- International Monetary Fund. Research Dept.
- Published Date:
- May 1996
World Economic and Financial Surveys
This series (ISSN 0258-7440) contains biannual, annual, and periodic studies covering monetary and financial issues of importance to the global economy. The core elements of the series are the World Economic Outlook report, usually published in May and October, and the annual report on International Capital Markets. Other studies assess international trade policy, private market and official financing for developing countries, exchange and payments systems, export credit policies, and issues raised in the World Economic Outlook.
World Economic Outlook: A Survey by the Staff of the International Monetary Fund
The World Economic Outlook, published twice a year in English, French, Spanish, and Arabic, presents IMF staff economists’ analyses of global economic developments during the near and medium term. Chapters give an overview of the world economy; consider issues affecting industrial countries, developing countries, and economies in transition to the market; and address topics of pressing current interest.
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1995 (May). ISBN 1-55775-468-3. Stock #WEO-195.
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International Capital Markets: Developments, Prospects, and Policy Issues
This annual report reviews developments in international capital markets, including recent bond market turbulence and the role of hedge funds, supervision of banks and nonbanks and the regulation of derivatives, structural changes in government securities markets, and recent developments in private market financing for developing countries
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1995 ISBN 1-55775-516-7. Stock #WEO-695.
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Staff Studies for the World Economic Outlook
by the IMF’s Research Department
These studies, supporting analyses and scenarios of the World Economic Outlook, provide a detailed examination of theory and evidence on major issues currently affecting the global economy.
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Issues in International Exchange and Payments Systems
by a Staff Team from the IMF’s Monetary and Exchange Affairs Department
The global trend toward liberalization in countries’ international exchange and payments systems has been widespread in both industrial and developing countries and most dramatic in Central and Eastern Europe. Countries in general have brought their exchange systems more in line with market principles and moved toward more flexible exchange rate arrangements in recent years.
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1995. ISBN 1-55775-480-2. Stock #WEO-895.
Private Market Financing for Developing Countries
by a Staff Team from the IMF’s Policy Development and Review Department led by Steven Dunaway
This study surveys recent trends in private market financing for developing countries, including flows to developing countries through banking and securities markets; the restoration of access to voluntary market financing for some developing countries; and the status of commercial bank debt in low-income countries.
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1995 (November). ISBN 1-55775-526-4. Stock #WEO-1595.
1995 (March). ISBN 1-55775-456-X. Stock #WEO-994.
International Trade Policies
by a Staff Team led by Naheed Kirmani
The study reviews major issues and developments in trade and their implications for the work of the IMF, Volume 1, The Uruguay Round and Beyond: Principal issues, gives an overview of the principal issues and developments in the world trading system. Volume II, The Uruguay Round and Beyond: Background Papers, presents detailed background papers on selected trade and trade-related issues. The study updates previous studies published under the title Issues and Developments in international Trade Policy.
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by a Staff Team from the IMF’s Policy Development and Review Department led by Anthony R. Boote
This study provides information on official financing for developing countries, with the focus on low- and lower-middle-income countries. It updates and replaces Multilateral Official Debt Rescheduling: Recent Experience and reviews developments in direct financing by official and multilateral sources.
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1994. ISBN 1-55775-378-4. Stock #WEO-1394.
Officially Supported Export Credits: Recent Developments and Prospects
by Michael G. Kuhn, Balazs Horvath, Christopher J. Jarvis
This study examines export credits and covers policies in major industrial countries.
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1995, ISBN 1-55775-448-9. Stock #WEO-595.
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See page x of the October 1994 World Economic Outlook.
See Vito Tanzi and Ludger Schuknecht. “The Growth of Government and the Reform of the State in Industrial Countries.” IMF Working Paper 95/130 (December 1995).
On the new chain-weighted measure of real GDP, the potential growth rate is widely considered to be in the range of 2 to 2½ percent. Uncertainties about the level of the unemployment rate consistent with reasonable price stability mainly affect the level of potential output, not its growth rate. The reasons for the introduction of a chain-weighted measure of real GDP are discussed in Box 2.
