Appendix 1 Regional Economic Prospects - World Bank

East Asia and Pacific

Recent developments

THE EAST ASIA ECONOMIC RECOVERY

that began in late 2001 continued tostrengthen in the first half of 2002, but

momentum slowed after the summer and un-certainties have increased. Output growth indeveloping East Asia is estimated to have risento 6.3 percent in 2002 from about 5.5 percentin 2001, led by China growing at more than7 percent. Output growth has reboundedmost rapidly in those economies, such as theRepublic of Korea, Malaysia, Taiwan (China),Singapore, and Thailand, that had been hard-est hit by 2001’s steep fall in world trade andhigh-tech demand. Annualized growth in thefirst half of 2002 over the last half of 2001jumped to a 5- to 10-percent range in most ofthese economies, although industrial produc-tion and trade data indicate that outputgrowth softened in the second half of the year.Elsewhere in the region growth had in anycase slowed less among transition economiessuch as China and Vietnam, because of con-tinued strength in domestic demand and aless marked slowdown in exports. Growth inIndonesia and the Philippines had fallen lesssharply to a 3- to 3.5-percent pace in 2001from a 4- to 5-percent pace in 2000, andthe cyclical rebound in these countries (whilemore pronounced in the Philippines), has alsobeen less clear-cut than elsewhere in theregion.

The recovery so far has been underpinnedby both external and domestic demand. Agradual pickup in world conditions from2001’s severe global slowdown supported arevival of exports, including exports in the im-portant high-tech sector. U.S. dollar prices formany important East Asian primary commod-ity exports such as rice, rubber, palm oil, co-conut products, and lumber also rose sharplyafter late 2001, although they rose from thevery low levels reached following several yearsin which steep declines in the terms of tradeinflicted large income losses in many EastAsian countries. Intraregional exports havebeen strong, most notably those to China,which jumped an amazing 50 percent in thefirst half of 2002. Supportive monetary and(in several cases) fiscal policy conditions havefueled domestic demand. Household spendingin the region has been especially robust, boost-ing spending on cars and other consumerdurables, but private investment still lags.Debt-equity ratios, though they have fallenin some instances, remain high by interna-tional standards in most cases, and togetherwith low corporate profitability, continue todepress the investment climate and underminethe prospects for accelerated medium-termgrowth.

World semiconductor sales and orders forhigh-tech equipment in the United States re-bounded strongly in late 2001, but growthrates had already peaked before the summerof 2002, and the levels remained far below the

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record levels of 2000 (figure A1.1). A sharp fallin North American semiconductor equipmentbookings in August and September suggeststhat this year’s incipient revival in the depressedglobal high-tech industry may have faded. Sev-eral East Asian countries report some slippagein August-September export and industrialproduction growth from the high rates reachedaround midyear.

Steep falls in global equity markets in Junethrough September, evidence of renewedweakness in industrial country growth, con-tinued turmoil in emerging markets, risingworld oil prices, and terrorist attacks in thePhilippines and Indonesia are among the fac-tors that have substantially increased uncer-tainty about prospects for the region.

Near-term outlookHow well are East Asian countries able to rideout new external and internal shocks that mayarise? Here the experience of the last twoyears is cautiously encouraging. Neither theserious export decline of 2001 nor the heftyterms-of-trade losses of recent years led to anew wave of corporate and financial failuresin the countries previously hit by the 1997

crisis. Local East Asian financial markets havebeen remarkably resilient in the face of theglobal equity and emerging market turmoil.

On balance, countries in the region appearcomparatively well placed to weather the pre-sent high levels of external risk, especiallyif they can build on recent successes and con-tinue to advance reforms that further reducetheir vulnerability to external shocks and fos-ter sources of domestic productivity growth.Improvements in macroeconomic conditionshave been key to cushioning the impact ofexternal shocks and volatility in internationalcapital markets on East Asian countries overthe last three years. Most countries havestrengthened national balance sheet positionsby running continuous current account sur-pluses since the 1997 crisis, reducing foreigndebts (including short-term debt), and build-ing up foreign reserves. The adoption of moreflexible exchange rate regimes has also allowedcountries to adapt to external shocks moresmoothly (while the recent fall in the U.S. dol-lar has alleviated concerns about a loss ofcompetitiveness in countries with currencieson a dollar peg, such as China and Malaysia).

A potential source of macroeconomic vul-nerability in East Asia, however, is the higherlevel of public sector debt (including contin-gent liabilities) accumulated after the 1997crisis in several countries. Public debt levelsare quite high in Indonesia and the Philippines,and are not insignificant elsewhere. Publicdebt-to-GDP levels are now starting to fallbecause of rising currencies and lower interestrates, and well-judged fiscal policy measurescan build on this trend so as to secure medium-term fiscal sustainability.

Private investment in the crisis-affectedcountries still remains weak, compared withpre-1997 crisis levels. However, these peaklevels were based on overoptimistic expecta-tions and abundant foreign capital. Continuedeconomic growth, macroeconomic stability,low interest rates, rising currencies, and policyefforts to improve the investment climateshould lay the groundwork for an investment

G L O B A L E C O N O M I C P R O S P E C T S 2 0 0 3

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Note: Through August 2002. *Rep. of Korea, Malaysia,Singapore, and Taiwan (China).Source: SIA and national sources through Datastream,World Bank staff estimates.

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Figure A1.1 Emerging high-tech Asia:semi-conductor dollar sales andindustrial production*

Jul.2002

Jan.2000

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(percent change, 3m/3m saar)

Industrial production(right axis)

Semiconductorsales (left axis)


revival in due course. Equity markets in EastAsia also fell sharply in this period, but overthe last one or two years they have generallyoutpaced industrial country equity markets.In countries with flexible regimes, currenciesgenerally rose against the dollar during 2002while remaining steady or depreciating mod-estly against the yen. The stronger trend incurrencies occurred despite the fact that do-mestic interest rates in most countries weresignificantly lower than average 2001 levels,and is striking evidence of improving investorperceptions of the region.

The October terrorist attack in Bali isalso expected to reduce near-term growth inIndonesia. Receipts from tourism represent 4 to5 percent of gross domestic product (GDP) inIndonesia, and in Southeast Asia generally.Indonesian tourist arrivals could fall byaround 20 percent, based on the experience ofthe 1997 terrorist attack on tourists in Luxor,the Arab Republic of Egypt, and the impact ofprevious political unrest in Indonesia itself.Lower levels of tourist arrivals and the adverseimpact of the attack on consumer and busi-

ness confidence could reduce Indonesia’sgrowth by 1 percentage point in 2003. Gov-ernments in Southeast Asia must now grapplewith a major security challenge that also haspotentially divisive domestic political implica-tions—all at a time when many countries aremoving into the next turn of their electoralcycles. A loss of focus on development andreform priorities could result.

In this environment, acceleration of growthis unlikely, although there are also no signs ofsharp deterioration. Regional GDP is expectedto grow 6.1 percent in 2003 and 6.4 percent in2004. Growth in the region, excluding China, isexpected to reach 3.8 and 4.3 percent in 2003and 2004 respectively. Median inflation is ex-pected to remain low, albeit probably above thehistorically low 2.5 percent in 2002. With ex-port volumes growing at a rate of around 9 per-cent, the current accounts remain on average ata comfortable surplus of 2.5 percent of GDP.

Long-term outlookEast Asian countries face growing demandsfor better-quality public goods and services,

R E G I O N A L E C O N O M I C P R O S P E C T S

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Table A1.1 East Asia and Pacific forecast summary(percent per year)

Baseline forecast

Growth rates/ratios 1991–2000 2000 2001 2002 2003 2004 2005–15

Real GDP growth 7.7 7.0 5.5 6.3 6.1 6.4 6.2Private consumption per capita 5.8 6.0 6.2 5.7 5.2 5.6 5.6GDP per capita 6.4 5.9 4.5 5.4 5.2 5.6 5.4

Population 1.2 1.0 0.9 0.9 0.9 0.8 0.7Gross domestic investment/GDPa 28.7 29.2 30.1 32.8 33.9 34.9 30.4Inflationb 5.6 5.0 6.6 2.5 3.6 3.6 …Central gvt. budget balance/GDP �1.2 �3.3 �3.3 �3.6 �3.4 �3.3 …Export market growthc 9.7 14.1 �2.5 3.6 9.2 8.7 …Export volumed 11.4 22.5 2.5 15.9 15.7 11.3 …Terms of trade/GDPe 0.0 0.0 �0.4 �0.5 �0.1 �0.3 …Current account/GDP 0.5 3.6 2.7 2.7 2.7 2.5 …Memorandum itemsGDP growth: East Asia excluding China 4.5 5.4 2.3 3.6 3.8 4.3 5.0

… Not available.a. Fixed investment, measured in real terms.b. Local currency GDP deflator, median.c. Weighted average growth of import demand in export markets.d. Goods and nonfactor services.e. Change in terms of trade, measured as a proportion to GDP (percentage).Source: World Bank baseline forecast, November 2002.


not least for better law and order. Protectingthe lives and property of the public and up-holding rule of law are essential complementsto the ongoing emergence or consolidationof representative or democratic government inthe region, as well as a basic underpinning foreconomic development. The Bali terrorist at-tack underlines the importance of strengthen-ing security and law and order, through bothnational and cooperative regional efforts.

