The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Abstract

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Summary by Maitland MacFarlan

The October World Economic Outlook (WEO) was published in the midst of a particularly difficult and uncertain time in the global economy. Growth projections for 2001–02 were already revised downward in almost all regions of the world, compared with figures in the May 2001 WEO; downside risks in the outlook were further exacerbated by the September 11 terrorist attacks in the United States. Quantitative projections were finalized prior to September 11, but implications of the attacks are discussed in the main text of the WEO and in two separate boxes—one assesses possible effects on the global outlook, the other suggests some points of comparison with the 1995 earthquake in Kobe, Japan.

The WEO notes that the vulnerability of the global economy to adverse shocks has been heightened by the fact that there is now no major region that supports global activity, and by the strong cross-border linkages that are increasingly apparent across countries. These international trade and financial linkages, across both advanced and developing economies, are explored in detail in two essays. A third essay considers international linkages from the perspective of a possible new multilateral trade round. Further risks to the global outlook arise from external financing difficulties faced by some of the major emerging market economies, and from the pressures that slower growth in some countries could place on weak financial and corporate sectors (particularly in Japan). Given these concerns, the WEO emphasizes that macroeconomic policies need to remain supportive of activity to the extent possible, although there is limited room for maneuver in a number of countries—especially as result of relatively high levels of public deficits or debts. On the positive side, the WEO mentions several factors that should, in time, support economic recovery: these include the substantial macroeconomic policy easing already in progress; stronger economic fundamentals around the globe (including lower inflation and improved fiscal positions); and, in many emerging market economies, greater exchange rate flexibility and lower external vulnerabilities.

One background chapter considers the macroeconomic impact of the information technology (IT) revolution. To date, the IT revolution has largely followed the pattern of past technological advances—notably those associated with textiles production, steam power, railroads, and electricity—with an initial phase marked by a boom-and-bust cycle, both in stock prices of innovating firms and in spending on IT-intensive goods. The IT revolution stands out, however, in terms of the exceptionally sharp fall in relative prices of IT goods and the globalized production of these goods. Rapid technological progress in IT production, leading to falling relative prices, has already led to significant economic benefits, including through increased capital deepening and consumer surplus. The chapter concludes that, despite the current slump, the IT revolution will continue to yield substantial benefits to the global economy over the longer term. Many countries need to further strengthen structural policies, however, in order to facilitate the reorganization of production and to fully capture the potential benefits of IT.

A second background chapter analyzes the impact of international financial integration on developing countries. It points out that opening up financial markets to the rest of the world is a complex and often long drawn-out process. Less restrictive capital controls can significantly raise domestic investment, create spillovers to the rest of the economy from technological transfers, and deepen domestic financial markets. But, under certain circumstances, opening up the capital account may also entail significant risks. In particular, weak financial supervision and inconsistent macroeconomic policies can be associated with excessive capital inflows that are allocated inefficiently and later lead to rapid capital outflows. The conclusion is that while country experiences indicate there is no simple rule on sequencing capital account liberalization, such reforms need to be accompanied by sound and sustainable macroeconomic policies and coordinated with other measures, financial reforms in particular.

The October WEO can be found in full-text format at http://www.imf.org/research. A special issue of the WEO, with updated forecasts, will be available at this website in mid-December.

IMF Research Bulletin, December 2001
Author: International Monetary Fund. Research Dept.