彎彎腎攣灣 三co旦。旦直c·一 B叩啊：:：麗 、旦d:hoD以·doPi旦9 Ceu既負d f· 呼州 UL& 〔夜t吋丰么 ：亂＿，芻鹹｀～訕 中鬥吟 �� О О � и \ V � U � � � • � U � � С.) � � о .� r� � о о �� oQ � О � �' v � � Copyright (D 2001 by the International Bank for Reconstruction and Development/The World Bank 1818 H Street NW, Washington, DC 20433, USA All rights reserved Manufactured in the United States of America First printing December 2000 This publication has been compiled by the staff of the Development Prospects Group of the World Bank's Development Economics Vice Presidency. The World Bank does not accept responsibility for the accuracy or completeness of this publication. Any judgments expressed are those of World Bank staff or consultants and do not necessarily reflect the views of the Board of Executive Directors or the governments they represent. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. 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ISBN 0-8213-4675-X ISSN 1014-8906 Library of Congress catalog card number: 91-6-440001 (serial) Contents Acknowledgments vii Summary ix Abbreviations, Acronyms, and Data Notes xiii Chapter 1 Prospects for Developing Countries and World Trade 1 Long-term growth in industrial countries is projected to be higher 4 World trade remains on a long-term high-growth path 11 Private capital flows remain volatile 18 Commodity prices exhibit divergent recoveries 21 Developing countries' recovery is unexpectedly rapid, and prospects for long-term growth have improved 25 Vulnerabilities are significant 32 Recent trends and prospects for poverty reduction 34 Notes 44 References 45 Annex 1 Membership of selected major regional integration agreements (RIAs) and dates of formation 47 Chapter 2 Trade Policies in the 1990s and the Poorest Countries 49 Reductions in barriers to trade 51 Trends in trade and economic growth 53 Weaknesses in domestic trade-related policies 59 Protection in industrial countries 65 Notes 71 References 73 Annex 2 Sample countries in various charts and tables 76 Chapter 3 Standards, Developing Countries, and the Global Trade System 81 The regulation of standards: setting the stage 82 Product standards and regulatory barriers to trade 83 Labor standards and trade sanctions 88 Environmental standards and trade 93 Notes 101 References 103 iii GLOBAL ECONOMIC PROSPECTS Chapter 4 Electronic Commerce and Developing Countries 111 Emergence of electronic commerce 112 The digital divide 113 Effects on productivity in industrial and developing countries 116 Effects on international trade in developing countries 120 Effects on income distribution 122 Impediments to Internet use in developing countries and the role of policies 122 Challenges to regulatory regimes in developing countries 128 Notes 130 References 131 Annex 4 Firm interviews and website survey 134 Companies Participating in Survey of Alibaba B2B Website Users 135 Appendix 1 Regional Economic Prospects 137 Appendix 2 Global Commodity Price Prospects 159 Appendix 3 Global Economic Indicators 175 Technical Notes 190 Classification of Economies 191 Figures 1.1 Industrial production in developing regions 2 1.2 GDP growth for major industrial countries, 1998-2002 5 1.3 U.S. retail sales and the NASDAQ index 7 1.4 Total retail sales of durable goods and autos 8 1.5 IT (information technology) investment growth per employed person and productivity growth, 1980-99 9 1.6 Japanese corporate profits and private capital spending 9 1.7 German exports, foreign orders, and manufacturing output 11 1.8 Growth of GDP per employed person: United States and European Union 12 1.9 Trade versus GDP growth 12 1.10 East Asia-5 industrial production and import volume 13 1.11 Export volume and market growth, 1997-2000 14 1.12 GDP and export volume growth 15 1.13 Number of WTO notifications of regional integration agreements (RIAs) 16 1.14 Intra-RIA exports as a share of RIAs' total exports 17 1.15 Net capital flows to developing countries, 1985-2000 18 1.16 Sectoral breakout of bond financing by developing countries, January 1997-June 2000 19 1.17 FDI flows to developing countries, 1990s 20 1.18 Crude oil prices, January 1990-October 2000 21 1.19 Crude oil prices, 1960-2010 22 1.20 Divergent recoveries of commodity prices 23 1.21 Real commodity prices, 1900-2000 25 1.22 Developing regions' real GDP growth, 1999-2002 26 1.23 GDP per capita growth, 1990-2010 27 iv CONTENTS 1.24 Growth of real per capita GDP, developing countries as a group, 1963-2008 33 1.25 Growth of real per capita GDP, Latin America and the Caribbean, Sub-Saharan Africa, Middle East and North Africa, 1965-2000 34 1.26 Nonperforming loans of commercial banks in the East Asia-5 35 2.1 Average unweighted tariff rates by region 53 2.2 Merchandise export growth and GDP per capita growth in developing countries in the 1990s 55 2.3 Merchandise export and GDP per capita growth in poor developing countries in the 1990s 58 2.4 Real effective exchange rate volatility and growth in the 1990s 62 2.5 Real effective exchange rate behavior in selected poor countries, 1993-99 63 2.6 Imports of manufactures from developing countries as a percentage of apparent consumption 69 2.7 Share of developing countries in world trade 70 3.1 WTO enquiry point notification, by country group, 1995 and 1999 89 3.2 Number of notifications under the TBT agreement, 1995-2000 90 3.3 Number of notifications under the SPS agreement, 1995-2000 90 4.1 Estimates of electronic commerce in industrial countries, 1999-2000 113 4.2 Estimates of Internet access, 1990-2000 114 4.3 Regional Internet access 114 4.4 Access to telecommunications 115 4.5 Cost savings from electronic commerce 120 4.6 New customers gained from alibaba website 121 4.7 Increased sales reported because of alibaba website 122 4.8 Internet monthly access charge as a percentage of GDP per capita, 1998 123 4.9 Telephone mainlines per 100 inhabitants, developing countries, 1998 124 4.10 Developing country privatization in telecommunications, 1990-98 125 4.11 Information technology jobs unfilled because of skill shortages, 1998 126 4.12 Internet use in industrial countries by knowledge of English, 1998-99 127 4.13 Bond versus bank financing 129 Tables 1.1 Global conditions affecting growth in developing countries and world GDP growth 3 1.2 Intra- and extraregional trade 17 1.3 Current account effects for a sample of developing countries from a $10 increase in oil prices 23 1.4 Annual percentage change in nominal oil and non-oil commodity prices, 1981-2010 25 1.5 Growth of world GDP, 1998-2002 27 1.6 Growth of world GDP per capita, 1980s through 2010 28 1.7 Forecast assumptions: developing countries 29 1.8 Population living on less than $1 per day and head count index in developing countries, 1987, 1990, and 1998 36 1.9 Population living on less than $2 per day and head count index in developing countries, 1987, 1990, and 1998 37 1.10 Population estimates and projections, developing countries, 1998-2015 41 v GLOBAL ECONOMIC PROSPECTS 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 42 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 42 1.13 Regional breakdown of number of people living on less than $2 per day and head count index in developing countries, under scenarios of base case growth (scenario A) and low case growth (scenario B), 1990, 1998, and 2015 43 2.1 Standard deviation of tariff rates 53 2.2 Frequency of total core nontariff measures for developing countries, 1989-98 53 2.3 Countries imposing restrictions on payments for current account transactions 54 2.4 Average black market premium 54 2.5 The international environment 55 2.6 GDP and merchandise export growth rates 55 2.7 GDP, services, and merchandise export growth rates 57 2.8 Decomposition of merchandise export growth for the sample countries 57 2.9 Growth rates by income level for the sample countries 59 2.10 Tariffs in selected African countries 64 2.11 Developing-country exports to Quad countries facing tariffs of more than 50 percent 67 2.12 Average tariff rates by importing and exporting region 67 2.13 Producer support estimates for OECD countries 68 3.1 Summary of economywide studies assessing the impacts of trade liberalization on pollution 97 3.2 Evidence on international competitiveness and environmental regulation 98 4.1 Future Internet access speeds 115 Boxes 1.1 U.S. labor productivity and information technology 6 1.2 North-South regional arrangements 16 1.3 Trends in inequality 38 2.1 Openness and growth--evidence, old and new 52 2.2 Trends in volatility 56 2.3 Economic factors contributing to conflict 58 2.4 Exchange rate overvaluation in the CFA countries 61 2.5 The integrated framework for least-developed countries 66 2.6 Food processing 70 3.1 Mutual recognition agreements 88 3.2 The Trade-Related Intellectual Property Agreement (TRIPs) and developing countries 94 3.3 Evidence on the "race to the bottom" 99 4.1 Electronic data interchange (EDI) systems 117 4.2 The Internet and primary commodity exporters 119 Acknowledgments . his report was prepared by the Development Prospects Group, and drew from resources throughout the Development Economics Vice Presidency, the Poverty Reduction Board, and World Bank operational regions. The principal author of the report was William Shaw, with direction by Uri Dadush. The chapter authors were Hans Timmer (chapter 1), Ataman Aksoy (chapter 2), Dominique van der Mensbrugghe (chapter 3), and William Shaw (chapter 4). The report was prepared under the general direction of Jo Ritzen and Nicholas Stern. The report drew on inputs by other staff of the Development Economics Vice Presidency and from throughout the Bank. Ibrahim Al-Ghelaiqah, Caroline Farah, Himmat Kalsi, Robert Key- fitz, Annette I. De Kleine, Robert Lynn, Fernando Martel Garcia, Dominique van der Mens- brugghe, Shoko Negishi, and Mick Riordan contributed to the analysis of global economic trends and prospects in chapter 1. Tamar Manuelyan Atinc, Shaohua Chen, Valerie Kozel, Giovanna Prennushi, Martin Ravallion, and Aristomene Varoudakis contributed to the discussion of pov- erty. Betty Dow, Faezeh Fouraton, Carol Gabyzon, Theresa Goldberg, Dorsati Madani, Donald Mitchell, Ashish Narain, Francis Ng, and Konstantin Senyut contributed to chapter 2. Constan- tine Michalopoulos and John S. Wilson contributed to chapter 3. Carol Gabyzon, Somik Lall, Ashish Narain, Andrew Sunil Rajkumar, and David Wheeler contributed to chapter 4. And John Baffes, Betty Dow, Donald Mitchell, and Shane Streifel contributed to the analysis of commodity prices in chapter 1 and the annex. Many others from inside and outside the Bank provided inputs, comments, guidance, and support at various stages of the report's publication. John Beghin, David Rohland-Holst, and Matthew Slaughter wrote background papers on trade issues. Henry Ergas and lain Little wrote a background paper on electronic commerce. Gary Hufbauer, Arvind Panagariya, Francisco Rodriguez, and Alan Winters served as outside reviewers. Carlos Braga, Shanta Devarajan, Richard Newfarmer, and Gene Tidrik were discussants at the Bankwide review. We would par- ticularly like to thank Gordon Betcherman, Milan Brahmbhatt, Sara Calvo, Richard Eglin, David Ellerman, Michael Finger, Carsten Fink, Andrea Goldstein, Bernard Hoekman, Albert Keidel, loannis Kessides, Michael Klein, Amy Luinstra, Will Martin, Aaditya Mattoo, Marcelo Olarreaga, Gary Pursell, David Tarr, and Edith Wilson for their helpful comments. The Development Data Group contributed to the appendix. Betty Sun served as the External Affairs task manager, Robert King managed dissemination from the Development Prospects Group, and Phil Hay managed media arrangements. Sarah Crowe served as the principal assistant to the team and Katherine Rollins assisted with chapter 1. Book design, editing, and production were directed and managed by the Production Services Unit of the World Bank's Office of the Publisher. vii Summary TECHNOLOGICAL INNOVATIONS AND THE growth. The same applies in developing coun- dismantling of trade barriers over the tries, where liberalization of markets, more past decade have contributed to an stable macroeconomic policies, and techno- acceleration of growth in global trade. This logical change have promoted integration. In- acceleration has been associated with faster dicators of human capital, including school growth in developing countries as a group. enrollment and literacy rates, show broad im- However, many of the poorest countries have provement across most developing regions. not kept pace. This year's Global Economic However, cyclical and structural aspects Prospects focuses on international trade and of the current boom have increased imbal- discusses policies that are required if devel- ances and tensions in the global economy. Eas- oping countries are to benefit from global ier monetary policy in the United States and integration. increased fiscal stimulus in Japan boosted growth from the depths of the financial crisis, but these policies also increased the already Prospects for developing countries large U.S. current account deficit (4.5 percent and world trade of GDP) and Japanese government debt (115 T he global economy is likely approaching a percent of GDP). The strong global recovery cyclical high in 2000, boosted by a further of 1999-2000, coupled with the sharp reduc- acceleration of growth in the United States, the tion in OPEC (Organization of Petroleum Ex- recovery in Europe and Japan, and the sharp porting Countries) supply, caused a surge in rebound in countries affected by the global fi- oil prices. Structural reforms and rapid tech- nancial crisis. World trade volumes are likely nological change have also generated political to increase by 12.5 percent, the highest rate of tensions. The fast pace of global economic growth since before the first oil shock of the integration has accentuated competition and 1970s. A moderation of growth in the crisis increased uncertainty, particularly for firms countries and slower consumption growth in in declining industries and their workers. In- the United States are likely to lead to a decel- equality both among and within countries ap- eration of output growth over the next year. pears to have risen, in part the result of tech- The apparent shift upward in trend pro- nological progress. ductivity growth in the United States, increased A low-case scenario assumes a less favor- labor market flexibility and product market able resolution of these imbalances and ten- competition in Europe, and steps toward fi- sions, marked by continued high oil prices and nancial and corporate restructuring in Japan a reversal of international investment flows have improved the prospects for long-term from the United States. The resulting reces- ix GLOBAL ECONOMIC PROSPECTS sion, coming on the heels of the global finan- ularly affected the poorest countries, because cial crisis, may feed "reform fatigue" and thus a host of other domestic policy and institu- lower developing countries' long-term growth tional weaknesses inhibit their diversification potential. into less restricted sectors. Trade policies in the 1990s Standards, developing countries, and the poorest countries and the global trade system O ver the past decade, developing countries roduct standards (rules governing the char- reduced the level and dispersion of tariffs, 1 acteristics of goods that are generally im- dismantled nontariff trade barriers, and in- posed to protect health and safety) are critical creased reliance on market forces to allocate to the effective functioning of markets and foreign exchange. These policies, coupled with provide important support to the trade system. other market reforms, were associated with an However, many developing countries (particu- acceleration of output and export growth, ex- larly the poorest ones) lack the technological cept for countries that were affected by conflict and financial resources to develop product or the breakup of the Soviet Union. The per standards effectively, meet industrial countries' capita income of small, low-income countries import requirements, and bring disputes when (thus excluding China and India) declined standards are used to discriminate against their during the 1990s, but growth averaged 1 per- exports. cent a year if countries involved in conflict Adherence to labor and environmental stan- and countries in transition are excluded. This dards (for example, the right to form unions and represents a significant acceleration compared limits on pollution) is critical to economic ef- with the 1980s but is still well below the aver- ficiency and welfare. However, pressures to use age of middle-income countries, trade sanctions to support labor and environ- Weaknesses in trade-related policies con- mental standards threaten to restrict develop- tinued to impede growth in many of the poor- ing countries' access to international markets est countries. Appreciated real exchange rates while doing little to improve welfare. Labor and high real exchange rate volatility have and environmental standards generally improve often been associated with a muted export re- as countries develop, but low labor and envi- sponse to trade liberalization; per capita in- ronmental standards are not usually a signifi- come growth was significantly faster in poor cant source of competitive advantage. The im- countries with relatively stable real exchange position of trade sanctions is vulnerable to rates. The absence of effective duty exemp- capture by protectionist interests and hurts tion/drawback programs, coupled with fiscal workers by reducing demand for the goods reliance on tariffs on intermediate and capital they produce. Even if the threat of sanctions goods, has increased costs for exporters. Fi- improves conditions for some workers, aver- nally, weak export infrastructure, inadequate age working conditions in the economy are ancillary export services, and high transport unlikely to improve. Similarly, empirical stud- costs-often in part the result of policy short- ies show that imposing trade sanctions on ex- comings-have left many countries (particu- porters can cause considerable output losses larly the landlocked ones) at a competitive dis- while doing little to reduce pollution. advantage on international markets. High trade barriers imposed by industrial countries on agriculture and processed food Electronic commerce and imports, along with agricultural subsidies, developing countries have contributed to the decline in developing mhe Internet will boost efficiency and en- countries' share of world trade in these com- 1 hance market integration, particularly in modities. These trade distortions have partic- developing countries that are most disadvan- SUMMARY taged by poor access to information. The Inter- that lack the reputation to bid on the new on- net will raise productivity through increased line exchanges or the technology to interact ef- procurement system efficiency, strengthened ficiently with more sophisticated firms could inventory control, lowered retail transaction see reduced demand. While the growing use of costs, and elimination or transformation of in- cell phones and other technologies should in- termediaries. The cost of reaching industrial crease Internet access rapidly over the next 10 country markets will fall, generating large gains years, access is likely to remain limited in per from trade. Developing-country firms that sell capita terms, especially in the poorest countries. labor-intensive, differentiated products (for ex- Taking advantage of electronic commerce ample, crafts, software, and business services- requires an open economy to promote compe- particularly services involving the remote pro- tition and diffusion of Internet technologies; cessing of routine information) will experience improved international coordination (for ex- increased demand. Developing-country firms ample, in confronting challenges to domestic also will benefit from the opportunity to leap- tax and financial systems); and efficient so- frog to the most advanced technologies. cial and infrastructure services, in particular a Nevertheless, Internet access is grossly un- competitive telecommunications sector and a equal across countries, and the Internet also well-educated labor force. The importance of brings increased danger of economic marginal- network effects and first-mover advantages ization to countries that cannot access it effec- emphasizes the importance of government sup- tively. For example, developing-country firms port for achieving these goals. xi Abbreviations, Acronyms, and Data Notes APEC Asia Pacific Economic Cooperation CAP Common Agricultural Policy CEE Central and Eastern Europe (Central and Eastern European countries are CEECs) CFA Communaut6 Financi6re Africaine CIS Commonwealth of Independent States EBRD European Bank for Reconstruction and Development ECA Europe and Central Asia EMU European Monetary Union EU European Union FAO Food and Agriculture Organization of the United Nations FDI Foreign direct investment GATT General Agreement on Tariffs and Trade GDP Gross domestic product GSP Generalized System of Preferences HIPC Heavily indebted poor countries HIV/AIDS Human immunodeficiency virus/acquired immune deficiency syndrome ILO International Labour Organisation IT Information technology LAC Latin America and the Caribbean LIBOR London interbank offered rate LDC Least-developed countries M&A Mergers and acquisitions MNA Middle East and North Africa Mercosur Latin America Southern Cone trade bloc (Argentina, Brazil, Paraguay, and Uruguay) MFN Most favored nation xiii GLOBAL ECONOMIC PROSPECTS MFP Multifactor productivity MRA Mutual recognition agreement MUV Manufactures unit value index NAFTA North American Free Trade Agreement NASDAQ National Association of Securities Dealers Automated Quotation NIE Newly industrializing economy NTBs Nontariff barriers OECD Organisation for Economic Co-operation and Development OPEC Organization of Petroleum Exporting Countries PSE Producer support estimate RIA Regional integration agreement saar Seasonally adjusted annualized rate TBT Technical barriers to trade TRIPs Trade-related intellectual property rights SPS Sanitary and Phytosanitary Standards UNAIDS Joint United Nations Programme on HIV/AIDS WTO World Trade Organization Data notes The "classification of economies" tables at The following norms are used throughout: the end of this volume classify economies by income, region, export category, and indebt- * Billion is 1,000 million. edness. Unless otherwise indicated, the term * All dollar figures are U.S. dollars. "developing countries" as used in this vol- * In general, data for periods through 1998 ume covers all low- and middle-income are actual, data for 1999 are estimated, countries, including the transition economies. and data for 2000 onward are projected. xiv Prospects for Developing Countries and World Trade W ORLD ECONOMIC ACTIVITY DURING on high oil revenues and more fragile than in 2000 is proceeding at the fastest pace East Asia. With oil prices expected to ease in in over a decade, with developing- the medium term and the effect of the 1998 country output growth expected to exceed 5 ruble devaluation wearing off, the Russian percent. World trade volumes are expected to Federation's current GDP growth of about 7.2 rise by a record 12.5 percent in the year. Al- percent is expected to slow significantly over though oil prices have surged by more than the medium term. Sub-Saharan Africa has ex- 50 percent, inflation in both industrial and de- perienced a less uniform recovery, with oil veloping countries continues, thus far, to be rel- exporters gaining and commodity-dependent atively subdued. But developments in oil mar- oil-importing nations suffering large terms- kets remain a major uncertainty in the outlook, of-trade losses. These synchronous recoveries as do the sustainability of the remarkable non- have carried developing-country growth to a inflationary U.S. expansion and the general peak of 5.3 percent in 2000-0.7 percent- fragility of financial systems in East Asia. This age points faster than projected nine months chapter reviews the cyclical and structural fac- ago in the World Bank's Global Development tors responsible for the robust economic ex- Finance 2000-with a slight slowing to 5.0 pansion and discusses the major challenges and percent expected next year (table 1.1). Growth risks ahead, in both the short and the medium in the industrial countries may also be near- terms. The main conclusions are: ing a turning point; it is expected to slow from this year's rapid 3.7 percent pace to 2.9 The world economy recovered remarkably percent in 2001. Moderation of consumer well and is likely approaching a cyclical demand in the United States, following in- high in 2000 terest rate increases and stock market de- Many of the developing countries that experi- clines, is the principal factor behind this mod- enced a sharp rebound after the 1997-98 re- est deceleration. cession appear to have reached cyclical peaks, The current double-digit growth of world with the five East Asian countries hit hardest trade, the strongest since before the first oil by the financial crisis the clearest example of shock of the early 1970s, is clearly a cyclical this development (figure 1.1). The strength of phenomenon tied to robust world activity lev- the recovery in Latin America has been im- els. During the upswing, as inventories were re- pressive, but momentum appeared to be wan- plenished and investments accelerated, trade ing in the second half of the year. And the re- expanded much faster than the economy as a bound in the Russian Federation has also been whole. Once stocks of durable goods and capi- unexpectedly strong, though largely dependent tal goods have adjusted, growth rates of trade 1 GLOBAL ECONOMIC PROSPECTS Figure 1.1 Industrial production in developing regions Three-month moving average, percent year over year 18 East Asia All developing regions 12 "I ~'CEE 66E 5,L C AC -6 Jan. 1997 July 1997 Jan. 1998 July 1998 Jan. 1999 July 1999 Jan. 2000 July 2000 Note: I atest data for East Asia are from July, for CFE (Central and Eastern Europe) are from june, for developing regions are front June, and for LAC (ILatia Anierica and the Caribbeani are from July. Source: Darastream and World Bank staff estimates. should moderate to around 8 percent, which is improved business confidence. And Japan ap- still a high level by historical standards. pears to be emerging from a long period of sluggish growth. This follows the initiation of Foundations for longer-term growth have serious efforts toward financial and corporate improved in many industrial and restructuring, although a lack of self-sustaining developing regions . . . effective demand, especially from private con- Industrial countries have been undergoing a sumers, is still a danger. period of accelerated transformation, restruc- Liberalization, accompanying policy mea- turing, and adjustment that is now starting to sures, and technological change in many devel- pay off. The United States appears to have cre- oping countries have led to a spectacular in- ated an institutional and policy environment crease in openness during the 1990s. Foreign that supports the adoption of new informa- direct investment (FDI) flows into developing tion and communications technologies at a countries rose from 0.5 percent of developing rapid pace, contributing to a substantial accel- countries' GDP in 1990 to 2.7 percent at the eration in productivity growth. Most Euro- end of the decade. Despite the financial crisis, pean countries have made some progress in exports of goods and services from developing rendering labor markets more flexible and ex- countries increased by 10 percent a year during posing product and service markets to greater the 1990s, contrasted with less than 4 percent competition; these processes have been facili- during the 1980s. Competition from both do- tated by regional integration, including, most mestic and foreign sources has increased in this recently, the introduction of a single currency. more open environment, and macroeconomic The recent decline in Euro Area unemploy- policies have become more prudent, keeping ment rates, and the more than doubled value inflation low and reducing some of the larger of merger and acquisitions (M&A) activities fiscal deficits. And indicators of human capital, and corporate bond issues in 1999, offers some including school enrollment and illiteracy indication of accelerated restructuring and rates, have shown broad improvement across PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE 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) Curren Cu"rP %1l.rch !00 E rurln Frcc.i; Fore,ain 2.s 2I 2iip1 ZU00 2D01 2002 GlobAl Condition, XX..rldtdi& ,vum5 12 ' a 3 e ,5 Infl3fion so.:n umer prit-l: 1.2. 1'.9 s * 2.0 C ,:mmodi o pr , I flminm l 31 H rld GL)P " r.ush 2 4 I 3 2 35 3.1 31 HCgh-incmA H) unr. 3 2 3.2 2. .'u6 ur .C r..-J, c. 2, .1 1 1.0 3 . 3 ,-.2 -h i.2 2h 34 i7 I %--,I rf-' flr r th2- 3.2 1.I . 42~ ~~ ,. 2.1 .645 I I r IB-. k. . r . j . c 1.1 .. -i 1 4 3.6 3.5 4.4 ..22 *' I 4 1 3 3.5 3 b 3.6 Sd,~ L) AI.0 212.45 3 0. 3r 1 1 1..arr.' .. 1.4 1.6 b..:I,,j,sc1 4h 4ii.. 2.-.r1 3.A 3 1 2'' Sl .t Decikpn -iu44i 4' 354 41.1 4.2 ..Not available. a. Canada, France, Germany, Italy, Japan, the United Kingdom, and the United Stares. b. In local currency, aggregated using 1995 GDP weighrs. 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. most developing regions. With these structural . . . but these favorable cyclical and changes, many countries in Latin America, structural conditions contain built-in Central Europe, and Sub-Saharan Africa ap- tensions pear to have considerably improved their Developments during the global financial crisis growth potential. Assuming continued corpo- sowed the seeds for some severe imbalances rate and financial restructuring to deal with that have remained or become evident during the debt overhang left by the crisis, countries in the current boom. The adoption of an easier East Asia should achieve high rates of growth monetary policy in the United States to avert over the next decade. a global recession in late 1998 contributed to 3 GLOBAL ECONOMIC PROSPECTS an acceleration of U.S. demand growth and a Asia and Latin America more severely. The widening of the current account deficit, which sharp growth slowdown that would result, is likely to breach 4.5 percent of GDP in coming on the heels of the global financial 2000. Fiscal stimulus in Japan, while helping crisis, may feed "reform fatigue" in developing to sustain demand during the worst part of the countries, resulting in low growth. The low- crisis, has further increased the huge burden case scenario below illustrates the importance of government debt to some 115 percent of of reducing short-run imbalances to safeguard GDP. Nonperforming loans in the Asian crisis the long-term prospects for growth. countries reached 30 to 50 percent of GDP This chapter is organized as follows. First and have been declining only gradually. The the cyclical environment and the long-term financial vulnerabilities translated into an av- growth potential in the industrial countries are erage decline of more than 30 percent in the discussed, and a review of recent develop- equity markets in these countries between Jan- ments and prospects for world trade and fi- uary and November. The strong global recov- nancial flows to developing countries follows. ery of 1999-2000, coupled with the sharp re- The section on commodity prices focuses on duction in OPEC supply (following the plunge the sharp hike in oil prices, one of the major in oil prices to $10 per barrel in 1998), caused threats to the current outlook. And the fol- a surge in oil prices. lowing two sections summarize the conse- Structural reforms and rapid technological quences of these trends for developing regions change have also generated political tensions. in the short and longer terms, including elabo- The fast pace of global economic integration ration of a low-case scenario. Finally, the con- has accentuated competition and increased un- sequences for poverty alleviation are explored. certainty, particularly for firms in declining industries and their workers. Inequality, both among and within countries, and in part tied Long-term growth in industrial to technological change, appears to have in- countries is projected to be higher creased. A backlash against globalization could rowth in the high-income Organisation result in a slower pace of reforms, especially if V for Economic Co-operation and Devel- the current expansionary phase is broken. opment (OECD) countries may average 3.7 percent in 2000 (the fastest growth recorded These tensions could reduce growth in in over a decade), driven by a sharp accelera- both the short and longer terms tion of exports, strong carryover effects of The baseline scenario assumes a soft landing the U.S. consumer boom of late 1999 to mid- for the U.S. economy, smooth private sector 2000, broadening and strengthening of eco- adjustment, and prudent policy reactions to nomic activity across the Euro Area, and a the current oil price shock. However, a less pickup in Japanese private and public invest- favorable resolution of the tensions now af- ment spending. Growth rates in the three fecting the global economy is possible. Supply major blocs are expected to move toward con- interruptions or unexpectedly high demand vergence, yielding OECD growth of 2.9 per- could lead to a sharper and more protracted cent in 2001 and 2.7 percent in 2002 (figure spike in oil prices, while uncertainty about fu- 1.2). But this outlook is subject to important ture oil prices could severely affect business risks, including the potential for a hard land- and consumer confidence. These adverse reac- ing in the United States because of investor tions could be reinforced by a tightening of concern over the burgeoning current account monetary policies. A reversal of international deficit, higher inflation and the likelihood of investment flows to the United States, triggered monetary tightening if the present spike in oil by increasing current account deficits and a prices is sustained, and a disruption of the change in sentiment in the stock market, could Japanese recovery because of fragile financial accentuate the global downturn affecting East conditions. 4 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Figure 1.2 GDP growth for major industrial countries, 1998-2002 Percent 6 U United States U Euro Area 0 Japan 3 1 ....... -3 1998 1999 2000 2001 2002 Note: Growth for 2001-02 is estimated. Source: Datastream and World Bank staff estimates. Structural transformation may lead to in information and communications technol- stronger long-term growth ogy (box 1.1). Nevertheless, cyclical factors Technology-driven productivity growth in the have played an important role in the boom. United States, market reforms and adjustment Increasing job opportunities, rising incomes to a common currency in the European Union and wealth, and strong corporate profits have (EU), and corporate and financial restructur- boosted consumer and business optimism to ing and deregulation in Japan offer the poten- record levels and encouraged rapid growth tial for rapid growth in the long run. However, in expenditure. Equity price movements have important challenges remain in reaping the exerted a large impact on consumer behavior benefits of these new technologies, expanding (figure 1.3). Over 1995-98, household net the EU to the east, and adjusting to slower wealth grew each year by some 30 percentage population growth. Moreover, the huge U.S. points more than disposable incomes.1 Partly external deficit and Japan's rising government as a result, the personal saving rate dropped debt will continue to pose major risks. As- from 7.6 percent in the first half of the 1990s suming effective policies to confront these to negative territory (-0.2 percent) in the third challenges, growth for the industrial countries quarter of 2000. over 2003-10 has been upgraded from earlier Consumer price inflation has risen by 1.5 forecasts to 2.8 percent. percentage points over the last year, partly in response to the 50 percent rise in oil price. Cyclical and structural forces are shaping Compensation pressures are rising, as the Em- the path of U.S. expansion ployment Cost Index increased by 4.4 percent United States. The remarkable performance of during the first three quarters of the year. the U.S. economy since the mid-1990s has its However, the pass-through of rising input roots in prudent monetary, fiscal, and regula- costs to core inflation has been limited, in tory policies that encouraged private sector large measure because of strong productivity activity. It also stems from the availability of growth (4.7 percent through the third quarter venture capital and a flexible labor force that from a year ago)-suppressing any increase facilitated productivity-enhancing innovations in unit labor costs-and the appreciation of 5 GLOBAL ECONOMIC PROSPECTS Box 1.1 U.S. labor productivity and information technology T he rise in . I. labor producrityi growrh from Why now? 1.5 percent per year in 1980-95 to nearlN 2.6 Why did it take until the late 1990s for mainframe percent per year in the late 1990s was closely tied to computers and related IT, which have been widely innovations in information technology IfT). used over the last quarter century, to have an impact There are three principal sources of productivity on productivity? The full implementation and wide- growth: capital deepening, represented by increases in spread adoption of new general purpose technologies the amount of plant and equipment per worker; im- usually takes many %ears, because of both investment provements In technology and in the organization of and learning corts. ProdLItiCItD may slow initially the production process. otherwise known as multitac- because of costs as!ociated with obtaining and im- tor productivity, or NIFP; and impro%ements in the plementing thc new% technolog,. as well as increased quality of the work force tied to ad%ances in education scrap rates, reflecting more rapid obsolescence of old and increased e%penence. Oliner and Sichel (2000) capital. The speed of the recover% in productivity is calculate the contribution of these three sources ot determined bN factors such as the steepness of the growth to the one-percentage-point acceleration of learning curve and the time required for the complete labor productivity growth in the nonfarm business sec- replacement of older technologies. Hence, while tor between the tirst half and the second halt of the firms have been investing in computers for many 1990s: increased use of IT capital (capital deepeningi years, associated gains in productivity are only now accounts for 43 percent ot the upward shift in produc- being realized: managers needed to figure out how to rivitv growth, and improvements in NIFP in the com- incorporate IT into business processes and staff puter industries accounts for another 36 percent. In needed to be trained. the lXorld Econouc Outlook ilIF 2000), the Inter- A number of underlying factors contributed to national Monetary Fund cires these sources of produc- the upswing in productivity growth, including sup- riviry growth from computers and IT, in addition to portive macroeconomic policies and deregulation, inesument spillover effects, such as those ned to gain- the end of the Cold War (allowing resources to be re- ing Internet access as more consumers and businesses deployed from the defense sector to the commercial establish Internet capabilities. sector), and trade liberalization (resulting in greater cross-border competition). The combination of ad- Labor productivity growth: nonfarm business vances in IT and deregulation may also have helped sector output per hour by providing tools for the unbundling of risks in cap- Annualaveragapercenragecange iral markers through IT and by creating a more com- 3 periri%e marker tri%ironment. Will the rebound be sustained? How long the increase in productivity growth will - persist depends criticall on the penetration of IT product% in gains into the service sector (which represents close to Si percent of U.S. GDP); evidence on this issue is lacking or unclear.b The extensive re- search on assessing productivity gains in different sectors of the economy has revealed severe measure- ment problems." However, Triplett (1999) and Jor- -3 genson and Stiroh (2000) stress the importance of 19&`--73 174-9 1S-- 1996-99 industry-level analysis in examining past trends in E.:wc Ec-,.iq. .r-i -1 1A Pr z.l r LU.. C...VnIc.i Ecne.. U.S. productivity growth. Until these information Nd.i.r F,huan 21itl gaps are addressed, evaluating the spread of IT gains 6 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Box 1. 