Policy Rosearch WORKING PAPERS Intifflanal Ecoromic Analysis and Prospocts International Econ,mics Department The World Bank March 1992 WPS 870 Economic Shocks and the Global Environment F. Desmond McCarthy and Ashok Dhareshwar Countries tend to react as though favorable external shocks are permanent and unfavorable external shocks are temporary. This tendency - together with the magnitude and diversity in effect of external shocks - complicates attempts to get prices right and to determine what right prices should be. It might also help explain why growth rates differ among countries. Policy Rea4ch WokingPapers dismninatethefindingsofworkinprogreandenoourage thcxchangeafideasamongBankr2f and aloth intacsted in development issues. Thesepapers, distributed bytheResearch Advisc y Staff. canythenam of theauthors.reflec only theirviews,andshouldbeused and citedaccordingly. Thefindings, intcprcttions,andconclusions arc theauthors'own. They rhould not be attibuted to the Wodd Bank, its Board of Directors, its management, or any of its member countries. Policy Research International Economic Analysis and Prospects WPS 870 This paper -a product of the International Economic Analysis and Prospects Division, International Economics Department-is part of a largereffort in the department to analyze global linkages. An earlier version of this paper was presented at the Global Economic Prospects Seminar Series at the World Bank in November 1991. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Mila Divino, room S8-037, extension 33739 (March 1992, 55 pages). Policy fornulation in most countries is compli- by combining a pro-export bias with tightening cated by the role of the extemal economic of domestic demand; its balance of payments environment, especially during periods of great soon began to improve. The United States, on the external shocks. McCarthy and Dhareshwar other hand, allowed its export share to deterio- examine how individual countries were affected rate and relied more on external financing - by, and responded to, extemal shocks. They with unfavorable consequences for its current apply an enhanced version of an earlier method- account. ology for estimating the effect of three kinds of shock: terms of trade, variations in global Among developing countries, easy access to demand, and changes in the interest rate. They external financing often provided an easy short- discuss the magnitude of these shocks and term option for policymakers - especially in country responses to them in Brazil, Ireland, and countries with a strong anti-export bias where Korea and present numerical results for some political expediency precluded any significant other countries. curtailment of durmestic spending. A policy of leaning on extemal financing often created McCarthy and Dhareshwar find that the cxternal balance problems in the medium term. magnitude of extemal shocks may be greater than previously recognized. For large industrial McCarthy and Dhareshwar conclude that the OECD countries, such as Gernany, it is not magnitude and composition of external shocks unusual for external shocks to equal 2 percent of should be part of any explanation of why growth GDP in any one year. And such shocks range as rates differ among countries. Some countries high as 10 percent or more in some developing tend to view favorable shocks as permanent and countries, particularly those that depend heavily unfavorable shocks as temporary. This asymme- on a large trade share in commodities. The size try of response, together with the magnitude of and components of the shock depend on such the shocks, complicates attempts to get the prices factors as the country's openness to trade, the right - and even to determine what the right composition of its imports and exports, and its price is. level of extemal debt. In formulating economic policy, McCarthy The authors also found that countries dif- and Dhareshwar argue, policymakers must fered greatly in their responses to extemal adequately consider extemal shocks, because of shocks. Some rely on additional extemal financ- their major impact on economies. They do not ing, some place more emphasis on export answer the question: Which policy instruments promotion, and others favor import substitution. are the correct response in which situations? But Among industrial OECD countries, for example, they do offer insights that may be of use to Germany addressed unfavorable extemal shocks policymakers facing these issues. The Policy Research Working Paper Series disseminates the findings of work under way in the Bank. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers Jo not necessarily represent official Bank policy. Produced by the Policy Research Dissemination Center Table of Contents Page No. I. SUHMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. THE ROLE OF EXTERNAL SHOCKS . . . . . . . . . . . . . . . . . . . . 2 III. GLOBAL SHOCKS .... . . . . . . . . . . . . . . . . . . . . . . . 6 IV. ANALYTICAL FRAMEWORK .... . . . . . . . . . . . . . . . . . . . 14 V. SHOCKS IN BRAZIL, IRELAND AND KOREA ... . . . . . . . . . . . . . 28 VI. SHOCKS IN OTHER COUNTRIES .... . . . . . . . . . . . . . . . . . 38 VII. CONCLUSION .... . . . . . . . . . . . . . . . . . . . . . . . . 41 LIST OF FIGURES 1. Non-Oil Prices 2. Commodity Prices Against Manufactures 3. World Trade Levels and Growth Rates 4. Global Interest Rate 5. The "Shocks and Adjustments" Schema 6. Brazil 7. Ireland 8. Korea BIBLIOGRAPHY APeENDIX 1. Results of Shocks in Selected Countries: Country Data Sheets AcknowledgM2nt An earlier version of this paper was presented at the Global Economic Prospects Seminar Series at the World Bank under the chairmanship of D.C. Rao in November 1991. The authors would like to thank particip_nts in that seminar and also John Edelman, Kenneth Meyers, Vikraa Nehru, Peter Petri, Warren Sanderson, Vinod Thomas, Ian Bannon, Ishrat Husaini, and Ijaz Nabi for their comments. Ms. Milagros Divino provided statistical assistance and also prepared the final draft. I. SARY 1. Policy formulation in most countries is complicated by the role of the external economic environment especially during periods when large shocks are taking place. In this paper a particular aspect of this problem is considered, namely the impact of external shocks on the current account of individual countriea and how these countries responded to them. A methodology is devised that a'-lows one to estimate these shocks and the response, on a yearly basis. The results are discussed in some detail for three countries, Brazil, Ireland and Korea. Preliminary results are provided for a number of other countries. Three broad classes of shocks are considered, torms of trade, variations in global demand and interest rate changes. The results obtained suggest that the size of external shocks may be larger than previously recognized. For the large OECD industrialized countries, such as Cermany, it is not unusual to have external shocks equal to 2 percent of GDP in any one year 'hile for some of the developing countries they can range as high as 10 percent or more. This is especially true in those countries with large trade share and heavy dependenc; on commodities. The responses also show great differences. Among OECD inc -rrialized countries Germany, for example, addressed unfavorable external shocks by combining a proexport bias with tightening of domestic demand so that the baance of payments soon began to improve. The United States on the other hand allowed its export share to deterlorate and tended to rely more on external financing with rather unfavor- able consequences for its current account. Among developing countries, easy access to external financing provided an easy option in the short term for policymakers in many instances. This was particularly true where strong anti- export bias already existed and political expediency precluded any significant - 2 - curtailment of domestic expenditure. Such policy choices often led to major problems with external balances in the medium term. 2. In the cu-rrent debate on why growth rates differ between countries the results obtained in this work suggest that the magnitude of external shocks strongly suggest that they need to be included as part of the explanatory process. In responding to shocks the tendency seems to be to view favorable shocks as permanent and vice-versa. This asymmetry of response together with the magnitude of the shocks complicates further any attempts to get the prices right or indeed to determine what the right prices should be. II. THE ROLE OF EXTERNAL SHOCKS 3. There is extensive literature on the role of external factors in economic development. These range from the work on terms of trade by Ricardo to more recent work by Lewis (1969), Prebisch (1950) and Singer (1950). Broadly speaking these authors argued that over the long run the tendency is for the terms of trade of commodity exporting countries to deteriorate. Economists in countries such as Australia with a large traded sector have also devoted considerable attention to these issues. Salter (1959) and Swan (1960) have made basic analytical contributions for the analysis of booms and busts. More recently, one finds the problem rediscovered as the Dutch disease which afflicted some oil exporting countries in particular. Corden (1984) provides a useful review. - 3 - 4. In recent years there has been renewed debate on the differences in growth performance between countries. The traditional view of long-term growth based on Solows model (1970) is becoming increasingly questioned. Romer (1.989) has proposed including the role of economies of scale while other analysis tends to focus on the role of the external environment and the relative importance of domestic policies. The external environment can affect countries in widely differing ways while at the same time countries can choose to respond to it by a variety of approaches. 