Wealth of Nations, 1776 (New York; The Modem Library, 1937), p. 862.
As an indication of the progress that has been achieved among the countries that are most advanced in the transition, the Czech Republic became a member of the Organization for Economic-Cooperation and Development (OECD), on December 21, 1995; Hungary, Poland, and the Slovak Republic (and also Korea) are also being considered for membership.
For a description of the construction, use, and limitations of such indices, see C. Freedman, “The Use of Indicators and of the Monetary Conditions Index in Canada,” in Tomas J.T. Baliño and Carlo Cottarelli, eds., Frameworks for Monetary Stability: Policy-Issues and Country Experiences (Washington: IMF, 1994). See also Direction de la prévision, Ministère de l’économie et des finances. Note de Conjoncture Internationale (Paris, December 1995), p. 10.
Data and projections for the United States are based on the new chain-weighted method for estimating real GDP (Box 2).
At the end of 1995, Argentina’s inflation rate stood at only 1½ percent, the lowest in fifty years.
See Statistical Appendix, Table A26.
Movements in interest rates, exchange rates, and equity markets discussed in this section refer to the period from the end of September 1995 through the end of March 1996.
For the transition countries, the ratios of debt to output and debt to exports of goods and services are projected to decline in 1996 to 27 percent and 105 percent, respectively.
According to Article 109 of the Treaty, the Council may, acting unanimously, and after consulting the ECB in an effort to achieve consensus consistent with the objective of price stability, conclude formal agreements on an exchange rate system for the Euro in relation to non-Community currencies. In the absence of such a system, the Council may, acting by a qualified majority, adopt general orientations for exchange rate policy in relation to non-Community currencies. These orientations must not conflict with the goal of price stability.
It is unclear how the criterion on exchange rate stability will be applied given the widening of fluctuation margins in the ERM that occurred in mid-1993 at the height of the EMS crisis.
For countries participating in the third stage of EMU, the permanent locking of exchange rates would presumably help to reduce risk premiums in interest rates and, hence, government debt-servicing costs. This should help to lower budget deficits further in accordance with the objective of the proposed Stability Pact.
The December 1995 Madrid meeting of the European Council confirmed the intention of the EU to consider the membership applications of the countries of central and eastern Europe, Malta, and Cyprus.
For a comprehensive review of long-term fiscal trends, see Paul Masson and Michael Mussa, “Long-Term Tendencies in Budget Deficits and Debt,” IMF Working Paper 95/128 (December 1995).
See for example, Martin Feldstein, “The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act,” Journal of Political Economy, Vol. 103 (June 1995), pp. 551–72.
For further discussion, see Assar Lindbeck, “Hazardous Welfare-State Dynamics,” American Economic Review, Papers and Proceedings, Vol. 85 (May 1995), pp. 9–15.
For a discussion of why democracies have such difficulties, see Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, Massachusetts: Harvard University Press, 1971).
For a survey of the relationship between government involvement and economic performance, see Joel Slemrod, “What Do Cross-Country Studies Teach About Government Involvement, Prosperity, and Economic Growth?” Brookings Papers on Economic Activity: 2 (1995), The Brookings Institution (Washington), pp.373–415.
While an increased size of government historically has been associated with significant improvements in social indicators, a recent study suggests that when the government share of the economy exceeds about one third, diminishing returns set in. See Vito Tanzi and Ludger Schuknecht, “The Growth of Government and the Reform of the State in Industrial Countries,” IMF Working Paper 95/130 (December 1995).
See, for example, Thomas Helbling and Robert Wescott, “The Global Real Interest Rate,” in Staff Studies for the World Economic Outlook (IMF, September 1995), pp. 28–51; and Robert Ford and Douglas Laxton, “World Public Debt and Real Interest Rates,” IMF Working Paper 95/30 (March 1995).