Continued public sector and governance re-forms are important if greater fiscal discipline inEast Asia is to be combined with meeting pub-lic demand for more and better public goodsand services, such as law and order, health, ed-ucation, basic research, technology dissemina-tion, and infrastructure generally. Many of thesethings are valuable to consumers in their ownright, are key elements of a productive invest-ment climate, and provide a crucial underpin-ning for political legitimacy and stability. Thereis now open discussion and acknowledgment ofthese issues in the region, though the pace of re-form is generally slow, except in the Republic ofKorea, Malaysia, and Singapore.

Countries have generally continued to makesome progress (at varying rates) on corporateand financial restructuring, reforms to improvefinancial supervision and regulation, andstrengthening corporate governance. However,most countries need to deepen corporate andfinancial sector reform efforts, as well as fur-ther the broader institutional agenda of foster-ing private sector development and strengthen-ing the investment climate. It is notable thatthe sectors which are more dynamic are thosewhere the corporate restructuring agenda isless urgent, for example, small- and medium-scale enterprises or large exporters who havemoved more quickly to resolve their debts.This is especially important because China’sWorld Trade Organization (WTO) accession isleading to a restructuring of regional produc-tion networks, a surge in foreign direct invest-ment (FDI) to China, and an increase in com-petitive pressures in other countries in theregion, especially those competing directlywith China in low wage sectors.

Efforts to strengthen regional cooperationin East Asia have gained ground in recentyears, alongside the region’s long-standingcommitment to multilateral trade liberaliza-tion and integration. The Association ofSoutheast Asian Nations (ASEAN) Free TradeArea (AFTA) came into force at the begin-ning of 2002 among the six original members.Association members now seek to build ontheir success in reducing tariff barriers andfostering deeper integration by tackling issuessuch as non-tariff barriers, product standards,customs procedures, trade in services, trans-port and logistics, and investment flows. Atthe same time the Initiative for ASEAN Inte-gration (IAI) has been launched to help newand less-developed members (Cambodia, theLao People’s Democratic Republic, Myanmar,and Vietnam) build capacity and integratemore fully into the AFTA over time. Regionaldiscussions and cooperation in the ASEAN�3(ASEAN, China, Japan, and Korea) and othernew forums also continue to develop.

Against this background, per capita GDPin the region could grow solidly at a rate ofaround 5.5 percent during the coming decade,although this implies a slowing by 1 percent-age point compared with the previous decadeof rapid catching up. As population growthalso slows during the coming 15 years—being0.5 percentage point lower than during the1990s—the long-run trend in GDP growth isestimated to be 6.2 percent, 1.5 percentagepoint below the trend during the 1990s.

South Asia

Recent developments

Growth in the South Asia region is proj-ected to average 4.6 percent in 2002.This downward revision from the

Global Economic Prospects 2002 forecast of5.3 percent GDP growth for the year largelyreflects adverse weather conditions, continuedinternal and external security concerns, andthe more protracted than anticipated recentglobal economic slowdown. As a consequence,


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given slower demand growth, inflation hasremained low throughout most of the region,notwithstanding high oil prices. Further, gov-ernment budget balances are expected to postrising deficits in most countries. On an ag-gregate level, current account balances—which strengthened during 2001, reaching asurplus in the case of India—are projectedto show a slight improvement during 2002.This is partly due to lower levels of imports,which are generally projected to more thanoffset the negative impact of slow exportvolume growth dampened by weak externaldemand.

Because agriculture is a key sector in the re-gion’s economies, important to both employ-ment and growth, the recent drought has re-strained output, although the late rains (insome cases flooding) have somewhat amelio-rated the shortfall for the season. As a conse-quence, 2002 harvests are expected to be gen-erally smaller than in 2001, an outcome that isexpected to put some additional pressure ongovernment coffers through increased trans-fers for drought relief.

Security issues are an ongoing concern, al-though there has been some easing of tensionsin parts of the region, paving the way forimproved growth conditions. The diminishedfighting in Afghanistan from late 2001, andthe more recent introduction of a new govern-ment in June 2002, has led to a rebound in ac-tivity to begin rebuilding the economy fromextremely low levels and contraction in 2001.

Throughout the region, the weakening ofeconomic conditions has complicated effortsat fiscal consolidation. Although some coun-tries were able to achieve budget targets bycutting expenditures—including spending ondevelopment programs—to offset revenuelosses, India notably did not cut expenditures.Citing concerns about the magnitude ofIndia’s domestic debt—estimated at 70 per-cent of GDP—Standard and Poor down-graded Indian government paper to junk bondstatus in October 2002.

External demand in South Asia’s majormarkets has been subdued in the first half of

2002, although it shows some firming relativeto the contraction witnessed in 2001 for mostof the region’s economies. During the secondhalf of 2002, preliminary data suggest somefurther acceleration of export volume growth,although not as strong as projected in GlobalEconomic Prospects 2002, given the moreprotracted recovery in world trade volumes.Import volume growth has been dampened bysluggish demand for raw materials and inter-mediate goods by exporters and by weak do-mestic demand conditions. The overall impactof these factors has led to a net improvementin the region’s trade balance. This improve-ment, combined with a rise in the region’s ag-gregate worker remittances—reflecting port-folio shifts following the September 11 attacksand, in the case of Bangladesh, a sharp in-crease in private inflows due to improvementsin the speed with which remittances are trans-ferred through official channels—has con-tributed to an increase in the region’s foreignreserve holdings. Given the recent weakness ofthe U.S. dollar, a number of currencies in theregion have appreciated during 2002. How-ever, a general monetary stance of maintainingcompetitiveness suggests that these short-term


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Jul.

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Source: International Monetary Fund, InternationalFinancial Statistics.

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Figure A1.2 Industrial production inSouth Asia(3-month moving average, y/y percentage change)

Bangladesh Pakistan

India


cross-currency dynamics will reverse and thatregional exchange rates will resume a path ofdepreciation.

Near-term outlookOur near-term outlook is premised upon con-tinued improvement in both domesticpolitical stability and regional security issues—although tensions will remain evident. Amarked improvement in Sri Lanka’s politicaland policy environment, for example, shouldallow that country to enjoy a sharp accelera-tion of GDP over the near term—and, indeed,into the medium term. In contrast, continueddomestic political pressures would cause Nepalto underperform relative to regional growthaverages in the near-term forecast horizon.

We are also assuming a return to morenormal weather patterns over the next twoyears, in contrast to the recent drought condi-tions discussed above. Agriculture accountsfor approximately one-fourth of regional out-put, but the impact of improved harvests willbe even more pronounced for the pooresthouseholds, for whom the rural economy

provides the largest share of employment.Higher rural incomes will feed through intostronger private consumption growth, butprospects for investment—particularly in theprivate sector—are more mixed, as continuedconcerns over stability will at least partiallyoffset the impetus to invest generated bystronger domestic and external demand. In-dustrial production will marginally underpacereal GDP growth, as the service sector contin-ues to provide the main near-term contri-bution to growth over much of the region.

Our global projections of a recovery inworld trade prospects translate into strength-ening external demand conditions for theeconomies in the South Asia region. Partly be-cause of the above assessment of the domesticeconomy, the region is forecast to post a firm-ing of growth to an average of 5.4 percent in2003 and 5.8 percent in 2004. Trade balancesshould benefit, although import growth willalso strengthen along with external demand,given the high import content of exportsand high import intensity of consumption.Coupled with a modest deterioration in the


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Table A1.2 South Asia forecast summary(percent per year)

Baseline forecast



Population 1.9 1.9 1.7 1.7 1.6 1.6 1.3Gross domestic investment/GDPa 21.9 24.2 24.9 25.8 25.8 25.5 24.8Inflationb 7.9 3.9 6.1 5.0 5.1 6.8 …Central gvt. budget balance/GDP �10.3 �9.7 �10.3 �10.3 �9.8 �9.2 …Export market growthc 12.8 13.1 0.4 2.8 7.3 7.9 …Export volumed 10.9 7.4 5.3 8.3 8.8 8.5 …Terms of trade/GDPe �0.1 �0.8 0.4 0.0 0.2 0.2 …Current account/GDP �1.5 �0.8 �0.3 �0.1 �0.2 �0.2 …Memorandum itemsGDP growth: South Asia excluding India 4.3 4.2 3.8 3.9 4.8 5.2 5.3

… Not available.a. Fixed investment, measured in real terms.b. Local currency GDP deflator, median.c. Weighted average growth of import demand in export markets.d. Goods and nonfactor services.e. Change in terms of trade, measured as a proportion to GDP (percentage).Source: World Bank baseline forecast, November 2002.


terms of trade, these growth patterns are ex-pected to translate into a slight increase in theregional average current account deficit toGDP ratios.