1 (continued) in producni rn to o[her sectors will remain an open posirivelk to o%erall productivity growth in the question. To this end. Bosworth and Triplett (201.0) United States for some time. Recent evidence sug- make a plea for improving U.". starinacal agencics' gests productivity appears to be increasing outside methods, which have not kept up with changes in of IT sectors: norinmanufactunng productivity has in- the underlying structure of the U.S. economy. creased nonceabli since mid-1999, and productiviri While the transmission of IT productivity gains in retail activity has been on the upsing since mid- to the sern ice sector has not nmateriali7ed full in the 199- iKasman 2000). If these indicators reflect the dlca, it is clear that the demand for IT goods has re- onset of IT penetranon Into the produCTion processes mained strong, making it reasonable to expect that of other sectors, then strong productivity growth gain! in IT productiviry w ill contimue to contribute could continue for some rime. 3 In the four quarttrs through the c-.ind quarter o 2a10). *ear-nn-iear growth in nonfarm business output per hour has averaged 4 percNr,1 b. Indeed. Gurdon ifurtheornmngi evaluates recent labor productivic grow[h in the United Stares. appling cyclical tactor, and he irgucn that the tillurr rr.elf-t IT producEn in gains to penctrae into non-IT ectors-implies that the growth niumenrur in trend produci it, will n.t b- sutaincd. ffr 3 number .4 ScrICC nJustrCN t1--eamplccducatrinr the current method fir rrrcauring prodo,nuivitv mnol;s a;urrung thar real outpuT and prie change mn,e tvgethcr-that ii to bi that there ir no labor pr.ductirN growth iBowonh and Tripleti 2000. Figure 1.3 U.S. retail sales and the NASDAQ index Sales: percentage change over three months ago, seasonally adjusted annualized rate; NASDAQ: percentage change over three months ago Sales NASDAQ 18 - 60 Retail sales 50 12 40 30 6 20 10 0 0 -10 NASDAQ -6 -20 Jan. 1998 June 1998 Nov. 1998 April 1999 Sept. 1999 Feb. 2000 July 2000 Dec. 2000 Source: U.S. Department of Commerce and Datastream. the dollar on the heels of massive capital momentum of consumer demand growth over inflows.2 the course of the first half of the year, with The Federal Reserve's increase in the Fed- interest-sensitive sectors such as automobiles eral Funds rate (by 175 basis points in six steps and housing being particularly affected (figure from June 1999 to May 2000) reduced the 1.4). The slowing of consumption growth was 7 GLOBAL ECONOMIC PROSPECTS Figure 1.4 Total retail sales, durable goods and autos Retail sales and autos: three-month/three-month, percentage change, seasonally adjusted annualized rate 20 \ Autos 15 5- Total retail sales -10Durable goods sales- Jan. 1999 Apr. 1999 July 1999 Oct. 1999 Jan.2000 Apr. 2000 July 2000 Oct. 2000 Source: U.S. Census Bureau; Datastream; and World Bank staff calculations. short-lived, however, and third-quarter data plus, which would tend to increase the current revealed a rebound in spending to 4.5 percent account deficit yet further. Current financial growth. Nonetheless, GDP advanced at a 2.7 tensions in the high-yield sectors may be a first percent pace in the third quarter representing a sign that financing of large U.S. private debt is dramatic slowing to about one-half the rate of becoming increasingly difficult. the previous year. A sharp decline in business Strong productivity growth is likely to con- fixed investment was a major factor in the tinue over the medium term (box 1.1), as the slowdown, as an unwinding of the high-tech rapid growth in IT investment (which has spending boom appears to have begun. risen over the 1990s at four times the rate of Still, prospects remain favorable for a soft other private capital-spending components) landing and we expect that GDP growth will despite cyclical up- and downturns is likely to average 5.1 percent in 20003 and about 3 per- continue at high rates on a secular basis (figure cent on average in 2001-02. The consensus 1.5). With demographic factors likely to slow view of financial analysts is that the Federal growth of the labor force to rates below 1 per- Reserve is likely to raise interest rates further cent per year over the coming decade,4 long- in 2001 against the background of still rapid term potential growth could be as high as 3 or domestic demand growth, high oil prices, and 3.5 percent, without risk of significant infla- continued wage pressures. With a slackening tionary pressure. But achieving this potential in the pace of economic activity over the course growth will present policy challenges, as cor- of 2001, policy as well as long-term interest rection of the persistent external deficit will rates should ease moderately in 2002. The un- require extended periods of low import de- derlying risk of a harder landing remains, how- mand, a fall in the value of the dollar, or both. ever, since domestic savings are not expected to recover and the current account deficit is Japan emerges from recession, but its likely to register $450 billion to $475 billion in financial underpinnings are fragile 2000-02 (4.5 percent of GDP). The possibility Japan. GDP rose by 10.3 percent (seasonally of tax cuts following the November elections adjusted annualized rate, or saar) in the first suggests a reduction of the public sector sur- quarter of 2000 and 4.2 percent in the second, 8 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Figure 1.5 IT (information technology) investment growth per employed person and productivity growth, 1980-99 Percentage change Percent (IT/E) Percent (VA/hr) 25 --- 5 IT investment (left side) 20 -- 4 15-- 2 10 -- 1 5-- Productivity growth 0 (right side) 0 liil -1 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Source: U.S. Bureau of Labor Statistics; U.S. Department of Commerce; Bureau of Economic Analysis. as public investment increased and a sharp re- sumer confidence the boost necessary for the covery in profits supported private capital recovery to maintain momentum. The Bank of spending (figure 1.6). There are now signs that Japan has abandoned its "zero" policy interest household demand is rising (after a decade of stance, suggesting that the pickup in activity is stagnation or decline), grounded in improved sufficiently grounded to withstand the 25-basis labor market conditions. This could give con- point rise. With evidence that industrial corpo- Figure 1.6 Japanese corporate profits and private capital spending Percentage change year over year 40 20Operating proft 20 Private capital expenditures 0 -20 -40 01 1997 Q31997 01 1998 031998 01 1999 03 1999 Q1 2000 Q3 2000 Note: All measures are in nominal yen. Source: Datastream. 9 GLOBAL ECONOMIC PROSPECTS rate recovery is more advanced than antici- Growth solidifies in the Euro Area, but pated, that public works-related investment is weak currency is underpinning now filtering through the economy, that a inflationary pressures nascent upturn in consumer demand could Euro Area. During the second half of 1999, consolidate with rising incomes, and that pros- improvements in world activity, a competitive pects for Japanese exports remain favorable, exchange rate, and buoyant domestic demand we have upgraded projections for GDP growth delivered a rebound for the Euro Area from in 2000 to 2 percent, and to a range of 2-2.2 the crises of 1998, with GDP growth averag- percent over 2001-02. ing 3.8 percent on an annualized basis. This Recent efforts in the corporate and financial pace of growth continued unabated in the first restructuring required for long-term recovery quarter of 2000, slowing to an annualized 3.5 from a decade of slow growth show progress. percent in the second. A key to the recovery Announcements of corporate restructuring was the momentum underlying export growth, plans (mostly by larger firms) surged during which continued to build during the first half 1999 and 2000, and many of these plans con- of 2000 toward rates of 10 to 15 percent, with tained commitments to refocus on core activi- thickening export order books and rising man- ties, improve long-term profitability, strengthen ufacturing production (figure 1.7 highlights financial control, and forge links with foreign the case of Germany). partners. The government is drafting more The European Commission's surveys of workable insolvency laws to help facilitate consumer and business confidence reached labor mobility and the scrapping of excess ca- record highs during the first half of 2000, with pacity, is providing loans and credit insurance retail sales rising 3.5 percent in the year to to startups and venture firms, and is easing the June. Notable after several years of stagnant process for mergers and acquisitions and em- employment growth has been the creation of ployee buyouts. Successful restructuring over over one million jobs in 1999, bringing down the next decade could generate significant gains Euro Area unemployment to 9 percent from in productivity, which together with the ex- 11 percent in 1998. The economic expansion pected decline in the labor force would imply has also become more broadly based across output growth modestly above 2 percent per the region, although Italy remains weak in year. part because of tightened fiscal policies in Nevertheless, critical challenges remain, the run-up to the European Monetary Union Uneven corporate restructuring continues to (EMU). Preliminary figures for the third quar- pose a threat to the near-term recovery. The ter point to a slight slowing and stabilization number of business failures soared to a record of activity, partly as a consequence of the oil in the first seven months of 2000, and debt as- related terms-of-trade shock and rising inter- sociated with the failed firms has skyrocketed. est rates. Higher oil prices and the weak euro Events triggered by the still fragile state of have boosted the harmonized index of con- several financial institutions and nonmanufac- sumer prices by 2.8 percent in the year to turing firms could impair consumer and busi- September, well above the European Central ness confidence, as evidenced by the bank- Bank's (ECB) target of 2 percent year-on-year ruptcy of the Sogo department stores (carrying growth. In response, the ECB has tightened $17 billion in debt) after the withdrawal of a monetary policy since November 1999, grad- proposed government bailout. And Japan's ually raising the repurchase rate by 225 basis general government gross liabilities will reach points to 4.75 percent in October. Further 115 percent of GDP in 2000; massive expen- hikes in policy rates appear likely in order to diture compression and an overhaul of the tax prevent a translation of high current inflation system will be required to address the debt into higher price and wage expectations-or overhang in the medium term. so-called second-round effects. 10 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Figure 1.7 German exports, foreign orders, and manufacturing output Percentage change, three-month moving average, year over year 25 Export orders 20 15A Exports (volume) 10 5 Manufacturing output 0 -5 Jan. 1998 May 1998 Sept. 1998 Jan. 1999 May 1999 Sept. 1999 Jan. 2000 May 2000 Sept. 2000 Source: Datastrearn. Recovery in 2000 will likely result in Euro the possibility of "New Economy" contagion. Area growth of 3.4 percent, up from 2.4 per- EMU comes on the heels of increased compe- cent in 1999. Looking forward, growth should tition in the financial field stemming from the be supported by continued firm consumer de- internal market, deregulation, and rapid tech- mand-bolstered by tax reductions in France, nological process, thereby accelerating the move Germany, Italy, and Spain-with stronger spill- toward integrated and more efficient capital overs to fixed investment, and the expected markets. The more than doubling of the value unwinding of the terms-of-trade shock as oil of M&A activities and of corporate bond is- prices fall. Yet growth will be restrained by sues in 1999 is some evidence of the early im- the higher interest rate environment and slow- pact of the EMU. The eastward expansion of ing from exceptionally rapid growth in a num- the EU could enhance the positive growth sce- ber of smaller countries (such as Belgium, the nario outlined above. Alternatively, difficulties Netherlands, and Spain). These factors sug- in absorbing substantial new population blocs gest a slight moderation in growth toward 3.2 into the union could present risks to future percent in 2001 and further to 2.8 percent in growth.5 Questions regarding intra-EU labor 2002. mobility and especially the Common Agricul- Economic performance in the major Euro- tural Policy (CAP) will become more pressing pean countries is expected to improve sub- as expansion moves forward. stantially over the next decade compared with the 1990s, when low productivity growth (1.3 percent during the second half of the decade-- World trade remains on a figure 1.8), persistent unemployment, and slug- long-term high-growth path gish capital spending limited GDP growth to r he 1990s witnessed a dramatic acceleration less than 2 percent per year, compared with I of world trade, both in comparison with the more than 3 percent in the United States. Po- 1980s and in relation to growth in GDP, driven tential growth rates may be as high as 2.8 or 3 by technological change and the removal of percent underpinned among other things, by trade barriers (figure 1.9). World trade is likely the introduction of the euro; the growing par- to continue to grow strongly, although some- ticipation of women in the labor force; and what below the current record pace. 11 GLOBAL ECONOMIC PROSPECTS Figure 1.8 Growth of GDP per employed person: United States and European Union Percentage change 3 European Union s- 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: U.S. Bureau of Labor Statistics; U.S. Department of Commerce; OECD. Figure 1.9 Trade versus GDP growth Percent 12-- 4 Trade Ratio of trade/GDP growth rates 9-- -3 6 GDP 2 31 00 -3-- -1 1965 1970 1975 1980 1985 1990 1995 2000 Note: Trade is defined as the average of real exports and imports of goods and nonfactor services. Trade-to-GDP growth-rate ratio is based on five-year moving average. Source: World Bank staff estimates. Global trade is now at a cyclical high supported by strong demand growth in indus- World trade accelerated in the second half of trial countries and the recovering economies of 1999, peaked at 14 percent (year on year) in the East Asia (which contributed 25 percent of the first quarter of 2000, and is expected to average growth in world demand in 1999). After the fi- a remarkable 12.5 percent for the year as a nancial crisis, industrial production in the crisis whole, the highest annual rate of growth since countries surged to refill inventories and stocks before the first oil crisis. This robust growth was of capital goods and consumer durable goods 12 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Figure 1.10 East Asia-5 industrial production and import volume Percentage change year over year 25 15 Industrial production GDP (bar) -5 -15 Import volume -25 011996 01 1997 011998 Q11999 Q1 2000 Note: The East Asia-5 countries are Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand. Source: Datastream and World Bank staff estimates. (figure 1.10). Demand for foreign durable with China's record of no growth in this area goods and intermediate inputs increased at the between October 1998 and April 1999. In same rate. As industrial production will rise contrast, Latin American countries (excluding faster than GDP only temporarily, the extraor- Mexico) experienced significant losses in mar- dinarily strong import demand is only transi- ket share in 1999 (figure 1.11, second panel), tory. Other regions recovering from the crisis and the rebound witnessed in the first half showed similar, although weaker, patterns. of 2000 was weak in comparison to that of In addition, real exchange rate depreciation East Asia. Export volumes continued to grow fueled developing countries' export volumes. strongly in Mexico throughout the crisis pe- East Asian countries' real exchange rates de- riod of 1997-99 and averaged about 15 per- preciated by an average of 23 percent in 1999 cent in the first half of 2000, despite an appre- compared with June 1997 levels, resulting in ciating real exchange rate, owing to strong strong gains in market share-though there links to U.S. manufacturing developed through were short-lived losses in U.S. dollar terms- the globalization of production and cemented (figure 1.11, first panel). Brazil, Colombia, by the North American Free Trade Agreement Ecuador, and Peru also undertook large ex- (NAFTA). Similarly, exports from Central Eu- change rate adjustments in early 1999 (al- ropean economies benefited from their in- though the average real exchange rate in Latin creasingly close ties to Western Europe (partic- America in 1999 was only 7 percent below ularly Germany) as they progress toward full precrisis levels). accession to the EU (figure 1.11, third panel). Even China, which initially gained export market share in U.S. dollar terms because of Structural factors boosted trade during the its policy decision to hold the renminbi fixed 1990s during the crisis period, benefited handsomely Developing countries' exports increased by 10 from the cyclical upturn with export volumes percent per year during the 1990s, triple the growing in excess of 35 percent year on year in growth rate during the 1980s (figure 1.12). the first half of 2000. This can be compared Privatization and more intense competition in 13 GLOBAL ECONOMIC PROSPECTS domestic markets increased the incentive to Figure 1.11 Export volume and market find lower-cost intermediate inputs and to growth, 1997-2000 search for new export markets. Technological Three-month moving average, year over year advances reduced communications and trans- portation costs, greatly facilitating marketing Percent and outsourcing of production (World Bank 40 1992, 1997). And regional and multilateral export growth agreements have reduced barriers and greatly 30 -contributed to the acceleration in trade. 20 Multilateral agreements. Negotiations under the General Agreement on Tariffs and Trade 10 (GATT) and the World Trade Organization (WTO) have provided an enormous impetus to 0 market owth trade. Multilateral agreements were primarily -o g responsible for the reduction in average tariff Oct. Apr. Oct. Apr. Oct. Apr. July rates in industrial countries and the removal of 1997 1998 1998 1999 1999 2000 2000 Note: The East Asia-5 countries are Indonesia, the Republic of a wide range of nontariff barriers through the Korea, Malaysia, the Philippines, and Thailand. mid-1990s, when the Tokyo Round was fully implemented. Further, the GATT negotiations Latin America have exerted important influences on other ne- 40 gotiations and trade policy in general. Prece- dents established under the GATT have guided 30 regional arrangements.6 The GATT has pro- vided an important venue for many countries to participate in trade negotiations, sometimes 10 m g for the first time; has established a wide variety of standards (such as tariffication, import val- a ,uation, standards for trade in food and ani- -10 export growth mals [SPS agreement], protection of intellectual Oct. Apr. Oct. Apr. Oct. Apr. July property [TRIPs agreement], and so forth); has 1997 1998 1998 1999 1999 2000 2000 contributed immeasurably to maintaining sta- Note: The Latin American countries sn the graph above are Argentina, Brazil, Chile, and Colombia. ble rules of the game in international trade re- Source: Datastream; and World Bank staff estimates. lations, by facilitating dispute settlement and Central Europe constraining unfair trade practices;7 and has Percent heightened awareness of the importance of in- 40 ternational trade and encouraged significant 30 improvements in countries' capacity for trade export growth administration and negotiation.8 20 Regional agreements. Regional agreements 10 played an increasingly important role in the market growth global trading system during the 1990s (box 0 , 1.2). They have often provided opportunities for more comprehensive dismantling of trade -1Oct. Apr. Oct. Apr. Oct. Apr. barriers and greater harmonization of rules 1997 1998 1998 1999 1999 2000 2000 governing trade than can be accomplished Note: The Central European countries in the graph above are under multilateral negotiations. This is par- the Czech Republic, Hungary, and Poland. Source: Datastream; and World Bank staff estimates. ticularly true of the EU and NAFTA, both of which developed important precedents for 14 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Figure 1.12 GDP and export volume growth Percentage change per year 12 I 1970s 1980s 1990s 10 8 6 4 2 0 V GDP Exports GDP Exports GDP Exports High-income Developinga World a. This excludes countries in Europe and Central Asia. Source: World Bank staff estimates. multilateral negotiations and other regional lateral agreements that lead to increased arrangements. There are many reasons for en- growth may spur intraregional exports be- tering regional trade agreements-many of a cause of lower transport costs (than outside political economy nature. However, there are the region) and other agglomeration effects significant concerns over their economic bene- (for example, greater knowledge of closer fits. Regional trade agreements shift import markets than of extraregional ones). Con- supply from external countries to countries versely, regional arrangements can stimulate within the free trade area. This may lead to re- global trade through improving the efficiency duced efficiency for the countries within the and hence competitiveness of regional produc- free trade area if external suppliers are lower- ers and expanding demand for inputs from cost suppliers. Also, those outside the agree- nonregional sources. Nevertheless, the existing ment suffer from lost market share or lower data do indicate that some regional arrange- supply prices, ments have been associated with expanded A myriad of other regional integration trade. The growth of intraregional trade was agreements have evolved (figure 1.13 and the significantly greater than the growth of ex- annex).' Some of these agreements are de- ports outside the region in NAFTA and the EU signed to address similar leverage and harmo- during the 1980s, and in NAFTA and Merco- nization issues that faced the EU and NAFTA. sur (the Latin America Southern Cone trade Some countries have undertaken more am- bloc) during the first half of the 1990s (table bitious efforts at regionalism-for example, 1.2). The EU during 1990-95 is an exception, the members of the Association of Southeast owing to the relatively slow growth in Europe Asian Nations and the Asia Pacific Economic following German reunification.10 Cooperation. Many of the other regional arrangements It is extremely difficult to measure the rela- lack the economic diversity required to meet tive importance of regional and multilateral the bulk of their trade needs. Only three of the agreements to the expansion of trade. Multi- non-NAFTA and EU agreements have more 15 GLOBAL ECONOMIC PROSPECTS Box 1.2 North-South regional arrangements O ne distinguishing teature of NAFTA, its North- These strategic properties should make North- South orientation, is of special relevance to de- South agreements more artractive to developing veloping countries, and this fact alone makes it countries than South-South arrangements, since the likely to influence most regional integration agree- latter have more limited potential for exploiting ments (RIAs) in the future. Motives for North-South comparative advantage or capturing growth exter- agreements are many. Included among these are the nalities and can lead to trade diversion and greater usual regional incentives such as shared history, economic divergence. Moreover, North-South RIAs trade, and transport economies. Agreements between are more likely to foster economic convergence industrial and developing countries also imply more that, if it coincides with accelerated growth, can be extensive shifts in specialization (and thereby greater beneficial to all partners. Surely this fact explains the gains from trade) than regional agreements among willingness of both sides to extend existing successful developing countries alone. North-South agree- regional agreements outside their immediate bound- ments have also encouraged developing countries aries. The EU is currently expanding trade partner- to lock in domestic economic and other reforms.a ship in two "southern" directions-Eastern Europe enhance prospects for market-driven development and the Maghreb. The NAFTA is also looking as far sttategies, and increase the likelihood ot lower ex- as the Southern Cone to expand its economic ties. ternal Tariffs. From the developing-country partner a. Same authors have argued that Norh-South concla%es are perspective, these include enlargement of export an importrit impetus for demoLranzanon. and ver) recent ex- markets. accelerated foreign capital inlow s, technol- penence with EU enlargement and the NAFTA do not conradio ogy transfer, and possibly enhanced mobility of this view. other factors. Source- World Bank 2UD0Yd. Figure 1.13 Number of WTO notifications of regional integration agreements (RIAs) 18 15 12 9 6 3 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 Source; World Trade Organization. than 20 percent of their average trade within The vast increase in the number of countries their respective regions (figure 1.14). None- participating in the WTO has greatly compli- theless, regional integration arrangements may cated negotiations, a fact that may lead coun- cover a growing share of trade in the future. tries to focus more on regional arrangements 16 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Table 1.2 Intra- and extraregional trade growth to 12-13 percent in 2000. However, (annual percentage change in exports) world trade growth is likely to slow over the 1980-90 i as course of the year, in line with the expected - -slowing of world industrial production. In- 1ahin Ouide 'Xiih.n Oui;d dustrial production in key developing regions region repion reason eg.O.I (such as East Asia and Latin America) had al- NAFTA 15.6 9.5 5. ready slowed by the second quarter. While European Ur....-. 16.1 14.9 1 2 some upturn is likely for these countries in the Mercosur 4 34second half, overall momentum is unlikely to Source: World Bank staff data, return to the rates experienced in the latter half of 1999 and the first quarter of 2000. Growth in world trade volumes is projected with smaller memberships, where reciprocal to slow to 8 percent in 2001 and 6.8 percent in concessions can be more transparent and 2002, for a number of reasons. First, the cycli- immediate (thus facilitating the negotiating cal pattern of world GDP growth is expected process). Smaller memberships may also make to move toward more sustainable long-run it easier to negotiate the increasingly impor- rates, thereby reducing import demand. For tant issues inherent in product standards (see example, U.S. import growth, which reached chapter 3). 13 percent (year on year) in the first half of 2000, is likely to slow toward 7 or 8 percent Prospects for trade growth in 2001-02, helping to stabilize the widening Strong growth momentum in industrial coun- trend in the current account deficit. This is un- try import demand in the first half of the year likely to be offset completely by increases in will bolster developing-country export volume import demand in other major trading coun- Figure 1.14 Intra-RIA exports as a share of RIAs' total exports Percent 80 70 - 60 1990 0 1996 50- 40- 20- _____ 10- -_ _ _ IoIIF1 0o I§ C11 &e .e Note: The names and abbreviations on the horizontal axis represent the names of organizations involved in regional integration agreements. See the annex for membership and dates of formation. Source: World Bank 2000e. 17 GLOBAL ECONOMIC PROSPECTS tries. Second, gross private capital flows to de- While participating countries will continue to veloping countries are expected to rise by only benefit from increased integration, it is un- 15 to 20 percent over the next two years, well likely that further reductions in trade barriers below the rate of increase in 1996-97, when will be of the same magnitude. large capital flows permitted some developing Other forces may boost world trade growth regions (such as Latin America) to boost im- in comparison with the 1990s. For example, ports. Third, the terms of trade for oil-import- there may well be improvements in informa- ing countries are likely to remain soft in the tion technology (see the section on industrial near term, as oil prices stay relatively high and countries and chapter 4), and another round non-oil commodity prices rebound weakly. of trade negotiations may be successfully con- This, in combination with fairly sluggish pri- cluded (despite the derailing of the launch of vate capital flows, would tend to limit the abil- a new round in Seattle in December 1999). ity of oil-importing countries to sustain rapid While any quantitative comparison of these import growth for an extended period. How- influences is extremely speculative, on balance ever, none of the above factors are expected to we anticipate some decline in the ratio of world cause a massive deterioration in world trade trade growth to output growth. growth in the near term. In the longer term (2003-10), world trade is projected to grow by 6.8 percent a year. Private capital flows remain The long-term forecast for trade growth is 2.1 Volatile times the projected rate of world GDP growth, he surge in globalization during the lower than what was observed in the 1990s 1 1990s was even more spectacular in cap- but still much higher than in the 1980s. The ital flows than in trade flows. Net long-term very high ratio of the 1990s was in part due to capital flows to the developing countries the one-time increases in integration repre- surged from $80 billion in 1989 to $344 bil- sented by the EU single-market initiative and lion just before the financial crisis, before NAFTA as well as large-scale trade liberaliza- falling to $280 billion in 1999 (figure 1.15). tion in a number of developing countries. FDI flows grew steadily to $180 billion in Figure 1.15 Net capital flows to developing countries, 1985-2000 Billions of U.S. dollars 400 350 - [ ] Official 0 Other private 300 - FDI 250 200 150 100 1111 50 1985 1990 1995 2000 Note: Amounts for 2000 are estimated. Source: World Bank data and staff estimates. 18 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE 1999, almost eight times their level at the be- conditions, combined with large current ac- ginning of the decade. Other private flows count surpluses, reduced the need for interna- have been extremely volatile-increasing ten- tional financing. At the same time, the current fold between 1989 and 1996, but declining account deficits in the high-income countries 70 percent during the last three years of the increased from $9 billion in 1998 to $175 bil- decade. Total official flows fluctuated around lion in 1999, and they are expected to reach $50 billion, with significant dips in 1996 and $250 billion in 2000. With an increased do- 1997. Preliminary data for 2000 covering gross mestic savings shortfall from $218 billion to flows suggest that total inflows stabilized, with $435 billion during the last two years, the the share of FDI declining somewhat from its United States (which saw an investment boom) high level of 1999. was the main source of the deterioration of the current account in the industrial world. Stabilization of capital flows Continued uncertainty and risk aversion fol- in the short run lowing the financial crisis constrained market- The stabilization of international capital flows based flows (bonds, bank loans, and equity) to into developing countries was initially driven several of the emerging market economies in by a reduced supply of funds by international 2000. The average risk premium on developing- investors, but now it increasingly reflects im- country secondary market debt remained high. proved domestic credit conditions and a sharp New financing primarily targeted less risky rise in capital demand in the industrial world. borrowers: 60 percent of total developing- Most countries affected by the financial crisis country bond issuance came from sovereign brought inflation rapidly under control while borrowers (compared with 55 percent in 1999), achieving currency stability after large devalu- and the share of private borrowers remained ations and current account adjustments, and low (figure 1.16). Moreover, a substantial pro- this opened the way for more accommodating portion of bank lending (55 percent) went to monetary policies. Improved domestic credit finance the rollover of upcoming liabilities or Figure 1.16 Sectoral breakout of bond financing by developing countries, January 1997-June 2000 Percent Private Sovereign 0 Public 100 75 -- 50 25 0 -I Hi 1997 H2 1997 H1 1998 H2 1998 H1 1999 H2 1999 H1 2000 Source: World Bank data and staff estimates. 19 GLOBAL ECONOMIC PROSPECTS took the form of less risky lending, such as past years, from $111 billion in 1993 to $52 trade finance or securitized lending. billion in 1998 and $41 billion in 1999.13 The volatility of capital flows in the second quarter underlined the continued vulnerabil- In the long term, capital flows should ity of developing countries to shifts in inves- regain momentum tor sentiment. A sharp correction in the U.S. FDI flows to developing countries are likely to NASDAQ market was associated with a jump rise over the long term, as rapid international in volatility in developing-country stock mar- integration continues (witness the recent wave kets,11 and the risk premium on developing- of cross-border mergers and acquisitions country external debt rose to 850 basis points among corporations in the industrial coun- (compared with 760 basis points at the start of tries),14 and developing countries' growth rates the year). In April, the volume of capital flows continue to exceed growth rates in the indus- to developing countries dropped by 75 percent trial world. Renewed cross-border M&A ac- over March, and it declined marginally further tivity in Korea and in other East Asian coun- in May before recovering in June to almost the tries could raise FDI inflows to the region. March level. And political commitment to removing obsta- For the first time in over a decade, prelimi- cles to privatization may accelerate postponed nary data suggest a contraction in FDI flows to projects in a number of Central and Eastern developing countries in 2000 from the $180 European economies. However, the growth of billion recorded in 199912 (figure 1.17). The FDI is unlikely to be as spectacular as it was in downturn in FDI was brought about by re- the 1990s. duced commitments for new projects in major Other private capital flows are expected to recipient countries, combined with a slowdown regain some momentum from their current de- in M&A activity, and completion of large-scale pressed levels. A narrowing of current account privatization projects. China, the largest recip- imbalances may increase demand in some de- ient of FDI, experienced a substantial reduction veloping countries, and further progress in fi- in the value of new commitments during the nancial reforms should go some way toward Figure 1.17 FDI flows to developing countries, 1990s Billions of U.S. dollars Percent 200 40 180 35 160 30 140 As share of world FDI 120 25 100 20 80 15 50 10 40 20 5 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999a a. Preliminary. Source: World Bank Debt Reporting System and UNCTAD Investment Yearbook. 20 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE restoring the confidence of international in- inventories fell dramatically, and prices sky- vestors. However, capital market flows will re- rocketed (figure 1.18). OPEC has responded main volatile, in turn contributing to the un- to the near-term shortage in the market by certainty in the real economy. For that reason, raising its production ceiling back to the levels FDI flows are likely to continue as the primary of early 1998. A combination of supply in- source of international funding for developing creases and some decline in demand (from countries, in the process helping to reduce vul- higher prices) should reduce oil prices from an nerability to financial shocks. average of $28 per barrel in 2000 to $25 per barrel in 2001 and $21 per barrel in 2002. Plausible worst-case scenarios (for exam- Commodity prices exhibit ple, an unusually cold winter or unanticipated divergent recoveries supply disruptions) could see prices averaging O il prices. The present oil price shock is $30 a barrel in 2000 and 2001, with tempo- expected to be temporary, since it was rary spikes running to $50 or more. Depend- generated by the confluence of a number of ing on policy and private sector reactions, unexpected short-term factors. The spike in such higher prices could pose a substantial oil prices has its roots in the reaction to the threat to global expansion, particularly if the 1998 price decline in the wake of the financial shock contributes to steep declines in the sev- crisis-a decline that in real terms placed the eral highly valued industrial country equity oil price at one-quarter of its peak level of markets (the implications are explored in the 1980. OPEC members, along with some non- low-case scenario-see below). However, it is members, agreed on production cuts in 1999 difficult to see significantly higher prices being to boost prices, while low prices also led to a sustained for more than a year or two, given slowdown in the growth of non-OPEC pro- that non-OPEC production would increase in duction and in investment in the oil sector. response. Prices are expected to average about The drop in production coincided with the un- $18 to $19 per barrel for the rest of the de- expectedly strong rebound in world economic cade, as technological improvements (for in- activity in 1999, and hence in oil demand. Oil stance, better methods of locating and recov- Figure 1.18 Crude oil prices, January 1990-October 2000 US$ per barrel 40 - 3G Dubai Brent - WTi 35 30 25 20AAif 15 10 5 I I I Jan. 1990 Jan. 1992 Jan. 1994 Jan. 1996 Jan. 1998 Jan. 2000 Oct. 2000 Source: World Bank data and staff estimates. 21 GLOBAL ECONOMIC PROSPECTS Figure 1.19 Crude oil prices, 1960-2010 US$Ibbi 60 - Current US$ - 1990 US$ 50 40 30 20 10 0 FllllllIll 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: World Bank data and staff estimates. ering crude oil) boost energy production and tries, table 1.3 presents the impact of a $10 per conservation efforts continue. barrel increase in price (the average increase The impact of the current oil price rise on anticipated in the baseline for 2000) on current industrial countries has been less than the im- account positions for a sample of 92 countries. pact of price rises during the oil price shocks While the current account balance of oil- of 1973-74 and 1979-80, because the current exporting developing countries is expected to increase is smaller and output is much less improve by about $135 billion (at unchanged dependent on oil than before. Oil prices in oil trade volumes) as a result of the oil price in- 2000 should average about half the level of crease, that of oil-importing developing coun- the 1979-80 oil shock in real terms (figure tries is expected to deteriorate by about $40 1.19).15 Nevertheless, the oil price rise has billion, or a little over 1 percent of GDP. increased inflationary pressures and trade Because the oil shock is expected to be tem- deficits in some of the industrial countries, as porary, there is a good economic case for oil- well as exacerbating tensions over the level of importing countries to meet higher bills for oil gasoline taxes. and gas imports through temporary balance of Oil-importing developing countries have payments deficits and external financing been more severely affected than industrial rather than through adjustment. However, there countries, because they consume more energy is a good deal of uncertainty about how high per unit of output and have less access to the prices will go and for how long, and even a external financing required to sustain expen- temporary shock could make international diture levels until oil prices decline. Moreover, lenders jittery about the sustainability of prices for their primary commodity exports countries' external debt. This uncertainty in- (especially tropical beverages and other agri- creases the risk of a sudden withdrawal of ex- cultural goods) have continued to drop over ternal finance. It is thus likely that risk-averse the course of 1999 and 2000, so their terms of policymakers in oil-importing countries will trade have fallen precipitously. undertake some degree of prudent adjustment. To illustrate the effects of higher crude oil The oil-importing emerging market econ- (and natural gas) prices on developing coun- omies should be able to smooth the impact of 22 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Table 1.3 Current account effects for a sample of developing countries from a $10 increase in oil prices Oil imponers Od capeD. 411developimg counmes Number m SU5 as Numb.r u.n $1.1 1 Number in S a. 6ample bl u GDP - Imple bin . GDP sample bin. 1 GDP ELsr A--, midP.. - -16 L0' 2~ 1') -9 41..- S..-uh \ . 5 -5 -0. C'.) 5 -5 -0.9 L.,n mr..r.ci 15 -4 -0.- 22 2.'1 22 18 0.8 S.h.sjP-jrjr. Itr-, 13 -2 -4) 13 1 ~ S C..;is 1 3.2 E ..-rc jr.d < .rar . 4-.1 18 -14 -1.- 1 2 1 lI1 3 21 13 1.5 I l.JJr Fio .rrl N-rrh Ntric 6 -2 -11 r v, 114 16 64 8.0 Tomal delolpirmL counrres 6-4 --43 -I.A 2 3 1 i) - 92 92 1.5 ic': :';HI 13 -2 -1 4 i I,) k' 19 3 L., Note: The table shows the direct current account impact (keeping volumes constant) of a $10/bbl increase in crude oil and refined products and a (similar) 54 percent increase in the gas price. Source: World Bank staff estimates. the shock with private finance, though some a time, the net additional call on international with already large current account deficits will donors does not appear insurmountable. have to proceed with caution. Oil-importing Non-oil commodity prices. Non-oil com- developing countries without access to private modity prices began to decline in early 1997 capital markets will face an additional official and then plummeted with the East Asian crisis financing need of about $18 billion (without (figure 1.20). While the global economic re- adjustment). Since countries will be undertak- covery has led to some recovery of metals and ing some degree of adjustment (leading to a minerals prices, agricultural prices continue lower financing need), and the need for official to languish near their cyclical troughs. This aid flows to oil exporters may be much less for divergent recovery is not surprising, since met- Figure 1.20 Divergent recoveries of commodity prices Index, January 1997=100 Oct. 2000 150 Crude oil 100Metals and minerals 75 50 Agriculture 25 Jan. May Sept. Jan. May Sept. Jan. May Sept. Jan. May Sept. 1997 1997 1997 1998 1998 1998 1999 1999 1999 2000 2000 2000 Source: World Bank staff estimates. 