T H E W O R L D B A N K Global 34414 v 1 Development Finance Mobilizing Finance and ManagingVulnerability 2005 I : A N A L Y S I S A N D S T A T I S T I C A L A P P E N D I X Global Development Finance Mobilizing Finance and ManagingVulnerability I: Analysis and Statistical Appendix Global Development Finance Mobilizing Finance and ManagingVulnerability I : A N A L Y S I S A N D S T A T I S T I C A L A P P E N D I X 2005 T H E W O R L D B A N K © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 08 07 06 05 This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. 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Table of Contents Foreword ix Acknowledgments xi Selected Abbreviations xiii Overview and Policy Messages: Mobilizing Finance and Managing Vulnerability 1 Capital flows to developing countries continued to recover, but at a slower pace 2 The world economy is slowing 3 Growing global imbalances pose risks for emerging market economies 4 The complexity of developing-country debt poses new challenges 5 Meeting poor countries' financing needs requires recognition of the countries' special challenges 8 Chapter 1 Financial Flows to Developing Countries: Recent Trends and Near-Term Prospects 13 Capital flows to developing countries 13 Capital flows from the private sector 15 Capital flows from the official sector 22 Annex: Recent trends in workers' remittances to developing countries 28 Notes 29 References 29 Chapter 2 Global Outlook and the Developing Countries 33 Global growth 34 Global imbalances, currencies, and inflation 38 World trade 40 Commodity markets 43 Risks and policy priorities for the global economy 44 Notes 47 References 48 Chapter 3 Global Imbalances and Emerging Market Economies 51 The mixed effect of exchange-rate fluctuations 52 Global monetary tightening: higher interest rates 52 Potential volatility in emerging-market spreads 54 Capital flows and reserve accumulation 56 Promoting stability in global capital flows 61 Notes 63 References 63 v G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Chapter 4 Complex Challenges in Developing-Country Debt 67 The change since the 1990s 68 External debt trends in emerging markets 72 The rise of domestic debt markets 76 Balancing external and domestically financed debt 81 No room for complacency, despite improvements 85 Notes 85 References 86 Chapter 5 Meeting the Financing Needs of Poor Countries 89 The external financing environment in poor countries 90 Other developing countries as a source of finance for poor countries 99 Meeting the Monterrey challenge--an agenda for donors and recipients 102 Sound economic and pro-poor policies in recipient countries 109 Notes 110 References 111 Statistical Appendix 115 Tables 1.1 Net capital flows to developing countries, 1996­2004 14 1.2 Regional composition of net FDI inflows to developing countries, 2002­4 16 1.3 Regional composition of net portfolio flows to developing countries, 2002­4 19 1.4 Net official development assistance (ODA) from principal donor countries, 1990­2003 23 1.5 Net bilateral ODA and special purpose grants, 1990­2003 24 1.6 Projected increases in ODA from DAC donors, 2003­6 26 1A.1 Workers' remittances to developing countries, 1990­2004 28 1A.2 Developing countries with highest remittance flows, 2001 and 2003 29 2.1 The global outlook in summary 35 3.1 Current account balances in developing countries, 2000­4 57 3.2 Ratios of foreign-exchange reserves to imports and external short-term debt in emerging market economies, 2004 59 3.3 Reserve carrying costs in emerging markets 60 4.1 Selected indicators of the burden of external debt, 1997­2002/3 69 4.2 Corporate and financial sector comparison for Asian crisis countries, 1998 and 2003 71 4.3 External indebtedness of top 20 debtors, 1997 and 2003 74 5.1 Net capital flows to poor countries, 1990­2004 90 Figures 1.1 Financial flows to developing countries, 1990­2004 14 1.2 Financial flows to developing countries as a percentage of GDP, 1990­2004 15 1.3 Current account balance of developing countries, 1976­2004 15 1.4 Financial flows to developing countries from the private sector, 1990­2004 16 1.5 Net equity flows to developing countries, 1990­2006 16 1.6 Share of net FDI inflows to low-income and least developed countries, 1990­2004 17 vi T A B L E O F C O N T E N T S 1.7 FDI outflows from developing countries, 1990­2004 17 1.8 Equity price indexes, 2003­4 19 1.9 Net private debt flows to developing countries, 1990­2004 20 1.10 Gross private flows to developing countries, 1990­2004 20 1.11 Emerging-market bond spreads, 1997­2004 21 1.12 Official debt flows and foreign aid grants, 1990­2004 22 1.13 ODA as a percentage of GDP in recipient countries, 1990­2003 23 1.14 ODA as a percentage of GNI in DAC donor countries, 1990­2006 25 1.15 Percentage of ODA disbursed to Sub-Saharan Africa, 1990­2003 26 1.16 ODA and grants from nongovernmental organizations, 1990­2003 26 2.1 Developing-country and world growth, 1980­2007 34 2.2 Slowing industrial production, September 2003­May 2005 36 2.3 Regional growth projections, 2003­7 36 2.4 Estimated global imbalances in current accounts, 2004 38 2.5 Financing the U.S. current account: net flows by asset type, 2000, 2002, and 2004 38 2.6 Appreciation of developing-country currencies against the dollar between January 2002 and February 2005 39 2.7 Interest rates and the weakening dollar, 1995­2005 39 2.8 Very low real interest rates in the United States, 1997­2005 40 2.9 Rising consumer inflation, 2000­4 40 2.10 Slower trade growth, 2003­5 41 2.11 World semiconductor sales and East Asian technology exports, 1997­2005 41 2.12 Real effective revaluations of developing-country exchange rates, 2002­5 42 2.13 Commodity prices, 2000­4 43 2.14 Developing-country demand and commodity prices, 2003 and 2004 43 2.15 Metals--lower stocks mean higher prices, 1995­2005 44 2.16 Terms-of-trade gains to developing countries from commodity price changes, 2001­4 44 2.17 Effects of higher interest rates on GDP growth, 2005­7 46 2.18 The dollar in historical perspective, 1970­2004 46 3.1 Impact of dollar depreciation on debt service ratios, 2002­4 52 3.2 Short-term policy rates in developed countries, 2002­4 53 3.3 Short-term policy rates in major emerging markets, 2002­4 53 3.4 Movement of real federal fund rates, 1991­2004 53 3.5 U.S. Treasury implied forward rates 54 3.6 Estimated additional debt service burden due to increase of one percentage point in U.S. interest rates 54 3.7 Change in sovereign bond spreads following increase of 200 basis points in U.S. interest rates, by degree of indebtedness of country 57 3.8 World current account surpluses as shares of U.S. current account deficit, 2004 57 3.9 Capital flows, current account balances, and reserve accumulations in developing countries, 1980­2004 57 3.10 Global foreign-exchange reserve accumulation, 1999­2004 58 3.11 Foreign-exchange reserves in developing countries, 1999­2004 58 3.12 Foreign official assets in the United States, 1980­2003 60 4.1 Composition of developing countries' external debt, 1990­2003 69 4.2 Developing countries' total public sector debt, 1990­2003 70 4.3 Burden of public debt: external vs. domestic, 1990­2002 70 4.4 Credit quality of emerging markets, 1997­2004 71 vii G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 4.5 Change in net private debt flows (long-term plus short-term) of crisis countries and others, 1994­2003 72 4.6 Total external debt of developing countries, 1990­2003 74 4.7 