacific
Banks: Progress in Bank Restructuring, February 23, 1999.
1Includes nonperforming loans (NPLs) sold to asset management companies (AMCs), to better reflect the
magnitude of the problem prior to balance sheet restructuring. In Indonesia, for example, NPLs on banks
balance sheets fell to 41 percent of total loans, and 11 percent of GDP, after some NPLs were transferred to
the IBRA. For Korea, the NPL figure is based on market sources. For Thailand, the figure is for commercial banks.
2Figures for Korea and Thailand are for commercial banks only.
3In Korea, the KAMC acquired unsecured loans at a discount of 97 percent and secured loans at a discount of 55 percent.
4Estimated recapitalization requirements include recapitalization already undertaken; these are official estimates for Malaysia, and staff estimates for Korea and Thailand.
5Data for Indonesia in this and following rows are as of end-July, after the formation of Bank Mandiri
(see Box 2.5).
6For Korea, intervened institutions are those under rehabilitation and excludes the numerous but relatively small Credit Unions and Mutual Savings institutions. For Malaysia and Thailand, they comprise recapitalized institutions.
7For Korea, this figure excludes the numerous but relatively small Credit Unions and Mutual Savings
institutions.
8For Indonesia, this figure and those in the next two rows represent shares of total liabilities. The percentages add up to over 100 because some intervened institutions have subsequently been merged or closed.
For Malaysia, the figure is proxied from the share of institutions loans in the system total.
9For Korea, these figures are for commercial banks only (sourced from Merrill Lynch) and are not directly
comparable to the number of merged, intervened, and closed institutions above, which include merchant
banks and insurance companies.
Financial sector restructuring cannot be looked at in

isolation from the rest of the reform process.
Restructuring in the corporate sector is less advanced,
and an important remaining issue concerns the allocation of accumulated losses in this sector. If past experience is a guide, there is a major risk that a large share
of these losses, rather than being borne by corporate
shareholders, may be shifted to the financial system
and ultimately to taxpayers through repeated recapitalizations of banks.
all the countries under consideration. Reform efforts

to date have focused mainly on improving the underlying legal and institutional framework for financial
and operational restructuring. Bankruptcy and foreclosure procedures have generally been strengthened,
including through measures to increase the independence and authority of the judiciary. In Thailand, for
example, specialized bankruptcy courts have been established and the bankruptcy law has been reformed
to include and strengthen court supervised reorganization. In Indonesia, new anticorruption legislation
and improved staffing practices (including higher
salaries) are intended, in part, to increase the standing
and effectiveness of the courts. Each of the countries
has also put in place an improved framework for out-
Corporate Restructuring
In contrast with the progress in the financial sector,
corporate restructuring is at a relatively early stage in
58
of-court settlements and voluntary debt restructuring,

with quasi-public agencies taking a leading role in
coordinating debt workout agreements between heavily indebted corporations and their creditors (especially the banks). Efforts are also being made
throughout the region to improve corporate governancefor example, by upgrading accounting, auditing, and disclosure standards, and strengthening the
rights of minority shareholders. Complementing these
measures are reforms designed to increase competition in corporate operations and ownership, including
strengthening antitrust procedures, increasing the
scope for foreign investment in the economy, and
preparing state-owned enterprises for full or partial
privatization.
While the framework and strategy for corporate restructuring are generally in place, their implementation has been slow. Most of the progress to date has
been in financial rather than operational restructuring
of indebted enterprises, reflecting the closely related
process of financial sector adjustment, the inherent
complexities of introducing operational changes, and
the resistance to such adjustments. Even with financial restructuring, though, much remains to be done:
the amount of corporate debt that formally awaits restructuring (for example, as a result of applications to
the workout committees set up for this purpose) represents a rather small proportion of total nonperforming loansjust over 30 percent in Malaysia and
Korea, and 47 percent in Thailandand there has
been mixed success in concluding workout agreements (Figure 2.8). While comparable data are not
available for Indonesia, progress there appears to
have been particularly slow, both in applying the necessary improvements in corporate governance and in
restructuring the very high level of corporate debt.
However, implementation of a substantial privatization program is on track with more than half the targeted proceeds of $1.5 billion for 1999/2000 already
achieved.
In Korea, while voluntary debt workouts among the
second-tier chaebols have led to a substantial amount
of debt being restructured, concerns have emerged
about the workouts: some business plans have been
overly optimistic; debt restructuring has not gone deep
enough; management has at times remained in place;
and there are cases where creditors have not properly
monitored companies performance and sanctioned
those that went off track. Progress was initially even
slower with the top five chaebols regarding both financial and operational aspects of restructuring. But
following the emergence of severe difficulties at
Daewoo, reform of the top five conglomerates has
begun to accelerate. On the financial side there are
several indications of progress: the large chaebols
have eliminated cross-guarantees between affiliates in
different industrial sectors, reduced their outstanding
bank loans by over 25 percent in the year to April
Figure 2.8. Selected East Asian Countries:

Progress with Corporate Sector Restructuring1
(Percent of total nonperforming loans)
There has been mixed progress in concluding debt workout agreements
in the crisis-hit economies.
Corporate debt
restructured
Corporate debt
pending restructuring
50
40
30
20
10
Malaysia
Korea
Thailand

1End-March 1999 or the latest available data. While the total amount
of nonperforming loans to be restructured is unclear, a proportion less
than 100 percent should be expected.
59
II
Box 2.5. Financial Sector Restructuring in Indonesia, Korea, Malaysia, and Thailand
newed effort is now being made to improve loan collection from the banks major debtors in order to offset these
costs to the extent possible.
In Korea, the rehabilitation and consolidation of the
banking sector are generally well advanced, although the
full extent of the problem is still uncertain because of ongoing corporate restructuring. As demonstrated by the recent near-bankruptcy of Daewoo, corporate weaknesses
pose risks to the system. Five of the 26 commercial banks
that operated at end-1997 have been closed, and the rest
(including those that were nationalized and others receiving public support) are engaged in various forms of restructuring, including mergers and raising additional capital. Operational changes are substantial, involving a 25
percent reduction in the workforce, salary reductions, and
branch closures. Negotiations have been underway since
late-1998 for the sale of two nationalized banks; there
have been difficulties in reaching final agreement with
prospective foreign buyers, but a terms of agreement for
the sale of Korea First Bank was signed in September
1999. The main area of policy attention now is with the
nonbank financial intermediaries (such as investment
trust companies), which accounted for just under one-half
of financial sector assets at end-1997 and are heavily exposed to large chaebols such as Daewoo. The 11 remaining merchant banks (of the original 30) are all under rehabilitation plans approved by the Financial Supervisory
Commission, as are all the investment trust companies
and 16 of the remaining 45 insurance companies. Public
funds equivalent to 16 percent of GDP have so far been
allocated for financial restructuring, although the eventual resources required could be substantially above this
In Indonesia, the program for recapitalizing private sector banks has been completed. Under an agreement
reached in April 1999, seven large private banks have
been recapitalized on the basis of an interim 4 percent
capital adequacy ratio (with one further expected), private owners contributing 20 percent of the funds required
and the authorities the rest (in return for a corresponding
equity share). The remaining 74 smaller private banks
have been assessed by the authorities as adequately capitalized, although around one-quarter of owners and managers failed the fit and proper test and are being replaced. Progress is slower in the case of the seven state
banks and the 12 banks taken over by the Indonesian
Bank Restructuring Agency (IBRA). These two groups
account for around 75 percent of total deposits, and 90
percent of the estimated $40 billion negative net worth of
the domestic banking system at end-March 1999. Four of
the state banks were merged on July 31, and recapitalization of the new institutionwhich has a market share of
around 30 percentis intended in 1999 as its downsizing
and other restructuring proceeds. Strategic decisions concerning the other three state banks are expected in
August. The estimated costs of rehabilitating the banking
sector have risen since earlier in the year as a result of
higher estimates of nonperforming loans, lower loan recovery rates, and operating losses, but now seem to have
stabilized. Overall, bonds totaling some $68 billion
(around 45 percent of GDP) may need to be issued for the
recapitalization of banks and resolution of closed institutions. The budgetary cost for 1999/2000 is estimated at 3
percent of GDP but, including quasi-fiscal items, the
gross fiscal cost could be nearly double this level. A re-
1999, and agreed to lower their debt-equity ratios to

200 percent by the end of this yearan ambitious objective given that this ratio was over 500 percent at
end-1998.
In view of the slow pace of adjustment, some policy
measures have recently been introduced in Indonesia,
Korea, and Thailand to encourage financial institutions to speed upor, at least, not blockthe restructuring of corporate debt. The Indonesian authorities
have directed state financial institutions to target restructuring efforts on their 20 largest delinquent borrowers, with explicit timetables and loan recovery
goals. The authorities in Korea are pressing the major
commercial banks to tighten the availability of credit
to the largest chaebols, with credit supply tied in part
to the chaebols fulfillment of restructuring commitments, and, more generally, tax incentives for debt restructuring have been introduced for both creditors
and debtors. Such incentives were also introduced in
Thailand in late-1998, and the Thai government has
made available Tier II capital support for financial institutions that restructure debt.
Social Policies
The strengthening of social support systems in the
crisis-hit Asian economies has been motivated primarily by the need to combat the rise in poverty and ensure a minimum level of support for those worst affected by the economic downturn.12 As discussed in
Box 2.6, the crisis has resulted in significant output
losses, which in turn have contributed to increases in
unemployment. In addition, social expenditures can
play a longer-term role in supporting stabilization and
adjustmentfor example, by reducing some of the uncertainties associated with structural change and job
loss, and increasing economic flexibility against future
macroeconomic shocks.
12Social policy developments are discussed in more detail in

Sanjeev Gupta et al., Mitigating the Social Costs of the Economic
Crisis and the Reform Program in Asia, IMF Paper on Policy
Analysis and Assessment 98/7 (Washington: International Monetary
Fund, June 1998), and Timothy Lane et al., IMF-Supported
Programs in Indonesia, Korea, and Thailand.
60
private banks, with around 56 percent of total deposits,

met current capital requirements and have access to sufficient funds (including from foreign owners) to meet
higher future criteria. Two other private banks are raising
private capital with assistance from the Tier-1 capital support scheme.1 Two large state banks, holding 20 percent
of deposits, have been formed through mergers of existing institutions, including 12 intervened finance companies. These banks are now being recapitalized, and the
government intends to privatize them over the medium
term. After some initial delays, privatization of the four
remaining intervened banks is scheduled for completion
by October 1999. The Financial Restructuring Authority
(FRA) has conducted several rounds of auctions of assets
taken over from the 56 finance companies that were
closed in 1997, and expects to complete these sales by the
third quarter of 1999. Reflecting the FRA strategy of auctioning off the simplest and best assets first, the recovery
rate in asset sales has declined from just under 50 percent
in the case of hire purchase loans and residential mortgages sold in mid-1998, to around 20 percent in more recent auctions of business loans. Related to this, a rising
share of assets has been purchased by the governmentowned Asset Management Company, acting as bidder of
last resort.
levelfor example, if nonperforming loans turn out to be

higher than current estimates. Financial sector restructuring in Malaysia also appears to be progressing well,
probably helped by the limited number of institutions affected by the crisis and by Malaysias relatively good
prior record with such reforms. The government-owned
entities charged with taking over nonperforming loans
and recapitalizing banks have raised funds totaling
around 9 percent of GDP, in line with current estimates of
their requirements, and these are now being provided to
institutions requiring support. As of April 1999, capital
injections amounting to just over 2 percent of GDP had
been distributed, with recapitalization scheduled for completion by end-June 1999. The restructuring process has
emphasized the rapid purchase of nonperforming loans
and recapitalization. Since January 1999, the central bank
has assumed management control of four financial institutions, which remain open to customers, and is seeking
suitable merger partners. For institutions receiving new
capital, Danamodal (the bank recapitalization agency)
participates directly in bank management through its representation on the board of directors. The number of finance companies has been reduced from 39 as of mid1998 to 25 at present, and further mergers are planned
involving these institutions along with the commercial
banks and merchant banks.
In Thailand, implementation of the October 1997 and
August 1998 financial restructuring plans is generally
on track. The restructuring strategy emphasizes private
sector-led recapitalization, with state support where necessary. In its January review of financial institutions
business plans, the Bank of Thailand determined that six
1The Tier-1 and Tier-2 capital support schemes were discussed

in the December 1998 World Economic Outlook, which also
notes an estimated total cost of bank restructuring of 32 percent
of GDP (in terms of the stock of public debt issued).
Public spending on social safety nets has increased

substantially over the past two years, reflecting higher
unemployment, the expansion of eligibility criteria,
and increases in some benefit entitlements. In
Indonesia and Thailand, for example, safety net expenditures are projected to rise by 0.51 percent of
GDP in 1999 while, in Korea, these expenditures have
roughly quadrupled compared with precrisis levels
(from 0.4 percent of GDP in 1997 to 1.7 percent in
1999). In general, much greater emphasis is being
placed throughout the region on the targeting of benefits, involving both cash and in-kind transfers to the
most vulnerable. Correspondingly, the use of acrossthe-board benefits such as price subsidies has been reduced, although some subsidiessuch as on rice and
energy in Indonesiaremain an important part of the
social policy framework. Along with increased targeting, administrative reforms have been (or are being)
introduced to improve the monitoring of these programs. For example, Indonesia is to make greater use
of local communities and independent civil groups as
monitors.
Korea is the only crisis-hit country with an unemployment insurance system, and the potential coverage
of its scheme has been doubled to around 70 percent of
wage earners through extensions of eligibility to employees of small firms and to part-time workers. The
duration of benefits has also been lengthened and
qualifying periods for coverage shortened.
A further important development is the increase in
employment-generating schemes. In Korea, funding for
nearly half a million jobs has been provided by local
governments and public corporations, with 150,000
jobs taken up in the final quarter of 1998; Korea and
Indonesia are expanding special credit schemes for
small enterprises, with Indonesia also introducing temporary, community-based employment programs; and
Thailand is increasing funding available for temporary
employment in such areas as construction and infrastructure rehabilitation. Attention is also being given to
investment in human capital and infrastructure. Health
and education spending has been increased throughout
the region, and public pension schemes are being developed in Indonesia and extended in Korea.
61
II
Table 2.4. Russian Federation: Macroeconomic Indicators, 199699

1996
1998
Estimated
1997
1999
Projected
(Annual percentage changes)

Production and prices
Real GDP
Change in consumer prices
Annual average
12-month
Change in GDP deflator
3.5
0.8
4.5
47.6
21.8
43.9
14.6
11.0
16.6
27.7
84.4
11.4
87.8
45.0
52.7
(Percent of GDP)
Public sector
Federal government
Overall balance (commitment)
Primary balance
Revenue
Of which: cash
Expenditure
Interest (cash)
Noninterest
8.4
2.5
12.5
9.2
20.9
5.9
15.0
7.1
2.5
12.3
10.0
19.0
4.7
14.3
5.9
1.3
10.7
9.0
15.6
4.0
11.6
5.2
2.1
13.0
13.0
15.1
4.3
10.8
(Billions of U.S. dollars unless otherwise indicated)

External sector
Total exports, f.o.b.
Total imports, f.o.b.
External current account (deficit)
Federal government external debt service due
As percent of exports of goods and services
Stock of federal government external debt
As percent of GDP
Gross reserves coverage (months of
imports of goods and services)
90.6
72.8
3.9
17.5
17.0
136.1
32.6
89.0
77.4
3.0
15.9
15.4
134.6
30.9
74.7
56.8
2.5
17.5
19.9
152.4
48.7
73.6
45.3
14.4
18.6
21.9
157.5
90.1
2.0
2.2
2.0
3.7
(Units as indicated)
Memorandum
Nominal GDP (billions of rubles)
Nominal GDP (billions of U.S. dollars)
Exchange rate (rubles per US$, period average)
2,146.0
417.4
5.1
2,522.0
435.5
5.8
2,685.0
313.0
9.7
4,100.0
174.8
...
Sources: Russian authorities; and IMF staff estimates and projections.
The authorities main achievement in recent

months has been the measure of macroeconomic stabilization resulting from the move toward tighter
macroeconomic policies in early 1999 (Table 2.4).
The depreciation of the ruble against the U.S. dollar
was halted in early May, and monthly CPI inflation
declined from a peak of 38!/2 percent in September
1998 to 1!/4 percent in August. Helped by this return
to broad currency stability and relatively moderate inflation, and also the competitiveness gain from the
ruble depreciation in the second half of 1998, industrial production has turned up, being more than 5 percent higher in JanuaryAugust 1999 than in the same
period a year earlier. Import-competing activities
have benefited the most from the large real depreciation of the ruble with imports in U.S. dollar terms
more than 40 percent lower in the first half of 1999
than in the same period of 1998, before the crisis.
However, there has not been any pronounced recovery in exports or output in the export-oriented
branches; in particular, production of oil and gas has
Russia and Neighboring Countries in

Transition: Prospects for Recovery
and Reform
In the wake of the August 1998 crisis, the Russian
authorities faced a range of major challenges. They
had to address the consequences of the crisis for domestic financial markets and the banking sector, and
for the countrys relations with international creditors.
Moreover, they were confronted with the need to
tackle the fiscal and structural problems that were at
the root of the crisis. The subsequent record has been
mixed. Monetary, and subsequently fiscal, policies
were relaxed in the aftermath of the crisis, but were
tightened again in the first half of 1999. Also, steps
have been taken to revitalize domestic financial markets and to normalize relations with key international
creditors. On the other hand, only limited progress has
been made in restructuring the banking sector and in
addressing the pervasive fiscal and structural problems, with back tracking in some areas.
62
Russia and Neighboring Countries in Transition: Prospects for Recovery and Reform
broadly stagnated owing to extraction and transportation constraints. Output in major sectors other than
industry, including agriculture and construction, in
the first half of 1999 remained lower than a year earlier. As a result, real GDP in the first half of 1999 was
1 percent lower than a year earlier. Both macroeconomic stability and prospects for sustained recovery
remain at risk unless further progress is made in addressing the fiscal and structural problems that were
the root causes of the August 1998 crisis.
The authorities have also taken steps to restart the
operation of the domestic fixed income markets and to
avoid a further deterioration in relations with international creditors. A final conversion scheme for the domestic treasury bills that were frozen in the August
1998 debt restructuring was adopted in March 1999,
and a reorganization of the treasury bill market completed in June. As a result of these steps, by the end of
June the face value of outstanding treasury bills had
been reduced by more than one-third (more than twothirds when adjusted for inflation) and their average
maturity extended to around 2#/4 years from less than 1
year just prior to the 1998 restructuring. However, the
domestic treasury bill market remains highly illiquid
and secondary market yields, at more than 60 percent
in early September, very high; reflecting these unfavorable conditions, the government has not returned to
the market to raise new financing. In the context of the
treasury bill conversion scheme, incentives were provided to major companies to issue domestic currency
corporate debt instruments, opening the perspective of
a revival of the corresponding market. But overall,
among the domestic financial markets, only the equity
market has as yet resumed activities on a substantial
scale, with broad investor interest, including among
banks, contributing to the sharp rally in Russian equity
prices during 1999.
Some progress was also made on the external debt
front. The authorities continued their dialogue with
major international creditors, following the announcement in late 1998 that the country would be unable to
make payments on Soviet-era debt but would fully
honor debts incurred by the Russian sovereign. The dialogue has been successful in avoiding a formal default toward Paris or London Club creditors, although
Russia has effectively failed in recent months to make
a series of scheduled payments to both groups of creditors.13 In the middle of June, in the context of the
Cologne summit, the major industrial country members of the Paris Club announced their support for a restructuring (but not partial write-off) of the Soviet debt
owed to official creditors, and an agreement to
reschedule around $8 billion of this debt was reached
at end-July. The June announcement was interpreted

by investors as also improving the payment prospects
for London Club debt and eurobonds, and secondary
market prices for these instruments subsequently
staged a significant recovery. The government has
continued to meet its obligations on eurobonds, and
also on the U.S. dollar-denominated domestic debt instruments issued in 1996.
Only limited progress has been made in restructuring the banking sector. The August 1998 crisis inflicted heavy losses on this sector, which was already
structurally weak, and made comprehensive and largescale restructuring even more urgent. The main vehicle
for bank restructuring is the Agency for Restructuring
Credit Organizations (ARCO), created in October
1998 and slated to acquire controlling stakes in banks
in distress, manage bad assets, and initiate bank liquidations. However, the agencys resources are modest
compared with the restructuring and recapitalization
needs, and significant deficiencies in the legal framework governing banking sector reform remain. The
central bank has been reluctant to withdraw licenses
from ailing banks and place them under administration, although there has recently been some progress
in this regard as part of the new IMF program. The
central bank has also failed to act decisively against
extensive asset stripping of insolvent institutions. The
lack of progress in bank restructuring has further
eroded commercial banks willingness to extend new
lending to households and firms, and new credit to the
private sector has continued to decline in real terms
since the crisis, from already very low levels. In the
absence of investment opportunities other than equities, many commercial banks have built up large liquidity positions in their correspondent accounts at the
central bank.
Long-standing fiscal problems were at the root of
the August 1998 crisis, including the federal governments poor revenue performance and tax and expenditure arrears. Much remains to be done to address
these problems; nevertheless, some signs of progress
are apparent in the revenue and expenditure measures
introduced to reach the targeted 2 percent primary
surplus target included in the new stand-by arrangement. Moreover, the fiscal situation at the federal
level has improved since the beginning of the year,
with a strong recovery in revenues reflecting both the
improvement in the macroeconomic environment, including higher oil prices, and reinforced tax collection efforts. Federal government revenues in the second quarter of 1999 were around 14 percent of GDP
compared with less than 11 percent in the same quarter of last year, and revenue collection has further improved since then, exceeding nominal budget targets.
In particular, cash revenues relative to GDP have
risen from the very low levels recorded in the second
half of 1998. Noninterest expenditures have been restrained further and the primary balance has swung
13A number of secondary market holders of London Club debt not

represented at the London Club have formed a separate representation group, which is exploring the scope for default litigation against
Russia.
63
II
Box 2.6. Counting the Costs of the Recent Crises

To quantify some of the costs incurred during the recent
financial crises, the first table presents estimates of cumulative output losses for the four economies worst afflicted by the Asian crisis and also for Argentina and
Mexico during the 199495 tequila crisis. The estimates refer to the four years following the respective
crises, are based on current WEO output projections for
years after 1998, and show cumulative output losses relative to hypothetical noncrisis output paths. The estimates therefore rely on counterfactual assumptions and
projections.
In the estimation of output losses during the tequila
crisis, it is assumed that in a noncrisis scenario output
would have grown at 4 percent a year; this corresponds
roughly to the average annual growth rate of real GDP in
Mexico during 199094 and to the lower bound of potential output growth estimates for Argentina.1 Despite
the rapid recovery of output in both countries during
1996, 1997, and the first half of 1998, the output losses
associated with the crisis were substantial, especially in
the case of Mexico.
For the Asian economies, it is assumed that, in the absence of a crisis, output growth would have slowed down
from rates in the 78!/2 percent range prior to the crisis to
4 percent a year from 1997 onwardsa hypothetical
soft-landing scenario. The output losses implied by
comparison with such a scenario are sizable, particularly
for Indonesia and Thailand, where they appear to have far
exceeded those incurred by Argentina and Mexico earlier
in the decade.
Increases in unemployment and the associated social
costs have been important by-products of the 199798
crises in Asia, although they have not been as large as
was widely feared when the crises were at their peaks.
All the Asian countries considered here have witnessed
marked rises in measured unemployment in the wake of
the crises (see figure), often to the highest levels in over
a decade. The increases in unemployment relative to output declines have been largest in Korea, Thailand, and
Hong Kong SAR. In Korea and Thailand, job losses have
been exacerbated by banking and corporate sector restructuring. In Hong Kong SAR, with the exchange rate
peg having been maintained, adjustment called for de-
Cumulative Output Losses of 1990s Crises

(In percent of potential output)
Cumulative Four-Year Output Loss1
Tequila crisis
Argentina
Mexico
15
30
Asian crisis
Indonesia
Korea
Malaysia
Thailand
82
27
39
57
Source: International Monetary Fund, World Economic

Outlook database; and staff estimates.
1Calculated as the sum of the output gap over a four-year period, starting with the crisis year. The output gap is defined as the
percentage difference between the actual and the hypothetical
(or potential) level of real GDP for each country. Graphically,
the cumulative output loss would thus be represented by the area
between the potential and actual output paths, starting from
the crisis year and expressed as a percentage of potential real
GDP. It follows that accumulated losses will be positive, and
possibly large, even in cases where output is back to potential
at the end of the four-year period. In the counterfactual scenario,
it is assumed that potential GDP grows at 4 percent per annum
and that actual and potential output coincided within the twoyear period preceding the crisis. Actual GDP during 1999
2002 refers to WEO projections.
clines in output prices, and in real and nominal wages.

Output prices andto a lesser extentwages adjusted
downwards, but unemployment still bore a significant
part of the short-term burden of adjustment. In Malaysia,
where measured unemployment has not risen commensurately with output declines, labor market adjustment
has been facilitated by the repatriation of migrant
workers to Indonesia as well as by a combination of
falling real wages in the formal sector and the movement
of workers into low-paying informal sector jobs.2
Unemployment has also risen sharply in Brazil and Chile
2Tamar Manuelyan Atinc and Michael Walton, Social

Consequences of the East Asian Financial Crisis, available at
http://www.worldbank.org/poverty (Washington: World Bank,
1998).
1See IMF, Argentina: Recent Economic Developments (Washington, 1997).
into surplus, in part due to the tight financing constraint since the government has lost access to new financing in domestic and international financial markets. However, federal revenues remained low as a
percent of GDP, and the authorities have failed to
benefit fully from the financial gains in the energy
sector stemming from the ruble depreciation and
higher energy prices. Also, recent cuts in noninterest
expenditures have been mainly ad hoc (including
through a less than full adjustment of wages and pensions to inflation) rather than being based on the comprehensive expenditure reduction plan introduced in
early 1998. Interest expenditures, and hence the size
of the overall deficit, have been kept artificially low
as interest payments have been rescheduled and interest charges on debt held by the central bank have been
maintained at below market rates. Finally, and most
importantly, the authorities have continued to fail to
64
Selected Emerging Market Economies: Unemployment1

(Percent of labor force)
18
15
12
9
6
3
0
18
15
12
9
6
3
0
18
15
12
9
6
3
0
Malaysia
Indonesia
1990
92
94
96
98
1990
Thailand2
1990
92
92
94
96
98
Korea
94
96
98
1990
Brazil
1990
92
96
98
1990
1990
92
94
96
98
92
94
96
98
1990
92
94
96
98
Mexico
92
94
96
98
1990
92
9
6
3
0
18
15
12
Argentina
Chile
94
18
15
12
Hong Kong SAR
94
96
98
9
6
3
0
18
15
12
9
6
3
0
1Shaded
21998

data are IMF staff estimates.
Recent World Bank estimates3 indicate that in Indonesia

the share of the population living below the (nationally
defined) poverty line increased from 11.0 percent in
1997 to 19.9 percent in 1998. In Korea, the share of the
urban population living in poverty increased from 8.6 to
since early 1998 in spite of some decline in real wages.

In Argentina, buoyant economic activity through the first
half of 1998 helped keep unemployment on a declining
trend until late in the year, but the combination of weakening activity amidst deflationary pressures and labor
market rigidities (see Box 2.3) raised the unemployment
rate by 3 percentage points between October 1998 and
May 1999.
The approximate magnitude of the social costs can be
gleaned from a variety of socioeconomic indicators.

3See World Bank, 1999, World Bank Poverty Update: Trends
in Poverty, available on the Internet at http://wb.forumone.com/
poverty/data/trends.
act decisively against tax delinquency and the use of

noncash transactions.
The authorities have furthermore been unsuccessful
in moving beyond the postcrisis standstill in other
areas of structural reform. There has been little or no
further progress in the liberalization of the economy or
in enterprise restructuring, and there have been reversals in some areas, including in the enforcement of
bankruptcy procedures, the regulation of infrastructure
monopolies, and trade policy. The privatization effort

has also slowed considerably, with no major sales thus
far in 1999.
Without a reinvigorated effort to move ahead with
banking sector rehabilitation, fiscal, and other structural reforms, the recent macroeconomic stabilization
and turnaround in industrial output are unlikely to last.
As set out in the new IMF program, banking sector rehabilitation needs to focus on the enforcement of sound
65
II
Box 2.6 (concluded)

Selected Emerging Market Economies: Average Growth of Real GDP and Its Volatility
(Percent a year)
19621999
________________________
19791989
_______________________
Mean
Standard
deviation
Mean
Standard
deviation
19891999
_________________________
Mean
Standard
deviation
Asia
HongKong SAR
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan POC
Thailand
6.3
5.1
7.5
6.4
3.7
7.8
7.8
6.6
4.3
4.6
3.7
3.5
3.4
3.8
9.9
3.6
7.0
5.2
7.5
5.6
1.9
7.1
7.8
7.1
3.9
2.7
4.1
3.1
5.2
3.9
2.7
2.9
3.2
4.2
5.4
6.2
2.6
6.9
5.8
5.0
3.6
7.3
4.4
5.0
2.3
3.0
0.9
5.8
Latin America
Argentina
Brazil
Chile
Mexico
2.1
4.8
3.9
4.6
6.9
5.0
5.7
3.7
1.0
2.8
3.4
2.2
4.9
4.6
7.2
4.3
4.2
1.7
6.4
3.2
4.7
3.0
3.3
3.6
Note: 1999 growth rates are IMF staff estimates.
19.2 percent over the same period. In Thailandwhere

the middle class seems to have been affected the most
the poverty headcount increased from 11.0 to 12.9 percent. Increases in poverty have therefore been significant
in the countries most affected by the crisis, but they have
not been as large as initially feared, and poverty rates
have remained well below the levels of the 1980s.4
Marked increases in unemployment and in consumer
prices following devaluations put considerable strain on
existing social safety nets. As described in the main text,
in all crisis-stricken countries with IMF programs safety
nets have been put in place or extended to help mitigate
the impact of the crises on living standards.5 In Thailand,
expenditure on social support measures, including food

subsidy programs and direct budgetary transfers to the
poor, is estimated to have doubled over the last two years
adding to the deterioration in the fiscal balance between
1996 and 1998 by the equivalent of 1 percent of GDP. A
fiscal cost of similar magnitude has been estimated for
Indonesia. In Korea, on the basis of a broader definition
of the social safety net, it has been estimated that higher
social expenditures added the equivalent of some 2 percent of GDP to the deterioration of the fiscal position in
the same period.6
Apart from the costs of the social safety net and the decline in revenues resulting from lower economic activity,
the other main fiscal costs associated with the crises have
been associated with banking sector restructuring.7 Soon
4For example, in Indonesia, the share of the population below

the poverty line was estimated to have been 32 percent in 1985.
See East Asia: The Road to Recovery (Washington, DC: World
Bank, 1998).
5For a more detailed description and estimates of the size of the
respective social safety net programs, see Sanjeev Gupta et al.,
Mitigating the Social Costs of the Economic Crisis and Reform
Programs in Asia, International Economic Policy Review
(Washington: IMF, 1999).
6See Timothy Lane et al., IMF-Supported Programs in

Indonesia, Korea, and Thailand. A Preliminary Assessment,
International Monetary Fund, Occasional Paper 178, 1999.
7No quantification of corporate losses is provided because of
the lack of comprehensive data and uncertainty about how these
costs will be distributed. In principle, these costs should be
borne by shareholders but the experience of other countries is
regulatory policies, the referral of insolvent banks

meeting specific criteria to ARCO for restructuring,
and the swift closure of banks that cannot be saved. The
structural reform agenda needs to focus on the full and
prompt implementation of measures to tackle the nonpayment problem; stimulate industrial restructuring,
private sector development, and investment; and
strengthen the legal system. Fiscal reform, in turn,
should focus on strictly enforcing tax payments; elimi-
nating recourse to tax offsets; and prioritizing expenditures and controlling spending commitments made by
ministries and agencies. While the authorities must
give new impetus to a broad range of reforms, the highest priority should be given to bank restructuring and
steps to address the nonpayment problem.
The Russian crisis has had significant spillover effects on neighboring countries in transition. These effects have been most pronounced in the countries that
66
after the outbreak of the crises in 1997, it became clear

that sizeable public sector disbursements would be needed
in Indonesia, Korea, Malaysia, and Thailand to recapitalize banks and provide guarantees to depositors.
Estimating the net costs of banking restructuring is not
straightforward as it requires assumptions to be made, for
example, about the present and future incidence of nonperforming loans, their recovery rate, and the amount of
liquidity support. On a gross basis (i.e., excluding future
proceeds from reprivatization, loan recovery, and repayment of the liquidity assistance provided by the government), official estimates of the cost of financial sector restructuring range from 15 percent of GDP in Korea to 41
and 45 percent of GDP in Thailand and Indonesia, respectively.8 On the assumption that such disbursements are financed by the issuance of government bonds, the fiscal
burden can be measured by the interest costs on an annual
basis. These have been estimated as being in the neighborhood of 1 percent of GDP in Korea in 1999, 2 percent
of GDP in Thailand, and 2.8 in Indonesia in 1999/2000.
Further costs may have arisen from any increase in actual or expected income volatility associated with the
crises. Theoretically, even if long-run or permanent income is unaffected, increased volatility will lower welfare
to the extent that it makes consumption-smoothing more
costly, particularly in economies with less developed financial markets.9 Also, insofar as higher output volatility
increases uncertainty about future income streams, it will
tend to raise precautionary saving and thus lower the path
of private consumption in the long-run.10
The second table shows estimates of aggregate income
volatility in terms of the unconditional standard deviation
of year-on-year growth rates of real GDP for selected

emerging market economies over 196399 and the two
most recent decades individually. As one would expect,
output volatility in the 1990s was noticeably higher than
in the 1980s or the period as a whole in the Asian
economies that were most severely affected by the
199798 financial crisisnamely, Indonesia, Korea,
Malaysia, and Thailand. However, although the recent
crisis also affected Hong Kong SAR, the Philippines,
Singapore, and Taiwan POC, output volatility was actually lower in these economies during the 1990s than in
the 1980s or the period since 1963 as a whole (see second
table). But private consumption declined or decelerated
sharply in 1998 in all the crisis-stricken countries. And it
may be that even in the latter group of economies the
severity of the recent recession, coupled with uncertainty
generated by job dislocation during the reform process,
raised precautionary saving and lowered private consumption over the past two years. On the basis of the
present evidence, however, it is not possible to establish
that weaker private consumption resulted from systematically higher output volatility in the 1990s.
In Latin America, output volatility fell in Argentina,
Brazil, Chile, and Mexico in the 1990s, notwithstanding
the severity of the 199495 Mexican crisis, the spillovers
from the Asian and Russian crises, and the financial turmoil in Brazil itself. Particularly noteworthy is the drop
in output volatility in Chile, where the standard deviation
of year-on-year growth rates more than halved between
the 1980s and the 1990s. Moreover, three out of the four
major Latin American emerging market economies, the
exception being Brazil, achieved higher output growth in
the 1990s than in the 1980s, while also avoiding the more
dramatic boom-bust cycles of the previous decade.
In sum, the economic and social costs of the 199798
Asian crisis in the countries directly affected, though less
than widely feared around the peaks of the crises, have
been substantial, with output losses exceeding those incurred by Argentina and Mexico as a result of the
199495 tequila crisis. But it is not clear, on the basis
of simple measures of volatility of real GDP growth,
whether macroeconomic instability has generally increased among emerging market economies in the 1990s,
in tandem with the liberalization of capital flows and financial integration; nor is it obvious what effects the recent bouts of financial instability will have on consumption and saving in the longer term.
that the banking sector ends up absorbing part of these losses.

Insofar as this leads to capital adequacy problems, and requires
the injection of public sector funds to recapitalize banks, the
costs may ultimately be borne by the taxpayer.
8Some market observers have estimated the costs to be considerably higher. See Financial Sector Crisis and Restructuring
Lessons from Asia, mimeo (Washington: IMF, 1999). Narrower
estimates of restructuring costs and other associated statistics are
provided in Table 2.3.
9For a rigorous analytical treatment of this point, see A.
Deaton, Understanding Consumption (Oxford: 1992).
10For a discussion of the impact of higher income volatility on
precautionary saving and consumption growth, see Jonathan
Ostry and Joaquim Levy, Household Savings in France, in
IMF Staff Papers (1995), pp. 37597.
maintained extensive trade links with Russia prior to

the crisis, namely the Baltics and the countries of the
Commonwealth of Independent States (CIS) other
than Russia. The depreciation of the ruble and fall in
Russian import demand put significant pressure on
these countries currencies (apart from in the Baltics).
With Kazakhstan having abandoned its managed float
in early April 1999, the number of CIS countries, excluding Russia, that have switched to more flexible ex-
change rate regimes since the August 1998 crisis has

risen to six, while in Belarus, where foreign exchange
controls remain in place, the rate of devaluation of the
currency has increased.14 The associated cumulative
losses in the value of the exchange rate versus the U.S.
14Apart from Kazakhstan, those countries are Georgia, the Kyrgyz

Republic, Moldova, Tajikistan, and Ukraine.
67
II
Table 2.5. Countries in Transition: Average

Annual Growth Rates in 199498, and 1998 GDP
Per Capita in U.S. Dollar Purchasing Power
Parity Terms
dollar are in the 3080 percent range, broadly according to the importance of each countrys precrisis trade
links with Russia. In all cases, the depreciations have
led to sizable upturns in inflation. Armenia and, with
some adjustment to the value of its currency in early
July, Azerbaijan and also the Baltic countries have
maintained their currency regimes in the wake of the
crisis, and their exchange rates have appreciated
sharply versus the ruble, while remaining broadly stable against the U.S. dollar. Declines in domestic currency prices of imports from Russia and other CIS
countries have put downward pressure on inflation in
these five countries, in Azerbaijan in particular, where
consumer prices in August were around 9 percent
lower than 12 months earlier.
In most CIS countries, both exports and imports remain well below precrisis levels. In the first half of
1999, exports in U.S. dollar terms were down by 20
percent or more compared with the same period of
1998 in Belarus, Kazakhstan, Moldova, and Ukraine,
mainly reflecting the sharp contraction in import demand in Russia and their currencies real appreciations against the ruble. Estonia and Latvia recorded
declines in exports of more than 10 percent, and
Lithuaniathe Baltic country with the highest precrisis trade exposure to Russiaof around 25 percent in
this period.15 The decline in trade flows has in turn
had a negative impact on activity in industry and the
transit sector. As a result, real GDP fell in Kazakhstan
and Ukraine by around 3 percent, and in Moldova by
more than 5 percent, in the first half of 1999 yearon-year. In the Baltics, all three countries have had
contractions in real GDP in the first half of 1999 compared with the first half of 1998, with the largest
declines in Estonia, by around 4 percent, and in
Lithuania, by around 5 percent.
Apart from its macroeconomic impact, the Russian
crisis has also affected neighboring CIS and Baltic
countries banking sectors and financial markets, their
access to international financial markets, and the pace
of market-oriented reform more generally. Losses on
assets with exposure to Russia and deposit withdrawals induced by declines in confidence have led
to widespread banking problems that, except in the
Baltic countries, have still to be addressed effectively.
The development of domestic financial markets has
suffered a setback as well. Prices and turnover in the
equity markets of the Baltics and Ukraine have been
depressed, while activity in the fledgling equity
markets elsewhere in the CIS has virtually dried up.
Except in the Baltics, domestic real interest rates
have remained high, with negative consequences
for the development of money and treasury bill
Average Growth
Per Capita GDP
Central and eastern

Europe and Baltics
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Slovak Republic
Slovenia
Average
5.5
2.2
4.2
3.1
3.2
2.1
6.0
5.9
4.3
4.0
6,839
12,479
7,607
10,202
5,557
6,437
7,658
9,817
14,305
8,989
Southeastern Europe
Albania
Bulgaria
Macedonia, FYR of
Romania
Average
5.7
2.1
0.4
0.2
1.1
2,860
4,776
4,432
5,646
4,428
Russia
4.2
6,474
5.7
2.9
0.2
3.1
4.2
1.3
9.5
6.3
11.1
10.0
0.4
3.3
2,162
2,211
6,131
3,330
4,300
2,336
1,927
884
3,169
3,248
2,117
2,892
CIS
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyz Republic
Moldova
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Average
Mongolia
3.7
...
Memorandum
EU15
Japan
U.S.A.
2.5
1.1
3.4
20,031
23,979
30,057
Source: OECD and IMF staff estimates.
markets. Conditions facing the Baltic countries in

international financial markets have become less
favorable, mostly so in Lithuania,16 while elsewhere
progress toward gaining access to such markets
has come to a standstill or, in Moldova and Ukraine,
been reversed. More negative investor sentiment
toward the region has also affected FDI flows, delaying the sale of some large state enterprises to international investors. Finally, in a number of CIS countries,
16In Lithuania, a five-year euro-denominated Eurobond issued in
June 1999 carried a premium of 374 basis points above comparable
Bunds, as against a premium of 117 basis points above U.S. treasuries for a five-year U.S. dollardenominated Eurobond issued in
the third quarter of 1997.
15In
the first half of 1999, Lithuanias exports to Russia in U.S.

dollar terms had plummeted to one-fourth of their value in the first
half of 1998, and Russias share in the countrys total exports had
been reduced from 24 percent to less than 7 percent.
68
Table 2.6. Countries in Transition: Structural Reform Indicators,

199498 Averages
EBRD
Transition
Indicators
FDI
Per Capita1
Annual Growth
of Fixed
Investment
Broad Money
to GDP Ratio
Private
Sector Credit
to GDP Ratio
Central and eastern

Europe and Baltics
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Slovak Republic
Slovenia
Average
3.0
3.5
3.3
3.5
2.9
3.0
3.4
3.3
3.2
3.2
393
818
555
1,113
646
318
321
144
530
538
4.1
6.2
10.1
6.9
8.8
7.8
14.3
9.1
11.2
8.7
32
72
28
43
27
21
36
68
39
41
33
60
24
23
11
13
15
36
29
27
Southeastern Europe
Albania
Bulgaria
Macedonia, FYR of
Romania
Average
2.5
2.6
2.7
2.6
2.6
103
140
58
208
127
...
6.2
4.2
1.6
0.1
50
32
13
25
30
4
13
28
11
14
Russia
2.7
92
15.2
19
10
CIS
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyz Republic
Moldova
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Average
2.3
1.8
1.8
2.2
2.4
2.8
2.5
1.7
1.3
2.2
2.2
2.1
64
406
42
37
312
69
113
16
108
43
23
112
8.0
32.6
7.0
12.7
15.4
15.4
13.2
...
...
18.4
4.2
1.3
10
21
24
5
11
14
17
11
9
16
16
15
8
2
11
4
10
8
8
5
...
4
26
9
Mongolia
...
39
23
11
1.02
Sources: EBRD, UNECE, and IMF staff estimates.

1Cumulative FDI in U.S. dollars for the period 199498.
2Average for 199397.
early 1999 reflects the common role of trade linkages

in transmitting the effects of the crisis, and suggests
that trade-based contagion effects have been the main
transmission channel from the Russian crisis for
countries with a relatively high trade exposure to
Russia. At the same time, a comparison of the Baltics
with the CIS countries also shows how faster progress
with structural reform, as in the Baltics, may have
been important in limiting vulnerability to setbacks in
financial development and other structural areas. The
roles of the two factors are illustrated further by the
experience of the countries of central and eastern
Europe, which by virtue of the reorientation of their
trade toward western markets, in part facilitated
by geographical proximity, and their sustained structural reform efforts in recent years have by and large
avoided any major impact from the Russian crisis
the crisis has slowed the overall pace of structural reform. The taste for reform measures that involve
short-term costs but only medium-term benefits has
weakened in view of the lower short-term growth
prospects and reduced access to financial markets
which could smooth the impact of reforms on demand. In fact, pressures for backslidingincluding
the reimposition of price controls on basic commodities and the reintroduction of protectionist arrangementshave intensified.
The economic record of the Baltics and the CIS
countries in the wake of the August 1998 crisis illustrates the importance of two factors in particular in
shaping the spillovers from the Russian crisistrade
exposure and the pace of structural reform. The pronounced weakening in export and output performance
in the Baltics and most CIS countries in late 1998 and
69
II
beyond a modest and temporary slowdown in

growth.17 Their experience underscores the link between progress in structural reform and resilience to
external shocks.
The Russian crisis has clearly exposed the vulnerabilities of those transition economies that have been
relatively slow in making progress with structural reform. In recent years, a widening gap has developed
between the economic performance of these slow reformers and those transition countries that have been
generally successful in building a market economy
and, in most cases, making significant progress toward
meeting the criteria for EU accession. Thus, in
199498, the (unweighted) average annual GDP
growth rate of the more advanced reformers of central
and eastern Europe was 4.0 percent, but that of the
countries of southeastern Europe only 1.1 percent, and
that of the CIS countries other than Russia 3.3 percent
(or 0.3 percent, if 1994, which was a particularly bad
year for the CIS, is excluded) (Table 2.5, page 68). In
1998, average per capita GDP in central and eastern
Europe and the Baltics was more than twice the level
elsewhere in the transition region. Unlessand the
Russian crisis could act as a catalystthe less advanced reformers begin to catch up in their reform efforts, these differences in growth performance and living standards seem likely to remain or widen further.
This divergent growth performance, in addition to
being the outcome of differences in initial conditions
and in the number of years lapsed since the beginning
of the transition, stems from uneven progress in structural reform, which is reflected in a variety of indicators covering such areas as institution-building, corporate restructuring, and financial deepening. A number
of indicators, computed as the averages over the period
1994 to 1998, are presented in Table 2.6 (page 69).
The EBRD transition indicators provide a measure of
progress made in establishing an institutional and legal
framework that ensures the effective operation of a
market economy. The average scores reported for the
countries in central and eastern Europe and the Baltics
are notably higher than those for southeastern Europe
and the CIS. Another criterion, the level of FDI per
capita, and the associated transfer of resources and
managerial skills, is indicative of the scale of corporate restructuring that has taken place. The annual
growth of gross fixed investment is a proxy for the degree of capital stock renewal. According to both criteria, the restructuring and renewal process is significantly more advanced in central and eastern Europe
and the Baltics. Financial sector development, finally,
is another important dimension of the transition.
Table 2.7. Countries in Transition: Indicators of

Export Performance and Labor Productivity in
Industry, 199498 Averages
Average Annual
Export Growth
Labor Productivity
in Industry1
6.8
12.8
29.7
21.9
15.3
26.9
18.6
12.2
8.6
9.2
8.5
7.9
11.0
9.4
5.4
9.9
6.5
7.1
13.5
8.3
12.9
4.1
4.8
12.1
...
2.0
3.2
5.6
8.4
3.6
5.3
1.2
9.5
1.8
32.3
3.3
7.8
11.1
8.0
8.4
22.0
1.0
5.5
13.9
1.1
4.0
1.2
3.4
14.3
3.2
1.2
12.0
1.1
5.0
Average
5.1
2.7
Mongolia
6.7
9.42
Central and eastern

Europe and Baltics
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Slovak Republic
Slovenia
Average
Southeastern Europe
Albania
Bulgaria
Macedonia, FYR of
Romania
Average
Russia
CIS
Armenia
Azerbaijan
Belarus
Georgia
Kazakhstan
Kyrgyz Republic
Moldova
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
Source: EBRD, UNECE, CIS Interstate Statistical Committee,

and IMF staff estimates.
1Manufacturing in the countries of central and eastern Europe and
the Baltics.
2Average for 199397.
Outstanding bank liabilities relative to GDP are an indicator of the financial sectors overall size, while
bank credit to the private sector relative to GDP is a
proxy for the information, monitoring, and risk management services provided by the sector.18 The
199498 averages for both variables show financial
sector development to be still in its initial stages outside central and eastern Europe.
Institutional reform, corporate restructuring, and financial sector development are all expected to improve productivity and international competitiveness.
17For an analysis of the, generally limited, spillovers from the

Russian crisis on financial markets in central and eastern Europe,
see R. Gaston Gelos and Ratna Sahay, Comovements and Crises
Financial Market Spillovers in Transition Economies, IMF
Working Paper (Washington: IMF, 1999, forthcoming).
18Thorsten Beck, Ross Levine, Norman Loayza, Finance and the

Sources of Growth, World Bank Policy Research Working Paper
2057 (Washington, February 1999).
70
Increases in labor productivity in industry and export

growth can therefore be interpreted as indicators of the
overall progress in these areas. The 199498 productivity and export numbers illustrate further the divide
between the more advanced reformers, which, while
reorienting trade towards western European markets,
have made significant gains on both accounts, and the
other transition countries, where labor productivity
has been stagnant or even falling and export growth
modest at best (Table 2.7). These findings provide

strong evidence that structural reform efforts pay off
and suggest that less advanced reformers can significantly improve their longer-term growth performance
by narrowing the structural reform gap. The Russian
crisis, which has highlighted the additional vulnerability of slow reformers to external shocks, further
strengthens the case for a sustained effort to narrow
this gap.
71
II
72
III
Growth Divergences in the United States,
Europe, and Japan: Trend or Cyclical?
hile the United States, Europe, and Japan have

all experienced declines in inflation since the
early 1990s to rates representing reasonable price stability, their growth and labor market performance have
differed markedly (Figure 3.1). Since the 199091 recession, the U.S. economy has expanded at a 3 percent
average annual rate, generating a rise in private sector
employment sufficient to reduce the unemployment
rate to near 4 percent while the labor force has been
rising quite rapidly. In Japan, a period of strong growth
faltered in the early 1990s as the bubble economy
burst. Since then, the economys performance has generally been lackluster, leaving average growth for the
199198 period at about 1 percent and resulting in a
rise in unemployment to 4#/4 percent recently, the highest rate in the countrys postwar history. In Europe,
growth performance has also been disappointing, 2
percent on average for the decade, but has varied
across countriesfrom under 1 percent a year on average in Switzerland to nearly 7 percent in Ireland.
Unemployment in Europe increased further in the
1990s, rising to 12!/2 percent of the labor force in
1997, with a modest decline since then.
These divergences in economic performance reflect
differences in both demand and supply developments
across the three regions. In the short run, demand conditions are usually the more important determinant of
observed variations in output, with supply accommodating demand through temporary changes in domestic resource utilization (often measured as the difference between actual and estimated potential output or
the output gap). Over longer periods, however, although there may be prolonged periods of underutilization of resources, supply conditions tend to be the
more important determinant of output growth, with
capital, labor, and productivity growth as the driving
forces.
Unlike aggregate demand and output, which are
measured on a regular basis in national accounts statistics, an economys potential output is an unobserved
concept that can only be approximated using a variety
of analytic approaches. These approaches all involve
data for actual output and they can therefore provide
changing estimates of the economys current potential
output or cyclical position as new data become available. For example, most analysts estimates of potential output growth in the United States have been increased recently as the recovery has endured and
Figure 3.1. United States, the Euro Area, and Japan:

Economic Performance Indicators1
(Percent)
The U.S. economy has performed better than Japan and the euro area
in terms of output growth and unemployment. Inflation has declined in
all three cases.
6
GDP Growth
United States
4
2
0
Euro area
1990
91
92
93
Japan
94
95
96
97
2
98
99
4
14
Unemployment Rate
12
10
Euro area
United States
6
4
2
Japan
1990
91
92
93
94
95
96
97
98
99
0
6
CPI Inflation
5
Euro area
4
3
United States
2
1
0
Japan
1990
91
1Shaded
72
92
93
94
95
96
97
98
99
Growth Divergences in the United States, Europe, and Japan: Trend or Cyclical?
strengthened unexpectedly; and this is true of IMF

staff estimates (Figure 3.2). The opposite has happened to estimates of potential output growth in Japan
and to a lesser extent in Europe: as output growth in
these economies has weakened, estimates of their potential growth have been lowered. For the United
States, the apparent rise in potential growth has been
attributed partly to a rise in productivity growth related to new information technologies. In Japan, the
apparent decline in potential growth has been attributed to the precipitous drop in investment and excess
capacity problems that originated in the bubble period.
While such phenomena may correctly explain changes
in potential output growthand may eventually justify further revisions in estimated potential growth
ratesit is also possible that the estimates of potential
growth are unduly influenced by recent temporary,
cyclical factors and therefore underestimate the degree
of excess demand in the United States and the margins
of slack in Japan in particular, but perhaps also in
Europe.
The following analysis suggests that both longer-run
structural factors and short-term cyclical or other temporary influences have contributed to the differences
in performance among the United States, Europe, and
Japan. For the United States, although the rate of potential growth is probably higher than previously believed, the extent to which it has been raised permanently by new technologies and other elements of the
new economy cannot yet be quantified with confidence. The available evidence suggests that the impact
of a series of fortuitous, but temporary events may explain a significant part of the low inflationhigh
growth performance in 199698. Therefore, while the
analysis does not allow firm conclusions to be drawn
at this time about the relative importance of temporary
and longer-term factors, it does suggest that caution is
called for when assessing the policy implications of
the U.S. economys recent performance. For Japan, the
analysis suggests that the low rate of growth in
199198 and associated declines in estimated rates of
potential output growth in part reflect temporary adverse economic conditions, whether cyclical or not.
This suggests a need for caution in assuming that the
protracted weakness will persist into the medium term;
but in view of the severity of the 199798 recession
and the recent problems in the banking sector, both
macroeconomic and structural policies have roles to
play in restoring more satisfactory economic performance. The high rates of growth of the past, however,
are not likely to be seen on a sustained basis in the
foreseeable future. For many countries in Europe, a series of temporary, cyclical factors has clearly reduced
rates of growth, especially recently. But to raise potential output in the medium term, the emphasis in these
countries needs to be on labor market policies. In both
Europe and Japan the aging of the populations will
hold down potential output growth in the future.

Vintages of Potential Output Growth
and Output Gaps1
(Percent)
IMF staff estimates of potential output growth have been raised for the
United States during the recent prolonged expansion but have been
lowered for Europe and Japan as growth has faltered. This has resulted
in revisions to output gap estimates.
October 1999 WEO
October 1996 WEO
October 1994 WEO
United States
2.8
Potential Output Growth
Output Gap
2.7
2
2.6
2.5
2.4
2.3
2.2
1990 92 94 96 98 00 02 04
1990
92
94
96
98
Euro Area
3.3
Output Gap
3.0
2.7
0
2.4
2
2.1
1.8
1990 92 94 96 98 00 02 04
1990
92
94
96
98
Japan
5
Output Gap
0
2
1
0
1990 92 94 96 98 00 02 04
4
6
1990
92
94
96
98

1Data are from the indicated issues of the World Economic Outlook
(WEO). Each vintage of potential output growth includes five years of
projections.
73
III GROWTH DIVERGENCES IN THE UNITED STATES, EUROPE, AND JAPAN: TREND OR CYCLICAL?
Table 3.1. United States, the Euro Area, and

Japan: Estimates of Potential Output Growth1
Estimates of potential output and its rate of growth

can serve several related purposes. As mentioned
above, they provide an indication of an economys
trend rate of growth and can help to explain its longrun performance, while output gapsthe difference
between actual and estimated potential outputare
often used as indicators of inflationary pressure.
Potential output estimates also enter into structural fiscal balance calculations that are used to assess a countrys underlying fiscal policy stance and the macroeconomic impact of policy initiatives.1
The quantity of goods and services that can be produced on a sustainable basispotential outputdepends on the inputs of capital and labor and on their
productivity. But data limitationsin particular difficulties in the measurement of factor inputs and their
contributions to output, and uncertainty about the
speed of technological improvementshave led to a
variety of complementary methods to explain an economys potential output (see Table 3.1).2
The production function is a conceptual relationship describing how capital, labor, and technology
are combined to produce output or GDP.3 An advantage of the production function is that it can be
used to explain why potential output growth varies
over time or across countries by examining
changes in capital and labor inputs. A limitation of
this approach is the difficulty in quantifying the
role of technological progress (or the growth of
total factor productivity, TFP) which by its nature
cannot be measured directly. Indirect methods used
to estimate TFP are heavily influenced by changes
in cyclical conditions. The production function estimates in Table 3.1 assume that TFP growth is un-
(Percent)
198089
United States
Actual output growth
Estimates of potential output growth
IMF staff estimate
Structural VAR model
Time trend
Production function
Estimated contributions of:
Labor force
Capital stock
Total factor productivity
Euro area
IMF staff estimate
Time trend
Production function
Labor force
Capital stock
Japan2
IMF staff estimate
Time trend
Production function
Labor force
Capital stock
199098
2.7
2.5
2.8
3.3
2.8
2.9
2.7
2.9
2.6
2.6
1.1
0.9
0.9
0.9
0.8
0.9
2.3
2.0
2.4
2.4
2.3
2.2
2.4
2.1
2.1
2.0
0.3
0.9
1.0
0.2
0.8
1.0
3.8
1.0
3.6
3.4
3.9
3.6
2.1
0.8
1.5
2.6
0.7
1.8
1.1
0.3
1.2
1.1
Source: IMF, World Economic Outlook database and staff

calculations.
1IMF staff estimates are those used throughout the World Economic Outlook. For Japan and many countries in the euro area, the estimates are based on production functions. For the United States, a
combination of a production function and a split time trend is used.
The structural VAR model is estimated using output growth and inflation as endogenous variables. The time trend estimates are derived
from a Hodrick-Prescott filter. The production function is based on
the growth rates of official labor force and capital stock data; the
labor force is adjusted for the NAIRU. TFP is described in the text.
2For Japan, the second column refers to the period 199298.
1Structural and actual fiscal balances differ because the ratio of actual expenditures to output tends to fall, while the revenue ratio rises,
when an economy is operating above its trend path. Similar adjustments are made to imports and exports (using output gap estimates
for partner countries) to construct structural external balances.
2For other methods see Charles Adams and David T. Coe, A
Systems Approach to Estimating the Natural Rate of Unemployment
and Potential Output for the United States, IMF Staff Papers (June
1990), pp. 23293. Stefan Gerlach and Frank Smets, Output Gaps
and Monetary Policy in the EMU Area, European Economic
Review, No. 43 (1999), pp. 80112, utilize an unobserved components model that provides an estimate of the uncertainty attached to
the output gap estimate itself.
3The production function, or growth accounting framework, is
based on Robert Solow, Technical Change and the Aggregate
Production Function, The Review of Economics and Statistics,
Vol. 39, No. 3 (August 1957), pp. 31220. Robert E. Hall and
Charles I. Jones, Why Do Some Countries Produce So Much More
Output Per Worker Than Others? NBER Working Paper 6564
(Cambridge, Massachusetts: National Bureau of Economic
Research, May 1998) use a similar model to explain cross-country
differences in productivity levels. See also Michael T. Kiley,
Computers and Growth with Costs of Adjustment: Will the Future
Look Like the Past? (unpublished; Washington: Federal Reserve
Board of Governors, July 1999) for a discussion of growth accounting with adjustment costs.
changed from the last full cycle and therefore does

not capture the impact of productivity-enhancing
technologies developed in the 1990s.4
4This limitation follows from the fact that TFP growth is calculated as the residual after deducting from actual output growth the
sum of the estimated contributions to growth of the factor inputs
over some time period, in this case between the two most recent
years in which demand was assumed to be close to potential output.
Estimates of the contributions to output growth of the factor inputs
are based on the assumption that factor payments are proportional to
marginal products, which would be true under competitive conditions with constant returns to scale. Peak to peak or trough to trough
comparisons or regressions of yearly TFP residuals can also be used
to estimate TFP growth.
74
Structural vector autoregressive models (VAR)

explain changes in output in terms of long-term
supply and short-term deviations from it.5 They
identify potential output growth as increases in
output that do not result in an increase in inflation;
increases in output that cause inflation are assumed to be related to cyclical demand pressures.
They do not explain trend or cycles in terms of the
underlying factor inputs.
Trend analysis is used to estimate potential output
using observed output data only, and is based on
the assumption that the growth rate of potential is
constant or varies systematically over time.
Examples include time trends, split time trends,
and moving averages such as the HodrickPrescott filter, which is used for the time trend estimates in Table 3.1. Trend methods are generally
easy to apply and have minimal data requirements. However, they cannot attribute changes in
potential output to observed economic developments. In addition, these methods are not well
suited to distinguishing between trend and cycle
in the recent past because the estimates are highly
sensitive to the end-point of the last observations
in the data set.
Table 3.1 provides estimates of potential output
growth for the United States, the euro area, and Japan
based on the three methods outlined above. They
should be viewed as illustrative and are provided to
demonstrate the range of potential growth estimates
that tend to be derived using different techniques. IMF
staff estimates are also provided; these incorporate
necessary judgments regarding the methodology and
data for each country or region. Production functions
are used for IMF staff estimates for Japan and countries in the euro area; a combination of a split time
trend and a production function approach is used for
the United States.6 For Japan, the staff estimate of potential growth for the period 199298 is lower than
that of the illustrative production function mainly due
to a correction of labor input for the decline in average
hours worked over the period. For the euro area, the
IMF staff estimate is a weighted average of estimated
potential growth in each euro area country, mainly

based on production functions. (The illustrative alternative calculations are based on aggregations of the
underlying data.)
The differences in estimates of potential growth
across countries can be explained by the production
function in terms of differences in the growth rates of
labor and capital inputs (weighted by their respective
shares in total factor payments) and in TFP growth.7
Focusing on the 199098 period, the stronger contribution of labor force growth in the United States
(0.9 percentage point compared with 0.2 and 0.3 percentage points in the euro area and Japan respectively)
offsets the smaller contributions of capital accumulation and TFP growth in the United States relative to
Japan. The larger contribution of labor force growth in
the United States is accounted for in turn partly by
faster growth in the U.S. working age population and
partly by an apparent decline in the NAIRU in the
United States over this period, contrasting with increases in the estimated NAIRU in Europe and Japan.8
The rise in the NAIRU in Europe over the 1990s and
its high level have combined to reduce the level of potential output in Europe relative to what it otherwise
would have obtained.9
The contributions to potential output growth of increases in the capital stock are similar in Europe and
the United States in the 1980s and 1990s. The slight
decline in capitals contribution in the United States is
explained by the 199091 recession which reduced the
average growth of the capital stock in that period. The
U.S. capital contribution increased, however, in the
second half of the period as investment growth picked
up. The decline in the contribution of the growth of the
capital stock in Japan reflects the drop in investment in
the 1990s; it accounts for one-half of the decline in potential growth from 3!/2 percent in the 1980s to 2!/2 percent in the 1990s, as estimated on the production function basis. TFP growth accounts for very little of the
differences in estimated potential output growth across
the three cases. One possible explanation for this result is that, because average TFP growth is assumed to
7In principle, capital and labor inputs to the production process
are the flows of capital and labor services, but these are difficult to
measure, especially at the macroeconomic level. For example, the
true flow of labor services should include the number of hours
worked (which are generally available) and a measure of worker
skill (which is not). Measuring capital services is equally tricky and
depends on utilization, the vintage of the capital asset, and its rate of
economic depreciation.
8Estimates of the NAIRU (the non-accelerating-inflation rate of
unemployment) are used in the potential labor force time series to
provide a measure of sustainable employmentthat is, the labor
force that can be fully employed without generating inflationary
pressures. A decline in the NAIRU raises the level of the potential
labor force.
9See Chapter IV of the May 1999 World Economic Outlook,
which provides an extensive survey of labor market issues in
Europe.
5The
structural VAR models referred to are based on vector auto

regression (VAR) and rely on a key identifying assumption, namely
that temporary (or cyclical) factors do not affect long-run output or
inflation. See Oliver Blanchard and Danny Quah, The Dynamic
Effects of Supply and Demand Disturbances, American Economic
Review, Vol. 79 (September 1989), pp. 65573. The estimates in
Table 3.1 are based on VARs with output growth and inflation as the
endogenous variables.
6For Japan, see Tamim Bayoumi, Where Are We Now and Where
Are We Going? Estimating the Output Gap and Growth of Potential
Output in Japan, in JapanSelected Issues, IMF Staff Country
Report (Washington: IMF, forthcoming). For the United States, see
Paula R. De Masi, Jorge Chan-Lau, and Alex Keenan, Measures of
Potential Output, NAIRU, and Capacity Utilization, in United
StatesSelected Issues, IMF Staff Country Report (Washington:
IMF, 1999, forthcoming).
75
be unchanged in each case from period to period, the

benefits of recent advances in information technology
in the United States, or the other countries, are not
captured.10 Another possible explanation is that the
impact of new technologies will not be seen in
changes in TFP growth, but in changes in the capitallabor ratio.11
An alternative measure of productivity is output per
employed person, or labor productivity,12 an indicator
which is observed directly and in contrast to TFP,
which can only be inferred from reported data. From a
longer-run perspective, productivity growth is related
to the economys stage of development; it tends to rise
as production shifts from agriculture to manufacturing, and to slow as services become more important.13
Between the 1960s and the 1980s, labor productivity
rose more quickly in Japan and Europe as these
economies caught up with the United States (Figure
3.3). In the 1980s, however, the catch-up rate began to
decline as productivity levels converged. This pattern
and the increasing importance of service sectors in
these economies suggest that productivity growth and
therefore potential output growth may well slow in the
future as the catch-up process comes to an end.
From a shorter-term perspective, however, there are
two reasons to expect a pickup in labor productivity
growth. One possibility, or even likelihood, is that the
observed slowdown in labor productivity growth in
Japan and to a lesser extent in Europe during the 1990s
represents a cyclical phenomenon that will be reversed
with a recovery in demand. A second possibility is that
productivity growth could rise in Japan and Europe as
it has recently in the United States, to the extent that it
is technology-based and assuming that these technologies will be successfully transferred to these countries.
Explanations for this rise in U.S. productivity growth
are discussed in the next section.
The rate of catch-up has been slower in Europe than
in Japan, and by the early 1980s, Japan had overtaken
the euro area in terms of income per head of population, though not in terms of output per employee

Output Per Employee and Per Capita1
(U.S. dollars at 1992 prices; logarithmic scale)
Productivity levels have been converging, and productivity growth
slowing.
United States
Euro area
Japan
70000
Output Per Employee
50000
30000
20000
10000
1965
70
75
80
85
90
95
2000
50000
Output Per Capita
30000
20000
10000
1965
70
75
80
85
90
95
2000
5000
1Converted into U.S. dollars using purchasing-power-parity

exchange rates. Shaded areas indicate IMF staff projections.
10The U.S. Bureau of Labor Statistics, Multifactor Productivity

Trends, 1997, estimates multifactor (or total factor) productivity for
the United States on an annual basis. For 1997, nonfarm private
business TFP growth was 0.4 percent, unchanged from the 199097
average.
11See Dale W. Jorgenson and Kevin J. Stiroh, Information
Technology and Growth, The American Review Papers and
Proceedings (May 1999), pp. 10915, for this distinction between
substitution of capital for labor (as relative prices change) and technological change which occurs only when more output is produced
from the same inputs.
12Labor productivity growth can be derived from the production
function as the growth rate of TFP plus the growth rate of the capital to labor ratio multiplied by the capitals factor payment share in
total income.
13See Robert Rowthorn and Ramana Ramaswamy, Deindustrialization: Causes and Implications, in Staff Studies for the
World Economic Outlook (December 1997), pp. 6177, for a discussion of this topic.
76
(Figure 3.3, lower panel). The difference can be explained by the rise in unemployment and the lower
labor force participation rates in Europe, which together lower the ratio of employed persons to the total
population so that even if the levels of output per employee were the same across countries, output per
head of population would be lower. Participation rates
rose in the United States and Japan between the 1970s
and the 1990s to about 80 percent, but remained
roughly stable at 65 percent in the euro area. Labor
market institutions, high tax rates, and generous welfare and early retirement provisions probably play an
important role in explaining Europes lower participation rates.
Figure 3.4. United States: Output, Labor

Productivity, and Inflation in Recent Expansions1
(Percent change from a year earlier)
Output and productivity growth in the current U.S. expansion were
initially slower than in earlier recoveries but have recently
strengthened. Inflation in the current expansion declined and then
remained steady for six years, before declining recently.
The United States: Will the Good

Times Endure?
Current expansion
Economic performance in the United States has

been impressive in the 1990s. The current expansion
will become the longest on record if it continues into
early next year (Figure 3.4).14 It has been unique in
other respects as well. For example, the unemployment rate has fallen to 4!/4 percent, which is at the
lower end of current NAIRU estimates and also below
NAIRU estimates at the start of the decade, while inflation has declined; it typically begins to rise as recoveries lengthen.15 Unlike in other recent expansions,
output and labor productivity picked up slowly in the
early phase of the recovery, but began to accelerate
after five years, by which stage most upswings have
begun to lose momentum. These unusual developments, in particular the recent rise in productivity
growth, have been interpreted by some analysts as an
indication of a new economy in which sustainable
output growth is faster than previously thought possible. However, even though the latest data do indicate
higher trend growth rates of productivity and potential
output in the 1990s than previously estimated, it is unclear whether the rise in labor productivity growth in
the past three years represents an acceleration that may
be expected to be sustained.16
Domestic demand has been buoyant through most
of the expansion. The strength of its recent growth,
given the stage of the business cycle and the financial
crises in emerging markets, has surprised many ana-
1983:Q11990:Q2
1975:Q21979:Q4
10
Output Growth
8
6
4
2
0
2
1
11 13 15 17 19 21 23 25 27 29 31 33
Labor Productivity Growth2
11 13 15 17 19 21 23 25 27 29 31 33
4
6
5
4
3
2
1
0
1
2
14
CPI Inflation
12
10
8
6
4
2
14For
a detailed analysis of the current expansion see Victor

Zarnowitz, Theory and History Behind Business Cycles: Are the
1990s the Onset of a Golden Age? Journal of Economic
Perspectives, Vol. 13 (Spring 1999), pp. 6990.
15De Masi, Chan-Lau, and Keenan, Measures of Potential
Output, NAIRU, and Capacity Utilization, provide various estimates of the NAIRU in the United States. They range from 4!/4 to 6!/2
percent.
16See Mark E. Schweitzer, Productivity Gains During Business
Cycles: Whats Normal, Economic Commentary, Federal Reserve
Bank of Cleveland (July 1998).
11 13 15 17 19 21 23 25 27 29 31 33
1The horizontal axis indicates quarters from the start of each

expansion. The current expansion began in the second quarter of
1991.
2Nonfarm business sector.
77
lysts. Buoyant demand has also been maintained during a period of fiscal consolidation when the primary
structural deficit was being reduced (by 1!/2 percent of
potential output from 1995 to 1998, Figure 3.5). The
strength of consumer demand reflects sustained employment growth and rising real income, but also a decline in the household saving ratefrom 6 percent at
the start of the expansion in 1993, to zero and below
during 1998that has been attributed to rising equity
prices and access to consumer credit by an increasing
number of households. The crises in emerging markets
and weak demand in Japan and Europe have contributed to buoyant bond and equity markets, providing business with lower-cost financing. The weak international environment has further helped to contain
inflation, thereby forestalling a monetary tightening.
These fortuitous effects appear to have offset the negative impact on U.S. exports (Figure 3.6). From 1997,
a large share of the rapid growth of domestic demand
was met by an increasing external deficit as the dollar
appreciated in real effective terms and growth lagged
in partner countries.
How the rise in demand has been met without a rise
in inflation is a subject of considerable debate: a rise
in net imports (and an associated increase in capital inflows) is part of the explanation, but there also may
have been developments in the economy that have
lifted potential output or potential output growth.17
Several hypotheses have been advanced, including the
possibility that a series of fortuitous developments
have temporarily suppressed inflation.
Potential output growth may have risen. The new
economics or new paradigm hypothesis argues that
the higher rates of labor productivity growth observed
in 199698 are likely to be permanent and will make
possible a sustained increase in potential output
growth, maybe to 3 percent a year or more. The main
reasons given for this rise are new information technologies, new cost-cutting management practices that
foster continuous productivity improvements, and related efforts by firms to seek greater efficiencies in response to labor shortages and increased competition.
While there is a certain appeal to the claim that these
new technologies and practices are bringing considerable benefits, for example with just-in-time inventory
control, the link to the observed productivity pickup
has yet to be proved.
Potential output growth did not slow in the early
1990s as previously estimated, nor has it increased recently. At least until recently, many economists believed that potential growth slowed around 1990, but
new data suggest otherwise. Rather, the slowdown in
productivity growth observed in the early and mid-
Figure 3.5. United States: Policy

and Demand Indicators1
The strong performance of the U.S. economy in the 1990s is reflected
in the relative output gap. It has been supported by robust private
sector expenditure, based partly on the rising stock market, which
together with the strong dollar led to the widening current account
deficit. A significant improvement in the structural fiscal balance may
have helped to moderate rises in interest rates.
4
2
General Government
Structural Budget Balance
(percent of potential GDP)
180
Real Effective
Exchange Rate
(1990 = 100)
160
140
120
100
10
8
1990
92
94
96
98 99
Real Interest Rates

(percent a year)
1990
92
94
96
80
98 99:
Q2
Current Account
(percent of GDP)
Long-term
4
2
Short-term
0
2
400
300
1990
92
94
96
98 99:
Q2
1990
92
96
98 99
Output Gap Indicators2

Stock Market Prices:

S&P 500
(1990:Q1 = 100)
6
3
Relative output gap
200
100
0
94
Output gap
1990
92
94
96
98 99:
Q2
1990 92
94
96
98 99
11999 data for structural budget balance, current account, and output
gaps reflect IMF staff projections.
2The estimated relative output gap is the output gap in the United
States less a weighted average of output gaps in the other major industrial countries.
17De Masi, Chan-Lau, and Keenan, Measures of Potential

Output, present estimates of potential output in the United States
based on their own calculations and those of other organizations.
78
1990s now seems transitory or cyclical, perhaps reflecting the relative weakness of the initial phase of
expansion following the 199091 recession. This may
have given the false impression that there had been a
permanent slowdown in productivity and potential
output growth. In 199698, however, the pace of productivity increases picked up, so that the declines in
long-term potential growth estimated earlier are no
longer evident in the data.18 Such considerations have
led to a revision this year in the IMF staffs estimate of
potential growth to about 2#/4 percent a year from 2!/4
percent previously. It is enough of an increase in potential growth to imply that the U.S. economy was operating with spare capacity through much of the 1990s
and only closed the output gap in 1998 (see Figure
3.2). The revised assumption can explain the recent
combination of high growth with low inflation.
Demographic shifts have lowered unemployment
and generated a one-time shift in potential supply. The
argument here is that the decline in the unemployment
rate to 4!/4 percent in 199899 has not caused a pickup
in inflation because the NAIRU has fallen. A recent
study has raised the possibility that as the postwar
baby-boom generation has aged, the overall unemployment rate at a given level of labor market tightness
has declined as the numerous members of this group
have moved into older age cohorts, which typically
have experienced lower rates of unemployment.19 This
may help to explain how the unemployment rate has
fallen to a 30-year low and suggests that the level of
potential output has increased accordingly even
though the underlying growth rate of potential may not
have increased.
Wage and price behavior has changed. In 1996,
Federal Reserve Chairman Greenspan cited evidence
that workers were worried about job security and for
this reason were willing to accept smaller wage increases at given levels of labor market tightness, but in
February 1999, he noted that job security concerns no
longer seemed able to explain favorable wage developments.20 Recent work by IMF staff concludes that
wage behavior, as measured by Phillips curve estimates, has not changed in the past few years, and attributes the low rates of consumer price inflation in

Changes in WEO Export Market Growth
Assumptions1
(Percent)
Export market growth was generally underestimated for the year 1997
in the assumptions used in the May 1997 WEO. The subsequent sharp
slowdown in market growth in 1998 owed much to the Asian and
Russian crises.
15
United States
12
Current
9
May 1997
6
3
1994
95
96
97
98
99
2000
01
02
0
15
Euro area
12
Current
9
6
May 1997
3
1994
95
96
97
98
99
2000
01
02
0
15
Japan
12
Current
9
6
May 1997
18See De Masi, Chan-Lau, and Keenan, Measures of Potential

Output.
19Robert Shimer, Why Is the U.S. Unemployment Rate So Much
Lower? NBER Macroeconomics Annual, 1998 (Cambridge,
Massachusetts: MIT Press, 1998), pp. 1161. Other factors that have
helped to lower unemployment include developments in the temporary help industry, the growth of the incarcerated population, increased competition, and a decline in unionization. See Lawrence F.
Katz and Alan B. Krueger, The High-Pressure U.S. Labor Markets
of the 1990s (unpublished, May 1999).
20Alan Greenspan, Testimony Before the Committee on Banking,
Housing, and Urban Affairs, U.S. Senate (July 18, 1996 and
February 23, 1999). In his February 1999 testimony, Chairman
Greenspan said that wages were now being held down by a decline
in firms pricing power and increases in productivity.
3
1994
95
96
97
98
99
2000
01
02
1Export market growth is calculated as a trade-weighted average of

import growth in partner countries. Projections begin in 1997 for the
May 1997 export market demand assumptions and in 1999 for the current assumptions.
79
199598 to productivity gains, to the slower growth of

nonwage labor compensation since 1995, and to declines in import prices (see below).21
Changes in price index methodology have increased
measured output and productivity growth, mainly
since 1995. A recent study suggests that improvements
in the measurement of inflation, in terms of the GDP
deflator, in part linked to efforts to reduce measurement bias in the consumer price index, have increased
measured average productivity growth in the nonfarm
business sector in 199698, by about !/2 of 1 percentage point compared to the 197295 period.22 The reason that measured real output growth (and therefore
measured growth of output per worker) has increased
is because the price indices used to deflate nominal
output data now show lower inflation, relative to price
indices based on earlier methods. Thus, comparisons
of productivity growth before and after 1995 (when
the bulk of the changes took place) have to be interpreted carefully because of this possible break in the
data.
Special, one-time factors are masking signs of overheating. Declines in global commodity prices and the
strong dollar have lowered import prices and exerted
downward pressure on domestic prices, thus masking
signs of overheating. Recent estimates indicate that
falling import prices reduced consumer price inflation
by an average of 0.8 percentage points a year during
199698, mainly through the impact on the prices of
tradable goods (Figure 3.7).23 Another special factor
that has masked possible consequences of overheating
can be seen in the favorable financing of the U.S. current account deficit. As the deficit widened in
199798, interest rates declined and the effective exchange rate appreciated, bolstering U.S. domestic demand, in part because of the emerging market financial crisis and the underutilization of resources in Asia,
Europe, and Latin America. As growth picks up in
these regions, it may become harder to finance the current account deficit at prevailing interest rates and exchange rates.
Figure 3.7. United States: Selected Price Indices

Prices of tradable goods fell in 199798.
8
6
Consumer price index,
excluding food and energy
Consumer price
index, services
0
Tradable goods
(PPI, finished goods)
1991
92
93
94
Consumer price
index, total
95
96
97
98
Jul.
99
Source: Haver Analytics database.
21Stephen Tokarick, Jorge Chan-Lau, and Gustavo Ramirez,

Wage and Price Determination, in United StatesSelected Issues,
IMF Staff Country Report (Washington: IMF, 1999, forthcoming).
22See Robert J. Gordon, Has the New Economy Rendered the
Productivity Slowdown Obsolete? (unpublished; June 1999). The
paper also estimates that the more than 40 percent a year productivity increase in computer manufacturing in 1995:Q41999:Q1 accounts for all of the rise in manufacturing productivity growth over
this period.
23The estimate is based on the model in Tokarick, Chan-Lau, and
Ramirez, Wage and Price Determination, and includes the dynamic feedback effects through lagged inflation. Roger E. Brinner,
Is Inflation Dead? New England Economic Review (Federal
Reserve Bank of Boston, January/February 1999), finds a similar
effect. The 0.8 percent estimated impact of falling import prices on
domestic inflation should be seen as partly temporary and partly
due to the trend decline in U.S. import prices which began around
1980.
80
While each of these hypotheses could explain the

high growth but declining inflation experience of the
past few years, the implications for the future, and for
policy, are quite different. The new paradigm, and
other explanations relying on sustained higher rates of
productivity growth, suggest that the U.S. economy
can continue to expand at rates previously thought to
be unsustainable. Other explanations point to a level
shift in potential output or transitory changes in the
economy, which suggest that as these one-time influences diminish, signs of overheating could quickly
emerge. These include a temporary pickup in productivity in 199698 reflecting a delayed cyclical productivity catch-up, a one-time demographic shift in unemployment, temporary factors holding down inflation,
and larger than normal capital inflows owing to the
economic slowdown in other economies.
A definitive answer to the question of whether the
U.S. economy has entered a new golden age of sustainable, faster potential growth or whether it has been
benefiting from temporary or cyclical influences is not
possible at this stage. The evidence and historical experience, however, suggest a cautious approach. First,
temporary effectsfor example, falling import
pricesare indisputable and may well disappear or be
reversed over time. Second, studies supporting the
new economy hypothesis do not, as of now, seem to
outweigh contradictory evidence and studies reaching
opposite conclusions. As noted above, it is possible
that the rise in U.S. productivity growth in 199698
represents an unusual cyclical boost and not a change
in the long-run trend. One recent study that does not
support the new economy hypothesis fails to find a
rise in TFP growth over the period 198896 when
computer-related gains could be expected.24 A second
recent study finds a modest, 0.15 percentage point, impact of recent technological advances on potential output growth, while a third finds that the investment
boom in computer equipment raised potential growth
by 0.35 percentage point in 199698.25 This study,
however, concludes that it is too early to label this rise
as a permanent increase in potential growth or the result of a transitory response to falling computer prices.
Third, in view of the tendency for estimates of potential output growth to be raised during cyclical upswings, and lowered during periods of low growth, it
would seem prudent to leave open the possibility that
potential output growth has risen somewhat, but de-
sign policies on the assumption that temporary or onetime changes in the economic environment have
played an important role. Fourth, a cautious approach
is indicated by the adverse consequences of the overheated economies that went unrecognized in the late
1980s and early 1990s in Japan, the United Kingdom,
and the Nordic countries. Finally, the high rates of
growth in the United States in the 1920s and again in
the 1960s were considered by some at the time to
augur new golden ages of prosperity. This of course
did not prove to be the case, and there are many compelling reasons to think that the recent expansion will
be no different.26
Japan: Why the Decade of Lost Growth

May Be an Aberration
Japans lackluster economic performance in the
1990s is rooted in the asset price bubble that emerged
in the 1980s, and that burst at a relatively late stage in
1990. The subsequent collapse of land and equity
prices triggered a protracted period of weak economic
growth, characterized by overcapacity and a pervasive
lack of confidence, associated in part with accumulating worries and uncertainties regarding future employment growth and restructuring, and mounting
public debt. The economic effects of the asset price
collapse were compounded by the precipitous fall in
business investment that has slowed potential growth
and by its effects on the banking system, although
regulatory forbearance delayed the main impact until
1996/97. In response to these problems, the authorities have acted forcefully, if somewhat belatedly, by
adopting a series of large fiscal stimulus packages,
and by easing monetary policy to the extent that policy interest rates have been effectively zero since
early this year. In 1996, fiscal stimulus helped to
jump-start a recovery, but the reversal of the fiscal expansion the next year, together with financial system
instability and the onset of the Asian crisis, contributed to a 5!/2 percent contraction in output between
the beginning of 1997 and the end of 1998, a decline
unprecedented among the major industrial countries
in the postwar period. Consumer price inflation has
been close to zero since 1995, reflecting the large degree of slack in the economy and the impact of falling
import prices; although there has been some downward drift in the price level, deflationary pressures
have been moderate.
24Robert J. Gordon, U.S. Economic Growth Since 1870: One

Big Wave? American Economic Review, Vol. 89 (May 1999), pp.
12328.
25Jorgenson and Stiroh, Information Technology and Growth,
estimate that information technology has added about 0.15 percentage points to total factor productivity growth. Daniel E. Sichel,
Computers and Aggregate Economic Growth, Business
Economics (April 1999), pp. 1824, estimates that computer hardware investment added 0.35 percentage point a year to private nonfarm business output growth in 199698.
26Victor Zarnowitz, Theory and History Behind Business

Cycles, lists seven reasons why the U.S. economy has not become
more stable. For example, while the inventory to sales ratio has followed a gradual downward trend in the 1990s, inventory investment
was about as volatile and cyclical in the period as in the past. The
volatility remains large enough to play a role in propagating a
recession.
81
Cyclical Factors Affecting Economic Activity

in Japan
a welcome development, but it is not clear yet whether

this signals the beginning of a self-sustained recovery
of private demand, given the weakness in the labor
market.
Diminishing support from the external sector has
worsened the recession. For most of the second half of
the 1990s, net exports made a small positive contribution to growth, reflecting the strength of demand in
some partner countries, especially the United States,
and the effects of the yens real effective depreciation
from its peak in 1995. However, export volumes declined during 1998 owing to falling import demand in
the Asian crisis countries, and again in the first quarter
of 1999 as the impact of the earlier yen depreciation
waned.
The authorities have used both macroeconomic and
structural policies to address the protracted weakness
of the Japanese economy. They have implemented numerous economic stimulus packages, which have resulted in a swing in Japans structural government balance from a surplus of 2 percent of potential output in
1991 to a projected deficit of about 6 percent of GDP
in 1999 (Figure 3.8).29 Gross public debt rose from
about 70 to 120 percent of GDP between 1990 and
1998. The fiscal stimulus packages helped initiate a recovery in 1996, when private demand rose vigorously
and output growth increased to 5 percent, but the subsequent fiscal tightening in early 1997, in conjunction
with financial turbulence and the onset of the Asian
crisis, led to a weakening of economic activity again.
The latest packages, implemented in 1998, contributed
to a pickup in private demand in the first two quarters
of 1999, but it is still too early to know whether this
will lead to a self-sustaining recovery. With regard to
monetary policy, the authorities have kept the
overnight interest rate close to zero since March, but
disintermediation problems in the financial sector and
the very low rates of inflation that have put a floor
under real interest rates have rendered monetary policy
less effective.30 Since late 1998, however, a comprehensive framework has been put in place to deal with
banking sector weaknesses.
The explanations for the slowdown in private demand may help to explain why fiscal and monetary
stimulus in the 1990s appears so far to have had only
limited success in rekindling demand (Figure 3.8).
Many firms still have excess capacity, while those
with weak balance sheets may have difficulty in securing finance. A decline in financial intermediation
In terms of the expenditure components, the recession in Japan is accounted for largely by a pronounced
weakening of business and residential investment.
Business investment has fallen by about 20 percent
from its peak in the early 1990s, while the decline in
residential investment is even more pronounced, with
a drop of more than 30 percent between 1990 and
1998. An important factor contributing to weak investment has been the stock adjustment following the
rapid capital accumulation during the asset price bubble period. After the bubble burst in 1990 and as the
economy subsequently slowed, many firms were confronted with substantial excess capacity. Estimates
suggest that even though investment has declined significantly in the 1990s, the ratio of net business capital to potential output is still above its trend prior to the
bubble years.27
Investment spending has also been depressed by
high levels of corporate debt, particularly in the real
estate and construction sectors, and other non-manufacturing sectors. Firms in these sectors had borrowed
heavily on the basis of expectations about economic
growth that were not fulfilled. Their financial situation
worsened markedly and their ability to obtain funds
for new investment or working capital became seriously limited. On the other hand, balance sheets of
large manufacturers have improved since 199192,
and in addition, many of these companies have access
to international capital markets where they can raise
funds directly.
Recent problems in the banking system have contributed to tight funding conditions, especially for
small and medium-sized enterprises that rely on banks
for finance. This appears to have constrained the supply of credit even to many creditworthy firms. In addition to holding back fixed capital projects, it may also
have contributed to limits on firms access to working
capital, thereby hindering production and the ability of
some firms to take advantage of new business opportunities.28
The drop in private consumption by about 1 percent
in 1998 also contributed to the downturn. Important
causes of this decline appear to include a decline in
labor earnings and concerns about future employment
prospects related partly to concerns that corporate restructuring would reduce job opportunities in the future. Further, albeit mild, declines in asset prices may
also have dampened consumer demand. The pickup in
private consumption in the first two quarters of 1999 is
29A more detailed description of the fiscal stimulus packages was

presented in Chapter IV of the October 1998 World Economic
Outlook. See also Martin Mhleisen, Implementation and
Effectiveness of Fiscal Stimulus, in JapanSelected Issues, IMF
Staff Country Report (Washington: IMF, 1999, forthcoming).
30See Tamim Bayoumi and James Morsink, A Peek Inside the
Black Box: The Monetary Policy Transmission Mechanism in
Japan, in JapanSelected Issues, IMF Staff Country Report
(Washington: IMF, 1999, forthcoming).
27See Ramana Ramaswamy, The Slump in Business Investment

in Japan in the 1990s, in JapanSelected Issues, IMF Staff
Country Report (Washington: IMF, forthcoming).
28Bayoumi, Where Are We Now and Where Are We Going? explains potential growth in Japan using several models. All show a
drop in potential growth, but with a wide range.
82
may be holding back viable firms from investing.