23 GLOBAL ECONOMIC PROSPECTS als, which are used as inputs to industrial pro- countries in Latin America and Sub-Saharan duction, have higher short-run income elastic- Africa, have seen substantial deterioration in ities than food and beverages. their commodity terms of trade. C6te d'Ivoire, After the price declines in 1998, metals and Ghana, Kenya, and Uganda all receive 40 to minerals producers cut production at high- 60 percent of export earnings from agriculture cost mines and smelters, leading to some slow- (mainly coffee and cocoa), and fuel imports down in production growth. For example, constitute 20 to 30 percent of import costs. copper production slowed to 3 percent growth Most Asian countries have been less affected, in 1999, from 4 percent in 1998. At the same since they are less dependent on agricultural time, the strong global economic recovery exports and fuels are a smaller share of total boosted demand for metals. Consumption of imports. copper rose 4 percent in 1999 and will rise an Non-oil commodity prices are expected to in- expected 6 percent in 2000, while aluminum crease in the near term, gradually aligning with consumption rose 6 percent in 1999 and is up the continued expansion of the global economy 5 percent in 2000. Slower production growth (table 1.4). Metals and minerals prices, which and accelerating demand have reduced stocks, rose about 14 percent in 2000, are expected to and metals and minerals prices are estimated increase about 2 percent per year in nominal to have risen above 14 percent in 2000, to a terms over the next several years, but more rapid level about 20 percent above the cyclical trough. increases are possible if global economic growth In contrast, agricultural prices remained is higher than anticipated. stagnant for most of this year. Despite this, the The recovery in agricultural prices is ex- United Nations' Food and Agriculture Or- pected to remain slow, as supplies continue to ganization's index of global agricultural pro- increase at nearly the same pace as consump- duction rose by 1.6 percent in 1999 (slightly tion. But experience shows that current low below the 30-year trend growth rate of 2.2 prices in agriculture could give way to a surge percent), which contributed to further stock in the near to medium term. While it is difficult buildups. Consequently, world stocks of most to predict when such an event might occur, his- agricultural commodities remain high-and in torical evidence indicates that it could begin some cases stocks have continued to increase. about two to three years after the cyclical low. Sugar stocks, for example, rose for the fifth Over the longer term, non-oil commodity consecutive year in 1999, while cocoa stocks prices are likely to decline in real terms, con- reached the same levels as in 1990-91, when tinuing the trend over the past 100 years (real the International Cocoa Organization was op- non-oil commodity prices fell by nearly two- erating a buffer stock mechanism. An excep- thirds during the twentieth century, and by tion to this trend is cotton, for which pro- half over the last two decades-[figure 1.21]). duction is expected to decline by 2 percent, There appears to be no letup in the improve- contributing to a 15 percent reduction in stocks. ments in technology that boost commodity Moreover, recovery in demand has been weaker supplies at lower cost. Crop yields continue than in metals. Grain consumption is expected to increase along historical trends, and new to be roughly unchanged in 2000; but con- plant-breeding techniques offer the prospect sumption of raw materials is recovering, led of further increases. Improved mining and re- by cotton, which is expected to increase 2 per- fining techniques reduce the cost of recovering cent next year. ore and producing metals. On the demand Recent trends in commodity prices have side, population growth is projected to slow obviously favored food importers (particularly from 1.4 percent during the 1990s to 1.1 per- the oil-exporting countries, which simultane- cent during the first decade of the 21st century ously have benefited from higher oil revenues), and 0.9 percent during the second decade. In while net agricultural exporters, such as many Asia, where the demand for commodities has 24 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Table 1.4 Annual percentage change in nominal oil and non-oil commodity prices, 1981-2010 Commodity 1981-90 1991-9' 1998 1999 !00 2UiII 11.02-,1 Oil -4 -2.5 -31.5 383 55'' -l' -3' Non-oil -2.2 2.3 -15.- -11 2 -''.S 1 4 2.s Agriculture -3.2 3 -I6.3 -13.9 - 5.2 Food -1.3 2.2 -9.4 -16.5 -3 I 24 Grains -2.9 1 6 -Q.- -14.- - 5 31 Beverages -5.8 1.9 -1-.- -23 4 -lo 4 1, Raw materials -0.4 1.9 -23 2 1 4 3 4.' i Metals and mine-i. 06 -1.5 -lt 2 -2.3 13 e ' I Fertilizers -2.5 2.b 2') -6 6 -ot 4 - II Memorandum item G-5 manufactures un,r - Auc 3.3 1 1 -1.9 -21 -2 1 " 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. grown most rapidly, population growth will be Developing countries' recovery is even slower. This may be partially offset by unexpectedly rapid, and prospects faster growth of world real incomes (projected for long-term growth have at 3.4 percent over 2000-10 compared to 2.7 improved percent during the 1990s). However, since in- eveloping countries' recovery from the come elasticities of demand for commodities 1/ 1997-98 financial crisis at 5.3 percent are low, the overall impact of more rapid in- growth has been faster and much stronger than come growth on commodities will be small. anticipated.16 All regions have experienced Figure 1.21 Real commodity prices, 1900-2000 Index, 1900=100 250 - 200 Crude oil 150 100 50Non-ol 1900 1920 1940 1960 1980 2000 Source: World Bank data and staff estimates. 25 GLOBAL ECONOMIC PROSPECTS Figure 1.22 Developing regions' real GDP growth, 1999-2002 Percent U 1999 U 2000 0 2001 U 2002 6- 4- 2- 0- East Asia South Asia Latin America ECA MNA Sub-Saharan Africa Source: World Bank staff estimates. stronger growth in 2000, although there has by 5.3 percent in 2000, matching peak years been diversity across regions. Contributing fac- 1983 and 1997. Inflation came down quickly tors include easier monetary policies in the following the crisis (when sharp exchange rate industrial countries and in East Asia, which depreciations led to rapid price rises in several lowered interest rates and stimulated domestic countries) and remains moderate despite the demand; the depreciation of many developing spike in oil prices. Despite this favorable pic- countries' currencies, which boosted exports; ture, financial tensions are building up once and more recently the rise in oil prices, which again in East Asia and Latin America. The de- has supported economic activity in some of the cline in stock markets and the recent increase economies hit by the crisis or in those near in spreads make several countries vulnerable in crisis (such as Indonesia, Nigeria, and the Rus- the short run. The risks associated with these sian Federation). Industrial production in most vulnerabilities are explored later in this chapter of the crisis-affected countries of East Asia re- where the possibilities of a strong global down- bounded at double-digit growth rates in late turn are discussed. The baseline forecast, how- 1999 and into 2000. Latin America also is re- ever, features a moderate slowdown from the covering sharply, albeit at a slower rate than in cyclical peak in early 2000. With this moderate the wake of the Mexican peso crisis. And Rus- deceleration, all developing regions are expected sian growth (a large segment of the growth in to enjoy near-term increases in per capita in- the Europe and Central Asia region) was un- come, ranging from nearly 6 percent in East expectedly strong, boosted by oil revenues (fig- Asia to about 1.5 percent in the Middle East ure 1.22 and table 1.5). China and India con- and North Africa and Sub-Saharan Africa. tinue to exhibit sustained rapid growth, and Middle Eastern countries are benefiting from Payoffs to domestic reforms and improved high oil prices and recovery in the Euro Area. external conditions favor long-term growth Even the non-oil exporters in Sub-Saharan The cyclical recovery is expected to be followed Africa increased GDP by 3.2 percent, despite by an acceleration of long-term growth, al- low non-oil commodity prices. Altogether, de- though the outlook varies considerably across veloping countries' GDP is expected to increase regions (figure 1.23). Population growth in the 26 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Table 1.5 Growth of world GDP, 1998-2002 (percentage change in real GDP) 1991 I2 1001 2001 202 World total 1 ' 2. 4.1 4 32 High-income countries 2.1 - 3 5 10 2 OECD 2 1 United States 4.4 4 i 1 3.2 Japan -25 1i 'i 2.1 2 2 Euro Area 4 2-1 3.4 2 ' Non-OECD countries 4 2 0.3 I Developing countries S - 5.3 54.4 East Asia and Pacific -1.4 *. -.2 b 4 Europe and Central Asia (-.j I 2 4 3 Latin America and the Cat..hh- 2.0 I 4 11 4.1 41.3 Middle East and North Afr., i . 3 1 1. South Asia 5 6 ,.5 Sub-Saharan Africa 2') 21 3.4 3 - Memorandum items East Asia-5 countries' -x.2 ':5 -.1 Transition countries of ECA -l 5.0 4 2 Developing countries Excluding the transition c..u..rr... I 2 13 5 1 Excluding China and Indi- -t t 22 4 - 4.4 Note: All countries listed in the "classification of economies" section at the end of this volume are included as components of the regions presented in tables 1.5 and 1.6 (as well as the world summary table [table 1.1]). Exceptions for which sufficient historical data or projections are unavailable include: 11 low-income countries (among which are Armenia, Honduras and Nicaragua); seven middle-income countries (among which are Iraq, Georgia, and Guyana); and two high-income countries (Cyprus and 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, 1990-2010 Percent change per year 6 1990s 2000s O low case] 4 2 0 -2 East Asia South Asia ECA LAC MNA SSA Source: World Bank staff estimates. 27 GLOBAL ECONOMIC PROSPECTS developing world is slated to slow from 1.6 reap the benefits of reforms carried out over percent annually in the 1990s to 1.3 percent the past decade (selected indicators are high- during 2000-10. And output per capita in de- lighted in table 1.7). In effect, these factors veloping countries is projected to rise by 3.7 constitute the initial conditions from which percent per year over the next decade, more longer-term prospects may be drawn. A num- than double the 1990s rate, in large part re- ber of clear improvements can be discerned. flecting the turnaround from output declines Median inflation rates have been halved, and in the transition economies (table 1.6). Other central government budget deficits are lower developing regions are expected to achieve now than in the late 1980s, contributing to more modest increases in growth rates. Ex- improved investor confidence. And developing ternal conditions are assumed to be more countries are much more open now than they favorable than during the 1990s, as higher were 10 years ago, as trade liberalization and productivity-led per capita growth in indus- stronger trade growth have helped raise trade to trial countries (2.6 percent versus 1.9 percent, GDP ratios by 50 percent on average. In addi- respectively) and further progress in trade lib- tion, better policies have attracted FDI (which eralization should support the growth of de- increased from 0.5 percent of developing coun- mand for developing-country exports at high tries' GDP in 1988-90 to 2.7 percent in 1998- levels. And capital flows to developing coun- 2000). Moreover, rapid growth in exports fa- tries should resume within an environment of cilitated a significant decline in debt-to-export low inflation and low interest rates. ratios compared with the late 1980s. It is important to note that developing Many developing countries have made sub- countries all over the world are expected to stantial investments in human capital. For ex- Table 1.6 Growth of world GDP per capita, 1980s through 2010 (annual average percentage change) Forecast Baseline Low case in growth raLeS 1980, 1990s 20s.n - I= 2.'i3l- It World total I 3 1.3 2 3 lI -1.0 High-income countries 2.4 1 9 2 1. -1.u OECD 2.4 1 9 2 l -1.0 United States 2 2 2.3 2 1 2 -1.3 Japan 3.4 1.1 2 3 I '1 -1 3 Euro Area 2.1 1.9 1i 2 -0.6 Non-OECD countries 3 - 3.' 2 3 -1.8 Developing countries 0.8 1.8 3. 2 . -1.4 East Asia and Pacific 5.6 5 9 i.4 q -1.5 Europe and Central Asia E. 0.4 -2 0 4 I 1i -1.1 Latin America and the C irst .r, -0.4 1. 3 I 4 -1.6 Middle East and North D.i -0.6 0.9 I - - -10 South Asia 3.5 3.5 31 2' -1.4 Sub-Saharan Africa -1.2 -0.b I 3 -'I I -1.4 Memorandum items East Asia-S countries' 4.4 3.5 4 2 .9 -1.3 Transition countries of EC s 0.3 -2c 4I I - I. Developing countries Excluding the transition c...[r . 1.3 3.1 3 - 2 -1 5 Excluding China and In,i.3 U.0 U.S ; , I -1 3 a. Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand. Source: Development Prospects Group, baseline and low-case, October 2000. 28 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Table 1.7 Forecast assumptions: 1999 at a rate of 6.7 percent in contrast with developing countries their 1998 crisis decline of 8.2 percent. They Ir.nal %:.mim..n. dir-n0 19S8 -200 consolidated further with growth near 7 percent -- in 2000. A low-inflation, low-interest-rate envi- I .....r reFl GE*r.-rn..r-r5 ronment has been particularly beneficial to the I J .I.J ..r. .. .rr 19.5 20 . r... r iF ... 290 43. process of unwinding the domestic debt prob- n ir- 1. t r.- lems faced by firms and consumers in these cri- ~.d h3n hcrI .. [r -2 -1 1 sis countries. Corporate and financial restruc- In .-.r i. tA i 23.1 241 In rn-ni .. Iln.", 25.6 24.3 turing and rehabilitation of the financial sectors -- 25.2 23 3 are being pursued, though perhaps at a slower ). L . )i( pace than warranted. The slow pace could be a FN kl k ; 2 - detrimental factor to near-term growth, if inter- 1' 1 [,il -CIL, F..rr F2 t 142.2 est rates rise rapidly or demand falters leading to Pf. - g1.1 diminished cash flow. Robust export growth 5..o o3 0 and firming export prices have helped maintain D - IIr.-s. r 31 o C.' a positive current account balance. Though the U Fin ..i~. 10 ob. recovery of imports and higher oil prices have - - - -- narrowed the balance in many countries, rising . reserves and the improved term structure of for- SF11., .:... i. 1 6 1.3 eign debt have strengthened external positions IV I: ' gr. ...V 2.4 29 vis-A-vis precrisis levels. t-. r-' i S pr' 11jrrLI 1 I S.2 20i.2 4 i ..-Ij r cr .. r. 6.3 6 s Growth in China during the postcrisis pe- - -- riod has ranged between 7 and 8 percent. A *Exports of goods and services plus workers remittances. f . Note: Real indicators use 1995 as base year. falloff in export growth, combined with the Source: World Bank database, World Bank staff estimates. short-term impact of reform programs for the state enterprises and the financial system, led ample, school enrollment rates are substantially initially to a drop in domestic demand and a higher than in the late 1980s, and illiteracy period of deflation. The real depreciation of rates fell from 31 percent in 1990 to 26 percent the yuan, coupled with the global recovery, in 1998. And health indicators show improve- eventually led to a resurgence of exports. ment: under-five mortality rates dropped from Combined with fiscal pump priming, and an 91 per 1,000 live births to 79, and life ex- incipient increase in FDI, export growth has pectancy has increased from 63 years to 65 produced improving conditions in China, with years. These developments suggest that new- GDP growth accelerating in the first half of comers to the labor force should be better edu- 2000 and the deflationary cycle ending. In cated and more capable of working than those 2001-02, output for the East Asia region is who retire-a positive development for absorp- likely to begin a general process of moderating tion of new technologies and for innovation. and converging toward longer-term growth With real per capita incomes today still only paths. The two most vulnerable countries are one-twentieth that of the industrial countries, Indonesia and the Philippines. These countries developing countries that remain open to trade also suffer from political weaknesses, civil dis- and FDI can achieve higher rates of growth turbances, and a perception (from the point of through maximizing the new technology and view of investors) that business operating prac- skills embodied in these flows. tices have not changed substantially from less East Asia. On average, output in the five than transparent modes. countries most affected by the financial crisis East Asia should continue to achieve the (Indonesia, the Republic of Korea, Malaysia, the most rapid rates of growth over the longer Philippines, and Thailand) recovered smartly in term, although some deceleration from the 29 GLOBAL ECONOMIC PROSPECTS last decade's pace is likely. Growth in the re- the surge of world trade growth have sup- gion's higher-income economies is expected to ported a broad resumption of economic activ- converge toward more moderate OECD aver- ity across the region. At the same time, infla- age rates. Lower-income countries that have tion eased or held steady in most countries, achieved high growth rates through strong re- allowing interest rates to continue on a general form programs may find the future reform declining trend. Exchange rates stabilized in agenda (particularly strengthening the finan- several countries that experienced periods of cial sector) more difficult to implement. free fall during 1999 (for example, Brazil and South Asia. GDP growth in South Asia has Ecuador), improving the outlook for domestic risen to 5.7 percent in 1999 and is likely to demand growth, especially in Brazil. register 6 percent in 2000, owing to better Global conditions are expected to be more than expected agricultural sector performance supportive of growth in the region over the in Bangladesh, India, and Pakistan, as well as next two years. However, recent experience an acceleration of India's industrial produc- suggests that volatility in financial markets tion to double-digit rates and strong advances and primary commodity prices remains a sub- in services output. Burgeoning foreign de- stantial threat to near-term recovery. Private mand for IT-related services from Bangalore capital inflows fell dramatically in the second and a pickup of FDI inflows ($2.2 billion in quarter of 2000, tied to the worldwide decline 1999) are major factors underlying India's im- in equity markets, and the recovery in indus- proved export performance. To facilitate the trial production among the large countries of growth of Indian services exports, legislation the region appeared to have faltered. The has been introduced to support the IT sector surge in the price of oil, concomitant with and develop electronic business infrastructure. weakness in commodity prices of critical im- Average growth for the region is expected to portance to the region (particularly the prices slow to 5.5 percent in 2001-02. Financial dif- of coffee, grains, and soybeans) produced ficulties are likely to restrain growth in Pak- terms-of-trade losses for a large number of istan. In addition, the region is heavily depen- countries. Nonetheless, consolidation of the dent on energy imports and (especially in the region's recovery in 2001-02 is likely, as ad- case of the smaller countries) on agricultural justment in Brazil has been impressive so far, exports such as cotton, tea, and rubber. The and new governments in Argentina and Mex- necessity of adjusting to terms-of-trade losses ico appear set to embark on a path of deep- from the recent, adverse movements in pri- ened reforms. Regional output growth is ex- mary commodity prices may dampen growth pected to reach 4.1 percent in 2001 and to rise in the near term. By contrast, South Asian further to 4.3 percent in 2002. economies may raise per capita growth rates Latin America is poised to enter a phase of in the long term if they can manage to reduce sustained moderate growth over the next fiscal deficits (while still maintaining growth- decade that is due to the past trend toward enhancing expenditures) and make necessary market-friendly policies in the larger coun- progress in trade liberalization. For example, tries; relatively strong banking and financial India's average tariff for all goods, while con- sectors; potential for technology spillovers siderably reduced from that of 10 years ago, from the United States; the largest rise in FDI remains at 40 percent. among developing regions (much of which Latin America's GDP is expected to rise by went into infrastructure such as telecommuni- 4 percent in 2000, although the dispersion of cations, utilities, ports, and so forth); and the growth across the region is wide, ranging from potential strengthening of Mercosur through over 6 percent in Mexico and Chile to nearly trade links with Europe and NAFTA. But low 2 percent in Colombia and Uruguay, and to lit- national savings and large debt overhangs that tle growth in Argentina, Ecuador, and Jamaica. will need to be rolled over on a continuing Stabilization of global financial markets and basis make the region vulnerable to swings in 30 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE external financing and are likely to constrain sian Federation, while the trajectory of growth growth below the rates expected in Asia. in world trade and output should support Europe and Central Asia. Average GDP steady gains in other CIS states. growth is expected to rise to 5.2 percent in Sub-Saharan Africa. Fallout from the 1997- 2000, significantly above the 1 percent ad- 99 crisis continued to exert a depressing effect vance of 1999. The 50 percent rise in oil and on the region in 2000, as non-oil commodity gas prices has transformed the Russian pri- prices remained near cyclical lows. But higher mary fiscal position from deep deficit to sur- oil revenues boosted growth for the region's oil plus, allowing reductions in government wage exporters, and output in South Africa strength- arrears and contributing to higher disposable ened moderately to 2.2 percent growth follow- incomes.17 Moreover, Russian industry con- ing several years of subdued performance. On tinues to benefit from the sharp devaluation of average, the region experienced an acceleration August 1998, although import-substitution ef- of growth to 2.7 percent from 2.1 percent in fects are diminishing with the recent real ap- 1999, and per capita income gained an average preciation of the ruble. Higher energy prices of 0.2 percent. Countries with better policy en- and economic spillovers from the Russian vironments-Botswana, Uganda, and several Federation are contributing to stronger output countries of the Communaut6 Financi re growth among hydrocarbon-rich members Africaine (CFA) zone-tended to perform bet- of the Commonwealth of Independent States ter than average, with GDP gains of 4.4 per- (CIS). The Central and Eastern European coun- cent. Countries experiencing civil strife or tries (CEECs) and the Baltic countries are bene- major political disruption-Angola, the Demo- fiting from growing demand from Western Eu- cratic Republic of Congo, Ethiopia, Sierra rope and to a lesser degree from the Russian Leone, and Zimbabwe-registered the weakest Federation." Growth in Turkey is approaching performances, averaging a decline of 1.5 percent 6 percent in 2000, up from the sharp 5.1 per- during the year. cent contraction in 1999, principally because of Growth is projected to accelerate to 3.4 per- a rebound domestic demand linked to declines cent in 2001 and 3.7 percent in 2002. Oil pro- in real interest rates. ducers, including Angola, Nigeria, and Sudan, Growth performance for the region through are scheduled to bring further supply on- 2002 is expected to remain relatively strong in stream, while continued high prices through aggregate, stabilizing at around 4 percent. De- 2001 should abet revenue growth. The terms of velopments in the EU export market, policy im- trade for commodity exporters should stabilize plementation related to EU accession for the or improve moderately from their current low CEECs, and the path of the oil price will be crit- levels as non-oil commodity prices firm. The ical factors in shaping the outlook. The Russian HIPC (Heavily Indebted Poor Countries) Ini- Federation and other hydrocarbon exporters of tiative is gaining momentum, with nine African the CIS may experience a slowing of growth countries-Benin, Burkina Faso, Cameroon, beginning in 2001, as oil prices retreat from Mali, Mauritania, Mozambique, Senegal, Tan- current high levels. The region's longer-term zania, and Uganda-now having qualified for prospects have improved considerably after the a total of close to $9 billion (net present value) difficulties experienced during the initial period of relief. And several more countries are ex- of transition to market economies in the 1990s. pected to reach completion points in the near Countries anchored by the EU accession process term. The enhanced HIPC Initiative is worth have strong incentives to implement reforms nearly $30 billion in net present value terms, and are positioned for stronger growth than with some 80 percent of the program ear- other countries in the region. The baseline as- marked for Sub-Saharan Africa. sumes improved economic management and Progress in reform programs and in debt- some progress in implementing recently pro- relief has improved the prospects for growth. posed social and economic reforms in the Rus- Per capita income is projected to rise by 1.3 31 GLOBAL ECONOMIC PROSPECTS percent per year over the next decade. This growth in the oil exporters. For the diversified prospect is far better than the decline that con- exporters, the positive effects of higher exter- tinued over the 1990s, but the increase is only nal demand are being counterbalanced by rel- one-third the average rate of Asian economies. atively strong currencies, high fiscal deficits in Economies in Sub-Saharan Africa will continue Egypt and Lebanon, as well as recent declines to confront the severe problems of poor trans- in stock markets. Moreover, the ongoing na- port and communications infrastructures, a lack ture of recent conflict in the Levant may also of investor confidence that encourages capital have dampening effects on confidence in the flight and constrains private investment rates, rest of the MNA region. and continued low levels of official assistance. Progress in structural reforms and im- It is important to realize that HIV/AIDS will proved fiscal behavior with respect to com- have a substantial negative impact on a num- modity price booms and busts should support ber of countries. According to estimates by some acceleration of per capita growth over UNAIDS (2000), Sub-Saharan Africa contains the next decade. However, large and ineffi- 24.5 million (or 70 percent) of the 34.3 million cient public sectors, a shortage of social safety existing cases worldwide and 12.1 million of a nets, and low savings and private investment total of 13.2 million AIDS orphans. In the rates should limit growth rates to well below longer term, lower human capital accumula- those of most other regions. Moreover, with- tion may well emerge as the biggest cost, and out more substantial diversification of pro- in the worst-affected countries, labor force duction, these economies will remain exposed growth could slow by 1 or 2 percentage points, to unfavorable terms-of-trade shocks. with a depressing effect on growth. Middle East and North Africa. Develop- ments for both oil exporters and diversified ex- Vulnerabilities are significant porters in the region have been quite favorable, W hile the baseline scenario of solid growth with GDP growth of 2.2 percent reported in V in all regions is realistic and achievable, 1999 and growth of 3.1 percent anticipated for history cautions that cyclical downturns or 2000. Many of the major oil producers had crises induced by commodity or financial shocks formulated budgets around an assumed oil are difficult to anticipate. To explore the im- price of $22 per barrel, and higher revenues plications of less favorable outcomes, a low- have contributed to lower borrowing require- case scenario has been developed that com- ments, lower deficits, and a decline in domestic bines a downturn of the global economy in the arrears. Strong growth in Western Europe has short run with lower potential growth rates in fueled a boom in tourism, with record numbers the long run. In the short run, continued high of tourist arrivals in many North African and oil prices especially characterized by short- Mediterranean countries. The economic revival lived "spikes," contribute to inflationary pres- in Europe has also led to stronger gains in sures and increased uncertainty, triggering se- non-oil exports and workers' remittances. For rious cuts in demand and restrictive monetary example, remittance flows to Tunisia rose by policies. Additionally, investor concern over 75 percent during 1999. And the ending of the high U.S. current account deficit leads to drought conditions in many countries boosted a rapid reversal of foreign funds and a large agricultural incomes and exports and led to de- stock market correction, while the associated clines in required food imports. fall in demand, depreciation of the dollar, and Activity is expected to pick up moderately rise in interest rates have significant spillovers to 3.8 percent in 2001 and 3.6 percent in to other regions through trade, capital flows, 2002. With an average oil price of $25 per and debt service. The East Asian countries, in barrel for 2001 and $21 in 2002, export process of financial restructuring, would be revenues should continue to support income particularly affected. The ensuing global re- 32 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE cession exacerbates the strains inherent in velopments, while for Pakistan the worsening rapid globalization and structural adjustment, of international financial conditions has very leading to a hold on reform programs that severe consequences. slows expected gains in productivity leading Since the structural risks are mainly of do- to long-term growth. On average, these ele- mestic origin, they are by nature quite differen- ments bring down the potential growth rate of tiated across countries. Nevertheless, there are the developing countries as a group by almost some common elements that follow from past 1.5 percentage points over the period to 2010 trends in the regions. Sub-Saharan Africa and (table 1.6 and figure 1.24). the Middle East and North Africa are at the The implications of the short-term global end of two decades of stagnation or decline, recession differ greatly across developing re- while growth in Latin America has picked up gions. Latin America, with high levels of debt from the "lost decade" of the 1980s (figure and relatively high dependence on exports to 1.25). Reform programs in many of these coun- the United States, is hit hardest by the global tries have greatly improved the conditions for downturn and the higher interest rates. East growth. However, high indebtedness and the Asia, which has a similar export orientation fragility of the reforms make these regions very toward the United States, is directly hurt by vulnerable to adverse global conditions, espe- the fall in U.S. demand, the depreciation of the cially a rapid rise in interest rates. The main dollar, and mounting domestic financial diffi- risk for the oil-importing countries in these re- culties. Central and Eastern Europe, the Mid- gions is that a global downturn, combined with dle East and North Africa, and Sub-Saharan a deterioration of the terms of trade and a lack Africa, all with a stronger focus on Europe, ex- of immediate improvements, could bring about perience a more moderate downturn in the social unrest and "reform fatigue." For oil ex- short run, as the growth slowdown in Europe porters, the danger is that the temporary surge is not as severe as in the United States. In South in oil revenues might suggest that reform is not Asia, the impact of the global downturn is di- urgent anymore. Such a reversal of the reform verse. As during earlier crises, India exhibits momentum in both oil-exporting and oil- some resilience to less favorable external de- importing countries could reduce the growth Figure 1.24 Growth of real per capita GDP, developing countries as a group, 1963-2008 Compound growth rate, centered five-year moving average, percent 5 4 Base case 3 Low case 2 0 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Source: World Bank staff estimates. 33 GLOBAL ECONOMIC PROSPECTS Figure 1.25 Growth of real per capita GDP, Latin America and the Caribbean, Sub-Saharan Africa, Middle East and North Africa, 1965-2000 Compound growth rate, five-year moving average, percent 6 4 Latin America and the Caribbean 2 0 Sub-Saharan Africa -2 Middle East and North Africa 1965 1970 1975 1980 1985 1990 1995 2000 Source: World Bank staff estimates. potential for the coming decade. And in Sub- Europe, this increases domestic tensions and Saharan Africa, diminished government rev- reduces FDI flows, bringing down trend growth. enues tied to terms-of-trade losses could make The oil-exporting countries in the CIS experi- HIV/AIDS prevention and alleviation campaigns ence a delay of necessary reforms, similar to more difficult, further increasing economic the delay in the Middle Eastern and North losses associated with the epidemic. African oil exporters. When, ultimately, the oil In Asia, by contrast, many countries achieved price declines quickly as a result of the eco- rapid rates of growth through strong reform nomic downturn, the lack of reforms trans- programs during the 1980s and 1990s. Never- lates into lower potential growth. theless, continued rapid growth in the larger countries requires further reforms, including trade liberalization (in China measures related to Recent trends and prospects for WTO accession, in India reduction of high ex- poverty reduction isting tariffs), strengthening of the financial sec- Doverty trends during the 1990s. Our esti- tor (through much of East Asia)-(figure 1.26) 1 mates for poverty in developing countries and strengthening of the fiscal position in India. have changed slightly since last year's Global In the alternative scenario, a backlash to reform Economic Prospects because of the availability programs reduces the long-term growth poten- of new information from household surveys. tial in Asia by about 1.5 percentage points a year. These revisions do not affect the major conclu- The transition economies experience some sions about poverty trends. Extreme poverty weakening of reform momentum that lowers declined only slowly in developing countries long-term productivity, without repeating the during the 1990s: the share of the population disastrous experience of the 1990s. Central living on less than $1 a day fell from 28 per- European countries' accession to the European cent in 1987 to 23 percent in 1998, and the Union is postponed because the global down- number of poor people remained roughly con- turn reduces growth in Europe and increases stant as the population increased.19 The share the perceived costs of accession. For Central and number of people living on less than 34 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Figure 1.26 Nonperforming loans of commercial banks in the East Asia-5 Percent of total commercial bank loans Indonesia March 1999 _____________June 2000 Rep. of Korea June 2(00 Malaysia Nov. 1998 July 2 00 Nov. 1999 Philippines July 2000 May 1999 Thailand 000 August 2000 0 15 30 45 60 75 Ol Latest estimate U Dec. 1999 E Peak Note: See source for details. Because of the redefinition of nonperforming loans in Korea, there is no estimate for the peak. This excludes loans sold to asset management corporations. Source: ADB, Asia Recovery Report, October 2000, page 11. $2 per day-a more relevant threshold for countries that experienced stagnation or con- middle-income economies such as those of East traction. Indeed, the overall decline in extreme Asia and Latin America-showed roughly sim- poverty during the 1990s was driven by high ilar trends (tables 1.8 and 1.9). rates of growth in countries with large num- It should be emphasized that these historical bers of poor people. For example, China ac- estimates are subject to some uncertainty. Up- counted for a fourth of the total number of to-date survey and price data are not available poor at the start of the decade, and per capita for all countries, and the quality of household GDP during the 1990s rose by 9 percent per surveys can vary considerably among countries year, so by 1998 China's share of the world's and over time. Some country surveys yield in- poor was less than one-fifth. Nevertheless, the come measures of living standards, while others decline in poverty in rapidly growing coun- yield consumption measures, and these two tries was slowed by increases in inequality in a sources are likely to give different poverty esti- number of countries with large numbers of mates for the same underlying population.20 poor, in particular in China, Bangladesh, India, Further, the international measure of poverty and Nigeria.21 Income inequality is an impor- used here is subject to error because of the diffi- tant factor in determining poverty outcomes culties involved in estimating purchasing power (box 1.3). parity exchange rates. Despite these weaknesses, In East Asia, poverty declined most rapidly the estimates provide a fairly reliable view of during the 1990s, falling sharply in China. poverty trends at the aggregate level, because However, growth in China's poorer and more of the substantial increases in the coverage of rural western provinces was much slower than household surveys and in data accuracy over the in the more industrialized east. This diver- past few years. gence reflects slow growth in rural incomes In general, poverty declined in countries related to declining prices for agricultural that achieved rapid growth, and increased in products and reduced opportunities for off- 35 GLOBAL ECONOMIC PROSPECTS Table 1.8 Population living on less than $1 per day and head count index in developing countries, 1987,1990, and 1998 Population Number of people living on less than $1 a day covered by at (millions) least one survey Region (percent) 1987 1990 1998 new 1998 (GEP 2000) East Asia and Pacific 90.8 417.5 452.4 267.1 278.3 Excluding China 71.1 114.1 92.0 53.7 65.1 Europe and Central Asia 81.7 1.1 7.1 17.6 24.0 Latin America and the Caribbean 88.0 63.7 73.8 60.7 78.2 Middle East and North Africa 52.5 9.3 5.7 6.0 5.5 South Asia 97.9 474.4 495.1 521.8 522.0 Sub-Saharan Africa 72.9 217.2 242.3 301.6 290.9 Total 88.1 1,183.2 1,276.4 1,174.9 1,198.9 Excluding China 84.2 879.8 915.9 961.4 985.7 Population Head count index covered by at (percent) least one survey Region (percent) 1987 1990 1998 new 1998 (GEP 2000) East Asia and Pacific 90.8 26.6 27.6 14.7 15.3 Excluding China 71.1 23.9 18.5 9.4 11.3 Europe and Central Asia 81.7 0.2 1.6 3.7 5.1 Latin America and the Caribbean 88.0 15.3 16.8 12.1 15.6 Middle East and North Africa 52.5 4.3 2.4 2.1 1.9 South Asia 97.9 44.9 44.0 40.0 40.0 Sub-Saharan Africa 72.9 46.6 47.7 48.1 46.3 Total 88.1 28.3 29.0 23.4 24.0 Excluding 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 region for 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 growth rate 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 with the lowest survey coverage. The head count index is the percentage of the population below the poverty line. Further details on data and methodology can be found in Chen and Ravallion 2000. Source: World Bank staff estimates. farm employment. This widening of income In South Asia, the share of the population inequality slowed the rate of poverty reduc- living in poverty declined moderately through tion for the country as a whole.22 Elsewhere in the 1990s, but not sufficiently to reduce the the region, poverty increased in the aftermath absolute number of poor. Household survey of the 1997-98 financial crisis. In Indonesia, data indicate limited growth in average con- the government responded to the crisis by sumption in rural areas, reflecting slow growth strengthening safety nets, which helped cush- in agriculture.23 Urban poverty appears to have ion the impact of the crisis. However, the inci- declined at twice the rate of poverty in rural dence of poverty still increased substantially, areas. However, the Indian poverty data are doubling from its precrisis level. Since early subject to considerable uncertainty. In particu- 1999, there have been indications that poverty lar, private consumption as measured in the has declined significantly as rice prices have national accounts has grown about three fallen, and real wages are starting to recover times faster over the 1990s than household (Suryahadi and others 2000). consumption as measured by the National 36 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE Table 1.9 Population living on less than $2 per day and head count index in developing countries, 1987,1990, and 1998 Pop"lation Number of people living on less than $2 a day covered by at (millions) Ieat one survey Region (percentl 1987 1990 1998 new 1998 (GEP 2000) East Asi irnd P i -t.c 1.0i 3 1.S%4 4 S, 4 ' Vf2i Exclud.. k-hr-j -1 1 2qu C4 214 202 1 'A11.1 Europe rid Ce.rrl has 8." l' 3 43.8 1S.2 CP2 C. Latin A' r., and [h, ( rbbe r. 88.1) 14 . It 2 I I I 12 Middle Ej,r a.d N..rih Mr.ci 52.5 i I i -54 2 South . i,I 3 4 Q Q11 4 6 1)4 1. 1.45 t Sub-Sahir n Nlr-c -.9 3',3,3 2 4S sc,4 Total 89.1 2.54. 2.[ 1 4 2.hl I. in (exclude, t h 842 12.6.' 1 l. ' '.1 " 2.1 P Q Populanon Head coun ind. coered b5 ai p"cenu leai one,ure, --- -- - --- -- Region 1percenl 1%)S I491) 199i n,,. 194 IGEP 2i 0r East As., ind P3,., Qc r4.X o ' ~ Excit.1.r.o t h-r.3 . 2 k 44 A 44 3tj Europe fnd Cn r ii A.s 81. ' 21.1 - Latin Amer. 3n ar.J k j sr.F r, S.0) 3 I 3 3t 4 Middle E., nd N...- Ntr,a 52.5 31'1* 24 s 29 21 South A .i 9".9 3 . 3 .4 Sub-Sal rn ir,' 3 - 4 Total AS.1 of (1 .l - I Excudi, % h.n i k4.2 5.2 ~ .t5 ' Note: The $2 a day is in 1993 purchasing power parity terms. See the note to table 1.8. Source: World Bank staff estimates. Sample Survey. Discrepancies are to be ex- been key in holding back the reduction of pected, as the two sources track different ag- poverty in rural areas.25 gregates.24 Moreover, the survey data tend to In Latin America, both the share and the understate the consumption of high-income number of poor declined between 1990 and households. Nevertheless, the size of this dif- 1998. In Brazil, successful stabilization has ference and the slowness of poverty reduction stepped up the reduction of poverty, with the revealed in the survey data are difficult to ac- poor gaining from stronger growth and the count for, particularly given the improvement decrease in inflation. Nonetheless, their liveli- in human development indicators. Thus more hoods remain vulnerable. Evidence from em- accurate data could indicate more rapid pov- ployment surveys in metropolitan areas shows erty reduction than our current estimates. In large swings in poverty, with an upturn in the Bangladesh, steady growth reduced the inci- poverty rate in the wake of the 1997-99 crisis dence of poverty during the 1990s, in contrast and a decrease since late 1999, thanks to the re- to the relative stagnation experienced in the bound in growth. Low educational attainment 1980s. Poverty in urban areas fell at a consid- has helped to perpetuate income inequality and erably faster rate than rural poverty, partly re- poverty by preventing the poor from taking ad- flecting slower growth in rural wages and vantage of opportunities created by growth higher rural unemployment. Landlessness has (World Bank 2000a). 37 GLOBAL ECONOMIC PROS PECTS Box 1.3 Trends in inequality c oumrics wirh high leiels of initial nequaliry smallholder agriculture. the\ benetit mre; it bhie reduced poiern less for gnen rates ol groUth rakes place in areas or secrorý that are g.rowth than coumnries urh low initial inequaLirv not accessible to the pocr. inequalirA can increase. i\Xorld Bank 2100cd), and if growth is accompanied Domestic policy distortions rhat hinder agricultuire b increasing inequalirv. ts impact on poier: nill along with international trade barriers) hake re- be reduced. Howe\er, our Understanding or long- traied growth in rural incomes in many coun- rerm trends in ineqiairv is limired, partly beause of tries. This has also been reflected in risng regional weaklnesse> in the data.