WorldEconomicOutlook 1998 10

WORLD ECONOMIC AND FINANCIAL SURVEYS
WORLD ECONOMIC
OUTLOOK
October 1998
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
1998 International Monetary Fund
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)
1. Economic history1971 Periodicals. I. International
Monetary Fund. II. Series: Occasional paper (International Monetary
Fund)
HC10.W7979
84-640155
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Library of Congress
8507
Published biannually.
ISBN 1-55775-773-9
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Contents
Page
Assumptions and Conventions
vii
Preface
ix
Chapter I. Policy Responses to the Current Crisis
Financial Market Developments and Risks

Asia: Setbacks, but Progress Toward Crisis Resolution
Russias Financial and Payments Crisis
Other Emerging Market Countries: Reducing Vulnerabilities
The United States, Canada, and the United Kingdom: Striking a Balance
in Monetary Policy
Euro Area: Prospects and Policy Challenges
Systemic Considerations
Chapter II. The Crisis in Emerging Marketsand Other Issues
in the Current Conjuncture
Global Growth and Inflation Outlook
The Emerging Markets Crisis: Its Evolution and Spread
Prospects for Global Flows of Funds and Current Account Balances
Foreign Exchange and Financial Market Developments
in the Industrial Countries
Inflation Concerns in Advanced Economies
Issues Relating to Growth and Inflation in Developing Countries
and Countries in Transition
Chapter III. The Asian Crisis and the Regions Long-Term Growth Performance
Sources of East Asias Growth
Efficiency of Investment
The Role of Policies and Institutions in Fostering High Growth
The East Asian Development Strategy in a Changing Environment
Building the Basis for Sustained Recovery and Growth
Chapter IV. Japans Economic Crisis and Policy Options
The Boom-Bust Cycle in Asset Markets
Consequences for the Real Economy
Role of Macroeconomic Policies
Role of Structural Policies
3
4
7
8
12
14
15
19
19
32
59
66
69
76
82
82
82
87
100
102
107
108
110
112
118
Chapter V. Economic Policy Challenges Facing the Euro Area

and the External Implications of EMU
Economic Policies in the Euro Area
The Euro Area and the World Economy
Appendix. Economic Policymaking in the EU and Surveillance
by EU Institutions
iii
123
124
141
155
CONTENTS
Statistical Appendix
158
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)
158
158
159
169
171
182
190
199
207
219
230
240
245
Boxes
1.1 Review of Debt-Reduction Efforts for Low-Income Countries
and Status of the HIPC Initiative
1.2 Strengthening the Architecture of the International Monetary System
Through International Standards and Principles of Good Practice
2.1 Policy Assumptions Underlying the Projections for
Selected Advanced Economies
2.2 Trade Adjustment in East Asian Crisis Countries
2.3 The Role of Monetary Policy in Responding to Currency Crises
2.4 The Asian Crisis: Social Costs and Mitigating Policies
2.5 Fiscal Balances in the Asian Crisis Countries: Effects of Changes
in the Economic Environment Versus Policy Measures
10
16
26
36
40
46
50
3.1 Aging in the East Asian Economies: Implications for Government

Budgets and Saving Rates
3.2 Summary of Structural Reforms in Crisis Countries
98
105
4.1 Japans Liquidity Trap
118
5.1 How Useful Are Taylor Rules as a Guide to ECB Monetary Policies?
5.2 Orienting Fiscal Policy in the Medium Term in Light of the Stability
and Growth Pact and Longer-Term Fiscal Needs
5.3 Euro-Area Structural Rigidities
5.4 Determining Internal and External Conversion Rates for the Euro
5.5 The Euro Area and Effective Exchange Rates
134
136
140
144
146
Tables
2.1 Overview of the World Economic Outlook Projections
2.2 Advanced Economies: Real GDP, Consumer Prices,
and Unemployment Rates
2.3 Major Industrial Countries: General Government
Fiscal Balances and Debt
2.4 Selected Developing Countries: Real GDP and Consumer Prices
2.5 Countries in Transition: Real GDP and Consumer Prices
2.6 Selected Asian Economies: Macroeconomic Indicators
2.7 Baseline Recovery Path of the Asian Crisis Countries
2.8 Russia and Ukraine: Selected Macroeconomic Indicators
2.9 Developing Countries, Countries in Transition, and
Newly Industrialized Asian Economies: Net Capital Flows
2.10 Gross Private Financing to Emerging Market Economies
2.11 Overview of Current Account Projections
2.12 Selected Economies: Current Account Positions
iv
20
25
28
31
32
35
45
54
60
61
63
64
Contents
2.13
2.14
2.15
2.16
2.17
Recent Exchange Rate Movements on a Bilateral and Multilateral Basis

United States: Economic Indicators
Selected Advanced Economies: Unemployment Rates, 1997
Selected Countries: Changes in Asset Prices
Major Oil-Exporting Developing Countries: Budgetary Impact
of Oil Price Decline
2.18 Middle East and African Countries: Growth, Inflation,
and Fiscal Balances
65
70
72
75
3.1 Selected Economies: Sources of Economic Growth

3.2 Selected East Asian Economies: Estimates of Total Factor
Productivity Growth
3.3 Selected Economies: Investment-GDP Ratios
3.4 Selected Economies: Composition of Private Saving
3.5 Selected Economies: Net Private Capital Flows
3.6 Selected Economies: Structure of Financial System
3.7 Selected Economies: Broad Money (M2)
3.8 Selected Economies: Private Sector Credit
3.9 Selected Economies: Debt-Equity Ratios of Manufacturing Corporations
3.10 Selected East Asian Economies: Banking Sector Problems
3.11 Selected Economies: Macroeconomic Indicators
3.12 ASEAN-4 Plus Korea: Macroeconomic Developments
and Debt Dynamics
84
77
78
85
88
90
91
92
93
93
94
96
101
104
4.1 Japan: Growth Decomposition

4.2 Japan: Summary of Major Economic Stimulus Packages
112
115
5.1 Euro Area and Selected Countries: Trade Linkages in 1996

5.2 Effect of 1 Percent Higher Output in the EMU Area
on Selected Developing Countries
5.3 Selected Countries: Exchange Rate Regimes
5.4 Debt of CFA Franc Zone Countries
5.5 Selected Countries: External Debt and Shares
of Long-Term Debt by Currency
5.6 Prospective European Union Members: Convergence Indicators, 1997
141
150
151
152
153
154
Figures
1.1 World Industrial Production
1.2 World Output and Inflation
1
2
2.1 Selected European Union Countries, Japan, and the United States:
Indicators of Consumer and Business Confidence
2.2 Prices of Crude Petroleum and Nonfuel Commodities
2.3 Selected Advanced Economies: Inflation
2.4 Advanced Economies: Inflation and Commodity Prices
2.5 Major Industrial Countries: Output Gaps
2.6 Selected European Countries: Real Total Domestic Demand
2.7 Major Industrial Countries: Indices of Monetary Conditions
2.8 Selected Emerging Market Countries: Bilateral U.S. Dollar
Exchange Rates
2.9 Selected Emerging Market Countries: Equity Prices
2.10 Selected East Asian Countries: Unemployment
2.11 Selected Emerging Market Countries: Short-Term Interest Rates
2.12 Mexico and Selected Asian Economies: Real Private Sector Credit
Growth During Crisis Periods
2.13 Developing Countries: Equity Prices
2.14 Russia: Monetary and Financial Market Developments
2.15 Emerging Markets: Bond Spreads
2.16 Major Industrial Countries: Effective Exchange Rates
21
22
23
24
29
29
30
33
34
38
39
44
49
55
62
67
CONTENTS
2.17
2.18
2.19
2.20
2.21
2.22
2.23
2.24
Major Industrial Countries: Nominal Interest Rates

Advanced Economies: Equity Prices
United States: Actual and Predicted Inflation
Selected Advanced Economies: Unemployment
Selected Advanced Economies: Labor Force Participation
Selected Advanced Economies: Employment
Prices of Selected Commodities
Selected Countries in Transition: Inflation
68
69
71
72
73
74
79
80
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Selected Economies: Efficiency of Investment

Selected Economies: Incremental Capital-Output Ratios
Selected Economies: Stock Market Capitalization
Selected Economies: Growth of Merchandise Exports
Selected Country Groups: Shares of World Exports, Imports, and Output
Selected Countries: Destination of Exports
ASEAN-4 Plus Korea: Stock of Debt at End-1997
86
87
95
97
97
100
103
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Selected Major Industrial Countries: Output Growth and Unemployment

Selected Countries: Equity and Property Prices
Japan: Stock Market Indicators
Selected Countries: Personal Saving Ratio
Japan: Business Capital-to-Output Ratio and GDP Components
Japan: Interest Rates and Indicators of Monetary Conditions
Japan: Fiscal Indicators
Japan: Credit Growth, Tankan Survey, and Bankruptcies
107
108
109
110
111
113
116
121
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
Euro Area and the World Economy: Indicators of Relative Size

Euro Area: GDP Growth and Components of Demand
Euro Area: General Government Fiscal Balance and Inflation
Euro Area: Real Exchange Rates and Interest Rates
Euro Area: Output Gaps, Employment, and Unemployment
Euro Area: Inflation
Euro Area and the United States: Asset Prices
Euro-Area Broad Money Stock, Slope of German Yield Curve,
and Forward Interest Rates for Germany
Euro Area: Fiscal Trends
Euro Area: Structural Fiscal Balances and Output Gaps, 1997 and 1998
Euro Area: Employment and Unemployment, 1996
ECU and Deutsche Mark Exchange Rates Vis--vis the U.S. Dollar:
Spot and Forward, August 31, 1998
123
124
125
126
127
128
129
5.9
5.10
5.11
5.12
World Economic Outlook and Staff Studies for the World Economic Outlook,
Selected Topics, 199298
vi
130
132
133
138
143
248
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 27August 24, 1998 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 2.1); that
the average price of oil will be $13.28 a barrel in 1998 and $14.51 a barrel in 1999, 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 5.7 percent in both 1998 and 1999.
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 midSeptember 1998.
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.
***
Inquiries about the content of the World Economic Outlook, including questions relating to
the World Economic Outlook database and requests for additional data, 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
vii
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,
Staffan Gorne, Mark De Broeck, Donogh McDonald, Ramana Ramaswamy, Jahangir Aziz,
Phillip Swagel, Ranil Salgado, and Cathy Wright. Other contributors include Anthony Boote,
Philip Gerson, Sanjeev Gupta, Peter Heller, Kalpana Kochhar, Laura Kodres, Guy Meredith,
Doris Ross, Blair Rourke, Christian Schiller, Steven Symansky, and Andrew Tweedie. The
Fiscal Analysis Division of the Fiscal Affairs Department computed the structural budget and
fiscal impulse measures. Gretchen Gallik, Mandy Hemmati, Yutong Li, and Anthony G. Turner
provided research assistance. Allen Cobler, Nicholas Dopuch, Isabella Dymarskaia, Yasoma
Liyanarachchi, Olga Plagie, and Irim Siddiqui processed the data and managed the computer
systems. Susan Duff, Caroline Bagworth, and Lisa Marie Scott-Hill 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 9 and 11, 1998. 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
Policy Responses to the Current Crisis
Figure 1.1. World Industrial Production1
nternational economic and financial conditions

have deteriorated considerably in recent months as
recessions have deepened in many Asian emerging
market economies and Japan, and as Russias financial
crisis has raised the specter of default. Negative
spillovers have been felt in world stock markets,
emerging market interest spreads, acute pressures on
several currencies, and further drops in already weak
commodity prices. Among the industrial countries of
North America and Europe, the effects of the crisis on
activity have been small so far but are beginning to be
felt, especially in the industrial sector (Figure 1.1).
World growth of only 2 percent is now projected for
1998, a full percentage point less than expected in the
May 1998 World Economic Outlook and well below
trend growth. Chances of any significant improvement
in 1999 have also diminished, and the risks of a deeper,
wider, and more prolonged downturn have escalated.
(Percent change from a year earlier; three-month

centered moving average; manufacturing)
The worldwide slowdown in industrial activity has been most
pronounced in the Asian region but is also being felt in
North America and Europe.
20
15
Asia
10
World
***
Among the countries at the center of the Asian crisis, Korea and Thailand have made encouraging advances toward restoring confidence and initiating recovery, although their turnarounds remain at risk,
including from the external environment. The situation in Indonesia, however, remains very difficult.
Malaysia has resorted to external payments controls in
an effort to insulate its economy from the regional crisis. In Japan, despite substantial fiscal stimulus and
new initiatives to deal with banking sector problems,
only modest recovery is expected in 1999, and significant downside risks remain. Growth in China appears
to be slowing, and both the renminbi and the Hong
Kong dollar have been under considerable pressure.
With Russias unilateral debt restructuring and the
ensuing intensification of contagion, the current crisis
has extended to most emerging market economies and
to stock markets globally. A key problem is that financial markets tend, in the face of such a shock, to be
characterized by panic and herd instinct, and, as in
times of euphoria, to fail to discriminate between
economies with strong and weak fundamentals.
Except perhaps for central and eastern Europe, the recent upward spike in interest rate spreads indicates a
sharp slowdown in capital flows to emerging market
economies, including notably in Latin America. Policy
responses can help to restore confidence, but even
with such actions growth is likely to slow. As these
0
United States,
Canada, and
western Europe
1991
92
93
94
95
96
97
Aug.
98
Sources: WEFA, Inc.; OECD; and IMF, International Financial

Statistics.
1Based on data for 30 advanced and emerging market economies representing 75 percent of world output. The world total includes five
emerging market countries (Argentina, Brazil, Chile, Hungary, and
Mexico) that are not included in either of the two subtotals.
POLICY RESPONSES TO THE CURRENT CRISIS
Figure 1.2. World Output and Inflation1
economies adjust to smaller capital inflows, their trade

balances will improve significantly, and coming on
top of the continuing trade adjustments by the Asian
crisis countries, this implies another negative shock to
be absorbed by the rest of the world, primarily the
United States and the European Union (EU), and also
many commodity-exporting developing countries.
Considerable uncertainty remains about the nearterm outlook. The IMFs revised projections (summarized in Table 2.1) are based on the assumption that
financial market confidence in the Asian crisis economies will gradually return during the remainder of
1998 and in 1999, as crucial reforms are implemented.
This should allow financial market pressures in these
countries to continue to abate and permit the recent
easing of interest rates to be sustained, which will reinforce the boost to activity from strengthened external competitiveness. In this scenario, economic recovery in Asia should be well under way by the second
half of 1999. A key assumption is that Japan implements the planned fiscal stimulus and undertakes
banking sector restructuring measures that bolster confidence and set the stage for an economic turnaround.
The scenario also assumes that emerging market interest spreads will gradually decline and that capital
flows to Latin America, central and eastern Europe,
the Middle East, and Africa will recover to levels that,
although lower than in the recent past, will not provoke payments crises. For the future euro area, it is expected that the momentum of recovery will be reasonably well-sustained, and for the United States, it is
projected that the economy will slow markedly in a
soft landing, without falling into recession. The resulting slowdown in world economic growth would be
of the same order of magnitude as the three previous
slowdowns in the past quarter century (Figure 1.2).
One feature of this baseline scenario is that the
global economy would gradually recover in the course
of 1999, and return to trend growth in 2000. The risks
to this projection, however, are predominantly on the
downside.
Indeed, a significantly worse outcome is clearly
possible. The potential for a broader and deeper economic downturn stems from a multitude of interrelated risks that make the current economic situation
unusually fragile. Many of these risks are related to
developments in international capital markets, including the danger of a prolonged retreat by international
investors and banks from emerging markets, widespread financing difficulties, threats to international
payments and associated disruptions to trade, and further declines in stock markets and other asset prices,
with attendant losses of financial wealth and contraction of consumption and investment worldwide.
To deal with the worsening global economic situation and prospects, confidence-restoring policy adjustments are needed. In view of its pivotal role in the
world economy, and especially in Asia, it is critical
(Annual percent change)

The Asian crisis has resulted in the fourth global economic slowdown
in a quarter century.
8
Growth of World Real GDP
Average, 197097
4
2
0
1970
75
80
85
90
95
98
2002
20
Inflation
15
Developing countries
(consumer prices, median)
10
5
Advanced economies
(GDP deflator)
0
1970
75
80
85
90
95
98
2002
World Real Long-Term

Interest Rate2
6
4
2
0
2
4
6
1970
75
80
85
90
95
98
2002
1Shaded areas indicate IMF staff projections. Aggregates are computed on the basis of purchasing-power-parity weights unless otherwise
indicated.
2 GDP-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.
as a policy response to counter exchange market

pressure.
For some time after the recent panic has subsided,
emerging market countries external borrowing costs
are likely to remain considerably higher than in most
of 199698, and their access to international finance
could be significantly reduced. Net private capital
flows to emerging markets, which in the May 1998
World Economic Outlook were projected to be less
than half their level in 1996 before recovering next
year, are now expected to decline even more sharply in
1998, to their lowest level since 1990, and to remain
weak in 1999. Latin America, which had continued securing relatively large inflows of private capital in the
wake of the Asian crisis, appears to have been affected
the most by the dramatic deterioration in market sentiment following the Russian crisis. A real risk is that
the recent panic may fail to subside for some time,
which could imply significant net outflows of foreign
capital from many economies, as witnessed in the
Asian crisis countries. Fears among market participants reflected in the large yield spreads seen recently
could become self-fulfilling and result in prolonged
disruption of international financial flows, with severely depressive effects on trade and activity. This
risk can and must be contained.
Among the industrial countries, the global flight to
quality has been reflected in further declines in longterm interest rates on public sector debt instruments, in
many cases to levels not seen in more than 30 years. In
contrast, stock market prices have declined, amid considerable volatility, as investors have marked down
growth and profit expectations in the wake of the
Russian crisis and fled to lower-risk assets. By midSeptember, U.S. stock market prices had declined by
about 15 percent from their peak in mid-July. In the
major European countries, declines in stock prices
from peaks at around the same time average somewhat
more than 20 percent. To some extent, such corrections may be warranted in view of the earlier surge in
equity prices, which may not have been fully justified
by earnings prospects. However, just as equity prices
may previously have overshot, the turmoil in financial
market risks provoking an overreaction to recent
events, with investors becoming unduly risk-averse.
Significant further stock market corrections in the industrial countries might well spill over to the already
depressed stock markets in Asia and other emerging
markets. This could further undermine confidence and
prospects for recovery.
The adjustment processes that have been triggered
by the current crisis have produced a sharp widening
of current account imbalances among the major industrial countries, which may also affect financial markets. The United States has so far absorbed much of
the improvement in emerging Asias trade balance,
whereas Japans external surplus has widened further
owing to the weakness of both domestic activity and
that Japan takes decisive action to resolve banking

problems and ensure a self-sustaining recovery. The
emerging Asian market economies in recession need
to steadfastly address the weaknesses in policies and
institutions that have been unmasked by the crisis, including the restructuring of their financial and corporate sectors. Russia needs to reestablish monetary discipline, achieve fiscal viability, restructure its banking
system, and restore relations with external creditors.
Other emerging market countries under stress need to
forcefully address key problem areas and sources of
vulnerability. The international community needs to
support strong policy actions through multilateral and
bilateral financial assistance. And for the United States
and the future euro area, the time has come to consider
a moderate easing of monetary policies to help counter
the effects of the deteriorating external environment
on domestic activity, and to help restore calm in global
financial markets. In all countries, it is particularly
important that the difficult external environment does
not lead to defensive exchange rate and trade actions
with negative international consequences, or to marketclosing measures that would threaten countries longerterm economic prospects.
The current crisis has underscored the urgent need
to improve the functioning of the international financial system so that countries can safely access international capital markets and investors can diversify their
portfolios with a better understanding of the risks involved. This requires increased efforts to strengthen
the robustness of financial institutions in both debtor
and creditor countries, to enhance the transparency of
the financial health of countries, corporations, and financial institutions, and to foster a realistic pricing of
risks in the face of market volatility. It also requires
more effective means to ensure that debtor countries
face their responsibilities in dealing with the legitimate rights of creditors, that creditors participate constructively when debt workouts become necessary,
and that debtors, creditors, and the international community find means to cooperate more effectively to
avoid actual and quasi defaults in situations of stress.

Following several waves of pressure in emerging
markets since early 1997 emanating mainly from Asia,
Russia became a new source of contagion during
August. Negative sentiment in response to the devaluation of the ruble and Russias debt restructuring
quickly spread to other emerging market countries,
with risk premia increasing sharply and exchange market pressures intensifying as investors fled to quality
and unloaded assets to meet margin calls. Emerging
market spreads, on average, have widened to levels
not seen since early 1995 at the peak of the Mexican
crisis. Short-term interest rates have also risen, partly
the yen, and the future euro areas external position

has remained in large surplus. Although the adjustments to the most recent bout of turmoil may be allocated more evenly between the United States and the
euro area, large imbalances are likely to persist. These
imbalances are not sustainable over the medium term
and give rise to concerns about prospective changes in
the pattern of exchange rates among the major currencies, especially if the potential downward correction
of the U.S. dollar and upward correction of the yen
and the euro were to occur too abruptly. It is therefore
important to ensure that domestic policies in the three
large currency areas during the period ahead are consistent with the need to gradually reduce external imbalances over the next several years while minimizing
the risk of excessive exchange rate volatility.
Also setting back the resolution of the Asian crisis

in May and June were delays in the implementation of
stabilization and reform policies in Indonesia, due in
part to the political instability that led to a change of
government in late May. Associated with Indonesias
political instability has been the largest currency depreciation, by far, among the Asian crisis economies.
The introduction by Malaysia in early September of
exchange and capital controls may also turn out to be
an important setback not only to that countrys recovery and potentially to its future development, but also
to other emerging market economies that have suffered from heightened investor fears of similar actions
elsewhere.
Despite these setbacks, sight should not be lost of a
number of significant achievements since the beginning of the year:
The exchange rates of all the crisis economies
have strengthened from their lows, which in most
cases were reached in January. The Indonesian
rupiah remains deeply depreciated, but it has recovered significantly from its low reached in
June. It is encouraging as well that both China and
Hong Kong Special Administrative Region (SAR)
have successfully maintained their exchange rate
policies.
In Korea and Thailand, and also the Philippines,
interest rates have declined markedly since
January as currency pressures have eased.
Korea and Thailand, in particular, have made significant progress in macroeconomic stabilization
and have also begun to implement structural reforms, including in the key areas of the financial
system and corporate debt restructuring. In
Indonesia, the modified policy program in effect
since late June has been implemented broadly as
planned, with some positive results.
Increases in inflation in the wake of currency depreciations have in most cases fallen significantly
short of expectations, reflecting the flexibility of
wages and prices in the Asian economies in the
context of very weak demand conditions, firm
monetary policies, and the weakness of commodity prices.
Contributing to the strengthening of currencies
have been rapid and large turnarounds in current
account positions generated by substantial gains
in price competitiveness, and the compression of
demand and imports. In 1998, Indonesia, Korea,
Malaysia, the Philippines, and Thailand are now
projected to have current account surpluses
amounting in total to $57 billion, which contrasts
with aggregate deficits of $24 billion in 1997 and
$54 billion in 1996.
Asia: Setbacks, but Progress

Toward Crisis Resolution
Since the May 1998 World Economic Outlook was
finalized, significant setbacks in the resolution of the
Asian crisis have overshadowed the progress that has
been made in some countries in the implementation of
corrective policies and the stabilization of exchange
rates.
First among the setbacks, data that have appeared in
recent months point to significantly larger contractions
in activity in much of Asia than earlier envisaged. The
proximate causes include larger-than-expected declines in consumption and investment owing to losses
of confidence, the widespread deflation of asset values
in the region, substantial corporate debt burdens, and
large reversals of capital flows that have reduced access to financing and made many firms unviable. The
declines in domestic demand, in turn, have exacerbated the compression of intraregional trade, which
has added to the weakness of activity both in the countries at the center of the crisis and in their trading partners in the region. In addition to these feedback effects
of the ongoing contraction, the unexpected severity of
the crisis could also indicate that the underlying structural weaknesses in the crisis countries may be more
serious than previously thought (see Chapter III).
The evidence of greater economic weakness in
Japan has had a particularly large impact because of
the importance of that economyboth in terms of size
and regional trade and financial linksand also the
role of the yen. Thus, associated with the renewed
weakness of the yen in May and early June, in particular, were further downward pressure on other Asian
currencies and further declines in stock markets.
Exacerbating the weakness of confidence in Japan
has been the lack of convincing progress in addressing the problems of the banking sector and slowness
in responding to the unexpected weakness of private
demand.
The prospects for financial stabilization and economic recovery in Asia continue to depend crucially
on policies, with the appropriate roles of fiscal policy,
Asia: Setbacks but Progress Toward Crisis Resolution
monetary policy, financial and corporate sector restructuring, and other structural reforms in helping
generate recovery varying from case to case. In the
countries at the center of the crisis, the international financial community is providing essential support, including private creditors through debt-restructuring
agreements.
For strong growth to resume on a sustained basis in
the crisis countries, fundamental economic, financial,
and institutional reforms will clearly be required.
There is a particular need to adopt stricter prudential
rules and ensure their enforcement, to strengthen corporate governance, and to combat the relationshipbased financial and business practices that appear to
have played such a large role in the imprudent lending
and borrowing that characterized the buildup to the
crisis. If these challenges are met, the crisis countries
should be able to achieve quite rapid rates of economic
growth combining somewhat lowerand more sustainablerates of capital accumulation in the future
with stronger productivity growth as the region resumes the process of catching up with the mature industrial countries.
Japan, the second largest advanced economy in the
world and the market for about one-sixth of the exports of the ASEAN-4 countries (Indonesia, Malaysia,
the Philippines, and Thailand) and Korea, bears a particular responsibility to support recovery in Asia by
ensuring a resumption of solid growth in domestic demand. Since early last year domestic spending has
fallen significantly, owing in part to excessively ambitious fiscal consolidation in 1997, but perhaps more
importantly to continuing strains in the financial system and their effects on both the availability of credit
and business and consumer confidence (see Chapter
IV). The authorities have taken measures in the fiscal,
monetary, financial sector, and other structural areas in
order to revive the economy, but there have been
shortcomings in policy design and implementation.
In the fiscal area, the stimulus package announced
in April includes measures estimated to be equivalent
to 2!/2 percent of GDP, which should help to ensure a
pickup in domestic demand and activity in late 1998.
In August, the new government announced a further
fiscal package, including tax reductions, which should
provide a further moderate stimulus in 1999 as a
whole. But on present plans, the stimulus would start
to be withdrawn in the second half of next year, and
further expansionary measures seem likely to be needed
to provide continued support to activity until recovery
is firmly in place. Given the downside risks, an early
announcement of such measures would be desirable.
Although the expansionary fiscal stance will add to the
public debt burden, which remains a significant issue
that will need to be addressed over the medium term,
in view of the very low level of interest rates, it need
have only modest effects on the cost of servicing this
debt.
With regard to monetary policy, in a context of virtual price stability and very weak demand the authorities have continued to maintain easy monetary conditions, including through market operations in late
1997 and early 1998in response to failures of several major financial institutionsthat accelerated the
expansion of base money. In early September, the
Bank of Japan lowered its operating target for the
overnight call rate to around 0.25 percent from its recent average of about 0.45 percent, while leaving the
official discount rate unchanged at 0.5 percent. This
action was appropriate, particularly in the context of
further evidence of deteriorating economic conditions
and a strengthening of the yen from very weak levels.
The scope to lower interest rates further is now virtually nil, and excessive monetary expansion would risk
exacerbating financial turbulence in the region by
leading to renewed depreciation of the yen. Any further policy stimulus accordingly needs to come from
the fiscal side.
Resolution of the bad-loan problems that have afflicted the financial sector is the key to providing the
basis for a lasting recovery. A number of important
and welcome initiatives have been announced in recent months. However, questions remain about how
problem loans will be dealt with and whether the necessary recapitalization and restructuring of the core
banking system will be achieved quickly and decisively. The extent of bad loans should be promptly
recognized and provisioned against, which will require that the self-assessment framework be rigorously enforced by the new Financial Supervision
Agency. For this purpose, the independence and resources of this new agency need to be assured. Ways
need to be found to ensure the appropriate incentives
for vigorous efforts to resolve problem assets, including through debt work-outs and liquidation. Recently
proposed legislation to set up a bridge bank facility
and to provide the government with authority to nationalize troubled banks provides potentially valuable
instruments for dealing with failing institutions in an
orderly manner, and thus limiting further losses in
asset values and the disruption of credit relations.
However, care will be needed to ensure that public resources are used efficiently and the stockholders take
appropriate responsibility for losses. Bad assets will
need to be quickly identified, and new loans provided
only on strictly commercial criteria. Private sector
buyers for bridge banks and nationalized banks will
need to be identified in a timely fashion. Public funds
have been made available to bolster the deposit insurance system and to inject capital into solvent banks,
but the limited use of these funds so far has not effectively promoted the restructuring that is needed. The
recapitalization of the core banking system needs to
be pursued urgently and aggressively by the government, with injections of public funds linked to strong
restructuring plans.
Elsewhere on the structural reform front, deregulation initiatives already announced will promote the
necessary restructuring of the Japanese economy, but a
more ambitious approach is needed in a number of
areas to meet the challenges of globalization and an
aging population and to foster fresh economic dynamism. The big bang financial reforms will promote the longer-term restructuring of the financial sector, and are critical to restoring the long-term health of
the economy. However, given the difficult economic
environment, the process of financial liberalization
will need to be managed carefully, and the supervision
and regulatory structure will need to be strengthened
to contain potential risks that would be expected to
arise in a more deregulated financial system. Further
deregulation in the real estate market and telecommunications, and reforms to labor market and bankruptcy
laws, need to be pushed ahead, while more ambitious
steps toward reducing nontariff barriers to trade would
also help to raise productivity.
In both Korea and Thailand, the steadfast implementation of the policy programs supported by the
IMF, World Bank, and other official financing needs
to be sustained for the stabilization gains that have
been achieved to be consolidated and translated into
an early resumption of growth. Provided that programmed policies are fully implemented, there is
scope for activity in both countries to begin to turn
around in the course of 1999. Policy-determined interest rates have already come down significantly in both
countries, to precrisis levels, but cautious monetary
policies will still be needed to maintain exchange market stability and prevent inflation from picking up.
Lending rates have been slower to recede, but are
likely to fall in the period ahead, adding support to the
recovery. Fiscal deficits have widened appropriately,
in the face of the worsening recessions and to accommodate the need to strengthen social safety nets and finance financial restructuring.
In both countries, policies to strengthen the financial system, restructure the corporate sector, and deal
decisively with the corporate debt problem are essential. Significant progress has been made, notably with
the consolidation under way in Koreas banking sector
and the comprehensive package announced in Thailand in August, which aims to further consolidate and
recapitalize the financial sector and provides for the
use of public fundslinked to banks progress in corporate debt restructuringin recapitalizing financial
institutions. The resolution of Thailands 56 closed finance companies has also been proceeding satisfactorily. But in both countries, the problems being addressed in these areas are complicated, and their
resolution will take time.
Indonesia has begun to reestablish financial stability following the collapse of its currency, financial system, and distribution network in May and early June as
the political situation worsened and investor confi-
dence plummeted. The revised policy program introduced in late June with the support of the IMF projects
a fiscal deficit in 1998/99 of 8!/2 percent of GDP, to be
financed by foreign assistance. This reflects the depth
of the economic crisis and the associated substantial
increase in social safety net spending. The tasks
aheadincluding the rehabilitation of the financial
system, restoration of confidence to foster the reversal
of capital flight, restructuring of the corporate sector,
and repair of the distribution system and market mechanisms more generallyare formidable, requiring
bold action across a range of policy areas. With regard
to corporate debt restructuring, the governments recent announcement of the Jakarta initiative is a
promising step. The rice situation is of particular concern, and the government is now increasing imports,
expanding open market sales, and greatly extending
the targeted program of subsidized rice to poor families. The economic situation remains fragile, but assuming that the current program continues to be implemented as planned, output may be expected to
bottom out during 1999.
Malaysia has been better positioned than the other
crisis countries, because of its smaller short-term external debt burden. The authorities response to the deteriorating situation has included a reversal of earlier
fiscal tightening, combined with efforts to stimulate
private sector credit. In addition, exchange and capital
controls were introduced in early September to support a renewed peg of the ringgit to the U.S. dollar.
These policies are having a negative effect on foreign
investors confidence. Whether they will improve
near-term prospects for economic recovery remains to
be seen, but in any event, they cannot be a substitute
for strong reform and stabilization efforts. With a coherent strategy to deal with longer-term structural
problems in the banking and corporate sectors still
lacking, the fragility of the financial sector, faced with
a sharp downturn in activity, continues to present a serious threat to the economy.
In the Philippines also, banking and corporate sectors have shown increasing signs of stress, and plans
to reform the public finances and strengthen the banking system need to be firmly implemented to reduce
the economys vulnerability.
The stability of the renminbi and the Hong Kong
dollar has provided important anchors for the region.
Both currencies have been subject to significant
strains, however. In China, growth is expected to slow
significantly this year, because of the weakening of
external demand, past overbuilding and excess inventory accumulation that will need to be worked off, and
devastating floods; unemployment is becoming an increasing problem. Further cuts in interest rates in recent months and an expansionary fiscal package
amounting to about 2!/2 percent of GDP will provide
worthwhile support for activity in the period ahead, although it will be important for the package to be care-
fully tailored to ensure that the quality of growth is not

compromised. The continuing strong balance of payments and foreign reserve position, in the context of a
relatively closed capital account, should allow the
maintenance of the current value of the renminbi. The
slowing of growth has heightened the importance of
accelerating structural reforms, especially in the financial and public enterprise sectors.
Hong Kong SAR has suffered a much more severe
weakening of activity, reflecting the economys
greater openness, the reversal of the previous sharp
run-up in asset prices, and the increases in interest
rates that have been required to maintain exchange
rate stability. Fiscal policy has appropriately been
eased. The authorities in mid-August began intervening in the stock market to counter speculative pressures. The intervention was, appropriately, halted by
end-August, and measures were adopted to discourage
speculation in the securities and futures markets. Also,
in early September, technical measures were implemented to buffer the effects on interest rates of temporary market pressures and strengthen the currency
board arrangements. The flexibility of domestic wages
and prices and the strength of the banking system, together with a gradual return of confidence, should help
to limit the contraction and facilitate recovery.
Singapore and Taiwan Province of China have been
hit less hard by the regional turmoil, reflecting these
economies strong macroeconomic positions and
sound financial sectors. In Singapore, a fiscal stimulus
package introduced in late June should help prevent
contraction of the economy on a calendar-year basis.
Both Australia and, especially, New Zealand are experiencing slower growth as a result of the deterioration in the external environment and an associated
weakening of confidence. Large external current account deficitsprojected at 5 percent and 6!/2 percent
of GDP respectively in 1998underscore the need to
maintain cautious fiscal policies. In Australia, the
achievement of an underlying budget surplus in
1997/98a year ahead of schedulemeans that the
projected rise in the current account deficit is taking
place against the background of a significant improvement in public finances. Subdued inflationary pressures in both countries have enabled monetary policy
to allow significant exchange rate depreciations,
which will both support activity and facilitate external
adjustment.
In India, the weakness of the exchange rate and equity markets in recent months has reflected not only
the Asian crisis, but also concerns about the economic
sanctions introduced following the nuclear tests in
May and the limited fiscal adjustment and reforms
contained in the budget in early June. To restore investor confidence, contain the risk of macroeconomic
instability, and enhance growth prospects, action continues to be needed to rein in the public sector deficit
and to implement a wide range of structural reforms.
Pakistan is facing even greater challenges as a result

of the economic sanctions and in view of its vulnerable external and domestic financial situation and unfinished structural reform agenda.

In August, Russia replaced Asia as the epicenter of
global financial market pressures. The emergency
measures announced by the Russian authorities on
August 17including a de facto devaluation of the
ruble unaccompanied by supporting macroeconomic
policies, a unilateral restructuring of ruble-denominated public debt, and a 90-day moratorium on foreign
credit repaymentsgave rise to new fears in financial
markets not only of macroeconomic instability in
Russia, but also of default by other emerging market
countries, and to further declines of confidence in the
containment of what had hitherto been a mainly Asian
crisis.
The immediate cause of the Russian crisis was the
growing loss of financial market confidence in the
countrys fiscal and international payments situation,
leading to a loss of international reserves and an inability to roll over treasury bills as they matured. The
financial market concerns had been reflected in substantial hikes in interest rates that had been needed to
defend the ruble. The strengthened policies announced
by the government in June and July, and the associated
large package of financial assistance from the IMF,
World Bank, and Japan, provided only temporary relief. This was mainly because markets remained concerned that the governments promised actions would
not be implemented, especially after the Duma rejected certain key measures. Also, problems in the
banking sector were becoming severe as the continued
fall in asset prices led to margin calls that could not be
met.
Although external developments, including the
Asian crisis and associated weakness of energy prices,
contributed to Russias difficulties, domestic policy
shortcomings were more important. In particular, the
failure over many years to bring the fiscal situation
under control led to levels of public debt and debtservice payments that increasingly appeared unsustainable. The fiscal problems, in turn, originated in
failure to reform the tax system, inadequate tax collection that formed part of a culture of nonpayment,
lack of spending discipline in important areas, and
slow progress in structural reform, including in enterprise restructuring and the legal framework, which adversely affected the economys performance more
broadly.
In the wake of the crisis, the need for effective stabilization and reform remains, but the emergency measures taken, including the effective default on ruble
debt, and the ensuing political uncertainties and relax-
ation of monetary policy, have heightened the challenges involved. In particular, the fiscal situation has
been further worsened by the loss of access to financial markets, the devaluation, the likely disruptions to
the economic system and contraction in economic
activity, and the increased prospective costs of bank
restructuring; and the risk of a reemergence of rapid
inflation has damaged confidence and calls for a renewed effort to establish macroeconomic stability. To
resolve the crisis and to put Russia on a path toward
economic recovery and sustainable growth, the new
government will need the will and parliamentary support to strengthen tax collection, tighten credit policy,
restructure the banking system, restore relations with
external creditors, and pursue badly needed reforms in
many areas. The strength of the program adopted will
be key to determining the availability of external financial support, the timing of the turnaround in economic activity, and the momentum of recovery.
pressures intensified in most of the region, apparently

reflecting increased fear of devaluation and default. To
help alleviate these concerns, individual countries have
needed to take appropriate measures to strengthen and
safeguard macroeconomic stability, maintain the credibility of their exchange rate policies, and continue
their structural reform efforts.
The country whose growth has been worst hit by developments over the past year is Venezuela, owing in
part to its dependence on oil. With macroeconomic
policies having been loosened in 1997, the tightening
of policies that is in train this year is important for the
achievement of macroeconomic stability. Venezuela
also has a pending agenda of structural reforms that
are needed to put the economy on a sustainable recovery path and to promote economic diversification. The
Asian crisis has also had a significant impact on
Chiles balance of payments, reflecting the importance
to it of the Asian market, which accounts for about
one-third of its exports, and also its dependence on primary commodity exports. Chiles strong macroeconomic and structural fundamentals will help it to cope
with the needed adjustment. Private demand growth is
slowing down, and in late September the authorities
announced measures to restrain the growth of public
expenditure in 1999 to 1 percentage point below projected GDP growth. Given present uncertainties about
external and domestic economic conditions, it will be
important to monitor developments closely and to assess on a continuous basis whether further policy action is needed. In early September, a reserve requirement that has discouraged short-term capital inflows
was removed to promote stronger inflows, and the
trading band for the peso was widened.
Brazil weathered the Asian crisis with the assistance
of tighter fiscal and monetary policies implemented in
late 1997. In fact, by late June, interest rates had been
allowed to decline to pre-October 1997 levels. The intensification of pressures in August led to a renewed
tightening of policies in early September, but this
failed to fully restore confidence and reverse the capital outflows; additional spending cuts were announced
in mid-September. With the fiscal deficit still running
at 7 percent of GDP and a significant current account
deficit, efforts to rein in spending and to improve the
finances of state governments still need to be strengthened to restore and maintain investor confidence.
Financial pressures in Argentina and Mexico have also
intensified since the eruption of the Russian crisis. In
Argentina, confidence in the currency board arrangement has been maintained, and there are no indications
of capital flight. Nonetheless, a relatively heavy debtservice burden for 1999 and a still large current account deficit point to a difficult financing situation if
the external turbulence were to continue for an extended period, and highlight the importance of continued fiscal restraint and structural reforms. Likewise in
Mexico, continued capital market uncertainty points to
Other Emerging Market Countries:

Reducing Vulnerabilities
Many developing and transition countries have felt
in their own financial markets the waves of pressure
that have emanated first from Asia and then from
Russia over the past year, with currencies weakening
and equity markets declining sharply. The general decline in private capital flows to emerging markets,
higher yield spreads, weaker exports to Asia, deteriorations in competitiveness as a result of depreciations
abroad, and commodity price declines have all formed
part of the transmission mechanism. In many cases,
macroeconomic policies have been tightened to preserve financial market confidence, with effects on
growth that are generally negative in the short term,
but with longer-term benefits. Countries with strong
economic fundamentalsincluding many that have
turned their economies around in recent years through
policies of adjustment and reformhave shown the
most resilience to spillovers from crisis countries.
Nevertheless, discrimination in their favor by private
investors has sometimes appeared to be lacking.
Until the Russian crisis broke out in August, most of
the developing countries in the Western Hemisphere
had weathered the turmoil in financial markets reasonably well thanks to the strengthening of economic
policies in the region during the past decade and also
through a broad range of measures, including increases in interest rates, to help defend exchange rates,
and a tightening of fiscal policies. As a result, capital
inflows had been sustained at relatively high levels,
and growth prospects had deteriorated only moderately. Venezuela, Chile, and to some extent Mexico
were more seriously affected than others, partly as a
result of weakening prices of export commodities.
With the Russian crisis, however, financial market
the need to maintain tight credit conditions, while a

widening current account deficit points to the importance of continued fiscal restraint and structural
reforms.
In Africa, the limited access of most countries to international financial markets has in turn limited the impact of the past years market turbulence: the crisis in
emerging markets has affected Africa mainly through
commodity prices and trade. Growth in Africa is now
projected to be little higher than 3!/2 percent in 1998,
but such an outcome would still exceed the growth performance of most of the past 20 years. This can be attributed to substantial improvements in economic policies in many countries, which are being supported by
several important initiatives to ease the debt burdens of
the poorest countries (Box 1.1). Although some
African countries will be net gainers from recent commodity price declinesbenefiting more from cheaper
oil imports than they lose from lower export prices
the region as a whole, and about one-third of the countries, are expected to be net losers.
In South Africa, the authorities faced the challenge
of reestablishing financial stability in the face of heavy
downward pressure on the exchange rate in May and
June. After an initial rise in interest rates, the authorities intervened heavily in the foreign exchange markets, particularly the forward market, leading to a
weakening of the net reserve position. Subsequently,
they allowed the rand to adjust, but have since pursued
a tight monetary policy. This, together with cautious
fiscal policies, will need to be maintained to avoid a
rise in inflation and to maintain confidence. Accelerated
implementation of structural reforms would not only
help to restore confidence and dampen inflationary
pressures, but also would enhance competitiveness
and improve the medium-term outlook. Oil price declines have placed particular pressure on Nigerias external and fiscal situation, and growth performance
has continued to be hampered by governance problems and widespread economic distortions. Broadly
based reforms will be needed for Nigeria to achieve
higher growth on a sustainable basis.
In the Middle East, the sharp deterioration in fiscal
and external current account positions in the oilexporting countries has forced governments to compress public sector outlays and contributed to marked
decelerations in growth. It will be important not to
allow these adverse developments to delay the implementation of structural reforms that are essential for
enhancing medium-term growth prospects. In Saudi
Arabia, revenue and expenditure measures that have
been announced to contain the deterioration in the fiscal position will need to be implemented forcefully. In
Egypt, the downturns in oil export earnings and workers remittances from within the region have been exacerbated by a weakening of tourism earnings and the
current account has shifted into deficit. The external
capital account has also weakened. To reduce Egypts
vulnerability to adverse external developments, it will

be important to maintain progress with structural reforms and to make further headway with fiscal consolidation; monetary policy will also need to be responsive to adverse shifts in sentiment.
In Turkey, a strengthened commitment to reduce fiscal imbalances and a more active use of monetary policy have improved inflation prospects and helped to
contain the effects of the turmoil in global financial
markets. But the crisis in Russia, a major trading partner, will adversely affect Turkeys external position.
Sustained macroeconomic discipline, measures to
strengthen the banking system, and increased commitment to reforms, notably of the tax and social security
systems, will be needed to safeguard financial stability.
The transition countries have felt the repercussions
of the crisis in emerging markets unevenly. The new
round of turbulence set off by the events in Russia in
August have had a particularly large impact on
Ukraine and other economies with close trade and financial linkages to Russia. Most countries of central
and eastern Europe have weathered the crisis better,
reflecting their considerable progress in stabilization
and economic reform, which had enabled them to
lower inflation and resume growth following years of
large output declines. The most significant achievements in this regard have been in Poland, the Czech
Republic, Hungary, Croatia, Slovenia, and the Baltic
countries. Several of the central Asian and transcaucasian countries have also seen a resumption of
growth and most other transition countries have registered significant progress in some areas. In the wake of
the Russian crisis, sharp declines in equity prices have
been recorded throughout central and eastern Europe,
and exchange market pressures have also been evident.
For all of the transition countries, the turmoil in
emerging markets has brought new challenges and has
underscored the risks of setbacks in the transformation
process. In most cases, the transition countries have
only recently gained access to international financial
markets, but such access expanded rapidly in 1997.
Capital inflows into transition countries remained substantial in the first half of 1998, and sustained recovery in western Europe should provide a favorable external environment, but increased volatility of capital
flows and higher risk premia in the wake of the Asian
and Russian crises have highlighted the vulnerability
of these economies to sudden shifts in attitudes of foreign investors.
In eastern Europe, such difficulties were manifested
in the Czech Republic in May 1997 when internal
political difficulties and a large and widening current
account deficit led to an abrupt reassessment of the
countrys fundamentals. Policies were subsequently
tightened to reduce fiscal and external imbalances,
causing financial market confidence to recover. More
recently, the Czech koruna has been subject to upward
pressure. But growth slowed sharply in the Czech
Box 1.1. Review of Debt-Reduction Efforts for Low-Income Countries and Status of the HIPC Initiative
For many years, support from the international community to low-income countries has included debt relief
from commercial/private and official bilateral creditors,
as well as highly concessional development finance from
both bilateral and multilateral creditors, including in the
context of arrangements with the IMF under the
Enhanced Structural Adjustment Facility (ESAF).
As of the end of 1996, the external debt of the heavily
indebted poor countries (HIPCs)1 amounted to some $210
billion, equivalent to about 1!/2 times their combined GNP,
or $167 billion in net present value (NPV) terms (see first
table).2 The bulk of this was to official bilateral (44 percent) and multilateral (30 percent) creditors (see figure).
These amounts reflect debt relief already granted by bilateral creditors in the framework of the Paris Club. Since
the late 1980s, such debt relief has been on increasingly
concessional terms. In addition, a number of bilateral
creditors have forgiven large amounts of claims, particularly aid loans. Multilateral creditors agreed in 1996 to
provide debt relief in the context of the HIPC Initiative.3
New financing to HIPCs is provided largely by multilat-
HIPC External Indebtedness, 19961

(Percent of total)
Total Debt ($206.9 billion)2
Multilateral
(31%)
Bilateral
(42%)
Short-term
(15%)
Private
(12%)
Sources: World Bank, Global Development Finance

(Washington); and IMF staff calculations.
1HIPCs, excluding Nigeria.
2 Including short-term debt.
1The
group of 40 HIPC countries shown in the table was established for analytical purposes in the work leading up to the
HIPC Initiative. Nigeria was originally also included, but it is
excluded here because it does not have IDA-only status with the
World Bank (that is, the ability to borrow only on concessional
terms, from the World Bank Groups International Development
Association)one of the prerequisites for HIPC eligibility.
2The face value of the external debt stock is not a good measure of a countrys debt burden if a significant part of the external debt is contracted on concessional termsfor example, with
an interest rate below the prevailing market rate. The net present
value (NPV) of debt is a measure that takes into account the degree of concessionality. It is defined as the sum of all future
debt-service obligations (interest and principal) on existing
debt, discounted at the market interest rate. Whenever the interest rate on a loan is lower than the market rate, the resulting
NPV of debt is smaller than its face value, with the difference
reflecting the grant element.
3The Initiative aims to provide special assistance to reduce the
external debt of HIPCs to sustainable levels. It entails coordinated action by all creditors. To obtain assistance under the HIPC
Initiative, a country must be eligible for concessional assistance
from the IMF and the World Bank, face an unsustainable debt
burden even after the full application of traditional debt-relief
mechanisms, and establish a track record of reform and sound
policies through IMF- and World Bank-supported programs.
Stages in the decision-making process include the decision point,
after a track record of three years, when the Executive Boards of
the IMF and the World Bank formally decide on a countrys eligibility and commit assistance under the Initiative in parallel
with a countrys other creditors. At the completion point, typically three years later, the two Boards decide if a country has met
the conditions for assistance, allowing that assistance to be implemented and disbursed. The conditionality is linked both to
macroeconomic variables as well as social aspects. Creditors are
free to deliver this assistance according to their own modalities;
some creditors may provide interim assistance during the second
stage. See Anthony R. Boote and Kamau Thugge, Debt Relief for
Low-Income Countries: The HIPC Initiative, Pamphlet Series,
No. 51 (Washington: IMF, 1997).
eral and bilateral creditors, typically in the form of grants

or highly concessional loans aimed at achieving economic
adjustment and sustainable development. HIPCs debt to
commercial/private creditors is much more limited (12
percent of total external debt at end-1996); most of it has
been restructured or bought back at very steep discounts
with IDA support, and these creditors typically do not provide new financing. To date, all but 4 of the 40 HIPCs
have rescheduled debt with Paris Club official bilateral
creditors. This has involved 169 rescheduling agreements,
covering debt of some $54 billion, including amounts
rescheduled repeatedly. These creditors have provided increasingly concessional reschedulings under Toronto
terms (October 1988June 1991) with up to 33 percent
NPV reduction, under London terms (December
1991December 1994) with 50 percent NPV reduction,
and under Naples terms (since January 1995) with 67 percent NPV reduction on eligible nonconcessional debt.4
4Naples terms also provide for a 50 percent NPV reduction for
countries with per capita GDP above $500 and overall indebtedness in NPV terms of less than 350 percent of exports. Only
three countriesCameroon, Guinea, and Hondurashave received 50 percent NPV reduction under Naples treatment; all
others have received 67 percent NPV reduction. In the context of
concessional Paris Club reschedulings, concessional debt (official development assistance) is deferred over long periodswith
a maturity of 40 years under Naples/Lyon terms, including a
grace period of 16 years, and an interest rate no higher than the
original concessional interest rate.
10
Past Debt Restructurings for HIPCs, 1976July 19981

Commercial Bank Debt- and
Total
Paris
Club
Reschedulings
Debt-Service-Reduction
(DDSR) Operations
_______________________________________________ ____________________________________________
External
NPV
Effective
Debt
Amounts
reduction
Amounts
net present
Number
(end-1996;2 _____________
consolidated
in last
Year of
restructured
value
billions of
Conces(millions of rescheduling
agreement (millions of
reduction
U.S. dollars) Total sional
Year
U.S. dollars)3 (percent)4 Number in principle U.S. dollars)5 (in percent)6
Angola
Benin
Bolivia
Burkina Faso
Burundi
Cameroon
Central African
Rep.
Chad
Congo, Dem.
Rep. of
Congo, Rep. of
Cte dIvoire
Equatorial Guinea
Ethiopia
Ghana
Guinea
Guinea-Bissau
Guyana
Honduras
Kenya
Lao Peoples
Dem. Rep.
Liberia
Madagascar
Mali
Mauritania
Mozambique
Myanmar
Nicaragua
Niger
Rwanda
So Tom and
Prncipe
Senegal
Sierra Leone
Somalia
Sudan
Tanzania
Togo
Uganda
Vietnam
Yemen, Rep. of
Zambia
All HIPCs
10.6
1.6
5.2
1.3
1.1
9.5
1
4
6
3
4
4
3
...
3
1989
198996
198695
199196
...
198997
446
579
2,379
171
...
5,273
67
67
67
...
50
...
...
1987, 1993
...
...
...
...
...
643
...
...
...
...
...
91
...
...
...
0.9
1.0
6
3
3
3
198194
198996
163
60
50
67
...
...
...
...
...
...
12.8
5.2
19.7
0.3
10.1
6.2
3.2
0.9
1.6
4.5
6.9
10
4
8
4
2
1
5
3
4
3
1
1
1
2
3
2
4
2
3
2
197689
198696
198498
198594
199297
1996
198697
198795
198996
199096
1994
6,555
4,741
6,355
131
625
93
801
241
1,150
572
535
33
67
80
50
67
...
50
67
67
50
...
...
...
1996
...
1996
...
...
...
1992
...
...
...
...
6,658
...
284
...
...
...
93
...
...
...
...
77
...
93
...
...
...
89
...
...
2.3
2.1
4.2
3.0
2.4
5.8
5.2
5.9
1.6
1.0
4
8
4
6
5
3
9
1
...
3
4
3
3
...
3
4
1
...
198084
198197
198896
198595
198496
...
199198
198396
1998
...
94
2,316
160
521
2,467
...
1,625
623
64
...
...
67
67
67
80
...
67
67
67
1
1
1
1
...
...
...
...
1996
1991
...
1995
1991
...
...
...
...
...
89
198
...
1,819
207
...
...
...
...
...
93
93
...
95
91
...
0.3
3.7
1.2
2.6
17.0
7.4
1.5
3.7
20.0
6.4
7.1
206.9
12
7
2
4
5
10
7
1
2
6
169
...
6
3
4
4
4
1
2
3
88
...
198198
197796
198587
197984
198697
197995
198198
1993
199697
198396
...
1,684
432
280
1,457
3,921
1,486
606
791
1,557
3,445
54,399
...
67
67
...
...
67
67
80
50
67
67
1
1
1
1994
1996
1995
...
...
...
1997
1993
1996
...
1994
10
112
286
...
...
...
74
177
808
...
408
11,866
90
87
89
...
...
...
92
87
50
...
94
95
7
7
1
7
1
1
1
7
1
16
Source: (World Bank) Global Development Finance, 1998 (Washington); Paris Club; IMF and World Bank staff estimates for DDSR
operations.
1Forty heavily indebted poor countries (HIPCs), excluding Nigeria because it is not IDA-only (International Development Association).
2From World Bank (Washington), Global Development Finance, 1998. For some countries, debt to Russia is covered only partially; an
adjustment has been made for Vietnam.
3Includes each rescheduling, and thus double-counts debt covered repeatedly.
4On eligible debt only.
5Including eligible principal and accrued interest.
6Effective NPV reduction of overall operation.
7DDSR operation under discussion.
11
Box 1.1 (concluded)

In the context of the HIPC Initiative, Paris Club creditors
agreed in 1996 to provide up to 80 percent NPV reduction
under Lyon terms. As shown in the first table, most countries that have rescheduled since the inception of concessional terms have obtained the most favorable terms available at the time, except for Ghana and Kenya; in these two
cases the reschedulings were, at the authorities request,
limited to arrears only on nonconcessional terms.
In the context of Naples terms, Paris Club creditors
have provided stock-of-debt operations to seven HIPCs
(Benin, Bolivia, Burkina Faso, Guyana, Mali, Senegal,
and Uganda). Creditors have topped up the level of concessionality from a 67 percent NPV reduction to 80 percent for Uganda after it reached its completion point
under the HIPC Initiative in April 1998. Creditors have
indicated a willingness to top up the stock treatments for
Bolivia, Burkina Faso, Guyana, and Mali when they reach
their completion points under the Initiative. Such action
was not required for Benin and Senegal, since their external debts are sustainable without assistance under the
Initiative.5 All stock operations provided for a comprehensive treatment of debt, including the topping-up of
amounts previously rescheduled on less concessional

terms. Generally, stock treatments provide a means for
low-income countries to exit from the rescheduling cycle,
as most middle-income countries have done by now.
Regarding debt to private commercial creditors, to
date, 15 HIPCs have completed market-related restructurings of their debt to commercial banks, covering
claims of $11.9 billion, of which $6.7 billion were claims
on Cte dIvoire. In 13 cases, the countrys commercial
debt was virtually extinguished, and in the cases of Cte
dIvoire and Vietnam it was reduced by three-fourths and
one-half, respectively. The total cost of these operations
has amounted to some $0.6 billion. All operations have
been funded in large part from the IDA Debt Reduction
Facility and bilateral donors, with the IMF contributing
in the case of Cte dIvoire. Three other HIPCsGuinea,
Tanzania, and Yemenare advanced in their negotiations
with commercial banks, involving debt of $0.7 billion.
Guyana is negotiating a settlement with non-bank private
creditors, following the successful completion of a buyback operation with commercial bank creditors in 1992.
Discussions have also been initiated by several other
HIPCs, including Cameroon, Central African Republic,
Republic of Congo, and Honduras, involving eligible
debt of about $1.5 billion.
To date, assistance under the HIPC Initiative has been
committed by the international financial community to
six countries (Bolivia, Burkina Faso, Cte dIvoire,
Guyana, Mozambique, and Uganda) for nominal debt relief of $5.6 billion, or a reduction of close to $3 billion
in NPV terms, compared with total debt of these six
countriesafter traditional debt-relief mechanismsof
$17.4 billion in NPV terms (see second table). In total,
ten countries have been considered under the HIPC
Initiative: two were found to have a sustainable external
debt, and eight to require HIPC assistance, of which six
5Debt sustainability under the Initiative is generally defined

by ratios for the NPV of public and publicly guaranteed external debt and debt service in relation to exports of goods and services in or below the ranges of 200250 percent and 2025 percent, respectively. Specific sustainability targets in these ranges
are set for each country in light of country-specific vulnerability factors, such as the concentration and variability of exports,
or fiscal indicators of the burden of debt service. For very open
economies (exports of at least 40 percent of GDP) with a very
heavy fiscal debt burden, despite strong efforts to generate
revenue (fiscal revenue of at least 20 percent of GDP), the target can be set below an NPV of 200 percent of exports; for such
countries, debt sustainability would be defined as meeting a
maximum NPV of debt of 280 percent of fiscal revenue.
Republic in 199798, in contrast to the general

strengthening of activity in central and eastern Europe.
Intense financial pressures have been felt in Ukraine
for similar reasons as in Russiapersistent fiscal imbalances, significant short-term liabilities to foreign
investors, and delays in the implementation of structural reforms. In response to spillovers from the
Russian crisis, the authorities have announced a
widening of the trading band for the hryvnia and an
arrangement to swap part of the short-term domestic
debt for longer maturities.
by fiscal consolidation and the emergence of budgetary surpluses that have put the government debt-toGDP ratio on a sharply declining path; a monetary policy that has successfully supported the expansion
while helping to maintain low inflation; and flexible
product and labor markets that have permitted rapid
employment growth and a decline in the unemployment rate to its lowest level in decades, with little sign
of increased inflationary pressure. The strength of the
U.S. expansion, and especially of domestic demand,
has facilitated adjustment in countries afflicted by the
Asian financial crisis, albeit at the expense of a sharp
deterioration of the U.S. external position that is not
sustainable in the long run. Looking ahead, the U.S.
economy is projected to experience a slowdown in
199899, partly on account of the deterioration in the
external environment, with output growth in 1999 as a
whole weakening slightly below potential, but the timing and degree of the slowdown remain uncertain.
The United States, Canada, and the United

Kingdom: Striking a Balance
in Monetary Policy
The impressive economic expansion in the United
States, now in its seventh year, has been underpinned
12
The United States, Canada, and the United Kingdom: Striking a Balance in Monetary Policy
How Much Relief Will the HIPC Initiative Provide?
Country
Decision
Point
Completion
Point
Uganda
Apr. 1997
Apr. 1998
Bolivia
Burkina Faso
Cte dIvoire
Guyana
Mozambique
Total provided/committed
Sept. 1997
Sept. 1997
Mar. 1998
Dec. 1997
Apr. 1998
Guinea-Bissau
End-1998
End-2001
Mali
Mid-1998
End-1999
Benin
Senegal
July 1997
Apr. 1998
...
...
Total Debt
Relief, Nominal
(millions of
U.S. dollars)
Assistance (NPV at completion point)

__________________________________________
Percent
reduction
in debt
All creditors
(millions of
U.S. dollars)
IMF
(millions of
U.S. dollars)
Completion point reached

650
20 percent
347
69
Decision point reached and assistance committed by IMF and World Bank
Sept. 1998
Apr. 2000
Mar. 2001
Early 1999
June 1999
600
13 percent
448
200
14 percent
115
800
6 percent
345
500
25 percent
253
2,900
57 percent
1,442
5,650
2,950
Preliminary discussions held (timing and assistance subject to change)
...
29
10
23
35
105
271
...
300
...
...
Debt judged to be sustainable
128
14
...
...
...
...
...
...
...
...
lief provided by Paris Club reschedulings is substantial.

Also, since Mozambiques overall indebtedness was
higher than Ugandas, the need for HIPC assistance was
larger.
have already reached their decision points, while two

have been considered on a preliminary basis. The relief
from traditional mechanisms is limited for Uganda,
since its debt is largely to multilateral creditors. In contrast, most of Mozambiques debt is to bilateral creditors, including a large share to Russia,6 and thus the re-
countries. Most of its claims have not been serviced in recent

years. It joined the Paris Club as a creditor in September 1997
and, in this context, has committed to provide substantial debt
relief to rescheduling countries.
6Russia, which inherited the external claims of the former

U.S.S.R., is a major bilateral creditor for many developing
The effects of the current crisis are increasingly

being felt by the United States and will influence the
conduct of monetary policy during the period ahead.
The crisis has contributed to a significant decline in
net external demand, which is projected to deepen, and
to a reversal since mid-July of most of the earlier gains
this year in equity prices, which may be expected to
slow domestic demand, especially given the low level
to which personal saving has recently fallen. But at the
same time, the flight to quality by investors that has
been associated with the crisis has contributed to further declines in long-term interest rates, which will
tend to strengthen domestic demand; and labor markets remain tight, with wage growth on an upward
trend. Most measures of inflation have remained surprisingly subdued, partly reflecting the influence of a
number of special factors that cannot be expected to
continue indefinitelyincluding the appreciation of
the U.S. dollar since 1995, declines in commodity
prices, and a moderation of the rise in health care

costs. Some of these forces are likely to reverse at
some point; indeed the dollar has weakened against a
number of major currencies since mid-August. But it
seems increasingly likely that domestic demand and
activity will slow sufficiently to keep inflation in
check. Moreover, there are significant risks of a more
pronounced weakening of domestic growth than projected, in the event of continuing global financial instability. At the present time, therefore, the balance of
policy considerations has shifted away from favoring
a near-term monetary tightening, and the projections
in this report assume that the Federal Reserve will
continue to maintain short-term interest rates at the
level set early last year through 1999. However, the
global financial crisis, with its attendant adverse effects on the U.S. economy, may soon justify a move to
ease monetary policy on both domestic and international grounds.
13
when much of Asia has entered a recession that may

last into next year, and when growth in many other
emerging countries is likely to slow sharply after the
recent escalation of the global financial crisis. In view
of the risks emanating from the external environment,
it is important that policies in the euro area be tuned to
maintain robust growth of domestic demand.
The introduction of a common currency and adoption of a common monetary policy by 11 member
countries of the EUeventually perhaps the entire
EUwill have far-reaching implications for Europe
and the world economy. While monetary union carries
many benefits, it also poses new challenges and merits reflection on the role of economic policies in safeguarding macroeconomic stability and securing high
levels of employment. The responsibility for monetary
policy will be transferred to the European System of
Central Banks (ESCB), whose mandate is to safeguard
price stability in the euro area as a whole. This implies
that individual countries will sometimes find themselves with levels of interest rates that appear too easy
or too restrictive, depending on a countrys cyclical
position relative to that of the area as a whole. It could
be argued that this is not much different from the monetary regime prevailing among the countries participating in the exchange rate mechanism (ERM) of the
European Monetary System (EMS), where interest
rates have been largely set according to the needs in
Germany, the anchor country. However, occasional
currency realignments and significant interest rate differentials (partly reflecting risks related to possible
currency movements and differences in fiscal positions) have meant that monetary conditions (broadly
defined to include the effects of exchange rate
changes) have often varied considerably within the
ERMalthough not always in ways that have been
helpful from a cyclical perspective. Moreover, while a
common monetary policy and continued economic
and financial integration may eventually tend to reduce cyclical divergences across member countries,
differences in economic structures will mean that
asymmetric shocks and differences in economic responses to monetary policy will continue to limit the
extent to which a common monetary policy can suit all
members.
Current divergences in cyclical conditions and thus
in policy requirements across the euro area raise an
immediate issue, which has become more acute as a
result of the crisis in emerging markets. The euro area
as a whole is close to price stability, and there is little
near-term danger of a pickup in inflationthe overall
margin of slack as measured by the shortfall of actual
from potential GDP is estimated by the IMF staff at
some 23 percent of GDP for 1997, which would on
current projections be absorbed only gradually over
the next several years. This suggests that it would be
appropriate for the ESCB initially to adopt a monetary
stance similar to that prevailing in Germany at present,
Canada experienced solid growth for almost two

years before the recent slowing associated largely with
the Asian crisis. Official interest rates were raised by a
full percentage point in late August in the face of continuing downward pressure on the exchange rate following significant depreciation over several months.
At present, it is not clear that this action will have a
significant adverse effect on economic growth. While
both short- and long-term interest rates rose initially,
they have come back down, and although short-term
market rates are somewhat higher than before the
tightening, long-term government bond yields are actually lower. Given the apparent softness of the economy, low inflation, and heightened uncertainty in
world financial markets, consideration might be given
to an easing of monetary policy in the period ahead.
In the United Kingdom, where the Bank of England
raised the official interest rate by !/4 of 1 percentage
point to 7!/2 percent in June, growth moderated to a little below potential in the first half of the year, and
there have been increasing signs of growth weakening
further. Although unemployment has fallen further to
an 18-year low, earnings growth appears to have moderated, and inflation edged down to its 2!/2 percent target in August. Significant fiscal consolidation, together with the tightening of monetary conditions
since early 1997, has restrained the forward momentum of domestic demand, and this should help to contain inflation risks in the period ahead. The possibility
of a sharper slowdown than needed to meet the inflation target, which has been enhanced by the turbulence
in financial markets and the external environment,
warrants readiness for an early move toward monetary
easing.

With strengthening growth across the future euro
area, improving labor market conditions, and a high
degree of convergence of inflation rates close to price
stability, domestic conditions are auspicious for the
euros start in 1999. Despite some adverse effects from
the Asian crisis, there are encouraging signs that the
economic recovery has been gaining in breadth and
strength and that domestic demand in the major EU
countries is beginning to replace net exports as the
principal engine of growth. This is particularly the
case in France and, albeit to a lesser extent, Germany.
In contrast, the Italian upswing still appears to be
somewhat tentative. In many of the other European
countries, activity remains quite strong, including in
Belgium, Denmark, Finland, Greece, Ireland, the
Netherlands, Portugal, and Spain. The strengthening
of domestic demand in the prospective euro area is
particularly welcome at a time when two large trading
partners, the United States and the United Kingdom,
are likely to begin to experience cyclical slowdowns,
14
with the remaining convergence of short-term interest

rates occurring close to the lower end of prevailing interest rates across the euro area. This would imply
some further decline in the average level of interest
rates in the euro area. Moreover, the absence of price
pressures in the area as a whole provides room for
some additional easing of core interest rates if warranted by the deteriorating external environment.
For some countries that are much more advanced in
the upswing, however, such an easing of monetary
policy in the area as a whole will exacerbate the risk of
overheating in goods and asset markets and tend to accelerate wage growth, which would undermine competitiveness and future employment growth. This situation is a familiar one in the United States, where
individual states or regions may experience cyclical
conditions that diverge from those of the U.S. economy as a whole. However, the consequences are potentially more serious in Europe because of relatively
rigid labor markets, low regional labor mobility, and
limited scope for fiscal transfers among the member
states.
In addressing this issue, two key requirements need
to be met: fiscal policy (at the national level) needs to
shift from being pro- to being countercyclical, and
labor and product markets need to become more flexible. For fiscal policy, there is at present a fortunate
compatibility between short-term and medium-term
requirements. The key challenge for the medium term,
for all member countries, is to ensure continued
progress toward securing budgetary positions that
would enable the authorities to allow, at a minimum, a
full play of automatic stabilizers while complying with
the requirements of the Stability and Growth Pact
(SGP). Additional consolidation would be necessary
to prepare countries for the aging of populations and
associated pressures on pension and health outlays.
Thus, countries facing the danger of overheating at the
present time will benefit doubly from additional efforts to secure stronger budgetary positions, because
such efforts are consistent with both short-term and
longer-run policy requirements.
It is in the area of labor markets that the euro area
faces its greatest policy challenge. High labor costs
and entitlement systems that hamper incentives for job
search have depressed employment creation. The flexibility of European labor markets needs to be enhanced through structural reform measures across a
wide front to safeguard the key principles and objectives of European welfare systems and at the same
time lessen distortions and strengthen incentives to
work and create jobs. This would facilitate adjustment
to adverse economic disturbances and lessen the magnitude and duration of divergent economic trends
across the area. And even in the absence of disturbances, greater labor market flexibility is needed to
promote job creation, reduce structural unemployment, enhance budgetary performance, and strengthen
the areas resilience to inflationary pressures. Unfortunately, despite progress in some areas, labor market
reform efforts have remained inadequate in most of
Europe.
In the absence of deeper and more comprehensive
reforms, emerging wage pressures could choke off the
recovery prematurely by leading to a need to tighten
monetary policy more quickly than would be the case
if labor markets were more flexible. Moreover, without reforms, there is a serious risk that structural unemployment will continue to rise in some countries or
regions, even as cyclical unemployment may be
falling, thus compromising efforts to contain longerterm fiscal imbalances. A tendency for unemployment
to continue to rise secularly along the trend of the past
two to three decades would risk eventually increasing
pressures for an undue relaxation of monetary policy.
And down the road it could ultimately erode public
support for the monetary union, which might unjustly
be regarded as the cause of rising unemployment.
With activity strengthening across Europe, the time is
more than ripe for bold reforms to address the
Achilles heel of the Economic and Monetary Union
(EMU) project.
The seriousness of the Asian and Russian crises and
the intensity of contagion effects on other emerging
market countries have underscored the vulnerability
of emerging market countries to disruptive shifts in
investor sentiment.1 A key lesson from this experience is the need to address promptly any signs of
weaknesses in policies and institutions that may ultimately provoke sharp revisions in investor perceptions of a countrys prospects. Countries also need to
limit the potential damage from shifts in investor sentiment by fostering the development of robust financial systems.
It would be wrong, however, to attribute financial
crises exclusively to policy shortcomings in the crisis
countries. Financial crises of the type experienced in
Asia and Russia also illustrate the difficulties that
emerging market countries can experience when they
suddenly become the target for very large capital inflows. History is replete with episodes in which developing countries have experienced large-scale capital
inflows in situations when rates of return in the industrial countries were relatively unattractive, for example during periods of cyclical economic weakness, or
when developing countries have appeared to offer particularly promising investment opportunities.
1See also Charles Adams and others, International Capital

MarketsDevelopments, Prospects, and Policy Issues (Washington: IMF, September 1998).
15
Box 1.2. Strengthening the Architecture of the International Monetary System

Through International Standards and Principles of Good Practice
Ongoing efforts to improve the resiliency of the international monetary system to financial crises seek to reduce the risk of disruptive shifts in market sentiment,
limit damaging contagion and spillover effects when such
shifts in sentiment do occur, and strengthen the process
and procedures of crisis resolution. In this work, particular emphasis is being given to the development and implementation of international standards and principles of
good practice. Although these standards or principles are
in various stages of development and dissemination, their
ultimate goal is to (1) strengthen effective financial market supervision and regulation; (2) improve the institutional infrastructure; (3) enhance transparency, market
discipline, and corporate governance; and (4) enhance
risk management by financial institutions. Besides encouraging the implementation of international standards,
the Fund also aims to avoid crises and limit their contagious effect by continuing to strengthen its surveillance
efforts and provide support for its adjustment policies
through technical assistance missions and other means.
Insurance Supervision and Financial Conglomerates. In

September 1997, the International Association of Insurance Supervisors (IAIS) released Principles, Standards,
and Guidance Papers for insurance supervisors dealing
with internationally active insurance companies.4 Separately, the Joint Forum on Financial Conglomerates, a
group of supervisors covering banks, securities firms,
and insurance companies, released a set of consultative
documents aimed at enhancing the supervision of financial conglomerates.5
Institutional Infrastructure
Bankruptcy. Domestic bankruptcy systems vary considerably across countries, and regional and multilateral initiatives to harmonize domestic bankruptcy laws
have not been successful. This reflects, in part, differences in legal traditions and practices. In contrast, some
success has been achieved in promoting harmonization in
the treatment of cross-border bankruptcy problems, notably under the auspices of the United Nations Commission on International Trade Law (UNCITRAL) (a
model law on Cross-Border Insolvency),6 the International Bar Association (a Cross-Border Insolvency
Concordat), and the European Union (a still unratified
Convention on Insolvency Procedures). While harmonizing bankruptcy laws across national jurisdictions has
been difficult, somewhat more progress has been made in
modernizing national bankruptcy laws under the aegis of
IMF programs.
Financial Market Supervision and Regulation

Banking Supervision. The Basle Committee has developed the Core Principles for Effective Banking Supervision, which are intended to serve as a basic reference
and minimum standards for bank supervisory and other
public authorities.1 Consistent with these principles, the
IMF has developed a framework for financial sector surveillance, which is helping to analyze financial sector
vulnerabilities.2 Promulgation of these standards or
guiding principles is being conducted through a number
of channels, including the Basle Committees Liaison
Group and the Institute for Financial Stability, recently
created by the Bank for International Settlements (BIS),
and the IMFs bilateral and multilateral surveillance
activities.
Payment Systems. Payment system reforms have focused on widespread adoption of real-time gross settlement (RTGS) systems and the use of delivery versus payment (DVP) schemes for securities settlement.7 These
reforms are ongoing, with a large number of countries
adopting such systems. As noted by the Committee on
Payment and Settlement Systems (CPSS), foreign exchange settlement risk, given that transaction lags settle
in different time zones, raises significant concerns, including the effects on safety and soundness of banks, the
adequacy of market liquidity, market efficiency, and
overall financial stability. The CPSS has set out a strategy
for reducing foreign exchange settlement risks, and several private sector initiatives are under way, including a
potential new derivatives contract, the contract for differences, and a global settlement bank, using the Continuously Linked Settlement (CLS) system. These initiatives
Securities Regulation. The International Organization

of Securities Commissions (IOSCO) is working to establish universal principles for securities market regulation,
and a draft will be considered for membership endorsement in September 1998. IOSCO is also working on improving disclosure requirements and has proposed a disclosure standard for international cross-border offerings,
which will also be considered by the IOSCO membership
in September 1998.3
1Basle Committee on Banking Supervision, Core Principles
for Effective Banking Supervision: Consultative Paper (Basle,
Switzerland: Basle Committee, 1997). Available via the Internet:
http://www.bis.org/publ/index.htm.
2David Folkerts-Landau and Carl-Johan Lindgren, Toward a
Framework for Financial Stability (Washington: IMF, January
1998).
3International Organization of Securities Commissions
(IOSCO), Objectives and Principles Securities Regulation, and
International Disclosure Standards for Cross-Border Offerings
and Initial Listings by Foreign Issuers (Montreal, Canada:
IOSCO, General Secretariat, 1998).
4IAIS
(Basle, Switzerland: IAIS Secretariat, September 1997).

Forum on Financial Conglomerates (Basle Committee,
IOSCO, and IAIS), Supervision of Financial Conglomerates
(Montreal, Canada: IOSCO General Secretariat, February 1998).
6United Nations Commission on International Trade Law,
UNCITRAL Model Law on Cross-Border Insolvency (New
York: United Nations, 1997).
7For a survey of recent payment system initiatives, see
Omotunde E. G. Johnson, Payment Systems, Monetary Policy,
and the Role of the Central Bank (Washington: IMF, 1998).
5Joint
16
business and other organizations for financial reporting

across the world.10 International standards of auditing
have been established by the International Federation of
Accountants (IFAC), through its International Auditing
Practices Committee (IAPC). IOSCO is working with
both IASC and IFAC/IAPC to ensure relevant and comprehensive approaches to the respective standards and
their harmonization with securities market regulation.
would lower settlement risks by reducing the amounts at

risk and the time lags involved in settlements. The CPSS
continues to encourage other payment system reforms to
reduce systemic concerns.
Transparency, Market Discipline,
and Corporate Governance
Data Dissemination. The IMF has established the
Special Data Dissemination Standard (SDDS) to guide
its market-borrowing members on the provision of
economic and financial data to the public. The IMF
maintains a Dissemination Standards Bulletin Board on
the Internet, which posts information on the statistical
practices to subscribers of the SDDS (46 countries at
present). Hyperlinks to country data sites on the
Internet have been established for 17 subscribers. The
General Data Dissemination System (GDDS), the other
tier of the dissemination standards, was established by
the IMF in December 1997.8 Its focus is on improvements in data quality across the spectrum of IMF membership. Both the IMF and the Eurocurrency Standing
Committee are reviewing current data collection and dissemination efforts with a view to enhancing them. In
particular, the BIS is set to collect information about
over-the-counter derivatives on a six-month basis for
a subset of derivatives dealers. The BIS is also enhancing its recording and dissemination of the maturity, sectoral, and geographical distribution of international bank
lending. More generally, the Group of 22 (also known as
the Willard Group), comprising the Group of 7 plus selected other mature and emerging economies, has established a working party to report on transparency and
accountability.
Corporate Governance. The OECD, the Basle Committee, the World Bank, and the European Bank for
Reconstruction and Development (EBRD) are involved
in the development of principles and good practices in the
area of corporate governance. An informal, business
sector advisory group associated with the OECD issued a
report in April 1998 entitled Corporate Governance:
Improving Competitiveness and Access to Capital in
Global Markets.11 In response, the OECD ministers have
requested that the organization formulate a set of standards and guidelines for corporate governance. It is anticipated that these standards and guidelines will be available in May 1999. In April 1990, the Financial Action
Task Force and the Basle Committee adopted recommendations designed to prevent the use of banks for money
laundering. The OECDs Convention on Combating
Bribery of Foreign Public Officials in International
Business Transactions was signed in December 1997 and
entered into force in 1998. The Convention sets a standard for national laws and requires that countries signing
the Convention must implement laws that make bribery a
criminal offence and impose strong penalties on both the
company and the individuals who are found to bribe foreign officials. It is hoped the enforcement of the
Convention will lead companies to put better internal
controls in place.
Fiscal Transparency. The IMF has developed a Code

of Good Practices on Fiscal Transparency to guide members in enhancing the accountability and credibility of
fiscal policy as a key component of good governance.9
Fund members will be encouraged to implement the
Code on a voluntary basis, with no formal subscription
process currently envisaged. The desirability of a similar
code with respect to financial and monetary policies is
also being considered by the IMF.
***
Other initiatives to strengthen international financial
architecture include work to better understand the role of
structural factors in contributing to financial crises
(OECD); the development of indicators of vulnerabilities
and an understanding of factors that may trigger financial
crises (IMF; see the May 1998 World Economic Outlook,
Chapter IV, pp. 8897),12 and proposals to potentially involve the private sector in crisis prevention and resolution (IMF). Group of 22 working parties are developing
evaluations and recommendations on a broad range of issues that complement other efforts.
Auditing and Accounting. The International Accounting

Standards Committee (IASC) has published a series of
International Accounting Standards (IAS) that aim to
achieve uniformity in the accounting principles used by
10International Accounting Standards Committee (IASC),

International Accounting Standards (London, 1998).
11Ira M. Millstein, Corporate Governance: Improving Competitiveness and Access to Capital in Global MarketsA Report
to the OECD (Paris: OECD, Business Sector Advisory Group
on Corporate Governance, 1998).
12For an example of recent work in these areas, see Financial
Crises: Characteristics and Indicators of Vulnerability, in the
May 1998 World Economic Outlook, pp. 7497.
8Access
and more information can be found at this Internet

address: http://dsbb.imf.org.
9See Interim Committee of the Board of Governors of the
International Monetary Fund, Code of Good Practice on
Fiscal Transparency: Declaration on Principles, IMF Survey,
Vol. 27 (April 28, 1998), pp. 12224; also available via the
Internet as IMF Press Release No. 98/14 (April 16, 1998):
http://www.imf.org/external/np/sec/pr/1998/pr9814.htm#12.
17
Such reallocations of financial resources are clearly

desirable for reasons of economic efficiency. They may
also help to sustain global economic expansion when
large countries or regions experience cyclical downturns. At the same time, complications often arise for
two reasons. First, because of the magnitude of the resulting capital inflows relative to the absorptive capacity of the recipient countries, the inflows may contribute to surges in property and stock market prices as
well as appreciating real exchange ratesasset price
bubbles that often prove unsustainable. Second, when
cyclical conditions normalize in creditor countries, or
when perception of countries fundamentals change,
investors and banks may no longer find the higher returns in emerging market countries worth the risk.
Bouts of excessive optimism among international investors followed by episodes of excessive pessimism
can also be a problem, as illustrated by the inadequate
yield spreads on emerging market debt instruments immediately prior to the Mexican and Asian crises, and
by the excessive jumps in risk premia in the wake of
these crises, even for countries with relatively sound
policy records. Indeed, such cycles go back hundreds
of years. Through these channels, and in conjunction
with weak financial systems in many emerging market
countries and other weaknesses in policies and institutions, fluctuations in the global economic and financial
environment may therefore contribute to the proneness
of emerging market countries to crises.
How can individual countries best protect themselves against such destabilizing influences? Among
creditor countries, it is apparent that investors, banks,
and financial regulators need to recognize the inherently fragile and volatile nature of capital flows by
better pricing risksfor example, by attributing appropriate risk weighting to cross-border assets. This
should not be a contentious issue in principle, although it may be difficult to reach a consensus on the
precise risk weights to apply to different types of assets and for different countries.
For recipients of capital flows, views differ more
fundamentally about the appropriate course of action.
In light of the apparent association of external financial liberalization and subsequent financial crises,
some commentators have questioned whether policymakers should turn the clock back on capital account
liberalization, especially the liberalization of flows

other than foreign direct investment. However, to turn
the clock back would be to forgo the benefits of countries rapidly growing ability to attract foreign saving
to help realize their potential, as well as the broader
welfare gains from international portfolio diversification and risk sharing. Indeed, among the industrial
countries, the benefits of liberalized capital movements are widely and correctly perceived to outweigh
the costs.
For many emerging market countries, a more relevant issue is whether capital account liberalization
sometimes may be premature in the context of countries overall progress toward macroeconomic stability
and structural reform, including the development of
robust financial systems. Indeed, there is clearly scope
for strengthening efforts to ensure that capital account
liberalization is well sequenced and prudent. Wellsequenced external financial liberalization means that
structural reforms in other areas are often needed prior
to, or along with, capital account liberalization to reduce the risk that resource misallocations stemming
from distortions elsewhere in the economy are exacerbated when capital controls are removed. Prudent liberalization means the need to take into account the
possibility that information asymmetries or market
failures may lead to undesirable surges and excessive
volatility of capital inflows, especially short-term
flows. Just as domestic financial deregulation needs to
be accompanied by the adoption of prudential rules, so
does international financial deregulation require the
adoption of prudential measures that provide adequate
safeguards against excessive short-term currency exposure by banks, nonfinancial corporations, and government entities.2
These concerns figure prominently in current discussions about the conditions that need to be in place
for an orderly liberalization of the capital account of
the balance of payments and, more generally, about
strengthening the architecture of the international
monetary system (Box 1.2; see preceding pages).
2For further discussion, see Barry Eichengreen and others,

Capital Account Liberalization: Theoretical and Practical Aspects,
Occasional Paper 172 (Washington: IMF, October 1998).
18
II
The Crisis in Emerging Marketsand
Other Issues in the Current Conjuncture
covery has gained momentum since early last year, underpinned by strengthening domestic demand. Recent
indicators, including continued strong business and
consumer confidence (Figure 2.1) and improvements
in labor market conditions, suggest that near-term
growth prospects in the EU remain favorable. As in
North America, growth in the European advanced
economies appears thus far to have been relatively little affected, on net, by the crisis in emerging markets;
but in a number of cases the composition of demand
has changed significantly. While external positions
vis--vis Asia have worsened, domestic spending has
been stimulated by further declines in long-term interest rates since mid-1997 and the strength until recently
of equity markets, as well as improvements in the
terms of tradedevelopments partly attributable to
the Asian crisis. However, with the recent corrections
in equity prices and the further weakening of net exports as a result of the continuing adjustments in Asia
and emerging markets more generally, a widespread
slowing of output growth is likely over the coming
year.
Deteriorating economic conditions in Asia were a
key factor behind the further falls in commodity prices
in the first half of 1998. Successive agreements among
oil-producing countries in the spring to cut production
led to only temporary increases in oil prices, with market skepticism persisting about the effectiveness of the
cuts. Prices fell to a 1998 low in the middle of June, in
real terms the lowest level since 1973 (Figure 2.2).
Prices rebounded somewhat following fresh pledges
of production cutbacks by oil-exporting countries in
late June, but declined again in August. On the basis of
futures markets quotations for the rest of the year, oil
prices in 1998 as a whole are projected to be about 30
percent lower, on average, than in 1997, with only a
partial recovery projected for 1999. The prices of
many nonfuel commodities weakened further between
May and August, by around 9 percent on average, following some stabilization in early 1998, as the situation in Asia and other emerging markets deteriorated.
They are now projected to be about 12 percent lower
on average in 1998 than in 1997, and to show little
upward movement next year. With the weakness of
primary commodity prices adding to the downward
pressures on the broader price level arising from
enhanced competition from Asia, most of the advanced economies have moved closer to price stability
ince the finalization of the May 1998 World

Economic Outlook, the recessions in the east Asian
emerging market economies suffering from financial
crisis and in Japan have deepened. And the August
crisis in Russia has brought a new wave of financial
market pressure to many emerging market economies,
especially in Latin America, and helped to trigger a
sell-off in equity markets worldwide. Economic conditions in most industrial countries except Japan,
however, have remained favorable, with growth moderating in some cases and strengthening somewhat in
others: the adverse effects on overall activity of developments in Asia and emerging markets elsewhere
have been relatively muted. The volume of world trade
has decelerated sharply in 1998. Prices of oil have remained very weak, and nonfuel commodity prices
have weakened further. Reflecting these developments, world output growth this year is now projected
at 2 percentmore than 1 percentage point lower than
projected in May (Table 2.1). Global growth is projected to recover only moderately in 1999, and the
risks appear to be predominantly on the downside.
The following sections discuss the global growth
and inflation outlook, and some salient features of the
background to recent developments and the projections.

In Asia, while exchange rates have stabilized and, in
some cases, recovered significantly from their lows,
the economic downturns in the crisis countries and
Japan have worsened beyond expectations early in the
year, with particularly sharp declines in activity in the
first half of 1998 in Indonesia, Korea, Malaysia, and
Thailand. The weakness of the Japanese economy and
the yen has put additional pressures on financial markets both in the crisis countries and in other emerging
market economies, especially in Asia.
Growth has continued to be well sustained overall
in the advanced economies of North America and
Europe, but with significant changes in relative
growth performance. In the United States, growth
eased to below its potential rate in the second quarter
of 1998 after registering its highest rate for almost two
years in the first quarter, but final domestic demand remained robust. Growth has also slowed in the United
Kingdom and Canada. In continental Europe, the re-
19
II THE CRISIS IN EMERGING MARKETSAND OTHER ISSUES IN THE CURRENT CONJUNCTURE
Table 2.1. Overview of the World Economic Outlook Projections

(Annual percent change unless otherwise noted)
Current
Projections
______________
1998
1999
Differences
from May 1998
Projections
______________
1998
1999
1996
1997
World output
Advanced economies
Major industrial countries
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Other advanced economies
4.2
3.0
2.8
3.4
3.9
1.3
1.6
0.7
2.2
1.2
3.8
4.1
3.1
2.9
3.9
0.8
2.2
2.3
1.5
3.4
3.7
4.2
2.0
2.0
2.1
3.5
2.5
2.6
3.1
2.1
2.3
3.0
1.4
2.5
1.9
1.9
2.0
0.5
2.5
2.8
2.5
1.2
2.5
2.3
1.1
0.4
0.2
0.6
2.5
0.1
0.2
0.2
0.0
0.2
1.5
1.2
0.6
0.3
0.2
0.8
0.3
0.2
0.2
0.9
0.3
1.3
Memorandum
Industrial countries
European Union
Euro area
Newly industrialized Asian economies
2.8
1.7
1.6
6.3
2.9
2.7
2.5
6.0
2.3
2.9
3.0
2.9
2.0
2.5
2.8
0.7
0.1
0.1
0.1
4.7
0.4
0.3
0.2
3.8
Africa
Asia
ASEAN-4
Middle East and Europe
Western Hemisphere
6.6
5.8
8.2
7.1
4.7
3.5
5.8
3.2
6.6
3.7
4.7
5.1
2.3
3.7
1.8
10.4
2.3
2.8
3.6
4.7
3.9
0.1
2.7
2.7
1.8
0.9
2.6
7.7
1.0
0.6
1.7
0.2
2.0
2.6
1.3
1.6
1.0
1.6
3.7
5.0
1.6
2.0
2.8
3.2
0.9
2.1
0.2
3.4
3.7
6.0
4.1
0.2
3.6
4.1
6.0
3.8
3.1
0.5
0.7
7.0
0.4
3.6
0.6
0.5
7.9
1.3
6.8
9.7
3.7
4.6
2.7
1.5
6.4
9.3
10.0
9.0
9.8
8.2
4.5
1.0
3.5
4.7
4.6
3.5
2.3
4.2
1.6
0.9
3.2
2.1
6.0
8.8
7.0
10.3
10.9
6.9
3.6
3.9
5.3
4.2
5.5
5.9
2.6
3.5
1.1
1.8
1.2
0.7
23.7
18.4
0.2
5.4
29.2
31.1
10.4
9.3
6.4
7.2
1.3
0.1
3.3
1.2
2.0
3.3
11.6
13.9
1.4
0.4
5.6
6.5
0.6
0.5
2.4
14.1
41.4
2.1
9.1
27.9
1.7
10.3
29.5
1.7
8.3
34.6
0.4
0.1
15.7
0.3
0.2
25.9
5.6
0.7
3.3
...
5.9
0.7
3.4
...
5.7
0.7
3.7
...
5.7
0.6
...
3.7
0.4
0.0
0.2
...
0.4
0.6
...
...
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
Oil1
In SDRs
In U.S. dollars
Nonfuel2
In SDRs
In U.S. dollars
Consumer prices
Advanced economies
Six-month LIBOR (in percent)3
On U.S. dollar deposits
On Japanese yen deposits
On deutsche mark deposits
On Euro deposits
Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during July
27August 24, 1998, except for the bilateral rates among ERM currencies, which are assumed to remain
constant in nominal terms.
1Simple 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 $19.27 in 1997; the assumed price is $13.28 in 1998 and $14.51 in 1999.
2Average, based on world commodity export weights.
3London interbank offered rate.
20
(Figures 2.3 and 2.4). At the same time, commodity

price declines have boosted real incomes and domestic demand in these economies. However, commodity
price weakness has also lowered growth prospects of
the many developing and transition economies that are
mainly commodity-based.
Reflecting these various developments, growth
prospects have been marked down significantly for
Asia, Russia, and to a lesser extent for many emerging
market countries in other regions, including oil and
other commodity exporters, while growth forecasts for
1998 have been revised upward for the United States,
and, to a lesser extent, for some continental European
countries. (Policy assumptions underlying the projections are summarized in Box 2.1, on page 26.) With the
downward revisions dominating, growth in the world
economy is now projected at 2 percent in 1998, 2!/4
percentage points lower than projected a year ago. In
1999, global growth is projected to pick up moderately
to 2!/2 percent; a modest turnaround of growth in Asia,
including Japan, is projected to be offset by a slowing
of expansions in North America and, to a lesser extent,
in Europe, with the developing countries outside Asia,
and the transition countries, showing little or no improvement. The impact of the emerging market crisis
is the main factor contributing to the projected slowdown in world trade growth to 3#/4 percent in 1998,
markedly lower than the exceptionally high 1997
growth rate, with only a moderate pickup predicted in
1999. The trade growth now projected for 1998 and
1999 is similar to that experienced during 199293.
Among the advanced economies of Asia, there have
been large downward revisions to the growth projections for Japan and also, as discussed below, for Hong
Kong SAR, Korea, and Singapore (Table 2.2).
In Japan, following the modest rebound in activity
in the third quarter of 1997, output declined for three
consecutive quarters, with the economic situation deteriorating significantly in the first half of 1998 (see
Chapter IV). Factors underlying the disappointing performance include increasing financial strains, particularly in the banking system; the large withdrawal of
fiscal stimulus initiated in April 1997 (Table 2.3); the
fallout from the crises in neighboring economies; and
a general weakening of confidence. In response to the
downturn, the government announced in April 1998 a
fiscal stimulus package including tax and spending
measures worth 2!/2 percent of GDP, mainly concentrated in the second half of the year. A further fiscal
package, including tax reductions, was announced in
August, and in early September the Bank of Japan cut
the overnight call rate by 25 basis points to !/4 of 1 percent while leaving the discount rate unchanged. The
authorities have also taken steps to address balance
sheet problems in the banking sector and improve the
availability of credit. Following the failure of several
major financial institutions in late 1997, the Bank of
Japan provided ample liquidity to ease money market
Figure 2.1. Selected European Union Countries,

Japan, and the United States: Indicators
of Consumer and Business Confidence1
Consumer confidence remains very high in the United States and has
continued to improve in France and Germany.
140
130
120
110
100
90
80
70
60
50
40
30
60
20
Consumer Confidence
15
10
5
0
5
United States
(left scale)
United Kingdom
(right scale) 2
10
15
20
25
30
35
Germany
(right scale) 2
France
(right scale) 2
1990
91
92
93
94
Business Confidence
95
96
97
Aug.
98
United States
(left scale)
55
50
Germany
(right scale) 2
45
United Kingdom
(right scale) 2
40
35
30
France
(right scale) 2
Japan
(right scale)
25
20
1990
91
92
93
94
95
96
97
60
50
40
30
20
10
0
10
20
30
40
50
60
Aug.
98
Sources: Consumer confidencefor the United States, the Conference Board; for European Union countries, the European
Commission. Business confidencefor the United States, the U.S.
Department of Commerce, Purchasing Managers Composite Diffusion
Index; for European Union 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.
21
conditions. In addition, in early 1998, public funds totaling around 6 percent of GDP were made available to
bolster the deposit insurance system and recapitalize
banks, and in July the authorities unveiled plans for restructuring the banking system (see Chapter I). The
April and August fiscal stimulus packages should ensure a pickup in activity late this year and prevent a
withdrawal of fiscal stimulus in 1999 as a whole. But
even with the additional stimulus, GDP in Japan is
now projected to fall by 2!/2 percent in 1998 as a
whole, and to grow by just !/2 of 1 percent in 1999
significantly down from the projections in the May
1998 World Economic Outlook. Moreover, this projection is subject to downside risks, particularly relating
to possible further deteriorations in the banking system and in private sector confidence.
The U.S. economy has continued to perform strongly,
with real GDP accelerating to 5!/2 percent growth at an
annual rate in the first quarter of 1998 before slowing in
the second quarter to 1#/4 percent growth. The widening
current account deficit, attributable mainly to the Asian
slump and the strength of the dollar, has been acting as
an increasing drag on growth, but the expansion of final
domestic demand has remained robust. Above-potential
growth has further reduced the unemployment rate (to
4!/2 percent, close to a 28-year low) and put upward
pressure on the growth of labor earnings. But core price
inflation has shown little rise: it was 2!/2 percent at an
annual rate in the first half of 1998, compared with 2!/4
percent in 1997. After the slowing of the expansion in
the second quarter, growth is projected to be close to its
potential rate (around 2!/4 percent a year) in the second
half of 1998, giving growth of 3!/2 percent for the calendar year, compared with 3 percent projected previously. GDP growth next year is expected to remain
close to potential, as domestic demand softens in response to the recent decline in equity prices and external demand remains weak. A further deterioration of
economic conditions in Asia, continuing global financial turmoil, or a significant further stock market decline would tend to slow growth more than projected.
In the future euro area as a whole, economic recovery has gained momentum since early 1997, with consumption and fixed investment taking over from foreign demand and stockbuilding as the main forces
sustaining the expansion. The contractionary effects of
the Asian crisis on exports have been largely offset by
the expansionary effects of improved terms of trade,
lower long-term interest rates, and continued strong
growth in many non-Asian markets. Inflation in the
area has remained subdued, at around 1!/2 percent, and
there are few signs of general inflationary pressures
despite high capacity utilization in some of the smaller
countries and strong asset markets. Growth is projected to reach 3 percent in 1998 and to moderate to
2#/4 percent in 1999, with strong business and consumer confidence, recent declines in interest rates, and
an almost uniform shift to expansionary fiscal stances
Figure 2.2. Prices of Crude Petroleum

and Nonfuel Commodities
(Quarterly average; 1990 = 100)
Prices of oil and nonfuel commodities declined further in the first half
of 1998, in both nominal (U.S. dollar) and real terms.
250
Petroleum
225
Real terms
200
175
150
125
U.S. dollars
100
75
50
25
0
1970
75
80
85
90
95
98:
Q2
250
Nonfuel Commodities
200
Real terms
150
100
U.S. dollars
50
0
1970
75
80
85
90
95
98:
Q2
22
following the efforts to meet the Maastricht criteria in

1997 all tending to boost activity. Among the main
risks to this outlook are the possibilities of a sharperthan-projected slowdown in the United States or a further deterioration in growth prospects in Asia, Russia,
and emerging market economies in other regions.
Developments in the future euro area as a whole
mask important differences among member countries.
In the three largest economiesGermany, France, and
Italyrecoveries are still at relatively early stages,
and output gaps remain significant (Figure 2.5).
Indicators for 1998 show some acceleration of growth
in France and Germanyalbeit less certain in the latter caseas a result of upturns in investment and consumer spending (Figure 2.6), while inflation has fallen
below 1 percent in both cases. The momentum of
growth is projected to be fairly well-maintained in
1999 in both countries. With output gaps remaining
significant and falls in commodity prices still feeding
through, inflation is expected to remain subdued. In
Italy, recent indicators, including modest GDP growth
in the first half of 1998, indicate that the recovery is
still tentative, with growth in private consumption remaining weak. The economys upturn is expected to
strengthen, however, with the further convergence of
short-term interest rates toward the euro-area average;
in addition, consumer confidence remains high, business investment is picking up, and export orders have
been growing strongly, although at a somewhat reduced pace recently, apparently reflecting reduced demand from Asia. In Austria and Belgiumthe other
two euro-area countries where the recovery lagged
until 1997growth has firmed recently, with domestic demand gaining momentum and net exports remaining strong.
The other euro-area countries are at more advanced
stages of the cycle, with resource utilization relatively
high, growth generally vigorous, and in some cases
rising inflationary pressures. In Spain, the economy
has been growing by 3!/24 percent at an annual rate
since the middle of 1997 and is projected to continue
to do so through 1999. Wage moderation is helping to
keep inflation under control in Spain, and this is also
the case in Finland, where growth is projected to moderate to 3!/2 percent in 1999. Inflation risks are particularly high in Ireland, where growth has remained the
fastest in Europe, capacity constraints have been increasingly binding, the impact of the 1997 decline in
the effective exchange rate is still being felt, and a significant reduction of short-term interest rates is in
prospect by end-1998 with pre-EMU convergence.
Inflationary pressures have also been rising in the
Netherlands and Portugal, where economic growth accelerated in the first quarter of 1998 and labor markets
have tightened further.
In the United Kingdom, after five years of solid expansion, growth has slowed significantly since late
1997, with a marked weakening in net exports result-
Figure 2.3. Selected Advanced Economies: Inflation

Inflation in the advanced economies has stabilized at low levels.
35
30
25
United Kingdom
20
Canada
Japan
15
United
States
10
5
0
5
1960 64
68
72
76
80
84
88
92
96
98:
Q2
35
30
25
Italy
20
France
15
10
5
Switzerland
1960 64
68
72
76
Germany
80
84
88
92
96
0
5
98:
Q2
35
Portugal
30
25
New Zealand
20
Spain
15
10
Australia
1960 64
23
68
72
76
80
84
88
92
96
0
5
98:
Q2
ing mainly from the prolonged strength of the pound

sterling, and domestic demand growth abating since
early 1998 as a result of past fiscal and monetary tightening. Taking into account the appreciation of sterling
since late 1996 as well as the rise in short-term interest rates since May 1997, monetary conditions have
tightened very sharply in the past two years (Figure
2.7). At the same time, a fiscal tightening of some 3
percent of GDP is being implemented over 199798 as
a whole. In early June, with inflation above its 2!/2 percent target and labor earnings accelerating, the Bank
of England raised official interest rates by 25 basis
points to 7!/2 percentthe first change in seven
months. While labor markets remain tightwith unemployment down to 4!/2 percentearnings growth
appears to have moderated during the summer, and inflation has edged down to meet its target. Real GDP
growth is projected to moderate to 2!/4 percent in 1998,
broadly in line with potential, and to decline further to
1!/4 percent in 1999.
In Norway, currency depreciation associated with
falling oil prices, together with rising inflationary
pressures as a result of continued strong growth outside the oil sector and accelerating wages, prompted
increases in interest rates amounting to 3#/4 percentage
points between late June and late August. Projected
growth in 1998 has been revised down by 2!/4 percentage points to 3 percent, mainly on account of weak oil
prices and their effects on oil production and the terms
of trade. In Denmark, where signs of overheating have
emerged after five years of steady growth, a fiscal
tightening was announced in June 1998, and official
interest rates were raised by a full percentage point in
September. These measures should help to slow
growth to a more sustainable pace in 1999. In
Switzerland, the recovery has only recently begun to
gather pace; growth in 1998 is now projected to be
somewhat higher than previously, with domestic demand strengthening while inflation should remain
subdued.
In Australia, Canada, and New Zealand, exchange
rate depreciations against the U.S. dollar and the
European currencies, and robust growth in the United
States and Europe, have moderated the contractionary
effects of the downturn in exports to Asia and lower
commodity prices. In Canada and Australia, buoyant
domestic demand has also been cushioning the impact
of the Asian crisis. In Canada, growth is projected to
moderate to 3 percent in 1998 as a whole and to slow
further in 1999. In Australia and New Zealandadvanced economies with particularly large trade exposure to Asiathe Asian crisis is having a more significant negative impact. Growth has slowed particularly
sharply in New Zealand: in fact, activity declined in
the first quarter, and the economy is projected to contract slightly in 1998 as a whole. A moderate recovery
is projected for 1999, partly in response to the recent
easing of monetary conditions.
Figure 2.4. Advanced Economies:

Inflation and Commodity Prices
(Percent change from a year earlier)
The decline in commodity prices since 1997 has helped to keep
inflation low in the advanced economies.
40
Advanced economy
consumer prices
30
20
10
0
10
20
Commodity prices including oil
30
40
1983
85
87
89
91
93
95
97 Aug.
98
40
Advanced economy
consumer prices
30
20
10
0
10
Nonfuel commodity prices
20
30
40
1983
85
87
89
91
93
95
97 Aug.
98
24
Table 2.2. Advanced Economies: Real GDP, Consumer Prices, and Unemployment Rates
(Annual percent change and percent of labor force)
Real GDP
Consumer Prices
Unemployment Rates
_______________________________
_______________________________
______________________________
1996
1997
1998
1999
1996
1997
1998
1999
1996
1997
1998
1999
Advanced Economies
3.0
3.1
2.0
1.9
2.4
2.1
1.7
1.7
7.3
7.1
6.9
7.0

United States
Japan
Germany
France
Italy
United Kingdom1
Canada
2.8
3.4
3.9
1.3
1.6
0.7
2.2
1.2
2.9
3.9
0.8
2.2
2.3
1.5
3.4
3.7
2.1
3.5
2.5
2.6
3.1
2.1
2.3
3.0
1.9
2.0
0.5
2.5
2.8
2.5
1.2
2.5
2.2
2.9
0.1
1.5
2.0
3.9
2.9
1.6
2.0
2.3
1.7
1.8
1.2
1.7
2.8
1.4
1.4
1.6
0.4
1.0
1.1
1.8
2.8
1.3
1.6
2.3
0.5
1.4
1.3
1.7
2.8
1.9
6.9
5.4
3.3
10.4
12.4
12.1
7.3
9.7
6.7
4.9
3.4
11.5
12.5
12.3
5.5
9.2
6.4
4.5
4.1
10.9
11.8
12.1
4.8
8.4
6.5
4.8
4.3
10.6
11.2
11.8
4.9
8.4

Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Luxembourg
3.8
2.3
3.1
1.5
1.3
1.6
3.5
3.6
2.7
3.6
7.4
3.5
4.2
3.4
3.6
2.9
1.8
2.5
3.5
6.0
3.5
4.0
9.8
4.8
1.4
3.8
3.8
2.7
2.9
2.8
2.5
5.1
3.2
4.2
8.6
4.1
2.3
3.6
3.0
2.6
3.3
2.6
1.9
3.5
3.6
3.7
7.0
3.5
3.3
3.5
2.1
2.1
0.5
1.9
2.8
0.6
8.2
3.1
1.6
1.4
2.6
2.0
2.2
1.6
0.5
1.3
2.2
1.2
5.5
2.2
1.5
1.4
3.0
2.1
2.0
1.4
0.5
1.1
2.1
1.6
5.0
2.7
2.8
1.2
2.3
2.4
2.2
1.8
0.5
1.3
2.4
2.0
3.8
2.6
2.5
1.4
8.4
22.2
7.6
12.7
8.1
6.3
8.6
14.6
10.3
7.3
11.5
3.3
8.1
20.8
6.6
12.6
8.0
6.4
7.6
12.6
10.3
6.7
10.2
3.7
8.5
19.2
5.6
12.4
6.7
6.4
6.4
11.3
10.2
5.1
8.9
3.9
8.6
18.3
5.3
12.2
6.2
6.3
6.2
10.1
10.0
5.0
8.2
4.2
Switzerland
Norway
Israel
Iceland
5.5
4.6
5.5
1.7
3.4
2.2
5.0
2.0
3.0
1.6
5.0
1.9
2.2
2.4
4.0
0.8
1.3
11.3
2.3
0.5
2.6
9.0
1.8
0.2
2.5
4.6
2.2
1.2
3.5
4.0
3.0
4.7
4.8
6.7
4.5
5.2
4.1
7.7
3.9
4.1
3.2
9.0
3.3
3.9
4.0
9.5
3.0
Korea
Australia2
Taiwan Province of China
Hong Kong SAR
Singapore
New Zealand2
7.1
3.7
5.7
4.6
6.9
3.1
5.5
3.3
6.9
5.3
7.8
2.3
7.0
3.5
4.0
5.0
0.0
0.5
1.0
2.0
3.9
0.0
0.2
1.7
4.9
2.7
3.1
6.0
1.4
2.3
4.4
1.7
2.1
5.7
2.0
1.7
8.5
1.9
2.0
3.0
1.8
1.4
4.3
2.8
2.0
3.8
2.0
1.6
2.0
8.6
2.6
2.8
3.0
6.2
2.7
8.6
2.7
2.2
2.4
6.7
7.0
8.1
2.6
5.0
4.4
7.8
8.0
8.2
2.4
5.7
5.7
8.9
1.7
1.6
2.7
2.5
2.9
3.0
2.5
2.8
2.5
2.4
1.9
1.7
1.7
1.4
1.8
1.6
11.3
12.4
11.0
12.5
10.3
11.8
10.0
11.3
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.
In Israel, following a tightening of macroeconomic

policies designed to reduce overheating pressures that
emerged in 1996, growth has slowed, unemployment
has increased, and inflation has declined below 5 percent. The abatement of demand pressures has allowed
monetary policy to be eased recently, and financial markets have been relatively little affected by the turmoil in
other emerging markets. Following the liberalization of
the capital account in May, continuing structural reform, combined with additional fiscal consolidation,
would establish conditions for further interest rate reductions and a resumption of sustainable growth.
Among the developing countries, in the Middle East
and Europe region output growth is projected to
weaken from 4#/4 percent in 1997 to 2!/4 percent this
year but to pick up to 2#/4 percent in 1999. The projections represent significant downward revisions from
the May 1998 World Economic Outlook. The sharp de-
cline in oil prices has adversely affected activity not

only in the oil-producing countries in the region but
also in other countries, owing to lower workers remittances and reduced regional demand. Reductions in
fiscal outlays in the Islamic Republic of Iran, Saudi
Arabia, and other oil-producing countries, while containing the deterioration of budgetary and external balances, are likely to restrain growth, and growth projections have been marked down accordingly (Table
2.4). Growth in Turkey, following a very strong firstquarter performance, is projected to slow in the second
half of 1998, in part owing to the short-term impact of
policies being implemented to curtail inflation. In
Jordan, growth data for 199697 have been revised
down, and growth prospects for 1998 and the medium
term now seem less favorable in light of an apparently
slower underlying growth trend and the limited
progress with the regional peace process.
25
Box 2.1. Policy Assumptions Underlying the Projections for Selected Advanced Economies
France. The projection for 1998 reflects the staffs assessment of the state and social security budget plans for
1998. The difference from the governments deficit goal
reflects a better revenue performance (mainly on VAT
and social securities receipts) partially offset by overruns in health care spending. For 1999, the projection is
based on announced official fiscal targets, implying a
slight decline in the ratio of expenditure to GDP. Beyond
1999, it is assumed that the ratio of revenue to GDP and
the structural primary balance remain broadly unchanged.
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 1998. 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 selected
advanced economies, the specific assumptions adopted
are as follows (see Table 2.3, and Tables 1416 in the
Statistical Appendix for the projected implications of
these assumptions).
Italy. The projection for 1998 is based on the official

budget, allowing for the impact of the IMF staffs
macroeconomic forecast and the announced change in
the timing of pension payments, which results in a onetime saving in the current year. For 19992001, the projections are based on IMF staff estimates of the current
services budget (tendenziale), corrected for the measures announced in the three-year plan for those years. It
is assumed that the plans measures are fully implemented and yield the officially estimated amounts.
Projections beyond 2001 assume an unchanged structural balance.
United States. The fiscal projections are based on the administrations May 1998 Mid-Session Review of the
FY1999 Budget, 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.
United Kingdom. The budgeted spending ceilings for