Neither a reduction in interest rates nor fiscal stimulus
may therefore do much to spur private investment. The
response of household demand to expansionary policies may also be muted, because of the use of temporary tax cuts and because policies may not be perceived as addressing the underlying uncertainties
about future employment. With the government deficit
near 10 percent of GDP, there is clearly a risk that
households may respond to fiscal easing by discounting future fiscal policy tightening, and raise their saving rates accordingly.
Figure 3.8. Japan: Policy and Demand Indicators1

The weakness of the Japanese economy in the 1990s is reflected in the
relative output gap. Despite the sharp deterioration in the structural
budget balance, the external balance has remained in surplus owing to
weak private demand and the weaker yen. Monetary easing has driven
interest rates effectively to zero.
Has Japans Long-Run Potential Output

Growth Slowed?
Estimates of potential growth in Japan show a decline from about 3!/24 percent in the 1980s to about
12!/2 percent in the 1990s (see Table 3.1). The wide
range of estimates, especially in the later period, is indicative of the uncertainties involved in estimating
potential growth when an economys actual growth
rate falls well below the previous long-term trend over
an extended period. One outcome of this uncertainty
is that any point estimate of potential growth in Japan
at the lower end of the range may be biased and may
understate the true potential growth rate.
Nevertheless, in terms of the production functionbased estimates, about !/2 of 1 percentage point of the
decline in potential growth from about 3!/2 percent to
about 2!/2 percent can be explained by lower labor
force growth in the 1990s compared to the 1980s, the
remaining !/2 of 1 percentage point of the decline
being accounted for by slower growth of the capital
stock (see Table 3.1).31
Looking ahead, the baseline projection incorporates
a decline in the growth rate of potential output, to just
over 1 percent a year in 19992002, from 2!/4 percent
in 199298. The projected slowdowns in labor force
growth and growth in the capital stock account about
equally for the lower rate of potential growth. Over the
longer term, however, it may be argued that Japans
potential growth rate is likely to increase from its currently estimated low rate. First, it is clear that estimates of potential growth in the 1990sparticularly
the most pessimistic ones based on time trends and
structural VAR modelshave been biased downward
by the unusually weak demand conditions in 199198.
Second, despite the aging of the population, available
labor services (and their quality) could increase if the
average retirement age is increased and if the practice
of lifetime employment diminishes and workers are
able to change jobs more easily. This would help to
raise the rate of growth of potential output during the
4 Structural Budget Balance

180
Real Effective
Exchange Rate
(1990 = 100)
160
140
120
100
1990
92
94
96
98 99
10 Real Interest Rates 2
1990
92
94
96
80
98 99:
Q2
Current Account
(percent of GDP)
(percent a year)
8
4
6
2
Long-term
4
2
0
Short-term
1990
92
94
96
98 99:
Q2
120 Stock Market Prices:
1990
92
94
96
98 99

Relative output gap
Nikkei 225
100 (1990: Q1 = 100)
2
6
3
80
60
40
Output gap
20
0
1990
92
94
96
98 99:
Q2
1990
92
94
96
98 99
11999 data for structural budget balance, current account, and output gaps reflect IMF staff projections.
2The real interest rates exclude the effect of the April 1997 valueadded tax (VAT) increase.
3The estimated relative output gap is the output gap in Japan less a
weighted average of output gaps in the other major industrial countries.
31See Bayoumi, Where Are We Now and Where Are We Going?

for a detailed discussion of potential output in Japan and uncertainties in estimating it.
83
transition period. Third, as the detrimental effects of

past overinvestment and the recent banking sector
problems are resolved, firms will again begin to invest
and build up the capital stock. However, rates of capital accumulation are unlikely to return to those experienced in the 1980s when capital spending was widely
viewed as unsustainable. In addition, capital accumulation is likely to slow as labor force growth slows.
Finally, the extent to which capital accumulation will
contribute to potential growth will also depend critically on incentives for new activities and for allocating
resources more efficiently.
A key to higher potential growth lies in structural
policies that address the underlying reasons for the
misallocation of resources in the past that led to the
deterioration in Japans economic performance.32 For
example, Japans high saving rate, together with capital market inefficiencies, has provided Japanese businesses with cheap funding and reduced incentives for
employing such funds efficiently, while labor market
practices such as lifetime employment have limited the
response of businesses to productivity-increasing innovations. Financial market reforms, supported by improved corporate governance and a safety net for unemployed workers, would foster labor mobility and a
more efficient allocation of resources that should raise
productivity and better enable the economy to adjust
to adverse shocks. Easing regulations and other constraints will also enhance efficiency particularly in the
nontradables sectors.
Figure 3.9. Euro Area: Policy

and Demand Indicators1
Fiscal consolidation in the run-up to EMU led to a considerable
improvement of the structural budget balance and to a decline in real
interest rates, which in turn contributed to the strong performance of
the stock market in the second half of the 1990s. The weak cyclical
position of the euro-area economy is reflected in the decline in the
relative output gap.
4 Structural Budget Balance
180
Real Effective
Exchange Rate
(1990 = 100)
160
140
120
100
1990
92
10
94
96
98 99
Real Interest Rates,

Germany
(percent a year)
8
6
1990
92
94
96
80
98 99:
Q2
Current Account
(percent of GDP)
Long-term
Europes growth performance in the 1990s, especially in the major continental countries in the second
half of the decade, has been weak in comparison to the
United States, and has been somewhat weaker than average growth in the 1980s, as is illustrated by data for
the euro area (Figure 3.1 and Figure 3.9). Unemployment has continued the trend rise that started in the
1970s, and the cyclical recovery in 199798 has only
made a small dent in joblessness. Weak demand
growth appears to explain why output growth slowed
in the 1990s, as staff estimates of potential growth are
unchanged from the 1980s to the 1990s (Table 3.1).
However, longer-run supply factors are important in
explaining slower growth in Europe compared to the
United States.
2
2
Short-term
0
2
1990
92
94
96
98 99:
Q2
400 Stock Market Prices:

300
1990
92
94
96
98 99

DAX, Germany
(1990: Q1 = 100)
4
6
3
Relative output gap
200
Output gap
100
0
1990
92
94
96
98 99:
Q2
1990
92
94
96
98 99
6
32For a detailed analysis of these issues, as well as the full range
of estimated benefits of deregulation see Ichiro Oishi and
Christopher Towe, Governance, Deregulation, and Economic
Performance, in JapanSelected Issues, IMF Staff Country Report
No. 98/113 (Washington: IMF, 1998), pp. 14663. This paper also
presents estimates of the possible output gains from structural reform. These vary widely, from 2!/2 percent to almost 19 percent, depending on the study and assumptions made.
11999 data for structural budget balance, current account, and output gaps reflect IMF staff projections.
2The estimated relative output gap is the output gap in euro area
less a weighted average of output gaps in the other major industrial
countries.
84
As discussed in earlier issues of the World Economic

Outlook, the origins of this lackluster performance can
be traced to a number of negative influences including
the effects of labor market rigidities, the tensions and
financial market turbulence in the countries participating in the European exchange rate mechanism following German unification, the need for fiscal consolidation, a monetary stance that has sometimes been slow
in reacting to weakness in demand in the absence of inflationary pressures, and more recently, the negative
trade effects of the financial crises in emerging markets
(see Figure 3.6). In some of the smaller euro area countries, growth has been significantly above average
owing to a variety of factors including the convergence
of per capita incomes, lower real interest rates associated with the convergence of nominal rates and relatively high inflation, and the positive effects of labor
and product market reforms. Outside the euro area,
growth in the United Kingdom in the 1990s as a whole
has been little different from the euro area average. But
in each of the years 199397, U.K. growth exceeded
euro area growth. This above-average performance
may have benefited from an early start to structural reforms in the early 1980s, as well as prudent macroeconomic policies.
proved the primary structural balance by about 9 percent of GDP. In addition, restrictive monetary policies
were necessary at the beginning of the decade to reduce inflation and again in 199495 to gain early reentry into the ERM. Structural impediments to faster
growth, including rising tax rates, an inefficient welfare system, and labor market rigidities have also contributed to Italys below average performance in the
1990s. The causes of Italys slowdown in the second
half of 1998 and early 1999 remain somewhat unclear,
especially given the large declines in interest rates associated with the convergence of monetary conditions
and inflation rates with the lower rates prevailing in
Germany and France. As in Germany, the shock to external demand stemming from the crises in emerging
markets was an important contributor to the slowdown
(see below). In addition, the slowdown in domestic demand, especially business investment, may have reflected a tendency for firms to delay investment projects until the full effects of monetary union and
interest rate convergence could be assessed. The
lagged effects of the earlier fiscal tightening, as well as
uncertainties about future fiscal and structural policies, may also have weakened demand.
In France, growth performance was weak in the
early 1990s, but it improved in the second half of the
decade, to an average annual rate of 2!/2 percent, and
was stronger than in Germany or Italy over this period.
While the recovery in France is far from complete, it
nevertheless has been somewhat more vigorous than in
Germany or Italy for several reasons. First, the degree
of fiscal consolidation in France in the 1990s was less
than in the other countrieson the order of 2!/4 percent of GDP, compared to 3#/4 percent in Germany and
9 percent in Italy. Second, wage moderation over
much of the 1990s has boosted Frances competitiveness within the euro area (Statistical Appendix Table
10). Third, construction has been picking up in France,
while Germany has experienced an unwinding of the
high levels of building activity that followed unification. Finally, consumer confidence and hence demand
has been more robust in France than Germany, in part
due to somewhat more effective labor market policies
in France that has added jobs in the second half of the
1990s while employment has declined in Germany.
While the cut in working hours now being implemented in France may help to raise productivity, it will
also act as a constraint on the level of potential output
and therefore the sustainable level of output in the
medium term.
The 199899 growth slowdown in Germany and
Italy also appears to have been steeper than in France,
perhaps because the composition of these countries
exports left Germany and Italy more vulnerable to the
financial crises in Asia and Russia. About 20 percent
of German exports in 1997 went to emerging markets
in east Asia and eastern Europe, compared to about 12
percent in France. And the impact of these crises on
The Slower-Growing Countries

The recovery in Germany that began in 1993 has
been slow, with average annual output growth rate of
less than 2 percent. The need for fiscal consolidation
after the heavy costs of unification has played a major
role. In addition, the high cost of labor contributed to a
5 percent decline in employment in 199298. This
long period of declining employment can be attributed
partly to labor market institutions that have failed to
match wage developments with productivity growth,
but also to the after-effects of unification when acrossthe-board wage increases and the need to finance unification through hikes in social contribution rates
added to labor costs. The decline in employment has
been greatest in eastern Germany where the rise in
labor costs was most pronounced and where productivity has yet to catch up with wage levels. In much of
1997 and early 1998, Germanys recovery appeared to
be gaining strength, after the successful achievement
of the Maastricht fiscal objective. It was temporarily
derailed, however, by the decline in export demand in
1998 associated with the emerging market crises; in
addition to cutting exports, this adversely affected
business confidence and investment. Why the German
economy appears to have been affected more by the
emerging market crisis than some of its neighbors is
discussed below.
Economic growth in Italy has been the weakest
among Europes major economies in the 1990s, in part
reflecting the particularly tight fiscal policies that have
been needed: fiscal adjustment over the decade im-
85
Germany was magnified because about 80 percent of

German exports consist of cyclically sensitive capital
and intermediate goods, compared to 50 percent in
France. Italy suffered a loss of net exports equivalent
to almost 1 percent of GDP in 1998, in part owing to
the composition of its exports, which are more heavily
weighted toward textiles, garments, and leather products. Italy appears to have lost market share for these
goods to the Asian crisis countries. Exports of Italys
high-quality consumer goods also suffered with the
downturn in global demand in 199798.
Figure 3.10. Euro Area: Economic Performance

Indicators1
(Percent)
The Faster-Growing Countries
Strong economic performance in the countries shown in the left-hand

side of the figure is reflected in significant declines in unemployment.
Inflation has come down in all countries. Unemployment rates are
expected to fall by small amounts in the countries shown in the righthand side.
In contrast to the disappointing growth performance

of Germany, France, and Italy, several other European
countries including Finland, Ireland, the Netherlands,
Portugal, and Spain within the euro area, and the
United Kingdom, Denmark, and Norway have experienced periods of rapid expansion in the 1990s.
Although most were affected by the recession in the
early years of the decade, they subsequently enjoyed
recoveries that reduced unemployment to levels not
seen since the early 1970s in some cases. Among these
countries Ireland stands out with output growth averaging a remarkable 9 percent in 199498. Strong productivity gains (helped by foreign direct investment attracted by advantageous tax arrangements) and
moderate wage increases (helped by a tri-partite agreement) led to considerable and sustained increases in
competitiveness and, with the fiscal position brought
under control, contributed to a virtuous circle of real
income gains, strong employment growth, and a buoyant domestic economy. Recently there have been
growing concerns about overheating, signs of which
are seen particularly in rapidly rising property prices.
Denmark, the Netherlands, Spain, and the United
Kingdom have made significant progress in addressing
labor market rigidities, and this has led to reductions in
structural unemployment, whereas in some other
European economies both actual and structural unemployment have stabilized or continued to rise (Figure
3.10). The success of these countries in bringing down
structural unemployment can be attributed to a range
of labor market reforms that have differed across
countries. One common ingredient, though, is reforms
of unemployment benefit systems that have reduced
the negative incentives that were present in the old systems. Also, wage moderation has been an important
ingredient, which has been achieved either through decentralization of wage bargaining, as in the United
Kingdom and to some extent in Denmark, or through
a tripartite consensus approach, as in the Netherlands
and Austria.33
Unemployment Rate
26
26
Spain
22
22
18
Belgium
14
10
6
2
18
Italy
Finland
14
France
Ireland
Netherlands
10
Germany
Portugal
1993
95
97
99
1993
95
Austria
97
99
CPI Inflation
7
6
7
Portugal
Italy
5
Spain
Belgium
Germany
3 Netherlands
2
1
0
2
France
Finland
1993
1Shaded
95
Ireland
97
Austria
99
1993
95
97
99
33For more details on labor market reforms in European

economies see Chapter IV of the May 1999 World Economic
Outlook. A discussion of how centralized wage bargaining has
86
Table 3.2. Selected European Economies: General Government Structural

Balances and Long-Term Interest Rates
Fiscal Balance in Percent
of Potential Output
____________________________________
Primary
Structural
balance
________________
Change,
1998
199598
structural balance
________________
1998
Change,
199598
Long-Term Interest Rate

__________________________________
Nominal
Real
_______________
_______________
1998
Change,
199598
1998
Change,
199598
Germany
France
Italy
United Kingdom
0.7
1.3
1.5
0.3
2.2
2.3
5.6
4.3
2.2
1.6
6.0
2.6
2.0
1.9
2.1
4.4
4.6
4.8
4.9
5.5
2.3
2.8
7.3
2.7
4.0
4.1
3.1
2.9
0.2
1.7
3.9
2.5
Austria
Belgium
Denmark
Finland
Greece
Ireland
Netherlands
Portugal
Spain
Sweden
1.8
0.1
0.1
1.5
2.5
0.8
1.4
2.4
1.3
4.1
3.1
2.8
1.6
2.6
7.7
2.0
1.9
2.2
4.0
10.0
1.2
7.3
2.3
3.4
6.6
3.4
2.6
1.0
2.4
7.1
2.7
1.3
1.0
3.7
4.0
0.5
1.1
0.6
2.7
10.4
4.7
4.7
4.9
4.8
7.8
4.7
4.8
4.1
4.8
5.0
2.4
2.6
3.4
4.0
7.7
3.5
2.4
5.9
6.4
5.2
3.9
3.8
3.2
3.4
3.3
2.3
2.8
1.3
3.1
5.2
1.6
2.1
3.0
4.3
3.3
3.4
2.4
4.6
3.5
2.6
Source: IMF World Economic Outlook database.
Part of the divergences in output growth across

Europe can be understood in terms of the convergence
hypothesis of the economic growth literature, which
states that countries with low initial levels of output per
worker tend to experience higher rates of labor productivity growth and thus tend to grow faster than countries with higher initial levels of output per worker.
Among euro area countries there does appear to be
some negative correlation between the initial level and
subsequent growth of output per worker (Figure 3.11).

Hence, the fact that some countries in the euro area are
growing faster than others is not a sign of divergence,
but rather a sign of catching up and convergence. This
process may have been accelerated as the European
economies have become more integrated.
Looking forward, can output growth in Europe, especially that in the economies where growth has been
weakest, eventually match that of the U.S. economy in
the second half of the 1990s? Some improvement in
economic growth is projected in the near future, as indicated in Chapter I, but improvements beyond what is
projected are possible as well if labor market reforms
gain momentum throughout Europe, and if further
progress is made with the liberalization of product markets. Most important, labor market policies that help
reduce structural unemployment would raise potential
output. This would be reinforced to the extent that
labor force participation increases as well. Furthermore, the continuing process of economic integration,
which has already contributed to convergence to higher
income levels in the initially poorer European
economies, may further promote competition and the
efficiency of the European economy, and thereby support a higher long-run growth rate of output. 34 Finally,
it is possible that output growth in Europe will benefit
contributed to the high rates of unemployment in Italy and Spain can

be found in Paulo Mauro, Eswar Prasad, and Antonio Spilimbergo,
Perspectives on Regional Unemployment in Europe, Occasional
Paper 177 (Washington: IMF, 1999). Also see C. Max Watson, Bas
B. Bakker, Jan Kees Martijn, and Ioannis Halikias, The
Netherlands: Transforming a Market Economy, Occasional Paper
181 (Washington: IMF, 1999).
34For more detailed discussion of European unemployment and

the rise in Europes NAIRU, see Chapter IV of the May 1999 World
Economic Outlook. It notes that in some countries labor market reforms have helped to reduce structural unemployment. However,
these reforms usually take a considerable time to materialize, as evidenced by the experiences of the Netherlands and the United
Kingdom. Reforms in these countries were initiated in the 1980s.
In the run-up to monetary union, all countries in the

EU, including those that were not planning to join the
monetary union in the first round, implemented substantial deficit-reduction measures (Table 3.2). The
contractionary impulse of these has largely passed.
More recently, as the start of monetary union approached, both inflation rates and interest rates converged to the lower levels prevailing in the core countries. In Spain, Greece, and Portugal, real long-term
interest rates fell by 3!/24!/2 percentage points from
1995 levels, which in turn contributed to significant reductions in fiscal deficits (Table 3.2), increased investor and consumer confidence, and the pickup in private sector demand.
Catching Up and Convergence Within Europe
87
from new information technologies, as may be happening in the United States currently.
Alternative Scenarios: Harder Landing

or Higher World Growth?
The World Economic Outlook baseline scenario assumes a smooth adjustment of the imbalances in output growth and external current accounts that developed in the 1990s. In particular, growth in Europe and
Japan is expected to rise sufficiently to close current
output gaps over the five-year period to 2004, while
U.S. economic growth is expected to slow to a sustainable pace. Associated with these developments, the
household saving rate would rise in the United States,
continue to decline in Japan, and remain roughly unchanged in the euro area (Figure 3.12). Developing
and transition countries would see gradual improvements in their external environment. Prospects for this
slow unwinding of macroeconomic imbalances improved through mid-1999 as recoveries in the emerging market countries recently in crisis gained momentum, economic indicators pointed up in Europe, some
initial signs of recovery emerged in Japan, and the
Federal Reserve raised interest rates to slow the momentum of the U.S. economy. Nevertheless, there remains a possibility that the imbalances now present
will unwind in other ways.
In one alternative scenario, a harder landing could
be triggered in several ways, for example, by a pickup
in inflation in the United States and the monetary
tightening that would be likely to follow, or by a
change in financial markets assessment of the sustainability of the U.S. current account deficit causing a
dollar depreciation (Table 3.3). This scenario, which is
described in more detail in the May 1999 World
Economic Outlook, could well lead to a decline in equity prices that would contribute to depress U.S. domestic demand and output growth. These disturbances
would be transmitted to partner economies through reductions in world trade growth, higher interest rates,
and through spillovers to equity markets outside of the
United States. In consequence, world output would
fall by about 1 percent relative to the baseline scenario
in the short term.
The largest impact on growth would occur in the
United States where the alternative assumptions result
in lower domestic demand (relative to the baseline)
and a consequent correction in the net private sector
saving-investment balance. The impact of the scenario
assumptions is offset in part by countercyclical fiscal
and monetary policies. Room for fiscal policy flexibility is greater in the United States than in other industrial countries because of the successful efforts to
eliminate the U.S. federal budget deficit. The euro area
and Japan would be negatively affected by the drop in
import demand in the United States and a rise in U.S.
Figure 3.11. Euro Area: Convergence

of Output Per Worker
Countries with comparatively low output per worker in 1965 tended to
have higher growth rates of output per worker over 196698.
4.0
Ireland
Finland
Spain
3.0
Portugal
Germany
Austria
Italy
France
Netherlands
5000
10000
15000
20000
2.5
Belgium
25000
Growth of output per worker over 196698
3.5
2.0
1.5
30000
Output per worker in 1965

(converted to U.S. dollars at purchasing power parity)
88
exports that are made more competitive as the U.S.

dollar depreciates against the euro and the yen. Output
in the euro area and Japan initially falls relative to the
baseline owing to reduced external surpluses, but it recovers later as lower interest rates boost investment.
The near-term drop in output is somewhat greater in
the euro area than in Japan because rigidities in
European labor and product markets tend to hamper
adjustment to economic disturbances of this kind.
Output in the developing countries is about 1 percent lower than in the baseline scenario, mainly because of effects operating through trade links and
lower demand from the industrial countries. In addition, the slower recovery in world output delays the
pickup in global commodity prices that is assumed in
the medium-term baseline, putting further pressure on
commodity exporters. These negative effects on developing countries are offset to some degree by lower interest rates in the advanced economies that act to reduce debt-service costs in the indebted developing
countries.
Alternatively, the adjustment process could unfold
through higher growth outside the United States as illustrated by an accelerated adjustment scenario (Table
3.4). The scenario assumes a pickup in demand in
Europe through an improvement in business confidence and some additional monetary easing made possible by further declines in inflation, and in Japan
through some additional monetary stimulus and an
easing of the credit crunch.35 The initial rise in demand in Japan is somewhat stronger than in Europe,
reflecting Japans recent deep cyclical downturn and
slow recovery in the baseline and the implied potential
for a strong cyclical rebound. The scenario also incorporates reforms that enhance both the level and growth
of potential output in Europe and Japan, the impact of
which is phased in slowly. Absent this assumption,
economic growth in Europe and Japan would slow
after the initial demand stimulus as capacity limits are
reached.
Stronger growth in Europe and Japan has implications for capital and current account balances, and ultimately the U.S. economy. With increases in growth
and growth prospects in Europe and Japan, demand for
capital would rise and investors, seeing opportunities
for higher returns in these areas, would rebalance their
portfolios toward yen and euro-denominated assets (at
the expense of dollar assets) causing the U.S. currency
to depreciate. These flows, which would be channeled
through the capital account, would lead to reductions
in current account surpluses in Europe and Japan, initially as imports rise with the pickup in domestic demand and currency appreciation, and later as reform

Household and National Saving Rates1
The U.S. household saving rate fell to zero in late 1998 but is projected
to recover somewhat. Japans national saving rate is higher than those
of the United States and the euro area, although it has declined
following the bubble period.
25
Household Saving
(percent of disposable income)
20
Euro area
15
Japan
10
5
United States
1980 82
84
86
88
90
92
94
96
98 2000 02
04
40
Gross National Saving

(percent of GDP)
35
Japan
30
25
Euro area
20
15
United States
1980 82
1Shaded
35The monetary stimulus involves a higher rate of monetary

growth, relative to the baseline. This tends to raise inflation expectations and thus reduce real interest rates.
89
84
86
88
90
92
94
96
98 2000 02
04
10
Table 3.3. Harder Landing Scenario1

(Percent deviation from baseline unless otherwise noted)
First Year
World
Real GDP
Industrial economies
United States
Real GDP
Domestic demand
Net private saving (percent of GDP)
Current account
(in billions of U.S. dollars)
(percent of GDP)
CPI inflation
Short-term real interest rate
Effective exchange rate
Euro area
Real GDP
Domestic demand
Current account
(percent of GDP)
CPI inflation
Japan
Real GDP
Domestic demand
Current account
(percent of GDP)
CPI inflation
Real GDP
Second Year
Third Year
Fourth Year
Fifth Year
1.2
0.8
0.6
0.3
0.2
1.9
3.3
1.8
1.5
3.5
2.3
0.8
3.1
2.3
0.3
2.5
2.1
0.5
2.3
2.1
79.0
0.9
0.1
0.4
10.3
173.0
1.8
0.8
0.6
6.8
235.0
2.3
0.4
1.7
3.1
280.0
2.7
0.1
2.4
0.9
282.0
2.6
0.5
2.4
5.5
1.2
0.7
0.1
0.6
1.3
0.9
0.4
1.4
1.4
0.2
1.4
1.8
0.1
1.3
1.9
8.0
0.4
0.8
0.4
10.8
40.0
0.7
0.6
0.8
8.8
72.0
1.0
0.7
1.2
6.5
100.0
1.2
0.7
1.3
4.2
111.0
1.3
0.7
1.5
2.2
1.1
0.4
0.4
0.8
1.1
1.2
0.5
1.6
1.8
0.1
2.0
2.3
0.7
2.2
2.4
3.0
0.7
1.2
0.4
15.8
44.0
1.3
0.7
12.1
74.0
1.7
0.7
0.6
8.2
92.0
1.9
0.6
1.0
4.5
90.0
1.8
0.3
1.8
0.8
0.8
1.0
1.2
1.3
1.2
1Baseline
is taken from the World Economic Outlook database, with shocks starting in 2000. The scenario models an increase in U.S. consumers preference for saving and declines in equity prices, especially
in the United States.
measures in Japan increase the propensity to import.

At the same time, Japans export growth would slow
with currency appreciation and lower demand in the
United States.
The current account deficit in the United States
would decline correspondingly. Rising demand for imports in Europe, Japan, and emerging economies
would provide stimulus for U.S. exports, as would the
dollars lower value. But because the U.S. economy is
already operating at high rates of resource utilization
in the baseline scenario, U.S. domestic demand growth
would still need to slow significantly relative to the
base case. This is accomplished in the scenario
through higher costs for investment projects and consumer financing as external funding sources become
more scarce: interest rates would rise and the dollar
depreciate. The scenario also assumes that the Federal
Reserve would tighten policies to meet its price stabil-
ity objective if domestic demand did not slow on its

own.
As a result, Europe and Japan would take over for a
while as the engines of growth for the world economy.
The smooth redistribution of demand from the United
States toward Europe and Japan would raise output
growth in the industrial countries as a group as well as
in the developing countries. This latter group would
benefit from stronger export markets in Europe and
Japan, and a more robust rebound in commodity prices
that would offset negative consequences of higher
U.S. interest rates. Assuming that output in the United
States can be maintained close to potential through a
switch from domestic to foreign demand, world GDP
would rise by about #/4 of 1 percent in the medium
term. Output in developing countries would increase
by less, about !/2 of 1 percent, although regions more
dependent on U.S. markets may be negatively af-
90
Table 3.4. Accelerated Adjustment Scenario1

(Percent deviation from baseline unless otherwise noted)
First Year
World
Real GDP
Industrial economies
United States
Real GDP
Domestic demand
Current account
(percent of GDP)
CPI inflation
Euro area
Real GDP
Domestic demand
Current account
(percent of GDP)
CPI inflation
Short-term real interest rates
Japan
Real GDP
Domestic demand
Current account
(percent of GDP)
CPI inflation
Short-term real interest rates
Real GDP
Second Year
Third Year
Fourth Year
Fifth Year
0.3
0.7
0.8
0.8
0.8
1.0
0.3
0.2
1.1
0.6
0.2
1.0
0.8
0.2
1.1
0.9
1.1
1.0
17.0
0.2
0.8
0.3
10.0
46.0
0.5
0.1
0.2
8.0
62.0
0.6
0.2
0.1
6.5
76.0
0.7
0.3
0.1
5.3
89.0
0.8
0.4
0.2
4.1
0.6
1.1
0.3
1.4
2.0
1.3
1.3
2.1
1.6
1.1
2.0
1.6
0.9
1.9
1.5
15.0
0.1
0.8
1.4
3.8
3.0
0.2
0.3
2.0
3.5
5.0
0.2
0.2
2.0
3.8
13.0
0.3
0.2
1.7
4.0
24.0
0.4
0.2
1.6
4.1
0.8
1.5
0.8
1.4
2.3
1.2
1.7
2.7
11.5
2.1
3.0
1.8
2.5
3.3
1.9
14.0
0.6
0.1
0.4
3.4
31.0
0.9
0.1
0.4
1.1
44.0
1.0
0.4
1.3
51.0
1.1
0.1
1.0
3.0
57.0
1.1
0.2
1.0
4.3
0.1
0.4
0.5
0.6
0.6
1Baseline
is taken from the World Economic Outlook database, with shocks starting in 2000. The scenario models a shift in investor preference away from U.S. dollar assets; an increase in money supply
growth in Europe and Japan; and higher productivity growth in Japan and Europe.
fected. This longer-run result is predicated on structural measures in Europe and Japan that would raise
productivity and thus potential output.
Even in the more favorable accelerated adjustment
scenario the adjustment process that assumes that U.S.
exports pick up and domestic demand slows in tandem
need not be smooth as outlined above. It is possible,
for example, that investors, fearing a pickup in inflation or a drop in output growth, would shift funds out
of the United States quickly, causing a sharp drop in
equity markets and a loss of confidence. Demand
could fall sharply and inflation rise with the higher import prices. The implications for domestic output,
price stability, and policies could be made even more

stark if the remarkable period of high growth and low
inflation in the United States turns out, in hindsight, to
have reflected not (primarily) a higher level of potential output, but temporary factors. In this case there
would be a greater risk of an increase in inflationary
pressures, especially if a rebound in demand outside of
the United States were to result in a pickup in commodity and other tradable goods prices that would
raise U.S. import prices sharply. The situation could be
made worse if investors withdrew funds even more
quickly in response to diminished prospects for high
expected future rates of return on U.S. assets.
91
IV
Safeguarding Macroeconomic Stability
at Low Inflation
he 1990s have witnessed some notable economic

achievements but a number of new challenges
have also arisen. The establishment of reasonable
price stability in the industrial countries and of low
rates of inflation in the majority of developing and
transition economies stand out as particularly remarkable accomplishments. There has also been widespread progress in fiscal consolidation. As events in
recent years have shown, however, while these conditions are necessary for safeguarding reasonably robust
and stable economic growth, they are clearly not sufficient. Eliminating fiscal and monetary policy shortcomings addresses some, but not all, sources of
macroeconomic disturbances. Indeed, it is now generally accepted that private sector behaviorespecially
in the context of improperly regulated markets and
poor contractual environments, but at times also in the
context of well-functioning and undistorted markets
can result in what in retrospect turn out to be mistaken
real and financial investment decisions, or in boomsand-busts in asset prices and economic activity.
This chapter focuses on the challenge of safeguarding macroeconomic stability in a low-inflation environment. It begins with a review of how low inflation
was achieved in the industrial countries and then turns
to a discussion of the effectiveness of policies in the
presence of nominal rigidities and the relationship between price stability and macroeconomic stability. In
doing so it addresses questions such as: Can inflation
be too low? When should deflation be of most concern? Does low inflation induce excessive risk taking?
And what role should asset prices play in the conduct
of monetary policy?
Figure 4.1. Industrial Countries:

Consumer Price Inflation
(Percent)
In recent years inflation rates in industrial countries have converged
to levels approaching reasonable price stability.
16
14
Average
12
10
8
6
4
Standard deviation
2
1970
The Achievement of Reasonable

Price Stability
Over the past two decades or so, the industrial countries have succeeded in bringing their inflation rates
under control. Average inflation fell steeply in the
1990s, following an earlier episode of broad-based
disinflation in the first half of the 1980s, and during
the last few years it has stood at rates that many would
consider to constitute reasonable price stability
(Figure 4.1). The decline in inflation has been associated with a marked convergence of inflation rates
across countries. In 1998, consumer price inflation in
92
75
80
85
90
95
98
The Achievement of Reasonable Price Stability
expansion.3 Although not without some success in

helping to control inflation, by the early 1980s monetary targets began to be de-emphasized and have since
been largely abandoned, with the notable exceptions
of Germany and Switzerland.4 The difficulty with
monetary targeting was, of course, the instability of
the relationship between monetary aggregates (the intermediate target of policy) and inflation (the ultimate
target or goal), which in many countries increased in
the 1970s and the early 1980s partly owing to financial
deregulation and innovation.
The problems with monetary targeting led some
countries to pursue a disinflationary monetary policy
making use of an array of indicators of monetary conditions and the expected future course of inflation. For
the three major economies (the United States, Japan,
and Germany), as well as for some of the smaller industrial countries, monetary policy has been found to
correspond to a policy reaction function whereby the
central bank seems to adjust interest rates in response
to deviations of projected inflation from the desired
rate or range and in response to the position of output
relative to trend.5 In particular, in response to a rise in
projected inflation relative to the target rate, the central bank seems inclined to raise nominal interest rates
by a greater amount than the increase in inflation so
that the real interest rate rises and dampens demand.6
Exchange rate targeting was used most prominently
in reducing inflation in Europe in the context of the exchange rate mechanism (ERM) of the European
Monetary System, and in the Nordic countries
(Finland, Norway, and Sweden), which unilaterally
pegged their currencies to the ECU.7 Inflation in the
participating countries converged fairly steadily, and
in some countries quite steeply, toward the rate in
Germany but the strategy was not entirely successful
in other respects. In particular, it did not succeed in
firmly establishing policy credibility: financial markets obliged a number of countries with histories of
relatively high inflation and/or large fiscal imbalances
to maintain high real interest rates to support their ex-
all but one of the 23 industrial countries was below 3

percentwith 12 countries in the 12 percent range
and six below 1 percent. Inflation as low as in the past
five years has not been experienced since the late
1950s and early 1960s.
Although many factors have played a role in the disinflation, including declining prices for oil and other
primary commodities, undoubtedly the main factor
has been the policy environment, namely, central
banks focus on the goal of price stability, as the public became increasingly aware that higher inflation is
associated with broadly inferior economic performance. In many countries this was part of a mediumterm policy strategy that also included fiscal consolidation and structural economic reform. In Europe, it
was further reinforced by the required convergence of
economic performance in the areas of inflation, public
finances, and interest rates, as set out in the Maastricht
Treaty in preparation for monetary union. In many developing countries too, the decline in inflation owes
much to improved policies, especially more disciplined fiscal policy and the adoption of outward-oriented trade regimes. And globally, the trend toward
greater openness of economies and closer integration
of the world economy seems to have contributed to
lower inflation by increasing competitive forces.
How has monetary policy been conducted to
achieve low inflation in the industrial countries? The
approaches adopted fall into four categories or monetary policy regimes: monetary targeting, exchange rate
targeting, explicit inflation targeting, and implicit inflation targeting.1
In the mid-1970s, a number of industrial countries,
including the United States, Canada, Germany, and the
United Kingdom among the major economies,
adopted targets for money growth.2 This reflected two
developments: the rise in inflation to postwar highs
and the collapse of the Bretton Woods system of
pegged exchange rates, which deprived countries of
their nominal anchor. The adoption of official money
growth targets served two main purposes: they acted
as a guidepost for monetary policy, aiding the central
bank in setting its instruments for an appropriately disinflationary policy stance; and they signaled to the
public the central banks intentions and goals with respect to inflation and provided the basis for a public
understanding of its policy actions. In some cases targets for broad monetary aggregates also served a third
purpose, helping to discipline fiscal policy by highlighting the implications of fiscal deficits for monetary
3J.S. Fforde, Setting Monetary Objectives, Bank of England

Quarterly Bulletin, Vol. 23, No. 2, June 1983, pp. 20008.
4According to some observers, in both countries money-growth
targeting was applied flexiblythe target ranges were frequently
missed, on the order of 50 percent of the time; see, for example,
Frederic S. Mishkin, International Experiences with Different
Monetary Policy Regimes, NBER Working Paper 6965 (February
1999).
5A policy rule for interest rates along these lines was first proposed by John Taylor, Discretion Versus Policy Rules in Practice,
CarnegieRochester Conference Series on Public Policy, Vol. 39
(1993), pp. 195214.
6For empirical evidence in support of this interpretation for the
197993 period, see Richard Clarida, Jordi Gali, and Mark Gertler,
Monetary Policy Rules in Practice: Some International Evidence,
NBER Working Paper 6254 (November 1997).
7The motivation for the ERM, of course, extended beyond the desire for lower inflation.
1An alternative to inflation targeting that has received considerable attention in the economic literature is nominal income targeting, but it has not been explicitly adopted by any central bank, perhaps because it is more difficult to explain to the public.
2Japan, like other major central banks, also began to pay more attention to money growth rates, but instead of announcing targets
for money growth it announced forecasts.
93
IV
SAFEGUARDING MACROECONOMIC STABILITY AT LOW INFLATION
Table 4.1. Selected Countries: Measurement Bias in the Consumer Price Index
(Percent)
Total
Range
Canada
Germany
Japan
United Kingdom
United States1
0.50
0.75
0.501.50
0.90
0.352.00
0.350.80
1.10
0.801.60
Sources: Allan Crawford, Measurement Biases in the Canadian CPI: An Update, Bank of Canada
Review, pp. 2856 (Spring 1998); Johannes Hoffmann, Problems of Inflation Measurement in Germany,
Deutsche Bundesbank, Economic Research Group, Discussion Paper No. 1/98 (1998); Shigenori
Shiratsuka, Measurement Errors in Japanese Consumer Price Index, Federal Reserve Bank of Chicago,
Working Paper No. 99-2 (1999); Alistair W.F. Cunningham, Measurement Bias in Price Indices: An
Application to the UKs RPI, Bank of England, Working Paper No. 47 (1996); Advisory Commission to
Study the Consumer Price Index, Toward a More Accurate Measure of the Cost of Living, final report to
the Senate Finance Committee (1996).
1In recent years a number of methodological changes, including the use of updated expenditure weights,
have reduced the measurement bias.
change rates, and the policy regime did not sufficiently

modify wage- and price-setting behavior. Moreover
some countries could not sustain their membership in
the ERM or could only do so with wide exchange rate
bands, which were established following the crises of
199293. What emerged from this experience is that
although fixing exchange rates to a credible anchor
currency for a time may achieve considerable success
in reducing inflation, for some countries it may not
prove sustainable because of cyclical divergences and
differences in policy fundamentals.8
In light of the shortcomings of monetary targets and
pegged exchange rates, in the 1990s, inflation targeting gained in popularity and has become the preferred
monetary policy strategy in a number of countries, especially by those who assign a large weight to transparency and accountability in the monetary policy
process. With the launch of European Monetary Union
in January this year and the adoption by member countries of price stability as the ESCBs primary objectivewith price stability defined as an annual rate of
increase in the Harmonized Index of Consumer Prices
for the euro area of below 2 percent over the medium
terma numerically explicit inflation goal is now a
central feature of the monetary policy strategy of most
industrial countries. The notable exceptions are, of
course, the United States and Japan where the monetary authorities have clearly demonstrated their commitment to a high degree of price stability but have not
adopted an explicit nominal anchor.
As inflation rates have come down to low single
digits since the mid-1990s, increasingly the question is
being raised as to what constitutes price stability. What
inflation rate should central banks target? This is especially the case for countries that have adopted explicit
inflation targets, but it is also relevant for countries
with implicit inflation targets. On account of some up-
ward bias in the measurement of consumer price inflation it could be argued that the targeted rate of inflation should be some small positive rate rather than
zero (Table 4.1). On analytical grounds too, having to
do with nominal rigidities and the efficacy of countercyclical monetary policy, it could be argued that the
optimal rate of inflation is a small positive rate. From
the announced target ranges for inflation by the countries with explicit inflation targetsranges that typically lie between between 1 and 3 percentit would
appear that the authorities generally agree with this assessment.
Maintaining reasonable price stability does not
mean maintaining a stable price index on a short-term
basisthat is, on a monthly or even a quarterly basis.
First of all, it is not possible to do so because many
factors affect prices on a day-to-day basis and monetary policy is not so precise a tool that it could accomplish the task. Control of inflation requires both that
the central bank be able to forecast its future path and
that the impact of policy changes on that path be
known (or estimated) with some precision. However,
as is the case with other economic variables, inflation
is quite difficult to forecast with any degree of precision, including at short horizons of one quarter. And
the relationship between monetary policy instrumentstypically a very short-term interest rateand
inflation varies considerably over time and is difficult
to estimate precisely.9
Secondly, even if monetary policy could eliminate
short-run fluctuations in inflation, it would not be desirable to do so, since attempts to do so would require
sharp fluctuations in short-term interest rates, creating
increased volatility in money markets and exchange
rates and risking instability in financial markets. Even
the achievement of reasonable stability of inflation on
a yearly basis may not be feasible at all times. Indeed,
the best that realistically can be achieved is reasonable
8Lars E.O. Svensson, Fixed Exchange Rates as a Means to Price

Stability: What Have We Learned?, European Economic Review,
Vol. 38, 1994, pp. 44768.
9On these points see Stephen G. Cecchetti, Inflation Indicators

and Inflation Policy, NBER Working Paper 5161 (June 1995).
94
price stability over the medium term. In this context, it

is worth emphasizing that price stability is not all that
matters for monetary policy. Central banks, even in
inflation-targeting countries, do not ignore traditional
stabilization goals. Indeed, the two objectives of monetary policy, long-run price stability and short-run output stabilization, are complementary and consistent.
The first objective relates to the average thrust of policy over time, while the second relates to variations in
that thrust over the course of the business cycle.
Moreover, since inflation usually follows a cyclical
pattern, smoothing cyclical fluctuations in output
helps to even out inflation, when variations in output
and inflation are primarily driven by disturbances to
demand. The behavior of prices over the cycle thus allows monetary policy to pay attention to developments
in real economic activity in conformity with the aim of
reasonable price stability.
Figure 4.2. Hypothetical Distribution

of Nominal Wage Increases
In the absence of downward rigidity of nominal wages, the average
rates of inflation and productivity growth (and the standard deviation
of the wage change distribution) will determine the share of wage
recipients experiencing a decline in nominal wages.
Zero
percent
inflation
Average productivity
increase: 2 percent
in both cases
(both distributions
have a standard
deviation of 2
percentage points)
Downward Rigidity of Nominal Wages

As inflation declines to low levels, adjustments in
the labor market may become more difficult owing to
resistance to reductions in nominal wage levels.
Efficient adjustment to changes in the relative scarcity
of different types of labor requires that changes in real
wages not be uniform but that they be distributed
around the economy-wide average. The higher the average rate of general price and wage inflation, the less
will be the need for nominal wage reductions in particular sectors and enterprises to achieve an optimal
real wage adjustment, since the warranted real wage
reductions can be achieved by raising nominal wages
in the enterprises or sectors concerned by less than the
rate of inflation. But the lower the overall inflation
rate, the larger the part of the left-hand tail of the wage
adjustment distribution that will fall into the range of
nominal wage reductions (Figure 4.2). When nominal
wage stickiness prevails, this will prevent or retard the
warranted real wage adjustment, increasing the natural
rate of unemployment.10
The fact that wages and prices adjust only gradually
to their equilibrium values following exogenous
shocks to the economy, as well as the resistance to reductions in nominal wages, has been long recognized
by economists, but the implications for economic policy conduct have received major attention only in the
post-World War II period. A historical review of the
recognition by leading economists of wage and price
stickiness and its effects on the real economy is pro-
5 3 1
10A rise in average productivity growth can offset a decline in

inflation by an equal amount (in percentage points) by moving the
distribution of wage increases to the right for any given rate of
inflation.
95
Eight
percent
inflation
3 5 7 9 11 13 15 17 19 21 23 25
Nominal wage increase (percent)
Frequency
Region of
declining
nominal
wages
IV
increase lower than the rate of inflation.14 A more

recent survey of employers attitudes towards reducing nominal wages confirms these findings.15
A rational explanation for employers reluctance to
demandand employees resistance to accept
nominal wage reductions in established employment
relationships has been provided by implicit contract
theory.16 However, the latter does not exclude the possibility of a decline in nominal wages in the context of
job turnover.
Can any resistance to nominal wage reductions be
detected in actual statistics? The available evidence for
the United States is mixed, and few comparable studies are available for other countries.17 An analysis
based on the Panel Study of Income Dynamics (PSID)
finds that individuals wages in these panel data vary
considerably over time, and that nominal wage cuts
are not rareaffecting on average some 17 percent of
panel members each year.18 A subsequent study, also
based on the PSID data set, does find some evidence
for nominal wage rigidity, which, however, is judged
insignificant in quantitative terms.19 The preceding results differ starkly from the analysis in the influential
paper by Akerlof et al., who also survey empirical
studies of the incidence of reductions in nominal
vided by David Laidler who points out that the classical economists were well aware of price and particularly wage stickiness, while Keynes himself treats
itmuch like the classical economists before him
as a fact of life, which is, however, not central to his
analysis.11
Some analysts and policymakers have concluded
that a moderate positive rate of inflation will facilitate
labor market adjustment by allowing declines in real
wages even if nominal wages are rigid downward.12
Underlying this argument is an assumption of some
degree of money illusion in the wage negotiation
process, which is inconsistent with the assumption of
rational behavior underlying conventional economic
analysis. However, seemingly irrational behaviorincluding incidence of apparent money illusion in various guisesis not uncommon in practice, and often
constitutes a rational response to imperfect information, adjustment costs, and other market imperfections.13 The hypothesis of downward rigidity of nominal wages can therefore not be rejected a priori as
based on unrealistic assumptions, but becomes a legitimate object of empirical investigation.
Survey results for the United States do indeed
document a certain reluctance by employers to reduce
nominal wages and by employees to accept such
reductions. This resistance to declining nominal
wages is overcome usually only where the survival of
the firm is threatened by bankruptcy or other severe
circumstances. A common explanation given for such
behavior is that a cut in real wages brought about by
a reduction in the nominal wage (at zero inflation)
is considered unfair by a significantly larger percentage of persons than an equivalent reduction in
the real wage brought about by a nominal wage
14Daniel Kahnemann, Jack Knetsch, and Richard Thaler,

Fairness as a Constraint on Profit Seeking: Entitlements in the
Market, American Economic Review, Vol. 76 (No. 4), pp. 72841.
The authors quote survey results that show that a given decline in
real wages is considered unfair by 62 percent of persons interviewed
when it involves a cut in nominal wages, but by only 22 percent
when it comes about by nominal wages rising by less than the rate
of inflation.
15Truman Bewley and William Brainard, A Depressed Labor
Market as Explained by Participants, unpublished paper, quoted in
Akerlof et al., The Macroeconomics of Low Inflation.
16For a seminal paper on implicit contracts see George A. Akerlof,
Labor Contracts as Partial Gift Exchange, Quarterly Journal of
Economics, Vol. 97 (1982), pp. 54369.
17Given the higher job turnover, as well as comparatively unregulated labor markets and low unionization in the United States, the
downward nominal rigidity of wages is likely to be more prevalent
in Europe than in the United States. On the other hand, where part
of labor compensation is based on profit sharing, this should facilitate a decline in (effective) nominal labor income and thus lower the
natural rate of unemploymentwhich is consistent with experience
in Japan.
18The PSID data record the hourly wages (or salary equivalents)
of breadwinners in over five thousand families since 1968. The
analysis referred to is by Kenneth J. McLaughlin, Rigid Wages?
Journal of Monetary Economics, Vol. 34 (1994), pp. 383414.
19 The supportive evidence is twofold: first, there is a positive correlation between the symmetry of the wage change distribution (as
measured by skewednessor absence thereof) and the rate of inflation; second, there is a spike in the wage changes distribution at zero
changes, the size of which rises as inflation falls. However the estimated welfare loss from the estimated degree of nominal wage
rigidity amounts to less than one tenth of a percent for a decline in
inflation from 4 percent to zero percent; see David Lebow, David
Stockton, and William Wascher, Inflation, Nominal Wage Rigidity,
and the Efficiency of Labor Markets, Finance and Economics
Discussion Series 94-45 (Washington: Federal Reserve Board,
1995).
11It is not the discovery of price stickiness, but the elaboration

of its theoretical foundations and its systematic linkage to the business cycle, which distinguishes the Neo-Keynesian contribution; see
David Laidler, Wage and Price Stickiness in Macroeconomics:
Historical Perspective, in Forrest Capie and Geoffrey E. Wood,
eds., Monetary Economics in the 1990s (London: Centre for
Banking and International Finance, City University of London,
1996), pp. 92121.
12This point was prominently developed in James Tobin,
Inflation and Unemployment, American Economic Review,
Vol. 62 (1972), pp. 118. The argument has recently been formalized in a paper by Akerlof et al., which attempts to quantify the implications of downward nominal wage rigidity on the equilibrium
level of unemployment using a stochastic general equilibrium
model; see George A. Akerlof, William T. Dickens, and George L.
Perry, The Macroeconomics of Low Inflation, Brookings Papers
on Economic Activity: 1 (1996) pp. 159.
13For a comprehensive survey see James Haley, Theoretical
Foundations for Sticky Wages, Journal of Economic Surveys,
Vol. 4 (No. 2), pp. 11555. A discussion of the underlying causes of
money illusion, its impact on wage formation, and possible ways to
integrate these aspects into formal models of the economy can also
be found in Eldar Shafir, Peter Diamond, and Amos Tversky,
Money Illusion, Quarterly Journal of Economics (May 1997),
pp. 341374.
96
1960s.22 The hypothesis seems to conform better with

the experience in the majority of European economies,
where determined efforts to reduce inflation toward
low German levels in the run-up to the formation of
monetary union (stage 3 of EMU) succeeded in reducing inflation to record low levels, but were accompanied by an increase in unemployment to new postwar
peaks. As has been widely argued, this is the consequence of significant and pervasive labor market distortions and rigidities, but it is an open question
whether downward rigidity of nominal wages plays a
particularly important role among them.23 In Japan,
too, the reduction of inflation to zero has been accompanied by a substantial rise in unemployment, despite
the relative flexibility of the Japanese compensation
system, though it is unclear how much of the increase
in the unemployment rate is of a cyclical nature rather
than a structural phenomenon causally linked to zero
inflation.
In any case, potential benefits from facilitating wage
adjustment by some positive steady state inflation rate
need to be evaluated against the cost of such inflation
that may result from distorting price and wage signals.
A recent study which tries to identify these offsetting
effects on labor market efficiency for the U.S. economy comes to the conclusion that the two effects
largely offset each other below an inflation rate of 5
percent, above which the net costs increasingly dominate. Below the 5 percent threshold, the net output and
employment effects of inflation are estimated to be
positive but statistically indistinguishable from zero.24
This study does not take account of the benefits of zero
inflation due to the efficient holding of real balances,
nor of the potential distortions of low inflation on
household saving and business investment decisions.
wages in the United States and conclude that the

downward rigidity of nominal wages is indeed widespread (Box 4.1).20
One reason why downward rigidity of nominal
wages may have been common in the postwar period
is that the average inflation rate has been comparatively high. Under such conditions a fall in
nominal wages implies a large cut in real wages, at
a time when average real wages have risen rapidly.
It is quite possible that at lower rates of inflation
nominal wage reductions will become more acceptable. Likewise, institutional arrangements may influence the ability of implementing nominal wage
reductions in response to changes in relative scarcities
in labor market skills: if a substantial part of the
pay package depends on the enterprises economic
performance (e.g. through profit sharing) or is delivered in the form of (non-contractual) fringe benefits,
de facto nominal wages may be easier to cut. Whether
these factors are capable of reducing the widely observed discontinuity of the wage change distribution
at zero wage increases is an empirical question, which
cannot be resolved a priori. It would therefore be premature for policymakers to dismiss downward nominal wage rigidity as a temporary cost in the transition
to price stability, rather than acknowledging its permanent impact on equilibrium (un)employment and
output.21
Since inflation during the postwar period has been
around 3 percent or above in virtually all industrial
countries until very recently, a test of the hypothesis
that zero inflation will entail a significant increase in
equilibrium unemployment due to downward nominal
wage rigidity, as predicted by Akerlof et al., is difficult
using postwar data. Box 4.1 presents a summary of
simulation results by these authors, showing a large increase in equilibrium unemployment as inflation is reduced to zero. However, recent developments in the
U.S. economy seem to contradict such a prediction:
the rate of inflation has been reduced below any fiveyear moving average since 1950 (and well below 3
percent), while the unemployment rate, far from ratcheting upward, has reached the lowest level since the
22A positive productivity shock may be responsible (at least partly)

for preventing falling inflation from translating into higher structural
unemployment in the U.S. in the recent past; see Chapter 3 for a
more detailed discussion of this issue. It is worth noting that the recent performance of the U.S. economy is difficult to reconcile not
only with the predictions of the Akerlof/Dickens/Perry model, but
with those of the standard natural rate models as well. If a permanent
increase in productivity growth has shifted the long-run Phillips
curve to the left, this does not refute the Akerlof/Dickens/Perry hypothesis that at low rates of inflation the curve becomes non-vertical;
cf. Box 4.1.
23 For a recent discussion of European labor market rigidities, see
Chapter IV in the May 1999 World Economic Outlook, pp. 88121.
24Erica L. Groshen and Mark E. Schweitzer, Identifying
Inflations Grease and Sand Effects in the Labor Market, NBER
Working Paper 6061 (June 1997). The results of this study rely on
identifying the detrimental and beneficial effects of inflation in the
wage formation process: inflation-induced deviations among employers mean wage changes are interpreted as unintended distortions, while inflation-induced inter-occupational wage changes are
interpreted as efficiency-enhancing relative wage adjustments. This
identification strategy has, however, been questioned by several
economists; see Discussion Summary in Martin Feldstein (ed.),
The Costs and Benefits of Price Stability (Chicago and London:
Chicago University Press, 1999), pp. 31113.
20A summary of their findings on nominal wage rigidity is presented in Table 3 of their paper. All studies reviewed show an asymmetry of wage changes about the mean and, with the exception of
evidence from the PSID data set, they all find that reductions in
nominal wages are infrequentmuch more so than could be expected on the basis of normally distributed wage changes.
Concerning the PSID data set, the authors argue that the high incidence of nominal wage cuts reported in this survey can be accounted
for by measurement error. Cf. Akerlof et al., The Macroeconomics
of Low Inflation.
21The discontinuity of the wage change distribution at zero is
extensively documented in a recent paper by Beth Anne Wilson,
Wage Rigidity: A Look Inside the Firm (unpublished;
Washington: Federal Reserve Board, April 1999). The research reported in this paper supports the contention by Akerlof et al. that
downward nominal wage rigidity is widespread and important.
97
IV
Box 4.1. The Effects of Downward Rigidity of Nominal Wages on (Un)employment:

Annual inflation has averaged above 3 percent for all
major industrial countries since 1950, and price stability
seems to have come into reach only during the most recent
years. It is therefore difficult to conclude from the empirical data pertaining to the postwar period how significantly
labor market outcomes and output will be affected by
downward nominal wage rigidity.1 To gauge the potential
importance of these effects, Akerlof et al. have constructed
a stochastic general equilibrium model of the U.S. economy embodying downward rigidity of nominal wages,
monopolistic competition among firms, and heterogeneous
demand and supply shocks affecting individual firms.2 The
equilibrium level of real wages in the model is determined
by a Nash bargaining process which produces a conventional wage setting curve relating the real wage to the
rate of (un)employment, but in addition real wages of individual firms are subject to stochastic shocks. Profit-maximizing firms in the model respond to both demand and
supply shocks by adjusting the prices they charge, wages
they pay, and number of persons they employ.3
The model is simulated for a large number of alternative
parameter combinations, all of which replicate three key
characteristics of the U.S. labor market: the equilibrium
rate of unemployment prevailing in the mid-1990s, the rate
of job creation and destruction, and the standard deviation
of changes in nominal wages.4 As the shocks affecting the
economy are heterogeneous, the resulting wage changes in
the economy are heterogeneous as well. They are distributed around the average rate of (wage) increase, itself determined as the sum of average inflation and labor productivity increases. Without downward wage rigidity, firms
wage responses are symmetric, and other model characteristics will determine the models unique equilibrium un-
Long-Run Phillips Curve with Downward

Nominal Wage Rigidity1
(Percentage points)
10
8
Inflation
2
0
7
8
Unemployment rate
2
10
1Results based on simulations by Akerlof, Dickens, and

Perry, The Macroeconomics of Low Inflation.
employment rate. Downward rigidity of nominal wages

will act as a constraint on wage changes for some firms if
the average rate of inflation is low enough so that the left
hand tail of the hypothetical wage change distribution implies declining wages (Figure 4.1 in the main text). These
model characteristics result in a nonlinear relation between
the rates of unemployment and inflation in equilibrium. A
large number of simulations with alternative parameter
sets results in a mean increase in the equilibrium unemployment rate when the economy operates at 0 rather than
3 percent inflation by 2.1 percentage points.5 The nonlinear Phillips curve generated from a representative parameter set by simulating the model for alternative equilibrium
inflation rates is presented in the first figure.
Akerlof et al. also develop an inflation equation consistent with their general equilibrium model, which can
be estimated from time series data. This equation equals
the standard accelerationist Phillips curve, but in addition
contains an additive term embodying the effects of downward nominal wage rigidity. This wage rigidity term reflects the number of firms inhibited to lower their nominal wages and the degree to which they are constrained6
1Some observers have noted that average inflation rates were

well below 3 percent in several major countries during the
1950s, with little apparent detrimental effects on labor market
performance. This may be partly due to rapid productivity
growth (and thus large average nominal wage increases) in the
early postwar period.
2George A. Akerlof, William T. Dickens, and George L. Perry,
The Macroeconomics of Low Inflation.
3Comparable studies are not available for other countries.
While the quantitative results obtained for the United States presented here cannot be readily applied to other economies, the
qualitative arguments may nevertheless be relevant for policymakers in other countries as well: reducing inflation to zero will
entail not only a transitory cost, but also a permanent cost (reflected in an increase in equilibrium unemployment) if there is
downward nominal wage rigidity.
4The equilibrium rate of unemployment (at rates of inflation of
3 percent and above) is fixed at 5.8 percent, corresponding to the
consensus estimate in the mid-1990s. The standard deviation of
nominal wage changes is set at 2.8 percent, corresponding to empirical estimates for the U.S. manufacturing sector. Finally, annual job creation is set at 11 percent of total employment, and that
of job destruction slightly lower, following estimates by Steven J.
Davis, John C. Haltiwanger, and Scott Schuh, Job Creation and
Job Destruction (Cambridge, Massachusetts: MIT Press, 1996).
5An increase of 1 (5.7) percentage points delimits the 10th

(90th) percentile of the distribution of simulated changes in the
equilibrium unemployment rate.
6The model allows for firms lowering nominal wages if they
incur losses in two consecutive periods.
98
Alternative Stabilization Paths for Zero

and 3 Percent Inflation Targets1
Dynamic Simulations of Inflation, 192942

and 1954951
(Percentage points)
(Percentage points)
11
Model with Downward Rigidity of Nominal Wages

Actual
Actual
10
7
Three percent inflation target
10 12
Year
14
10
1924 29 34 39 44 49 54 59 64 69 74 79 84 89 94
Standard Natural Rate Model
16
18
20
0
5
Simulated
Unemployment rate
10
5
Simulated
Zero inflation target
15
Actual
Actual
Simulated
Simulated
1924 29 34 39 44 49 54 59 64 69 74 79 84 89 94
1Dynamic
projections starting from 6 percent inflation,

based on equation 5-2 of table 5 in Akerlof, Dickens, and
Perry, The Macroeconomics of Low Inflation.
15
20
10
0
10
20
30
40
50
60
Source: Akerlof, Dickens and Perry, The Macroeconomics of Low Inflation.

1Both models estimated using data for 195495 only.
and measures the distortions in unit labor costs introduced by downward nominal wage rigidity. Estimating
this equation on data from 1954 to 1995 and using the resulting parameter estimates to simulate alternative stabilization paths serves to illustrate both the increase in the
cost of adjustment and the permanently higher equilibrium unemployment rate entailed if policymakersstarting from an inflation rate of 6 percentaim at zero rather
than 3 percent steady state inflation under conditions of
downward nominal wage rigidity (see second figure).
The ability of the rigidity augmented Phillips curve to
replicate actual data does not differ greatly from the performance of conventional Phillips curve estimates within
the estimation period (195495). This is because during
that period average wage increases were large enough to
make the rigidity constraint largely inoperative. However,
in out-of-sample simulations covering the interwar depression years, the rigidity augmented Phillips curve replicates
the actual inflation/unemployment experience quite
closely, a test which standard models assuming a vertical
long-run Phillips curve tend to fail (see third figure).7
While the authors recognize that their simulation results are subject to considerable uncertainty, they nevertheless consider that these results provide sufficient evidence to strongly support the idea that the optimal
inflation rate in the United States is a small (but positive)
number. In particular they emphasize that a proper analysis of the optimal rate of inflation requires not only that
the transitory costs of reducing inflation be compared
with the permanent gains of reducing inflation to zero (by
removing inflation distortions), but that the cost calculations need to take account of the permanent costs of
downward nominal wage rigidity and the resulting increase in the equilibrium rate of unemployment at zero
inflation. The authors also argue that this downward
wage rigidity provides a useful safety net against deflationary spirals, and that policymakersrather than aiming at eliminating this downward nominal wage rigidityshould accommodate it by choosing a proper
(nonzero) inflation target.
7According to the standard model, the substantial labor market slack persisting during the depression should not only have
brought inflation to zero (which it did), but also have induced
accelerating deflation, which did not materialize: following an

initial fall in the price level, inflation returned to above zero
after 1933, despite a double digit unemployment rate.
99
IV
In a different context it has been argued that these effects are not negligible.25 However, a comprehensive
study of the net benefits (or costs) of low inflation, including all the separate effects studied in isolation, is
still outstanding, explaining why the question of what
constitutes the optimal rate of inflation remains controversial.
Zero Interest Rate Floors and the Effectiveness of
Monetary Policy
Figure 4.3. Selected Countries:

Short-Term Interest Rates
Another argument as to why a small positive rate of

inflation may be preferable to zero inflation as a policy target is that countercyclical monetary policy is
constrained by the zero floor on nominal interest rates.
An important stabilizing function of monetary policy
is to reduce output gaps by helping to maintain aggregate demand close to potential output through variations in interest rates and other transmission mechanisms. The fact that nominal interest rates cannot fall
below zero places a floor under real interest rates that
may limit the extent to which monetary policy can
support or stimulate aggregate demand.26 The floor
under real interest rates will be higher and more constraining the lower the rate of inflation. Thus real interest rates cannot become negative if the actual and
expected rate of inflation is at or below zero.27
(Percent a year)
Nominal rates remained well above zero in all countries (except Japan
and Switzerland) throughout the period, while real rates were negative
only in periods of high inflation.
Nominal short-term
interest rate
20 United States
Real short-term
interest rate
20
Japan1
10
10
10
10
(imin = 1.02)
20
1957
67
77
87
20 Germany
(imin = 0.03)
99: 1957
Q2
67
77
87
20
99:
Q2
10
10
10
10
(imin = 2.25)
20
1957
67
77
87
20 United Kingdom
(imin = 3.05)
99: 1957
Q2
67
77
87
20
99:
Q2
20
Switzerland
10
10
10
20
1957
25For an estimate of welfare gains from more efficient cash management at zero inflation, see Alexander L. Wolman, Staggered
Price Setting and the Zero Bound on Nominal Interest Rates,
Economic Quarterly, Federal Reserve Bank of Richmond, Vol. 84,
No. 4 (Fall 1998), pp. 124. Extensive research on permanent welfare gains from reducing distortions in private saving/consumption
decisions resulting from the interaction of taxation and inflation is
referred to in Martin Feldstein, The Costs and Benefits of Price
Stability. This volume contains estimates for the permanent level
gains in GDP when inflation is reduced from 2 to zero percent, and
compares these gains with transitory losses entailed by the shift to
price stability for four countries (Germany, Spain, the United
Kingdom, and the United States). The results reported imply large
net gains for the U.S., Germany, and Japan, and a somewhat smaller
net gain for the U.K. The analysis, however, does not address the
issue of permanent losses due to downward rigidity of nominal
wages when inflation is reduced to zero analyzed by Akerlof et al.,
nor does it take into account the constraints on monetary policy resulting from zero inflation.
26The zero floor to nominal interest rates is a consequence of the
existence of government issued currency with a zero nominal interest rate and the fact that the non-pecuniary returns to currency exceed those of other financial assets. In principle the effective interest rate floor could be reduced below zero by taxing currency. See
Willem H. Buiter and Nikolas Panigirtzoglou, Liquidity Traps
How to Avoid Them and How to Escape Them (unpublished;
London: Bank of England, March 1999).
27Real interest rates are defined as the nominal interest rates
minus the (expected) rate of inflation. In practice, ex post real interest rates are computed as the difference between observed nominal
interest and inflation rates. This leaves open the question whether
real interest rates can actually be negative if inflation is fully anticipated; while this seems possible for short-term (policy-determined)
interest rates, it appears less plausible for long-term rates on which
policy exerts only a limited influence.
20
France
10
(imin = 3.18)
67
77
87
(imin = 0.09)
99: 1957
Q2
67
77
87
20
99:
Q2
Source: IMF, International Financial Statistics. Short-term money

market rate or, if unavailable, comparable lending rate.
Note: The notation imin indicates the minimum quarterly nominal
interest rate (in percent) since 1957.
1The real short-term interest rate excludes the effect of the April
1997 value-added tax (VAT) increase.
100
How important a constraint on policy effectiveness

is the zero interest rate floor? This will depend on a
number of factors, importantly including the nature,
frequency, severity, and duration of the shocks to
which the economy is exposed, and which determine
the need for offsetting policy action. To gather evidence on the likelihood of such events, it is informative to observe the incidence of negative real interest
rates during past economic cycles. This information
can be gleaned from Figure 4.3, which shows the level
of policy-determined nominal and corresponding (ex
post) real interest rates over the period from 1957 to
the present for several major economies.
The data presented in Figure 4.3 show that real interest rates were negative in the majority of industrial
countries both at the beginning and during the latter
half of the 1970s, when policymakers in these countries
were trying to overcome the slowdown induced by the
first oil shock.28 In contrast, real interest rates were abnormally high on average during the 1980s, when policy priorities had shifted to combating inflation.
Beyond this common pattern, there are isolated
episodes when real rates were close to zero in some
countries (e.g., the United States in the early 1990s,
and Switzerland in the late 1970s), but in general,
short-term interest rates have tended to be well above
zero and positive in real terms over the postwar period.
The only noteworthy exception is Japan, which slid
into a deepening recession during the 1990s, with nominal interest rates and inflation approaching zero.29
Empirical evidence preceding 1957 is scarce: it
seems that the only period when the zero nominal interest rate floor may have been a constraint on monetary
policy was during the depression. But many believe that
it was self-inflicted policy errors in the form of restrictive monetary policydocumented in the contraction
of the real money supplywhich best characterize this
episode, rather than a genuine liquidity trap.
Due to the limited experience with very low rates of
inflation in the postwar period, and the dubious relevance of experience during those periods in which real
short-term interest rates were actually negative, it is
difficult to derive firm empirically based conclusions
on how seriously the effectiveness of monetary policy

is curtailed by the zero nominal interest rate constraint. Given the scarcity of relevant empirical
episodes and data, it is useful and informative to analyze this question using counterfactual simulation
analysis, and this has indeed been carried out with respect to the economies of the United States and Japan.
Representative results of these simulations for the U.S.
are presented in Box 4.2. Similar simulations for the
Japanese economy are discussed in Box 4.1. of the
October 1998 World Economic Outlook, where conditions leading to a downward deflationary spiral are
also explored. If inflationary expectations are adaptive
(backward looking) rather than rational (forward looking), the risk of initiating a deflationary spiral by a
contractionary shock greatly increases, putting a
heavy responsibility on policymakers to prevent such
developments by a credible policy commitment to resisting deflation.
The effect of the zero interest rate floor on monetary
policy effectiveness principally depends on the target
rate of inflation and on the (equilibrium) real interest
rate of the economy:
The higher the target rate of inflation, the less
likely it is that the zero interest rate floor will become binding. This is because a higher inflation
target raises the nominal rate of interest and the
actual inflation rate in steady state (or the average
inflation and interest rates over the cycle), providing room for monetary policy to ease by lowering
real rates, including to negative levels if deemed
necessary.
Similarly, the higher the steady state (or equilibrium) real interest rate, the lower the probability of
the zero interest rate floor to become binding. This
is because the steady state real interest rate will
equal the nominal steady state interest rate at zero
inflation, and the higher this rate, the more room
remains for monetary policy to lower the nominal
(and real) rate in pursuit of expansionary policies.30
Stochastic simulation exercises for the U.S. economy imply that a nominal rate of interest in steady state
(and thus on average over the cycle) exceeding 3 percent will provide sufficient downward flexibility for
monetary policy to avoid the zero interest rate floor,
under the assumption of a normal size and distribution of shocks (as gauged by those experienced since
the early 1980s) and conventional policy reaction
functions (as implicit in the average size of policy responses to macroeconomic disequilibria over the same
28As discussed above, real rates of interest could reach such low
negative levels only because of high rates of inflation. It has been argued that the easy monetary conditions implied by the negative real
interest rates in the 1970s constituted a policy error, which entailed
a steep rise in inflation. Arguably, a more appropriate response to the
oil price shock would have been a policy geared towards preventing
a rise in inflation expectations and supportive of rapid structural adjustment, rather than expansionary demand management. The cost
of this error continued to be paid in the stabilization recession of
the early 1980s, when the Medium-Term Strategy was formulated
by industrial countries, signaling a shift in policy.
29More recently negative rates of inflation (and rapidly falling
nominal interest rates) have been experienced in some other
economies as well (e.g., Sweden, Australia, China, Hong Kong
SAR), suggesting that the issues discussed here may become relevant for other countries as well.
30The equilibrium real rate of interest is influenced by a large

number of factors, including both technological and economic variables, as well as various parameters characterizing the behavior of
economic agents. The most important among these factors are the
growth of the labor force and rate of technical progress (summing to
the natural rate of growth), and the propensity to save, determined
by the (social) rate of time preference, the risk aversion of economic
agents, the level of government debt, distortionary tax regimes, etc.
101
IV
Box 4.2. The Effects of a Zero Floor for Nominal Interest Rates on Real Output:
This box presents some selected results from recent
studies of how the effectiveness of monetary policy can
be affected by low target rates of inflation in conjunction
with the inability of reducing nominal interest rates
below zero. While the empirical research discussed is
based on U.S. data, the qualitative lessons provided are
applicable more generally. And given the compactness of
the simulation model used, even for the United States the
results should be considered illustrative rather than providing reliable quantitative estimates.1
The rational expectations models used for this analysis have a similar structure,2 comprising equations for
aggregate demand and a forward-looking wage-price determination mechanism. A policy-determined nominal
short-term interest rate is set according to a monetary
policy reaction function, responding to the output gap
and the deviation of actual from targeted inflation, or
in the case of the FM studythe deviation of nominal
GDP from its target level. The long-term real interest
rate, which influences aggregate demand, is derived
from a forward-looking (rational expectations) term
structure equation adjusted for inflation expectations.
Prices are determined as a markup on wages, and the latter are determined in an overlapping contract model, taking account of past wage contracts, expected future wage
settlements, the rate of inflation (both past and anticipated), and the expected output gap over the duration of
the contract. Both models concentrate exclusively on the
interest rate transmission channel of monetary policy,
thereby probably overestimating the importance of the
Effects of a Zero Nominal Interest Floor

Under Alternative Inflation Targets
Zero inflation target
Three percent inflation target
Adverse Demand Shock1

5 Nominal Interest Rate
Output Gap
4
1
0
2
2
0
1
1998
00
02
04 05:
Q4
1998
00
02
04 05:
Q4
Favorable Wage Shock 2

5
Nominal Interest Rate
1.0
Output Gap
4
0.5
3
2
1
0.5
0
1
1998
1Two key references are Jeffrey C. Fuhrer and Brian F.

Madigan, Monetary Policy When Interest Rates Are Bounded
at Zero, The Review of Economics and Statistics, 1997,
pp. 57385 (hereafter referred to as FM), and Athanasios
Orphanides and Volker Wieland, Price Stability and Monetary
Policy Effectiveness When Nominal Interest Rates Are Bounded
at Zero, Board of Governors of the Federal Reserve System,
Finance and Economics Discussion Series 1998-35 (Washington: Federal Reserve Board; hereafter referred to as OW).
2Despite the similar structure of the models used, the two studies referenced in the preceding footnote come to quantitatively
different conclusions concerning the seriousness of the zero nominal interest rate constraint. The difference can be traced to different assumptions about the underlying equilibrium real interest
rate in the two models: it equals 1 percent in the OW model, but
exceeds 2 percent in the FM model; see discussion below.
00
02
04 05:
Q4
1998
00
02
04
1.0
05:
Q4
Source: See Athanasios Orphanides and Volker Wieland, Price

Stability and Monetary Policy Effectiveness When Nominal
Interest Rates are Bounded at Zero, Finance and Economics
Discussion Series, No. 1998-35 (Washington: Board of Governors
of the Federal Reserves System, 1998).
1The shock consists of a temporary (one quarter) reduction
in gross fixed investment equivalent to 1 percent of GDP.
2The shock consists of a temporary (two quarters) reduction
in nominal wage growth by 0.25 percentage points.
zero interest rate floor (see main text for a discussion of

this point).
period).31 This safe equilibrium nominal interest rate

can be secured by either having a sufficiently high real
interest rate in steady state (e.g., by pushing up the natural rate of growth), or by picking a sufficiently high
target inflation rate, so that the sum of the two exceeds
31Athanasios Orphanides and Volker Wieland, Price Stability and

Monetary Policy Effectiveness when Nominal Interest Rates are
Bounded at Zero, Board of Governors of the Federal Reserve
System, Finance and Economics Discussion Series 199835,
(Washington: Federal Reserve Board). Obviously this does not exclude the possibility that a much larger contractionary shock than
those experienced since the early 1980s might render the constraint
effective. On the other hand, to the extent that policy responses tend
to be more cautious the less certain policymakers are about the nature of the underlying shock to be offset, or about the ultimate effect
of changes in policy instruments, increased uncertainty in these
areas tends to reduce the probability that the constraint becomes
binding, but raises the risk that policy reactions are too timid.
102
The first figure depicts two representative simulation results from the OW study, showing how the zero nominal
interest rate floor becomes a binding constraint on expansionary monetary policy when policymakers target a zero
inflation rate in case of an adverse demand shock (top panels of the figure) and in the case of a beneficial wage shock
(bottom panels). In response to the adverse demand shock
at the low target (and thus steady state) inflation rate, monetary authorities cannot lower the policy rate by as much
as indicated by the policy reaction function because the
policy rate attains its zero floor (panel 1). This in turn prevents the real long-term rate from falling as much as implied by a normal (i.e., unconstrained) policy response.
Consequently, monetary policy is unable to provide the desired demand stimulation, resulting in a larger temporary
decline in inflation and output than desired (panel 2). It is
interesting to note that the zero interest rate constraint inflicts the largest losses in output (relative to the unconstrained case) not in case of a negative demand shock, but
in case of a beneficial wage shock (e.g., an autonomous
decline in wages). In this case inflation would fall and
monetary policy could be eased to reap some of the benefits of the positive supply shock in the form of increased
output. But the zero interest rate floor prevents monetary
policy from easing sufficiently (panel 3): real long term
rates will rise rather than fall, causing demand and thus
output to decline rather than increase (panel 4).
More generally, the zero interest rate floor will hamper
monetary policy from pursuing its stabilization objectives whenever the economy experiences shocks for
which the central bank would aim at a real interest rate
sufficiently low so as to require a nominal rate lower than
zero. As a result, the variability of the arguments in the
objective functiontypically some measure of output
and inflationwill increase. This implies a deterioration
in the policy efficiency frontier, characterized by the
trade-off between the standard deviations of the output
gap and inflation, respectively, subject to a maximum
variability of the instrument variable (the policydetermined short-term interest rate). These relationships
are summarized in the second figure, which depicts the
deterioration in the efficiency frontier when a zero rate of
inflation is targeted.
The authors use stochastic simulations to gauge the impact of the zero inflation target on the level of output,
subjecting the model to a large number of shocks mod-
Policy Efficiency Frontier Under Alternative

Inflation Targets1
(Percentage points)
0.7
Efficiency frontier
with zero inflation
target
0.6
0.5
Unconstrained efficiency frontier

(inflation target > 3 percent)
0.6
0.7
0.8
0.9
Standard deviation of output gap
0.4
Standard deviation of inflation
0.8
0.3
1.0
Source: See Orphanides and Wieland, Price Stability and

Monetary Policy Effectiveness.
1Based on a constant standard deviation of the instrument
variable (the federal funds rate), computed from a Henderson-McKibbin policy reaction function with coefficients
of 2 and 1 for the output gap and inflation gap, respectively.
eled to have the same characteristics on average as those

actually experienced since 1980. The result is that on average output is reduced by 0.1 percent when the inflation
target is reduced from 2 percent (or higher) to zero percent. These output losses fall well short of those implied
by the simulations embodying downward rigidity of
nominal wages discussed in Box 4.1. Of course larger
shocks than those experienced on average since 1980
would entail larger output losses, while incorporating
other transmission mechanisms than the interest rate
channel would tend to reduce average losses.
3 percent. Since rapid steady-state (or equilibrium)

growth tends to raise the equilibrium real rate of interest, it also facilitates the pursuit of lower inflation by
making it less risky in terms of the probability of hitting the zero nominal interest rate constraint.
Problems related to the inability of monetary authorities to reduce the nominal rate of interest below
zero have been discussed widely in the literature under
the heading of the liquidity trap. This discussion has
given rise to claims that in such a situation monetary

policy is ineffective as a stabilization tool. However,
modern monetary theory has added some important
caveats to the liquidity trap hypothesis. In particular,
the liquidity trap does not prevent monetary authorities from increasing the supply of base money through
open market operations in government debt, foreign
exchange, or even private securities. If the resulting
increase in liquidity can raise private domestic expen-
103
IV
diture or net exports (via changes in the exchange rate)

independently of changes in the nominal interest rate,
the liquidity trap will only reduce the effectiveness of
monetary policy by paralyzing the interest rate transmission mechanism, while leaving other transmission
mechanisms unaffected.
Prominent monetarists have challenged the key policy implication of the liquidity trap, i.e. that monetary
policy will be rendered ineffective if there is an effective floor to the nominal interest rate.32 The key argument is that implicitly the liquidity trap framework
ignores many of the complicated and diverse transmission mechanisms set in train when the central bank
changes the monetary base, thus causing a disequilibrium in the portfolios of private agents containing a
large number of different financial and real assets.
Changes in the composition of these portfolios in reaction to an increase in real money supply continue to
affect aggregate demand even if the nominal interest
rate has a binding floor.33 A similarthough less generalline of reasoning underlies more recent arguments for a separate credit channel of the monetary
policy transmission mechanism. This analysis emphasizes the special role of the banking sector and the impact of imperfect and costly information on the availability of bank credit and how it can be affected by
changes in free bank reserves.34 Like the monetarist
critique, the credit channel implies that expanding
the base money supply will induce an increase in aggregate spending apart from the narrow interest rate
transmission channel.
These arguments appear to be supported by empirical studies that show a statistically significant impact
of real money balances on major demand components

as well as on aggregate output, independent of (and in
addition to) the explanatory power of the real interest
rate.35 The policy implication of the monetarist critique of the liquidity trap concept is that even when the
short-term interest rate has been driven down to zero,
monetary policy can still effectively stimulate aggregate demand by further increasing the monetary base,
in particular by including a wider range of assets
among those eligible for open-market purchases by the
central bank.36 However, the monetarist contention of
the practical irrelevance of the liquidity trap concept
due to alternative transmission mechanisms is looking
increasingly implausible in Japan, where despite an increase in real base money supply by over 42 percent
since 1992, real output has risen by less than 1 percent
per year on average, entailing a widening output gap.
The Japanese experience strongly suggests that expanding the monetary base is not a sufficient condition
to raise aggregate demand under all circumstances and
within the relevant policy horizon, giving rise to the
question of the potential role of fiscal policy.
The conventional Keynesian prescription to escape
the liquidity trap is the use of expansionary fiscal policy, in particular an increase in public consumption
and/or investment expenditures, whichunlike the indirect incentive effects of monetary policycan raise
aggregate demand directly. However, since the early
1980s the use of fiscal demand management policies
has been severely constrained in most countries by the
need to contain and correct accumulated deficits and
debt, resulting from the earlier asymmetry in fiscal policy conduct, which in turn points to the shortcoming
arising from how fiscal demand management has
tended to interact with the political decision making
process. Governments tended to be eager to raise expenditure and cut taxes in a recession, but reluctant to
cut spending or raise taxes during a boom, which lead
to an inflation bias in fiscal policy and an upward ratcheting of public expenditures and debt in relation to
GDP. However, even if fiscal policy could be applied
symmetrically, resulting in a zero contribution to the
debt level over a complete cycle, it would still be diffi-
32The existence of a liquidity trap is inconsistent with the quantity

theory of money (orequivalentlya stable money demand function with a finite interest elasticity) and has been rejected by leading
monetarists. It is interesting to note that Keynes himself considered
an infinitely interest-elastic money demand a theoretical curiosity of
little practical relevance. In the original Keynesian framework (The
General Theory), the ineffectiveness of monetary policy was linked
to a low and unstable interest elasticity of aggregate demand (business investment in particular), rather than to an infinitely interestelastic demand for money, labeled the liquidity trap by Keynes
and his followers; see Karl Brunner and Allan Meltzer, Liquidity
Traps for Money, Bank Credit and Interest Rates, Journal of
Political Economy, JanuaryFebruary 1968, pp. 138.
33An implication is that an assumption of a transmission mechanism that works exclusively through changes in a single interest rate
(for example, the federal funds rate), as incorporated in many
macro-models, is much too restrictive, ignoring adjustments among
a large array of other assets in private portfolios. Only if all these assets are perfect substituteswhich is highly unlikely given their diversitywill a further increase in base money at zero short-term interest rates be ineffective.
34For a concise exposition of the argument and a survey of the relevant literature, see Chapter 7 (The Credit Channel of Monetary
Policy) in Carl E. Walsh, Monetary Theory and Policy (Cambridge,
Massachusetts: MIT Press, 1998). Another useful overview of the
credit channel in the transmission of monetary policy can be found
in Ben S. Bernanke and Mark Gertler, Inside the Black Box: The
Credit Channel of Monetary Policy Transmission, Journal of
Economic Perspectives, Vol. 9 (1995), pp. 2748.
35Evan F. Koenig, Real Money Balances and the Timing of

Consumption, Quarterly Journal of Economics (May 1990),
pp. 399425, and Allan Meltzer, The Transmission Process, manuscript, available at: http://www.gsia.cmu.edu/afs/andrew/gsia/meltzer.
While both these studies are based on U.S. data, Meltzer also reports
similar results obtained for Germany. In contrast, IMF research by
Tamim Bayoumi and James Morsink on Japan fails to detect any independent impact on aggregate demand from changes in the monetary
base when controlling for the impact of changes in interest rates.
36A detailed discussion of possible central bank actions to affect
aggregate spending when the policy interest rate is at its zero floor,
and their likely effectiveness and shortcomings can be found in
Karen Johnson, David Small, and Ralph Tryon, Monetary Policy
and Price Stability, forthcoming in the Proceedings of a Conference
on Possibilities and Limitations of Monetary Policy, held on June
1011, 1999 at the Austrian National Bank in Vienna.
104
cult to get the timing right for it to be stabilizing rather

than destabilizing because of various lags affecting
budgetary decision making and policy implementation.
Nevertheless, in situations where monetary stimulation
fails to prevent massive shortfalls of demand from output capacity, the question of timing loses importance
and fiscal stimulus can become appropriate, as suggested by recent developments in Japan.
Some doubts concerning the effectiveness and suitability of fiscal policy for demand management have
been related to the possibility of (partly) offsetting variations in private saving behavior (Ricardian equivalence) and private investment spending (crowding
out), 37 and to the efficiency arguments for a stable,
non-distortionary tax system that is not subject to frequent changes for the sake of macroeconomic stabilization. Use of discretionary fiscal policy for demand
management purposes should therefore be restricted to
exceptional cases,38 while the predominant concerns of
fiscal policy should be the efficient allocation of resources and justified income distribution objectives.
This still leaves an important role for fiscal policy in
cyclical stabilization through the operation of built-in
stabilizers, to which most of the above criticisms concerning discretionary fiscal policy do not apply.
sharp drops in prices were associated with financial

crisis, corporate bankruptcies, and the collapse of production. Episodes of mild deflation have been much
less disruptive for real economic activity. Prior to
World War I, periods of declining prices were quite
frequent, but economies nonetheless expanded during
these periods, albeit at lower rates than during periods
of rising prices (Table 4.2).39
In considering the implications of declining prices, it
is crucial to distinguish between various potential
sources of deflation. If the deflation is the result of a severe contraction in demand and, as may be the case, the
deflation further feeds the contraction in demand and
real activity in a downward spiral of shrinking demand,
falling prices, weakening confidence, and financial distress, the deflation can be very costly. If, on the other
hand, the deflation is the result of competitive pricing
in a robust economy, in a period when productivity is
rising rapidly and there are abundant investment opportunities, as was the case in earlier periods of persistent mild deflation, then there may be less cause for
concern, provided the deflation has no independent influence on real economic activity. (For example, declining prices in the computer industry have clearly not
been an impediment to investment in the sector, while
their price declines have been generally beneficial to
the rest of the economy.) The above qualification is
crucial, however, since widespread deflation is harmful
to business. The business sector as a whole stands to
lose by a fall in prices since it is necessarily long in real
assets and short in nominal assets.40 Thus, fear of
falling prices may induce businesses to curtail their activity. More generally, deflation shrinks the value of
collateral in relation to nominal debt and diminishes
the capacity of debtors to service their debt. It is the
disruption to the network of credit intermediation that
makes deflation particularly worrisome. Furthermore,
as stated above, to escape recession real interest rates
may need to be negative, but this cannot be achieved
when prices are falling.
Industrial countries today are less likely to experience falling prices than in the past. One reason, as noted
Deflation Concerns
In the last year or two, with inflation approaching
zero in some countries and price levels declining in
others (Box 4.3), a concern has been expressed by
some that countries may become caught in a deflationary spiral from which it is difficult to escape.
Clearly, once reasonable price stability is achieved
there is an increased likelihood that a downturn in economic activity could result in deflation. And if price
stability were to be maintained over the long run,
cyclical episodes of price declines would presumably
not be uncommon. One difficulty in assessing the consequences of deflation today is that until recently there
have been no significant episodes of deflation in the
post-World War II period.
Concerns about deflation are deeply colored by the
experience of the interwar Great Depression, when
39The United States in the last quarter of the 19th century provides
a good example of an economy that was able to grow rapidly in an
environment of sustained moderate price declines. Between 1875
and 1900, a period during which the United States industrialized
rapidly, prices fell on average by 1 percent per year, while real output grew at an average annual rate of a little over 4 percentsee
James Bullard, Deflation and Economic Growth, The Federal
Reserve Bank of St. Louis, National Economic Trends, March 1998,
p. 1. It should be noted, however, that periods during which prices
were declining faster than trend were periods during which industrial production was declining as well. It should also be recalled that
this was a period of considerable macroeconomic turbulence, with
large fluctuations in prices and output around their trends. For instance, the period from 1890 to 1897, dubbed the disturbed years
by Friedman and Schwartz, witnessed three recessions.
40This point was emphasized by John Maynard Keynes, A Tract
on Monetary Reform (London: Macmillan, 1924).
37Of course, fiscal expansion will not crowd out private expenditures through interest rate effects in the case of a liquidity trap.
38As noted, a decisive advantage of public consumption and investment expenditure over monetary policy is that the former does
not rely on indirect incentive effects but can raise aggregate demand
directly. It may therefore be necessary to resort to fiscal demand
management if monetary policy should indeed turn out to be ineffective in stimulating demand. The current situation in Japan seems
to be a case in point, though the high debt/GDP ratio already attained and its projected further increase may limit the credibility and
thus the effectiveness of further fiscal stimulus. A good part of the
policy debate between monetarists and Keynesians is about how
likely it is for monetary policy ever to be ineffective, and how effective expansionary fiscal policy will be when expansionary monetary policy has proved ineffective.
105
IV
Table 4.2. Deflation and Output Growth

(Average annual percentage growth)
Deflation Periods1
____________________
Nondeflation Periods
____________________
Prices
Output
Prices
3.7
3.7
2.0
1.1
1.2
3.0
4.7
4.2
2.8
3.5
3.0
1.2
1.8
4.0
2.1
1.3
1.4
1.1
1.6
2.0
2.8
1.7
Output
Memorandum:
Years of Deflation
4.4
2.7
2.6
1.6
2.2
1.9
4.6
2.1
3.3
3.0
2.8
5
4
8
2
14
8
3
8
12
10
7
7.3
6.6
7.1
3.7
3.4
4.1
6.6
2.6
4.2
3.5
4.9
8
8
4
5
8
9
4
5
8
7
7
18821913
United States
Japan2
Germany
France
Italy
United Kingdom
Canada
Belgium
Sweden
Denmark
Average
1.4
4.4
1.8
0.2
1.4
1.0
1.1
1.5
2.2
1.8
1.7
192339
United States
Japan3
Germany
France
Italy
United Kingdom
Canada
Belgium
Sweden
Denmark
Average
4.2
6.7
6.4
5.8
5.4
3.1
6.2
5.6
3.0
5.0
5.1
United States
Japan4
Germany
France
Italy
United Kingdom
Canada
Belgium
Sweden
Denmark
Average
1.6
4.2
6.1
5.5
2.3
3.8
3.3
5.8
4.1
3.8
0.9
2.2
1.9
1.1
0.6
8.6
1.1
2.7
2.3
1.0
1.8
5.7
1.6
10.2
6.1
1.9
0.6
8.7
1.5
3.0
4.1
Of which: 192339 excluding 193033

1.1
0.5
1.8
3.1
1.8
1.3
5.9
3.0
1.9
1.8
6.3
1.6
11.1
6.1
1.9
0.6
9.6
1.5
2.9
4.4
7.3
7.9
7.1
4.4
3.4
4.1
6.6
2.7
4.2
3.5
5.1
4
6
0
2
4
4
0
2
4
4
4
Source: Bank for International Settlements, 69th Annual Report, 1999.