Debt dynamics are described by the equation Δd = [(r - g)/(1 + g)]d-1 – pb, where A indicates the change from the previous period, d is the debt-to-GDP ratio, pb is the primary balance-to-GDP ratio, r is the nominal interest rate on public debt, and g is the growth rate of nominal GDP. There are two conventional measures of public debt: general government gross liabilities (gross debt) and the corresponding net liabilities (net debt). Net debt is the measure used to calculate the fiscal adjustment required to meet specific debt objectives since it comes closest to the correct measure of government net worth that should be used in sustainability calculations. Elsewhere in this chapter gross debt is used because it plays an important role in financial markets in many countries.
This numerical exercise represents an upper bound to the required primary surplus, because it does not assume a narrowing in risk premiums arising from the reduction in the ratio of debt to GDP, nor any growth benefits from lower interest rates.
See Robert P. Hagemann and Christoph John, “The Fiscal Stance in Sweden: A Generational Accounting Perspective,” IMF Working Paper 95/105 (November 1995).
See, for example, Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff, “Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy,” Journal of Economic Perspectives, Vol. 8 (Winter 1994), pp. 73–94.
See estimates in Sheetal K. Chand and others, Aging Populations.
See Jan B. Kune and others, “The Hidden Liabilities of the Basic Pensions System in the Member States,” Center for European Policy Studies Working Paper (Brussels, November 1993).
In this analysis of the contribution gap, the contribution rate is a percentage of GDP.
This contribution gap analysis therefore does not show what steps would be required to reduce net pension liabilities to a uniform benchmark across countries. As shown in Chart 23, there were large differences in net pension liabilities across countries in 1995.
For a discussion of multipillared approaches, see World Bank, Averting the Old Age Crisis (New York: Oxford University Press for the World Bank, 1994), pp. 101–63.
See Box 2 in the May 1995 World Economic Outlook, pp. 24–25.
For a background study with additional empirical support, see John McDermott and Robert Wescott, “An Empirical Analysis of Fiscal Adjustment,” IMF Working Paper (forthcoming). This follows work described in several recent papers, including Alberto Alesina and Roberto Perotti, “Reducing Budget Deficits,” paper presented at Conference on Growing Government Debt: International Experiences, Economic Council of Sweden, Stockholm, June 12, 1995, and Francesco Giavazzi and Marco Pagano, “Non- Keynesian Effects of Fiscal Policy Changes: International Evidence and the Swedish Experience,” paper presented at IMF Research Department seminar, November 16, 1995.
A blend of IMF and OECD data was used to provide the broadest possible country coverage and the longest possible historical perspective. The results did not appear to be very sensitive to the choice of structural balance methodology.
Because the definition of success depends on the change in the public debt two years after the consolidation, 9 episodes of fiscal consolidation that occurred after 1993 cannot be classified. In addition, 3 episodes are not classified because data on public debt were not available (Australia 81 and 82; New Zealand 86).
Many of the hypotheses tested were suggested by Alesina and Perotti, “Reducing Budget Deficits,” and Giavazzi and Pagano, “Non-Keynesian Effects of Fiscal Policy Changes.” As these authors point out, using these simple statistics, one cannot rule out an episode being deemed successful, where an exogenous increase in growth, possibly due to an easing of monetary conditions, facilitated the budget consolidation process.
Actually noninvestment government expenditure cuts.
A notable exception may have been Ireland in the late 1980s, where the currency depreciated sharply in real terms before and during its consolidation period.
It is interesting to note that in the year after the two-year contraction, the real exchange rate appreciated sharply in the successful cases.
The fiscal data discussed in this section refer to activities of the central government because of the lack of internationally comparable data for a broader definition of the public sector.
Uganda’s successful adjustment was discussed in Box 3 of the October 1995 World Economic Outlook, p. 54.
Annex I provides a detailed assessment of progress with macroeconomic stabilization and structural reforms in the Middle East and North Africa region.
