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GlobalEconomicProspectsand the Developing Countries

2001Embargoed until Tuesday, December 5, 2 p.m. EST

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Copyright © 2001 by the International Bankfor Reconstruction and Development/The World Bank1818 H Street, NW, Washington, DC 20433, USA

All rights reservedManufactured in the United States of AmericaFirst printing December 2000

This publication has been compiled by the staff of the Development Prospects Group of theWorld Bank’s Development Economics Vice Presidency. The World Bank does not acceptresponsibility for the accuracy or completeness of this publication. Any judgments expressedare those of World Bank staff or consultants and do not necessarily reflect the views of theBoard of Executive Directors or the governments they represent.

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Acknowledgments vii

Summary ix

Abbreviations, Acronyms, and Data Notes xiii

Chapter 1 Prospects for Developing Countries and World Trade 1Long-term growth in industrial countries is projected to be higher 4World trade remains on a long-term high-growth path 12Private capital flows remain volatile 17Commodity prices exhibit divergent recoveries 20Developing countries’ recovery is unexpectedly rapid, and prospects for long-term

growth have improved 25Vulnerabilities are significant 32Recent trends and prospects for poverty reduction 34Notes 42References 44

Chapter 2 Trade Policies in the 1990s and the Poorest Countries 000Reductions in barriers to trade 000Trends in trade and economic growth 000Weaknesses in domestic trade-related policies 000Protection in industrial countries 000Notes 000References 000Appendix: firm interviews and survey 000

Chapter 3 Standards, Developing Countries, and the Global Trade System 000The regulation of standards: setting the stage 000Product standards and regulatory barriers to trade 000Labor standards and trade sanctions 000Environmental standards and trade 000Notes 000References 000

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Chapter 4 Electronic Commerce and Developing Countries 000Emergence of electronic commerce 000The digital divide 000Effects on productivity in industrial and developing countries 000Effects on international trade in developing countries 000Effects on income distribution 000Impediments to Internet use in developing countries and the role of policies 000Challenges to regulatory regimes in developing countries 000Notes 000References 000

Appendix 1 Regional Economic Prospects 000

Appendix 2 Global Commodity Price Prospects 000

Technical Notes 000

Classification of Economies 000

Figures1.1 Industrial production in developing regions 0001.2 GDP growth for major industrial countries, 1998–2002 0001.3 U.S. retail sales and the NASDAQ index 0001.4 Total retail sales of durable goods and autos 0001.5 IT (information technology) investment growth per employed person

and productivity growth, 1980–1999 0001.6 Japanese corporate profits and private capital spending 0001.7 German exports, foreign orders, and manufacturing output 0001.8 Growth of GDP per employed person: United States and European

Union 0001.9 Trade versus GDP growth 0001.10 East Asian crisis-5 industrial production and import volume 0001.11 Export volume and market growth, 1997–2000 0001.12 GDP and export volume growth 0001.13 Number of WTO notifications of regional integration agreements (RIAs) 0001.14 Intra-RIA exports as a share of RIA’s total exports 0001.15 Net capital flows to developing countries, 1985–2000 0001.16 Sectoral breakout of bond financing by developing countries,

1997–June 2000 0001.17 FDI flows to developing countries, 1990s 0001.18 Crude oil prices, January 1990–September 2000 0001.19 Crude oil prices, 1960–2010 0001.20 Divergent recoveries of commodity prices 0001.21 Real commodity prices, 1900–1999 0001.22 Developing regions real GDP growth, 1999–2002 0001.23 GDP per capita growth, 1990–20101.24 Growth of real per capita GDP, developing countries as a group,

1960–2010 000

G L O B A L E C O N O M I C P R O S P E C T S

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1.25 Growth of real per capita GDP, Latin America and the Caribbean,Sub-Saharan Africa, Middle East and North Africa, 1960–2000

2.1 Average unweighted tariff rates by region 0002.2 Merchandise export and GDP per capita growth in developing countries

in 1990s 0002.3 Merchandise export and GDP per capita growth in poor developing countries

in 1990s 0002.4 Real effective exchange rate volatility and growth in 1990s 0002.5 Real effective exchange rate behavior in selected poor countries 0002.6 Imports of manufactures from developing countries as a percentage of apparent

consumption 0002.7 Share of developing countries in world trade 0003.1 WTO enquiry point notification, by country group, 1995 and 1999 0003.2 Number of notifications based on the TBT Agreement, 1995–2000 0003.3 Number of notifications based on the SPS Agreement, 1995–2000 0004.1 Estimates of electronic commerce in industrial countries, 1999–2000 0004.2 Estimates of internet access, 1990–2000 0004.3 Regional internet access 0004.4 Access to telecommunications 0004.5 Cost savings from e-commerce 0004.6 New customers gained from Alibaba website 0004.7 Increased sales reported because of Alibaba website 0004.8 Internet monthly access charge as a percentage of GDP per capita 0004.9 Main telephone lines per 100 inhabitants, developing countries, 1998 0004.10 Developing country privatization in telecommunications, 1990–98 0004.11 Information technology jobs unfilled because of skill shortages, 1998 0004.12 Internet use in industrial countries by knowledge of English, 1998–99 0004.13 Bond versus bank financing 000

Tables1.1 Global conditions affecting growth in developing countries

and World GDP Growth 0001.2 Intra- and extra-regional trade 0001.3 Annual direct terms-of-date changes for developing countries from a

$10 increase in oil prices1.4 Annual percentage change in nominal energy and non-energy commodity prices,

1981–2010 0001.5 Growth of World GDP, 1998–2002 0001.6 Growth of World GDP per-capita, 1980s through 2010 0001.7 Forecast Assumptions: Developing Countries 0001.8 Population living on less than $1 per day and headcount index in developing

countries, 1987, 1990, and 1998 0001.9 Population living on less than $2 per day and head count index in developing

countries, 1987, 1990, and 1998 0001.10 Population estimates and projections, 1998–2015 0001.11 Poverty in developing countries under scenarios of base case growth (scenario A);

low case growth (scenario B); and 1990s average growth, 1990, 1998, 2015 000

C O N T E N T S

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1.12 Regional breakdown of number of people living on less than $1 per day and head count index in developing countries, under scenarios of base case growth (scenario A) and low case growth (scenario B), 1990, 1998, and 2015 000

1.13 Regional breakdown of number of people living on less than $2 per day and head count index in developing countries, under scenarios of base case growth (scenario A) and low case growth (scenario B), 1990, 1998, and 2015 000

A1 Membership of Selected Major Regional Integration Agreements (RIAs) and Date ofFormation 000

2.1 Standard deviation of tariff rates 0002.2 Frequency of total core nontariff measures for developing countries, 1989–98 0002.3 Countries imposing restrictions on payments for current account transactions 0002.4 Average black market premium 0002.5 The international environment 0002.6 GDP and merchandise export growth rates 0002.7 GDP, Services and merchandise export growth rates 0002.8 Decomposition of merchandise export growth for the sample countries 0002.9 Growth rates by income level for the sample countries 0002.10 Tariffs in selected African countries 0002.11 Developing country exports to Quad countries facing tariffs of more than

50 percent 0002.12 Average tariff rates by importing and exporting region 0002.13 Producer support estimates for OECD countries 000A2.1 Sample countries in various charts and tables 0003.1 Summary of economy-wide studies assessing the impacts of trade liberalization on

pollution 0003.2 Evidence on international competitiveness and environmental regulation 0004.1 Future Internet access speeds 000

Boxes1.1 U.S. Labor Productivity and Information Technology 0001.2 North-South regional arrangements 0001.3 Trends in inequality 0002.1 Openness and growth—evidence, old and new 0002.2 Trends in volatility 0002.3 Economic factors contributing to conflict 0002.4 Exchange rate overvaluation in the CFA countries 0002.5 The integrated framework for Least Developed Countries 0002.6 Food processing 0003.1 Mutual Recognition Agreements 0003.2 The Trade-Related Intellectual Property Agreement (TRIPs)

and developing countries 0003.3 Evidence on the “race to the bottom” 0004.1 Electronic data interchange (EDI) systems 0004.2 The Internet and primary commodity 000


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This report was prepared by the Development Prospects Group, and drew from resourcesthroughout the Development Economics Vice-Presidency, the Poverty Reduction Board,and World Bank operational regions. The principal author of the report was William

Shaw, with direction by Uri Dadush. The chapter authors were Hans Timmer (chapter 1),Ataman Aksoy (chapter 2), Dominique van der Mensbrugghe (chapter 3) and William Shaw(chapter 4). The report was prepared under the general direction of Jo Ritzen and Nicholas Stern.

The report drew on inputs by other staff of the Development Economics Vice-Presidency andfrom throughout the Bank. Ibrahim Al-Ghelaiqah, Caroline Farah, Himmat Kalsi, Robert Key-fitz, Annette I. De Kleine, Robert Lynn, Dominique van der Mensbrugghe, Fernando Martel Gar-cia, Shoko Negishi, and Mick Riordan contributed to the analysis of global economic trends andprospects in chapter 1. Tamar Manuelyan Atinc, Valerie Kozel, Giovanna Prennushi, ShaohuaChen, Martin Ravallion, and Aristomene Varoudakis contributed to the discussion of poverty.Betty Dow, Faezeh Fouraton, Carol Gabyzon, Theresa Goldberg, Ashish Narain, Francis Ng,Dorsati Madani, Donald Mitchell, and Konstantin Senyut contributed to chapter 2. ConstantineMichalopoulos and John S. Wilson contributed to chapter 3. Carol Gabyzon, Somik Lall, AshishNarain, Andrew Sunil Rajkumar, and David Wheeler contributed to chapter 4. And John Baffes,Betty Dow, Donald Mitchell, and Shane Streifel contributed to the analysis of commodity pricesin chapter 1 and the annex.

Many others from inside and outside the Bank provided inputs, comments, guidance, andsupport at various stages of the report’s publication. John Beghin, David Rohland-Holst, andMatthew Slaughter wrote background papers on trade issues. Henry Ergas and Iain Little wrotea background paper on electronic commerce. Gary Hufbauer, Arvind Panagariya, FranciscoRodriguez and Alan Winters served as outside reviewers. Richard Newfarmer, Gene Tidrik,Shanta Devarajan, and Carlos Braga were discussants at the Bankwide review. We would partic-ularly like to thank Gordon Betcherman, Milan Brahmbhatt, Sara Calvo, Richard Eglin, DavidEllerman, Michael Finger, Carsten Fink, Andrea Goldstein, Bernard Hoekman, Albert Keidel,Michael Klein, Ioannis Kessides, Amy Luinstra, Will Martin, Aaditya Mattoo, Marcelo Olarreaga,Gary Pursell, David Tarr, and Edith Wilson for their helpful comments. The Development DataGroup contributed to the Appendix. Betty Sun served as the External Affairs task manager,Robert King managed dissemination from the Development Prospects Group, and Phil Haymanaged media arrangements. Sarah Crowe served as the principal assistant to the team andKatherine Rollins assisted with chapter 1. Book design, editing, and production were directed andmanaged by the Production Services Unit of the World Bank’s Office of the Publisher.

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Acknowledgments


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TECHNOLOGICAL INNOVATIONS AND THE

dismantling of trade barriers over thepast decade have contributed to an

acceleration of growth in global trade. Thisacceleration has been associated with fastergrowth in developing countries as a group.However, many of the poorest countries havenot kept pace. This year’s Global EconomicProspects focuses on international trade anddiscusses policies that are required if devel-oping countries are to benefit from globalintegration.

Prospects for developing countriesand world trade

The global economy is likely approaching acyclical high in 2000, boosted by a further

acceleration of growth in the United States, therecovery in Europe and Japan, and the sharprebound in countries affected by the global fi-nancial crisis. World trade volumes are likelyto increase by 12.5 percent, the highest rate ofgrowth since before the first oil shock of the1970s. A moderation of growth in the crisiscountries and slower consumption growth inthe United States are likely to lead to a decel-eration of output growth over the next year.

The apparent shift upward in trend pro-ductivity growth in the United States, increasedlabor market flexibility and product marketcompetition in Europe, and steps toward fi-nancial and corporate restructuring in Japanhave improved the prospects for long-term

growth. The same applies in developing coun-tries, where liberalization of markets, morestable macroeconomic policies, and techno-logical change have promoted integration. In-dicators of human capital, including schoolenrollment and literacy rates, show broad im-provement across most developing regions.

However, cyclical and structural aspectsof the current boom have increased imbal-ances and tensions in the global economy. Eas-ier monetary policy in the United States andincreased fiscal stimulus in Japan boostedgrowth from the depths of the financial crisis,but these policies also increased the alreadylarge U.S. current account deficit (4.5 percentof GDP) and Japanese government debt (115percent of GDP). The strong global recoveryof 1999–2000, coupled with the sharp reduc-tion in OPEC (Organization of Petroleum Ex-porting Countries) supply, caused a surge inoil prices. Structural reforms and rapid tech-nological change have also generated politicaltensions. The fast pace of global economicintegration has accentuated competition andincreased uncertainty, particularly for firms in declining industries and their workers. In-equality both among and within countries ap-pears to have risen, in part the result of tech-nological progress.

A low-case scenario assumes a less favor-able resolution of these imbalances and ten-sions, marked by continued high oil prices anda reversal of international investment flowsfrom the United States. The resulting reces-

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sion, coming on the heels of the global finan-cial crisis, may feed “reform fatigue” and thuslower developing countries’ long-term growthpotential.

Trade policies in the 1990s and the poorest countries

Over the past decade, developing countriesreduced the level and dispersion of tariffs,

dismantled nontariff trade barriers, and in-creased reliance on market forces to allocateforeign exchange. These policies, coupled withother market reforms, were associated with anacceleration of output and export growth, ex-cept for countries that were affected by conflictor the breakup of the Soviet Union. The percapita income of small, low-income countries(thus excluding China and India) declined during the 1990s, but growth averaged 1 per-cent a year if countries involved in conflict and countries in transition are excluded. Thisrepresents a significant acceleration comparedwith the 1980s but is still well below the aver-age of middle-income countries.

Weaknesses in trade-related policies con-tinued to impede growth in many of the poor-est countries. Appreciated real exchange ratesand high real exchange rate volatility haveoften been associated with a muted export re-sponse to trade liberalization; per capita in-come growth was significantly faster in poorcountries with relatively stable real exchangerates. The absence of effective duty exemp-tion/drawback programs, coupled with fiscalreliance on tariffs on intermediate and capitalgoods, has increased costs for exporters. Fi-nally, weak export infrastructure, inadequateancillary export services, and high transportcosts—often in part the result of policy short-comings—have left many countries (particu-larly the landlocked ones) at a competitive dis-advantage on international markets.

High trade barriers imposed by industrialcountries on agriculture and processed foodimports, along with agricultural subsidies,have contributed to the decline in developingcountries’ share of world trade in these com-modities. These trade distortions have partic-

ularly affected the poorest countries, becausea host of other domestic policy and institu-tional weaknesses inhibit their diversificationinto less restricted sectors.

Standards, developing countries,and the global trading system

Product standards (rules governing the char-acteristics of goods that are generally im-

posed to protect health and safety) are criticalto the effective functioning of markets andprovide important support to the trade system.However, many developing countries (particu-larly the poorest ones) lack the technologicaland financial resources to develop productstandards effectively, meet industrial countries’import requirements, and bring disputes whenstandards are used to discriminate against theirexports.

Adherence to labor and environmental stan-dards (for example, the right to form unions andlimits on pollution) is critical to economic ef-ficiency and welfare. However, pressures to usetrade sanctions to support labor and environ-mental standards threaten to restrict develop-ing countries’ access to international marketswhile doing little to improve welfare. Laborand environmental standards generally improveas countries develop, but low labor and envi-ronmental standards are not usually a signifi-cant source of competitive advantage. The im-position of trade sanctions is vulnerable tocapture by protectionist interests and hurtsworkers by reducing demand for the goodsthey produce. Even if the threat of sanctionsimproves conditions for some workers, aver-age working conditions in the economy areunlikely to improve. Similarly, empirical stud-ies show that imposing trade sanctions on ex-porters can cause considerable output losseswhile doing little to reduce pollution.

Electronic commerce and thedeveloping countries

The Internet will boost efficiency and en-hance market integration, particularly in

developing countries that are most disadvan-


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S U M M A R Y

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taged by poor access to information. The Inter-net will raise productivity through increasedprocurement system efficiency, strengthenedinventory control, lowered retail transactioncosts, and elimination or transformation of in-termediaries. The cost of reaching industrialcountry markets will fall, generating large gainsfrom trade. Developing-country firms that selllabor-intensive, differentiated products (for ex-ample, crafts, software, and business services—particularly services involving the remote pro-cessing of routine information) will experienceincreased demand. Developing-country firmsalso will benefit from the opportunity to leap-frog to the most advanced technologies.

Nevertheless, Internet access is grossly un-equal across countries, and the Internet alsobrings increased danger of economic marginal-ization to countries that cannot access it effec-tively. For example, developing-country firms

that lack the reputation to bid on the new on-line exchanges or the technology to interact ef-ficiently with more sophisticated firms couldsee reduced demand. While the growing use ofcell phones and other technologies should in-crease Internet access rapidly over the next 10years, access is likely to remain limited in percapita terms, especially in the poorest countries.

Taking advantage of electronic commercerequires an open economy to promote compe-tition and diffusion of Internet technologies;improved international coordination (for ex-ample, in confronting challenges to domestictax and financial systems); and efficient so-cial and infrastructure services, in particular a competitive telecommunications sector and awell-educated labor force. The importance ofnetwork effects and first-mover advantagesemphasizes the importance of government sup-port for achieving these goals.


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Abbreviations, Acronyms,and Data Notes

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APEC Asia Pacific Economic Cooperation

CAP Common Agricultural Policy

CEE Central and Eastern Europe (Central and Eastern European countries areCEECs)

CFA Communauté Financière Africaine

CIS Commonwealth of Independent States

EBRD European Bank for Reconstruction and Development

ECA Europe and Central Asia

EMU European Monetary Union

EU European Union

FAO Food and Agriculture Organization of the United Nations

FDI Foreign direct investment

GATT General Agreement on Tariffs and Trade

GDP Gross domestic product

GSP Generalized System of Preferences

HIPC Heavily Indebted Poor Countries

HIV/AIDS human immunodeficiency virus/acquired immune deficiency syndrome

ILO International Labour Organisation

IT Information technology

LAC Latin America and the Caribbean

LIBOR London interbank offered rate.

LDC Least-developed countries

M&A Mergers and acquisitions

MNA Middle East and North Africa (use MNA instead of MENA)

Mercosur Latin American Southern Cone trade bloc (Argentina, Brazil, Paraguay, and Uruguay)

MFN Most favored nation


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MFP Multifactor productivity

MRA Mutual recognition agreement

MUV Manufactures unit value index

NAFTA North American Free Trade Agreement

NASDAQ National Association of Securities Dealers Automated Quotation

NIE Newly industrializing economies

NTBs Nontariff barriers

OECD Organisation for Economic Development and Co-operation

OPEC Organization of Petroleum Exporting Countries

PSE Producer support estimate

RIA Regional integration agreement

saar Seasonally adjusted annualized rate

TBT Technical Barriers to Trade

TRIPs Trade-related intellectual property requirements

SPS Sanitary and Phytosanitary Standards

UNAIDS Joint United Nations Programme on HIV/AIDS

WTO World Trade Organization

Data notesThe “classification of economies” tables atthe end of this volume classify economies byincome, region, export category, and indebt-edness. Unless otherwise indicated, the term“developing countries” as used in this vol-ume covers all low- and middle-incomecountries, including the transition economies.

The following norms are used throughout:

• Billion is 1,000 million.• All dollar figures are U.S. dollars.• In general, data for periods through 1998

are actual, data for 1999 are estimated,and data for 2000 onward are projected.


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WORLD ECONOMIC ACTIVITY DURING

2000 is proceeding at the fastest pacein over a decade, with developing-

country output growth expected to exceed 5percent. World trade volumes are expected torise by a record 12.5 percent in the year. Al-though oil prices have surged by more than 50 percent, inflation in both industrial and de-veloping countries continues, thus far, to be rel-atively subdued. But developments in oil mar-kets remain a major uncertainty in the outlook,as do the sustainability of the remarkable non-inflationary U.S. expansion and the generalfragility of financial systems in East Asia. Thischapter reviews the cyclical and structural fac-tors responsible for the robust economic ex-pansion and discusses the major challenges andrisks ahead, in both the short and the mediumterms. The main conclusions are:

The world economy recovered remarkablywell and is likely approaching a cyclicalhigh in 2000Many of the developing countries that experi-enced a sharp rebound after the 1997–98 re-cession appear to have reached cyclical peaks,with the five East Asian countries hit hardestby the financial crisis the clearest example ofthis development (figure 1.1). The strength ofthe recovery in Latin America has been im-pressive, but momentum appeared to be wan-ing in the second half of the year. And the re-bound in the Russian Federation has also beenunexpectedly strong, though largely dependent

on high oil revenues and more fragile than inEast Asia. With oil prices expected to ease inthe medium term and the effect of the 1998ruble devaluation wearing off, the RussianFederation’s current GDP growth of about 7.2percent is expected to slow significantly overthe medium term. Sub-Saharan Africa has ex-perienced a less uniform recovery, with oilexporters gaining and commodity dependentoil-importing nations suffering large terms-of-trade losses. These synchronous recoverieshave carried developing-country growth to apeak of 5.3 percent in 2000—0.7 percent-age points faster than projected nine monthsago in the World Bank’s Global DevelopmentFinance 2000—with a slight slowing to 5.0percent expected next year (table 1.1). Growthin the industrial countries may also be near-ing a turning point; it is expected to slow from this year’s rapid 3.7 percent pace to 2.9percent in 2001. Moderation of consumerdemand in the United States, following in-terest rate increases and stock market de-clines, is the principal factor behind this mod-est deceleration.

The current double-digit growth of worldtrade, the strongest since before the first oilshock of the early 1970s, is clearly a cyclicalphenomenon tied to robust world activity lev-els. During the upswing, as inventories were re-plenished and investments accelerated, tradeexpanded much faster than the economy as awhole. Once stocks of durable goods and capi-tal goods have adjusted, growth rates of trade

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Prospects for Developing Countriesand World Trade

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should moderate to around 8 percent, which isstill a high level by historical standards.

Foundations for longer-term growth haveimproved in many industrial anddeveloping regions . . .Industrial countries have been undergoing aperiod of accelerated transformation, restruc-turing, and adjustment that is now starting topay off. The United States appears to have cre-ated an institutional and policy environmentthat supports the adoption of new informa-tion and communications technologies at arapid pace, contributing to a substantial accel-eration in productivity growth. Most Euro-pean countries have made some progress inrendering labor markets more flexible and ex-posing product and service markets to greatercompetition; these processes have been facili-tated by regional integration, including, mostrecently, the introduction of a single currency.The recent decline in Euro Area unemploy-ment rates, and the more than doubled valueof merger and acquisitions (M&A) activitiesand corporate bond issues in 1999, offers some

indication of accelerated restructuring andimproved business confidence. And Japan ap-pears to be emerging from a long period ofsluggish growth. This follows the initiation ofserious efforts toward financial and corporaterestructuring, although a lack of self-sustainingeffective demand, especially from private con-sumers, is still a danger.

Liberalization, accompanying policy mea-sures, and technological change in many devel-oping countries have led to a spectacular in-crease in openness during the 1990s. Foreigndirect investment (FDI) flows into developingcountries rose from 0.5 percent of developingcountries’ GDP in 1990 to 2.7 percent at theend of the decade. Despite the financial crisis,exports of goods and services from developingcountries increased by 10 percent a year duringthe 1990s, contrasted with less than 4 percentduring the 1980s. Competition from both do-mestic and foreign sources has increased in thismore open environment, and macroeconomicpolicies have become more prudent, keepinginflation low and reducing some of the largerfiscal deficits. And indicators of human capital,


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Figure 1.1 Industrial production in developing regionsThree-month moving average, percent year over year

–6

0

6

12

18

Jan. 1997 July 1997 Jan. 1998 July 1998 Jan. 1999 July 1999

CEE

All developing regions

East Asia

LAC

Jan. 2000 July 2000

Note: Latest data for East Asia are from July, for CEE (Central and Eastern Europe are from June, for developing regions arefrom June, and for LAC (Latin America and the Caribbean) are from July.Source: Datastream; and World Bank staff estimates.

including school enrollment and illiteracyrates, have shown broad improvement acrossmost developing regions. With these structuralchanges, many countries in Latin America,Central Europe, and Sub-Saharan Africa ap-pear to have considerably improved theirgrowth potential. Assuming continued corpo-rate and financial restructuring to deal with the debt overhang left by the crisis, countries in

East Asia should achieve high rates of growthover the next decade.

. . . but these favorable cyclical andstructural conditions contain built-intensionsDevelopments during the global financial crisissowed the seeds for some severe imbalancesthat have remained or become evident during

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Table 1.1 Global conditions affecting growth in developing countries and world GDP growth(percentage change from previous year, except interest rates and oil price)

Current Current March 2000Estimate Forecasts Forecasts

1999 2000 2001 2002 2000 2001 2002

Global Conditions

World trade (volume) 5.8 12.5 8.0 6.8 8.3 6.9 6.5

Inflation (consumer prices)G-7 OECD countriesa,b 1.2 2.0 1.9 1.9 1.8 1.9 2.0United States 2.2 3.4 3.0 2.8 2.7 2.5 2.6

Commodity prices (nominal $)Commodity prices, except oil ($) –11.2 –0.8 3.4 4.9 5.6 3.9 3.3Oil price ($, weighted average), $/bbl 18.1 28.0 25.0 21.0 23.0 19.0 18.0Oil price, Percent Change 38.3 55.0 –10.7 –16.0 27.3 –17.4 –5.3Manufactures export unit value ($) c –2.7 –2.3 3.6 3.7 2.5 2.5 2.6

Interest ratesLIBOR, 6 months (US$, percent per year) 5.5 6.7 6.8 6.2 6.5 6.5 5.5EURIBOR, 6 months (Euro, percent per year) 3.0 4.5 5.0 4.6 ... ... ...

World GDP growth 2.8 4.1 3.4 3.2 3.5 3.1 3.1High-income countries 2.7 3.8 3.0 2.8 3.2 2.7 2.6

OECD countries 2.7 3.7 2.9 2.7 3.0 2.6 2.5United States 4.2 5.1 3.2 2.9 3.8 2.7 2.8Japan 0.3 2.0 2.1 2.2 1.2 1.4 1.6Euro Area 2.4 3.4 3.2 2.8 3.4 3.1 2.8

Non-OECD countries 4.2 6.3 5.1 5.1 4.6 4.8 5.1

Developing countries 3.2 5.3 5.0 4.8 4.6 4.8 4.8East Asia and Pacific 6.9 7.2 6.4 6.0 6.6 6.3 6.1Europe and Central Asia (ECA) 1.0 5.2 4.3 3.9 2.5 3.4 3.6Latin America and the Caribbean 0.1 4.0 4.1 4.3 3.6 3.8 4.4Middle East and North Africa 2.2 3.1 3.8 3.6 3.5 3.6 3.6South Asia 5.7 6.0 5.5 5.5 5.9 5.8 5.5Sub-Saharan Africa 2.1 2.7 3.4 3.7 3.2 3.7 3.8

Memorandum itemsEast Asian crisis–affected countriesd 6.7 6.9 5.5 5.1 5.7 5.4 5.1Transition countries of ECA 2.5 5.0 4.2 3.7 2.1 3.0 3.3Developing countries

Excluding the Transition countries 3.3 5.3 5.1 5.0 5.0 5.0 5.1Excluding China and India 2.2 4.7 4.4 4.3 3.8 4.0 4.2

... Not available.a. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.b. In local currency, aggregated using 1995 GDP weights.c. Unit value index of manufactures exports from G-5 to developing countries, expressed in U.S. dollars.d. Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand.Source: Development Prospects Group, baseline, October 2000; and GDF projections of March 2000.

the current boom. The adoption of an easiermonetary policy in the United States to avert a global recession in late 1998 contributed to an acceleration of U.S. demand growth and awidening of the current account deficit, whichis likely to breach 4.5 percent of GDP in 2000. Fiscal stimulus in Japan, while helpingto sustain demand during the worst part of thecrisis, has further increased the huge burden of government debt to some 115 percent ofGDP. Nonperforming loans in the Asian crisiscountries reached 30 to 50 percent of GDP and have been declining only gradually. Thefinancial vulnerabilities translated into an av-erage decline of more than 30 percent in theequity markets in these countries between Jan-uary and November. The strong global recov-ery of 1999–2000, coupled with the sharp re-duction in OPEC supply (following the plungein oil prices to $10 per barrel in 1998), causeda surge in oil prices.

Structural reforms and rapid technologicalchange have also generated political tensions.The fast pace of global economic integrationhas accentuated competition and increased un-certainty, particularly for firms in decliningindustries and their workers. Inequality, bothamong and within countries, and in part tied to technological change, appears to have in-creased. A backlash against globalization couldresult in a slower pace of reforms, especially ifthe current expansionary phase is broken.

These tensions could reduce growth inboth the short and longer termsThe baseline scenario assumes a soft landingfor the U.S. economy, smooth private sectoradjustment, and prudent policy reactions tothe current oil price shock. However, a lessfavorable resolution of the tensions now af-fecting the global economy is possible. Supplyinterruptions or unexpectedly high demandcould lead to a sharper and more protractedspike in oil prices, while uncertainty about fu-ture oil prices could severely affect businessand consumer confidence. These adverse reac-tions could be reinforced by a tightening ofmonetary policies. A reversal of internationalinvestment flows to the United States, triggered

by increasing current account deficits and achange in sentiment in the stock market, couldaccentuate the global downturn affecting EastAsia and Latin America more severely. Thesharp growth slowdown that would result,coming on the heels of the global financialcrisis, may feed “reform fatigue” in developingcountries, resulting in low growth. The low-case scenario below illustrates the importanceof reducing short-run imbalances to safeguardthe long-term prospects for growth.

This chapter is organized as follows. Firstthe cyclical environment and the long-termgrowth potential in the industrial countries arediscussed, and a review of recent develop-ments and prospects for world trade and fi-nancial flows to developing countries follows.The section on commodity prices focuses onthe sharp hike in oil prices, one of the majorthreats to the current outlook. And the fol-lowing two sections summarize the conse-quences of these trends for developing regionsin the short and longer terms, including elabo-ration of a low-case scenario. Finally, the con-sequences for poverty alleviation are explored.

Long-term growth in industrialcountries is projected to be higher

Growth in the high-income Organisationfor Economic Co-operation and Devel-

opment (OECD) countries may average 3.7percent in 2000 (the fastest growth recordedin over a decade), driven by a sharp accelera-tion of exports, strong carryover effects of the U.S. consumer boom of late 1999 to mid-2000, broadening and strengthening of eco-nomic activity across the Euro Area, and apickup in Japanese private and public invest-ment spending. Growth rates in the threemajor blocs are expected to move toward con-vergence, yielding OECD growth of 2.9 per-cent in 2001 and 2.7 percent in 2002 (figure1.2). But this outlook is subject to importantrisks, including the potential for a hard land-ing in the United States because of investorconcern over the burgeoning current accountdeficit, higher inflation and the likelihood ofmonetary tightening if the present spike in oil



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prices is sustained, and a disruption of theJapanese recovery because of fragile financialconditions.

Structural transformation may lead tostronger long-term growthTechnology-driven productivity growth in theUnited States, market reforms and adjustmentto a common currency in the European Union(EU), and corporate and financial restructur-ing and deregulation in Japan offer the poten-tial for rapid growth in the long run. However,important challenges remain in reaping thebenefits of these new technologies, expandingthe EU to the east, and adjusting to slowerpopulation growth. Moreover, the huge U.S.external deficit and Japan’s rising governmentdebt will continue to pose major risks. As-suming effective policies to confront thesechallenges, growth for the industrial countriesover 2003–10 has been upgraded from earlierforecasts to 2.8 percent.

Cyclical and structural forces are shapingthe path of U.S. expansionUnited States. The remarkable performance ofthe U.S. economy since the mid-1990s has itsroots in prudent monetary, fiscal, and regula-

tory policies that encouraged private sectoractivity. It also stems from the availability ofventure capital and a flexible labor force thatfacilitated productivity-enhancing innovationsin information and communications technol-ogy (box 1.1). Nevertheless, cyclical factorshave played an important role in the boom.Increasing job opportunities, rising incomesand wealth, and strong corporate profits haveboosted consumer and business optimism torecord levels and encouraged rapid growth in expenditure. Equity price movements haveexerted a large impact on consumer behavior(figure 1.3). Over 1995–98, household netwealth grew each year by some 30 percentagepoints more than disposable incomes.1 Partlyas a result, the personal saving rate droppedfrom 7.6 percent in the first half of the 1990sto negative territory (–0.2 percent) in the thirdquarter of 2000.

Consumer price inflation has risen by 1.5percentage points over the last year, partly inresponse to the 50 percent rise in oil price.Compensation pressures are rising, as the Em-ployment Cost Index increased by 4.4 percentduring the first three-quarters of the year.However, the pass-through of rising inputcosts to core inflation has been limited, in



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Figure 1.2 GDP growth for major industrial countries, 1998–2002Percent

Note: Growth for 2001–02 is estimated.Source: Datastream and World Bank staff estimates.

–3

0

3

6

1998 1999 2000 2001 2002

United States Euro Area Japan



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The rise in U.S. labor productivity growth from1.5 percent per year in 1980–95 to nearly 2.6

percent per year in the late 1990s was closely tied toinnovations in information technology (IT).3

There are three principal sources of productivitygrowth: capital deepening, represented by increases inthe amount of plant and equipment per worker; im-provements in technology and in the organization ofthe production process, otherwise known as multifac-tor productivity, or MFP; and improvements in thequality of the work force tied to advances in educationand increased experience. Oliner and Sichel (2000)calculate the contribution of these three sources ofgrowth to the one-percentage-point acceleration oflabor productivity growth in the nonfarm business sec-tor between the first half and the second half of the1990s: increased use of IT capital (capital deepening)accounts for 43 percent of the upward shift in produc-tivity growth, and improvements in MFP in the com-puter industries accounts for another 36 percent. Inthe World Economic Outlook (IMF 2000), the Inter-national Monetary Fund cites these sources of produc-tivity growth from computers and IT, in addition toinvestment spillover effects, such as those tied to gain-ing Internet access as more consumers and businessesestablish Internet capabilities.

Box 1.1 U.S. Labor Productivity and InformationTechnology

Why now?Why did it take until the late 1990s for mainframecomputers and related IT, which have been widelyused over the last quarter century, to have an impacton productivity? The full implementation and wide-spread adoption of new general purpose technologiesusually takes many years, because of both investmentand learning costs. Productivity may slow initiallybecause of costs associated with obtaining and im-plementing the new technology, as well as increasedscrap rates, reflecting more rapid obsolescence of oldcapital. The speed of the recovery in productivity isdetermined by factors such as the steepness of thelearning curve and the time required for the completereplacement of older technologies. Hence, whilefirms have been investing in computers for manyyears, associated gains in productivity are only nowbeing realized: managers needed to figure out how toincorporate IT into business processes and staffneeded to be trained.

A number of underlying factors contributed tothe upswing in productivity growth, including sup-portive macroeconomic policies and deregulation,the end of the Cold War (allowing resources to be re-deployed from the defense sector to the commercialsector), and trade liberalization (resulting in greatercross-border competition). The combination of ad-vances in IT and deregulation may also have helpedby providing tools for the unbundling of risks in cap-ital markets through IT and by creating a more com-petitive market environment.

Will the rebound be sustained?How long the increase in productivity growth willpersist depends critically on the penetration of ITproductivity gains into the service sector (whichrepresents close to 80 percent of U.S. GDP); evidenceon this issue is lacking or unclear.4 The extensive re-search on assessing productivity gains in differentsectors of the economy has revealed severe measure-ment problems.5 However, Triplett (1999) and Jor-genson and Stiroh (2000) stress the importance ofindustry-level analysis in examining past trends inU.S. productivity growth. Until these informationgaps are addressed, evaluating the spread of IT gains

01960–73 1974–79 1980–95 1996–99

1

2

3

Source: Economic Report of the President, U.S. Council of EconomicAdvisors, February 2000.

Labor productivity growth: nonfarm businesssector output per hourAnnual average percentage change

large measure because of strong productivitygrowth (4.7 percent through the third quarterfrom a year ago)—suppressing any increase inunit labor costs—and the appreciation of thedollar on the heels of massive capital inflows.2

The Federal Reserve’s increase in the Fed-eral Funds rate (by 175 basis points in six stepsfrom June 1999 to May 2000) reduced the momentum of consumer demand growth over the course of the first half of the year, with

interest-sensitive sectors such as automobilesand housing being particularly affected (figure1.4). The slowing of consumption growth wasshort-lived, however, and third-quarter datarevealed a rebound in spending to 4.5 percentgrowth. Nonetheless GDP advanced at a 2.7percent pace in the third quarter representing adramatic slowing to about one-half the rate ofthe previous year. A sharp decline in businessfixed investment was a major factor in the



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in productivity to other sectors will remain an openquestion. To this end, Bosworth and Triplett (2000)make a plea for improving U.S. statistical agencies’methods, which have not kept up with changes inthe underlying structure of the U.S. economy.

While the transmission of IT productivity gainsto the service sector has not materialized fully in thedata, it is clear that the demand for IT goods has re-mained strong, making it reasonable to expect thatgains in IT productivity will continue to contribute

Box 1.1 (continued)

positively to overall productivity growth in theUnited States for some time. Recent evidence sug-gests productivity appears to be increasing outside of IT sectors: nonmanufacturing productivity has in-creased noticeably since mid-1999, and productivityin retail activity has been on the upswing since mid-1997 (J. P. Morgan 2000). If these indicators reflectthe onset of IT penetration into the productionprocesses of other sectors, then strong productivitygrowth could continue for some time.

Figure 1.3 U.S. retail sales and the NASDAQ indexSales: percentage change over three months ago, seasonally adjusted annualized rate; NASDAQ: percentage change overthree months ago

Jan. 1998 June 1998 Nov. 1998

Sales

Retail sales

NASDAQ

NASDAQ

April 1999 Sept. 1999 Feb. 2000 July 2000 Dec. 2000

–6

0

6

12

18

–20

–10

0

10

20

30

40

50

60

Source: U.S. Department of Commerce and Datastream.

slowdown, as an unwinding of the high-techspending boom appears to have begun.

Still, prospects remain favorable for a softlanding and we expect that GDP growth willaverage 5.1 percent in 20006 and about 3 per-cent on average in 2001–02. The consensusview of financial analysts is that the FederalReserve is likely to raise interest rates furtherin 2001 against the background of still rapiddomestic demand growth, high oil prices, andcontinued wage pressures. With a slackeningin the pace of economic activity over the courseof 2001, policy as well as long-term interestrates should ease moderately in 2002. The un-derlying risk of a harder landing remains,however, since domestic savings are not ex-pected to recover and the current accountdeficit is likely to register $450 billion to $475billion in 2000–02 (4.5 percent of GDP). Thepossibility of tax cuts following the Novemberelections suggests a reduction of the public sec-tor surplus, which would tend to increase thecurrent account deficit yet further. Current fi-nancial tensions in the high-yield sectors maybe a first sign that financing of large U.S. pri-vate debt is becoming increasingly difficult.

Strong productivity growth is likely to con-tinue over the medium term (box 1.1), as the

rapid growth in IT investment (which hasrisen over the 1990s at four times the rate ofother private capital–spending components)despite cyclical up and downturns is likely tocontinue at high rates on a secular basis (figure1.5). With demographic factors likely to slowgrowth of the labor force to rates below 1 per-cent per year over the coming decade,7 long-term potential growth could be as high as 3 or3.5 percent, without risk of significant infla-tionary pressure. But achieving this potentialgrowth will present policy challenges, as cor-rection of the persistent external deficit willrequire extended periods of low import de-mand, a fall in the value of the dollar, or both.

Japan emerges from recession, but itsfinancial underpinnings are fragileJapan. GDP rose by 10.3 percent (seasonallyadjusted annualized rate, or saar) in the firstquarter of 2000 and 4.2 percent in the second,as public investment increased and a sharp re-covery in profits supported private capitalspending (figure 1.6). There are now signs thathousehold demand is rising (after a decade ofstagnation or decline), grounded in improvedlabor market conditions. This could give con-sumer confidence the boost necessary for the



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Figure 1.4 Total retail sales, durable goods and autosRetail sales and autos: three-month/three-month, percentage change, seasonally adjusted annualized rate

–10

Jan. 1999 Apr. 1999 July 1999 Oct. 1999

Autos

Durable goods sales

Total retail sales

Jan. 2000 Apr. 2000 July 2000 Oct. 2000

–5

0

5

10

15

20

Source: U.S. Census Bureau; Datastream; and World Bank staff calculations.

recovery to maintain momentum. The Bank ofJapan has abandoned its “zero” policy intereststance, suggesting that the pickup in activity issufficiently grounded to withstand the 25–basispoint rise. With evidence that industrial corpo-rate recovery is more advanced than antici-

pated, that public works–related investment isnow filtering through the economy, that anascent upturn in consumer demand couldconsolidate with rising incomes, and that pros-pects for Japanese exports remain favorable,we have upgraded projections for GDP growth



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Figure 1.5 IT (information technology) investment growth per employed personand productivity growth, 1980–99Percentage change

Percent (IT/E)

Source: U.S. Bureau of Labor Statistics; U.S. Department of Commerce; Bureau of Economic Analysis.

0

1980 1982 1984 1986 1988 1990

Productivity growth(right side)

IT investment(left side)

1992 1994 1996 1998

5

10

15

20

25

–1

0

1

2

3

4

5

Percent (VA/hr)

�

�

Figure 1.6 Japanese corporate profits and private capital spendingPercentage change year over year

Note: All measures are in nominal yen.Source: Datastream.

–40

Q1 1997 Q3 1997 Q1 1998 Q3 1998 Q1 1999 Q3 1999 Q1 2000 Q3 2000

Operating profits

Private capital expenditures

–20

0

20

40

in 2000 to 2 percent, and to a range of 2–2.2percent over 2001–02.

Recent efforts in the corporate and financialrestructuring required for long-term recoveryfrom a decade of slow growth show progress.Announcements of corporate restructuringplans (mostly by larger firms) surged during1999 and 2000, and many of these plans con-tained commitments to refocus on core activi-ties, improve long-term profitability, strengthenfinancial control, and forge links with foreignpartners. The government is drafting moreworkable insolvency laws to help facilitatelabor mobility and the scrapping of excess ca-pacity, is providing loans and credit insuranceto startups and venture firms, and is easing theprocess for mergers and acquisitions and em-ployee buyouts. Successful restructuring overthe next decade could generate significant gainsin productivity, which together with the ex-pected decline in the labor force would implyoutput growth modestly above 2 percent peryear.

Nevertheless, critical challenges remain. Un-even corporate restructuring continues to posea threat to the near-term recovery. The numberof business failures soared to a record in thefirst seven months of 2000, and debt associatedwith the failed firms has skyrocketed. Eventstriggered by the still fragile state of several fi-nancial institutions and nonmanufacturing firmscould impair consumer and business confidence,as evidenced by the bankruptcy of the Sogo de-partment stores (carrying $17 billion in debt)after the withdrawal of a proposed governmentbailout. And Japan’s general government grossliabilities will reach 115 percent of GDP in2000; massive expenditure compression and anoverhaul of the tax system will be required toaddress the debt overhang in the medium term.

Growth solidifies in the Euro Area, butweak currency is underpinninginflationary pressuresEuro Area. During the second half of 1999,improvements in world activity, a competitiveexchange rate, and buoyant domestic demanddelivered a rebound for the Euro Area from

the crises of 1998, with GDP growth averag-ing 3.8 percent on an annualized basis. Thispace of growth continued unabated in the firstquarter of 2000, slowing to an annualized 3.5percent in the second. A key to the recoverywas the momentum underlying export growth,which continued to build during the first halfof 2000 toward rates of 10 to 15 percent, withthickening export order books and rising man-ufacturing production (figure 1.7 highlightsthe case of Germany).

The European Commission’s surveys ofconsumer and business confidence reachedrecord highs during the first half of 2000, withretail sales rising 3.5 percent in the year toJune. Notable after several years of stagnantemployment growth has been the creation ofover one million jobs in 1999, bringing downEuro Area unemployment to 9 percent from11 percent in 1998. The economic expansionhas also become more broadly based acrossthe region, although Italy remains weak inpart because of tightened fiscal policies in the run-up to the European Monetary Union(EMU). Preliminary figures for the third quar-ter point to a slight slowing and stabilizationof activity, partly as a consequence of the oilrelated terms-of-trade shock and rising inter-est rates. Higher oil prices and the weak Eurohave boosted the harmonized index of con-sumer prices by 2.8 percent in the year toSeptember, well above the European CentralBank’s (ECB) target of 2 percent year-on-yeargrowth. In response, the ECB has tightenedmonetary policy since November 1999, grad-ually raising the repurchase rate by 225 basispoints to 4.75 percent in October. Furtherhikes in policy rates appear likely in order toprevent a translation of high current inflationinto higher price and wage expectations—orso-called second-round effects.

Recovery in 2000 will likely result in EuroArea growth of 3.4 percent, up from 2.4 per-cent in 1999. Looking forward, growth shouldbe supported by continued firm consumer de-mand—bolstered by tax reductions in France,Germany, Italy and Spain—with stronger spill-overs to fixed investment, and the expected



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unwinding of the terms-of-trade shock as oilprices fall. Yet growth will be restrained by thehigher interest rate environment and slow-ing from exceptionally rapid growth in a num-ber of smaller countries (such as Belgium, theNetherlands, and Spain). These factors suggesta slight moderation in growth toward 3.2 per-cent in 2001 and further to 2.8 percent in 2002.

Economic performance in the major Euro-pean countries is expected to improve sub-stantially over the next decade compared withthe 1990s, when low productivity growth (1.3percent during the second half of the decade—figure 1.8), persistent unemployment, and slug-gish capital spending limited GDP growth toless than 2 percent per year, compared with



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Figure 1.7 German exports, foreign orders, and manufacturing outputPercentage change, three-month moving average, year over year

Source: Datastream.

–5

Jan. 1998 May 1998 Sept. 1998 Jan. 1999 May 1999 Sept. 1999 Jan. 2000 May 2000 Sept. 2000

Export orders

Manufacturingoutput

Exports (volume)

0

5

10

15

20

25

Figure 1.8 Growth of GDP per employed person: United States and European UnionPercentage change

Source: U.S. Bureau of Labor Statistics; U.S. Department of Commerce; OECD.

01985 1986 1987 1988 1989

European Union

United States

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

1

2

3

more than 3 percent in the United States. Po-tential growth rates may be as high as 2.8 or3.0 percent underpinned among other things,by the introduction of the euro; the growingparticipation of women in the labor force; andthe possibility of “New Economy” contagion.EMU comes on the heels of increased compe-tition in the financial field stemming from theinternal market, deregulation, and rapid tech-nological process, thereby accelerating the movetowards integrated and more efficient capitalmarkets. The more than doubling of the valueof M&A activities and of corporate bond is-sues in 1999 is some evidence of the early im-pact of the EMU. The eastward expansion ofthe EU could enhance the positive growth sce-nario outlined above. Alternatively, difficultiesin absorbing substantial new population blocsinto the union could present risks to futuregrowth.8 Questions regarding intra-EU labormobility and especially the Common Agricul-tural Policy (CAP) will become more pressingas expansion moves forward.

World trade remains on a long-term high-growth path

The 1990s witnessed a dramatic accelerationof world trade, both in comparison with

the 1980s and in relation to growth in GDP, dri-ven by technological change and the removal oftrade barriers (figure 1.9). World trade is likelyto continue to grow strongly, although some-what below the current record pace.

Global trade is now at a cyclical highWorld trade accelerated in the second half of1999, peaked at 14 percent (year on year) in thefirst quarter of 2000, and is expected to averagea remarkable 12.5 percent for the year as awhole, the highest annual rate of growth sincebefore the first oil crisis. This robust growth wassupported by strong demand growth in indus-trial countries and the recovering economies ofEast Asia (which contributed 25 percent of thegrowth in world demand in 1999). After the fi-nancial crisis, industrial production in the crisiscountries surged to refill inventories and stocks

of capital goods and consumer durable goods(figure 1.10). Demand for foreign durablegoods and intermediate inputs increased at thesame rate. As industrial production will risefaster than GDP only temporarily, the extraor-dinarily strong import demand is only transi-tory. Other regions recovering from the crisisshowed similar, although weaker, patterns.

In addition, real exchange rate depreciationfueled developing countries’ export volumes.East Asian countries’ real exchange rates de-preciated by an average of 23 percent in 1999compared with June 1997 levels, resulting instrong gains in market share—though therewere short-lived losses in U.S. dollar terms—(figure 1.11, first panel). Brazil, Colombia,Ecuador, and Peru also undertook large ex-change rate adjustments in early 1999 (al-though the average real exchange rate in LatinAmerica in 1999 was only 7 percent belowprecrisis levels).

Even China, which initially gained exportmarket share in U.S. dollar terms because ofits policy decision to hold the renminbi fixedduring the crisis period, benefited handsomelyfrom the cyclical upturn with export volumesgrowing in excess of 35 percent year on year inthe first half of 2000. This can be comparedwith China’s record of no growth in this areabetween October 1998 and April 1999. Incontrast, Latin American countries (excludingMexico) experienced significant losses in mar-ket share in 1999 (figure 1.11, second panel),and the rebound witnessed in the first half of 2000 was weak in comparison to that ofEast Asia. Export volumes continued to growstrongly in Mexico throughout the crisis pe-riod of 1997–99 and averaged about 15 per-cent in the first half of 2000, despite an appre-ciating real exchange rate, owing to stronglinks to U.S. manufacturing developed throughthe globalization of production and cementedby the North American Free Trade Agreement(NAFTA). Similarly, exports from Central Eu-ropean economies benefited from their in-creasingly close ties to Western Europe (partic-ularly Germany) as they progress toward fullaccession to the EU (figure 1.11, third panel).



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Structural factors boosted trade during the1990sDeveloping countries’ exports increased by 10percent per year during the 1990s, triple thegrowth rate during the 1980s (figure 1.12).

Privatization and more intense competition indomestic markets increased the incentive tofind lower-cost intermediate inputs and tosearch for new export markets. Technologicaladvances reduced communications and trans-



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Figure 1.9 Trade versus GDP growthPercent

Note: Trade is defined as the average of real exports and imports of goods and nonfactor services. Trade-to-GDP growth-rateratio is based on five-year moving average.Source: World Bank staff estimates.

–3

0

3

6

9

12

1965 1970 1975 1980

TradeRatio of Trade/GDP Growth Rates

GDP

1985 1990 1995 2000

–1

0

1

2

3

4

Figure 1.10 East Asia-5 industrial production and import volumePercentage change year over year

Note: The East Asia-5 countries are Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand.Source: Datastream; and World Bank staff estimates.

–25

1996 Q1 1997 Q1 1998 Q1 1999 Q1

GDP (bar)

Importvolume

Industrialproduction

2000 Q1

–15

–5

5

15

25

portation costs, greatly facilitating marketingand outsourcing of production (World Bank1992, 1997). And regional and multilateralagreements have reduced barriers and greatlycontributed to the acceleration in trade.

Multilateral agreements. Negotiations underthe General Agreement on Tariffs and Trade(GATT) and the World Trade Organization(WTO) have provided an enormous impetus totrade. Multilateral agreements were primarilyresponsible for the reduction in average tariffrates in industrial countries and the removal ofa wide range of nontariff barriers through themid-1990s, when the Tokyo Round was fullyimplemented. Further, the GATT negotiationshave exerted important influences on other ne-gotiations and trade policy in general. Prece-dents established under the GATT have guidedregional arrangements.9 The GATT has pro-vided an important venue for many countriesto participate in trade negotiations, sometimesfor the first time; has established a wide varietyof standards (such as tariffication, import val-uation, standards for trade in food and ani-mals [SPS agreement], protection of intellectualproperty [TRIPs agreement], and so forth); hascontributed immeasurably to maintaining sta-ble rules of the game in international trade re-lations, by facilitating dispute settlement andconstraining unfair trade practices;10 and hasheightened awareness of the importance of in-ternational trade and encouraged significantimprovements in countries’ capacity for tradeadministration and negotiation.11

Regional agreements. Regional agreementsplayed an increasingly important role in theglobal trading system during the 1990s (box1.2). They have often provided opportunitiesfor more comprehensive dismantling of tradebarriers and greater harmonization of rulesgoverning trade than can be accomplishedunder multilateral negotiations. This is partic-ularly true of the EU and NAFTA, both ofwhich developed important precedents formultilateral negotiations and other regionalarrangements. There are many reasons for en-tering regional trade agreements—many of apolitical economy nature. However, there are



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Figure 1.11 Export volume and marketgrowth, 1997–2000Three-month moving average, year over year

–10

export growth

market growth

0

10

20

30

40Percent

Note: The East Asia-5 countries are Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand.Source: Datastream; and World Bank staff estimates.

export growth

market growth

Oct.1997

Apr.1998

Oct.1998

Apr.1999

Oct.1999

Apr.2000

July2000

Oct.1997

Apr.1998

Oct.1998

Apr.1999

Oct.1999

Apr.2000

July2000

Oct.1997

Apr.1998

Oct.1998

Apr.1999

Oct.1999

Apr.2000

July2000

–10

0

10

20

30

40

Percent

Note: The Central European countries in the graph above arethe Czech Republic, Hungary, and Poland.Source: Datastream; and World Bank staff estimates.

East Asia-5

–10

10

0

20

30

40Percent

export growth

market growth

Note: The Latin American countries in the graph above areArgentina, Brazil, Chile, and Colombia.Source: Datastream; and World Bank staff estimates.

Latin America

Central Europe

significant concerns over their economic bene-fits. Regional trade agreements shift importsupply from external countries to countrieswithin the free trade area. This may lead to re-duced efficiency for the countries within thefree trade area if external suppliers are lower-cost suppliers. Also, those outside the agree-ment suffer from lost market share or lowersupply prices.

A myriad of other regional integrationagreements have evolved (figure 1.13 andannex table A1).13 Some of these agreementsare designed to address similar leverage andharmonization issues that faced the EU andNAFTA. Some countries have undertaken moreambitious efforts at regionalism, for example,the members of the Association of SoutheastAsian Nations and the Asia-Pacific EconomicCooperation.

It is extremely difficult to measure the rela-tive importance of regional and multilateralagreements to the expansion of trade. Multi-lateral agreements that lead to increasedgrowth may spur intraregional exports be-cause of lower transport costs (than outsidethe region) and other agglomeration effects

(for example, greater knowledge of closermarkets than of extraregional ones). Con-versely, regional arrangements can stimulateglobal trade through improving the efficiencyand hence competitiveness of regional produc-ers and expanding demand for inputs fromnonregional sources. Nevertheless, the existingdata do indicate that some regional arrange-ments have been associated with expandedtrade. The growth of intraregional trade wassignificantly greater than the growth of ex-ports outside the region in NAFTA and the EUduring the 1980s, and in NAFTA and Merco-sur (the Latin America Southern Cone tradebloc) during the first half of the 1990s (table1.2). The EU during 1990–95 is an exception,owing to the relatively slow growth in Europefollowing German reunification.14

Many of the other regional arrangementslack the economic diversity required to meetthe bulk of their trade needs. Only three of thenon-NAFTA and EU agreements have morethan 20 percent of their average trade withintheir respective regions (figure 1.14). None-theless, regional integration arrangements maycover a growing share of trade in the future.



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Figure 1.12 GDP and export volume growthPercentage change per year

a. This excludes countries in Europe and Central Asia.Source: World Bank staff estimates.

0

GDP Exports

High-income Developinga

World

GDP Exports GDP Exports

2

4

6

8

10

12

1970s 1980s 1990s

Figure 1.13 Number of WTO notifications of regional integration agreements (RIAs)

Source: World Trade Organization.

0

3

6

9

12

15

18

1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997

The vast increase in the number of countriesparticipating in the WTO has greatly compli-cated negotiations, a fact that may lead coun-tries to focus more on regional arrangements

with smaller memberships, where reciprocalconcessions can be more transparent andimmediate (thus facilitating the negotiatingprocess). Smaller memberships may also make



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One distinguishing feature of NAFTA, its North-South orientation, is of special relevance to de-

veloping countries, and this fact alone makes it likelyto influence most regional integration agreements(RIAs) in the future. Motives for North-South agree-ments are many. Included among these are the usualregional incentives such as shared history, trade, andtransport economies. Agreements between industrialand developing countries also imply more extensiveshifts in specialization (and thereby greater gainsfrom trade) than regional agreements among devel-oping countries alone. North-South agreements have also encouraged developing countries to lock indomestic economic and other reforms,12 enhanceprospects for market-driven development strategies,and increase the likelihood of lower external tariffs.From the developing-country partner perspective,these include enlargement of export markets, acceler-ated foreign capital inflows, technology transfer, andpossibly enhanced mobility of other factors.

Box 1.2 North-South regional arrangementsThese strategic properties should make North-

South agreements more attractive to developingcountries than South-South arrangements, since thelatter have more limited potential for exploitingcomparative advantage or capturing growth exter-nalities and can lead to trade diversion and greatereconomic divergence. Moreover, North-South RIAsare more likely to foster economic convergence that, if it coincides with accelerated growth, can bebeneficial to all partners. Surely this fact explains thewillingness of both sides to extend existing successfulregional agreements outside their immediate bound-aries. The EU is currently expanding trade partner-ship in two “southern” directions—Eastern Europeand the Maghreb. The NAFTA is also looking as faras the Southern Cone to expand its economic ties.

Source: World Bank 2000d.

it easier to negotiate the increasingly impor-tant issues inherent in product standards (seechapter 3).

Prospects for trade growthStrong growth momentum in industrial coun-try import demand in the first half of the yearwill bolster developing-country export volumegrowth to 12–13 percent in 2000. However,world trade growth is likely to slow over thecourse of the year, in line with the expectedslowing of world industrial production. In-

dustrial production in key developing regions(such as East Asia and Latin America) had al-ready slowed by the second quarter. Whilesome upturn is likely for these countries in thesecond half, overall momentum is unlikely toreturn to the rates experienced in the latterhalf of 1999 and the first quarter of 2000.

Growth in world trade volumes is projectedto slow to 8.0 percent in 2001 and 6.8 percentin 2002, for a number of reasons. First, thecyclical pattern of world GDP growth is ex-pected to move toward more sustainable long-run rates, thereby reducing import demand.For example, U.S. import growth, whichreached 13 percent (year on year) in the firsthalf of 2000, is likely to slow toward 7 or 8percent in 2001–02, helping to stabilize thewidening trend in the current account deficit.This is unlikely to be offset completely byincreases in import demand in other majortrading countries. Second, gross private capitalflows to developing countries are expected torise by only 15 to 20 percent over the next two years, well below the rate of increase in



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Table 1.2 Intra- and extraregional trade(annual percentage change in exports)

1980–90 1990–95

Within Outside Within Outside region region region region

NAFTA 15.6 9.8 9.9 5.3European Union 16.1 10.9 3.2 6.6Mercosur 4.3 9.3 27.5 4.0

Source: World Bank staff data.