FY1998/99 are assumed to be observed. Thereafter, noncyclical spending is assumed to grow in line with the new
expenditure plans announced following the recent
Comprehensive Expenditure Review. For revenues, the
projections incorporate, for FY1998/99, the announced
commitment to raise excises on tobacco and road fuels
each year in real terms; thereafter, real tax rates are assumed to remain constant.
Japan. The projections take account of recent policy initiatives, including the 16 trillion supplementary budget
announced in April 1998, and the August 1998 spending
guidelines for central government spending. The projections also assume that reductions in marginal personal
and corporate income tax rates worth 7 trillion are implemented in 1999, which is consistent with plans announced in August 1998, and that the increase in the
public pension contribution rate planned for October
1999 occurs on schedule. Over the medium term, the
structural deficit, excluding social security, is assumed
to be reduced gradually to 3 percent of GDP by 2005/06,
broadly in line with the objective set in the revised Fiscal
Structural Reform Act.
Canada. Federal government outlays for departmental

spending and business subsidies are assumed to conform
to the commitments announced in the February 1998
budget. The employment insurance premium is assumed
to be cut by 10 cents a year during 20002003. Other outlays and revenues are assumed to evolve in line with the
IMF staffs macroeconomic projections. After 1998/99, it
is assumed that the federal government will maintain a
small budget surplus, which implies some small cuts in
taxes and increases in program spending. The fiscal position of the provinces is assumed to be consistent with
their stated medium-term targets.
Germany. The projection for 1998 is based on the 1998

federal budget and Financial Planning Council projections for the other levels of government. It incorporates the unwinding of temporary measures implemented in 1997 and takes account of the tax changes
that took effect at the beginning of 1998 (such as the 2
percentage point reduction in the solidarity income
tax surcharge and the increase in the basic income tax
allowance) and the April increase of 1 percentage point
in the value-added tax (VAT) rate. The projections for
1999 and the medium term assume unchanged policies
of the territorial authoritiesapproximated by a constant structural primary balance. The surplus of the
social security funds (estimated at 0.3 percent of GDP
in 1998) is projected to diminish gradually as the legally mandated liquidity reserve of the pension fund is
restored.
Australia. Projections are based on the Australian

Treasurys September 1998 projections of ratios of expenditure and revenue to GDP until 2001/02, with these
ratios assumed to remain constant thereafter. Unchanged
policies are assumed for the state and local government
sector from 1998.
Belgium. The fiscal deficit for 1998 reflects the budget
and a subsequent revision of the expected outturn owing
to lower-than-projected short-term interest rates and the
26
Singapore. Projections for 1998 are based on budget data

adjusted to take account of a fiscal stimulus package
worth 1!/2 percent of GDP announced in end-June 1998;
the package comprises tax breaks and public spending on
infrastructure projects. The projections also assume
lower capital receipts as a result of a freeze of state land
sales in 1998 and 1999.
favorable impact of strong economic activity on tax receipts. For 1999 and the medium term, the projections incorporate a slight decline in the structural primary surplus, as a result of planned tax cuts.
Denmark. Fiscal projections for 1998 are based on the
implementation of the 1998 Finance Act, which tightened
policies to slow down domestic demand growth. For
1999 and beyond, no major changes in tax and expenditure policies are assumed; fiscal projections are adjusted
for differences between the economic projections of the
IMF staff and the authorities.
Spain. The projections for 1998 assume that the budget is

implemented as passed, allowing for small differences in
macroeconomic assumptions. For 1999 and beyond, it is
assumed that there is no major change in tax policy.
(Notably, the projections do not yet incorporate the impact of the proposed personal income tax reform.)
Greece. The projection for 1998 is based on the official

budget, adjusted to reflect the corrective measures announced following ERM entry and the higher-thanbudgeted average interest rate projected for the year.
Projections beyond 1998 incorporate the authorities intention to increase public capital formation (although by
less than the amount indicated in the revised convergence
program), an unchanged ratio of current primary spending in structural terms, and a trend decline in the current
revenue ratio owing to a projected decline in the share of
consumption in GDP. The projections, including those for
inflation and other macroeconomic variables, do not incorporate the effects of possible indirect tax reductions or
other measures under consideration.
Sweden. The fiscal projections are based on the authorities policies and projections as presented in the 1998
Spring Budget Bill, which includes the objective of
achieving a fiscal surplus of 2 percent of GDP on average
over the cycle.
Switzerland. The projection for 1998 is based on the
1998 budget plans, adjusted for the estimated fiscal
impact of recent macroeconomic developments. For
19992001, the projections are in line with official projections and take account of the constitutionally mandated annual maximum deficit ceilings for the federal
budget deficits during 19992001. Beyond 2001, the
general governments structural primary balance is assumed to remain unchanged.
Israel. Projections are based on the 1998 budget and the

governments medium-term fiscal plan, which establishes annual deficit targets for the central government
until 2001. In the years thereafter, the projections assume
an unchanged fiscal deficit as a percent of GDP.
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. It is assumed that Economic
and Monetary Union (EMU) in Europe will be implemented from the start of 1999, with short-term interest
rates converging close to the lower end of the current
range observed across the member countries of the
prospective euro area. On this basis, it is assumed that the
London interbank offered rate (LIBOR) on six-month
U.S. dollar deposits will average 5.7 percent in 1998 and
5.7 percent in 1999 (40 basis points less than projected in
the May 1998 World Economic Outlook); on six-month
Japanese yen deposits will average 0.7 percent in 1998
and 0.6 percent in 1999 (60 basis points less than projected in the May 1998 World Economic Outlook); on
six-month deutsche mark deposits will average 3.7 percent in 1998; and on six-month euro deposits will average 3.7 percent in 1999. Changes in interest rate assumptions compared with the May 1998 World Economic
Outlook are summarized in Table 2.1.
Korea. The medium-term projections assume that the

central and general government budgets will be broadly
in balance. In the short term, however, unemployment is
expected to pick up sharply, and there are costs of restructuring the banking system. The associated increase
in social safety net and bank restructuring expenditures
will imply moderate fiscal deficits over the next few
years.
Netherlands. The 1998 projections are based on the 1998
budget and the IMF staffs macroeconomic projections.
Projections for 19992003 reflect the new governments
expenditure norm and take into account planned tax cuts.
New Zealand. The projections are based on the New
Zealand Treasurys September 1998 projections of ratios
of expenditure and revenue to GDP until 2000/01, and
IMF staff estimates thereafter.
Portugal. The projection for 1998 is based on the budget,
allowing for the impact of recent macroeconomic developments. Projections for 1999 and beyond are based on
estimates of revenue and expenditure trends on the basis
of unchanged policies.
27
Table 2.3. Major Industrial Countries: General Government Fiscal Balances and Debt1
(Percent of GDP)
198191
1992
1993
1994
1995
1996
1997
1998
2000
2003

Actual balance
Output gap
Structural balance
2.9
0.7
2.6
3.8
1.5
3.0
4.2
2.7
2.9
3.5
2.3
2.4
3.4
2.3
2.3
2.7
1.7
1.8
1.2
1.1
0.6
1.1
1.3
0.5
0.9
1.5
0.1
0.5
0.3
0.6
United States
Actual balance
Output gap
Structural balance
Net debt
Gross debt
2.8
1.6
2.2
37.4
51.6
4.4
3.2
3.1
50.3
64.8
3.6
3.2
2.3
52.4
66.8
2.3
2.1
1.4
53.3
66.2
1.9
2.2
1.1
53.1
66.6
0.9
1.2
0.5
52.9
66.6
0.2
0.4
0.1
50.5
62.7
1.1
1.4
0.6
47.7
59.3
1.4
0.8
1.1
42.6
52.9
2.2
2.2
33.1
41.2
0.4
0.7
0.6
19.7
67.8
1.5
1.7
0.9
4.2
70.0
1.6
0.6
1.4
5.2
75.1
2.3
2.3
1.5
7.7
82.2
3.6
2.9
2.5
13.3
89.7
4.3
1.5
3.6
15.4
94.2
3.1
3.0
1.9
18.2
99.4
5.7
7.4
2.8
29.6
115.6
6.2
8.4
2.8
42.5
134.1
2.7
1.3
2.1
48.4
138.1
Japan
Actual balance
Output gap
Structural balance
Net debt
Gross debt
Memorandum
Actual balance excluding
social security
Structural balance excluding
social security
3.5
2.0
4.8
5.1
6.5
6.8
5.2
7.3
7.8
4.4
3.6
2.4
4.6
4.6
5.8
6.5
4.5
5.5
5.8
4.1
Germany 2
Actual balance
Output gap
Structural balance
Net debt
Gross debt
2.1
1.1
1.6
21.1
41.0
2.8
2.0
4.0
27.7
44.1
3.2
2.0
2.2
35.1
47.9
2.4
2.2
1.2
40.5
50.2
3.3
2.5
2.0
48.9
58.0
3.4
3.2
1.5
51.5
60.4
2.7
3.1
0.7
52.4
61.3
2.6
2.6
1.0
52.6
61.4
1.9
1.7
0.9
52.3
61.1
1.0
0.2
0.8
49.1
58.0
France
Actual balance
Output gap
Structural balance
Net debt3
Gross debt
2.2
0.4
2.4
22.5
30.8
3.8
0.5
3.4
30.2
39.2
5.6
3.8
3.2
34.4
45.2
5.7
3.0
3.7
40.2
48.3
4.9
2.7
3.1
43.6
52.5
4.1
3.3
1.9
46.3
55.4
3.0
3.2
0.9
48.0
57.8
2.9
2.5
1.3
49.2
58.9
2.0
1.4
1.1
49.9
59.7
0.6
0.6
47.0
56.8
Italy
Actual balance
Output gap
Structural balance
Net debt
Gross debt
11.1
0.3
11.3
75.5
83.0
9.6
0.2
9.5
103.0
108.7
9.5
2.6
8.2
112.8
119.1
9.2
2.5
7.9
118.3
124.9
7.7
1.1
7.1
117.6
124.2
6.7
2.0
5.7
117.4
124.0
2.7
2.3
1.6
115.2
121.6
2.6
2.1
1.7
112.2
118.5
1.7
0.7
1.3
107.7
113.7
1.3
1.2
98.8
104.4
United Kingdom
Actual balance
Output gap
Structural balance
Net debt
Gross debt
1.9
0.8
1.3
42.1
50.1
6.3
4.5
3.7
29.0
36.1
7.9
4.5
4.4
33.8
42.5
6.9
2.4
4.3
39.4
48.4
5.6
1.6
4.2
42.3
50.5
4.6
1.3
3.6
45.7
53.8
1.9
0.5
1.8
47.9
54.5
0.1
0.3
0.6
43.3
51.5
0.2
0.6
0.7
38.9
47.0
1.7
1.7
31.2
39.0
Canada
Actual balance
Output gap
Structural balance
Net debt
Gross debt
4.2
0.6
3.8
32.7
65.3
7.5
5.1
4.0
56.0
88.2
7.3
3.6
4.6
63.3
96.9
5.3
1.8
4.0
67.2
98.7
4.0
1.9
2.9
68.5
100.2
1.7
2.7
0.1
70.0
100.5
1.1
1.6
2.0
66.5
96.2
1.5
0.9
2.0
63.3
91.7
1.5
0.5
1.8
55.4
81.6
2.0
2.0
43.0
67.0
Note: The budget projections are based on information available through September 1998. The specific assumptions for each country are set
out in Box 2.1.
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 198691. 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 198191 is average of 198391.
28
Figure 2.5. Major Industrial Countries:

Output Gaps1
In the emerging market economies of Latin America,

the weakness of oil prices has contributed to downward
revisions in growth projections for Colombia, Mexico,
and especially Venezuela, on account of oil production
cutbacks and fiscal restraint in response to the weakening of budgetary revenues. Increases in interest rates
associated with financial market pressure, and policy
measures taken to reduce countries vulnerability to
such pressure, have affected growth prospects more
widely. In Mexico, following two previous fiscal adjustments in January and March 1998, the government
in July announced an additional round of measures
aimed at offsetting the effect of lower oil prices on the
budget. Projected growth has also been marked down
for Chile, mainly reflecting a tightening of credit policy and weak demand in Asian marketswhich account for about one-third of Chiles exports, about
three times the average for the region. In Brazil, where
financial market pressures associated with the Asian
and Russian crises have been felt more acutely, growth
in 1998 and 1999 is projected to slow down considerably from the 3!/4 percent rate achieved in 1997.
Growth projections for Argentina have also been reduced; unemployment, having fallen below 14 percent,
could increase in the period ahead.
Economic developments in Africa have remained
uneven. A number of countries in the north have benefited in 1998 from improved agricultural production
following last years drought and from the strengthening of growth in Europe, and many other countries
have been net beneficiaries of declines in oil and nonoil commodity prices. But other countries have been
adversely affected by the weakness of commodity
prices, and in some cases economic activity has been
disrupted by civil and military unrest. The impact of El
Nio was less significant than previously feared.
South Africa is the only country in the region to have
suffered significant financial contagion from the Asian
crisis (see below). All these factors have combined to
lower the growth projection for Africa in 1998, with
significant risks of a weaker outcome.
In Algeria, the strong recovery in agricultural output
following the severe drought last year is expected to
help growth to rebound to 4 percent this year, despite
weak oil prices, and the expansion is projected to be
maintained in 1999. A recovery in agricultural production also underlies the rebound of growth in Morocco.
In Tunisia, the expansion of manufacturing production
is projected to be sustained at relatively high rates in
199899, driven partly by the recovery in import demand in European markets. In Nigeria, reflecting the
fall in oil prices and political instability, growth is projected to weaken to 2 percent in 1998. In Kenya,
growth is projected to strengthen somewhat following
the slowdown in 1997, which reflected a deterioration
in macroeconomic imbalances. Torrential rains in
Uganda in early 1998 may adversely affect this years
production and exports of coffee.
(Actual less potential output, as percent of potential)

Output in the United States has recently exceeded its potential level,
while in the other major industrial countries, except Japan, it is approaching potential.
6
4
2
0
2
4
6
8
10
United States
United Kingdom
1983
85
87
Canada
89
91
93
95
97
99
6
4
2
0
2
4
6
8
10
Japan
Italy
Germany 2
France
1983
85
87
89
91
93
95
97
99
1Shaded areas indicate IMF staff projections. The estimates of output

gaps are subject to a significant margin of uncertainty. For a discussion
of approaches to calculating potential output, see Paula R. De Masi,
IMF Estimates of Potential Output: Theory and Practice, in Staff
Studies for the World Economic Outlook (Washington: IMF, December
1997), pp. 4046.
2Data through 1991 apply to west Germany only.
Figure 2.6. Selected European Countries:

Real Total Domestic Demand1
(Percent change from four quarters earlier)
Domestic demand has been strengthening in France and Germany
but weakening in the United Kingdom.
6
France
United
Kingdom
Germany
2
0
Italy
2
4
1992
1Shaded
29
93
94
95
96
area indicates IMF staff projections.
97
98

Indices of Monetary Conditions1
Activity in the transition countries as a group is

now expected to stagnate in both 1998 and 1999, but
with substantial differences in performance across
countries (Table 2.5). The three Baltic countries and
Poland are all expected to record further rapid growth
in 1998 and 1999, underpinned by fast-expanding domestic demand, business investment in particular. In
Hungary, the adjustment policies implemented since
1995 have set the foundations for sustained growth,
projected to accelerate to about 5!/4 percent this year
and to moderate slightly in 1999. In contrast, growth is
projected to slow somewhat in Croatia and the Slovak
Republic, where current account deficits of close to 10
percent of GDP, banking sector problems, and other
weaknesses need to be addressed. In the Czech
Republic, where growth slowed to 1 percent in 1997 as
a result of the May currency crisis and associated
tightening of policies, activity has remained subdued:
real GDP in the second quarter of 1998 was 2!/2 percent lower than in the corresponding quarter of 1997.
In Bulgaria, which saw renewed macroeconomic instability and output contraction last year, activity has
rebounded following the fresh impetus given to stabilization and restructuring, while Romania, which was
in a similar situation in 1997 but where policies in
both areas have lagged after some initial progress,
seems likely to see a further decline in output in 1998.
Major downside risks for the countries of central
and eastern Europe and the Baltics arise from the uncertainties surrounding the effects of the financial crisis in Russia. A weakening of exports to Russia will
adversely affect growth in the Baltic countries especially, since their exports to Russia still accounted for
up to 20 percent of total exports before the crisis and
even a limited deterioration in the trade balance with
Russia could have significant effects, as their current
account deficits are already very high. In the central
and eastern European countries, where the proportion
of exports to Russia is less than 7 percent in Hungary
and Poland and less than 4 percent in the Czech
Republic, the impact of the Russian crisis is expected
to be felt mainly through international and domestic financial market conditions, although the relatively
strong macroeconomic fundamentals of these countries have helped to limit these effects.
In Russia, and to a lesser extent Ukraine, growth
performance and prospects have been damaged by the
intense financial market pressures since May, which
in Russias case culminated in the August crisis, discussed below. Growth in Russia is projected to be severely affected by a sharp fall in domestic demand
and disruptions in the financial and payments systems, and output declines of 6 percent are projected
for both 1998 and 1999downward revisions of 7
percent and 8 percent respectively. In Ukraine, the
spillover and contagion effects from the Russian crisis and a monetary policy tightening to support the
new exchange rate band are expected to result in zero
Monetary conditionsreflecting changes in both interest rates and

exchange rateshave tightened in the United States and, especially,
in the United Kingdom.
United States
Japan
Canada
1990
91
92
93
94
95
96
97
United Kingdom
Germany
France
Italy
1990
91
92
93
94
95
96
97
110
108
106
104
102
100
98
96
94
92
90
Aug.
98
110
108
106
104
102
100
98
96
94
92
90
Aug.
98
1For each country, the index is defined as a weighted average of the

percentage point change in the real short-term interest rate and the percentage change in the real effective exchange rate relative to a base
period (January 1990 to December 1997). Relative weights of 3 to 1 are
used for Canada, France, Italy, and the United Kingdom; 4 to 1 for
Germany; and 10 to 1 for Japan and the United States. The weights are
intended to represent the relative impact of interest rates and exchange
rates on aggregate demand; they should be regarded as indicative rather
than precise estimates. For instance, a 3-to-1 ratio indicates that a 1 percentage point change in the real short-term interest rate has about the
same effect on aggregate demand over time as a 3 percent change in the
real effective exchange rate. Movements in the index are thus equivalent to percentage point changes in the real interest rates. The lag with
which a change in the index may be expected to affect aggregate
demand depends on the extent to which the change stems from a change
in the interest rate or the exchange rate, and varies depending on the
cyclical position; the lag also differs across countries. No meaning is to
be attached to the absolute value of the index; rather, the index is
intended to show the degree of tightening or easing in monetary conditions from the (arbitrarily chosen) base period. Small changes in the
relative weights may affect the value of the index but not the qualitative
picture.
30
Table 2.4. Selected Developing Countries: Real GDP and Consumer Prices
Real GDP
_____________________________
Consumer Prices
______________________________
1996
1997
1998
1996
1997
1998
6.6
5.8
2.3
14.1
9.1
10.3
Median
4.6
4.3
4.0
7.3
5.9
5.0
5.8
3.8
5.0
6.8
4.4
3.8
12.0
6.4
3.2
4.7
4.1
6.9
8.9
3.2
1.3
5.1
6.0
3.0
1.8
2.2
3.9
1.7
6.6
3.9
5.6
4.2
3.7
4.0
5.0
6.0
5.6
2.7
6.8
2.0
0.8
6.1
3.3
5.9
5.5
26.7
18.7
6.4
2.7
45.6
9.0
3.0
29.3
7.4
132.8
25.7
3.8
7.5
11.0
5.7
4.2
5.6
27.9
11.2
1.0
8.5
8.6
46.7
17.1
3.7
7.8
7.7
5.7
2.1
3.0
15.5
9.3
2.2
9.0
6.0
12.3
14.5
3.7
6.2
SAF/ESAF countries2
CFA countries
5.8
5.3
4.6
5.5
4.6
5.7
15.6
5.4
8.6
4.3
7.1
2.7
Asia
Bangladesh
China
India
Indonesia
Malaysia
Pakistan
Philippines
Thailand
Vietnam
8.2
5.4
9.6
7.5
8.0
8.6
5.2
5.7
5.5
9.3
6.6
5.7
8.8
5.6
4.6
7.8
1.3
5.1
0.4
8.8
1.8
4.2
5.5
4.8
15.0
6.4
5.4
0.6
8.0
4.0
7.9
4.5
8.4
6.9
7.9
3.5
10.3
8.4
5.9
5.8
4.7
4.8
2.8
6.3
6.6
2.7
12.5
6.0
5.6
3.2
8.3
8.6
0.0
7.2
60.0
6.0
8.0
10.0
9.0
9.0

Egypt
Iran, Islamic Republic of
Jordan
Kuwait
Saudi Arabia
Turkey
4.7
4.3
4.8
0.8
0.9
1.4
6.9
4.7
5.0
3.2
2.2
1.6
1.9
7.5
2.3
5.0
0.0
2.5
1.3
0.4
3.7
24.6
7.2
23.1
6.5
3.6
0.9
82.3
22.6
6.2
16.9
3.0
0.8
0.4
85.7
22.6
3.3
22.7
4.0
0.5
0.0
78.0
3.5
4.8
2.8
7.4
2.1
7.3
2.0
3.0
5.2
2.5
5.3
0.4
5.1
8.6
3.2
7.1
3.1
8.1
3.4
4.1
7.0
7.2
5.1
5.1
2.8
5.0
1.5
4.5
2.7
6.0
1.5
4.5
4.5
3.0
4.0
2.5
20.8
0.2
11.1
7.4
20.8
5.4
24.4
11.0
34.4
11.5
28.3
99.9
13.9
0.8
7.9
6.1
18.5
8.3
30.6
9.2
20.6
8.5
19.8
50.0
10.8
1.3
5.0
5.4
19.5
5.0
33.6
6.5
15.3
7.5
10.2
37.0
Africa
Algeria
Cameroon
Cte dIvoire
Ghana
Kenya
Morocco
Nigeria
South Africa
Sudan1
Tanzania
Tunisia
Uganda
Western Hemisphere
Argentina
Brazil
Chile
Colombia
Dominican Republic
Ecuador
Guatemala
Mexico
Peru
Uruguay
Venezuela
1The
inflation figures published in the May 1998 World Economic Outlook were end-of-period data.
countries that had arrangements, as of the end of 1997, under the IMFs Structural Adjustment
Facility (SAF) or Enhanced Structural Adjustment Facility (ESAF).
2African
growth this year and only a very moderate recovery in

1999.
A number of smaller countries of the former Soviet
Union, including Armenia, Azerbaijan, and Georgia,
are projected to enjoy continued strong growth of 5
percent or more in 199899. Their trade exposure to
Russia is relatively small, and the early stage of de-
velopment of their financial markets also limits their

susceptibility to external disturbances. Other countries of the former Soviet Union that have stronger
trade links to Russia or more integrated financial markets are expected to be more affected by the Russian
crisis. In Kazakhstan, for instance, and also on account of the decline in oil prices, growth projections
31
Table 2.5. Countries in Transition: Real GDP and Consumer Prices

Real GDP
____________________________
Consumer Prices
___________________________
1996
1997
1998
1996
1997
1998
1.0
2.0
0.2
41
28
30
3.0
1.6
3.7
9.1
2.8
10.9
6.0
3.9
3.1
2.8
3.2
7.0
10.4
6.9
6.5
1.0
5.1
3.4
3.7
10.0
7.0
5.5
5.0
1.0
24
32
23
13
53
123
4
9
15
38
41
33
64
1,082
4
8
11
18
17
22
53
27
5
11
4.0
1.3
3.3
4.7
10.9
4.4
6.5
5.7
6.0
5.2
6.0
6.0
23
23
18
25
11
18
8
9
10
15
5
7
0.8
7.8
6.1
3.9
6.6
3.1
10.0
1.5
1.3
6.9
6.6
6.5
3.8
3.2
5.0
3.0
5.8
4.0
4.0
4.4
0.1
2
24
20
39
6
10
80
2
12
15
152
6
9
16
2
8
12
61
7
8
14
Russia
5.0
0.9
6.0
48
15
48

Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
1.6
5.8
1.3
10.5
0.5
7.1
2.1
3.1
5.8
11.0
2.0
6.5
4.1
5.5
7.0
10.0
1.5
6.0
69
19
20
39
39
30
31
14
4
7
17
26
21
10
5
6
10
12
2.6
4.4
7.7
1.6
3.0
1.7
25.9
2.4
4.0
3.4
20.0
2.0
49
418
992
64
37
88
84
50
12
64
18
40
Median
Albania
Belarus
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Macedonia, former
Yugoslav Rep. of
Moldova
Poland
Romania
Slovak Republic
Slovenia
Ukraine
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
where output is now projected to contract by 15 percent and 6!/2 percent, respectively.
The downward revisions have been prompted partly
by new data on activity and trade in the first half of
1998, which have shown the initial impact of the crisis to have been considerably worse than previously
thought. In addition, a number of developments have
indicated forces making for deeper downturns than
projected earlier, including further declines in equity
markets and asset values more broadly; the political
turmoil in Indonesia; mounting problems in financial
and corporate sectors more serious than previously expected; the effects of the deteriorating situation in
Japan on confidence and activity throughout the region; and spillovers from the crisis in Russia.
Moreover, adverse developments in individual countries of the region have clearly fed on each other, especially through a sharp contraction of regional trade.
The deterioration became increasingly clear in May
and June as data for activity in the first quarter became
available for several countries. Following signs of re-
have been marked down to 1!/2 percent in 1998 and

zero in 1999. In Belarus, growth projections are subject to substantial downside risk, due to that economys heavy reliance on preferential credit and trade
with Russia.
The Emerging Markets Crisis:

Its Evolution and Spread
Why Has Economic Activity Contracted More Than
Expected in the East Asian Crisis Countries?
Since the May 1998 World Economic Outlook, projected growth in 1998 and 1999 for the crisis-afflicted
economies of east Asia has been revised down by significant margins. For the countries at the center of the
crisisIndonesia, Korea, Malaysia, the Philippines,
and Thailanddownward revisions in projected 1998
growth range from 3 to 10 percentage points, the
largest revisions being for Indonesia and Malaysia,
32
covery in the regions exchange markets during

FebruaryApril, a number of the regions currencies
suffered further depreciations at this time, although,
except for the Indonesian rupiah, they remained well
above the lows reached in January, and upward pressure on the Korean won, in particular, quickly resumed
(Figure 2.8). Since June, although exchange markets
have continued to experience bouts of volatility, the
rupiah also has recovered significantly, while the other
currencies have remained fairly stable. Larger and
more widespread declines were registered in equity
markets (Figure 2.9). GDP data for the second quarter
have confirmed the substantial declines in activity
(Table 2.6).
The previous projection of early recovery in the
crisis-hit countries was based partly on the assumption
of rapid improvements in trade balances, including
through growth in exports generated by improved
competitiveness. The crisis countries have indeed registered substantially improved trade balances in the
first half of 1998, with a combined annualized merchandise surplus of over $80 billion, compared with
an annualized deficit of around $40 billion in the same
period of 1997 (Box 2.2, on page 36). But the improvements have resulted mainly from import compression: total imports in U.S. dollar terms were over
30 percent lower in the first half of 1998 than in the
first half of 1997, with declines ranging from about 10
percent in the Philippines to over 25 percent in
Malaysia, and over 35 percent in Indonesia, Korea,
and Thailand. The total exports of the five countries in
U.S. dollar terms were roughly unchanged as a marked
increase in export volumes virtually offset declines in
prices in U.S. dollar terms, reflecting, in part, declines
in primary commodity prices. Changes in export revenues varied considerably among the countries, however, with growth of about 20 percent in the Philippines and close to 5 percent in Korea but declines of
510 percent in Indonesia, Malaysia, and Thailand.
The overall performance of exports from the five
countries masks a sharp contraction of regional trade,
especially with Japan, and a strong rise in export revenues from outside Asia. Thus the dollar value of
Koreas exports to the EU and the United States in the
first five months of 1998 were, respectively, 6 percent
and 11 percent higher than a year earlier.1
In all the crisis countries, notwithstanding the sizable improvements in real trade balances, indicators of
overall activity point to deep recessions in 1998. Thus
in the second quarter, real GDP was 6!/2 percent lower
than a year earlier in Korea, 16!/2 percent lower in
Indonesia, and 6#/4 percent lower in Malaysia. Other
Figure 2.8. Selected Emerging Market Countries:

Bilateral U.S. Dollar Exchange Rates
(U.S. dollars per currency unit; January 5, 1996 = 100)
Exchange rates in the Asian crisis countries have recovered somewhat
since early 1998, but downward pressures have continued in many
emerging markets.
110
100
90
80
70
60
50
40
30
20
10
Hong Kong SAR1 110

Malaysia
Philippines
Thailand
Taiwan
Province of China
Korea
Indonesia
1996
110
100
90
80
70
60
50
Singapore
1997
Sep. 25,
98
China
India
Pakistan
1996
1997
Brazil
Mexico
1997
110 Czech Republic

100
90
80
70
Hungary
60
50
1996
1997
Sep. 25,
98
Sep. 25,
98
110
100
Chile
90
80
70
60
50
Argentina1
South Africa
1996
1996
1997
Sep. 25,
98
Poland
Russia
Sep. 25,
98
Sources: WEFA, Inc.; and Bloomberg Financial Markets, LP.

to U.S. dollar.
1Pegged
1It is unclear to what extent exports from Korea and other countries have been constrained by lack of financing. In the case of
Korea, the dollar value of export letters of credit declined by 10 percent in the first quarter of 1998, reflecting strains in both the industrial and corporate sectors.
33
100
90
80
70
60
50
40
30
20
10
indicators of economic activity, such as unemployment, confirm the sharp contractions. Thus in Korea,
the unemployment rate climbed from 2!/4 percent before the crisis to 7 percent in June, its highest level in
12 years (Figure 2.10). Activity has weakened more
moderately in the Philippines, with real GDP in the
second quarter 1!/4 percent lower than a year earlier.
Meanwhile, except in Indonesia, where currency depreciation has been by far the steepest, inflation has
been generally well-contained, reflecting the flexibility of wages and prices as well as the weakness of
demand.
In Indonesia, Korea, and Thailand, the key priority
for monetary policy in the programs supported by IMF
arrangements has been exchange rate stabilization. In
Korea and Thailand, monetary tightening effectively
stanched depreciation early in the year (Box 2.3, on
page 40); in both cases, the monetary authorities have
allowed short-term interest rates to decline cautiously
since January as exchange market pressures have
eased (Figure 2.11). In fact, in both cases the currencies have appreciated significantly from their January
lows. In Indonesia, exchange rate stabilization appears
to have been achieved more recently, although at an
extremely depreciated rate despite some strengthening
of the rupiah in July and August. It is notable that
among the Asian crisis countries, exchange rates held
up relatively well in late August and early September,
when stock markets in the region, as elsewhere, experienced spillovers from the Russian financial crisis.
Data for private sector credit indicate that Indonesia,
the Philippines, and Thailand have recently experienced significant declines in real terms, but these are
far from matching the deep decline seen in Mexico in
1995 (Figure 2.12). Fiscal policies, meanwhile, have
sought to strike a balance between, on the one hand,
supporting external adjustment and avoiding an excessive accumulation of public debt that would adversely
affect financial stabilization and, on the other, allowing
automatic fiscal stabilizers to operate to help stabilize
activity, and strengthening social safety nets (Box 2.4,
on page 46). Fiscal deficits have widened considerably
in all the crisis countries, with adjustment measures
offsetting only part of the deterioration resulting from
the weakening of activity (Box 2.5, on page 50).
In Malaysia, the authorities in August imposed capital controls to support a repegging of the exchange
rate and to contain the effects on external balance of a
strategy to revive the domestic economy that involves
expansionary fiscal and monetary policies. In the immediate aftermath of these announcements, while equity markets strengthened, in part because of large
purchases by domestic institutional investors, yield
spreads on foreign Malaysian bonds widened by over
300 basis points; by early September these spreads had
widened to about 1,200 basis points.
The unexpectedly deep contractions in activity in
the Asian crisis countries have led some observers to

Equity Prices
(U.S. dollars; logarithmic scale; January 5, 1996 = 100)
Declines in the equity markets of the Asian crisis countries and Russia
since late 1997 have been particularly large.
270
200
270
200
Taiwan Province
of China
Philippines
100
80
60
40
100
80
60
Thailand1
Hong Kong
SAR
Singapore
Malaysia
20
40
20
Korea
Indonesia1
10
1996
400
1997
10
Sep. 25,
98
1996
400
Mexico
Brazil
India
40
Sep. 25,
98
China
270
200
100
80
60
1997
Argentina
South Africa
Pakistan
1996
1997
Sep. 25,
98
1996
1997
Chile
270
200
100
80
60
40
Sep. 25,
98
800
Russia1
Poland
Hungary
270
200
100
80
60
Czech Republic
1996
1997
Sep. 25,
98
Source: International Finance Corporation, Emerging Markets Database.

1On September 25, 1998 equity prices for Thailand, Indonesia, and
Russia reached lows of 9.3, 8.9, and 52.3, respectively, in terms of the
indices shown.
34
Table 2.6. Selected Asian Economies: Macroeconomic Indicators

(Percent change from four quarters earlier unless otherwise noted)
1997:Q1
1997:Q2
1997:Q3
1997:Q4
1998:Q1
1998:Q2
Hong Kong SAR

Output growth1
Inflation
Trade balance2
Import value growth3
Export value growth3
Export volume growth
5.9
6.1
6.2
4.2
2.0
4.0
6.8
5.7
6.2
4.7
4.1
6.2
6.0
6.1
4.0
5.5
2.5
4.4
2.7
5.5
4.1
5.8
7.4
9.6
2.8
5.0
4.2
5.1
1.0
1.4
5.0
4.4
4.5
6.0
3.1
0.5
Indonesia
Output growth1
Inflation
Trade balance2
8.5
5.2
1.7
11.0
10.4
26.2
6.8
4.9
2.4
7.8
7.5
20.4
2.5
6.0
3.6
2.6
9.6
33.5
1.4
10.1
4.0
10.1
2.4
33.0
7.9
29.9
3.4
31.3
1.0
32.8
16.5
52.1
4.3
26.7
8.8
19.1
Korea
Output growth1
Inflation
Trade balance2
5.7
4.7
7.3
3.9
5.6
17.3
6.6
4.0
1.8
0.8
7.1
24.1
6.1
4.0
1.5
3.8
15.6
35.3
3.9
5.1
2.2
14.8
3.5
23.2
3.9
8.9
8.4
35.4
8.7
35.0
6.6
8.2
11.7
36.6
0.5
24.1
Malaysia
Output growth1
Inflation
Trade balance2
8.5
3.2
0.8
1.1
6.1
...
8.4
2.5
1.9
11.2
0.1
...
7.4
2.3
0.5
1.5
2.7
...
6.9
2.7
0.4
8.0
5.1
...
2.8
4.3
2.2
18.6
10.6
...
6.8
5.7
3.4
33.1
9.2
...
Philippines
Output growth1
Inflation
Trade balance2
5.6
5.4
2.9
14.2
17.5
...
5.5
5.3
2.8
8.3
26.5
...
4.9
5.9
3.1
20.9
24.7
...
5.6
7.5
2.4
12.9
22.2
...
1.7
7.9
1.1
5.9
23.8
...
1.2
9.9
0.3
17.4
14.4
...
Singapore
Output growth1
Inflation
Trade balance2
4.0
1.7
2.1
2.6
3.2
0.3
8.5
1.7
1.4
2.7
4.0
8.8
10.6
2.3
2.5
8.8
3.2
10.5
7.7
2.3
1.4
5.2
4.0
7.8
6.1
1.1
0.9
16.2
6.9
7.6
1.6
0.3
2.4
24.8
13.9
2.0
6.9
1.7
1.6
5.8
5.8
9.3
6.3
1.0
1.8
3.6
4.9
5.6
6.9
1.1
1.6
7.0
17.1
9.7
7.1
0.2
2.5
6.4
7.1
11.4
5.9
1.5
0.1
5.4
0.3
3.8
5.2
1.7
1.3
6.9
7.8
0.8
7.0
4.4
3.2
7.6
1.0
1.7
7.5
4.3
3.1
7.5
2.2
4.3
4.2
6.1
0.9
11.4
7.7
11.7
11.5
7.5
2.5
27.5
6.7
16.3
16.8
9.0
3.1
39.8
2.9
14.3
15.8
10.3
2.6
38.2
5.3
12.5

Output growth1
Inflation
Trade balance2
Thailand
Output growth1
Inflation
Trade balance2
Sources: Country authorities; IMF, International Financial Statistics (IFS), and IMF staff estimates.
growth except for Thailand, where growth of manufacturing production is shown.
2In billions of U.S. dollars, on national accounts basis (calculated as exports [f.o.b.] less imports [c.i.f.]),
except balance of payments basis for the Philippines, Singapore, and Thailand.
3In U.S. dollars, on a national accounts basis, except balance of payments basis for the Philippines,
Singapore, and Thailand.
1GDP
35
Box 2.2. Trade Adjustment in East Asian Crisis Countries

The trade balances of the east Asian crisis countries,
which had generally deteriorated in the years leading up
to the recent financial crisis, are expected to turn around
rapidly this year and next.1 Sharp declines in exchange
rates have improved external competitiveness, while contractions in domestic spending have lowered import demand. How large is the overall adjustment in their trade
balances likely to be, and how quickly will it be felt?
What is the expected composition of the adjustment in
terms of movements in export and import values? This
box looks at these issues from three perspectives: the
staffs projections, the recent merchandise trade data for
these countries, and econometric estimates of trade
adjustment.
The May 1998 World Economic Outlook projected
an improvement in the combined balance on trade in
goods and nonfactor services of the east Asian crisis
countriesIndonesia, Korea, Malaysia, the Philippines,
and Thailand (henceforth referred to as the Asian-5
countries)of some $73 billion between 1996 and
1998. It was projected that over half of this adjustment
would come from higher export values, with a rise of
$43 billion, while imports were forecast to fall by
$30 billion. Since that time, forecasts for domestic demand in these countries have been marked down further,
reinforcing the projected decline in imports. These
changes have more than offset downward revisions to
exports, owing in part to weaker activity in Japan and
elsewhere in Asia. As a result, the overall adjustment in
the Asian-5 trade position has risen to $110 billion in the
current projections, with about $100 billion reflecting
lower imports and $10 billion attributable to higher
exports.
The figure illustrates the recent merchandise trade performance of the Asian-5 region. The first striking feature
is the magnitude and speed of the adjustment in the combined trade position since early 1997: from an annualized deficit of roughly $40 billion (4 percent of Asian-5
GDP in 1997) in the first half of 1997, the balance swung
to a surplus of over $80 billion in the first half of 1998
(equivalent to 12 percent of projected 1998 aggregate
GDP). Even this large shift of $120 billion probably understates the true magnitude of the swing in the external
balance because these data reflect only trade in goods
to the extent that the balance on nonfactor services has
also improved, the adjustment in the overall trade position would be larger.2 The second important feature of
the monthly data is the marked asymmetry in the division of the adjustment between exports and imports. In
particular, merchandise exports (expressed in U.S. dol-
Asian-5 Economies: Trade Developments1

(Billions of U.S. dollars, annualized monthly data)
150
125
Aggregate Merchandise Trade Balance
100
75
50
Trade balance
25
0
25
50
75
100
1994
95
96
125
97
Aug.
98
125
100
Changes in Merchandise Imports and Exports

(twelve-month change)
75
50
25
Exports
0
25
50
75
Imports
100
125
1994
95
96
97
150
Aug.
98
Source: WEFA, Inc.

1The Asian-5 economies are Korea, Indonesia, Malaysia,
the Philippines, and Thailand.
lars) were roughly unchanged in the first half of 1998

relative to their level a year ago, while the import bill
plunged by about $120 billion, or about one-third of the
precrisis level.
To assess the consistency of the trade adjustment indicated by these data with the historical experience of the
Asian-5 region, an equation was estimated explaining the
movements in trade balances (as a ratio to GDP) as a
function of domestic demand relative to foreign activity
and the real effective exchange rate. Panel estimation was
performed using annual data for the five countries over
the 198796 period. The results indicate that, in the short
run, a 1 percent rise in domestic demand relative to foreign activity weakens the trade balance by about #/4 of 1
1The countries included in this group are Indonesia, Korea,

Malaysia, the Philippines, and Thailand.
2Data on trade in nonfactor services are not available on a
timely basis for most of the Asian-5 countries. An exception is
Korea, where data through May indicate an improvement of
about $7 billion (annual rate) in the first five months of 1998
relative to the same period in 1997.
36
States is instructive. Data for the Asian-5 countries (excluding Indonesia) indicate a drop in exports to Japan in
the first quarter of 1998 of about 14 percent relative to
the same period in 1997, versus a rise in exports to the
United States of 16 percent. Over this period, Japanese
domestic demand fell by about 5 percent, while U.S. domestic demand rose by almost 5 percent. In addition, the
yen weakened against the dollar by about 10 percent, reducing the competitiveness gains of Asian-5 exporters in
Japanese markets. Although complete data are not yet
available on the geographic breakdown of Asian-5 trade
or demand growth in partner countries, this comparison
suggests that Asian-5 export revenue in U.S. dollar terms
has continued to grow strongly in markets where domestic demand has been robust and competitiveness gains
large, but that weaker activity and exchange rates elsewhere in Asia have reduced revenue from exports to regional trading partners.
On the import side, the fall in dollar import bills of
about one-third observed through early 1998 can be
attributed partly to the decline in Asian-5 domestic
demand of 20 percent projected for 1998, and partly
to sharp increases in the relative price of imports.
Again, comprehensive price and volume data are not yet
available that would allow a full analysis of import adjustment. But the observed magnitude of the decline
seems consistent with plausible responses to standard
determinants. Assume, for instance, that import prices
measured in dollars have remained unchanged, while
Asian-5 real exchange rates have depreciated by some
40 percent. Then a short-run elasticity of imports with
respect to domestic demand of unity and to relative import prices of !/3 would generate a 34 percent drop in
import volumes over this period, similar to the decline
observed.4
On balance, then, the picture provided by both observed trade data for the first half of 1998 and the econometric estimates suggests that the ultimate adjustment in
the Asian-5 trade position could be even larger than that
embodied in the latest forecast. It also seems possible, at
least in the short run, that more of the adjustment could
come through lower import values, and less through
higher exports. Of course, this situation could well
change over time, since the response of export volumes
to declines in relative prices may well increase over the
longer run and constraints on the availability of trade
credit to exporters ease. The prospects for Asian-5 exports also depend on the course of the Japanese economy,
as well as future developments in the exchange rates of
these countries.
percent of GDP, whereas an 8 percent appreciation of the

real effective exchange rate reduces the balance by about
1 percent of GDP.
The current projections suggest that domestic demand
in the Asian-5 countries will fall by a cumulative 20 percent between 1996 and 1998, compared with an increase
in foreign activity of 5 percent. Based on the estimated
parameters, the difference in domestic versus foreign
growth would improve the trade balance by about 15
percent of GDP in the short run. In addition to this activity effect, the real effective exchange rate of the
Asian-5 countries, on a weighted average basis, has depreciated by almost 40 percent since 1996. On the basis
of historically observed elasticities, this would generate
an additional improvement in the trade position of 5 percent of GDP. Taken together, the activity and exchange
rate effects imply an overall swing in the trade balance
of 20 percent of GDP, or $140150 billionsomewhat
larger than the adjustment indicated by the recent merchandise trade data. This difference would be consistent
with some improvement in the services trade balance,
which is not reflected in the merchandise data. On this
basis, it appears that the dramatic improvement in the
combined Asian-5 external position observed so far in
the incoming trade data is broadly in line with historical
relationships.
Why has the adjustment reflected a sharp decline
in import bills, while export revenues have shown virtually no growth through early 1998? The stagnation
of export revenues appears to reflect two factors: lower
export prices (in U.S. dollars), which have masked
the effect of higher volumes; and weaker domestic
demand in other Asian markets, especially Japan.
Assessing the precise size of the export price decline
is difficult given the lack of timely data on trade
prices and volumes for these countries. The exception is
Korea, where monthly data for early 1998 indicate that
export prices in dollar terms fell by some 1520 percent
as the won depreciated by about 40 percent against the
dollar. Assuming that a decline of this size is characteristic of the experience of the Asian-5 countries as a
group, the stability of export values indicates that volumes have increased substantiallyby well in excess of
the 5 percent rise in partner-country activity during
199798. These calculations suggest that export volumes have indeed responded to exchange rate depreciation, but that the effect on dollar values has been offset
by lower prices.3
As regards the effect of partner-country activity on exports, a comparison of the behavior of growth in U.S.
dollar revenue from exports to Japan and the United
4These elasticities are, of course, subject to considerable uncertainty, as is the assumption that import prices in dollars have
remained constant as Asian-5 exchange rates have depreciated.
To the extent that import prices have in fact declined, the implied drop in import volumes would be smaller, reinforcing the
conclusion that the drop in import values does not seem atypically large.
3Another
perspective on valuation effects is given by expressing export revenue in terms of the local currencies of the
Asian-5 countrieson this basis, export revenue rose by about
65 percent in the first months of 1998 over the equivalent period
in 1997, implying substantial increases relative to GDP for these
countries.
37
question whether the downturn will end in the foreseeable future. As illustrated by experience from earlier financial crises, however, such crises can end and
turn around quite quickly. A possible recovery scenario from the present crisis, embodied in the current
baseline projections, is discussed next.
What Are the Forces That Will Determine
the Recovery Path in East Asia?
A key uncertainty in the baseline scenario concerns
the timing and vigor of the eventual turnaround and recovery in the Asian crisis countries. On current projections, output in each of the crisis countries is expected to bottom out during the first half of 1999, with
some pickup in activity by the end of the year. Little
growth is projected for 1999 as a whole, compared
with 1998, but the pickup in activity in the course of
next year is projected to be followed by a period of
sustained recovery beginning in 2000 (Table 2.7, on
page 45). This scenario, however, is subject to both
upside and downside risks that differ among the affected countries. In Korea and Thailand, financial
market confidence seems to have begun tentatively to
return, and there are reasonable prospects of some
pickup in activity in 1999. In Indonesia, however,
where the economic situation has remained particularly difficult, recovery seems likely to come later than
in the rest of the region.
The current projections are based on the assumption
that stabilization and reform policies being implemented in the crisis countries will put in motion a set
of mutually reinforcing economic forces that will stem
the contraction in activity and pave the way for initial
recovery. Chief among these forces are the impact on
financial market confidence of the turnaround in external balances and progress in the reform process. As
discussed in the preceding subsection, in all the crisis
countries trade and current account balances have already shifted into large surplus. These surpluses will
help countries to reconstitute their depleted foreign exchange reserves and thereby restore the confidence of
investors in the ability of the authorities to meet normal demands for foreign exchange. The restoration of
confidence, in turn, along with the liberalization of
regulations governing foreign ownership of assets in
many of the crisis countries, will promote the recovery
of capital inflows, provide further support for the stabilization of exchange rates, and permit gradual easing
of interest rates. This process has already begunin
fact, it seems quite well advanced in Korea and
Thailandand with continued implementation of appropriate policies it may be expected to continue in the
period ahead. The return of financial market confidence and the cautious easing of interest rates will reinforce the stimulative effects of increased net exports
by providing support for a pickup of private consumption and business investment.
Figure 2.10. Selected East Asian Countries:

Unemployment
(Percent of labor force)
Unemployment rates have increased since the beginning of
the crisis.
8
Korea
4
Hong Kong SAR1
1995
96
97
Jul.
98
Sources: For Korea, WEFA, Inc.; for Hong Kong SAR, Hong
Kong SAR Government Information Center.
1Seasonally adjusted quarterly data.
38
Although these positive forces will eventually bring

an end to the current downturn in activity and provide
some initial stimulus for recovery, other factors may
act as a drag on recovery. Two major issues in this context are the related questions of how quickly and effectively financial sectors are restructured, and the effects
and eventual resolution of the problems associated with
high corporate debt burdens.2 These problems, which
are discussed in more detail in Chapter III, have led to
large-scale insolvency in the financial and corporate
sectors. Moreover, as a consequence of the debt burdens borne by the private sector, creditors have been
reluctant to extend further credit even to viable enterprises, which are suffering from a lack of working capital, trade credit, and export guarantees. This has been
one cause of the sharp contraction in activity in the first
half of this year in these countries.
In the past few months, considerable efforts have
been made to find solutions to financial and corporate
sector balance sheet problems. In Thailand, significant progress has been made in implementing financial sector reforms. A large number of failed financial
institutions have been closed, a strategy is being implemented for the restructuring and return to private
ownership of institutions in which authorities have intervened, and bank regulation and supervision are
being strengthened. There has also been significant
progress in reforming and strengthening the banking
system in the Philippines. In Korea, there has been
significant progress in financial and corporate sector
restructuring: the merchant banking sector has been
rationalized and consolidated; 5 out of 12 undercapitalized commercial banks have been closed, and recapitalization plans for the 7 others are being evaluated; a procedure for voluntary debt workouts
between corporations and banks has been established;
and a number of chaebols have been pursuing restructuring. In Indonesia, a separate agency has been
established to deal with failed financial institutions.
In addition, in Korea a debt-conversion agreement
among international creditors, domestic banks, and
the government, covering part of outstanding bank
debt, has been reached. There has been less progress
in addressing corporate sector debt problems in the
crisis countries, although, in Indonesia, international
creditors and the authorities have agreed on a framework to restructure the countrys private external
debt.3 Given the complexity and size of the indebtedness of the corporate sectors in these countries, it is

Short-Term Interest Rates
(Percent)
Short-term interest rates have risen in many emerging market
economies to support exchange rates.
50
50
Indonesia1
40
30
Hong Kong SAR

Philippines
Taiwan
Province of
China
Thailand
20
10
Korea
10
Malaysia
1996
97
Sep.
98
1996
97
50
Sep.
98
50
Brazil
40
20
30
20
Singapore
30
40
Mexico
Pakistan
India
40
30
South
Africa
20
Chile
10
10
Argentina
China
0
1996
50
97
Sep.
98
1996
97
0
Sep.
98
Russia2
40
30
Poland
Hungary
20
10
Czech Republic
0
1996
97
Sep.
98
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 averaged 70.7 percent.
2 The Russian three-month interbank rate reached 127.8 on August
12, 1998, after which transactions were suspended.
2At the beginning of 1998, the private sectors debt burden ranged
from close to 130 percent of GDP in Indonesia to over 200 percent
of GDP in Korea and Thailand. For details on the debt problem, see
Chapter III.
3Under this (Frankfurt) agreement, interbank debt will be
rescheduled; trade credits will be rolled over and maintained at an
agreed level; and a debt-restructuring agency (INDRA) will be established to facilitate the repayment of all corporate debt, which has
been restructured on specified terms.
39
Box 2.3. The Role of Monetary Policy in Responding to Currency Crises

This is not to say that monetary tightening as a response to currency pressure does not have drawbacks or
limitations, apart from its negative impact on domestic
activity. Tight monetary policies increase the debt burden of domestic currency borrowers, which may put
downward pressure on the exchange rate when investors
perceive greater credit risks and thus put a higher risk
premium on the currency itself.2 In this regard, the adverse effects of tighter monetary policy will be greater in
economies with relatively large domestic debt burdens
or when, because of credibility problems, high interest
rates have to be maintained for a prolonged period.3 In
addition, interest rate increases are unlikely to be sufficient to provide lasting support for the exchange rate
when there are perceived to be substantial inconsistencies between the exchange rate and economic fundamentals, or when economic circumstances are such that
the higher interest rates are not considered sustainable
for any length of time. It should also be noted that high
interest rate policies have distributional implications,
since they will lead to redistribution from domestic
debtors to domestic creditors for debts denominated in
domestic currency, while lessening income losses for
(mainly corporate) agents with net liabilities in foreign
currency. But despite these caveats, in a currency crisis,
when the first priority must be to secure macroeconomic
stability and prevent a pervasive loss of confidence, a
monetary stance that demonstrates the authorities determination to maintain monetary discipline cannot be
avoided, and it is usually the least costly in terms of forgone output.
In the course of the Asian crisis, a number of emerging

market economies have experienced severe currency
pressures. In several instancesmost notably, of course,
in Asia itselfthis has led to the abandonment of currency pegs and to large depreciations well beyond what
could reasonably have been expected prior to the turbulence (see figure). But in other cases, authorities have
successfully maintained exchange rate pegs (for example,
in Argentina and Hong Kong SAR) or other arrangements
with limited flexibility (for example, Brazil), or contained depreciation under more flexible arrangements
(for example, Mexico), or reestablished exchange rate
stability fairly quickly after an initial depreciation (for
example, the Czech Republic).
Pros and Cons of Monetary Tightening
The pressure that arose in each case depended on the
perceived sustainability of the exchange rate, the closeness of the economys links with the crisis economies,
and the health of the financial system, as well as on the
credibility accumulated by the authorities as a result of
the past conduct of policy. But a major element determining the outcome in each case was the response of the
authorities to the pressure that arose.1 Currencies were
stabilized when monetary policy was tightened with
ample force and persistence and when broader measures
were implemented where necessary to address underlying macroeconomic imbalances and structural weaknesses. Currency stabilization and a return of market confidence in turn provided room for a gradual lowering of
interest rates, helping to mitigate and reverse the adverse
effects on economic activity of the initial tightening. But
when monetary policy was not tightened forcefully, in
some cases because vulnerability of the financial system
formed an obstacle, instability persisted.
Monetary policy tightening is generally necessary to
defend a currency that is under severe pressure. Higher
interest rates raise the nominal return to investors from
assets denominated in the currency and make speculation
more expensive by increasing the cost of shorting the currency. Tighter monetary policy will tend to support the
exchange rate also by reducing expectations of future inflation and therefore of future currency depreciation, and
by lowering domestic demand and improving the current
account. A forceful response to currency pressure also reduces default risk for domestic residents who have borrowed in foreign currency.
Policy Under Pressure

Among the emerging market economies that in the fall
of 1997 were successful in supporting exchange rate pegs
through interest rate increases along with other macroeconomic and financial adjustments, Argentina, under its
currency board arrangement, let market-driven interest
rate increases absorb the pressure that spilled over from
Asia. But such spillovers were limited, and overnight
2See, for example, Steven Radelet and Jeffrey Sachs, The

East Asian Financial Crisis: Diagnosis, Remedies, Prospects
(Cambridge, Massachusetts: Harvard Institute for International
Development Working Paper, April 1998).
3Among the east Asian countries, Korea and Malaysia were
on this account more susceptible, prima facie, to tighter monetary policy because most of the debt in these countries was
owed to domestic creditors prior to the crises, while Indonesia
and Thailand seemed more susceptible to the risk of excessive
currency depreciation. Korea, however, was also vulnerable to a
currency depreciation because a relatively large portion of its
foreign debt was short-term.
1See Box 5, Policy Responses to Exchange Market Crises,

in the December 1997 World Economic Outlook: Interim
Assessment, pp. 4243, for a discussion of policy responses to
exchange market crises prior to 1997 and initial policy responses to the east Asian financial crises.
unlikely that comprehensive solutions can be quickly

decided and implemented. In the near term, the more
pressing need is to put in place mechanisms that will,
on the one hand, assure creditors that their interests
associated with existing claims will be safeguarded

while a solution to the problems is being worked out
and, on the other hand, will enable viable enterprises
to carry out productive activities.
40
Selected Economies: Currency Market and Monetary Indicators

Exchange rate1 (left scale; December 1996 = 100)
110 Argentina
100
90
80
70
60
50
40
30
20
10
1997
Brazil
40
20
0
Sep.
98
1997
Sep.
98
1997
Korea
20
Sep.
98
80
Malaysia
60
40
20
0
20
Sep.
98
110 Philippines
100
90
80
70
60
50
40
30
20
10
1997
80
Czech Republic
60
110 Indonesia
100
90
80
70
60
50
40
30
20
10
1997
Short-term interest rate2 (right scale; percent)
1997
Sep.
98
1997
Russia
Sep.
98
80
Thailand
60
40
20
0
20
Sep.
98
1997
Sep.
98
1997
Sep.
98
Source: Bloomberg Financial Markets, LP.

1In U.S. dollars per national currency; for Czech Republic, a basket of currencies (sum of 0.65 times deutsche mark exchange rate
and 0.35 times U.S. dollar exchange rate) per national currency. The Czech koruna was pegged to this basket until May 1997.
2 Monthly average of daily overnight interbank rates.
As discussed in the May 1998 World Economic

Outlook, historical experience suggests that the duration and speed of recovery from financial crises vary
considerably from case to case, often depending on
how effectively financial sector problems and corporate sector difficultieswhich are often an integral
part of the financial sector weaknesses contributing
to crisesare dealt with. In the current crisis, too,
41
Box 2.3 (concluded)

on the baht in early 1997 by intervening in the spot and
forward markets, but overnight interest rates generally
remained below 10 percent until May. As the crisis intensified in the second half of May and in June, interest
rates were allowed to rise; overnight rates peaked at
around 30 percent at the beginning of July, when the peg
to the U.S. dollar was abandoned. In both Malaysia and
the Philippines in that same period, the authorities only
briefly defended the values of their currencies relative to
the U.S. dollar through interest rate hikes and intervention and subsequently allowed their currencies to depreciate substantially. A more forceful but delayed interest
rate response in Indonesia in the second half of July and
the first half of August 1997 drove up overnight interest
rates to close to 100 percent, but this proved insufficient
to stem the pressure, and the rupiah was allowed to float
independently on August 14. When downward pressure
on the Korean won intensified starting in the last week
of October 1997, the authorities first responded by intervening heavily. They raised interest rates and floated the
won only in December, when a currency crisis was already well under way.
Given the structural problems, such as corporate
overindebtedness, present in the east Asian countries, a
more rapid and forceful monetary policy response alone
would not, of course, have been sufficient to stem the
pressure on their currencies. The unresolved structural
problems thus not only contributed to the pressure but
made an interest rate defense less credible and more
costly. A combination of structural measures and tight
monetary policies, together with appropriate fiscal policies, was needed. In cases where there were grounds for
considering currencies to be overvalued and exchange
rate adjustment to be called for, monetary policy tightening would have needed to have been accompanied by
timely exchange rate action.4
The importance of adequately addressing fundamental
imbalances is underscored by Russias experience.5 It succeeded in defending the ruble and maintaining its currency band arrangement during successive periods of
market turbulence in late 1997 and the first half of 1998,
interest rates peaked at around 13 percent in early

November before falling back by early 1998.
Subsequently, in the aftermath of recent events in Russia
and spillovers to Latin America, interest rates increased
to over 10 percent by early September. Similarly, in Hong
Kong SAR, short-term rates have on a number of occasions in the past year risen into the middle teens as they
have absorbed pressure on the Hong Kong dollar, and
they briefly touched higher levels in late 1997. As the
currency market came under renewed speculative attack
in August 1998, however, the Hong Kong authorities responded by intervening in the currency and stock markets, amid concerns about the state of the domestic economy, and subsequently announced measures to
discourage speculative trading, boost liquidity, and lower
interest rates. Among countries having arrangements with
limited flexibility, Brazil tightened monetary conditions
forcefullywith official rates rising from around 20 percent to more than 43 percent in late October 1997as
part of the measures taken to maintain the real within the
official currency band. When exchange rate pressures
again arose in August, the authorities initially responded
with intervention in the currency market and only raised
interest rates from around 20 to 50 percent after some
delay in early September when international reserves
were being expended at an unsustainable pace. In part,
the delayed response on monetary policy may be attributable to concerns about a sluggish domestic economy,
political uncertainties related to an upcoming general
election, and a large stock of mostly domestically held
short-term public debt, which had been increasingly
indexed to overnight interest rates or the U.S. dollar during 1998.
The experience of these countries also illustrates that,
for an interest rate defense to be successful, policies addressing macroeconomic imbalances or structural weaknesses need to be in place. Argentina, for example, had
significantly strengthened its financial system following
the 1995 banking crisis, established a track record in defending its currency during the tequila crisis of
199495, and has tightened its fiscal stance further since
late 1997 and again in August 1998, while Brazil announced several packages of fiscal measures to accompany the interest rate hikes, including to in part offset
some of the fiscal costs of those hikes.
The east Asian crisis countries, in contrast, did not
raise interest rates promptly and significantly, or engineer appropriate and orderly exchange rate adjustments,
when exchange rate pressures emerged in the course of
1997. As a result, they were forced to abandon their
pegged or relatively inflexible exchange rate arrangements as international reserves were depleted. In
Thailand, the authorities responded to periodic pressures
4In contrast with the Thai experience, the Czech Republic,

when faced with increasing pressure in May 1997, raised interest rates and abandoned its fixed peg well before international
reserves were depleted.
5During the first bout of turbulence, in the fall of 1997, the
initial interest rate response also proved insufficient. Reluctant
to raise interest rates further, the Central Bank of Russia in the
course of November allowed international reserves to fall from
around $23 billion to less than $17 billion, while offsetting the
liquidity impact by letting net domestic assets (NDA) expand.
Only at the beginning of December was more decisive interest
rate action taken, and the expansion in NDA halted.
how deftly the financial and corporate sector problems are managed will be importantnot only for
the strength of the initial pickup in activity, but also
or the prospects for sustained recovery. To a large
extent this will determine whether the east Asian

countries are in store for a protracted period of
slow growth, as in Japan since the early 1990s, a
U-shaped recovery, as in the case of Chile in the early
42
In contrast, domestic credit growth was sharply curtailed

in the other countries facing exchange market pressures
during the same period, as well as in other countries in
previous crises (see Chapter II). Because of a lack of sustained commitment to higher interest rates and delays in
the adoption of structural measures, not only could currencies not be stabilized for several months after they
were floated, but also the subsequent hike in interest rates
lacked credibility because of the earlier hesitation and the
deterioration in macroeconomic and financial conditions
in the meantime. Nevertheless, in Thailand, tighter monetary policies in the last quarter of 1997, along with other
policy adjustments, finally began to stabilize the currency
by early 1998. In Korea, by January 1998, the overnight
interest rate had been raised to around 30 percent, and
these high rates together with other factorsincluding
debt restructuring, mobilization of additional financial
support, and structural measuresmanaged to halt the
decline of the currency. The exchange rate has also stabilized in Indonesia since June 1998.
but did not manage to restore investor confidence while

fiscal problems remained unresolved. As a result, interest
rates had to be kept substantially above pre-October 1997
levels, exacerbating the fiscal problems given the large
amount of short-term government debt being rolled over,
and international reserves were gradually depleted. By
early July 1998, international reserves had fallen to $13.5
billion, down from $24.5 billion in mid-1997, and the authorities were forced to seek additional financial assistance from the IMF and other official sources for continued defense of the currency band. When pressure on the
exchange rate resumed in early August, as confidence in
the implementation of measures to address the fiscal problems weakened, monetary authorities were not any longer
willing to tighten monetary policy. The Central Bank of
Russia kept the refinance rate, which in late July had been
lowered from 80 percent to 60 percent, unchanged and extended large amounts of liquidity support to banks in an
attempt to sterilize the effects of its foreign exchange market interventions. Within weeks, the exchange rate band
vis--vis the U.S. dollar had to be abandoned.
With independently floating exchange rates, interest
rate policies still have an important role in preventing
self-reinforcing cycles of depreciation and losses of confidence, and periods of relatively high interest rates may
be needed to stabilize a floating exchange rate when confidence is lacking. For instance, in the Czech Republic,
when in late May 1997 the monetary authorities abandoned the currency peg against the deutsche markU.S.
dollar basket and switched to a float, the exchange rate
against the dollar fell by some 10 percent relative to the
previous parity. Interest rates were initially kept high following the float and as market pressures abated in the
following weeks they were then gradually lowered, with
the two-week repo rate being brought down from a peak
of 75 percent at the end of May to under 20 percent at the
end of June. In addition, the authorities introduced measures to reduce the fiscal deficit, restrain wage growth,
and strengthen the structural reform program. This combination of policies prevented the currency from depreciating further: its value in terms of the deutsche mark
was broadly unchanged in the remainder of 1997, and by
July 1998 had returned to levels prevailing before the
May 1997 crisis. Following the financial turmoil in
Russia in August, the currency weakened somewhat, alleviating concerns about the appreciation in previous
months.
In the east Asian crisis countries, by contrast, in the period immediately following the switch to independent
floating, the monetary authorities allowed interest rates to
fall back quickly, and confidence and stability were not
regained. It is also noteworthy that in these countries domestic credit growth remained strong throughout 1997.
Breathing Room
Once currencies have stabilized and confidence returns, authorities have room to begin lowering interest
rates again, thereby limiting the negative output effects of
the initial tightening. This changing stance of monetary
policy following stabilization is illustrated by the recent
experience of the east Asian crisis countries and some
other emerging markets. Argentina and Brazil, for example, which in the wake of the Asian crisis were successful in defending their currency arrangements, and the
Czech Republic, which avoided an excessive depreciation when it abandoned its peg, were in a position to
bring down interest rates again relatively quickly. In
Argentina, the increased level of overnight interest rates
during late 1997 was maintained for less than a month,
while in Brazil, following sizable capital inflows in the
first quarter of 1998, the official rate was by mid-April
brought down close to levels observed in early October
1997. In the Czech Republic, the benchmark two-week
repo rate had been reduced to around 200 basis points
above its precrisis lows within two months after the introduction of the float. Similarly, in Korea and Thailand,
where sustained monetary policy tightening managed to
restore confidence in early 1998, interest rates fell significantly in the second quarter, and by the end of July
overnight interest rates in Korea and Thailand had returned to levels observed at the beginning of 1997, despite ongoing turbulence in other emerging markets. At
the same time, with greater confidence, part of the sharp
depreciation of the initial crisis months was corrected, as
the Korean won and the Thai baht recovered by about 20
percent during the first eight months of 1998.
1980s, or a sharp rebound, as in Mexico in the mid1990s.

In addition to the domestic conditions for recovery
discussed above, economic prospects for the crisis
countries are interdependent, given the importance of

intraregional economic relations: on this account, recoveries will tend to be mutually reinforcing for the
same reasons that the downturns have been mutually
43
Figure 2.12. Mexico and Selected Asian Economies: Real Private Sector Credit Growth During Crisis Periods1
Real private sector credit growth has turned negative in the Asian crisis countries, but not by as much as in Mexico in 1995.
60 Mexico
Indonesia
60
Korea
40
40
20
20
20
20
40
40
60
60
1994
60
1995
1996
Malaysia
97
Jun.
98
Philippines
1996
97
Jun.
98
60
Thailand
40
40
20
20
20
20
40
40
60
60
1996
60
97
Jun.
98
Hong Kong SAR
1996
97
Jun.
98
Singapore
1996
97
Jun.
98
60
Taiwan Province
of China
40
40
20
20
20
20
40
40
60
60
1996
97
Jun.
98
1996
97
Jun.
98
1996
97
Jun.
98
Source: IMF, International Financial Statistics.

1Shaded areas indicate the postcrisis periodthat is, from July 1997, except after December 1994 for Mexico. Three-month annualized percent
change of nominal private sector credit deflated by consumer price index during January 1994 to December 1995 for Mexico and January 1996 onward for the selected Asian economies.
44
Table 2.7. Baseline Recovery Path of the Asian Crisis Countries1

(Annual averages; in percent of GDP unless otherwise noted)
Growth2
Contributions to growth
Foreign balance
Domestic demand
Public consumption
Private consumption
Gross investment
Central government fiscal balance
1996
1997
1998
1999
2000
20012003
7.2
4.1
8.7
0.6
3.0
5.3
0.3
7.5
0.6
4.3
2.7
3.0
1.1
0.2
2.4
1.5
6.8
15.5
0.9
4.1
12.3
0.5
1.1
1.1
0.1
2.4
1.0
4.0
0.4
1.6
2.8
0.5
5.7
0.2
2.8
2.7
1.0
4.9
3.9
2.2
0.3
Current account balance
4.9
2.2
6.4
4.3
2.6
0.7
Net private capital flows
6.8
1.6
18.5
0.9
1.8
2.9
Consumer prices (median)2
5.4
5.0
9.1
6.4
4.2
3.7
1Comprises
2Annual
Indonesia, Korea, Malaysia, and Thailand. IMF staff estimates from 1998 through 2003.
percent change.
damaging. Economic prospects for the crisis countries

will also depend critically on the external environment.
Particularly important, in this regard, are the health of
the Japanese economy, exchange rate developments
among the major currencies and within the region, success in resolving the financial sector problems that afflict much of the region, and conditions in international
capital markets, as discussed in Chapter I.
sponded by intervening in the stock market. Whether

this intervention bolstered confidence in equity values
is unclear; it may have been counterproductive by suggesting a reduced commitment to the rules of the currency board. The intervention was halted by endAugust, and new measures were adopted to discourage
speculation in the futures market. In early September,
to strengthen the currency board arrangement, the discount window facility was modified to buffer the effects of temporary market pressures on interest rates.
Projected growth in China in 1998 has been revised
down to 5!/2 percent, partly owing to recent widespread flooding, with the weakening expansion having
already contributed to rising unemployment. Industrial
production growth has remained well below last years
pace, imports have weakened further, and deflationary
pressures appear to have intensified. Public investment in the first seven months of this year was
15!/2 percent higher than a year earlier, as the government stepped up efforts to boost demand, but it is unclear that planned fiscal measures alone will be successful in reversing the slowdown. Despite slowing
growth elsewhere in Asia, Chinas external position
remains strong: its current account is projected to remain in surplus, and its foreign exchange reserves are
large. Together with its relatively closed capital account, these factors have helped China to maintain its
exchange rate vis--vis the U.S. dollar. However, there
is some uncertainty surrounding the overall external
position in view of recent increases in recorded and
unrecorded outflows. There is also a considerable
overhang of unused commercial property in major
cities, exerting downward pressure on property prices,
with adverse implications for the financial sector.
Equity prices have remained under downward pressure, and yield spreads on Chinese bonds have increased. Furthermore, although there has been some
progress in tackling the problems of inefficient stateowned enterprises, they continue to be a significant
How Have Other Emerging Market Economies

in Asia Been Affected?
Among the countries in Asia that have felt the crosscurrents from the crisis, growth projections have been
revised the most for Hong Kong SAR. The economy is
now projected to contract by 5 percent this year, compared with growth of 3 percent projected earlier, and
to show no growth in 1999. Real GDP in the second
quarter was 5 percent lower than a year earlier, with
both investment and consumer spending depressed.
Unemployment rose to 5 percent on average in June
August, its highest level in 15 years. Equity and real
estate prices have declined sharply. The recession in
Hong Kong SAR reflects the openness of the economy
and the tightening of monetary conditions that has
been needed to maintain the peg to the U.S. dollar
under the currency board arrangement, in the face of
the deterioration in competitiveness stemming from
the general appreciation of the U.S. dollar and the declines of other currencies in the region, and several intensive speculative attacks. In response to the weakening of activity, the authorities in late June announced a
number of measures to stem the decline in property
prices and stimulate the economy, including a suspension of government land sales. The estimated fiscal
cost of these measures is 2!/4 percent of GDP.
However, pressures resumed in July and August, with
interbank interest rate rising and stock prices falling
sharply. The Hong Kong Monetary Authority re-
45
Box 2.4. The Asian Crisis: Social Costs and Mitigating Policies1
The impact of the Asian crisis on poverty and human
welfare is of considerable concern. In the three countries
that have suffered the most acute crises and that are implementing programs supported by the IMFIndonesia,
Korea, and Thailandpoverty is likely to increase
markedly. In Indonesia especially, the extent and depth of
the social crisis is likely to be substantial. The programs
being implemented incorporate many social protection
measures aimed at mitigating the fallout of the crisis on
the vulnerable as well as the short-term adverse effects of
adjustment and reform.
Various factors are adversely affecting real household
incomes in the three countriesincluding currency depreciation, higher interest rates, financial sector collapse,
corporate bankruptcies, job losses, and supply bottlenecks, including national calamities. Although most
households will be hurt by these developments, some
could gainfor example, if they are engaged in the export sector or are net holders of foreign assets.2
The negative effects of the economic crisis and adjustment on living standards of low-income households will
occur mostly through price increases and the associated
cut in real consumption, and the loss of job opportunities.3 Of the three countries concerned, Indonesia is confronted with the largest reduction in real GDP, and the
highest inflation and unemployment in 1998 (see first
table).
The short-term effect of the economic crisis on the
poor and vulnerable can be estimated by using data on
household expenditures by income group, together with
projected changes in real GDP and unemployment. This
calculation only accounts for the direct, first-round
Real GDP, Unemployment, and Inflation

in Indonesia, Korea, and Thailand
(Annual average)
Country
1996
1997
Forecast
1998
Real GDP
(percent change)
Indonesia
Korea
Thailand
8.0
7.1
5.5
4.6
5.5
0.4
15.0
7.0
8.0
Unemployment
(percent of labor force)
Indonesia
Korea
Thailand
4.9
2.0
2.0
5.4
2.7
4.0
15.0
7.0
6.0
Consumer price inflation

(percent change)
Indonesia
Korea
Thailand
7.9
4.9
5.9
6.6
4.4
5.6
60.0
8.5
9.0
Food price inflation1
Indonesia
Thailand
9.5
8.9
8.8
7.0
76.2
11.1
Sources: National employment statistics, International Labor

Organization, and IMF staff estimates.
1For 1998, price increases are averages for the first eight
months.
impact of the crisis and neglects effects operating

through channels other than real household income and
job losses. For instance, the loss of purchasing power
could be offset or reinforced by changes in saving behavior, informal safety nets (relatively important in
Indonesia and Thailand), and safety nets provided by
firms (important in Korea). In previous economic downturns in Korea (1980), Indonesia (1983), and Thailand
(1984), changes in household saving behavior and informal safety nets absorbed a significant part of the downward pressure on consumption. However, there is evidence that households in Korea have raised their saving
rates in the current crisis. The results of the analysis are
therefore preliminary and should be interpreted with
caution.
The impact of the decline in real GDP on poverty will
depend on its effect on real household income. This can be
estimated using the elasticity of the proportion of the population below the poverty line with respect to real mean
consumption expenditures. The elasticity has been calculated at about 2.8 for Indonesia and 1.9 for Thailand
1Based on Sanjeev Gupta, C. McDonald, C. Schiller, M.

Verhoeven, Z. Bogetic, and G. Schwartz, Mitigating the Social
Costs of the Economic Crisis and the Reform Programs in
Asia, Paper on Policy Analysis and Assessment 98/7 (Washington: IMF, 1998).
2Twenty-five percent of households in Thailand are net agricultural producers and are likely to see an increase in their net
earnings as a result of an increase in food prices.
3Ke-young Chu and Sanjeev Gupta, eds., Social Safety Nets:
Issues and Recent Experiences (Washington: IMF, 1998), discuss the methodology used here for assessing the impact of
macroeconomic developments on poverty.
Singapore output is expected to be flat. In both

economies, strong macroeconomic and financial sector fundamentals have served to minimize adverse financial market reactions to developments in neighboring countries.
Since mid-1997, equity markets in Asia have fallen
significantly relative to emerging markets in other regions (Figure 2.13). Not all of the decline in Asia,
however, is attributable to the crises in southeast and
east Asia. Thus, in India and Pakistan, following nu-
burden on the budget and the banking system, which

is saddled with a significant proportion of nonperforming loans as a result of directed lending. The large
accumulation of inventories by the industrial sector is
also likely, sooner or later, to be a drag on growth.
Spillovers from within the region have also affected
Taiwan Province of China and Singapore, with growth
slowing in both economies, especially Singapore. In
Taiwan Province of China growth in 1998 is projected
to remain positive on a calendar-year basis, while in
46
during the period 198595.4 For Korea, the elasticity is

assumed to be 1.5. Using these elasticities and the real
GDP projections for 1998, and assuming that real household consumption falls at the same rate as real GDP, a
rough estimate of the increase in poverty attributable to
the fall in real incomes can be calculated. In Indonesia, the
number of poor would increase by 9.2 million persons (5
percent of the population), in Korea 0.7 million persons (2
percent of the population), and in Thailand 1.3 million
persons (2 percent of the population) (see second table).
These estimates assume that income distributions in these
countries remain unchanged, and that the elasticities
representing past conditionsare not affected.
The impact on real consumption could be reinforced
by large price increases for particular commodities.
These specific price increases affect households differently, depending on the shares of the goods concerned in
households consumption baskets. In Indonesia and
Thailand, food makes up a relatively large share of the
poors consumption basket; for the average poor household, food accounts for 71 percent of household expenditure in Indonesia (with rice accounting for 20 percent)
and about 55 percent in Thailand. Thus, the impact on
poverty of the significant price increases for food would
be relatively large in these two countries for the existing
poor and those clustered just above the poverty line. In

Indonesia, the latter group accounted for about 30 percent
of the population before the crisis.
Job losses in the formal sector would push skilled
workers into jobs in agriculture and the informal sector in
Indonesia and Thailand, while they would mostly affect
the middle class in Korea. Households in the top and bottom quintiles would not be affected by job losses as much
as other income groups. Assuming that one person per
household is affected by unemployment, an increase in
unemployment in Indonesia of 9 million workers (equivalent to an increase in the unemployment rate by 10 percentage points) since before the crisis would affect 21
percent of all households. The projected unemployment
increase in Korea and Thailand of 1.2 million workers (a
5.5 percentage point increase in the unemployment rate)
and 1.4 million workers (a 4 percentage point increase in
the unemployment rate), respectively, would affect 10
percent of Korean households and 9 percent of Thai
households. The household size varies from an average
of 3.7 persons in Korea to 4.5 persons in Indonesia. Both
the projections of the number of unemployed and of the
affected households should be treated with caution, given
the lack of a robust relationship between output and unemployment in these countries.
The impact of rising unemployment will affect some
households more than others and thus could alter the income distribution. Its effect on poverty will depend on
the extent of the associated decline in household incomes; not all households affected by job losses will fall
below the poverty line. For instance, in Indonesia, the
average consumption of households affected by unemployment would decline by about 30 percent if these
households were initially clustered in the middle of the
household consumption distribution, and they would
slide down one decile in the distribution after unemployment. The reduction in consumption of affected
households in Korea and Thailand would be expected to
be half as much under similar assumptions.5 The situa-
4This elasticity equals the slope of the Lorenz curve, which

here represents the consumption distribution function, at the
poverty line. Lorenz curves have been estimated for Indonesia
and Thailand from their respective household consumption
distributions.
5The impact of rising unemployment on poverty is less in

Indonesia than in the other two countries because households
affected by job losses are relatively further away from the
poverty line and can absorb a larger decrease in consumption
before becoming poor.
Poverty in Indonesia, Korea, and Thailand

(Percent of population)
Poor before the crisis

Additional poor due to
real income decline
Additional poor due to
unemployment
Total additional poor
Indonesia
Korea
Thailand
11.3
15.7
15.1
4.8
1.6
2.3
0 to 6.4
4.8 to 11.2
0 to 10.5
1.6 to 12.1
0 to 9.3
2.3 to 11.6
Source: IMF staff estimates.
June, which, apart from increasing protection of the

manufacturing sector, implied a continued loose fiscal
stance. In reaction to the continued downward pressure on the Indian rupee, the central bank tightened
monetary policy in late August. However, with the
fiscal position remaining weak, there is a need for
stronger measures, including reforms to strengthen
the financial sector.
In Vietnam, the regional crisis came at a time when
domestic structural problems were already pointing
clear tests in May and June, exchange and equity markets reacted sharply to sanctions imposed by the
United States and other countries, and to the prospect
of cuts in bilateral and multilateral financial assistance. While the sanctions will have a larger impact
on Pakistan owing to its greater dependence on official financing, they could also have an effect on the
flow of private funds to India. Weakness in Indias exchange rate and equity markets intensified after the
announcement of the governments budget in early
47
Box 2.4 (concluded)

ket flexibility in mitigating adverse social effects. As in
Mexico, it is likely that urban informal activities and migration from urban to rural areas will absorb some of the
unemployed in Indonesia and Thailand.
The IMF-supported programs in Indonesia, Korea,
and Thailand include many measures to strengthen social protection, and in particular to shelter the poor from
the adverse effects of the economic crisis. The challenge
has been to establish cost-effective and fiscally sustainable safety nets that do not create large labor market
disincentives or discourage job creation. In Indonesia,
subsidies on food, fuel, electricity, medicine, and other
essential items have been increased to around 6 percent
of GDP from about !/2 of 1 percent of GDP in 1997, although the benefit of fuel subsidies accrues mostly to
better-off population groups. In addition, employmentgenerating public works programs directed toward poor
households, social programs targeted to children in poor
regions, and credit programs targeted to rural areas
and small and medium-sized enterprises, among other
groups, have been expanded. In Korea, unemployment
insurance coverage will be extended, in several stages,
to workers in small firms, as well as part-time and
temporary workers (daily workers will not be covered).8
Also in Korea, the allocations for social assistance and
special loan programs for the unemployed have been
increased, a temporary program of noncontributory
income support for the unemployed has been introduced,
and public works programs are being expanded significantly. The cost of these programs will exceed 2 percent of GDP in 1998. In Thailand, temporary labor-intensive civil works programs in construction and
infrastructure rehabilitation and job training programs
have been introduced, social spending has been strengthened, and government subsidies for urban bus and rail
fares have been maintained. The budgetary cost of these
programs will amount to around 6 percent of GDP in
1998.
If the crisis deepens, it will clearly be necessary to expand social protection measures further.
tion would be made worse in Indonesia if new labor market entrants, numbering about 2.5 million annually, do
not find jobs.
The effects of increasing unemployment on poverty
can be calculated for all three countries by using their respective consumption distribution data and the above assumptions about the number of middle-class households
affected. In Indonesia the number of poor would increase
by up to 12.3 million persons (6 percent of the population), by up to 4.7 million persons in Korea (10 percent
of the population), and by up to 5.4 million persons in
Thailand (9 percent of the population).
If the effects of the real income decline and unemployment on poverty are combined, the number of poor in
Indonesia would increase by between 9.2 million persons
and 21.5 million persons (511 percent of the population), in Korea by between 0.7 million persons and 5.4
million persons (212 percent of the population), and in
Thailand by between 1.5 million persons and 6.7 million
persons (312 percent of the population).6
The poverty estimates presented here are based on the
assumption that the poverty line is not redefined in light
of the large changes in real consumption levels. Such adjustments of the poverty line could take place, however,
especially in Korea where the poverty line reflects social
attitudes to minimum living standards. In Indonesia, in
contrast, the scope for adjusting the poverty line is limited, because its level is already quite low.7
In all three countries, arrangements for social protection were already in place before the crisis. However, the
coverage of these arrangements is limited. For instance,
only Korea has a formal system of unemployment benefits. The experience of Mexico in dealing with the crisis
in 1994 and 1995 illustrates the importance of labor mar-
6A range of estimates is presented as there is bound to be an

overlap between households affected by the across-the-board
reduction in real income and those who become unemployed.
However, the overlap is likely to be small because households
affected by unemployment are assumed to be relatively distant
from the poverty line, and therefore, they are not among the
households who become poor as a consequence of the acrossthe-board real income decline.
7Before the crisis, the monthly per capita poverty line was
about $10 in Indonesia, $227 in Korea, and $28 in Thailand.
8This extension in the coverage of the unemployment insurance scheme would raise eligibility to over 50 percent of the
labor force (from 30 percent at present).
to a slowing of economic growth in 1998. Reduced

foreign direct investment from Asia, and eroding
export competitiveness reflecting limited exchange
rate flexibility, as well as emerging signs of stress in
the banking system, have increased the vulnerability
of the economy. In response, the authorities devalued
the currency by 10 percent against the dollar in early
August and have also begun cautiously to implement
reforms in the banking sector and state-owned
enterprises.
The Russian Crisis

In August 1998, Russia replaced Asia as the center
of the financial crisis afflicting emerging markets. It
had been subject to recurrent financial market pressures since the intensification of the Asian crisis in
October 1997. These pressures reflected, in addition to
financial contagion from Asia and the adverse implications of the decline in oil prices for Russias external balance, persistently large fiscal imbalances, heavy
48
reliance on short-term foreign inflows, and delays in

structural reform. The authorities responded through
combinations of foreign exchange market intervention, interest rate hikes, and a widening of intervention
bands. While these policies were successful in maintaining broad exchange rate stability, interest rates
were left for long periods at extremely high levels that
limited confidence in the sustainability of the response. Sharp declines in stock market values ensued.
Following some easing of pressures in the spring, financial markets came under renewed intense pressures
in mid-May. This new episode culminated in the fullscale crisis in August.
Figure 2.13. Developing Countries: Equity Prices

(U.S. dollar terms; logarithmic scale; January 1990 = 100)
Equity prices in Asia have fallen sharply relative to other
emerging markets.
Unfolding of the August Crisis
600
The new wave of financial pressure in May 1998

was sparked by contagion from the worsening of the
Asian crisis discussed above, but the placement of a
major commercial bank under central bank administration and miners strikes over wage arrears were also
contributory factors. More fundamentally, the pressure
reflected growing perceptions among market participants that Russias fiscal position was unsustainable,
and doubts about the implementation of required policies. In response, the central bank, in addition to intervening in the foreign exchange market, raised official
interest rates in three steps, briefly to as high as 150
percent at the end of May. At the same time, the government announced revisions to the 1998 budget, including a cut in primary expenditures by 20 percent,
and a number of initiatives to boost revenues. These
policy actions and announcements temporarily eased
tensions and allowed a partial reversal of the official
interest rate hikes in early June.
In an acknowledgment that the actions taken in May
and early June were insufficient to fully restore calm to
financial markets, the authorities in late June adopted a
more ambitious, three-pronged approach. First, the government unveiled a wide-ranging anti-crisis program,
aimed at boosting tax revenues, cutting expenditures,
and speeding up structural reforms. At the same time,
the authorities intensified their campaign to strengthen
tax collection, particularly from major companies in the
energy sector, including by seizing assets. Finally, the
government requested substantial additional official financial assistance to replenish international reserves
and overcome liquidity problems stemming from the
need to redeem short-term ruble-denominated debt held
by foreign investors. However, market confidence did
not return, and the central bank was forced to raise official interest rates again at the end of June.
To address the continuing difficulties, the authorities in mid-July introduced an additional policy package, in the context of an agreement with the IMF on an
augmented Extended Fund Facility (EFF) arrangement. The package extended and strengthened the lateJune anticrisis program and had three main elements:
500
Latin America
400
300
(IFC composite)
200
140
Asia
100
80
60
Middle East, Europe,
and Africa
1990
91
92
93
94
95
96
97
Aug.
98
40
Source: International Finance Corporation, Emerging Markets Database.
49
Box 2.5. Fiscal Balances in the Asian Crisis Countries: Effects of Changes
action to maintain the status quo. This problem is particularly acute in the area of expenditure policy. An improvement in the fiscal balance that results from, say, a
decline in the wage bill relative to GDP in the wake of a
crisis-induced inflation could be regarded as a deliberate,
contractionary policy to reduce the real wages of civil
servants by denying them a cost of living adjustment.
Alternatively, it could be labeled as policy inaction, on
the grounds that nominal wages remain unchanged. The
associated improvement in the fiscal position in the latter
case would be attributed wholly to the changed economic
environment. Similarly, a large increase in expenditure
on subsidies that arises from a failure fully to adjust local
prices of imported goods that are subject to price controls
may be viewed either as a result of the changed economic
environment (specifically, the depreciation of the exchange rate) or as a result of an explicit policy decision to
expand social spending. Where possible, the calculations
in this box use information about the authorities intentions to distinguish the results of policy decisions from
the results of changes in the economic environment. For
subsidies, however, increases in expenditure have been
ascribed to changes in the economic environment.2 All of
the analysis is based on program data or IMF staff projections available in mid-July 1998.
The analysis (summarized in the table), shows that, in
all cases, the deterioration in the economic environment
producedor is expected (in the context of IMF programs) to contribute substantially todeteriorations in
fiscal positions. In Indonesia, changes in the economic
environment are expected to cause the fiscal deficit to
widen by as much as 11.1 percent of GDP in 1998/99.
The corresponding effects in Thailand, the Philippines,
and Korea are sizable but much smaller (3.1 percent of
GDP, 1.5 percent of GDP, and 1.5 percent of GDP,
respectively, in 1998) because the exchange rate depreciation and output decline have been more modest. The
principal source of the deteriorations is the massive depreciations in exchange rates, particularly in the case of
Indonesia (mainly through its impact on the cost of commodity subsidies). Weaker international oil prices are affecting the fiscal balance only of Indonesia, with an associated revenue shortfall of 0.7 percent of GDP in
1998/99. The decline or deceleration of real GDP worsened fiscal balances by 4 percent of GDP in Indonesia
(1998/99), but by less than 1 percent of GDP in all the
other cases.
Although all the countries took policy measures (or allowed policy inaction) to contain the deterioration in
The resolution of the crises in Asia has required monetary policy in the countries concerned to be geared
largely toward stabilizing exchange rates. Thus, to a
larger extent than usual, demand management has been
delegated to fiscal policy, and actual and projected (or
targeted) fiscal deficits have widened by much more than
was envisaged before the scale of the downturns in activity and the structural problems needing to be addressed
became apparent. To understand the role that fiscal policy
has played in Indonesia, Korea, the Philippines, and
Thailand during the recent economic turmoil, it is important to identify the factors that have influenced fiscal balances and, in particular, to distinguish the endogenous effects of the changes in the macroeconomic environment
associated with the crisis from the effects of policy measures implemented in the context of programs supported
by IMF financing.
In the course of the crisis, the economies of east and
southeast Asia have experienced very large adjustments
in their exchange rates, output, and price levels. Many
facets of their economic and financial structures, both
real and nominal, are likely to be very different once they
have recovered. In this box, year-to-year changes in the
fiscal balance are ascribed to various elements of the
changed economic environment and to different categories of policy actions, all defined in a consistent way
across countries.1
Changes in the economic environment comprise exchange rate movements, developments in international
oil prices, and changes in the rate of real income growth.
Some of these changes may have multiple effects on the
budget balance, some of which may be offsetting. For example, a depreciation of the exchange rate will tend to increase expenditure on foreign-currency-denominated
goods and services, but it will also tend to increase the
local currency value of imports, thereby raising revenues
from import duties. In some cases, however, such revenues may also be affected by changes in the composition
of imports in favor of goods subject to lower duties. The
figures reported here (see table) are net, aggregating
across revenues and expenditures.
Determining what constitutes a policy action is judgmental. In part, this is because any form of policy inaction can alternatively be viewed as a deliberate policy
1This approach is different from the standard approach used
for measuring the impact on the budgetary balances of changes
in macroeconomic conditions in industrial countries. The latter
approach limits the endogenous effects to those of fluctuations
in output around a trend growth path. This type of analysis has
been modified for the exercise described here to recognize the
effects of changes in exchange rates and other macroeconomic
variables in the Asian context.
2As noted below, this significantly affects the calculated net

impact of policy changes for Indonesia.
additional fiscal measures aimed at reducing the fiscal

deficit; new structural reforms addressing the problem
of arrears and promoting private sector development;
and steps to reduce the vulnerability of the government debt position, including a voluntary restructuring
of short-term treasury bills.
50
Changes in Fiscal Balances

(Percent of GDP; a negative number indicates a deterioration in the fiscal balance)
Indonesia
___________________
1997/98
1998/99
Korea
_____________
1997
1998
Thailand
___________________
1996/97
1997/98
Philippines
_____________
1997
1998
Fiscal balance1
0.9
10.1
4.0
1.6
5.1
0.9
2.1
Change in fiscal balance
2.2
9.2
...
4.0
4.0
3.5
0.4
1.2
Change due to economic environment

Exchange rate2
GDP growth
Oil price
4.2
3.5
0.5
0.2
11.1
6.4
4.0
0.7
...
...
...
...
1.5
0.9
0.6
0.3
0.2
0.1
3.1
2.0
0.9
0.7
0.6
1.5
0.9
0.6
Policy changes
Outlays
Social safety net3
Bank restructuring
Statutory revenue change
2.7
2.7
1.7
3.8
1.0
1.6
0.5
...
...
...
...
...
2.5
0.8
2.1
1.4
1.8
2.6
1.9
0.7
0.6
2.6
0.6
2.0
0.7
0.6
0.5
0.1
1.6
2.5
0.2
0.7
Residual (unexplained)
0.7
0.2
...
1.1
0.1
0.5
1.3
19.8
4.6
2.1
43.4
12.1
6.4
8.1
5.5
0.1
0.1
5.0
0.2
6.14
0.44
2.7
5.35
5.05
0.6
11.7
5.1
...
11.3
1.0
...
Memorandum
Nominal GDP growth rate
Real GDP growth rate
Fiscal impulse6
1This measure of the balance excludes privatization proceeds but includes bank restructuring costs. Data are on a fiscal year basis. For
Indonesia, the fiscal year runs from April through March; for Thailand, it runs from October through September. In Korea and the
Philippines, fiscal years correspond to calendar years. Data for 1998, or 1998/99, are projections under IMF programs and are subject
to revision.
2Includes the impact on the fiscal balance of increases in domestic interest rates in response to currency depreciation.
3This excludes the effect of exchange rate changes on subsidies arising from the failure to fully adjust commodity prices. These effects are included above as effects from economic conditions. In some cases, notably Indonesia, a strong case could be made for treating the increase in subsidies as a result of policy changes.
4Refers to calendar year 1997.
5Refers to calendar year 1998.
6From Lorenzo Giorgianni, The Fiscal Stance in Thailand and Other Countries: 19911998 (unpublished; Washington: IMF, April
1998). The fiscal impulse for Indonesia has been changed to reflect data available in mid-July 1998.
their fiscal balances, in some countries these have been

outweighed by policy measures in support of the banking
system and by additional social outlays that have increased budget deficits. In Indonesia, the country where
the deterioration in the macroeconomic environment has
had the largest impact on the budgetary position, the net
impact of policy changes has been to offset part of the increase in the deficit resulting from the deterioration in the
economic environment; in the Philippines, policy measures are projected to accommodate the effects of the deterioration in the economic environment.3 In contrast, in
Korea and Thailand the net impact of policy measures

has been to widen the fiscal deficit. Support for ailing financial systems accounts for a significant portion of discretionary policy measures.4 Measures to strengthen the
social safety net have increased fiscal deficits the most in
Korea. While Indonesia, the Philippines, and Thailand (in
1997/98) cut other budgetary outlays, Korea and Thailand
(in 1996/97) actually increased them.
4Bank restructuring costs in this analysis are limited to the carrying costs of any net increase in debt associated with support of
financial institutions. Because countries have adopted different
support strategies, and different budgetary treatments for recording costs, comparisons of current budgetary costs across countries will not necessarily provide a good indicator of the relative
severity of each countrys financial sector difficulties.
3In 1998/99, classification of the increase in subsidies in

Indonesia as a policy decision, rather than an effect of the
change in the economic environment, would result in the net impact of policy changes being expansionary.
The announcement of the package, and its approval

by the IMF on July 20, initially had positive effects on
Russian financial markets and eased pressures on the
ruble. Equity prices rebounded by over 30 percent, average treasury bill rates fell from more than 100 percent to below 50 percent, and the central bank, on July
51
Box 2.5 (concluded)

This analysis also illustrates that, even in the unlikely
event that real output returns to its former growth paths,
fiscal positions would not be restored to precrisis levels.
Rather, it appears that the evolution of the exchange rate
(in particular, the extent to which the exchange rate recovers to its precrisis level) and the way that various expenditure policies are reconfigured in the aftermath of the
crisis will also have a significant impact on the postcrisis
fiscal balance. Of course, so will the legacy of the financing costs of addressing the immediate effects and
causes of the crisis.
Thus, the analysis indicates that exchange rate depreciations have tended to produce more important effects on
fiscal balances than declines in output growth, that discretionary policy measures have tended to induce smaller
impacts on budget positions than deteriorations in the
macroeconomic environment, and that the net effect in all
cases has been to move the fiscal balance significantly toward deficit.
These are the results as they appear from the perspective of July 1998, one full year into the Asian crisis. The
economic situation viewed from this standpoint, however, is much worse than had been expected by national
authorities, the IMF, or private forecasters when the crisis started in the summer of 1997: no one anticipated the
extent to which the economic situtation would deteriorate. Indeed, the average of private forecasts for these
economies moved markedly and progressively downward throughout the intervening year (see figure). Fiscal
policies adjusted quite substantially to this unanticipated
deterioration; and the policies in place as of July 1998
were, appropriately, quite different from those that had
been planned earlier. This is well illustrated by the case
of Thailand, the country that first entered the crisis.
When Thailands stabilization and reform program was
initially agreed with the IMF in mid-August 1997, the
growth of the Thai economy was projected to slow considerably but nonetheless to remain significantly positive. Thus, the initial program called for measures to
strengthen the fiscal position, to enhance the credibility of
the governments policy program, and thereby help to stabilize foreign exchange and financial market conditions;
to contribute to an orderly reduction in Thailands large
current account deficit; and to make fiscal provision for
the large expected public sector costs of cleaning up the financial system. By the autumn of 1997, expectations for
the growth of the Thai economy had declined further for
both 1997 and 1998, but they were still positive.
Conditions in the foreign exchange and financial markets,
however, had not stabilized. Additional fiscal measures
were adopted by the Thai authorities, with IMF support, to
strengthen the credibility of the adjustment program.
In the ensuing months, however, it became apparent
that the economic crisis in Thailand (and elsewhere in
Evolution of the Consensus Forecast

for 1998 Real GDP Growth
(Percent)
10
Korea
Malaysia
0
Thailand
5
10
Indonesia
15
Jul.
1997
1998
Aug.
20
Source: Consensus Economics, Inc., Asia Pacific Consensus Forecasts.
Asia) was much deeper than expected earlier and that

projected growth for 1998 had turned modestly negative.
Also, the Thai trade and current accounts had shifted
massively toward surplus, owing primarily to import
compression, and by February 1998 a meaningful recovery of the exchange rate of the baht had been achieved.
The fiscal measures of the preceding autumn were essentially reversed as fiscal policy moved to support the economy. As the outlook for the economy continued to deteriorate, the projected fiscal deficit widened, owing to the
operation of the (relatively weak) automatic stabilizers
and because of policy efforts to cushion the output decline and provide support to the needy (see Box 2.4)
within the limits of what can be financed without destabilizing foreign exchange financial markets.
For Indonesia and Korea, current account deficits going
into the crisis were much smaller than for Thailand, and
the initially agreed fiscal tightenings to enhance credibility and provide for financial sector cleanups were roughly
half the size (relative to GDP) of that in Thailand. As it became clear that the economic situation in these countries
would also turn out much worse than initially expected,
the planned fiscal stance has shifted substantially toward
deficit. For Indonesia, which has fallen into deep crisis,
large external support has been arranged to help to finance
the deficit in a manner that does not further destabilize financial markets. Even with such support, tight discipline
on less essential components of government spending is
needed to keep the fiscal deficit (estimated to reach 10
percent of GDP) within the bounds of available finance.
24, lowered its refinancing rate from 80 to 60 percent.

In conjunction with the approval of the augmented
program and to reduce short-term debt-servicing costs,
the Ministry of Finance swapped treasury bills with a

market value of $4.4 billion into long-term Eurobonds,
placed additional Eurobonds worth $500 million, and
52
shifted its borrowing in rubles to longer maturities, introducing new bonds with maturities longer than one
year.
The improvement in financial market conditions
was short-lived, however. Confidence was weakened
particularly by the lack of support for the program in
the Duma, which forced the President to veto several
measures approved by the Duma and to implement a
number of other measures by decree, and led the IMF
to reduce the amount of a disbursement from the $5.6
billion originally planned to $4.8 billion. Also, in the
key energy sector, major producers voiced strong opposition to the program, and the collection of overdue
tax payments from a number of oil companies proved
difficult. Finally, the government-owned Sberbank
took a decision not to roll over its sizable treasury bill
holdings falling due in the last two weeks in July, forcing the government to borrow at relatively high rates
to cover its debt service, and shaking the confidence of
other investors in the governments ability to roll over
its debt in the future. As a result, from the last week of
July, treasury bill rates rose and equity prices fell
again, and the Ministry of Finance was forced to cancel the auctions for its new longer-term bonds three
weeks in a row because of prohibitively high borrowing rates. The ruble also came under downward pressure, forcing the central bank to intervene on a large
scale. Pressures intensified in the second week of
August and spread to the banking sector. By August
14, with average treasury bill rates at around 300 percent, international reserves down to around $15 billion
(from $18!/2 billion following the July IMF disbursement), and banks unable to meet payment obligations,
Russia was facing a full-scale banking and currency
crisis.
The authorities responded to the crisis by announcing a number of measures on August 17, including a
change in exchange rate policy entailing a de facto devaluation; a unilateral conversion of short-term ruble
government debt and suspension of trading in the domestic treasury bill market; a 90-day moratorium on
the payment of many private sector foreign currency
obligations; a strengthening of controls on capital
flows; and steps to stabilize the banking sector, including interbank settlements. The new exchange rate
policy moved the band to 6.09.5 rubles per U.S. dollar from 5.37.1 rubles, thus signaling a willingness to
let the ruble depreciate significantly, and introduced
more flexibility within the band. The other measures
were aimed at supporting the new exchange rate policy, easing the budgets cash-flow situation, and protecting the banking sector.
Market reaction to the new measures was extremely
unfavorable, with negative sentiment exacerbated by
uncertainty regarding the details of the debt conversion
scheme and the moratorium. In the days that followed
the announcement, the exchange rate vis--vis the U.S.
dollar fell by more than 10 percent, equity prices
dropped sharply, and the spread on Russian U.S. dollar

Eurobonds rose by more than 1,000 basis points to
over 3,000 points. In response to the strong downward
pressure on the currency, the Russian central bank
raised its overnight rate to 250 percent and again intervened heavily in the foreign exchange market, with international reserves falling to around $13!/2 billion by
August 21. The financial crisis intensified following
the dissolution of the government, the subsequent political uncertainty, and the (delayed) announcement of
the terms of the domestic debt conversion. The conversion conditions, which broadly offered the choice
to exchange treasury bill holdings for either ruble
bonds with maturities of three, four, and five years
with coupons of 2030 percent, or (up to a limit of
20 percent of the total holding) eight-year U.S. dollardenominated bonds with a 5 percent return, were seen
as implying major losses for investors.
On August 26, following heavy intervention, the
central bank announced it would stop selling U.S. dollars and suspended trading in the ruble on the countrys main exchanges. In the interbank market, the
ruble subsequently began to trade in the 1012 rubles
per dollar range, well beyond both the announced official rate and the upper bound of the new band. Also
in late August, continued severe pressures on the
banking sector led to the announcement of two major
bank mergers and the formation of payment pools
between banks, while the central bank withdrew the
license of a large bank and imposed a temporary administration on the countrys second-largest deposit
bank (SBS-Agro Bank). On September 2, finally, the
central bank abandoned the exchange rate band and let
the ruble float.
Financial markets remained unsettled and highly
volatile in the first two weeks of September, reflecting
uncertainty about the approval of a new prime minister
and the future course of economic policies. The ruble
exchange rate made sharp swings, while equity prices
weakened further. Following parliamentary approval of
a new prime minister in mid-September, markets stabilized somewhat, with the ruble trading at around 15
rubles per dollar, close to 60 percent lower against the
dollar than in early August. As pressures on the banking sector continued, the central bank initiated an
arrangement whereby banks would transfer accounts of
assenting depositors to Sberbankwhose deposits are
state guaranteedand began to provide additional liquidity to ailing banks. The authorities also announced
their intention to revise some of the terms of the August
17 domestic debt conversion, involving a larger initial
cash offer, shorter terms for the ruble securities on
offer, and better conditions for the Eurobond option.
Background to the Crisis: Fiscal Problems
The recurrent financial market pressures in Russia
since late 1997 and the August 1998 crisis are attribut-
53
able to a combination of serious remaining weaknesses in economic fundamentals, especially in the fiscal area; unfavorable developments in the external environment; and the countrys vulnerability to changes
in market sentiment arising from the financing of the
balance of payments and the budget through shortterm treasury bills and bonds placed in international
markets. A number of shortcomings in economic reform have set the context. In addition to incomplete reforms in the structural area, chronic fiscal imbalances
and poorly functioning tax and expenditure management systems have continued to present major problems. As discussed in the May 1998 World Economic
Outlook (Chapter V, including Box 9), Russia has
made insufficient progress in improving tax systems
and budget procedures, establishing fully competent
agencies to collect taxes and control expenditures,
clarifying intergovernmental fiscal relations, and introducing accountability and transparency at all levels
of government operations. Following a substantial
revenue shortfall in 1997, the revenue performance at
the federal level was again disappointing in the first
half of 1998, with expected conversions of arrears and
noncash revenue into cash payments not materializing
and the decline in international oil prices reducing tax
contributions from the oil sector. Reflecting the poor
revenue performance, the federal government deficit
amounted to about 5 percent of GDP (Table 2.8).
Local governments and the pension fund also ran large
deficits, resulting in a deficit of the enlarged government of close to 10 percent of GDP for the first half of
1998, with wage and payments arrears rising at all levels of government.
The retreat of investors from emerging markets compounded the fiscal problem. Until the early autumn of
1997, substantial short-term capital inflows had played
a key role in driving interest rates on Russian treasury
bills to below 20 percent. Easy access to foreign financing led to the development of financing strategies
that relied heavily on a combination of short-term treasury bill sales, targeted at domestic and foreign financial institutions, and borrowing in the international
markets; this resulted in considerable vulnerability to
changes in market sentiment. In the wake of the Asian
crisis, foreign investors began to reduce their exposure
to the Russian markets, and they returned in early 1998
only when offered yields well above precrisis levels.
The combination of high yields and the short maturity
of the treasury bills, however, raised concerns that the
government would not be able to meet the equivalent
of around $1.5 billion in debt service falling due each
week in the remainder of 1998. In the face of deteriorating market sentiment, beginning in June, domestic
borrowing to finance the federal budget came to a virtual halt, with the government making large net repayments of treasury bills (Figure 2.14).
The decline of confidence in the authorities ability
to bring the fiscal situation under control and to roll
Table 2.8. Russia and Ukraine: Selected

Macroeconomic Indicators
1996
1997
1998
First Half
Russia
Real GDP growth (percent)
Consumer price inflation (percent)2
5.0
21.8
0.9
11.0
0.51
6.4
Public finance (federal government)3

Revenue
Expenditure
Balance
Primary balance
13.0
22.1
9.1
3.4
11.9
18.9
7.0
2.5
10.2
16.1
5.1
0.7
Money and credit growth (percent)2

Base money
Broad money
26.2
29.6
25.7
29.5
2.3
5.7
99.8
103.0
31.9
42.3
58.5
36.7
0.6
15.3
5.1
0.1
17.8
5.8
1.0
13.7
6.1
10.0
39.7
3.2
10.1
Public finance (general government)3

Revenue
Expenditure
Balance
Primary balance
36.7
39.9
3.2
1.6
38.4
44.0
5.6
3.8
37.2
42.2
5.0
2.2
Money and credit growth (percent)2

Base money
Broad money
37.9
35.1
44.6
33.9
18.8
21.2
Interest rates
Refinance rate4
Bank loan rate4
60.3
79.6
24.8
49.1
43.8
47.3
External sector
Current account balance3
Gross international reserves5
Exchange rate: rub/$4
2.7
2.0
1.8
2.6
2.4
1.9
4.1
1.8
2.0
Interest rates (percent)

Refinance rate4
Bank loan rate4
External sector
Current account balance3
Gross international reserves5
Exchange rate: rub/$4
Ukraine
Real GDP growth
Consumer price inflation (percent)2
0.21
6.7
1Change
from the same period in the previous year.

change at end of period.
3In percent of GDP.
4Period average.
5Billions of U.S. dollars, end-period.
2Twelve-month
over the treasury bills that had not been swapped into
Eurobonds was the main immediate cause of the
August 1998 crisis. The augmented program of July
1998 was built on a number of assumptions regarding
revenues, expenditures, and financing flows for the
second half of 1998 and 1999 which, if realized,
would have allowed an improvement in the countrys
fiscal position and an easing of financial market tensions. However, the program required the passing into
law, ahead of IMF approval on July 20, of a series of
measures needed for the achievement of revenue and
expenditure targets; and it was also based partly on the
assumption that confidence would improve such that
54
official treasury bill holders would be willing to roll

over all, and private domestic and foreign treasury bill
holders would be willing to roll over at least part of,
their treasury bill holdings falling due in the remainder
of 1998. As financial market participants began to see
that the programs revenue and expenditure measures
were not being implemented fully, and following early
indications that many treasury bill holders, including
the government-owned Sberbank, were demanding
payment as obligations fell due, there was a growing
perception of a likely financing shortfall. Expectations
that it was only a matter of time before the government
would run out of resources to meet its gross debtservice payments and demands for foreign exchange
led to intensifying financial market pressures from the
end of July, undermining the program within weeks
after its approval.
A key trigger of the loss of confidence was the failure of the Russian government to obtain parliamentary
approval of the fiscal measures planned under the program. Substitute action in the form of presidential decrees could not pass into law some of the missing measures needed to achieve the programs budget targets,
in the areas of personal income taxation and pension
fund financing in particular. While the government announced a special Duma session in August to seek passage of remaining measures, uncertainty remained
about their adoption. Further, in the absence of signs
of a substantial intensification of revenue collection
efforts,4 skepticism remained regarding the prompt
and full implementation of even those measures that
had been approved. In addition to the lack of confidence in the implementation of the anticrisis program,
investor sentiment was hit by the further reassessment
of risks in emerging markets. Another critical factor
was the continued large-scale expansion of credit in
JulyAugust by the central bank, as it sought to protect Russian commercial banks. More technical factors
also played a role. With a total of $8.6 billion of
Russian Eurobonds issued in JuneJuly, a supply overhang in these instruments emerged, as reflected in a
widening Russian spread relative to other emerging
market economies.
Figure 2.14. Russia: Monetary and Financial

Market Developments
As pressure in Russias financial markets intensified in the late spring
of 1998, international reserves fell, interest rates rose sharply, and net
financing from treasury bill issues turned negative.
200
175
30
25
Base money
(left scale; billions of rubles)
150
20
125
100
15
Gross international reserves

(right scale; billions of U.S. dollars)
1996
97
Sep.
98
120
10
0.3
Overnight interbank interest rate1
(left scale; percent)
100
80
Exchange rate
(right scale; U.S. dollars per ruble)
60
0.2
40
20
0
1996
97
Sep.
98
240
0.1
20
0
180
Net finance from treasury bill issues
(right scale; billions of rubles)
120
20
Average treasury bill yield 2
(left scale; percent)
60
0
Implications for the Economy
1996
97
40
60
Sep.
98
Sources: Central Bank of Russia; and IMF staff estimates.