For an analysis of trends in military expenditure and estimates of the associated effects on economic growth, see Malcolm Knight, Norman Loayza, and Delano Villanueva, “The Peace Dividend: Military Spending Cuts and Economic Growth,” Staff Papers, IMF, Vol. 43 (March 1996); and Tamim Bayoumi, Daniel Hewitt, and Steven Symansky, “The Impact of Worldwide Military Spending Cuts on Developing Countries,” IMF Working Paper 93/86 (November 1993).
For an empirical assessment of political fiscal policy cycles in developing countries, including countries with IMF-supported structural adjustment programs, see Ludger Schuknecht, “Political Business Cycles and Expenditure Policies in Developing Countries,” IMF Working Paper 94/121 (October 1994).
For an extensive discussion of the range of policy instruments that are often used to pursue fiscal objectives, see Vito Tanzi, “Government Role and the Efficiency of Policy Instruments,” IMF Working Paper 95/100 (October 1995).
See Howell H. Zee, “Some Simple Cross-Country Empirics of Tax Revenue Ratios,” paper presented at the International Seminar on Fiscal Reforms in Developing Countries, Seoul National University, Seoul, Korea, October 1994.
This so-called Ricardian effect is attributed to the private sector’s reduced need to save to meet expected future tax liabilities. For recent estimates of the extent to which changes in public saving are offset by changes in private saving, see Paul R. Masson, Tamim Bayoumi, and Hossein Samiei, “Saving Behavior in Industrial and Developing Countries,” in Staff Studies for the World Economic Outlook (IMF, September 1995), pp. 1–27.
For an extensive discussion of inefficiencies of public expenditure, see Fiscal Affairs Department, Unproductive Public Expenditures: A Pragmatic Approach to Policy Analysis, IMF Pamphlet Series 48 (1995).
See, for example, Robert Barro, “Economic Growth in a Cross-Section of Countries,” Quarterly Journal of Economics, Vol. 106 (May 1991), pp. 407–43, which finds that higher current expenditure lowers per capita growth; but also Shantayana Devarajan, Vinaya Swaroop, and Heng-fu Zou, “The Composition of Public Expenditure and Economic Growth,” World Bank Working Paper (1995), which finds that higher current expenditure increases growth while higher capital expenditure reduces growth. William Easterly and Sergio Rebelo, “Fiscal Policy and Economic Growth: An Empirical Investigation,” NBER Working Paper 4499 (October 1993), which examines components of capital expenditure, find a strong positive association between growth and expenditure on transport and communication.
See Ajai Chopra, Charles Collyns, Richard Hemming, and Karen Parker, India: Economic Reform and Growth, IMF Occasional Paper 134 (December 1995).
Seigniorage comprises the inflation tax—the reduction in the purchasing power of private sector holdings of high-powered money balances due to inflation—and autonomous changes in the level of real high-powered money balances.
See William Easterly and Klaus Schmidt-Hebbel, “Fiscal Adjustment and Macroeconomic Performance: A Synthesis,” in Public Sector Deficits and Macroeconomic Performance, ed. by William Easterly, Carlos A. Rodriguez, and Klaus Schmidt-Hebbel (New York: Oxford University Press for the World Bank, 1994), for estimates of government revenue from financial repression in selected developing countries during the late 1970s and 1980s.
In fact, if public debt grows at a rate faster than the difference between the real growth rate of the economy and the real interest rate, the fiscal deficit will not be sustainable. It is difficult to evaluate the sustainability of fiscal deficits in many developing countries because nominal interest rates are often controlled at below-market rates so that real interest rates do not reflect the opportunity cost of financing debt. See also section on Sustainability of Public Debt and Generational Fairness in Chapter III for a formal analysis of fiscal sustainability in the industrial countries.
See Aart Kraay and Caroline Van Rijckeghem, “Employment and Wages in the Public Sector—A Cross-Country Study,” IMF Working Paper 95/70 (July 1995).
See James P. Gordon, “Can Increasing the Government Payroll Boost Growth? Evidence from Africa,” IMF Working Paper (forthcoming) for an assessment of the public sector’s contribution to growth in selected African countries.