11.cent events in the Middle East have once more emphasized the need for assessing the role of the international environment and ideally how countries might best respond to it. The price of oil doubled to about US$30 a barrel, most major stock markets lost about 10-15 percent of their value, and, at least for a while, there has been a general upward thrust in world interest rates. These events have produced added impetus for the study of what are broadly termed shocks. The present work provides one approach for weakening external shocks. 5. There is little unanimity in the literature on what actually constitutes a shock or how it should be measured. In this paper the geaeral approach is that, any deviation from the pattern of the immediately preceding years, is considered a shock. One can readily modify these criteria by the design of appropriate digital filters. Depending on one's interests, for instance, one could filter out various harmonics corresponding to either business cycles or Kondratieff style waves. The particular advantage of the present approach is that it allows one to compute the impact of shocks on a year-by-year basis. This is elaborated on further in the section on methodology. 6. A number of authors have focused on different aspects of shocks and adjustment. These include Bruno's (1982) emphasis on structural change, Khan (1986) highlightLng the exchange rate or van Wijnbergen (1984) on short- term adjustment measures for oil price shocks. The principal focus in the present work is on the current account: the impact of the external environment on the current account--and the adjustment in response to it. This is estimated for a variety of countries. The analysis is generally for the period 1973-1989 except for some relatively minor data limitations. 7. Over the last two decades there have been a number of major shocks. These have resulted in wide repercussions for the global economy. Depending on the spec'i,c country these can be either favorable or unfavorable. The more notable shocks were: (a) The Qil shocks of 1973 and 1979. (b) Significant changes in terms of trade. These include the supply shortfall in a number of agricultural commodities in the early seventies, the coffee/tea boom of the later seventies and the generally unfavorable trends in many commodity prices in recent years. (c) The rapid increase in world interest rates in the late seventies/early eighties. -5- (d) Changes in the global demand for easprts, strongly positive for most of the period 1965-89 but interrupted by slowc3wn in some years and more notably by a serious recession in the early eighties. (e) Changes in official and especially private transfers to some countries and the sharp drop in private loan capital following the debt crisis of the 1980s. (f) There have also been significant changes in the composition of exports, as the relative importance of commodities declined, while that of high tech items increased. (This change in composition is not covered in the present analysis). 8. These shocks lead to a number of interesting questions. How big was their impact? How vulnerable were different countries? What were the welfare effects on different countries/groups of countries. Who gained/lost? What was the policy response? In particular are there any lessons for future policy formation? For developing countries in particular, how important are these external shocks compared to the role of domestic policies? The present paper is a first step in analyzing these issues. It is shown that both the impact of shocks and the policy response to them tend to vary widely between countries. It is to be noted that some shocks are not independent of each other; thus, terms of trade changes could also be associated with changes in interest rates or the growth of the global economy. This further complicates the task of the policymaker in the choice of appropriate response. It is -6- perhaps not surprising that shocks have such different impact, when one considers the differences in economies, in terms of openness, domestic markat size, import composition, level and structure of external debt. However, the variety in policy responses, as measured by performance indicators, evon at the aggregate level considered here, is more intriguing. While some of these differences may be due to variations in structure between countries, there still remain striking differences in policy response, especially in areas such as the reliance on foreign borrowing, or the amount of emphasis on domestic contraction or export promotion. III. GLOBAL SHOCKS 9. Three principal types of external shocks are considered over the period 1973-1989: terms of trade, changes in global demand for exports, and interest rate changes. This analysis can be readily extended tc consider a more detailed study of shocks. In particular it seems important to consider separately non-fuel and manufactures terms of trade movements. For some countries changes in the level of transfers and other capital flows are an important component of the current account adjustment, while for other countries the economic situation in their respective trading partners may be of particular relevance. o Terms of Trade. Since 1965, the aggregate pattern for prices of commodities other than oil has been a strong downward trend interrupted only by a few boom years (Figure 1). Thus between 1973 and 1989 commodity exporters lost about US$130 billion (in -7- Figure 1: NON-r'IL COMMODITY PRICE (deflated by the U.S.$ MlIJV Index) Index (1980=100) 140 1 120 -] 100- 40 I l l l 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 Observed Projected value value* ed onmetodoo explainedt ..................... Based on methodology explained in the text. -8- 1980 prices) or around 25 percent of their export earnings through price effects alone. If one adjusars for changes in volume the estimated dollar loss would be even bigger. The size of these losses varies greatly between countzies. Some indication of changes in terms of trade for various subaggregates are given in Figure 2. Big losers in recent years are those countries with export composition tilted towards agricultural comodities. These include many of the poorer countries in AMrica, where coffee and cocoa figure prominently in their exports. o Global Demand Effects. The level of world trade is, to a large extent, determined by global economic activity which in turn is mainly determined by OECD activity. World trade has exhibited a steady growth since the sixties with notable exceptions in the mid-seventies and early eighties (Figure 3). However, the rnate of increase has slowed from around 8 percent p.a. in the sixties to about half that in the late eighties. Again the effect of these changes vari.es greatly between countries. On average, the elasticity of developing country growth with rospect to the growth of world trade is around 0.5 percent but this varies a great deal depending on country trade partners. O Interest Rate Effects. The nominal interest rate (on six-month US$ LIBOR) has varied between 5 and 16 percent since 1965 (Figure 4). The impact of these changes on current accounts also varies a great deal between countries, depending, in the first place, on -9- Figure 2: REAL COMMOD1TY PRICES (deflated by the U.S.