Beginning in the late 1970s, and extending to the present, a large number of industrial countries initiated a process of financial deregulation and liberalization. The gains from this have been substantial, including increased access to credit markets by households and enterprises, higher rates of remuneration on deposits, and a more market-determined allocation of resources. Major economic sectors have been affected by this process and the responses of these sectors have contributed to important economic developments in the 1980s and early 1990s.
This report presents the annual survey of international capital market developments and prospects. It reviews trends in the main market segments and seeks to analyze the principal forces underlying these developments, in particular the progressive integration of markets and the related globalization of investor and borrower behavior. Against this background, the study examines the financing of the current account imbalances among the main industrial countries, and reviews recent developments affecting capital market financing for developing countries. The paper also looks at a number of issues that have arisen from these developments, including efforts to promote an efficient and stable system of capital markets, the process of trade liberalization in the financial services sector, the pressures toward international harmonization of tax systems, and recent initiatives to foster debt reduction for heavily indebted developing countries.
Economic activity is affected by decisions that are based on projections of future growth and inflation. Consumption and investment decisions rely heavily on projections of future economic developments. Governments plan budgets and set macroeconomic policies based on forecasts of future economic activity. Because large deviations from anticipated conditions may prove to be costly in terms of lost output and employment, it is important to assess whether forecasts are accurate, given the information that is available when they are made.
This section discusses broad trends in international financial intermediation since the start of 1988. A feature of this period has been that current account imbalances in the large industrial countries were principally financed by private capital flows, rather than through large-scale central bank intermediation as in 1987. The shift in financing patterns was accompanied by a surge in intermediation through bond markets relative to 1987 when intervention had boosted banking flows, particularly in the interbank market. Flows related to direct investment and syndicated credits also increased significantly in this period, partly reflecting the continued high level of mergers and acquisitions. Portfolio investments in equity, however, remained below levels experienced before the October 1987 stock market break.
Manmohan S. Kumar, Hossein Samiei, and Ms. Sheila Bassett
The current developing country models, LDCMOD, developed by Adams and Adams (1989), have been used extensively in the World Economic Outlook for analyzing the impact on the developing countries of changes in their external environment. In addition, these models have played a key role in the updating of the staff’s projections following changes in assumptions regarding the external environment. The models were estimated separately for each of the net debtor developing countries and took the specific characteristics of each of them into account. This paper reports the results of efforts under way to augment these models by incorporating fiscal and monetary sectors, to allow domestic factors to play a role in the determination of imports, and to extend the models to the case of net creditor countries.
In the early years after the onset of the debt crisis in 1982, developing countries with debt problems tended to have access to capital market financing primarily in the form of reschedulings of principal obligations falling due and, in some cases, arrangement of new loans—usually on a concerted basis where new money was provided by banks as part of a collective effort including support from official sources. This approach was viewed as the appropriate response to what was regarded primarily as a “liquidity” problem faced by debtors, and was consistent with the weak underlying financial position of the major commercial banks that precluded wholesale writedowns of exposure to problem debtors.
This section reviews recent institutional changes in financial markets, looking in turn at developments relating to the regulation of the banking and securities industries and at the reform of market structures. Liberalization of financial markets has continued at a rapid pace and has involved reduced separation of functions between institutions, increased integration of markets, and a sustained rate of financial innovation. These developments have required the adaptation of regulatory structures, and in particular have spurred efforts at international harmonization of standards. Further impetus for reform has emerged in the wake of the market break of October 1987 and other events that have raised awareness of systemic risk, and this has led to attempts to improve market safeguards and establish more rigorous codes of conduct.
This study develops an analytical and simulation framework for the analysis of the labor market in the seven major industrial countries.1 After specifying and estimating a simple model of employment and wage dynamics, the new labor market block is integrated into the current version of MULTIMOD, the International Monetary Fund’s macroeconomic simulation model used in policy analysis. The resulting version of the model is intended to replace the version of MULTIMOD that was documented in Masson, Symansky, and Meredith (1990). To this end, several alternative scenarios are considered to illustrate the main differences between the effects of standard policy simulations in the versions of MULTIMOD that include and exclude explicit treatment of the labor market.