For a formal analysis of the effects on tax evasion and corruption of widening wage differentials between the public and private sectors, see Nadeem Ul Haque and Ratna Sahay, “Do Government Wage Cuts Close Budget Deficits? A Conceptual Framework for Developing Countries and Transition Economies,” IMF Working Paper 96/19 (February 1996).
See World Bank, Bureaucrats in Business: The Economics and Politics of Government Ownership (Washington: Oxford University Press for the World Bank, 1995).
See World Bank, Lessons of Tax Reform (Washington, 1991).
See Box 3 of the October 1994 World Economic Outlook, pp. 26–27, for details of exchange market reforms in a number of African countries.
See the October 1994 World Economic Outlook for extensive discussions of the recent surge in capital flows to developing countries and Annex I of the May 1995 World Economic Outlook for an evaluation of the causes of the sharp reversal of capital flows to Mexico in early 1995.
The country classification in the World Economic Outlook, which is described is the Statistical Appendix, places in the group of transition countries ten countries in central and eastern Europe, the three Baltic countries, the Russian Federation, the other eleven countries of the former Soviet Union, and Mongolia. Two additional countries. Bosnia and Herzegovina and the Federal Republic of Yugoslavia, are also classified in the group of transition countries, but they are not yet included in the World Economic Outlook because their data are incomplete. Asian countries that are also in transition from central planning are classified as developing countries’. these countries differ in certain important respects from the transition countries as defined here, although they also share important similarities with respect to issues discussed in this chapter.
Methodological problems plague national accounts data in most transition countries. These problems are thought to be more severe in countries of the former Soviet Union, given their earlier stage in the transition, as well as the more limited capacity of their statistical agencies. The fiscal balance, revenue, and expenditure figures cited below should therefore be viewed as indicative of broad trends, rather than as a precise accounting of fiscal developments.
It should be noted that, as a result of steep declines in real GDP, the revenue-to-GDP figures cited here mask, in many cases, very significant declines in real revenues. To the extent that these revenue declines stem from the transition process, particularly the collapse of central planning and the dismantling of direct controls over resource allocation, they may be both inevitable and desirable provided they are matched by concomitant reductions in expenditures achieved by reducing the role of government in the economy.
This problem is attributable to the poor institutional capacity of key central agencies at the outset of the transition process. In most countries, government spending units independently pursued individual objectives without central control or coordination of spending decisions. The problem of poor expenditure control was exacerbated by weak tax administration, as the procedures used under central planning (sequestration of bank accounts, for example) were and abandoned because of their incompatibility with market reforms. Although important progress has been made in introducing or augmenting treasury and lax administration functions, additional efforts in these areas are required in most transition countries.
Access to seigniorage and the inflation tax might have been an important incentive for many countries of the former Soviet Union to withdraw from the ruble area and to introduce their own currencies.
Revenue performance in the transition countries is reviewed in two recent studies: Gérard Belanger, “Eastern Europe—Factors Underlying the Weakening Performance of Tax Revenues.” IMF Working Paper 94/104 (September 1994): and Richard Hemming, Adrienne Cheasty, and Ashok K. Lahiri, “The Revenue Decline.” in Policy Experiences and Issues in the Baltics, Russia and Other Countries of the Former Soviet Utsion ed. by Daniel A. Citrin and Ashok Lahiri, IMF Occasional Paper 133 (December 1995).
For a detailed discussion of the status of privatization and enterprise restructuring, see European Bank for Reconstruction and Development. Transition Report: Investment and Enterprise Development (London. 1995).
Kathie Krumm, Branko Milanovic, and Michael Walton, “Transfers and the Transition from Socialism: Key Tradeoffs,” World Bank, Policy Research Working Paper 1380 (November 1994).
See Expenditure Policy Division, Fiscal Affairs Department, “Social Safety Nets for Economic Transition: Options and Recent Experience,” IMF Paper on Policy Analysis and Assessment 95/3 (February 1995).