$ MUV Index*) Index (1979-81-100) 200 Minerals and metals 150\ < , Agriculture 100 " 50X 0 1951 1956 1961 1966 1971 1976 1981 1986 1991 Manufactrm export puc ftom the GS to LMIC*. - 10 - whether they are net debtor or creditor, and then if they are net debtor, like most of the developing countries, the level and composition of debt. However, the main impact of the rise in interest rates (for many of the developing countries) has been increasing indebtedness. O Transfers. Transfers have provided a significant component of balance of payments support for many poorer countries for a number of years. More recently some members of the European Community have benefitted irom significant transfers. IV. PERFORMANCE INDICATORS OF POLICY RESPONSE 10. The performance response is considered by estimating four indicators: export promotion, import substitution, macroeconomic contraction (expansion), and external financing. Again these estimates can be extended to include, for instance, various sub-aggregates for export promotion or import substitution. o Exoort Promotion: the change in export market share compared to recent levels. This provides a measure of the success of overall policy in stimulating exports. - 11 - Figure 3: WORLD TRADE LEVELS AND GROWTH RATES World Trade (Constant 1980 U.S.$) 3 2.5 - 2- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...................... .......... 2 - 1.5 - -,965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 Actual Expected value value* ............. * Based on methodology *Iaalned In ton World Trade Growth (constant 1980 dollars) Yearwly percent change 15 10 5- 0 - -5 -10 1 1 1 1 1 1 1 1 1 1 1 19,9 1965 j9e7 1969 1971 1973 1975 1977 1979 1981 1983 1935 1987 1989 - 12 - Figure 4: GLOBAL INTEREST RATES Nominal (six-month U.S. dollar LIBOR) Percent 18 14 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 Actual Expwcted value value* - ased on awthodokgy xpIaJned In t#4 Real (the same deflated by U.S. consumer prices) Percent 10 8 - 4- 2- 0 - -2- -4- 65 67 69 71 73 75 77 79 81 83 85 87 89 - 13 - ° ImPQrt Substitution: change in imports as measured by change in import/GDP ratio. This gives an indication of relative importance of substitution attempts within the economy, and the degree to which the policy response favored increased trade liberalization. It would be preferable to use change in import elasticity rather than in import share but there are important difficulties in interpreting point estimates. o Macroeconomic Contraction (Expansion): the impact of changes in the level of macroeconomic activity, as measured by GNP growth rate, on the level of import demand. o External Financing: the amount of additional external financing beyond that required in the previous year for "unshocked "level of exports and :mports. The present work does not discuss risk hedging policies--financing, diversification, hedging strategies or what part these play in mitigating the original shocks. Given the major role of external financing in the policy response it would be interesting to analyze this component further. 11. Policy Variables/Indicators. The pattern of policy variables provide some guidance on the measures behind the policy response adopted by individual countries. These variables include exchange rate, government deficit, domestic credit, domestic energy price, and a metric of trade - 14 - posture. More extensive analysis of public finances can provide insight on how the adjustment policies relied on, changes in expenditures for investment/social sectors while, revenue changes can indicate alterations in the tax regime. There variables can then be combined with various measures of adjustment such as GNP growth rate, domestic savings rate, productivity, and OD inflation rate. For many of the more developed countries unemployment statistics provide a good indicator of the impact of adjustment, while the impact of adjustment for some of the poorer countries can be captured by various social indicators such as infant mortality, nutritional status, or educational level. However, many of these operate with long lags and many countries' data are poor. IV. ANALYTICALEFAMEWORK 12. General statements at an aggregate or regional country group level about external shocks and the response to them are only of limited value to policymakers. Since most policy is made at the country level it is essential that such work be complemented by analysis at the individual country level. The methodology used in this study is a modified version of that developed by Balassa (1981). 13. The postwar years through 1973 may be considered a tranquil period for the world economy, especially as compared to the period since then, which has been characterized by a number of shocks of different nature. While it might be obvious, over a speeified period, that a given country has been buffeted by adverse developments, the composition and extent of the shocks - 15 - impinging on the economy are not observable. Nor are the adjustments undertaken by the economy in response to the shocks. An accounting or modelling framework is needed to quantify the shocks and adjustments. 14. There is a variety of such frameworks in literature, ranging from heuristic accounting formulations through macroeconometric simulation models and computable general equilibrium models, and on through theoretical multi- period models with sound microeconomic foundations. The simpler heuristic technique followed in. this paper has the virtues of transparency of interpretation and ease of empirical implementation for a large number of countries. This technique has also been used in Balassa-McCarthy (1984) and McAleese-McCarthy (1989). The following is a brief summary of the technique. 15. If one assumes that for a given country, under conditions of "business as usual," there is a stabla pattern of evolution of such variables as world trade, import prices, export prices, and interest rates, then these, together with a known, stable set of policies, determine the current account balance for the country. For convenience, the set of values for these variables (and for the current account balance) expected normally to prevail for a given year or period may be referred to as the "trend" set of values. Now suppose this economy is hit by a major shock or shocks, such as an adverse terms-of-trade movement, a contraction of demand for its exports, or an interest rate increase. The country will respond to the shocks Wit;b a range of policy adjustments, including trade adjustments. As a combined result of the shocks and the adjustments, the "actual" or observed values assumed by these variables and the current account balance for the period will be - 16 - different from the "trend" configuration that would have resulted in the absence of shocks and adjustments. In other words, the difference between the 'trend" values and the "actual" values is due to shocks ad adjustments. 16. The respective effects of shocks and adjustments may be decomposed by introducing the concept of a "hypothetical" configuration of the relevant variables corresponding to the state of the economy, as it would be, given the shocks, but without adjustment. Then the difference between the 'hypothetical current account deficit" and the "trend current account deficit" may be taken to be the overall effect of the shocks on the economy, and the difference between the "hypothetical current account deficit" and the "actual current account deficit" to be the overall effect of the adjustment (Figure 5). A similar analysis of the components of the current account deficit yields further insight into the adjustment process. 