The Global Economy
- International Monetary Fund
- Published Date:
- January 1993
The world economy showed a slight recovery in 1992. Activity increased at a modest 1¾ percent, compared with an increase of ½ of 1 percent in 1991. There was a weak rise in growth to 1½ percent in the industrial countries, a further weakening of growth in many African developing countries, and substantial output losses in countries in transition to a market-based economy in Central and Eastern Europe and the former U.S.S.R. At the same time, the developing countries in the Middle East and Asia and many countries in the Western Hemisphere displayed stronger growth, which helped to fuel a 6 percent increase in real GDP for the group of developing countries as a whole. The increase in growth in the industrial countries and the continued expansion of intraregional trade, particularly in Asia, was reflected by an increase in the growth of world trade to 4¼ percent.
Inflation continued to decline throughout the world in 1992, as demand remained below productive potential and price pressures eased in world oil markets. In the industrial countries, consumer price inflation declined to 3¼ percent; in some cases, it fell to the lowest rates since the 1960s. While the average rate of inflation in the developing countries remained below 40 percent, in almost half of the countries of this group the rate declined to below 9 percent. Declines were evident in many countries in Asia and the Western Hemisphere, as well as in the Middle East.
Owing to the prevailing weak conditions in the world economy, monetary conditions generally eased further in 1992 and early 1993. Market interest rates continued to decline in the United States. By comparison, monetary conditions remained tight in Europe throughout much of 1992 before easing somewhat in the fall and increasing in the first half of 1993.
The combined current account deficit of the industrial countries rose to $46 billion in 1992 from $27 billion in 1991, despite an improvement in the terms of trade. The deficit increased sharply in the United States and the United Kingdom, while the Japanese surplus increased steadily and reached a record level in dollar terms.
Among the developing countries, the aggregate current account deficit narrowed slightly to $64 billion in 1992, as normalization of external transactions in the Middle East was counterbalanced by rising deficits in other regions, notably the Western Hemisphere. The total debt of the developing countries fell as a percentage of export earnings to 116 percent in 1992 from 124 percent in 1991. Many countries continued to face debt problems, however, and a number of significant debt-restructuring agreements were completed during the year.
Economic Activity and Employment
World economic activity increased 1¾ percent in 1992 (Table 1). This modest growth was marked by a weak recovery in the industrial countries, a further weakening of growth in many developing countries in Africa, and further substantial output losses in the countries in transition to a market economy. In contrast, the developing countries in the Middle East and Asia experienced stronger growth in 1992, as did many countries in the Western Hemisphere. Reflecting the increase in growth in the industrial countries and the continued expansion of intraregional trade, particularly in Asia, the growth of world trade increased to 4¼ percent in 1992.
|Seven countries above||3.1||2.0||0.2||1.6|
|Other industrial countries||3.8||2.7||0.6||0.8|
|Middle East and Europe||2.9||3.9||2.1||9.9|
|Countries in transition||1.9||–3.6||–10.1||–15.5|
|Central and Eastern Europe2||0.2||–7.4||–13.5||–7.5|
|World trade volume||7.0||4.4||2.3||4.2|
|Industrial country import volume||7.4||4.6||2.4||4.0|
|Developing country import volume||8.7||7.3||9.1||10.2|
|Oil3(in U.S. dollars a barrel)||17.19||22.05||18.30||18.2|
|Countries in transition||27.6||32.4||100.5||776.2|
|Central and Eastern Europe2||135.5||158.8||119.4||196.6|
|Six-month LIBOR(in percent)5|
|On U.S. dollar deposits||9.3||8.4||6.1||3.9|
|On Japanese yen deposits||5.5||7.8||7.2||4.3|
|On deutsche mark deposits||7.2||8.8||9.4||9.4|
Country group composites for output and inflation are based on individual country estimates weighted by purchasing power parity (PPP) values of their respective GDPs.
The countries in Central and Eastern Europe comprise Albania, Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, as well as Croatia, Slovenia, and the other republics of the former Socialist Federal Republic of Yugoslavia.
Simple average of the U.S. dollar spot prices of U.K. Brent, Dubai, and Alaska North Slope crude oil.
In U.S. dollars; based on world export weights.
London interbank offered rate.
Country group composites for output and inflation are based on individual country estimates weighted by purchasing power parity (PPP) values of their respective GDPs.
The countries in Central and Eastern Europe comprise Albania, Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, as well as Croatia, Slovenia, and the other republics of the former Socialist Federal Republic of Yugoslavia.
Simple average of the U.S. dollar spot prices of U.K. Brent, Dubai, and Alaska North Slope crude oil.
In U.S. dollars; based on world export weights.
London interbank offered rate.
Economic growth in the industrial countries picked up to 1½ percent in 1992. Although the United States and Canada emerged from recession, growth declined sharply in Japan and many countries in Europe because of depressed levels of consumer and business confidence and because of actions by households and businesses to reduce excessive levels of debt following the sharp declines in asset prices. Economic activity in Europe was also restrained by persistently high short-term real interest rates and considerable tensions in exchange markets. As a result, the unemployment rate in the industrial countries increased from 7 percent in 1991 to 7¾ percent in 1992 (Chart 1).
Chart 1Industrial Countries: Unemployment Rates
1Aggregation based on labor force weights.
The initial sluggishness of the U.S. recovery in the first half of 1992 gave way to stronger growth later in the year (Chart 2). The expansion has been subdued compared with previous recoveries, mainly because of private sector balance sheet adjustments to reduce debt levels, low employment growth, and subdued confidence. Canada also experienced a subpar recovery, in part because of its interdependence with the United States but also because of ongoing restructuring and cost cutting by businesses. By contrast, output declined in the United Kingdom for the second consecutive year, as high real interest rates throughout most of 1992 and ongoing financial restructuring continued to restrain demand. In early 1993, the expansion in North America became more deeply rooted and the U.K. industrial sector showed encouraging signs of recovery following reductions in interest rates and the depreciation of sterling.
Chart 2Major Industrial Countries: Real GDP
In Japan, output growth slowed significantly in 1992 as private spending retreated as a result of stock adjustments and a decline in asset prices. As economic conditions have worsened in Japan, profits have fallen sharply, labor market conditions have eased considerably, consumer confidence has remained low, and the banking sector has experienced a sharp rise in nonperforming loans. In western Germany, economic growth declined sharply to 1½ percent, reflecting, in part, high interest rates associated with tight monetary policies required to contain inflation and expansionary fiscal policies following unification. At the same time, the construction sector in eastern Germany supported activity but the industrial sector remained weak because of the rapid growth in wages relative to productivity.