Macroeconomic policies in the region havehistorically been biased toward accommodat-ing growth and have generated fiscal imbal-ances. Generally, revenue mobilization remainsa challenge in the region. The unsustainablenature of fiscal deficits has been widely rec-ognized by governments across the region—although this does not imply that a consensushas been reached. Therefore, the introductionof prudent fiscal policies over the next twoyears could be tempered by political consider-ations, and by the need to address the laggedeffects of the current downturn in agriculturaloutput. Indeed, budget deficits in many coun-tries could deteriorate in the next fiscal year.One of the key problems is the scale of publicdebt—large servicing requirements limit thescope for cutting expenditures, especially inconditions of extreme poverty. The main issuefor the region is extending the tax base, butprogress to date has not been as rapid as an-ticipated. The introduction of tax reforms inIndia, for example, has been delayed.

Most regional economies have a generalmonetary policy posture involving deprecia-tion aimed at shoring up foreign reserves andpromoting exports through increased compet-itiveness, which is forecast to also have a pos-itive impact on current account balances. Thisconduct of monetary policies had been facili-tated by relatively weak inflationary pressuresacross the region. In general, consumer priceinflation in the region has been relatively low,despite the droughts and firm oil prices of re-cent years. Several countries have subsidies forfuel and some foods, a policy that cushionsthe impact of imported inflation on consumerprices. However, these are being lifted in somecases (for example, Pakistan). While the recentslowdown in demand will restrain price risesinitially, inflation is forecast to rise moderatelylater in 2003 and in 2004 as growth momen-tum builds, and as the average prices of non-oil imports rise.

Long-term prospectsLong-term growth in South Asia is forecastto average about 5.5 percent, in line withthe growth forecast in Global EconomicProspects 2002. This forecast is somewhathigher than the 5.2 percent average realgrowth posted during the 1990s. The higherprojected growth over the coming decade,through 2015, reflects a number of underly-ing assumptions, such as the assumption of alarger contribution of growth by the privatesector. This in turn reflects the expectation ofprogress with fiscal consolidation and contin-ued structural reforms, including reforms intrade, banking, privatization, and infrastruc-ture. These factors, combined with the im-provement in human capital indicators inrecent years—such as rising literacy rates andschool enrollments, and declining infant mor-tality rates—will lead to an increase in pro-ductivity. Despite a projection of declininginfant mortality rates, overall the South Asianpopulation growth rate is projected to deceler-ate because birthrates are expected to declinefaster. Lower population growth in the com-ing decade, along with the forecast growthrates, implies that per capita GDP growth willbe close to 4 percent per year.

RisksDownside risks to the forecast include a weakerthan anticipated recovery in global demand,translating into slower export growth andlower regional GDP. Similarly, a continuationof adverse weather conditions would result inlower than anticipated growth caused bylower agricultural output. Domestic politicaluncertainty could slow down implementationof fiscal and other structural reforms.Regional political tensions also pose impor-tant threats to the growth forecasts, poten-tially aggravating economic disruptions andincreasing poverty rates, as well as generatingless severe effects, such as declines in tourismrevenues and the reduction of foreign assis-tance. Generally, the region faces a number ofvulnerabilities, as evidenced by the covariantshocks over recent years—such as droughts in


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Pakistan, floods in Bangladesh, natural disas-ters in parts of India, and civil war in SriLanka. Vulnerability to such shocks has con-tributed to the high incidence of transientpoverty in a country such as Pakistan, andprobably explains the large year-to-year fluc-tuations in income and poverty that are ob-served. Such vulnerability can also have aprofound impact on the growth prospects ofa country, since uninsured risk can affect theex ante behavior of economic agents.

Latin America and the Caribbean

Recent developments

Unlike most other developing regionswhere economic growth strengthenedin 2002, GDP contracted 1.1 percent

in Latin America, about 1.6 percentage pointslower than anticipated in the spring. Thisgrowth deceleration from 0.4 percent in 2001,however, was the result of enormous eco-nomic contraction in a handful of countries,fueled in large part by the external environ-ment and aggravated by domestic factors.Growth performance in the region, excludingArgentina, is expected to be 0.7 percent in2002, somewhat lower than last year’s growth

of 1.2 percent. Negative spillover effects fromthe meltdown in Argentina began to affectneighbors in the region in the second half ofthe year.

The external environment for most of LatinAmerica was more adverse than expected atthis stage of the global economic recovery.Despite low interest rates in industrial coun-tries, capital flows to developing countries fell,and the decline was especially pronouncedin the Latin America and the Caribbean(LAC) region, partly because of the crisis inArgentina and its small neighbors. Afterfalling for most developing countries betweenOctober 2001 and April 2002, spreads onexternal debt rose sharply for many LACcountries—Chile, Mexico, and small CentralAmerican and Caribbean countries had only asmall rise (figure A1.4). Few countries were ableto attract the necessary capital flows to sus-tain a strong growth recovery in the absenceof rising domestic savings. U.S. growth, after astrong start in the first quarter of 2002, weak-ened significantly thereafter, while Europeangrowth was anemic, resulting in lower growthexpectations for LAC principal markets in theshort term. The region’s export market growthrate was a disappointing 1.2 percent in 2002and was not helped by the price fall in keycommodities exported by the region (for ex-ample, sugar fell by 26.5 percent, arabicacoffee by 8.8 percent, bananas by 7.4 per-cent, aluminum by 6.5 percent, and copperby 0.2 percent). Moreover, tourism revenueswere weak because of reduced air travel fromNorth America (affecting the Caribbean coun-tries), and the collapse of income in Argentinasignificantly affected tourism in Paraguayand Uruguay as well as workers’ remittancesto Bolivia and Paraguay.

Domestic factors are important in explain-ing the weak economic performance in a smallset of countries, and these countries contri-buted most to the region’s dismal growthperformance in 2002. In Argentina, the lack ofpolitical consensus on a sustainable macro-economic framework has delayed an Interna-tional Monetary Fund (IMF) program, shrunk


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Note: *Other LAC � Brazil, Chile, Mexico.Source: Datastream and World Bank staff estimates.

Figure A1.3 GDP growth in LAC,1997–2002(percent y/y)

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net capital flows even further, and led to adeep, protracted economic contraction in ex-cess of 10 percent. This affected other Merco-sur affiliates deeply, especially Uruguay and, toa lesser extent, Paraguay and Bolivia. In Brazil,uncertainty associated with the elections aswell as with the global outlook weighed oninvestor confidence in spite of sound macro-economic policies, slowing the pace of growthrecovery. In the República Bolivariana deVenezuela, an acute political crisis that culmi-nated in a short-lived coup contributed to aresurgence in large-scale capital outflows, littleinvestment outside of the oil sector, and a steepdecline in growth.

The confluence of these factors weakenedthe acceleration in growth that one would ex-pect in the context of recovering global activ-ity. Policy responses, constrained by high debtlevels, high external borrowing requirements,and contracting external financing, were un-avoidably contractionary. In Uruguay, a fin-ancial crisis ensued as Argentines withdrewa large amount of dollar deposits, depleting

reserves and causing the currency to float,and forcing the authorities to embark on fis-cal consolidation and monetary tightening.GDP growth is estimated to have fallen byabout 10 percent. Brazil was forced to tightenfiscal policy but was able to lower short-termpolicy rates only temporarily and experiencedsignificant increases in long rates. The initialsurge in Brazilian investment at the beginningof the year gave way to a more muted second-half growth. In Colombia, the fiscal accountsremain vulnerable, with the government mak-ing small progress in reducing the fiscal deficitto bring debt dynamics onto a sustainablepath in the wake of presidential elections,escalating civil war, and lower-than-expectedgrowth. Peru, in contrast, was able to makeprogress in addressing the fiscal deficit andin keeping the public debt situation undercontrol; growth accelerated in 2002. Ecuadorbenefited from relatively high oil prices, butthe authorities had difficulty in reducingthe fiscal deficit, a move necessary to main-tain macroeconomic discipline in a dollar


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Figure A1.4 Spreads for selected LAC countries(basis points above U.S. Treasuries)

Source: Datastream and World Bank staff estimates.