Composition of outstanding external debt of developing countries, 1970­2003 74 4.8 Substitution of bond financing for bank credit, 1990­2002 75 4.9 Volatility in acquisition of new debt, 1994­2003 75 4.10 Bank credit to developing countries, 1970­2003 76 4.11 Composition of outstanding market-sourced debt in the developing world, 1970­2003 76 4.12 Public debt stocks in emerging markets, 1997 and 2002 77 4.13 Stock of outstanding domestic bonds, by sector, 1993­2002 77 4.14 Share of domestic debt in total public debt in selected Asian countries, 1990­2003 79 4.15 Stock of domestic bonds outstanding in emerging markets, by region, 1993­2002 79 4.16 Share of domestic debt in total public debt in selected Latin American countries, 1990­2003 80 4.17 Distribution of volatility in risk premium for selected developing countries 83 4.18 Average credit quality, by region, 1999­2004 84 5.1 Shift from aid toward FDI in poor countries, 1990­2003 91 5.2 ODA to poor countries relative to total ODA, 1990­2003 91 5.3 Sectoral distribution of ODA to poor countries, 1990­2002 93 5.4 Natural resource availability and ratios of FDI to GDP in poor countries, 1990­2003 94 5.5 Improving risk conditions in poor countries, 1985­2003 97 5.6 FDI in oil- and mineral-exporting poor countries, 1990­2003 98 5.7 Global military spending and aid, 1992­2003 104 5.8 Change in volatility of aid, 1970­2002 106 5.9 Volatility of different components of aid, remittances, and FDI, 1990­2002 106 Boxes 1.1 Measuring capital flows in dollars versus as a percentage of GDP 18 1.2 Implementation of the Heavily Indebted Poor Countries (HIPC) Initiative 25 1.3 Aid in the wake of the Asian tsunami 27 3.1 Asset prices and unanticipated news 55 3.2 Determinants of emerging-market spreads 56 3.3 Developing countries as exporters of capital--a new twist on the Bretton Woods system 59 4.1 Currency valuation effects have significant impacts 73 4.2 The role of short-term bank credit in trade financing 75 4.3 Foreign investment in developing countries' domestic debt markets 78 4.4 Assessing the risk of external versus domestic debt 84 5.1 Wide variations in the mix of external financing in poor countries 92 5.2 Growing financing role for NGOs 94 5.3 Workers' remittances to poor countries 95 5.4 The rise, fall, and recovery of FDI to poor countries, 1990­2003 96 5.5 Realizing the development promise of trade 97 5.6 Collapse in international bank lending to poor countries 98 5.7 UNDP, Japan, and triangular cooperation 101 5.8 New sources of financing 105 5.9 Securitization of future workers' remittances and other external flows 108 viii . Foreword T HE GLOBAL ECONOMY IS AT A countries have improved their capacity to manage turning point. Growth has peaked, and pres- debt, and many countries have acted aggressively sures to address global imbalances are grow- to address the weaknesses that contributed to pre- ing, exposing important risks facing both developed vious crises. But external debt burdens have risen and developing countries as the needed adjustments in more than half of emerging market economies, occur. Whether or not the rebalancing occurs in an and, in many, domestic borrowing has risen dra- orderly fashion will have a crucial impact on matically as well. Although the shift from external whether recent improvements in developing- to domestic borrowing can reduce vulnerability to country performance can be sustained--and external shocks, it also carries risks from possible whether progress towards the Millennium Develop- overborrowing or inadequate supervision. The ment Goals (MDGs) can be accelerated. The stakes central policy message is that excessive borrowing are large. is risky, regardless of the source, and that efforts to Global economic performance over the last avoid the discipline required by external borrow- year provides continuing evidence of the growing ing by switching to domestic sources will fail. interdependence of developed and developing Emerging market economies are also vulnera- countries. Global growth was high, in part from ble to the possible impact of larger-than-expected record expansion in developing countries, which increases in interest rates (which would translate have been benefiting from favorable global condi- into higher borrowing costs) and possible capital tions and from years of domestic policy improve- losses on dollar-denominated assets from dollar ments. Financial flows to developing countries depreciation. The impact could be particularly during 2004 reached levels not seen since the onset acute for economies in which reserve accumula- of the financial crises of the late 1990s. And devel- tion far exceeds normal prudential levels, which oping countries' increasing integration with the entails fiscal costs as monetary authorities issue global financial system continues to raise their low-yield securities to absorb the excess liquidity stake in the health and resilience of that system. created by reserve accumulation. But the strong recovery has also given rise to For low-income countries, the major vulnera- sizable global financial imbalances that will have bilities stemming from the current global environ- to be addressed. If the global growth cycle has in- ment are linked less to the evolution of interest deed peaked, the likely scenario involves contin- rates and exchange rates and more to the future ued (though slower) growth and an orderly reduc- of flows of aid from bilateral and multilateral tion in imbalances. But there are also risks--of sources. While the challenge of generating suffi- higher-than-expected interest rates, of abrupt and cient aid to help low-income countries reach the disorderly exchange-rate movements, and of a Millennium Development Goals (MDGs) remains pronounced global slowdown that could encour- large, there are some encouraging signs of age protectionist sentiments and curtail expansion progress, as some donors have increased their of trade and investment linkages between devel- commitment levels and aid flows have turned up- oped and developing countries. wards. But concerns persist about whether these The resilience of developing-country financial increases are large enough, and whether adequate positions will be tested as global conditions tighten, flows are reaching areas that need them most, such with special concern for the vulnerability posed by as Sub-Saharan Africa. As the global community increased debt burdens, which have been at the reevaluates progress towards the MDGs in the heart of the financial crises over the last decade. coming year, donors and recipients alike must There is some good news here--aggregate exter- remain focused on the imperative of generating nal debt indicators are down, many developing resources that can be effectively used in developing ix G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 countries that have supportive policy and institu- volume provides analysis and summary tables on tional environments. selected macroeconomic indicators and financial Equally encouraging is the growing evidence flows. A separate volume contains detailed, stan- that financial flows other than official aid are dardized, external-debt statistics for 136 countries. growing--from rapid expansion in private invest- More information on the analysis, including ment (including substantial growth in South-South additional material and sources, is available at investment flows), to private grants, to other www.worldbank.org/prospects. A