A Survey by the Staff of the International Monetary Fund
I. Global Economic Prospects and Policies
In the developing countries as a group, growth picked up to 6 1/2 percent last year from 6 percent in 1995, as stronger activity in Africa, Latin America, and the Middle East offset a moderate slowdown in parts of Asia. Data on trade and industrial production indicate that aggregate activity slowed in the course of 1995 but picked up speed again during 1996. The apparent synchronization of the developing countries' business cycle in 1995-96 with that of the advanced economies contrasts with the experience of the early 1990s when the buoyancy of developing country growth helped maintain global expansion while many advanced economies suffered recessions (see Chart 1). The recent abatement of overheating pressures in many of the most successful developing countries has enhanced the chances of their expansions being sustained, and the growth projection for the developing countries overall in 1997 has been marked up to 6 1/2 percent.
The Mexican economy is continuing to recover following the 1995 crisis, and the return of financial market confidence has allowed Mexico to prepay a substantial part of the emergency loans obtained in support of its adjustment efforts. The expansion is expected to maintain its momentum in 1997 provided financial policies and structural reforms remain on rack. The recovery in Argentina is also expected to continue in 1997, with inflation emaining close to zero. In Brazil, growth strengthened in 1996 while inflation fell to 9 percent by the end of the year, the lowest in three and a half decades. But a widening deficit on current account and a policy mix characterized by a weak fiscal stance and tight monetary conditions carry risks. In Chile, the most successful economy in the region, inflation fell to a 36-year low of 6 1/2 percent at the end of 1996, and demand pressures have eased in response to tighter monetary policies. Output growth remains strong, however, and the external deficit, affected by the decline in copper prices, is quite large so that further restraint may be warranted. To avoid stimulating capital inflows, fiscal policy should provide the bulk of this restraint.
Among the developing countries in Asia, those that have had to deal with risks of overheating have generally been successful in dampening the growth of domestic demand. The slowdown in the region's export growth in 1996 helped to contain inflationary pressures, although it has exacerbated external imbalances in some cases. Thailand saw a significant slowdown in growth in 1996, largely as a result of a disappointing export performance; concerns about the large current account deficit as well as fragilities in the financial system have given rise to exchange market pressures in recent months. Malaysia appears to have weathered the slowdown in foreign demand relatively well; the possibility of a rebound in demand pressures in 1997, as well as concerns about asset price inflation, warrant a cautious policy stance. In Indonesia, inflation has begun to diminish and growth has slowed moderately; the reliance on foreign saving will need to be contained through a stronger fiscal position. The Philippines saw a further trengthening of economic performance in 1996 and is expected to continue to reap the fruits of its intensified stabilization and reform efforts.
Like many other rapidly growing economies in Asia, China has taken measures to reduce overheating, and real GDP growth moderated to just under 10 percent in 1996 with retail price inflation slowing further to 6 percent, down from 22 percent in 1994. The soft landing has set the stage for continued expansion, but sustaining rapid growth with low inflation will require tangible progress in restructuring and raising efficiency in state enterprises (including by diversifying ownership), addressing weaknesses in the financial sector, and enhancing budget revenue. The strong external sector provides the opportunity to accelerate significantly the process of trade liberalization, which is critical for China to benefit fully from the recent and welcome implementation of current account convertibility.
India's quite strong expansion moderated somewhat in 1996, and inflation also slowed, as a result of both policy measures and a marked slowing of export growth in line with trends in the rest of Asia. In 1997, growth is expected to be sustained at a moderate pace, helped by the easing of monetary policy since mid-1996, but limited progress in reducing the fiscal deficit remains a risk for inflation and a constraint on growth. Further trade liberalization, reform of domestic product markets, and enterprise reform are needed to put India on a higher sustainable growth path. In Pakistan, which experienced severe balance of payments difficulties in late 1996, there is a continued need for strong stabilization measures and a wide range of structural reforms.