Other European countries also were affected by tight monetary conditions and by a general deterioration in the economic climate. In France, the contribution of exports to growth was partly offset by weak domestic demand related to low consumer confidence and higher unemployment. Similarly, in Italy, although the effects of weak domestic demand were partly mitigated by an improvement in competitiveness (from the elimination of wage indexation and the suspension of the lira from the exchange rate mechanism (ERM) of the European Monetary System (EMS)), growth nevertheless declined. In addition, economic conditions remained weak in many smaller industrial countries because of the generally sluggish economic environment—which weakened key export markets—and domestic budgetary and financial imbalances.
In the developing countries, real GDP increased by 6 percent in 1992. Low interest rates on U.S. dollar-denominated external liabilities, and considerable capital inflows in some cases, helped to offset the effects of declining terms of trade for commodity exporters and of generally weak demand in the industrial countries. The comparatively strong performance of a growing number of developing countries was the result of the beneficial effects of sustained stabilization and reform efforts in the context of outward-oriented economic strategies. For many other developing countries, economic conditions remained weak, and living standards continued to decline in many of the poorest countries.
The increase in growth in the developing countries as a group was spurred by a strong recovery in the Middle East following the 1990–91 crisis and a rise in growth in Asia to 8 percent—owing to a dramatic rise in production in China and strong growth in countries such as Bangladesh, India, and Pakistan that had adopted sound financial policies and structural reforms. In the Western Hemisphere, output growth declined because of a substantial drop in output in Brazil associated with difficulties in establishing an appropriate macro-economic policy. Excluding Brazil, regional growth averaged 4¼ percent, as Argentina, Chile, Uruguay, Venezuela, and a number of smaller countries grew by 7 percent or more. In Africa, adverse movements in terms of trade, ongoing effects of the drought in southern Africa, and disruptions from conflicts in a number of countries limited growth to ¾ of 1 percent in 1992. Growth in countries that had arrangements under the Fund’s structural adjustment facility (SAF) or enhanced structural adjustment facility (ESAF) was above the regional average.
The economic situation remained difficult for the countries in transition from central planning, following what was already a sizable decline in output in 1990–91. With the exception of Poland, output declined further in 1992 in the Central European economies in transition, although the rates of decline slowed markedly. In the former Czech and Slovak Federal Republic, Hungary, and Poland, there was a pickup in private sector activity and exports. Output continued to decline sharply in other countries where key aspects of the reform and stabilization efforts were not yet fully implemented. In the former Socialist Federal Republic of Yugoslavia, disruptions caused by its breakup and the continuation of the regional conflicts severely reduced production. In Russia and most other states of the former Soviet Union, economic conditions worsened. Real GDP is estimated to have fallen in the region by nearly 20 percent in 1992, but in some states output losses have been greater. In addition to problems associated with the transformation to a market economy, the continued collapse in output resulted from difficulties in implementing macroeconomic stabilization policies, political unrest, and uncertainties about the reform process itself. Disruptions to trade and payments arrangements also contributed to the output decline experienced by countries in transition.
Inflation continued to decline worldwide in 1992 and early 1993 as demand remained well below productive potential in many regions. Contributing to lower inflation were an easing of price pressures in world oil markets owing to high levels of oil production, slow economic growth, and low demand for heating oil because of unseasonably warm weather in Europe and North America. Prices of nonfuel commodities also declined further, reflecting high rates of production, the arrival of exports from the countries in transition, and generally weak world demand for commodities.
Consumer price inflation declined to 3¼ percent in the industrial countries in 1992; in some cases, it fell to the lowest rates since the 1960s—in part reflecting the removal of structural rigidities and credible commitments to reduce inflation further. Inflation declined to below 2 percent in both Japan and Canada, remained at 3 percent in the United States, and declined to 4½ percent in the European Community (EC). Among the large European countries, consumer price inflation was 2¾ percent in France, 3¾ percent in the United Kingdom, 4½ percent in Germany, and 5¼ percent in Italy. A number of the smaller industrial countries reduced their inflation rates to below 2 percent in 1992.
Average inflation in the developing countries remained below 40 percent in 1992, and almost half of the developing countries had an inflation rate below 9 percent (Chart 3). Inflation rates declined in most Asian countries and in many countries of the Western Hemisphere, partly as a result of cautious financial policies. A notable exception was Brazil, where the widening fiscal imbalance led to about a tenfold rise in the price level. In Africa, the average inflation rate increased, in part because of the drought in southern Africa, although price performance improved in a number of individual countries. Inflation in the Middle East and the developing countries of Europe increased slightly to an average of 26½ percent.
Chart 3Developing Countries and Regions: Consumer Prices1
1 Composites are geometric averages of consumer price indices measured in local currencies for individual countries weighted by GDP valued at PPPs as a share of total world or group GDP.
In the countries in transition, there were marked divergences in inflation performance in 1992. Following successive rounds of price liberalizations, inflation was brought under control in the former Czechoslovakia and fell substantially in Hungary and Poland. Inflation remained high in Romania and Bulgaria, despite a large decline in the latter, and hyperinflation prevailed in much of the former Socialist Federal Republic of Yugoslavia. In the former Soviet Union, however, inflation surged to 1,300 percent. Price liberalization in Russia led to an initial surge in prices early in 1992, after which there was a marked decline in the monthly rate until August. Toward the end of the year, however, lax fiscal and monetary policies led to a sharp acceleration of inflation. Inflation increased sharply in other countries of the region as well.
Financial and Exchange Market Developments
Owing to the weak economic conditions in the world economy, monetary conditions generally eased further in 1992 and early 1993 and the six-month London interbank offered rate (LIBOR) declined significantly. Market interest rates continued to decline in the United States as the Federal Reserve allowed the federal funds rate to drift downward and lowered the discount rate to 3 percent. The official discount rate was also lowered successively in Japan, from 4½ percent in early 1992 to 2½ percent in February 1993, and both short- and long-term interest rates also declined substantially.