companion on- sources of foreign exchange such as workers' remit- line publication, Prospects for the Global Economy, tances. While such flows cannot and should not is available in English, French, and Spanish at substitute for sustained and targeted official aid, www.worldbank.org/globaloutlook. they nonetheless highlight the growing options and opportunities open to low-income countries. Global Development Finance is the World François Bourguignon Bank's annual review of the external financial Chief Economist and Senior Vice President conditions facing developing countries. The current The World Bank x . Acknowledgments T HIS REPORT WAS PREPARED BY THE Bussolo, Betty Dow, Annette de Kleine, Fernando International Finance Team of the World Martel Garcia, Don Mitchell, Mick Riordan, and Bank's Development Prospects Group Shane Streifel. The technical aspects of the forecast (DECPG). Substantial support was also provided were handled by Milko Iantchev, while Ketaki by staff from other parts of the Development Eco- Jain, Denis Medvedev, and Caroline Diaz-Bonilla nomics Vice Presidency, World Bank operational provided additional technical support. regions and networks, the International Finance The outlook for Sub-Saharan Africa was Corporation, and the Multilateral Investment carried out in cooperation with Celine Kauffman Guarantee Agency. (Organisation for Economic Co-operation and The principal author was Jeffrey Lewis, with Development [OECD] Development Centre), with direction by Uri Dadush. The report was prepared input from Delfin Go. Milan Brahmbhatt provided under the general guidance of François Bour- input for the East Asia and Pacific outlook. Other guignon, World Bank Chief Economist and Senior contributors to regional outlooks included Vice President. The principal authors of each Guillermo Perry (Latin America and the Caribbean), chapter were: Ejaz Syed Ghani (South Asia), Ali Mansoor (Europe and Central Asia), and Mustapha Nabli (Middle Overview Jeffrey Lewis, with contributions East and North Africa). Background notes and from the International Finance papers were prepared by Paul Masson and Jean Team and Andrew Burns Jose Padou (University of Toronto) and Neeltje Chapter 1 Douglas Hostland, Dilek Aykut, Van Horen. The online companion publication, Neil Bush, Mansoor Dailami, Prospects for the Global Economy, was prepared by Himmat Kalsi, Eung Ju Kim, Jeffrey Andrew Burns, with the assistance of the Global Lewis, and Dilip Ratha Trends team. The Web site was designed by Hager Chapter 2 Andrew Burns Ben-Mahmoud, Oxana Michenko, and Kavita Chapter 3 Mansoor Dailami, Jeffrey Lewis, Watsa. The data platform, graphics engine, and Web and Eung Ju Kim interface were produced by Reza Farivari, Sarubh Chapter 4 Himmat Kalsi and Jeffrey Lewis Gupta, David Hobbs, Shahin Outadi, Raja Reddy Chapter 5 Neil Bush, Dilek Aykut, Douglas Komati Reddy, Malarvizhi Veerappan, and Cherin Hostland, Eung Ju Kim, Jeffrey Verghese. Lewis, Dilip Ratha, and Neeltje Van The report also benefited from the comments Horen of the Bank's Executive Directors, made at an in- formal board meeting on March 8, 2005. Preparation of the statistical appendix was Many others provided input, comments, guid- managed by Eung Ju Kim, with inputs from Mick ance and support at various stages of the report's Riordan, Milko Iantchev, and Dilek Aykut of preparation. Kevin Barnes, Barbara Mierau-Klein, DECPG, and the Financial Data Team of the De- Vikram Nehru, Malvina Pollock, and Philip Suttle velopment Data Group (DECDG), led by Ibrahim (J.P. Morgan Chase) were discussants at the Levent and including Nevin Fahmy, Shelly Fu, and Bankwide review. In addition, within the Bank, Gloria R. Moreno. The financial flow and debt comments and help were provided by Alberto estimates were developed in a collaborative effort Agbonyitor, Paloma Anos-Casero, Jorge Araujo, between DECPG and DECDG. The main macro- Amarendra Bhattacharya, Milan Brahmbhatt, Nina economic forecasts were prepared by the Global Budina, Christopher Juan Costain, Jean-Jacques Trends Team of DECPG, led by Hans Timmer and Dethier, Mark Dorfman, Shahrokh Fardoust, including John Baffes, Andrew Burns, Maurizio Norbert Fiess, Alan Gelb, Coralie Gevers, Ejaz xi G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Ghani, Indermit Gill, Doris Herrera-Pol, Gregory Donovan, Carlos Humud, Santos Mahung, Carlos Ingram, Philippe Le Houerou, Ali Mansoor, Paldao, and Antoine Chevrier (Inter-American Susan McAdams, Celestin Monga, Christopher Agency for Cooperation and Development); Neal, Richard Newfarmer, Julia Nielson, Akihiko Hiroshi Yoneda and Lori Merritt (Japan Interna- Nishio, Brian Pinto, David Rosenblatt, Francis tional Cooperation Agency); and Steven Radelet Rowe, Carlos Silva-Jauregui, Mark Sundberg, Eric (Center for Global Development). Swanson, Ekaterina Vostroknutova, Yan Wang, and Steven Kennedy edited the report. Maria Gianni Zanini. Amparo Gamboa provided assistance to the team. Outside the Bank, several people contributed Dorota Nowak managed production and dissemi- through meetings and correspondence on issues nation activities by DECPG. Book design, editing, addressed in the report. These include: Brian and production were coordinated by Melissa Hammond and Simon Scott (OECD Development Edeburn and Cindy Fisher of the World Bank Assistance Committee); Alfonso Quiñonez, Sheila Office of the Publisher. xii . Selected Abbreviations AGFUND Arab Gulf Program for United Nations ICRG International Country Risk Guide Development Organizations IDA International Development Association AGOA African Growth and Opportunity Act (World Bank) (United States) IFC International Finance Corporation ASEAN Association of Southeast Asian Nations IFF International Finance Facility BADEA Arab Bank for Economic Development IFFIm IFF for Immunization in Africa IFI International financial institution BIS Bank for International Settlements IMF International Monetary Fund CAC Collective action clause LICUS Low-income countries under stress CPIA Country Policy and Institutional JICA Japan International Cooperation Agency Assessment (World Bank) LIBOR London interbank offered rate DAC Development Assistance Committee, MDG Millennium Development Goals OECD MFA Multi-Fibre Arrangement DPR Diversified payment rights MIGA Multilateral Investment Guarantee Agency DRS Debtor Reporting System (World Bank) NEPAD New Partnership for Africa's Development EBA Everything But Arms (European Union) NERICA New Rice for Africa EMBI Emerging Markets Bond Index NGO Nongovernmental organization EU European Union ODA Official development assistance FDI Foreign direct investment OECD Organisation for Economic Co-operation G-3 Group of Three (European Union, Japan, and Development United States) OPEC Organization of Petroleum-Exporting G-7 Group of Seven (Canada, France, Germany, Countries Italy, Japan, United Kingdom, PPP Purchasing power parity United States) PRSP Poverty reduction strategy paper G-8 G-7 plus Russian Federation S&P Standard and Poor's GAVI Global Alliance for Vaccines and SDDS Special Data Dissemination Standard (IMF) Immunization UN United Nations GDP Gross domestic product UNCTAD United Nations Conference on Trade and GNI Gross national income Development GNP Gross national product UNDP United Nations Development Programme HIPC Heavily Indebted Poor Countries Initiative WARDA West Africa Rice Development Association IACD Inter-American Agency for Cooperation WEO World