4

ECONOMY

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 Introduction

A portrait of the global economy

A portrait of the global economy and the activity of more than 200 countries and ­territories
that produce, trade, and consume the world’s output—that is what the data in this section provide.
Timely and reliable macroeconomic statistics are important for three reasons. First, they provide a
measure of the wealth of economies, reflecting the welfare of their residents and prospects for future
growth. Second, because the design of sound macroeconomic policies requires an understanding
of historical patterns and trends, they provide guidance in shaping development policies. Third, they
inform consumers, workers, investors, taxpayers, voters, and citizens on how their economy is man-
aged so that they can make appropriate choices and exert control over their governments.

Developing economies grew faster over the last decade (1995–2005) than in the two previous
decades and faster than high-income countries. World output in 2005 amounted to about $61 tril-
lion, measured in purchasing power parities. This was a 45 percent increase over 1995, when the
world output was $42.3 trillion (figure 4a). The share of developing economies in global output
increased from 39 percent to 46 percent. The developing economies in the East Asia and the
Pacific region grew the most, doubling their output and increasing their share of global output
from 13 percent to 19 percent.

Further integration into world markets, better functioning internal markets, and rising demand for
many commodities all contributed to the acceleration of growth in developing countries. Past periods
of growth were often interrupted by financial or balance of payments crises. Indeed, from 1997 to
1998 some of the fastest growing economies experienced a major financial crisis, which started
in Asia and spread to the transition economies of Europe and Central Asia. But recovery from
this crisis has been widespread and durable. Developing economies are running lower fiscal and
external deficits, accumulating larger reserves, and adopting more cautious monetary and financial
policies. These policies make economies less vulnerable to shocks and less volatile, increasing the
confidence of investors. The financial shocks of the period also revealed the importance of reliable,
publicly available data for monitoring the actions of governments and private agents.

Developing economies increase their share of global output 4a

1995 2005
$42.3 trillion $61.3 trillion
East Asia &
Pacific 13%
East Asia &
Pacific 19%
Latin America
& Caribbean 8%
Latin America
Europe & High-income & Caribbean 8%
Central Asia 7% 54%
High-income
60%
South Asia 6%
Middle East & Europe &
North Africa 3% Central Asia 7%
Sub-Saharan Africa 2%
South Asia 8%

Middle East & North Africa 3%

Note: Global output is measured in 2005 international Sub-Saharan Africa 2%
dollars (GDP in purchasing power parity terms).
Source: World Bank staff estimates.

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 Better policies to achieve
Long-term trends macroeconomic stability
Developing economies are expected to grow faster than high- The high growth experienced in the developing world was due
income economies. The surprise is that they often don’t. in part to expanding trade (section 6) and a better investment
Labor surpluses and higher returns to physical capital in de- climate (section 5). The very rapid industrialization of large
veloping countries, along with ready access to technology al- countries such as China and India also benefited the export-
ready developed and amortized in high-income countries, are ers of primary commodities—oil, metals and minerals, and
among the reasons that developing economies are expected agricultural produce.
to grow faster and, in the long run, close the gap with richer Macroeconomic stability also helped. Since the high infla-
economies. But until recently only a few developing econo- tion and the debt crises of the 1970s and 1980s, better fis-
mies enjoyed sustained periods of high growth. And even cal, monetary, and exchange rate policies have brought infla-
fewer have reached the average growth of the high-income tion rates down in most developing countries. And the very
economies. Poverty traps, exclusion from global markets, rapid inflation in European and Central Asian countries after
and government and market failures are some of the reasons the collapse of the Soviet Union came back to earth after
put forward to explain the failure to converge. their transition from central planning to market economies
The last decade brought a change, however. The average (figure 4d).
growth of low- and middle-income economies surpassed that Macroeconomic stability, one factor in a favorable invest-
of high-income economies (figure 4b). The most successful ment climate, promotes economic growth (figure 4e). But low
are no longer counted as “developing.” During this period 13 inflation does not always lead to high economic growth. In
countries graduated from the World Bank’s classification of general, developed economies have lower inflation and eco-
low- and ­ middle-income economies: Antigua and Barbuda, nomic growth rates. The median inflation rate was below 10
Bahrain, Greece, Guam, Isle of Man, Republic of Korea, percent in all developing regions, well below the median of
Malta, New Caledonia, Northern Mariana Islands, Puerto around 15 percent or higher in 1990 in three regions.
Rico, Saudi Arabia, San Marino, and Slovenia. But these are
only a few, and they account for less than 2 percent of the
world’s population. Growth is still uneven (figure 4c). Global
and regional averages are driven by a few large countries,
which carry large weights in the aggregate measures.

Growth is accelerating in Inflation is now less than

the low-income economies 4b 10 percent in all developing regions 4d
Average annual growth (%) 1985–95 1975–85 1995–2005 Average annual growth in GDP deflator (%)
6 50
Europe & Central Asia
5
40
4
30
Latin America
3 South Asia & Caribbean Sub-Saharan
Africa
20
2

1 10

Middle East & North Africa East Asia & Pacific

0 0
Low-income Middle-income High-income 1970 1975 1980 1985 1990 1995 2000 2005

Source: World Bank data files. Source: World Bank data files.