0

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Argentina (right axis)

Brazil

UruguayCountries outsideLatin America

Mexico

Chile


economy. In Central America, low exportearnings from falling coffee prices and weakdemand in the United States, and relativelyhigh fiscal and external deficits, limited fiscalexpansion. And some Caribbean countrieswere faced with little scope for fiscal expan-sion or monetary easing in light of decliningtourism revenues; weak prices of bananas,sugar, and aluminum; and, in the case ofJamaica, a large debt overhang that was ex-acerbated by the financial sector crisis in themid-1990s. In Mexico, the government stuckto fiscal discipline—helped by higher-than-expected oil prices—and is making slowprogress with key reforms, while being onlypartially successful in increasing non-oil gov-ernment revenues.

Overall, policies in Latin America were in-strumental in keeping inflation from accelerat-ing in most countries. However, countries thathad a sharp adjustment in their exchange ratesdue to a sharp fall in net capital flows did faceinflationary pressures. Inflation (as measuredby consumer price index—CPI) rose to fairlyhigh levels in Argentina (about 45 percent), inVenezuela (in excess of 20 percent), and inUruguay (about 20 percent). Given high debtlevels and worsening public debt dynamics—due to high interest rates and depreciatingcurrencies—most authorities were unable topursue countercyclical policies, and unemploy-ment remained high throughout the region(21.5 percent [May] in Argentina, 19 percent[September] in Uruguay, 16.2 percent [June]in Venezuela, 17.2 percent [September] inColombia, and 9.7 percent [September] inChile).

Slow world growth and external financingconstraints compelled an adjustment in the re-gion’s external accounts. Import volumes fellfor a second consecutive year (mostly due tosharp declines in Argentina, Uruguay, andVenezuela), and the current account deficitnarrowed from over $50 billion (or 2.9 per-cent of GDP) in 2001 to below $25 billion (or1.5 percent of GDP) in 2002, with most ofthe adjustment coming after April. The levelof foreign reserves in August was around

$10 billion lower than at the end of last year,due primarily to sharp declines in Argentinaand Uruguay.

Near-term outlookThe region’s growth prospects are expected toimprove in 2003, supported by strengtheningof the global economy, particularly in tradevolumes, commodity prices, and capital flows.The region’s GDP is now expected to grow by1.8 percent in 2003—still almost 2 percentagepoints lower than the spring forecast and inline with the downgrading of world growth,provided there is a turnaround in the currentuncertain political and financial market out-look. Greater fiscal adjustment in a number ofcountries with high debt and relatively largefinancing requirements is a necessity for reduc-ing economic vulnerabilities. This, along withreforms currently on the agendas of manycountries, is needed to restore investor confi-dence (which will lower interest costs), attractmore equity external financing, and reinvigo-rate growth.

In the baseline forecast, it is assumed thatArgentina will put in place an externally sup-ported macroeconomic program that will bereaffirmed by the new government after theelection in March 2003. Depending on itsactual timing, this would lead to a revival ofgrowth, possibly by midyear—but may notshow up in strong annual growth until 2004.If this scenario were to materialize, it wouldimprove prospects for the smaller Mercosurcountries. The base case also depicts a newBrazilian government that maintains prudentmacroeconomic policies and succeeds inrestoring market confidence. Regional GDPgrowth is expected to rise to 3.7 percent in2004.

There are a number of positive factors forthe region that give credence to the baselineforecast. Mexico has weathered the recentglobal downturn very well. Sound policieshave kept investors confident and inflowslarge, and the upturn in U.S. growth shouldbolster a rapid expansion in 2003. Chile alsohas fared well in light of negative effects from


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Argentina and adverse terms of trade, andexpected firming of copper prices should un-derpin growth. The policy stance of the newColombian administration has been positivefor investors, and it has strong support fromthe United States for assistance in resolvingthe guerrilla war. Expected strengthening ofmetals prices next year should help Peru toreduce the rise in external financing as theeconomy recovers from the 2001 recession.And the small island states in the Caribbeanhave shown resilience in the face of stronglynegative external and domestic factors—Jamaica has stayed the course with tight fiscalpolicy (a primary surplus of 9 to 11 percent ofGDP in the past three years); Trinidad andTobago’s economy continued to grow despitepolitical uncertainty.

However, risks are on the downside in theshort term. Argentina faces enormous ob-stacles in its financial system, and while thesituation has stabilized somewhat in 2002,the authorities will face a difficult situationin containing inflation in 2003—with the

monetary overhang and weak public finances.While it is assumed that the required politicalconsensus will be attained before the March2003 elections, there are risks that the con-sensus may not materialize that quickly. Theincoming Brazilian administration will haveto take confidence-building measures to re-verse the current market uncertainty. ShouldBrazil fail to maintain a sustainable macro-economic policy framework, its correspon-dent weak economic performance will havea major impact on regional economic pros-pects. Venezuela will be facing lower oilprices, which will make necessary adjustmenteven more painful. And Caribbean countriesface the possibility of a delayed recovery intourism, which would reduce the fiscalspace to tackle the ever-present risk of naturaldisasters.

Long-term prospectsPer-capita GDP growth over the long term(2005–15) is projected to average 2.6 percenta year, 1 percentage point higher than the


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Table A1.3 Latin America and the Caribbean forecast summary(percent per year)

Baseline forecast


Real GDP growth 3.3 3.7 0.4 �1.1 1.8 3.7 3.8Private consumption per capita 2.3 2.4 �1.1 �2.8 �0.3 1.9 2.5GDP per capita 1.6 2.1 �1.2 �2.6 0.3 2.3 2.6

Population 1.7 1.6 1.6 1.5 1.4 1.4 1.2Gross domestic investment/GDPa 19.8 19.7 19.3 18.0 17.3 18.1 22.0Inflationb 12.5 6.4 6.9 5.0 4.2 4.4 …Central gvt. budget balance/GDP �3.1 �1.8 �1.8 �2.6 �3.1 �3.0 …Export market growthc 11.4 11.9 �1.5 1.2 8.2 8.8 …Export volumed 8.6 10.5 1.4 4.7 11.1 10.9 …Terms of trade/GDPe 0.2 0.6 �0.5 �0.1 �0.3 �0.5 …Current account/GDP �2.8 �2.4 �2.9 �1.5 �1.3 �1.8 …Memorandum itemsGDP growth: LAC excluding Argentina 3.1 4.5 1.2 0.7 1.9 3.6 3.8

Central America 4.4 2.9 1.6 2.1 3.1 3.6 4.0Caribbean 3.5 6.2 2.7 3.6 4.3 4.3 4.2

… Not available.a. Fixed investment, measured in real terms.b. Local currency GDP deflator, median.c. Weighted average growth of import demand in export markets.d. Goods and nonfactor services. e. Change in terms of trade, measured as a proportion to GDP (percentage).Source: World Bank baseline forecast, November 2002.


growth achieved by the region in the 1990s.Improvement in macroeconomic managementin a number of countries throughout the1990s, albeit emanating from crises, shouldprovide the basis for a good investor climate.This has already encouraged FDI into the re-gion at the fastest pace of all regions, eventhough this has been due partly to privatiza-tion of public enterprises and mergers and ac-quisitions. The next wave of FDI is likely to bein greenfield activities, as witnessed in CostaRica’s attracting high-tech firms. Regulationand supervision of financial sectors have beenstrengthened since the early 1990s, but thereremains room for further improvement. Poten-tial gains from global trade have increasedwith trade liberalization during the 1990s,leading to high and rising ratios of trade toGDP (Chile, Mexico, the Caribbean Commu-nity and Common Market, and other smalleconomies are examples). Moreover, the re-gion has been proactive in deepening trade in-tegration, especially with North America,through negotiations to establish a Free TradeAssociation of the Americas (FTAA) and bilat-eral agreements (Chile and Central Americawith the United States).

At the same time, the region remains morevulnerable than many other developing re-gions. First, a high debt overhang from the1980s remains a problem to finance in manycountries. In the 1990s, some countries con-tinued to rely on significant debt financing,particularly in the public sector. Public debt-to-GDP ratios rose in some countries and thematurity of that debt shortened in duration,increasing their vulnerability to shifts in in-vestor sentiment as they question debt sustain-ability. LAC countries may have to learn tolive with less debt in the future, adjusting pub-lic expenditures as required. Countries need tocreate fiscal space during good times (boomyears) to be able to conduct countercyclicalpolicies in future downswings in economicactivity. Second, many countries, especially thelow-income coffee producers, also need tofurther diversify their export base to reducevulnerability to large swings in commodity

prices. Finally, the region still lags in financialdeepening (which could help raise nationalsaving rates), infrastructure, and quality ofinstitutions—areas that need to be improvedbefore the region can attain high sustainablegrowth rates.