1The overnight interbank interest rate was 190 percent on September 25, 1998.
2 The Russian treasury bill market was suspended as of August 17,
1998.
The consequences of the August crisis for the

Russian economy will depend crucially on the policy
responses. The authorities immediate task is to stabilize financial markets, restore confidence, and prevent
a further decline in the value of the currency. Even if
they manage to do so quite quickly, however, the crisis and the measures announced in August and Sep4For instance, the government continued to hesitate to implement
fully the steps that had been announced to seize the assets and limit
the oil export rights of major oil companies with overdue tax
liabilities.
55
number of major oil and energy companies announced

for the remainder of 1998 is likely to be postponed, as
foreign investor interest has diminished and domestic
investors now lack the financial resources. More generally, the August unilateral domestic debt conversion
extends the practice of nonpayment to holders of financial instruments and thereby reinforces the culture
of nonpayment. The conversion is expected to stimulate further the buildup of arrears, barter arrangements
(which now account for close to 50 percent of industrial sales), and dollarization.
tember will have important consequences, including

for growth and inflation.
Growth in the Russian economy, which was positive
in 1997 after eight years of deep output decline, again
turned slightly negative in JanuaryJuly 1998 (by
comparison with the same period of 1997), reflecting
the unfavorable financial environment. High interest
rates impeded bank lending to the private sector and
discouraged fixed investment, which was more than 5
percent lower in the first seven months of 1998 than a
year earlier, following a cumulative drop by more than
75 percent in 199197. Growth is expected to be further adversely affected in the remainder of 1998 and in
1999 by declines in consumption and investment associated with the collapse of confidence, the sharp decline in real wealth, severe financing constraints, and
disruptions in the financial and payments systems.
Inflation, which on a 12-month basis had fallen to
below 6 percent in July, is expected to rise quickly,
owing to the rapid pass-through of the currency depreciation, reflecting not only the high share of imported
goods in the consumer goods basket, but also the high
degree of dollarization in the economy. According to
initial estimates consumer prices rose by 15 percent in
August at a monthly rate, compared with a 0.2 percent
rise in July, and by as much as 43 percent in the first
two weeks of September. In the retail sector, some
stores appear to have reintroduced the practice of
quoting U.S. dollar-based ruble prices.
The impact of the crisis and the August 17 measures
on the banking sector is likely to be severe. One private international bank has referred to estimates that
Russian banks on-balance-sheet net external foreigncurrency-denominated liabilities amount to $5 billion,
with an additional $5 billion off-balance-sheet forward
exposure; and there are other estimates considerably
higher than these. The banking sector is therefore
heavily affected by the depreciation of the ruble, with
the 90-day external payments moratorium offering
only temporary relief.5 The sharp fall in interbank
market activity, payment delays, and the freezing of
the banks treasury bill portfolio have created severe
liquidity management problems for most banks. The
consolidation observed in late August among the sectors still more than 1,500 banks is expected to accelerate, and only the systemically important and strongest
banks seem likely to receive liquidity support from the
Central Bank of Russia and to be in a position to renegotiate foreign currency payment obligations.
The depreciation of the ruble and the other measures
announced on August 17 also have important consequences for the structural reform agenda. Government
intervention in the banking sector and financial markets has increased, and the sale of state holdings in a
How Have Financial Market Conditions in Other

Emerging Market Economies Been Affected?
Other Transition Economies
Among other countries in transition, the effects of
the Asian and Russian crises have been felt most
strongly in Ukraine, which has close financial and
trade ties to Russia and has been suffering from similar underlying structural and fiscal problems and associated vulnerability to changes in investor sentiment
(see Table 2.8). In the face of poor revenue collection
and inadequate expenditure control, the Ukrainian
government in 1997 increased sharply its issuances of
treasury bills, around half of which were taken up by
foreign investors, and borrowed short-term from the
international markets. In the wake of the Asian crisis,
foreign investors began to redeem maturing bills, in
spite of a marked increase in yields from around 20
percent in October 1997 to more than 50 percent in
early 1998. Confronted with a substantial rise in its
gross financing needs, the government issued
Eurobonds twice and relied increasingly on treasury
bill purchases by the National Bank of Ukraine, which
by April 1998 had become the largest participant in the
primary treasury bill market.
The renewed pressures in Russia from mid-May
quickly spilled over to Ukraine, and official interest
rate hikes in Russia were followed in Ukraine in late
May and early July, while the currency and equity
prices weakened. In August, in the wake of the Russian
crisis, the financial situation deteriorated further. An
additional increase in the Lombard rate and significant
foreign exchange market intervention, which reduced
usable reserves to very low levels, could not prevent
the hryvnia from moving outside its 2!/4 per U.S. dollar band in the interbank market. On September 4, in
the context of an agreement with the IMF on an EFF
arrangement, the authorities announced a policy package including adoption of a new 2!/23!/2 hryvnia per
U.S. dollar exchange rate band, the implementation of
tighter fiscal policies, and a rescheduling of domestic
debt involving an arrangement to swap part of the
short-term debt for longer maturities. The rescheduling
is intended to be voluntary and provides, for nonresident investors, the option to exchange treasury bills for
5 Indications are that most Russian banks did not meet obligations under rubleU.S. dollar forward contracts that fell due on
September 14.
56
U.S. dollar Eurobonds yielding 20 percent. As of midSeptember, conditions in the Ukrainian treasury bill
and equity markets remained unsettled, and the currency was under further pressure as investors awaited
the results of the debt rescheduling and sought reassurances that the September 4 package was being fully
implemented.
Financial markets in the Czech Republic, Hungary,
and Poland, which had been temporarily affected by
the Asian crisis, have faced renewed, and significant,
pressure since the onset of the Russian crisis.6 The currencies of all three countries had come under pressure
in late 1997, with stock markets also recording significant declines. In early 1998, the currencies stabilized
and, in the Czech and Polish cases, appreciated significantly, especially in real terms, while equity markets
recovered, partially in the Czech Republic and more
than fully in Hungary and Poland. In August and early
September, however, the koruna depreciated by more
than 5 percent vis--vis the deutsche mark, the forint
fell to the bottom of its trading band, and the zloty
moved from close to the upper limit to the middle of
its trading band. The weakening of the Czech and
Polish currencies eased concerns about excessive appreciation earlier in the year. As foreign investors reduced exposure to countries in transition, equity prices
also fell sharply from their mid-July peaks, by almost
50 percent in Hungary and by 2530 percent in the
Czech Republic and Poland, while government bond
yields in Hungary and Poland rose significantly. The
authorities in all three countries signaled their intention not to let these financial market pressures affect
the longer-run stance of interest and exchange rate
policies. In the Czech Republic official interest rates
were lowered in mid-August; in Hungary the monthly
rate of depreciation of the crawling peg was reduced
from 0.8 to 0.7 percent in late August; and in Poland a
reduction in official money market rates accompanied
a reduction in the monthly devaluation rate of the zloty
from 0.65 percent to 0.5 percent in early September. In
Hungary, however, as pressure on the currency continued in mid-September, the central bank raised its operating rate by a full percentage point.
In other countries in transition, the effects of the
Asian and Russian crises have differed depending on
the degree of development and international integration of local financial markets, the scale of imbalances, and trade and financial links with Russia.
In the three Baltic countries, the effects of the crises
have been felt mostly in equity markets, which
reached historic lows in mid-September, in Estonia
and Latvia at about one-fourth their values in

September 1997. In Latvia, where according to some
estimates more than 8 percent of banks assets are exposed to Russian risk, the banking sector has also been
affected, with a major bank holding significant
amounts of Russian treasury bills suffering a run on
deposits in late August. In Romania and the Slovak
Republic, where restrictions on short-term capital
flows have been maintained, currency and financial
market pressures have mainly reflected countryspecific factors, including rising current account and
fiscal imbalances and political uncertainties. Finally,
the countries of the former Soviet Union other than
Ukraine, which had been relatively untouched by the
Asian crisis, have felt significant pressures on exchange rates, Eurobond spreads, and domestic interest
rates as a result of the Russian crisis.
The Asian crisis occurred while transition countries
were rapidly gaining access to international financial
markets. By the end of 1997, 14 transition countries
had received credit ratings from at least one of the
major agencies, compared with only 4 countries two
years earlier. Gross medium- and long-term funds
raised in the international bond and loan markets by
the transition countries increased from less than $8 billion in 1995 to almost $30 billion in 1997 (in spite of
a slowdown in the last quarter), while foreign portfolio investment rose from less than $4 billion to more
than $19 billion in the same period. There was, in fact,
a surge in portfolio investment in 1997, largely into
short-term treasury bills in Russia and Ukraine.
Overall, while total net private capital flows to all developing and transition economies fell by more than a
third to $123 billion in 1997 from $215 billion in
1996, net flows to transition countries rose to $23 billion from $16 billion. In a number of countries in transition, the creation and opening up of new financial
markets as part of the transition process may have motivated flows in excess of what was warranted in relation to the overall level of private capital flows to
emerging markets before the Asian crisis and to underlying economic and financial conditions in the transition countries.7 The vulnerability to external financial shocks of countries such as Russia and Ukraine,
which were notable destinations for investors in search
of high yields, was thereby increased.
The effects of the Asian and Russian crises on financial markets in the economies in transition have
been significant, but the broader economic repercussions are expected to remain limited, at least in the
short run. Because of the relative insensitivity of
banks lending rates to monetary policy (reflecting
the low degree of competition in the banking systems),
6For a more detailed analysis of the contagion effects of the Asian

crisis on these three, and other, transition countries, see Steven
Fries, Martin Raiser, and Nicholas Stern, Macroeconomic and
Financial Stability: Transition and East Asian Contagion, EBRD
Working Paper 28 (London: European Bank for Reconstruction and
Development, 1998).
7See Hans Peter Lankes and Nicholas Stern, Capital Flows to

Eastern Europe and the Former Soviet Union, EBRD Working
Paper 27 (London: European Bank for Reconstruction and
Development, 1998).
57
the still limited role of banking sector credit, and the

low leverage of the corporate sector in transition countries,8 the effects of higher official interest rates on aggregate demand and economic activity tend to be relatively small. Similarly, given the still low levels of
stock market capitalization, even sharp drops in equity
prices tend not to have sizable direct effects on the real
economy. In the short run, therefore, growth prospects
in the transition countries are unlikely to be affected
substantially by recent interest rate and equity price
movements. However, their longer-term growth prospects may suffer significantly if the financial turbulence slows down the development of financial markets and banking sectors that should be playing an
increasing role in intermediating the financial resources needed for further restructuring and new
investment.
large and widening fiscal deficit, a large current account deficit, and a sizable stock of short-term public
debt, increasingly and largely indexed to overnight interest rates or the U.S. dollar. In the wake of the
Russian crisis and the subsequent reassessment of risk
by investors, private capital outflows accelerated, equity prices fell sharply, and sovereign bond yield
spreads increased by around 1,400 basis points. The
authorities responded by intervening heavily in the
foreign exchange market to defend the real, raising the
benchmark interest rate in two stages from 19 to almost 50 percent in early September, relaxing restrictions on short-term capital inflows, promising to increase primary fiscal surpluses after 1998, and
announcing fiscal cuts for 1998 partly to offset the increase in debt-servicing costs related to higher interest
rates.
In Venezuela, as discussed earlier, economic activity
has contracted during 1998, owing in large measure to
the decline in world oil prices. The fiscal position has
shifted from a surplus in 1997 to a large deficit in
1998, and the current account has moved into deficit.
Exchange market pressures intensified sharply with
the Russian crisis. In response, the authorities intervened to support the exchange rate, while allowing the
bolivar to drop to the lower end of its band, tightened
liquidity conditions, and announced additional measures aimed at reducing the fiscal deficit.
In Argentina, by the end of July interest rates had
declined to pre-October 1997 levels with an easing of
financial market pressures attributable in part to a
moderation of growth and tight fiscal policy, although
the widening current account deficit and slow progress
with labor market reforms remained sources for concern. During August and early September, however,
pressures reemerged, with equity prices falling sharply
and spreads on stripped Brady bonds increasing by
over 600 basis points. Domestic interest rates increased by smaller amounts as gross liquid reserves at
the central bank fell only slightly, reflecting in part the
credibility of the currency board as well as banking
sector reforms, improved public debt management,
and recent measures to reduce fiscal spending in 1998
and freeze public spending in 1999. Nevertheless, the
economy, which has substantial trade exposure to
Brazil, remained vulnerable.
In Mexico, contagion from other emerging markets
together with concerns about oil price declines, the
widening current account deficit, and the fragility of
the banking system have also been reflected in financial market pressures in recent months. These concerns have been partially allayed, however, by a tightening of monetary policy and the prospect of tax
reform aimed particularly at boosting non-oil revenue.
Equity and sovereign bond prices have fallen sharply,
but by less than in other parts of Latin America, reflecting a more flexible exchange ratethe peso has
depreciated by over 10 percent since July and by about
Latin America
After weathering the fallout from the Asian crisis
that hit their financial markets in October 1997, with
the help of tighter monetary and fiscal policies (as
discussed in the May 1998 World Economic Outlook),
the Latin American economies faced renewed financial market pressures in the wake of the Russian crisis. The pressures were exacerbated by falling commodity prices and downgraded credit ratings for
Brazil and Venezuela. Sovereign bond spreads widened
dramatically in late August and early September,
reaching levels not seen since the tequila crisis,
while equity prices fell by 40 to 60 percent between
mid-July and early September before recovering
somewhat. Authorities in the region generally again
responded by tightening monetary and fiscal policies,
and, in some cases, intervening in the foreign exchange markets. In early September, Colombia and
Ecuador adjusted the trading bands of their currencies, effectively devaluing them by 9 and 15 percent,
respectively. While contagion from Asia and Russia
and the repercussions on fiscal and external positions
may in part explain the financial market pressures that
arose, country-specific factors, including macroeconomic imbalances and structural weaknesses unrelated to the crisis, as well as political uncertainties,
also played a role.
In Brazil, short-term interest rates had been lowered
to pre-October 1997 levels by the end of July as international reserves increased. Capital inflows had been
sustained in part by private sector bond issues, the privatization program, and high real interest rates. But
the economy remained vulnerable on account of a
8Banking sector claims on the nongovernment sector in central
and eastern European countries other than Croatia, the Czech
Republic, and the Slovak Republic are only in the 1530 percent of
GDP range, and are even lower in Russia and other countries of the
former Soviet Union.
58
25 percent since the beginning of the yeara smaller

current account deficit, and stronger links to the still
buoyant U.S. economy.
In Chile, the decline in copper prices and the countrys substantial exposure to Asia through trade, along
with the turmoil in other emerging markets, have significantly worsened short-term prospects for growth
and the external current account and reduced capital
inflows, putting downward pressure on the exchange
rate. A tight monetary stance and a package of measures introduced in Junewhich included a reduction
in public expenditure, a narrowing of the exchange
rate band from 25 percent to 5!/2 percent combined
with a faster rate of crawl of the band, the issuance of
medium-term dollar-indexed bonds, and a lowering of
the unremunerated deposit on certain capital inflowshelped to reduce the pressure on the currency.
In mid-September, following the subsequent reemergence of pressures, official interest rates were increased, the deposit requirement on capital inflows
was reduced to zero, and the trading band for the peso
was widened to 7 percent, with allowance for a further
gradual widening to 10 percent by end-1998, in a further effort to reduce volatility in interest rates and stem
capital outflows.
sure on the rand, the persistent sluggishness of domestic growth, high unemployment, and inflation above
partner-country levels have been important sources of
vulnerability.
Prospects for Global Flows of Funds

and Current Account Balances
Associated with the Asian crisis have been substantial shifts in international financial flows, with important implications for adjustments of external positions
by many countriesboth those in crisis and their partners. With the crisis in Russia and contagion to other
countries, further adjustments to financial and trade
flows will be needed. In 1997, net private capital flows
to emerging markets (defined here as all developing
and transition countries, together with the newly industrialized Asian economies) are estimated to have
fallen by $91 billion from the record level of $215 billion reached in 1996, with Asia more than fully accounting for the decline (Table 2.9). In all other developing country regions, and the transition countries as
a group, net inflows continued to rise last year, although there was a notable slowing of the growth of
inflows to the developing countries of the Western
Hemisphere.
Data on gross private financial flows to emerging
markets indicate that gross (or new) financing peaked
in the second and third quarters of 1997, and that in
the first half of 1998 it was running at about half of
precrisis levels (Table 2.10). Asia accounts for most
of the decline in gross flows since mid-1997, but
flows to other regions have also been adversely affected. In August, gross financing virtually dried up,
reflecting the turbulence in Russia and other emerging markets.
Net private capital flows in 1998 as a whole are projected to be a further $67 billion lower than in 1997, at
around $57 billionsome $65 billion lower than projected in the May 1998 World Economic Outlook, and
about one-fourth the net inflow recorded in 1996.
Some gradual recovery in private flows to emerging
market economies is assumed in late 1998 as confidence picks up, and this is reflected in a recovery in
private flows projected for 1999, although the timing
and degree of recovery remain highly uncertain.
The financial crisis in Russia, the devaluation of the
ruble, and the unilateral debt restructuring announced
by the Russian authorities have substantially worsened
prospects and increased risks for net private capital inflows into emerging market economies in Latin
America and central and eastern Europe. While these
countries access to private flows was undiminished in
the wake of the Asian crisis, some are likely to be adversely affected by these more recent developments.
One early indication of this is demonstrated by
Eurobond spreads that have widened to levels last seen
Other Developing Countries

Most countries in the Middle East and Africa had
experienced relatively little financial market contagion from the Asian crisis. Recent developments in
Russia have had a larger impact, although not uniform
across all countries, as equity prices have plummeted
and sovereign bond spreads have risen sharply. In
Egypt, the stock market has weakened significantly
during 1998, reflecting more the effects of the decline
in oil prices and the decline in tourism earnings than
direct contagion from Asia or Russia. The exchange
rate has not come under more than moderate pressure
in recent months, while equity prices have fallen less
since July than in other emerging markets. In contrast,
financial markets in Turkey, which has strong trade
links with Russia, came under strong pressure in the
wake of the Russian crisis, with the large-scale capital
inflows that had been attracted earlier in the year by
high interest rates and improved prospects of disinflation being partially reversed. In Africa, financial market turbulence has been most in evidence in South
Africa. The rand, which has been on a depreciating
trend since early 1996, came under particularly intense
downward pressure during MayJuly and again in
August. The authorities responded by tightening monetary conditions in both instances. After vigorous intervention in the foreign exchange market earlier in
the year that left net international reserves at a precarious level, the authorities intervened little during the
latest turmoil. Although external developments and
depressed commodity prices contributed to the pres-
59
Table 2.9. Developing Countries, Countries in Transition, and Newly Industrialized

Asian Economies: Net Capital Flows1
(Billions of U.S. dollars)
1984892
1990962
1994
1995
1996
1997
1998
1999
Total
Net private capital flows3
Net direct investment
Net portfolio investment
Other net investment
Net official flows
Change in reserves4
13.5
13.0
4.4
3.8
26.2
14.4
144.2
64.8
64.0
15.4
17.4
79.6
155.7
85.3
104.4
34.0
2.1
75.4
195.3
99.6
40.7
55.1
23.2
121.0
214.9
120.4
80.2
14.2
3.2
106.2
123.5
147.2
69.9
93.5
22.4
37.7
56.7
127.5
35.3
106.1
53.4
31.7
129.2
118.6
41.9
31.3
0.6
67.3
Net official flows
Change in reserves4
17.8
12.2
4.9
0.6
27.2
5.1
129.4
57.9
51.1
20.4
16.8
54.8
133.8
76.5
85.7
28.4
10.3
42.3
148.2
86.5
22.2
39.5
32.1
67.1
190.4
108.5
52.7
29.3
3.2
95.2
139.0
126.5
55.5
43.0
3.3
57.8
65.8
108.2
32.0
74.4
27.6
3.6
116.1
97.8
38.4
20.1
3.3
37.0
Africa
Net official flows
Change in reserves4
2.6
1.3
0.8
2.1
6.4
0.1
4.0
3.0
0.2
1.3
7.4
2.3
9.2
3.5
0.5
5.1
9.3
5.0
10.5
4.2
1.5
4.8
7.7
1.8
5.4
5.1
0.4
0.6
6.0
7.3
14.0
7.3
2.8
3.9
2.3
12.8
6.4
5.8
2.8
2.2
2.9
0.9
13.4
7.0
0.2
6.5
1.2
1.6
Asia
Net official flows
Change in reserves4
13.1
4.5
1.5
7.0
7.8
2.1
55.8
32.9
6.7
16.3
8.6
28.9
64.7
44.4
11.3
9.0
5.8
39.7
91.8
51.0
10.0
30.8
5.1
29.1
99.0
60.1
10.2
28.7
11.3
48.1
28.8
60.2
11.6
43.0
7.5
19.2
44.3
48.2
12.2
80.4
25.9
4.8
11.0
40.4
2.6
32.1
10.1
37.9

Net official flows
Change in reserves4
2.3
1.1
5.1
3.9
4.8
6.6
23.1
2.9
12.3
7.9
0.4
5.5
13.4
3.7
13.0
3.2
1.0
2.7
7.7
5.1
9.1
6.4
1.1
10.9
4.2
4.1
2.7
2.7
0.6
11.6
8.7
5.0
3.0
0.7
0.6
10.8
28.4
5.1
13.6
9.8
1.0
8.4
25.2
6.0
15.3
3.8
1.7
5.7
Western Hemisphere
Net official flows
Change in reserves4
0.2
5.3
0.9
4.6
8.2
0.5
46.4
19.2
32.3
5.1
1.2
18.1
46.5
25.0
60.9
39.3
3.8
5.0
38.2
26.2
1.7
10.3
20.5
25.3
81.8
39.2
40.0
2.6
13.5
28.2
87.5
54.1
38.0
4.6
8.0
15.0
75.2
49.0
27.8
1.6
0.1
8.2
66.6
44.3
20.7
1.6
3.9
8.3
Net official flows
Change in reserves4
1.0
0.2
0.8
0.2
3.6
12.5
6.4
10.4
4.2
1.1
7.6
18.8
5.4
20.5
7.1
12.1
6.9
43.2
13.4
18.8
11.0
8.4
36.2
16.2
13.4
24.3
21.6
0.1
22.7
18.2
20.7
16.2
9.9
6.1
20.0
18.8
14.3
13.0
15.0
0.8
31.1
17.9
11.8
1.5
1.7
8.7
3.3
0.9
0.5
3.7
1.1
15.9
2.2
0.5
2.4
0.8
0.5
17.2
3.1
3.4
1.8
1.5
0.3
26.2
4.0
0.2
0.3
4.5
0.6
17.7
8.4
1.5
3.3
6.6
10.9
38.3
2.4
6.3
34.3
15.8
26.1
29.0
0.6
11.0
18.7
10.8
36.1
18.0
3.0
8.3
12.7
5.7
21.6
Newly industrialized Asian economies5

Net official flows
Change in reserves4
1Net capital flows comprise net direct investment, net portfolio investment, and other long- and short-term net investment flows, including
official and private borrowing.
2Annual averages.
3Because of data limitations, other net investment may include some official flows.
4A minus sign indicates an increase.
5Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.
60
Table 2.10. Gross Private Financing to Emerging Market Economies

1997
________________________________
1998
__________________________________________
1996
1997
Q1
Q2
Q3
Q4
Q1
Q2
June
July
August
Total
Asia
Europe
Middle East and Africa
Western Hemisphere
218.4
118.5
21.3
15.5
63.1
286.3
127.5
37.6
31.0
90.1
56.2
32.5
4.1
2.8
16.7
87.2
38.2
13.9
5.8
29.4
84.8
36.2
7.9
10.6
30.1
58.2
20.7
11.8
11.7
14.1
39.5
7.1
7.5
3.3
21.7
52.9
13.9
3.3
11.5
24.2
17.0
1.7
3.3
3.3
8.7
17.3
1.0
2.8
6.7
6.8
2.7
1.2
0.3
1.2
Bond issues
Asia
Western Hemisphere
Other regions
101.9
43.1
47.2
11.6
127.9
45.5
54.2
28.2
27.7
12.7
11.9
3.1
43.0
15.9
18.7
8.4
45.0
14.2
20
10.9
12.4
2.7
3.8
5.9
25.3
2.7
14.8
7.8
30.4
6.7
15.6
8.1
9.7
0.2
5.3
4.2
13.6
0.1
5.4
8.2
0.4
0.3
0.2
Other fixed income

Asia
Western Hemisphere
Other regions
9.4
9.4
10.0
9.8
0.2
1.9
1.9
3.3
3.1
0.1
3.6
3.6
1.1
1.1
0.1
0.1
0.4
0.4
0.1
0.1
Loan commitments
Asia
Western Hemisphere
Other regions
90.7
56.2
12.3
22.2
123.6
58.9
30.9
33.8
23.3
14.9
4.8
3.6
32.7
15.6
9.0
8.1
29.9
16.2
7.6
6.0
37.5
12.1
9.4
15.9
11.0
2.5
6.9
1.5
18.4
4.8
8.5
5.0
6.2
1.2
3.4
1.6
3.4
1.0
1.3
1.2
2.3
1.0
1.2
0.2
Equity issues
Asia
Western Hemisphere
Other regions
16.4
9.8
3.7
3.0
24.8
13.2
5.1
6.5
3.2
2.9
0.1
0.3
8.2
3.5
1.6
3.0
6.3
2.2
2.5
1.6
7.1
4.7
0.9
1.6
3.1
1.7
1.4
3.7
1.9
0.1
1.7
1.0
0.2
0.8
0.2
0.1
0.1
Source: Capital Data Loanware and Bondware, Ltd.
in January 1995, close to the peak of the Mexican crisis (Figure 2.15). The baseline projections assume that
these spreads will decline and access to private financing will be maintained, although at lower levels than
in 1997 and early 1998. Thus net private inflows
into the emerging market economies of the Western
Hemisphere are projected to decline in 1998 and 1999,
to a level next year that would be about $20 billion
below the 1997 peak. Net private inflows into countries in transition are also projected to decline in 1998,
mainly reflecting Russia. If interest rate spreads do not
decline, and if private capital flows do not recover as
assumed, domestic demand and economic activity in
the emerging market economies will, of course,
weaken, by more than projected in the baseline as imports are compressed and current account balances
turn toward surplus. Higher borrowing costs could also
put strains on fiscal balances.
The sharp declines in private capital flows to emerging market economies that began with the eruption of
the Asian crisis have already required substantial adjustments of external positions, especially in Asia,
even though the adjustments are being cushioned in
several cases by drawdowns of reserves and by official
borrowing. Among the crisis countries, Indonesia,
Korea, and Thailand have all been supported by substantial official flows catalyzed by IMF arrangements.
Looking ahead, similar adjustment patterns can be expected in Russia and to a lesser extent in several countries of the Western Hemisphere, particularly if net pri-
vate inflows fall below those assumed in the baseline

projections.
For the five countries most severely affected by the
Asian crisisIndonesia, Korea, Malaysia, the Philippines, and Thailandcurrent account balances are projected to amount to a combined surplus of $57 billion
in 1998, compared with combined deficits of $24 billion in 1997 and $54 billion in 1996 (Table 2.11). The
swings between 1997 and 1998 alone are projected to
range from about 4 percentage points of GDP in
Indonesia and the Philippines to 1315 percentage
points of GDP in Korea and Thailand (Table 2.12).
These large shifts in external balancesand they could
turn out to be even larger than projected in the baselineare being generated partly by the large currency
depreciations that have occurred and partly by the compressions of domestic demand that have resulted from
the tightening of financial conditions, including
through the implementation of adjustment measures.
As discussed earlier, the adjustments in the Asian crisis
countries thus far have occurred mainly through a
sharp decline in imports, but the large improvements in
competitiveness may be expected increasingly to boost
exports, especially as financial conditions ease. With
regard to currency movements, it is notable that in the
14 months to September 1998 the real effective exchange rates of Korea, Malaysia, the Philippines, and
Thailand declined by 1828 percent, and that of
Indonesia by 60 percent, with the general weakness of
partner currencies in Asia and higher domestic inflation
61
offsetting a relatively small fraction of their nominal

depreciations vis--vis the U.S. dollar (Table 2.13).
Other emerging market countries experiencing
weaker capital inflows are also projected to improve
their current account positions in 1999, in part through
adjustment measures. And adjustments in current account balances could be larger than projected if interest spreads remain high and net capital inflows are
lower than in the baseline.
The improvements in current account positions
occurring in countries where financing has become
more constrained are contributing to corresponding
deteriorations in the current account balances of other
countriesboth emerging market and advanced
economieswhich are experiencing weaker export
demand, deteriorations in competitiveness, and declines in the prices of commodity exports. Among the
developing country regions, the largest projected
shift into deficit in 1998 is for the Middle East and
Europea shift of about $24 billion, $10 billion larger
than the shift projected in the May 1998 World
Economic Outlookreflecting the deterioration in the
current account balances of the oil-producing countries. This deterioration is not expected to be significantly reversed in 1999. In Saudi Arabia, for example,
after virtual balance in 1996 and 1997 a deficit equivalent to 8!/4 percent of GDP is projected for 1998. The
weakness of commodity prices is also a factor tending
to increase Africas deficit.
In the industrial countries as a group, current account balances are projected to deteriorate by more
than $80 billion in 1998, and by a further $47 billion
in 1999. The main component of the shift into deficit
in 1998 is an $81 billion widening projected for the
current account deficit of the United States; other projected changes are mutually offsetting. The current account surplus of the EU is projected to narrow by $27
billion, while the current account surplus of Japan is
projected to increase by $37 billion. Australias current account deficit is projected to widen to almost $20
billion or 5!/2 percent of GDP this year, reflecting regional developments.
The projected increase in the U.S. current account
deficit, to about 2#/4 percent of GDP in 1998 and 3!/4
percent in 1999 from its levels of 1!/22 percent over
the past several years, reflects the downturn in Asia
and expected adjustments in Latin America together
with the continued buoyancy of domestic demand and
the strength of the dollar. The decline in the EUs surplus is accounted for mainly by a widening of the
United Kingdoms deficit to 1!/2 percent of GDP in
1998, reflecting the appreciation of sterling and the
strength of domestic demand. Elsewhere in Europe,
lower import prices and improvements in competitiveness in recent years are likely to offset the decline in
exports to Asia, leaving the current account balances
of the major continental countries broadly unchanged.
Norways current account surplus, however, is ex-
Figure 2.15. Emerging Markets: Bond Spreads1

(Percent a year)
In all regions, emerging market bond spreads (relative to U.S.
treasury securities) increased sharply following the Russian
crisis in August 1998.
20 Emerging Market
15
20
Europe
Bond Index
Spread
Russia2
10
10
Turkey
5
0
20
15
Poland
Hungary
1992
94
96
Sep.
98
1997
Sep.
98
20
Latin America
Asia
15
Venezuela
Indonesia
10
15
10
Korea
Brazil
Mexico
Philippines
Argentina
Thailand
1997
Sep.
98
1997
Sep.
98
Sources: Bloomberg Financial Markets, LP; Reuters; and IMF staff

estimates.
1Secondary market yield spreads on U.S. dollar-denominated bonds
over comparable U.S. treasury securities.
2 The Russian Eurobond spread reached 63.8 percent in the first week
of September 1998.
62
Table 2.11. Overview of Current Account Projections

Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Korea
Hong Kong SAR
Singapore
Memorandum
European Union
Euro area
Africa
Asia
ASEAN-4
Indonesia
Malaysia
Philippines
Thailand
Western Hemisphere
Russia
Total1
In percent of total world current
account transactions
In percent of world GDP
Differences
Current
from May 1998
Projections
Projections
_________________
_____________
1997
1998
1999
1998
1999
1995
1996
51.2
0.9
115.3
111.4
22.6
10.9
25.1
5.8
4.7
52.2
8.5
5.5
5.5
14.3
34.3
21.4
134.9
65.8
13.8
20.5
40.5
2.9
3.3
55.7
23.0
11.0
1.6
14.6
69.4
6.0
155.2
94.1
4.0
39.4
33.6
7.3
9.3
63.4
8.2
7.7
5.5
14.8
39.6
67.4
236.3
131.4
6.4
31.4
30.4
18.7
11.9
107.0
39.0
5.1
17.7
18.4
120.9
290.4
135.8
8.0
28.4
28.0
21.1
9.5
102.4
26.7
6.0
1.9
16.0
11.0
15.5
9.3
4.5
4.2
2.3
1.5
1.8
1.1
4.6
3.9
0.3
1.9
0.4
55.5
61.1
39.4
3.4
9.5
4.0
3.6
6.8
1.1
5.6
6.9
0.2
3.0
0.6
50.3
53.9
54.7
5.8
38.7
90.8
87.3
1.0
64.0
123.3
111.6
8.9
19.5
96.6
110.9
61.7
66.4
92.8
108.3
50.7
16.7
12.1
9.6
5.8
65.0
29.7
21.5
9.5
95.3
16.5
41.9
32.0
6.8
8.7
3.3
13.2
0.9
35.9
71.4
3.9
38.4
30.7
7.6
4.9
3.9
14.4
8.7
37.8
61.8
5.3
4.7
16.0
3.9
4.8
4.3
3.0
3.7
64.9
78.3
14.7
37.2
17.6
2.1
4.4
1.0
12.1
20.3
80.5
63.2
12.7
39.4
17.6
2.8
3.4
0.5
11.9
18.9
71.0
12.6
0.3
7.1
4.2
2.7
0.1
1.7
3.0
2.8
29.3
0.2
15.5
6.2
2.7
0.6
2.9
1.7
15.8
1.6
5.9
4.1
5.7
1.5
18.0
16.6
14.9
2.5
4.0
25.0
20.3
18.2
0.6
4.1
30.8
21.7
19.7
4.1
5.0
25.1
23.3
21.6
2.0
3.8
6.9
0.6
0.1
6.0
0.3
17.2
3.2
2.1
13.0
1.1
45.7
55.1
17.4
69.5
106.7
8.5
8.9
0.4
0.2
0.4
0.2
0.1
0.1
0.5
0.2
0.7
0.4
0.1
0.1
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.
crepancy to $70 billion in 1998 and $107 billion in

1999.9 Even though the discrepancy in 1997, at $17 billion, was exceptionally small by the standards of preceding years, the projected increases in the discrepancy
seem unlikely to be realized once actual data become
available. This inconsistency or tension in the current
pected to decline sharply to below 1!/2 percent of GDP

this year, from more than 5 percent in 1997, owing to
lower oil export revenues.
In Japan, the substantial negative impact of adjustments in neighboring economies is expected to be outweighed by the weakness of domestic demand, lower
commodity prices, and the yens depreciation against
other industrial country currencies, so that the current
account surplus this year is projected to widen to 3!/2
percent of GDP, the largest surplus since 1987 and !/2
of 1 percent larger than projected in May.
The projected changes in current account balances
imply a widening of the global current account dis-
9The global current account discrepancy reflects the fact that current account imbalances do not sum to zero across all countries.
Over history, this reflects a number of factors including differences
in accounting practices. In the projection period, changes in the discrepancy reveal inconsistencies among country projections, or tensions in the global projections.
63
Table 2.12. Selected Economies: Current Account Positions

(Percent of GDP)
1995
1996
1997
1998
1999
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
1.6
2.2
0.9
0.7
2.3
0.5
0.8
1.8
1.4
0.6
1.3
3.3
0.2
0.6
1.9
2.2
0.2
2.8
2.9
0.6
1.5
2.8
3.6
0.3
2.2
2.6
1.4
2.0
3.3
4.0
0.4
1.9
2.3
1.5
1.6
Australia
Austria
Finland
Greece
Hong Kong SAR1
Ireland
Israel
Korea
New Zealand
Norway
Singapore
Spain
Sweden
Switzerland
5.5
2.0
4.1
2.1
3.9
2.7
5.6
1.9
3.1
3.3
16.8
0.2
2.4
7.0
2.1
4.0
1.8
4.0
2.6
1.1
2.7
5.6
4.7
3.9
6.7
15.7
0.3
2.6
7.2
4.0
3.2
1.3
5.5
2.4
3.2
2.8
3.6
1.8
7.7
5.2
15.4
0.5
2.7
8.2
2.7
5.0
0.6
5.0
2.3
0.0
3.2
2.6
12.9
6.5
1.3
20.6
0.2
3.1
7.8
2.0
5.4
0.6
4.7
2.1
1.2
3.6
2.6
7.9
6.0
3.8
18.9
0.2
3.3
8.1
2.2
0.6
1.1
1.5
1.2
1.1
Algeria
Argentina
Brazil
Cameroon
Chile
China
Cte dIvoire
Egypt
India
Indonesia
Malaysia
Mexico
Nigeria
Pakistan
Philippines
Saudi Arabia
South Africa
Thailand
Turkey
Uganda
5.3
1.5
2.6
0.8
2.1
0.2
6.0
2.3
1.6
3.3
10.0
0.6
3.2
3.4
4.4
4.3
2.0
7.9
0.5
2.5
2.7
1.9
3.0
2.3
5.4
0.9
4.8
0.3
1.4
3.3
4.9
0.7
16.9
6.5
4.7
0.2
1.3
7.9
1.4
1.8
7.4
3.5
4.2
1.3
5.3
3.9
4.5
0.2
1.6
1.8
4.8
1.9
4.7
5.8
5.2
0.2
1.5
2.0
1.4
0.8
1.1
4.4
3.6
2.4
7.0
3.4
4.1
2.4
1.8
2.5
6.5
3.4
6.8
2.4
1.5
8.3
1.1
10.7
1.9
1.8
0.1
4.3
3.3
2.5
5.5
3.3
3.2
2.0
1.6
2.7
4.6
2.3
2.5
2.5
0.7
8.0
1.1
9.9
3.0
3.5
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland2
Russia
Slovak Republic
Ukraine
2.7
5.1
5.7
3.4
10.2
3.3
1.6
2.0
4.0
7.6
9.7
3.8
4.0
9.1
1.0
0.6
11.0
3.0
6.1
12.2
2.2
6.9
10.3
3.3
0.1
11.0
3.0
3.0
9.2
2.9
6.9
9.8
4.3
1.3
10.0
3.0
3.0
7.8
3.3
6.8
9.2
5.4
0.7
6.0
2.0
Memorandum
European Union
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
64
Table 2.13. Recent Exchange Rate Movements on a Bilateral and

Multilateral Basis1
(Percent)
Bilateral
Nominal Effective
Real Effective
Exchange Rate
_________________________
Exchange Rate
__________________
Exchange Rate
__________________
Versus
U.S. dollar
Versus
Japanese yen
INS
weights2
DOTS
weights3
INS
weights2
DOTS
weights3
United States
Japan
Germany
France
United Kingdom
Italy
Canada
15.0
0.9
1.6
1.9
0.3
9.2
17.6
18.7
19.5
19.8
17.9
6.8
10.9
6.7
2.8
3.0
4.1
1.5
5.4
16.5
1.5
5.8
4.8
7.0
4.0
6.2
10.5
9.6
2.1
2.0
7.3
1.8
6.2
12.7
4.0
2.9
2.5
8.6
2.2
7.4
Australia
New Zealand
21.9
26.3
8.1
13.3
16.2
20.5
6.7
13.5
16.9
20.2
9.9
14.7
China
India
15.9
17.4
1.1
6.1
12.0
13.5
6.8
0.4
6.3
6.1
3.0
Hong Kong SAR

Korea
Singapore
33.8
17.6
19.4
17.5
22.2
3.1
5.2
8.2
29.3
5.9
12.9
14.8
23.5
2.0
8.2
12.6
23.7
8.2
14.9
16.1
19.8
2.7
12.4
Indonesia
Malaysia
Philippines
Thailand
77.7
39.8
38.3
36.7
73.8
29.2
27.5
25.6
75.6
32.3
32.5
30.5
74.3
30.2
31.3
26.7
58.0
28.8
27.2
22.3
56.3
27.2
26.0
19.1
Argentina
Brazil
Chile
Venezuela
Mexico
5.8
11.3
17.2
22.2
17.7
10.8
4.3
2.6
8.5
4.4
1.8
6.6
14.0
19.3
7.7
0.6
2.7
13.1
20.6
3.4
0.2
2.4
28.0
4.4
3.9
0.7
0.2
26.8
6.4
Poland
Hungary
Turkey
South Africa
10.6
13.8
47.5
27.0
5.1
1.3
38.3
14.1
8.5
12.5
46.5
24.4
8.6
12.7
45.4
21.0
2.4
2.1
19.8
21.1
2.4
2.8
21.2
19.0
Sources: IMF, Direction of Trade Statistics (DOTS) and Information Notice System (INS) databases;
WEFA, Inc; and IMF staff calculations.
1Change from June 1997 to September 1998; positive number means appreciation. September 1998 was
calculated based on the average exchange rates up to and including September 21.
2Partner country weights capture both bilateral and third-country effects based on data for 198890.
3Partner country weights capture only bilateral trade, based on data for 199496.
projections is greater than is typically the case, perhaps

reflecting the size of the adjustments in trade flows
now under way and the paucity of consistent trade and
financial flow data available for 1998. It is likely to
stem from a combination of two sources of possible
forecast error: first, underestimation of the projected
adjustments in the external balances of emerging market countries experiencing reduced capital inflows
that is, the current account surpluses of these countries
may turn out to be greater than now projected; and second, overestimation of the shifts into deficit of other
economies.10
The consequences for the global outlook are difficult to determine but point in the direction of downside risk. In particular, data available for the first
half of 1998 show a potentially larger trade surplus
in Asia than is portrayed in the projections. On this
basis, one plausible scenario would incorporate
more trade adjustment in the crisis economies than
in the baseline projections. In this case, import
compression and the slowdown in economic activity in these countries may still be underestimated
in the current projections. Similarly, the rise in the
global discrepancy could point to unresolved tensions in the more recent evolution of the crisis. For
example, the projections for the United States may
allow for a larger decline in exports than is consistent with the import projections for its trading partners in Latin America. Here, the tension would be
10The recent drop in commodity prices is a third potential source

of inconsistency but is likely to be a smaller factor in the current
circumstances.
65
resolved by greater-than-assumed adjustment in Latin

America.
The large shifts in external positions stemming from
the crisis in emerging markets have been both inevitable and, in the circumstances, to some extent also
desirable. They have not only helped to cushion the
contraction in output in the crisis countries but also to
reduce the risk of overheating in countries that are at a
mature stage of the business cycle. However, these adjustments will eventually need to be reversed through
a process that is likely to involve shifts in relative
cyclical positions, changes in the pattern of the global
flows of funds, and exchange rate changes. A benign
scenario for this process would involve a gradual return of confidence in emerging markets, a decline in
interest rate spreads to more normal levels, a pickup in
domestic demand in the crisis countries, and a progressive reduction of the large surpluses emerging in
these countries in 199899. Recovery in Japan, led by
resurgent domestic demand and a strengthening of the
yen, would help to reverse the recent rise in Japans
surplus. The U.S. and U.K. economies would experience a cyclical moderation of growth, while the euro
area would continue to absorb economic slack, with
the dollar and sterling adjusting vis--vis the euro in
accordance with the likely shifts in relative cyclical
positions and in the relative attractiveness of financial
assets. Finally, the resumption of stronger growth in
Asia would help the recovery of commodity prices and
strengthen external positions of commodity exporters.
In this scenario, the adjustment of external positions
would contribute to the forces of recovery from the
Asian crisis.
However, the adjustment process might proceed less
smoothly if the return of confidence in emerging markets were significantly delayed and if financial markets eventually were to question the sustainability of
the large current account deficit of the United States,
which appears to be the main counterpart of the sharp
shifts into surplus in the crisis countries. In this case,
the current account imbalances would initially widen
further, with a risk that subsequent market reactions
would be more abrupt and with potentially adverse
effects on the exchange rates of the major currencies,
inflation, interest rates, and stock markets. Such a
scenario might well be associated with significantly
weaker global economic growth. The adjustment
process could also be severely impeded if countries
where current account deficits widen engage in defensive reactions, in the form of protective trade measures
or competitive currency depreciations, with their damaging repercussions for global trade and growth.
The wider crisis scenario could also be transmitted
to partner countries through the banking system. The
Russian crisis, coming on top of the Asian crisis, has
adversely affected the balance sheets of banks in the
industrial countries. German banks have outstanding
loans of about $30 billion to Russia, 60 percent of
which is government guaranteed, with half of the remainder being provisioned for. Other European banking systems combined have smaller exposures than
German banks, some of them are state-guaranteed, and
provisions have been increasing. U.S. banks have
about $7 billion in exposure to Russia, which has already resulted in some significant provisions and
losses. U.K. and Japanese banks have relatively small
exposures, at less than $1 billion each, although one
U.K. bank has reported substantial losses. Moodys
has put the ratings of several European banks on review and has placed a negative outlook on others, although it does not view events in Russia as a major
systemic risk to banks in the industrial countries. Nonbank financial institutions have been adversely affected as well, with a number of hedge funds and securities firms reporting substantial losses. A handful of
hedge funds have been unable to meet margin calls or
have sought bankruptcy protection.
Foreign Exchange and Financial Market

Developments in the Industrial Countries
The deepening crisis in emerging financial markets
and the deteriorating economic situation in Japan have
had sizable spillover effects on financial markets in
the industrial countries. Markets in the United States
and Europe initially benefited, as bond yields declined, equity markets reached new highs, and the U.S.
dollar and core European currencies strengthened on a
multilateral basis. Downward pressures on financial
markets were confined mainly to Japan and major
commodity-exporting countries such as Canada and
Australia, which were perceived as most vulnerable to
the negative effects of a prolonged slowdown in Asia.
However, the nature of the spillover effects changed in
August and early September as the crisis took on a
more global dimension. Government bond yields fell
furthermost sharply in the United States, the United
Kingdom, and the core ERM countriesamid a global
flight to quality, which was reflected in widening international yield differentials on government bonds
and widening yield spreads on corporate bonds. In addition, stock markets in the major industrial countries
suffered sizable downward corrections, and the U.S.
dollar weakened against the yen and the ERM currencies. Volatility increased sharply across all markets.
In foreign exchange markets, the multilateral value
of the U.S. dollar reached its highest level since
December 1986 in mid-July, buoyed by strong domestic demand growth in the United States, interest rate
differentials favoring dollar-denominated assets, and
safe-haven demand in the face of deteriorating sentiment toward emerging markets (Figure 2.16).
However, the dollar fell sharply in late August and
early September as the financial market crisis spread
to Russia and Latin America, prompting a downward
66
Foreign Exchange and Financial Market Developments in the Industrial Countries

Effective Exchange Rates
correction in U.S. equity prices and revised expectations regarding the near-term direction of U.S. monetary policy.
The depreciation of the Japanese yen accelerated in
May and early June as the extent of the economic contraction in the first quarter became apparent, and as
concerns increased about prospects for the early resolution of problems in the banking system. An 8-year
low of more than 145 to the dollar was reached in
mid-June before a rebound sparked initially by coordinated intervention by the U.S. and Japanese authoritiesthe first U.S. intervention since 1995and supported in early July by the announcement of new
initiatives by the Japanese authorities in the banking
sector. The yen subsequently fell back to a new low before rebounding in late August and early September.
Associated with the weakness of the yen and the
Japanese economy were renewed currency weakness in
neighboring emerging market economies. Moreover,
the deep recessions in the Asian emerging market
economies and Japan contributed to the weakness of
commodity prices, which was a key factor in the decline of the Australian and New Zealand dollars against
the U.S. dollar and the major European currencies.
Lower commodity prices also contributed to downward pressure on the Canadian dollar, which fell to
record lows against the U.S. dollar in August, prompting the Bank of Canada to raise official interest rates by
a full percentage point.
In Europe, movements in the pound sterling, which
have been in a narrow range vis--vis the U.S. dollar,
have been affected mainly by changing expectations
regarding U.K. monetary policy. The pound rebounded
temporarily in June following the release of data showing inflation above its target and wages accelerating,
and after the Bank of England unexpectedly raised official rates by a further 25 basis points. However, sterling subsequently weakened again as signs emerged
that the economy was slowing and as wage and price
pressures began to moderate, suggesting that shortterm interest rates had peaked. The prospective euroarea currencies have generally strengthened on an effective basis, particularly since late August as the
dollar has weakened. Most currencies have remained
near their central ERM parities, the exceptions being
the Irish pound, which has remained moderately appreciated following its revaluation by 3 percent in
March, and the Greek drachma (not an initial participant in the third stage of EMU), which entered the
ERM in March at a central rate that entailed a 12.3 percent devaluation against the European currency unit
(ECU). The drachma initially strengthened to about
9 percent above its ERM central parity before giving
up part of those gains in August as the Russian crisis
deepened.
Government bond yields rose slightly in April and
early May in most industrial countries except Japan
amid concerns about the inflation risks associated
(Logarithmic scale; 1990 = 100)

The yen continued to weaken up to August, while concerns about
the effects of falling commodity prices led to a decline in the
Canadian dollar.
Real effective exchange rate1
130
United States
120
Nominal effective exchange rate 2
130
120
Germany
110
110
100
100
90
80
1991
1991
93
95
93
95
97 Aug.
98
90
97 Aug.
98
120
France
110
180
Japan
170
160
100
90
150
1991
93
95
140
80
97 Aug.
98
130
110
Italy
120
100
110
90
100
90
80
1991
93
95
97 Aug.
98
70
60
120
1991
93
95
Canada
97 Aug.
98
110
100
United Kingdom
130
120
90
110
80
100
70
60
90
1991
93
95
97 Aug.
98
80
1991
93
95
97 Aug.
98
1Defined in terms of relative normalized unit labor costs in manufacturing, as estimated by the IMFs Competitiveness Indicators System,
using 198991 trade weights.
2 Constructed using 198991 trade weights.
67
with continued above-potential growth in the United

States. However, yields declined steadily from midMay as the deteriorating economic situation in Asia
and associated weakness in commodity prices eased
inflation concerns and as turmoil in emerging markets, including Russia, triggered a flight to quality.
This trend accelerated in late August, particularly in
the United States, the United Kingdom, and core
ERM countries, as the emerging market crisis deepened. By early September, nominal bond yields had
fallen by 150 basis points or more from a year earlier,
in some cases reaching postwar lows, though the declines from earlier lows were somewhat less pronounced in real terms. In Japan, bond yields reached
unprecedented levels of well below 1 percent as
economic and financial sector conditions continued to
deteriorate and inflation dropped to near zero (Figure
2.17). Elsewhere, government bond yield differentials
widened somewhat in the future euro area, and bond
yields also rose for a period in Canada, Australia, and
New Zealand, reflecting downward pressures on the
currencies of these countries. Corporate bond yield
spreads also widened sharply in North America and
Europe.
Since mid-April, monetary authorities in most industrial countries have held short-term interest rates
steady as the deflationary effects of the Asian crisis
and its repercussions have helped to keep inflationary
pressures well-contained, even in countries such as the
United States where resource utilization has been
high. Among the major commodity-exporting countries, strong downward pressures on exchange rates
prompted official interest rate hikes amounting to a
cumulative 375 basis points in Norway between late
June and August, and a 100 basis point hike in Canada
in August. Exchange rate pressures also prompted
rises in short-term market rates for a period in New
Zealand and, to a lesser extent, in Australia, while official rates were raised on two occasions in Denmark,
most recently by 100 basis points in mid-September.
Earlier, in June, inflation concerns had prompted a 25
basis point hike in the United Kingdom. By contrast,
in Sweden, official interest rates were lowered by 25
basis points in early June, while in Greece the central
bank cut its Lombard rate by 300 basis points at the
end of July. In Japan, the central bank reduced its target for the overnight call rate from !/2 to !/4 of 1 percent
in early September amid continuing concerns about
deflationary pressures and the weaknesses in the banking sector.
Within the future euro area, the scope for adjusting
monetary policy in response to differences in cyclical
conditions has been constrained by the need for shortterm interest rates to converge by the January 1, 1999
start date of EMU. This process will entail significant
rate reductions in some countries, including Ireland
andto a lesser extentPortugal, where domestic demand growth is already strong, raising additional con-

Nominal Interest Rates
(Percent a year)
Long-term interest rates in the industrial countries have declined
further during 1998. Short-term interest rate convergence in the
euro area has continued.
18
Long-Term Interest Rates1
16
United Kingdom
14
Italy
12
10
Canada
8
6
France
United States
Japan
Germany
2
0
1990
91
92
93
94
95
96
97
Aug.
98
18
Short-Term
Interest Rates 2
16
Italy
14
France
United
Kingdom
12
10
8
6
United States
4
Germany
Canada
1990
91
92
Japan
93
94
95
96
97
Aug.
98
Sources: WEFA, Inc.; and Bloomberg Financial Markets, LP.

1Yields on goverment bonds with residual maturities of ten
years or nearest.
2Three-month maturities.
68
cerns about overheating (see Chapter V). Moves toward convergence of short-term rates since mid-April
have been fairly limited, with official rates being cut
by 50 basis points in Italy and by smaller amounts in
Portugal and Spain.
After further strong gains in early 1998, stock market prices in many industrial countries generally
consolidated or rose to new highs in mid-July before
sizable downward corrections prompted by the prospect of a marked slowdown in world economic
growth (Figure 2.18). Although the global interest
rate environment remained highly favorable for equities, concerns that current market valuations may be
difficult to sustain in the face of slower growth in
corporate earnings, combined with a general increase
in risk aversion, prompted a reversal of the price
gains recorded earlier in the year in the United States
and the United Kingdom, and a partial reversal of
the larger earlier gains in the major continental
European markets. In Japan, equity prices remained
under downward pressure, falling to 12-year lows in
late August and early September on concerns about
the economy and the banking sector. Markets also
weakened significantly in other countries with large
direct and indirect exposures to the economic downturn in Asia, including Canada, Australia, and New
Zealand.
Figure 2.18. Advanced Economies: Equity Prices

(U.S. dollar terms; logarithmic scale; January 1990 = 100)
Equity markets in the United States and the major European countries
performed strongly up to mid-July but then dropped sharply.
400
United States
United Kingdom
300
200
140
France
100
Germany
80

60
What Is the Role of Transitory Factors in

Influencing Inflation in the United States?
Japan
Inflation has remained low in the United States despite robust output growth and labor market conditions
that previous experience suggests would result in inflationary pressures (Table 2.14). The U.S. unemployment rate fell to a 28-year low of 4.3 percent in April
1998, and since late 1994 it has been consistently
below the level of around 6 percent at which labor
shortages were previously found to result in wage and
inflationary pressures.
The success of the United States in maintaining low
inflation close to full resource utilization can be attributed in part to factors that are likely to allow continued strong growth at a lower inflation rate than in
the past. The Federal Reserves successful efforts to
lower inflation appear to have reduced inflation
expectations in the United States, and to have allowed
lower interest rates and higher levels of investment
and output than was the case without the added
credibility. Moreover, there is evidence that the unemployment rate consistent with stable inflation
the nonaccelerating inflation rate of unemployment
(NAIRU)has fallen in recent years, from around 6
percent to between 5 and 5!/2 percent, though there is
a large degree of uncertainty surrounding such esti-
1990
91
92
Source: WEFA, Inc.
69
93
94
95
96
97
Aug.
98
40
Table 2.14. United States: Economic Indicators
demand and output in the United States, with a slowdown in net exports in lieu of a retrenchment in domestic consumption and investment that would otherwise have taken place as a result of monetary
tightening.)
Further, the exchange value of the U.S. dollar has
risen sharply in the past three years, with its nominal
effective value increasing by over 25 percent since
April 1995. This has had both a direct effect of reducing prices of imported goods, and an indirect effect of
putting competitive pressure on producers of tradables
and thus limiting the scope for price increases. Weak
demand in Asia has also contributed to declines in the
prices of commodities, thereby reducing cost pressures, as reflected especially clearly in the producer
price index, which has declined since the beginning of
1997. With firms facing competitive pressure both domestically and externally, these cost reductions have
contributed to lower price inflation. Meanwhile, in the
labor market, although the growth of labor earnings
has picked up somewhat, it has remained subdued in
relation to the experience of recent decades despite
low rates of unemployment. The low-inflation environment has also been enhanced by slower growth of
health care costs, reflecting the rapid expansion of
health maintenance organizations that put an emphasis
on cost containment. Falling computer prices have
been another contributory factor.
The United States has also enjoyed relatively strong
productivity gains in recent years that have largely offset wage increases and have even led to declines in
unit labor costs in manufacturing in some years. This
increased productivity growth may stem in part from
the environment of stable, low inflation and also from
the effects of corporate restructuring. There may also
have been benefits from the large-scale investments in
information technology. Finally, revisions to the calculation of the U.S. consumer price index will have
the effect of reducing the upward bias in the measurement of inflation by about 0.4 percentage point over
the next five years, so that measured inflation will tend
to be somewhat lower on this account.
Some of the developments that have dampened inflation recently are of a temporary nature, implying
that unless productivity growth remains strong there
are notable risks to the inflation outlook as these transitory factors are reversed. The current value of the
dollar appears to be significantly above its mediumterm equilibrium level, and as growth picks up in
Europe and Asia the currency may be expected to depreciate, putting upward pressure on import prices.
Similarly, renewed growth in Asia could provide the
impetus for a reversal of the decline in commodity
prices. And despite the absence of serious cost pressures in the United States so far, it remains an open
question whether labor costs and the prices of other
factors of production will remain subdued if resource
utilization remains elevated.
(Annual percent change unless otherwise noted)

United States
___________________________
Real GDP
Consumer price index
GDP deflator
Unemployment rate2
Producer price index
Productivity, manufacturing
Unit labor costs, manufacturing
Nominal effective exchange rate
Import prices
Memorandum
Oil prices
Nonfuel commodity prices
199295
1997
19981
2.7
2.9
2.5
6.5
1.7
3.6
0.5
0.2
1.6
3.9
2.3
1.9
5.0
0.1
4.0
10.3
4.3
3.5
1.6
1.2
4.5
5.6
3.4
1.2
4.9
5.8
2.0
6.2
5.4
3.3
31.1
13.9
1Projections, except for producer price inflation and the nominal

effective exchange rate, where changes shown refer to data through
August 1998.
2Percent of labor force.
mates.11 The apparent fall in the NAIRU can be explained in part by demographic shifts, as the aging of
the baby boom generation has resulted in a larger proportion of older workers who tend to change jobs less
frequently, thus reducing the frictional unemployment present in the economy.12
For 1995 and 1996, the combination of low inflation
and unemployment below 6 percent appears to be consistent with a decline in the NAIRU from 6 percent before 1995 to 5.5 percent (Figure 2.19). However, even
assuming a NAIRU as low as 5 percent does not explain the fall in inflation in 1997; indeed, all else
equal, inflation would have been expected to rise as
unemployment stayed below 5 percent from the second quarter of 1997 on, which is below essentially all
estimates of the NAIRU. This suggests that factors
other than labor market developments account for the
decline in inflation since the beginning of 1997.
In fact, it would appear that the performance of inflation in 199798 results in part from a confluence of
favorable developments, the influence of which could
wane in the period ahead. For example, slow growth in
Asia has curbed demand for U.S. exports and thus has
helped to avert the need for the Federal Reserve to
raise interest rates to stem overheating. (The crisis in
Asia has thus effectively changed the composition of
11See Robert J. Gordon, The Time-Varying NAIRU and Its

Implications for Economic Policy, Journal of Economic
Perspectives, Vol. 11 (Winter 1997), pp. 1132; and Douglas
Staiger, James H. Stock, and Mark W. Watson, The NAIRU,
Unemployment and Monetary Policy, Journal of Economic
Perspectives, Vol. 11 (Winter 1997), pp. 3349.
12See Joseph Stiglitz, Reflections on the Natural Rate
Hypothesis, Journal of Economic Perspectives, Vol. 11 (Winter
1997), pp. 316, for a more detailed discussion of the NAIRU.
70
Does the Unemployment Rate Provide a Good

Indicator of the State of the Labor Market, and
How Much Slack Is There Currently in the Labor
Markets of Advanced Economies?
After falling to 4.3 percent in April and May 1998,
the unemployment rate in the United States stood at
4.5 percent in June 1998, close to the lowest level
reached in three decades. In contrast, unemployment
has trended sharply upward over the past decade in
many of the continental EU countries, reaching postwar highs in 1997 in countries such as France,
Germany, and Italy. While unemployment in Germany
and France has declined somewhat in the first five
months of this year, it is still more than 2!/2 times the
current unemployment rate in the United States
(Figure 2.20). There have been a few notable exceptions to the trend of rising unemployment in the EU
for example, the unemployment rate dipped sharply in
the United Kingdom, to about 4.8 percent, in May
1998. Unemployment in the Netherlands has also been
falling in recent years.
While differences in measured rates of unemployment do provide useful information about the relative
strengths of labor markets in different countries, they
do not always provide the best indicator of the capacity of an economy to create jobs and employ people
gainfully. In part this is because of the differences in
how unemployment is measured among countries
labor force surveys being used in some cases, and
numbers of people claiming benefits in others. Table
2.15 shows how assessments of labor market performance can change significantly depending on the measure of unemployment used. For instance, the unemployment rate in the United Kingdom in 1997, based
on the standardized measure of the Organization for
Economic Cooperation and Development (OECD),
was almost 1!/2 percentage points higher than the national definition based on benefit claimants. In the
case of the Netherlands, by contrast, the OECDs standardized measure paints a more impressive picture of
labor market performance than the national definition,
although allowance needs to be made for substantial
withdrawal from the labor force.
Changes in the measured rate of unemployment
may at times be mainly a reflection of changes taking
place in participation rates, as people move in and
out of the labor force, rather than an indication of
changes in employment.13 Although structural factors
such as increased participation of women in the
labor force govern long-term trends in participation
rates, there is also a tendency for participation rates to
be procyclical, reflecting cyclical variation movements in the probability of successful job search
Figure 2.19. United States: Actual

and Predicted Inflation1
(Percent)
Low inflation in 199596 appears consistent with a decline in the
NAIRU from about 6 percent to the 55.5 percent range, but this
does not explain the even lower inflation in 1997 and early 1998.
7
Inflation forecast with NAIRU

of 6.0 percent

of 5.5 percent

of 5.0 percent
1994
95
96
2
Actual
97
98:
Q2
1The forecasts of inflation are based on a model in which inflation is

related to the current and past values of the unemployment gap (the difference between the actual rate of unemployment and the non-accelerating inflation rate of unemployment (NAIRU)); past rates of inflation;
and past rates of increase of unit labor costs, import prices, oil prices,
and nonfuel commodity prices. The model is estimated using quarterly
data from 1975 to 1994, assuming a NAIRU of 6.0 percent, and then
used to provide forecasts of inflation for values of the NAIRU of 6.0,
5.5, and 5.0 percent.
13The participation rate is defined as the percentage of the working-age population that is either employed or actively seeking
employment.
71
Table 2.15. Selected Advanced Economies:

Unemployment Rates, 1997
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Netherlands
Belgium
Sweden
Figure 2.20. Selected Advanced Economies:

Unemployment1
Unemployment has declined in the United States but increased
sharply in a number of European countries over the past two
decades.
National
Definitions
Standardized
Definitions
NAIRU1
4.9
3.4
11.5
12.5
12.3
5.5
9.2
6.6
12.6
8.1
4.9
3.4
10.0
12.4
12.1
7.0
9.2
5.2
9.2
9.9
5.0
2.8
8.9
9.5
9.7
6.7
8.4
6.3
11.6
7.0
1Nonaccelerating inflation rate of unemployment (IMF staff

estimates).
15
(Figure 2.21). Consequently, movements in the measured rate of unemployment usually understate both
the extent of the improvement in labor market performance during recoveries, as well as the deterioration
during recessions.
Focusing on the employment, rather than unemployment, performance of different countries is one way of
avoiding some of the pitfalls involved in using unemployment data to make judgments about labor market
performance. But here there also are problems. Thus,
potential employment growth depends on the growth of
the working-age population, and one of the explanations for the relatively large growth of employment in
the United States is its relatively rapid population
growth by the standards of other industrial countries. To
assess the performance of labor markets, one should
therefore examine employment growth relative to the
growth of the working population. In addition, employment data may conceal factors such as whether the jobs
that have been created are temporary, part-time, or relatively poorly paying. Movements in employment may
nevertheless offer a valuable macroeconomic indicator
of labor market performance beyond what can be seen
from unemployment data. Figures 2.21 and 2.22 show
that the United States impressive record in bringing unemployment down in the 1990s is matched by its performance in employment creation, which has permitted
a substantial increase in participation rates. Aggregate
employment in the United States has increased by more
than 30 percent since 1980. This contrasts with the experience in continental Europe. There has, for instance,
been virtually no increase in employment in Germany
since 1980 as unemployment has increased steeply,
while in Italy employment has actually fallen during
this period. The United Kingdoms recent success in reducing unemployment is put into perspective not only
by the standardized measures referred to earlier, but
also by its relatively sluggish employment creation. In
this context, the job creation records of Ireland and the
Netherlands appear particularly impressive.
France
10
Germany
United States
5
Japan
1980
82
84
86
88
90
92
94
96
98
15
Italy
10
United Kingdom
1980
82
1Shaded
84
86
88
Netherlands
90
92
94
96
98
areas indicate IMF staff projections.
72
What accounts for the differences in the employment performances of the advanced economies? The
successful employment growth record of the United
States is related to the high degree of flexibility of its
labor marketboth real and relative wages respond
relatively quickly to market forces in the United
States, and there is also a much smaller wedge between
the gross wage paid by employers and the net wage received by employees than is the case in the other industrial countries. Factors contributing to the high degree of flexibility in U.S. labor markets include low
minimum wages, low rates of unionization, and relatively low levels of unemployment and social welfare
benefits. In contrast, the poor employment creation
record of countries such as France, Germany, and Italy
has been attributed to a variety of labor market regulations and norms that have had the effect in these countries of discouraging employers from hiring and workers from actively seeking employment, although more
recently some modest reforms have been introduced in
these countries. Although the institutional structures of
labor markets in both the United Kingdom and the
Netherlands were closer to those of the other EU countries up until the early 1980s, both these countries implemented a series of reforms in the mid-1980s that
succeeded in removing many of the rigidities that had
earlier characterized their labor markets. In the United
Kingdom, the reforms involved the liberalization of
hiring and firing laws, abolition of minimum wages for
all categories of workers except agricultural workers,
and the reduction of unemployment benefits relative to
earnings. (A national minimum wage, due to be introduced in 1999, is likely to affect employment negatively.) In the Netherlands, there were modest reductions in unemployment benefits, although with more
stringent eligibility requirements for receiving them.
Minimum wages were reduced substantially, and nonwage labor costs, particularly for unskilled workers,
were brought down significantly.14
Although the unemployment rate provides some indication of the degree of excess demand or supply in
the labor market, it is a very imprecise measure. Thus,
a relatively high unemployment rate need not imply an
effective excess supply of workers at the going wage.
Workers may be unwilling to accept jobs at the going
wage even at high rates of unemployment if there are
generous unemployment benefits or other social welfare programs. Also, since high unemployment rates
are generally associated with high proportions of longterm unemployed, leading in turn to the deskilling and
demotivation of workers, employers may be faced
with shortages of suitable workers even in conditions
characterized by high unemployment.
In this regard, unemployment relative to the natural
rate of unemployment or the NAIRU is a more appro-

Labor Force Participation
(Percent of total labor force)
Changes in participation rates reflect both long-term trends and
procyclical movements.
80
United States
Japan
Germany
70
France
60
1980
82
84
86
88
90
92
94
96
50
80
United Kingdom
70
60
Italy
Netherlands
1980
82
84
86
88
90
Source: OECD, Analytical Data Bank.
14These issues were discussed in more detail in the October 1997

World Economic Outlook.
73
92
94
96
50
priate indicator of potential inflationary pressures. The

NAIRU is determined in part by institutional features
of the labor market, such as wage-setting patterns; the
generosity of the unemployment benefits system; and
the ease with which training programs are available to
workers. But the NAIRU may change over time, reflecting not only institutional changes in the labor
market but also unemployment itself. Thus, a period of
sustained low unemployment can lower the NAIRU,
as previously demotivated workers reenter the labor
market. Table 2.15 provides the IMF staffs estimates
of the NAIRU for a group of selected advanced
economies. Even though there are wide margins of uncertainty about these estimates, it is apparent that the
NAIRU is higher in countries where labor market
rigidities are more pronounced.
When actual unemployment is below the NAIRU, it
is a sign that inflationary pressures may be building up
in the economy. Unemployment in both the United
States and the United Kingdom is currently below estimates of their respective NAIRUs, indicating a risk
of incipient inflationary pressures that may be building
in these economies. In the major continental European
countries, in contrast, unemployment is above the estimated NAIRU, suggesting that there is no immediate
inflationary danger from the rebound of activity in
these countries.

Employment1
(1980 = 100)
The performance of France, Germany, and Italy in employment
creation since 1980 has been disappointing.
140
130
United States
120
Japan
110
Germany
100
France
1980
82
84
86
88
90
92
94
96
98
90
140
Implications of Asset Price Inflation for Monetary

Policy in the Advanced Economies
130
In advanced economy equity markets, the sharp

price declines experienced in July and August have
largely reversed the gains accrued in 1998. Even with
these recent declines, however, asset prices, particularly the prices of equities, have risen substantially in
many advanced economies over the past several years.
This has raised concerns on the part of policymakersalthough inflation, as measured by consumer
price indices or other broad measures of the general
level of output prices, has remained low in most cases.
Concerns arise because increases in asset prices have
often in the past seemed to be a leading indicator of increasing demand and inflation. Part of the explanation
is that rising stock market wealth leads to increased
consumption, while associated declines in finance
costs lead to higher investment. Especially in economies such as the United States and United Kingdom
with high degrees of resource utilization, the rise of
stock market values over the past years has added to
the perceived risks of overheating. These risks have
been offset to some extent by the summer corrections,
since this sharp reminder that markets fluctuate both
up and down may well give pause to the translation of
increased stock market wealth into consumption.
In the United States, before the recent price declines, the Standard & Poor 500 stock price index
through July had risen by more than 20 percent since
120
Netherlands
110
United Kingdom
100
Italy
1980
82
1Shaded
84
86
88
90
92
94
96
98
90
74
Table 2.16. Selected Countries: Changes in Asset Prices

(In percent)
Country
United States
United Kingdom
Canada
France
Germany
Italy
Japan
Netherlands
Spain
Equity Prices
__________________________________________
Housing Prices
____________________
1998 to
September 24
1997
199296
Average
1997
8.6
0.6
10.8
12.7
11.2
13.4
6.9
4.8
11.0
29.5
26.1
13.7
27.8
38.4
53.1
21.0
44.9
42.2
14.5
11.4
12.3
7.0
11.3
7.0
1.3
23.5
13.2
4.3
8.4
1.8
0.9
4.6
...
3.61
9.9
2.4
199296
Average
3.3
2.3
0.8
1.8
...
4.41
7.6
Sources: Share prices from Bloomberg Financial Markets, LP. Indices are: United States, Standard &
Poor 500; United Kingdom, FTSE 100; Japan, Nikkei 225; Germany, Frankfurt Commerzbank; France,
Paris CAC 40; Italy, Milan Banca Commerciale; Canada, Toronto Stock Exchange Composite; Netherlands,
CBS General Index; Spain, Madrid stock index. Housing prices for United States and United Kingdom are
from Bloomberg Financial Markets, LP.; prices for Japan, Netherlands, and Spain from IMF staff country
data; Germany and France from Bank for International Settlements (BIS).
1Land price used for Japan instead of housing price.
the beginning of the year, following sharp increases in

199597 (Table 2.16). Other equity indices in the
United States have shown similar experiences. In the
United Kingdom, the Financial Times Stock Exchange
100 index rose by over 17 percent in 1998 before the
July reversal, following a 26 percent rise in 1997.
Equity prices in continental Europe have shown even
larger increases since late 1996, after relative sluggishness earlier and continue to show sizable gains in
1998. Prices of real estate have not risen by nearly as
much as equity prices, although there have been regional increases in the United States and the United
Kingdom, and they have declined since early 1997 in
Germany as well as Japan.
The strong multiyear performance of equity markets
could present a challenge for monetary policy, because
of its possible implications for aggregate demand and
inflation expectations. With regard to effects on consumption, using data through the mid-1980s for the
United States, it has been estimated that in the long run
consumption tends to increase by $0.03$0.05 for
every dollar increase in stock market wealth, compared with a $0.07$0.09 increase for each dollar increase in nonequity wealth, with the relative volatility
of stock values appearing to lead consumers to exercise greater caution in changing consumption than in
response to capital gains from other sources.15
Assuming a wealth effect of $0.04 per dollar, this evidence suggests that the more than 25 percent increase
in stock market capitalization in the United States
since end-1995 will eventually translate into an $85

billion increase in consumption, equal to about 1 percent of 1997 GDP. At its peak in July, however, stock
market wealth had increased by 50 percent since end1995, with an implied doubling of the effect on
consumption.
Although there are lags of up to three years involved
in the materialization of wealth effects on spending, the
gains have accumulated over more than four years and
appear to have already contributed to increased consumption, as evidenced by the decline in the household
saving rate in the United States from 3.4 percent in
1995 to 2.1 percent in 1997, with a further decline to
0.9 percent in the first half of 1998. There may have
been an even larger effect on investment, with business
sector fixed investment growing by 910 percent annually in 199597, as firms took advantage of lower
capital costs to increase borrowing. These effects are
similar to the experience of the 1980s, when the household saving rate fell from 9.4 percent in 1981, before
the asset price boom, to 5.3 percent in 1988 just after
the stock market reversal. Other countries, including
the United Kingdom and Sweden, also experienced
marked swings in consumption and investment in part
associated with changes in asset prices in the 1980s.
To the extent that the wealth effect translates asset
price gains, with lags, into added consumption, asset
price inflation represents incipient demand and price
pressures. Policymakers need to take such indicators into account in setting monetary conditions.
Conversely, of course, monetary policy influences
asset prices through interest rates and the cost of borrowing. Indeed, asset price reversals in the late 1980s
in a number of advanced economies were closely associated with monetary tightenings. The link between
monetary policy and asset price changes may well be
enhanced during asset booms because borrowing on
15See Flint Brayton and Peter Tinsley, eds., A Guide to the

FRB/U.S.: A Macroeconomic Model of the United States, Federal
Reserve Board Working Paper 1996-42 (Washington: Board of
Governors of the Federal Reserve System, 1996); and Martha StarrMcCluer, Stock Market Wealth and Consumer Spending, Finance
and Economic Discussion Series, No. 1998-20 (Washington: Board
of Governors of the Federal Reserve System, April 1998).
75
the basis of appreciating collateral and to finance asset

accumulation increases consumer and firm financial
leverage, and thus potentially heightens the sensitivity
of demand to interest rate changes.
In the past, asset market reversals following sustained appreciations that were in retrospect seen as not
being justified by underlying fundamentals may have
had long-lasting effects on overall activity and the
structure of the real economy. In Japan, Sweden, the
United Kingdom, and the United States, for example,
overinvestment and real estate speculation fueled by
easier access to credit in the 1980s left firms in weak
positions when faced with business cycle downturns,
so that asset price reversals led to widespread balance
sheet adjustments and financial fragility that prolonged
recessions and weakened recoveries.16 In Japan, the effects of the asset price collapse are still being felt
nearly a decade later, even though the asset price increases appear to have spilled over to a relatively small
extent into inflation in goods prices.17 Because asset
price developments may have a substantial impact on
macroeconomic stability, they are an essential part of
the overall array of indicators that monetary authorities
must monitor and assess on an ongoing basis.
Such concerns do not imply, however, that monetary
policy should primarily aim at stabilizing asset prices
rather than inflation in goods and services. As recent
events have made clear, asset prices are much too variable for this to be feasible, and the relationship between asset prices and monetary policy instruments is
poorly understood. Just as high asset prices do not
alone imply the need for a tightening of monetary policy, a decline in asset prices similarly does not by itself
call for a loosening, especially if the declines represent
a retreat from overvalued levels. This is particularly
true in the United States and other advanced economies
with continued strong growth and solid fundamentals.
countries on commodity exports for foreign exchange

earnings.18 As a consequence, the adverse effects of
recent primary commodity price declines seem likely
to be potentially greater for the Middle East and Africa
than for other regions.19
Oil-Exporting Countries in the Middle East and Africa
With direct links to the rest of the economy being
relatively minor, and oil companies being fully or majority state-owned in most cases, the main direct impact of changes in oil prices is on the revenues accruing to the state through these companies. Many
oil-exporting countries are likely to face difficult budgetary decisions over the near and medium term if the
oil price path remains at levels much below those that
prevailed in 1997. In general, those problems are
likely to be more severe for the oil-exporting countries
in the Middle East and Africa than elsewhere because
they rely more heavily on oil revenues to finance government expenditure (Table 2.17).
A key question facing governments heavily dependent on oil revenues is how to deal with current and intertemporal budget constraints in light of lower oil
prices. How this is done affects both near-term non-oil
output (and its future growth) and the prospects for inflation. For a number of countries that are particularly
oil-rich (in per capita terms), notably in the Persian
Gulf region, the need for near-term fiscal and current
account adjustment may be lessened by their ability to
attract net capital inflows that can generate budgetary
resources. However, if oil prices do not rebound
strongly, even these countries will need to undertake
revenue-raising and expenditure-reducing measures to
ensure medium-term external and fiscal sustainability.
Other oil-exporting countries, particularly those in
sub-Saharan Africa (for example, Cameroon and
Nigeria), are more likely to be constrained by external
Issues Relating to Growth and Inflation

in Developing Countries and Countries
in Transition
18Nine of the 14 developing countries in the Middle East rely on

oil exports for more than one-half of their export earnings.
Fourteen of the 51 developing countries in Africa depend on a single primary commodity for 50 percent or more of their export earnings (4 on crude petroleum and 10 on a single nonfuel primary
commodity). For 20 more African countries, the leading two or
three primary commodity exports easily account for at least half of
their earnings from exports of goods and services. The degree of
commodity dependence is typically much less for developing and
transition economies in Europe, Asia, and the Western Hemisphere.
For example, for only three such countries does a single commodity account for more than one-half of their export earnings; this list
includes Venezuela on account of its heavy dependence on oil
exports.
19Many other countries are, of course, being adversely affected
also. In particular, in some transition countries energy is a leading sector helping to drive economic recovery and attract
foreign investment, and the decline in energy prices, in addition to
having a direct negative effect on output, could slow the growth
of investment inflows and hence weaken longer-term growth
prospects.
How Have Recent Commodity Price Movements

Affected Growth and Inflation Prospects,
Particularly in the Middle East and Africa?
A common feature of the economies of the Middle
East and Africa is a heavy dependence of a number of
16See Garry J. Schinasi and Monica Hargraves, Boom and Bust
in Asset Markets in the 1980s: Causes and Consequences, in Staff
Studies for the World Economic Outlook (Washington: IMF,
December 1993), pp. 127.
17See Alexander W. Hoffmaister and Garry J. Schinasi, Asset
Prices, Financial Liberalization, and Inflation in Japan, in Ulrich
Baumgartner and Guy Meredith, eds., Saving Behavior and the
Asset Price Bubble in Japan: Analytical Studies, Occasional Paper
124 (Washington: IMF, April 1995).
76
Issues Relating to Growth and Inflation in Developing Countries and Countries in Transition
Table 2.17. Major Oil-Exporting Developing Countries:

Budgetary Impact of Oil Price Decline
199697 Averages
___________________________________
1998
__________________________________
Impact of oil
price decline on
fiscal receipts
(percent of GDP)
Government oil
revenue as percent
of total revenue
Overall
fiscal balance
(percent of GDP)
Government
oil revenue as
percent of GDP
Africa
Algeria
Angola
Cameroon
Congo, Rep. of
Equatorial Guinea
Gabon
Nigeria
63
83
26
67
49
61
67
2.7
14.8
1.4
6.5
2.4
4.4
1.11
17.8
25.0
2.9
18.8
8.2
16.5
15.3
4.6
4.0
1.4
5.4
3.1
4.0
2.3
Middle East
Bahrain
Egypt
Islamic Rep. of Iran
Kuwait
Libya
Oman
Qatar
Saudi Arabia
Syria
United Arab Emirates
Yemen
61
12
58
74
57
76
66
77
45
72
70
0.1
0.9
2.3
3.5
1.1
2.3
7.3
3.4
2.9
9.8
3.2
14.6
2.4
10.8
37.7
14.8
23.4
26.8
19.3
10.2
16.4
17.4
5.7
0.3
1.6
8.5
4.8
10.0
3.2
7.9
2.9
5.5
8.3
10
30
37
22
58
3.52
2.8
0.4
1.8
1.1
2.5
4.9
6.9
2.4
7.3
0.5
2.1
1.0
1.0
5.1
Country
Memorandum
Latin America
Colombia
Ecuador
Mexico
Trinidad and Tobago
Venezuela
Sources: National authorities; and IMF staff estimates.

1Nigeria recorded an overall deficit of 0.4 percent of GDP in 1997.
2Combined public sector.
credit requirements and will face a need to enact

stronger adjustment measures in both the near term
and the medium term.
Current projections of fiscal positions in the oilexporting countries of the Middle East and Africa indicate a considerable weakening in 1998 and 1999
compared with the projections made early in 1997. In
comparison with the earlier projections, there is a
modest decline in projected GDP growth and a small
increase in projected rates of inflation for this group of
countries (Table 2.18).
the impact of the price decline on neighboring oil

exporters.
A number of oil-importing countries in Africa, furthermore, depend to a large degree on exports of certain
nonfuel primary commodities whose prices have also
fallen quite sharply over the past year. Thirteen of the
43 African oil-importing countries rely heavily for their
foreign exchange earnings on nonfuel primary commodities that declined in price by 10 percent or more
from 1997 to 1998 (Figure 2.23). For example, metal
(including precious metal) prices have been subject to
quite significant price declines over the past year. The
price of copper by June 1998 was 27 percent lower than
a year earlier, and this decline is having a serious impact on Zambia and to a lesser extent on the Democratic
Republic of Congo.20 Aluminum prices have also de-
Oil-Importing Countries in the Middle East and Africa

For oil-importing countries in the two regions, the
fall in oil prices will have beneficial effects on their
current account positions, although deeper fiscal adjustment in the Persian Gulf region may produce some
offset via reduced remittances and investment in some
countries (for example, Jordan and Lebanon). Even in
oil-importing countries, growth may suffer because of
20Countries in other regions, such as Chile, Kazakhstan,

Mongolia, Papua New Guinea, and Peru, are also clearly affected by
the copper price decline.
77
Table 2.18. Middle East and African Countries: Growth, Inflation,

and Fiscal Balances
1997
1998
__________
_________________________________
Country Groups
GDP growth (percent a year)
Oil-exporting countries
Middle East
Africa
Sub-Saharan excluding Nigeria
Oil-importing countries
Middle East
AfricaGroup A1
Excluding South Africa
AfricaGroup B1
Sub-Saharan
Inflation (year-to-year percent
change in consumer price index)
Middle East
Africa
Oil-importing countries
Middle East
AfricaGroup A1
Excluding South Africa
AfricaGroup B1
Sub-Saharan
(percent of GDP)
Middle East
Africa
Number of
Countries
September
1998
estimate
May 1997
forecast
September
1998
estimate Difference
12
8
6
3.9
2.9
4.4
3.7
5.4
6.0
1.8
3.1
3.3
1.9
2.3
2.7
2
13
12
30
28
2.7
3.6
5.4
3.1
4.7
6.8
4.0
5.2
4.8
5.8
3.3
2.8
4.6
5.1
4.7
3.5
1.2
0.6
0.3
1.1
12
8
6
8.4
13.6
46.4
7.3
6.9
21.6
9.8
9.7
20.4
2.5
2.8
1.2
2
13
12
30
28
4.6
14.2
19.7
5.7
8.1
4.2
9.1
8.8
4.9
5.7
5.2
8.8
11.5
4.7
6.5
1.0
0.3
2.7
0.2
0.8
12
8
6
2.1
0.2
6.7
1.9
0.8
4.0
3.3
3.6
7.8
1.4
2.8
3.8
1Group A African oil-importing countries rely for 10 percent or more of their export earnings on nonfuel
primary commodities for which prices have fallen from 1997 to 1998 by more than 10 percent. Group B
comprises all other oil-importing African countries.
clined quite sharply, by about 10 percent, and this will

have a negative impact on Bahrain, which uses its own
natural gas for refining imported bauxite. Gold prices
declined quite sharply during 1997 and have fluctuated
around $300 per ounce since. Gold exports are very important for such countries as South Africa and Ghana,
while also contributing to the export performance of
Mali and Zimbabwe.
The loss of earnings from exports of the leading
non-oil primary commodity exports in 1998 is expected to exceed the gain from lower prices for petroleum imports for 10 of the 13 African oil-importing
countries experiencing adverse shocks from lower
nonfuel commodity prices. The remaining 33 oilimporting countries in Africa will likely benefit from
the lower cost of oil imports, with the gain equal to
about 3 percent of their import bill. On balance, the
current growth rate and inflation rate projections for
1998 for African oil-importing countries differ little
from those made in 1997.
How Low and How Fast Should the Transition

Economies Further Reduce Inflation?
Following notable successes in bringing down inflation to the moderate range, countries in transition have
been facing difficulties in further reducing inflation to
the low single-digit rates typical of the advanced
economies in western Europe. In 1997, 12-month inflation rates rose in all the central and eastern
European countries except Hungary, Latvia, Lithuania,
and Poland, and in Hungary and Poland they remained
well above 10 percent; inflation also remained in the
double digits in Estonia (Figure 2.24). Inflation rates
in some of the advanced reformers in central and eastern Europe and the Baltics now exceed rates observed
in countries such as Azerbaijan, Kazakhstan, and the
Kyrgyz Republic, where very significant progress in
bringing down inflation was made in the past three
years. Overall, in 1998, only four transition countriesAzerbaijan, Croatia, Latvia, and the former
78
Yugoslav Republic of Macedoniaare expected to experience inflation at or below 5 percent. These developments raise questions about the factors underlying
the recent lack of progress in lowering inflation further
in central and eastern Europe and the appropriate goal,
speed, and design of further disinflation policies.21
The recent inflation experience of the transition
countries reflects a variety of factors. In Albania, the
collapse of revenue in the wake of the civil unrest contributed to a sharp increase in inflation in 1997, but
strong stabilization efforts over the past year have
helped to reduce inflation markedly. In Bulgaria and
Romania, overall macroeconomic instability resulted
in sharp increases in inflation in 1997 also; although in
Bulgaria inflation has since declined sharply in the
context of a currency board arrangement, it has remained high in Romania. In the Czech Republic, large
increases in regulated prices and wage pressures, especially in state-owned enterprises, were the principal
factors behind a modest acceleration, while in Slovenia
a currency depreciation and adjustments in administered prices contributed to a similar outcome. The persistence of inflation in Hungary, with year-on-year
price increases still running at 13!/2 percent in August
1998, reflects a combination of inertia in inflation expectations, driving high nominal wage growth, and a
relatively high rate of decline in the crawling peg of
the forint. In Estonia, inflation remained in the double
digits until July because of large adjustments in remaining administered prices and strongly rising domestic demand.
Although progress in further reducing inflation has
stalled in several countries, the common goal of the reform-minded transition countries continues to be to
bring down inflation rates to western European levels,
and the countries that aspire to EU membership have
explicitly affirmed their intention to do so (see Chapter
V). This objective is appropriate and achievable over a
reasonable span of time. As discussed in the October
1996 World Economic Outlook (Chapter VI), inflation
may negatively affect both the level and rate of growth
of output. The negative impact on growth is most
clearly established for annual inflation rates in the double digits or higher. For inflation rates in the single digits but above advanced-economy levels, there is no
strong evidence that inflation is detrimental to growth,
but neither are there indications that it is beneficial.22
In this range, however, the negative effects on the level
Figure 2.23. Prices of Selected Commodities

Prices of many commodities have dropped significantly since the
middle of 1997, adversely affecting developing countries in Africa
and the Middle East.
27 Petroleum
24 (U.S. dollars per barrel)
Arabica Coffee
(U.S. cents
per pound)
300
250
21
200
18
150
15
12
100
1996
97
Aug.
98
450 Gold (U.S. dollars
1996
97
Cotton
(U.S. cents per pound)
per fine ounce)
Aug.
98
100
400
90
350
80
300
70
250
60
1996
97
Aug.
98
1996
97
Aug.
98
330
Flue-Cured Tobacco
(U.S. cents per kilogram)
140 Copper
(U.S. cents per pound)
300
120
270
100
240
80
60
210
1996
97
Aug.
98
1800 Aluminum (U.S. dollars

1700 per metric ton)
21For
a more detailed analysis, see Carlo Cottarelli and Gyrgy

Szapry, eds., Moderate Inflation: The Experience of Transition
Economies (Washington: IMF and National Bank of Hungary,
1998); and Carlo Cottarelli and Peter Doyle, eds., Disinflation in
Transition199397 (Washington: IMF, forthcoming).
22See the evidence in Cottarelli and Szapry, Moderate Inflation:
The Experience of Transition Economies, and in Atish R. Ghosh and
Steven Phillips, Inflation, Disinflation, and Growth, Working
Paper 98/68 (Washington: IMF, May 1998).
97
Burley Tobacco (U.S.

cents per kilogram)
180
Aug.
98
170
160
1600
150
1500
140
1400
130
1300
120
1996
97
Aug.
98
79
1996
1996
97
Aug.
98
of output and the risk of slipping back into the double

digits, where the effect on growth is unambiguously
harmful, seem higher than at low single-digit rates.23
Achieving the low inflation goal is, however, complicated by the need in many transition economies to increase further many remaining administered prices.
With the main contribution to inflation now coming
from these price adjustments, policies can focus on underlying inflation so as to allow the needed relative
price changes to take place without an undue upward
push to the overall price level or to inflation expectations. In the Czech Republic, for instance, the National
Bank has begun to formulate policies in terms of net inflation, which excludes changes in administered prices.
Given the objective of reducing inflation to levels
observed in the advanced western European economies, authorities in the countries in transition still need
to set a timetable for further disinflation. The Czech
authorities have set a target of lowering net inflation
from around 6!/2 percent in mid-1998 to between 3!/2
and 5!/2 percent by the end of 2000; Slovenia plans to
reduce inflation from the current 9 percent to 35 percent by the end of 2001. Such timetables for further
disinflation have to be assessed in light of the relative
output costs of fast versus slow disinflation. Fast disinflation will be more costly the more monetary and
fiscal policy lack credibility; the more rigid are nominal prices and wages; and the less flexible are relative
prices and real wages.24
With regard to the credibility of policies, fiscal and
financial sector fragilities that put the credibility of
disinflation policies to the test form the main threat to
successful fast disinflation in the countries in transition. As was illustrated by the reversal of the initial
disinflation achievements in Bulgaria and Romania,
financial sector problems that are not properly addressed may end up forcing central bank intervention
and, accordingly, weaken the credibility of monetary
policy. Similarly, in Russia a tight monetary policy in
the presence of large fiscal deficits and lack of longerterm fiscal credibility resulted in high interest rates
and, in the absence of measures to correct the underlying fiscal imbalances, an unsustainable accumulation of debt, which forced the authorities to change
their exchange policy in August 1998, with immediate
inflationary consequences. Second, with regard to
nominal flexibility, price- and wage-setting arrange-
Figure 2.24. Selected Countries in Transition:

Inflation
(Twelve-month percent change in the consumer price index)
Progress in reducing inflation has stalled in some of the central and
eastern European economies; inflation has picked up again in Russia
following the August crisis.
60
60
40
40
Hungary
Slovak Republic
20
Poland
1995
96
Czech Republic
97
Aug.
98
1995
96
97
Aug.
98
60
40
20
60
Lithuania
40
Macedonia, former
Yugoslav Rep. of
20
Latvia
20
Croatia
Estonia
Slovenia
1995
96
97
Aug.
98
1995
96
97
Aug.
98
60
60
Ukraine
Kazakhstan
40
40
Kyrgyz
Republic
20
23For a discussion of the mechanisms whereby low inflation still

may have a negative effect on the level of output, see, for example,
John Driffill, Grayham Mizon, and Alistair Ulph, Costs of
Inflation, in Benjamin Friedman and Frank Hahn, eds., Handbook
of Monetary Economics, Vol. 2 (Amsterdam and New York: NorthHolland, 1990); and Howell Zee, Welfare Cost of (Low) Inflation:
A General Equilibrium Perspective, Working Paper 98/111
(Washington: IMF, August 1998).
24For an analysis of these three factors, see Olivier Blanchard,
Optimal Speed of Disinflation: Hungary, in Cottarelli and
Szapry, eds., Moderate Inflation, pp. 13246.
20
Russia
Azerbaijan
1995
96
97
Aug.
98
1995
96
97
Aug.
98
80
ments in the transition countries are in general relatively flexible (except in Poland and Slovenia, where
formal indexation has been widely applied), and facilitate fast disinflation. Finally, with regard to real
rigidities, most transition countries in central and eastern Europe (the Slovak Republic is an important exception) have made significant progress in raising administered prices to cost-recovery levels, and further
increases are expected to be gradual and without major
impact on relative prices and real wages, making the
adjustment process less of an impediment to fast disinflation. Current conditions in the transition countries, therefore, seem to be conducive to further reductions in inflation over a reasonable span of time,
provided that disinflation efforts coincide with strong
policies to foster fiscal sustainability and strengthen financial systems, with further progress in raising administered prices to cost-recovery levels, and with
structural reform in the goods and labor markets aimed
at increasing price and wage flexibility.
To achieve the low-inflation objective within the appropriate time frame, various monetary and exchange
rate strategies can be effective. As discussed in the
October 1997 World Economic Outlook (Chapter V),
transition countries have adopted a range of monetary
and exchange rate arrangements to bring down inflation. Under any arrangement, a key issue is how to
respond to the capital inflows and real exchange rate
appreciation that tend to accompany successful disinflations. The recent experience of the Czech Republic,
Hungary, and Poland illustrates some of the trade-offs
involved. In the Czech Republic and Poland, capital
inflows were strong and real exchange rates appreciated significantly in the first half of 1998, as tight
monetary policies aimed at reducing inflation were
implemented and exchange rate arrangements are in
place that allow for flexibility, following the korunas
flotation in May 1997 and the widening of the margin
within which the zloty is managed in February 1998.
In Hungary, in contrast, a narrow crawling-peg framework and sterilization of capital inflows have kept the
real exchange rate broadly constant since the beginning of the year and insulated the price system from
the volatility of capital inflows, but have at the same
time reduced the scope for monetary policy tightening
and thereby contributed to an overshooting of the inflation targets. Because real exchange rates are a main
determinant of competitiveness, their movements during the process of disinflation require careful monitoring, especially in countries such as Poland and the
Baltics, which are recording sizable current account
deficits. Although standard measures indicate that
these countries have maintained their competitive positions and the deficits are mainly the counterpart of a
surge in investment, constant vigilance and cautious
fiscal policies are warranted.
81
III
The Asian Crisis and the Regions
Long-Term Growth Performance
recent decades? Or will the east Asian economies regain their dynamism and resume rapid growtheven
if not as rapid as in the pastas they did following the
financial crises they experienced in the 1970s and
1980s? And what is required to build the basis for sustained recovery and growth?
To address these issues, this chapter revisits the east
Asian growth experience, with a view to identifying
both the strengths of the regions development strategy
and weaknesses that may have been overlooked and
that might have led to slower growth, even in the absence of the financial crisis. This will help a judgment
to be reached about whether the recent problems reflect
mainly short-term financial and macroeconomic imbalances that will dissipate within a relatively short period, provided that the financial crisis is appropriately
dealt with, rather than more fundamental problems.
ver the past three decades, the economies of east

Asia made remarkable economic progress.
Following on the heels of Japans double-digit growth
in the 1960s, Korea, Taiwan Province of China, Hong
Kong SAR, and Singapore grew at very rapid rates
from the mid-1960s, with their per capita incomes rising to match those in a number of advanced economies
in western Europe. They were followed in the 1980s
and the 1990s by the southeast Asian economies (especially Indonesia, Malaysia, and Thailand), which
then also grew exceptionally fast. All these countries
experienced sustained economic growth at rates that
exceeded those earlier thought achievable, with some
attaining growth of 810 percent a year for a decade.1
The rapid growth of the east Asian economies was accompanied by impressive advances in social development: poverty, infant mortality, and adult illiteracy all
declined significantly, while life expectancy at birth
rose considerably. Also, and again contrary to earlier
conventional wisdom,2 rapid economic growth was
achieved without increases in income inequality.3
Since mid-1997, however, a number of southeast
Asian economies and Korea have been in the grip of
severe financial crises that have thrown the region into
a deep recession, while economic activity in Japan,
after languishing since the bursting of the asset price
bubble in 1990, has also contracted fairly sharply
since spring 1997. The severity of the Asian crisis
has raised questions about both the durability of the regions rapid growth and the factors that underlay it.4
Does the crisis indeed mark the end of the rapid
growth that characterized the east Asian economies in
Sources of East Asias Growth

Although no uniform model of development was
applied throughout east Asia, central to the performance of the successful east Asian economies was an
emphasis on stability-oriented macroeconomic policies, among the aims of which were relatively low inflation and the avoidance of overvalued exchange
rates; high rates of physical and human capital accumulation; and export-oriented production, which,
among other things, encouraged the adoption of advanced technology. Favorable initial conditions also
played a part.5 More differentiated across countries,
and more controversial in their effects, were industrial
policies and government intervention (particularly in
financial markets) aimed at mobilizing and allocating
savings.
The sources of east Asias rapid and sustained economic growth have been the focus of extensive research. Central to much of this research have been at-
1For instance, Hollis B. Chenery and Alan Strout, Foreign

Assistance and Economic Development, American Economic
Review, Vol. 56 (September 1966), pp. 679733, suggested that the
maximum achievable rate of growth was between 6 and 8 percent.
2Simon Kuznets, Economic Growth and Income Inequality,
American Economic Review, Vol. 45 (March 1955), pp. 128.
3There is evidence, however, that in recent years inequality has
been on the rise in some economies, particularly Thailand and
China; see Michael Walton, The Maturation of the East Asian
Miracle, Finance & Development, Vol. 34 (September 1997),
pp. 710.
4The key factors that contributed to the crisis have been discussed
in detail in the December 1997 World Economic Outlook: Interim
Assessment and the May 1998 World Economic Outlook. The capital market dynamics and spillover of the crisis are discussed in IMF,
International Capital Markets: Developments, Prospects, and
Policy Issues (Washington, 1998, forthcoming).
5Initial conditions were particularly favorable in east Asia: educational systems were relatively strong; inequalities in the distribution
of income and wealth (land) were less marked than in developing
countries in other regions; dependency ratios were low; and initial
income levels were low, so that there was considerable scope for
catch-up. See Dani Rodrik, King Kong Meets Godzilla: The World
Bank and the East Asian Miracle, in Albert Fishow and others,
Miracle or Design? Lessons from the East Asian Experience, Policy
Essay II (Washington: Overseas Development Council, 1994).
82
contentious (Table 3.2).9 The differences in estimates

of the contribution of productivity growth are important, not only because they suggest different explanations for east Asias past success, but because of their
different implications for the long-term future prospects of the region. Thus, those who hold that most of
the regions growth was due to capital accumulation,
with productivity growth contributing little, tend to regard a growth slowdown as inevitable, as diminishing
returns to capital set in. Future growth prospects will
thus depend critically on structural changes that enhance the role of technological and efficiency gains.10
In contrast, for those who consider that productivity
growth has made a relatively greater contribution, deceleration in economic growth may also be inevitable
as a result of technological catch-up, but it should be
possible to sustain relatively high rates of growth at
lower rates of factor accumulation.
Taking into consideration international differences in
productivity levels, there does appear to be abundant
opportunity for further technological catch-up in the
east Asian economies. Real output per worker in
Korea, one of the most advanced of the east Asian
economies, is only about one-half of the level in the
United States, and labor productivity in most other east
Asian economies represents smaller fractions of the
U.S. level. Thus far, much of the catch-up in real GDP
per capita in east Asia has occurred through increased
capital intensity rather than growth in TFP, so that productivity gaps, although they have narrowed over time,
remain wide. When differences in hours worked per
worker are taken into account, the gaps in labor productivity between east Asia on the one hand and North
America and Europe on the other are even larger.11 In
Korea, real GDP per hour worked was 46 percent of the
U.S. level in 1996, while in Thailand and Indonesia it
was 18 percent and 15 percent, respectively.12
tempts to measure the relative contributions that factor

inputsphysical and human capitaland technological progress made to the persistently high rates of
growth. A commonly used approach has been to
deduct from growth in output per worker a weighted
average of the accumulation of physical and human
capital per worker, and to interpret the residual as total
factor productivity (TFP) growththe increase in productivity brought about by technological advances and
greater organizational efficiency.6
Empirical estimates of the contributions of factor inputs and TFP growth to east Asian economies output
growth fall in a wide range, with capital accumulation
generally found to have made the largest contribution.
Productivity growth is found to have made smaller but
still significant contributions.7 Thus, one recent study
found that during 196094 in all four of the Asian
newly industrialized economies and the three fastgrowing ASEAN economiesIndonesia, Malaysia,
and Thailandthe contribution of capital per worker
dominated growth in factor productivity in explaining
growth in output per worker (Table 3.1). Since the
early 1980s, however, TFP growth appears to have
played a larger role. For instance, in Singapore, TFP
growth was around 1 percent a year during the periods
196073 and 197384, respectively, but rose to over 3
percent a year during 198494. Similarly, in Thailand,
TFP growth was 1!/4 percent a year during 196084,
but rose to 3!/4 percent a year in the subsequent ten
years. These results may be compared with the experience of the industrial countries during 196094: although rates of growth in output per worker in the east
Asian economies (except for the Philippines) were significantly higher than in the industrial countries, the
contributions of TFP growth were markedly higher
only in a few casesChina, Taiwan Province of
China, and Thailanddespite the Asian economies
lower initial levels of technological development.
Compared with the TFP growth of European economies and Japan during their fast catch-up years in the
1950s and 1960s, however, TFP growth in the east
Asian economies has been much less rapid.8 However,
no other group of developing countries has done as
well as the east Asian economies.
Even though there is broad agreement on the dominant role played by resource accumulation in accounting for east Asias superior growth experience, the relative importance of productivity growth remains
Notwithstanding the east Asian economies outstanding record of economic growth and their potential for continued productivity gains, the crisis has cast
considerable doubt on their ability to sustain the very
high rates of capital accumulation they experienced in
9In part this is a result of differences in empirical methodologies
and assumptions, and data deficienciessee Box 9, Measuring
Productivity Gains in East Asian Economies, in the May 1997 World
Economic Outlook, pp. 8283, for a detailed analysis of the various
reasons for the wide-ranging estimates and their implications.
10In the more advanced east Asian economies, such as Korea,
there is also a need for the service sector to play a larger role.
11Annual hours worked per worker in 1996 in the east Asian
economies were between 15 percent and 30 percent higher than
those in the United States, which, in turn, were substantially higher
than those in Europe.
12Crafts, East Asian Growth.
6Factor income shares typically have been used as weights in

aggregating growth rates of factor inputs, reflecting the theoretical
basis of the approach in the assumption of a neoclassical aggregate production function with marginal product factor payments.
7The exception is the Philippines, where, according to most estimates and time periods, productivity growth made little, or even a
negative, contribution to output growth.
8See Nicholas Crafts, East Asian Growth Before and After the
Crisis, Working Paper 98/137 (Washington: IMF, October 1998).
83
III THE ASIAN CRISIS AND THE REGIONS LONG-TERM GROWTH PERFORMANCE
Table 3.1. Selected Economies: Sources of Economic Growth

(Contributions to average annual percent growth in output per worker)
Korea
Output per worker
Capital per worker
Education per worker
Total factor productivity
Singapore
Output per worker
Capital per worker
Output per worker
Capital per worker
Indonesia
Output per worker
Capital per worker
Malaysia
Output per worker
Capital per worker
Philippines
Output per worker
Capital per worker
Thailand
Output per worker
Capital per worker
China
Output per worker
Capital per worker
South Asia
Output per worker
Capital per worker
Latin America
Output per worker
Capital per worker
United States
Output per worker
Capital per worker
Other industrial countries
Output per worker
Capital per worker
196073
197384
198494
196094
5.6
3.2
0.9
1.4
5.3
3.4
0.8
1.1
6.2
3.3
0.6
2.1
5.7
3.3
0.8
1.5
5.9
4.6
0.4
0.9
4.3
3.1
0.2
1.0
6.0
2.3
0.6
3.1
5.4
3.4
0.4
1.5
6.8
3.9
0.5
2.2
4.9
3.0
0.9
0.9
5.6
2.3
0.5
2.8
5.8
3.1
0.6
2.0
2.5
0.9
0.5
1.1
4.3
3.3
0.5
0.5
3.7
2.3
0.5
0.9
3.4
2.1
0.5
0.8
4.0
2.4
0.5
1.0
3.6
2.7
0.5
0.4
3.8
1.8
0.5
1.4
3.8
2.3
0.5
0.9
2.5
1.3
0.6
0.7
1.2
2.0
0.6
1.3
0.3
0.2
0.4
0.9
1.3
1.2
0.5
0.4
4.8
3.2
0.1
1.4
3.6
2.0
0.5
1.1
6.9
2.6
0.8
3.3
5.0
2.7
0.4
1.8
2.2
0.4
0.4
1.4
4.3
1.7
0.3
2.2
8.0
2.9
0.3
4.6
4.5
1.5
0.4
2.6
1.8
1.4
0.3
0.1
2.5
0.9
0.4
1.2
2.7
1.0
0.3
1.5
2.3
1.1
0.3
0.8
3.4
1.3
0.3
1.8
0.4
1.1
0.4
1.1
0.1
0.1
0.4
0.4
1.5
0.9
0.4
0.2
1.9
0.5
0.6
0.8
0.2
0.3
0.5
0.5
0.9
0.3
0.7
1.1
0.4
0.4
0.3
4.8
2.3
0.4
2.2
1.8
1.1
0.6
0.2
1.7
0.8
0.2
0.7
2.9
1.5
0.4
1.1
Source: Barry P. Bosworth and Susan M. Collins, Economic Growth in East Asia: Accumulation Versus
Assimilation, Brookings Papers on Economic Activity: 2 (1996), pp. 135203.
84
Table 3.2. Selected East Asian Economies: Estimates of Total Factor Productivity Growth
(Percent a year)
Period
Young (1995)
Bosworth, Collins, and Chen (1995)
Bosworth, Collins, and Chen (1995)
Sarel (1996)
Sarel (1997)
196690
196080
198692
197590
197996
Hong
Kong
SAR
2.3
3.8
Korea
Singapore
1.7
0.7
1.9
3.1
0.2
0.3
4.0
1.9
2.5
Taiwan
Province
of China
2.6
1.3
2.5
3.5
Indonesia
Malaysia
Philippines
Thailand
1.0
0.8
0.7
2.8
0.5
1.1
4.0
0.9
2.0
0.9
2.0
Sources: Alwyn Young, The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience, Quarterly
Journal of Economics, Vol. 10 (August 1995), pp. 64180; Barry P. Bosworth, Susan M. Collins, and Yu-chin Chen, Accounting for
Differences in Economic Growth, Brookings Discussion Papers in International Economics, No. 115 (Washington: Brookings Institution,
October 1995); Michael Sarel, Growth in East Asia: What We Can and What We Cannot Infer, Economic Issues, No. 1 (Washington: IMF,
September 1996); and Michael Sarel, Growth and Productivity in ASEAN Countries, Working Paper 97/97 (Washington: IMF, August 1997).
recent years. Investment rates in Korea, Malaysia, and

Thailand have been exceptionally high, at around
40 percent of GDP, in the 1990s. But there is a variety
of evidence that suggests that in the east Asian
economies the efficiency of investment has declined,
partly because of their rapid rates of convergence toward the levels of per capita income of the advanced
economies, but in some economies also partly owing
to overinvestment.
It is difficult, of course, to determine whether a
country is overinvesting. Several ways, each not without drawbacks, have been suggested in the economic
literature to ascertain whether a countrys rate of investment is broadly appropriate. A commonly used
method is to compare an economys real rate of return
on domestic investment to its real rate of growth.13 If
the return on investment is lower than the growth rate
of the economy, then by reducing capital accumulation
welfare will be enhanced: the consumption of both
current and future generations can be increased. Such
comparisons are difficult to make in practice, however, because it is not straightforward to measure the
rate of return on investment for an economy as a
whole. Moreover, returns on investment vary with the
riskiness of projects.
One way of assessing the appropriateness of an
economys rate of investment in the presence of risk
and uncertainty is to compare gross investment with
gross capital income (the sum of profit, rental income,
and interest income). If investment consistently, over a
number of years, exceeds capital income, then it may
be argued that the economy is overinvesting: capital
accumulation is absorbing more resources than all past
accumulation is making available for consumption.14
For the countries in crisis, data on capital income are

readily available only for Korea. They show that, between the mid-1970s and mid-1990s, the share of total
capital income in GDP fell substantially: from around
55 percent to less than 40 percent (Figure 3.1). The
share of total investment in GDP, in contrast, rose
from around 25 percent to about 40 percent.15 By
1996, the rate of investment was almost the same as
the share of capital income. Although this is not conclusive evidence of overinvestment, it does suggest
that the efficiency of investment in Korea was declining rapidly.
Another measure of changes in the efficiency of
overall investment is provided by the incremental capital-output ratio (ICOR), which measures the ratio of
investment in any period to the periods change in output. A rising ICOR may be interpreted as indicating a
declining output response to investment and, thus, a
falling efficiency of investment. It could also indicate,
however, that output is decelerating, relative to capital,
for other reasons: for example, the economy may be
shifting to a production structure with a higher capital
intensity, which is a normal feature of industrialization.16 In almost all the crisis countries ICORs increased in the 1990s (Figure 3.2). In Korea and
Thailand (and also in Hong Kong SAR), ICORs approximately doubled between 1990 and 1995, suggesting that investment became less efficient in generating growth. In Indonesia (and also Singapore), in
contrast, ICORs remained roughly constant. The increase in ICORs in several of the east Asian economies
15By comparison, in the United States, capital income has increased slightly over the corresponding period to about one-third of
GDP, while the investment rate has declined modestly to some 18
percent of GDP. Thus, in recent years, Koreas investment rate was
about double that of the United States for only a slightly higher
share of capital income.
16Gross rather than net rates of investment are usually used to
compute ICORs because of the differences across countries in the
treatment of depreciation. Hence, increases in ICORs could also
stem from a shift toward shorter lived capital equipment.
13An early exposition is provided by Peter A. Diamond, National

Debt in a Neoclassical Growth Model, American Economic
Review, Vol. 55 (1965), pp. 112650.
14See Andrew B. Abel, N. Gregory Mankiw, Lawrence H.
Summers, and Richard J. Zeckhauser, Assessing Dynamic
Efficiency: Theory and Evidence, Review of Economic Studies,
Vol. 56 (January 1989), pp. 120.
85
need not necessarily imply a declining efficiency of investment, however. As noted above, it could be an indication that these economies were shifting to a more
capital-intensive production structure. In view of the
similarities and close relationships between these
economies in their production structures and trade,
however, it does not appear plausible that Hong Kong
SAR was moving to a more capital-intensive technology while Singapore was not, and that Thailand was
upgrading its technology while Indonesia was not.
In recent years, in several of the east Asian economies increased portions of investment have been in
nontraded or protected sectorssuch as real estate or
petrochemicals in Indonesia, Malaysia, and Thailand
that generated low returns, or in sectors with high or
excess capacitysuch as semiconductors, steel, ships,
and automobiles in Koreathat also yielded low or
even negative returns. In Thailand, for example, value
added in the construction and real estate sector grew
by over 11 percent annually in real terms between
1992 and 1996, rising from 12!/2 to 14 percent of GDP.
During this period office vacancy rates increased,
reaching 15 percent by the end of 1996. Similarly, in
Indonesia the construction and real estate sector grew
at over 13 percent annually between 1991 and 1996,
rising from 9!/2 to 10!/2 percent of GDP, while in
Malaysia, the construction sector grew by over 14 percent annually between 1993 and 1997.
In Korea, government policies, such as access to
easy credit through directed lending, played an important role in allowing the chaebols (the large conglomerates) to pursue growth and market share, with inadequate attention to profitability. Although it could be
argued that in the early years of industrialization these
policies made a positive contribution to growth and
profitssince Korean companies had only a small
share of world production and labor costs were relatively lowin later years, and particularly by the
1990s, when Korean production accounted for significant shares of world production in industries such as
semiconductors, steel, ships, and automobiles, profits
fell as these industries increasingly suffered from excess capacity and intense competition worldwide.
Despite the drop in profits, easy access to credit induced the chaebols to continue to invest and diversify
away from core businesses into other industries, often
also characterized by excess capacity. As a result, by
1996, the net profits of the 30 largest chaebols were
close to zero, with six chaebols filing for bankruptcy
in early 1997 before the beginning of the crisis.
In large part, investment in the crisis economies was
financed by bank lending. As the returns from investment fell in these countries, the quality of bank asset
portfolios declined as well. In Thailand, nonperforming loans of commercial banks reached almost 8 percent of total credit outstanding by mid-1996, and nonperforming loans of other financial institutions were
even larger. By comparison, nonperforming loans in
Figure 3.1. Selected Economies:

Efficiency of Investment1
(Percent of GDP)
The efficiency of investment in Korea appears to have declined.
Capital income
70 Korea
60
50
40
30
20
10
0
1970 75
70 Japan
60
50
40
30
20
10
0
1970 75
70 France
60
50
40
30
20
10
0
1970 75
Total investment
Taiwan
Province of China
80
85
90
95
1970 75
80
85
90
95
United States
80
80
85
85
90
95
1970 75
80
85
90
95
70
60
50
40
30
20
10
0
70
60
50
40
30
20
10
0
90 94
Sources: Korean National Statistical Office; Taiwan Province of

China Directorate-General of Budget, Accounting, and Statistics; World
Economic Outlook database; OECD database; and IMF staff estimates.
1Given differences in the way the income of the self-employed is
treated, cross-country comparisons of capital income have to be interpreted with care.
86
the United States, using a more strict classification,

were around 1 percent of total lending in 1996 and
peaked at around 4 percent during the banking crisis of
the 1980s.17 In Indonesia, classified loans accounted
for over 10 percent of total loans in late 1996, and
property lending had increased to about 20 percent of
total lending. Exposure to the property sector was high
also in Thailand and Malaysia, where it had reached
about 18 percent and 25 percent of total lending, respectively.18 In Malaysia, although nonperforming
loans had fallen substantially from a peak of over 35
percent in 1985 (following a banking crisis) to under 4
percent by 1997, banks were exposed by substantial
lending for consumer credit and stock market investments, in addition to lending to the property sector. In
Korea, commercial bank profitability, measured by returns on assets or equity, had declined substantially
during the 1990s, falling to levels far below international standards by 1996.19 The role of government
policies in contributing to the growing fragility of the
financial system is discussed below.
Further research will be needed to throw light on the
extent to which rates of return have been declining in
east Asia. There are sufficient indications, nonetheless,
to suggest that the high investment rates in recent
years in a number of these economies were excessive.