Figure 1.14 Intra-RIA exports as a share of RIA’s total exportsPercent

Note: The names and abbreviations on the horizontal axis represent the names of organizations involved in regional integration agreements.Source: Collier and Venables 1999.

1990 1996

80

70

60

50

40

30

20

10

0

APEC

Europ

ean

Union

NAFTA

ASEAN

Mer

cosu

r

CACM

Andea

n Gro

up

UEMOA

SADCGCC

UMA

CEMAC

ECOWAS

1996–97, when large capital flows permittedsome developing regions (such as Latin Amer-ica) to boost imports. Third, the terms of tradefor oil-importing countries are likely to remainsoft in the near term, as oil prices stay rela-tively high and non-oil commodity prices re-bound weakly. This, in combination with fairlysluggish private capital flows, would tend tolimit the ability of oil-importing countries tosustain rapid import growth for an extendedperiod. However, none of the above factors areexpected to cause a massive deterioration inworld trade growth in the near term.

In the longer term (2003–10), world tradeis projected to grow by 6.8 percent a year. The long-term forecast for trade growth is 2.1times the projected rate of world GDP growth,lower than what was observed in the 1990sbut still much higher than in the 1980s. Thevery high ratio of the 1990s was in part due tothe one-time increases in integration repre-sented by the EU single-market initiative andNAFTA as well as large-scale trade liberaliza-tion in a number of developing countries.While participating countries will continue tobenefit from increased integration, it is un-likely that further reductions in trade barrierswill be of the same magnitude.

Other forces may boost world trade growthin comparison with the 1990s. For example,there may well be improvements in informa-tion technology (see the section on industrialcountries and chapter 4), and another roundof trade negotiations may be successfully con-cluded (despite the derailing of the launch of a new round in Seattle in December 1999).While any quantitative comparison of theseinfluences is extremely speculative, on balancewe anticipate some decline in the ratio of worldtrade growth to output growth.

Private capital flows remainvolatile

The surge in globalization during the1990s was even more spectacular in cap-

ital flows than in trade flows. Net long-termcapital flows to the developing countriessurged from $80 billion in 1989 to $344 bil-lion just before the financial crisis, beforefalling to $280 billion in 1999 (figure 1.15).FDI flows grew steadily to $180 billion in1999, almost eight times their level at the be-ginning of the decade. Other private flowshave been extremely volatile—increasing ten-fold between 1989 and 1996, but declining



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Figure 1.15 Net capital flows to developing countries, 1985–2000Billions of U.S. dollars

Figure W16-10-5

Note: Amounts for 2000 are estimated.Source: World Bank data and staff estimates.

0

1985 1990 1995 2000

50

100

150

200

250

300

350

400

Official

Other private

FDI

70 percent during the last three years of thedecade. Total official flows fluctuated around$50 billion, with significant dips in 1996 and1997. Preliminary data for 2000 covering grossflows suggest that total inflows stabilized, withthe share of FDI declining somewhat from itshigh level of 1999.

Stabilization of capital flows in the short runThe stabilization of international capital flowsinto developing countries was initially drivenby a reduced supply of funds by internationalinvestors, but now it increasingly reflects im-proved domestic credit conditions and a sharprise in capital demand in the industrial world.Most countries affected by the financial crisisbrought inflation rapidly under control whileachieving currency stability after large devalu-ations and current account adjustments, andthis opened the way for more accommodatingmonetary policies. Improved domestic creditconditions, combined with large current ac-count surpluses, reduced the need for interna-tional financing. At the same time, the currentaccount deficits in the high-income countries

increased from $9 billion in 1998 to $175 bil-lion in 1999, and they are expected to reach$250 billion in 2000. With an increased do-mestic savings shortfall from $218 billion to$435 billion during the last two years, theUnited States (which saw an investment boom)was the main source of the deterioration of thecurrent account in the industrial world.

Continued uncertainty and risk aversion fol-lowing the financial crisis constrained market-based flows (bonds, bank loans, and equity) toseveral of the emerging market economies in2000. The average risk premium on developing-country secondary market debt remained high.New financing primarily targeted less riskyborrowers: 60 percent of total developing-country bond issuance came from sovereignborrowers (compared with 55 percent in 1999),and the share of private borrowers remainedlow (figure 1.16). Moreover, a substantial pro-portion of bank lending (55 percent) went to fi-nance the rollover of upcoming liabilities ortook the form of less risky lending, such astrade finance or securitized lending.

The volatility of capital flows in the secondquarter underlined the continued vulnerabil-



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Figure 1.16 Sectoral breakout of bond financing by developing countries,January 1997– June 2000

Percent

Source: World Bank data and staff estimates.

Sovereign PublicPrivate

100

75

50

25

0

1997 H1 1997 H2 1998 H1 1998 H2 1999 H1 1999 H2 2000 H1

ity of developing countries to shifts in inves-tor sentiment. A sharp correction in the U.S.NASDAQ market was associated with a jumpin volatility in developing-country stock mar-kets,15 and the risk premium on developing-country external debt rose to 850 basis points(compared with 760 basis points at the start ofthe year). In April, the volume of capital flowsto developing countries dropped by 75 percentover March, and it declined marginally furtherin May before recovering in June to almost theMarch level.

For the first time in over a decade, prelimi-nary data suggest a contraction in FDI flowsto developing countries in 2000 from the $180billion recorded in 199916 (figure 1.17). Thedownturn in FDI was brought about by re-duced commitments for new projects in majorrecipient countries, combined with a slow-down in M&A activity, and completion oflarge-scale privatization projects. China, thelargest recipient of FDI, experienced a sub-stantial reduction in the value of new commit-ments during the past years, from $111 billionin 1993 to $52 billion in 1998 and $41 billionin 1999.17

In the long term, capital flows shouldregain momentumFDI flows to developing countries are likely torise over the long term, as rapid internationalintegration continues (witness the recent waveof cross-border mergers and acquisitionsamong corporations in the industrial coun-tries),18 and developing countries’ growth ratescontinue to exceed growth rates in the indus-trial world. Renewed cross-border M&A ac-tivity in Korea and in other East Asian coun-tries could raise FDI inflows to the region.And political commitment to removing obsta-cles to privatization may accelerate postponedprojects in a number of Central and EasternEuropean economies. However, the growth ofFDI is unlikely to be spectacular as it was inthe 1990s.

Other private capital flows are expected toregain some momentum from their current de-pressed levels. A narrowing of current accountimbalances may increase demand in some de-veloping countries, and further progress in fi-nancial reforms should go some way towardrestoring the confidence of international in-vestors. However, capital market flows will re-



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Figure 1.17 FDI flows to developing countries, 1990sBillions of U.S. dollars Percent

a. Preliminary.Source: World Bank Debt Reporting System and UNCTAD Investment Yearbook.

0

20

40

60

80

100

120

140

160

180

200

1991 1992 1993 1994 1995

As share of world FDI

1996 1997 1998 1999a

0

5

10

15

20

25

30

35

40

main volatile, in turn contributing to the un-certainty in the real economy. For that reason,FDI flows are likely to continue as the primarysource of international funding for developingcountries, in the process helping to reduce vul-nerability to financial shocks.

Commodity prices exhibitdivergent recoveries

Oil prices. The present oil price shock isexpected to be temporary, since it was

generated by the confluence of a number ofunexpected short-term factors. The spike inoil prices has its roots in the reaction to the1998 price decline in the wake of the financialcrisis—a decline that in real terms placed theoil price at one-quarter of its peak level of1980. OPEC members, along with some non-members, agreed on production cuts in 1999to boost prices, while low prices also led to aslowdown in the growth of non-OPEC pro-duction and in investment in the oil sector.The drop in production coincided with the un-expectedly strong rebound in world economicactivity in 1999, and hence in oil demand. Oilinventories fell dramatically, and prices sky-

rocketed (figure 1.18). OPEC has respondedto the near-term shortage in the market byraising its production ceiling back to the levelsof early 1998. A combination of supply in-creases and some decline in demand (fromhigher prices) should reduce oil prices from anaverage of $28 per barrel in 2000 to $25 perbarrel in 2001 and $21 per barrel in 2002.

Plausible worst-case scenarios (for exam-ple, an unusually cold winter or unanticipatedsupply disruptions) could see prices averaging$30 a barrel in 2000 and 2001, with tempo-rary spikes running to $50 or more. Depend-ing on policy and private sector reactions,such higher prices could pose a substantialthreat to global expansion, particularly if theshock contributes to steep declines in the sev-eral highly valued industrial country equitymarkets (the implications are explored in thelow-case scenario—see below). However, it isdifficult to see significantly higher prices beingsustained for more than a year or two, giventhat non-OPEC production would increase inresponse. Prices are expected to average about$18 to $19 per barrel for the rest of the de-cade, as technological improvements (for in-stance, better methods of locating and recov-



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Figure 1.18 Crude oil prices, January 1990–October 2000US$ per barrel


Dubai Brent WTI

40

35

30

25

20

15

10

5

Jan. 1990 Jan. 1992 Jan. 1994 Jan. 1996 Jan. 1998 Jan. 2000 Oct. 2000

ering crude oil) boost energy production andconservation efforts continue.

The impact of the current oil price rise onindustrial countries has been less than the im-pact of price rises during the oil price shocksof 1973–74 and 1979–80, because the currentincrease is smaller and output is much lessdependent on oil than before. Oil prices in2000 should average about half the level ofthe 1979–80 oil shock in real terms (figure1.19).19 Nevertheless, the oil price rise hasincreased inflationary pressures and tradedeficits in some of the industrial countries, aswell as exacerbating tensions over the level ofgasoline taxes.

Oil-importing developing countries havebeen more severely affected than industrialcountries, because they consume more energyper unit of output and have less access to theexternal financing required to sustain expen-diture levels until oil prices decline. Moreover,prices for their primary commodity exports(especially tropical beverages and other agri-cultural goods) have continued to drop overthe course of 1999 and 2000, so their terms oftrade have fallen precipitously.

To illustrate the effects of higher crude oil(and natural gas) prices on developing coun-

tries, table 1.3 presents the impact of a $10 perbarrel increase in price (the average increaseanticipated in the baseline for 2000) on currentaccount positions for a sample of 92 countries.While the current account balance of oil-ex-porting developing countries is expected to im-prove by about $135 billion (at unchanged oiltrade volumes) as a result of the oil price in-crease, that of oil-importing developing coun-tries is expected to deteriorate by about $40billion, or a little over 1 percent of GDP.

Because the oil shock is expected to be tem-porary, there is a good economic case for oil-importing countries to meet higher bills for oiland gas imports through temporary balance ofpayments deficits and external financingrather than through adjustment. However, thereis a good deal of uncertainty about how highprices will go and for how long, and even atemporary shock could make internationallenders jittery about the sustainability ofcountries’ external debt. This uncertainty in-creases the risk of a sudden withdrawal of ex-ternal finance. It is thus likely that risk-aversepolicymakers in oil-importing countries willundertake some degree of prudent adjustment.

The oil-importing emerging market econ-omies should be able to smooth the impact of



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Figure 1.19 Crude oil prices, 1960–2010US$/bbl


Current US$ 1990 US$

0

10

20

30

40

50

60

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

the shock with private finance, though somewith already large current account deficits willhave to proceed with caution. Oil-importingdeveloping countries without access to privatecapital markets will face an additional officialfinancing need of about $18 billion (withoutadjustment). Since countries will be undertak-ing some degree of adjustment (leading to alower financing need), and the need for officialaid flows to oil exporters may be much less for

a time, the net additional call on internationaldonors does not appear insurmountable.

Non-oil commodity prices. Non-oil com-modity prices began to decline in early 1997and then plummeted with the East Asian crisis(figure 1.20). While the global economic re-covery has led to some recovery of metals andminerals prices, agricultural prices continue to languish near their cyclical troughs. Thisdivergent recovery is not surprising, since met-



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Figure 1.20 Divergent recoveries of commodity pricesIndex, January 1997=100

Source: World Bank staff estimates.

25

Jan.1997

May1997

Sept.1997

Jan.1998

May1998

Sept.1998

Jan.1999

May1999

Sept.1999

Jan.2000

May2000

Sept.2000

Metals and minerals

Crude Oil

Oct. 2000

Agriculture

50

75

100

125

150

Table 1.3 Current account effects for a sample of developing countries from a $10increase in oil prices

Oil importers Oil exporters All developing countries

Number in $US as Number in $US as Number in $US assample bln. % GDP sample bln. % GDP sample bln. % GDP

East Asia and Pacific 7 –16 –1.0 3 7 2.0 10 –9 –0.7South Asia 5 –5 –0.9 0 0 0.0 5 –5 –0.9Latin America 15 –4 –0.7 7 22 2.0 22 18 0.8Sub-Saharan Africa 13 –2 –0.7 5 13 19.5 18 11 3.2Europe and Central Asia 18 –14 –1.7 3 27 10.3 21 13 1.5Middle East and North Africa 6 –2 –1.1 10 66 11.4 16 64 8.6

Total developing countries 64 –43 –1.1 28 135 5.7 92 92 1.5

Memo item: HIPC 13 –2 –1.4 6 5 19.0 19 3 1.7

Note: The table shows the direct current account impact (keeping volumes constant) of a $10/bbl increase in crude oil andrefined products and a (similar) 54% increase in the gas price.

als, which are used as inputs to industrial pro-duction, have higher short-run income elastic-ities than food and beverages.

After the price declines in 1998, metals andminerals producers cut production at high-cost mines and smelters, leading to some slow-down in production growth. For example,copper production slowed to 3 percent growthin 1999, from 4 percent in 1998. At the sametime, the strong global economic recoveryboosted demand for metals. Consumption ofcopper rose 4 percent in 1999 and will rise anexpected 6 percent in 2000, while aluminumconsumption rose 6 percent in 1999 and is up5 percent in 2000. Slower production growthand accelerating demand have reduced stocks,and metals and minerals prices are estimatedto have risen above 14 percent in 2000, to alevel about 20 percent above the cyclical trough.

In contrast, agricultural prices remainedstagnant for most of this year. Despite this, theUnited Nations’ Food and Agricultural Or-ganization’s index of global agricultural pro-duction rose by 1.6 percent in 1999 (slightlybelow the 30-year trend growth rate of 2.2percent), which contributed to further stockbuildups. Consequently, world stocks of mostagricultural commodities remain high—and insome cases stocks have continued to increase.Sugar stocks, for example, rose for the fifthconsecutive year in 1999, while cocoa stocksreached the same levels as in 1990–91, whenthe International Cocoa Organization was op-erating a buffer stock mechanism. An excep-tion to this trend is cotton, for which pro-duction is expected to decline by 2 percent,contributing to a 15 percent reduction in stocks.Moreover, recovery in demand has been weakerthan in metals. Grain consumption is expectedto be roughly unchanged in 2000; but con-sumption of raw materials is recovering, ledby cotton, which is expected to increase 2 per-cent next year.

Recent trends in commodity prices haveobviously favored food importers (particularlythe oil-exporting countries, which simultane-ously have benefited from higher oil revenues),while net agricultural exporters, such as many

countries in Latin America and Sub-SaharanAfrica, have seen substantial deterioration intheir commodity terms of trade. Côte d’Ivoire,Ghana, Kenya, and Uganda all receive 40 to60 percent of export earnings from agriculture(mainly coffee and cocoa), and fuel importsconstitute 20 to 30 percent of import costs.Most Asian countries have been less affected,since they are less dependent on agriculturalexports and fuels are a smaller share of totalimports.

Non-oil commodity prices are expected to in-crease in the near term, gradually aligning withthe continued expansion of the global economy(table 1.4). Metals and minerals prices, whichrose about 14 percent in 2000, are expected toincrease about 2 percent per year in nominalterms over the next several years, but more rapidincreases are possible if global economic growthis higher than anticipated.

The recovery in agricultural prices is ex-pected to remain slow, as supplies continue toincrease at nearly the same pace as consump-tion. But experience shows that current lowprices in agriculture could give way to a surgein the near to medium term. While it is difficultto predict when such an event might occur, his-torical evidence indicates that it could beginabout two to three years after the cyclical low.

Over the longer term, non-oil commodityprices are likely to decline in real terms, con-tinuing the trend over the past 100 years (realnon-oil commodity prices fell by nearly two-thirds during the twentieth century, and byhalf over the last two decades—[figure 1.21]).There appears to be no letup in the improve-ments in technology that boost commoditysupplies at lower cost. Crop yields continue to increase along historical trends, and newplant-breeding techniques offer the prospectof further increases. Improved mining and re-fining techniques reduce the cost of recoveringore and producing metals. On the demandside, population growth is projected to slowfrom 1.4 percent during the 1990s to 1.1 per-cent during the first decade of the 21st centuryand 0.9 percent during the second decade. InAsia, where the demand for commodities has



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grown most rapidly, population growth will beeven slower. This may be partially offset byfaster growth of world real incomes (projectedat 3.4 percent over 2000–10 compared to 2.7percent during the 1990s). However, since in-come elasticities of demand for commoditiesare low, the overall impact of more rapid in-come growth on commodities will be small.

Developing countries’ recovery isunexpectedly rapid, and prospectsfor long-term growth haveimproved

Developing countries’ recovery from the1997–98 financial crisis at 5.3 percent

growth has been faster and much stronger thananticipated.20 All regions have experienced



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Figure 1.21 Real commodity prices, 1900–2000Index, 1900=100

0

1900 1920

Crude oil

Non-oil

1940 1960 1980 2000

50

100

150

200

250


Table 1.4 Annual percentage change in nominal oil and non-oil commodity prices,1981–2010

Forecasts

Commodity 1981–90 1991–97 1998 1999 2000 2001 2002–10

Oil –4.7 –2.5 –31.8 38.3 55.0 –10.7 –3.0Non-oil –2.2 2.3 –15.7 –11.2 –0.8 3.4 2.8

Agriculture –3.2 3.7 –16.3 –13.9 –5.2 3.9 3.3Food –3.3 2.2 –9.8 –16.5 –3.9 5.1 2.4

Grains –2.9 1.6 –9.7 –14.7 –9.4 7.5 3.8Beverages –5.8 7.9 –17.7 –23.4 –16.9 1.5 4.3

Raw materials –0.4 1.9 –23.2 1.4 3.7 4.2 3.5Metals and minerals 0.6 –1.5 –16.2 –2.3 13.6 2.2 1.6Fertilizers –2.5 2.6 2.0 –6.6 –6.3 4.7 1.1

Memorandum itemG-5 manufactures unit value 3.3 1.1 –1.9 –2.7 –2.3 3.6 2.2

Note: The G-5 countries are France, Germany, Japan, the United Kingdom, and the United States.Source: World Bank data and projections update, November 2000.

stronger growth in 2000, although there hasbeen diversity across regions. Contributing fac-tors include easier monetary policies in theindustrial countries and in East Asia, whichlowered interest rates and stimulated domesticdemand; the depreciation of many developingcountries’ currencies, which boosted exports;and more recently the rise in oil prices, whichhas supported economic activity in some of theeconomies hit by the crisis or in those nearcrisis (such as Indonesia, Nigeria and the Rus-sian Federation). Industrial production in mostof the crisis-affected countries of East Asia re-bounded at double-digit growth rates in late1999 and into 2000. Latin America also is re-covering sharply, albeit at a slower rate than inthe wake of the Mexican peso crisis. And Rus-sian growth (a large segment of the growth inthe Europe and Central Asia region) was un-expectedly strong, boosted by oil revenues (fig-ure 1.22 and table 1.5). China and India con-tinue to exhibit sustained rapid growth, andMiddle Eastern countries are benefiting fromhigh oil prices and recovery in the Euro Area.Even the non-oil exporters in Sub-SaharanAfrica increased GDP by 3.2 percent, despitelow non-oil commodity prices. Altogether, de-veloping countries’ GDP is expected to increase

by 5.3 percent in 2000, matching peak years1983 and 1997. Inflation came down quicklyfollowing the crisis (when sharp exchange ratedepreciations led to rapid price rises in severalcountries) and remains moderate despite thespike in oil prices. Despite this favorable pic-ture, financial tensions are building up onceagain in East Asia and Latin America. The de-cline in stock markets and the recent increasein spreads make several countries vulnerable inthe short run. The risks associated with thesevulnerabilities are explored later in this chapterwhere the possibilities of a strong global down-turn are discussed. The baseline forecast, how-ever, features a moderate slowdown from thecyclical peak in early 2000. With this moderatedeceleration, all developing regions are expectedto enjoy near-term increases in per capita in-come, ranging from nearly 6 percent in EastAsia to about 1.5 percent in the Middle Eastand North Africa and Sub-Saharan Africa.

Payoffs to domestic reforms and improvedexternal conditions favor long-term growthThe cyclical recovery is expected to be followedby an acceleration of long-term growth, al-though the outlook varies considerably acrossregions (figure 1.23). Population growth in the



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Figure 1.22 Developing regions’ real GDP growth, 1999–2002Percent

0

East Asia South Asia Latin America ECA MENA Sub-Saharan Africa

2

4

6

8

1999 2000 2001 2002




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Table 1.5 Growth of World GDP, 1998–2002(percentage change in real GDP)

Forecast

1998 1999 2000 2001 2002

World total 1.9 2.8 4.1 3.4 3.2

High-income countries 2.1 2.7 3.8 3.0 2.8OECD 2.1 2.7 3.7 2.9 2.7

United States 4.4 4.2 5.1 3.2 2.9Japan –2.5 0.3 2.0 2.1 2.2Euro Area 2.7 2.4 3.4 3.2 2.8

Non-OECD countries 0.7 4.2 6.3 5.1 5.1

Developing countries 1.0 3.2 5.3 5.0 4.8East Asia and Pacific –1.4 6.9 7.2 6.4 6.0Europe and Central Asia (ECA) 0.0 1.0 5.2 4.3 3.9Latin America and the Caribbean 2.0 0.1 4.0 4.1 4.3Middle East and North Africa 3.3 2.2 3.1 3.8 3.6South Asia 5.6 5.7 6.0 5.5 5.5Sub-Saharan Africa 2.0 2.1 2.7 3.4 3.7

Memorandum itemsEast Asia-5 countriesa –8.2 6.7 6.9 5.5 5.1Transition countries of ECA –0.7 2.5 5.0 4.2 3.7Developing countries

Excluding the transition countries 1.2 3.3 5.3 5.1 5.0Excluding China and India –0.6 2.2 4.7 4.4 4.5

Note: All countries listed in the “Classification of Economies” section at the end of this report are included as components of the regions presented in Tables 1.5 and Table 1.6 (as well as the world summary table (Table 1.1). Exceptions, for whichsufficient historical data or projections are unavailable include: 11 low-income countries (among which, Armenia, Honduras andNicaragua); 7 middle-income countries (among which, Iraq, Georgia, Guyana), and 2 high-income countries (Cyprus, Iceland).a. Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand.Source: Development Prospects Group, baseline, October 2000.

Figure 1.23 GDP per capita growth, 1990–2010Percent change per year

1990s 2000s low case


East Asia South Asia ECA LAC MENA SSA

–2

0

2

4

6

Embar-

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reap the benefits of reforms carried out overthe past decade (selected indicators are high-lighted in table 1.7). In effect, these factorsconstitute the initial conditions from whichlonger-term prospects may be drawn. A num-ber of clear improvements can be discerned.Median inflation rates have been halved, andcentral government budget deficits are lowernow than in the late 1980s, contributing toimproved investor confidence. And developingcountries are much more open now than theywere 10 years ago, as trade liberalization andstronger trade growth has helped raise trade toGDP ratios by 50 percent on average. In addi-tion, better policies have attracted FDI (whichincreased from 0.5 percent of developing coun-tries’ GDP in 1988–90 to 2.7 percent in 1998–2000). Moreover, rapid growth in exports fa-cilitated a significant decline in debt-to-exportratios compared with the late 1980s.

Many developing countries have made sub-stantial investments in human capital. For ex-


28

Table 1.6 Growth of World GDP per capita, 1980s through 2010(annual average percentage change)

Forecast

DifferenceBaseline Low case

in growth rates1980s 1990s 2000–2010 2000–2010

World total 1.3 1.3 2.3 1.3 –1.0

High-income countries 2.4 1.9 2.7 1.7 –1.0OECD 2.4 1.9 2.6 1.6 –1.0

United States 2.2 2.3 2.5 1.2 –1.3Japan 3.4 1.1 2.3 1.0 –1.3Euro Area 2.1 1.9 3.0 2.4 –0.6

Non-OECD countries 3.7 3.7 4.1 2.3 –1.8

Developing countries 0.8 1.8 3.7 2.3 –1.4East Asia and Pacific 5.6 5.9 5.4 3.9 –1.5Europe and Central Asia (ECA) 0.4 –2.0 4.1 3.0 –1.1Latin America and the Caribbean –0.9 1.7 3.0 1.4 –1.6Middle East and North Africa –0.6 0.9 1.7 0.7 –1.0South Asia 3.5 3.5 3.9 2.5 –1.4Sub-Saharan Africa –1.2 –0.6 1.3 –0.1 –1.4

Memorandum itemsEast Asia-5 countriesa 4.4 3.5 4.2 2.9 –1.3Transition countries of ECA 0.3 –2.6 4.1 3.1 –1.0Developing countries

Excluding the transition countries 1.3 3.0 3.7 2.2 –1.5Excluding China and India 0.0 0.5 2.9 1.6 –1.3

a. Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand.Source: Development Prospects Group, baseline and low-case, October 2000.

developing world is slated to slow from 1.6percent annually in the 1990s to 1.3 percentduring 2000–10. And output per capita in de-veloping countries is projected to rise by 3.7percent per year over the next decade, morethan double the 1990s rate, in large part re-flecting the turnaround from output declinesin the transition economies (table 1.6). Otherdeveloping regions are expected to achievemore modest increases in growth rates. Ex-ternal conditions are assumed to be morefavorable than during the 1990s, as higherproductivity–led per capita growth in indus-trial countries (2.6 percent versus 1.9 percent,respectively) and further progress in trade lib-eralization should support the growth of de-mand for developing-country exports at highlevels. And capital flows to developing coun-tries should resume within an environment oflow inflation and low interest rates.

It is important to note that developingcountries all over the world are expected to

Table 1.7 Forecast assumptions:developing countries

Initial conditions 1988–90 1998–2000

1. Ratio of real GDP per capita:industrial / developing countries 19.5 20.5

2. Trade (X+M) / GDP ratio (real) 29.0 43.53. Median Inflation rate 12.6 6.14 Median Fiscal Balance / GDP –2.7 –1.85. Investment / GDP (real) 23.1 24.36. Investment / GDP (nominal) 25.6 24.37. Gross National Savings / GDP 25.2 23.37a. Gross Domestic Savings / GDP 27.1 25.18. Current account balance / GDP –0.7 –0.89. FDI / GDP 0.5 2.7

10. External DOD / Exports* 172.6 142.211. School enrollment rates

Primary 78.0 82.0Secondary 56.0 63.0

12. Illiteracy rate 31.0 26.013. Under-5 mortality rate 91.0 79.014. Life expectancy 63.0 65.0

Exogenous assumptions 1990s 2001–10

1. Population growth 1.6 1.32. OECD GDP growth 2.4 2.93. Oil price $ per barrel (avg.) 18.2 20.24. World trade growth 6.5 6.8

*Exports of goods and services plus workers remittances.Note: Real indicators use 1995 as base year.Source: World Bank database, DECPG staff estimates.

ample, school enrollment rates are substantiallyhigher than in the late 1980s, and illiteracyrates fell from 31 percent in 1990 to 26 percentin 1998. And health indicators show improve-ment: under-five mortality rates dropped from91 per 1,000 live births to 79, and life ex-pectancy has increased from 63 years to 65years. These developments suggest that new-comers to the labor force should be better edu-cated and more capable of working than thosewho retire—a positive development for absorp-tion of new technologies and for innovation.With real per capita incomes today still onlyone-twentieth that of the industrial countries,developing countries that remain open to tradeand FDI can achieve higher rates of growththrough maximizing the new technology andskills embodied in these flows.

East Asia. On average, output in the fivecountries most affected by the financial crisis(Indonesia, the Republic of Korea, Malaysia, thePhilippines, and Thailand) recovered smartly in

1999 at a rate of 6.7 percent in contrast withtheir 1998 crisis decline of 8.2 percent. Theyconsolidated further with growth near 7 percentin 2000. A low-inflation, low-interest-rate envi-ronment has been particularly beneficial to theprocess of unwinding the domestic debt prob-lems faced by firms and consumers in these cri-sis countries. Corporate and financial restruc-turing and rehabilitation of the financial sectorsare being pursued, though perhaps at a slowerpace than warranted. The slow pace could be adetrimental factor to near term growth, if inter-est rates rise rapidly or demand falters leading todiminished cash flow. Robust export growthand firming export prices have helped maintaina positive current account balance. Though therecovery of imports and higher oil prices havenarrowed the balance in many countries, risingreserves and the improved term structure of for-eign debt have strengthened external positionsvis-à-vis pre-crisis levels.

Growth in China during the postcrisis pe-riod has ranged between 7 and 8 percent. Afalloff in export growth, combined with theshort-term impact of reform programs for thestate enterprises and the financial system, ledinitially to a drop in domestic demand and aperiod of deflation. The real depreciation ofthe yuan, coupled with the global recovery,eventually led to a resurgence of exports.Combined with fiscal pump priming, and anincipient increase in FDI, export growth hasproduced improving conditions in China, withGDP growth accelerating in the first half of2000 and the deflationary cycle ending. In2001–02, output for the East Asia region islikely to begin a general process of moderatingand converging toward longer-term growthpaths. The two most vulnerable countries areIndonesia and the Philippines. These countriesalso suffer from political weaknesses, civil dis-turbances, and a perception (from the point ofview of investors) that business operating prac-tices have not changed substantially from lessthan transparent modes.

East Asia should continue to achieve themost rapid rates of growth over the longerterm, although some deceleration from the



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last decade’s pace is likely. Growth in the re-gion’s higher-income economies is expected toconverge toward more moderate OECD aver-age rates. Lower-income countries that haveachieved high growth rates through strong re-form programs may find the future reformagenda (particularly strengthening the finan-cial sector) more difficult to implement.

South Asia. GDP growth in South Asia hasrisen to 5.7 percent in 1999 and is likely toregister 6 percent in 2000, owing to betterthan expected agricultural sector performancein Bangladesh, India, and Pakistan, as well asan acceleration of India’s industrial produc-tion to double-digit rates and strong advancesin services output. Burgeoning foreign de-mand for IT-related services from Bangaloreand a pickup of FDI inflows ($2.2 billion in1999) are major factors underlying India’s im-proved export performance. To facilitate thegrowth of Indian services exports, legislationhas been introduced to support the IT sectorand develop electronic business infrastructure.Average growth for the region is expected toslow to 5.5 percent in 2001–02. Financial dif-ficulties are likely to restrain growth in Pak-istan. In addition, the region is heavily depen-dent on energy imports and (especially in thecase of the smaller countries) on agriculturalexports such as cotton, tea, and rubber. Thenecessity of adjusting to terms-of-trade lossesfrom the recent, adverse movements in pri-mary commodity prices may dampen growthin the near term. By contrast, South Asianeconomies may raise per capita growth ratesin the long term if they can manage to reducefiscal deficits (while still maintaining growth-enhancing expenditures) and make necessaryprogress in trade liberalization. For example,India’s average tariff for all goods, while con-siderably reduced from that of 10 years ago,remains at 40 percent.

Latin America’s GDP is expected to rise by4 percent in 2000, although the dispersion ofgrowth across the region is wide, ranging fromover 6 percent in Mexico and Chile to nearly 2 percent in Colombia and Uruguay, and to lit-tle growth in Argentina, Ecuador and Jamaica.Stabilization of global financial markets and

the surge of world trade growth have sup-ported a broad resumption of economic activ-ity across the region. At the same time, infla-tion eased or held steady in most countries,allowing interest rates to continue on a generaldeclining trend. Exchange rates stabilized inseveral countries that experienced periods offree fall during 1999 (for example, Brazil andEcuador), improving the outlook for domesticdemand growth, especially in Brazil.

Global conditions are expected to be moresupportive of growth in the region over thenext two years. However, recent experiencesuggests that volatility in financial marketsand primary commodity prices remains a sub-stantial threat to near-term recovery. Privatecapital inflows fell dramatically in the secondquarter of 2000, tied to the worldwide declinein equity markets, and the recovery in indus-trial production among the large countries ofthe region appeared to have faltered. Thesurge in the price of oil, concomitant withweakness in commodity prices of critical im-portance to the region (particularly the pricesof coffee, grains, and soybeans) producedterms-of-trade losses for a large number ofcountries. Nonetheless, consolidation of theregion’s recovery in 2001–02 is likely, as ad-justment in Brazil has been impressive so far,and new governments in Argentina and Mex-ico appear set to embark on a path of deep-ened reforms. Regional output growth is ex-pected to reach 4.1 percent in 2001 and to risefurther to 4.3 percent in 2002.

Latin America is poised to enter a phase ofsustained moderate growth over the nextdecade that is due to the past trend towardmarket-friendly policies in the larger coun-tries; relatively strong banking and financialsectors; potential for technology spilloversfrom the United States; the largest rise in FDIamong developing regions (much of whichwent into infrastructure such as telecommuni-cations, utilities, ports, and so forth); and thepotential strengthening of Mercosur throughtrade links with Europe and NAFTA. But lownational savings and large debt overhangs thatwill need to be rolled over on a continuingbasis make the region vulnerable to swings in



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external financing and are likely to constraingrowth below the rates expected in Asia.

Europe and Central Asia. Average GDPgrowth is expected to rise to 5.2 percent in2000, significantly above the 1 percent ad-vance of 1999. The 50 percent rise in oil andgas prices has transformed the Russian pri-mary fiscal position from deep deficit to sur-plus, allowing reductions in government wagearrears and contributing to higher disposableincomes.21 Moreover, Russian industry con-tinues to benefit from the sharp devaluation ofAugust 1998, although import-substitution ef-fects are diminishing with the recent real ap-preciation of the ruble. Higher energy pricesand economic spillovers from the RussianFederation are contributing to stronger outputgrowth among hydrocarbon-rich members of the Commonwealth of Independent States(CIS). The Central and Eastern European coun-tries (CEECs) and the Baltic countries are bene-fiting from growing demand from Western Eu-rope and to a lesser degree from the RussianFederation.22 Growth in Turkey is approaching6 percent in 2000, up from the sharp 5.1 per-cent contraction in 1999, principally because ofa rebound domestic demand linked to declinesin real interest rates.

Growth performance for the region through2002 is expected to remain relatively strong inaggregate, stabilizing around 4 percent. Devel-opments in the EU export market, policy im-plementation related to EU accession for theCEECs, and the path of the oil price will be crit-ical factors in shaping the outlook. The RussianFederation and other hydrocarbon exporters ofthe CIS may experience a slowing of growthbeginning in 2001, as oil prices retreat fromcurrent high levels. The region’s longer-termprospects have improved considerably after thedifficulties experienced during the initial periodof transition to market economies in the 1990s.Countries anchored by the EU accession processhave strong incentives to implement reformsand are positioned for stronger growth thanother countries in the region. The baseline as-sumes improved economic management andsome progress in implementing recently pro-posed social and economic reforms in the Rus-

sian Federation, while the trajectory of growthin world trade and output should supportsteady gains in other CIS states.

Sub-Saharan Africa. Fallout from the 1997–99 crisis continued to exert a depressing effecton the region in 2000, as non-oil commodityprices remained near cyclical lows. But higheroil revenues boosted growth for the region’s oilexporters, and output in South Africa strength-ened moderately to 2.2 percent growth follow-ing several years of subdued performance. Onaverage, the region experienced an accelerationof growth to 2.7 percent from 2.1 percent in1999, and per capita income gained an averageof 0.2 percent. Countries with better policy en-vironments—Botswana, Uganda, and severalcountries of the Communauté FinancièreAfricaine (CFA) zone—tended to perform bet-ter than average, with GDP gains of 5.2 per-cent. Countries experiencing civil strife ormajor political disruption—Angola, the Demo-cratic Republic of Congo, Ethiopia, SierraLeone, and Zimbabwe—registered the weakestperformances, averaging only 0.2 percent growthduring the year.

Growth is projected to accelerate to 3.4 per-cent in 2001 and 3.7 percent in 2002. Oil pro-ducers, including Angola, Nigeria, and Sudan,are scheduled to bring further supply on-stream, while continued high prices through2001 should abet revenue growth. The terms oftrade for commodity exporters should stabilizeor improve moderately from their current lowlevels as non-oil commodity prices firm. TheHIPC (Heavily Indebted Poor Countries) Ini-tiative is gaining momentum, with nine Africancountries—Benin, Burkina Faso, Cameroon,Mali, Mauritania, Mozambique, Senegal, Tan-zania, and Uganda—now having qualified for a total of close to $9 billion (NPV) of relief.And several more countries are expected toreach completion points in the near term. Theenhanced HIPC Initiative is worth nearly $30billion in net present value terms, with some 80 percent of the program earmarked for Sub-Saharan Africa.

Progress in reform programs and in debt–relief has improved the prospects for growth.Per capita income is projected to rise by 1.3



UNPUBLISHED PROOFS

percent per year over the next decade. Thisprospect is far better than the decline that con-tinued over the 1990s, but the increase is onlyone-third the average rate of Asian economies.Economies in Sub-Saharan Africa will continueto confront the severe problems of poor trans-port and communications infrastructures, a lackof investor confidence that encourages capitalflight and constrains private investment rates,and continued low levels of official assistance.It is important to realize that HIV/AIDS willhave a substantial negative impact on a num-ber of countries. According to estimates byUNAIDS (2000), Sub-Saharan Africa contains24.5 million (or 70 percent) of the 34.3 millionexisting cases worldwide and 12.1 million of atotal of 13.2 million AIDS orphans. In thelonger term, lower human capital accumula-tion may well emerge as the biggest cost, andin the worst-affected countries, labor forcegrowth could slow by 1 or 2 percentage points,with a depressing effect on growth.

Middle East and North Africa. Develop-ments for both oil exporters and diversified ex-porters in the region have been quite favorable,with GDP growth of 2.2 percent reported in1999 and growth of 3.1 percent anticipated for2000. Many of the major oil producers hadformulated budgets around an assumed oilprice of $22 per barrel, and higher revenueshave contributed to lower borrowing require-ments, lower deficits, and a decline in domesticarrears. Strong growth in Western Europe hasfueled a boom in tourism, with record numbersof tourist arrivals in many North African andMediterranean countries. The economic revivalin Europe has also led to stronger gains in non-oil exports and workers’ remittances. Forexample, remittance flows to Tunisia rose by 75 percent during 1999. And the ending ofdrought conditions in many countries boostedagricultural incomes and exports and led to de-clines in required food imports.

Activity is expected to pick up moderatelyto 3.8 percent in 2001 and 3.6 percent in2002. With an average oil price of $25 perbarrel for 2001 and $21 in 2002, export revenues should continue to support income

growth in the oil exporters. For the diversifiedexporters, the positive effects of higher exter-nal demand are being counterbalanced by rel-atively strong currencies, high fiscal deficits inEgypt and Lebanon, as well as recent declinesin stock markets. Moreover, the ongoing na-ture of recent conflict in the Levant may alsohave dampening effects on confidence in therest of the MNA region.

Progress in structural reforms and im-proved fiscal behavior with respect to com-modity price booms and busts should supportsome acceleration of per capita growth overthe next decade. However, large and ineffi-cient public sectors, a shortage of social safetynets, and low savings and private investmentrates should limit growth rates to well belowthose of most other regions. Moreover, with-out more substantial diversification of pro-duction, these economies will remain exposedto unfavorable terms-of-trade shocks.

Vulnerabilities are significant

While the baseline scenario of solid growthin all regions is realistic and achievable,

history cautions that cyclical downturns orcrises induced by commodity or financial shocksare difficult to anticipate. To explore the im-plications of less favorable outcomes, a low-case scenario has been developed that com-bines a downturn of the global economy in theshort run with lower potential growth rates inthe long run. In the short run, continued highoil prices especially characterized by short-lived “spikes,” contribute to inflationary pres-sures and increased uncertainty, triggering se-rious cuts in demand and restrictive monetarypolicies. Additionally, investor concern overthe high U.S. current account deficit leads to a rapid reversal of foreign funds and a largestock market correction, while the associatedfall in demand, depreciation of the dollar, andrise in interest rates have significant spilloversto other regions through trade, capital flows,and debt service. The East Asian countries, inprocess of financial restructuring, would beparticularly affected. The ensuing global re-



UNPUBLISHED PROOFS

cession exacerbates the strains inherent inrapid globalization and structural adjustment,leading to a hold on reform programs thatslows expected gains in productivity leadingto long-term growth. On average, these ele-ments bring down the potential growth rate ofthe developing countries as a group by almost1.5 percentage points over the period to 2010(table 1.6 and figure 1.24).

The implications of the short-term globalrecession differ greatly across developing re-gions. Latin America, with high levels of debtand relatively high dependence on exports tothe United States, is hit hardest by the globaldownturn and the higher interest rates. EastAsia, which has a similar export orientationtoward the United States, is directly hurt bythe fall in U.S. demand, the depreciation of thedollar, and mounting domestic financial diffi-culties. Central and Eastern Europe, the Mid-dle East and North Africa and Sub-SaharanAfrica, all with a stronger focus on Europe, ex-perience a more moderate downturn in theshort run, as the growth slowdown in Europeis not as severe as in the United States. In SouthAsia, the impact of the global downturn is di-verse. As during earlier crises, India exhibitssome resilience to less favorable external de-

velopments, while for Pakistan the worseningof international financial conditions has verysevere consequences.

Since the structural risks are mainly of do-mestic origin, they are by nature quite differen-tiated across countries. Nevertheless, there aresome common elements that follow from pasttrends in the regions. Sub-Saharan Africa andthe Middle East and North Africa are at theend of two decades of stagnation or decline,while growth in Latin America has picked upfrom the “lost decade” of the 1980s (figure1.25). Reform programs in many of these coun-tries have greatly improved the conditions forgrowth. However, high indebtedness and thefragility of the reforms make these regions veryvulnerable to adverse global conditions, espe-cially a rapid rise in interest rates. The mainrisk for the oil-importing countries in these re-gions is that a global downturn, combined witha deterioration of the terms of trade and a lackof immediate improvements, could bring aboutsocial unrest and “reform fatigue.” For oil ex-porters, the danger is that the temporary surgein oil revenues might suggest that reform is noturgent anymore. Such a reversal of the reformmomentum in both oil-exporting and oil-importing countries could reduce the growth



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Figure 1.24 Growth of real per capita GDP, developing countries as a group, 1963–2008Compound growth rate, centered five-year moving average, percent


0

1963 1968 1973 1978 1983 1988

Base case

Low case

1993 1998 2003 2008

1

2

3

4

5

potential for the coming decade. And in Sub-Saharan Africa, diminished government rev-enues tied to terms-of-trade losses could makeHIV/AIDS prevention and alleviation campaignsmore difficult, further increasing economiclosses associated with the epidemic.

In Asia, by contrast, many countries achievedrapid rates of growth through strong reformprograms during the 1980s and 1990s. Never-theless, continued rapid growth in the largercountries requires further reforms, includingtrade liberalization (in China measures related toWTO accession, in India reduction of high ex-isting tariffs), strengthening of the financial sec-tor (through much of East Asia), (figure 1.26)and strengthening of the fiscal position in India.In the alternative scenario, a backlash to reformprograms reduces the long-term growth poten-tial in Asia by about 1.5 percentage points a year.

The transition economies experience someweakening of reform momentum that lowerslong-term productivity, without repeating thedisastrous experience of the 1990s. CentralEuropean countries’ accession to the EuropeanUnion is postponed because the global down-turn reduces growth in Europe and increasesthe perceived costs of accession. For Central

Europe, this increases domestic tensions andreduces FDI flows, bringing down trend growth.The oil-exporting countries in the CIS experi-ence a delay of necessary reforms, similar tothe delay in the Middle Eastern and NorthAfrican oil exporters. When, ultimately, the oilprice declines quickly as a result of the eco-nomic downturn, the lack of reforms trans-lates into lower potential growth.

Recent trends and prospects forpoverty reduction

Poverty trends during the 1990s. Our esti-mates for poverty in developing countries

have changed slightly since last year’s GlobalEconomic Prospects because of the availabilityof new information from household surveys.These revisions do not affect the major conclu-sions about poverty trends. Extreme povertydeclined only slowly in developing countriesduring the 1990s: the share of the populationliving on less than $1 a day fell from 28 per-cent in 1987 to 23 percent in 1998, and thenumber of poor people remained roughly con-stant as the population increased.23 The shareand number of people living on less than



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Figure 1.25 Growth of real per capita GDP, Latin America and the Caribbean,Sub-Saharan Africa, Middle East and North Africa 1965–2000Compound growth rate, five-year moving average, percent

–4

1965 1970

Latin America

MNA

Sub-Saharan Africa

1975 1980 1985 1990 1995 2000

–2

0

2

4

6��

�


$2 per day—a more relevant threshold for middle-income economies such as those of EastAsia and Latin America—showed roughly sim-ilar trends (tables 1.8 and 1.9).

It should be emphasized that these historicalestimates are subject to some uncertainty. Up-to-date survey and price data are not availablefor all countries, and the quality of householdsurveys can vary considerably among countriesand over time. Some country surveys yield in-come measures of living standards, while othersyield consumption measures, and these twosources are likely to give different poverty esti-mates for the same underlying population.24

Further, the international measure of povertyused here is subject to error because of the diffi-culties involved in estimating purchasing powerparity exchange rates. Despite these weaknesses,the estimates provide a fairly reliable view ofpoverty trends at the aggregate level, because ofthe substantial increases in the coverage ofhousehold surveys and in data accuracy over thepast few years.

In general, poverty declined in countriesthat achieved rapid growth, and increased in

countries that experienced stagnation or con-traction. Indeed, the overall decline in extremepoverty during the 1990s was driven by highrates of growth in countries with large num-bers of poor people. For example, China ac-counted for a fourth of the total number ofpoor at the start of the decade, and per capitaGDP during the 1990s rose by 9 percent peryear, so by 1998 China’s share of the world’spoor was less than one-fifth. Nevertheless, thedecline in poverty in rapidly growing coun-tries was slowed by increases in inequality in anumber of countries with large numbers ofpoor, in particular in China, India, Bangla-desh, and Nigeria.25 Income inequality is animportant factor in determining poverty out-comes (box 1.3).

In East Asia, poverty declined most rapidlyduring the 1990s, falling sharply in China.However, growth in China’s poorer and morerural western provinces was much slower thanin the more industrialized east. This diver-gence reflects slow growth in rural incomesrelated to declining prices for agriculturalproducts and reduced opportunities for off-



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Figure 1.26 Nonperforming loans of commercial banks in the East Asia-5Percent of total commercial bank loans

March 1999

June 2000

June 2000

Nov. 1998

July 2000

Nov. 1999

July 2000

May 1999

August 2000

Note: See source for details. Because of the redefinition of nonperforming loans in Korea, there is no estimate for the peak. The excludes loans sold to asset management corporations.Source: ADB, Asia Recovery Report, October 2000, page 11.

Indonesia

Korea

Malaysia

Philippines

Thailand

0 15 30 45 60 75

Latest estimate Dec. 1999 Peak

farm employment. This widening of incomeinequality slowed the rate of poverty reduc-tion for the country as a whole.30 Elsewhere in the region, poverty increased in the aftermathof the 1997–98 financial crisis. In Indonesia,the government responded to the crisis bystrengthening safety nets, which helped cush-ion the impact of the crisis. However, the inci-dence of poverty still increased substantially,doubling from its precrisis level. Since early1999, there have been indications that povertyhas declined significantly as rice prices havefallen, and real wages are starting to recover(Suryahadi and others 2000).

In South Asia, the share of the populationliving in poverty declined moderately throughthe 1990s, but not sufficiently to reduce theabsolute number of poor. Household surveydata indicate limited growth in average con-sumption in rural areas, reflecting slow growthin agriculture.31 Urban poverty appears to havedeclined at twice the rate of poverty in ruralareas. However, the Indian poverty data aresubject to considerable uncertainty. In particu-lar, private consumption as measured in thenational accounts has grown about threetimes faster over the 1990s than householdconsumption as measured by the National



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Table 1.8 Population living on less than $1 per day and headcount index in developingcountries, 1987, 1990, and 1998

Population Number of people living on less than $1 a daycovered by at (millions)

least one surveyRegion (percent) 1987 1990 1998 new 1998 (GEP 2000)

East Asia and Pacific 90.8 417.5 452.4 267.1 278.3Excluding China 71.1 114.1 92.0 53.7 65.1

Europe and Central Asia 81.7 1.1 7.1 17.6 24.0Latin America and the Caribbean 88.0 63.7 73.8 60.7 78.2Middle East and North Africa 52.5 9.3 5.7 6.0 5.5South Asia 97.9 474.4 495.1 521.8 522.0Sub-Saharan Africa 72.9 217.2 242.3 301.6 290.9

Total 88.1 1,183.2 1,276.4 1,174.9 1,198.9Excluding China 84.2 879.8 915.9 961.4 985.7

Population Headcount indexcovered by at (percent)




Total 88.1 28.3 29.0 23.4 24.0Excluding China 84.2 28.5 28.1 25.6 26.2

Note: The $1 a day is in 1993 purchasing power parity terms. The numbers are estimated from those countries in each regionfor which at least one survey was available during the period 1985–98. The proportion of the population covered by such sur-veys is given in column 1. Survey dates often do not coincide with the dates in the above table. To line up with the above dates,the survey estimates were adjusted using the closest available survey for each country and applying the consumption growthrate from national accounts. Using the assumption that the sample of countries covered by surveys is representative of the re-gion as a whole, the numbers of poor are then estimated by region. This assumption is obviously less robust in the regions withthe lowest survey coverage. The head count index is the percentage of the population below the poverty line. Further details ondata and methodology can be found in Chen and Ravallion 2000.Source: World Bank staff estimates.

Sample Survey. Discrepancies are to be ex-pected, as the two sources track different ag-gregates.32 Moreover, the survey data tend tounderstate the consumption of high-incomehouseholds. Nevertheless, the size of this dif-ference and the slowness of poverty reductionrevealed in the survey data are difficult to ac-count for, particularly given the improvementin human development indicators. Thus moreaccurate data could indicate more rapid pov-erty reduction than our current estimates. InBangladesh, steady growth reduced the inci-dence of poverty during the 1990s, in contrastto the relative stagnation experienced in the1980s. Poverty in urban areas fell at a consid-erably faster rate than rural poverty, partly re-flecting slower growth in rural wages andhigher rural unemployment. Landlessness has

been key in holding back the reduction ofpoverty in rural areas.33

In Latin America, both the share and thenumber of poor declined between 1990 and1998. In Brazil, successful stabilization hasstepped up the reduction of poverty, with thepoor gaining from stronger growth and thedecrease in inflation. Nonetheless, their liveli-hoods remain vulnerable. Evidence from em-ployment surveys in metropolitan areas showslarge swings in poverty, with an upturn in thepoverty rate in the wake of the 1997–99 crisisand a decrease since late 1999, thanks to the re-bound in growth. Low educational attainmenthas helped to perpetuate income inequality andpoverty by preventing the poor from taking ad-vantage of opportunities created by growth(World Bank 2000a).



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Table 1.9 Population living on less than $2 per day and head count index in developingcountries, 1987, 1990, and 1998

Population Number of people living on less than $1 a daycovered by at (millions)


East Asia and Pacific 90.8 1,052.3 1,084.4 884.9 892.2Excluding China 71.1 299.9 284.9 252.1 260.1

Europe and Central Asia 81.7 16.3 43.8 98.2 92.9Latin America and the Caribbean 88.0 147.6 167.2 159.0 182.9Middle East and North Africa 52.5 65.1 58.7 85.4 62.4South Asia 97.9 911.0 976.0 1,094.6 1,095.9Sub-Saharan Africa 72.9 356.6 388.2 489.3 474.8

Total 88.1 2,549.0 2,718.4 2,811.5 2,801.0(excluding China) 84.2 1,796.6 1,918.8 2,178.7 2,168.9

Population Headcount indexcovered by at (percent)




Total 88.1 61.0 61.7 56.1 56.0Excluding China 84.2 58.2 58.8 57.9 57.6

Note: The $2 a day is in 1993 purchasing power parity terms. See the note to table 1.8.Source: World Bank staff estimates.

In Africa, slow growth increased both theshare and the number of the poor over the1990s; Africa is now the region with the largestshare of people living on less than $1 per day.In Nigeria, the number of people living inextreme poverty rose steeply following the re-versal of the 1985–92 reforms, reaching an es-

timated 70 million (66 percent of the popula-tion) based on the national definition (ratherthan the international $1-a-day definition usedhere). Nigeria now accounts for nearly one-fourth of Sub-Saharan Africa’s poor. Urbanpoverty has grown faster than rural poverty,owing to massive migration from rural areas to



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C ountries with high levels of initial inequalityhave reduced poverty less for given rates of

growth than countries with low initial inequality(World Bank 2000d), and if growth is accompanied by increasing inequality, its impact on poverty willbe reduced. However, our understanding of long-term trends in inequality is limited, partly because ofweaknesses in the data.26 Trends in inequality havebeen extremely diverse. For example, Malaysia sawdeclines in inequality (as measured by the Gini coef-ficient) during the 1980s, but this trend was reversedin the 1990s. Korea and Indonesia experienced rapidgrowth during the 1980s with little change in in-equality, while China and Russia experienced largeincreases in inequality over the same period.

The available data show no stable relationshipbetween growth and inequality.27 On average, incomeinequality within countries has neither decreased notincreased over the last 30 years. However, sincewithin-country inequality has increased in somepopulous countries, overall more people have beenaffected by increases in inequality than by decreases.

What drives inequality? Here, too, our knowl-edge is limited. Nevertheless, both cross-countryanalyses and case studies have generated insights intothe link between inequality and several policy andinstitutional factors.

• Policies fostering stable macroeconomic condi-tions, openness to trade, and moderate size ofgovernment tend to stimulate growth but havebeen found in one study not to systematicallyaffect the distribution of income (Dollar andKraay 2000). However, policies that reduce infla-tion from very high levels appear to benefit thepoor more than the average.

• If growth is strong in areas where the poor liveand sectors where they are employed (for example,

Box 1.3 Trends in inequalitysmallholder agriculture), they benefit more; ifgrowth takes place in areas or sectors that are not accessible to the poor, inequality can increase.Domestic policy distortions that hinder agriculture(along with international trade barriers) have re-strained growth in rural incomes in many coun-tries. This has also been reflected in rising regionalinequality, as in poor regions farming is often thedominant sector of activity.28

• Changes in income inequality reflect changes in thedistribution of assets (for example, education) and inthe return to these assets. In some countries, such asMexico, more educated workers saw larger increasesin earnings than did others workers, and these gainscontributed to increasing income inequality.

• Gender bias and other forms of discriminationhave led to increasing inequality where the groupsthat are discriminated against are poorer than oth-ers to start with. For example, discrimination ledto lower returns to education and lower overall in-comes for ethnic minorities in Vietnam and indige-nous groups in Latin America.

• The impact of liberalization programs on inequal-ity has differed among countries. If prereform con-trols benefit higher-income groups disproportion-ately, reforms can narrow inequality. If, on theother hand, prereform controls favor the poor, lib-eralization can have the opposite effect (Ravallion2000). For example, in the transition to an opentrade regime, the poor may suffer if sectors wherethey have a stake are subjected to competition.This may happen especially in middle-income de-veloping economies with intermediate skill endow-ments. These economies may have a comparativeadvantage regarding goods that require medium-intensity skills. These countries are likely to pro-tect sectors intensive in unskilled labor where low-paid workers can be found.29

the cities, with the incidence of urban povertynow matching that of rural poverty. By con-trast, the rural poverty rate fell in Ethiopia,Sub-Saharan Africa’s second most populouscountry and one of the poorest. The reformsimplemented after the end of the civil war inthe early 1990s spurred a strong recovery, end-ing a two-decade slump. The benefits of agri-cultural price liberalization have spread quickly,boosting growth of rural incomes. Urban pov-erty, on the other hand, has been stagnant.Urban inequality has risen, in part because oflarge population movements resulting from thecivil war, and in part as a result of economic re-form, as agricultural price liberalization raisedconsumer prices in urban areas and civil servicerationalization reduced urban employment.Unfortunately, progress is likely to have beenslowed by the border conflict.

In the Middle East and North Africa, thepercentage of people living on less than $1 perday declined slightly, but the proportion livingbelow $2 per day increased, from 25 to 30percent of the population, because of increasesin Egypt, Morocco, and Yemen.

Poverty also rose markedly in the transitioneconomies during the 1990s. In the RussianFederation, the breakup of the central plan-ning system was accompanied by a steep fallin output and a sharp increase in inflation.Poverty as measured by the national definitionhad jumped from an estimated 11 percent dur-ing the Soviet period to 43 percent by 1996,and probably increased further with the 1998crisis. Inequality widened dramatically duringthe transition, with the Gini coefficient of con-sumption expenditure rising from an esti-mated 0.24 in 1988 to about 0.49 in 1998. In-creasing disparities in poverty across regionshave also surfaced, exacerbated by a ineffi-cient system of fiscal decentralization that leftthe more backward regions short of resourcesto assist the poor.

Prospects for poverty. As noted above,progress in reducing extreme poverty duringthe 1990s was constrained by increasing in-equality in a few countries that accounted fora large share of the world’s poor. As in last

year’s Global Economic Prospects, this year’spoverty scenarios show that continued in-creases in inequality, coupled with less thanrobust growth, would imply failure to reachthe poverty target for developing countries asa group; in particular, the scenarios indicatesubstantial increases in the number of poor inSub-Saharan Africa. Given the uncertainty sur-rounding the historical estimates for povertyand the risks associated with long-term growthprojections, these scenarios should not be viewedas presenting the full range of poverty ratesthat are likely to occur.

The three poverty scenarios outlined belowrequire a projection of growth of the economyas a whole (and of population growth), a pro-jection of the average growth rate in per capitaconsumption for the household sector (mea-sured by household surveys)34; and a projec-tion of changes in the distribution of per capitaconsumption.

Income growth. The three scenarios differonly in terms of the assumed growth rate forthe economy as a whole. Scenario A reflectsthe base case growth rates, and scenario B re-flects the low case growth rates described above.A third scenario assumes that the growth rate of each developing-country region is reducedproportionately from the low-case forecast, sothat the average growth for developing coun-tries as a group is equal to that experienced inthe 1990s (1.7 percent in per capita terms).

Consumption trends. In previous povertyforecasts, the projected growth rate of percapita consumption for households was takenfrom forecasts of private consumption fromthe national income accounts. By contrast, thescenarios outlined below take account of re-cent research that shows that the growth inhousehold consumption from survey data hasbeen lower on average than private consump-tion growth as measured by the national in-come accounts. Data for 142 time periods(during the 1980s and 1990s) for 60 countriessuggest that the growth of per capita con-sumption from household surveys was an esti-mated 87 percent of the growth rate in privateconsumption from the national accounts.35



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The most likely explanation for this discrep-ancy is that the surveys do not pick up fullythe growth in living standards of the rich.36 Asthe poverty estimates are based on consump-tion from household surveys, we assume inpoverty forecasts for most developing coun-tries that the growth rate of this variable willequal 87 percent of the growth rate of privateconsumption from the national income ac-counts. The failure to adjust the forecast ofhousehold consumption growth to reflect thehistorical divergence from the national incomeaccounts has resulted in substantial overesti-mation of the rate of poverty reduction in pastforecasting exercises.