Economic Outlook (IMF) and Development WTO World Trade Organization IBRD International Bank for Reconstruction and Development xiii . Overview and Policy Messages: Mobilizing Finance and Managing Vulnerability 2 004 WAS A ROBUST YEAR FOR THE last two years can be sustained over the medium global economy, especially for developing term. countries, which recorded their fastest growth Emerging market economies with access to in more than three decades. The global recovery global finance are particularly vulnerable to changes strengthened, with much of the momentum coming in interest and exchange rates that may occur as from the United States and Asia (notably China), markets anticipate and adjust to policy measures in- and broadened, with a pickup in Latin America, tended to relieve the yawning imbalances. Countries acceleration in Japan, and modest recovery in the that have accumulated large dollar-denominated European Union (EU). Driven by favorable global reserve holdings face acute pressures and large po- conditions and strong domestic performance at tential investment losses from the weakening dollar, home, developing countries continued to attract though their dollar-denominated debt burdens may capital in 2004, although more slowly than in 2003. ease. Those that have failed to take advantage of Favorable global economic and financial con- recent favorable conditions to lighten their debt ditions over the past few years, along with domes- burden may face debt-servicing difficulties as tic policy initiatives, have improved economic conditions worsen. All countries, whatever their fundamentals in most developing countries, circumstances, stand to benefit from a better under- strengthening their external positions and making standing of the complex challenges that are chang- them less susceptible to external pressures. But sig- ing the borrowing environment (both external and nificant global financial imbalances suggest the domestic) and the options open to policymakers. need for adjustment. History has shown time and The risks are somewhat different for low- again that financial crises often take markets and income countries that are more reliant on official policymakers by surprise. The Asian crisis that and concessional sources of external finance. Offi- erupted in mid-1997 offers a striking example-- cial aid flows are vulnerable to growing fiscal pres- large exchange-rate exposures on balance sheets in sures in donor countries, while private flows will the corporate, financial, and public sectors were come to reflect tightening global conditions. Keep- not widely recognized until after the fact. ing growth on a sustainable path as the global Valuable lessons can be learned from these recovery evolves will therefore be a major factor in past episodes. One is that there is a tendency for attaining the Millennium Development Goals financial markets and policymakers to miss the embraced by the world's leaders at the UN Millen- warning signs and overshoot, making the neces- nium Summit in 2000. sary adjustment larger when it does occur. Over- The theme of this year's edition of Global shooting has contributed to "boom-bust" cycles Development Finance--mobilizing finance and in global financial markets, which have impeded managing vulnerability--embraces three key economic development in many regions. In the challenges: current context, the memory of past mistakes raises the question of whether the strong pickup · Managing the vulnerability inherent in global in capital flows to developing countries over the economic and financial imbalances, 1 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 · Confronting the risks posed by the new com- the previous two years. While the concentration plexities in developing country debt, and of FDI flows remains high (five emerging market · Mobilizing and diversifying sources of finance economies account for 60 percent of FDI and for low-income countries with more limited 88 percent of the increase), the share flowing to access to international capital markets. low-income countries reached 11 percent, the highest in 15 years. Reported FDI outflows from developing countries surged dramatically, reach- ing an estimated $40 billion in 2004 (from only Capital flows to developing $3 billion in 1991). The bulk of the FDI outflows countries continued to recover, originated in countries that have been major re- but at a slower pace cipients of inflows in recent years. In response to T he strong recovery of capital flows to devel- greater foreign competition, domestic firms in oping countries that began in 2003 carried those countries have launched an aggressive over to 2004, albeit at a reduced pace. Total pri- search for markets abroad--often elsewhere in vate and official net debt flows totaled a record the developing world. high of almost $325 billion, up significantly from $200 billion during 2000­2. The pickup is more Private debt flows showed strong gains from modest after taking into account factors such record levels of bond issuance as inflation, economic growth, and the sizable Net international bank lending continued to depreciation of the dollar against most major decline as net bond flows rebounded sharply, currencies. Net capital flows to developing coun- reaching a record high in 2004. Gross bond is- tries equaled 4.5 percent of their gross domestic suance surpassed gross bank lending for the first product (GDP) in 2004, up slightly from 4.3 per- time, although bank lending remains available to cent in 2003, but significantly below highs ex- a larger group of countries. The strong gains in ceeding 6 percent reached in the mid-1990s bond issuance over the past two years reflect both (chapter 1). supply and demand factors--ample global liquid- ity, low advanced-country interest rates promoting Developing countries continued to export a "search for yield," and a broad-based improve- capital and accumulate reserves ment in credit fundamentals in many emerging Drawing on healthy trade balances, developing markets. Apart from some short-lived volatility in countries have continued to generate large current April­May (as the tightening of U.S. monetary account surpluses, a dramatic turnaround from policy began), emerging-market bond spreads fell past decades. Combined with expanding capital steadily during 2004, reaching a near-record low flows, the growing surpluses contributed to accel- by the end of the year. erating accumulation of foreign reserves by devel- oping countries--from $292 billion during 2003 Official aid continued to shift from to $378 billion during 2004. Although the largest loans to grants reserve accumulation was concentrated in Asia, Recent figures confirm the continuing structural the phenomenon was widespread. More than shift in official development assistance (ODA) from three-quarters of developing countries reporting loans to grants over the last several years. While bi- reserve changes (101 of 132) accumulated reserves lateral aid grants have risen annually since 2001, net during the year. A sizable portion of this new accu- official lending, largely multilateral, has declined mulation is invested in U.S. Treasuries, indicative dramatically, falling from $27 billion in net inflows of the growing stake of developing countries in the to developing countries, to $25 in net outflows in global financial system. 