Incremental Capital-Output Ratios
(Five-year moving average)
Incremental capital-output ratios have risen in several east Asian
countries in recent years, possibly indicating declines in the
efficiency of investment.
10
8
Malaysia
6
Thailand
4
Indonesia
Korea
1965
The Role of Policies and Institutions

in Fostering High Growth
70
75
80
85
90
95
10
Singapore
As previously noted, central features of the highgrowth east Asian economies included high rates of investment, saving, and human capital formation; exports having a leading role in the growth process; and
stable macroeconomic conditions. Government policies and institutions played a large role in fostering
these attributes. Financial sector policies, in particular,
played an important role in mobilizing and allocating
savings. In some cases, however, government intervention hindered financial market development and
led to inefficient allocation of investment and other
resources.
8
India
China
6
4
Hong Kong SAR
Taiwan
Province of China
0
1965
70
75
80
85
90
95
20
Japan
Resource Mobilization
15
United States
Human capital formation advanced at a rapid pace,

both quantitatively and qualitatively, in almost all the
10
5
17The
levels of nonperforming loans are not strictly comparable

across countries because of differences in classification procedures.
Through 1996, the loan classification procedures in the Asian crisis
economies generally did not meet international standards.
18See Amar Bhattacharya, Stijn Claessens, Swati Gosh, Leonardo
Hernandez, and Pedro Alba, Volatility and Contagion in a
Financially Integrated World: Lessons from East Asias Recent
Experience (unpublished; Washington: World Bank, May 1998).
19See Sung Kwack, The Financial Crisis in Korea: Causes and
Cure, Seminar Series, No. 199819 (Washington: IMF, June 1998).
0
1965
87
70
75
80
85
90
95
rapidly growing east Asian economies. As early as

1965, primary school enrollment rates were already
higher in this region than in many other developing
countries. Hong Kong SAR, Korea, the Philippines,
and Singapore had achieved universal primary education, and even Indonesiaa populous nation and, at
the time, one of the poorest developing countries
had a primary school enrollment rate of over 70 percent. In the past three decades further significant
progress was achieved, except in Thailand. In Korea,
secondary school enrollment increased from around
35 percent in 1965 to virtually 100 percent in 1995,
while Indonesias secondary school enrollment rate of
close to 50 percent in 1995 was higher than in other
countries with comparable levels of income. In
Thailand, however, the secondary school enrollment
rate of under 50 percent in 1995 was lower than that
predicted by its income level on the basis of international data. Associated with this were serious shortages of skilled labor in Thailand in recent years, resulting in upward pressures on wages. Not only
enrollment rates, but also the quality of education improved significantly during the past three decades in
most of the east Asian economies, as average education expenditure per pupil rose and pupil-teacher ratios
were reduced.20
By raising the skill level of the workforce, education
and training contribute directly to the expansion of an
economys productive capacity and growth potential. It
is estimated that education accounts directly for about
1015 percent of the growth in output per worker in the
east Asian economies in the period 196094 (see Table
3.1).21 Human capital accumulation, however, also affects economic growth in indirect ways. Physical capital equipment and skill levels are often complementary,
so that an increased availability of skilled labor may induce greater investment; conversely, as is the case in a
number of developing countries, a paucity of skilled
labor may deter certain types of investment.22
Moreover, empirical evidence indicates that, although
foreign direct investment is an important vehicle for
the transfer of technology to developing countries, the
productivity of foreign direct investment is higher than
that of domestic investment only when the host economy has a minimum of human capital.23
Table 3.3. Selected Economies:

Investment-GDP Ratios1
(Percent)
Averages
________________________________________
196069
197079
198089
199096
35
...
18
16
35
18
15
19
23
35
24
19
18
34
28
23
25
41
34
28
27
22
30
30
30
23
42
39
30
32
24
30
37
38
23
35
25
22
29
25
24
28
24
41
Brazil2
Chile
Mexico2
17
...
17
22
12
22
21
18
22
20
25
22
Germany
Italy
Spain
United Kingdom
United States
26
...
...
19
21
23
26
24
20
20
20
23
22
17
20
22
19
22
16
17
China2
Hong Kong SAR
Indonesia2
India2
Japan
Korea
Malaysia2
Philippines2
Singapore2
Taiwan Province
of China2
Thailand2
1Investment refers to gross fixed capital formation plus change in

inventories.
2Data start in 1963.
East Asian economies began their takeoff to rapid

growth with an edge over many other developing
countries in human capital and maintained that edge
through explicit policies of investment in education.
But critical to their superior growth performance was
their ability to supply their workforces consistently
with rapidly increasing amounts of physical capital
(Table 3.3). In Indonesia, Korea, Malaysia, and
Thailand, gross fixed investment as a proportion of
GDP rose steadily and markedly over the past three
decades, to above 30 percent in the first case and close
to 40 percent in the other three. The main exceptions
are Hong Kong SAR and Taiwan Province of China,
where investment was a fairly stable share of GDP
throughout, close to one-fourth, and the Philippines,
where investment rose from 19 percent of GDP in the
1960s to a steady level of around 23 percent in subsequent decades. Despite its lower rate of capital accumulation, Taiwan Province of Chinas growth performance has been as good as those of other east Asian
economies.
Counterparts to the rapidly rising investment rates
were, of course, rapidly rising saving rates and inflows
of foreign capital. Several factors contributed to the
rapid rise in domestic saving. Perhaps most important
was the rapid pace of economic growth, which, by
raising income levels above subsistence, led to higher
aggregate saving rates. Rapid growth may have helped
to raise overall saving also by increasing the incomes
20For details see World Bank, The East Asian Miracle: Economic
Growth and Public Policy (New York: Oxford University Press,
1993), pp. 4345.
21Measured by the contribution of changes in the labor forces average years of schooling.
22For evidence regarding capital-skill complementarity see Per
Krussel, Lee E. Ohanian, Jose-Victor Rios-Rull, and Giovanni L.
Violante, Capital-Skill Complementarity and Inequality, Staff
Report 239 (Minneapolis, Minnesota: Federal Reserve Bank of
Minneapolis, September 1997).
23See Eduardo Borensztein, Jose De Gregorio, and Jong-Wha Lee,
How Does Foreign Direct Investment Affect Economic Growth?
Journal of International Economics, Vol. 45 (June 1998), pp. 11535.
88
of the working young at a disproportionately fast rate.

The regions demographics, in particular its relatively
low dependency ratios, were also conducive to high
saving rates (Box 3.1).24 The fruits of favorable economic policiesincluding a stable macroeconomic
environment, especially low rates of inflation, positive
real interest rates,25 and a fast pace of financial deepeningare also likely to have had a strong positive influence on saving rates. In some countries, particularly
Malaysia and Singapore, well-developed mandatory
saving schemes have been in existence since the 1960s
and 1970s, but their effects on overall rates of private
saving have not been unambiguously determined.26
The high rates of private saving have often been ascribed to exceptionally high propensities to save by
east Asian households. Less noted has been the role of
business saving, perhaps because few of these countries gather information on the components of total
private saving on a regular basis, so that much of the
data on business saving are fragmentary and derived
indirectly.27
Among the countries for which data are available, in
Thailand, during the 1970s and 1980s, corporate saving accounted for almost 45 percent of total private
saving and 8!/2 percent of GDP, on average. The share
of corporate saving rose sharply during the late 1980s,
to around 60 percent of total private saving and 13 percent of GDP. In Korea, corporate saving also played a
significant role. Household saving was less than 3 percent of GDP in the 1950s and 1960s, on average,
whereas corporate saving was close to 6 percent of
GDP. The public sector accounted for more than 60
percent of total domestic saving. Over the years, however, both personal and corporate saving rose considerably: household saving increased to an average of 11
percent of GDP in the period 197479 and to 13 percent during 199095, while firms retained earnings
increased to 12!/2 percent and 14 percent of GDP in the
corresponding periods (Table 3.4). With economic
growth, corporate saving kept pace with household
saving and in the 1990s still constituted 50 percent of
private saving. In contrast, in Singapore, partly reflecting the importance of the mandatory provident
fund, where household contributions reached almost
15 percent of GDP in the mid-1980s, the share of corporate saving was smaller.
Compared with the advanced economies of Europe
and North America, the shares of corporate saving in
total private saving in the east Asian economies are not
exceptionally high, but compared with the relatively
less successful developing countries they are a larger
source of saving, no doubt reflecting the relatively
more stable macroeconomic performance and investment climate in east Asia. Nevertheless, retained earnings fell far short of the funds needed to finance business investment.28 With private securities markets
(bonds and equity) underdeveloped, especially until
the early 1990s, corporations relied heavily on the
banking system for financing (see below).
Reliance on foreign saving differed widely across
countries. The newly industrialized economies, except
Korea, were less dependent on foreign saving than the
ASEAN-4, even in the early years of their development, and since the mid-1980s have posted current
account surpluses. The composition of foreign saving
also differed across countries. Some countries (Malaysia and Singapore) relied on direct and portfolio investment to finance domestic investment, while others
(Korea and Thailand) depended largely on foreign
borrowing (Table 3.5). In Korea, restrictive limits on
foreign ownership along with capital controls influenced the composition of foreign funds, and until the
1990s direct and portfolio investment constituted a
minor fraction of total foreign inflows. Liberalization
of foreign ownership limits in the 1990s, however, led
to a significant increase in foreign portfolio investment. By and large, external borrowing by the corporate sector, intermediated mainly through the banking
system, was the main vehicle by which foreign funds
were mobilized. One of the features of the current crisis, which distinguishes it from previous financial
crises in the region, is the large size and critical role
played by the corporate sectors foreign debt.
24See page 98. For further discussion of the theoretical and empirical relationship between growth and saving, see Anuradha DayalGulati and Christian Thimann, Saving in Southeast Asia and Latin
America Compared: Searching for Policy Lessons, in John Hicklin,
David Robinson, and Anoop Singh, eds., Macroeconomic Issues
Facing ASEAN Countries (Washington: IMF, 1997), pp. 13050.
25Real interest rates, however, were negative over intermittent periods in some of the countries in the region. For example, in Korea
during the early phase of its stabilization program in the 1980s, the
real interest rate fell below 3 percent, implying a large transfer of
real resources from creditors (especially households) to debtors (especially businesses).
26See Dayal-Gulati and Thimann, Saving in Southeast Asia and
Latin America Compared; and World Bank, The East Asian
Miracle, pp. 21920.
27See for example, Patrick Honohan and Izak Atiyas, Intersectoral Financial Flows in Developing Countries, Economic Journal,
Vol. 103 (May 1993), pp. 66679.
Financial Intermediation and the Role

of the Financial Sector
Financial systems in east Asia, aided by favorable
demographics and rapid growth, successfully encouraged domestic saving and until recent years for the
most part allocated financial resources to investments
that yielded significant returns. Financial intermediaries played the dominant role, particularly early in the
development process; equity and bond markets were
less important. East Asian governments intervened extensively in the financial sector, however, through reg28See Honohan and Atiyas, Intersectoral Financial Flows in
Developing Countries.
89
Table 3.4. Selected Economies: Composition of Private Saving

(Percent of GDP)
197074
197579
198084
198589
199096
Thailand
Private saving
Household
Corporate
18
14
4
15
11
3
15
10
5
22
10
12
22
9
13
Korea
Private saving
Household
Corporate
16
7
8
22
10
12
20
8
12
28
13
15
26
13
14
...
14
...
23
12
10
27
14
14
33
17
15
24
13
11
Philippines
Private saving
Household
Corporate
20
6
14
22
8
14
22
3
19
18
3
16
16
...
...
Japan
Private saving
Household
Corporate
31
...
...
30
...
...
27
12
15
26
10
16
25
9
17
India
Private saving
Household
Corporate
15
13
2
19
17
2
17
15
2
19
17
2
21
19
3
United States
Private saving
Household
Corporate
17
...
...
18
...
...
18
6
12
16
4
12
15
4
11

Private saving
Household
Corporate
Sources: Sang-Woo Nam, What Determines National Saving? A Case Study of Korea and the Philippines,
Policy, Planning, and Research Working Paper WPS 205 (Washington: World Bank, May 1989); World
Bank; national authorities; OECD; and IMF, World Economic Outlook database and staff estimates.
ulations, state-owned financial institutions, and by

guiding and rewarding financial market participants.
Usually these interventions directly or indirectly favored financial intermediation, particularly through
the banking system, relative to securitization. Government policies and the role of government intervention
varied widely by country, however, and there was no
one model of financial sector development. In Hong
Kong SAR, for example, the governments role generally was limited to prudential regulation and supervision, whereas at the other extreme, in Korea, the government actively directed the allocation of credit.29
In several east Asian economies, the public sector

created, owned, and managed financial institutions to
encourage and intermediate saving, particularly where
financial institutions were weak or did not exist. These
institutions included postal savings systems, development banks, and state-run commercial banks. In
Korea, Malaysia, Singapore, and Taiwan Province of
China, postal savings systems were established to encourage small savers by offering a secure and convenient way to deposit their savings through extensive
post office networks. In these four economies, as well
as in Indonesia and Thailand, development banks provided long-term credit to priority industries, small
firms, agriculture, housing, and poorer borrowers. All
commercial banks were state-owned and managed in
Korea from the early 1960s to the early 1980s, while
in Taiwan Province of China the largest commercial
banks are still state-owned and operated. In most of
the other east Asian economies as well, the government helped to establish and continues to own some of
the commercial banks (Table 3.6). Moreover, most
east Asian governments, except those in Hong Kong
SAR, Singapore, and recently Indonesia, protected fi-
29For discussions of the role of the financial sector in east Asia,

see Shakil Faruqi, ed., Financial Sector Reforms, Economic Growth,
and Stability: Experiences in Selected Asian and Latin American
Countries (Washington: World Bank, 1994); Shahid N. Zahid, ed.,
Financial Sector Development in Asia (Hong Kong SAR and New
York: Oxford University Press, 1995); Shahid N. Zahid, ed.,
Financial Sector Development in Asia: Country Studies (Manila:
Asian Development Bank, 1995); and Joseph E. Stiglitz and
Marilou Uy, Financial Markets, Public Policy, and the East Asian
Miracle, World Bank Research Observer, Vol. 11 (No. 2, August
1996), pp. 24976.
90
nancial institutions from domestic and foreign competition by restricting entry and branch licensing.30
East Asian governments also guided the financial
sector by way of tax incentives and subsidies, and by
rationing access to limited credit and foreign exchange. For example, in Korea and Taiwan Province
of China, households were encouraged to use the
postal savings system through the exemption of interest income from tax, while in many east Asian countries development banks policy loans to priority industries were subsidized. In Korea, in particular,
companies that performed well in export markets were
granted ready access to credit and foreign exchange.
Economic regulations included controls on interest
rates and international capital flows entailing moderate financial repression; restrictions on competition
and entry into the financial sector; and restrictions on
the activities of financial institutions, such as lending
for certain uses or to certain sectors. Unlike in other
developing countries, however, where the main function of financial repression was to help lower the public sectors debt-service costs, financial repression in
east Asia mainly benefited the private sector, especially corporate borrowers.31 One consequence of this
repression was that income was transferred from net
savers, particularly households, to net investors, particularly corporations, as interest rates were kept
low.32 Another was that financial repression increased
the scarcity of funds, thereby providing added leverage and apparent justification for government intervention. Complementing financial repression were
controls on international capital flows. Without these
controls, households funds might have flowed abroad
when domestic deposit rates were held significantly
below international rates.
At times, east Asian governments also limited lending for consumer spending, housing, real estate, and
equity purchases. The restrictions on lending for consumer spending and housing encouraged households
to save before making large purchases, while the restrictions on lending for real estate and stock market
investments discouraged speculative borrowing.
Table 3.5. Selected Economies: Net Private

Capital Flows1
(Percent of GDP)
1975822
China
Short-term liabilities
Indonesia
India
Korea
Malaysia
Philippines
Thailand
Brazil
Chile
Mexico
30In Indonesia, entry and licensing requirements, in fact, may

have been too lenient from a prudential perspective, especially because bank capital requirements were very low.
31In east Asia, government revenues from financial repression
were significantly lower than in most Latin American and African
countriesfor estimates of revenue generated through financial repression, see Alberto Giovannini and Martha De Melo, Government Revenue from Financial Repression, American Economic
Review, Vol. 83 (September 1993), pp. 95363. For a general discussion of the issue, see Box 5, Financial Repression, in the
October 1996 World Economic Outlook, p. 73.
32In other developing countries, financial repression has been
shown to have reduced national saving by leading to persistently
negative real interest rates, which reduced household saving by
more than the increases in government or corporate saving. In east
Asia, because inflation was relatively low and stable, real interest
rates generally remained positive.
1983912
1992962
0.3
0.1
0.2
0.2
1.1
0.6
0.1
0.4
0.2
3.5
4.2
0.3
1.0
0.2
1.1
0.5
0.1
0.5
0.8
2.6
0.6
0.1
1.9
1.4
4.8
1.8
0.7
2.3
2.4
0.2
0.2
0.1
1.4
0.1
1.4
0.7
1.5
0.4
0.8
0.3
0.1
5.7
0.1
0.1
5.5
3.6
0.4
0.1
0.3
0.8
0.6
3.2
0.3
2.4
1.1
2.7
5.1
3.7
1.4
0.8
4.1
3.6
0.5
0.5
10.5
6.5
4.0
3.5
5.5
0.5
0.1
5.0
2.9
0.8
1.0
0.1
1.9
2.0
4.8
1.7
0.1
3.0
2.3
1.9
0.3
0.1
1.5
0.6
2.2
0.9
0.3
1.0
2.0
2.5
0.6
0.2
2.0
1.4
4.0
0.4
3.5
1.7
5.7
1.3
0.8
3.6
2.8
8.8
1.0
2.2
5.7
4.7
4.1
0.9
0.1
3.2
0.8
0.6
0.4
0.2
0.5
3.5
0.5
4.1
1.1
0.2
7.1
0.7
6.4
1.7
3.9
2.2
0.2
1.5
0.5
8.9
3.1
1.2
4.6
1.7
4.3
0.8
0.1
3.4
0.6
0.5
1.0
0.1
1.4
0.5
3.0
2.2
1.3
0.6
0.2
1Because of data limitations, other net investment may include

some official flows.
2Annual averages.
91
Table 3.6. Selected Economies: Structure of Financial System1
Singapore
Taiwan
Province
of China
Thailand
5
3
25
21
4
...
>1,000
0
144
0
0
143
12
131
79
182
1
144
8
4
87
22
65
8
>400
1
53
2
5
29
15
14
0
>1,000
0
12
12.9
3.1
50.4
43.5
6.8
...
14.1
...
19.5
...
...
75.4
...
...
16.0
...
...
8.6
33.1
9.5
13.6
10.7
2.9
7.3
20.4
11.7
4.4
3.4
9.2
64.6
62.6
2.0
...
21.0
...
1.8
Hong Kong
SAR
Indonesia
Korea
Malaysia
Philippines
Number of institutions
State commercial banks
Development or regional banks
Private commercial banks
Domestic
Foreign or joint-venture
Merchant or specialized banks2
Other savings and finance institutions3
Postal savings system
Insurance companies4
0
0
182
31
151
62
124
223
7
27
205
164
41
...
>500
0
145
6
3
76
24
52
...
>1,000
1
60
1
1
34
21
13
12
168
1
67
Share of assets (in percent of total)5

State commercial banks
Development or regional banks
Private commercial banks
Domestic
Foreign or joint-venture
Merchant or specialized banks2
Other savings and finance institution3
Postal savings system
Insurance companies4
...
...
89.3
...
...
4.5
2.7
...
3.5
36.9
2.2
46.6
39.1
7.5
...
9.4
...
4.9
12.0
8.9
33.1
29.6
3.5
...
37.9
0.8
7.5
...
0.6
59.0
...
...
5.4
29.5
0.9
4.5
Sources: Hong Kong Monetary Authority; Hong Kong Office of the Commissioner of Insurance; IMF, IndonesiaSelected Issues, IMF Staff
Country Report 97/76 (Washington: IMF, June 1997); Marcus Noland, Restructuring Koreas Financial Sector for Greater Competitiveness,
APEC Working Paper 96-14 (Washington: Institute for International Economics, 1996); Shahid N. Zahid, ed., Financial Sector Development
in Asia: Country Studies (Manila: Asian Development Bank, 1995); Bank Negara, Malaysia; Monetary Authority of Singapore; Council of
Economic Planning and Development, Taiwan Statistical Data Book (Taipei, Taiwan Province of China, 1997); and IMF staff estimates.
1Structure for years as follows: Hong Kong SAR, 1996; Indonesia, 1996 (except 1991 for share of assets of other finance and insurance companies); Korea, 1994 for number of institutions and 1993 share of assets; Malaysia, 1997; Philippines, 1991; Singapore, 1996 (July for number
of institutions and end-year for share of assets); Taiwan Province of China, 1996 for number of institutions and 1990 for share of assets; and
Thailand, 1997 for number of institutions and 1992 for share of assets.
2Includes restricted-license banks for Hong Kong SAR (24 of these banks were incorporated outside of Hong Kong SAR) and medium business banks for Taiwan Province of China.
3Includes (domestically or foreign-owned) rural, thrift, and savings banks; credit unions and cooperatives; other savings or deposit-taking institutions; and investment, leasing, and finance companies. Excludes unit trusts, mutual funds, and securities dealers and brokers.
4Includes state-owned, domestic private, foreign, and offshore (life, property, casualty, social, and reinsurance) insurance companies.
5May not add up to 100 because of rounding. Excludes assets of the postal savings system and other savings and finance institutions for
Singapore and assets of the mandatory pensions schemes for Malaysia and Singapore.
In all of the east Asian economies financial intermediation, as measured, for instance, by the ratio of broad
money (M2) to GDP, expanded rapidly over the past
three decades (Table 3.7). As noted earlier, this occurred in part because of the underdevelopment of securities markets, which meant that to finance the rapid
accumulation of capital taking place companies had to
rely on debt financing, mainly through banks and
other financial intermediaries.
The reliance on private sector debt in these
economies can also be gauged using two other measures: private sector credit as a percent of GDP, and
debt-equity ratios (Tables 3.8 and 3.9). In most east
Asian economies, private sector credit expanded
rapidly during the 1980s and 1990s, and by 1995 the
ratio of private sector credit to GDP was at least equal
to that in the United States. Furthermore, the debtequity ratio in Korea, the only crisis country for
which data are readily available, was very high. In the
period 197590, retained earnings financed, on aver-
age, about 30 percent of total corporate investment in

Korea,33 and the ratio of debt to equity rose from
around 90 percent in the 1960s to close to 350 percent
in the mid-1980s, before declining to around 300 percent in the first half of the 1990s. On the eve of the financial crisis, however, the debt-equity ratio had
reached nearly 400 percent.34 By comparison, in
Taiwan Province of China, the debt-equity ratio was
around 85 percent, in Japan around 200 percent, and
in the United States just above 150 percent in the
1990s. The very high and rapidly growing debt levels
in the east Asian economies indicate that both the
banking and corporate sectors were becoming in33See Ajit Singh, Savings, Investment, and the Corporation in
the East Asian Miracle, Study No. 9, Project on East Asian
Development: Lessons for a New Global Environment (Geneva:
United Nations Conference on Trade and Development, March
1996).
34Sung Kwack, The Financial Crisis in Korea.
92
Table 3.7. Selected Economies: Broad Money (M2)

(Percent of GDP)
China
Hong Kong SAR
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
Germany
Japan
United States
1965
1970
1975
1980
1985
1990
1995
...
...
11
12
31
22
56
34
25
...
...
10
33
34
23
66
41
28
...
...
16
31
45
18
61
57
34
37
...
17
33
52
24
64
66
38
55
...
24
35
63
28
72
109
56
80
...
40
38
66
34
91
148
70
102
173
48
44
91
50
84
194
79
44
77
66
49
74
63
54
85
65
55
86
61
59
96
67
66
117
66
64
114
58
Source: IMF, International Financial Statistics (IFS) (Washington, various years).
creasingly vulnerable to adverse shocks. This fragility

may have been exacerbated by the short-term nature
of the debt and because credit growth was often led
by nonbank financial intermediaries, such as finance
companies.35
Although stock market capitalization in east Asia
rose dramatically in the 1990s until 1997 (Figure 3.3),
securities markets in the region are relatively young
and underdeveloped, for a variety of reasons.36 The
shares of many companies that are traded on the stock
exchanges are closely held, with the percent of shares
actively traded being relatively low, despite improve-
ments in market liquidity during this decade. Furthermore, unlike in industrial countries, equity markets
play a limited role in corporate governance, owing to
the importance of family-controlled firms. As a result,
companies have not relied on these markets for financing, and equity prices have not performed the
functions of evaluating or effectively disciplining corporate or managerial performance.
Other securities markets in the region, such as
money and bond markets, are even less developed
and liquid. Fixed-income markets typically develop
after the creation of a government bond market. In
east Asia, however, government securities markets
have been slow to develop: governments either have
not required substantial budgetary financing, because
of their prudent fiscal stances, or have borrowed
from banks to cover fiscal shortfalls. East Asian
governments may also have discouraged the development of securities markets through their interven-
35See also IMF, International Capital Markets: Developments,

Prospects, and Key Policy Issues (Washington: IMF, 1998, forthcoming).
36See Stijn Claessens and Thomas C. Glaessner, Are Financial
Sector Weaknesses Undermining the East Asian Miracle? Directions in Development (Washington: World Bank, 1997).
Table 3.8. Selected Economies: Private Sector Credit1

(Percent of GDP)
China2
Hong Kong SAR
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
Germany
Japan
United States
1965
1970
1975
1980
1985
1990
1995
...
...
5
11
13
19
38
24
14
...
...
9
34
18
19
46
32
18
...
...
21
35
27
24
57
51
26
53
...
10
42
38
31
71
55
30
69
...
18
49
62
20
92
67
46
89
...
47
57
71
19
82
100
65
87
155
53
61
85
38
91
149
98
57
81
53
64
78
55
70
88
62
79
85
65
87
99
68
95
124
71
100
118
65
Source: IMF, IFS.

1Private sector credit includes lending by the monetary authorities and deposit money banks; it excludes
lending by other banking institutions, for which data are not available for most of the countries listed.
2Credit to nongovernment sector.
93
Table 3.9. Selected Economies: Debt-Equity Ratios of Manufacturing

Corporations
(Percent)
Korea
Japan
United States
1985
1990
1991
1992
1993
1994
1995
348
114
252
121
285
83
226
149
306
98
221
147
318
93
216
168
294
88
213
174
302
87
209
166
286
86
206
159
Source: Sung Kwack, The Financial Crisis in Korea: Causes and Cure, IMF Seminar Series, No.
199819 (Washington, June 1998).
tions.37 For instance, in Thailand (as in Japan), the

government directly hindered the development of the
bond market by granting a monopoly in the issuance
of long-term debentures to one bank.
The rapid expansion of financial intermediation in
the east Asian economies was not always matched by
a commensurate strengthening of regulatory and supervisory systems. Indeed, all of these economies in
varying degrees suffered from financial sector distress
at times during the past two decades (Table 3.10).
In several instances, such as in Hong Kong SAR during 198286, Indonesia during the early 1990s,
Malaysia during 198588, the Philippines during
the mid-1980s, Taiwan Province of China during
198384, and Thailand during 198387, some financial institutions failed or were closed. In Malaysia, the
closure of banks led to runs on other banks, while in
Hong Kong SAR the period of financial sector problems coincided with a period of exchange market pressure. In other casesfor example, Korea during the
mid-1980s and Singapore in 1982although banks
did not fail, nonperforming loans grew, and financial
institutions came under significant stress.
Banking sector distress in these economies was
caused by both external and domestic factors. External
causes included increases in international interest rates
(for several economies in the early 1980s), falling export demand (in Korea), or terms of trade shocks (in
Malaysia and the Philippines). Domestic causes included weak prudential regulations (in all of these
economies), speculative borrowing (related mainly to
real estate in Hong Kong SAR, Malaysia, and
Thailand; equities in Malaysia; exchange rates in
Thailand; and arbitrage across the yield curve in
Taiwan Province of China), and lending on noncommercial criteria, often to clients connected to bank
management or the government (in Indonesia, the
Philippines, and Thailand).
Governments responded to the crises in different

ways. In Hong Kong SAR and Taiwan Province of
China, most insolvent financial institutions were
merged, liquidated, or allowed to fail, and management was replaced when institutions were merged
or bought by healthier banks. In contrast, in Indonesia, Malaysia, and Thailand, although a few, generally small, financial institutions were allowed to
fail, most institutions were allowed to remain in operation through government intervention, despite nonperforming loans in the banking sector that exceeded
25 percent of total assets. In Korea, where nonperforming loans peaked at over 7 percent of total
lending, no financial institutions were closed.38
Furthermore, even when financial institutions failed,
most depositors were protected, notwithstanding the
absence (except in the Philippines) of explicit deposit
insurance. In almost all of these economies, prudential regulations and supervisory frameworks were
tightened after the crises, but only in Hong Kong SAR
and Singapore were reforms implemented in a systematic way.
From the mid-1980s onward, east Asian governments began to liberalize their financial sectors. The
liberalization included domestic reforms as well as liberalization of exchange and capital controls. These reforms were not solely in response to the banking crises
of the 1980s but were motivated also by changes in
needs for financing as these economies matured, production processes became more complex, and a
broader range of often more sophisticated financial instruments took on greater importance.39 Financial
market liberalization and reform, however, did not
generally occur in a coherent fashion: rather, governments liberalized in an ad hoc manner as problems
arose, and they failed to upgrade accounting and reporting standards and to strengthen regulatory and supervisory systems.
37Maxwell J. Fry, Nine Financial Sector Issues in Eleven Asian

Countries, International Finance Group Working Paper 9009
(Birmingham, U.K.: University of Birmingham, October 1990) argues that long-term securities markets will only develop as market
participants learn-by-doing with market-determined interest rates.
Therefore, when interest rates are administered, the development of
bond markets may be hampered.
38By comparison, in the United States during the banking crisis of

the mid-1980s when nonperforming loans peaked at around 4 percent of total loans, over 2,000, mainly small, banks and savings and
loan institutions failed.
39Membership in the World Trade Organization (WTO) and, for
Korea, in the OECD, may also have encouraged financial sector liberalization in recent years.
94
In Korea, for example, the liberalization of the financial sector was very gradual and selective.40 On the
external side, developments in the current account essentially dictated the way capital flows were controlled or liberalized. When the current account weakened (for example, in the early 1980s), the government
restricted overseas investments by residents and eased
inward restrictions on capital flows. When the current
account shifted into surplus in the late 1980s, the government abolished all restrictions on outward foreign
direct investment below $1 million, but foreign commercial loans to private domestic firms were restricted.41 When again the current account worsened in
the early 1990s, capital account liberalization proceeded. On the domestic side, state banks were privatized, interest rates were gradually deregulated, policy
lending was reduced, and the development of securities markets was encouraged. The government, however, was tardy in improving the supervisory and
regulatory framework as the financial sector was liberalized, and debt levels remained high. Furthermore,
as capital controls were relaxed, albeit mostly for domestic commercial banks, external debt rose.
Similar weaknesses developed in Indonesia,
Thailand, and to a lesser extent in Malaysia as the financial sector and capital account were liberalized. In
addition, previous government interventions to support
weak or insolvent financial institutions (for example, in
Indonesia, Malaysia, and Thailand) and governmentdirected credit to corporations through banks (in
Korea) clearly exacerbated moral hazard by creating
the perception of implicit guarantees and thereby encouraging excessive risk taking.42 In the three southeast
Asian countries, banks also lent heavily to the property
sector and for equity investments. Hence by the mid1990s, the financial sector was vulnerable to asset price
deflation. Offshore financial institutions, such as the
Bangkok International Banking Facilities in Thailand,
actively intermediated funds raised through short-term
foreign borrowing, increasing the private sectors vulnerability to currency depreciation. In Indonesia, the
fragmentation of the banking system that occurred after
bank licensing was liberalized without appropriate capital requirements may also have increased the fragility
of the financial system. Improvements in the prudential

Stock Market Capitalization1
(Percent of GDP)
Stock market capitalization has risen in east Asia in the 1990s.
1986
1996
1991
Hong Kong SAR
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
Japan
United States
50
100
150
200
250
300 350
Sources: International Finance Corporation, IFC Factbook; and IMF,

World Economic Outlook database.
1Data for capitalization are end of period, and for GDP are period
average.
40See R. Barry Johnston, Salim M. Darbar, and Claudia

Echeverria, Sequencing Capital Account Liberalization: Lessons
from the Experiences in Chile, Indonesia, Korea, and Thailand,
Working Paper 97/157 (Washington: IMF, November 1997).
41See Yung Chul Park and Chi-Young Song, Managing Foreign
Capital Flows: The Experiences of the Republic of Korea, Thailand,
Malaysia, and Indonesia, International Monetary and Financial
Issues for the 1990s (New York: United Nations Conference on
Trade and Development, 1997).
42See IMF, International Capital Markets, 1998 (forthcoming);
and Paul Krugman, What Happened to Asia? January 1998
(available via the Internet: http://web.mit.edu/krugman/www/
disinter.html).
95
Table 3.10. Selected East Asian Economies: Banking Sector Problems

Economy
Hong Kong SAR
Dates
Extent of Financial Distress
Government Measures/Estimated Losses
198283
Nine deposit-taking institutions failed.
198386
Seven banks and other financial institutions failed

or were merged, taken over, or liquidated.
The authorities revamped regulatory and auditing

systems for financial institutions.
The authorities introduced new management in
several institutions and provided credit for others.
Indonesia
199296
A large private bank failed, causing runs on smaller

banks. Nonperforming loans peaked at over
25 percent of total lending.
The government recapitalized five state banks at a

cost of about 2 percent of GDP. One bank was
liquidated.
Korea
mid-1980s
Nonperforming loans of deposit-money banks

peaked at over 7 percent of total assets.
Malaysia
198588
At peak, nonperforming loans were over 30 percent

of total loans. Sporadic runs on financial institutions.
Several finance companies failed or were merged.
Overall, the authorities intervened in 3 banks,
4 finance houses, 14 insurance companies, and
24 other deposit-taking institutions.
The reported losses were equivalent to about

5 percent of GDP. The shareholders of some
institutions were required to inject new capital, with
supplements from the central bank. Loans to some
banks were provided at concessional rates. The
supervisory and regulatory framework was
strengthened, and a secondary mortgage market
to aid bank liquidity was established.
Philippines
198187
Banks accounting for almost 2 percent of total

assets failed in 1981. Through the mid-1980s,
3 private commercial banks, 128 rural banks, and
32 thrift institutions failed. Nonperforming loans
were almost 20 percent of total loans at peak.
The central bank provided substantial liquidity,

amounting to 3 percent of GDP at peak. Several
insolvent institutions were closed or were taken
over, and depositors were paid off (depositor losses
were equivalent to over 5 percent of total deposits).
The government took over several banks and
established an agency to administer, recover, and
dispose of nonperforming loans.
Singapore
1982
Nonperforming loans of commercial banks reached

almost 1 percent of GDP.
The government provided tax breaks for two years

to write off losses.
Taiwan Province
of China
198384
Four trust companies and 11 cooperatives failed.
Healthier banks bought or took over management of

weaker ones.
1995
A credit cooperative failed, causing runs on other

credit unions.
198387
Runs on financial institutions caused over 20 finance

companies to fail. More than 25 percent of financial
system assets were impaired.
Thailand
The authorities intervened to assist over 50 finance

companies and banks: 25 were closed and another
9 were merged; 20 other institutions received
government subsidies. The total cost to the
government was about 1 percent of GDP. Depositors
of finance companies bore about 50 percent of losses.
Sources: Gerard Caprio, Jr. and Daniela Klingebiel, Bank Insolvencies: Cross-Country Experience, Policy Research Working Paper 1620
(Washington: World Bank, July 1996); Carl-Johan Lindgren, Gillian Garcia, and Matthew I. Saal, Bank Soundness and Macroeconomic Policy
(Washington: IMF, 1996); and World Bank, The East Asian Miracle: Economic Growth and Public Policy (New York: Oxford University Press,
1993).
regulatory and supervisory frameworks and their rigorous enforcement, risk-weighted capital adequacy requirements, limitations on overexposure to individual
sectors, rules for loan-loss provisioning, and restrictions on lending to related parties might have mitigated
the risks and reduced the vulnerability that developed
as domestic and external financial controls were removed in these countries.
substitution phase, they subsequently promoted exports while, in most cases, continuing to protect domestic industries from import competition.43 The ex43The east Asian experience was instrumental in changing established views regarding trade policy and economic developmentin
particular, in altering the consensus view from favoring import-substitution to favoring outer-oriented trade policies. See Anne O.
Krueger, Trade Policy and Economic Development: How We
Learn, American Economic Review, Vol. 87 (March 1997), pp. 122.
Import substitution policies were favored until 1958 in Taiwan
Province of China, 1960 in Korea, 1967 in Singapore, 1970 in
Malaysia, and 1980 in Thailand. Indonesia, which had followed export-oriented policies and liberalized trade in the late 1960s, turned
inward during the oil and commodity price boom of the 1970s, but returned to an export-push strategy in the second half of the 1980s. In
recent years, China and the Philippines have also promoted exports.
Export Orientation and Trade Openness

A key ingredient of the east Asian economies successful development strategy was their export orientation. Although each of these economies, other than
Hong Kong SAR, went through an initial import-
96
ports and imports of all of these economies grew even

faster than their output, and the newly industrialized
Asian economies shares of world trade now far exceed their shares of world output (Figures 3.4 and 3.5).
In large part, manufactured exportsinitially laborintensive manufactures and more recently high-technology exports such as machinery and equipment
have led the export drive.44
Exports have been regarded as vital to the east Asian
growth strategy, for several reasons. First, exports provided demand needed to sustain the growth process.
For the most part, these countries had relatively small
internal marketssmall populations or low per capita
incomes at the initial stages of development. Therefore,
rapid growth required external markets. Second, producing for export markets encouraged efficiency because domestic firms had to compete internationally.
This was particularly important because east Asian
governments had often discouraged domestic competition in order to enhance corporate earnings and saving,
protect infant industries from foreign competition (so
as to develop comparative advantages in new areas,
particularly in manufacturing), and stimulate rapid
growth (so that firms would achieve economies of
scale). Furthermore, as part of their export-promotion
strategies, east Asian governments encouraged the import of technology by fostering licensing for knowledge-intensive or technology-intensive products (for
example, in Korea, modeled on the experience of Japan),
by promoting inward foreign direct investment geared
mainly toward export industries (in Indonesia and
Thailand, for example), or by spurring capital goods
imports through tax and subsidy incentives and tariff
policy.45 Third, export promotion reinforced both the
need for, and the ability to maintain, macroeconomic
stability. On the one hand, east Asian governments generally sought to sustain competitive exchange rates to
foster exports. Maintaining fiscal and monetary stability was important, therefore, to prevent real currency
appreciation and exchange rate instability. On the other
hand, export growth helped to resolve the potential
conflict between rapid economic growth and the external financing constraint by helping to avoid the emergence of large current account deficits. In addition, as
exports rose and generated income they contributed to
government revenues and the governments ability to
maintain fiscal balance, in a virtuous circle.

Growth of Merchandise Exports
(Percent a year; five-year moving average)
Exports have grown faster in east Asia than in other developing
countries.
50
40
ASEAN-4
Newly industrialized
Asian economies
30
20
10
0
China
1963
Other
developing
countries1
68
1Excludes
73
78
83
88
10
93
97
20
fuel exporters.
Figure 3.5. Selected Country Groups:

Shares of World Exports, Imports, and Output
(Percent)
East Asias shares of world trade and output have risen steadily
over the past two decades.
Exports
Imports
Output
10
ASEAN-4
8
6
4
2
0
197579
198084
198589
199095
10
Newly Industrialized Asian Economies
44In Indonesia, Malaysia, and Thailand, oil and other natural resource exports have been significant for periods of time.
45Borensztein, De Gregorio, and Lee, How Does Foreign Direct
Investment Affect Economic Growth? for example, shows that foreign direct investment is an important vehicle for the transfer of
technology, contributing relatively more to growth than domestic investment when the stock of human capital exceeds some threshold.
Gene Grossman and Elhanan Helpman, Innovation and Growth in
the Global Economy (Cambridge, Massachusetts: MIT Press, 1991),
emphasize that technological spillovers can come through imports
as well as exports.
6
4
2
0
197579
97
198084
198589
199095
Box 3.1. Aging in the East Asian Economies: Implications for Government Budgets and Saving Rates
The aging of a countrys population poses important
long-term public policy challenges. Educational systems will need to adapt, and rapidly modernize, while
aging societies will confront difficult challenges in
meeting the growing and shifting demands for medical
care. Social insurance mechanisms will be needed to ensure that the elderly have adequate financial resources
when they retire, particularly since traditional extended
family support systems normally weaken as economies
mature.
Forecasting the budgetary effects of aging is always
problematic. But the lack of established comprehensive
social insurance systems in many Asian countries and
the uncertainty about the direction of public policy
makes forecasting particularly difficult. It seems clear,
however, that the narrow demographic effects on government budgets of aging populations (in terms of rising
shares of the elderly in the populations) will be quite
pronounced for the newly industralized Asian economies
primarily because their social insurance schemes are
more developed. Conversely, the more limited social insurance commitments of China and the countries in
southeast Asia suggest that the impact of aging populations alone may not have significant fiscal effects.
A realistic budgetary projection, however, would need to
take account of the likelihood that these countries will
seek to broaden significantly the coverage of their social
insurance systems, long before the elderly become more
important in the population. Such policy changes, interacting with the aging of the populations, are likely to
create significant fiscal pressures. Indeed, a recent IMF
study suggests that the introduction of a plausible extension of the social sector policy framework could
lead to a substantial increase in budgetary outlays on
Beyond the recent economic turmoil afflicting many

of the Asian economies, one facet of their longer-term
prospects not often remarked upon is that, like many
industrial countries, their populations are aging (albeit
with a lag relative to the industrial countries). The
share of the elderly in the populations of the Asian
economies of China, Indonesia, Korea, Malaysia, the
Philippines, Singapore, Thailand, Taiwan Province of
China, Vietnam, and Hong Kong SAR will at least double by 2025, and the share of the young will fall sharply.
There has also been a swift transformation in the health
status of these economies populations toward patterns
increasingly mirroring those in industrial countries.
These developments will influence the long-term development of these economiesaffecting labor markets,
saving and investment, and growth rates, and posing
policy challenges for government, particularly in the social sectors. Given Asias importance in the world economy, there may be global macroeconomic ramifications
as well.
In demographic terms, Hong Kong SAR, Korea,
Singapore, and Taiwan Province of Chinathe newly industrialized Asian economiesare the furthest advanced
in terms of population aging. Their working-age populations will increase modestly during 200030 and then
shrink. By 2010, their overall dependency rates will begin
to rise sharply, reflecting the rising shares of the elderly.
For China, these structural changes will begin about ten
years later. For Indonesia, Malaysia, the Philippines,
Thailand, and Vietnam the declines in fertility and increases in life expectancy are more recent. Overall dependency rates will fall until 2020, when the elderly dependency rate will begin to rise sharply, reaching 2228
percent by mid-century.
Many government policies assisted the export drive.

Thus, despite high effective rates of protection, exporters had access to imports at close to world prices
through a variety of channels, including free trade
zones, export-processing zones, bonded warehouses,
duty drawbacks, and tariff exemptions. In fact, comparisons of international and domestic price levels and
their variability show significantly smaller price distortions in the east Asian economies than in other developing countries.46 Also, east Asian governments typically provided preferential financing and tax incentives
for exports, subsidized export-marketing efforts and
export-related infrastructure, promoted the creation of
international trading companies, and, particularly in the
southeast Asian economies, provided incentives for
foreign investment directed toward exports.
The export drive was also abetted by the availability of external markets, particularly in Japan and the
United States, but also increasingly within the Asian
region (Figure 3.6). Japan, the United States, and the
EU furnished substantial demand for the labor-intensive manufactures that generated the largest growth in
east Asian exports, and more recently, also provided a
market, particularly in the United States, for technology-intensive products. Reciprocally, the industrial
countries (especially Japan) exported the capital goods
that the Asian economies required to produce their export goods and improve the technology base.
Expanding intraregional trade also played a critical
role. A large part of this trade consisted of trade in intermediate goods, allowing the east Asian economies
to generate economies of scale. This expansion was
aided, in part, by the more advanced economies in the
region, starting with Japan and subsequently Korea,
Singapore, and Taiwan Province of China, investing
directly and relocating firms to other east Asian
economies. By the mid-1990s, about one-half of the
46See David Dollar, Outward-Oriented Developing Economies

Do Really Grow More Rapidly: Evidence from 95 LDCs, 197685,
Economic Development and Cultural Change, Vol. 40 (April 1992),
pp. 52344.
98
pensions and medical care in coming decades in these

countries.1
In addition to the fiscal effects, one can expect that the
aging of east Asian populations may have a significant effect on national saving rates, bolstering their already high
levels in the next decade but then eroding saving rates as
elderly dependency rates begin to rise. Another recent
IMF study has sought to gauge the possible partial effects, over time, of expected demographic shifts on private sector saving rates.2 Such an exercise suggests that
through 2010, there may be an increase in private saving
rates. Through 2025, only in the four newly industrialized
Asian economies would demographic factors adversely
influence private saving rates. Thus, at a time when industrial countries saving rates are declining as a result of
their demographic profiles, the east Asian countries
should provide some additional saving. After 2025, however, private saving rates may decline markedly across
the region, as elderly dependency rates rise.
Combining the effects on the public and private sectors
(and taking account of possible Ricardian equivalence effects), one may initially observe a deterioration in national saving rates in the newly industrialized Asian
economies by 2010, and to a lesser extent in China (see
figure). In contrast, national saving rates may increase in
southeast Asia. From 2025 on, however, the Asian newly
industrialized economies and China may observe significant deteriorations in national saving rates.
National Saving Rates1

(Percent of GDP)
45
China
40
Newly industrialized
Asian economies
35
Southeast Asia
30
25
1995
2010
2025
20
1The newly industrialized Asian economies are Hong

Kong SAR, Korea, Singapore, and Taiwan Province of
China. Southeast Asia comprises Indonesia, Malaysia, the
Philippines, Thailand, and Vietnam. Saving rate for 2010
and 2025 are IMF staff projections.
1Peter
S. Heller, Aging in the Asian Tigers: Challenges for

Fiscal Policy, Working Paper 97/143 (Washington: IMF,
October 1997).
2Peter S. Heller and Steven A. Symansky, Implications for
Savings of Aging in the Asian Tigers, Working Paper 97/136
(Washington: IMF, September 1997).
macroeconomic stability until recently. Fiscal and current account deficits were less than one-half the average for other developing countries, and inflation for
the most part was kept in the single digits. In some
economies (for instance, Indonesia, Taiwan Province
of China, and Thailand), legislation limited the size of
public sector deficits, while in other economies (for
instance, Korea, Malaysia, and Singapore) strong political support for anti-inflationary policies acted as a
constraint on fiscal policies. Also, in Hong Kong SAR,
the currency board arrangement in place since 1983
has disciplined fiscal policy as well as constraining
monetary action. Disciplined macroeconomic policies
provided a stable environment for private sector decision making and contributed to the high rates of saving, domestic and foreign investment, and export
growth that were ingredients in the regions growth
performance (Table 3.11).
This generally favorable performance, however,
was not without difficulties. Indeed, several of the east
Asian economies experienced intermittent bouts of
exports of each of the east Asian economies went to

other countries in the region, including Japan (see
Figure 3.6). The Philippines is the least regionally integrated economy, with more than one-third of exports
destined to the United States. China and Indonesia are
the most regionally integrated, with almost 60 percent
of their exports directed to other countries in the region. The increased regional trade integration has undoubtedly been a positive element in the regions economic development, but it has also tended to
exacerbate the regional spillovers of the recent financial crises, magnifying their effects on trade and activity within the region relative to their effects on the rest
of the world economy.
Macroeconomic Stability
Unlike many other developing countries that experienced numerous boom-bust cycles during the past
three decades, the fast-growing east Asian economies
generally maintained a relatively high degree of
99

Destination of Exports
overheating pressures, indicated by rising inflation, at

least in asset markets, and sizable current account
deficits. In the period leading up to the recent crises a
number of east Asian economies witnessed sharp increases in private capital inflows, attracted in part by
the high rates of growth, which contributed to overheating pressures. Goods price inflation remained
moderate, but asset pricesreal estate and equity
pricesrose at a rapid pace. In some countries real exchange rates appreciated, eroding competitiveness and
exacerbating the deterioration of current account imbalances. With currencies essentially pegged to the
U.S. dollar in many of the east Asian countries, and
with the scope for, or the readiness to undertake, fiscal
adjustment limited, the policy response to the capital
inflows was often limited to sterilization of their monetary impact, which tended to be impractical given the
size of the inflows. By late 1996 and early 1997, the
fine balance between macroeconomic stability with
pegged exchange rates, high investment, and rapid
growth began to unravel in many parts of east Asia,
particularly in Thailand.47
(Percent of total exports)

Intraregional exports in east Asia have risen to about one-half of all
exports, while the United States and European Union continue to be
important export markets.
ASEAN-4
Newly
industrialized
Asian
economies
China
Japan
United
States and
European
Union
100
ASEAN-4
80
60
40
20
The East Asian Development Strategy

in a Changing Environment
0
9
7
75
19
6
9
92
19
Indonesia
9
7
6
9
75 992
19
1
Malaysia
9
6
7
9
75 992
19
1
Philippines
9
6
7
9
75 992
19
1
Thailand
Newly Industrialized Asian Economies and China
The east Asian growth experience and the recent

crises cannot be assessed only in terms of developments in the east Asian economies themselves; they
have to be viewed, rather, in the context of a changing
world economy. In particular, the recent crises have revealed, in ways that previous crises did not, the limitations of managed development in an increasingly
integrated world economy.
In recent decades, as the east Asian economies have
been experiencing rapid economic growth, the world
economy has become increasingly integrated. Globalization, especially of financial markets, has greatly increased the potential costs to countries of the failure to
maintain sound domestic financial sectors. In some respects the east Asian development strategy was well
suited to the evolving environment: east Asian governments on the whole fostered macroeconomic stability and encouraged mobilization of domestic resources necessary for sustained rapid growth, and their
outward-oriented strategy allowed them to benefit
from expanding markets for their products. But the
strategy was not so well suited to fostering strong domestic financial systems. This was partly a problem of
success: economic growth was so rapid that it was difficult for institutional development, and prudential
regulation and supervision, to keep pace with require-
100
80
60
40
20
0
9
9
6
6
7
7
9
9
75 992
75 992
9
9
1
1
1
1
Hong Kong
Korea
SAR1
9
9
9
6
6
6
7
7
7
9
9
9
75 992
75 992
78 992
9
9
9
1
1
1
1
1
1
Singapore
Taiwan
China1, 2
Province of
China
Source: IMF, Direction of Trade Statistics.

for exports from Hong Kong SAR and China include Chinas
exports to Hong Kong SAR, which are reexported to other destinations.
2Data start in 1978.
1Data
47For further details regarding macroeconomic developments

prior to the crisis in mid-1997, see the December 1997 World
Economic Outlook: Interim Assessment, pp. 810.
100
The East Asian Development Strategy in a Changing Environment
Table 3.11. Selected Economies: Macroeconomic Indicators

Growth
(percent a year)
Inflation
(percent a year)
Fiscal Balance1
(percent of GDP)
Current Account
Balance2
(percent of GDP)
197585 (average)
China
Hong Kong SAR
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
7.9
8.2
5.7
7.6
6.3
2.9
7.2
8.3
6.6
2.7
8.2
13.4
13.5
4.8
15.6
3.4
6.3
7.2
1.0
1.1
0.3
2.2
5.3
2.0
1.9
0.3
3.7
0.4
3.0
2.0
3.7
3.2
5.1
7.2
4.3
5.5
Brazil
Chile
India
Mexico
4.1
2.2
5.0
4.7
101.2
81.0
6.7
39.5
0.9
6.8
5.2
3.6
6.5
0.7
2.3
198696 (average)
China
Hong Kong SAR
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
9.9
6.3
7.4
8.6
7.8
3.7
8.4
7.7
9.1
11.6
8.0
8.2
5.7
2.6
8.9
1.9
3.0
4.5
1.9
2.1
0.5
0.1
2.4
2.3
9.1
0.5
2.1
0.4
5.6
2.8
0.9
2.6
2.5
9.5
7.8
4.9
Brazil
Chile
India
Mexico
2.6
7.7
5.9
2.0
983.1
15.8
9.2
45.7
1.3
2.6
7.4
4.0
0.6
3.1
2.0
2.8
1Central
2For
government.
Hong Kong SAR, data are for the goods and services balance.
ments. Thus, in Korea, for instance, the financial system remained underdeveloped compared with systems
in other countries with similar levels of per capita income. But it was also a result of two other factors.
First, government interventions and guidance of the
financial sector retarded the development of domestic
securities markets and also led to problems associated
with connected lending, implicit guarantees, and
overly exposed financial sectors. Second, financial liberalization was not well sequenced.
With regard to the first of these factors, governments have an important responsibility to supervise
and safeguard financial systems because of their central role in the payments mechanism and in the mobilization, intermediation, and allocation of savings.
Governments may also need to intervene actively in financial markets because of market failures, typically
stemming from incomplete or asymmetric information.48 There are reasons to believe that financial mar-
ket failures may be particularly acute in emerging

market economies. For example, in a relatively immature financial system, banks and other financial institutions may face limited competition or may not even
exist in certain rural areas, so that the private sector
may be discouraged from saving or investing. Also, reliable sources of information, such as credit agencies,
may not exist, so that banks or other creditors may be
hesitant or unwilling to lend to viable borrowers.
Clearly, government interventions may be justified
to correct some market failures and can, in principle,
improve the efficiency of financial markets. Often,
however, as has been the case in many developing
countries, such interventions are counterproductive,
hampering the efficiency of financial markets. Furtherborrower. As a result, financial resources will not be rationed by equilibrating prices (in this case, interest rates) but by other generally information-based means. Financing, therefore, may not go to investments with the highest social returns. For a more detailed discussion
of market failures in the financial sector and the potential role of government, see Joseph E. Stiglitz, The Role of the State in Financial
Markets, in Proceedings of the Annual World Bank Conference on
Developments Economics 1993, edited by Michael Bruno and Boris
Pleskovic (Washington: World Bank, 1994), pp. 1952; and World
Bank, The East Asian Miracle, pp. 20521 and pp. 27391.
48For example, many financial transactions do not reflect concurrent exchanges of goods or services, and participants in these transactions base their decisions on information about future economic
conditions and prices. Also a creditor usually will have less information about a borrower and the use of the borrowed funds than the
101
more, what may appear to be a successful government

intervention in one dimension may have negative effects in another. For example, policies such as restraints on consumer credit may help to mobilize and
increase domestic saving and investment, but they
may also lead to a suboptimal level and inefficient pattern of consumption and to a misallocation of investment. Also, interventions that may be appropriate for a
certain stage of economic and financial development
may well be inappropriate at more advanced stages,
but they might be difficult to dismantle because of
vested interests that have become established or because they have hindered the development of managerial competencies and institutional structures. Thus,
directed lending and other government involvement in
the loan decision process may result in banks having
poor credit risk assessment capabilities, since loan officers will be inexperienced in evaluating and monitoring the performance of debtors with long-term financing needs. They may also retard the development
of effective accounting, legal, supervisory, monitoring, and information systems.
This was the case in the crisis countries: the institutional structure became increasingly inadequate at efficiently intermediating the large and growing volume
of saving, and the moral hazard problems present in all
financial systems were magnified. Owing to underdeveloped capital markets and regulations that prevented
domestic savers from investing abroad, banks had a
dominant position in the intermediation of funds.
Connected lending, poor credit risk assessment, and
other deficiencies, however, contributed to excessive
debt creation and to the financing of marginal or uncertain investment projects, while restrictions on the
entry of foreign financial institutions limited competitive discipline and the injection of outside expertise.
Financial discipline tended not to be imposed by banks
because of implicit or explicit guarantees on both bank
assets and liabilities. A history of public guarantees of
private projects, some of which were undertaken
under government guidance, directly subsidized or
supported by policies of directed credit to favored
companies or sectors, had contributed to insufficient
attention being paid by corporations and banks to the
underlying riskiness and returns of investment projects. Distorted incentives in project selection, combined with insufficient expertise in the monitoring and
evaluation of projects, weak prudential supervision
and regulation, and low capital adequacy ratios, resulted in the buildup of structural weaknesses in undercapitalized financial systems.49
These weaknesses were exacerbated by financial
market deregulation and capital account liberalization
during the 1990s. Capital inflows gave banks and

other financial intermediaries a larger supply of funds
to intermediate. The partial and improperly sequenced
financial liberalization, coupled with effectively
pegged exchange rates, contributed to a poor allocation of funds for investment. Financial deregulation
made it easier for traditional borrowers to find new
sources of finance without making it correspondingly
easier for banks to maintain the quality of their loan
portfolios. The enhanced moral hazard was manifested
in a growing number of nonperforming loans.
In the years leading to the recent crises, the weaknesses in the financial systems were aggravated by excessive investment in low-profitability projects and
overborrowing. Rapid economic growth, however,
tended to mask the inefficient investments, while poor
data disclosure standards and lack of transparency, lax
loan classification and provisioning practices, and regulatory forbearance masked the true extent of financial
sector weaknesses. Moreover, a history of government
intervention and support in favor of troubled financial
institutions and corporations had done nothing to
strengthen financial discipline in a way that made future crises less likely.
These problems, however, should not lead one to
overlook the many positive features of the east Asian
economiesin particular, their outward orientation,
their emphasis on human capital formation and technology transfer, and their high saving ratesfeatures that
are even more advantageous in todays globalized markets than in the past. Indeed, their prospects for rapid
economic growth are still favorable but will require significant changes from the model based on very high
rates of capital accumulation and, especially in recent
years, high reliance on capital inflows. Although relatively high investment rates are likely to be a feature of
the east Asian economies for some years to come, more
of the growth will have to come from improved productivity performance, including through better use of capital. Changes to the model will also have to be made
with respect to financial structure and governance, both
in the corporate sector and in public policymaking.
The crisis has particularly highlighted the incompatibility of government intervention in the financial sector and the investment process with highly integrated
capital markets. The changing needs of an advancing
economy and the globalization of financial markets
alter the role the government can effectively play in
the economy to one of ensuring the regulatory, legal,
and political institutional structures capable of supporting rapid economic growth.
Building the Basis for Sustained

Recovery and Growth
49See
Morris Goldstein, The Asian Financial Crisis: Causes,

Cures, and Systemic Implications, Policy Analyses in International
Economics, No. 55 (Washington: Institute for International
Economics, June 1998).
A pronounced slowdown in economic growth is an

unavoidable consequence of crises of the type that
102
have hit the east Asian economies.50 The downturns

have been led by the compression of domestic demand,
as large exchange rate depreciations, equity price declines, and increases in interest rates have reduced real
income and wealth and boosted debt-servicing costs.
Demand and activity have also been reduced by a
tightening of bank credit resulting from the deterioration of banks balance sheets. The impetus for recovery
will most likely come from two sources: an expansion
of exports and import-competing production in response to the real exchange rate depreciations that
have occurred, and a recovery of confidence among
domestic and external investors once financial stability
is restored. The forces likely to contribute to the initial
process of recovery are discussed in Chapter II.
Financial stabilization to foster the initial turnaround in activity is only the first order of business. To
build the basis for a sustained and strong recovery of
activity over the next several years, major efforts are
also needed, and are under way, to restructure the financial and corporate sectors.
In the financial sector this will require the restructuring and recapitalization of weak but viable financial
institutions and the closing or merger of nonviable institutions. Significant progress has been made in these
areas in Thailand and Korea, but more remains to be
done in Indonesia. Despite the progress, the financial
systems in these economies remain fragile. Nonperforming loans are estimated at between 20 and 40
percent of total loans in the crises economies, and
banking sectors remain illiquid and undercapitalized.
Furthermore, many financial institutions are likely to
be insolvent, implying large recapitalization requirements. There are a number of approaches that could be
adopted to rehabilitate banking systems.51 Typically,
they involve several elements: the injection of some
public funds to recapitalize distressed banks; the temporary transfer of ownership of nonviable banks to an
independent public agency; and the resale to the private sector of the banks in which the authorities have
intervened, which in some cases will require the liberalization of foreign-ownership limits so that foreign
investors can help to finance the recapitalization.
In conjunction with bank restructuring and recapitalization, there is a need for financial reconstruction
of the corporate sector. The crises have led to large increases in domestic and foreign debt burdens of both
the private and public sectors. At the end of 1997, total
(domestic and foreign) debt of private and public sectors in Korea, Malaysia, and Thailand exceeded 225
Figure 3.7. ASEAN-4 Plus Korea: Stock of Debt

at End-19971
(Percent of GDP)
Private sector debt dominates the large overall debt burden in the
Asian crisis countries.
Public
Private:
nonfinancial
Private:
financial
Private
200
Short-Term Foreign Debt
150
100
50
0
Indonesia
Korea
Malaysia
Philippines
Thailand
200
Long-Term Foreign Debt
150
100
50
0
Indonesia
Korea
Malaysia
Philippines
Thailand
200
Domestic Debt2
150
100
50
0
Indonesia
Korea
Malaysia
Philippines
Thailand

1Based on end-1997 exchange rates.
2Banking sector credit.
50Based on past experience (over the period 197597), it takes, on

average, about three years for output growth to return to trend following a banking crisissee Financial Crises: Characteristics and
Indicators of Vulnerability, Chapter IV in the May 1998 World
Economic Outlook, pp. 7497.
51See Resolving Banking Sector Problems, Box 6 in the May
1998 World Economic Outlook, pp. 8081.
103
Table 3.12. ASEAN-4 Plus Korea: Macroeconomic Developments and Debt Dynamics1
(Average percent change unless otherwise indicated)
Country
Estimated Cumulative
Estimated Cumulative
Increase in 1996
Increase in 1996
Developments in 1997
Developments in JanuaryJune 1998
__________________________________
Debt-to-GDP Ratio, ___________________________________
Debt-to-GDP Ratio,
Interest1
Exchange
December 19972
Interest1
Exchange
June 1998 2
rate
Inflation Growth
rate
(percentage points)
rate
Inflation Growth
rate
(percentage points)
Indonesia
Korea
Malaysia
Philippines
Thailand3
8
8
8
9
8
7
4
3
6
6
5
6
8
5
52
43
33
29
44
47
40
29
26
48
External debt
13
10
10
10
9
43
6
4
7
5
12
5
5
50
6
1
5
16
88
39
39
30
35
Indonesia
Korea
Malaysia
Philippines
Thailand
27
13
8
13
16
7
4
3
6
6
5
6
8
5
52
43
33
29
44
14
3
3
1
10
Domestic debt
44
21
11
20
24
43
6
4
7
5
12
5
5
50
6
1
5
16
11
13
3
4
27
Note: Assumes that the end-period stock of debt is completely rolled over at the average interest rate.
1The interest rate used for the external debt calculation is the average annual offshore rate, which is calculated as the eurobond spread plus
U.S. short-term interest rate. For the domestic debt calculation, the interest rate used is the average annual short-term domestic rate.
2Estimated cumulative impact on the debt-to-GDP ratio, from its December 1996 level, of the change in the interest rate, the exchange rate,
and nominal GDP during 1997 (and during the first half of 1998).
3Since data for Thailand on quarterly GDP is not available, the projected growth rate for 1998 is used instead.
percent of GDP, while in Indonesia it stood at around

190 percent of GDP. Unlike in the Latin American
debt crisis of the 1980s, most of the debt is private
rather than sovereign. In Korea, Malaysia, and Thailand, private sector debt accounted for over 85 percent
of total debt at end-1997 (Figure 3.7; see preceding
page), while in Indonesia and the Philippines private
debt amounted to 70 and 60 percent, respectively, of
total debt.52 The composition of debt has varied significantly across countries, with external debt as a proportion of GDP particularly high in Indonesia, Korea,
and Thailand.
Large corporate debt burdens have undermined the
solvency of many potentially viable enterprises, and
corporate bankruptcies have risen sharply. The debt
overhang has also made it very difficult for less financially stressed enterprises to access capital markets; it
has impaired the ability of otherwise viable firms to
obtain credit for working capital and trade, which has
contributed to the sharp contractions in output. The
debt problem has also acted as a disincentive to the investment of new resources in debt-ridden enterprises
since the benefits would in large part accrue to holders
of old debt.
Although the current debt burdens in many of these
countries are very large, they reflect not only the do-
mestic and foreign borrowing undertaken in the years

preceding the crises, but also the sharp currency depreciations and increases in interest rates that have occurred subsequently (Table 3.12). In Indonesia, for example, even if there had been no new borrowing after
the end of 1996, macroeconomic developments alone,
of which currency depreciation is dominant, would
have raised the 1996 debt-to-GDP ratio by close to 50
percentage points by December 1997 and by over 85
percentage points by March 1998. Restoring macroeconomic stability and preventing further collapses in
exchange rates is therefore critical to preventing further increases in debt burdens. Indeed, just as the steep
currency depreciations were important in boosting
debt burdens, a return of investor confidence and the
consequent appreciation of currencies will reduce
them. Nevertheless, even with a more favorable macroeconomic environment, it appears that some form of
private sector debt restructuring will be essential for
the medium- and long-term recovery of the crisis
economies. While burden sharing between debtors and
creditors should be an important element of a restructuring process so as to minimize future moral hazard
problems, the solutions to be adoptedwhich may
need to involve a mix of debt restructuring, debt forgiveness, reduced interest rates, and debt-for-equity
swapswill need to be worked out on a case-by-case
basis. Any provision of public funds should be limited
so as to minimize the burden on taxpayers, but the authorities need to establish the legal and regulatory
frameworks within which restructuring exercises can
be fruitfully carried out. Corporate debt-restructuring
52A more appropriate measure of corporate solvency is the debt-equity ratio. Although data on debt-equity ratios are not systematically
available for many of the crisis countries, the sharp declines in equity
prices together with the steep currency depreciations and increases in
interest rates suggest that corporate indebtedness has risen severalfold.
104
Box 3.2. Summary of Structural Reforms in Crisis Countries

The IMF-supported programs and policy advice to the
Asian crisis countries have placed particular emphasis on
wide-ranging structural reforms of the financial and corporate sectors, competition and governance policies, and
trade regimes. In broad terms, the suggested reforms may
be summarized as follows.
Competition and Governance Policies

Liberalization of restrictive marketing arrangements
for a variety of key commodities (Indonesia).
Establishment of competitive procedures for privatization of government assets and for procurement (Indonesia; planned in Malaysia and Thailand).
Announcement of bans on or limits to the use of public
funds to bail out private corporations (Indonesia, Korea,
Malaysia, and Thailand).
Introduction or strengthening of bankruptcy laws and
exit policies (Indonesia, Korea, and Thailand).
Acceleration of privatization or closure of nonviable
public enterprises (Indonesia).
Strengthening of corporate disclosure standards (Korea).
Liberalization of foreign investment in ownership and
management in sectors other than the financial sector
(Korea, Indonesia, Malaysia, and Thailand).
Financial and Corporate Sector Reforms

Closure of insolvent financial institutions, with their
assets transferred to a resolution or restructuring
agency (Korea, Indonesia, and Thailand); together with
recapitalization and mergers of others (all countries).
The reform programs in Malaysia and Thailand place
particular importance on the finance company sector.
Announcement of limited use of public funds for bank
restructuring; actual funds used to be made explicit in
the budget (all countries).
Measures to significantly strengthen prudential regulations, including loan classification and provisioning requirements, and capital adequacy standards (all
countries).
Measures to strengthen disclosure, accounting, and auditing standards, as well as the legal and supervisory
frameworks (all countries).
Liberalization of foreign investment in domestic banks
(Korea, Indonesia, and Thailand).
The introduction of more stringent conditions for official
liquidity support (Indonesia, Malaysia, and Thailand).
Strengthening of prudential regulations on loan exposure (all countries).
Introduction of funded deposit insurance schemes
(planned in Indonesia and Thailand; under consideration in Malaysia; already in place in Korea and the
Philippines).
Restructuring of domestic and external corporate debt
(Indonesia, Korea, Thailand) and closure of nonviable
firms (Korea).
Trade Reforms
Reduction of import tariffs and export taxes (Indonesia).
Easing of quantitative import or export restrictions
(Indonesia and Korea).
Social Policies
Labor-intensive public works programs (Indonesia,
Thailand) and expansion of unemployment insurance
system (Korea).
Protection of low-income groups from increases in
prices of food and other essentials (Indonesia, Malaysia, the Philippines, Thailand).
Provision of higher spending for health and education
(Indonesia) and reallocation of budgetary expenditures
to health programs for the poor (Thailand).
Expansion of scholarship and loan programs to minimize number of student dropouts (Thailand, Malaysia).
Provision of subsidized credit for small and mediumsized enterprises (Indonesia, Malaysia).
efforts are now under way in Indonesia, Korea, and

Thailand, but this is likely to be a drawn-out process.
Besides the needed restructuring and recapitalization
of the banking system and the nonfinancial corporate
sector, financial reforms are required to prevent a recurrence of similar crises. There is a clear need for
stronger prudential, supervisory, accounting, and legal
standards, as well as improved corporate governance
and the establishment of more transparent relations
among government, banks, and corporations (Box 3.2).
ive climate for investment and the supply of finance,

risk taking and innovation, and the efficient allocation
of investment. The crisis has brought to the fore the
structural weaknesses that in recent years have led to
the inefficient use of capital in the economies concerned and that, if left unaddressed, would have
eroded the scope for rapid growth even in the absence
of the crisis. These weaknesses include the jump in investment rates in the first half of the 1990s to levels
that were not sustainable, especially in view of the
high reliance on foreign saving. They also included, in
a number of economies, excessive corporate sector
leveraging, declining rates of return, excess capacity
in some industries, and property market bubbles.
Perhaps most critical was the growing fragility of financial systems.
To restore the long-term health of the crisis economies, it will of course be necessary to work off the ex-
***
From a long-term perspective, a fundamental question facing the east Asian economies is whether they
can gradually shift from mainly input-driven growth to
growth that is based more on stronger gains in efficiency. That will depend on continuing improvements
in the institutional infrastructure to provide a support-
105
cesses that have accumulated in recent years. This will

require a considerable effort to restructure the financial system and, to some extent, the corporate sector.
However, it would be wrong to view the crises as simply a cyclical episode from which growth eventually
will bounce back to the rapid pace these economies
enjoyed in the past. The crisis has revealed fundamental weaknesses that will require profound reforms to
foster more efficient and robust financial systems, substantially reduce the role of governments in financial
intermediation, and strengthen governance and accountability in the corporate sector. That is why financial sector restructuring and other structural reforms
are at the heart of the IMF-supported programs.
Through such reforms the region in the future may
well be able to combine somewhat lowerbut more
sustainablelevels of investment with stronger productivity growth. The outcome may well be a growth
trend that is less steep than in the past, but that still is
impressive by international standards.
106
IV
Japans Economic Crisis and Policy Options
Figure 4.1. Selected Major Industrial Countries:
Output Growth and Unemployment
n the seven years following the collapse of the asset

price bubble in 1990, the Japanese economy grew at
an average rate of about 1!/2 percent a year. And with
output contracting by annualized rates of 5!/4 percent
and 3!/4 percent in the first and second quarters of 1998
respectively, the economy is now in recession. The
economic cycle in Japan is thus desynchronized not
only from that of the United States, where output has
been growing at a solid pace since 1992, but also from
those of the European countries, where, in most cases,
growth has either been strong for some time or has recently gained strength (Figure 4.1), as well as from
most of the rest of Asia, where growth was very strong
until the onset of the present crisis. Japans economic
performance in the 1990s is particularly disappointing
when viewed in the context of its own past performanceGDP growth in the 1980s averaged about 4
percent a year.
Japans weak economic performance during this
decade has so far not resulted in the high unemployment that has characterized many continental European
labor markets. The unemployment rate inched up to
only 3!/2 percent by end-1997, although it has increased significantly in recent months, reaching 4.1
percent in July 1998. The manifestation of the economic crisis in Japan has, rather, taken the form of a
self-reinforcing mixture of very slow growth, severe
banking sector problems, rising fiscal deficits and
public debt, the failure of asset prices to recover from
their collapse in the early 1990s, and a profound lack
of confidence among both consumers and businesses.
Mutually reinforcing adverse spillover effects have recently exacerbated the crisis in both Japan and the
emerging market economies of Asia.
As discussed below, the evidence indicates that the
protracted slowdown of growth in Japan during the
1990s can be linked to the effects of the collapse of the
asset price and investment bubbles in the early years
of the decade, the persistent difficulties of the banking
system, and strong upsurges in the foreign exchange
value of the yen in 1993 and 1995, which undermined
incipient recoveries. But this still leaves open many
questions about economic developments in Japan. A
number of other advanced economies also experienced
collapses in asset prices in the early 1990s, and in several of the Nordic countries a severe banking crisis followed the collapse in asset prices, as in Japan. But the
aftermath of the asset price collapse in these countries
The economic cycle in Japan has been desynchronized from those

of the United States and Germany.
10
GDP Growth
(percent change from four quarters earlier)
United States
Germany1
6
4
2
0
Japan
2
4
6
1980
82
84
86
88
90
92
94
96
98:
Q2
14
Unemployment Rates
12
Germany1
10
8
6
United States
4
Japan
2
0
1980
1Data
107
82
84
86
88
90
92
94
through 1991 apply to west Germany only.
96
98:
Q2
IV
JAPANS ECONOMIC CRISIS AND POLICY OPTIONS
was characterized by a deep recession that was followed by a robust recovery in output. Why has Japan
been subject to a protracted slowing of growth, instead
of experiencing the sharp decline and quick recovery
observed elsewhere? Have the effects of the asset
price collapse on domestic demand in Japan been different from those experienced by other countries during this period? Or has Japans experience in the 1990s
been a consequence of the failure of macroeconomic
policies to respond adequately to its economic problems? Has the failure to solve the problems in the
banking sector prolonged the economic difficulties?
Are structural rigidities in the Japanese economy impeding economic revival? What policy options are
currently available for overcoming the crisis? This
chapter attempts to address these questions.
Figure 4.2. Selected Countries: Equity

and Property Prices
The boom-bust cycle in asset prices has been particularly pronounced
in Japan.
Equity Prices
(logarithmic scale; 1985 = 100)
1000
Sweden
United States
500
A notable feature of economic developments in the

latter half of the 1980s was the explosive increase in
asset prices in many advanced economies (Figure 4.2).
The roughly threefold increases in equity and land
prices in Japan were much greater than those experienced, for instance, in the United States and the United
Kingdom, but they closely matched the dramatic increases in Swedish asset prices in the same period.
Improved fundamentals clearly contributed to the
increase in equity pricesfor instance, corporate profits increased by almost 70 percent in Japan during
198590. Nevertheless, the rapid rise in the ratio of
stock market capitalization to GDP to unprecedented
levels in the latter half of the 1980sas well as the
significant increase in the price-earnings ratio during
198586 and its subsequent persistently high level
(Figure 4.3) during a period when bond yields began
to trend upwardssuggests that improved fundamentals cannot provide the entire explanation for the runup in equity prices.1
The combination of financial liberalization and inadequate prudential regulations seems to have played
an important role in the sharp increase in asset prices.
Beginning in the first half of the 1980s, controls on
capital movements were gradually dismantled, interest
rates on deposits were deregulated, and new financial
instruments emerged. As a result, large Japanese corporations were able to lessen their dependence on
banks and to draw increasingly on international capital markets and domestic securities markets. Deprived
300
United Kingdom
200
Japan
100
50
1985
87
89
91
93
95
97 Aug.
98
400
Property Prices1
(1985 = 100)
350
Sweden
300
250
200
United Kingdom
150
United States
Japan
100
0
1985
87
89
91
93
95
97
1Price-earnings ratios in Japan are to some extent overstated because of relatively high cross-share holdings, combined with nonconsolidation of accounts under Japanese accounting rules, as well
as low dividend payout ratios. For a more detailed discussion of
these issues, see Thomas Krueger, Recent Developments in Equity
Prices in Japan, in Guy Meredith and others, Japan: Selected
Issues, Staff Country Report 97/90 (Washington: IMF, October
1997), pp. 11139.
1For
Japan, average land prices in six largest cities; for Sweden,

housing price index; for the United Kingdom, Halifax PLC all-houses
price index; for the United States, average sale price of existing singlefamily homes.
108
to some extent of their traditional client base, facing

competition from the nonbank financial sector, and
operating under inadequate prudential regulations,
banks expanded their lending to smaller firms that did
not have the same degree of access to capital markets,
and also to the property sector. The increased lending
to the property market fueled the boom in the prices of
both commercial and residential property. Increased
property prices boosted the collateral value of small
and medium-sized enterprises, and with bank lending
heavily influenced by collateral values, the unwarranted exuberance about the prospects for capital gains
in both the equity and property markets became temporarily self-fulfilling.2 The Japanese experience in
this regard is broadly similar to the experience of the
Nordic countries in the second half of the 1980s, with
the main difference being that firms rather than consumers were the primary driving force behind the asset
price bubble in Japan.3
The stance of monetary policy in the second half of
the 1980s also had a role in fueling asset price inflation. The Bank of Japans official discount rate was
halved in several steps to 2!/2 percent between the end
of 1985 and early 1987 and was then maintained
unchanged for two years, despite the robust growth of
activity. The accommodative stance of monetary policy during this period was based in part on the perceived need to contribute to the policies being coordinated internationally to promote the stabilization of
the dollars exchange value, especially following the
Louvre Accord of February 1987. The continuing low
level of general price inflation in the second half of the
1980s may have also weakened the case for monetary
tightening.
Toward the end of the 1980s, however, it became
apparent that the boom in asset prices had clearly outstripped the increases that might be warranted by
changes in fundamentals. As noted earlier, the ratio of
stock market capitalization to GDP had reached unprecedented levels by 1989, and the price-earnings
ratio stood at extremely high levels. The decline in
dividend yields to under !/2 of 1 percent by end-1989,
when bond yields in Japan stood at about 7 percent,
was yet another indication of a substantial market
Figure 4.3. Japan: Stock Market Indicators

Both the market capitalization ratio and the price-earnings ratio
indicate signs of overvaluation in the stock market in the late 1980s.
160
140
Market capitalization
(percent of GDP)
120
100
80
60
Price-earnings
ratio
40
20
1985
87
89
91
93
95
97 98:
Q2
Sources: Morgan Stanley Capital International; and WEFA, Inc.
2For a more detailed discussion of the impact of financial liberalization on asset markets in Japan, see Juha Khknen, Movements
in Asset Prices Since the Mid-1980s, pp. 5162, and Alexander W.
Hoffmaister and Gary J. Schinasi, Asset Prices, Financial Liberalization, and Inflation in Japan, pp. 6377 in Ulrich Baumgartner
and Guy Meredith, eds., Saving Behavior and the Asset Price
Bubble in Japan: Analytical Studies, Occasional Paper 124
(Washington: IMF, April 1995).
3For a discussion of the impact of financial liberalization on asset
markets in the Nordic countries, see Desmond Lachman and others,
Challenges to the Swedish Welfare State, Occasional Paper 130
(Washington: IMF, September 1995); and Burkhard Drees and
Ceyla Pazarbasioglu, The Nordic Banking Crises: Pitfalls in Financial Liberalization? Occasional Paper 161 (Washington: IMF, April
1998).
109
IV
20
overvaluation. Responding to the overheating of the

real economy and to the bubble in asset prices, monetary policy was tightened sharply beginning in May
1989, with the official discount rate being raised in
several steps to 6 percent by August 1990a cumulative increase of 3!/2 percentage points in just over a
year. Equity prices began to fall in early 1990, and by
the time they bottomed out in mid-1992, the Nikkei
index had declined by over 60 percent from its peak at
end-1989. Despite sporadic recoveries in the interim,
equity prices have recently slumped back to the lowest
levels for 12 years amid considerable price volatility.
Land prices began declining only in early 1991, but
the slide in prices since then has continued unabated,
with the average price of land in the six largest
Japanese cities at the end of 1997 being about 40 percent of the peak values in 1990.
15
Figure 4.4. Selected Countries:

Personal Saving Ratio
(Percent of disposable income)
The personal saving ratio in Japan has been more stable than in
Sweden and the United Kingdom.
Japan1
The bubble years were characterized by rapid

growth of domestic demand. Spurred to some extent
by wealth effectsthe ratio of net worth to the disposable income of the household sector increased
from about 5!/2 in 1985 to about 8!/2 in 1989private
consumption grew relatively rapidly during the second
half of the 1980s. But there was a much more marked
rise in the growth of investmentgross private fixed
investment grew on average at about 10 percent a year
in the latter half of the 1980sas the boom in asset
prices lowered capital costs for large firms that were
able to tap into financial markets, and small and
medium-sized firms increased their borrowing from
banks, using the rising value of land as collateral. A
significant part of this investment was in commercial
property.
The collapse of the asset price bubble in 1990 was
followed by a sharp contraction of domestic demand.
The decline in investment proved to be particularly severegross private fixed investment contracted on
average by over 2 percent a year in the first half of the
1990s. While there was a sharp pickup in 1996, private
investment fell again in 1997, and the decline carried
over into the first half of 1998. In contrast, private
consumption in Japan was much less affected by the
fluctuations in asset prices. This is somewhat surprising when seen in the context of the large swings in private consumption observed in both Sweden and the
United Kingdom. This is reflected in part in the relative stability of the private saving ratio in Japan when
compared with that of Sweden and the United
Kingdom (Figure 4.4).
Thus, wealth effects in Japan may have been somewhat weaker than elsewhere. This has been attributed,
among other things, to the possibility that propertyowning households may not have regarded their entire
unrealized capital gains in the second half of the 1980s
10
United Kingdom
5
Sweden
1980
1For
82
84
86
88
90
92
94
96
10
Japan, 1997 data are IMF staff estimates.
110
as permanent increases in their real wealth. Furthermore, households that did not own property in this period may have felt compelled to increase their saving
in order to be able to afford housing that was already
expensive by international standards, and was becoming increasingly so.4 Muted wealth effects may also be
explained by the relatively low holdings of equities in
households financial portfolios in Japan compared
with other advanced economies, and by the limited
role played by Japanese banks in extending consumer
loans. Finally, that the bursting of the asset price bubble in Japan was accompanied neither by a sharp increase in unemployment, nor by any serious doubts
about the sustainability of social welfare programs,
meant that households may not have been strongly
motivated to increase precautionary saving.
In any event, the absence of a large decline in private consumption in the aftermath of the asset price
collapse in Japan helps to explain why Japan did not
experience a severe contraction of activity of the magnitude that Sweden and the United Kingdom experienced. More recently, however, private consumption
expenditure has declined sharply in the last quarter of
1997 and in the first half of 1998, reflecting the adverse effects on confidence of the aggravation of the
banking problems, and the recent sharp upward spike
in unemployment.
The protracted weakness of activity in the 1990s can
be explained to a large extent by trends in investment.
As noted, investment grew rapidly in the latter half of
the 1980sthe ratio of gross private fixed investment
to GDP, for instance, increased by almost 5 percentage
points during this period to reach 25 percent in 1990.
The capital-output ratio increased markedly in relation
to its upward trend (Figure 4.5), as many low-return
and high-risk projects were undertaken. This suggests
that investment spending during the second half of the
1980s was excessive, spurred by the combined effects
of the boom in asset prices and the lax lending policies
of banksnot dissimilar from the recent Korean experience. When asset prices collapsed in the early
1990s, investment was cut back abruptly, as firms
were saddled with the investment overhang from the
late 1980s, and returns to capital dropped (see Figure
4.5). Investment by small and medium-sized enterprises has been particularly adversely affected by the
squeeze on credit given their greater dependence on
bank financing.
In contrast to the decline in private investment, public investment has increased relatively rapidly in the
Figure 4.5. Japan: Business Capital-to-Output

Ratio and GDP Components
Movements in the ratio of net business capital to potential GDP provide one indicator of overinvestment in the second half of the 1980s.
1.4
Ratio of Net Business Capital to Potential GDP
1.3
Actual
1.2
Trend 197586
1.1
1.0
1985
87
89
91
93
95
97 98:
Q2
30
GDP Components
(four-quarter percent change)
20
Public investment
10
GDP
0
Private
consumption
expenditure
Private business
investment
10
20
1985
4For a fuller discussion of the impact of land price movements on

consumption, see Takatoshi Ito, The Japanese Economy (Cambridge, Massachusetts: MIT Press, 1992). For a more general discussion of the relationship between land price movements and
wealth effects, see Orazio P. Attanasio and Guglielmo Weber, The
U.K. Consumption Boom of the Late 1980s: Aggregate Implications
of Microeconomic Evidence, Economic Journal, Vol. 104 (November 1994), pp. 12691302.
111
87
89
91
93
95
97 98:
Q2
IV
graphic changes, which will reduce the proportion of

the population of working age. To offset these negative factors, deregulation and other structural reforms
are needed to enhance productivity growth.
Table 4.1. Japan: Growth Decomposition

(Contributions to GDP growth; percent a year)
198090
199197
Actual
GDP
Employment
Hours
Capital
Productivity
3.9
0.8
0.2
1.9
1.4
1.7
0.4
0.7
1.4
0.6
Potential
GDP
Trend employment
Trend hours
Capital
Trend productivity
3.6
0.7
0.2
1.9
1.2
2.7
0.7
0.5
1.4
1.2

What roles did monetary and fiscal policies play
during the 1990s? Was the monetary easing that took
place in the first half of the 1990s important for counteracting the contractionary impulses that were set in
motion by the asset price collapse? How has fiscal policy affected the performance of the economy, and how
effective has fiscal policy been in the face of a credit
crunch? While these questions can no doubt be answered more easily with the advantage of hindsight,
the analysis in this section also considers the appropriateness of monetary and fiscal policies following the
collapse of the asset price bubble on the basis of the
information available in that period. These questions
are essentially counterfactual: they require an assessment of how the Japanese economy would have performed if no policy actions had been taken or if monetary, fiscal, and structural policies had been different
from those actually selected.
In the period from mid-1991 to mid-1996, both
monetary and fiscal policies did respond forcefully,
repeatedly, and cumulatively very substantially to the
strong forces tending to depress the Japanese economy, including the fallout from the collapse of the
asset price and investment bubbles and the effects of
the strong appreciation of the yen. Were it not for these
macroeconomic policy responses, the Japanese economy would surely have suffered a deep and prolonged
recession in the first half of this decade. That annual
real GDP growth was kept positive and averaged
nearly 1 percent from 1992 through 1995, in the face
of strong depressive forces, is testimony to the usefulnessnot to the weaknessof macroeconomic policies. When the downward correction of the yen beginning in the late spring of 1995 was reinforced by
further easing of monetary policy and by substantial
new fiscal stimulus, the recovery of the Japanese
economy to nearly 4 percent real growth in 1996 again
showed the effectiveness of policy action. The less
successful experiences of a number of other countries
facing qualitatively similar situations, but with less
latitude or willingness to use countervailing macroeconomic policies, reinforces this conclusion. With
this understanding, the critical counterfactual question
for the 199296 period is whether policy could usefully have done more to put the Japanese economy on
the path of sustained recovery. The key questions for
the most recent period are whether and what policy errors contributed to the renewed and steep downturn of
the Japanese economy, and what now can be done to
reverse the situation.
1990s through repeated attempts to revive the stalling

economy (see below). However, the returns to public
investment have declined.5 The weak returns have
been attributed to limited control by the central authorities over project implementation, weak incentives
for local governments to achieve cost-effectiveness,
and the tendency at times to use public investment for
distributional objectives.6
The marked slowing down of private investment in
the 1990s has contributed to lower potential output
growth, which is estimated to have fallen to around 2
percent in 1998, well below the 2.7 percent average
from 199197. To analyze this issue, the IMF staff
uses a production function approach, which models
the growth of potential output as a function of the
growth of the private capital stock, the trend growth in
labor supply, and the trend growth of total factor productivity (TFP).7 As can be seen from Table 4.1, the
decline in the growth of the private capital stock accounts for almost half of the slowdown in the trend
growth of output in Japan in the 1990s. Trend growth
of employment has been stable, but there has been a
marked trend decline in hours worked, in part as a result of the introduction of a 40-hour work week. While
the decline in trend hours worked may be desirable
from a welfare point of view in the Japanese context,
it nonetheless accounts for the rest of the slowdown in
potential growth. Looking ahead, trend growth in
Japan is likely to be negatively affected by demo5See Japan, Economic Planning Agency, Economic Survey of
Japan: 1995/96 (Tokyo, 1997).
6For a more detailed discussion of these issues, see Tamim
Bayoumi, Christopher Towe, and Ichiro Oishi, Fiscal Policy
Issues, in IMF, JapanSelected Issues, Staff Country Report
(Washington, July 1998).
7For a discussion of the technical issues pertaining to the measurement of potential output, see Tamim Bayoumi and Christopher
Towe, Macroeconomic Developments and Prospects, in IMF,
JapanSelected Issues, Staff Country Report (Washington, July
1998).
112
Monetary Policy
The process of monetary easing began in mid-1991,
when equity prices had been falling steeply for more
than a year, and after property prices had begun their
sharp decline. The official discount rate (ODR) was
lowered gradually from 6 percent in mid-1991 to 4!/2
percent by early-1992. As the economy fell into recession in the second quarter of 1992, the process of easing continued, with the ODR being reduced in several
steps to 1#/4 percent by the end of 1993. Activity continued to stagnate, however, and as the depth of the
economic crisis became apparent, the ODR was further reduced to !/2 of 1 percent by September 1995 and
has since then remained at that level. In early September 1998, however, the Bank of Japan lowered its operating target for the overnight call rate to !/4 of 1 percent from its recent average of about 0.45 percent in
response to the continued contraction of economic activity and a moderate strengthening of the yen. The decline in long-term interest rates has broadly paralleled
that in short-term rates, falling by mid-September 1998
to about 0.7 percent, the lowest long-term interest
rates in recorded history (Figure 4.6).
Despite the actions taken by the authorities to lower
short-term interest rates, the effective easing of monetary conditions in the first half of the 1990s was much
less pronounced than appears from the interest rate reductions. This was in part due to the decline in inflation, which implied that the declines in real interest
rates were smaller than those in nominal interest rates
(see Figure 4.6). Also, there was a widening of bank
intermediation spreads, reflecting the mounting problems of bad loans in the banking sector, so that the declines in average loan rates were less than the declines
in official and money market interest rates.
More important, in 1993 and again in 1995, the effect on aggregate demand of the easing of interest
rates was more than offset by the effects of strong upsurges in the foreign exchange value of the yen. This
is apparent in the behavior of the monetary conditions
index, which attempts to measure overall changes in
monetary conditions by weighting movements in interest rates and in exchange rates according to their estimated effects on aggregate demand.8 The upward
movements in the monetary conditions index in 1993
and 1995 signify a tightening of overall monetary conditions, the effects of which, in each instance, were to
slow the recovery of the Japanese economy. The Bank
Figure 4.6. Japan: Interest Rates and Indicators

of Monetary Conditions
Monetary conditions were relatively tight in the first half of the
1990s despite the significant reductions in nominal interest rates.
10
Interest Rates
(percent)
Ten-year government bond yield
6
4
2
Official discount rate

1985
87
89
91
95
93
97 Aug.
98
20
Real Interest Rates

(percent)
15
Three-month CD rate
10
Real average
new loan rate
5
0
Real short-term
interest rate
1985
87
89
91
93
95
97 Aug.
98
104
Monetary Conditions
Index (MCI)1
Tighter
MCI
102
100
98
Easier
96
94
1980
8The
monetary conditions index estimated by IMF staff assumes

that a 10 percent drop in the real effective value of the yen has approximately the same effect on demand as a 1 percentage point decline in short-term real interest rates. For a more detailed discussion,
see Gabrielle Lipworth and Guy Meredith, Background Paper: A
Reexamination of Indicators of Monetary and Financial
Conditions, in Bijan B. Aghevli, Tamim Bayoumi, and Guy
Meredith, eds., Structural Change in Japan: Macroeconomic
Impact and Policy Challenges (Washington: IMF, 1998).
82
1Data
113
84
86
88
90
are as in Chapter II, Figure 2.7.
92
94
96
Aug.
98
IV
sault on their already meager rates of return. In this

context, an early resolution of the problems in the
banking system is more likely to enhance confidence
and boost domestic demand than a strategy of expanding the monetary base. Furthermore, while the further
decline in the exchange value of the yen brought about
by a strategy of boosting inflation expectations should
provide a positive stimulus to activity in Japan, other
things remaining constantas shown in the MULTIMOD simulationsit also risks simultaneously accentuating the crisis elsewhere in Asia. And given Japans
close economic links with the rest of Asia, the adverse
spillovers to Japan from any further instability in the
region could easily overwhelm the positive direct effects on activity of further yen depreciation.
Another approach that has been suggested for
providing stimulus to the economy is to unblock the
credit channel, not only through measures to resolve
the bad-loan problems of the banking system, but also
through market operations of the kind conducted by
the Bank of Japan earlier this year, when it bought
large amounts of bills, commercial paper, and Japanese
government bonds from banks on a repo basis. This increased the ability of banks to extend credit to clients,
both by expanding their liquidity and by lowering the
risk-weighted value of their assets and so easing capital constraints. However, commercial paper repo operations involve a degree of credit risk for the central
bank, and liquidity injections put downward pressure
on the exchange rate. A more promising way of unblocking the credit channel is to solve the problems in
the banking sector and thereby ease the credit crunch.
These issues are discussed in more detail below.
of Japan responded to these appreciations of the yen

with further reductions of official interest rates, but the
responses were slower and somewhat smaller than
many in the international community were urging at
the time. Arguably, earlier and more vigorous monetary policy responses would have forestalled some of
the unwarranted appreciation of the yen or brought
about its earlier reversal, thereby inducing a desirable
downward movement in the monetary conditions
index from both of its components. In addition, less
yen appreciation would have meant less deflationary
impetus to the Japanese economy, with the result that
more of the reduction in nominal interest rates would
have shown up in real interest rates. In the end, waiting until the Japanese economy was experiencing mild
deflation before reducing official interest rates almost
to the theoretical limit made it impossible to get real
interest rates down to zero (or even lower), as had usefully been done by the U.S. Federal Reserve in less
difficult circumstances in 199293.
With the Japanese economy currently in recession,
short-term interest rates having been lowered virtually
to rock bottom, and inflation close to zero or even
slightly negative, is there any further scope for monetary policy to provide support for the economy? This
question essentially involves assessments of whether,
in an environment that appears to be characterized by a
liquidity trapthat is, a state where individuals become indifferent between holding money and other financial assets because of the very low interest rates and
weak financial systemmonetary policy should be
used to lower real interest rates by raising expected future inflation. This has been a subject of debate recently.9 Box 4.1 (see page 118) examines the issues involved in this debate by providing illustrative
simulations on the IMFs multicountry macroeconomic
model, MULTIMOD. The simulations indicate that, as
a theoretical matter, reducing real interest rates in
Japan by raising expectations of future price increases
while holding the nominal interest rate unchanged
would tend to boost activity, both by stimulating domestic demand and through the positive effects on
external demand of the induced decline in the real exchange rate. With respect to the applicability of this
theory, however, there is considerable doubt about
whether the announcement of a policy that will only
begin to affect policy instruments six years in the future
can have important effects in the near term because expectations of future policy begin to affect peoples behavior today. Also, as a practical matter, it is perhaps to
be doubted whether the best way to stimulate demand
in an economy suffering from weak consumer confidence is to announce an inflation policy likely to be interpreted by nervous Japanese savers as a further as-
Fiscal Policy
Starting with an overall fiscal surplus of 3 percent of
GDP and a ratio of net government debt to GDP of
under 10 percent in 1991 (40 percent excluding social
security assets), the Japanese authorities had latitude
both to allow the automatic stabilizers to operate and
to ease fiscal policy in a discretionary way as the economy absorbed the negative effects of the collapse of
the asset price and investment bubbles and other disturbances. Reflecting both of these factors, by 1996
the overall fiscal balance had deteriorated by over 7
percent of GDP. Discretionary measures, embodied
primarily in six stimulus packages (Table 4.2), accounted for the downward shift in the structural budget balance from a surplus of 1!/2 percent of GDP in
1991 to a deficit of nearly 3!/2 percent of GDP in 1996.
In fact, even as fiscal policy began to be reversed in
the second half of 1996 with a significant slowdown of
public investment, the support for the level of economic activity from discretionary fiscal policy probably reached 5 percent of GDP for calendar year 1996.
As previously emphasized, this impressive fiscal support helped to convert a recession into a slowdown in
9See Paul Krugman, Japans Trap, May 1998 (available via the
Internet: http://web.mit.edu/krugman/www/japtrap.html).
114
Table 4.2. Japan: Summary of Major Economic Stimulus Packages1

(Trillions of yen unless otherwise noted)
Date Proposed
1992
August
1993
__________________
April
September
1994
February
1995
September
1998
April
Total package
(Percent of GDP)
10.7
(2.3)
13.2
(2.8)
6.2
(1.3)
15.3
(3.2)
14.2
(3.0)
16.7
(3.3)
Tax reductions
(Percent of GDP)
()
0.2
()
()
5.9
(1.2)
()
4.62
(0.8)
Public investment3
(Percent of GDP)
6.2
(1.3)
7.6
(1.6)
2.0
(0.4)
4.5
(0.9)
6.3
(1.3)
7.7
(1.5)
Land purchases
(Percent of GDP)
1.6
(0.5)
1.2
(0.3)
0.3
(0.1)
2.04
(0.4)
3.25
(0.7)
1.6
(0.3)
Increased lending by Housing

Loan Corporation
(Percent of GDP)
0.8
(0.2)
1.8
(0.4)
2.9
(0.6)
1.2
(0.3)
0.5
(0.1)
()
Increased lending by governmentaffiliated financial institutions

(Percent of GDP)
2.1
(0.5)
2.4
(0.5)
1.0
(0.2)
1.5
(0.3)
2.6
(0.5)
2.0
(0.4)
Other
(Percent of GDP)
()
()
()
0.2
()
2.6
(0.5)
0.8
(0.2)
Sources: Japanese authorities; and IMF staff estimates.

1In addition, there was a 2.7 trillion Kobe earthquake package in April 1995, and a 4.2 trillion package
in February 1996 to offset the effects of the proposed increase in consumption taxes.
2Includes 0.3 trillion in welfare benefits.
3Includes disaster relief, unidentified land component of public investment, and Fiscal Investment and
Loan Program lending to public corporations for public works.
4Includes 0.5 trillion of land purchases to be conducted over a five-year period.
5Includes 0.5 trillion of land purchases by a government-affiliated urban development organization.
199295, and helped to initiate a more vigorous recovery in 1996.