In some countries, however, spending on unemployment benefits has remained remarkably low because of tight eligibility requirements and modest benefits. These expenditures have been limited to about ½ of 1 percent of GDP in the Slovak Republic, and even less in the Czech Republic where unemployment has remained rather low.
Generous severance payments prescribed by legislation, which might be more costly than providing nonwage benefits, may provide enterprises with an incentive to keep workers on the payroil.
See Louise Fox, “Old Age Security in Transition Economies,” World Bank, Policy Research Department Working Paper 1257 (February 1994).
The increase in early retirement is attributable 10 several factors. including the attractiveness of early retirement benefits relative to unemployment benefits, given that early retirement is widely perceived as an alternative to unemployment; liberal eligibility criteria that, initially, did not penalize pensioners who continue to work; limited supervision and enforcement capabilities to track working pensioners; and anticipation of restrictive pension reforms that would adversely affect later retirees. See Gerd Schwartz. “Social Impact of the Transition,” in Poland: The Path to a Market Economy, IMF Occasional Paper 113 (October 1994).
The Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and the Slovak Republic have borrowed in international capital markets. The reform efforts of the Czech Republic, in particular, have been recognized with successive upgrading of its sovereign debt by international credit agencies.
The policy challenges posed by large capital inflows were discussed in the context of the transition countries in the October 1995 World Economic Outlook, Chapter V. and in the context of the developing countries in the May 1995 World Economic Outlook, Chapter III.
See Victoria P. Summers and Emil M. Sunley, “An Analysis of Value-Added Taxes in Russia and Other Countries of the Former Soviet Union.” IMF Working Paper 95/1 (January 1995).
See Ratna Sahay and Carlos A. Végh, “Dollarization in Transition Economies: Evidence and Policy Implications,” IMF Working Paper 95/96 (September 1995).
In this sense, it has been argued that tax administration is tax policy. See Vito Tanzi and Anthony Petlechio, “The Reform of Tax Administration,” IMF Working Paper 95/22 (February 1995).
Two caveats apply to these figures. First, they reflect a number of factors, including poor credit analysis, non-arm’s-length lending to connected enterprises, and the reluctance of solvent enterprises to service their debts given prospective government bailouts, in addition to the direct effects of government policies. Second, increases in the level of nonperforming loans may be attributable to improved classification and reporting, as well as deteriorating loan quality. As a result of these factors, the figures in Table 24 are not comparable across countries and should be viewed as only indicative of the risks posed by banking sector problems in individual countries.
See Eric V. Clifton and Mohsin S. Khan, “Interenterprise Arrears in Transforming Economies: The Case of Romania,” Staff Papers, IMF, Vol. 40 (September 1993), pp. 680–96.
Ashok K. Lahiri and Daniel A. Citrin, “Interenterprise Arrears.” in Policy Experiences in the Baltics, Russia, and Oilier Countries of the Former Soviet Union ed. by Daniel A. Citrin and Ashok K. Lahiri. IMF Occasional Paper 133 (December 1995).
The potential fiscal costs can be quite high. In Kazakstan, defaults on previously issued guaranteed loans resulted in additional outlays totaling almost 7½ percent of GDP in 1994. The experience there has been that only one third of external loans guaranteed by the government are serviced, while roughly three fourths of all domestic loans guaranteed by the government eventually go into default. To prevent further defaults from undermining the 1995 budget. the government made explicit provisions for the cost of meeting these loan guarantees.
This is likely to be the case as many governments have extended explicit deposit insurance guarantees to the former slate savings banks. Depositors in other banks would therefore demand equal treatment.
The problem of bad loans is common to most transition countries. including several more advanced in transition: Bulgaria, Croatia, the Czech and Slovak Republics, and Hungary recapitalized banks using loan guarantees and government bonds to cover nonperforming loans, but loan losses continued in many cases. Poland recapitalized several banks prior to privatization, while Slovenia recapitalized its three largest banks in the context of a formal restructuring program. See Michael S. Borish. Millard F. Long, and Michel Noël, “Restructuring Banks and Enterprises: Recent Lessons from Transition Countries,” World Bank Discussion Paper 279 (January 1995).
