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.
The May 1992 World Economic Outlook examined the role played by balance sheet adjustments in the nonfinancial sectors of the economy in constraining the pace of recovery in the United States and the United Kingdom.1 It also examined in less detail similar adjustments in Japan and in the smaller industrial countries. This annex updates the earlier work and then focuses on the corresponding adjustments in the financial sectors of Japan, the United States, and several of the Nordic countries.
Thus far, economic recovery is proceeding broadly as expected, although downside risks remain elevated. Most advanced and a few emerging economies still face major adjustments, including the need to strengthen household balance sheets, stabilize and subsequently reduce high public debt, and repair and reform their financial sectors. In many of these economies, the financial sector is still vulnerable to shocks, and growth appears to be slowing as policy stimulus wanes. By contrast, in emerging and developing economies prudent policies, implemented partly in response to earlier crises, have contributed to a significantly improved medium-term growth outlook relative to the aftermath of previous global recessions. However, activity in these economies, particularly those in emerging Asia, remains dependent on demand in advanced economies. In this setting, global activity is forecast to expand by 4.8 percent in 2010 and 4.2 percent in 2011, with a temporary slowdown during the second half of 2010 and the first half of 2011. Output of emerging and developing economies is projected to expand at rates of 7.1 percent and 6.4 percent in 2010 and 2011, respectively. In advanced economies, however, growth is projected to be only 2.7 percent and 2.2 percent, respectively. Risks to the forecast are mainly to the downside. Sustained, healthy recovery rests on two rebalancing acts: internal rebalancing, with a strengthening of private demand in advanced economies, allowing for fiscal consolidation; and external rebalancing, with an increase in net exports in deficit countries and a decrease in net exports in surplus countries, notably emerging Asia. The two interact in strong ways. Increased net exports in advanced economies imply higher demand and higher growth, allowing more room for fiscal consolidation. A number of policies are required to support these rebalancing acts. In advanced economies, repair and reform of the financial sector need to accelerate to allow a resumption of healthy credit growth. In addition, fiscal adjustment needs to start in earnest in 2011. Specific plans to cut future budget deficits are urgently needed to create new room for fiscal policy maneuver. If global growth threatens to slow appreciably more than expected, countries with fiscal room could postpone some of the planned consolidation. Meanwhile, key emerging economies will need to further develop domestic sources of growth, with the support of greater exchange rate flexibility.