` Trends in inequalitv hake inequaliry. as in poor regions farmng is oftren the been extremelv diverse. For example. AMalavsia saw dominan sector of actmt. declines in inequahry- as measured b% the Gini coef- • Changes in income mequalin reflect changes in the htcienti during the l980s, bur this trend was reversed distribution of assers tfor example, education and in in the VW0s. Korea and Indonesia experienced rapid the return t- these assets. In some counrines, such as growth during the 1980s witl little change in in- Nlexico, more educated workers sa\ larger increases equality, white China and Russia experitnced large in eamings than did other' workers, and these gains increases in inequality o%er the same period. contributed to increamg income inequalir. The aailahle data shou no stable relationship • Gender bias and other forms of discrimnation between growth and inequalir.b On average, income hake led to inereasing inequalit w here the groups inequalhty wirhin countries has neiher decreased nor that are discrinminaed against are poorer than .th- increased over the last 30 vears. Howeier, since ers to start s ith. For e\ample, discrimination led w ithin-ountry ieqialit has mcreased in some to lower returns to educanion and lower oxerall in- populous countries, csnerall more peiple have been comes tor ethnic mmoriIes in Niernam and indige- atfected bS ncreases in meqLialir than bx decreases. nous groups i Latin America. What drves mequalir? Here, t-,o, our knowl- * The impact of liberalization progrims on nequal- edge is linited. Nevertheless,. both cross-countrs iry has differed among countrie,s. If prereform con- anahses and case studics have generated insights int- trok beneft higher-income groups disproporTion- the link between inequaIiry and seseral polie and atel, reforms can narrow nequalitr. If. on the institutional factrs. other hand, prereform controls fas or the poor, lib- eralization can hake the opposite efiect (Ravalion * Policees fostering staNle macroeconomic condi- 20001. For e.\ample, in the transirion ro an open tions. openness to trade. and nioderate swe or trade regime, the poor inas sutfer it sectors u, here gosernment rend ro stimulate growth bur hase rhev have a stake are subiected to comperition been found in one study noro systemaically This may happen especialls in middle-income de- affeer the distribution ut income iDollar and keloping economies wuh intermediare skill endowv- Kraa% 20001. Hiwever, policies that reduce infla- ments. These economies may have a comparatne non from vers high les el appear to benetir the adsanitage regarding goods rhar require medium- poor more than the average. intensty skills. These countries are likely tu pro- * It grovth is sirong in areas u here the pour lie ec sectors inrensite in unskilled labor where low- and sectors where the% are emplo ed (for eample, paid vurker, can be round." 3. inqiianiis C,r.maId mh i cran degrec -1 u,r1.mt. 1, i based -n ämple suries TILu, chng.4c. -er nme iced in be Je J areiuih; i.' asce;i i- hier The are signitican t a rimn de,rcc ir .hether the-, tall t idiii the mirgr, ot error Th( c ,t.maion li 5tandrd error, Ll enple\. and ..,rk *n this 1 iuST begnning. b ',c tor exampic rli.gtr and '~iutrc 199. .naion and ren 1~-, Brun'. Ra allion, ind squir, 19%: 'oll:r and Kli a . Kr v\ample. i,i the ridirjn ;arre o) Urr Pradch-hich ha5 , popuiaunni id b millon anJ i p.cr rar ,4 ab..ut 1) per- cent-agriculrurc i-..unr, w9 ~iiri percent or GDP and pro-.ides 3 pr,..t c.ft emplmmni d F,r -ampk, i ie, a cuntrv rhar implemenred one o the mosi aniktious trade poba rftrrn pr grams ironi 1gi o r ihe n9,mmal tar-t nd imp..rt li nw :.,,erage in r-arl and r-ni,ar .7.crc am ng the hiJicr in mania[urin, Re..nga l ii A nnilir prcrvct-rn panern -t proti i.n wa ii.... tolnd Im i-r LL. 4iune and H irri-~n 19 1 38 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE In Africa, slow growth increased both the crisis. Inequality widened dramatically during share and the number of the poor over the the transition, with the Gini coefficient of con- 1990s; Africa is now the region with the largest sumption expenditure rising from an estimated share of people living on less than $1 per day. 0.24 in 1988 to about 0.49 in 1998. Increas- In Nigeria, the number of people living in ing disparities in poverty across regions have extreme poverty rose steeply following the re- also surfaced, exacerbated by a inefficient sys- versal of the 1985-92 reforms, reaching an es- tem of fiscal decentralization that left the timated 70 million (66 percent of the popula- more backward regions short of resources to tion) based on the national definition (rather assist the poor. than the international $1-a-day definition used Prospects for poverty. As noted above, here). Nigeria now accounts for nearly one- progress in reducing extreme poverty during fourth of Sub-Saharan Africa's poor. Urban the 1990s was constrained by increasing in- poverty has grown faster than rural poverty, equality in a few countries that accounted for owing to massive migration from rural areas to a large share of the world's poor. As in last the cities, with the incidence of urban poverty year's Global Economic Prospects, this year's now matching that of rural poverty. By con- poverty scenarios show that continued in- trast, the rural poverty rate fell in Ethiopia, creases in inequality, coupled with less than Sub-Saharan Africa's second most populous robust growth, would imply failure to reach country and one of the poorest. The reforms the poverty target for developing countries as implemented after the end of the civil war in a group; in particular, the scenarios indicate the early 1990s spurred a strong recovery, end- substantial increases in the number of poor in ing a two-decade slump. The benefits of agri- Sub-Saharan Africa. Given the uncertainty sur- cultural price liberalization have spread quickly, rounding the historical estimates for poverty boosting growth of rural incomes. Urban pov- and the risks associated with long-term growth erty, on the other hand, has been stagnant. projections, these scenarios should not be viewed Urban inequality has risen, in part because of as presenting the full range of poverty rates large population movements resulting from the that are likely to occur. civil war, and in part as a result of economic re- The three poverty scenarios outlined below form, as agricultural price liberalization raised require a projection of growth of the economy consumer prices in urban areas and civil service as a whole (and of population growth), a pro- rationalization reduced urban employment. jection of the average growth rate in per capita Unfortunately, progress is likely to have been consumption for the household sector (mea- slowed by the border conflict. sured by household surveys)26; and a projec- In the Middle East and North Africa, the tion of changes in the distribution of per capita percentage of people living on less than $1 per consumption. day declined slightly, but the proportion living Income growth. The three scenarios differ below $2 per day increased, from 25 to 30 per- only in terms of the assumed growth rate for cent of the population, because of increases in the economy as a whole. Scenario A reflects Egypt, Morocco, and Yemen. the base case growth rates, and scenario B re- Poverty also rose markedly in the transition flects the low case growth rates described above. economies during the 1990s. In the Russian A third scenario assumes that the growth rate Federation, the breakup of the central plan- of each developing-country region is reduced ning system was accompanied by a steep fall proportionately from the low-case forecast, so in output and a sharp increase in inflation, that the average growth for developing coun- Poverty as measured by the national definition tries as a group is equal to that experienced in had jumped from an estimated 11 percent dur- the 1990s (1.7 percent in per capita terms). ing the Soviet period to 43 percent by 1996, Consumption trends. In previous poverty and probably increased further with the 1998 forecasts, the projected growth rate of per 39 GLOBAL ECONOMIC PROSPECTS capita consumption for households was taken the consumption levels of the rich. Thus, the from forecasts of private consumption from projections for India and the ECA region as- the national income accounts. By contrast, the sume that the share of national accounts scenarios outlined below take account of re- growth reflected in the survey mean will equal cent research that shows that the growth in 51 percent over the forecast period, the lower household consumption from survey data has bound of the 95 percent confidence interval been lower on average than private consump- for the estimate for the developing world as tion growth as measured by the national in- a whole (excluding China, India, and Europe come accounts. Data for 142 time periods and Central Asia).29 (during the 1980s and 1990s) for 60 countries Distribution. The other determinant of the suggest that the growth of per capita con- incidence of poverty is in the distribution of sumption from household surveys was an esti- household consumption. Long-term cross- mated 87 percent of the growth rate in private country evidence suggests that most countries consumption from the national accounts.27 have not experienced a systematic trend in The most likely explanation for this discrep- household consumption inequality as mea- ancy is that the surveys do not pick up fully sured using household survey data. Thus, the the growth in living standards of the rich.28 As assumption for the bulk of the developing the poverty estimates are based on consump- countries is that inequality will not change tion from household surveys, we assume in over the forecast period. poverty forecasts for most developing coun- However, there are exceptions. The 1990s tries that the growth rate of this variable will did witness a dramatic rise in inequality in the equal 87 percent of the growth rate of private Europe and Central Asia region. We assume consumption from the national income ac- that this was a transitional phenomenon and counts. The failure to adjust the forecast of will not continue. Further, the available data household consumption growth to reflect the do indicate a rise in inequality in China and historical divergence from the national income India over the past decade,30 in part because of accounts has resulted in substantial overesti- slower growth in rural areas, where the major- mation of the rate of poverty reduction in past ity of the poor live, than in urban areas. We as- forecasting exercises. sume that inequality will continue to rise in The discrepancy between consumption both countries over the forecast period. In growth from the household surveys and the China, the liberalization of trade in agricultural national accounts is larger in China and India commodities and land markets is likely to allow (which together account for more than half of a shift to more remunerative crops and larger the world's poor) and in the Europe and Cen- landholdings. Since good quality land is scarce, tral Asia region. For China, the time series ev- the consolidation of landholdings and higher idence indicates that 72 percent of a gain in returns to good quality land are likely to lead to private consumption is reflected in household higher levels of inequality in rural areas. More- consumption, and this adjustment is used in over, continued integration with the world the projections. For India, only 28 percent of economy will increase the demand for skilled an increase in private consumption is reflected labor. Inequality within urban areas may rise, in the household consumption, and in Europe as wages increase rapidly for skilled workers in and Central Asia the time series evidence for manufacturing and some services while low- the 1990s suggests virtually no correlation be- skill service workers experience lagging wages tween the two consumption aggregates. It is under the twin pressures of migrant laborers difficult to understand these unusually large and laid-off workers from the state enterprises. discrepancies, which probably reflect serious Rising demand for skilled labor may also in- data problems, as well as the failure to capture crease inequality between urban and rural 40 PROSPECTS FOR DEVELOPING COUNTRIES AND WORLD TRADE areas, as the gap in educational attainment be- Table 1.10 Population estimates and tween the two is high. Thus, both scenarios as- projections, developing countries, 1998-2015 sume that urban incomes will increase more (millions of people) rapidly than rural incomes, and that inequality Region 1998 .0; within both the rural and the urban sectors will increase slightly, in the form of a 10 percent East As. re , --h-- higher Gini coefficient in each sector by 2015. Eastern fur..pr In India, rising inequality during the 1990s and C.-r 4-i 4N9 appears to have slowed the rate of poverty re- Lain Ai. .r.t .. 50)2 -.23 duction relative to that of the previous decade. Middle F, So far, reforms have largely bypassed the econ- and N.-oh Mr.C 286 omy in rural areas, where the majority of SuthSa.r 1.0i the poor live, leading to a wide divergence of Total 5.011 . growth between urban and rural areas. Weak ExcluJ... inclusive economic development (World Bank lower labor standards generally provide a 1995 and Aidt and others 2000). However, competitive advantage. imposing trade sanctions to bring about im- proved labor standards is unlikely to enhance Core labor standards and their either global welfare or the welfare of devel- relationship to development oping countries. In terms of the criteria for Core labor standards are commonly defined regulatory decisionmaking outlined in the be- to include freedom of association and collec- ginning of the chapter, labor standards should tive bargaining; nondiscrimination in employ- not be the subject of trade negotiations be- ment; no exploitative child labor; and no forced cause the level of standards in one country labor (for example, slavery).15 Each of these does not affect the welfare of its trading part- core standards is covered by at least one In- ners, and the workers whom trade sanctions ternational Labour Organisation (ILO) con- are designed to protect have no role in decid- vention. By the mid-1990s, only 27 countries ing whether sanctions are imposed. Although worldwide and only 10 OECD countries had higher labor standards are associated with im- ratified all core ILO conventions, although proved living conditions and development, the ratifications increased in the second half of the imposition of trade sanctions is a remarkably 1990s (OECD 2000). Several countries that costly mechanism. Furthermore, trade sanc- have not ratified some of these standards are tions are vulnerable to capture by domestic in- regarded as being in compliance with them in terests, and are likely to hurt the workers the practice. Their reasons for nonratification ap- sanctions are designed to assist. Lower labor pear not to relate to objections on principle, standards abroad are not a serious threat to but rather to specific details of the conven- the livelihoods of workers in industrial coun- tions or their interpretations by ILO bodies tries; neither theory nor evidence suggests that (OECD 1996).16 Of course, ratification does 89 GLOBAL ECONOMIC PROSPECTS Figure 3.2 Number of notifications under the TBT agreement, 1995-2000 700 U Low- and middle-income countries U High-income countries 600 500 400 300 200 100 1995 1996 1997 1998 1999 2000 Note: TBT, Technical Barriers to Trade. Data are for 2000 through October 4, 2000. Source: G/TBT/N, WTO . Figure 3.3 Number of notifications under the SPS agreement, 1995-2000 250 U Low- and middle-income countries High-income countries 200 150 10 00 0 1995 1996 1997 1998 1999 2000 Note: SPS, Sanitary and Phytosanitary Standards. Data are for 2000 through October 3, 2000. Source: G/SPS/N, WTO . not necessarily imply that core labor standards of association is used because it is easier to will be observed, which requires legislative and measure than some of the other standards.) regulatory changes, as well as monitoring and On average, more-developed countries have enforcement to stop abuses. better-than-average compliance, while compli- Adherence to core labor standards, as mea- ance in many of the poorest countries is inad- sured by freedom of association, is weakly equate. Higher income levels stimulate demand correlated with both higher levels, and higher for better standards, and higher standards con- growth rates, of GDP per capita." (Freedom tribute to growth by increasing work effort 90 STANDARDS, DEVELOPING COUNTRIES, AND THE GLOBAL TRADE SYSTEM and stimulating innovation, in order to econo- knowledge of the competitive conditions in the mize on labor. affected labor markets. There is less evidence that adherence to In some cases, improvements in labor stan- labor standards is correlated with other mea- dards may have unintended consequences and sures of economic development, such as real not necessarily improve the welfare of work- wages. In the newly industrializing countries of ers. In several countries, labor standards are East Asia, rising real wages have been associ- lower in export-processing zones (EPZs) than ated with improved bargaining rights (Maskus in the rest of the country, mainly because of 1997). In a larger sample of countries, how- bans on unions or restrictions on strikes ever, there is no clear correlation between free- (OECD 1996).20 Workers in most EPZs, how- dom of association and changes in real wages ever, earn higher wages and enjoy better work- or changes in manufacturing output per worker ing conditions than their counterparts else- for the period 1973-92. In a sample of 17 where in the country (ILO 1993; Maskus countries that had recorded discrete improve- 1997).21 It is not clear what effect better labor ments in legislation and practice regarding standards would have on investors the EPZs freedom of association, there was no uniform are designed to attract. Advocates of improv- tendency for growth to accelerate after the ing labor standards in EPZs must understand changes (OECD 1996). not only the domestic labor market but also the negotiating position of the developing coun- Labor standards and economic welfare try relative to investors. Adherence to core labor standards can make Labor standards and competitiveness important contributions to improving welfare. It is often argued that low labor standards im- The welfare impact depends on the structure pose low wages and thus enhance domestic of domestic institutions and policies. For ex- competitiveness at the expense of trading part- ample, if monopsonist firms hire workers be- ners' workers. In some cases, employer collu- low their marginal revenue product, allowing sion, in the absence of collective bargaining worker association and collective bargaining rights for workers, may reduce wages below could raise both worker wages and efficiency what they would be with effective labor stan- by boosting employment.18 Moreover, orga- dards, thus potentially raising production.22 nized labor can contribute to raising efficiency Such an outcome would require nationwide and welfare in ways that go beyond the adju- collusion since if a firm pays below the pre- dication of wages. For example, unions can vailing wage, it will eventually lose its employ- contribute to firm-specific knowledge and or- ees to other sectors.23 The key point in this dis- ganizational capital, thus raising productivity, cussion is that standards need to be ratcheted and can help improve domestic labor stan- up in a coordinated and economywide fashion; dards by overcoming a "prisoner's dilemma" a sectoral or partial approach will have spill- low-standards equilibrium (Stiglitz 2000).19 over effects which could in many cases be But if the economy starts from a competitive detrimental to a broad group of workers. equilibrium, collective bargaining that raises Over time, artificially imposed low labor wages above their marginal revenue product standards are likely to erode competitiveness may lower efficiency. If collective bargaining is because they reduce incentives for workers to supported by measures to restrict entry (and in improve their skills; the earnings gain that can competitive conditions, collective bargaining is be achieved by upgrading skills is limited by not likely to have a long-term impact on wage labor market conditions. Similarly, low labor levels otherwise), the excluded workers are standards reduce incentives for firms to intro- clear losers. Thus, evaluating policies for in- duce labor-saving technology, because the say- ducing higher labor standards requires detailed ings are worth less if wages are low. 91 GLOBAL ECONOMIC PROSPECTS The data do not indicate that core labor ther employment and wages in the sector. If standards play a significant role in shaping the monopsonist were large, that would lead trade performance (OECD 1996). Countries to pressures to reduce wages in the economy with higher labor standards had higher growth as a whole (Maskus 1997). rates in their share of world manufacturing Trade sanctions on particular export goods exports from 1980 to 1990, but it is not pos- are unlikely to improve labor standards for sible to infer the direction of causality from the economy as a whole, even if the sanctions these results. Of six countries that achieved change the behavior of particular firms. For significant improvements in labor standards, example, barring child labor in one firm or half saw a decrease in the growth of their share sector without addressing the fundamental in world manufactures, while half saw an in- causes of child labor is likely to shift children crease. Differences in endowments and tech- to less-remunerative and perhaps more dan- nology are much more important than labor gerous occupations in other sectors. In Ban- standards in determining patterns of compara- gladesh in 1993, the threat of U.S. sanctions tive advantage. led owners of garment factories in Dhaka to The OECD study (1996) also examined the dismiss all children under age 16. Anecdotal relationship between labor standards and FDI. evidence suggests that many of these children Most world FDI flows from OECD countries found employment in workshops and facto- into other OECD countries, which generally ries not producing for export, or as prosti- have high labor standards. As for the inflows tutes, brick-breakers, or street vendors (Pana- of FDI to non-OECD countries, it is not clear gariya 1999a). There are effective measures that countries with low standards are the pri- for combating abusive child employment, in- mary destinations.24 cluding income-support programs and subsi- dies for education, but trade sanctions are not Effectiveness of trade sanctions in among them. The political-economy arguments against improving labor standards imposing trade sanctions on countries with Even where low labor standards reduce eco- low labor standards are even more compel- nomic efficiency and welfare, sanctions are ling. As discussed above, determining whether unlikely to improve workers' welfare. It is a particular improvements in labor standards familiar principle of economics that the most would raise welfare requires considerable in- efficient way to remove a distortion is to ad- formation on labor and product market con- dress it directly. For example, setting a tariff is ditions. Determining whether labor arrange- an inefficient way to encourage domestic pro- ments in exporting countries will affect wage duction of a good. Imposing trade sanctions is rates in importing countries is even more com- a vastly inefficient way to encourage better plicated, requiring estimates of various param- labor standards. eters such as demand and supply elasticities Take a favorable (to those advocating trade in different markets and factor intensities of sanctions) case, in which government-supported goods (Maskus 1997). The complexity of these barriers to entry enable monopsonist employ- issues, and the decentralized nature of the ers to pay workers below their marginal rev- costs of protection to consumers, increase the enue product. Both employment and wage potential for decisions to be captured by well- rates are lower than if the market were com- organized domestic interests that would ben- petitive. Assume that the rest of the world im- efit from trade barriers. The fact that labor poses a tariff on exports of the product, thus unions and producers in some protected indus- reducing the export price. The monopsonist's tries in industrial countries favor using the response to any reduction in demand under WTO system to improve labor standards un- this market structure would be to reduce fur- derlines this concern. 92 STANDARDS, DEVELOPING COUNTRIES, AND THE GLOBAL TRADE SYSTEM While adherence to core labor standards Environmental standards improves welfare, integrating labor standards and trade into the WTO is contentious. Under tradi- he past decade has seen increasing debate tional criteria, which focus on product stan- I over the contribution of trade to environ- dards, not process standards, labor standards mental degradation. In part, this debate has would not be considered for trade discussions. reflected concern about the role of growth in The TRIPs agreement has, however, widened depleting cross-border public goods; specific the scope for broadening the traditional crite- issues include the dangers of global warming ria (see box 3.2). and the unsustainable pace of fishing and water Inadequate labor standards and poor work- use in some regions (Nordstr6m and Vaughan ing conditions are, first and foremost, a devel- 1999). Workers and firms in industrial coun- opment challenge that affects sizable popula- tries fear that their competitive position is tions, whether or not they are involved in being undermined by environmental regula- trading activities.25 It may be easy to identify tions that force pollution-intensive industries some blatant abuses linked with goods that to move to developing economies. Greater trade enter industrial markets, but the large majority integration and access to information, while of workers in developing countries may suffer boosting global welfare, are increasing the in- from even worse conditions than workers em- tensity of disputes and the potential for do- ployed in export activities. The keys to improv- mestic interests to be injured by the actions of ing workers conditions-beyond development foreigners. itself-lie in assisting countries with the devel- Although environmental concerns are opment of domestic institutions to support clearly legitimate, the trade system is rarely the workers' rights and improve working condi- appropriate instrument for addressing them, tions, and coordinating policies across develop- given the principles outlined at the beginning of this chapter. Only a limited set of environ- ing countries to ratchet up standards and escape metaissuafect more ha oenr.T a lo-stadar equlibrum.mental issues affect more than one country. To the extent that environmental damage is lim- The ILO has been actively pursuing these ited to a single country, decisions on whether activities since its creation in 1919. The ILO reglaly ontos wrkngconiton in. it to restrict production for environmental rea- regularly monitors working conditions mn its sons should not be imposed through trade ne- member countries, and traditionally provides gotiations. Imposing trade sanctions to achieve incentives (such as technical assistance) to environmental goals is likely to be inefficient encourage improved compliance with ILO and perhaps counterproductive. Countries have conventions. However, it is able to invoke eco- different priorities, which are in large part a nomic sanctions (Article 33 of the ILO Con- reflection of different levels of development. stitution) and did so for the first time in 2000 Poorer countries are likely to make different (against Myanmar), although implementation choices in facing tradeoffs between growth and of the sanctions was postponed to allow the environmental goals than do industrial coun- country time to comply.26 Strengthening the tries-today's industrial countries did the same ILO and enhancing its cooperation with other when they were developing. It is important that international organizations would be an effec- developing countries retain access to the in- tive step toward ameliorating working condi- ternational trade system, even if their domestic tions around the world. The private sector, environmental policies are not those preferred particularly multinational firms, should also by richer countries. Several international in- play a more active role by promoting uniform stitutions-such as the Joint United Nations corporate codes of conduct and using best- Environment Programme (UNEP)-and the practice production methods in all countries international environmental summits, have an where they or their affiliates operate. environmental mandate and should be the 93 G L О В А 1 Е С О N О М I С Р А О 5 Р Е С Т S Во1 3.2 T1ie Trade-Related Intellectual Property Agreenle��t (TRIPs) arid developing countries R1P; rг�иlгс> .1II \\-Tl_� mrmhrr; [и .сг тт[тит cйnнrain сг�иnстгг;' acic;i [+; .пл.а1 dru�,i such з, Т:гаnдаг.Э, tг�r рr�пгсг�П� iп[г1lе.гиаl рт�гrп гhо±с fгrr rrr.,nng .�IDS иг таlзг[з. 5c+mr оЕ тhг rrla- neht; irn�ludm�, р.п�п[:, �оР�+rг�,hг, апд trзdгmark,i п+.е1� :г�l,апсг.l дг,гlоргпg iг_+untnrc та�� Ьс зhlе to апд rn c;t.[Ыг,h nhlг�at��.n; гс•karJin� гhс гПt0[Cr- ргпдисс thcir dCUg; dumesticзll}. То до сг,, thгt тгnt ��f rг�,ht,. 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TRIPS ,�.tII [r.7niteY гспг; trom Jгсеlс�ри�; nrt impзct c:�iL1 г,гпгиаll� дгргпд �+п тhг с�[;tгпсг иг гг� гnд[[,[па1 �ииП[гггi, иhгch hu11 гhг �+[гr«hгlmin�; дг[rlnpmenr �_F subatruгc;, ггh[гh.:ии1.1 гедисг thc hй11, ,rf рзггnn зп�1 cn�,,rr�hг;. 1г г; 1тРи:;1Ыг [U markeт рез,сгr of ра[епг or cc+p�n�ht hnldrrл апд Prc�1i[ nc� ;гZс Uf [I��:г гг,7!lifГrS. 1+)П12 1П,1�hС гп[U [i1c �+C1i2 f-I3;Пi1[1' Or COПilamrC �1сп13П�1. гhг ordгn +,Е т.з�тгиJг т+лh.д сап he fгигл� in а 1п гhг 1с+п�; run, srr+mgгr рrг�гг,аиiп ot гпtеllсггиаl ,ги.1г 1:..+ \1.;.1.и, i'_iи7г)hi. 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Jur гiг гh, �,�;г; гn,иl;гд. Вг,��_тд purr гиlгиrr, kпnнlгд�г, .гпд grnen: rciJUCCrч 3гг рго- rсип��тгс с�нt,, гhгrг г, сс,псггп гh.[г TR[Р; тз�, гссreд ап.1 rгтиnгг.эггд. 94 STANDARDS, DEVELOPING CO UNTRIES , AND THE GLOBAL TRADE SYSTEM forums for discussing environmental goals. In outward-oriented economies have lower pollu- addition, donor countries and international tion intensity of aggregate output than inward- agencies can and do condition their assistance oriented ones. During the 1980s outward- on achievement of environmental goals, in- oriented growth was associated with declining cluding those that affect important aspects of pollution intensity because the industrial ac- the global commons. tivities of outward-oriented economies became more diversified, shifting away from heavy The impact of trade integration on the manufacturing (Lucas, Wheeler, and Hettige environment 1992).31 FDI and the use of technology-laden Trade integration influences growth, the tech- imported inputs have helped transmit cleaner nology mix, and the composition of output. In- technologies from the regulated industrial- creased openness will raise economic growth country market to developing countries-for and living standards, which, other things being example, in the paper and pulp industry equal, will increase environmental degrada- (Wheeler and Martin 1992) and the steel in- tion. This scale effect is empirically important, dustry (Reppelin-Hill 1999). especially for countries that are specialized in Conversely, 'n many countries import- environment-intensive activities, such as min- substitution strategies have been pollution- ing, fisheries, and forestry, as in Chile, and and resource-intensive because of price distor- wood and wood products, industrial chemi- tions and lack of competitive discipline. There cals, and petroleum, as in Indonesia (Lee and is strong evidence that under an import- Roland-Holst 1997). substitution strategy, countries have special- Although the scale effect is always positive ized in pollution-intensive manufacturing ac- (as long as trade integration induces growth), it tivities in which they are not truly competitive. can be counterbalanced by two other effects: The resource content of goods in such coun- the technique effect and the composition ef- tries is much higher than that of comparable fect. 29 Trade integration changes access to tech- goods in open economies (Jha, Markandya, nology (through, for example, capital goods and Vossenaar 1999; Vukina, Beghin, and So- imports), and this technique effect may have a lakoglu 1999). Some distortions have stronger positive or negative impact on environmental environmental consequences than others. For degradation. New technology may result in example, subsidized energy usually implies a savings on energy and other inputs, reducing more resource-intensive economy and there- the pollution intensity of growth. The compo- fore more emissions. sition effect may also have a positive or nega- Trade liberalization and other reforms have tive impact on environmental degradation. helped correct policy distortions that subsidize Trade integration and growth affect the com- environmental degradation. For example, en- position of output, owing to changes in the ergy use per unit of aggregate product in 12 relative endowments of factors, the increas- former centrally planned economies declined ing consumption of (relatively cleaner) services drastically with market reform, in part be- that accompanies higher incomes, and the in- cause of the rise in domestic oil prices and the creased affordability and desirability of pollu- cleaner composition of manufacturing output tion reduction, which indirectly lead to better following trade and price liberalization. En- environmental protection. 30 ergy intensity in China fell by 30 percent be- The impact of trade integration on the en- tween 1985 and 1997 as market-oriented re- vironment has varied considerably, depending forms were introduced (Vukina, Beghin, and on the nature and strength of these three ef- Solakoglu 1999; World Bank 1997). Similar fects, but outward orientation has reduced findings emerge for use of natural resources. the pollution intensity of output in several For example, in Sri Lanka, trade liberalization countries (Birdsall and Wheeler 1992), and increased the demand for land to be planted in 95 GLOBAL ECONOMIC PROSPECTS tea, which is less erosive than other crops, thus tries, setting off a "race to the bottom." The generating both environmental and economic emergence of such a race is theoretically pos- benefits (Bandara and Coxhead 1999). sible (Klevorick 1997; Wilson 1997), particu- Some countries do show increased pollu- larly in political and regulatory environments tion following trade liberalization, owing to that are not transparent and are vulnerable both scale and composition effects. Beghin to capture by dirty-industry interests. (Cap- and Potier (1997) suggest that some countries ture by "green" interests is also possible-en- faced more domestic pollution following trade vironmental protection would exceed public liberalization because their aggregate activities preferences.) The several methodological ap- expanded, not necessarily because they spe- proaches used to study this question generally cialized in "dirty" activities. Several countries, find mixed evidence as to whether environ- however, did see increased specialization in mental regulation is eroding competitiveness dirty activities following trade liberalization in relatively "clean" countries (see table 3.2 because they happened to be competitive in and box 3.3). these activities. In this category are Indonesia (Lee and Roland-Holst 1997; Strutt and An- The cost of environmental protection derson 1999); China (Dean 1999; Dessus, One reason for the paucity of evidence that Roland-Holst, and van der Mensbrugghe environmental regulations impair competitive- 1999; Jha, Markandya, and Vossenaar 1999); ness is that the cost of environmental protection Costa Rica (Abler, Rodriguez, and Shortle is often low, as measured by forgone growth or 1999; Dessus and Bussolo 1998); and Turkey the capital cost of abatement. Despite the inef- (Jha, Markandya, and Vossenaar 1999). Fer- ficiency of the command-and-control approach rantino and Linkins (1999), using simulations that most OECD countries have used in ad- with a CGE model to estimate the effects of dressing pollution, the cost of compliance to in- trade liberalization on output of toxic emis- dustries has been surprisingly small, and abate- sions, suggest that specialization is more im- ment has been significant (Jaffe and others portant than scale in determining the impact 1995). Simulations using applied general equi- of trade liberalization on pollution. Table 3.1 librium models of developing economies have summarizes the evidence from economywide found that the cost of abatement for most types studies on the relationship between trade lib- of emissions is modest in terms of forgone GDP eralization and pollution. Panel studies found growth. This finding was robust, having been a mixed effect of outward orientation. Rock generated from models of seven developing eco- (1996) found that the composition effect of nomies with different assumptions on abate- outward orientation was positive or ambigu- ment possibilities and for 13 types of pollution. ous. Lucas, Wheeler, and Hettige (1992) found The only type of pollution that was found to be a negative composition effect. Negative results expensive to abate was bioaccumulative toxic in a study by Vukina, Beghin, and Solakoglu releases in water (Beghin, Roland-Holst, and (1999) were robust. van der Mensbrugghe forthcoming). Detailed One concern about trade and financial in- qualitative case studies of individual industries tegration is that countries with relatively weak undertaken by the United Nations Conference environmental regulations will attract dirty in- on Trade and Development (UNCTAD) con- dustries away from countries with stronger firm these findings (Jha, Markandya, and Vos- regulations, and that because of competitive- senaar 1999). ness concerns integration will inhibit the im- Malaysia provides an interesting case of position of strong environmental regulations specialization in resource-intensive activities ("regulatory chill"). A related conjecture is accompanied by environmental protection that states could strategically decrease envi- (Jha, Markandya, and Vossenaar 1999). The ronmental protection to attract new indus- palm oil industry adapted to a rapidly imple- 96 STANDARDS, DEVELOPING COUNTRIES, AND THE GLOBAL TRADE SYSTEM Table 3.1 Summary of economywide studies assessing the impacts of trade liberalization on pollution Pohtc change Sc Ale Compoitnon Tc.hn.qdc Total pollution Me:. .. Trade ,berah.aron - Small decrease Unir-i %ijrc with NAFTA - lncreaje Car ,d. + Incre-se Me: ... TraJc liberatzaton . IncreAse Uni%cd t - witb NAFTA plus - Increase Car 3.j. ime,ment * Increase hberaluniton Me: c.. Trade bberaltzanor. 2 t.. -43 to 2.6, - t, - i -1) 2 to 6.4'. berrer terms of trade warh United States and Canada Costs E.." 'Trade iberalization 4 4-. 5 6 to 10.6n . 1but -mill 15 to 20'. Vietr .;.r. Trade ltberalizarton 1 .. 1 . -e.3 to St. 1 I r. - r . 0.q t 23.1'. Ind..c.:, Trade bberaluanon .' 5- - 36 to 2 86*s ,.51 iro 3 , with Japan Japi. Tride lberltzaron -0.09 to -0.02oo -0.09 to -0.02 with Indonesia Glci iA' lultilaretal .-1.. t.. i -4. U to o`, U her acaon . .. Not available. Note: NAFTA, North American Free Trade Agreement. The data cited in notes a-f are reproduced from Beghin and Potier 1997. a. Grossman and Krueger 1992; percentages not available. b. Beghin, Roland-Holst and van der Mensbrugghe 1995. The scale effect range refers to production and absorption. The ranges for composition and technique effects refer to 13 measures of pollution emissions. c. Dessus and Bussolo 1998. The scale effect is the increase in output. The composition effect is the difference between total and scale effects. d. Dessus and van der Mensbrugghe 1996. e. Lee and Roland-Holst 1997. The range of composition effects refers to 10 pollutant types. The authors also report a human toxicity index. f. Ferrantino and Linkins 1999, tables 7 and 9. Scale and composition figures are not disaggregated. mented set of environmental regulations and tion of the latest technology (Jha, Markandya, taxes. Compliance is high, and exports are sta- and Vossenaar 1999). ble, even though opportunities to pass the cost increase on to consumers were limited by the Trade policy and environmental highly competitive nature of the industry. State- protection funded research helped develop commercial Tariffs are usually ineffectual instruments for by-products from palm meal, reducing the tackling pollution and environmental degra- cost of compliance by generating revenues dation. Only when the externality originates from the by-products instead of treating them in trade are trade taxes effective in addressing or dumping them and paying fines and fees the problem (Subramanian 1992). A ranking (Jha, Markandya, and Vossenaar 1999; Khalid of instruments for addressing pollution emis- and Braden 1993). The Malaysian electronics sions follows the targeting principle (Bhagwati industry also continued to grow despite tighter and Srinivasan 1997), which, broadly, says environmental regulations, in part because the "the closer, the better." Hence, emissions taxes strong FDI presence facilitated the introduc- are the best instrument for dealing with pollu- 97 GLOBAL ECONOMIC PROSPECTS Table 3.2 Evidence on international competitiveness and environmental regulation Approach Study Conclusion Cross-sectional Kalt 1988 U.S. manufacturing exports negatively affected by Heckscher-Ohlin (H-O) model environmental regulation Tobey 1990 World trade in dirty commodities not affected by environmental regulation Han 1996 Small negative impact of regulation, decreasing over time Valluru and Peterson 1997 Grain trade not affected by environmental regulation Diakosauvas 1994 Exports of the five most polluting crops negatively affected by regulation Xu 1999 Environmentally sensitive exports of 34 countries not influenced by regulation Investigations of FDI flows Albrecht 1998 United States found to import pollution-intensive industries more than it exports them Eskeland and Harrison 1997 No pollution-intensive bias in French and U.S. FDI in developing economies Xing and Kolstad 1995 U.S. FDI influenced by weak regulation only in chemical industries Plant location: firm surveys UNCTAD 1993 Negative effects of environmental policy on location Levinson 1997a, summary Marginal impact of compliance cost except for self-declared U.S. dirty industries Plant location: econometric Levinson 1997a No effect approach Bartik 1989 Small and negative effect Mani, Pargal, and Huq 1997 Positive effect of one measure of environmental stringency on plant location Metcalfe 2000 Negative effect of regulatory stringency on small U.S. livestock operators tion emissions and minimizing distortionary There have been few trade disputes over effects elsewhere in the economy. If emissions technical requirements related to the environ- taxes are not feasible, input taxes are prefer- ment. Whalley and Hamilton (1996) report able to production taxes, which in turn are only a limited number of environment-related preferable to tariffs (Beghin, Roland-Holst, trade disputes for the period 1982-96, and very and van der Mensbrugghe 1997; Lloyd 1992; few such disputes have been brought to the Ulph 1999). This point has been documented WTO since 1995 (WTO website). Only two of empirically in the case of forestry products the 43 requests from developing countries- (Barbier and Rauscher 1994), as well as for concerning reformulated U.S. gasoline and the the Indonesian economy (Lee and Roland- U.S. ban on certain seafood products-involve Holst 1997). With increasing economic in- environmental objectives. Of 300 cases of trade tegration, Indonesia is tending to specialize impediments to U.S. agricultural exports, only in resource- and pollution-intensive activities. one was based on environmental goals; most in- Pollution emissions at the national level (as volved food safety and protection of crops and distinguished from the sector level), however, livestock from pests and disease. It is not clear cannot be decreased even modestly by using whether the paucity of environment-related dis- tariffs. By contrast, production taxes propor- putes reflects the limited impact of environmen- tional to the pollution content of output make tal regulations on traded goods, the high costs the targeted pollution abatement feasible at a of litigation, or the scope of disputes provided reasonable cost in forgone growth. for under WTO rules. 