World Economic Outlook

Financial Turbulence and the World Economy

October 1998

Contents
Assumptions and Conventions
Preface
Chapter I
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Policy Responses to the Current Crisis
Financial Market Developments and Risks
Asia: Setbacks, but Progress Toward Crisis Resolution
Russia's Financial and Payments Crisis
Other Emerging Market Countries: Reducing Vulnerabilities
The United States, Canada, and the United Kingdom:
Striking a Balance in Monetary Policy
Euro Area: Prospects and Policy Challenges
Systemic Considerations
Boxes
1.1 Review of Debt-Reduction Efforts for Low-Income Countries and Status of the HIPC Initiative
1.2 Strengthening the Architecture of the International Monetary System Through International Standards and Principles of Good Practice
Figures
1.1 World Industrial Production
1.2 World Output and Inflation
Chapter II
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The Crisis in Emerging Markets--and Other Issues in the Current Conjuncture
Global Growth and Inflation Outlook
The Emerging Markets Crisis: Its Evolution and Spread
Prospects for Global Flows of Funds and Current Account
Balances
Foreign Exchange and Financial Market Developments
in the Industrial Countries
Inflation Concerns in Advanced Economies
Issues Relating to Growth and Inflation in Developing
Countries and Countries in Transition
Boxes
2.1 Policy Assumptions Underlying the Projections for Selected Advanced Economies
2.2 Trade Adjustment in East Asian Crisis Countries
2.3 The Role of Monetary Policy in Responding to Currency Crises
2.4 The Asian Crisis: Social Costs and Mitigating Policies
2.5 Fiscal Balances in the Asian Crisis Countries: Effects of Changes in the Economic Environment Versus Policy Measures
Tables
2.1 Overview of the World Economic Outlook Projections
2.2 Advanced Economies: Real GDP, Consumer Prices, and Unemployment Rates
2.3 Major Industrial Countries: General Government Fiscal Balances and Debt
2.4 Selected Developing Countries: Real GDP and Consumer Prices
2.5 Countries in Transition: Real GDP and Consumer Prices
2.6 Selected Asian Economies: Macroeconomic Indicators
2.7 Baseline Recovery Path of the Asian Crisis Countries
2.8 Russia and Ukraine: Selected Macroeconomic Indicators
2.9 Developing Countries, Countries in Transition, and Newly Industrialized Asian Economies: Net Capital Flows
2.10 Gross Private Financing to Emerging Market Economies
2.11 Overview of Current Account Projections
2.12 Selected Economies: Current Account Positions
2.13 Recent Exchange Rate Movements on a Bilateral and Multilateral Basis
2.14 United States: Economic Indicators
2.15 Selected Advanced Economies: Unemployment Rates, 1997
2.16 Selected Countries: Changes in Asset Prices
2.17 Major Oil-Exporting Developing Countries: Budgetary Impact of Oil Price Decline
2.18 Middle East and African Countries: Growth, Inflation, and Fiscal Balances
Figures
2.1 Selected European Union Countries, Japan, and the United States: Indicators of Consumer and Business Confidence
2.2 Prices of Crude Petroleum and Nonfuel Commodities
2.3 Selected Advanced Economies: Inflation
2.4 Advanced Economies: Inflation and Commodity Prices
2.5 Major Industrial Countries: Output Gaps
2.6 Selected European Countries: Real Total Domestic Demand
2.7 Major Industrial Countries: Indices of Monetary Conditions
2.8 Selected Emerging Market Countries: Bilateral U.S. Dollar Exchange Rates
2.9 Selected Emerging Market Countries: Equity Prices
2.10 Selected East Asian Countries: Unemployment
2.11 Selected Emerging Market Countries: Short-Term Interest Rates
2.12 Mexico and Selected Asian Economies: Real Private Sector Credit Growth During Crisis Periods
2.13 Developing Countries: Equity Prices
2.14 Russia: Monetary and Financial Market Developments
2.15 Emerging Markets: Bond Spreads
2.16 Major Industrial Countries: Effective Exchange Rates
2.17 Major Industrial Countries: Nominal Interest Rates
2.18 Advanced Economies: Equity Prices
2.19 United States: Actual and Predicted Inflation
2.20 Selected Advanced Economies: Unemployment
2.21 Selected Advanced Economies: Labor Force Participation
2.22 Selected Advanced Economies: Employment
2.23 Prices of Selected Commodities
2.24 Selected Countries in Transition: Inflation
Chapter III
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The Asian Crisis and the Region's Long-Term
Growth Performance
Sources of East Asia's Growth
Efficiency of Investment
The Role of Policies and Institutions in Fostering High