2004. The largest factor underlying this shift has been a $30 billion net decline in lending by the Inter- FDI inflows increased modestly, but outflows national Monetary Fund (IMF), reflecting repay- surged ment of sizable crisis-related disbursements made in FDI inflows to developing countries increased 2001. But net lending by the World Bank also fell by during 2004, partly offsetting the decline during $9 billion over the period, as several countries 2 O V E R V I E W A N D P O L I C Y M E S S A G E S repaid large structural adjustment loans, and other will remain above the rising trend for much of the Bank loans were repaid ahead of schedule. past two decades. As a result, commodity prices are While ODA figures for 2004 are not yet avail- expected to ease only slowly, and inflation pres- able, promising signs of expansion since the sures will continue to build in a number of develop- March 2002 Monterrey Conference on Financing ing countries. for Development are evident, with an increase in 2003 of around $10 billion to $69 billion (although Global imbalances and major currencies after accounting for inflation and exchange rate are stabilizing changes, the real increase was only 5 percent). A combination of a somewhat tighter fiscal policy Sub-Saharan Africa has received 60 percent of the and higher interest rates in the United States is pro- increases in ODA disbursements over the five-year jected to halt and even reverse the widening current period from 1998 to 2003. However, with most of account deficit. Higher U.S. interest rates will in- these funds allocated to postconflict situations, the crease the willingness of private-sector investors to increase in development aid has been small. hold dollars, and the two effects should slow the Five bilateral donors have increased disburse- currency's tendency to depreciate. Co-movements ments to levels exceeding the United Nations (UN) among the currencies of developing countries and target of 0.7 percent of GNI; four additional donors the compensating effect of an appreciation of the have specified explicit time tables for meeting the euro have left the real effective exchange rate of UN target over the next few years. ODA as a share most developing countries broadly stable. However, of gross national income (GNI) in donor countries the large swings in the bilateral exchange rates of the is projected to rise from 0.25 percent in 2003 to major industrialized economies impose adjustment 0.30 percent in 2006--implying a 9 percent annual costs on firms that are expected to augment trade increase in ODA in real terms, well above that growth. achieved over the past two years (6 percent). Significant downside risks persist A reduction in the pace at which central banks are The world economy is slowing accumulating dollars, a weakening in investors' The growth cycle is peaking appetite for risk, or a greater than anticipated T he year 2004 was a record year for developing pickup in inflationary pressures could cause inter- countries, with aggregate growth of 6.6 per- est rates to rise farther than projected, provoking a cent. While very strong growth in China (and to a deeper-than-expected slowdown or even a global lesser extent in Russia and India) contributed im- recession. If the dollar were to depreciate by more portantly to this result, growth was strong through- than projected, it would likely undershoot its long- out the developing world. However, high-frequency run equilibrium level. Should it remain low for an data suggest that global growth began slowing in extended period, this could induce a costly restruc- the second half of the year, and this trend is pro- turing of world industry that would have to be un- jected to continue into 2005 and 2006. Persistently done in following years as the dollar returned to high oil prices, rising interest rates as a result of its equilibrium level. Finally, the slowdown in monetary tightening, and a waning fiscal stimulus global growth could sap policymakers' desire to from efforts to address the 2000/01 recession are pursue further trade liberalization, which has been projected to dampen domestic demand and slow a major motor of the improved performance of de- growth among high-income countries. These same veloping countries over the past half decade. forces, plus softening import demand in the devel- Sensible policy can reduce the probability oped world, are expected to slow the pace of ex- and severity of such adverse scenarios. Tighter pansion in low- and middle-income countries. Nev- U.S. monetary and fiscal policy, a relaxation of ertheless, their growth should continue to outpace European monetary policy (relative to the United industrial economies by a wide margin--partly States), and a managed appreciation of some Asian because of continued strong growth in China and currencies would reduce the likelihood of a sharp India. Indeed, notwithstanding the slowdown, eco- depreciation in the dollar or an abrupt hike in nomic growth in low- and middle-income countries interest rates by reducing global imbalances, 3 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 increasing demand for dollars, and lowering infla- U.S. dollar, the dollar's slide since 2002 has re- tionary pressure in developing countries. To mini- duced average ratios of debt to gross national mize the impact of a weaker-than-projected out- product (GNP) and debt service to exports by come, developing countries should ensure that debt about 1 percentage point. and spending obligations will remain affordable, Global tightening of monetary policy as major even if output and tax revenues slow substantially industrial economies move to a neutral stance will and interest rates rise. While a coordinated re- have an impact on market interest rates. Rising in- sponse would be ideal, the policies described above terest rates, in turn, will likely slow global eco- would be beneficial for each economic grouping-- nomic growth, as increases in short-term policy even if adopted unilaterally. rates lead to higher borrowing costs (although this effect has been modest to date, as long-term yields in the United States have not increased as in previ- Growing global imbalances pose ous monetary tightenings). risks for emerging market economies How market interest rates respond to future D espite recent strong performance, developing changes in monetary policy--particularly in the countries face substantial risks from trends in United States--and how such reactions spill over the global economy. The channels through which to emerging bond markets is taking on consider- events in global financial markets affect develop- able significance. With emerging-market bond ing countries reflect the changing character and spreads at record lows (which suggests that mar- growing significance of developing countries' in- kets may be underestimating credit risks), an un- ternational financial relationships. Not only is expected deterioration in global conditions could there concern about the traditional sensitivity of lead to a precipitous widening of those spreads as emerging-market finance to cyclical developments investors adapt their expectations and reduce their in international capital markets, but, for some risk appetite. With gross bond financing surpass- countries, the carrying costs of large accumula- ing bank financing in 2004 for the first time, the tions of foreign exchange reserves raise new impact of sharply higher spreads on emerging challenges. Looking ahead, the possibility of "dis- markets would be substantial. orderly" adjustments