In several countries, governments have not only stopped energy companies from taking effective measures to collect outstanding debts but have maintained price controls that keep domestic energy costs below world levels and even below narrowly defined cost recovery levels.
Some countries have taken decisive measures to contain this problem. In Lithuania, for example, the government has undertaken not to intervene in the enforcement of payments discipline. Needy households will be eligible for full compensation for energy outlays in excess of 20 percent of their incomes; the 1996 budget provides funding for this purpose.
See Vito Tanzi, “Government Role and the Efficiency of Policy Instruments,” IMF Working Paper 95/100 (October 1995). and Vito Tanzi. “The Budget Deficit in Transition,” Staff Papers, IMF, Vol. 40 (September 1993). pp. 697–707.
Measures to strengthen the banking system are especially urgent in most transition countries in view of the role of banks in screening and monitoring investment projects. Commercial banks in some countries may be unwilling to perform these functions, however, in the knowledge that calling nonperforming loans would eliminate their capital and result in closure. The outcome is continued financing of inefficient enterprises at the expense of more efficient firms in the nascent private sector. An additional complication in some countries is the absence, unenforceability, or weakness of laws needed to support a market economy, particularly collateral, property rights, and bankruptcy legislation.
This Annex was prepared by Douglas Laxton in the Economic Modeling and External Adjustment Division of the Research Department.
There is clear evidence emerging that market participants demand significant risk premiums in cases where the government debt process has been explosive. See, for example, Tamim Bayoumi, Morris Goldstein, and Geoffrey Woglom, “Do Credit Markets Discipline Sovereign Borrowers? Evidence from States,” Journal of Money Credit and Banking, Vol. 27 (November 1995), pp. 1046–59. This annex abstracts from these issues. For a discussion of the macroeconomic implications of debt-induced country risk premiums, see the October 1995 World Economic Outlook, pp. 73–81.
In particular, Vito Tanzi and Domenico Fanizza, “Fiscal Deficit and Public Debt in Industrial Countries, 1970–1994,” IMF Working Paper 95/49 (May 1995) suggest that a good estimate is around 150 basis points. Using a slightly different methodology, Robert Ford and Douglas Laxton, “World Public Debt and Real Interest Rates,” IMF Working Paper 95/30 (March 1995) report a range of estimates between 250 and 450 basis points.
See the May 1995 World Economic Outlook, Box 13, pp. 86–7.
This section is a brief summary of Hamid Faruqee, Peter Isard, and Douglas Laxton, “Reducing Government Debt: Short-Run Pain Versus Long-Run Gain,” IMF Working Paper (forthcoming). A simple closed economy prototype version of the model can be found in Hamid Faruqee, Douglas Laxton, and Steven Symansky, “Government Debt, Life-Cycle Income, and Liquidity Constraints: Beyond Approximate Ricardian Evidence” (unpublished, IMF, 1995).
There is an active debate in the academic literature about the empirical relevance of Ricardian equivalence. For two recent survey papers that reach opposite conclusions, see John J. Seater, “Ricardian Equivalence,” Journal of Economic Literature, No. 31, (1993), pp. 142–90, and B. Douglas Bernheim, “Ricardian Equivalence: An Evaluation of Theory and Evidence,” in NBER Macroeconomics Annual 1987, ed. by Stanley Fischer (Cambridge, Massachusetts: MIT Press, 1987). pp. 263–304. For policymakers, it may be best to err on the side of caution and assume that government debt reduces world saving and raises real interest rates. The reason for this is that a failure to recognize a link between government debt and real interest rates could result in extreme instabilities in the debt process—see Box 6.