1Deflation defined as at least two consecutive years of price decreases.
218851913.
3192638.
4192629 and 193438.
above, is that resistance to nominal wage declines may

help to prevent prices from falling, particularly in the
relatively low (and more stable) productivity growth
service sectors that now account for much of these
economies.41 Thus, a contraction in demand is likely to
induce a smaller decline in inflation (and a correspondingly larger decline in output) when inflation is low
than when inflation is high.42 It would take a severe
economic downturn to induce firms to cut wages (and

prices) on a wide scale. Japan has been experiencing
such a severe economic downturn and firms have indeed cut wages on a wide scaleover the past year,
employment compensation has fallen by 3 percent.43
Another reason is that monetary policy now does
not face the constraints faced by policy in the often referred to earlier episodes of deflation when countries
were on the gold standard (since the supply of fiat
money is completely policy determined). Moreover, in
41Deflation in commodity prices, arising, say, from a slump in

world demand, can of course have severe adverse macroeconomic
effects in undiversified, commodity-exporting countries.
42U.S. experience supports this conjecturesee George L. Perry,
Is Deflation the Worry? Brookings Institution, Policy Brief 41
(Washington, December 1998).
43As discussed above, the protection against deflation provided by

the institutional structure of labor markets may come at the cost of
substantially higher unemployment as the inflation rate approaches
zero (see Box 4.1).
106
the past couple of years, as the threat of inflation has

ebbed in many countries and the specter of deflation
surfaced, there has been a growing recognition that
price stability should be pursued in a more balanced
way: monetary policy can be too tight as well as too
loose.44 Unlike in the 1980s and the first half of the
1990s, when the quest for price stability usually meant
the adoption of monetary policies aimed at reducing
inflation to lower levels, in the past few years the
maintenance of price stability has generally called for
the adoption of symmetrical policy responses to deviations of inflation from its target or desired rate. Thus,
in situations where inflation developments call for a
monetary policy response, policy should respond as
forcefully when inflation is below target as when it is
above target, since deflation is to be as much avoided
as inflation.45 Indeed, some have argued that at price
stability an asymmetric policy response should be favored in which monetary policy would respond more
forcefully (and in a more timely way) to inflation
below than above target.46 The reason is that monetary
policy can always suppress aggregate demand and reduce inflation by raising interest rates sufficiently; but
monetary policys capacity to stimulate aggregate demandand, therefore, fight deflationis limited if
confidence is very depressed or once short-term nominal interest rates have been lowered close to zero, as
Japans experience in recent years suggests.47
For these and other reasons, including the role of
stabilization policy, and, more generally, differences in
the monetary order, the pre-World War I experience
with deflation is not entirely relevant to present-day
economies.48 This does not mean that deflation is not
possible, especially when it is considered that it can

take different forms, some less problematic than others. Clearly, reductions in prices in particular industries associated with rapid advances in technology and
productivity are not problematic. Nor are gradual declines in the general price level associated with broadbased or economy-wide positive supply shockssince
these are likely to be temporary and should not have an
adverse effect on investor sentiment. More likely and
prevalent today than declines in the general price level
in product markets is deflation in asset pricesparticularly the prices of corporate stock and real estate.
While price declines limited to equities and real estate
may not be as damaging as widespread price deflation,
they can be very disruptive and costly, especially if the
earlier run-ups in these asset prices have been leveraged through credit expansion and give rise to banking
sector problems, as Japans experience has once again
shown.49 (Issues related to asset price inflation are discussed further below.)

The continued strong growth of the U.S. economy,
the indications of a strengthening of growth in Europe
and of a possible pickup in Japan, and the clear signs
of recovery in the crisis-afflicted emerging market
economies have diminished the concerns about global
recession and deflation that were expressed at the
height of the financial market turbulence in late 1998
and early this year. Unease about deflation in some
countries, particularly China and Japan, remains, but
apprehension about a more generalized deflation has
abated. Increasingly, the focus has shifted to concerns
about developments in asset prices, in particular the
U.S. stock market, which many indicators suggest has
become overvalued, posing the risk of a sharp correction. The disquiet is that macroeconomic policy, especially monetary policy, may have been too expansionary, with a number of fortuitous and temporary factors,
including declining commodity prices and an appreciation of the U.S. dollar, having contributed to keep
general product price inflation low even as the overly
accommodating policy has fueled a stock market
boom.
Recently, therefore, the issue facing policymakers has been: Does maintaining stability of the prices
of currently produced goods and services suffice to
44See William R. White, Evolving International Financial Markets:

Some Implications for Central Banks, Bank for International
Settlements, BIS Working Paper No. 66 (Basel, April 1999).
45In response to supply shocks, both negative and positive, inflation
is usually allowed to deviate flexibly from target. The need for such
flexibility is the reason why in countries with explicit inflation targets,
for instance, the price index on which the inflation target is based often
excludes the effects of supply shocks associated with changes in
food and energy prices, indirect taxes, terms-of-trade shocks, and the
direct effect of interest rate changes on the price index.
46See The Global Economic Outlook and Challenges Facing
Monetary Policy around the World, remarks by Governor Laurence
H. Meyer before the World Economic Forum, U.S.A. Regional
Meeting, U.S. Chamber of Commerces National Chamber
Foundation, Washington, D.C., April 14, 1999. Paul Krugman,
Deflationary Spirals, February 25, 1999, http://web.mit.edu/krugman/www/spiral.html, presents a simple model in which in the presence of a substantial output gap an incipient deflation can turn into
a deflationary spiral if the central bank fails to implement an expansionary monetary policy quickly and vigorously.
47This does not mean that monetary policy becomes completely
ineffective; there are other channels than short-term interest rates
through which monetary policy can affect the real economysee
Karen Johnson, et al., Monetary Policy and Price Stability.
48The monetary order refers to the broad set of arrangements
encompassing the exchange rate regime and the monetary policy
framework and the way these influence private sector expectations
and behavior. It includes the goal of monetary policy, the powers of
the authorities charged with achieving that goal, and private agents
perceptions of the conduct of policy and how these influence their
expectations and actionssee David Laidler, The Exchange Rate
Regime and Canadas Monetary Order, Bank of Canada Working
Paper 99-7 (Ottawa, March 1999).
49On Japans experience see Tamim Bayoumi, The Morning
After: Explaining the Slowdown in Japanese Growth in the 1990s,
Working Paper 99/13 (Washington: IMF, January 1999).
107
IV
Box 4.3. Recent Episodes of Negative Inflation

A number of countries have experienced declines in
economy-wide price indices in recent years (see the first
table). For headline consumer prices and GDP deflators, in general, these declines have been short-lived or
small (sometimes reflecting seasonal factors, particularly
for developing countries), except for countries with substantial oil and other commodity exports or countries that
have had civil conflicts.1 In addition, episodes of declin-
ing consumer and total output prices have been no more

frequent in the 1990s than in previous decades, other than
the 1970s when average inflation rates were relatively
high, although producer and wholesale prices have declined more frequently in this decade, perhaps reflecting
relatively greater downward price pressures on tradable
goods (see the second table). There is some indication,
however, that the frequency of price declines has increased, particularly for industrial countries, since 1997.
1The consumer price indices referred to in this box include

volatile components such as food, energy, and direct interest
rate costs. Because these headline indices can give misleading
signals, monetary authorities that target inflation often focus on
consumer price indices that exclude volatile components. For

example, in Australia, consumer price inflation, excluding these
volatile components, was positive not negative between the first
and third quarters of 1997 (see first table).
Selected Countries: Recent Episodes of Declining Prices1

(Annual average data unless otherwise stated)
Change3
Country
Algeria
Argentina
Armenia
Australia
Azerbaijan
Bahrain
Barbados
Belize
Brazil
Brunei Darussalam
Bulgaria
Cameroon
Canada
Central African Republic
China
Congo, Dem. Rep. of
Congo, Republic of
Eritrea
Ethiopia
Gabon
Hong Kong SAR
Israel
Japan
Kuwait
Macedonia, FYR
Maldives
Mali
New Zealand
Niger
Nigeria
Norway
Oman
Qatar
Rwanda
Period2
Price Index
GDP deflator
CPI (monthly)
CPI (monthly)
CPI (quarterly)
GDP deflator
GDP deflator
CPI (monthly)
CPI
CPI (monthly)
GDP deflator
CPI (monthly)
CPI (monthly)
GDP deflator
CPI
CPI
CPI (monthly)
GDP deflator
GDP deflator
CPI
GDP deflator
CPI (monthly)5
CPI (monthly)
CPI (monthly)
GDP deflator
CPI (monthly)
CPI
CPI
CPI (quarterly)
CPI (monthly)
GDP deflator
GDP deflator
GDP deflator
GDP deflator
CPI (monthly)
199798
8/986/99
3/989/98
Q1/97Q3/97
199798
199798
9/974/99
199798
6/9811/98
199798
5/986/99
5/971/98
199798
199798
199798
4/9712/97
199798
199798
199597
199798
5/986/99
12/983/99
10/972/99
199698
2/981/99
199798
199697
Q3/98Q1/99
8/982/99
199798
199798
199698
199697
12/975/99
maintain macroeconomic stability more broadly?

There are several aspects to this.
One is that reasonable price stabilitythat is, a low
rate of change of the aggregate price levelis an es-
Price
(percent)
2.8
1.7
12.7
0.7
5.7
5.4
3.9
0.9
1.0
0.2
5.1
6.8
0.6
1.9
0.8
30.4
16.9
0.9
8.6
15.1
4.3
1.4
1.2
14.1
3.5
1.4
0.4
1.1
7.2
6.4
0.4
15.2
9.7
6.9
Memorandum: 1999
Consumer
Price Inflation4
(percent)
5.3
0.8
2.7
1.8
5.5
1.0
2.5
2.0
4.6
1.0
1.5
2.0
1.5
2.4
1.5
40.0
7.4
5.5
3.6
2.0
3.1
5.5
0.4
0.9
2.0
2.3
2.5
1.3
3.0
12.5
2.3
0.3
2.6
0.5
sential element of macroeconomic stability. The distortionary and harmful effects of inflation are well
known. By distorting relative price signals, increasing
uncertainty about future prices, and generally reducing
108
(concluded)
Country
Saudi Arabia
Senegal
Singapore
Sweden
Syrian Arab Republic
Thailand
Uganda
Price Index
Period2
Price Change3
(percent)
Memorandum: 1999
Consumer
Price Inflation4
(percent)
GDP deflator
CPI (monthly)
CPI (monthly)
CPI (monthly)
CPI
CPI (monthly)
CPI (monthly)
199798
9/985/99
11/9710/98
9/9712/98
199798
8/986/99
1/987/98
13.4
2.9
1.7
1.4
1.2
1.6
6.3
1.5
2.0
0.2
0.2
2.5
0.5
5.0
Source: CPI (consumer price index) from IMF, International Financial Statistics, or IMF staff estimates and GDP deflator from WEO
database.
1During 199699.
2Starting and ending periods of price index decline in years, quarters, or months according to data availability.
3Price change is calculated as the percent change of the price index (second column of this table) between the first date and the last
date of the period (third column) and reflects the period yielding the maximum decrease in the price index.
4IMF staff projections for annual consumer price inflation.
5Composite consumer price index.
Frequency of Episodes With Negative Inflation1

(Percent of observations with year-on-year price declines)
196069
197079
198089
199099
199799
Annual data
CPI
All countries
Nonindustrial countries
8.4
0.9
11.9
1.9
0.0
2.4
4.2
1.3
4.8
4.0
1.0
4.6
4.0
2.2
4.4
GDP deflator
All countries
14.6
0.7
16.6
9.4
0.0
10.7
10.8
2.3
12.0
5.9
5.1
6.0
7.3
6.8
7.3
PPI/WPI
All countries
12.9
11.9
13.6
3.8
3.1
4.2
9.8
13.9
7.7
13.9
26.5
8.0
25.8
40.5
18.9
Monthly data
CPI
All countries
12.2
1.5
16.8
3.2
0.0
4.1
5.7
2.0
6.6
5.5
1.9
6.2
7.1
3.8
7.7
PPI/WPI
All countries
15.3
12.1
17.7
4.7
4.3
5.0
10.0
15.1
6.5
16.6
29.2
9.8
25.0
41.8
17.3
Source: CPI (consumer price index) and PPI/WPI (producer or wholesale price index) from IMF, International Financial Statistics,
and GDP deflator from WEO database.
1Observations (country-periods) when year-on-year inflation was negative as a percent of all available observations. For example, for
the first (upper-left) cell in the table, there were 67 instances where countries had negative CPI inflation in a given year during 196069
out of 796 available observations (country-years).
the information content of the price system, inflation

distorts the allocation of resources and adversely affects economic efficiency and growth. High inflation
tends to be associated with increased variability of
and hence increased uncertainty aboutthe aggregate

price level and relative prices, which has a negative effect on output. Countries that, on average, over the
past four decades have had higher rates of inflation
109
IV
have tended to have more variable rates of inflation.

And countries with more volatile inflation have tended
to have more volatile output growth.50
Perhaps most illustrative of the relationship between inflation and macroeconomic instability is the
fact that run-ups in inflation have usually been followed by recessions as monetary policy was tightened
to bring inflation under control. Moreover, in some
countries with pegged exchange rates, higher rates of
inflation than in the anchor country have resulted in
real exchange rate overvaluations, a loss of international competitiveness, and balance of payments
crises. The ensuing currency devaluations have in
some cases further resulted in debt crises and financial sector distress. This suggests that by keeping inflation low and stable, policymakers can make recessions less frequent, shallower, and shorter, and
thereby enhance macroeconomic stability.51 They can
also avoid the excessive expansion of credit and overheating that often precedes currency and banking
crises.52
International evidence on the magnitude of output
fluctuations is difficult to interpret because historically
there have been only a small number of business cycles.53 Thus, to obtain a meaningful sample size the
data must span many decades, which introduces the
further complication of poorer quality data or the unavailability of data in the more distant past. With this
caveat in mind, it appears that cyclical variations in
output have tended to moderate in the postwar period
compared to the prewar period. (The interwar period
(191445), during which output and other macroeconomic variables were exceptionally volatile, is usually
considered a special case.) This has often been attributed to stabilization policy having become more effective in the postwar period. An additional explanation is
that as economies have become increasingly integrated internationally, they have become less susceptible to the influence of developments in any one countrythe international business cycle has been
diversified.54 Structural changes in the economyfor
instance, the rise of the service sector and the public

sector, which are less cyclical than agriculture and
manufacturingand differences in the incidence and
magnitude of exogenous shocks may also have played
a role.
The behavior of prices does differ markedly between the post-World War II and the pre-World War I
periods in some important respects. In most countries, price levels changed very little, on average, during the prewar period (the 50 years or so before
1914), but rose persistently after World War II.55 But
while mean inflation was considerably lower in the
prewar period than in the postwar period, it was not
more stable: the standard deviations of inflation rates
in the two periods are comparable, on balance. The
behavior of inflation rates in the two periods further
differ in two other respects: one, inflation rates have
become more persistent in the postwar period, reflecting perhaps changes in economic structure and in
the policy environment, which have created the general expectation that government policies will oppose
large price movements; and two, price fluctuations
have changed from being procyclical to countercyclicalthat is, from a positive to a negative correlation
between price level and output fluctuations, possibly
reflecting a shift to non-accommodation of price
movements by the monetary authorities in the postwar period.56
When the postwar period alone is considered, there
is no evidence that for industrial countries as a group
cyclical fluctuations in output have moderated over
time (Figure 4.4): the experience across countries has
been too mixed to allow firm conclusions to be drawn.
While business cycles have become more moderate in
recent years, the experience of industrial countries
more broadly (including the G-7 economies and several smaller industrial countries) has typically been
one of more frequent recessions in the second half
than in the first half of the postwar period.57 The favorable performance of the U.S. economy since the
mid-1980s, which has witnessed two exceptionally
long expansions, has been attributed by some observers to the better management of aggregate demand, which has kept inflation low and thus avoided
50See The Rise and Fall of InflationLessons from the Postwar

Experience, in the October 1996 World Economic Outlook.
51For arguments and evidence that this has indeed been the case
for the United States in the postwar period, see John B. Taylor,
Monetary Policy and the Long Boom, Federal Reserve Bank of St.
Louis Review, Vol. 80, No. 6 (November/December 1998), pp. 311,
and Christina D. Romer, Changes in Business Cycles: Evidence
and Explanations, Journal of Economic Perspectives, Vol. 13,
No. 2, Spring 1999, pp. 2344.
52See Financial Crises: Characteristics and Indicators of
Vulnerability, in the May 1998 World Economic Outlook.
53For instance, the United States has had only nine cycles since
1945, and only seven in peacetime.
54U. Michael Bergman, Michael D. Bordo, and Lars Jonung,
Historical Evidence on Business Cycles: The International
Experience, in Jeffrey C. Fuhrer and Scott Schuh, Beyond Shocks:
What Causes Business Cycles (Boston: Federal Reserve Bank of
Boston, 1998).
55The notable exception in the prewar period was Japan, where

the price level rose. During most of that period Japan was not on the
gold standard.
56David K. Backus and Patrick J. Kehoe, International Evidence
on the Historical Properties of Business Cycles, American
Economic Review, Vol. 84, No. 4 (September 1992), pp. 86488.
The countercyclical behavior of prices in the postwar period has
been reported in a number of studiessee, for instance, Laurence
Boone and Stephen G. Hall, Stylized Facts of the Business Cycle
Revisited: A Structural Modelling Approach, International
Journal of Finance and Economics, Vol. 4, No. 3 (July 1999),
pp. 25368.
57Victor Zarnowitz, Theory and History Behind Business
Cycles: Are the 1990s the Onset of the Golden Age? Journal of
Economic Perspectives, Vol. 13, No. 2, Spring 1999, pp. 6990.
110
policy-induced recessions.58 Indeed, during the current U.S. expansion, the inflation rate has declined,
which is unlike any other expansion in the postwar period. In contrast to the U.S. experience, the Japanese
economy has been in a slump through most of the
1990s, while for the euro area as a whole unemployment rates have remained persistently high and there is
no evidence that cyclical fluctuations in output have
moderated. Indeed, the uneven growth among the
three major currency areas and growing trade imbalances have raised concerns about macroeconomic stability in the years ahead. More broadly, considering
the string of emerging market financial crises, there is
little to suggest that macroeconomic instability in the
world economy has diminished.
It would be inappropriate, however, to assign exclusive importance to policies and exogenous shocks in
explaining economic fluctuations. Economic expansions do not necessarily result in excessive inflation to
be countered by tight monetary policy; nor do increases in official interest rates to dampen a boom necessarily cause or explain recessions. Rather, at the core
of business cycles stand endogenous interacting movements in business profits, investment, and credit.59
This does not mean that policies do not play a role in
alleviating or contributing to recessions; but the view
that market economies are inherently stable and that it
is excessively stimulatory policies that first cause excesses to develop and then belatedly curtail them, engendering a downturn in real activity, clearly do not
fully reflect international experience.
A second aspect of the relationship between price
stability and macroeconomic stability has come to the
fore in recent years, as central banks have increasingly focused on price stability as the main, or even
the sole, long-run goal of monetary policy. The concern has arisen whether such a narrow focus might
compromise the stability of the financial system. The
concern is that in the absence of a perceived threat to
its inflation goal, a central bank may fail to respond in
a timely manner to developments that may place the
financial system at risk of instability. An alternative
view maintains, in contrast, that price level instability
can exacerbate financial instability, which might then
result in economic instability more broadly. A monetary policy directed at maintaining price stability,
therefore, would enhance both financial and economic stability.
Underlying this alternative view is the notion that
price instability leads to inefficient lending because it
increases the uncertainty faced by both borrowers and
Figure 4.4. Industrial Countries:

Output Gap and Inflation1
(Percent)
Cyclical fluctuations in output for industrial countries as a group
show no sign of having moderated during the past three decades.
15
Inflation
10
0
Output gap
5
1970
1Data
58Christina D. Romer, Changes in Business Cycles: Evidence

and Explanations, Journal of Economic Perspectives, Vol. 13, No.
2, Spring 1999, pp. 2344; and John Taylor, Monetary Policy and
the Long Boom, Federal Reserve Bank of St. Louis Review, Vol. 80,
No. 6 (November/December 1998), pp. 311.
59Zarnowitz, Theory and History Behind Business Cycles.
111
75
80
85
90
for 1999 are IMF staff projections.
95
99
IV
Table 4.3. Pronounced Changes in Real Equity Prices1

(Annual real equity price index, starting year = 100)
Rise in Equity Prices2
Subsequent Equity Price Correction3
_____________________
_________________________________
Country
Index at
peak year
Starting Year
Peak year
Finland
Ireland
Japan
Spain
1981
1982
1982
1983
1989
1989
1989
1989
527
320
427
389
Finland
Ireland
Norway
United States
1992
1992
1982
1980
1998
1998
1997
1998
447
544
863
477
Emerging markets
Israel
Korea
Malaysia
Mexico
Thailand
1988
1983
1986
1988
1986
1993
1989
1996
1994
1994
407
608
378
528
646
Trough year
Index at
trough year
1992
1992
1992
1992
240
227
210
247
1996
1992
1998
1995
1998
202
308
157
344
130
Source: IMF, International Financial Statistics.

1Nominal equity prices deflated by CPI.
2Average annual increase exceeding 20 percent.
3Overall correction of at least 25 percent in annual price index.
flation. But it may not be the maintenance of price stability per se that engenders booms in asset prices.
Rather, booms in asset prices tend to be associated, in
a mutually reinforcing manner, with relatively long
economic expansions which breed overconfidence,
overborrowing, overinvestment, and overconsumption.
In turn, long expansions are associated with relatively
low inflation. Rising equity prices help to keep the expansion going by lowering the cost of capital, which
spurs investment, and, through wealth effects, by raising consumption. They may also channel part of the
monetary growth into the demand for stocks, which
may restrain the rise in prices of goods and services
and accentuate the rise in equity prices.61 Business expansions, especially long expansions, ultimately give
rise to imbalances that make them unsustainable. The
difficult task of policy is to forestall the speculative excesses in asset prices, especially in equity and real estate prices, that sometimes develop during long expansions by preventing the overexpansion of credit that
feeds asset price bubbles.
Table 4.3 summarizes medium-term developments
in equity markets in selected industrial countries and
emerging market economies over the past two
decades, singling out periods of rapidly rising equity
prices and those of significant price falls. The following features stand out: typically periods of rising equity prices are prolonged, coinciding with periods of
rapid output growth and moderate or declining inflation. In both industrial countries and emerging market
lenders about the potential real returns to investment

and because inflation makes it more difficult to assess
the true quality of borrowers. Furthermore, sustained
inflation can encourage speculative investment and
borrowing by creating the expectation that prices will
continue to rise. When disinflation unexpectedly sets
in, the realized real returns to investment fall below
what had been expected, and the real burden of nominal debt rises above what had been expected, resulting in increased defaults by borrowers and distressed
lenders. The historical evidence for a number of industrial countries is consistent with this view.60
Price stability may be conducive to maintaining financial stability in another sense: when inflation is
under control the central bank has greater flexibility to
respond to crises when needed. In what is perhaps the
best recent demonstration of this, the existence of reasonable price stability in the United States allowed the
Federal Reserve to cut interest rates decisively, and arguably by more than seemed warranted at the time by
U.S. domestic considerations alone, in order to contain
potential spillover effects during the emerging market
financial crisis in the fall of last year.
While price stability generally enhances financial
stability, it can at times also induce excessive risk taking. Booms in asset prices, especially in equity prices,
have tended to develop in periods of relatively low in-
60Michael D. Bordo and David C. Wheelock, Price Stability and

Financial Stability: The Historical Record, Federal Reserve Bank
of St. Louis Review, Vol. 80, No. 5 (September/October 1998),
pp. 4162.
61Zarnowitz,
112
Theory and History Behind Business Cycles.
economies, periods of equity price increases have usually been accompanied by large capital inflows, rapid
expansion of domestic demandoften in the form of
investment boomsand a deteriorating external balance. The contraction of equity prices is usually rather
sudden and often coincides with, or leads to, a significant deterioration in the real economy. However, not
all periods of significant equity price rises are followed by a disruptive correction.
What leads to a sudden reversal to prolonged rises in
equity prices during a boom? The empirical evidence
suggests that it occurs when monetary conditions
tighten significantly, either because monetary authorities react to the manifestation of actual or prospective
inflationary pressures, or because of large swings in
transborder capital flows, as was the case in Mexico in
1994 and Thailand in 1997.
Monetary policyand demand management policies in generalseem a blunt instrument to prevent
large swings in asset prices from adversely affecting
the real economy, or from preventing such swings in
asset prices in the first place. It is therefore important
to recall the role of prudential regulations and supervision of the financial sector in preventing asset price
behavior from threatening macroeconomic stability.
Part of their task is to limit the tendency of easy monetary conditions to entail asset price inflation, and to
reduce adverse repercussions of substantial declines in
asset prices on the balance sheets of private businesses
(including banks and other financial institutions) and
households alike. The 1988 Capital Accord reached
among members of the Bank for International
Settlements in Basel constitutes a major supranational
effort to safeguard the stability of the international
banking system. By establishing risk-adjusted minimum capital requirements the Accord aims to prevent
excessive risk taking as international competition
among banks intensifies. However, experience with
the Accord has revealed that some of its features lead
to procyclical bank lending behavior, and this is one of
the reasons why it is currently under review by the
Basel Committee.62
Not every asset price collapse needs to entail a recession, as witnessed by the experience of the 1987
stock market crash. The initial magnitude of the
October 1987 stock market collapse was comparable
to that of 1929, and like the latter it extended around
the globe. But the policy reaction in 1987 was very
different from that in 1929, with central banks taking
seriously their roles as lenders of last resort in response to a sudden surge in liquidity preference, and
governments worldwide refrained from interfering
with free world trade in order to protect the domestic
economy. As a result, the massive stock market decline

was barely reflected in output growth and employment, and most stock markets recouped their losses
within less than two years (Figure 4.5). It appears ex
post that the monetary policy response to the 1987
stock market crash was probably too expansionary for
too long, not only preventing a recession, but actually
leading to a re-acceleration of inflation in the industrial countries. And the quick recovery of equity prices
it facilitated in some countries, like Japan, may have
reduced investors caution, thus contributing to the
subsequent stock market bubble.

The recent rapid and sustained rise in equity prices
in most industrial countries has led to concerns about
excessive global liquidity (Box 4.4) and that some of
these markets may have become overvalued and potentially subject to large and sudden corrections that
may destabilize future real activity. The most notable
example is the U.S. stock market, which rose about
190 percent in nominal terms in the last five years
through June 1999, and almost 80 percent from the
time Federal Reserve Chairman Alan Greenspan first
spoke of irrational exuberance in December 1996
(Figure 4.6).63 The U.S. stock market now has a capitalization of over U.S. $12 trillion, equivalent to an
unprecedented 140 percent of the annual output of the
U.S. economy. Other standard valuation measures
also confirm that U.S. stock prices have reached historical highs, including in relation to corporate profits
(Figure 4.7).64 The U.S. stock market is not the only
buoyant market: other major stock exchanges, with
the exception of Japans, have also risen in recent
years, although not to the same extent.65
Sharp increases in equity prices can complicate the
task of assessing the appropriate stance of monetary
policy, particularly in an environment of low and stable inflation in goods and services prices. This is because asset price inflation, even in the absence of
goods and services price inflation, can lead to excessive growth in aggregate demand, which could eventually spill over to general inflation. Also, past experience indicates that disproportionately large increases
in asset prices can be suddenly reversed, resulting in a
deterioration of household, corporate, and financial
sector balance sheets and adversely affecting real ac-
63Calculated price increases for the U.S. stock market are percent
changes for the monthly averages of the S&P 500 index.
64Valuation measures are generally not comparable across countries because of differences in accounting practices, tax laws, the
relative importance of cross shareholding, and the structure and operation of financial markets.
65Although stock prices in Japan have generally declined in recent
years, they have risen sharply in recent months.
62Changes to the existing accord currently under consideration are

discussed in Basel Committee on Banking Supervision, A New
Capital Adequacy Framework (Basel: June 1999).
113
IV
tivity.66 Monetary authorities, thereforeeven those

with the sole declared goal of stability in the overall
level of product priceshave reason to be concerned
about rapid changes in asset prices, including stock
prices, real estate prices, exchange rates, and bond
yields, since they may influence or signal changes in
future inflation and economic activity.
Although equity prices have risen sharply in many
industrial countries in the past few years and although
there is some anecdotal evidence that the real estate
markets in some countries have recently tightened,
goods and services price inflation have approached
postwar lows. Potentially unsustainable imbalances
may have developed, however, as indicated by large
and increasing external current account imbalances
and declining household saving rates and declining
and negative net private financial balances in
Australia, Canada, Denmark, New Zealand, and the
United States, partly related to rising equity prices
(Figure 4.8). Falling net private financial imbalances
are often suddenly reversed, as highlighted by the experiences of Finland, Japan, Sweden, and the United
Kingdom in the late 1980s and early 1990s.67 A key
issue in the current conjuncture, then, is how central
banks should interpret the rise in asset pricesspecifically, equity prices, and whether they should react to
them. In addressing this issue it is useful to consider
the information content of asset prices, the determinants of asset prices, and whether asset price booms
are more likely or more dangerous at low rates of
product price inflation.
Figure 4.5. Comparison of Two Stock Market Crashes

Stock prices behaved similarly in the initial phase of the 1929 and
1987 crashes, but a different response by monetary authorities entailed
very different developments in both equity prices and aggregate output
following the initial crises.
120
Nominal Stock Prices

(monthly index; peak month = 100)
100
1987 crash
80
1929 crash
60
Index1
GDP
Output Developments
120
110
1987 crash
100
90
1929 crash
80
70
1928/86 1929/87 1930/88 1931/89 1932/90 1933/91
40
20
Sep. 1928
Aug. 1986
Sep. 1929
Aug. 1987
Sep. 1930
Aug. 1988
Information Content of Asset Prices
Sep. 1931
Aug. 1989
Whether monetary authorities should respond to

asset price fluctuations in part depends on whether
they provide leading information about future movements in output or inflation. For instance, rising equity prices can stimulate aggregate demand by increasing the wealth of households, improving
corporate balance sheets and confidence, and lowering the cost of capital. If the increase in equity prices
does not reflect changes in underlying factorssuch
as an improvement in supply conditions (for example,
through productivity gains) or changes in preferencesthen it could also lead to excess demand pressures, a misallocation of resources, and a rise in infla-
Sources: Bureau of Economic Analysis, Business Conditions Digest;

and IMF, World Economic Outlook (WEO) database.
1Year preceding the year of the stock market crash equals 100.
66For discussions of recent examples of the boom-bust cycle in

asset prices, see Garry J. Schinasi and Monica Hargraves, Boom
and Bust in Asset Markets in the 1980s: Causes and
Consequences, Staff Studies for the World Economic Outlook
(Washington: IMF, 1993) and Chapter IV, Japans Economic
Crisis and Policy Options, in the October 1998 World Economic
Outlook.
67See also Chapter II, Global Repercussions of the Crises in the
Emerging Markets and Other Conjunctural Issues, in the May 1999
World Economic Outlook.
114
tion.68 Similarly, fluctuations in the exchange rate can

affect the level and composition of aggregate demand
and the rate of inflation. And an increase in the spread
between long- and short-term interest rates, for example, can signal strengthening demand or expectations
of rising inflation.
Empirical evidence on the information content of
asset prices is mixed. There is some evidence that
changes in equity prices help to explain changes in
aggregate demand and output, particularly for the
United States, the United Kingdom, and Japan, but
the evidence is mixed and the causal relationships unclear.69 Equity price changes, however, have been
only weakly (and generally, negatively) correlated
with current and future changes in product prices (as
illustrated below). Rising equity prices may not cause
but simply anticipate increases in future real activity,
because equity price valuations reflect expectations of
future profits growth. The distinction matters for policy. If equity prices increase for speculative reasons,
aggregate demand may rise owing to wealth effects or
changes in the cost of capital, thereby temporarily
boosting real activity, but the increase will be unsustainable in the longer term since aggregate supply
does not rise to meet the increase in demand. In contrast, if equity prices rise because of accurate expectations of higher future real growth (perhaps because
of favorable developments in productivity), then the
growth is likely to be sustainable. Real estate prices
have also been found to provide information about
economic activity, particularly when they are declining, but generally are contemporaneous with real activity and inflation.
Changes in the exchange ratewhich is also
an asset pricecan affect inflation directly through
import prices or indirectly through effects on
demand conditions. Empirical evidence for a number of industrial countries, including Canada,
Finland, Iceland, New Zealand, Norway, and Sweden, indicates that inflationary pressures have
depended in part on the effects of movements in the
exchange rate on aggregate demand and the output
Figure 4.6. Selected Countries: Stock Prices

(Index in local currency; logarithmic scale; 1980:Q1 = 100)
Stock prices in many industrial countries have risen sharply in recent
years in both nominal and real terms.
4000 Nominal Stock Prices
2000
United States
1000
Real Stock Prices1
1500
1000
Japan
500
500
200
100
50
United States
200
100
Japan
15
1960
70
80
90
99:
Q2

2000
1960
70
80
90
Real Stock Prices1
99:
Q2
1500
1000
1000
500
500
200
100
50
50
Germany
Germany
200
France
100
France
15
1960
50
70
80
90
99:
Q2

2000
80
90
Real Stock Prices1
99:
Q2
1500
1000
Sweden
500
United
Kingdom
200
100
some supply shocks, such as a discovery of natural resources, the induced wealth effect may also lead to excess demand
and inflation in the near term because the increase in demand may
precede the increase in supply.
69See, for example, Bank for International Settlements, The Role
of Asset Prices in the Formulation of Monetary Policy (1998); B.S.
Lee, Causal Relations Among Stock Returns, Interest Rates, Real
Activity, and Inflation, Journal of Finance, Vol. 47 (1992); and
Martha Staff-McCluer, Stock Market Wealth and Consumer
Spending (unpublished; Washington: Federal Reserve System,
Board of Governors, 1998). For evidence that the wealth effect from
equity prices has increased in the United States in recent years, perhaps because household equity holdings have increased and market
capitalization has grown larger than nominal output, see Vincent R.
Reinhart, Equity Prices and Monetary Policy in the United States,
in BIS, The Role of Asset Prices in the Formulation of Monetary
Policy.
70
Sweden
1000
500
68For
1960
200
United
Kingdom
50
100
15
1960
50
70
80
90
99:
Q2
1960
70
80
90
99:
Q2
Sources: Bureau of Economic Analysis, Business Conditions

Digest; and IMF, International Financial Statistics.
1Stock price index deflated by CPI.
115
IV
gap.70 These findings have led a number of these

countries to use a monetary conditions indexa
weighted average of the exchange rate and short-term
interest ratesas an indicator or operating target of
monetary policy. The importance of the exchange rate
for inflation has naturally been found to depend on
the openness, flexibility, and competitive structure of
the economy.
The term structure of interest rates, namely the
spread between long- and short-term interest rates, has
also been found to contain information about future inflation and economic activity and to perform better
than many other macroeconomic indicators, including
indices of leading economic indicators, in predicting
recessions.71 Conceptually, the term structure may be
correlated with future economic activity because it reflects the markets expectations about future shortterm interest rates, which may or may not be induced
by changes in monetary policy, and hence about future
economic growth and inflation.72 The empirical findings about the relationship between the term structure
and future economic activity are very strong for the
United States and Germany, but weaker for some other
industrial countries, particularly Japan and France.73
But even though asset prices contain some information about future economic activity, their usefulness as
indicators for monetary policy are limited because
forecasts based on them have been subject to large errors. Furthermore, even if the forecasts, particularly
for real activity, were accurate, it is not clear that monetary policy should in every case try to resist the predicted changes in activity, since changes in asset prices
may reflect changes in the underlying fundamentals,
such as a terms of trade, rate of time preference, or
Figure 4.7. Selected Countries: Measures

of Stock Market Valuation
Several measures of stock market valuation indicate that stock prices
in many industrial countries are at or near historical peaks.
80
Price-Earnings Ratios
Price-Dividend Ratios
250
200
60
Japan
150
Japan
40
100
United
States
20
United
States
1965 70 75 80 85 90 95 99:
Q2
35
1965 70 75 80 85 90 95 99:
Q2
50
0
80
30
25
Germany
60
Germany
20
40
15
10
5
20
France
1965 70 75 80 85 90 95 99:
Q2
35
France
70C. Freedman, The Use of Indicators and the Monetary

Conditions Index in Canada, in T. Balino and C. Cottarelli, eds.,
Frameworks for Monetary StabilityPolicy Issues and Country
Experiences (Washington: IMF, 1994).
71See, for example, Eugene F. Fama, Term-Structure Forecasts
of Interest Rates, Inflation, and Real Returns, Journal of Monetary
Economics, Vol. 25 (1990); Arturo Estrella and Gikas A.
Hardouvelis, The Term Structure as a Predictor of Real Economic
Activity, Journal of Finance, Vol. 46 (1991); P. Jorion and F.
Mishkin, A Multi-Country Comparison of Term-Structure
Forecasts at Long Horizons, Journal of Financial Economics,
Vol. 29 (1991); C.I. Plosser and K.G. Rouwnhorst, International
Term Structures and Real Economic Growth, Journal of Monetary
Economics, Vol. 33 (1994); Arturo Estrella and Frederic S. Mishkin,
The Yield Curve as a Predictor of U.S. Recessions, Current Issues
in Economics and Finance, Vol. 2 (Federal Reserve Bank of New
York, 1996); and Henri Bernard and Stefan Gerlach, Does the Term
Structure Predict Recessions? The International Evidence, Working
Paper No. 37 (Basel: Bank for International Settlements, 1996).
72In rare instances, the term spread may also widen if there is a
flight to liquidity such as occurred in October 1998.
73It has been argued that the weakness of the results in some industrial countries may reflect tighter financial market regulations
during parts of the time periods that were investigated, which may
have made interest rates less sensitive to market expectations.
1965 70 75 80 85 90 95 99:
Q2
80
30
25
Sweden
Sweden
20
60
40
15
10
5
20
United Kingdom
United Kingdom
0
1965 70 75 80 85 90 95 99:
Q2
1965 70 75 80 85 90 95 99:
Q2
Source: Primark Datastream.
116
productivity shock. For it to be advisable for monetary

policy to consider counteracting a rise in asset prices,
the monetary authorities must determine that the assets
have become overvalued or misalignedthat is, the
asset price increases do not reflect changes in the underlying fundamentals, including accurate and rational
changes in expectations. This determination involves
the difficult task of assessing changes in the determinants of asset prices.
Figure 4.8. Selected Countries:
Net Financial Balances1
Determinants of Asset Prices

Most asset price models in modern finance theory
are based on the assumption that households choose
the path of their consumption over time and allocate
their assets at each point in time so that risk-adjusted
expected rates of return are equated to the risk-free interest rate. Under this assumption, asset prices will be
determined by the present (risk-adjusted) discounted
value of their respective expected income streams.
For stocks, the income stream is the stream of future
dividends, and under some simplifying assumptions,
the stock price will be equal to the expected dividend
divided by the sum of the nominal risk-free interest
rate, a premium for holding (risky) equities rather
than a bond paying the risk-free interest rate, and (the
negative of) the expected nominal growth rate of
dividends.74
This formula can be used to understand the factors
that may lead to equity price gains. Equity prices can
rise because of changes in these fundamental variablesnamely, because the real interest rate or the equity premium falls or the expected real growth rate of
dividends rises. In a period of strong economic
growth, therefore, equity prices generally rise because
of changes in these variables in the near term such as
expectations for the increasing growth of dividends
and decreasing volatility of stock returns.75
It has been argued that the unusual strength of most
industrial country stock markets over the past decade
(Percent of GDP)
Net private financial balances have turned negative in several
countries, leading to concerns of a sharp correction, as occurred
in some countries in the past.
Net private saving
12
Net public saving
Australia
Net foreign saving
12
Canada
12
12
1960
12
70
80
90
99
Denmark
1960
70
80
90
12
New
Zealand
12
1960
12
74This formula is known as the Gordon equation. See Myron J.

Gordon, The Investment, Financing, and Valuation of the
Corporation (1962). Similar price formulas can be constructed
for other assets including real estate and bonds with (imputed)
rents and interest payments, respectively, substituting for dividends. The simplifying assumptions are that the interest rate, the
equity premium, and the expected growth rate of dividends are
constant and that the sum of the interest rate and the equity premium are greater than the expected growth rate of dividends.
Alternatively, if a constant dividend payout ratio is assumed, expected earnings times the payout ratio can be substituted in the formula for the expected dividend. The equity premium is not well understood but is thought to depend on how stock returns (including
the potential for corporate default) are correlated with the marginal
utility of consumption.
75Because of discounting, near-term changes in the underlying
variables have greater weight and may lead to a higher fundamental price, even when average long-term growth and volatility remain the same.
99
70
80
90
99
Ireland
1960
70
80
90
12
99
12
United States
12
1960
70
80
90
99
1960
70
80
90
12
99
117
IV
Box 4.4. Global Liquidity

Ample global liquidity has been cited as a factor behind
the strong gains in financial asset markets in recent
years.1 Some have argued that abundant global liquidity contributed to the surge in private capital flows to
emerging markets and compression of yield spreads in
the lead up to the Asian crisis. Favorable liquidity conditions also may have contributed to the general buoyancy of mature equity markets, and the rebound since
early 1999 in many emerging equity markets.
But what is meant by global liquidity, and how
should it be measured? There is no single agreed concept or measure of global liquidity. Both price and
quantity measures are usually invoked in discussions
of this issue. When the interest cost of obtaining nearterm finance is exceptionally low, this is usually regarded as a symptom of easy liquidity conditions.
Similarly, when the growth rate of the money and
credit aggregates is high, especially in relation to
growth in nominal income, this is usually viewed as a
sign of ample liquidity. This box examines a few possible indicators of global liquidity. It finds that interest rate indicators present a mixed picture, but trends
in G-7 money growth suggest a rise in global liquidity that may have contributed to the buoyancy in financial asset markets in recent years.
In principle, a measure of liquidity conditions at the
global level should be some aggregate of conditions at
the individual country level. In practice, however, it is
normally the case that the predominant determinants
of global liquidity are conditions in the major reserve
center countries. Global liquidity conditions may also
be affected by developments outside these economies,
but policymakers in the major economies can generally offset such developments through adjustments in
their own policy stance.2 Accordingly, for the purpose
of this exercise, the focus is on liquidity conditions in
the seven major industrial countries (broadened to include the euro area from the beginning of 1999).
Recent interest rate developments in the major industrial countries do not of themselves provide strong
grounds for concluding that global liquidity conditions
have been unusually accommodative (see first figure).3
Figure 4.8 (concluded)

Net private saving
12
Net public saving
Net foreign saving
12
France
Finland
12
1960
12
70
80
90
99
1960
70
80
90
12
99
12
Japan
Germany
12
1960
12
70
80
90
99
1960
70
80
90
99
12
United Kingdom
Sweden
12
12
1960
1See, for example, International Capital Markets

Developments, Prospects, and Key Policy Issues (Washington:
IMF, September 1999).
2A notable recent example is the global liquidity tightening
in the fall of 1998 that was sparked initially by developments
in Russia, but ultimately was offset by a moderate monetary
easing in the major economies, particularly the United States.
3The aggregates in this box are weighted by GDP converted to U.S. dollars at market exchange rates (averaged
over the preceding three years).
12
70
80
90
99
1960
70
80
90
99
1Public net saving is the general government current balance less

government net investment, as defined in the national accounts. Foreign net saving is the current account balance, shown with opposite
sign. Net private saving is the sum of public and foreign net saving,
with opposite sign; it represents household disposable income less
expenditure, plus after-tax corporate profits, less investment. The net
saving of a sector is also known as its financial balance. Data for 1999
are IMF staff projections.
may also be a result of permanent shocks to these fundamental variables. Examples of these permanent
shocks include higher future productivity growth (and
thereby expected dividend growth) and lower ex ante
118
States, and 200 basis points in Japan and Germany (with

larger reductions elsewhere in continental Europe).
However, inflation has also slowed, partly reflecting
temporary factors, so that real interest rates have fluctuated around fairly stable trends at the short end and
fallen only moderately at the long end. Real interest rates
currently are generally below average levels in the 1980s
but do not seem unusually low from a longer-term perspective. As regards the shape of the yield curve, the upwardly-sloping curve in the period 199297 is suggestive of relatively accommodative monetary conditions.
However, the yield curve subsequently flattened as G-7
bond yields fell more than short-term rates in the wake
of the Asian crisis. Overall, interest rate developments
among the G-7 countries do not suggest that liquidity
conditions have been particularly tight in recent years,
but it is also not obvious that they have been unusually
loose, particularly when viewed against the background
of declining inflation.
While interest rate indicators provide a mixed picture,
there has been a marked increase in money growth
among the G-7 countries in recent years that does appear
suggestive of increasing global liquidity (see second figure).4 The upswing is most pronounced for broad money,
which has accelerated sharply since early 1995. The
pickup in narrow money growth is a more recent phenomenon, but this primarily reflects the fact that narrow
money growth in the United States was negative in the
period 199497.5 Excluding the United States, narrow
money growth has also been strong since early 1995.
The acceleration in money growth is particularly striking
when viewed against the background of developments in
nominal output. While broad money growth has been on
a marked upward trend, nominal output of the major
economies grew at a relatively steady 45 percent rate
Major Industrial Countries: Interest Rates1

(Percent)
20
Short-Term Rates
15
Nominal
10
5
Real
0
1980
82
84
86
88
90
92
94
96
99:
Q1
20
Long-Term Rates
15
Nominal
10
5
Real
0
1980
82
84
86
88
90
92
94
96
99:
Q1
Spread Between Longand Short-Term Rates
2
1
0
1
2
1980
82
84
86
88
90
92
94
96
4Growth in the monetary aggregates reflects changes in the

balance sheets of financial institutions, but does not reflect offbalance-sheet transactions, which are typically more difficult to
measure. In general, it seems reasonable to expect the macroeconomic forces driving on- and off-balance-sheet activities to
be broadly similar, i.e., an environment that fosters rapid growth
in bank lending is also likely to be associated with significant
increases in off-balance-sheet financing activities. However,
there may also be a degree of substitutability between on- and
off-balance-sheet activities, reflecting regulatory practices as
well as short-term factors (e.g., in late 1998, U.S. companies
drew down their bank credit lines as liquidity in the corporate
bond market dried up).
5The contraction in M1 primarily reflects the introduction of
sweep programs designed to minimize the level of transactions balances subject to reserve requirements (see, for example,
the February 1999 Humphrey-Hawkins Report of the Federal
Reserve Board).
99:
Q1
Sources: National authorities; and WEFA, Inc.

1GDP-weighted average of three-month interest rates
for short-term rates, and of ten-year (or nearest maturity)
government bond yields for long-term interest rates. Real
interest rates are nominal rates less consumer price
inflation over the last year.
Nominal interest rates have declined significantly at both

the short and the long end of the term structure since
1995. The decline in short-term rates reflects cuts in official interest rates, which have been reduced since early
1995 by a cumulative 100 basis points in the United
real interest rates compared to previous economic

booms because fiscal balances have improved.
Another permanent shock may be a decreased equity
premium because financial liberalization and lower
transaction costs may have allowed individuals who

previously could not afford to invest in the stock market (perhaps because of liquidity constraints) to buy
stocks, and those who held stocks to better diversify
119
IV
Box 4.4 (concluded)

years, peaking at about 5 percentage points in late 1998.
The only previous instances of significant excess
money growth in the past two decades occurred in
198283 and 198587.
The emergence of a significant excess of money
growth over growth in nominal output for the G-7
economies reflects developments in the individual countries. In the United States, nominal output growth has remained fairly steady at around 5 percent a year since the
early 1990s, whereas annualized M3 growth accelerated
from 1 percent in 1993 to 11 percent in 1998. Temporary
factors may partly explain the surge in broad money
growth in 1998,6 but there is little evidence for the period
as a whole that monetary policy has exerted a strong restraining influence on money and credit growth. In
Japan, the monetary stance was eased significantly in
1995 as short-term interest rates were reduced and
growth in the monetary base accelerated. Broad money
growth has been more moderatein the 34 percent
rangewhile nominal output has been volatile but generally weak. As a result, sizable gaps between money
and output growth opened up in 199495 and, more dramatically, in 199798. Monetary policy has also been
eased in continental Europe, where broad money growth
has generally exceeded nominal output growth since
1995.
Episodes of rapid money growth in excess of growth in
nominal output of goods and services have on occasions
been associated with strong asset price gains that ultimately proved unsustainable. Two notable examples from
the late 1980s were the asset price bubble in Japan and
the house price boom in the United Kingdom.7 In the recent period, a link between excess money growth and rising asset prices could be inferred from the strong gains
since 1995 in U.S. equity prices (see third figure). A similar relationship is also evident for the G-7 countries as a
group, particularly when equity prices in Japanwhich
have been depressed until very recentlyare excluded.
In Japan and Europe, the combination of accommodative
monetary policies and weak domestic demand has been
associated with sizable capital outflows, including a
surge in bank lending to emerging markets prior to the
Asian crisis. Subsequently, those capital flows may have
been redirected to the mature financial markets, contributing to a further rise in equity prices.
The link between excess money growth and asset
prices does not appear to be particularly tight, nor does
Major Industrial Countries: Money

and Output Growth
14
Narrow and Broad Money

Narrow money 1
12
10
8
6
4
Narrow money 2
Broad money
1980
82
84
86
88
90
92
94
96
99:
Q1
14
Broad Money and Output Growth
12
10
8
6
Nominal GDP
4
Broad money
1980
82
84
86
88
90
2
92
94
96
99:
Q1
0
8
Gap Between Broad Money and Output Growth
6
4
2
0
2
4
1980
82
84
86
88
90
92
94
96
99:
Q1
Sources: IMF, International Financial Statistics; and

WEFA, Inc.
1Excluding the United States.
2Including the United States.
through mid-1997, before slowing to below 3 percent in

the second half of 1998. As a result, a gap between broad
money and output growth emerged in the second half of
1995 and widened steadily over the subsequent 3!/2
6Including safe haven flows in response to the increased

volatility in financial markets.
7These episodes were analyzed in the May 1993 World
Economic Outlook, pp. 8195.
their portfolios and decrease the volatility of their

stock market returns. A decrease in the equity premium might also reflect an increase in the demand for
stocks stemming from changing demographicsin
particular, an increase in the proportion of the population that is in the prime earning and saving portion
of the lifecycle. If these explanations are correct, the
unusually large run-up in stock prices in recent years
120
porate restructuring, policy reforms, or technological

progress that increase the share of capital in national income, but they may still be associated with rapid money
growth to the extent that share purchases are partly financed through increased borrowing. Alternatively,
rapid asset price increases could themselves be a sign of
broader imbalances or inflationary pressures fueled by
an overly expansionary monetary policy that, for temporary or other reasons, is not reflected in a rise in measured inflation. Definitive evidence on which of these
two explanations more closely approximates reality is
rarely available ex ante. However, the high costs of
cleaning up after previous asset price bubbles suggest it
may be prudent for monetary policy to err on the firm
side when confronted with a combination of rapid
money growth, strong asset price gains, and macroeconomic imbalances that raise questions about mediumterm sustainability.
To conclude, recent trends in G-7 money growth provide some indication that global liquidity conditions
have been particularly accommodative since 1995. This
may have contributed to the surge in capital flows to
emerging markets, the reversal of which resulted in substantial output losses for a number of countries, as well
as to the strong gains in some mature equity markets.
Relatively accommodative global liquidity conditions in
the wake of the Asian crisis may also have helped cushion the subsequent negative demand shock, and partly
explain why the slowdown in world economic growth
has been more modest and short-lived than initially
feared. Global liquidity conditions are primarily an outcome of the monetary policies adopted in the major
economies. In Japan and Europe, accommodative monetary policies have been fully appropriate given the weak
state of domestic demand. However, rapid monetary
growth in the United States may raise a question about
whether monetary policy has been sufficiently firm in
the face of unusually strong domestic demand growth,
notwithstanding the subdued performance of measured
inflation. Looking forward, the large disparity between
money and output growth seems unlikely to persist, and
liquidity conditions can be expected to become less accommodative as world growth recovers and as G-7 monetary policy reverts to a more neutral stance. This
process should be viewed as part of a return to more normal conditions. However, it also carries a risk of renewed instability in circumstances where some mature
equity market valuationsmost notably in the United
Statesare near historic highs, and some emerging market economies face sizable short-term external financing
needs.
Major Industrial Countries: Excess Money

and Equity Price Growth
60
50
40
30
20
10
0
10
20
30
40
Major Industrial Countries
100
80
60
40
20
0
20
40
60
80
United States
100
80
60
40
20
0
20
40
60
80
Japan
Equity prices1
(left scale)
Excess money
growth
(right scale)
Equity prices
(left scale)
1980
82
84
86
88
90
92
94
96
Equity prices
(left scale)
Excess money growth

(right scale)
1980
1980
82
84
86
88
90
92
94
96
Excess money growth

(right scale)
Equity prices
(left scale)
82
84
86
88
90
92
94
96
6
5
4
3
2
1
0
1
2
3
4
98 99:
Q2
10
8
6
4
2
0
2
4
6
8
98 99:
Q2
10
8
6
4
2
0
2
4
6
8
98 99:
Q2
Sources: IMF, International Financial Statistics;

and WEFA, Inc.
1Excluding Japan.
it necessarily say anything about causality between the

two. For example, rapid gains in stock market prices may
be driven by real economic fundamentals such as cor-
could be justified by changes in the underlying fundamentals.

To some degree, nevertheless, it is also possible
that sustained, strong economic growth may boost
confidence and result in overly optimistic assessments of future stock market returns and volatility,
thereby leading investors to underestimate the inherent risks in equities and leading to some stock price
121
IV
Table 4.4. Selected Countries: Illustrative Examples of Potential Stock Market

Overvaluation (First Quarter, 1999)1
(Percent)
Historical2
Dividend
Yield
Real GDP
Growth
Real
Interest Rate3
Inflation
Rate
Equity
Premium4
3.1
3.9
2.4
2.3
1.0
4.5
3.5
2.4
2.0
2.5
1.9
2.9
2.1
2.6
5.0
4.2
4.1
3.5
2.5
3.6
3.9
4.4
4.7
2.7
7.8
1.9
5.7
4.3
0.5
1.7
0.8
0.7
1.4
3.2
2.4
Canada
France
Germany
Italy
Japan
United Kingdom
United States
Current5
Canada
France
Germany
Italy
Japan
United Kingdom
United States
Potential
Overvaluation
Canada
France
Germany
Italy
Japan
United Kingdom
United States
Dividend
Yield
Potential
GDP Growth6
Real
Interest Rate3
Inflation
Rate
Implied
Equity
Premium7
Implied Expected
Real Dividend
Growth8
1.7
2.2
1.3
2.1
0.8
2.9
1.3
2.4
2.3
2.1
1.8
2.1
2.5
2.7
4.7
3.8
3.2
2.7
0.4
2.2
3.3
0.5
0.3
0.5
1.4
0.1
2.3
1.7
0.5
0.7
0.3
1.3
2.5
3.3
0.8
3.4
3.3
2.6
1.3
1.0
2.5
4.3
Implied Equity
Premium Reduction9
Implied Excess Expected

Real Dividend Growth10
1.1
1.0
0.6
0.6
1.1
0.1
1.6
1.0
1.0
0.5
0.5
1.1
0.0
1.6
1These illustrative calculations are based on the Gordon equation (described in the text), which incorporates several simplying assumptions, including constant interest rate, equity premium, and expected dividend growth.
2Geometric averages for 198099 (through first quarter 1999 or most recent data available).
3Nominal 10-year or longer government bond deflated using the CPI.
4Calculated using the historical averages of the dividend yield, real interest rate, inflation rate, and real
GDP growth (as a proxy for expected real dividend growth).
5First quarter 1999, except fourth quarter 1998 for the real interest rate in France and Japan.
6IMF staff estimates.
7Calculated using the current values for the dividend yield, real interest rate, inflation rate, and potential
real GDP growth (as a proxy for expected real dividend growth).
8Calculated using the historical average of equity premium and the current values for the dividend yield,
real interest rate, and inflation rate.
9Historical equity premium less implied equity premium.
10Implied real dividend growth less potential GDP growth.
overvaluation relative to fundamentals.76 In the

United States, for example, where there have been
two relatively long economic booms with a relatively
mild recession in between, assessments may be even
more optimistic than in previous business cycles, and

therefore, stock price overvaluations may be correspondingly larger. Also, to the extent that there is
asymmetric information in the credit approval
process, asset price inflation can become self-perpetuating as the value of collateral rises and private sector balance sheets improve, potentially boosting investment and temporarily increasing earnings.
It is, however, very difficult to determine ex ante
whether asset price increases are justified by changes
in fundamentals or stem from excesses in financial
76There have been many economic studies examining whether

asset prices are excessively volatilei.e., whether prices are more
volatile than their underlying fundamentals. See, for example,
Robert Shiller, Do Stock Prices Move Too Much to Be Justified by
Subsequent Changes in Dividends? American Economic Review,
Vol. 71 (1981), pp. 42136.
122
Table 4.5. Selected Countries: Correlation of Equity Price Inflation and Goods Price Inflation1
(Percent)
Contemporaneous
Equity lagged one year
Equity lagged two years
Equity lagged three years
All
Industrial2
Canada
France
Germany
Italy
Japan
United
Kingdom
United
States
14.3
5.8
0.1
1.4
11.6
2.9
19.7
3.8
20.2
5.9
0.5
6.2
33.9
42.1
20.0
9.9
3.9
2.8
1.9
4.8
14.5
14.3
25.6
11.9
8.7
28.4
9.4
0.8
35.8
20.4
12.2
15.9
Source: IMF, International Financial Statistics.

1Data are quarterly from first quarter 1958 to first quarter 1999 (unless unavailable).
2Excluding Iceland for which data are unavailable.
markets, and to assess whether stock prices are

overvaluedbecause the equity premium and the expected growth rate of dividends are unobservable.
Furthermore, small changes in assumptions about
these variables can lead to large changes in the estimated fundamental value. However, as an illustrative example, rough assessments are possible by making assumptions about one of the two unobservable
variables and assessing what this implies for the other
(Table 4.4).77 For the major industrial countries, these
calculations indicate that during the first quarter of
1999 the U.S. stock market is possibly the most overvalued with the equity premium 1.6 percentage points
below its historical average, or the expected real
growth rate of dividends 1.6 percentage points above
potential GDP growth.78 These calculations further indicate that markets in Canada, France, and Germany
also may be overvalued, while the Japanese and Italian
markets may be undervalued.
During 196199, in instances when real equity prices

in the industrial countries rose by over 100 percent
during a five-year period, the average rate of goods
price inflation was 3.7 percent, while during periods
when equity prices rose by less than 100 percent, the
average inflation rate was 6.1 percent.
Since stocks are claims on the earnings of real assets, it is somewhat surprising that real stock returns
are negatively correlated with inflation. Indeed, if increases in goods price were purely monetary in nature,
stock prices should also rise to the extent that costs
and earnings are equally affected. For example, if
nominal interest rates rise because expected inflation
rises, the real value of stocks should be unchanged because the expected nominal growth rate of dividends
will rise by the same amount, unless higher expected
inflation also leads to higher expected volatility of
earnings.
There are several potential explanations of why increasing goods price inflation may undermine stock
price fundamentals and lead to decreasing stock valuations. Goods price inflation may be the result of (at
least partly accommodated) adverse supply shocks.
During the 1970s, inflation rose and stock prices and
corporate profits fell as oil and energy prices rose
faster than corporate revenues. Conversely, positive
supply shocks (such as increasing productivity
growth) can lead to rising stock prices with falling inflation. In addition, stock prices may fall when goods
price inflation rises because of expectations of monetary tightening to counteract the increase in goods
prices, leading to lower future economic activity and
corporate earnings.80,81
Equity Prices at Low Inflation

Generally, changes in equity prices (in nominal
terms) have not been positively correlated with inflation in the short to medium term (except in instances
of very high inflation or hyperinflation).79 The contemporaneous correlation between equity price inflation and goods price inflation is negative for most
countries (Table 4.5). In addition, periods of sustained
increases in real equity prices tend on average to occur
in periods of relatively low or declining inflation.
77These illustrative calculations are based on the Gordon equation, which employs several simplifying assumptions, including
constant interest rates, equity premiums, and expected dividend
growth.
78Based on the Gordon equation, the implied price overvaluation
is an increasing function of the implied excess expected real dividend growth or the implied reduction in the equity premium. Similar
results can be found in Mike Kennedy, Angel Palerm, Charles
Pigott, and Flavia Terribile, Asset Prices and Monetary Policy,
OECD Working Paper No. 188 (Paris), and IMF, International
Capital Markets (1999).
79Jeremy J. Siegel, Stocks for the Long Run (New York: McGrawHill, 1998).
80Another explanation is that tax codes that are not fully indexed
for inflation affect the after-tax return to investors by lowering real
after-tax corporate profits, dividends, and capital gains when inflation is high.
81A recent study for the United States finds that the negative correlation between equity valuations and expected inflation stems
from the fact that a rise in expected inflation coincides with both
lower expected real earnings growth and higher required real returnssee Steven A. Sharpe, Stock Prices, Expected Returns, and
Inflation(Washington: Board of Governors of the Federal Reserve
System, April 1999).
123
IV
Some analysts have argued, however, that stock

prices may also rise without corresponding improvements in stock price fundamentals in a period of low
and apparently stable inflation, particularly when
monetary and credit aggregates are growing faster
than nominal output. One argument is that investors
take excessive risks in their search for higher yields
when inflation is low because nominal interest rates
are low. Other arguments are based on the premise
that in periods of low goods inflation the monetary
authorities, particularly when targeting goods inflation, are more likely or willing to interpret rapid monetary expansion as an increase in the real demand for
money (or decrease in money velocity). In one scenario, goods prices remain restrained because of positive productivity shocks, while corporate profits temporarily rise faster than productivity gains because
real wages rise but not as fast as productivity rises
since workers are temporarily satisfied with their increased purchasing power.82 An asset price bubble develops as investors overestimate future earnings
growth by extrapolating past earnings gains. In another scenario, goods prices and wages are temporarily restrained by increased global competition, while
financial liberalization, demographic changes, structural changes, and tax reforms shift the use of money
and credit from purchasing goods to purchasing assets, creating an asset price bubble.83 In both cases,
the monetary authorities err by focusing solely on the
stability of goods prices. If they focused instead on
the stability of a broader index of prices, including
asset prices, goods prices would have been allowed to
fall moderately while equity prices may not have risen
as sharply.
These arguments are based, in part, on the premise
that asset price inflation is also more dangerous at low
inflation because asset prices can decline in real terms
only by falling in nominal terms. Asset price deflation
may lead to prolonged and adverse effects on output
because of its impact on household, corporate, and financial sector balance sheets. As net wealth and asset
values decline, aggregate spending may also fall. In
addition, the credit allocation process (when there is
asymmetric information) may be impeded as the value
of collateral declines. Alternatively, it has been argued
that asset price inflation is less dangerous when there
is low inflation because the monetary authorities have
more freedom to respond to a sudden decline in asset
prices by easing monetary conditions if they believe

there is a danger to the financial sector or credit allocation process.84
Should the Measure of Inflation Relevant for Policy
Include Asset Prices?
When central banks explicitly or implicitly target
inflation, they generally focus on current consumption
or production-based measures such as the consumer
price index or the GDP deflator. In principle it is possible to target a broader index of prices that includes
not just measures of prices for current consumption
and production but also measures of prices for future
consumption and production, such as asset prices that
are claims on future income or production.85 An intermediate step for central banks might include using a
broader index of monetary conditions, including other
asset prices in addition to exchange rates and shortterm interest rates, as an indicator or operational target
of monetary policy.86
In practice, however, monetary policy based on a
broader measure of prices or monetary conditions may
lead to greater variability in current and future output
and inflation. For instance, if changes in equity prices
occur mainly because of changes in the underlying
fundamentals such as real shocks (for example, productivity shocks, as discussed above), monetary policy
that counteracts such changes may not be optimal and
indeed can be destabilizing.87 Essentially, using a
broader index of prices or monetary conditions, which
include asset prices, presupposes that the monetary authorities understand the equilibrium or fundamental
prices for these assets. Monetary conditions indices as
practiced today work reasonably well for some countries because the equilibrium real exchange rate and
84This may create moral hazard, but moral hazard can be limited
with effective supervision and regulation. Also, see Mark Gertler,
Marvin Goodfriend, Otmar Issing, and Luigi Spaventa, Asset Prices
and Monetary PolicyFour Views (London: Centre for Economic
Policy Research, 1998) for views on why asset price inflation is less
of a concern when there is goods price stability.
85Armen A. Alchian and Benjamin Klein, On a Correct Measure
of Inflation, Journal of Money, Credit and Banking, Vol. 5 (1973),
advocate using an intertemporal cost of living index (ICLI) to properly reflect changes in the purchasing power of money. A price index
based on the ICLI was developed and computed for Japan by
Hiroshi Shibuya, Dynamic Equilibrium Price Index: Asset Price
and Inflation, Bank of Japan Monetary and Economic Studies,
Vol. 10, No. 1 (1992), pp. 95109, and Shigenori Shiratsuka, Asset
Price Fluctuation and Price Indices, Bank of Japan, Institute for
Monetary and Economic Studies, Discussion Paper No. 99E21,
July 1999.
86The optimal weight for each type of asset in these broader indices will depend on the impact of asset prices on current and future
economic activity.
87The intuition here is that changes in asset prices have differing
impacts on economic activity over time depending on the underlying causes affecting the asset prices. Therefore, the optimal weights
for each asset vary over time.
82Federal Reserve Bank of Cleveland, Beyond Price Stability: A

Reconsideration of Monetary Policy in a Period of Low Inflation,
Annual Report (1998).
83Monica Hargraves and Garry J. Schinasi, Monetary Policy,
Financial Liberalization, and Asset Price Inflation, Annex I, in the
May 1993 World Economic Outlook; and Garry J. Schinasi, Asset
Prices, Monetary Policy, and the Business Cycle, Paper on Policy
Analysis and Assessment 94/6 (Washington: International Monetary
Fund, March 1994).
124
short-term interest rate remain relatively stable for

these countries. Nevertheless, for most countries, because equilibrium asset prices, particularly equity
prices, are volatile and almost impossible to determine
with any degree of precision, a policy of targeting a
broader index of prices or monetary conditions faces
severe practical and conceptual difficulties.88
international competition and domestic structural reforms that remove barriers to competitive pricing. In
the case of positive supply developments, the concern
is that resistance to deflation might result in excessive
monetary expansion which in the first instance might
be reflected in asset price inflation, especially equity
prices, rather than in consumer prices. Fear of precipitating a sharp drop in equity prices might then deter
the central bank from tightening policy until financial
imbalances and inflationary pressures have clearly
surfaced.
The solution to this dilemma, however, is not to
abandon price stability as a long-run goal of monetary
policy, nor to redefine price stability more broadly to
include asset prices. First of all, permanent increases
in the economy-wide rate of growth of productivity are
unlikely to be so large as to imply a rate of deflation
that if not resisted would adversely affect consumer
and business sentiment, and lead to a contraction in
demand and real activity. Deflations associated with
positive supply developments are likely to be mild and
temporary. Secondly, redefining price stability more
broadly to include asset prices would not be particularly helpful: not only because of the difficulty of constructing and applying such a price index, but also because directly focusing monetary policy on asset
prices can be destabilizing. While in retrospect it may
seem clear that monetary policy mistakes were made
during past episodes of rapidly rising asset prices, it is
not at all clear that the mistakes occurred because central banks focused on the wrong price index. A forward-looking monetary policy will take into account
the effect of asset price movements on future inflation,
but precisely how policy settings should be adjusted in
response to asset price developments is not always
clear, in part because the leading indicator properties
of asset prices are not well established.
The critical issues facing policymakers are: When
should they be concerned about the behavior of asset
prices? And how should they act? Two situations may
be distinguished. One is a sharp break in asset prices
that generates turbulence in financial markets and
threatens to disrupt the financial systemfor instance,
the stock market crashes in October 1987. In these circumstances there is no question that central banks
should respond to the asset price declines by supplying the needed liquidity. The other situation is a persistent buildup of asset prices, during which there is
little evidence of inflationary pressures, but that
threatens to destabilize economic activity and financial markets in the event of a crash. In this case there
may be reasons to presume that inflationary pressures
are mounting but they are being temporarily offset by
benign influences. There may also be reasons to believe that the buildup in asset prices carries an increased risk of a crash. In this case too central banks
need to act. The response of policy to asset price
movements should be symmetricalthat is, policy
Monetary Policy at Low Inflation

Macroeconomic policy has been very successful in
the industrial countries in achieving low inflation, but
the work of policy is not done: sustaining reasonable
price stability presents its own challenges. There are
two aspects to this that in recent years have come to
the fore. One is deflation and the other is asset price
inflation. With consumer price inflationthe explicit
or implicit target of many central banksclose to
zero, monetary authorities have had to confront a
question they have not faced in many decades: How
should they respond to deflation? The appropriate response depends, of course, on the form the deflation
takes. When deflation is the result of deficient aggregate demand there is no question that the response is
the adoption of an expansionary monetary policy, with
fiscal policy available to provide additional support
depending on the seriousness of the deflationary pressure and the room to maneuver allowed by mediumterm sustainability considerations. The difficulty may
lie in the implementation of monetary policy in situations where nominal short-term interest rates have
been reduced effectively to zero. While the zero bound
on nominal interest rates constrains the effectiveness
of policy through the interest rates channel, monetary
policy does not lose all effectiveness. The challenge
for policy is to prevent the economy from possibly becoming caught in a deflationary spiral from which it
may be difficult to escape. The greater challenge,
therefore, may be not the actual implementation of expansionary monetary policies, but rather the early
recognition of difficulties and the adoption of timely
and sufficiently forceful policies. In this respect, targeting a small positive rate of inflationas the midpoint of a target rangewould be preferable to targeting zero inflation.
A difficulty with targeting a positive rate of inflationin excess of any measurement biasis that
price increases can fall below the target rates as a result of sustained positive supply developments or, in
some cases, the consequence of increased exposure to
88For a discussion of the issues see Charles A.E. Goodhart, Price

Stability and Financial Fragility, in Kunio Sawamaoto, Zenta
Nakajima, and Hiroo Taguchi, eds., Financial Stability in a
Changing Environment (New York: St. Martins Press, 1995), and
the comments by Horst Bockelmann, Franco Bruni, and Jerry L.
Jordan. For an illustration of the practical difficulties see Shiratsuka,
Asset Price Fluctuation and Price Indices.
125
IV
should respond not only to sharp declines in asset

prices that threaten to disrupt the financial system and
the economy more broadly, but also to unsustainable
increases in asset prices that carry a similar risk. The
problem is that for technical and political reasons it
may be difficult to do so. Technically, it is extremely
difficult to determine ex ante whether the increase in
asset prices is justified by changes in fundamentals.
And even if it were not, the consequences of policy actions on financial markets and the economy more
broadly are very uncertain. Politically, too, central
banks charged with maintaining price stability may
feel that they do not have the mandate under the circumstances to risk bringing an end to a beneficial economic expansion and go against the judgment of markets. The alternative, howeverto delay action until
there are clearer signs that asset price inflation is
spilling over to generalized inflationary pressuresis
much more costly, as the example of Japan so clearly
illustrates.
While there is no mechanical way for taking account of asset price inflation in setting monetary policy, attention should be paid to it if past mistakes are
to be avoided. The challenge facing stabilization policy stems from the possibility that traditional indica-
tors of inflationary pressuresthat is, measures of inflation in goods and services pricesmay not provide
sufficiently unambiguous signals at low inflation rates
to allow policymakers to rely primarily or exclusively
on them in gauging the extent of imbalances that may
be developing in an economy as the expansion matures. Central banks cannot ignore the implications for
the economy of large changes in asset prices, particularly when they may signal deviations from fundamentalsnotwithstanding the fact that these deviations will be difficult (or even impossible) to measure.
Monetary authorities should attempt to ascertain the
underlying reasons for the changes in asset prices and
determine their relationship to current and future economic activity. In particular, central banks should examine asset price inflation in light of other developing
imbalances that can be suddenly reversed, including
external and private sector financial balances as well
as growth in money and credit aggregates that persistently exceeds growth in nominal output by a large
margin. Monetary policy should not target or attempt
to stabilize asset prices, but neither can it neglect the
consequences for economic and financial stability of
asset price movements and unsustainable balance
sheet developments.
126
V
Trends and Issues in the Global
Trading System
new, multilateral trade Round will be launched

at the Ministerial Conference of the World Trade
Organization (WTO) in Seattle in December 1999,
five years after the conclusion of the Uruguay Round
negotiations. In a climate of slower trade growth
in 1998 and 1999, and amid some signs of tensions
developing in international trade relations, an ambitious Round would contribute to the restoration of
market confidence, help to create more competitive
global markets for goods, services, and technology,
and reinforce the multilateral trading system.
Sustaining and enhancing the growth of world trade is
essential to a balanced and sustained recovery in the
world economy.
Figure 5.1. Exports of Goods

(U.S. dollar value; 1990 = 100)
Developing and newly industrialized economies have experienced
the fastest growth of trade in the 1990s.
220
200
Developing and newly

industrialized economies1
180
Least developed
countries
160
140
120
World trade in goods and services expanded by

over 55 percent in nominal U.S. dollar terms between
1990 and 1998, from $4,300 billion to $6,700 billion.
Trade volume growth (6.7 percent a year) has continued to outpace significantly the growth of real
GDP (about 3 percent a year). Thus, the openness of
national economies has continued to increase: the
ratio of global trade in goods and services to
GDP rose from 19 percent in 1990 to 23 percent in
1998; for developing countries the same ratio now
stands at well over 30 percent. Developing and
newly industrialized economies have achieved the
fastest expansion of trade in the 1990s (Figure 5.1),
with an average annual increase of over 10 percent;
their share in world trade increased from 23 percent to
27 percent. The share of industrial countries, although
declining somewhat (to 68 percent in 1998 from
72 percent in 1990), is still predominant, while that
of the transition countries remained constant at
around 4 percent. World trade growth in volume and
value slowed sharply in 1998 as a result of the collapse of demand in Asia, the broader slowdown in
global economic growth, and depressed commodity
prices.
Changes in the geographic and product composition
of trade reflect to a large extent policy trends during
the 1990s. For example, the developing country regions experiencing the fastest growth in tradeAsia
and the Western Hemisphere (Figure 5.2)are also
the ones that have implemented the most substantial
100
Countries in
transition
1990
91
92
93
94
95
96
97
98
80
1The category of developing countries in this figure excludes the

least developed countries.
127
TRENDS AND ISSUES IN THE GLOBAL TRADING SYSTEM
trade reforms.1 At the same time, both developed and

developing countries engaged in regional groupings
have experienced an increased regional orientation of
trade. This is true, for example, of members of the
European Union (EU), the North American Free Trade
Agreement (NAFTA), the Common Market of the
South (MERCOSUR), and the Association of South
East Asian Nations (ASEAN) (Table 5.1). Trade in
services has grown slightly faster than trade in goods.
Trade in manufactures has continued its long-term historical trend of growing faster than trade in agricultural and mining products, both in value and in volume
terms (Figure 5.3). The slower growth of trade in agricultural products can be related in part to the restrictiveness of the trade regimes that apply in this sector.
World prices of traded agricultural and mining products have lagged behind those of manufactures, causing terms of trade losses for countries, particularly the
least developed, that specialize in them.
Figure 5.2. Developing Countries and Countries

in Transition: Average Annual Growth
of Exports, 198898
(U.S. dollar value; percent)
Asia and the Western Hemisphere are the developing country regions
that have experienced the fastest growth of trade in the 1990s.
16
14
12
Policy Trends
10
Considerable progress has been made in the 1990s

in liberalizing trade policies. Trade restrictions have
been reduced, and in most sectors quantitative restrictions (quotas, licensing, etc.) have now been replaced
by price-based measures such as tariffs; trade in textiles and clothing remains the most significant sectoral
exception, but even here quantitative restrictions are
scheduled to be removed entirely by January 1, 2005,
once the Uruguay Round results in this area are fully
implemented. Trade policy reform has extended inside
national borders, to tackle market and policy distortions that limit competition between domestic and foreign suppliers. And although the speed and depth of
implementation vary from one region to another, a majority of countries are now engaged in forward-looking, outward-oriented, trade policy reform programs.
Trade policy reform has been the outcome of a mix
of unilateral, regional, and multilateral initiatives, in
varying measures across countries and regions.
Broadly speaking, the industrial countries have relied
mainly on the multilateral process under the WTO and
on regional integration initiatives to generate a positive
dynamic in favor of more liberal trade, while unilateral
trade reform has been a feature primarily in
developing, newly industrialized, and transition economies. While multilateral and unilateral trade liberalization have generally complemented each other,
doubts have been raised about whether regional trade
8
6
4
2
Countries
in transition
Africa
Middle East
Western
and Europe Hemisphere
Asia
1This is as measured by changes in overall ratings under the

IMFs index of trade restrictiveness, where available, or by reductions in average tariff rates. The index of trade restrictiveness is
made up of measures relating to both the pervasiveness of nontariff
barriers and average tariff protection. See Robert L. Sharer and others, Trade Liberalization in IMF-Supported Programs (Washington:
IMF, 1998).
128
Table 5.1. Intraregional Export Shares, 199098

NAFTA
EU
MERCOSUR
ASEAN
Andean Community
1990
1991
1992
1993
1994
1995
1996
1997
1998
41.4
59.0
8.9
18.7
3.8
42.2
58.7
11.1
19.3
5.8
43.7
59.5
14.0
19.1
7.8
45.8
56.2
18.5
20.0
9.8
48.0
56.8
19.2
22.7
10.5
46.2
63.5
20.3
23.0
11.8
47.6
62.8
22.7
22.9
10.4
49.1
62.1
24.8
22.1
10.0
51.0
62.5
24.8
20.6
10.0
Sources: IMF, Direction of Trade Statistics (DOTs); and EUROSTAT.
agreements (RTAs) foster trade liberalization on a

Most Favored Nation (MFN) basis. Maintaining the
momentum of the multilateral trade agenda, and cuts
in external tariffs by RTAs at least matching any increases in regional preferences, are necessary to ensure that intraregional trade preferences do not become the norm in international trade relations and are
steadily reduced.
countries today. This was supplemented by substantial

reductions in tariffs,3 which have been reduced from
an unweighted average of more than 50 percent in
South and Central America to the range of 1015 percent,4 as well as a significant reduction in tariff dispersion. However, in the 1990s for many of these
countries, unilateral liberalization has given way to regional initiatives, and in most cases the pace of reform
has slowed.
Central and eastern European countries (CEECs)
and the Baltic countries have taken decisive steps to
reverse quasi-autarkic policies applied in the context
of centrally planned systems. During the 1990s, quantitative restrictions on industrial products have been
virtually eliminated, and average (unweighted) tariffs
have been reduced often to below 10 percent. As in
Latin America, the unilateral process subsequently
gave way to regionally oriented liberalization, with the
CEECs signing free trade agreements with the EU (the
Europe Agreements) and among themselves (Central
European Free Trade Agreement (CEFTA)). The removal of quantitative restrictions under the Europe
Agreements was extended to all other trading partners,
while the margin of preference between tariffs levied
on EU products, and most manufactured products
from outside the region, is small. Nevertheless, in
some sensitive areas such as textiles and agriculture,
the phasing-out of preferences has clearly provided an
incentive to bilateral trade between the CEECs and the
EU, raising concerns in third countries about possible
trade diversion.
The trade reform process in southeast and east Asia
is being conducted in a more gradual way, partly because it has been under way for much longer than in
most other regions. Reforms in the 1990s have focused
essentially on reducing tariffs, with reductions of
about one-half in Indonesia, Korea, and Malaysia,
from around 20 percent in 1990 to less than 10 percent
currently. While gradualism facilitated reforms, it also
allowed a substantial degree of discretion in implementation. Little progress has been made in tackling
Unilateral Liberalization
In the mid- to late-1980s and early 1990s, unilateral
liberalization reflected a major shift in attitudes in developing, newly industrialized, and transition economies away from inward-looking policies of importsubstitution that had earlier characterized their
policymaking. To a large extent, the change was
caused by recognition of the economic inefficiencies
and anti-export bias which those policies had produced. Unilateral trade reform has generally been proportional to the initial degree of restrictiveness, with
the transition being most evident in Latin America and
central and eastern Europe, followed by southeast
Asia. Some progress in the same direction has been
made in south Asia and Africa, albeit to a lesser degree. Many of the reforms, particularly in Latin
America, eastern Europe, and Africa, have been implemented in the context of programs supported by the
IMF and the World Bank.2
Central and South American countries have implemented substantial reforms on a unilateral basis, with
trade liberalization having become a symbol of economic progress. Chile pioneered reforms in the late
1970s, and trade liberalization took hold more broadly
from the mid-1980s, with early reformers, such as in
Mexico and Bolivia, followed in the late 1980s and
early 1990s by the majority of other Latin American
and Caribbean countries. The initial focus was on the
elimination of nontariff barriers (NTBs), which covered up to 100 percent of tariff lines in central
American countries and 60 percent in South American
countries in the mid-1980s, and which have been reduced to less than 10 percent of tariff lines in most
3Tariff data for Latin America are drawn from Crisis and Reform
in Latin America, World Bank, 1998.
4Impressively, Peru reduced average tariffs from 110 percent to 15
percent in two years (199092), and Colombia from 34 percent to
12 percent in one year (199091).
2See, in particular, Sharer and others, Trade Liberalization in

IMF-Supported Programs.
129
NTBs, so that when the financial crisis broke several

important sectors in these countries continued to be
sheltered from international competition, hampering
their adjustment efforts. This was particularly evident
in the high level of protection accorded to agriculture,
and to a lesser extent heavy industries, in several countries, and more broadly throughout the region in restrictions on foreign investment in key sectors such as
banking and finance. In the wake of the crisis, governments in many cases realized that trade-distorting barriers had played a role in the vulnerability of their
economies to downturns and took steps to remove
them.
Trade policies in south Asia have become more outward-oriented, but progress in reducing tariffs has
been slow. Recent analysis indicates that some countries, such as Bangladesh, Pakistan, and Sri Lanka,
have achieved a level of elimination of quantitative restrictions and liberalization of NTBs which is now
comparable to that of southeast Asia. Overall, however, reforms here have not been as deep as in southeast Asia, and considerable scope remains to reduce
tariffs further. Bangladesh (21 percent), India (35 percent), and Pakistan (24 percent) still have average, unweighted tariffs that are among the worlds highest.
Furthermore, the process of trade reform has lost momentum in the past two years.
Trade reforms in Africa began somewhat later than
elsewhere, but have accelerated since the early 1990s,
particularly in the context of Fund-supported structural adjustment programs. While in absolute terms
trade regimes in Africa remain more restrictive than
those of the other regions, significant progress is being
achieved. In 1990, more than 75 percent of African
countries had trade regimes classified as restrictive
under the IMF trade restrictiveness index, with a combination of high tariffs and extensive NTBs. No
African country was classified as open under this
index. By the mid-1990s, the share of restrictive trade
regimes had been reduced to less than half, and 20 percent had moved into the open category. By end-1998
the proportion of restrictive trade regimes had fallen to
28 percent, and trade regimes classified as open had
risen to almost 40 percent. Reforms have focused on
removing the previously far-reaching panoply of
NTBs. Progress was also made on tariffs, which now
average about 20 percentstill about twice the average of Africas main competitors in Latin America, the
CEECs, and Asia. The median tariff of all Fund members is 12.5 percent.
Few industrial countries have improved market access on a unilateral basis, probably because trade policy typically is formulated on legalistic, quid pro quo
principles rather than on economic considerations
which recognize the merits of unilateral liberalization.
Australia and New Zealand are the only countries to
have engaged in significant unilateral trade liberalization. Canada has taken some steps to liberalize its agri-
Figure 5.3. World Merchandise and Services Exports

