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Y2K problem: Developing countries could be vulnerable to disruption caused by “millennium bug”

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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The Y2K problem is a legacy of a computer programming shortcut used in the 1960s and 1970s to save computer memory. Software programmers used two digits instead of four (for example, 99 instead of 1999) to identify the year in the date field in software code. As a result, many computer programs and systems may fail or generate errors as they misinterpret 00 as 1900 instead of 2000.

Government agencies and businesses around the world have spent considerable resources to assess the extent of the problem in their systems and to fix and test vulnerable systems. Despite these efforts, the World Economic Outlook notes, considerable uncertainty remains about the extent of the remaining problem. Many governments, public sector entities, and private companies, particularly small and medium-sized enterprises, have not finished—or in some cases, even begun—the remediation process. In addition, it is almost impossible to ensure that systems are fully protected from the bug in an era when computer and information systems are extensively interconnected. Because of these uncertainties and others regarding anticipatory behavior—such as the hoarding of goods and currency and the avoidance of travel—estimates of the Y2K problem vary widely and are subject to wide margins of effort. Thus, the IMF staff study notes, the projections in the World Economic Outlook do not attempt to incorporate any estimate of these effects. However, it is possible to speculate in qualitative, rather than quantitative, terms about the potential macroeconomic consequences.

Negative supply shock

The impact of the millennium bug, the World Economic Outlook suggests, may best be compared to that of a negative supply shock, such as a natural disaster, since a portion of the existing capital stock in the form of hardware and software will become temporarily unusable and, in some cases, obsolete. Because the problem has been foreseen, there has been some time to attempt to reduce its potential impact. But because it is a global shock, resources and expertise to repair problems could become severely constrained early in 2000.

Some businesses, the IMF staff study notes, particularly insurance companies and other financial services firms that make projections about the future, began efforts to make their systems Y2K compliant more than 10 years ago, partly because systems failures had already begun to occur. In recent years, repair efforts have intensified and expanded to include other sectors. Because measured GDP does not take into account the depreciation of systems caused by the Y2K problem, these repairs have actually boosted measured output to the extent that they have increased spending—for example, as firms have advanced plans to modernize their information technology infrastructure without reducing other expenditures. For the U.S. economy, for example, the impact on real GDP has been estimated to have been several tenths of a percentage point in each of the past few years. In other economies, where the repair effort is not as advanced and reliance on computers is less, the impact on GDP has been correspondingly smaller. Toward the end of 1999, GDP may also be stimulated by stock building of goods by consumers and businesses as a precaution against potential economic disruptions in early 2000.

Impact of Y2K: stylized depiction of deviation of GDP from trend

Data: IMF, World Economic Outlook, May 1999

Some disruptions in economic activity are expected in early 2000, according to the World Economic Outlook, to the extent that some firms and government agencies will not have addressed the problem in time. In addition, destocking as the threat of disruption fades and lower Y2K-related spending in organizations that have already completed their remediation efforts may tend to reduce aggregate demand and output early in 2000. However, as unprepared firms and government agencies repair their computer systems and make up for lost output, GDP may be boosted, perhaps starting later in 2000, possibly followed by a small negative impact as the extra spending is unwound. The figure on page 233 is a stylized (that is, no actual measurements on the x or y axes) depiction of the time profile of the net outcome of those effects in terms of aggregate output: an initial boost to activity resulting from anticipatory expenditures, followed by a drop in output as Y2K takes its main toll, and then a renewed upswing resulting from repair spending.

As with other types of supply shocks, the macroeconomic effects could include higher prices or lower profits and lower productivity. Already, the IMF staff study notes, wages among COBOL programmers—those most involved with the compliance effort—have risen significantly, and prices may rise to cover these higher wage costs as well as other costs of the remediation effort. Firms that face relatively high costs will realize a reduction in profits.

Developing and transition economies

Perhaps the greatest uncertainties are attached to the possible impact of the Y2K problem in the developing and transition countries, according to the World Economic Outlook. On the one hand, these economies are generally less dependent than the advanced economies on computer-based technology, which suggests that the potential disruptions would be less serious than in the advanced economies. Moreover, in the rapidly growing economies at least, a larger share of the capital stock is recently installed and therefore relatively likely to be Y2K compliant. On the other hand, because some countries are less likely to have invested sufficiently in fixing the Y2K problem, they may be more vulnerable, particularly to infrastructure failures in such areas as electricity, water, communications, transportation, and health services, which tend to be dependent on older computer systems. Government tax collection and statistical systems may also be vulnerable. In addition, to the extent these countries have problems, it may take them longer to fix their computer and information systems because of financial and human resource constraints. Also, failures in payment and other financial systems that are not Y2K compliant could lead to disruptions in international trade, while perceived or actual compliance problems might increase capital flight and affect the cost and availability of external financing, especially in those cases where potential problems might affect production for exports and, therefore, the balance of payments.

Conclusion

The macroeconomic effects of the Y2K problem are potentially significant but extremely difficult to quantify, the World Economic Outlook concludes. They should not be exaggerated, since experience suggests that economies can quickly recover from temporary shocks. In industries and sectors where compliance problems have been identified, there may still be time to alleviate the problem. But it is unlikely that all problems can be addressed in time.

Copies of the May 1999 World Economic Outlook are available for $36.00 (academic rate: $25.00) each from IMF Publication Services. See ordering information on page 237. The full text is also available on the IMF’s website (http://www.imf.org).

Perhaps the greatest uncertainties are attached to the possible impact of the Y2K problem in developing and transition economies.

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