The intertemporal elasticity of substitution is 0.3 in MULTIMOD. Blundell provides a survey paper on empirical estimates of this elasticity and concludes that it is likely to be less than 0.5. None of the qualitative conclusions in this annex would be affected if it was set at 0.5. See Richard Blundell, “Consumer Behaviour: Theory and Empirical Evidence: A Survey,” The Economic Journal, Vol. 98 (March 1988). pp. 16–65.
Specifically, the cuts in government expenditures are assumed to fall on government consumption goods and not on productive investment goods. Consequently, the expenditure reductions are assumed not to have any direct deleterious effects on the capital stock and potential output.
The actual change in the debt-to-GDP ratio is slightly less than 5 percentage points because of the endogenous reaction of nominal GDP.
This simulation is meant to be illustrative. If the bond market has already anticipated future Fiscal consolidation in the United States, real long-term interest rates will decline by less when the fiscal consolidation actually takes place.
The composition of capital and labor taxes is held fixed in this simulation so both tax rates are assumed to adjust by equal amounts.
This annex was prepared by Alain Jean-Pierre Féler and Oussama T. Kanaan in the Middle East Department.
The coverage of MENA in this annex includes the economies of the Middle East country grouping used in International Financial Statistics plus the three North African countries of Algeria, Morocco, and Tunisia. Iraq and the Libyan Jamahiriya, however, are excluded from the analysis because of data limitations.
Fuel exporters are defined as countries whose fuel exports account for over 50 percent of total exports of goods and services plus workers’ remittances. The GCC includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Although Bahrain does not technically meet the above definition of fuel exporters, it is closely interconnected and has many similarities with other GCC countries and is therefore included among the group of fuel exporters for the present analysis.
Recent analyses of macroeconomic and structural issues in the MENA region are also provided in Mohamed El-Erian and Shamsuddin Tareq, “Economic Reform in the Arab Countries: A Review of Structural Issues,” in Economic Development of the Arab Countries: Selected Issues, ed. by Said El-Naggar (Washington: IMF, 1993), pp. 26–50; International Monetary Fund, Macroeconomics of the Middle East and North Africa: Exploiting Potential for Growth and Financial Stability (Washington, 1995); and The World Bank, Claiming the Future: Choosing Prosperity in the Middle East and North Africa (Washington, 1995).
The decline in expenditure was more pronounced in the case of the Islamic Republic of Iran, largely as a result of the cessation of the war with Iraq in 1988.
Kuwait, however, sharply increased its government expenditure from 55 percent of GDP in 1986–90 to about 100 percent of GDP in 1991–95, mainly for reconstruction following the regional crisis.
See Said El-Naggar and Mohamed El-Erian, “The Economic Implications of a Comprehensive Peace in the Middle East,” in The Economics of the Middle East Peace: Views from the Region, ed. by Stanley Fischer, Dani Rodrik, and Elias Tuma (Cambridge, Massachusetts: MIT Press, 1993).
For more details see Saleh Nsouli, Amer Bisat, Oussama T. Kanaan, “The European Union’s New Mediterranean Strategy,” Finance & Development (forthcoming).
For an analysis of the sources of comparative advantage in these countries, see The World Bank, Claiming the Future, pp. 65–7.
Commission 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 (5th ed., 1993).
See Annex IV, May 1993 World Economic Outlook and Anne Marie Guide 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. 106–23.
As used here, the term “country” does not in all cases refer to a territorial entity that is a slate as understood by international law and practice. It also covers some territorial entities that are not slates, but for which economic policies are formulated, and statistical data are maintained, on a separate and independent basis.
A few countries are presently not included in the country groups listed, either because they are not IMF members, and their economies are not monitored by the IMF, or because data bases have not yet been compiled. Cuba and the Democratic People’s Republic of Korea are examples of countries that are not IMF members, whereas San Marino, among the industrial countries, and Eritrea, among the developing countries, are examples of economies for which data bases have 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.
Excluding Nigeria and South Africa.
Hong Kong, Korea, Singapore, and Taiwan Province of China.
Not included in the World Economic Outlook data base.
The United Nations classification also covers Tuvalu, which is not included in the World Economic Outlook classification.