Europe and Central Asia

Recent developments

The slack external environment, espe-cially in Western Europe, is contribut-ing to a general slowdown of growth

in most of the countries of the Europe andCentral Asia (ECA) region in 2002 relative to2001. However, the region has weathered therecent global economic downturn relativelywell, largely because of fairly strong domesticdemand throughout most ECA countries, andsustained high oil prices to the benefit of theoil-exporting Commonwealth of IndependentStates (CIS) countries. Whereas almost all ECAcountries are facing a moderation of growth in2002, Turkey is expected to post a recovery—a massive swing from the over 7 percent col-lapse in GDP that it posted in 2001—which israising the region’s average growth for theyear. As a consequence, aggregate growth forthe ECA region is projected to expand from anestimated 2.3 percent in 2001 to 3.6 percent in2002. Growth in the ECA region (excludingTurkey) is forecast to decelerate to 2.3 percentin 2002 from 2.9 percent in 2001.

The Central and Eastern European (CEE)countries, in particular, have been affected byweakening demand from Western Europe—their main export market—as well as by ex-change rate appreciation in many of the sub-region’s economies. As a result, export volumegrowth has slowed significantly, although itstill remains at impressive levels in a numberof countries (such as the Czech Republic,Hungary, and Poland), as they have increasedmarket penetration (see box 1.2 in chapter 1).Thus, the consequent drag on GDP is not ashigh as it might have been. Furthermore, eas-ing import volumes—which largely reflect


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high import intensity of exports in all of theCEEs—are helping to reduce the impact of theslowdown in export volumes. Strong domesticdemand, witnessed in most of the CEE coun-tries, is partially offsetting the loss in impetusto growth from the slowdown in the externalsector. Domestic demand has been generallysupported by lower inflation, easing interestrates, and expanding private consumption. Insome countries, fiscal policy has become moreexpansionary, notably in the Czech Republic,Hungary, and the Slovak Republic. Poland isthe main exception to this picture of relativelystrong domestic markets, with tight monetaryconditions, weak wage growth and recordunemployment rates translating into anemicdomestic demand. While inflationary pres-sures have generally been subsiding in the CEEsubregion, they remain significant (in doubledigits) in Romania, Turkey, and the FederalRepublic of Yugoslavia. Many of the CEEcountries continue to run relatively high cur-rent account deficits of above 4 percent, al-though sufficient external financing has beensustained. Continued significant FDI inflows,in particular, are helping to finance the currentaccount deficits, in addition to generally sup-porting domestic demand and regional growth.

Turkey remains a key question mark. Indica-tors for early 2002 point to a recovery, facili-tated in part by the new reform program,lower interest rates, and improved confidencerelative to 2001. However, uncertainty linkedto the continued implementation of the cur-rent economic program of the new govern-ment, as well as heightened political instabilityin the Middle East, could contain the buildinggrowth momentum, as interest rates havebegun to rise and market sentiment is becom-ing more cautious. Lowering interest rates re-mains important to achieving a sustainablepublic debt.

Relatively firm oil prices—fueling fiscallinkages in oil producers and bolstering intra-CIS trade—have sustained the recent recoveryin the CIS subregion, partially buffering itfrom the deterioration in external conditions.Nevertheless, given the moderation in externaldemand, exchange rate appreciation in anumber of countries (such as the Russian Fed-eration), and some easing in oil prices in thefirst half of 2002, growth is moderatingthroughout the CIS subregion. Hydrocarbonexporters—Azerbaijan, Kazakhstan, Russia,and Turkmenistan—in particular have experi-enced robust growth, although growth has


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Jun.1999

Aug.1999

Oct.1999

Dec.1999

Feb.2000

Apr.2000

Jun.2000

Aug.2000

Oct.2000

Dec.2000

Feb.2001

Apr.2001

Jun.2001

Aug.2001

Oct.2001

Dec.2001

Feb.2002

Apr.2002

Oct.2002

Jun.2002

Aug.2002

Source: International Monetary Fund, International Financial Statistics.

0

5

15

10

25

20

�20

�15

�10

�5

Figure A1.5 German imports and CEECs exports in dollars, 1999–2002(3-month moving average, y/y percentage change)

CEEC-exports

German imports


slowed significantly from 2001. Increased in-vestment in production capacity in the energysector has also supported economic activity inthese countries. Among the energy-importingCIS countries, other factors have contributedto the continued strong growth, including rel-atively good harvests in the Kyrgyz Republic(combined with increased gold production),Tajikistan (combined with increased alu-minum production), and Ukraine. Not onlybecause Russia represents the largest weight inthe subregion, but also because it represents amajor export market for many of the CIScountries (in addition to some of the CEEs),continued strong growth in Russia has alsosustained growth in the subregion. As in manyCEE countries, domestic demand has been un-derpinned in the CIS countries by falling infla-tion rates and lower interest rates. While in-flationary pressures have eased in all the CIScountries, they remain a source of concern insome cases, particularly in Belarus and Uzbek-istan. Inflation rates in Russia and Tajikistanare also expected to post in the double digitsin 2002, but at more moderate levels. Whileenergy-related receipts boosted revenues, fis-cal positions remained relatively prudent inthe energy-exporting CIS countries, althoughthey became somewhat more expansionaryin Azerbaijan and Kazakhstan. To providefor budgetary smoothing, Azerbaijan andKazakhstan have created national funds forwindfall oil rents. With the decline in energyprices posted in 2001 (in both real and nomi-nal terms) from the spike posted in 2000, thefiscal surplus in Russia narrowed, although re-cent firming in oil prices should contribute tosome stabilization of budget receipts for 2002over 2001. In other CIS countries, fiscal policyhas been more expansionary, in general, gen-erating widening deficits (for example, inUkraine). Throughout the CIS subregion, cur-rent account surpluses (for instance, in Russiaand Ukraine) are narrowing and deficits (inmost of the remaining CIS economies) arewidening somewhat, because of exchange rateappreciation, rising imports, and, until morerecently, moderating oil export earnings.

Russia’s current account surplus has nar-rowed, although it remains very large.

Near-term outlookGrowth in the CEE countries is expected tobegin increasing again in 2003, assuming afirming of European Union (EU) import de-mand in 2003, which is projected to strengthensignificantly in 2004. For Turkey, assuming rel-ative political stability and the continued pur-suit of the current reform program by the newgovernment, the recovery is expected to be sus-tained in 2003. Growth in the CEE subregionis forecast to accelerate from 2.3 percent in2002 to 3.1 percent and 4.3 percent in 2003and 2004, respectively. As the EU accessionprocess moves forward, it is expected that thefirst round of new members in particular willcontinue to receive significant FDI inflows (inaddition to EU transfers), which will remain animportant source of external finance and un-derpin long-term growth.1 While a number ofimportant hurdles remain—linked in particu-lar to the negotiations on the existing commonagricultural policy (CAP), on the EU’s budget,and on transfers to new member countries—the process is still on schedule.2 Growth is ex-pected to slow in the CIS subregion (throughfiscal and trade linkages) through 2004, as-suming significant declines in oil prices in both2003 and 2004 (from a projected $25 per bar-rel in 2002 to a forecast of $23 per barrel and$20 per barrel in 2003 and 2004, respectively).CIS GDP is forecast to decline from a pro-jected 4.4 percent in 2002 to 3.5 percent andto 3 percent in 2003 and 2004, respectively.While Russia’s current account is expected toremain in surplus over the near term, it isforecast to narrow markedly as energy pricessoften. In 2003 and 2004, growth is expectedto average 3.4 percent and 3.6 percent, respec-tively, for the ECA region as a whole.

Long-term prospectsIn the CEE, during the second decade of tran-sition, a number of factors are expected tocontribute to stronger growth than postedduring the previous decade. These include


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higher investment rates and ongoing restruc-turing of the capital base. Continued improve-ments in the policy environment, includinggreater macroeconomic stability, are expectedto underpin the projected higher growth rates.The EU accession process and coming mem-bership will continue to act as an anchor forstructural reforms and will help attract signif-icant inflows of FDI. While structural reformsare being pursued in many CIS countries, ingeneral, implementation is not as advancedor as widespread as in the CEE subregion’seconomies, and in some cases there is signif-icant resistance to structural reforms. Thisimplies lower long-run growth in comparison.The recent boom in hydrocarbon rents hasprovided an impetus to growth, facilitated theintroduction of a number of reforms in manyof the oil-exporting countries, and contributedto an increase in investment outlays (particu-larly in the energy sector). However, giventhe volatility of energy market prices, theseeconomies will not be able to sustain recently

achieved higher growth rates until diversifica-tion from energy becomes much more broadlybased. Given the degree of energy dependencein many of the CIS economies, particularlyRussia, the projected softening of oil prices—to an average nominal price of about $18to $19 per barrel for the 2005–10 period, inthe underlying forecast—implies a ratchetingdown of the subregion’s growth from recenthigh rates.