(U.S. dollar value; 1990 = 100)
Trade in services and manufactures has continued to grow faster than
trade in agricultural and mining products in the 1990s.
180
Services
160
Manufactures
140
Agriculture
120
Mining
100
1990
91
92
93
94
95
96
97
80
Source: World Trade Organization.
130
cultural and services sectors, and Switzerland has removed many of its NTBs, prompted by the creation of
the European Single Market and Switzerlands consequent need to maintain competitiveness vis--vis
European Union firms. Broadly speaking, however,
trade reform in these countries has been driven by regional initiatives and by the multilateral liberalization
process. The latter has focused particularly on advanced sectors, particularly telecommunications and
information technology. Agriculture remains highly
restrictive and implementation of the Uruguay Round
Agreement on Textiles has been heavily backloaded.
general, there seems to be a growing awareness of the

important impact RTAs can have on the multilateral
trading system, although much remains to be done to
translate good intentions into reality and to make sure
that regionalism complements multilateralism.
The EU has been the main actor in the regionalization process, internally by removing numerous barriers to the free circulation of goods, services, persons,
and capital under the Single Market, and externally by
developing its network of Free Trade Agreements
(FTAs). As a result of these agreements, the EU now
trades duty- and quota-free with its immediate neighbors on most products, with the notable exception of
agriculture. This includes central and eastern European countries in the context of Europe Agreements,
and neighboring countries in the Mediterranean basin
under the so-called Euro-Mediterranean Agreements.
It also has agreements with South Africa, Mexico,
Chile, MERCOSUR, and Canada. It cooperates with
the United States in reducing NTBs to bilateral trade
under the Transatlantic Economic Partnership. Finally,
it is negotiating with the Atlantic, Caribbean, and
Pacific Countries (ACP) on a successor to the Lom
Convention.
The United States has also been active in developing
regional economic and trade ties within the Western
Hemisphere. Building on the 1989 bilateral FTA with
Canada, NAFTA entered into force in 1994, with a
view to removing trade barriers between the United
States, Canada, and Mexico by 2003. Duty-free treatment has already been achieved on many products.
The United States has also been sponsoring the recent
agreement on the creation of a Free Trade Area of the
Americas (FTAA), gathering 34 countries in a hemispheric FTA by 2005. In South America, Argentina,
Brazil, Paraguay, and Uruguay established MERCOSUR in 1991, an FTA that evolved into a partial customs union in 1995, with a Common External Tariff
(CET) covering 85 percent of trade. A full customs
union is to be developed by 2000. Since the creation of
MERCOSUR, a number of subregional FTAs have developed to link all South American countries. For example, Bolivia and Chile are now tied to MERCOSUR
members by an FTA, although they do not participate
in the CET. MERCOSUR members are also discussing the prospects for an FTA with the Andean
Community, which itself vows to form a common
market by 2005. Chile has signed, in 1998, an FTA
with Canada.
Since 1993, ASEAN countries have been working together with the view of reducing tariffs on intraASEAN trade to between zero and 5 percent and eliminating all remaining NTBs. Members agreed in 1998
to accelerate tariff reductions and to create a regionwide free investment area. Twenty-one economies of
Asia and the Pacific are associated within the APEC
forum, although the benefits of all liberalization initiatives are to be expected on an MFN basis. Regional in-
Regional Initiatives
The 1990s were marked by a substantial expansion
in the scope and number of regional trade agreements.
By 1999, there were more than 100 RTAs in force, and
others are under negotiation. Nearly all countries participate in at least one agreement. Often, such agreements are aimed at wider geopolitical objectives, such
as strengthening political relations or security with
neighboring countries. Their impact on world trade is
a complex issue. On the one hand, some RTAs have
provided powerful motivation for structural reforms in
member countries (for example, the EU and NAFTA),
and some have offered a means for countries to take
their first steps toward the broader process of integration into the world economy (for instance, Vietnams
experience with ASEAN). In many cases, progress
made in eliminating intraregional barriers to trade has
facilitated access not only for members but also for
third countries. In some areas, such as technical regulations and standards, regional processes have
achieved faster and deeper liberalization than has been
possible at the multilateral level. At the same time, certain aspects of regionalism cause concern, particularly
when tariff preferences are granted to regional members; where complex rules of origin have been imposed to safeguard regional preferences (frequently
the case in sensitive sectors such as automobiles and
textiles); and where the accession of new members has
led to increases in tariffs by existing members. In addition, powerful regional groupings may discourage
smaller member countries from adopting more liberal
trade policies unilaterally.
Regional integration has the greatest benefits when it
is outward-oriented, i.e., based on nondiscrimination
and transparency, and is complementary to liberalization on a Most Favored Nation basis. This is the case
for the Asian-Pacific Economic Cooperation (APEC)
agreement, whose members have committed themselves to extending any trade liberalization they agree
among themselves on an MFN basis. In some other regional groupings, such as ASEAN, members have been
careful to reduce preferential and MFN tariffs concurrently, so that margins of preference for regional suppliers have remained constant and relatively limited. In
131
tegration is also developing in south Asia, with the recent signature of an FTA between India and Sri Lanka.
RTAs have featured increasingly strongly in trade
liberalization in Africa during the 1990s. In west and
central Africa, countries in both monetary zones are
seeking to establish closer integration with fellow
members while opening up to the rest of the world.
Thus in the West African Economic and Monetary
Union, member countries have reduced external tariffs
and extended bilateral preferences in preparation for
the establishment of a common external tariff in
January 2000. Various groupings have proliferated in
southern and eastern Africa, sometimes with overlapping memberships, and conflicting rules and administrative procedures.5 Overlapping regional groupings
may increase confusion and uncertainty, and the complexity of doing business for foreign investors. This
makes it even more important that reductions in external tariffs are priority actions for all the RTAs.
been eliminated by 40 WTO members accounting for

92 percent of trade in the products covered.
Maintaining the Momentum of Liberalization
Since the onset of the recent crises, the growth of
world trade has slowed substantially, from 10 percent
in 1997 to 3!/4 percent in 1998. While the growth of
world trade is expected to pick up as the health of the
global economy improves, it is also essential to keep
up the pace of trade liberalization in order to help restore confidence in the trading community and offer
new market opportunities for all countries. In the past
two years, some protectionist reactions, generally in
the form of selective tariff increases (often partly motivated by fiscal concerns), have been recorded in such
crisis-stricken groups of countries as Latin America
(Argentina, Bolivia, Ecuador, Mexico, and Venezuela),
the transition economies (Kazakhstan, Lithuania,
Russia, Slovakia, Tajikistan, and Ukraine), and Asia
(Thailand and the Philippines).6 Overall, however,
these reactions have remained limited and have not
caused major disruption in global trade flows.
Governments of the large importing countries generally resisted protectionist demands, except for some
increase in antidumping activity and the development
of a clear protectionist pattern in the steel sector.7
Compared to the situation prevailing a decade ago, the
resolution of trade tensions is facilitated by the existence of well-established channels of communications
at the regional level, and the operation of an enforceable dispute settlement system at the multilateral level.
Nevertheless, the existence of large external imbalances among the major trading nations of the world
poses a clear threat of increased protectionist pressures. This danger seems most acute in the United
States, especially if the prospective slowdown in economic growth were to be more protracted than envisaged at present; the danger in this case would seem to
be one of pressure for increased contingent protection
(antidumping or countervailing actions).
The containment of protectionist pressures is not a
sufficient objective in a context where doubts over the
fairness of the global trading system are rising, notably among developing countries. The momentum for
trade liberalization needs to be revived and the upcoming multilateral talks provide an excellent opportunity for it. However, full participation in the talks
can be ensured only if frustrations linked to the implementation of the Uruguay Round are addressed. This
concerns in particular the maintenance of high levels
The Multilateral Trading System

The multilateral agenda in the 1990s was dominated
by the conclusion of the Uruguay Round negotiations
in 1994 and by the establishment of the WTO as successor to the GATT on January 1, 1995. The WTO has
brought permanence to a strengthened set of multilateral rules for trade and now oversees an extensive legal
framework applying to trade in goods, services, and
the protection of intellectual property. The new dispute
settlement mechanism, previously subject to veto by
any member under the GATT, is now binding and
more automatic. The practice of binding tariffs and
locking in trade policies under WTO rules has increased the credibility and lasting character of economic policy reforms, by guaranteeing that they will
not be reversed at some later date. Tariffs have been
substantially reduced, and the integration of the textiles and clothing and the agricultural sector under the
disciplines of the WTO represent significant progress.
Since the creation of the WTO, the momentum of
trade liberalization has been maintained with a number
of additional sectoral agreements. Important liberalization of trade in basic telecommunications services
and in financial services has been achieved, and under
the Information Technology Agreement, tariffs have
5The Cross-Border Initiative (CBI), a loose association of countries committed to reform in partnership with the IMF, World Bank,
African Development Bank, and the EU, has been encouraging a
fast pace of common tariff reductions and mutual trade preferences.
The Common Market for Eastern and Southern Africa
(COMESA)the largest RTA in geographic terms with 21 members
from Egypt to Namibiaplans to establish a free trade area in
October 2000 and a common external tariff by 2004. The Southern
African Development Community (SADC)which includes South
Africa and many southern African members of COMESAhas
been conducting negotiations to start a free trade area in 2000, but
does not have an agenda for external liberalization.
6See Box 1.3, Are There Dangers of Increased Protection? of

the May 1999 World Economic Outlook.
7Steel is a highly cyclical and politically sensitive industry, and
the recent crisis has exacerbated problems of excess capacity. A
number of major producers have responded by taking restrictive actions against imports, particularly through antidumping.
132
of protection in areas of interest to developing countries, particularly agriculture, textiles and clothing,
footwear, and some consumer goods. Given that the
recovery of emerging market economies depends
largely on a pickup of exports, which in turn depends
significantly on open markets in these products,
progress in these areas would be generally beneficial.
Progress would also reinforce the case for liberal trade
policies in developing countries. In this regard, only a
comprehensive set of multilateral trade negotiations
can generate the kinds of trade-off that will help developing, including the least developed, countries to
feel that they are full participants in the negotiations.
one-fifth of world trade, or $1,300 billion. Services account for about 60 percent of world output, averaging
some two-thirds in high-income countries and onethird in low-income countries. Despite the slowdown
of the last two years, trade in services has grown at an
average rate of 7 percent a year since the beginning of
the decade, slightly exceeding the growth of merchandise trade. The flow of foreign direct investment (FDI)
in services has grown even faster than cross-border
trade. The participation of developing countries increased in the recent WTO Agreement on Trade in
Services (GATS) negotiations on basic telecommunications and financial services, and the liberalization of
services markets entails major benefits for all participants, both developed and developing. Opening to foreign competition and presence is the source of major
productivity gains, by creating incentives for restructuring inefficient activities and attracting fresh foreign
capital. The gains from increased services trade spread
beyond the services sector to benefit the entire economy, as services constitute important inputs in the production of goods.
Preparations for the services negotiations that will
be launched at Seattle are underway. The main focus
of the negotiations will be the improvement of access
conditionsthe Agreement speaks of achieving a
progressively higher level of liberalization. This
means improving the quality of existing commitments
(through the removal of limitations now contained in
members schedules) and including new sectors. The
basis for negotiations will be the schedules negotiated
in the Uruguay Round plus the further commitments
which have been undertaken in subsequent negotiations and in the accession of new members. There will
clearly be interest in extending commitments in a
number of sectors where relatively few commitments
were made in the Uruguay Round: distribution, construction, education, and health services are among
these, as is maritime transport, on which there is a specific agreement to resume the negotiations suspended
in 1996. Further liberalization in basic telecommunications and financial services is also expected.
The new services negotiations will also cover a
number of systemic issues relating to the GATS. An
Annex to the GATS provides for the review and renegotiation of current exemptions from MFN treatment.
There is also a commitment to consider extending the
coverage of the Agreement in the air transport sector,
where at present the great bulk of the industry is explicitly excluded. It is also clear that the ongoing negotiations on emergency safeguard measures, subsidies, and government procurement of services, on
which the Agreement contains no disciplines at present, will be continued in the new Round, with improved chances of bringing them to conclusion.
Agriculture is the other key area of the built-in
agenda. Through the Uruguay Round Agreement, agriculture became subject to strengthened and opera-

Topics Covered by the Round
The Built-In Agenda and Other Traditional Issues
Agreement was already reached five years ago, at the
conclusion of the Uruguay Round, that further WTO
negotiations would start, no later than January 1, 2000,
to carry forward the multilateral liberalization of trade
in agriculture and trade in services. These represent the
core elements of the WTOs so-called built-in
agenda. It includes also the review of aspects of a number of key WTO agreements, such as the Agreements on
Trade-Related Aspects of Intellectual Property Rights
(TRIPs) and on Trade-Related Investment Measures
(TRIMs), and the Dispute Settlement Understanding
(DSU), which could also lead to further improvements
in these areas.8
Since 1995, proposals have been made to add other
subjects to the list for negotiation. They include industrial tariffs and NTBs, trade and investment, trade and
competition policy, government procurement, trade facilitation, and electronic commerce. The preparatory
process that is currently under way in the WTO aims
to consolidate the proposals, and derive from them a
consensus document to be presented for adoption at
the WTO Ministerial Conference in Seattle in
December. This would constitute the mandate for the
new Round, and for other aspects of the future work
program of the WTO. There is already widespread
support for setting a target period of three years for
completing a new Round, reflecting the desire to avoid
another marathon negotiation; it took seven years to
conclude the Uruguay Round.
Much will depend on progress achieved in the services negotiations. The potential is considerable.
Trade in services alone already accounts for about
8The Agreement on TRIMs addresses measures linked to merchandise trade such as local-content requirements, export performance requirements, and certain foreign exchange restrictions. The
DSU sets out rules and procedures for the settlement of disputes
arising under WTO agreements.
133
tionally more effective multilateral rules, and thus to

disciplines the sector had largely escaped for 50 years.
Reliance on price supports for domestic production and
exports were curtailed in favor of less distortionary
forms of support such as direct income-support payments to farmers. Agriculture-specific NTBs such as
import quotas, variable levies, and minimum import
prices are now outlawed, while sanitary and phytosanitary measures are to be applied only to the extent necessary to protect health and must be based on scientific
principles. However, despite significant tariff cuts overall, tariffication of NTBs has resulted, in many cases, in
prohibitive duty rates. In a number of key product areas,
market access improvements seem to have been limited
to the opening of minimum access opportunities under
tariff rate quotas. Moreover, agricultural tariff systems
have remained complex and opaque.
It would be desirable for the new Round to set ambitious objectives in agriculture, which remains highly
restrictive; for example, in OECD countries the effective subsidy has been estimated to average 1.5 percent
of GDP. Liberalization of agriculture would be a significant benefit to the industrial countries, through
more efficient resource allocation, reduced direct budget costs, and enhanced consumer welfare. It would
also entail great benefits to developing and least developed countries, many of which have a comparative
advantage in agriculture. Currently, their economic development is hampered by high market access barriers
in agriculture abroad, as well as by continued high levels of protection and subsidies. Access conditions for
agricultural products should be eased, so as to make
them more comparable to those applying to other
goods. Tariff peaks could be curtailed, average tariffs
lowered, tariff escalation reduced, and tariff systems
simplified and made more transparent. Tariff rate
quota administration could be streamlined so that it
does not impede filling tariff rate quotas. Moreover,
trade-distorting domestic supports, which remain far
in excess of subsidies available to other industries,
could be reduced, and agricultural export subsidies
eliminated. While food security is a legitimate concern, it could be addressed through increased trade,
rather than subsidies, preferential treatment to select
groups of producers, or restrictions on trade.9
The liberalization of agriculture is particularly significant for the export potential and prospects of the
least developed countries,10 as is the operation of existing trade preference systems and general issues related to access for their products in industrial country
markets. As noted above, the trade performance of
these countries has lagged behind the growth of world

trade, with adverse implications for their development
and growth performance. Policies with respect to agricultural liberalization and market access will be critical complements to their own domestic policy environment in efforts to better integrate these countries
into the global trading system. Initiatives likely to be
discussed in the context of the new trade round include
calls for across-the-board, bound, duty-free access for
their export products in industrial country markets.
Discussion of such an initiative would coincide with
the renegotiation of the EUs wide ranging Lom system of trade preferences, which will expire in 2000.
There is growing recognition that multilateral tariff
negotiations on industrial products should be part of the
new Round. The recent failure to carry sectoral liberalization further forward in the WTO, through enhanced
tariff cuts on information technology products (socalled ITA II), and at the regional level (APECs
Early Voluntary Liberalization scheme), show the
limits of the sectoral approach. Both initiatives are to be
carried over to the new Round, where trade-offs between sectors can be used to help generate liberalization. Various proposals have been submitted so far, most
of them in favor of comprehensive tariff negotiations
covering all industrial products. The objectives include
substantial tariff cuts, the reduction or elimination of
tariff peaks and tariff escalation, and the expansion of
the scope of tariff bindings. Proposals have also been
forwarded to simplify WTO members tariff structures,
and to convert specific duties to ad valorem duties.
There is also a proposal to accord negotiating credit
for autonomous trade liberalization initiatives. Most
far-reaching of all is a proposal to eliminate tariffs on
all industrial products (zero-for-zero approach).11
The trading system would benefit from improvements in WTO rules on the use of antidumping duties
and dispute settlement. With respect to antidumping,
in the current context of trade tensions the international trade community needs strong and enforceable
multilateral trade rules which render the resort to protectionism more difficult. Current WTO rules provide
governments with the means to impose antidumping
duties well before there is any established proof of
dumping, and are therefore prone to protectionist
abuse.12 New WTO rules on competition policy (see
below) would provide a clear way of closing off this
loophole. With respect to dispute settlement, although
11Apart from agriculture and other sensitive sectors such as textiles and clothing, footwear, and transport equipment, which continue to carry higher-than-average tariffs, the elimination of tariffs
on industrial products should not impose an excessive burden on industrial countries. Average bound industrial tariffs in the Quad
countries (the EU, Canada, Japan, and the United States) are currently below 4 percent.
12Use of antidumping actions has increased in recent years. The
main traders are still the main users, but developing countriesas a
groupare rapidly closing the gap.
9For example, the deregulation of agricultural imports in

Indonesia, implemented as part of the IMF program, has improved
the food situation.
10This would also apply to many other poor countries, for example, those covered by the HIPC initiative that are not classified as
least-developed by the United Nations.
134
the current system under the WTO is a major improvement, it has also proved to be sluggish and inefficient. This has made it particularly costly for developing countriesespecially the least developed
among themto participate in dispute settlement. The
review of the WTO dispute settlement system should
aim at improving the implementation of rulings to ensure a better participation of the developing, and particularly the least developed, countries.
prospect for negotiations in the near future. In the absence of a multilateral consensus on competition issues, bilateral cooperation in dealing with anticompetitive practices is developing slowly and carefully.
The WTO participates in the international effort to
improve global governance by seeking to draw up
rules on transparency in government procurement.
Some WTO members are working toward having
an agreement ready for adoption at Seattle, but there is
a possibility that work on transparency issues will still
be required in the course of the negotiations. Although
enhanced transparency would, in itself, help to improve the cost-effectiveness of procurement decisions
and market access for trading partners, the absence of
multilateral rules on overt forms of discrimination
against foreign supplies and suppliers will remain one
of the major gaps in the multilateral trading system unless agreement can also be reached on tackling this aspect in the context of future negotiations.14
The WTO needs to accelerate its accession process if
it is to become a truly universal organization. Since its
creation in 1995, membership has increased by seven
countries15 to a total of 135. Thirty candidates are currently negotiating accession.16 The start of a new Round
adds urgency to the process, since it is desirable that as
many of the worlds trading nations as possible participate in the negotiations. The WTO accession process is
technically complex, placing particular strains on least
developed country applicants. Also, political factors,
varying demands on applicants, hard bargaining strategies, and in some cases slow implementation of reforms
by the applicants themselves have increased the length
of negotiations. The fastest accessions usually take
three to four years, yet accession negotiations for China
have been dragging on for 13 years. This is particularly
unfortunate given the rapidly growing weight of China
in world output (12 percent in 1998, second largest after
the United States) and world exports (3.1 percent, ninth
in the rank of world exporters). It is to be hoped that
agreement can be reached at the Seattle Conference to
streamline the accession process, without compromising on its basic requirements.17
New Issues
In addition to the built-in agenda, the Seattle
Conference will take stock of progress on work mandated by the WTOs 1996 and 1998 Ministerial
Conferences. This includes the issues of trade and investment, trade and competition, and government procurement. Issues such as trade facilitation, electronic
commerce, and trade and the environment will also be
addressed in Seattle.
Since the interruption of OECD negotiations on a
Multilateral Agreement on Investment (MAI), some
countries have pushed for negotiations on a WTObased investment code, building on the analytical work
undertaken in the WTO Working Group on the
Relationship between Trade and Investment and the
Agreement on Trade-Related Investment Measures, the
first WTO Agreement containing rules on the treatment
of FDI (albeit not fully implemented yet). However,
many developing countries have shown clear opposition to these proposals, and have been reluctant even to
extend the mandate of the WTO Working Group to
avoid being drawn into unwarranted negotiations. The
future of the Working Group, as well as possible improvements to the Agreement on Trade-Related
Investment Measures, will be major issues of the upcoming talks. The rapid development of FDI flows,
particularly to developing countries, has created a need
for more comprehensive rules in this domain. Major investors are seeking greater stability and transparency in
host countries policies, and, in their absence, the number of disputes linked to investment conditions (in particular investment incentives) has tended to increase.
Clearly, bilateral investment treaties leave scope for
discrimination and country-specific provisions.
The challenges posed for regulatory authorities by
globalization also underlie discussions on the relationship between trade and competition. While the relevant WTO Working Group has highlighted the complementarity between trade liberalization and antitrust
enforcement, Members do not agree on the need for
worldwide competition rules at this stage.13 In this
context, the Round will have to decide on the continued existence of the WTO Working Group, with little
14A plurilateral WTO Agreement addresses these issues but

amongst a limited group of countries, consisting of the main industrialized countries, plus some leading developing countries.
15The new members are Bulgaria, Ecuador, Estonia, the Kyrgyz
Republic, Latvia, Mongolia, and Panama.
16The main applicants, in terms of importance in world trade,
are China, Russia, Taiwan Province of China, and Saudi Arabia.
There are also a number of transition economies, including most of
the countries of the former U.S.S.R., some Balkan countries (Albania,
Croatia, and Macedonia) and some Asian countries (Cambodia, Laos,
and Vietnam). Other applicants include some least developed countries (for example, Nepal), as well as Algeria and Lebanon.
17There are several proposals in this direction. They include the
introduction of a fast-track procedure for the least developed countries, arrangements to allow applicants to participate in the new
Round and have their views taken into account in areas of special interest to them, and greater responsiveness of Members to applicants
that show clear willingness for compromise.
13So far, two-thirds of WTO membership do not even have competition regulation, although several members deny that regulating
in this domain is necessary.
135
VI
Growth in Sub-Saharan Africa: Performance,
Impediments, and Policy Requirements
age real per capita income in 1998 was roughly unchanged from its level in 1970 (Figure 6.1). This average performance masks significant differences across
countries, however, and is strongly affected by developments in the two largest economies, South Africa
and Nigeria, which in 1998 together accounted for almost 30 percent of the regions total output (in terms
of purchasing power parities). Out of the 47 SSA
countries,2 the nine fastest growing economies
achieved average annual growth of 3.1 percent in real
per capital incomes over the past 30 years. In the nine
slowest growing economies, real per capita income
contracted by 2 percent a year on average, owing in
some cases to armed conflicts and political instability.3
In fact, SSA had by far the worst performance among
developing country regions: the Middle East and
Europe regions as well as Latin America experienced
real per capita income growth of 12 percent a year on
average during 197098, while in Asia, at 4.7 percent
a year, growth was well above the world average of
2.4 percent.
In the second half of the 1990s, average real per
capita income growth in SSA rose to 1.5 percent,
partly reflecting policy improvements, including in the
context of programs supported by the IMF and the
World Bank.4 In several countries average annual
growth exceeded 3 percent,5 sometimes reflecting special circumstances such as recovery from armed conflict (Angola, Ethiopia, Mozambique, Rwanda) or the
exploitation of recently discovered oil reserves
(Equatorial Guinea). Some other countries, however,
hen recent turmoil in financial markets disrupted economies across the globe, the countries of sub-Saharan Africa (SSA) were adversely affected through trade and the decline in commodity
prices induced by the crises. But there was little impact on their financial markets or on the financing conditions facing them, with the exception of South
Africa (see Box 2.1). These countries were in effect
largely immune to financial contagion because of the
low degree of international integration and underdevelopment of their financial markets. These same factors, however, from a longer-term perspective, have
also hampered economic growth in the region.
Although growth performance has improved in the
second half of the 1990s, it remains fragile and, in
most countries, insufficiently strong to significantly
reduce the dire levels of poverty that are prevalent.
This chapter explores some of the main sources of the
disappointing growth performance of the SSA countries, discusses areas where reforms are needed to increase growth, and considers the potential contribution
of the Heavily Indebted Poor Countries (HIPC) debt
relief initiative.
Past Growth in SSA Countries and Its

Relationship to Policies1
The growth performance of SSA in recent decades
has been weak by most standards. The regions aver1For recent analyses of SSA growth performance, see Paul Collier
and Jan Willem Gunning, Explaining African Economic
Performance, Journal of Economic Literature, Vol. 37 (March
1999), pp. 62111; Ernesto Hernndez-Cat, Raising Growth and
Investment in Sub-Saharan Africa: What Can Be Done? Working
Paper (Washington: IMF, 1999, forthcoming); William Easterly and
Ross Levine, Africas Growth Tragedy: Policies and Ethnic
Divisions, The Quarterly Journal of Economics (November 1997),
pp. 120350; Jeffrey D. Sachs and Andrew Warner, Sources of
Slow Growth in African Economies, Journal of African Economy,
Vol. 6 (1997), pp. 33576; Dhaneshwar Ghura and Michael T.
Hadjimichael, Growth in Sub-Saharan Africa, IMF Staff Papers,
Vol. 43, No. 3 (1996), pp. 60534. For the policy implications in
particular, see Stanley Fischer, Ernesto Hernndez-Cat, and
Moshin Khan, Africa: Is This the Turning Point? Working Paper
98/6 (Washington: IMF, May 1998). For an analysis of growth performance in relation to adjustment programs, see The ESAF at Ten
Years: Economic Adjustment and Reform in Low-Income Countries,
Occasional Paper 156 (Washington: IMF, 1997), pp. 150, and the
May 1995 World Economic Outlook (Annex II).
2Eritrea has been omitted from the sample for lack of data availability.
3Throughout the chapter, high- and low-growth countries are defined by the top and bottom quintile of the distribution, respectively,
when SSA countries are ranked by their 197098 average rate of increase in real income per capita. The first group comprises
Botswana, Congo, Equatorial Guinea (even excluding the spectacular oil-induced growth since 1996), Guinea, Mauritania, Mauritius,
Mozambique, Seychelles, and Swaziland, while the second group
consists of Angola, Democratic Republic of Congo, Djibouti,
Liberia, Madagascar, Sierra Leone, Somalia, Togo, and Zambia. The
remaining countries constitute the medium-growth group. The average growth rates dividing the three groups are 0.75 and +0.93 percent per annum.
4For the role of ESAF programs in enhancing growth by promoting macroeconomic stability, external viability, and structural reforms, see The ESAF at Ten Years.
5Angola, Botswana, Equatorial Guinea, Ethiopia, Gabon, Malawi,
Mauritius, Mozambique, Rwanda, Sudan, Uganda.
136
Past Growth in SSA Countries and Its Relationship to Policies1
experienced an average yearly contraction of per

capita income during this period of more than 1 percent, in most cases as a result of civil war.6
Figure 6.1. Sub-Saharan Africa and Other

Developing Country Groups: Growth,
Investment, and Saving
Causes of Inadequate Growth
Among developing country groups, higher investment and saving tend

to be correlated with higher growth.
In the past two decades there has been a revival of

research on the sources of economic growth. One of
the hypotheses tested has been that of conditional convergence of per capita incomes, based on the observation that poorer countries tend to grow faster, other
things being equal.7 The standard cross-section growth
regressions (based on initial per capita income and
such explanatory variables as investment rates, the
level of education, and macroeconomic policy characteristics) were unable to explain the poor SSA growth
performance. Recent analysis has therefore emphasized the importance of various institutional, social,
and political factors, which constitute a focus of this
chapter. Obviously, most of these factors are also
strongly influenced by output growth and the level of
economic development, making it difficult to establish
the causal relationship either way. It has also been suggested that economic growth in SSA countries has
been adversely affected by several factors beyond their
immediate control, such as rapid population growth,
unfavorable climatic conditions, location (landlocked
positions in some cases and distance from large markets), terms-of-trade changes, and virulence of diseases.8
Sustainable growth of per capita income usually results from investment in physical and human capital
and growth in total factor productivity (TFP). Growth
accounting exercises for SSA countries over 197394
show a modest contribution to per capita income
growth from accumulation of physical and human
capital, and a large negative contribution from TFP
growth (of the order of a negative 1.3 percent per
annum), which indicates major impediments to
growth.9 A rise in TFP may in fact result not only
from advances in technology and economies of scale,
but also from amelioration of the economic environ-
Per Capita GDP Growth

(annual percent change; three-year centered moving average)
12
8
All Groups
12
Sub-Saharan Africa
Western
Hemisphere
Asia
8
Medium
High
Low
Middle East Sub-Saharan

Africa
and Europe
8
1970 75
80
85
90
95
1970 75
80
85
90
95
Total Investment
(percent of GDP)
40
All Groups
40
Sub-Saharan Africa
Asia
35
Middle East
and Europe
30
35
High
30
Medium
25
25
20
20
15
Sub-Saharan
Africa
10
5
1970 75
80
15
Western
Hemisphere
85
90
95
Low
1970 75
80
85
10
90
95
Saving
(percent of GDP)
35
All Groups
30
Sub-Saharan Africa
30
Asia
Middle East
and Europe
25
25
High
20
6Burundi,
Comoros, Democratic Republic of Congo, Djibouti,

Guinea-Bissau, Sierra Leone, Zambia.
7The conditional convergence hypothesis implies that countries
grow faster the further their per capita real income is below its potential path, which in turn depends on a number of factors, including technology, cultural, demographic, social, institutional, and political characteristics. See Robert Barro and Xavier Sala-i-Martin,
Economic Growth (New York: McGraw Hill, 1995) and October
1994 World Economic Outlook (Box 11).
8For geographic and climatic factors in particular, see Sachs and
Warner, Sources of Slow Growth in African Economies, and
David E. Bloom and Jeffrey D. Sachs, Geography, Demography,
and Economic Growth in Africa, Brookings Papers on Economic
Activity (1998), pp. 70795.
9Susan M. Collins and Barry Bosworth, Economic Growth in
East Asia: Accumulation Versus Assimilation, Brookings Papers on
Economic Activity (1996), pp. 135203.
Sub-Saharan
Africa
1985
137
Medium
Western
Hemisphere
5
0
20
15
15
10
35
10
5
Low
0
90
95
1985
90
95
VI
GROWTH IN SUB-SAHARAN AFRICA: PERFORMANCE, IMPEDIMENTS, AND POLICY REQUIREMENTS
Box 6.1. Africa and World Trends in Military Spending

Since the mid-1980s, there has been a persistent fall in
military spending throughout the world, including
Africa.1,2 World Economic Outlook data for 132 countries
show that the share of military expenditures in GDP fell
gradually from 5.1 percent in 1985, to 3.4 percent in 1990,
and to 2.1 percent in 1998. As a share of total government
spending, military outlays fell from 13.9 percent in 1990
to 9.4 percent in 1998. This downward trend in worldwide
military spending is confirmed by the other three widely
known sources of data on military expenditures:3 the
Stockholm International Peace Research Institute (SIPRI),
the International Institute for Strategic Studies (IISS),
and the U.S. Arms Control and Disarmament Agency
(ACDA).4
Regional differences in military spending patterns
have narrowed down in the 1990s (see first figure).
These differences are due primarily to regional tensions
and the concentration of armed conflicts and military engagements in different parts of the world. A countrys
military spending is also likely to be affected by spending in neighboring countries.5 According to SIPRI, the
number of major armed conflicts in the world fell
from 31 in 1990 to 24 in 1997, before rising to 26 in
1998. In Africa, the number of conflicts halved between
1990 (10 conflicts) and 1996 (5 conflicts) but has risen
since (8 conflicts in 1997 and 11 conflicts in 1998). The
increase in overall major conflicts in the world in 1998
Military Expenditures, 199098

(Percent of GDP)
12
10
Middle East
8
6
Africa
Advanced economies
4
2
Asia
Western Hemisphere
1990
92
94
96
98
has been accounted for by conflicts on the continent of

Africa.6
In Africa, despite the recent increase in the number of
armed conflicts, the downward trend in military spending
throughout most of the 1990s is confirmed by different data
sources (see second figure). However, military outlays remain relatively high among African countries, at 2.3 percent of GDP in 1998, against 1.6 percent of GDP in Asia,
and 1.3 percent of GDP in the Western Hemisphere.
Military spending has been higher in Africa than in these
two regions as a share of GDP throughout the 1990s, even
if conflict countries are excluded from the analysis. Among
developing and transition countries, Africa spends more as
a share of GDP on the military than all other regions except
the Middle East. As a share of government spending, military outlays fell to 8.5 percent in Africa in 1998 from 12.5
percent in 1990. This ratio is lower in Africa than all regions in the developing world and transition economies,
except the Western Hemisphere and the transition
economies of Central Europe. As in many countries in
other regions, budgetary data may not capture, in full, all
military outlays. The recent increase in armed conflicts is
likely to have put further pressures on governments in
Africa to increase military outlays and these expenditures
may rise as a share of total government spending.
1Africa includes Sub-Saharan Africa, Algeria, Morocco, and

Tunisia.
2See Sanjeev Gupta, Calvin McDonald, Luiz de Mello, and
Randa Sab, Military Spending Continues to Stabilize; Some
Countries Increase Social Spending, IMF Survey, Vol. 28, No.
11 (June 7, 1999, pp. 18688); and also Sanjeev Gupta, Jerald
Schiff, and Benedict Clements, Worldwide Military Spending,
199095, IMF Working Paper 96/64 (June 1996).
3In a sample of 71 countries, SIPRI reported a fall in worldwide military expenditures to 2.3 percent of GDP in 1997 from
3.2 percent of GDP in 1990. For a sample of 89 countries, IISS
data show that worldwide military expenditures fell by 0.6 percent of GDP since 1990 to 2.5 percent of GDP in 1997. The data
produced by ACDA are available only up to 1995 and show a
decline in military spending for 102 countries of 1.0 percent of
GDP since 1990 to 2.7 percent of GDP in 1995.
4These data sources differ primarily in country coverage
and the definition of expenditures. The WEO data set contains
defense budget outturns reported by IMF country desk officers and has the widest coverage of countries. SIPRI uses the
NATO definition and includes military pensions, military interest payments, and paramilitary expenditures in total outlays, but excludes police expenditures. IISS uses the NATO
definition only for NATO countries, and defense budget outturns for non-NATO countries. These sources also differ in the
treatment of calendar and fiscal year data. For instance, WEO
and SIPRI data are calculated on a calendar year basis, while
IISS uses a mix of fiscal and calendar year data. The timeliness
with which data are reported also varies among these data
sources.
5See Hamid Davoodi, Benedict Clements, Jerald Schiff, and
Peter Debaere, Military Spending, the Peace Dividend, and
Fiscal Adjustment, IMF Working Paper 99/87.
Size of the Armed Forces

A large army relative to population can exert significant
pressure on a governments wage bill, thus crowding out
spending on more productive programs. In line with the
fall in military spending in the 1990s, ACDA data show a
reduction in the size of the armed forces per 1,000 population between 1990 and 1995. Data for 134 countries
show that the size of the armed forces has fallen since
6 The UN Secretary-General has recently called for a reduction in military spending in Africa; see Secretary-General tells
assembly debate on durable peace in Africa, immediate and dramatic action needed to ease Africas debt burden, Press Release
GA/9475, October 1998.
138
Changes in Military, Education, and Health

Care Expenditures, 1990971
Military Expenditures in Africa, 199098

(Percent of GDP)
(Percent of GDP)
3.4
All countries
3.2
IISS 1
3.0
0.5
WEO 3
0.0
2.6
0.5
2.4
1.0
2.2
1990
92
94
1.0
2.8
ACDA2
SIPRI 4
Africa
World
96
98
Total government Education

expenditures
2.0
Health care
Military
Countries with IMF-Supported Programs

(more than two years)
1The
Military Balance, The International Institute for

Strategic Studies (IISS), includes 16 countries.
2World Military Expenditures and Arms Transfers, U.S.
Arms Control and Disarmament Agency (ACDA),
includes 26 countries.
3World Economic Outlook (WEO) includes 43 countries.
4SIPRI Yearbook, Armaments, Disarmament and International Security, Stockholm International Peace Research
Institute, Stockholm (SIPRI), includes 23 countries.
1.5
0
1
2
3
expenditures
Health care
Countries with IMF-supported

programs (more than two years)
1990 for all regions from 6.7 per 1,000 population to 5.7
per 1,000 population, except in the newly industrialized
Asian countries. Countries in Africa and the Western
Hemisphere have the smallest armed forces as a share of
population. In the 45 African countries in our sample, the
size of the armed forces fell from 3.9 per 1,000 population
in 1990 to 3.3 per 1,000 population in 1995.
Military
African
HIPCs
Countries with IMF-Supported Programs, and HIPCs

(more than two years)
Military Spending Versus More Productive Expenditure:

The Case of Education and Health Care

expenditures
Military spending appears to have become, on average,

a lower priority in government budgets compared to
spending on education and health care. Because poor social indicators are often associated with low levels of
spending on education and health care, a decline in military outlays in relation to both GDP and total government
spending frees resources in the budget that can be used to
finance more productive expenditures for human development. In a sample of 56 countries for which data are
available for 199097, the fall in military spending is associated with increases in spending on education and
health care as a proportion of GDP (third figure, top
panel). The 25 African countries in the sample fare particularly well, with greater increases in health care and
education spending.
In IMF-supported programs, particular attention is devoted to improving the composition of government expenditures in favor of programs with higher productivity,
including supporting human development. Among the
countries that have had an IMF-supported program for
more than two years, military spending has fallen faster
Health care
Military
2
1
0
1
2
3
4
5

1Unweighted averages. Excludes industrial countries.
as a share of GDP in Africa than elsewhere (third figure,

middle panel).7,8 These African countries have increased
expenditures in education and health care despite the reduction in total government spending.
7Data are available for 14 African countries in a sample of 31
countries that have had IMF-supported programs for more than
two years, over 199097.
8Evidence that military expenditure was more likely to be reduced in African countries with IMF programs for the period of
197887 can also be found in Geoff Harris and Newman Kusi,
The Impact of the IMF on Government Expenditures: A Study
of African LDCs, Journal of International Development, Vol.
4, No. 1 (1992), pp. 7385.
139
VI
ment for private sector activity, which may stem

from improvements in macroeconomic, trade, and
structural policies, or in the quality of the public
sector infrastructure, institutions, and governance.
These factors tend to be complementary to investment
in physical and human capital, making it more
productive.
Box 6.1 (concluded)
Changes in Size of Armed Forces, 199095

(Per 1,000 population; percentage change)
Shortage of Human and Physical Capital
Education and Health10
10
Improvements in health and education are primary

sources of human and economic development.
Although SSA countries have made significant
progress in enhancing education (Table 6.1), they are
still lagging behind other regions in terms of literacy
rates and especially with regard to secondary school
enrollment. High-growth SSA countries had much
higher levels, as well as faster accumulation, of
human capital throughout the observation period than
slow-growth countries. After some improvement during the 1970s, secondary school enrollment in lowgrowth countries has not increased any further over
the past 20 years. Gains from efforts to provide better
education have also been limited by the deleterious
effects of the brain drain, which has been particularly prevalent in countries that have suffered long
periods of economic stagnation and political instability. Such emigration is likely to continue to be a significant impediment to economic development as
long as SSA countries fail to offer an attractive economic and political environment to their better educated citizens.
A similar pattern applies to the main health indicatorsinfant mortality and life expectancywith SSA
countries, despite significant improvements, still lagging behind other regional groups, and high-growth
SSA countries scoring better than low-growth countries over the past 30 years. Life expectancy has not increased in the past 15 years in either group of SSA
countries, partly owing to the devastating effects of
AIDS.11 Infectious diseases in general, and AIDS in
particular, are estimated to be a significant constraint
on growth in many SSA countries.12
15
20
All countries
Africa
IMF
program
countries1
IMF
program
countries
in Africa1
African
HIPCs
25
Source: World Military Expenditures and Arms Transfers,

U.S. Arms Control and Disarmament Agency (ACDA),
Washington, D.C.
1Countries with IMF-supported programs for more than
two years.
An increase in education and health care spending

has also taken place in the African countries that are eligible for debt relief under the Heavily Indebted Poor
Countries (HIPC) Initiative.9 Through debt relief, the
Initiative focuses on ensuring additional financing for
social sector programsprimarily basic health care
and education. African HIPCs (by far the majority of
all HIPCs) have increased health care spending faster
than other countries that have had IMF-supported programs for more than two years. This increase was
achieved despite the reduction in total government expenditures (third figure, bottom panel).10 However,
African HIPCs have failed to match the increase in education spending of other IMF-supported program
countries. With regard to army size, the fall in the size
of the armed forces between 1990 and 1995 was twice
as large in the African HIPCs as in the African countries that have had an IMF-supported program for more
than two years (see fourth figure).
10Health and education are both sources and outcomes of economic growth. Clearly they affect the productivity of the labor force
and thus per capita income. On the other hand, the higher the per
capita income, the easier it will be to provide the population with
health and education services, and the higher the demand for such
services.
11It is estimated that in 1997 21 million SSA inhabitants were infected with HIV/AIDS, i.e., about 3.4 percent of the total SSA population and 7.8 percent of the regional labor force. UNAIDS and
WHO, Report on the Global HIV/AIDS Epidemic (New York:
United Nations, 1998).
12See Bloom and Sachs, Geography, Demography, and
Economic Growth in Africa.
9The HIPC Initiative entails a coordinated action by the international financial community, including multilateral institutions, to reduce the external debt burden of heavily indebted
poor countries to sustainable levels following the implementation of sound economic policies in the context of IMF- and
World Bank-supported programs. The Summit of G-7
Finance Ministers held in Kln in 1999 has recently called for
broadening the scope of the HIPC framework to provide
deeper and faster debt relief.
10Data are available for 14 African HIPCs in a sample of 31
countries with IMF-supported programs for more than two
years.
140
Table 6.1. Sub-Saharan Africa and Other Developing Country Groups: Education and Health
Secondary
School Enrollment1
___________________________
1970
1995
197095
Illiteracy Rate
___________________________
1970
1997
197097
51
...
26
69
71
46
24
...
13
38
42
26
36
...
18
52
56
34
24
80
28
24
7
31
61
106
52
64
27
67
SSA countries: unweighted

grouping by yearly per
capita GDP growth rate
in 197098
High growth (top quintile)
Medium growth
Low growth (bottom quintile)
59
71
70
33
45
41
45
57
55
13
6
9
Memorandum
CFA: unweighted average3
81
54
67
Asia
Advanced economies
Western Hemisphere
Sub-Saharan Africa
World
Life Expectancy at Birth

___________________________
1970
1997
197097
Primary School Enrollment2

___________________________
1970
1995
197095
45
94
44
49
19
51
82
102
100
68
50
83
112
103
112
97
77
104
107
103
106
91
74
100
38
25
18
29
17
17
59
49
64
90
72
84
88
72
72
20
17
50
67
70
Infant Mortality Rate

___________________________
1970
1997
197097
Asia
Advanced economies
Western Hemisphere
Sub-Saharan Africa
World
56
71
61
53
44
59
67
77
70
67
51
67
63
74
65
60
48
63
95
22
84
134
137
98
48
6
32
49
91
56
69
13
56
87
112
76

grouping by yearly per
capita GDP growth rate
in 197098
Medium growth
46
44
42
55
52
48
52
49
46
132
138
155
78
87
114
96
110
134
Memorandum
42
50
47
146
92
117
Source: World Bank, World Development Indicators (regional groupings may differ from WEO classifications).
11995=1994 for sub-Saharan Africa and for Western Hemisphere; 1970=1975 for advanced economies.
21995=1994 for sub-Saharan Africa; 1970=1975 for advanced economies and for Western Hemisphere.
3Communaut Financire Africaine and Coopration Financire en Afrique.
Investment and Saving
been relatively unproductive, as indicated by the negative estimates of TFP growth.

This evidence suggests that the poor growth performance of SSA countries may be attributed partly to
factors that either discourage investment or make it
less productive. Inadequate infrastructure, poor quality
of public services, and distortions in investment incentives have been factors limiting the productivity of
capital.13 Moreover, the high risks attached to the return on investment in Africa, particularly those associated with macroeconomic and political instability, inefficient institutions, and weak legal systems, have
Physical investment, in particular private fixed capital formation, remains low in SSA. The ratio of total
fixed investment to GDP has actually declined gradually over the past 30 years, to 17.5 percent of GDP in
the second half of the 1990s from 20 percent in
197074 (see Figure 6.1), while private fixed investment has averaged 1112 percent of GDP since 1970
with only a modest upward trend. These aggregate figures conceal large differences among countries within
the region. High-growth countries have relatively high
investment ratios that have been rising, with total and
private investment reaching 32 and 25 percent of GDP,
respectively, in the second half of the 1990s, while in
the same period total and private investment ratios in
the low-growth countries averaged 10 and 5 percent,
respectively. Investment in SSA also appears to have
13This may explain why some studies (Shantayanan Devarajan,

William Easterly, and Howard Pack, Is Investment in Africa Too
Low or Too High? (Washington: World Bank, May 1999)) find that
investment, even by the private sector, has contributed little to
growth in SSA.
141
VI
played a major role in reducing the incentive to invest

(see below).14
Investment has also been constrained by the limited
availability of financing.15 National saving rates have
been low compared with other regions, partly due to
widespread poverty and partly due to the same reasons
that discourage investment (see Figure 6.1).16 Over the
past 15 years, national saving rates averaged 14 percent of GDP, well below those in other developing
country regions, especially Asia. National saving rates
have dropped in the 1990s and have shown only modest signs of recovery recently, except in the highgrowth countries, where they have risen to 20 percent
in the second half of the 1990s, while in low-growth
countries they have dropped to 4 percent.
Low domestic saving is not the only obstacle to investment financing in SSA. Financial intermediation is
still very limited, typically provided by a few financial
institutions that often do not perform in a competitive
environment. Private capital flows into the region are
low, although they have been rising during the 1990s:
foreign investors in search of high risk-adjusted returns have tended to prefer other developing countries
where risks are smaller and capital markets are better
developed and less subject to government control.
Reliance on official development assistance (ODA)
has been predominant and its use often inefficient.
ODA flows have declined in recent years, and it cannot be taken for granted that they will recover to levels
reached in the past, given budgetary constraints in the
advanced economies, and the concentration of assistance on countries with superior track records in translating aid into growth.17
tios than low-growth countries (Figure 6.2). It is now

generally accepted that the direction of causality, even
though difficult to establish, runs primarily from
macroeconomic stability to growth.18 During the past
decade, policy efforts in the SSA region have aimed
increasingly at macroeconomic stabilization and the
implementation of essential structural reforms, often
under ESAF-supported programs. Much of the recent
improvement in SSA growth performance has indeed
been attributed to relatively successful macroeconomic stabilization efforts: the average fiscal deficit
(including grants) fell from 5 percent of GDP in the
first half of the 1990s to 3 percent in 199598, while
average inflation fell from 29 to 21 percent, with median inflation declining from 11 percent to 8 percent.
Fiscal measures have included reducing tax exemptions and unproductive expenditures (such as transfers
and subsidies to state enterprises), as well as enhancing revenues through the introduction of VAT.
Monetary policy reforms have ranged from targeted
reductions in domestic credit expansion to the elimination of selective credit controls, directed credit, and
interest rate controls.
As in other developing countries, there has also
been a shift toward increased exchange rate flexibility
in SSA. Even so, approximately half of the SSA countries have continued to peg their domestic currency to
one or more foreign currencies:19 15 countries peg to
the French franc (the 14 CFA countries and Comoros),
2 to the U.S. dollar (Djibouti, with a currency board,
and Angola, with a crawling peg), 4 to a currency basket (Botswana, Burundi, Cape Verde, Seychelles), and
3 to the South African rand (Lesotho, Namibia, and
Swaziland). Despite the shift toward greater exchange
rate flexibility, the variability of real exchange rates in
the SSA region has diminished as inflation has fallen.
In the countries with pegged rates, adjustments of
the pegs have been used to correct currency misalignments that have arisen. In particular, in the CFA
countries, the devaluation of the CFA franc in 1994
corrected a fundamental misalignment, and in combination with stronger reform and stabilization efforts
led to a significant improvement in growth performance. Thus annual growth in CFA countries increased
strongly from 2 percent in the first half of the 1990s
to 5 percent in the second half, with a large increase in
private investment (from 12 to 18 percent of GDP, on
average, between the same periods) and to a major reduction in the fiscal deficit (from 6 to 2 percent of
GDP). This improved performance increased the confidence of international investors and attracted private
Roles of Macroeconomic, External, and

Structural Policies
Macroeconomic Stabilization Policies
Over the past 30 years, high-growth SSA countries
had much lower inflation and fiscal deficit-to-GDP ra14For a detailed analysis of the impact of risk factors on investment, see Paul Collier and Catherine Pattillo, Investment and Risk in
Africa (London: Macmillan, 1999) Chapter 1, pp. 330.
15However, contrary to widely held belief, Collier and Gunning,
Explaining African Economic Performance, find financial factors
to be less important than other factors in explaining low-growth performance.
16In particular, the underdevelopment of the financial sector, poor
monetary policies (e.g., administrative credit allocation and interest
rate controls), and lack of adequate accounting practices and property titles.
17For recent studies showing that aid helped growth only when
coupled with significant reforms in the recipient countries and associated with an increase in private investment, see Craig Burnside
and David Dollar, Aid, Policies and Growth, Policy Research
Working Paper 1777 (Washington: World Bank, 1997), and David
Dollar and William Easterly, The Search for the Key: Aid,
Investment, and Policies in Africa, Policy Research Working Paper
No. 2070 (Washington: World Bank, 1999).
18The argument that macroeconomic stabilization is important for

growth is supported, for example, by the econometric analysis of
Evangelos A. Calamitis, Anupam Basu, and Dhaneshwar Ghura,
Adjustment and Growth in Sub-Saharan Africa, Working Paper
99/51 (Washington: IMF, April 1999).
19See October 1997 World Economic Outlook (Chapter IV).
142
capital flows and foreign direct investment, which rose

in relation to GDP from 0.6 to 3.0 percent and from 0.8
to 1.9 percent, respectively, between the first and second halves of the 1990s.
Trade and Exchange Liberalization
Empirical studies have provided substantial evidence of a positive causal relationship running from
trade and exchange rate liberalization to growth and of
a two-way causal relationship between trade and
growth.20 During the past decade, many SSA countries
have made substantial progress in eliminating multiple
exchange rates and in reducing exchange restrictions
on current account transactions: in 1990, 43 SSA
countries (out of 47) had not accepted the obligations
of Article VIII of the IMFs Articles of Agreement; this
number had dropped to 33 by 1995 and to 13 by
1998.21
Although lagging behind other developing country
regions in terms of trade liberalization, SSA countries
have recently adopted widespread trade reforms: nontariff barriers and licensing requirements have been
greatly reduced and replaced with ad valorem tariffs,
which have subsequently been progressively reduced
as well. Such efforts have often been made in the context of regional trade arrangements (see Chapter V).
In their quest to attract a larger share of global FDI,
many African countries have introduced changes in
policy. These include increasing the number of sectors
open to FDI; lowering government participation in equity holding and moving away from mandatory joint
ventures; expediting the approval process for FDI by
opening one-stop investment centers; removing restrictions on the repatriation of profits, the provision of
tax incentives, and the creation of export processing
zones; allowing foreign participation in the privatization of state-owned enterprises; enhancing measures to
protect intellectual property rights; and signing various multilateral trade and investment agreements.
SSA authorities have proceeded with prudence in
the liberalization of capital account transactions.
Particularly in the light of the financial difficulties experienced by several countries in the second half of the
1990s, such liberalization should follow the develop-
Figure 6.2. Sub-Saharan Africa and Other

Developing Country Groups: Inflation
and Fiscal Balance
Among sub-Saharan African countries, greater macroeconomic
stability is associated with higher growth.
Inflation
(annual percent change)
60 All groups
40
30
60
Sub-Saharan
Africa
Western
Hemisphere
50
50
Low
40
Middle East
and Europe
30
20
20
10
10
High
0
10
1970 75
Sub-Saharan
Africa
Asia
Medium
0
10
80
85
90
95
1970 75
80
85
90
95
Fiscal Balance
(percent of GDP)
2 All groups
Sub-Saharan
0
Africa
Western
Hemisphere
Sub-Saharan Africa
0
High
Asia
6
Medium
8
10
1985
20In particular for SSA countries, see Easterly and Levine,

Africas Growth Tragedy, for the role of black market premium,
and Dani Rodrik, Trade Policy and Economic Performance in SubSaharan Africa, NBER Working Paper 6562 (May 1998), for the effects of trade liberalization.
21Article VIII prohibits members from imposing restrictions on
payments and transfers for current international transactions, engaging in multiple currency practices, or implementing discriminatory
currency arrangements. The following countries had not accepted
the obligations of Article VIII at the end of July 1999: Angola,
Burundi, Cape Verde, Democratic Republic of Congo, Ethiopia,
Liberia, Mauritania, Mozambique, Nigeria, So Tom and Prncipe,
Somalia, Sudan, Zambia.
143
90
95
8
10
Low
Middle East
and Europe
12
14
12
1985
90
95
14
VI
Table 6.2. Sub-Saharan Africa and Other Developing Country Groups: External Performance
Openness1
_______________________________________
Foreign Exchange Black Market Premium2

_______________________________________
199094
199598
197098
199094
199598
197098
Asian NIEs3
Asia
Advanced economies
Western Hemisphere
Sub-Saharan Africa
World
60.1
21.3
19.3
14.2
31.4
27.8
19.4
68.4
24.4
21.9
15.7
32.2
31.6
22.4
60.3
15.3
18.8
13.6
32.8
28.2
19.7
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...

grouping by yearly per capita
GDP growth rate in 197098
Medium growth
52.8
30.6
34.7
59.0
32.8
34.0
53.7
29.5
35.2
1.2
1.4
17.5
1.1
1.1
6.7
2.3
3.1
19.5
Memorandum
SSA: unweighted average4
CFA: unweighted average
35.6
30.8
38.1
37.8
35.4
34.1
4.3
1.0
2.1
1.0
6.1
1.0
Ratio of Private Capital Inflows to GDP

_______________________________________
199094
199598
197098
Ratio of FDI to GDP

_______________________________________
199094
199598
197598
Asian NIEs3
Asia
Advanced economies
Western Hemisphere
Sub-Saharan Africa
World
...
2.8
...
3.0
5.3
0.6
...
1.3
2.3
...
3.6
1.5
3.0
...
1.4
1.5
...
2.3
0.3
1.7
...
...
1.8
...
1.1
0.5
0.8
...
...
2.8
...
2.4
0.8
1.9
...
...
0.9
...
0.8
0.3
0.8
...

Medium growth
3.0
2.5
2.1
9.3
4.1
0.3
4.7
2.3
1.6
4.4
1.5
1.2
7.8
1.9
3.3
2.5
0.7
0.9
Memorandum
CFA: unweighted average
2.5
1.4
4.4
7.7
2.6
3.8
2.0
2.2
3.3
4.7
1.1
1.2
Source: IMF WEO database; and World Bank, World Development Indicators for Foreign Exchange Black Market Premium (regional groupings differ slightly from WEO classifications).
1Average ratio of exports and imports of goods and services to GDP.
2The maximum ratio of market to official exchange rate has been set to 100.
3Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.
4Sub-Saharan Africa.
unusual, as they reflect primarily the small size of SSA

economies.22 Private capital inflows and ratios of FDI
to GDP increased by more than 50 percent between the
first and second halves of the 1990s, mostly reflecting
the financing of specific projects, the liberalization of
FDI regulations, the implementation of privatization
ment of mature domestic financial markets, in order to

limit the vulnerability of the economic and financial
system to the volatility of capital flows and the risk
that capital inflows may be directed toward inefficient
investment projects.
The dismantling of official distortions in exchange
markets has drastically reduced black market premia
during the 1990s (Table 6.2). Trade liberalization has
helped to spur trade flows, which have risen progressively during the 1990s, both contributing to, and
being reinforced by, the increase in output growth during the second half of the decade. Interestingly, recent
evidence (based on gravity models) suggests that the
relatively low (absolute) levels of SSA trade are not
22Foroutan and Pritchett, Intra-Sub-Saharan African Trade: Is It

Too Little? Journal of African Economies (1993), pp. 74105;
Rodrik, Trade Policy and Economic Performance in Sub-Saharan
Africa; and David T. Coe and Alexander W. Hoffmaister, NorthSouth Trade: Is Africa Unusual? Working Paper 98/84
(Washington: IMF, June 1998; forthcoming in Journal of African
Economies).
144
programs, and the increasing confidence of international investors that SSA countries would pursue pertinent reforms, but also as a result of the recent strengthening of growth prospects.
via cumbersome industrial and trade licensing procedures as well as restrictions on the issuance of work
permits for expatriates. Further progress in these, as
well as the following, areas is essential.
Structural Policies and Sectoral Composition

of Output
Reforms Aimed at the Public Sector, Financial

Markets, and Infrastructure
Following independence from colonial rule, leadership in many SSA countries questioned the efficiency
and fairness of market economies and the importance
of comparative advantage, and introduced extensive
controls on prices, exchange rates, distribution systems and, more generally, on the sectoral allocation of
resources. The agricultural sector was often effectively
discriminated against by the imposition of price and
exchange rate controls, the creation of public monopolies for the marketing of agricultural goods, and the
inadequate provision of rural infrastructure. The industrial sector, in most countries dominated by inefficient public enterprises, was often implicitly subsidized by import-substitution policies, by the rents
derived from public monopolies, and by the artificial
suppression of agricultural prices, but nevertheless
failed to flourish, as the resulting distortions entailed
inefficient investment and chronic mismanagement.
In the 1990s many of these policies have been reversed and many distortions eliminated, as price controls have been reduced, agricultural marketing liberalized, large public monopolies eliminated, and many
public enterprises privatized. The full effects of this
greater reliance on market mechanisms will not be felt
for several years, while further efforts are still needed
to provide the right incentives for an efficient allocation of resources.
There are several aspects of public policy, services,

and institutions that constitute major obstacles to enhancing productivity and add to the riskiness of investment: they include inefficiency of the state bureaucracy, corruption, limited respect for the legal
system and property rights, political risks associated
with political instability and domestic conflicts, underdevelopment of the financial system, and lack of an
adequate physical infrastructure.
Quality of Public Sector Institutions and Governance
In many cases the lack of broad representation and
the political instability that followed independence
from colonial rule, coupled with conflicts related to
historical and ethnic factors, have hindered the development of an efficient political and institutional environment, and clearly constrained growth. Reforms
aimed at improving the quality of the public sector, institutions, and governance remain urgent in many of
these countries.
Inefficiency in the provision of public services results from underqualified public employees as well as
remuneration systems unrelated to performance, and
absorbs budgetary resources that could be better devoted to the development of human resources or physical infrastructure.23
Extensive corruption within the political system and
inefficient government bureaucracy tend to increase
transaction costs and constrain the efficiency of resource allocation.24 The lack of an impartial legal system, the generally inadequate observance and enforcement of law, the risk of expropriation, and the lack of
effective sanctions for contract repudiation are important factors increasing the riskiness of investments.
Improving SSAs Growth

Performance Further
Recent policy efforts have brought SSA countries
closer to macroeconomic stability and reduced distortions in incentive structures, resulting in some improvements in growth performance. In most cases,
however, these efforts have not been sufficient to eliminate the obstacles and disincentives to increased capital accumulation: only in the high-growth countries has
private investment risen in the second half of the 1990s.
There is certainly more to be done in the areas of
macroeconomic stabilization and structural reforms: in
1998, average inflation in SSA was 10 percent, while
the average fiscal deficit including grants stood at 4.3
percent of GDP. More than a quarter of SSA countries
do not yet accept the obligations under Article VIII,
while average tariff and nontariff barriersalthough
lower than in the pastare still relatively high. Many
state monopolies remain, along with extensive price
and quantity controls. FDI flows are still overregulated,
23For a detailed analysis of employment and remuneration policies in SSA countries, see Ian Lienert and Jitendra Modi, A
Decade of Civil Service Reform in Sub-Saharan Africa, Working
Paper 97/179 (Washington: IMF, December 1997). Regarding the
importance of remuneration policies in avoiding and reversing the
brain-drain phenomenon, see Nadeem Ul Haque and Jahangir Aziz,
The Quality of Governance: Second Generation Civil Service
Reform in Africa, Working Paper 98/164 (Washington: IMF,
November 1998).
24Note, however, that recent evidence on the determinants of corruption and growth indicates that the corruption process in SSA is
little different from elsewhere, once the structure of the economy
and institutional characteristics are taken into account. See Sergio
P. Leite and Jens Weidmann, Does Mother Nature Corrupt?
Natural Resources, Corruption, and Economic Growth, Working
Paper 99/85 (Washington: IMF, July 1999).
145
VI
Table 6.3. Sub-Saharan Africa and Other Developing Country Groups: Quality of Governance,
Institutions, and Public Services
(010, higher=better quality)1
Quality of
Extent of Government Ethnic
Political
Bureaucracy Corruption
Stability
Tensions Violence
198498
198498
198498
198498 198498
Law and
Order
198498
Risk of
Risk of
Contract
Expropriation Repudiation
198497
198497
Asian NIEs2
Asia
Advanced economies
Western Hemisphere
Sub-Saharan Africa
World
7.3
4.6
8.7
4.2
4.8
4.1
5.4
6.9
4.3
8.3
4.6
4.7
4.6
5.5
6.5
5.0
6.5
4.9
5.7
4.8
5.4
7.5
4.5
8.2
7.1
5.9
4.9
6.4
9.0
6.0
8.7
5.8
5.7
5.5
6.6
7.4
5.0
8.7
4.8
5.4
4.4
5.8
8.3
6.3
7.9
5.7
6.2
5.3
6.3
9.1
6.0
9.2
6.0
5.9
4.8
6.4

Medium growth
4.3
4.6
3.0
5.9
4.7
3.5
5.5
5.0
3.8
5.7
5.1
3.9
6.4
5.7
4.5
5.1
4.6
3.6
5.6
5.7
4.3
5.3
5.2
3.4
Memorandum
4.5
4.3
4.9
5.4
6.0
4.4
5.7
5.3
Source: International Country Risk Guide (published by Political Risk Services).

1For regional groupings: unweighted averages of countries in the dataset.
2Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.
Armed conflicts, political instability, and civil wars reduce the expected profitability of investments, by increasing the risk that capital assets will be destroyed
and economic activities interrupted. Government instability introduces uncertainty about economic and
other policies. The persistence of nonelected governments in some countries tends to increase government
intervention and corruption.
All these factors tend to reduce the overall efficiency of the economy and discourage domestic and
foreign investment. According to surveys, highgrowth SSA countries have tended to score somewhat
better on most of these factors, both in the past 15
years and more recently (Table 6.3).25 But SSA countries as a whole have ranked substantially worse than
other regional groups in recent years, especially relative to the advanced economies and fast-growing developing and newly industrialized economies of Asia.
While these findings may partly reflect an interdependence between economic performance on the one
hand and the quality of public sector institution and

governance on the other, SSA countries clearly need to
create an institutional and political environment which
increases efficiency and reduces the riskiness of economic activity.
Financial Development
The development of the financial system has been
shown to be an important factor in determining growth
performance.26 A well-functioning financial system
facilitates economic transactions, stimulates saving,
and channels savings to productive investment activities, thus helping to mobilize resources and improve
their allocation. SSA countries need to develop financial markets that allow portfolio diversification, facilitate consumption-smoothing, and provide insurance,
given the high exposure to risks associated with such
uncontrollable factors as weather changes and terms of
trade shocks.
Recent studies document the substantial efforts by
SSA countries to improve the functioning of their financial systems since the late 1980s.27 Liberalization
25The relevance of these political and economic indicators for

growth has been documented by Hlne Poirson, Economic
Security, Private Investment, and Growth in Developing Countries,
Working Paper 98/4 (Washington: IMF, January 1998), pp. 131. A
pioneering analysis on the role of corruption is Paolo Mauro,
Corruption and Growth, Quarterly Journal of Economics, Vol.
110 (1995), pp. 681712; Easterly and Levine, Africas Growth
Strategy, argue that ethnolinguistic diversity is harmful for growth,
while Paul Collier and Jan W. Gunning, Explaining African
Economic Performance, find that this is true particularly when
combined with low levels of democracy and political rights.
26See, for example, Ross Levine, Financial Development and

Economic Growth: Views and Agenda, Journal of Economic
Literature, Vol. 35 (1997), pp. 688726.
27Enrique Gelbard and Sergio Pereira Leite, Measuring Financial
Development in Sub-Saharan Africa, Working Paper 99/105
(Washington: IMF, September 1999), and Hassanali Mehran et al.,
Financial Sector Development in Sub-Saharan African Countries,
Occasional Paper, 169 (Washington: IMF, 1998).
146
of the domestic financial market has been one of the

most successful areas of reform, and only a few countries still impose quantitative credit controls or maintain negative real lending rates. However, further
progress is needed. On the basis of various measures
of financial development, the average SSA country attained only about one-third of the level of the overall
financial development of South Africa in 1987, and
still just above one-half in 1997:28
In most SSA countries the financial sector is uncompetitive, and credit allocation is often subject
to government intervention. In 1997, banking
systems were highly concentrated: the average
spread between lending and deposit rates was
between 6 and 10 percentage points (reflecting
higher credit risk as well as lack of competition),
the average share of nonperforming loans in the
portfolio of the banking system was above 20 percent (partly due to the weak legal system), and
less than half of the countries had risk-adjusted
capital adequacy ratios that matched the recommendation of the Basel Committee.
The range of available financial products is unduly limited in SSA, with the notable exception of
South Africa: in most countries no interest is paid
on demand deposits, while the maturity structures
of both deposits and government securities are
very short (also because of the pronounced economic and political uncertainty), and both stock
markets and interbank markets are largely underdeveloped.
The use of monetary policy instruments in SSA
countries still needs to be improved. Political interference in monetary policy decisions is still
common. Central banks often rely on advances to
commercial banks as a major instrument of monetary policy, and less on the use of open market
operations. In addition, few countries have payment systems that can ensure rapid settlement of
transactions, and interbank markets are often very
thin.
Banking supervision and regulation are often inefficient and seldom independent from political
pressure. Financial and commercial legislation,
and the associated institutional environment, are
inadequate in many countries. The low level of
computerization and the generally limited use of
technologies also hamper the development of the
financial system.
All these factors require attention, as they reduce the
efficiency of financial intermediation, raise borrowing
SSA countries need to redirect public spending

partly toward increasing the quantity and improving
the quality of infrastructure, not only to stimulate investment and growth, but also to reduce poverty and
income inequality, and to minimize environmental
damage.29
Many of the high-growth SSA countries have benefited from having a larger initial stock of infrastructure
than slow-growth countries, and from faster growth
rates of infrastructure over the past 20 years (Table
6.4). The quality of infrastructure is, of course, also
important. In many countries few roads are paved,
raising transportation costs, and the public supply of
electricity is unreliable, causing firms to install their
own private generators, with associated increases in
production costs.30 For landlocked countries, improvements in transport infrastructure would enhance economic integration with other countries, thus stimulating trade and growth.31
Despite recent improvements, further investment in
infrastructure is essential. By one indicator, in
199597, the average number of telephones per employee in SSA countries was about two-thirds of that
in the Middle East and North African region, and onethird of that in the Western Hemisphere, with the differences widening in the first half of the 1990s.
After decades of exclusive central government provision of infrastructure, the 1990s have witnessed the
emergence of a new strategy: the promotion of local
community involvement and the stimulation of private
28 Gelbard and Leite, Measuring Financial Development in SubSaharan Africa. The index of overall financial development encompasses measures of the competitiveness of financial markets, the degree of financial liberalization, the quality of financial institutions
services, the extent of financial integration with foreign markets,
and the availability of monetary policy instruments.
29See African Development Bank, African Development Report

(Oxford: Oxford University Press, 1999).
30For small firms, generators can account for as much as a quarter of the value of their capital equipment.
31See Sachs and Warner, Sources of Slow Growth in African
Economies, on the importance of geographic factors for growth.
costs, reduce saving incentives, increase the risk of

bank failure, and also increase the likelihood that private sector borrowers may be unable to obtain finance
even for viable projects.
Progress in financial sector reform often does not
provide immediate benefits, not only with respect to
output growth, but also with regard to the development
of financial intermediation. After years of financial
distortion, repression, and underdevelopment, businesses and households, and also the public sector, have
to learn and adapt to the different environment, where
decisions on bank lending and the corresponding interest rates are no longer made by the government, but
by market forces in a competitive environment, with
financial institutions basing decisions on new kinds of
information to assess the creditworthiness of borrowers. The benefits of financial development may therefore take time to accrue.
Infrastructure
147
VI
Table 6.4. Sub-Saharan Africa and Other Developing Country Groups: Infrastructure Indicators
Telephone Lines per Employee

_______________________________
198084
199597
197097
Asia
Advanced economies
Western Hemisphere
Sub-Saharan Africa
World
Growth Rate
of Telephone Lines
per Employee
___________________
199597
197097
Paved Road/Total Road

______________________________
198084
199597
197097
11
111
63
32
21
103
81
216
182
92
62
180
24
143
89
52
36
127
29
3
15
14
10
2
12
4
7
8
7
4
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...

Medium growth
20
12
11
39
32
19
23
20
14
20
10
4
12
7
1
21
9
8
33
15
14
29
14
12
Memorandum
13
11
31
28
20
17
11
17
7
13
10
7
18
15
16
11
Source: World Bank, World Development Indicators (regional groupings may differ from the WEO classifications).
Official donors have provided large amounts of

concessional financial assistance through official development assistance (ODA) and debt relief, aimed at
reducing the burden of the debt and debt service. Debt
relief provided to SSA countries, in the form of reductions or rescheduling of principal (often at reduced interest rates) and of interest falling due, averaged more than 3 percent of recipient countries GNP
annually over the past 15 years. Official aid, in the
form of grants or concessional lending, rose from
slightly above 2 percent of the GNP of SSA countries
on average in 197084 to almost 6 percent in
19851994, and subsequently declined to 4.5 percent
of GNP in 199598. The share of concessional debt
rose from 28 percent in the first half of the 1980s to
37 percent in the second half of the 1990s. Despite official financial assistance, external debt burdens remained unsustainable in many countries, some of
which became more and more dependent on the continuation of such assistance. As of 1997, the ratio of
the net present value (NPV) of debt to GNP averaged
92 percent, while the ratio to exports reached 347 percent (Table 6.5). There were 19 countries with ratios
of the NPV of debt to exports above 250 percent, and
12 countries with debt service-to-export ratios above
20 percent.34
sector participation, including through the privatization of state-owned enterprises. This strategy has succeeded in improving the development, management,
and efficiency of infrastructure services and seems
likely to be an important ingredient of future infrastructure policies.
The Debt Problem and the HIPC Debt
Relief Initiative
In the past 30 years, the foreign indebtedness of
most SSA countries has risen alarmingly. The total external debt of the region rose from almost $9 billion in
1971 (or 14 percent of area GNP) to $107 billion in
1985 (56 percent of GNP) and to $220 billion in 1997
(68 percent of GNP).32 By the mid-1980s, external
debt had already risen to high levels for many countries. In 1985, 24 SSA countries (out of 47) had nominal debt-to-export ratios above 250 percent, and 22
countries had debt service-to-export ratios above 20
percent (Table 6.5).33 The creditors were mostly official: excluding South Africa, only one-quarter of external debt was owed to private creditors and most of
that was guaranteed by the public sector of the borrowing country.
32The overall debt-to-GDP ratios mask large differences among

countries. Small countries tend to be more indebted, relative to GDP,
than large ones, as shown by the unweighted average debt-to-GDP
ratio of SSA countries, which was 124 percent in 1997.
33Debt service due, which includes amortization payments but for
which broad data are unavailable, would be an even larger percentage of GDP.
34The net present value of the debt is a more meaningful measure

of the existing effective liability than nominal debt, whenever loans
have been contracted or rescheduled at concessional rates: the lower
the concessional rate, the lower the net present value of all future
debt-service obligations (interest and principal) discounted at the
market rate.
148
Table 6.5. Sub-Saharan Africa: Selected Debt Sustainability Indicators
Sub-Saharan Africa
Debt
to GNP
1985
Debt to
Exports
1985
Debt-Service
to Exports
1985
Debt
to GNP
1997
Debt to
Exports
1997
Debt-Service NPV of Debt

to Exports
to GNP1
1997
1997
NPV of Debt
to Exports1
1997
56
171
18
68
202
13
...
...

Medium growth
106
79
121
356
437
479
20
23
19
113
120
151
325
506
517
11
16
14
92
83
126
217
389
349
Memorandum
SSA HIPC: unweighted average4
92
91
108
432
241
572
22
21
27
124
106
162
474
294
635
15
12
18
92
79
114
347
214
469
Source: World Bank, Global Development Finance.

1NPV refers to net present value.
4Sub-Saharan Africa, Heavily Indebted Poor Countries.
Reasons Behind Debt Accumulation

to Unsustainable Levels
High indebtedness aggravated the situation, as debtservice costs claimed a rising share of export earnings
and limited the fiscal resources available for productive expenditure. It also discouraged investment (especially foreign), both because of the resulting lack of infrastructure, and because of the effects of the actual
and expected burden of taxation.37 Moreover, it reduced the amount of financial assistance available to
finance new projects, as almost a third of financial aid
provided to SSA countries is estimated to have been
devoted to the servicing of past loans.38
Official aid was not always based on economic criteria relating either to need, such as low levels of income per capita and inability to find alternative foreign resources, or to policy performance. In fact,
official aid was often driven by political and strategic
consideration,39 especially during the cold war, and including the support of former colonies. Much official
aid has been tied to the purchase of goods and services
produced by the donor country and sold at uncompetitive prices.40 Empirical evidence suggests that coun-
There are several reasons for the accumulation of

the huge debt of SSA countries and its unsustainability, ranging from external factors to inappropriate policies in both borrowing and lending countries. Large
loans and sizable official financial assistance were
often requested and granted without significant conditionality attached, partly in view of overly optimistic
expectations of output and export growth, and without
regard to the high economic and political uncertainty
characterizing the region. SSA countries were generally unsuccessful in channeling these financial inflows
into productive investment, which would have enhanced growth and export-earning capacity and allowed the loans to be repaid. Economic stabilization
and reform efforts were often not sufficient to create
an economic and institutional environment conducive
to growth, and in some cases were undermined by political instability.
External factors, such as terms of trade shocks and,
to a lesser extent, adverse weather conditions, reduced
the market value or the volume of exports.35 The inflow of financial assistance was often poorly managed,
thus reducing the economic return on aid programs:
corrupt practices sometimes took their toll on available
resources, while the fungibility of aid allowed governments to deflect financial assistance towards implicitly
financing alternative projects politically more appealing but economically less productive than those originally targeted by the donors.36
it actually frees fiscal resources that become available for alternative

use (fungibility). In this case, foreign aid effectively finances
such alternative use, or public expenditure at the margin. For a discussion and estimates of the fungibility of aid, see Shantayanan
Devarajan, Andrew S. Rajkumar, and Vinaya Swaroop, What Does
Aid to Africa Finance? Policy Research Working Paper 2092
(Washington: World Bank, 1998).
37For evidence on the impact of the debt overhang on investment
and growth in SSA countries, see Ibrahim A. Elbadawi, Benno J.
Ndulu, and Njuguna Ndungu, Debt Overhang and Economic
Growth in Sub-Saharan Africa, in Zubair Iqbal and Ravi Kanbur,
eds., External Finance for Low-Income Countries (Washington:
IMF, IMF Institute, 1997).
38Devarajan, Rajkumar, and Swaroop, What Does Aid to Africa
Finance?
39Alberto Alesina and David Dollar, Who Gives Foreign Aid to
Whom and Why? NBER Working Paper No. 6612 (1998).
40Barfour Osei, The Cost of Aid Tying to Ghana, University of
Ghana, mimeo, presented at the African Economic Research Consortium Research Workshop, Nairobi, Kenya, December 510, 1998.
35For evidence on policy and exogenous factors contributing to

the accumulation of large and unsustainable debt, see Ray Brooks et
al., External Debt Histories of Ten Low-Income Developing
Countries: Lessons from Their Experience, Working Paper 98/72
(Washington: IMF, May 1998).
36When foreign aid is provided to finance essential projects that
would be pursued by the authorities even in the absence of such aid,
149
VI
tries economic performance has benefited lastingly

from official assistance only when the aid has been accompanied by appropriate stabilization and reform
policies.41
tic and foreign investment, by reducing political

and economic uncertainty.
Twenty-six SSA countries have been classified as
HIPC countriesa majority of the 41 HIPC countries
worldwide. Uganda and Mozambique are the only
SSA countries that have already received HIPC assistance; Burkina Faso, Cte dIvoire, and Mali have received commitments of assistance subject to the successful implementation of programs supported by
ESAF arrangements; while for Benin and Senegal
their debt has been judged sustainable without HIPC
assistance (although these two countries may qualify
for assistance under the proposed strengthening of the
HIPC Initiative). These seven countries improved their
performance between the first and second halves of the
1990s more than other SSA countries, but given their
less advantageous starting positions there is at present
no significant difference in saving-investment ratios,
the degree of openness, the ability to attract foreign
private capital, the level of infrastructure, or the overall quality of the institutional and political environment between these countries and the SSA average.
Thus further efforts will be needed to spur investment
and generate satisfactory, sustainable growth, including in areas such as reforming the public sector, improving legal and political institutions, stabilizing the
political situation, developing the financial system,
and improving the quality and quantity of infrastructure. In the absence of such further steps, growth performance and prospects may not improve, irrespective
of the help provided by the HIPC Initiative.
The HIPC Initiative

Under the HIPC Initiative, developed jointly by the
IMF and World Bank in 1996, eligible heavily indebted poor countries can receive from the international community sufficient financial assistance, in addition to traditional relief mechanisms, to reduce their
debt to a sustainable level. To qualify for such assistance, countries have to meet certain requirements; in
particular, (1) they have to be ESAF-eligible and IDAonly eligible countries, (2) they must have established
and sustained a record of strong policy adjustment and
reform in the context of programs supported by the
IMF and the World Bank, and (3) their external debt
situation at the completion point must remain unsustainable after the full adoption of traditional debtrelief measures.42
There are three reasons why the HIPC Initiative is
expected to have a stronger impact on growth than the
debt-relief mechanisms of the past 15 years.
First, the financial assistance under the initiative
has to be preceded by significant macroeconomic
and structural reforms, which have been shown to
provide benefits in terms of growth (as previously
discussed).
Second, insofar as the HIPC Initiative will reduce
debt to a sustainable level, it should greatly reduce
the drag that debt servicing imposes on investment and economic growth.
Third, the commitments both of the donor countries to write off part of the debt, and of the borrowing countries to reform, in order to permanently eliminate the need of regular rescheduling,
should appear more credible under the HIPC
Initiative than under previous assistance programs. This credibility effect should boost domes-

Economic growth in sub-Saharan Africa has long
been woefully inadequate to the needs of the region,
although recent improvements are encouraging. This
chapter has discussed the main reasons for the poor
performance and the main areas where further reforms
are needed to improve growth prospects.
The poor growth performance of the SSA region
may be attributed largely to the interaction of economic, political, social, institutional, and geographic
factors that have prevented the development of the
right conditions for productive investment to flourish.
However, Africa is not doomed to remain poor. Most
of these factors can be changed, provided that governments have the determination and perseverance to pursue consistently the long agenda of needed reforms.
In many countries, an essential condition is to establish peace and a stable political situation, reversing the recent trend of a rising number of conflicts (see Box 6.1, page 138).
SSA countries should continue to press ahead
with macroeconomic stabilization programs that
control inflation and curtail excessive budget
deficits, improve the use of public resources, and
41Burnside and Dollar, Aid, Policies, and Growth, and Dollar

and Easterly, The Search for the Key.
42For technical and historical information regarding the HIPC
Initiative, see October 1998 World Economic Outlook (Box 1.1) and
Anthony R. Boote and K. Thugge, Debt Relief for Low-Income
Countries: The HIPC Initiative, Pamphlet Series No. 51
(Washington: IMF, 1999). Debt sustainability is defined, on the basis
of past experience, by generic thresholds: NPV of debt-to-export
ratio below 200250 percent and debt service-to-exports ratio below
2025 percent; these thresholds are adjusted for other fiscal, financial, and external factors that may affect country-specific vulnerability. A good evaluation of the effects of the HIPC Initiative is provided
by Stijn Claessen and others, HIPC Debt: A Review of the Issues,
Journal of African Economies, Vol. 2 (1997). Enhancement of the
HIPC Initiative, with less restrictive criteria, more favorable assistance schemes, faster procedures, and an explicit link to poverty reduction has recently been endorsed by the G-8 at the Cologne
Meeting (June 1820, 1999) and is currently under preparation.
150
further reduce trade and exchange restrictions.

