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.
The countries in transition—the former centrally planned economies of central Europe, the former Soviet Union, and Mongolia—have adopted, or are in the process of adopting, economic reforms on an unprecedented scale. These countries are now in different stages of the transition to market economies, with central Europe broadly more advanced, having started earlier. Some of the countries in transition—notably the former Czech and Slovak Federal Republic, Estonia, Hungary, Latvia, and Poland—have made significant progress in macroeconomic stabilization. Most, however, still face difficult fiscal problems stemming from the web of soft budget constraints and state subsidies, increases in outlays for social benefits and structural reform, or reductions in revenues because of output declines and administrative difficulties. Containing inflationary pressures will require tight control of government budgets and of credit creation, while reductions in subsidies, hard budget constraints on enterprises, and further privatization will be required if firms are to respond fully to market forces. Both macroeconomic stability and structural change are crucial to ensuring sustainable increases in living standards in the years ahead.
Growth has now resumed in most of the 28 countries in transition from central planning to market oriented economies.37 Only Azerbaijan, Belarus, the Russian Federation, Tajikistan, Ukraine, and Uzbekistan are expected to suffer further output declines in 1996, and positive growth is within reach for these countries also during the period ahead provided slippages can be avoided in their structural reform and stabilization efforts.
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 statistical appendix presents historical data, as well as projections. It comprises five sections: Assumptions, What’s New, Data and Conventions, Classification of Countries, and Statistical Tables.
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.
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.