Front Matter

Front Matter

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1990
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    World Economic and Financial Surveys
    January 1988International Capital Markets: Developments and Prospects, by Maxwell Watson, Donald Mathieson, Russell Kincaid, David Folkerts-Landau, Klaus Regling, and Caroline Atkinson.
    February 1988Officially Supported Export Credits: Developments and Prospects, by K. Burke Dillon and Luis Duran-Downing, with Miranda Xafa.
    April 1988World Economic Outlook: A Survey by the Staff of the International Monetary Fund.
    May 1988Multilateral Official Debt Rescheduling: Recent Experience, by Peter M. Keller, with Nissanke E. Weerasinghe.
    May 1988Primary Commodities: Market Developments and Outlook, by the Commodities Division of the Research Department.
    July 1988Staff Studies for the World Economic Outlook, by the Research Department of the International Monetary Fund.
    October 1988World Economic Outlook: Revised Projections, by the Staff of the International Monetary Fund.
    April 1989World Economic Outlook: A Survey by the Staff of the International Monetary Fund.
    April 1989International Capital Markets: Developments and Prospects, by a Staff Team from the Exchange and Trade Relations and Research Departments.
    July 1989Primary Commodities: Market Developments and Outlook, by the Commodities Division of the Research Department.
    August 1989Staff Studies for the World Economic Outlook, by the Research Department of the International Monetary Fund.
    September 1989Developments in International Exchange and Trade Systems, by a Staff Team from the Exchange and Trade Relations Department.
    October 1989World Economic Outlook: A Survey by the Staff of the International Monetary Fund.
    April 1990International Capital Markets: Developments and Prospects, by a Staff Team from the Exchange and Trade Relations and Research Departments.
    May 1990Officially Supported Export Credits: Developments and Prospects, by G.G. Johnson, Matthew Fisher, and Elliott Harris.
    May 1990World Economic Outlook: A Survey by the Staff of the International Monetary Fund.
    Note: For information on the titles and availability of World Economic and Financial Surveys published prior to 1988, please consult the most recent IMF Publications Catalog or contact IMF Publication Services.

    WORLD ECONOMIC AND FINANCIAL SURVEYS

    May 1990

    WORLD ECONOMIC OUTLOOK

    A Survey by the Staff of the International Monetary Fund

    INTERNATIONAL MONETARY FUND • WASHINGTON, D.C.

    © 1990 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.—(1981–84: 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 history—1971– —Periodicals. I. International Monetary Fund. II. Series: Occasional paper (International Monetary Fund)

    HC10.W7979

    84-640155

    338.5’443’09048—dc19

    AACR 2 MARC-S

    Library of Congress

    8507

    Published biannually.

    ISBN 1-55775-138-2

    Price: $30.00 ($20.00 for full-time faculty members and students of universities and colleges)

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    Contents

    List of Tables

    Conventions and Symbols

    A number of standard conventions have been employed in arriving at the projections in the report. It has been assumed that the average real exchange rates for the major currencies of a recent period (March 1990) will prevail through the end of the forecast period; that “present” policies of national authorities will be maintained; and that the average price of oil will be $17.65 a barrel in 1990 and will remain constant in real terms over the forecast period. These are, of course, working assumptions rather than forecasts, and the uncertainties surrounding them add to the margins of error that would in any event be involved in the report’s projections. The estimates and projections themselves are based on statistical information available on or before April 17, 1990.

    The following symbols have been used throughout this report:

    • … to indicate that data are not available;

    • — to indicate that the figure is zero or less than half the final digit shown;

    • – between years or months (e.g., 1989–90 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

    • / between years or months (e.g., 1989/90) to indicate a crop or fiscal (financial) year.

    “Billion” means a thousand million.

    Minor discrepancies between constituent figures and totals are due to rounding.

    * * *

    It should be noted that the term “country” used in this report does not in all cases refer to a territorial entity that is a state as understood by international law and practice. The term also covers some territorial entities that are not states but for which statistical data are maintained and provided internationally on a separate and independent basis.

    Preface

    The projections and analysis contained in the World Economic Outlook are the product of a comprehensive interdepartmental review of world economic developments by the staff of the International Monetary Fund. This review is carried out biannually and draws on the information the Fund staff gathers through its regular and special consultations with member countries as well as through its econometric modeling techniques. The project is coordinated in the Research Department and draws on the specialized contributions of staff members in the Fund’s five Area Departments, together with those of staff in the Exchange and Trade Relations and Fiscal Affairs Departments. The World Economic Outlook has been published annually since 1980 and biannually since 1984.

    An earlier version of the material in this report was the basis for a discussion of the world economic outlook by the Fund’s Executive Board on April 11–13, 1990. The present version has benefited from comments made by Executive Directors. However, the descriptions of developments and policies that the report contains, as well as the projections for individual countries, are those of the Fund staff and should not be attributed to Executive Directors or their national authorities.