The discrepancy between consumptiongrowth from the household surveys and thenational accounts is larger in China and India(which together account for more than half ofthe world’s poor) and in the Europe and Cen-tral Asia region. For China, the time series ev-idence indicates that 72 percent of a gain inprivate consumption is reflected in householdconsumption, and this adjustment is used inthe projections. For India, only 28 percent ofan increase in private consumption is reflectedin the household consumption, and in Europeand Central Asia the time series evidence forthe 1990s suggests virtually no correlation be-tween the two consumption aggregates. It isdifficult to understand these unusually largediscrepancies, which probably reflect seriousdata problems, as well as the failure to capturethe consumption levels of the rich. Thus, theprojections for India and the ECA region as-sume that the share of national accountsgrowth reflected in the survey mean will equal51 percent over the forecast period, the lowerbound of the 95 percent confidence intervalfor the estimate for the developing world as a whole (excluding China, India, and Europeand Central Asia).37

Distribution. The other determinant of theincidence of poverty is in the distribution ofhousehold consumption. Long-term cross-country evidence suggests that most countrieshave not experienced a systematic trend inhousehold consumption inequality as mea-

sured using household survey data. Thus, theassumption for the bulk of the developingcountries is that inequality will not changeover the forecast period.

However, there are exceptions. The 1990sdid witness a dramatic rise in inequality in theEurope and Central Asia region. We assumethat this was a transitional phenomenon andwill not continue. Further, the available data do indicate a rise in inequality in China andIndia over the past decade,38 in part because ofslower growth in rural areas, where the major-ity of the poor live, than in urban areas. We as-sume that inequality will continue to rise inboth countries over the forecast period. InChina, the liberalization of trade in agriculturalcommodities and land markets is likely to allowa shift to more remunerative crops and largerlandholdings. Since good quality land is scarce,the consolidation of landholdings and higherreturns to good quality land are likely to lead tohigher levels of inequality in rural areas. More-over, continued integration with the worldeconomy will increase the demand for skilledlabor. Inequality within urban areas may rise,as wages increase rapidly for skilled workers inmanufacturing and some services while low-skill service workers experience lagging wagesunder the twin pressures of migrant laborersand laid-off workers from the state enterprises.Rising demand for skilled labor may also in-crease inequality between urban and ruralareas, as the gap in educational attainment be-tween the two is high. Thus, both scenarios as-sume that urban incomes will increase morerapidly than rural incomes, and that inequalitywithin both the rural and the urban sectors willincrease slightly, in the form of a 10 percenthigher Gini coefficient in each sector by 2015.

In India, rising inequality during the 1990sappears to have slowed the rate of poverty re-duction relative to that of the previous decade.So far, reforms have largely bypassed the econ-omy in rural areas, where the majority of the poor live, leading to a wide divergence ofgrowth between urban and rural areas. Weakinfrastructure services, limited education, andinadequate health care have made it difficult



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for the poor to share equally in the country’srapid growth. For example, the liberalizationprocess is increasing returns to education, whileeducation is inequitably distributed (one-thirdof men, and 60 percent of women, over theage of 15 are illiterate). The forecasts assumethat the divergence in consumption growthbetween rural and urban areas will continuealong past trends.

Scenarios. In scenario A, with base casegrowth (adjusted for historical differences be-tween household survey and national incomeaccounts consumption) and rising householdconsumption inequality in China and India,the world as a whole would be on track toreach the International Development Goal ofreducing the share of people living on less than$1 per day by 2015 to half of what it was in1990. The total number of poor people woulddecline to about 800 million (see table 1.10 forthe forecasts of total population in developingcountries). But not all regions would be ontrack: Africa would be far from reaching thegoal even under this favorable growth sce-nario. With low case growth rates (scenario B),the world as a whole would not reach the tar-get. Only the countries of East Asia would beable to reduce poverty beyond the target ofhalf the 1990 incidence. The total number ofpoor people in the world (excluding China)would remain unchanged from the 1990 levelof about 1 billion.39 Finally, if aggregate GDPgrowth in developing countries over the next

15 years were to equal the average of the1990s, then progress in poverty reductionwould be even slower than in scenario B, andthe number of people living on less than $1 aday at the end of the forecast period would beonly marginally lower than in 1998. The num-ber of poor based on the $2 per day levelwould actually increase. Table 1.11 provides asummary of the poverty forecasts, and tables1.12 and 1.13 give regional details for the twoscenarios that use the base case and low casegrowth rates.

The preceding scenarios highlight the im-portance of achieving fast growth and distrib-uting the benefits of growth equitably. Without



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Table 1.10 Population estimates andprojections, developing countries, 1998–2015(millions of people)

Region 1998 2015

East Asia and Pacific 1,817 2,099Excluding China 569 708

Eastern Europeand Central Asia 475 483

Latin Americaand the Caribbean 502 623

Middle Eastand North Africa 286 390

South Asia 1,305 1,676Sub-Saharan Africa 627 914

Total 5,011 6,185Excluding China 3,763 4,794


Table 1.11 Poverty in developing countries under scenarios of base case growth(scenario A); low case growth (scenario B); and 1990s average growth, 1990, 1998, 2015

$1 a day $2 a day

Headcount ratio Number of poor Headcount ratio Number of poor(percent) (million) (percent) (millions)

1990 29.0 1,276 61.7 2,7181998 23.4 1,175 56.1 2,812

2015: scenario A(base case growth) 12.6 777 36.7 2,272

2015: scenario B(low case growth) 16.4 1,011 43.2 2,672

2015: growth as in 1990s 18.7 1,157 47.5 2,938


macroeconomic stability, sustained structuralreforms, prudent and transparent use of publicresources, improvements in the provision ofpublic services and infrastructure to the poor,and actions to reduce vulnerability and give thepoor more voice in development choices, thepattern of sustained, inclusive growth that un-derlies the best scenario will not be realizedand millions more people will remain enslavedin poverty. Achieving the poverty reductiontargets also will require an increase in aid flowsto the poorest countries. With slow growthand increases in inequality, progress would bemuch slower everywhere, the target would beout of reach for all regions apart from EastAsia, and more than 200 million more peopleworldwide would remain mired in poverty. Ifpolicies are inadequate to achieve more thanthe slow growth of the 1990s, then the number

of people living in extreme poverty would re-main near current levels for the next 15 years.

In Africa, the number of people living inpoverty would increase under all scenarios. Ifthe lack of progress observed over the lastdecade with respect to other dimensions ofpoverty—life expectancy, school enrollment,and child mortality—continues, as may well bethe case if the AIDS epidemic is not stemmed,then the gap between the region and the rest ofthe world could widen significantly. This wouldbe a grim outlook, not just for Africa but forthe whole world, and efforts are needed in theregion and elsewhere to break with the recentpattern of conflict and crisis, and to deal withthe AIDS epidemic.

Even if the most optimistic scenario isachieved, 2.3 billion people would still be liv-ing on less than $2 per day in 2015. Thus, the



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Table 1.12 Regional breakdown of number of people living on less than $1 per day and head count index in developing countries, under scenarios of base case growth(scenario A) and low case growth (scenario B), 1990, 1998, and 2015

Number of people living on less than $1 per day

2015 2015Region 1990 1998 low case base case

East Asia and Pacific 452.4 267.1 100.7 65.1Excluding China 92.0 53.7 20.1 9.4

Europe and Central Asia 7.1 17.6 9.0 6.3Latin America and the Caribbean 73.8 60.7 58.3 42.8Middle East and North Africa 5.7 6.0 6.2 5.1South Asia 495.1 521.8 410.7 296.7Sub-Saharan Africa 242.3 301.6 426.2 360.6

Total 1,276.4 1,174.9 1,011.2 776.5Excluding China 915.9 961.4 930.6 720.9

Headcount index (percent)




Total 29.0 23.4 16.4 12.6Excluding China 28.1 25.6 19.4 15.0


global war on poverty is likely to be with uswell into the twenty-first century.

In closing, it is important to note that theseprojections have some serious limitations.First, despite enormous progress in measuringpoverty over the past 10 years, the databasehas significant weaknesses: recent data aremissing for a number of countries, especially inAfrica, where renewed efforts are needed to in-stitutionalize survey work that began in the1990s. Major questions remain as to the trendsfor India. In addition, our understanding oftrends in inequality and the divergence be-tween national accounts and household-basedmeasures of private consumption is limited.Research to address some of these limitations,including further analysis of the data for India,is underway.

Notes1. See Gale and Sabelhous 1999.2. Gross capital inflows (largely portfolio flows) ex-

ceeded $750 billion in 1999. See U.S. Department ofCommerce, Survey of Current Business, various issues.

3. In the four quarters through the second quarterof 2000, year-on-year growth in nonfarm business out-put per hour has averaged 4 percent.

4. Indeed, Gordon (forthcoming) evaluates recentlabor productivity growth in the United States, apply-ing cyclical factors, and he argues that the failure it-self—of IT productivity gains to penetrate into non-ITsectors—implies that the growth momentum in trendproductivity will not be sustained.

5. For a number of service industries (for example,education), the current method for measuring produc-tivity involves assuming that real output and pricechanges move together—that is to say that there is nolabor productivity growth (Bosworth and Triplett2000).



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Table 1.13 Regional breakdown of number of people living on less than $2 per day andhead count index in developing countries, under scenarios of base case growth (scenario A) and low case growth (scenario B), 1990, 1998, and 2015

Number of people living on less than $1 per day


East Asia and Pacific 1,084.4 884.9 472.2 323.2Excluding China 284.9 252.1 187.2 114.6

Europe and Central Asia 43.8 98.2 57.6 46.9Latin America and the Caribbean 167.2 159.0 161.6 132.9Middle East and North Africa 58.7 85.4 79.7 57.5South Asia 976.0 1,094.6 1,213.6 1,077.8Sub-Saharan Africa 388.2 489.3 690.3 636.7

Total 2,718.4 2,811.5 2,675.0 2,275.1Excluding China 1,918.8 2,178.7 2,390.0 2,066.5

Headcount index (percent)




Total 61.7 56.1 43.3 36.8Excluding China 58.8 57.9 49.9 43.1


6. This figure is strongly influenced by large carry-over in GDP levels from late 1999 and first-half 2000;growth on an annualized basis is anticipated to fallwithin a range of 3 percent during the second half ofthe year.

7. This assumes little or no increase in participationrates from the average of the 1990s.

8. The total population of the EU, assuming allcountries now under consideration (excluding Turkey)join, will be close to 500 million in 2010, with the newmembers representing close to 25 percent of the total.

9. There is an entire literature on strategic linkagesbetween multilateral and regional integration agree-ments. See World Bank 1999, Section 5, for more de-tailed discussion.

10. For more discussion, see Hoekman andKostecki 1995.

11. Nonetheless, many developing-country mem-bers of the WTO—particularly the least developed—still face significant impediments in being able to par-ticipate fully in the workings of the WTO and otherinternational bodies related to international trade (seechapter 3). Capacity building, technical assistance, andfinancial resources to help developing countries im-prove their presence in Geneva are major items on theiragenda for the new post–Uruguay Round negotiations.

12. Some authors have argued that North-Southconclaves are an important impetus for democratiza-tion, and very recent experience with EU enlargementand the NAFTA do not contradict this view.

13. Forty-two of the 108 notifications listed in fig-ure 1.13 represent extensions of the EU or NAFTA.

14. Since intraregional trade is usually amongcloser substitutes than extraregional trade, the formercan be more vulnerable to the business cycle.

15. The performance of stock markets in develop-ing countries was heavily influenced by the technologyand telecommunications sectors, which accounted forsome 65 percent of total equity placements in the firsthalf of 2000.

16. The 1999 figure of $180 billion reflects a revi-sion from the estimate of $192 billion presented inGlobal Development Finance 2000 because of lowerlevels of inflows to China and Saudi Arabia during theyear.

17. However, the recent downtrend in FDI to Chinamay be reversed, as the value of approved projects rose25 percent year on year during the first five months of2000.

18. Global crossborder acquisitions of a more than10 percent–stake reached $720 billion in 1999, up 35percent from 1998.

19. Oil prices deflated by the U.S. Dollar Manufac-tured Export Unit Value (MUV) index for France, Ger-many, Japan, the United Kingdom, and the United

States. The latter index has been essentially flat overthe 1990s.

20. See appendix 1, Regional Economic Prospects,for further details.

21. The percentage of the population on wages“below subsistence” remains high at 27.6 percent, ac-cording to official estimates as of June 2000. However,it has declined significantly from the 34 percent aver-age of 1999.

22. The EU market now accounts for 60 to 80 per-cent of Central and Eastern European countries’ exports.

23. Figures for 1998 were updated in September2000 using data from surveys that have become avail-able only recently, and they differ slightly from the pre-liminary estimates included in last year’s Global Eco-nomic Prospects.

24. The estimates of global poverty given here arebased on consumption, and income data are adjustedaccordingly.

25. A common way to measure inequality is to cal-culate the Gini coefficient. The Gini coefficient wouldbe equal to 0 if all had the same income and to 1 if oneperson had all the income and everybody else hadnone. We observe Gini coefficients for income in therange of 0.2 –to 0.6 (the Slovak Republic has the low-est Gini, 0.195, while Swaziland and Brazil have thehighest (0.6); among OECD countries, Austria has thelowest Gini at 0.23 and New Zealand the highest at0.44 (World Bank 2000c).

26. Inequality is estimated with a certain degree ofuncertainty, as it is based on sample surveys. Thuschanges over time need to be considered carefully to as-sess whether they are significant to a certain degree orwhether they fall within the margin of error. The esti-mation of standard errors is complex, and work on thisis just beginning.

27. See for example Deininger and Squire 1996;Ravallion and Chen 1997; Bruno, Ravallion, andSquire 1998; Dollar and Kraay 2000.

28. For example, in the Indian state of UttarPradesh—which has a population of 160 million and apoverty rate of about 40 percent—agriculture accountsfor 40 percent of GDP and provides 75 percent ofemployment.

29. For example, in Mexico, a country that imple-mented one of the most ambitious trade policy reformprograms from 1985 to 1988, the nominal tariff andimport license coverage in apparel and footwear wereamong the highest in manufacturing (Revenga 1995).A similar prereform pattern of protection was alsofound in Morocco (Currie and Harrison 1997).

30. The data for China pose several problems. First,consumption per capita, as estimated by surveys, hasbeen growing less rapidly than estimates of privateconsumption from the national accounts would sug-



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gest. Second, urban household surveys do not includerural migrants. Third, savings rates are very high inChina, even among the poor, so poverty estimatesbased on consumption measures yield a higher povertyincidence than those based on income. Moreover, it ap-pears that savings rates increased among the poor overthis period. The estimates above differ from official es-timates, and new survey work will be needed to recon-cile the differences (work on urban surveys is underway). These discrepancies cast doubt on the estimatesfor China and therefore on the global estimates, giventhe size of the country.

31. Unfavorable trends in agriculture partly reflectinefficiencies in public support to farming, as well aslimited reform, in contrast to the deregulation of theurban sector.

32. The major differences are that consumptionmeasures from household surveys sometimes do not in-clude imputed housing, and private consumption in thenational accounts typically includes spending by non-profit enterprises (nongovernmental organizations, po-litical parties, churches, charities, and so on) as well ashouseholds.

33. For example, a household with at least 2.5acres enjoyed 43 percent higher per capita consump-tion in 1995–96 than did a landless rural household(World Bank 1999).

34. This excludes consumption by other private en-tities such as nonprofit organizations, political parties,unincorporated enterprises and so forth that are oftenincluded in the national accounts estimate of privateconsumption.

35. See Ravallion 2000. India, China, and Europeand Central Asia are excluded from this estimation.

36. There is a presumption that higher-income groupstend to underreport consumption. Moreover, consump-tion measures from household surveys sometimes donot include imputed housing expenditures, which, infast-growing economies, are likely to grow rapidly inthe higher-income groups. There are other explanationsfor the divergence between survey mean household con-sumption growth rates and those from the nationalaccounts, including the fact that (for most countries)private consumption in the national accounts includesspending by nonprofit enterprises (such as churches andcharities and so on) as well as households, and the shareof the nonprofit sector is probably rising.

37. This assumption has an important impact onthe forecasts. For example, if in India consumptionwere assumed to rise at 87 percent (rather than 51 per-cent) of the national income accounts growth rate, thenby 2015 the forecast (using base case growth rates) forextreme poverty in South Asia would be only abouthalf the 22 percent rate shown for scenario A.

38. For example, the per capita consumption (asmeasured in the household survey) of the bottom 10percent of China’s population increased by 2.5 percentper year during 1990–98, while per capita consump-tion of the top 10 percent increased by 11 percent peryear. In India, per capita consumption of the bottom 10percent did not increase at all during 1985–97, whilethe top 10 percent saw a rise of 4.7 percent per year.

39. These results are roughly similar to the povertyforecasts in Global Economic Prospects 2000. In sce-nario A, the head count poverty index is 15.9 percentin 2008 (the last year of the GEP 2000 forecasts), com-pared with 12.3 percent in GEP 2000. This year’s fore-cast is more pessimistic because we assume that growthin household consumption will be slower than in pri-vate consumption in the national income accounts.Conversely, the GEP 2000 forecast for scenario B wasmore pessimistic (head count index of 21.9 percentcompared with 19.5 percent now), because last year weassumed a rise in inequality in all regions.

ReferencesBosworth, Barry P., and Jack E. Triplett. 2000. “Num-

bers Matter.” Brookings Institution Policy Brief63 (July). Washington, D.C.

Bruno, Ravallion, and Squire 1998 [[ref. TK, cite is inpoverty section notes]]

Chen, S., and M. Ravallion. 2000. “How Have theWorld’s Poorest Fared in the 1990s?” Policy Re-search Working Paper 2409, World Bank, Wash-ington, D.C. [[Or Ravallion and Chen, as inpoverty section notes—will CK]]

Collier and Venables. 1999. [[CITED FIG 1.14.]]Council of Economic Advisors. 2000. “Economic Re-

port of the President.” Washington, D.C. [[CKMick]]

Currie and Harrison. 1997. [[ref. TK—-cite is inpoverty section.]]

Deininger and Squire. 1996. www.worldbank.org/growth/dddeisqu.htm); [[ref. TK, is in povertynotes]]

Dollar and Kraay 2000 [[(ref TK, cite is in poverty sec-tion) CITED BOX 1.3]]

Gale and Sabelhous. 1999. [[CITED IN NOTE 1.]]Gordon, Robert J. Forthcoming. “Does the ‘New’

Economy Measure up to the Great Inventions ofthe Past?” Draft for Journal of Economic Per-spectives.

IMF (International Monetary Fund). 2000. World Eco-nomic Outlook: 2000. Preliminary edition, Sep-tember. Washington, D.C.

Jorgenson, Dale W., and Kevin J. Stiroh. 2000. “Indus-try-level Productivity and Competitiveness be-



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tween Canada and the United States: U.S. Eco-nomic Growth at the Industry Level.” AmericanEconomic Review 90 (2): 161–7.

J.P. Morgan. 2000. [[CITED P. 7.]]Kasman, Bruce. 2000. “U.S. productivity growth: It’s

breadth that matters.” J. P. Morgan Global DataWatch. August. [[I can’t find this reference in thetext]][[UNDER J.P. MORGAN P. ?]]

Kotlikoff and others. 2000. [[CITED P. 12.]]OECD (Organisation for Economic Co-operation and

Development). 1999. Economic Survey of Japan.November. Paris. [[CK Mick]]

Oliner, Stephen D., and Daniel E. Sichel. 2000. “TheResurgence of Growth in the Late 1990s: Is In-formation Technology the Story?” Federal Re-serve Board. May. Washington, D.C.

Ravallion 2000. [[ref. TK—is in poverty section.CITED BOX 1.3]] “A Note on ForecastingPoverty Using National Accounts Growth Rates.”Background paper for GEP 2000. World Bank,Washington, D.C.

Revenga 1995 [[ref TK—-is in poverty section.]]Suryahadi and others. 2000. [[ref. TK——cite is in

poverty section notes CITED P. 35.]]Triplett, Jack E. 1999. “Economic Statistics, the New

Economy, and the Productivity Slowdown.” Busi-

ness Economics, April [[Need volume and pagenumbers.]]

U.S. Department of Commerce. 1996. “Prospects forGrowth in Japan in the 21st Century.” Office ofthe Chief Economist Economics and Statistics Ad-ministration Research Series: OMA 2-96, No-vember. Washington DC. [[CK Mick]]

———. Various years. Survey of Current Business.[[CITED IN NOTE 2.]]

UNAIDS (United Nations [[AU: SPELL OUT.]]. 2000.Report on the Global HIV/AIDS Epidemic.Geneva: Joint United Nations Programme onHIV/AIDS), http://www.unaids.org/epidemic_up-date/report/Epi_report.pdf.

World Bank. 1999. [[ref TK—cite is in notes of povertysection]]

———. 2000a. India: Reducing Poverty, AcceleratingDevelopment. New York: Oxford UniversityPress.

———. 2000b. “Sri Lanka: Recapturing Missed Op-portunities.” Report 20430-CE. Poverty Reduc-tion and Economic Management, South Asia Re-gion, Washington, D.C.

———. 2000c. World Development Indicators 2000. ———. 2000d. World Development Report 2000/01.



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UNPUBLISHED PROOFSP R O S P E C T S F O R D E V E L O P I N G C O U N T R I E S A N D W O R L D T R A D E

Table A1 Membership of selected major regional integration agreements (RIAs) and date of formation

INDUSTRIAL AND DEVELOPING ECONOMIESEuropean Union (EU): formerly European Economic Community (EEC) and European Community (EC), 1957: Belgium, France,

Germany, Italy, Luxembourg, Netherlands; 1973: Denmark, Ireland, United Kingdom; 1981: Greece; 1986: Portugal, Spain;1995: Austria, Finland, Sweden.

European Economic Area (EEA): 1994: EU, Iceland, Liechtenstein, Norway.Euro-Mediterranean Economic Area (Euro-Maghreb): Bilateral agreements, 1995: EU and Tunisia; 1996: EU and Morocco.EU bilateral agreements with Eastern Europe: 1994: EC and Hungary, Poland, 1995: EC and Bulgaria, Romania, Estonia, Latvia,

Lithuania, Czech Republic, Slovak Republic, Slovenia.Canada-US Free Trade Area (CUSFTA): 1988: Canada, United States.North American Free Trade Area (NAFTA): 1994: Canada, Mexico, United States.Asia Pacific Economic Cooperation (APEC): 1989: Australia, Brunei Darussalam, Canada, Indonesia, Japan, the Republic of

Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, United States; 1991: China, Taiwan (China), Hong Kong(China); 1993: Mexico, Papua New Guinea; 1994: Chile; 1998: Peru, the Russian Federation, Vietnam.

LATIN AMERICA AND THE CARIBBEANAndean Pact: 1969: revived in 1991, Bolivia, Colombia, Ecuador, Peru, Republica Bolivariana de Venezuela.Central American Common Market (CACM): 1960: revived in 1993, El Salvador, Guatemala, Honduras, Nicaragua; 1962:

Costa Rica.Southern Cone Common Market, Mercado Común del Sur (Mercosur): 1991: Argentina, Brazil, Paraguay, Uruguay.Group of Three (G-3): 1995: Colombia, Mexico, Republica Bolivariana de Venezuela.Latin American Integration Association (LAIA): formerly Latin American Free Trade Area (LAFTA), 1960: revived 1980, Ar-

gentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela.Caribbean Community and Common Market (CARICOM): 1973: Antigua and Barbuda, Barbados, Jamaica, St. Kitts and Nevis,

Trinidad and Tobago; 1974: Belize, Dominica, Grenada, Montserrat, St. Lucia, St. Vincent and the Grenadines; 1983:The Bahamas (part of the Caribbean Community but not of the Common Market).

MIDDLE EAST AND ASIAAssociation of Southeast Asian Nations (ASEAN): 1967: ASEAN Free Trade Area or AFTA was created in 1992, Indonesia,

Malaysia, Philippines, Singapore, Thailand; 1984: Brunei Darussalam; 1995: Vietnam; 1997: Myanmar, Lao People’sDemocratic Republic; 1999: Cambodia.

Gulf Cooperation Council (GCC): 1981: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates.South Asian Association for Regional Cooperation (SAARC): 1985: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan,

Sri Lanka.

AFRICACross-Border Initiative (CBI): 1992: Burundi, Comoros, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles,

Swaziland, Tanzania, Uganda, Zambia, Zimbabwe.East African Cooperation (EAC): 1967: formerly East African Community (EAC), broke up in 1977 and recently revived, Kenya,

Tanzania, Uganda.Economic and Monetary Community of Central Africa (CEMAC): 1994: formerly Union Douanière et Economique de l’Afrique

Centrale (UDEAC), 1966: Cameroon, Central African Republic, Chad, Congo, Gabon; 1989: Equatorial Guinea.Economic Community of West African States (ECOWAS): 1975: Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, Gambia,

Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo.Common Market for Eastern and Southern Africa (COMESA): 1993: Angola, Burundi, Comoros, Djibouti, Egypt, Ethiopia,

Kenya, Lesotho, Malawi, Mauritius, Mozambique, Rwanda, Somalia, Sudan, Swaziland, Tanzania, Uganda, Zambia,Zimbabwe.

Indian Ocean Commission (IOC): 1984: Comoros, Madagascar, Mauritius, Seychelles.Southern African Development Community (SADC): 1980: formerly known as the Southern African Development Coordination

Conference (SADCC), Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia, Zimbabwe; 1990:Namibia; 1994: South Africa; 1995: Mauritius; 1998: Democratic Republic of the Congo, Seychelles.

Economic Community of West Africa (CEAO): 1973: revived in 1994 as UEMOA, Benin, Burkina Faso, Côte d’Ivoire, Mali,Mauritania, Niger, Senegal.

West African Economic and Monetary Union (UEMOA or WAEMU): 1994: Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger,Senegal, Togo, 1997: Guinea-Bissau.

Southern African Customs Union (SACU): 1910: Botswana, Lesotho, Namibia, South Africa, Swaziland.Economic Community of the Countries of the Great Lakes (CEPGL): 1976: Burundi, Rwanda, Democratic Republic of the

Congo.

Source: World Bank 1999.

DURING THE 1960S AND 1970S, DEVELOP-ing economies exhibited severe trade-related distortions, including quantita-

tive restrictions on imports and exports, veryhigh tariffs, overvalued exchange rates, andadministrative controls on foreign exchangeallocation. Although growth remained rapidagainst a background of a favorable externalenvironment up to the first oil shock in 1973,policies of import control and substitution in-duced inefficiencies as well as rigidities in eco-nomic structure. Often, they resulted in peri-odic balance of payments crises. Subsequently,the failure of many countries to adjust ade-quately to the external shocks of the 1970sand early 1980s underlined the importance ofreforms designed to encourage responsivenessto market signals, improve the investment cli-mate, and to enhance export diversification.

One result was that most developing coun-tries implemented significant liberalization oftheir trade regimes during the late 1980s andthe 1990s. Their export growth acceleratedduring the 1990s, and kept pace with the 6percent per year expansion of world trade in volume terms. However, average per capitagrowth rates in developing countries as a groupremained well below those of the rich countriesin the 1990s. Though the giant low-incomecountries China and India embarked on marketreforms and grew rapidly, growth in a largenumber of small, poor countries was disap-pointing. This led many observers to questionthe success of liberalization programs.

This chapter reviews the export andgrowth performance of developing countriesin the 1990s, giving special attention to thepoorest economies. It reviews the decline intrade barriers during the 1990s, examines out-put and export trends, and analyzes domestictrade-policy constraints. Finally, it considersexternal barriers to developing countries’ ef-forts to accelerate their export growth.

The chapter reaches the following con-clusions:

• Trade regimes were significantly liberal-ized during the late 1980s and 1990s. De-veloping countries cut the average tariffrate by half, narrowed tariff dispersion inmany instances, and greatly reduced theincidence of nontariff barriers to trade.Most countries now rely on market forcesrather than administrative fiat to allocateforeign exchange, and black market pre-miums have declined significantly. Al-though the degree of trade protection isstill high in many developing countries,gross distortions in trade regimes havebeen greatly reduced.

• Despite the reforms and improved globaleconomic conditions, developing coun-tries’ average real per capita incomes in-creased by less than 1 percent per yearduring the 1990s, compared with morethan 2 percent in industrial countries.This outcome is partially affected by thepolitical shocks and various foreign and

1

Trade Policies in the 1990sand the Poorest Countries

2


Unpublished Proofs

civil conflicts. Eighteen developing coun-tries were severely affected by conflict,and as a group they suffered declines inper capita income of more than 1 percentper year. Incomes also fell in most transi-tion economies following the breakup ofthe Soviet Union. Excluding countries hitby these severe political shocks, develop-ing countries saw per capita incomes riseby 1.5 percent a year, about 1 per centfaster than in the 1980s.

• These countries also saw merchandise ex-port growth of 6.4 percent per year dur-ing the 1990s, about 2 percent faster thanduring the 1980s. Export outcomes werevery uneven, however. Regions that sawthe largest declines in trade barriers, in-cluding East Asia, South Asia, and LatinAmerica also saw the largest accelerationin exports. By contrast, growth in exportvolumes in Sub-Saharan Africa averagedonly 2 percent per year, in part becauseworld trade of the products Africa exportsgrew at half the rate of growth of worldtrade. Countries in Sub-Saharan Africa andin the Middle East and North Africa alsosaw market share decline in their tradi-tional exports.

• The poorest countries were those most af-fected by conflict and political shocks. Tenof the 32 low-income countries were af-fected by conflict. Average per capita in-come of the low-income, small countriesdeclined during the 1990s, but averaged 1 percent a year in real terms if countriesinvolved in conflict are excluded. This rep-resents a significant acceleration comparedwith the 1980s, but is still well below theaverage of middle-income countries. Ex-ports also accelerated in the small low-income countries not involved in conflict,but grew about 3.5 percent slower than inthe middle-income countries in the 1990s.

• Despite significant progress, many of thepoorest countries have not put in place thepolicies necessary to raise living standardsby improving (or even maintaining) ex-port shares in traditional markets and en-

couraging rapid diversification. Appreci-ated real exchange rates and high real ex-change rate volatility have often beenassociated with a muted export responseto trade liberalization and other reformmeasures. Per capita income growth wassignificantly faster in countries with rela-tively stable real exchange rates. Addition-ally, institutional weaknesses, such as the absence of effective duty exemption/drawback programs, coupled with theneed to use revenues from tariffs on inter-mediate and capital goods as a revenuesource, have acted as an effective tax onexports in many of the poorest developingcountries. Finally, weak export infrastruc-ture, inadequate ancillary export services,and high transport costs—often in part theresult of policy shortcomings—have leftmany of the poorest countries (particu-larly the landlocked ones) at a competitivedisadvantage on international markets.

• External barriers to exports from devel-oping countries, especially agricultural andlabor-intensive products, continue to im-pede the integration of the poorest eco-nomies into the world market. While theshare of developing countries in worldtrade of manufactures rose sharply in the1990s, their share of world trade in agri-cultural products and processed foods hasdeclined. In part this development is theresult of domestic policies that restrainagricultural exports. But high trade bar-riers imposed by industrial countries onagriculture and processed food imports,and agricultural subsidies in industrialcountries, are also important and have be-come even more important with the do-mestic policy reforms in developing coun-tries. These barriers particularly penalizerural areas where the majority of the poor in developing countries reside, andimpede growth in the poorest countries in areas of their comparative advantage.Various restrictions and subsidies in in-dustrial countries also hamper the poorestcountries’ efforts to diversify into down-



Unpublished Proofs

stream processing, higher value added,and faster-growing products. The poorestcountries are the least equipped to dealwith these external barriers because ahost of other domestic policy and institu-tional weaknesses inhibit their diversifica-tion into less restricted sectors.

Reductions in barriers to trade

Developing countries made substantialprogress in reforming their trade and ex-

change rate policies during the 1990s. Tariffswere cut, their dispersion declined in manycountries, fewer products were covered byquantitative restrictions (QRs), the number ofcountries allocating foreign exchange throughadministrative means (as measured by the In-ternational Monetary Fund) dwindled, and the black market premium narrowed. Althoughany one of these measures is an imperfect guideto the restrictiveness of the trade regime,1

taken together they show enormous progressin opening the developing economies to inter-national trade. Several studies have found thatincreased openness is associated with eco-nomic growth (box 2.1).

Tariffs. The average tariff rate in develop-ing countries has been cut by at least half inthe last 20 years, from 32 percent in the firsthalf of the 1980s to 15.6 percent in the secondhalf of the 1990s. Tariff reductions have beensignificant in most regions (figure 2.1), buthave been largest in South Asia (where, how-ever, they remain the highest of any region),Latin America, and East Asia. In many devel-oping countries, the degree of tariff dispersionhas also declined (table 2.1). Despite this prog-ress, tariffs remain high in many countries, av-eraging more than 15 percent in three of thesix geographical regions in 1996–98.

Latin American countries reduced tariffssubstantially during the 1990s. Colombia, forexample, slashed import tariffs by 65 percentin just one year in 1991, while Argentina andNicaragua reduced them from an average of110 percent to 15 percent in one bold move in1992 (Dornbusch and Edwards 1995). India

reduced its average tariff from 100 percent in 1986 to around 33 percent in 1998, andBangladesh’s average tariff fell from 82 per-cent to 24 percent during the same period.

Tariffs in Africa have also been reduced,though more moderately: the average un-weighted tariff remains at almost 20 percent.Some countries have embarked on rapid re-forms, however. Tariffs fell in Kenya from41 percent in 1980–85 to 13.5 percent in1996–99 and in Guinea from 76.4 percent in1978–80 to 10.8 percent in 1990–95. A fewcountries, such as Zimbabwe, increased theiraverage tariffs (from 10 percent in 1980–85 to22.7 percent in 1996–99), reflecting in part theconversion of an import surcharge into tariffs.3

The Middle East and North Africa region hasseen little reduction in average tariffs, althoughthe signing of trade agreements with the Euro-pean Union in recent years by several countriesin the region should eventually pave the wayfor significant reductions.

Nontariff barriers (NTBs). Developingcountries in all regions have substantially re-duced the coverage of NTBs (such as licensing,prohibitions, quotas, and administered pricing)during the 1990s (table 2.2).4 In many coun-tries where NTBs remain more or less preva-lent (for example, India and Korea), commit-ments have been made to liberalize them in thefuture (Michalopoulos 1999). NTB coveragehas been reduced significantly in a number ofLatin American countries, with the remainingNTBs mainly on agricultural products (Dorn-busch and Edwards 1995). Most countries inSouth Asia have reduced NTBs significantly,though India still has restrictions on a relativelylarge number of imports.

Exchange rate regimes. The 1990s alsosaw a general move toward market-based for-eign exchange regimes. In 1991, 66 countrieshad restrictions on payments for current ac-count transactions, but by 1995 only 28 did(table 2.3). Many countries also undertook sig-nificant exchange rate reforms. The averageblack market premium for developing coun-tries, one indicator of the restrictiveness of for-eign exchange allocations as well as of macro-

T R A D E P O L I C I E S I N T H E 1 9 9 0 s A N D T H E P O O R E S T C O U N T R I E S

3

Unpublished Proofs


economic imbalances, fell almost 70 percentbetween the 1980s and the 1990s.5

The average black market premium hasremained low or fallen further in all regions.East Asian countries have had low black mar-ket premiums in recent years because theywere early adopters of an outward-orienteddevelopment strategy. Latin America alsoachieved impressive gains in the late 1980s,and South Asia in the first half of the 1990s.In Sub-Saharan Africa and in the Middle East

and North Africa, the considerable reductionsin black market premiums in many countriesare masked by two outliers (table 2.4).

Reforms by income group. The trend to-ward lowering tariffs and eliminating foreignexchange restrictions is evident in both low-income and middle-income countries. Theaverage tariff rate for low-income countriesfell from almost 45 percent in the early 1980s to 20 percent in the late 1990s, only slightlyabove the average rate for middle-income



Unpublished Proofs

A large number of cross-country empirical studieshave documented a strong relationship between

trade and growth.2 Dollar (1992) finds that two sep-arate measures of trade restrictions (an index of realexchange rate distortion and an index of real ex-change rate variability) are negatively correlated withgrowth in developing countries. Sachs and Warner(1995) find that an openness index reflecting tariffand nontariff barriers, the black market premium,and the existence of commodity marketing boardshas a high and robust negative coefficient in growthequations. Ben David (1993) finds that income levelsin countries that joined the European Common Mar-ket have tended to converge toward the level of therichest partners. Similar studies have documented in-come convergence among states within the UnitedStates. Edwards (1997) finds a significant, positiverelationship between openness and productivitygrowth, which is robust to several different measuresof openness. In a recent study designed to identifymeasures of openness that cannot be said to be af-fected by economic growth, Frankel and Romer(1998) find that countries that are geographicallyclosest to centers of demand have grown faster.

The positive relationship between openness andgrowth has also been supported by numerous casestudies (Bhagwati 1978; Little, David, Scitovsky, and Scott 1970; and Papageorgiou, Choksi, andMichaely 1991), firm-level analyses (Bigsten andothers 1998; Clerides, Lach, and Tybout forthcoming;and Kraay 1997), as well as a combination of eco-nomic theory and anecdotal evidence dating back at

Box 2.1 Openness and growth—evidence,old and new

least to Adam Smith. But the statistical relationshipidentified by cross-country studies is still occasionallychallenged by researchers. For example, a recentanalysis (Rodriguez and Rodrik 1999) raises severalquestions about the findings, and argues that the ad-vocates of trade liberalization claim too much. Insome cases the indicators of openness that re-searchers use as measures of trade barriers are highlycorrelated with other sources of poor economic per-formance, including macroeconomic policy, or theyimperfectly reflect a country’s trade policy regime.For example, most of the explanatory power of theSachs and Warner index is derived from just two in-dicators—the black market premium and state mo-nopoly over major exports. These two indicators arecorrelated with a wide range of macroeconomic pol-icy and institutional factors other than trade open-ness, and thus yield an upward bias in the estimationof trade restriction effects. Rodriguez and Rodrik(1999) underline that tariff and nontariff barriers,two variables that directly measure trade openness,have little explanatory power when considered sepa-rately in the cross-country regression studies.

It is perhaps not surprising that the effects oftrade reform are difficult to isolate statistically, sincetrade liberalization is rarely implemented as a stand-alone policy measure, nor is such a course recom-mended. It has long been accepted that trade liberal-ization needs companion policies to be successful,often including other market reforms, macroeconomicstabilization, exchange rate adjustment, and adequatesafety nets. (See, for example, World Bank 1997b.)

countries (figure 2.2). By the late 1990s, mostof the low-income countries had eliminatedcurrent account restrictions and reduced theblack market premium to negligible levels.

Trends in trade and economicgrowth

The lowering of trade barriers and wide-spread adoption of market-based foreign

exchange regimes during the 1990s was ac-


5

Unpublished Proofs


Figure 2.1 Average unweighted tariff rates by regionPercent

Source: World Bank data, and World Trade Organization data.

0

South Asia Latin Americaand the

Caribbean

East Asiaand Pacific

Sub-SaharanAfrica

Middle Eastand

North Africa

Europe andCentral Asia

Industrialeconomies

10

20

30

40

50

60

70

1980–85 1986–90 1991–95 1996–98

Table 2.2 Frequency of total core nontariffmeasures for developing countries,1989–98

Region 1989–94 1995–98

East Asia and Pacific (7) 30.1 16.3Latin America and the Caribbean (13) 18.3 8.0Middle East and North Africa (4) 43.8 16.6South Asia (4) 57.0 58.3Sub-Saharan Africa (12) 26.0 10.4

Notes: Average number of commodities subject to nontariffmeasures as a percentage of total. Figures in parentheses arethe number of countries in each region for which data areavailable.Source: Michalopoulos 1999.

Table 2.1 Standard deviation of tariff rates

1990–94 1995–98

South Asia

Bangladesh 114.0 14.6India 39.4 12.7Sri Lanka 18.1 15.4

Sub-Saharan Africa

South Africa 11.3 7.2Malawi 15.5 11.6Zimbabwe 6.4 17.8

East Asia and Pacific

Philippines 28.2 10.2Thailand 25.0 8.9Indonesia 16.1 16.6China 29.9 13.0

Latin America

and the Caribbean

Argentina 5.0 6.9Brazil 17.3 7.3Colombia 8.3 6.2Mexico 4.4 13.5

Middle East and North Africa

Egypt, Arab Rep. of 425.8 28.9Tunisia 37.4 11.7Turkey 35.7 5.7

Notes: Country observations are for one year in the timeperiod noted above.Source: World Bank, World Development Indicators 1998;2000; WTO, Trade Policy Reviews.

Table 2.4 Average black market premium(percent)

Region 1980–89 1990–93 1994–97

Totala 82.0 78.2 20.3East Asia and Pacific 3.6 3.6 3.2Middle East and North Africa 165.6 351.6 46.5

Excluding outliersb 7.1 8.8 1.4Latin America and the Caribbean 48.7 13.1 4.4South Asia 40.8 45.1 10.1Sub-Saharan Africa 116.5 28.6 32.2

Excluding Nigeria 112.1 25.8 9.6

a. Sample of 41 developing countries.b. Algeria and the Islamic Republic of Iran.Source: World Bank data.

companied by an acceleration of trade in de-veloping countries. The improvement in the in-ternational environment in the 1990s, markedby lower interest rates and inflation but higherworld trade growth and non-oil commodityprices than in the 1980s, also contributed tothe acceleration of exports (table 2.5). More-over, developing countries faced a more stableglobal economy in the 1990s, as the volatilityof these key indicators declined. The growth ofdeveloping-country exports almost doubled inreal terms, to 6.2 percent a year in the 1990s,compared to 3.7 percent a year in the 1980s.6

Per capita income also accelerated, though moremodestly, from no growth in real terms in the1980s to 0.7 percent in the 1990s.

The observation that developing countriesas a group continued to exhibit relatively slowgrowth in per capita income in the 1990s—about one-third the rate of advance in the richcountries, despite large-scale liberalization and

export expansion, has sometimes been cited asevidence that increased integration with theglobal economy has not helped developingcountries, particularly the poorest. In fact, out-put declines in countries that were hit by se-vere political shocks, including the breakup of the Soviet Union and various external or internal conflicts, had a large effect on the developing-country aggregates, and the rise ofincomes in countries that did not suffer thesecalamities was considerable (table 2.6). Exclud-ing the transition economies and countriesinvolved in conflict, per capita GDP growthrates in developing countries averaged 1.5 per-cent per year during the 1990s, versus 0.4 per-cent in the 1980s, and export growth ratesaveraged 6.4 percent in the 1990s, comparedwith 4.3 percent in the 1980s. Furthermore,while developing countries became more openduring the 1990s, volatility declined in mostcountries (see box 2.2).



Unpublished Proofs

Table 2.3 Countries imposing restrictions on payments for current account transactions(percent)

Region 1980 1991 1995

East Asia and Pacific (9) 33 33 22South Asia (5) 100 100 40Middle East and North America (6) 67 67 33Sub-Saharan Africa (23) 85 83 39Latin America and the Caribbean (30) 44 60 17Europe and Central Asia (17) . . . 94 47Industrialized economies (12) 17 8 0Total (102) 55 65 27

Notes: Figures in parentheses are the number of countries in each regional grouping.Source: IMF, Exchange Arrangements and Exchange Restrictions, 1981, 1992, 1996.

With the exception of the countries intransition and conflict, there is little evidencethat developing regions that engaged in rapidtrade liberalization and companion reformssaw a deterioration in performance. In fact, de-veloping regions that saw the largest reductions

in tariffs during the 1990s also saw the mostrapid increases in GDP and exports.7 GDP andexport growth rates more than doubled inLatin America in the late 1980s and 1990s(table 2.7), a period that followed large ad-vances in trade liberalization as well as theadoption of important macroeconomic reformsand widespread privatization. South Asia andEast Asia also saw very sharp increases in ex-port growth rates and continued high GDPgrowth. By contrast, countries in Sub-SaharanAfrica and in the Middle East and North Af-rica made relatively less progress in reducingtariffs, and both GDP and export growth wasconsiderably slower than in the other regions.

Factors affecting developing country ex-ports. The acceleration of exports of develop-ing countries in the 1990s reflected highergrowth of world trade (itself a reflection inpart of the increased integration of developing


7

Unpublished Proofs


Figure 2.2 Merchandise export andGDP per capita growth in developingcountries in the 1990sPercent per year

7

6

5

4

3

2

1

0Developing countries

[84 countries]Developing countriesexcluding ECA andcountries in conflict

[59 countries]

Source: World Bank data.

Merchandise export growth, average 1990–98

GDP per capita growth, average 1990–98

Table 2.5 The international environment

1980–89 1990–98

U.S. Real LIBOR 4.8 2.4G-7 CPI (percent p.a.) 5.3 2.7G-7 Real GDP growth (percent p.a.) 2.8 2.1World Export Growth (percent p.a.) 4.4 6.4Oil price (index, 1987 = 100) 138.4 113.1Non-oil commodities price

(index, 1987=100) 115.6 123.0


Table 2.6 GDP and merchandise export growth rates(percent per year, in constant prices; group simple average)a

GDP per capita Merchandise exportsb

Number of1980–89 1990–98 1980–89 1990–98 countries

World 0.6 1.2 4.1 6.4 133Industrial countries 2.1 2.2 5.6 6.8 30Countries that lack consistent data –0.4 1.8 3.6 6.4 20Developing countries (excluding those

that lack consistent data) 0.3 0.7 3.7 6.2 83Europe and Central Asiac 2.6 –1.1 0.4 7.6 6Countries in conflict –1.1 –1.3 3.0 5.0 18Developing countries excluding ECA

and countries in conflict 0.4 1.5 4.3 6.4 59

a. All growth rates are estimated using least squares for the sample periods.b. Merchandise exports are deflated by constant 1987 U.S. dollar export prices.c. To give comparable data over 1980s and 1990s, the republics of the former Soviet Union are treated as one country.Source: World Bank data.

The increase in openness and acceleration ofgrowth during the 1990s were associated with

a small decline, and not an increase, in the volatilityof output and export growth in developing countries(see table). Output volatility increased significantly in countries affected by conflict and in Europe andCentral Asia (ECA), but fell for other developingcountries as a group and in three of the five geo-graphic regions. Although open economies are morevulnerable to external shocks, especially when theyare reliant on short-term capital flows (Easterly,Islam, and Stiglitz 2000), lower volatility in the1990s may have resulted from less severe global eco-nomic shocks than in the 1980s. The 1990s were, ofcourse, not tranquil for developing countries: theysaw the breakup of the Soviet Union, the Gulf Warfollowed by a global recession, the Tequila crisis, and

Box 2.2 Trends in volatilitythe global financial crisis of 1998–99. But the decadeof the 1980s was characterized by much larger oilshocks that contributed to two global recessions anddramatically affected economic volatility of oil ex-porters. Partly reflecting the oil shocks, the industrialcountries saw high inflation and international inter-est rates rose to high levels. The buildup of oil-related debts in the 1970s contributed to a massivedebt crisis in developing countries that lasted most ofthe decade.

Policies, as well as luck, may have contributedto the modest reduction in volatility in the 1990s,especially lower inflation in both industrial and de-veloping countries reflecting sounder macroeconomicpolicies. Increased integration with world marketsmay also have contributed to reduced volatility incountries where shocks originated domestically.

countries), as well as greater diversification oftheir export base and, for some developingregions, improved market share in traditionalmarkets (table 2.8).8 While South Asia, EastAsia, and Latin America saw both increases inmarket share in traditional markets and some

diversification, countries in the Middle Eastand North Africa and Sub-Saharan Africa sawsome diversification, but a large decline in mar-ket share in traditional markets.

Sub-Saharan Africa stands out because theregion experienced much slower growth of world



Unpublished Proofs

Volatility of growth rates

GDP per capita Merchandise exports Merchandise exports(1987 US$)a (1987 US$)a (import prices deflator)b

1980s 1990s 1980s 1990s 1980s 1990s

All countries 4.5 4.2 15.2 14.1 17.9 15.2Industrial 2.9 3.4 7.3 8.1 8.5 8.9Developing 5.0 4.4 17.6 16.0 20.8 17.1

Conflicts 6.3 7.3 21.3 28.9 25.6 30.0Europe and Central Asia 4.1 7.0 10.6 17.7 12.2 17.5Other countries 6.4 4.1 24.8 19.6 28.0 18.1Developing excluding ECA and countries

in conflict 4.8 3.6 17.3 13.2 20.3 14.4Sample 4.3 3.5 15.1 11.2 18.0 13.2

East Asia 3.8 4.6 10.4 10.8 12.8 9.1Middle East and North Africa 5.0 3.6 15.4 7.7 21.7 14.0Latin America and the Caribbean 4.3 2.7 12.6 13.0 15.6 14.6South Asia 2.1 2.6 11.8 8.2 14.0 10.0Sub-Saharan Africa 4.6 3.7 18.4 12.3 20.2 14.0

a. Standard deviation of growth rates expressed as a percentage in constant U. S. dollars.b. Standard deviation of growth rates of merchandise exports, deflated by import prices and expressed as a percentage.Source: World Bank data.

trade in its export basket in both decades thanother developing regions. Reflecting the contin-ued decline in primary commodity prices andlow-income elasticities of demand, world tradegrowth rates during the 1990s were less than 2 percent annually for exports of some of the poorest African countries, including Benin,Chad, Mali, and Mauritania, among others.

Trends in the poorest developing coun-tries. Excluding China and India, which saw

significant increases in per capita incomes inthe 1990s, per capita income declined in the1990s in the poorest developing countries as a group (figure 2.3). Since 1980, 10 of the 32low-income countries with consistent datahave been involved in foreign or civil wars (seebox 2.3). In 1999, one African in five lived ina country severely disrupted by conflict (WorldBank 2000a). Excluding countries affected byconflict, per capita GDP growth rates in small


9

Unpublished Proofs


Table 2.8 Decomposition of merchandise export growth for the sample countries(percent per year, current U.S. dollars)

1980/81–1989/90 1989/90–1997/98

World WorldTotal Trade Market Total Trade Market

Exports Growth Share Diversification Exports Growth Share Diversification

Total 3.9 4.1 –1.0 0.8 5.9 5.4 0.0 0.6East Asia

and Pacific 8.5 5.2 2.1 0.9 11.9 6.5 4.9 0.1Middle East and

North Africa 2.4 3.1 –1.3 0.6 3.0 6.2 –3.5 0.5Latin America

and theCaribbean 3.9 5.4 –2.2 0.8 8.3 6.7 0.6 0.9

South Asia 8.9 5.9 1.5 1.5 10.0 6.4 2.8 0.6Sub-Saharan Africa 1.0 2.9 –1.6 0.8 3.0 3.8 –1.2 0.6

Source: COMTRADE database, and authors’ calculations.

Table 2.7 GDP, services, and merchandise export growth rates(percent per year, in constant prices; group simple average)

ExportsPurchasing power of

GDPa Merchandisea Goods and servicesa GNFS exportsc

Number of1980–89 1990–98 1980–89 1990–98 1980–89 1990–98 1980–89 1990–98 countries

Totalb 3.1 3.8 4.3 6.4 4.5 6.3 2.2 6.2 59East Asia

and Pacific 5.4 6.3 5.7 14.5 5.9 14.3 4.1 13.7 7Middle East and

North Africa 3.6 3.4 5.3 6.0 5.5 5.0 0.2 3.3 9Latin America

and theCaribbean 1.8 3.6 3.9 9.1 4.8 8.1 1.6 8.8 14

South Asia 4.9 5.2 5.8 9.3 5.0 10.3 5.3 10.7 5Sub-Saharan

Africa 2.5 2.9 3.5 2.0 3.4 2.6 2.0 2.7 24

a. All growth rates are simple arithmetic averages of individual rates computed using least squares. Nonfactor services are de-flated by constant 1987 GDP deflator; other series are expressed in constant U.S. dollars.b. Refers to a sample of 59 developing countries.c. Denotes average annual growth rate of GNFS export deflated by merchandise import prices.Source: World Bank data.

low-income countries averaged 1 percent peryear during the 1990s, well below the 1.5 per-cent rate of growth achieved by middle-incomecountries (table 2.9).

Merchandise export volume growth ratesin the 22 small, low-income countries (exclud-

ing countries affected by conflict) averagedonly 4.1 percent per year during the 1990s, upfrom 2.9 percent in the 1980s but still wellbelow performance in the middle-income coun-tries. More than two-thirds of these small low-income countries (16 of 22) are in Sub-Saharan



Unpublished Proofs

Figure 2.3 Merchandise export growth and GDP per capita growth in poor developing countries in the 1990sPercent per year

–1

Low-income smallcountries [32 countries]

Low-income smallcountries excludingcountries in conflict

[22 countries]

Least developedcountries

[26 countries]

Least developedcountries excludingcountries in conflict

[16 countries]

0

1

2

3

4

5




There is a large body of literature documenting thenegative impact of wars and rebellions on a

country’s growth performance, and there is also evi-dence that economic factors also contribute to con-flict. Using a panel data set for 161 countries, Collierand Hoeffler (1999) find that among other factors,the risk of civil war is significantly and negatively re-lated to growth in per capita income. A reliance onexports of primary commodities is positively relatedto civil conflict. For a country with a primary com-modity export share of around 0.26, the risk of acivil war is around 23 percent (compared with 0.5percent for countries with no natural resource ex-ports), in part because the capture of resources either

Box 2.3 Economic factors contributing to conflictmotivated or made possible several rebellions. Dia-monds in Angola and Sierra Leone and drugs inColombia are some obvious examples.

Countries that are commodity-dependent are sub-ject to larger external shocks. Rodrik (1998) arguesthat while external shocks can lead to distributionalconflicts, societies that are cohesive and have stronginstitutions can adjust more easily to such shocks andavoid conflict. He compares Brazil, Korea, and Turkey,all of which suffered sharp trade declines during the1970s. Korea was the hardest hit, as it was more openthan either of the other two, but it recovered muchfaster. Adjustment was delayed in both Turkey andBrazil, and they witnessed considerable turmoil.

Africa. An important factor accounting for theslow growth of the poor countries’ exports wasslow growth of world trade in their traditionalexport baskets. Several of the poorest develop-ing countries lost market share in traditionalexports and were unable to diversify rapidlyenough into new products.

Summarizing, developing countries not inconflict and not in transition saw significantacceleration in incomes and exports in the1990s, following adoption of trade and com-panion reforms. The poorest small countrieswere among those most affected by conflictsand political shocks. The poorest small coun-tries that avoided these calamities performedbetter, but still not as well as the middle-income countries, on average. Thus, despite sig-nificant progress, it appears that policy regimesin many of the poorest countries are still in-adequate to improve or even maintain exportcompetitiveness in traditional markets or toencourage rapid diversification. The next twosections will discuss the key trade-related pol-icy impediments to rapid integration of thepoorest countries in the world economy, in-cluding trade barriers to their exports in indus-trial countries.

Weaknesses in domestic trade-related policies

Domestic policies that directly restrict ex-ports or deter investment in the export

sector remain important in most of the poorestdeveloping countries (Yeats and others 1997).Policies that tend to discourage investment in

the export sector include overvalued real ex-change rates, inconsistent or erratic macroeco-nomic policies, a high share of governmentspending in aggregate expenditure, excessivereliance on tariff revenues and on taxes onagriculture, and a variety of direct public inter-ventions in product and factor markets, espe-cially price controls and requirements that bankcredit be allocated to the public sector (WorldBank 1989, 1994, 2000a). Weak infrastructureand inadequate provision of ancillary servicesto exports also severely constrain export per-formance in many countries. As discussed inprevious sections, some of the most severe pol-icy distortions present in developing countriesin the 1980s are being alleviated: average in-flation and fiscal deficits have declined signifi-cantly (Easterly 2000); real exchange rateshave been adjusted in many cases; tariffs andquotas have been cut; and export taxes and re-strictions on agriculture have been reduced oreliminated in many countries.

This section examines three aspects oftrade-related domestic policies that remain im-portant impediments to integration of many ofthe poorest developing countries into the globaleconomy: overvalued and unstable real ex-change rates, high cost of imported inputs forexporters, and the higher costs of transporta-tion and other trade-supporting infrastructure.

Exchange rate management. A competi-tive and stable real exchange rate ensures thatproducing tradable goods is profitable, and tounderpin investor confidence in the export sec-tor. In many of the poorest countries, pro-tracted episodes of real exchange rate overval-


11

Unpublished Proofs


Table 2.9 Growth rates by income level for the sample countries(percent per year)

GDP Merchandise exports GDP per capitaNumber of

1980s 1990s 1980s 1990s 1980s 1990s countries

Total 3.1 3.8 4.3 6.4 0.4 1.5 59Low income (large countries) 7.9 8.4 6.7 14.1 6.1 6.9 2Low income (small countries) 2.7 3.6 2.9 4.1 –0.1 1.0 22Least developed 2.2 3.5 2.9 3.2 –0.6 0.8 16Middle income 3.0 3.6 5.1 7.4 0.5 1.5 35

Note: The sample (59 developing countries) excludes countries in conflict, transition economies, and those with limited data.Source: World Bank.

uation have impaired the competitive positionof local firms. At different times, they havecontributed to unsustainable trade deficits,and prompted increased tariffs, quantitativerestrictions, and foreign exchange controls infutile attempts to contain these deficits. Epi-sodes of overvaluation have also resulted inforeign exchange crises, economic instability,and the deterioration of growth over the longrun. At the same time, unsustainable macro-economic policies have also contributed to theovervaluation of real exchange rates (Bhagwati1978; Krueger 1978; Papageorgiou, Choksi, andMichaely 1991; and Rodrik 1996).

The effects of real exchange rate overval-uation have been studied extensively. Dollar(1992) shows that Africa and Latin Americahad relatively overvalued exchange rates andlarge real exchange volatility, while East Asiahad relatively undervalued exchange rateslower real exchange rate volatility, and morerapid growth. Using a wide variety of mea-surements and techniques, econometric stud-ies have fairly uniformly found that overval-uation and associated real exchange ratevolatility are negatively correlated with bothexport and GDP growth.9

The factors that lie behind protractedepisodes of real exchange rate overvaluation,despite awareness of their adverse implica-tions for growth, are varied. They include useof the exchange rate as a nominal anchor forthe stabilization program and difficulties inexiting from the peg; rigid exchange rateregimes that fail to accommodate secular dete-rioration in the terms of trade and adjust towidening productivity differentials; dispropor-tionate influence of urban elites who are con-sumers of imported consumer goods; concernsabout the effect on the urban poor dependenton imported food staples or energy; and aver-sion to incur the immediate fiscal costs reval-uating foreign currency liabilities.

Perhaps because of increased openness, inrecent years policymakers appear to havebecome more aware of the need to maintaincompetitive and stable real exchange rates. Theaverage exchange rate of developing coun-

tries depreciated during the 1990s (Easterly2000), and many countries adopted more flex-ible nominal exchange rate arrangements.10 Insome cases, for example the CFA countries(see box 2.4), these efforts resulted in a sharpturnaround in economic performance.