RisksWeaker than anticipated recovery in the EUarea would reduce external demand for re-gional economies, particularly for the CEEcountries, and thus translate into lowergrowth. In many CEE countries high currentaccount deficits could become an importantdownside risk for international credit, if FDIinflows suddenly dry up (which a pronounceddelay in the EU accession process couldtrigger). For CIS hydrocarbon exporters,which are highly dependent on energy prices,


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Table A1.4 Europe and Central Asia forecast summary(percent per year)

Baseline forecast


Real GDP growth �1.7 6.6 2.3 3.6 3.4 3.6 3.6Private consumption per capita 0.2 9.1 1.5 4.8 4.0 3.8 3.7GDP per capita �1.9 6.4 2.2 3.5 3.3 3.5 3.5

Population 0.2 0.1 0.1 0.1 0.1 0.1 0.1Gross domestic investment/GDPa 23.6 22.1 21.9 20.6 20.8 21.2 28.6Inflationb 128.0 9.8 7.0 3.2 5.8 5.7 …Central gvt. budget balance/GDP �4.4 �5.4 �6.5 �6.2 �6.0 �5.5 …Export market growthc 10.7 12.9 6.7 2.1 6.4 8.1 …Export volumed 9.4 10.9 8.8 6.4 8.2 7.5 …Terms of trade/GDPe 0.0 �1.6 3.0 �2.5 �1.3 0.1 …Current account/GDP �2.3 �4.9 �1.8 �2.4 �2.4 �2.3 …Memorandum itemsGDP growth: transition countriesf �2.6 6.4 4.6 3.5 3.3 3.5 …

Central and Eastern Europef 0.6 3.8 2.9 2.3 3.1 4.3 …CIS �4.4 8.4 5.9 4.4 3.5 3.0 …

… Not available.a. Fixed investment, measured in real terms.b. Local currency GDP deflator, median.c. Weighted average growth of import demand in export markets.d. Goods and nonfactor services.e. Change in terms of trade, measured as a proportion to GDP (percentage).f. Excluding Turkey.Source: World Bank baseline forecast, November 2002.


a sharper decline in oil prices than forecastposes a significant downside risk. In Russia, asa consequence, a more rapid decline in growththan projected would result in lower externaldemand for a number of the other economiesof the CIS and of some CEEs (that is, theBaltic states). Greater political uncertainty ora reversion from the reform program inTurkey could undermine its fledgling recoveryand result in much lower than anticipatedgrowth—and affect some of its trade partners(including Bulgaria). Some of the poorest CIScountries (Georgia, the Kyrgyz Republic, andTajikistan) have relatively high external debt(up to 200 percent of exports), placing them atrisk of default if growth does not materializeas anticipated and external assistance is notforthcoming. Greater political instability andheightened tensions in the Middle East couldprove destabilizing to economic (and political)positions in the neighboring ECA countries,particularly in Turkey and in some of thesouthern-tier CIS countries. Aside from poten-tially undermining tourism revenues, therecould be trade disruptions and a general rise inthe perception of risks in the region leading tohigher interest rates.

Sub-Saharan Africa

Recent developments

Sub-Saharan Africa was not immune tothe chilling effects of the global recession.The slowdown may have been less pro-

nounced there than elsewhere, but the collapsein world trade and steep declines in commod-ity prices had a depressing effect on economicperformance. Services exports, primarilytourism, were further affected by the Septem-ber 11 terrorist attacks. In real terms, GDPgrowth slowed from 3.2 percent in 2000 to2.9 percent in 2001 and 2.5 percent in 2002.With the exception of Nigeria, oil exportersgenerally outpaced the region, especially thosewhere production was increasing—Angola,Equatorial Guinea, Sudan—as oil prices,though down from 2001, remained relatively

strong. Meanwhile, countries where severedrought put a damper on agricultural pro-duction fared worse and, as usual, the worstoutturns were to be found in countries experi-encing civil and political strife. But slowdownwas widespread throughout the region.

The subdued economic performance in2002 is attributable to the region’s export de-pendence on European markets, where growthwas weak. As a result, exports remained basi-cally stagnant in real terms. On the plus side,there was a turnaround in non-oil commod-ity prices, albeit from historically depressedlevels. After reaching a low in October 2001,non-energy commodity prices reboundedsharply, gaining 26 percent in export weightedterms by August 2002. The main contributorwas cocoa, which was up 80 percent, but othercommodities gained as well—robusta coffeeup by 20 percent, cotton up by 33 percent,copper by 7 percent, and gold by 10 percent.Because the upward momentum began late inthe year, on an annual basis many commodityprices exhibited declines in 2002, and most re-main well below peak levels of the mid-1990s.Nevertheless, modest real price gains over themedium term will deliver a measure of reliefto external balances. Oil prices, too, remainedstronger than expected, an outcome that,though unwelcome to non-oil exporters, wasa positive benefit to the region as a whole.

The disappointing results for tourism,which accounts for 11 percent of regional ex-port receipts, reflected not only the weaknessof Europe’s economy, but the aftermath ofSeptember 11. Some important destinations—such as Mauritius, which benefits from its rep-utation as a safe destination—saw an increasein the flow of arrivals in 2002. Most othercountries, however, only partially recoveredfrom the impact of September 11. Accordingto estimates by the World Travel and TourismCouncil (WTTC),3 Sub-Saharan travel andtourism exports slowed to just 1.5 percentgrowth in 2001 before recovering to 4.3 per-cent in 2002. Both years represent growth sig-nificantly below potential. The WTTC esti-mates September 11 to have cost 3.2 percent


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of exports and 1.3 million jobs over the period2001–02.

In the domestic sphere, agricultural pro-duction was disrupted by drought and, in thecase of Zimbabwe, political disturbances. Asa result, nearly 30 million persons were leftin need of emergency food aid. Approximatelyhalf of them were in southern Africa, whichexperienced a second successive year of poorharvests. Malawi, Zambia, and Zimbabwewere most affected, and because agricultureconstitutes a large share of their economies,incomes and consumption spending were de-pressed. But Ethiopia suffered the worst, withdrought putting at risk an estimated 15 mil-lion persons. However, the effects were quitelocalized. South Africa experienced a bumpermaize harvest, which gave a strong boost todomestic spending.

South Africa sustained a recovery throughthe first half of 2002, with broad-basedstrength in agriculture, as well as in export-oriented mining and manufacturing, whichbenefited from the rand’s weakness. On the

expenditure side, domestic demand grew at a2.3 percent annual pace in the first half, re-flecting buoyant fixed investment, strong pri-vate consumption, and a moderately expan-sionary fiscal stance, though weak inventoryaccumulation slowed the pace. In the external


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02001 2002 2003 2004

1

2

3

4

5

Source: World Bank staff estimates.

Figure A1.6 Real GDP growth ofSub-Saharan Africa oil and non-oilexporters(percent)

Oil

Non-oil

Table A1.5 Sub-Saharan Africa forecast summary(percent per year)

Baseline forecast


Real GDP growth 2.2 3.2 2.9 2.5 3.2 3.8 3.7Private consumption per capita �0.6 �1.4 0.7 0.3 0.8 1.3 1.2GDP per capita �0.4 0.7 0.5 0.1 0.9 1.5 1.5

Population 2.6 2.5 2.4 2.4 2.3 2.3 2.2Gross domestic investment/GDPa 16.9 17.9 18.7 18.9 18.6 18.2 21.1Inflationb 9.8 6.3 5.4 4.3 3.9 4.2 …Central gvt. budget balance/GDP �3.0 �0.6 �0.3 �0.4 �0.5 �0.3 …Export market growthc 14.4 10.8 0.1 2.4 7.1 7.8 …Export volumed 4.1 4.3 2.8 1.1 5.3 5.8 …Terms of trade/GDPe 0.0 2.1 �1.1 �1.5 0.2 �0.8 …Current account/GDP �2.1 �2.3 �2.2 �3.0 �1.8 �1.2 …Memorandum itemsGDP growth: SSA excluding South Africa 2.7 3.3 3.6 2.7 3.7 4.2 …

Oil exporters 2.5 4.8 4.4 2.0 3.6 3.8 …CFA countries 2.6 2.3 3.2 2.9 3.3 3.8 …

… Not available. SSA is Sub-Saharan Africa. CPA is Communaute Financiere Africaine.a. Fixed investment, measured in real terms.b. Local currency GDP deflator, median.c. Weighted average growth of import demand in export markets.d. Goods and nonfactor services.e. Change in terms of trade, measured as a proportion to GDP (percentage).Source: World Bank baseline forecast, November 2002.


accounts, tourism has been slow to recoverfrom the effects of September 11, but theweaker rand boosted net visibles trade, andthe current account balance moved back into asmall surplus. The main concern for the SouthAfrican economy was an uptick in inflation—not surprising after a nearly 40 percent depre-ciation of the rand in 2001, but neverthelessputting upward pressure on interest rates.Robust wage gains were only partially offsetby higher productivity, resulting in a substan-tial rise in unit labor costs. Nevertheless, indi-cations are that monetary restraint will prevail,and the outlook is for inflation to ease. Therand stabilized at an average of 10.9 againstthe dollar in the first three quarters of the year,after weakening to above 12 in late 2001.