98 STANDARDS, DEVELOPING COUNTRIES, AND THE GLOBAL TRADE SYSTEM Box 3.3 Evidence on the "race to the bottom" E mpirical studis of the pattern of trade, the allo. pollution-mnrensve bias in the allocation ot French and ctanon of FDI, plant locaton, and prohtabibrt LU.S. FDI flow; going into manufacturing industrivs in hase tound imired or no evidence that enironmenal Cote Jdoire, Alexico, Alorocco, and the Republica regulanons have reduced in.esrment or lowered coi Bolsarana de Venezuela. Xing and Kolstad ( 19 pentiseness. As might be e.pected. evidence for a find that U.. FDI in chemical industries seems to be race to the bortom is somewhat stronger tor the dirn- influenced ' weak ensircinmeitral regulaion. as prox. est mdusries, although even here there are conflic. ed b- sulfur dioxide emissions, but[ they alse tind thar ing resulis. There is no eidence that intracountrr, -Dl in eleaner industrics svas not influenced b% ens- difference, in en'ironinental regularions aftect ronmental stmineency. investment. Lage firms appear berter-able to accom- Studies have fkund oriN lirmted iudence that modare en\ ironmental regulations rhan smaller firns. enironmental regulation has a igntifican eftect on Studies o[ the par_er [ . trade has e u,ed the pLI1ut lucatOn. Sir,ey , ot the relocation of transna- cross-setional Heckscher-Ohlin (H-O) model, \ hich ional corporations provide some support for the no- explains specialzanon on the basis of ensironmental rion of a race to the bortom iRunge 1994; UNCTA[D abundance, to examint indirectly the effects of ensi- 19931. Stress, hok%cierr, end v) be less reliable than ronmental regulaIon on international competitise- ctuial Jara because they report what is said rarher ness. The results are mixed. Using 19~ data, Kalt than what is done i les inson 11a i. Lesinson firds, (19881 found that 1.5. en' ironmental regularion for many industries and ne.isire, of stringenes, that had a significantly negantie erfeci on compeiiNsc- interstate differences in en' ironniental regulatons do ness, as measured by, ner exports of manufacturing not si stematicalls aftect the locaten choices of mist goods. Tobey i1 90 i, using 1C9 data, round no e - manutacturing plants in the Unired States. Nani, dence that increased regulation attected output in Pargal, and Hug l199i1 find, surprisinghs, that a polluion-inrensite mdustries Han i 199i1 tested tht proxi tor ditterent letls of entorcement of federal en' tronmental H--0 model using panel data iacro,s ensironmental polhcs n Indian states is posinely industries and over time) and actual expenditure rel:atd to decisions on the locaiton t new manutac- data on pollution abatement as a measure of the turing plants for a wide range ut manufacturing environmental input. He tound that increased enu- industries and for the smaller subser of pollution- ronmental regulation has had a signiticantiv negaine intensive industries. It is possible that the pro-\ ftor eftect on competnreness, bLt that this etfect has de- stIingeney ithe share of the state budget spent on creased over time as man countries tightened their enktronmental programsi measures the etticieney of regulatons and as abatement costs tell sith new cap- state administratiun, vhch induccs firms t-, locare i nal vinages, learning bl doing. and new technolo- states with bigher ens-tronmental e\penditures. gies. \'alluru and Peterson 1199-1 and Diakusausas Several other studies have looked at the impact (19941 found little evidence that ens'ironmental regi- or ens ironnientmal regulation in agricultire, but morstly lations hase had a significant negant e econoimL, to OECD countrie'. AMetealte i01i tinds that strin- effect on agricultural trade excep[ tor the most- gencv had litnle inipact on ihr lcsaton ot U.S. hog pollunng commodiies such as coton and tobacco. produciion acro, srate, and oner time. StnenLk Nu i 1949i tound that the e\port performance of en- did hase a necatise impact on small operators but sironmentallk sensitike ndustries Ln 34 countries was not on large, modern. continement Inesrock produc- unchanged berween the 19o11s and the 14,40s depte ers. Herrge and others 11996) foLInd eidence of the eniergence of ensironniental standards in most economies 4 scale in ens ronmemal compliance for industrial countries since 19-0. mani other indusrics in teteral countnies. The elidence on the allocazon t oFDI prou ides Finally, studies ha' e tound a posiin e relation- l;tle support for the existence of pollution hasens. ship berween ems-ironmental performance and the The United States is importing more pollution- pro tiabilirv of l'.S. firms iCohen and Fenn 149- iensive industries than it is exporting, and dirry Repetto 1995 Although en'ironmenral compliance industries are no more Lkel ro mst abroad than ts not free. it creates new market opporiunines and other industries iAlbrecht 1998, cired in Nordstrom maå, mducc turrher efficienc. gains that ma. ortset irs and Viughan 1949; Eskeland and Harrison Iqc~¯. 'small> c.st. Enironmental performance appears to Eskeland and Harnison i1991 tind nu en\ideice of be ssteiatically asciacd wah higher protitabilir. 99 GLOBAL ECONOMIC PROSPECTS Several global environmental treaties have cation under industrial-country labeling schemes been concluded over the last 25 years, notably may be difficult for developing countries to the Convention on International Trade in En- obtain (Jha, Markandya, and Vossenaar 1999; dangered Species of Wild Fauna and Flora Jha and Zarrilli 1994; OECD 1997a; Zarsky (CITES)32 protecting trade in endangered 1994). For example, none of the 48 licenses species, and the Montreal Protocol33 banning granted under the EU Commission's ecolabel the use of ozone-depleting chemicals (for exam- went to a developing-economy firm, although ple CFCs, widely used as a coolant in refrigera- it is not clear whether any of these firms ap- tors and air conditioners). These agreements plied (Nimon and Beghin 1999). Ecolabeling typically provide incentives for compliance schemes can be used in a discriminatory way, through both technical and financial assistance. especially in markets dominated by develop- In addition, many also provide for trade sanc- ing economies, such as textiles. Domestic tions to enforce compliance. The compatibility industries have more say in defining ecostan- with WTO rules-of-trade sanctions potentially dards than do foreign competitors. The stan- allowed by such treaties has not been tested. dards are likely to favor technologies that are feasible in industrial countries rather than the Alternative policies for environmental input mix and technology set of developing protection countries. Although trade sanctions are not effective Local ecolabels are emerging in developing means of inducing environmental protection, countries, especially in timber-based products, foreigners can affect environmental choices in but also in textiles, to promote better practice other ways. In some cases, foreign countries and preempt discriminatory labeling in indus- could provide subsidies to encourage better trial countries. For example, Malaysia sup- environmental practices. For example, in the ports ecolabels and standards that apply to all U.S.-Mexican dispute over protecting dolphins, types of timber and are based on internation- an alternative policy would have been for the ally agreed standards, not merely on standards United States to equip Mexican fishermen with developed by one or a few countries (Jha, improved nets.34 The cost of this option would Markandya, and Vossenaar 1999). have to be compared with the overall losses Another approach is to help trading part- resulting from trade restrictions. This is to ners implement market-based environmental some extent an empirical issue, but the option policies that have proved effective in tackling would at least reduce dolphin kill, which nei- environmental problems in developing coun- ther trade sanctions nor a consumer boycott is tries. Reducing subsidies on pollution-intensive likely to do. activities or raising taxes on polluting activi- Ecolabeling schemes enable foreign con- ties, through discharge, input, or output taxes, sumers to choose goods produced in an envi- has reduced pollution and increased tax rev- ronmentally benign way. These schemes can enues in Bangladesh, Brazil, Indonesia, and be a source of trade friction, even though the other countries (World Bank 1997). Market- markets they cover are still relatively small, based instruments also provide incentives to because of the increased production costs in- save on the taxed resource and become more volved in the certification process. For exam- resource-efficient. The more targeted the in- ple, ecolabeling schemes in textiles require strument, the better. Some countries, such as multiple production standards for dyes, fibers, China and Malaysia, have used emissions and bleaching chemicals (OECD 1997a). In charges with some success. When the cost of addition, most schemes impose fees. Canada's monitoring is not prohibitive, the market in- Environmental Choice Program imposes a 0.5 strument can be very targeted; for example, percent charge, based on the price of the good, many countries use stumpage fees to foster on sales up to Canadian $1,000,000. Certifi- sustainable forest management (World Bank 100 STANDARDS, DEVELOPING COUNTRIES, AND THE GLOBAL TRADE SYSTEM 1997). China has been successfully abating many developing countries, but it is not the main sub- pollution for the past 20 years by using levies ject of this chapter. The effects of voluntary product (Wang and Wheeler 2000). standards are touched on summarily. 2. Many international food standards are set by the Codex Alimentarius Commission, which is based in mental reform in this direction, can promote Rome and is a joint commission of the Food and Agri- better resource management. Several studies culture Organization of the United Nations (FAO) and identify state firms as worse polluters than the World Health Organization (WHO). firms in the private sector (Pargal and Wheeler 3. This framework is taken, in part, from Rollo and 1996) or centrally planned economies as worse Winters 2000. than market economies (Vukina, Beghin, and 4. For a primer on standards and trade, see Na- .tional Research Council 1995. Solakoglu 1999). Incentives to economize, tinlRsacCocl195 5. This section draws on Maskus and Wilson combined with increased resources for better forthcoming. management, have improved the performance 6. The Development Economics Research Group of public entities in many countries. For ex- of the World Bank is carrying out a major project on ample, in several countries, water-user associ- trade and standards that includes construction of a ations have been substituting for the govern- new global database on standards barriers to support ment in allocating irrigation water. future empirical and policy research in this area. 7. The estimate of the decrease in costs attributable Engagement of the public is essential to suc- to the adoption of uniform standards is taken from cessful environmental protection. This process Gasiorek, Smith, and Venables 1992. can foster partnership among the public, firms, 8. An overview of all WTO dispute settlement cases and authorities. The government can be a fa- may be accessed through the WTO website at cilitator for private industry by disseminating and the WTO information on new technology and environ- document distribution facility at . mental regulations. Alternatively, the process The U.S.-EU case on hormone-treated beef is cataloged cetan begoerie,. r telngaontislo e pocvi under WT/DS26 and WT/DS48. can be coercive, relying on disclosure of vio- 9. WTO cases involving only industrial countries lation of environmental regulations, such as may have implications for developing-country ex- illegal discharges. The coercive approach has porters' market access. For example, the EU's restric- been effective in developing economies such as tions on U.S. exports of genetically modified grains China (Dasgupta and Wheeler 1997), although could have major implications for the exports of simi- complaints tend to be positively associated with lar products from countries, such as Argentina and higher income and greater human capital. Brazil, where varieties of genetically modified organ- isms have been widely planted. Regional approaches to environmental stan- 10. The budget of the office of the USTR in fiscal dards may prove more effective than global ap- 2000 was $25.5 million, and the office had 178 (full- proaches, particularly on issues with a clear time equivalent) staff members; see . emissions and shared water resources. A re- 11. For additional background, see Wilson 2000a gional approach does not imply uniform stan- and 2000b. dards for domestic environmental problems; 12. The (unweighted) average development assis- e ce a tance budget as a share of GDP for low-income coun- the case against harmonization of policies is trewa1.2pcnti198 tries was 11.2 percent in 1998. overwhelming in most settings because of dif- 13. The World Bank has an active program to assist ferent valuations of the marginal benefits of en- developing countries in improving their standards in- vironmental protection. frastructure. Further information is available at . 14. This discussion is taken from formal posi- Notes tions submitted to WTO General Council, January- 1. The regulation of standards in a local or national November 1999. economy, particularly with respect to appropriateness 15. These core labor standards were enunciated in and efficiency impacts, is another important topic for the June 1998 ILO Declaration on Fundamental Prin- ciples and Rights at Work. 101 GLOBAL ECONOMIC PROSPECTS 16. The 1996 OECD study was updated in a more reasons, but the attraction of a large and rapidly grow- recent report (OECD 2000), reaching broadly the same ing market is the most significant motive. conclusions as the earlier study. 25. Labor markets in developing countries have 17. This analysis should be viewed with some cau- been a subject of increasing involvement by the World tion, for several reasons: simple correlations provide Bank-including the seminal 1995 World Develop- no information on the direction of causality; the lack ment Report on "Workers in an Integrating World"- of a theoretical model of the determinants of growth in large part because of the recognition that they play means that the measured correlations between stan- a key role in poverty reduction and economic develop- dards and growth may be misleading; and it is difficult ment. Bank projects with a labor market component to construct adequate quantitative measures of the ex- have increased dramatically since the early 1990s. Ef- tent of adherence to core labor standards. forts are also underway to enhance dialogue with 18. Alternatively, the worker association could re- NGOs and other external partners, including regular strict entry of workers and enable them to bargain for consultations with representatives from the Interna- a higher wage, improving the welfare of workers in the tional Confederation of Free Trade Unions (ICFTU) to association at the expense of excluded workers. The discuss areas of mutual concern. outcome would depend on the goals of the association 26. For more information, see http://www.ilo.org/ and the relative bargaining power of workers and cap- public/english/bureau/inf/pr/2000/27.htm. ital (Maskus 1997). 27. To date, six cases against developing countries 19. The "prisoner's dilemma" in this context refers have been initiated, all by the EU and the United States. to the fact that if a country attempts to improve stan- Four cases deal with pharmaceuticals and agricultural dards it will lose a competitive edge if it acts alone. As chemicals and two concern compatibility of domestic a result, in the absence of coordination, no country will regulations with TRIPs obligations. The countries in- attempt to improve standards. volved are Argentina, Brazil, India, and Pakistan; see 20. Maskus (1997) points out, however, that labor http://www.wto.org/english/tratop_e/dispu_e/stplay-e. turnover in EPZs is rapid, in part because assembly em- doc. ployment is dominated by women, who leave to marry. 28. The transfers refer to the net present value of In any event, high labor turnover results in low union- payments from 1988 on, based on the 1988 structure ization rates, even in EPZs in which union organization of patents. and the right to strike are protected. 29. The scale effect, almost by definition, has an 21. Firms in EPZs may pay higher wages than other elasticity of one with respect to growth. Thus, if an domestic firms for several reasons: they benefit from economy grows by x percent, all else being equal, emis- less burdensome regulations and can operate more flex- sions will also increase by x percent. ibly; they tend to be larger and thus enjoy scale 30. A significant body of literature on the "envi- economies; they are governed by the policies of foreign- ronmental Kuznets curve" (EKC) posits that pollution owned firms that are bound by their headquarters' best intensity follows an inverse-U-shaped curve with re- practices in labor standards; they need to attract labor spect to income. At low levels of development, pollu- to move to the area; or pressures to maintain quality to tion tends to increase with economic growth; above a satisfy export requirements may encourage them to pay certain income level, it declines. There is evidence, at higher wages to induce greater effort (Maskus 1997). least for some types of pollutants, that the turning 22. Even here, the impact of higher exports on point in some developing countries is occurring at wages in importing countries is likely to be small, par- lower levels of income than was witnessed in industrial ticularly in the familiar case of highly labor intensive countries earlier. If this tentative evidence is borne out, goods such as apparel, footwear, and electronics it suggests that several factors are working in favor of (Maskus 1997). a more rapid transformation to a cleaner environment 23. This analysis depends on the structure of labor in developing countries. These factors include techno- market conditions. For example, employers who col- logical diffusion of both cleaner production processes lude to reduce labor standards can benefit if there are and abatement technologies and greater awareness of effective barriers to labor mobility. the costs of environmental damage on the part of both 24. In the 1990s China, whose labor standards officials and the general public. 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Enforcement and Effectiveness of China's Pollu- New York: Oxford University Press. 108 STANDARDS, DEVELOPING COUNTRIES, AND THE GLOBAL TRADE SYSTEM WTO (World Trade Organization) "Overview of the Xu, X. 1999. "Do Stringent Environmental Regula- State-of-Play of WTO Disputes." Geneva. Avail- tions Reduce the International Competitive- able at . Global Perspective." World Development 27 (7): Xing, Y., and C. Kolstad. 1995. "Do Lax Environmen- 1215-26. tal Regulations Attract Foreign Investments?" Zarsky, L. 1994. "Towards an International Ecola- Working Papers in Economics 06/95. University belling Framework." In Life-Cycle Management of California, Santa Barbara. and Trade, pp. 194-205. OECD: Paris. 109 Electronic Commerce and Developing Countries HE INTERNET IS GLOBALIZATION ON STER- The Internet will boost productivity in de- oids. It will boost efficiency and en- veloping countries by increasing the efficiency hance market integration domestically of the procurement system, strengthening in- and internationally, particularly in developing ventory control, lowering retail transaction countries that are most disadvantaged by poor costs, and eliminating or transforming inter- access to information. Although the Internet mediaries. Virtual proximity to industrial should enhance global growth, it also brings in- country markets will increase as the Internet creased danger of economic marginalization to reduces the costs inherent in operating at a countries that cannot access it effectively. Tak- distance. Given the wide differences in returns ing advantage of electronic commerce requires to factors in developing versus industrial policies similar to those needed to capitalize on countries, this increased proximity will gener- the opportunities for trade: improved interna- ate large gains from trade in sectors that lend tional coordination, for example in ensuring themselves to electronic commerce. interoperability of communications technology Consumers will benefit from increased and confronting challenges to domestic tax and competition and market transparency, but the financial systems; an open economy promoting benefits to firms will vary greatly, depending competition and diffusion of Internet technolo- on the sector, degree of product differentia- gies; and efficient social and infrastructure ser- tion, and level of technological sophistication. vices, in particular a competitive telecommuni- Developing-country firms that sell labor- cations sector and a well-educated labor force. intensive, differentiated products (such as Despite the obvious benefits of the Internet, crafts, software, or business services-particu- uncertainty exists about the implications of larly services involving the remote processing this technology and its likely rate of diffusion. of routine information) will experience in- This chapter provides a tentative view of the creased demand. These firms also will benefit implications of electronic commerce for devel- from the opportunity to leapfrog to the most oping countries, based on the theoretical liter- advanced technologies and from easier access ature, inferences from experience in industrial to advertising on global markets. countries, and anecdotal evidence. The discus- The impact of electronic commerce on devel- sion is inevitably somewhat more speculative oping countries' sales to global supply chains is than in other chapters. The evidence, however, uncertain. Reduced transactions costs should warrants four broad conclusions: provide greater interaction among multi- Firms in developing countries should enjoy nationals and technologically sophisticated productivity gains and expanded demand with firms in developing countries. Many developing- the spread of electronic commerce. country firms may lack the reputation required 111 GLOBAL ECONOMIC PROSPECTS to bid on the newly created online exchanges, developing countries. Access, supported by however. Industrial-country multinationals also the growing use of cell phones as a major link may prefer integrating their operations more to the Internet, is expected to rise at a faster closely with a reduced number of the most ad- rate in developing countries than in industrial vanced firms, given the opportunities for mana- countries during the next 10 years. Internet ging tightly linked production processes through access is likely, nonetheless, to remain limited the Internet. in per capita terms, especially in the poorest Government action is critical to removing countries, and to remain well below levels al- impediments to electronic commerce. ready achieved in industrial countries. Access Network externalities imply that market by firms in developing countries may increase prices may not fully reflect the gains to the so- significantly, but the poorest developing coun- ciety from increased levels of Internet access; tries may still see their competitiveness im- hence the government has a role in speeding paired because of a lack of human capital and Internet diffusion. Complementary inputs, in- complementary services required for effective cluding telecommunications, transport and participation in electronic commerce. power infrastructure, and a well-educated labor force are critical to exploiting the Internet's po- Emergence of electronic commerce tential. Governments have also encouraged the ransacting business using electronic aids expansion of the Internet by subsidizing Inter- is as old as the telegraph, which was in- net connections and investing directly in infra- troduced in the mid-nineteenth century. More structure, although such investments can crowd recently, electronic data interchange (EDI) sys- out private initiatives and may quickly become tems not residing on the Internet have facili- obsolete due to rapid changes in technology. tated business transactions worth trillions of Other policies can also contribute to boost- dollars. This chapter, however, explores how ing Internet use. An open foreign direct invest- the relatively new phenomenon of the Internet ment regime is necessary to promote dissemi- is likely to affect commerce. Several defini- nation of information technology and training. tions of electronic commerce exist, including Governments can help facilitate services that transactions where the Internet is used to evaluate and attest to the quality of output gather information, to order goods or services, from domestic firms, which could support and to make payments. A reasonable definition their access to global Internet exchanges. of electronic commerce would include com- Governments must provide a supportive legal mercial operations in which two of these three framework for electronic transactions, such as steps are taken electronically.1 recognition of digital signatures and legal ad- Although the chapter focuses on electronic missibility of electronic documentation. Gov- commerce (in keeping with the overall theme ernments can also encourage Internet expansion on trade), this is by no means the only, or nec- by moving procurement and administrative re- essarily the most important, way the Internet quirements (tax forms and permits, for exam- will affect developing countries. Increased ac- ple) online. Finally, it is desirable to avoid high cess to information holds enormous promise levels of taxation on critical inputs to elec- for bettering noncommercial aspects of the tronic commerce such as personal computers lives of people in the developing world-pro- and telecommunications equipment. viding health and education services from a The gap in Internet access between indus- distance, and more efficient government ad- trial and developing countries will persist ministration are but two examples. At the through the next decade. same time, the growth of the Internet will in- Access to the Internet is grossly unequal, crease the exposure of developing countries to with 30 percent of the U.S. population online material, such as pornography, that may be compared with an average of 0.6 percent in viewed as undesirable. 112 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES Electronic commerce in industrial countries The digital divide has grown rapidly, from next to nothing in the he distribution of Internet access among mid-1990s to $100 to $200 billion in 1999- T countries is severely unequal. Despite 2000 (figure 4.1). Nevertheless, the dollar value rapid growth in Internet access in developing of electronic commerce transactions is less than countries, industrial countries still account for 1 percent of the total U.S. gross domestic prod- the majority of Internet subscribers (figure 4.2). uct (GDP) of $23 trillion (and the business-to- More than 30 percent of U.S. residents had ac- business data refer to total turnover, not just cess to the Internet in 1999, compared with value added). Consumer Internet purchases eqale about). tothi r of ercet ofures 0.5 percent in Sub-Saharan Africa (figure 4.3). equa abot to-thrdsof Ipercnt f reail Electronic commerce is also relatively small mn sales of goods in the United States (U.S. Depart- El e.oi ommerces s Lati smallcin .most developing countries. In Latin America, ment of Commerce 1999), excluding services for example, electronic commerce is estimated such as travel, tickets, and financial brokers, and about one-third of 1 percent in the United at $459 million in 1999 (Lapper 2000), com- Kingdom and Germany (OECD 2000a).2 pared with a GDP of about $2 trillion. The importance of electronic commerce Internet access in the developing world rests not in its current size but in the likely varies greatly. Some countries, particularly in speed of its establishment as a significant ve- East Asia, have achieved impressive penetra- hicle for commerce and the potential for fu- tion rates. For example, the share of Internet ture growth. Electronic commerce is projected subscribers in Korea has grown rapidly and is to reach $4 trillion to $6 trillion in the United estimated at 20 percent of the population in States alone within the next three to four 2000, above rates in most European countries years (Bermudez and others 2000; Economist (Grebb 2000). Although per capita subscriber 1999).3 Electronic commerce may account for rates in China and India remain low, these as much as 25 percent of world trade by 2005 countries are so large that they have a critical (UNCTAD 1999). mass of subscribers ready to benefit from the Figure 4.1 Estimates of electronic commerce in industrial countries, 1999-2000 Billions of US. dollars 160 140 0 Business to business A Business to consumer 120 Business to business and consumer 100 80 - 60 40 0 Suttle 2000 Teo 1999 OECD 2000a Phillips and Meeker Gartner 2000 Source: See Suttle 2000 in the chapter references. 113 GLOBAL ECONOMIC PROSPECTS Figure 4.2 Estimates of Internet access, 1990-2000 Millions of subscribers 250 U United States U Western Europe E Japan U Developing countries 200 150 100 50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: Pyramid. Figure 4.3 Regional Internet access Percentage of population with access to the Internet 35 30 25 20 1 5 10- 5 E 0 Industrial United Other Middle East Sub- Eastern Latin Asia countries States and Saharan Europe America North Africa Africa and the Caribbean Source: Pyramid. Internet, a situation that increases the potential which is the availability of telecommunications for electronic commerce transactions. services. Canning (1999) finds strong evidence that the quantity and quality of telecommuni- Analysis of Internet diffusion cations services provided in a country is a sig- The nascent condition of Internet diffusion in nificant determinant of the existence of Inter- many developing countries reflects the con- net connections and the level of Internet use; to straints on Internet use, the most important of date, almost all Internet users have depended 114 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES on telephone lines for connection. The trends in "Internet intensity"-the ratio of Internet Figure 4.4 Access to telecommunications subscribers to available telephone lines-are Per 1,000 persons remarkably similar across developing and in- 600 dustrial countries, however. Urban density and E OECD countries the policy environment for private sector de- 500 - Latin America velopment are strongly related to growth in In- and the Caribbean ternet intensity.4 Many developing countries 400 - [ Sub-Saharan Africa (including, on average, those in Asia, Latin America, and Sub-Saharan Africa) are experi- 300 encing much more rapid diffusion of the Inter- net for the given availability of telephone lines 200 - than is the United States. The digital divide re- sults from differential access to telecommuni- 100 cations, not from the use of the Internet after telecommunications are available. 0 Unfortunately, the gap in telecommunica- Telephone mainlines Mobile phones tions services between industrial and develop- Source: World Bank 2000b. ing countries is large, so the digital divide is likely to remain wide for some time. The gap is also wide among developing countries, with rope. Approximately 10 million users in Japan, the poorest countries being particularly disad- or 40 percent of total users there, accessed the vantaged. For example, the average OECD Internet through mobile telecommunications country had 70 times, and the average Latin devices in May 2000 (Reuters 2000). Low- American country had 17 times, the number of Earth-orbit satellite systems also have potential telephone mainlines than did countries in Sub- for reaching areas where telephone service is Saharan Africa (excluding South Africa) (fig- poor (Wood 1999).6 Work is underway to in- ure 4.4). By some indicators, the digital divide vestigate the feasibility of Internet transmission is widening. Wilson and Rodriguez (2000) find through power lines. that an index of between-country inequality in All of these links to the Internet will bypass access to communications (the components are the often inefficient and difficult-to-build tele- personal computers, Internet hosts, fax ma- phone networks now used for Internet access chines, mobile phones, and televisions) deteri- and will have substantially higher access orated substantially during the 1990s.5 speeds, although the forecasts in table 4.1 are speculative. The rapid diffusion of cellular Prospects for Internet access phone and other systems with Internet access Given the enormous investments required for will mean that much of the Internet's capacity telephone lines (and in some countries the con- tinued dominance of the telephone system by Table 4.1 Future Internet access speeds inefficient monopolies), hopes for narrowing the digital divide rest largely on the spread of plat..). ar ,ajbk r .,.lit' . alternative means of accessing the Internet. Celh.1. .9w. 4.i, The availability of cable, cellular phone, and 2e, I m. ne..-. satellite systems is likely to reduce dependence iii . on telephone lines for access to the Internet satil,..,. 21I)i m4 during the next decade. Digital cellular tele- PoN .. .J 1 N phone systems with Internet access are already Source: Harrow 2000; www.teledesic.com; www. spreading rapidly in Japan and Western Eu- mediafusioncorp.net. 115 GLOBAL ECONOMIC PROSPECTS may be available at relatively low cost in many new technologies (although at the same time developing countries. Although the most re- developing-country firms will benefit from lower cent experience with wireless Internet access prices and increased access to services offered has been disappointing in some respects (wit- by industrial-country firms). Finally, an overly ness the slow diffusion of Internet-enabled restrictive interpretation of current rules on in- wireless phones in the United States), over the tellectual property rights could constrain devel- medium term these alternative Internet plat- oping countries' access to some of these new forms are likely to give a significant boost to technologies, which have largely been devel- the spread of the Internet. oped in the industrial world. One potential Some insight into the implications of new issue is the patenting of business processes and platforms for Internet access and electronic methods linked to the Internet; for the time commerce can be gained by looking at the being that practice is found only in the United prospects for diffusion of cellular telephones. States. International recognition of such patents During the 1990s cell phone diffusion within could constrain the ability of firms in other countries was strongly influenced by per countries to compete. capita income, the change in per capita in- come, the size of the urban population, and the strength of the policy environment facing Effects on productivity in the private sector.7 Assuming future per capita industrial and developing income growth and policy performance will be countries equal to the 1990s experience, this equation lectronic commerce will generate produc- forecasts very rapid growth in cell phone, and tivity gains by reducing transaction costs. hence Internet, penetration during the next The rapid dissemination of information, the decade in all developing regions. Cell phone substitution of digital for paper record keep- use in developing countries as a group would ing, and the networking capabilities of the quadruple by 2010 compared with 1998. Internet will improve flexibility and respon- Cell phone penetration would remain low siveness, encourage new and more efficient in- relative to population, a projected 6 percent termediaries, increase the use of outsourcing, in 2010, compared with 2 percent in 1998. reduce time to market by linking orders to However, this figure does not imply that only production, and improve internal coordina- 6 percent of developing country residents will tion. Although the effect of electronic com- have access to cell phones, given the potential merce on productivity has probably been small for multiple use (although privacy concerns to date (Oliner and Sichel 2000), simulations may constrain multiple use in some circum- have indicated that electronic commerce could stances). For example, hundreds of people have raise output levels by some 5 percent in the access to the single cell phone provided to major industrial countries (Mann, Eckert, and each village participating in the Bangladesh Knight 2000; OECD 2000a).8 Firms can ex- Village Pay Phone program. pect productivity gains through improved sys- Increased access to the Internet is only one tems for procurement and inventory control precondition for effective participation in elec- and reduced costs of intermediation and sales tronic commerce. Many developing countries, transactions, as well as through more rapid particularly the poorest ones, lack the human diffusion of technology. Consumers also will capital and complementary services required benefit through reduced search costs, thus in- to make effective use of the latest technolo- creasing competition and reducing prices. gies. There also is concern that developing country firms will face increasing challenges in Procurement and inventory control competing with the leading firms in industrial Firms in developing countries can use the In- countries, which have a headstart in using these ternet to achieve the kinds of procurement and 116 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES inventory savings now enjoyed only by the The use of online auctions also can reduce largest firms that have established EDI sys- the price of inputs by improving transparency tems, simply by purchasing "out of the box" and facilitating competitive bidding. General electronic commerce applications (box 4.1). Electric, for example, has cut the cost of pur- Goldman Sachs (1999) estimates that 30 per- chased inputs by 10 to 20 percent through cent or more of the total cost of intermediate online bidding. The potential savings from in- goods typically are "process costs," or the creased transparency varies with the infor- costs of administering transactions and main- mation content of the good. Goldman Sachs taining inventories. The potential for savings (1999) estimates that the savings from pur- can be divided into reduced processing costs chasing online may vary from 2 percent in of procurement transactions, reduced price of relatively undifferentiated products (such as inputs attributable to increased competition, coal) to 40 percent in highly differentiated ones and improved inventory control. (some electronic components, for example). Substituting the Internet for paper-based Keeping an electronic inventory and trans- systems can reduce the cost of processing or- ferring information on replenishment needs ders by saving staff time, speeding up the over the Internet enables producers and retail- process, and reducing processing errors.9 Esti- ers to reduce the time that components and mates of the savings in processing costs of raw materials spend at each processing stage. Web-based procurement are 90-95 percent Even relatively small reductions in inventory (Schwartz 2000; U.S. Department of Com- holding time in retail trade can mean substan- merce 1999). tial increases in profits because the average Box 4.1 Electronic data interchange (EDI) systems E DI systems provide one view of the potential effi- Internet-based systems are less than 1 percent of EDI ciency gains from relying on the Internet for pro- systems (Xie 2000). cessing procurement and inventory control. These That large firms are miling to make huge fixed systems use proprietary software to connect pur- investments and pay high operating costs for EDI chasers' and suppliers' computers and to automate systems indicates the substantial gains that firms can the transaction processing and information ex- capture by transferring from paper-based to elec- change. EDI is estimated to support about $3 trillion tronic systems. The smaller initial Investment and in economic acuvity in the United States alone lower operating costs in Internet-based systems (Phillips and Meeker 2000). About 80 percent of the (along with greater flexibility and transparency of dollar %alue of intercompany transactions among operations means that small- and medium-size firms Fortune 500 companies in the United States is con- can capture these gains. ducted through EDI systems (Bermudez and others The migration of EDI systems to the Internet 20001. Despite this, only about 100,000 U.S. compa- Ito reduce operating costs and to improve flecibilty) nies use EDI-our of the 2 million U.S. companies is likely to boost the dollar value of electronic with 10 employees or more. The large investment re- commerce transactions over the next few years. quired to develop proprierary software and the costs This change will be slow because of the reluctance involved in integrating new suppliers effectively bars to abandon the huge fixed costs represented in small firms from using EDI. By contrast, a large EDI systems and the cost of conversion to Internet- share of the investment required for similar systems based systems (Wenninger 1999). Concerns over over the Internet has already been made, and interac- the lower security of the Internet compared with tiviry with other computers is automatically pro- that of proprietary EDI systems also may limit vided. Also, it is estimated that operating costs in conversions. 