Several of the poorest countries failed toachieve stable and competitive real exchangerates during the 1990s. Overall, the averagevolatility of real exchange rates in the small,low-income countries increased. High exchangerate volatility was associated with weak eco-nomic performance. Among the countries inour sample (excluding countries affected byconflict), the poor countries that exhibited lowexchange rate volatility saw exports rise at over6 percent a year and per capita incomes rise at nearly 2 percent a year, much faster thancountries with high exchange rate volatility(figure 2.4).

As countries became more open to inter-national trade, the adverse effects of real ex-change rate volatility on stability and growthmay have become even more severe. In somecases, trade liberalization combined with sharpreal exchange appreciation severely impairedthe profitability of domestic firms.11 Ex-change rate overvaluation and high volatilityalso has a negative effect on investor con-fidence and can delay the supply response toliberalization.12 Figure 2.5 shows six coun-tries in Africa that moved to flexible exchangerates and liberalized their trade regimes duringthe early 1990s. These countries subsequentlyexperienced appreciation and high volatilityof the real exchange rates and low rates ofgrowth. Per capita income growth in these sixcountries averaged only 0.5 percent a year inthe 1990s, and their export effort (changes inmarket share and diversification) fell by 2.3percent a year.

The causes of high real exchange ratevolatility have been widely explored. They in-clude unstable or inconsistent macroeconomicpolicies, which result in inflationary pressuresand high fiscal and current account deficits.Many countries have tried to maintain stablenominal exchange rates, despite the formal



Unpublished Proofs

adoption of more flexible exchange rate re-gimes during the 1990s (Calvo and Reinhart2000).13 However, attempts to maintain nom-inal exchange rate stability in the face of highand variable inflation rates or various domes-tic or foreign shocks imply that the real ex-change rate will be volatile. For example, 17of the 26 countries that exhibited high real ex-change rate volatility were also rated by theWorld Bank as exhibiting relatively unstablemacroeconomic policies.14 Among the 22 low-income countries in our sample, only twomanaged to achieve both macroeconomic sta-bility and low real exchange rate volatility.

In addition, terms-of-trade shocks are animportant factor contributing to high real ex-change rate volatility in commodity-dependentcountries. Hausman and others (1999) cite thevolatility of capital flows as a driving force be-hind the volatility of exchange rates in manymiddle-income countries, particularly in con-junction with large debts denominated in for-eign currency.

Thus, the record of the 1990s underlinesthe difficulties that poor countries face in main-taining a stable and competitive real exchangerate, reflecting their thin foreign exchange markets, their vulnerability to weather-relatedshocks, and their dependence on primarycommodity exports that are subject to sharpchanges in price.15

Exchange rate policies are hampered bythe lack of clear signposts as to the exchangerate regime that minimizes real exchange ratevolatility. The choice of exchange rate regimewill depend on many factors, including thecurrency composition of public and privateexternal debt and domestic financial assets,the track record and credibility of the mone-tary authorities, and the nature of externaland internal shocks.16

Free trade status for exporters. High tar-iffs coupled with inefficiencies in customs andtax administration have increased the costs ofexporting from many developing countries.Access to inputs at world prices is critical to


13

Unpublished Proofs


the annual rate of increase in exports due to risingmarket shares and diversification, rose from –4.8percent per year in 1986–93 to 7.8 percent per yearin 1994–98.

Exchange rates and CFA countries

1986–93 1994–98

Average GDP growth 0.7 4.7Average REER index 99.4 63.0Export efforta –4.8 7.8

Note: The countries included are Burkina Faso, Cameroon,Central African Republic, Chad, Côte d’Ivoire, Gabon,Mali, Niger, Senegal, and Togo.a. The merchandise export growth rate achieved throughchanges in market share and export diversification.Source: IMF, International Financial Statistics.

The CFA countries provide one of the most strik-ing examples of the impact of exchange rate

overvaluation on growth and the gains from im-proved exchange rate policies. The currencies ofthese countries are tied to the French franc, and atvarious times the appreciation of the franc, deterio-ration in the terms of trade, and higher inflation inCFA countries contributed to a highly appreciatedcurrency that tended to depress export and GDPgrowth, the latter to less than 1 percent per year for1986 to 1993 (see box table). The CFA franc was de-valued in 1994, and GDP growth accelerated to 5percent per year from 1994 to 1998. Export growthalso accelerated, reflecting improved market share intraditional products and greater diversification, aswell as acceleration of world trade in the CFA coun-tries’ export products: export effort, which measures

Box 2.4 Exchange rate overvaluation in the CFAcountries

export competitiveness, so that high tariffs onintermediate and capital goods can reduce ex-ports, particularly of processed goods that re-quire substantial intermediate inputs. At thesame time, many developing countries dependon tariffs for an important share of govern-ment revenues. Thus governments often face adifficult tradeoff between the desire to encour-age export production through low tariffs onimported inputs and the need to generate suf-ficient revenues.

Successful exporters such as the Asiannewly industrializing countries, in the earlystages of their export drive, have enabled ex-port firms to obtain their inputs at world mar-ket prices through reimbursing tariff duties oninputs (duty drawback systems), providing ex-emptions on duties for exporters (duty exemp-tion systems), and setting up export process-ing zones where intermediate inputs can enterthe country free of duty.17 These systems havebeen effective in reducing or eliminating tariffson exporters’ inputs, while maintaining a tar-iff structure that meets the revenue needs ofthe government. These systems, however, re-quire considerable administrative resources to

ensure that reimbursement or exemption isgranted quickly and fairly.

By contrast, the poorest developing coun-tries have faced severe difficulties in ensuringduty-free access to inputs by exporters, for tworeasons. First, a substantial share of govern-ment revenues in many of these countries is gen-erated from taxes on international trade. To re-duce distortions affecting domestic productionand to simplify administration, tariff reform inmany poor countries involves increasing lowtariffs while reducing peak tariffs (Falvey andKim 2000; Harberger 1988). As a result, manyof the poor countries have significant tariffs onintermediate and capital goods (table 2.10). Al-though the average tariff rates for this sample of15 African countries are not high comparedwith those of many other developing countries(figure 2.1), the duties on capital and interme-diate goods do represent a considerable tax onexport production.18 These duties are essen-tially designed to collect revenues, rather thanto protect domestic production.19

Second, most of the poorer countries lackthe administrative resources required to estab-lish effective drawback/exemption schemes.



Unpublished Proofs

Figure 2.4 Real effective exchange rate volatility and growth in 1990sPercent per year

Countries with highvolatility in 1990s

[26 countries]

Countries with lowvolatility in 1990s

[33 countries]

Low-income smallcountries with highvolatility in 1990s

[13 countries]

Low-income smallcountries with lowvolatility in 1990s

[9 countries]

0

1

2

3

4

5

6

7

8

9

Source: World Bank data; IMF, International Financial Statistics.




15

Unpublished Proofs


Figure 2.5 Real effective exchange rate behavior in selected poor countries, 1993–99

60

70

80

90

100

Ghana Kenya

Malawi Tanzania

Zambia Nigeria

70

80

90

100

110

120

130

140

1993 1994 1995 1996 1997 1998

40

60

80

100

120

80

100

120

140

160

60

80

100

120

140

160

60

80

100

120

140

160

180

200

1993 1994 1995 1996 1997 1998

1993 1994 1995 1996 1997 1998

1993 1994 1995 1996 1997 1998

1993 1994 1995 1996 1997 1998

1993 1994 1995 1996 1997 1998

Note: 1990=100, upward movement indicates appreciation.Source: IMF, International Financial Statistics; World Bank data.

Attempts to establish such systems during the1990s were generally not successful. The re-quirement of examining individual importtransactions imposed a substantial administra-tive burden on exporters and the government.In many countries, the government failed toprovide (or significantly delayed) promised re-imbursements of duties paid on imported in-puts.20 Even exporters’ value added taxes werenot reimbursed consistently. Ongoing work on15 reforming Sub-Saharan African countriesshows that none had a working duty drawbacksystem. Mauritius operated a successful exportprocessing zone program, while Cape Verdeand South Africa had low duties on intermedi-ate goods. The 12 other countries imposedsignificant duties on inputs to export produc-tion without effective means of compensatingexporters.

There is no easy solution for poor coun-tries attempting to ensure duty-free access toinputs by exporters.21 Further efforts are re-quired to strengthen the administration of cus-toms and to increase reliance on other sourcesof revenues such as income taxes. However,such efforts take time. In the short term, de-pending on the structure of export activity (forexample, degree of processing) and the level of institutional development, governmentsneed to decide whether drawback/exemptionsystems or free trade zones are feasible, or al-ternatively whether reductions in intermediateand capital goods tariffs are necessary to en-courage export production. Since all but five ofthe countries in table 2.10 have total collectionrates of less than 10 percent it is possible to

move to a tariff structure that has zero or verylow rates for capital and intermediate goodsalong with much lower rates for consumergoods (coupled with reduced exemptions).

Infrastructure for trade expansion. Weakinfrastructure constrains economic growth inmany of the poorest countries and has a severeimpact on trade performance. A firm’s abilityto compete in the world economy depends inpart on the cost and availability of supportingservices, such as transport, communications,and finance. While some of the problems thesecountries face in providing adequate infra-structure and other services are to some extentthe result of location, technological deficien-cies, and a lack of capital, many of these prob-lems result from restrictive regulatory policiesthat limit competition.22

Many of the least developed countries haveweak and expensive service suppliers. Amjadi,Reincke, and Yeats (1996) conclude that hightransport costs in low-income African countriesare a more important trade barrier than tar-iffs.23 These high costs add to the cost of ex-porting, and (other things being equal) lower itsprofitability in many of these countries. Coun-tries in Africa normally absorb all, or most, ofthe transport charges for penetrating externalmarkets. Africa’s net freight and insurance pay-ments in 1990/91 were about $3.9 billion, ap-proximately 15 percent of the total value of the region’s exports. For developing countriesas a whole similar payments averaged 5.8 per-cent, about one-third of Africa’s ratio. Thus, inorder to be competitive, an average producer inAfrica has to be 10 percent more efficient than



Unpublished Proofs

Table 2.10 Tariffs in selected African countries

Average nominal Trade weighted Collection Share oftariff average Rate tariff revenues

All goods 19.8 16.2 10.3 100.0Capital goods 13.7 13.2 7.8 12.9Intermediate goods 16.9 14.2 8.1 42.4Consumer goods 23.6 15.3 10.9 22.4

Note: Textiles, energy, and passenger cars are not included in capital, intermediate, and consumer goods. Data are for 1996 forBenin, Burkina Faso, Cameroon, Cape Verde, Côte d’Ivoire, Ghana, Malawi, Mauritius, Senegal, South African Customs Union,Tanzania, Uganda, Zambia, and Zimbabwe; data for Mali are for 1997.Source: World Bank data.

firms in other developing countries. For the 10landlocked countries in Africa, average netfreight and insurance payments in 1990 were42 percent of their total exports, eight times theaverage for other developing countries.

Limão and Venables (1999) also find thathigher transport costs and weak infrastructureexplain a significant portion of Africa’s poortrade performance. This is especially true forlandlocked countries. Exporters from land-locked economies face final city destinationsthat are on average four times further from thesea than that of exporters from coastal eco-nomies. The median transport cost for land-locked countries is 58 percent higher than themedian for coastal countries. Delays and coor-dination problems at the border, higher insur-ance costs due to uncertainty and delays, anddirect charges made by transit countries alsoadd to the transport costs of landlocked coun-tries. Improving transport infrastructure inlandlocked countries and their transit coun-tries can dramatically reduce costs and increasetrade flows. Improving a country’s worldwiderank from the 75th percentile to the 50th per-centile in the distribution of infrastructurequality would double the volume of trade.

Poor availability of communications andenergy can also constrain exports. Unreliableservice can be even more damaging to com-petitiveness than high costs. Production stop-pages, missed delivery dates, and lack of re-liable communications make it difficult tocompete and become part of global produc-tion networks. Despite liberalization of the fi-nancial systems in many countries, access tocredit is limited, interest rate spreads are high,and in many countries weakness in regulatoryinstitutions have kept financial sector reformsfrom having their anticipated benefits.

Reforms are being undertaken in manydeveloping countries to liberalize the policyregimes for these sectors. Foreign participa-tion is being allowed to improve the level oftechnology and efficiency, and also to generatethe financing for the required investments.The potential gains from these reforms and re-sulting investments are very large. For exam-

ple, allowing exporters to charter their ownvessels in Côte d’Ivoire halved the costs ofshipping bananas to the United States, and re-duced cocoa freight costs one-quarter (WorldBank 2000a). Improving the operating effi-ciency of the Nacala rail line through Mozam-bique, with little new investment, would in-crease the GDP of Malawi by 3 percent. Theseefforts may have a significant role in improv-ing export performance over the next decade(AfDB 1999). Donors also are engaged in theefforts to help the low-income countries toovercome the major institutional impedimentsthat inhibit their integration into the worldeconomy (see box 2.5).

Protection in industrial countries

Import restrictions and subsidies in industrialcountries limit the growth of developing

countries’ exports by supporting less efficientproduction in industrial countries. Export sub-sidies to industrial country producers furtherlimit the expansion of developing-country ex-ports to third markets. Moreover, these poli-cies make it difficult for developing countriesto diversify into products for which world de-mand is high or increasing, and in line withtheir evolving competitive advantage.

Industrial-country import restrictions. Al-though the average tariffs in the Quad (Can-ada, European Union, Japan and the UnitedStates) countries range from only 4.3 percentin Japan to 8.3 percent in Canada, their tariffsand trade barriers remain much higher onmany products exported by developing coun-tries (Finger and Laird 1987). The UruguayRound contributed to a sharp decline in theuse of nontariff barriers (NTBs) in the OECD.In the Quad, only 1.2 percent of tariff lines are subject to NTBs. However, most of theNTBs are found in agriculture (tariff quotas,for example)25 and textiles and clothing (Multi-fiber Arrangement), where developing coun-tries have a comparative advantage (Fingerand Schuknecht 1999).

Products with high tariffs in Quad coun-tries include (1) major agricultural staple food


17

Unpublished Proofs


products, such as meat, sugar, milk, dairy prod-ucts, and chocolate, where tariff rates fre-quently exceed 100 percent; (2) tobacco andsome alcoholic beverages; (3) fruits and vegeta-bles—including 180 percent for above-quotabananas in the European Union and 550 per-cent and 132 percent for shelled groundnuts in Japan and the United States, respectively;(4) food industry products, including fruit juices,canned meat, peanut butter, and sugar confec-tionery, with rates exceeding 30 percent inseveral markets; and (5) textiles, clothing, andfootwear, where tariff rates are in the 15 to 30

percent range for a large number of products.These are sectors in which developing countrieshave a comparative advantage.

For example, in the United States only 311of 5,000 tariff lines are above 15 percent.26

Yet 15 percent of exports from least developedcountries to the United States face these tariffs(Hoekman, Ng, and Olarreaga 2000). Thus,there might be considerable potential for theleast developed countries to increase their ex-ports if U.S. tariffs were reduced.

Some of the highest tariff rates in indus-trial countries are applied to products that are



Unpublished Proofs

The least developed countries (LDCs) are particu-larly disadvantaged by a lack of capacity to pro-

vide the minimal public and private trade facilitationservices and infrastructure required to support inter-national trade.24 The Uruguay Round agreement in-cluded promises by industrial countries to providetechnical assistance to help developing countriesstrengthen their trade services, but these promiseswere not binding, and the reality has been disappoint-ing (Michalopoulos 1999; Wang and Winters 2000).

The Integrated Framework (IF) was establishedin 1996 to increase the effectiveness and efficiency oftrade-related technical assistance to the countries, inpart by strengthening coordination among participat-ing agencies and ensuring that technical assistance isdemand driven. Participating agencies are the WorldTrade Organization, the International MonetaryFund, the International Trade Center, the United Na-tions Development Programme, the United NationsConference on Trade and Development, and theWorld Bank.

By the summer of 2000, 40 LDCs had com-pleted the first step of the IF process (a needs assess-ment). The six international agencies responded, in-dicating areas in which they could assist. Thisprocess revealed little overlap in the activities of theagencies and substantial needs that required addi-tional financing. Progress in organizing IF roundta-bles to mobilize donor resources proved difficult; by

Box 2.5 The integrated framework for least developed countries

August 2000 only five roundtables had taken place.In only one case (Uganda) did the roundtable lead tothe commitment of new funds from donors.

An independent review of the IF, completed inJune 2000, highlighted that recipients expected addi-tional funding, while donors were hoping to increasethe effectiveness of technical assistance through im-proved coordination among agencies. The reportnoted a lack of clear priorities, weak administration,and a lack of donor resources. The review recom-mended that trade needs be better integrated in na-tional development strategies, that steps be taken tostrengthen the secretariat and coordination func-tions, and that a trust fund be established for IFactivities. Although the memberships and governingbodies of the core IF agencies broadly support thefirst four suggestions, to date there has been littleconcrete support for the trust fund proposal. Effortsare ongoing to mobilize the required resources.

The six agencies are committed to continue todeliver trade-related technical assistance to least de-veloped countries within their existing resource con-straints, pursuant to their mandates and competence.The World Bank’s activities in trade policy, trade fa-cilitation, and export development are primarily un-dertaken at the country level and based on the coun-try’s development strategy. Consequently, the Bank’sefforts in mainstreaming trade will be driven by thepriorities identified by each country’s government.

typically exported by developing countries.For example, almost $26 billion of exportsfrom developing countries in 1999 to theworld were products that would have facedtariffs above 50 percent in the Quad countries.Only about $5 billion of that sum was actuallyexported to the Quad countries. On the otherhand, Quad countries imported about $50 bil-lion of the same goods, most of it from otherindustrial countries.27 This suggests some po-tential for developing countries to expand ex-ports of these products to the Quad if the tar-iffs were lowered. Although $26 billion is onlyabout 2 percent of total developing-countryexports, individual developing countries (in-cluding among the least developed countriesin the above example) may be more affected.

The tariff rates in table 2.11 do not reflectthe Generalized System of Preferences (GSP)and other preferential schemes operated byQuad countries. These schemes tend to reducethe tariff rates applicable to imports of theseproducts from some developing countries.North-South preferential trade agreementssuch as NAFTA or the Euro-MediterraneanAgreements also provide duty-free entry forsome developing countries.28 However, in mostcases where tariff peaks are present, the sensi-tivity of domestic industry to imports excludevarious products from preferential schemeslimit the amount that can be imported underthe preferential rates, or restricts the number ofcountries that are eligible. For example, theUnited States has no GSP or least-developedcountry preference for products facing tariffsof more than 50 percent.29 The EU limits pref-

erential margins and imposes country or sectorquotas, or both (Michalopoulos 1999).

The potential for growing exports in therestricted categories is illustrated by those de-veloping countries that have managed to accel-erate their agricultural exports through freetrade arrangements with industrial countries(see chapter 1 for a discussion of the benefits ofNorth–South regional trade agreements). Forexample, since Mexico joined NAFTA in 1994,the value of its agricultural exports has in-creased by 15 percent per year—twice the rateof the previous five years. After joining the EUin 1986, Portugal’s agricultural exports grewby 9.2 percent per year in nominal U.S. dollars,and Spain’s exports grew by 10.9 percent. Inthe prior five years, both Portugal and Spainhad seen declining export earnings from agri-culture. These experiences suggest that furthertrade liberalization in agriculture is likely tohave a major effect on developing countries’abilities to increase agricultural exports.

Developing-country trade barriers. Devel-oping countries’ exports are subject to muchhigher trade barriers in other developing coun-tries than in industrial countries. The averagetariff developing countries face in their exportsof manufactures to other developing countriesis 12.8 percent, more than three times the av-erage tariff on their manufactured exports toindustrial countries (table 2.12) (Hertel andMartin 1999). Tariffs in developing countries


19

Unpublished Proofs


Table 2.12 Average tariff rates byimporting and exporting region(percent)

Importing region

High-income DevelopingExporting region countries countries

ManufacturesHigh-income 0.8 10.9Developing 3.4 12.8World 1.5 11.5

AgricultureHigh-income 15.9 21.5Developing 15.1 18.3World 15.6 20.1

Source: Hertel and Martin 2000.

Table 2.11 Developing-country exports toQuad countries facing tariffs of more than50 percent

Average most favored nation tariff (%) 113Range of tariffs (%) 50–343Exports to Quad (billion US$) 5.0Share of developing countries in

total imports of Quad (%) 10Exports to the world (billion US$) 26.6

Source: OECD, 2000b; UN COMTRADE; and staff calculations.

Table 2.13 Producer support estimates for OECD countries

Percent US$ billion

1986–88 1997–99 1986–88 1997–99

Lower-income OECD countries 37.5 28.7 28.8 39.4Australia, New Zealand 9.5 4.5 1.8 1.4Canada, United States 29.5 18.5 47.5 47.8European Union 44.0 44.0 95.2 116.6Other non-EU OECD 71.0 66.7 7.8 7.8Japan 67.0 61.0 53.6 53.1OECD 41.8 34.9 234.8 266.2

Source: OECD 2000a.

are somewhat higher in agricultural markets aswell. These high tariffs are becoming all themore important to developing countries, as theshare of South–South trade in their exports hasrisen from about 26 percent in 1980 to 40 per-cent in 1999.

Industrial-country agricultural subsidies.Agricultural subsidies in industrial countrieslimit the growth of developing countries’ agricul-tural exports by supporting inefficient producers.Furthermore, surplus agricultural products havebeen exported at a loss, further reducing the op-portunities for many developing-country pro-ducers in third markets. Estimates of agriculturalproducer support declined as a share of grossfarm receipts between the mid-1980s and themid-1990s. Over the past few years, however,when agricultural prices have declined, subsidieshave actually increased.30 By 1999 the averageproducer support estimate reached 40 percent,almost equal to the average of 1986–88 (ta-ble 2.13). Virtually all OECD countries, exceptNew Zealand and Australia, have increased theirsupport levels. The biggest increases in the rate ofprotection took place in lower income OECDcountries but the largest subsidy in absoluteterms was given by the EU. During 1997–99, theaverage annual value of subsidies was about 60percent of total world trade in agriculture, andalmost twice the value of agricultural exportsfrom developing countries.31

The impact of trade restrictions on di-versification and trade growth. The lowering of industrial country trade barriers has com-bined with improved efficiency in developing

countries to spur rapid export growth. Themore successful middle-income countries have achieved rapid progress by increasing exportsof labor-intensive manufactures, in part replac-ing production in industrial countries. This de-celeration or decline in industrial countries’share in labor-intensive manufactures has al-lowed developing countries to increase theirexports at a much higher rate than the growthof world income.32 By allowing the least-costproducers to capture a greater share of de-mand, the efficiency of global production hasincreased. Despite remaining quotas and otherrestrictions on many labor-intensive products(such as textiles), the shares of developingcountries’ manufacturing exports in worldtrade (figure 2.6) and in the consumption of theQuad countries have increased. But, even in1995 the shares were not high—ranging from6.8 percent of consumption in Canada and theUnited States to only 3.4 percent in Japan.

Tariff escalation in industrial countrymarkets has restricted the market access of de-veloping country producers of finished goods,thus hampering industrialization.33 The Uru-guay Round has made some progress in re-ducing the degree of overall tariff escalation.Yet, in a number of sectors (such as food pro-cessing) that are of particular interest to de-veloping countries, high levels of tariff escala-tion are still present (box 2.6). Many productsare also protected by some form of quota. Assome of these quotas are allocated on the basisof historical trade shares, new and more effi-cient countries cannot enter these markets.



Unpublished Proofs

Developing country exporters of agricul-tural products have not achieved even the lim-ited penetration of industrial country marketsthat occurred in manufactures. The share of de-veloping countries’ agricultural exports in worldtrade have actually decreased (figure 2.7). Therelatively low level of developing country agri-cultural exports can be attributed in part togreater protection and subsidies in agriculturethan in manufacturing. Higher protection al-lows only the most efficient agricultural pro-ducers in developing countries to enter industri-alized country markets and relatively moreinefficient producers in industrial countries tomaintain their market share. The success ofmany developing countries in products that facelower protection and subsidies, such as cut flow-ers from Africa, and more stable trade shares infruits and vegetables also suggest that if protec-tion in agriculture is lowered, many of the poor-est countries could expand their exports.34

Implications for the poorest countries.While external constraints are not the primaryreason for slow export growth and decliningterms of trade of the poorest countries;35 nev-ertheless, industrial country trade restrictionsand subsidies are having an adverse impact on

growth and poverty reduction. Many of thepoorest countries are still primarily agricul-tural exporters, 40 to 60 percent of their pop-ulation (and the majority of the poor—WorldBank 2000c) lives in rural areas, and expan-sion of agricultural exports is one of their fewavenues to accelerating growth (at least in themedium term), given their level of technologyand human capital base. Many of the poorestcountries made progress during the 1990s inremoving domestic policy constraints on agri-cultural exports; however, policy reforms andinvestments in rural areas, which are neces-sary for poverty alleviation, are unlikely toyield significant improvements unless the de-mand for many of these products can be ex-panded through exports to world markets.

Numerical estimates of gains from re-duced agricultural protection vary consider-ably, but reducing protection could have aparticularly important impact on the poorestcountries. Ianchovichina, Mattoo, and Olar-reaga (2000) show that if the all the Quadcountries gave free trade access to the low-income African countries, their net exportswould increase about 6 percent. The negativeimpact of this expansion on other developing


21

Unpublished Proofs


Figure 2.6 Imports of manufactures from developing countries as a percentage ofapparent consumptionPercent

0

European Union United States and Canada Japan

1

2

3

4

5

6

7

8

1980 1985 1990 1995

Source: UNCTAD 1996.

Food manufacturing products are subject to high tariff levels and a high degree of escalation.

In the European Union and Japan, fully processedmanufacturing food products face tariffs almosttwice as high as tariffs on products in the first stage of processing. In Canada, tariffs on fullyprocessed food products are 13 times higher than for products in the first stage of processing. Highnominal tariffs on goods with high degrees of pro-cessing imply even higher rates of effective protec-tion (because the tariff rate is a relatively large per-centage of value added).

Partly because of these trade restrictions, thepenetration of developing-country food exports hasbeen limited, is much lower than average manufac-turing, and has been declining in some markets.

Tariff escalation in food manufacturing(percent)

Canada EU Japan

First stage 3 15 35Semiprocessed 8 18 36Fully processed 42 24 65

Source: WTO (several years), Trade Policy Review—QuadCountries.

and on industrial countries would be negligi-ble, because the absolute size of the increase isvery small in comparison to the world trade.36

Almost all the gains come from the expansionof agricultural trade. Hertel, Hoekman, andMartin (2000) report that a 40 percent reduc-tion in industrial countries’ agricultural tariffsand export subsidies by 2005 (a less radicalassumption than in the paper cited above)would increase income in most developing re-gions by less than 1 percent.

However, one point needs to be underlinedwhen discussing the trade barriers facing theexports of the poorest counties. Most of thesecountries have weak export-supporting infra-structure and skills that make it difficult toswitch from domestic market to exporting, andvice versa, in response to changes in relativeprices, or to diversify out of traditional com-



Unpublished Proofs

Figure 2.7 Share of developing countriesin world tradePercent

Source: FAOSTAT, World Bank data.

0

10

20

30

40

1970 1975 1980 1985 1990 1995

Agriculture

Manufactures

Box 2.6 Food processing

Imports of processed food from developingcountries as a percentage of apparentconsumptionPercent

0

European Union United Statesand Canada

Japan

0.5

1

1.5

2

2.5

3

3.5

4

1980 1985 1990 1995

Source: UNCTAD 1996.

modities facing artificially constrained mar-kets. These weaknesses are reflected in littleexport-market diversification, imperfect capitalmarkets that do not provide adequate andtimely credit, low capitalization of many enter-prises, small numbers of firms, and a very diffi-cult environment for transactions. The fact thatmany of these countries have a history of policyreversals and mismanagement implies that thecredibility that must underpin investment islacking. Thus they are in a much weaker posi-tion than some of the more successful countriesto overcome industrial countries’ barriers totheir traditional exports through diversification.

Notes1. For example, import-weighted calculations of

average tariffs may understate the importance of veryhigh rates that block all imports, while the number ofQRs may not accurately reflect their impact on trade.Moreover, data availability for these series is unevenboth over time and across countries. Nevertheless, theyare preferable indicators of trade policy than manyused in the literature (see Edwards 1997). Some ofthem (such as share of trade to GDP, or growth of ex-ports) are endogenous variables that depend on loca-tion, country size, and other policies; some rank traderegimes as perceived by users (the Heritage index),while others measure the degree of trade distortionsonly at one point in time (the Sachs-Warner index).Most of these measures have even more limited coun-try and time period coverage.

2. See Barro and Sala-i Martin 1995 for a review ofthe econometric literature. Sensitivity of results to bothvariables and specifications are highlighted by Levine andRenelt 1992 and Sala-i Martin 1997a, 1997b).

3. One concern is that in many developing coun-tries tariff bindings have been applied to only a smallpercentage of tariff lines, and wherever applied, theseceilings in general have been higher than the actual ap-plied tariffs. In a sample of 42 countries, the boundceilings were 49 percent, while the average applied ratewas only 18 percent. The large gap between tariff bind-ings and actual levels may make the government sus-ceptible to protectionist pressures and creates uncer-tainty about the future direction of reforms.

4. These averages need to be used with caution, asdata are available for only a few countries in each re-gion and may not exist for both the time periods underconsideration.

5. The black market premium is used here to mea-sure the administrative allocation of foreign exchangefor trade purposes. However, a large black market pre-

mium may also reflect the degree of overvaluation aswell as capital account restrictions.

6. This chapter uses simple averages, which giveequal weight to individual countries regardless of size.These figures differ from the weighted average growthrates reported in chapter 1 and the annex, which givegreater weight to bigger countries. China and India inAsia, and South Africa and Nigeria in Africa, dominatethe regional averages. Weighted averages are appropri-ate for measuring the total regional increase in GDP orexports, while simple averages are appropriate in ana-lyzing the impact of policy on growth (since the rela-tionship between policy and performance is just as rel-evant for a small country as for a large one).

7. Tariff reductions are clearly not the only deter-minant of export growth rates, and some regions withrelatively high tariff rates (such as South Asia) hadrapid growth in exports. Nevertheless, the reductionsin tariff rates during the 1990s were, on average, asso-ciated with rapid export growth.

8. To measure the role of world trade conditions asopposed to other factors that determine export perfor-mance, export growth (in nominal dollars) is decom-posed into three components using COMTRADE data:(a) growth caused by the expansion of world trade forproducts defined as traditional exports in the initial pe-riod, (b) gains in the share of individual countries inworld trade in these commodities, and (c) growth attrib-utable to diversification. COMTRADE data are notidentical to the trade data used in the rest of the report.They are based on the reported imports from OECD andother reporting countries and cover about 90 percent ofworld trade. Because most countries in Sub-SaharanAfrica and the Commonwealth of Independent States(CIS) do not report their imports fully, they underesti-mate intra-African and intra-CIS trade. The decomposi-tion into growth in traditional markets, increased mar-ket share, and diversification depend on the definition ofthe traditional or initial export basket. In table 2.8 theexport baskets of 1979–80 and 1989–90 were taken andall exports above US$5 million were classified as major.Growth of new exports and exports that were less than$5 million during the initial period are classified as di-versified. (See Yeats 1998, and Ng and Yeats 2000 for asimilar exercise.)

9. See Dollar 1992; Elbadawi 1998; Ghura andGrenness 1993; Razin and Collins 1997; and Sekkatand Varoudakis 2000. Edwards and Savastano (1999)have a critical review of the measures of exchange ratemisalignment. See also Hinkle and Montiel 1999 andWilliamson 1994 for a detailed analysis of the mea-surement issues and economic implications of ex-change rate misalignment.

10. According to IMF, 97 percent of its members in1970 were classified as having a pegged exchange rate;by 1999, this share had come down to very low levels


23

Unpublished Proofs


(Calvo and Reinhart 2000). As of 1999, of the 185countries reporting their exchange rate arrangements,84 had pegged regimes, 75 had floating rates, and 26managed a system of limited flexibility. Of the countrieswith floating rates, 27 maintained a managed float, and48 had an independent float (Shatz and Tarr 2000).

11. The fears of deindustrialization by manyAfrican countries are usually attributed to trade re-form, while the exchange rate behavior probablyplayed an even more important role.

12. Some studies have found a negative relation-ship between indicators of real exchange rate volatilityand private investment (Aizenman and Marion 1995,1996). Similar results were obtained by Darby and oth-ers 1998 for a group of five OECD countries and byServen 1998 for developing countries. Other studieshave found no relationship between real exchange ratevolatility and aggregate investment (Bleaney 1996;Goldberg 1993; Ramey and Ramey 1995).

13. They cite various evidence, including thelower volatility of nominal exchange rates in develop-ing countries than in several industrial countries,higher volatility of foreign exchange reserves thanwould be expected under floating rates, that countriesuse nominal interest rates to smooth exchange ratefluctuations, and that exchange rate rigidity occurs inthe face of commodity price shocks.

14. The World Bank prepares ratings of develop-ing countries’ macroeconomic policy stances using aconsistent framework, for the purpose of cross-countrycomparisons. Although exchange rate volatility macro-economic stability ratings are highly correlated, the re-lationship is not perfect. There are twenty-one coun-tries which either had high exchange rate volatility andwere rated as having stable macroeconomic policies orvice versa. Only 16 countries managed to achieve bothmacroeconomic stability and low real exchange volatil-ity. These countries also achieved much higher percapita GDP growth rates than other countries.

15. Thin markets lead to large changes in ex-change rates due to small changes in demand and sup-ply of foreign exchange.

16. A recent IMF study on exchange rate regimescomes to the same conclusions (Mussa and others 2000).

17. In many countries, initial policies did not in-clude broad trade liberalization, but what can be called“compensatory” policies for exports. These range fromelaborate input coefficients for duty exemption systemin Korea and duty drawback systems in Taiwan to ex-port processing zones, and so on, which gradually gaveway to elimination of NTBs, lower tariffs, and openingup of the domestic economy. Mauritius relied on an ef-fective free trade zone, while the success of Bangladeshgarments is due to a well-working bonded warehousescheme, which is a form of duty exemption system.

18. There has been significant tariff reductionsince 1996 in most of these countries. Also, there arelarge differences among the countries included (thetrade-weighted tariff ranges from 25 percent in Zim-babwe to about 7 percent in the South African Cus-toms Union).

19. Many of these products do not have local sub-stitutes, and it is unlikely that they will be produced inthese countries over the medium term. In that sense,they are pure revenue tariffs.

20. See Nash and Fouratan 1997 for the experi-ences in Africa, and Rajapatirana 1997 for Latin Amer-ica and the Caribbean.

21. Just lowering tariffs on intermediate and cap-ital goods without corresponding reductions in tariffson consumer goods will increase the effective rate ofprotection for domestic producers, and thus may im-pair the efficiency of resource allocation.

22. Most infrastructure services in developingcountries are supplied by governments or public de-partments with administrative barriers to entry. Thislack of competition leads to higher costs, poor mainte-nance, and a lack of investment for technological up-grading. Opening up many of these services to compe-tition under a transparent regulatory environment willlower costs, attract foreign and private capital, and im-prove delivery of services. For examples of recent pri-vatization and demonopolization efforts and their pos-itive impact on performance, see AfDB 1999.

23. In a sense these high costs act as an exporttax, increasing the costs of production over those ofsuppliers that do not pay these duties.

24. See various needs assessment papers issuedthrough the Integrated Framework for Trade-RelatedTechnical Assistance to Least Developed Countriesprocess. They include references to the state of standardsand conformity assessment systems and infrastructureneeds in these countries (www.ldcs.org/index.htm).

25. Under tariff quotas, a fixed quantity of prod-ucts from specified countries can be imported at alower tariff and anything above that level is subject tothe normal tariff.

26. The average most favored nation (MFN) tar-iff for these 311 lines is 21 percent; for the least devel-oped countries it is 18 percent.

27. It is not clear why so few of these products areimported into Quad countries. But the significant dif-ference between the United States’ (86 percent) and theEuropean Union’s (9 percent) share of developing coun-tries’ exports suggest that intra-EU trade makes up thedifference.

28. Note that GSP and North-South free tradearrangements imply some trade diversion that will ben-efit some developing countries, but hurt others. Forth-



Unpublished Proofs

coming work by Hoekman, Ng, and Olareaga (2000)argues that these preferences are not very extensive.

29. The NAFTA preference is 50 percent for thesetariffs.

30. The producer support estimate (percent PSE)is calculated as the annual monetary value of produc-tion-related support to agricultural producers as ashare of gross farms receipts (OECD 2000a).

31. The recent proposal by the EU to grant duty-free access to all exports from least developed countriesand the move to income support rather than direct sup-port to production should improve market access for de-veloping countries.

32. UNCTAD (TDR 1999) has shown that inlow- and medium-skill manufactures, small changes inimport penetration ratios significantly increase the ex-port growth rates for these products from developingcountries.

33. Tariff escalation means that the tariff raterises with the level of processing.

34. For example, developing countries’ share infruits and vegetables trade, which is less protected, hasnot declined over this period.

35. Previous sections described the impact of con-flicts and trade-related policies on developing coun-tries’ performance. In addition, expansion of agricul-tural exports (such as tropical commodities) that aresubject to few trade restrictions in industrial countriestends to reduce prices and hence the terms of trade.

36. The effect on agricultural exports is muchgreater. The model reduces the exports of other prod-ucts that faced lower tariffs because of factors movingto the expanding agricultural sector.

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27

Unpublished Proofs


Unpublished Proofs



Annex 2.1 Sample countries in various charts and tables

Within core sample

ECA Countries CountriesAll countries Least- Low-income with high with low

developing Countries (excluding developed small REER REERcountries in conflict Yugoslavia) Core sample countries countries volatility in volatility in

No. Region [105] [19] [6] [59] [16] [22] 1990s [26] 1990s [33]

1 Africa Angola Angola2 Africa Burundi Burundi3 Africa Benin Benin Benin Benin Benin4 Africa Burkina Faso Burkina Faso Burkina Faso Burkina Faso Burkina Faso5 Africa Botswana Botswana Botswana6 Africa Central Central Central Central Central

African African African African AfricanRepublic Republic Republic Republic Republic

7 Africa Côte d’Ivoire Côte d’Ivoire Côte d’Ivoire8 Africa Cameroon Cameroon Cameroon9 Africa Congo Congo

10 Africa Comoros11 Africa Cape Verde12 Africa Djibouti13 Africa Ethiopia Ethiopia14 Africa Gabon Gabon Gabon15 Africa Ghana Ghana Ghana Ghana16 Africa Guinea17 Africa Gambia Gambia Gambia Gambia Gambia18 Africa Guinea-Bissau19 Africa Equatorial

Guinea20 Africa Kenya Kenya Kenya Kenya21 Africa Liberia Liberia22 Africa Lesotho23 Africa Madagascar Madagascar Madagascar Madagascar Madagascar24 Africa Mali Mali Mali Mali Mali25 Africa Mauritania Mauritania Mauritania Mauritania Mauritania26 Africa Mauritius Mauritius Mauritius27 Africa Malawi Malawi Malawi Malawi Malawi28 Africa Namibia29 Africa Niger Niger Niger Niger Niger30 Africa Nigeria Nigeria Nigeria Nigeria31 Africa Rwanda Rwanda32 Africa Sudan33 Africa Senegal Senegal Senegal34 Africa Sierra Leone Sierra Leone35 Africa São Tomé &

Principe36 Africa Swaziland37 Africa Seychelles

Islands38 Africa Chad Chad Chad Chad Chad39 Africa Togo Togo Togo Togo Togo40 Africa Tanzania Tanzania Tanzania Tanzania Tanzania41 Africa Uganda Uganda42 Africa South Africa South Africa South Africa43 Africa Democratic Democratic

Republic of Republic ofthe Congo the Congo

44 Africa Zambia Zambia Zambia Zambia Zambia45 Africa Zimbabwe Zimbabwe Zimbabwe46 East Asia China China China47 East Asia Fiji48 East Asia Indonesia Indonesia Indonesia Indonesia

Unpublished Proofs



Annex 2.1 Sample countries in various charts and tables (continued)

Within core sample



No. Region [105] [19] [6] [59] [16] [22] 1990s [26] 1990s [33]

49 East Asia Republic of Republic of Republic ofKorea Korea Korea

50 East Asia Malaysia Malaysia Malaysia51 East Asia Philippines Philippines Philippines52 East Asia Papua

New Guinea53 East Asia Thailand Thailand Thailand54 East Asia Myanmar Myanmar Myanmar Myanmar Myanmar55 ECA Former Former

Soviet Union Soviet Union56 ECA Bulgaria Bulgaria57 ECA Former Former

Czechoslovakia Czechoslovakia58 ECA Hungary Hungary59 ECA Poland Poland60 ECA Romania Romania61 ECA Yugoslavia, Yugoslavia

federal federalRepublic Republicof (Serbia/ of (Serbia/Montenegro) Montenegro)

62 LAC Argentina Argentina Argentina63 LAC Bolivia Bolivia Bolivia64 LAC Brazil Brazil Brazil65 LAC Barbados66 LAC Chile Chile Chile67 LAC Colombia Colombia Colombia68 LAC Costa Rica Costa Rica Costa Rica69 LAC Dominican Dominican Dominican

Republic Republic Republic70 LAC Ecuador Ecuador Ecuador71 LAC Guatemala Guatemala72 LAC Guyana73 LAC Honduras Honduras Honduras74 LAC Haiti Haiti75 LAC Jamaica Jamaica Jamaica76 LAC Mexico Mexico Mexico77 LAC Nicaragua Nicaragua78 LAC Panama79 LAC Peru Peru80 LAC Paraguay Paraguay Paraguay81 LAC El Salvador El Salvador82 LAC Suriname83 LAC Trinidad and

Tobago84 LAC Uruguay Uruguay Uruguay85 LAC Venezuela, Venezuela, Venezuela,

Rep. Bol. de Rep. Bol. de Rep. Bol. de86 MNA Turkey Turkey Turkey87 MNA United Arab

Emirates88 MNA Kuwait Kuwait89 MNA Morocco Morocco Morocco90 MNA Bahrain91 MNA Algeria Algeria Algeria

Unpublished Proofs



92 MNA Egypt, Egypt, Egypt,Arab Arab ArabRep. of Rep. of Rep. of

93 MNA Iran, Islamic Iran, Islamic Iran, IslamicRep. of Rep. of Rep. of

94 MNA Iraq Iraq95 MNA Jordan Jordan Jordan96 MNA Oman Oman Oman97 MNA Saudi Arabia Saudi Arabia Saudi

Arabia98 MNA Syrian Arab Syrian Arab

Republic Republic99 MNA Tunisia Tunisia Tunisia100 MNA Yemen, Yemen,

Rep. of Rep. of101 South Asia Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh102 South Asia India India India103 South Asia Sri Lanka Sri Lanka Sri Lanka Sri Lanka104 South Asia Nepal Nepal Nepal Nepal Nepal105 South Asia Pakistan Pakistan Pakistan Pakistan

Annex 2.1 Sample countries in various charts and tables (continued)

Within core sample



No. Region [105] [19] [6] [59] [16] [22] 1990s [26] 1990s [33]

PRODUCT STANDARDS, OR RULES GOVERN-ing the characteristics of goods, are crit-ical to the effective functioning of mar-

kets and provide important support to thetrade system. For example, government test-ing and certification of the bacteria content ofimported beef safeguards health and increasesconsumer acceptance of imported products.Product standards in the international tradesystem do, however, raise difficult issues fordeveloping countries. These countries’ limitedtechnical capability and financial resourcesmake it hard for them to participate effectivelyin negotiations governing standards or tobring disputes. In addition, pressures some-times exerted to use trade sanctions in supportof labor and environmental standards—legit-imate and desirable as these standards may be intrinsically—threaten to restrict develop-ing countries’ access to international marketswithout achieving their professed goals.

The rapid growth of international trade hasgreatly increased the importance of effectiveregulation of standards at the internationallevel. This chapter examines how standardsimposed by governments in importing coun-tries affect developing-country exporters anddiscusses the international regulation of someof the more prominent standards addressed inglobal trade negotiations.1 Its main messagesare as follows:• Insufficient technical and financial re-

sources limit developing countries’ abilities

to play an effective role in the design andimplementation of product standards andthus constrain their access to some mar-kets. Many developing countries, particu-larly the poorest ones, lack the technolog-ical capabilities and financial resources toparticipate effectively in the developmentof product standards, to meet industrialcountries’ import requirements, and tobring disputes when standards are used to discriminate against their exports. Forexample, the European Union (EU) is har-monizing standards for levels of aflatoxin,a substance that may cause liver cancer, infood products. The new standard, which ismore stringent than would be suggested byinternationally accepted standards, wouldlower risks by approximately 1.4 cancerdeaths per billion per year.2 The new stan-dard has the potential for substantially re-ducing exports of cereals from developingcountries into Europe (Otsuki, Wilson,and Sewadeh 2000). Few developing coun-tries have the technology to evaluate thedangers of aflatoxin, nor do they have the capabilities in scientific analysis to ad-dress the new EU standard. Furthermore,considerable legal and financial resourcesare needed to initiate a review under theWorld Trade Organization’s (WTO’s) dis-pute resolution mechanism. One achieve-ment of the Uruguay Round agreementwas to strengthen international rules gov-

1

Standards, Developing Countries,and the Global Trade System

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erning product standards in order to mini-mize their use for protectionist purposesand to create a level playing field. None-theless, the lack of capacity in developingcountries, particularly the poorest, limitsthe ability of these countries to benefitfrom the new rules (Wilson 2000b).

• The adoption and respect of core laborstandards—including freedom from dis-crimination, from exploitative child labor,forced labor, and the freedom to associ-ate and bargain collectively—are desirableand essential. However, the threat of tradesanctions or the imposition of trade bar-riers are likely to be excessively costlyinstruments for raising labor standards,and could even be counter-productive insome cases. Barriers to a country’s exportshurt workers by reducing demand for thecountry’s products. Even if sanctions forceimprovements in some sectors, they areunlikely to improve average working con-ditions in the economy. For example, theresult of foreign pressure to reduce the useof child labor in the production and exportof garments in Bangladesh was that manyof the laid-off children were employed inmore harmful occupations, such as prosti-tution or brick-breaking, and in factoriesthat did not produce for export (FinancialTimes, August 24, 1999). The impositionof trade barriers to improve labor stan-dards is vulnerable to capture by well-organized interests in domestic marketsthat would benefit from limiting imports.Similarly, trade sanctions are usually inef-fective in addressing environmental degra-dation. Empirical studies show that impos-ing trade sanctions on exporters can causeconsiderable losses in output while doinglittle to reduce pollution.

• Although labor and environmental stan-dards generally improve as countries de-velop, low labor and environmental stan-dards are not usually a significant sourceof competitive advantage. Labor and en-vironmental standards are positively cor-related with income, both because higherincomes stimulate demand for better stan-

dards and because better standards tendto encourage technological change toeconomize on inputs. Studies have foundonly limited evidence that low environ-mental standards increase competitive-ness or attract more direct foreign invest-ment. Experience in both industrial anddeveloping countries shows that the costof appropriately designed environmentalprotection is often low in terms of bothforgone growth and the capital cost ofabatement. Keeping labor standards lowis not an effective way of gaining a com-petitive advantage over trading partners.Indeed, low labor standards are likely toerode competitiveness over time becausethey reduce incentives for workers to im-prove skills and for firms to introducelabor-saving technology.

• The international community has moreeffective means than trade sanctions toencourage improved environmental andlabor standards in developing countries.Efforts to support development, such asincreasing assistance to countries withgood policies, will raise standards. Encour-aging greater openness to trade and to for-eign direct investment (FDI) will facilitatethe diffusion of cleaner technology thatcan reduce environmental degradationand improve worker productivity, therebypromoting better labor standards. Re-gional collaboration is appropriate foraddressing environmental issues that havea clear regional component, such as trans-boundary emissions and shared waterresources.

The regulation of standards:setting the stage

In the broadest sense, regulations are estab-lished because of perceived market failures,

when reliance on voluntary market transactionsis not efficient from the standpoint of society.3

For example, market prices may not reflect thefull cost of production because firms use publicwaterways to dispose of waste; consumers maylack information about product defects that can



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have serious consequences (unsafe automobiles,for example); and collusion and monopoly maymean increased costs for consumers. Establish-ment of regulatory standards is appropriatewhen the benefits of correcting these marketfailures exceed the costs. For example, currentauto safety standards have significantly reducedthe chances of injury and death but have noteliminated them, presumably because the costof doing so is too high. Costs include not onlythe direct costs facing the regulated firm butalso the costs of monitoring compliance and ofany potential spillovers in other areas. (Taxinggasoline at the pump to limit pollution imposesa direct cost on consumers, but it also imposesa cost on filling stations and refineries as a re-sult of lower demand.) The more detailed therules are in defining what goods are producedand consumed, and how, the greater the costs interms of stifling innovation, reducing choice,and monitoring compliance. Thus, regulatoryinstruments should use the market as much aspossible to encourage flexibility and choice ofproducts and of production techniques. For ex-ample, taxes and tradable permits have provedto be an effective and efficient means of con-trolling air and water emissions in certain cir-cumstances and to be less onerous than tradi-tional regulations that specify maximum levelsof pollution.

Because preferences and policy options dif-fer from country to country, regulatory re-gimes should be determined as much as possi-ble by the communities to which they apply,unless there are spillovers to other communi-ties. Given different preferences and differentaccess to information, regulation that is ac-countable to the community and meets locallydefined needs is likely to be more efficient andlegitimate than regulation imposed from afar.In an international context, it is important toensure that regulation (a) does not discrimi-nate between domestic and foreign producers,(b) relates to products or activities that imposecosts on domestic markets, (c) is restricted ge-ographically to the markets affected, and (d) isimplemented locally.

These simple principles have powerful im-plications for the appropriateness of different

kinds of standards. Briefly put, product stan-dards are necessary to support markets andmust be applied in a nondiscriminatory fash-ion. Environmental standards should be ad-dressed by the community affected by the rel-evant market failure. The impact of pollutionis normally limited to domestic or, sometimes,regional markets, although some issues, suchas those related to global warming and deep-sea fishing, require global action. Differencesin labor standards do not impose costs on for-eign markets and hence are not an appropriatearea for international trade negotiations.

Product standards and regulatorybarriers to trade

Ensuring that imported products meet ap-propriate standards for protecting health

and safety has become increasingly importantwith the rapid expansion of trade over thepast decade. Discriminatory regulations im-posed at the border can disadvantage foreignproducers and distort commercial markets.The reduction of tariffs and quotas throughmultilateral trade negotiations has highlightedthe use of product standards as trade barriers.Tariffs, quotas, and subsidies continue to re-strict trade in several sectors (see chapter 2),but other barriers—technical requirements,testing, certification, and labeling that affectimports—have emerged as important new is-sues for liberalization efforts (World Bank2000b). Two significant achievements of theUruguay Round, the Agreement on TechnicalBarriers to Trade (TBT) and the Agreement onSanitary and Phytosanitary Standards (SPS),were designed to address some of these issues.The TBT essentially relates to manufacturedgoods; the SPS applies to food (sanitary stan-dards) and animals and plants (phytosanitarystandards).

The role of product standards Product standards are critical to the effectivefunctioning of markets and play an importantrole in supporting international trade. Forconsumers, standards provide informationand help ensure quality. (For example, food la-

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beling requirements allow easier comparisonacross products, and regulations increase con-sumer confidence that electrical fixtures aresafe.)4 Standards are critical for “component”goods such as consumer electronics and com-puters, where the ability to mix and matchcomponents is important. They also helpachieve public objectives such as cleaner air;auto emissions standards and fuel economyregulations are examples. Because the exportof goods that are physically dangerous or ofagricultural products that are harmful tohuman health obviously damages the export-ing country’s (and the firm’s) credibility andthe acceptance of its products in the interna-tional trade system, there are important incen-tives for self-regulation.

For producers, standards can facilitate scaleeconomies and the efficient combination ofparts and components in production. Stan-dards can also be used to gain access to intel-lectual property and technology. For example,the European Union’s (EU) licensing of tech-nology based on European TelecommunicationStandards Institute (ETSI) standards facilitatedthe spread of wireless telephones in the Euro-pean market, highlighting the importance ofthe relationships between standards and tradein goods and services (Wilson 1997). Stan-dards can facilitate coordination of produc-tion that might not be achieved through mar-ket forces. For example, countries can improvetheir integration into global information andtelecommunication networks by adhering to in-ternational compatibility requirements for elec-trical products. Shared standards can reduceentry barriers by lowering inspection and test-ing costs that typically arise from imperfectinformation concerning the quality of tradedgoods (Moenius 2000).

Standards as barriers to tradeMandatory standards can also act as nontariffbarriers to trade, whether or not the intent isdiscriminatory; regulatory requirements mayraise foreign firms’ costs relative to those ofdomestic firms even if both are subject to thesame requirements in the domestic market.5

Health and safety standards typically requiretesting and conformity assessment for all pro-ducers, but costs will be greater for exportersthan for domestic producers if the exportersmust conform to standards different fromthose in their own market or if they are subjectto duplicative tests (Hoekman and Konan1998). For example, an EU regulation requiresthat dairy products be manufactured from milkproduced by cows kept on farms and milkedmechanically. This rule precludes imports frommany developing countries, particularly thosewith many small producers for whom mech-anization is not cost-effective (Henson andothers 2000). A country may have relativelystringent regulatory requirements owing to adifferent view of the tradeoff between risks andprice. Such requirements may pose a significantcompliance cost for exporters but would not beviewed as discriminatory, since they apply toboth domestic and foreign producers.

The need to comply with varying standardscan raise entry barriers in the form of in-creased one-time costs of product redesignand creation of an administrative system. Forexample, manufacturers may need to keep re-designing automobile seat belts to meet chang-ing standards for multiple export markets.Standards may also diminish the ability tocompete, owing to the recurrent costs of main-taining quality control, testing, and certifica-tion. Often, firms must decide whether to es-tablish a costly platform design that can easilyaccommodate small modifications—for exam-ple, a car chassis that can serve multiple mar-kets—or to design a product solely for thehome market, even though costly modifica-tions are required for export. A classic exam-ple of the latter is the right-hand or left-handplacement of car steering wheels.

Costs also may be incurred in meeting pre-cise technical regulations and carrying out con-formity assessment—that is, in evaluatingwhether a product “conforms” to a regulatoryrequirement. These requirements present thelargest potential technical barrier to futuretrade. Governments in importing countries mayrefuse to recognize tests performed in foreign



Unpublished Proofs

laboratories or by foreign public authoritiesand may not accept declarations of conformityby a foreign manufacturer. For example, Mex-ico used to allow only Mexican organizationsand laboratories to test products subject toMexican regulations. (Under the North Ameri-can Free Trade Agreement, or NAFTA, Mexicoagreed to allow U.S. and Canadian firms toperform testing and certification.) Such re-quirements may represent legitimate concernsregarding the quality of administration in theexporting countries, or they may result fromadministrative shortcomings in the importingcountry (delays, arbitrary inspections, redun-dant tests, and the like) that affect both foreignand domestic firms.

The use of product standards for protec-tionist purposes is a clear threat to an opentrade regime. In principle, it is possible to dis-tinguish between the “normal” costs of trade(the kinds of frictional costs described above)and barriers that are designed to limit compe-tition from imports. The SPS agreement pro-vides that trade restrictions can be imposedonly to the extent necessary to protect life orhealth, that they must be based on scientificprinciples, and that they cannot be maintainedif scientific evidence is lacking. Where theweight of scientific evidence is clear and well-accepted, this approach has helped to resolvedisputes. For example, the United States suc-cessfully challenged Japanese technical regula-tions on the ground that there was no evidencethat costly fumigation tests were necessary foreach new variety of fruit imported into Japan.At times, the scientific community is unable toassess risks because the damages are only evi-dent ex post (as was the case with asbestos),or the relative newness of the technology maycall for caution in accepting existing evidence,as is happening with genetically modified or-ganisms (Messerlin and Zarrouk 2000).

Given differences in historical experiences,levels of development, and risk preferences,differences in product standards among coun-tries will remain an important feature of thetrade system. Over time, the accumulation ofcase law through the WTO dispute settlement

mechanism should help establish precedentsfor determining what is acceptable underWTO disciplines. This should help resolvedisputes earlier and restrain discriminatorygovernment initiatives that clearly conflictwith principles of nondiscrimination. In addi-tion, greater reliance on private initiatives, asopposed to government fiat, in designingproduct standards is desirable. For example,whereas voluntary agreements account for alarge proportion of the standards (except forthose related to health or the environment) inindustrial countries, in developing and tran-sition countries such as China, Russia, andUkraine, standards in important areas of eco-nomic activity continue to be developed andpromulgated by governments. Reliance on pri-vate norms in developing countries wouldreduce the use of standards as trade barriers(industry-based standards may have protec-tionist intent but can be difficult to enforceunless backed up by government regulations),and they can help ensure appropriate expertisein designing standards.

Empirical evidence on standards as tradebarriersA large proportion of internationally tradedgoods is subject to standards, including about60 percent of U.S. exports and 75 percent ofintra-EU trade (European Commission 1996;Wilson 1997). The coverage of standards hasincreased significantly in the past few years(Hoekman and Konan 1998). Few attemptshave been made to measure the general impactof product standards on traded goods.6 TheOrganisation for Economic Co-operation andDevelopment (1996) found that differing stan-dards and technical regulations, along withcosts of testing and certification, can representbetween 2 and 10 percent of overall productcosts, and the European Commission (1996)found that the average frictional costs of dif-fering standards among EU countries prior tothe single-market initiative ranged between 2and 3 percent of the value of trade. The U.S.-EU mutual recognition agreement on tele-communications and information technology



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products, if fully implemented, could reducecosts by 5 percent of the value of goods traded(Wilson 1997). These costs are greater thanthe average tariff on intra-OECD manufactur-ing trade (less than 1 percent in 1995) and ondeveloping countries’ manufactured exports toindustrial countries, which was 3.4 percent(Hertel, Hoekman, and Martin 2000).

There is some evidence that the adoption of common standards tends to reduce importsfrom other sources. Sectors of EU economiesfor which common trade regulations wereadopted as part of the move to the single mar-ket represent one-third of EU value added andone-third of intra-EU trade, but only one-fourth of EU imports from the rest of theworld. Conversely, sectors in which the estab-lishment of common trade regulations was lesssuccessful represent one-third of both intra-EUtrade and EU imports from the rest of theworld (Messerlin 1998). Surveys and simula-tion exercises confirm the role of standards inincreasing costs. An OECD (1999) survey of55 firms in Germany, Japan, the United King-dom, and the United States found that tech-nical standards and conformity assessmentprocedures imposed significant costs on dairyproducts, auto parts, and telecommunications.Typical problems included requirements fortesting of each product consignment both be-fore shipping and at the port of entry and forfrequent tests following design changes. Simu-lations with a computable general equilibrium(CGE) model found that a 2.5 percentage pointdecrease in border costs within the EU (the es-timated result of adoption of uniform stan-dards) would generate a short-term welfaregain of up to 0.5 percent of the gross domesticproduct (GDP) of EU countries (Harrison,Rutherford, and Tarr 1996), in part because ofscale economies and increasing competition.7

The benefit could reach 2.4 percent of GDPover the long term as investment increases as aresult of a rise in the real return to capital.