17. Thus the essential core of the methodology is based on devising three measures of the current account for each year of the period under analysis. These are called: Actual: A ; Trend: T ; Hypothetical: H. A: the current year U.S. dollar level of current account as reported in the IFS. T: The value that would result if variables continued to evolve in a no shock situation. For convenience this -17 - Figure 5: THE "SHOCKS AND ADJUSTMENTS" SCHEMA Current Account Deficit Hypothetical value (shocks and no adjustment) Actualvauef (shocks and adjustment) A ctual value................................................... ............................................... Trend value (no shocks) - 18 - is called the trend value. In order to compute this one has to make certain assumptions. In the present work it is assumed that in a no shock situation, macro aggregates such as GDP growth, continue at a rate equal to that achieved during the previous three years, while share values, such as export share of total world exports, remains equal to the average value over the previous three years. H: This is hypothetical. It is the value that would result in the face of changing external conditions if domestic policy had remained unchanged. Again trying to specify this poses many difficulties. It can be defined in many ways. In this paper the following procedure is adopted. The hypothetical level of trade is defined as the level of trade that would result if a country maintained its share (average over the last three years) of the actual (current) value of total world trade--the assumption being that unchanged domestic policy would just maintain trade share. Shock S: is then defined as H-T. (Note that the convention adopted is that unfavorable shocks are positive). Response R: is defined as H-A - 19 - Additional Financing F: is defined as A-T Thus it is noted that the shock, S, minus the response to it, R, equals the additional financing, F. There may also be changes in unrelated factors that affect the level of financing. These are not considered here but can be incorporated in a more dotailed analysis. Put another way if the response exactly offsets the shock then no additional financing is indicated, while a weak or inadequate response would require some positive level of additional financing. 18. Analytical details are as follows. For a given year, let C - the current account deficit in current U.S. dollars ! - the volume of merchandise imports X - the volume of merchandise exports PM - import price index in U.S. dollars Px - export price index in U.S. dollars F - the interest-sensitive part of net factor-service payments in U.S. dollars N - the non-interest sensitive part of net factor-service payments plus net non-factor service payments U - private and of.icial unrequited transfers, in U.S. dollars 19. Let subscripts T and H refer to the "trend" and "hypothetical" values of the variables, and the unsubscripted form of the variables, to the actual values. Then, the current account deficit may be defined as imports - 2o - minus exports plus factor payments by the country minus transfers to the country. That is, C - HMP - XPX + F + N - U (1) Similarly, the "trend" and "hypothetical" values: CT- - -p - TPTx +FT + NT - UT (2) Cg- _H - XPx + Fs + NH - UH (3) Then total shock - CT - C and ' adjustment - CH - C. 20. C-CT is the difference between shocks and adjustments; it quantifies the additional external financing necessitated by the shocks. Following Balassa-McCarthy (1984), it may be defined as a component of adjustment, thus arriving at a shocks-adjustment identity. - 21 - 21. The 'trend" scenario (no shocks) may be arrived at on the following plausible assumptions: Ti. The import and export prices equal the average of past three years. T2. The world trade would grow at the medium-term rate it had for the past three years. T3. The country maintains its share of world exports, computed as its average share over the past three years. T4. The GDP of the country would grow in the current year at the medium-term rate it had at each of the past three years. TS. The country's ratio of imports to GDP remains the same as the average of v e past three years. T6. The trend interest rate is assumed to remain the same as in the past three years. T7. The net unrequited private and government transfers to the country maintain their level at the average of the past three years. T8. Net non-factor service payments and non-interest sensitive component of factor-service payments are the same as the observed values. 22. The formal expressions are as follows: - 22 - Trade prices: Px(t) - (PX(t - 3)PX(t-2)PX(t-1))13 and similarly for PTM. Income: Let Y(t) - GDP of the country in year t in real terms, in 1980 U.S. dollars, and g(t) - GDP growth rate from 1965 through year t, as estimated by OLS. Then YT(t) - [Y(t-3)(g(t-3))3y(t-2)(g(t-2))2Y(y-1)g(t-l)113 Expected ("trend") world trade is computed analogously. Interest rate: I(TM - ((I + i(t - 3))(1 + i(t - 2))(1 + l(t - 1)))1/3 - 23 - Then, the "trend" factor-service payments (the interest-sensitive part) would be FT - 'TF 23. Depending on the level of detail needed and data availability, it is possible to make the "trend" scenario more realistic and sophisticated. For example, an alternative to T2 would be to focus on the income and import demand growth in three major partner countries (rather than the growth of world trade) as in Mitra. As another example, net private transfers could be related to wage rates in related countries, and net official transfers to growth rates of industrial countries. 24. The "hypothetical" scenario (shocks and no adjustment) may be constructed on the following assumptions: HI. The observed import and export prices for the year. H2. The actual world trade for the year. H3. The country passively accepts its share of world exports utithout any additional export promotion effort. H4. The real GDP of the country would grow in the current year at the same rate as the trend rate, adjusted for the difference in "trend" exports and "hypothetical" exports. H5. The country's ratio of imports to GDP remains the same as over the past three years. - 24 - H6. The actual interest rates for the period. H7. The actual transfers for the period. 25. The assumption Hl implies that the country is a price-taker in the imports market, and that changes in export promotion effort by the country, if any, is reflected in its observed share of world trade being different from "trend." The latter could be relaxe4 in a more comprehensive framework that would incorporate effects such as those due to changes in the real exchange rate or labor market adjustments. From HI we have Pa - pM and PH - PX. (4) From H2 and H3, we can readily compute Xi. Then, using H4, we can arrive at the 'hypothetical" GDP as the "trend" GDP adjusted for Xi - XT. This would yield MH through assumption H5. That is, if m is the country's imports-to- output ratio, its "hypothetical" GDP would then be given by YH(t) - YT(t) + H - XT and the "hypothetical" imports by MH - mY5(t). - 25 - From H6, we get F3 - F. (5) Assumption H7 is that unrequited transfers are invariant to policy adjustments, that is, uH -U. (6) Using (4) through (6), we may write (3) as C, - PM% - PXXH + F + N - U. (3') Thus, we have shock- C - CT [(PM PNM)MT (PX, PTX)X]1 + [PM(N - MT) ..PX(X XT)I + F(l - T) - (U - UT), (7) 26 - and adjustment - CH - C - p4(IN _ M) - PX(X5 - X). (8) 26. The various groups of terms in the expression for shocks in equation (7) may be interpreted as follows. 27. The first group, ((PM - PT')MI - (PX - PTX) ]XT, shows the price effect of the disturbances on "trend" import and export volumes, and thus may be taken as the price or terms-of-trade shock. 28. The second group, [Pm(M& - XT) - Px(Xs - X$)], measures the net quantity effect of the disturbances. The export-volume shock is -Pz(XH_XT) and the offset due to the resultant reduction in imports is given by pMP _ r) . 29. The term F(l - IT/I) is the interest-rate shock. - 27 - 30. The various terms in the expression for adjustment in equation (8) may be interpreted as follows. The term Pm(M. - M) represents the reduction in the import bill from the hypothetical scenario, and may be further broken down into two components: import reduction through a growth slowdown and import substitution (reduction in the imports-to-output ratio). Formally, let M' be the imports of goods if the imports-to-output ratio stayed the same. Then M' - mY, and we have pMQ - M) - PM(Ma - M!) + PM(Mf - M). The term PM(M - MI) denotes the reduction in imports achieved by allowing the output to fall, and the term PM(M/ - M) denotes import substitution. It may be noted that there is a degree of arbitrariness in this decomposition. 31. Finally, the term PX(X, - X) stands for export promotion efforts by the country. 32. Data Sources. The balance-of-payments data are all from IFS, downloaaed through BESD.1/ These include: current account balance, exports 1/ Bank Economic and Social Database, User's Guide, World Bank, July 1989. - 28 - and imports, transfers, and factor-service payments. The income data are also from BESD. Trade price indices are from World Bank sources.2/ The relatively recent innovation by the Fund of separating factor and nonfactor service flows has been helpful. It has been assumed that half of net factor service payments are interest sensitive. The interest rate variable, i, is the six month U.S. dollar LIBOR. 