These are important elements of programs supported by the IMF and World Bank.
Equally important, governments should intensify
their efforts in the following areas:
Intensify programs aiming at the improvement of
health and education.
Improve the efficiency and quality of public services, fight corruption, enhance the protection of
property rights, and increase the respect for law
and the impartiality of the legal system.
Stimulate the development and improve the efficiency of financial markets and institutions,
which constitutes a necessary precondition for
pursuing the liberalization of the capital account.
Devote sufficient resources increasing the stock of
infrastructure as well as enhancing its quality.
Highly indebted SSA countries should take full
advantage of the opportunity offered by the HIPC
Initiative to intensify and press ahead with reforms while benefiting from the debt reduction.
Only if combined with domestic efforts can international support reduce the external debt burden,
allow countries to gain the confidence of world financial markets, and restore their ability to borrow under normal conditions to finance sustainable growth.
Such policies will improve the economic environment for private sector activity, by improving political
and economic stability, enhancing social capital, and
providing the right incentives for stimulating the accumulation of productive physical and human capital. At
the same time, the implementation of such measures
may well increase the amount of official development
assistance, as donor countries become more convinced
of its beneficial effects.
At the turn of the millennium, the HIPC Initiative
could provide the right incentive for a concerted regional implementation of the long but essential agenda
necessary to bring Africa on to a path of sustainable
growth in the context of globalized trade and financial
markets.
151
Annex
Summing Up by the Chairman1
major industrial countries. Directors also acknowledged the uncertain but potentially significant impact
of the Y2K problem, including the possibility of capital outflows from vulnerable economies in the coming months.
irectors welcomed the strengthening of the

global economy during 1999, led by rapid recoveries in most of the crisis-hit Asian economies, preliminary indications of a long-awaited turnaround in
Japan, shallower-than-expected downturns in Brazil
and Russia, a firming of activity in much of western
Europe, and ongoing growth in the U.S. economy.
They noted that a reduction in financial market tensions is supporting growth in many emerging market
economies, a number of which have also been helped
by increases in some key commodities prices, including oil. Economic activity in the industrial world,
meanwhile, is being underpinned by generally benign
inflation, low interest rates, and improved fiscal positions in most cases. Directors also concurred with the
staffs projections of a further pickup in growth in
2000, with expected mild slowdowns in the U.S. and
Canada more than offset by stronger activity in other
industrial countries and in most emerging market
economies.
Nevertheless, while Directors agreed that the risks
surrounding these projections appear to be reasonably
well balanced, several speakers emphasized the uncertainties still surrounding the global outlook. Of
particular concern is the potential extent and global
impact of a slowdown in the United States. Most
Directors agreed that such a slowdown is inevitable
and needed in view of rising domestic and external
imbalances in the U.S. economy. However, several
noted that a smooth transition to a somewhat slower
and more sustainable rate of growth, as in the baseline
projections, could not be taken for granted. Moreover,
they and others questioned whether growth in Japan
and Europe would be sufficiently robust to compensate for the effects of slower expansion in the United
States, and pointed to the risks that such a slowdown
could pose to the fragile recoveries now appearing in
crisis-affected emerging markets. Some Directors
considered that, if realized, such risks would disproportionately affect developing countries prospects,
and called for better policy coordination among the
Ensuring Sustainable Recoveries

in Emerging Market Economies
Directors welcomed the strengthening economic recoveries in the crisis-hit economies in Asia. They observed that the now-more-appropriate exchange rates
and improvements in regional trading conditions were
contributing to rising exports, with fiscal stimulus and
easier monetary conditions also supporting growth.
Looking ahead, a broader-based pickup in domestic
demand is expected as economic confidence strengthens. But Directors also agreed that, for the recovery to
be sustainable and in order to reduce the vulnerability
to external shocks, programs of structural reforms
need to be vigorously pursued, focusing in particular
on the banking and corporate sectors, including corporate governance. In this regard, they noted that plans
for strengthening the financial sectors in these countries are largely in place, but underscored the importance of their full implementation. They noted that the
overall costs of rehabilitating the banking sectors are
still unclear, partly because of the much slower pace of
corporate restructuring. Several Directors pointed to
the risk that further rounds of bank recapitalization
could be required, with the associated costs eventually
shifted to taxpayers. Directors urged the countries concerned not to allow recent improvements in economic
conditions to become a pretext for slowing the pace of
structural change.
Directors concurred with projections for continuing
growth in China and India, but also noted some
important concerns about these economies. In the
case of China, they suggested that rapid restructuring
of state enterprises and the financial sector should
be a policy priority, with some fiscal consolidation
required over the medium term given the likely costs
of these reforms. For India, while welcoming the
way in which the authorities have managed the
economy to enable it to weather the financial crisis
1The staff paper of the World Economic Outlook was discussed by

the IMF Executive Board on September 1 and 3, 1999. This summing
up represents the Chairmans summary of the Board discussions.
152
Mature Market Economies: Adjustment Toward Balanced Growth
affecting the Asian region, Directors considered that

the longer-term outlook would be strengthened
through measures to rein in the large public sector
deficit, combined with wide-ranging structural
reforms to liberalize labor and product markets and
the trade regime. A few Directors pointed to the
lessons to be learned from the cautious approach
adopted by these countries to global economic and financial integration.
In considering the divergent performance of
economies in Latin America, Directors noted the improved outlook for Brazil and Mexico, but expressed
concern about economic difficulties in other countries
in the region. Several Directors suggested that the
rapid recovery in Brazil reflected the firm implementation of measures introduced in response to the recent
economic crisis. They and others cautioned, however,
that the economic situation was still fragile, and they
underscored the need for continued forceful actions,
including effective implementation of the new inflation-targeting framework and public sector reforms directed at strengthening expenditure control and revenue performance. Directors noted that the prospects
for continued recovery in Mexico would be closely
tied to developments in the U.S. economy. Directors
underscored that the recovery would also be supported
by decisive efforts to address the persistent weaknesses in the banking sector since the 1994/95 crisis.
Directors noted that difficult external trading conditions have contributed to the economic slowdowns in
Argentina, Chile, and other regional economies; in this
regard, sustained recovery in Brazil is all the more important. On balance, Directors considered that the
risks for Latin America remain on the downside, especially in view of difficult external financing conditions
and the expected slowdown in the U.S. economy, as
well as domestic political uncertainties.
Turning to the transition economies, Directors
agreed that the economic downturn in Russia in the
wake of the 1998 financial crisis has been made somewhat milder than earlier expected, but that a wide
range of reforms is needed to support a sustained recovery. These measures include public sector reforms
to tackle the persistent weaknesses in fiscal performance; restructuring of the banking sector, drawing on
the legislative framework and institutions recently established for this purpose; corporate sector restructuring, especially in large state-owned enterprises; and a
major effort to improve governance with a view, in
particular, to eradicating corruption, as announced by
the authorities. Directors also noted the impact of the
downturn in Russia on neighboring economies, particularly those with strong trade links with Russia. With
regard to the striking divergences in economic performance among the transition economies, Directors concurred that the stronger performers were generally
characterized by a more advanced state of structural
reforms, relatively high credibility of monetary and
exchange rate arrangements, and willingness to introduce firm budgetary measures to limit fiscal slippages.
As a result, these countries have shown greater resilience to external shocks.
In considering growth prospects for the Middle East
and Africa, Directors agreed that the recent increase in
oil prices was helping to improve the fiscal positions
and external balances of several economies, although
others continued to be adversely affected by ongoing
weaknesses in non-oil commodity prices. Directors
urged countries to build on the recent progress with
fiscal consolidation and structural reforms, including
efforts at diversifying the economies of oil exporting
countries. Directors also expressed concern about the
humanitarian and economic difficulties being experienced by Turkey as a result of the recent earthquake.
Directors welcomed the recent improvements in
policy implementation and growth performance
among many of the smaller countries in sub-Saharan
Africa, noting, however, that further efforts are necessary to improve the environment for profitable investment and growth. In this regard, they stressed the importance of promoting political stability and reducing
the occurrence of armed conflicts. In view of the secular decline in non-oil commodity prices, priority
should also be attached to creating incentives aimed at
diversifying production toward manufacturing and services. Directors also attached importance to improving
access for these countries exports to markets in the advanced economies. They concurred that highly indebted sub-Saharan African countries should take full
and prompt advantage of the opportunity offered by
the HIPC Initiative to intensify and press ahead with
reforms while benefiting from debt reduction.
Mature Market Economies: Adjustment

Toward Balanced Growth
Directors discussed the unbalanced pattern of
growth experienced recently among the United States,
Japan, and the euro area, which has stemmed from differences both in short-term demand factors and in underlying potential growth rates. While noting the critically important role that growth in the United States
had recently played in supporting global activity, they
considered that, as this pattern is not sustainable in the
medium term because of its implications for domestic
and external imbalances, sustained global expansion
would require a significant rebalancing of growth.
While these swings in current accounts have provided
a welcome relief valve for cyclical divergences among
advanced economies and also the Asian crisis
economies, they are unlikely to be sustained. They
could unwind slowly, as in the baseline projections, or
more rapidlyfor example, if investors move out of
dollar assets quickly and trigger a new global slowdown through a sharp depreciation of the U.S. dollar
153
ANNEX SUMMING UP BY THE CHAIRMAN
against the other major currencies and a major correction in U.S. equity markets.
Directors were encouraged by evidence that growth
divergences among the major industrial economies
had narrowed somewhat during the first half of 1999.
They welcomed the sharp pickup in demand in Japan
in the first quarter, signs that the anticipated recovery
in the euro area is on track, and the moderation
albeit limitedof demand growth in the United States
in the second quarter of 1999. They cautioned, nevertheless, that these initial indications of convergence do
not confirm that a smooth adjustment path has yet
been established.
While welcoming the skillful management of monetary policy by the U.S. Federal Reserve, many
Directors agreed that if the recent slowdown in the
U.S. economy were not sustained, the authorities
would need to consider further increases in short-term
interest rates to contain inflation pressures. Indeed, a
few Directors felt that monetary policy had been insufficiently tight in the face of the continued surge in
the stock market and the unsustainable growth in domestic demand resulting from the run-up in asset
prices. Most Directors, however, considered that the
current monetary policy stance was appropriate, especially given the recent increases in interest rates and
the absence of clear evidence of rising inflation. Some
pointed in particular to the risks that further monetary
tightening in the United States could pose to the still
fragile recoveries in many emerging market economies. Several Directors believed that the recent period of high growth, low inflation, and low unemployment in the United States could be attributed to
fundamental and sustainable changes in the economy.
Several others, however, suggested that these positive
recent developments were better explained by a series
of transitory and special factors that had stimulated demand and put downward pressure on certain important
prices. This group of Directors warned against an
overly sanguine assessment of the economys recent
performance and prospectsincluding the surge in
asset priceswhich could lead to a delay in monetary
tightening. Directors generally agreed that risks of
overheating in the U.S. economy would be exacerbated if prospective budget surpluses led to substantial
tax cuts or increases in public spending. Some speakers noted that, in the event of a downturn, the strong
fiscal position would provide substantial room to
maneuver.
Turning to developments in Japan, Directors noted
that the exceptionally rapid growth recorded in the
first quarter was one of a number of signs that the
economy may be emerging from recession, but agreed
that the economic situation remained fragile. Most
Directors concurred that, notwithstanding the longerterm need for fiscal consolidation, the supportive
stance of fiscal policy should be maintained until a recovery in private sector confidence and demand was
more clearly established, and they welcomed the recent announcement of a forthcoming supplementary
fiscal package. But several other Directors questioned
the potential benefits from continued expansionary fiscal packages, pointing to their implications for Japans
already high debt-to-GDP ratio and emphasizing the
growing medium-term challenges that Japan faces in
the fiscal area. Directors agreed with the supportive
stance of monetary policy, noting that the Bank of
Japans zero interest rate policy would remain appropriate until deflationary concerns dissipated. A number of Directors suggested that the recent appreciation
of the yen was consistent with the improved economic
outlook and with the adjustment over time required in
global current account imbalances, although some expressed concern that further substantial appreciation
could jeopardize the prospects for economic recovery
both in Japan and in other crisis-hit economies in Asia.
All Directors concurred that the key requirement for
enduring recovery in Japan was the pursuit of structural reforms. Priorities include the effective implementation of the framework now in place to rehabilitate and strengthen the banking sector, and further
improvements in the tax system, legal framework, and
competitive environment to promote enterprise restructuring and improve corporate governance.
Directors welcomed the indications of stronger
growth in western Europe, noting the role played by
the better external environment, improved business
confidence, and lower interest rates in the euro area
and in several other European countries. Directors
agreed that the recent strengthening in the euro relative
to the dollar, partially offsetting its earlier decline, represented a move consistent with medium-term fundamentals and would not threaten prospects for stronger
growth. Nevertheless, some Directors considered that
the outlook for sustained recovery in the major continental countries was not robust, and a few saw some
scope for a further cut in interest rates if recovery in
Europe were to fall short of expectations. Other
Directors, however, thought that the present balance of
risks appeared to be on the upside, with the possibility
of a stronger than currently expected upturn. Several
Directors suggested that more rapid fiscal consolidation was needed in most European economies in order
to reduce oppressive tax burdens, lower public debt,
and prepare for the fiscal pressures arising from population aging. Directors agreed that the other main policy challenge in Europe is to address structural rigidities, particularly in view of the high level of structural
unemployment in much of the euro area.
Safeguarding Macroeconomic Stability

at Low Inflation
Directors concurred that the industrial countries
have now achieved reasonable price stability, and that
154
Safeguarding Macroeconomic Stability at Low Inflation
significant progress has also been made in reducing inflation to low rates in most developing and transition
economies. They agreed that this success in curtailing
inflation was mainly the result of determined and prolonged policy efforts, reflecting the widespread public
perception that high and volatile inflation is detrimental to sustainable economic growth and development.
However, Directors noted that, while the establishment of reasonable price stability is necessary to safeguard macroeconomic stability, it is not sufficient.
Indeed, the frequency and severity of financial crises
during the 1990s indicates that safeguarding macroeconomic stability requires policy attention well beyond the maintenance of price stability for currently
produced goods and services.
With inflation in industrial countries averaging
about 1!/2 percent, and with a number of countries having adopted explicit inflation targets, the question of
what constitutes reasonable price stability, and how to
maintain it, has gained increased relevance for the
conduct of monetary policy. Directors agreed that attempts to eliminate short-run fluctuations in inflation
would be neither desirable nor practical. The best that
can be achieved is reasonable price stability over the
medium terma goal usually consistent with the policy objective of output stabilization over the course of
the business cycle. Directors further recognized that
the conduct of monetary policy at low rates of inflation
required careful analysis of, among other things, the
effects of nominal rigidities on economic performancein particular, the implications of resistance to
reductions in nominal wages for equilibrium output,
and of the zero floor to nominal interest rates for the
effectiveness of monetary policy. Some Directors expressed the view that further detailed analysis in these
areas is required. Several speakers pointed to the dangers resulting from deflationary expectations becoming ingrained, and to the current difficulties in Japan in
trying to stimulate economic activity when official interest rates have been effectively reduced to zero in an
environment of mild deflation.
Some Directors argued that the threats to macroeconomic stability from price declines would differ
greatly depending on whether the price declines originated from widespread and rapid technical progress or
whether they were caused by persistent aggregate demand deficiencies, and that this difference was relevant for economic policy because the former reason
for price declines need not pose difficulties.
One of the most difficult questions related to the
conduct of monetary policy at present, Directors
noted, is whether and how to react to the persistent

boom in asset prices in many industrial countries, and
in the United States in particular. While inflation in the
prices of currently produced goods and services has
remained low and shown little if any sign of near-term
acceleration, equity prices in many countries have
reached levels that are difficult to justify on the basis
of fundamentals as conventionally defined. In this
context, several Directors referred to recent experiences of rising economic and financial vulnerability
resulting from rapid growth in asset prices, as in
Japan, the United Kingdom, and the Nordic countries
in the late 1980s and early 1990s and, indeed, in many
Asian countries more recently. Directors pointed to
the risks that a sudden correction of asset prices may
entail for macroeconomic stability, and considered it
important for economic policy to moderate the adverse effects on output and employment of such an occurrence. Several speakers emphasized, however, that
the response of policy to asset price movements
should be symmetricalthat is, policy should respond
not only to sharp declines in asset prices, but also to
unsustainable increases that threaten to disrupt the financial system and the economy more broadly.
Without such symmetry, there would be a risk that
monetary policy could contribute inadvertently to excessive optimism and the occurrence of price bubbles
in asset markets.
While agreeing on these principles, Directors were
less certain about how this objective could actually be
achieved and the role asset prices should play in the
design and conduct of monetary policy. Most
Directors agreed that not enough is known about the
determinants of asset prices and their interaction with
output and inflation to be able to establish definite
rules linking asset prices to stabilization policies. At
the same time, Directors recognized that asset price
movements can contain valuable information on future
output and inflation trends, and should therefore be
taken into consideration in setting monetary policy.
A number of Directors suggested that conventional
macroeconomic policiesincluding monetary policyare not in themselves sufficient to safeguard
against the risks of financial distress and banking sector difficulties arising from booms and busts in asset
prices. This challenge also has to be met by prudential
regulation and supervision, which should aim at preventing excessive risk-taking by financial market participants and at strengthening their balance sheets so
as to be better able to resist sudden swings in asset
prices.
155
Statistical Appendix
deposit rate for the euro will average 3.0 percent in

1999 and 3.5 percent in 2000.
With respect to introduction of the euro, on
December 31, 1998 the Council of the European
Union decided that, effective January 1, 1999, the irrevocably fixed conversion rates between the euro and
currencies of the member states adopting the euro are:
he statistical appendix presents historical data, as

well as projections. It comprises four sections:
Assumptions, Data and Conventions, Classification of
Countries, and Statistical Tables.
The assumptions underlying the estimates and projections for 19992000 and the medium-term scenario
for 20012004 are summarized in the first section. The
second section provides a general description of the
data, and the conventions used for calculating country
group composites. The classification of countries in
the various groups presented in the World Economic
Outlook is summarized in the third section. Note that
the group of advanced economies includes Israel and
four newly industrialized Asian economies, which all
were added to the industrial country group in the May
1997 issue of the World Economic Outlook.
The last, and main, section comprises the statistical
tables. Data in these tables have been compiled on the
basis of information available through early September 1999. The figures for 1999 and beyond are
shown with the same degree of precision as the historical figures solely for convenience; since they are
projections, the same degree of accuracy is not to be
inferred.
1 euro =
=
=
=
=
=
=
=
=
=
=
40.3399
1.95583
166.386
6.55957
0.787564
1,936.27
40.3399
2.20371
13.7603
200.482
5.94573
Belgian francs
Deutsche mark
Spanish pesetas
French francs
Irish pounds
Italian lire
Luxembourg francs
Netherlands guilders
Austrian schillings
Portuguese escudos
Finnish markkaa
See Box 5.4 in the October 1998 World Economic

Outlook for details on how the conversion rates were
established.

Data and projections for 182 countries form the statistical basis for the World Economic Outlook (the
World Economic Outlook database). The data are
maintained jointly by the IMFs Research Department
and area departments, with the latter regularly updating country projections based on consistent global assumptions.
Although national statistical agencies are the ultimate providers of historical data and definitions, international organizations are also involved in statistical
issues, with the objective of harmonizing methodologies for the national compilation of statistics, including the analytical frameworks, concepts, definitions,
classifications, and valuation procedures used in the
production of economic statistics. The World Economic Outlook database reflects information from
both national source agencies and international organizations.
The completion in 1993 of the comprehensive revision of the standardized System of National Accounts
1993 (SNA) and the IMFs Balance of Payments
Manual (BPM) represented important improvements
Assumptions
Real effective exchange rates for the advanced
economies are assumed to remain constant at their average levels during the period July 26August 16,
1999. For 1999 and 2000, these assumptions imply average U.S. dollar/SDR conversion rates of 1.362 and
1.367, respectively.
Established policies of national authorities are assumed to be maintained. The more specific policy assumptions underlying the projections for selected advanced economies are described in Box 1.2.
It is assumed that the price of oil will average
$16.70 a barrel in 1999 and $18.00 a barrel in 2000. In
the medium term, the oil price is assumed to remain
unchanged in real terms.
With regard to interest rates, it is assumed that the
London interbank offered rate (LIBOR) on six-month
U.S. dollar deposits will average 5.4 percent in 1999
and 6.1 percent in 2000; that the three-month certificate of deposit rate in Japan will average 0.2 percent in
1999 and in 2000; and that the three-month interbank
156
in the standards of economic statistics and analysis.1

The IMF was actively involved in both projects, particularly the new Balance of Payments Manual, which
reflects the IMFs special interest in countries external positions. Key changes introduced with the new
Manual were summarized in Box 13 of the May 1994
World Economic Outlook. The process of adapting
country balance of payments data to the definitions of
the new BPM began with the May 1995 World
Economic Outlook. However, full concordance with
the BPM is ultimately dependent on the provision by
national statistical compilers of revised country data,
and hence the World Economic Outlook estimates are
still only partially adapted to the BPM.
Composite data for country groups in the World
Economic Outlook are either sums or weighted averages of data for individual countries. Arithmetically
weighted averages are used for all data except inflation
and money growth for the developing and transition
country groups, for which geometric averages are
used. The following conventions apply.
Country group composites for exchange rates, interest rates, and the growth rates of monetary aggregates are weighted by GDP converted to U.S.
dollars at market exchange rates (averaged over
the preceding three years) as a share of world or
group GDP.
Composites for other data relating to the domestic
economy, whether growth rates or ratios, are
weighted by GDP valued at purchasing power
parities (PPPs) as a share of total world or group
GDP.2
For central and eastern European countries, external

transactions in nonconvertible currencies (through
1990) are converted to U.S. dollars at the implicit U.S.
dollar/ruble conversion rates obtained from each countrys national currency exchange rate for the U.S. dollar and for the ruble.
Unless otherwise indicated, multiyear averages of
growth rates are expressed as compound annual rates
of change.
Summary of the Country Classification
The country classification in the World Economic
Outlook divides the world into three major groups: advanced economies, developing countries, and countries in transition.3 Rather than being based on strict
criteria, economic or otherwise, this classification has
evolved over time with the objective of facilitating
analysis by providing a reasonably meaningful organization of data. A few countries are presently not included in these groups, either because they are not
IMF members, and their economies are not monitored
by the IMF, or because databases have not yet been
compiled. Cuba and the Democratic Peoples Republic
of Korea are examples of countries that are not IMF
members, whereas San Marino, among the advanced
economies, is an example of an economy for which a
database has not been completed. It should also be
noted that, owing to lack of data, only three of the former republics of the dissolved Socialist Federal
Republic of Yugoslavia (Croatia, the former Yugoslav
Republic of Macedonia, and Slovenia) are included in
the group composites for countries in transition.
Each of the three main country groups is further divided into a number of subgroups. Among the advanced economies, the seven largest in terms of GDP,
collectively referred to as the major industrial countries, are distinguished as a subgroup, and so are the 15
current members of the European Union, the 11 members of the euro area, and the four newly industrialized
Asian economies. The developing countries are classified by region, as well as into a number of analytical
and other groups. A regional breakdown is also used
for the classification of the countries in transition.
Table A provides an overview of these standard groups
in the World Economic Outlook, showing the number
of countries in each group and the average 1998 shares
of groups in aggregate PPP-valued GDP, total exports
of goods and services, and population.
Composite unemployment rates and employment

growth are weighted by labor force as a share of
group labor force.
Composites relating to the external economy are
sums of individual country data after conversion
to U.S. dollars at the average market exchange
rates in the years indicated for balance of payments data, and at end-of-year market exchange
rates for debt denominated in currencies other
than U.S. dollars. Composites of changes in foreign trade volumes and prices, however, are arithmetic averages of percentage changes for individual countries weighted by the U.S. dollar value of
exports or imports as a share of total world or
group exports or imports (in the preceding year).
1Commission of the European Communities, IMF, OECD,

UN, and World Bank, System of National Accounts 1993
(Brussels/Luxembourg, New York, Paris, and Washington, 1993);
and IMF, Balance of Payments Manual, Fifth Edition (Washington,
1993).
2See Annex IV of the May 1993 World Economic Outlook. See
also Anne Marie Gulde and Marianne Schulze-Ghattas, Purchasing
Power Parity Based Weights for the World Economic Outlook, in
Staff Studies for the World Economic Outlook (IMF, December
1993), pp. 10623.
3As used here, the term country does not in all cases refer to a
territorial entity that is a state as understood by international law and
practice. It also covers some territorial entities that are not states, but
for which statistical data are maintained on a separate and independent basis.
157
STATISTICAL APPENDIX
Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports
of Goods and Services, and Population, 19981
(Percent of total for group or world)
Number of
Countries
GDP
Exports of Goods
and Services
Advanced
economies
World
______________________
100.0
55.4
80.2
44.4
37.5
20.8
13.4
7.4
9.1
4.5
6.2
3.4
5.6
3.1
6.0
3.3
3.3
1.8
19.8
11.0
Advanced
economies
World
_____________________
100.0
77.9
63.3
49.3
17.8
13.8
8.3
6.5
11.9
9.3
7.4
5.7
6.1
4.8
7.2
5.6
4.7
3.6
36.7
28.6
Population
Share of total for
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Memorandum
Industrial countries (former definition)
European Union
Euro area
28
7
21
23
15
11
4
93.8
35.9
28.0
5.7
52.0
19.9
15.5
3.2
Developing
countries
World
______________________
Regional groups
Africa
Sub-Sahara
Excluding Nigeria and South Africa
Asia
China
India
Other Asia
Western Hemisphere
Analytical groups
By source of export earnings
Fuel
Nonfuel
Manufactures
Primary products
Services, income, and private transfers
Diversified
By external financing source
Net creditor countries
Net debtor countries
Official financing
Private financing
Diversified financing
Net debtor countries by
debt-servicing experience
Countries with arrears and/or
rescheduling during 199397
Other net debtor countries
Other groups
Heavily indebted poor countries
Least developed countries
Middle East and north Africa
Russia
1The
87.4
51.7
41.1
12.0
68.1
40.3
32.0
9.3
Developing
countries
World
_____________________
100.0
17.7
Advanced
economies
World
____________________
100.0
74.5
29.5
13.8
8.9
6.3
6.2
6.4
3.3
25.5
15.6
11.6
4.6
2.2
1.4
1.0
1.0
1.0
0.5
4.0
90.9
40.5
31.4
8.5
14.2
6.3
4.9
1.3
Developing
countries
World
____________________
100.0
77.5
128
100.0
39.8
51
48
46
27
25
17
33
8.3
6.0
3.6
57.5
30.1
11.0
16.3
11.7
22.5
3.3
2.4
1.4
22.8
12.0
4.4
6.5
4.7
8.9
10.2
7.7
4.0
45.9
17.5
3.7
24.7
19.2
24.8
1.8
1.4
0.7
8.1
3.1
0.7
4.4
3.4
4.4
15.4
13.9
10.2
67.4
27.4
21.3
18.6
6.4
10.8
11.9
10.8
7.9
52.2
21.2
16.5
14.5
5.0
8.4
17
111
6
40
39
26
9.7
90.3
55.3
5.1
3.8
26.0
3.9
35.9
22.0
2.0
1.5
10.3
16.6
83.4
39.3
6.5
4.4
33.3
2.9
14.8
7.0
1.2
0.8
5.9
6.9
93.1
57.4
12.0
4.2
19.5
5.3
72.2
44.5
9.3
3.3
15.1
7
121
62
34
25
2.8
97.2
9.4
64.8
23.0
1.1
38.7
3.7
25.8
9.1
10.1
89.9
8.1
63.6
18.2
1.8
16.0
1.4
11.3
3.2
0.8
99.2
21.2
45.1
32.9
0.6
76.9
16.4
34.9
25.5
60
61
23.4
73.8
9.3
29.3
22.0
67.9
3.9
12.0
26.8
72.4
20.8
56.1
40
46
21
4.1
4.4
11.6
1.6
1.8
4.6
4.6
2.8
17.2
0.8
0.5
3.0
13.2
13.4
7.4
10.2
10.4
5.7
28
18
16
9
Countries
in
transition
World
______________________
100.0
4.8
56.5
2.7
45.8
2.2
33.9
1.6
9.5
0.5
Countries
in
transition
World
_____________________
100.0
4.4
63.5
2.8
54.1
2.4
29.4
1.3
7.1
0.3
GDP shares are based on the purchasing-power-parity (PPP) valuation of country GDPs.
158
Countries
in
transition
World
____________________
100.0
6.9
44.9
3.1
29.8
2.1
36.6
2.5
18.6
1.3
Table B. Advanced Economies by Subgroup

European Union
Euro Area
Newly Industrialized
Asian Economies
Other
Countries

France
Germany
Italy
United Kingdom
France
Germany
Italy
Austria
Belgium
Denmark
Finland
Greece
Ireland
Austria
Belgium
Finland
Ireland
Luxembourg
Netherlands
Portugal
Spain
Canada
Japan
United States
1On
Luxembourg
Netherlands
Portugal
Spain
Sweden
Hong Kong SAR1

Korea
Singapore
Taiwan Province of
China
Australia
Iceland
Israel
New Zealand
Norway
Switzerland
July 1, 1997, Hong Kong was returned to the Peoples Republic of China and became a Special Administrative Region of China.
A new classification, the euro area, has been added

to the Statistical Appendix for some variables. The
euro area comprises the countries that formed the
European Monetary Union as of January 1, 1999;
namely: Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal,
and Spain. Data shown are aggregates of country data
and do not reflect official statistics at this time.
Developing Countries
The group of developing countries (128 countries)
includes all countries that are not classified as advanced economies or as countries in transition, together with a few dependent territories for which adequate statistics are available.
The regional breakdowns of developing countries in
the World Economic Outlook conform to the IMFs
International Financial Statistics (IFS) classificationAfrica, Asia, Europe, Middle East, and Western
Hemispherewith one important exception. Because
all of the developing countries in Europe except
Cyprus, Malta, and Turkey are included in the group of
countries in transition, the World Economic Outlook
classification places these three countries in a combined Middle East and Europe region. In both classifications, Egypt and the Libyan Arab Jamahiriya are included in this region, not in Africa. Three additional
regional groupingstwo of them constituting part of
Africa and one a subgroup of Asiaare included in
the World Economic Outlook because of their analytical significance. These are sub-Sahara, sub-Sahara
excluding Nigeria and South Africa, and Asia excluding China and India.
The developing countries are also classified according to analytical criteria and into other groups. The
analytical criteria reflect countries composition of export earnings and other income from abroad, a distinction between net creditor and net debtor countries,
and, for the net debtor countries, financial criteria
based on external financing source and experience
with external debt servicing. Included as other
groups are currently the heavily indebted poor countries (HIPCs), the least developed countries, and
Middle East and north Africa (MENA). The detailed
composition of developing countries in the regional,
analytical, and other groups is shown in Tables C
through E.
General Features and Compositions of Groups in the

World Economic Outlook Classification
Advanced Economies
The 28 advanced economies are listed in Table B.
The seven largest in terms of GDPthe United States,
Japan, Germany, France, Italy, the United Kingdom,
and Canadaconstitute the subgroup of major industrial countries, often referred to as the Group of Seven
(G-7) countries. The current members of the European
Union (15 countries) and the newly industrialized
Asian economies are also distinguished as subgroups.
Composite data shown in the tables under the heading
European Union cover the current 15 members of
the European Union for all years, even though the
membership has increased over time.
In 1991 and subsequent years, data for Germany
refer to west Germany and the eastern Lnder (that is,
the former German Democratic Republic). Before
1991, economic data are not available on a unified
basis or in a consistent manner. Hence, in tables featuring data expressed as annual percent change, these
apply to west Germany in years up to and including
1991, but to unified Germany from 1992 onward. In
general, data on national accounts and domestic economic and financial activity through 1990 cover west
Germany only, whereas data for the central government and balance of payments apply to west Germany
through June 1990 and to unified Germany thereafter.
159
Table C. Developing Countries by Region and Main Source of Export Earnings
Fuel
Manufactures
Primary Products
Services,
Income, and
Private Transfers
Diversified
Source of
Export Earnings
Africa
Sub-Sahara
Angola
Congo,
Rep. of
Gabon
Nigeria
North Africa
Algeria
Botswana
Burundi
Central African
Rep.
Chad
Congo, Democratic
Rep. of
Cte dIvoire
Equatorial Guinea
Ethiopia
Ghana
Guinea
Guinea-Bissau
Liberia
Madagascar
Malawi
Mali
Mauritania
Namibia
Niger
Rwanda
So Tom and
Prncipe
Somalia
Sudan
Swaziland
Tanzania
Togo
Uganda
Zambia
Zimbabwe
Benin
Burkina Faso
Cape Verde
Comoros
Djibouti
Eritrea
Gambia, The
Lesotho
Mozambique, Rep. of
Seychelles
Cameroon
Kenya
Mauritius
Senegal
Sierra Leone
South Africa
Morocco
Tunisia
Asia
Brunei
Darussalam
China
India
Malaysia
Pakistan
Thailand
Cambodia
Myanmar
Papua New Guinea
Solomon Islands
Vietnam
Bhutan
Fiji
Kiribati
Maldives
Marshall Islands
Micronesia,
Federated States of
Nepal
Samoa
Tonga
Vanuatu
Afghanistan,
Islamic State of
Bangladesh
Indonesia
Lao Peoples
Democratic
Rep.
Philippines
Sri Lanka
Cyprus
Egypt
Jordan
Lebanon
Yemen, Rep. of
Malta
Syrian Arab Rep.
Turkey

Bahrain
Iran, Islamic
Rep. of
Iraq
Kuwait
Libya
Oman
Qatar
Saudi Arabia
United Arab
Emirates
160
Table C (concluded)
Fuel
Manufactures
Primary Products
Services,
Income, and
Private Transfers
Diversified
Source of
Export Earnings
Western Hemisphere
Trinidad and
Tobago
Venezuela
Brazil
Bolivia
Chile
Guyana
Honduras
Nicaragua
Peru
Suriname
The first analytical criterion, by source of export

earnings, distinguishes among five categories: fuel
(Standard International Trade ClassificationSITC
3); manufactures (SITC 5 to 9, less 68); nonfuel
primary products (SITC 0, 1, 2, 4, and 68); services,
income, and private transfers (exporters of services
and recipients of income from abroad, including workers remittances); and diversified export earnings.
Countries whose 199093 export earnings in any of
the first four of these categories accounted for more
than half of total export earnings are allocated to that
group, while countries whose export earnings were not
dominated by any one of these categories are classified
as countries with diversified export earnings (see Table
C).
The financial criteria first distinguish between net
creditor and net debtor countries. Net creditor countries are defined as developing countries with positive
net external assets at the end of 1997.4 Countries in the
much larger net debtor group are differentiated on the
basis of two additional financial criteria: by main
source of external financing and by experience with
debt servicing.5
Within the classification main source of external financing, three subgroups, based on country estimates
of the composition of external financing, are identi-
Antigua and Barbuda

Bahamas, The
Barbados
Belize
Dominican Rep.
El Salvador
Grenada
Haiti
Jamaica
Panama
Paraguay
St. Kitts and Nevis
St. Lucia
St. Vincent and the
Grenadines
Argentina
Colombia
Costa Rica
Dominica
Ecuador
Guatemala
Mexico
Netherlands
Antilles
Uruguay
fied: countries relying largely on official financing,

countries relying largely on private financing, and
countries with diversified financing sources. Net
debtor countries are allocated to the first two of these
subgroups according to whether their official financing, including official grants, or their private financing, including direct and portfolio investment, accounted for more than two-thirds of their total
199397 external financing. Countries that do not
meet either of these two criteria are classified as countries with diversified financing sources (see Table D).
The other groups of developing countries (see Table
E) constitute the HIPCs, the least developed countries,
and MENA countries. The first group comprises 40 of
the countries (all except Nigeria) considered by the
IMF and the World Bank for their debt initiative,
known as the HIPC Initiative.6 The group of least developed countries comprises 46 of the 47 developing
countries classified as least developed by the United
Nations (Tuvalu, not being an IMF member, is excluded). Finally, Middle East and north Africa, also referred to as the MENA countries, is a new World
Economic Outlook group, whose composition straddles the Africa and Middle East and Europe regions. It
is defined as the Arab League countries plus the
Islamic Republic of Iran.
Countries in Transition
4If information on the net external asset position is unavailable,

the inclusion of countries in this group is based on whether they
have cumulated a substantial current account surplus over the past
25 years to 1997.
5Within the classification experience with debt servicing, a distinction is made between countries with arrears or rescheduling
agreements (or both) and other net debtor countries. During the
199397 period, 60 countries incurred external payments arrears or
entered into official or commercial bank debt-rescheduling agreements. This group of countries is referred to as countries with arrears and/or rescheduling during 199397.
The group of countries in transition (28 countries)

comprises central and eastern European countries (including the Baltic countries), Russia, the other states
6See Anthony R. Boote and Kamau Thugge, Debt Relief for LowIncome Countries: The HIPC Initiative, Pamphlet Series, No. 51
(Washington: IMF, December 1997).
161
Table D. Developing Countries by Region and Main External Financing Source

Net Debtor Countries
____________________________________________
By main external financing source
____________________________________________
Countries
Net Creditor
Countries
Official
financing
Private
financing
Diversified
financing
Africa
Sub-Sahara
Angola
Benin
Botswana
Burkina Faso
Burundi
Cameroon
Cape Verde
Central African Rep.
Chad
Comoros
Congo, Democratic Rep. of
Congo, Rep. of
Cte dIvoire
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia, The
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mauritius
Mozambique, Rep. of
Namibia
Niger
Nigeria
Rwanda
So Tom and Prncipe
Senegal
Seychelles
Sierra Leone
Somalia
South Africa
Sudan
Swaziland
Tanzania
Togo
Uganda
Zambia
Zimbabwe
North Africa
Algeria
Morocco
Tunisia
162
Table D (continued)
____________________________________________
____________________________________________
Countries
Net Creditor
Countries
Official
financing
Private
financing
Diversified
financing
Asia
Afghanistan, Islamic State of
Bangladesh
Bhutan
Brunei Darussalam
Cambodia
China
Fiji
India
Indonesia
Kiribati
Lao Peoples Democratic Rep.
Malaysia
Maldives
Marshall Islands
Micronesia, Federated States of
Myanmar
Nepal
Pakistan
Papua New Guinea

Philippines
Samoa
Solomon Islands
Sri Lanka
Thailand
Tonga
Vanuatu
Vietnam

Bahrain
Cyprus
Egypt
Iran, Islamic Rep. of

Iraq
Jordan
Kuwait
Lebanon
Libya
Malta
Oman
Qatar
Saudi Arabia
Syrian Arab Rep.
Turkey
United Arab Emirates

Yemen, Rep. of
Western Hemisphere
Antigua and Barbuda
Argentina
Bahamas, The
Barbados
Belize
Bolivia
163
Table D (concluded)
____________________________________________
____________________________________________
Countries
Net Creditor
Countries
Official
financing
Private
financing
Brazil
Chile
Colombia
Costa Rica
Dominica
Dominican Rep.
Ecuador
El Salvador
Grenada
Guatemala
Guyana
Haiti
Diversified
financing
Honduras
Jamaica
Mexico
Netherlands Antilles
Nicaragua
Panama
Paraguay
Peru
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
Suriname
Trinidad and Tobago

Uruguay
Venezuela
of the former Soviet Union, and Mongolia. The transition country group is divided into three regional subgroups: central and eastern Europe, Russia, and
Transcaucasus and central Asia. The detailed country
composition is shown in Table F.
One common characteristic of these countries is the
transitional state of their economies from a centrally
administered system to one based on market principles.
Another is that this transition involves the transformation of sizable industrial sectors whose capital stocks
have proven largely obsolete. Although several other

countries are also in transition from partially command-based economic systems toward market-based
systems (including China, Cambodia, the Lao Peoples
Democratic Republic, Vietnam, and a number of
African countries), most of these are largely rural, lowincome economies for whom the principal challenge is
one of economic development. These countries are
therefore classified in the developing country group
rather than in the group of countries in transition.
164
Table E. Other Developing Country Groups

Countries
Heavily Indebted
Poor Countries
Least Developed
Countries
Middle East and

North Africa
Africa
Sub-Sahara
Angola
Benin
Botswana
Burkina Faso
Burundi
Cameroon
Cape Verde
Central African Rep.
Chad
Comoros
Congo, Democratic Rep. of
Congo, Rep. of
Cte dIvoire
Djibouti
Equatorial Guinea
Ethiopia
Gambia, The
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique, Rep. of
Niger
Rwanda
So Tom and Prncipe

Senegal
Sierra Leone
Somalia
Sudan
Tanzania
Togo
Uganda
Zambia
North Africa
Algeria
Morocco
Tunisia
Asia
Bangladesh
Bhutan
Cambodia
Kiribati
Lao Peoples Democratic Rep.
Maldives
Myanmar
Nepal
165
Table E (concluded)
Heavily Indebted
Poor Countries
Countries
Samoa
Solomon Islands
Vanuatu
Vietnam
Least Developed
Countries
Middle East and

North Africa

Bahrain
Egypt
Iran, Islamic Rep. of
Iraq
Jordan
Kuwait
Lebanon
Libya
Oman
Qatar
Saudi Arabia
Syrian Arab Rep.

Yemen, Rep. of
Western Hemisphere
Bolivia
Guyana
Haiti
Honduras
Nicaragua
Table F. Countries in Transition by Region

Central and Eastern Europe
Albania
Belarus
Bulgaria
Croatia
Czech Rep.
Estonia
Hungary
Latvia
Russia
Lithuania
Moldova
Poland
Romania
Slovak Rep.
Slovenia
Ukraine
Yugoslavia, Federal Rep. of
(Serbia/Montenegro)
Russia
166
Transcaucasus
and Central Asia
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Rep.
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
List of Tables
List of Tables
Page
Output
1.
2.
3.
4.
5.
6.
7.
Summary of World Output

Advanced Economies: Real GDP and Total Domestic Demand
Advanced Economies: Components of Real GDP
Advanced Economies: Unemployment, Employment, and Real Per Capita GDP
Developing Countries: Real GDP
Developing Countriesby Country: Real GDP
Countries in Transition: Real GDP
169
170
171
173
175
176
179
Inflation
8. Summary of Inflation
9. Advanced Economies: GDP Deflators and Consumer Prices
10. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs
in Manufacturing
11. Developing Countries: Consumer Prices
12. Developing Countriesby Country: Consumer Prices
13. Countries in Transition: Consumer Prices
180
181
182
183
184
187
Financial Policies
14. Summary Financial Indicators
15. Advanced Economies: General and Central Government Fiscal Balances
and Balances Excluding Social Security Transactions
16. Advanced Economies: General Government Structural Balances
17. Advanced Economies: Monetary Aggregates
18. Advanced Economies: Interest Rates
19. Advanced Economies: Exchange Rates
20. Developing Countries: Central Government Fiscal Balances
21. Developing Countries: Broad Money Aggregates
188
189
191
192
193
194
195
196
Foreign Trade
22.
23.
24.
25.
26.
Summary of World Trade Volumes and Prices

Nonfuel Commodity Prices
Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade
Developing Countriesby Region: Total Trade in Goods
Developing Countriesby Source of Export Earnings: Total Trade in Goods
197
199
200
201
203
Current Account Transactions

27.
28.
29.
30.
31.
32.
Summary of Payments Balances on Current Account

Advanced Economies: Balance of Payments on Current Account
Advanced Economies: Current Account Transactions
Developing Countries: Payments Balances on Current Account
Developing Countriesby Region: Current Account Transactions
Developing Countriesby Analytical Criteria: Current Account Transactions
205
206
207
208
210
212
Balance of Payments and External Financing

33. Summary of Balance of Payments and External Financing
34. Developing Countriesby Region: Balance of Payments
and External Financing
35. Developing Countriesby Analytical Criteria: Balance of Payments
and External Financing
167
217
219
221
36. Developing Countries: Reserves

37. Net Credit and Loans from IMF
225
227
External Debt and Debt Service

38. Summary of External Debt and Debt Service
39. Developing Countriesby Region: External Debt, by Maturity
and Type of Creditor
40. Developing Countriesby Analytical Criteria: External Debt,
by Maturity and Type of Creditor
41. Developing Countries: Ratio of External Debt to GDP
42. Developing Countries: Debt-Service Ratios
43. IMF Charges and Repurchases to the IMF
228
230
231
234
235
237
Flow of Funds
44. Summary of Sources and Uses of World Saving
238
Medium-Term Baseline Scenario

45. Summary of World Medium-Term Baseline Scenario
46. Developing CountriesMedium-Term Baseline Scenario:
Selected Economic Indicators
168
243
244
Output: Summary
Table 1. Summary of World Output1

Ten-Year Averages
___________________
198190 19912000
World
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
1.8
2.5
2.7
4.0
3.8
4.3
4.2
2.5
3.0
3.5
3.4
3.2
Advanced economies
3.1
2.4
1.2
2.0
1.3
3.2
2.6
3.2
3.2
2.2
2.8
2.7
United States
European Union
Japan
2.9
2.4
4.0
2.7
2.0
1.3
0.9
1.7
3.8
2.7
1.1
1.0
2.3
0.4
0.3
3.5
2.9
0.6
2.3
2.5
1.5
3.4
1.7
5.0
3.9
2.6
1.4
3.9
2.7
2.8
3.7
2.0
1.0
2.6
2.7
1.5
4.6
3.9
2.7
3.5
4.1
5.8
5.0
4.2
4.6
1.1
4.0
3.8
4.2
5.5
4.9
6.7
6.5
6.8
6.1
6.6
5.8
3.2
3.5
4.8
Regional groups
Africa
Asia
Western Hemisphere
2.5
6.9
2.8
1.6
2.9
7.3
3.5
3.3
1.8
6.6
2.7
3.9
0.2
9.5
7.1
3.3
0.7
9.3
3.9
3.9
2.4
9.6
0.7
4.9
3.0
9.1
3.7
1.5
5.9
8.2
4.7
3.6
3.1
6.6
4.5
5.3
3.4
3.7
3.2
2.2
3.1
5.3
1.8
0.1
5.0
5.4
3.1
3.9
Analytical groups
Fuel
Nonfuel
1.4
4.7
2.8
5.8
4.8
4.9
6.3
6.7
1.4
7.2
0.2
7.5
2.5
6.6
3.8
6.9
3.4
6.0
2.2
3.4
3.9
2.9
5.0

Official financing
Private financing
0.6
4.4
3.5
4.5
4.5
3.0
5.5
3.7
6.1
4.7
5.0
4.9
3.9
6.0
2.5
8.7
6.6
3.0
7.8
5.1
3.8
6.6
2.6
7.9
4.7
1.7
6.9
3.5
7.7
6.3
1.3
6.3
3.9
6.4
7.0
3.0
6.7
5.8
6.7
6.9
3.1
5.8
3.1
6.5
5.2
2.0
3.3
3.7
4.0
0.9
0.1
3.6
3.3
3.6
3.9
2.0
4.8
4.5
4.9
4.8
Net debtor countries by debtservicing experience

2.1
5.5
3.0
6.5
1.9
6.1
2.4
8.3
2.7
8.0
3.3
8.2
4.0
7.1
3.9
7.6
4.2
6.4
2.0
3.7
1.3
4.4
4.1
5.1
2.2
3.2
7.6
13.8
7.1
7.1
0.5
0.3
2.2
0.2
0.8
2.8

Russia
...
...
...
...
1.4
0.7
5.7
3.7
9.9
10.7
5.4
7.0
8.5
5.0
19.4
14.4
3.7
0.3
10.4
9.6
2.9
3.2
11.6
10.4
1.6
5.6
2.4
4.4
1.6
3.7
3.4
1.6
3.0
3.4
0.9
2.5
2.2
2.3
4.6
2.2
1.0
1.7
2.0
3.3
4.0
2.0
2.9
Median growth rate

Advanced economies
3.0
3.2
2.8
2.7
3.8
1.6
2.1
2.9
10.8
1.4
3.6
11.4
0.9
2.9
8.1
3.8
3.8
1.8
2.9
4.4
1.9
3.4
4.6
3.1
3.7
4.1
3.5
3.0
3.5
3.7
2.8
3.7
1.8
3.0
4.4
3.7
Output per capita

Advanced economies
2.4
1.9
1.5
1.8
3.6
3.1
0.4
2.9
7.7
1.3
4.1
14.0
0.6
4.5
6.5
2.5
4.9
6.4
1.9
4.4
0.5
2.5
4.9
2.6
4.2
2.2
1.6
1.5
0.3
2.2
1.9
0.7
2.1
3.1
2.7
World growth based on market

exchange rates
3.0
2.2
0.5
0.7
1.0
2.8
2.7
3.5
3.3
1.8
2.5
2.9
15,580
18,922
27,811
34,727
28,868 29,655
33,646 35,714
29,493
37,870
29,236
39,103
30,186
40,714
31,743
43,052
Memorandum
Value of world output in billions

of U.S. dollars
At market exchange rates
At purchasing power parities
1Real
23,888 23,927
27,015 28,473
GDP.
169
24,801 26,315
29,915 31,768
Table 2. Advanced Economies: Real GDP and Total Domestic Demand

Fourth Quarter1
____________________
Ten-Year Averages
___________________
198190 19912000 1991
1992
1993
1994
1995
1996
1997
1998
1999 2000
1998
1999
2000
Real GDP
Advanced economies
3.1
2.4
1.2
2.0
1.3
3.2
2.6
3.2
3.2
2.2
2.8
2.7
...
...
...

United States
Japan
Germany2
2.9
2.9
4.0
2.3
2.2
2.7
1.3
1.9
0.8
0.9
3.8
5.0
1.8
2.7
1.0
2.2
1.1
2.3
0.3
1.1
2.8
3.5
0.6
2.3
2.2
2.3
1.5
1.7
3.0
3.4
5.0
0.8
2.9
3.9
1.4
1.8
2.2
3.9
2.8
2.3
2.6
3.7
1.0
1.4
2.4
2.6
1.5
2.5
2.0
4.3
3.0
1.3
2.6
3.1
1.9
2.2
2.5
2.5
2.4
2.8
2.4
2.2
2.7
2.8
1.8
1.4
2.0
2.4
0.8
1.4
1.5
1.9
1.2
0.8
0.1
0.9
1.3
0.9
2.3
2.3
2.8
2.2
4.4
4.7
2.1
2.9
2.8
2.8
1.6
0.9
2.6
1.7
2.3
1.5
3.5
4.0
3.2
1.3
2.2
3.1
2.5
1.2
1.1
3.6
3.0
2.4
2.4
2.6
2.8
0.3
1.1
2.8
2.7
2.1
1.0
3.5
3.0
2.1
2.6
2.4
3.7
3.0
2.2
1.9
2.0
2.2
2.0
3.1
1.6
2.9
3.6
4.6
3.4
2.4
2.6
1.8
1.5
2.2
2.4
2.0
2.2
2.5
6.5
4.9
2.9
2.3
2.3
1.6
1.1
3.4
1.4
5.9
3.1
2.3
1.9
5.4
2.5
0.7
2.0
1.5
1.4
1.3
1.3
3.2
0.7
1.9
3.3
5.8
2.0
1.2
0.8
1.5
2.2
0.5
0.8
0.6
1.6
1.4
2.6
8.5
4.5
2.1
3.2
2.6
3.9
2.4
5.8
3.7
2.0
2.4
5.8
4.1
4.3
2.9
2.3
2.3
3.7
1.7
3.0
3.9
2.1
2.4
9.5
3.5
3.9
2.4
3.1
1.3
1.3
2.0
3.3
4.1
2.4
3.6
7.7
3.5
4.2
3.7
3.6
3.0
1.8
2.5
3.1
5.6
3.2
3.8
10.7
4.8
2.1
4.0
3.8
2.9
2.6
3.3
2.9
5.6
3.7
3.9
8.9
5.7
3.5
3.4
2.6
1.4
3.2
2.0
1.3
3.6
3.3
3.0
7.5
3.5
3.6
3.5
2.5
2.5
3.0
2.5
1.5
3.8
3.6
3.2
7.0
4.4
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
Switzerland
Norway
Israel
Iceland
2.1
2.4
3.5
2.7
0.7
3.3
4.4
2.9
0.8
3.1
5.7
1.1
0.1
3.3
6.8
3.3
0.5
2.7
3.4
1.0
0.5
5.5
6.9
3.6
0.5
3.8
6.8
1.0
0.3
4.9
4.7
5.6
1.7
4.3
2.7
5.4
2.1
2.1
2.0
5.1
1.2
1.0
1.7
5.6
1.9
2.8
3.0
4.7
...
...
...
...
...
...
...
...
...
...
...
...
Korea
Australia
Hong Kong SAR
Singapore
New Zealand
9.1
3.4
7.9
6.5
7.0
1.6
5.4
3.5
6.1
3.6
7.2
2.5
9.2
1.0
7.6
5.1
7.1
1.7
5.4
2.6
6.8
6.3
6.6
0.9
5.5
3.8
6.3
6.1
12.8
5.1
8.3
5.0
6.5
5.4
11.4
5.9
8.9
4.4
6.0
3.9
8.2
4.0
6.8
4.0
5.7
4.5
7.5
3.1
5.0
3.9
6.8
5.3
9.0
2.1
5.8
5.1
4.9
5.1
0.3
0.3
6.5
4.0
5.0
1.2
4.5
2.6
5.5
3.0
5.1
3.6
5.0
3.3
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
2.9
2.4
2.4
2.2
2.0
1.9
0.8
1.7
2.4
1.7
1.1
1.4
1.0
0.4
0.9
2.9
2.9
2.5
2.3
2.5
2.4
3.0
1.7
1.5
3.0
2.6
2.4
2.4
2.7
2.8
2.6
2.0
2.1
2.5
2.7
2.8
...
...
...
...
...
...
...
...
...
8.2
5.5
8.0
6.0
6.3
7.5
7.3
6.2
5.8
1.8
5.2
5.1
...
...
...
France
Italy
United Kingdom3
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece4
Portugal
Ireland
Luxembourg
Memorandum
European Union
Euro area
Newly industrialized Asian
economies
Real total domestic demand
Advanced economies
3.1
2.4
0.9
1.9
1.0
3.3
2.5
3.2
2.9
2.5
3.5
2.7
...
...
...

United States
Japan
Germany
3.0
3.1
4.1
1.8
2.3
3.0
1.1
1.9
0.4
1.6
2.9
4.8
1.8
2.8
0.4
2.9
1.0
2.9
0.1
1.1
2.9
3.9
1.0
2.2
2.0
2.1
2.3
1.7
3.1
3.6
5.7
0.3
2.8
4.2
0.1
1.0
2.8
5.0
3.5
2.6
3.3
4.7
1.3
2.1
2.5
2.9
1.2
2.2
2.8
5.3
3.2
2.6
3.2
4.3
2.0
2.0
2.5
2.6
2.4
2.6
2.4
2.3
3.1
3.0
1.4
1.2
2.3
2.1
0.6
2.1
0.9
1.4
0.2
0.5
0.8
0.9
2.2
4.5
2.2
1.4
3.0
2.1
3.4
3.2
1.8
2.2
1.8
1.7
0.9
0.2
3.1
1.6
0.9
2.5
3.8
5.7
3.7
2.5
3.6
2.2
2.6
1.8
2.5
3.5
2.8
2.3
2.7
2.0
3.5
1.7
2.7
1.1
2.7
1.8
1.7
4.2
2.7
2.7
2.8
1.3
3.6
3.2
3.1
2.4
1.0
4.8
4.5
3.7
3.6
0.9
4.4
3.8
...
...
...
2.9
2.4
2.3
2.3
1.9
1.8
0.5
1.8
2.5
1.7
1.1
1.3
0.7
1.6
2.4
3.0
2.6
2.4
2.2
2.2
2.2
3.0
1.4
1.0
2.9
2.3
2.0
3.1
3.5
3.5
3.3
2.6
2.6
2.5
2.7
2.7
...
...
...
...
...
...
...
...
...
7.8
5.2
9.1
6.4
5.9
8.3
7.5
6.4
4.2
8.1
6.7
6.4
...
...
...
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
1From
fourth quarter of preceding year.

through 1991 apply to west Germany only.
3Average of expenditure, income, and output estimates of GDP at market prices.
4Based on revised national accounts for 1988 onward.
2Data
170
Output: Advanced Economies
Table 3. Advanced Economies: Components of Real GDP

Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Private consumer expenditure

Advanced economies
3.2
2.6
1.6
2.4
1.7
2.9
2.6
2.9
2.8
2.8
3.5
2.7

United States
Japan
Germany1
3.1
3.2
3.7
2.1
2.4
3.0
1.6
2.0
1.1
0.6
2.5
5.6
2.2
2.8
2.1
2.9
1.6
2.9
1.2
2.5
3.3
1.9
1.0
2.3
2.7
2.1
1.9
2.6
3.2
2.9
0.9
2.5
3.4
1.0
0.7
3.0
4.9
1.1
1.8
3.5
5.0
1.9
2.5
2.4
2.8
1.7
2.3
2.6
2.6
3.4
2.9
1.8
1.5
2.3
2.2
1.4
2.9
0.9
1.4
1.4
1.3
0.4
1.8
0.2
2.6
3.0
1.8
1.4
2.2
2.9
3.1
1.7
2.2
1.7
2.1
2.0
0.5
3.6
2.5
0.9
2.6
4.0
4.2
3.8
1.7
2.7
2.8
2.5
1.8
1.9
2.5
2.6
2.3
2.1
2.5
3.5
3.4
3.5
3.3
1.9
4.2
3.9
3.8
3.7
1.8
3.9
3.7
3.0
2.5
2.4
2.4
2.0
1.9
1.2
2.8
3.3
2.2
1.7
2.0
1.4
0.1
0.7
2.5
1.9
1.5
2.3
1.9
2.0
2.6
1.9
1.5
2.6
2.1
1.7
3.1
2.9
2.9
3.5
2.5
2.6
2.5
2.5
2.6
7.9
5.5
7.8
6.9
7.1
8.1
6.9
6.4
5.4
3.1
5.0
5.3
Advanced economies
2.5
1.3
2.0
1.5
0.8
1.0
0.7
1.6
1.0
1.1
1.6
1.4

United States
Japan
Germany1
2.3
2.6
2.5
1.2
1.0
0.7
1.8
1.1
1.5
1.0
2.0
0.5
1.2
0.1
2.0
5.0
0.5
0.3
2.4
0.1
0.9
0.4
2.4
2.4
0.5
0.3
3.3
1.5
1.1
0.7
1.9
1.3
0.7
1.3
1.5
0.6
0.9
1.1
0.7
0.1
1.5
1.5
0.8
0.8
1.5
1.6
1.5
0.5
2.3
2.5
0.9
2.5
1.8
0.4
1.4
0.3
2.8
1.7
2.9
2.8
3.4
0.6
0.5
1.0
3.4
0.2
0.8
0.1
1.1
0.8
1.4
1.2
2.1
1.6
0.5
2.6
1.4
1.7
1.1
1.2
0.5
1.4
0.5
1.1
1.3
1.0
1.7
1.5
2.0
4.0
1.0
1.5
1.2
3.0
0.1
3.5
2.2
4.3
2.9
2.0
1.3
1.6
3.5
2.0
1.9
1.8
1.2
2.3
2.0
2.3
1.2
1.3
1.3
1.8
2.3
2.2
1.3
2.4
3.0
0.6
0.9
1.2
1.0
1.0
1.0
0.7
0.6
0.4
1.2
1.6
1.6
0.8
0.4
1.1
1.1
1.1
1.6
1.9
1.4
1.5
1.5
1.2
6.3
3.3
7.4
6.2
3.6
1.0
2.0
7.4
3.4
1.6
0.6
0.1
Advanced economies
3.3
3.2
1.6
1.7
0.1
4.4
4.1
6.0
4.6
4.2
5.5
3.8

United States
Japan
Germany1
3.1
2.6
5.2
1.6
3.2
5.3
0.1
1.7
2.4
6.6
3.3
6.0
2.1
5.2
1.5
4.5
0.1
5.1
2.0
4.5
3.9
6.6
0.8
4.0
3.3
5.0
1.7
0.7
6.2
7.8
11.1
0.9
4.2
7.2
1.9
0.6
4.7
9.6
8.8
1.8
6.0
9.0
0.4
3.5
3.6
4.7
0.3
2.8
2.3
1.8
4.3
3.9
0.7
0.7
2.8
3.3
1.0
8.7
3.5
2.8
1.4
0.7
1.3
6.7
10.9
0.8
2.7
1.3
0.1
3.6
7.4
2.5
6.0
2.9
1.9
0.5
2.3
4.9
6.5
0.1
0.9
7.5
13.9
4.2
3.5
9.9
3.6
5.2
3.1
5.3
8.5
4.2
4.1
4.0
3.9
4.4
3.6
2.0
0.1
1.0
6.4
7.4
5.4
6.1
2.1
3.3
4.6
3.1
2.6
2.3
3.1
1.9
1.6
2.4
2.0
1.5
0.6
0.2
0.5
5.7
6.8
4.1
2.5
2.2
3.7
3.6
3.3
5.9
2.1
1.1
4.6
3.3
2.3
5.0
5.4
4.3
5.8
4.7
4.6
3.6
4.1
4.0
8.8
5.2
11.4
6.1
6.9
9.8
9.7
7.3
4.7
9.2
0.2
7.1
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Public consumption
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Gross fixed capital formation
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
171
Table 3 (concluded)
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Final domestic demand

Advanced economies
3.1
2.4
1.1
2.0
1.1
2.8
2.5
3.4
2.7
2.5
3.6
2.7

United States
Japan
Germany1
3.0
3.0
4.0
1.8
2.3
3.1
1.2
2.0
0.6
1.3
2.7
4.7
1.9
2.7
0.9
3.7
1.0
2.7
0.3
1.0
2.4
3.3
1.1
2.0
2.1
2.6
2.1
1.3
3.2
3.6
5.3
0.5
2.4
3.8
0.1
0.5
2.8
5.2
3.3
1.4
3.7
5.2
1.4
2.4
2.5
3.0
1.3
2.0
2.4
2.4
3.0
3.0
1.5
1.1
2.2
2.0
1.3
2.3
0.4
0.8
0.8
0.6
0.3
1.0
0.7
3.8
1.8
0.6
1.3
1.2
2.7
2.8
1.5
2.0
1.9
0.8
1.6
1.0
3.5
2.4
0.8
1.7
3.5
4.9
3.3
2.0
3.6
2.7
2.8
2.1
2.9
3.4
2.8
2.5
2.6
2.3
3.7
3.2
3.4
2.4
1.3
4.2
4.3
4.1
3.9
1.5
3.3
3.6
2.9
2.4
2.3
2.3
1.8
1.8
0.7
2.1
2.7
1.8
1.4
1.7
0.7
1.1
1.7
2.5
1.8
1.6
2.2
2.0
1.9
3.1
1.8
1.4
2.6
2.0
1.6
3.0
3.0
2.9
3.6
2.9
2.8
2.6
2.7
2.7
7.9
5.1
8.9
6.2
6.5
7.7
7.3
7.0
4.9
4.9
2.9
5.3
Advanced economies
0.2
0.1
0.1
0.5
0.2
0.2
0.1

United States
Japan
Germany1
0.1
0.1
0.2
0.2
0.2
0.1
0.1
0.2
0.5
0.7
0.2
0.1
0.1
0.5
0.6
0.2
0.3
0.1
0.5
0.2
0.4
0.1
0.4
0.3
0.4
0.5
0.1
0.5
0.1
0.1
0.1
1.1
0.3
0.5
0.3
0.1
0.2
0.1
0.2
0.1
0.1
0.1
0.1
0.1
0.7
0.1
0.5
0.5
0.6
0.1
0.5
0.1
1.5
0.7
0.4
0.8
1.7
0.8
0.7
0.3
0.3
0.2
0.9
0.7
0.8
0.4
0.7
0.1
0.8
0.3
0.7
0.3
0.6
0.4
0.2
0.2
0.3
0.1
0.1
0.1
0.1
0.3
0.3
0.3
0.5
0.2
0.3
0.3
0.5
0.9
0.2
0.2
0.3
0.2
0.1
0.2
0.4
0.1
0.5
0.7
0.5
0.8
0.8
0.2
0.3
0.1
0.4
0.4
0.3
0.3
0.4
0.2
0.5
0.6
0.3
0.2
0.2
0.1
0.1
0.2
0.3
0.5
0.6
0.3
0.5
0.7
3.1
3.2
0.9
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Stock building2
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Foreign balance2
Advanced economies
0.1
0.4
0.3
0.2
0.1
0.2
0.4
0.8

United States
Japan
Germany1
0.1
0.2
0.5
0.1
0.4
0.2
0.3
0.5
0.6
0.9
0.5
0.1
0.6
0.6
0.1
0.7
0.2
0.1
0.2
0.5
0.3
0.1
0.1
0.1
0.8
0.1
0.1
0.2
0.5
0.5
0.1
0.4
1.4
0.8
0.8
1.4
0.6
0.3
0.8
1.1
0.2
0.6
0.2
0.3
0.3
0.1
0.1
0.5
0.1
0.4
0.2
0.3
0.4
0.2
0.8
1.3
0.2
0.9
0.2
0.8
0.4
0.9
3.7
0.1
0.9
0.2
0.2
0.9
1.5
0.3
0.7
1.0
1.0
0.6
0.7
0.5
0.1
1.4
0.9
0.3
1.7
0.4
1.1
2.1
1.0
0.1
0.6
2.1
0.2
0.2
0.1
0.4
0.6
0.2
0.2
0.1
1.0
0.2
0.1
0.2
0.7
1.2
0.6
0.1
0.1
0.1
0.1
0.2
0.5
0.1
0.1
0.1
0.1
0.3
1.2
1.4
0.1
0.3
0.2
0.1
0.4
0.3
0.3
0.6
0.1
0.4
0.5
0.8
0.8
0.6
0.8
0.7
0.5
0.1
0.1
0.2
0.7
0.4
1.2
0.6
0.6
0.8
0.1
0.1
1.7
6.2
0.7
0.7
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
1Data

expressed as percent of GDP in the preceding period.
2Changes
172
Output: Advanced Economies
Table 4. Advanced Economies: Unemployment, Employment, and Real Per Capita GDP
(Percent)
Ten-Year Averages1
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Unemployment rate
Advanced economies
7.0
6.9
6.5
7.2
7.6
7.4
7.0
7.1
6.8
6.7
6.5
6.5

United States2
Japan
Germany3
6.9
7.1
2.5
7.3
6.7
5.6
3.4
8.2
6.5
6.9
2.1
5.5
7.1
7.5
2.2
6.6
7.2
6.9
2.5
7.9
7.0
6.1
2.9
8.4
6.7
5.6
3.1
8.2
6.7
5.4
3.3
8.9
6.5
4.9
3.4
9.9
6.2
4.5
4.1
9.4
6.2
4.3
5.0
9.1
6.4
4.5
5.8
8.6
9.3
10.1
9.0
9.4
11.4
11.3
7.3
9.6
9.4
10.9
7.8
10.4
10.3
10.7
9.6
11.3
11.6
10.1
10.3
11.2
12.3
11.1
9.4
10.4
11.7
11.6
8.1
9.5
12.4
11.6
7.4
9.7
12.5
11.7
5.7
9.2
11.6
11.8
4.7
8.3
11.3
11.7
4.8
8.0
10.7
11.4
5.3
8.1
7.2
18.4
8.2
9.7
2.4
2.7
9.1
4.8
7.5
7.4
14.6
1.5
7.8
19.6
5.6
9.0
6.5
4.0
9.0
12.4
9.7
5.6
11.3
2.6
6.5
16.3
5.5
6.6
2.9
3.4
10.2
6.6
7.7
4.1
14.7
1.4
7.3
18.4
5.4
7.3
5.3
3.4
10.9
11.7
8.7
4.1
15.2
1.6
8.6
22.7
6.5
8.8
8.2
4.0
12.0
16.4
9.7
5.5
15.5
2.1
8.7
24.2
7.6
10.0
8.0
3.8
11.9
16.6
9.6
6.8
14.1
2.7
8.2
22.9
7.1
9.9
7.7
3.9
10.0
15.4
10.0
7.2
12.1
3.0
8.1
22.2
6.6
9.7
8.0
4.3
8.6
14.6
10.3
7.3
11.5
3.3
7.8
20.8
5.5
9.4
8.0
4.4
7.7
12.6
10.3
6.7
9.8
3.4
8.1
18.8
4.1
9.5
6.5
4.7
6.3
11.4
10.1
5.0
7.7
3.1
7.5
15.7
3.6
9.2
5.4
4.3
6.0
10.3
10.3
4.6
6.5
2.9
6.9
14.0
3.7
9.2
5.1
4.2
6.2
9.2
10.2
4.6
6.2
2.8
Switzerland
Norway
Israel
Iceland
0.6
3.1
6.5
0.9
3.7
4.7
8.7
3.3
1.1
5.5
10.6
1.5
2.5
5.9
11.2
3.0
4.5
5.9
10.0
4.4
4.7
5.4
7.8
4.8
4.2
4.9
6.9
5.0
4.7
4.8
6.7
4.3
5.2
4.1
7.7
3.7
3.9
3.2
8.6
3.0
3.0
3.6
9.3
1.7
2.9
4.0
8.8
1.7
Korea
Australia
Hong Kong SAR
Singapore
New Zealand
3.5
7.7
2.0
2.7
3.4
5.4
3.6
8.9
2.1
3.2
2.8
7.9
2.3
9.6
1.4
1.8
1.9
10.3
2.4
10.8
1.5
2.0
2.7
10.3
2.8
10.9
1.4
2.0
2.7
9.5
2.4
9.8
1.5
1.9
2.6
8.2
2.0
8.5
1.8
3.2
2.7
6.3
2.0
8.6
2.6
2.8
2.0
6.1
2.6
8.5
2.7
2.2
1.8
6.6
6.8
8.0
2.8
4.7
3.2
7.5
7.0
7.2
3.0
6.1
4.3
7.2
6.0
7.0
2.7
5.4
4.2
7.0
7.3
9.2
9.6
7.2
9.9
10.6
6.8
8.4
8.7
7.6
9.4
9.5
8.0
10.7
10.9
7.9
11.1
11.7
7.5
10.7
11.4
7.5
10.7
11.7
7.2
10.4
11.7
6.8
9.6
10.9
6.6
9.1
10.3
6.6
8.8
9.7
3.0
3.2
2.0
2.1
2.3
2.1
2.1
2.2
2.5
5.4
5.7
5.0
Advanced economies
1.3
0.7
0.1
0.1
1.0
1.1
1.0
1.4
1.1
1.0
0.8

United States
Japan
Germany3
1.2
1.8
1.2
0.5
0.6
1.3
0.3
0.5
0.1
0.9
1.9
1.7
0.1
0.7
1.1
1.9
1.5
0.2
1.8
0.9
2.3
0.1
0.7
0.8
1.5
0.1
0.4
0.8
1.4
0.5
1.3
1.3
2.2
1.1
1.3
0.9
1.5
0.6
0.8
1.5
1.0
0.1
0.6
0.9
0.3
0.2
0.3
0.4
0.8
1.7
0.5
0.2
1.3
0.2
1.4
3.6
1.9
0.6
1.1
2.8
0.6
1.2
4.1
0.7
1.4
0.1
1.6
0.8
2.1
0.8
0.6
1.7
1.6
0.3
0.5
1.9
1.2
0.2
0.4
1.8
1.9
2.1
1.1
1.2
2.8
1.6
1.1
2.4
1.5
0.7
0.3
1.8
1.4
1.2
0.8
0.1
0.3
1.3
2.1
1.7
1.8
1.7
1.9
1.6
1.2
0.6
0.5
0.6
0.1
0.2
0.1
0.1
1.1
0.3
1.6
1.4
0.2
2.0
2.3
0.8
0.3
0.7
1.0
0.7
0.5
0.9
0.6
0.3
1.3
0.6
0.4
1.2
1.5
1.6
0.9
1.0
1.2
0.7
0.8
1.0
2.4
2.0
2.4
1.9
1.8
2.6
2.1
2.0
2.3
0.5
2.1
2.1
France
Italy4
United Kingdom
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Luxembourg
Memorandum
European Union
Euro area
economies
Growth in employment
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
173
Table 4 (concluded)
Ten-Year Averages1
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Growth in real per capita GDP

Advanced economies
2.4
1.8
0.4
1.3
0.6
2.5
1.9
2.5
2.6
1.6
2.2
2.1

United States
Japan
Germany3
2.2
1.9
3.4
2.0
1.6
1.8
1.1
1.6
2.0
3.4
4.2
1.1
1.6
0.7
1.5
0.5
1.2
1.8
2.2
2.5
0.4
2.1
1.6
1.3
1.3
1.4
2.3
2.5
4.6
0.5
2.3
3.0
1.2
1.7
1.7
3.0
3.0
2.3
2.0
2.8
0.8
1.5
1.9
1.7
1.3
2.6
1.9
2.1
2.5
1.6
1.4
1.4
1.6
1.2
0.4
1.1
2.2
3.1
0.8
1.1
0.3
0.2
1.7
0.5
2.1
1.2
2.4
1.9
4.0
3.6
1.7
2.7
2.4
1.5
1.2
0.7
2.3
0.5
1.9
1.2
3.2
2.9
2.8
1.3
2.0
2.0
2.1
1.2
0.9
2.5
2.7
2.5
2.2
1.6
3.1
2.6
2.0
1.9
1.2
3.7
3.5
3.1
3.5
1.5
2.9
3.0
2.2
2.1
2.1
1.6
1.7
1.7
0.1
1.2
1.9
1.1
0.8
1.2
0.4
0.6
1.0
2.3
2.6
2.2
1.7
2.1
2.1
2.4
1.5
1.3
2.4
2.4
2.2
1.9
2.5
2.6
2.1
1.8
2.0
2.0
2.6
2.7
6.8
4.4
6.9
5.0
5.3
6.1
5.8
4.8
4.9
2.6
4.2
4.2
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
1Compound
annual rate of change for employment and per capita GDP; arithmetic average for unemployment rate.
projections for unemployment have been adjusted to reflect the new survey techniques adopted by the U.S. Bureau of Labor Statistics in January 1994.
3Data through 1991 apply to west Germany only.
4New series starting in 1993, reflecting revisions in the labor force surveys and the definition of unemployment to bring data in line with those of other advanced economies.
2The
174
Output: Developing Countries
Table 5. Developing Countries: Real GDP

Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
4.2
5.5
4.9
6.7
6.5
6.8
6.1
6.6
5.8
3.2
3.5
4.8
2.5
2.3
2.9
2.9
1.8
1.7
0.2
0.7
1.5
2.4
2.0
3.0
4.0
5.9
5.5
3.1
3.9
3.4
2.7
3.1
2.9
5.0
4.7
2.8
6.9
5.3
2.8
1.6
3.4
7.3
4.4
3.5
3.3
1.3
6.6
6.5
2.7
3.9
0.1
9.5
6.6
7.1
3.3
1.3
9.3
6.1
3.9
3.9
2.3
9.6
6.7
0.7
4.9
4.9
9.1
7.5
3.7
1.5
5.7
8.2
6.6
4.7
3.6
4.7
6.6
3.6
4.5
5.3
3.7
3.7
5.4
3.2
2.2
4.4
5.3
2.3
1.8
0.1
5.5
5.4
4.0
3.1
3.9
1.4
6.3
2.1
2.8
7.1
4.7
4.8
5.7
3.2
6.3
8.6
3.5
1.4
9.3
4.7
0.2
9.7
5.2
2.5
8.7
6.7
3.8
7.7
5.6
3.4
6.5
5.8
2.2
4.8
3.3
5.1
3.4
2.9
5.5
5.6
4.3
3.0
3.8
3.6
0.4
4.5
4.0
4.5
3.0
4.3
3.2
4.5
3.6
2.7
4.5
5.8
4.7
5.3
4.8
5.2
1.2
5.0
3.7

Official financing
Private financing
0.6
4.4
3.5
4.5
4.5
3.0
5.5
3.7
6.1
4.7
5.0
4.9
3.9
6.0
2.5
8.7
6.6
3.0
7.8
5.1
3.8
6.6
2.6
7.9
4.7
1.7
6.9
3.5
7.7
6.3
1.3
6.3
3.9
6.4
7.0
3.0
6.7
5.8
6.7
6.9
3.1
5.8
3.1
6.5
5.2
2.0
3.3
3.7
4.0
0.9
0.1
3.6
3.3
3.6
3.9
2.0
4.8
4.5
4.9
4.8

2.1
5.5
3.0
6.5
1.9
6.1
2.4
8.3
2.7
8.0
3.3
8.2
4.0
7.1
3.9
7.6
4.2
6.4
2.0
3.7
1.3
4.4
4.1
5.1
2.5
3.0
2.4
3.7
4.3
3.3
0.9
2.2
3.0
1.4
2.4
6.1
1.7
3.6
2.1
2.6
3.1
2.5
5.5
6.3
2.1
5.7
5.6
4.7
5.0
5.0
3.1
4.1
4.4
3.7
4.9
5.1
2.4
5.7
5.3
3.8
1.9
3.6
2.9
4.1
4.5
4.9
4.4
4.9
4.2
1.5
1.9
3.1
0.6
5.0
0.4
0.5
0.3
5.7
0.8
1.5
1.0
4.8
0.9
1.9
2.3
7.7
0.3
1.2
1.9
7.5
1.5
2.0
0.2
8.0
2.2
3.1
1.1
7.5
1.5
1.1
3.3
6.6
5.8
0.7
0.5
5.1
2.3
4.2
0.9
2.2
0.7
0.5
0.6
3.9
0.6
1.5
2.5
4.0
0.7
2.3
Regional groups
Africa
Sub-Sahara
Excluding Nigeria and
South Africa
Asia
Excluding China and India
Western Hemisphere
Analytical groups
Fuel
Manufactures
Nonfuel primary products
Services, income, and
private transfers
Diversified
Other groups
Memorandum
Real per capita GDP
Regional groups
Africa
Asia
Western Hemisphere
175
Table 6. Developing Countriesby Country: Real GDP1

Average
198190
Africa
1991
1992
1993
1994
1995
1996
1997
1998
2.5
1.8
0.2
0.7
2.4
3.0
5.9
3.1
3.4
2.3
2.1
1.1
10.9
2.8
1.2
0.7
4.7
7.4
10.0
1.6
1.0
4.0
3.0
2.5
2.2
27.0
3.5
2.0
0.8
1.1
1.4
4.4
3.4
1.2
3.9
11.3
4.6
4.7
4.0
3.8
11.7
5.5
6.9
6.0
1.1
6.6
5.7
7.8
4.8
4.7
0.2
4.5
6.0
6.2
Burundi
Cameroon
Cape Verde
Chad
4.5
3.3
2.6
2.0
5.0
5.0
3.8
34.1
0.6
10.4
0.7
3.1
18.4
6.4
2.4
5.9
3.2
87.9
0.3
1.8
3.7
2.5
12.7
4.9
5.7
7.3
3.3
2.2
6.0
0.9
8.4
5.0
2.6
3.3
3.7
0.4
5.1
2.2
5.7
4.1
4.5
5.0
3.6
4.8
6.8
Comoros
Congo, Dem. Rep. of
Congo, Rep. of
Cte dIvoire
Djibouti
2.4
0.7
5.2
1.0
0.3
5.4
8.4
2.4
0.5
8.5
10.5
2.6
0.2
0.2
3.0
13.5
1.0
0.2
3.9
5.3
3.9
5.5
2.0
2.9
3.9
0.7
4.0
7.1
3.6
0.4
0.9
6.3
6.8
3.7
5.7
1.9
6.0
0.7
1.0
5.0
3.5
5.4
0.8
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia, The
2.2
...
1.9
1.6
3.4
3.6
...
4.7
6.1
2.2
17.0
...
5.1
3.3
4.4
7.1
2.5
13.4
2.4
6.1
6.8
9.8
3.5
3.4
3.8
16.2
2.9
6.1
7.0
3.4
27.8
6.8
10.9
5.1
5.3
71.2
7.9
5.9
5.3
0.8
22.0
3.0
1.0
2.1
9.9
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
2.1
3.1
2.4
4.3
4.6
5.3
2.4
5.1
1.4
4.1
3.9
3.5
1.1
0.8
4.6
5.0
4.9
2.1
0.4
3.7
3.8
4.0
3.2
2.6
3.7
4.5
4.4
4.4
4.4
6.0
3.5
4.6
4.6
4.1
9.7
4.2
4.8
5.4
2.1
4.1
4.6
4.6
28.1
1.5
5.4
Liberia
Madagascar
Malawi
Mali
Mauritania
...
0.5
2.2
2.0
4.5
...
6.3
8.7
0.9
2.6
...
1.2
7.3
8.4
1.7
...
2.1
9.7
2.4
5.5
...
10.2
2.2
4.6
...
1.7
15.4
6.4
4.5
...
2.1
9.0
4.0
4.7
...
3.7
4.9
6.7
4.8
...
3.9
3.1
3.6
3.5
Mauritius
Morocco
Mozambique, Rep. of
Namibia
Niger
4.9
3.9
0.1
0.6
6.4
6.9
4.9
5.7
2.5
4.8
4.0
8.1
9.5
6.5
6.7
1.0
8.7
2.0
1.4
4.3
10.4
7.5
6.7
4.0
3.5
6.6
4.3
3.4
2.6
5.1
12.1
7.1
2.9
3.4
5.5
2.0
11.3
1.8
3.3
5.6
6.3
12.0
1.7
8.4
Nigeria
Rwanda
So Tom and Prncipe
Senegal
Seychelles
2.0
2.2
1.5
2.5
3.6
6.0
4.3
1.2
0.4
2.7
2.6
6.6
0.7
2.2
6.9
2.2
8.3
1.1
2.2
6.5
0.6
49.5
2.2
2.9
0.8
2.6
32.8
2.0
5.5
0.6
6.4
15.8
1.5
5.2
4.7
3.1
12.8
1.0
5.0
4.3
1.9
9.5
2.7
5.7
2.3
Sierra Leone
Somalia
South Africa
Sudan
Swaziland
0.8
...
1.5
2.5
6.6
8.0
...
1.0
7.0
2.5
9.6
...
2.1
5.2
1.3
0.1
...
1.2
2.8
3.3
3.5
...
3.2
5.3
3.5
10.0
...
3.1
4.4
3.0
5.0
...
4.2
4.7
3.6
20.2
...
2.5
6.7
3.7
0.7
...
0.5
5.0
2.0
Tanzania
Togo
Tunisia
Uganda
Zambia
3.3
1.1
3.6
3.6
1.0
2.1
0.7
3.9
1.0
0.6
4.0
7.8
3.1
1.7
1.2
16.4
2.2
8.4
6.8
1.6
16.8
3.3
5.3
8.6
3.6
6.8
2.4
10.5
4.3
4.5
9.7
7.0
8.1
6.4
3.5
4.3
5.4
5.2
3.5
3.3
1.0
5.1
5.5
2.0
Zimbabwe
4.4
5.5
9.0
1.3
6.8
0.6
7.3
3.2
1.6
Algeria
Angola
Benin
Botswana
Burkina Faso
176
Output: Developing Countries
Table 6 (continued)
Average
198190
1991
1992
1993
1994
1995
1996
1997
1998
Asia
6.9
6.6
9.5
9.3
9.6
9.1
8.2
6.6
3.7

Bangladesh
Bhutan
Brunei Darussalam
Cambodia
...
4.3
7.6
...
...
...
4.1
3.9
4.0
9.1
...
4.8
4.4
1.1
4.8
...
4.2
5.0
0.5
7.5
...
4.7
5.1
1.8
7.0
...
5.3
6.9
3.0
7.7
...
5.1
6.0
3.6
7.0
...
5.2
5.7
4.1
1.0
...
4.8
4.6
1.0
1.0
China
Fiji
India
Indonesia
Kiribati
9.1
2.5
5.9
5.4
9.2
1.5
1.7
8.9
6.9
14.2
4.8
4.2
7.2
1.6
13.5
3.5
5.1
7.3
0.8
12.6
4.2
7.2
7.5
7.2
10.5
2.4
8.0
8.2
6.5
9.6
3.3
7.4
8.0
2.6
8.8
3.6
5.5
4.7
3.3
7.8
4.0
5.8
13.7
6.1
5.6
6.0
10.2
...
...
4.0
8.6
7.6
0.1
4.3
7.0
7.8
6.3
0.1
1.2
5.9
8.3
6.2
5.4
5.7
8.1
9.3
6.6
2.7
0.9
7.1
9.4
7.2
1.9
1.3
6.9
8.6
6.5
13.1
0.5
6.5
7.7
6.2
5.3
3.8
5.0
6.7
6.0
4.3
2.8
1.3
4.8
6.0
1.5
1.7
0.7
4.6
5.5
9.5
0.6
9.7
3.3
7.8
11.8
0.3
5.9
8.2
1.9
16.6
2.1
6.8
3.5
3.9
4.4
4.4
7.2
5.3
5.1
2.9
4.7
7.0
4.0
5.0
3.5
5.8
7.0
1.9
1.2
5.4
5.2
7.0
4.0
3.3
3.8
0.5
12.9
1.2
4.3
7.9
1.6
2.4
3.0
4.6
8.1
6.4
4.1
9.5
4.3
8.2
0.3
1.7
2.0
6.9
8.5
3.7
0.1
5.2
5.6
8.6
5.0
6.8
7.7
5.5
8.8
4.8
6.1
0.6
3.8
5.5
1.4
1.6
0.5
6.4
1.3
4.4
1.3
1.0
5.0
9.4
1.5
2.8
5.9
4.3
6.0
0.7
8.6
4.5
8.1
1.3
8.8
3.8
9.5
3.5
9.3
2.7
8.2
2.1
3.5
Lao P.D. Republic

Malaysia
Maldives
Marshall Islands
Micronesia, Fed. States of
Myanmar
Nepal
Pakistan
Papua New Guinea
Philippines
Samoa
Solomon Islands
Sri Lanka
Thailand
Tonga
Vanuatu
Vietnam
2.8
2.7
7.1
3.9
0.7
3.7
4.7
4.5
3.2
Bahrain
Cyprus
Egypt
Iraq
2.1
6.2
5.9
3.1
3.0
4.6
0.5
3.2
10.6
62.9
7.8
9.6
3.3
6.1
29.2
8.3
0.7
1.6
2.1
2.4
5.9
2.9
0.9
2.1
5.8
2.5
2.9
6.7
3.1
2.2
5.0
5.5
3.1
2.5
5.0
3.0
10.0
2.1
5.0
5.4
1.7
12.0
Jordan
Kuwait
Lebanon
Libya
Malta
2.3
2.7
5.8
1.2
3.7
2.3
41.0
38.2
12.0
5.9
17.0
77.4
4.5
4.2
6.7
5.8
34.2
7.0
0.1
4.0
7.6
8.4
8.0
0.9
5.0
3.9
1.0
6.5
1.1
7.3
1.0
2.1
4.0
2.0
3.2
1.3
2.5
4.0
2.6
3.7
2.2
2.2
3.0
2.6
3.1
Oman
Qatar
Saudi Arabia
Turkey
8.6
1.9
0.5
2.2
5.2
6.0
0.4
8.4
7.1
0.8
8.5
9.3
2.8
10.6
5.0
6.1
0.4
0.6
5.0
7.7
3.8
2.3
0.5
7.7
4.7
4.8
1.1
0.5
5.8
8.1
2.9
10.0
1.4
1.8
6.9
6.4
15.5
2.7
1.2
7.6
2.9
11.5
1.6
5.4
2.8

Yemen, Republic of
0.6
...
0.2
0.3
2.7
4.9
0.9
2.9
2.2
0.5
6.1
8.6
10.1
5.6
2.4
5.2
0.4
2.7
177
Table 6 (concluded)
Average
198190
1991
1992
1993
1994
1995
1996
1997
1998
Western Hemisphere
1.6
3.9
3.3
3.9
4.9
1.5
3.6
5.3
2.2
Antigua and Barbuda

Argentina
Bahamas, The
Barbados
Belize
6.7
1.2
2.8
0.9
4.8
2.7
10.5
2.7
3.9
3.1
0.4
10.3
2.0
5.7
10.2
5.5
6.3
1.7
0.8
3.3
6.2
5.8
0.9
4.0
1.8
5.0
2.8
0.3
2.9
3.3
5.1
5.5
4.2
4.1
2.0
3.3
8.1
3.0
3.0
3.5
3.8
3.9
2.2
4.9
3.1
Bolivia
Brazil
Chile
Colombia
Costa Rica
0.1
1.5
3.1
3.4
2.8
5.3
1.0
8.0
2.0
2.3
1.6
0.5
12.3
4.0
7.7
4.3
4.9
7.0
5.4
6.3
4.7
5.9
5.7
5.8
4.5
4.7
4.2
10.6
5.2
2.4
4.7
2.8
7.4
2.0
0.6
4.2
3.7
7.6
2.8
3.7
4.7
0.1
3.4
0.6
6.2
Dominica
Dominican Republic
Ecuador
El Salvador
Grenada
5.4
2.4
2.1
0.1
5.6
0.7
1.0
5.0
3.6
3.6
2.1
8.0
3.6
7.4
1.1
0.8
3.0
2.0
7.4
1.2
1.8
4.3
4.4
6.0
3.3
1.4
4.8
2.4
6.4
3.1
3.3
7.3
1.9
1.8
3.5
1.8
8.2
3.5
4.1
3.6
2.5
7.3
0.4
3.2
3.6
Guatemala
Guyana
Haiti
Honduras
Jamaica
0.9
2.5
0.5
2.4
3.1
3.7
6.0
4.8
3.3
0.8
4.8
7.8
13.2
5.6
1.8
3.9
8.2
2.4
6.2
1.3
4.0
8.5
8.3
1.4
1.0
4.9
5.0
4.4
4.3
3.0
7.9
2.7
3.7
1.9
4.1
6.2
1.1
4.9
2.4
4.9
1.5
3.0
5.0
1.9
Mexico
Nicaragua
Panama
Paraguay
1.9
0.1
1.4
1.4
2.8
4.2
1.8
0.2
9.4
2.5
3.6
3.7
0.4
8.2
1.8
2.0
0.3
0.2
5.5
4.1
4.4
2.4
3.3
2.9
3.1
6.2
4.2
1.8
4.7
5.2
2.4
4.5
2.4
1.3
7.0
3.0
4.5
4.4
3.5
4.6
3.0
5.0
4.0
3.5
Peru
St. Kitts and Nevis
St. Lucia
Suriname
0.8
5.8
6.8
6.4
0.8
2.9
3.9
2.3
0.6
2.9
1.6
3.5
7.1
7.5
4.0
6.4
7.0
2.0
0.2
9.5
13.1
4.8
2.1
2.4
5.4
7.3
3.9
4.1
7.6
7.1
2.5
6.3
1.4
1.6
6.7
7.2
7.0
2.1
2.1
5.6
0.7
3.8
2.9
4.0
1.9
Trinidad and Tobago

Uruguay
Venezuela
2.9
0.5
0.9
2.7
3.2
9.7
1.7
7.9
6.1
1.4
3.0
0.3
3.6
6.3
2.4
3.8
1.8
4.0
3.5
5.3
0.2
3.5
5.1
5.9
3.2
4.5
0.7
1For
many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years.
178
Output: Countries in Transition
Table 7. Countries in Transition: Real GDP1

Average
198190
1991
1992
1993
1994
1995
1996
1997
1998
...
9.9
8.5
3.7
2.9
1.6
1.6
3.0
2.2
Albania
Belarus
Bulgaria
Croatia
1.2
...
...
2.1
...
28.0
1.2
...
11.7
...
7.2
9.7
...
7.3
...
9.6
7.0
...
1.5
8.0
9.4
13.2
...
1.7
5.9
8.9
10.4
21.2
2.2
6.8
9.1
2.9
69.0
10.9
6.0
7.0
11.4
30.0
7.0
6.5
8.0
8.3
18.0
3.5
2.3
Czech Republic
Czechoslovakia, former
Estonia
Hungary
Latvia
...
2.1
...
1.1
...
...
15.9
7.9
11.9
11.1
...
8.5
21.6
3.1
35.2
0.6
...
8.2
0.6
16.1
2.7
...
1.8
2.9
2.1
6.4
...
4.3
1.5
0.3
3.8
...
4.0
1.3
3.3
0.3
...
10.6
4.6
6.5
2.3
...
4.0
5.1
3.8
Lithuania
Moldova
Poland
Romania
...
...
...
0.2
0.6
5.7
...
17.5
7.0
12.9
21.3
...
29.7
2.6
8.8
16.2
9.1
1.2
3.8
1.5
9.8
1.8
31.2
5.2
4.0
3.3
1.2
1.4
7.0
7.2
4.7
0.8
7.8
6.0
3.9
7.3
1.5
1.3
6.8
6.9
5.1
2.9
8.6
4.8
7.3
Slovak Republic
Slovenia
Ukraine
Yugoslavia, former
...
...
...
0.3
...
...
10.6
17.0
...
...
17.0
34.0
3.7
2.8
14.2
...
4.9
5.3
22.9
...
6.9
4.1
12.2
...
6.6
3.5
10.0
...
6.5
4.6
3.0
...
4.4
3.9
1.7
...
Russia
...
5.4
19.4
10.4
11.6
2.4
3.4
0.9
4.6
...
7.0
14.4
9.6
10.4
4.4
1.6
2.5
2.2
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
...
...
...
...
...
12.4
0.7
20.6
11.0
7.8
52.6
22.7
44.8
5.3
13.9
14.1
23.1
25.4
9.2
15.5
5.4
19.7
11.4
12.6
20.1
6.9
11.8
2.4
8.2
5.4
5.8
1.3
10.5
0.5
7.1
3.1
5.8
11.0
2.0
9.9
7.2
10.0
2.9
2.5
2.0
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
5.3
...
...
...
9.2
7.1
4.7
0.5
9.5
28.9
5.3
11.1
3.0
11.1
10.0
2.3
2.3
21.4
18.8
4.2
6.3
12.5
8.2
0.9
2.6
4.4
7.7
1.6
4.0
1.7
25.9
2.4
3.5
5.3
5.0
3.3
1Data for some countries refer to real net material product (NMP) or are estimates based on NMP. For many countries, figures for recent years are IMF
staff estimates. The figures should be interpreted only as indicative of broad orders of magnitude because reliable, comparable data are not generally available. In particular, the growth of output of new private enterprises or of the informal economy is not fully reflected in the recent figures.
179
Table 8. Summary of Inflation

(Percent)
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP deflators
Advanced economies
5.6
2.3
4.5
3.3
2.8
2.3
2.3
1.8
1.7
1.3
1.2
1.7
United States
European Union
Japan
4.5
6.6
1.9
2.3
2.8
0.3
4.0
5.4
2.7
2.8
4.3
1.7
2.6
3.4
0.6
2.4
2.6
0.2
2.3
2.9
0.6
1.9
2.5
1.4
1.9
1.8
0.1
1.0
1.9
0.3
1.5
1.6
0.2
2.3
1.7
0.4
10.0
3.0
5.6
3.9
3.8
3.3
3.4
3.0
2.3
1.7
1.1
2.2
Advanced economies
5.6
2.6
4.7
3.5
3.1
2.6
2.6
2.4
2.1
1.5
1.4
1.8
United States
European Union
Japan
4.7
6.3
2.1
2.7
2.8
0.9
4.2
5.1
3.3
3.0
4.5
1.7
3.0
3.8
1.2
2.6
3.0
0.7
2.8
3.2
0.1
2.9
2.5
0.1
2.3
1.8
1.7
1.6
1.4
0.6
2.2
1.3
0.4
2.5
1.5
10.1
3.3
6.5
4.1
3.5
3.3
3.6
3.3
2.6
2.7
1.2
2.2
39.0
23.3
43.2
32.8
47.3
51.8
22.1
14.6
9.2
10.3
6.7
5.8
15.1
7.1
19.2
145.4
21.5
8.2
24.6
63.5
24.6
8.3
28.0
173.9
32.5
7.6
25.1
110.8
30.6
10.7
25.3
209.0
37.3
15.9
31.4
208.9
33.2
12.8
35.6
35.9
25.9
8.2
24.2
22.4
11.1
4.8
23.1
13.2
8.7
8.0
23.6
10.6
9.0
3.1
18.3
9.8
6.9
3.5
13.1
7.6
Analytical groups
Fuel
Nonfuel
13.3
43.8
22.3
23.5
21.3
46.5
22.8
34.3
26.1
50.2
32.0
54.3
42.1
20.0
30.4
12.9
15.3
8.6
14.6
9.9
12.4
6.3
9.7
5.4

Official financing
Private financing
2.3
40.6
18.3
60.8
10.0
3.0
24.0
16.7
30.2
12.0
6.1
44.7
25.6
61.7
16.7
3.2
34.0
22.3
45.8
12.3
4.2
49.0
22.5
71.9
10.8
3.4
53.7
27.3
78.3
11.4
5.0
22.7
22.2
26.6
13.1
2.4
15.0
16.2
16.3
11.0
1.3
9.4
10.2
10.0
7.7
1.1
10.6
8.7
7.6
20.5
2.0
7.0
8.1
5.7
10.3
1.9
5.9
6.6
5.4
6.9

84.4
23.7
64.8
11.7
150.1
15.8
114.3
11.9
217.4
13.0
235.4
17.1
42.7
16.6
23.4
12.3
12.0
8.7
10.3
10.7
10.2
6.0
7.8
5.3
11.5
123.0
94.1
646.6
602.0
266.9
126.8
40.6
28.2
20.9
39.3
18.1
...
...
...
...
83.9
40.5
163.9
199.4
94.9
277.2
98.0
102.3
92.7 1,353.0
97.0
938.2
356.5
152.6
80.3
45.3
895.9
302.0
1,224.0 1,671.8
74.6
25.1
190.1
248.7
32.0
23.2
47.8
64.1
36.7
38.8
14.7
36.5
17.8
15.3
27.7
15.3
21.3
8.8
88.4
16.1
15.9
6.4
23.4
15.3
6.2
9.4
1.9
2.4
7.9
164.8
2.5
10.0
40.1
2.1
7.0
24.1
1.7
6.2
14.9
1.6
5.3
10.0
1.4
4.3
8.0
1.9
4.0
5.9

Consumer prices
Regional groups
Africa
Asia
Western Hemisphere
Russia
Memorandum
Median inflation rate
Advanced economies
4.0
12.1
101.4
3.2
9.9
839.5
180
3.0
9.3
472.3
2.4
10.6
131.6
Inflation: Advanced Economies
Table 9. Advanced Economies: GDP Deflators and Consumer Prices

Fourth Quarter1
___________________
Ten-Year Averages
___________________
198190 19912000 1991
1992
1993
1994
1995
1996
1997
1998
1999 2000
1998
1999
2000
GDP deflators
Advanced economies
5.6
2.3
4.5
3.3
2.8
2.3
2.3
1.8
1.7
1.3
1.2
1.7
...
...
...