In Europe, by comparison, monetary conditions remained tight throughout most of 1992 before easing somewhat in the fall and increasing in the first half of 1993. In mid-July 1992, the Deutsche Bundesbank raised the discount rate to a record high of 8¾ percent as monetary growth and inflation increased. Toward the end of the summer, however, economic conditions in Germany worsened and market interest rates declined; official interest rates were reduced somewhat in mid-September during the exchange market crisis. In early 1993, in response to further signs of economic recession and indications that inflation pressures were beginning to abate, the Bundesbank reduced the discount rate further, in several steps, to 7¼ percent and the Lombard rate to 8½ percent. Monetary conditions in other ERM countries closely followed those in Germany and were dominated by the European currency crisis in mid-September. In early 1993, interest rates generally declined with the abatement of inflationary pressures; this decline has both reflected and contributed to an easing of tensions in the ERM.
In foreign exchange markets in 1992, the U.S. dollar appreciated by 6½ percent against the deutsche mark and the French franc and by approximately 25 percent against both the pound sterling and the Italian lira; the dollar appreciated by ½ of 1 percent against the Japanese yen. However, the value of the dollar fluctuated during the year; it appreciated by 7 percent (in nominal effective terms) through early March, depreciated by about 10 percent through early September, and then appreciated nearly 14 percent by the end of the year. The turmoil in the ERM that began in mid-September 1992 led to the suspension of the lira and the pound sterling from the mechanism and to a series of four realignments in the period to the end of April 1993 (two depreciations of the Spanish peseta and depreciations of the Portuguese escudo and the Irish pound). The three Nordic currencies that had been pegged to the European currency unit (ECU) were forced to float. Following the suspension of the pound sterling and the Italian lira from the ERM in September 1992, the two currencies have depreciated in nominal effective terms. By mid-April 1993, the depreciation amounted to 14 percent and 23 percent, respectively. Along with these developments, both the dollar and the yen appreciated markedly—by 10 percent and 17 percent, respectively. In the first four months of 1993, foreign exchange markets have been characterized by several broad developments: ongoing strains within the ERM early in the period, with a marked easing of tensions after mid-February; the appreciation of the yen against the European currencies and a new record high against the U.S. dollar in mid-April; and the continued appreciation of the U.S. dollar against the European currencies—well above the level registered before the European crisis—despite some downward movement in April.
Box 1Discrepancies in Global Balance of Payments Statistics
In principle, the sum of the external current accounts worldwide should sum to zero, as should the sum of the global measures on capital account. For a number of years, the global data on current account have shown a large negative discrepancy or excess of recorded debits. Conversely, the global capital account has shown a large positive discrepancy or excess of recorded credits (capital inflows). These discrepancies derive from errors, omissions, and asymmetries in countries’ treatment of balance of payments statistics, as well as the absence of data for a limited number of countries that do not compile such data. Such discrepancies can undermine the credibility of analysis of global economic developments and can hinder the formulation of appropriate policies. They may also contribute to the development of protectionist pressures owing to mistaken perceptions of countries’ balance of payments situations.
Noting the large asymmetries in the statistics published by the Fund on world current account, in particular in the investment income, shipping and transportation, and official transfers accounts, the Fund in 1984 established a Working Party under the chairmanship of Pierre Esteva to investigate and recommend procedures to improve statistical practices in these areas. The Final Report of the Working Party on the Statistical Discrepancy in World Current Account Balances, published by the Fund in 1987, offered a number of recommendations addressing measurement issues in each of the principal areas and for improving consistency of global balance of payments data on current account.
The Interim Committee in its communiqué of September 25, 1989 “encouraged the Executive Board to continue improving the analytical and empirical framework underlying multilateral surveillance, including the measurement, determinants, and systemic consequences of international capital flows.” For this purpose, a second Working Party was established in December 1989, under the chairmanship of Baron Jean Godeaux, to evaluate statistical practices relating to the measurement of international capital flows (Annual Report, 1992, pages 40–41). It submitted its final report, entitled Report on the Measurement of International Capital Flows, to the Board in February 1992, and it was published by the Fund in September 1992. The report found that world capital account statistical systems had failed to keep pace with the growth in the volume and complexity of international transactions, and as a consequence there had been a deterioration in the quality of capital account statistics in many countries.
To improve these data, the Working Party on the Measurement of International Capital Flows made a number of recommendations directed to national compilers and international organizations. These included, inter alia, the need for national authorities to keep their statistical systems under review and adapt them quickly to the changing international financial environment, and to reinforce statistical agencies that compile balance of payments statistics.
Various recommendations of a technical nature were made to address problems in each of the component categories of the capital account. As a follow-up mechanism, the Working Party also recommended that a small standing committee of senior balance of payments compilers should be set up, under the auspices of the Fund, to oversee the implementation of recommendations in its report and those in the earlier Current Account Report. In response to this recommendation, the Fund established the IMF Committee on Balance of Payments Statistics in the summer of 1992.
The new committee, comprising representatives from industrial and developing countries, together with international organizations involved in this area, held its inaugural meeting in November 1992, and a second meeting in April 1993. Among the statistical issues being addressed by the committee are improvements to international banking statistics compiled by the Fund and the Bank for International Settlements to make them more usable in balance of payments compilation, the coordination of a benchmark survey on portfolio investment, and research on the recording of flows relating to financial derivatives.
External Balances, Financing, and Debt
The combined current account deficit of the industrial countries rose from $27 billion in 1991 to $46 billion in 1992, despite an improvement in the terms of trade. In the United States, the current account deficit increased sharply as economic recovery gained momentum and as the transfers related to the conflict in the Middle East, which reduced the deficit in 1991, ended. The U.K. current account deficit also widened considerably, as export growth slowed and as imports rose to a level more consistent with the historical trend. The Japanese current account surplus increased steadily in 1992 and reached a record level in dollar terms; this increase reflected a sharp reduction in the growth of domestic demand, lower world commodity prices, and the effect on dollar export prices of the appreciation of the yen in 1991–92. France also recorded a current account surplus in 1992 because of strong exports and weak domestic demand.
The aggregate current account deficit of the developing countries narrowed to $64 billion in 1992, as the normalization of external transactions in the Middle East was counterbalanced by rising deficits in other regions, notably the Western Hemisphere. Net external financing1 to the developing countries increased by $8 billion, to $112 billion, owing to a sharp rise in net financing flows to the Middle East and in portfolio investment in the Western Hemisphere (Chart 4). The current account deficit increased in the countries in transition, although experiences within the region differed considerably. The external deficit declined sharply in the countries of Central Europe, to $1½ billion, primarily because of increased exports to Western Europe; but it widened in the states of the former Soviet Union as exports, particularly of oil, declined. Net external financing flows to Central European countries in transition rose to $4¾ billion in 1992 (Chart 5). (See Box 1 for a discussion of the discrepancies in the global current and capital account balances.)
