prospects for developing countries and world trade · 2016. 7. 30. · world trade volumes are...

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

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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

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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

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Jan. 1999 Apr. 1999 July 1999 Oct. 1999

Autos

Durable goods sales

Total retail sales

Jan. 2000 Apr. 2000 July 2000 Oct. 2000

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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

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0

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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).



UNPUBLISHED PROOFS

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-



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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.



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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-



UNPUBLISHED PROOFS

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-



UNPUBLISHED PROOFS

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-



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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-



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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



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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-



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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



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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



UNPUBLISHED PROOFS

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-



UNPUBLISHED PROOFS

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.

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

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UNPUBLISHED PROOFS

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

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

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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.

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