33. The main bottleneck--limiting the coverage across countries and time as well as depth of analysis--has been trade prices. In the analysis, the unit values of imports and exports, from IFS, have been used. For a majority of developing countries, unit values are not available. Further, it would be straightforward to extend the above analysis to study the effects of nonfuel terms of trade, manufactures terms of trade, adjustment to fuel shocks, and promotion of manufactures exports as further trade price data becomes available. V. SHOCKS IN BRAZIL. IRELAND AND KOREA 34. Preliminary estimates have been made of the shocks and policy response to them for about 50 countries. In this section, three countries are selected which reflect some degree of variation in, not only the magnitude of the shocks and the response to them, but also the prevailing country conditions. These are Brazil, Ireland and Korea. Further details on shocks and responses to them for the second oil shock are given in Balassa and 2/ Further details are given in M. Riordan, DEC Analytical Data Base, IBRD, forthcoming. - 29 - McCarthy (1984) for Brazil and Korea while the Irish situation is discussed in McAleese and McCarthy (1989). Brazil was a relatively successful country up to the first oil shock and continued to maintain a strong growth performance into the mid-seventies. However, -ne severity of external shocks and inappropriate policy choices eventually led to an unfortunate situation: much of the Irish economy was inward-looking up to the early eighties. A poorly conceived attempt to stabilize the economy in the early eighties was unsuccessful and led to results such as the debt/GDP ratio rising to over 100 percent. However, adjustment efforts were more successful in the late eighties. The policy package at this time included a mixture of export oriented policies, incomes policy and strong support from the EEC. Korea was a relatively open economy and so suffered rather large shocks. However, the strong productive capacity of the economy and a highly elastic supply response meant that external adjustment could be achieved through a combination of changes to relative prices and adjustment to domestic demand. Eventually favorable improvement in terms of trade and a more buoyant global economy provided further stimulus to a strong economic performance. 35. The shocks and the policy response for these three countries are now considered in more detail. This format is similar to that used in Balassa-McCarthy (1984) but with two principal differences. The present work is for a longer period while the shocks together with the response to them is given on a year-by-year basis. The country coverage in this work is also much broader and, in particular, includes a number of industrialized countries. - 30 - (a) Brazil. (The broad picture is given in Figure 6. Details are given in Appendix 1). (i) External Shocks. The most significant external shocks were: unfavorable shocks in 1975, 3.1 percent of CDP; 1980, 3.7 percent of GDP; and 1981, 4.2 percent of GDP; and a favorable shock in 1986, 2.4 percent of GDP. Most of the 1975 shock was due to a terms-of-trade loss compounded by a slowdown in global demand. The 1980/81 shocks were primarily due to unfavorable movement in terms-of-trade and to a lesser extent, slowdown in global demand together with higher interest rates. The favorable shock in 1986 was due to improvement in terms-of-trade and a reduction in interest rates. (ii) Policies Applied a. The response to the first oil shock was expansionary. This was accommodated by heavy reliance on external borrowing. The initial response to the second oil shock was also expansionary. However, by 1981 there was a policy switch to contractionary mode with ouitput compression and significant limitations on imports. X X \_ _ _ _ _ _ _ _ a - p i i \ 8-I X X I - X' 4 / Z~~. \ I-AA .::::-:: - 32 - This contraction resulted in a sharp decline in investment (see Figure 6) and in per capita incomes. b. After the second oil shock the policy regime continued to favor export promotion. The real effective exchange rate depreciated most years and exports responded by gaining market share. (Detailed results are given in Appendix 1, page 2). Import limitations resulted in substantial import substitution equivalent to 1.4 percent, 1.4 percent, and 2.1 percent of GDP in the years 1981, 1982, 1983. C. The expansionary response to the first oil shock and initially to the second shock resulted in a major external debt burden. When the policy finally became contractionary a significant part of the adjustment fell on investment and per capita consumption. It was not possible to adequately offset the impact of these shocks, even by a strong export performance, as the total export sector accounted for only about 10 percent of GDP. The tilt against productive capacity also weakened the economy. When the upturn in the global economy occurred in the mid-eighties, Brazil was not able to take sufficient advantage of the opportunity. The situation was further compounded by - 33 - the many years of decline in per capita incomes so that by the late eighties, political support was weak for any viable alternative that required further sacrifice. (b) Ireland. (Figure 7 and details in Appendix 1, page 6). (i) External Shocks. Ireland was heavily dependent on oil imports in the seventies and early eighties. Consequently, it suffered major adverse shocks in 1974, 1975 and again in 1980, 1981 equivalent to about 7 percent, 10 percent, 7 percent and 10 percent of GDP in each of those years. These shocks were mostly (about 60 percent) due to adverse movement in terms of trade but had a significant component (about 25 percent) due to slowdown in the global economy. (ii) Policy Resnonse a. The response to the first shock was some additional external borrowing but primarily countercyclical fiscal policy so that a mild recession ensued. However, even as changes in terms-of-trade continued to be unfavorable throughout much of the seventies the authorities sought to bolster employment by relying on external resources. -34- Figure 7: IRELAND ToW uhWlto GOMtM (63e1 nofflaMl G0F) F ~~~~~~LJ iws11 lift liwo im~ 187? 11 1wo i~ ;m Im 16w tow 'ow l 166? IO RMos gross domntiutlnvestrmnt (% of real GDP) so 90 170t 1974 1i 197 1i7 197 1979 10 16 1 10 16 la" 1966 16 107 1a" Roa GDP In US $8 Q3 s ale) 14 10 1 m 1" 1 4# 1@ ff u67 m 110 §14 1"n 11 11 1^ "1 "7 RsW Effod Exchr Rob index Index (180-100) 190 141* 107 1674 t 107 107 IN 1 1" 16,0 lW IU 162 1 61 6 1 1060 INt 163? 116 - 35 - b. This led to an economy being particularly vulnerable when the second oil shock struck. The situation was further compounded by the interest rate shock which led to a burgeoning external debt situation. The deteriorating overall situation masked some rather new initiatives for export promotion. C. When the global economy eventually began to recover in the mid-eightiea these export promotion efforts began to yield positive results. At the same time some of the external debt uurden was alleviated by transfers resulting from EEC membership. At this juncture it is not clear whether this strategy can be sustained if the global economy stalls once more. (c) Korea. (Figure 8, Details in Appendix 1, page 8). (i) External Shocks. Korea was severely impacted by adverse external shocks in 1974, 1975 and again in 1980, 1981 equivalent to 10.4 percent, 10.9 percent, 8.0 percent and 8.2 percent, respectively, of GDP. These were primarily due to adverse movements in ttrms of trade effects and to a lesser degree to a slowdown in global demand for exports. However, from 1984 Mtu tat Ori It BUs Ant atUl Mt taI on- asa cot (DOI-OOeI1) XcpUj Mt Mt not Mt Mt cot Mt ml gu so an & r ig i a l t tat Mt 0* cm a (aims es0 seen -4 dCO FM ewi ssai suet cel gut cut gui ti0t owl ese MMt SO u at Mss tint uisi '3 a as (d(]D pouP WMPOU 00*= OI MO U *0 LJ~~~~~~~~~~~I ( 6a r luw po ) mu.w 4ps ugcswomp swB all dUI gut Win alt alt Net tuit WIt w I A l v380)1 :8 einBt - 37 - onwards external shocks were favorable primarily due to improving terms of trade. (ii) Policy Response a. The response to the first oil shock was a strong pro-export policy combined with some constraint on the domestic economy. The economy then recovered to enjoy a strong period of growth over 10 percent. When the second oil shock struck, this gro6th surge was eased back some, while strong encouragement for exports continued. b. The policy thrust was tcwards a steady depreciation of the exchange rate together withI other incentives for exporters. These included access to favorable interest rate loans. The strong pro-export bias especially in manufacturing provided a strong basis for rebound when the global economy and especially the terms uf trade for manufactures turned favorable in the mid- eighties. c. Korea also increased its external debt but not unduly so during the unfavorable shock years. - 38 - However as interest rates eased by the mid- eighties the authorities were able to move rapidly to improve their external debt situation. 