After a series of financial crises between mid-1997 and early 1999, which for a time raised fears of a global recession, there has recently been a marked improvement in financial market conditions and most of the economies that were affected by the crises have begun to recover. Although there are a number of remaining global downside risks, growth appears to have bottomed out at 2½ percent in 1998, in what appears to have been the mildest of the four world economic slowdowns of the past three decades.
In Southeast Asia, where the first crises occurred, the countries most directly affected—Korea, Indonesia, Malaysia, and Thailand—are all showing signs of recovery. In Russia, despite many difficulties, the government implemented policies that have helped stabilize the economy. In Latin America, Brazil took swift action to stem the crisis affecting its economy. In these and other areas, the IMF has been directly involved—providing policy advice to its 182 member countries, extending financial support for soundly formulated adjustment and reform programs, offering contingent financing to countries affected by financial contagion, granting low-cost assistance to the poorest and most indebted of its member countries, and taking steps to strengthen the international financial system, including by promoting transparency and good governance in its members.
Despite the signs of progress, many challenges remain. Continuing recovery depends on sound policies at the national level and also on a healthy global economic environment. Globalization, characterized by increasingly integrated financial markets, accompanied by freer capital flows across national borders, is now accepted as a permanent and beneficial feature of the world economy. All participating countries can benefit—enjoying more investment and a better standard of living—although many have been left out of this progress.
The crises gave powerful impetus to proposals to strengthen the architecture of the international financial system and commanded much of the Executive Board’s attention in 1998 and the first half of 1999. The proposals addressed, among other issues, transparency and accountability; internationally accepted standards of good practice in economic, financial, and business activities; capital market liberalization; the role of the private sector in forestalling and resolving crises; and improvements in financial market supervision. The IMF made considerable progress in these areas and also devoted much of its time to discussing ways to strengthen its support of member countries, particularly the poorest and most heavily indebted.
Developments in the world economy
World output growth slowed to 2½ percent in 1998 from 4¼ percent in 1997, largely as a result of the emerging market crises and the deepening recession in Japan. Global growth is projected to pick up moderately in 1999 and to be only slightly below its long-term average in 2000.
Globalization is now accepted as a permanent and beneficial feature of the world economy.
Commodity prices fell across the board in 1998, with the price of oil declining more than 30 percent for the year as a whole, depressing growth in the oil-producing countries of Africa and the Middle East. The prices of other commodities weakened steadily and were partly responsible for a sharp slowdown in growth in Latin America in the second half of the year. Although the price declines lowered global inflation, they also reduced real incomes and domestic demand in many commodity-exporting developing countries. Oil prices began to recover in March 1999, partly in response to signs of economic recovery in Asia but also because of supply constraints by many producing countries.
Among the crisis-affected countries in Asia, output growth was negative for 1998 in Hong Kong SAR, Indonesia, Korea, Malaysia, and Thailand, but economic activity picked up toward the end of the year in Korea and Malaysia, and in early 1999 in Indonesia, Thailand, and Hong Kong SAR. The Philippines also experienced a slight drop in output in 1998, mainly because of the impact of bad weather on agricultural production. Real GDP grew by 7¾ percent in China in 1998, but economic activity was weak in Singapore, which was hard hit by the crisis.
In early 1999, the Russian economy began to recover from its low point of September 1998, with the rise in oil prices and macroeconomic policies helping to improve the fiscal position and balance of payments. Output declined by 4½ percent in 1998 as a whole, and inflation picked up somewhat in late 1998 and early 1999, with the ruble remaining under pressure. The Russian crisis spilled over to neighboring transition countries, depressing economic activity in many of these, but its impact on Central and Eastern European economies was limited and mostly temporary.
In the developing countries as a group, growth slowed to 3¼ percent in 1998 from 5¾ percent in 1997; growth increased slightly in Africa, to 3½ percent. Most Latin American countries, which had coped well with the financial pressures stemming from the Asian crisis, were more negatively affected by the Russian crisis. Brazil came under particularly heavy pressure because of concerns about its large fiscal deficit and the sustainability of its exchange rate peg. These led Brazil to adopt a flexible exchange rate regime in January 1999. Pressures did not abate until March 1999, when the government took steps to strengthen its fiscal and monetary policies under its IMF-supported program. This helped confidence to recover in Latin American countries generally. The economies of several Central American countries, especially Honduras and Nicaragua, were devastated by Hurricane Mitch in October 1998, prompting emergency support from the IMF.