    Introduction

    The pace of world economic activity slowed last year to about 3 percent from an exceptionally rapid rate of 4 percent in 1988. The growth of output is expected to moderate further in 1990, to 2¼ percent, before picking up to about 3 percent in 1991. The slowdown reflects the restrictive monetary policies that have been implemented in most industrial countries to deal with pressures on productive capacity and rising inflation. Output growth is expected to decline further this year in North America and the United Kingdom, but it is expected to recover in 1991. The slowdown would be considerably more gradual in Japan and the industrial countries of continental Europe, where economic activity has been quite strong. The intensification of inflation appears to have been contained in most industrial countries, and the rate of inflation is projected to decline slightly this year and in 1991. However, high rates of capacity utilization and tight labor markets are generally expected to persist, even in some countries where unemployment rates remain fairly high, and the risk of renewed cost-price pressures remains significant.

    The growth of real GDP in the developing countries fell from 4 percent in 1988 to 3 percent in 1989, and it is expected to remain broadly unchanged in 1990 before recovering to 4½ percent in 1991. This pattern of output growth reflects the recent and prospective implementation of stabilization policies in many developing countries. It also reflects a less favorable external environment in 1989–90—including slower growth of world trade, the firming of international interest rates, and the weakening of primary commodity prices. Price performance has deteriorated sharply in several high-inflation countries, in contrast to the situation in a number of countries where stabilization efforts have begun to bear fruit and inflation has been reduced. The average rate of inflation in the developing countries is projected to decline sharply in 1990 and 1991, but this presupposes the firm implementation of stabilization programs in several large countries.

    The performance of the world economy in the period ahead is likely to be significantly influenced by a number of major developments that have recently taken place or are in prospect for the next few years. The process of integration in the European Community and particularly the scheduled completion of the single market in 1992 are expected to boost investment and output in Europe and could have important ramifications in other areas as well. The prospect of fundamental economic reforms in the countries of Eastern Europe and in the Union of Soviet Socialist Republics suggests that economic performance in these countries could improve substantially over the medium term, although economic activity and employment are likely to be weak during the initial stage of the reforms. Moreover, the reduction of international tensions that has accompanied recent political developments in these countries has raised the hope that worldwide cuts in defense expenditures might improve the scope both for deficit-reduction in some countries and for increasing government spending in critical areas. The analysis presented in this report, however, suggests that the budget savings resulting from such reductions, although not insignificant, may not be very large over the short to medium term.

    It should be stressed that the projections presented in this report do not take into account the possible consequences of monetary and economic unification between the Federal Republic of Germany and the German Democratic Republic, although these issues are explored in a preliminary way in the box in Chapter V. It is very difficult at this stage to gauge the possible impact of these developments with any degree of precision, but it is clear that they could have important regional and global repercussions. Within a unified Germany, government spending, private investment, and productivity would rise considerably, and the pressure of aggregate demand on productive resources would intensify. Pressure on prices coupled with a higher real rate of return on capital would mean higher real interest rates, a prospect that appears to have been reflected in recent financial market developments. Germany’s demand for imported goods would rise, stimulating production in those countries where unused resources are available, but the rise in real interest rates could lead to some crowding out of investment and rising demand could put pressure on prices where productive capacity is fully utilized.

    The prospective evolution of the world economy will depend crucially on the stance of policies. As is customary, the staff’s projections for the industrial countries are based on the assumption of unchanged policies. This assumption implies the continuation of restrained monetary policies aimed at containing existing wage/price pressures. It also implies that the policy of fiscal consolidation will continue—and in some cases will be strengthened—thus helping to sustain savings rates in the industrial countries. In general, restrained macroeconomic policies appear to be a critical requirement for sustained growth in the industrial countries. A shift toward expansionary policies out of excessive concern for the near-term growth outlook in certain countries could lead to a resurgence of inflationary pressures, require a more severe tightening of monetary policy at a later stage, and threaten the sustainability of the expansion.

    Of course, economic performance in the industrial countries, and therefore in the world economy, could be improved by adopting more ambitious policies than those assumed in the baseline projections. In particular, the implementation of a monetary strategy aimed at progress toward price stability would increase confidence in economic policies and bring about lasting efficiency gains that are likely to exceed the transitory costs of disinflation, perhaps by a substantial margin. A tighter fiscal policy in those countries that are currently experiencing relatively high rates of inflation would reduce the burden now borne by monetary policy in containing price pressures. More broadly, a more aggressive plan to strengthen the public finances—particularly in those countries where fiscal deficits remain high, such as the United States, Canada, and Italy—would help to lower interest rates, increase national saving, and make room for investment in both domestic and foreign assets, and therefore raise potential GNP. Lower interest rates also would help to reduce the debt burden of the developing countries.