36. Policy Variables. The linkage between the performance variables and the actual policy package that produced them inevitably varies between countries. This will be the subject of further analysis where preliminary analysis suggests the role of real 3ffective exchange rate and domestic energy pricing policies are particularly important. VI. SHOCKS IN OTHER COUMNIES 37. In this section some preliminary results are noted for a selection of countries in addition to the three discussed in the previous section: Brazil, Ireland and Korea. The data for all countries are listed alphabetically in Appendix 1. The countries chosen c.over a wide variety of experiences from the poor developing countries of Africa to some of the more affluent OECD members. It is hoped that this will provide insight: first, or how countries responded; and second, which policies were most effective. 0 Cote d'Ivoire. Cote d'Ivoire was impacted by a particularly volatile series of shocks since 1973. These include very unfavorable shocks in 1975 (9.8 percent GDP), 1981 (14 percent), 1982 (10 percent), and strong favorable shocks in 1977 (13 percent), 1985 (11 percent). A notable feature of the passive - 39 - response was the strong contraction of the economy especially since 1979 together with heavy reliance on import substitution. Germany. For most of the decade preceding 1986, Germany experienced adverse but relatively mild shocks due to unfavorable movements in its terms of trade and weak export markets. The response in most years was a modest macro contraction together with relatively successful export promotion efforts. Shocks turned favorable in 1986 primarily due to improved terms-of-trade. o India. The magnitude of external shocks for India was relatively low, partly because India was not a very open country and also trade accounted for only a small portion of GDP. It adopted an inward-looking policy up to recent times. There are some who would argue, that this relative insulation from the outside world served them reasonably well, during the oil shocks and the slowdown in the global economy in the early eighties. However, in an import substitution economy, like India at that time, imports were already compressed so that policymakers were severely constrained in their room to maneuver. Given that further import compression requires large reductions in domestic demand and an endemic anti-export bias, it is perhaps not too surprising that increased foreign borrowing resultel. The costs of this approach became evident in the late eighties when a noncompetitive industrial sector was not well positioned to take advantage of the surge in global demand. - 40 - o Kenya. Kenya reflects the problems of many African countries. Its exports have a large commodity component while its imports are heavily biased towards capital equipment and intermediate goods. Consequently, for much of the period considered here, they experienced unfavorable mo.-ements in terms of trade and adverse global market conditions. A notable exception was 1977 when coffee prices benefitted from a frost in Brazil. The policy response to these unfavorable external shocks on the current account was to rely on external financing and reinforce further the traditional dependence on import substitution. Even during the boom period (roughly 1977-79) public expenditures increased as if the boom was perceived as permanent. Generally export promotion efforts were weak with the exception of tourism and horticulture. These two exports, aided by a favorable exchange rate, have expanded rapidly since the mid-1980s. O XMdlawi. The pattern of shocks here was similar to Kenya. The response indicates a stronger export promotion effort, during much of the period, than in Kenya. There was also more reliance in Malawi on macro contraction. o Malaysia. Malaysia has a ruch more diverse export composition than most developing countries and is also an oil exporter. Thus it experienced favorable slocks in most of the decade prior to 1981. However, when oil prices softened and global demand - 41 - weakened in the early eighties, Malaysia initially responded by an expansionary macro policy and continued to stress export promotion. As conditions failed to respond promptly, the authorities adopted a number of policy measures. The content of these policy measures included trade liberalization, relaxation of NEP related rules on euployment and more favorable treatment of foreign investment. These measures, along with deep cutbacks in the fiscal deficit provided a strong indicator of the government's commitment to macroeconomic stability and promotion of a healthy private sector. This policy combination set the stage for a strong recovery in the late eighties. _ !nted State. The Unites States experienced unfavorable but modest external shocks throughout virtually the whole of this period. The policy response involved some export promotion and import substitution together with macroeconomic expansion up to the early eighties. This was supported by additional external borrowing. Around 1983/84 there was some reversal of policies to a more expansionary macro mode. However a rather indifferent export promotion effort ensued. Again, this was supported by further external financing. VII. CONCLUSION 38. The first conclusion is rather pedantic but important. External shocks can have a major impact and so need to be given adequate consideration in formulating country economic policy. However, there is a great deal of - 42 - variation between countries so that any analysis needs to have a country focus. In some instances shocks can be as high as 10 percent of GDP in any one year. The size and various components of the shock depends on such factors as degree of openness, export/import composition, external debt. The adjustment to shocks also varies a great deal between countries, with some of them relying on additional external financing while others place more emphasis on export promotion and yet others on import substitution. An interesting question is which policy instruments led to the various performance indicators, and is there a "correct" response to shocks. The present work does not provide a definitive answer to either of these at this stage, but does offer some insights that may eventually be of use to policymakers facing these issues. - 43 - BIBLIOGRAH Balassa, Bela. 1981. "The Newly Industrializing Developing Economies After the Oil Crisis." World Bank Reprint-Series 190. Washington, D.C. Balassa, Bela, and F.D. McCarthy. 1984. "Adjustment Policies in Developing Countries 1979-82: An Update." World Bank Staff Working Paper 675. Washington, D.C. Bruno, Michael. 1982. "Adjustment and Structural Change Under Supply Shocks." Scandinavian Journal of Economics 82(2):199-221.. Corden, W.M. 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation." Oxford Economic PaRers 36:359-80. Khan, Mohsin S. 1986. "Developing Country Exchange Rate Policy Response to Exogenous Shocks." American Economic Review, Papers and Proceedings 76(2):84-87. Lewis, W.A. 1969. Asoects of World Trade 1883-1965. Stockholm: Almqvist and Wiksell. McAleese, Dermot, and F.D. McCarthy. 1989. "Adjustment and External Shocks in Ireland." World Bank Policy, Planning and Research Working Paper 262. Washington, D.C. Mitra, Pradeep, and Associates. 1973, 1979, 1990. "Adjustment in Oil Importing Developing Countries." Cambridge University Press. Forthcoming. Prebisch, R. 1950. "The Economic Development of Latin America and its Principal Problems." New York: UN Economic Commission for Latin America. Romer, P. 1989. "Increasing Returns and New Developments in the Theory of Growth." Working Paper No. 3098, National Buerau of Economic Research. Salter, W.E.G. 1959. "Internal and External Balance: Income and Price Effects." Economic Record. Productivity and Technical Change. Cambridge University Press. Sanderson, Warren C., and Jeffrey G. Williamson. 1985. "How Should Developing Countries Adjust to External Shocks in the 1980s? An Examination of Some World Bank Macroeconomic Models." World Bank Staff Working Paper 708. Washington, D.C. Singer, H.W. 1950. "The Distribution of Gains Between Investing and Borrowing Countries." American Economic Review. Papers and Proceedings 5 (Supplement, May):473-85. Solow, R.M. 1970. Growth- Theor. An Exposition. Oxford University Press. Swan, T.W. 1960. "Economic Control in a Dependent Economy," Economic Record 36 (March). van Wijnbergen, Sweder. 