Chart 4Developing Countries: External Debt and Debt Service1
1 Debt service refers to actual payments of interest on total debt plus actual amoritization payments on long-term debt.
Chart 5Countries in Transition: External Debt and Debt Service1
1 Debt service refers to actual payments of interest on total debt plus, actual amoritization payments on long-term debt.
Total debt (excluding Fund credit) of the developing countries fell as a percent of export earnings from 124 percent in 1991 to 116 percent in 1992. Many countries continued to face difficult debt problems, however, including in sub-Saharan Africa where countries have remained vulnerable to adverse terms of trade and other setbacks including the drought. Significant debt-restructuring agreements were completed in 1992. These agreements involved restructuring of commercial bank debt totaling $35 billion and a net reduction of arrears of $15 billion—a substantial amount in the Western Hemisphere. Major agreements included a debt-restructuring package with the Philippines, and an agreement to restructure Argentina’s foreign debt, both financed in part by the allocation of roughly $1 billion from the Fund in support of debt-reduction packages. Brazil reached an agreement on a term sheet for a comprehensive bank debt package that was recently presented to creditors. Among low-income countries, Bolivia and Uganda have made good progress toward debt workouts with the commercial banks.
Further progress was also made in restructuring official bilateral debt. Between July 1992 and May 1993, Paris Club creditors agreed to grant debt relief on enhanced concessional terms to ten low-income developing countries. Agreements have also been reached with five middle-income countries, and in April 1993 official bilateral creditors concluded a rescheduling agreement with the Russian Federation, covering some $15 billion of arrears and debt-service payments falling due through the end of 1993 on the debt of the former Soviet Union.
Trade Policy Developments
The Fund reviews trade policy issues under its surveillance functions and in the context of member countries’ macroeconomic and structural reform programs. At the global level, trade policy issues are examined by the Board both at the time of the World Economic Outlook exercise and on the basis of more comprehensive periodic reviews of trade policies prepared by the staff. The last such comprehensive review was held in November 1991 (Annual Report, 1992, pages 65–69). The Board’s discussions, as well as the consideration of trade issues in the Interim Committee, have been dominated by the continuing failure to reach agreement in the Uruguay Round of multilateral trade negotiations; the issues affecting trade relations in both the industrial and the developing countries; and the distinct problems facing countries in transition to a market-based system. The declaration issued by the Interim Committee in April 1993 stressed the immediate and urgent need for successfully concluding the Uruguay Round (Box 2).
Box 2Uruguay Round
The Uruguay Round negotiations have been effectively on hold since early 1992, pending agreement between major trading partners on such difficult issues as export subsidies in agriculture, domestic subsidies in general, and the negotiation of increased market access. Nevertheless, there has been clear progress in certain areas of the Round, including clarification of segments of the Draft Final Act, which had been put forward at the end of 1991. In particular, the Draft Services Agreement was considerably clarified.
Remaining problems largely involve potential exclusions and dealing with “free riders” in services in the event commitments to liberalization are not sufficient. Broad agreement has been reached on protection of intellectual property rights with only one or two issues outstanding. Improved procedures for dispute settlement already have been put into effect on a pro tern basis, and more extensive changes will go into effect upon implementation of the Uruguay Round. The organizational features of fitting together the GATT and the resulting Uruguay Round agreements have been fleshed out and clarified; there now is general agreement that the resultant institutional provisions should be an umbrella for all trade in goods and services, as well as intellectual property, to be administered under one institutional framework.
Prospects have improved for achieving the goal of a tariff cut of one third set at the mid-term review. Remaining questions concern the improvement in rules, particularly in antidumping and countervailing procedures and recognition of the nexus between trade and the environment. The decision of the U.S. Administration to seek renewal of fast-track authority for the Uruguay Round, for a period that foresees agreeing on an overall package by the end of 1993, has revived hopes that the opportunities for trade growth provided by the Round—and the removal of uncertainties—may not be wasted.
Trade Relations Among Industrial Countries
Trade policy developments in the industrial countries in 1992/93 have been overshadowed by the continued uncertainty about the conclusion of the Uruguay Round. Trade relations among these countries have been characterized by recurrent trade tensions against a backdrop of macroeconomic imbalances, structural impediments to growth, and high unemployment. Frictions have increased in several sectors that continue to be insulated from foreign competition through trade restrictions, subsidies, or managed trade agreements. This has been reflected in a rise in trade disputes, both within and outside the General Agreement on Tariffs and Trade (GATT), which have contributed to a number of trade confrontations in the 12 months under review. The persistence of trade imbalances between major industrial countries has intensified protectionist pressures. Industrial countries’ trade relations with developing countries, especially in Asia and the Western Hemisphere, have been increasingly influenced by issues such as the protection of intellectual property rights, the environment, and labor standards.
In addition, major industrial countries have continued to rely heavily on antidumping and countervailing duties, voluntary export restraints (VERs), and threats of retaliation as important instruments of trade policy. This, in turn, has triggered greater adoption of antidumping legislation and other actions by developing countries. Pending the conclusion of the Uruguay Round, industrial countries—with some exceptions (Australia, New Zealand, and Sweden)—have generally limited their market opening efforts to the furtherance of regional integration objectives. In 1992, the EC took some steps toward reform of the Common Agricultural Policy.
Trade Policies in Developing Countries
Trade policies in many developing countries in recent years have been characterized by efforts to liberalize and rationalize their exchange and trade regimes as part of comprehensive macroeconomic and structural adjustment programs, often supported by Fund and World Bank resources. These efforts have frequently led to a phased reduction or elimination of quantitative trade restrictions and their replacement with tariffs, as well as a reduction in the level and dispersion of tariffs (recent examples include Brazil, Ecuador, Guatemala, India, Mali, Tanzania, and Zimbabwe). In Africa, many countries are beginning to liberalize and improve the transparency of their trade regimes, although much remains to be done in a number of cases. In Asia, several countries have continued to pursue their long-standing policy of gradual but steady liberalization, while others recently have joined the trend away from inward-looking policies. Latin American countries have extended and consolidated the trade liberalization they initiated in the 1980s; in particular, tariff dispersion has been further reduced and, in line with their increasing adoption of GATT and Tokyo Round Code obligations, they are implementing the harmonized tariff system. However, liberalization has met with resistance in some sectors where world markets are particularly distorted, such as agriculture. This, together with the increased friction in the trading environment, has led many developing countries to more frequent use of measures such as safeguards, as well as antidumping and variable levies to shield domestic industries from “unfair” foreign competition.