It might be argued, and was argued by some at the
time, that even more vigorous use of fiscal policy
would have engendered an earlier, stronger, and better
sustained recovery of the Japanese economy. To some
degree, this argument is almost surely correct, especially with respect to more timely response to the adverse shocks associated with sharp appreciations of
the yenwhere an earlier coordinated reaction of both
monetary and fiscal policy would have been helpful.
However, it is essential to recognize the important and
legitimate concern of the Japanese authorities with the
longer-term implications of a substantial weakening of
the governments fiscal position, especially in view of
the future burdens associated with rapid aging of the
population early in the next century. Although the fiscal starting position in 1991 was relatively comfortable, after pumping in substantial fiscal stimulus the
process would at some point need to begin to be
reversed.
A start was made in the second half of 1996, and between 1996 and 1997 the structural deficit was reduced by 1!/2 percent of GDP (Figure 4.7). But the
swing toward consolidation from mid-1996 to mid1997 was even sharper than this, given the withdrawal
of public spending by 2 percent of GDP. Moreover, so-
cial security contributions were raised in October

1996, a temporary income tax cut amounting to about
!/4 of 1 percent of GDP was withdrawn in January
1997, and a 2 percentage point increase in the consumption tax rate (to 5 percent), yielding about #/4 of 1
percent of GDP, was introduced on April 1. All told,
between mid-1996 and mid-1997, the withdrawal of
fiscal support amounted to nearly 3 percent of GDP.
The economic impact of the shift in fiscal policy
was somewhat delayednot only by the usual lags,
but also by the artificial stimulus to consumption
spending and housing investment in late 1996 and
early 1997 in anticipation of the tax hike on April 1. In
the second quarter, consumption spending declined
sharply, with modest recovery in the third quarter. By
the fourth quarter, and continuing into 1998, the deepening crisis elsewhere in Asia began to affect Japanese
exports and to further undermine consumer and business confidence. Worse yet, the failures of Hokkaido
Takushoku Bank and Yamaichi Securities weighed on
already worried households and led to increased saving and deposit withdrawals that necessitated substantial liquidity injections by the Bank of Japan. The result has been a deepening recession in Japan, led by
falling consumption and business investment.
In hindsight, the large-scale tightening of Japanese
fiscal policy in 199697 was clearly excessively am-
115
IV
bitious. Looking at the issue ex ante, it must be recognized that some of the things that went wrong in
199798, especially the depth and scale of the Asian
crisis outside Japan, could not reasonably have been
anticipated at the time that key fiscal policy decisions
were made in the second half of 1996. Nevertheless,
and notwithstanding the broad (but not universal) international support for the tightening of Japanese fiscal policy, it may reasonably be asked whether the
large degree of tightening actually undertaken was a
prudent decision. Sound macroeconomic policy needs
to be made with appropriate regard to risks and vulnerabilities and with understanding of the scope for remedial action if something unexpected goes wrong. At
the time key policy decisions were made, Japan had
experienced only about a year of solid recovery after
four years of near stagnation. With that year of recovery boosted by substantial fiscal stimulus, there was
reason to question whether economic expansion had
yet been put on a strong, self-sustaining basis, capable
of withstanding a large sudden withdrawal of fiscal
support. The need for fiscal consolidation over the
medium and longer term was undisputed, and there
were good reasons to start, at a gradual pace, as soon
as possible. But there was no urgent reason to attempt
roughly half of the consolidation needed over five or
six years within a single year. Unlike some countries
where large premia on long-term interest rates suggest
lack of confidence in longer-term fiscal probity (see
the May 1996 World Economic Outlook), Japan had
nothing particular to gain from extremely rapid, rather
than more gradual, fiscal consolidation. Even if not
fully recognized by the authorities, the long-standing
and unaddressed problems in the financial system
clearly implied important vulnerabilities if something
went wrong with the recovery. The specific event of
the Asian crisis was essentially unpredictable, but general external risks to the Japanese economy, many of
which have not materialized, were certainly present. In
Japan, with monetary policy already eased to very
near the theoretical limit, this tool was not available
for effective remedial action if something did go
wrong. And the option of re-reversing the stance of
fiscal policy to again provide support for activity was
unattractive politically and involved the problem of
having to persuade people of the virtues of fiscal easing when they had so recently been urged to see the
vital necessity of substantial fiscal consolidation.
Perhaps because of this last problem, it may have
taken longer than otherwise to reach the necessary political consensus to shift back to a policy of fiscal support. That shift began some time after the Japanese
economy started to slide into recession, with the announcement in December 1997 of 2 trillion of temporary income tax cuts and an acceleration of already
planned public investment in fiscal year 1998. In
April, the previously proposed regular FY1998 budget
was passed, which provided for a significant further
Figure 4.7. Japan: Fiscal Indicators

(Percent of GDP)
Public finances have deteriorated significantly in the 1990s in Japan.
6
General Government Balances
Social security balance
Overall balance
Structural balance1
0
2
Structural balance
excluding
social security1
Overall balance excluding

social security
6
8
1985
87
89
91
93
95
97
140
General Government Debt
120
100
80
Gross debt
60
Net debt excluding

social security assets
40
20
Net debt
0
1985
87
1Structural
89
91
93
95
97
balances are calculated as percent of potential GDP.
116
fiscal consolidation in accordance with the Fiscal

Structural Reform Act of December 1997. Within
days, this was followed by the announcement of a
more than 16 trillion fiscal package to stimulate domestic demandthe net effect of which would be essentially to reverse the consolidation in the regular
FY1997 and FY1998 budgets. When the legislation
was passed in June, the Fiscal Structural Reform Act
was also modified; the goal of reducing the general
government deficit to 3 percent of GDP was put back
from 2003 to 2005, signaling the flexibility to allow
fiscal policy to support activity as might be needed for
a long period, although the spending ceilings were left
in place.
After the defeat of the Liberal Democratic Party in
upper-house elections on July 12, Prime Minister
Hashimoto and his government resigned. The new
government, led by Prime Minister Obuchi, has announced the intention to implement additional spending of more than 10 trillion (2 percent of GDP) and
tax cuts of more than 6 trillion (about 1!/4 percent of
GDP). Full details of the package are not yet available,
but it is expected to include some measures that would
not have a direct impact on economic activity, such as
land acquisition. Tax cuts are expected to involve reductions in the corporate tax rate (from about 46 percent to 40 percent) and in marginal personal income
tax rates (including a reduction in the top rate from 65
to 50 percent). In addition, the new government plans
a further revision of the Fiscal Structural Reform Law,
which is likely to suspend many of the constraints on
major expenditure items. Thus, there has been a definite shift in fiscal policy toward providing support for
a fragile economy. Although full details are not yet
available, the IMF staff has assumed in preparing its
projections that present policies would imply some
further increase in the level of fiscal support in 1999.
In pursuing this new policy, it will be essential to
maintain adequate flexibility. If the economy fails to
respond as expected to programmed fiscal stimulus
during the second half of 1998, the authorities should
be prepared to take appropriate further action. The
critical need at this stage is for Japan to rekindle the
process of economic recovery.
Concerning the specifics of fiscal policy, there are
several trade-offs involving different policy measures.
One is that the measures that can provide the maximum cyclical stimulusspending increasesare not
necessarily those that are most appropriate from the
point of view of the longer-term health of the economy. Another is that the current need for fiscal stimulus has to be traded against the requirements for
longer-term fiscal consolidation in anticipation of the
pressures that will arise from population aging, particularly given that the surpluses in the social security accounts have recently been declining.
Simulations with MULTIMOD indicate that the fiscal multipliers for direct government spending are in
the range of 1.01.2, whereas the multiplier for taxes

or transfers is about 0.5.10 As noted earlier, the effectiveness of fiscal policy has been muted by a number
of other factors. Asset price deflation and exchange
rate appreciation operated against fiscal expansion in
the early 1990s. These factors waned in 1996 when the
effects of the exchange rate depreciation and low interest rates proved complementary to the fiscal expansion and allowed the economy to expand rapidly. More
recently, the effects of the fiscal stimulus have been
partially offset by the credit crunch and the weakness
of confidence engendered by the aggravation of the
banking crisis. Nevertheless, taken at face value, the
fiscal multipliers suggest that increases in public expenditure are likely to be more effective than tax cuts
in providing immediate support for domestic demand.
However, arguing in favor of permanent cuts in tax
rates are the benefits they are likely to provide in terms
of longer-term efficiency gains and the contribution
they are likely to make to a revival of confidence. In
fact, they are likely to strike a better balance between
the immediate need to provide support for domestic
demand and the requirements for longer-term growth.
A broadening of the tax base that is phased in gradually as the economy recovers should allay concerns
about fiscal sustainability. Also arguing in favor of
permanent tax cuts is the fact that both corporate taxes
and the maximum marginal tax rates on personal incomes are significantly higher in Japan than in most
other industrial countries.
Finally, while this shift in the stance of fiscal policy
will slow down the pace of fiscal consolidation in the
near term, so too will any further weakening of activity that might arise from an absence of fiscal stimulus.
In this regard, before the announcement of the stimulus package by the new government, the staff had projected that, assuming that the general government
deficit (excluding social security) is reduced to 3 percent of GDP by fiscal year 2005 in line with the Fiscal
Structural Reform Act, net general government debt
(excluding social security assets) would rise to almost
95 percent of GDP by the end of this period. Implementing the new governments package could add 5
percent of GDP to the net general government debt by
fiscal year 2005, assuming a gradual withdrawal of
stimulus over the next few years. However, given the
very low rates of interest prevailing on Japanese debt
instruments, and given that net interest payments constitute only about 1!/2 percent of GDP, there is little
risk of crowding-out or of substantially adverse debt
dynamics arising from the additional fiscal stimulus
package.
10Estimates of fiscal multipliers vary across different models, and

the estimates derived by the OECD and Japans Economic Planning
Agency are slightly higher than those of MULTIMOD (1.21.3 for
spending, 0.50.8 for taxes).
117
IV
Box 4.1. Japans Liquidity Trap

tic demand. Given a high degree of international capital
mobility, changes in the real return on domestic assets
also affect the real exchange rate, and thus influence activity through changes in real net exports.
Inflation expectations are determined by the models
prediction for future inflation, which in turn depends on
factors such as the projected level of activity and the authorities assumed objective for inflation. The latter is important, since it determines the monetary policy response
to inflationary pressures.3 In particular, the higher is the
authorities objective for inflation, the less they resist upward pressure on inflation until it reaches the assumed
target level, and the higher is the projected path for actual
inflation. To illustrate the role played by inflation expectations in the model, two simulations were performed. In
the first scenario, the monetary authorities are assumed to
aim at stabilizing inflation at zero. In the second, in contrast, they credibly commit to achieving a positive
longer-term inflation rate of 1!/2 percent a year, implying
that they only resist inflationary pressures after inflation
reaches this threshold.
The results of the two simulations are shown (see figure) for the period 19982010. In both cases, nominal
short-term interest rates are constrained by the floor of
zero. Long-term real interest rates, however, are substantially higher in the scenario with a zero inflation target
than in that with a 1!/2 percent target. This reflects differences in the projected inflation path. In the first scenario,
inflation initially undershoots the authorities assumed
longer-term target of zero, given the large initial output
gap and the lack of scope for the authorities to lower
nominal interest rates to boost activity. Output eventually
recovers in the later years of the scenario, and inflation
correspondingly increases such that the target of zero is
realized, on average, over the period as a whole. But the
strong initial deflationary pressures cause the real interest
rate to rise in the initial years of the simulation, which in
turn causes the real exchange rate to appreciate. Both of
these factors compress aggregate demand and reinforce
the amplitude of the decline in output.
In the second scenario, when the authorities objective
for inflation is 1!/2 percent, inflation also initially undershoots the longer-term target. But deflationary forces are
less strong than in the first scenario, reflecting expectations that the authorities will achieve a higher inflation
The very low level of nominal short-term interest rates

in Japan places an important constraint on the extent to
which monetary policy can be used to stimulate economic
activity. In general, no amount of monetary easing can
drive interest rates on risk-free assets significantly below
zero, given that the (zero) return on holding cash would
dominate that on assets yielding a negative nominal return.
As nominal interest rates reach zero, then, investors would
choose to hold all of their financial wealth in cash rather
than in interest-bearing assets, implying that the supply of
loanable funds would also fall to zero. Keynes termed this
constraint on monetary policy the liquidity trap.1
Given that interest rates in Japanese money markets
are already below !/2 of 1 percent, there is little scope for
the monetary authorities to further reduce short-term
interest rates. What other policies could the monetary authorities pursue to stimulate activity? One option would
be to attempt to influence inflation expectations, possibly
through statements by the authorities regarding their
longer-term objective for inflation. To the extent that
such statements are regarded as credible by the private
sector, higher inflation expectations would reduce expected real interest rates for any given level of nominal
rates. Lower real interest rates, in turn, would boost activity through standard macroeconomic channelsexpectations of higher product prices would make investment more attractive for firms, while consumers would
be induced to substitute current for future consumption.
This box illustrates the possible effects of credible
steps to influence inflation expectations through simulations of a Japan-specific version of the IMFs multicountry simulation model, MULTIMOD.2 MULTIMOD incorporates forward-looking behavior in financial and
goods markets, implying that expectations of future values of the endogenous variables can affect prices and activity in the current period. Expectations of future inflation influence current activity directly through their effect
on expected long-term real interest rates and thus domes1Cases in which the liquidity trap has imposed a practical constraint on monetary policy are relatively rare, with the United
States in the 1930s and Switzerland in the late 1970s being two
of the few notable examples.
2The model is similar to the one used to assess the implications of alternative exchange rate assumptions for Japan in the
October 1997 World Economic Outlook (Box 2, Alternative
Exchange Rate Assumptions for Japan, pp. 89). Paul Krugman
presents a more stylized treatment of this issue in Japans
Trap, May 1998 (available via the Internet: http://web.mit.edu/
krugman/www/japtrap.html).
3The monetary policy rule used in this model is similar to that

proposed for the United States by John Taylor, Discretion
Versus Policy Rules in Practice, Carnegie-Rochester Series on
Public Policy, Vol. 39 (December 1993), pp. 195220.
dampening the effectiveness of macroeconomic policies has already been noted. Labor market arrangements, product market regulations, and other features
of the working of economic institutions and their interrelationships, such as the relationship between
banks and corporations, have also affected economic
performance.

Structural impediments to the recovery of demand
and the working of market mechanisms in the
Japanese economy are also important in helping to
explain the prolonged slowdown of growth in the
1990s. The role of banking sector difficulties in
118
demand moderates the initial decline in output and leads

to a faster recovery thereafter.
The contrasting results of these two scenarios underscore the important role that inflation expectations can
play in influencing real interest rates and thus aggregate
demand in the face of a liquidity trap. They also suggest
how a deflationary spiral could emerge: if a protracted
cyclical downturn ultimately led to expectations of deflation, real interest rates would rise, further depressing
output and inflation expectations in a self-reinforcing
manner.4 Indeed, such a situation appears to have characterized the U.S. economy in the early 1930s. Of course,
the current recession in Japan has been much less severe
than the depression in the United States at that time.
Furthermore, there are few current signs in Japan that deflationary expectations have gained the upper hand, as
evidenced by the relative stability of broad measures of
prices and wages, and continuing growth in monetary aggregates. So the risk of a deflationary spiral in Japan appears hypothetical at the current juncture.
At a practical level, there are several caveats to implementing such a policy. First, it is not clear what actions
the authorities could take to credibly influence inflation
expectations, especially given that Japan has not pursued
a regime of explicit inflation targeting up to this point,
and there is little scope for lowering nominal short-term
interest rates to directly signal a more accommodative
stance. This analysis also does not incorporate the impact
of a shift in Japanese monetary policy on the rest of Asia,
since developments in trading partners are assumed to be
unaffected by Japanese policies. In practice, a sharp
weakening in the yen could put downward pressure on
other Asian currencies and require tighter monetary policy in those countries, offsetting the beneficial effects for
Japan. There is also a risk that household confidence
could be undermined by central bank operations to expand base money in order to influence inflation expectations, leading to a contraction in private consumption that
is not incorporated in the second scenario. Finally, the response of business investment to lower real interest rates
could be relatively muted, given existing strains in the financial sector. In light of these caveats, the analysis using
model simulations should be regarded as illustrative, not
as a characterization of the trade-offs currently facing
Japanese policymakers.
Japan: Alternative Liquidity Trap Scenarios,

19982010
Long-term inflation
target of 1.5 percent
Long-term inflation
target of 0 percent
6
4
Nominal Short-Term
Interest Rates
(percent)
Inflation
(GDP
deflator;
percent)
6
3
1998 2000 02 04 06 08 10 1998 2000 02 04 06 08 10
6
4
Real Long-Term
Interest Rates
(percent)
Real Exchange Rates

(logarithmic scale;
1990 = 100)
220
200
180
160
140
120
100
80
1998 2000 02 04 06 08 10 1998 2000 02 04 06 08 10
Real GDP Growth

(percent)
Output Gap
(actual less potential,
as percent of
potential)
10
5
0
0
5
4
10
15
1998 2000 02 04 06 08 10 1998 2000 02 04 06 08 10
Source: IMF staff calculations.
4Model simulations in which the inflation target of the monetary authorities is not fully credible, and expectations of the target instead depend on the observed behavior of inflation, are capable of generating this type of deflationary spiral.
target over the longer term. As a result, both the real longterm interest rate and the real exchange rate are lower
than in the first scenario. The boost provided to aggregate
The Banking Crisis
banks capital bases to market risk, and the slow

process of loan-loss recognition and disposal.
The collapse in November 1997 of Hokkaido
Takushoku Bank, a major city bank, and Yamaichi
Securities, one of the largest securities houses, highlighted the depth of the financial crisis in Japan and
triggered sharp increases in bank certificate of deposit
There are several dimensions to the banking crisis in

Japan. The weaknesses stemming from the bad-loan
problems have been the focal point of public discourse
about the banking crisis. Other manifestations of the
weaknesses in the banking sector are the exposure of
119
IV
rates and in the Japan premium, forcing the Bank of

Japan to inject liquidity into the interbank market.
While the failure of these two institutions served to
focus attention on the urgent need to resolve the problems in the banking sector, the crisis itself had been
simmering without any effective solutions since the
early part of the decade.
As noted earlier, the difficulties in the banking sector were sparked by the collapse of the asset price bubble. Since banks own directly a significant portion of
the total value of listed equities, the direct impact on
banks balance sheets was more severe in Japan than,
for example, in the Nordic countries. More important,
the decline in property prices sharply reduced the quality of banks loan portfolios, and the prolonged weakness in activity following the asset price collapse exacerbated the magnitude of the problem loans. A
distinctive aspect of the banking crisis in Japan has
been that opaque accounting practices have masked
the true size of problem loans for many years, and official statements regarding problem loans have lacked
credibility in markets. From the accounting year ending March 1998, however, banks have started disclosure based on a new standard designed to match the
SEC (Securities and Exchange Commission) standard
in the United States with respect to the disclosure of
nonperforming loans. The self-assessment of asset
quality by the banks, on the basis of more transparent
accounting rules than adopted in the past, showed
sub-standard and doubtful loans of about 71 trillion (about 14 percent of GDP), net of specific loanloss reserves at end-March 1998. The equivalent figure
for all deposit-taking institutions is 88 trillion.
However, these estimates were not fully subject to supervisory scrutiny, and probably do not fully reflect the
effects of the Asian crisis on the banking sector in
Japan; market estimates of problem loans are higher.
The lack of transparency in even recognizing the scale
of the problems in the banking sector has undermined
confidence among businesses and the public at large,
with deleterious effects on domestic demand, and
stands in marked contrast to the experience of the
Nordic countries, where there was an explicit recognition by the authorities that transparency was a precondition to the solution of the banking crisis.11
Recent research has tended to emphasize the special
role played by banks in the monetary transmission
mechanism in advanced economies, since funds raised
through capital markets are an imperfect substitute for
bank credit because of informational asymmetries.12
Such informational asymmetries are likely to be particularly pronounced in Japan because of the high
transaction costs of raising capital in Japanese markets. Consequently, changes in the lending practices of
banks can have effects on economic activity that are
independent of the effects operating through changes
in interest rates. The credit channel is likely to be particularly prominent in Japan, given the important role
played by banks in financial intermediation. Consequently, disruptions to the banking sector, which are
always detrimental to an economy, are likely to be particularly troublesome in Japan.
The growth of bank lending, which has been weakening since the early 1990s, has turned negative in recent months (Figure 4.8). Although the deterioration in
the macroeconomic environment has contributed to
the deceleration of bank credit, there is evidence that a
declining availability of credita credit crunchhas
also been important in constraining lending, aggregate
demand, and economic activity. Banks had in the past
dealt with credit losses by realizing accumulated hidden reserves. But, more recently, they have been
forced to pay greater attention to credit quality because of the influence of declining equity values on
bank capital, and in anticipation of the more competitive financial environment that is expected to be fostered by the big bang reforms. The prompt corrective action introduced in April 1998 has also added to
the pressures on banks to strengthen their capital positions, and they have responded to a large extent by cutting back on lending in order to meet capital adequacy
requirements.13
The Japanese authorities have recently taken a series of measures to resolve the banking crisis. These
include providing an additional 17 trillion in funding
to the Deposit Insurance Corporation to protect depositors when insolvent banks are closed. A further 13
trillion has been made available for recapitalizing undercapitalized but solvent banks of systemic importance. In early July 1998 the authorities announced a
bridge bank facility to take over the operations of
failed institutions. Under this scheme, a public bridge
Perspectives, Vol. 9 (Fall 1995), pp. 2748. See also Allan D.
Brunner and Steven B. Kamin, Bank Lending and Economic
Activity in Japan: Did Financial Factors Contribute to the Recent
Downturn? International Finance Discussion Papers, No. 513
(Washington: Board of Governors of the Federal Reserve System,
June 1995); and Tamim Bayoumi, Monetary Policy Issues, in IMF,
JapanSelected Issues, Staff Country Report (Washington, July 22,
1998); and Mark Gertler and Simon Gilchrist, Monetary Policy,
Business Cycles, and the Behavior of Small Manufacturing Firms,
Quarterly Journal of Economics, Vol. 109 (May 1994), pp. 30939.
13The prompt corrective action framework includes (1) a graduated response matrix requiring banks to take remedial action when
regulatory capital falls below prespecified levels; (2) a more systematic self-assessment of loan quality, subject to approval by external auditors; and (3) an independent Financial Supervisory
Agency, established in June 1998, and strengthened disclosure standards for nonperforming loans.
11See, Stefan Ingves and Gran Lind, Loan Loss Recoveries and
Debt Resolution Agencies: The Swedish Experience, in Charles
Enoch and John H. Green, eds., Banking Soundness and Monetary
Policy: Issues and Experiences in the Global Economy (Washington: IMF, 1997), pp. 42142.
12For a more detailed analysis of the credit channel, see Ben
Bernanke and Mark Gertler, Inside the Black Box: The Credit
Channel of Monetary Policy Transmission, Journal of Economic
120
bank would be set up to carry on the operations of the

failed institution, including extending new loans to
sound borrowers while a private bank was sought to
take over its operations. Additional instruments under
discussion include the temporary nationalization of a
troubled bank, in a situation where the banks failure
could destabilize the financial system, and the setting
up of a Japanese version of the U.S. Resolution Trust
Corporation with broad powers to buy bad debt, including from solvent and nationalized banks. At the
time of writing, however, the full details of the plan
have not yet been finalized.
In addition, the authorities have recently announced
a number of measures to help the workout of real estate
loans: the easing of regulations covering asset-backed
securities and special-purpose corporations for holding
securitized assets, the use of public money to buy and
consolidate odd plots of land and changes in zoning
regulations for certain areas, and the creation of arbitration panels to mediate the resolution of bad loans. In
May 1998 a plan was announced to establish an arbitration panel that will clarify and consolidate the liens
on real estate collateral and mediate the terms of agreements between debtors and creditors. In June 1998,
legislation aimed at stimulating the securitization of assets, in particular bad loans, was approved by the Diet.
The recent measures proposed by the authorities
provide a useful starting point for the resolution of the
problems of the banking sector. However, an effective
and lasting solution requires more aggressive and decisive actions on a number of fronts. The prompt corrective action framework will have to be applied
more systematically to the smaller banks, and those
that are judged insolvent should be closed. There also
has to be quicker action in fully recognizing and cleaning up the bad loans of the bigger banks, and recapitalizing those that fall short of meeting capital adequacy requirements. In this regard, the recapitalization
measures that have been adopted so far have been
smallonly 1.8 trillion has been spent on capital
injectionsand the conditionality attached to such
spending has been limited. Any future injections
should carry strict conditionality, including to require
bank shareholders to take appropriate responsibility
for loan losses. The Financial Supervisory Authority
has to be provided with sufficient financial and human
resources and independence to be able to fulfill its supervisory mandate effectively. For the bridge bank facility to be effective, clear procedures will have to be
laid out to ensure that bad assets are identified, assets
are subject to proper valuation, and new loans are provided only on prudent commercial criteria. Private
sector buyers for the bridge banks will also need to be
identified quickly. The proposed bridge bank scheme
is a mechanism for dealing with failed institutions
only. However, it is just as important to advance the
restructuring of those major banks that are undercapitalized but that may be solvent.
Figure 4.8. Japan: Credit Growth, Tankan Survey,

and Bankruptcies
The availability of credit has tightened recently.
15
Credit Growth
(percent change in preceding twelve months)
10
Bank lending
0
Domestic credit
1990
60
91
92
93
94
95
96
97
1600
Banks willingness to lend

(left scale; index)
20
1400
1200
0
Number of bankruptcies
(right scale; three-month
moving average)
20
40
1000
800
600
60
80
121
1800
Tankan Survey and Bankruptcies
40
Aug.
98
1990
91
92
93
94
95
96
97
Aug.
98
400
IV
in Japan, such as lifetime employment practices, may

also have played a role in slowing down the pace of
structural change although Japanese manufacturing
employment has fallen by over 3 percent in 1998.
Looking ahead, as the pace of growth picks up, and as
the process of deindustrialization in Japan proceeds
more in line with the path taken in other advanced
economies, there will need to be changes in labor market arrangements to serve the needs of an increasingly
services-based economy.
There has been a close nexus in Japan among banks,
corporations, and the government. In particular, the relationship between banks and corporations may have
helped to foster Japans rapid economic catch-up.16
Bank-oriented financial control minimized pressures
toward short-termism in corporate decision making.
It also provided support to sustain other features of the
Japanese economic system, such as lifetime employment practices. However, financial liberalization in
the 1980s implied a significant loosening of the relationship between banks and the corporate sector. As
discussed earlier, the larger corporations, in particular,
increasingly tapped both the domestic and international financial markets for funds. The banking crisis
in the 1990s has further eroded the capacity of banks
to carry out their monitoring functions. Meanwhile, alternative systems of corporate governance, such as enhancing shareholders rights to carry out effective
monitoring of the corporate sector, have not fully replaced the role played in the past by bank monitoring.
In this context, the full and effective implementation
of the big bang financial reforms should set the
stage for more stringent market-oriented discipline on
corporate behavior.
Other Structural Issues

Japans economic performance in the years ahead
will depend significantly on developments in the nontradables sector. Past initiatives in deregulating some
segments in the nontradables sector have borne fruit
most notably in the form of increased investments and
reduced prices in the retail, energy, and telecommunications sectors. Nevertheless, a number of restrictions
and market distortions remain in agriculture, transportation, distribution, and construction that have contributed to a lack of competition and low productivity
in these sectors.14 The reforms introduced in these sectors have too often been of a minor technical nature,
and they have failed to address key quantity and price
restrictions. Further steps toward deregulating the
nontradables sector will have to be combined with efforts to increase transparency and reduce nontariff barriers to trade.
In this regard, Japan has not experienced declines in
the share of manufacturing employment of the magnitude that have occurred in other advanced economies
in the past two decades as part of the normal process
of economic development. The slower pace of deindustrialization in Japan can be explained by special
factors such as the ability to generate rising manufacturing trade surpluses and the effects of relative price
movements that have tended to augment domestic demand for manufactures.15 Labor market arrangements
14See, for instance, OECD, JapanEconomic Survey, 1997
(Paris, December 1997).
15For a more detailed discussion of these issues, see Robert
Rowthorn and Ramana Ramaswamy, Deindustrialization: Causes
and Implications, in Staff Studies for the World Economic Outlook
(Washington: IMF, December 1997), pp. 6177; and Robert
Rowthorn and Ramana Ramaswamy, Growth, Trade, and Deindustrialization, Working Paper 98/60 (Washington: IMF, April
1998). See also Eswar Prasad, Sectoral Shifts and Structural
Change in the Japanese Economy: Evidence and Interpretation,
Japan and the World Economy, Vol. 9 (No. 3, 1997), pp. 293313.
16See Nicholas Crafts, East Asian Growth Before and After the
Crisis, background study for the World Economic Outlook,
(Washington: IMF, Research Department, August 1998).
122
V
Economic Policy Challenges Facing the Euro
Area and the External Implications of EMU
Figure 5.1. Euro Area and the World Economy:
Indicators of Relative Size
n January 1, 1999, the third and final stage of

European Economic and Monetary Union (EMU)
will begin with the establishment of a currency union
encompassing 11 of the 15 member countries of the
European Union (EU)Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain. On that date, these
countries will lock their exchange rates and adopt
the euro as their common currency, with monetary
and exchange rate policy determined by area-wide institutions. Thus, each country will give up the possibility of independent monetary and exchange rate
policy.
EMU does not change the locus of responsibility for
policies other than monetary and exchange rate policies. Policies affecting external trade and the integration of internal markets are already a matter of EU
competence. Fiscal and labor market policies will continue to be decided mostly at the national level, albeit
subject to closer surveillance by EU institutions (see
the appendix to this chapter). In this regard, the
Stability and Growth Pact (SGP), agreed in June 1997,
set out the procedures for surveillance of national fiscal policies, strengthening the framework provided in
the Maastricht Treaty. Also, the Treaty of Amsterdam,
signed in October 1997, explicitly recognized labor
market policies as a matter of common concern and set
out procedures for their surveillance. Except for monetary and exchange rate policies, area-wide decision
making and surveillance are the responsibility of institutions of the EU as a whole. It has been agreed that
ministers of euro-area countries can meet (as the Euro11 Group) to discuss issues related to the single currency, but that formal surveillance and coordination
decisions will be the prerogative of the full EU
Council of Ministers (ECOFIN).
The monetary and exchange rate policies conducted
at the euro-area level will be of considerable global
importance. The prospective euro area rivals the
United States in terms of output and trade, and the role
of the euro in financial transactions eventually may
challenge that of the U.S. dollar (Figure 5.1). EMU
will be particularly important for countries with close
trade and financial ties with the euro area, notably
countries in central and eastern Europe and in the
Mediterranean basin, and many countries in Africa.
And with EMU, policies conducted at the national
level will have an important influence on the exchange
The euro area is somewhat smaller than the United States in terms of
output but accounts for a larger share of world trade, while European
currencies are currently underrepresented in global financial markets.
Output and Trade1

8000 GDP at Purchasing
Power Parity (billions
7000 of U.S. dollars at
1990 prices)
6000
Shares in World Trade

(percent)
25
Euro area
20
United States
Developing
countries
5000
Euro area
15
United States
4000
10
3000
2000
Japan
1990
92
94
Japan
96
98
1990
92
94
96
98
Currency Composition of International

Lending, 1997
(percent)
EU currencies
55
International Note and
50 Bond Markets
Yen
U.S. dollar
International Bank
Lending2
55
50
45
45
40
40
35
35
30
30
25
25
20
20
15
10
15
10
Sources: IMF (upper panel); and Bank for International Settlements,

68th Annual Report (Basle: Bank for International Settlements,
June 1998).
1For 1998, IMF staff projections. Trade shares are calculated through
1997 only.
2 Cross-border claims and local claims in foreign currency of banks
located in industrial reporting countries. European Union currencies
comprise the deutsche mark and French franc only.
123
CHALLENGES FACING THE EURO AREA AND THE EXTERNAL IMPLICATIONS OF EMU
rate of the euro and on the ease with which monetary

policy is able to achieve its goals.
The delineation of monetary, fiscal, and structural
policy responsibilities between the euro-area institutions and national governments helps assign responsibility for these policies, but it also complicates their
coordination. Monetary policy in the euro area will
concentrate on economic conditions in the area as a
whole. At the same time, structural and fiscal policies
at the national level will need to take account of the
fact that independent movements in interest rates and
exchange rates are no longer possible. This allocation
of responsibilities will make the task of achieving an
appropriate mix of policies at the euro-area level more
complex than in most national monetary areas.
The October 1997 World Economic Outlook (Chapter III) examined the new policy regime entailed in
EMU, the policy requirements of a successful EMU,
and the implications of EMU for the rest of the world
economy. A year later, and in the context of the economic conjuncture a few months before the single currencys inauguration, this chapter examines economic
policies in the euro area from national, regional, and
global perspectives. One aim is to highlight the policy
challenges facing the euro area and its member countries in light of the interrelationships between policies
at the national and regional levels. The desirability of
promoting compatibility between policies set at the
two levels while at the same time recognizing the separate policy mandates was stressed by the European
Council in December 1997, when it emphasized the
need for enhanced coordination for a proper functioning of EMU. Another aim of the chapter is to draw out
further some of the implications of EMU for the global
economy and especially for those countries with close
economic ties to the euro area.
Figure 5.2. Euro Area: GDP Growth

and Components of Demand1
(Percent change unless otherwise noted)
Exports led the recent revival of euro-area growth, but domestic
demand is projected to play the leading role in 199899.
12 Real GDP
10
8
Final Domestic
Demand
12
10
8
0
2
0
2
1992 93 94 95 96 97 98 99
12 Exports
10
8
1992 93 94 95 96 97 98 99
Net Exports
(contribution
to GDP growth)
12
10
8
0
2
0
2
1992 93 94 95 96 97 98 99
1Shaded
1992 93 94 95 96 97 98 99
The fiscal, monetary, and structural policy requirements of the euro area, and their implications for the
overall policy mix, have to be considered in the context of recent economic developments and current
prospects.
Economic Developments and Prospects
The birth of EMU is being facilitated by a macroeconomic environment in the euro area that has improved considerably from the early and mid-1990s.
For the area as a whole, a slack-absorbing recovery
has been gathering momentum since early 1997, and
the strengthening of fiscal and inflation performance
associated with meeting the convergence criteria for
EMU has provided the basis for what could become an
extended period of generalized, sustained, noninflationary growth (Figures 5.2 and 5.3). The initial impe-
124
tus to the recent renewal of growth came from exports,

which surged in response to a strengthening of global
demand and a real depreciation of euro-area currencies
(Figure 5.4). A sharp rebound in business and consumer sentiment followed quickly. This was supported
by a stabilization of conditions in the labor market and
reinforced in late 1997 and into 1998 by a decline in
unemployment, which is expected to average 11#/4 percent of the labor force in 1998 compared with 12!/2
percent in 1997. These domestic factors, combined
with some moderation in external demand, were reflected in a shift in the composition of growth moving
into 1998 to one largely based on domestic demand.
Overall, growth in the euro area rose from an annual
rate of under 1!/2 percent in the course of 1995 (fourth
quarter to fourth quarter) to almost 3 percent in the
course of 1997.
Within this overall picture, notable differences in
cyclical positions have emerged in the euro area, with
countries falling into two broad groupings, albeit with
considerable intragroup variation. For the more cyclically advanced countries (Austria, Finland, Ireland,
the Netherlands, Portugal, and Spain), which account
for about one-fourth of euro-area GDP, output gaps in
1998 are estimated to be negligible on average, while
for the other, less cyclically advanced economies
(Belgium, France, Germany, and Italy), gaps are estimated to average close to 2 percent (Figure 5.5).
These differences in cyclical positions reflect recent
variations across countries in growth performance.
While no single explanation fits all countries, exports
in a number of the more cyclically advanced countries
(notably Finland, Ireland, and Spain) were spurred by
marked real exchange rate depreciation between 1992
and 1995, while the less cyclically advanced countries
as a group experienced real appreciation over this period.1 Labor market performance has also been
stronger in the more cyclically advanced economies,
helping to boost confidence. While differences in this
respect between the groups are of course closely related to growth performance, employment in a number
of the more cyclically advanced economies (notably
Ireland, the Netherlands, and Spain) has also been
boosted by structural reforms.
Consumer price inflation, while still low by most
historical standards, is somewhat stronger in the more
cyclically advanced economies, running at an annual
rate of close to 2 percent in the summer of 1998, com-
Figure 5.3. Euro Area: General Government

Fiscal Balance and Inflation1
Preparations for EMU have led to large reductions in fiscal
imbalances and inflation.
4
General Government Fiscal Balance
Primary structural balance
(percent of potential GDP)
2
Structural balance
(percent of potential GDP)
4
Unadjusted balance
(percent of GDP)
8
1990
91
92
93
94
95
96
97
98
99
6
Consumer Price Inflation
(percent)
5
2
1
0
1990
1Within
the group of less cyclically advanced economies, Italy experienced a substantial real depreciation between 1991 and 1995,
which was reversed in part in 199697. Italys position in the less
cyclically advanced group reflects its particularly large fiscal retrenchment. Among the more cyclically advanced economies, the
Netherlands and Austria also experienced real appreciations. The
relatively cyclically advanced position of the Netherlands reflects
the benefits of many years of structural reform, while in the case of
Austria there was a relatively narrow output gap after the 199293
recession.
91
1Shaded
125
92
93
94
95
96
97
98
99
pared with less than 1!/2 percent in the euro area as a

whole (Figure 5.6). The potential for increased price
pressures in the more cyclically advanced countries is
suggested not only by the high rates of resource utilization, but also by faster increases in equity and real
estate prices (Figure 5.7) and strong growth of credit.
However, inflation developments in the less cyclically
advanced economies are likely to dominate the picture
for the euro area as this group includes the three
largest economies (France, Germany, and Italy).
Looking forward, and despite the weakening in the
external environment, the recovery in the euro area is
projected to maintain its recent momentumwith
growth of 2#/43 percent a year in 199899as the
earlier rebound in confidence is being reinforced by an
accommodative policy stance, reflecting relatively
low real short-term interest rates, a further decline in
long-term rates, and a shift in fiscal policy from
markedly restrictive in 1997 to slightly expansionary
in 1998 (see Chapter II). Consumer price inflation is
projected to remain at around 1!/2 percent in 1999 for
the area as a whole and to rise to about 2!/4 percent in
the more cyclically advanced economies. While unemployment is expected to decline further as a result
of above-potential growth, it is projected still to be
above 11 percent of the labor force at the end of 1999.
Uncertainty about the degree of economic slack
complicates the assessment of medium-term prospects, but the IMF staffs estimates (which show an
output gap of 1#/4 percent for the euro area as a whole
in 1998) seem to be consistent with the absence of all
but localized symptoms of inflationary pressures.
Taking into account also the likelihood that the nonaccelerating inflation rate of unemployment (NAIRU)
will decline in a sustained recovery, as hysteresis effects are reversed, there would appear to be considerable scope for a reasonably paced expansion, perhaps
with euro-area output growing for a number of years
by around !/2#/4 of 1 percentage point faster than its recent trend. Early structural reforms would reduce further the risk that supply bottlenecks emerge as the recovery matures.
As discussed in Chapter I, global economic conditions have deteriorated significantly in the course of
1998 as a result of severe financial and economic difficulties in Asia and Russia and spillover effects elsewhere. Exports to Japan, Russia, Korea, and the
ASEAN-4 countries taken together account for 11 percent of euro-area exports and 1!/2 percent of GDP, but
the risks clearly extend beyond direct trade linkages
with these countries to include the impact on the global
economic environment and on confidence in the euro
area. In addition, there are important uncertainties surrounding the exchange rate of the euro. While the euro
appears to be only moderately undervalued in effective
terms relative to medium-term fundamentals, the implied correction that may be in prospect would comprise larger, but to a significant extent offsetting,
Figure 5.4. Euro Area: Real Exchange Rates

and Interest Rates
A real depreciation has eased monetary conditions since 1996.
120
Real Effective Exchange Rate1

(in terms of relative unit labor costs; 1990 = 100)
110
100
90
80
1992
93
94
95
96
97
Aug.
98
70
10
Real Short-Term Interest Rate 2

(percent a year)
8
6
4
2
1992
93
94
95
96
97
Aug.
98
Real Long-Term Interest Rate 2

(percent a year)
1992
1See
93
94
95
96
97
Aug.
98
Box 5.5 for details of the euro effective exchange rate.

by the 12-month change in consumer prices.
2Deflated
126
medium-term shifts upward against the U.S. dollar and

downward against the Japanese yen. Should these
movements not occur in tandem or should overshooting occurnot inconsequential risks given the current
international circumstancesthere could be significant
shifts in the real effective exchange rate of the euro that
would materially affect prospects for the area.
General Policy Considerations
In addition to consolidating the convergence
achievements to date, euro-area policymakers need to
focus increasingly on how to capitalize on them. In
particular, these achievements provide a strong foundation for tackling the structural rigidities that are at
the root of high unemployment while, in a shorter-run
context, they afford greater room for maneuver in addressing the uncertainties in the economic outlook.
Greater cyclical convergence would have facilitated
the smooth launch of EMU, and of the single monetary
policy in particular. Fortunately, differences in cyclical
positions among the three largest countries are not
large. But the differences between them and the more
cyclically advanced economies, which are being exacerbated by expansionary policies in many of the latter,
could, if not properly handled, cause strains that would
impede the recovery in the area as a whole.
Two aspects of the EMU policy framework will help
the euro area to meet these challenges. The first is the
clear commitment to price stabilitywidely taken to
mean inflation of 2 percent or belowfor the euro area
as whole, with the European Central Bank (ECB)
charged to make this its overriding priority. This strong
commitment to preserving the nominal stability that
has been establishedwhich should allow a more neutral stance of monetary policy over the cycle than has
been the casebodes well for the longer-term growth
performance of the euro area. The second positive feature of the framework is the SGP, specifically the commitment by each member to achieving medium-term
budgetary positions that are close to balance or in surplus. On one level, this is simply the fiscal analogue of
the dedication of monetary policy to price stability. On
another, however, the SGP can help the euro area cope
with and dampen the transmission of shocks and imbalances, be they regionwide or country-specific, by
promoting the establishment of medium-term fiscal
positions that allow countries to deal with normal
cyclical fluctuations and still respect the deficit ceiling
of 3 percent of GDP.2 This medium-term orientation is
essential if the procyclical and consequently destabilizing fiscal policies common in continental Europe
over the past two decades are to end. Such policies
Figure 5.5. Euro Area: Output Gaps, Employment,

and Unemployment1
Notable cyclical differences have emerged between two groups
of countries since 1995.
1
Output Gap (percent of potential GDP)
0
More cyclically advanced
1
Less cyclically advanced
Euro
area
1992
93
94
95
96
97
98
99
112
Employment (1992 = 100)
108
104
Euro area
100
96
92
88
1992
93
94
95
96
97
98
99
20
Unemployment Rate
18
16
14
Euro area
12
10
8
1992
93
94
95
96
97
98
99
Sources: IMF, World Economic Outlook; and OECD.

1More cyclically advanced countries are Austria, Finland, Ireland,
the Netherlands, Portugal, and Spain. Less cyclically advanced countries are Belgium, France, Germany, and Italy. Shaded areas indicate
IMF staff projections.
2As
discussed in Chapter III of the October 1997 World Economic

Outlook, observance of the SGP should allow a degree of fiscal stabilization in the euro area at least as powerful as that observed in
other monetary areas, even without a central fiscal authority.
127
have reflected the tendency of policymakers to focus

on actual rather than cyclically adjusted fiscal balances
and thus to implement expansionary measures during
periods of buoyant economic activity, with the consequence that corrective action has often needed to be
taken when economies have been in a downturn.
However, when it comes to addressing real imbalances and divergences, the EMU policy framework is
not yet sufficiently elaborated in two key areas. First,
while maintaining primary responsibility for fiscal and
structural policymaking at the national level provides
scope to adapt these policies to country-specific circumstances, this will pose a challenge for policy coordination. National policies will have inevitableand
often pervasivespillover effects on other member
countries via their implications for the single monetary
policy and the exchange rate of the euro. How countries use fiscal policy to tackle their divergent cyclical
situations is a clear example. But structural policies
also are relevant in this regard both because inflexible
markets impede the ability of countries to adapt to
contractionary forces and because of their longer-term
effects on economic performance. While surveillance
mechanisms are in place to facilitate coordination, it
remains to be seen how effective these will be in ensuring a sound overall development. Second, while
there has been some progress in reducing structural
rigidities, policies in place are inadequate, and political opposition to reform is still strong. It remains to be
seen how effectively the new EU arrangements for
labor market surveillance will help policymakers
tackle these issues. In addition to its role in addressing
the euro areas high unemployment, greater flexibility
in labor and product markets will be needed to deal
with asymmetric shocks, given that exchange rate adjustments will no longer be an option within the euro
area. Moreover, as the process of getting to EMU has
been associated with rising unemployment, many may
question whether EMU was worth the effort if it does
not set the stage for a lasting and marked reduction in
euro-area joblessness.
The various authorities therefore need to put in
place clear and credible strategies that both make the
most of the positive aspects of the framework for
EMU and address its limitations. With the monetary
conditions resulting from the single monetary policy
unlikely to fit well the circumstances of all countries
at all times, the strategies for fiscal and structural policies need to ensure that countries are well positioned
to deal with country-specific problems. By the same
token, there is need for effective coordination to ensure that the combined effect of national policies fits
well the overall macroeconomic dynamics of the euro
area. This is especially important in the early days of
EMU when financial markets will be assessing how
well the institutional framework is coping with interactions and interdependencies of national and regionwide policies. Against this background, the require-
Figure 5.6. Euro Area: Inflation1

(Percent change in consumer prices from a year earlier)
Inflation in the more cyclically advanced countries is above the
euro-area average.
3.0
2.5
Euro area
More cyclically
advanced
2.0
1.5

1996
97
1.0
Jul.
98
1More cyclically advanced countries are Austria, Finland,

Ireland, the Netherlands, Portugal, and Spain. Less cyclically advanced
countries are Belgium, France, Germany, and Italy.
128
ments for monetary, fiscal, and structural policies are

assessed below.
Monetary Policy
The convergence to low inflation in the euro area
eases the challenge that the ECB will confront as it
takes over the reins of monetary policy on January 1,
1999, as well as that facing the Bundesbank and other
European central banks as they seek to ensure a
smooth transition to the new regime over the coming
months. Earlier in 1998, it seemed that the benign inflation outlook would provide room for maneuver in
phasing the tightening of monetary conditions in the
euro area that would be needed to ensure a less accommodative stance as the cyclical expansion matured. The focus has shifted considerably in the course
of 1998, however, because of the deterioration in the
external environment and the associated increased
downside risks to growth and further dampening of
commodity price expectations. By late summer, financial markets no longer expected interest rates to rise in
the euro area over the next year: rather they anticipated that rates would by the end of 1998 converge
downward to the level of around 3!/2 percent currently
prevailing in the ERM core and remain around this
level through 1999 (Figure 5.8). Moreover, there has
been increasing attention to the questions of whether
and under what circumstances a lowering of interest
rates from this level would be warranted.
As it seeks to come to grips with the monetary policy needed in an evolving environment, the ECB will
need to pay due regard to establishing its credibility
quickly in the face of some unique start-up challenges.
Some of these, such as putting in place the requisite information and operational systems, and compiling
consolidated area-wide monetary statistics, are comparatively straightforward. Others are more imponderable, such as assessing the effects of the regime
change involved in EMU on behavior not only in financial markets but in product and labor markets as
well; the acclimatization of ECB Council members
conditioned by years of policy formation and implementation on the basis of national considerations and
operating strategies predominantly oriented to maintaining a stable exchange rate against the deutsche
markto the need to act and to be perceived to act
from a pan-European perspective, as required by the
ECBs mandate; and within such a perspective, giving
appropriate weight to the euros importance in the
world economy.
A further challenge is to elaborate a workable monetary framework. Regime-shift considerations, particularly given the pronounced changes in European financial markets that are in prospect, suggest that
approaches based on the behavioral relationships of
economic modelssuch as monetary targeting or inflation targetingare likely to be difficult to imple-
Figure 5.7. Euro Area and the United States:

Asset Prices
Since 1996, asset prices have risen particularly sharply in the
more cyclically advanced euro-area countries.
400
Equity Prices (July 1993 = 100)
350
More cyclically advanced1
300
United States
250
200
Euro area
150
Less cyclically advanced1
100
50
1991
92
93
94
95
96
97
Sep.
98
120
House Prices (1993 = 100)
115
More cyclically advanced1
110
Euro area
105
100
Less cyclically advanced 2
95
90
1991
92
93
94
95
96
97
Sources: WEFA, Inc.; and Bank for International Settlements.

1More cyclically advanced countries are Austria, Finland, Ireland,
the Netherlands, Portugal, and Spain. Less cyclically advanced countries are Belgium, France, Germany, and Italy.
2 Less cyclically advanced countries as above except for the exclusion of Italy, for which data are unavailable.
129
ment at the outset of EMU, even though they would be

helpful in underlining the pan-European nature of policy since they would be explicitly formulated in euroarea terms. A flexibly implemented monetary target
could boost the ECBs credibility because it would follow the Bundesbanks practice. But, with the relationships between instruments and inflation apt to be unstable, or at least uncertain, for a considerable period,
the ECB is more likely to be able to assert an effective
pan-European approach by adapting the instruments of
monetary policy pragmatically with a view to maintaining low inflation. In doing so, however, it will
have to explain clearly and frequently, especially at the
outset, its monetary policy strategy and the factors influencing its deliberations and actions.
As of September 1998, the key data pertaining to an
assessment of inflation prospects in the euro area are:
Figure 5.8. Euro-Area Broad Money Stock, Slope

of German Yield Curve, and Forward Interest
Rates for Germany
Signs of inflationary pressure are generally absent from monetary
indicators.
8
M3
(twelve-month percent change)
Euro area
Euro-area price inflation has been subdued, and

there are no imminent dangers either on the cost
side or from output bottlenecks. Recent wage increases have remained moderate, primary commodity prices have been weak, and the effective
exchange rate of the euro area has appreciated
over the past year. The sizable output gap and the
moderate speed at which it is expected to close
suggest that bottlenecks are unlikely to pose problems during the next year to 18 months.
Developments in the monetary aggregates also
suggest the absence of inflationary dangers (see
Figure 5.8). Over the past year, the 12-month
growth of M3 in the euro area has hovered in the
46 percent range, which would appear broadly in
line with medium-term requirements.3 Moreover,
the moderate growth of M3 over the past four
years would seem to imply that the supply of
money does not at present pose an inflation
danger.
Concerns about inflation appear absent in the financial markets. The relatively flat yield curve for
this stage of the cycle implies that monetary conditions are not overly easy (see Figure 5.8), and
the continued downward trend in long-term interest rates over the past year suggests a further decline in inflation expectations, although it probably also reflects declines in real interest rates.
Long-term deutsche mark interest rates are now at
historical lows.
6
4
2
1993
94
95
96
97
Sep.
98
Germany: Slope of Yield Curve and Output Gap

(percent)
Slope of yield curve1
4
2
0
2
Output gap
1970
74
78
82
86
4
90
94
Germany: Three-Month Forward Interest Rates

(percent a year)
Sep.
98
6.0
5.5
June 1999 contract
5.0
December 1999 contract
4.5
In assessing what these factors imply for interest

rate policy, one perspective is provided by policy rules
4.0
December 1998 contract
3.5
1997
Sep.
98
3Assuming inflation of 2 percent, together with a euro-area potential growth rate of 2.4 percent and the trend decline in velocity of
0.35 percent a year since 1990, would imply a neutral growth rate
of 4#/4 percent a year for broad money. Available data at the time of
writing refer to aggregations of national monetary statistics rather
than consolidated euro-area statistics; consolidated data are expected to become available later in 1998.
Sources: WEFA, Inc.; and IMF staff estimates.

1Ten-year bond yield minus three-month money market rate,
in percent a year.
130
based on the past behavior of central banks such as the

U.S. Federal Reserve and the Bundesbank. In this context, the literature provides a number of Taylor rules estimated for the Bundesbank, which suggest on the basis
of current projections for output and inflation that
short-term interest rates in the euro area should rise in
1999 by !/3 of 1 percentage point from their average
level in 1998 (see Box 5.1, on page 134). Such rules
also highlight the tensions emanating from cyclical divergences that will become more apparent as shortterm interest rates in the euro area converge over the
coming months. For France and Germany on their
own, they indicate for the year ahead an interest rate
about !/2 of 1 percentage point lower than for the euro
area as a whole, while for the more cyclically advanced
economies, they point to the need for short-term interest rates that in some cases are well above average.
Policy rules based on past behavior have, however,
a number of important limitations in the current
circumstances.
in the past used the exchange rate as a means of

adjustment could become much more conditioned
by the need to maintain competitiveness when
there is no longer the escape route of devaluation.
A narrowing of output gaps in such countries may
thus entail less wage pressure than previously.
The above considerations, together with the absence
of inflationary dangers, would suggest that a path for
short-term interest rates in line with current market expectations is appropriate at the present juncture, with
short-term interest rates converging on those in the
core of the ERM. While this would entail a reduction
in the average euro-area short-term interest rate in the
coming months of about !/2 of 1 percentage point from
its level in the summer of 1998, the fact that mediumand long-term rates have already effectively converged in the euro area will limit the expansionary implications. If the downside risks to growth materialize
or intensify, a more definite easingentailing a reduction of euro-area short-term rates below those presently prevailing in the ERM coremay be needed. A
resumption of fiscal deficit reduction in 1999, particularly if it entailed determined action to restrain demand and avoid overheating in the more cyclically
advanced economies, would allow the monetary authorities greater room for maneuver in easing monetary conditions. If, on the other hand, there is unfavorable news about the prospects for fiscal adjustment in
1999, and especially if continued fiscal stimulus
seems likely, it will become more difficult for monetary authorities in the euro area to ease their policy
stance.
Taylor rules capture only the average past response of central banks and do not take account of
all the factors that typically influence monetary
policy such as external factors and the balancing
of risks in particular circumstances. These last
two considerations are both pertinent in the current context, since there are risks that the global
environment could deteriorate further, while the
policy problems that would arise from growth
being slower than projected are likely to be
greater than those that would emerge should
growth be faster than expected. Moreover, the
monetary authorities of the euro area will also
need to weigh any implications of a change in
rates for the global economy.
The marked decline in long-term interest rates in
recent months, which has followed a steady
downward trend over several years, combined
with the relatively flat yield curve currently, raises
questions whether there may have been a downward shift in the neutral real interest ratethat is,
the interest rate that is compatible with output at
potential and stable inflation. Portfolio reallocations in the wake of the Asian crisis have favored
the mature financial markets of North America
and Europe, suggesting some influences on longterm interest rates that may be temporary in nature. However, convergence around low inflation
and reduced fiscal deficits may have contributed
to a more permanent moderation of real interest
rates in the EU and a number of industrial countries elsewhere. In the euro area, this consideration is reinforced by the strengthened policy
framework for fiscal discipline.
The regime change associated with EMU is likely
to influence other key behavioral relationships.
For instance, wage behavior in countries that have
Fiscal Policy
Fiscal policy requirements are conditioned by the
large fiscal imbalances and the significant growth of
public sector budgets since the 1970s. Increased debt
ratios cast a shadow over longer-term economic
prospects and, together with large deficits, have limited the scope for fiscal policy to act as a stabilizing instrument, a weakness all too evident in the 1990s. The
substantial increases in transfers to households and interest spending have resulted in a heavy tax burden on
the economy, particularly on labor, and the design and
interaction of social benefits and tax systems have further distorted incentives to work (Figure 5.9).
Owing in large part to the Maastricht criteria, the
1990s have witnessed considerable progress in reducing structural deficits and in stabilizing debt ratios. In
contrast, the recent record on spending and tax reform
has been decidedly mixed; the cyclically adjusted revenue burden actually rose as a share of potential output in the early 1990s, and it has only leveled out more
recently. Moreover, while adjustment since 1993 has,
for the euro area as a whole, emphasized spending
cuts, it has relied too much on ad hoc adjustments such
131
as across-the-board spending limits, government investment cutbacks, and sometimes even temporary
measures, rather than on fundamental reform of government programs.4
The SGP provides a framework for protecting and
building on recent progress in strengthening the financial positions of governments. In part, it does this by
establishing more clearly the principle that countries
that fail to correct excessive deficits will be subject to
sanctions. But equally important, it strengthens procedures for the surveillance of fiscal policies. While this
surveillance will be conducted in the context of the
SGPs medium-term goal of budgetary positions close
to balance or in surplus, and while the conditions that
would trigger sanctions are both expressed in terms of
actual budgetary positions, countries will need to
focus on underlying fiscal positions to make the pact
work as intended.
There has been considerable discussion as to
whether structural balance is needed to provide countries adequate room to deal with normal cyclical fluctuations. Using the largest output gaps in the past as a
guide, a structural deficit averaging 1 percent of GDP
for the area as a whole would allow the operation of automatic stabilizers while keeping the general government deficit within 3 percent of GDP. However, a range
of additional considerationsincluding uncertainties
regarding potential output and output volatility, the advisability of providing some extra room for discretionary measures, and high debt ratios in some countriesargue for a more prudent stance (see Box 5.2, on
page 136). Moreover, the future pressure on pension
and health spending associated with the aging of populations underlines the case for substantially reducing the
debt-to-GDP ratio, and thereby the interest burden;
while there are considerable uncertainties in the estimation of these demographic effects, they could on present
policies add 7 percentage points of GDP to spending
over the next 30 years, with a further, albeit relatively
moderate, increase over the following decade.
The objective of structural balance or small surplus
implied in the SGP thus appears to be a reasonable
first approximation to the medium-term fiscal needs of
the area as a whole. This objective seems readily
achievable since the structural deficit of the area as a
whole is projected at 1!/4 percent of GDP in 1998.
Moreover, that figure overstates the primary adjustment required to reach the SGP goal, as interest spending is projected to decline by #/4 of 1 percentage point
of GDP between 1998 and 2001. Thus, in the euro area
as a whole, a primary structural adjustment of about !/2
of 1 percentage point of GDP should be sufficient to
achieve a balanced structural position by 2001, assuming no adverse interest rate shocks.
Figure 5.9. Euro Area: Fiscal Trends1

(Percent of GDP)
The growth of government debt has been curbed in recent years,
but the tax burden is significantly larger than in the late 1960s.
90
Debt and Fiscal Balance
80
General government debt
(left scale)
70
60
50
5
General government balance
(right scale)
40
30
1977 79
81
83
85
87
89
91
6
93
95
97
99
56
Expenditure and Revenue

General government
expenditure
52
48
44
General government
revenue
40
1977
79
81
83
85
87
89
91
93
95
97
99
36
16
Change in Taxes in the European Union

Between 196569 and 199094
12
8
4
Total taxes
0
Taxes on labor
Taxes on
consumption
Taxes on
capital
Sources: OECD; and European Commission.

1OECD projections.
4Estimates by the European Monetary Institute (EMI) indicate

that temporary measures reduced the euro-area fiscal deficit by almost !/2 of 1 percent of GDP in 1997.
132
The requirements vary somewhat by country. In

most cases, an underlying budgetary position of
around balance would be satisfactory, but surpluses of
12 percent of GDP appear to be warranted for
Finland and Ireland.5 On this basis, five of the euroarea countries (Belgium, Finland, Ireland, Italy, and
Luxembourg) already have a satisfactory primary budgetary position or need at most a small primary structural adjustment. Of the other countries, Austria,
France, Germany, the Netherlands, and Spain require
primary structural adjustment of !/2 of 1 percent to 1
percent of GDP, with an adjustment of 1#/4 percent
needed in the case of Portugal. Countries may in due
course need to go further, depending on how their individual circumstances evolve, including progress
with labor market and spending reforms, and also taking into account the need in some countries to reduce
the high level of government debt.
The improvements warranted in primary structural
balances understate the extent of spending reform required, in view of the need to address the distortions
associated with the large tax wedges built up over the
past three decades and in particular those affecting
low-income workers.6 To make significant headway in
reducing tax burdens while also reducing structural
deficits, countries will need to restrain the real growth
of primary spending well below that of GDP.
Political resistance to both slowing primary spending and broader structural reforms could imply a shortrun trade-off between structural reform and deficit reduction.7 In this light, a gradual move to underlying
fiscal balance in the euro area by 2001 would be reasonable, provided that it is combined with substantial
structural reforms, including spending reforms that
would make way for significant tax reduction. Ultimately, strengthening fiscal positions and structural
reform are complementary in that a decline in structural unemployment, based on a broad reform strategy
(not just reduced taxes) can facilitate improvements in
Figure 5.10. Euro Area: Structural Fiscal Balances

and Output Gaps, 1997 and 19981
(Percent of potential GDP)
In 1998, structural balances in most euro-area countries are
projected to deteriorate, contrary to the requirement of the SGP.
2.5
2.0
Finland
1.5
Ireland
0.5
SGP-mandated evolution
0.0
Belgium
0.5
Germany
1.0
Euro area
Austria
France
1.5
Italy
Netherlands
Spain
2.0
2.5
Portugal
4
Structural balance
1.0
3.0
Output gap
1The large arrow indicates the direction in which countries need to
move in order to satisfy the Stability and Growth Pact (SGP). The
lighter arrows, which show movements in output gaps and structural
balances from 1997 (blue) to 1998 (red), indicate that many countries
will move away from the objective of structural balance in 1998.
5In Finland, a significant structural surplus (about 1!/2 percent of

GDP) is projected for 1998. Such a surplus is warranted in light of
the large cyclical effects on the budget in the past and the relatively
early onset of problems associated with an aging population. In
Ireland, the considerations include the less synchronized business
cycle, a greater vulnerability to asymmetric shocks, and the expected reduction in EU structural funds in the next decade.
6Market pressures for tax harmonization may also intensify,
putting additional pressure on countries to lower relatively high tax
rates. The move to monetary union has reinvigorated EU efforts to
foster greater tax harmonization and coordination, especially with
regard to capital income, but progress remains difficult owing in
large part to the requirement that decisions be unanimous. It should
be noted in this context, however, that the OECD, based on analysis
of Canada and Switzerland, infers that significant differences in tax
rates can exist over time, even within countries (see OECD,
Economic Outlook, June 1998, Chapter IV).
7See Barry Eichengreen and Charles Wyplosz, The Stability
Pact: More Than a Minor Nuisance? in David Begg and others,
EMU: Prospects and Challenges for the Euro (Oxford, U.K.:
Blackwell, 1998).
133
Box 5.1. How Useful Are Taylor Rules as a Guide to ECB Monetary Policies?
pected inflation constant. These ranges of estimates encompass the parameters used in the original Taylor rule,
characterizing the behavior of the U.S. Federal Reserve
Bank.4 There are significant differences, however, between the rules based on Bundesbank behavior and the
original Taylor rule with respect to the neutral real shortterm interest rate, which is the real interest rate compatible with output at potential and inflation at the central
banks target. In the studies of Clarida, Gali, and Gertler,
for instance, this was set at the ex-post average of the real
short-term rate in Germany over the estimation period
varying from 3!/4 to 3#/4 percent, depending on the specific sample period chosenwhile in the original Taylor
rule the neutral rate was assumed to be 2 percent.
On the basis of the rules estimated for the Bundesbank,
the narrowing of the euro-area output gap and the small
increase in inflation that are projected for 1999 would
warrant an increase in short-term interest rates by perhaps
!/3 of 1 percentage point in 1999 from the 1998 average.
Two of these rulesthose produced by Clarida, Gali, and
Gertler (1997) and Peersman and Smets (1998)produce
an interest rate in 1998 that is broadly the same as the actual euro-area average in the summer of 1998, but the
1998 rate implied by Clarida, Gali, and Gertler (1998) is
significantly higher, mainly reflecting its larger estimate
for the neutral rate. This latter estimate of the neutral rate
would, however, seem particularly susceptible to upward
bias, as it is based on the simple average of real interest
rates in a sample period in which disinflation efforts were
particularly prominent.
A number of factors need to be considered in assessing
whether such rules are relevant in the context of EMU.
The ECBs objective function. The constitution of the
ECB, and in particular the primacy it accords to price stability, is similar to that of the Bundesbank. Thus, it would
Taylor rules are one way of characterizing how central

banks adjust short-term interest rates in response to deviations of inflation from target or of output from potential.1 Such rules have received considerable attention, including from market analysts, as a basis for assessing
what policies the European Central Bank (ECB) might
follow. This box considers to what extent a Taylor rule
based on the past behavior of the Bundesbank might be
useful from this perspective.
Although the original Taylor (1993) rule was based on
actual inflation data,2 it can easily be given a forwardlooking perspective, as was done by various authors that
have recently estimated feedback rules for the Bundesbank experience since the mid-1970s.3 The estimates indicate that the Bundesbank has typically pushed up the
nominal short-term interest rates by about 130 to 160
basis points (and thus the real rate by some 30 to 60 basis
points) for every 1 percentage point rise in expected inflation one year ahead, holding the output gap constant,
and that it has reduced the nominal (and real) short rate
by about 25 to 50 basis points for every 1 percentage
point shortfall in output relative to potential, holding ex1The presence of the output gap in such rules can reflect that
minimizing the output gap (or achieving full employment) is a
key objective of the central bank along with low inflation, or alternatively that it provides the central bank with additional information on the inflation outlook as well perhaps as carrying
some weight as a secondary monetary policy objective.
2J.B. Taylor, Discretion Versus Policy Rules in Practice,
Carnegie-Rochester Conference Series on Public Policy, No. 39
(1993), pp. 195214.
3See, for instance, R. Clarida, J. Gali, and M. Gertler,
Monetary Policy Rules in Practice: Some International
Evidence, European Economic Review, Vol. 42 (1998),
pp. 103368; R. Clarida,, J. Gali, and M. Gertler, Has the
Bundesbank Followed a Taylor Rule? A New Test and Some
Implications, IMF Seminar Series 199710A (Washington,
1997); and G. Peersman and F. Smets, The Taylor Rule: A
Useful Monetary Policy Guide for the ECB?, paper presented at
the conference on Monetary Policy of the ESCB: Strategic and
Implementation Issues, Universit Bocconi, July 67, 1998.
4The original Taylor rule assumed that nominal interest rates

are increased by 150 basis points for every one percentage point
increase in expected inflation and are reduced by 50 basis points
for every 1 percentage point shortfall in output relative to
potential.
a governments financial position, while the durability

of improvements in government finances in the face of
continued high unemployment will inevitably be open
to question.
While the improvement needed in primary structural balances over the next few years seems quite
moderate, there are serious risks that countries will not
achieve it, exemplified by the projected weakening of
euro-area structural fiscal positions in 1998 (Figure
5.10; see preceding page). Admittedly, fiscal performance in 1998 should be seen in the context of the
very large adjustments in 199697, and the need in
some countries to replace temporary measures adopted
in 1997 with more permanent ones. However, the outlook for 1999, based on policies now in place, height-
ens concern that the procyclical bias in fiscal policy

remains. Primary structural balances are projected to
deteriorate further, with the improvement in actual fiscal balances reflecting the cyclical recovery and declining interest spending (see Figure 5.3).
The fiscal risks just outlined are all too reminiscent
of the historical proclivity of governments to loosen
their belts during cyclical upswings. Thus, between
1988 and 1990, as the last cyclical peak was reached,
the structural fiscal balance in the euro area deteriorated by over 1 percentage point of GDP. Similar procyclical tendencies in the period ahead would inevitably bring tension between fiscal policy and the
SGP during the next cyclical downturn. In this connection, a key challenge facing governments is to accept
134
question is the extent to which the effects of interest rate

changes on output and inflation that have pertained to
Germany will be similar for the euro area as a whole. It is
clear that there are differences across countries in the
transmission of policy, but the general conclusion has
been that these do not appear to be so large as to create
major problems for the ECB. For example, simulations
with the IMFs MULTIMOD model indicate that after a
year, the impact of a change in monetary policy (modeled
as a change in the monetary target) on output and inflation
is broadly similar for the euro area as a whole and for
Germany. Again, however, past estimates are subject to
the usual caveat that behavior may change in EMU.
The neutral real interest rate. The neutral real interest
rate that prevailed in Germany in the past seems more relevant than the average for the euro area as a whole, given
that interest rates in many of the euro area countries included significant currency risk premia. There are reasons
to believe, however, that historical experience may overestimate the current neutral real interest rate for both
Germany and the euro area as a whole. Relevant considerations include that monetary policies over the past two
decades were engaged in an effort to bring inflation down,
and the significant adjustments in fiscal positions that
have recently taken place across the euro area. Matters are
complicated further by the sharp fall in long-term interest
rates in Europe over the past two years to levels that are
unprecedented in post-war experience. It is unclear to
which extent these declines reflect changes in inflationary
expectations, temporary effects stemming from the flight
to quality in the wake of the Asian crisis, or more permanent changes in the real rate. Taken all together, these
considerations would indicate not only that the equilibrium real interest rate may have fallen but also that there
are very large confidence intervals around even the best
estimate of the equilibrium real interest rate.
In conclusion, a Taylor rule based on parameters estimated for Germany may provide a useful benchmark
against which to monitor the policies of the ECB. However, owing to the various factors outlined above, such calculations need to be interpreted with a great deal of caution.
seem reasonable to assume, as a working hypothesis, that

the ECBs objective function in terms of desired euro
area performance will be broadly similar to that of the
Bundesbank in terms of German economic performance.
It should be noted, however, that the arguments typically
used in Taylor rules do not include the full range of influences on central bank behavior, notably in the present
context external factors and the assessment of risks in the
outlook.
The implications of output gaps for future inflation.
The regime change that EMU brings could induce important behavioral changes, especially in labor market
negotiations, which would affect the interpretation of
what output gaps portend for future inflationary pressures. For example, in countries that in the past have relied on exchange rate changes to correct competitiveness
problems, wage claims may be more moderate for a
given level of demand pressures, as the exchange rate escape hatch will no longer be available. More generally, it
might be argued that monetary union will foster increased
awareness in wage negotiations of competitive positions
relative to other parts of the euro area. On the other hand,
where monetary policy has in the past had an effective
role in moderating wage pressures, the shift to EMU may
weaken the perceived constraints on wage demands.
Thus, it has been argued that wage demands could intensify in Germany, as wage agreements in Germany will
weigh less in the considerations of the ECB than they had
in those of the Bundesbank.5
The transmission of monetary policy. The calibration of
the rise in official interest rates needed to address a specific increase in future inflationary pressures will depend
on the transmission of changes in official rates to interest
rates in the economy more generally and from there to the
behavior of consumers and investors. In judging the applicability of a rule based on Bundesbank behavior, a key
5Rudiger Dornbusch, C.A. Favero, and F. Giavazzi, The

Immediate Challenges for the European Central Bank,
Economic Policy, Vol. 26 (1998), pp. 1564.
that they will need to achieve sizable budget surpluses

as output moves above trend. In the past, it has been
fairly common for output to exceed its trend or potential level by 34 percent at cyclical peaks; at such levels of resource utilization, actual budget surpluses of
around 2 percent of GDP would be needed in most
countries to be consistent with underlying balance.
The weakening of euro-area structural fiscal positions projected for 199899 is for the most part due to
projected declines in revenue relative to GDP. This is
in a sense good news: it would be far worse if the
stickiness of deficits was due to increases in spending.
Tax wedges in Europe are too large and need to be reduced for structural reasons. However, in some cases
the revenue declines reflect reversals of temporary in-
creases in 1997 while in others they are insufficiently

oriented toward attacking the most severe labormarket distortions, especially the high marginal taxes
facing low-income workers. More fundamentally, financing these revenue declines through slower deficit
reductions rather than spending cuts risks weakening
the foundations of the recovery and mortgaging the
areas ability to weather future downturns. In particular, weaker government fiscal positions could result in
tighter monetary policy and force governments to resort to policies that would exacerbate the next cyclical
downturn as they try to keep deficits within 3 percent
of GDP.
Against this background, governments should provide convincing evidence in their budgets for 1999
135
Box 5.2. Orienting Fiscal Policy in the Medium Term in Light of the Stability and Growth Pact
and Longer-Term Fiscal Needs
countries; compensate in some countries for the relatively modest size of the automatic stabilizers (for example, Portugal); provide extra room for maneuver for
countries with economic cycles that are, at least for
now, less synchronized with the monetary area as a
whole, or which are especially vulnerable to asymmetric shocks (for example, Ireland and Finland); and help
deal with particularly difficult downturns.
There may be additional risks not directly related to the
cycle, but that could complicate the fiscal position if
they should materialize at the same time as a cyclical
downturn. Thus, countries with high debt levels (for example, Belgium and Italy) may need to provide a buffer
against interest rate shocks, and euro-area countries that
are large recipients of EU structural funds (Ireland,
Portugal, and to a lesser extent Spain) may wish to provide a contingency against the possible reduction of
these funds as the EU plans for increased membership.
Given the above considerations and the difficulties in
assessing the size of the output gap, and particularly the
tendency to underestimate the degree of overheating
late in the cyclewith a consequent overestimation of
the underlying strength of the fiscal positionsit
seems prudent to allow some additional margin of fiscal maneuver.
This box considers how fiscal policy should be oriented in the medium term in light of the goal established
in the Stability and Growth Pact (SGP) and longer-term
fiscal policy needs.
In the SGP, EU member states commit themselves to
medium-term budgetary positions that are close to balance
or in surplus so as to allow them to deal with normal cyclical fluctuations while keeping the general government
deficit at or below 3 percent of GDP. Based on the largest
negative output gaps experienced by individual countries
over the past 30 years, a more modest fiscal goala deficit
ranging from !/2 of 1 to 1!/2 percentage point of GDP for
most countries and averaging 1 percent of GDP for the
euro area as a wholemight appear to allow sufficient
room for the operation of automatic stabilizers.1 However,
there are a number of additional factors that need to be
considered, which taken together would seem to provide
support for the more ambitious goal embodied in the SGP.
The three recessions of the past 30 years may, for countries individually, provide too few episodes to assess
the range of shocks to which they could be subjected.
Indeed, calculating the underlying variability of output
suggests that the risks for many countries may be larger
than is indicated by the actual scale of past cyclical
downturns, thus warranting a stronger fiscal position
than suggested by the size of past recessions alone.
Some additional room may be needed from time to
time to supplement the operation of automatic stabilizers through discretionary fiscal support for economic
activity. This could substitute for the past role that
monetary policy played as a stabilizing tool in a few
The medium-term fiscal position needs also to be considered in light of the contribution that improvements in
the net-liability position of governments can make to
preparing for the impact of population aging. While there
are many uncertainties in the calculations, and while the
situation varies somewhat across countries, population
aging over the next 30 years could add cumulatively
about 7 percentage points of GDP to government pension
and health spending in the euro area, with a further relatively moderate increase over the following decade unless
there are modifications to existing programs. Moreover,
1While the pattern of output fluctuations may change in

EMU, there is little practical alternative at present to using past
experience in assessing the implications of cyclical fluctuations
for fiscal policy.
and the stability programs to be presented to ECOFIN

by the end of 1998 that they are putting in place fiscal
strategies in line with medium-term needs, emphasizing strict control of spending based on forwardlooking reforms. Progress toward structural balance
needs to resume but the pace of adjustment should also
take into account the pressing case for further tax cuts
as part of a broad strategy of structural reform, with
particular emphasis on the tax burden of low-wage
earners. Should the recovery prove stronger than envisaged, governments must resist the temptation to
relax the reins on spending. Any windfall should be
used to advance deficit reduction and to accelerate tax
reform.
For countries with relatively high resource utilization, however, cyclical conditions would warrant a
more restrictive stance. In some of these economies
(notably, the Netherlands and Portugal), the expan-
sionary fiscal policy projected in 199899 seems

clearly inconsistent with the cyclical position and the
primary structural adjustment that is now needed.
Even for the countries where the primary structural
position is satisfactory, spending restraint can still be
consistent with the medium-term strategy, as the room
created can be used for tax cuts once cyclical conditions permit.
Structural Policies
As indicated earlier, for EMU to be a long-term
success, structural policies will have to effect a sea
change in the performance of European labor markets, which have adapted poorly to changes in the
global economic environment since the 1970s.
Unemployment in the euro area rose from 2!/2 percent
of the labor force then to 12!/2 percent in 1997, com-
136
would improve the primary fiscal balance by 2 percentage points of GDP, even assuming that the productivity
of the new workers is only one-third of already employed workers.2 In addition, boosting participation by
5 percentage points, at a given unemployment rate,
could produce a reduction in primary spending of 2 percentage points of GDP. Although these scenarios are
used here only as an illustration, they provide an indication of the fiscal room that could be created to accommodate the fiscal costs of aging populations.
as the tax burden also needs to be cut, an even greater effort is required to reduce the ratio of spending to GDP.
For the euro area as a whole, achieving and maintaining a deficit of 1 percent of GDP would over a 30-year
period reduce the debt ratio by almost 40 percentage
points allowing a decline in the ratio of interest spending to GDP of over 2 percentage points. Moving to
structural balance at an early stage would reduce the interest bill by an additional 1 percentage point of GDP
over a 30-year time frame. Moreover, compared with a
scenario that maintained a deficit at 1 percent of GDP,
the lower deficit in the balanced-budget scenario would
provide additional scope to absorb spending pressures
as the aging process neared its end by letting the deficit
drift back up at that time.
Directly cutting spending programsincluding but
not limited to those directly affected by the aging
processis a second option. Spending on pensions and
health presently accounts for about 19 percent of GDP
in the euro area. A key element will be to tackle the
higher pension spending that is a result of the rise in
life expectancy and the decline in the average age of retirement. In addition to reducing spending, reforms
(notably of pension and unemployment benefit programs) could also improve the public finances by fostering higher employment.
The employment ratethe ratio of those employed to
the working age populationis relatively low in the
euro area compared with both EU countries outside the
euro area and the non-European advanced economies.
Boosting this ratethrough policies that lower structural unemployment or foster increased participation
would reduce the burden of spending relative to GDP,
for given government spending policies. Based on estimates made by the OECD, reducing the structural unemployment rate by 5 percentage points in the euro area
While there are thus a number of options to address the

longer-term fiscal challenge of aging, the scale of the
problem is likely to require some combination of the
available options. The likely need for a substantial improvement in the net-liability position of governments as
part of the solution would seem to reinforce the arguments for structural fiscal positions of around balance.
For Finland and Ireland, significant surpluses would
seem to be warranted. In Finland, this reflects the large
cyclical effects on the budget in the past, related to its
greater susceptibility to asymmetric shocks, and the relatively early onset of the demographic shock. In Ireland,
the main considerations are the less synchronized business cycle, a greater vulnerability to asymmetric shocks,
and the expected reduction in EU structural funds in the
next decade. Whether there is a need in due course to
strengthen the medium-term budgetary goals in euro-area
countries will depend, inter alia, on the extent to which
countries plan to reform spending programs and their
success in fostering higher employment ratios.
2See OECD, Economic Outlook (Paris, June 1997). The lower
productivity of the marginal workers can be seen partly as a
reflection of policies that bring less-skilled workers back into
the labor force, and partly as a proxy for the effect of employment-oriented policies on the capital-output ratio over time.
pared with no increase in the United States and much

more moderate increases in Canada and Japan. Job
creation has compared even less well, particularly
with the United States. (See Chapter II.) At the same
time, developments in output per head of the working-age population in the euro area have been in line
with those in the United States, reflecting in part the
distortions in the euro area that have favored capital
deepening. Had the incentive system been geared
more toward fostering employment creation, output
growth would have been stronger, with fewer people
denied the full benefits of this prosperity as a result of
unemployment.8
One indication of the size of the problem in the euro

area is the employment rate (employment in percent of
the working-age population), which at about 57 percent in 1997 contrasts with rates in the range of
7076 percent in Denmark, Sweden, Switzerland, the
United Kingdom, and the United States.9 This contrast
is only partly explained by higher unemployment; differences in labor force participation are also a key factor, as discussed in Chapter II. Employment data, especially such data that distinguish part-time from
full-time labor, also indicate that relative employment
performance within the euro area is not adequately
captured by unemployment data; for example, despite
its low unemployment rate and strong employment
8The exclusion of the unemployed from general prosperity is exacerbated in the euro area by the higher incidence of long-term unemployment than in non-European industrial countries.
9Correction for the incidence of part-time employment would narrow the differences, but would not fundamentally alter the picture.
137
growth in recent years, the Dutch economy has mobilized a relatively small share of its employment potential (measured in terms of full-time equivalents), while
the employment rate in Finland is relatively high by
euro-area standards despite a very high unemployment
rate.10 More generally, if one excludes Austria and
Portugal, which are in relatively favorable positions,
and Spain, which is in a particularly unfavorable position, there is no clear, close linkage between employment (in full-time equivalents) and unemployment
rates (Figure 5.11).
The relatively poor employment performance of the
euro area underlines the scope for shifting to a virtuous path that would combine falling unemployment,
increasing labor force participation, and a strengthening of the long-term foundation for the public finances. While there are many factors that lie behind
differences in labor force participationranging from
cultural factors to lack of job opportunitieseven a
moderate increase in euro-area participation rates
could have quite a notable impact on employment, assuming of course that policies fostering job creation
and wage flexibility were in place. As the relatively
low participation in the euro area reflects in large part
low participation by younger and older workers, the
strategy particularly needs to address the labor market
involvement of these groups. Without action, moreover, the cost of labor market rigidities will loom even
larger, as relatively low participation rates among
older workers will lead to a decline in the overall participation rate as the euro-area population ages, and as
the high unemployment among younger workers affects their future employability and productivity.
The need to facilitate realignments of competitive
positions and adjustments to asymmetric shocks within
the euro area also underlines the importance of increasing the flexibility of markets. An example is the
realignment of competitive positions that currently
seems warranted over the medium term within the
euro area. IMF staff calculations suggest that Germany
is at a moderate competitive disadvantage relative to
the euro area on average, while France, the Netherlands, and Spain, in particular, have relatively favorable competitive positions. To achieve the needed adjustments smoothly through inflation differentials,
around the low average inflation rate that the ECB will
target, will require greater price and wage flexibility
than in the past. Without this flexibility, countries that
need to strengthen their competitive positions will see
increased unemployment as weakness of demand
meets relatively rigid real wages. Meanwhile, greater
labor market flexibility would enable countries starting from favorable competitive positions to use them
as a platform to cut structural unemployment or boost
Figure 5.11. Euro Area: Employment

and Unemployment, 1996
(Percent)
Unemployment rates alone are an inadequate guide to labor
market conditions.
70
Austria
60
Finland
Germany
France
55
Belgium
Ireland
Netherlands
Italy
50
Spain
10
15
20
Full-time equivalent employment rate1
65
Portugal
45
25
40
Unemployment rate (percent of civilian labor force)
Source: European Commission.

1Taking into account part-time and overtime in relation to nationally
legislated work weeks.
10Comparisons across countries may also be affected by the direct

use of government jobs as an employment tool and by labor market
subsidy programs.
138
participation rather than allowing them merely to increase the incomes of insiders.
Europes structural problems have complex and
wide-ranging originssocial benefit systems that provide inadequate incentives to work; tax systems that
also distort incentives, placing an especially high burden on labor; excessive labor market regulations; and
product market rigiditieswith the importance of the
different elements varying by country (see Box 5.3).
As a consequence, there are no generally applicable
solutions. Thus, the OECD and the EU in their respective labor market strategies have set out lists of guidelines that national authorities should endeavor to incorporate in policies that should be oriented to
national needs. But while the required mix of policies
varies from country to country, most countries need to
address issues in each of the areas identified above,
taking account of the interactions between different
labor market policies and institutions.
Progress is being made with labor market reform.
But this has not been enough to make a noticeable dent
in structural unemployment in most countries. Thus, a
recent analysis of the implementation of the OECD
Jobs Strategy indicates that although euro-area countries have taken action on a fairly broad front consistent with its recommendations, the action has not yet
been sufficient in most areas.11 The introduction of
new labor market surveillance procedures in the EU
provides an opportunity to increase the momentum of
reform through peer pressure and by strengthening the
hands of reform-minded policymakers. The national
action programs that countries have submitted to the
EU represent an important step in this process but
these generally need to be made more specific. Moreover, there remains a reluctance on the part of national
authorities to reduce unemployment benefits and their
duration or to make minimum wage and employment
protection regulations more flexible. As well as actively promoting reform, an important task of stronger
surveillance must be to ensure that measures such as
reductions in the work week are implemented flexibly
so as to prevent such adverse effects as increases in
labor costs. It will also be critical to maintain the pressure for reform as the recovery proceeds since there is
a danger that the attention paid to labor market problems may diminish as cyclical unemployment declines.
As the process of integration within the euro area
deepens, there is a risk that pressures emerge for
wages and social benefits to converge across countries
in advance of productivity. The experience in a number of countriesmost notably, the convergence of
wages in Germany following unification, but also in
Belgium, Italy, and Spain where national arrangements have contributed to serious regional diver-
gences in unemploymentunderlines the dangers. To

counteract tendencies toward a euro-area focus in
wage agreements, national labor market policies need
to address factors that tend to delink wage behavior
from local labor market conditions, especially policies
and institutions that give power to insiders, such as
rigid employment protection legislation, practices that
extend contracts to nonunion workers, and subsidies
or market support to enterprises and sectors.
Beyond their importance to the performance of national and area-wide labor markets, structural policies
at the national level are also relevant to the euro-area
policy mix. First, more flexible markets can help
economies adapt to shocks, especially asymmetric
ones. This flexibility is likely to become more important in the future to the extent that fiscal policies have
been brought into line with medium-term needs, as the
case for using fiscal policy actively to restrain demand
in cyclically advanced economies will not then be bolstered, as it is now, by the need for medium-term consolidation. Second, reforms that strengthen the euro
areas supply response would tend to postpone the
need for monetary tightening and reduce upward pressure on the real value of the euro as the recovery matures; the related lengthening of the recovery would
improve the chance of reversing some of the past effects of hysteresis on unemployment. While some
types of reform, especially in product markets, may
take a considerable time to produce supply-side benefits, measures that directly increase incentives to work
and to employ can have important benefits within a
few years, if not sooner.12
11OECD, The OECD Jobs Strategy: Progress Report on

Implementation of Country-Specific Recommendations, Economics
Department Working Paper 196 (Paris, 1998).
12The Netherlands since the early 1980s and Denmark in the mid1990s are two cases where labor market reforms produced relatively
early improvements in labor supply conditions.
The Overall Policy Mix

In light of the above analysis, the preferred policy
mix for the euro area would be a moderately paced reduction of structural deficits that would realize at least
balanced structural positions by 2001, combined with
substantially stronger structural reform. Within this
framework, the cyclically advanced economies should
put particular emphasis on fiscal tightening, while the
others should avoid further slippage from the SGPs
medium-term goals by ensuring that deficit reduction
resumes in 1999 budgets. These fiscal policy requirements are underscored by the need to ensure that monetary policy has adequate room for maneuver in light
of the prevailing uncertainties. Policymakers should
pay particular attention to addressing inflexibilities in
their labor and product markets, including through reform of tax and benefit structures. This strategy would
strengthen the recovery by deferring the emergence of
supply constraints and allowing lower interest rates
than would otherwise be possible.
139
Box 5.3. Euro-Area Structural Rigidities

While social benefits systems in the euro area play an
essential role in helping to reduce poverty and alleviating
the costs of economic restructuring, their design does not
adequately take account of the need to foster reemployment of the unemployed. Unemployment benefits, typically provide unemployed workers with a high replacement rate of prior income, long duration of benefits, and
often inadequate tests of a workers availability for
work.1 A relatively high replacement rate can have advantages because it allows unemployed workers some
time to find a good job match without being forced by income considerations to take the first job that becomes
available. However, when generous replacement rates are
combined with long benefit duration and weak tests of
how seriously the unemployed person is searching for
work, the disincentive to seek employment can be significant. Similar disincentives can result from the operation
of early retirement provisions, which in many cases effectively provide an additional option for extended unemployment benefits. There are also concerns, reflected
for example in the employment guidelines adopted by the
Council of the EU, that an insufficient share of spending
on the unemployed is devoted to active labor market
measures and that the active measures that are in place
need often to be made more effective (through better targeting and design of the activities of public employment
services, and of training and job creation programs).
The revenue burden in the euro area has been pushed to
a very high level over the past 30 years, in order to finance
the expansion of transfers to households and the interest
costs associated with the rise in government debt.2 A particularly heavy share of increase has been levied on labor
income, and less skilled labor in particular. This reflects,
inter alia, the rise in the relative importance of social security contributions, including those paid by employers.
OECD data show that, between 1978 and 1995, the increase in the marginal tax rate paid by workers who earn
only two-thirds of the average production wage (APW)
was clearly larger than the increase in marginal tax rates
at the APW in five of seven euro-area countries (Belgium,
Finland, France, Italy, and the Netherlands).3 Moreover, in
many countries, relatively high marginal tax rates combined with a withdrawal of benefits that are related to
earned income (for example, housing benefits) result in particularly sharp disincentives to work at low income levels.
Regulation of labor markets in the euro area, notably
through employment protection legislation (EPL) and
minimum wage regulations, has received considerable
criticism. As regards EPL, while the situation varies
across countries, most euro-area countries have relatively
strict legislation compared with Denmark, the United
Kingdom, and the United States (based on the EPL indices constructed by the OECD). The concern is that
EPL, by increasing the expense of firing or laying off
workers, discourages new hires, though there is some debate about how important such legislation is in explaining cross-country differences in unemployment.4 On
minimum wages, a recent OECD study concluded that
there was not clear evidence of adverse effects on employment as long as minimum wages were not too high
relative to the general wage level, but that adverse effects
were more likely to occur with young workers.5
While the internal market program has contributed importantly to breaking down barriers in European markets,
there are still important rigidities and distortions in product markets. Sheltered producers will tend to produce a
lower volume of output than would be supplied under
competitive conditions, thereby reducing employment.
More generally, inefficient allocation of resources keeps
output and demand below potential. In a recent report, the
European Commission stated that there are significant
barriers to market access in sectors accounting for half of
GDP in the EU.6 In part this reflects areas that have been
brought late into the internal market programnotably
telecommunications and energy. In other areas, the implementation of the internal market program has not been
as successful as had been hoped (for example, in public
procurement). Government programs have also had a
marked distortionary effect on price signals. Notably,
subsidies to agriculture and industry remain significant,
with the Commission observing in its latest report on
state aid that the previous trend toward reduction in the
volume of state aid to industry had not continued in
199294.7 Further liberalization of retail trade and distribution is also needed in many countries.
1The OECD index of benefit generosity, based on the first

two of these three characteristics, indicates that, among euroarea countries, benefits are particularly generous in Belgium,
Finland, and the Netherlands. See Table 2 of OECD, Implementing the OECD Jobs Strategy: Lessons from Member Countries
Experience (Paris, 1997), for 1995 data.
2The general government revenue in the euro area in 1997
was equivalent to 47!/2 percent of GDP.
3For these countries, the increases in marginal tax rates for
low wage earners ranged from 9 percentage points in the
Netherlands to 36 percentage points in Belgium. These calculations do not include social security levies on employers. In
Spain, there was also a greater rise in the marginal rate for low
wage earners. However, both the differential increase over that
at the APW and the scale of the increase for low wage earners
(1 percentage point and 3 percentage points respectively) were
small in comparison with the five countries mentioned in the
text. In the case of Germany, the marginal rate fell significantly
for low wage earners while they rose for those at the APW. Data
were not presented for Austria, Ireland, Luxembourg and
Portugal. See OECD, Economic Outlook (Paris, June 1998).
4See Stephen Nickell, Unemployment and Labor Market
Rigidities: Europe Versus North America, Journal of Economic
Perspectives, Vol. 11 (Summer 1997), pp. 5574.
5 OECD, Employment Outlook (Paris, 1998).
6Commission of the European Communities, Growth and
Employment in the Stability-Oriented Framework of EMU,
COM 98/103 (Brussels, 1998).
7Commission of the European Communities, Fifth Survey of
State Aid in the European Union in the Manufacturing and
Certain Other Sectors, COM 97/170 (Brussels, 1997). State
aids to the industrial sector were estimated at about 4 percent of
value added in 199294 in the EU as a whole.
140
Policy requirements viewed from the perspective of

individual member countries seem generally compatible with the policy mix needed for the euro area. An
important issue now is whether the more cyclically advanced countries recognize the urgency of taking measures to restrain demand. In this context, there is a risk
that in EMU inflation may seem less of a short-term
policy concern at the national level than it has been
when countries have had their own separate currencies. But inflation at the national level will carry adverse implications for competitiveness, and hence for
employment, especially if adverse wage dynamics
emerge. In this context, the stance of fiscal policy in
some of these countries is not reassuring. Moreover, in
a few cases, notably Ireland and the Netherlands, the
pickup in asset prices and its implications for private
sector balance sheets and the quality of banks loan
portfolios need to be watched closely.
Unfortunately, there are risks that sufficient progress will not be made in implementing the desirable
policy strategy for the euro area. In part, these risks reflect the frequent tendency for policymakers to ignore
the spillover effects on other economies of their actions, or lack of action. They may also reflect, in the
case of some of the more cyclically advanced economies, the mistaken hope that the monetary policy
stance of the ECB may compensate in part for the inadequacies of national fiscal policymaking. But, more
fundamentally, they reflect the inherent difficulty that
policymakers face in rallying domestic support for the
adoption of policies that may seem to the public at
large as unnecessarily stringent in a period of growing
prosperity. The slippage in fiscal policy that is evident

in 1998, and the fears that this slippage could intensify
as the recovery gathers strength, are obvious worries.
Even more worrisome is the risk that the actions
needed to address labor market problems will not be
forthcoming as cyclical unemployment recedes.

EMU and the economic performance of the euro
area will have their largest external effects on neighboring economies in western Europe and on developing and transition countries with important trade and
financial links to Europe, including countries that link
their currencies to the euro (Table 5.1). Among emerging market economies, those likely to be most affected
are the transition countries of central and eastern
Europe and the Baltics, the developing countries of the
Mediterranean basin, and countries in Africa. Other
countries, in Asia and the Western Hemisphere, as well
as advanced economies outside Europe, will be affected as well, but to a lesser extent.
The Current Global Environment
and the Transition to EMU
The global environment has been favorable in a
number of respects for the transition to EMU and the
achievement of its economic objectives. As discussed
earlier, strong demand for euro-area exports from industrial countries at more advanced stages of the busi-
Table 5.1. Euro Area and Selected Countries: Trade Linkages in 1996
(Exports to and imports from trading partners as percent of total trade and output)
Partner Countries
________________________________________________________________
1
Trade
Output2
____________________________ __________________________________
Developing
and
transition Total
Euro
area
Other
advanced
Developing
and
transition
Euro
area
Other
advanced
Euro area
51.0
30.8
18.2
22.9
11.7
7.1
4.2
Denmark
Greece
Sweden
United Kingdom
47.1
57.5
44.5
49.4
40.2
21.4
43.1
34.9
12.7
21.1
12.3
15.7
23.6
14.6
29.1
22.3
11.1
8.4
13.0
11.0
9.5
3.1
12.6
7.8
3.0
3.1
3.6
3.5
Japan
United States
11.3
13.8
54.7
53.6
34.1
32.6
8.2
9.4
0.9
1.3
4.5
5.0
2.8
3.1
Asia
Africa
CFA franc zone
12.5
39.8
48.1
67.7
34.4
23.7
19.8
25.8
28.2
19.7
19.5
25.5
2.5
7.7
12.3
13.3
6.7
6.1
3.9
5.0
7.2

26.9
51.0
42.8
16.1
30.2
32.8
25.6
32.9
6.9
16.8
11.0
5.3
7.8
10.8
Western Hemisphere
13.3
61.4
25.3
14.8
2.0
9.1
3.7
Source: IMF, Direction of Trade Statistics and World Economic Outlook.

1Imports plus exports of goods from and to partner countries as a percent of total imports plus exports.
2The average of imports plus exports of goods from and to the partner countries as a percent of GDP.
141
ness cycle and the depreciation of the currencies of

euro-area countries over the past three years fostered a
strengthening of growth in the euro area and helped to
offset the effects of the Asian crisis. Demand growth
from these areas is likely to slow, however, making
self-sustaining demand growth in Europe more important. The recession in Asia, however unwelcome, has
lowered actual and prospective inflation further and
been a factor in the reallocation of global portfolios toward mature markets that has helped to reduce longterm interest rates in the euro area.
The global economic environment also provides
challenges for EMU, especially since the Asian and
Russian crises, and financial market volatility in
emerging market economies elsewhere could have adverse spillover effects on the euro area and make monetary policy decisions more difficult. First, should
these crises deepen or spread, external demand could
be weaker than projected, dampening the current cyclical upswing in Europe. Confidence effects in this case
could have adverse implications for domestic demand.
Second, financial market volatility could add to uncertainty in the assessment of economic indicators that
will be monitored by the ECBfor example, through
shifts in the demand for money and other assetsand
thus complicate assessments of the outlook for growth
and inflation. Third, the weakness of the Japanese yen
since late 1997 and the volatility of the yen-dollar exchange rate in recent months illustrate how market exchange rates among major currencies can move
quickly in ways that are inconsistent with mediumterm fundamentals. Such changes could influence financial market conditions and monetary policy deliberations in the euro area in the period ahead. Finally,
the crises in Asia and Russia, and the possibility of a
broader crisis in emerging markets could influence the
transmission of policy to the real economy if euro-area
commercial banks have to adjust their balance sheets to
make substantial provisions for nonperforming loans.
It is, of course, impossible to predict the precise

properties of the behavior of the exchange value of the
euro (Box 5.4).13 With regard to broad trends, however, it seems likely that the euro will tend to appreciate against the U.S. dollar and pound sterling over the
next few years, but depreciate against the Japanese
yen when Japans economic recovery begins.
The cyclical position of the euro-area economy relative to other major economies is likely to be a significant near-term influence on the euros value vis--vis
other currencies. As discussed in the May 1998 World
Economic Outlook, the currencies of countries in weak
cyclical positions tend to depreciate relative to those

of countries that are cyclically strong. Because the
United Kingdom and the United States have reached
relatively advanced stages of their cyclical upswings,
with resources more fully utilized than in the euro
area, the euros initial value vis--vis the pound sterling and U.S. dollar can reasonably be considered to
be somewhat below its medium-term equilibrium. As
the economic recovery in the euro area proceeds and
growth in the U.K. and U.S. economies slows, some
appreciation of the euro against these currencies is
likely. Japan, on the other hand, remains in a weak
cyclical position, having slipped into recession in late
1997, a development reflected in the recent weakness
of the yen. The resumption of moderate growth in
Japan, projected to begin late this year, may be expected to lead to a recovery of the yen toward values
more consistent with medium-term fundamentals.
Market expectations, as reflected in interest differentials, point to a yen appreciation over this period, albeit modest relative to the decline in the yen since the
end of 1996.
Measures of fundamental equilibrium exchange
rates are consistent with the assessment that the euro is
likely to debut below its medium-term equilibrium
value. The IMF uses a number of criteria to evaluate
exchange rates, but the central framework is the
macroeconomic balance approach, which takes into
consideration medium-term prospects for national
saving and investment and their implications for the
medium-term equilibrium current account balance.14
For the euro area, demographic factorsin particular,
a relatively high percentage of the population approaching retirement agecan be expected to raise
national saving relative to investment over the medium
term, warranting an equilibrium current account surplus. However, the external surplus recorded by the
euro-area countries in 1997, which was strongly influenced by cyclical divergences between the euro area
and its trading partners, appears to have been larger
than what would constitute a reasonable medium-term
equilibrium, suggesting room for the euro to appreciate in effective terms toward levels consistent with a
smaller surplus (Box 5.5, on page 146).
Another important determinant of the demand for
euro-denominated assets will be the degree to which
investors perceive the euro to be a stable store of value,
which will depend on the credibility of the ECB. It is
reasonable to assume that the ECB will have a high degree of credibility in the eyes of investors at its inception because it has been given independence to pursue
price stability as its primary objective, and because its
governing body mainly comprises central bankers who
have demonstrated their resolve to achieve and main-
13See Paul R. Masson, Thomas H. Krueger, and Bart G.

Turtelboom, eds., EMU and the International Monetary System
(Washington: IMF, 1997).
14See Peter Isard and Hamid Faruqee, eds., Exchange Rate

Assessment: Extensions and Applications of the Macroeconomic
Balance Approach, Occasional Paper 167 (Washington: IMF, 1998).
The Euro
142
tain price stability and who are mostly regarded by financial markets as inflation hawks. Forward market
exchange rates already indicate high credibility: forward rates vis--vis the U.S. dollar imply expectations
of a strengthening European currency unit (ECU) and
deutsche mark, which may be seen as proxies for the
euro before euro trading begins (Figure 5.12).
Other factors also will affect the euros exchange
value. For example, EMU may well lead the national
central banks of the euro area to reduce their holdings
of international reserves because trade within the euro
area will no longer need to be backed by international
reserves.15 The range of estimates of the resulting surplus of international reserves is wide, from $50 billion
to $230 billion, reflecting uncertainties in the underlying calculations.16 If the European System of Central
Banks (ESCB) reduces its reserves, given that they are
held mostly in U.S. dollars, there would tend to be
downward pressure on the euro/dollar exchange rate;
but the impact is likely to be minor, since the estimates
of excess foreign reserves are very small relative to the
stocks of U.S. international assets and liabilities,
which are of the order of $3!/2 trillion and $4 trillion,
respectively. Central banks outside the euro area are
also likely to reduce their dollar positions (which
amount to approximately $775 billion), choosing to
hold more euros than pre-EMU euro-area currencies,
particularly if the risk-return characteristics of eurodenominated assets become more competitive with the
dollar as euro-area financial markets deepen. This effect also is likely to be small, however, because the adjustment is likely to be gradual and small relative to
asset stocks and private sector portfolio shifts.
Shifts in private sector supply and demand for eurodenominated assets will almost certainly swamp the
effects of the rebalancing of official reserves. In the
short run, adjustments in existing portfolios could result in upward pressure on the euro, as uncertainty
about monetary union and ECB policy is further reduced. Over time, however, the reduction in transactions costs likely to be associated with the integration
of euro-area markets has the potential to increase both
supply and demand for euro-denominated instruments,
making the impact on euro exchange rates difficult to
predict, but also tending to make the euro a major international currency.17
Figure 5.12. ECU and Deutsche Mark Exchange

Rates Vis--vis the U.S. Dollar: Spot and Forward,
August 31, 1998
(Currency units per U.S. dollar)
Financial markets expect the euro to appreciate over the next
five years.
1.00
ECU
0.95
0.90
August 31, 1998
0.85
Spot
6
Month
3
Years
0.80
2.00
Deutsche Mark
1.90
1.80
1.70
August 31, 1998
Spot
6
Month
3
Years
Source: Bloomberg Financial Markets, LP.
15Significant changes in reserves at the national central banks will

be subject to ECB concurrence because of the potential consequences for euro-area monetary policy.
16See Paul R. Masson and Bart G. Turtelboom, Characteristics of
the Euro, the Demand for Reserves, and Policy Coordination Under
EMU, in Masson, Krueger, and Turtelboom, eds., EMU and the
International Monetary System, pp. 194224.
17Robert N. McCauley and William R. White, The Euro and
European Financial Markets, in Masson, Krueger, and Turtelboom,
eds., EMU and the International Monetary System, pp. 32488,
make the point that the supply of euro-denominated bonds could rise
relative to the current supply of bonds in the member currencies. See
also the introduction to the same volume for a review of these issues.
143
1.60
Box 5.4. Determining Internal and External Conversion Rates for the Euro1
will be converted to euros on January 1, 1999 at the announced parities.2
Setting the conversion rates among the participating
currencies of course does not establish the external exchange rate of the euro, and by extension, the final locking conversion rates of participating currencies against
the euro itself. These will depend on market exchange
rates of the participating currencies, plus the exchange
values of the three currencies in the ECU basket that will
not be part of the euro area at the outset. This last constraint reflects the requirement, based on the Maastricht
Treaty, that one euro must equal one ECU at the time that
the euro comes into being. This requirement would be
mathematically simple if all currencies included in the
ECU basket were in the monetary union. However, because the Danish krone, the Greek drachma, and the
British pound will not be replaced by the euro but are in
the ECU basket, special procedures are needed.
The three-step process to determine the irrevocable
conversion rates is illustrated in the table. In step 1, participating central banks will observe market exchange
rates for their respective currencies against the U.S. dollar at a specified time on December 31. Forward exchange rates for the end of 1998 are used as proxies in the
example shown in the table (first column). In step 2, dollar exchange rates, including for the three currencies that
will not participate in monetary union, will be used to
calculate the ECU basket in terms of dollars ($1.13/ECU,
bottom of first column); approximate weights are shown
in the second column of the table. In step 3, the dollar exchange rates for the participating currencies will be multiplied by the dollar-ECU rate (calculated in step 2) to
give euro area member currency exchange rates in terms
of ECU (example for Austria: S 12.20/$ $1.13/ECU =
S 13.8/ECU3). These will become the irrevocable euro
conversion rates on January 1, 1999, and by construction,
will satisfy the requirement that one euro equals one ECU
when trading begins.4 The euro conversion rates are consistent with market rates prevailing on the last day before
the single currency begins and therefore the process will
not create incentives for speculation.
The last column of the table shows illustrative euro exchange rates against selected currencies outside of the
When the euro is created on January 1, 1999, its conversion rates against other currenciesinternal and externalwill need to be established. Internal conversion
rates are the rates at which participating currencies will
be converted into euros, while external exchange rates
are the exchange rates against currencies outside of the
euro area. A key distinction is that the internal rates will
be irrevocably fixed while the external value of the euro
will be market determined. Both, however, will depend
on market rates (on December 31, for internal rates) and
therefore they cannot be calculated in advance. To avoid
market surprise, ministers and central bank governors of
the member states that will adopt the euro, together with
the European Commission and the EMI, have announced
the procedures that will be followed to establish these
rates.
As an initial step, it was announced in early May that
the eleven currencies participating in monetary union
will be converted on December 31 among each other at
the current central bilateral rates of the ERM. They will
be market determined until then. By preannouncing the
rates at which these currencies will be fixed against each
other, market expectations have been anchored and uncertainties about the final locking rates are greatly reduced. This announcement was anticipated by market
participants, as reflected by a convergence of forward
markets toward these rates.
In order to ensure that market exchange rates on
December 31 are equal to the preannounced cross exchange rates, the central banks of the participating countries agreed to use appropriate market techniques to the
extent necessary. With the progress made in nominal convergence among these countries, including the convergence of forward exchange rates to the announced parities noted above, the need for official intervention
appears unlikely unless countries in the area are hit by a
large asymmetric shock or similar development before
the end of the year. The threat of intervention would be
credible, however, because it would have no lasting impact on central bank balance sheets or monetary policy
since all participating central bank assets and liabilities
1This box is based on The Joint Communiqu on the Determination of the Irrevocable Conversion Rates for the Euro issued by the ministers of economic affairs and finance of the
countries adopting the euro as their single currency, the governors of the central banks of these countries, the Commission,
and the EMI on May 3, 1998.
2This neutrality applies to nonsterilized intervention where

one euro currency is exchanged for another.
3Actual conversion rates will be calculated to six digits.
4The official ECU will be discontinued on January 1, 1999.
The variability of the new currencys external value

is also not easy to predict. On the one hand, the weight
placed by the ECB on the euros external value in formulating its monetary policy may be less than the
weight placed by its predecessor central banks on the
exchange rates of their respective currencies, possibly
resulting in greater variability of the exchange rate, if
variation in the euros exchange rate against the U.S.
dollar has a diminishing impact on domestic inflation.