Trade disputes on product standardsOne indication of the importance of standardsin restricting trade is the marked increase in the

number of trade disputes over standards andtechnical barriers during the past five years.(The increase is evident in the U.S. annual re-ports in the National Trade Estimates seriesand the EU’s annual reports on trade barriers.)In addition, most countries’ submissions forthe 1999 ministerial conference of the WTO in Seattle stressed the need to address techni-cal barriers in the context of new trade talks(Wilson 1999). The most prominent standardscases in recent years have been in agriculture,such as the dispute between the EU and UnitedStates over hormone-treated beef.8 The use ofgenetically modified organisms (GMOs) in ag-riculture is also generating trade tensions. Bythe end of January 1999, the WTO DisputeSettlement Body had considered 25 disputesthat referenced either the SPS or the TBT (Wil-son 1999). Nine of the disputes centered onfood safety regulations, five involved technicalregulations tied to customs requirements, andthe remainder were in areas such as quotas,import bans, and disputes over environmentallaws. Most of the complaints brought to theWTO are from industrial countries; of the 25complaints considered by the WTO throughJanuary 1999, 16 were brought by industrialcountries against other industrial countries, 3were brought by industrial countries againstdeveloping countries, and 6 were brought bydeveloping countries against industrial coun-tries. No low-income country other than Indiahas brought cases to the WTO under the TBTor the SPS or has been challenged under theseagreements.9 Pursuing a case through WTOprocedures is expensive and resource-intensive,which may explain in part why many develop-ing countries have not done so.

One indication of the increased focus onWTO dispute settlement—including cases re-lated to standards—by members is the invest-ment by the United States in new staff in the Office of the U.S. Trade Representative(USTR). The budget request for fiscal 2001 in-cludes an increase of 14 percent for additionalstaff, all of whom would focus on dispute set-tlement case work at the WTO (Hufbauer,Kotschwar, and Wilson 2000).10 The least-



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developed countries (a UN-designated groupof 48 developing countries) are likely to find itdifficult to match this type of investment inWTO dispute settlement processes.

Disputes over standards as barriers to tradewill undoubtedly become more important as(a) the share of trade in world output increasesand developing countries’ weight in worldtrade rises, (b) exports of finished goods bydeveloping countries grow, and (c) large de-veloping and transition countries, such asChina, Russia, and Ukraine, whose domesticregulatory systems and import rules requiredeep reform, join the WTO. A recent review of Ukraine’s standards and regulatory systemcommissioned by the World Bank, for exam-ple, reveals serious economic distortions in thedesign of the government’s standards, testing,and certification systems (World Bank 2000a).

Capacity in developing countriesProduct standards may work to the disadvan-tage of developing countries, where capacityto engage in standards development and tocomply with standards in export markets islimited. Because of lack of resources, manydeveloping countries find it difficult to diffusebest-practice information on quality standardssuch as those in the International Organiza-tion for Standardization (ISO) 9000 series andto adopt appropriate process and productionmethods (World Bank 2000b). Certificationcosts can be particularly significant for smallfirms. ISO 9000 certification for a single plantcan cost up to $250,000, with additional au-diting costs after initial approval. Limits oncapacity are particularly important for theleast developed countries.

Developing countries lag behind industrialcountries in their capacity for effective certifi-cation and accreditation of testing facilities(Stephenson 1997), and authorities in indus-trial countries may not trust developing coun-tries’ inspection procedures (Baldwin 2000).Developing countries thus find it difficult todevelop standards based on internationalnorms and to reach mutual recognition agree-ments (MRAs) with other nations. Their pro-

ducers may thus confront higher costs of entryin markets than do producers from countriesthat can certify compliance through an MRA(see box 3.1). Furthermore, governments andfirms in more advanced countries can establishstrategic standards that shut out developing-country firms or that alter the terms of compe-tition or the terms of trade in favor of domes-tic firms (Fischer and Serra 2000; Gandal andShy 1999; Matutes and Regibeau 1996).

Full implementation of the commitmentsmade in the SPS and TBT agreements will ben-efit both developing and industrial countriesand will strengthen the multilateral system.There have, however, been reservations aboutdeveloping countries’ abilities to meet specificprovisions of these agreements. The SPS agree-ment, for example, encourages the use of rele-vant international standards; although a coun-try may apply other standards at the border, it has the burden of demonstrating their scien-tific merit. Since most standards were designedby industrial countries, they may not be appro-priate for the technology mix or preferences indeveloping countries. “Thus for a country toeffectively use the WTO agreement to defendits export rights or justify its import restric-tions, it will have to upgrade its SPS system tointernational standards” (Finger and Schuler2000). Upgrading standards and providing riskassessments for proposed standards can becostly. There are similar questions regarding re-quirements in the TBT agreement which em-body the concept that trade is best facilitatedby harmonizing international standards.

Effective compliance with requirements forWTO enquiry points (offices that provide in-formation regarding national technical regula-tions) can involve substantial costs, includingthe costs of establishing governmentwide in-formation systems to report regulatory changesand respond to requests.11 Formal compliancewith enquiry point requirements has improvedin developing countries, but it remains lessthan 60 percent for the SPS agreement and 75percent for the TBT agreement (figure 3.1). Itis not clear whether these enquiry points meetall the provisions of the agreements. The num-



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ber of notifications by developing countries ofnew technical regulations and certificationrules, as required by TBT and SPS agreements,has grown (figures 3.2 and 3.3), although theincrease may not reflect greater ability to meetproduct standards for export goods.

All in all, the costs involved in complyingwith TBT and SPS requirements are substantialand are likely to be equal to an entire year’sdevelopment budget in some least developedcountries. (This calculation includes the costsof meeting Trade-Related Aspects of Intellec-tual Property requirements, or TRIPs, require-ments; see (Finger and Schuler 2000).)12 Suchexpenditures can improve a country’s capacityto participate in international trade, but theymust be evaluated in light of other develop-ment priorities.13

Many developing countries have recom-mended a targeted review of TBT and SPS

requirements in light of development needs, in-cluding extension of the time frame for com-plying with some provisions and modificationof the rules governing notification of new tech-nical regulations. (Providing 60 days to com-ment on new regulations is of questionablevalue to developing countries that lack thecapacity to analyze and formulate positions on technical requirements quickly.)14 A seriousand thorough use of the results of the SecondTriennial Review of the TBT agreement, sched-uled to conclude in November 2000, wouldhelp address developing countries’ concerns.

Labor standards and tradesanctions

Adoption and compliance with core laborstandards is desirable on moral grounds,

and necessary for promoting broad-based and



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Mutual recognition agreements (MRAs) arespecifically encouraged as part of the Technical

Barriers to Trade (TBT) agreement. Discussions ofMRAs have dominated trade policy discourse sincethe early 1990s, in part because of internal marketharmonization in the European Union (National Re-search Council 1995; Wilson 1995). Several bilateralMRAs have been completed among industrial coun-tries, including four between the EU and its tradingpartners. The EU is pursuing negotiations with othercountries. Regional talks on MRAs are also under-way among, for example, members of the Asia-Pacific Economic Cooperation (APEC). APEC hasconcluded model MRAs on food, electrical products,and exchange of information on toy safety. There islittle quantitative evidence on the economic or tradefacilitation benefits of MRAs, although in areas ofdeep regulatory intervention market expansion maybe achieved through convergence in standards overtime, if MRAs are fully implemented.

Developing countries find it difficult to partici-pate in MRAs, in particular because more developedtrading partners often are less than confident in their

Box 3.1 Mutual recognition agreementstesting and certification procedures. NegotiatingMRAs is time- and resource-intensive (as came out indiscussions at the WTO Symposium on ConformityAssessment Procedures, June 8–9, 1999). Moreover,the lack of modern technical infrastructure to sup-port an MRA in developing countries poses clear ob-stacles to implementation. Thus, developing-countryfirms are likely to be at a competitive disadvantagein exporting to markets covered by MRAs. HowMRAs relate to WTO obligations on the most fa-vored nation (MFN) commitment—that is, nondis-crimination—remains unclear. It is unlikely that ac-cess to the benefits of an MRA could be offered on anondiscriminatory basis to developing countries.

Other tools exist to facilitate trade in goods sub-ject to mandatory regulation. For example, manufac-turers’ declarations of conformity avoid duplicativegovernment or third-party product testing and havebeen employed for products that pose limited health,safety, or environmental risk. Innovative regional useof declarations of conformity, with countries poolingtheir resources, could be explored as a way of facili-tating developing countries’ trade.

inclusive economic development (World Bank1995 and Aidt and others 2000). However,imposing trade sanctions to bring about im-proved labor standards is unlikely to enhanceeither global welfare or the welfare of devel-oping countries. In terms of the criteria forregulatory decision making outlined in the be-ginning of the chapter, labor standards shouldnot be the subject of trade negotiations be-cause the level of standards in one countrydoes not affect the welfare of its trading part-ners, and the workers whom trade sanctionsare designed to protect have no role in decid-ing whether sanctions are imposed. Althoughhigher labor standards are associated with im-proved living conditions and development, theimposition of trade sanctions is a remarkablycostly mechanism. Furthermore, trade sanc-tions are vulnerable to capture by domestic in-terests, and are likely to hurt the workers thesanctions are designed to assist. Lower laborstandards abroad are not a serious threat tothe livelihoods of workers in industrial coun-tries; neither theory nor evidence suggests that

lower labor standards generally provide acompetitive advantage.

Core labor standards and theirrelationship to developmentCore labor standards are commonly definedto include freedom of association and collec-tive bargaining; nondiscrimination in employ-ment; no exploitative child labor; and no forcedlabor (for example, slavery).15 Each of thesecore standards is covered by at least one In-ternational Labour Organisation (ILO) con-vention. By the mid-1990s, only 27 countriesworldwide and only 10 OECD countries hadratified all core ILO conventions, althoughratifications increased in the second half of the1990s (OECD 2000). Several countries thathave not ratified some of these standards areregarded as being in compliance with them inpractice. Their reasons for nonratification ap-pear not to relate to objections on principle,but rather to specific details of the conven-tions or their interpretations by ILO bodies(OECD 1996).16 Of course, ratification does



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Figure 3.1 WTO enquiry point notification, by country group, 1995 and 1999Percent

Note: Percentage of countries with WTO enquiry points under the rules of the Technical Barriers to Trade (TBT) andSanitary and Phytosanitary Standards (SPS) agreements.Source: G/TBT/ENQ,WTO <www.wto.org>.

0

TBT SPS TBT SPS

Developing countries Industrial countries

10

20

30

40

50

60

70

80

90

100

1995 1999

not necessarily imply that core labor standardswill be observed, which requires legislative andregulatory changes, as well as monitoring andenforcement to stop abuses.

Adherence to core labor standards, as mea-sured by freedom of association, is weaklycorrelated with both higher levels, and highergrowth rates, of GDP per capita.17 (Freedom

of association is used because it is easier tomeasure than some of the other standards.)On average, more-developed countries havebetter-than-average compliance, while compli-ance in many of the poorest countries is inad-equate. Higher income levels stimulate demandfor better standards, and higher standards con-tribute to growth by increasing work effort



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Figure 3.3 Number of notifications under the SPS agreement, 1995–2000

1999 2000

Note: SPS, Sanitary and Phytosanitary Standards. Data are for 2000 through October 3, 2000.Source: G/SPS/N, WTO <www.wto.org>.

1995 1996 1997 1998 1999 2000

0

50

100

150

200

250

Low- and middle-income countries High-income countries

Figure 3.2 Number of notifications under the TBT agreement, 1995–2000

Note: TBT, Technical Barriers to Trade. Data are for 2000 through October 4, 2000.Source: G/TBT/N, WTO <www.wto.org>.

0

1995 1996 1997 1998 1999 2000

100

200

300

400

500

600

700

Low- and middle-income countries High-income countries

and stimulating innovation, in order to econo-mize on labor.

There is less evidence that adherence tolabor standards is correlated with other mea-sures of economic development, such as realwages. In the newly industrializing countries ofEast Asia, rising real wages have been associ-ated with improved bargaining rights (Maskus1997). In a larger sample of countries, how-ever, there is no clear correlation between free-dom of association and changes in real wagesor changes in manufacturing output per workerfor the period 1973–92. In a sample of 17countries that had recorded discrete improve-ments in legislation and practice regardingfreedom of association, there was no uniformtendency for growth to accelerate after thechanges (OECD 1996).

Labor standards and economic welfareAdherence to core labor standards can makeimportant contributions to improving welfare.The welfare impact depends on the structureof domestic institutions and policies. For ex-ample, if monopsonist firms hire workers be-low their marginal revenue product, allowingworker association and collective bargainingcould raise both worker wages and efficiencyby boosting employment.18 Moreover, orga-nized labor can contribute to raising efficiencyand welfare in ways that go beyond the adju-dication of wages. For example, unions cancontribute to firm-specific knowledge and or-ganizational capital, thus raising productivity,and can help improve domestic labor stan-dards by overcoming a “prisoner’s dilemma”low-standards equilibrium (Stiglitz 2000).19

But if the economy starts from a competitiveequilibrium, collective bargaining that raiseswages above their marginal revenue productmay lower efficiency. If collective bargaining issupported by measures to restrict entry (and incompetitive conditions, collective bargaining isnot likely to have a long-term impact on wagelevels otherwise), the excluded workers areclear losers. Thus, evaluating policies for in-ducing higher labor standards requires detailed

knowledge of the competitive conditions in theaffected labor markets.

In some cases, improvements in labor stan-dards may have unintended consequences andnot necessarily improve the welfare of work-ers. In several countries, labor standards arelower in export-processing zones (EPZs) thanin the rest of the country, mainly because ofbans on unions or restrictions on strikes(OECD 1996).20 Workers in most EPZs, how-ever, earn higher wages and enjoy better work-ing conditions than their counterparts else-where in the country (ILO 1993; Maskus1997).21 It is not clear what effect better laborstandards would have on investors the EPZsare designed to attract. Advocates of improv-ing labor standards in EPZs must understandnot only the domestic labor market but alsothe negotiating position of the developing coun-try relative to investors.

Labor standards and competitivenessIt is often argued that low labor standards im-pose low wages and thus enhance domesticcompetitiveness at the expense of trading part-ners’ workers. In some cases, employer collu-sion, in the absence of collective bargainingrights for workers, may reduce wages belowwhat they would be with effective labor stan-dards, thus potentially raising production.22

Such an outcome would require nation-widecollusion since if a firm pays below the pre-vailing wage, it will eventually lose its employ-ees to other sectors.23 The key point in this dis-cussion is that standards need to be ratchetedup in a coordinated and economy-wide fash-ion, i.e. a sectoral or partial approach will havespillover effects which could in many cases bedetrimental to a broad group of workers.

Over time, artificially imposed low laborstandards are likely to erode competitivenessbecause they reduce incentives for workers toimprove their skills; the earnings gain that canbe achieved by upgrading skills is limited bylabor market conditions. Similarly, low laborstandards reduce incentives for firms to intro-duce labor-saving technology, as the savingsare worth less if wages are low.



Unpublished Proofs

The data do not indicate that core laborstandards play a significant role in shapingtrade performance (OECD 1996). Countrieswith higher labor standards had higher growthrates in their share of world manufacturingexports from 1980 to 1990, but it is not pos-sible to infer the direction of causality fromthese results. Of six countries that achievedsignificant improvements in labor standards,half saw a decrease in the growth of their sharein world manufactures, while half saw an in-crease. Differences in endowments and tech-nology are much more important than laborstandards in determining patterns of compara-tive advantage.

The OECD study (1996) also examined therelationship between labor standards and FDI.Most world FDI flows from OECD countriesinto other OECD countries, which generallyhave high labor standards. As for the inflowsof FDI to non-OECD countries, it is not clearthat countries with low standards are the pri-mary destinations.24

Effectiveness of trade sanctions inimproving labor standardsEven where low labor standards reduce eco-nomic efficiency and welfare, sanctions areunlikely to improve workers’ welfare. It is afamiliar principle of economics that the mostefficient way to remove a distortion is to ad-dress it directly. For example, setting a tariff isan inefficient way to encourage domestic pro-duction of a good. Imposing trade sanctions isa vastly inefficient way to encourage betterlabor standards.

Take a favorable (to those advocating tradesanctions) case, in which government-supportedbarriers to entry enable monopsonist employ-ers to pay workers below their marginal rev-enue product. Both employment and wagerates are lower than if the market were com-petitive. Assume that the rest of the world im-poses a tariff on exports of the product, thusreducing the export price. The monopsonist’sresponse to any reduction in demand underthis market structure would be to reduce fur-

ther employment and wages in the sector. Ifthe monopsonist were large, that would leadto pressures to reduce wages in the economyas a whole (Maskus 1997).

Trade sanctions on particular export goodsare unlikely to improve labor standards forthe economy as a whole, even if the sanctionschange the behavior of particular firms. Forexample, barring child labor in one firm orsector without addressing the fundamentalcauses of child labor is likely to shift childrento less-remunerative and perhaps more dan-gerous occupations in other sectors. In Ban-gladesh in 1993, the threat of U.S. sanctionsled owners of garment factories in Dhaka todismiss all children under age 16. Anecdotalevidence suggests that many of these childrenfound employment in workshops and facto-ries not producing for export, or as prosti-tutes, brick-breakers, or street vendors (Pana-gariya 1999a). There are effective measuresfor combating abusive child employment, in-cluding income-support programs and subsi-dies for education, but trade sanctions are notamong them.

The political-economy arguments againstimposing trade sanctions on countries withlow labor standards are even more compel-ling. As discussed above, determining whetherparticular improvements in labor standardswould raise welfare requires considerable in-formation on labor and product market con-ditions. Determining whether labor arrange-ments in exporting countries will affect wagerates in importing countries is even more com-plicated, requiring estimates of various param-eters such as demand and supply elasticities in different markets and factor intensities ofgoods (Maskus 1997). The complexity of theseissues, and the decentralized nature of the costs of protection to consumers, increase thepotential for decisions to be captured by well-organized domestic interests that would ben-efit from trade barriers. The fact that laborunions and producers in some protected indus-tries in industrial countries favor using theWTO system to improve labor standards un-derlines this concern.



Unpublished Proofs

While adherence to core labor standardsimproves welfare, integrating labor standardsinto the WTO is contentious. Under tradi-tional criteria, which focus on product stan-dards, not process standards, labor standardswould not be considered for trade discussions.The TRIPs agreement has, however, widenedthe scope for broadening the traditional crite-ria (see box 3.2).

Inadequate labor standards and poor work-ing conditions are first and foremost, a devel-opment challenge that affects sizable popula-tions, whether or not they are involved intrading activities.25 It may be easy to identifysome blatant abuses linked with goods thatenter industrial markets, but the large majorityof workers in developing countries may sufferfrom even worse conditions than workers em-ployed in export activities. The keys to improv-ing workers conditions—beyond developmentitself—lie in assisting countries with the devel-opment of domestic institutions to supportworkers’ rights and improve working condi-tions, and coordinating policies across develop-ing countries to ratchet up standards and escapea low-standard equilibrium.

The ILO has been actively pursuing theseactivities since its creation in 1919. The ILOregularly monitors working conditions in itsmember countries, and traditionally providesincentives (such as technical assistance) to encourage improved compliance with ILOconventions. However, it is able to invoke eco-nomic sanctions (Article 33 of the ILO Con-stitution) and did so for the first time in 2000(against Myanmar), although implementationof the sanctions was postponed to allow thecountry time to comply.26 Strengthening theILO and enhancing its cooperation with otherinternational organizations would be an effec-tive step toward ameliorating working condi-tions around the world. The private sector,particularly multinational firms, should alsoplay a more active role by promoting uniformcorporate codes of conduct and using best-practice production methods in all countrieswhere they or their affiliates operate.

Environmental standards and trade

The past decade has seen increasing debateover the contribution of trade to environ-

mental degradation. In part, this debate hasreflected concern about the role of growth indepleting crossborder public goods; specificissues include the dangers of global warmingand the unsustainable pace of fishing and wateruse in some regions (Nordström and Vaughan1999). Workers and firms in industrial coun-tries fear that their competitive position isbeing undermined by environmental regula-tions that force pollution-intensive industriesto move to developing economies. Greater tradeintegration and access to information, whileboosting global welfare, are increasing the in-tensity of disputes and the potential for do-mestic interests to be injured by the actions offoreigners.

Although environmental concerns areclearly legitimate, the trade system is rarely theappropriate instrument for addressing them,given the principles outlined at the beginningof this chapter. Only a limited set of environ-mental issues affect more than one country. Tothe extent that environmental damage is lim-ited to a single country, decisions on whetherto restrict production for environmental rea-sons should not be imposed through trade ne-gotiations. Imposing trade sanctions to achieveenvironmental goals is likely to be inefficientand perhaps counterproductive. Countries havedifferent priorities, which are in large part areflection of different levels of development.Poorer countries are likely to make differentchoices in facing tradeoffs between growth andenvironmental goals than do industrial coun-tries—today’s industrial countries did the samewhen they were developing. It is important thatdeveloping countries retain access to the inter-national trade system, even if their domesticenvironmental policies are not those preferredby richer countries. Several international in-stitutions—such as the Joint United NationsEnvironment Programme (UNEP)—and the international environmental summits, have anenvironmental mandate and should be the



Unpublished Proofs



Unpublished Proofs

TRIPs requires all WTO members to set minimumstandards for protecting intellectual property

rights (including patents, copyright, and trademarks)and to establish obligations regarding the enforce-ment of rights. Disputes under TRIPs are subject tothe WTO’s integrated dispute settlement system.27 In-dustrial countries were strong advocates of TRIPs,and developing countries may have acceded to it toachieve progress in sectors of importance to themsuch as agriculture and textiles.

TRIPs makes significant demand for changes inintellectual property regimes, particularly in manydeveloping countries in which protection of intellec-tual property does not meet minimum TRIPs stan-dards. Changes in legal systems are under way inmany countries. However, there is a concern that thetendency to copy intellectual property regimes fromindustrial countries in order to comply with TRIPsrequirements may be inappropriate for many develop-ing countries. For example, these regimes may notadequately protect traditional knowledge, particularlygiven that the appropriate form of such protection isunknown and will require experience to develop (Finger and Schuler 1999).

Implementation of the TRIPs agreement couldhave a significant financial impact on developingcountries. TRIPs will transfer rents from developingto industrial countries, which hold the overwhelmingbulk of patents and copyrights. It is impossible topredict the size of these transfers. Some insight intothe orders of magnitude involved can be found in astudy by Maskus (2000b). He estimates that had theTRIPs agreement been in place in 1988, transferscould have amounted to $8.3 billion (in 1995 dol-lars) to the top six industrial countries, with slightlyless than half this amount coming from the develop-ing countries in his sample.28 A second area of con-cern regarding the financial impact of the TRIPsagreement is the considerable cost of administeringintellectual property rights, particularly for thepoorer developing countries. In addition, developingcountries may not benefit from the most advancedtechnologies, due to the costs involved. Beyond pureeconomic costs, there is concern that TRIPs may

Box 3.2 The Trade-Related Intellectual PropertyAgreement (TRIPs) and developing countries

constrain countries’ access to critical drugs such asthose for treating AIDS or malaria. Some of the rela-tively advanced developing countries may be able toproduce these drugs domestically. To do so, theycould invoke an exception in the TRIPs agreement togrant compulsory licenses for the domestic produc-tion of drugs. (The agreement allows for compulsorylicensing under certain conditions, one being bonafide negotiations between the local government andthe foreign manufacturer regarding the terms onwhich the manufacturer would be willing to supplythe domestic market. In either case, compensation isdue the foreign patent holder.) Less-advanced coun-tries may have difficulties in producing or importingcheaper drugs because, although TRIPs does notentirely foreclose the possibility of exporting drugsproduced under compulsory licenses, it does limit it(Subramanian 1999).

The negative impacts of TRIPs for developingcountries were intended to be mitigated by severalfactors. First, they had longer transition periods forimplementation, though these have largely expiredexcept for least developed countries (which haveuntil January 2005). Second the TRIPs obligationsdo not apply to products and processes that were al-ready on the market before TRIPs took effect. Thenet impact will eventually depend on the existence ordevelopment of substitutes, which could reduce themarket power of patent or copyright holders, andthe price elasticity of consumer demand.

In the long run, stronger protection of intellectualproperty in developing countries may contribute togrowth by removing a disincentive for owners oftechnology to export and license, encouraging for-eign investment, and by stimulating both domesticand foreign research and development. Such benefitsare likely to be greatest for the larger and richerdeveloping countries, which can enforce patent pro-tection and imitate technology (Maskus 2000b). Inaddition, to counter some of the perceived imbalancein the initial agreement, developing countries havemade various proposals to ensure that indigenousculture, knowledge and genetic resources are pro-tected and remunerated.

forums for discussing environmental goals. Inaddition, donor countries and internationalagencies can and do condition their assistanceon achievement of environmental goals, in-cluding those that affect important aspects ofthe global commons.

The impact of trade integration on theenvironmentTrade integration influences growth, the tech-nology mix, and the composition of output. In-creased openness will raise economic growthand living standards, which, other things beingequal, will increase environmental degrada-tion. This scale effect is empirically important,especially for countries that are specialized inenvironment-intensive activities, such as min-ing, fisheries, and forestry, as in Chile, andwood and wood products, industrial chemi-cals, and petroleum, as in Indonesia (Lee andRoland-Holst 1997).

Although the scale effect is always positive(as long as trade integration induces growth), itcan be counterbalanced by two other effects:the technique effect and the composition ef-fect.29 Trade integration changes access to tech-nology (through, for example, capital goodsimports), and this technique effect may have apositive or negative impact on environmentaldegradation. New technology may result insavings on energy and other inputs, reducingthe pollution intensity of growth. The compo-sition effect may also have a positive or nega-tive impact on environmental degradation.Trade integration and growth affect the com-position of output, owing to changes in therelative endowments of factors, the increas-ing consumption of (relatively cleaner) servicesthat accompanies higher incomes, and the in-creased affordability and desirability of pollu-tion reduction, which indirectly lead to betterenvironmental protection.30

The impact of trade integration on the en-vironment has varied considerably, dependingon the nature and strength of these three ef-fects, but outward orientation has reduced the pollution intensity of output in severalcountries (Birdsall and Wheeler 1992), and

outward-oriented economies have lower pollu-tion intensity of aggregate output than inward-oriented ones. During the 1980s outward-oriented growth was associated with decliningpollution intensity because the industrial ac-tivities of outward-oriented economies becamemore diversified, shifting away from heavymanufacturing (Lucas, Wheeler, and Hettige1992).31 FDI and the use of technology-ladenimported inputs have helped transmit cleanertechnologies from the regulated industrial-country market to developing countries—forexample, in the paper and pulp industry(Wheeler and Martin) and the steel industry(Reppelin-Hill 1999).

Conversely, in many countries import-substitution strategies have been pollution-and resource-intensive because of price distor-tions and lack of competitive discipline. Thereis strong evidence that under an import-substitution strategy, countries have special-ized in pollution-intensive manufacturing ac-tivities in which they are not truly competitive.The resource content of goods in such coun-tries is much higher than that of comparablegoods in open economies (Jha, Markandya,and Vossenaar 1999; Vukina, Beghin, and So-lakoglu 1999). Some distortions have strongerenvironmental consequences than others. Forexample, subsidized energy usually implies amore energy-intensive economy and thereforemore emissions.

Trade liberalization and other reforms havehelped correct policy distortions that subsidizeenvironmental degradation. For example, en-ergy use per unit of aggregate product in 12former centrally planned economies declineddrastically with market reform, in part be-cause of the rise in domestic oil prices and thecleaner composition of manufacturing outputfollowing trade and price liberalization. En-ergy intensity in China fell by 30 percent be-tween 1985 and 1997 as market-oriented re-forms were introduced (Vukina, Beghin, andSolakoglu 1999; World Bank 1997). Similarfindings emerge for use of natural resources.For example, in Sri Lanka, trade liberalizationincreased the demand for land to be planted in



Unpublished Proofs

tea, which is less erosive than other crops, thusgenerating both environmental and economicbenefits (Bandara and Coxhead 1999).

Some countries do show increased pollu-tion following trade liberalization, owing toboth scale and composition effects. Beghinand Potier (1997) suggest that some countriesfaced more domestic pollution following tradeliberalization because their aggregate activitiesexpanded, not necessarily because they spe-cialized in “dirty” activities. Several countries,however, did see increased specialization indirty activities following trade liberalizationbecause they happened to be competitive inthese activities. In this category are Indonesia(Lee and Roland-Holst 1997; Strutt and An-derson 1999); China (Dean 1999; Dessus,Roland-Holst, and van der Mensbrugghe1999; Jha, Markandya, and Vossenaar 1999);Costa Rica (Abler, Rodriguez, and Shortle1999; Dessus and Bussolo 1998); and Turkey(Jha, Markandya, and Vossenaar 1999). Fer-rantino and Linkins (1999), using simulationswith a CGE model to estimate the effects oftrade liberalization on output of toxic emis-sions, suggest that specialization is more im-portant than scale in determining the impactof trade liberalization on pollution. Table 3.1summarizes the evidence from economywidestudies on the relationship between trade lib-eralization and pollution. Panel studies founda mixed effect of outward orientation. Rock(1996) found that the composition effect ofoutward orientation was positive or ambigu-ous. Lucas, Wheeler, and Hettige (1992) founda negative composition effect. Negative resultsin a study by Vukina, Beghin, and Solakoglu(1999) were robust.

One concern about trade and financial in-tegration is that countries with relatively weakenvironmental regulations will attract dirty in-dustries away from countries with strongerregulations, and that because of competitive-ness concerns integration will inhibit the im-position of strong environmental regulations(“regulatory chill”). A related conjecture isthat states could strategically decrease envi-ronmental protection to attract new indus-

tries, setting off a “race to the bottom.” Theemergence of such a race is theoretically pos-sible (Klevorick 1997; Wilson 1997), particu-larly in political and regulatory environmentsthat are not transparent and are vulnerable to capture by dirty-industry interests. (Cap-ture by “green” interests is also possible—en-vironmental protection would exceed publicpreferences.) The several methodological ap-proaches used to study this question generallyfind mixed evidence as to whether environ-mental regulation is eroding competitivenessin relatively “clean” countries (see table 3.2and box 3.3).

The cost of environmental protectionOne reason for the paucity of evidence thatenvironmental regulations impair competitive-ness is that the cost of environmental protectionis often low, as measured by forgone growth orthe capital cost of abatement. Despite the inef-ficiency of the command-and-control approachthat most OECD countries have used in ad-dressing pollution, the cost of compliance to in-dustries has been surprisingly small, and abate-ment has been significant (Jaffe and others1995). Simulations using applied general equi-librium models of developing economies havefound that the cost of abatement for most typesof emissions is modest in terms of forgone GDPgrowth. This finding was robust, having beengenerated from models of 7 developing eco-nomies with different assumptions on abate-ment possibilities and for 13 types of pollution.The only type of pollution that was found to beexpensive to abate was bioaccumulative toxicreleases in water (Beghin, Roland-Holst, andvan der Mensbrugghe forthcoming). Detailedqualitative case studies of individual industriesundertaken by the United Nations Conferenceon Trade and Development (UNCTAD) con-firm these findings (Jha, Markandya, and Vos-senaar 1999).

Malaysia provides an interesting case ofspecialization in resource-intensive activitiesaccompanied by environmental protection(Jha, Markandya, and Vossenaar 1999). Thepalm oil industry adapted to a rapidly imple-



Unpublished Proofs

mented set of environmental regulations andtaxes. Compliance is high, and exports are sta-ble, even though opportunities to pass the cost-increase on to consumers were limited by thehighly competitive nature of the industry. State-funded research helped develop commercialby-products from palm meal, reducing thecost of compliance by generating revenuesfrom the by-products instead of treating themor dumping them and paying fines and fees(Jha, Markandya, and Vossenaar 1999; Khalidand Braden 1993). The Malaysian electronicsindustry also continued to grow despite tighterenvironmental regulations, in part because thestrong FDI presence facilitated the introduc-

tion of the latest technology (Jha, Markandya,and Vossenaar 1999).

Trade policy and environmentalprotectionTariffs are usually ineffectual instruments fortackling pollution and environmental degra-dation. Only when the externality originatesin trade are trade taxes effective in addressingthe problem (Subramanian 1992). A rankingof instruments for addressing pollution emis-sions follows the targeting principle (Bhagwatiand Srinivasan 1997), which, broadly, says“the closer, the better.” Hence, emissions taxesare the best instrument for dealing with pollu-



Unpublished Proofs

Table 3.1 Summary of economywide studies assessing the impacts of trade liberalizationon pollution

Policy change Scale Composition Technique Total pollution

Mexicoa Trade liberalization + – n.a. Small decreaseUnited Statesa with NAFTA + + n.a. IncreaseCanadaa + + n.a. Increase

Mexicoa Trade liberalization + + n.a. IncreaseUnited Statesa with NAFTA plus + + n.a. IncreaseCanadaa investment + + n.a. Increase

liberalization

Mexicob Trade liberalization, +2.8 to 3.7% –4.3 to 2.6% –0.7 to 3.5% –0.2 to 6.4%better terms of tradewith United Statesand Canada

Costa Ricac Trade liberalization 9.4% 5.6 to 10.6% + but small 15 to 20%

Vietnamd Trade liberalization 5 to 8.8% –6.3 to 8% 1.1 to 7.5% 0.8 to 23.1%

Indonesiae Trade liberalization 0.87% –.36 to 2.86% n.a. 0.51 to 3.73%with Japan

Japane Trade liberalization 0% –0.09 to –0.02% n.a. –0.09 to –0.02%with Indonesia

Globalf Multilateral n.a. n.a. –0.02 to 0% –4.32 to 0%liberalization

n.a. Not available.Note: NAFTA, North American Free Trade Agreement. The data cited in notes a–f are reproduced from Beghin and Potier 1997.a. Grossman and Krueger 1992; percentages not available.b. Beghin, Roland-Holst and van der Mensbrugghe 1995. The scale effect range refers to production and absorption. The rangesfor composition and technique effects refer to 13 measures of pollution emissions.c. Dessus and Bussolo 1998. The scale effect is the increase in output. The composition effect is the difference between total andscale effects.d. Dessus and van der Mensbrugghe.e. Lee and Roland-Holst 1997. The range of composition effects refers to 10 pollutant types. The authors also report a humantoxicity index.f. Ferrantino and Linkins 1999, tables 7 and 9. Scale and composition figures are not disaggregated.

tion emissions and minimizing distortionaryeffects elsewhere in the economy. If emissionstaxes are not feasible, input taxes are prefer-able to production taxes, which in turn arepreferable to tariffs (Beghin, Roland-Holst,and van der Mensbrugghe 1997; Lloyd 1992;Ulph 1999). This point has been documentedempirically in the case of forestry products(Barbier and Rauscher 1994), as well as forthe Indonesian economy (Lee and Roland-Holst 1997). With increasing economic in-tegration, Indonesia is tending to specialize in resource- and pollution-intensive activities.Pollution emissions at the national level (asdistinguished from the sector level), however,cannot be decreased even modestly by usingtariffs. By contrast, production taxes propor-tional to the pollution content of output makethe targeted pollution abatement feasible at areasonable cost in forgone growth.

There have been few trade disputes overtechnical requirements related to the environ-ment. Whalley and Hamilton (1996) reportonly a limited number of environment-relatedtrade disputes for the period 1982–96, and veryfew such disputes have been brought to theWTO since 1995 (WTO website). Only two ofthe 43 requests from developing countries—concerning reformulated U.S. gasoline and theU.S. ban on certain seafood products—involveenvironmental objectives. Of 300 cases of tradeimpediments to U.S. agricultural exports, onlyone was based on environmental goals; most in-volved food safety and protection of crops andlivestock from pests and disease. It is not clearwhether the paucity of environment-related dis-putes reflects the limited impact of environmen-tal regulations on traded goods, the high costsof litigation, or the scope of disputes providedfor under WTO rules.



Unpublished Proofs

Table 3.2 Evidence on international competitiveness and environmental regulation

Approach Study Conclusion

Cross-sectionalHeckscher-Ohlin (H-O) model

Investigations of FDI flows

Plant location: firm surveys

Plant location: econometricapproach

Kalt 1988

Tobey 1990

Han 1996

Valluru and Peterson 1997

Diakosauvas 1994

Xu 1999

Albrecht 1998

Eskeland and Harrison 1997

Xing and Kolstad 1995

UNCTAD 1993

Levinson 1997a, summary

Levinson 1997a

Bartik 1989

Mani, Pargal, and Huq 1997

Metcalfe 2000

U.S. manufacturing exports negatively affected byenvironmental regulation

World trade in dirty commodities not affected byenvironmental regulation

Small negative impact of regulation, decreasing overtime

Grain trade not affected by environmental regulation

Exports of the five most polluting crops negativelyaffected by regulation

Environmentally sensitive exports of 34 countries notinfluenced by regulation

United States found to import pollution-intensiveindustries more than it exports them

No pollution-intensive bias in French and U.S. FDI indeveloping economies

U.S. FDI influenced by weak regulation only inchemical industries

Negative effects of environmental policy on location

Marginal impact of compliance cost except for self-declared U.S. dirty industries

No effect

Small and negative effect

Positive effect of one measure of environmentalstringency on plant location

Negative effect of regulatory stringency on small U.S.livestock operators



Unpublished Proofs

Empirical studies of the pattern of trade, the allo-cation of FDI, plant location, and profitability

have found limited or no evidence that environmentalregulations have reduced investment or lowered com-petitiveness. As might be expected, evidence for arace to the bottom is somewhat stronger for the dirti-est industries, although even here there are conflict-ing results. There is no evidence that intracountrydifferences in environmental regulations affectinvestment. Large firms appear better-able to accom-modate environmental regulations than smaller firms.

Studies of the patterns of trade have used thecross-sectional Heckscher-Ohlin (H-O) model, whichexplains specialization on the basis of environmentalabundance, to examine indirectly the effects of envi-ronmental regulation on international competitive-ness. The results are mixed. Using 1977 data, Kalt(1988) found that U.S. environmental regulation had a significantly negative effect on competitive-ness, as measured by net exports of manufacturinggoods. Tobey (1990), using 1975 data, found no evi-dence that increased regulation affected output inpollution-intensive industries. Han (1996) tested theenvironmental H-O model using panel data (acrossindustries and over time) and actual expendituredata on pollution abatement as a measure of theenvironmental input. He found that increased envi-ronmental regulation has had a significantly negativeeffect on competitiveness, but that this effect has de-creased over time as many countries tightened theirregulations and as abatement costs fell with new cap-ital vintages, learning by doing, and new technolo-gies. Valluru and Peterson (1997) and Diakosauvas(1994) found little evidence that environmental regu-lations have had a significant negative economiceffect on agricultural trade except for the most-polluting commodities such as cotton and tobacco.Xu (1999) found that the export performance of en-vironmentally sensitive industries in 34 countries wasunchanged between the 1960s and the 1990s despitethe emergence of environmental standards in mostindustrial countries since 1970.

The evidence on the allocation of FDI provideslittle support for the existence of pollution havens.The United States is importing more pollution-intensive industries than it is exporting, and dirtyindustries are no more likely to invest abroad thanother industries (Albrecht 1998, cited in Nordströmand Vaughan 1999; Eskeland and Harrison 1997).Eskeland and Harrison (1997) find no evidence of

Box 3.3 Evidence on the “race to the bottom”pollution-intensive bias in the allocation of French andU.S. FDI flows going into manufacturing industries inCôte d’Ivoire, Mexico, Morocco, and the RepublicaBolivariana de Venezuela. Xing and Kolstad (1995)find that U.S. FDI in chemical industries seems to beinfluenced by weak environmental regulation, as prox-ied by sulfur dioxide emissions, but they also find thatFDI in cleaner industries was not influenced by envi-ronmental stringency.

Studies have found only limited evidence thatenvironmental regulation has a significant effect onplant location. Surveys of the relocation of transna-tional corporations provide some support for the no-tion of a race to the bottom (Runge 1994; UNCTAD1993). Surveys, however, tend to be less reliable thanactual data because they report what is said ratherthan what is done (Levinson 1997a). Levinson finds,for many industries and measures of stringency, thatinterstate differences in environmental regulations donot systematically affect the location choices of mostmanufacturing plants in the United States. Mani,Pargal, and Huq (1997) find, surprisingly, that aproxy for different levels of enforcement of federalenvironmental policy in Indian states is positivelyrelated to decisions on the location of new manufac-turing plants for a wide range of manufacturingindustries and for the smaller subset of pollution-intensive industries. It is possible that the proxy forstringency (the share of the state budget spent onenvironmental programs) measures the efficiency ofstate administration, which induces firms to locate instates with higher environmental expenditures.

Several other studies have looked at the impactof environmental regulation in agriculture, but mostlyin OECD countries. Metcalfe (2000) finds that strin-gency had little impact on the location of U.S. hogproduction across states and over time. Stringencydid have a negative impact on small operators butnot on large, modern, confinement livestock produc-ers. Hettige and others (1996) found evidence ofeconomies of scale in environmental compliance formany other industries in several countries.

Finally, studies have found a positive relation-ship between environmental performance and theprofitability of U.S. firms (Cohen and Fenn 1997;Repetto 1995). Although environmental complianceis not free, it creates new market opportunities andmay induce further efficiency gains that may offset its(small) cost. Environmental performance appears tobe systematically associated with higher profitability.

Several global environmental treaties havebeen concluded over the last 25 years, notablythe Convention on International Trade in En-dangered Species of Wild Fauna and Flora(CITES)32 protecting trade in endangeredspecies, and the Montreal Protocol33 banningthe use of ozone-depleting chemicals (for exam-ple CFCs, widely used as a coolant in refrigera-tors and air conditioners.) These agreementstypically provide incentives for compliancethrough both technical and financial assistance.In addition, many also provide for trade sanc-tions to enforce compliance. The compatibilitywith WTO rules of trade sanctions potentiallyallowed by such treaties has not been tested.

Alternative policies for environmentalprotectionAlthough trade sanctions are not effectivemeans of inducing environmental protection,foreigners can affect environmental choices inother ways. In some cases, foreign countriescould provide subsidies to encourage betterenvironmental practices. For example, in theU.S.-Mexican dispute over protecting dolphins,an alternative policy would have been for theUnited States to equip Mexican fishermen withimproved nets.34 The cost of this option wouldhave to be compared with the overall lossesresulting from trade restrictions. This is tosome extent an empirical issue, but the optionwould at least reduce dolphin kill, which nei-ther trade sanctions nor a consumer boycott islikely to do.

Ecolabeling schemes enable foreign con-sumers to choose goods produced in an envi-ronmentally benign way. These schemes canbe a source of trade friction, even though themarkets they cover are still relatively small,because of the increased production costs in-volved in the certification process. For exam-ple, ecolabeling schemes in textiles requiremultiple production standards for dyes, fibers,and bleaching chemicals (OECD 1997a). Inaddition, most schemes impose fees. Canada’sEnvironmental Choice Program imposes a 0.5percent charge, based on the price of the good,on sales up to Canadian $1,000,000. Certifi-

cation under industrial-country labeling schemesmay be difficult for developing countries toobtain (Jha, Markandya, and Vossenaar 1999;Jha and Zarrilli 1994; OECD 1997a; Zarsky1994). For example, none of the 48 licensesgranted under the EU Commission’s ecolabelwent to a developing-economy firm, althoughit is not clear whether any of these firms ap-plied (Nimon and Beghin 1999). Ecolabelingschemes can be used in a discriminatory way,especially in markets dominated by develop-ing economies, such as textiles. Domesticindustries have more say in defining ecostan-dards than do foreign competitors. The stan-dards are likely to favor technologies that arefeasible in industrial countries rather than theinput mix and technology set of developingcountries.

Local ecolabels are emerging in developingcountries, especially in timber-based products,but also in textiles, to promote better practiceand preempt discriminatory labeling in indus-trial countries. For example, Malaysia sup-ports ecolabels and standards that apply to alltypes of timber and are based on internation-ally agreed standards, not merely on standardsdeveloped by one or a few countries (Jha,Markandya, and Vossenaar 1999).

Another approach is to help trading part-ners implement market-based environmentalpolicies that have proved effective in tacklingenvironmental problems in developing coun-tries. Reducing subsidies on pollution-intensiveactivities or raising taxes on polluting activi-ties, through discharge, input, or output taxes,has reduced pollution and increased tax rev-enues in Bangladesh, Brazil, Indonesia, andother countries (World Bank 1997). Market-based instruments also provide incentives tosave on the taxed resource and become moreresource-efficient. The more targeted the in-strument, the better. Some countries, such asChina and Malaysia, have used emissionscharges with some success. When the cost ofmonitoring is not prohibitive, the market in-strument can be very targeted; for example,many countries use stumpage fees to fostersustainable forest management (World Bank



Unpublished Proofs

1997). China has been successfully abatingpollution for the past 20 years by using levies(Wang and Wheeler 2000).

Privatization and competition, or incre-mental reform in this direction, can promotebetter resource management. Several studiesidentify state firms as worse polluters thanfirms in the private sector (Pargal and Wheeler1996) or centrally planned economies as worsethan market economies (Vukina, Beghin, andSolakoglu 1999). Incentives to economize,combined with increased resources for bettermanagement, have improved the performanceof public entities in many countries. For ex-ample, in several countries, water-user associ-ations have been substituting for the govern-ment in allocating irrigation water.

Engagement of the public is essential to suc-cessful environmental protection. This processcan foster partnership among the public, firms,and authorities. The government can be a fa-cilitator for private industry by disseminatinginformation on new technology and environ-mental regulations. Alternatively, the processcan be coercive, relying on disclosure of vio-lation of environmental regulations, such asillegal discharges. The coercive approach hasbeen effective in developing economies such asChina (Dasgupta and Wheeler 1997), althoughcomplaints tend to be positively associated withhigher income and greater human capital.

Regional approaches to environmental stan-dards may prove more effective than global ap-proaches, particularly on issues with a clearregional component such as transboundaryemissions and shared water resources. A re-gional approach does not imply uniform stan-dards for domestic environmental problems;the case against harmonization of policies isoverwhelming in most settings because of dif-ferent valuations of the marginal benefits of en-vironmental protection.

Notes1. The regulation of standards in a local or national

economy, particularly with respect to appropriatenessand efficiency impacts, is another important topic for

many developing countries, but it is not the main sub-ject of this chapter. The effects of voluntary productstandards are touched on summarily.

2. Many international food standards are set by theCodex Alimentarius Commission, which is based inRome and is a joint commission of the Food and Agri-culture Organization of the United Nations (FAO) andthe World Health Organization (WHO).

3. This framework is taken, in part, from Rollo andWinters 2000.

4. For a primer on standards and trade, see Na-tional Research Council 1995.

5. This section draws on Maskus and Wilson,forthcoming.

6. The Development Economics Research Group of the World Bank is carrying out a major project ontrade and standards that includes construction of anew global database on standards barriers to supportfuture empirical and policy research in this area.

7. The estimate of the decrease in costs attributableto the adoption of uniform standards is taken fromGasiorek, Smith, and Venables 1992.

8. An overview of all WTO dispute settlement casesmay be accessed through the WTO website at<www.wto.org/wto/dispute/bulletin.htm> and the WTODocument Distribution Facility at <www.wto. org/ddf>.The U.S.-EU case on hormone-treated beef is catalogedunder WT/DS26 and WT/DS48.

9. WTO cases involving only industrial countriesmay have implications for developing-country ex-porters’ market access. For example, the EU’s restric-tions on U.S. exports of genetically modified grainscould have major implications for the exports of simi-lar products from countries, such as Argentina andBrazil, where GMO varieties have been widely planted.

10. The budget of the Office of the USTR in fiscal2000 was $25.5 million, and the office had 178 (full-time equivalent) staff members; see <http://www.ustr.gov/reports/spy.pdf>.

11. For additional background, see Wilson 2000aand 2000b.

12. The (unweighted) average development assis-tance budget as a share of GDP for low-income coun-tries was 11.2 percent in 1998.

13. The World Bank has an active program to assistdeveloping countries in improving their standards in-frastructure. Further information is available at <http://www1.worldbank.org/wbiep/trade/Standards.html>.

14. This discussion is taken from formal posi-tions submitted to WTO General Council, January–November 1999.

15. These core labor standards were enunciated inthe June 1998 ILO Declaration on Fundamental Prin-ciples and Rights at Work.



Unpublished Proofs

16. The 1996 OECD study was updated in a morerecent report (OECD 2000), reaching broadly the sameconclusions as the earlier study.

17. This analysis should be viewed with some cau-tion, for several reasons: simple correlations provideno information on the direction of causality; the lack of a theoretical model of the determinants of growthmeans that the measured correlations between stan-dards and growth may be misleading; and it is difficultto construct adequate quantitative measures of the ex-tent of adherence to core labor standards.

18. Alternatively, the worker association could re-strict entry of workers and enable them to bargain fora higher wage, improving the welfare of workers in theassociation at the expense of excluded workers. Theoutcome would depend on the goals of the associationand the relative bargaining power of workers and cap-ital (Maskus 1997).

19. The “prisoner’s dilemma” in this context refersto the fact that if a country attempts to improve stan-dards it will lose a competitive edge if it acts alone. Asa result, in the absence of coordination, no country willattempt to improve standards.

20. Maskus (1997) points out, however, that laborturnover in EPZs is rapid, in part because assembly em-ployment is dominated by women, who leave to marry.In any event, high labor turnover results in low union-ization rates, even in EPZs in which union organizationand the right to strike are protected.

21. Firms in EPZs may pay higher wages than otherdomestic firms for several reasons: they benefit fromless burdensome regulations and can operate more flex-ibly; they tend to be larger and thus enjoy scaleeconomies; they are governed by the policies of foreign-owned firms that are bound by their headquarters’ bestpractices in labor standards; they need to attract laborto move to the area; or pressures to maintain quality tosatisfy export requirements may encourage them to payhigher wages to induce greater effort (Maskus 1997).

22. Even here, the impact of higher exports onwages in importing countries is likely to be small, par-ticularly in the familiar case of highly labor intensivegoods such as apparel, footwear, and electronics(Maskus 1997).

23. This analysis depends on the structure of labormarket conditions. For example, employers who col-lude to reduce labor standards can benefit if there areeffective barriers to labor mobility.

24. In the 1990s China, whose labor standardshave been criticized, was the largest beneficiary of FDIflows among developing countries. Significant anecdo-tal evidence indicates, however, that U.S. FDI in Chinais establishing above-market-wage, high-standards op-erations. Clearly, firms are investing in China for many

reasons, but the attraction of a large and rapidly grow-ing market is the most significant motive.

25. Labor markets in developing countries havebeen a subject of increasing involvement by the WorldBank—including the seminal 1995 World Develop-ment Report on “Workers in an Integrating World”—in large part because of the recognition that they playa key role in poverty reduction and economic develop-ment. Bank projects with a labor market componenthave increased dramatically since the early 1990s. Ef-forts are also underway to enhance dialogue withNGOs and other external partners, including regularconsultations with representatives from the Interna-tional Confederation of Free Trade Unions (ICFTU) todiscuss areas of mutual concern.

26. For more information, see http://www.ilo.org/public/english/bureau/inf/pr/2000/27.htm.

27. To date, six cases against developing countrieshave been initiated, all by the EU and the United States.Four cases deal with pharmaceuticals and agriculturalchemicals and two concern compatibility of domesticregulations with TRIPs obligations. The countries in-volved are Argentina, Brazil, India, and Pakistan; seehttp://www.wto.org/english/tratop_e/dispu_e/stplay_e.doc.

28. The transfers refer to the net present value ofpayments from 1988 on, based on the 1988 structureof patents.

29. The scale effect, almost by definition, has anelasticity of 1 with respect to growth. Thus, if an econ-omy grows by x percent, all else being equal, emissionswill also increase by x percent.

30. A significant body of literature on the “envi-ronmental Kuznets curve” (EKC) posits that pollutionintensity follows an inverse-U-shaped curve with re-spect to income. At low levels of development, pollu-tion tends to increase with economic growth; above acertain income level, it declines. There is evidence, atleast for some types of pollutants, that the turningpoint in some developing countries is occurring atlower levels of income than was witnessed in industrialcountries earlier. If this tentative evidence is borne out,it suggests that several factors are working in favor ofa more rapid transformation to a cleaner environmentin developing countries. These factors include techno-logical diffusion of both cleaner production processesand abatement technologies and greater awareness ofthe costs of environmental damage on the part of bothofficials and the general public. This literature is sum-marized succinctly in Nordström and Vaughan 1999.

31. See Rock 1996, however, for a critique of themeasurement of openness and market integration.

32. For more information see http://www.wcmc.org.uk/CITES/index.shtml.



Unpublished Proofs

33. For more information on the Montreal Proto-col, see http://www.unep.org/ozone/montreal.htm.

34. The United States placed trade restrictions onthe import of Mexican tuna because Mexican tunafishing techniques led to the indiscriminate killing ofdolphins.

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Reppelin-Hill, V. 1999. “Trade and Environment: AnEmpirical Analysis of the Technology Effect in theSteel Industry.” Journal of Environmental Eco-nomics and Management 38 (3): 283–301.***

Richardson, J. David. 2000. “The WTO and Market-Supportive Regulation: A Way Forward on NewCompetition, Technological, and Labor Issues.”Review (Federal Reserve Bank of St. Louis) 82(4): 115–26.

Robbins, Donald J. 1996. “Evidence on Trade andWages in the Developing World.” Technical Paper119. OECD Development Center, Paris.

Roberts, Donna. 1998. “Implementation of the WTOAgreement on the Application of Sanitary andPhytosanitary Measures: The First Two Years.”IATRC Working Paper 98-4. International Agri-cultural Trade Research Consortium. Available at<http://www1.umn.edu/iatrc/workpap.html>.

Rock, M. T. 1996. “Pollution Intensity of GDP andTrade Policy: Can the World Bank Be Wrong?”World Development 24 (3): 471–79.***

Rollo, Jim, and L. Alan Winters. 2000. “Subsidiarityand Governance Challenges for the WTO: Envi-ronmental and Labor Standards.” World Econ-omy (4): 561–76.***

Runge 1994. [[CITED BOX 3.3.]]Runge, C. F., with F.Ortalo-Magne and P. Van de Kamp. 1994. FreerTrade, Protected Environment: Balancing TradeLiberalization and Environmental Success. NewYork: Council on Foreign Relations Press. ***

Slaughter, Matthew J. 1999. “Globalization and Wages:A Tale of Two Perspectives.” World Economy 22(5): 609–30.

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Stephenson, Sherry M. 1997. “Standards and Confor-mity Assessment as Nontariff Barriers to Trade.”Policy Research Working Paper 1826. Develop-ment Research Group, World Bank, Washington,D.C. ***

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Strutt, A., and K. Anderson. 1999. “Will Trade Liber-alization Harm the Environment? The Case of In-donesia to 2020.” In Per G. Fredriksson, ed.,



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Trade, Global Policy, and the Environment,13–34. Discussion Paper 402. World Bank, Wash-ington, D.C. ***

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Unpublished Proofs

THE INTERNET IS GLOBALIZATION ON STER-oids. It will boost efficiency and en-hance market integration domestically

and internationally, particularly in developingcountries that are most disadvantaged by pooraccess to information. Although the Internetshould enhance global growth, it also brings in-creased danger of economic marginalization tocountries that cannot access it effectively. Tak-ing advantage of electronic commerce requirespolicies similar to those needed to capitalize onthe opportunities for trade: improved interna-tional coordination, for example in ensuringinteroperability of communications technologyand confronting challenges to domestic tax andfinancial systems; an open economy promotingcompetition and diffusion of Internet technolo-gies; and efficient social and infrastructure ser-vices, in particular a competitive telecommuni-cations sector and a well-educated labor force.

Despite the obvious benefits of the Internet,uncertainty exists about the implications ofthis technology and its likely rate of diffusion.This chapter provides a tentative view of theimplications of electronic commerce for devel-oping countries, based on the theoretical liter-ature, inferences from experience in industrialcountries, and anecdotal evidence. The discus-sion is inevitably somewhat more speculativethan in other chapters. The evidence, however,warrants four broad conclusions:

Firms in developing countries should enjoyproductivity gains and expanded demand withthe spread of electronic commerce.

The Internet will boost productivity in de-veloping countries by increasing the efficiencyof the procurement system, strengthening in-ventory control, lowering retail transactioncosts, and eliminating or transforming inter-mediaries. Virtual proximity to industrialcountry markets will increase as the Internetreduces the costs inherent in operating at adistance. Given the wide differences in returnsto factors in developing versus industrialcountries, this increased proximity will gener-ate large gains from trade in sectors that lendthemselves to electronic commerce.

Consumers will benefit from increasedcompetition and market transparency, but thebenefits to firms will vary greatly, dependingon the sector, degree of product differentia-tion, and level of technological sophistication.

Developing country firms that sell labor-intensive, differentiated products (such ascrafts, software, or business services—particu-larly services involving the remote processingof routine information) will experience in-creased demand. These firms also will benefitfrom the opportunity to leapfrog to the mostadvanced technologies and from easier accessto advertising on global markets.

The impact of electronic commerce on devel-oping countries’ sales to global supply chains isuncertain. Reduced transactions costs shouldprovide greater interaction among multi-nationals and technologically sophisticatedfirms in developing countries. Many developing-country firms may lack the reputation required

1

Electronic Commerce andDeveloping Countries

4


Unpublished Proofs

to bid on the newly created online exchanges,however. Industrial-country multinationals alsomay prefer integrating their operations moreclosely with a reduced number of the most ad-vanced firms, given the opportunities for mana-ging tightly linked production processes throughthe Internet.

Government action is critical to removingimpediments to electronic commerce.

Network externalities imply that marketprices may not fully reflect the gains to the so-ciety from increased levels of Internet access;hence the government has a role in speedingInternet diffusion. Complementary inputs, in-cluding telecommunications, transport andpower infrastructure, and a well-educated laborforce are critical to exploiting the Internet’s po-tential. Governments have also encouraged theexpansion of the Internet by subsidizing Inter-net connections and investing directly in infra-structure, although such investments can crowdout private initiatives and may quickly becomeobsolete due to rapid changes in technology.

Other policies can also contribute to boost-ing Internet use. An open foreign direct invest-ment regime is necessary to promote dissemi-nation of information technology and training.Governments can help facilitate services thatevaluate and attest to the quality of outputfrom domestic firms, which could supporttheir access to global Internet exchanges. Governments must provide a supportive legal framework for electronic transactions, such asrecognition of digital signatures and legal ad-missibility of electronic documentation. Gov-ernments can also encourage Internet expansionby moving procurement and administrative re-quirements (tax forms and permits, for exam-ple) online. Finally, it is desirable to avoid highlevels of taxation on critical inputs to elec-tronic commerce such as personal computersand telecommunications equipment.

The gap in Internet access between indus-trial and developing countries will persistthrough the next decade.

Access to the Internet is grossly unequal,with 30 percent of the U.S. population onlinecompared with an average of 0.6 percent in

developing countries. Access, supported bythe growing use of cell phones as a major linkto the Internet, is expected to rise at a fasterrate in developing countries than in industrialcountries during the next 10 years. Internetaccess is likely, nonetheless, to remain limitedin per capita terms, especially in the poorestcountries, and to remain well below levels al-ready achieved in industrial countries. Accessby firms in developing countries may increasesignificantly, but the poorest developing coun-tries may still see their competitiveness im-paired because of a lack of human capital andcomplementary services required for effectiveparticipation in electronic commerce.