Many developing countries have increasingly become aware of the benefits of a stable and liberal multilateral trading system and have accordingly been seeking an early conclusion to the Uruguay Round as a means of assuring stable and predictable trading rules and of securing market access in areas of their export interest—such as textiles, agriculture, and some services—as well as fostering multilateral rather than bilateral solutions to frictions in other areas.
The unilateral liberalization efforts by developing countries have been accompanied by increasing interest in participation in the multilateral trading system, as evidenced by the significant number of new accessions to the GATT. In 1992/93, several countries—Dominica, Mali, Mozambique, Namibia, St. Lucia, and Swaziland—acceded to the GATT; a number of other countries are in the process of accession, while others have received observer status. In the 16-month period ended April 1993, the Fund participated in the consultations of the GATT’s Committee on Balance of Payments Restrictions with Bangladesh, Egypt, India, Pakistan, the Philippines, Poland, Sri Lanka, Tunisia, and Turkey.
Trade Liberalization in Economies in Transition
Central and Eastern European countries continued the process that began in the late 1980s of liberalizing and reorienting their exchange and trade regimes on market-based principles. In some instances, temporary import surcharges were introduced to ease the strains of transition, including in the context of budgetary or balance of payments difficulties, or both. The difficulties in developing an adequate domestic revenue base and effective tax collection system are emerging as constraints on the sustainability of trade liberalization. A number of these countries (specifically Hungary, Poland, and Romania) are renegotiating their protocols of accession to the GATT to reflect market-oriented reforms, while several others are seeking GATT membership. One feature of the political and economic strategy of anchoring their economies irreversibly to the West, which has been adopted by the Central and Eastern European countries and the Baltic states, has been to seek closer integration with the EC and the European Free Trade Association (EFTA), initially via association or free trade agreements.
These arrangements provide for the gradual removal over a number of years of trade barriers on most industrial goods; however, a number of key sectors of strong export potential for Central and Eastern European economies, such as agriculture, textiles, and steel, remain subject to significant barriers to entry, albeit temporary in a number of instances. Most recently, the EC has started moves toward accelerating preferential market access under the association agreements. The EC has also signed trade and cooperation agreements with Albania and Slovenia. The Czech and Slovak Republics formed a customs union and also entered into a free trade agreement with Hungary and Poland.
Trade among the states of the former Soviet Union continued to decline sharply during 1992 and early 1993, as did their trade with the rest of the world. This partly reflected, and contributed to, the decline in economic activity across the former Soviet Union.
Progress in reform of trade and payments regimes has varied in the Baltic states and the states of the former Soviet Union. The Baltic states achieved the greatest progress in reorienting their policies toward market mechanisms, as part of comprehensive economic reforms supported by the use of Fund resources. These countries have also sought greater integration with Western Europe; each signed a free trade agreement with Norway, Sweden, and Finland, respectively, as well as trade and cooperation agreements with the EC.
Other states of the former Soviet Union have experienced greater difficulties in reorienting their trade regimes. Export quotas, licensing requirements, and explicit and implicit export taxes and payments restrictions were used in an attempt to sustain domestic price controls (particularly in primary product sectors) and to mitigate the adverse affects of monetary expansion. Although imports remained largely free of quantitative trade restrictions, and tariffs in most cases were maintained at moderate levels and were mainly geared to raising revenue, these states have adopted a number of transitional payments arrangements that have posed an obstacle to effective import liberalization.
Many of these states have resorted to barter (including barter with countries outside the area of the former Soviet Union) or intergovernmental trade agreements in order to preserve a minimum of trade, to ensure supplies of critical raw materials, or to arrest deterioration of their terms of trade. Nonetheless, reforms aimed toward establishing a more market-based trade and payments system have been initiated in some states of the former U.S.S.R. These include broadening the role of foreign exchange markets through introducing greater current account convertibility, reduction of implicit export taxes, and exchange rate unification.
Several states of the former Soviet Union have received observer status in the GATT as a first step to their possible accession (Armenia, Belarus, Estonia, Kazakhstan, Latvia, Lithuania, Moldova, Turkmenistan, and Ukraine); the Russian Federation took over the observer seat formerly occupied by the Soviet Union.
Regional Trade Arrangements
The trend toward regional integration accelerated in 1992 both among industrial countries and developing countries. This reflected partly a deepening of existing trade arrangements and partly the stalemate in the Uruguay Round—which intensified fears of unilateral defensive trade actions and the need to increase bargaining power vis-à-vis other trading blocs, especially with the advent of the European single market and the North American Free Trade Agreement (NAFTA).
In Europe, the EC’s single market, which came into existence in January 1993, entails further intra-EC liberalization in goods, services, and factors of production and greater harmonization of standards. By the end of 1992, nearly all the single market measures had been adopted by the EC Council, although some proposals were still under discussion; member states are in the process of completing the adjustment of their national legislations to some of the new EC rules.
The single market program is one of the most important European initiatives directed toward stimulation of trade and growth since the establishment of the EC. The harmonization of technical and supervisory standards in combination with greater market access will expose national industries to additional pressures of competition from within and outside the EC, which should induce them to improve efficiency and strengthen their ability to adjust to new circumstances. The creation of the single market is a recognition of the essential importance of open, international competition as an engine for growth of trade and incomes.
The implementation of the single market program has improved access intraregionally (and in some service industries also for third countries), and it has also enhanced transparency and legal security in many sectors both for EC and non-EC producers. However, this liberalization has not always been accompanied by immediate dismantling of existing protection against outside competition in sensitive sectors, such as automobiles, steel, textiles, coal mining, and shipbuilding; in the case of bananas, the reach of trade restrictions against third countries is being widened. The EC and EFTA countries (except Switzerland) signed an agreement to create a European Economic Area that would establish a single market among the participants; the European Economic Area could enter into force later this year if ratified by the legislatures of its members. Most EFTA members also have declared their intention to become full members of the EC.
As mentioned earlier, the EC and the EFTA countries entered into various regional trade agreements with several Central and Eastern European countries, while similar arrangements have been concluded among the latter; the Baltic states have concluded free trade agreements with some EFTA countries and cooperation agreements with the EC and are also contemplating a free trade area among themselves.