United States
Japan
Germany2
4.7
4.5
1.9
2.8
2.0
2.3
0.3
2.2
4.1
4.0
2.7
3.9
2.9
2.8
1.7
5.0
2.4
2.6
0.6
3.7
1.9
2.4
0.2
2.5
1.9
2.3
0.6
2.0
1.5
1.9
1.4
1.0
1.4
1.9
0.1
0.7
1.1
1.0
0.3
1.1
1.2
1.5
0.2
0.7
1.6
2.3
0.4
1.1
1.0
0.9
1.3
1.6
2.0
0.1
0.9
1.6
2.3
0.4
1.4
6.3
10.6
6.4
5.0
1.6
3.9
3.1
1.4
3.3
7.6
6.7
2.7
2.1
4.5
4.0
1.3
2.5
3.9
2.8
1.5
1.5
3.5
1.5
1.1
1.6
5.0
2.5
2.3
1.2
5.2
3.3
1.6
0.9
2.6
2.9
0.8
0.8
2.8
2.7
0.6
1.0
2.0
2.2
1.4
0.8
1.7
2.8
1.5
0.9
2.6
2.6
0.7
0.9
2.1
3.0
2.3
0.7
1.6
3.1
1.4
9.5
9.3
2.0
4.5
7.7
3.9
5.9
7.2
18.2
17.9
7.1
3.4
3.4
3.9
2.1
2.2
2.3
2.3
1.9
1.9
9.2
5.7
3.3
1.8
6.4
7.1
2.7
3.1
7.6
3.7
2.5
1.6
19.8
12.3
1.8
2.2
4.9
6.9
2.3
3.7
1.0
4.3
2.2
1.0
14.8
10.6
2.8
2.9
4.3
4.3
1.9
4.0
2.6
2.8
0.5
1.8
14.5
7.1
5.2
0.9
3.8
4.0
2.3
2.3
2.4
2.8
1.4
2.0
11.2
6.1
1.7
5.5
3.7
4.8
1.7
1.5
3.6
2.3
1.4
3.6
9.8
5.6
2.7
1.0
2.9
3.2
1.7
1.6
1.4
1.7
2.2
0.6
7.9
2.4
2.3
0.4
2.5
2.1
2.0
1.4
1.2
1.6
1.8
2.0
6.9
3.0
3.5
2.4
2.4
2.3
2.0
1.9
1.1
1.0
1.4
2.7
5.0
4.6
5.6
1.7
1.6
2.3
2.1
1.5
0.8
1.4
2.9
1.9
2.3
3.0
4.3
0.7
2.2
2.1
2.2
1.3
1.1
1.1
2.4
2.2
1.6
2.7
3.3
1.3
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
Switzerland
Norway
Israel
Iceland
3.9
6.2
92.7
32.9
1.8
1.9
10.2
3.7
6.0
2.4
20.6
7.8
2.7
0.4
12.3
3.6
2.7
2.1
11.6
2.5
1.6
0.2
12.7
2.0
1.1
3.1
8.9
2.7
0.4
4.3
11.2
1.9
0.1
2.7
8.9
3.4
1.1
0.4
7.1
5.9
0.9
2.8
4.7
4.0
1.3
2.8
5.2
3.4
...
...
...
...
...
...
...
...
...
...
...
...
Korea
Australia
Hong Kong SAR
Singapore
New Zealand
7.0
7.5
3.0
8.1
3.0
10.2
5.6
1.6
2.4
4.9
1.7
1.4
10.9
2.6
3.8
9.2
3.8
1.0
7.6
1.4
3.9
9.7
1.4
1.7
7.1
1.4
3.5
8.5
3.4
2.6
7.7
0.9
1.9
6.9
2.9
1.6
7.1
1.5
1.9
2.6
2.7
2.6
3.9
2.0
2.7
5.9
1.2
1.9
3.1
1.4
1.9
7.1
1.3
0.1
5.3
0.3
2.0
1.1
1.1
1.3
1.0
1.0
1.4
3.5
1.3
0.1
2.8
3.1
1.3
2.4
0.3
1.8
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
5.1
6.6
6.4
2.1
2.8
2.7
4.3
5.4
4.9
3.1
4.3
4.3
2.6
3.4
3.5
2.0
2.6
2.7
2.1
2.9
2.9
1.6
2.5
2.2
1.5
1.8
1.5
1.2
1.9
1.7
1.3
1.6
1.4
1.7
1.7
1.4
...
...
...
...
...
...
...
...
...
5.7
4.3
8.0
6.4
5.9
5.4
4.6
3.6
3.2
3.2
0.6
2.1
...
...
...
France
Italy
United Kingdom
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Luxembourg
Memorandum
European Union
Euro area
economies
Consumer prices
Advanced economies
5.6
2.6
4.7
3.5
3.1
2.6
2.6
2.4
2.1
1.5
1.4
1.8
...
...
...

United States
Japan
Germany 2,3
4.8
4.7
2.1
2.6
2.3
2.7
0.9
2.3
4.3
4.2
3.3
3.5
3.2
3.0
1.7
5.1
2.8
3.0
1.2
4.4
2.2
2.6
0.7
2.7
2.4
2.8
0.1
3.1
2.2
2.9
0.1
1.2
2.0
2.3
1.7
1.5
1.3
1.6
0.6
0.6
1.4
2.2
0.4
0.4
1.7
2.5
0.8
1.2
1.5
0.5
0.3
1.4
2.5
1.1
0.6
1.7
2.4
0.5
0.8
6.3
9.8
6.1
5.9
1.7
3.6
3.2
1.8
3.2
6.3
6.8
5.6
2.4
5.3
4.7
1.5
2.1
4.6
3.0
1.8
1.7
4.1
2.4
0.2
1.8
5.2
2.8
2.2
2.1
3.9
3.0
1.6
1.3
1.7
2.8
1.4
0.7
1.7
2.7
1.0
0.5
1.5
2.3
1.5
1.1
1.6
2.2
1.7
0.3
1.6
3.0
1.1
0.6
1.5
2.1
2.1
1.4
1.6
2.3
1.2
9.3
3.5
6.3
4.9
4.1
4.1
3.6
3.2
2.4
2.5
1.4
2.1
...
...
...
5.1
6.3
6.2
2.4
2.8
2.6
4.5
5.1
4.4
3.3
4.5
4.4
2.9
3.8
3.7
2.3
3.0
3.0
2.5
3.2
3.2
2.2
2.5
2.3
2.0
1.8
1.6
1.3
1.4
1.2
1.4
1.3
1.0
1.7
1.5
1.3
...
...
...
...
...
...
...
...
...
5.2
4.2
7.5
5.9
4.6
5.7
4.6
4.3
3.4
4.4
0.3
1.9
...
...
...
France
Italy
United Kingdom4
Canada
Memorandum
European Union
Euro area
economies
1From
fourth quarter of preceding year.

3Based on the revised consumer price index for united Germany introduced in September 1995.
4Retail price index excluding mortgage interest.
2Data
181
Table 10. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Hourly earnings
Advanced economies
6.8
3.7
6.0
5.6
3.9
3.4
3.1
3.1
3.4
2.6
2.8
2.9

United States
Japan
Germany1
5.9
5.0
4.0
4.8
3.3
3.6
2.5
3.7
5.3
5.3
5.9
0.3
5.1
4.3
4.6
9.6
3.5
3.0
2.6
6.7
2.8
2.8
2.7
1.9
2.6
2.4
2.5
4.1
2.6
2.1
1.7
4.3
3.3
4.0
3.2
1.1
2.5
4.3
1.1
1.7
2.9
4.3
0.2
4.0
2.8
3.4
0.6
4.5
7.8
9.6
10.4
5.7
3.0
4.4
2.6
2.3
5.2
9.7
7.9
4.7
4.8
6.7
3.7
3.5
3.9
5.4
2.4
2.1
3.7
3.1
3.9
1.6
1.6
4.7
1.1
1.4
2.6
6.3
1.5
3.2
3.2
4.6
1.7
0.9
1.5
1.1
0.7
2.1
1.8
2.5
1.1
1.9
2.3
2.7
3.1
11.4
5.2
8.9
8.1
5.8
6.0
5.1
5.5
4.2
3.0
2.6
3.2
6.3
8.0
7.5
3.5
3.8
3.9
5.5
5.8
5.2
5.2
6.6
7.2
3.6
4.9
5.4
3.0
3.4
3.1
2.7
3.3
3.5
2.8
3.7
3.9
3.3
2.7
2.8
2.6
1.5
1.5
3.0
2.8
3.1
2.9
3.1
3.2
12.3
7.4
14.9
14.0
9.2
11.3
7.8
10.0
5.5
1.4
0.8
1.9
Advanced economies
3.2
3.0
2.4
2.8
1.9
4.8
3.6
3.0
4.3
2.0
2.9
1.8

United States
Japan
Germany1
3.1
2.8
2.9
2.9
2.8
3.6
1.1
4.5
2.3
2.2
1.5
5.3
2.8
5.1
3.7
1.0
1.6
2.2
0.7
2.8
4.5
3.0
3.4
8.5
3.4
3.9
4.8
4.2
3.0
4.0
3.7
5.2
4.3
4.7
4.8
6.9
1.9
4.1
4.2
4.8
2.9
4.7
0.5
3.0
1.7
1.9
0.8
3.5
3.9
2.2
5.6
2.5
3.9
2.3
1.7
1.2
1.7
2.9
0.6
4.4
4.4
3.5
4.3
0.4
0.6
2.5
3.4
9.0
6.0
4.2
3.8
3.9
3.6
2.6
0.2
2.9
0.1
3.3
0.6
6.4
3.4
2.1
4.7
1.0
3.3
1.5
2.9
0.7
0.8
1.6
3.1
2.0
1.0
1.0
3.5
3.5
2.7
2.8
3.5
6.5
4.3
3.1
4.1
2.4
3.0
2.3
3.1
3.5
3.2
2.8
2.9
3.5
2.1
2.6
2.6
2.7
2.9
2.7
1.9
2.3
2.2
4.8
7.4
8.0
3.4
2.8
3.9
2.9
1.6
2.6
4.2
3.9
5.2
2.0
2.1
3.2
2.8
1.7
2.2
1.7
1.9
2.5
8.0
5.5
7.8
4.2
3.4
6.4
8.0
6.6
6.1
2.6
5.6
4.4
Advanced economies
3.6
0.7
3.5
2.8
1.9
1.4
0.6
0.1
0.8
0.7
0.1
1.0

United States
Japan
Germany1
2.7
2.1
1.0
1.9
0.5
1.4
0.7
3.0
3.0
4.3
5.3
2.3
0.7
8.6
8.5
1.9
0.7
3.3
3.9
1.5
0.2
0.7
6.0
0.8
1.5
2.2
0.1
0.3
1.8
1.9
0.8
1.0
0.7
1.6
5.4
0.7
0.2
5.5
3.0
0.4
0.3
1.0
1.1
1.5
0.2
1.0
3.7
7.2
4.5
3.1
0.8
2.0
2.7
0.5
4.0
7.9
4.9
4.1
0.3
2.2
0.2
0.8
3.6
4.7
0.2
1.3
4.9
2.7
0.3
2.2
2.3
1.0
3.8
1.2
0.3
6.5
5.0
2.6
3.0
1.1
3.8
0.9
3.1
2.1
4.2
0.6
1.1
1.8
1.9
1.5
1.1
0.3
3.7
2.0
7.7
1.6
5.7
4.8
2.1
0.6
0.5
2.0
0.7
0.3
0.8
3.1
4.3
4.1
0.7
0.9
0.4
3.3
3.2
2.7
2.5
3.7
4.4
1.7
2.6
3.2
1.7
3.7
4.5
0.6
0.5
0.3
2.1
1.4
0.8
1.0
2.2
0.7
0.6
1.7
0.2
1.1
0.8
1.2
1.2
0.6
3.3
1.1
5.5
7.2
4.5
3.1
1.2
2.2
0.8
0.6
5.5
2.3
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Productivity
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Unit labor costs
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
1Data
182
Inflation: Developing Countries
Table 11. Developing Countries: Consumer Prices

Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
39.0
23.3
43.2
32.8
47.3
51.8
22.1
14.6
9.2
10.3
6.7
5.8
15.1
17.7
21.5
25.8
24.6
27.6
32.5
38.3
30.6
38.3
37.3
46.5
33.2
39.5
25.9
32.3
11.1
13.7
8.7
10.3
9.0
11.0
6.9
8.1
18.5
7.1
5.8
19.2
145.4
31.3
8.2
9.3
24.6
63.5
37.8
8.3
11.0
28.0
173.9
46.6
7.6
6.8
25.1
110.8
44.5
10.7
7.8
25.3
209.0
60.2
15.9
7.9
31.4
208.9
43.1
12.8
8.6
35.6
35.9
43.7
8.2
7.5
24.2
22.4
17.3
4.8
6.8
23.1
13.2
11.6
8.0
22.4
23.6
10.6
12.1
3.1
10.1
18.3
9.8
7.6
3.5
5.0
13.1
7.6
13.3
46.2
59.8
22.3
27.4
26.3
21.3
56.9
82.4
22.8
44.8
43.8
26.1
79.5
34.3
32.0
85.9
37.2
42.1
19.5
24.2
30.4
9.3
22.1
15.3
4.6
12.6
14.6
3.4
9.5
12.4
1.6
8.3
9.7
3.3
5.7
17.2
41.3
10.7
19.1
21.3
29.3
19.2
18.7
13.3
16.3
14.0
16.3
12.8
21.5
8.7
19.6
6.2
16.6
4.5
26.1
4.3
17.2
4.2
10.3

Official financing
Private financing
2.3
40.6
18.3
60.8
10.0
3.0
24.0
16.7
30.2
12.0
6.1
44.7
25.6
61.7
16.7
3.2
34.0
22.3
45.8
12.3
4.2
49.0
22.5
71.9
10.8
3.4
53.7
27.3
78.3
11.4
5.0
22.7
22.2
26.6
13.1
2.4
15.0
16.2
16.3
11.0
1.3
9.4
10.2
10.0
7.7
1.1
10.6
8.7
7.6
20.5
2.0
7.0
8.1
5.7
10.3
1.9
5.9
6.6
5.4
6.9

84.4
23.7
64.8
11.7
150.1
15.8
114.3
11.9
217.4
13.0
235.4
17.1
42.7
16.6
23.4
12.3
12.0
8.7
10.3
10.7
10.2
6.0
7.8
5.3
28.9
18.7
12.9
31.7
22.6
13.8
52.2
39.5
20.8
46.0
36.7
17.8
44.1
30.2
16.7
57.2
39.5
18.2
42.8
25.0
22.6
41.0
21.8
13.1
16.1
11.8
8.5
11.8
10.7
8.3
10.8
9.6
7.1
7.5
7.0
5.9
9.4
7.9
12.1
9.9
9.3
10.6
10.0
7.0
6.2
5.3
4.3
4.0
10.0
8.2
6.3
13.5
9.9
7.8
4.6
9.1
10.5
11.9
9.1
22.7
11.1
8.8
6.5
12.1
9.5
8.0
5.0
10.7
24.7
8.3
4.7
8.3
12.3
8.6
4.4
10.2
7.7
6.9
3.6
7.1
7.5
6.7
3.6
6.1
6.0
7.9
3.1
5.0
5.0
6.2
2.6
5.0
4.8
4.3
3.0
4.2
Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
Other groups
Memorandum
Median
Regional groups
Africa
Asia
Western Hemisphere
183
Table 12. Developing Countriesby Country: Consumer Prices1

Average
198190
1991
1992
1993
1994
1995
1996
1997
1998
Africa
15.1
24.6
32.5
30.6
37.3
33.2
25.9
11.1
8.7
Algeria
Angola
Benin
Botswana
Burkina Faso
9.7
1.8
1.3
13.5
3.7
25.9
83.6
2.1
11.8
2.5
31.7
299.1
5.9
16.2
2.0
20.5
1,379.5
0.4
14.3
0.6
29.0
949.8
38.5
10.5
24.7
29.8
2,671.6
14.5
10.5
7.8
18.7
4,147.0
4.9
10.1
6.1
6.8
111.2
3.8
8.8
2.3
6.2
79.4
5.8
6.5
5.0
Burundi
Cameroon
Cape Verde
Chad
7.6
7.0
12.0
4.5
3.8
9.0
0.6
7.6
2.8
4.2
4.5
1.9
13.4
0.8
3.8
9.7
3.7
5.8
2.9
7.0
14.7
12.7
3.4
24.5
41.3
19.4
25.8
8.4
19.2
9.5
26.4
6.6
6.0
4.4
11.3
31.1
5.2
8.6
0.6
5.6
12.6
2.8
4.4
2.4
4.3
Comoros
Congo, Dem. Rep. of
Congo, Rep. of
Cte dIvoire
Djibouti
3.2
60.9
6.6
4.9
4.6
1.7
2,154.4
1.6
1.6
6.8
1.4
4,129.2
3.9
4.2
3.4
2.0
1,893.1
4.9
2.1
4.4
25.3
23,760.5
42.9
26.0
6.5
7.1
541.8
8.6
14.3
4.5
1.4
616.8
10.2
2.7
2.6
1.0
198.5
8.3
5.6
2.4
1.0
29.1
4.8
4.5
2.0
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia, The
18.4
...
4.3
5.5
17.1
0.9
...
20.9
3.3
9.1
1.0
...
21.0
10.8
12.0
1.6
4.6
10.0
0.6
5.9
38.9
11.6
1.2
36.1
4.0
11.4
10.7
13.4
10.0
4.0
6.0
9.3
0.9
4.5
4.8
3.0
1.3
6.4
2.5
2.1
3.0
8.3
3.7
2.1
2.1
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
43.0
31.2
54.3
11.2
14.0
18.0
19.6
57.6
19.6
17.9
10.1
16.6
69.4
27.3
17.0
24.9
6.7
48.2
45.9
13.8
24.9
4.7
15.2
28.8
7.2
59.5
5.6
45.4
1.5
9.9
45.6
3.0
50.7
9.0
9.1
28.8
1.9
49.1
11.2
8.5
19.3
5.1
8.0
6.6
7.8
Liberia
Madagascar
Malawi
Mali
Mauritania
...
17.6
16.1
2.1
8.4
...
8.5
8.2
1.5
5.6
...
15.3
23.2
5.9
10.1
...
9.2
22.8
0.6
9.3
...
39.1
34.7
24.8
4.1
...
49.0
83.1
12.4
6.5
...
19.8
37.7
6.4
4.7
...
4.5
9.1
0.6
4.5
...
6.2
29.7
4.2
8.0
Mauritius
Morocco
Mozambique, Rep. of
Namibia
Niger
9.2
7.2
41.5
12.9
2.8
12.8
9.0
33.3
11.9
1.9
2.9
5.7
45.1
17.7
1.7
8.9
5.2
42.3
8.5
0.4
9.4
5.1
63.1
10.8
35.6
6.1
6.1
54.4
10.0
10.9
5.8
3.0
44.6
8.0
5.3
7.9
1.0
6.4
8.8
2.9
5.3
2.7
0.6
6.2
4.5
Nigeria
Rwanda
So Tom and Prncipe
Senegal
Seychelles
19.5
4.3
17.8
5.8
3.0
13.0
19.6
46.5
1.7
2.0
44.6
9.5
33.7
0.1
3.2
57.2
12.5
25.5
0.6
1.3
57.0
64.0
51.2
32.1
1.8
72.8
22.0
36.8
8.0
0.3
29.3
8.9
35.5
2.8
1.1
8.5
11.7
71.3
2.5
0.6
10.0
6.8
42.3
1.3
1.0
Sierra Leone
Somalia
South Africa
Sudan
Swaziland
67.9
...
14.7
13.6
13.0
102.7
...
15.2
123.6
11.0
65.5
...
13.9
117.6
8.1
22.2
...
9.7
101.3
11.2
24.2
...
9.0
115.5
13.9
26.0
...
8.6
68.4
12.3
23.1
...
7.4
132.8
6.4
14.9
...
8.6
46.7
7.2
35.5
...
6.9
17.0
8.0
30.5
3.7
8.3
109.2
45.5
28.0
0.2
8.2
20.8
97.7
21.9
1.6
5.8
42.2
165.7
23.6
0.1
4.0
30.0
183.3
37.1
35.3
4.6
6.5
54.6
26.5
15.8
6.3
6.1
34.9
21.0
4.6
3.8
7.5
43.1
16.1
5.3
3.7
7.8
24.4
12.6
1.0
3.6
5.8
24.5
13.9
23.3
42.1
27.6
22.2
22.6
21.4
18.8
32.3
Tanzania
Togo
Tunisia
Uganda
Zambia
Zimbabwe
184
Inflation: Developing Countries
Table 12 (continued)
Average
198190
Asia
1991
1992
1993
1994
1995
1996
1997
1998
7.1
8.3
7.6
10.7
15.9
12.8
8.2
4.8
8.0
...
10.3
9.1
...
...
...
6.3
13.3
1.6
197.0
...
3.5
16.0
1.3
75.0
...
3.1
8.9
4.3
114.3
...
6.3
8.1
2.4
0.5
...
7.7
10.7
6.0
7.7
...
4.5
7.0
2.0
6.8
...
4.8
7.0
1.7
8.0
...
7.9
7.0
14.8
6.9
7.1
8.9
8.6
3.0
3.6
6.1
13.9
9.4
6.1
6.4
8.2
11.8
7.5
4.2
14.7
6.5
6.4
9.7
6.1
24.3
4.9
10.2
8.5
5.3
16.7
5.2
10.2
9.4
4.1
8.4
0.6
9.0
7.9
1.5
2.8
7.2
6.6
2.2
0.8
2.2
13.0
59.6
4.7
Lao P.D. Republic

Malaysia
Maldives
Marshall Islands
Micronesia, Fed. States of
43.1
3.2
4.8
...
...
13.4
2.6
14.7
4.0
4.0
9.8
4.7
16.8
10.3
5.0
6.3
3.5
20.1
5.0
6.0
6.8
3.7
3.4
5.6
4.0
19.4
3.4
5.5
8.3
4.0
13.0
3.5
6.2
9.6
4.0
19.3
2.7
7.2
4.8
3.0
81.0
5.3
5.0
4.0
3.0
Myanmar
Nepal
Pakistan
Papua New Guinea
Philippines
12.3
9.3
6.9
5.8
9.2
29.1
19.3
11.6
7.0
18.7
22.3
5.9
3.6
4.3
9.0
33.6
9.1
9.8
5.0
7.6
22.4
8.7
11.3
2.9
9.1
28.9
9.2
12.4
17.3
8.1
20.0
1.7
10.3
11.6
8.4
10.0
10.1
12.5
3.9
6.0
10.0
9.0
7.8
13.5
9.7
Samoa
Solomon Islands
Sri Lanka
Thailand
Tonga
6.4
11.8
12.2
4.4
10.4
1.8
10.8
12.2
5.7
13.5
9.0
9.2
11.4
4.1
8.7
1.7
9.2
11.7
3.4
3.1
12.1
13.3
8.4
5.1
2.4
2.9
9.6
7.7
5.8
0.3
5.4
12.1
15.9
5.9
2.8
6.9
8.1
9.6
5.6
1.8
2.2
8.0
5.0
8.1
2.9
8.2
130.7
6.5
84.4
4.1
37.8
3.6
8.4
2.3
9.4
2.2
17.0
0.9
5.8
2.8
3.2
5.0
7.7

Bangladesh
Bhutan
Brunei Darussalam
Cambodia
China
Fiji
India
Indonesia
Kiribati
Vanuatu
Vietnam
19.2
28.0
25.1
25.3
31.4
35.6
24.2
23.1
23.6
Bahrain
Cyprus
Egypt
Iraq
1.9
4.9
17.4
18.4
21.5
1.0
5.0
19.5
20.7
263.8
6.5
21.1
24.4
12.8
2.1
4.9
11.2
22.9
68.0
0.4
4.7
9.0
35.2
44.7
3.1
2.6
9.4
49.4
208.4
0.2
3.0
7.0
23.1
34.5
1.0
3.6
6.2
17.3
45.0
0.2
2.2
3.8
22.0
45.0
Jordan
Kuwait
Lebanon
Libya
Malta
7.3
3.8
76.1
7.5
2.2
8.2
9.1
50.1
11.7
2.6
4.0
0.5
99.8
18.0
1.8
3.3
0.4
24.7
23.0
4.0
3.5
2.5
8.0
17.0
4.1
2.4
2.7
10.6
10.0
4.0
6.5
3.6
8.9
7.0
2.4
3.0
0.7
7.8
6.0
3.1
4.5
0.5
4.5
5.0
2.4
Oman
Qatar
Saudi Arabia
Turkey
1.8
3.6
0.2
21.7
45.6
4.6
4.4
4.6
19.0
66.0
1.0
3.1
0.4
3.4
70.1
1.1
0.9
0.8
23.6
66.1
0.7
1.3
0.6
7.9
106.3
1.1
3.0
5.0
1.2
93.7
0.3
2.5
0.9
1.6
82.3
0.8
2.6
0.4
1.9
85.7
0.9
2.6
0.2
0.4
84.6

Yemen, Republic of
4.2
...
5.5
44.9
6.9
50.6
5.0
62.3
3.9
71.8
4.4
62.5
3.6
27.3
4.4
6.3
3.1
9.0
185
Table 12 (concluded)
Average
198190
1991
1992
1993
1994
1995
1996
1997
1998
Western Hemisphere
145.4
173.9
110.8
209.0
208.9
35.9
22.4
13.2
10.6
Antigua and Barbuda

Argentina
Bahamas, The
Barbados
Belize
4.4
437.2
5.5
5.7
4.1
4.6
171.7
7.1
6.3
3.2
3.0
24.9
5.7
6.0
2.4
3.1
10.6
2.7
1.2
1.4
3.5
4.2
1.3
0.1
2.5
2.7
3.4
2.1
2.4
2.9
3.5
0.2
1.4
2.4
6.3
1.2
0.8
1.2
7.7
1.0
1.2
0.9
1.8
1.2
Bolivia
Brazil
Chile
Colombia
Costa Rica
222.7
339.9
20.3
23.6
25.6
21.4
774.9
21.8
30.3
28.7
12.1
540.3
15.4
27.1
21.8
8.5
2,103.3
12.7
22.5
9.8
7.9
2,123.7
11.4
22.8
13.5
10.2
59.7
8.2
20.9
23.2
12.4
15.5
7.4
20.8
17.6
4.7
6.0
6.1
18.5
13.3
6.5
3.8
5.1
18.7
11.7
Dominica
Dominican Republic
Ecuador
El Salvador
Grenada
4.7
24.8
36.1
19.0
5.1
5.6
47.1
48.8
14.4
2.6
5.3
4.3
54.6
11.2
3.8
1.6
5.3
45.0
18.5
2.8
8.3
27.3
10.6
2.6
1.3
12.5
22.7
10.1
2.2
1.7
5.4
24.4
9.8
2.8
2.4
8.3
30.6
4.5
1.1
0.9
4.8
36.1
2.5
2.5
Guatemala
Guyana
Haiti
Honduras
Jamaica
12.7
30.9
7.8
8.0
17.5
35.1
101.5
19.0
34.0
68.6
10.2
28.2
21.3
8.8
57.5
13.4
12.0
18.8
10.7
24.3
12.5
12.4
37.4
21.7
33.2
8.4
12.2
30.2
29.5
21.7
11.0
7.1
21.9
23.8
21.5
7.1
3.6
16.2
20.2
8.8
7.5
4.6
10.0
13.0
7.3
Mexico
Nicaragua
Panama
Paraguay
65.1
3.7
559.3
1.8
21.7
22.7
3.8
7,755.3
1.4
24.2
15.5
1.5
40.5
1.8
15.2
9.8
1.9
20.4
0.5
18.2
7.0
1.9
7.7
1.3
20.5
35.0
2.7
11.2
0.9
13.4
34.4
3.5
6.8
1.3
9.8
20.6
3.5
5.7
1.3
8.3
16.7
3.5
5.0
0.6
7.0
Peru
St. Kitts and Nevis
St. Lucia
Suriname
332.1
3.2
3.9
5.1
12.8
409.5
4.2
6.2
5.9
26.0
73.5
2.9
4.6
3.8
43.7
48.6
1.8
0.8
4.2
143.4
23.7
1.4
2.7
0.4
368.5
11.1
3.0
5.9
2.4
235.5
11.5
2.0
0.9
4.4
0.8
8.5
8.9
0.5
7.2
7.3
3.6
2.8
1.7
20.8
11.2
60.6
23.3
3.8
101.8
34.2
6.5
68.5
31.4
13.2
54.2
38.1
3.7
44.7
60.8
5.3
42.2
59.9
3.3
28.3
99.9
3.7
19.8
50.0
5.6
10.8
35.8
Trinidad and Tobago

Uruguay
Venezuela
1For
many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years.
186
Inflation: Countries in Transition
Table 13. Countries in Transition: Consumer Prices1

Average
198190
1991
1992
1993
1994
1995
1996
1997
1998
...
94.9
277.2
356.5
152.6
74.6
32.0
36.7
17.8
Albania
Belarus
Bulgaria
Croatia
...
...
...
4.8
...
35.8
83.5
...
333.5
...
225.2
969.0
...
82.0
...
85.0
1,188.0
...
72.8
1,516.6
22.6
2,200.0
...
96.0
97.5
7.8
709.0
4.0
62.1
2.0
12.7
53.0
25.0
123.0
3.5
32.1
64.0
14.0
1,082.2
3.6
20.9
73.2
10.0
22.3
5.7
Czech Republic
Czechoslovakia, former
Estonia
Hungary
Latvia
...
2.3
...
10.7
...
...
59.0
210.6
34.8
124.4
...
11.0
1,069.0
22.8
951.3
20.8
...
89.0
22.4
109.1
10.0
...
47.7
18.8
35.8
9.1
...
28.9
28.3
25.1
8.8
...
23.1
23.5
17.6
8.5
...
11.2
18.3
8.4
10.6
...
8.2
14.3
4.7
Lithuania
Moldova
Poland
Romania
...
...
...
71.8
11.6
224.7
...
162.0
70.3
161.1
1,021.0
...
1,276.0
43.0
210.4
410.4
338.6
788.5
35.3
256.1
72.1
126.4
329.6
32.2
136.7
39.5
16.2
30.2
27.9
32.3
24.7
2.5
23.5
19.9
38.8
8.8
1.5
11.8
15.1
154.8
5.1
0.6
7.7
12.0
59.1
...
...
...
144.9
...
...
91.2
117.4
...
...
1,210.0
6,146.6
23.0
32.9
4,734.9
...
13.4
21.0
891.2
...
9.9
13.5
376.4
...
5.8
9.9
80.2
...
6.1
8.4
15.9
...
6.7
8.0
10.6
...
Slovak Republic
Slovenia
Ukraine
Yugoslavia, former
Russia
...
92.7
1,353.0
895.9
302.0
190.1
47.8
14.7
27.7
...
97.0
938.2
1,224.0
1,671.8
248.7
64.1
36.5
15.3
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
...
...
...
...
...
100.3
105.6
78.5
91.0
85.0
824.5
912.6
887.4
1,515.7
854.6
3,731.8
1,129.7
3,125.4
1,662.3
772.4
5,273.4
1,664.4
15,606.5
1,879.9
228.7
176.7
411.7
162.7
176.3
40.7
18.7
19.8
39.4
39.1
31.3
14.0
3.7
7.1
17.4
25.5
8.7
0.8
3.6
7.3
12.0
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
0.2
...
...
...
20.2
111.6
102.5
109.7
202.6
1,156.7
492.9
626.9
268.4
2,194.9
3,102.4
534.2
87.6
350.4
1,748.3
1,568.3
56.8
610.0
1,005.3
304.6
46.7
418.0
992.4
54.0
36.8
88.0
83.7
70.9
9.4
43.2
16.8
29.0
1For many countries, inflation for the earlier years is measured on the basis of a retail price index. Consumer price indices with a broader and more up-todate coverage are typically used for more recent years.
187
Table 14. Summary Financial Indicators

(Percent)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Advanced economies
Central government fiscal balance1
Advanced economies
3.1
4.1
4.2
3.6
3.2
2.5
1.3
1.0
0.9
0.6
United States
European Union
Euro area
Japan
3.5
4.1
4.0
0.2
4.7
5.1
4.2
1.7
3.9
6.0
5.1
2.7
2.7
5.3
4.7
3.5
2.3
4.6
4.2
4.0
1.4
3.9
3.7
4.3
0.1
2.2
2.3
4.0
0.8
1.6
2.1
5.0
1.1
1.4
1.8
5.5
1.5
1.1
1.6
5.2
2.0
2.2
2.0
1.3
0.8
0.2
0.5
0.4
1.1
0.6
2.6
3.6
4.1
3.4
3.3
2.5
1.1
0.8
1.0
0.6
3.3
4.2
4.6
2.9
4.4
5.0
4.7
1.5
3.6
6.3
5.7
1.6
2.3
5.7
5.3
2.3
1.9
5.4
5.2
3.6
0.9
4.2
4.2
4.2
0.4
2.4
2.5
3.4
1.3
1.5
2.1
5.3
1.6
1.4
1.8
7.3
2.0
1.0
1.2
7.1
2.6
2.9
2.3
1.5
0.8
0.6
0.5
0.9
0.4
2.8
3.3
3.1
2.6
2.6
1.8
0.6
0.3
0.4
0.1
4.4
3.1
3.9
2.4
4.3
4.9
5.0
6.7
...
...
3.1
5.8
2.3
1.8
4.9
0.2
1.3
5.9
2.2
0.6
2.0
2.8
3.9
3.4
3.3
4.6
4.5
2.9
5.8
4.7
3.9
8.5
5.3
4.0
...
...
...
...
...
...
8.8
8.1
7.9
9.1
8.2
8.5
6.1
10.2
...
...
5.5
7.0
10.5
3.5
4.1
11.1
3.1
2.7
8.6
4.4
1.9
6.3
5.7
1.0
6.1
5.1
0.3
4.6
5.2
0.3
4.1
4.9
0.2
3.9
4.8
0.1
2.7
5.5
0.2
3.1
6.1
3.9
3.4
5.1
6.1
5.6
5.8
5.5
5.4
6.1

Weighted average
Median
3.5
3.7
2.9
3.7
3.1
4.0
2.6
3.8
2.5
3.3
2.3
2.6
2.4
2.5
4.0
3.3
4.2
3.2
3.3
2.5
General government fiscal balance1

Weighted average
Median
3.7
3.6
3.4
3.8
3.5
4.0
3.5
3.7
3.1
3.3
2.8
2.8
3.0
2.5
4.4
3.1
4.7
3.0
3.8
2.2
Growth of broad money

Weighted average
Median
72.9
18.7
84.4
17.9
91.3
16.4
68.3
18.7
24.6
16.4
23.1
14.4
20.3
15.5
16.7
10.0
14.7
10.3
13.8
10.0
9.7
9.6
100.8
10.0
14.1
429.3
6.2
6.7
425.5
7.4
7.0
192.9
4.3
4.4
74.7
4.4
5.5
32.2
4.6
5.0
32.4
3.9
4.8
20.6
3.3
3.6
25.9
2.1
2.5
20.6

Advanced economies
United States
European Union
Euro area
Japan
General government structural
Advanced economies
balance2

Advanced economies
United States
Euro area
Japan
Short-term interest
United States
Japan
Euro area
rates3
LIBOR
1In
percent of GDP.
percent of potential GDP.
3For the United States, three-month treasury bills; for Japan, three-month certificates of deposit; for LIBOR, London interbank offered rate on six-month
U.S. dollar deposits.
2In
188
Financial Policies: Advanced Economies
Table 15. Advanced Economies: General and Central Government Fiscal Balances and Balances
Excluding Social Security Transactions1
(Percent of GDP)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Advanced economies
2.6
3.6
4.1
3.4
3.3
2.5
1.1
0.8
1.0
0.6

United States
Japan
Germany
2.7
3.3
2.9
3.1
3.7
4.4
1.5
2.5
4.3
3.6
1.6
3.1
3.5
2.3
2.3
2.4
3.4
1.9
3.6
3.2
2.7
0.9
4.2
3.4
1.2
0.4
3.4
2.6
0.8
1.3
5.3
2.0
1.0
1.6
7.3
1.9
0.6
2.0
7.1
1.1
2.2
10.0
2.2
7.2
3.9
9.5
6.0
8.0
5.9
9.4
8.0
7.6
5.8
9.1
6.8
5.6
5.5
7.7
5.8
4.3
4.1
7.0
4.4
1.8
3.0
2.8
2.1
0.8
2.7
2.7
0.3
0.9
2.4
2.4
0.4
1.5
1.8
1.6
0.6
1.2
2.5
4.3
2.9
6.3
1.1
3.0
2.4
1.1
11.5
6.0
2.3
1.9
3.0
4.0
3.9
7.1
7.5
2.0
2.2
5.5
12.8
2.9
2.4
0.8
3.4
6.7
3.2
7.3
11.8
4.2
2.8
7.1
13.8
6.1
2.3
1.6
2.9
6.1
3.8
4.9
11.0
5.0
2.4
5.8
10.0
6.0
1.7
2.8
2.6
7.0
4.0
3.8
7.9
5.1
2.3
4.4
10.6
5.7
2.1
1.9
1.4
4.4
2.0
3.1
3.6
3.7
1.0
3.0
7.5
3.3
0.3
2.5
0.6
2.5
0.9
1.6
1.8
1.9
0.1
1.6
4.0
2.5
1.1
1.7
0.9
1.7
0.9
0.9
1.9
2.1
1.0
1.5
2.4
2.3
2.4
0.6
1.1
1.5
0.8
1.0
2.0
2.0
2.5
3.0
1.7
1.7
2.7
0.9
0.6
1.0
0.5
0.6
2.0
1.9
2.1
4.1
1.5
1.5
2.6
0.8
Switzerland
Norway
Israel
Iceland
2.1
0.1
4.4
2.9
3.4
1.7
3.3
2.8
3.6
1.4
2.7
4.5
2.8
0.4
1.1
4.7
1.8
3.5
2.7
3.0
1.7
6.6
3.9
1.6
2.2
7.9
2.5
1.9
3.9
2.6
0.4
2.2
3.9
3.5
0.7
1.5
4.7
2.7
0.8
Korea4
Australia5
Hong Kong SAR
Singapore
New Zealand6
1.3
2.7
0.5
3.2
10.4
4.4
0.1
4.6
0.3
2.5
11.4
4.1
1.3
4.4
0.6
2.3
14.4
0.1
1.0
3.6
0.2
1.3
13.8
2.0
1.3
2.3
0.4
0.3
12.3
3.3
1.0
1.1
0.7
2.2
9.3
2.8
0.9
0.2
0.6
6.2
9.2
2.3
3.9
0.2
0.9
1.8
2.4
2.4
4.5
0.6
0.5
3.0
5.4
1.1
3.0
0.8
0.5
1.2
3.8
0.3
2.8
4.2
4.6
0.6
3.9
5.0
4.7
1.2
4.5
6.3
5.7
2.0
3.7
5.7
5.3
1.6
3.6
5.4
5.2
1.5
2.7
4.2
4.2
1.2
1.2
2.4
2.5
0.8
0.8
1.5
2.1
1.6
0.9
1.4
1.8
3.0
0.5
1.0
1.2
1.9
United States
Japan
Germany
5.5
0.8
3.8
6.3
2.0
2.5
5.3
4.8
3.4
4.1
5.1
2.6
3.6
6.5
2.9
2.5
6.8
3.1
2.1
5.9
2.8
1.7
7.5
2.3
1.5
9.5
2.2
1.3
9.3
1.3
France
Italy
Canada
1.9
6.4
5.4
3.3
5.2
5.9
4.6
5.4
5.4
5.0
4.5
3.4
4.8
5.7
2.2
3.6
5.2
0.4
2.5
0.8
3.0
2.6
1.3
2.9
2.5
1.9
3.3
2.0
2.9
2.6
General government fiscal balance
France2
Italy
United Kingdom3
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Luxembourg
Memorandum
European Union
Euro area
Fiscal balance excluding social
security transactions
189
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Advanced economies
3.1
4.1
4.2
3.6
3.2
2.5
1.3
1.0
0.9
0.6

United States7
Japan8
Germany9
3.2
3.5
0.2
1.8
4.3
4.7
1.7
1.2
4.3
3.9
2.7
2.1
3.6
2.7
3.5
1.5
3.2
2.3
4.0
1.4
2.8
1.4
4.3
2.2
1.4
0.1
4.0
1.7
1.0
0.8
5.0
1.5
0.8
1.1
5.5
1.4
0.5
1.5
5.2
1.2
1.7
10.2
4.3
4.6
2.9
10.3
8.5
4.3
4.4
9.9
8.2
4.6
4.8
9.1
6.7
3.7
3.0
7.1
5.5
3.1
3.4
6.8
4.6
1.3
2.6
2.6
2.1
1.0
2.8
2.8
0.4
1.1
2.7
2.0
0.5
0.8
2.4
1.7
0.3
0.9
2.6
3.2
3.9
3.2
3.2
1.6
0.9
1.2
1.5
0.9
Memorandum
European Union
Euro area
3.2
4.1
4.0
0.4
4.3
5.1
4.2
0.3
4.5
6.0
5.1
0.4
3.8
5.3
4.7
0.7
3.4
4.6
4.2
0.8
2.7
3.9
3.7
0.7
1.4
2.2
2.3
0.4
1.0
1.6
2.1
1.8
0.8
1.4
1.8
3.1
0.5
1.1
1.6
2.2
Central government fiscal balance
France9
Italy
United Kingdom
Canada
1On
a national income accounts basis except as indicated in footnotes. See Box 1.2 for a summary of the policy assumptions underlying the projections.
for valuation changes of the foreign exchange stabilization fund.
3Excludes asset sales.
4Data include social security transactions (that is the operations of the public pension plan).
5Data exclude net advances (primarily privatization receipts and net policy-related lending).
6Data from 1992 onward are on an accrual basis and are not strictly comparable with previous cash-based data.
7Data are on a budget basis.
8Data are on a national income basis and exclude social security transactions.
9Data are on an administrative basis and exclude social security transactions.
2Adjusted
190
Table 16. Advanced Economies: General Government Structural Balances1

(Percent of potential GDP)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Advanced economies
2.8
3.3
3.1
2.6
2.6
1.9
0.6
0.3
0.4
0.1

United States
Japan
Germany3
2.5
2.2
1.8
4.7
3.1
3.1
0.9
4.1
3.0
2.2
1.5
3.0
2.4
1.2
1.8
2.3
2.4
0.8
3.0
3.0
1.9
4.6
2.3
0.6
0.8
3.5
1.3
0.2
1.3
3.8
0.7
0.5
1.3
5.7
0.4
0.1
1.7
5.6
2.5
10.6
2.4
4.9
3.4
9.4
3.5
4.8
3.4
8.2
4.8
4.6
3.7
7.9
4.4
4.1
3.6
7.0
4.6
3.1
1.9
6.0
3.7
0.1
0.9
1.7
2.1
1.8
1.3
1.5
0.3
1.6
1.1
1.0
0.5
1.7
0.9
0.4
0.1
1.3
4.6
6.8
3.9
7.2
2.0
4.1
1.8
0.8
12.4
7.7
2.5
4.5
5.0
4.4
7.4
5.4
2.7
1.1
2.0
13.4
4.3
1.7
4.0
5.0
2.4
5.4
6.4
3.7
1.1
1.8
13.1
5.4
0.2
3.5
4.0
3.3
3.0
7.4
4.8
1.2
1.6
9.5
5.0
0.6
3.5
5.3
3.3
2.4
5.9
4.9
1.7
1.2
10.2
4.5
1.2
1.5
2.7
1.5
1.2
1.0
3.1
1.2
0.3
7.2
2.5
0.3
0.4
1.4
0.8
0.5
1.0
1.3
0.5
0.4
3.8
2.2
0.2
0.3
1.3
1.4
0.3
4.1
1.8
0.1
1.5
2.5
2.4
0.8
0.1
1.4
1.4
0.2
3.4
1.5
1.8
3.0
1.9
1.8
1.1
0.2
1.2
1.0
2.7
1.4
1.9
3.9
1.8
1.6
1.1
Structural balance2
France
Italy
United Kingdom
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Norway
Australia4
New Zealand5
Memorandum
European Union6
Euro area6
1.9
0.1
0.1
1.2
3.9
6.4
6.9
2.1
2.8
4.4
1.9
7.3
3.2
4.0
2.9
0.5
2.5
0.2
1.7
0.2
0.6
0.1
0.3
0.5
0.3
1.9
0.6
1.1
0.9
1.2
5.1
5.7
5.0
5.2
4.6
4.4
4.3
4.1
4.4
4.2
3.0
2.9
1.3
1.2
0.8
1.1
0.6
0.8
0.3
0.4
1On
a national income accounts basis.

structural budget position is defined as the actual budget deficit (or surplus) less the effects of cyclical deviations of output from potential output.
Because of the margin of uncertainty that attaches to estimates of cyclical gaps and to tax and expenditure elasticities with respect to national income, indicators of structural budget positions should be interpreted as broad orders of magnitude. Moreover, it is important to note that changes in structural budget
balances are not necessarily attributable to policy changes but may reflect the built-in momentum of existing expenditure programs. In the period beyond
that for which specific consolidation programs exist, it is assumed that the structural deficit remains unchanged.
3The estimate of the fiscal impulse for 1995 is affected by the assumption by the federal government of the debt of the Treuhandanstalt and various other
agencies, which were formerly held outside the general government sector. At the public sector level, there would be an estimated withdrawal of fiscal impulse amounting to just over 1 percent of GDP.
4Excludes commonwealth government privatization receipts.
5Excludes privatization proceeds.
6Excludes Luxembourg.
2The
191
Table 17. Advanced Economies: Monetary Aggregates

(Annual percent change)1
1991
1992
1993
1994
1995
1996
1997
1998
Advanced economies
6.9
8.2
8.8
4.2
5.4
4.2
4.1
5.1

United States
Japan
Germany
6.6
7.9
9.5
3.4
8.3
14.3
3.9
10.8
8.4
10.6
7.0
8.5
3.7
2.5
4.2
5.2
4.7
1.6
13.1
6.8
3.5
4.5
9.7
12.4
3.7
1.2
8.6
2.3
4.7
1.8
5.0
11.1
4.7
10.5
3.0
5.5
0.2
0.7
2.8
6.0
1.4
7.6
6.0
14.9
2.8
3.4
6.8
7.3
7.7
1.4
5.6
6.3
0.8
3.9
6.7
17.1
6.5
7.7
6.5
10.2
3.1
9.0
5.7
9.1
8.8
7.3
10.8
6.9
8.9
8.0
6.5
7.1
6.4
3.6
25.4
8.0
4.2
12.8
8.4
6.4
17.6
4.0
4.3
11.2
5.1
6.5
11.7
4.2
7.2
4.4
4.4
5.9
3.5
5.2
8.5
2.0
Advanced economies
4.4
3.1
3.9
2.4
4.3
4.9
5.0
6.7

United States
Japan
Germany
3.6
3.1
2.3
6.3
2.2
1.8
0.2
7.6
2.8
1.3
2.2
10.9
1.7
0.6
2.8
1.6
3.8
3.9
3.3
3.6
4.2
4.6
2.9
8.7
4.7
5.8
3.9
3.6
6.4
8.5
4.0
7.3
2.0
5.8
5.7
4.6
5.1
0.1
2.7
3.0
2.9
3.8
4.9
3.0
1.8
1.0
4.2
2.7
4.6
1.9
9.9
3.8
3.3
3.8
9.6
2.1
2.0
9.0
5.7
1.5
2.7
5.6
8.3
1.7
8.6
7.2
9.1
6.3
7.4
8.6
6.9
8.1
3.9
5.8
20.3
2.6
4.9
16.1
3.5
5.9
15.5
1.9
2.0
17.0
4.0
3.4
12.8
4.6
4.5
11.4
4.8
4.7
11.7
6.1
5.3
21.3
Narrow money2
France
Italy
United Kingdom
Canada
Memorandum
Euro area
Broad money3
France
Italy
United Kingdom
Canada
Memorandum
Euro area
1Based
on end-of-period data.
except for the United Kingdom, where M0 is used here as a measure of narrow money; it comprises notes in circulation plus bankers operational deposits. M1 is generally currency in circulation plus private demand deposits. In addition, the United States includes travelers checks of nonbank issues and
other checkable deposits and excludes private sector float and demand deposits of banks. Japan includes government demand deposits and excludes float.
Germany includes demand deposits at fixed interest rates. Canada excludes private sector float.
3M2, defined as M1 plus quasi-money, except for Japan, Germany, and the United Kingdom, for which the data are based on M2 plus certificates of deposit (CDs), M3, and M4, respectively. Quasi-money is essentially private term deposits and other notice deposits. The United States also includes money
market mutual fund balances, money market deposit accounts, overnight repurchase agreements, and overnight Eurodollars issued to U.S. residents by
foreign branches of U.S. banks. For Japan, M2 plus CDs is currency in circulation plus total private and public sector deposits and installments of Sogo
Banks plus CDs. For Germany, M3 is M1 plus private time deposits with maturities of less than four years plus savings deposits at statutory notice. For
Italy, M2 comprises M1 plus term deposits, passbooks from the Postal Office, and CDs with maturities of less than 18 months. For the United Kingdom,
M4 is composed of non-interest-bearing M1, private sector interest-bearing sterling sight bank deposits, private sector sterling time bank deposits, private
sector holdings of sterling bank CDs, private sector holdings of building society shares and deposits, and sterling CDs less building society holdings of
bank deposits and bank CDs and notes and coins.
2M1
192
Table 18. Advanced Economies: Interest Rates

(Percent a year)
August
1999
1991
1992
1993
1994
1995
1996
1997
1998
7.7
5.7
7.5
8.9
6.3
3.6
4.6
9.4
4.7
3.0
3.0
7.4
4.5
4.2
2.1
5.3
5.4
5.9
1.2
4.4
4.4
5.3
0.4
3.2
4.2
5.5
0.4
3.1
4.3
5.4
0.4
3.3
...
4.8
0.0
...
9.5
12.7
11.5
9.0
10.7
14.5
9.4
6.6
8.6
10.5
5.9
4.6
5.6
8.8
5.5
5.1
6.3
10.7
6.7
6.9
3.7
8.6
6.0
4.3
3.3
6.6
6.6
3.3
3.4
4.8
7.2
4.9
...
...
5.3
4.6
...
...
...
...
...
...
...
...
2.5
Advanced economies
8.1
6.9
5.4
4.9
5.2
4.1
4.0
4.0
3.8

United States
Japan
Germany
7.6
5.5
7.0
9.3
6.1
3.5
4.1
9.5
4.6
3.1
2.7
7.2
4.4
4.4
1.9
5.3
4.7
5.7
1.0
4.5
3.7
5.1
0.3
3.3
3.7
5.2
0.3
3.3
3.6
4.9
0.2
3.5
3.8
5.4
0.0
2.7
9.2
12.7
11.5
8.8
9.5
14.5
9.5
6.6
7.2
10.5
5.9
4.8
5.3
8.8
5.5
5.5
4.5
10.7
6.7
7.1
3.3
8.6
6.0
4.2
3.3
6.6
6.9
3.2
3.7
4.8
7.4
4.7
2.5
2.5
5.3
4.9
11.0
10.6
8.7
7.4
7.3
6.1
5.7
5.7
4.1
8.0
10.8
10.5
6.8
11.0
11.1
5.3
8.3
8.6
4.8
6.4
6.3
5.0
6.4
6.1
3.9
4.9
4.6
3.8
4.6
4.1
3.7
4.5
3.9
3.7
3.2
2.8
11.5
9.8
8.4
8.9
9.0
8.7
9.6
10.2
4.9
Advanced economies
8.7
8.0
6.6
7.2
6.8
6.1
5.4
4.5
5.3

United States
Japan
Germany
8.3
7.9
6.3
8.5
7.5
7.0
5.1
7.9
6.2
5.9
4.0
6.4
6.8
7.1
4.2
7.1
6.4
6.6
3.3
6.9
5.8
6.4
3.0
6.2
5.2
6.4
2.1
5.6
4.2
5.3
1.3
4.6
5.0
6.0
1.9
4.9
9.0
13.1
10.1
9.4
8.6
13.3
9.1
8.1
6.9
11.3
7.5
7.2
7.4
10.5
8.2
8.4
7.6
12.2
8.2
8.1
6.4
9.4
7.8
7.2
5.6
6.9
7.0
6.1
4.8
4.9
5.5
5.3
5.0
5.1
5.6
5.7
11.0
10.5
8.7
9.3
9.1
7.7
6.7
6.0
6.5
Memorandum
European Union
Euro area
8.6
10.3
10.1
15.0
7.8
9.9
9.8
13.6
6.5
8.2
8.1
10.9
7.1
8.4
8.2
11.1
6.7
8.6
8.5
11.0
6.0
7.3
7.1
9.7
5.3
6.1
5.9
10.5
4.3
4.9
4.7
12.0
5.0
5.2
5.0
11.4
Policy-related interest rate1

United States
Japan
Germany
France
Italy
United Kingdom
Canada
Euro area
Short-term interest rate2
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Long-term interest rate3
France
Italy4
United Kingdom
Canada
1For the United States, federal funds rate; for Japan, overnight call rate; for Germany, repurchase rate; for France, day-to-day money rate; for Italy, threemonth treasury bill gross rate; for the United Kingdom, base lending rate; for Canada, overnight money market financing rate; for the euro area, repurchase
rate.
2For the United States, three-month certificates of deposit (CDs) in secondary markets; for Japan, three-month CDs; for Germany, France, and the United
Kingdom, three-month interbank deposits; for Italy, three-month treasury bills gross rate; and for Canada, three-month prime corporate paper.
3For the United States, yield on ten-year treasury bonds; for Japan, over-the-counter sales yield on ten-year government bonds with longest residual maturity; for Germany, yield on government bonds with maturities of nine to ten years; for France, long-term (seven- to ten-year) government bond yield (Emprunts
dEtat long terme, TME); for Italy, secondary market yield on fixed-coupon (BTP) government bonds with two to four years residual maturity; for the
United Kingdom, yield on medium-dated (ten-year) government stock; and for Canada, average yield on government bonds with residual maturities of over
ten years.
4August 1999 data refer to yield on ten-year government bonds.
193
Table 19. Advanced Economies: Exchange Rates
1991
1992
1993
1994
1995
1996
1997
1998
Exchange Rate
Assumption1
1999
National currency units per U.S. dollar

U.S. dollar nominal exchange rates
Japanese yen
Euro2
Deutsche mark
French franc
Italian lira
Pound sterling2
Canadian dollar
134.7
...
1.66
5.64
1,241
1.76
1.15
126.7
...
1.56
5.29
1,232
1.76
1.21
111.2
...
1.65
5.66
1,574
1.50
1.29
102.2
...
1.62
5.55
1,612
1.53
1.37
94.1
...
1.43
4.99
1,629
1.58
1.37
108.8
...
1.50
5.12
1,543
1.56
1.36
121.0
...
1.73
5.84
1,703
1.64
1.38
130.9
...
1.76
5.90
1,736
1.66
1.48
115.3
1.07
1.83
6.14
1,813
1.61
1.50
103.9
1.87
34.1
6.05
11.7
6.40
4.04
182.3
144.5
0.62
102.4
1.76
32.1
5.82
11.0
6.04
4.48
191.1
135.0
0.59
127.3
1.86
34.6
7.78
11.6
6.48
5.71
229.3
160.8
0.68
134.0
1.82
33.5
7.72
11.4
6.36
5.22
242.7
166.0
0.67
124.7
1.61
29.5
7.13
10.1
5.60
4.37
231.7
151.1
0.62
126.7
1.69
31.0
6.71
10.6
5.80
4.59
241.0
154.2
0.63
146.4
1.95
35.8
7.63
12.2
6.60
5.19
273.2
175.3
0.66
149.4
1.98
36.3
7.95
12.4
6.70
5.34
295.5
180.1
0.70
155.8
2.06
37.8
8.23
12.9
6.97
5.57
306.1
187.7
0.74
Swiss franc
Norwegian krone
Israeli new sheqel
Icelandic krona
1.43
6.48
2.28
59.00
1.41
6.21
2.46
57.55
1.48
7.09
2.83
67.60
1.37
7.06
3.01
69.94
1.18
6.34
3.01
64.69
1.24
6.45
3.19
66.50
1.45
7.07
3.45
70.90
1.45
7.55
3.80
70.96
1.50
7.76
4.16
72.82
Korean won
Australian dollar
New Taiwan dollar
Hong Kong dollar
Singapore dollar
733.4
1.28
26.81
7.77
1.73
780.7
1.36
25.16
7.74
1.63
802.7
1.47
26.39
7.74
1.62
803.4
1.37
26.46
7.73
1.53
771.3
1.35
26.49
7.74
1.42
804.5
1.28
27.46
7.73
1.41
951.3
1.35
28.70
7.74
1.48
1,401.4
1.59
33.46
7.75
1.67
1,202.8
1.54
32.16
7.74
1.68
Spanish peseta
Netherlands guilder
Belgian franc
Swedish krona
Austrian schilling
Danish krone
Finnish markka
Greek drachma
Portuguese escudo
Irish pound
Percent change
from previous
assumption3
Index, 198089 = 100

Real effective exchange rates4
United States
Japan
Euro5
Germany
France
United Kingdom
Italy
Canada
75.1
115.4
109.2
112.2
93.4
96.0
109.0
116.3
73.2
120.1
114.1
116.2
94.6
93.1
107.6
110.8
75.0
146.0
111.6
123.5
96.7
86.6
90.4
101.4
74.0
156.1
109.9
126.7
96.3
86.5
84.7
93.7
69.6
163.1
114.9
135.6
96.6
81.5
78.6
93.1
73.6
137.8
114.2
132.8
93.9
84.4
87.7
95.0
79.9
129.6
101.6
123.3
90.1
102.4
90.3
95.7
85.6
118.8
98.2
119.7
89.9
110.9
90.1
88.1
0.9
3.0
0.2
0.1
0.8
0.1
1.2
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
118.2
91.0
95.5
107.0
89.6
106.8
95.7
97.9
120.4
79.1
122.3
92.8
97.2
107.7
90.1
108.0
78.2
96.8
134.3
78.0
113.0
94.0
99.3
81.9
90.7
109.2
66.3
94.0
132.3
71.6
105.8
93.8
101.6
79.5
88.8
107.7
69.7
96.1
130.8
68.1
104.5
95.4
106.4
78.2
86.0
110.4
77.8
102.3
135.8
65.2
107.7
91.9
103.8
86.3
82.2
107.4
72.8
108.8
134.8
63.6
105.8
86.5
99.5
81.8
78.3
104.9
69.2
115.5
130.3
60.7
108.3
85.7
101.4
79.0
77.4
104.4
68.8
113.0
127.8
55.1
0.1
0.1
0.1
1.0
0.1
0.1
0.1
0.1
0.3
Switzerland
Norway
118.3
101.4
113.1
100.7
114.2
99.6
124.2
100.7
131.8
108.1
131.2
112.2
125.7
117.4
130.4
116.5
0.1
0.5
Australia
New Zealand
102.5
111.0
96.6
100.2
89.3
99.3
94.1
103.1
93.7
107.0
109.7
116.2
113.8
118.4
101.8
101.5
1.3
2.0
1Average
exchange rates for the period July 26August 16, 1999. See Assumptions in the Introduction to the Statistical Appendix.
in U.S. dollars per currency unit.
3In nominal effective terms. Average July 26August 16, 1999 rates compared with May 14June 10, 1999 rates.
4Defined as the ratio, in common currency, of the normalized unit labor costs in the manufacturing sector to the weighted average of those of its industrial
country trading partners, using 198991 trade weights.
5An effective euro is used prior to January 1, 1999. See Box 5.5 in the World Economic Outlook, October 1998.
2Expressed
194
Financial Policies: Developing Countries
Table 20. Developing Countries: Central Government Fiscal Balances

(Percent of GDP)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
3.5
2.9
3.1
2.6
2.5
2.3
2.4
4.0
4.2
3.3
Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
3.6
4.9
5.5
7.0
6.6
6.9
4.9
5.4
3.3
3.1
2.7
2.8
2.3
3.2
4.2
4.5
3.5
3.9
2.1
2.0
6.8
2.9
1.8
11.8
0.1
9.2
2.8
1.9
6.1
0.3
6.6
2.8
1.8
7.7
0.2
5.6
2.4
1.2
5.8
0.8
4.3
2.3
0.8
4.1
1.9
3.8
2.0
1.0
4.0
1.7
3.6
2.5
1.9
3.3
1.6
3.6
3.7
3.1
6.3
3.6
3.0
4.3
4.4
5.2
3.7
2.1
4.1
4.1
4.4
1.1
Analytical groups
Fuel
Manufactures
Diversified
7.4
2.6
4.3
13.1
1.7
5.7
2.7
4.6
4.1
1.7
7.9
2.5
4.3
3.8
2.1
6.9
2.1
3.0
3.1
1.8
3.8
2.5
2.1
2.0
2.1
1.4
2.4
1.9
2.2
2.4
0.9
2.7
1.7
2.1
2.5
6.1
4.2
2.2
2.6
3.3
3.6
4.6
2.7
2.2
4.3
2.0
3.5
1.9
2.1
3.8

Official financing
Private financing
21.3
2.8
5.1
1.2
5.9
12.8
2.6
5.2
1.4
4.3
10.8
2.9
5.7
1.8
4.5
9.2
2.4
4.8
1.4
4.1
5.5
2.4
3.4
1.9
3.2
3.0
2.2
3.6
1.8
2.8
0.6
2.4
3.6
1.9
3.5
6.5
3.9
4.6
3.6
4.4
5.1
4.2
4.1
3.8
5.2
3.7
3.3
3.2
2.7
4.9

3.6
2.5
2.8
2.4
3.7
2.6
3.0
2.2
2.5
2.3
1.8
2.4
1.8
2.7
4.7
3.7
3.9
4.3
1.3
3.9
7.8
6.6
10.9
9.9
6.8
5.9
7.6
5.7
7.6
6.0
5.5
5.8
4.3
4.1
4.1
3.8
3.7
2.6
3.6
3.3
1.5
3.6
3.9
4.8
3.1
3.9
2.8
2.4
3.5
2.3
3.7
3.7
4.0
3.8
3.3
2.6
2.5
3.3
3.2
2.5
4.3
4.5
6.9
1.2
5.5
4.6
4.3
1.8
6.0
4.0
7.2
1.6
5.3
2.9
7.1
1.0
3.7
3.4
4.1
1.8
4.8
2.7
3.5
1.4
2.5
2.0
2.7
1.7
3.2
3.0
6.4
2.5
3.2
3.4
4.1
2.6
2.4
2.7
2.9
1.9
Other groups
Memorandum
Median
Regional groups
Africa
Asia
Western Hemisphere
195
Table 21. Developing Countries: Broad Money Aggregates

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
72.9
84.4
91.3
68.3
24.6
23.1
20.3
16.7
14.7
13.8
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
29.6
33.8
23.3
23.8
26.5
227.6
33.1
38.4
22.7
20.3
26.1
276.0
28.9
33.7
27.4
21.8
26.2
299.4
42.7
53.6
24.8
18.7
38.8
161.9
25.4
31.1
23.3
22.2
32.8
22.4
22.2
25.9
21.8
19.7
33.8
20.7
18.1
19.3
18.2
17.3
25.7
21.1
17.1
18.4
17.9
20.5
27.0
11.6
16.3
18.6
14.9
14.1
19.6
12.4
11.7
12.4
13.6
13.7
13.9
14.3
Analytical groups
Fuel
Manufactures
Diversified
18.2
132.3
81.7
25.1
50.7
18.6
210.0
56.7
21.3
31.9
21.0
262.5
47.9
19.7
27.9
23.9
148.9
53.8
16.2
32.7
20.1
24.6
33.3
13.9
25.9
21.3
18.9
28.8
11.5
28.9
17.4
15.3
24.1
14.0
27.7
12.7
11.8
15.3
9.6
26.4
10.8
13.0
18.2
8.1
18.4
9.0
13.2
14.2
9.3
16.7

Official financing
Private financing
8.1
78.6
38.4
114.4
20.5
2.4
92.2
37.8
133.4
21.9
2.7
100.0
32.9
144.6
22.0
3.5
74.1
39.1
95.9
25.1
6.0
26.0
23.7
27.7
20.9
6.2
24.3
18.5
25.5
22.0
6.7
21.1
15.3
22.1
20.0
3.4
17.5
17.0
15.8
24.1
3.6
15.4
15.1
15.2
16.1
3.5
14.4
12.2
14.8
13.9

172.8
37.5
290.5
28.3
374.3
28.6
233.1
29.5
29.6
24.4
21.2
25.7
19.0
22.2
12.7
20.1
14.9
15.7
14.3
14.4
56.3
55.8
16.9
62.6
54.7
15.0
52.6
45.8
15.8
73.7
46.0
12.4
42.8
30.3
14.0
35.7
24.8
13.1
24.2
20.2
11.3
19.7
17.7
10.3
21.1
18.3
6.9
16.0
16.0
7.3
18.7
17.9
16.4
18.7
16.4
14.4
15.5
10.0
10.3
10.0
13.4
21.5
14.9
33.7
12.5
18.1
13.9
25.1
14.6
19.6
10.3
17.0
31.1
18.7
10.0
18.3
16.2
17.2
10.0
20.3
14.4
15.8
8.6
15.3
16.2
16.5
11.0
15.5
8.9
14.5
6.4
10.0
10.4
13.5
5.0
9.8
10.0
13.0
8.0
9.1
Other groups
Memorandum
Median
Regional groups
Africa
Asia
Western Hemisphere
196
Foreign Trade: Summary
Table 22. Summary of World Trade Volumes and Prices

Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Trade in goods and services

World trade1
Volume
Price deflator
In U.S. dollars
In SDRs
4.7
6.2
4.6
4.7
3.9
9.1
9.4
6.8
9.9
3.6
3.7
6.2
1.4
1.0
0.3
0.3
0.9
1.8
2.5
0.4
3.9
3.1
2.5
8.7
2.6
1.3
3.1
4.9
0.3
5.1
3.7
0.8
1.2
1.4
1.0
Volume of trade
Exports
Advanced economies
5.3
3.4
6.0
8.3
5.7
7.0
5.2
11.0
3.3
8.8
8.7
13.0
9.0
10.7
6.3
8.8
10.3
11.4
3.2
4.9
3.0
2.4
6.2
5.6
Imports
Advanced economies
5.7
2.5
6.0
7.7
3.3
9.8
4.7
10.9
1.6
11.4
9.7
7.3
8.9
11.3
6.5
8.3
9.2
11.4
4.8
1.3
5.9
1.1
5.9
7.2
Terms of trade
Advanced economies
0.8
2.7
0.2
0.8
0.8
5.0
0.8
2.6
0.6
0.5
0.2
0.2
0.2
2.7
0.3
0.7
0.5
0.9
1.2
6.6
0.8
1.5
0.3
1.2
4.6
6.4
5.1
4.6
4.0
10.0
10.4
6.0
10.5
3.9
3.9
6.2
1.4
1.0
0.6
0.7
1.5
2.3
2.1
0.8
4.3
3.5
2.4
0.1
8.9
2.8
1.2
3.3
6.4
1.2
5.7
4.3
1.1
1.5
1.5
1.2
World trade prices in U.S. dollars2

Manufactures
Oil
Nonfuel primary commodities
3.2
4.6
0.7
0.3
2.4
0.8
0.4
15.7
5.7
3.5
1.7
0.1
5.7
11.8
1.8
3.1
5.0
13.4
10.2
7.9
8.4
3.1
18.4
1.2
7.8
5.4
3.3
1.5
32.1
14.8
1.4
27.7
7.2
0.9
7.8
3.4
World trade prices in SDRs2

Manufactures
Oil
2.7
5.0
1.1
0.4
2.5
0.9
1.2
16.4
6.5
0.6
4.5
2.8
4.9
11.1
2.7
0.5
7.3
10.6
4.0
1.8
2.3
1.2
23.7
3.3
2.7
0.2
2.0
0.1
31.2
13.5
1.8
27.2
7.6
0.5
7.4
3.0
World trade prices in euros2

Manufactures
Oil
4.2
3.6
0.3
0.9
1.2
0.4
2.4
13.4
3.1
1.2
6.2
4.5
4.8
2.0
13.1
2.0
6.0
12.2
0.1
2.0
1.6
0.6
21.6
1.5
5.2
7.9
10.3
0.1
31.0
13.4
3.7
24.7
9.4
0.2
7.1
2.8
Volume of trade
Exports
Advanced economies
5.4
6.1
5.6
4.6
2.9
9.5
9.4
5.8
11.1
3.8
2.8
6.0
Fuel exporters
Nonfuel exporters
2.5
0.3
5.3
8.3
4.4
9.5
6.3
3.2
7.9
10.1
10.2
10.1
8.5
5.9
9.6
12.9
5.7
15.5
14.7
3.6
18.0
5.8
5.9
5.8
12.4
6.1
14.3
4.6
5.9
2.4
0.6
2.8
6.1
3.6
6.6
Imports
Advanced economies
5.7
6.4
4.1
4.7
2.4
11.0
9.3
5.9
9.9
5.1
6.2
5.9
Fuel exporters
Nonfuel exporters
1.9
2.2
3.3
8.1
3.7
8.9
7.7
5.0
8.5
14.5
27.4
10.9
10.5
4.9
14.8
8.3
14.4
13.6
14.4
3.7
16.3
7.0
3.4
7.6
10.4
13.9
9.9
1.3
6.1
2.5
2.0
1.2
2.6
8.0
3.6
8.7
Price deflators in SDRs

Exports
Advanced economies
1.6
0.9
3.1
0.4
3.3
0.2
3.2
1.9
2.7
3.2
1.8
0.9
Fuel exporters
Nonfuel exporters
1.1
4.1
0.5
0.6
2.4
0.2
4.9
13.1
0.7
3.7
7.3
2.2
2.5
7.0
0.7
0.4
5.7
1.5
1.6
3.5
1.1
8.4
19.4
5.4
1.8
0.6
2.1
9.4
22.7
5.7
1.3
9.0
0.4
2.5
6.1
1.7
Trade in goods
World trade1
Volume
Price deflator
In U.S. dollars
In SDRs
197
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Imports
Advanced economies
0.6
1.3
2.6
1.7
5.3
0.4
3.0
2.4
1.8
4.5
2.3
1.2
Fuel exporters
Nonfuel exporters
1.3
1.0
1.3
0.4
0.5
0.4
0.9
5.5
0.4
1.6
10.5
0.9
0.1
0.5
0.8
1.0
1.2
0.7
3.1
1.3
5.7
5.0
5.8
2.1
1.3
2.2
2.7
3.2
2.6
0.3
1.6
0.1
1.3
2.1
1.1
Terms of trade
Advanced economies
1.0
0.4
0.5
1.3
2.1
0.6
0.2
0.5
0.9
1.4
0.5
0.3
Fuel exporters
Nonfuel exporters
2.3
5.0
0.8
1.0
2.8
0.3
5.8
17.6
0.4
2.2
3.6
3.1
2.4
6.5
0.6
0.4
6.6
2.8
2.3
0.4
2.4
2.6
13.7
0.3
0.3
0.6
0.1
6.9
20.2
3.1
1.0
7.3
0.5
1.3
3.9
0.6
2,864
2,295
5,959
4,744
4,393
3,498
4,702
3,716
4,707
3,706
5,264
4,186
6,259
5,033
6,565
5,253
6,812
5,446
6,686
5,328
6,844
5,430
7,361
5,847
Memorandum
World exports in billions of
U.S. dollars
Goods and services
Goods
1Average of annual percent change for world exports and imports. The estimates of world trade comprise, in addition to trade of advanced economies and
developing countries (which is summarized in the table), trade of countries in transition.
2As represented, respectively, by the export unit value index for the manufactures of the advanced economies; the average of U.K. Brent, Dubai, and West
Texas Intermediate crude oil spot prices; and the average of world market prices for nonfuel primary commodities weighted by their 198789 shares in world
commodity exports.
198
Foreign Trade: Nonfuel Commodity Prices
Table 23. Nonfuel Commodity Prices1

(Annual percent change; U.S. dollar terms)
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
0.7
0.8
5.7
0.1
1.8
13.4
8.4
1.2
3.3
14.8
7.2
3.4
Food
Beverages
Agricultural raw materials
Metals
Fertilizers
2.2
6.1
1.6
1.1
1.4
0.9
1.6
0.5
3.3
1.0
0.9
6.5
3.6
14.3
3.2
2.3
13.9
2.7
2.3
5.0
1.3
6.3
16.2
14.2
15.4
5.1
74.9
9.5
16.6
8.0
8.1
0.9
4.3
19.5
10.6
12.2
17.4
2.7
11.9
13.7
10.8
32.6
6.8
3.0
1.1
12.7
15.2
16.3
16.3
2.8
12.4
18.4
2.3
8.7
2.4
4.8
1.8
2.9
3.3
3.0
Advanced economies
0.2
0.5
6.0
2.0
3.1
8.4
6.8
2.8
6.2
14.2
2.9
3.8
2.0
0.7
3.4
2.8
3.0
18.7
7.9
4.7
3.0
16.2
11.0
3.1
2.3
2.4
2.3
2.4
0.2
1.8
0.8
1.0
0.2
0.5
1.4
1.4
5.3
5.8
0.5
0.3
6.2
4.9
6.5
6.7
3.2
4.5
5.6
6.2
2.8
4.6
10.4
11.9
11.2
3.3
21.6
22.6
13.7
14.5
14.6
23.0
6.3
5.9
8.7
8.8
13.1
7.6
6.3
7.8
4.7
5.9
2.7
4.0
8.8
9.7
6.9
7.5
3.2
10.4
14.7
16.1
15.0
14.9
10.6
18.3
12.5
13.5
6.0
5.7
7.0
15.0
2.8
3.5
2.8
2.8
2.1
3.6
1.7
2.6
1.3
1.0
0.5
1.6
11.1
0.5
6.6
1.1
1.0
5.1
16.7
7.6
3.7
11.3
12.0
23.5
6.6
7.9
11.6
9.5
1.9
10.4
3.4
1.9
7.9
16.9
15.2
16.3
8.2
11.4
15.2
3.5
2.7
5.7
2.0
1.9
1.6
0.1
6.8
3.4
8.1
2.6
0.3
1.6
17.9
24.3
9.6
5.5
5.9
3.4
2.8
5.4
13.1
17.4
10.5
8.0
2.5
2.0

Official financing
Private financing
0.9
2.0
1.8
2.1
2.1
1.9
0.7
0.9
0.9
0.2
18.0
3.4
3.9
3.1
3.8
2.9
2.8
8.7
2.6
1.1
6.3
3.0
0.5
2.8
5.4
25.2
18.6
24.0
16.5
21.0
18.8
7.9
7.5
8.4
6.8
13.6
4.7
8.1
3.3
6.0
4.2
2.9
9.1
2.5
0.5
14.7
16.2
15.4
16.8
15.2
6.8
11.0
10.7
12.9
5.9
3.8
3.1
2.8
3.4
2.4

2.0
2.0
1.0
0.4
4.2
2.8
5.2
0.8
0.5
5.8
19.7
17.9
6.2
9.1
2.5
6.2
8.6
1.3
16.7
15.8
12.8
9.4
2.6
3.5
2.8
1.1
1.3
0.6
1.5
0.7
5.6
6.2
3.7
8.1
9.3
7.8
6.5
1.6
11.7
28.6
29.7
14.4
5.3
10.5
14.4
10.2
13.1
12.6
13.2
0.8
16.0
19.9
4.8
14.5
11.9
5.0
3.8
3.5
0.1
2.9
24.1
3.2
12.1
17.6
0.3
15.7
19.37
0.4
1.7
19.04
3.5
11.8
16.79
5.7
5.0
15.95
3.1
7.9
17.20
10.2
18.4
20.37
3.1
5.4
19.27
7.8
32.1
13.07
1.5
27.7
16.70
1.4
7.8
18.00
0.9
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
Primary products
private transfers
Diversified
Other groups
Memorandum
Average oil spot price2
In U.S. dollars a barrel
Export unit value of manufactures3
1Averages of world market prices for individual commodities weighted by 198789 exports as a share of world commodity exports and total commodity
exports for the indicated country group, respectively.
2Average of U.K. Brent, Dubai, and West Texas Intermediate crude oil spot prices.
3For the manufactures exported by the advanced economies.
199
Table 24. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Trade in goods and services

Export volume
Advanced economies
United States
Japan
Germany1
5.3
4.9
5.5
5.3
5.1
6.0
5.5
6.8
3.9
4.8
5.7
5.5
6.3
5.2
12.8
5.2
4.5
6.6
4.9
0.8
3.3
1.8
2.9
1.3
5.5
8.7
7.9
8.2
4.6
7.6
9.0
8.5
11.3
5.4
5.8
6.3
6.2
8.5
6.3
5.3
10.3
10.7
12.8
11.6
10.9
3.2
2.9
1.5
2.3
6.5
3.0
1.9
3.6
0.5
0.3
6.2
5.9
6.5
3.3
6.3
France
Italy
United Kingdom
Canada
3.9
4.8
3.5
5.6
6.3
5.2
4.9
4.9
8.0
7.0
4.1
2.5
0.2
2.3
6.0
4.9
6.5
4.1
7.9
6.4
0.4
8.0
3.9
10.9
5.9
6.0
10.1
9.2
13.1
10.1
6.3
12.7
9.5
9.0
9.8
5.2
1.5
7.5
5.8
6.4
12.6
5.0
8.6
8.5
9.6
6.3
1.2
2.0
8.2
3.9
1.6
2.0
0.9
8.4
4.8
6.4
5.8
5.7
6.2
6.8
4.9
4.6
4.7
11.2
5.6
5.4
5.6
9.4
5.0
4.9
6.0
12.5
4.4
3.3
3.3
11.7
2.1
1.2
0.5
12.1
8.1
8.7
8.4
12.4
8.1
8.0
7.8
15.2
6.1
5.3
5.0
7.4
10.3
9.7
9.9
10.0
3.7
5.4
6.0
0.3
2.6
2.2
2.6
5.8
6.0
6.2
6.4
7.5
Advanced economies
United States
Japan
Germany1
5.7
5.6
6.9
6.0
3.6
6.0
5.7
8.6
2.4
4.9
3.3
1.9
0.7
3.1
13.7
4.7
4.1
7.5
0.7
1.5
1.6
0.8
8.9
0.3
5.4
9.7
9.1
12.2
8.9
7.3
8.9
8.2
8.8
14.2
5.7
6.5
6.7
9.2
11.9
3.4
9.2
9.6
13.9
0.5
8.2
4.8
6.5
10.6
7.5
8.0
5.9
5.7
9.8
1.4
2.6
5.9
5.3
6.0
1.0
5.4
France
Italy
United Kingdom
Canada
4.2
5.2
5.6
6.5
5.9
3.9
4.0
5.3
7.0
6.5
3.0
1.4
5.0
3.2
5.9
1.2
4.7
6.8
6.2
5.8
3.5
10.3
3.2
7.4
3.0
6.7
10.3
5.4
8.3
10.8
5.1
10.4
5.5
6.2
10.3
3.0
1.3
9.1
5.8
6.2
8.1
10.0
9.2
14.6
8.5
7.9
6.1
8.4
5.8
1.9
1.9
4.5
5.2
8.2
6.3
6.0
5.5
6.0
5.0
7.0
5.3
4.5
4.4
10.9
5.7
5.0
5.0
8.9
2.0
4.0
6.1
15.6
3.8
3.3
2.9
12.5
0.3
3.2
4.4
11.2
9.1
7.9
8.1
13.9
8.1
7.0
7.1
15.0
6.3
4.3
3.5
7.7
9.5
9.0
8.8
7.5
7.0
8.2
8.2
9.4
5.6
4.4
4.3
8.2
5.4
6.0
6.1
9.3
Advanced economies
United States
Japan
Germany1
0.8
0.9
0.7
2.2
0.1
0.2
0.2
0.9
0.6
0.6
0.8
1.4
2.2
0.2
11.6
0.8
1.0
1.6
2.4
0.6
0.7
1.1
1.8
2.5
0.2
0.3
0.8
1.3
0.2
0.2
0.2
0.7
0.9
0.3
0.6
0.7
6.4
0.5
0.5
0.4
2.0
4.5
1.8
1.2
1.9
2.9
2.4
2.0
0.8
1.3
0.3
5.5
0.9
0.3
0.8
0.3
6.9
0.3
France
Italy
United Kingdom
Canada
0.5
1.5
0.1
0.3
0.5
0.2
0.4
0.8
0.4
0.1
0.7
3.9
1.3
1.9
0.3
1.0
0.5
1.7
0.6
0.6
1.2
2.8
0.3
1.9
0.3
0.3
0.5
2.0
0.7
0.1
1.3
1.6
2.5
2.8
0.1
1.5
2.3
1.0
2.3
0.3
0.4
0.1
2.5
1.1
0.7
0.4
1.6
2.7
3.3
1.0
0.9
3.4
1.2
0.1
0.1
0.2
0.2
0.5
0.4
Memorandum
European Union
Euro area
0.8
0.4
0.4
0.9
0.2
0.1
0.1
1.1
2.3
3.2
0.9
0.9
1.5
1.5
0.5
0.6
0.2
0.4
0.6
0.3
0.2
0.1
0.2
0.5
0.3
1.8
0.2
0.2
0.5
0.4
0.3
0.6
1.0
1.3
1.3
1.2
0.3
1.0
0.8
0.5
0.1
0.5
0.1
0.7
5.4
5.7
1.0
6.1
6.4
0.4
5.6
4.1
0.5
4.6
4.7
1.3
2.9
2.4
2.1
9.5
11.0
0.6
9.4
9.3
0.2
5.8
5.9
0.5
11.1
9.9
0.9
3.8
5.1
1.4
2.8
6.2
0.5
6.0
5.9
0.3
Memorandum
European Union
Euro area
Import volume
Memorandum
European Union
Euro area
Terms of trade
Memorandum
Trade in goods
Advanced economies
Export volume
Import volume
Terms of trade
1Data
200
Foreign Trade: Developing Countries
Table 25. Developing Countriesby Region: Total Trade in Goods

Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Value in U.S. dollars
Exports
Imports
0.8
2.7
7.2
8.3
0.8
9.6
7.7
13.9
4.6
9.4
15.3
9.8
23.1
20.6
9.5
8.1
8.2
6.7
7.2
5.3
3.9
2.6
9.0
9.5
Volume
Exports
Imports
2.5
1.9
8.3
8.1
6.3
7.7
10.1
14.5
8.5
10.5
12.9
8.3
14.7
14.4
5.8
7.0
12.4
10.4
4.6
1.3
2.4
2.0
6.1
8.0
Unit value in U.S. dollars