Emergence of electronic commerce

Transacting business using electronic aidsis as old as the telegraph, which was in-

troduced in the mid-nineteenth century. Morerecently, electronic data interchange (EDI) sys-tems not residing on the Internet have facili-tated business transactions worth trillions ofdollars. This chapter, however, explores howthe relatively new phenomenon of the Internetis likely to affect commerce. Several defini-tions of electronic commerce exist, includingtransactions where the Internet is used togather information, to order goods or services,and to make payments. A reasonable definitionof electronic commerce would include com-mercial operations in which two of these threesteps are taken electronically.1

Although the chapter focuses on electroniccommerce (in keeping with the overall themeon trade), this is by no means the only, or nec-essarily the most important, way the Internetwill affect developing countries. Increased ac-cess to information holds enormous promisefor bettering noncommercial aspects of thelives of people in the developing world—pro-viding health and education services from adistance, and more efficient government ad-ministration are but two examples. At thesame time, the growth of the Internet will in-crease the exposure of developing countries tomaterial, such as pornography, that may beviewed as undesirable.



Unpublished Proofs

Electronic commerce in industrial countrieshas grown rapidly, from next to nothing in themid-1990s to $100 to $200 billion in 1999–2000 (figure 4.1). Nevertheless, the dollar valueof electronic commerce transactions is less than1 percent of the total U.S. gross domestic prod-uct (GDP) of $23 trillion (and the business-to-business data refer to total turnover, not justvalue added). Consumer Internet purchasesequal about two-thirds of 1 percent of retailsales of goods in the United States (U.S. Depart-ment of Commerce 1999), excluding servicessuch as travel, tickets, and financial brokers,and about one-third of 1 percent in the UnitedKingdom and Germany (OECD 2000a).2

The importance of electronic commercerests not in its current size but in the likelyspeed of its establishment as a significant ve-hicle for commerce and the potential for fu-ture growth. Electronic commerce is projectedto reach $4 trillion to $6 trillion in the UnitedStates alone within the next three to four years (Bermudez and others 2000; Economist1999).3 Electronic commerce may account foras much as 25 percent of world trade by 2005(UNCTAD 1999).

The digital divide

The distribution of Internet access amongcountries is severely unequal. Despite

rapid growth in Internet access in developingcountries, industrial countries still account forthe majority of Internet subscribers (figure 4.2).More than 30 percent of U.S. residents had ac-cess to the Internet in 1999, compared with0.5 percent in Sub-Saharan Africa (figure 4.3).Electronic commerce is also relatively small inmost developing countries. In Latin America,for example, electronic commerce is estimatedat $459 million in 1999 (Lapper 2000), com-pared with a GDP of about $2 trillion.

Internet access in the developing worldvaries greatly. Some countries, particularly inEast Asia, have achieved impressive penetra-tion rates. For example, the share of Internetsubscribers in Korea has grown rapidly and isestimated at 20 percent of the population in2000, above rates in most European countries(Grebb 2000). Although per capita subscriberrates in China and India remain low, thesecountries are so large that they have a criticalmass of subscribers ready to benefit from the

E L E C T R O N I C C O M M E R C E A N D D E V E L O P I N G C O U N T R I E S


Unpublished Proofs

Figure 4.1 Estimates of electronic commerce in industrial countries, 1999–2000Billions of U.S. dollars

Source: See Suttle 2000 and so forth in the chapter references.

0

Suttle 2000 Teo 1999 OECD 2000 Phillips and Meeker 2000

Gartner

20

40

60

80

100

120

140

160

Business to business

Business to consumer

Business to business and consumer

Internet, a situation that increases the potentialfor electronic commerce transactions.

Analysis of Internet diffusionThe nascent condition of Internet diffusion inmany developing countries reflects the con-straints on Internet use, the most important of

which is the availability of telecommunicationsservices. Canning (1999) finds strong evidencethat the quantity and quality of telecommuni-cations services provided in a country is a sig-nificant determinant of the existence of Inter-net connections and the level of Internet use; todate, almost all Internet users have depended



Unpublished Proofs

Figure 4.2 Estimates of Internet access, 1990–2000Millions of subscribers

United States Western Europe Japan Developing countries

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

50

100

150

200

250

Source: Pyramid.

Figure 4.3 Regional Internet accessPercentage of population with access to the Internet

Source: Pyramid.

0Industrialcountries

UnitedStates

Other Middle Eastand

North Africa

Sub-Saharan

Africa

EasternEurope

LatinAmericaand the

Caribbean

Asia

5

10

15

20

25

30

35

on telephone lines for connection. The trendsin “Internet intensity”—the ratio of Internetsubscribers to available telephone lines—areremarkably similar across developing and in-dustrial countries, however. Urban density andthe policy environment for private sector de-velopment are strongly related to growth in In-ternet intensity.4 Many developing countries(including, on average, those in Asia, LatinAmerica, and Sub-Saharan Africa) are experi-encing much more rapid diffusion of the Inter-net for the given availability of telephone linesthan is the United States. The digital divide re-sults from differential access to telecommuni-cations, not from the use of the Internet aftertelecommunications are available.

Unfortunately, the gap in telecommunica-tions services between industrial and develop-ing countries is large, so the digital divide islikely to remain wide for some time. The gapis also wide among developing countries, withthe poorest countries being particularly disad-vantaged. For example, the average OECDcountry had 70 times, and the average LatinAmerican country had 17 times, the number oftelephone mainlines than did countries in Sub-Saharan Africa (excluding South Africa) (fig-ure 4.4). By some indicators, the digital divideis widening. Wilson and Rodriguez (2000) findthat an index of between-country inequality inaccess to communications (the components arepersonal computers, Internet hosts, fax ma-chines, mobile phones, and televisions) deteri-orated substantially during the 1990s.5

Prospects for Internet accessGiven the enormous investments required fortelephone lines (and in some countries the con-tinued dominance of the telephone system byinefficient monopolies), hopes for narrowingthe digital divide rest largely on the spread ofalternative means of accessing the Internet.The availability of cable, cellular phone, andsatellite systems is likely to reduce dependenceon telephone lines for access to the Internetduring the next decade. Digital cellular tele-phone systems with Internet access are alreadyspreading rapidly in Japan and Western Eu-

rope. Approximately 10 million users in Japan,or 40 percent of total users there, accessed theInternet through mobile telecommunicationsdevices in May 2000 (Reuters 2000). Low-Earth-orbit satellite systems also have potentialfor reaching areas where telephone service ispoor (Wood 1999).6 Work is underway to in-vestigate the feasibility of Internet transmissionthrough power lines.

All of these links to the Internet will bypassthe often inefficient and difficult-to-build tele-phone networks now used for Internet accessand will have substantially higher accessspeeds, although the forecasts in table 4.1 arespeculative. The rapid diffusion of cellularphone and other systems with Internet accesswill mean that much of the Internet’s capacity



Unpublished Proofs

Table 4.1 Future Internet access speeds

Platform Year available Potential bandwidth

Cellular 1999 144 kilobits2000 1.6 megabits2003 5.2 megabits

Cable 2000 1–10 megabitsSatellite 2005 64 megabitsPower grid (?) 2.5 gigabits (?)

Source: Harrow 2000; www.teledesic.com; www.mediafusioncorp.net.

Figure 4.4 Access to telecommunicationsPer 1,000 persons

0

Telephone mainlines Mobile phones

100

200

300

400

500

600

OECD countries

Latin Americaand the Caribbean

Sub-Saharan Africa,excluding South Africa

Source: World Bank 2000b.

may be available at relatively low cost in manydeveloping countries. Although the most re-cent experience with wireless Internet accesshas been disappointing in some respects (wit-ness the slow diffusion of Internet-enabledwireless phones in the United States), over themedium term these alternative Internet plat-forms are likely to give a significant boost tothe spread of the Internet.

Some insight into the implications of newplatforms for Internet access and electroniccommerce can be gained by looking at theprospects for diffusion of cellular telephones.During the 1990s cell phone diffusion withincountries was strongly influenced by percapita income, the change in per capita in-come, the size of the urban population, andthe strength of the policy environment facingthe private sector.7 Assuming future per capitaincome growth and policy performance will beequal to the 1990s experience, this equationforecasts very rapid growth in cell phone, andhence Internet, penetration during the nextdecade in all developing regions. Cell phoneuse in developing countries as a group wouldquadruple by 2010 compared with 1998.

Cell phone penetration would remain lowrelative to population, a projected 6 percent in 2010, compared with 2 percent in 1998.However, this figure does not imply that only6 percent of developing country residents willhave access to cell phones, given the potentialfor multiple use (although privacy concernsmay constrain multiple use in some circum-stances). For example, hundreds of people haveaccess to the single cell phone provided toeach village participating in the BangladeshVillage Pay Phone program.

Increased access to the Internet is only oneprecondition for effective participation in elec-tronic commerce. Many developing countries,particularly the poorest ones, lack the humancapital and complementary services requiredto make effective use of the latest technolo-gies. There also is concern that developingcountry firms will face increasing challenges incompeting with the leading firms in industrialcountries, which have a headstart in using these

new technologies (although at the same timedeveloping-country firms will benefit from lowerprices and increased access to services offeredby industrial country firms). Finally, an overlyrestrictive interpretation of current rules on in-tellectual property rights could constrain devel-oping countries’ access to some of these newtechnologies, which have largely been devel-oped in the industrial world. One potentialissue is the patenting of business processes andmethods linked to the Internet; for the timebeing that practice is found only in the UnitedStates. International recognition of such patentscould constrain the ability of firms in othercountries to compete.

Effects on productivity inindustrial and developingcountries

Electronic commerce will generate produc-tivity gains by reducing transaction costs.

The rapid dissemination of information, thesubstitution of digital for paper record keep-ing, and the networking capabilities of theInternet will improve flexibility and respon-siveness, encourage new and more efficient in-termediaries, increase the use of outsourcing,reduce time to market by linking orders toproduction, and improve internal coordina-tion. Although the effect of electronic com-merce on productivity has probably been smallto date (Oliner and Sichel 2000), simulationshave indicated that electronic commerce couldraise output levels by some 5 percent in themajor industrial countries (Mann, Eckert, andKnight 2000; OECD 2000a).8 Firms can ex-pect productivity gains through improved sys-tems for procurement and inventory controland reduced costs of intermediation and salestransactions, as well as through more rapiddiffusion of technology. Consumers also willbenefit through reduced search costs, thus in-creasing competition and reducing prices.

Procurement and inventory controlFirms in developing countries can use the In-ternet to achieve the kinds of procurement and



Unpublished Proofs

inventory savings now enjoyed only by thelargest firms that have established EDI sys-tems, simply by purchasing “out of the box”electronic commerce applications (box 4.1).Goldman Sachs (1999) estimates that 30 per-cent or more of the total cost of intermediategoods typically are “process costs,” or thecosts of administering transactions and main-taining inventories. The potential for savingscan be divided into reduced processing costsof procurement transactions, reduced price ofinputs attributable to increased competition,and improved inventory control.

Substituting the Internet for paper-basedsystems can reduce the cost of processing or-ders by saving staff time, speeding up theprocess, and reducing processing errors.9 Esti-mates of the savings in processing costs ofWeb-based procurement are 90–95 percent(Schwartz 2000; U.S. Department of Com-merce 1999).

The use of online auctions also can reducethe price of inputs by improving transparencyand facilitating competitive bidding. GeneralElectric, for example, has cut the cost of pur-chased inputs by 10 to 20 percent throughonline bidding. The potential savings from in-creased transparency varies with the infor-mation content of the good. Goldman Sachs(1999) estimates that the savings from pur-chasing online may vary from 2 percent inrelatively undifferentiated products (such ascoal) to 40 percent in highly differentiated ones(some electronic components, for example).

Keeping an electronic inventory and trans-ferring information on replenishment needsover the Internet enables producers and retail-ers to reduce the time that components andraw materials spend at each processing stage.Even relatively small reductions in inventoryholding time in retail trade can mean substan-tial increases in profits because the average



Unpublished Proofs

EDI systems provide one view of the potential effi-ciency gains from relying on the Internet for pro-

cessing procurement and inventory control. Thesesystems use proprietary software to connect pur-chasers’ and suppliers’ computers and to automatethe transaction processing and information ex-change. EDI is estimated to support about $3 trillionin economic activity in the United States alone(Phillips and Meeker 2000). About 80 percent of thedollar value of intercompany transactions amongFortune 500 companies in the United States is con-ducted through EDI systems (Bermudez and others2000). Despite this, only about 100,000 U.S. compa-nies use EDI—out of the 2 million U.S. companieswith 10 employees or more. The large investment re-quired to develop proprietary software and the costsinvolved in integrating new suppliers effectively barssmall firms from using EDI. By contrast, a largeshare of the investment required for similar systemsover the Internet has already been made, and interac-tivity with other computers is automatically pro-vided. Also, it is estimated that operating costs in

Box 4.1 Electronic data interchange (EDI) systemsInternet-based systems are less than 1 percent of EDIsystems (Xie 2000).

That large firms are willing to make huge fixedinvestments and pay high operating costs for EDIsystems indicates the substantial gains that firms cancapture by transferring from paper-based to elec-tronic systems. The smaller initial investment andlower operating costs in Internet-based systems(along with greater flexibility and transparency ofoperations) means that small- and medium-size firmscan capture these gains.

The migration of EDI systems to the Internet (to reduce operating costs and to improve flexibility) is likely to boost the dollar value of electroniccommerce transactions over the next few years. This change will be slow because of the reluctance to abandon the huge fixed costs represented in EDI systems and the cost of conversion to Internet-based systems (Wenninger 1999). Concerns over the lower security of the Internet compared with that of proprietary EDI systems also may limit conversions.

cost to retailers of holding inventory for a yearis at least 25 percent of the price, and marginsmay average only 3–4 percent (OECD 1999).Improved inventory control will enable firmsto become more integrated with suppliers,thereby saving time and allowing greater pro-duction specialization. Increased productionintegration has led to a boom in specializedmanufacturing firms that produce compo-nents for more well-known companies. A fa-mous example is Cisco, whose componentsare made to Cisco’s specifications by suppli-ers, tested through a connection to the Inter-net, and then shipped directly to the buyer.

Procurement in most developing countries isslower, less efficient, and more labor-intensivethan in industrial countries, so the technical ef-ficiency gains from transferring procurementsystems to the Internet could be relatively large(although the lower cost of labor in developingcountries means that the economic gains couldbe more limited than in industrial countries).The savings in working capital from reducedholding of inventories also would be significantin developing countries, where the cost ofcapital is high and credit is often rationed orunavailable. The lack of reliable telecommu-nications networks and complementary ser-vices—for example, transport facilities—maylimit these gains, however. Some limited surveyevidence (see appendix for description of sur-vey) indicates that North American firms thatwere better at supply-chain management tobegin with are cutting these costs by an evenlarger amount when using Internet-based in-ventory systems. This may be because an ade-quate supply of high-skilled workers and aflexible organization are required to reap thefull benefits of these systems.

Reduced intermediary costsProductivity gains can be derived from elimi-nating or improving the efficiency of interme-diaries involved in marketing and distribution.Middlemen often charge substantial markupsbecause of their knowledge about and con-tacts with suppliers. By greatly expanding ac-

cess to information, the Internet has enabledthe elimination of retailers, wholesalers, and(in the case of intangible products) even dis-tributors in some sectors. More commonly,existing middlemen have been replaced bynew approaches to intermediation made pos-sible by the technology—for example, onlineauctions and aggregators (firms that representcollections of buyers that can demand lowerprices for bulk purchases).

The Internet also can generate significantcost savings in transport. The advertisementand trading of empty truck space over theWeb is reducing costs per ton in the U.S.trucking sector (Economist 1999). Accordingto one industry estimate, $15 billion to$20 billion annually in cost savings (4 to5 percent of output in the U.S. trucking indus-try) may be realized (Business 2.0 1999).

Eliminating or transforming intermediaryfunctions will enable developing-country pro-ducers to access both domestic and foreignmarkets at lower cost. By contrast, firms in de-veloping countries whose main purpose is tohelp domestic companies trade with interna-tional markets will be at particular risk. Net-work externalities, combined with a low mar-ginal cost of adding new users, mean that the market for providing intermediary services offers considerable advantage to the first com-pany on the scene. Thus the later-arriving and less technologically sophisticated firms inmany developing countries may have difficultycompeting with industrial country firms as Internet-based intermediaries (UNCTAD 2000).Developing countries also may not be able tocapture the cost savings from reduced inter-mediation in some sectors, such as primarycommodity exports, where purchasers arelikely to be the major beneficiaries of any costsavings (box 4.2).

Retail transactions The Internet offers the potential for savings in retail transactions compared with tradi-tional systems. OECD (1998b) suggests thatthe greater availability of information to the



Unpublished Proofs

consumer and savings on providing servicescould increase the productivity of sales staff inOECD countries by a factor of 10. The evi-dence on the sale of goods over the Internet sofar does not show large savings, however. Pre-liminary studies found that goods sold on theInternet were priced the same or higher thanin stores (Goldman Sachs 1997; Krantz 1998;Lee, Westland, and Hong 2000; OECD 1998a).Other studies estimated that books and com-pact discs (CDs) were 10 percent cheaper onthe Internet (Economist 2000; Oliner andSichel 2000).10 The potential savings in ser-vice transactions are more impressive. For ex-ample, the total cost (including investment) ofbank transfers over the Internet is half that ofexisting automated systems and one-eighththat of transactions using tellers (WTO 1998;figure 4.5). Note that a portion of this savingsreflects efficiency gains, while another portion

reflects the transfer of costs from producers toconsumers in the form of time spent searchingthe Internet.

The lower cost of service transactions islikely to have a less significant effect in devel-oping than in industrial countries because thelower wages paid in developing countries meanthat firms have less incentive to undertake thefixed costs involved in setting up electronic sys-tems. Also, poor distribution systems, inade-quate protection against credit card fraud, andlimited consumer Internet access constrain thepotential for business to consumer commercein many developing countries.

Knowledge acquisition and technologydiffusion Easier access to knowledge through the Inter-net will speed technology diffusion, which isof critical importance to developing countries



Unpublished Proofs

Electronic commerce may affect relatively homo-geneous primary commodities less than it does

more differentiated products because most of thenecessary information is contained in the productprice. Although electronic commerce is likely to pro-vide some benefits to producers by increasing the ef-ficiency of commodity markets, the major benefitswill accrue to purchasers.

More timely access to market information aboutprices could generate benefits to producers. Small-holder farmers in remote areas could check the pricesin the nearest market (which could be a considerablejourney if done in person) before deciding whether tosell to local middlemen; such a capability could po-tentially improve the farmers’ bargaining positionwith local and foreign buyers. The Internet alsocould provide producers with better informationabout input prices and product availability and eas-ier access to training about best production practices.

Several firms have projected that a large share of commodity trade will occur over the Internet

Box 4.2 The Internet and primary commodityexporters

(for example, Forrester Research 1999a), but theefficiency gains will vary depending on the com-modity. Commodities already traded on establishedexchanges (such as wheat), with widely dissemi-nated information on prices and centralized trading,may not be greatly affected. Online auctions willhave a greater role in reducing margins for com-modities (such as fertilizer) that trade throughbrokers with limited price transparency. For exam-ple, brokerage fees in the sugar trade, which rangefrom 0.5 to 1.0 percent of the value of the com-modity, may decline as more trade is done over the Internet.

Producers in developing countries are unlikelyto see substantial increases in incomes from lowertrading and marketing costs; rather, these gains willaccrue to the consumer through lower prices for finalproducts. Lower consumer prices may increase de-mand only slightly, because the demand for mostcommodities is price inelastic and the reduction inmarketing costs will probably be small.

because they tend to operate within the tech-nological frontier. Electronic commerce canreduce the costs of communication betweengeographically distant partners and lower thesearch-and-compare costs involved in findingpotential business partners and technologies.Moreover, the Internet provides a radial struc-ture for interpersonal communication net-works. Bulletin boards and news servers allowindividuals to exchange information fasterand within a wider environment than withnetworks based on telephone and fax. Con-nolly (1998) found that differences in commu-nication and transportation infrastructurewere significantly related to differences in therate of product imitation encouraged by for-eign direct investment (although this does notnecessarily mean that electronic commerce hasan independent positive effect). Grossman andHelpman (1991) argue that international con-tacts enable a country to obtain foreign tech-nologies and adjust them to domestic use, animportant channel through which the produc-tivity levels of industrial and developing coun-tries are interrelated. Such international “net-

working” is greatly facilitated by the Internet.Harris (1998) quotes a Neilson survey thatfound business’s primary use of the Internetwas for gathering information.

Effects on international trade indeveloping countries

By opening markets to a wider range of po-tential buyers and sellers, the Internet is

likely to foster a greater volume and variety oftrade. The Internet could erode an importantadvantage now enjoyed by firms in industrialcountries: proximity to wealthy customers.For example, the Internet reduces the cost ofproducing customized products designed fordistant markets; consumers in the UnitedStates can purchase a hand-sewn suit made bya tailor in Shanghai without ever visitingChina (Xie 2000).

Service exports The Internet will reduce barriers to the sale of services embodying skilled labor (Harris1998).11 In the Philippines, for example, com-



Unpublished Proofs

Figure 4.5 Cost savings from electronic commerceRatio of cost of traditional process to Internet

Notes: Bank transfer: total cost of teller and ATM transaction versus online.Airline tickets: travel agent booking via computer reservations system versus consumer booking online.Sending documents: send a 42-page document by fax, courier, and airmail relative to e-mail.Software distribution: download to CD and ship versus electronic transmission.Source: Kibati 1999, OECD 1999, WTO 1998.

0

Bank transfer Airline tickets Sending documents Softwaredistribution

5

10

15

20

25

30

35

panies use the Internet to provide accountingservices, process insurance claims, and trackcredit card defaulters for firms in industrialcountries (Jordan and Hilsenrath 2000). In India workers have been transcribing U.S.physicians’ oral records into written files since 1996, at one-tenth the cost of U.S. tran-scription services (Mills 1996).12 Schuknechtand Perez-Esteve (1999) suggest that financial,insurance, and other business and communica-tion services are likely to see the greatest im-pact from electronic commerce.

Multinational supply chains The Internet’s impact on access to multina-tional supply chains by firms in developingcountries is uncertain. Increased informationon these firms may improve their access tomultinationals, which tend to use supplierswith whom they have experience. GoldmanSachs (1999) estimates that, because of poorresearch, firms’ purchasing managers tend toaward 90 percent of their procurement con-tracts to about 20 percent of suppliers. At thesame time, suppliers with poor hardware,software, and Internet transmission capabil-ities may be unable to compete with better-connected companies. It is unclear whetherthe new online auction systems have resultedin the expansion of supply networks. GeneralElectric, for one example, may be increasingthe number of its suppliers through its onlinebidding site for procurement.

A lack of credibility may make it difficultfor firms in developing countries to access on-line auctions. Purchasers need to have confi-dence that suppliers will provide input on timeand in conformance with specifications, andproduct quality may not be known ex ante.More than half of 35 large firms using onlineauction or exchange sites said that they wouldnot do business through online Web sites withfirms they did not know (Forrester Research1999b). Interview results indicate buyers—typically firms in industrial countries—see anespecially high risk in purchasing from firmsin developing countries. Over time, greater usemay be made of certification agencies (such as

the International Standards Organization andthe International Electrotechnical Commis-sion) to assess independently the quality ofnew firms’ products and services. However,relatively few small firms, even in industrialcountries, use the certification services thesebodies provide, because of the cost and fearsthat certification may not fully address buyers’concerns in the markets where small firmscompete (Callaghan and Schnoll 1997).

Online advertisement New websites are emerging that provide avenue for smaller firms to advertise theirgoods, and buyers to advertise their productneeds.13 A survey of one of the best-known ad-vertising websites (www.alibaba.com), whichhas grown to 200,000 subscribers since itsApril 1999 inception, indicates that the impacthas been modest so far, although it is too earlyto judge the site’s full potential. Most par-ticipants say they have found only a few newcustomers so far. Only 13 percent of firms re-ported that total sales had gone up consider-ably since posting on the website, whereas64 percent reported some increase and the restnone (no firm reported a decline in sales).However, 87 percent of the firms viewed the



Unpublished Proofs

Figure 4.6 New customers gained fromalibaba websitePercentage of respondents

0None Few Many

10

20

30

40

50

60

70

Source: See appendix.

website as helpful or very helpful, with thesmaller firms showing the greatest enthusiasm.

Effects on income distribution

The Internet improves access to and use ofinformation, which increases the produc-

tivity of capital, thus raising its return relativeto labor (Rodriguez 2000). The Internet alsoincreases the demand for skilled labor, partic-ularly in the information technology sector. Bycontrast, better information will tend to re-duce the demand for, and hence the relative re-turn to, unskilled labor involved in the routineprocessing of transactions and (perhaps) retailsales.14 There is a risk that this divergence indemand for skilled versus unskilled laborcould increase inequality between industrialand developing economies as well as withindeveloping economies.15 Any rise in inequalitymay be exacerbated by opportunities for mi-gration as skills shortages in the informationtechnology sectors intensify in industrial coun-tries. Electronic commerce also may increaseregional inequality. In many developing na-tions, Internet services rarely spread beyondthe country’s capital and a few large urbancenters. In Kenya, for example, more than

85 percent of Internet users are in Nairobi(Jensen 1999; Kibati 1999).

Some aspects of electronic commerce couldmitigate its impact on inequality, particularlyon the poor, in developing countries. The fallin production costs is likely to increase the de-mand for all workers, despite the fall in theper unit labor input in production. Althoughinequality may increase, the income of thepoor may rise. Also, electronic commerce in-creases market transparency, thus reducingsearch costs and reliance on intermediaries.These effects reduce the price of skill-intensivegoods, thus raising the real incomes of work-ers generally, although the poor are unlikely tobenefit greatly as consumers because of theirlimited access.

A direct impact of technological change oninequality in developing countries has beendifficult to show empirically, perhaps becausethe adoption of new technologies has coin-cided with economywide structural reform(Rodriguez 2000). Studies have shown thatfor industrial countries, the recent rise in in-come inequality has occurred during a periodof rapid technological change in the informa-tion technology sector.16

Impediments to Internet use andthe role of policies in developingcountries

The presence of network externalities,where all participants gain from each ad-

dition to the network, implies that marketprices may not fully reflect the total benefit to society from increased Internet access. Thusgovernment has an important role in speedingInternet diffusion. Inappropriate policies andthe lack of complementary services, particu-larly affecting the telecommunications sector,other infrastructure, human capital, and the in-vestment environment severely constrain In-ternet access in developing countries.

Telecommunications Poor telecommunications will limit the growthof electronic commerce. Required telecommu-



Unpublished Proofs

Figure 4.7 Increased sales reportedbecause of alibaba websitePercentage of respondents

0None Moderate Considerable

10

20

30

40

50

60

70

Source: See appendix.

nications facilities include transmission facili-ties connecting a country’s domestic networkto the greater Internet, the domestic Internetbackbone, and connections from homes andbusinesses to the backbone network. The de-fects of domestic telecommunications servicesmay be less important for the larger firms indeveloping countries; these firms may find itprofitable to invest in telecommunications fa-cilities (such as wireless) that bypass the localnetwork.

State or privatized monopolies that controlinternational connections impose inefficientpricing structures and conditions,17 which meansthat many Internet service providers cannotafford to buy enough transmission capacityfor electronic commerce applications to func-tion without congestion. This poor state ofdomestic backbone networks results in a largevolume of domestic Internet traffic being sentto the United States before being returned toits region of origin (Cukier 1999). A growingnumber of African Internet sites are hosted onservers in Europe or the United States becauseof poor infrastructure (Jensen 1999). Hence,

even traffic that originates and terminates do-mestically can cost the same as internationaltransmission.

The high cost of Internet access, the lack oflocal loop infrastructure necessary for basicdial-up modem access, and the poor quality ofthe local loop infrastructure that does exist allimpede connections to the domestic backbone.Country comparisons show a strong relation-ship between usage price and Internet penetra-tion; for industrial countries the correlationbetween the Internet hosts per capita and theaverage cost of Internet access from 1995 to2000 is –.73 (EU Commission 2000; OECD2000c). Developing countries face much highercosts relative to incomes than do industrialcountries (figure 4.8). For example, surveys in-dicate that some users in Beijing may spend anaverage of 35 percent of take-home salaries onInternet access charges (Rosen 1999).

Internet use appears to be higher in coun-tries where local phone service is charged at afixed rate than in those where callers are billedby the minute. For example, in most LatinAmerican countries (Mexico being the major



Unpublished Proofs

Figure 4.8 Internet monthly access charge as a percentage of GDP per capita, 1998

Source: ITU 1999.

United States

Australia

Finland

Japan

Turkey

Mexico

Senegal

Guinea

Mozambique

Ethiopia

Uganda

Sierra Leone

0 20 40 60 80 100 120 140

exception), local calls are charged per unit oftime (Oxford Analytica 1999), and telephonecharges account for 40 percent of monthly ac-cess costs (E-Marketer 2000). In the UnitedStates the marginal cost of local calls is zero.Note that subsidizing Internet access throughflat rate charges for local calls may discourageinvestment in alternative forms of Internet ac-cess that ultimately could be more efficient(EU Commission 2000).

For many developing countries, the mostimportant issue is the lack of telephone serviceto homes and businesses. Despite increases inrates of telephone line penetration during the1990s, more than one-third of the 130 devel-oping countries (excluding small islands) withdata for 1998 have fewer than 5 telephonelines per 100 inhabitants (figure 4.9). The com-parable level in the United States is 66.

The quality of access also is important, assome electronic commerce applications thatrely on sophisticated technology and high userinteractivity require low congestion and highbandwidth transmission between the user’s ac-cess device and the host server. The most pop-ular alternatives by which developing countries

can overcome inadequate local loop infrastruc-ture have been either shared facilities or wire-less local loop. Shared facilities, which involvelocal entrepreneurs selling the use of a com-puter with Internet access, are a fast and rela-tively cheap way of increasing Internet use. Forexample, the number of Internet users on eachInternet account in Egypt is estimated to be be-tween 2.5 and 4.5 people (El-Nawawy and Is-mail 1999). Public access Internet cafés exist insome 110 countries (Rao 1999).

Wireless and satellite technologies also pro-vide an alternative to the high costs and ineffi-ciencies of many domestic telecommunicationssystems. Although currently used primarily forvoice, mobile phones “soon will be a muchbetter device for many of the usual Internet ap-plications,” according to some technologists.18

Cellular phones in some developing countrieshave experienced strong growth rates and rela-tively high penetration, similar to those in in-dustrial countries. In Haiti, for example, poortelephone service (0.9 phone lines per 100people, less than half Africa’s average, andhuge waiting lists for new lines) has led to thegrowth of wireless service (Peha 1999). In1998 Ecuador, the Slovak Republic, and West-ern Samoa had ratios of cellular phone sub-scriptions to regular phone service similar tothose of industrial countries (ITU 1998). Onaverage, however, cellular phone penetrationremains well below industrial-country levels.Sub-Saharan Africa averages 5 cellular phonesper 1,000 people, compared with 265 cellularphones for every 1,000 people in high-incomecountries (World Bank 2000b).

Impressive increases in penetration can beachieved through increasing competition, al-though in some cases privatization has meantreducing subsidies to local calls, with a nega-tive impact on Web access, at least in the shortterm (Zambrano 1999). The relative level ofcapital spending on communication infra-structure and development of Internet applica-tion software generally tends to be higher andmore advanced in those industrial countriesthat liberalized telecommunications marketsearlier (OECD 2000a). Perhaps as a result of



Unpublished Proofs

Figure 4.9 Telephone mainlines per 100inhabitants, developing countries, 1998Number of countries

0Fewer than 5 5 to 20 More than 20

10

20

30

40

50

60

Note: United States = 66 telephone mainlines per 100 inhabitants.Source: World Bank data.

privatization and liberalization, Africa has re-corded its highest annual growth rate in maintelephone lines for a decade (AED 1998a).Figure 4.10 reveals the growing trend of pri-vatization in the telecommunications sectorsof developing countries.

Other infrastructure Poor infrastructure services (other than tele-communications) are an important constrainton electronic commerce. Frequent and longpower interruptions can seriously interfere withdata transmission and systems performance,so many Bangalore software firms have theirown generators (Panagariya 1999). Mail ser-vice can be unreliable, expensive, and time-consuming in many developing countries. Forexample, the unreliability of postal services inLatin America has meant that more expensivecourier services must be used to deliver goodsordered over the Internet, and in response, in-ternational courier services are setting up spe-cial distribution systems in Miami (Lapper2000; Oxford Analytica 1999).

The lack of safeguards against fraud can se-verely restrict credit card purchases, the mostcommon means of conducting transactionsover the Internet. For example, many Latin

American consumers are unwilling to pur-chase goods over the Internet because creditcard companies will not compensate holdersfor fraudulent use of cards (in many industrialcountries, cardholders have only a limited ex-posure to loss). This lack of security does notmake consumer purchases on the Internet impossible. In China, companies are depend-ing on cash payments and local distributionthrough taxis and bicycles to reach consumers(Fan 2000).

Human capitalA critical mass of highly skilled labor is neededin developing countries to supply the necessaryapplications, provide support, and disseminaterelevant technical knowledge for electroniccommerce. The work force in many develop-ing countries lacks a sufficient supply of theseskills, and the demand for this specializedlabor from industrial countries has furtherstrained the supply of this labor in developingcountries. In the mid-1990s North Americaand Europe had unfilled demand for profes-sionals trained in information technology (fig-ure 4.11). The wages of workers in informa-tion technology industries continue to risemore rapidly than those of workers in other



Unpublished Proofs

Figure 4.10 Developing country privatization in telecommunications, 1990–98Billions of U.S. dollars

0

5

10

15

20

25

30

1990 1991 1992 1993 1994 1995 1996 1997 1998

Source: World Bank 2000b.

U.S. industries (U.S. Department of Commerce1999). U.S. firms will be able to fill only half ofthe estimated 1.6 million positions open in2000 (ITAA 2000), while the shortfall of in-formation technology workers is estimated atalmost 1 million in Japan (OECD 2000b).

At the same time, Harris (1998) notes thatthe Internet also facilitates the mobility of skilledlabor services. Workers can choose to remainin their own country while exporting laborservices to higher-paying industrial countries.19

Developing countries may also reap some ben-efits from migration. For example, Indians inSilicon Valley have played a role in provid-ing capital, expertise, and business contacts to Indians in the software exporting firms ofBangalore.

Investment environment Several regulatory impediments to the wide-spread adoption of electronic commerce exist inmany developing countries. Duties and taxes oncomputer hardware and software and commu-nication equipment increase the expense of con-necting to the Internet. For example, a com-puter imported into some African countries may

be taxed at rates exceeding 50 percent. Theoverall environment for private sector activitiesis a significant determinant of Internet servicediffusion. An open foreign direct investmentregime helps promote technology diffusion,which is important to the growth of electroniccommerce. Foreign direct investment also is onechannel that could facilitate certification of do-mestic firms for access to online auctions.

Governments also can play an importantrole in supporting the certification of firms byproviding information on certification proce-dures, promoting access by domestic firms tointernational organizations and firms thatprovide certification, and perhaps subsidizingthe costs of certification to demonstrate thekinds of resources available in the domesticmarket. This role will be particularly impor-tant (at least in a transitional sense) as theintermediaries that formerly helped connectdeveloping-country firms to internationalmarkets are replaced by Web-based intermedi-aries that may have less information on devel-oping countries.

Governments must provide a supportivelegal framework for electronic transactions, in-cluding recognition of digital signatures; legaladmissibility of electronic contracts; and estab-lishment of data storage requirements in paperform, intellectual property rights for digitalcontent, liability of Internet service providers,privacy of personal data, and mechanisms forresolving disputes. The U.N. Commission onInternational Trade Law has a “Model Law onElectronic Commerce” that offers national leg-islatures legal principles and guidelines fordealing with some of these issues (Price Water-house Coopers 1999; UNCTAD 2000).

Governments also have had considerableimpact on Internet use through direct inter-ventions. Singapore is providing grants tolocal companies to encourage participation inelectronic commerce (Price Waterhouse Coop-ers 1999). Malaysia is wiring a zone south ofKuala Lumpur with fast communications(Bickers 1999). The “Wiring the Border” proj-ect is providing subsidies to small businessesalong the Mexico-U.S. border to finance Inter-



Unpublished Proofs

Figure 4.11 Information technology jobsunfilled because of skill shortages, 1998Thousands

0

UnitedStates

Other Germany Canada UnitedKingdom

50

100

150

200

250

300

350

400

Source: OECD 1998b.

net access. The U.S. Department of Defenseplayed a critical role in developing the initialnetworking technologies (Goodman and oth-ers 1994). The U.S. government also financedthe original Internet backbone until increaseddemand for services led to the creation ofcommercial backbones; a similar pattern wasfollowed in several other industrial countries(Braga and Fink 1997). Despite some successstories, however, the rapidity of technologicalchange greatly increases the riskiness of gov-ernment interventions to support Internet ac-cess. The expenditure of billions of dollars toconnect schools to the Internet through tele-phone lines could be wasted if wireless orpower line technology turns out to be less ex-pensive (Davis and Seib 2000). Furthermore,government investments may crowd out pri-vate sector initiatives that could provide ser-vices more efficiently.

Finally, government can support the spreadof the Internet by switching to online servicesfor its own transactions. Public sector procure-ment, many aspects of tax and customs ad-ministration, the processing of routine applica-tions (such as car permits and real estatelicenses) and other governmental functions can often be carried out through the Internet.Decisions on the use of the Internet in publicadministration should be based on the costs of providing services relative to paper-basedprocesses, the capability of government per-sonnel, and the extent of demand. Neverthe-less, greater government use of the Internet canplay a role in encouraging public participation.

Language That most Internet business is conducted inEnglish is currently an important constrainton using the Internet. Estimates of the share ofEnglish used on the Internet range from 70 to80 percent, but only 57 percent of Internetusers have English as their first language (ITU1999; Vehovar, Batagelj, and Lozar 1999). Percapita Internet use averages about 30 percentin those industrial countries where English iscommon, compared with about 5 percent inother industrial countries (figure 4.12). Famil-

iarity with English was the principal determi-nant of Internet use in Slovenia, for all eco-nomic groups (Vehovar, Batagelj, and Lozar1999). Conversely, Internet content is limitedin the local language of most developing coun-tries. From a commercial aspect, Schmitt(2000) found that just 37 percent of For-tune 100 Web sites support a language otherthan English.20

The amount of non-English material on theWeb is growing, however. Spanish websites inparticular are increasing, in part to serve thelarge Spanish-speaking community in theUnited States (Vogel and Druckerman 2000).Improvements in translation services (by peo-ple and machines), as well as Web browsersthat recognize characters of different lan-guages, should ease language constraints (U.S.Department of Commerce 1999). There is grow-ing recognition that English-only content is in-sufficient for an international economy.21



Unpublished Proofs

Figure 4.12 Internet use in industrialcountries by knowledge of English,1998–99Percentage of population

0English is

first languagefor many

Knowledge ofEnglish iscommon

Other

5

10

15

20

25

30

35

First group: Australia, Canada, Ireland, United Kingdom, United States.Second group: Denmark, Finland, Norway, Sweden.Third group: Austria, Belgium, France, Germany, Greece, Italy, Japan, Portugal, Spain, Switzerland.Source: www.headcount.com

Challenges to regulatory regimesin developing countries

Electronic commerce will pose difficultchallenges for government regulation of

tax and financial systems. The growth of elec-tronic commerce will encourage tax compe-tition and may facilitate some forms of taxevasion. Competitive pressures in domesticbanking systems will rise, generating substan-tial benefits to consumers and firms but po-tentially lowering the franchise value of exist-ing banks.

Tax policy The growth of electronic commerce will pre-sent some challenges to tax enforcement indeveloping countries and place increased em-phasis on improving the technological sophisti-cation of tax authorities and on internationalcoordination of tax collection efforts. The In-ternet reduces the cost to firms of being physi-cally far away from customers and increasesthe ability of companies to relocate production,because a substantial share of the work in-volved in organizing production is carried outby computers that can be located anywhere.Thus multinationals will find it easier to shiftactivities to low-tax regimes. Governments mayfind it more difficult to impose desired incometax levels on existing corporations, and com-petition among developing countries for in-vestment by multinationals may rise. This situ-ation will place a greater premium on efforts toreach agreements among developing countriesto limit this kind of competition.

In addition, some of the new transactionsconducted through electronic commerce willbe difficult to monitor. Government may notbe able to detect the transfer of digitized ma-terial and thus know that a taxable transac-tion has occurred.22 It may also be difficult tocontrol such transactions through the supplierbecause companies can easily provide suchservices from other jurisdictions. Thus effec-tive international agreements to assist with taxenforcement will be important.

The Internet increases the potential for con-sumer-to-consumer purchases and for barter

transactions, which also are difficult to moni-tor. Barter exchanges using digital money aresmall now, but the potential for growth couldbe great when a critical mass of participants is reached (Washington Post 2000). Reducedtransaction costs also might make it easier fortaxpayers to hide potentially taxable activi-ties. The impact of electronic commerce ontax evasion should not be overestimated, how-ever. The sale of domestic goods will still becontrolled by monitoring companies’ transac-tions, and imported goods will be controlledat the border.

Tax authorities will require greater exper-tise in information technology, both to im-prove the efficiency of tax administration andto enhance government ability to obtain andunderstand records of electronic transactions.In this respect, the greater transparency andease of retrieval of electronic transactions (com-pared with paper processes) could assist taxenforcement.

Financial sector and capital flows Electronic commerce could pose a significantchallenge to government regulation of the fi-nancial sector by reducing the franchise valueof domestic banks, thus increasing the incen-tive for banks to undertake excessive risk. Atthe same time, electronic commerce will gen-erate substantial benefits to consumers andfirms that rely on banking services. Competi-tion in domestic banking systems will increasebecause of reduced costs, greater access byforeign banks, and greater reliance on capitalmarkets by former bank borrowers.

Online banking may reduce banking trans-action costs by 15–25 percent compared withregular accounts (Morgan Stanley Dean Wit-ter 1999). Enhanced transparency and compe-tition will mean that a large part of these costreductions are transmitted to the consumers ofbanking services. In fact, some degree of pricecompetition among banks is already becomingapparent in the emerging economies (Gold-man Sachs 2000).

The Internet will greatly increase the abilityof foreign banks to compete in developing



Unpublished Proofs

countries’ domestic markets. The geographiclocation of the consumer and the service pro-vider will become increasingly irrelevant,eroding the local banks’ advantage of havinglarge branch networks. First-mover advan-tages, economies of scale, and reputationaladvantages backed by strong supervisory sys-tems will strengthen the competitive positionof industrial-country banks. They will be in abetter position than domestic banks to offerintegrated trade payments systems, in whichcustomers can obtain applications for a letterof credit, care of credit approvals, telegraphictransfers, invoices, and confirmations (Granit-sas 2000). One indication of the potential forforeign firms’ inroads into developing countrybanking systems comes from a 1997 study,which indicated that U.S. and U.K. firms dom-inated global Internet financial services mar-ket because of their reputations, head start,and the predominance of English on the Inter-net (OECD 1999).

Furthermore, the Internet will reduce theadvantage that domestic banks enjoy fromhaving a monopoly on information abouttheir clients. Local banks often are betterplaced than foreign lenders to monitor the fi-nancial position of domestic firms (Eichen-green and Mody 1999). This advantage hasenabled domestic banks to play an importantrole in on lending international capital flowsto domestic borrowers; domestic banks ac-counted for as much as 46 percent of net long-term capital flows to developing countries in1997 (World Bank 1999). Domestic banks mayexperience sharper competition for makingloans in their own markets, as the Internetmakes information about borrowers more ac-cessible to international lenders.

The easier dissemination of credit informa-tion made possible by the Internet is likely tostrengthen the trend toward greater relianceon bond financing in developing countries,potentially at the expense of domestic banks.The number of firms in developing countrieswith access to international bond markets in-creased more than sixfold from 1991 to 1998(Eichengreen and Mody 1999), and the share

of private source debt that was held in bondsin developing countries rose from about one-fourth in 1990 to more than one-half in 1999(figure 4.13). Currently, leading rating com-panies rate only several hundred corporateand foreign bonds. A private initiative is un-derway to rate millions of companies on theInternet by merging credit management tech-niques with collecting and organizing infor-mation on companies (UNCTAD 2000; www.cface.com). Furthermore, with a huge pool ofrated companies, it would become possible toissue guarantees based on estimated defaultprobabilities and to securitize these guaranteesthrough the capital markets.

International coordination Electronic commerce raises several regulatoryissues that should be addressed through im-proved international coordination. The im-portance of international cooperation to taxadministration was noted earlier. Ensuringopen access for the international transmissionof goods delivered electronically would facili-tate the continued growth of electronic com-merce. Members of the World Trade Organi-zation have decided provisionally to exemptsuch goods from customs duties.23 A more im-



Unpublished Proofs

Figure 4.13 Bond versus bank financingMillions of U.S. dollars

1,200

1,000

800

600

400

200

0

1980 1990 1999

Commercial banks

Bonds

Source: World Bank 2000.

portant contribution to ensuring open accesswould be to secure agreement on barrier-freetreatment of electronically delivered services,by strengthening commitments entered intounder the General Agreement on Trade in Ser-vices (Mattoo and Schuknecht 2000).

More generally, the rise in the volume ofcross-border transactions promised throughthe spread of the Internet will raise a host ofissues requiring international agreement. Ex-amples include improved procedures for allo-cating domain names used for Internet loca-tions;24 agreement on privacy standards fordata generated through commercial transac-tions; closer coordination of antitrust reviewsto reduce the administrative burden imposedon companies; and efforts to harmonize thelaws governing electronic commerce transac-tions. Electronic commerce will further speedthe process of globalization and thus will un-derline the importance of an effective interna-tional framework for cross-border transactions.

Notes1. See OECD 1999 and UNCTAD 2000 for a

more detailed discussion of the definition of electroniccommerce.

2. These estimates exclude sales where the Inter-net is used as an information resource only. In someservice sectors, the penetration of electronic commerceis relatively high. In the United States, for example,electronic commerce accounts for some 25 percent ofstock trades.

3. These figures vary greatly depending on the de-finition of electronic commerce used. Projections oftrillions of dollars of electronic commerce in part re-flect the migration of EDI systems to the Internet.Moreover, these forecasts are extremely speculative. Asindicated earlier, estimates of even the current size ofelectronic commerce differ substantially.

4. The regression is log(I/T 1997) – log(I/T 1990)= –14.76 – 1.04log(I/T 1999) + .86log(urban pop1999) – .10log(income 1990) + .61log(policy). All co-efficients are significant except income. Regionaldummy variables are also included. R-squared is .97.I/T stands for Internet intensity.

5. Between-country inequality of access to com-ponents of this index (such as mobile phones) appearsto have declined during the 1990s. Thus trends in thedigital divide may differ significantly among differentkinds of communications media.

6. Companies such as Teledesic and Skybridgeplan to launch satellite systems capable of supportinghigh-speed Internet access for millions of users. So farthe failure of the Iridium system has not derailed theseplans.

7. The regression equation is log(cell 99) – log(cell90) = –9.16 – .84log(cell 90) + .78log(urban pop 90) +2.12[log(income 99) – log(income 90)] + .78log(in-come 90) + 1.06log(policy). R-squared is .78. Obser-vations = 99.

8. These studies are by their nature speculative,however, and the results require several restrictive as-sumptions that may or may not reflect actual events(OECD 2000a).

9. At Cisco the replacement of phone, fax, and e-mail ordering by electronic commerce systems cut thenumber of orders that had to be reworked from 25 per-cent to 2 percent (OECD 1999).

10. The use of discounts to increase market share,coupled with the lack of profits, leaves some doubt asto whether these lower prices reflect efficiency gains,however.

11. See World Bank 1995 for an earlier discussionof the potential for long-distance service exports fromdeveloping countries.

12. The potential for exports of Internet-basedservices by developing countries in the medical sector isstaggering. About one-third of the cost of health carein the United States, or some $300 billion a year, rep-resents the cost of capturing, storing, and processinginformation such as records, physicians’ notes, test re-sults, and insurance claims (Evans and Wurster 1997).

13. Examples include www.indiaonestop.com;www.in-business.com.ar/mall/;www.maquilamarket.com; and mm.malaysiadirectory.com/b2b/, which focusmainly on markets in India, Argentina, Mexico, andMalaysia, respectively. The World Bank is providingsupport to the Virtual Souk, an online marketplace forartisans in the Middle East and North Africa, owned bylocal nongovernmental organizations and cooperatives.

14. Note that the Internet also enables servicetransactions that would not otherwise have occurred,which increases the demand for literate but not highlyskilled workers in developing countries.

15. Inequality is affected by many factors, and thestrength of this effect is unknown. Thus, whether theInternet will ultimately have a significant impact on in-equality remains uncertain.

16. For example, see Autor, Katz, and Krueger1998; Bresnahan and Brynjolfsson 1998; Krueger 1993.

17. In Egypt, for example, El-Nawawy and Ismail(1999) report that the cost of an international half cir-cuit can be 2.5 times the international tariff.

18. Helft 2000.19. Harris (1998) goes further to say that “the

Internet can eliminate the scale disadvantage of small



Unpublished Proofs

regions in producing services . . . [and] then can po-tentially lead to in-migration of skilled labor to theregion.”

20. DePalma, McCarthy, and Armstrong (1998)found that although 49 of 50 companies surveyed hadoperations outside the United States, and 80 percentprint marketing material in other languages, only fivesaid that their multilingual sites were as functionallyrich as their English sites.

21. Advertisements have appeared in U.S. busi-ness magazines highlighting the need for Internet content to be written in other languages in addition to English. Schmitt (2000) warns businesses that English-only sites are no longer feasible for interna-tional companies.

22. According to Bach and Erber (1999), it is vir-tually impossible to enforce taxes on electronic trans-actions. This conclusion is uncertain, however, and itsaccuracy will depend on whether the evolution of In-ternet technology ultimately favors privacy over gov-ernment monitoring.

23. The impact of this decision on governmentrevenues should be slight because the tariff lost if notaxes are levied on digitizable goods is less than one-fifth of 1 percent of total revenues in the major devel-oping country importers (Matoo and Schuknecht2000).

24. The World Intellectual Property Organizationissued a detailed report on the intellectual propertyissues associated with domain names and has devel-oped an online system to assist in resolving disputes(UNCTAD 2000).

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Unpublished Proofs


Firm interviews

The interview information included in thechapter is based on conversations with:

• managers or executives from five multi-national firms: Ingram Micro, The Gap,Ford, General Electric, and Infosys. Thesespecialize in computer hardware and soft-ware distribution; apparel; automobiles;electrical and lighting equipment; andcustoms software, respectively. The firstfour appeared on this year’s Fortune-200list, while the last is a major Indian-basedmultinational software company.

• representatives from: (i) the U.S.-Mexicoand US-Philippines Chambers of Com-merce; as well as from: (ii) the offices ofthe Commercial or Trade Attaches repre-senting Taiwan (China) and Brazil in theUnited States.

• participants in a conference on the May 24,2000, “Wiring the Border” program, in-cluding representatives from small-businessassociations, technology specialists, gov-ernment officials, and academic experts.

Website surveyThe conclusions on the alibaba website arebased on a survey of firms via fax, conductedin May 2000. To keep the survey manageable,the firms to be contacted were chosen from se-lected economic subsectors. Within these sub-sectors, we included all firms posting offers inthe last two weeks of April 2000—whether assellers or buyers. We received 105 completereplies to our questionnaire from the 800 firmssurveyed. A list of all respondents’ names andwebsites (if any) is attached.

Appendix:firm interviews and survey

Unpublished Proofs

Unpublished Proofs



China Yangzhou Weiteli Motor-

Manufacturing Co., Ltd.

Tianjin Printronics Circuit Corp.

Horman Company

China National Electric Wire and Cable

I/E Corp. (Xiamen Branch)

Hebei Xin Hua Li Da Sale Department

K.O.G. International Philippines., Inc.

Jiangxi Wire and Cable General Factory

Young Eak Trading Co., Ltd.

Shenzhen Tonghaisheng Investment

Development Co., Ltd.

Jiangsu I/E (Group) Corp. (Heiteng Co.,

Ltd.)

Sinochem Hebei (Shenzhen Toomly)

Import and Export Co., Ltd.

Zhejiang Yongkang Crown Power Tools

Manufacturing Co., Ltd.

Truly Sales Co.

Hongguang Electronics Import and

Export Co. (Guangzhou Office)

Chengdu Guoxin Maida Electronic Co.,

Ltd.

Catic Electronics

H2O Electronics Co.

Dong Young International Corp.

Sinoleather.com Ltd.

Chew The World

Gusung Machinery

Eros Group

Xiangshui Bearing Accessory Co., Ltd.

Shandong Gifts and Decorations Import

and Export Corp.

Dalian F.T.Z. Zhengxing International

Trading Co., Ltd.

Yuyao Kingfan Industry and Trade Co.,

Ltd.

Green Source International Group

Wellmade Industry Corp., Ltd.

Zhejiang Light Industrial Products

Import and Export Corp.

iSquare Design and Development

Shandong Xingfa Foodstuffs

Mideast Mercantile Ltd.

Xiamen Zhongxin Metal Products Co.,

Ltd.

Cintel International

Sandstone International Co., Ltd.

Shanghai Yang Ning International

Trading Co., Ltd.

Pacific Silk Route Pte.

China Shaanxi Techrun Technology

Company

Praphan Ceramica Co., Ltd.

China Tea Import and Export Corp.

Hebei Sanli Cashmere Products Co., Ltd.

Yixing Tanghan Ceramic Co., Ltd.

Xiamen Zhenhua Ind. Corp.

Ningbo Economic and Technical

Development Zone Import and Export

Corp.

Starscom Info-Tech Co., Ltd.

Seanet RS

Cixi Kaida Bearing Co., Ltd.

Kedi Hi-Tech Industrial Co., Ltd.,

Xiamen Office

Shijiazhuang Gulf Semiconductor Co.,

Ltd.

Tao’s Inc.

Feidong Foreign Economics and Trade

Corp.

China Dalian Aidi International Trade

Company

Aurora Translation Services

Cixi Fuda Bearing Co., Ltd.

Hanbit Ebenezet

Shen Zhen Xinhaowei Industrial Co.,

Ltd.

G.K. Trading Corp.

Giga Technology Co., Ltd.

On Time Taiwan Ltd.

Suzhou Arts and Crafts I/E Corp.

Belgraver Asia Pte. Ltd.

W. & J. Co., Ltd.

ChangZhou Rui Da Trading Company

Well Hung (Australia) Pte. Ltd.

Renaissance International

Wuhan Zhongbai Group Co., Ltd.

CNACC International Co., Ltd.

Fujian Coal Import and Export Corp.

Tung Kong Handbag Mfy

Ambp Enterprises Co., Ltd.

Software International

Xiamen Gemachieve Enterprise

Shandong Metals and Minerals Import

and Export Corp.

D.P. International

Jitco Group Ltd.

Beijing Orient Sotoma Garment Co., Ltd.

Ishida Co., Ltd.

Ningbo Free Trade Zone Sino-Dubai

International Trading Co., Ltd.

Shriya Impex

Regan (H. K.) Ltd.

Citic Shanghai Import and Export Co.,

Ltd.

Chengde Bearing Co., Ltd.

Manray Concept

Atul Exports

W. H. Enterprises

Guangdong Yangchun Bearing Co. Ltd.

S.L.S. Partnership

Adore International

Dorly International Enterprises Inc.

Shandong Commercial Group

Corporation

Goldsense Technology Ltd.

CV RJR International

Companies Participating in Survey of Alibaba B2B Website Users

East Asia and Pacific

Recent developments

EAST ASIA HAS CONTINUED TO CONSOLIDATE

its recovery from the deep crisis-inducedrecession of 1997–98, albeit with sub-

stantial variation across countries in the re-gion. Developing countries in the region regis-tered 6.9 percent growth in 1999, up from adecline of 1.4 percent in 1998. The Republic of Korea experienced the sharpest “V-shaped”recovery, with GDP growth of 10.7 percent inthe year. Indonesia, at the other extreme,barely reached positive territory, following itsdifficult economic performance of 1998. Onaverage, output in the five most affected crisiscountries (Indonesia, the Republic of Korea,Malaysia, the Philippines, and Thailand—known as the East Asia-5) recovered smartly at a rate of 6.7 percent from their 1998 crisisdecline of 8.2 percent. China suffered a minordip in output growth in 1999—though stillgrowing at a clip of 7.1 percent—as recoveryin exports did not occur until the second halfof the year. The newly industrializing econ-omies (NIEs—Hong Kong [China], Taiwan[China], and Singapore), which suffered sub-stantial spillover effects of the crisis, saw arebound to growth of 4.8 percent in 1999 from1.1 percent in 1998. And momentum con-tinues to be fairly strong in the region. Datacovering the first three quarters of 2000 sug-gest that the near-term projections publishednine months ago in Global Development Fi-

nance 2000 were generally conservative, andwe have upgraded the 2000 forecast for mostcountries. Growth for developing East Asia, inparticular, is likely to be nearer to 7.2 percentthan to earlier projections for 6.6 percentgrowth.

A common element across the region overthe last 12 to 18 months has been low and sta-ble inflation and interest rates, and these havebeen strong positive factors in the recoveryprocess. For example, inflation in the EastAsia-5 has stabilized at a rate of 1.5 to 2 per-cent, after a rapid but brief acceleration causedby the devaluation of 1997–98 (figure A1.1).Surging oil prices have translated into mild in-flationary pressure in Korea (3.9 percent yearon year in September) but have had consider-ably less impact to date in Malaysia or Thai-land. As a result, monetary policy has con-tinued to be largely accommodative, thoughcentral bank officials are carefully monitoringthe situation. The low-inflation, low-interestrate environment has been particularly benefi-cial to the process of unwinding the domesticdebt problems faced by firms and consumersin the crisis countries. Similarly, governmentshave been able to limit the growth of publicdebt (as a share of GDP) below the worst lev-els initially feared. Indonesia stands out fromthe other East Asian economies. It has beenbuffeted by continuing instability—the rupiahdropping 20 percent through October since thebeginning of the year—and inflation started a

1

Appendix 1Regional Economic Prospects


UNPUBLISHED PROOFS

rapid rise in the third quarter (6.6 percent yearon year in September).

In all the crisis countries, real effective ex-change rates have stabilized at rates well abovecrisis troughs, but some 15 to 30 percent be-low precrisis levels. Thus real devaluation haspersisted and facilitated a double-digit boom inexports. Robust export growth and firmingexport prices have abetted the maintenance of a positive current account balance, thoughthe recovery of imports and higher oil priceshas narrowed the balance in many countries.Nonetheless, rising reserves and the improvedterm structure of foreign debt have led to asubstantial improvement in the external posi-tion of the region compared to the pre-crisisposition. China’s competitiveness—throughmaintaining stability in its own foreign ex-change market—suffered in the wake of thecrisis, but ultimately improved as a conse-quence of price deflation and VAT (valueadded tax) export rebates. The loss of compet-itiveness, combined with the sharp import re-versals in the crisis countries, including Japan,led to a sharp falloff in export growth—1.7percent in 1998 (in dollar terms), followed by5.8 percent in 1999. Weak external demand,

combined with softening internal demand as a result of reforms in the state enterprises and the financial system, led to a deflationarycycle. Deflation effectively yielded a real depre-ciation of the currency, and export growth hasboomed since the second half of 1999, withmerchandise exports 35.4 percent above year-ago levels in 2000 (year-to-date through Au-gust in dollar terms).