Among the industrial countries, divergences in economic performance became more pronounced in 1998. Japan’s economy contracted by 2¾ percent, largely because of weakness in private demand and in the emerging market economies of East Asia. In contrast, the U.S. economy continued to grow strongly, expanding by almost 4 percent for the second successive year in 1998. In Canada, growth slowed in 1998 as a whole, but picked up toward the end of the year. Unemployment in the United States reached a 29-year low of 4¼ percent in early 1999.
In Europe, the third stage of European Economic and Monetary Union began on January 1, 1999, when 11 countries adopted the euro as their currency. Growth in the euro area, which picked up in 1997, slowed significantly in late 1998, particularly in Germany and Italy, before beginning to recover in early 1999. Outside the euro area, growth in the U.K. economy slowed markedly during 1998, but showed signs of recovery by mid-1999. Inflation remained low in the advanced economies, partly reflecting low-cost imports from Asia and declining commodity prices.
IMF in 1998/99
In its 1998/99 fiscal year, ending on April 30, 1999, the IMF continued to deal with the fallout from the Asian crisis and the subsequent crises affecting Russia and Brazil and their repercussions, which presented the institution with additional challenges and underscored the risks of financial contagion. During August—October 1998, most emerging market economies temporarily lost access to private financing amid fears of a global credit crunch, before calm returned to financial markets by the end of the year. As a result of the ongoing financial market turbulence during the year, the demand for IMF financing continued to be heavy—amounting to $30 billion—and the IMF resorted to borrowing on two occasions (see page 23). Its resources subsequently dipped to a very low level in December 1998–January 1999, but were augmented by the increase in members’ quotas that took effect in late January. The IMF was thus able to provide a high level of assistance to its member countries during the year.
The largest users of IMF resources in 1998/99 were Brazil and Russia, although a number of other countries also used relatively large amounts, including Bulgaria, Indonesia, Korea, Pakistan, the Philippines, Thailand, and Ukraine. As of April 30, 1999, 9 Stand-By Arrangements, 12 Extended Arrangements, and 35 Enhanced Structural Adjustment Facility Arrangements were in effect with member countries. In the face of continuing uncertainties in Russia, the IMF approved, on July 28, 1999, a 17-month Stand-By Arrangement for $4.5 billion to enable Russia to tackle the root causes of the crisis—including persistent fiscal imbalances, structural rigidities, and financial sector weaknesses.
Reform of the international financial architecture
The IMF has recently taken a number of initiatives that will enable it to assist members that have experienced difficulties over the past year and to better meet the challenges of a globalized economy. These initiatives (relating to governance, transparency, and crisis prevention) fall under the rubric of strengthening the international financial system. In late April 1999, the IMF created the Contingent Credit Lines to prevent crises by shoring up market confidence in countries that are pursuing strong economic policies but that may be vulnerable to balance of payments problems stemming from financial contagion.
To increase the transparency of its own operations as well as those of its members, the IMF has launched a pilot project—which will be reviewed after one year—under which the reports prepared by IMF staff at the conclusion of Article IV consultation discussions with individual members are released when the member country concerned agrees. In another move intended to increase public awareness of its activities—and to demonstrate its commitment to greater openness—the IMF released, for the first time in June 1999, a summary of the Executive Board’s work program.
In April, the IMF and the World Bank reviewed the HIPC (Heavily Indebted Poor Countries) Initiative with a view to strengthening its framework so as to bring greater relief to this group of countries (see page 19). The Executive Board stressed the urgency of securing full financing for the HIPC Initiative, whose cost was projected to double, and for continuing the ESAF. The Executive Board also agreed to modify the policy on postconflict emergency financial assistance to take into account the special circumstances of post conflict countries.