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 Thomas Helbling

In addition to the widely known, comprehensive review of recent global developments, prospects, risks, and policy recommendations, the latest IMF World Economic Outlook (WEO) also includes two analytical chapters on trade and its links with finance—topical issues that should be of interest to both analysts and policymakers. This article summarizes the analytical work contained in the September 2002 WEO.

The main analytical chapter of the latest WEO focuses on the interaction between trade and financial integration. Historical experience suggests that international trade integration and international financial integration tend to move together over time and across countries. In the last major episode of globalization, from 1870 to 1914, advances in transportation and communication technology drove international economic integration, while policy liberalization is the main force in the current period. With policy liberalization largely driving integration now, the sequencing of policy reforms, thus, matters. Based on the empirical analysis of integration patterns for trade and finance, and their effects on the risks of external financial crises and macro-economic volatility, the WEO states that integration in both the trade and financial domains is necessary to reap the full benefits of globalization. With unbalanced integration, benefits are smaller and risks are greater, as recent cases of financial integration leaping ahead of trade integration have shown. Given this experience, a gravity model is used in the main analytical chapter to look at the major factors determining levels of merchandise trade.

The WEO’s second analytical chapter contains three essays on topical issues related to trade and finance. The first essay examines whether current external imbalances are worrisome or not. It is argued that policymakers should continue to be concerned about current accounts despite recent discussions of their irrelevance. A trade balance adjustment of just a few percentage points of GDP may require significant changes in the tradable goods sector and lead to large and possibly disruptive exchange rate movements. After analyzing the evolution of external imbalances during the 1990s, from a multilateral perspective, the essay concludes that current levels of current account deficits and surpluses are not viable over the medium term. While macroeconomic policies should not target current account balances directly, the essay emphasizes that policies should, nevertheless, try to minimize the risk of rapid and disruptive current account adjustments. In deficit countries, this would mean credible medium-term fiscal consolidation is called for whereas, in surplus countries, authorities should press ahead with needed structural reforms to foster growth.

The second essay looks at how agricultural policies of industrial countries affect developing countries. The essay provides detailed, partial, and general equilibrium analyses of the welfare costs of agricultural support policies, more broadly and for specific commodities. The main conclusion is that removing agricultural support in industrial countries would raise world real income by at least $100 billion a year, with most of the gains accruing to industrial countries. Developing countries would also gain, in an amount equal to one sixth of global aid flows. The removal of agricultural supports in developing countries would confer even larger benefits to the developing world. The importance of removing supports by a multilateral method is underscored. The essay also argues that industrial countries are best placed to take the lead in agricultural trade liberalization, given their wealth and the small size of their agricultural sectors.

The third essay is a study of corporate financial structure across emerging markets. An analysis of related indicators in 18 emerging market economies finds that corporations in east Asian emerging mrkets have substantially higher ratios of debt to assets, and debt to equity, than Latin American and emerging European corporates. The east Asian corporations also tend to rely more on short-term debt. Detailed empirical analysis of main determinants finds the two most important factors in explaining differences in corporate health indicators across emerging market regions. First, as financial systems develop, corporate leverage tends to rise first, as corporates find it easier to borrow. Equity financing by corporates usually only increases at more advanced stages of financial development. Second, firms in emerging market economies that are more open to foreign investors will tend to find it easier to sell equity and reduce their dependence on shorter-term domestic debt.