117 GLOBAL ECONOMIC PROSPECTS cost to retailers of holding inventory for a year cess to information, the Internet has enabled is at least 25 percent of the price, and margins the elimination of retailers, wholesalers, and may average only 3-4 percent (OECD 1999). (in the case of intangible products) even dis- Improved inventory control will enable firms tributors in some sectors. More commonly, to become more integrated with suppliers, existing middlemen have been replaced by thereby saving time and allowing greater pro- new approaches to intermediation made pos- duction specialization. Increased production sible by the technology-for example, online integration has led to a boom in specialized auctions and aggregators (firms that represent manufacturing firms that produce compo- collections of buyers that can demand lower nents for more well-known companies. A fa- prices for bulk purchases). mous example is Cisco, whose components The Internet also can generate significant are made to Cisco's specifications by suppli- cost savings in transport. The advertisement ers, tested through a connection to the Inter- and trading of empty truck space over the net, and then shipped directly to the buyer. Web is reducing costs per ton in the U.S. Procurement in most developing countries is trucking sector (Economist 1999). According slower, less efficient, and more labor-intensive to one industry estimate, $15 billion to than in industrial countries, so the technical ef- $20 billion annually in cost savings (4 to ficiency gains from transferring procurement 5 percent of output in the U.S. trucking indus- systems to the Internet could be relatively large try) may be realized (Business 2.0 1999). (although the lower cost of labor in developing Eliminating or transforming intermediary countries means that the economic gains could functions will enable developing-country pro- be more limited than in industrial countries). ducers to access both domestic and foreign The savings in working capital from reduced markets at lower cost. By contrast, firms in de- holding of inventories also would be significant veloping countries whose main purpose is to in developing countries, where the cost of help domestic companies trade with interna- capital is high and credit is often rationed or tional markets will be at particular risk. Net- unavailable. The lack of reliable telecommu- work externalities, combined with a low mar- nications networks and complementary ser- ginal cost of adding new users, mean that vices-for example, transport facilities-may the market for providing intermediary services limit these gains, however. Some limited survey offers considerable advantage to the first com- evidence (see annex 4 for description of survey) pany on the scene. Thus the later-arriving indicates that North American firms that were and less technologically sophisticated firms in better at supply-chain management to begin many developing countries may have difficulty with are cutting these costs by an even larger competing with industrial-country firms as amount when using Internet-based inventory Internet-based intermediaries (UNCTAD 2000). systems. This may be because an adequate sup- Developing countries also may not be able to ply of high-skilled workers and a flexible orga- capture the cost savings from reduced inter- nization are required to reap the full benefits of mediation in some sectors, such as primary these systems. commodity exports, where purchasers are likely to be the major beneficiaries of any cost Reduced intermediary costs savings (box 4.2). Productivity gains can be derived from elimi- nating or improving the efficiency of interme- Retail transactions diaries involved in marketing and distribution. The Internet offers the potential for savings Middlemen often charge substantial markups in retail transactions compared with tradi- because of their knowledge about and con- tional systems. OECD (1998b) suggests that tacts with suppliers. By greatly expanding ac- the greater availability of information to the 118 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES Box 4.2 The Internet and primary commodity exporters E Iccronic commercc may affect relatively homo- itor example, Forrester Research 1999a), but the gencous primary commodities less than it does efficiency gains will ary depending on the com- more diftcrniated products because most of the modit'. Commodities already traded an established necessar% intormarion is contained in the product exchanges such as wheat), %%ith widely dissemi- price. Alchough electronic commerce i' likel% to pro- nared intormaEion on prices and centralized trading. %dc some benefius to producers by increasing the et- ma.% not be greatly affected. Online auctions will ticicn ot commodit% markets, the major benefits hate a greater role in reducing margins for com- will accrue to purchasers modities (such as ferrilizeri that trade through More timel access to market information about brokers with limited price transparency. For exam- prices could generate benetir t) producers. Small- ple. brokerage fees in the sugar trade, which range holder tarmers in remote areas could check the prices from 0.5 to 1.0 percent of the salue ot the com- in the neare>r mirket iwhich Lould be a considerable modiry. may decline as more trade is done over l'urn- it done in personi before deciding wheiher to the Internet. sclI to local middlemen; !uch . capability could po- Producer-, in de%:loping countries are unlikel% teintally impro-te the tarmers' bargaining position to see qubstanrial increases in incomes from lower with local and toreign buyers. The Internet also trading and markering costs; rather, these gains \%ill could pruJidc producers with better inbormation accrue to the consumer through lower prices for final about input prices and product a%ailabilir and ea<- products. Lower consumer price, mav increase de- ier access to traming about best production practices. mand only slightly, because the demand tor most ,ie\eral firms have projected that a large share commodities is price inelastic and the reduction in of cormmodlir trade will occur over the Internet marketing costs will probably be small. consumer and savings on providing services reflects the transfer of costs from producers to could increase the productivity of sales staff in consumers in the form of time spent searching OECD countries by a factor of 10. The evi- the Internet. dence on the sale of goods over the Internet so The lower cost of service transactions is far does not show large savings, however. Pre- likely to have a less significant effect in devel- liminary studies found that goods sold on the oping than in industrial countries because the Internet were priced the same or higher than lower wages paid in developing countries mean in stores (Goldman Sachs 1997; Krantz 1998; that firms have less incentive to undertake the Lee, Westland, and Hong 2000; OECD 1998a). fixed costs involved in setting up electronic sys- Other studies estimated that books and com- tems. Also, poor distribution systems, inade- pact discs (CDs) were 10 percent cheaper on quate protection against credit card fraud, and the Internet (Economist 2000; Oliner and limited consumer Internet access constrain the Sichel 2000).10 The potential savings in ser- potential for business-to-consumer commerce vice transactions are more impressive. For ex- in many developing countries. ample, the total cost (including investment) of bank transfers over the Internet is half that of Knowledge acquisition and technology existing automated systems and one-eighth diffusion that of transactions using tellers (WTO 1998; Easier access to knowledge through the Inter- figure 4.5). Note that a portion of this savings net will speed technology diffusion, which is reflects efficiency gains, while another portion of critical importance to developing countries 119 GLOBAL ECONOMIC PROSPECTS Figure 4.5 Cost savings from electronic commerce Ratio of cost of traditional process to Internet 35 30_ 25 a-_ 20 15 - 5U OI I Bank transfer Airline tickets Sending documents Software Notes: Bank transfer: total cost of teller and ATM transaction versus online. distribution Airline tickets: travel agent booking via computer reservations system versus consumer booking online. Sending documents: send a 42-page document by fax, courier, and airmail relative to e-mail. Software distribution: download to CD and ship versus electronic transmission. Source: Kibati 1999; OECD 1999; WTO 1998. because they tend to operate within the tech- working" is greatly facilitated by the Internet. nological frontier. Electronic commerce can Harris (1998) quotes a Neilson survey that reduce the costs of communication between found business's primary use of the Internet geographically distant partners and lower the was for gathering information. search-and-compare costs involved in finding potential business partners and technologies. Moreover, the Internet provides a radial struc- Effects on international trade in ture for interpersonal communication net- developing countries works. Bulletin boards and news servers allow B y opening markets to a wider range of po- individuals to exchange information faster B tential buyers and sellers, the Internet is and within a wider environment than with likely to foster a greater volume and variety of networks based on telephone and fax. Con- trade. The Internet could erode an important nolly (1998) found that differences in commu- advantage now enjoyed by firms in industrial nication and transportation infrastructure countries: proximity to wealthy customers. were significantly related to differences in the For example, the Internet reduces the cost of rate of product imitation encouraged by for- producing customized products designed for eign direct investment (although this does not distant markets; consumers in the United necessarily mean that electronic commerce has States can purchase a hand-sewn suit made by an independent positive effect). Grossman and a tailor in Shanghai without ever visiting Helpman (1991) argue that international con- China (Xie 2000). tacts enable a country to obtain foreign tech- nologies and adjust them to domestic use, an Service exports important channel through which the produc- The Internet will reduce barriers to the sale tivity levels of industrial and developing coun- of services embodying skilled labor (Harris tries are interrelated. Such international "net- 1998).11 In the Philippines, for example, com- 120 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES panies use the Internet to provide accounting the International Standards Organization and services, process insurance claims, and track the International Electrotechnical Commis- credit card defaulters for firms in industrial sion) to assess independently the quality of countries (Jordan and Hilsenrath 2000). In new firms' products and services. However, India workers have been transcribing U.S. relatively few small firms, even in industrial physicians' oral records into written files countries, use the certification services these since 1996, at one-tenth the cost of U.S. tran- bodies provide, because of the cost and fears scription services (Mills 1996).12 Schuknecht that certification may not fully address buyers' and Perez-Esteve (1999) suggest that financial, concerns in the markets where small firms insurance, and other business and communica- compete (Callaghan and Schnoll 1997). tion services are likely to see the greatest im- pact from electronic commerce. Online advertisement New websites are emerging that provide a Multinational supply chains venue for smaller firms to advertise their The Internet's impact on access to multina- goods, and buyers to advertise their product tional supply chains by firms in developing needs.13 A survey of one of the best-known ad- countries is uncertain. Increased information vertising websites (www.alibaba.com), which on these firms may improve their access to has grown to 200,000 subscribers since its multinationals, which tend to use suppliers April 1999 inception, indicates that the impact with whom they have experience. Goldman has been modest so far, although it is too early Sachs (1999) estimates that, because of poor to judge the site's full potential. Most par- research, firms' purchasing managers tend to ticipants say they have found only a few new award 90 percent of their procurement con- customers so far. Only 13 percent of firms re- tracts to about 20 percent of suppliers. At the ported that total sales had gone up consider- same time, suppliers with poor hardware, ably since posting on the website, whereas software, and Internet transmission capabil- 64 percent reported some increase and the rest ities may be unable to compete with better- none (no firm reported a decline in sales). connected companies. It is unclear whether However, 87 percent of the firms viewed the the new online auction systems have resulted in the expansion of supply networks. General Electric, for one example, may be increasing Figure 4.6 New customers gained from the number of its suppliers through its online alibaba website bidding site for procurement. Percentage of respondents A lack of credibility may make it difficult 70 for firms in developing countries to access on- o 60 line auctions. Purchasers need to have confi- dence that suppliers will provide input on time 50 and in conformance with specifications, and product quality may not be known ex ante. 40 More than half of 35 large firms using online 30 auction or exchange sites said that they would not do business through online Web sites with 20 firms they did not know (Forrester Research 1999b). Interview results indicate buyers- 10 typically firms in industrial countries-see an o especially high risk in purchasing from firms None Few Many in developing countries. Over time, greater use Source: See annex 4. may be made of certification agencies (such as 121 GLOBAL ECONOMIC PROSPECTS 85 percent of Internet users are in Nairobi Figure 4.7 Increased sales reported (Jensen 1999; Kibati 1999). because of alibaba website Some aspects of electronic commerce could Percentage of respondents mitigate its impact on inequality, particularly 70 on the poor, in developing countries. The fall in production costs is likely to increase the de- 60 mand for all workers, despite the fall in the 50 per unit labor input in production. Although inequality may increase, the income of the 40 poor may rise. Also, electronic commerce in- creases market transparency, thus reducing search costs and reliance on intermediaries. 20 These effects reduce the price of skill-intensive goods, thus raising the real incomes of work- 10 ers generally, although the poor are unlikely to - benefit greatly as consumers because of their None Moderate Considerable limited access. Source: See annex 4. A direct impact of technological change on inequality in developing countries has been difficult to show empirically, perhaps because website as helpful or very helpful, with the the adoption of new technologies has coin- smaller firms showing the greatest enthusiasm. cided with economywide structural reform (Rodriguez 2000). Studies have shown that, for industrial countries, the recent rise in in- Effects on income distribution come inequality has occurred during a period T he Internet improves access to and use of of rapid technological change in the informa- information, which increases the produc- tion technology sector.16 tivity of capital, thus raising its return relative to labor (Rodriguez 2000). The Internet also increases the demand for skilled labor, partic- Impediments to Internet use and ularly in the information technology sector. By the role of policies in developing contrast, better information will tend to re- countries duce the demand for, and hence the relative re- he presence of network externalities, turn to, unskilled labor involved in the routine I where all participants gain from each ad- processing of transactions and (perhaps) retail dition to the network, implies that market sales. 14 There is a risk that this divergence in prices may not fully reflect the total benefit demand for skilled versus unskilled labor to society from increased Internet access. Thus could increase inequality between industrial government has an important role in speeding and developing economies as well as within Internet diffusion. Inappropriate policies and developing economies.15 Any rise in inequality the lack of complementary services, particu- may be exacerbated by opportunities for mi- larly affecting the telecommunications sector, gration as skills shortages in the information other infrastructure, human capital, and the in- technology sectors intensify in industrial coun- vestment environment severely constrain In- tries. Electronic commerce also may increase terner access in developing countries. regional inequality. In many developing na- tions, Internet services rarely spread beyond Telecommunications the country's capital and a few large urban Poor telecommunications will limit the growth centers. In Kenya, for example, more than of electronic commerce. Required telecommu- 122 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES nications facilities include transmission facili- even traffic that originates and terminates do- ties connecting a country's domestic network mestically can cost the same as international to the greater Internet, the domestic Internet transmission. backbone, and connections from homes and The high cost of Internet access, the lack of businesses to the backbone network. The de- local loop infrastructure necessary for basic fects of domestic telecommunications services dial-up modem access, and the poor quality of may be less important for the larger firms in the local loop infrastructure that does exist all developing countries; these firms may find it impede connections to the domestic backbone. profitable to invest in telecommunications fa- Country comparisons show a strong relation- cilities (such as wireless) that bypass the local ship between usage price and Internet penetra- network. tion; for industrial countries the correlation State or privatized monopolies that control between the Internet hosts per capita and the international connections impose inefficient average cost of Internet access from 1995 to pricing structures and conditions,17 which means 2000 is -.73 (EU Commission 2000; OECD that many Internet service providers cannot 2000c). Developing countries face much higher afford to buy enough transmission capacity costs relative to incomes than do industrial for electronic commerce applications to func- countries (figure 4.8). For example, surveys in- tion without congestion. This poor state of dicate that some users in Beijing may spend an domestic backbone networks results in a large average of 35 percent of take-home salaries on volume of domestic Internet traffic being sent Internet access charges (Rosen 1999). to the United States before being returned to Internet use appears to be higher in coun- its region of origin (Cukier 1999). A growing tries where local phone service is charged at a number of African Internet sites are hosted on fixed rate than in those where callers are billed servers in Europe or the United States because by the minute. For example, in most Latin of poor infrastructure (Jensen 1999). Hence, American countries (Mexico being the major Figure 4.8 Internet monthly access charge as a percentage of GDP per capita, 1998 United States Australia Finland Japan Turkey Mexico Senegal Guinea Mozambique Ethiopia Uganda Sierra Leone 0 20 40 60 80 100 120 140 Source: ITU 1999. 123 GLOBAL ECONOMIC PROSPECTS exception), local calls are charged per unit of can overcome inadequate local loop infrastruc- time (Oxford Analytica 1999), and telephone ture have been either shared facilities or wire- charges account for 40 percent of monthly ac- less local loop. Shared facilities, which involve cess costs (E-Marketer 2000). In the United local entrepreneurs selling the use of a com- States the marginal cost of local calls is zero. puter with Internet access, are a fast and rela- Note that subsidizing Internet access through tively cheap way of increasing Internet use. For flat rate charges for local calls may discourage example, the number of Internet users on each investment in alternative forms of Internet ac- Internet account in Egypt is estimated to be be- cess that ultimately could be more efficient tween 2.5 and 4.5 people (El-Nawawy and Is- (EU Commission 2000). mail 1999). Public access Internet caf6s exist in For many developing countries, the most some 110 countries (Rao 1999). important issue is the lack of telephone service Wireless and satellite technologies also pro- to homes and businesses. Despite increases in vide an alternative to the high costs and ineffi- rates of telephone line penetration during the ciencies of many domestic telecommunications 1990s, more than one-third of the 130 devel- systems. Although currently used primarily for oping countries (excluding small islands) with voice, mobile phones "soon will be a much data for 1998 have fewer than 5 telephone better device for many of the usual Internet ap- lines per 100 inhabitants (figure 4.9). The com- plications," according to some technologists.18 parable level in the United States is 66. Cellular phones in some developing countries The quality of access also is important, as have experienced strong growth rates and rela- some electronic commerce applications that tively high penetration, similar to those in in- rely on sophisticated technology and high user dustrial countries. In Haiti, for example, poor interactivity require low congestion and high telephone service (0.9 phone lines per 100 bandwidth transmission between the user's ac- people, less than half Africa's average, and cess device and the host server. The most pop- huge waiting lists for new lines) has led to the ular alternatives by which developing countries growth of wireless service (Peha 1999). In 1998, Ecuador, the Slovak Republic, and West- ern Samoa had ratios of cellular phone sub- Figure 4.9 Telephone mainlines per 100 scriptions to regular phone service similar to inhabitants, developing countries, 1998 those of industrial countries (IT'U 1998). On Numberofcountries average, however, cellular phone penetration 60 remains well below industrial-country levels. Sub-Saharan Africa averages 5 cellular phones 50 per 1,000 people, compared with 265 cellular phones for every 1,000 people in high-income 40 countries (World Bank 2000b). Impressive increases in penetration can be 30 achieved through increasing competition, al- 20 though in some cases privatization has meant 20- reducing subsidies to local calls, with a nega- tive impact on Web access, at least in the short 10 - term (Zambrano 1999). The relative level of capital spending on communication infra- 0o Ft I structure and development of Internet applica- Fewer than 5 51to20 More than 20 tion software generally tends to be higher and inhabitad States = 66 telephone mainlines pee 100 more advanced in those industrial countries Source; World Bank data. that liberalized telecommunications markets earlier (OECD 2000a). Perhaps as a result of 124 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES privatization and liberalization, Africa has re- American consumers are unwilling to pur- corded its highest annual growth rate in tele- chase goods over the Internet because credit phone mainlines for a decade (AED 1998a). card companies will not compensate holders Figure 4.10 reveals the growing trend of pri- for fraudulent use of cards (in many industrial vatization in the telecommunications sectors countries, cardholders have only a limited ex- of developing countries. posure to loss). This lack of security does not make consumer purchases on the Internet Other infrastructure impossible. In China, companies are depend- Poor infrastructure services (other than tele- ing on cash payments and local distribution communications) are an important constraint through taxis and bicycles to reach consumers on electronic commerce. Frequent and long (Fan 2000). power interruptions can seriously interfere with data transmission and systems performance, Human capital so many Bangalore software firms have their A critical mass of highly skilled labor is needed own generators (Panagariya 1999). Mail ser- in developing countries to supply the necessary vice can be unreliable, expensive, and time- applications, provide support, and disseminate consuming in many developing countries. For relevant technical knowledge for electronic example, the unreliability of postal services in commerce. The work force in many develop- Latin America has meant that more expensive ing countries lacks a sufficient supply of these courier services must be used to deliver goods skills, and the demand for this specialized ordered over the Internet, and in response, in- labor from industrial countries has further ternational courier services are setting up spe- strained the supply of this labor in developing cial distribution systems in Miami (Lapper countries. In the mid-1990s North America 2000; Oxford Analytica 1999). and Europe had unfilled demand for profes- The lack of safeguards against fraud can se- sionals trained in information technology (fig- verely restrict credit card purchases, the most ure 4.11). The wages of workers in informa- common means of conducting transactions tion technology industries continue to rise over the Internet. For example, many Latin more rapidly than those of workers in other Figure 4.10 Developing country privatization in telecommunications, 1990-98 Billions of U.S. dollars 30 25 20 15 10 5 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: World Bank 2000b. 125 GLOBAL ECONOMIC PROSPECTS be taxed at rates exceeding 50 percent. The Figure 4.11 Information technology jobs overall environment for private sector activities unfilled because of skill shortages, 1998 is a significant determinant of Internet service Thousands diffusion. An open foreign direct investment 400 regime helps promote technology diffusion, which is important to the growth of electronic commerce. Foreign direct investment also is one 300 - channel that could facilitate certification of do- mestic firms for access to online auctions. 250 - Governments also can play an important 200 - role in supporting the certification of firms by 150 providing information on certification proce- 1 __ dures, promoting access by domestic firms to international organizations and firms that 50 I provide certification, and perhaps subsidizing the costs of certification to demonstrate the 0 I kinds of resources available in the domestic United Other Germany Canada United p i a States Kingdom market. This role will be particularly impor- Source: OECD 1998b. tant (at least in a transitional sense) as the intermediaries that formerly helped connect developing-country firms to international markets are replaced by Web-based intermedi- U.S. industries (U.S. Department of Commerce aries that may have less information on devel- 1999). U.S. firms will be able to fill only half of oping countries. the estimated 1.6 million positions open in Governments must provide a supportive 2000 (ITAA 2000), while the shortfall of in- legal framework for electronic transactions, in- formation technology workers is estimated at cluding recognition of digital signatures; legal almost 1 million in Japan (OECD 2000b). admissibility of electronic contracts; and estab- At the same time, Harris (1998) notes that lishment of data storage requirements in paper the Internet also facilitates the mobility of skilled form, intellectual property rights for digital labor services. Workers can choose to remain content, liability of Internet service providers, in their own country while exporting labor privacy of personal data, and mechanisms for services to higher-paying industrial countries.19 resolving disputes. The U.N. Commission on Developing countries may also reap some ben- International Trade Law has a "Model Law on efits from migration. For example, Indians in Electronic Commerce" that offers national leg- Silicon Valley have played a role in provid- islatures legal principles and guidelines for ing capital, expertise, and business contacts dealing with some of these issues (Price Water- to Indians in the software exporting firms of house Coopers 1999; UNCTAD 2000). Bangalore. Governments also have had considerable impact on Internet use through direct inter- Investment environment ventions. Singapore is providing grants to Several regulatory impediments to the wide- local companies to encourage participation in spread adoption of electronic commerce exist in electronic commerce (Price Waterhouse Coop- many developing countries. Duties and taxes on ers 1999). Malaysia is wiring a zone south of computer hardware and software and commu- Kuala Lumpur with fast communications nication equipment increase the expense of con- (Bickers 1999). The "Wiring the Border" proj- necting to the Internet. For example, a com- ect is providing subsidies to small businesses puter imported into some African countries may along the Mexico-U.S. border to finance Inter- 126 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES net access. The U.S. Department of Defense played a critical role in developing the initial Figure 4.12 Internet use in industrial networking technologies (Goodman and oth- countries by knowledge of English, ers 1994). The U.S. government also financed 1998-99 the original Internet backbone until increased Percentage of population demand for services led to the creation of 35 commercial backbones; a similar pattern was followed in several other industrial countries (Braga and Fink 1997). Despite some success 25 stories, however, the rapidity of technological change greatly increases the riskiness of gov -20 ernment interventions to support Internet ac- U5 cess. The expenditure of billions of dollars to connect schools to the Internet through tele- 10 phone lines could be wasted if wireless or power line technology turns out to be less ex- pensive (Davis and Seib 2000). Furthermore, UW government investments may crowd out pri- English is Knowledge of Other vate sector initiatives that could provide ser- first language English is for many common First group: Australia, Canada, Ireland, United Kingdom, Finally, government can support the spread United States. of the Internet by switching to online services Second group: Denmark, Finland, Norway, Sweden. Third group: Austria, Belgium, France, Germany, Greece, for its own transactions. Public sector procure- Italy, Japan, Portugal, Spain, Switzerland. ment, many aspects of tax and customs ad- Source: www.headcount.com. ministration, the processing of routine applica- tions (such as car permits and real estate licenses) and other governmental functions can often be carried out through the Internet. iarity with English was the principal determi- Decisions on the use of the Internet in public nant of Internet use in Slovenia, for all eco- administration should be based on the costs nomic groups (Vehovar, Batagelj, and Lozar of providing services relative to paper-based 1999). Conversely, Internet content is limited processes, the capability of government per- in the local language of most developing coun- sonnel, and the extent of demand. Neverthe- tries. From a commercial aspect, Schmitt less, greater government use of the Internet can (2000) found that just 37 percent of For- play a role in encouraging public participation. tune 100 websites support a language other than English.20 Language The amount of non-English material on the That most Internet business is conducted in Web is growing, however. Spanish websites in English is currently an important constraint particular are increasing, in part to serve the on using the Internet. Estimates of the share of large Spanish-speaking community in the English used on the Internet range from 70 to United States (Vogel and Druckerman 2000). 80 percent, but only 57 percent of Internet Improvements in translation services (by peo- users have English as their first language (ITU ple and machines), as well as Web browsers 1999; Vehovar, Batagelj, and Lozar 1999). Per that recognize characters of different lan- capita Internet use averages about 30 percent guages, should ease language constraints (U.S. in those industrial countries where English is Department of Commerce 1999). There is grow- common, compared with about 5 percent in ing recognition that English-only content is in- other industrial countries (figure 4.12). Famil- sufficient for an international economy.21 127 GLOBAL ECONOMIC PROSPECTS Challenges to regulatory regimes transactions, which also are difficult to moni- in developing countries tor. Barter exchanges using digital money are E lectronic commerce will pose difficult small now, but the potential for growth could challenges for government regulation of be great when a critical mass of participants tax and financial systems. The growth of elec- is reached (Washington Post 2000). Reduced tronic commerce will encourage tax compe- transaction costs also might make it easier for tition and may facilitate some forms of tax taxpayers to hide potentially taxable activi- evasion. Competitive pressures in domestic ties. The impact of electronic commerce on banking systems will rise, generating substan- tax evasion should not be overestimated, how- tial benefits to consumers and firms but po- ever. The sale of domestic goods will still be tentially lowering the franchise value of exist- controlled by monitoring companies' transac- ing banks. tions, and imported goods will be controlled at the border. Tax policy Tax authorities will require greater exper- The growth of electronic commerce will pre- tise in information technology, both to im- sent some challenges to tax enforcement in prove the efficiency of tax administration and developing countries and place increased em- to enhance government ability to obtain and phasis on improving the technological sophisti- understand records of electronic transactions. cation of tax authorities and on international In this respect, the greater transparency and coordination of tax collection efforts. The In- ease of retrieval of electronic transactions (com- ternet reduces the cost to firms of being physi- pared with paper processes) could assist tax cally far away from customers and increases enforcement. the ability of companies to relocate production, because a substantial share of the work in- Financial sector and capital flows volved in organizing production is carried out Electronic commerce could pose a significant by computers that can be located anywhere. challenge to government regulation of the fi- Thus multinationals will find it easier to shift nancial sector by reducing the franchise value activities to low-tax regimes. Governments may of domestic banks, thus increasing the incen- find it more difficult to impose desired income tive for banks to undertake excessive risk. At tax levels on existing corporations, and com- the same time, electronic commerce will gen- petition among developing countries for in- erate substantial benefits to consumers and vestment by multinationals may rise. This situ- firms that rely on banking services. Competi- ation will place a greater premium on efforts to tion in domestic banking systems will increase reach agreements among developing countries because of reduced costs, greater access by to limit this kind of competition. foreign banks, and greater reliance on capital In addition, some of the new transactions markets by former bank borrowers. conducted through electronic commerce will Online banking may reduce banking trans- be difficult to monitor. Governments may not action costs by 15-25 percent compared with be able to detect the transfer of digitized ma- regular accounts (Morgan Stanley Dean Wit- terial and thus know that a taxable transac- ter 1999). Enhanced transparency and compe- tion has occurred.22 It may also be difficult to tition will mean that a large part of these cost control such transactions through the supplier reductions are transmitted to the consumers of because companies can easily provide such banking services. In fact, some degree of price services from other jurisdictions. Thus effec- competition among banks is already becoming tive international agreements to assist with tax apparent in the emerging economies (Gold- enforcement will be important. man Sachs 2000). The Internet increases the potential for con- The Internet will greatly increase the ability sumer-to-consumer purchases and for barter of foreign banks to compete in developing 128 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES countries' domestic markets. The geographic location of the consumer and the service pro- Figure 4.13 Bond versus bank financing vider will become increasingly irrelevant, Millions of U.S. dollars eroding the local banks' advantage of having 1,200 large branch networks. First-mover advan- tages, economies of scale, and reputational 1,000 advantages backed by strong supervisory sys- - 800 ECommercial banks tems will strengthen the competitive position 800 Bon of industrial-country banks. They will be in a better position than domestic banks to offer 600 integrated trade payments systems, in which 400 ----- - __ customers can obtain applications for a letter of credit, care of credit approvals, telegraphic 200 -- transfers, invoices, and confirmations (Granit- sas 2000). One indication of the potential for 0 foreign firms' inroads into developing-country 1980 1990 1999 banking systems comes from a 1997 study, Source: World Bank 2000. which indicated that U.S. and U.K. firms dom- inated global Internet financial services mar- ket because of their reputations, head start, and the predominance of English on the Inter- of private source debt that was held in bonds net (OECD 1999). in developing countries rose from about one- Furthermore, the Internet will reduce the fourth in 1990 to more than one-half in 1999 advantage that domestic banks enjoy from (figure 4.13). Currently, leading rating com- having a monopoly on information about panies rate only several hundred corporate their clients. Local banks often are better and foreign bonds. A private initiative is un- placed than foreign lenders to monitor the fi- derway to rate millions of companies on the nancial position of domestic firms (Eichen- Internet by merging credit management tech- green and Mody 1999). This advantage has niques with collecting and organizing infor- enabled domestic banks to play an important mation on companies (UNCTAD 2000; www. role in onlending international capital flows cface.com). Furthermore, with a huge pool of to domestic borrowers; domestic banks ac- rated companies, it would become possible to counted for as much as 46 percent of net long- issue guarantees based on estimated default term capital flows to developing countries in probabilities and to securitize these guarantees 1997 (World Bank 1999). Domestic banks may through the capital markets. experience sharper competition for making loans in their own markets, as the Internet International coordination makes information about borrowers more ac- Electronic commerce raises several regulatory cessible to international lenders. issues that should be addressed through im- The easier dissemination of credit informa- proved international coordination. The im- tion made possible by the Internet is likely to portance of international cooperation to tax strengthen the trend toward greater reliance administration was noted earlier. Ensuring on bond financing in developing countries, open access for the international transmission potentially at the expense of domestic banks. of goods delivered electronically would facili- The number of firms in developing countries tate the continued growth of electronic com- with access to international bond markets in- merce. Members of the World Trade Organi- creased more than sixfold from 1991 to 1998 zation have decided provisionally to exempt (Eichengreen and Mody 1999), and the share such goods from customs duties.23 A more im- 129 GLOBAL ECONOMIC PROSPECTS portant contribution to ensuring open access 6. Companies such as Teledesic and Skybridge would be to secure agreement on barrier-free plan to launch satellite systems capable of supporting treatment of electronically delivered services, high-speed Internet access for millions of users. So far stremtments eres the failure of the Iridium system has not derailed these by strengthening commitments entered into plans. under the General Agreement on Trade in Ser- 7. The regression equation is log(cell 99) - log(cell vices (Mattoo and Schuknecht 2000). 90) = -9.16 -.841og(cell 90) + .781og(urban pop 90) + More generally, the rise in the volume of 2.12[log(income 99) - log(income 90)] + .78log(in- cross-border transactions promised through come 90) + 1.061og(policy). R-squared is .78. Obser- the spread of the Internet will raise a host of vations = 99. 8. These studies are by their nature speculative, however, and the results require several restrictive as- amples include improved procedures for allo- sumptions that may or may not reflect actual events cating domain names used for Internet loca- (OECD 2000a). tions;24 agreement on privacy standards for 9. At Cisco the replacement of phone, fax, and e- data generated through commercial transac- mail ordering by electronic commerce systems cut the tions; closer coordination of antitrust reviews number of orders that had to be reworked from 25 per- to reduce the administrative burden imposed cent to 2 percent (OECD 1999). 