of external payments imbal- Borrowing costs would rise if such pressures ances in the global economy could pose acute risks lead credit-rating agencies to downgrade their rat- to emerging markets. ing of emerging-market borrowers. It is estimated, for example, that for the "typical" low-investment- Exchange-rate volatility and higher interest grade borrower, a one-notch downgrade raises rates could affect the cost and availability borrowing costs an average of 80 basis points. of capital This effect could be accentuated for more vulnera- While the baseline outlook for the global economy ble countries. For example, for countries with (chapter 2) is for an orderly adjustment in global high external debt levels, a 200-basis-point in- imbalances in external payments, less salutary out- crease in U.S. rates (the approximate increase cur- comes are possible. One key implication of a more rently anticipated) would bring an additional in- disorderly adjustment scenario for emerging mar- crease of 65 basis points (on top of the 200). For ket economies is that it would likely bring an end countries with low debt, the incremental impact is to the favorable economic and financial environ- only around 6 basis points. ment that has supported a strong rebound in capi- tal flows over the last two years. The most likely Excessive reserve accumulation has costs consequence would be a widening of credit Not all of the increase in capital inflows has been spreads on emerging-market bonds, which in turn directed to productive domestic investment or could adversely affect the flow of debt. consumption. Some has been channeled into foreign On the positive side, a weaker dollar reduces exchange reserves. Recent record levels of reserve the net external debt burden (measured in local accumulation across a broad range of developing currency) of countries with dollar-denominated countries reflect several motives: insuring against debt. For example, in the 100 or so developing abrupt reversals of capital flows, liquidity consider- countries whose exchange rate is not pegged to the ations related to exchange-rate management and 4 O V E R V I E W A N D P O L I C Y M E S S A G E S creditworthiness concerns, and, for some, relieving consequences are very real, as countries reach the upward pressure on a fixed exchange rate to help limit of their ability to sterilize the impact of large maintain trade competitiveness. reserve accumulations. Although these motives are justifiable under some conditions, one outcome is that current Clear policy challenges are emerging reserve levels in several countries exceed by a large For developing countries, the greatest challenge margin the conventional measures of reserve ade- is to continue taking advantage of current favor- quacy. That excess leads to concerns over the cost able financing conditions, while pursuing the and the sustainability of current policies, particu- necessary domestic macroeconomic and struc- larly (i) the quasi-fiscal cost associated with central tural reforms necessary to promote long-term banks' sterilized intervention operations to offset stability in their external financing sources. This the expansionary monetary impact of higher re- would involve: serves, and (ii) potential capital losses on dollar- dominated reserve assets (chapter 3). · Renewed commitment to macro stabilization The quasi-fiscal burden reflects the difference and structural reforms that have laid the foun- between what the foreign-currency reserve assets dation for the recovery and vigorous expan- earn and what the central bank must pay on sion of capital flows since 2002. domestic securities issued to offset their expan- · In high-reserve countries, reevaluation of sionary monetary impact. This burden can be the sustainability and costs of rapid reserve substantial--the gap between the two rates, under accumulation, both in terms of domestic prevailing market conditions, can be as high as macroeconomic management and increased 6­8 percent, with each percentage point costing vulnerability to changing external conditions. the central bank an additional $100 million annu- These countries need to consider how to man- ally for each $10 billion in reserves. Moreover, age appreciation of their currencies against where domestic financial markets are still under- the major currencies, to share the global developed, there are institutional limits on cen- adjustment burden. tral bank capacity to pursue such sterilized market · Continuing efforts to improve asset and liabil- operations. India has a shortage of available in- ity management, especially by lengthening bor- struments to use in sterilization operations, rowing maturity, retiring high-cost debt, diver- Korea has run up against limits on the amount of sifying the currency composition of debt, and securities it can issue, and state-owned banks in hedging currency exposure as much as possible. China have reached the limits of their capacity to · Pushing forward with efforts to strengthen purchase additional securities at below-market the health and soundness of the domestic rates. financial system through measures to improve The capital loss costs relate to the valuation prudential regulations, enhance banks' capi- and management of the central bank's portfolio talization, develop local bond markets, and of reserve assets. While most central banks are remove incentives for excessive foreign cur- engaging professional asset managers, an esti- rency intermediation. mated 70 percent of reserves are held in dollar- denominated assets (individual country estimates are generally not available), implying that a sharp drop in the dollar could translate into a corre- The complexity of developing- sponding drop in the domestic value of the reserve country debt poses new challenges M holdings. uch has changed since the wave of financial Looking ahead, countries accumulating sub- crises rocked emerging market economies stantial excess reserves will have to reconcile the and disrupted global financial markets from the benefits of higher reserves with the potential for mid-1990s up until 2002. Many countries that capital losses and growing quasi-fiscal carrying were at the center of earlier crises have made signif- costs. Even when costs are hidden (for example, by icant progress in improving prudential and regula- requiring banks to hold domestic assets at below- tory policies and structures whose weaknesses con- market yields), the domestic macroeconomic tributed to the crisis. Fiscal policies have generally 5 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 been more prudent, although concerns persist strengthen the banking sector and enhance the about the sustainability of public debt in several ability of banks to take on and sustain riskier lend- countries. Inflation has fallen. Greater exchange ing, through measures to mitigate and manage rate flexibility has reduced the likelihood that an risk. Joint international efforts on statistics and exchange-rate crisis will become a debt crisis and monitoring are improving the quality and quantity raised awareness of the risks inherent in currency of information available for use in managing ap- mismatches. Since 1996, 19 developing countries proaching crises. have shifted to floating exchange-rate regimes. But while efforts to strengthen the interna- Overall, the improved disposition of investors to- tional framework for dealing with financial dis- ward developing countries