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FINANCE & DEVELOPMENT A QUARTERLY PUBLICATION OF THE INTERNATIONAL MONETARY FUND

March 2003 • Volume 40 • Number 1

Finance & Development is published quarterly in English, Arabic, Chinese, French, Russian, and Spanish by the International Monetary Fund.

English edition ISSN 0015-1947

Laura Wallace

EDITOR-IN-CHIEF

Asimina Caminis

SENIOR EDITOR

Jeremy Clift

Elisa Diehl

Christine Ebrahim-zadeh

Natalie Hairfield

ASSISTANT EDITORS

Luisa Menjivar

ART EDITOR

Lai Oy Louie

GRAPHIC ARTIST

Lijun Li

Kelley E. McCollum

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Kenneth S. Rogoff

CONTRIBUTING EDITOR

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Peter Allum

Francesco Caramazza

Adrienne Cheasty

Paula De Masi

Andrew Feltenstein

Paul Hilbers

Ashoka Mody

Piroska M. Nagy

Mark Plant

Thomas Richardson

Jerald Schiff

Garry J. Schinasi

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FROM THE EDITOR

AS WE GO to press, the possibility of military conflict casts a shadow over the global economic outlook—and especially the economic outlook for the Middle East and North Africa. The March issue of Finance & Development focuses on this region, asking why so many countries have been stuck on slow growth paths for at least the past two decades, effectively sidelined from globalization and the benefits of closer economic links with the rest of the world. About 30 percent of the region’s population—one of the fastest growing in the world—lives on less than $2 a day, and the job picture is bleak, fueling social tensions and migration. In six articles, we examine the different reasons—from lagging political reforms and dominant public sectors to underdeveloped financial markets, high trade barriers, and inappropriate exchange rate regimes. The contributors conclude that the region’s best hope lies in sticking to the economic reforms that will put it back on the high growth path of the 1970s, which had been made possible by the surge in oil prices. The encouraging news is that those countries that did undertake reform in the late 1980s and early 1990s—such as Egypt, Jordan, Mauritania, Morocco, and Tunisia—and those that have undertaken reform more recently—such as Oman and Bahrain—have reaped the benefits of higher growth rates and greater integration with the world economy. But in those countries where the reform momentum has faltered, growth rates have reverted to their low averages.

Of course, the volatility and unpredictability of oil prices and revenues—and the worry about what to do when the oil runs out—pose major challenges for all oil-exporting countries, not just in the Middle East. We read in “What goes Up …” that policymakers would do well to follow some prudent guidelines—in particular, trying to avoid a stop-go pattern of expenditure related to oil price movements and taking a longer-term view on the use of exhaustible oil resources. But on this score, many oil-exporting countries have performed poorly. Why is that so? In “Managing Oil Wealth,” the authors identify some of the underlying political determinants of fiscal performance in a wide range of political regimes. They argue that mature democracies—as opposed to other regimes, such as factional democracies—clearly have an edge in managing oil wealth. But, whatever political system is in place, cautious expenditure management is a continuing struggle.

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With this issue of F&D, we introduce two new features and a new look to spice up our offerings and enhance our readability. In People in Economics, we shine the spotlight on Vernon Smith, one of the winners of the 2002 Nobel Prize in economics for his pathbreaking work in “experimental economics”—a field that allows economists to test market theories in a controlled laboratory environment. Is economics inching closer to the precision of the physical sciences? In Back to Basics, we study the phenomenon called “Dutch disease”—the problems that can arise for an economy when there is an influx of revenues from natural resources, foreign aid, or other sources.

In Straight Talk, Kenneth Rogoff, the IMF’s Economic Counsellor and Research Department Director, argues against grandiose schemes to coordinate interest rate policies for the dollar, the yen, and the euro at the international level. He insists—taking a perhaps heretical stance—that the benefits of any scheme, no matter how well designed and implemented, would be small compared with those flowing from the Group of Three central banks’ simply following good domestic monetary policies.

Laura Wallace

Editor-in-Chief

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