Growth in the Middle East and Europe region in 1996, at 4 1/2 percent, was stronger than expected, partly as a result of economic reforms introduced in recent years, but also reflecting the higher-than-projected level of oil prices. For 1997, expected output growth has also been marked up. The temporary character of the recent tightness in oil markets underscores the continued need for structural reforms to lessen the dependence on oil revenues and enhance long-term growth prospects. Higher oil revenues and public expenditure restraint contributed to an improvement in economic conditions in Saudi Arabia last year, which is expected to continue in 1997. In Egypt, recent actions to consolidate macroeconomic stabilization and deepen the process of structural reform should strengthen growth further and promote the reorientation of the economy. Jordan is setting a prominent example in the region through its progress with stabilization and reform policies as underscored by declining internal and external imbalances, low inflation, and robust economic growth. In contrast, the economic outlook in Turkey remains subject to significant downside risks owing to lax fiscal and monetary policies and rampant inflation.
Africa's growth performance in 1996 was particularly encouraging: real GDP is estimated to have risen by about 5 percent, the strongest growth rate in 20 years, and nearly twice the average growth rate observed since the early 1970s. There are signs that the implementation of stronger macroeconomic and structural policies and improvements in governance have begun to produce higher growth in an increasing number of countries. For example, Benin, Côte d'Ivoire, Senegal, and other CFA franc one countries are seeing continued recovery following the adjustment to a more realistic exchange rate since 1994 and the adoption of appropriate reforms. Ghana, Kenya, Malawi, and Uganda are also achieving growing success from allowing market forces a greater role in an environment of macroeconomic discipline. In South Africa, downward pressure on the exchange rate emerged in 1996, while growth, at 3 percent, was somewhat weaker than expected. Sustained reform and stabilization policies, in accordance with the authorities' announced strategy, would enhance future growth. Stronger oil revenues have improved the near-term outlook for Nigeria but medium-term prospects remain uncertain. In Algeria, which has shown impressive stabilization gains, public enterprise restructuring and privatization are needed to enhance the medium-term outlook, although the security situation greatly complicates the tasks of economic policy. Morocco and Tunisia also need to step up the pace of structural reform to further enhance their growth prospects. In both Algeria and Morocco, however, high unemployment, while making economic growth all the more important, also constitutes a difficult social setting for stronger reform efforts. Overall, Africa's recovery remains fragile and, in spite of recent successes, it is still a great challenge for Africa and the international community to reverse the decline in the region's living standards over the past quarter century.
Sharply contrasting economic trends have emerged during the past decade or so in the developing world. Some countries, such as Chile and Malaysia, have benefited considerably from strong macroeconomic policies and outward-oriented, market-based reforms, which are enabling them to integrate rapidly into the global economic and financial system. With their already relatively high per capita income levels, these countries are firmly on the road to joining the ranks of the advanced economies along with the newly industrialized economies. Other emerging market economies like China, Thailand, and Indonesia are similarly showing impressive achievements even though convergence will, of course, take longer given their lower levels of income. The economic success of all of these economies reflects the mutually reinforcing effects of sustained progress in many areas of economic policy. Their major policy challenge for the future is to continue to deregulate product, labor, and financial markets, while guarding against domestic and external imbalances and financial sector fragility. If these conditions are met, the benefits of economic reforms should continue to be reinforced by the forces of globalization.
A large part of the developing world, however, has not yet reaped the benefits of globalization: many countries have seen their living standards grow only modestly and have continued to lose ground in relation to the advanced economies. This is the case, for example, in the Indian subcontinent, and much of the Middle East and Latin America. Although there is no simple recipe for improving economic performance, there are strong indications that these countries have made inadequate progress in improving the policy environment. Policy shortcomings are in many cases not across the board but in some critical areas such as the failure to sustain macroeconomic stability, delays in liberalizing foreign trade, or inadequate progress in deregulating domestic product markets, establishing market-based institutions, and improving governance. Many of these countries are increasingly realizing the need for more comprehensive strategies and are beginning to see the fruits of their efforts as illustrated, for example, by the recent experiences of Argentina, Jordan, the Philippines, and ganda.
Some of the poorest countries, especially in Africa, have fallen behind not only in relative but also in absolute terms. These countries are facing a general need to open their economies, reform government, establish financial markets, and maintain internal and external financial stability. To help them cope with the enormous challenges they are facing, the international community needs to provide well-targeted assistance and to lessen external debt burdens, which have risen to unsustainable levels in some cases. In addition to special low-cost lending facilities to support the adjustment efforts of the poorer countries, the IMF and the World Bank have launched a joint initiative, which will provide further assistance to help reduce the debt burden of heavily indebted poor countries that have followed sound policies but for whom traditional debt-relief mechanisms have failed to secure a sustainable external position.