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 pace of global economic activity is projected to moderate to 2 percent in 1990, reflecting a slowdown in growth in both industrial and developing countries and a contraction of output in Eastern Europe and the Union of Soviet Socialist Republics (Table 1). The staff projects that the growth of world output will increase to 2½ percent in 1991, about the same as the average rate of growth in the 1980s. The rate of expansion of world trade is expected to continue to decline, averaging about 5½ percent in 1990–91. As noted above, these projections are based on the assumption that world oil prices will average $26 per barrel for the remainder of 1990 and decline gradually to $21 per barrel in the fourth quarter of 1991.
Since late 2001, a global recovery has been under way, with trade and industrial production picking up across the globe. However, after a strong first quarter, concerns about the pace and sustainability of the recovery have risen significantly. Financial markets have weakened markedly, with equity markets falling sharply since end-March accompanied by a depreciation of the U.S. dollar; financing conditions for emerging markets have deteriorated, particularly in South America and Turkey; and incoming data in both the U.S. and the euro area have fallen short of expectations. The recovery is still expected to continue, but global growth in the second half of 2002 and in 2003 will be weaker than earlier expected (Figure 1.1 and Table 1.1), and the risks to the outlook are primarily on the downside. With inflationary pressures generally subdued, macroeconomic policies in advanced countries will now need to remain accommodative for longer than had earlier seemed necessary; if incoming data were to suggest that the recovery is faltering, additional monetary easing would need to be considered. Attention also needs to focus on policies to reduce dependence on the United States as the global engine of growth, and to support an orderly reduction in the global imbalances, which remain a serious risk to the world economy.
This chapter contains three essays on current policy issues associated with trade and finance: two on vulnerabilities to the world economic outlook (global external imbalances and corporate financial structures in emerging markets) and one on industrial country barriers to agricultural trade. The topics covered are of particular interest in light of recent events, including fluctuations in major exchange rates, renewed concern about emerging markets, and continuing multilateral negotiations on lowering trade barriers under the Doha round, including the granting of “fast track” negotiating authority to the U.S. president.
Acrucial and often-overlooked feature of globalization is that trade and financial integration typically go hand in hand (Table 3.1). This is true both over time and across countries, reflecting the inherent linkages between the two—as emphasized by recent theoretical work. The complementarity between trade and finance not only reflects production possibilities—for example, technological improvements in ocean shipping increased both opportunities for world trade and the need to finance these ventures—but also is desirable in order to reap the full benefits of globalization. For example, trade integration is needed to take full advantage of international financial integration, as low trade penetration tends to increase an economy’s vulnerability to external financial crises.
World economic activity showed signs of revival in the first half of 1992 as some major economies slowly began to emerge from the cyclical downturns of 1990–91. During the next 12 months, world growth is expected to continue to recover at a moderate pace: following stagnation in 1991, world output is projected to expand by 1 percent in 1992 and by 3 percent in 1993, close to the average growth rate during the past two decades but somewhat less than experienced after the two previous—and more pronounced—recessions in 1974–75 and 1981–82 (Chart 1). Recent progress in reducing inflation is likely to continue in most countries. The growth of world trade is forecast to rise from 2¼ percent in 1991 to 6¾ percent in 1993.
The world economy, following the third major slowdown since the early 1970s, is expected to recover gradually during 1992 and 1993. Although the forces at work should on balance support a resumption of stronger growth, many of the uncertainties in the outlook involve downside risks, suggesting that the recovery may well be modest compared with previous cyclical upturns. This chapter discusses the global economic situation and the short-term outlook. Subsequent chapters analyze the role economic policies could play in improving conditions for sustained growth in the future.
The industrial countries as a group are gradually emerging from their first major economic slowdown since the early 1980s. During the past decade, inflation has been reduced substantially, and growth of potential output may have strengthened in some countries. Price stability was not achieved, however, and budgetary imbalances have remained excessive in many cases and in some countries have widened again. Policymakers now face the tasks of supporting economic recovery in the short run while improving conditions for stronger growth over the medium term. A key priority should be a reduction in real long-term interest rates through a resumption of progress toward fiscal consolidation; this would stimulate capital formation and raise productive potential.
Economic activity in the developing countries has been relatively resilient in the face of the recent slowdown in the industrial countries. This resilience reflects, in part, the fall in world interest rates and external debt reduction; but it is also due to the economic policies pursued in many countries. These policies have reduced macroeconomic imbalances, improved efficiency, helped to attract capital inflows, and led to an increase in productive capacity. As a growing number of countries implement similar policies, the developing countries should see significant improvements in economic growth in the 1990s. In reviewing the experience of the successfully adjusting countries it is impossible to do justice to the diversity of situations and problems in individual cases. The following discussion attempts to highlight some of the more salient features common to most of these countries.15
In a large number of developing countries, notably those that encountered debt-servicing difficulties, the decade of the 1980s was one of slow growth and declining per capita output. By contrast, many countries that were able to avoid debt-servicing difficulties have achieved very high growth rates and substantial gains in real income. These differences can be attributed to several factors. Most important, policies have differed significantly among the indebted developing countries. Countries that avoided debt-servicing difficulties have generally pursued more cautious financial policies and have placed greater emphasis on reducing structural rigidities and distortions in their economies than the countries with debt-servicing difficulties. Macroeconomic instability and persistent foreign financing constraints have adversely affected capital formation in many countries that encountered debt-servicing difficulties. Also, the international trading environment has not been equally favorable for all countries. While most exporters of manufactures have benefited from strong growth in the industrial countries, many exporters of primary products have faced deteriorating terms of trade.