In the Western Hemisphere, NAFTA was concluded among the executive branches of Canada, Mexico, and the United States in 1992 and is awaiting ratification by their legislatures. NAFTA is intended to expand progressively the flows of goods, investment, and services among the participants; trade restrictions against third countries have not been increased, though the risk of some shifts away from non-members in trade and investment in selected sectors (such as automobiles, textiles, and services) cannot be ruled out. In Central and South America, the impetus toward integration has been intensified among existing groupings—especially the Southern Cone Common Market (Mercosur), the Andean free trade area, and the Caribbean Community (Caricom)—and through the formation of smaller new groupings.
In other parts of the world, too, the interest in regional arrangements has deepened. Members of the Association of South East Asian Nations (ASEAN) concluded an ASEAN Free Trade Agreement (AFTA); the Economic Cooperation Organization was extended to cover some of the Central Asian states; and in Africa, the Preferential Trade Area for Eastern and Southern African States (PTA), the Southern African Development Community (SADC), the Central African Customs and Economic Union (UDEAC), and the Economic Community of West African States (Ecowas) are considering ways to make integration more effective.
Trade and the Environment
The relationship between trade and the environment is becoming an important and complex issue in national and international trade relations. Three themes have pervaded the debate: (1) the effect on the environment of growth in general, and trade in particular; (2) the consequences for international competitiveness of differential environmental standards and whether trade restrictions could be used to offset these differences; and (3) the role of trade measures—for example, for enforcement purposes—in finding cooperative solutions to global environmental problems.
The interaction between trade regulations and the environment has been highlighted by a number of cases that have gained prominence in recent years, for example, the U.S. measures against tuna caught through fishing methods harmful to dolphins; the Austrian labeling requirements on tropical timber; and, most recently, whether NAFTA should be conditioned on securing higher environmental standards and their effective enforcement.
In the GATT, the Group on Environmental Measures and International Trade was revived in 1991 and has been examining three issues: (1) trade provisions contained in existing multilateral environmental agreements vis-à-vis GATT principles; (2) transparency of national environment regulations likely to have trade effects; and (3) trade effects of new environmental packaging and labeling requirements. The United Nations Conference on Environment and Development in June 1992 supported the need for open markets as part of international efforts to attain sustainable development and identified trade-related environmental issues for future discussions. Some of these issues are likely to be taken up in the further work of the GATT. These include the trade aspects of sustainable development, especially their environmental dimension.
World Economic Outlook
The Fund’s Executive Board, and subsequently the Interim Committee, regularly reviews global economic developments and policies. These reviews are based on the World Economic Outlook report, which is prepared by Fund staff and contains comprehensive analyses of short-term and medium-term prospects for the world economy as well as for individual countries and country groupings. By providing the global context that is necessary for the Fund to carry out its surveillance responsibilities with regard to individual members, the World Economic Outlook exercise helps to identify possible areas of tension that may arise among countries if economic policies continue unchanged. It also gives Fund members the opportunity to monitor systematically the world economic situation and to analyze the implications of individual country policies for the international monetary system.
World Economic Outlook reviews usually are conducted twice a year, in the spring and in the fall. However, if conditions in the world economy change markedly in the period between regular discussions, the Executive Board may decide to hold additional discussions. In December 1992, it held such a supplemental discussion. Its purpose was to reevaluate prospects and policies, particularly in the major industrial countries, in the aftermath of a weakening of activity in many key economies and following a period of considerable turmoil in foreign exchange and financial markets associated with the crisis in the ERM in September 1992.
In their discussions in September and December 1992 and April 1993, Directors examined a wide range of global economic issues, such as the link between trade and growth, the prospects for recovery in the industrial countries, the stabilization and reform efforts of developing countries, and the progress made by the countries in Central and Eastern Europe in their transition to a market economy. Summaries of these discussions follow.
On a number of occasions during earlier discussions on the world economic outlook, Directors had emphasized the need for a medium-term orientation of economic policies, as well as the need to ensure that short-term policy concerns are consistent with the medium-term growth strategy followed by countries since the early 1980s. Among the aims of this strategy are achieving a high degree of price stability, that is, a low and stable rate of inflation that does not distort economic decisions; fostering saving, especially by reducing public sector deficits; and eliminating obstacles to an efficient allocation of resources and to high employment through structural reforms.
In their discussions in April 1993, Directors generally shared the view that despite the near-term uncertainty, there was substantial potential for strengthening global economic performance in the medium term through close adherence to the medium-term strategy and a cooperative and coordinated approach in which each country played its role. In this process, Directors saw a key role for strengthened Fund surveillance to emphasize the mutually reinforcing gains from the cooperative actions of individual countries.
At the two earlier discussions in September and December 1992, Directors also had stressed the need for cooperative policy actions that would reduce uncertainty and strengthen confidence, as well as the need for effective adherence to the basic tenets of the medium-term strategy. In fact, in the discussion in December 1992 following the ERM crisis, there was wide agreement that the medium-term strategy had not failed, but rather that it had not been fully implemented. In December 1992, Directors called on the industrial countries to demonstrate a new spirit of cooperation in efforts to coordinate their macroeconomic and exchange rate policies in the common interest. They saw the challenge of supporting the transformation of the former centrally planned economies, while continuing to assist the successful development of many of the world’s poorer nations, as a vital area for such cooperative efforts.
In April 1993, Directors expressed considerable concern regarding the continued weak aggregate performance of the world economy and noted that for many countries projections for output had been sharply revised downward. Directors were particularly concerned about the continuing weakness of economic growth in the industrial countries where a continued reassessment of the impact of asset price deflation and the associated balance sheet adjustments on private spending and lending decisions in many countries, the effects of persistent high real interest rates in Europe and Canada, and heightened uncertainty from the turmoil in European exchange markets had contributed to further downward revisions to growth forecasts.
In North America, there were welcome signs of recovery, but in Europe and Japan economic performance had deteriorated. In fact, several Directors felt that the revised downward growth projections for Europe and Japan might still not take full account of existing recessionary tendencies. It was also of concern that cyclical divergences, growing current account imbalances, and persistently high or rising unemployment were leading to increased pressures for protection.