The main weakness in many countries hasappeared in the equity markets. On average,stock market indexes in the five East Asian cri-sis countries declined by over 30 percent (inlocal currency terms) since the beginning of theyear (through early November). Globally, therehas been a flight to “quality” instruments, andthis has depressed financial markets in almostall emerging markets. Gross financial capitalinflows into East Asia appeared to have pickedup in the first half of 2000 compared to 1999.However, the flows have been dominated bysome large issues, particularly by China. Forexample, China received $10.4 billion of theregional total of $11.6 billion in equity in-flow, and less than $600 million flowed intothe equity markets of the East Asia-5 countries.Net flows remain negative, and in particular,



UNPUBLISHED PROOFS

Figure A1.1 Inflation in the East Asia-5 countries, 1991–2000Percent change, year over year

Note: GDP-weighted average. The East Asia-5 comprises Indonesia, the Republic of Korea, Malaysia, the Philippines,and Thailand.Source: IMF, International Financial Statistics, and World Bank staff estimates.

0

5

10

15

20

25

Q1 1991 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000

commercial banks continue to unwind theirlocal positions.

Near-term outlookIn 2001–02, output for the group is likely tobegin a general process of moderating and con-verging toward longer-term growth paths, withgrowth easing to 6.4 percent in 2001 and 6percent by 2002 (table A1.1). Export growth,sizzling in 2000, should ease considerably in2001 and 2002 in line with slower externalgrowth. External risks for East Asia are similarto what we have assessed over the last 12months: a hard landing in the United States, arenewal of financial difficulties in Japan, and aweakening of the electronics cycle. But theserisks have generally been pushed back in time.And domestic risks in aggregate have dimin-ished from past high levels. Nonetheless, theprocess of working-out from under the post-crisis financial difficulties is far from finished.Higher interest rates, and/or slower growthcould further worsen financial conditions formany firms and consumers still saddled withhigh debt. The two most vulnerable largecountries are Indonesia and the Philippines.These countries also suffer from politicalweaknesses, civil disturbances, and a percep-tion (from the point of view of investors), that

business operating practices have not changedsubstantially from earlier, less than transparentmodes. Some of the smaller island nations havealso suffered from political turmoil (for exam-ple, Fiji and the Solomon Islands), whereasnewly formed East Timor is in a slow andlengthy process of nation building.

Long-term prospectsLong-term prospects are little changed fromearlier projections. Average per capita incomegrows in our long-term baseline (2003–10) by 5.4 percent per year—somewhat below1990–2000 per capita growth of 5.9 percent.The factors underlying slower growth varyfrom country to country. The upper-middle-income countries and NIEs are convergingwith (or in some cases have exceeded) OECDincome levels. They are maturing economies,with already highly educated work forces; andit is likely that GDP growth will ease graduallytoward the OECD average over the next sev-eral years. The lower-income countries, partic-ularly China, are unlikely to sustain the highgrowth rates of the past decade. Many of thelow-income countries—as well as the crisis-affected middle-income countries—will haveto devote resources in order to overcome thelegacy of past institutional failures: addressing

R E G I O N A L E C O N O M I C P R O S P E C T S


UNPUBLISHED PROOFS

Table A1.1 East Asia and Pacific forecast summary(percent per year)

Baseline forecast

Growth rates/ratios 1990–2000 1998 1999 2000 2001 2002 2000–10

Real GDP growth 7.1 –1.4 6.9 7.2 6.4 6.0 6.3Consumption per capita 5.2 –2.8 5.2 5.9 6.1 6.1 5.8GDP per capita 5.9 –2.5 5.8 6.1 5.4 5.0 5.4

Population 1.2 1.1 1.1 1.0 0.9 0.9 0.8Median inflationa 5.9 9.2 –1.0 3.8 5.4 5.8 4.8Gross domestic investment/GDP 31.3 30.1 29.6 30.3 31.1 31.9 32.6Median Central Gvt. budget/GD –0.8 –2.3 –3.2 –2.8 –2.1 –1.7 –0.8Export volumeb 12.2 6.8 6.2 19.4 9.3 8.6 8.5Current account/GDP 0.3 5.9 4.1 3.3 2.5 2.3 2.1Memorandum item

GDP East Asia-5 countriesc 5.2 –8.2 6.7 6.9 5.5 5.1 5.5

a. GDP deflator.b. Goods and nonfactor services.c. Indonesia, Republic of Korea, Malaysia, Thailand, and the Philippines.Source: World Bank baseline forecast, October 2000.

Table A1.1a Forecast assumptions—East Asia and Pacific


1. Ratio of real income per capita:industrial / East Asia and Pacific 36.8 23.7

2. Trade (X+M) / GDP ratio (real) 45.3 67.23. Median Inflation rate (percent) 7.4 4.24. Median Fiscal Balance / GDP –1.9 –1.75. Investment / GDP (real) 28.3 30.76. Investment / GDP (nominal) 29.0 31.77. Gross National Savings / GDP 32.9 36.67a. Gross Domestic Savings / GDP 34.2 38.38. Current Account balance / GDP –0.1 4.29. FDI / GDP 1.1 3.5

10. External debt / exports* 107.3 99.711. School enrollment rates

Primary (pct of eligible population) 96.0 97.0

Secondary 55.0 67.012. Illiteracy rate (pct of people

15+ years) 21.0 16.013. Under-5 mortality rate

(per 1,000 live births) 55.0 43.014. Life Expectancy at birth (years) 67.0 69.0


1. Population growth 1.2 0.92. Market’s GDP growth 2.9 3.53. Oil price $/bbl (avg.) 18.2 20.24. Market’s import growth 7.6 6.7

*Exports of goods and services plus workers remittances.Note: Market growth is trade-weighted partner GDP / importgrowth.Source: World Bank database, World Bank staff estimates.

nonperforming loans in the financial sector,disposing of distressed assets, and reducingthe state’s active role in the economy while en-hancing its regulatory role and competition.

Initial conditions for sustained high growthin East Asia at the beginning of the millen-nium appear better than at the beginning ofthe 1990s, the end-of-decade financial crisisnotwithstanding (table A1.1a). Openness in-creased by more than 20 percentage pointsover the 1990s and was, if anything, enhancedduring the crisis, presenting both an opportu-nity as well as a challenge. The opportunitycomes from the ability to import new tech-nologies, knowledge, and business practices.The challenge comes from increased competi-tion and the need to develop institutions thatenhance flexibility and speed of adaptation.

The countries of East Asia—with their everincreasing involvement in the so-called neweconomy—are well placed to meet the chal-lenge, but they are lagging far behind the moreadvanced countries. In 1999, the East Asia-5countries had only half the number of Internethosts (per 10,000 persons) that Brazil or Mex-ico had, and only 5 percent compared to theNIEs. And though markets for the Internetand mobile phones have been growing at some40 percent per year in East Asia, they havebeen growing at over 50 percent in Brazil andMexico, in part as a result of deeper reformsand greater competition in the telecommuni-cations sectors of the latter countries. There isalso the possibility of reform fatigue or evenreversal. Malaysia’s recent decision to renegeon removing import tariffs on automobilescould signal a weakening of a commitment toregional free trade.

South Asia

Recent developments

GDP growth in South Asia averaged 5.1percent in 1997–98, as the larger econ-

omies—relatively closed to international trade—were successful in mitigating losses of agricul-tural income tied to commodity price declinesin the wake of the East Asian crisis. Outputgrowth accelerated to 5.7 percent in 1999 and is estimated to reach 6 percent in 2000.Better-than-expected agricultural sector per-formance in Bangladesh, India, and Pakistan,has accounted for a fairly large proportion ofthe recent improvement in growth outturns. In addition, the rate of growth in industrialproduction in Bangladesh and India climbedto more than 10 percent during the first half of 2000 (figure A1.2). Output in Bangladeshwas boosted by the recovery from the mas-sive flooding of 1998. The burgeoning Indianservice sector also has maintained strongadvances, at rates of more than 8 percentthrough 1999 and into 2000. Exports of goodsand services continue to grow at rapid rates—by more than 10 percent in India, Pakistan,



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and Sri Lanka. At the same time, manufactur-ing production has fallen sharply in Pakistan,given financial constraints and other difficul-ties. And the surge in the oil price and contin-ued weakness in non-oil commodity prices (forexample, the prices of Sri Lanka’s main exportcommodities—tea and natural rubber—arenow some 20 and 30 percent below recenthighs) is exacting a moderate toll from the re-gion’s growth momentum.

Recent steps to make South Asian economiesmore open to capital flows and strengthen thefinancial system have also supported growth.India eased some restrictions on FDI to encour-age foreign flows into the energy sector, whereit is most needed. FDI registered $2.2 billion in1999 and is expected to achieve similar levels in2000. But foreign investment is broadening inscope across the economy, supplementing do-mestic investment in such sectors as the soft-ware industry, which has achieved remarkablegrowth of almost 50 percent over the last year.Portfolio flows to India also increased, to a highof $3 billion in 1999–2000, attracted by (andcontributing to) the boom in India’s stock mar-ket. Equity prices increased by more than 50percent from the first quarter of 1999 to thefirst quarter of 2000, and capitalization rose to

$210 billion. Recently, however, in tandem withglobal financial volatility, there was a reversalof portfolio flows, which affected the stockmarket and exerted some pressure on the rupee.Nonetheless, steps toward improving super-vision and restructuring of the banking systemsin India, Pakistan, and Sri Lanka have yieldedsome positive results and have improved confi-dence in the region to a degree.

Near-term outlookAverage growth for 2001–02 is anticipated tobe 5.5 percent for the region (table A1.2).Underlying this aggregate figure, however, area number of driving and restraining forcesshaping the near-term view. Among positivefactors are improved prospects for capital in-flows, as the Indian government in particularundertakes efforts to boost foreign investmentand relax direct exchange controls. And to fa-cilitate the growth of services exports, legisla-tion has been introduced to support the IT sec-tor and develop “e-business.” External factorssuch as continued strong advances in worldtrade and prospects for an eventual moderatefirming of non-oil commodity prices shouldsupport growth across countries of the region,especially in Bangladesh and Sri Lanka.



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Figure A1.2 Industrial production in South Asia3-month moving average, year-on-year, percentage change

Source: IMF, International Financial Statistics.

Jan. 1998 May 1998

Bangladesh

India

Pakistan

Sept. 1998 Jan. 1999 May 1999 Sept. 1999 Jan. 2000 May 2000

–10

–5

0

5

10

15

20

Recent developments in oil markets will re-strain growth in the near term, however. SouthAsia is one of the more energy import–intensivedeveloping regions, with crude oil and otherenergy commodities constituting 20 percent oftotal imports in India and 15 percent in Pak-istan (representing 2 percent of GDP in bothcountries). The 50 percent rise in the oil priceover the past year has increased India’s im-port bill by some $4 billion and Pakistan’s by$650 million, increasing pressure on balance of payments positions, especially for Pakistan,where external financing difficulties are ex-pected to continue. Moreover, uncertainty gen-erated by the high debt levels and precariousfiscal position of central and state governmentsis likely to constrain private sector activity.

Long-term prospectsAverage GDP growth for South Asia over the2003–10 period is anticipated to register 5.4percent, about 0.3 percentage points higherthan in projections prepared one year ago.This pace of output growth, combined withdeclining rates of population growth, shouldsupport advances in per capita incomes ofclose to 4 percent per year over the 2000–10period, a marked improvement over the 1990srecord of 3.5 percent growth (table A1.2).South Asia begins the new decade after having

achieved some progress in a number of areassupportive of longer-term growth (table A1.2a).Although the region remains in large partclosed to foreign trade (in part because of thelarge scale of the Indian domestic economy),median inflation and central government fis-cal deficits have declined modestly; externaldebt ratios have been brought down signifi-cantly, and domestic investment and FDI as ashare of GDP have increased from generallylow levels. Indicators of human capital havealso improved, with school enrollment ratesrising, illiteracy falling, and life expectancy in-creasing by three years over the last decade.

Estimates for longer-term growth assumethat the region’s high potential, as embodiedin the initial conditions above, will be fullyused. Relative to the 1990s, total factor pro-ductivity in India, for example, is expected tocontinue growing at a slightly higher base (by0.2 percent) in the next decade. The abundantsupply of Indian workers with training in hightechnology sectors should continue to providestrong momentum to the software industry.Total investment is expected to maintaingrowth of 8 percent throughout the nextdecade, with most growth emanating from theprivate sector. Demand for the region’s ex-ports is expected to continue to grow rapidly,with import growth in South Asia’s principal



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Table A1.2 South Asia forecast summary(percent per year)

Baseline forecast


Real GDP growth 5.4 5.6 5.7 6.0 5.5 5.5 5.4Consumption per capita 3.5 6.7 3.5 3.7 3.3 3.5 3.6GDP per capita 3.5 3.7 3.8 4.0 3.7 3.8 3.9

Population 1.9 1.8 1.8 1.8 1.7 1.7 1.5Median inflationa 8.2 8.3 9.8 5.4 5.1 5.0 5.8Gross domestic investment/GDP 22.2 23.0 23.3 23.7 24.1 24.3 25.0Median central govt. budget/GDP –6.9 –5.8 –4.9 –4.7 –4.5 –4.4 –3.7Export volumeb 9.9 6.4 4.9 11.5 4.4 8.4 7.9Current account/GDP –1.8 –2.3 –1.6 –2.6 –2.9 –2.2 –3.0

a. GDP deflator.b. Goods and nonfactor services.Source: World Bank baseline forecast, October 2000.

Table A1.2a Forecast assumptions— South Asia


1. Ratio of real income per capita:industrial / South Asia 47.2 39.3

2. Trade (X+M) / GDP ratio (real) 13.6 19.73. Median Inflation rate (percent) 8.6 7.84. Median Fiscal Balance / GDP –6.7 –5.45. Investment / GDP (real) 20.4 22.76. Investment / GDP (nominal) 21.0 22.07. Gross National Savings / GDP 19.8 19.97a. Gross Domestic Savings / GDP 18.8 19.08. Current Account balance / GDP –2.6 –1.59. FDI / GDP 0.1 0.6





(per 1,000 live births) 121.0 89.014. Life Expectancy at birth (years) 59.0 62.0




export markets rising from 6 percent in the1990s to 6.2 percent over 2000–10. Intra-regional trade and economic integration withthe world are assumed to accelerate as an eas-ing of import substitution policies and tradeand industrial restrictions takes place. Smallercountries such as Bhutan, Maldives, Nepal,and Sri Lanka will benefit from the reduc-tion in larger-country import barriers. But animportant factor likely to restrain growth is the dependency of the region—and especiallythe smaller countries—on a limited number of export crops, for example, cotton, tea, andrubber. Volatility and secular decline in com-modity prices are likely to continue to pres-sure merchandise export receipts.

However, countries such as India and Pak-istan face major challenges in achieving thepotential rate of output growth over the nextdecade. High levels of domestic debt and largefiscal deficits present substantial difficulties inachieving fiscal consolidation while maintain-ing expenditures that are necessary for growth.A reduction in unproductive subsidies andstepped-up investment in human capital andinfrastructure are essential to this effort. Infra-structure bottlenecks and delays in privatiza-tion may limit the acceleration of growth inthe real and financial sectors. Also, much re-mains to be done to improve the competitive-ness of the region’s export industries. The in-creased focus of the government of India ontrade liberalization has coincided with someincreases in tariffs and an intensified use ofanti-dumping measures. High tariff rates, forexample, an average of 40 percent for allgoods in India in 1999–2000, limit exporters’access to cheaper, more efficient industrial in-puts, and serve in the long term to limit pro-ductivity gains.

Latin America and the Caribbean

Recent developments

The economic recovery in Latin Americahas been broadly favorable, with the re-

gion’s GDP expected to rise by 4 percent in2000. Stabilization of global financial marketsand the burgeoning of world trade growthhave come to support a general resumption ofeconomic activity across the region. As in EastAsia, this has been complemented on the do-mestic front by a steady improvement in mostmacroeconomic indicators through the courseof 2000. Inflation declined or held steady inmost countries (Ecuador was a notable excep-tion), allowing interest rates to continue on afalling trend. Unemployment dropped and realwages rose in Brazil, Chile, and Mexico com-pared with 1999 averages, but unemploymentremains high in Argentina and Colombia. Ex-



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change rates stabilized in several countriesthat experienced periods of freefall during 1999(such as Brazil and Ecuador), restoring a de-gree of purchasing power and improving theoutlook for private consumption and invest-ment spending.

In real terms, most exchange rates have ap-preciated in 2000, but they are still low enoughto facilitate rapid export growth in countriessuch as Brazil, Chile, Colombia, and Peru,leading to an improvement in trade balancesfor most countries (including oil importers).Merchandise exports in dollar terms from theregion’s largest economies (excluding Mexico)exhibited a sharp recovery from the lows ex-perienced in 1998, growing by over 17 per-cent year on year during January–June 2000;Mexico’s exports advanced by 25 percent (fig-ure A1.3).

Mexico is an exception within the regionwith respect to the positioning of countries onthe recovery and growth cycle. Whereas mostLatin American countries experienced negativeor slow growth in 1999 because of fallout fromthe Asian and Brazilian crises, Mexico bene-fited from its special trading relations throughNAFTA with the United States, which remained

the “engine” for world activity through thisperiod. Mexican growth has continued to bebuoyed by the U.S. import boom in 1999–2000, with business cycles in the two countriesbecoming more closely aligned—and likelyreaching high points in 2000. In addition, theusual exchange rate difficulties that Mexicoexperienced with earlier electoral cycles wasnoticeably absent this time, in part because ofprudent macroeconomic policies that helped torestrain inflation under 10 percent for the firsttime since the 1994 peso devaluation. As Mex-ico approaches a peak in its growth cycle, whileothers are escaping the trough, an implicationis that near-term growth (2000–01) for LatinAmerica as a whole is unlikely to display thedistinct V-shaped pattern of recovery evident inEast Asia.

Near-term outlookVolatility in financial markets and primarycommodity prices continues to pose a threat tothe recovery in Latin America. Sharply declin-ing equity prices during the first half of 2000contributed to a period of uncertainty in globalfinancial markets at a time when key commod-ity price movements for the region also di-



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Figure A1.3 World and selected Latin American export growth in U.S. dollars(Percent, three-month moving average year over year)

Note: LAC in this case refers to Argentina, Brazil, Chile, Colombia, and Mexico; world refers to 30 countries that are responsiblefor 82 percent of the world’s exports.Source: World Bank data.

June 1997

30

25

20

15

10

5

0

–5

–10

–15

Mexico

World

LAC, excluding Mexico

Dec. 1997 June 1998 Dec. 1998 June 1999 Dec. 1999 June 2000

Table A1.3a Forecast assumptions—Latin America and the Caribbean


1. Ratio of real income per capita:industrial / Latin America 9.6 10.0

2. Trade (X+M) / GDP ratio (real) 26.7 51.53. Median Inflation rate (percent) 24.4 6.14. Median Fiscal Balance / GDP –1.4 –2.35. Investment / GDP (real) 18.4 20.26. Investment / GDP (nominal) 21.4 19.97. Gross National Savings / GDP 20.3 17.47a. Gross Domestic Savings / GDP 23.9 19.38. Current Account balance / GDP –0.7 –3.69. FDI / GDP 0.8 3.9





(per 1,000 live births) 49.0 38.014. Life expectancy at birth (years) 68.0 70.0




verged. The oil price rose sharply, while non-energy commodity prices of importance to theregion weakened—particularly coffee, grains,and soybeans. Although most of the largecountries experienced strong gains in industrialoutput in the first quarter of 2000, the recoveryappeared to have faltered in the second quar-ter, except for the oil exporters Ecuador andVenezuela. And private capital inflows fell dra-matically. Argentina was particularly hard hitby these developments as they coincided withstrong fiscal adjustment and a political crisisthat weakened investor confidence and delayedthe economic recovery. Nonetheless, consoli-dation of the region’s recovery in 2001–02 islikely, as adjustment in Brazil has been impres-sive so far, and new governments in Argentinaand Mexico appear set to embark on a path of deepened reforms. Global conditions are ex-pected to remain supportive of growth in theregion, with above-average world trade growth,gradual recovery in key non-oil commodityprices, declining but still moderately high oilprices, and a modest increase in private capitalflows. The Caribbean islands, with their in-creasing reliance on tourism revenues, are alsoexpected to benefit from moderately strong in-come growth in North America and Europeover the next two years. Latin American region



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Table A1.3 Latin America and the Caribbean forecast summary(percent per year)

Baseline forecast


Real GDP growth 3.4 2.0 0.1 4.0 4.1 4.3 4.3Consumption per capita 0.9 0.8 –2.9 1.8 2.3 2.6 2.3GDP per capita 1.7 0.4 –1.5 2.4 2.5 2.8 3.0

Population 1.7 1.6 1.6 1.6 1.6 1.5 1.4Median inflationa 16.6 7.6 9.3 8.2 9.0 7.0 7.2Gross domestic investment/GDP 19.4 20.9 19.5 19.8 20.3 20.8 21.7Median Central Gvt. budget/GDP –2.8 –2.3 –2.9 –1.9 –2.0 –2.0 –1.3Export volumeb 8.4 7.5 7.0 8.9 7.8 7.3 7.0Current account/GDP –2.3 –4.0 –2.9 –2.8 –2.6 –2.6 –2.0


output growth is expected to reach 4.1 percentin 2001 and to rise further to 4.3 percent by2002 (table A1.3).

Long-term prospectsPer capita GDP growth over the long term(2003–10) is likely to average around 3 per-cent, about 0.2 percentage points higher thanin projections prepared one year ago. Some ofthe elements supporting this cautious opti-mism are highlighted in table A1.3a and in-clude: a definitive movement toward greaterdomestic macro stability, as median inflationrates dropped from 24 percent to 6 percentover the decade; a two-point increase in realinvestment as a share of GDP, supported bystrong FDI inflows, surging from less than 1percent to almost 4 percent of regionwide out-put. And openness to investment flows hasbeen complemented by a remarkable increasein integration with global trade flows—withthis measure doubling as a proportion to GDPover the last 10 years. Finally, indicators ofhuman capital have improved, with primaryand secondary school enrollment rates risingby some 10 points.

The improved state of initial conditions forthe outlook joins with a more definitive trendtoward market-friendly policies in the largercountries, such as Argentina, Brazil, and Mex-ico, and potential for technology spilloversfrom the United States (particularly for Mex-ico). Banking and financial sectors in the largeeconomies weathered the global financial crisisof 1997–98, in part because of reforms enactedin many countries following the Mexican cri-sis. Further strengthening of prudential regula-tion and supervision should support financialdeepening and help to diminish the incentivesfor capital flight. Finally, the strong inflows ofFDI in recent years into areas of the economythat could raise growth of productivity sub-stantially—telecommunications, utilities, ports,and so forth—should produce dividends in thenext decade compared with the relatively poorperformance of the last 10 years. However,there is need for more progress in financial and

macroeconomic policies to deal with volatility,which may have contributed to the observedcycle of booms and busts in many countriesduring the 1980s and 1990s. Moreover, vul-nerability of the region to swings in externalfinancing is likely to remain a concern in thelong run. Low national savings and the persis-tence of large debt overhangs will requirerollover on a continuing basis. And this fun-damental exposure to international financialconditions underlines our view that per capitagrowth potential is unlikely to breach 3 to 3.3percent over the next decade, which would,nonetheless, be twice as fast as occurred duringthe 1990s.

Europe and Central Asia

Recent developments

GDP growth in the Europe and CentralAsia region (ECA) is expected to acceler-

ate sharply through 2000, after hitting atrough in 1998 and early 1999 following theAugust 1998 financial crisis in the RussianFederation. Growth in 2000 is anticipated torise to 5.2 percent, significantly higher thanthe 1 percent realized in 1999. Notably, forthe first time since the onset of the transitionand the breakup of the Soviet Union, almostall of the countries in the region are expectedto record positive growth. Short-term projec-tions stand well above those prepared for theGlobal Economic Prospects report one yearago, primarily because of the unexpectedstrength of the rebound in Russia. And a com-mon element supporting near-term growthacross the region is a substantial pickup in ex-ports, in large part because of rising importdemand from the Euro Area.

In Russia, President Putin’s apparent will-ingness to introduce reforms has eased somepolitical uncertainties and improved businessconfidence. Russian industry has continued tobenefit from the impact of import substitutiondriven by the sharp devaluation of 1998; thiscan be witnessed in an industrial production



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growth rate of close to 10 percent during thefirst half of 2000. This fillip to growth is di-minishing, however, with the recent real appre-ciation of the ruble. An additional, more recentdriver to Russia’s unanticipated recovery is thewindfall increase in oil and natural gas exportrevenues. Higher oil prices improved the fiscalbalance from –4.2 percent of GDP in 1999 to +1.6 percent during the first half of 2000,and has yielded a primary surplus of 4.8 per-cent. This has supported continued reductionsin government wage arrears, contributing tohigher disposable incomes.1 The current ac-count surplus is expected to register close to $30 billion in 2000, or some 15 percent of GDP, boosting foreign reserve holdings considerably and easing the need for near-term external financing. Ukraine is now regis-tering gains in output, although the politicalcontext remains difficult. For several of thehydrocarbon-rich Commonwealth of Indepen-dent States (CIS), higher oil and gas prices areproviding extraordinary export earnings andcontributing to higher output. Oil and gas ex-port volumes should increase as well, as exportmarkets (especially in Western Europe) are ex-pected to achieve stronger growth.

The Central and Eastern European coun-tries (CEECs) are benefiting from growing de-mand from Western Europe and, to a lesserdegree, from Russia. This is boosting growthin Hungary (5.8 percent) and Poland (4.4 per-cent), in particular. In the Baltic countries, es-pecially Estonia and Latvia, GDP growth ofsome 4.8 and 3.8 percent, respectively, in2000 is also largely export-driven. However,high oil prices, combined with the deprecia-tion of the euro, are putting additional pres-sure on external balances and contributing tohigher inflation. Turkey’s economy has contin-ued to recover, reaching growth above 6 per-cent in 2000, up from the sharp 5.1 percentcontraction experienced in 1999, because of arebound in domestic demand tied to markeddeclines in real interest rates and reconstruc-tion expenditures in the wake of the 1999earthquake. Business confidence has also im-proved in response to implementation of anIMF-sponsored stabilization program begunin January 2000. Recent data, however, showthat the current account deficit will be largerthan targeted, reflecting strong domestic growth,real exchange rate appreciation and higher oilprices.



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Figure A1.4 Eurobond spreads for selected ECA countriesBasis points

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

July 1998 July 1998 July 1998 July 1998 July 1998

Sept. 2000

Czech Republic Romania Russian Federation Turkey

Source: Bloomberg and World Bank data.

Table A1.4a Forecast assumptions—Europe and Central Asia


1. Ratio of real income per capita:industrial / Europe and Central Asia 6.9 11.6

2. Trade (X+M) / GDP ratio (real) 27.2 58.33. Median Inflation rate (real) 43.2 10.54. Median Fiscal Balance / GDP –2.3 –2.05. Investment / GDP (real) 28.4 22.16. Investment / GDP (nominal) 27.1 20.77. Gross National Savings / GDP 29.1 18.77a. Gross Domestic Savings / GDP 28.6 21.98. Current Account balance / GDP 2.1 –1.29. FDI / GDP 0.1 2.3









In most ECA countries, exchange rates havebroadly stabilized since mid- to late 1999, andinflationary pressures remain largely under con-trol. Early in 2000, several currencies faced up-ward pressure against the euro, including thePolish zloty, the Czech and Slovak koruny, aswell as the Turkish lira following the introduc-tion of a crawling peg regime at the beginningof the year. Interest rates have eased in Turkeyand in Russia, where higher fiscal revenueshave reduced pressures on central bank financ-ing. Interest rates have been reduced in theCzech Republic and Hungary to stimulate do-mestic demand, in contrast with rate increasesin Poland intended to slow domestic demandand import growth. Investor perceptions of po-tentially improved prospects for the region, in-cluding reduced political uncertainty in Russia,have led to a large decline in spreads on sec-ondary market bonds (figure A1.4).

Near-term outlookGrowth performance for the region through2002 is expected to remain relatively strong in the aggregate (table A1.4). Output growthis expected to stabilize near 4 percent over2001–02. The moderate slowdown reflectsshort-term effects of structural reforms in a



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Table A1.4 Europe and Central Asia forecast summary(percent per year)

Baseline forecast


Real GDP growth –1.9 0.0 1.0 5.2 4.3 3.9 4.1Consumption per capita –1.7 1.1 1.5 4.9 4.1 3.6 4.2GDP per capita –2.0 –0.1 0.9 5.1 4.2 3.8 4.1

Population 0.2 0.1 0.1 0.1 0.1 0.1 0.1Median inflationa 23.3 12.9 8.4 8.0 6.9 5.5 4.6Gross domestic investment/GDP 25.2 23.0 22.1 22.6 22.9 23.1 23.6Median Central Gvt budget/GDP –3.9 –5.0 –4.5 –4.0 –3.7 –3.5 –3.6Export volumeb 0.7 7.1 1.0 8.3 6.5 6.4 6.8Current account/GDP –0.1 –1.7 1.6 2.8 1.4 0.6 –1.3Memorandum item

GDP Central and Eastern Europe 1.5 2.5 2.5 3.9 3.9 4.2 4.4GDP CIS states –4.9 –3.3 2.6 5.9 4.5 3.3 3.5


number of countries; a tightening of policy toavoid overheating in a few Central Europeancountries; and anticipated easing of energyprices, affecting CIS performance. But devel-opments in export markets, policy changes re-lated to European Union (EU) accession, andthe highly uncertain path of the oil price willbe critical factors in shaping the outlook.

Output among the CEECs is expected topick up in 2001–02 to 3.9 and 4.2 percent re-spectively, as export markets remain firm anddeeper domestic reforms contribute to improvedmacro stability and continued dynamism of theprivate sector. These countries should continueto attract high levels of FDI flows, linked tightlyto the EU accession process.2 Although fiscaland current account pressures will remain highin most of the CEECs, they are expected to easegradually because of policies that converge morerapidly with Western European norms. In con-trast, the outlook for Russia and other hydro-carbon exporters of the CIS is particularly un-certain, given the state of flux in current andprospective oil market developments. Growth inthese countries is expected to slow moderatelyin 2001, with sharper deceleration possible in2002, as oil prices retreat from current high lev-els (see the commodities section of this report).

Long-term prospectsThe coming decade is likely to be character-ized by substantially higher average growthrates than witnessed during the difficult initialtransition period of the 1990s. As is appar-ent, relative performance of countries withinECA has varied tremendously over the lastdecade, with Poland having re-attained pre-transition GDP levels by 1996, while Russiaand Ukraine still languish some 40 percentbelow that level. Despite less-than-satisfactoryoutturns in a number of transition countries,there has been a degree of underlying progressin strengthening some of the fundamentals for longer-term growth (table A1.4a). Medianinflation is now one-quarter of its 1988–90value, while fiscal balances have been main-tained at moderate levels. FDI has risen as ashare of regional GDP from 0.1 percent to 2.3

percent (though largely concentrated in theCEECs), and trade openness has doubled, re-flecting earlier western reorientation of tradeand a nascent recovery of intraregion flows. Aprincipal area of weakness, particularly incontrast with other emerging-market regions,remains the paucity of investment, and therehas been a 10–percentage point decline in grossnational saving over the period. Despite in-creasing inequality in Russia and other CIScountries, the basic quality of the labor forceremains potentially strong, and it is an assetthat, combined with improved physical capi-tal, could sow the seeds for more rapid growthin productivity and living standards.

Given these initial conditions, GDP for theregion is projected to expand at a fairly robust4.1 percent per year for the period 2000–10,contrasted with its decline of –1.9 percent over1990–2000. But the regionwide forecast againmasks expected divergences in growth outcomesat the country level. Countries anchored by theEU accession process have achieved a greaterdegree of stability and realignment of institu-tions and markets, positioning them for strongergrowth compared to most of the states of theCIS, which have not wholly supported reformas extensively. The current long-term projectionfor the region is more optimistic than that pre-sented in forecasts of one year ago (3.4 percentaverage GDP growth for the period 1999–2008)—a revision taking into account threemain factors.

The new projections reflect a substantivelyrevised assumption that over the near tomedium term, Russia’s new administrationwill be partly successful in improving eco-nomic management and in implementing re-cently proposed social and economic reforms.And growth prospects in the CEECs will beginto reflect benefits associated with the Decem-ber 1999 Helsinki Accord of the EuropeanCommission, a decision to extend invitationsfor EU membership to Bulgaria, Latvia,Lithuania, Romania, the Slovak Republic, and Turkey. (This is in addition to invitationspreviously extended to the “early accessors”:the Czech Republic, Estonia, Hungary, Poland,



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and Slovenia.) Finally, the somewhat highertrajectory of growth in world trade and West-ern European output in the new baseline has a positive impact on expansion in the ECA region.

Despite the upward revision in aggregategrowth, there are a number of downside risks.In Russia, risks center on the extent to whichthe new government will be able to transformthe current windfall gains into long-termgrowth. Policy measures among the EU candi-date countries have contributed to increasedeconomic stability and have helped attract sub-stantial foreign capital. But policy mismanage-ment could expose the CEECs to a sharp re-versal of these inflows. There is also a risk thatdisputes within the European Commissionover reforms to its institutions, decisionmakingprocedures, and budget and agricultural subsi-dies—which must be undertaken to accommo-date an expanded membership—could delaythe accession process, thus deterring foreign in-vestors. Similarly, within the applicant coun-tries, as more contentious reforms are intro-duced, political support for joining the EU maydiminish, potentially slowing the accession pro-cess and growth within these countries.

Sub-Saharan Africa

Recent developments

Fallout from the 1997–99 crisis continuedto exert a dampening effect on much of the

Sub-Saharan African economy in 2000, asnon-oil commodity export prices continued todecline over the first half of the year (figureA1.5). But higher oil revenues boosted growthfor the region’s oil exporters, while SouthAfrica also strengthened modestly to 2.2 per-cent growth following several years of sub-dued performance. These and other support-ing factors helped to raise GDP growth to an estimated 2.7 percent from 2.1 percent in1999, and per capita income rose by 0.2percent.

Substantial variation in performance wasapparent across the region. Countries with bet-ter policy environments—Botswana, Uganda,and the Communauté Financière Africainecountries (excluding Côte d’Ivoire)—tended to perform better than average, with GDP up 4.4 percent. Oil producers benefited frombuoyant export receipts and strong investmentand grew by 3.5 percent. In East and southernAfrica, many countries lagged behind. The



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Figure A1.5 Nonenergy commodity prices—World and Sub-Saharan AfricaIndex, July 1996 = 100

* Weighted index of non-oil commodities traded by Sub-Saharan African countries.Source: World Bank data.

70

Sub-Saharan Africa index*

World index

July1996

Nov.1996

March1997

July1997

Nov.1997

March1998

July1998

Nov.1998

March1999

July1999

Nov.1999

March2000

July2000

80

90

100

110

weather was partly to blame, as drought inKenya and Ethiopia, floods in Mozambiqueand South Africa, and hurricanes in Mauritiuscontributed to a string of disappointing results.Countries experiencing civil strife or majorpolitical disruption—the Democratic Republic of Congo, Ethiopia, Sierra Leone, and Zim-babwe—registered the weakest performances,with GDP falling 1.5 percent during the year.

A strong rise in oil-related export revenueparticularly afforded some breathing space toNigeria’s new, democratically elected govern-ment. While the country faces enormousshort-term problems, a much needed boost togovernment revenues and strong foreign in-vestment inflows underwrote growth of some3.1 percent and yielded a sharp improvementin the balance of payments and fiscal ac-counts. This is helping to tide the country overuntil a possible resumption of InternationalMonetary Fund lending and hoped-for debtrelief. In South Africa, a weak performance byagriculture was the main cause of growth thatwas somewhat below expectations, thoughthe country also experienced renewed turbu-lence in financial markets, as investor senti-ment turned negative in the fourth quarter of1999 and remained so through the first half of

2000. Country-specific factors, especially con-cern over the value of the rand and politicaldevelopments in the region, were mainly re-sponsible. A conservative fiscal stance helpedto reinforce foreign confidence, though a sec-ond successive year of declining real publicconsumption did nothing to counter the weak-ness elsewhere in the economy.

Near-term outlookSub-Saharan Africa should further consolidateits recovery, as growth accelerates to 3.4 per-cent in 2001 and 3.7 percent in 2002 (tableA1.5). Oil exporters will benefit from pricesthat are expected to remain at high levelsthrough 2002. Further, Angola, EquatorialGuinea, Nigeria, and Sudan are all scheduled to bring additional supplies and exports on-stream.3 However, these gains will in part beoffset by terms-of-trade losses to many othercountries in the region, especially beverage ex-porters, who are facing the lowest prices in ageneration (see the commodities section of thisreport). At least, the worst is now likely over,and terms of trade are expected to stabilize orimprove modestly as non-oil commodity pricesbegin to firm. Also, despite the price weakness,privatization and deregulation are promoting



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Table A1.5 Sub-Saharan Africa forecast(percent per year)

Baseline forecast


Real GDP growth 2.1 2.0 2.1 2.7 3.4 3.7 3.6Consumption per capita –0.6 –0.6 –1.0 0.3 0.6 0.6 0.8GDP per capita –0.6 –0.5 –0.3 0.2 0.9 1.3 1.3

Population 2.6 2.6 2.5 2.5 2.5 2.4 2.3Median inflationa 10.4 5.3 5.1 4.3 3.6 3.5 4.1Gross domestic investment/GDP 19.5 20.5 19.9 20.1 20.7 21.0 21.9Median Central Gvt. budget/GDP –3.7 –3.3 –3.0 –2.9 –2.4 –2.0 –1.8Export volumeb 4.6 0.7 2.4 6.1 5.3 5.9 6.0Current account/GDP –1.5 –3.5 –2.3 –2.7 –2.2 –3.1 –3.1Memorandum item

GDP Major oil exportersc 2.5 2.3 3.2 3.5 4.0 3.8 3.8GDP Region � S. Africa/Oil-X 2.6 3.6 2.9 3.0 3.6 4.1 4.1

a. GDP deflator.b. Goods and nonfactor services.c. Angola, Gabon and Nigeria.Source: World Bank baseline forecast, October 2000.

Table A1.5a Forecast assumptions— Sub-Saharan Africa


1. Ratio of real GDP per capita:Industrial / Sub-Saharan Africa 31.4 37.9

2. Trade (X+M) / GDP ratio (real) 39.0 42.93. Median Inflation rate (real) 10.6 7.24. Median Fiscal Balance / GDP –3.4 –2.55. Investment / GDP (real) 16.9 17.56. Investment / GDP (nominal) 17.0 16.77. Gross National Savings / GDP 15.2 13.57a. Gross Domestic Savings / GDP 17.2 14.88. Current Account balance / GDP –1.6 –3.59. FDI / GDP 0.5 1.5



Secondary ... ...12. Illiteracy rate (pct of people




1. Population growth 2.6 2.32. Market’s GDP growth 2.4 3.03. Oil price $/bbl (avg.) 18.2 20.24. Market’s Import growth 6.1 6.1

… Not available.*Exports of goods and services plus workers’ remittances.Note: Market growth is trade-weighted partner GDP / importgrowth.Source: World Bank database, World Bank staff estimates.

greater supply and export growth in key mar-kets such as cotton and cocoa in west Africaand copper in Zambia. Nevertheless, the im-pact on real incomes will result in weaker do-mestic demand and slower growth in the nearterm. The baseline also assumes a return tomore normal weather patterns, which will fur-ther boost agricultural production and exports.Trade liberalization, particularly in COMESA,SADC, and the South African-EU FTA, shouldspur greater trade and regional cooperation.And finally, the Heavily Indebted Poor Coun-tries (HIPC) Initiative is gaining momentum,with nine African countries—Benin, BurkinaFaso, Cameroon, Mali, Mauritania, Mozam-bique, Senegal, Tanzania, and Uganda—now

having received a total of close to $9 billion ofrelief in net present value terms. Several moreAfrican countries are expected to reach deci-sion points in the near future.

Long-term prospectsDespite the growth slowdown of the late1990s, recent performance continues to sup-port the view that fundamental structuralchange and institutional strengthening willhave a significant impact on Sub-SaharanAfrica’s prospects. The forecast is for a halt tothe region’s lengthy decline and marginaliza-tion and even for a moderate reversal. Thelonger term (2003–10) outlook is for sus-tained GDP growth—around 3.7 percent—with per capita incomes rising 1.5 percent peryear. The primary driving force behind theoutlook remains better governance and ongo-ing reforms to the policy environment. TableA1.5a highlights improvements in a numberof economic outturns over the last decade thatserve as the initial conditions for developmentinto the next 10 years. Median inflation andfiscal deficits have been reduced, while moder-ate gains in real investment and in FDI havealso been achieved. To a degree, these havebeen countered by a fall in savings rates and arise in external deficits (characteristic of thesecular decline in commodity prices). Increasesin school enrollment and the decline in illiter-acy rates are more encouraging indicators forthe stock of human capital. However, HIV/AIDS is expected to carry substantial negativeeffects for the future labor force (see below).

Growth is likely to remain modest com-pared to that of other emerging regions, re-flecting a range of negative factors still to beovercome, including poor transportation andcommunications infrastructure, low savingsand private investment rates, and limited ac-cess to foreign capital (World Bank 2000).Moreover, without substantial diversificationof production, economies in the region willremain overexposed to irregular weather con-ditions and unfavorable terms-of-trade shocks.Unfortunately, on balance, there seems very



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little prospect for achieving widespread percapita growth rates on the order of 4 or 5 per-cent or more, which have characterized EastAsia’s best performers.

Access to foreign savings may also proveproblematic. Apart from the HIPC Initiative,foreign aid is likely to diminish further. Theenhanced HIPC Initiative is worth nearly $30 billion in net present value terms, withsome 80 percent of the program earmarkedfor Sub-Saharan Africa. However, even thislevel of resource transfer—roughly 9 percentof 1998 GDP—is small compared to the re-gion’s requirements, and it will be necessary toattract more private capital. The main poten-tial benefit of the HIPC Initiative may be theimpetus it gives toward strengthening the pol-icy framework and poverty reduction objec-tives in the region.

AIDS and the economy. The forecast at-tempts to factor in more carefully the eco-nomic effects of HIV/AIDS—an issue of hugeimportance for Sub-Saharan Africa. Accord-ing to U.N. estimates (UNAIDS 2000), Sub-Saharan Africa is home to 24.5 million (or 70percent) of the 34.3 million existing casesworldwide and 12.1 million of a total of 13.2million AIDS orphans. Moreover, the epidemicappears to be increasingly concentrated inAfrica, where 4 million of the 5.5 million newinfections occurred in 1999. Southern Africais particularly affected, with Botswana, Swa-ziland, Zimbabwe, Lesotho, Zambia, SouthAfrica, and Namibia having incidence rates in the adult population between 36 percent(Botswana) and 19 percent (Namibia). Bycontrast, incidence rates in north and westernAfrica are typically below 3 to 5 percent,though they range up to 8 percent in Cam-eroon and 11 percent in Côte d’Ivoire. Thefact that victims tend to be working adults inthe prime of their lives amplifies not only thetragic human impacts but the social and eco-nomic disruption as well.

Because the scale of the HIV/AIDS epidemicis unprecedented in recent history, it is difficultto gauge its macroeconomic impacts with pre-

cision. Nevertheless, a growing body of surveywork has attempted to measure the effects onhouseholds and businesses, communities, andgovernments. Various studies have identified a wide range of costs. These include reducedhousehold savings and labor supply caused bythe expenditure of time and money in caringfor sick family members or raising orphanedchildren; lower productivity in the businesssector because of illness, absenteeism, skillshortages, and higher training costs; and diver-sion of government budgets from expenditureon education and infrastructure. The impactsare more severe in sectors such as transpor-tation, construction, and power generation,where male workers live away from their fam-ilies (UNAIDS 2000, pp. 26–36; Bollinger andStover 1999). Macroeconomic impacts havebeen modeled using various approaches at botha regional level and in country-specific studiesof Cameroon, Kenya, Swaziland, Tanzania, andZambia. These studies yield similar estimatesof the prospective cost, generally a fall in percapita growth of 1 percent or more annuallyfor countries with high, though not the mostextreme, incidence rates (Over 1992; Bollingerand Stover 1999).

Projecting the medium-term economic im-pact is further complicated by variations ingovernment policy, which can have a major in-fluence on the course of the disease. In Ugandaand Zambia, concerted government effortshave helped to lower significantly incidencerates in high-risk populations (see, for exam-ple, UNAIDS 2000, p. 10). Nevertheless, untilnow such interventions have been all too rare.Thus, fairly pessimistic estimates of the im-pact on population growth and productivitymust be factored in, particularly for countrieswhere the incidence is currently high, a cate-gory that includes some of Sub-SaharanAfrica’s consistently strongest performers. Inthe worst-affected countries, population growthis expected to slow by 1 to 2 percent annually(possibly even to turn negative), while percapita income growth may slow by nearly thatmuch again.



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Middle East and North Africa

Recent developments

Despite some favorable developments, in-cluding higher oil prices, the Middle East

and North Africa region’s growth prospectsremain modest in the short and mediumterms. Adverse developments in the MiddleEast peace process are also casting a renewedpall on prospects for tourism, investment, andtrade in the Levant. GDP growth of 2.2 per-cent was reported in 1999, and growth of 3.1 percent is expected in 2000. Cyclical fac-tors have played a role in the region’s recovery,with external factors such as the surge in oilprices, recovery in traditional export mar-kets—especially the Euro Area—and some im-provement in weather conditions beginning to relieve drought; these factors are leading to modest improvements in growth outturns.But significant impediments to higher potentialgrowth remain, as the countries in the regionface major challenges in the reform of domesticpolicies affecting trade openness, exchangerates, investment, and the labor force.

Oil prices remained above $30 per barrel for much longer than anticipated in 2000, rais-

ing export revenues and incomes in the oil exporters. As OPEC increased productionquotas, export volumes have risen, and mostOPEC countries are now producing at peakcapacity. The impact on fiscal positions hasbeen favorable; major oil producers had for-mulated budgets around an assumed oil priceof $22 per barrel, and higher revenues havecontributed to lower deficits and borrowingrequirements. For example, in 1999 Kuwaiti oil revenues grew by 39 percent and publicrevenues increased by 30 percent. Externaldebt–financing constraints have eased and do-mestic arrears have fallen. In Saudi Arabia,bank claims on the public sector had grown by7.7 percent in 1998 and 3.5 percent in 1999,but fell by 8 percent in May 2000. As a result,pressure on exchange rates that were experi-enced in 1998 and early 1999 in several Gulfcountries have eased significantly, and mone-tary authorities in most oil-exporting countrieshave built up sufficient foreign reserves to de-fend their exchange rate pegs. Current accountpositions have shown large improvement, witha turnaround of over $42 billion between 1998and 2000, representing about 6 percent of oilexporters’ annual GDP (figure A1.6). Increasedimports by the Islamic Republic of Iran and Al-



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Figure A1.6 Oil prices and current account balances, Middle East and North Africa,1995–2000Millions of U.S. dollars US$/bbl

–20,000

–15,000

–10,000

–5,000

0

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15,000

1995 1996

Right axis

Left axis

1997 1998 1999 2000

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25

30Current account balance Average oil price


geria have diminished the magnitude of the re-gion’s surplus to a degree.

For the diversified exporters, favorable ex-ternal conditions have been largely overshad-owed by negative domestic effects. Growthrose somewhat to 3.6 percent in 2000 from3.3 percent during 1999. Strong growth inEurope has fueled a boom in tourism, withrecord numbers of tourist arrivals and receiptsbeing experienced in many North African andMediterranean countries. Tourist arrivals in-creased by 37 percent in the Arab Republic ofEgypt, rose to a record 4.8 million in Tunisia,and are rising by 10 percent year on year inJordan for the first four months of 2000. Theeconomic revival in Europe has also led togains in some export categories (food and pri-mary commodities, some mechanical goods,and energy), but exports of labor-intensivegoods such as textiles and clothing remain flatin value terms. Workers’ remittances have alsobeen boosted (75 percent in 1999 in Tunisia)by the improvement in economic activity inthe broader Euro-Mediterranean and Gulf re-gions. The gradual easing of drought condi-tions in many countries improved agriculturalincomes and exports and led to some decline

in food imports. But drought conditions havecontinued in Morocco for the second consecu-tive year, with a significant impact on overallgrowth. Price stability in many diversified ex-porters has been maintained in a time ofhigher oil prices through energy subsidies todomestic consumers and maintenance of tightmonetary policy in support of fixed exchangerate pegs to dollar-dominated baskets. How-ever, there are some troubling elements in thepicture for diversified exporters that are limit-ing GDP growth:

• Exchange rates in many countries arepegged to an appreciating dollar, but thesecountries’ major export markets are in theEuro Area. Prices in the region are risingmore rapidly than in the United States, im-plying that exchange rates are becomingovervalued relative to other currencies. As aresult, export growth is generally lower thanexport market growth would suggest, andseveral countries, particularly Egypt, are ex-periencing pressures on their exchange rates.

• Lower confidence in the group stemmingfrom both economic and political factors isa second force restraining growth. Capital



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Table A1.6 Middle East and North Africa forecast summary(percent per year)

Baseline forecast


Real GDP growth 3.1 3.3 2.2 3.1 3.8 3.6 3.6Consumption per capita 0.4 –1.2 –0.3 1.2 1.5 1.3 1.3GDP per capita 0.9 1.3 0.3 1.1 1.9 1.7 1.7

Population 2.2 2.0 2.0 2.0 1.9 1.9 1.9Median inflationa ... 0.7 4.3 5.2 3.9 3.8 3.6Gross domestic investment/GDP 21.6 22.0 22.3 22.6 22.8 23.1 23.7Median Central Gvt. budget/GDP –1.6 –3.3 –3.4 –2.0 –1.8 –1.7 –1.2Export volumeb 4.6 –2.5 4.2 5.6 4.5 5.1 5.3Current account/GDP 0.4 –1.0 1.7 1.3 1.0 0.5 0.7Memorandum item

GDP Oil-dominant economies 2.5 0.9 1.6 3.2 3.3 2.9 3.1GDP Diversified exporters 3.9 5.5 3.3 3.6 4.7 4.9 4.4

… Not available.a. GDP deflator.b. Goods and nonfactor services.Note: Excluding Iraq.Source: World Bank baseline forecast, October 2000.

Table A1.6a Forecast assumptions—Middle East and North Africa


1. Ratio of real GDP per capita:Industrial / MENA region 8.8 9.8

2. Trade (X+M) / GDP ratio (real) 36.8 37.03. Median Inflation rate (percent) 13.4 2.74. Median Fiscal Balance / GDP –5.0 –1.05. Investment / GDP (real) 23.1 23.86. Investment / GDP (nominal) 24.8 20.87. Gross National Savings / GDP 20.8 19.57a. Gross Domestic Savings / GDP 20.6 19.28. Current Account Balance / GDP –2.1 –1.49. FDI / GDP 0.6 1.2


Primary (pct of eligiblepopulation) 82.0 86.0Secondary 59.0 66.0

12. Illiteracy rate (pct of people 15+ years) 46.0 37.0

13. Under-5 mortality rate (per 1,000 live births) 71.0 55.0

14. Life Expectancy at birth (years) 65.0 68.0




markets have responded with disfavor tohigher-than-anticipated fiscal deficits inEgypt and Lebanon, with several down-grades undertaken by ratings agencies forLebanon, large declines in stock market in-dexes (by 50 percent in Egypt from Januaryto October), and rising spreads. Because ofthe effects on confidence of the recent con-flict in the West Bank and Gaza, and thelower likelihood of a peace agreement in thenear future in the Levant, the climate for in-vestment (and tourism) will be poorer andGDP growth will show only modest, ratherthan strong, recovery in 2000.

Near-term outlookThe recent modest improvement in economicactivity in 2000 and the effects of reform pro-grams under way in many countries will influ-ence the near-term outlook for the region fa-vorably. Activity is expected to pick up to 3.8 percent in 2001 and to slow slightly to 3.6 percent in 2002 (table A1.6). For oil-exporting countries, the outlook is conditionedby the expected path for oil prices in the periodand the lagged response to higher incomes.With an average price of $28 a barrel for 2000and $25 in 2001, oil revenues should continueto support income growth in the oil exporters,but large domestic and external arrears andstructural budget deficits imply continued needfor public sector expenditure restraint and re-forms. Improved agricultural conditions in Al-geria and the Islamic Republic of Iran, com-bined with continuing attempts to privatizestate industries, and planned investments in thehydrocarbons sector through both domesticand foreign investment, will make positivecontributions to growth. Moreover, the grad-ual reform of the multiple exchange rateregime in the Islamic Republic of Iran is ex-pected to continue, given the success of the“export” rate in recent months. In the GulfCooperation Council countries, continued in-vestments in hydrocarbons, reform of invest-ment regimes (particularly the taxation of for-eign firms), and a lowering of corporate taxesgenerally should provide a more favorable

business climate. And in a reversal of patternsof the 1990s, trade regimes are also expectedto become more open, as several countries,such as Saudi Arabia and Oman, seek and gainmembership in the World Trade Organization.

The near-term outlook for the diversifiedexporters indicates that growth will rise to 4.7 percent in 2001 and to 4.9 percent in 2002. Favorable factors assisting growth in-clude the smooth changes in leadership in Jor-dan, Morocco, and the Syrian Arab Republic,which contributed to lower political uncer-tainty; the potential for reduction of politicalconflict in the Western Sahara; and efforts tojump-start the UMA (Arab Maghreb Union).The public sector in several countries will con-tribute significantly to growth, with bond is-sues in Lebanon and Egypt to finance higherfiscal expenditures. The recent gradual down-



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ward adjustment to the Egyptian pound is ex-pected to continue into 2001, improving theprospects for net exports somewhat. Broaden-ing of privatization programs into areas such as telecommunications, airlines, and the fi-nance sectors in Egypt, Jordan, Tunisia, andMorocco will attract additional foreign invest-ment, helping to deepen equity markets, andimprove efficiency in operations of the sectors.However, unfavorable factors persist. The po-litical uncertainty in the Levant appears to becontinuing, with significant adverse impacts onconfidence and investment. The effects on in-vestment may be felt outside the Levant, partic-ularly because of “wrong neighborhood” ef-fects. Additionally, the pace of reforms in thepublic sector, privatization programs, and mi-croeconomic reform in the private sector is veryslow, suggesting that the gains will not be feltfully in the near term. And with the perfor-mance of the large agricultural sectors in manycountries heavily reliant on weather conditions,volatility in growth resulting from unpredict-able weather conditions will continue.

Long-term prospectsAt this juncture, the moderately optimisticnear-term picture for the region does not trans-late into significantly higher long-term growthpotential. Despite reforms in many of thecountries in the region, much of the improvedperformance in the recent past owes much tocyclical and external factors such as weather,oil prices, and export market–growth. Signifi-cant structural impediments to higher long-term growth remain. Table A1.6a shows thatthere have been fundamental (and likely secu-lar) improvements in some regional macro-economic conditions and in the nurturing ofthe labor force over the last decade. Reductionin inflation and fiscal imbalances, attractionof additional FDI flows, and lowering of ex-ternal debt ratios are significant. Moreover,considerable improvements in school enroll-ment, reduction of illiteracy, and better healthindicators are positive forward-looking indi-cators for the future labor force. But the re-gion remains less open to foreign trade than

others, with the exception of South Asia, withno change in the ratio of trade to GDP over a10-year period. And investment has remainedstagnant, with little improvement in privatecapital spending—a critical element in foster-ing efficiencies and contributing to higherlong-term potential growth rates.

Other substantial obstacles to higher long-term growth persist. Public sectors continue tobe large and inefficient in delivering services,and the institutional and regulatory capabili-ties in many sectors are not geared to fosteringprivate sector development. Moreover, theregion continues to rely heavily on narrowsources of external revenues, whether they areproduct or export-market dominated, suggest-ing the potential for longer-term volatility inexport earnings. Overvaluation of exchangerates in several countries will continue to havedampening effects on export growth. And theproblem of noncompetitiveness of basic indus-try will be further exacerbated by the proposedabolition of the Multifibre Agreement (MFA),which will allow greater competition by low-cost producers in traditional export marketsfor North African textiles and clothing.

Recent political events have cast a pall over confidence in the region, overshadowingthe potential for improvements in regional in-tegration resulting from the EU AssociationAgreements and peace agreements in the Le-vant. While tensions remain high, prospectsfor intraregional trade, as well as foreign in-vestment and tourism, will be poor. Even ifsome form of détente is reached in the Levant,it may result in a “cold peace” where coun-tries may not be in conflict, but the coopera-tion required for trade relations may be lack-ing. For oil exporters, the windfalls fromhigher oil prices are expected to be temporary,and oil prices are expected to fall in the me-dium term, suggesting that structural changesneed to be made to improve fiscal positionsand increase the scope of private activity indomestic economies. This implies that whileconditions in oil markets and major tradingpartners are so favorable, the region shouldtake advantage of the current trends to cast a



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wider net and proceed more quickly with theirdomestic reform agendas.

Notes1. The percentage of the population on wages

“below subsistence” remains high at 27.6 percent, ac-cording to official estimates as of June 2000. However,it has declined significantly from 33.5 percent as ofApril.

2. The EU market now accounts for 60 to 80 percentof Central and Eastern European countries’ exports.

3. Note that Angola, Equatorial Guinea, andSudan are not OPEC members. For Nigeria, recentcrude oil production has been marginally below theOPEC quota of 2.157 million barrels per day. How-ever, the Obasanjo administration has ambitions to in-crease production well beyond the current quota limit,to 3 million barrels per day by 2003. A warming ofrelations with Nigeria’s foreign joint venture partnersand a recent surge in exploration and development ac-tivity indicate strongly that an increase of this magni-tude will likely be feasible. Less problematic for re-

lations with OPEC, a third liquid natural gas (LNG)train is scheduled to come onstream at Bonny Island in 2002, raising production by 50 percent. The addi-tional output has already been presold. See, further,http://www.eia.doe.gov/emeu/cabs/nigeria.html.

ReferencesBollinger, Lori, and John Stover. 1999. “The Economic

Impact of AIDS.” The Futures Group Interna-tional, Glastonbury, Conn. Available at http://www.iaen.org/impact/stovboll.pdf.

Over, Mead. 1992. “The Macroeconomic Impact ofAIDS in Sub-Saharan Africa.” World Bank.Processed. Available at http://www.worldbank.org/aids-econ/macro.pdf.

UNAIDS. (Joint United Nations Programme on HIV/AIDS). 2000, Report on the Global HIV/AIDSEpidemic. Geneva: Joint United Nations Pro-gramme on HIV/AIDS. Available at http://www.unaids.org/epidemic_update/report/Epi_report.pdf.

World Bank. 2000. Can Africa Claim the 21st Cen-tury? Washington, D.C.