This could be the case if the invoicing of international
trade, such as in commodities, shifts from dollars to
euros. On the other hand, in the near term at least, the
euros exchange rate may take on added importance as
an indicator for monetary policy decisions owing to the
potential instability in money demand and in the relationships between money growth and future inflation.
144
Euro Conversion Rates and Initial Market Exchange Rates: An Illustrative Example
U.S. Dollar
Forward Rate for
End-19981
Euro-area countries
Austria
Belgium
Finland
France
Germany
Ireland4
Italy
Luxembourg
Netherlands
Portugal
Spain
12.20
36.06
5.28
5.83
1.73
1.43
1,722.3
36.06
1.96
179.36
148.25
Other EU countries
Denmark
Greece
Sweden
United Kingdom4
6.66
311.21
7.98
1.67
Memorandum
Dollars per ECU
Approximate
Weight in ECU
Basket2
8.12
20.15
31.68
1.08
7.77
0.32
9.89
0.69
4.10
2.63
0.42
13.16
Illustrative Euro
Conversion Rates
(per euro)3
Illustrative Euro
Exchange Rates
on January 4, 1999
13.8
40.8
6.0
6.6
2.0
1.6
1,950.2
40.8
2.2
203.1
167.9
7.50
352.40
9.00
1.47
1.13
1Four-month
forward rates as of August 31, 1998.

currencies of Austria, Finland, and Sweden are not in the ECU basket.
3Final conversion rates wil be announced as six-digit numbers.
4Expressed in dollars or ECUs per local currency.
2The
dollar. However, this is simply a question of unit of account, or numeraire, and will have no economic impact.
The situation comes about because these three currencies
help determine the dollar value of the ECU, which will be
used to set the numeric value of the euro at the start of
Stage 3. For example, if sterling (which has a 13 percent
weight in the ECU basket) were to end the year 10 percent
stronger against the dollar than predicted by the forward
rate shown in the table, the ECU would be 1.3 percent
more appreciated than shown, thus causing the euro exchange rate vis--vis the dollar to be stronger by the same
magnitude. The more appreciated ECU-dollar rate will be
exactly offset by lower conversion rates of all participating currencies against the euro, leaving the external values
of the participating currencies unchanged. Underlying relative prices, for example the implied deutsche mark-dollar exchange rate (if it were to exist), would be unaffected
as would external prices of euro exports and import prices
of goods coming from outside the euro area.
euro area when trading in euros begins (example:

Dkr 7.5 = 1 euro). As with the internal conversion rates,
these are derived by multiplying each currencys dollar
value on December 31 by the ECU-dollar exchange rate,
again because the euro is set up to equal one ECU at the
euros debut. Because these rates will be based on market
rates on December 31, they will establish the euros
likely opening levels against currencies outside of the
area when euro trading begins, assuming that there are no
shocks or relevant news between the time markets close
on December 31 and the time markets open on January 4.
Of course, when the new currency market starts operating, the value of the euro against other currencies will be
determined by market conditions.
An interesting implication of the announced procedures
is that the values of the drachma, krone, and sterling
against the U.S. dollar can affect the irrevocable conversion rates of the participating currencies against the euro
and the initial external euro exchange rate against the U.S.
Policy Challenges for Advanced Economies

Outside the Euro Area
has indicated its intention to link the drachma to the

euro in the ERM-2 arrangement from the outset of
Stage 3.18 Its objective of joining the euro area in 2001
will require continued tight fiscal and monetary poli-
Developments in the euro area will have important

implications for the EU members that will not participate in the first round of monetary union. Greece has
continued to make significant progress toward macroeconomic convergence with other EU countries and
18ERM-2 will replace the ERM. Currencies will float within a

15 percent band against the euro; there is a possibility for tighter
bands to be arranged on a bilateral basis.
145
Box 5.5. The Euro Area and Effective Exchange Rates

Effective exchange rate indices are an essential tool for
multilateral exchange rate analysis in the World Economic Outlook. With Stage 3 of monetary union and the creation of the euro, the World Economic Outlook will introduce effective exchange rate measures for the euro area.
Exchange Rate Indices Vis--vis

the U.S. Dollar
The Synthetic Euro
France
120
Germany
ECU
Because the euro will not exist as a currency until

January 1, 1999, a proxy measure of the euros exchange
value against external currencies will be useful for historical analysis. Prior to the announcement of the countries qualifying for monetary union, the ECU was used as
an indicator of what the euros value would have been,
had it existed. Now that the participating currencies are
known, it is possible to create a synthetic euro based on
the 11 currencies that it will replace, using GDP weights
(as in the ECU) to aggregate the separate currency values
against the U.S. dollar (see first figure).1 A conceptual
concern, however, is that the properties of the synthetic
euro (and estimated economic responses to its movements in the euro area and in trading partner countries)
may not be representative of the new currency, since the
synthetic measure is a weighted average of currencies
that in the past moved relative to each other. The impact
of this change in structure cannot be assessed empirically
because the euro and its constituent currencies will not
overlap as market-determined rates.
110
100
90
Synthetic euro
80
Italy
70
1990
92
94
96
60
Aug.
98
Source: IMF, Competitiveness Indicators System.
Effective Exchange Rates
for this system have been calculated for the euro

area and preliminary results are shown in the table.
Recalculation of the CPI weighting system used for all
countries is more complicated owing to the higher number of countries involved and the use of more disaggregated data.
Movements in the nominal effective rate for the euro
area, calculated using 11 partner countries and the synthetic euro, generally follow those of member countries,
except during periods of relative exchange rate instability within Europe, for example, during the ERM crisis in
1992 (see second figure). More recently, the synthetic
The IMF maintains two systems of real effective exchange rate indices: one covers 21 industrial countries
and is based on unit labor costs (ULC); and the second
covers almost all IMF member countries and is based on
consumer prices (CPI).2 Given the large swings in some
emerging market currencies in Asia over the past year,
there is some concern that the system only covering industrial countries may understate current movements in
effective exchange rates.
The ULC system of industrial country weights is
based on manufactured goods trade data and takes into
account competition between imports and locally
produced goods, competition between own exports and
foreign goods, and competition between own exports
and foreign-produced exports in third countries. Weights
Effective Exchange Rate Weights

for the Euro Area
(In percent)
1The choice of weights is arbitrary and GDP weights are used

because they underlie the ECU. Trade weights do not affect the
results significantly. To set the external level, the euro/dollar exchange rate is assumed to equal the ECU/dollar forward rate at
the end of 1998.
2See Alessandro Zanello and Dominique Desruelle, A Primer
on the IMFs Information Notice System, Working Paper 97/71
(Washington: IMF, May 1997). Both sets of weights can also be
employed to calculate nominal effective exchange rate indices.
See also Anthony G. Turner and Stephen S. Golub, Multilateral
Unit-Labor-Cost-Based Competitiveness Indicators for Advanced,
Developing, and Transition Countries, in Staff Studies for the
World Economic Outlook (Washington: IMF, December 1997),
pp. 4760.
Partner Countries
Euro Area
Australia
Canada
Denmark
Greece
Japan
New Zealand
Norway
Sweden
Switzerland
United Kingdom
United States
0.4
2.0
3.3
1.3
14.5
0.1
2.0
7.8
12.7
30.4
25.5
Source: IMF staff calculations.
146
The Euro Area and Selected Countries: Nominal and Real Effective Exchange Rates
Nominal effective exchange rate1
130
120
Real effective exchange rate 2
130
120
Germany
110
110
100
100
90
90
80
80
70
1980
82
84
86
88
90
92
94
96
Aug.
98
1980
82
84
86
88
90
92
94
96
120
France
120
110
70
Aug.
98
110
100
100
90
90
80
1980
82
84
86
88
90
92
94
96
1980
Aug.
98
82
84
86
88
90
92
94
96
80
Aug.
98
110
140
130
120
110
100
100
90
90
80
80
70
70
140
130
120
60
130
120
110
Italy
1980
82
84
86
88
90
92
94
96
1980
Aug.
98
82
84
86
88
90
92
94
96
Aug.
98
130
120
Euro Area
110
100
100
90
90
Average
January 1980August 1998
Average
January 1980August 1998
80
70
60
1980
82
84
86
88
90
92
94
96
Aug.
98
1980
1Estimated
82
84
86
88
90
92
94
96
80
Aug.
98
70
by the IMFs Competitiveness Indicators System, using 198991 trade weights.

in terms of relative normalized unit labor costs in manufacturing, as estimated by the IMFs Competitiveness Indicators
System, using 198991 trade weights.
2 Defined
147
cies in the period ahead to ensure fulfilment of the

Maastricht criteria and broad exchange rate stability
vis--vis the euro.
In 1997, Denmark, Sweden, and the United Kingdom all met the Maastricht criteria for inflation and
interest rate convergence and none had excessive
deficits. However, Denmark and the United Kingdom
had opted out of monetary union (and therefore were
not formally assessed), while Sweden indicated that
it did not intend to participate initially. The decision
on future participation is likely to depend, in each
country, on approval by public referendum; public
opinion polls have suggested that referenda would
have been unlikely in recent months to approve
membership.
In the United Kingdom, the government has set out
five economic tests to be passed before moving ahead
with membership. These benchmarks, which comprise
macroeconomic and structural convergence indicators,
are intended to ensure that entry into monetary union
is consistent with high and stable growth and employment.19 The United Kingdom is now operating close to
full capacity and official interest rates, at 7!/2 percent
since early June, are significantly above the short-term
interest rates expected to prevail in the euro area at the
start of EMU. This cyclical divergence plus structural
differences between the U.K. economy and the initial
euro areafor example, external trade patterns and financial market practices that affect the transmission of
monetary policyled the authorities to judge in October 1997 that the United Kingdom had not yet demonstrated the sustainable and durable convergence needed
for monetary union.20
An important near-term challenge faced by all three
of these countries if they are to participate in the euro
area is how to adjust their existing monetary policy
frameworks and stances to ones compatible with the
single currency. For Denmark, adopting the euro and
Box 5.5 (concluded)

euro effective rate index has moved away from the effective rates of individual member countries, but this
time reflecting changes in dollar exchange rates and
the fact that the euro index gives greater weight to the
U.S. dollar. For example, the weight for the U.S. dollar is two and one-half times larger in the euro index
compared with the weight of the dollar in the
deutsche mark index. This is because intra-European
trade is eliminated in the new index, giving non-euro
currencies a greater weight than at the country level.
The real effective exchange rate index for the euro
area (based on unit labor costs) moves with the nominal index reflecting relatively small differences in unit
labor cost changes across countries (see second figure). It is currently below its long-run average, perhaps reflecting the relatively weak cyclical position
of the euro area. Differences between the euro area
and country indices suggest differences in competitiveness within the euro area with some countries,
Germany for example, losing competitiveness relative
to the euro area average while France and Italy have
gained.
Implications for the World Economic Outlook
Starting with the World Economic Outlook prepared in the spring of 1999, nominal and real effective exchange rate indices for the euro area will be reported regularly; publication of these in the IMFs
International Financial Statistics will begin in 1999,
in conjunction with other data for the euro area. Over
the historical period through 1998, euro effective exchange rate indices will be based on a synthetic euro,
which will be calculated along the lines described
above, and the market-determined euro exchange rate
thereafter. Final estimates of the necessary weights
should be similar to those in the table, but could incorporate data revisions and refinements to the
weight calculations.
Historical effective indices for industrial countries
in and outside of the euro area will be unchanged
through 1998. From January 1999, current procedures
for calculating effective exchange rates will continue
to be used and the indices will be based on weights
now in place. In these future calculations, the euro
will be replaced by the appropriate European currencies, after converting it to national currencies using
the final locking rates that will be established on
December 31. While currency variation within the
euro area will cease, effective exchange rates for
countries in the euro area will remain useful and provide information on competitiveness outside of the
euro area and among countries within the euro area,
the latter reflecting differences in relative costs and
prices only. A decision on how to calculate the system
of effective exchange rate indices covering almost all
countries (CPI system) has not been made. The results
of alternatives explored for the industrial country
ULC system suggest that a full recalculation effort
may not be necessary.
19The five tests ask (1) whether business cycles and economic
structures are compatible between the United Kingdom and the
euro area; (2) whether markets are sufficiently flexible to deal with
shocks; (3) whether EMU will strengthen incentives for investment
in the United Kingdom; (4) what impact entry into EMU will have
on the U.K. financial sector; and (5) whether EMU will promote
growth and stability in the United Kingdom. See UK Membership
of the Single Currency: An Assessment of The Five Economic
Tests (H.M. Treasury, 1998; available via the Internet: http://
www.hm-treasury.gov.uk/pub/html/docs/emumem/main.html).
20Because about one-half of U.K. trade is with North America
compared with about one-fourth for each of the three largest euroarea countries, changes in dollar exchange rates are likely to have
stronger effects on the United Kingdom than in the euro area. With
regard to the effects of monetary policy, the personal sector is often
considered to be more sensitive to short-term interest rates than in
other European countries because variable rate mortgages are more
prevalent, and because corporate indebtedness also differs relative
to other European countriesfor example, large U.K. corporations
rely more on equity finance. Empirical evidence on differences in
the effects of monetary policy is, however, mixed: see the October
1997 World Economic Outlook, pages 5556.
148
these safe-haven pressures on the Swiss franc have

subsided as confidence in EMU has grown. It is unclear to what extent the larger euro-area financial
market could affect banking and other financial services industries in Switzerland.
EMU and economic developments in the euro area
more generally will have smaller direct effects on the
non-European advanced economies. For Canada, the
United States, and the advanced economies of Asia,
trade with the euro area is a small share of each countrys total trade or GDP, so that the direct effects of developments within the euro area on these economies is
likely to be limited. (See Table 5.1.) Indirect influences, however, could be more important, especially
for the United States. In addition to the implications
for the dollars exchange value discussed above, a
redirection of demand for international reserves from
dollars to euros will act through various channels to
reduce the U.S. current account deficit as a necessary
counterpart to the negative impact on the U.S. capital
account. In addition, a shift in official and private demand from dollar-denominated assets to euros would
redistribute some international seigniorage revenue
from the Federal Reserve to the ECB, while financing
costs for the U.S. government and private sector could
rise marginally if greater demand for euro assets reduces investors willingness to absorb dollar debt.23
EMU and European integration can also be expected
to have positive effects on the United States and other
countries, especially as the single currency and the integrated market will facilitate financial and business
transactions.
shifting monetary policy decisions to the ECB is

likely to be a small step because the krone has for
some time been linked to the deutsche mark within
the ERM and will be tied to the euro through participation in ERM-2, under a narrow band arrangement.
As under the present ERM, Denmarks relative cyclical position, which currently reflects a significantly
higher level of resource utilization than in the euro
area, will be a factor in determining the success of its
peg to the euro in ERM-2, as will its willingness to
continue to use fiscal policy actively as needed to prevent overheating. Sweden and the United Kingdom
have both anchored monetary policy with inflation
targets since shortly after the ERM crisis of 1992;
their currencies have floated and not participated in
the ERM since then, but it is unclear to what extent
this would be an obstacle to participation in the monetary union in the future.21 The currencies of both
countries have moved significantly in exchange
markets over the past economic cycle and a decision
to enter the monetary union will need to consider the
appropriate entry rates of the krona and the pound.
For example, had the United Kingdom entered monetary union at market exchange rates prevailing in the
first half of 1998, the deutsche marksterling conversion rate might have been set above the rate at which
sterling entered the ERM in September 1990, a rate
that was also influenced by relatively tight monetary
policies in the United Kingdom and that proved
unsustainable.
Norway and Switzerland, which are not members
of the EU and therefore not eligible for EMU, will be
significantly affected by the new monetary union
owing to their geographic proximity and strong trade
and financial links with the euro area. Monetary policy in Norway has sought to stabilize the krone
against a basket of European currencies, while leaving some limited room for short-term variations in
exchange and interest rates. The authorities have indicated that they will maintain a similar strategy in
Stage 3. The desire for some flexibility reflects the
need to accommodate the influence of Norways significant oil wealth as the krone tends to be sensitive to
changes in world oil prices and new North Sea oil discoveries.22 The Swiss franc was subject to unwelcome upward pressure against the deutsche mark and
other European currencies at times during 1996 when
there was market uncertainty about EMU prospects;
Implications for Developing

and Transition Countries
More robust activity and higher import demand in
the euro area stemming from the strengthening cyclical recovery and the beneficial effects of ongoing market integration and structural reforms may be expected
to generate increased demand for exports from developing and transition countries. Financial linkages
reflecting, for example, exchange rate pegs to the
euro, financial market developments, and capital flows
including foreign direct investmentwill also carry
implications for developing and transition countries
and their policies.
In 1996, trade with the euro area constituted 4050
percent of total trade in goods for Africa as a whole,
and stood at the higher end of this range in North
Africa and the countries of the CFA franc zone, as well
as in a number of countries in eastern Europe and the
21Participation in the ERM for two years is one of the Maastricht

criteria. However, allowances were made for Finland and Italy,
which rejoined the ERM in November 1996, less than two years before positive recommendations for monetary union membership
were made.
22See William E. Alexander, John H. Green, and Birgir Arnason,
A Monetary Framework for Norway: The Options, in Anne Berit
Christiansen and Jan Fredrik Qvigstad, eds., Choosing a Monetary
Policy Target (Oslo: Scandinavian University Press, 1997),
pp. 2660.
23 See the October 1997 World Economic Outlook, Chapter III.

Kenneth Rogoff, Blessing or Curse? Foreign and Underground
Demand for Euro Notes, in Begg and others, EMU: Prospects and
Challenges for the Euro, discusses the implications of euro currency
notes replacing dollars in illegal transactions.
149
Table 5.2. Effect of 1 Percent Higher Output in the Euro Area

on Selected Developing Countries
(In percent)
Exports to EMU
(as share of total
exports, 1996)
Total Exports
(as share of
GDP, 1996)
Albania
Bulgaria
Croatia
Czech Republic
Hungary
Macedonia, F.Y.R.
Poland
Romania
Slovak Republic
Slovenia
64.5
31.0
56.0
54.3
60.3
47.3
56.7
51.3
38.9
63.9
11.8
44.5
20.0
38.5
28.1
25.9
18.1
21.2
46.7
42.1
1.6
0.7
0.9
0.7
1.4
0.9
0.9
1.0
0.8
1.1
0.2
0.3
0.2
0.3
0.4
0.3
0.2
0.2
0.4
0.5
Cyprus
Israel
Malta
Turkey
14.3
25.0
50.1
43.5
14.5
20.5
48.2
12.7
0.4
0.5
2.9
0.8
0.1
0.1
1.5
0.1
Algeria
Egypt
Jordan
Morocco
Syrian Arab Republic
Tunisia
59.9
39.6
7.7
56.9
53.1
79.6
27.5
8.1
18.0
12.8
21.5
27.4
0.3
1.0
0.5
1.1
1.5
1.9
0.1
0.1
0.1
0.2
0.4
0.6
Country
Change in Total Exports

from 1 Percent
Higher EMU GDP
Change in Output
from 1 Percent
Higher EMU GDP
Source: IMF, Direction of Trade Statistics and World Economic Outlook, columns 1 and 2; and R. Feldman
and others, Impact of EMU on Selected NonEuropean Union Countries, Occasional Paper (IMF, 1998,
forthcoming), columns 3 and 4.
Mediterranean.24 It accounted for less than 15 percent

of total trade in the developing countries of Asia and
the Western Hemisphere.
A rough indication of the first-round effect of higher
euro area output on trading partner exports and output
can be obtained by multiplying estimates of the income elasticities of import demand for the 11 EMU
participants by the exports of each partner country to
the euro-area countries. Such analysis indicates that a
1 percent increase in euro-area GDP will tend to result
in a 0.71.6 percent increase in exports and a 0.20.5
percent increase in output for the transition countries
of central and eastern Europe, with somewhat smaller
effects for countries in the Mediterranean and North
Africa (Table 5.2). The estimated effects of higher
euro-area output on exports and GDP in Hungary and
Tunisia are particularly large because these countries
exports go overwhelmingly to euro-area markets,
while the effect is large for Malta because of that
countrys large share of exports in GDP. The effects
may be underestimated for Cyprus, in particular because tourism receipts are not included in the trade
data used.
The effects of changes in euro-area output on exports and GDP for the countries in sub-Saharan Africa
are likely to be much smaller than for European and
Mediterranean countries, because the principal exports
of most African countries are primary commodities,
the supplies of which are insensitive to demand in the
short term. In addition, demand for such commodities
does not respond strongly to changes in income.25
The above estimates indicate only rough orders of
magnitude and there is considerable uncertainty attached to them. Associated with higher exports would
be some leakage in the form of higher imports that
would partly offset the direct and positive effects on
aggregate demand and output. Moreover, and directly
related to monetary union, increased productivity and
other cost savings from EMU within the euro area
could increase the competitiveness of euro-area firms
and divert trade from non-euro-area suppliers, especially when the currencies of the latter are tied to the
euro and cannot adjust to reflect relative productivity
changes. On balance, however, it is likely that the net
24Exports to the EU are a much greater share of total exports for

some countries in these groups. For discussions of trade linkages, see
Robert A. Feldman and Heliodoro Temprano-Arroyo, Trade and
Financial Effects of EMU on Selected Transition and Mediterranean
Countries; and Karim Nashashibi, Peter Allum, and Klaus Enders,
European Monetary Union: Prospects for the MENA Region, in R.
Feldman and others, Impact of EMU on Selected NonEuropean
Union Countries, Occasional Paper (Washington: IMF, 1998, forthcoming).
25See Michael T. Hadjimichael and Michael Galy, The CFA

Franc Zone and the EMU, Working Paper 97/156 (Washington:
IMF, November 1997).
150
Table 5.3. Selected Countries: Exchange Rate Regimes

Country
Exchange Rate Regime
Basket or Target
Albania
Bosnia-Herzegovina
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Macedonia, F.Y.R.
Poland
Romania
Slovak Republic
Slovenia
Independent float
Currency board
Currency board
Managed float
Managed float
Currency board
Crawling peg
Fixed peg
Currency board
Managed float
Crawling peg
Independent float
Fixed peg
Managed float
...
DM
DM
Narrow band with DM
...
DM
DM 70%, US$ 30%
SDR
US$
De facto peg to DM
US$ 45%, DM 35%, 10%, F 5%, S 5%
...
DM 60%, US$ 40%
De facto shadow of DM; also real exchange
rate rule
Cyprus
Israel
Malta
Turkey
Fixed peg
Crawling peg
Fixed peg
Managed float
ECU
US$ 54%, DM 26%, 8%, 7%, F 6%
ECU 67%, US$ 21%, 12%
Real exchange rate rule
Algeria
Egypt
Iran, Islamic Rep. of
Jordan
Lebanon
Morocco
Saudia Arabia
Tunisia
CFA franc countries1
Managed float
Managed float
Fixed peg
Fixed peg
Managed float
Fixed peg
Fixed peg
Fixed peg
Managed float
Fixed peg
US$
US$
US$
US$
US$
Basket of partner currencies
US$
US$
Basket of partner currencies
French franc
1Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Comoros, Republic of Congo, Cte
dIvoire, Equatorial Guinea, Gabon, Mali, Niger, Senegal, and Togo.
positive spillover of new trade resulting from higher

euro-area output will outweigh the diversion of existing imports to provide a net positive effect of euroarea growth on these countries.
Benefits to emerging market economies will be reinforced by further progress with trade liberalization
in the EU. There is a risk, however, of protectionist
pressures that could limit imports from emerging market economies if countries in the euro area progress
only slowly with labor market and other structural reforms and unemployment in the area remains high.
The countries of the CFA franc zone and most
countries in central and eastern Europe and the
Mediterranean link their currencies either to one of
those that will be replaced by the euro or to a basket
in which euro-area currencies have a prominent
weight (Table 5.3). The peg for these exchange rate
regimes may be expected to shift to the euro or a basket dominated by the euro. Thus, it has been announced that the peg of the CFA franc to the French
franc will convert arithmetically to the euro, while
Bulgaria, Cyprus, and Lithuania have announced their
intentions of pegging to the euro. For countries pegging to the euro, changes in its exchange value will
not affect competitiveness vis--vis euro-area markets. However, EMU could lead to increased variabil-
ity in these countries terms of trade and competitiveness if it leads to larger fluctuations of the euro
against the dollar and yen than have occurred with
pre-EMU European currency pegs. Conversely, as
countries move to a euro peg they may benefit from a
currency link to the larger, more diversified euro area
rather than to Germany or France, with the potential
for reduced exposure to demand shocks transmitted
through the exchange rate.
The extent to which changes in the value of the euro
vis--vis the dollar and yen affect the competitiveness
of developing and transition countries that peg to the
euro will depend on how close an approximation the
euro is to a countrys effective exchange rate basket.
Exchange rate movements could also have important
effects on countries with substantial external debt. For
example, when there is a mismatch between the currency denomination of the debt and the anchor of the
exchange rate regime or the currency mix of trade
partners, an appreciation of the euro would benefit
countries that peg to the euro and export primarily to
euro-area countries but service a substantial debt denominated in dollars, since this would decrease the domestic currency cost of debt service, probably without
a fully offsetting decline in export revenue. Conversely, a depreciation of the euro would increase the
151
Table 5.4. Debt of CFA Franc Zone Countries

(In percent)
Share of Long-Term Debt
Country
Benin
Burkina Faso
Cameroon
Central African Republic
Chad
Comoros
Congo, Republic of
Cte dIvoire
Equatorial Guinea
Gabon
Mali
Niger
Senegal
Togo
Denominated by Selected Currencies, 1996

______________________________________________________
External Debt
(as share of
GDP, 1997)
Euro-area
currencies1
U.S. dollar and

Japan yen
U.K. pound and

Swiss franc
Multiple
currencies
61.3
56.6
109.6
78.0
55.4
95.2
248.3
172.1
42.9
80.5
113.9
69.8
68.2
87.9
10.3
3.7
52.7
5.3
6.5
17.6
47.4
43.1
13.0
53.8
20.4
32.7
15.6
10.1
55.2
61.0
12.8
58.6
53.4
31.6
24.4
26.4
41.6
12.4
27.1
39.4
47.5
54.7
0.3
2.0
2.4
6.0
1.3
5.6
3.7
1.1
0.5
12.0
15.5
21.3
10.9
25.2
25.6
4.7
2.3
18.7
14.6
9.3
19.0
3.7
14.9
8.4
Sources: IMF, World Economic Outlook, column 1; World Bank, Global Development Finance (Washington, 1998), columns 25.
1Euro-area currencies are composed of the deutsche mark and the French franc.
domestic currency cost of debt service. A depreciation

of the euro against other major currencies would be of
particular concern for countries with substantial external debt such as Bulgaria, and several countries of the
CFA franc zone, but less so for other countries in central and eastern Europe that have generally small debt
burdens (Tables 5.4 and 5.5).
To avoid these effects of exchange rate movements,
it may be desirable for countries to adjust their exchange rate regimes, for example to basket pegs that
better reflect the composition of their trade and financial links, or change their debt management policies.
As the euro becomes widely used in trade and financial markets, it is likely to account for a larger share of
debt securities, so that countries choosing to peg to the
euro on account of their extensive trade ties will be
able to reduce their exposure to variations in their dollar-denominated debt payments. Moreover, countries
in the Middle East and Asia that now peg their currencies to the dollar could benefit from attaching some
weight to stability vis--vis the euro. At the same time,
it must be recognized that pegging to a basket of
currencies is not as transparent as pegging to one currency and could be less effective in anchoring expectations for domestic inflation. Countries with mismatches between their currency pegs and their trade
and financial linkages will have to balance the benefits
of a peg to a single currency against the potential costs
of exchange rate fluctuations.
While exchange rate stability vis--vis the euro will
partially shield countries with strong trade ties to
Europe from the trade-related effects of currency fluctuations, it will leave them exposeddepending on
their degree of international financial integrationto
changes in interest rates in the euro area, which will
necessitate adjustments in domestic monetary conditions to maintain the exchange rate link. Changes in
interest rates could affect debt servicing costs as well
as domestic demand. In the central and eastern
European countries, the generally low levels of debt
relative to GDP imply that this effect is not likely to be
substantial, except in Bulgaria. In sub-Saharan Africa,
given the prevalence of debt at preferential rates, servicing costs are unlikely to be significantly affected by
changes in euro-area market interest rates.
EMU may tend to increase capital flows to emerging market economies.26 First, deeper and more liquid
capital markets in Europe will lower borrowing costs
both for countries in the euro area and for countries
raising funds through euro-denominated instruments.
Second, EMU will allow euro-area institutions such as
insurance companies and pension funds to shift some
of their portfolios into emerging market investments
as constraints imposed by currency matching requirements are eased.27 Third, emerging market economies
could benefit from direct and portfolio capital inflows
if the convergence of asset returns in Europe leads
global investors to increase their emerging market
holdings in order to diversify across countries with a
wider range of risk and return characteristics or with
26See Feldman and Temprano-Arroyo, Trade and Financial

Effects of EMU on Selected Transition and Mediterranean Countries, for a complete review of the financial implications of EMU
for emerging markets in central and eastern Europe.
27Currency matching rules limit the amount of foreign currencydenominated investments held by some types of financial institutions. With the single currency, investments in other euro-area countries will automatically be reclassified as domestic currency assets,
thus making room for investments in other currencies.
152
Table 5.5. Selected Countries: External Debt and Shares

of Long-Term Debt by Currency
(In percent)
Share of Long-Term Debt
Denominated by Selected Currencies, 1996
______________________________________________________
External Debt
(as share of
GDP, 1997)
Euro-area
currencies1
U.S. dollar and

Japan yen
U.K. pound and

Swiss franc
Multiple
currencies
Albania
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Macedonia, F.Y.R.
Poland
Romania
Slovak Republic
Slovenia
35.5
89.9
33.0
39.8
22.9
52.8
10.8
26.6
34.0
28.1
27.8
58.7
22.1
18.8
11.2
6.2
3.9
30.4
31.0
7.5
8.0
7.0
22.6
9.9
5.8
19.6
75.5
76.4
77.1
79.8
21.2
48.3
65.5
62.0
69.1
51.2
57.3
18.3
55.7
1.3
7.4
5.8
3.1
1.0
6.8
2.8
0.7
0.5
0.8
5.6
6.3
9.7
28.7
10.4
35.1
13.0
15.5
5.5
15.6
71.8
7.6
Cyprus
Israel
Malta
Turkey
12.8
18.12
27.7
46.3
...
3.1
29.6
19.9
...
96.9
34.4
63.3
...
1.5
3.1
...
1.8
12.1
Algeria
Egypt
Iran, Islamic Rep. of
Jordan
Lebanon
Morocco
Tunisia
64.0
38.9
13.6
82.5
26.1
60.2
46.1
52.8
26.9
30.8
11.9
16.0
8.9
25.1
2.9
19.7
51.0
47.8
83.6
52.1
65.0
35.4
85.8
30.6
1.5
3.9
0.4
7.9
0.1
0.2
0.7
0.1
7.8
7.8
2.4
12.7
6.8
24.0
2.4
25.5
Country
Sources: IMF, World Economic Outlook, column 1; World Bank, Global Development Finance
(Washington, 1998), columns 25.
1Euro-area currencies are composed of the deutsche mark and the French franc.
2For Israel, net external debt.
different cyclical positions. Flows will depend on the

degree of capital account convertibility.
EMU also carries financial market risks for emerging market countries, however. A successful EMU that
raises productivity and growth could make Europe
more attractive for investors and thus tend to increase
the cost of capital for emerging market economies.
Furthermore, increased competitiveness of European
financial institutions and the greater depth of euro-area
financial markets could lead firms in developing and
transition countries to raise funds in euros rather than
domestic currencies, which could pose a challenge to
the continued development of local capital markets.
EMU thus provides further incentive for these countries to strengthen financial intermediation and foster
sound banking systems.
Finally, cyclical movements in the euro area will
have an important bearing on financial conditions facing developing and transition countries, both in terms
of interest rates and in terms of the magnitude and stability of capital flows available to finance investment.
To the extent that cyclical volatility in the euro area
can be reduced through appropriate policies that
reflect the commitment under EMU to preserve an environment with low and stable inflation, adverse
spillovers on interest rates and capital flows for developing countries will be more limited.
The Challenges of EU Enlargement
While the EMU process involves a substantial deepening of the links among the 11 participants, the EU is
also in the process of being broadened to include the
transition countries of the Baltics and central and eastern Europe, and selected European countries in the
Mediterranean area. For six countriesnamely Cyprus,
the Czech Republic, Estonia, Hungary, Poland, and
Sloveniathe European Commission has delivered a
favorable opinion on their membership applications,
and accession negotiations are under way.28 Countries
that hope to join the EU will need to show progress toward meeting the Maastricht criteria, but these eco-
28These countries already participate in special trade and other

arrangements through association agreements.
153
Table 5.6. Prospective European Union Members: Convergence Indicators, 1997

(in percent and U.S. dollars)
Partner Countries
______________________________________________________________________________
GDP Per Capita
______________________________________
Maastricht Indicators
_______________________________________
As percent
As percent of
Consumer
Government Government
of Euro area
poorest EU
price inflation balance/GDP debt/GDP In dollars
average
country (Greece)
Czech Republic
Estonia
Hungary
Poland
Slovenia
8.4
11.3
18.3
15.1
9.1
2.1
2.4
4.8
3.2
1.1
10.9
5.6
68.0
48.2
24.1
5,041
3,085
4,431
3,503
9,535
23.0
14.1
20.2
16.0
43.6
43.8
26.8
38.5
30.4
82.8
Cyprus
3.1
3.1
53.4
13,489
61.6
117.1
Euro area
1.7
2.5
76.2
21,885
...
...
Reference value
2.7
3.0
60.0
...
...
...
Source: IMF, World Economic Outlook.
nomic objectives are not a requirement for accession,

nor are new members expected to participate in EMU
automatically.29
The requirements for joining the EU and eventually
participating in EMU are demanding and span macroeconomic, structural, and institutional areas. The
countries in transition need to make further progress
with privatization, to continue to reduce government
involvement in the economy, and to increase the scope
for resources to be allocated through market forces.
Other necessary structural reforms include the removal of distortions such as monopolies and trade restraints, and the development of flexible and wellfunctioning labor markets. The slowness of the
progress in some of the first 15 EU members in some
of these areas, notably labor-market reform, is not to
be emulated by the transition countries.
Unless transitional arrangements are negotiated,
new countries joining the EU will have to comply
from their date of accession with all the legal and institutional requirements (the so-called acquis communautaire) in the area of EMU. These requirements include, in particular, the establishment of fully
independent central banks; the elimination of any direct financing of the general government by the central
bank, or other privileged government financing; the
complete liberalization of capital flows; and the coordination of macroeconomic policies, particularly exchange rate policy. Eventual participation in the euro
area will also require the further development of indirect instruments of monetary policy, and the adoption
of modern, real-time gross settlement (RTGS) payments systems that can allow payments in euros and be
connected with TARGET, the EU-wide payments system to be established upon the launching of EMU.30
The six countries negotiating EU accession have
generally made substantial progress in meeting the fiscal guidelines of the Maastricht Treaty, but inflation in
all five of the transition countries remains higher than
in the euro area (Table 5.6). There are several ways of
viewing these currently positive inflation differentials.
They may be considered necessary to allow real exchange rate appreciation warranted by relatively rapid
productivity growth during the transition process,
given pegged nominal exchange rates. The continued
restructuring of enterprises and ongoing adjustment of
administered prices, such as for energy and services,
to market economy levels may also suggest that the elevated rate of inflation may continue for a number of
years.31
An indicator of real, rather than nominal, economic
convergence in the accession countries is per capita income relative to present EU members. Slovenia is furthest along in this convergence, with per capita income
over 40 percent of the EU average, and over 80 percent of that in Greece, the EU member with the lowest
30For a discussion of the institutional requirements in the area of
EMU that are applicable to EU countries remaining outside the euro
area, see Heliodoro Temprano-Arroyo and Robert A. Feldman,
Selected Transitional and Mediterranean Countries: An Institutional Primer on EMU and EU Relations, Working Paper 98/82
(Washington: IMF, June 1998).
31Alternately, rather than mainly reflecting productivity increases,
real exchange rate appreciation could be driving the restructuring
and increased productivity, since increased real wages drive up costs
and thus serve to winnow out inefficient enterprises and reallocate
resources to more dynamic sectors. See Clemens Grafe and Charles
Wyplosz, The Real Exchange Rate in Transition Economies,
CEPR Discussion Paper 1773 (London: Centre for Economic Policy
Research, December 1997).
29As indicated by the European Council of Copenhagen of June

1993, countries wishing to join the EU must first demonstrate their
capacity to adhere to the aims of EMU. This does not imply that
candidate countries will need to satisfy the macroeconomic convergence criteria laid down in the Maastricht Treaty to become members of the EU. It does mean, however, that it is expected they will
participate in EMU eventually.
154
Appendix. Economic Policymaking in the EU and Surveillance by EU Institutions
The European System of Central Banks. The ESCB

comprises the European Central Bank (ECB) and the
national central banks (NCBs) of all EU member
states. The ECB, which makes the monetary policy decisions for the euro area, is controlled by a Governing
Council consisting of an Executive Board (with six
members appointed by the heads of state or governments of countries in the euro area) and the governors
of the NCBs of countries in the euro area. Monetary
policy decisions are made by simple majority of the
Governing Council, with other voting procedures applying to matters pertaining to the finances of the
ECB. A number of elements underpin the independence of the ESCB. Members of the Executive Board
have nonrenewable eight-year terms, with the terms of
the initial Executive Board members ranging from
four to eight years so as to stagger subsequent appointments. Terms for NCB governors must be at least
five years. The Maastricht Treaty precludes member
governments from attempting to influence ECB decisions and members of ECB decision-making bodies
from seeking or taking instructions from governments
or EU institutions. The ESCB is prohibited from financing directly either governments or EU institutions, or from assuming their commitments. Changes
to the key provisions of the Statute of the ESCB must
be ratified by all EU countries.
The Council of the European Union. Normally referred to as the Council (but also the Council of
Ministers), this is the principal decision-making body
of the EU. It consists of one representative each of national governments, normally at the ministerial level.
When meeting on issues in the domain of fiscal and
macroeconomic policies, the Council consists of ministers of finance or economic affairs and is referred to
as ECOFIN. Voting procedures vary: unanimity is required on some issues (including any decision affecting the taxation powers of members or establishing an
exchange rate regime), while for most decisions in the
economic sphere qualified majority voting holds with
a majority comprising 62 of the 87 votes in the
Council.33 On issues pertaining to exchange rate policy, or the application of sanctions under the SGP,
ministers of countries outside the euro area do not
vote. The Council is supported in its work by various
committees. In the macroeconomic policy area, the
principal committee has been the Monetary Committee, which effective January 1, 1999 will become
the Economic and Financial Committee.
The Euro-11 Group. This is the name given to informal meetings of the ministers of finance and economic affairs of countries participating in the euro
area, the first of which was held in June 1998. These
meetings are intended to address issues pertaining to
the joint responsibility of these countries for the single
currency. It is expected that issues of economic policy
coordination will be an important focus of discussion.
The Commission and the ECB will be invited to take
part when appropriate. Where issues of common interest are concerned, they are to be discussed by all member states. All relevant economic policy and surveillance decisions will continue to be taken by ECOFIN.
The European Commission. The Commission is the
executive body of the EU. The Executive of the Commission comprises 20 memberstwo nationals each
from the five largest countries (France, Germany,
Italy, Spain, and the United Kingdom) and one each
from the other member states. The Commission has
32See Stanley Fischer, Ratna Sahay, and Carlos A. Vgh, From

Transition to Market: Evidence and Growth Prospects, Working
Paper 98/52 (Washington: IMF, April 1998); and Stanley Fischer,
Ratna Sahay, and Carlos A. Vgh, How Far Is Eastern Europe from
Brussels? Working Paper 98/53 (Washington: IMF, April 1998).
33The distribution of votes is as follows: Germany, France, Italy,

and the United Kingdom (ten votes each); Spain (eight votes);
Belgium, Greece, the Netherlands, and Portugal (five votes each);
Austria and Sweden (four votes each); Denmark, Finland, and
Ireland (three votes each) and Luxembourg (two votes).
per capita income. The other countries are much further behind, and it has been estimated that full convergence to income levels in the advanced economies will
take 20 years even for the most advanced transition
countries such as the Czech Republic, and 35 to 45
years for others.32 Central and eastern Europe is thus
approximately one to two generations behind living
standards in western Europe.
It would seem more relevant, and in line with
Council intentions, to define economic convergence in
terms of meeting a broader set of structural and institutional requirements, which would be important in
helping to ensure that accession countries would be
successful members of the monetary union. Unfortunately, the transition countries have also lagged in
terms of a number of these requirements. Foremost
among them are the preconditions for full capital account liberalization, including vis--vis countries outside of the EU. The Czech Republic, Hungary, and
Poland have begun this process as part of joining the
OECD, Estonia already has virtually open capital markets, and most countries have at least partially liberalized capital regulations. But substantial progress remains to be made, not only in eliminating barriers to
capital flows, but also in the development of robust financial sectors and well-functioning capital markets,
and the strengthening of the regulatory and oversight
capacities needed to help ensure systemic stability and
to cope with potential shifts in capital flows.
Appendix. Economic Policymaking in the

EU and Surveillance by EU Institutions
Institutions
155
the principal power of initiative: with some exceptions, the Council cannot legislate in the economic
area unless there is a proposal from the Commission.34
The Commission is also a key body in the process of
surveillance of economic policies. In addition to
preparing the surveillance decisions for the Council
(for example, those related to the broad economic policy guidelines, employment policy guidelines, and the
stability and growth pactsee below), it contributes
to the process through its analyses of economic developments in individual countries and in the EU as a
whole. The Commission has important decisionmaking authority of its own in the area of competition
policy and it conducts trade negotiations on behalf of
the EU, on the basis of a mandate from the Council
and with any agreements to be ratified by the Council.
The Commission also is entrusted with the implementation of decisions made by the Council, monitoring
countries compliance with EU law, and initiating
legal action against noncompliant countries.
The European Council. This is the name given to
the meetings of heads of state or government of EU
member states which give political guidance to the
EU. The European Council is scheduled to meet twice
a year (in June and December) but also holds special
meetings from time to time on specific issues, for example, the summit meeting on employment that took
place in November 1997 in Luxembourg.
The European Parliament. The European Parliament
has a largely consultative role in macroeconomic surveillance but it will also hold hearings on the policies
of the ECB, which are intended to enhance the transparency of monetary policy and the accountability of
the ECB. In other areas, it plays a more direct role in
decisions. Under the so-called cooperation procedures,
which apply, for example, to the European Regional
Development Fund, research, the environment, and
cooperation and development, the opinion of Parliament can only be overridden by a unanimous decision
of the Council. An even stronger procedure, called
co-decision, applies to the free movement of workers, the establishment of the internal market, technological research and development, the environment,
consumer protection, education, culture, and health.
Here, if the Council fails to take due account of
Parliaments opinion, Parliament can prevent the adoption of the proposal. Finally, decisions such as those on
the accession of new member states, association agreements with third countries, the conclusion of international agreements (outside of those related to monetary
and exchange rate policies), the organization and goals
of the structural funds, and the tasks and powers of
the European Central Bank require the assent of
Parliament.
Policymaking Responsibilities
Monetary policy. Monetary policy is determined by
the ECB and implemented by the ESCB under the direction of the ECB.
Exchange rate policy. Responsibility is divided between the Council and the ECB. In particular, the
Council has the right to enter into formal exchange
rate arrangements with non-EU countries or to formulate general orientations for the exchange rate. In the
absence of such arrangements or orientations, the
management of the exchange rate is the sole responsibility of the ECB. A formal exchange rate arrangement
would require unanimous support in the Council,
would have to be based on a recommendation of the
Commission or the ECB, and in the case of the former
must be after consultation with the ECB in an endeavor to reach consensus consistent with the objective of price stability. A European Council Resolution
on economic policy coordination in December 1997
indicated that ECOFIN may provide general orientations for exchange rate policy in exceptional circumstances, for example in the case of a clear misalignment. Moreover, these orientations should always
respect the independence of the ESCB and be consistent with the primary objective of the ESCB to maintain price stability.
Fiscal policy. There is a small EU budget of just
over 1 percent of EU GDP, devoted principally to the
Common Agricultural Policy (CAP) and the EUs
structural funds. Spending policies are established
within multiyear frameworks, the present one covering 199399, and deficit financing is prohibited. Fiscal
policy thus remains almost entirely the prerogative of
individual countries. It is, however, subject to surveillance under procedures discussed below. Some degree
of harmonization of value-added tax and excise duties
(in the form of minimum rates) is also established at
the EU level.
Structural policies. Matters pertaining to the free
movement of capital, labor, goods, and services within
the EU are a community competence. Legislation on
internal market issues is for the most part enacted by
the Council on the basis of qualified majority, the principal exception being matters pertaining to taxation.
Except to the extent that they fall under the internal
market program, labor market policies are the prerogative of national governments. For the first time, the
Treaty of Amsterdam, signed in October 1997, identified employment policies explicitly as a matter of
common concern among EU member states and established procedures for their surveillance.
External economic policies. When negotiations with
non-EU states are needed on economic matters within
the competence of the EU (notably trade), the normal
practice is for the Commission to make a recommendation to the Council, which would then decide
whether to authorize the Commission to negotiate. The
34One exception, for example, is that an agreement on a formal

exchange rate system with a non-EU country may also be made on
the basis of a recommendation from the ECB.
156
Appendix. Economic Policymaking in the EU and Surveillance by EU Institutions
Council would also appoint committees to assist the

Commission with such negotiations. On monetary and
foreign exchange regime matters, there is no established principle on who would negotiate. The Council
decides on the negotiation arrangements on the basis
of a recommendation from the Commission, following
consultation with the ECB.
Economic and Financial Committee. The Council may

on the basis of a qualified majority choose to make
public the advice given to countries in this context.
Economic policy coordination. In a Resolution
adopted at its meeting in Luxembourg in December
1997, the European Council envisaged that economic
policy coordination would be effected through the various surveillance instruments provided for in the
Maastricht Treaty and outlined above. In particular, it
called for the broad economic policy guidelines to be
developed into an effective instrument for ensuring
sustained convergence. The guidelines should be more
concrete and country-specific and more attention
should be paid in them to improving competitiveness;
labor, product, and services market efficiency; education and training; and to making taxation and employment systems more employment-friendly. It also emphasized the importance of early warnings under the
SGP, and more effective use of surveillance under
Article 103. The resolution indicated, in addition, that
monitoring of the economic situation and related policy discussion should become a regular item at informal ECOFIN meetings.
Surveillance of employment policies. The EU countries have agreed to implement the provisions of the
Amsterdam Treaty related to the surveillance of employment policies in advance of the formal ratification
of the treaty. Under these procedures, the Council
adopts employment policy guidelines and these guidelines are to be incorporated into national employment
plans by the EU countries. The Council is to hold an
annual review of the way in which countries have put
the guidelines into practice and submit a report to the
European Council. The guidelines will be revised annually on the basis of experience and countries will
update their employment plans every year. The first
employment policy guidelines were adopted in
December 1997 and countries submitted their first national employment plans to the Council in April 1998.
Surveillance of compliance with internal market
legislation. The Commission monitors compliance
with the internal market legislation and produces regular reports both on compliance and on strategies to
develop the internal market further. On the basis of experience, it proposes modifications to legislation
where warranted and can take legal action against
countries that fail to comply.
Surveillance Procedures
Broad economic policy guidelines. These guidelines
are formulated annually by ECOFIN and adopted by
ECOFIN following discussion in the European Council. The guidelines cover policies in both macroeconomic and structural areas, though they have tended in
the past to be much less specific on structural matters
than on fiscal policy matters. The European Council
has recently requested that the guidelines be strengthened in the area of structural policies. A report on
progress in implementing the broad economic guidelines is produced by the Council annually and submitted to the European Council.
The Stability and Growth Pact. The SGP covers both
the implementation of the excessive deficit procedure
specified in the Maastricht Treaty and the mediumterm surveillance of fiscal policies. Under the excessive deficit procedure, EU countries that breach the 3
percent of GDP reference value for the general government deficit will be deemed to be in excessive deficit,
unless exceptional circumstances apply, and will receive advice from ECOFIN on correcting the excessive
deficit. Failure to follow up effectively on this advice
will result in financial sanctions for countries in the
euro area. Countries are also expected to submit
medium-term stability programs and update them annually (convergence programs for countries not in
EMU) that will identify how governments plan to meet
and maintain the pacts medium-term objective of general government positions that are close to balance or
in surplus. It has been agreed that countries will submit
their first stability programs before the end of 1998.
Surveillance under Article 103 of the Maastricht
Treaty. Under this article, EU members recognize that
their economic policies are a matter of concern to be
coordinated within the Council. This is the basis for
ongoing review of countries economic policies in the
Council and its supporting committees, including the
157
rate in Japan will average 0.7 percent in 1998 and 0.6
percent in 1999; and that the three-month interbank
deposit rate in Germany will average 3.7 percent in
1998 and 1999.
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 199899 and the medium-term scenario
for 20002003 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, previously labeled
industrial countries, 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 in mid-September 1998.
The figures for 1998 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.
Data and Conventions

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 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
Balance of Payments Manual 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.
Assumptions
Real effective exchange rates for the advanced
economies are assumed to remain constant at their average levels during the four-week period July 27
August 24, 1998, except that the bilateral exchange
rates among the ERM currencies are assumed to remain constant in nominal terms. For 1998 and 1999,
these assumptions imply average U.S. dollar/SDR
conversion rates of 1.339 and 1.326, 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 2.1.
It is assumed that the price of oil will average
$13.28 a barrel in 1998 and $14.51 a barrel in 1999. 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 5.7 percent in 1998
and 1999; that the three-month certificate of deposit
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).
158
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.
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 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 1997 shares
of groups in aggregate PPP-valued GDP, total exports
of goods and services, and population.
A new classification, the euro area, has been added
to the Statistical Appendix for some variables. The
euro area comprises the countries that will form 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.
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
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).
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.
General Features and Compositions of Groups

in the World Economic Outlook Classification
Classification of Countries
Advanced Economies
Summary of the Country Classification
The composition of advanced economies (28 countries) is shown in Table B. The seven largest countries
in this group 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
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
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.
159
STATISTICAL APPENDIX
Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP,
Exports of Goods and Services, and Population, 19971
(In percent of total for group or world)
Number of
Countries
Exports of Goods
and Services
GDP
Population
Share of total for

Advanced
Advanced
Advanced
economies
World
economies
World
economies
World
______________________
_____________________
____________________
Advanced economies
United States
Japan
Germany
France
Italy
United Kingdom
Canada
Memorandum
Industrial countries (former definition)
European Union
Euro area
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 199296
Other net debtor countries
Other groups
Heavily indebted poor countries
Least developed countries
Middle East and north Africa
Russia
1The
28
7
21
23
15
11
4
100.0
80.1
36.8
14.0
8.2
6.2
5.7
5.9
3.3
19.9
55.3
44.3
20.4
7.7
4.6
3.4
3.1
3.2
1.8
11.0
93.4
51.7
35.8
19.8
28.0
15.5
6.1
3.4
Developing
countries
World
______________________
100.0
62.7
17.8
9.2
11.3
6.8
6.0
7.0
4.7
37.3
77.1
48.4
13.7
7.1
8.7
5.2
4.6
5.4
3.6
28.7
86.1
66.4
49.1
37.9
38.9
30.0
13.3
10.3
Developing
countries
World
_____________________
100.0
74.5
29.5
13.8
9.0
6.3
6.2
6.4
3.3
25.5
15.7
11.7
4.6
2.2
1.4
1.0
1.0
1.0
0.5
4.0
90.9
14.3
40.6
6.4
31.5
4.9
8.5
1.3
Developing
countries
World
____________________
128
100.0
39.9
100.0
18.6
100.0
77.3
51
48
8.3
6.0
3.3
2.4
10.6
8.0
2.0
1.5
14.9
13.4
11.5
10.4
46
27
25
17
33
3.6
57.9
29.0
10.8
18.2
11.6
22.1
1.5
23.1
11.6
4.3
7.2
4.6
8.8
4.1
45.0
16.6
3.6
24.8
20.5
23.9
0.8
8.4
3.1
0.7
4.6
3.8
4.4
10.2
67.6
27.5
21.6
18.6
6.6
10.8
7.9
52.3
21.2
16.7
14.4
5.1
8.4
17
111
6
40
39
26
9.8
90.2
54.7
5.0
3.8
26.7
3.9
36.0
21.8
2.0
1.5
10.6
19.0
81.0
39.2
6.0
4.7
31.0
3.5
15.1
7.3
1.1
0.9
5.8
6.7
93.3
57.6
12.0
4.2
19.5
5.2
72.2
44.5
9.3
3.3
15.1
7
121
62
34
25
2.8
97.2
9.4
63.9
23.8
1.1
38.7
3.7
25.5
9.5
11.1
88.9
7.8
63.3
17.8
2.1
16.5
1.5
11.8
3.3
0.8
99.2
20.8
45.4
33.0
0.6
76.7
16.1
35.1
25.5
60
61
23.6
73.6
9.4
29.3
22.7
65.7
4.2
12.2
26.8
72.5
20.7
56.1
40
46
21
28
18
16
9
4.1
1.6
4.4
1.8
11.6
4.6
Countries
in
transition
World
______________________
100.0
51.7
41.0
38.8
9.5
4.8
2.5
2.0
1.9
0.5
4.3
0.8
2.6
0.5
18.8
3.5
Countries
in
transition
World
_____________________
100.0
57.4
48.8
35.7
7.0
GDP shares are based on the purchasing-power-parity (PPP) valuation of country GDPs.
160
4.2
2.4
2.1
1.5
0.3
13.1
10.2
13.5
10.4
7.5
5.8
Countries
in
transition
World
_____________________
100.0
45.1
29.9
36.6
18.4
7.0
3.1
2.1
2.5
1.3
Table B. Advanced Economies by Subgroup

European Union
Newly Industrialized
Asian Economies
Other
Countries

France
Germany
Italy
United Kingdom
Canada
Japan
United States

Austria
Belgium
Denmark
Finland
Greece
Ireland
Luxembourg
Netherlands
Portugal
Spain
Sweden
Hong Kong SAR1

Korea
Singapore
Taiwan Province of
China
Australia
Iceland
Israel
New Zealand
Norway
Switzerland
1On July 1, 1997, Hong Kong was returned to the Peoples Republic of China and became a Special
Administrative Region of China.
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.
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 1995.4 Countries in the
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.
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
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 1995.
161
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,
Republic of
Gabon
Nigeria
North Africa
Algeria
Botswana
Burundi
Central African
Republic
Chad
Congo, Democratic
Republic 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,
Republic 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
Republic
Philippines
Sri Lanka
Cyprus
Egypt
Jordan
Lebanon
Yemen, Republic of
Malta
Syrian Arab
Republic
Turkey

Bahrain
Iran, Islamic
Republic of
Iraq
Kuwait
Libya
Oman
Qatar
Saudi Arabia
United Arab
Emirates
162
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
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 identified: countries relying largely on official financing,
countries relying largely on private financing, and
countries with diversified financing source. 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 199195 external financing. Countries that do not meet either of these two
criteria are classified as countries with diversified financing source (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
Antigua and Barbuda

Bahamas, The
Barbados
Belize
Dominican Republic
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
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
The group of countries in transition (28 countries)
comprises central and eastern European countries (including the Baltic countries), Russia, the other states
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 marketbased systems (including China, Cambodia, the Lao
Peoples Democratic Republic, Vietnam, and a number of African countries), most of these are largely
rural, low-income 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.
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.
6See Anthony R. Boote and Kamau Thugge, Debt Relief for LowIncome Countries: The HIPC Initiative, Pamphlet Series, No. 51
(December 1997).
163
Table D. Developing Countries by Region and Main External Financing Source

Net Debtor Countries
____________________________________________
By main external financing source
____________________________________________
Net Creditor
Countries
Official
financing
Private
financing
Diversified
financing
Africa
Sub-Sahara
Angola
Benin
Botswana
Burkina Faso
Burundi
Cameroon
Cape Verde
Chad
Comoros
Congo, Democratic Republic of
Congo, Republic of
Cte dIvoire
Djibouti
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia, The
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mauritius
Mozambique, Republic 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
164
Table D (continued)
____________________________________________
____________________________________________
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 Republic
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

Iraq
Jordan
Kuwait
Lebanon
Libya
Malta
Oman
Qatar
Saudi Arabia
Turkey

Yemen, Republic of
Western Hemisphere
Antigua and Barbuda
Argentina
Bahamas, The
Barbados
Belize
Bolivia
165
Table D (concluded)
____________________________________________
____________________________________________
Net Creditor
Countries
Official
financing
Private
financing
Brazil
Chile
Colombia
Costa Rica
Dominica
Dominican Republic
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
166
Table E. Other Developing Country Groups

Heavily Indebted
Poor Countries
Least Developed
Countries
Middle East and

North Africa
Africa
Sub-Sahara
Angola
Benin
Botswana
Burkina Faso
Burundi
Cameroon
Cape Verde
Chad
Comoros
Congo, Democratic Republic of
Congo, Republic of
Cte dIvoire
Djibouti
Equatorial Guinea
Ethiopia
Gambia, The
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
Liberia
Madagascar
Malawi
Mali
Mauritania
Mozambique, Republic 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 Republic
Maldives
Myanmar
Nepal
167
Table E (concluded)
Heavily Indebted
Poor Countries
Samoa
Solomon Islands
Vanuatu
Vietnam
Least Developed
Countries
Middle East and

North Africa

Bahrain
Egypt
Iraq
Jordan
Kuwait
Lebanon
Libya
Oman
Qatar
Saudi Arabia

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

Central and Eastern Europe
Albania
Belarus
Bosnia and Herzegovina
Bulgaria
Croatia
Czech Republic
Estonia
Hungary
Latvia
Russia
Lithuania
Macedonia, former Yugoslav Republic of
Moldova
Poland
Romania
Slovak Republic
Slovenia
Ukraine
Yugoslavia, Federal Republic of
(Serbia/Montenegro)
168
Russia
Transcaucasus
and Central Asia
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
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
171
172
173
175
177
178
181
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
182
183
184
185
186
189
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
190
191
193
194
195
196
197
198
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
199
201
202
203
205
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
207
208
209
210
212
214
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
169
219
221
223
36. Developing Countries: Reserves

37. Net Credit and Loans from IMF
227
229
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
230
232
233
236
237
239
Flow of Funds
44. Summary of Sources and Uses of World Saving
240
Medium-Term Baseline Scenario

45. Summary of World Medium-Term Baseline Scenario
46. Developing Countries: Medium-Term Baseline Scenario:
Selected Economic Indicators
170
245
246

Output: Summary
Table 1. Summary of World Output1

Ten-Year Averages
___________________
198089 199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
3.4
3.0
2.7
1.8
2.5
2.6
3.9
3.7
4.2
4.1
2.0
2.5
Advanced economies
2.9
2.3
2.7
1.2
1.9
1.2
3.2
2.5
3.0
3.1
2.0
1.9
United States
European Union
Japan
2.7
2.3
3.8
2.4
2.0
1.5
1.2
3.0
5.1
0.9
1.6
3.8
2.7
1.0
1.0
2.3
0.5
0.3
3.5
2.9
0.6
2.3
2.4
1.5
3.4
1.7
3.9
3.9
2.7
0.8
3.5
2.9
2.5
2.0
2.5
0.5
4.5
3.5
3.7
2.8
3.4
4.2
5.7
4.8
4.1
4.5
0.2
1.6
4.3
5.3
4.0
5.0
6.6
6.5
6.7
6.1
6.6
5.8
2.3
3.6
Regional groups
Africa
Asia
Western Hemisphere
2.5
7.0
2.2
2.2
2.8
7.0
3.8
3.2
2.3
5.6
5.6
1.0
1.9
6.6
3.5
3.8
0.4
9.5
6.5
3.3
0.7
9.3
3.9
3.9
2.2
9.6
0.7
5.2
3.1
9.0
3.8
1.2
5.8
8.2
4.7
3.5
3.2
6.6
4.7
5.1
3.7
1.8
2.3
2.8
4.7
3.9
2.7
2.7
Analytical groups
Fuel
Nonfuel
0.8
5.0
3.0
5.6
4.9
3.9
4.8
5.0
6.3
6.7
1.5
7.1
0.2
7.5
2.6
6.5
3.7
6.9
3.5
6.0
0.7
2.4
2.2
3.7

Official financing
Private financing
0.4
4.4
3.5
4.6
4.5
3.6
5.4
3.8
5.9
4.5
7.2
3.9
3.8
3.6
4.7
5.0
5.0
4.0
6.0
2.9
8.4
6.6
3.0
7.8
4.9
4.0
6.6
2.5
7.9
4.7
1.7
6.9
3.4
7.8
6.1
1.2
6.2
3.9
6.3
6.9
3.5
6.7
5.8
6.7
6.9
2.9
5.9
3.4
6.4
5.3
0.4
2.3
4.5
3.2
0.8
2.4
3.6
3.3
3.6
3.6
Net debtor countries by debtservicing experience

2.3
5.6
2.8
6.3
0.7
5.3
2.3
6.1
2.2
8.3
2.6
8.0
3.2
8.2
4.1
7.0
3.8
7.6
4.1
6.4
2.2
2.4
3.2
3.7
2.8
4.1
3.5
7.6
14.0
7.3
7.1
1.5
1.0
2.0
0.2
0.2

Russia
...
...
...
...
...
...
...
...
...
...
...
...
10.0
10.7
5.4
7.0
8.7
5.2
19.4
14.4
3.8
0.2
10.4
10.1
2.8
3.3
11.6
10.3
1.6
5.5
4.8
4.3
1.6
3.7
5.0
1.6
2.8
3.2
0.9
2.1
3.4
3.7
6.0
4.1
3.6
4.1
6.0
3.8
Median growth rate

Advanced economies
3.0
3.2
3.5
2.7
3.8
1.9
3.2
3.1
2.9
2.2
2.9
10.8
1.4
3.6
11.4
1.3
2.9
8.1
3.6
3.5
1.8
2.9
4.4
1.8
3.5
4.6
3.0
3.4
4.3
3.1
3.0
4.0
5.1
2.6
4.5
4.6
Output per capita

Advanced economies
2.2
1.9
2.2
1.6
3.3
4.3
1.9
2.1
4.1
0.4
3.0
7.7
1.2
4.0
14.1
0.6
4.5
7.4
2.5
4.5
7.1
1.9
4.2
1.4
2.1
4.5
0.9
2.5
4.0
1.9
1.4
0.7
0.3
1.4
2.0
0.2
14,473
17,584
26,648
33,427
25,972 28,802
31,713 33,639
29,610
35,759
29,506
38,047
28,997
40,685
29,772
43,606
World
Memorandum
Value of world output in billions

of U.S. dollars
At market exchange rates
At purchasing power parities
1Real
22,489 23,636
25,524 26,986
GDP.
171
23,506 24,191
28,435 29,880
Table 2. Advanced Economies: Real GDP and Total Domestic Demand

Fourth Quarter1
____________________
Ten-Year Averages
_________________
198089 199099
Real GDP
Advanced economies
1990
1991
1992
1993
1994
1995
1996
1997
1998 1999
1997
1998
1999
2.9
2.3
2.7
1.2
1.9
1.2
3.2
2.5
3.0
3.1
2.0
1.9
...
...
...

United States
Japan
Germany2
France
Italy
United Kingdom3
Canada
2.7
2.7
3.8
1.8
2.3
2.4
2.4
2.9
2.1
2.4
1.5
2.4
1.8
1.4
1.6
1.8
2.4
1.2
5.1
5.7
2.5
2.2
0.4
0.3
0.7
0.9
3.8
5.0
0.8
1.1
2.0
1.9
1.8
2.7
1.0
2.2
1.2
0.6
0.5
0.9
1.0
2.3
0.3
1.2
1.3
1.2
2.1
2.5
2.8
3.5
0.6
2.7
2.8
2.2
4.3
3.9
2.1
2.3
1.5
1.2
2.1
2.9
2.7
2.2
2.8
3.4
3.9
1.3
1.6
0.7
2.2
1.2
2.9
3.9
0.8
2.2
2.3
1.5
3.4
3.7
2.1
3.5
2.5
2.6
3.1
2.1
2.3
3.0
1.9
2.0
0.5
2.5
2.8
2.5
1.2
2.5
2.7
3.8
0.4
2.3
3.0
2.6
3.2
4.0
2.0
3.2
2.0
2.1
3.0
2.8
1.4
2.7
1.9
1.9
0.6
3.1
2.5
1.6
1.7
2.4

Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece4
Portugal
Ireland
Luxembourg
Switzerland
Norway
Israel
Iceland
Korea
Australia
Hong Kong SAR
Singapore
New Zealand
3.7
2.7
3.0
1.7
2.7
2.0
1.8
3.7
1.8
3.0
3.4
4.7
2.2
2.7
3.2
3.2
7.8
3.3
8.1
7.3
7.3
1.8
3.2
2.3
2.8
1.9
1.3
2.4
2.3
1.5
1.9
2.8
6.8
4.6
0.9
3.4
4.6
2.4
5.0
2.8
5.9
3.4
6.6
2.0
4.0
3.7
4.1
3.0
1.4
4.6
1.2
4.8
7.8
3.4
3.8
2.0
6.0
1.2
9.5
1.5
5.4
3.4
9.0
0.2
2.9
2.3
2.3
1.6
1.1
3.4
1.4
7.1
3.1
2.3
2.0
5.4
0.8
3.1
5.5
1.1
9.1
0.7
7.6
5.1
7.3
1.7
2.5
0.7
2.0
1.5
1.4
1.3
1.3
3.6
0.7
1.9
4.2
5.8
0.1
3.3
6.6
3.3
5.1
2.4
6.8
6.3
6.2
0.9
2.0
1.2
0.8
1.5
2.2
0.5
1.5
1.2
1.6
1.4
3.1
8.5
0.5
2.7
3.3
1.0
5.8
3.9
6.3
6.1
10.4
5.1
4.6
2.1
3.2
2.4
3.3
2.5
3.6
4.5
2.0
2.3
7.3
4.1
0.5
5.5
6.9
3.6
8.6
5.5
6.5
5.4
10.5
6.0
4.4
2.9
2.3
2.1
3.9
2.1
3.1
5.1
2.1
2.4
11.1
3.5
0.6
3.8
6.8
1.0
8.9
3.5
6.0
3.9
8.7
3.9
3.8
2.3
3.1
1.5
1.3
1.6
3.5
3.6
2.7
3.6
7.4
3.5
5.5
4.6
5.5
7.1
3.7
5.7
4.6
6.9
3.1
4.2
3.4
3.6
2.9
1.8
2.5
3.5
6.0
3.5
4.0
9.8
4.8
1.7
3.4
2.2
5.0
5.5
3.3
6.9
5.3
7.8
2.3
1.4
2.3
3.8
3.6
3.8
3.0
2.7
2.6
2.9
3.3
2.8
2.6
2.5
1.9
5.1
3.5
3.2
3.6
4.2
3.7
8.6
7.0
4.1
3.5
2.0
1.9
3.0
2.2
1.6
2.4
5.0
4.0
7.0 1.0
3.5
2.0
4.0
3.9
5.0
0.2
0.5
1.7
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
Memorandum
European Union
Euro area
Newly industrialized Asian
economies
2.7
2.3
2.3
2.1
2.0
2.1
2.5
3.0
3.7
0.8
1.6
2.4
1.7
1.0
1.3
0.9
0.5
1.0
2.9
2.9
2.7
2.2
2.4
2.2
2.8
1.7
1.6
2.9
2.7
2.5
2.3
2.9
3.0
2.0
2.5
2.8
...
...
...
...
...
...
...
...
...
7.8
5.2
7.3
7.9
5.8
6.3
7.6
7.3
6.3
6.0
2.9
0.7
...
...
...
Real total domestic demand

Advanced economies
2.8
2.2
2.7
0.8
1.9
0.9
3.3
2.5
3.0
2.8
2.1
2.1
...
...
...

United States
Japan
Germany
France
Italy
United Kingdom
Canada
2.6
2.4
3.6
1.3
2.3
2.7
2.9
3.2
2.1
2.6
1.2
2.3
1.5
1.2
1.5
1.6
2.2
0.8
5.2
5.2
2.8
2.5
0.6
0.2
1.6
2.9
4.8
0.6
1.8
3.1
1.4
1.7
2.8
0.4
2.8
0.2
0.5
0.2
0.9
0.9
2.9
0.1
1.4
2.2
4.5
2.0
1.5
3.0
3.9
1.0
2.7
3.0
1.5
3.4
3.0
2.0
2.1
2.3
1.4
1.8
2.3
1.8
1.0
2.9
3.6
4.8
0.7
0.9
0.3
2.5
1.1
2.7
4.2
0.5
1.4
0.9
2.5
3.7
5.3
2.8
5.0
3.5
2.6
3.5
2.6
3.7
2.7
2.1
2.6
2.7
3.1
2.8
1.5
2.2
2.7
4.4
2.0
1.5
1.6
3.7
4.3
4.5
2.8
5.2
2.6
2.4
3.7
2.1
2.6
1.7
1.9
1.6
0.4
3.4
3.1
3.9
1.7
2.1
3.5
2.8
4.8
3.2
2.5
0.9
4.8
4.4
3.6
3.0
0.9
2.1
...
...
...
2.6
2.3
2.2
2.1
1.8
1.9
2.3
3.0
3.8
0.3
1.4
2.4
1.6
1.0
1.3
0.6
1.8
2.5
3.0
2.6
2.4
2.2
2.1
2.1
2.8
1.3
1.1
2.8
2.3
2.0
3.0
3.3
3.2
2.3
2.8
3.1
...
...
...
...
...
...
...
...
...
7.0
4.4
10.5
9.6
6.6
5.7
8.6
7.0
6.5
2.8
11.4
0.2
...
...
...
Memorandum
European Union
Euro area
economies
1From
fourth quarter of preceding year.

3Average of expenditure, income, and output estimates of GDP at market prices.
4Based on revised national accounts for 1988 onward.
2Data
172
Output: Advanced Economies
Table 3. Advanced Economies: Components of Real GDP

Ten-Year Averages
__________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Private consumer expenditure

Advanced economies
3.0
2.4
2.9
1.4
2.4
1.7
2.8
2.5
2.9
2.7
2.3
1.9

United States
Japan
Germany1
2.9
3.0
3.4
1.7
2.2
2.6
1.7
2.3
2.6
1.7
4.4
5.4
0.9
0.6
2.5
5.6
2.2
2.8
2.1
2.8
1.6
2.9
1.2
0.1
2.5
3.3
1.9
1.2
2.2
2.7
2.1
1.8
2.7
3.2
2.9
1.6
2.5
3.4
1.1
0.5
2.8
4.7
1.7
1.5
2.0
2.4
0.3
2.3
2.4
2.9
3.4
2.9
1.8
1.4
1.9
2.0
2.7
2.4
0.6
1.3
1.4
2.7
2.2
1.4
1.4
1.0
0.1
1.8
0.2
2.4
2.5
1.9
1.4
1.4
2.8
3.1
1.7
1.9
1.7
1.7
2.0
0.8
3.6
2.4
0.9
2.4
4.6
4.1
3.3
1.9
3.8
3.0
2.9
2.4
1.8
2.1
3.3
3.0
4.2
3.8
3.5
2.0
4.1
3.7
3.7
3.6
0.4
1.5
2.8
2.4
2.3
2.2
2.0
2.0
2.6
3.0
3.6
1.0
2.3
3.2
2.1
1.6
2.0
1.4
0.2
0.6
2.5
1.7
1.4
2.3
1.9
1.9
2.7
2.1
1.7
2.6
2.2
1.6
2.9
2.7
2.5
2.2
2.6
2.7
7.4
4.9
8.9
8.5
7.5
7.0
7.7
6.3
6.4
5.2
5.5
1.6
Advanced economies
2.5
1.3
2.7
2.0
1.5
0.7
1.1
0.8
1.5
0.9
1.0
1.1

United States
Japan
Germany1
2.3
2.5
2.7
1.3
1.1
0.7
1.5
1.7
2.2
2.3
1.5
2.2
1.5
1.0
2.0
0.5
1.1
0.1
2.0
4.1
0.5
0.3
2.4
0.5
1.0
0.4
2.4
2.1
0.6
0.3
3.3
2.0
1.1
0.7
1.5
2.7
0.6
1.3
0.1
0.7
1.1
1.1
0.1
2.7
1.1
1.3
0.2
2.3
2.3
2.5
1.0
2.5
1.9
0.4
1.2
0.6
2.1
1.3
2.5
3.7
2.8
1.7
2.6
2.8
3.4
1.1
0.1
1.0
3.4
0.5
0.2
0.2
1.1
0.6
2.2
1.8
1.0
1.3
0.4
2.6
0.2
1.2
1.3
1.2
0.7
0.2
0.1
1.1
1.7
0.9
0.8
1.6
0.3
1.2
1.7
3.5
2.5
5.0
4.5
3.2
1.5
1.7
1.6
3.3
2.4
0.7
1.1
2.4
2.0
2.3
1.2
1.5
1.6
2.4
2.4
2.4
1.7
2.2
2.2
1.2
2.2
2.8
0.6
0.9
1.1
1.0
1.1
1.0
0.8
0.9
0.7
1.1
1.6
1.7
0.7
0.2
0.3
1.1
1.6
1.8
1.2
1.4
1.5
6.1
4.2
8.8
8.0
7.4
2.0
2.5
2.0
7.5
5.0
0.6
0.5
Advanced economies
3.1
2.8
2.7
1.6
1.5
0.4
4.4
4.1
5.3
3.9
4.0
4.5

United States
Japan
Germany1
2.8
2.2
4.3
1.0
2.7
4.5
0.7
2.0
1.9
1.4
8.5
8.5
2.4
6.6
3.3
6.0
1.9
5.2
1.5
3.5
0.2
5.1
2.0
5.6
4.0
6.6
0.8
3.5
3.3
5.0
1.7
5.4
7.8
9.5
1.2
3.6
7.2
3.5
0.1
4.9
10.5
7.2
1.1
4.6
7.0
0.2
4.3
2.2
2.3
3.9
5.3
0.5
0.8
0.3
1.8
2.8
3.6
3.5
3.6
0.8
9.5
3.5
2.8
1.8
1.5
1.3
6.7
12.8
0.6
2.9
1.3
0.5
4.3
7.1
2.5
7.1
1.5
2.8
0.5
0.4
1.5
4.8
0.4
0.6
5.2
11.4
4.1
4.9
4.5
4.6
4.4
5.9
1.0
5.1
4.4
3.5
6.3
1.9
1.3
6.1
7.3
5.0
5.3
0.3
4.0
2.9
2.6
2.2
2.6
1.4
1.6
1.9
3.8
5.4
2.5
0.2
1.9
1.3
1.0
0.5
0.8
6.3
7.6
4.0
2.4
2.1
3.7
3.7
3.7
5.2
1.0
0.6
4.0
2.6
2.1
5.1
4.5
4.2
4.6
4.4
4.9
7.7
5.9
16.7
11.1
6.0
6.4
10.3
9.5
6.8
3.4
11.7
2.9
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
173
Table 3 (concluded)
Ten-Year Averages
__________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Final domestic demand

Advanced economies
2.9
2.3
3.0
1.0
1.9
1.0
2.8
2.5
3.2
2.5
2.2
2.4

United States
Japan
Germany1
2.8
2.8
3.6
1.4
2.1
2.7
1.3
2.3
2.5
1.2
5.4
5.4
0.4
1.4
2.7
4.7
1.8
2.7
0.9
3.2
0.9
2.7
0.3
1.3
2.4
3.3
1.1
1.9
2.1
2.6
2.1
1.4
3.1
3.6
4.8
1.2
2.3
3.7
0.5
0.1
2.8
5.2
3.2
1.7
2.4
3.2
0.1
2.7
2.4
2.7
3.0
3.3
1.5
1.1
1.5
1.6
2.6
2.4
0.2
0.9
1.3
2.1
2.6
0.8
0.8
0.5
0.3
1.0
0.7
4.0
1.6
0.5
1.3
0.9
2.9
2.7
1.5
2.3
1.6
0.4
1.6
0.6
2.7
2.0
0.9
1.5
3.8
4.5
3.0
2.4
3.4
2.8
3.0
2.6
1.5
2.6
3.5
3.0
5.0
3.5
2.5
1.2
4.2
4.2
3.9
3.6
2.1
2.8
2.4
2.3
2.1
1.8
1.8
2.5
3.0
3.8
0.5
1.7
2.7
1.7
1.1
1.6
0.7
1.3
1.8
2.4
1.8
1.5
2.3
2.0
2.0
3.0
1.8
1.5
2.4
1.9
1.5
2.9
2.9
2.7
2.5
2.8
3.0
7.3
5.1
11.6
9.3
6.6
6.1
8.0
6.9
6.7
4.4
7.4
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Stock building2
Advanced economies
0.2
0.3
0.2
0.1
0.5
0.1
0.2
0.2
0.1
0.2

United States
Japan
Germany1
0.2
0.4
0.1
0.1
0.1
0.3
0.4
0.2
0.1
0.2
0.2
0.2
0.1
0.1
0.2
0.5
0.4
0.2
0.1
0.1
0.6
0.6
0.2
0.8
0.1
0.5
0.2
0.2
0.1
0.5
0.4
0.5
1.2
0.1
0.1
0.2
1.0
0.3
0.6
0.1
0.1
0.1
0.1
0.1
0.2
0.1
0.8
0.9
0.7
0.3
0.5
0.5
0.6
0.1
0.5
0.1
1.5
0.6
0.4
1.0
1.7
0.6
0.5
0.3
0.3
0.2
0.6
0.7
0.3
0.2
0.9
0.1
1.0
0.1
0.8
0.5
0.2
0.3
0.1
0.1
0.2
0.4
0.2
0.1
0.3
0.3
0.5
0.2
0.2
0.6
0.8
0.2
0.1
0.2
0.1
0.1
0.2
0.3
0.3
0.1
0.1
0.3
0.1
0.5
0.7
0.6
0.8
0.9
0.1
0.1
0.1
0.2
0.4
0.4
0.4
0.4
0.6
0.1
0.4
0.5
0.3
0.1
0.1
0.1
0.5
0.9
0.3
0.1
0.5
0.7
0.1
0.2
1.6
3.6
0.2
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Foreign balance2
Advanced economies
United States
Japan
Germany1
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
1Data
0.1
0.1
0.3
0.3
0.2
0.1
0.1
0.3
0.1
0.1
0.1
0.3
0.5
0.3
0.2
0.3
0.2
0.3
0.8
0.5
0.6
0.9
0.5
0.1
0.6
0.6
0.1
0.7
0.2
0.3
0.2
0.5
0.3
0.1
0.1
0.8
0.2
0.1
0.2
0.8
0.6
0.1
0.4
1.3
0.8
0.7
1.6
0.9
0.2
0.5
0.5
0.2
0.1
0.2
0.5
0.3
0.3
0.2
0.1
0.3
0.3
0.4
1.0
0.6
0.2
0.7
1.2
0.2
0.9
0.7
0.4
0.9
3.4
1.0
0.2
0.7
0.9
0.8
0.3
0.7
0.9
0.9
0.6
0.4
0.5
0.3
1.4
0.9
0.4
1.6
0.4
0.4
1.4
0.4
0.2
0.3
0.3
0.5
0.3
0.4
0.6
0.2
1.1
0.2
0.1
0.3
1.3
2.2
0.1
0.1
0.2
0.2
0.2
0.2
0.5
0.2
0.1
0.1
0.3
1.3
1.5
0.1
0.3
0.2
0.3
0.2
0.1
0.4
0.6
0.1
0.4
0.5
0.7
0.4
0.2
0.2
0.2
0.2
1.2
0.8
2.5
1.4
0.4
0.7
0.9
0.4
0.1
3.5
7.9
0.5

expressed as percent of GDP in the preceding period.
2Changes
174
Output: Advanced Economies
Table 4. Advanced Economies: Unemployment, Employment, and Real Per Capita GDP
(Percent)
Ten-Year Averages1
__________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Unemployment rate
Advanced economies
6.9
7.1
5.9
6.6
7.3
7.7
7.6
7.2
7.3
7.1
6.9
7.0

United States2
Japan
Germany3
6.9
7.3
2.5
7.0
6.7
5.8
3.0
9.0
5.8
5.6
2.1
6.2
6.5
6.8
2.1
5.5
7.2
7.5
2.2
7.7
7.3
6.9
2.5
8.8
7.2
6.1
2.9
9.6
6.8
5.6
3.1
9.4
6.9
5.4
3.3
10.4
6.7
4.9
3.4
11.5
6.4
4.5
4.1
10.9
6.5
4.8
4.3
10.6
9.0
9.8
9.0
9.3
11.2
11.4
7.3
9.7
8.9
11.0
5.8
8.1
9.4
10.9
8.0
10.4
10.3
10.7
9.7
11.3
11.6
10.2
10.3
11.2
12.3
11.3
9.3
10.4
11.6
12.0
8.0
9.5
12.4
12.1
7.3
9.7
12.5
12.3
5.5
9.2
11.8
12.1
4.8
8.4
11.2
11.8
4.9
8.4
7.2
17.9
7.8
11.1
2.5
3.7
8.9
4.9
7.3
7.8
14.2
1.4
8.1
20.1
7.0
11.6
6.2
5.8
9.3
11.8
9.3
5.6
12.5
2.7
6.3
16.2
7.0
8.7
1.5
4.7
9.4
3.2
7.0
4.2
13.4
1.3
6.8
16.3
6.6
9.3
2.9
5.2
10.2
6.7
7.7
4.1
15.5
1.4
7.7
18.4
6.6
10.3
5.3
5.3
10.9
11.9
8.7
4.1
15.5
1.6
9.0
22.7
7.7
12.0
8.2
6.1
12.1
16.5
9.7
5.5
15.5
2.1
9.0
24.2
8.6
12.9
8.0
5.9
12.0
16.8
9.6
6.8
14.1
2.7
8.5
22.9
8.3
12.9
7.7
5.9
10.1
15.6
10.0
7.2
12.2
3.0
8.4
22.2
7.6
12.7
8.1
6.3
8.6
14.6
10.3
7.3
11.5
3.3
8.1
20.8
6.6
12.6
8.0
6.4
7.6
12.6
10.3
6.7
10.2
3.7
8.5
19.2
5.6
12.4
6.7
6.4
6.4
11.3
10.2
5.1
8.9
3.9
8.6
18.3
5.3
12.2
6.2
6.3
6.2
10.1
10.0
5.0
8.2
4.2
Switzerland
Norway
Israel
Iceland
0.6
2.7
6.1
0.8
3.5
4.9
8.9
3.5
0.5
5.2
9.6
1.8
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
5.1
4.7
4.8
6.7
4.5
5.2
4.1
7.7
3.9
4.1
3.2
9.0
3.3
3.9
4.0
9.5
3.0
Korea
Australia
Hong Kong SAR
Singapore
New Zealand
3.8
7.6
1.9
2.9
3.6
5.0
3.4
9.0
1.9
2.8
3.0
8.2
2.5
7.0
1.6
1.3
1.7
7.8
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
8.1
2.0
8.5
1.8
3.2
2.7
6.3
2.0
8.6
2.6
2.8
3.0
6.2
2.7
8.6
2.7
2.2
2.4
6.7
7.0
8.1
2.6
5.0
4.4
7.8
8.0
8.2
2.4
5.7
5.7
8.9
7.2
9.0
9.4
7.4
10.3
11.1
6.2
8.1
8.9
6.9
8.5
8.9
7.8
9.9
10.1
8.2
11.1
11.4
8.1
11.6
12.3
7.7
11.2
12.0
7.7
11.3
12.4
7.5
11.0
12.5
7.1
10.3
11.8
7.1
10.0
11.3
3.2
2.9
2.1
2.0
2.1
2.3
2.1
2.1
2.3
2.6
5.5
6.2
Advanced economies
1.2
0.8
1.6
0.1
0.1
0.1
1.1
1.1
1.0
1.3
0.9
0.9

United States
Japan
Germany3
1.1
1.7
1.1
0.4
0.7
1.2
0.6
0.3
1.5
1.3
2.0
3.0
0.9
1.9
1.7
0.1
0.7
1.1
1.9
1.5
0.2
1.8
1.0
2.3
0.1
0.7
0.8
1.5
0.1
0.4
0.7
1.4
0.5
1.3
1.3
2.2
1.1
1.3
0.9
1.5
0.6
0.2
0.5
0.7
0.1
0.1
0.4
0.6
2.0
0.4
0.4
0.1
1.0
1.1
1.4
0.4
0.6
0.2
1.4
3.1
1.9
0.6
1.1
2.4
0.6
1.2
4.1
0.8
1.4
0.1
1.7
1.8
2.1
1.1
0.5
0.9
1.6
0.4
1.2
1.3
0.8
1.6
1.9
1.4
0.3
1.3
2.5
1.4
0.5
0.5
1.5
1.3
1.2
2.0
0.6
0.1
0.5
1.3
2.1
1.7
1.6
0.9
2.0
1.1
0.4
0.4
0.7
0.2
0.2
1.6
1.7
2.1
0.1
0.1
1.0
0.3
1.6
1.4
0.3
2.0
2.3
0.9
0.2
0.7
1.0
0.6
0.5
0.9
0.5
0.3
1.3
0.6
0.4
1.1
1.2
1.1
0.7
0.9
0.9
2.5
1.9
2.3
2.3
1.9
1.5
2.8
2.2
1.9
1.8
1.0
3.0
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
175
Table 4 (concluded)
Ten-Year Averages1
__________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Growth in real per capita GDP

Advanced economies
2.2
1.6
1.9
0.4
1.2
0.6
2.5
1.9
2.1
2.5
1.4
1.4

United States
Japan
Germany3
2.1
1.8
3.1
1.7
1.4
1.4
1.2
1.9
1.6
0.2
4.7
3.8
2.0
3.4
4.2
1.1
1.6
0.7
1.4
0.4
1.2
1.9
2.2
2.5
0.4
2.4
1.5
1.3
1.3
0.9
1.9
2.1
3.5
0.9
2.3
3.0
0.6
2.1
1.6
2.6
2.8
2.7
1.3
1.2
0.3
2.5
1.8
2.3
2.2
1.7
1.4
1.5
1.3
0.7
2.0
2.0
0.1
1.2
0.4
0.8
2.6
3.1
0.8
0.9
0.9
0.2
1.7
0.2
1.8
1.4
2.4
1.9
4.0
2.8
1.6
2.8
3.0
1.0
1.2
0.5
1.9
0.1
1.9
1.5
3.1
2.6
2.7
2.0
2.0
2.0
2.5
2.4
0.9
1.5
3.0
2.4
3.2
2.0
1.8
1.2
3.8
3.6
3.0
3.5
0.8
1.6
2.1
2.1
2.0
1.5
1.7
1.8
1.7
2.3
2.9
1.0
1.9
1.0
0.7
1.1
0.3
0.7
1.1
2.2
2.6
2.3
1.6
2.2
2.0
2.0
1.4
1.3
2.4
2.5
2.3
1.8
2.7
2.8
1.5
2.4
2.7
6.4
4.1
6.1
6.9
4.8
5.3
6.3
6.1
4.8
5.1
3.8
0.2
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
176
Output: Developing Countries
Table 5. Developing Countries: Real GDP

Ten-Year Averages
__________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
4.3
5.3
4.0
5.0
6.6
6.5
6.7
6.1
6.6
5.8
2.3
3.6
2.5
2.4
2.8
2.8
2.3
2.2
1.9
1.8
0.4
0.7
1.4
2.2
1.7
3.1
4.1
5.8
5.3
3.2
4.0
3.7
3.3
4.7
4.7
2.9
7.0
5.1
2.2
2.2
3.2
7.0
4.5
3.8
3.2
1.5
5.6
7.5
5.6
1.0
1.6
6.6
6.5
3.5
3.8
9.5
6.6
6.5
3.3
1.2
9.3
6.1
3.9
3.9
2.0
9.6
6.7
0.7
5.2
4.8
9.0
7.5
3.8
1.2
5.8
8.2
6.6
4.7
3.5
4.9
6.6
3.8
4.7
5.1
4.5
1.8
6.0
2.3
2.8
5.6
3.9
0.5
2.7
2.7
0.8
6.7
2.2
3.0
6.7
4.6
4.9
3.6
1.6
4.8
5.7
3.4
6.3
8.6
3.6
1.5
9.3
4.6
0.2
9.6
4.9
2.6
8.7
6.6
3.7
7.7
5.7
3.5
6.5
5.7
0.7
3.6
4.4
2.2
4.1
5.2
4.4
3.1
3.6
3.8
2.1
5.1
2.6
4.5
2.4
4.5
2.5
4.4
3.2
4.7
4.0
2.5
4.1
5.8
5.0
5.4
4.8
0.8
5.3
2.4

Official financing
Private financing
0.4
4.4
3.5
4.6
4.5
3.6
5.4
3.8
5.9
4.5
7.2
3.9
3.8
3.6
4.7
5.0
5.0
4.0
6.0
2.9
8.4
6.6
3.0
7.8
4.9
4.0
6.6
2.5
7.9
4.7
1.7
6.9
3.4
7.8
6.1
1.2
6.2
3.9
6.3
6.9
3.5
6.7
5.8
6.7
6.9
2.9
5.9
3.4
6.4
5.3
0.4
2.3
4.5
3.2
0.8
2.4
3.6
3.3
3.6
3.6

2.3
5.6
2.8
6.3
0.7
5.3
2.3
6.1
2.2
8.3
2.6
8.0
3.2
8.2
4.1
7.0
3.8
7.6
4.1
6.4
2.2
2.4
3.2
3.7
2.7
2.8
2.0
3.5
4.2
3.4
1.3
2.7
4.0
1.2
2.4
3.7
1.5
2.5
5.6
1.6
3.5
2.0
2.3
2.8
2.4
5.4
6.2
2.1
5.8
5.7
4.7
5.3
5.7
3.4
4.8
4.9
2.5
5.6
5.2
3.5
1.9
3.3
2.1
3.0
4.0
4.5
4.5
4.2
4.5
4.0
0.7
2.0
0.6
5.1
1.2
0.2
5.4
0.6
1.4
0.5
3.9
3.5
1.0
0.5
4.8
1.6
1.9
2.2
7.7
0.2
1.2
2.0
7.5
1.4
2.0
0.5
7.5
3.2
3.3
0.7
7.4
1.7
0.7
3.2
6.7
2.4
0.7
0.6
5.1
2.3
3.4
1.2
0.6
0.2
1.2
2.2
2.6
0.3
1.0
Regional groups
Africa
Sub-Sahara
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
177
Table 6. Developing Countriesby Country: Real GDP1

Average
198089
Africa
1990
1991
1992
1993
1994
1995
1996
1997
2.5
2.3
1.9
0.4
0.7
2.2
3.1
5.8
3.2
1.6
2.4
1.6
11.4
3.4
0.8
0.5
1.2
7.2
1.5
1.2
0.7
4.7
7.5
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
3.6
1.2
3.9
11.3
5.5
5.1
4.0
3.8
11.6
5.6
6.2
6.0
1.3
7.6
5.3
4.9
5.5
Burundi
Cameroon
Cape Verde
Chad
3.4
5.0
3.6
2.0
4.0
3.5
6.2
5.1
2.9
3.2
5.0
3.8
2.1
0.6
10.4
0.7
3.1
2.0
6.4
2.4
5.9
3.2
2.1
0.3
1.8
3.7
2.5
2.4
4.9
5.6
7.3
3.3
5.2
6.0
0.9
8.4
5.0
1.5
1.5
3.5
4.4
5.1
4.6
5.1
6.6
Comoros
Congo, Rep. of
Congo, Dem. Rep. of
Cte dIvoire
Djibouti
3.0
6.4
1.6
1.6
0.7
5.1
0.9
6.6
1.1
0.6
5.4
2.4
8.4
0.5
8.5
2.6
10.5
0.2
0.2
3.0
1.0
13.5
0.2
3.9
5.3
5.5
3.9
2.0
2.9
3.9
2.2
0.7
7.1
4.0
0.4
4.8
0.9
6.8
5.1
1.3
5.7
6.0
1.0
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia, The
2.4
...
1.4
1.1
2.9
3.3
...
2.7
5.2
5.7
3.6
...
4.7
6.1
2.2
17.0
...
5.3
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
6.2
7.0
3.4
37.3
6.8
11.0
3.8
5.3
98.7
7.9
7.0
4.1
0.8
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
1.8
2.9
3.4
4.4
4.3
3.4
4.3
4.6
4.2
0.6
5.3
2.4
5.1
1.4
7.7
3.9
3.5
1.1
0.8
2.5
5.0
4.9
2.1
0.4
10.1
3.8
3.2
3.2
2.6
8.7
4.5
4.4
4.4
4.4
6.6
4.4
3.9
4.6
3.8
11.0
3.0
4.9
5.0
1.8
6.2
0.9
0.3
1.7
1.8
5.1
...
3.1
5.7
0.4
1.8
...
6.3
8.7
0.9
2.6
...
1.2
7.3
8.4
1.7
...
2.1
9.7
2.4
4.9
...
10.2
2.3
4.2
...
1.7
14.7
6.4
4.3
...
2.1
9.8
4.0
4.4
...
3.6
5.0
6.6
4.5
4.7
3.8
0.5
0.1
0.6
4.7
4.0
1.0
1.3
6.4
6.9
4.9
5.7
2.4
4.8
4.0
8.2
7.4
6.5
6.7
1.0
8.6
2.0
1.4
4.3
10.4
7.5
6.6
4.0
3.5
7.0
4.3
5.1
2.6
5.0
12.0
7.1
3.0
3.3
5.3
2.2
12.4
2.3
4.6
1.5
1.8
1.4
2.4
2.6
7.5
0.4
2.2
4.5
7.5
6.0
4.3
1.2
0.7
2.7
2.6
6.6
0.7
2.8
6.9
2.2
8.1
1.1
2.1
6.5
0.6
49.5
2.2
2.0
0.8
2.6
36.6
2.0
4.8
0.6
6.4
12.0
1.5
5.6
4.7
3.9
10.9
1.0
4.7
4.3
Sierra Leone
Somalia
South Africa
Sudan
Swaziland
0.6
1.6
2.2
2.6
4.9
1.6
...
0.3
1.0
9.7
8.0
...
1.0
7.0
2.5
9.6
...
2.2
5.0
4.0
0.1
...
1.3
2.8
7.3
3.5
...
2.7
1.5
3.4
10.0
...
3.4
3.5
2.5
5.0
...
3.2
4.7
2.5
...
...
1.7
6.6
3.0
Tanzania
Togo
Tunisia
Uganda
Zambia
2.9
1.3
3.4
2.6
1.4
5.4
0.2
7.1
6.5
0.5
4.5
0.7
3.9
6.9
1.3
4.0
9.7
4.6
1.7
0.9
16.4
2.2
7.6
6.8
1.4
16.8
3.3
6.7
8.6
2.6
6.8
2.4
11.5
4.3
4.1
9.1
6.9
8.9
6.4
3.9
4.7
5.6
4.2
3.5
Zimbabwe
4.8
7.0
5.5
9.0
1.3
6.8
0.1
7.3
3.7
Algeria
Angola
Benin
Botswana
Burkina Faso
Liberia
Madagascar
Malawi
Mali
Mauritania
Mauritius
Morocco
Mozambique, Rep. of
Namibia
Niger
Nigeria
Rwanda
So Tom and Prncipe
Senegal
Seychelles
178
Output: Developing Countries
Table 6 (continued)
Average
198089
Asia
1990
1991
1992
1993
1994
1995
1996
1997
7.0
5.6
6.6
9.5
9.3
9.6
9.0
8.2
6.6

Bangladesh
Bhutan
Brunei Darussalam
Cambodia
2.0
4.0
7.5
...
...
2.6
4.9
5.9
2.7
1.2
0.8
4.1
3.9
4.0
7.6
1.0
4.8
4.4
1.1
7.0
3.1
4.2
5.0
0.5
4.1
3.0
4.7
5.1
1.8
4.0
26.2
5.3
6.9
2.0
7.6
6.0
5.4
6.0
2.8
7.0
6.0
5.7
5.7
3.5
2.0
China
Fiji
India
Indonesia
Kiribati
9.5
2.0
6.0
5.3
5.0
3.8
3.2
5.9
9.0
3.2
9.2
1.5
1.7
8.9
2.8
14.2
4.8
4.2
7.2
1.6
13.5
3.5
5.0
7.3
0.9
12.6
4.2
6.9
7.5
1.8
10.5
2.4
7.9
8.2
3.2
9.6
3.3
7.5
8.0
2.0
8.8
3.6
5.6
4.6
2.5
Lao P.D. Republic

Malaysia
Maldives
Marshall Islands
Micronesia, Fed. States of
5.9
5.8
10.4
...
...
6.7
9.6
16.2
3.2
2.7
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
9.2
6.6
2.7
0.9
7.0
9.5
7.2
1.9
1.3
6.8
8.6
6.5
13.1
0.5
6.5
7.8
6.2
5.3
3.8
Myanmar
Nepal
Pakistan
Papua New Guinea
Philippines
1.8
3.5
6.4
1.6
1.9
2.8
6.4
4.5
3.0
3.0
0.7
4.6
5.5
9.5
0.6
9.7
3.3
7.8
11.8
0.3
5.9
7.9
1.9
16.6
2.1
6.8
2.9
3.9
4.4
4.4
7.2
5.4
5.2
2.9
4.8
7.0
3.8
5.2
3.5
5.7
7.0
4.5
1.3
5.4
5.1
Samoa
Solomon Islands
Sri Lanka
Thailand
Tonga
0.2
0.8
4.2
7.3
1.8
9.4
1.0
6.2
11.6
2.0
2.3
3.0
4.6
8.1
6.4
0.2
9.5
4.3
8.2
0.3
4.1
2.0
6.9
8.5
3.7
6.5
5.2
5.6
8.6
5.0
9.6
7.7
5.5
8.8
4.8
5.8
0.6
3.8
5.5
1.4
4.1
0.5
6.4
0.4
4.4
Vanuatu
Vietnam
2.3
5.0
5.2
4.9
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
8.8
2.2
5.6
3.5
6.5
3.9
0.7
3.8
4.7
4.7
Bahrain
Cyprus
Egypt
Iraq
2.4
6.0
6.0
0.4
0.2
4.6
7.3
2.4
11.2
26.0
4.6
0.4
1.2
10.6
62.9
7.8
9.7
0.3
6.1
29.2
8.3
0.7
0.5
2.1
2.4
5.8
2.7
0.9
2.2
5.6
3.2
3.1
6.7
3.1
2.0
4.3
4.8
3.1
2.3
5.0
3.2
10.0
Jordan
Kuwait
Lebanon
Libya
Malta
3.1
1.9
4.3
2.3
4.0
1.9
26.2
13.4
8.2
6.3
1.8
41.0
38.2
12.0
6.3
16.1
77.4
4.5
4.2
4.7
5.6
34.2
7.0
0.1
4.5
8.5
8.4
8.0
0.9
4.0
5.9
1.0
6.5
1.1
9.0
0.8
0.9
4.0
2.0
3.7
2.2
1.6
4.0
2.6
3.7
Oman
Qatar
Saudi Arabia
Turkey
8.3
0.4
1.4
2.6
4.2
8.4
14.8
10.7
7.6
9.2
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
6.7
7.7
3.8
2.3
0.5
7.6
4.7
4.8
1.1
0.5
3.6
8.1
3.5
10.0
1.4
5.5
6.9
3.6
15.5
1.9
5.0
7.5

Yemen, Republic of
1.1
...
17.5
...
0.2
0.3
2.7
4.9
0.9
2.9
2.2
0.5
6.1
8.2
9.5
5.2
3.0
5.5
179
Table 6 (concluded)
Average
198089
1990
1991
1992
1993
1994
1995
1996
1997
Western Hemisphere
2.2
1.0
3.8
3.3
3.9
5.2
1.2
3.5
5.1
Antigua and Barbuda

Argentina
Bahamas, The
Barbados
Belize
6.7
1.0
3.4
1.7
4.3
2.3
1.3
1.2
3.3
10.2
2.7
10.5
2.7
3.9
3.1
0.4
10.3
2.0
5.7
9.5
5.5
6.3
1.7
0.8
3.3
6.2
8.5
0.9
4.0
1.8
5.0
5.8
0.3
2.9
3.3
5.1
4.8
4.2
5.2
2.0
3.3
8.6
3.0
4.7
3.5
Bolivia
Brazil
Chile
Colombia
Costa Rica
0.2
2.8
3.5
3.4
2.5
4.6
3.7
3.7
4.3
3.6
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
5.8
2.4
4.7
2.8
7.4
2.1
0.6
4.2
3.2
7.1
3.1
3.2
Dominica
Dominican Republic
Ecuador
El Salvador
Grenada
7.5
3.6
2.3
1.2
5.0
5.3
5.8
3.0
4.9
5.2
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
2.3
6.3
3.1
3.3
7.3
2.0
2.0
3.5
1.8
8.1
3.4
4.0
3.6
Guatemala
Guyana
Haiti
Honduras
Jamaica
0.9
2.1
0.2
2.5
2.2
3.1
2.5
0.2
0.1
4.1
3.7
6.1
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
8.6
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
6.1
1.1
4.9
1.4
Mexico
Nicaragua
Panama
Paraguay
2.3
0.6
0.9
1.8
3.7
5.1
1.5
0.1
8.1
3.1
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
Peru
St. Kitts and Nevis
St. Lucia
Suriname
5.6
6.3
6.2
1.5
3.2
3.0
4.1
5.0
0.1
2.9
3.9
2.3
0.6
2.9
1.6
3.5
7.1
7.5
4.0
6.4
7.0
2.1
0.2
9.5
13.1
4.8
2.2
2.4
5.4
7.3
3.9
4.1
7.6
7.1
2.5
6.3
3.7
1.6
6.7
7.2
7.0
3.5
2.1
5.6
Trinidad and Tobago

Uruguay
Venezuela
2.9
1.0
0.1
1.5
0.9
6.5
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
3.7
3.5
5.3
0.4
3.2
5.1
5.1
1For
many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years.
180
Output: Countries in Transition
Table 7. Countries in Transition: Real GDP1

Average
198089
1990
1991
1992
1993
1994
1995
1996
1997
...
...
10.0
8.7
3.8
2.8
1.6
1.6
2.8
Albania
Belarus
Bulgaria
Croatia
Czech Republic
2.5
...
3.6
...
...
10.0
...
9.1
...
...
28.0
1.2
11.7
...
...
7.2
9.7
7.3
...
...
9.6
7.6
1.5
8.0
0.6
9.4
12.6
1.8
5.8
2.7
8.9
10.4
2.1
6.8
6.4
9.1
2.8
10.9
6.0
3.9
7.0
10.4
6.9
6.5
1.0
Czechoslovakia, former
Estonia
Hungary
Latvia
Lithuania
2.5
...
1.5
...
...
0.4
...
3.5
...
...
15.9
7.9
11.9
11.1
5.7
8.5
21.6
3.1
35.2
21.3
...
8.2
0.6
16.1
16.2
...
1.8
2.9
2.1
9.8
...
4.3
1.5
0.3
3.3
...
4.0
1.3
3.3
4.7
...
10.9
4.4
6.5
5.7
Macedonia, former Yugoslav Rep. of

Moldova
Poland
Romania
Slovak Republic
...
...
1.7
...
...
...
7.2
7.7
...
...
17.5
7.0
12.9
...
...
29.7
2.6
8.8
...
9.1
1.2
3.8
1.5
3.7
1.8
31.2
5.2
3.9
4.9
1.2
1.4
7.0
6.9
6.9
0.8
7.8
6.1
3.9
6.6
1.5
1.3
6.9
6.6
6.5
Slovenia
Ukraine
Yugoslavia, former
...
...
0.7
...
...
7.5
...
10.6
17.0
...
17.0
34.0
2.8
14.2
...
5.3
22.9
...
4.1
12.2
...
3.1
10.0
...
3.8
3.2
...
Russia
...
...
5.4
19.4
10.4
11.6
4.8
5.0
0.9
...
...
7.0
14.4
10.1
10.3
4.3
1.6
2.1
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
...
...
...
...
...
...
...
...
...
...
12.4
0.7
20.6
11.0
7.9
52.6
22.6
44.8
5.3
13.9
14.1
23.1
25.4
10.6
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
6.5
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
6.6
...
...
...
5.6
...
...
...
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
3.0
1.7
25.9
2.4
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.
181
Table 8. Summary of Inflation

(Percent)
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Advanced economies
6.1
United States
European Union
Japan
5.0
7.2
2.2
2.6
4.5
4.5
3.3
2.8
2.2
2.3
1.9
1.7
1.6
1.5
2.5
3.2
0.6
4.3
5.3
2.3
4.0
5.4
2.7
2.8
4.5
1.7
2.6
3.7
0.6
2.4
2.6
0.2
2.3
2.9
0.6
1.9
2.4
0.5
1.9
1.7
0.6
1.2
1.8
0.4
2.0
1.8
1.0
11.2
3.4
5.6
5.4
3.5
3.4
3.0
3.3
2.8
2.1
3.1
1.8
Advanced economies
6.3
2.9
5.2
4.7
3.5
3.1
2.6
2.5
2.4
2.1
1.7
1.7
United States
European Union
Japan
5.5
7.0
2.5
3.0
3.2
1.2
5.4
5.4
3.1
4.2
5.1
3.3
3.0
4.4
1.7
3.0
3.8
1.2
2.6
3.0
0.7
2.8
2.9
0.1
2.9
2.5
0.1
2.3
1.9
1.7
1.6
1.7
0.4
2.3
1.8
0.5
11.3
3.9
6.3
6.5
4.1
3.5
3.4
3.6
3.3
2.8
3.3
2.4
35.9
29.2
68.2
36.5
38.7
47.2
51.6
22.3
14.1
9.1
10.3
8.3
15.0
8.8
19.5
116.7
22.3
8.9
25.0
91.6
16.0
7.0
22.4
438.4
24.7
8.2
27.5
129.0
32.4
7.2
25.6
151.4
30.5
11.0
24.6
208.5
37.5
15.9
31.9
208.3
34.1
12.8
35.9
35.9
26.7
7.9
24.6
20.8
11.0
4.7
22.6
13.9
7.7
8.3
22.6
10.8
7.1
7.0
13.7
9.4
Analytical groups
Fuel
Nonfuel
13.3
40.3
23.0
30.1
14.3
77.7
21.3
38.7
22.8
41.0
26.1
50.2
32.4
54.1
42.7
20.1
30.7
12.4
14.9
8.5
15.1
9.8
13.5
7.7

Official financing
Private financing
2.6
37.4
18.0
53.7
12.4
3.2
30.1
17.9
40.0
12.8
3.9
71.2
18.2
117.1
13.3
6.1
37.7
25.7
49.8
16.0
3.2
40.1
22.4
56.6
11.6
4.2
49.0
22.3
71.6
11.5
3.4
53.5
27.3
78.0
11.7
5.0
22.8
22.3
26.6
13.5
2.3
14.5
16.5
15.7
10.5
1.2
9.4
10.0
10.1
7.3
1.1
10.6
7.4
7.8
19.7
1.7
8.4
8.9
6.7
13.1

69.5
23.7
86.2
13.5
273.9
22.4
111.7
15.5
152.8
11.6
216.0
13.2
233.2
17.1
43.0
16.6
22.2
12.1
12.5
8.4
10.7
10.5
9.4
8.1
8.6
128.0
38.6
95.8
656.6
609.3
268.4
124.1
41.4
27.9
29.5
34.6

Russia
...
...
...
...
...
...
...
...
...
...
...
...
95.4
98.9
92.7
110.9
283.1
103.8
1,353.0
945.3
357.7
79.9
895.9
1,224.2
153.3
45.1
302.0
1,667.7
75.3
25.1
190.1
183.6
32.4
23.4
47.8
68.7
38.2
40.7
14.7
31.0
18.3
16.7
48.4
20.6
14.7
10.2
73.2
11.7
6.9
9.8
1.2
2.8
8.5
165.7
5.4
10.4
7.8
4.0
11.8
101.4
3.2
9.8
839.5
3.0
9.5
472.2
2.4
10.6
131.6
2.4
10.0
46.0
2.2
7.3
24.1
1.8
5.9
14.9
1.9
5.0
11.3
2.0
4.7
8.6
GDP deflators

Consumer prices
Regional groups
Africa
Asia
Western Hemisphere
Memorandum
Median inflation rate
Advanced economies
182
Inflation: Advanced Economies
Table 9. Advanced Economies: GDP Deflators and Consumer Prices

Fourth Quarter1
___________________
Ten-Year Averages
__________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998 1999
1997
1998
1999
6.1
5.3
5.0
2.2
3.0
7.1
11.7
7.5
5.8
10.2
10.0
1.2
4.7
7.4
4.1
6.4
7.4
17.9
18.7
8.6
3.4
3.8
7.1
105.5
36.5
8.4
8.3
4.2
8.9
3.6
11.6
2.6
2.3
2.5
0.6
2.5
1.9
4.4
3.6
1.5
3.9
4.4
2.1
2.5
2.9
2.5
2.2
2.3
11.3
6.5
1.9
1.9
2.0
2.1
11.2
4.9
6.0
2.2
2.7
5.4
2.8
1.9
4.5
4.1
4.3
2.3
3.2
3.1
7.6
6.4
3.1
6.5
7.3
2.3
3.1
8.8
3.4
3.4
5.7
20.6
12.4
0.8
2.2
4.2
3.9
16.7
16.9
9.9
4.8
3.8
7.5
4.9
3.9
4.5
4.1
4.0
2.7
3.9
3.3
7.7
6.5
2.7
6.3
7.1
2.7
3.2
7.6
3.7
2.5
2.6
19.8
12.3
1.7
2.2
6.0
2.4
20.7
7.8
10.1
2.1
3.8
9.2
3.7
1.0
3.3
3.0
2.8
1.7
5.6
2.1
4.7
4.6
1.3
4.7
6.9
2.3
3.6
1.0
4.3
2.2
0.7
14.8
10.6
2.5
2.9
2.7
0.4
12.0
3.6
6.1
1.4
3.9
9.7
0.9
1.7
2.8
2.5
2.6
0.6
4.0
2.5
4.4
3.2
1.2
4.1
4.3
1.9
4.2
2.6
2.8
0.9
2.4
14.5
7.1
4.4
0.9
2.7
2.1
12.3
2.5
5.1
1.4
3.5
8.5
5.5
2.6
2.2
1.9
2.4
0.2
2.4
1.5
3.5
1.6
1.2
3.5
4.0
2.3
2.3
2.5
2.8
2.4
1.3
11.3
6.1
1.2
5.5
1.5
0.2
12.7
2.0
5.5
0.9
1.9
6.9
3.8
1.7
2.3
1.9
2.3
0.6
2.2
1.6
5.1
2.4
2.6
3.5
4.8
1.7
1.7
3.7
2.1
1.8
2.4
9.8
4.8
0.4
1.0
1.2
3.1
8.6
2.7
5.6
2.6
1.9
2.6
2.7
2.5
1.9
1.6
1.9
0.5
1.0
1.2
5.0
3.1
1.4
2.9
3.1
1.7
1.6
1.0
2.1
1.8
0.8
8.1
2.6
1.7
0.4
0.4
4.1
11.3
1.9
3.4
2.2
2.7
5.9
1.4
2.0
1.7
1.5
1.9
0.6
0.6
0.9
2.6
2.5
0.5
2.4
2.2
2.0
1.4
1.2
1.4
2.0
2.2
6.9
3.1
2.3
2.4
0.2
2.8
9.0
2.8
2.4
2.0
1.8
6.7
1.5
0.2
1.6
1.2
1.2
0.4
1.0
1.1
2.3
2.6
3.2
2.1
2.4
2.0
0.7
1.4
2.2
2.2
4.9
3.3
2.4
1.2
0.5
4.8
5.8
9.5
1.6
1.8
2.7
1.8
1.7
1.5
1.3
2.0
1.0
1.3
1.4
1.7
2.5
1.0
2.1
2.4
2.3
1.7
0.1
1.4
2.8
2.3
3.4
2.9
2.9
1.4
0.9
3.5
4.5
3.4
2.7
3.3
1.9
4.5
2.0
1.9
...
1.4
1.7
0.9
0.5
1.0
2.6
2.1
0.3
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
1.2
1.4
0.2
1.2
1.4
1.6
2.7
0.3
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
1.4
2.1
0.7
1.7
1.4
1.8
2.3
1.1
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
...
5.6
7.2
7.0
2.5
3.2
3.0
4.4
5.3
4.7
4.3
5.4
4.9
3.2
4.5
4.4
2.6
3.7
3.7
2.0
2.6
2.7
2.1
2.9
2.9
1.7
2.4
2.2
1.6
1.7
1.5
1.3
1.8
1.6
1.5
1.8
1.7
...
...
...
...
...
...
...
...
...
6.8
4.7
7.3
7.6
5.6
5.1
4.4
3.9
3.4
2.7
5.7
1.5
...
...
...
6.3
5.5
5.5
2.5
2.9
7.3
11.2
7.0
6.5
2.9
2.7
3.0
1.2
2.5
2.0
4.1
3.9
2.2
5.2
4.8
5.4
3.1
2.7
3.4
6.5
8.1
4.8
4.7
4.3
4.2
3.3
3.5
3.2
6.3
6.8
5.6
3.5
3.2
3.0
1.7
4.7
2.4
5.3
4.7
1.5
3.1
2.8
3.0
1.2
4.4
2.1
4.6
3.0
1.8
2.6
2.2
2.6
0.7
2.7
1.7
4.1
2.4
0.2
2.5
2.3
2.8
0.1
1.8
1.8
5.2
2.8
2.2
2.4
2.2
2.9
0.1
1.5
2.0
3.9
2.9
1.6
2.1
2.0
2.3
1.7
1.8
1.2
1.7
2.8
1.4
1.7
1.7
1.4
1.6
1.6
2.3
0.4 0.5
1.0
1.4
1.1
1.3
1.8
1.7
2.8
2.8
1.3
1.9
...
1.9
1.9
2.2
1.9
1.2
1.6
2.8
1.2
...
1.3
1.8
0.6
0.8
1.4
1.8
2.8
1.9
...
1.6
2.3
0.3
1.4
1.0
1.8
2.8
1.8
10.1
4.1
6.7
6.3
4.9
4.1
4.1
3.6
3.3
2.6
3.0
2.3
...
...
...
5.8
7.0
6.9
2.8
3.2
3.0
5.0
5.4
4.4
4.5
5.1
4.4
3.3
4.4
4.3
2.9
3.8
3.8
2.3
3.0
3.0
2.4
2.9
2.9
2.3
2.5
2.4
2.0
1.9
1.7
1.5
1.7
1.4
1.7
1.8
1.6
...
...
...
...
...
...
...
...
...
6.7
5.1
7.0
7.5
5.9
4.6
5.6
4.6
4.3
3.7
5.3
2.4
...
...
...
GDP deflators
Advanced economies
United States
Japan
Germany2
France
Italy
United Kingdom
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Luxembourg
Switzerland
Norway
Israel
Iceland
Korea
Australia
Hong Kong SAR
Singapore
New Zealand
Memorandum
European Union
Euro area
economies
Consumer prices
Advanced economies
United States
Japan
Germany 2,3
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
183
Table 10. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing
Ten-Year Averages
____________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Hourly earnings
Advanced economies
6.4
4.3
6.6
6.0
5.9
3.9
3.4
3.3
3.2
3.9
3.6
2.8

United States
Japan
Germany1
5.3
2.8
4.0
5.1
3.8
3.7
2.9
3.7
5.8
4.7
6.5
5.7
5.3
5.3
5.9
0.3
5.3
4.3
4.6
9.6
3.5
3.0
2.6
6.7
2.9
2.8
2.7
1.9
2.9
2.4
2.5
4.1
2.8
2.1
1.7
4.3
3.5
4.0
3.2
1.1
3.4
4.6
0.9
1.7
2.6
3.7
1.5
2.7
8.9
13.7
10.1
4.5
3.6
5.4
5.6
2.7
4.8
8.7
9.4
5.2
5.4
9.4
8.2
4.7
4.6
6.6
6.6
3.5
3.5
4.2
4.5
2.1
3.7
2.6
5.0
1.6
1.6
5.4
4.5
1.4
2.5
5.3
4.4
3.2
3.3
5.0
4.4
0.9
3.5
2.8
5.1
2.2
3.1
3.8
4.1
2.1
11.6
6.3
10.2
9.0
8.5
5.8
5.9
5.1
5.1
5.9
4.6
3.6
5.9
9.0
8.8
3.9
4.6
4.3
6.1
7.3
6.6
5.5
5.8
5.2
5.4
7.0
7.1
3.6
5.0
5.1
3.0
3.5
3.0
3.0
4.0
3.7
2.9
4.0
3.7
3.5
3.3
2.9
3.4
3.3
2.8
2.8
3.5
3.3
11.7
10.7
18.7
14.9
16.2
9.2
11.3
7.8
8.9
11.1
6.9
2.7
Advanced economies
2.3
3.0
2.4
1.9
3.5
2.3
5.0
4.0
3.4
4.3
1.8
1.7