The importance of successfully concluding the Uruguay Round of trade negotiations was another recurring theme of the three World Economic Outlook discussions in 1992–93. In April 1993, Directors highlighted the key importance of trade as an engine of growth, which they considered to be essential in the current global economic environment. They emphasized the close linkage between liberal trade and exchange regimes and economic prosperity. They particularly welcomed the significant trade liberalization undertaken by many developing countries, which they considered to have been a key factor in their recent favorable growth performance. They also noted that many of the countries in transition in Central and Eastern Europe had included trade liberalization as an essential element of the process of transformation to market-based economies. Some Directors, noting the rise of regional trade arrangements, were of the view that these could contribute to raising the economic welfare of their member countries to the extent that they were accompanied by multilateral reductions in trade barriers.
Directors were concerned that the significant benefits of free trade now seemed threatened and emphasized the urgency of successfully concluding the long-delayed Uruguay Round. The continued failure to complete the Round was not only depriving the world of the benefits of growing trade but had also been accompanied by a marked increase in tensions between countries over trade issues, which could seriously harm the world economy.
Directors noted the recent proliferation of bilateral and managed trade arrangements and stressed the risk that such arrangements could severely limit the access to global markets of developing countries and countries in transition. They urged all countries to resist inward-looking policies, as these would be highly detrimental to world prosperity in both the short and the long run. In these circumstances, Directors observed that failure to complete the Round would not merely produce a standstill, but be a step backward. Directors asked the Interim Committee strongly to emphasize the immediate and urgent need for a rapid conclusion of the Round.
Industrial Country Policies
At the April 1993 discussion, Directors generally agreed that the industrial countries needed to take effective measures to strengthen growth and to diminish financial market and trade tensions, while preserving progress in reducing inflation. There was opportunity for implementing a serious program of medium-term fiscal consolidation in the United States, while the situation in Europe and Japan called for measures to contain recessionary elements and to promote recovery.
The progress made in moderating inflationary pressures in a number of industrial countries was attributed in part to tight monetary policies and to increased policy credibility. A number of countries had been able to lower interest rates without raising concerns of renewed inflation, which was seen as a critical benefit of a strong commitment to monetary discipline. Such reduction would be an essential contribution to stronger growth. The moderation of inflationary pressures, the indications of a slowdown in monetary growth, and the pronounced weakening of the economy were seen to allow Germany to take a lead in this process.
These developments should ensure a durable reduction of inflation in Germany and would allow a marked easing of monetary conditions that most Directors felt would be fully consistent with both domestic objectives and the interests of the world economy without impairing the credibility of the monetary authorities’ commitment to bring down inflation to very low levels. There was general agreement that the current monetary policy in the United States had been appropriate in supporting the recovery.
In December 1992, Directors observed that the crisis in the ERM had shaken confidence. Most Directors felt that the main underlying cause of the tensions was the lack of convergence of inflation rates and of budgetary positions, which had led to growing divergences in economic fundamentals, including relative competitive positions. An additional critical factor was the cyclical divergence between Germany, where a tight stance of monetary policy was needed to resist inflation pressures from the expansionary fiscal conditions associated with unification, and most other European countries, where economic conditions were generally weak, and high interest rates, necessary in the context of the ERM during this period, appeared to be inappropriate from a domestic point of view.
Directors agreed at that time that initiatives on a number of fronts would be needed to restore confidence and to reduce exchange rate tensions and prevent their re-emergence. Greater convergence in inflation and budgetary performance, as envisaged in the Maastricht Treaty, was a fundamental requirement. While the ERM constraint was seen to be an important element in countries’ convergence strategy, some Directors noted that until greater convergence was achieved, realignment might be required from time to time, while others emphasized the benefits of the discipline imposed by a credible commitment to stable exchange rates. Greater coordination of fiscal and monetary policies would also be essential to ease strains on the system.
When the Board returned to the subject in April 1993, several Directors observed that while strains had eased in the EMS, tensions among some currencies were still visible—even if they were declining—in the large premiums on interest rates compared with those in Germany. During May, the peseta and the escudo were devalued, but tensions and premiums diminished or disappeared for key currencies in the ERM. Directors noted that price increases had remained moderate in both the United Kingdom and Italy after the suspension of their currencies from the ERM.
Directors observed that these developments demonstrated the crucial importance of strengthening monetary policy cooperation across Europe. Several Directors encouraged the staff to continue its work on assessing whether and how national indicators of monetary conditions, activity, and inflation might be complemented with ERM-wide indicators. Directors also encouraged the authorities in all countries to take note of the policy lessons from the asset price inflation cycle since the late 1980s. The effect of asset market developments on the real economy had been costly, and in hindsight both macroeconomic and supervisory policies had contributed to these developments. Enhanced oversight and due attention to asset price movements in the implementation of monetary policy were seen as essential to avert such problems in the future.
The Board unanimously called for reinvigorated fiscal consolidation in many industrial countries, particularly in the United States, Canada, Germany, Italy, and the United Kingdom, as well as in several smaller industrial countries, as part of their medium-term strategy. Directors emphasized that inadequate fiscal consolidation had constituted an important failure in implementing a key element of the medium-term strategy thus far and had represented a binding constraint on policy during the economic downturn in 1992–93. The persistence of large structural budget deficits was also seen as a critical issue, given the need to alleviate the potential shortage of world saving over the medium term, to reduce the high level of real interest rates, and to permit higher rates of investment and increased job creation.
Welcoming the efforts of the U.S. administration to confront the problem of the deficit and to strengthen saving and investment, Directors viewed the U.S. economic plan of February 1993 as representing an important step in this direction. Nevertheless, many Directors noted that, even with full enactment and implementation of the fiscal package, the structural federal fiscal deficit in 1998 would be above 3 percent of GDP—that is, at the same level as in the late 1980s. Given also the likely costs of the forthcoming health care reform package, many Directors saw a need for further action to ensure an adequate degree of fiscal consolidation over the medium term. Most Directors felt that the natural forces of recovery were taking hold in the United States and that the fiscal stimulus was consequently less necessary than it might have seemed earlier.
The Board emphasized that further progress toward fiscal consolidation in Germany, especially through cuts in expenditures and subsidies, would contribute to the reduction in macroeconomic imbalances and further facilitate the needed reduction in interest rates. In the United Kingdom and Italy, reduction of the large public sector deficits was clearly needed. In France, despite a relatively strong fiscal performance over the last years, the subsequent deterioration in the underlying fiscal position also pointed to the need for consolidation over the medium term. In contrast, in Japan, given the risk of a prolonged recession and the less-than-expected impact of the August 1992 package, it would be necessary to maintain an adequate level of fiscal stimulus in the near term. (The associated supplementary budget passed the Diet in December 1992 and its impact only became apparent in the beginning of 1993.) Consequently, Directors welcomed the measures to stimulate the economy announced by the Japanese authorities in April 1993 and looked forward to an early staff analysis of their impact. They noted positively that Japan’s enviable fiscal record allowed it to take such action without jeopardizing the credibility of the authorities’ medium-term fiscal objectives.