In Nigeria, adherence to reduced Organi-zation of Petroleum Exporting Countries(OPEC) quotas more than offset the impact ofstronger-than-expected oil prices, while bud-get gridlock constrained government spend-ing, resulting in a real GDP decline estimatedat 0.6 percent from 2001. Unfortunately, thestrength of oil revenues may have also relievedpressure to implement urgently needed struc-tural reforms, as evidenced by the discontinu-ation of the informal monitoring arrangementwith the IMF. Politically, the situation remainstense. Local elections have been postponedtwice, and national elections are now sched-uled for April 2003. President Obasanjo hascome under strong pressure by the NationalAssembly on budgetary issues. If oil prices de-crease, as expected in the near term, Nigeria’sproblems will mount, though there are indica-tions that these problems may be offset bya significant medium-term expansion of theenergy sector, consistent with expected OPECpolicies. The United States is particularlyinterested in expanding oil purchases fromNigeria in an effort to diversify sources ofsupply to decrease dependence on the MiddleEast.

Near-term outlookThe forecast calls for growth to accelerate in2003–04 on the strength of a pickup in exter-

nal performance. Overall, the forecast antici-pates real growth rising to 3.2 percent in 2003and 3.8 percent in 2004, around 1.1 percent inper capita terms. Faster growth in Europe willboost export volumes, and price trends willremain broadly favorable as supply-demandbalances for most commodities tighten withthe recovery in the world economy. Cocoa, al-ready at a 15-year high, is the main exception.Oil prices are expected to ease, though theyremain significantly above late-1990s lows.While large, real price gains for commoditiesimportant to Sub-Saharan Africa are unlikelyto be sustained in the medium term, the wide-spread introduction of structural reforms andmarket liberalization are expected to raiseexport competitiveness, and the region shouldremain a significant commodity supplier forthe foreseeable future. On balance, with im-port price inflation remaining low, non-oilexporters’ terms of trade are forecasted tostrengthen marginally in 2003–04.

Along with a modest improvement in ex-ternal sectors, the forecast assumes a strongerdomestic performance. The expectation is fora return to more normal weather conditions,which will underpin a recovery of agricultureand consumption spending, while fastergrowth stimulates a cyclical upturn in invest-ment. Overall, domestic demand will remainthe primary source of GDP growth, as risingimport demand—constrained mainly by theavailability of financing—holds net exports incheck. Indeed, current account balances areexpected to narrow marginally as foreign di-rect investment eases back from recent levelswith a slowdown in privatization offeringssuch as Air Madagascar, though at the sametime more favorable economic conditionsoverseas should have a positive impact onremittances.

For the region’s oil producers, weaker ex-port prices will be offset by higher production.Major new offshore developments are sched-uled to come onstream in the Gulf of Guinea(Angola, Equatorial Guinea, and Nigeria)over the next few years, and despite the fallin prices oil sectors should remain highly


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profitable. As in the past, however, moregeneral spillovers to non-oil sectors will berelatively muted. As a result, growth of oilproducers will improve from 2 percent in2002 to 3.6 percent in 2003 and 3.8 percent in2004. Falling terms of trade will widen cur-rent account deficits, though oil prices areexpected to remain comparatively strong,above $20 per barrel, containing the pressureon external performance and fiscal accounts.

Long-term prospectsThe forecast anticipates per capita growth av-eraging 1.5 percent over the 2005–15 period,near the levels achieved in the mid-1990s. Theoutlook is optimistic—such a result would sig-nify a reversal of the region’s long-term histor-ical decline—but even so growth will fall shortof what is needed to reduce poverty andachieve the Millennium Development Goals.Sub-Saharan Africa will continue to lag behindother developing regions, and by 2015 thenumber of persons living on less that $1 perday is forecasted to rise by nearly 30 percent,from 315 million to 404 million.

The outlook is predicated on a continuationof broad trends toward better standards ofgovernance and economic policies. The greatmajority of countries in the region have begunpreparing Poverty Reduction Strategy Papers,and nine are in different stages of implemen-tation of the strategies. Early results seempromising. At the same time, NEPAD (the NewPartnership for Africa’s Development) andother regional initiatives are enhancing thecredibility of governments and strengtheningintraregional cooperation. There has beenencouraging progress as well toward resolvingintractable conflicts in central Africa, eventhough events in Côte d’Ivoire, Madagascar,and Zimbabwe underscore the fragility ofthe region’s political processes. Improved pol-icy environments should stimulate faster pro-ductivity growth and diversification fromagriculture, and reduce export dependence onprimary commodities.

These internal developments, coupled withmodest improvements in the external environ-

ment, will promote diversification, encouragehigher savings and investment, and stimulateproductivity growth. Despite a dismal overallrecord, the region boasts a number of exem-plary performers (Botswana and Mauritius)and cases in which policy reform has pro-duced dramatic turnarounds (Ethiopia,Mozambique, Tanzania, and Uganda). At thesame time, a panoply of deep-rooted problemswill continue to plague economic perfor-mance. There are no quick solutions to lowlevels of human and physical capital, poorinfrastructure, HIV/AIDS, civil strife and neg-ative perceptions of international investors,and excessive export specialization will con-tinue to expose external sectors to high pricevolatility. Nevertheless, if the new realism thatappears to be taking hold on the continentproves to be more than just rhetoric, there isadequate reason to believe the moderate im-provement in overall performance that theforecast anticipates can be achieved.

Middle East and North Africa

Recent developments

Despite a continuation of high oilprices, growth in the Middle East andNorth Africa (MENA) region slowed

in 2002 to 2.5 percent, down from 3.2 percentin 2001 as the events of September 11, 2001,continue to reverberate throughout the region.

For the oil-exporting countries, growth re-mained above 2 percent. The larger increasesin growth that might have been expectedfrom both high oil prices and increased publicexpenditures were offset by a slowdown inproduction and exports, a result of tightenedOPEC quotas put into place in 2001 to sup-port higher oil prices. To counter these effects,some oil exporters have implemented expendi-ture programs financed with increased oil rev-enues. In the absence of a strong private in-vestment response to the reform program ithad implemented, Algeria, for example, put afour-year economic recovery program in placeworth about 10 percent of 2001 GDP, aimed at


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supporting growth in domestic demand whileenhancing social and economic infrastructure.

Diversified exporters faced worsening con-ditions in 2002, with GDP growth falling to2.2 percent, a decline of 2 percent from 2001.External factors leading to this decline includethe deterioration in export market growth forEgypt, Morocco, and Tunisia, as well as sharpdeclines in the tourism sector in North Africaand the several countries in the Levant, fol-lowing the events of September 11, 2001. InEgypt, the number of tourists fell 41 percentyear-on-year in the last quarter of 2001, andeven by the end of the first half of 2002,tourism had not yet returned to precrisis lev-els. In Morocco, tourist arrivals were down byover 20 percent in the first half of 2002. Forsome countries in the region, however, thedeclines in tourism from abroad have beenpartially offset by MENA nationals divertingtheir tourism to within the region. Touristreceipts may likely show an even larger declinethan tourist numbers, as many firms in thetourist sectors have discounted heavily. Ex-ports to the EU have also suffered, in particu-lar Moroccan textiles and electronics exportsto the EU. Jordan has been somewhat insu-lated from this situation, as its export demandfrom India and the United States continued togrow quite strongly in 2002.

Internal factors have also contributed toa decline in growth in several countries. The

positive agricultural growth of 2001 inMorocco slowed down somewhat in 2002because of the less favorable weather condi-tions. To prevent a potentially steep increasein the current account deficit, fiscal and mon-etary policies were tightened in Tunisia; thisaction contained domestic demand pressuresand reduced pressures on external balancebut exacerbated the impact of the slowdownstemming from the external shocks. Thoughtourism has begun to recover gradually inEgypt, the recovery of the private sector hasbeen hampered by unresolved problems withthe exchange rate regime, which have theirroots in the late 1990s.