10. The use of discounts to increase market share, on companies; and efforts to harmonize the coupled with the lack of profits, leaves some doubt as laws governing electronic commerce transac- to whether these lower prices reflect efficiency gains, tions. Electronic commerce will further speed however. the process of globalization and thus will un- 11. See World Bank 1995 for an earlier discussion derline the importance of an effective interna- of the potential for long-distance service exports from tional framework for cross-border transactions. developing countries. 12. The potential for exports of Internet-based services by developing countries in the medical sector is staggering. About one-third of the cost of health care Notes in the United States, or some $300 billion a year, rep- 1. See OECD 1999 and UNCTAD 2000 for a resents the cost of capturing, storing, and processing more detailed discussion of the definition of electronic information such as records, physicians' notes, test re- commerce. sults, and insurance claims (Evans and Wurster 1997). 2. These estimates exclude sales where the Inter- 13. Examples include www.indiaonestop.com; net is used as an information resource only. In some www.in-business.com.ar/mall/;www.maquilamarket. service sectors, the penetration of electronic commerce com; and mm.malaysiadirectory.com/b2b/, which focus is relatively high. In the United States, for example, mainly on markets in India, Argentina, Mexico, and electronic commerce accounts for some 25 percent of Malaysia, respectively. The World Bank is providing stock trades. support to the Virtual Souk, an online marketplace for 3. These figures vary greatly depending on the de- artisans in the Middle East and North Africa, owned by finition of electronic commerce used. Projections of local nongovernmental organizations and cooperatives. trillions of dollars of electronic commerce in part re- 14. Note that the Internet also enables service flect the migration of EDI systems to the Internet. transactions that would not otherwise have occurred, Moreover, these forecasts are extremely speculative. As which increases the demand for literate but not highly indicated earlier, estimates of even the current size of skilled workers in developing countries. electronic commerce differ substantially. 15. Inequality is affected by many factors, and the 4. The regression is log(I/T 1997) - log(I/T 1990) strength of this effect is unknown. Thus, whether the = -14.76 - 1.041og(I/T 1999) + .86log(urban pop Internet will ultimately have a significant impact on in- 1999) - .10log(income 1990) + .61log(policy). All co- equality remains uncertain. efficients are significant except income. Regional 16. For example, see Autor, Katz, and Krueger dummy variables are also included. R-squared is .97. 1998; Bresnahan and Brynjolfsson 1998; Krueger 1993. IT stands for Internet intensity. 17. In Egypt, for example, El-Nawawy and Ismail 5. Between-country inequality of access to com- (1999) report that the cost of an international half cir- ponents of this index (such as mobile phones) appears cuit can be 2.5 times the international tariff. to have declined during the 1990s. Thus trends in the 18. Helft 2000. digital divide may differ significantly among different 19. Harris (1998) goes further to say that "the kinds of communications media. Internet can eliminate the scale disadvantage of small 130 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES regions in producing services ... [and] then can po- vate Sector. Note No. 122. World Bank, Wash- tentially lead to in-migration of skilled labor to the ington, D.C. July. region." Bresnahan and Brynjolfsson. 1998. "Information Tech- 20. DePalma, McCarthy, and Armstrong (1998) nology, Workplace Organisation and the Demand found that although 49 of 50 companies surveyed had for Skilled Labour: Firm-level Evidence." Stan- operations outside the United States, and 80 percent ford University, Palo Alto, Calif. Processed. print marketing material in other languages, only five Business 2.0. 1999. "Wise Load." (www.business2. said that their multilingual sites were as functionally com[Mayl]). rich as their English sites. Callaghan, Nancy, and Leo Schnoll. 1997. "ISO 9000 21. Advertisements have appeared in U.S. busi- for Small Companies." Quality Digest Online ness magazines highlighting the need for Internet (www.qualitydigest.com[August]). content to be written in other languages in addition Canning, David. 1999. "Infrastructure's Contribution to English. Schmitt (2000) warns businesses that to Aggregate Output." Policy Research Working English-only sites are no longer feasible for interna- Paper 2246. World Bank, Washington, D.C. tional companies. Connolly, Michelle. 1998. "The Dual Nature of Trade: 22. According to Bach and Erber (1999), it is vir- Measuring Its Impact on Imitation and Growth." tually impossible to enforce taxes on electronic trans- Duke University Working Paper 97-34 (http:// actions. This conclusion is uncertain, however, and its www.econ.duke.edu/Papers/Abstracts97/abstract. accuracy will depend on whether the evolution of In- 97.34.html). ternet technology ultimately favors privacy over gov- Cukier, Kenneth. 1999. "Bandwidth Colonialism? The ernment monitoring. Implications of Internet Infrastructure on Interna- 23. The impact of this decision on government tional E-Comrnmerce." (Paper delivered at the an- revenues should be slight because the tariff lost if nual INET conference sponsored by the Internet no taxes are levied on digitizable goods is less than Society, San Jose, Calif., (http://www.isoc.org/ one-fifth of 1 percent of total revenues in the major inet99/proceedings/le/1e_2.htm). developing-country importers (Matoo and Schuknecht Davis, Bob, and Gerald Seib. 2000. "Technology Will 2000). Test a Washington Culture Born in Industrial 24. The World Intellectual Property Organization Age." Wall Street Journal. May 1. issued a detailed report on the intellectual property DePalma, D., J. McCarthy, and A. Armstrong. 1998. issues associated with domain names and has devel- "Strategies for Global Sites." The Forrester Re- oped an online system to assist in resolving disputes port 3 (3) (May). (UNCTAD 2000). Economist. 1999. 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E-Commerce, Lima, August 4-5. 133 Annex 4: Firm interviews and website survey Firm interviews * participants in a conference on the May T he interview information included in the 24, 2000, "Wiring the Border" program, chapter is based on conversations with: including representatives from small- business associations, technology special- * managers or executives from five multi- ists, government officials, and academic national firms: Ingram Micro, The Gap, experts. Ford, General Electric, and Infosys. These specialize in computer hardware and soft- ware distribution; apparel; automobiles; Website survey electrical and lighting equipment; and The conclusions on the alibaba website are customs software, respectively. The first based on a survey of firms via fax, conducted four appeared on this year's Fortune 200 in May 2000. To keep the survey manageable, list, while the last is a major Indian-based the firms to be contacted were chosen from se- multinational software company. lected economic subsectors. Within these sub- * representatives from: (i) the U.S.-Mexico sectors, we included all firms posting offers in and U.S.-Philippines Chambers of Com- the last two weeks of April 2000-whether as merce; as well as from (ii) the offices of sellers or buyers. We received 105 complete the Commercial or Trade Attaches repre- replies to our questionnaire from the 800 firms senting Taiwan (China) and Brazil in the surveyed. A list of all respondents' names and United States. websites (if any) is attached. 134 ELECTRONIC COMMERCE AND DEVELOPING COUNTRIES Companies Participating in Survey of Alibaba B2B Website Users China Yangzhou Weiteli Motor- Green Source International Group Belgraver Asia Pre. Ltd. Manufacturing Co., Ltd. Wellmade Industry Corp., Ltd. W. & J. Co., Ltd. Tianjin Printronics Circuit Corp. Zhejiang Light Industrial Products ChangZhou Rui Da Trading Company Horman Company Import and Export Corp. Well Hung (Australia) Pte. Ltd. China National Electric Wire and Cable iSquare Design and Development Renaissance International I/E Corp. (Xiamen Branch) Shandong Xingfa Foodstuffs Wuhan Zhongbai Group Co., Ltd. Hebei Xin Hua Li Da Sale Department Mideast Mercantile Ltd. CNACC International Co., Ltd. K.O.G. International Philippines., Inc. Xiamen Zhongxin Metal Products Co., Fujian Coal Import and Export Corp. Jiangxi Wire and Cable General Factory Ltd. Tung Kong Handbag Mfy Young Eak Trading Co., Ltd. Cintel International Ambp Enterprises Co., Ltd. Shenzhen Tonghaisheng Investment Sandstone International Co., Ltd. Software International Development Co., Ltd. Shanghai Yang Ning International Xiamen Gemachieve Enterprise Jiangsu I/E (Group) Corp. (Heiteng Co., Trading Co., Ltd. Shandong Metals and Minerals Import Ltd.) Pacific Silk Route Pte. and Export Corp. Sinochem Hebei (Shenzhen Toomly) China Shaanxi Techrun Technology D.P. International Import and Export Co., Ltd. Company Jitco Group Ltd. Zhejiang Yongkang Crown Power Tools Praphan Ceramica Co., Ltd. Beijing Orient Sotoma Garment Co., Ltd. Manufacturing Co., Ltd. China Tea Import and Export Corp. Ishida Co., Ltd. Truly Sales Co. Hebei Sanli Cashmere Products Co., Ltd. Ningbo Free Trade Zone Sino-Dubai Hongguang Electronics Import and Yixing Tanghan Ceramic Co., Ltd. International Trading Co., Ltd. Export Co. (Guangzhou Office) Xiamen Zhenhua Ind. Corp. Shriya Impex Chengdu Guoxin Maida Electronic Co., Ningbo Economic and Technical Regan (H. K.) Ltd. Ltd. Development Zone Import and Export Citic Shanghai Import and Export Co., Catic Electronics Corp. Ltd. H20 Electronics Co. Starscom Info-Tech Co., Ltd. Chengde Bearing Co., Ltd. Dong Young International Corp. Seanet RS Manray Concept Sinoleather.com Ltd. Cixi Kaida Bearing Co., Ltd. Atul Exports Chew The World Kedi Hi-Tech Industrial Co., Ltd., W. H. Enterprises Gusung Machinery Xiamen Office Guangdong Yangchun Bearing Co. Ltd. Eros Group Shijiazhuang Gulf Semiconductor Co., S.L.S. Partnership Xiangshui Bearing Accessory Co., Ltd. Ltd. Adore International Shandong Gifts and Decorations Import Tao's Inc. Dorly International Enterprises Inc. and Export Corp. Feidong Foreign Economics and Trade Shandong Commercial Group Dalian ET.Z. Zhengxing International Corp. Corporation Trading Co., Ltd. China Dalian Aidi International Trade Goldsense Technology Ltd. Yuyao Kingfan Industry and Trade Co., Company CV RJR International Ltd. Aurora Translation Services Cixi Fuda Bearing Co., Ltd. Hanbit Ebenezet Shen Zhen Xinhaowei Industrial Co., Ltd. G.K. Trading Corp. Giga Technology Co., Ltd. On Time Taiwan Ltd. Suzhou Arts and Crafts I/E Corp. 135 Appendix 1 Regional Economic Prospects East Asia and Pacific nance 2000 were generally conservative, and we have upgraded the 2000 forecast for most Recent developments countries. Growth for developing East Asia, in EAST ASIA HAS CONTINUED TO CONSOLIDATE particular, is likely to be nearer to 7.2 percent its recovery from the deep crisis-induced than to earlier projections for 6.6 percent recession of 1997-98, albeit with sub- growth. stantial variation across countries in the re- A common element across the region over gion. Developing countries in the region regis- the last 12 to 18 months has been low and sta- tered 6.9 percent growth in 1999, up from a ble inflation and interest rates, and these have decline of 1.4 percent in 1998. The Republic been strong positive factors in the recovery of Korea experienced the sharpest "V-shaped" process. For example, inflation in the East recovery, with GDP growth of 10.7 percent in Asia-5 has stabilized at a rate of 1.5 to 2 per- the year. Indonesia, at the other extreme, cent, after a rapid but brief acceleration caused barely reached positive territory, following its by the devaluation of 1997-98 (figure A1.1). difficult economic performance of 1998. On Surging oil prices have translated into mild in- average, output in the five most affected crisis flationary pressure in Korea (3.9 percent year countries (Indonesia, the Republic of Korea, on year in September) but have had consider- Malaysia, the Philippines, and Thailand- ably less impact to date in Malaysia or Thai- known as the East Asia-5) recovered smartly at a rate of 6.7 percent from their 1998 crisis land As arel apoliy hon- decline of 8.2 percent. China suffered a minor tinulto be largely accommodative, though di i utu gothin199touhstl central bank officials are carefully monitoring groing autt rowth cli o 19ercentasurecov the situation. The low-inflation, low-interest growing at a clip of 7.1 percent-as recovery rt niomn a enpriual eei in exports did not occur until the second half rate environment has been particularly benefi- of the year. The newly industrializing econ- cial to the process of unwinding the domestic omies (NIEs-Hong Kong [China], Taiwan debt problems faced by firms and consumers [China], and Singapore), which suffered sub- in the crisis countries. Similarly, governments stantial spillover effects of the crisis, saw a have been able to limit the growth of public rebound to growth of 4.8 percent in 1999 from debt (as a share of GDP) below the worst lev- 1.1 percent in 1998. And momentum con- els initially feared. Indonesia stands out from tinues to be fairly strong in the region. Data the other East Asian economies. It has been covering the first three quarters of 2000 sug- buffeted by continuing instability-the rupiah gest that the near-term projections published dropping 20 percent through October since the nine months ago in Global Development Fi- beginning of the year-and inflation started a 137 GLOBAL ECONOMIC PROSPECTS Figure A1.1 Inflation in the East Asia-5 countries, 1991-2000 Percent change, year over year 25 20 15 10 5 0 1111I Illil 011991 011992 01 1993 Q1 1994 Q1 1995 Q1 1996 Q11997 Q11998 Q1 1999 Q1 2000 Note: GDP-weighted average. The East Asia-5 comprises Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand. Source: IMF, International Financial Statistics, and World Bank staff estimates. rapid rise in the third quarter (6.6 percent year combined with softening internal demand as on year in September). a result of reforms in the state enterprises In all the crisis countries, real effective ex- and the financial system, led to a deflationary change rates have stabilized at rates well above cycle. Deflation effectively yielded a real depre- crisis troughs, but some 15 to 30 percent be- ciation of the currency, and export growth has low precrisis levels. Thus real devaluation has boomed since the second half of 1999, with persisted and facilitated a double-digit boom in merchandise exports 35.4 percent above year- exports. Robust export growth and firming ago levels in 2000 (year-to-date through Au- export prices have abetted the maintenance gust in dollar terms). of a positive current account balance, though The main weakness in many countries has the recovery of imports and higher oil prices appeared in the equity markets. On average, has narrowed the balance in many countries. stock market indexes in the five East Asian cri- Nonetheless, rising reserves and the improved sis countries declined by over 30 percent (in term structure of foreign debt have led to a local currency terms) since the beginning of the substantial improvement in the external posi- year (through early November). Globally, there tion of the region compared to the precrisis has been a flight to "quality" instruments, and position. China's competitiveness-through this has depressed financial markets in almost maintaining stability in its own foreign ex- all emerging markets. Gross financial capital change market-suffered in the wake of the inflows into East Asia appeared to have picked crisis, but ultimately improved as a conse- up in the first half of 2000 compared to 1999. quence of price deflation and VAT (value However, the flows have been dominated by added tax) export rebates. The loss of compet- some large issues, particularly by China. For itiveness, combined with the sharp import re- example, China received $10.4 billion of the versals in the crisis countries, including Japan, regional total of $11.6 billion in equity in- led to a sharp falloff in export growth-1.7 flow, and less than $600 million flowed into percent in 1998 (in dollar terms), followed by the equity markets of the East Asia-5 countries. 5.8 percent in 1999. Weak external demand, Net flows remain negative, and in particular, 138 REGIONAL ECONOMIC PROSPECTS commercial banks continue to unwind their practices have not changed substantially from local positions. earlier, less than transparent modes. Some of the smaller island nations have also suffered Near-term outlook from political turmoil (for example, Fiji and In 2001-02, output for the group is likely to the Solomon Islands), whereas newly formed begin a general process of moderating and con- East Timor is in a slow and lengthy process of verging toward longer-term growth paths, with nation building. growth easing to 6.4 percent in 2001 and 6 percent by 2002 (table A1.1). Export growth, Long-term prospects sizzling in 2000, should ease considerably in Long-term prospects are little changed from 2001 and 2002 in line with slower external earlier projections. Average per capita income growth. External risks for East Asia are similar grows in our long-term baseline (2003-10) to what we have assessed over the last 12 by 5.4 percent per year-somewhat below months: a hard landing in the United States, a 1990-2000 per capita growth of 5.9 percent. renewal of financial difficulties in Japan, and a The factors underlying slower growth vary weakening of the electronics cycle. But these from country to country. The upper-middle- risks have generally been pushed back in time. income countries and NIEs are converging And domestic risks in aggregate have dimin- with (or in some cases have exceeded) OECD ished from past high levels. Nonetheless, the income levels. They are maturing economies, process of working-out from under the post- with already highly educated work forces; and crisis financial difficulties is far from finished. it is likely that GDP growth will ease gradually Higher interest rates or slower growth could toward the OECD average over the next sev- further worsen financial conditions for many eral years. The lower-income countries, partic- firms and consumers still saddled with high ularly China, are unlikely to sustain the high debt. The two most vulnerable large countries growth rates of the past decade. Many of the are Indonesia and the Philippines. These coun- low-income countries-as well as the crisis- tries also suffer from political weaknesses, civil affected middle-income countries-will have disturbances, and a perception (from the point to devote resources in order to overcome the of view of investors), that business operating legacy of past institutional failures: addressing Table A1.1 East Asia and Pacific forecast summary (percent per year) Ba,Ow lrc j Growth rai, si i,- 1990-2000 1999 1999 20ifi) 2I.C.I 11(' 0I. Real GD.',r.-...ih 7.1 -1.4 69 2 6-i 4- Consumnpr._.. r.,r c iva3 5.2 -2.8 5 2 5 c4 F, I GDP per .ip.ia 5.9 -2.5 5.8 .1 4 5 4 Populkt.r 1.2 11 1.1 1. 0I Q Median iralai-..,r 5.9 9.2 -1.0 1 N i.4 4 5 Gross dom r., .,r. c.rr.[ -E[w 31.3 30.1 29.6 31) A 31 1 31 2. Median ccroral . I.udgert DP -0.8 -2.3 -3.2 -2 x -2 1 -I - Export v:.I- e' 122 6.8 6 2 l .4 9 N. Current a,C..u-r.LG- l' 0.3 5 9 4.1 1.3 ' 2? 2' Memora.Jw-i ii.: w GDE. ; _ur5. 2 -8.2 6.7 5 5 a. GDP deflator. b. Goods and nonfactor services. c. Indonesia, Republic of Korea, Malaysia, Thailand, and the Philippines. Source: World Bank baseline forecast, October 2000. 139 GLOBAL ECONOMIC PROSPECTS Table A1.1a Forecast assumptions- The countries of East Asia-with their ever East Asia and Pacific increasing involvement in the so-called new Initial conditions 198q-40o 1.94-20r. economy-are well placed to meet the chal- -- - -- - lenge, but they are lagging far behind the more 1. Ratio of real ,..,.. ... ' advanced countries. In 1999, the East Asia-5 industrial/I I - i , - h 3o.. 23.. 2. Trade(X+NW. P'.'. -. I. -i.*. X ' 2 countries had only half the number of Internet 3. Median infl a.. r. -.r '.4 4.2 hosts (per 10,000 persons) that Brazil or Mex- 4. Median fiscal 1.,l..< * 1 9 -1.- ico had, and only 5 percent compared to the 5. Investment / t lI *=.21 j 3 ih. 6. Investment/ - .2 ..........1, 21h 11 NIEs. And though markets for the Internet 7. Gross natioi-i F..*f Q.v .i f and mobile phones have been growing at some 7a. Gross dome-,. i tnt. 'Hi 34.2 3,3 40 percent per year in East Asia, they have 8. Current acc(...,..r -l... If -1 4' 9. FDI / GDP 1 been growing at over 50 percent in Brazil and 10. External del -. ' ii.3 u9. Mexico, in part as a result of deeper reforms 11. School enro I.......r . and greater competition in the telecommuni- Primary (pci . 1 .. population. '0.0 a- ( cations sectors of the latter countries. There is Secondary . tu Lo also the possibility of reform fatigue or even 12. Illiteracy rat: icr. a it =c. reversal. Malaysia's recent decision to renege 15+ years 21.'. l1) ) 13. Under-5 mo-i . r. on removing import tariffs on automobiles (per 1,000 -. I iS') 4..U could signal a weakening of a commitment to 14. Life expecta..,. I.r. . , /7') 6. I' regional free trade. Exogenous assurnpt. 149rIs 2001- II) 1. Population I- 1.2 -, South Asia 2. Market's Gr* ... . r- 2.9 31. 3. Oil price $/1 A1 1 h. 2 2 U..2 4. Market's im- .. -6 . Recent developments DP growth in South Asia averaged 5.1 *Exports of goods and services plus workers' remittances. Note: Market growth is trade-weighted partner GDP / import G percent in 1997-98, as the larger econ- growth. omies-relatively clsdto international trade- Source: World Bank database, World Bank staff estimates. oerelatvel closed toainternatioarde- were successful in mitigating losses of agricul- tural income tied to commodity price declines nonperforming loans in the financial sector, in the wake of the East Asian crisis. Output disposing of distressed assets, and reducing growth accelerated to 5.7 percent in 1999 the state's active role in the economy while en- and is estimated to reach 6 percent in 2000. hancing its regulatory role and competition. Better-than-expected agricultural sector per- Initial conditions for sustained high growth formance in Bangladesh, India, and Pakistan in East Asia at the beginning of the millen- has accounted for a fairly large proportion of nium appear better than at the beginning of the recent improvement in growth outturns. the 1990s, the end-of-decade financial crisis In addition, the rate of growth in industrial notwithstanding (table A1.1a). Openness in- production in Bangladesh and India climbed creased by more than 20 percentage points to more than 10 percent during the first half over the 1990s and was, if anything, enhanced of 2000 (figure A1.2). Output in Bangladesh during the crisis, presenting both an opportu- was boosted by the recovery from the mas- nity as well as a challenge. The opportunity sive flooding of 1998. The burgeoning Indian comes from the ability to import new tech- service sector also has maintained strong nologies, knowledge, and business practices. advances, at rates of more than 8 percent The challenge comes from increased competi- through 1999 and into 2000. Exports of goods tion and the need to develop institutions that and services continue to grow at rapid rates- enhance flexibility and speed of adaptation. by more than 10 percent in India, Pakistan, 140 REGIONAL ECONOMIC PROSPECTS Figure A1.2 Industrial production in South Asia three-month moving average, year-on-year, percentage change 20 15 10 5 lop Pakistan Bangladesh -10 Jan. 1998 May 1998 Sept. 1998 Jan. 1999 May 1999 Sept. 1999 Jan. 2000 May 2000 Source: IMIF, International Financial Statistics. and Sri Lanka. At the same time, manufactur- $210 billion. Recently, however, in tandem with ing production has fallen sharply in Pakistan, global financial volatility, there was a reversal given financial constraints and other difficul- of portfolio flows, which affected the stock ties. And the surge in the oil price and contin- market and exerted some pressure on the rupee. ued weakness in non-oil commodity prices (for Nonetheless, steps toward improving super- example, the prices of Sri Lanka's main export vision and restructuring of the banking systems commodities-tea and natural rubber-are in India, Pakistan, and Sri Lanka have yielded now some 20 and 30 percent below recent some positive results and have improved confi- highs) is exacting a moderate toll from the re- dence in the region to a degree. gion's growth momentum. Recent steps to make South Asian economies Near-term outlook more open to capital flows and strengthen the Average growth for 2001-02 is anticipated to financial system have also supported growth. be 5.5 percent for the region (table A1.2). India eased some restrictions on FDI to encour- Underlying this aggregate figure, however, are age foreign flows into the energy sector, where a number of driving and restraining forces it is most needed. FDJ registered $2.2 billion in shaping the near-term view. Among positive 1999 and is expected to achieve similar levels in factors are improved prospects for capital in- 2000. But foreign investment is broadening in flows, as the Indian government in particular scope across the economy, supplementing do- undertakes efforts to boost foreign investment mestic investment in such sectors as the soft- and relax direct exchange controls. And to fa- ware industry, which has achieved remarkable cilitate the growth of services exports, legisla- growth of almost 50 percent over the last year. tion has been introduced to support the IT sec- Portfolio flows to India also increased, to a high tor and develop "e-business." External factors of $3 billion in 1999-2000, attracted by (and such as continued strong advances in world contributing to) the boom in India's stock mar- trade and prospects for an eventual moderate ket. Equity prices increased by more than 50 firming of non-oil commodity prices should percent from the first quarter of 1999 to the support growth across countries of the region, first quarter of 2000, and capitalization rose to especially in Bangladesh and Sri Lanka. 141 GLOBAL ECONOMIC PROSPECTS Table A1.2 South Asia forecast summary (percent per year) Ba,ehnc lore..im Growth rare, rn., 1990-2000 1998 1999 2000 201 2u02 20no.-Il Real GDPcr.... rh 5.4 5.6 5. '' 55 5 5, Consumpt:.:i per :apit 3.5 6.' 3.5 1 - 3 3 3 1 V GDP per cap.r 3.5 3.7 3.8 4 0 3- 3 4 Populati. r. 1.9 1.8 1.3 .5 1 - I i i Median in]la,. r. 8.2 8.3 9.8 1 4 i. I ii S. Gross dome r. e .,rr.,.r ([i 22.2 23.0 23.3 23 - 24 I 24 3 25.1-1 Median cerir il c..r tue t C EW -6.9 -5.8 -4.9 -4 - -4 J -4 4 -1 - Export vol.,r.-' 99 64 4.9 115 4 4 4 84 Current ac;i:-ur CDP -1 8 -2 3 -1 6 -2.6 -: , -2-32 a. GDP deflator. b. Goods and nonfactor services. Source: World Bank baseline forecast, October 2000. Recent developments in oil markets will re- achieved some progress in a number of areas strain growth in the near term, however. South supportive of longer-term growth (table A1.2a). Asia is one of the more energy import-intensive Although the region remains in large part developing regions, with crude oil and other closed to foreign trade (in part because of the energy commodities constituting 20 percent of large scale of the Indian domestic economy), total imports in India and 15 percent in Pak- median inflation and central government fis- istan (representing 2 percent of GDP in both cal deficits have declined modestly; external countries). The 50 percent rise in the oil price debt ratios have been brought down signifi- over the past year has increased India's im- cantly, and domestic investment and FDI as a port bill by some $4 billion and Pakistan's by share of GDP have increased from generally $650 million, increasing pressure on balance low levels. Indicators of human capital have of payments positions, especially for Pakistan, also improved, with school enrollment rates where external financing difficulties are ex- rising, illiteracy falling, and life expectancy in- pected to continue. Moreover, uncertainty gen- creasing by three years over the last decade. erated by the high debt levels and precarious Estimates for longer-term growth assume fiscal position of central and state governments that the region's high potential, as embodied is likely to constrain private sector activity. in the initial conditions above, will be fully used. Relative to the 1990s, total factor pro- Long-term prospects ductivity in India, for example, is expected to Average GDP growth for South Asia over the continue growing at a slightly higher base (by 2003-10 period is anticipated to register 5.4 0.2 percent) in the next decade. The abundant percent, about 0.3 percentage points higher supply of Indian workers with training in high than in projections prepared one year ago. technology sectors should continue to provide This pace of output growth, combined with strong momentum to the software industry. declining rates of population growth, should Total investment is expected to maintain support advances in per capita incomes of growth of 8 percent throughout the next close to 4 percent per year over the 2000-10 decade, with most growth emanating from the period, a marked improvement over the 1990s private sector. Demand for the region's ex- record of 3.5 percent growth (table A1.2). ports is expected to continue to grow rapidly, South Asia begins the new decade after having with import growth in South Asia's principal 142 REGIONAL ECONOMIC PROSPECTS Table A1.2a Forecast assumptions- However, countries such as India and Pak- South Asia istan face major challenges in achieving the Initialconditions potential rate of output growth over the next decade. High levels of domestic debt and large 1. . '. ..... fiscal deficits present substantial difficulties in i-,u r., s...r .,47.' 39.3 2. .... < ..,,. resli 13.6 19.7 achieving fiscal consolidation while maintain- 3. ?o ... r.. ,,..rr 8.6 7.8 ing expenditures that are necessary for growth. 4. i' ..i b ,i ' -6.7 -5.4 A reduction in unproductive subsidies and 5. I r...r f 20.4 22.-7 6. I rn,cr,E- ... 21.o0 2.0 stepped-up investment in human capital and 7. ( r.- ...._. .1.. o-r 19.8 19.9 infrastructure are essential to this effort. Infra- 7a. ( 1.......... l . .i 18.8 19.0 structure bottlenecks and delays in privatiza- 8. C,( n i.........i blri- C14 -26 -1.5 9. IPI , Ui 0.6 tion may limit the acceleration of growth in 10. £ u.ni c'rrT 311. 175.8 the real and financial sectors. Also, much re- 11. 5l...1 . . .In.cr.r ri.r.,. 11......l....i.... mains to be done to improve the competitive- 6C.0 73.0 ness of the region's export industries. The in- s,...nr. 52.0 55.0 creased focus of the government of India on 12., I.sr.rsrc . ir . I -ir * 53 0 47.0 trade liberalization has coincided with some 13. IIc.s,,.,rnl.r; rn increases in tariffs and an intensified use of 1'" -. -rrh i 121.0 99.0 anti-dumping measures. High tariff rates, for 14. 1 t r. 59.0 62.0 example, an average of 40 percent for all Exogen.. i.. ... 199s 2001-10 goods in India in 1999-2000, limit exporters' 1. 1'.rl . , 1.9 1.5 access to cheaper, more efficient industrial in- 2. 1.1 irke . i H.... rh 2.2 3.2 puts, and serve in the long term to limit pro- 3. Od P'., hls.. 18R2 20.2 ductivity gains. 4. I.lsrt..r .'n ..rr ri. 6.0 6.2 *Exports of goods and services plus workers' remittances. Note: Market growth is trade-weighted partner GDP / import Latin America and the Caribbean growth. Source: World Bank database, World Bank staff estimates. Recent developments The economic recovery in Latin America export markets rising from 6 percent in the has been broadly favorable, with the re- 1990s to 6.2 percent over 2000-10. Intra- gion's GDP expected to rise by 4 percent in regional trade and economic integration with 2000. Stabilization of global financial markets the world are assumed to accelerate as an eas- and the burgeoning of world trade growth ing of import substitution policies and trade have come to support a general resumption of and industrial restrictions takes place. Smaller economic activity across the region. As in East countries such as Bhutan, Maldives, Nepal, Asia, this has been complemented on the do- and Sri Lanka will benefit from the reduc- mestic front by a steady improvement in most tion in larger-country import barriers. But an macroeconomic indicators through the course important factor likely to restrain growth is of 2000. Inflation declined or held steady in the dependency of the region-and especially most countries (Ecuador was a notable excep- the smaller countries-on a limited number of tion), allowing interest rates to continue on a export crops, for example, cotton, tea, and falling trend. Unemployment dropped and real rubber. Volatility and secular decline in com- wages rose in Brazil, Chile, and Mexico com- modity prices are likely to continue to pres- pared with 1999 averages, but unemployment sure merchandise export receipts. remains high in Argentina and Colombia. Ex- 143 GLOBAL ECONOMIC PROSPECTS Figure A1.3 World and selected Latin American export growth in U.S. dollars (Percent, three-month moving average year over year) 30 Mexico 20 210 . LAC_exclding exic 15 Sourc: Word BaWodata 5-> 0 LA, excluding Mexico -10 -15 June 1997 Dec. 1997 June 1998 Dec. 1998 June 1999 Dec. 1999 June 2000 Note: LAC in this case refers to Argentina, Brazil, Chile, Colombia, and Mexico; world refers to 30 countries that are responsible for 82 petrcent of the world's exports. Source: World Bank data. change rates stabilized in several countries the "engine" for world activity through this that experienced periods of freefall during 1999 period. Mexican growth has continued to be (such as Brazil and Ecuador), restoring a de- buoyed by the U.S. import boom in 1999- gree of purchasing power and improving the 2000, with business cycles in the two countries outlook for private consumption and invest- becoming more closely aligned-and likely ment spending. reaching high points in 2000. In addition, the In real terms, most exchange rates have ap- usual exchange rate difficulties that Mexico preciated in 2000, but they are still low enough experienced with earlier electoral cycles was to facilitate rapid export growth in countries noticeably absent this time, in part because of such as Brazil, Chile, Colombia, and Peru, prudent macroeconomic policies that helped to leading to an improvement in trade balances restrain inflation under 10 percent for the first for most countries (including oil importers). time since the 1994 peso devaluation. As Mex- Merchandise exports in dollar terms from the ico approaches a peak in its growth cycle, while region's largest economies (excluding Mexico) others are escaping the trough, an implication exhibited a sharp recovery from the lows ex- is that near-term growth (2000-01) for Latin perienced in 1998, growing by over 17 per- America as a whole is unlikely to display the cent year on year during January-June 2000; distinct V-shaped pattern of recovery evident in Mexico's exports advanced by 25 percent (fig- East Asia. ure A1.3). Mexico is an exception within the region Near-term outlook with respect to the positioning of countries on Volatility in financial markets and primary the recovery and growth cycle. Whereas most commodity prices continues to pose a threat to Latin American countries experienced negative the recovery in Latin America. Sharply declin- or slow growth in 1999 because of fallout from ing equity prices during the first half of 2000 the Asian and Brazilian crises, Mexico bene- contributed to a period of uncertainty in global fited from its special trading relations through financial markets at a time when key commod- NAFTA with the United States, which remained ity price movements for the region also di- 144 REGIONAL ECONOMIC PROSPECTS Table A1.3 Latin America and the Caribbean forecast summary (percent per year) L.iRc tIOffil I. Gro,% i .SI . . 1991-20M 1998 199 2' .116 2'u11 206 i .'00-11 Couni. .. CL) S -2.3 1 09 - I 21 2 1 2 GDIp r .r I 0.4 -1 5 2.4 '1 ,- I - 1 6 1 6 I1e I I 4 lk;h -6 9 3 . ' -I - Gre..-, Ir.ncrcrt1ij [.4 21)9 19.5 i ~ 2' 1''. MeJdic:rr ,ni,,I hdtIr-F -2.q -2.3 -2.4 -I 2' -2' - Exp,.rr A.Iul' 8.4 -5 -.0'-'' Curcff-f ..n '0 -2 3 -_4.0 -2.Y -2 -' 2r -' a. GDP deflator. b. Goods and nonfactor services. Source: World Bank baseline forecast, October 2000. verged. The oil price rose sharply, while non- Table A1.3a Forecast assumptions- energy commodity prices of importance to the Latin America and the Caribbean region weakened-particularly coffee, grains, Initial conditions 1.86-90 19`8-2000 and soybeans. Although most of the large countries experienced strong gains in industrial 1. Ratio of real income per pra industrial / Latin Arr-- 9.6 10 0 output in the first quarter of 2000, the recovery 2. Trade (X+M) / GDP r ir..-. l . 26 " 51 5 appeared to have faltered in the second quar- 3. Median inflation ratL .c. ..cr.r 244 6.1 ter, except for the oil exporters Ecuador and 4. Median fiscal balance C L' -1.4 -2.3 Venezuela. And private capital inflows fell dra- 5. Investment / GDP (r: iI' 18.4 20.2 6. Investment /GDP (r-m.rl . 21.4 19.9 matically. Argentina was particularly hard hit 7. Gross national savinc.