    Economic performance in all industrial countries could also be enhanced through more forceful action in the area of structural policies. For example, the high rates of unemployment that persist in several countries of Europe in spite of an unusually long economic expansion could be significantly reduced by removing the distortions affecting labor markets. More generally, a higher degree of wage and price flexibility would help to minimize the transitional costs of bringing down inflation from its present levels. In the area of trade policy, continued efforts to counter protectionism and foster a more open trading system are essential to sustain the expansion of world trade and to help the adjustment efforts of the indebted developing countries. In this connection, the successful conclusion of the Uruguay Round of trade negotiations by the end of 1990 would be an achievement of major importance, as it would bring about substantial efficiency gains for the world economy and reduce frictions among trading partners.

    The large current account imbalances that emerged during the 1980s in many industrial countries, and particularly in the three largest countries, have raised concerns about sustainability and possible adverse reactions in financial markets. In the past few years, however, the surplus of Japan and the deficit of the United States have declined substantially. The surplus of the Federal Republic of Germany has continued to increase and is projected to remain large on the basis of current policies and real exchange rates. However, if domestic demand, especially investment, increases sharply as a result of reunification, Germany’s surplus could diminish considerably. Given the continued need for saving in the developing countries—and the additional needs associated with reform in Eastern Europe—this prospect underscores the importance and the urgency of dealing with external imbalances by increasing saving in the deficit countries rather than by reducing saving in the surplus countries.

    The situation in most of the heavily indebted developing countries remains extremely difficult, and the projected improvement in economic performance over the medium term depends critically on the assumption that stabilization and adjustment programs will be implemented more effectively. A number of developing countries have adopted improved domestic policies in recent years, but in several highly indebted countries in the Western Hemisphere and in Europe, the costs of earlier policy slippage are now evident. It is essential that these countries follow more restrictive financial policies in order to reverse the recent trend toward chronic inflation with its attendant costs and to restore the environment of confidence and stability that is required to encourage investment and growth. More generally, structural policies in the developing countries need to be strengthened considerably to improve the efficiency of resource use and to increase the flexibility of these economies.

    Strong domestic adjustment measures in the heavily indebted developing countries remain the key to achieving sustained growth and balance of payments viability over the medium term. As recognized in the Brady initiative, however, a degree of debt or debt service reduction may also be needed in order to increase the incentives for adjustment and investment and to improve business confidence. So far, debt reduction arrangements have been reached only by Mexico and the Philippines, although Costa Rica, Morocco, and Venezuela have reached agreements in principle with their creditors. The generally slow progress of negotiations has been disappointing and could mean a substantial delay in the restoration of growth in some highly indebted countries. Paris Club creditors have continued to provide debt relief in the form of concessional terms on the official debt owed by the low-income countries of sub-Saharan Africa, but this reduced debt service payments in 1989 only marginally. Looking ahead, achieving higher growth in the indebted countries will require that markets in the industrial countries remain open, that the supply of world saving be sufficient to ensure a lasting decline in world interest rates, and that official financial assistance to Eastern Europe does not lead to a reduction in the financial resources provided to the developing countries.

    The comprehensive structural reforms that are underway or planned in several East European countries are essential to bring about a substantial improvement in living standards in that region. However, the transition from a centrally planned form of economic organization to a more market-oriented economy is likely to involve significant short-run adjustment costs, as resources are reallocated in response to relative price signals that reflect more clearly supply and demand conditions. The process of reallocation will be greatly facilitated if it is accompanied by monetary and fiscal policies that reduce actual or suppressed inflationary pressures and help to foster the stable economic environment needed for sustained economic growth.

    The present report is organized as follows. Chapter I reviews recent developments in the world economy and presents the staff’s projections for 1990 and 1991 for both industrial and developing countries. Chapter II presents the staff’s medium-term baseline scenario for the industrial countries and alternative scenarios aimed at analyzing two important policy issues: the consequences of a concerted program to achieve price stability in the industrial countries; and the possible impact of prospective cuts in defense spending for the industrial economies in general and for the fiscal position of the United States in particular. Chapter III examines a number of key policy issues in the industrial countries. It argues the case for price stability as the principal objective of monetary policy, evaluates medium-term trends and prospects for fiscal consolidation with particular emphasis on the role of social security funds, and discusses several interpretations of the emergence during the 1980s of large current account imbalances in the industrial countries. This chapter also reviews the prospects for economic integration within the European Community and examines major policy issues in individual industrial countries.

    Chapter IV presents the staff’s medium-term baseline scenario for the developing countries. It reviews the recent experience with inflation, analyzes the causes and consequences of accelerating inflation, and stresses the critical importance of adjustment programs designed to restore macroeconomic stability, particularly in the high-inflation developing countries. Chapter V describes the comparative economic performance of Eastern Europe and the Soviet Union since the second World War. Against this historical background, the chapter discusses the impetus for market-oriented reforms now proposed or under way, and some of the key issues that arise in the implementation of these reforms.

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