Exports
Imports
0.7
1.7
0.6
0.5
4.1
1.8
0.9
1.3
3.3
1.0
2.1
1.7
7.7
5.3
3.8
1.1
3.5
3.2
10.7
4.1
1.8
0.7
2.9
1.6
Terms of trade
2.3
1.0
5.8
2.2
2.4
0.4
2.3
2.6
0.3
6.9
1.0
1.3
3.8
3.1
2.7
3.1
2.9
4.0
3.5
4.1
3.9
1.1
2.4
3.0
2.0
0.7
3.4
2.8
3.0
18.7
7.9
4.7
3.0
16.2
11.0
3.1
Africa
Exports
Imports
0.7
0.1
2.4
3.9
3.4
1.9
0.9
7.0
5.5
3.8
3.5
5.2
18.5
20.1
11.3
1.6
1.9
3.2
13.5
1.0
4.7
4.2
11.5
6.5
Volume
Exports
Imports
1.0
0.2
3.8
4.2
4.2
1.5
0.3
4.5
1.2
0.3
3.0
4.3
9.3
12.0
7.6
4.4
6.0
6.5
1.4
3.7
2.5
4.0
6.6
4.7

Exports
Imports
0.7
1.0
1.1
0.2
6.9
0.6
0.5
2.3
6.6
3.9
0.6
1.0
8.9
7.3
3.7
2.3
3.6
3.1
12.6
4.2
2.5
0.7
5.0
1.7
Terms of trade
1.7
1.0
6.3
2.7
2.8
0.4
1.4
6.1
0.5
8.8
1.8
3.2
Sub-Sahara
Exports
Imports
1.2
1.1
2.4
4.2
4.3
1.4
0.1
5.2
5.0
3.2
4.6
2.9
18.5
21.5
10.8
4.3
1.5
5.4
13.9
3.3
3.0
3.7
12.5
6.3
Volume
Exports
Imports
0.5
0.5
3.9
4.7
2.2
1.9
0.9
3.3
0.9
0.8
3.1
2.9
9.2
12.8
9.2
8.4
5.4
8.1
0.7
1.7
2.5
3.3
7.4
4.5

Exports
Imports
0.6
0.6
1.3
0.3
6.0
0.5
0.9
1.9
5.8
3.9
1.8
0.3
9.0
7.6
1.6
3.6
3.4
2.4
13.4
4.6
0.9
1.0
5.3
1.7
Terms of trade
1.1
1.0
5.6
2.7
1.9
1.4
1.3
5.4
1.0
9.3
3.5
Asia
Exports
Imports
7.7
7.6
11.5
10.2
13.5
11.8
15.2
15.0
11.7
19.3
23.7
17.4
29.6
27.4
4.7
7.2
11.9
1.3
1.8
13.7
3.0
10.5
7.4
10.9
Volume
Exports
Imports
7.0
7.1
11.1
9.3
12.2
8.4
10.7
11.7
11.5
18.9
19.4
15.0
21.9
20.3
2.7
5.4
17.7
6.1
8.6
9.5
2.0
8.2
6.1
11.0

Exports
Imports
1.3
0.8
0.6
0.9
1.2
2.8
3.9
2.2
0.3
0.4
3.6
2.1
6.4
6.0
2.1
1.8
4.7
4.4
8.6
4.6
1.1
2.4
1.3
0.3
Terms of trade
0.5
0.3
1.5
1.7
0.1
1.5
0.4
0.3
0.3
4.2
1.3
0.9
Memorandum
Real GDP growth in developing
country trading partners
Market prices of nonfuel commodities
exported by developing countries
Regional groups
201
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Exports
Imports
6.4
8.0
10.6
8.1
15.3
14.1
15.4
10.0
12.6
14.1
18.5
19.3
22.2
26.9
6.2
6.4
7.1
0.8
3.4
22.6
4.9
7.6
9.0
14.3
Volume
Exports
Imports
6.0
8.2
10.2
7.0
14.7
10.4
9.7
7.8
11.4
13.0
15.0
17.0
13.8
17.9
3.4
4.3
10.3
1.8
11.9
17.9
3.7
5.1
8.5
15.3

Exports
Imports
1.1
0.3
0.6
1.3
0.6
3.6
5.4
2.5
1.3
1.1
3.1
2.0
7.3
7.6
2.7
2.1
2.8
2.4
12.3
5.7
1.3
3.1
0.6
0.5
Terms of trade
0.8
0.7
3.0
2.8
0.2
1.1
0.3
0.5
0.4
7.0
1.8
1.2

Exports
Imports
4.0
1.3
2.4
4.9
9.2
8.2
5.5
9.7
1.2
2.4
7.2
10.7
14.1
17.5
16.9
11.3
1.8
7.2
18.9
0.5
6.2
1.6
7.3
7.8
Volume
Exports
Imports
0.2
0.3
5.2
5.1
3.1
3.1
13.5
20.0
6.7
3.2
8.3
12.1
4.1
9.4
7.1
8.7
5.2
12.7
0.9
5.8
0.9
2.4
3.0
5.6

Exports
Imports
3.2
1.6
1.7
0.9
9.9
5.0
4.6
0.4
6.1
0.6
0.7
2.7
9.8
7.9
9.8
2.7
3.2
4.5
18.3
6.0
5.6
0.9
4.3
2.6
Terms of trade
4.8
2.6
14.2
4.2
5.5
3.3
1.7
6.9
1.4
13.1
4.7
1.6
3.1
0.4
7.8
10.8
1.1
16.5
4.7
21.1
5.9
8.0
15.6
18.5
21.8
10.7
11.5
10.6
10.4
18.8
4.6
3.8
3.7
6.5
12.3
9.4
4.4
1.5
9.0
11.0
4.0
19.4
12.7
19.8
10.3
10.3
12.1
18.1
13.9
8.5
9.9
10.2
12.2
18.9
2.9
5.8
4.3
4.8
8.1
6.4
0.2
3.5
0.4
0.2
2.2
2.3
4.5
1.1
4.0
2.0
3.2
0.4
7.3
1.1
1.7
0.2
1.6
7.2
1.8
0.2
1.8
4.0
2.8
3.2
0.2
0.1
5.5
2.1
2.8
6.2
1.4
1.6
5.5
1.6
1.2
Western Hemisphere
Exports
Imports
Volume
Exports
Imports
Exports
Imports
Terms of trade
202
Foreign Trade: Developing Countries
Table 26. Developing Countriesby Source of Export Earnings: Total Trade in Goods
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Fuel
Exports
Imports
4.4
1.2
1.2
3.6
11.4
11.5
3.0
12.0
3.5
6.1
1.8
11.3
13.5
12.8
20.6
3.9
1.2
8.9
24.7
1.4
9.7
0.5
10.1
5.6
Volume
Exports
Imports
0.3
2.2
4.4
3.7
3.2
5.0
10.2
27.4
5.9
4.9
5.7
14.4
3.6
3.7
5.9
3.4
6.1
13.9
6.1
0.6
1.2
3.6
3.6

Exports
Imports
3.7
1.4
2.3
0.5
12.3
6.4
4.6
7.9
7.8
1.4
3.3
3.5
9.6
9.2
14.3
0.5
4.6
4.0
23.8
4.6
9.5
2.1
6.5
2.5
Terms of trade
5.0
2.8
17.6
3.6
6.5
6.6
0.4
13.7
0.6
20.2
7.3
3.9
Nonfuel
Exports
Imports
5.1
4.1
9.4
9.3
7.0
9.1
9.7
14.4
7.8
13.8
20.0
14.7
26.0
21.9
6.5
8.8
10.3
6.3
2.3
6.4
2.7
2.9
8.7
10.1
Volume
Exports
Imports
5.3
3.3
9.5
8.9
7.9
8.5
10.1
10.9
9.6
14.8
15.5
13.6
18.0
16.3
5.8
7.6
14.3
9.9
5.9
2.5
2.8
2.6
6.6
8.7

Exports
Imports
0.9
1.8
0.2
0.5
0.1
0.4
0.6
3.9
1.5
0.9
4.1
1.3
7.1
4.5
0.9
1.2
3.2
3.1
7.0
4.0
0.5
2.1
1.5
0.8
0.3
0.4
3.1
0.6
2.8
2.4
0.3
0.1
3.1
0.5
0.6
Manufactures
Exports
Imports
8.7
6.6
10.9
10.4
12.1
11.8
14.7
13.4
11.1
21.3
24.3
18.3
29.1
31.8
3.0
5.6
11.1
1.7
2.7
11.8
2.3
7.6
7.8
10.0
Volume
Exports
Imports
8.6
5.1
10.4
9.9
10.1
9.4
11.1
10.4
12.2
22.2
19.7
16.5
21.7
24.5
1.3
3.4
18.5
7.6
3.8
7.5
1.8
6.8
6.1
8.8

Exports
Imports
0.2
1.7
0.5
0.4
1.8
1.8
3.1
1.8
1.0
0.7
3.8
1.5
6.1
6.1
1.8
2.1
6.2
5.3
6.1
4.9
0.5
0.8
1.8
1.2
1.5
0.1
1.3
0.3
2.3
0.3
0.9
1.2
0.2
0.6

Exports
Imports
1.5
0.9
7.0
7.8
0.6
4.0
4.1
10.8
0.1
4.4
18.6
11.2
25.5
25.5
5.6
10.3
9.5
7.0
6.0
1.1
4.4
0.2
10.7
8.8
Volume
Exports
Imports
1.5
0.4
7.7
7.4
5.0
4.9
6.0
8.4
6.0
5.8
9.0
10.3
8.1
16.1
11.4
8.0
12.8
9.6
1.9
3.7
8.3
0.8
9.3
7.4

Exports
Imports
1.3
1.9
0.5
0.5
3.6
0.3
1.6
2.1
5.1
1.6
8.8
0.7
16.1
7.6
4.8
2.2
2.6
2.1
7.6
4.2
3.7
0.8
1.3
1.6
0.6
1.0
3.3
3.6
3.6
8.0
8.0
6.8
0.5
3.6
3.0
0.3
Terms of trade
Terms of trade
Terms of trade
203
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

private transfers
Exports
Imports
0.1
2.1
6.8
6.8
4.4
4.3
1.7
3.3
5.9
9.0
9.5
3.6
24.3
16.8
5.3
8.9
8.2
5.5
0.4
4.5
3.6
5.8
11.4
7.0
Volume
Exports
Imports
1.3
0.1
8.5
5.1
5.0
7.5
38.1
12.3
2.8
4.5
8.0
9.1
11.7
14.3
3.4
9.6
7.3
3.3
8.5
2.8
5.5
8.2
5.3
3.1
3.2
3.4
2.7
24.0
2.7
10.3
27.4
3.0
4.5
3.2
3.1
12.5
3.0
4.5
5.5
0.6
1.7
3.5
3.8
1.0
0.1
3.3
1.5
0.1
0.6
27.4
29.6
1.4
6.5
9.2
1.0
1.1
0.3
1.1
1.8
Diversified
Exports
Imports
3.9
3.4
8.4
9.0
3.4
8.7
6.5
18.7
5.8
9.3
15.8
13.6
22.1
10.9
11.8
12.7
9.7
12.2
1.2
3.2
2.8
1.8
9.2
11.2
Volume
Exports
Imports
4.4
3.4
8.9
9.0
6.6
8.8
7.3
17.1
7.8
11.6
12.1
11.9
15.5
7.3
11.2
13.7
9.4
13.3
9.7
0.1
3.0
2.0
6.7
9.5

Exports
Imports
1.2
1.3
0.2
0.1
3.0
0.6
1.3
1.8
2.0
3.4
1.9
6.0
2.5
0.7
0.9
0.3
0.9
8.5
3.0
0.6
2.4
1.7
0.1
0.3
3.0
1.9
0.2
1.4
3.4
1.6
1.2
5.7
0.6
0.7

Exports
Imports
Terms of trade
Terms of trade
204
Current Account: Summary
Table 27. Summary of Payments Balances on Current Account

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Advanced economies
17.8
12.1
66.1
32.8
55.3
44.7
81.4
37.3
77.3
73.0
United States
Euro area
Japan
4.3
65.1
68.4
50.6
51.3
112.3
85.3
26.9
132.0
121.7
19.3
130.6
113.6
56.8
111.4
129.3
89.9
65.8
143.5
107.2
94.1
220.6
85.4
121.0
316.1
79.6
143.1
324.6
95.3
138.5
4.4
0.9
9.9
3.0
1.2
12.9
8.9
50.1
37.2
41.1
Memorandum
32.4
15.7
28.5
16.3
47.1
20.8
19.3
16.1
54.6
5.9
49.1
0.9
75.8
9.0
24.2
62.2
126.7
52.0
118.1
48.0
98.6
84.3
120.8
88.6
89.1
72.6
62.1
77.3
55.6
66.0
Regional groups
Africa
Asia
Western Hemisphere
7.4
11.1
63.1
16.9
10.3
12.6
26.8
34.5
11.6
34.0
29.3
45.8
11.9
20.4
4.7
51.6
16.1
35.7
0.2
37.0
6.2
38.1
10.4
38.7
7.1
5.0
6.7
66.7
18.8
50.9
20.2
89.1
18.8
26.0
6.3
56.5
15.2
12.0
6.4
56.5
Analytical groups
Fuel
Nonfuel
60.1
38.5
30.3
54.0
24.1
96.7
4.9
83.7
2.8
91.9
31.7
104.2
22.0
84.1
24.2
53.1
5.0
50.6
3.1
69.0

Official financing
Private financing
49.3
49.3
13.6
21.9
13.7
15.8
68.5
14.5
41.7
12.3
13.4
107.4
17.8
74.4
15.2
6.8
81.8
15.1
49.2
17.6
3.1
92.2
17.7
50.4
24.1
13.0
85.6
13.9
47.2
24.6
12.0
74.1
13.5
38.8
21.8
12.0
65.2
17.8
35.3
12.1
2.8
58.4
21.0
23.7
13.7
6.5
72.5
17.0
35.9
19.6

24.7
24.5
20.1
48.5
29.4
78.0
16.7
65.1
39.6
52.7
25.5
60.1
43.1
31.0
66.4
1.1
49.3
9.1
44.2
28.2
Russia
Total1
4.9
1.7
5.4
3.8
2.9
16.7
26.3
25.1
16.1
20.2
4.8
3.5
4.1
5.5
1.1
1.5
1.2
1.7
7.0
5.7
2.6
1.0
3.8
2.0
8.4
0.8
6.2
4.2
4.8
1.6
16.8
15.1
3.9
3.9
19.4
17.3
3.0
3.9
22.6
20.3
2.3
4.8
24.1
22.9
11.8
3.8
24.2
22.7
8.4
4.4
111.5
98.2
60.0
52.0
36.7
44.6
7.0
65.0
149.0
159.1
In percent of total world current

account transactions
In percent of world GDP
1.3
0.5
1.0
0.4
0.6
0.2
0.5
0.2
0.3
0.1
0.3
0.2
0.1
0.5
0.2
1.1
0.5
1.1
0.5
Memorandum
Emerging market countries, excluding
Asian countries in surplus2
94.5
83.4
102.3
75.3
75.6
73.4
110.7
159.8
106.9
111.1
1Reflects
errors, omissions, and asymmetries in balance of payments statistics on current account, as well as the exclusion of data for international organizations and a limited number of countries. See Classification of Countries in the introduction to this Statistical Appendix.
2All developing and transition countries excluding China, Hong Kong SAR, Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, and
Thailand.
205
Table 28. Advanced Economies: Balance of Payments on Current Account
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Spain
Netherlands
Belgium-Luxembourg
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Switzerland
Norway
Israel
Iceland
Korea
Australia
Hong Kong SAR1
Singapore
New Zealand
Memorandum
European Union
Euro area
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
17.8
14.4
4.3
68.4
17.1
12.1
16.0
50.6
112.3
13.5
66.1
17.2
85.3
132.0
9.0
32.8
8.5
121.7
130.6
22.5
Billions of U.S. dollars

55.3
44.7
81.4
4.5
6.4
21.2
113.6
129.3
143.5
111.4
65.8
94.1
19.0
5.6
1.4
37.3
51.0
220.6
121.0
3.6
77.3
142.5
316.1
143.1
0.2
73.0
146.1
324.6
138.5
5.5
6.2
26.6
14.8
22.4
3.8
29.2
17.8
21.0
9.2
8.1
15.9
21.8
7.4
13.0
2.2
13.0
10.9
25.1
5.9
4.4
20.5
39.8
0.9
3.3
39.4
32.5
10.3
10.3
40.6
20.1
2.4
11.0
37.2
18.7
18.9
6.4
41.7
21.2
22.7
5.7
3.4
20.0
7.7
4.7
4.7
0.6
2.0
6.7
3.4
0.7
0.3
3.8
21.3
7.4
6.6
7.8
0.6
4.1
5.1
2.0
0.5
48.9
5.8
13.6
11.2
3.8
1.2
4.7
1.1
2.4
0.1
1.8
41.3
6.6
17.9
12.6
1.6
2.9
2.7
1.1
0.5
2.2
1.5
50.8
0.2
23.8
14.2
6.3
5.4
1.9
5.4
2.8
0.2
1.7
51.1
0.2
22.9
14.1
6.6
4.8
3.1
5.2
3.2
4.5
2.0
60.3
2.3
22.2
14.0
6.5
5.0
0.9
6.9
3.1
5.5
1.9
88.3
1.4
20.9
12.0
4.6
4.4
2.4
7.5
3.2
7.2
0.8
65.2
3.8
21.5
10.8
2.7
3.9
2.0
6.9
2.9
8.3
0.6
73.1
4.7
23.8
11.7
3.6
3.3
1.2
7.5
3.0
8.6
0.4
10.6
5.1
1.1
0.3
15.1
2.9
0.1
0.2
19.5
3.5
1.8
17.5
3.2
2.5
0.1
21.4
4.9
5.2
0.1
22.0
10.6
5.3
0.1
22.9
8.0
3.4
0.1
22.1
1.2
0.7
0.5
20.9
0.9
2.5
0.5
22.1
4.8
2.9
0.4
8.3
11.2
13.1
6.1
4.9
0.9
3.9
11.2
8.5
5.8
5.9
1.1
1.0
9.8
7.0
8.6
4.2
0.5
3.9
17.2
6.5
2.1
11.4
1.1
8.5
19.6
5.5
5.5
14.4
1.8
23.0
15.8
11.0
1.6
14.5
2.7
8.2
12.7
7.7
5.5
15.0
4.6
40.0
17.6
3.5
1.1
17.6
3.2
23.6
23.6
7.4
2.5
18.6
3.7
15.2
21.5
9.4
4.1
19.2
3.3
32.4
86.0
65.1
15.7
28.5
74.8
51.3
16.3
47.1
9.5
26.9
20.8
19.3
20.9
19.3
16.1
54.6
56.3
56.8
5.9
49.1
95.3
89.9
0.9
75.8
121.9
107.2
9.0
24.2
86.8
85.4
62.2
126.7
58.5
79.6
52.0
118.1
72.0
95.3
48.0
Percent of GDP
United States
Japan
Germany
0.1
2.0
1.0
0.8
3.0
0.7
1.3
3.1
0.5
1.8
2.8
1.1
1.6
2.2
0.8
1.7
1.4
0.2
1.8
2.2
0.1
2.6
3.2
0.2
3.5
3.5
3.5
3.4
0.3
France
Italy
United Kingdom
Canada
0.5
2.3
1.4
3.8
0.3
2.4
1.7
3.6
0.7
0.8
1.7
3.9
0.6
1.3
0.2
2.3
0.7
2.3
0.5
0.8
1.3
3.2
0.1
0.5
2.8
2.8
0.8
1.6
2.8
1.7
0.2
1.8
2.6
1.6
1.4
1.0
2.8
1.7
1.6
0.9
Spain
Netherlands
Belgium-Luxembourg
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
3.6
2.7
2.4
1.9
0.4
1.5
5.4
3.8
0.9
0.7
3.5
2.3
3.0
3.0
0.3
2.8
4.7
2.0
1.0
1.2
4.4
5.2
2.0
0.6
3.4
1.3
2.6
0.1
3.7
1.3
5.3
5.4
0.8
1.5
1.8
1.1
0.5
2.5
2.7
6.0
5.2
2.6
2.4
1.1
4.2
2.4
0.1
2.6
5.8
5.2
2.5
2.1
1.7
4.1
2.6
4.2
2.8
0.4
6.1
5.8
2.8
2.4
0.5
5.6
2.6
5.4
2.5
0.2
5.5
4.8
1.9
2.1
1.4
5.8
2.7
6.7
0.9
0.6
5.6
4.3
1.1
1.8
1.1
5.3
2.3
7.5
0.6
0.7
5.9
4.5
1.4
1.5
0.7
5.4
2.4
7.4
0.4
Switzerland
Norway
Israel
Iceland
4.6
4.3
1.9
4.0
6.2
2.3
0.2
2.4
8.2
3.0
2.8
0.8
6.7
2.6
3.4
2.0
7.0
3.3
6.0
0.8
7.4
6.7
5.6
1.7
8.9
5.2
3.4
1.6
8.4
0.8
0.7
6.0
8.0
0.6
2.6
5.5
8.3
3.2
2.8
4.0
Korea
Australia
Hong Kong SAR1
Singapore
New Zealand
2.8
3.6
7.3
7.1
11.4
2.2
1.3
3.7
4.0
5.7
12.1
2.7
0.3
3.3
3.2
7.4
7.3
1.2
1.0
5.1
2.7
1.6
16.3
2.2
1.7
5.4
2.1
3.9
17.3
3.1
4.4
3.9
4.0
1.0
15.9
4.1
1.7
3.1
2.7
3.2
15.7
7.1
12.5
4.8
1.3
0.7
20.9
6.1
5.9
6.0
2.6
1.5
21.1
6.7
3.4
5.2
3.0
2.4
20.4
5.8
1Data
include goods and nonfactor services only.
206
Current Account: Advanced Economies
Table 29. Advanced Economies: Current Account Transactions

Exports
Imports
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2,789.1
2,800.6
2,989.6
2,965.0
2,938.0
2,849.2
3,308.0
3,234.8
3,943.7
3,855.2
4,065.3
4,006.1
4,167.8
4,098.6
4,128.5
4,064.9
4,1874
4,231.0
4,491.7
4,552.1
Trade balance
11.5
24.5
88.8
73.3
88.5
59.2
69.2
63.6
43.6
60.4
Services, credits
Services, debits
747.5
711.9
830.2
779.8
829.3
771.9
884.7
821.5
1,001.2
934.3
1,060.1
982.7
1,088.7
994.5
1,093.3
1,020.0
1,133.0
1,052.4
1,211.8
1,115.5
Balance on services
35.6
50.4
57.4
63.2
66.9
77.4
94.2
73.3
80.5
96.3
Balance on goods and services
24.1
74.9
146.2
136.5
155.4
136.6
163.5
136.9
36.9
35.9
2.8
44.6
1.3
88.4
10.4
90.5
0.1
103.5
4.9
105.0
17.9
109.8
20.3
102.4
14.2
113.8
5.4
119.6
9.9
118.8
17.8
12.1
66.1
32.8
55.3
44.7
81.4
37.3
77.3
73.0
24.1
74.9
146.2
136.5
155.4
136.6
163.5
136.9
36.9
35.9
13.3
29.5
54.3
2.2
47.4
37.0
80.7
2.4
81.2
69.9
96.5
8.1
70.4
98.4
96.4
11.4
85.0
97.5
74.7
19.7
55.3
104.3
21.2
27.4
77.3
104.7
47.3
30.8
24.6
164.3
73.2
35.9
55.3
238.1
90.2
27.4
66.9
246.7
72.5
33.1
7.0
2.3
10.2
3.8
21.5
0.3
13.0
2.6
24.5
32.5
10.1
0.4
25.0
36.7
7.0
6.3
28.9
45.3
4.4
18.4
31.2
62.0
6.5
24.4
45.7
47.8
0.1
10.6
45.0
39.9
13.1
8.0
40.2
36.1
23.2
12.2
44.7
40.2
25.3
14.6
10.8
27.5
65.0
66.0
70.4
81.3
86.2
112.3
92.2
102.9
20.5
16.4
8.8
70.9
11.6
19.5
136.8
90.1
92.1
132.7
110.7
107.5
159.3
145.5
137.8
145.8
178.0
168.8
162.7
184.7
173.0
80.3
158.7
165.0
8.0
126.0
142.8
6.0
143.0
160.8
9.6
9.6
16.9
11.9
4.3
0.8
7.0
60.5
50.4
47.6
2.8
1.3
10.4
0.1
4.9
17.9
20.3
14.2
5.4
9.9
26.9
23.9
25.9
20.0
35.6
22.3
35.4
21.7
34.8
23.2
40.6
16.6
29.1
15.9
40.3
3.0
26.1
19.4
44.4
0.2
45.7
17.2
53.6
1.1
44.1
3.2
55.6
1.7
37.0
12.2
56.6
9.2
29.2
32.1
66.7
2.2
34.4
35.9
77.3
2.8
5.7
17.6
2.2
17.4
8.7
22.0
4.2
17.5
9.1
17.2
1.5
20.8
6.8
16.6
12.4
19.0
9.0
15.7
9.4
22.7
2.7
15.0
13.0
21.6
2.6
11.2
16.9
21.4
5.6
12.3
28.1
19.6
7.0
11.5
16.3
19.3
7.3
11.1
14.9
20.9
24.1
34.3
24.4
29.3
21.1
27.8
23.8
22.7
23.9
24.5
1.1
24.3
11.3
3.6
35.2
24.8
7.6
31.2
19.2
3.2
29.6
31.7
3.4
29.3
29.4
16.8
23.5
24.7
20.0
10.5
18.5
16.7
7.9
26.7
5.8
6.9
12.8
9.8
7.0
12.4
5.6
6.0
3.9
4.5
4.3
4.3
3.8
0.3
2.6
3.3
Income, net
Current transfers, net
Current account balance
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Income, net
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
207
Table 30. Developing Countries: Payments Balances on Current Account

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
98.6
84.3
120.8
88.6
89.1
72.6
62.1
77.3
55.6
66.0
7.4
8.6
10.3
9.8
11.6
10.6
11.9
8.7
16.1
11.9
6.2
6.9
7.1
9.8
18.8
16.8
18.8
17.5
15.2
14.0
10.4
11.1
20.6
63.1
16.9
10.4
12.6
16.1
26.8
34.5
10.0
34.0
20.6
29.3
45.8
7.2
20.4
24.5
4.7
51.6
8.8
35.7
39.3
0.2
37.0
8.9
38.1
40.4
10.4
38.7
9.3
5.0
24.4
6.7
66.7
11.9
50.9
22.7
20.2
89.1
12.0
26.0
18.4
6.3
56.5
11.0
12.0
7.3
6.4
56.5
Analytical groups
Fuel
Manufactures
private transfers
Diversified
60.1
4.6
10.2
30.3
0.5
11.3
24.1
26.8
13.5
4.9
12.6
11.7
2.8
38.8
13.9
31.7
44.5
16.8
22.0
15.4
17.2
24.2
16.4
18.2
5.0
4.9
14.5
3.1
2.4
15.3
4.9
18.7
3.8
38.3
5.8
50.6
6.3
53.1
7.5
31.6
8.5
34.5
7.6
43.9
11.3
39.9
12.2
28.8
12.6
38.8

Official financing
Private financing
49.3
49.3
13.6
21.9
13.7
15.8
68.5
14.5
41.7
12.3
13.4
107.4
17.8
74.4
15.2
6.8
81.8
15.1
49.2
17.6
3.1
92.2
17.7
50.4
24.1
13.0
85.6
13.9
47.2
24.6
12.0
74.1
13.5
38.8
21.8
12.0
65.2
17.8
35.3
12.1
2.8
58.4
21.0
23.7
13.7
6.5
72.5
17.0
35.9
19.6

24.7
24.5
20.1
48.5
29.4
78.0
16.7
65.1
39.6
52.7
25.5
60.1
43.1
31.0
66.4
1.1
49.3
9.1
44.2
28.2
11.9
9.3
64.7
11.8
8.6
27.9
14.0
8.1
25.5
10.2
6.5
13.3
12.3
7.9
5.0
13.3
8.8
12.3
12.3
7.9
11.1
13.8
10.6
25.5
14.8
12.4
7.9
14.0
12.3
4.8
Other groups
208
Current Account: Developing Countries
Ten-Year Averages
___________________
198190 19912000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Percent of exports of goods and services

10.4
8.8
14.9
11.7
15.9
10.2
8.4
6.3
4.9
6.6
4.5
4.9
15.8
17.6
10.5
12.9
7.2
11.1
10.0
12.6
11.9
14.3
11.7
11.2
13.4
12.9
4.6
6.8
5.2
9.5
15.6
18.4
14.9
18.6
10.9
13.3
23.9
14.1
15.4
5.6
12.0
22.8
2.5
6.8
8.0
19.7
27.4
4.9
14.8
38.3
10.3
27.5
4.8
10.0
15.0
19.9
27.5
11.4
11.3
16.4
24.9
19.0
5.5
11.2
2.5
24.7
19.6
7.6
14.7
0.1
15.0
18.2
7.6
14.0
4.2
14.1
18.4
0.9
7.9
2.6
22.2
25.7
9.4
7.9
9.0
30.9
24.5
4.6
6.1
2.7
18.5
19.9
2.0
2.2
2.5
16.7
4.4
13.1
32.3
5.8
3.5
22.1
34.5
2.2
23.2
16.7
0.2
24.2
13.7
10.1
28.5
2.7
3.8
21.2
1.4
9.2
20.1
13.0
10.1
22.9
8.9
3.2
21.6
12.6
3.5
23.9
2.4
1.0
18.3
1.3
0.5
17.5
19.3
12.6
17.3
12.6
15.6
9.1
11.4
17.3
16.0
21.7
15.7
20.1
16.5
10.0
17.5
9.7
14.7
11.2
21.9
10.4
22.5
7.3
21.1
9.0

Official financing
Private financing
4.4
15.4
26.3
8.8
27.8
6.8
9.0
19.3
7.2
10.2
50.4
8.8
21.0
5.7
12.2
14.8
11.2
21.7
9.9
10.0
12.7
16.5
26.5
16.4
11.6
6.3
10.8
20.7
9.1
11.8
2.5
9.9
20.3
7.5
13.7
9.1
8.4
14.1
6.5
12.8
8.1
6.7
13.3
4.9
10.1
10.4
6.2
18.5
4.7
5.8
2.2
5.3
21.2
3.0
6.2
4.8
6.1
15.4
4.3
8.0

20.3
12.2
15.0
6.9
14.2
6.3
11.0
11.3
16.0
16.6
8.3
11.6
17.2
7.5
9.7
8.0
15.2
3.8
25.8
0.1
18.0
1.1
14.2
3.2
34.7
41.5
7.2
28.9
33.4
8.8
35.8
45.5
39.0
34.6
42.0
15.7
42.2
37.7
14.6
27.4
26.9
7.4
26.8
27.6
2.4
25.6
28.9
5.3
22.4
24.1
4.6
25.9
33.0
12.8
26.0
36.0
3.7
22.1
32.0
2.1
18.7
14.4
15.0
17.7
19.8
14.4
13.2
14.1
11.3
15.0
12.4
10.8
Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
Other groups
Memorandum
Median
209
Table 31. Developing Countriesby Region: Current Account Transactions

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
546.7
531.0
589.0
604.6
616.2
661.5
710.3
726.6
874.4
876.0
957.4
946.8
1,035.9
1,010.2
961.0
956.6
998.8
981.2
1,088.2
1,074.1
15.7
15.6
45.3
16.3
1.6
10.6
25.7
4.4
17.6
14.1
Services, net
56.9
41.2
50.7
66.3
49.0
94.3
41.0
57.3
50.5
52.1
51.1
40.5
58.2
32.4
49.1
44.7
32.8
15.3
34.4
20.3
Income, net
52.2
5.1
48.2
30.2
52.9
26.5
56.9
25.6
69.9
32.8
68.8
36.7
71.1
41.5
73.1
40.5
84.9
44.6
92.4
46.7
98.6
84.3
120.8
88.6
89.1
72.6
62.1
77.3
55.6
66.0
660.0
80.1
128.2
719.7
77.3
133.8
758.1
79.6
116.2
868.9
83.0
114.5
1,055.6
98.2
125.8
1,157.1
103.6
157.2
1,258.4
103.4
152.9
1,172.5
110.8
105.0
1,226.6
115.1
114.5
1,333.3
120.4
124.5
87.7
76.6
86.9
81.9
82.2
78.8
85.1
82.9
100.8
99.6
112.2
101.2
114.3
104.4
98.9
103.4
103.6
107.7
115.5
114.7
Trade balance
11.1
5.0
3.4
2.2
1.2
11.0
9.9
4.5
4.1
0.8
Services, net
8.9
2.2
8.9
3.9
8.3
4.9
8.3
6.1
10.0
8.8
8.9
2.1
9.5
0.5
7.8
12.3
8.4
12.5
8.9
8.0
19.5
10.0
18.0
11.6
17.4
10.7
16.4
10.7
17.9
10.5
19.2
10.9
18.9
11.3
18.3
11.7
18.3
12.0
19.5
12.3
7.4
10.3
11.6
11.9
16.1
6.2
7.1
18.8
18.8
15.2
Exports of goods and services

Interest payments
Oil trade balance
102.1
16.3
25.2
103.1
15.9
24.6
98.2
14.9
20.7
102.0
14.4
19.2
120.0
16.8
22.1
133.1
16.8
30.2
135.8
16.5
29.2
120.6
16.7
18.6
126.2
16.6
20.4
139.7
17.1
25.8
Asia
Exports
Imports
193.0
203.4
222.3
233.8
248.4
278.9
307.3
327.5
398.3
417.3
417.0
447.3
466.7
453.0
458.4
391.1
472.3
432.3
507.1
479.6
10.4
11.5
30.6
20.2
19.0
30.3
13.8
67.4
40.0
27.4
0.7
9.7
2.7
14.2
5.2
35.8
5.0
25.2
13.1
32.1
10.5
40.8
17.7
3.9
16.4
51.0
13.8
26.2
13.5
13.9
12.6
11.2
11.7
13.3
12.5
14.4
11.5
16.3
21.8
18.2
19.4
22.1
17.1
26.1
22.2
22.1
23.7
23.4
26.2
24.4
11.1
12.6
34.0
20.4
35.7
38.1
5.0
50.9
26.0
12.0
227.8
18.2
2.8
264.1
19.8
4.3
297.0
20.8
5.8
369.1
23.5
6.2
472.3
27.0
8.9
501.3
30.3
14.1
560.7
27.3
13.2
539.6
30.9
6.5
561.5
30.6
7.1
603.0
31.9
11.1
Exports
Imports
Trade balance

Memorandum
Interest payments
Oil trade balance
Regional groups
Africa
Exports
Imports
Income, net
Memorandum
Trade balance
Services, net
Income, net
Memorandum
Interest payments
Oil trade balance
210
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
139.6
133.3
147.3
146.3
145.5
149.8
155.9
133.7
177.9
157.1
208.0
174.9
211.8
187.6
171.7
186.7
182.3
183.7
195.5
198.1
6.3
1.0
4.3
22.2
20.8
33.1
24.2
15.0
1.4
2.6
Services, net
39.7
33.5
28.8
27.8
21.1
25.4
13.0
9.2
12.5
8.3
16.5
16.7
13.5
10.8
3.5
18.5
4.2
5.6
4.2
6.8
Income, net
7.9
37.5
8.5
7.6
6.3
10.2
1.1
14.9
3.0
11.6
5.6
11.9
7.7
11.7
8.7
10.4
8.5
9.2
9.4
9.0
63.1
26.8
29.3
4.7
0.2
10.4
6.7
20.2
6.3
6.4

Interest payments
Oil trade balance
164.7
10.4
91.1
178.7
8.3
99.3
179.1
9.5
89.2
188.8
9.0
88.2
216.1
10.7
97.5
248.8
10.8
118.9
260.8
11.3
116.8
224.4
11.7
81.3
234.4
12.4
88.6
251.9
12.7
94.8
Western Hemisphere
Exports
Imports
126.5
117.7
132.4
142.6
140.2
154.0
162.0
182.5
197.4
201.9
220.1
223.4
243.1
265.3
232.0
275.4
240.6
257.5
270.1
281.7

Exports
Imports
Trade balance

Memorandum
Trade balance
Services, net
Income, net
8.7
10.2
13.8
20.5
4.6
3.2
22.2
43.5
16.9
11.6
9.0
0.3
10.3
20.4
14.4
28.2
14.6
35.1
14.9
19.5
15.2
18.4
17.5
39.7
21.4
64.9
6.5
23.4
7.8
19.4
28.0
11.3
27.0
12.9
29.3
11.7
30.0
13.5
33.3
15.7
35.8
15.5
42.8
15.8
41.3
17.1
51.5
18.4
56.0
19.0
16.9
34.5
45.8
51.6
37.0
38.7
66.7
89.1
56.5
56.5
165.3
35.2
14.8
173.8
33.2
14.2
183.8
34.3
12.2
209.0
36.0
13.4
247.2
43.7
15.2
274.0
45.7
22.3
301.2
48.3
20.1
287.8
51.5
11.6
304.5
55.5
12.5
338.7
58.7
14.9
Memorandum
Interest payments
Oil trade balance
211
Table 32. Developing Countriesby Analytical Criteria: Current Account Transactions

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
162.3
118.0
167.1
132.1
161.3
124.1
164.3
110.1
186.4
124.3
224.8
129.1
227.6
140.7
171.4
142.6
187.9
143.3
206.8
151.4

Fuel
Exports
Imports
Trade balance
44.3
35.0
37.2
54.2
62.1
95.7
87.0
28.7
44.6
55.5
Services, net
55.7
11.4
46.9
11.9
38.7
1.5
30.8
23.4
32.6
29.6
38.4
57.3
39.9
47.1
28.9
0.1
27.0
17.5
30.1
25.4
Income, net
3.3
52.0
1.2
19.7
1.1
21.5
4.4
23.9
4.4
22.4
3.5
22.2
2.3
22.7
1.4
22.6
0.7
21.9
1.0
21.3
60.1
30.3
24.1
4.9
2.8
31.7
22.0
24.2
5.0
3.1

Interest payments
Oil trade balance
173.9
11.2
132.3
182.1
11.7
139.4
176.3
12.0
125.2
179.9
11.2
123.0
204.2
13.9
137.7
242.8
13.9
172.4
247.8
13.4
170.4
191.6
13.8
118.0
209.5
13.9
129.7
229.2
15.1
143.9
Nonfuel exports
Exports
Imports
384.4
413.0
421.9
472.5
454.9
537.4
546.0
616.4
688.0
751.7
732.5
817.6
808.3
869.5
789.6
813.9
810.9
837.9
881.4
922.7
Trade balance
28.6
50.6
82.5
70.4
63.7
85.1
61.2
24.3
27.0
41.4
Services, net
1.2
29.8
3.8
54.4
10.3
92.9
10.2
80.6
17.9
81.6
12.8
97.8
18.3
79.5
20.2
44.5
5.8
32.8
4.3
45.7
Income, net
55.6
46.9
49.4
49.9
51.8
48.0
52.5
49.5
65.4
55.2
65.3
58.9
68.8
64.2
71.7
63.1
84.2
66.5
91.3
68.0
38.5
54.0
96.7
83.7
91.9
104.2
84.1
53.1
50.6
69.0
486.1
68.9
4.0
537.6
65.6
5.6
581.8
67.6
9.0
689.0
71.8
8.5
851.4
84.3
12.0
914.3
89.7
15.2
1,010.6
90.0
17.5
980.9
97.0
12.9
1,017.1
101.2
15.2
1,104.1
105.3
19.5
176.7
171.3
202.7
194.3
225.3
235.6
280.0
278.8
361.4
367.5
372.2
388.0
413.5
394.7
402.5
348.3
411.6
374.9
443.9
412.4

Memorandum

Memorandum
Interest payments
Oil trade balance
Manufactures
Exports
Imports
Trade balance
5.5
8.4
10.3
1.2
6.1
15.8
18.8
54.2
36.8
31.5
Services, net
0.8
6.3
1.9
6.6
4.4
14.7
4.1
2.9
11.9
18.1
6.8
22.6
11.8
7.0
7.1
47.1
0.2
36.6
0.8
32.2
20.1
9.2
18.9
11.8
23.9
11.8
23.4
13.7
37.1
16.3
40.9
19.0
44.5
22.1
49.1
18.4
51.8
20.1
55.9
21.3
4.6
0.5
26.8
12.6
38.8
44.5
15.4
16.4
4.9
2.4
204.8
20.7
7.5
236.2
21.6
8.1
265.1
23.5
9.3
330.0
24.3
9.3
420.7
28.9
12.7
438.7
33.6
18.0
486.5
31.1
16.6
470.9
34.2
10.9
486.5
34.4
11.4
525.5
35.4
13.4
Income, net
Memorandum
Interest payments
Oil trade balance
212
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
36.5
38.8
38.0
43.0
38.0
44.9
45.1
50.0
56.5
62.7
59.7
69.2
65.3
74.0
61.4
73.2
64.1
73.0
71.0
79.4
Trade balance
2.4
5.0
6.9
4.9
6.1
9.4
8.6
11.8
8.9
8.4
Services, net
4.1
6.4
4.8
9.9
4.8
11.7
4.3
9.2
5.5
11.6
5.8
15.3
6.4
15.0
6.0
17.7
5.3
14.2
5.7
14.2
10.0
6.2
9.0
7.5
8.7
7.0
10.0
7.5
9.9
7.6
10.4
8.9
10.7
8.5
9.7
9.1
9.9
9.6
10.8
9.7
10.2
11.3
13.5
11.7
13.9
16.8
17.2
18.2
14.5
15.3

Interest payments
Oil trade balance
44.3
9.0
3.9
46.8
9.1
3.4
47.2
8.9
2.9
55.4
8.8
3.0
69.1
9.5
3.9
73.1
9.0
4.8
79.5
9.2
5.0
76.2
9.5
4.5
79.1
9.6
4.6
87.4
9.7
4.5

private transfers
Exports
Imports
14.5
36.8
14.2
38.0
15.1
41.4
16.5
42.9
20.5
50.1
21.6
54.5
23.4
57.5
23.3
60.1
24.1
63.6
26.9
68.1
Trade balance
22.3
23.7
26.3
26.3
29.5
32.9
34.1
36.8
39.5
41.2
Services, net
7.2
15.1
7.8
15.9
8.1
18.2
10.2
16.2
10.7
18.8
12.8
20.1
13.4
20.8
11.5
25.3
13.1
26.4
15.0
26.2
3.2
13.4
0.8
12.9
1.1
13.6
2.3
12.2
1.7
13.1
1.1
12.7
1.0
14.1
0.9
15.0
1.3
15.5
1.7
15.3
4.9
3.8
5.8
6.3
7.5
8.5
7.6
11.3
12.2
12.6
31.4
6.3
33.4
3.6
0.6
36.2
3.5
0.8
39.9
3.3
1.2
45.5
3.4
1.4
48.6
3.2
1.5
51.6
3.1
2.2
51.5
3.0
2.7
54.3
3.2
3.5
59.5
3.3
3.6
156.7
166.2
166.9
197.2
176.5
215.5
204.4
244.8
249.5
271.4
279.0
306.0
306.1
343.3
302.4
332.4
311.0
326.4
339.7
362.8

Exports
Imports
Income, net
Memorandum
Income, net
Memorandum
Interest payments
Oil trade balance
Diversified
Exports
Imports
9.5
30.3
39.0
40.4
21.9
27.0
37.2
30.0
15.4
23.2
Services, net
Trade balance
5.1
14.5
5.0
35.2
9.2
48.2
12.0
52.4
11.2
33.1
12.9
39.8
13.5
50.7
18.6
48.6
13.4
28.8
14.4
37.6
Income, net
22.2
18.0
20.7
17.6
18.1
15.7
16.7
16.1
16.8
18.2
12.9
18.3
12.6
19.5
12.0
20.7
21.3
21.3
22.9
21.7
18.7
38.3
50.6
53.1
31.6
34.5
43.9
39.9
28.8
38.8
205.6
32.9
7.4
221.2
31.3
6.5
233.3
31.7
4.0
263.7
35.4
5.1
316.1
42.4
6.0
353.8
43.8
9.1
392.9
46.6
6.3
382.3
50.3
5.2
397.1
54.0
4.3
431.8
57.0
2.0

Memorandum
Interest payments
Oil trade balance
213
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
455.3
473.0
492.1
535.0
520.1
593.0
612.0
661.5
761.9
804.3
825.6
871.0
900.9
930.1
858.3
875.7
885.0
900.6
966.6
990.2

Exports
Imports
Trade balance
17.7
42.9
72.9
49.5
42.4
45.4
29.2
17.4
15.6
23.6
Services, net
13.8
31.4
17.6
60.5
22.7
95.5
21.2
70.7
29.0
71.5
23.9
69.4
30.3
59.5
29.6
47.0
15.0
30.6
14.5
38.2
Income, net
66.4
48.5
60.6
52.6
63.0
51.2
63.5
52.3
78.3
57.6
77.1
60.9
80.1
65.5
82.7
64.5
95.7
67.9
104.0
69.7
49.3
68.5
107.4
81.8
92.2
85.6
74.1
65.2
58.4
72.5
562.2
78.3
53.5
613.0
75.6
51.4
652.4
77.9
41.2
760.6
81.1
40.3
931.7
95.8
43.1
1,014.3
100.6
57.1
1,110.4
99.7
53.9
1,056.7
106.8
35.9
1,098.4
111.1
38.7
1,197.0
116.3
44.3
Official financing
Exports
Imports
51.5
62.0
51.6
66.7
51.0
68.5
55.2
71.0
67.1
86.0
77.4
93.7
80.6
95.7
74.4
96.5
76.5
101.5
86.1
106.9
Trade balance
10.5
15.1
17.4
15.8
18.9
16.4
15.1
22.0
25.0
20.8
Services, net
5.0
15.4
4.6
19.6
4.5
21.9
4.6
20.4
5.6
24.5
5.4
21.8
6.3
21.4
4.5
26.6
5.0
30.0
4.9
25.7
Income, net
12.7
14.5
12.1
17.2
12.0
16.1
11.5
16.8
11.4
18.2
11.8
19.7
12.6
20.5
12.6
21.3
12.0
20.9
12.7
21.4
13.6
14.5
17.8
15.1
17.7
13.9
13.5
17.8
21.0
17.0
65.0
12.0
8.8
67.0
12.1
8.8
67.2
11.7
6.5
72.7
11.5
5.9
87.0
12.4
7.7
98.6
12.2
11.3
101.7
12.4
11.0
96.3
12.8
4.6
99.3
12.2
4.6
110.7
12.5
7.6
316.8
308.7
346.0
355.1
367.9
400.9
442.6
448.2
558.9
547.3
601.4
587.8
655.1
629.5
620.5
593.4
636.9
604.1
689.5
665.0

Memorandum
Interest payments
Oil trade balance

Memorandum
Interest payments
Oil trade balance
Private financing
Exports
Imports
Trade balance
Services, net
Income, net
8.1
9.1
33.0
5.6
11.6
13.6
25.6
27.1
32.8
24.5
9.7
1.6
14.1
23.1
17.4
50.4
17.1
22.7
21.2
9.6
15.0
1.4
17.1
8.5
15.7
11.3
1.2
31.5
0.8
23.7
36.2
15.9
36.6
18.0
40.7
16.7
43.2
16.7
60.2
19.4
65.1
19.4
69.7
22.4
68.6
22.0
81.4
26.2
87.0
27.5
21.9
41.7
74.4
49.2
50.4
47.2
38.8
35.3
23.7
35.9
385.2
48.3
41.6
423.2
49.0
40.6
454.1
51.2
34.3
538.9
53.7
33.7
669.3
65.6
35.3
724.4
70.3
47.3
792.6
68.6
41.4
750.8
73.5
27.0
777.9
76.0
30.5
842.0
78.8
34.3
Memorandum
Interest payments
Oil trade balance
214
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
87.0
102.3
94.5
113.3
101.1
123.6
114.3
142.4
135.9
171.0
146.8
189.5
165.2
204.9
163.4
185.8
171.6
195.0
191.0
218.4
Trade balance
15.3
18.8
22.5
28.1
35.1
42.6
39.7
22.5
23.4
27.3
Services, net
0.9
14.4
1.0
17.8
0.8
23.2
0.4
27.7
2.3
37.4
3.5
46.2
6.9
46.6
9.3
31.8
8.7
32.1
8.8
36.1
Income, net
17.5
18.2
11.9
17.4
10.3
18.3
8.7
18.8
6.8
20.0
0.2
21.8
2.2
22.6
1.5
21.2
2.3
20.8
4.3
20.9
13.7
12.3
15.2
17.6
24.1
24.6
21.8
12.1
13.7
19.6
112.0
18.0
3.1
122.8
14.4
2.1
131.1
15.0
0.4
149.0
15.8
0.6
175.4
17.8
0.1
191.2
18.1
1.5
216.1
18.7
1.5
209.5
20.6
4.2
221.2
22.9
3.6
244.4
25.1
2.5
144.6
145.3
149.4
153.0
148.8
157.8
163.0
164.5
188.3
209.3
215.6
225.0
232.1
250.4
209.6
246.8
223.8
247.0
257.4
271.3
Exports
Imports

Memorandum
Interest payments
Oil trade balance
Exports
Imports
0.6
3.6
9.0
1.6
20.9
9.4
18.3
37.2
23.2
13.9
Services, net
Trade balance
11.2
11.9
11.4
15.0
13.5
22.5
11.0
12.6
15.9
36.8
15.0
24.4
21.1
39.3
20.2
57.4
15.1
38.3
15.7
29.6
Income, net
34.6
21.8
28.7
23.6
30.5
23.6
27.9
23.7
27.6
24.8
25.6
24.6
28.1
24.4
34.4
25.5
37.3
26.3
41.1
26.4
24.7
20.1
29.4
16.7
39.6
25.5
43.1
66.4
49.3
44.2

Interest payments
Oil trade balance
173.8
35.1
51.4
182.2
31.3
50.3
183.2
32.5
43.5
201.1
30.3
42.4
230.5
35.7
46.9
262.7
36.5
62.1
283.9
37.2
60.5
256.8
38.8
40.0
273.3
42.0
44.3
312.2
43.9
53.4

Exports
Imports
310.7
327.7
342.7
382.1
371.2
435.2
449.1
497.0
573.6
595.1
610.0
646.0
668.8
679.7
648.7
628.9
661.2
653.7
709.2
718.9
Trade balance
17.0
39.4
63.9
47.9
21.5
36.0
10.9
19.8
7.5
9.7
Services, net
2.5
19.5
6.2
45.6
9.1
73.1
10.2
58.2
13.2
34.7
8.9
44.9
9.2
20.2
9.4
10.4
0.1
7.7
1.1
8.6
Income, net
31.7
26.7
31.9
29.0
32.5
27.6
35.6
28.7
50.7
32.8
51.5
36.3
52.0
41.2
48.3
39.0
58.3
41.6
63.0
43.3
24.5
48.5
78.0
65.1
52.7
60.1
31.0
1.1
9.1
28.2
388.4
43.2
2.1
430.8
44.3
1.2
469.2
45.4
2.3
559.5
50.9
2.1
701.2
60.1
3.8
751.6
64.1
5.0
826.5
62.5
6.6
799.9
68.0
4.2
825.2
69.1
5.6
884.8
72.5
9.1

Memorandum

Memorandum
Interest payments
Oil trade balance
215
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
26.6
29.8
26.7
31.5
25.9
32.9
29.5
34.8
36.5
42.4
42.0
48.4
44.9
49.7
42.7
50.7
45.7
54.2
51.4
57.9
Other groups
Exports
Imports
Trade balance
3.2
4.8
6.9
5.3
6.0
6.4
4.9
8.0
8.4
6.5
Services, net
4.6
7.8
5.0
9.8
4.7
11.7
4.2
9.5
5.3
11.2
6.0
12.4
6.2
11.1
5.9
13.8
6.2
14.6
6.5
13.0
10.0
5.9
8.8
6.7
8.8
6.4
8.7
8.0
9.0
8.0
9.7
8.9
9.6
8.4
9.2
9.3
9.7
9.6
10.4
9.5
11.9
11.8
14.0
10.2
12.3
13.3
12.3
13.8
14.8
14.0

Interest payments
Oil trade balance
33.3
7.7
2.2
34.1
7.7
2.7
33.3
7.6
1.7
37.4
7.1
1.5
45.8
7.4
2.0
51.9
7.6
2.6
54.8
7.3
3.6
53.2
7.3
1.4
56.8
7.4
2.5
63.4
7.3
3.9

Exports
Imports
16.0
25.6
15.6
26.4
16.5
27.3
18.8
28.4
22.7
33.3
24.4
36.2
26.7
37.6
25.6
39.0
27.3
42.1
30.6
44.8
9.6
10.8
10.8
9.6
10.5
11.8
10.8
13.5
14.9
14.2
2.8
12.3
2.8
13.6
2.8
13.7
2.3
11.9
3.1
13.7
2.9
14.7
2.8
13.6
3.2
16.7
3.5
18.4
3.8
18.0
3.3
6.4
2.3
7.3
1.8
7.4
3.6
9.1
3.5
9.3
3.8
9.7
3.8
9.4
3.7
9.7
3.7
9.8
3.9
9.6
9.3
8.6
8.1
6.5
7.9
8.8
7.9
10.6
12.4
12.3
20.4
3.4
2.7
20.5
3.4
2.5
21.5
3.2
2.6
24.0
3.3
2.7
28.5
3.5
3.4
30.3
3.4
3.8
33.0
3.5
3.6
32.2
3.5
3.7
34.4
3.7
3.8
38.4
3.3
3.5
146.2
130.7
151.8
143.5
148.2
139.6
152.2
132.6
172.7
146.9
200.2
155.7
204.7
162.4
162.7
165.9
177.6
168.1
191.9
178.4
Income, net
Memorandum
Trade balance
Services, net
Income, net
Memorandum
Interest payments
Oil trade balance
Exports
Imports
15.5
8.2
8.6
19.6
25.8
44.5
42.3
3.1
9.5
13.5
Services, net
Trade balance
45.7
30.2
34.3
26.1
27.4
18.9
17.7
1.9
18.3
7.6
21.5
23.0
22.2
20.1
14.8
17.9
11.8
2.3
13.0
0.5
Income, net
3.7
38.2
5.0
6.8
2.5
9.2
1.8
13.4
1.2
11.4
0.6
11.3
2.6
11.6
3.5
11.0
4.2
9.8
4.2
9.5
64.7
27.9
25.5
13.3
5.0
12.3
11.1
25.5
7.9
4.8
165.8
11.9
105.8
177.7
9.9
113.1
175.2
10.6
102.2
180.7
9.7
100.1
204.3
11.8
110.8
233.6
12.3
135.7
240.4
12.4
134.2
198.3
12.4
95.3
215.9
12.6
103.4
232.3
13.0
111.7

Memorandum
Interest payments
Oil trade balance
216
Balance of Payments and External Financing: Summary
Table 33. Summary of Balance of Payments and External Financing

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
98.6
84.3
120.8
88.6
89.1
72.6
62.1
77.3
55.6
66.0
98.6
84.3
120.8
88.6
89.1
72.6
62.1
77.3
55.6
66.0
12.3
152.8
14.6
51.9
3.7
137.4
9.4
47.3
4.7
171.5
8.0
47.4
4.1
141.8
13.9
43.4
5.4
180.8
29.6
67.5
8.8
170.6
11.7
95.2
7.5
151.0
28.4
68.0
7.5
91.4
21.9
0.3
5.9
81.0
13.3
18.0
9.1
109.0
11.2
41.0
Nonexceptional financing flows

Exceptional financing flows
124.9
25.6
100.5
31.1
134.1
34.1
103.7
28.3
134.5
22.2
147.4
20.4
124.4
5.7
58.6
18.4
49.0
24.6
94.4
12.6
Arrears on debt service

Debt forgiveness
Rescheduling of debt service
15.9
8.3
13.9
6.5
0.3
17.2
12.4
1.8
22.6
6.3
1.2
25.5
5.0
0.9
19.8
4.1
5.5
24.7
4.2
3.5
15.5
0.2
1.9
5.3
...
...
...
...
...
...
Change in reserves ( = increase)
51.9
47.3
47.4
43.4
67.5
95.2
68.0
0.3
18.0
41.0
98.6
51.9
84.3
47.3
120.8
47.4
88.6
43.4
89.1
67.5
72.6
95.2
62.1
68.0
77.3
0.3
55.6
18.0
66.0
41.0
Balance of payments
Balance on current account
Balance on capital and
financial account
By balance of payments component
Capital transfers1
Net financial flows
Errors and omissions, net
By type of financing flow
External financing
Change in reserves ( = increase)2
Asset transactions, including
net errors and omissions3
Total, net external financing4
Non-debt-creating flows, net
Capital transfers1
Direct investment and portfolio
investment equity flows
Net credit and loans from IMF5
Net external borrowing6
Borrowing from official
creditors7
Borrowing from banks8
Other borrowing9
11.0
22.4
25.2
20.4
57.1
52.3
119.3
108.2
80.7
72.3
139.5
154.0
193.3
152.4
213.8
220.1
249.4
185.1
154.3
179.2
44.7
43.1
83.0
101.6
102.0
134.2
151.2
129.6
119.3
127.1
12.3
3.7
4.7
4.1
5.4
8.8
7.5
7.5
5.9
9.1
32.4
39.5
78.4
97.5
96.6
125.4
143.7
122.1
113.5
118.0
1.1
93.6
0.4
111.3
0.1
110.4
0.8
51.5
12.6
99.2
2.9
88.9
0.8
97.4
8.5
47.1
...
32.7
...
59.5
26.5
21.4
45.7
20.1
18.9
72.3
21.9
0.4
88.9
19.7
18.3
50.2
38.8
16.8
43.6
15.3
15.3
88.8
0.6
20.7
76.1
19.2
15.3
12.5
16.1
5.1
21.8
4.3
6.2
57.6
1.2
1.7
2.1
1.3
1.1
0.8
0.6
0.8
0.3
0.4
94.8
234.3
188.4
114.4
268.4
225.7
129.6
322.9
240.0
136.3
288.7
187.9
159.8
373.5
258.9
195.4
415.5
284.3
217.6
467.1
315.0
227.9
413.0
274.9
235.7
390.0
268.5
212.2
391.4
271.7
4.9
1.7
5.4
3.8
2.9
16.7
26.3
25.1
16.1
20.2
4.9
1.7
5.4
3.8
2.9
16.7
26.3
25.1
16.1
20.2
1.5
0.6
18.7
13.0
3.9
6.7
7.2
1.6
4.1
19.0
8.5
9.3
2.1
5.4
4.8
6.4
1.0
35.7
3.8
37.6
0.9
14.0
2.5
0.6
9.8
31.3
5.0
9.8
0.8
24.0
2.4
2.1
1.0
23.5
1.1
7.4
1.3
30.7
0.4
11.5
Memorandum
in percent of GDP10
Scheduled amortization
of external debt
Gross external financing11
Gross external borrowing11
Balance of payments
Balance on capital and
financial account
By balance of payments component
Capital transfers1
Net financial flows
Errors and omissions, net
217
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Nonexceptional financing flows

Exceptional financing flows
32.2
14.4
17.6
20.9
8.6
23.3
14.8
17.4
24.7
15.8
8.8
8.5
33.1
3.0
23.9
3.4
3.2
20.3
23.8
7.8
Arrears on debt service

Debt forgiveness
Rescheduling of debt service
0.1
0.2
2.9
7.3
2.4
9.5
2.1
2.1
16.7
3.1
14.8
12.4
0.2
26.7
1.0
0.9
8.5
0.3
1.9
0.7
1.9
...
...
...
...
...
...
13.0
1.6
9.3
6.4
37.6
0.6
9.8
2.1
7.4
11.5
4.9
13.0
1.7
1.6
5.4
9.3
3.8
6.4
2.9
37.6
16.7
0.6
26.3
9.8
25.1
2.1
16.1
7.4
20.2
11.5
19.4
9.8
1.7
5.0
18.3
4.6
15.6
14.0
12.5
10.6
By type of financing flow
External financing
Change in reserves ( = increase)2
net errors and omissions3
Total, net external
financing4
1.6
13.2
16.4
7.6
22.2
22.0
51.7
41.3
36.0
42.2
3.8
8.1
10.1
7.7
14.6
14.5
30.8
21.1
23.2
25.2
transfers1
1.5
3.9
4.1
2.1
1.0
0.9
9.8
0.8
1.0
1.3
2.3
4.2
6.0
5.6
13.6
13.6
21.0
20.3
22.2
23.9
2.4
4.6
1.6
3.6
3.7
2.6
2.4
2.5
4.7
2.9
3.7
3.7
2.5
18.5
5.5
14.7
...
13.9
...
18.2
9.3
6.1
7.8
3.6
1.2
1.2
0.7
7.4
4.2
10.5
4.2
3.8
9.1
1.7
13.6
2.4
2.9
3.2
8.2
4.9
5.4
10.8
3.1
0.8
1.9
0.9
11.1
1.1
2.0
15.2
0.6
0.3
1.9
0.4
0.6
2.0
2.7
2.6
1.4
1.8
32.9
34.5
28.3
31.0
44.1
34.5
26.3
42.7
28.9
26.6
34.2
24.1
28.6
50.9
31.5
29.2
51.1
32.9
24.5
76.2
43.0
33.0
74.3
47.7
36.3
72.3
50.2
39.6
81.8
57.8
Capital
Direct investment and portfolio
investment equity flows
Net credit and loans from
Net external borrowing6
IMF5
Borrowing from official

creditors7
Borrowing from banks8
Other borrowing9
Memorandum
in percent of GDP10
Scheduled amortization
of external debt
Gross external financing11
Gross external borrowing11
1Comprise debt forgiveness as well as all other identified transactions on capital account as defined in the fifth edition of the IMFs Balance of Payments
Manual (1993).
2Positioned here to reflect the discretionary nature of many countries transactions in reserves.
3Include changes in recorded private external assets (mainly portfolio investment), export credit, the collateral for debt-reduction operations, and balance
of payments net errors and omissions.
4Equals, with opposite sign, the sum of transactions listed above. It is the amount required to finance the deficit on goods and services, income, and current transfers; the increase in the official reserve level; the net asset transactions; and the transactions underlying net errors and omissions.
5Comprise use of IMF resources under the General Resources Account, Trust Fund, Structural Adjustment Facility (SAF), and Enhanced Structural
Adjustment Facility (ESAF). For further detail, see Table 37.
6Net disbursement of long- and short-term credits (including exceptional financing) by both official and private creditors.
7Net disbursements by official creditors (other than monetary authorities) based on directly reported flows and flows derived from statistics on debt stocks.
The estimates include the increase in official claims caused by the transfer of officially guaranteed claims to the guarantor agency in the creditor country, usually in the context of debt rescheduling.
8Net disbursements by commercial banks based on directly reported flows and on cross-border claims and liabilities reported in the International Banking
section of the IMFs International Financial Statistics.
9Includes primary bond issues and loans on the international capital markets. Since the estimates are residually derived, they also reflect any underrecording or misclassification of official and commercial bank credits above.
10This is often referred to as the resource balance and, with opposite sign, the net resource transfer.
11Net external financing/borrowing (see footnotes 4 and 6, respectively) plus amortization due on external debt.
218
Balance of Payments and External Financing: By Region
Table 34. Developing Countriesby Region: Balance of Payments and External Financing1
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
7.4
3.0
10.3
0.3
11.6
2.2
11.9
5.6
16.1
0.7
6.2
10.1
7.1
14.2
18.8
2.5
18.8
1.4
15.2
8.2
9.7
12.1
10.2
1.3
3.2
5.7
4.1
6.4
5.4
4.2
Total, net external financing
20.0
22.0
24.1
18.7
20.0
22.0
25.4
27.7
25.6
27.5

Net credit and loans from IMF
Net external borrowing
From official creditors
From banks
Other
3.9
0.2
15.9
9.1
3.5
3.3
2.3
0.2
20.0
12.1
1.6
6.3
4.3
0.2
19.6
8.3
4.0
7.3
4.1
0.9
13.7
13.5
3.6
3.4
4.5
0.8
14.7
11.7
2.5
5.6
11.2
0.6
10.2
0.2
0.2
9.7
11.6
0.5
14.3
4.7
1.1
20.0
8.1
0.5
20.1
2.2
1.0
18.9
11.5
...
14.1
4.8
0.6
9.9
16.6
...
11.5
3.5
0.3
15.3
15.2
11.4
15.6
15.6
18.0
11.6
16.9
15.7
14.2
14.9
9.4
19.0
14.7
14.4
15.3
5.0
16.5
5.7
14.8
1.5
8.6
1.6
9.8
0.9
10.6
2.1
8.7
3.5
11.9
1.9
6.9
7.2
9.8
9.6
16.8
3.2
17.5
1.9
14.0
7.2
2.3
3.8
2.6
0.3
3.5
5.8
6.9
6.9
5.4
4.2
12.5
12.7
15.4
12.5
17.3
19.9
26.3
26.9
24.8
25.4

From banks
Other
3.4
9.1
6.5
0.1
2.8
1.2
11.4
9.8
3.2
4.9
3.2
0.7
11.5
5.6
0.1
5.9
3.0
0.5
9.0
7.0
0.6
1.3
3.8
0.6
12.9
6.8
0.9
5.3
10.2
0.1
9.7
0.3
0.6
9.3
9.9
0.5
16.9
1.2
1.2
19.3
6.4
0.3
20.8
3.2
0.7
18.2
9.6
...
15.0
4.8
0.5
9.6
14.9
...
10.8
4.6
0.5
14.9
7.7
10.4
6.3
15.0
9.3
11.6
10.8
10.0
11.6
9.2
7.5
14.4
15.7
11.2
14.7
4.0
15.8
5.2
12.7
1.3
11.1
27.1
12.6
14.7
34.0
26.3
20.4
40.3
35.7
33.5
38.1
39.7
5.0
29.1
50.9
23.0
26.0
17.7
12.0
24.8
Africa
net errors and omissions
Memorandum
Net financial flows
Exceptional financing
Sub-Sahara
Memorandum
Net financial flows
Exceptional financing2
Asia
7.7
10.1
11.9
17.7
35.3
30.7
91.4
76.9
60.5
49.5
45.9
37.4
72.3
78.4
104.5
108.5
115.5
49.0
52.3
62.2

From banks
Other
12.6
1.9
31.4
10.6
10.4
10.4
17.4
1.3
18.7
10.8
6.0
1.9
35.5
0.6
36.2
10.3
11.3
14.6
47.9
0.8
31.3
10.8
19.8
0.7
50.4
1.5
55.6
7.3
19.2
29.1
58.5
1.7
51.7
0.6
26.8
25.4
62.2
5.0
48.3
14.2
20.7
13.4
57.1
6.6
14.6
13.8
2.8
25.6
41.0
...
8.5
8.0
8.2
8.6
40.8
...
20.9
1.3
1.4
18.2
42.4
2.4
29.7
2.2
63.1
0.8
71.7
1.2
94.2
0.5
93.5
0.8
51.4
8.1
10.0
12.0
0.9
18.8
22.8
10.6
Memorandum
Net financial flows
219
Asia excluding China and India
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
20.6
10.2
16.1
15.4
20.6
17.8
24.5
4.2
39.3
12.1
40.4
4.4
24.4
11.0
22.7
12.7
18.4
16.3
7.3
12.0
1.2
0.1
2.7
9.2
7.9
1.7
27.3
17.2
9.9
3.5
32.1
31.4
41.2
37.9
59.3
46.4
40.7
7.3
7.8
8.1

From banks
Other
9.0
0.2
22.9
6.4
6.6
9.9
10.0
0.1
21.3
4.8
1.9
14.6
11.8
0.1
29.3
4.4
3.4
21.5
15.0
0.4
22.5
2.0
8.3
12.2
14.7
0.3
44.8
3.3
11.8
29.8
16.4
0.4
30.5
2.4
25.5
7.4
17.2
5.7
17.8
17.2
16.2
15.5
13.3
7.0
13.0
8.3
3.0
18.3
10.4
...
5.8
6.1
15.1
3.2
7.9
...
0.4
2.5
9.2
11.2
29.1
2.4
27.3
2.2
34.8
0.8
32.7
1.2
50.0
0.5
42.4
0.8
17.8
8.1
11.0
12.0
3.7
18.8
3.7
10.6
63.1
4.4
26.8
10.3
29.3
2.4
4.7
1.7
0.2
7.9
10.4
17.3
6.7
10.2
20.2
12.9
6.3
5.6
6.4
4.0
38.0
7.5
3.1
1.2
6.0
2.5
10.2
9.7
5.2
6.5
29.5
29.6
29.9
5.2
14.1
9.4
13.7
17.0
17.2
16.8

From banks
Other
9.7
19.9
4.0
4.3
11.5
1.5
0.1
28.1
1.2
11.8
17.5
4.2
25.8
2.5
0.6
22.6
6.3
0.4
1.5
1.2
11.1
10.8
8.2
0.4
5.5
1.2
2.6
9.3
3.6
0.1
5.7
0.8
7.3
13.9
5.4
0.2
8.1
0.6
0.9
7.8
5.9
0.1
11.3
0.9
9.6
2.6
6.4
...
11.1
1.5
3.5
9.1
10.3
...
6.5
1.8
0.9
7.5
68.4
1.3
38.2
3.3
28.3
14.2
12.4
4.8
4.6
3.9
2.1
0.3
7.2
0.4
8.1
0.5
11.7
0.5
8.9
16.9
17.4
34.5
22.6
45.8
21.3
51.6
4.2
37.0
25.5
38.7
28.1
66.7
14.5
89.1
12.9
56.5
6.7
56.5
4.1
9.5
7.8
0.1
2.6
12.7
13.4
13.7
15.2
9.5
12.1
Memorandum
Net financial flows

Memorandum
Net financial flows
Western Hemisphere
43.9
64.9
67.0
50.1
75.2
80.2
94.9
91.4
59.2
72.6

From banks
Other
12.0
1.0
32.9
2.7
3.2
27.0
14.4
1.6
52.1
1.7
0.4
54.3
12.6
0.9
55.3
0.7
16.3
70.9
23.5
1.3
27.8
3.4
30.6
61.8
23.3
12.9
39.0
21.1
2.7
15.2
39.8
2.0
42.4
14.1
4.4
60.9
52.5
4.0
46.3
8.4
0.2
54.4
48.4
2.5
40.4
4.1
9.6
26.7
43.1
...
16.5
4.8
0.1
11.6
43.3
...
36.8
0.1
4.2
32.8
26.8
13.1
53.9
10.0
62.1
7.5
40.7
6.5
67.8
2.8
65.6
0.9
77.8
1.1
77.9
0.8
51.9
0.3
62.6
0.4
Memorandum
Net financial flows
1For
definitions, see footnotes to Table 33.

1997, the reduction of the stock of arrears through cancellation of payments arrears exceeds the total value of debt forgiveness and rescheduling, since
the lower values for the latter reflect implicit discounts on debt-reduction operations with commercial banks.
2In
220
Balance of Payments and External Financing: By Analytical Criteria
Table 35. Developing Countriesby Analytical Criteria: Balance of Payments and External Financing1
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
60.1
1.2
30.3
0.4
24.1
11.3
4.9
2.9
2.8
1.4
31.7
23.2
22.0
13.2
24.2
17.6
5.0
2.1
3.1
4.1

Fuel
30.3
2.7
12.1
11.3
8.4
9.0
8.4
11.5
8.1
10.1
30.9
32.6
24.9
13.2
4.2
0.6
0.4
18.1
11.1
11.1

From banks
Other
3.2
0.5
27.2
8.0
7.4
11.8
0.9
0.5
32.2
7.5
10.7
14.0
0.7
0.8
24.9
3.3
5.7
16.0
4.3
0.4
8.5
9.0
2.3
1.8
5.4
0.2
1.0
5.7
9.3
2.6
9.0
0.7
9.1
1.5
11.7
4.1
9.9
0.3
10.0
2.2
2.5
5.3
9.4
0.6
9.2
1.2
5.1
2.9
9.8
...
1.8
0.4
2.2
14.3
...
2.5
0.3
1.0
1.3
81.4
4.8
43.7
10.3
25.8
17.3
14.1
14.1
2.5
12.5
13.2
13.5
6.8
7.5
4.9
6.4
4.7
2.5
1.7
1.0
38.5
50.7
54.0
47.7
96.7
58.7
83.7
46.3
91.9
68.9
104.2
71.9
84.1
54.9
53.1
17.3
50.6
20.0
69.0
36.9
Memorandum
Net financial flows
Nonfuel
19.3
19.8
13.1
9.1
48.7
43.3
110.9
96.7
72.6
62.2
108.5
121.4
168.4
139.1
209.5
219.5
249.8
167.1
143.2
168.1

From banks
Other
35.0
0.6
72.9
18.5
13.9
40.5
34.6
86.7
12.5
8.2
66.0
55.9
0.6
112.0
18.5
6.0
99.4
77.6
1.2
62.8
10.7
16.0
68.1
80.9
12.8
115.8
33.1
26.0
56.7
104.0
3.6
119.1
13.8
27.1
105.8
121.8
1.2
126.9
2.7
23.3
100.9
110.1
9.1
47.9
18.0
10.2
19.7
92.2
...
48.3
16.1
4.7
37.0
96.7
...
78.2
4.0
7.2
75.0
71.4
20.8
93.6
20.8
145.6
16.8
127.6
14.2
183.3
9.6
183.9
6.9
157.8
1.8
86.5
12.0
76.3
22.0
107.4
11.6
49.3
1.4
15.8
4.5
13.4
7.8
6.8
3.2
3.1
1.0
13.0
7.5
12.0
7.8
12.0
11.3
2.8
1.0
6.5
2.3
Memorandum
Net financial flows

37.8
6.3
4.9
3.4
10.1
7.2
5.6
9.0
6.6
7.6
12.9
14.0
10.5
7.0
6.1
1.7
1.3
9.7
4.9
3.3

From banks
Other
0.4
12.5
0.1
1.0
11.5
0.7
14.6
7.0
7.6
10.5
0.3
2.4
7.8
2.3
4.7
0.2
2.4
6.8
2.2
3.9
0.1
1.1
4.8
0.3
2.0
0.9
5.2
6.4
2.0
0.6
0.6
1.9
3.1
2.0
7.7
0.5
6.0
1.2
2.2
...
2.7
1.0
1.1
2.6
5.1
...
1.7
1.3
0.3
0.2
62.8
25.4
11.1
10.5
0.5
5.0
2.7
1.0
0.8
3.4
Memorandum
Net financial flows
221
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
49.3
50.5
68.5
42.8
107.4
55.2
81.8
46.6
92.2
68.5
85.6
87.7
74.1
60.3
65.2
11.0
58.4
17.0
72.5
38.7
26.8
28.7
20.3
16.9
47.0
45.2
113.7
99.2
74.0
64.7
126.5
140.0
182.8
145.4
207.7
218.4
248.1
175.4
149.4
175.9

From banks
Other
37.7
1.1
87.7
26.4
20.4
40.8
36.2
0.4
104.3
20.0
11.9
72.3
56.5
0.1
126.4
21.5
2.8
107.6
79.5
0.8
66.6
19.5
15.9
63.1
84.2
12.6
110.9
38.7
17.8
54.5
113.4
2.9
108.0
16.1
20.6
103.6
129.7
0.8
117.6
18.8
98.8
117.5
8.5
49.4
18.7
9.3
21.3
99.7
...
47.5
17.1
6.2
36.6
105.9
...
77.4
3.0
6.5
73.9
90.1
25.6
111.9
31.1
160.3
34.1
131.3
28.3
180.3
22.2
175.6
20.4
153.7
5.7
90.4
18.4
81.8
24.6
112.5
12.6
13.6
4.3
14.5
0.2
17.8
15.1
5.2
17.7
2.4
13.9
5.2
13.5
4.3
17.8
1.2
21.0
0.9
17.0
5.2
0.6
0.9
1.8
1.8
0.7
1.1
1.1
0.9
0.1
1.6
18.5
13.9
16.0
18.5
20.9
20.2
16.7
18.1
22.1
20.7

From banks
Other
5.3
0.2
13.0
9.1
0.6
4.5
4.9
0.3
8.7
12.7
4.0
7.4
0.3
9.0
7.7
0.6
1.8
8.3
0.8
9.4
8.8
0.1
0.7
9.8
0.6
10.5
8.8
0.4
1.3
11.7
8.4
4.7
0.4
3.4
14.0
0.1
2.8
0.5
0.4
2.6
10.8
7.3
2.7
0.2
4.3
11.3
...
10.3
6.0
0.7
5.0
16.1
...
5.4
5.4
0.4
10.4
12.6
12.0
8.6
15.1
11.7
11.3
17.0
10.6
15.2
9.7
15.0
9.6
12.6
2.6
12.3
9.4
17.3
8.6
12.9
4.3
21.9
34.1
41.7
31.2
74.4
40.5
49.2
30.2
50.4
59.4
47.2
72.2
38.8
42.5
35.3
0.5
23.7
11.5
35.9
32.8

Memorandum
Net financial flows
Official financing
Memorandum
Net financial flows
Private financing
25.3
37.8
28.9
17.7
41.6
43.7
114.9
103.8
73.9
66.5
81.3
110.7
143.8
97.1
151.4
163.0
196.2
138.6
109.0
135.2

From banks
Other
20.2
1.2
62.3
12.2
16.7
33.4
25.9
1.9
86.7
3.2
13.4
70.1
41.7
0.4
102.5
6.4
1.6
97.6
61.7
0.2
35.6
7.7
23.8
51.7
60.4
13.7
77.2
28.9
8.3
40.0
82.6
1.0
81.5
7.3
0.5
89.4
102.9
1.5
94.8
10.7
1.4
104.1
96.0
2.5
40.1
10.8
4.8
24.6
76.8
...
32.7
8.2
0.7
25.2
78.5
...
64.2
3.1
6.6
54.5
60.5
13.5
89.3
12.1
126.9
18.3
87.0
14.5
135.9
10.6
132.0
4.3
107.1
2.1
58.5
2.0
47.3
0.3
80.8
0.5
Memorandum
Net financial flows
222
Balance of Payments and External Financing: By Analytical Criteria
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
13.7
12.1
12.3
11.3
15.2
14.7
17.6
11.2
24.1
6.7
24.6
10.3
21.8
13.5
12.1
10.3
13.7
4.5
19.6
0.7
0.9
8.2
6.9
1.1
4.7
0.3
0.1
3.7
0.1
0.2
26.8
15.5
23.0
29.9
35.4
35.2
35.2
18.7
18.3
20.0
12.2
2.2
12.4
5.1
4.3
3.0
5.4
1.2
8.9
4.1
2.6
2.3
7.5
0.6
15.0
7.4
0.6
8.2
9.6
1.4
21.7
3.0
8.0
10.7
13.9
1.7
23.2
0.9
9.1
13.2
19.1
1.9
18.0
13.5
20.7
10.8
12.8
2.5
20.0
10.1
17.8
7.9
10.7
6.1
2.0
5.2
4.3
7.5
11.7
...
4.5
2.9
4.8
6.4
11.3
...
7.8
0.7
0.5
9.0
16.9
0.1
14.1
3.8
21.7
4.5
27.3
3.1
29.3
1.8
28.7
6.5
33.9
1.0
19.6
6.9
17.2
15.6
18.8
7.8
24.7
8.0
20.1
15.3
29.4
10.9
16.7
17.1
39.6
17.5
25.5
34.5
43.1
0.3
66.4
17.9
49.3
4.2
44.2
4.4
13.2
8.2
5.6
3.1
0.5
4.0
0.2
8.9
3.3
1.5
45.9
43.5
46.0
36.9
57.6
64.0
43.2
57.4
48.4
50.2

From banks
Other
15.7
30.2
10.6
6.1
13.5
9.3
0.9
35.1
7.8
1.6
25.7
10.2
1.0
36.8
7.2
3.6
33.2
13.5
0.8
22.7
11.5
37.3
48.5
18.2
0.1
39.4
10.4
6.2
35.2
33.7
0.5
29.7
2.1
4.2
36.0
39.3
0.4
3.5
1.4
3.7
8.5
40.6
4.8
12.0
5.4
1.3
5.2
38.2
...
5.8
10.7
5.1
0.2
41.5
...
14.2
2.5
1.5
18.1
27.1
21.1
37.1
28.5
37.1
32.4
29.4
27.1
46.4
21.6
51.0
20.1
36.4
5.1
48.1
6.1
43.3
6.0
40.9
2.0
24.5
42.5
48.5
27.5
78.0
44.2
65.1
29.5
52.7
51.0
60.1
53.2
31.0
60.0
1.1
28.9
9.1
21.1
28.2
34.3
13.6
20.5
14.6
13.8
46.5
41.1
113.9
90.3
70.7
63.2
80.6
96.5
136.8
108.5
150.1
154.4
204.9
118.0
101.0
125.7

From banks
Other
22.0
1.1
57.4
15.8
14.3
27.4
26.9
0.4
69.2
12.3
10.3
46.6
46.3
0.9
89.6
14.3
0.9
74.4
66.1
1.5
43.9
7.9
21.4
14.6
66.0
12.7
71.5
28.3
24.0
19.2
79.6
3.5
78.3
14.1
24.8
67.5
90.4
0.4
114.1
1.4
22.5
90.2
76.9
3.7
37.4
13.3
8.0
16.1
61.5
...
41.6
6.4
1.2
36.4
64.4
...
63.2
0.5
7.9
55.8
63.0
4.5
74.9
2.6
123.2
1.7
101.8
1.2
134.0
0.5
124.6
0.3
117.2
0.6
42.3
12.2
38.4
18.6
71.6
10.6
From banks
Other
Memorandum
Net financial flows

Memorandum
Net financial flows

Memorandum
Net financial flows
223
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
11.9
1.0
11.8
0.2
14.0
1.8
10.2
2.6
12.3
1.7
13.3
4.2
12.3
1.4
13.8
0.4
14.8
1.0
14.0
1.2
Other groups
1.0
1.2
2.3
0.5
0.2
1.7
1.8
0.3
0.1
1.5
13.8
10.4
9.9
12.3
14.2
15.8
11.9
13.7
15.7
13.7

From banks
Other
4.5
0.1
9.3
4.9
1.1
3.3
3.8
6.7
5.5
0.3
0.9
5.9
0.2
4.3
3.4
0.9
5.3
0.5
6.5
4.9
1.0
0.5
7.0
0.6
6.6
5.9
0.7
0.1
13.0
0.3
2.5
0.5
0.8
2.2
9.6
2.3
0.4
1.0
3.7
7.7
0.2
5.8
2.5
0.7
4.0
8.6
...
7.0
4.4
0.2
2.8
12.7
...
1.3
4.2
1.1
6.6
8.8
10.9
7.4
12.1
6.7
10.2
10.3
9.8
10.0
8.4
8.4
11.6
8.3
0.5
8.7
1.7
11.7
4.1
6.0
1.5
9.3
1.6
8.6
0.6
8.1
1.5
6.5
2.4
7.9
1.6
8.8
2.6
7.9
1.6
10.6
0.7
12.4
0.8
12.3
1.0
0.4
0.9
0.4
1.4
0.3
0.6
0.1
1.0
Memorandum
Net financial flows
10.8
8.9
8.8
8.8
9.9
9.9
9.9
10.8
13.3
12.3

From banks
Other
3.4
0.1
7.4
3.4
1.1
2.9
3.3
0.2
5.3
2.9
0.2
2.6
4.1
0.1
4.8
2.5
0.1
2.4
2.9
0.2
5.7
5.6
0.4
0.5
4.1
0.5
5.2
4.5
0.3
0.5
4.6
0.1
5.3
2.4
0.4
2.4
6.5
0.1
3.2
2.7
0.2
0.7
5.9
0.1
4.8
1.5
3.3
6.6
...
6.5
3.6
2.9
11.5
...
1.3
5.5
0.6
7.3
4.4
5.4
2.2
6.4
1.9
5.8
2.7
5.5
4.0
4.4
6.5
3.2
3.9
6.1
5.5
5.1
10.1
2.6
11.7
0.8
64.7
6.5
27.9
9.4
25.5
2.9
13.3
2.8
5.0
2.1
12.3
16.0
11.1
11.7
25.5
13.9
7.9
1.4
4.8
0.9
Memorandum
Net financial flows
33.1
4.1
4.5
2.8
5.3
2.6
4.9
4.1
5.3
38.2
33.2
27.1
18.9
12.4
3.7
3.2
16.4
10.7
11.0

From banks
Other
9.5
0.2
28.5
4.9
9.1
14.6
1.7
0.1
31.7
1.9
14.6
15.2
4.6
0.5
23.0
2.7
2.3
18.0
6.7
0.5
11.6
6.9
1.1
5.9
8.0
0.2
4.2
4.4
7.9
7.8
3.8
0.6
0.7
0.6
10.7
9.3
6.4
0.3
3.5
3.4
1.3
1.2
7.0
0.1
9.5
0.7
6.0
4.2
7.5
...
3.3
1.0
0.4
4.6
11.2
...
0.3
1.4
1.8
79.5
1.1
45.1
5.5
29.4
15.6
23.2
11.9
4.4
11.2
2.9
5.6
0.8
5.1
10.2
3.1
6.1
2.4
4.0
1.7
Memorandum
Net financial flows
1For
definitions, see footnotes to Table 33.
224
External Financing: Reserves
Table 36. Developing Countries: Reserves1

1991
1992
1993
1994
1995
246.2
261.3
307.9
362.3
432.5
21.3
15.6
95.2
46.7
63.5
66.2
18.5
12.3
86.9
59.4
66.8
89.1
19.8
13.5
109.7
75.9
69.3
109.2
24.9
16.1
158.2
84.3
74.1
105.1
1996
1997
1998
1999
2000
517.8
570.2
578.4
597.2
638.6
26.7
19.1
188.4
93.8
87.3
130.0
32.0
21.6
233.8
105.3
95.7
156.3
43.3
29.0
255.1
86.5
102.1
169.7
42.7
29.1
273.7
96.0
105.1
156.8
44.0
31.0
291.4
112.2
111.6
150.1
52.1
38.1
316.1
124.1
116.1
154.3

Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
60.6
85.9
18.7
51.6
88.9
22.1
49.7
117.7
22.8
50.1
169.2
31.7
51.4
206.4
36.8
62.3
252.6
41.4
74.0
268.1
45.2
71.6
271.5
43.1
70.4
281.9
45.1
74.8
306.6
47.5
15.3
65.6
20.6
78.1
25.1
92.6
28.5
82.8
32.7
105.1
36.7
124.7
39.1
143.8
40.2
151.9
38.8
161.0
36.7
173.0

Official financing
Private financing
29.1
217.1
17.6
153.2
46.2
26.3
235.1
16.2
161.8
57.0
25.3
282.7
18.9
197.7
66.1
25.1
337.2
24.4
231.4
81.4
29.1
403.3
23.8
289.5
90.0
28.8
489.0
26.8
357.3
105.0
30.2
540.0
32.1
398.4
109.6
31.6
546.8
33.5
397.4
115.9
32.6
564.6
34.4
409.8
120.4
34.9
603.7
39.5
443.1
121.1

59.7
157.4
76.3
158.8
87.9
194.8
102.7
234.5
119.5
283.9
148.6
340.4
153.4
386.7
137.1
409.6
133.7
430.9
138.4
465.2
6.1
10.9
61.3
6.5
11.5
64.5
6.0
12.5
66.8
7.9
14.5
72.4
10.3
15.5
79.8
12.3
16.3
86.6
13.8
17.4
94.9
13.5
18.7
96.2
14.5
19.5
95.7
15.5
20.4
97.1
Other groups
Ratio of reserves to imports of goods and services2

Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
35.1
33.3
36.1
39.1
39.0
43.2
44.2
47.5
48.1
47.2
21.3
20.4
40.1
29.4
32.0
39.9
17.3
15.2
31.2
33.5
32.4
45.9
19.2
17.2
33.0
37.2
33.9
51.5
23.0
20.0
40.1
34.6
41.2
43.1
20.7
19.8
37.4
30.6
42.0
48.8
24.4
21.5
43.1
31.6
41.2
53.5
32.0
27.4
45.2
25.5
40.8
49.8
32.2
28.8
56.0
36.4
43.3
44.5
31.8
29.4
54.4
39.6
46.5
45.8
35.3
33.9
53.7
38.7
44.9
43.1
32.7
43.3
36.9
26.6
38.7
38.9
27.9
42.1
38.8
32.0
50.8
49.1
29.4
47.1
45.6
33.6
54.8
46.8
36.8
55.9
47.8
37.3
64.1
45.9
36.7
62.7
48.4
36.7
62.2
46.8
32.8
29.8
41.9
30.5
46.1
32.9
50.9
26.2
50.9
30.1
53.4
31.7
54.0
32.4
52.3
35.3
48.0
37.8
42.8
36.9
225
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Official financing
Private financing
27.0
36.6
21.9
39.6
36.6
23.3
34.9
18.7
36.3
40.6
24.2
37.8
21.2
39.2
42.8
26.4
40.6
26.2
41.2
46.1
27.9
40.2
21.4
42.6
42.3
25.2
45.1
22.2
49.2
44.2
25.0
46.2
26.0
50.8
41.7
27.8
49.5
27.2
53.7
48.0
28.9
50.0
26.6
54.9
47.5
29.5
48.9
29.0
54.1
43.2

32.1
38.6
38.7
33.3
42.7
35.9
48.1
38.0
44.7
38.6
51.8
42.7
47.4
45.7
43.6
51.9
42.9
52.7
40.5
52.1
14.7
33.4
31.3
14.9
33.8
31.7
13.4
35.5
34.4
16.9
40.4
40.5
18.0
36.8
40.6
19.1
36.1
41.1
21.0
37.2
43.1
20.1
38.2
44.5
20.3
36.9
43.9
20.3
36.1
41.9
Other groups
1In this table, official holdings of gold are valued at SDR 35 an ounce. This convention results in a marked underestimate of reserves for countries that have
substantial gold holdings.
2Reserves at year-end in percent of imports of goods and services for the year indicated.
226
External Financing: IMF Credit
Table 37. Net Credit and Loans from IMF1

1990
1991
1992
1993
1994
1995
1996
1997
1998
0.3
0.1
0.1
11.3
5.2
11.3
5.2
1.9
1.1
0.4
0.1
0.8
12.6
2.9
0.8
8.5
0.6
0.3
2.4
1.0
0.1
1.2
0.2
1.9
0.2
1.0
0.2
1.3
0.1
0.1
1.6
0.2
0.7
0.6
0.1
0.9
0.9
0.5
0.8
0.4
0.4
1.3
0.8
0.6
1.5
0.3
0.4
12.9
0.6
0.1
1.7
0.4
0.1
2.0
0.5
0.5
5.0
5.7
0.2
4.0
0.5
0.3
6.6
7.0
0.1
2.5
1.9
2.6
0.5
0.5
1.4
0.3
0.5
0.9
0.8
0.1
0.1
0.4
0.9
0.2
0.2
1.2
0.4
0.7
1.5
0.2
0.3
1.7
0.6
4.9
0.3
0.5
0.1
0.6
0.1
1.0
0.1
0.7
0.5
0.1
13.7
2.3
0.2
0.7
0.2
4.0

Official financing
Private financing
1.9
0.8
0.5
1.6
1.1
0.2
1.2
2.2
0.4
0.3
1.9
1.2
0.1
0.3
0.4
0.6
0.8
0.8
0.2
1.4
12.6
0.6
13.7
1.7
2.9
1.0
1.9
0.8
0.1
1.5
2.5
8.5
2.5
6.1

0.1
2.0
1.1
0.9
0.4
1.0
0.9
0.8
1.5
0.1
12.7
0.5
3.5
0.4
0.4
4.8
3.7
0.3
0.4
0.3
0.1
0.1
0.2
0.2
0.1
0.2
0.1
0.5
0.5
0.2
0.5
0.6
0.5
0.2
0.3
0.1
0.6
0.1
0.3
0.2
0.1
0.1
0.3
2.4
1.6
3.7
2.4
4.7
3.7
2.5
5.5

Russia
...
...
...
...
2.4
2.4
0.5
0.5
1.0
2.0
2.0
1.5
0.2
0.5
0.2
1.5
0.3
1.3
2.7
5.5
0.6
0.8
3.2
0.5
0.7
0.4
1.5
0.2
0.1
0.4
5.3
0.3
Total
Net credit provided under:
General Resources Account
Trust Fund
SAF/ESAF
1.885
0.365
0.688
2.520
0.069
1.070
0.644
0.733
3.374
0.060
0.253
0.594
0.014
0.998
15.633
0.015
1.619
0.291
0.325
14.355
0.007
0.179
18.811
0.001
0.363
Disbursements at year-end under:2

Trust Fund
SAF/ESAF
29.028
0.296
3.363
31.821
0.226
4.499
31.217
0.217
5.041
34.503
0.157
5.285
37.276
0.153
6.634
53.275
0.141
8.342
51.824
0.137
8.392
62.703
0.121
8.049
84.961
0.126
8.777
Advanced economies
economies
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
Other groups
Memorandum
1Includes net disbursements from programs under the General Resources Account, Trust Fund, Structural Adjustment Facility (SAF), and Enhanced
Structural Adjustment Facility (ESAF). The data are on a transactions basis, with conversions to U.S. dollar values at annual average exchange rates.
2Converted to U.S. dollar values at end-of-period exchange rates.
227
Table 38. Summary of External Debt and Debt Service

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

External debt
Regional groups
Africa
Asia
Western Hemisphere
Analytical groups
Official financing
Private financing
Russia
1,269.8
1,338.2
1,472.9
1,573.7
1,714.4
1,784.8
1,865.7
1,965.2
1,969.6
2,029.7
255.4
369.1
186.7
458.5
256.4
409.7
191.7
480.4
266.5
457.1
210.8
538.5
284.2
511.4
214.0
564.0
307.0
562.0
223.1
622.4
306.4
592.8
231.4
654.2
298.8
644.7
241.9
680.3
303.0
640.1
271.3
750.9
308.4
631.5
279.3
750.4
313.7
650.6
290.4
774.9
22.2
1,247.6
234.5
674.1
338.9
24.5
1,313.7
242.1
725.4
346.2
30.6
1,442.2
254.8
829.2
358.2
29.7
1,544.0
270.2
885.9
388.0
29.9
1,684.5
286.8
990.8
406.9
36.8
1,748.0
290.4
1,045.6
412.0
44.4
1,821.3
283.8
1,101.2
436.3
58.9
1,906.3
292.9
1,166.6
446.8
64.5
1,905.1
300.3
1,162.5
442.2
66.7
1,963.0
304.9
1,207.1
451.0
570.7
676.9
587.0
726.7
612.9
829.3
637.8
906.2
667.6
1,016.9
685.0
1,063.0
693.1
1,128.2
740.4
1,165.9
738.8
1,166.3
744.1
1,218.8
209.7
113.5
113.4
95.3
0.9
211.7
104.5
100.4
105.4
1.8
233.8
116.2
110.5
112.7
4.9
248.7
121.5
112.2
119.8
7.4
267.2
137.1
126.3
120.4
9.7
279.0
140.8
129.0
125.0
13.2
287.5
147.0
130.8
123.5
17.0
319.9
163.4
147.7
137.0
19.5
328.0
173.3
157.2
133.9
20.8
344.0
189.0
172.1
133.4
21.6
150.1
176.6
186.2
205.2
242.9
278.7
302.7
316.1
331.8
326.2
27.2
39.2
18.7
64.9
27.7
54.0
22.1
72.8
26.1
53.9
24.7
81.5
27.2
61.9
26.2
89.9
33.2
76.2
27.9
105.6
30.1
81.0
44.2
123.4
30.7
81.4
39.8
150.8
29.2
105.4
35.0
146.5
35.7
88.2
40.9
167.1
37.4
88.2
38.3
162.3
1.8
148.3
16.5
99.5
32.2
1.8
174.8
17.2
112.6
45.1
2.9
183.3
16.3
125.5
41.4
7.2
198.0
19.7
136.9
41.3
7.1
235.8
25.8
165.2
44.8
18.9
259.8
21.4
190.4
47.9
14.4
288.3
22.6
210.6
55.1
8.5
307.5
22.7
213.5
71.4
8.6
323.2
16.8
240.9
65.5
8.4
317.8
26.0
229.5
62.3
57.4
90.8
64.9
109.9
65.2
118.1
58.9
139.1
71.9
163.9
75.7
184.1
94.4
193.9
94.3
213.3
123.9
199.4
122.6
195.2
40.1
23.8
23.8
16.3
25.8
13.1
13.1
12.6
0.1
19.5
13.0
12.8
6.2
0.3
22.6
17.7
15.8
4.3
0.6
31.6
23.7
22.0
6.4
1.5
35.8
27.5
26.1
6.9
1.4
35.3
27.7
26.1
5.9
1.7
53.7
35.1
33.0
15.1
3.5
59.4
41.0
39.3
15.9
2.4
63.5
45.9
42.8
15.1
2.5
Debt-service payments1
Regional groups
Africa
Asia
Western Hemisphere
Analytical groups
Official financing
Private financing
Russia
228
External Debt: Summary
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

External debt2
Regional groups
Africa
Asia
Western Hemisphere
Analytical groups
Official financing
Private financing
Russia
192.4
185.9
194.3
181.1
162.4
154.2
148.3
167.6
160.6
152.2
250.1
162.0
113.3
277.3
248.6
155.1
107.3
276.5
271.3
153.9
117.7
293.0
278.6
138.6
113.4
269.9
255.8
119.0
103.2
251.8
230.2
118.3
93.0
238.8
220.0
115.0
92.8
225.9
251.2
118.6
120.9
260.9
244.4
112.5
119.1
246.5
224.6
107.9
115.3
228.8
22.7
221.9
361.1
175.0
302.6
22.9
214.3
361.4
171.4
281.9
29.0
221.1
379.3
182.6
273.2
27.4
203.0
371.6
164.4
260.4
24.1
180.8
329.6
148.0
231.9
25.8
172.3
294.5
144.3
215.5
30.0
164.0
279.0
138.9
201.9
50.9
180.4
304.1
155.4
213.2
50.4
173.4
302.4
149.4
199.9
48.9
164.0
275.4
143.4
184.6
328.3
174.3
322.1
168.7
334.5
176.8
317.1
162.0
289.6
145.0
260.8
141.4
244.1
136.5
288.3
145.8
270.4
141.3
238.3
137.8
106.9
116.4
159.1
154.8
2.5
129.9
110.2
126.1
183.4
17.1
129.0
114.2
132.0
171.1
36.2
122.9
107.1
116.9
156.1
60.8
103.4
92.9
100.3
126.6
61.8
98.9
87.1
95.8
121.6
75.1
96.7
83.9
89.3
119.7
89.9
109.7
87.2
91.3
156.2
117.3
110.3
88.2
91.1
160.9
117.7
106.2
87.0
89.3
151.3
117.7
22.7
24.5
24.6
23.6
23.0
24.1
24.1
27.0
27.0
24.5
26.6
17.2
11.4
39.3
26.9
20.4
12.4
41.9
26.5
18.1
13.8
44.4
26.7
16.8
13.8
43.0
27.6
16.1
12.9
42.7
22.6
16.2
17.8
45.1
22.6
14.5
15.3
50.1
24.2
19.5
15.6
50.9
28.3
15.7
17.4
54.9
26.8
14.6
15.2
47.9
1.9
26.4
25.4
25.8
28.8
1.6
28.5
25.6
26.6
36.7
2.8
28.1
24.3
27.6
31.6
6.6
26.0
27.1
25.4
27.7
5.7
25.3
29.6
24.7
25.5
13.2
25.6
21.7
26.3
25.1
9.7
26.0
22.2
26.6
25.5
7.4
29.1
23.5
28.4
34.1
6.7
29.4
16.9
31.0
29.6
6.1
26.5
23.5
27.3
25.5
33.0
23.4
35.6
25.5
35.6
25.2
29.3
24.9
31.2
23.4
28.8
24.5
33.2
23.5
36.7
26.7
45.3
24.2
39.3
22.1
20.4
24.4
33.4
26.4
15.9
13.8
16.5
21.9
1.0
10.8
12.8
15.3
9.4
2.4
11.1
15.6
16.4
5.6
4.8
12.2
16.1
17.5
6.7
9.5
12.7
17.0
19.4
6.7
7.8
11.9
15.8
17.8
5.7
9.2
18.4
18.8
20.4
17.2
20.9
20.0
20.9
22.7
19.1
13.7
19.6
21.1
22.2
17.2
13.8
Debt-service payments
Regional groups
Africa
Asia
Western Hemisphere
Analytical groups
Official financing
Private financing
Russia
1Debt-service payments refer to actual payments of interest on total debt plus actual amortization payments on long-term debt. The projections incorporate
the impact of exceptional financing items.
2Total debt at year-end in percent of exports of goods and services in year indicated.
229
Table 39. Developing Countriesby Region: External Debt, by Maturity and Type of Creditor
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
1,269.8
1,338.2
1,472.9
1,573.7
1,714.4
1,784.8
1,865.7
1,965.2
1,969.6
2,029.7
166.9
1,102.7
207.6
1,130.5
239.3
1,233.8
244.3
1,330.0
275.2
1,439.1
295.5
1,489.2
303.2
1,562.4
288.0
1,677.3
257.9
1,710.8
268.2
1,761.1
609.0
368.2
292.5
631.9
372.9
333.4
678.6
365.8
428.5
733.6
366.7
473.3
772.4
414.1
527.8
777.2
453.6
554.0
755.5
535.0
575.2
784.2
560.4
620.7
783.8
549.2
636.4
784.0
556.5
689.0
255.4
256.4
266.5
284.2
307.0
306.4
298.8
303.0
308.4
313.7
19.0
236.4
20.2
236.2
19.1
247.3
26.1
258.1
31.3
275.7
34.2
272.1
38.9
259.8
41.0
262.0
24.5
282.8
26.2
286.9
165.4
47.7
42.3
172.7
43.4
40.3
182.6
41.7
42.1
197.8
44.8
41.6
214.3
42.4
50.3
221.2
35.5
49.7
210.3
34.7
53.7
214.2
29.2
59.7
216.8
28.0
63.3
214.2
27.3
72.0
200.0
202.2
211.2
223.2
241.8
240.0
237.2
240.8
249.0
253.5
16.9
183.1
18.3
183.9
17.3
194.0
24.3
198.9
29.8
212.0
32.1
207.7
37.2
200.0
39.1
201.7
22.4
225.5
23.7
229.1
134.8
25.4
39.8
141.5
21.8
38.9
148.8
21.8
40.6
160.2
22.8
40.2
171.3
22.4
48.0
170.2
23.0
46.8
163.9
22.2
51.1
166.7
17.5
56.6
171.0
17.5
60.2
166.9
17.6
68.8
369.1
409.7
457.1
511.4
562.0
592.8
644.7
640.1
631.5
650.6
49.1
319.9
59.6
350.0
69.0
388.3
76.3
435.7
97.4
464.5
104.0
488.8
102.4
542.2
81.5
558.5
70.5
561.1
68.9
582.0
184.0
101.3
83.8
202.6
112.1
94.9
223.1
121.9
112.2
252.4
144.2
114.7
256.2
166.5
139.2
266.8
196.0
130.0
274.2
217.3
153.1
280.4
220.1
139.7
281.7
209.2
140.6
285.0
211.3
154.4
186.7
191.7
210.8
214.0
223.1
231.4
241.9
271.3
279.3
290.4
36.1
150.6
48.0
143.7
63.7
147.1
46.9
167.2
49.2
173.9
52.2
179.2
55.1
186.9
63.1
208.2
66.1
213.2
69.4
221.0
100.1
61.8
24.8
95.5
68.7
27.5
106.1
66.8
37.9
114.3
65.4
34.3
105.3
78.1
39.6
106.9
77.4
47.1
103.2
106.3
32.4
110.8
119.9
40.6
106.3
122.4
50.6
105.3
124.6
60.5
458.5
480.4
538.5
564.0
622.4
654.2
680.3
750.9
750.4
774.9
62.8
395.8
79.8
400.6
87.5
451.0
95.0
469.0
97.3
525.0
105.1
549.1
106.8
573.5
102.3
648.5
96.8
653.6
103.8
671.1
159.6
157.3
141.6
161.1
148.8
170.6
166.8
135.4
236.3
169.2
112.2
282.6
196.6
127.0
298.7
182.3
144.7
327.2
167.7
176.7
336.0
178.8
191.3
380.8
179.0
189.6
381.8
179.6
193.2
402.1
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Regional groups
Africa
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Sub-Sahara
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Asia
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Western Hemisphere
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
230
External Debt: By Analytical Criteria
Table 40. Developing Countriesby Analytical Criteria: External Debt, by Maturity and Type of Creditor
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
182.0
190.8
205.7
213.6
215.1
214.3
209.8
228.0
232.0
233.3
31.9
150.1
35.4
155.3
48.5
157.2
44.4
169.2
43.7
171.4
43.2
171.1
46.8
163.0
53.6
174.5
35.5
196.5
36.6
196.7
66.2
70.8
44.9
74.4
66.6
49.8
89.2
64.9
51.7
97.7
61.9
54.0
93.1
68.3
53.6
100.4
58.7
55.1
95.2
60.1
54.4
100.9
62.8
64.3
99.9
62.7
69.3
100.1
62.6
70.6
1,087.8
1,147.4
1,267.1
1,360.1
1,499.3
1,570.6
1,655.9
1,737.2
1,737.7
1,796.4
135.1
952.6
172.2
975.1
190.9
1,076.5
199.9
1,160.8
231.6
1,267.7
252.3
1,318.1
256.4
1,399.4
234.4
1,502.8
222.5
1,514.3
231.6
1,564.4
542.8
297.4
247.6
557.5
306.3
283.6
589.4
300.9
376.8
635.9
304.8
419.3
679.3
345.8
474.2
676.8
394.9
498.9
660.2
474.9
520.8
683.3
497.6
556.3
683.9
486.5
567.0
683.9
493.8
618.4
344.8
384.3
427.7
465.3
510.1
551.3
594.3
617.1
610.2
628.3
50.4
294.4
69.7
314.6
83.1
344.6
83.2
382.1
99.5
410.7
111.6
439.7
107.8
486.6
73.1
544.0
62.4
547.8
67.1
561.1
136.4
126.4
82.1
143.8
126.0
114.5
152.8
137.9
137.0
169.1
125.0
171.2
172.4
144.6
193.1
167.9
172.7
210.7
170.2
204.1
220.0
190.7
207.6
218.8
195.6
206.0
208.6
200.4
214.5
213.3
176.1
185.9
193.9
206.9
222.3
226.3
225.1
233.9
242.8
247.3
15.2
160.8
17.9
167.8
19.6
174.5
20.1
187.4
22.8
199.4
23.1
203.0
22.4
202.6
20.1
213.8
20.7
221.2
21.8
225.1
127.7
29.3
19.1
133.8
30.6
21.5
139.2
31.5
23.2
151.0
34.6
21.2
158.4
38.0
25.9
158.0
39.8
28.6
154.1
40.0
31.0
157.5
40.4
36.0
160.0
42.8
39.7
154.9
44.9
47.3
95.5
87.4
83.8
86.8
89.3
90.0
87.0
89.7
90.3
93.2
8.7
86.8
8.6
78.8
7.1
76.7
6.6
80.2
7.4
81.9
5.8
84.2
6.2
80.7
6.4
83.3
6.1
84.1
6.0
87.2
75.6
12.8
7.1
66.9
13.1
7.4
67.0
8.1
8.7
70.4
7.9
8.5
72.5
8.3
8.5
72.2
7.8
9.9
62.6
6.8
17.5
62.9
6.8
20.0
62.4
6.5
21.4
63.6
6.4
23.2
471.4
489.7
561.7
601.1
677.5
703.0
749.5
796.5
794.4
827.7
60.8
410.6
75.9
413.8
81.0
480.7
90.0
511.1
101.9
575.7
111.8
591.2
120.0
629.5
134.7
661.7
133.3
661.1
136.8
690.9
203.2
128.9
139.3
213.0
136.6
140.1
230.4
123.4
207.9
245.4
137.4
218.3
276.1
154.8
246.6
278.7
174.6
249.7
273.3
223.9
252.3
272.1
242.9
281.5
265.9
231.2
297.3
264.9
228.0
334.7

Fuel
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Nonfuel
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Manufactures
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
private transfers
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Diversified
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
231
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
22.2
24.5
30.6
29.7
29.9
36.8
44.4
58.9
64.5
66.7
5.5
16.7
8.4
16.0
14.6
16.1
14.7
15.0
12.2
17.7
11.8
25.1
11.8
32.6
14.7
44.2
15.3
49.3
16.1
50.6
2.5
18.7
1.0
2.8
20.8
0.8
4.1
21.1
5.5
5.2
18.7
5.7
5.7
14.2
10.1
7.9
17.2
11.7
9.2
22.5
12.7
11.4
28.1
19.4
10.3
30.0
24.2
9.2
30.8
26.7
1,247.6
1,313.7
1,442.2
1,544.0
1,684.5
1,748.0
1,821.3
1,906.3
1,905.1
1,963.0
161.5
1,086.0
199.2
1,114.4
224.8
1,217.7
229.7
1,315.0
263.0
1,421.5
283.7
1,464.1
291.4
1,529.8
273.3
1,633.1
242.7
1,661.5
252.1
1,710.5
606.5
349.5
291.5
629.1
352.0
332.6
674.5
344.7
423.0
728.4
348.0
467.6
766.8
399.9
517.8
769.3
436.4
542.3
746.2
512.5
562.6
772.8
532.3
601.2
773.5
519.2
612.1
774.8
525.7
662.3
234.5
242.1
254.8
270.2
286.8
290.4
283.8
292.9
300.3
304.9
11.0
223.4
14.4
227.6
17.9
237.1
22.3
248.6
26.0
260.8
30.0
260.2
33.8
249.9
36.2
256.7
19.7
279.8
22.1
282.3
193.7
27.7
13.2
205.7
23.0
13.4
215.9
21.5
17.4
232.3
22.3
15.7
246.4
23.1
17.3
246.9
23.7
19.8
237.3
24.5
22.0
242.3
25.3
25.3
245.3
23.8
31.0
240.7
23.8
40.1
674.1
725.4
829.2
885.9
990.8
1,045.6
1,101.2
1,166.6
1,162.5
1,207.1
116.6
557.5
148.4
577.0
170.0
659.2
164.8
721.0
186.2
804.7
200.6
845.1
203.2
898.0
183.9
982.7
173.8
988.7
181.6
1,025.5
211.4
243.9
218.8
220.6
245.4
259.4
245.2
243.7
340.3
263.4
240.0
382.5
288.6
280.6
421.6
284.7
297.5
463.4
269.9
354.2
477.1
300.6
369.3
496.8
300.4
364.5
497.6
305.7
371.1
530.3
338.9
346.2
358.2
388.0
406.9
412.0
436.3
446.8
442.2
451.0
33.8
305.1
36.3
309.9
36.8
321.4
42.6
345.4
50.9
356.0
53.1
358.9
54.4
381.9
53.2
393.6
49.2
393.1
48.4
402.6
201.4
78.0
59.6
202.8
83.6
59.8
213.4
79.5
65.3
232.7
85.8
69.4
231.7
96.2
78.9
237.7
115.3
59.1
239.0
133.8
63.5
229.9
137.8
79.1
227.8
130.9
83.5
228.4
130.7
91.9

Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Official financing
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Private financing
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
232
External Debt: By Analytical Criteria
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
570.7
587.0
612.9
637.8
667.6
685.0
693.1
740.4
738.8
744.1
62.8
507.8
76.2
510.6
89.2
523.9
81.1
557.4
87.8
579.7
95.7
589.1
101.6
591.4
91.6
648.8
65.0
672.8
70.4
673.3
317.0
162.5
91.2
322.8
149.2
115.0
342.4
139.6
130.9
362.9
106.9
168.0
366.4
128.6
172.6
369.2
133.4
182.4
349.7
151.6
191.8
367.2
148.4
224.8
371.8
142.5
224.2
370.7
140.9
232.3
676.9
726.7
829.3
906.2
1,016.9
1,063.0
1,128.2
1,165.9
1,166.3
1,218.8
98.7
578.2
122.9
603.8
135.5
693.8
148.6
757.6
175.2
841.7
188.0
875.0
189.8
938.4
181.7
984.2
177.6
988.7
181.7
1,037.2
289.5
187.1
200.3
306.3
202.9
217.6
332.1
205.1
292.1
365.5
241.1
299.6
400.4
271.3
345.2
400.1
303.0
359.9
396.5
360.9
370.8
405.6
383.9
376.4
401.7
376.7
387.9
404.0
384.8
430.0
172.1
178.7
188.7
197.8
211.1
210.8
204.9
210.3
217.3
218.8
9.0
163.0
9.4
169.3
10.7
178.0
11.2
186.6
12.1
199.0
10.6
200.1
10.7
194.1
8.0
202.2
8.1
208.1
8.5
209.7
140.4
16.0
15.8
147.5
17.6
13.6
155.2
17.6
15.9
167.7
19.4
10.7
177.2
21.5
12.4
175.8
23.0
12.1
165.3
23.5
16.1
169.2
19.5
21.6
172.5
18.8
25.7
168.7
17.6
32.4
122.3
126.3
134.5
141.8
148.8
150.7
151.5
157.6
162.7
162.6
5.9
116.3
6.1
120.2
6.2
128.5
5.6
136.9
5.5
143.3
5.7
144.8
6.0
145.5
7.3
150.3
7.1
154.7
6.9
155.3
108.7
7.1
6.5
112.6
6.8
7.0
118.6
6.8
9.2
127.8
6.4
7.6
134.2
6.8
7.8
135.7
6.6
8.4
131.7
6.5
13.4
134.2
6.6
16.8
136.6
6.3
19.5
131.8
5.7
24.9
209.1
208.5
218.1
229.8
238.3
242.3
239.6
258.1
260.8
265.5
29.4
179.7
37.5
171.0
47.4
170.7
37.7
192.1
35.5
202.8
34.4
208.0
34.0
205.6
39.0
219.1
39.7
221.1
41.3
224.2
121.3
69.9
18.0
118.5
74.0
15.9
130.1
67.4
20.6
139.8
65.9
24.1
137.2
74.9
26.2
146.8
65.8
29.7
135.6
68.6
35.4
138.8
73.5
45.8
135.0
73.2
52.7
135.5
73.0
57.1

Countries with arrears
and/or rescheduling
during 199397
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Other groups
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
Total debt
By maturity
Short-term
Long-term
By type of creditor
Official
Banks
Other private
233
Table 41. Developing Countries: Ratio of External Debt to GDP1

Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
37.8
35.1
33.4
36.3
37.3
35.1
34.6
37.1
37.1
35.8
66.0
66.5
31.8
47.4
33.9
36.4
64.9
66.7
31.5
47.1
31.5
31.9
70.4
73.5
31.0
47.4
34.5
27.8
77.0
79.4
33.2
46.7
37.6
30.4
74.0
75.0
30.3
45.0
34.2
37.1
70.5
72.4
28.0
42.8
32.8
35.8
67.7
69.6
29.1
47.5
32.3
34.1
71.0
74.5
30.2
57.8
35.9
37.7
72.1
77.4
27.2
47.2
35.5
42.4
68.9
74.4
25.7
42.0
35.1
41.6
Analytical groups
Fuel
Manufactures
private transfers
Diversified
38.2
25.2
79.3
36.8
24.0
76.3
42.9
20.3
74.6
46.2
24.0
70.6
40.9
24.5
61.9
36.9
23.6
56.1
33.7
24.4
49.4
37.2
25.6
48.8
36.0
26.7
47.6
34.8
25.6
43.6
83.9
40.1
68.9
37.2
58.6
39.7
52.6
40.7
52.6
46.1
49.5
44.5
44.4
44.3
42.7
50.5
40.1
48.5
38.3
47.4

Official financing
Private financing
10.7
39.6
81.6
30.1
54.7
10.8
36.7
82.3
27.5
52.9
13.4
34.5
90.0
25.8
52.5
12.6
37.6
91.7
29.0
51.3
11.9
38.7
84.4
31.4
47.7
13.2
36.4
78.7
30.0
43.7
15.3
35.7
75.7
29.3
45.0
21.5
38.0
77.0
30.9
51.8
21.8
38.0
77.5
31.9
45.4
21.3
36.6
74.0
31.1
42.4

52.6
32.8
46.2
31.4
37.5
32.6
43.0
34.6
44.9
35.5
41.8
33.6
39.3
33.7
41.9
35.9
45.8
34.4
42.8
33.6
95.3
73.0
43.4
93.5
69.0
38.9
91.8
67.1
42.0
89.5
62.8
43.6
82.3
57.5
41.6
72.1
51.9
38.4
61.2
45.7
36.3
57.2
43.0
39.0
53.2
39.6
37.1
47.5
35.0
35.8
Other groups
1Debt
at year-end in percent of GDP in year indicated.
234
External Debt: Servicing
Table 42. Developing Countries: Debt-Service Ratios1

(Percent of exports of goods and services)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
10.2
9.6
9.4
8.7
8.5
8.3
7.7
9.0
9.2
9.0
11.1
9.5
8.0
8.1
4.4
18.3
10.3
8.6
7.5
6.8
5.2
16.7
10.2
8.6
6.9
6.2
5.5
16.8
10.1
8.5
6.4
6.0
4.3
15.9
10.8
9.2
5.8
6.1
4.0
16.7
9.1
7.6
6.1
6.3
4.0
15.9
8.9
7.7
5.0
6.6
3.6
15.6
10.2
9.0
5.8
7.6
5.0
17.5
12.0
11.1
5.4
7.3
5.3
18.2
12.3
11.5
5.3
7.1
5.0
17.3
4.9
10.1
12.5
4.8
9.2
9.9
5.1
8.7
10.5
4.7
7.3
10.8
4.9
7.0
9.0
3.9
7.7
8.2
3.8
6.5
8.1
5.5
7.3
9.5
6.7
7.1
9.9
6.5
6.7
11.0
9.3
14.3
15.1
13.0
11.4
12.8
7.1
12.9
5.8
13.3
7.5
12.2
5.5
11.8
5.9
13.1
6.2
13.5
5.5
13.2

Official financing
Private financing
1.4
11.7
12.4
11.3
12.7
1.2
11.0
10.7
10.7
12.4
1.4
10.7
10.5
10.5
11.3
1.5
9.7
12.0
9.3
10.0
1.7
9.5
10.2
9.4
9.5
1.8
9.2
9.1
9.3
8.9
1.9
8.5
8.8
8.4
8.6
3.6
9.6
9.6
9.5
9.8
3.2
10.0
10.8
9.8
10.3
3.0
9.7
11.5
9.3
10.1

14.5
10.4
13.9
9.8
14.2
9.3
12.0
8.9
12.0
8.6
11.4
8.5
10.9
7.6
12.9
8.5
14.7
8.4
14.0
8.2
12.2
8.4
4.7
9.5
6.9
5.5
10.2
6.7
5.6
13.0
6.3
4.4
9.8
7.8
4.2
9.5
8.0
4.3
7.9
5.0
3.7
8.7
5.2
5.3
9.8
6.8
5.3
11.3
9.1
5.0
12.6
15.0
15.2
15.0
14.5
15.8
16.4
18.0
17.8
15.5
15.8
8.1
9.2
10.8
6.9
21.0
17.0
10.2
12.9
15.0
7.2
25.1
16.6
9.0
11.3
12.4
8.3
27.6
16.7
9.3
10.4
11.9
9.5
27.1
16.8
10.6
10.3
12.5
8.9
26.1
13.6
9.7
10.1
11.5
13.8
29.1
13.7
11.1
9.5
12.1
11.6
34.5
14.0
11.5
13.7
19.7
10.6
33.4
16.3
15.2
10.3
12.8
12.1
36.7
14.5
13.1
9.5
11.4
10.1
30.6
8.8
9.4
12.2
7.9
11.2
10.4
9.5
11.3
13.2
11.3
9.6
13.0
11.2
9.2
20.3
14.7
10.4
13.8
13.4
11.8
11.0
9.5
14.7
12.3
11.3
18.3
3.1
10.0
13.5
15.2
9.5
19.6
19.7
25.3
19.1
23.8
11.2
25.2
7.4
23.3
8.2
24.7
9.9
25.8
8.1
28.7
7.7
24.9
7.2
22.2
Interest payments2
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
Other groups
Amortization2
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
235
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Official financing
Private financing
0.5
14.7
13.4
14.6
16.1
0.4
17.6
15.7
15.9
24.3
1.4
17.5
14.3
17.1
20.3
5.2
16.3
15.3
16.1
17.8
4.0
15.8
19.5
15.3
16.1
11.5
16.4
12.7
16.9
16.2
7.9
17.5
13.4
18.2
17.0
3.8
19.5
13.9
18.9
24.3
3.5
19.5
6.1
21.2
19.3
3.2
16.9
12.9
17.9
15.4

18.7
13.0
22.0
15.7
21.5
15.9
17.4
16.0
19.2
14.7
17.4
16.0
22.3
15.8
23.8
18.1
30.6
15.8
25.6
13.9
12.7
10.5
10.4
10.9
10.4
9.7
11.9
9.3
11.4
13.4
8.6
12.0
22.1
9.6
10.9
9.3
8.9
15.1
8.9
5.8
12.4
9.3
8.0
9.4
0.9
13.8
10.3
14.9
12.5
9.2
Other groups
1Excludes
service payments to the IMF.

payments on total debt and amortization on long-term debt. Estimates through 1998 reflect debt-service payments actually made. The estimates
for 1999 and 2000 take into account projected exceptional financing items, including accumulation of arrears and rescheduling agreements. In some cases,
amortization on account of debt-reduction operations is included.
2Interest
236
External Debt: Servicing
Table 43. IMF Charges and Repurchases to the IMF1

(Percent of exports of goods and services)
1991
1992
1993
1994
1995
1996
1997
1998
1.3
1.0
0.9
0.7
0.9
0.6
0.6
0.5
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
1.2
1.1
1.0
0.8
0.1
3.0
1.1
0.9
0.5
0.5
2.7
1.1
0.7
0.3
0.3
2.6
0.8
0.5
0.5
0.2
1.5
2.5
2.8
0.4
0.2
0.1
1.6
0.4
0.3
0.4
0.2
0.1
1.6
0.9
0.7
0.2
0.2
1.9
1.0
0.7
0.2
0.2
0.1
1.1
Analytical groups
Fuel
Nonfuel
0.3
1.7
0.4
1.2
0.6
1.0
0.4
0.8
0.5
0.9
0.3
0.7
0.4
0.7
0.6
0.5

Official financing
Private financing
1.5
1.7
1.3
2.0
1.2
1.5
1.1
1.3
1.1
1.4
1.1
0.7
0.8
0.7
0.6
1.4
1.0
3.2
0.6
1.3
0.7
0.6
0.6
1.1
0.7
0.5
0.8
0.6
0.6
0.4
0.6
0.4

1.6
1.5
1.6
1.0
1.8
0.8
0.8
0.8
1.9
0.7
0.7
0.7
0.6
0.8
0.7
0.5
2.4
2.7
0.3
1.9
1.6
0.3
1.7
1.3
0.4
1.1
0.9
0.3
5.5
8.1
0.3
0.5
0.3
0.2
0.5
0.2
0.3
0.5
0.4
0.3
0.1
0.4
0.4
1.2
1.4
0.8
0.6
1.0

Russia
0.2
0.3
0.8
0.9
0.7
0.8
0.1
1.9
2.3
0.2
0.1
2.3
2.6
0.3
0.3
0.8
0.8
1.0
0.3
0.4
0.4
1.0
0.4
0.6
0.5
1.9
1.0
Total, billions of U.S. dollars

Charges
Repurchases
8.767
2.430
6.337
8.056
2.288
5.768
7.633
2.315
5.319
8.337
1.791
6.546
12.737
2.777
9.960
9.491
2.260
7.231
9.957
2.171
7.786
8.745
2.468
6.299
Trust Fund
Interest
Repayments
0.070
0.001
0.069
0.063
0.003
0.060
0.015
0.014
0.015
0.015
0.007
0.007
0.001
0.001
SAF/ESAF
Interest
Repayments
0.021
0.021
0.055
0.022
0.033
0.151
0.025
0.126
0.330
0.024
0.306
0.585
0.033
0.552
0.747
0.043
0.703
0.863
0.037
0.827
0.781
0.034
0.841
Other groups
Memorandum
1Excludes
advanced economies. Charges on, and repurchases (or repayments of principal) for, use of IMF credit.
237
Table 44. Summary of Sources and Uses of World Saving

(Percent of GDP)
Averages
__________________
197784 198592
World
Saving
Investment
1993
1994
1995
1996
1997
1998
1999
2000
Average
20012004
23.2
24.1
22.6
23.7
22.2
23.7
23.1
23.8
23.6
24.1
23.5
23.9
23.9
23.9
23.3
23.2
23.3
23.5
23.3
23.5
23.6
24.1
Advanced economies
Saving
Private
Public
22.1
20.8
1.3
20.7
19.4
1.3
20.0
20.0
20.5
20.1
0.4
21.1
20.4
0.7
21.3
20.1
1.3
21.8
19.5
2.3
21.5
18.7
2.8
21.3
18.4
2.8
21.5
18.5
3.0
21.7
18.1
3.6
Investment
Private
Public
22.7
17.8
4.4
21.6
17.6
4.0
20.3
16.2
4.1
20.8
16.8
4.0
20.9
17.0
3.9
21.0
17.2
3.9
21.2
17.5
3.6
20.8
17.3
3.5
21.0
17.3
3.6
21.0
17.5
3.5
21.4
18.0
3.4
Net lending
Private
Public
Current transfers
Factor income
Resource balance
0.6
2.7
3.6
0.4
0.1
0.1
0.9
1.7
2.7
0.4
0.4
0.2
0.3
3.8
4.1
0.4
0.4
0.5
0.3
3.3
3.6
0.5
0.2
0.4
0.2
3.4
3.2
0.4
0.1
0.4
0.3
2.9
2.6
0.4
0.3
0.4
0.6
2.0
1.3
0.4
0.4
0.6
0.7
1.5
0.7
0.4
0.5
0.7
0.3
1.1
0.8
0.5
0.6
0.1
0.4
0.9
0.5
0.4
0.7
0.1
0.3
0.1
0.2
0.4
0.7
0.1
United States
Saving
Private
Public
19.6
18.0
1.6
16.3
15.8
0.6
14.5
14.9
0.5
15.5
14.8
0.7
16.3
15.2
1.1
16.6
14.5
2.1
17.3
14.1
3.3
17.2
12.8
4.4
16.9
12.3
4.6
17.2
12.4
4.8
17.4
12.4
5.0
Investment
Private
Public
20.7
16.8
3.3
18.4
14.9
3.5
16.5
13.4
3.1
17.5
14.5
3.0
17.4
14.4
3.0
17.8
14.8
3.0
18.4
15.5
2.9
18.8
16.1
2.8
18.9
16.1
2.8
18.9
16.1
2.7
19.0
16.3
2.7
Net lending
Private
Public
Current transfers
Factor income
Resource balance
1.1
1.5
2.6
0.4
0.5
1.3
2.0
0.9
2.9
0.4
0.4
2.0
2.0
1.6
3.6
0.6
0.3
1.1
1.9
0.3
2.3
0.6
1.4
1.0
0.9
1.9
0.5
0.8
1.3
1.1
0.2
0.9
0.6
0.8
1.4
1.0
1.4
0.4
0.5
0.8
1.3
1.6
3.3
1.7
0.5
0.8
1.9
2.0
3.8
1.8
0.5
1.2
2.7
1.7
3.7
2.0
0.4
1.4
2.6
1.6
3.9
2.3
0.4
1.2
2.4
European Union
Saving
Private
Public
21.3
21.2
0.1
20.2
20.6
0.4
18.7
21.9
3.3
19.5
22.4
2.9
20.3
22.8
2.6
20.3
22.3
2.0
21.1
21.6
0.5
21.2
20.9
0.3
21.2
20.4
0.8
21.6
20.2
1.3
22.1
20.2
1.9
Investment
Private
Public
21.8
17.9
4.0
21.3
18.0
3.3
19.0
15.9
3.1
19.5
16.6
2.9
19.8
17.1
2.7
19.2
16.7
2.5
19.4
17.1
2.4
20.1
17.8
2.3
20.4
18.0
2.4
20.7
18.3
2.4
21.1
18.6
2.4
Net lending
Private
Public
Current transfers
Factor income
Resource balance
0.5
3.4
3.9
0.7
0.7
0.8
1.1
2.7
3.8
0.4
1.3
0.6
0.3
6.0
6.3
0.6
0.9
1.2
5.8
5.8
0.7
0.7
1.4
0.4
5.7
5.3
0.6
0.6
1.7
1.1
5.6
4.5
0.6
0.2
2.0
1.6
4.5
2.9
0.6
2.2
1.1
3.1
2.0
0.7
1.8
0.8
2.3
1.6
0.7
1.4
0.9
2.0
1.1
0.7
1.6
1.0
1.6
0.6
0.6
0.1
1.5
Japan
Saving
Private
Public
31.3
27.8
3.5
33.0
25.1
7.8
32.8
25.8
6.9
31.4
25.9
5.5
30.7
25.9
4.9
31.4
26.9
4.5
31.0
27.0
4.0
29.7
27.4
2.3
28.8
28.0
0.8
28.6
28.3
0.3
28.1
25.1
3.0
Investment
Private
Public
30.5
21.4
9.1
30.2
23.4
6.8
29.7
21.1
8.6
28.7
20.0
8.6
28.6
20.0
8.6
30.0
21.2
8.7
28.7
20.9
7.8
26.5
18.6
7.9
25.9
17.3
8.6
25.5
17.6
7.9
25.9
19.1
6.9
Net lending
Private
Public
Current transfers
Factor income
Resource balance
0.9
6.5
5.6
0.1
0.1
0.8
2.8
1.7
1.1
0.1
0.6
2.3
3.1
4.7
1.6
0.1
0.9
2.3
2.8
5.9
3.1
0.1
0.9
2.1
2.1
5.8
3.7
0.2
0.8
1.5
1.4
5.7
4.2
0.2
1.2
0.5
2.3
6.0
3.8
0.2
1.3
1.1
3.2
8.7
5.5
0.2
1.5
1.9
2.9
10.7
7.8
0.3
1.1
2.1
3.1
10.7
7.6
0.3
1.7
1.6
2.1
6.0
3.9
0.2
1.7
0.7
238
Flow of Funds: Summary
Averages
__________________
197784 198592
1993
1994
1995
1996
1997
1998
1999
2000
Average
20012004

economies
Saving
Private
Public
...
...
...
35.1
27.6
7.5
33.7
26.4
7.3
33.4
25.9
7.5
33.5
26.2
7.3
32.7
25.8
6.9
32.4
25.7
6.7
32.6
25.3
7.3
32.8
26.1
6.7
33.0
26.5
6.4
33.2
27.5
5.7
Investment
Private
Public
...
...
...
28.9
22.6
6.3
31.2
24.2
7.0
31.7
24.9
6.8
32.5
25.7
6.8
32.0
25.3
6.7
30.7
24.1
6.6
23.5
16.5
7.0
26.7
19.6
7.1
27.9
21.0
6.9
29.5
22.9
6.7
Net lending
Private
Public
Current transfers
Factor income
Resource balance
...
...
...
...
...
...
6.2
5.0
1.2
0.1
0.4
5.6
2.4
2.2
0.2
0.3
2.1
1.7
1.0
0.7
0.6
1.1
1.0
0.5
0.5
0.3
1.1
0.2
0.7
0.5
0.2
0.3
1.2
0.2
1.7
1.6
0.1
0.1
1.4
0.5
9.1
8.9
0.2
0.3
1.1
7.7
6.1
6.4
0.3
0.1
1.0
5.1
5.1
5.5
0.4
0.3
1.0
4.3
3.7
4.6
0.9
0.2
1.0
2.8
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
23.3
24.4
1.1
0.9
1.5
1.6
23.4
25.2
1.9
1.0
1.6
1.3
25.5
28.6
3.2
1.3
1.5
2.9
26.9
28.2
1.3
1.1
1.1
1.3
27.4
28.9
1.5
1.1
1.5
1.0
26.9
28.0
1.1
1.2
1.5
0.8
27.3
27.8
0.5
1.3
1.6
0.2
26.4
26.6
0.2
1.2
1.5
0.1
26.3
27.1
0.8
1.3
1.8
0.2
26.0
26.8
0.9
1.3
1.8
0.4
26.1
27.4
1.3
1.2
1.8
0.7
0.9
0.1
0.9
0.6
1.8
1.2
2.8
2.0
3.1
1.8
3.3
2.1
4.6
1.7
3.1
0.4
2.3
0.3
2.4
0.8
2.0
0.9
22.3
25.0
2.7
1.8
3.6
4.2
17.4
20.9
3.5
3.4
5.0
1.9
15.0
20.5
5.5
4.2
6.0
3.7
15.8
20.8
5.0
4.2
5.6
3.6
15.4
20.5
5.0
3.7
5.3
3.5
17.6
19.0
1.4
3.5
4.8
0.1
17.6
19.3
1.8
3.7
4.9
0.6
15.9
21.2
5.3
3.9
4.8
4.4
15.9
21.6
5.7
3.8
4.8
4.8
17.5
21.6
4.0
3.7
4.8
2.9
19.4
23.0
3.6
3.5
4.5
2.6
Acquisition of foreign assets

Change in reserves
1.0
0.4
1.5
0.2
2.4
1.5
1.7
0.4
0.3
3.7
3.0
3.0
3.3
0.8
0.2
0.2
0.4
1.9
1.7
1.4
1.1
Asia
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
25.4
25.6
0.1
1.2
0.9
2.2
28.1
29.4
1.3
0.8
0.4
1.7
32.5
34.6
2.1
1.0
0.6
2.5
33.5
33.9
0.4
1.0
0.4
1.1
33.4
34.6
1.2
1.0
1.2
1.0
32.5
33.6
1.1
1.1
0.8
1.4
33.3
32.7
0.7
1.3
1.0
0.4
33.2
30.3
2.8
1.1
1.1
2.8
32.5
31.2
1.3
1.1
1.0
1.2
31.1
30.3
0.8
1.1
0.9
0.6
30.2
30.3
0.1
1.0
1.0
4.8
2.1
1.1
0.8
2.5
1.6
4.6
3.3
4.2
2.0
3.8
2.1
6.5
1.9
5.3
1.2
3.7
0.6
3.4
1.0
2.6
1.0
26.5
25.1
1.3
0.7
0.7
1.3
19.3
23.2
3.9
0.3
0.2
4.4
19.4
24.1
4.7
0.8
0.1
5.4
22.5
21.7
0.8
0.3
1.2
24.2
23.8
0.5
0.1
0.6
20.6
20.0
0.6
0.2
0.7
1.2
21.1
20.9
0.2
0.2
0.2
0.2
18.7
21.8
3.2
0.2
3.3
18.9
21.6
2.7
0.5
1.1
2.1
19.3
21.8
2.5
0.5
0.7
2.3
20.0
22.8
2.8
0.6
1.1
2.3
4.8
2.1
0.2
0.4
0.4
0.7
1.1
0.9
1.9
1.6
2.2
2.5
2.2
1.0
0.6
1.5
0.8
0.5
0.6
0.2
0.8
0.4
Memorandum
Change in reserves
Regional groups
Africa
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Memorandum
Change in reserves
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Change in reserves
239
Averages
__________________
197784 198592
Western Hemisphere
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
1993
1994
1995
1996
1997
1998
1999
2000
Average
20012004
19.2
22.2
3.0
0.3
3.4
0.1
19.6
20.8
1.1
1.0
3.3
1.2
17.5
21.3
3.8
1.0
2.3
2.4
18.6
21.5
2.9
0.9
1.7
2.1
19.1
20.8
1.6
1.1
1.6
1.2
19.5
21.4
1.9
1.1
2.2
0.7
18.7
21.9
3.2
1.0
2.2
1.9
17.1
21.6
4.5
1.1
1.9
3.6
18.0
21.3
3.3
1.2
3.1
1.3
19.0
22.2
3.2
1.1
3.3
1.1
20.6
23.5
2.9
1.1
3.0
1.0
1.3
0.3
0.9
0.4
0.8
1.0
0.4
2.1
1.7
2.5
1.7
1.8
1.0
0.1
0.7
0.2
0.4
0.9
0.2
1.1
0.7
30.5
25.6
4.9
2.4
1.7
5.7
20.1
22.8
2.7
2.9
0.4
0.2
19.0
24.3
5.3
2.1
1.4
1.8
22.0
21.8
0.2
2.5
1.8
4.4
23.5
23.4
0.1
2.4
1.8
4.3
23.5
18.0
5.5
2.0
1.9
9.4
23.0
19.7
3.3
1.8
1.5
6.7
17.5
21.8
4.3
2.1
1.3
1.0
18.1
21.5
3.4
1.8
2.6
1.0
19.7
21.2
1.5
1.5
2.3
2.4
20.6
22.6
2.0
1.0
2.3
1.3
5.1
1.6
0.2
0.4
0.1
2.0
2.7
0.1
0.4
5.5
4.5
3.2
2.2
1.5
2.7
0.3
1.0
1.7
0.8
1.2
0.5
21.5
24.1
2.6
1.6
1.9
2.6
23.9
25.6
1.7
1.6
1.9
1.4
26.3
29.2
2.9
1.7
1.5
3.1
27.5
29.0
1.5
1.5
1.1
1.9
27.9
29.5
1.6
1.5
1.5
1.6
27.3
29.2
1.9
1.6
1.4
2.0
27.8
28.7
0.9
1.6
1.6
1.0
27.3
27.1
0.2
1.6
1.5
0.2
27.2
27.7
0.5
1.6
1.8
0.3
26.6
27.4
0.8
1.6
1.7
0.7
26.7
27.9
1.2
1.4
1.7
0.9
0.5
0.3
1.1
0.7
2.0
1.6
2.8
2.2
3.4
2.0
3.1
1.9
4.8
1.6
3.5
0.7
2.6
0.5
2.5
0.8
2.1
0.9
38.3
26.0
12.3
8.3
1.8
18.7
16.2
20.3
4.1
12.0
7.9
17.5
22.1
4.7
11.4
7.4
0.7
18.3
20.1
1.8
12.2
4.9
5.5
21.5
20.1
1.4
10.5
4.6
7.4
23.1
18.9
4.2
9.1
3.1
10.2
24.5
20.5
4.0
8.8
3.6
9.2
16.4
21.7
5.3
9.6
4.6
0.3
17.3
19.5
2.2
8.6
1.9
4.6
17.8
18.6
0.8
8.1
2.2
5.0
18.5
19.0
0.5
7.0
2.5
4.1

Change in reserves
12.3
2.0
3.4
1.3
2.4
3.8
0.5
1.6
3.0
0.8
5.1
2.9
4.5
3.0
2.0
5.1
2.0
0.2
2.8
0.7
2.6
0.6

Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
22.5
24.3
1.8
1.3
1.7
2.5
23.6
25.4
1.8
1.5
2.0
1.3
25.7
28.9
3.1
1.7
1.8
3.0
27.2
28.5
1.3
1.5
1.3
1.5
27.6
29.1
1.5
1.5
1.7
1.3
27.0
28.3
1.3
1.5
1.6
1.2
27.4
28.0
0.6
1.6
1.7
0.5
26.7
26.8
0.1
1.5
1.7
0.1
26.6
27.3
0.7
1.6
1.9
0.4
26.2
27.1
0.9
1.5
1.9
0.5
26.3
27.6
1.3
1.4
1.9
0.8
0.3
1.1
0.6
1.9
1.3
2.9
2.1
3.1
1.8
3.3
2.1
4.7
1.7
3.2
0.5
2.3
0.3
2.4
0.8
2.0
0.9
Memorandum
Change in reserves
Analytical groups
Fuel
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Change in reserves
Nonfuel
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Change in reserves
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Memorandum
Change in reserves
240
Flow of Funds: Summary
Averages
__________________
197784 198592
Official financing
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
1993
1994
1995
1996
1997
1998
1999
2000
Average
20012004
17.0
19.2
2.2
3.7
0.7
8.4
14.0
18.5
4.5
4.5
2.5
6.5
13.5
20.2
6.6
6.0
4.4
8.2
14.5
19.9
5.4
5.7
4.4
6.7
13.8
19.4
5.7
5.4
4.2
6.9
14.9
19.3
4.4
5.4
3.8
5.9
14.9
19.2
4.3
5.9
4.1
6.1
14.1
19.7
5.6
5.9
4.3
7.2
13.6
19.9
6.3
5.5
3.7
8.0
15.3
19.9
4.6
5.3
3.7
6.3
17.4
21.1
3.7
4.9
3.2
5.5

Change in reserves
0.5
0.3
0.6
0.1
1.0
0.1
1.0
1.9
0.5
0.6
1.4
1.3
0.8
1.1
0.2
0.1
0.9
1.3
0.6
0.7
Private financing
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
24.7
25.8
1.1
0.4
0.9
0.5
26.5
27.3
0.8
0.6
1.7
0.3
28.8
31.9
3.2
0.6
1.6
2.2
30.6
31.3
0.7
0.5
1.2
31.1
31.8
0.8
0.6
1.8
0.5
30.0
30.8
0.7
0.6
2.1
0.7
30.7
30.3
0.4
0.7
1.9
1.6
30.2
29.4
0.8
0.6
1.9
2.0
30.4
30.4
0.8
2.3
1.6
29.6
29.9
0.3
0.8
2.2
1.2
29.1
30.0
1.0
0.7
2.2
0.6
0.9
0.5
1.4
0.7
2.5
1.2
3.6
2.4
4.2
2.4
4.4
2.7
6.3
1.8
4.3
0.2
3.3
0.3
3.4
1.0
2.7
1.1
19.9
23.1
3.2
2.3
2.2
3.3
20.7
23.6
2.9
2.4
2.3
3.0
22.9
24.3
1.4
2.9
1.3
3.0
23.5
24.5
0.9
2.5
0.2
3.2
23.9
25.7
1.8
2.4
0.4
3.8
23.9
25.2
1.3
2.4
0.6
4.3
23.2
25.1
1.9
2.3
0.1
4.1
21.9
22.0
0.1
2.3
0.1
2.4
21.0
21.5
0.5
2.2
2.7
20.8
21.7
0.9
2.1
3.0
21.9
23.1
1.2
1.8
0.1
3.0
1.6
1.6
0.4
0.6
1.7
2.4
1.8
1.5
1.4
0.9
1.1
0.8
1.8
1.6
1.4
1.6
0.5
0.4
0.1
0.3
0.3
20.2
23.2
3.0
1.4
3.5
3.3
18.9
21.4
2.5
2.3
3.1
1.7
17.6
21.5
3.9
3.0
3.3
3.7
19.9
21.3
1.4
2.6
2.5
1.4
19.5
21.5
2.0
2.3
1.6
2.7
18.6
19.4
0.9
2.2
2.1
1.1
17.8
19.8
2.0
2.2
1.9
2.3
16.0
20.2
4.3
2.3
2.2
4.4
16.3
20.4
4.1
2.3
3.0
3.4
17.7
20.9
3.2
2.2
3.0
2.5
19.5
22.5
2.9
2.1
2.7
2.3

Change in reserves
0.1
0.7
0.7
0.2
1.0
0.8
2.1
1.4
1.1
1.2
2.9
2.7
0.5
0.5
0.5
0.9
0.3
0.4
0.4
0.4
0.7
0.7

Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
23.9
25.0
1.1
1.3
0.3
2.1
25.8
27.2
1.4
1.1
1.4
1.1
28.7
31.5
2.8
1.2
1.3
2.8
29.8
31.0
1.2
1.2
0.9
1.5
30.4
31.7
1.4
1.2
1.7
0.8
29.8
31.2
1.4
1.3
1.4
1.2
30.5
30.6
0.1
1.4
1.6
0.1
30.1
28.8
1.3
1.3
1.5
1.5
29.8
29.5
0.3
1.3
1.6
0.6
28.8
29.0
0.1
1.3
1.5
0.1
28.4
29.2
0.8
1.2
1.6
0.4
0.6
0.6
1.2
0.9
2.3
1.5
3.2
2.3
3.8
2.1
3.4
1.9
6.0
2.0
4.4
1.0
3.1
0.6
3.0
0.9
2.3
0.9
Memorandum
Memorandum
Change in reserves
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Change in reserves
and/or rescheduling
during 199397
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Memorandum
Change in reserves
241
Averages
__________________
197784 198592
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
1993
1994
1995
1996
1997
1998
1999
2000
Average
20012004
...
...
...
...
...
...
...
...
...
...
...
...
23.2
25.9
2.7
1.5
1.1
3.1
24.1
24.7
0.6
0.9
1.0
0.5
23.4
24.3
0.9
0.7
0.6
1.0
21.6
24.1
2.5
0.8
0.4
2.9
20.5
24.1
3.5
0.9
0.9
3.5
18.3
21.7
3.4
0.9
1.6
2.8
20.0
21.4
1.3
1.2
3.3
0.7
20.3
22.0
1.6
1.0
2.1
0.5
22.0
24.1
2.0
1.0
1.7
1.3
...
...
...
...
3.1
2.1
2.2
1.2
2.5
4.3
0.5
0.2
2.8
1.4
1.9
0.1
3.5
1.0
3.4
1.5
2.8
1.5
Memorandum
Change in reserves
Note: The estimates in this table are based on individual countries national accounts and balance of payments statistics. For many countries, the estimates
of national saving are built up from national accounts data on gross domestic investment and from balance-of-payments-based data on net foreign investment.
The latter, which is equivalent to the current account balance, comprises three components: current transfers, net factor income, and the resource balance. The
mixing of data sources, which is dictated by availability, implies that the estimates for national saving that are derived incorporate the statistical discrepancies. Furthermore, errors, omissions, and asymmetries in balance of payments statistics affect the estimates for net lending; at the global level, net lending,
which in theory would be zero, equals the world current account discrepancy. Notwithstanding these statistical shortcomings, flow of funds estimates, such
as those presented in this table, provide a useful framework for analyzing development in saving and investment, both over time and across regions and countries. Country group composites are weighted by GDP valued at purchasing power parities (PPPs) as a share of total world GDP.
242
Medium-Term Baseline Scenario: Summary
Table 45. Summary of World Medium-Term Baseline Scenario

Eight-Year
Averages
______________________
198188
198996
Four-Year
Average
19972000
1997
1998
1999
2000
Four-Year
Average
20012004
Annual percent change unless otherwise noted

World real GDP
Advanced economies
3.4
3.0
4.2
2.9
3.2
2.5
5.7
4.7
3.3
2.7
4.3
1.4
4.2
3.2
5.8
2.2
2.5
2.2
3.2
0.2
3.0
2.8
3.5
0.8
3.5
2.7
4.8
2.8
4.0
2.8
5.4
4.6
Memorandum
Potential output
2.8
2.6
2.3
2.4
2.3
2.3
2.2
2.3
4.3
6.4
5.8
9.9
3.6
3.7
6.2
6.3
5.3
1.8
2.3
6.1
8.8
0.9
6.4
4.5
3.7
9.2
11.4
7.0
4.8
1.3
2.9
5.9
1.1
2.7
5.9
7.2
8.2
6.0
7.3
8.0
4.8
2.4
3.4
6.6
9.2
1.2
5.6
6.0
5.2
10.3
11.4
5.0
3.2
4.9
5.9
3.0
2.4
2.7
6.2
5.6
7.2
6.1
6.7
7.8
1.2
3.8
0.9
0.1
0.1
1.9
0.3
0.8
0.6
0.5
0.9
1.2
6.6
1.2
0.8
1.5
1.7
0.3
1.2
0.6
0.1
0.1
0.2
2.8
10.7
0.2
2.0
4.1
0.9
2.5
3.1
5.7
7.8
5.4
3.3
1.5
32.1
14.8
1.4
27.7
7.2
0.9
7.8
3.4
1.0
1.6
3.7
5.8
32.9
6.6
3.7
41.9
160.6
1.7
8.0
26.4
2.1
9.2
28.2
1.5
10.3
20.9
1.4
6.7
39.3
1.8
5.8
18.1
2.0
4.3
10.1
5.7
5.5
2.9
3.9
4.1
3.2
4.0
3.2
4.5
3.0
4.0
3.3
3.9
3.5
3.8
3.5
World trade, volume1

Imports
Advanced economies
Exports
Advanced economies
Terms of trade
Advanced economies
World prices in U.S. dollars
Manufactures
Oil
Consumer prices
Advanced economies
Interest rates (in percent)
Real six-month LIBOR2
World real long-term interest rate3
Percent of GDP
Balances on current account
Advanced economies
0.4
2.2
0.4
1.9
0.5
1.2
2.8
0.4
1.1
2.8
0.2
1.5
3.1
0.3
1.0
2.4
0.3
1.2
2.8
0.2
1.5
2.5
Total external debt

35.1
8.4
35.9
30.2
36.1
41.6
34.6
30.8
37.1
39.2
37.1
49.3
35.8
47.0
33.2
41.0
Debt service
4.6
2.0
4.7
3.6
5.9
7.0
5.6
3.8
6.0
6.6
6.3
8.9
5.7
8.7
5.1
7.0
1Data
refer to trade in goods and services.

interbank offered rate on U.S. dollar deposits less percent change in U.S. GDP deflator.
3GDP-weighted average of ten-year (or nearest maturity) government bond rates for the United States, Japan, Germany, France, Italy, the United Kingdom,
and Canada.
2London
243
Table 46. Developing CountriesMedium-Term Baseline Scenario: Selected Economic Indicators

Eight-Year
Averages
______________________
198188
198996
Four-Year
Average
19972000
1997
1998
1999
2000
Four-Year
Average
20012004
Annual percent change

Real GDP
Export volume1
Terms of trade1
Import volume1
4.2
2.4
3.8
1.8
5.7
9.2
0.1
8.8
4.3
6.0
0.8
4.5
5.8
11.4
0.9
11.4
3.2
4.9
6.6
1.3
3.5
2.4
1.5
1.1
4.8
5.6
1.2
7.2
5.4
6.7
0.1
7.3
Africa
Real GDP
Export volume1
Terms of trade1
Import volume1
2.4
4.3
3.6
5.2
2.5
5.2
0.2
4.2
3.6
3.4
0.1
5.1
3.1
6.3
0.3
7.9
3.4
1.8
5.6
2.9
3.1
3.3
2.2
5.2
5.0
6.1
2.8
4.6
5.2
5.1
0.3
4.8
Asia
Real GDP
Export volume1
Terms of trade1
Import volume1
7.2
5.8
0.2
5.3
8.0
12.7
0.6
12.1
5.2
6.9
1.0
3.1
6.6
14.3
0.5
7.0
3.7
6.0
3.8
9.2
5.3
1.2
1.2
5.5
5.4
6.3
0.7
10.1
5.9
7.9
0.4
9.5

Real GDP
Export volume1
Terms of trade1
Import volume1
2.5
1.1
6.9
1.0
3.9
7.7
3.8
3.1
4.8
2.3
4.6
4.5
9.8
0.2
13.2
3.2
5.3
13.6
2.6
1.8
0.6
3.7
2.0
3.1
3.6
1.4
5.3
4.5
3.8
0.1
4.0
Western Hemisphere
Real GDP
Export volume1
Terms of trade1
Import volume1
1.7
4.2
4.4
2.4
3.0
7.9
0.2
10.7
2.9
6.7
0.4
6.7
5.3
10.0
2.8
19.9
2.2
5.5
6.1
7.3
0.1
5.6
3.5
4.7
3.9
5.6
1.8
5.5
4.9
7.6
0.2
6.9

and/or rescheduling
during 199397
Real GDP
Export volume1
Terms of trade1
Import volume1
2.2
3.9
5.3
1.3
2.7
5.1
0.9
4.4
2.9
5.9
0.1
5.5
4.2
9.9
0.2
14.3
2.0
0.4
4.7
2.0
1.3
6.1
2.0
4.1
7.5
2.7
6.1
4.9
7.9
0.5
6.7

Real GDP
Export volume1
Terms of trade1
Import volume1
5.6
5.5
1.4
3.2
6.9
10.5
11.1
4.9
6.6
0.8
4.4
6.4
12.9
1.1
10.4
3.7
7.0
5.1
2.6
4.4
1.2
0.4
2.0
5.1
5.4
0.7
8.4
5.7
7.0
0.4
8.1
Regional groups
Analytical groups
244
Medium-Term Baseline Scenario: Developing Countries
1988
1992
1996
1997
1998
1999
2000
2004

Total external debt
Interest payments
Amortization
11.8
221.7
27.1
14.4
12.8
11.7
185.9
24.5
9.6
15.0
6.3
154.2
24.1
8.3
15.8
4.9
148.3
24.1
7.7
16.4
6.6
167.6
27.0
9.0
18.0
4.5
160.6
27.0
9.2
17.8
4.9
152.2
24.5
9.0
15.5
6.7
131.3
19.2
7.4
11.9
Africa
Total external debt
Interest payments
Amortization
16.2
257.0
27.8
13.2
14.8
10.0
248.6
26.9
10.3
17.0
4.6
230.2
22.6
9.1
13.6
5.2
220.0
22.6
8.9
13.7
15.6
251.2
24.2
10.2
14.0
14.9
244.4
28.3
12.0
16.3
10.9
224.6
26.8
12.3
14.5
8.2
190.1
20.6
9.2
11.9
Asia
Total external debt
Interest payments
Amortization
12.0
184.8
21.1
10.2
10.9
4.8
155.1
20.4
7.5
12.9
7.6
118.3
16.2
6.1
10.1
0.9
115.0
14.5
5.0
9.5
9.4
118.6
19.5
5.8
13.7
4.6
112.5
15.7
5.4
10.3
2.0
107.9
14.6
5.3
9.5
3.7
90.6
12.7
4.1
8.6

Total external debt
Interest payments
Amortization
13.5
146.4
16.3
8.2
8.1
15.0
107.3
12.4
5.2
7.2
4.2
93.0
17.8
4.0
13.8
2.6
92.8
15.3
3.6
11.6
9.0
120.9
15.6
5.0
10.6
2.7
119.1
17.4
5.3
12.1
2.5
115.3
15.2
5.0
10.1
3.5
111.4
11.2
5.3
5.9
Western Hemisphere
Total external debt
Interest payments
Amortization
7.4
308.3
43.1
25.4
17.8
19.9
276.5
41.9
16.7
25.1
14.1
238.8
45.1
15.9
29.1
22.2
225.9
50.1
15.6
34.5
30.9
260.9
50.9
17.5
33.4
18.5
246.5
54.9
18.2
36.7
16.7
228.8
47.9
17.3
30.6
13.4
195.1
35.8
13.8
22.0
23.6
343.6
39.1
21.7
17.5
11.0
322.1
35.6
13.9
22.0
9.7
260.8
28.8
11.4
17.4
15.2
244.1
33.2
10.9
22.3
25.8
288.3
36.7
12.9
23.8
18.0
270.4
45.3
14.7
30.6
14.2
238.3
39.3
14.0
25.6
9.8
190.3
26.8
9.5
17.6

7.3
Total external debt
196.4
25.7
Interest payments
12.9
Amortization
12.9
11.3
168.7
25.5
9.8
15.7
8.0
141.4
24.5
8.5
16.0
3.8
136.5
23.5
7.6
15.8
0.1
145.8
26.7
8.5
18.1
1.1
141.3
24.2
8.4
15.8
3.2
137.8
22.1
8.2
13.9
6.8
120.3
18.2
7.2
11.0
Regional groups
Analytical groups
and/or rescheduling
during 199397
Total external debt
Interest payments
Amortization
1Data
refer to trade in goods and services.

payments on total debt plus amortization payments on long-term debt only. Projections incorporate the impact of exceptional financing items.
Excludes service payments to the IMF.
2Interest
245
World Economic Outlook and Staff Studies

for the World Economic Outlook,
I. MethodologyAggregation, Modeling, and Forecasting

World Economic Outlook
The Accuracy of World Economic Outlook Projections for
the Major Industrial Countries
Revised Weights for the World Economic Outlook
Structural Budget Indicators for Major Industrial Countries
The New Balance of Payments Manual
The Difficult Art of Forecasting
World Current Account Discrepancy
Alternative Exchange Rate Assumptions for Japan
May 1992, Annex VIII

May 1993, Annex IV
October 1993, Annex I
May 1994, Box 13
October 1996, Annex III
October 1997, Box 2
Staff Studies for the
An Extended Scenario and Forecast Adjustment Model for

Manmohan S. Kumar, Hossein Samiei, and Sheila Bassett
How Accurate Are the World Economic Outlook Projections?
Jose M. Barrionuevo
Purchasing Power Parity Based Weights for the
Anne Marie Gulde and Marianne Schulze-Ghattas
How Accurate Are the IMFs Short-Term Forecasts?
Another Examination of the World Economic Outlook
Michael J. Artis
IMFs Estimates of Potential Output: Theory and Practice
Paula R. De Masi
Multilateral Unit-Labor-Cost-Based Competitiveness Indicators
for Advanced, Developing, and Transition Countries
Anthony G. Turner and Stephen Golub
December 1993
December 1993
December 1993
December 1997
December 1997
December 1997
II. Historical Surveys

The Postwar Economic Achievement
Non-Oil Commodity Prices
The Rise and Fall of InflationLessons from Postwar Experience

October 1994, Chapter VI
October 1994, Box 10
III. Economic GrowthSources and Patterns

Convergence and Divergence in Developing Countries
Trade as an Engine of Growth
New Theories of Growth and Trade
Why Are Some Developing Countries Failing to Catch Up?
246

May 1993, Chapter IV
May 1993, Chapter VI
May 1993, Box 9
The Postwar Economic Achievement
Business Cycles and Potential Output
October 1994, Box 5
Economic Convergence
Saving in a Growing World Economy
May 1995, Chapter V
North-South R&D Spillovers
May 1995, Box 6
Long-Term Growth Potential in the Countries in Transition
October 1996, Chapter V
Globalization and the Opportunities for Developing Countries
Measuring Productivity Gains in East Asian Economies
May 1997, Box 9
The Business Cycle, International Linkages, and Exchange Rates
May 1998, Chapter III
The Asian Crisis and the Regions Long-Term Growth Performance
October 1998, Chapter III
Potential Macroeconomic Implications of the Year 2000

Computer Bug
May 1999, Box 1.2
Growth Divergences in the United States, Europe, and Japan:

Trend or Cyclical?

How Large Was the Output Collapse in Russia?

Alternative Estimates and Welfare Implications
Evgeny Gavrilenkov and Vincent Koen
September 1995
Deindustrialization: Causes and Implications

Robert Rowthorn and Ramana Ramaswamy
December 1997
IV. Inflation and Deflation; Commodity Markets

Asset Price Deflation, Balance Sheet Adjustment,
and Financial Fragility
Monetary Policy, Financial Liberalization, and Asset Price Inflation
May 1993, Annex I
Price Stability
May 1993, Box 2
Oil Demand and Supply in the Medium Term
May 1993, Box 5
Hyperinflation and Chronic Inflation
October 1993, Box 8
The Rise and Fall of InflationLessons from Postwar Experience
World Oil Market: Recent Developments and Outlook
October 1996, Annex II
Inflation Targets
October 1996, Box 8
Indexed Bonds and Expected Inflation
October 1996, Box 9
Effects of High Inflation on Income Distribution
Central Bank Independence and Inflation
Recent Developments in Primary Commodity Markets
May 1998, Annex II
Japans Liquidity Trap
October 1998, Box 4.1
October 1999, Chapter IV
Global Liquidity

Boom and Bust in Asset Markets in the 1980s:

Causes and Consequences
Garry J. Schinasi and Monica Hargraves
December 1993
Prices in the Transition: Ten Stylized Facts

Vincent Koen and Paula R. De Masi
December 1997
247
SELECTED TOPICS, 199299
V. Fiscal Policy
Structural Budget Indicators for Major Industrial Countries

Economic Benefits of Reducing Military Expenditure
Structural Fiscal Balances in Smaller Industrial Countries
May 1995, Annex III
Can Fiscal Contraction Be Expansionary in the Short Run?
May 1995, Box 2
Pension Reform in Developing Countries
May 1995, Box 11
Effects of Increased Government Debt: Illustrative Calculations
May 1995, Box 13
Subsidies and Tax Arrears
October 1995, Box 8
Focus on Fiscal Policy
May 1996
The Spillover Effects of Government Debt
May 1996, Annex I
Uses and Limitations of Generational Accounting
May 1996, Box 5
The European Unions Stability and Growth Pact
October 1997, Box 3
Progress with Fiscal Reform in Countries in Transition
May 1998, Chapter V
Pension Reform in Countries in Transition
May 1998, Box 10
Transparency in Government Operations
May 1998, Annex I
The Asian Crisis: Social Costs and Mitigating Policies
Fiscal Balances in the Asian Crisis Countries: Effects of Changes

in the Economic Environment Versus Policy Measures
Aging in the East Asian Economies: Implications for Government

Budgets and Saving Rates
Orienting Fiscal Policy in the Medium Term in Light of the Stability

and Growth Pact and Longer-Term Fiscal Needs
Comparing G-7 Fiscal PositionsWho Has a Debt Problem?

An International Comparison of Tax Systems in Industrial Countries

Enrique G. Mendoza, Assaf Razin, and Linda L. Tesar
December 1993
VI. Monetary Policy; Financial Markets; Flow of Funds

Monetary Policy, Financial Liberalization, and Asset Price Inflation
Chronology of Events in the Recent Crisis in the
European Monetary System
Information Content of the Yield Curve
Saving in a Growing World Economy
Saving and Real Interest Rates in Developing Countries
Financial Market Turmoil and Economic Policies in
Industrial Countries
Financial Liberalization in Africa and Asia
Policy Challenges Facing Industrial Countries in the Late 1990s
Using the Slope of the Yield Curve to Estimate Lags in Monetary
Transmission Mechanism
Financial Repression
Bank-Restructuring Strategies in the Baltic States, Russia, and Other
Countries of the Former Soviet Union: Main Issues and Challenges
Monetary and Financial Sector Policies in Transition Countries
Dollarization
248
May 1993, Annex I

October 1993, Box 3
May 1994, Annex II
May 1995, Chapter V
May 1995, Box 10
October 1995, Box 4
October 1996, Box 2
October 1996, Box 5
October 1996, Box 7
October 1997, Box 6
Interim Assessment (Focus on Crisis in AsiaRegional

and Global Implications)
Financial Crises: Characteristics and Indicators of Vulnerability
December 1997
The Role of Hedge Funds in Financial Markets
May 1998, Box 1
International Monetary System: Measures to Reduce

the Risk of Crises
May 1998, Box 3
Resolving Banking Sector Problems
May 1998, Box 6
Effective Banking Prudential Regulations and Requirements
May 1998, Box 7
Strengthening the Architecture of the International Monetary System

Through International Standards and Principles of Good Practice
The Role of Monetary Policy in Responding to Currency Crises
Summary of Structural Reforms in Crisis Countries
Japans Liquidity Trap
How Useful Are Taylor Rules as a Guide to ECB Monetary Policies?
The Crisis in Emerging Markets
December 1998, Chapter II
Turbulence in Mature Financial Markets
December 1998, Chapter III
What Is the Implied Future Earnings Growth Rate that Would

Justify Current Equity Prices in the United States?
December 1998, Box 3.2
Leverage
The Near Collapse and Rescue of Long-Term Capital Management
Risk Management: Progress and Problems
Supervisory Reforms Relating to Risk Management
Emerging Market Banking Systems
December 1998, Annex
International Financial Contagion
From Crisis to Recovery in the Emerging Market Economies
October 1999, Chapter II
The Effects of a Zero Floor for Nominal Interest Rates on Real

Output: Selected Simulation Results

The Global Real Interest Rate

Thomas Helbling and Robert Wescott
September 1995
A Monetary Impulse Measure for Medium-Term Policy Analysis

Bennett T. McCallum and Monica Hargraves
September 1995
Saving Behavior in Industrial and Developing Countries

Paul R. Masson, Tamim Bayoumi, and Hossein Samiei
September 1995
VII. Labor Market Issues

Fostering Job Creation, Growth, and Price Stability
in Industrial Countries
Capital Formation and Employment
May 1995, Box 4
Implications of Structural Reforms Under EMU
Euro-Area Structural Rigidities
Chronic Unemployment in the Euro Area: Causes and Cures
Labor Market Slack: Concepts and Measurement
May 1999, Box 4.1
EMU and European Labor Markets
May 1999, Box 4.2
Labor MarketsAn Analytical Framework
May 1999, Box 4.3
249
The OECD Jobs Study
May 1999, Box 4.4
The Effects of Downward Rigidity of Nominal Wages on

(Un)employment: Selected Simulation Results

Unemployment and Wage Dynamics in MULTIMOD

Leonardo Bartolini and Steve Symansky
December 1993
Evaluating Unemployment Policies: What Do the Underlying

Theories Tell Us?
Dennis J. Snower
September 1995
Institutional Structure and Labor Market Outcomes:

Western Lessons for European Countries in Transition
Robert J. Flanagan
September 1995
The Effect of Globalization on Wages in the Advanced Economies

Matthew J. Slaughter and Phillip Swagel
December 1997
International Labor Standards and International Trade

Stephen Golub
December 1997
VIII. Exchange Rate Issues

Interim Assessment (Focus on Crisis in the European Monetary System)

January 1993
Recent Changes in the European Exchange Rate Mechanism
Chronology of Events in the Recent Crisis in the European

Monetary System
October 1993, Box 3
Striving for Stability: Realignment of the CFA Franc
May 1994, Box 8
Currency Arrangements in the Former Soviet Union and

Baltic Countries
May 1994, Box 10
Exchange-Rate-Based Stabilization
May 1994, Box 11
Exchange Market Reforms in Africa
October 1994, Box 3
Currency Convertibility
October 1994, Box 7
Currency Substitution in Transition Economies
October 1994, Box 8
Exchange Rate Effects of Fiscal Consolidation
October 1995, Annex
Exchange Rate Arrangements and Economic Performance in

Asymmetric Shocks: European Union and the United States
October 1997, Box 4
Currency Boards
October 1997, Box 5
The Business Cycle, International Linkages, and Exchange Rates
Evaluating Exchange Rates
May 1998, Box 5
Determining Internal and External Conversion Rates for the Euro
The Euro Area and Effective Exchange Rates
Recent Dollar/Yen Exchange Rate Movements
International Financial Contagion
Exchange Rate Crashes and Inflation: Lessons for Brazil
May 1999, Box 2.1
Recent Experience with Exchange-Rate-Based Stabilizations
May 1999, Box 3.1

Multilateral Unit-Labor-Cost-Based Competitiveness Indicators

for Advanced, Developing, and Transition Countries
Anthony G. Turner and Stephen Golub
250
December 1997
IX. External Payments, Trade, Capital Movements, and Foreign Debt

Trade as an Engine of Growth

May 1993, Chapter VI
New Theories of Growth and Trade
May 1993, Box 9
Is the Debt Crisis Over?
October 1993, Box 5
The Uruguay Round: Results and Implications
May 1994, Annex I
The Recent Surge in Capital Flows to Developing Countries
Currency Convertibility
October 1994, Box 7
Trade Among the Transition Countries
October 1995, Box 7
World Current Account Discrepancy
October 1996, Annex III
Capital Inflows to Developing and Transition Countries

Identifying Causes and Formulating Appropriate Policy Responses
October 1996, Annex IV
GlobalizationOpportunities and Challenges
May 1997
Moral Hazard and IMF Lending
May 1998, Box 2
The Current Account and External Sustainability
May 1998, Box 8
Review of Debt-Reduction Efforts for Low-Income Countries

and Status of the HIPC Initiative
Trade Adjustment in East Asian Crisis Countries
Are There Dangers of Increasing Protection?
May 1999, Box 1.3
Trends and Issues in the Global Trading System
Capital Flows to Emerging Market Economies: Composition

and Volatility

Foreign Direct Investment in the World Economy

Edward M. Graham
September 1995
X. Regional Issues
The Maastricht Agreement on Economic and Monetary Union
May 1992, Annex II
Interim Assessment (Focus on Crisis in the European Monetary System)
January 1993
Economic Performance and Financing Needs in Africa
October 1993, Box 6
Stabilization and Economic Reform in the Baltic Countries
October 1993, Box 7
Adjustment and Recovery in Latin America and the Caribbean
May 1994, Annex III
European Economic Integration
Adjustment in Sub-Saharan Africa
May 1995, Annex II
Macroeconomic and Structural Adjustment in the

Middle East and North Africa
May 1996, Annex II
Stabilization and Reform of Formerly Centrally Planned

Developing Economies in East Asia
May 1997, Box 10
EMU and the World Economy
Implications of Structural Reforms Under EMU
The European Unions Stability and Growth Pact
October 1997, Box 3
Asymmetric Shocks: European Union and the United States
October 1997, Box 4
Interim Assessment (Focus on Crisis in AsiaRegional

and Global Implications)
December 1997
The Asian Crisis and the Regions Long-Term Growth Performance
251
Economic Policy Challenges Facing the Euro Area

and the External Implications of EMU
Economic Policymaking in the EU and Surveillance

by EU Institutions
October 1998, Chapter V,

Appendix
Chronic Unemployment in the Euro Area: Causes and Cures
Growth in Sub-Saharan Africa: Performance, Impediments,

and Policy Requirements
The Regional Economic Impact of the Kosovo Crisis
Counting the Costs of the Recent Crises
Africa and World Trends in Military Spending

The Design of EMU

David Begg
December 1997
XI. Country-Specific Analyses

Voucher Privatization in the Czech and Slovak Federal Republic
Currency Reform in Estonia
Economic Reforms, Growth, and Trade in China
Economic Arrangements for the Czech-Slovak Breakup
Indias Economic Rebound
Japans Trade Surplus
The Treuhandanstalt
Adjustment and Recovery in Latin America and the Caribbean
Polands Economic Rebound
Foreign Direct Investment in China
Factors Behind the Financial Crisis in Mexico
New Zealands Structural Reforms and Economic Revival
Brazil and Korea
The Output Collapse in Russia
Foreign Direct Investment in Estonia
September 1995 Economic Stimulus Packages in Japan
Uganda: Successful Adjustment Under Difficult Circumstances
Changing Wage Structures in the Czech Republic
Resolving Financial System Problems in Japan
New Zealands Fiscal Responsibility Act
Deindustrialization and the Labor Market in Sweden
Ireland Catches Up
Foreign Direct Investment Strategies in Hungary and Kazakhstan
ChinaGrowth and Economic Reforms
Alternative Exchange Rate Assumptions for Japan
Hong Kong, China: Economic Linkages and
Institutional Arrangements
Russias Fiscal Challenges
Japans Economic Crisis and Policy Options
Brazils Financial Assistance Package and Adjustment Program
Recent Developments in the Japanese Financial System
Malaysias Capital Controls
252

October 1992, Box 2
October 1992, Box 3
May 1993, Box 4
May 1993, Box 6
October 1993, Box 1
October 1993, Box 2
October 1993, Box 9
May 1994, Annex III
May 1994, Box 9
October 1994, Box 6
May 1995, Annex I
May 1995, Box 3
May 1995, Box 5
May 1995, Box 8
May 1995, Box 9
October 1995, Box 1
October 1995, Box 3
October 1995, Box 6
May 1996, Box 3
May 1996, Box 4
May 1997, Box 7
May 1997, Box 8
May 1997, Box 12
October 1997, Box 2
October 1997, Box 9
May 1998, Box 9
Hong Kongs Intervention in the Equity Spot and Futures Markets

Is Chinas Growth Overstated?
Measuring Household Saving in the United States
Australia and New Zealand: Divergences, Prospects, and Vulnerabilities
The Emerging Market Crises and South Africa
Structural Reforms in Latin America: The Case of Argentina
Malaysias Response to the Financial Crisis: How Unorthodox Was It?
Financial Sector Restructuring in Indonesia, Korea, Malaysia,
and Thailand

May 1999, Box 2.2
How Large Was the Output Collapse in Russia?

Alternative Estimates and Welfare Implications
Evgeny Gavrilenkov and Vincent Koen
September 1995
253
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WORLD ECONOMIC AND FINANCIAL SURVEYS

1999 International Monetary Fund

World economic outlook (International Monetary Fund)

Please send orders to:

1999 International Monetary Fund

Further Information and Data

Chapter I. World Economic Outlook and the Challenges of Global Adjustment

Macroeconomic Stability and the Forces of Globalization: Lessons

Assessing the Sustainable Level of Output

Chapter IV. Safeguarding Macroeconomic Stability at Low Inflation

The Achievement of Reasonable Price Stability

Chapter VI. Growth in Sub-Saharan Africa: Performance, Impediments, and

Annex. Summing Up by the Chairman

Gross Private Financing to Emerging Market Economies

3.4 United States: Output, Labor Productivity, and Inflation

1999 International Monetary Fund

Assumptions and Conventions

to indicate that data are not available or not applicable;

to indicate that the figure is zero or negligible;

Billion means a thousand million; trillion means a thousand billion.

1999 International Monetary Fund

Further Information and Data

1999 International Monetary Fund

1999 International Monetary Fund

1If real domestic demand in the United States had expanded in

WORLD ECONOMIC OUTLOOK AND CHALLENGES OF GLOBAL ADJUSTMENT

Table 1.1. Overview of the World Economic Outlook Projections

Figure 1.1. Global Indicators1

9 World Real Long-Term

Macroeconomic Stability and the Forces of

The current global adjustment challenge has its

WORLD ECONOMIC OUTLOOK AND CHALLENGES OF GLOBAL ADJUSTMENT

Table 1.2. Selected Economies:

include only goods and nonfactor services.

Figure 1.2. Financing Conditions

Gross Private Financing 2

Sources: Bloomberg Financial Markets, LP; and IMF staff estimates.

WORLD ECONOMIC OUTLOOK AND CHALLENGES OF GLOBAL ADJUSTMENT

Economic performance differed sharply between

ing market economies, fueled by the rapid growth of

and the dampening effect on prices of an appreciating

ities in Australia and nearly 50 percent in New Zealand.

Current Account Developments1

Goods and services

Net investment income

areas indicate IMF staff projections.

Zealand; in the latter case, these outflows have tended to

asset market bubbles, while rapid reversals of such

wide since the breakdown of the Bretton Woods system

WORLD ECONOMIC OUTLOOK AND CHALLENGES OF GLOBAL ADJUSTMENT

gencesmay well have increased in many cases, as

Although further research into these issues is

As recent experience attests, a prolonged period of price

This may help to explain the surge in capital flows

The Inevitable U.S. Slowdown and Adjustment

of a cyclical expansion. This seems to be related partly

The Inevitable U.S. Slowdown

WORLD ECONOMIC OUTLOOK AND CHALLENGES OF GLOBAL ADJUSTMENT

Other advanced economies

Japan: Recovery in Sight?

Japan: Recovery in Sight?

WORLD ECONOMIC OUTLOOK AND CHALLENGES OF GLOBAL ADJUSTMENT

Japan: Recovery in Sight?