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Note: Projections as of November 14, 2000. Source: Wor1d Bank, Development Economics, Development Prospects Group. 169 GLOBAL ECONOMIC PROSPECTS Table A2.2 Commodity prices and price projections in constant 1990 dollars -%Cluj' Prtntcnons Commodity utul I P;sll zoo I M02 Z00i .010 Energy Coal, U.S. $/Mt - 59.86 41.67 32.40 32.10 32.70 31.57 30.91 30.13 29.18 Crude oil, avg, spot SIbbi 4.82 51.21 22.88 12.31 17.49 27.74 23.91 19.38 15.49 14.78 Natural gas, Europe $/Mmbtu - 4.72 2.55 2.28 2.06 3.76 3.59 2.96 2.37 2.14 Natural gas, U.S. $hnmbtu 0.68 2.15 1.70 1.97 2.19 3-96 3.83 3.23 2.37 2.33 Non-energy commodities Agriculture Beverages Cocoa clkg 268.9 361.6 126.7 157.9 109.9 89.2 59.9 101.5 129.1 132.3 Coffee, other milds c/kg, 456.8 481.4 197.2 280.9 221.7 193.2 186.5 193.3 218.2 206.2 Coffee, robusta -114 364.0 4SO.5 118.2 171.7 144.1 93.9 92.8 101.7 129.0 14S.8 Tea, auctions (3) average cft 332.7 230.5 20S.8 192.8 178.0 187.3 183.7 177.2 167.8 163.4 Food Fats and oils Coconut oil $11111: 1582.4 935.9 336.5 619.9 713.5 439.9 478.3 498.3 533.7 305.7 Copra $tmt 89S.8 628.8 230.7 387.3 446.7 307.1 406.5 401.4 395.9 375.8 Grounclnut oil s1hrr 1508.2 1192.7 963.7 856.8 762.4 69&6 707.9 715.1 705.8 661.3 Palm oil Shrit 1036.0 810.7 289.8 632.3 422.0 319.0 325.2 332.2 3443 350.1 Soybean meal $/Mt 408.7 364.5 200.2 160.5 147.3 183.3 186.5 184.5 185.1 175.8 Soybean oil $/mr 1140.8 830.0 447.3 589.7 413.6 336.9 344A 350.6 370.1 357.9 Soybeans Shut 465.8 411.4 246.8 229.2 195.2 Z08A 21M 212.2 215.2 210.1 Grains Maize $/-t 232.7 174.0 109.3 96.1 87.3 8S.2 90.9 101.5 107.6 101.1 Rice, Thai, S% Vint 503.2 570.S 270.9 286.6 240.5 200.1 205.7 216.8 236.7 233.4 Sorghum $/Mt, 206.4 179.0 103.9 92.4 81.7 $4.2 94.2 92.3 103.3 97.3 Wheat, U.S., HRW $Ymt 218.7 239.9 135.5 118.8 108.5 111,0 114.8 120.0 137.7 132.3 Other food Bananas 661.7 524.0 540.9 461.2 361.9 426.5 445.0 452.6 45SA 441.7 Beef, U.S. c/kg 519.6 383.3 256.3 162.6 178.4 1921 189.8 187.1 180.2 175.1 Oranges S/mt 669.S 555.8 531.1 416.8 424.2 361.6 382.6 461.3 486.3 466.8 Shrimp, Mexican ekg .. 1,600 1,069 1,488 1,414 1,489 1,449 1,412 1,334 1,237 Sugar, world c/kg 32.8 87.7 27.7 18.5 13.4 17.7 17.3 K7 17.2 18.7 Agricultural raw materials Timber Logs, Cameroon Ii/clarn 171.3 349.6 343.5 269.8 260.7 272.5 272.6 276.8 284.0 299.5 Logs, Malaysia $/--Vol 171.8 271.6 177.2 153.0 181.1 1902 189A 193.8 2M9 22S.6 Sawnwood, Malaysia Sicum 697.2 550.0 533.0 456.1 S81.6 594.5 593.1 604.4 645.6 700.2 Other raw materials Cotton cJkg 269.4 286.4 181.9 136.1 113.4 126,7 130.8 130.2 136.6 140.7 Rubber, RSS1, Malaysia Jkg 162.2 197.9 86.5 68.0 60.8 69. 71.7 73.2 75.9 77.2 Tobacco $11M 4,287 3,161 3,392 3,143 2,944 2,958 2,870 2,860 2,797 2,567 Fertilizers DAP $1mt 215.1 308.6 171.4 191.7 172.1 153.6 157.8 161 5 167.8 159.5 Phosphate rock 43.8 64.9 40.5 40 5 42.6 43.4 42A 40.6 37.9 35.8 Potassium chloride S/Mt 127.5 160.7 98.1 110.1 117.8 IZIA 118.6 114.4 107.6 98.8 TSP Vmt 171.3 250.4 131.8 163.0 149.5 138.7 143.5 141.0 137.7 1323 Urea, E. Europe, bagged $/mt 191.2 308.5 130.7 97.1 75.3 111.0 114,8 120.1 120.5 116.7 Metals and minerals Aluminum $/Mt 2,215 2,022 1,639 1,279 1,317 1,560 1,531 IS22 1,549 1,478 Copper Volt 5,640 3,031 2,661 1,558 1,522 1,809 1,889 1,991 1,894 1,967 Gold $/Toz 143.2 844.3 383.5 277.1 269.8 277.4 267.8 253.7 236.7 233.4 Iron ore C/dmtu 39.2 39.0 32.5 29.2 26.7 i 3 28.2 27.9 27.5 25.7 Lead 120.7 125.8 81.1 49.8 48.7 45.46 47.8 SO.8 S1.6 49.8 Nickel $/nit 11,339 9,054 8,864 4,362 5,819 9,521 7,174 6,459 5,164 5,291 Silver c1toz 705.2 2866.1 482.0 S21.4 508.1 SOO.4 478.3 470.6 451 9 427.9 Tin 1463.5 2329.8 608.5 522.0 523.1 540.0 526.1 516.7 507.8 474.6 Zinc 117.9 105.7 151.4 96.5 104.2 113.0 111.0 108.0 103.3 97.3 - Not available. S/mr, dollars per metric ton; $/bbl, dollars per barrel; S/mmbtu, dollars per million British thermal units; c/kg, cents per kilogram; $/curn, dollars per cubic meter; $hoz, dollars per troy ounce; c/dmtu, cents per dry metric ton unit of iron (fe). Note: Projections as of November 14, 2000. Source: World Bank, Development Economics, Development Prospects Group. 170 GLOBAL COMMODITY PRICE PROSPECTS Table A2.3 Weighted indexes of commodity prices and inflation Annual Pro',enon ' Index (Ic1'' IIl 19'0 1980 1990 1998 1'Ne 2no'X 2001 i2001 200; 2010 Curren dollar. Petroleum. 5.1 161 2 100 0 S 1 1 9.0 122 4 liu.3 *I 8 -8.- 53 io Non-energ comrmoda..' 43.8 125.5 100.' 9q 1 88.0 i- 3 Q 3 6-44 % li.) 315.6 Agriculture 45.8 138.1 100.r1 10"8 .8 128 .1 Q I4 l t, 122.3 Bcrcrge 5a.9 181.4 100.0 140.6 1. C1 6 18 %.n 121 L.2Q Food 46.- 139.3 100.0 104.9 8".6 4 a x.5 C3 a.; a : 111 Fin 3nd .kI 64.4 148 100.0 132.S 105.0 I C 101.8 1116 4 11. 125 - Gr3ri, 46.- 134.3 1111 301.3 86.4 -S s4 1 632 11( 1 1-. Other -*..-.d 32.2 134.3 100.0 84.1 -4.0 4. 'I S2 4 Sp,.2 Q3.0 Ra%% 3w r,31l 36.4 104.6 1000 8" 3 8S.5 4l., 95 1110.3 110 130.3 T.-ber 31.8 "90 10rQ.0 90.9 111.8 112 1l13 - 122 3 141-14 182 Ibri rrhr 13r. 396 122.0 100.0 84.8 2. x. 1 '21 i r 1 3 I I1.A.4 Ferti,aer, 30.4 128.9 100.0 122.] -114.1 't, 111.4 114 3 1I1 121 Metal' ir.J rn.eri 40.4 94.2 100.0 5.; -3.- 3 s B i.t. s.t C,2 45 Constant 1660 dollar4 Petroleum 21 1 223 S 100.0 53.8 "6.5 121.1 '4 42 .- - 64.( Non-energ, c1mnod.& l4.2 l"4.3 1000 934 85.2 SI.S 6 4 8r 4 41 '1,1.0. Agricullure 182.4 191 8 100.0) 101.6 89.8 2 4 5 Oc 4 45 2 CI5 1 Bt. erwr. 226.6 252.0 100.0 132.4 104 2 B 4. 1. 1114 S 163 34 186.0 193.4 100.0 98.9 84.8 93.4 s4 h %n '' A. 1 8; k Fi; 3r.J .1.il- 256.4 20.5 100.0 125.2 101.2 " 1 4. A 2 100.H 4 % Gr l,.n' 186 1 18c.S 100.0 95.4 83.p w4 8'.' 4 86.' 4 8 1.1 .thrr 1 328 4 186.6 10 '9.3 Tl. .1 I -2 4 2 Ra m ricria, 145.1 145.2 160 0 82.3 85 -I 0 I 12 3 301.4 T.mbcr 126.6 19. 100.0 83 108 2 11 li 1 I, 3 12 8 120.8 13') 1 ')hbr s.. mnl, eral. 15 .- 169.4 1011.0 .).9 "0.3 -- 3 "b 8 - ' n1.2 81 3 Fert.I.7er, 121.1 379.0 100.0 115.0 111.4 l0.4 1 .' 15 l 1 I11).5 i Metulk ind m..ralk 1608 130.8 100.U -1.1 "3.3 3).0 1 no, 4 - ii Inflation mrde%e,. 1990 =100. MUV .n.Je % 25 10 "2 Lh) 100 0) I00. 14 103.31 11.- 1 4 3 .38 It. I 32s qI Percenge changc pcr .cr 11 11 1.34 ) "5 -2.b -2.10 1 3 C,i 2. i 2 04 U.S. GDP dthr... 33.59 65.93 lu.00 119.32 12111 1 23 1 2In.3 124 q 185.4 15296 Percen)g, .t chant pLr .ea. 6 *8 4.25 2.23 L.it 2 3o 2 4- 2 41 2 1" 200 aCommodity price projections as of November 14, 2000. 'The World Bank primary commodity price indexes are computed based on 1987-89 export values in U.S. dollars for low- and middle-income economies, rebased to 1990. Weights for the subgroup indexes expressed as ratios to the non-energy index are as follows in percent: agriculture 69.1, fertilizers 2.7, metals and minerals 28.2, beverages 16.9, food 29.4, raw materials 22.8, fats and oils 10.1, grains 6.9, other food 12.4, timber 9.3, and other raw materials 13.6. cComputed from unrounded data and deflated by the MUV index. dInflation indexes for 2000-10 are projections as of November 3, 2000. MUV for 1999 is an estimate. Growth rates for years 1980, 1990, 1998, 2005, and 2010 refer to compound annual rate of change between adjacent endpoint years; all others are annual growth rates from the previous year. 'Unit value index in U.S. dollar terms of manufactures exported from the G-5 countries (France, Germany, Japan, the United Kingdom, and the United States) weighted proportionally to the countries' exports to the developing countries. 171 GLOBAL ECONOMIC PROSPECTS Description of Price Series in Commodity Price Tables Aluminum (LME) London Metal DAP (diammonium phosphate), bulk, Rubber (Malaysian), RSS 1, f.o.b. Kuala Exchange, unalloyed primary ingots, f.o.b. U.S. Gulf. Lumpur. high grade, cash price. Gold (U.K.), London afternoon fixing. Sawnwood (Malaysian), dark red Bananas (Central and South American), Groundnut oil (any origin), c.i.f. seraya/meranti, select and better import price, free on truck (f.o.t.) Rotterdam. quality, kiln dry, cost and freight U.K. U.S. Gulf. Iron ore (Brazilian), Companhia Vale do Silver (Handy and Harman), refined, Beef (Australian/New Zealand); frozen Rio Doce (CVRD) Carajas fines, New York. boneless; 85 percent chemical lean; contract price to Europe, f.o.b. Ponta Sorghum (U.S.), no. 2 milo yellow, f.o.b. cost, insurance, and freight (c.i.f.) da Madeira. Gulf. U.S. East Coast. Lead (LME), refined, settlement price. Soybean meal (any origin), c.i.f. Coal (U.S.) thermal, free on board Logs (West African), sapele, high quality Rotterdam. (f.o.b.) Hampton Roads/Norfolk. (Loyal and Marchand LM), f.o.b. Soybean oil (Dutch), crude, f.o.b. Cocoa (ICCO), International Cocoa Cameroon. ex-mill. Organization daily price. Logs (Malaysian), meranti, Sarawak, Soybeans (U.S.), c.i.f. Rotterdam. Coconut oil (Philippines/Indonesian), Tokyo import price. Sugar (world), International Sugar bulk, c.i.f. Rotterdam. Maize (U.S.), no. 2, yellow, f.o.b. U.S. Agreement daily price, raw, f.o.b. Coffee (ICO), International Coffee Gulf ports. Caribbean ports. Organization indicator price, other Natural Gas (Europe), import border Tea, average of quotations at Calcutta, mild Arabicas, average New York price. Colombo, and Mombasa/Nairobi. and Bremen/Hamburg markets. Natural Gas (U.S.), Henry Hub, Tin (LME), refined, settlement price. Coffee (ICO), International Coffee Louisiana. TSP (triple super-phosphate), bulk, f.o.b. Organization indicator price, Nickel (LME), cathodes. U.S. Gulf. Robustas, average New York and Le Oranges (Mediterranean exporters), EEC Urea, (varying origins), bagged, f.o.b. Havre/Marseilles markets. indicative import price, c.i.f. Paris. Eastern Europe. Copper (LME), grade A, cathodes and Palm oil (Malaysian), bulk, c.i.f. N. W Wheat (U.S.), no. 1, hard red winter, wire bar. Europe. export Gulf. Copra (Philippines/Indonesian), bulk, Phosphate rock (Moroccan), 70 percent Zinc (LME), special high grade, c.i.f. N.W. Europe. BPL, contract, free alongside ship settlement price Cotton ("Cotton Outlook A Index"), (f.a.s.) Casablanca. c.i.f. Northern Europe. Potassium chloride, f.o.b. Vancouver. Crude oil, average spot price of Brent, Rice (Thai), 5 percent broken, white rice, Dubai, and West Texas Intermediate, milled, indicative survey price, f.o.b. equally weighed. Bangkok. 172 GLOBAL COMMODITY PRICE PROSPECTS Notes 3. However, the growth during the 1990s was re- duced by a 40 percent decline in grain consumption in 1. Real prices are obtained by deflating nominal the FSU countries and smaller declines in Eastern Eu- prices by the unit value index in U.S. dollar terms of rope. When these countries are excluded, world grain manufactures (MUV) exported from the G-5 countries consumption grew by 2.0 percent per year during the (France, Germany, Japan, the United Kingdom, and the 1990s. Growth rates in China and India, with 46 per- cent of developing-country populations, has been 1.9 United States) weighted proportionally to the coun- and 1.5 percent, respectively, during the 1990s. tries' exporrs to the developing countries. 4. The five largest grain exporters are Argentina, 2. Grains account for 55 percent of the world's Australia, Canada, the European Union, and the United food supplies (calories) and occupy nearly one-half of States. Together, these entities account for about 85 the world's cultivated cropland (FAO). Grains prices percent of world exports. are important as an indicator of overall food prices be- 5. For example, the Brazilian real depreciated 68 cause of the close substitutability of grains with other percent from 1997 to 1999, the CFA franc depreciated food crops in production and consumption. Sugar and 9 percent, and the Kenyan shilling depreciated 16 per- vegetable oils account for about 10 percent each of the cent (IFS, August 2000) world's total calorie supplies while animal products 6. Fuel cells convert energy stored in a fuel directly and fish account for about 16 percent. The remaining into electricity and heat without combustion. Using hy- roughly 10 percent of world food supplies come from drogen as fuel, they emit only water and heat as waste fruits, nuts, pulses, roots, tubers, and vegetables. products. 173 Appendix 3 Global Economic Indicators GLOBAL ECONOMIC PROSPECTS Table A3.1 Growth of real GDP, 1971-2010 (GDP in 1995 prices and exchange rates-average annual percentage growth) 1"49 GDP 1rurveni bilson of E-urnate For"an 1. S d l.q[ans 1 l-v, I44a lI-<' 149 2000 2 r00--10 World 20,215 3.6 3.0 2.4 2.8 4.1 4 High-income economies 23,665 3.3 3.1 2.2 2.7 3.8 3.0 Industrial 23,135 3.2 3.0 2.1 2.7 3.7 2.9 G-7 19,895 3.3 3.1 2.1 2.5 3,6 .8 United States 8,710 2.8 3.2 3.0 4.2 5.1 3.3 Japan 4,395 4.5 4.0 1.3 0.3 2.0 2.2 G-4 Europe 6,050 2.9 2.3 1.6 1.9 3.1 2.8 Germany' 2,080 2.7 2.3 1.7 1.4 3.1 2.8 Euro Area 6,375 3.2 2.4 1.8 2.4 3.4 3.0 Other industrial 3,240 3.1 2.6 2.4 3.5 4.0 3.2 Other high-income 735 7.9 5.5 5.3 4.2 63 5.3 Asian NIEs 530 9.5 7.4 5.9 4.3 6.9 5.9 Low- and middle-income economies 6,555 5.3 2.7 3.2 3.2 5.3 5.0 Excluding Eastern Europe and CIS 5,175 5.5 3.4 4.7 3.3 53 5.2 Asia 2,490 5.4 6.8 6.7 6.6 6.9 6.1 East Asia and Pacific 1,895 6.6 7.2 7.1 6.9 7.2 63 China 990 5.3 9.1 10.4 7.1 7.5 Korea, Rep. of 405 7.6 7.7 3.8 10.7 8.7 Indonesia 145 7.9 5.6 4.1 0.3 4.4 South Asia 595 3.1 5.8 5.4 5.7 6.0 SA India 445 3.0 5.9 5.7 6.2 6.4 Latin America and the Caribbean 2,055 5.9 1.1 3.2 0.1 4.0 4.3 Brazil 750 8.5 1.5 2.4 1.0 41 Mexico 485 6.7 1.9 3.1 3.7 6.8 Argentina 280 3.0 -1.5 5.1 -3.1 0.8 Europe and Central Asia 1,095 4.9 1.2 -2.3 1.0 5.2 4.2 Russian Federationb 400 4.8 -0.3 -5.8 3.2 7.2 Turkey 185 4.2 4.0 3.7 -3.1 6.2 - Poland 155 5.0 -0.3 3.9 4.1 4.4 Middle East and North Africa 505 6.6 2.4 3.1 2.4 3.1 3,6 Saudi Arabia 140 10.3 0.4 2.1 0.4 1.9 - Iran, Islamic Rep. 110 1.8 2.7 3.8 2.5 1 ... Egypt, Arab Rep. 90 6.6 5.5 4.3 5.9 5.3 .. Sub-Saharan Africa 330 3.3 1.8 2.0 2.3 217 3.6 Republic of South Africa 130 3.5 1.3 .4 12 2.2 - Nigeria 35 4.7 1.1 2.5 4.1 3.1 ... a. Data prior to 1991 covers West Germany. b. Data prior to 1992 covers the former Soviet Union. Source: World Bank data and staff estimates. Figure A3.1 Real GDP growth 1991-2010 Percent? 4.0 Otgh-incomei EaSt AsM South Asia Latin Amenica Europe and Middle East Sub-Saharan economies andc Pacific and fhe Centrai Asia and North Africa Camftbean Africa 176 GLOBAL ECONOMIC INDICATORS Table A3.2 Growth of real per capita GDP, 1971-2010 (GDP in 1995 prces and exchange rates-average annual percentage growth) " i GP .r¯rff-f EiD3pILJÅ t.. L//drA ··4 .y' -.'l l IN[- <4'9 20''O 2'iÜ-lÙ World 5.055 1 I'i 1.5 2." 2.; High-inc .. . . 26n . I -2 2 - Indus..I -.545 2 V 2.2 32 2." G-? 2AlY' 2 i -, 2 'i 3 I 2 i IL.,1 V . ?I.15 I fl' 1.2 4.1 23 J.r'. 34,25 . ' i'4 3 2 i.4 2 4 4 [4. 1 k Eti . 2I.S65 2 i 22 33 3') Otl. .. ' ... 11 32 I I I 3.~ 3' Other l.. .. V-'in ' 2 n 4 4 1 Asi'.. .lI l6.ini - -n 3. 5.6 - i Low- and mL- dJ,an,am1 w.ro .29i .: I 1. . Excludir., n.»..F- .. .. .J i' I 1 '' - Asia Si,i 4 44 Eas , . 1 I i ... . 1 13 4 ' I i 4 Lat . 0 t i i 2 ~ l -44ti i 11 4. n,,b -43 .414 Latm> - il.. .. Jrh i ..11 . 4.1s -'I .1 1 41 '.. I L4> .I- -1. 4' I - ! Eurol - . . .42,iUri ~ -. 1.l 44 In N id. -f.i l,% l i ii - 4 . . a. Data prior to 1991 covers West Germany. b. Data prior to 1992 covers the former Soviet Union. Source: World Bank data and staff estimates. Figure A3.2 Real per capita GDP growth, 1991-2010 Percent 6 t * 1991-99 E 2000-10 40 2.0 0 0 -20 -4.0 High-income East Asia South Asia Latin Aneina Europe and Middle East Sub-Saharan economies and Pacific and the Central Asia and North Africa Carnbbean Atrica 177 GLOBAL ECONOMIC PROSPECTS Table A3.3 Inflation: GDP deflators, 1971-2010 (percentage changea) Estimate Forecast 19710 1981-90 1991-99 1999 2000 2000-10 World 8.0 6.4 5.1 2.9 2.8 2.5 High-income economies 7.2 5.8 2.8 2.0 2.1 2.0 Industrial 7.2 5.8 2.6 2.0 1.9 2.0 G-7 7.0 5.7 2.5 2.0 1.8 2.0 United States 5.7 6.5 2.3 1.5 2.1 2.1 Japan 8.1 3.4 1.1 -0.9 -1.5 0.3 G-4 Europe 6.3 7.2 4.1 2.0 1.8 1.7 Germany" 53 3,6 3.9 0.9 0.0 1.2 Euro Area 7.0 6.7 3.9 1.2 1.2 1.7 Other industrial 8.9 6.9 3.7 3.1 2.0 2.1 Other high-income 7.7 6.2 4.9 4.2 5.0 3.8 Asian NIEs 6.7 t. I 4.1 2 i 2.9 Low- and middle-income economies 11.2 . 14.1 .4.8 Excluding Eastern Europe and CIS 11.6 I'' I 6 4.7 Asia 12.2 - 1 . I4 5.2 East Asia and Pacific 11.0 '.4 1 4 5.0 China 2.2 :1. .1 ... Korea, Rep. of 23.4 - I 6 ... Indonesia 22.9 1 In.. South Asia 122 . .4 5.7 India 9.1 1; 4 4 Latin America and the Caribbean 14.3 2-.') i . : 7.0 Brazil 40.9 " ' -. ... Mexico 22.5 v. 1. 1 . . Argentina 138.7 It. 16;nl .. Europe and Central Asia 3.0 - 4 -- 4 5.3 Russian Federationc 0.3 1.1 3 4li I 4 Turkey 42.3 4- 2 4 ..i Poland 6.5 il i 'i s ... Middle East and North Africa 14.9 -4. 3.6 Saudi Arabia 26.9 ' I '2. Iran, Islamic Rep. 20.9 i 2 II 4 I Egypt, Arab Rep. 11.2 1 . 4 . Sub-Saharan Africa 10.1 4 4 4 4 4.5 Republic of South Africa 13.4 I . 11.1.4 - 4 Nigeria 14.0 1 4 -II* I"- Note: Deflators are in local currency units: 1995=100. a. High-income group inflation rates are GDP-weighted averages of local currency inflation. Low- and middle-income groups are medians. World is GDP-weighted average of the two groups. b. Data prior to 1991 covers West Germany. c. Data prior to 1992 covers the former Soviet Union. Source: World Bank data and staff estimates. Figure A3.3 GDP inflation, 1991-2010 Percent 250- 2 200-ft 150 1o 5.0 o Kgh-- ncome Eas Asia South Asia Latin Amenca Europe and Middle East Sub-Saharan economiea and Pacific and the Central Asia and North Africa Carribbean Afnca 178 GLOBAL ECONOMIC INDICATORS Table A3.4 Current account balances, 1970-2010 (percentage of GDP) 4'" .Urfelh bril,.-r: of Eii,nr 1 ,rrvt,c V N Jun.J,r, '1 - *1 -1 I 1 * 194") 2011. Njis World -1 1I.1 **I -'4 -1 -" -1I -I- High-income economics - I 2.4 I' I - I -' . -1 1 Industrial I-4 . -'I -lo - I -u " G-7 - -'i -II -I -1 United States --i --I -a Japan lian 4 G-4 Europe I . 1 1.4 Germanva p1 ,, . _,, 4 Euro Area I *0 1i1 Other industrial 14 -- - .. I 4 Other high-income 43 2.n Asian NIEs . .21 .4 Low- and middle-income economiu. - I n -:- Excluding Eastern Europe and C' - -2 - -0 Asia - - I -1 -1 1. 4 1 East Asia and Pacific -1 4 -1 I 41 I China i. -* 4.I; 114 Korea, Rep. of -I I 1 n. Indonesia - 4 - 4 4... South Asia -2 -1 -1. -2r -to India -2. 0 - -r rI - Latin America and the Caribb .. - -1 -. -2 -, -' I. Brazil I -4 - --4 -. Mexico -14 - --1 Argentina - I - - - -4 1 Europe and Central Asia o 'I 2 - I1 Russian Federationb i 4 Turkey -1 4 Poland - - Middle East and North Africa 1 I - - - i. Saudi Arabia - - - - 2. Iran, Islamic Rep. 5 i - Egypt, ArabRep. -l -4- - -- Sub-Saharan Africa -- Republic of South Africa -..4 - -i - - . -I 2 Nigeria ' -0 -0* I 2 a. Data prior to 1991 covers West Germany. b. Data prior to 1992 covers the former Soviet Union. Source: World Bank data and staff estimates. Figure A3.4 Ratio of current account balance to GDP, 1991-2010 Percent 20 1 0 -0.0 -3 0 -4 0 High-income East As a South Asia Latin America Europe and Middle East Sub-Saharan economies and Pacific and the Central Asia and North Africa Carribbean Atica 179 G L О В д L Е С О Ч О М I С Р А О S Р Е С Т 5 ТаЫе АЗ.5 Exports of goods, 1998 (peтcentJ Мгг�гтдг.ь 1.ггье. Ene:n.�r \1cr;handru 1.�г,рг En тпе 4lгrehandric 4.:�.4. Еtlг:тг еьу��п, a:�:.ьii marArr е�{юп. inn�i� m.vln .•.pans i�.n,.�1 т.:гЬег �L')! рп.пИ гггписh iL')3 ьп•ь.�м gro+rh �L�i ...rr• цоигh мгlhorc:• 1•г.••_�. lанч_а�, пггlGию�� г°�.•_•�• �ачх'N' �ndh�rnri г•�.й_..� 1'1мЧ-лгл Wor1d ?.ii`..6s г..а "' Lrr�n ��п,r.,.г .т� \1�Jd1� 1 �.г .гпJ rh, C.rr�hh..rn �с.iпилигдl V..гг1, �1п„ i.unnnucd� А11 develop�n4 i-�r��-�„ ],� ` •• � �; i,,.•, . i,-,д - а ; с countries 1.'_"�.М+? r.a '.а .., .�..i� 1-.?n� а а у_' ,,. . i..i 1.sr11 ia,i ч 1 Asia i".11_'у 1'_.� $5 L�r��p. �пд ��h�dura�i l-.nrгil �•га 2�6.5Ча ;; _ 4гп..t '1.Ua' г.1 Ь.Н East Asia гг.д . ��� ..� � _'ч J п - - .i � .- - _ ; ' Pacific ���.Пйй 1' - R.6 -.�i ��,��� n'i h<, F...r .,,, _;1ь•1 _ СЬiпа lчд,_i?� 1;_ л. t.i. � -,1 дi д l� �,...�� 1.51�U i г. Ч Fqi ;�{ J, ну i��i_� � -1.1"д -1J "1 •� Ji..,. a..-j i- п_ lndonesra ;п ;' 1 � " -.ч м i � `",;�, ,- i. гr., г , , г � а ' п � Когеа. КеF 11' 1'_' �` ч.i й�.,.. � '.qai� н.и �r •, �,3'_ • i п � Malavsra -_' i�- ��� _ ti.J . _ � дiгп , г i•�. � ],пч� �- r..i Myanmar 1J :д 1 • И,ч i i.•,�_ , '_и,-а- _ .. и.,-,. � '.и1 ; , �� r, д Рариа Nev й�. J п г„ i,к"1 с• � 1�.1 �•_ � �г i i� п �5 Guinea 1.--3 �г '- м,_. i,.r Gд; �г�' г•.-. . ч.ч-� '- �ч Phrlippines ?�.ачv �' - - - � ,г �. _'.ri11 ~ о _ �i 1.1VU _ • г. - Thailand -_.-д" 1' i )' �.ri�u.. � 'й.`+г_' .�rr. �г,.,.� _'у'3-1 i • ,.� Vretnam а: - ч J • I.iJ • па� д.S •.Л �.• ;`"r Ia ' r.,ч I 1 � ,�1 '.ао' 1i� . . _ ���,1•� , ti-J -. - ,_ South Asia 52 aaN 1�г ' ',5 г.•..,,., . .. _ . ti, i11- -- п.С. ..��1 �1" . I ��-'а �. - � BangladesF ;.1 д 1 l- .. и• � •. Indra ;а,1i-м i 1 1 -7 r�J., �г�..,, -а ti�,r р i H.�11 гп.,�qц :Vepa1 �i' 1п � - - •i. �� г .г. 11i,-�rr - ч �,..п�г�п�., �.Ub2.Ы 1i� �.ч '.Ь Pakis[an S,+L' ~ - • 1 .,.i , г,,, ;vo 5ri Laпka а-i� i i . .. i i г i 1пд�,гги1 3,е•ЭS.;'? ;.п '.а � 1 �...1..,,. � 1.5" �.п Latin Ате: ..� .�пд Г��г4 �,,, ,,, � ,�, г.1� .. г- - ,.Ь_''!АЬй .- . theCarib�,�i.� 'Si.�дi �.' 9А i��rt�. :1�'_'гг 1��� о.1 � �.1, '_1-.д-а �а пч Argentina 2п,�� 1 -• 9 о � i г t��� 1 3.г,чч hг �.�.•. iiiu.r,oi ,.. п.i Bolivia l,1ri; .а ч; i�-1-,.r.r�� _'.l)l ,.� jдч,'-7й _ �� Brazil +1,! дь а+ н а i�,� 'а-'.иа' • а -_ Chile 1-1•Sд� �. �.i 11.,1д1. Fi.r ��id 1�i �.� й-S 'Ч9 _ + 1 Colombia 11,аЧ3 _ '.J V.�,rh �Упга а�.55^ ; j ',� i�п.rJ Costa Rica i.5-i" i�. �г '.1 �.i_� г � 1U.'о� _ • R.n ~�.,._ i...., �-�,лYin _ -.гг Dominican ы�• i. �1,•'ti1 1п п r,.i ��,h•г �,., ;,-Уг -i п ' S 1�.. � 1•�,�, Ь-j.�1b� �- ч.h Ecuador �,'i�3 � 1 й U t_ i r г �г• Е1 5alvado '.a i 1 ! f" 3.1 �� i а.ап д а п �,' i пЕ., г Guatemala '_,5а- � i >> �г ��� i��...., r,;Ju•rnal 1,0173,�Uy п а Ь.Ь Jamarca 1,01 й � _ Г. -0 i•. i 1 �."3_' , i -.1 ��� ь �i� � �6AiN й � • - � Mexico 11' а ia i 1- r: ч г; ,..i -.$-0ti -_ 1fг.д ь„ г., � Ь}..г„ . а ..,i Рапата 6.3'i � -.м �..;J, 1.i(�' .- -J Y,.i���.��,,' 1iч.iati а• b.? Paraguay 3.-_' ; 1 с 11.3 г 1.... ... -.] д� ,- п.а i�-�.�,. �, i .7'.чП.i а а - �г Реги ).-;) i g? ...�, i,чpS . i 3,Ч 1,,i�..J -0д,;ч: -- -.- 1"rinidad аг..� ,J. • ,i , � ;±:,��� _ _ ',3 г ,-�.... ч.-0ч3 а , n,i Toбago _'.i{К J- ji) ,.��, �h1�...r, i,1ii ai р9 �..,i��nJ 1.ч_' -i. 64 180 GLOBAL ECONOMIC INDICATORS Table A3.5 Exports of goods, 1998 (continued) (percent) Merchan&se A,,r3e Eifewe NILmhanJisc A%,rage Efiemve Mcirchandiiit iii,crige Efftictme nPorli 3nnaal market v4poni ari marka expom annual markzt XSS w-ih grid-th (US1 Aro"Tb grom-Lh LISS wo ih gron-th m1hons, 1989-99. P"Ithom, 1.154-4i 1%9-49 millsoml VIAQ-4. lq?39-q9l 0iher indul,111101 (continued) Other hiph. Other hieh-inc.,me 1 6 3, i 13 I 1 6. 2 Income 4; '. 13 i 9.1 1 Coni UL d I \e[l-,i,rI:irJ; 1-2,-95 64 bir,.r- 1.894 11 n.- s.r.4jp- -rc 110.5,11 N-% Z,,jl3r.j 12-1-1 7.6 H--niz Ti. 3-. 40.63' 6.4 - h-r-3 1"i,-84 11319.690 16 4 6." r j c. 1 22.4-2 so jef. 93,369 - 1 6.6 1%-. .t 9.61 iii; 8. t, F 2-,04 68 so 92.S45 i 1.1 o.9 Qit r 4X_ 4 Not available a. Effective market growth is a weighted average of import volume growth in the country's export markets. b. Includes Luxembourg Source: See technical notes. Figure A3.5a Merchandise exports as a share of GDP, 1998 Percent 40.0 30.0 Word 20.0 0.0 Industrial Sub-Saharan East Asia Soulh Asia Latin America Europe and Middle East economies Africa and Pacific and the Contra] Asia and North Carribbean Africa Figure A3.5b Average annual growth rate of export Volumes, 1989-98 Percent 14.0- 12.0- 10.0 Word 8.0- so- 4.0- 2.0- t'C) fndusIra( Sub-Saharan East Asia South Asia Latin America Europe and Middle East economies Africa and Pacific and the Central Asia and North Caribbean Africa 181 GLOBAL ECONOMIC PROSPECTS Table A3.6 Imports of goods, 1998 (percent) Merchandne Average Mer&hai- Merchandie Average Merchan- Merchandise Average Merchan- npon annual dise imiport annual dise imports annual dise lisl growth Iports/ f1USS growth Itports/ fUSs growth Imports/ mrilhos) 1989-98 GDP million) 1989-98 GDP millions) 1989-98 GDP World 5,281.525 6.4 184 Latin America and Middle East and ihe Caribbean (continued) North Africa (continued) All developing I a.iguay 3,601 11.4 17.3 Tunisia 7,875 7.9 39.5 countrie, 1.251.828 &.0 21.3 1.-nezuela 14,816 1.2 1M.6 Yemen, Rep. 2,201 3.6 36.7 Asia 452,912 901 IS.S E urope and Sub-Saharan ( entral Asia 302,686 5.6 30.3 Africa 81,791 5.2 26.8 East Asia .rJ Armenia 806 .. 424 Angola 2,079 3.8 27.7 Pacific 384,220 9.3 20.7 Azerbaijan 1,724 .. 41.9 Botswana 1,983 6.7 40.7 China 136,915 11.3 14.5 Belarus 8,569 .. 33.4 Cameroon 1,452 1.4 16.4 Fiji 612 4.3 38.8 Bulgaria 4,574 -7.5 37.3 C6te d'Ivoire 2,705 4.3 24.8 Indonesia 31,942 8.4 33.9 Czech Rep. 28,989 .. 51.4 Ethiopia 1,042 0.8 15.9 Korea, Rep. 90,495 6.0 28.5 Estonia 3,805 .. 73.1 Gabon 765 -0.9 16.1 Malaysia 54,469 12.7 75.1 Georgia 1,060 .. 20.4 Ghana 2,897 10.8 38.8 Myanmar 2,480 15.8 10.1 Hungary 23,101 9.0 48.3 Kenya 3,029 4.9 26.2 Papua New Kazakhstan 6,672 .. 30.4 Madagascar 693 7.9 18.3 Guinea 1,078 -2.8 2 1 k r,. - Pep. 756 .. 46.4 Nigeria 9,211 7.3 22.3 Philippines 29,524 13.4 45 4 1 i 3,141 .. 49.1 Senegal 1,245 2.5 26.6 Thailand 36,706 6.9 32 K I qv... 5,480 .. 51.0 South Africa 27,216 4.2 20.3 Vietnam 10,351 21.9 3.1 -l.. 1,043 .. 64.5 Sudan 1,732 6.4 16.2 I.. I. nd 45,303 12.9 28.8 Zambia 1,022 3.8 30.5 South Asia 68,692 7.4 12.3 Romania 10,927 3.4 28.6 Zimbabwe 2,019 4.9 31.9 Bangladesh 6,716 9.6 15.7 Russian India 44,828 8.0 10.4 Federation 57,791 .. 20.9 High-income Nepal 1,239 6.4 25.9 Slovak Rep. 13,071 .. 64.2 economies 4,029,697 5.9 17.7 Pakistan 10,607 3.7 16.7 Tajikistan 731 .. 41.1 Sri Lanka 5,302 10.2 33.8 TFYR Industrial 3,589,067 5.6 163 Macedonia 1,722 .. 51.1 Latin America and Turkmenistan 1,137 .. 42,0 G-7 2,622,338 5.6 13.9 the Caribbean 323,048 13.0 16.4 Turkey 45,552 12.8 22.9 Canada 204,554 5.7 34.4 Argentina 29,558 19.1 9.9 Ukraine 16,283 .. 38.4 France 279,506 4.6 19.6 Bolivia 1,760 10.5 20.6 Uzbekistan 2,716 .. 16.1 Germany 459,188 6.0 21.8 Brazil 57,739 14.1 7.4 Italy 202,782 4.7 17.2 Chile 17,347 12.9 22.7 Middle East and Japan 251,254 4.1 6.6 Colombia 14,007 11.0 13.6 North Africa 91,390 3.1 19.0 United Kingdom 305,730 4.9 22.0 Costa Rica 5,791. 15.0 55.3 Algeria 865 -18.7 1.8 United States 919,324 6.8 11.0 Dominican Rep. 7,597 16.7 47.9 Bahrain 3,299 3.5 61.7 Ecuador 5,198 11.5 26.4 Egypt, Arab Other El Salvador 3,717 13.4 31.3 Rep. 14,617 4.7 17.7 industrial 966,729 5.5 30.2 Guatemala 4,256 10.5 22.6 Iran, Islamic Australia 83,433 5.3 17.0 Jamaica 2,710 7.6 42.2 Rep. 13,608 2.2 11,9 Austria 67,988 6.1 32.9 Mexico 125,374 15.3 30.6 Iraq 1,205 -18.7 0.5 Belgiuma 149,230 5.1 56.2 Panama 7,696 11.6 84.2 Jordan 3,404 3.2 46.0 Denmark 44,021 5.5 25.4 Paraguay 3,942 13.8 45.3 Morocco 9,463 7.9 26.6 Finland 30,903 3.7 24.6 Peru 8,200 10.5 13.1 Oman 5,217 7.0 34.9 Greece 19,173 4.8 15.9 Trinidad and Saudi Arabia 27,535 2.7 21.4 Iceland 2,279 4.5 28.8 Tobago 2,999 10.4 47.0 Syrian Arab Rep. 3,307 5.4 19.0 Ireland 41,896 12.9 48.6 182 GLOBAL ECONOMIC INDICATORS Table A3.6 Imports of goods, 1998 (continued) (percent) Merchandise Average Merhan- Mer.hand,%e A-eg, Marchan- Merchandise !-rig Merchan. imports annual dise imports ar.al di, Imporns nnual due (US$ growth Imports/ lU55 rur.Th Imports LU5s RF.arih Imporum millions) 1989-98 CDP rillionsI I - GDP QmUi, GuD lnutfu.mi GDP Other industrial (conltinued) Other high- Other hieh. Netherlands 152,247 4.8 40.5 income 440.629 x.S 61.5 r.:.mc iconnriniuedl New Zealand 11,334 5.0 21.5 Brunei 1 12.".4 35.4 Iars. 3,322 1' 1 311. Norway 39,070 5.1 26.6 Hong Kong, . 95.1 2 115. Spain 127,740 7.9 22.9 China 1I1,51.3 Ir r 112.6 1... r. kh., S'Q49 -4 3-.4 Sweden 66,237 3.9 29.1 Israel 2-'I - 21"I Lit.red sriL. Switzerland 92,882 2.5 35.4 Kuwait V'1l I 30 5 L.r.rrca 24,995 1*> 52.9 .. Not available a. Includes Luxembourg Source: See technical notes. Figure A3.6a Merchandise imports as a share of GDP, 1998 Percent 40.0 30.0 W, 20 0 World 10.0 0. 0 Industrial Sub-Saharan East Asia South Asia Latin Amenca Europe and Middle East economies Africa and Pacific and the Central Asia and North Carbbeen Africa Figure A3.6b Average annual growth rate of import volumes, 1989 98 Percent 14.0 12.0 10.0 Workd 6.0 - .0- .0 MM I- i I I __ _ _ Industrial Sub-Saharan Eat Asia South Asia Latin America Europe and Middle Eas economies Africa and Pacific and the Central Asia and North Cam1bbean Africa 183 GLOBAL ECONOMIC PROSPECTS Table A3.7 Direction of merchandise trade, 1998a (percentage of world trade) High-income unporters Lo4 - and .n.ddle ioincm inpcricr. Laim' iddlk Amenca A Sub Ei-i Eur.pe Eie aid lo- Other Al Ocher All Saha A.-a and and ih, and Uned mdu.- indus high- hgh- iar and S4.uih Cnual Nonh Ca-b middle Sour" u AOn1 Statei EU 15 Japan mal mal income income Atnca Pacific %!a A,i3 4rni ben inceirn World High-income econ. 12.1 29.' 3.1 13.8 52.0 5.5 57.4 1i) 6.1 .7 3.8 I. 4 I4.- "53 ."d u;tr- 10.U 28.3 2.3 130 4-.3 4.3 51.6 II- 3 Si lI5 i In 45 i14 664 tlr.ircd Mure ... 2 8 1.2 1 3 -.6 1.2 8.8 'I 1 I.1 'I 0.2 *) 1 2 4 13.5 El. 1~ 3.4 22.2 0 102 28 1 3 30.1 '10 1' ' ' l II ' r3.1 iipr. 2.5 14 1r 4.2 1.4 5.0 l I4 .I .1 1 i ('4 221.8 , 1rher .rrJs 1.1 96 0.5 3.4 12.2 0.6 12 S I t., I lu ''3 4 25 15.3 t rhrhi, h.,r. rr' 21 1 4 0 " 0.8 4 6 1.2 5 Il ' s 1. I '2 2I Lo.- rd midd- inmome econom-n 6.1 6.0 2.0 2.6 14.9 2.9 17.8 0. 1.8 0.5 2.0 0.6 1.; b.9 24.7 Suh il 1r A 0ca '.2 0.4 1 0.0 02 0.8 0.1 0.8 12 I 1 1.1.1 * .I fill . 4 1.2 Fir N. .jr-P.a c 2.2 1.6 1.5 10 5.- 2.4 8.1 2 11 '.2 1' 12 ''3 24 104 s..,rh A;.j 0.3 03 0.1 0 1 0.6 0.1 08 1' 1 '..1 '1I '' 1 1. .1 1.0 Eur.re jrj I.rrr N.i ' 33 2.4 0.1 0.8 29 0.1 30 iiii .il I'.' l I GI 211 -19 Middle East and North Africa 0.2 0.6 0.2 0.2 1.0 0.2 1.2 0.0 0.3 0.1 0.1 0.1 0.0 0.6 1.8 Latin America and Caribbean 2.9 0.7 0.1 O3 3.9 0.1 4.0 0.0 0.1 0.0 0.1 0.1 1.1 1.4 5.4 World 18.2 35.7 5.0 16.4 66.8 8.4 75.2 1.5 7.9 1.2 5.8 2.3 6.2 24.8 100.0 a. Expressed as a share (percent) of total world exports. World merchandise exports in 1998 amounted to some $5,360 billion. b. Other high-income group includes the Asian newly industrializing economies, several oil exporters of the Gulf region, and Israel. Source: IMF, Direction of Trade Statistics. 184 GLOBAL ECONOMIC INDICATORS Table A3.8 Growth of current dollar merchandise trade, by direction 1989-98 (average annual percentage growth) High-Icome imporens Lo-. and middle income importer Latin PAiddle America All sub- fair Ebrop, Easi and louw- Other All Other All Saha Asia and and Ihe and United indnus mdin- high- high- ran and south Central North Carib middle- Source of exporT- Stares EU15 Japan trial cr ianome icome Afnca Pacifi, 4%.a %iia kfica bean income World High-income economies 6.1 4.0 3.8 3.3 4.6 8.0 4.9 29 S6 A I 11.8 4 - 12.0 4.9 5. Industrial 5 q 3.8 3.5 3.0 4.4 '1 4.6 2 h - . I 1.1 11.- 4 - II 9 - 5.3 United Staic, .. 5.4 4.4 42 6.4 .5 6.5 oI I.s I s - a12 I0 i EU-15 6.2 3.' 4.5 29 3.9 11 4.1 24 8.2 I 135 44 I1l. 111 48 Japan 2. 2.5 ... 21) 2.5 o.3 3-4 -4 11. - 4 3$ s S Q 3.8 Other indu-ini 5.1 3 2 3.0 2.4 3.4 6.2 3 5 25 - -.1 IS 25 0 t 4.1 Other high-:r.c...,c 6.9 8.2 4.- 8.2 6 8 12.0 75 I I i h i 1 I4.6 I1.'. Low- and middl,. 12.1 10.5 6.2 9.5 10.4 11.0 10.5 12 1 1 12.1 13.0 -. 15.9 li." 11.4 income econom- Sub-Sahara .'i,,s 5.9 4 1 8.5 2.5 3.2 28.4 5 9 141 213 2.I 2 1 1 159 8 East Asia a.d PI. 11.0 12 1 6.9 14 3 10.3 11.5 1036 111 1 V, I 12 N 122 I 2A - V- 11.6 South Asia 12.9 8.9 1.6 6.8 9.4 13.0 9.9 1-i1. 14 I3 -2 13 32 4 14.t 9.2 Europe and Central A 13. 101 -1.9 8.5 '.9 13.4 10 0 42 4 -2 1 "i 32 $ 12 6 8.0 Middle Eanr anJ North Af .... 1.- 2.8 5.1 1).4 2.8 3 2 2.8 16 1$ < I 1 2 2 l 3 46 Latin Ame.: and Caribhce-. 14 5 3.4 1.4 21) 10.4 6.4 10 3 5.1 o .4 -u n 3 . 2 10.6 World 7.- 4.5 4.5 3.8 5.5 8.9 5.8 4.9 0.11 .4 .1 i.I 12.6 10.9 6.5 a. Other high-income group includes the Asian newly industrializing economies, several oil exporters of the Gulf region, and Israel. Note: Growth rates are compound averages. Source: IMF, Direction of Trade Statistics 185 GLOBAL ECONOMIC PROSPECTS Table A3.9 Structure of long-term public and publicly guaranteed (PPG) debt, 1998 (percentage of long-term PPG debt) Non-concessional Non-concessional Concessional Variable Fixed Concessional Variable Fixed All developing economies 25.7 35.1 39.2 Europe and Central Asia (continued) Bulgaria 2.1 84.9 13.0 Asia 37.1 31.4 31.5 Czech Republic 1.1 43.4 55.6 East Asia and Pacific 26.6 37.7 35.7 Estonia 12.7 62.8 24.5 China 27.0 35.1 37.9 Georgia 58.9 11.2 29.9 Indonesia 41.6 38.6 19.9 Hungary 3.3 23.0 73.6 Korea, Rep. 0.1 54.2 45.7 Kazakhstan 8.7 62.0 29.3 Malaysia 12.9 24.8 62.4 Kyrgyz Republic 67.8 23.8 8.4 Myanmar 88,1 0.0 11.9 Latvia 18.6 78.5 2.9 Papua New Guinea 59.9 19.9 20.2 Lithuania 9.6 52.7 37.7 Philippines 40.5 32.6 26.9 Moldova 24.5 48.1 27.4 Thailand 26.9 31.5 41.6 Poland 22.5 58.7 18.8 Vietnam 22.2 16.5 61.3 Romania 8.3 34.8 56.9 Russian Federation 1.9 54.9 43.2 South Asia 60.3 17.6 22.1 Slovak Republic 7.2 36.5 56.2 Bangladesh 99.0 0.1 0.8 Tajikistan 88.2 9.2 2.6 India 48.0 19.3 32.7 Turkmenistan 6.8 79.1 14.1 Nepal 98.5 0.0 1.5 Turkey 11.6 21.6 66.9 Pakistan 64.6 27.6 7.8 Ukraine 2.9 59.6 37.5 Sri Lanka 89.7 5.8 4.6 Uzbekistan 19.0 55.2 25.9 Latin America and Middle East and the Caribbean 7.7 42.4 49.9 North Africa 48.6 29.8 21.6 Argentina 2.9 34.0 63.1 Algeria 11.5 53.8 34.7 Bolivia 74.8 10.2 15.0 Egypt, Arab Rep. 84.8 4.4 10.8 Brazil 1.6 53.5 44.9 Jordan 52.1 28.2 19.7 Chile 7.6 78.1 14.2 Morocco 33.6 38.3 28.2 Colombia 5.3 39.7 55.0 Oman 24.9 45.0 30.1 Costa Rica 23.0 25.0 52.1 Syrian Arab Republic 92.4 0.0 7.6 Dominican Republic 43.6 36.5 19.9 Tunisia 28.3 25.1 46.6 Ecuador 15.4 54.2 30.4 Yemen, Rep. 90.3 2.2 7.5 El Salvador 48.5 26.8 24.7 Guatemala 44.3 23.2 32.6 Sub-Saharan Africa 51.9 13.1 35.0 Jamaica 34.1 23.4 42.5 Angola 27.3 12.8 59.9 Mexico 1.5 37.3 61.1 Botswana 58.2 11.4 30.4 Panama 7.2 49.1 43.7 C6te d'Ivoire 45.8 39.0 15.2 Paraguay 58.2 19.9 22.0 Cameroon 54.5 13.4 32.1 Ethiopia (excludes Peru 18.9 42.1 39.1 Eritrea) 91.6 0.2 8.2 Trinidad and Tobago 0.9 52.2 47.0 Gabon 24.7 14.2 61.1 Uruguay 4.7 43.8 51.5 Ghana 82.9 0.4 16.7 Venezuela 0.3 54.7 45.1 Kenya 73.5 4.7 21.8 Madagascar 70.9 5.7 23.3 Europe and Nigeria 6.8 19.7 73.5 Central Asia 8.1 46.9 45.0 Senegal 78.8 11.6 9.7 Armenia 56.3 22.9 20.8 Sudan 51.0 14.6 34.4 Azerbaijan 74.5 25.5 0.0 Zambia 68.6 13.4 18.1 Belarus 11.5 67.7 20.9 Zimbabwe 45.5 16.2 38.3 186 GLOBAL ECONOMIC INDICATORS Figure A3.9a Structure of long-term PPG debt, by group, 1998 Percent 100 80 - N 60EW "ww 40 20 East Asia Europe and Latin America Middle East South Asia Sub-Saharan and Pacific Central Asia and the and North Africa Carribbean Africa Figure A3.9b Top ten ratios of non-concessional debt to GDP, 1998 Vietnam Turkmenistan Gabon Guyana Bulgaria Congo, Dem. Rep. Guinea-Bissau Angola Congo, Rep. Of Nicaragua 0 20 40 60 80 t00 120 140 Percent 187 GLOBAL ECONOMIC PROSPEC T S Table A3.10 Long-term net resource flows to developing countries, 1998 (millions of U.S. dollars) Prva Ornaal Otncaal PerCemlge Debr dc'clop-.,ni TtS .l GDP Total low ne FDI Pordobo Toial a,,Ianc Orher All developing countries 318,32 5.13 26','00 81.191 1"0,942 15,567 50.625 3-.310 13.315 Asia 95,424 4.25 '4,830 -2,349 67,821 9,358 20.5q4 11.543 9.051 East Asia and Pacific 82,838 4.94 67,249 -5,919 64,162 9,007 15.586 6.8q" 8."32 China 45,230 4 -S 42,b"6 -2.349 43,-51 1,2-3 2. 54 1.3"," 1.194 Indonesia -808 -i's', -3,759 -3,653 -356 250 2.I 1.hl 1.333 Korea, Rep. 13,201 4 li ",644 -1,86' 5.415 4,096 5.5V -i" 5.5~' Malaysia 8,529 11 -- 8.295 2,03 5.000 592 235 " l Myanmar 272 . 153 83 0 0 1lw 12" -l Papua New Guinea 418 l 1 23 230 120 l110 0 l IS N 3 -41 Philippines 2,764 4.25 2.586 419 1,713 454 1-, 4b1 -303 Thailand 8,987 ,i.: .825 -1,458 6.941 2.341 1.12 355 s''- Vietnam 2,150 - 'S 832 -368 1,200 0 1.31* l.3''4 14 South Asia 12,586 2.23 7.581 3.5"1 3,659 351 5.005 4.686 319 Bangladesh 1,303 3.15 28 -23 308 3 1.15 1.''2n -11 India 7,604 l -~ 6,15! 3.1'4 2,635 342 1.453 I.0'I 443 Nepal 253 2 -1 -13 12 0 253 253 Pakistan 1,871 2 -44 806 306 500 0 l. 1.1l -I -113 SriLanka 818 .21 325 126 193 6 4"3 4S Latin America and the Caribbean 136,972 6.-1 126.854 55,783 69,323 1,748 11.118 3.522 6.595 Argentina 19,553 r. 18.899 12,699 6,150 50 's4 -I"3 81 Bolivia 1,194 1 1 5n 660 -12 8-2 0 334 445 -111 Brazil 59,393 ~.h- 54,385 21.930 31.913 542 5.""* lI 4.'2 Chile 9,189 12 1.4 9,252 4,526 4.638 8 -12 4" -11. Colombia 3,797 3.n" 3,b30 566 3,038 26 Is 3'.' 13 Costa Rica 796 - 5 8 811) 241 559 0 -5 -10 Dominican Rep. 807 - '1 6 691 '4 42 -' Ecuador 838 4 25 584 -247 831 0 234 1 52 102 El Salvador 428 242 230 12 0 1S', 109 ~ Guatemala 897 4~, b21 -52 6-3 0 2 - I-3 l'3 Jamaica 534 32 586 21- 369 0 -32 2, -NI Mexico 22,428 5 4- 23,1s8 12.220 10,238 -30 -~.' -?1 --3. Panama 1,600 [- 51 1.459 253 1,206 0 141 -14 15 Paraguay 305 3 51 236 -20 256 0 2.1 Peru 3,024 4 2.'24 r20 1,930 1-4 2 uj 2u4 4 Trinidad and Tobago 733 il 4 "t l 31 "30 0 -2S - -ei Uruguay 696 - Z4 496 332 164 0 lil r. l Venezuela 8,008 t 4 o,866 2.36" 4.435 64 1.142 1l 1.124 Europe and Central Asia 59,562 5.94 53.342 26,089 24.350 2,904 6.220 5."q 1 429 Armenia 321 I1 1l 232 0 232 0 .a 99 - Azerbaijan 1,178 28 ', 1.091 58 1,023 0 4 33 Belarus 216 ' '4 122 -2' 149 0 ·4 3 "I Bulgaria 673 49 498 32 401 66 1V '5 I Czech Republic 3,197 5 3,331 648 2,554 129 -1 35 l i, -233 Estonia 780 "S 1i '14 80 581 53 eo 51, 11 Georgia 207 39 57 - 50 0 IS'' 1c4 -14 Hungary 3,813 ". 4,683 2,485 1.936 259 -n~ - Kazakhstan 2,337 1il r3 1,983 825 1,158 0 353 95 25* Kyrgyz Republic 293 1 -S 108 -2 109 0 1'.5 1 -~ Latvia 530 5.29 366 5 35" 4 ler 1) Lithuania 1,83 I 12 983 5- 9Ž6 0 231 *6 114 188 GLOBAL ECON OMIC INDICATORS Table A3.10 Long-term net resource flows to developing countries, 1998 (continued) (millions of U. S. dollars) Prnare tJtf,caI Petentage Debi dselopn Total m GDP Toial Ho,n nei FDI Pordolio Toral an,rn,iM Oiher Europe and Central ua continuedi Mold.:. 100 6.22 62 -23 83 0 1' Poland 4,-16 r 1' 9,653 2,31Q 6,365 969 tN2 - Romar.a 1,825 4 s 1,826 -24-' 2,031 42 -1 2Y -225 Russiar, feJe..." 20,142 -28 19,34' 16.286 2.64 296 ~, 2 54 Slovak Rep 1.691 6 3' 1.480 9i8 562 0 211 -0 141 Tajikiijn 0 3 IQ -3 -23 18 U -2 - ' Turkrr.ijru nOl 222'' 4'3 343 130 0 l1 "' 54 Turke. 1.584 v SI'1 1.t41 -1'9 940 880 -" -219 1n0 Ukrai,z 2.438 5 2.0b' 1,344 43 '1 33 1 33 21 Uzbek-[n "32 4.3 592 392 200 0 34a' 1,2 -22 Middle East and Norib \iru,a 11.4'2 1.94 9,222 3.290 5.054 8"'8 2.249 4.06- -1,116 Algeri -1.42- -3''i -1,321 -1,328 5 2 -l" n2 -le Egypt. \rN, iR, 2.458 2 1.385 -186 l.06't 494 l.i-3 . -1'a Iran, iuc R..p -325 -'i2s 555 5h4 24 0 -317 -s -'n Jordan 632 5 r 2Cr- -114 31' I) 42- Morosc 436 2.3 965 4-'1 322 1-4 -2 ''' -4111 Omar. -248 -1 e -214 -330 106 10 -34 - -- Syriar. Arah Rep 143 12 6 -4 80 0 '14 -V' Tunisn j19 31' K4# 4 650 40 -- - -a Yemen. Pcfp 6 11'.' -21' ' -Žir0 0 21 231 - Sub-Saharan \lr'ca 14.895 4.46 3.452 -1,621 4.394 6-9 11.444 1238" -943 Ango: i 249 331 40 -320 360 0 2_" 23$ -3 BotsA ,- 10' 2 l' 91 -5 95 'l 4'' -24 Camer....n 23s 2.3t 1 -49 50 0 2l" - c -? CôteJ'di..rt "24 in¯ 181 -260 435 6 54' ~14 -I-I Ethion-j 500 - r 4 6 2 4 0 4w4 4% -2 Gabo- -64 -I 3" -r -- -50 0 -- - -35 Ghanj 5"9 4 42 -29 56 15 S: V- -35 Kenya 149 l 24 -' -2 11 4 2'in 3l -4- Mada.i..a 414 11 '5 -- le 0 3, 4l- -1 Niger. 598 I 4$ 1,02$ -25 1,051 2 -43' -143 -2 Seneg,' 341 2i 24 -16 40 0 3~ 35' -33 Sudar, 558 52 3-1 0 3-1 0 15 [s -I Zamb3 2>1 S 4') -32 -' 0 241 2" -4W Zimbjb,' 1 '" -21¯ -296 -6 3 .'l il' Source: World Bank data. 189 Technical Notes The principal sources for the data in this ap- have been supplemented by UNCTAD and UN pendix are the World Bank's central databases. Comtrade databases or by World Bank staff es- Regional aggregates are based on the clas- timates. Trade figures for countries of the for- sification of economies by income group and mer Soviet Union reflect the total of non-CIS region, following the Bank's standard defini- and intra-CIS exports and imports. tions (see country classification tables that fol- Tables A3.7 and A3.8. Growth rates are low). Debt and finance data refer to the 137 compound averages and are computed for cur- countries that report to the Bank's Debtor Re- rent dollar measures of trade. porting System (see the World Bank's Global Table A3.9. Long-term debt covers public Development Finance 2000). Small economies and publicly guaranteed external debt but ex- have generally been omitted from the tables cludes IMF credits. Concessional debt is debt but are included in the regional totals. with an original grant element of 25 percent Current price data are reported in U.S. or more. Nonconcessional variable interest dollars. rate debt includes all public and publicly guar- anteed long-term debt with an original grant element of less than 25 percent whose terms Notes on tables depend on movements of a key market rate. Tables A3.1 through A3.4. Projections are This item conveys information about the bor- consistent with those highlighted in Chapter 1 rower's exposure to changes in international and Appendix 1. interest rates. For complete definitions, see Tables A3.5 and A3.6. Merchandise ex- Global Development Finance 2000. ports and imports exclude trade in services. Im- Table A3.10. Long-term net resource flows ports are reported on a c.i.f. basis. Growth are the sum of net resource flows on long-term rates are based on constant price data, which debt (excluding IMF) plus non-debt-creating are derived from current values deflated by rel- flows. Foreign direct investment refers to the net evant price indexes. Effective market growth is inflows of investment from abroad. Portfolio the export-weighted import growth rate of the equity flows are the sum of country funds, de- country's trading partners. The IMF's Balance pository receipts, and direct purchases of shares of Payments database is the principal source by foreign investors. For complete definition, for data through 1998; in some cases these data see Global Development Finance 2000. 190 Classification of Economies GLOBAL ECONOMIC PROSPECTS Table 1 Classification of economies by income and region, July 2000 Europe and Middle East Sub-Saharan Africa Asia Central Asia and North Africa East and Eastern Income southern West East Asia South Europe and Rest of Middle North group Subgroup Africa Africa and Pacific Asia Central Asia Europe East Africa Americas Low- Angola Benin Cambodia Afghanistan Armenia Yemen, Rep. Haiti income Burundi Burkina Faso Indonesia Bangladesh Azerbaijan of Nicaragua Comoros Cameroon Korea, Dem. Bhutan Georgia Congo, Dem. Central African Rep. of India Kyrgyz Rep. of Republic of Lao PDR Nepal Republic Eritrea Chad Mongolia Pakistan Moldova Ethiopia Congo, Rep. of Myanmar Tajikistan Kenya C6te d'lvoire Solomon Turkmenistan Lesotho Gambia, The Islands Ukraine Madagascar Ghana Vietnam Uzbekistan Malawi Guinea Mozambique Guinea- Rwanda Bissau Somalia Liberia Sudan Mali Tanzania Mauritania Uganda Niger Zambia Nigeria Zimbabwe Sdo Tom and Principe Senegal Sierra Leone Togo Middle- Lower Namibia Cape Verde China Maldives Albania Turkey Iran, Islamic Algeria Belize income Swaziland Equatorial Fiji Sri Lanka Belarus Rep. of Djibouti Bolivia Guinea Kiribati Bosnia and Iraq Egypt, Arab Colombia Marshall Herzegovina Jordan Rep. of Costa Rica Islands Bulgaria Syrian Arab Morocco Cuba Micronesia, Kazakhstan Republic Tunisia Dominican Fed. Sts. of Latvia West Bank Republic Papua New Lithuania and Gaza Ecuador Guinea Macedonia, El Salvador Philippines FYRa Guatemala Samoa Romania Guyana Thailand Russian Honduras Tonga Federation Jamaica Vanuatu Yugoslavia, Paraguay Fed. Rep. Pern of St. Vincent and the Grenadines Surname Upper Botswana Gabon American Croatia Isle of Man Bahrain Libya Antigua and Mauritius Samoa Czech Lebanon Malta Barbuda Mayotte Korea, Rep. of Republic Oman Argentina Seychelles Malaysia Estonia Saudi Arabia Barbados South Africa Palau Hungary Brazil Poland Chile Slovak Dominica Republic Grenada Panama Puerto Rico St. Kitts and Nevis St. Lucia Trinidad and Tobago Uruguay Venatush, Rep Bol de Subtotal 157 25 23 23 8 26 2 H' 33 192 REGIONAL ECONOMIC PROSPECTS Table 1 Classification of economies by income and region, July 2000 (continued) Europe and Middle East Sub-Saatarc Africa Asia Central Asia and North Africa East and Eastern Income r.aiheri H,ifr ]r l Id .,Irb Ebn.pe and Resi ot LL.bdi Norn gruproup ou i4rica 4rnz3 ind PICIIAC %--a (c ntral Uji Eurape I.I. %tr.c.1 .America; High- L'F.D l CI1nuadirrs I snsdj income lit. Belpum Lir.ed New Zealand Denmark States Finland Francec Germany Greece Iceland Ireland Italy Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom Non-OECD Brunei Slovenia Andorra Israel Aruba French Channel Kuwait Bahamas, Polynesia Islands Qatar The Guam Cyprus United Arab Bermuda Hong Kong, Faeroe Emirates Cayman Chinad Islands Islands Macao, Greenland Netherlands Chinae Liechtenstein Antilles New Monaco Virgin Caledonia Islands N. Mariana (U.S.) Islands Singapore Taiwan, China Total 25 23 35 8 27 27 14 7 41 a. Former Yugoslav Republic of Macedonia. b. Federal Republic of Yugoslavia (Serbia/Montenegro). c. The French overseas departments French Guiana, Guadeloupe, Martinique, and R6union are included in France. d. On 1 July, 1997, China resumed its exercise of sovereignty over Hong Kong. e. On 20 December, 1999, China resumed its exercise of sovereignty over Macao. Source: World Bank data. Definitions of groups the group are experiencing similar development or that other For operational and analytical purposes, the World Bank's economies have reached a preferred or final stage of develop- main criterion for classifying economies is gross national ment. Classification by income does not necessarily reflect de- product (GNP) per capita. Every economy is classified as low- velopment status. income, middle-income (subdivided into lower-middle and This table classifies all World Bank member economies, upper-middle), or high-income. Other analytical groups, and all other economies with populations of more than based on geographic regions and levels of external debt, are 30,000. Economies are divided among income groups accord- also used. ing to 1999 GNP per capita, calculated using the World Bank Low-income and middle-income economies are sometimes Atlas method. The groups are: low-income, $755 or less; referred to as developing economies. The use of the term is lower-middle-income, $756-$2,995; upper-middle-income, convenient; it is not intended to imply that all economies in $2,996-$9,265; and high-income, $9,266 or more. 193 GLOBAL ECONOMIC PROSPECTS Table 2 Classification of economies by income and indebtedness, July 2000 Income Sub- Not classified group group Severely indebted Moderately indebted Less indebted by indebtedness Low- Afghanistan Mali Bangladesh Armenia Liberia income Angola Mauritania Benin Azerbaijan Burkina Faso Mozambique Cambodia Bhutan Burundi Myanmar Chad Eritrea Cameroon Nicaragua Gambia, The Korea, Dem. Rep. of Central Niger Georgia Lesotho African Nigeria Ghana Nepal Republic Rwanda Haiti Solomon Islands Comoros Sio Tom India Tajikistan Congo, Dem. and Principe Kenya Ukraine Rep. of Sierra Leone Kyrgyz Republic Uzbekistan Congo, Rep. Somalia Moldova C6te Sudan Mongolia d'Ivoire Tanzania Pakistan Ethiopia Uganda Senegal Guinea Vietnam Togo Guinea- Zambia Turkmenistan Bissau Yemen, Rep. of Indonesia Zimbabwe Lao PDR Madagascar Malawi Middle- Lower Bolivia Algeria Albania Namibia Marshall Islands income Bosnia and Belize Belarus Paraguay Micronesia, Fed. Sts. of Herzegovina Colombia Cape Verde Romania West Bank and Gaza Bulgaria Equatorial China Sri Lanka Cuba Guinea Costa Rica Suriname Ecuador Honduras Djibouti Swaziland Guyana Jamaica Dominican Tonga Iraq Macedonia, FYRa Republic Vanuatu Jordan Morocco Egypt, Arab Yugoslavia, Peru Papua New Rep. Fed. Rep. ofb Syrian Arab Guinea El Salvador Republic Philippines Fiji Russian Guatemala Federation Iran, Islamic Samoa Rep. of St. Vincent and Kazakhstan the Grenadines Kiribati Thailand Latvia Tunisia Lithuania Turkey Maldives Upper Argentina Chile Antigua and Oman American Samoa Brazil Hungary Barbuda Poland Isle of Man Gabon Lebanon Bahrain Saudi Arabia Mayotte Malaysia Barbados Seychelles Palau Mauritius Botswana Slovak Puerto Rico Panama Croatia Republic Uruguay Czech South Africa Venezuela, Rep. Bol. de Republic St. Kitts and Dominica Nevis Estonia St. Lucia Grenada Trinidad and Korea, Rep. Tobago Libya Malta 194 REGIONAL ECONOMIC PROSPECTS Table 2 Classification of economies by income and indebtedness, July 2000 (continued) Income Sub- r .'ed group group Severly indebted Moder,.'s .,dctlcI Le, ;ndebred b. *r,chrcdpc,. High- OECD - Iar* income a-.ri.. lu.c-mb..., rIlt n 'Li*I..n d.rn1 .I iIJ ,L C JJd l rl ,..r.j. Non-.r ..r 10 el OECD ub ..crr.