has been reflected in the tress have started to yield results, much remains to trends in average credit quality, which has risen be done. For example, the adoption of collective steadily since early 2002. The number of countries action clauses can help facilitate debt restructur- carrying formal credit risk ratings (around 60) is ing, but their impact is still quite limited, as they now almost four times higher than in the mid- apply only to bond debt, are not adopted in all 1990s. new issues, and do not apply to pre-2002 debt. The dynamics of external debt have been External debt burdens have eased for some, transformed but not for most The debt-related crises of the 1990s, which were Developing countries' burden of external debt concentrated in a small group of emerging market (public and private) declined from a peak of 45 per- economies, have induced changes in debt dynam- cent of GNI in 1999 to an estimated 39 percent in ics in many developing countries. A rapid expan- 2003. This improvement occurred despite an in- sion in bond finance, pursued most aggressively in crease of almost $207 billion in the nominal value countries that experienced severe debt pressures or of external debt. It therefore reflects the impact of crises in the 1990s, has increased vulnerability to stronger developing country performance: since the changing market conditions in global markets late-1990s, GNI has grown three times faster than (over which individual countries can exercise little external debt. Other indicators of developing coun- control) and domestic circumstances, which can tries' vulnerability to interest and exchange rates quickly translate into higher borrowing costs have improved as well: ratios of debt to exports through their impact on spreads (chapter 3) or re- dropped from 135 percent in 1997 to 105 percent duced capital availability. Furthermore, the enor- in 2003. mous increase in the number of stakeholders that Amid the overall improvement, the debt cir- has accompanied the shift into bonds has compli- cumstances of individual countries differ consider- cated the resolution and management of crises. ably. The reduction in aggregate debt burden has International capital markets today are more been driven by large improvements in a few coun- attuned to, and more discriminating about, devel- tries (representing about 30 percent of outstanding opment finance than in the past. This in turn im- debt). But in two-thirds of middle-income coun- poses a degree of discipline on borrowing through tries, the debt burden increased between 1997 and greater transparency, a more substantial flow of 2002. For nine emerging market economies in this information, increased market research, and finer group (Argentina, Brazil, Indonesia, Philippines, distinctions in credit risk. Overall, these develop- Poland, Russian Federation, South Africa, and ments have reduced the systemic risk in market- Turkey), the average deterioration in the debt/GNI based emerging market finance. ratio was 21 percentage points. Currency revalua- Similarly, the international financial architec- tion effects also loom large for countries with large ture, which aims to prevent defaults and facilitate dollar-denominated debts (chapter 3), more than orderly debt restructuring, has been strengthened. offsetting the underlying reduction in debt stocks Collective action clauses have been introduced in through repayment for some countries. some bond financing transactions, and discussions The share of foreign direct investment (FDI) over a code of conduct continue. The Capital and portfolio equity in the finance mix of many Adequacy Accord (Basel II) offers the potential to developing countries has grown in recent years--a 6 O V E R V I E W A N D P O L I C Y M E S S A G E S trend that enhances stability. Equity flows ac- 1999 has not been matched by as large an increase counted for 80 percent of total external financing in domestic financing. during 1999­2003, compared with just 60 percent Greater domestic borrowing by the private during 1993­98. sector also poses dangers. High levels of domestic credit to the private sector have been the precursor The composition of external debt has changed, to many financial crises. The risk is particularly with an increase in private borrowing great when perceptions of risk motivate swift Developments in international capital markets and changes in global asset allocations, beyond what is developing countries, as well as expansion in the warranted by underlying fundamentals. The bur- investor base, have helped facilitate the private den imposed by private sector bailouts, especially sector's access to international capital markets. As in the financial sector, can lead to a buildup of debt a result of greater private borrowing, the share of for the public sector as well. In addition, the corpo- public sector debt in total external debt declined rate sector's engagement in derivative-type transac- from 82 percent during 1990­95 to 69 percent tions can pose contingent liabilities that are at during 1996­2003. At the same time, the public times unanticipated, often for lack of information. sector's emphasis on domestic sources of financing But the deepening of local bond markets has increased. brings many benefits. Local bond markets help The reduction in the public debt share might finance government deficits, compensate for the appear to lower sovereign vulnerability, but as the effects of holding large, low-yield reserves, and fa- Asian crisis demonstrated, excessively risky pri- cilitate domestic monetary policy by providing a vate sector behavior can precipitate a crisis--and liquid debt market to facilitate operational aspects the subsequent cleanup often blurs the lines be- of monetary policy. They also strengthen the do- tween public and private. mestic financial system--bond markets comple- ment structured financing and stimulate competi- The rise in domestic debt partly offsets the tion, while the infrastructure required to support reduced burden of external debt them (clearing and settlement systems, regulatory Debt from domestic sources has grown rapidly in and legal frameworks) makes the entire financial emerging market economies, largely through the system more efficient. Domestic debt markets also development of domestic bond markets. In many offer an increasingly attractive destination for for- countries where external debt burdens have stabi- eign investors and have encouraged an important lized or fallen, domestic public debt burdens have catalytic role for international financial institu- increased (chapter 4). As a result, in many devel- tions, which have often taken the lead in initiating oping countries, the burden of public sector debt borrowing in developing-country currencies. remains high, calling into question the apparent improvement associated with falling external The need to balance external and domestically indebtedness. financed debt has created new challenges The extent of the shift from external to do- With the shift in the balance of external and do- mestic debt has varied across regions. In Asia, fol- mestic debt, new challenges have emerged. On the lowing the market-forced retrenchment of credit positive side, lower external debt reduces vulnera- that occurred during the crisis, the switch was bility to external shocks (related to exchange rates rapid and intentional--the ratio of domestic to ex- or interest rates), which in turn builds confidence