Reverting to a theme touched on in the earlier discussions on the world economic outlook, Directors commented that both cyclical factors and the lack of adequate structural reform of labor markets had led to the high levels of unemployment in a number of industrial countries, particularly in Europe. Rigidities in labor markets in Europe had kept unemployment high and had contributed to subdued consumer confidence, demands for industrial subsidies, and pressures on government trade policies. Directors were concerned that the cyclical increases in unemployment might not be fully reversed as economies strengthen. They stressed that there should be less emphasis on income maintenance policies and more on incentives for greater labor mobility, better training and retraining programs, and more flexible wage structures.
Developing Country Policies
In April 1993, Directors observed that many developing countries continued to show resilience to the weakness of activity in industrial countries. This relative strength reflected in large part the sustained stabilization and reform efforts undertaken by these countries, which had been supported by capital inflows, lower international interest rates, and debt-restructuring agreements.
In their review in September 1992, Directors commended the progress made in liberalizing financial markets in many developing countries, which together with an improved regulatory framework had helped to mobilize saving and raise efficiency. Some Directors noted that the improved economic performance in some developing countries had been associated with substantial capital inflows and a reversal of capital flight. These increased flows evidenced improved confidence in, and prospects for, economic performance in these countries. Notwithstanding the positive effects of increased capital flows, in some cases these would require policy adjustments to prevent overheating.
In April 1993, several Directors again observed that in some of the successfully adjusting developing countries, especially in Asia and the Western Hemisphere, capital inflows had contributed to growing signs of overheating. In these countries, fiscal policy might need to be tightened to make room for higher investment, and tighter monetary policies may be warranted to contain inflationary pressures and achieve sustainable growth. Some appreciation of the exchange rate might also be appropriate in certain cases.
Discussing developing country policies in September 1992, Directors also observed that budget imbalances had been reduced in many developing countries and stressed the importance of further consolidation, especially by reducing unproductive outlays in such areas as military expenditures and subsidies, a prescription that was considered to be valid for a number of industrial countries as well. Directors welcomed the dismantling or reduction of trade barriers by many developing countries, particularly in Latin America. Another positive development was the improvement in the debt situation of many developing countries, including progress toward bank debt restructuring. Some debtor countries had been able to reenter private capital markets.
Despite many promising developments, Directors noted in April 1993, divergences in growth among developing countries had tended to widen in recent years. Moreover, many countries had been unable to register any meaningful improvement in economic conditions. The continued weak performance of many countries in Africa was of particular concern. High debt and debt-service ratios continued to impede growth. If prospects for these countries were to improve, policy reforms would have to be supported by adequate financial assistance, including debt relief and concessional assistance as appropriate from the ESAF or its successor facility. In December 1992, some Directors had cautioned that the weak performance of the industrial countries would eventually take its toll on the developing countries, despite the continuing implementation of growth-promoting policy reforms.
Referring to a staff analysis, Directors noted in April 1993 that the stronger performers among the developing countries shared certain characteristics, such as markedly higher savings rates, greater investment in physical as well as human capital, higher efficiency of investment, and stronger overall growth in productivity. These characteristics reflected fundamental reforms that had led to more stable and sustainable economic conditions. In addition, these countries had undertaken reforms to reduce or eliminate structural distortions, particularly in the trade and financial sectors. However, given recent experiences in industrial countries, Directors cautioned that financial liberalization should be accompanied by adequate supervisory mechanisms.
Policies of Economies in Transition
In their discussions in April 1993, Directors were encouraged by the substantial progress made so far by a number of countries in Central and Eastern Europe in their transition to a market-based economy. It was apparent that the stabilization and structural reform efforts undertaken by these countries were beginning to bear fruit. In several of these countries, privatization was well under way, and important fiscal reforms, such as changes to tax systems and the extension of social safety nets, were being introduced. The improved macroeconomic stability had been sustained by broadly appropriate monetary and fiscal policies and, in some countries, output was beginning to rise again. Nevertheless, there was a need to maintain the pace of market-oriented reforms. Although a great deal of progress had been made in privatization and the establishment of property rights, much of the productive capacity, especially the largest enterprises, continued to remain in state hands. Therefore, there was an urgent need at least to complete the full commercialization of these enterprises.
The immediate outlook in most states of the former Soviet Union was, however, significantly bleaker than in Central and Eastern Europe, and output was likely to fall further in the short term. Of particular concern were inflation in a number of states and the closely related problems of excessive credit creation by the central bank, large government deficits, and subsidies to loss-making state enterprises. Directors were also worried that inadequate stabilization efforts threatened to lead to intensification of hyperinflation tendencies, which could derail the reform process.
The structural reforms already undertaken by the states of the former Soviet Union included efforts to begin the privatization process, to reform financial systems, and to establish an appropriate legal framework. Progress in these areas, however, had been uneven from country to country. Directors noted that structural reform and macroeconomic stability were closely linked and mutually reinforcing and emphasized that further progress in structural reform, supported by macroeconomic stabilization, was essential if output and standards of living were to begin to rise again.
International cooperation was seen by the Board as vital for sustaining the momentum for reform in the economies in transition, especially in the states of the former Soviet Union, where monetary, financial, and trade relations need a new basis. In this respect, both financial and technical assistance from governments and international organizations would be crucial, including assistance from the Fund’s new systemic transformation facility (STF). Trade and direct investment by the private sector would be equally important. Further reforms in the countries in transition were needed to promote such private sector activity, but industrial countries must also liberalize access to their own markets.
At their September 1992 review, many Directors stressed the need for comprehensive and mutual reinforcement of macroeconomic and structural policies and institution building. They emphasized that the pace of macroeconomic stabilization did not need to be made more gradual, in view of a slow pace of systemic reform, but, on the contrary, structural and systemic transformation needed to be accelerated to allow for a more rapid and sustainable recovery of growth. Referring to earlier experiences, several Directors noted that such a strategy could allow for well-targeted and transitory schemes to support the adaptation of viable enterprises to market conditions.