This section discusses a number of scenarios intended to facilitate the analysis of policy issues in both industrial and developing countries in a medium-term context. The scenarios, which focus on the evolution of the principal macroeconomic indicators, are used to illustrate the inflation risks that have been identified in the previous section and to examine the effects of alternative policy reactions in industrial countries.4 Medium-term scenarios are then used to assess the impact of unforeseen changes in key external variables on selected groups of developing countries. This analysis provides the background for the discussion of policy issues in the following sections of the paper. It will be recalled that the analysis of scenarios in earlier World Economic Outlook reports examined the consequences of alternative fiscal and structural measures in industrial countries; that analysis is not repeated here, but its implications stand behind some of the assessments presented in later sections of this report.
Since the initiation of economic reforms in the late 1970s. China has achieved impressive economic growth coupled with significant structural transformation (Figure 32). During 1978–96, real GDP grew on average by over 9 percent a year, contributing to a near quadrupling of per capita income and the lifting of millions out of poverty. Over the same period, many of the distortions and rigidities of the former central planning system were eliminated and market forces came to play an increasingly important role in economic decision making. Concomitantly, the state’s role in the economy was gradually reduced and a dynamic non-state sector emerged that now accounts for almost two-thirds of GDP.1 In addition, as part of the normal process of economic development, employment in agriculture has declined substantially while a thriving manufacturing sector has emerged.
This annex builds on the discussion in Chapter III and further explores the implications for Europe and the rest of the world of alternative assumptions about labor market reform, fiscal adjustment, and product market liberalization under EMU. While necessarily speculative in nature, the resulting scenarios are meant to illustrate the profound impact that EMU can have on macroeconomic performance depending on progress in these three policy areas.1
The following remarks were made by the Acting Chair at the conclusion of the Executive Board’s discussion of the World Economic Outlook, Global Financial Stability Report, and Fiscal Monitor on September 14, 2012.