Front Matter

Front Matter

International Monetary Fund. Research Dept.
Published Date:
January 1989
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    © 1989 International Monetary Fund

    World economic outlook (International Monetary Fund)

    World economic outlook: a survey by the staff of the International Monetary Fund.—1980– —Washington, D.C.: The Fund, [1980–

    v.; 28 cm.—(1981–84: Occasional paper/International Monetary Fund

    ISSN 0251–6365)


    Has occasional updates, 1984–

    ISSN 0258 7440 = World economic and financial surveys

    ISSN 0256 6877 = World economic outlook (Washington)

    1. Economic history—1971– —Periodicals. I. International Monetary Fund.

    II. Series: Occasional paper (International Monetary Fund)

    HC10.W7979 84-640155



    Library of Congress [8507]

    Biannual: April, World Economic Outlook; September/October, World Economic Outlook, Revised Projections.

    ISBN 9781451944433

    Price: $20.00

    Address orders to:

    External Relations Department

    Attention: Publication Services

    International Monetary Fund

    Washington, D.C. 20431 U.S.A.

    Tel: (202) 623-7430



    The projections and analysis contained in the World Economic Outlook are the product of a comprehensive interdepartmental review of world economic developments by the staff of the International Monetary Fund. This review is carried out biannually and draws on the information the Fund staff gathers through its regular and special consultations with member countries as well as through its econometric modeling techniques. The project is coordinated in the Research Department and draws on the specialized contributions of staff members in the Fund’s five Area Departments, together with those of staff in the Exchange and Trade Relations and Fiscal Affairs Departments. The World Economic Outlook has been published annually since 1980 and biannually since 1984.

    An earlier version of the material in this report was the basis for a discussion of the world economic outlook by the Fund’s Executive Board on September 6 and 8, 1989. The current version benefits from comments by Executive Directors. However, the descriptions of developments and policies that the report contains, as well as the projections for individual countries, are those of the Fund staff and should not be attributed to Executive Directors or their national authorities.

    Conventions and Symbols

    A number of standard conventions have been employed in arriving at the projections in the report. It has been assumed that the average real exchange rates for the major currencies of a recent period (the four weeks ending August 8, 1989) will prevail through the end of the forecast period; that “present” policies of national authorities will be maintained; and that the average price of oil will be $16 a barrel in 1989 and $16.35 in 1990. These are, of course, working assumptions rather than forecasts, and the uncertainties surrounding them add to the margins of error that would in any event be involved in the report’s projections. The estimates and projections themselves are based on statistical information available on or before September 12, 1989.

    The following symbols have been used throughout this report:

    … to indicate that data are not available;

    — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

    – between years or months (e.g., 1988–89 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

    / between years or months (e.g., 1988/89) to indicate a crop or fiscal (financial) year.

    “Billion” means a thousand million.

    Minor discrepancies between constituent figures and totals are due to rounding.

    * * *

    It should be noted that the term “country” used in this report does not in all cases refer to a territorial entity that is a state as understood by international law and practice. The terms also cover some territorial entities that are not states but for which statistical data are maintained and provided internationally on a separate and independent basis.

    Introduction World Economic Outlook—Prospects

    After two years of very rapid growth in 1987 and 1988, there are now signs that the economic expansion in the industrial countries is moderating to more sustainable rates. Inflationary pressures have built up over the last year, reflecting high levels of resource utilization as well as certain temporary factors, but monetary conditions have been tightened substantially, and while the risk of a dangerous acceleration of inflation still exists, it appears to have diminished somewhat. Growth has also been strong in many developing countries, particularly the exporters of manufactures, owing partly to the rapid expansion of world trade. However, performance has been less satisfactory in three important areas: the pace of external adjustment among the largest industrial countries appears to have slowed over the past year; unemployment has remained high in some European countries; and economic activity continues to be weak in most of the heavily indebted developing countries and in the low-income countries of Africa.