Growth
The East Asian Development Strategy in a Changing
Environment
Building the Basis for Sustained Recovery and Growth
Boxes
3.1 Aging in the East Asian Economies: Implications for Government Budgets and Saving Rates
3.2 Summary of Structural Reforms in Crisis Countries
Tables
3.1 Selected Economies: Sources of Economic Growth
3.2 Selected East Asian Economies: Estimates of Total Factor Productivity Growth
3.3 Selected Economies: Investment-GDP Ratios
3.4 Selected Economies: Composition of Private Saving
3.5 Selected Economies: Net Private Capital Flows
3.6 Selected Economies: Structure of Financial System
3.7 Selected Economies: Broad Money (M2)
3.8 Selected Economies: Private Sector Credit
3.9 Selected Economies: Debt-Equity Ratios of Manufacturing Corporations
3.10 Selected East Asian Economies: Banking Sector Problems
3.11 Selected Economies: Macroeconomic Indicators
3.12 ASEAN-4 Plus Korea: Macroeconomic Developments and Debt Dynamics
Figures
3.1 Selected Economies: Efficiency of Investment
3.2 Selected Economies: Incremental Capital-Output Ratios
3.3 Selected Economies: Stock Market Capitalization
3.4 Selected Economies: Growth of Merchandise Exports
3.5 Selected Country Groups: Shares of World Exports, Imports, and Output
3.6 Selected Countries: Destination of Exports
3.7 ASEAN-4 Plus Korea: Stock of Debt at End-1997
Chapter IV
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Japan's Economic Crisis and Policy Options
The Boom-Bust Cycle in Asset Markets
Consequences for the Real Economy
Role of Macroeconomic Policies
Role of Structural Policies
Box
4.1 Japan's Liquidity Trap
Tables
4.1 Japan: Growth Decomposition
4.2 Japan: Summary of Major Economic Stimulus Packages
Figures
4.1 Selected Major Industrial Countries: Output Growth and Unemployment
4.2 Selected Countries: Equity and Property Prices
4.3 Japan: Stock Market Indicators
4.4 Selected Countries: Personal Saving Ratio
4.5 Japan: Business Capital-to-Output Ratio and GDP Components
4.6 Japan: Interest Rates and Indicators of Monetary Conditions
4.7 Japan: Fiscal Indicators
4.8 Japan: Credit Growth, Tankan Survey, and Bankruptcies
Chapter V
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Economic Policy Challenges Facing the Euro Area
and the External Implications of EMU
Economic Policies in the Euro Area
The Euro Area and the World Economy
Appendix. Economic Policymaking in the EU and
Surveillance by EU Institutions
Boxes
5.1 How Useful Are Taylor Rules as a Guide to ECB Monetary Policies?
5.2 Orienting Fiscal Policy in the Medium Term in Light of the Stability and Growth Pact and Longer-Term Fiscal Needs
5.3 Euro-Area Structural Rigidities
5.4 Determining Internal and External Conversion Rates for the Euro
5.5 The Euro Area and Effective Exchange Rates
Tables
5.1 Euro Area and Selected Countries: Trade Linkages in 1996
5.2 Effect of 1 Percent Higher Output in the EMU Area on Selected Developing Countries
5.3 Selected Countries: Exchange Rate Regimes
5.4 Debt of CFA Franc Zone Countries
5.5 Selected Countries: External Debt and Shares of Long-Term Debt by Currency
5.6 Prospective European Union Members: Convergence Indicators, 1997
Figures
5.1 Euro Area and the World Economy: Indicators of Relative Size
5.2 Euro Area: GDP Growth and Components of Demand
5.3 Euro Area: General Government Fiscal Balance and Inflation
5.4 Euro Area: Real Exchange Rates and Interest Rates
5.5 Euro Area: Output Gaps, Employment, and Unemployment
5.6 Euro Area: Inflation
5.7 Euro Area and the United States: Asset Prices
5.8 Euro-Area Broad Money Stock, Slope of German Yield Curve, and Forward Interest Rates for Germany
5.9 Euro Area: Fiscal Trends
5.10 Euro Area: Structural Fiscal Balances and Output Gaps, 1997 and 1998
5.11 Euro Area: Employment and Unemployment, 1996
5.12 ECU and Deutsche Mark Exchange Rates Vis-à-vis the U.S. Dollar: Spot and Forward, August 31, 1998
Statistical
Appendix
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Assumptions
Data and Conventions
Classification of Countries
List of Tables
Output (Tables 1–7)
Inflation (Tables 8–13)
Financial Policies (Tables 14–21)
Foreign Trade (Tables 22–26)
Current Account Transactions (Tables 27–32)
Balance of Payments and External Financing (Tables 33–37)
External Debt and Debt Service (Tables 38–43)
Flow of Funds (Table 44)
Medium-Term Baseline Scenario (Tables 45–46)
Selected
Topics
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World Economic Outlook and Staff Studies for the World Economic Outlook, Selected Topics, 1992–98