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.
The authors of this special feature are Christian Bogmans, Lama Kiyasseh, Akito Matsumoto, Andrea Pescatori (team leader), and Julia Xueliang Wang, with research assistance from Lama Kiyasseh and Claire Mengyi Li.
The global expansion is losing speed in the face of a major financial crisis. The slowdown has been greatest in the advanced economies, particularly in the United States, where the housing market correction continues to exacerbate financial stress. The emerging and developing economies have so far been less affected by financial market turbulence and have continued to grow at a rapid pace, led by China and India, although activity is beginning to moderate in some countries. In the baseline, the U.S. economy will tip into a mild recession in 2008 as a result of mutually reinforcing housing and financial market cycles, with only a gradual recovery in 2009, reflecting the time needed to resolve underlying balance sheet strains. Activity in the other advanced economies will be sluggish in both 2008 and 2009 in the face of trade and financial spillovers. Growth in the emerging and developing economies is also projected to slow, although it should remain above long-term trends in all regions. Risks to the global projections are tilted to the downside, especially those related to the possibility of a full-blown credit crunch, while emerging and developing economies will not be insulated from a serious downturn in the advanced economies. Against this background, policymakers in the advanced economies must continue to grapple with the task of restoring stability to housing and financial markets while addressing downside risks to growth, without jeopardizing inflation performance or longer-term policy goals. Many emerging and developing economies still face the challenge of avoiding overheating or any buildup in vulnerabilities, but policymakers should be ready to respond judiciously to a deteriorating external environment.