In 1971–73 an average of only eight countries a year had Fund-supported adjustment programs. The world economy had just emerged from a decade (1963–72) in which the volume of world trade had grown at an average annual rate of 8½ percent and in which economic growth in industrial and developing countries was close to, or in excess of, 5 percent a year, respectively. Against such a background of very modest Fund program activity and generally favorable economic performance, the global effects of Fund programs were hardly discussed.
Scarcely more than a dozen years later, the situation is different. To begin with, the number of member countries, especially non-oil developing countries, undertaking Fund-supported adjustment programs has increased sharply in response to severe external payments deficits. In 1980–83, for example, an average of 23 countries a year had stand-by or extended Fund facility arrangements with the Fund; add to these the countries making purchases under the Fund’s compensatory financing facility and the figure rises to 31 countries a year.1 The background of this increase, of course, is the 1980–82 global recession, when, inter alia, economic growth fell short of 2 percent per annum in developing countries and of 1 percent in industrial countries, and when the volume of world trade was virtually stagnant. Seen in this light, it is perhaps not surprising that the global effects of Fund-supported adjustment programs have taken on an increased interest.
At the risk of over simplification, concerns about the global effects of Fund programs and of Fund policy prescriptions can be categorized into three areas. First, it is argued that simultaneous demand restraint policies in many program countries could impart a procyclical deflationary bias to the world economy, with adverse consequences for real output and employment in non-program and program countries alike.2 Second, there is concern about the consistency of the Fund’s policy prescriptions across countries—that, for example, the Fund’s prescriptions for appropriate monetary and fiscal policies in industrial countries might imply a lower demand for imports than the export objectives of Fund programs with non-oil developing countries.3 A third related concern is that because one program country’s imports are another’s exports, trade links among program countries may frustrate the trade objectives of individual countries.4 A final concern is that simultaneous exchange rate devaluation by many program countries, some of which export mainly primary commodities, will result primarily in a lower world price for the exports of program countries, with little beneficial effect on their export earnings. The common thread of these positions is that what might be feasible and desirable for a single program country acting alone will be neither for many program countries acting simultaneously.
This paper makes four contributions to the analysis of and debate on the global effects of Fund programs. First, it examines the strengths and weaknesses of alternative ways of defining and measuring the effects of programs, be they domestic effects or global effects. Second, it identifies the channels by which policies in program countries might be expected to affect both non-program and other program countries. Third, the paper reviews the empirical evidence on the likely size of such “aggregation” or “interdependence” effects of Fund programs. Finally, it discusses the ways in which the Fund currently takes these aggregation and interdependence effects into account, both in the design of stabilization programs and, more broadly, in the advice it gives to member countries.
Two restrictions have been placed on the scope of the paper to keep it manageable. First, in keeping with the emphasis on the global effects of Fund programs, the paper does not attempt either to appraise the effects of individual Fund-supported adjustment programs or to assess (in great detail) the effects of all Fund programs on individual regions, countries, industries, or financial institutions. Thus, for example, the paper investigates how a 15 percent change in the volume of imports in all program countries might affect export volumes and real gross national product (GNP) in industrial countries.5 But it does not investigate how, say, Fund-supported adjustment programs in Argentina, Brazil, and Mexico taken either individually or together, have affected U.S. capital goods exports or the market value of financial claims by the largest commercial banks against these particular countries.
The second restriction confines the analysis to the global effects of the most characteristic policy actions of past Fund-supported adjustment programs. (These include, for example, policies affecting the rate of domestic credit creation, the size of the public sector deficit, the level of foreign borrowing, the level of the real exchange rate and of real interest rates, and the restrictiveness of the trade and payments system.) The paper does not consider the international consequences of all possible policy scenarios by program countries. Thus, for example, although 11 of the 25 major borrowers among developing countries had Fund programs in 1983, there is no attempt to estimate the global consequences of, say, alternative large-scale debt rescheduling exercises for groups of program countries.6
The plan of the rest of the paper is as follows. Section II considers the thorny but important question of how to define the “effects” of Fund programs. It is argued there that if program effects are defined as the difference between what did happen in program countries and what would have happened in these countries in the absence of Fund programs, then any net transmission effects of programs may be quite different from what is of ten supposed. A case is likewise made for considering the long-run as well as the short-term effects of programs. Section II also shows why in practice it is so difficult to actually measure the effects of programs. Section III then presents some basic characteristics of the program country population that a priori should affect the size of any transmission effects from program countries to the rest of the world. These characteristics include: (1) the weight or share of program countries in world imports and exports; (2) the extent of trade interdependence among program countries; (3) the share of program countries in international capital flows; and (4) the size of initiating changes in import volumes, export prices, and real exchange rates in program countries themselves during the program period.
Section IV then utilizes these basic characteristics of program countries, in conjunction with some structural and behavioral parameters in industrial and oil exporting developing countries, to draw some inferences about the transmission effects of expenditure changes in program countries. Simulation results are reported for three World Trade Models, namely, the OECD Interlink Model, the Fund’s World Trade Model, and the Project LINK Model. (OECD stands for the Organization for Economic Cooperation and Development.) The focus of Section V is on the global effects of simultaneous exchange rate changes by program countries. In this connection, a distinction is made between exports of differentiated products (such as manufactures) and exports of homogeneous primary commodities. In order to identify those commodities for which exchange-rate-induced increases in production could affect the world price, data are presented on the country-concentration of production for many of the primary commodities that are most important in world trade, as well as on supply-price elasticities for these commodities. Indices of export and import “market power” for most Fund member countries are also presented. Section VI considers how the Fund takes aggregation and interdependence effects of programs into account in its operations. Emphasis is given to the World Economic Outlook exercises, to the interchange of information on programs among the Fund’s staff, and to the waiver and modification provisions in Fund programs. Finally, Section VII summarizes the paper’s main conclusions.