    In the industrial countries, a continued moderation of output growth is expected in the second half of 1989 and in 1990, but the economic expansion is nevertheless expected to be sustained at an acceptable pace. At the same time, inflationary pressures would diminish gradually. These projections assume the continuation of a firm anti-inflationary policy stance. If the projected slowdown in demand does not materialize—for example, as a result of a premature easing of monetary conditions—an intensification of price pressures could not be ruled out given the prevailing high levels of resource utilization. In that situation, a more substantial tightening of monetary conditions would be required at some stage, with adverse consequences for interest rates, economic activity, and employment. At this juncture, the possibility that the ongoing moderation of growth would turn into a pronounced cyclical downturn seems unlikely given the absence of major cyclical imbalances—such as a large inventory overhang or an erosion of profit margins—that typically emerge prior to a recession.

    The prospect of sizable and persistent current account imbalances among the three largest industrial countries continues to cloud the medium-term outlook. Indeed, in the next few years the pattern of demand and output growth among these countries is not expected to develop in a direction that is conducive to a further reduction of external imbalances. To diminish the risks associated with a continued build up of external assets and liabilities and to strengthen the credibility of the policy coordination process, both deficit and surplus countries need to contribute to bringing the external adjustment process back on track.

    In the major deficit countries, the current high rates of capacity utilization provide favorable conditions under which to reduce further fiscal deficits and implement structural reform measures. The Canadian authorities recently have announced significant steps to tackle their large fiscal imbalance and the federal deficit of the United States has been reduced somewhat; but further deficit reduction measures will be needed in these countries, and a major effort is now required to tackle the large fiscal imbalance of Italy. Action to strengthen public finances in these countries would raise national saving, make room for an improvement in the foreign balance, and reduce upward pressure on inflation and interest rates. In the structural area, the countries with external deficits, including the United Kingdom, need to devote special attention to removing distortions that affect private saving and investment decisions.

    There is also an urgent need for a more determined effort to address structural distortions in Japan, the Federal Republic of Germany, and other surplus countries. Such distortions hinder efficiency by insulating certain sectors from market forces. Implementation of structural reforms would help to enhance potential output growth, dampen inflationary pressures, facilitate external adjustment, and reduce unemployment. Macroeconomic policies in these countries should continue to sustain adequate growth of domestic demand consistent with the objective of keeping inflation under control. The current buoyancy of demand suggests that an expansionary shift in macroeconomic policies is not warranted at present, but these countries should be prepared to take timely steps should the need arise.

    The need to restore adequate growth in the developing countries with debt-servicing problems remains particularly urgent. After close to a decade of unsatisfactory economic performance, it is clear that considerable additional efforts are required by the indebted countries themselves, as well as by the international community. The maintenance of satisfactory growth in the industrial countries remains a crucial requirement for the success of the debt strategy, and it has been a major contributor to the reduction of the debt burden of some countries in the past few years. Also, to enable the developing countries to expand their exports and strengthen their debt-servicing capacity, the industrial countries have a major responsibility—shared by the developing countries themselves—of reversing the recent rise in protectionist barriers, resisting the trend toward managed trade, and moving decisively to reduce existing trade restrictions on a multilateral basis. Moreover, there is a need to reinforce recent steps taken by official creditors to address the continuing poor economic performance of low-income indebted countries. Many of these countries, especially those in sub-Saharan Africa, are projected to experience further declines in their already depressed standards of living, reflecting fundamental structural deficiencies, and in spite of substantial inward resource transfers.

    Two elements of the debt strategy that have been particularly problematic are the efforts to improve economic performance in the indebted countries through more appropriate fiscal, monetary, and structural policies, and the need to lower the net outward transfer of resources, particularly from the middle-income debtors. The strengthening of the debt strategy that has taken place since the beginning of 1989 is based on the recognition of the complex links that exist between the developing countries’ debt-servicing capacity, their overall debt burden, and the incentives for consumers and investors to increase saving and capital formation. Together with an adequate flow of new lending from commercial and official creditors, the growing importance of debt and debt-service reduction in the menu of options should help to promote growth by increasing the availability of resources in debt-problem countries. At the same time, it is important to realize that debt reduction is no panacea and that strong adjustment measures remain the key to fundamental improvements in economic performance.

    This report is organized as follows. Chapter I reviews recent developments in the world economy and presents the Fund staff’s projections for 1989 and 1990. Chapter II presents the medium-term outlook for the industrial countries and examines a number of alternative medium- and long-term scenarios, and Chapter III discusses major policy issues in the industrial countries. Chapter IV presents the medium-term baseline scenario for developing countries and analyzes the conditions required to restore adequate growth.1

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