United States
Japan
Germany1
2.0
0.4
3.0
2.6
2.9
3.3
1.0
4.6
2.4
2.3
2.8
3.5
1.7
2.1
1.5
0.4
3.5
5.2
3.7
5.9
1.8
2.1
0.7
2.8
4.6
3.2
3.4
8.5
3.9
4.1
4.8
4.2
3.4
4.5
3.7
5.2
4.2
4.0
4.9
6.9
1.8
3.4
4.1
4.8
1.7
2.5
1.9
4.0
4.1
4.0
3.9
0.7
3.7
2.7
2.2
1.5
1.5
1.4
2.6
3.3
1.3
1.3
2.9
0.6
4.2
3.9
6.3
4.3
1.9
5.0
4.2
9.0
6.0
4.8
2.6
3.9
5.9
0.7
0.2
2.8
0.4
0.9
0.4
6.6
2.8
1.1
0.2
4.3
1.8
0.1
0.9
3.3
2.3
0.3
0.4
3.4
3.6
2.3
2.9
3.6
4.5
6.9
4.4
3.4
4.9
2.1
1.5
2.2
3.7
3.8
2.8
3.3
3.6
2.2
1.9
1.9
1.6
1.4
1.1
3.3
4.4
4.0
2.1
3.0
2.5
4.9
7.5
8.2
3.8
3.8
4.4
3.1
1.9
2.4
4.0
4.3
4.9
1.8
2.9
3.6
1.7
2.5
3.0
5.8
6.8
8.3
8.5
8.0
6.5
7.6
8.7
8.6
10.2
1.4
1.0
Advanced economies
4.1
1.2
4.1
4.0
2.3
1.6
1.5
0.7
0.2
0.4
1.8
1.1

United States
Japan
Germany1
3.2
2.3
1.0
2.4
0.9
0.3
1.9
0.8
3.3
2.4
3.6
2.1
3.6
3.1
4.3
0.7
1.8
0.8
8.6
3.5
1.7
0.8
3.3
3.9
1.6
0.4
0.7
6.0
1.0
1.6
2.2
0.1
0.6
2.3
1.9
0.8
0.7
1.6
5.4
1.7
1.2
5.2
3.0
0.9
1.1
0.5
1.3
4.6
9.3
6.0
3.7
0.1
2.6
3.3
1.2
3.3
7.2
6.6
1.8
4.0
8.0
5.2
4.1
0.3
2.6
0.3
0.8
3.6
2.2
0.5
2.0
4.9
3.2
0.2
1.0
2.3
0.4
3.8
1.3
0.3
5.8
5.4
2.7
3.1
2.2
3.3
1.1
0.8
1.1
5.2
3.1
0.2
1.4
3.7
1.7
8.0
2.4
7.6
5.7
4.3
1.2
1.1
0.4
1.5
0.8
2.3
1.9
3.5
5.2
4.9
1.1
1.3
0.8
3.8
5.3
4.7
3.9
4.4
4.0
2.1
2.6
3.0
1.6
2.0
2.6
1.7
3.7
4.8
0.7
0.2
0.7
0.2
2.1
1.3
0.4
0.8
1.8
1.6
0.4
0.7
1.1
1.0
0.3
4.6
2.7
8.7
4.9
5.6
1.9
2.1
1.7
0.4
0.4
4.5
1.2
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
184
Inflation: Developing Countries
Table 11. Developing Countries: Consumer Prices

Ten-Year Averages
___________________
198089
199099
Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
35.9
32.5
68.2
36.5
38.7
47.2
51.6
22.3
14.1
9.1
10.3
8.3
15.0
17.5
18.6
22.0
16.0
17.6
24.7
27.8
32.4
38.2
30.5
38.1
37.5
46.9
34.1
40.9
26.7
33.4
11.0
13.8
7.7
9.2
7.1
8.4
18.3
8.8
9.6
19.5
116.7
25.4
8.9
10.0
22.2
103.8
22.1
7.0
9.7
22.4
438.4
38.1
8.2
11.0
27.5
129.0
46.4
7.2
6.8
25.6
151.4
44.2
11.0
7.8
24.6
208.5
60.6
15.9
7.9
31.9
208.3
45.3
12.8
8.6
35.9
35.9
45.6
7.9
7.6
24.6
20.8
17.4
4.7
6.7
22.6
13.9
10.3
8.3
24.2
22.6
10.8
8.9
7.0
15.7
13.7
9.4
Analytical groups
Fuel
Manufactures
private transfers
Diversified
13.3
40.4
50.1
18.1
38.2
43.6
14.3
99.0
147.2
21.3
42.3
83.3
22.8
57.7
44.1
26.1
79.8
34.2
32.4
85.4
37.4
42.7
19.4
24.7
30.7
8.2
22.6
14.9
4.7
12.7
15.1
3.1
8.3
13.5
4.3
6.8
16.7
41.9
14.6
31.9
22.0
47.4
21.3
29.0
19.3
18.9
13.5
16.0
14.1
16.5
12.8
21.6
9.2
19.7
5.9
16.4
4.1
26.7
4.5
16.1

Official financing
Private financing
2.6
37.4
18.0
53.7
12.4
2.9
33.7
18.0
46.7
12.6
3.9
71.2
18.2
117.1
13.3
6.1
37.7
25.7
49.8
16.0
3.2
40.1
22.4
56.6
11.6
4.2
49.0
22.3
71.6
11.5
3.4
53.5
27.3
78.0
11.7
5.0
22.8
22.3
26.6
13.5
2.3
14.5
16.5
15.7
10.5
1.2
9.4
10.0
10.1
7.3
1.1
10.6
7.4
7.8
19.7
1.7
8.4
8.9
6.7
13.1

69.5
23.7
77.7
18.5
273.9
22.4
111.7
15.5
152.8
11.6
216.0
13.2
233.2
17.1
43.0
16.6
22.2
12.1
12.5
8.4
10.7
10.5
9.4
8.1
27.8
17.8
12.8
31.1
21.0
13.8
33.0
26.6
15.0
52.6
39.9
20.1
45.8
37.0
18.2
43.9
29.8
16.1
57.7
39.1
18.7
44.8
25.2
23.0
42.6
22.4
13.6
16.2
11.5
8.4
9.8
8.3
8.6
9.0
8.4
8.0
9.8
8.5
10.4
11.8
9.8
9.5
10.6
10.0
7.3
5.9
5.0
4.7
10.3
8.7
6.4
13.0
10.3
7.9
5.7
11.1
10.1
9.2
9.8
23.3
10.5
11.9
9.0
22.7
10.1
8.8
6.9
12.1
9.5
8.7
5.0
10.7
24.8
7.2
4.7
8.3
12.4
8.1
5.0
10.2
8.0
7.2
6.5
7.1
7.8
5.3
3.6
7.2
5.2
6.0
3.3
5.0
4.5
6.3
3.3
4.6
Other groups
Heavily indebted poor
countries
Memorandum
Median
Regional groups
Africa
Asia
Western Hemisphere
185
Table 12. Developing Countriesby Country: Consumer Prices1

Average
198089
1990
1991
1992
1993
1994
1995
1996
1997
Africa
15.0
16.0
24.7
32.4
30.5
37.5
34.1
26.7
11.0
Algeria
Angola
Benin
Botswana
Burkina Faso
9.0
5.6
2.2
11.8
4.9
16.7
1.8
1.1
11.4
0.5
25.9
83.6
2.1
11.8
2.2
31.7
299.1
5.9
16.2
2.0
20.5
1,379.5
0.5
14.3
1.0
29.0
949.8
38.6
10.5
24.7
29.8
2,671.6
14.9
10.5
7.8
18.7
4,147.0
4.7
10.1
6.1
5.7
111.3
3.8
9.3
2.3
Burundi
Cameroon
Cape Verde
Chad
7.0
7.6
12.5
5.8
4.6
7.0
1.5
10.6
0.2
0.5
9.0
0.6
8.0
2.8
4.2
4.5
1.9
7.0
0.8
3.8
9.7
3.7
5.9
2.9
7.0
14.7
12.7
4.3
24.5
41.3
19.4
30.9
7.7
19.2
9.5
26.4
6.4
7.3
4.4
11.3
25.8
4.2
8.1
0.6
5.6
Comoros
Congo, Rep. of
Congo, Dem. Rep. of
Cte dIvoire
Djibouti
5.3
7.1
57.5
5.8
5.0
7.4
2.6
81.3
0.7
7.8
1.7
1.6
2,154.4
1.6
6.8
1.4
3.9
4,129.2
4.2
3.4
2.0
4.9
1,893.1
2.1
4.4
25.3
42.9
23,760.5
26.0
6.5
7.1
8.6
541.8
14.3
4.9
1.4
10.2
616.8
2.7
4.0
1.0
8.3
198.5
5.6
3.0
Equatorial Guinea
Eritrea
Ethiopia
Gabon
Gambia, The
18.3
...
5.0
6.1
16.6
0.7
...
5.2
5.7
10.2
0.9
...
20.8
3.3
9.1
1.0
...
23.0
10.8
12.0
1.6
4.6
10.1
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
Ghana
Guinea
Guinea-Bissau
Kenya
Lesotho
44.3
33.3
57.7
11.4
14.2
37.2
19.4
33.0
11.2
11.5
18.0
19.6
57.6
19.6
17.9
10.1
16.6
69.4
27.4
17.0
24.9
6.7
48.2
45.9
13.8
24.9
4.7
15.2
28.8
7.2
59.5
5.5
45.4
1.5
9.9
45.6
3.0
50.7
9.0
9.1
27.9
1.9
49.1
11.2
8.4
Liberia
Madagascar
Malawi
Mali
Mauritania
7.3
18.3
16.8
3.8
8.4
...
11.8
11.9
1.6
6.4
...
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
3.0
...
4.5
9.1
3.0
Mauritius
Morocco
Mozambique, Rep. of
Namibia
Niger
11.2
7.5
36.7
13.1
3.8
10.7
7.0
43.7
12.0
2.0
12.8
8.0
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
7.8
3.0
Nigeria
Rwanda
So Tom and Prncipe
Senegal
Seychelles
19.8
4.6
13.8
6.7
3.9
7.4
4.2
42.2
0.3
3.9
13.0
19.6
46.5
1.8
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
8.5
0.3
29.3
8.9
35.5
2.8
1.1
8.5
12.0
71.3
1.8
0.6
Sierra Leone
Somalia
South Africa
Sudan 2
Swaziland
57.7
52.4
14.6
10.7
13.4
110.9
...
14.4
65.2
13.6
102.7
...
15.2
123.6
11.0
65.5
...
13.9
117.6
8.2
17.6
...
9.7
101.3
11.3
18.4
...
9.0
115.5
13.8
29.8
...
8.6
68.4
12.3
23.1
...
7.4
132.8
8.0
...
...
8.6
46.7
8.0
30.5
4.8
8.7
115.9
36.6
30.4
1.1
6.5
45.4
109.6
31.7
0.2
8.2
32.9
97.7
24.8
1.6
5.8
42.2
165.7
23.8
0.1
4.0
18.2
183.3
30.2
35.3
4.7
6.5
54.6
34.0
15.8
6.2
6.1
34.9
25.7
4.6
3.8
7.5
43.1
17.1
8.1
3.7
7.8
24.4
12.9
17.4
23.3
42.1
27.6
22.3
22.6
21.4
19.0
Tanzania
Togo
Tunisia
Uganda
Zambia
Zimbabwe
186
Inflation: Developing Countries
Table 12 (continued)
Average
198089
Asia
1990
1991
1992
1993
1994
1995
1996
1997
8.8
7.0
8.2
7.2
11.0
15.9
12.8
7.9
4.7
21.6
11.2
9.4
...
...
157.8
6.0
9.4
2.1
141.8
166.0
6.3
13.3
1.6
182.2
58.2
3.5
16.0
1.3
93.8
34.0
3.1
8.9
4.3
152.2
20.0
6.3
8.1
2.4
4.1
14.0
7.7
10.7
6.0
7.3
14.0
4.5
7.0
2.0
7.3
14.0
4.8
7.0
1.7
7.9
7.2
7.4
9.1
9.6
6.7
3.1
11.9
9.9
7.8
3.8
3.6
6.1
13.0
9.4
5.7
6.4
8.2
9.8
7.5
4.0
14.6
6.5
8.4
9.7
6.1
24.3
4.9
10.0
8.5
5.2
16.7
5.2
10.2
9.4
3.6
8.4
0.6
6.9
7.9
0.6
2.8
6.3
6.6
4.0
Lao P.D. Republic

Malaysia
Maldives
Marshall Islands
Micronesia, Fed. States of
54.3
3.6
7.0
...
...
35.7
2.8
3.6
0.7
3.5
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
Myanmar
Nepal
Pakistan
Papua New Guinea
Philippines
10.1
8.5
7.2
6.3
14.1
21.9
9.8
9.1
7.0
12.7
29.1
21.0
11.6
7.0
18.7
22.3
8.9
3.6
4.3
8.9
33.6
8.9
9.6
5.0
7.6
22.4
7.6
11.8
2.9
9.1
28.9
8.1
12.1
17.3
8.1
20.0
9.0
10.3
11.6
8.4
10.0
7.5
12.5
3.9
6.0
Samoa
Solomon Islands
Sri Lanka
Thailand
Tonga
13.2
11.8
12.6
5.7
9.0
15.2
8.6
21.5
6.0
5.6
8.5
10.8
12.2
5.7
13.5
1.7
9.2
11.4
4.1
8.7
18.4
9.2
11.7
3.4
3.1
1.0
13.3
8.4
5.1
2.4
7.0
9.6
7.7
5.8
0.3
3.5
12.1
15.9
5.9
2.8
3.5
8.1
9.6
5.6
1.8
8.7
124.1
5.0
67.0
6.5
84.4
4.1
37.8
3.6
8.3
2.3
9.4
2.2
17.0
0.9
5.8
2.8
3.2
19.5
22.4
27.5
25.6
24.6
31.9
35.9
24.6
22.6
Bahrain
Cyprus
Egypt
Iraq
2.1
5.7
17.3
19.6
18.5
1.3
4.5
21.2
9.0
50.0
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
7.2
23.1
34.5
1.0
3.6
6.2
16.9
45.0
Jordan
Kuwait
Lebanon
Libya
Malta
6.8
3.6
68.9
7.7
3.4
16.1
9.8
88.9
8.6
3.0
8.2
9.1
50.1
11.7
2.6
4.0
0.5
99.8
18.0
1.6
3.3
0.4
24.7
23.0
4.1
3.5
2.5
8.0
17.0
4.2
2.4
2.7
10.6
10.0
4.0
6.5
3.6
8.9
7.0
2.5
3.0
0.8
8.5
6.0
2.5
Oman
Qatar
Saudi Arabia
Turkey
1.8
4.0
22.6
49.6
10.0
3.0
2.1
11.1
60.3
4.6
4.4
4.6
9.0
66.0
1.0
3.1
0.4
11.0
70.1
1.1
0.9
0.8
13.2
66.1
0.7
1.3
0.6
15.3
106.3
1.1
3.0
5.0
7.7
93.6
0.3
2.5
0.9
8.7
82.3
0.2
2.6
0.4
2.5
85.7

Yemen, Republic of
5.1
...
0.6
...
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

Bangladesh
Bhutan
Brunei Darussalam
Cambodia
China
Fiji
India
Indonesia
Kiribati
Vanuatu
Vietnam
187
Table 12 (concluded)
Average
198089
1990
1991
1992
1993
1994
1995
1996
1997
Western Hemisphere
116.7
438.4
129.0
151.4
208.5
208.3
35.9
20.8
13.9
Antigua and Barbuda

Argentina
Bahamas, The
Barbados
Belize
5.6
318.9
6.2
7.2
4.5
6.5
2,314.7
4.6
3.0
3.0
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
Bolivia
Brazil
Chile
Colombia
Costa Rica
230.2
237.3
21.2
23.3
24.1
17.1
2,740.0
26.0
29.1
19.0
21.4
413.3
21.8
30.3
28.7
12.1
991.4
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
59.6
8.2
20.9
23.2
12.4
11.1
7.4
20.8
17.5
4.7
7.9
6.1
18.5
13.2
Dominica
Dominican Republic
Ecuador
El Salvador
Grenada
7.3
21.7
32.1
18.4
6.8
3.1
50.5
48.4
24.0
2.8
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
4.6
1.1
Guatemala
Guyana
Haiti
Honduras
Jamaica
12.4
26.2
7.6
7.5
16.9
41.6
63.6
20.4
23.3
24.8
35.1
101.5
19.0
34.0
68.6
10.2
28.2
21.3
8.8
57.5
13.4
11.7
18.8
10.7
24.3
12.5
13.6
37.4
21.7
33.2
8.4
12.3
30.2
29.5
21.7
11.0
7.1
21.9
23.8
21.5
9.2
3.6
16.2
20.2
9.1
Mexico
Nicaragua
Panama
Paraguay
65.1
4.8
380.0
2.9
20.3
26.7
3.7
3,127.5
0.5
38.1
22.7
3.8
7,755.3
0.8
24.2
15.5
1.5
40.5
1.6
15.2
9.8
1.9
20.4
1.0
18.2
7.0
1.9
7.7
1.3
20.5
35.0
2.7
11.2
0.8
13.4
34.4
3.5
6.8
2.3
9.8
20.6
3.5
5.7
0.5
8.3
Peru
St. Kitts and Nevis
St. Lucia
Suriname
193.6
4.6
5.4
6.0
12.1
7,481.6
4.2
3.8
7.2
21.8
409.5
4.2
6.2
5.9
26.0
73.5
2.9
5.6
3.8
43.7
48.6
1.8
0.8
4.2
143.4
23.7
1.4
2.6
0.4
368.5
11.1
3.0
5.9
2.4
235.5
11.5
2.0
3.3
4.4
0.8
8.5
8.9
3.0
0.5
7.2
11.8
56.5
21.5
11.0
112.5
40.7
3.8
101.8
34.2
6.5
68.5
31.4
13.1
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
Trinidad and Tobago

Uruguay
Venezuela
1For
2The
many countries, figures for recent years are IMF staff estimates. Data for some countries are for fiscal years.
figures published in the May 1998 World Economic Outlook were end-of-period data.
188
Inflation: Countries in Transition
Table 13. Countries in Transition: Consumer Prices1

Average
198089
1990
1991
1992
1993
1994
1995
1996
1997
...
...
95.4
283.1
357.7
153.3
75.3
32.4
38.2
Albania
Belarus
Bulgaria
Croatia
Czech Republic
...
2.5
...
...
...
23.9
...
...
35.8
83.5
333.5
...
...
225.2
969.0
82.0
...
...
85.0
1,190.0
72.8
1,516.0
20.8
22.6
2,220.0
96.0
97.5
10.0
7.8
709.0
62.1
2.0
9.1
12.7
52.7
123.0
3.5
8.8
33.2
64.0
1,082.2
3.6
8.4
Czechoslovakia, former
Estonia
Hungary
Latvia
Lithuania
1.5
...
8.9
...
...
10.8
...
28.6
...
...
59.0
210.6
34.8
124.4
224.7
11.0
1,069.0
22.8
951.3
1,021.0
...
89.0
22.4
109.1
410.4
...
47.7
18.8
35.8
72.1
...
28.9
28.3
25.1
39.5
...
23.1
23.5
17.6
24.7
...
11.3
18.3
8.4
8.8
...
...
43.0
2.9
...
...
...
585.8
127.9
...
...
162.0
70.3
161.1
...
...
1,276.0
43.0
210.4
...
338.6
788.5
35.3
256.1
23.0
126.4
329.6
32.2
136.7
13.4
16.2
30.2
27.9
32.3
9.9
2.1
23.5
19.9
38.8
5.8
1.5
11.8
15.1
151.6
6.1
...
...
107.6
...
...
583.1
...
91.2
117.4
...
1,210.0
6,146.6
31.9
4,734.9
...
19.8
891.2
...
12.6
376.4
...
9.7
80.2
...
9.1
15.9
...
Macedonia, former Yugoslav Rep. of

Moldova
Poland
Romania
Slovak Republic
Slovenia
Ukraine
Yugoslavia, former
Russia
...
...
92.7
1,353.0
895.9
302.0
190.1
47.8
14.7
...
...
110.9
945.3
1,224.2
1,667.7
183.6
68.7
31.0
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
52.5
18.7
19.8
39.4
39.1
30.4
14.0
3.5
7.1
17.4
25.6
Mongolia
Tajikistan
Turkmenistan
Uzbekistan
0.2
...
...
...
...
...
...
20.2
111.6
102.5
169.0
202.6
1,156.7
492.9
645.2
268.4
2,194.9
3,102.4
534.0
87.6
350.4
1,748.0
1,568.0
56.8
610.0
1,005.0
116.9
49.3
418.0
992.0
64.4
36.9
88.0
84.0
50.0
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.
189
Table 14. Summary Financial Indicators

(Percent)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2.5
3.0
4.0
4.2
3.5
3.2
2.6
1.3
1.2
1.1
United States
European Union
Japan
3.0
3.5
0.5
3.5
3.8
0.2
4.7
4.8
1.7
3.9
6.0
2.7
2.7
5.3
3.5
2.3
4.5
4.1
1.4
4.0
4.3
0.3
2.2
3.6
0.6
1.7
4.8
0.7
1.5
5.1
0.6
1.9
2.2
2.0
1.2
0.8
0.2
0.9
1.0
1.1
2.0
2.7
3.6
4.1
3.4
3.2
2.5
1.1
1.2
1.2
United States
European Union
Japan
2.7
3.6
2.9
3.3
4.3
2.9
4.4
5.1
1.5
3.6
6.3
1.6
2.3
5.7
2.3
1.9
5.2
3.6
0.9
4.2
4.3
0.2
2.4
3.1
1.1
1.8
5.7
1.2
1.6
7.0
0.9
2.4
2.9
2.3
1.5
0.9
0.1
0.9
1.1
1.1
3.0
2.8
3.2
3.0
2.5
2.5
1.8
0.6
0.5
0.4
8.2
5.9
3.1
3.9
2.5
4.4
4.9
5.0
...
...
United States
European Union
Japan
4.1
11.6
7.4
3.1
9.8
2.3
1.8
4.6
0.2
1.3
5.9
2.2
0.6
2.2
2.8
3.9
4.4
3.3
4.6
5.6
2.9
5.7
4.6
3.9
...
...
...
...
...
...
Advanced economies
Central government fiscal balance1
Advanced economies
General government fiscal balance1

Advanced economies
General government structural balance2

Advanced economies
Growth of broad money
Advanced economies
11.9
8.8
8.1
7.8
9.2
8.0
8.5
6.2
...
...
Short-term interest rates3

United States
Japan
Germany
7.5
6.9
8.4
5.4
7.0
9.2
3.4
4.1
9.5
3.1
2.7
7.2
4.4
1.9
5.3
5.7
1.0
4.5
5.1
0.3
3.3
5.2
0.3
3.3
5.1
0.3
3.6
5.1
0.3
3.6
LIBOR
8.4
6.1
3.9
3.4
5.1
6.1
5.6
5.8
5.7
5.9

Weighted average
Median
3.1
4.0
3.4
3.9
2.9
3.9
3.2
4.1
2.7
3.8
2.5
3.4
2.3
3.0
2.3
2.4
3.4
2.7
2.9
2.5

Weighted average
Median
3.8
4.0
3.8
3.8
3.4
3.9
3.6
4.2
3.3
3.8
3.2
3.5
2.9
3.2
3.0
2.4
3.5
2.7
3.1
2.3

Weighted average
Median
92.4
18.1
73.0
18.6
84.7
17.6
91.8
16.4
70.5
18.5
24.4
16.6
22.4
14.1
19.5
13.8
17.3
11.2
13.8
10.5
4.2
4.3
21.7
9.2
9.6
100.6
10.7
15.7
429.9
5.9
6.9
451.0
7.2
7.0
185.2
3.9
4.5
72.9
4.9
5.6
31.2
4.5
5.0
27.0
3.8
5.3
9.6
2.6
3.3
17.5
1In
percent of GDP.
percent of potential GDP.
3For the United States, three-month treasury bills; for Japan, three-month certificates of deposit; for Germany, three-month interbank deposits; for LIBOR,
London interbank offered rate on six-month U.S. dollar deposits.
2In
190
Financial Policies: Advanced Economies
Table 15. Advanced Economies: General and Central Government Fiscal Balances and Balances
Excluding Social Security Transactions1
(Percent of GDP)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
General government fiscal balance

Advanced economies
2.0
2.7
3.6
4.1
3.4
3.2
2.5
1.1
1.2
1.2

United States
Japan
Germany2
2.1
2.7
2.9
2.0
2.7
3.3
2.9
3.3
3.8
4.4
1.5
2.8
4.2
3.6
1.6
3.2
3.5
2.3
2.3
2.4
3.4
1.9
3.6
3.3
2.7
0.9
4.3
3.4
1.2
0.2
3.1
2.7
1.1
1.1
5.7
2.6
1.2
1.2
7.0
2.3
1.6
11.1
1.2
4.0
2.0
10.1
2.6
6.6
3.8
9.6
6.3
7.5
5.6
9.5
7.9
7.3
5.7
9.2
6.9
5.3
4.9
7.7
5.6
4.0
4.1
6.7
4.6
1.7
3.0
2.7
1.9
1.1
2.9
2.6
0.1
1.5
2.3
2.3
0.2
1.3
1.6
3.7
5.1
5.5
4.2
2.1
1.0
5.3
16.1
5.1
2.3
4.8
2.6
4.4
2.9
6.3
1.1
3.0
2.4
1.5
11.5
6.0
2.3
1.9
3.0
3.5
3.9
6.9
7.8
2.0
2.2
5.9
12.8
2.9
2.5
0.8
3.6
6.7
3.2
7.1
12.3
4.2
2.8
8.0
13.8
6.1
2.7
1.6
3.0
6.3
3.8
4.9
10.3
5.0
2.7
6.2
10.0
6.0
1.6
2.8
2.7
6.7
4.0
3.9
7.8
5.1
2.2
5.2
10.3
5.8
2.2
1.9
1.5
4.5
2.3
3.2
2.1
3.7
0.9
3.5
7.5
3.3
0.4
2.5
0.4
2.6
0.9
2.0
1.1
1.9
0.2
1.4
4.0
2.5
0.9
1.7
1.5
2.2
1.3
1.3
1.9
1.9
1.2
1.0
2.5
2.3
1.8
0.6
1.4
1.6
1.3
1.2
1.4
2.0
2.0
1.6
2.2
2.0
2.3
0.9
Switzerland
Norway
Israel
Iceland
2.6
4.6
3.3
2.1
0.1
4.4
2.9
3.4
1.7
3.3
2.8
3.6
1.4
2.0
4.5
2.8
0.4
1.1
4.7
1.8
3.3
3.6
3.0
1.7
5.9
4.2
1.6
2.7
7.3
2.5
0.3
3.0
5.2
2.2
0.2
2.4
5.7
1.7
0.2
Korea 5
Australia6
Hong Kong SAR
Singapore
New Zealand7
0.6
0.1
0.8
0.7
11.4
1.7
1.6
2.3
0.5
3.2
10.3
4.4
0.9
4.4
0.3
2.5
11.3
4.1
0.4
4.4
0.6
2.3
14.3
0.2
0.6
3.3
0.2
1.3
13.7
1.9
0.4
2.0
0.4
0.3
12.0
3.3
0.4
0.8
0.7
2.2
9.1
2.8
0.1
0.2
0.6
5.7
10.4
2.4
6.2
0.7
0.5
1.6
2.2
1.3
6.2
1.0
0.5
1.8
1.1
0.3
2.2
3.6
4.2
0.7
2.8
4.3
4.6
0.4
3.9
5.1
4.7
0.7
4.4
6.3
5.7
1.6
3.7
5.7
5.3
1.4
3.5
5.2
5.1
1.1
2.7
4.2
4.2
0.8
1.2
2.4
2.5
1.3
1.0
1.8
2.4
3.3
1.1
1.6
2.0
3.4
United States
Japan
Germany 2
5.2
0.6
2.9
5.5
0.8
4.0
6.3
2.0
2.8
5.3
4.8
3.4
4.1
5.1
2.6
3.6
6.5
3.0
3.2
6.8
3.1
2.6
5.2
2.8
2.0
7.3
2.8
2.0
8.6
2.4
France
Italy
Canada
1.6
5.8
2.3
1.8
5.0
4.8
3.2
4.0
5.5
4.4
4.9
5.1
4.9
4.4
3.1
4.1
3.3
1.9
3.4
1.9
0.5
2.3
1.8
3.3
2.8
1.7
3.6
2.4
1.6
3.2
France3
Italy
United Kingdom4
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Luxembourg
Memorandum
European Union
Euro area
Fiscal balance excluding social
security transactions
191
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Advanced economies
2.5
3.0
4.0
4.2
3.5
3.2
2.6
1.3
1.2
1.1

United States8
Japan9
Germany2,10
2.8
3.0
0.5
2.0
3.0
3.5
0.2
1.9
4.2
4.7
1.7
1.3
4.3
3.9
2.7
2.1
3.6
2.7
3.5
1.5
3.3
2.3
4.1
1.5
2.8
1.4
4.3
2.2
1.5
0.3
3.6
1.7
1.1
0.6
4.8
1.5
1.1
0.7
5.1
1.4
1.6
10.2
1.1
3.7
1.6
10.3
2.3
4.3
2.9
10.4
7.0
4.0
4.2
10.0
8.0
4.7
4.6
9.2
6.8
3.4
4.0
7.1
5.4
3.0
3.6
6.9
4.7
1.4
2.6
2.7
2.1
0.8
2.7
2.6
0.3
0.9
2.4
2.4
0.4
0.6
1.6
2.6
3.1
4.0
3.1
2.6
1.6
0.6
1.5
1.5
Memorandum
European Union
Euro area
2.7
3.5
4.0
1.2
3.1
3.8
4.0
0.3
4.2
4.8
4.2
0.3
4.5
6.0
5.2
0.4
3.8
5.3
4.7
0.9
3.4
4.5
4.1
0.8
2.8
4.0
3.8
0.8
1.4
2.2
2.3
1.3
1.1
1.7
2.1
2.7
1.0
1.5
1.9
2.8
France10
Italy
United Kingdom
Canada
1On
a national income accounts basis except as indicated in footnotes. See Box 2.1 for a summary of the policy assumptions underlying the projections.
3Adjusted for valuation changes of the foreign exchange stabilization fund.
4Excludes asset sales.
5Data include social security transactions (that is the operations of the public pension plan).
6Data exclude net advances (primarily privatization receipts and net policy-related lending).
7Data from 1992 onward are on an accrual basis and are not strictly comparable with previous cash-based data.
8Data are on a budget basis.
9Data are on a national income basis and exclude social security transactions.
10Data are on an administrative basis and exclude social security transactions.
2Data
192
Table 16. Advanced Economies: General Government Structural Balances1

(Percent of potential GDP)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Advanced economies
3.0
2.8
3.2
3.0
2.5
2.5
1.8
0.6
0.5
0.4

United States
Japan
Germany3
2.9
2.7
1.6
3.2
2.6
2.1
1.7
5.4
3.0
3.1
0.9
4.0
2.9
2.3
1.4
2.2
2.4
1.4
1.5
1.2
2.3
1.1
2.5
2.0
1.8
0.5
3.6
1.5
0.6
0.1
1.9
0.7
0.5
0.6
2.8
1.0
0.5
0.9
3.6
0.9
2.8
12.2
3.9
4.4
2.3
10.7
2.7
4.1
3.4
9.5
3.7
4.0
3.2
8.2
4.4
4.6
3.7
7.9
4.3
4.0
3.1
7.1
4.2
2.9
1.9
5.7
3.6
0.1
0.9
1.6
1.8
2.0
1.3
1.7
0.6
2.0
1.0
1.6
0.1
1.8
4.1
6.7
6.0
6.7
0.1
3.3
0.4
4.7
16.6
6.8
3.6
4.5
7.2
3.4
7.1
2.9
4.3
1.8
3.6
12.5
7.6
1.9
4.1
4.8
3.9
7.2
6.5
2.8
0.9
2.9
13.3
4.3
1.2
3.8
5.0
2.0
5.3
7.0
3.7
0.6
2.5
13.0
5.4
0.3
3.4
4.3
3.0
3.2
7.0
4.8
1.1
2.1
9.3
5.0
0.1
3.4
5.0
3.0
2.4
6.0
4.9
2.1
0.7
9.6
4.6
2.5
1.4
2.8
1.6
1.5
0.5
3.1
1.2
1.2
7.1
2.4
0.8
0.5
1.5
0.7
0.7
1.8
1.4
0.6
0.8
4.0
2.1
0.4
0.4
1.8
1.7
0.3
4.0
1.6
0.4
1.5
2.6
2.6
0.3
0.3
1.6
1.9
0.5
2.5
1.8
1.4
1.9
2.5
2.5
1.1
4.2
2.4
0.7
0.8
1.7
4.0
6.1
6.8
3.9
5.2
New Zealand5
0.5
6.5
1.4
6.4
2.9
1.3
3.1
1.1
2.9
1.5
2.1
2.5
1.0
2.1
0.4
1.7
0.4
2.0
1.1
1.0
Memorandum
European Union6
Euro area6
5.2
5.6
5.3
5.8
4.9
5.0
4.3
4.1
3.9
3.8
3.9
3.8
2.7
2.6
1.1
1.0
1.0
1.3
0.9
1.2
Structural
balance2
France
Italy
United Kingdom
Canada
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Norway
Australia4
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.
3Data through 1990 apply to west Germany only. The 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
193
Table 17. Advanced Economies: Monetary Aggregates

(Annual percent change)1
1990
1991
1992
1993
1994
1995
1996
1997
Narrow money2
Advanced economies
6.7
7.1
8.2
8.8
4.2
5.3
4.2
4.2
6.5
4.1
4.5
29.6
6.6
7.9
9.5
3.4
8.3
14.4
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
4.4
9.7
12.4
3.7
1.2
8.6
2.3
3.9
6.6
2.7
1.0
4.7
10.5
3.0
5.5
0.2
0.7
2.8
5.9
1.4
7.6
6.0
14.9
2.8
3.4
6.8
7.2
7.7
1.4
5.6
6.1
0.8
3.9
6.7
16.9
6.5
7.7
6.7
10.0
8.1
10.2
7.0
11.1
6.9
8.6
7.9
6.9
6.7
11.7
13.6
4.4
6.6
4.0
4.1
25.4
8.0
3.7
4.0
12.8
8.5
6.5
6.5
17.6
4.0
4.5
4.3
11.2
5.0
6.2
6.3
11.7
4.2
7.2
7.2
4.4
4.4
6.1
6.1
3.5
8.2
5.9
3.1
3.9
2.5
4.4
4.9
5.0
7.6
4.1
7.4
19.7
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
4.6
5.7
3.9
3.6
9.0
6.1
12.0
8.3
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
3.2
3.8
9.6
2.1
1.9
9.0
5.5
1.5
11.2
17.9
7.6
9.3
6.7
7.5
8.8
6.6
Memorandum
European Union
Euro area
8.0
11.6
11.6
14.9
5.5
9.8
11.2
20.3
2.7
4.6
5.2
16.1
3.5
5.9
6.0
15.5
2.0
2.2
2.1
17.0
4.0
4.4
3.5
12.8
4.7
5.6
4.7
11.4
4.7
4.6
4.6
11.7

United States
Japan
Germany3
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
Broad money4
Advanced economies
United States
Japan
Germany3
France
Italy
United Kingdom
Canada
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.
3Data through 1989 apply to west Germany only. The growth rates for the monetary aggregates in 1990 are affected by the extension of the currency area.
4M2, 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
194
Table 18. Advanced Economies: Interest Rates

(Percent a year)
August
1998
1990
1991
1992
1993
1994
1995
1996
1997
9.1
8.1
7.2
8.0
7.7
5.7
7.5
8.9
6.3
3.5
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
4.5
4.4
5.4
0.4
3.2
4.2
5.5
0.4
3.1
4.3
5.6
0.4
3.3
10.0
12.3
14.8
12.9
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
6.4
6.6
3.3
3.4
4.7
7.5
4.7
Advanced economies
9.1
8.1
6.9
5.4
4.9
5.3
4.1
4.1
5.1

United States
Japan
Germany
8.7
7.5
6.9
8.4
7.5
5.4
7.0
9.2
6.2
3.4
4.1
9.5
4.7
3.1
2.7
7.2
4.4
4.4
1.9
5.3
4.9
5.7
1.0
4.5
3.7
5.1
0.3
3.3
3.7
5.2
0.3
3.3
4.4
5.6
0.6
3.5
10.2
12.3
14.8
12.8
9.7
12.7
11.5
8.8
10.5
14.5
9.5
6.6
8.4
10.5
5.9
4.8
5.8
8.8
5.5
5.5
6.6
10.7
6.7
7.0
3.8
8.6
6.0
4.2
3.3
6.4
6.9
3.2
3.5
4.7
7.7
5.2
11.2
11.0
10.6
8.7
7.4
7.3
6.1
6.0
8.0
Memorandum
European Union
Euro area
9.0
11.1
10.2
11.1
8.0
10.9
10.6
11.5
6.8
11.2
11.3
9.8
5.3
8.5
8.8
8.4
4.8
6.5
6.4
8.9
5.1
6.8
6.6
9.0
3.9
5.0
4.7
8.7
3.8
4.5
4.1
11.1
4.4
4.5
3.8
18.5
Advanced economies
9.5
8.7
7.9
6.6
7.2
6.8
6.1
5.4
4.8

United States
Japan
Germany
9.0
8.6
7.0
8.9
8.3
7.9
6.3
8.5
7.4
7.0
5.1
7.8
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
5.1
6.4
2.1
5.6
4.5
5.3
1.2
4.4
10.0
13.6
11.8
10.8
9.0
13.1
10.1
9.4
8.6
13.1
9.1
8.1
6.9
11.3
7.5
7.2
7.4
10.3
8.2
8.4
7.6
11.9
8.2
8.1
6.4
9.2
7.8
7.2
5.6
6.3
7.0
6.1
4.6
4.7
5.6
5.6
12.1
11.0
10.5
8.7
9.3
9.1
7.7
6.8
6.4
Memorandum
European Union
Euro area
9.4
11.2
10.8
13.8
8.6
10.3
10.1
15.0
7.8
9.8
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
7.2
7.0
9.7
5.3
6.1
5.8
10.5
4.5
4.8
4.6
11.2
Policy-related interest rate1

United States
Japan
Germany
France
Italy
United Kingdom
Canada
Short-term interest rate2
France
Italy
United Kingdom
Canada
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; and for Canada, overnight money market financing 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 1998 data refer to yield on ten-year government bonds.
195
Table 19. Advanced Economies: Exchange Rates
1990
1991
1992
1993
1994
1995
1996
1997
Exchange Rate
Assumption1
1998
National currency units per U.S. dollar

U.S. dollar nominal exchange rates
Japanese yen
Deutsche mark
French franc
Italian lira
Pound sterling2
Canadian dollar
144.8
1.62
5.45
1,198
1.78
1.17
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
144.5
1.78
5.98
1,759
1.63
1.52
Spanish peseta
Dutch guilder
Belgian franc
Swedish krona
Austrian schilling
Danish krone
Finnish markka
Greek drachma
Portuguese escudo
Irish pound
101.9
1.82
33.4
5.92
11.4
6.19
3.82
158.5
142.6
0.60
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
190.6
135.0
0.59
127.3
1.86
34.6
7.78
11.6
6.48
5.71
229.2
160.8
0.68
134.0
1.82
33.5
7.72
11.4
6.36
5.22
242.6
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
240.7
154.2
0.63
146.4
1.95
35.8
7.63
12.2
6.60
5.19
273.1
175.3
0.66
151.4
2.01
36.8
8.04
12.6
6.80
5.43
297.7
182.6
0.71
Swiss franc
Norwegian krone
Israeli new sheqel
Icelandic krona
1.39
6.26
2.02
58.28
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
1.50
7.60
3.68
71.48
Korean won
Australian dollar
New Taiwan dollar
Hong Kong dollar
Singapore dollar
707.8
1.28
26.85
7.79
1.81
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
1,534.5
1.67
34.59
7.74
1.74
Percent change
from previous
assumption3
Index, 198089 = 100

Real effective exchange rates4
United States
Japan
Germany
France
United Kingdom
Italy
Canada
77.2
107.9
113.1
97.2
93.1
107.8
112.9
75.2
115.3
111.7
93.4
96.3
108.9
116.7
73.9
119.8
115.9
94.5
93.2
107.4
108.6
75.6
145.2
123.9
96.2
87.0
90.0
99.8
74.6
153.9
128.6
95.3
87.4
83.9
93.1
71.0
159.5
138.9
95.1
82.2
77.3
90.1
74.9
133.3
138.5
92.4
85.6
85.1
93.3
81.9
123.3
129.2
88.7
103.4
87.4
92.8
2.3
4.3
0.6
0.7
1.1
0.6
3.7
Spain
Netherlands
Belgium
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
113.7
93.1
95.8
107.1
92.7
114.1
103.9
101.1
107.8
84.4
118.1
91.2
95.6
106.6
89.6
109.8
95.1
97.9
120.3
79.0
122.0
93.1
97.3
107.1
90.0
111.2
78.0
96.6
134.0
77.8
112.4
94.5
99.2
81.2
90.2
114.5
66.0
93.6
131.7
71.2
104.5
93.1
101.4
78.5
87.8
115.3
69.1
95.2
129.7
67.3
102.6
94.5
106.4
76.8
84.6
121.7
77.1
101.0
134.3
64.2
104.7
89.4
103.9
84.4
80.1
120.6
71.2
106.9
132.7
62.0
102.2
84.0
100.1
79.9
78.0
119.9
67.5
111.2
128.2
59.2
0.6
0.5
0.5
2.2
0.8
0.7
1.0
...
...
0.2
Switzerland
Norway
115.0
103.2
118.2
102.5
112.9
102.3
113.7
100.9
122.9
101.0
129.9
107.2
128.4
109.8
122.7
114.5
0.1
1.2
Australia
New Zealand
101.2
115.4
102.2
110.8
96.3
100.0
88.9
99.0
93.5
102.5
92.9
106.0
108.9
114.7
113.8
116.4
1.3
...
1Average
exchange rates for the period July 27August 24, 1998. See Assumptions in the Introduction to the Statistical Appendix.
in U.S. dollars per pound.
3In nominal effective terms. Average July 27August 24, 1998 rates compared with May 15June 11, 1998 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.
2Expressed
196
Financial Policies: Developing Countries
Table 20. Developing Countries: Central Government Fiscal Balances

(Percent of GDP)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
3.1
3.4
2.9
3.2
2.7
2.5
2.3
2.3
3.4
2.9
Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
2.8
4.4
3.8
5.2
5.2
6.6
6.3
6.3
5.1
5.6
3.5
3.3
2.8
2.9
2.0
2.9
3.1
3.2
1.9
1.8
6.7
3.2
1.5
8.5
0.2
6.8
3.0
1.8
11.4
0.1
8.2
2.9
1.9
6.0
0.3
6.8
2.9
1.8
8.0
0.2
5.8
2.4
1.2
6.0
0.9
4.4
2.1
0.8
5.0
1.9
3.7
2.0
0.9
4.4
1.7
3.2
2.4
1.6
3.6
1.7
3.2
3.5
4.9
4.4
2.6
2.3
3.4
3.8
3.4
1.9
Analytical groups
Fuel
Manufactures
Diversified
5.4
2.4
4.7
9.8
2.0
7.3
2.6
4.2
12.8
1.7
5.5
2.7
4.6
4.0
1.7
8.2
2.6
4.3
3.9
2.0
7.0
2.2
3.1
3.4
1.9
4.1
2.3
2.2
2.2
2.5
1.7
2.4
2.1
2.6
2.4
1.0
2.7
1.5
1.9
2.4
3.9
3.2
1.5
2.2
4.2
2.8
3.2
1.0
1.7
3.0

Official financing
Private financing
11.2
2.8
4.9
0.9
6.5
19.9
2.8
5.4
1.2
5.9
12.0
2.5
5.3
1.4
4.2
12.1
2.9
5.8
1.8
4.7
9.4
2.5
5.0
1.5
4.1
6.1
2.4
3.4
1.8
3.7
3.4
2.3
3.5
1.8
3.0
0.8
2.4
3.4
1.8
3.5
5.8
3.3
3.5
2.4
5.6
5.1
2.9
2.6
2.3
4.7

2.8
2.8
3.6
2.5
2.8
2.5
3.7
2.6
3.1
2.3
2.6
2.4
1.9
2.4
1.8
2.6
3.0
3.4
2.2
3.1
8.6
7.3
7.7
7.8
6.5
10.4
9.1
6.7
5.7
7.8
5.8
8.0
6.4
5.6
5.9
4.7
4.4
5.0
3.9
4.0
3.0
3.3
3.1
1.7
3.4
3.0
3.1
2.6
2.9
2.5
4.0
3.9
3.9
4.1
3.8
3.4
3.0
2.4
2.7
2.5
4.2
5.5
6.1
1.7
4.4
4.5
6.9
1.2
5.4
4.9
4.3
1.8
6.2
3.8
6.7
1.8
5.3
2.4
7.1
1.6
3.9
2.7
5.8
2.0
3.8
2.4
4.3
1.8
2.4
2.2
3.3
1.7
2.7
3.8
3.9
2.3
2.4
3.3
3.3
2.1
Other groups
Memorandum
Median
Regional groups
Africa
Asia
Western Hemisphere
197
Table 21. Developing Countries: Broad Money Aggregates

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
92.4
73.0
84.7
91.8
70.5
24.4
22.4
19.5
17.3
13.8
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
20.1
23.0
21.7
25.1
18.9
422.9
30.5
34.9
23.3
23.9
26.5
227.2
34.2
40.0
22.7
20.3
26.3
275.8
29.7
34.6
27.2
21.9
25.8
299.3
42.6
53.0
24.2
18.6
39.0
167.4
25.5
30.9
22.8
21.9
32.9
22.1
21.0
23.7
21.6
19.6
34.1
19.1
17.0
18.1
16.9
16.6
26.8
20.2
13.5
15.8
17.5
21.0
23.9
15.9
15.6
17.8
13.3
13.0
17.2
12.6
Analytical groups
Fuel
Manufactures
Diversified
18.0
151.5
184.9
21.8
76.3
18.4
132.3
83.0
25.1
50.9
19.1
210.0
58.6
21.2
32.0
21.0
268.2
48.3
19.7
28.0
24.3
163.8
54.0
16.8
32.7
20.1
23.7
33.7
13.8
26.2
20.4
17.2
29.7
12.5
28.8
17.9
15.5
22.9
13.0
25.4
9.7
13.9
16.8
10.9
26.5
15.6
10.6
15.0
10.1
17.6

Official financing
Private financing
4.2
100.4
49.7
160.2
17.5
8.1
78.7
39.9
114.3
20.4
3.0
92.5
39.7
133.3
21.9
1.9
100.7
34.4
145.9
22.0
3.5
76.7
39.9
100.7
25.1
6.1
25.7
23.4
27.4
21.1
6.4
23.4
16.9
24.6
22.2
6.4
20.3
15.6
21.3
19.0
3.2
18.2
14.0
17.4
23.4
5.3
14.3
15.9
13.9
15.0

220.7
47.0
171.4
37.5
288.6
28.4
372.1
28.5
239.6
29.3
28.7
24.4
19.1
25.7
20.7
20.1
15.4
19.8
13.5
14.7
64.9
33.9
13.6
57.6
58.9
17.4
64.4
58.4
15.8
53.4
47.6
16.1
74.0
47.9
12.9
43.7
31.5
14.4
36.9
25.7
14.0
22.5
20.1
11.1
18.5
16.8
9.1
16.9
16.4
10.7
18.1
18.6
17.6
16.4
18.5
16.6
14.1
13.8
11.2
10.5
15.2
18.4
11.4
27.5
14.9
21.3
14.9
33.7
12.9
18.0
13.9
25.1
13.6
19.0
10.3
17.0
31.1
18.4
10.5
18.3
16.8
17.0
10.0
20.2
15.1
15.4
8.1
14.5
11.3
14.8
10.0
15.0
10.5
14.3
9.8
11.8
10.8
13.0
9.7
10.0
Other groups
Memorandum
Median
Regional groups
Africa
Asia
Western Hemisphere
198
Foreign Trade: Summary
Table 22. Summary of World Trade Volumes and Prices

Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Trade in goods and services

World trade1
Volume
Price deflator
In U.S. dollars
In SDRs
4.4
6.2
5.6
4.6
4.7
3.6
9.3
9.5
6.8
9.7
3.7
4.6
2.5
2.6
0.6
0.2
8.6
2.6
1.0
1.9
2.7
0.3
3.8
2.9
2.4
0.2
8.4
2.3
1.2
3.2
5.6
0.5
4.5
1.9
0.9
2.0
Volume of trade
Exports
Advanced economies
5.3
2.1
6.3
8.5
6.7
7.5
5.8
6.7
5.2
10.4
3.4
7.5
8.9
13.1
8.9
10.5
6.0
8.8
10.3
10.9
3.6
3.9
4.2
5.5
Imports
Advanced economies
5.2
2.1
5.9
7.7
5.7
6.0
3.3
9.1
4.7
9.8
1.7
8.7
9.8
7.4
9.0
11.3
6.4
9.3
9.0
9.8
4.5
1.0
4.7
4.6
0.3
0.8
0.2
0.9
0.3
1.5
0.7
5.6
0.6
2.4
0.9
3.2
0.4
0.1
2.2
2.3
0.8
0.7
0.9
3.2
0.5
0.8
Terms of trade
Advanced economies
Trade in goods
World trade1
Volume
Price deflator
In U.S. dollars
In SDRs
4.5
6.4
5.1
4.9
5.1
3.7
10.1
10.2
6.6
10.3
3.9
4.5
2.3
2.4
0.2
0.1
8.0
2.1
1.6
2.4
1.9
1.0
4.4
3.6
2.5
8.7
2.6
1.4
3.1
6.2
1.0
5.0
2.4
1.0
2.1
World trade prices in U.S. dollars2

Manufactures
Oil
Nonfuel primary commodities
3.2
...
0.6
0.4
...
0.9
9.9
28.4
6.4
0.3
15.7
5.7
3.5
1.7
0.1
5.7
11.8
1.8
3.1
5.0
13.4
10.1
7.9
8.4
3.0
18.4
1.2
8.2
5.4
3.3
3.9
31.1
13.9
0.6
9.3
0.4
World trade prices in SDRs2

Manufactures
Oil
3.3
...
0.6
0.1
...
1.2
3.8
21.3
11.6
1.1
16.4
6.5
0.6
4.5
2.8
4.9
11.1
2.7
0.5
7.3
10.6
3.9
1.8
2.3
1.3
23.7
3.3
3.1
0.2
2.0
1.2
29.2
11.6
1.6
10.4
1.4
199
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Trade in goods
Volume of trade
Exports
Advanced economies
5.4
5.8
6.2
5.7
4.9
2.9
9.6
9.4
6.1
10.8
3.8
4.0
Fuel exporters
Nonfuel exporters
1.7
2.1
5.7
5.1
1.5
7.8
8.5
9.0
8.3
5.5
1.8
7.5
10.6
12.0
10.0
7.5
2.5
9.6
14.0
8.1
16.1
11.9
3.8
14.4
8.6
7.1
9.0
11.1
6.8
12.4
3.9
1.4
5.3
5.8
3.7
6.3
Imports
Advanced economies
5.2
5.7
5.1
4.3
4.8
2.2
11.1
9.4
5.8
9.6
4.7
4.6
Fuel exporters
Nonfuel exporters
2.9
1.1
4.3
5.6
1.3
6.8
6.0
2.8
7.0
6.9
3.2
8.0
15.5
26.8
12.2
10.4
5.7
14.9
7.9
12.2
12.5
12.3
3.6
13.9
9.1
1.3
10.4
10.7
14.0
10.1
1.3
1.7
1.3
4.8
5.7
4.7
Price deflators in SDRs

Exports
Advanced economies
2.6
1.1
2.1
1.9
0.6
3.7
0.3
3.0
1.6
2.5
2.3
1.5
1.9
0.9
2.6
1.0
1.1
1.6
2.2
13.2
2.7
4.0
11.4
0.2
2.8
4.9
1.9
3.1
8.8
0.7
1.3
7.6
1.0
1.2
1.6
1.1
7.7
14.8
5.7
3.1
2.5
3.3
3.9
13.9
1.2
3.2
7.3
2.2
Fuel exporters
Nonfuel exporters
Imports
Advanced economies
2.1
0.8
2.8
3.2
1.9
5.5
0.2
2.8
2.6
1.6
2.9
2.3
Fuel exporters
Nonfuel exporters
2.4
1.8
2.8
1.6
1.4
1.7
1.0
1.4
0.9
1.8
7.3
0.3
2.9
10.0
0.8
0.3
2.2
0.2
0.8
1.1
0.7
0.5
2.3
1.1
5.2
4.0
5.4
2.2
2.2
2.2
0.7
1.7
1.1
2.1
2.1
2.1
Terms of trade
Advanced economies
0.4
0.3
0.7
1.4
1.3
1.9
0.5
0.2
1.0
0.9
0.7
0.9
Fuel exporters
Nonfuel exporters
0.5
2.7
0.2
0.6
2.5
0.1
1.1
11.6
3.6
5.7
17.4
0.5
0.1
5.8
1.1
3.4
10.7
0.5
0.5
6.5
1.7
1.8
0.7
2.2
2.4
10.5
0.3
0.9
0.3
1.1
3.2
15.4
1.1
5.1
0.1
2,680
2,149
5,675
4,521
4,268
3,399
4,400
3,494
4,711
3,720
4,714
3,706
5,264
4,184
6,236
5,007
6,558
5,247
6,790
5,433
6,725
5,365
7,087
5,655
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.
200
Foreign Trade: Nonfuel Commodity Prices
Table 23. Nonfuel Commodity Prices1

(Annual percent change; U.S. dollar terms)
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
0.6
0.2
6.4
5.7
0.1
1.8
13.4
8.4
1.2
3.3
13.9
0.4
0.4
6.1
2.2
3.2
2.5
0.6
2.4
1.2
0.1
1.7
9.6
12.7
2.8
10.7
4.5
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
12.0
14.2
16.3
14.1
3.4
1.2
6.5
0.3
2.8
2.8
Advanced economies
0.9
4.7
6.0
2.0
3.1
8.4
6.8
2.8
6.2
13.6
1.2
0.9
0.7
5.7
3.4
2.8
3.0
18.7
7.9
4.7
3.0
15.6
1.2
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
1.8
2.0
0.9
0.9
1.5
0.6
0.9
1.1
0.4
0.4
0.3
0.8
3.4
3.4
5.5
5.7
2.6
7.1
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
13.4
14.7
14.7
14.8
9.9
17.7
0.9
0.7
0.5
0.8
1.0
2.2
Analytical groups
Fuel
Manufactures
Primary products
Diversified
0.3
1.2
0.8
0.3
0.8
0.7
0.7
0.8
0.2
0.6
10.2
6.0
4.7
2.6
6.2
11.1
0.5
6.6
6.8
3.4
1.1
1.0
5.1
8.1
2.6
16.7
7.6
3.7
0.3
1.6
11.3
12.0
23.5
17.9
24.3
6.6
7.9
11.6
9.6
5.5
9.5
1.9
10.4
5.9
3.4
3.4
1.9
7.9
2.8
5.4
15.5
14.9
14.8
12.1
17.1
2.5
0.8
1.0
1.9
2.4

Official financing
Private financing
1.8
0.9
0.8
0.7
1.4
0.4
0.7
0.6
0.7
0.6
13.9
5.7
3.2
6.6
4.7
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
12.4
15.6
14.3
16.2
14.6
3.6
1.3
1.4
1.6
0.3

1.2
0.6
0.9
0.5
6.2
5.3
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
16.1
15.2
1.2
1.3
2.8
0.3
0.9
1.3
0.7
0.4
4.6
4.3
2.0
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
14.6
18.5
3.1
0.8
1.8
0.8
...
...
3.2
...
...
1.8
5.0
15.95
3.1
7.9
17.20
10.1
5.4
19.27
8.2
31.1
9.3
13.28 14.51
3.9
0.6

Food
Beverages
Agricultural raw materials
Metals
Fertilizers
Other groups
Memorandum
Average oil spot price 2
In U.S. dollars a barrel
Export unit value of manufactures3
28.4 15.7
22.99 19.37
9.9
0.3
1.7 11.8
19.04 16.79
3.5
5.7
18.4
20.37
3.0
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.
201
Table 24. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Trade in goods and services

Export volume
Advanced economies
United States
Japan
Germany1
5.3
4.7
5.7
6.2
4.6
5.8
5.3
6.3
5.1
5.3
6.7
7.5
8.5
6.9
10.4
5.8
5.6
6.3
5.2
12.8
5.2
4.6
6.6
4.9
0.3
3.4
2.0
2.9
1.3
5.0
8.9
7.9
8.2
4.6
7.9
8.9
8.4
11.3
5.4
6.6
6.0
5.5
8.5
3.5
5.1
10.3
10.6
12.8
10.8
11.1
3.6
3.1
1.1
1.9
7.2
4.2
3.8
3.2
0.6
5.5
France
Italy
United Kingdom
Canada
3.6
3.1
2.9
5.3
6.6
4.6
4.6
3.8
6.3
6.8
5.4
6.8
5.0
4.7
5.3
4.1
0.8
0.7
2.3
6.1
4.9
5.9
4.4
7.9
6.3
0.4
9.1
3.5
12.0
5.9
6.0
10.7
9.3
11.8
10.8
6.3
11.6
7.8
9.3
9.7
5.2
0.2
6.8
5.7
6.9
12.2
6.3
8.0
8.0
9.7
6.1
6.0
0.8
6.8
4.4
5.8
5.7
2.8
4.3
4.9
4.9
4.4
4.2
10.8
5.4
5.2
5.2
10.0
6.8
6.5
7.1
6.3
5.1
5.0
6.2
12.6
4.4
3.4
3.3
11.6
2.3
1.4
0.9
11.9
8.4
9.2
9.0
12.8
8.0
7.7
7.7
15.1
5.7
5.2
5.0
7.8
10.2
9.6
9.9
10.9
4.0
6.1
7.1
0.7
4.4
5.6
6.1
2.7
Advanced economies
United States
Japan
Germany 1
5.2
4.8
5.8
4.3
3.0
5.5
5.2
6.9
3.3
4.4
5.7
5.5
3.9
7.9
9.4
3.3
2.1
0.7
3.1
13.7
4.7
4.2
7.5
0.7
2.0
1.7
0.9
8.9
0.3
5.9
9.8
9.1
12.2
8.9
7.7
9.0
8.3
8.8
14.2
7.3
6.4
6.4
9.2
11.5
2.9
9.0
9.5
13.9
0.2
8.1
4.5
6.3
11.5
9.4
7.4
4.7
4.5
5.7
3.6
6.4
France
Italy
United Kingdom
Canada
3.8
4.4
5.1
6.8
6.0
4.1
4.8
4.6
6.6
6.1
6.1
8.9
0.5
2.3
6.0
3.0
2.7
5.2
3.2
5.7
1.2
5.4
6.9
6.2
5.6
3.5
8.1
3.0
8.1
3.0
6.7
8.4
5.5
9.1
11.2
5.1
9.6
4.2
6.7
10.1
3.0
2.0
8.4
5.2
6.5
7.8
11.8
9.2
13.3
8.2
7.9
8.7
5.2
6.0
1.5
6.7
7.6
3.6
3.1
5.0
Memorandum
European Union
Euro area
4.9
4.4
3.8
9.8
5.2
4.8
4.7
9.1
5.1
5.8
7.3
11.5
2.1
4.2
6.3
15.2
3.8
3.4
3.1
12.4
0.5
3.1
4.3
11.1
9.3
8.2
8.5
13.3
8.2
7.0
7.3
14.5
6.2
4.2
3.5
7.6
9.3
8.8
8.8
7.3
6.6
7.5
8.0
8.7
5.0
6.3
7.0
2.7
Advanced economies
United States
Japan
Germany 1
0.3
0.4
0.4
0.4
0.1
0.2
0.3
0.1
0.3
0.3
0.3
0.7
1.7
6.1
0.7
0.7
1.0
1.9
2.6
1.0
0.6
0.9
0.3
1.7
2.5
0.9
1.1
1.3
1.7
1.7
0.2
0.5
1.4
0.1
0.1
0.1
0.1
0.5
1.2
0.1
0.5
4.0
0.4
0.8
0.6
1.7
4.6
1.9
0.9
1.6
3.6
1.6
3.1
0.5
0.6
0.8
2.7
0.2
France
Italy
United Kingdom
Canada
0.1
0.7
0.4
1.2
0.1
0.6
0.3
0.4
0.1
3.3
1.0
1.9
0.3
0.7
3.2
1.2
1.9
0.1
1.0
0.6
1.7
0.6
0.1
0.9
1.1
0.3
2.1
0.5
0.5
2.1
2.2
1.2
0.3
0.6
1.4
2.1
2.8
0.1
1.3
3.5
1.3
1.8
0.1
0.5
2.1
1.3
1.0
0.2
0.6
0.6
2.4
0.3
0.2
0.1
0.2
0.2
0.3
0.2
0.1
0.4
0.3
0.3
0.2
0.1
0.3
0.9
0.8
0.7
0.3
0.2
0.4
0.6
1.1
1.1
0.2
0.9
0.6
0.8
0.8
0.2
0.6
0.3
1.1
0.5
0.1
0.3
2.1
0.1
0.4
0.2
0.9
0.6
0.5
0.6
1.9
1.2
0.8
1.1
0.8
0.3
0.1
0.1
1.3
5.4
5.2
0.4
5.8
5.7
0.3
6.2
5.1
0.7
5.7
4.3
1.4
4.9
4.8
1.3
2.9
2.2
1.9
9.6
11.1
0.5
9.4
9.4
0.2
6.1
5.8
1.0
10.8
9.6
0.9
3.8
4.7
0.7
4.0
4.6
0.9
Memorandum
European Union
Euro area
Import volume
Terms of trade
Memorandum
European Union
Euro area
Memorandum
Trade in goods
Advanced economies
Export volume
Import volume
Terms of trade
1Data
202
Foreign Trade: Developing Countries
Table 25. Developing Countriesby Region: Total Trade in Goods

Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Value in U.S. dollars
Exports
Imports
2.1
4.1
8.8
9.4
16.8
13.2
0.7
9.5
8.9
13.7
3.4
9.5
15.0
9.6
19.9
18.4
11.8
9.8
8.5
7.1
2.8
2.0
8.1
6.0
Volume
Exports
Imports
1.7
2.9
8.7
8.4
8.5
6.0
5.5
6.9
10.6
15.5
7.5
10.4
14.0
7.9
11.9
12.3
8.6
9.1
11.1
10.7
3.9
1.3
5.8
4.8
Unit value in U.S. dollars

Exports
Imports
1.8
2.4
0.5
1.1
8.2
6.9
3.2
2.7
0.1
3.9
0.6
1.2
1.7
7.3
5.4
3.1
0.7
2.3
3.2
6.5
3.4
2.1
1.0
0.5
0.6
1.1
5.7
0.1
3.4
0.5
1.8
2.4
0.9
3.2
1.1
3.7
3.1
3.7
2.7
3.0
2.8
4.0
3.5
3.9
3.8
1.2
2.1
0.9
0.5
5.7
3.4
2.8
3.0
18.7
7.9
4.7
3.0
15.6
1.2
Africa
Exports
Imports
0.9
1.4
3.9
4.5
16.8
10.4
3.6
2.4
0.8
6.8
5.5
4.0
2.8
5.0
18.6
20.5
12.0
0.7
2.3
5.0
9.2
0.3
9.0
6.6
Volume
Exports
Imports
0.4
1.3
4.2
4.1
6.0
2.6
0.6
3.0
2.7
5.7
1.9
1.5
5.5
5.9
7.9
10.4
10.7
2.3
4.0
8.7
0.6
2.8
5.6
5.1

Exports
Imports
2.0
1.7
0.1
0.7
10.1
7.6
2.2
1.0
2.5
1.6
7.1
5.1
0.1
0.1
10.2
9.4
1.1
2.5
1.5
3.2
8.5
2.6
3.6
1.4
Terms of trade
0.3
0.5
2.3
3.2
4.1
2.0
0.7
3.7
1.7
6.1
2.2
Sub-Sahara
Exports
Imports
0.6
0.8
3.6
4.7
13.9
7.9
5.0
1.4
0.1
5.2
5.0
3.6
3.6
2.8
18.7
22.0
11.6
0.9
1.7
7.5
8.3
1.1
8.3
5.7
Volume
Exports
Imports
0.3
1.4
4.4
5.0
5.2
1.5
1.4
1.2
3.0
4.7
2.0
2.3
7.7
5.6
8.6
11.5
11.0
5.7
3.2
11.3
0.3
1.7
6.3
4.5

Exports
Imports
2.3
1.5
0.2
0.1
8.2
6.4
2.8
0.4
1.8
1.3
6.6
5.5
0.6
1.6
9.5
9.7
0.5
4.0
1.3
3.0
7.8
2.3
2.1
1.2
Terms of trade
0.9
0.3
1.6
3.2
3.0
1.1
1.0
0.1
4.7
1.8
5.6
0.9
Asia
Exports
Imports
8.6
9.2
12.9
10.4
16.1
13.2
13.4
11.7
15.2
14.9
11.8
19.4
23.6
17.1
23.1
23.2
11.0
11.6
11.1
1.2
0.4
9.2
5.8
5.0
Volume
Exports
Imports
6.7
7.5
11.3
9.2
10.7
5.3
12.1
8.9
11.0
12.7
11.5
19.0
19.4
14.3
15.7
17.2
8.0
9.9
14.8
6.9
5.0
4.2
4.9
3.8

Exports
Imports
2.5
1.9
1.5
1.2
5.0
7.4
1.2
2.8
3.9
2.3
0.2
0.4
3.5
2.6
6.3
5.1
2.8
1.5
3.4
5.1
4.4
5.4
0.8
1.2
Terms of trade
0.6
0.3
2.2
1.6
1.6
0.2
0.9
1.2
1.2
1.9
1.0
0.4
Terms of trade
Memorandum
Real GDP growth in developing country
trading partners
Market prices of nonfuel commodities
exported by developing countries
Regional groups
203
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

Exports
Imports
7.4
8.0
11.5
9.9
15.4
27.6
15.1
14.1
15.5
9.9
12.7
14.2
18.3
18.8
22.4
26.7
7.2
7.7
5.9
1.0
2.4
17.4
6.9
6.0
Volume
Exports
Imports
5.7
6.9
9.8
8.6
9.4
17.0
14.6
10.4
9.8
7.6
11.4
13.1
15.1
15.7
14.2
19.4
3.3
6.0
10.4
6.6
4.0
11.3
6.4
4.6

Exports
Imports
2.4
1.5
1.6
1.4
5.8
9.4
0.5
3.7
5.4
2.6
1.2
1.1
2.8
2.8
7.1
6.1
3.8
1.5
4.1
6.7
6.3
7.1
0.4
1.4
Terms of trade
0.9
0.2
3.3
3.1
2.7
0.1
1.0
2.2
2.8
0.9
0.9

Exports
Imports
3.2
2.3
5.1
7.0
24.1
16.3
9.1
8.2
9.9
9.4
5.6
2.7
6.9
10.8
12.7
16.0
13.7
10.6
4.6
9.0
10.0
2.8
8.8
8.4
Volume
Exports
Imports
1.6
1.6
5.9
5.3
5.4
8.1
3.1
0.4
13.2
21.6
2.4
1.7
11.7
13.9
4.9
6.6
7.0
9.7
6.3
11.6
1.5
3.5
4.3
7.0

Exports
Imports
1.1
1.3
2.2
19.0
8.1
9.5
7.6
0.5
5.5
8.0
1.9
3.9
2.6
7.4
9.7
6.7
1.0
1.4
2.2
11.5
0.9
4.2
1.1
Terms of trade
2.4
2.2
10.0
16.0
6.4
9.7
6.3
2.1
5.6
0.8
10.7
3.1
4.9
2.0
8.8
12.6
9.7
11.9
1.1
16.5
4.7
21.1
5.8
8.0
15.2
18.2
21.4
10.5
11.8
10.7
10.2
18.5
0.1
6.4
11.6
5.5
4.6
0.6
9.9
12.5
10.6
7.7
3.9
19.2
12.7
19.9
10.4
10.2
11.9
18.1
13.5
8.5
10.2
10.3
11.8
18.3
5.8
8.8
8.8
4.8
2.6
4.8
0.4
0.1
0.5
4.2
2.2
2.3
4.5
1.1
4.2
2.0
3.3
0.2
7.3
1.0
1.5
0.3
1.4
0.2
5.4
2.0
2.5
0.6
2.1
0.5
4.5
0.1
5.5
2.2
3.0
6.3
1.2
1.6
3.5
1.9
Western Hemisphere
Exports
Imports
Volume
Exports
Imports
Exports
Imports
Terms of trade
204
Foreign Trade: Developing Countries
Table 26. Developing Countriesby Source of Export Earnings: Total Trade in Goods
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Fuel
Exports
Imports
3.8
0.2
3.6
4.3
29.1
9.6
11.1
11.0
6.7
11.7
7.2
5.7
1.4
11.4
11.8
11.9
17.7
0.8
3.7
10.6
17.6
0.9
10.3
7.2
Volume
Exports
Imports
2.1
1.1
5.3
3.7
9.0
2.8
1.8
3.2
12.0
26.8
2.5
5.7
8.1
12.2
3.8
3.6
7.1
1.3
6.8
14.0
1.4
1.7
3.7
5.7

Exports
Imports
1.0
1.7
0.8
1.4
19.8
7.4
10.6
8.2
2.1
7.4
9.6
1.3
5.2
1.4
7.7
8.4
9.9
0.5
2.9
3.1
16.2
1.0
6.2
1.1
Terms of trade
2.7
2.3
11.6
17.4
5.8
10.7
6.5
0.7
10.5
0.3
15.4
5.1
Nonfuel
Exports
Imports
6.7
5.6
10.5
10.5
11.4
14.3
6.8
9.1
9.8
14.3
7.8
13.7
19.8
14.5
22.3
19.5
10.2
11.3
9.9
6.6
1.2
2.4
7.6
5.8
Volume
Exports
Imports
5.7
4.3
9.9
9.4
8.3
7.0
7.5
8.0
10.0
12.2
9.6
14.9
16.1
12.5
14.4
13.9
9.0
10.4
12.4
10.1
5.3
1.3
6.3
4.7

Exports
Imports
2.5
2.7
1.0
1.0
3.0
6.8
0.7
1.1
1.0
2.1
1.6
1.1
3.5
1.8
7.1
4.8
1.2
0.9
2.1
3.2
3.8
3.8
1.2
1.0
0.2
3.6
0.5
1.1
0.5
1.7
2.2
0.3
1.1
0.1
10.0
8.4
11.8
10.5
10.4
10.8
12.1
11.8
14.7
13.4
11.1
21.3
24.2
18.4
21.8
26.9
9.3
9.6
10.8
1.7
0.2
7.7
4.9
3.5
Volume
Exports
Imports
9.1
5.6
10.6
9.4
8.1
3.1
10.1
10.0
11.3
11.8
12.2
22.2
19.7
16.1
14.8
20.8
7.1
8.1
14.9
5.5
4.9
3.8
4.1
3.1

Exports
Imports
1.1
3.1
1.0
1.0
2.0
7.1
1.8
1.8
3.1
1.7
1.0
0.7
3.7
2.0
6.1
5.1
2.0
1.4
3.7
3.6
4.5
4.2
0.8
0.5
2.0
0.1
4.8
0.1
1.4
0.2
1.7
1.0
0.6
0.1
0.4
0.3

Exports
Imports
2.5
2.4
7.0
8.7
2.4
8.8
0.2
3.8
3.9
10.6
1.1
4.6
18.9
9.6
24.2
24.9
6.0
12.0
8.2
5.9
1.4
3.3
9.6
5.0
Volume
Exports
Imports
2.4
2.3
6.9
6.7
2.9
0.2
4.5
3.5
5.7
8.4
8.6
9.5
8.9
7.8
6.8
14.0
12.2
11.1
8.8
8.3
3.1
2.5
7.9
2.7

Exports
Imports
2.0
2.6
0.6
2.1
0.4
8.9
2.6
0.6
1.2
2.0
6.7
4.2
11.1
2.0
16.2
9.8
5.7
0.9
0.6
1.8
3.8
1.2
1.7
2.1
0.6
1.5
8.5
3.2
3.1
2.5
9.0
5.8
6.6
1.2
5.0
0.4
Terms of trade
Manufactures
Exports
Imports
Terms of trade
Terms of trade
205
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
6.8
7.9
4.9
13.3
4.3
4.4
1.7
3.3
3.1
8.8
9.3
3.3
24.9
14.0
2.3
10.1
10.4
7.4
5.2
7.1
7.3
7.8
0.1
1.7
5.9
3.7
1.7
3.5
1.4
0.8
28.8
1.7
0.2
4.2
6.8
0.6
15.9
6.9
0.3
7.0
5.7
4.9
3.0
6.1
4.5
5.5

Exports
Imports
2.5
1.9
5.9
4.2
8.5
9.5
28.5
4.0
1.8
6.4
3.6
3.5
3.2
3.1
8.4
6.8
2.7
3.1
3.9
2.4
2.2
1.0
2.6
2.2
Terms of trade
0.6
1.7
1.0
23.5
7.7
0.2
0.2
1.4
0.4
1.5
1.2
0.4
Diversified
Exports
Imports
5.8
4.8
10.3
11.5
15.5
19.8
3.0
8.8
6.6
18.6
5.7
9.2
15.2
13.4
22.3
10.9
13.2
13.6
9.0
12.6
2.9
0.9
10.7
8.0
Volume
Exports
Imports
4.5
4.4
9.9
11.3
11.1
14.2
6.2
8.9
7.8
16.8
7.5
11.0
13.9
11.8
15.3
7.0
11.8
13.9
10.1
17.5
6.6
6.1
9.2
6.7

Exports
Imports
3.6
2.4
0.6
0.1
4.4
5.2
2.4
0.1
0.8
1.4
1.6
1.6
1.7
1.3
6.5
3.2
1.4
0.2
0.8
4.0
3.3
5.1
1.4
1.3
Terms of trade
1.2
0.5
0.8
2.3
2.2
0.4
3.2
1.7
3.4
2.0
0.2

private transfers
Exports
Imports
1.4
2.9
Volume
Exports
Imports
206
Current Account: Summary
Table 27. Summary of Payments Balances on Current Account

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Advanced economies
87.2
24.4
17.3
61.9
32.8
51.2
34.3
69.4
39.6
18.4
United States
European Union
Japan
91.6
32.6
43.9
4.4
83.3
68.4
51.4
80.9
112.3
86.1
5.9
132.0
123.8
22.4
130.6
115.3
53.9
111.4
134.9
90.8
65.8
155.2
123.3
94.1
236.3
96.6
131.4
290.4
92.8
135.8
6.9
5.1
2.6
10.1
3.7
1.2
12.6
7.2
47.9
43.4
105.8
18.7
39.1
15.7
33.8
16.3
42.8
20.8
19.3
16.1
50.3
5.8
38.7
1.0
64.0
8.9
19.5
61.7
66.4
50.7

Memorandum
24.8
98.0
78.8
121.3
89.8
95.3
71.4
61.8
78.3
63.2
Regional groups
Africa
Asia
Western Hemisphere
8.0
16.4
0.6
1.0
6.8
11.3
63.0
16.9
10.3
12.8
21.2
34.5
11.0
34.3
30.4
45.6
12.1
20.4
6.6
50.7
16.5
41.9
0.9
35.9
3.9
38.4
8.7
37.8
5.3
4.7
3.7
64.9
14.7
37.2
20.3
80.5
12.7
39.4
18.9
71.0
Analytical groups
Fuel
Nonfuel
17.6
42.5
59.9
38.1
24.7
54.1
25.2
96.0
6.9
82.9
1.2
96.4
31.0
102.4
21.2
83.1
15.3
63.0
8.0
55.2

Official financing
Private financing
10.8
35.6
14.1
2.8
24.4
49.2
48.9
13.0
22.1
13.7
10.1
68.7
14.5
42.0
12.3
14.5
106.8
17.9
74.1
14.8
8.7
81.1
14.8
49.0
17.3
1.6
96.9
16.3
57.4
23.2
11.0
82.4
12.1
46.6
23.7
10.2
72.0
13.0
36.8
22.2
8.9
69.4
15.6
36.4
17.4
4.9
58.3
14.2
27.8
16.3

19.0
16.6
24.6
24.2
19.9
48.8
29.0
77.7
15.6
65.5
36.8
60.0
22.9
59.5
41.3
30.7
54.9
14.5
48.1
10.3
20.1
4.9
0.1
6.8
3.7
1.6
18.0
25.0
30.8
25.1
...
...
...
...
4.8
3.5
4.1
5.5
2.8
3.2
1.2
1.6
8.6
6.6
2.6
0.9
4.2
2.2
8.7
0.7
5.9
4.1
5.7
1.5
16.6
14.9
2.5
4.0
20.3
18.2
0.6
4.1
21.7
19.7
4.1
5.0
23.3
21.6
2.0
3.8
132.1
117.6
96.2
66.2
53.3
45.7
55.1
17.4
69.5
106.7
1.5
0.6
1.3
0.5
1.0
0.4
0.7
0.3
0.5
0.2
0.4
0.2
0.4
0.2
0.1
0.1
0.5
0.2
0.7
0.4
Russia
Total 1
In percent of total world current
account transactions
In percent of world GDP
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.
207
Table 28. Advanced Economies: Balance of Payments on Current Account

1990
Advanced economies
United States
Japan
Germany1
France
Italy
United Kingdom
Canada
Spain
Netherlands
Belgium-Luxembourg
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Switzerland
Norway
Israel
Iceland
Korea
Australia
Hong Kong SAR 2
Singapore
New Zealand
Memorandum
European Union
Euro area
United States
Japan
Germany1
France
Italy
United Kingdom
Canada
Spain
Netherlands
Belgium-Luxembourg
Sweden
Austria
Denmark
Finland
Greece
Portugal
Ireland
Switzerland
Norway
Israel
Iceland
Korea
Australia
Hong Kong SAR 2
Singapore
New Zealand
1Data
2Data
1991
1992
1993
87.2
79.2
91.6
43.9
48.9
9.8
17.2
33.5
19.8
8.0
18.0
9.2
3.6
6.8
1.2
1.3
6.9
3.9
0.2
0.4
8.6
2.9
0.1
2.0
16.0
10.9
6.7
3.1
1.2
24.4
21.2
4.4
68.4
18.0
6.2
24.5
14.1
22.4
3.3
20.0
7.7
4.7
4.7
0.1
2.0
6.6
3.4
0.7
0.3
10.6
4.4
1.1
0.3
8.3
11.2
13.1
6.1
4.9
0.9
17.3
23.4
51.4
112.3
19.1
3.8
30.2
17.9
21.0
6.1
21.3
7.4
6.6
7.8
0.1
4.1
4.9
2.0
0.5
15.1
4.5
0.1
0.2
3.9
11.2
8.5
5.8
5.9
1.1
61.9
12.2
86.1
132.0
14.0
9.2
8.4
15.5
21.8
49.7
5.7
13.6
11.2
3.8
0.7
4.7
1.1
2.4
0.1
1.8
19.5
3.5
1.8
1.0
9.7
7.0
8.6
4.2
0.5
105.8
32.6
10.4
18.7
39.1
83.3
63.1
15.7
33.8
80.9
57.3
16.3
42.8
5.9
22.8
20.8
1.6
1.5
3.3
0.8
1.6
3.4
3.4
3.7
3.2
1.9
3.0
0.8
1.0
5.1
4.7
0.3
0.8
3.8
2.5
2.1
0.8
5.4
6.8
8.9
8.3
2.8
0.1
2.0
1.0
0.5
2.1
1.4
3.8
3.8
2.7
2.4
2.0
1.5
5.4
3.8
0.9
0.7
4.6
3.7
1.8
4.0
2.8
3.8
7.3
7.1
11.2
2.2
0.8
3.0
1.0
0.3
2.5
1.7
3.6
3.7
2.3
3.0
3.1
0.1
2.8
4.6
2.0
1.1
6.2
3.5
0.2
2.4
1.3
3.8
4.0
5.7
11.9
2.7
1.3
3.1
0.7
0.7
0.9
1.6
3.9
1.2
4.4
5.2
2.0
0.4
3.3
1.3
2.6
0.1
3.8
8.2
3.0
2.7
0.8
0.3
3.4
3.2
7.4
7.2
1.2
through June 1990 apply to west Germany only.

include goods and nonfactor services only.
208
1996
1997
1998
1999
Billions of U.S. dollars

32.8
51.2
34.3
8.9
0.9
21.4
123.8
115.3
134.9
130.6
111.4
65.8
20.3
22.6
13.8
7.4
10.9
20.5
12.8
25.1
40.5
2.5
5.8
2.9
13.0
4.7
3.3
41.7
52.2
55.7
6.9
1.1
1.8
17.9
23.8
22.9
12.6
14.3
14.1
0.8
5.5
6.5
1.8
4.7
4.1
2.7
1.9
3.1
1.3
5.2
5.0
0.7
2.4
3.2
2.2
0.2
1.5
1.5
1.7
1.9
17.5
21.4
21.3
3.7
4.9
10.6
2.5
4.8
5.3
0.1
0.1
0.1
3.9
8.5
23.0
17.1
19.6
15.6
6.5
5.5
11.0
2.1
5.5
1.6
11.4
14.3
14.6
1.1
1.8
2.5
1994
1995
69.4
6.0
155.2
94.1
4.0
39.4
33.6
7.3
9.3
63.4
2.6
22.2
13.6
6.2
2.6
1.1
6.6
2.9
1.8
2.1
20.9
8.0
3.6
0.1
8.2
12.8
7.7
5.5
14.8
5.0
39.6
67.4
236.3
131.4
6.4
31.4
30.4
18.7
11.9
107.0
0.8
21.9
14.8
7.0
1.3
6.1
2.7
2.0
2.4
19.8
1.9
3.1
0.3
39.0
17.2
5.1
17.7
3.4
18.4
120.9
290.4
135.8
8.0
28.4
28.0
21.1
9.5
102.4
1.1
24.1
15.4
7.9
1.3
0.3
6.1
2.6
2.3
3.0
21.2
5.7
3.3
0.3
26.7
18.6
6.0
1.9
16.0
3.1
38.7
90.8
87.3
1.0
64.0
123.3
111.6
8.9
19.5
96.6
110.9
61.7
66.4
92.8
108.3
50.7
1.8
1.4
0.6
1.3
3.3
0.2
0.6
0.3
5.8
5.3
2.6
1.8
1.7
4.0
2.6
1.4
2.7
7.2
6.7
5.6
1.8
4.7
4.0
4.0
1.1
15.7
3.9
1.9
2.2
0.2
2.8
2.9
0.6
1.5
0.5
6.1
5.6
2.7
1.3
0.6
5.5
2.4
1.8
2.8
8.2
5.2
3.6
1.5
1.8
3.2
2.7
3.2
15.4
7.7
2.8
3.6
0.3
2.2
2.6
1.4
2.0
0.2
5.9
6.0
3.1
0.6
5.0
2.3
1.9
3.2
7.8
1.3
3.1
3.9
12.9
5.0
2.0
20.6
6.5
3.3
4.0
0.4
1.9
2.3
1.5
1.6
0.2
6.1
6.0
3.3
0.6
0.2
4.7
2.1
2.1
3.6
8.1
3.8
3.2
3.5
7.9
5.4
2.2
1.2
18.9
6.0
19.3
50.3
22.4
53.9
22.3
54.7
16.1
5.8
Percent of GDP
1.8
1.6
2.8
2.2
1.0
0.9
0.6
0.7
1.3
2.3
0.2
0.5
2.3
0.8
1.4
0.2
5.3
6.0
5.4
5.2
0.4
2.4
0.9
2.0
1.8
1.1
1.3
4.1
0.7
2.1
2.5
0.2
2.8
2.7
6.7
7.0
3.0
3.3
3.4
5.6
2.0
0.8
1.0
1.9
5.2
5.5
2.7
2.1
1.6
3.9
16.0
16.8
2.2
3.1
Current Account: Advanced Economies
Table 29. Advanced Economies: Current Account Transactions

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2,702.0
2,735.2
2,784.2
2,797.8
2,986.5
2,961.7
2,936.3
2,844.8
3,305.6
3,230.3
3,939.5
3,845.0
4,061.7
3,996.1
4,158.6
4,088.2
4,117.4
4,050.1
4,308.3
4,296.9
Trade balance
33.3
13.6
24.8
91.4
75.3
94.5
65.7
70.4
67.3
11.4
Services, credits
Services, debits
704.5
687.6
748.4
710.5
824.7
785.0
824.8
777.2
880.6
831.1
997.5
946.5
1,052.1
992.1
1,078.4
999.7
1,076.8
1,001.1
1,129.9
1,050.2
16.9
37.9
39.7
47.6
49.5
51.0
60.0
78.6
75.7
79.7
16.4
24.4
64.6
139.0
124.8
145.5
125.6
149.0
143.1
91.1
4.1
74.9
3.4
52.2
9.0
90.9
15.4
92.6
14.3
106.3
12.1
106.4
14.8
106.1
16.0
95.6
0.1
103.4
3.4
112.9
87.2
24.4
17.3
61.9
32.8
51.2
34.3
69.4
39.1
19.0
Advanced economies
16.4
24.4
64.6
139.0
124.8
145.5
125.6
149.0
143.1
91.1

United States
Japan
Germany1
23.3
81.1
25.5
56.1
12.1
30.9
54.3
2.3
43.4
38.7
80.7
2.4
77.7
71.9
96.5
8.1
65.0
100.9
96.4
11.4
79.1
99.9
74.7
19.6
49.4
108.6
21.2
27.8
67.8
110.2
47.3
30.9
19.8
176.1
83.0
48.9
34.2
218.4
79.3
49.1
2.2
0.6
27.0
0.4
7.0
0.2
11.9
3.8
21.5
0.8
14.4
2.6
24.5
32.9
11.9
0.4
25.0
36.6
9.7
6.3
28.9
45.4
7.4
17.9
31.2
62.7
8.9
23.9
45.7
48.9
6.1
11.2
36.1
44.7
23.9
7.2
32.3
41.9
28.4
10.0
6.9
12.2
21.2
61.4
59.8
66.3
76.2
81.2
123.2
125.3
26.5
21.8
49.9
20.0
15.6
6.4
60.5
2.7
13.3
129.3
84.6
88.7
120.7
101.1
101.6
151.6
140.6
134.9
137.6
174.4
167.5
152.3
179.7
173.5
92.3
166.0
179.3
46.6
157.6
175.1
14.5
10.4
9.6
16.9
11.9
4.5
0.5
6.9
59.1
52.8
4.1
3.4
9.0
15.4
14.3
12.1
14.8
16.0
0.1
3.4
28.5
24.2
23.2
16.8
28.1
21.5
25.9
21.2
33.3
22.5
35.4
18.0
34.6
23.9
40.6
13.2
36.2
16.5
40.3
7.0
27.8
19.3
44.4
1.2
37.6
14.2
53.6
5.1
38.4
5.3
55.6
2.4
21.9
20.0
57.8
9.2
27.3
32.0
67.3
6.2
3.9
14.6
2.3
19.4
5.7
17.6
0.3
17.4
8.7
22.0
5.5
17.5
9.1
17.2
3.9
20.8
6.8
16.7
14.8
19.0
9.0
15.7
12.5
22.4
2.7
15.0
13.4
20.8
2.6
11.2
19.9
20.9
4.8
9.1
17.5
19.8
6.5
7.6
19.2
20.0
24.4
24.7
24.4
19.2
21.8
15.7
22.8
22.4
21.9
23.9
1.5
16.9
8.7
0.2
19.9
9.2
4.1
29.1
22.4
12.7
26.8
18.0
11.4
16.0
21.1
9.3
23.6
25.6
12.1
25.6
26.8
13.6
6.7
15.8
0.4
10.0
19.0
4.3
2.1
14.0
4.1
4.9
5.9
3.9
4.5
4.2
4.3
3.8
1.3
1.1
Exports
Imports
Balance on services
Balance on goods and services
Income, net
Current transfers, net
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
Income, net
Advanced economies
United States
Japan
Germany1
France
Italy
United Kingdom
Canada
Memorandum
European Union
Euro area
economies
1Data
through June 1990 apply to west Germany only.
209

Table 30. Developing Countries: Payments Balances on Current Account

1990
1991
1992
1993
1994
24.8
98.0
78.8
121.3
89.8
8.0
9.0
6.8
8.5
10.3
9.8
11.0
10.0
13.3
16.4
18.8
0.6
1.0
10.3
11.3
20.8
63.0
16.9
10.3
12.8
16.3
21.2
34.5
1995
1996
1997
1998
1999
95.3
71.4
61.8
78.3
63.2
12.1
8.9
16.5
12.0
3.9
3.9
5.3
7.8
14.7
13.6
12.7
12.0
9.7
34.3
20.9
30.4
45.6
6.9
20.4
24.5
6.6
50.7
8.3
41.9
38.2
0.9
35.9
8.2
38.4
40.8
8.7
37.8
7.8
4.7
24.8
3.7
64.9
8.9
37.2
11.8
20.3
80.5
8.6
39.4
11.6
18.9
71.0

Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
17.6
11.1
13.6
59.9
4.8
10.1
24.7
0.6
11.2
25.2
26.8
13.1
6.9
12.9
10.7
1.2
45.7
12.2
31.0
44.1
15.6
21.2
15.4
15.8
15.3
12.0
17.1
8.0
15.3
14.9
5.7
12.0
4.9
18.3
3.8
38.5
5.9
50.2
6.5
52.8
7.2
31.3
9.0
33.6
8.7
43.1
12.0
45.9
12.7
42.9

Official financing
Private financing
10.8
35.6
14.1
2.8
24.4
49.2
48.9
13.0
22.1
13.7
10.1
68.7
14.5
42.0
12.3
14.5
106.8
17.9
74.1
14.8
8.7
81.1
14.8
49.0
17.3
1.6
96.9
16.3
57.4
23.2
11.0
82.4
12.1
46.6
23.7
10.2
72.0
13.0
36.8
22.2
8.9
69.4
15.6
36.4
17.4
4.9
58.3
14.2
27.8
16.3

19.0
16.6
24.6
24.2
19.9
48.8
29.0
77.7
15.6
65.5
36.8
60.0
22.9
59.5
41.3
30.7
54.9
14.5
48.1
10.3
13.8
11.7
1.3
11.8
9.2
64.1
11.7
8.5
22.3
13.6
8.1
26.6
9.2
6.5
15.1
10.7
7.8
5.9
12.3
8.6
10.1
11.1
8.2
7.7
11.0
9.8
19.3
10.5
10.8
14.9
Other groups
210
Current Account: Developing Countries
Ten-Year Averages
___________________
198089
199099
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Percent of exports of goods and services

Regional groups
Africa
Sub-Sahara
South Africa
Asia
Western Hemisphere
8.9
8.7
3.7
14.6
10.7
15.8
10.3
9.2
6.2
4.9
6.4
4.8
13.6
14.7
8.9
11.0
7.5
11.0
6.6
11.0
10.0
12.6
11.2
13.4
12.0
11.5
13.9
13.1
2.9
3.9
3.9
7.6
11.7
14.2
9.3
11.6
24.9
14.2
14.8
2.3
14.3
21.7
3.7
9.1
7.8
17.7
33.5
8.1
15.1
0.3
0.6
27.1
4.9
14.8
36.3
10.3
27.1
4.8
9.9
11.1
19.9
26.5
11.4
11.2
16.5
24.8
18.2
5.5
11.3
3.5
24.2
18.5
9.2
14.2
0.4
14.6
16.8
7.6
13.9
3.6
13.8
15.3
0.8
8.1
1.4
21.6
18.2
6.7
4.0
8.5
26.4
16.1
6.7
3.7
7.4
21.0
Analytical groups
Fuel
Manufactures
private transfers
Diversified
2.0
15.0
33.6
4.3
4.2
22.4
8.6
6.0
31.3
32.8
2.3
23.0
12.7
0.2
24.2
13.9
10.1
27.7
3.8
3.9
19.3
0.6
11.4
17.9
13.3
10.0
21.4
8.7
3.2
20.2
7.5
2.5
21.6
3.6
3.0
17.3
18.7
12.2
17.6
12.5
19.0
6.0
15.7
8.8
11.5
17.2
16.4
21.3
16.4
20.2
15.9
9.9
19.1
9.4
17.1
11.0
22.8
11.4
22.5
9.6

Official financing
Private financing
7.5
14.2
26.0
9.7
25.1
6.0
3.7
18.4
6.8
11.6
9.6
6.4
21.4
0.8
20.4
46.1
8.7
20.1
5.7
12.0
8.5
11.2
21.7
9.9
9.8
13.0
16.3
26.7
16.3
11.1
7.8
10.7
20.6
9.1
11.8
1.3
10.6
18.9
8.8
13.2
8.1
8.1
12.3
6.4
12.2
7.0
6.5
13.0
4.6
10.4
7.2
6.3
15.8
4.6
8.0
3.7
4.9
13.4
3.3
6.7

20.1
15.0
13.4
4.2
10.0
4.6
14.0
6.2
10.8
11.3
15.6
16.5
7.9
11.7
16.1
8.8
8.7
7.9
14.6
3.7
20.1
1.8
15.9
1.2
36.5
44.0
4.0
27.9
34.9
8.3
39.6
54.7
0.7
35.5
45.5
36.7
34.2
42.2
11.7
40.8
37.5
14.7
24.8
27.3
8.2
23.4
27.7
2.9
23.7
29.0
4.5
20.2
25.5
3.3
19.6
29.5
9.2
17.2
29.9
6.5
19.3
14.2
13.7
15.6
18.1
19.8
13.9
13.2
12.5
11.5
13.5
10.4
Other groups
Memorandum
Median
211
Table 31. Developing Countriesby Region: Current Account Transactions

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
541.9
484.9
546.0
531.1
594.4
604.1
614.8
661.4
707.0
724.9
847.6
858.0
947.9
942.0
1,028.5
1,008.8
999.3
989.0
1,080.0
1,048.1
57.1
14.9
9.6
46.5
17.9
10.5
5.9
19.7
10.3
32.0
Services, net
34.5
22.6
50.0
35.1
46.4
56.0
45.7
92.2
42.4
60.3
52.7
63.2
49.6
43.6
61.8
42.1
56.5
46.2
58.6
26.7
Income, net
58.4
11.0
59.1
3.8
53.8
31.0
56.0
26.9
53.7
24.2
63.0
30.9
64.0
36.2
61.0
41.2
72.4
40.2
76.0
39.5
24.8
98.0
78.8
121.3
89.8
95.3
71.4
61.8
78.3
63.2
665.0
84.4
152.7
670.4
81.8
130.0
734.0
79.6
135.7
767.3
82.5
116.3
870.2
87.4
115.7
1,031.8
96.1
124.9
1,153.0
100.6
152.1
1,251.0
100.4
152.5
1,224.5
109.7
115.3
1,318.7
117.2
128.0
90.3
78.5
87.1
76.6
86.4
81.8
81.6
78.6
83.9
82.5
99.6
99.4
111.5
98.7
114.0
103.6
103.5
103.3
112.8
110.1
11.8
10.5
4.6
3.1
1.4
0.1
12.8
10.4
0.2
2.7
Services, net
10.1
1.7
10.6
0.1
10.7
6.2
9.8
6.7
10.0
8.6
11.8
11.6
10.9
1.9
11.2
0.8
10.4
10.2
10.7
8.0
Income, net
20.3
10.6
17.8
11.1
16.3
12.2
15.7
11.4
14.7
11.1
15.9
11.1
17.1
11.3
16.3
11.7
16.6
12.1
16.6
12.0
8.0
6.8
10.3
11.0
12.1
16.5
3.9
5.3
14.7
12.7
Exports of goods and services

Interest payments
Oil trade balance
106.1
16.4
28.0
102.1
16.6
25.1
103.1
16.0
24.6
98.2
14.7
20.6
101.3
14.3
18.7
118.8
16.0
21.5
132.1
16.8
29.2
135.6
15.5
28.0
125.7
16.2
18.0
136.4
16.1
20.9
Asia
Exports
Imports
169.9
181.9
192.7
203.3
222.0
233.6
248.1
278.9
306.7
326.7
377.4
402.3
418.8
449.0
465.3
454.2
467.1
412.5
494.2
433.3
Exports
Imports
Trade balance

Memorandum
Interest payments
Oil trade balance
Regional groups
Africa
Exports
Imports
Trade balance

Memorandum
Trade balance
12.0
10.6
11.6
30.7
19.9
24.8
30.2
11.1
54.6
60.9
Services, net
12.0
1.5
9.2
1.9
13.5
5.9
36.7
9.7
29.6
16.8
41.6
12.6
42.8
22.8
11.7
20.6
34.0
22.9
38.1
Income, net
10.2
5.8
13.5
11.3
12.8
13.4
11.9
14.3
6.9
16.1
18.2
18.0
17.5
21.9
9.2
25.7
19.7
22.9
20.4
21.8
16.4
11.3
12.8
34.3
20.4
41.9
38.4
4.7
37.2
39.4
203.8
19.1
0.8
229.4
20.5
2.0
266.0
22.9
3.7
300.7
24.4
5.5
367.2
28.6
5.9
453.7
27.5
8.3
507.5
30.3
13.2
558.1
28.9
13.1
556.3
31.8
9.8
587.8
34.5
10.8

Memorandum
Interest payments
Oil trade balance
212
Exports
Imports
Trade balance
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
153.8
123.4
139.7
133.5
153.6
146.0
145.0
150.0
155.0
133.8
174.7
155.2
198.6
171.6
207.8
187.1
186.9
192.2
203.3
208.4
30.4
6.3
7.5
4.9
21.2
19.4
27.0
20.7
5.3
5.1
Services, net
17.2
13.2
31.9
25.6
23.5
16.0
15.7
20.7
9.7
11.4
12.1
7.3
13.1
13.9
12.6
8.1
12.4
17.7
12.8
17.9
Income, net
3.3
15.9
0.1
37.5
2.3
7.5
0.7
10.5
1.8
16.3
5.4
13.6
6.8
12.0
7.3
11.6
8.1
10.7
10.2
11.2
0.6
63.0
21.2
30.4
6.6
0.9
8.7
3.7
20.3
18.9

Interest payments
Oil trade balance
189.0
10.3
106.3
173.6
9.5
92.1
191.1
7.5
100.6
184.9
9.1
89.0
191.9
8.4
89.4
213.0
9.8
96.4
240.3
9.2
114.0
257.4
9.6
117.0
237.6
10.1
93.7
256.7
10.4
102.1
Western Hemisphere
Exports
Imports
127.9
101.1
126.5
117.7
132.4
142.6
140.1
153.9
161.4
182.0
195.9
201.1
219.1
222.7
241.5
263.9
241.8
280.9
269.7
296.3
Trade balance
26.9
8.7
10.2
13.9
20.6
5.2
3.7
22.5
39.1
26.6
Services, net
7.1
19.7
9.0
0.3
10.3
20.4
14.3
28.2
13.0
33.6
12.1
17.3
13.0
16.7
15.1
37.6
13.1
52.2
12.2
38.8
31.2
10.5
28.0
11.3
27.0
12.9
29.1
11.7
30.4
13.2
34.2
15.5
36.1
15.0
42.8
15.5
44.2
15.9
49.2
17.0
1.0
16.9
34.5
45.6
50.7
35.9
37.8
64.9
80.5
71.0
166.1
38.6
19.2
165.3
35.2
14.8
173.8
33.2
14.2
183.5
34.3
12.1
209.9
36.0
13.5
246.3
42.8
15.3
273.1
44.4
22.0
299.9
46.5
20.5
304.9
51.6
13.4
337.7
56.2
15.8

Memorandum
Income, net
Memorandum
Interest payments
Oil trade balance
213
Table 32. Developing Countriesby Analytical Criteria: Current Account Transactions

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
182.7
106.3
162.4
118.0
173.4
131.7
160.8
124.2
163.0
110.0
182.3
123.1
214.5
124.1
222.5
137.3
183.3
138.5
202.3
148.4

Fuel
Exports
Imports
Trade balance
76.4
44.5
41.7
36.6
53.0
59.2
90.3
85.1
44.8
53.8
Services, net
32.3
44.1
48.7
4.2
42.6
0.9
34.3
2.3
28.4
24.6
32.8
26.4
35.8
54.5
40.3
44.8
38.7
6.1
41.3
12.6
Income, net
0.6
25.9
3.7
52.0
4.2
19.6
5.8
21.8
7.3
24.2
1.8
23.4
1.6
21.9
1.2
22.3
0.2
21.1
1.4
22.0
17.6
59.9
24.7
25.2
6.9
1.2
31.0
21.2
15.3
8.0

Interest payments
Oil trade balance
204.9
13.0
153.5
182.8
10.3
132.8
194.5
10.9
140.0
182.0
11.5
124.5
182.6
10.6
122.8
200.3
13.1
134.8
233.6
12.5
165.7
243.1
11.5
168.2
203.4
11.7
129.9
223.1
11.7
144.2
Nonfuel exports
Exports
Imports
359.3
378.6
383.6
413.1
421.1
472.4
454.0
537.1
544.0
614.9
665.3
734.9
733.4
817.9
806.1
871.5
816.0
850.5
877.8
899.6
Trade balance
19.3
29.6
51.3
83.1
70.9
69.6
84.4
65.4
34.4
21.9
Services, net
2.1
21.5
1.3
30.9
3.8
55.1
11.4
94.5
14.0
84.8
19.9
89.5
13.7
98.1
21.5
86.9
17.8
52.2
17.3
39.2
Income, net
57.8
36.8
55.4
48.2
49.6
50.6
50.2
48.7
46.4
48.4
61.2
54.3
62.3
58.1
59.7
63.6
72.1
61.3
77.4
61.5
42.5
38.1
54.1
96.0
82.9
96.4
102.4
83.1
63.0
55.2
460.1
71.3
0.8
487.7
71.5
2.8
539.5
68.7
4.3
585.3
71.0
8.2
687.6
76.7
7.1
831.5
83.0
9.9
919.4
88.1
13.6
1,007.9
89.0
15.7
1,021.1
98.1
14.6
1,095.6
105.4
16.2
157.6
153.2
176.7
171.3
202.7
194.3
225.3
235.6
279.9
278.9
341.0
354.1
372.6
388.0
412.9
394.8
413.6
364.3
433.9
377.0

Memorandum

Memorandum
Interest payments
Oil trade balance
Manufactures
Exports
Imports
Trade balance
Services, net
Income, net
4.4
5.3
8.4
10.3
1.0
13.0
15.4
18.1
49.3
56.9
0.3
4.1
0.8
6.1
1.9
6.5
6.9
17.2
7.1
6.2
15.7
28.8
11.9
27.3
16.9
1.2
15.9
33.4
17.0
39.9
18.7
3.5
20.1
9.2
18.9
11.8
21.4
11.8
20.5
13.7
33.3
16.4
35.8
19.0
38.7
22.1
41.0
19.6
43.6
19.0
11.1
4.8
0.6
26.8
12.9
45.7
44.1
15.4
12.0
15.3
185.3
20.9
6.2
204.7
20.7
6.8
236.2
21.6
7.5
266.2
23.2
9.1
331.1
24.0
9.1
402.7
29.0
12.2
442.2
33.6
17.8
487.9
32.6
16.7
485.7
37.2
11.3
507.5
38.4
12.2
Memorandum
Interest payments
Oil trade balance
214
Exports
Imports
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
36.2
37.3
36.2
38.7
37.7
42.8
38.1
44.7
45.3
49.0
56.2
61.3
59.6
68.6
64.5
72.7
63.6
75.0
69.7
78.8
Trade balance
1.1
2.5
5.1
6.7
3.8
5.0
9.1
8.2
11.4
9.0
Services, net
5.0
6.1
4.2
6.6
4.9
10.0
4.9
11.5
4.5
8.2
5.1
10.1
5.6
14.6
6.2
14.3
5.1
16.6
4.5
13.6
12.7
5.1
10.0
6.4
9.0
7.8
8.6
7.1
9.8
7.4
9.8
7.7
9.9
8.9
10.2
8.7
9.9
9.3
10.6
9.3
13.6
10.1
11.2
13.1
10.7
12.2
15.6
15.8
17.1
14.9

Interest payments
Oil trade balance
43.4
9.2
3.5
44.1
9.0
3.9
46.5
9.1
3.3
47.2
8.9
2.9
55.3
8.8
3.0
68.4
9.5
3.9
73.0
9.1
4.6
78.5
9.0
4.9
79.0
9.7
4.9
86.3
9.8
5.2

private transfers
Exports
Imports
13.9
35.4
14.5
36.9
14.3
38.1
14.7
41.5
16.1
42.8
20.1
48.8
20.5
53.8
22.7
57.8
23.9
61.8
25.6
66.6
Trade balance
21.4
22.4
23.9
26.8
26.8
28.8
33.2
35.1
38.0
41.0
Services, net
7.7
13.8
7.3
15.1
8.0
15.9
8.4
18.3
10.6
16.2
10.5
18.3
12.8
20.5
13.2
21.8
12.2
25.8
14.1
26.9
2.4
10.5
3.7
13.9
1.4
13.4
1.5
13.9
1.7
11.4
1.1
12.2
0.6
12.0
13.2
0.1
13.7
14.2
5.7
4.9
3.8
5.9
6.5
7.2
9.0
8.7
12.0
12.7
30.1
5.5
0.1
31.4
6.3
0.5
33.4
3.6
35.9
3.5
0.2
39.5
3.3
0.4
44.9
3.4
0.7
47.3
3.3
0.2
50.6
3.1
0.7
52.7
3.0
0.1
56.7
3.1
0.3
151.6
152.8
156.1
166.2
166.4
197.1
176.0
215.3
202.7
244.1
247.9
270.7
280.7
307.4
306.0
346.3
314.9
349.3
348.5
377.2
Trade balance
1.2
10.1
30.7
39.4
41.3
22.8
26.7
40.3
34.4
28.7
Services, net
4.5
5.7
5.2
15.3
4.9
35.7
8.1
47.4
13.0
54.3
9.6
32.4
9.0
35.7
11.7
51.9
8.9
43.3
9.9
38.6
24.0
17.7
21.7
18.7
20.4
17.5
18.7
16.0
14.4
15.9
17.0
18.1
16.1
18.2
10.8
19.5
21.3
18.7
23.2
18.9
12.0
18.3
38.5
50.2
52.8
31.3
33.6
43.1
45.9
42.9
201.3
35.8
9.0
207.4
35.5
7.3
223.4
34.3
6.5
235.9
35.3
3.9
261.6
40.6
4.7
315.5
41.0
5.4
356.9
42.1
8.5
390.8
44.3
5.3
403.7
48.1
1.6
445.1
54.1
1.6
Income, net
Memorandum
Income, net
Memorandum
Interest payments
Oil trade balance
Diversified
Exports
Imports
Income, net
Memorandum
Interest payments
Oil trade balance
215
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
446.3
435.5
454.5
473.1
491.3
534.9
519.2
592.8
609.7
659.9
738.1
787.5
824.5
868.7
897.3
931.3
889.2
911.4
961.9
967.6
10.8
18.6
43.6
73.6
50.2
49.5
44.2
34.0
22.2
5.7
Services, net
17.6
6.8
14.6
33.2
18.5
62.1
24.6
98.2
25.8
76.0
32.2
81.7
26.0
70.2
34.6
68.6
29.7
52.0
30.3
36.0
Income, net
66.6
37.8
65.5
49.8
59.9
53.3
60.4
51.8
56.4
51.3
71.1
55.9
72.4
60.2
69.2
65.8
81.3
63.8
86.4
64.0
35.6
48.9
68.7
106.8
81.1
96.9
82.4
72.0
69.4
58.3
553.4
83.3
73.8
563.8
80.9
55.2
614.9
78.7
53.3
655.9
81.3
42.6
758.9
86.1
42.2
910.8
94.2
45.7
1,017.3
99.1
58.8
1,106.4
99.1
56.6
1,101.7
108.3
40.1
1,187.5
115.7
48.2
52.6
60.7
51.3
61.9
51.3
66.4
50.7
68.2
54.6
70.0
66.6
84.1
76.6
90.4
79.1
94.2
76.3
95.4
82.2
99.1

Exports
Imports
Trade balance

Memorandum
Interest payments
Oil trade balance
Official financing
Exports
Imports
8.1
10.5
15.1
17.5
15.3
17.5
13.9
15.1
19.1
16.9
Services, net
Trade balance
4.5
12.6
5.0
15.6
4.7
19.8
4.4
21.9
4.6
19.9
5.5
23.0
5.6
19.5
6.3
21.4
4.7
23.8
3.9
20.8
Income, net
13.1
11.6
13.1
15.6
12.6
17.9
12.4
16.5
11.9
16.9
11.8
18.5
12.1
19.5
12.3
20.6
13.1
21.2
13.1
19.6
14.1
13.0
14.5
17.9
14.8
16.3
12.1
13.0
15.6
14.2
65.9
12.0
10.9
64.8
12.3
8.8
66.7
12.3
8.9
67.0
11.8
6.6
72.1
11.7
5.8
86.2
12.6
7.7
97.9
12.5
10.9
100.3
12.3
10.7
98.8
13.0
6.2
106.1
12.7
7.5
Private financing
Exports
Imports
300.2
268.4
316.2
308.9
345.5
355.2
367.4
401.1
440.7
447.6
535.5
533.4
598.5
586.8
652.4
628.8
643.0
616.3
691.3
651.3
Trade balance
31.8
7.3
9.7
33.7
6.9
2.1
11.7
23.6
26.8
40.0
Services, net
8.3
23.6
10.5
3.1
14.9
24.6
20.5
54.1
19.2
26.1
23.4
21.3
18.8
7.1
20.4
3.2
17.9
8.9
19.6
20.4
35.6
14.9
35.5
16.5
35.8
18.5
37.4
17.5
39.1
16.2
54.2
18.1
58.3
18.8
61.7
21.7
64.7
19.4
68.9
20.7
2.8
22.1
42.0
74.1
49.0
57.4
46.6
36.8
36.4
27.8
368.2
50.2
50.8
385.2
48.7
43.5
423.1
49.2
42.5
455.1
50.9
36.2
540.5
53.5
36.4
649.4
63.9
38.4
724.4
68.8
49.6
793.0
67.3
44.0
784.8
74.2
30.5
838.9
78.7
35.3