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GLOBAL COMMODITY PRICES HAVE FOL-lowed many different paths since thelows after the Asian crisis, with crude

oil prices rising sharply, agricultural prices re-maining low, and metals and minerals pricesstaging a modest recovery. The recovery ofnon-oil commodity prices lagged behind that ofoil prices because supplies of non-oil commodi-ties were slow to adjust to low prices while oilproduction was significantly reduced by OPECproducers. Producers of non-oil commoditieshave been left with large inventories that stillneed to be absorbed before prices can risesignificantly. Metals and minerals prices havebegun to recover, rising 27 percent since theirlows. However, agricultural prices remain neartheir cyclical lows (after a brief rally that wasnot sustained), because of continued produc-tion increases and large stocks. Rapid globaleconomic growth, which contributed to thesharp increase in crude oil prices in 1999 and2000, is expected to fuel a recovery in non-oilcommodity prices during the next several years.

The near-term outlook is for the divergencein commodity prices to be reduced with de-clines in energy prices, further increases inmetals and minerals prices, and a recovery inagricultural prices (see annex tables A2.1 andA2.3 for nominal price forecasts for individualcommodities and indexes). In nominal terms,crude oil prices are expected to decline 11 per-cent in 2001, relative to 2000, and an addi-tional 16 percent in 2002 as OPEC and non-OPEC supplies increase in response to the surge

in prices in 1999 and 2000. Metals and min-erals prices are projected to rise 2.1 and 2.3percent, respectively, in 2001 and 2002 afterrising 13.7 percent in 2000. Agricultural pricescontinued to fall in 2000, with a decline of 4.7percent, but are expected to increase 4.2 per-cent in 2001 and an additional 6.3 percent in2002 as global stocks begin to fall and de-mand increases in response to current lowprices and rapid economic growth.

Over the balance of the decade, real com-modity prices1 are expected to reverse recentmoves as energy and metals prices fall andagricultural prices rise (see annex tables A2.2and A2.3 for real price forecasts for individualcommodities and indexes). Real energy pricesare projected to fall sharply from current lev-els, with real petroleum prices down 47 per-cent by 2010 compared to 2000 levels as OPECand non-OPEC supplies increase. Agriculturalprices are low by historical comparison, andreal prices are expected to rise modestly overthe balance of the decade. By 2010, real agri-cultural prices are projected to rise 8 percentrelative to 2000. Metals and minerals priceshave already made a significant recovery fromthe lows of 1999, and by 2010 they are pro-jected to fall 8.4 percent from the 2000 levels.This would still leave metals and mineralsprices above the 1999 levels. The long-termdecline in real commodity prices, which hasbeen observed for many decades, is expected tocontinue. However, these trends will largely bedominated during the decade by the reaction

1

Appendix 2Global Commodity Price Prospects


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of prices to recent extremes, which have seenenergy prices rise and agricultural prices fall.

Agriculture

Food

The World Bank’s index of nominal foodprices has declined by one-third since the

recent high in 1997. In real terms, food pricesare down by more than half since 1980 (seefigure A2.1). The decline in real food prices re-flects the combined impact of countries’ agri-cultural policies, improved technology, andchanges in demand, which, on balance, havecaused food supplies to increase faster thanfood demand and prices to decline relative tomanufactures prices. Despite the price declines,the FAO’s index of world food production in-creased by 20 percent from 1990 to 1999, andper capita production increased by about 5.5percent. Our forecast is for real food prices to stabilize over the decade following recentdeclines.

Grain prices are severely depressed, withnominal prices near the lows of the past decadeand real prices at all-time lows.2 Several fac-tors account for current low prices. Consump-tion growth has slowed over the last few

decades, from 2.7 percent per year during the1970s to 1.7 percent growth during the 1980sand 0.8 percent growth during the 1990s3, andthis has led to nearly stagnant world tradesince the late 1970s. While consumption andtrade have seen slow growth, world grainyields have been increasing at 1.4 percent peryear over the last decade, and an even morerapid 1.7 percent when the countries of theformer Soviet Union (FSU) and Eastern Europeare excluded. The yield increases have beenrapid enough to meet global demand at declin-ing real prices and still allow total world crop-land devoted to grains to fall by 8 percent sincethe peak in 1981. Among major grain-exportingcountries4, cropland planted to grain has de-clined 21 percent since the peak. Much of thisidled cropland will not likely return to grainproduction, but it represents substantial capac-ity that could return if prices rise enough tojustify its use. Grain prices are not expected torise in real terms for any sustained period be-cause of continued yield increases, the surplusproduction capacity in major exporting coun-tries, and continued moderate demand growth.However, prices are projected to increase overthe next several years, as prices recover fromcurrent severely depressed levels. This willlikely be followed by further price declines be-



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Figure A2.1 Food Price Index, 1960–2010Index, 1990=100

0

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1960 1970

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1980 1990 2000 2010

ginning about mid-decade as production in-creases exceed demand growth.

Vegetable oil prices remain depressed fol-lowing the declines in 1999. Prices of majorvegetable oils, such as soy and palm, have de-clined by nearly one-half since their 1998 highs,while prices of other oils, such as coconut andgroundnut, have fallen by about one-quartersince their 1999 highs. Unlike most other agri-cultural commodities, vegetable oil prices in-creased during the Asian crisis, as Indonesia (amajor exporter) imposed export taxes on palmoil in an effort to stabilize domestic prices.These taxes were gradually removed starting in1999, as the crisis eased, and this caused ex-ports to increase and all vegetable oil prices tofall. Global supplies of vegetable oils are ex-pected to increase 5.0 percent in 2000, com-pared to the long-term average of 3.5 percent,and this could keep prices depressed for atleast another year. Palm oil production hasgrown by 7.5 percent per year over the pastdecade, compared to 5.5 percent for soy oil,and this growth is expected to continue asmore Southeast Asian and Latin American pro-ducers expand palm oil production. Palm oilcould displace soy oil as the dominant oil pro-duced within five years, and this would con-tribute to long-term weakness in the entire veg-etable oils complex as palm oil use displacessoy and other oils. Palm oil is already the mostheavily traded oil, with a 40 percent marketshare, while soy oil is second with a 20 percentshare. The index of nominal vegetable oil pricesfell 8.6 percent in calendar year 2000 and isprojected to rise 6.0 percent in 2001. By 2005,nominal prices are projected to increase 21.7percent from 2000 levels. Real prices are pro-jected to rise less than 2 percent between 2000and 2010.

Other food prices have been mixed, withbeef and shrimp prices strong because of therapid global economic growth, while bananaand citrus prices have remained weak becauseof large supplies. Sugar prices have recoveredfrom 1999 lows despite large stocks resultingfrom five consecutive seasons when globalproduction has exceeded consumption. Raw

sugar prices averaged 17.6 cents per kilogramin the world market in 2000 compared to anaverage of 24.3 cents per kilogram during thedecade ending in 1998. World production andstocks are expected to fall in 2001, and pricesshould continue to recover. However, the pricerecovery is expected to take several years, withprices rising to about 20 cents per kilogram by2005. Real prices are projected to remain al-most unchanged from 2000 to 2010.

BeveragesAfter falling sharply in 1998 and 1999, theindex of nominal beverage prices is expectedto increase modestly in 2001 and more rapidlyin 2002 (figure A2.2). The decline in pricesbegan as the Asian crisis weakened demandand followed several years of high prices in themid-1990s, which had stimulated global pro-duction. The sharp drop in prices has not yetbeen reversed despite falling beverage stocksand rising imports. Currency devaluations inthe major exporters: Brazil (for coffee), Côted’Ivoire (for cocoa), and Kenya (for tea) con-tributed to lower U.S. dollar export prices.5

Weak currencies in major importers, such asthe European Union and the Russian Federa-tion, also weakened import demand. Beverageprices have historically been among the mostvolatile commodity prices, and a supply dis-ruption in a major producer could quickly re-verse the recent price declines. However, bar-ring such an event, prices are expected to beslow to recover because of new capacity addedby major exporters. The index of nominal bev-erage prices is expected to rise 2.9 percent in2001 and 9.7 percent in 2002. Real prices areexpected to increase about 20 percent from2000 to 2005 and then decline as productivityincreases allow supplies to meet demand withfalling real prices.

Cocoa prices reached a three-decade low inFebruary 2000, as production increased 6 per-cent in the 1999 season compared to a decade-long growth rate of 1.4 percent. Cocoa con-sumption rose in response to lower prices andincreased global economic growth, but notenough to keep stocks from rising 12 percent.

G L O B A L C O M M O D I T Y P R I C E P R O S P E C T S

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Prices are expected to begin to recover in 2001as demand increases in major markets accom-panying projected strong economic growth.By 2002, nominal cocoa prices are projectedto rise 22 percent from 2000 levels. The longer-term outlook is for real prices to rebound fromcurrent severely depressed lows. By 2005, realprices are projected to rise 43 percent from the lows of 2000 and then remain about un-changed at that level, but this would still leavereal prices at one-third of the 1980 level. Oneof the factors that should keep prices from re-turning to previous highs is the 20 percent in-crease in world cocoa planted areas during the1990s as low-cost producers such as Côted’Ivoire, Ghana, and Indonesia expanded pro-duction capacity.

Coffee prices declined sharply during 1999and 2000, with arabica prices down 37 per-cent and robusta prices down 48 percent. Over-production, the Brazilian currency devalua-tion in January 1999, and weak demand inEurope and the United States all contributedto the price declines. Vietnam emerged as thelargest robusta producer and exporter, andbecame the second-largest overall coffee ex-porter, following Brazil. This contributed tothe greater decline in robusta prices comparedto arabica prices but also contributed to over-

all weakness in all coffee prices. In response to low prices, Brazil and Colombia, the twolargest arabica producers and dominant mem-bers of the Association of Coffee ProducingCountries (ACPC), agreed to an export reten-tion scheme to withhold 4.5 million bags ofproduction from export during 2000 and2001. This could support arabica prices andwould be more effective if other ACPC coun-tries joined the scheme. However, this will notchange the longer-term issues of weak demandgrowth, excess production capacity, and largestocks, which have been with the industry formany years. Barring a weather-related supplydisruption, prices are expected to be slow torecover, with arabica prices increasing only11.7 percent by 2002 and robusta prices in-creasing 16.2 percent. Real prices are pro-jected to rise over the next 10 years (from cur-rent extremely depressed levels), with arabicaprices up 10 percent by 2010 compared to2000, and robusta prices up 54 percent.

Tea prices have remained the strongest ofthe three major beverages, with a 10 percentdecline in 1999 compared to 1998 and a 2.8percent increase in 2000. The strength waslargely due to poor weather–related growingconditions in India and Kenya, which reducedexports, and the recovery of demand in coun-



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Figure A2.2 Beverage Price Index, 1960–2010Index, 1990=100

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tries that benefited from increased crude oilprices. Many of the major oil exporters of theMiddle East as well as the Russian Federationare also major tea buyers. The return of Iraqas a tea importer, following the lifting of U.N.sanctions on food imports, contributed to theoverall price strength. However, supplies arenow increasing in major exporters, and nomi-nal prices are not projected to increase signifi-cantly over the next several years. Tea yields inSri Lanka, a major exporter, increased 48 per-cent from 1990–92 to 1996–98 in response totea estate privatization in the early 1990s,which led to increased investment and im-proved management of the tea estates. Nomi-nal prices are expected to rise about 11 per-cent by 2010 relative to 2000, while real teaprices are expected to fall about 14 percent.There is some prospect that rapid consump-tion growth in major producing countries,such as India and China, could offset weak de-mand in industrial countries and provide afirmer price outlook.

Agricultural Raw MaterialsThe index of nominal agricultural raw materi-als prices rose by 35 percent during the firsthalf of the 1990s, as the global economyboomed, and then fell sharply by 35 percent in

response to the Asian crisis. Prices are now setto recover from the lows of 1998 and have in-creased about 5 percent during 1999 and 2000(figure A2.3). We project a further increase of4.2 percent in 2001 and 5 percent in 2002. By2010, real prices are projected to increase 22percent relative to the 1998 lows, which wouldstill leave the index well below the cyclicalhighs of the mid-1990s. However, raw materi-als prices are responsive to global economicconditions and would likely rise further if theglobal recovery exceeds current forecasts.

Cotton prices have remained around 150cents per kilogram (nominal) for the past twodecades, and there is no reason to think thiswill change soon. Prices rose 66 percent from1993 to 1995, from 128 to 213 cents per kilo-gram, and then fell back to 117 cents per kilo-gram in 1999. Global consumption rose sharplyduring the 1980s as clothing fashions favoredcotton. However, those trends have changedand global consumption stagnated during the1990s. Global production has been very erraticin response to wide swings in prices and policychanges in major producers such as China andthe United States. Consequently, cotton priceshave been volatile, but without a clear trend,since about 1980. Prices have begun to recoverfrom the recent lows, with nominal prices up


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Figure A2.3 Agricultural Raw Materials Price Index, 1960–2010Index, 1990=100

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about 9.2 percent in 2000 and projected to riseabout 6.9 percent in 2001. By 2005, nominalprices are projected to rise to 159 cents perkilogram, and by 2010, prices are expected toreach 181 cents per kilogram. In real terms,prices are forecast to rise 22.8 percent relativeto the 1999 lows by 2010.

Rubber prices were severely depressed in1999 because Indonesia, Malaysia, and Thai-land (which account for 70 percent of rubberexports) devalued their currencies as a resultof the Asian crisis. The price of rubber in U.S.dollars tumbled to a 24-year low in 1999—down 60 percent from the 1995 high. Priceshave stopped falling, but the recovery hasbeen modest as record production, weak de-mand, and high stocks have kept prices nearthe low reached in 1999. The InternationalNatural Rubber Organization, which was thelast U.N.-backed commodity price stabiliza-tion body, was formally dissolved in October1999 after the withdrawal of key members inthe wake of the rubber price collapse and cur-rency devaluations. Buffer stocks held by theorganization (amounting to 2.5 percent of an-nual trade) are yet to be liquidated, but theywill eventually find their way into the market.Prices are expected to recover slowly and areunlikely to reach the highs seen in the mid-1990s. Our near-term forecast is for nominalprices to rise about 6 percent per year in both2001 and 2002, following the 12 percent in-crease in 2000. Real prices are projected torise 9.4 percent between 2000 and 2010.

Asian tropical timber has been one of thefew commodities that have seen rising realprices over the past two decades. However,prices fell following the Asian crisis as demandweakened dramatically. Prices of Malaysianlogs have since risen 24 percent from the 1998lows, and the recovery in Asian economies will likely support further price increases.Malaysian log prices are expected to increase17.5 percent, in real terms, from 2000 to 2010.African tropical timber is mostly imported intoEurope, and prices did not decline as sharplyas those of Asian timber did following theAsian crisis. The improving growth prospectsin Europe suggest prices of African timber could

rise over the next several years as tropical tim-ber becomes scarcer, environmental regula-tions become tighter, and demand continues toincrease. However, real price increases will alsobe moderated by improved production tech-niques that allow better use of timber. Realprices of Cameroon log are projected to in-crease 8.9 percent from 2000 to 2010.

Energy

Crude oil prices have tripled since the lowsof early 1999, to well over $35 per barrel,

as significant production cutbacks by OPEC(as well as reductions by Mexico and Norway)and strong demand growth, reduced stocks tohistorically low levels. Product stocks, partic-ularly gasoline and middle distillate, have alsobeen drawn to extremely low levels, and atight gasoline market is expected to turn intoa tight heating oil market this winter. In addi-tion, steep backwardation of futures prices(near-term futures prices lower than distantfutures prices) has discouraged stock buildingabove immediate requirements. The U.S. gaso-line market has been additionally affected bycapacity outages, the introduction of Phase IIreformulated gasoline (RFG), the phaseout ofmethyl tertiary butyl ether (MTBE), and Uno-cal’s RFG patent, which makes it more costlyto manufacture gasoline.

OPEC responded to the dramatic price in-creases by raising production quotas 7.5 per-cent in April 2000, 2.9 percent in July 2000,and 3.1 percent in October 2000. But these increases were not enough to reduce prices.OPEC also introduced a price band mecha-nism for its basket of crudes in mid-2000. Ifthe average price of the OPEC reference basketexceeds $28 per barrel each day for 20 consec-utive trading days, OPEC production, exclud-ing Iraq’s, will increase by 0.5 million barrelsper day. If the average price falls below $22 perbarrel for 10 consecutive trading days, OPECproduction, excluding Iraq’s, will decrease by0.5 million barrels per day. This mechanismwas triggered in late October when prices ex-ceeded $28 per barrel for 20 consecutive trad-ing days, and OPEC announced plans to in-



UNPUBLISHED PROOFS

crease production by 0.5 million barrels perday. Saudi Arabia, the largest OPEC producer,has stated that it would like to see prices settlearound $25 per barrel. Iraq remains outsidethe quota system because of U.N. sanctions,but its production has risen to nearly 3 millionbarrels per day. In response to persistent highprices, the United States released 30 millionbarrels from its Strategic Petroleum Reserveand set up emergency heating oil inventories inthe northeast region.

Inventories are now rebuilding, althoughstocks will likely remain low in the near term,depending on demand and the severity of win-ter. OPEC’s new price band and accompanyingproduction restraint are designed to raise oilprices. However, the impact on prices is ex-pected to be short-lived because oil productioncosts are substantially below current prices,and advances in technology and improvedmanagerial practices continue to result in everlower development costs. In addition, the costsof competing fuels and non-conventional en-ergy sources continue to fall and are becomingincreasingly competitive when oil prices arehigh. Non-OPEC oil supplies are expected tocontinue to increase, despite the significantlyslower growth in 1998–99, because of low oiland gas prices. Capital expenditures by the pe-troleum industry have been relatively modest,despite the rebound in prices, as companiesgrapple with large merger activities, debt pay-down, share buyback programs, and a cautiousattitude to the “new” price regime. However,major oil companies have had large earningsincreases, and this could eventually lead to sig-nificant spending programs, which would re-sult in higher oil production in future years.

Significant advances in oil developmenttechnology in recent years, such as 3-D com-puter seismic, horizontal drilling, and floatingproduction systems, have helped reduce devel-opment and operating costs and shifted supplycurves outward. New frontiers still remain forsubstantial oil development, for example, off-shore, deepwater, heavy oil, and the CaspianSea. Large increases in production from off-shore West Africa are expected in the next fewyears, and deepwater advances in the U.S. Gulf

of Mexico and Brazil give promise of similardevelopment in many other locales around theworld. The costs of non-conventional oil re-sources, such as oil sands development inCanada, have fallen significantly in recentyears, and new projects have proceeded underthe assumption of low oil prices. Several coun-tries have invited in, or back, foreign oil com-panies, including some OPEC countries, andthese actions will result in increased produc-tion capacity.

High oil prices will reduce demand and en-courage substitution of other fuels for oil, asoccurred when prices spiked during the pastthree decades. For example, world oil demand(excluding demand in the FSU) grew by 2.3percent in the 1990s compared with globalgrowth of 7.5 percent prior to the first oil priceshock in 1973. Efficiency improvements, how-ever, have slowed significantly in recent yearsas real prices have declined. This has been no-table in the United States, with the surge indemand for fuel-thirsty sport-utility vehicles(SUVs). In addition, U.S. corporate average fueleconomy (CAFE) standards for conventionalautomobiles have not been raised since 1990.Thus significant potential exists for improvingefficiency in transport and other uses. Higherprices will also encourage the substitution ofother fuels, notably natural gas, and also of re-newable energy sources. Environmental pres-sures to reduce local pollution, reduce con-gestion, and curb greenhouse gas emissionswill push policymakers to improve energy effi-ciency and restrain consumption of oil andother carbon-based fuels. More ominously foroil producers, the development of transportfuel-cell technology6 looms on the horizon, al-though the costs remain high and a single pre-ferred fuel has not yet been established.

We expect oil prices to average $28 per bar-rel in 2000 because of tight underlying marketconditions and OPEC’s resolve to keep priceswithin its new price band. Prices are then ex-pected to fall to $25 per barrel in 2001 ashigher production from both OPEC and non-OPEC sources allows stocks to rebuild and tiltthe market back into surplus. However, mostOPEC countries are at or near capacity, with


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only Saudi Arabia having significant spare ca-pacity. This, along with a delayed non-OPECsupply response, could keep OPEC in firmcontrol of the market for an extended period—perhaps several years. Over the longer term,real oil prices (figure 2.4) are expected to de-cline because of abundant low-cost global sup-plies, increasing competition from non-OPECproducers and non-oil fuels, environmental con-cerns, and technological advances.

Fertilizer

Fertilizer prices, like the prices of manyother commodities, have followed very

divergent paths over the past several years.Nitrogen fertilizer prices declined from morethan $200 a ton to near $60 a ton (for bulkurea), while phosphate fertilizer prices de-clined only 20 percent (for triple super phos-phate, or TSP), and potash fertilizer pricescontinued to rise. The differences in price be-havior were due to the different impact thatthe economic collapse of the FSU had on fer-tilizer markets, the different industry marketstructures, and different export firm behavior.The FSU was both a major producer and amajor consumer of fertilizer prior to 1990.When these countries faced severe economic

crisis in the 1990s, domestic fertilizer con-sumption declined along with grain demand,and firms directed their fertilizer productionto the export market. This led to aggressiveprice-cutting and competition for marketshare in the nitrogen fertilizer market, espe-cially by the Russian Federation and Ukraine.The competition was less intense in the phos-phate and potash markets because the FSUcountries had smaller market shares and be-cause other major phosphate and potash pro-ducers responded to increased exports fromthe FSU by cutting production rather than bylowering prices and competing for marketshare. Other factors also contributed to thedifferent price behavior, including the decisionby China (the major nitrogen fertilizer im-porter) to ban nitrogen imports in 1997.

Nitrogen fertilizer prices have increasednearly 45 percent in 2000 compared to 1999as major producers in Europe and the U.S. cutproduction. However, the price recovery is ex-pected to slow as the industry faces large ex-cess capacity and continued aggressive exportcompetition. Weak grain prices contribute toweak demand and further delay a significantprice recovery, since more than 50 percent ofnitrogen fertilizer is used for grain production.Real urea prices are projected to rise 54 per-



UNPUBLISHED PROOFS

Figure A2.4 Petroleum Price Index, 1960–2010Index, 1990=100

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cent by 2010 compared to 1999 lows, but stillremain 30 percent below the highs of 1996.

Phosphate prices fell less, and will likelyreach new highs sooner, than nitrogen fertil-izer prices. The industry is faced with surpluscapacity, but demand has been strong, asmany developing countries have increased im-ports of phosphate in order to improve thebalance of fertilizer applications. After falling19 percent from 1998 to 2000, TSP prices areprojected to increase 7 percent in 2001. Nom-inal prices are expected to increase an addi-tional 7 percent by 2005 as improvements inworld grain prices boost fertilizer demand. By2010, real prices are expected to decrease asnew capacity comes onstream, causing realprices to fall 5 percent from 2000 levels.

Potash prices have increased about 5 per-cent since 1998, while most other commodityprices fell. This was possible because of strongimport demand from developing countries andthe willingness of major producers to closeproduction capacity rather than see prices fall.These industry trends are expected to continueand should lead to gradually increasing muri-ate of potash (MOP) prices. At some point,enough new capacity may be developed tothreaten this price stability, but this probablywill not occur for several more years. Nominal

MOP prices are projected to increase about 1percent per year until 2005 and then remainabout unchanged for the balance of the decade.In real terms, prices will decline, as nominalprice increases will not be large enough to off-set overall inflation. By 2010, real MOP pricesare projected to fall about 19 percent from the2000 level.

Metals

The World Bank’s nominal index of metalsand minerals prices has increased nearly

27 percent from the lows in early 1999 be-cause of production cutbacks and strong de-mand growth (figure A2.5). However, abun-dant supplies and high stocks have preventedeven larger price gains. Much of the increasein the price index has been a result of the morethan doubling of nickel prices and the 30 to40 percent increases in aluminum and copperprices. Other metals prices have failed to movehigher because of abundant supplies and insome cases relatively weak demand. Tin priceshave risen slightly, while gold and silver pricesare relatively unchanged since early 1998.Lead prices have fallen because of weak de-mand and rising stocks. Many metals pricesare poised to increase in the near term in re-


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Figure A2.5 Metals Price Index, 1960–2010Index, 1990=100

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sponse to demand growth, which accompa-nies expected strong economic growth, andmore favorable supply balances.

Aluminum prices have recovered from thelows of early 1999, but high stocks, rising production, and forward selling by producers have kept a lid on price gains. In mid-2000,the market balance began to tighten becauseof producer cutbacks in the United States.Nearly 40 percent of the U.S. aluminum ca-pacity is located in the Pacific Northwest,where deregulation of the U.S. power industry,along with strong summer demand, has drivenup power prices and led to lower aluminumproduction. Further production cuts or strongdemand growth could lead to a period of higherprices. In the longer term, real prices are ex-pected to weaken because of improved tech-nologies, new lower-cost capacity, and demand-side pressures from substitution of low-costmaterials such as plastics. By 2010, real alu-minum prices are expected to fall by about 6percent from 2000 levels.

Copper prices have risen about 40 percentfrom the lows of early 1999 because of strongdemand and significant reductions in high-costproduction—much of it in the United States.World copper consumption is expected to growby more than 5 percent in 2000, and far out-stripped global production growth, resulting in a 50 percent decline in London Metals Ex-change (LME) inventories. As a result, themarket balance has moved into deficit, follow-ing large surpluses during the 1997–99. Furthershortfalls are anticipated, causing nominalprices to rise by 8.2 percent in 2001 and an ad-ditional 3.8 percent in 2002. However, higherprices will bring forth investment in new capac-ity, along with reactivation of idle plants, whichwill prevent escalation of real prices over theforecast period. Prices will remain cyclical, withthe cost structure of the industry essentially de-termining the low point in the cycle. New tech-nologies will continue to reduce productioncosts, leading to declining real prices later in theforecast period. On the demand side, new cop-per alloys could regain some market share pre-viously lost to aluminum. Although the threatof substitution from new materials exists, it is

likely that copper will retain its position in ex-isting applications. Real prices are expected torise about 2 percent between 2000 and 2010.

Gold has traded between $275 and $300per troy ounce during most of the past threeyears because of central bank sales, decliningproduction costs, and forward selling by pro-ducers. A number of central banks have beenselling gold reserves to exchange their low-interest assets for investments that yield higherinterest. The Netherlands, Switzerland, and theUnited Kingdom are in the midst of large goldsale programs, while other countries are con-templating such actions. In September 1999, 15European central banks agreed to limit goldsales to 2,000 tons over the next five years andrestrict their lending activities, and severalproducers announced that they would limit orsuspend their gold hedging programs. How-ever, this failed to lift prices. Prices are ex-pected to remain under pressure as suppliesfrom all sources will be more than adequate tomeet demand. Price movements above $300per troy ounce will probably face reduced de-mand, provide greater incentives for produc-ers to sell forward, and encourage central banksto increase sales. Real prices are expected todecline by about 1.8 percent per year between2000 and 2010.

Nickel prices rose from under $4,000 perton in December 1998 to more than $10,000per ton during 2000. Various supply problemscontributed to the tight market, particularlytechnical problems bringing on new capacityin Australia and labor strikes in Canada.Nickel demand has also been very strong be-cause of the strength of the global economicrecovery and large growth in steel production.This has depleted stocks, causing LME inven-tories to fall to the lowest level in nine years.Prices are expected to fall as nickel productionincreases substantially in the coming years andlarge amounts of scrap metal are brought tomarket. The supply deficit is expected to di-minish in 2001, and the market is expected tobe in better balance going forward. Real pricesare expected to decline by nearly 40 percentbetween 2000 and 2010, mainly reflecting thelofty level of prices in 2000.



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UNPUBLISHED PROOFS



Table A2.1 Commodity prices and price projections in current dollars

Actual Projections

Commodity Unit 1970 1980 1990 1998 1999 2000 2001 2002 2005 2010

EnergyCoal, U.S. $/mt — 43.10 41.67 34.38 33.17 33.00 33.00 33.50 35.00 37.50Crude oil, avg, spot $/bbl 1.21 36.87 22.88 13.07 18.07 28.00 25.00 21.00 18.00 19.00Natural gas, Europe $/mmbtu — 3.40 2.55 2.42 2.13 3.80 3.75 3.20 2.75 2.75Natural gas, U.S. $/mmbtu 0.17 1.55 1.70 2.09 2.27 4.00 4.00 3.50 2.75 3.00

Non-Energy CommoditiesAgriculture

BeveragesCocoa c/kg 67.5 260.4 126.7 167.6 113.5 90.0 95.0 110.0 150.0 170.0Coffee, other milds c/kg 114.7 346.6 197.2 298.1 229.1 187.4 191.8 209.4 253.5 265.0Coffee, robusta c/kg 91.4 324.3 118.2 182.3 148.9 94.8 97.0 110.2 149.9 187.4Tea, auctions (3) average c/kg 83.5 165.9 205.8 204.6 183.9 189.0 192.0 192.0 195.0 210.0

FoodFats and oilsCoconut oil $/mt 397.2 673.8 336.5 657.9 737.1 444.0 500.0 540.0 620.0 650.0Copra $/mt 224.8 452.7 230.7 411.1 461.5 310.0 425.0 435.0 460.0 483.0Groundnut oil $/mt 378.6 858.8 963.7 909.4 787.7 700.0 740.0 775.0 820.0 850.0Palm oil $/mt 260.1 583.7 289.8 671.1 436.0 322.0 340.0 360.0 400.0 450.0Soybean meal $/mt 102.6 262.4 200.2 170.3 152.2 185.0 195.0 200.0 215.0 226.0Soybean oil $/mt 286.3 597.6 447.3 625.9 427.3 340.0 360.0 380.0 430.0 460.0Soybeans $/mt 116.9 296.2 246.8 243.3 201.67 210.0 220.0 230.0 250.0 270.0

GrainsMaize $/mt 58.4 125.3 109.3 102.0 90.2 86.0 95.0 110.0 125.0 130.0Rice, Thai, 5% $/mt 126.3 410.7 270.9 304.2 248.4 202.0 215.0 235.0 275.0 300.0Sorghum $/mt 51.8 128.9 103.9 98.0 84.4 85.0 88.0 100.0 120.0 125.0Wheat, U.S., HRW $/mt 54.9 172.7 135.5 126.1 112.0 112.0 120.0 130.0 160.0 170.0

Other foodBananas, U.S., new series $/mt 166.1 377.3 540.9 489.5 373.8 430.5 465.2 490.5 529.1 567.7Beef, U.S. c/kg 130.4 276.0 256.3 172.6 184.3 194.0 198.4 202.8 209.4 225.0Oranges $/mt 168.0 400.2 531.1 442.4 438.2 365.0 400.0 500.0 565.0 600.0Shrimp, Mexican c/kg — 1,152 1,069 1,579 1,461 1,503 1,515 1,530 1,550 1,590Sugar, world c/kg 8.2 63.16 27.67 19.67 13.81 17.60 18.10 18.10 20.00 24.00

Agricultural raw materialsTimberLogs, Cameroon $/cum 43.0 251.7 343.5 286.4 269.3 275.0 285.0 300.0 330.0 385.0Logs, Malaysia $/cum 43.1 195.5 177.2 162.4 187.1 192.0 198.0 210.0 245.0 290.0Sawnwood, Malaysia $/cum 175.0 396.0 533.0 484.2 600.8 600.0 620.0 655.0 750.0 900.0

Other raw materialsCotton c/kg 67.6 206.2 181.9 144.5 117.1 127.9 136.7 141.1 158.7 180.8Rubber, RSS1, Malaysia c/kg 40.7 142.5 86.5 72.2 62.9 70.6 75.0 79.4 88.2 99.2Tobacco $/mt 1,076 2,276 3,392 3,336 3,041 2,985 3,000 3,100 3,250 3,300

FertilizersDAP $/mt 54.0 222.2 171.4 203.4 177.8 155.0 165.0 175.0 195.0 205.0Phosphate rock $/mt 11.00 46.71 40.50 43.00 44.00 44.00 44.00 44.00 44.00 46.00Potasium chloride $/mt 32.0 115.7 98.1 116.9 121.6 122.5 124.0 124.0 125.0 127.0TSP $/mt 43.0 180.3 131.8 173.1 154.5 140.0 150.0 155.0 160.0 170.0Urea, E. Europe, bagged $/mt 48.0 222.1 130.7 103.1 77.8 112.0 120.0 130.0 140.0 150.0

Metals and mineralsAluminum $/mt 556 1,456 1,639 1,357 1,361 1,575 1,600 1,650 1,800 1,900Copper $/mt 1,416 2,182 2,661 1,654 1,573 1,825 1,975 2,050 2,200 2,400Gold $/toz 36.0 607.9 383.5 294.2 278.8 280.0 280.0 275.0 275.0 300.0Iron ore, Carajas c/dmtu 9.84 28.09 32.50 31.00 27.59 29.00 29.50 30.25 32.00 33.00Lead c/kg 30.3 90.6 81.1 52.9 50.3 46.0 50.0 55.0 60.0 64.0Nickel $/mt 2,846 6,519 8,864 4,630 6,011 8,600 7,500 7,000 6,000 6,800Silver c/toz 177.0 2,064 482.0 553.4 525.0 505.0 500.0 510.0 525.0 550.0Tin c/kg 367.3 1,677 608.5 554.0 540.4 545.0 550.0 560.0 590.0 610.0Zinc c/kg 29.6 76.1 151.4 102.5 107.6 114.0 116.0 117.0 120.0 125.0

— Not available.Note: Projections as of October 24, 2000.Source: World Bank, Development Economics, Development Prospects Group.

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Table A2.2 Commodity prices and price projections in constant 1990 dollars

Actual Projections

Commodity Unit 1970 1980 1990 1998 1999 2000 2001 2002 2005 2010

EnergyCoal, U.S. $/mt — 59.86 41.67 32.40 32.10 32.70 31.57 30.94 29.86 28.90Crude oil, avg, spot $/bbl 4.82 51.21 22.88 12.31 17.49 27.74 23.91 19.40 15.36 14.64Natural gas, Europe $/mmbtu — 4.72 2.55 2.28 2.06 3.76 3.59 2.96 2.35 2.12Natural gas, U.S. $/mmbtu 0.68 2.15 1.70 1.97 2.19 3.96 3.83 3.23 2.35 2.31

Non-energy commoditiesAgriculture

BeveragesCocoa c/kg 268.9 361.6 126.7 157.9 109.9 89.2 90.9 101.6 128.0 131.0Coffee, other milds c/kg 456.8 481.4 197.2 280.9 221.7 185.7 183.5 193.4 216.3 204.2Coffee, robusta c/kg 364.0 450.5 118.2 171.7 144.1 93.9 92.8 101.8 127.9 144.4Tea, auctions (3) average c/kg 332.7 230.5 205.8 192.8 178.0 187.3 183.7 177.3 166.4 161.8

FoodFats and oilsCoconut oil $/mt 1582.4 935.9 336.5 619.9 713.5 439.9 478.3 498.8 529.0 500.9Copra $/mt 895.8 628.8 230.7 387.3 446.7 307.1 406.5 401.8 392.5 372.2Groundnut oil $/mt 1508.2 1192.7 963.7 856.8 762.4 693.6 707.9 715.8 699.7 655.0Palm oil $/mt 1036.0 810.7 289.8 632.3 422.0 319.0 325.2 332.5 341.3 346.8Soybean meal $/mt 408.7 364.5 200.2 160.5 147.3 183.3 186.5 184.7 183.5 174.2Soybean oil $/mt 1140.8 830.0 447.3 589.7 413.6 336.9 344.4 351.0 366.9 354.5Soybeans $/mt 465.8 411.4 246.8 229.2 195.2 208.1 210.5 212.4 213.3 208.1

GrainsMaize $/mt 232.7 174.0 109.3 96.1 87.3 85.2 90.9 101.6 106.7 100.2Rice, Thai, 5% $/mt 503.2 570.5 270.9 286.6 240.5 200.1 205.7 217.1 234.6 231.2Sorghum $/mt 206.4 179.0 103.9 92.4 81.7 84.2 84.2 92.4 102.4 96.3Wheat, U.S., HRW $/mt 218.7 239.9 135.5 118.8 108.5 111.0 114.8 120.1 136.5 131.0

Other foodBananas $/mt 661.7 524.0 540.9 461.2 361.9 426.5 445.0 453.1 451.5 437.5Beef, U.S. c/kg 519.6 383.3 256.3 162.6 178.4 192.2 189.8 187.3 178.7 173.4Oranges $/mt 669.5 555.8 531.1 416.8 424.2 361.6 382.6 461.8 482.1 462.4Shrimp, Mexican c/kg .. 1,600 1,069 1,488 1,414 1,489 1,449 1,413 1,323 1,225Sugar, world c/kg 32.8 87.7 27.7 18.5 13.4 17.4 17.3 16.7 17.1 18.5

Agricultural raw materialsTimberLogs, Cameroon $/cum 171.3 349.6 343.5 269.8 260.7 272.5 272.6 277.1 281.6 296.7Logs, Malaysia $/cum 171.8 271.6 177.2 153.0 181.1 190.2 189.4 194.0 209.0 223.5Sawnwood, Malaysia $/cum 697.2 550.0 533.0 456.1 581.6 594.5 593.1 605.0 639.9 693.5

Other raw materialsCotton c/kg 269.4 286.4 181.9 136.1 113.4 126.7 130.8 130.3 135.4 139.3Rubber, RSS1, Malaysia c/kg 162.2 197.9 86.5 68.0 60.8 69.9 71.7 73.3 75.2 76.5Tobacco $/mt 4,287 3,161 3,392 3,143 2,944 2,958 2,870 2,863 2,773 2,543

FertilizersDAP $/mt 215.1 308.6 171.4 191.7 172.1 153.6 157.8 161.6 166.4 158.0Phosphate rock $/mt 43.8 64.9 40.5 40.5 42.6 43.6 42.1 40.6 37.5 35.5Potasium chloride $/mt 127.5 160.7 98.1 110.1 117.8 121.4 118.6 114.5 106.7 97.9TSP $/mt 171.3 250.4 131.8 163.0 149.5 138.7 143.5 143.2 136.5 131.0Urea, E. Europe, bagged $/mt 191.2 308.5 130.7 97.1 75.3 111.0 114.8 120.1 119.5 115.6

Metals and mineralsAluminum $/mt 2,215 2,022 1,639 1,279 1,317 1,560 1,531 1,524 1,536 1,464Copper $/mt 5,640 3,031 2,661 1,558 1,522 1,808 1,889 1,893 1,877 1,849Gold $/toz 143.2 844.3 383.5 277.1 269.8 277.4 267.8 254.0 234.6 231.2Iron ore c/dmtu 39.2 39.0 32.5 29.2 26.7 28.7 28.2 27.9 27.3 25.4Lead c/kg 120.7 125.8 81.1 49.8 48.7 45.6 47.8 50.8 51.2 49.3Nickel $/mt 11,339 9,054 8,864 4,362 5,819 8,521 7,174 6,465 5,119 5,240Silver c/toz 705.2 2866.1 482.0 521.4 508.1 500.4 478.3 471.0 448.0 423.8Tin c/kg 1463.5 2329.8 608.5 522.0 523.1 540.0 526.1 517.2 503.4 470.1Zinc c/kg 117.9 105.7 151.4 96.5 104.2 113.0 111.0 108.1 102.4 96.3

— Not available.Note: Projections as of October 24, 2000.Source: World Bank, Development Economics, Development Prospects Group.

UNPUBLISHED PROOFS



Table A2.3 Weighted indexes of commodity prices and inflation

Actual Projectionsa

Index 1970 1980 1990 1998 1999 2000 2001 2002 2005 2010

Current dollarsPetroleum 5.3 161.2 100.0 57.1 79.0 122.4 109.3 91.8 78.7 83.0Non-energy commoditiesb 43.8 125.5 100.0 99.1 88.0 87.6 90.8 95.4 106.5 116.0

Agriculture 45.8 138.1 100.0 107.8 92.8 88.4 92.1 97.9 111.7 122.7Beverages 56.9 181.4 100.0 140.6 107.7 87.4 89.9 98.6 121.7 132.9Food 46.7 139.3 100.0 104.9 87.6 86.3 90.7 95.4 104.9 111.1

Fats and oils 64.4 148.7 100.0 132.8 105.0 96.0 101.8 106.4 116.8 125.7Grains 46.7 134.3 100.0 101.3 86.4 78.3 84.1 93.2 110.1 117.4Other food 32.2 134.3 100.0 84.1 74.0 82.8 85.2 87.6 92.3 95.6

Raw materials 36.4 104.6 100.0 87.3 88.5 91.8 95.7 100.5 113.0 130.3Timber 31.8 79.0 100.0 90.9 111.8 112.0 115.7 122.3 140.4 168.2Other raw materials 39.6 122.0 100.0 84.8 72.7 78.1 82.1 85.6 94.3 104.4

Fertilizers 30.4 128.9 100.0 122.1 114.1 107.1 111.9 114.3 116.7 123.3Metals and minerals 40.4 94.2 100.0 75.5 73.7 83.8 85.6 87.6 92.7 98.6

Constant 1990 dollarsc

Petroleum 21.1 223.8 100.0 53.8 76.5 121.3 104.5 84.8 67.1 64.0Non-energy commodities 174.7 174.3 100.0 93.4 85.2 86.8 86.9 88.1 90.8 89.4

Agriculture 182.4 191.8 100.0 101.6 89.8 87.6 88.1 90.4 95.3 94.6Beverages 226.6 252.0 100.0 132.4 104.2 86.6 86.0 91.1 103.9 102.4Food 186.0 193.4 100.0 98.9 84.8 85.5 86.7 88.1 89.5 85.6

Fats and oils 256.4 206.5 100.0 125.2 101.7 95.1 97.4 98.3 99.6 96.9Grains 186.1 186.5 100.0 95.4 83.6 77.5 80.4 86.1 93.9 90.5Other food 128.4 186.6 100.0 79.3 71.6 82.0 81.5 80.9 78.7 73.6

Raw materials 145.1 145.2 100.0 82.3 85.7 91.0 91.6 92.8 96.4 100.4Timber 126.6 109.7 100.0 85.7 108.2 111.0 110.7 113.0 119.8 129.6Other raw materials 157.7 169.4 100.0 79.9 70.3 77.3 78.5 79.0 80.5 80.5

Fertilizers 121.1 179.0 100.0 115.0 110.4 106.1 107.0 105.6 99.6 95.0Metals and minerals 160.8 130.8 100.0 71.1 71.3 83.0 81.9 80.9 79.1 76.0

Inflation indexes, 1990 = 10d

MUV indexe 25.10 72.00 100.00 106.14 103.31 100.93 104.54 108.27 117.20 129.77Percentage of change per year 11.11 3.34 0.75 –2.67 –2.30 3.58 3.57 2.68 2.06

U.S. GDP deflator 33.59 65.93 100.00 119.32 121.11 123.89 126.87 129.91 138.54 152.96Percentage of change per year 6.98 4.25 2.23 1.50 2.30 2.40 2.40 2.17 2.00

aCommodity price projections as of October 24, 2000.bThe World Bank primary commodity price indexes are computed based on 1987–89 export values in U.S. dollars for low- and middle-incomeeconomies, rebased to 1990. Weights for the subgroup indexes expressed as ratios to the non-energy index are as follows in percent: agriculture 69.1,fertilizers 2.7, metals and minerals 28.2, beverages 16.9, food 29.4, raw materials 22.8, fats and oils 10.1, grains 6.9, other food 12.4, timber 9.3, andother raw materials 13.6.cComputed from unrounded data and deflated by the MUV index.dInflation indexes for 2000–10 are projections as of October 20, 2000. MUV for 1999 is an estimate. Growth rates for years 1980, 1990, 1998, 2005,and 2010 refer to compound annual rate of change between adjacent endpoint years; all others are annual growth rates from the previous year.eUnit value index in U.S. dollar terms of manufactures exported from the G-5 countries (France, Germany, Japan, the United Kingdom, and the UnitedStates) weighted proportionally to the countries’ exports to the developing countries.Source: World Bank, Development Prospects Group. Historical U.S. GDP deflator: U.S. Department of Commerce.

The following key applies to Table A2.1 and A2.2.

— Not available.$/mt dollars per metric ton$/bbl dollars per barrel

$/mmbtu dollars per million Britishthermal units

c/kg cents per kilogram$/cum dollars per cubic meter$/toz dollars per troy ounce

c/dmtu cents per dry metric ton unit of iron (fe)

Notes

1. Real prices are obtained by deflating nominalprices by the unit value index in U.S. dollar terms ofmanufactures (MUV) exported from the G-5 countries(France, Germany, Japan, the United Kingdom, and theUnited States) weighted proportionally to the coun-tries’ exports to the developing countries.

2. Grains account for 55 percent of the world’sfood supplies (calories) and occupy nearly one-half ofthe world’s cultivated cropland (FAO). Grains pricesare important as an indicator of overall food prices be-cause of the close substitutability of grains with otherfood crops in production and consumption. Sugar andvegetable oils account for about 10 percent each of theworld’s total calorie supplies while animal productsand fish account for about 16 percent. The remainingroughly 10 percent of world food supplies come fromfruits, nuts, pulses, roots, tubers, and vegetables.

3. However, the growth during the 1990s was re-duced by a 40 percent decline in grain consumption inthe FSU countries and smaller declines in Eastern Eu-rope. When these countries are excluded, world grainconsumption grew by 2.0 percent per year during the1990s. Growth rates in China and India, with 46 per-cent of developing-country populations, has been 1.9and 1.5 percent, respectively, during the 1990s.

4. The five largest grain exporters are Argentina,Australia, Canada, the European Union, and the UnitedStates. Together, these entities account for about 85percent of world exports.

5. For example, the Brazilian real depreciated 68percent from 1997 to 1999, the CFA franc depreciated9 percent, and the Kenyan shilling depreciated 16 per-cent (IFS, August 2000)

6. Fuel cells convert energy stored in a fuel directlyinto electricity and heat without combustion. Using hy-drogen as fuel, they emit only water and heat as wasteproducts.



UNPUBLISHED PROOFS

UNPUBLISHED PROOFSG L O B A L C O M M O D I T Y P R I C E P R O S P E C T S


Aluminum (LME) London MetalExchange, unalloyed primary ingots,high grade, cash price.

Bananas (Central and South American),import price, free on truck (f.o.t.)U.S. Gulf.

Beef (Australian/New Zealand); frozenboneless; 85 percent chemical lean;cost, insurance, and freight (c.i.f.)U.S. East Coast.

Coal (U.S.) thermal, free on board(f.o.b.) Hampton Roads/Norfolk.

Cocoa (ICCO), International CocoaOrganization daily price.

Coconut oil (Philippines/Indonesian),bulk, c.i.f. Rotterdam.

Coffee (ICO), International CoffeeOrganization indicator price, othermild Arabicas, average New Yorkand Bremen/Hamburg markets.

Coffee (ICO), International CoffeeOrganization indicator price,Robustas, average New York and LeHavre/Marseilles markets.

Copper (LME), grade A, cathodes andwire bar.

Copra (Philippines/Indonesian), bulk,c.i.f. N.W. Europe.

Cotton (“Cotton Outlook A” index),c.i.f. Northern Europe.

Crude oil, average spot price of Brent,Dubai, and West Texas Intermediate,equally weighed.

DAP (diammonium phosphate), bulk,f.o.b. U.S. Gulf.

Gold (U.K.), London afternoon fixing.Groundnut oil (any origin), c.i.f.

Rotterdam.Iron ore (Brazilian), Companhia Vale do

Rio Doce (CVRD) Carajas fines,contract price to Europe, f.o.b. Pontada Madeira.

Lead (LME), refined, settlement price.Logs (West African), sapele, high quality

(Loyal and Marchand LM), f.o.b.Cameroon.

Logs (Malaysian), meranti, Sarawak,Tokyo import price.

Maize (U.S.), no. 2, yellow, f.o.b. U.S.Gulf ports.

Natural Gas (Europe), import borderprice.

Natural Gas (U.S.), Henry Hub,Louisiana.

Nickel (LME), cathodes.Oranges (Mediterranean exporters), EEC

indicative import price, c.i.f. Paris.Palm oil (Malaysian), bulk, c.i.f. N. W.

Europe.Phosphate rock (Moroccan), 70 percent

BPL, contract, free alongside ship(f.a.s.) Casablanca.

Potassium chloride, f.o.b. Vancouver.Rice (Thai), 5 percent broken, white rice,

milled, indicative survey price, f.o.b.Bangkok.

Rubber (Malaysian), RSS 1, f.o.b. KualaLumpur.

Sawnwood (Malaysian), dark redseraya/meranti, select and betterquality, kiln dry, cost and freight U.K.

Silver (Handy and Harman), refined,New York.

Sorghum (U.S.), no. 2 milo yellow, f.o.b.Gulf.

Soybean meal (any origin), c.i.f.Rotterdam.

Soybean oil (Dutch), crude, f.o.b. ex-mill.

Soybeans (U.S.), c.i.f. Rotterdam.Sugar (world), International Sugar

Agreement daily price, raw, f.o.b.Caribbean ports.

Tea, average of quotations at Calcutta,Colombo, and Mombasa/Nairobi.

Tin (LME), refined, settlement price.TSP (triple super-phosphate), bulk, f.o.b.

U.S. Gulf.Urea, (varying origins), bagged, f.o.b.

Eastern Europe.Wheat (U.S.), no. 1, hard red winter,

export Gulf.Zinc (LME), special high grade,

settlement price

Description of Price Series

Classificationof Economies


UNPUBLISHED PROOFS


2

Table 1 Classification of economies by income and region, July 2000

Europe and Middle EastSub-Saharan Africa Asia Central Asia and North Africa

East and EasternIncome southern West East Asia South Europe and Rest of Middle Northgroup Subgroup Africa Africa and Pacific Asia Central Asia Europe East Africa Americas

Low-income

BeninBurkina FasoCameroonCentral African Republic of

ChadCongo, Rep. ofCôte d’IvoireGambia, TheGhanaGuineaGuinea-Bissau

LiberiaMaliMauritaniaNigerNigeriaSão Tomé

and PrincipeSenegalSierra LeoneTogo

CambodiaIndonesiaKorea, Dem.

Rep. ofLao PDRMongoliaMyanmarSolomon

IslandsVietnam

AfghanistanBangladeshBhutanIndiaNepalPakistan

ArmeniaAzerbaijanGeorgiaKyrgyz

RepublicMoldovaTajikistanTurkmenistanUkraineUzbekistan

Yemen, Rep.of

HaitiNicaragua

Middle-income

Subtotal

Lower

Upper

157

NamibiaSwaziland

BotswanaMauritiusMayotteSeychellesSouth Africa

25

Cape VerdeEquatorialGuinea

Gabon

23

ChinaFijiKiribatiMarshall

IslandsMicronesia, Fed. Sts. of

Papua New Guinea

PhilippinesSamoaThailandTongaVanuatu

American Samoa

Korea, Rep. ofMalaysiaPalau

23

MaldivesSri Lanka

8

AlbaniaBelarusBosnia and Herzegovina

BulgariaKazakhstanLatviaLithuaniaMacedonia, FYRa

RomaniaRussian Federation

Yugoslavia, Fed. Rep.of b

CroatiaCzech Republic

EstoniaHungaryPolandSlovak Republic

26

Turkey

Isle of Man

2

Iran, IslamicRep. of

IraqJordanSyrian Arab Republic

West Bank and Gaza

BahrainLebanonOmanSaudi Arabia

10

AlgeriaDjiboutiEgypt, Arab Rep. of

MoroccoTunisia

LibyaMalta

7

BelizeBoliviaColombiaCosta RicaCubaDominican Republic

EcuadorEl SalvadorGuatemalaGuyanaHondurasJamaicaParaguayPeruSt. Vincentand the Grenadines

Suriname

Antigua andBarbuda

ArgentinaBarbadosBrazilChileDominicaGrenadaMexicoPanamaPuerto RicoSt. Kitts and

NevisSt. LuciaTrinidad and

TobagoUruguayVenezuela, Rep. Bol. de

33

AngolaBurundiComorosCongo, Dem.Rep. of

EritreaEthiopiaKenyaLesothoMadagascarMalawiMozambiqueRwandaSomaliaSudanTanzaniaUgandaZambiaZimbabwe


UNPUBLISHED PROOFS


3

Definitions of groupsFor operational and analytical purposes, the World Bank’smain criterion for classifying economies is gross nationalproduct (GNP) per capita. Every economy is classified as low-income, middle-income (subdivided into lower-middle andupper-middle), or high-income. Other analytical groups,based on geographic regions and levels of external debt, arealso used.

Low-income and middle-income economies are sometimesreferred to as developing economies. The use of the term isconvenient; it is not intended to imply that all economies in

the group are experiencing similar development or that othereconomies have reached a preferred or final stage of develop-ment. Classification by income does not necessarily reflect de-velopment status.

This table classifies all World Bank member economies,and all other economies with populations of more than30,000. Economies are divided among income groups accord-ing to 1999 GNP per capita, calculated using the World BankAtlas method. The groups are: low-income, $755 or less;lower-middle-income, $756–$2,995; upper-middle-income,$2,996–$9,265; and high-income, $9,266 or more.

Table 1 Classification of economies by income and region, July 2000 (continued)

Europe and Middle EastSub-Saharan Africa Asia Central Asia and North Africa

East and EasternIncome southern West East Asia South Europe and Rest of Middle Northgroup Subgroup Africa Africa and Pacific Asia Central Asia Europe East Africa Americas

High-income

AustraliaJapanNew Zealand

CanadaUnited States

OECD

Total

Non-OECD

25 23

BruneiFrench

PolynesiaGuamHong Kong,

Chinad

Macao,Chinae

NewCaledonia

N. MarianaIslands

SingaporeTaiwan,

China

35 8

Slovenia

27

AndorraChannel

IslandsCyprusFaeroe

IslandsGreenlandLiechtensteinMonaco

27

IsraelKuwaitQatarUnited Arab

Emirates

14 7

ArubaBahamas,

TheBermudaCayman

IslandsNetherlands

AntillesVirgin Islands(U.S.)

41

AustriaBelgiumDenmarkFinlandFrancec

GermanyGreeceIcelandIrelandItalyLuxembourgNetherlandsNorwayPortugalSpainSwedenSwitzerlandUnited Kingdom

a. Former Yugoslav Republic of Macedonia.b. Federal Republic of Yugoslavia (Serbia/Montenegro).c. The French overseas departments French Guiana, Guadeloupe, Martinique, and Réunion are included in France.d. On 1 July, 1997, China resumed its exercise of sovereignty over Hong Kong.e. On 20 December, 1999, China resumed its exercise of sovereignty over Macao.Source: World Bank data.


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4

Liberia

Marshall IslandsMicronesia, Fed. Sts. ofWest Bank and Gaza

American SamoaIsle of ManMayottePalauPuerto Rico

Low-income

Middle-income

Lower

Upper

Afghanistan MaliAngola MauritaniaBurkina Faso MozambiqueBurundi MyanmarCameroon NicaraguaCentral NigerAfrican NigeriaRepublic Rwanda

Comoros São Tomé Congo, Dem. and PrincipeRep. of Sierra Leone

Congo, Rep. SomaliaCôte Sudand’Ivoire Tanzania

Ethiopia UgandaGuinea VietnamGuinea- ZambiaBissau

IndonesiaLao PDRMadagascarMalawi

BoliviaBosnia and Herzegovina

BulgariaCubaEcuadorGuyanaIraqJordanPeruSyrian Arab Republic

ArgentinaBrazilGabon

BangladeshBeninCambodiaChadGambia, TheGeorgiaGhanaHaitiIndiaKenyaKyrgyz RepublicMoldovaMongoliaPakistanSenegalTogoTurkmenistanYemen, Rep. ofZimbabwe

AlgeriaBelizeColombiaEquatorial Guinea

HondurasJamaicaMacedonia, FYRa

MoroccoPapua New Guinea

PhilippinesRussian Federation

SamoaSt. Vincent and the Grenadines

ThailandTunisiaTurkey

ChileHungaryLebanonMalaysiaMauritiusPanamaUruguayVenezuela, Rep. Bol. de

ArmeniaAzerbaijanBhutanEritreaKorea, Dem. Rep. ofLesothoNepalSolomon IslandsTajikistanUkraineUzbekistan

Albania NamibiaBelarus ParaguayCape Verde RomaniaChina Sri LankaCosta Rica SurinameDjibouti SwazilandDominican TongaRepublic Vanuatu

Egypt, Arab Yugoslavia,Rep. Fed. Rep. ofb

El SalvadorFijiGuatemalaIran, Islamic Rep. of

KazakhstanKiribatiLatviaLithuaniaMaldives

Antigua and OmanBarbuda Poland

Bahrain Saudi ArabiaBarbados SeychellesBotswana Slovak Croatia RepublicCzech South AfricaRepublic St. Kitts and

Dominica NevisEstonia St. LuciaGrenada Trinidad and Korea, Rep. TobagoLibyaMalta

Table 2 Classification of economies by income and indebtedness, July 2000

Income Sub- Not classifiedgroup group Severely indebted Moderately indebted Less indebted by indebtedness


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5

Australia JapanAustria LuxembourgBelgium NetherlandsCanada New ZealandDenmark NorwayFinland PortugalFrancec SpainGermany SwedenGreece SwitzerlandIceland UnitedIreland KingdomItaly United States

Andorra KuwaitAruba LiechtensteinBahamas, Macao, The Chinad

Bermuda MonacoBrunei NetherlandsCayman AntillesIslands New Caledonia

Channel N. MarianaIslands Islands

Cyprus QatarFaeroe SingaporeIslands Slovenia

French Taiwan, ChinaPolynesia United Arab

Greenland EmiratesGuam Virgin Hong Kong, Islands (U.S.)Chinae

Israel

59

Definitions of groupsThis table classifies all World Bank member economies, andall other economies with populations of more than 30,000.Economies are divided among income groups according to1999 GNP per capita, calculated using the World Bank Atlasmethod. The groups are: low-income, $755 or less; lower-middle-income, $756–$2,995; upper-middle-income,$2,996–$9,265; and high-income, $9,266 or more.

Standard World Bank definitions of severe and moderateindebtedness are used to classify economies in this table. Se-verely indebted means either: present value of debt service toGNP exceeds 80 percent or present value of debt service toexports exceeds 220 percent. Moderately indebted means ei-

ther of the two key ratios exceeds 60 percent of, but does notreach, the critical levels. For economies that do not report de-tailed debt statistics to the World Bank Debtor Reporting Sys-tem (DRS), present-value calculation is not possible. Instead,the following methodology is used to classify the non-DRSeconomies. Severely indebted means three of four key ratios(averaged over 1996–98) are above critical levels: debt toGNP (50 percent); debt to exports (275 percent); debt serviceto exports (30 percent); and interest to exports (20 percent).Moderately indebted means three of the four key ratios ex-ceed 60 percent of, but do not reach, the critical levels. Allother classified low- and middle-income economies are listedas less indebted.

High-income

Total

OECD

Non-OECD

207 46 43 59

Table 2 Classification of economies by income and indebtedness, July 2000 (continued)

Income Sub- Not classifiedgroup group Severely indebted Moderately indebted Less indebted by indebtedness

a. Former Yugoslav Republic of Macedonia.b. Federal Republic of Yugoslavia (Serbia/Montenegro).c. The French overseas departments French Guiana, Guadeloupe, Martinique, and Réunion are included in France.d. On 20 December ,1999, China resumed its exercise of sovereignty over Macao.e. On 1 July, 1997, China resumed its exercise of sovereignty over Hong Kong.Source: World Bank data.


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