Short-term prospectsGrowth prospects for MENA are clearly con-tingent upon whether military actions aretaken in the region. Assuming that there is noconflict over the next year (and thus that thereis a gradual resumption in confidence in theregion), the region’s growth is forecast at3.7 percent for 2003–04. A recovery would beexpected for both oil-exporting countries anddiversified exporters. The public expenditureprograms being implemented by oil-exportingcountries over the next several years to im-prove infrastructure, agriculture, and supportreforms in social sectors would help to increasethe public sector’s contribution to growth.Growth is expected to average 3.6 percent


170

Figure A1.8 Export volume growth(percent) (percent)

�2

6420

8101214

01

2000 2001 2002 2003 2004

2345678


Export growth

Export market growth (right axis)

Figure A1.7 Oil prices and currentaccounts(dollars/barrel) (billions of dollars)

50

10

2015

3025

4035

15

2000 2001 2002 2003 2004

17

19

21

23

25

27

29


Oil prices

Current account


for the oil-exporting countries, supported bylikely increases in OPEC oil quotas in 2003 tomeet growing demand in a period of tightcrude inventories. Additionally, Algeria’s crudeproduction capacity is set to increase, and itsgas exports are expected to experience growthunfettered by quotas, indicating higher growthin the short term. However, much of thegrowth increase in Algeria in the medium termwould come from the large public sector stim-ulus currently under way. This would revivedomestic demand for the duration of the ex-penditure program. In Saudi Arabia, the stockmarket is performing well, and credit to theprivate sector is rising, auguring favorably for2003–04. The Islamic Republic of Iran will seethe revival of the agricultural sector after sev-eral years of drought, with the expansion ingas exports and the continuing relaxation ofimport restrictions buttressing growth in thenon-oil sector.

Growth in diversified exports would be ex-pected to increase to 2.7 percent in 2003 and3.6 percent in 2004. Export market growth

would be expected to rise considerably in2003–04, and the tourism industry wouldalso be expected to recover from its slide sinceSeptember 11, 2001, as the external environ-ment gradually improves through 2004. Someof the diversified exporters, such as Moroccoand Tunisia, will not be able to rely on gov-ernment stimulus for growth because of theneed to pursue fiscal consolidation and keeplarge inflexible expenditures, especially thegovernment wage bill, under control. Over-coming the vulnerabilities unveiled by theexternal shocks would call for a faster pace ofstructural reforms to improve prospects forprivate sector investment. Morocco must relyon privatization receipts to lower budgetdeficits, but this financing option will dimin-ish over the medium term as the better candi-dates for privatization are sold off and therevenues from the former parastatals decrease,implying higher deficits in the future unlessexpenditure reforms occur. This will require,among other things, public sector reforms,in particular reforms related to the wage bill,


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Table A1.6 Middle East and North Africa forecast summary(percent per year)

Baseline forecast



Population 2.2 2.0 1.9 1.9 1.9 1.9 1.8Gross domestic investment/GDPa 21.2 21.6 22.0 22.5 22.7 22.9 24.3Inflationb 6.0 4.8 4.2 4.1 4.0 4.0 …Central gvt. budget balance/GDP �1.1 �1.4 �1.1 �2.1 �2.4 �2.4 …Export market growthc 10.1 13.3 �1.0 3.0 7.8 8.2 …Export volumed 5.0 7.6 2.4 2.7 5.7 5.8 …Terms of trade/GDPe 0.5 8.4 �0.9 �0.9 �1.1 �1.4 …Current account/GDP �2.1 6.8 5.2 3.3 2.3 0.9 …Memorandum itemsGDP growth: Oil exporters 2.4 3.6 2.4 2.4 3.7 3.6 …

Diversified exporters 4.0 3.7 4.3 2.2 2.7 3.6 …

… Not available.a. Fixed investment, measured in real terms.b. Local currency GDP deflator, median.c. Weighted average growth of import demand in export markets.d. Goods and non-actor services.e. Change in terms of trade, measured as a proportion to GDP (percentage).Source: World Bank baseline forecast, November 2002.


that underlie high expenditures. Weaknesseswill remain in the private sectors of severalcountries. Jordan is weathering the downturnmore successfully than other countries be-cause of the high demand for its exports inIndia and the United States, but weak con-sumer demand and subdued rates of lendingto the private sector indicate that domesticweakness will continue. Egyptian private sec-tor activity is weak, reflecting credit condi-tions and tight monetary policy (althoughthe recent 100 basis point fall in the discountrate to 10 percent will help somewhat); fallingbank earnings in 2002 indicate that privatesector investment will remain sluggish in theshort term. In the current policy context, thegovernment will continue expansionary fiscalpolicy despite already high deficits and willput off the implementation of reforms thatmight have the potential for high social costs.

Recent political events obviously cast ashadow over prospects in the region. The con-tinuing uncertainty stemming from the poten-tial actions against Iraq would significantlyaffect the gradual recovery in the short-termforecast. Oil exporters would benefit fromincreased quotas and higher oil prices initially,but these impacts would probably be shortlived. Diversified exporters would suffermore, particularly from declines in thetourism industry. Even the expectations sur-rounding military action within the regioncould significantly affect growth in the shortterm. Moreover, the effects of military actionon confidence in already fragile global capitalmarkets may lead to increased spreads and aflight to quality, particularly from countries inthe region close to the field of war.

Long-term prospectsEven if relatively stronger growth perfor-mance is managed in the short term, growth inthe long term is expected to average just over3.2 percent.

The policy environment affecting long-termgrowth is gradually improving in many coun-tries in the region, albeit at a gradual pace.

Jordan is reaping the benefits of a more opentrade regime, and many of the North Africancountries are pressing ahead with more liberaltrade relations. However, budget deficits inthese countries could lead to problems, partic-ularly in those countries that rely heavily onprivatization revenues to finance increased ex-penditures. The temporary nature of receiptsfrom privatization makes reforms in publicexpenditures (and the public sector policiesthat underlie them) and taxation of para-mount importance in the future. Furthermore,many of the Mediterranean countries are cur-rently facing sluggish growth or stagnation inthe private sector, with low levels of growth inprivate investment. This indicates the need forstrengthening the investment climate and re-moving bottlenecks in access to finance andbackbone productive inputs that hamper pri-vate sector investment. In Egypt, long-termprospects appear weak. The policy reformagenda has slowed, mirroring the slowdownin the domestic economy. The current policymix includes an expansionary fiscal policy tocounter the tight monetary policy necessaryto support the exchange rate.

In the oil-exporting countries, Iran has uni-fied its exchange rate, allowed the formationof private banks, reaffirmed its commitmentto privatization, and is pushing ahead withfiscal reforms. Algeria is considering thederegulation of the power industry and open-ing the sector to private investment, and hasannounced the privatization of public compa-nies. In Saudi Arabia, customs tariffs havebeen reduced to pave the way for a customsunion with the Gulf Cooperation Council in2003, negotiations are under way with theWTO, and new legislation is being preparedto increase competition in domestic capital,labor, and insurance markets. However, manyof these changes are occurring very gradually,and some are being greatly delayed. Algeriahas not pushed ahead with its announced pri-vatizations, and reform in the power sector isvery slow. Many of the oil-exporting countriesin the region still have large and inefficient


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public sectors, and low rates of private invest-ment in the non-hydrocarbon sectors. Re-forms in these sectors leading to efficiencygains and higher potential growth rates will berequired.

In the long term, the region has to continueto address several obstacles. The region reliesvery heavily on a narrow range of externalrevenue sources, particularly oil, remittances,and tourism, and this reliance introduces thepotential for vulnerability in export earnings.Although several countries have adjustednominal exchange rates in recent years, fixedexchange rate regimes in several countriesmay adversely affect export competitivenessand offset gains made from trade and customsreforms. Receipts from tourism and remit-tances are vulnerable to the sluggish incomegrowth in source countries and recurringpolitical conflicts and potential military actionin the region. Oil revenue windfalls are usu-ally temporary, and real long-term oil pricesare expected to decline, particularly after

2005–06, when Caspian oil production is ex-pected to come onstream.

Notes1. At both the June 2002 summit in Seville and

October 2002 summit in Brussels, the EuropeanCommunity (EC) confirmed that eight of the ECA EUaccession candidate countries (the Czech Republic,Estonia, Hungary, Latvia, Lithuania, Poland, theSlovak Republic, and Slovenia) are on track to con-clude accession negotiations at the end of 2002 andto sign formal accession treaties in 2003. The officialtarget is for enlargement to happen in time for themid-2004 European Parliament elections. Bulgaria andRomania are at an earlier stage in the accession pro-cess and are expected to accede somewhat later. Turkeyis also an accession candidate, although it has yet tobegin formal negotiations.

2. Following the forthcoming EC Copenhagen sum-mit in mid-December 2002, the existing 15 EU membercountries’ national parliaments will vote to approve orreject enlargement.

3. WTTC. 2002. The Impact of Travel and Tourismon Jobs and the Economy—2002. http://www.wttc.org.


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Documents

Appendix 1 Regional Economic Prospects - World Bank