Memorandum
Interest payments
Oil trade balance
Income, net
Memorandum
Interest payments
Oil trade balance
216
Exports
Imports
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
93.5
106.5
86.9
102.3
94.5
113.3
101.1
123.5
114.3
142.3
135.9
170.0
149.3
191.4
165.8
208.2
169.9
199.8
188.5
217.2
Trade balance
12.9
15.4
18.8
22.4
28.0
34.1
42.1
42.5
29.9
28.8
Services, net
4.8
17.8
0.9
14.5
1.1
17.7
0.3
22.1
2.0
30.0
3.3
37.4
1.5
43.6
8.0
50.4
7.2
37.1
6.8
35.5
Income, net
17.9
11.3
16.9
17.7
11.5
16.9
10.6
17.9
5.5
18.2
5.1
19.3
2.0
21.8
4.8
23.4
3.6
23.3
4.4
23.7
24.4
13.7
12.3
14.8
17.3
23.2
23.7
22.2
17.4
16.3
119.3
21.1
12.1
113.8
19.9
3.0
125.0
17.1
2.0
133.8
18.6
0.2
146.3
20.8
0.1
175.2
17.8
0.4
195.0
17.8
1.7
213.1
19.5
1.9
218.1
21.1
3.4
242.4
24.3
5.4
159.4
141.8
144.4
145.3
149.2
152.9
148.8
157.8
163.0
163.4
187.9
206.6
215.1
222.0
231.0
249.0
220.3
252.0
246.5
269.9
17.6
0.9
3.8
9.1
0.4
18.7
7.0
18.0
31.6
23.4
Services, net
14.7
2.9
11.1
12.0
11.3
15.1
12.4
21.5
13.4
13.8
16.3
35.0
15.8
22.7
22.0
40.0
20.2
51.9
19.3
42.8
Income, net
37.5
15.6
34.7
22.0
28.8
23.9
31.1
23.6
24.3
22.5
25.6
23.8
23.5
23.4
25.6
24.2
28.0
24.9
30.9
25.6
19.0
24.6
19.9
29.0
15.6
36.8
22.9
41.3
54.9
48.1

Interest payments
Oil trade balance
190.7
40.3
67.5
175.6
37.0
52.0
184.2
34.1
50.9
185.8
36.0
44.1
198.2
35.3
43.7
229.5
35.6
48.7
261.9
36.8
63.2
282.4
37.6
63.1
272.5
41.4
46.9
303.0
43.3
55.1

Exports
Imports
286.9
293.7
310.0
327.8
342.1
382.0
370.4
435.0
446.7
496.5
550.1
580.9
609.4
646.6
666.3
682.3
668.9
659.5
715.4
697.7
Trade balance
6.8
17.8
39.9
64.5
49.8
30.7
37.3
16.0
9.4
17.7
Services, net
2.9
9.7
3.5
21.3
7.1
47.0
12.2
76.7
12.4
62.2
15.9
46.6
10.2
47.4
12.7
28.7
9.5
0.1
10.9
6.8
29.1
22.2
30.8
27.8
31.1
29.4
29.3
28.2
32.1
28.8
45.5
32.1
48.9
36.8
43.6
41.5
53.3
38.9
55.5
38.4
16.6
24.2
48.8
77.7
65.5
60.0
59.5
30.7
14.5
10.3
362.8
43.1
6.3
388.2
43.9
3.3
430.7
44.6
2.4
470.1
45.3
1.5
560.7
50.8
1.5
681.3
58.7
3.1
755.4
62.3
4.5
824.0
61.4
6.6
829.1
66.9
6.8
884.5
72.4
6.9

Memorandum
Interest payments
Oil trade balance
Exports
Imports
Trade balance

Memorandum
Income, net
Memorandum
Interest payments
Oil trade balance
217
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
28.3
30.4
26.6
30.0
26.8
31.7
26.0
32.9
29.7
34.3
36.6
41.9
41.6
48.2
44.7
49.6
44.6
51.5
49.1
55.3
Trade balance
2.1
3.4
4.9
6.8
4.5
5.3
6.6
4.9
6.8
6.2
Services, net
6.1
8.2
5.2
8.6
5.7
10.6
5.4
12.2
5.0
9.5
5.6
10.9
6.6
13.2
7.0
11.9
5.5
12.3
5.4
11.6
10.6
5.1
9.1
6.0
7.9
6.9
7.9
6.5
6.6
6.9
6.9
7.2
7.2
8.1
6.8
7.6
6.9
8.3
7.1
8.2
13.8
11.8
11.7
13.6
9.2
10.7
12.3
11.1
11.0
10.5

Interest payments
Oil trade balance
34.8
7.0
3.9
33.3
7.7
3.1
34.1
7.7
3.5
33.4
7.6
2.5
37.3
7.1
2.7
45.6
7.4
3.3
51.6
7.7
3.6
54.7
7.2
4.8
55.9
7.6
2.9
61.1
7.5
3.3

Exports
Imports
16.7
25.9
15.8
25.6
15.4
26.4
16.3
27.2
18.5
28.2
22.1
32.8
23.3
35.2
25.6
37.0
26.1
39.0
28.4
41.9
Other groups
Exports
Imports
Income, net
Memorandum
Trade balance
9.2
9.8
11.0
11.0
9.7
10.7
11.9
11.4
12.9
13.5
3.1
12.2
2.7
12.5
2.8
13.8
2.6
13.6
2.1
11.8
2.6
13.3
2.5
14.4
2.5
13.8
2.4
15.2
2.4
15.9
5.9
6.5
3.7
7.1
2.8
8.1
2.3
7.8
3.0
8.2
2.9
8.5
2.7
8.5
2.8
8.4
3.0
8.5
2.9
8.0
11.7
9.2
8.5
8.1
6.5
7.8
8.6
8.2
9.8
10.8
21.3
3.5
1.0
20.3
3.7
1.7
20.2
3.7
1.5
21.5
3.5
1.7
24.0
3.6
1.1
28.1
3.8
1.4
29.6
3.8
2.0
32.1
3.8
1.7
33.1
4.0
1.8
35.9
3.9
2.1
161.1
122.3
146.3
130.9
158.0
143.3
147.7
139.9
151.4
132.7
169.4
144.8
190.6
152.2
200.4
161.6
174.8
165.1
191.3
177.8
38.7
15.4
14.8
7.9
18.7
24.6
38.4
38.8
9.7
13.5
Services, net
22.7
16.0
37.8
22.4
29.1
14.3
22.0
14.2
14.4
4.3
18.2
6.4
18.6
19.8
21.7
17.1
22.0
12.3
22.3
8.8
Income, net
1.9
15.5
3.5
38.2
0.7
7.2
2.4
10.0
4.0
15.4
1.9
14.2
2.6
12.3
2.8
12.2
4.1
11.1
5.5
11.6
1.3
64.1
22.3
26.6
15.1
5.9
10.1
7.7
19.3
14.9
191.9
11.9
121.9
174.7
11.0
106.8
190.2
9.0
114.2
181.0
10.0
102.0
183.9
9.0
101.2
201.0
10.8
109.5
224.7
10.5
130.7
236.7
10.3
134.3
210.9
9.9
107.7
229.5
10.0
118.1
Services, net
Income, net
Memorandum
Interest payments
Oil trade balance
Exports
Imports
Trade balance

Memorandum
Interest payments
Oil trade balance
218
Balance of Payments and External Financing: Summary
Table 33. Summary of Balance of Payments and External Financing

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
24.8
98.0
78.8
121.3
89.8
95.3
71.4
61.8
78.3
63.2
24.8
98.0
78.8
121.3
89.8
95.3
71.4
61.8
78.3
63.2
15.7
61.9
11.2
41.6
4.7
149.3
6.2
49.8
3.5
125.3
11.1
38.9
4.8
170.1
5.0
48.6
4.3
144.2
16.4
42.3
2.1
180.4
20.1
67.1
6.9
193.7
34.0
95.2
6.6
135.9
22.9
57.8
10.2
93.8
29.3
3.6
5.8
119.9
25.6
37.0
Nonexceptional financing flows

Exceptional financing flows
23.2
43.2
122.3
25.5
86.8
30.9
136.8
33.1
104.8
27.3
140.1
22.3
152.9
13.7
112.8
6.8
74.3
0.4
95.7
4.5
Arrears on debt service

Debt forgiveness
Rescheduling of debt service
18.4
13.7
13.2
16.9
1.0
13.6
7.5
0.3
16.7
13.5
1.3
21.9
4.5
1.2
25.0
2.0
2.6
19.7
11.1
4.6
17.7
5.8
3.3
16.5
...
...
...
...
...
...
Change in reserves ( = increase)
41.6
49.8
38.9
48.6
42.3
67.1
95.2
57.8
3.6
37.0
24.8
41.6
98.0
49.8
78.8
38.9
121.3
48.6
89.8
42.3
95.3
67.1
71.4
95.2
61.8
57.8
78.3
3.6
63.2
37.0
34.6
35.4
18.3
3.3
23.1
36.8
71.1
104.2
102.0
70.3
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
101.0
112.4
136.0
173.2
155.2
199.2
237.7
223.8
176.6
170.5
Non-debt-creating flows, net
35.1
37.3
44.6
81.7
99.0
100.7
133.5
154.8
128.8
115.0
transfers1
15.7
4.7
3.5
4.8
4.3
2.1
6.9
6.6
10.2
5.8
19.4
32.6
41.1
76.9
94.7
98.6
126.5
148.2
118.6
109.2
1.9
67.8
1.1
74.0
0.4
91.8
0.1
91.6
0.8
57.1
12.6
85.9
2.9
107.2
0.8
68.3
...
44.3
...
61.5
12.8
8.3
46.7
24.3
17.1
32.6
16.8
12.6
62.4
18.2
7.5
80.9
10.3
32.7
79.5
32.1
11.8
42.0
3.2
13.1
90.8
3.3
2.3
73.9
27.6
11.7
5.0
3.3
8.6
49.6
0.7
1.1
1.6
2.4
1.5
1.3
0.8
0.8
0.8
0.5
89.9
190.9
157.7
94.1
206.5
168.1
114.4
250.4
206.3
128.4
301.6
220.1
132.5
287.8
189.6
144.7
343.8
230.6
166.0
403.7
273.2
176.6
400.5
244.9
162.1
338.7
206.4
152.7
323.2
214.2
20.1
4.9
0.1
6.8
3.7
1.6
18.0
25.0
30.8
25.1
20.1
4.9
0.1
6.8
3.7
1.6
18.0
25.0
30.8
25.1
10.7
2.1
7.4
0.9
0.6
6.4
1.3
2.5
7.2
3.2
6.4
2.7
20.9
4.2
12.5
8.1
6.7
11.6
6.9
0.5
34.8
2.4
36.2
1.5
16.2
0.5
0.1
0.7
32.7
2.3
6.1
0.4
35.0
5.4
0.8
0.4
32.9
0.6
8.7
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
Balance of payments
Balance on capital and
financial account
By balance of payments component
Capital transfers1
Net financial flows
Errors and omissions, net
219
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Nonexceptional financing flows

Exceptional financing flows
4.6
17.3
20.7
14.5
14.4
20.9
4.4
23.8
23.9
27.1
22.9
14.9
8.8
9.3
29.4
1.7
22.9
7.1
27.1
6.7
Arrears on debt service

Debt forgiveness
Rescheduling of debt service
9.0
8.3
6.1
0.9
7.2
8.6
2.4
9.7
3.7
2.1
16.6
3.4
7.9
15.6
12.7
0.2
25.6
1.2
1.4
8.9
0.3
1.9
...
...
...
...
...
...
7.4
1.3
6.4
12.5
6.9
36.2
0.1
6.1
0.8
8.7
20.1
7.4
4.9
1.3
0.1
6.4
6.8
12.5
3.7
6.9
1.6
36.2
18.0
0.1
25.0
6.1
30.8
0.8
25.1
8.7
By type of financing flow
External financing
Change in reserves ( = increase)2
net errors and omissions3
3.5
7.1
5.8
2.9
9.3
15.9
5.6
14.1
22.4
1.9
Total, net external financing4
16.3
0.9
12.3
16.4
12.5
21.9
23.7
45.1
52.4
35.8
0.3
3.2
6.7
8.7
13.7
13.9
15.0
19.1
19.3
18.2
0.9
2.5
2.7
8.1
0.5
1.5
0.7
0.4
0.4
0.3
2.3
4.2
6.0
5.6
13.3
13.5
18.4
18.8
17.8
0.3
16.2
2.4
4.6
1.6
4.1
3.7
4.0
2.4
3.6
4.7
3.3
3.7
5.0
2.4
23.6
...
27.4
...
18.1
11.5
0.6
5.4
12.0
4.5
12.1
3.9
0.3
0.5
1.1
4.7
1.7
12.1
2.3
6.2
8.4
0.5
12.2
1.1
3.9
9.9
3.8
9.8
15.0
3.5
8.9
1.7
0.3
16.1
0.8
0.6
0.8
1.4
1.2
0.5
1.2
1.9
2.1
1.4
29.1
45.3
45.3
28.0
28.9
23.3
28.4
40.7
32.5
25.6
42.0
29.6
26.9
39.4
23.3
25.1
47.0
28.4
20.7
44.4
25.7
16.3
61.4
39.9
23.1
75.5
50.5
25.1
60.9
43.2
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
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.
220
Balance of Payments and External Financing: By Region
Table 34. Developing Countriesby Region: Balance of Payments and External Financing1
Africa
net errors and omissions
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
8.0
1.5
6.8
2.1
10.3
1.0
11.0
0.9
12.1
5.0
16.5
1.8
3.9
7.3
5.3
12.8
14.7
0.9
12.7
1.6
2.6
0.6
1.5
0.5
3.7
2.1
5.5
4.9
0.7
1.7
Total, net external financing
12.1
8.3
7.8
10.6
20.8
20.4
16.6
13.3
14.9
16.0

Net credit and loans from IMF
Net external borrowing
From official creditors
From banks
Other
6.1
0.6
6.6
8.3
0.4
2.1
4.1
0.2
4.1
6.9
0.7
2.2
3.8
0.2
4.3
8.9
3.5
1.1
4.6
0.2
5.9
4.7
0.2
1.3
5.6
0.9
14.3
9.3
0.5
4.5
6.2
0.8
13.4
7.7
1.4
4.4
11.0
0.6
5.1
6.0
1.4
0.6
10.9
0.5
2.9
2.3
0.8
6.0
12.8
...
2.5
2.9
2.8
3.2
9.6
...
7.1
1.2
0.8
7.5
6.4
15.9
8.1
11.2
9.1
15.3
8.4
11.5
18.5
15.8
18.2
15.3
11.4
15.3
11.8
13.5
9.3
0.6
12.2
3.8
9.0
0.8
8.5
0.8
9.8
1.5
10.0
1.0
8.9
2.6
12.0
3.0
3.9
4.5
7.8
8.6
13.6
1.1
12.0
2.4
1.1
1.0
1.2
0.8
3.6
1.9
5.4
2.2
0.7
1.7
10.8
8.3
7.1
9.8
15.1
16.9
13.9
14.2
14.0
16.1

From banks
Other
3.1
0.3
8.0
10.2
1.6
3.7
3.6
4.7
5.7
1.0
2.7
4.4
7.7
2.7
0.5
3.4
0.7
5.7
4.6
0.1
1.1
4.2
0.5
10.5
7.1
1.4
1.9
5.6
0.6
10.6
6.1
0.9
3.6
10.0
0.1
3.8
4.9
0.8
1.8
9.0
0.6
5.7
0.6
0.4
5.4
11.2
...
3.1
3.9
3.0
3.9
7.6
...
8.9
1.4
1.3
6.2
7.8
11.5
8.1
10.2
8.4
14.8
7.7
11.5
12.9
10.1
14.8
9.3
8.7
10.8
12.8
10.4
8.5
1.7
12.5
3.8
16.4
19.1
11.3
26.4
12.8
14.4
34.3
25.7
20.4
39.7
41.9
29.1
38.4
48.1
4.7
19.2
37.2
4.8
39.4
37.9
0.5
8.5
12.3
12.2
14.1
36.1
41.0
82.2
86.9
56.6
36.0
46.3
39.6
72.2
74.1
107.1
127.5
96.7
44.9
55.1

From banks
Other
10.8
2.4
27.6
6.4
12.1
9.2
13.3
1.9
31.0
10.7
10.4
9.9
18.6
1.3
19.7
10.9
6.0
2.9
35.7
0.6
35.9
10.4
11.3
14.3
45.6
0.8
29.3
5.8
10.5
13.0
52.2
1.5
56.3
5.1
14.6
36.6
60.4
1.7
68.8
11.3
24.9
32.6
60.0
5.0
31.6
7.5
1.6
22.5
48.9
...
10.4
25.9
1.4
37.6
41.9
...
11.8
10.1
5.2
3.6
34.1
2.3
43.1
2.4
32.0
2.2
65.1
0.8
70.6
1.2
97.0
0.5
110.5
0.7
36.5
8.1
18.3
0.2
21.3
0.2
Memorandum
Net financial flows
Exceptional financing
Sub-Sahara
Memorandum
Net financial flows
Exceptional financing2
Asia
Memorandum
Net financial flows
221
Asia excluding China and India
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
18.8
8.7
20.8
10.0
16.3
15.1
20.9
17.2
24.5
3.5
38.2
7.7
40.8
12.8
24.8
18.6
11.8
9.7
11.6
14.1
0.8
2.1
1.2
2.3
5.9
15.9
9.1
19.8
18.1
3.6
26.7
32.9
32.6
40.4
33.9
61.8
62.8
26.0
3.5
6.2

From banks
Other
8.0
1.0
19.8
3.7
9.6
6.4
9.7
0.2
23.0
6.5
6.6
9.8
11.1
0.1
21.3
4.8
1.9
14.6
12.1
0.1
28.2
4.4
3.4
20.4
12.7
0.4
20.8
2.2
8.3
10.3
16.4
0.3
45.6
3.2
11.8
30.6
18.4
0.4
44.9
7.0
21.4
16.4
15.4
5.7
4.9
5.5
2.1
1.5
14.0
...
24.3
21.8
5.5
40.6
9.1
...
4.7
5.5
3.0
7.2
25.4
2.3
30.1
2.4
28.7
2.2
36.0
0.8
32.0
1.2
52.8
0.5
59.9
0.7
5.8
8.1
20.5
0.2
3.3
0.2
0.6
3.7
63.0
3.8
21.2
2.9
30.4
2.8
6.6
2.7
0.9
10.9
8.7
11.6
3.7
10.8
20.3
8.4
18.9
5.7
Memorandum
Net financial flows

15.7
54.5
0.7
11.9
10.2
6.3
9.2
11.2
0.2
1.2
18.8
12.3
23.4
21.3
0.9
5.5
12.2
18.3
28.4
25.8

From banks
Other
11.4
0.1
7.4
5.6
3.4
9.6
2.4
10.0
4.0
4.3
1.7
1.4
0.1
21.9
1.3
10.6
12.5
4.1
17.3
2.6
2.2
17.0
4.0
0.4
5.3
1.0
11.0
6.7
3.7
0.4
1.5
1.1
5.5
8.2
4.4
0.1
7.6
0.6
2.7
11.0
6.7
0.2
11.4
0.6
1.1
13.0
7.3
...
21.2
1.0
2.8
19.4
7.5
...
18.7
1.7
0.9
19.5
3.6
4.2
69.9
1.3
30.0
3.3
32.9
14.2
12.4
4.8
6.6
3.9
3.5
0.3
8.1
0.4
27.7
0.5
23.7
0.5
1.0
17.3
16.9
17.4
34.5
22.6
45.6
21.1
50.7
5.0
35.9
25.3
37.8
28.2
64.9
15.0
80.5
8.2
71.0
8.3
15.7
11.1
8.1
2.4
15.5
4.9
15.4
15.7
16.0
10.8
34.1
45.5
65.2
69.1
61.2
66.2
81.4
95.6
88.4
73.6

From banks
Other
7.0
1.2
25.9
3.6
7.5
29.8
12.1
1.0
34.4
2.7
3.1
28.6
14.5
1.6
52.3
1.7
0.5
54.6
13.1
0.9
56.9
0.5
16.3
72.6
25.6
1.3
37.0
3.8
32.6
73.3
26.5
12.9
26.8
20.5
1.3
5.0
39.6
2.0
43.7
13.5
7.5
64.7
55.5
4.0
44.0
8.0
2.0
54.0
49.4
...
41.4
0.1
4.6
36.9
44.6
...
35.4
3.9
1.7
37.5
17.7
20.9
28.2
13.1
54.1
10.0
63.7
6.6
42.7
5.4
58.6
2.6
68.3
2.0
79.5
0.9
75.1
0.7
62.7
Memorandum
Net financial flows
Western Hemisphere
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
222
Balance of Payments and External Financing: By Analytical Criteria
Table 35. Developing Countriesby Analytical Criteria: Balance of Payments and External Financing1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
17.6
7.3
59.9
0.6
24.7
7.8
25.2
6.1
6.9
2.0
1.2
1.5
31.0
17.8
21.2
13.9
15.3
7.6
8.0
3.6
16.4
47.5
2.2
12.8
2.5
6.9
13.3
8.2
6.6
3.6
6.0
13.0
14.7
6.3
7.4
6.5
0.2
0.9
14.3
8.0

From banks
Other
0.6
1.9
4.7
6.7
19.1
17.1
3.2
0.5
9.3
6.7
2.8
0.1
0.9
0.5
14.3
6.2
3.9
4.2
0.7
0.8
6.3
0.6
1.9
8.8
2.3
0.4
4.7
3.1
5.8
7.4
0.8
0.2
7.1
0.6
7.8
0.1
9.2
0.7
9.8
2.5
8.0
4.2
9.6
0.3
8.4
2.2
4.2
2.0
7.0
...
7.9
1.1
0.9
5.9
4.9
...
4.0
2.1
1.2
7.3
0.6
6.7
76.2
4.8
27.4
10.3
21.5
17.3
13.6
14.1
1.7
12.9
14.0
9.7
10.4
7.0
7.8
4.8
4.5
2.2
42.5
34.3
38.1
49.2
54.1
46.7
96.0
54.7
82.9
44.2
96.4
65.6
102.4
77.4
83.1
43.9
63.0
3.9
55.2
40.5

Fuel
Memorandum
Net financial flows
Nonfuel
18.2
12.1
20.5
16.1
20.7
43.6
57.8
96.1
95.4
66.8
95.0
99.4
121.3
166.9
147.8
205.7
237.5
223.0
162.3
162.5

From banks
Other
36.0
3.8
62.9
6.1
27.5
29.3
28.7
0.6
70.1
17.6
14.3
38.2
37.3
84.0
10.6
8.7
64.7
56.7
0.6
109.6
18.8
5.6
96.4
78.6
1.2
70.5
7.1
26.9
90.3
87.8
12.8
105.1
31.5
19.6
54.0
106.2
3.6
135.0
0.7
21.2
113.1
123.5
1.1
98.3
1.1
1.9
97.5
111.3
...
46.9
26.5
10.8
9.6
98.8
...
69.0
5.4
9.8
53.7
61.3
36.5
73.1
20.7
97.9
20.5
148.6
15.8
130.5
13.2
182.1
9.4
207.7
4.1
146.3
0.3
86.0
4.4
115.4
2.2
10.8
0.6
49.2
0.8
10.1
2.9
14.5
2.6
8.7
2.3
1.6
1.9
11.0
2.4
10.2
7.9
8.9
1.0
4.9
1.9
10.1
48.1
0.7
11.3
5.5
5.3
8.9
7.6
0.8
0.5
Memorandum
Net financial flows

0.1
2.0
6.6
0.6
1.0
5.0
0.3
5.3
10.7
7.3

From banks
Other
0.6
0.5
0.5
0.4
1.5
1.0
0.5
0.7
7.3
0.1
6.6
0.7
0.6
0.4
0.4
0.6
0.4
0.5
0.4
1.9
2.0
2.6
2.3
0.1
4.4
2.0
0.4
0.1
0.8
3.3
2.4
2.5
2.8
0.5
1.0
1.3
1.6
...
9.1
0.5
2.6
6.0
1.6
...
5.7
0.8
2.1
4.4
3.8
64.5
17.6
14.9
11.0
1.3
7.5
2.4
9.9
6.9
Memorandum
Net financial flows
223
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
35.6
41.0
48.9
48.9
68.7
41.8
106.8
51.2
81.1
44.6
96.9
65.2
82.4
92.8
72.0
49.9
69.4
4.6
58.3
35.1
24.5
12.6
18.9
14.6
28.6
42.0
62.2
96.6
101.2
69.8
101.1
110.4
129.4
172.6
154.3
204.1
237.4
218.5
166.0
163.2

From banks
Other
35.9
1.9
67.0
12.8
8.3
46.0
31.4
1.1
77.9
24.3
16.1
37.5
38.9
0.4
91.0
16.8
6.0
68.1
57.4
0.1
115.4
17.9
7.2
104.7
80.4
0.8
74.7
9.9
30.8
95.6
91.2
12.6
100.3
32.0
16.2
52.1
115.0
2.9
125.3
2.4
16.4
106.5
130.6
0.8
87.1
3.8
3.2
94.2
116.7
...
45.7
27.1
9.1
9.5
102.0
...
67.3
4.1
6.5
56.6
65.7
43.2
84.8
25.5
107.6
30.9
155.1
33.1
133.2
27.3
179.1
22.3
201.2
13.7
138.2
6.8
83.9
0.4
113.0
4.5
14.1
2.4
13.0
3.9
14.5
0.3
17.9
0.7
14.8
4.8
16.3
2.1
12.1
4.2
13.0
4.7
15.6
2.8
14.2
3.3
0.7
2.7
4.0
3.1
1.0
0.9
1.5
1.1
0.6
2.7
17.2
14.3
10.2
14.1
20.6
19.3
17.8
16.6
19.0
14.9

From banks
Other
7.4
0.8
10.6
10.0
0.5
0.1
5.3
0.2
8.8
9.2
0.6
0.2
5.2
0.3
4.7
11.1
3.4
3.0
7.0
0.3
7.4
7.5
0.2
0.1
8.2
0.8
11.6
10.1
0.7
0.7
8.8
0.6
9.9
8.8
0.5
0.6
8.6
9.2
7.4
0.6
1.2
10.8
0.1
5.9
2.3
0.7
3.0
13.9
...
4.9
4.7
3.4
3.2
11.1
...
4.6
0.1
0.5
5.2
10.5
15.5
10.8
11.9
8.4
15.0
11.6
11.3
18.0
10.7
15.8
9.7
16.1
10.0
13.6
2.3
11.7
4.8
10.8
3.5
2.8
34.8
22.1
33.4
42.0
30.7
74.1
37.7
49.0
29.6
57.4
60.5
46.6
70.4
36.8
41.0
36.4
1.0
27.8
26.0
21.4
20.4
28.4
22.3
26.1
29.4
53.1
97.4
101.4
72.3
53.4
75.9
101.1
134.1
104.6
147.2
170.2
175.1
138.8
126.0

From banks
Other
13.8
0.5
39.1
4.3
1.7
36.5
21.3
1.2
55.8
10.4
12.2
33.2
28.5
1.9
74.5
1.8
7.0
65.8
42.8
0.4
91.7
4.1
6.4
94.0
62.4
0.2
42.5
3.3
39.0
84.8
67.7
13.7
65.8
22.1
7.1
36.6
86.6
1.0
84.6
5.2
0.6
90.4
106.4
1.5
70.3
6.5
3.9
80.7
90.6
...
50.5
2.3
5.8
42.4
78.6
...
54.0
1.2
3.5
51.6
35.5
20.3
57.2
13.5
84.1
12.1
119.8
18.3
86.9
14.5
133.0
10.9
142.8
1.3
99.6
3.9
64.7
2.0
82.4
0.5
Memorandum
Net financial flows
Official financing
Memorandum
Net financial flows
Private financing
Memorandum
Net financial flows
224
Balance of Payments and External Financing: By Analytical Criteria
From banks
Other
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
24.4
3.8
13.7
11.7
12.3
11.4
14.8
14.2
17.3
10.3
23.2
2.6
23.7
18.1
22.2
4.1
17.4
8.4
16.3
5.8
2.3
5.1
5.5
4.5
1.6
11.8
7.5
0.4
0.9
0.2
30.4
20.3
18.1
24.5
29.1
37.6
49.3
26.7
8.1
22.2
14.7
1.6
17.4
1.4
9.4
9.4
4.8
2.2
13.3
4.6
4.5
4.2
5.2
1.2
11.7
4.0
2.5
5.2
7.6
0.6
16.3
6.2
0.5
10.6
9.8
1.4
20.6
3.1
7.5
10.0
14.8
1.7
24.6
1.1
8.6
14.9
19.7
1.9
31.5
0.1
16.4
15.0
13.4
2.5
10.9
0.4
10.5
12.3
...
9.8
20.0
0.1
29.7
12.3
...
8.7
5.4
3.4
0.2
19.7
7.4
16.7
0.1
15.2
3.8
23.7
3.5
28.3
2.1
30.3
1.8
42.2
2.4
25.0
0.6
7.6
6.4
19.8
0.5
19.0
4.9
24.6
7.8
19.9
15.1
29.0
10.5
15.6
15.9
36.8
16.8
22.9
33.5
41.3
1.0
54.9
4.6
48.1
1.8
Memorandum
Net financial flows

14.4
4.0
3.2
3.5
13.4
2.7
8.8
0.8
5.4
5.9
38.3
28.5
31.8
36.0
44.9
56.4
65.1
41.5
55.7
52.2

From banks
Other
16.0
0.2
22.2
4.0
17.8
36.0
8.4
0.8
20.1
8.3
1.6
10.2
9.4
1.2
23.2
4.5
3.8
22.5
10.2
0.1
26.7
4.0
7.3
30.1
14.6
1.0
29.5
6.9
40.3
62.9
17.9
1.7
38.6
5.4
1.8
35.1
31.3
0.9
33.3
4.2
2.9
32.0
36.8
0.3
4.3
0.2
4.3
8.8
40.8
...
14.6
5.9
2.0
6.6
32.7
...
20.2
2.2
0.5
18.5
19.1
34.8
19.1
21.0
28.3
28.3
29.8
31.4
30.6
26.1
47.1
21.8
54.3
13.4
32.9
6.6
44.5
0.1
45.6
4.2
16.6
36.1
24.2
41.1
48.8
26.7
77.7
40.7
65.5
28.7
60.0
48.4
59.5
59.3
30.7
48.9
14.5
0.1
10.3
36.8
10.1
16.6
22.1
18.2
15.2
39.3
53.4
97.5
95.8
63.9
Memorandum
Net financial flows

62.8
82.0
97.6
136.6
109.4
147.7
172.2
177.0
110.3
111.0

From banks
Other
20.0
1.7
44.8
8.8
26.1
10.0
23.0
1.9
57.8
16.0
14.5
27.3
29.4
0.8
67.7
12.3
9.8
45.6
47.1
0.1
88.6
13.9
0.2
74.6
65.8
1.8
45.2
3.0
9.5
32.7
73.3
10.9
61.7
26.6
18.0
17.0
83.7
3.9
92.0
1.9
19.3
74.6
93.8
0.5
82.8
3.7
1.1
85.4
75.9
...
31.1
21.2
7.1
2.9
69.3
...
47.1
1.9
7.0
38.2
46.6
8.5
65.7
4.4
79.3
2.6
125.4
1.7
102.5
1.2
132.0
0.5
147.0
0.3
105.4
0.2
39.4
0.3
67.4
0.2
Memorandum
Net financial flows
225
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
13.8
2.4
11.8
0.8
11.7
0.4
13.6
1.7
9.2
2.6
10.7
1.8
12.3
4.1
11.1
1.4
11.0
2.3
10.5
2.6
1.0
2.2
2.0
3.4
0.8
0.5
1.4
0.2
0.6
0.8
12.4
10.4
9.3
8.6
11.0
12.0
14.9
12.2
13.9
13.9

From banks
Other
2.2
0.3
10.5
10.3
2.3
2.1
4.3
0.1
6.0
4.4
1.2
0.4
3.9
5.4
3.9
0.5
1.0
5.4
0.2
3.4
3.0
0.2
0.2
4.7
0.5
5.8
5.5
1.6
1.3
6.4
0.6
4.9
5.8
0.7
1.6
10.5
0.3
4.1
5.8
0.9
2.5
7.9
0.1
4.4
2.1
0.8
3.1
10.7
...
2.9
2.9
3.0
2.9
7.0
...
7.3
1.4
1.3
4.6
10.0
9.9
7.8
10.8
7.4
11.9
6.4
10.2
9.3
9.8
10.0
8.4
9.2
7.9
8.5
6.3
3.8
10.5
3.1
11.7
2.1
9.2
0.9
8.5
0.2
8.1
0.5
6.5
1.4
7.8
0.7
8.6
0.5
8.2
1.8
9.8
1.8
10.8
1.9
Other groups
Memorandum
Net financial flows
2.1
0.1
0.1
0.7
0.9
0.1
1.0
1.3
11.7
10.2
8.8
8.6
8.0
9.2
10.0
9.9
12.5
14.0

From banks
Other
3.0
0.4
9.1
7.0
1.0
1.0
3.6
0.1
6.5
3.2
1.2
2.1
3.6
0.2
5.0
2.4
0.4
2.2
4.2
0.1
4.4
2.9
0.3
1.3
2.8
0.2
5.0
6.0
0.2
0.8
3.8
0.5
4.9
5.0
0.4
0.4
3.7
0.1
6.2
4.2
0.3
1.7
5.4
0.2
4.3
1.9
0.1
2.3
8.7
...
3.7
2.2
3.3
1.8
5.3
...
9.2
1.4
1.4
6.4
5.1
5.4
4.0
5.3
2.4
6.1
2.2
5.8
1.5
5.5
4.2
4.2
6.4
3.3
3.7
5.8
10.7
1.2
11.3
1.8
1.3
1.2
64.1
5.8
22.3
1.9
26.6
2.4
15.1
4.0
5.9
5.1
10.1
10.0
7.7
11.8
19.3
0.2
14.9
0.1
16.4
56.5
6.0
18.4
6.9
6.5
7.7
3.8
0.6
0.6
18.9
13.4
18.2
10.6
12.3
4.5
7.6
7.9
18.9
14.3

From banks
Other
14.0
0.3
5.2
7.2
1.7
10.7
2.1
0.2
11.0
3.4
4.7
2.9
1.7
0.1
16.6
0.6
8.6
7.5
4.6
0.5
6.6
1.0
4.7
10.2
4.7
0.5
7.0
3.0
4.6
8.7
3.3
0.2
1.0
2.5
7.0
5.5
4.7
0.6
2.4
3.0
7.9
7.3
7.8
0.3
0.2
1.6
3.8
5.2
7.7
...
11.1
0.6
2.3
8.2
8.2
...
6.5
2.4
0.2
8.7
1.6
10.1
73.6
1.1
28.2
5.5
26.0
15.6
22.6
11.9
7.1
11.5
1.2
5.7
0.6
4.9
19.0
3.1
13.6
1.9
Memorandum
Net financial flows
Memorandum
Net financial flows
1For
definitions, see footnotes to Table 33.
226
External Financing: Reserves
Table 36. Developing Countries: Reserves1

1990
1991
1992
1993
1994
194.6
246.2
261.3
307.9
362.4
17.6
13.7
68.1
35.8
60.4
48.5
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
57.6
63.6
15.2
60.6
85.9
18.7
51.6
88.9
22.1
10.8
47.3
15.3
65.6

Official financing
Private financing
27.0
167.6
14.2
118.6
34.8

1995
1996
1997
1998
1999
429.2
514.8
565.1
563.1
602.9
24.9
16.1
158.2
84.3
74.2
105.1
26.7
19.2
184.8
90.2
87.6
130.0
32.0
21.6
230.6
102.2
95.8
156.3
43.8
29.5
249.2
80.5
102.4
169.7
44.8
30.6
244.3
70.8
112.3
161.7
46.4
33.1
282.2
84.8
120.9
153.4
49.7
117.7
22.8
50.1
169.2
31.7
51.4
206.4
37.0
62.3
252.6
41.6
74.4
268.1
45.9
68.5
270.8
46.0
67.0
302.5
47.4
20.6
78.1
25.1
92.6
28.5
82.9
32.7
101.7
36.7
121.5
38.8
138.0
40.0
137.7
41.7
144.3
29.1
217.1
17.6
153.2
46.2
26.3
235.1
16.2
161.8
57.0
25.3
282.6
18.9
197.7
66.1
25.1
337.3
24.4
231.4
81.5
29.1
400.1
24.0
289.5
86.6
28.8
486.1
27.0
357.3
101.8
30.3
534.8
32.6
398.2
104.0
30.8
532.3
35.2
401.3
95.8
31.8
571.1
38.5
431.0
101.6
49.7
117.9
59.7
157.4
76.3
158.8
87.9
194.8
102.7
234.6
119.6
280.4
148.8
337.3
153.4
381.4
151.0
381.3
152.2
418.9
4.8
9.1
55.3
6.1
10.9
61.3
6.5
11.5
64.5
6.0
12.5
66.8
7.9
14.5
72.5
10.4
15.5
80.1
12.5
16.3
86.7
13.8
17.1
95.1
16.2
18.7
96.9
18.8
20.6
99.1

Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
Other groups
227
1990
1991
1992
1993
1994
1995
1996
Ratio of reserves to imports of goods and

1997
1998
1999
services2
30.3
34.9
33.1
35.8
38.9
39.2
43.0
43.7
44.3
44.8
16.9
17.6
31.5
25.2
34.4
33.2
20.8
19.8
39.9
29.2
31.9
39.9
16.9
14.8
31.1
33.3
32.3
45.9
18.9
16.8
32.5
36.4
33.7
51.6
22.7
19.6
39.9
34.2
41.1
43.2
20.5
19.5
37.3
29.0
42.6
49.3
24.6
21.7
41.9
30.0
42.3
54.0
32.1
27.6
43.7
23.4
41.1
50.3
32.9
29.0
46.8
24.5
44.0
45.3
32.1
29.7
51.3
27.6
44.0
40.7
35.8
35.1
30.8
32.4
43.3
37.0
26.4
38.7
39.0
27.6
41.5
38.9
31.7
50.2
49.9
29.6
47.8
47.1
34.8
53.8
47.5
37.5
55.1
49.4
34.7
59.9
48.2
31.8
64.7
47.4
24.7
22.8
32.8
29.5
41.8
30.2
46.2
32.7
51.2
26.2
51.8
29.2
54.2
31.0
53.5
31.2
51.0
30.8
49.9
29.8

Official financing
Private financing
32.8
29.9
18.1
34.4
25.4
26.8
36.4
21.9
39.5
36.0
23.2
34.7
18.7
36.1
40.0
24.0
37.5
21.3
38.8
42.4
26.2
40.4
26.5
40.8
46.2
28.4
40.3
22.0
43.2
40.7
26.3
44.7
23.0
48.8
42.7
25.6
45.5
26.8
50.4
39.5
26.3
46.1
28.8
51.7
37.5
26.1
46.7
30.3
52.7
36.5

26.5
31.7
31.8
38.4
38.3
33.2
42.4
35.6
48.4
37.7
45.2
38.5
52.3
42.0
47.6
44.7
46.6
46.0
44.0
47.7
11.1
27.0
31.4
14.4
33.4
31.1
14.6
33.9
31.6
13.2
35.6
34.2
17.0
40.6
40.3
18.4
37.5
41.2
19.2
37.1
42.3
20.8
37.2
43.3
23.7
38.7
43.4
25.8
39.7
41.6
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
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.
228
External Financing: IMF Credit
Table 37. Net Credit and Loans from IMF1

1989
Advanced economies
economies
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
1990
1991
1992
1993
1994
1995
1996
1997
0.3
0.1
0.1
11.3
11.3
1.5
1.9
1.1
0.4
0.1
0.8
12.6
2.9
0.8
0.1
0.4
1.1
0.2
0.2
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
0.6
5.0
5.7
0.2
4.0
Analytical groups
Fuel
Manufactures
private transfers
Diversified
1.7
2.0
0.4
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
0.1
0.6
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

Official financing
Private financing
1.5
0.2
1.3
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

0.2
1.3
0.2
1.7
0.8
1.9
1.2
0.8
0.1
0.1
1.0
1.8
1.7
10.9
0.9
3.9
0.3
0.5
0.3
0.3
0.5
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
0.2
0.3
0.3
0.3
2.4
1.6
3.7
2.4
4.7
3.7
2.4
...
...
...
...
...
...
...
...
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
Total
Net credit provided under:
General Resources Account
Trust Fund
SAF/ESAF
2.542
0.509
1.232
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
0.122
Disbursements at year-end under: 2

Trust Fund
SAF/ESAF
28.639
0.627
2.440
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
7.994
Other groups
Russia
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.
229
Table 38. Summary of External Debt and Debt Service

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

External debt
Regional groups
Africa
Asia
Western Hemisphere
Analytical groups
Official financing
Private financing
Russia
1,182.6
1,235.9
1,315.7
1,456.5
1,550.5
1,680.5
1,743.6
1,773.7
1,812.1
1,865.1
232.7
332.6
174.4
442.9
241.6
365.8
169.9
458.7
242.0
407.6
185.4
480.7
257.2
454.7
205.5
539.1
274.4
509.5
209.7
556.9
292.4
558.6
215.4
614.2
295.9
602.9
213.9
631.0
283.1
637.5
219.1
634.0
281.1
616.9
232.8
681.3
285.0
626.7
247.6
705.7
13.7
1,168.9
218.6
624.0
326.2
14.0
1,221.9
227.1
664.4
330.4
20.2
1,295.5
234.6
713.7
347.3
22.1
1,434.4
248.2
823.4
362.9
23.3
1,527.2
266.0
866.6
394.6
21.2
1,659.3
279.6
968.5
411.2
20.8
1,722.8
286.9
1,012.0
424.0
23.3
1,750.4
281.4
1,036.8
432.2
29.5
1,782.6
285.4
1,079.5
417.7
33.6
1,831.5
287.9
1,117.0
426.6
543.2
625.7
551.4
670.5
577.8
717.7
617.5
817.0
641.8
885.5
668.2
991.1
686.5
1,036.4
683.7
1,066.7
703.2
1,079.3
716.7
1,114.8
200.9
...
...
...
...
210.5
114.3
114.3
95.3
0.9
212.4
105.2
101.0
105.4
1.8
234.3
116.6
110.7
112.7
4.9
248.9
121.7
112.0
119.8
7.4
266.9
136.9
125.8
120.4
9.7
277.8
141.0
129.8
125.0
11.8
285.7
147.2
132.8
123.5
15.0
321.7
161.4
146.4
141.0
19.4
339.5
178.6
161.4
139.8
21.0
145.4
150.3
171.1
182.8
203.2
226.1
253.7
262.3
265.3
264.5
26.0
37.5
19.4
62.5
28.1
39.4
17.8
64.9
27.6
49.1
21.5
72.8
25.9
54.1
23.5
79.2
27.3
61.7
23.4
90.7
31.6
73.3
23.2
98.0
32.8
81.4
25.5
114.0
28.4
70.8
23.1
140.1
31.5
75.5
28.3
130.1
31.6
82.8
27.5
122.6
1.4
144.0
15.3
95.4
33.3
0.9
149.4
17.4
99.6
32.4
1.0
170.1
17.4
112.5
40.3
1.6
181.2
17.0
122.5
41.7
4.6
198.6
20.3
137.3
40.9
6.5
219.6
23.6
151.8
44.2
6.0
247.8
20.6
174.9
52.2
3.4
259.0
21.6
196.2
41.1
3.2
262.2
24.7
194.0
43.4
3.6
260.9
25.8
186.3
48.8
58.1
85.9
58.4
91.0
60.0
110.1
65.4
115.8
61.2
137.4
68.4
151.2
76.8
171.0
92.7
166.3
97.6
164.5
89.8
171.1
36.4
...
...
...
...
37.0
20.7
20.7
16.3
24.0
11.3
11.3
12.6
0.1
18.7
12.2
12.0
6.2
0.3
28.6
23.7
21.8
4.3
0.6
29.9
22.1
20.4
6.4
1.4
29.3
21.0
19.6
6.9
1.3
30.1
22.6
20.9
5.9
1.6
45.4
28.7
25.5
14.9
1.8
47.6
29.0
26.8
16.7
1.8
Debt-service payments1
Regional groups
Africa
Asia
Western Hemisphere
Analytical groups
Official financing
Private financing
Russia
230
External Debt: Summary
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999

External debt2
Regional groups
Africa
Asia
Western Hemisphere
Analytical groups
Official financing
Private financing
Russia
177.8
184.3
179.3
189.8
178.2
162.9
151.2
141.8
148.0
141.4
219.3
163.2
92.3
266.7
236.6
159.5
97.9
277.4
234.7
153.2
97.0
276.7
261.9
151.2
111.2
293.7
271.0
138.7
109.3
265.4
246.1
123.1
101.1
249.3
224.0
118.8
89.0
231.0
208.7
114.2
85.1
211.4
223.6
110.9
98.0
223.4
208.9
106.6
96.5
209.0
12.3
211.2
331.9
169.5
273.4
13.1
216.7
350.7
172.5
290.3
17.0
210.7
351.7
168.7
277.7
19.9
218.7
370.6
180.9
271.3
20.9
201.2
369.0
160.3
269.8
17.5
182.2
324.4
149.1
234.7
15.3
169.4
293.1
139.7
217.4
16.1
158.2
280.6
130.7
202.8
24.0
161.8
288.9
137.5
191.5
25.6
154.2
271.2
133.1
176.0
284.9
172.5
314.1
172.7
313.8
166.6
332.3
173.8
323.8
157.9
291.1
145.5
262.1
137.2
242.1
129.5
258.0
130.2
236.5
126.0
102.3
...
...
...
...
106.7
115.7
157.4
154.8
2.5
128.3
107.9
123.0
183.4
17.1
126.1
109.8
127.0
171.1
35.8
120.1
103.0
111.4
156.1
60.0
100.1
87.9
93.7
126.6
60.8
95.5
83.0
90.9
121.7
63.9
94.7
82.1
88.1
121.3
73.5
105.0
83.2
89.3
155.2
89.1
102.8
83.9
89.4
152.4
82.5
21.9
22.4
23.3
23.8
23.3
21.9
22.0
21.0
21.7
20.1
24.5
18.4
10.3
37.7
27.5
17.2
10.3
39.3
26.8
18.5
11.2
41.9
26.3
18.0
12.7
43.2
27.0
16.8
12.2
43.2
26.6
16.1
10.9
39.8
24.9
16.0
10.6
41.7
21.0
12.7
9.0
46.7
25.1
13.6
11.9
42.7
23.2
14.1
10.7
36.3
1.2
26.0
23.3
25.9
27.9
0.8
26.5
26.8
25.9
28.5
0.8
27.7
26.0
26.6
32.2
1.4
27.6
25.4
26.9
31.2
4.1
26.2
28.2
25.4
28.0
5.3
24.1
27.4
23.4
25.2
4.4
24.4
21.1
24.1
26.8
2.3
23.4
21.6
24.7
19.3
2.6
23.8
25.0
24.7
19.9
2.8
22.0
24.3
22.2
20.1
30.5
23.7
33.3
23.4
32.6
25.6
35.2
24.6
30.9
24.5
29.8
22.2
29.3
22.6
32.8
20.2
35.8
19.8
29.6
19.3
18.5
...
...
...
...
18.7
20.9
28.5
26.4
14.5
11.6
13.7
21.9
1.0
10.1
11.5
13.8
9.4
2.2
13.8
20.0
21.7
5.6
5.0
11.2
14.2
15.2
6.7
8.7
10.1
12.4
13.7
6.7
7.3
10.0
12.6
13.8
5.8
7.6
14.8
14.8
15.5
16.4
8.4
14.4
13.6
14.9
18.2
7.1
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.
231
Table 39. Developing Countriesby Region: External Debt, by Maturity and Type of Creditor
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
1,182.6
1,235.9
1,315.7
1,456.5
1,550.5
1,680.5
1,743.6
1,773.7
1,812.1
1,865.1
158.5
1,024.2
169.5
1,0665
205.2
1,110.5
243.4
1,213.2
252.4
1,298.1
293.2
1,387.3
309.3
1,434.3
304.9
1,468.7
294.9
1,517.1
270.8
1,594.3
567.8
379.8
235.1
599.6
389.2
247.2
630.8
383.1
301.8
678.8
402.5
375.2
737.0
398.9
414.6
764.5
437.5
478.5
754.8
460.1
528.7
730.6
475.6
567.4
746.7
475.1
590.3
750.5
483.0
631.5
232.7
241.6
242.0
257.2
274.4
292.4
295.9
283.1
281.1
285.0
23.4
209.3
22.6
219.0
23.2
218.7
30.3
227.0
35.6
238.8
40.3
252.1
40.7
255.2
39.9
243.2
39.9
241.1
23.0
262.0
153.4
35.8
43.5
162.3
34.8
44.5
170.6
28.1
43.3
181.6
29.2
46.5
199.2
31.9
43.2
212.3
33.8
46.3
220.3
32.3
43.3
207.4
32.5
43.3
210.5
28.3
42.2
209.5
29.2
46.3
180.1
187.3
187.4
197.3
212.8
226.8
229.3
222.1
221.3
228.2
20.4
159.7
20.0
167.3
20.8
166.6
28.1
169.2
33.3
179.5
38.0
188.8
38.7
190.6
37.8
184.3
37.0
184.2
20.1
208.1
124.2
26.0
29.8
131.7
25.7
29.8
139.4
20.0
28.0
147.8
21.6
28.0
161.5
24.7
26.6
169.1
26.0
31.7
169.0
26.7
33.6
160.2
27.5
34.4
164.8
23.5
32.9
166.3
24.9
36.9
332.6
365.8
407.6
454.7
509.5
558.6
602.9
637.5
616.9
626.7
36.3
296.3
47.0
318.7
57.2
350.3
66.7
388.0
74.2
435.3
95.6
463.0
113.6
489.3
109.7
527.9
90.1
526.8
78.4
548.4
171.7
99.6
61.4
187.5
101.4
76.8
206.4
111.9
89.3
230.9
121.7
102.2
257.5
144.6
107.3
255.1
165.1
138.4
248.1
193.5
161.2
252.1
192.1
193.3
270.7
190.8
155.4
281.1
196.1
149.5
174.4
169.9
185.4
205.5
209.7
215.4
213.9
219.1
232.8
247.6
40.7
133.7
37.1
132.8
44.7
140.7
59.8
145.8
41.3
168.4
46.3
169.1
48.9
164.9
50.5
168.6
57.9
174.9
60.8
186.8
96.2
46.0
32.2
90.2
53.8
25.9
92.8
59.4
33.3
104.3
61.2
40.1
111.4
58.5
39.8
103.6
67.6
44.2
102.0
60.0
51.8
101.4
82.3
35.4
98.9
84.1
49.8
97.3
85.0
65.4
442.9
458.7
480.7
539.1
556.9
614.2
631.0
634.0
681.3
705.7
58.0
384.9
62.8
395.9
80.0
400.7
86.6
452.5
101.3
455.6
111.1
503.1
106.1
524.9
104.9
529.1
107.0
574.3
108.6
597.2
146.5
198.4
98.0
159.6
199.1
100.0
161.0
183.8
136.0
162.1
190.5
186.5
168.9
163.8
224.2
193.5
171.0
249.6
184.4
174.2
272.3
169.8
168.7
295.5
166.6
171.8
342.8
162.7
172.7
370.4
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
232
External Debt: By Analytical Criteria
Table 40. Developing Countriesby Analytical Criteria: External Debt, by Maturity and Type of Creditor
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
162.8
170.3
184.0
201.5
209.5
209.8
200.2
186.4
189.4
189.9
35.1
127.8
32.9
137.4
32.8
151.2
41.4
160.1
38.6
170.9
40.6
169.2
37.1
163.1
39.5
147.0
43.9
145.5
26.4
163.5
67.1
41.6
54.1
69.1
50.6
50.6
78.0
44.5
61.5
93.3
43.5
64.7
102.4
39.7
67.5
98.5
49.5
61.8
102.6
39.2
58.4
93.4
35.3
57.8
93.2
35.8
60.3
90.5
34.6
64.8
1,019.8
1,065.6
1,131.7
1,255.0
1,341.0
1,470.8
1,543.4
1,587.2
1,622.7
1,675.2
123.4
896.4
136.5
929.1
172.4
959.3
201.9
1,053.1
213.9
1,127.1
252.6
1,218.1
272.2
1,271.1
265.5
1,321.8
251.0
1,371.6
244.4
1,430.8
500.6
338.2
180.9
530.5
338.6
196.5
552.8
338.6
240.3
585.5
359.1
310.4
634.6
359.2
347.1
666.1
388.0
416.7
652.2
420.9
470.3
637.3
440.4
509.6
653.5
439.3
529.9
660.1
448.4
566.7
322.0
344.8
384.3
427.7
465.2
508.8
552.7
590.8
607.5
621.5
41.9
280.1
50.4
294.4
69.7
314.6
83.1
344.6
83.2
382.0
99.5
409.4
111.6
441.0
106.2
484.6
93.5
514.0
83.0
538.4
123.7
127.8
70.4
136.4
126.4
82.1
144.1
126.0
114.3
153.4
137.9
136.5
168.2
122.4
174.6
170.9
134.6
203.4
166.8
144.7
241.2
178.0
144.9
267.9
180.9
145.9
280.8
186.9
150.4
284.2
163.4
171.0
180.9
189.4
203.5
217.5
221.8
218.3
221.2
227.9
15.5
147.9
15.7
155.3
18.5
162.3
20.1
169.3
21.2
182.3
22.0
195.5
21.7
200.1
19.3
199.0
16.4
204.8
17.4
210.4
114.3
29.1
20.1
120.7
29.7
20.6
127.2
31.0
22.7
132.6
32.2
24.6
144.8
35.3
23.4
151.1
40.4
26.0
151.4
42.3
28.1
146.4
42.3
29.6
148.7
41.3
31.3
149.9
43.4
34.6
95.5
84.7
83.5
85.4
88.0
88.9
87.1
84.2
86.8
91.0
8.5
87.0
7.7
77.1
6.2
77.4
11.1
74.3
8.6
79.4
9.5
79.4
8.1
79.0
4.7
79.6
4.5
82.3
5.1
85.9
74.9
13.9
6.7
67.6
11.6
5.5
65.9
12.1
5.5
67.5
13.0
4.9
70.4
12.4
5.2
73.4
9.8
5.8
71.1
9.2
6.8
65.6
8.2
10.4
65.4
8.0
13.4
65.9
8.0
17.1
438.9
465.1
483.0
552.5
584.2
655.5
681.8
693.9
707.1
734.9
57.6
381.4
62.7
402.4
78.0
405.0
87.6
464.9
100.9
483.4
121.7
533.9
130.9
550.9
135.3
558.6
136.6
570.5
138.8
596.0
187.8
167.5
83.7
205.8
170.9
88.4
215.5
169.6
97.9
232.1
176.0
144.4
251.2
189.1
143.9
270.8
203.3
181.5
262.9
224.7
194.2
247.2
245.0
201.7
258.5
244.2
204.4
257.4
246.6
230.9

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
233
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
13.7
14.0
20.2
22.1
23.3
21.2
20.8
23.3
29.5
33.6
10.3
3.5
5.5
8.6
5.3
14.9
6.6
15.5
7.4
15.9
7.5
13.8
6.8
13.9
7.0
16.3
8.4
21.1
9.8
23.9
1.4
5.0
7.4
1.4
11.6
1.0
1.6
13.6
5.0
2.9
14.0
5.2
4.1
11.8
7.4
4.5
6.9
9.8
5.3
3.5
12.0
5.5
4.4
13.4
5.9
7.0
16.6
5.1
9.0
19.5
1,168.9
1,221.9
1,295.5
1,434.4
1,527.2
1,659.3
1,722.8
1,750.4
1,782.6
1,831.5
148.2
1,020.7
164.0
1,057.9
199.9
1,095.6
236.7
1,197.7
245.0
1,282.2
285.7
1,373.6
302.5
1,420.3
297.9
1,452.4
286.5
1,496.0
261.0
1,570.5
566.4
374.8
227.6
598.2
377.5
246.2
629.1
369.5
296.8
675.9
388.6
369.9
732.9
387.1
407.3
760.0
430.7
468.7
749.6
456.6
516.7
725.1
471.2
554.0
740.7
468.2
573.6
745.4
474.0
612.1
218.6
227.1
234.6
248.2
266.0
279.6
286.9
281.4
285.4
287.9
11.1
207.5
12.0
215.1
14.4
220.2
21.8
226.4
26.6
239.4
31.0
248.6
33.6
253.2
33.8
247.6
35.8
249.6
17.3
270.6
178.0
28.8
11.8
186.8
27.9
12.5
199.0
21.9
13.7
209.3
22.5
16.3
228.0
23.9
14.1
238.4
25.6
15.7
240.8
26.4
19.7
230.1
28.3
23.0
233.4
28.3
23.8
232.9
28.0
27.0
624.0
664.4
713.7
823.4
866.6
968.5
1,012.0
1,036.8
1,079.5
1,117.0
102.4
521.6
116.9
547.5
148.7
565.0
175.4
648.0
174.8
691.8
202.6
765.9
204.1
807.8
200.4
836.4
194.0
885.5
187.9
929.1
188.9
269.9
165.2
211.4
272.5
180.4
220.8
266.4
226.5
240.6
286.1
296.6
261.5
274.6
330.5
283.4
311.4
373.7
285.2
320.8
405.9
280.8
337.2
418.8
276.1
338.8
464.6
274.9
341.5
500.5
326.2
330.4
347.3
362.9
394.6
411.2
424.0
432.2
417.7
426.6
34.6
291.6
35.1
295.3
36.8
310.4
39.5
323.4
43.6
351.1
52.0
359.1
64.8
359.2
63.7
368.5
56.7
360.9
55.8
370.9
199.5
76.1
50.6
200.0
77.1
53.3
209.4
81.2
56.6
226.0
79.9
56.9
243.3
88.7
62.6
238.2
93.7
79.3
223.6
109.4
91.0
214.3
105.7
112.2
231.3
101.1
85.3
237.6
104.5
84.6

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
234
Right Hand Running Head
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
543.2
551.4
577.8
617.5
641.8
668.2
686.5
683.7
703.2
716.7
62.5
480.7
65.2
486.2
77.2
500.6
96.7
520.8
87.4
554.4
95.1
573.1
101.5
585.0
100.6
583.1
103.2
600.0
85.4
631.3
298.2
147.2
97.7
310.3
148.3
92.8
324.3
132.4
121.1
350.1
129.8
137.5
370.8
99.7
171.2
367.1
112.7
188.4
368.9
106.0
211.6
348.9
99.3
235.5
351.6
94.0
257.6
354.0
93.7
269.0
625.7
670.5
717.7
817.0
885.5
991.1
1,036.4
1,066.7
1,079.3
1,114.8
85.7
540.0
98.8
571.8
122.7
595.0
140.0
676.9
157.7
727.8
190.6
800.5
201.0
835.3
197.3
869.4
183.3
896.0
175.6
939.2
268.2
227.6
129.9
287.9
229.3
153.3
304.9
237.1
175.8
325.8
258.7
232.4
362.0
287.4
236.1
392.9
317.9
280.3
380.7
350.6
305.0
376.3
371.9
318.5
389.2
374.1
316.0
391.4
380.3
343.1
158.4
165.9
173.3
184.8
197.9
208.3
209.6
203.8
203.9
209.9
10.5
147.9
11.0
154.8
11.3
162.0
16.4
168.4
16.9
181.0
18.2
190.1
17.1
192.5
13.0
190.8
10.2
193.7
11.3
198.6
130.4
16.6
11.5
137.0
16.3
12.5
145.1
15.8
12.3
154.0
17.4
13.4
168.5
21.6
7.9
174.6
24.3
9.4
174.6
25.8
9.3
165.6
28.2
10.1
169.6
24.2
10.0
171.8
25.7
12.4
107.9
114.7
118.7
127.0
135.7
142.8
144.2
144.4
148.5
155.5
4.7
103.2
5.1
109.6
4.8
113.9
8.7
118.3
8.5
127.2
8.6
134.3
9.3
134.8
5.8
138.6
6.5
142.0
7.8
147.7
95.9
7.5
4.4
102.0
7.6
5.1
106.3
7.3
5.1
112.0
9.2
5.8
122.0
9.0
4.7
127.1
10.2
5.5
127.2
10.1
6.8
126.0
10.4
7.9
128.7
10.8
9.0
130.6
12.4
12.5
194.3
190.9
202.6
217.5
226.0
231.1
225.0
215.7
222.7
226.3
34.8
159.5
31.1
159.9
35.0
167.7
44.0
173.5
32.8
193.2
33.4
197.7
31.2
193.8
29.7
186.0
34.1
188.6
35.3
191.0
117.1
41.2
36.0
111.0
48.8
31.2
115.4
51.4
35.9
127.7
49.7
40.2
136.4
44.3
45.3
135.0
52.4
43.6
141.2
41.7
42.1
133.4
37.3
44.9
133.1
39.4
50.2
130.9
39.6
55.9

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
235
Table 41. Developing Countries: Ratio of External Debt to GDP1

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
37.3
38.1
37.3
37.2
37.5
35.8
33.4
31.8
32.8
32.7
59.3
61.6
31.0
46.3
29.1
40.2
62.8
62.8
32.7
45.8
30.1
39.0
61.4
62.1
32.8
44.6
29.8
37.7
65.8
65.7
30.4
43.7
33.0
38.3
72.6
71.4
32.3
42.8
36.1
34.8
63.8
62.0
29.5
41.2
32.7
36.5
58.0
56.2
27.9
40.0
30.0
34.4
52.9
51.2
28.0
41.3
28.8
31.5
54.2
53.3
28.4
45.4
29.9
33.2
66.4
72.0
26.6
39.9
29.7
34.0
29.9
25.1
79.8
34.6
27.9
76.8
34.1
29.8
73.8
39.2
27.9
70.6
42.1
28.2
68.9
35.2
24.8
60.1
29.4
24.1
54.2
25.1
24.7
47.2
25.5
25.6
44.8
28.0
25.3
42.1
89.9
42.7
74.3
39.6
65.9
36.4
60.1
37.8
54.1
38.3
52.6
43.1
48.2
41.2
43.1
38.8
41.2
41.5
39.9
41.0

Official financing
Private financing
6.5
39.5
76.6
31.2
48.7
6.4
40.4
77.6
31.4
54.2
8.5
39.3
77.6
30.6
52.4
9.2
39.0
79.2
30.9
51.7
9.5
39.3
80.5
31.2
50.3
8.1
37.4
68.8
30.8
46.4
7.2
35.0
61.1
29.2
43.1
7.7
33.1
56.9
27.6
42.1
10.2
34.1
56.8
28.3
45.5
10.8
34.0
70.2
28.1
42.6

49.0
33.8
54.7
33.3
54.7
32.1
55.5
31.8
51.6
33.5
43.1
34.3
39.5
32.5
36.4
31.3
36.8
32.5
38.1
31.8
90.5
66.7
35.3
91.9
64.8
38.5
89.7
57.1
36.8
88.6
51.2
41.0
90.7
48.0
42.7
82.1
44.0
39.8
72.2
38.5
35.1
61.1
33.0
32.1
55.7
29.8
32.4
51.0
27.1
30.5
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
Other groups
1Debt
at year-end in percent of GDP in year indicated.
236
External Debt: Servicing
Table 42. Developing Countries: Debt-Service Ratios1

(Percent of exports of goods and services)
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
10.2
10.0
9.4
9.3
8.7
8.5
8.3
7.6
8.9
8.7
9.8
8.7
8.3
8.7
4.0
19.7
11.6
10.2
8.0
8.1
3.7
18.3
10.6
8.9
7.6
6.9
4.6
16.7
10.4
8.7
6.9
6.2
5.0
16.8
10.6
9.2
6.4
6.1
3.9
15.9
10.4
8.8
6.0
6.0
3.5
16.4
10.2
9.4
5.9
6.1
3.8
15.6
8.3
7.2
5.2
6.6
3.5
15.1
12.4
11.7
5.7
7.4
4.2
16.8
10.7
9.9
5.8
7.7
4.0
16.6
4.9
11.3
10.9
4.2
10.1
12.8
4.2
9.2
10.4
4.6
8.7
10.8
4.3
7.3
11.0
4.5
7.2
9.2
4.4
7.6
8.4
3.6
6.7
8.1
4.9
7.7
12.8
4.8
7.6
10.7
7.6
14.7
9.7
14.4
15.2
13.1
11.7
12.8
7.3
13.2
6.0
12.8
7.8
11.7
5.7
11.2
5.8
11.9
5.3
12.1

Official financing
Private financing
0.7
12.1
10.5
12.1
12.8
0.4
11.8
12.7
11.4
12.7
0.4
11.1
10.9
10.8
12.4
0.6
10.7
10.8
10.5
11.4
0.7
9.8
12.5
9.3
10.2
0.9
9.5
10.2
9.4
9.6
1.1
9.2
9.1
9.2
9.5
0.9
8.4
8.6
8.2
9.0
1.2
9.7
12.2
9.4
9.7
1.1
9.6
10.6
9.4
10.0

14.3
10.9
14.5
10.6
13.8
10.0
14.0
9.4
12.5
8.9
12.2
8.6
12.2
8.2
11.3
7.4
14.7
8.1
13.7
8.2
8.9
6.2
3.9
12.7
9.7
3.9
9.7
8.0
4.9
10.6
7.7
5.1
14.1
7.0
3.9
10.1
8.3
3.8
12.8
8.7
3.9
8.0
5.3
3.5
14.5
14.4
4.2
10.6
9.3
3.9
Interest
payments2
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
Other groups
237
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
11.7
12.4
13.9
14.6
14.7
13.4
13.7
13.4
12.8
11.3
14.7
7.3
10.1
11.4
6.3
17.9
15.9
8.2
9.2
10.6
6.6
21.0
16.2
8.9
10.9
11.7
6.7
25.1
15.9
8.5
11.1
12.2
7.8
26.3
16.4
8.9
10.4
12.0
8.3
27.3
16.1
10.0
10.1
11.7
7.4
23.4
14.7
11.1
10.1
11.7
6.9
26.1
12.6
9.9
7.5
8.3
5.5
31.6
12.7
11.0
7.9
8.8
7.7
25.9
12.5
11.3
8.2
9.0
6.7
19.7
Amortization2
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
Analytical groups
Fuel
Manufactures
private transfers
Diversified
7.8
11.0
7.0
8.8
9.4
11.3
7.5
11.2
9.0
8.8
11.2
13.1
10.3
9.5
12.6
9.6
9.3
18.2
8.6
10.3
13.3
7.3
12.5
11.0
7.6
12.5
12.3
7.0
11.3
12.8
10.8
17.4
9.8
19.3
19.7
22.5
19.0
22.4
12.5
25.2
7.0
21.0
8.0
22.2
9.3
19.4
7.4
16.6
6.7
13.8

Official financing
Private financing
0.6
13.9
12.8
13.8
15.1
0.4
14.7
14.1
14.5
15.8
0.4
16.6
15.1
15.8
19.8
0.8
16.9
14.6
16.4
19.8
3.4
16.4
15.7
16.1
17.7
4.4
14.6
17.2
14.0
15.6
3.3
15.1
12.0
15.0
17.3
1.4
15.0
13.0
16.5
10.3
1.4
14.1
12.8
15.3
10.2
1.7
12.4
13.7
12.9
10.2

16.2
12.8
18.8
12.9
18.8
15.6
21.1
15.2
18.4
15.6
17.6
13.6
17.2
14.4
21.5
12.8
21.1
11.8
15.9
11.2
9.5
6.4
9.2
14.1
9.1
9.9
9.7
7.3
9.1
12.6
8.9
10.8
14.4
8.0
10.8
19.2
10.2
9.2
13.6
8.3
7.9
10.0
7.3
5.7
12.9
9.4
6.0
13.0
10.6
6.2
Other groups
1Excludes
service payments to the IMF.

payments on total debt and amortization on long-term debt. Estimates through 1997 reflect debt-service payments actually made. The estimates
for 1998 and 1999 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
238
External Debt: Servicing
Table 43. IMF Charges and Repurchases to the IMF1

(Percent of exports of goods and services)
1990
1991
1992
1993
1994
1995
1996
1997
1.5
1.3
1.0
0.9
0.7
0.9
0.6
0.6
Regional groups
Africa
Sub-Sahara
Asia
Western Hemisphere
1.5
1.4
1.4
1.2
0.1
3.1
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
2.9
0.4
0.2
0.1
1.6
0.5
0.3
0.4
0.2
0.1
1.6
0.9
0.7
0.2
0.2
1.9
Analytical groups
Fuel
Nonfuel
0.1
2.1
0.3
1.7
0.4
1.2
0.5
1.0
0.4
0.8
0.5
1.0
0.3
0.7
0.4
0.7

Official financing
Private financing
1.8
2.6
1.5
2.0
1.5
1.8
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
3.3
0.6
1.3
0.7
0.6
0.6
1.1
0.7
0.5
0.8
0.6

2.4
1.4
2.5
1.1
2.3
0.7
2.2
0.6
1.3
0.6
2.3
0.6
1.0
0.6
0.9
0.7
3.5
3.7
0.3
2.4
2.7
0.3
1.9
1.7
0.3
1.7
1.3
0.4
1.1
0.9
0.3
5.7
8.5
0.3
0.6
0.5
0.2
0.6
0.4
0.2
0.2
0.1
0.4
0.3
1.1
1.4
0.7
0.5

Russia
...
...
...
...
0.2
0.3
0.7
0.9
0.5
0.6
0.1
1.8
2.1
0.2
0.1
2.2
2.5
0.3
0.3
0.7
0.8
0.9
0.3
0.3
0.3
0.8
0.3
10.119
2.530
7.589
8.768
2.431
6.337
8.059
2.291
5.768
7.533
2.215
5.319
8.270
1.724
6.546
12.806
2.847
9.960
9.382
2.151
7.231
9.587
1.800
7.787
Trust Fund
Interest
Repayments
0.367
0.002
0.365
0.070
0.001
0.069
0.063
0.003
0.060
0.015
0.014
0.015
0.015
0.001
0.001
0.008
0.001
0.007
SAF/ESAF
Interest
Repayments
0.013
0.013
0.021
0.021
0.055
0.022
0.033
0.151
0.025
0.126
0.330
0.024
0.306
0.586
0.034
0.552
0.742
0.039
0.703
0.854
0.033
0.821
Other groups
Memorandum
Total, billions of U.S. dollars
Charges
Repurchases
1Excludes
advanced economies. Charges on, and repurchases (or repayments of principal) for, use of IMF credit.
239
Table 44. Summary of Sources and Uses of World Saving

(Percent of GDP)
Averages
__________________
197683 198491
World
Saving
Investment
1992
1993
1994
1995
1996
1997
1998
1999
Average
20002003
23.7
24.2
22.7
23.5
22.4
23.5
22.1
23.5
22.9
23.6
23.2
23.8
23.3
23.8
23.7
23.7
23.2
23.2
23.6
23.6
24.0
24.2
Advanced economies
Saving
Private
Public
22.3
20.9
1.4
21.1
19.8
1.3
20.1
19.8
0.3
19.8
19.8
20.3
19.8
0.5
20.9
20.1
0.8
20.9
19.6
1.4
21.4
19.1
2.3
21.3
18.9
2.4
21.3
18.8
2.4
21.5
18.2
3.2
Investment
Private
Public
22.6
18.1
4.5
21.6
17.7
3.9
20.7
16.6
4.1
20.0
15.9
4.1
20.5
16.5
4.0
20.7
16.8
3.9
20.7
16.9
3.8
20.8
17.3
3.6
20.6
17.0
3.6
20.9
17.2
3.6
21.0
17.5
3.5
Net lending
Private
Public
Current transfers
Factor income
Resource balance
0.3
2.8
3.1
0.5
0.2
0.5
2.1
2.6
0.4
0.1
0.2
0.6
3.2
3.8
0.4
0.3
0.1
0.2
3.9
4.1
0.4
0.3
0.5
0.2
3.3
3.5
0.5
0.1
0.3
0.2
3.3
3.1
0.4
0.3
0.4
0.2
2.7
2.4
0.4
0.3
0.4
0.6
1.8
1.2
0.4
0.4
0.6
0.7
1.9
1.1
0.4
0.3
0.8
0.4
1.6
1.2
0.4
0.3
0.5
0.5
0.7
0.3
0.4
0.3
0.6
United States
Saving
Private
Public
19.5
17.8
1.7
16.9
16.2
0.7
14.5
15.5
1.1
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
13.5
3.7
16.7
13.0
3.7
16.3
12.1
4.3
Investment
Private
Public
20.4
17.1
3.3
19.1
15.6
3.5
16.0
12.7
3.3
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
18.9
16.1
2.8
19.1
16.4
2.7
19.0
16.3
2.7
Net lending
Private
Public
Current transfers
Factor income
Resource balance
0.9
0.8
1.7
0.3
0.4
0.9
2.1
0.6
2.8
0.5
0.6
2.3
1.5
2.9
4.4
0.6
0.3
0.6
2.0
1.6
3.6
0.6
0.3
1.1
1.9
0.3
2.3
0.6
0.1
1.5
1.0
0.9
1.9
0.5
0.8
1.4
1.1
0.2
0.9
0.5
0.8
1.4
1.0
1.4
0.4
0.5
0.8
1.4
1.8
2.7
0.9
0.5
0.8
2.1
2.4
3.4
0.9
0.5
0.5
2.5
2.6
4.2
1.6
0.4
0.1
2.4
European Union
Saving
Private
Public
22.0
21.7
0.3
21.0
21.2
0.2
19.0
21.2
2.2
18.4
21.4
3.0
19.3
21.9
2.6
20.0
22.3
2.3
19.6
21.2
1.6
20.4
20.6
0.2
20.5
20.1
0.3
20.7
20.1
0.6
21.2
19.7
1.6
Investment
Private
Public
21.8
17.8
4.0
20.7
17.5
3.2
20.1
16.9
3.2
18.2
15.2
3.0
18.8
15.9
2.8
19.2
16.5
2.7
18.4
16.0
2.4
18.7
16.4
2.3
19.2
16.8
2.4
19.6
17.2
2.4
20.1
17.6
2.5
Net lending
Private
Public
Current transfers
Factor income
Resource balance
0.2
3.9
3.8
0.8
0.3
0.7
0.3
3.7
3.5
0.5
0.7
1.1
4.3
5.3
0.6
0.4
0.1
0.2
6.2
6.0
0.6
0.3
1.1
0.5
5.9
5.4
0.7
0.1
1.3
0.9
5.8
4.9
0.6
0.1
1.6
1.2
5.2
4.1
0.6
0.2
2.0
1.7
4.2
2.5
0.5
2.2
1.3
3.3
2.1
0.7
0.1
2.0
1.1
2.9
1.8
0.7
1.8
1.1
2.0
0.9
0.7
0.2
1.7
Japan
Saving
Private
Public
31.5
28.3
3.3
32.6
25.3
7.3
33.8
25.0
8.8
32.8
25.8
6.9
31.4
25.9
5.5
30.7
25.9
4.9
31.3
26.9
4.4
30.8
26.4
4.4
29.7
27.6
2.1
29.7
28.5
1.2
29.1
26.4
2.7
Investment
Private
Public
30.9
21.7
9.2
29.8
23.0
6.8
30.8
23.3
7.5
29.7
21.1
8.5
28.7
20.0
8.7
28.6
20.0
8.6
29.9
21.1
8.8
28.5
20.7
7.8
26.5
18.5
7.9
26.0
17.6
8.4
25.1
17.9
7.2
Net lending
Private
Public
Current transfers
Factor income
Resource balance
0.6
6.6
6.0
0.1
0.1
0.6
2.8
2.3
0.5
0.1
0.6
2.4
3.0
1.7
1.3
0.1
1.0
2.2
3.1
4.7
1.6
0.1
0.9
2.3
2.8
6.0
3.2
0.1
0.9
2.1
2.1
5.9
3.7
0.2
0.8
1.5
1.4
5.8
4.4
0.2
1.2
0.5
2.3
5.7
3.4
0.2
1.3
1.1
3.2
9.0
5.8
0.3
1.1
2.3
3.7
10.9
7.2
0.3
1.7
2.3
3.9
8.5
4.6
0.3
2.0
2.3
240
Flow of Funds: Summary
Averages
__________________
197683 198491
1992
1993
1994
1995
1996
1997
1998
1999
Average
20002003

economies
Saving
Private
Public
...
...
...
34.8
28.6
6.2
33.5
28.2
5.3
33.4
27.1
6.3
33.0
25.9
7.1
33.3
25.7
7.6
32.6
25.5
7.2
32.6
26.7
5.8
34.2
27.8
6.4
34.4
27.9
6.4
34.8
28.3
6.5
Investment
Private
Public
...
...
...
28.3
22.3
6.0
31.7
24.5
7.1
31.0
23.9
7.1
31.5
24.6
6.8
32.4
25.7
6.7
32.1
25.4
6.7
31.0
24.7
6.3
24.7
18.6
6.2
27.1
20.6
6.5
29.0
22.2
6.7
Net lending
Private
Public
Current transfers
Factor income
Resource balance
...
...
...
...
...
...
6.5
6.3
0.2
0.1
0.3
6.0
1.8
3.6
1.9
0.1
0.4
1.2
2.4
3.2
0.8
0.3
2.1
1.6
1.3
0.3
0.5
1.1
0.9
0.9
0.3
1.1
0.1
0.5
0.1
0.4
0.3
1.2
0.4
1.6
2.1
0.5
0.1
1.3
0.4
9.4
9.2
0.2
0.4
1.0
8.1
7.3
7.4
0.1
0.4
1.1
6.5
5.9
6.1
0.2
0.3
1.1
5.1
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
24.3
24.7
0.4
0.9
0.4
0.9
22.9
24.8
1.9
1.0
2.0
0.9
24.8
26.4
1.6
1.5
1.5
1.7
25.4
28.6
3.2
1.3
1.7
2.8
26.7
28.3
1.5
1.2
1.3
1.4
26.8
28.6
1.8
1.1
1.5
1.5
27.1
28.4
1.3
1.2
1.4
1.1
27.4
27.8
0.5
1.3
1.2
0.6
26.3
26.7
0.4
1.3
1.8
0.1
27.0
27.1
0.1
1.4
1.7
0.2
27.3
27.8
0.5
3.2
1.6
2.1
2.0
1.0
0.7
0.4
1.6
1.1
1.6
1.3
2.8
2.0
2.8
1.7
3.8
2.2
3.9
1.3
2.1
0.7
2.7
1.0
2.4
1.4
23.5
25.3
1.8
1.9
0.4
4.1
18.1
21.4
3.2
3.2
4.6
1.7
16.5
20.5
4.0
4.3
4.5
3.7
15.2
20.8
5.6
4.2
5.8
4.1
15.9
21.3
5.4
4.3
5.2
4.5
15.3
21.0
5.7
3.6
5.0
4.4
18.6
19.5
0.9
3.5
2.5
1.9
17.6
19.1
1.5
3.4
3.3
1.6
16.2
20.4
4.2
3.5
4.1
3.5
17.3
20.9
3.5
3.6
4.0
3.1
19.1
22.0
2.8
3.1
3.8
2.1
Acquisition of foreign assets

Change in reserves
0.2
0.2
0.1
1.4
0.6
0.7
0.2
2.0
1.8
0.4
0.3
2.4
2.0
1.2
2.4
0.4
0.3
0.6
0.2
1.1
0.8
Asia
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
25.9
25.4
0.5
1.2
1.4
2.1
27.4
29.0
1.7
0.8
0.7
1.7
30.2
30.9
0.7
1.1
1.0
0.9
32.4
34.8
2.3
1.1
0.8
2.5
33.3
34.1
0.8
1.0
0.6
1.3
33.0
34.8
1.8
1.0
1.2
1.6
32.8
34.2
1.4
1.1
1.1
1.5
33.5
32.8
0.7
1.3
0.6
32.5
30.5
2.0
1.1
1.5
2.4
33.1
31.0
2.1
1.0
1.3
2.4
32.3
31.4
0.9
0.9
1.4
1.4
6.6
3.2
1.0
0.7
2.0
0.9
2.5
1.6
4.4
3.3
3.8
1.8
4.8
2.6
5.6
1.4
3.4
1.2
4.5
1.8
4.2
2.3
28.9
25.5
3.4
0.7
0.7
3.3
18.5
22.9
4.4
0.3
1.0
3.7
23.4
24.8
1.4
1.7
0.9
4.0
19.5
24.0
4.5
1.0
0.7
4.7
22.3
21.1
1.3
0.2
0.1
1.4
21.3
20.7
0.6
0.3
0.3
0.6
21.2
20.8
0.4
0.5
0.9
20.8
20.9
0.1
0.1
0.3
18.0
20.8
2.8
0.1
2.9
18.4
21.0
2.6
0.2
2.8
19.3
21.9
2.6
0.1
0.3
2.9
6.6
3.2
0.6
0.5
1.3
1.8
0.7
1.4
0.3
1.1
1.1
2.1
2.5
1.8
2.0
1.0
0.7
0.9
0.5
0.4
0.5
0.5
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
241
Averages
__________________
197683 198491
Western Hemisphere
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
1992
1993
1994
1995
1996
1997
1998
1999
Average
20002003
19.9
23.1
3.1
0.2
2.7
0.7
19.7
20.1
0.3
0.9
3.4
2.2
17.8
20.4
2.6
1.3
2.4
1.4
17.4
20.8
3.4
1.0
2.4
2.0
18.4
21.4
3.0
1.0
2.1
1.9
18.9
20.5
1.6
1.2
1.7
1.1
19.2
21.2
1.9
1.1
2.3
0.7
18.5
21.7
3.2
1.2
2.4
2.0
17.8
22.0
4.2
1.5
2.5
3.2
18.5
22.0
3.5
2.2
2.7
3.1
19.5
22.3
2.7
11.6
2.3
12.1
1.2
0.2
1.0
0.5
1.9
1.8
1.5
1.4
0.8
0.3
1.9
1.7
2.6
1.7
1.8
1.0
0.2
0.6
0.2
0.7
1.4
0.5
33.4
26.1
7.3
2.3
2.0
7.6
20.1
22.5
2.4
2.8
0.4
0.8
23.4
26.4
3.0
2.0
0.2
1.2
20.1
24.5
4.4
2.2
1.1
1.1
22.8
21.9
0.9
2.3
1.0
4.2
21.2
20.4
0.8
2.5
0.2
3.5
25.4
19.2
6.2
2.1
0.7
7.7
22.0
18.8
3.2
2.1
0.3
5.6
16.0
18.9
2.9
2.0
1.4
0.4
16.7
18.6
1.8
1.5
1.3
1.0
17.8
18.9
1.1
1.4
1.5
1.9
7.0
2.7
0.9
0.7
2.3
1.6
3.0
1.0
1.8
0.2
1.0
0.4
4.8
3.3
2.1
1.5
0.4
1.3
0.5
1.0
1.0
0.8
22.1
24.3
2.3
1.6
1.0
2.9
23.3
25.2
1.8
1.6
2.2
1.2
25.0
26.5
1.4
2.0
1.7
1.8
26.1
29.2
3.0
1.8
1.8
3.1
27.2
29.0
1.8
1.6
1.3
2.1
27.5
29.6
2.1
1.5
1.6
2.0
27.3
29.5
2.1
1.6
1.7
2.0
28.0
28.8
0.9
1.7
1.3
1.3
27.4
27.6
0.2
1.6
1.9
0.1
28.1
28.1
0.1
1.7
1.7
0.1
28.2
28.7
0.5
3.6
1.6
2.5
0.8
0.6
1.0
0.6
2.1
1.4
2.1
1.6
2.9
2.3
3.2
1.8
3.7
2.1
4.1
1.3
2.4
0.6
3.1
1.2
2.5
1.5
41.9
25.5
16.4
8.2
1.7
22.8
17.5
21.2
3.7
11.0
3.6
3.8
22.5
21.1
1.4
9.6
9.4
1.5
20.7
22.2
1.5
10.7
7.3
1.9
20.1
19.8
0.4
11.6
5.5
6.4
22.3
19.0
3.3
10.1
6.6
6.8
22.9
18.8
4.1
8.7
3.7
9.2
23.6
20.2
3.4
8.6
3.3
8.7
14.4
19.5
5.1
8.5
2.4
1.0
14.4
18.7
4.3
8.4
2.1
2.0
15.8
19.0
3.3
8.3
1.4
3.7

Change in reserves
15.9
4.1
3.8
3.0
2.6
1.4
6.6
1.0
3.5
0.8
1.9
0.7
3.7
0.7
5.2
2.7
0.3
0.3
0.5
0.6
0.8
0.9

Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
23.4
24.6
1.3
1.3
0.6
2.1
23.1
24.9
1.8
1.4
2.2
1.1
24.9
26.6
1.7
1.9
1.8
1.8
25.6
28.9
3.3
1.7
2.0
3.0
27.0
28.6
1.6
1.6
1.5
1.7
27.0
28.9
2.0
1.5
1.7
1.7
27.3
28.7
1.5
1.5
1.6
1.4
27.5
28.1
0.6
1.6
1.3
0.9
26.6
26.9
0.3
1.6
1.9
0.1
27.4
27.4
1.7
1.8
0.1
27.5
28.0
0.5
3.4
1.7
2.2
1.3
0.8
0.9
0.5
1.7
1.2
1.8
1.4
3.0
2.1
2.9
1.7
3.8
2.3
3.9
1.3
2.2
0.7
2.8
1.0
2.4
1.4
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
242
Flow of Funds: Summary
Averages
__________________
197683 198491
Official financing
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
1992
1993
1994
1995
1996
1997
1998
1999
Average
20002003
18.2
19.3
1.1
4.0
2.2
7.3
14.0
18.4
4.3
4.4
2.0
6.7
14.4
19.7
5.2
6.4
3.8
7.8
13.3
20.2
6.9
5.9
4.6
8.2
14.2
19.9
5.6
5.8
4.4
7.0
13.4
19.3
5.9
5.3
4.2
7.0
15.3
19.2
3.9
5.2
2.0
7.0
14.6
19.1
4.5
5.4
3.0
6.8
14.5
19.4
4.9
5.3
3.9
6.3
15.2
19.8
4.6
4.9
3.9
5.5
16.4
20.4
3.9
4.4
4.0
4.4
0.8
0.1
2.1
0.2
1.3
0.1
1.4
1.8
0.4
0.6
0.3
0.7
0.4
0.3
0.5
0.4
0.9
0.5
0.8
0.8
25.5
26.3
0.8
0.4
0.6
0.7
26.2
26.6
0.4
0.6
1.8
0.8
27.5
28.7
1.2
0.8
1.4
0.6
28.8
31.8
3.0
0.6
1.4
2.2
30.5
31.2
0.8
0.6
1.2
0.1
30.1
31.3
1.2
0.5
1.7
0.1
30.3
31.1
0.8
0.6
1.8
0.5
30.7
30.3
0.4
0.7
1.7
1.4
30.4
29.7
0.7
0.7
1.8
1.8
30.3
29.4
0.9
0.9
1.8
1.7
29.9
29.6
0.3
3.8
1.6
1.9
1.1
0.5
1.3
0.7
2.5
1.0
2.4
1.3
3.8
2.4
3.8
2.4
4.8
2.7
5.8
1.7
4.5
0.1
4.1
1.3
3.0
1.5
20.8
23.0
2.2
2.3
1.8
2.7
19.6
23.8
4.2
2.3
3.2
3.2
22.7
24.2
1.5
3.0
2.0
2.4
22.4
24.7
2.3
2.9
2.3
2.9
22.8
24.8
2.0
2.6
1.0
3.6
24.1
26.4
2.3
2.4
0.9
3.9
23.9
26.1
2.3
2.5
0.6
4.1
23.8
25.5
1.7
2.5
0.4
4.6
21.1
22.2
1.1
2.5
1.5
2.1
24.1
24.6
0.4
2.4
0.9
1.9
25.2
26.3
1.2
2.2
0.9
2.4
2.1
2.0
0.3
0.3
1.5
2.2
1.8
2.4
1.7
1.5
1.6
0.4
2.6
1.8
0.5
0.5
3.5
3.4
0.6
0.5
1.4
1.4
22.0
24.4
2.4
1.4
1.7
2.2
18.5
21.1
2.7
2.1
3.5
1.2
19.9
21.7
1.8
3.3
2.6
2.5
17.6
21.6
4.0
3.1
3.8
3.2
19.9
21.3
1.4
2.6
2.4
1.7
18.3
20.3
2.0
2.2
1.5
2.7
19.3
19.9
0.6
2.1
1.1
1.6
17.6
19.6
1.9
2.2
1.2
2.9
16.3
19.7
3.5
2.5
1.5
4.4
17.1
20.0
2.9
3.2
1.7
4.4
18.4
20.7
2.2
11.6
1.3
12.6

Change in reserves
2.0
1.0
0.3
0.2
1.1
1.5
0.5
1.2
2.6
1.5
1.3
1.1
2.9
2.5
0.1
0.3
0.3
0.1
0.2
1.2
0.1

Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
24.2
24.8
0.6
1.3
0.2
2.0
25.3
26.7
1.4
1.1
1.5
1.0
26.8
28.5
1.7
1.4
1.5
1.5
28.5
31.5
3.0
1.3
1.3
2.9
29.4
31.1
1.6
1.2
1.2
1.7
29.9
31.9
1.9
1.2
1.8
1.4
29.9
31.6
1.7
1.3
1.7
1.3
30.6
30.8
0.1
1.4
1.3
0.2
29.9
29.1
0.7
1.3
2.0
1.5
30.6
29.6
0.9
1.2
1.8
1.5
30.2
30.1
0.1
1.1
1.7
0.8
0.9
0.7
1.1
0.7
2.0
1.0
2.3
1.5
3.1
2.3
3.5
1.9
4.1
2.2
5.1
1.6
2.9
0.9
3.6
1.4
3.5
1.8
Memorandum
Change in reserves
Private financing
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
Change in reserves
and/or rescheduling
during 199397
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
Memorandum
Memorandum
Change in reserves
243
Averages
__________________
197683 198491
Saving
Investment
Net lending
Current transfers
Factor income
Resource balance
1992
1993
1994
1995
1996
1997
1998
1999
Average
20002003
...
...
...
...
...
...
...
...
...
...
...
...
29.3
33.4
4.2
2.5
5.1
1.5
23.2
26.3
3.2
1.6
1.5
3.2
24.1
24.8
0.7
1.0
1.7
22.1
22.8
0.7
0.7
1.5
20.3
22.9
2.5
0.7
1.2
2.0
19.6
23.0
3.4
0.9
1.7
2.6
19.2
23.1
3.9
0.7
2.5
2.1
20.4
23.4
3.0
0.7
2.8
0.9
22.4
25.7
3.3
0.5
2.2
1.6
...
...
...
...
3.1
1.8
3.0
2.8
2.8
1.3
2.7
4.1
0.6
0.1
2.4
0.9
2.7
1.4
1.2
0.8
0.5
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.
244
Medium-Term Baseline Scenario: Summary
Table 45. Summary of World Medium-Term Baseline Scenario

Eight-Year
Averages
______________________
198087
198895
Four-Year
Average
199699
1996
1997
1998
1999
Four-Year
Average
20002003
Annual percent change unless otherwise noted

World real GDP
Advanced economies
3.1
2.6
4.2
2.7
3.2
2.6
5.5
4.5
3.2
2.5
4.5
0.1
4.2
3.0
6.6
1.0
4.1
3.1
5.8
2.0
2.0
2.0
2.3
0.2
2.5
1.9
3.6
0.2
4.1
2.8
5.6
4.1
Memorandum
Potential output
2.8
2.6
2.2
2.2
2.2
2.3
2.3
2.2
3.6
6.6
6.2
6.8
9.7
3.7
4.6
6.2
4.3
1.1
1.9
6.5
8.0
0.8
6.1
6.1
6.3
6.4
9.3
10.0
9.0
9.8
8.2
4.5
1.0
3.5
4.7
4.6
3.5
5.6
7.6
7.6
World trade, volume1

Imports
Advanced economies
Exports
Advanced economies
Terms of trade
Advanced economies
4.6
0.6
3.0
6.9
9.1
1.0
6.0
7.2
6.2
6.0
8.8
7.0
10.3
10.9
6.9
3.6
3.9
5.3
4.2
5.5
5.9
6.1
7.2
7.3
0.3
0.8
0.3
0.3
1.3
1.0
0.1
0.2
1.2
2.3
2.5
0.8
0.7
0.7
0.9
3.2
1.8
0.5
0.8
0.2
0.3
0.4
0.2
World prices in U.S. dollars

Manufactures
Oil
3.3
6.1
1.8
3.2
0.7
3.8
3.7
4.2
4.7
3.0
18.4
1.2
8.2
5.4
3.3
3.9
31.1
13.9
0.6
9.3
0.4
1.0
3.2
2.6
Consumer prices
Advanced economies
6.9
30.4
6.4
3.7
47.4
153.0
2.0
10.4
33.2
2.4
14.1
41.4
2.1
9.1
27.9
1.7
10.3
29.5
1.7
8.3
34.6
2.0
5.1
8.0
5.8
4.7
3.0
4.3
4.0
3.2
3.7
3.8
4.0
3.2
4.5
3.0
3.9
2.8
4.0
3.3
Interest rates (in percent)

Real six-month LIBOR2
World real long-term interest rate3
Percent of GDP
Balances on current account
Advanced economies
0.5
1.6
0.4
0.1
2.1
0.2
0.1
1.3
2.8
0.1
1.4
2.0
0.3
1.1
2.7
0.2
1.4
3.6
0.1
1.1
3.0
1.1
3.6
Total external debt

31.4
8.3
37.9
27.9
32.7
34.7
33.4
30.7
31.8
30.4
32.8
37.8
32.7
39.9
30.3
37.0
Debt service
4.2
1.7
4.8
3.2
4.8
4.3
4.9
3.2
4.7
3.2
4.8
5.3
4.6
5.6
4.3
5.8
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
245
Table 46. Developing CountriesMedium-Term Baseline Scenario: Selected Economic Indicators

Eight-Year
Averages
______________________
198087
198895
Four-Year
Average
199699
1996
1997
1998
1999
Four-Year
Average
20002003
Annual percent change

Real GDP
Export volume1
Terms of trade1
Import volume1
4.2
0.6
0.8
1.1
5.5
9.1
1.3
8.0
4.5
7.2
0.2
6.1
6.6
8.8
2.3
9.3
5.8
10.9
0.7
9.8
2.3
3.9
3.2
1.0
3.6
5.5
0.8
4.6
5.6
7.2
0.4
7.6
Africa
Real GDP
Export volume1
Terms of trade1
Import volume1
2.2
0.1
0.4
1.0
2.3
4.6
1.1
4.3
4.3
4.7
0.3
3.5
5.8
8.8
3.6
1.5
3.2
4.7
0.8
6.2
3.7
0.2
5.6
2.0
4.7
5.2
1.7
4.5
5.2
5.4
0.1
5.0
Asia
Real GDP
Export volume1
Terms of trade1
Import volume1
6.9
5.9
0.3
5.5
8.1
12.7
0.7
12.5
5.1
7.6
0.4
3.2
8.2
9.2
0.1
8.5
6.6
13.1
1.1
5.6
1.8
4.0
0.6
4.9
3.9
4.6
0.1
4.2
6.3
8.4
0.2
10.0

Real GDP
Export volume1
Terms of trade1
Import volume1
2.3
3.8
0.6
0.7
3.5
8.0
4.1
1.5
3.6
5.8
0.4
8.6
4.7
7.6
7.3
14.8
4.7
9.6
1.0
11.6
2.3
2.4
8.7
3.5
2.7
3.9
1.6
5.0
3.9
4.3
0.3
4.5
Western Hemisphere
Real GDP
Export volume1
Terms of trade1
Import volume1
2.3
4.2
3.7
1.8
2.6
7.5
0.7
10.1
3.5
8.9
0.2
10.4
3.5
9.2
1.9
10.4
5.1
10.8
0.1
18.0
2.8
6.7
2.3
8.9
2.7
8.7
1.3
4.8
4.6
7.7
0.7
6.4

and/or rescheduling
during 199397
Real GDP
Export volume1
Terms of trade1
Import volume1
2.4
0.7
1.7
1.5
2.3
5.0
1.5
3.8
3.3
7.5
2.2
5.1
3.8
9.6
0.3
3.8
4.1
10.1
3.7
11.6
2.2
3.0
6.3
1.0
3.2
7.6
1.2
4.3
4.5
7.5
0.4
6.2

Real GDP
Export volume1
Terms of trade1
Import volume1
5.5
5.8
0.9
3.6
6.9
10.2
0.1
11.2
5.0
7.9
0.1
6.2
7.6
9.6
0.2
9.3
6.4
11.9
0.1
9.3
2.4
4.9
0.1
1.3
3.7
5.4
0.3
4.9
6.0
7.6
0.3
8.7
Regional groups
Analytical groups
246
Medium-Term Baseline Scenario: Developing Countries
1987
1991
1995
1996
1997
1998
1999
2003

Total external debt
Interest payments
Amortization
8.2
228.9
24.2
12.7
11.5
14.6
184.3
22.4
10.0
12.4
9.2
162.9
21.9
8.5
13.4
6.2
151.2
22.0
8.3
13.7
4.9
141.8
21.0
7.6
13.4
6.4
148.0
21.7
8.9
12.8
4.8
141.4
20.1
8.7
11.3
4.7
120.5
17.0
7.2
9.7
Africa
Total external debt
Interest payments
Amortization
7.5
257.2
23.7
11.1
12.6
6.6
236.6
27.5
11.6
15.9
13.9
246.1
26.6
10.4
16.1
2.9
224.0
24.9
10.2
14.7
3.9
208.7
21.0
8.3
12.6
11.7
223.6
25.1
12.4
12.7
9.3
208.9
23.2
10.7
12.5
6.6
170.2
18.0
8.8
9.2
Asia
Total external debt
Interest payments
Amortization
7.3
201.4
22.6
10.5
12.1
4.9
159.5
17.2
8.0
9.2
9.2
123.1
16.1
6.0
10.1
7.6
118.8
16.0
5.9
10.1
0.8
114.2
12.7
5.2
7.5
6.7
110.9
13.6
5.7
7.9
6.7
106.6
14.1
5.8
8.2
1.0
89.3
12.5
4.6
7.9

Total external debt
Interest payments
Amortization
9.6
120.2
11.6
6.2
5.4
36.3
97.9
10.3
3.7
6.6
0.4
101.1
10.9
3.5
7.4
3.6
89.0
10.6
3.8
6.9
1.4
85.1
9.0
3.5
5.5
8.5
98.0
11.9
4.2
7.7
7.4
96.5
10.7
4.0
6.7
7.1
94.2
8.7
3.7
5.0
Western Hemisphere
Total external debt
Interest payments
Amortization
8.0
361.6
40.6
23.6
16.9
10.3
277.4
39.3
18.3
21.0
14.6
249.3
39.8
16.4
23.4
13.8
231.0
41.7
15.6
26.1
21.6
211.4
46.7
15.1
31.6
26.4
223.4
42.7
16.8
25.9
21.0
209.0
36.3
16.6
19.7
12.2
174.1
29.9
13.6
16.3

and/or rescheduling
during 199397
Total external debt
Interest payments
Amortization
20.1
344.5
30.6
16.4
14.2
14.0
314.1
33.3
14.5
18.8
16.1
291.1
29.8
12.2
17.6
8.7
262.1
29.3
12.2
17.2
14.6
242.1
32.8
11.3
21.5
20.1
258.0
35.8
14.7
21.1
15.9
236.5
29.6
13.7
15.9
8.6
189.0
23.5
10.6
12.9

Total external debt
Interest payments
Amortization
2.8
221.7
27.0
14.0
13.0
6.2
172.7
23.4
10.6
12.9
8.8
145.5
22.2
8.6
13.6
7.9
137.2
22.6
8.2
14.4
3.7
129.5
20.2
7.4
12.8
1.8
130.2
19.8
8.1
11.8
1.2
126.0
19.3
8.2
11.2
3.9
109.4
16.6
6.9
9.7
Regional groups
Analytical groups
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
247
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?
248

May 1993, Chapter IV
May 1993, Chapter VI
May 1993, Box 9
The Postwar Economic Achievement

Business Cycles and Potential Output
Economic Convergence
Saving in a Growing World Economy
North-South R&D Spillovers
Long-Term Growth Potential in the Countries in Transition
Globalization and the Opportunities for Developing Countries
Measuring Productivity Gains in East Asian Economies
The Business Cycle, International Linkages, and Exchange Rates
The Asian Crisis and the Regions Long-Term Growth Performance

October 1994, Box 5
May 1995, Chapter V
May 1995, Box 6
October 1996, Chapter V
May 1997, Box 9
May 1998, Chapter III
October 1998, Chapter III
How Large Was the Output Collapse in Russia?

Alternative Estimates and Welfare Implications
Evgeny Gavrilenkov and Vincent Koen
Deindustrialization: Causes and Implications
Robert Rowthorn and Ramana Ramaswamy
September 1995
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
Price Stability
Oil Demand and Supply in the Medium Term
Hyperinflation and Chronic Inflation
The Impact of Lower Oil Prices
Non-Oil Commodity Prices
Nonfuel Primary Commodity Prices
The Rise and Fall of InflationLessons from Postwar Experience
World Oil Market: Recent Developments and Outlook
Inflation Targets
Indexed Bonds and Expected Inflation
Effects of High Inflation on Income Distribution
Central Bank Independence and Inflation
Rising Petroleum Prices in 1996
Recent Developments in Primary Commodity Markets
Japans Liquidity Trap

May 1993, Annex I
May 1993, Box 2
May 1993, Box 5
October 1993, Box 8
May 1994, Box 3
October 1995, Box 2
October 1996, Annex II
October 1996, Box 8
October 1996, Box 9
May 1997, Box 3
May 1998, Annex II
October 1998, Box 4.1
Boom and Bust in Asset Markets in the 1980s:

Causes and Consequences
Garry J. Schinasi and Monica Hargraves
Prices in the Transition: Ten Stylized Facts
Vincent Koen and Paula R. De Masi
December 1993
December 1997
V. Fiscal Policy
Structural Budget Indicators for Major Industrial Countries
Economic Benefits of Reducing Military Expenditure
249

SELECTED TOPICS, 199298
The Treuhandanstalt
Structural Fiscal Balances in Smaller Industrial Countries
Can Fiscal Contraction Be Expansionary in the Short Run?
Pension Reform in Developing Countries
Effects of Increased Government Debt: Illustrative Calculations
Subsidies and Tax Arrears
Focus on Fiscal Policy
The Spillover Effects of Government Debt
Uses and Limitations of Generational Accounting
The European Unions Stability and Growth Pact
Progress with Fiscal Reform in Countries in Transition
Pension Reform in Countries in Transition
Transparency in Government Operations
The Asian Crisis: Social Costs and Mitigating Policies
Fiscal Balances in the Asian Crisis Countries: Effects of Changes
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
October 1993, Box 9

May 1995, Annex III
May 1995, Box 2
May 1995, Box 11
May 1995, Box 13
October 1995, Box 8
May 1996
May 1996, Annex I
May 1996, Box 5
October 1997, Box 3
May 1998, Chapter V
May 1998, Box 10
May 1998, Annex I
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
Interim Assessment (Focus on Crisis in AsiaRegional
and Global Implications)
Financial Crises: Characteristics and Indicators of Vulnerability
The Role of Hedge Funds in Financial Markets
International Monetary System: Measures to Reduce the Risk of Crises
Resolving Banking Sector Problems
250
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
December 1997
May 1998, Box 1
May 1998, Box 3
May 1998, Box 6
Effective Banking Prudential Regulations and Requirements

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?
May 1998, Box 7

The Global Real Interest Rate

Thomas Helbling and Robert Wescott
A Monetary Impulse Measure for Medium-Term Policy Analysis
Bennett T. McCallum and Monica Hargraves
Saving Behavior in Industrial and Developing Countries
Paul R. Masson, Tamim Bayoumi, and Hossein Samiei
September 1995
September 1995
September 1995
VII. Labor Market Issues

Fostering Job Creation, Growth, and Price Stability
in Industrial Countries
Capital Formation and Employment
Implications of Structural Reforms Under EMU
Euro-Area Structural Rigidities

May 1995, Box 4
Unemployment and Wage Dynamics in MULTIMOD

Leonardo Bartolini and Steve Symansky
Evaluating Unemployment Policies: What Do the Underlying
Theories Tell Us?
Dennis J. Snower
Institutional Structure and Labor Market Outcomes:
Western Lessons for European Countries in Transition
Robert J. Flanagan
The Effect of Globalization on Wages in the Advanced Economies
Matthew J. Slaughter and Phillip Swagel
International Labor Standards and International Trade
Stephen Golub
December 1993
September 1995
September 1995
December 1997
December 1997
VIII. Exchange Rate Issues

Interim Assessment (Focus on Crisis in the European Monetary System)
Recent Changes in the European Exchange Rate Mechanism
Chronology of Events in the Recent Crisis in the European
Monetary System
Striving for Stability: Realignment of the CFA Franc
Currency Arrangements in the Former Soviet Union and
Baltic Countries
Exchange-Rate-Based Stabilization
Exchange Market Reforms in Africa
251

January 1993
October 1993, Box 3
May 1994, Box 8
May 1994, Box 10
May 1994, Box 11
October 1994, Box 3
Currency Convertibility
Currency Substitution in Transition Economies
Exchange Rate Effects of Fiscal Consolidation
Exchange Rate Arrangements and Economic Performance in
Asymmetric Shocks: European Union and the United States
Currency Boards
The Business Cycle, International Linkages, and Exchange Rates
Evaluating Exchange Rates
Determining Internal and External Conversion Rates for the Euro
The Euro Area and Effective Exchange Rates
October 1994, Box 7

October 1994, Box 8
October 1995, Annex
October 1997, Chapter IV
October 1997, Box 4
October 1997, Box 5
May 1998, Box 5
Multilateral Unit-Labor-Cost-Based Competitiveness Indicators

for Advanced, Developing, and Transition Countries
Anthony G. Turner and Stephen Golub
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 New Balance of Payments Manual
May 1994, Box 13
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

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
Chronology of Events in the Recent Crisis in the European

Monetary System
October 1993, Box 3
252
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
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
How Useful Are Taylor Rules as a Guide to ECB Monetary Policies?
Orienting Fiscal Policy in the Medium Term in Light of the Stability

Euro Area Structural Rigidities
Determining Internal and External Conversion Rates for the Euro
The Euro Area and Effective Exchange Rates

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
253

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
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
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
How Large Was the Output Collapse in Russia?

Alternative Estimates and Welfare Implications
Evgeny Gavrilenkov and Vincent Koen
254
September 1995
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WORLD ECONOMIC AND FINANCIAL SURVEYS

1998 International Monetary Fund

World economic outlook (International Monetary Fund)

The cover, charts, and interior of this publication

Please send orders to:

1998 International Monetary Fund

Chapter I. Policy Responses to the Current Crisis

Financial Market Developments and Risks

Chapter V. Economic Policy Challenges Facing the Euro Area

3.1 Aging in the East Asian Economies: Implications for Government

4.1 Japans Liquidity Trap

Recent Exchange Rate Movements on a Bilateral and Multilateral Basis

3.1 Selected Economies: Sources of Economic Growth

4.1 Japan: Growth Decomposition

5.1 Euro Area and Selected Countries: Trade Linkages in 1996

Major Industrial Countries: Nominal Interest Rates

Selected Economies: Efficiency of Investment

Selected Major Industrial Countries: Output Growth and Unemployment

Euro Area and the World Economy: Indicators of Relative Size

1998 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.

1998 International Monetary Fund

1998 International Monetary Fund

nternational economic and financial conditions

(Percent change from a year earlier; three-month

Sources: WEFA, Inc.; OECD; and IMF, International Financial

POLICY RESPONSES TO THE CURRENT CRISIS

Figure 1.2. World Output and Inflation1

economies adjust to smaller capital inflows, their trade

(Annual percent change)

Growth of World Real GDP

World Real Long-Term

Financial Market Developments and Risks

as a policy response to counter exchange market

that Japan takes decisive action to resolve banking

Financial Market Developments and Risks

POLICY RESPONSES TO THE CURRENT CRISIS

the yen, and the future euro areas external position

Also setting back the resolution of the Asian crisis

Asia: Setbacks, but Progress

Asia: Setbacks but Progress Toward Crisis Resolution

POLICY RESPONSES TO THE CURRENT CRISIS

Russias Financial and Payments Crisis

fully tailored to ensure that the quality of growth is not

Pakistan is facing even greater challenges as a result

Russias Financial and Payments Crisis

POLICY RESPONSES TO THE CURRENT CRISIS

pressures intensified in most of the region, apparently

Other Emerging Market Countries:

Other Emerging Market Countries: Reducing Vulnerabilities

the need to maintain tight credit conditions, while a

vulnerability to adverse external developments, it will

POLICY RESPONSES TO THE CURRENT CRISIS

HIPC External Indebtedness, 19961

Sources: World Bank, Global Development Finance

eral and bilateral creditors, typically in the form of grants

Other Emerging Market Countries: Reducing Vulnerabilities

Past Debt Restructurings for HIPCs, 1976July 19981

POLICY RESPONSES TO THE CURRENT CRISIS

Box 1.1 (concluded)