1984. "Oil Price Shocks and the Current Account: An Analysis of Short-Run Adjustment Measures." Weltwirtschaftsliches rchiz. 460-79. Page 1 of 11 RESULTS OF SHOCKS IN SELECTED COUNTRIES: COUNTRY DATA SHEETS o BRAZIL o COTE D'IVOIRE o GERMANY o INDIA o IRELAND o KENYA o KOREA o MAIAWI o MALAYSIA o UNITED STATES I. Shocks ds perLenlt ot ,DP - Couitry=Brazil - ----- -- ------------------ --- - lerms-of-Trade Net Intrst Shock (Fuel Export Volume Rate Trnsfrs Total and other) Shock Shock Shock Shock 1913 -0.5 0.0 0.2 -0.0 -0.3 1974 1.2 0.3 0.2 0.0 1.7 1975 2.3 0.9 -0.1 0.0 3.1 1976 0.5 0.5 -0.5 0.0 0.5 1977 -1.1 0.2 -0.3 0.0 -1.2 1918 0.2 0.1 0.3 -0.0 0.6 1979 1.2 O.1 0.5 0.0 1.8 1980 2.9 0.4 0.5 -0.1 3.7 1981 3.1 0.6 0.6 -0.0 4.2 1982 1.7 0.b -0.1 0.0 2.1 1983 0.6 1.6 -1.3 0.0 0.9 1984 -0.6 0.5 -0.5 -0.0 -0.6 1985 -0.2 0.3 0.9 -0.0 -0.8 1986 -1.3 -0.2 -0.9 0.0 -2.4 1987 0.0 0.0 -0.4 0.0 -0.3 11. Adjustments as percent of 6OP 19:17 Monday. October 21. 1991 8 ------------------- Country=Brazil ---- --- -- -- --------------------- --- Total Adj. Export Output Import Addlitional Including Promotion Compression Substitution financing Add). Fin 1913 0.1 -0.6 -0.6 0.1 -0.3 1974 0.5 -0.4 -2.8 4.4 1.7 1975 1.0 0.2 0.4 1.5 3.1 1976 0.1 0.2 1.2 -1.0 0.5 1977 -0.6 0.5 1.8 -3.0 -1.2 1978 0.0 0.7 0.6 -0.8 0.6 1979 0.5 0.7 -0.1 0.7 1.8 1980 2.1 0.3 0.6 0.7 3.7 1981 2.7 1.4 1.3 1.2 4.2 1982 0.5 1.4 1.5 -1.4 2.1 1983 2.0 2.1 2.1 -5.2 0.9 1984 2.2 1.1 1.7 -5.6 -0.6 1985 1.1 0.3 1.2 3.4 -0.8 1986 -1.7 0.0 -0.8 0.0 -2.4 1987 -0.2 0.1 -0.1 -0.2 -0.3 0'-a It 1 --- -- ------------------- Country=Cote dIvoire -----~-~-~----------------------------------- --------- Terms-of-Trade Net Intrst Shock (Fuel Export Volume Rate Trnsfrs Total and other) Shock Shock Shock Shock 19/4 -2.9 1.6 0.5 1.7 0.9 1975 4.3 3.7 -0.2 2.0 9.8 1976 -0.9 2.0 -0.9 3.4 3.7 1977 -15.6 0.9 -0.4 2.2 -13.0 - 1978 -4.9 0.4 0.5 2.3 -1.6 1979 -0.5 0.5 1.0 2.7 3.7 1980 2.6 , 1.5 0.9 2.6 7.5 1981 11.1 3.1 0.9 1.0 14.1 1982 11.0 2.4 -0.2 -2.9 10.3 1983 4.6 5.5 -1.8 -3.3 5.0 1984 -5.9 1.5 -0.7 -1.7 -6.7 1985 -9.5 0.9 -1.7 -0.7 -11.0 1986 -4.9 -0.5 -1.6 0.9 -6.1 1987 2.6 0.1 -0.9 0.6 2.4 11. Adjustments as percent of GDP 19:17 Monday. October 21. 1991 12 -- -. - - -- - ------ Country=Cote dlvoire - --- ---- - --------- ------- ---- - ITtal Adj. Export Output Import AdUiltiuridi Including Promotion Compression Substitution financing Addi. Fin 1914 6.0 2.1 -2.4 -4.8 0.9 1975 3.8 0.4 3.7 2.0 9.8 1976 4.8 -0.9 3.5 -3.7 3.7 1977 -4.3 0.2 -4.2 -4.6 -13.0 1978 0.3 -0.1 -4.2 2.4 -1.6 1979 -4.4 1.3 0.7 6.1 3.7 1980 -2.4 2.3 1.5 6.1 7.5 1981 2.4 2.7 7.6 1.4 14.1 1982 4.2 3.3 8.0 -5.3 10.3 1983 1.7 3.6 4.9 -5.2 5.0 1984 0.3 4.1 1.7 -12.9 -6.7 1985 -2.6 1.9 0.9 -11.3 -11.0 1986 -1.3 1.0 0.6 -6.4 -6.1 1987 -2.5 1.6 0.3 3.0 2.4 0 I-3 o oX I . >WiukS as pe, cent of 4jp . --- ----------------------- Cou- try=Germany ------------------------------------------------ --------- Terms-of-Trade Net Intrst Shock (Fuel Export Volume Rate lrnstrs Total and other) Shock Shock Shock Shock 1973 -1.3 0.0 0.0 0.6 -0.7 1974 0.4 1.0 0.0 0.5 1.9 1975 -0.6 2.7 -0.0 0.5 2.6 1916 0.3 1.6 -0.0 0.3 2.1 1977 -0.1 0.8 -0.0 0.2 0.7 1978 -1.1 0.3 -0.0 0.3 ,-0.6 1979 -0.5 0.3 0.0 0.4 0.2 1980 1.0 1.0 0.0 O.S 2.5 1981 3.0 2.2 0.0 -0.0 5.2 1982 0.9 1.7 -0.0 -0.2 2.5 1983 -0.4 3.7 0.0 -0.3 3.1 1994 0.4 1.2 0.0 -0.0 1.6 1965 0.2 0.7 0.1 -0.1 0.8 1986 -4.0 -0.4 0.1 0.3 -4.0 1987 -4.1 0.1 0.0 0.5 -3.6 II. Adjustments dS percent of UUP 19:17 Monidy. ULtuber- 21. 1991 18 .__ - ---------------------- Country=Germany ---- ---- --- -- - Totdl Adj. taport Output Import Adtdit ioldi I ncludrirg Promotion Compression Substitution financing Addl. Fin 1913 0.4 0.0 -0.4 -0.7 -0.7 1974 3.0 0.4 -0.2 -1.2 1.9 1975 0.4 0.9 -0.3 1.6 2.6 1976 1.1 0.4 -2.0 2.6 2.1 .1977 0.0 0.2 -1.0 1.6 0.7 1978 -0.2 0.0 -0.9 0.5 -0.6 1979 -0.7 -0.1 -1.0 2.0 0.2 1980 -0.2 0.1 -0.5 3.1 2.5 1981 1.6 0.5 1.2 1.8 5.2 1982 0.7 1.2 0.8 -0.2 2.5 1983 2.2 0.4 -0.1 0.6 3.1 1984 0.9 0.3 -1.0 1.3 1.6 1985 1.4 0.2 -1.3 0.5 0.8 1986 -0.7 0.3 -1.2 -2.3 -4.0 1987 -0.8 0.2 -1.1 -1.9 -3.6 0 t 0 O g -- ....-. - .-------------------- Cauntry=lndia ------------------ ----------------------------------- Terms-of-Trade Net Intrst Shock (Fuel Export Volume Rate Trnsfrs Totil and other) Shock Shock Shock Shock 1913 0.0 0.0 0.0 -0.0 0.1 1974 1.4 0.2 0.0 -2.2 -0.6 1975 1.9 0.6. -0.0 0.4 2.9 1976 0.2 0.4 -0.0 0.0 1.2 1977 -1.0 0.2 -0.0 0.0 -0.8 1978 -0.7 0.G 0.0 -0.5 -1.1 1979 0.6 0.1 -0.0 -0.5 0.1 1980 0.4 0.3 . -0.1 -1.0 -0.4 1981 -0.7 0.4 -0.0 -0.4 -0.6 1982 -1.4 0.3 -0.0 -0.1 -1.1 1983 -1.1 0.7 -0.1 0.0 -0.5 1904 -1.8 0.2 -0.0 0.1 -1.5 1985 -0.0 0.1 -0.1 0.1 0.1 1986 0.0 -0.1 -0.1 0.1 -0.1 1987 -0.9 0.0 -0.1 -O.t -1.0 11. Adjustments as percent of GDP 19:17 Monday. OLtuber 21. 1991 3b -- -. ---------------------- Countfy=lndia ----- - ---- - -- Total Adj. Export Output Import Adlit,ondl Including Promotion . Compression Substitution financing Addi. Fin 1914 -0.3 0.2 -0.2 0.3 0.1 1974 0.0 0.3 0.6 -1.5 -0.6 1975 1.1 -0.2 1.3 0.7 2.9 1976 1.1 -0.1 1.0 -0.9 1.2 1971 0.2 -0.2 -0.3 -0.6 -0.8 1978 -0.5 -0.2 -1.3 0.9 -1.1 1979 -0.3 0.4 -1.4 1.5 0.1 1980 -0.5 0.1 -2.2 2.1 -0.4 1981 0.5 -0.1 -2.4 1.4 -0.6 1982 0.4 -0.2 -1.4 0.1 -1.1 1983 0.9 -0.4 -0.2 -0.7 -0.5 1984 0.1 -0.2 -1.1 -0.4 -1.5 1985 -0.7 -0.3 0.5 0.6 0.1 1986 -0.4 -0.2 0.2 0.3 -0.1 1987 0.3 -0.0 -1.3 0.0 -1.0 - 1. Shocks as perceit oft GOP --- Counstry=lreland - --------------- ---- ferms-of-Trade Net lIntrst Shock (Fuel Export Volume Rate lrnsfrs lotal and other) Shock Shock Shock Sho^X 1Mt3 -4.5 0.1 -0.0 -1.5 -5.9 u1Y4 7.7 1.6 0.0 -2.2 7.1 1975 8.9 3.5 -0.0 -2.1 10.3 1976 3.5 2.3 -0.4 -0.2 5.2 1977 1.2 1.1 -0.4 -2.5 -0.7 1978 0.2 0.4 0.6 -3.5 -2.3 1979 3.3 0.4 0.9 -3.4 1.3 1980 6.9 1.4 0.8 -1.7 7.3 1981 5.5 2.7 0.8 1.3 10.3 set' 0.3 2.1 -0.2 1.2 3.3 1983 -3.6 4.8 -2.1 0.7 -0.2 1984 -1.7 1.6 -1.0 0.2 -0.9 1985 -1.0 0.9 2.0 1.2 -3.4 1986 -2.5 -0.6 -2.5 -'.6 -7.2 1987 -2.1 0.1 -1.1 -0.9 -4.0 1988 -2.4 -1.1 0.4 -1.0 -4.1 Ii. Adjustments as percent ot GOP 19:17 Monday. Oototber 21. 1991 38 - - ------ --------- Country=lreland -- - - ----- - Total Adj. Export Output Import Additional Including Promotion Compression Substitution financing Addl. Fin 19/3 -1.7 -0.3 -5.0 1.0 -5.9 1914 1.2 -0.7 -1.2 7.8 7.1 1975 5.6 -0.3 7.8 -2.8 10.3 1976 3.7 1.7 0.4 -0.6 5.2 1977 4.5 -0.5 -3.4 -1.4 -0.7 1978 5.6 -1.6 -7.4 1.0 -2.3 1979 3.6 -0.6 -9.0 7.4 1.3 1980 3.5 0.4 -0.6 4.0 7.3 1981 3.4 0.4 1.9 4.6 10.3 1982 2.2 1.2 5.1 -5.1 3.3 1983 8.9 1.2 0.0 -10.3 -0.2 1984 9.3 1.2 -2.7 -8.6 -0.9 1985 6.3 1.4 -2.9 -8.2 -3.4 1986 0.5 3.4 -3.6 -7.5 -7.2 ;S87 4.4 1.8 -1.9 -8.2 1988 2.3 1.7 -0.6 -7.S -4.1 I-i lb H 0 1. Shocks as percenit ot bUP ------------ Cotorktry=Kei,ya -- ----- -- Terms-of-Trade Net Intrst Shock (Fue1 Export Volume Rate Trnsfrs Total and other) Shock Shock Shock Shock 1973 4.2 0.0 0.4 0.4 5.1 1974 8.0 0.9 0.5 0.4 9.8 1975 9.2 2.2 -0.2 -0.4 10.9 1976 1.5 1.3 -1.1 0.6 2.4 1977 -6.6 0.6 -0.5 -0.8 -7.3 1978 0.4 0.3 0.5 -0.9 0.2 1979 4.4 0.3 0.6 -: .5 4.8 1980 8.6 0.8 0.5 -0.9 9.0 1981 9.5 1.4 0.4 -1.6 9.8 1982 4.4 1.1 -0.1 0.3 5.7 1983 3.0 2.5 -0.8 -0.2 4.6 1984 -2.1 0.7 -0.3 -0.0 -1.7 1985 1.7 0.4 0 7 -0.5 e 1.0 1986 -1.0 -0.3 -0.8 -0.3 -2.3 1987 2.3 0.1 -0.4 -0.3 1.7 11. Adjustments as pereent of (GDP 19:17 Monddy. Ootober 21. 19111 bo --- ------------------------ Count,y=Kenya --------------------- -------------------- ------ -------- Total Adj. Export Output Import Additional Including Promotion Compression Substitution financing Addl. Fin 1)1:3 1.6 -2.9 7.9 -1.5 5.1 1974 0.3 0.1 3.0 6.5 9.8 1975 0.5 2.7 7.3 0.5 10.9 1976 -2.4 3.4 6.6 -5.2 2.4 1977 -1.6 * 1.1 0.5 -7.4 -7.3 1978 -2.9 0.3 -7.0 9.7 0.2 1979 -2.8 -0.2 3.0 4.8 4.8 1980 1.6 0.3 2.5 7.9 9.0 1981 -1.1 1.2 13,0 -3.4 9.8 1982 -1.9 2.5 II.: -6.2 5.7 1983 0.2 3.0 13.8 .12.4 4.6 1984 -1.1 2.4 2.3 -5.4 -1.7 1985 -0.2 1.6 2.8 -3.3 1.0 1986 0.9 0.4 -1.2 -2.4 -2.3 1987 -0.4 0.0 -1.5 3.5 1'.7 1. 5hoCkb'85 percent ut LaUP - -- -------- ---------- ------ ---------------------- Country=Korea ----------------------------------------------------------- Terms-of-Trade Net Intrst Shock (Fuel Export Volume Rate Trnsfrs Total and other) Shock Shock Shock Shock 1973 3.5 0.0 0.1 -0.1 3.5 1974 9.7 0.8 0.2 -0.2 10.4 1975 8.7 2.5 -0.1 -0.1 10.9 1976 1.2 1.3 -0.4 -0.5 1.7 1917 -2.t 0.7 -0.2 0.1 -1.6 197B -2.3 0.3 0.2 -0.4 -2.3 1919 0.1 0.3 0.3 -0.1 0.6 1980 6.4 1.1 0.6 -0.1 8.0 1981 5.H 1.9 0.6 -0.1 8.2 1982 0.7 1.5 -0.1 -0.0 2.0 1983 -1.5 3.3 -0.8 -0.1 0.9 1984 -1.3 1.1 -0.3 -0.0 -0.6 1985 -0.8 0.6 -0.6i -0.0 -0.8 1986 -2.7 -0.5 -0.6 -0.4 -4.2 1987 -2.1 0.1 -0.2 -0.4 -2.5 1988 -2.2 -0.8 0.0 -0.3 -3.2 11. Adjustments as pert.ent of GUCD 19:17 MonUdy, OLtober 21. 