Patterns of regional Economies with high growth rates

growth vary widely 4c generally have lower rates of inflation 4e
Average annual growth (%) 1975–85 1985–95 1995–2005
Inflation, 1990–2005 (%)
10
200 Belarus
8 175
6 150
High-income average, 1975–2005
125
4 Brazil
100
2 Moldova
75
0 50
25
–2 China Uzbekistan
0
–4 –25
–6 –5 0 5 10 15 20
East Asia Europe & Latin America Middle East & South Sub-Saharan GDP growth (%)
& Pacific Central Asia & Caribbean North Africa Asia Africa
Source: World Bank data files. Source: World Bank data files.

186 2007 World Development Indicators

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 Rising reserves External public debt relief
Trade surpluses and growing workers’ remittances have al- Improvements in macroeconomic management of the poor-
lowed many developing countries to accumulate large hold- est countries have also paved the way for more extensive
ings of reserve assets over the past five years. One motive debt relief.
may be the desire to maintain larger precautionary reserves Since 1996 developing countries have benefited from
to protect against financial and balance of payments crises. debt writeoffs by official donors and will continue to do so. It
Indeed, the globalization of financial transactions may have makes sense to relieve debt when the causes of excessive
made countries with open capital accounts more vulnerable. indebtedness are being tackled at their roots and when the
China, India, and the Russian Federation are now among benefits of debt reduction are directed toward more effective
the top 10 economies with the largest reserves holdings poverty reduction programs.
(table 4f). Together they accounted for 25 percent of the world Making debt sustainable for poor countries is one of
reserves in 2005. In contrast, the United States holds only the Millennium Development Goals. Debt can bridge financ-
4 percent of the world reserves. With one exception in 1991, ing gaps and meet investment needs for projects with high
the current account deficit of the United States increased social returns. But when unsustainable, it obliges countries
steadily from around $12 billion in 1982 to $792 billion in to undertake policies that might be disruptive and harmful for
2005. The U.S. current account deficit is financed largely by growth and welfare, such as default, large fiscal adjustments,
China’s current account surplus and growing investments by and devaluation.
major oil exporters. In 2005 the external debt of developing countries
Large reserve holdings also make economies less vulner- amounted to $2,730 billion, and related debt service (prin-
able to debt crises, reassuring lenders and lowering inter- cipal and interest) to $513 billion. The debt stock has been
est rates. Economies with large reserves are less likely to declining in most regions and, accordingly, debt service
require assistance from lenders of last resort, such as the declined. The ratio of debt service to exports in 2005 was
World Bank or International Monetary Fund (IMF). Since 1995 13.8 percent, the lowest in the last 20 years. The ratio of
the ratio of reserves to external debt has increased for many total external debt to GDP declined from nearly 6.6 percent in
economies (figure 4g). 1999 to 5.4 percent in 2005.
The debt crises of the 1980s and 1990s were the result
Top 10 economies of excessive borrowing with overly optimistic expectations.
with largest reserves 4f But cyclical global recessions, declining agricultural com-
International
modity prices, and conflicts also left many poor countries
Share Increase Reserves
reserves of world over (months unable to service their debt. Traditional debt relief, based on
$ billions total 2004 of import
Economy 2004 2005 (%) (%) coverage) rescheduling and restructuring of payments, proved ineffec-
Japan 844.7 846.9 18 0.3 16 tive for them.
China 622.9 831.4 18 33.5 14 Special programs to address the problems of the poor
Taiwan, China 247.7 260.3 6 5.1 14
Korea, Rep. 199.2 210.6 5 5.7 8 countries with predominantly official creditors were started
United States 190.5 188.3 4 –1.2 1 in 1996, when the World Bank and the IMF launched the
Russian Federation 126.3 182.3 4 44.4 11 Heavily Indebted Poor Countries (HIPC) Initiative. The initia-
India 131.6 137.8 3 4.7 12
Hong Kong, China 123.6 124.3 3 0.6 4 tive aims to provide permanent relief from unsustainable
Singapore 112.2 115.8 3 3.2 5 debt by redirecting the resources for debt service toward
Germany 97.2 101.7 2 4.6 1 social expenditures aimed at poverty reduction. The initia-
Source: International Monetary Fund and World Bank data files.
tive relieved $61 billion in total nominal debt service for 29
More reserves countries, and another 11 countries are eligible for addi-
to cover debt 4g tional debt relief.
Number of countries 1995 2005 The debt stock of the 29 HIPCs was reduced by 90 per-
60 cent and their debt service by 2 percent between 1999 and
50 2005. And as a direct result of debt relief, public expendi-
tures in education and health have increased by 3 percent in
40
these countries.
30
The International Development Association (IDA), the IMF,
20 and the African Development Fund have committed to cancel
10 an additional debt stock of $49 billion for all HIPCs under
the new Multilateral Debt Relief Initiative in 2006. IDA has
0
Less than 10% 10%–20% 21%–50% 51%–100% More than 100% since canceled $27 billion and the IMF $3 billion for 19 coun-
Foreign reserves as share of external debt tries that have made progress in their economic and social
Source: World Bank and International Monetary Fund data files.
reforms.

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