1991 52 ---- - ---- ---------- ---------------------------- Country=Korea ------------------------------------------------ -------- lotal Adj. Export Output Import Additionral Includting Promotion Compression Substitution financing Addi. Fin 1973 10.7 -0.4 -3.3 -3.6 3.5 1974 7.6 -0.4 -1.9 5.1 10.4 1975 7.6 -0.2 1.1 2.4 10.9 1976 9.0 -0.7 -2.2 -4.5 1.7 1977 7.5 -0.8 -4.2 -4.1 -1.6 1978 5.2 -0.7 -6.8 -0.0 -2.3 1979 0.0 0.2 -3.9 4.3 0.6 1980 2.0 4.6 -0.8 2.2 8.0 1981 5.4 3.9 0.7 -1.8 8.2 1982 3.6 2.4 1.2 -5.2 2.0 1983 6.9 -0.8 0.6 -5.8 0.9 1984 3.9 -0.6 0.6 -4.5 -0.6 1985 2.1 0.1 1.9 -4.9 -0.8 1986 5.1 -0.5 -0.6 -8.2 -4.2 1987 8.9 -1.1 . -2.8 -7.5 -2.5 1988 6.5 -1.1 -2.3 -6.2 -3.2 '-I 1. Shocks "a percent ot GOP ---- ------------------------ Couptry=Malawi ---------------------------------- -------- Terms-of-Trade Net Intist Shock (Fuel Export Volume Rate Trnsfrs Total and other) Shock Shock Shock Shock 1973 3.1 0.0 -0.2 -0.6 2.3 1974 5.3 1.1 -0.6 0.2 6.1 1975 5.8 2.5 0.2 0.0 8.6 1976 4.5 . 1.4 -0.4 -2.6 2.9 1977 -1.9 0.7 0.0 -1.3 -2.5 1978 0.9 0.3 0.7 -2.7 -0.9 1979 6.5 0.4 2.5 -2.0 7.3 1980 9.2 0.9 2.0 -1.7 10.4 1981 1.7 1.6 1.6 -0.3 4.5 1982 -2.1 1.4 -0.2 0.9 -0.1 1983 0.2 3.1 -2.0 1.5 2.8 1984 0.3 1.0 -0.9 1.0 1.4 1985 4.0 0.6 -1.8 0.4 3.4 1986 4.9 -0.4 -2.1 -0.5 1.8 1987 2.8 0.1 -0.8 -0.5 1.6 1988 0.9 -0.8 0.1 -4.6 -4.4 11. Adjustments as perLent of GOP 19:17 Monday. OLtober 21. 1991 64 -------------------------------------------------- Country=Malawi -------------------------------------------------- Total Adj. Export Output Import Additional Including Promotion Compression Substitution financing Addi. Fin 1913 1.4 -0.'. 1.6 -0.1 2.3 1914 0.5 -0.4 2.1 3.8 6.1 1915 1.7 -1.1 -1.0 9.0 8.6 1976 1.5 -0.5 9.6 -7.7 2.9 '1977 -3.0 0.1 10.3 -9.9 -2.5 1978 -3.9 -0.9 1.2 2.8 -0.9 1979 1.8 -0.6 -1.4 7.5 7.3 1990 5.6 1.3 5.0 -1.5 10.4 1981 -1.9 4.3 9.3 -7.2 4.5 1982 -4.9 3.0 6.6 -4.7 -0.1 1993 0.6 0.9 3.0 -1.8 2.8 1984 4.8 0.2 6.0 -9.6 1.4 1985 3.1 0.0 0.9 -0.7 3.4 1986 -0.6 0.8 4.8 -3.1 1.8 1987 -1.5 1.2 2.4 -0.5 1.6 1988 -2.6 1.2 -2.7 -0.3 -4.4 1 CD f 0 * X 1. Sthocks *as percent of GDP ----------------------- Country=ialaysia ---------------- ------------------ --------- lerms-of-Trade Net Intrst Shock (Fuel Export Volume Rate Trnsfrs total and other) Shock Shock Shock Shock 1913 -4.0 0.0 0.4 0.1 -3.5 1974 -11.3 1.0 0.6 -0.1 -9.7 1975 0.5 3.3 -0.2 -0.2 3.3 1976 -2.1 1.9 -1.0 -0.1 -1.1 1977 -4.5 1.0 -0.5 -0.0 -4.1 1978 -3.0 0.4 0.6 0.1 -2.0 1979 -11.1 0.4 0.9 -0.1 -9.9 1980 -8.6 1.4 0.6 -0.0 -6.6 1981 1.8 2.9 0.5 0.0 5.2 1982 6.9 2.3 -0.1 0.0 .9.1 1983 3.6 4.3 -1.5 -0.1 6.4 1984 -2.2 1.2 -0.6 0.0 -1.6 1985 1.8 0.8 -1.2 -0.1 1.4 1986 11.5 -0.7 -1.5 -0.2 9.1 1987 0.5 0.1 -0.7 -0.4 -0.5 11. Adjustments as percent of GDP 19:17 Morday. October 21. 1991 66 .--- -- -- ---- --- - ----------------------- Country=Malaysia ---------------------------------------------- -------- lotal Adj. Export Output Import Additional Including Promotion Compression Substitution financing Addl. Fin 1973 -0.8 -2.3 2.6 -3.0 -3.5 1974 -6.4 -3.9 -2.1 2.7 -9.7 1975 -0.9 -2.5 4.7 2.0 3.3 1976 6.2 -1.8 3.1 -8.7 -1.1 1977 2.7 -1.2 0.5 -6.1 -4.1 1978 4.6 -0.7 -3.9 -2.0 -2.0 1979 3.0 -0.9 -5.8 -6.2 -9.9 1980 0.5 -1.6 -4.9 -0.5 -6.6 1981 -2.1 -2.2 -1.2 10.7 5.2 1982 1.4 -0.7 -1.4 9.8 9.1 1983 11.9 -1.7 -1.4 -2.3 6.4 1984 9.9 -0.5 -0.1 -11.0 -1.6 1985 6.9 2.9 3.1 -11.5 1.4 1986 10.2 4.8 0.7 -6.6 9.1 1987 8.6 3.0 -2.2 -9.9 -0.5 OQ- Y H ---- ------------------- Country=United Stdtes ---------------------------------------------- -- Terms-of-Trade Net Intrst Shock (Fuel Export Volume Rate Trnsfrs Total and othtr) Shock Shock Shock Shock 1973 0.2 0.0 -0.1 0.0 0.1 1974 1.1 0.3 -0.2 0.2 1.5 1975 0.8 0.8 0.1 -0.0 1.7 1976 0.2 0.5 0.3 -0.0 1.0 1977 0.2 0.3 0.2 -0.0 0.6 1978 0.3 0.1 -0.2 0.0 0.2 1979 0.7 0.1 -0.3 0.0 0.5 1980 1.6 0.4 -0.2 0.1 1.8 1981 0.7 0.6 -0.2 0.0 1.2 1982 -0.0 0.5 0.0 0.1 0.6 1983 -0.6 1.1 0.2 0.0 0.8 1984 -0.3 0.3 0.1 0.1 0.2 1985 -0.2 0.1 0.1 0.1 0.1 1986 -0.4 -0.1 0.1 0.1 -0.3 1987 0.2 0.0 0.0 -0.0 0.3 1988 0.2 -0.2 -0.0 -0.0 0.0 11. Adjustments as percent of GDP 19:17 Monday. October 21. 1991 106 ---------------------------------------------------- Country=United States ---------------- Total Adj. Export Output Import Additional Including Promotion Compression Substitution financing Adol. Fin 1913 0.6 -0.1 -0.4 0.1 0.1 1974 1.0 0.1 -0.3 0.7 1.5 1975 0.8 0.3 0.8 -0.2 1.7 1976 -0.1 0.1 -0.5 1.5 1.0 1977 -0.4 -0.1 -1.0 2.1 0.6 197-8 0.0 -0.3 -0.9 1.4 0.2 1979 0.7 -0.2 -0.2 0.2 a.5 1980 1.0 0.2 0.6 0.0 1.8 19B1 0.3 0.2 0.5 0.2 1.2 1982 -1.2 0.5 0.5 0.8 0.6 1983 -0.6 0.1. -0.5 1.8 0.8 1984 -0.4 -0.3 -1.4 2.3 0.2 1985 -0.3 -0.3 -0.9 1.7 0.1 1986 -0.4 -0.2 -1.1 1.4 -0.3 1987 0.1 -0.2 -0.5 0.8 0.3 1988 0.8 -0.2 -0.2 -0.3 0.0 CD. tri Ci2 O . '. II Policy Research Working Paper Series Contact Title Author Date for paper WPS 842 Capital Flows to South Asia and Ishrat Husain January 1992 S. King-Watson ASEAN Countries: Trends, Kwang W. Jun 31047 Determinants, and Policy Implications WPS843 How Financial Markets Affect Long- Ejaz Ghani January 1992 A. Nokhostin Run Growth: A Cross-Country Study 34150 VWPS844 Heterogeneity, Distribution, and Ravi Kanbur January 1992 WDR Office Cooperation in Common Property 31393 Resource Management WPS845 Inflation Stabilization in Turkey: Luc Everaert January 1992 B. Mondestin An Application of the RMSM-X Model 36071 WPS846 Incorporating Cost and Cost- Larry Forgy January 1992 0. Nadora Effectiveness Analysis into the Diana M. Measham 31091 Development of Safe Motherhood Anne G. Tinker Programs WPS847 Coping with the Legacies of Silvia B. Sagari January 1992 M. Guirbo Subsidized Mortgage Credit in Loic Chiquier 35015 Hungary WPS848 How EC 1992 and Reforms of the Merlinda D. Ingco Feb. uary 1992 P. Kokila Common Agricultural Policy Would Donald 0. Mitchell 33716 Affect Developing Countries' Grain Trade WPS849 Financial Structures and Economic Ross Levine February 1992 W. Pitayatonakarn Development 37666 WPS850 Fiscal Adjustment and the Real Kazi M. Matin February 1992 D. Ballantyne Exchange Rate: The Case of Bangladesh 38004 WPS851 Sources of World Bank Estimates Eduard Bos February 1992 0. Nadora of Current Mortality Rates My T. Vu 31091 Patience W. Stephens WPS852 How Health Insurance Affects the Joseph Kutzin February 1992 0. Nadora Delivery of Health Care in Developing Howard Barnum 31091 Countries WPS853 Policy Uncertainty, Information Gerard Caprio February 1992 W. Pitayatonakarn Asymmetries, and Financial 37664 Intermediation WPS854 Is There a Case for an Optimal Export Takamasa Akiyama February 1992 G. llogon Tax on Perennial Crops? 33732 WPS855 Sovereign Debt: A Primer Jonathan Eaton February 1992 S. King-Watson 31047 Pollcy Research Working Paper Series Contact Title Author Date for paper WPS856 Latin American Women's Earnings George Psacharopoulos February 1992 L. Longo and Participation in the Labor Force Zafiris Tzannatos 39244 WPS857 The Life Insurance Industry in the Kenneth M. Wright February 1992 W. Pitayatonakarn United States: An Analysis of Eccnomic 37664 and Regulatory Issues WPS858 Contractual Savings and Emerging Dimitri Vittas February 1992 W. Pitayatonakarn Securities Markets 37664 WPS859 Macroeconomic Management and Ibrahim A. Elbadawi February 1992 V. Barthelmes the Black Market for Foreign Exchar ge 39175 in Sudan WPS860 The Restrictiveness of the Multi- Refik Erzan February 1992 G. llogon Fibre Arrangement on Eastern Christopher Holmes 33732 European Trade WPS861 Private Saving in Mexico, 1980-90 Patricio Arrau February 1992 S. King-Watson Daniel Oks 31047 WPS862 Higher Education in Egypt Alan Richards February 1992 J.Vythilingam 33677 WPS863 Intergovemmental Fiscal Relations Roy Bahl February 1992 A. Bhalla in China Christine Wallich 37699 WPS864 Privatization of Natural Monopoly Ralph Bradburd February 1992 E. Madrona Public Enterprises: The Regulation 37496 Issue WPS865 Food Security and Health Security: Harold Alderman February 1992 C. Spooner Explaining the Levels of Nutrition in Marito Garcia 30464 Pakistan WPS866 Regulatory and Institutional Impacts Robert Pardy February 1992 Z. Seguis of Securities Market Computerization 37665 WPS867 The Rationale and Performance of Dimitri Vittas February 1992 W. Pitayatonakarn Personal Pension Plans in Chile Augusto Iglesias 37664 WPS868 Mortality Reductions from Measles Michael Koenig March 1992 0. Nadora and Tetanus Immunization: A Review 31091 of the Evidence WPS869 Financing Local Government in Richard Bird March 1992 A. Bhalla Hungary Christine Wallich 37699 WPS870 Economic Shocks and the Global F. Desmond McCarthy March 1992 M. Divino Environment Ashok Dhareshwar 33739