ternal debt rose from close to parity in 1997 to 3 among international investors. It also can relieve to 1 in 2002. Initial domestic debt buildup was pressure on exchange rates and raise credit ratings, driven by crisis responses (often bailouts or recapi- leading to lower external borrowing costs and talizations of failing banks), while more recent in- even increased asset demand as the economy creases have been driven by conscious policies to moves into a risk class more open to institutional reduce reliance on external debt (and, for many, a investors. buildup in foreign exchange reserves). Elsewhere, But the switch to domestic debt heightens other the picture is more mixed--in Latin America, for risks--notably the uncertainties of rolling over example, the decline in external financing since short-term debt (because maturities of domestic 7 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 debt are generally shorter than those of external Sources of external finance have changed debt), and associated interest-rate risks. To mini- Since the early 1990s, the relative importance of mize risk, domestic borrowing, like external bor- ODA as a source of external financing for poor rowing, must be based on sound measures for countries has declined, in part due to the end of managing public debt, a capable tax system, and the Cold War and waning support for client states, effective regulatory and legal environment for but also because of growing global integration domestic financial activity. Exchange-rate manage- through the liberalization of financial flows, trade, ment remains particularly crucial, because interna- and migration. Aggregate figures mask enormous tional demand for domestic assets will be critically variation among the 28 countries considered in affected by perceptions of the soundness of ex- this study: ODA dependence ranges from a high of change-rate policy and concerns over volatility and 36 percent of GDP in Mozambique to 2.2 percent convertibility. Finally, any temptation to borrow in Bangladesh. excessively from domestic sources needs to be re- But other forces were at work as well. While sisted. A debt crisis sparked by excessive domestic ODA was declining, other sources were rising: FDI borrowing can be just as devastating as one created rose from only 0.4 percent of GDP to 2.7 percent of through external borrowing, and a domestic debt GDP in 2003, reflecting improving performance problem can quickly grow to affect external debt. and a sounder investment climate. FDI has been of Despite the growing sophistication of interna- considerable importance for many poor countries-- tional capital markets and a steady growth in the including Lesotho, Mauritania, Moldova, and capacity of central banks and monetary authori- Mozambique. Nonetheless, much FDI to poor ties in developing countries, significant weak- countries still flows to enclave mining and natural nesses remain both in the international architec- resources projects, which may limit benefits and ture that has evolved to regulate those markets add to volatility. and in the quality of data available on the fast- While not technically a capital flow, private growing domestic debt markets in many emerging transfers (including NGO grants and workers' re- market economies. Improving the monitoring mittances) have become relatively more important and dissemination of information on public and in poor countries than in other developing coun- private domestic debt flows should remain a pri- tries. Both are large, stable sources of foreign ex- ority for international institutions and national change for poor countries and may be more likely authorities. than other capital flows to reach poor households. In addition, the size and stability of such current account flows (especially workers' remittances) over time may facilitate poor countries' access to Meeting poor countries' financing capital markets through securitization. needs requires recognition of the countries' special challenges Flows from other developing countries P oor countries are operating in an external fi- have grown nancing environment of growing complexity. The traditional view of developing countries Although ODA is still the major resource flow for as reliant solely on financing from industrial many countries, many others now receive growing economies is increasingly outdated. While the private capital flows (FDI and private debt flows, final report from Monterrey mentioned the sometimes originating in other developing coun- importance of cooperation between developing tries) or other nontraditional private resource countries only briefly, the available data suggest a flows (workers' remittances and grants from non- different perspective: with respect to poor coun- governmental organizations [NGOs]). Understand- tries, other developing countries (especially larger ing the differential availability of the new mix of ones such as Brazil, China, India, Saudi Arabia, financing resources to individual poor countries and South Africa) are increasingly important will be essential to efforts to maximize aid effec- financial players. tiveness and achieve development objectives-- With wealth increasing and administrative cap- notably the MDGs (chapter 5). ital controls being eased in the 1990s, developing 8 O V E R V I E W A N D P O L I C Y M E S S A G E S countries have also emerged as significant will only be met by 2015 if rates of progress in- sources of FDI outflows, in the form of invest- crease considerably. The Commission for Africa ments by developing country firms--usually in recently urged a doubling of aid to Sub-Saharan other developing countries. Because of proximity, Africa. And in February 2005, the G-7 finance cultural similarities, and similar cost structures, ministers reaffirmed their countries' commitments developing country firms may have advantages in to helping the developing world, particularly certain FDI projects. Companies from other de- Africa, achieve the MDGs by 2015. That goal is veloping countries bought assets in a broad one of two main themes for discussion at the G-8 range of privatization deals during the 1990s, in leaders' summit scheduled for July 2005. sectors ranging from mining to agro-business to Second, donors should pursue efforts to make telecommunications. aid flows more reliable. Recognizing that aid is Similarly, although aggregate numbers are still more effective when it is allocated preferentially small (and available data limited), ODA providers to countries that demonstrate a capacity to absorb are becoming more diverse. With the emergence of additional aid and to use it well, and that aid can- new donors such as China, Brazil, South Africa, not be expected to stabilize economic fluctuations and India, the scope of South-South development in recipient countries, volatility per se is inimical assistance is growing, with innovative approaches to aid effectiveness. Aid has been observed to be such as triangular cooperation (developed-country more volatile than GDP in recipient countries, financing of South-South technical cooperation) and more volatile than some other sources of receiving greater emphasis. foreign exchange. Efforts to make it less volatile Finally, the South is the primary destination (through vehicles such as the International Fi- for poor-country migrants--a large portion of nancing Facility, for example) could enhance its poor-country migrants in Africa and South Asia effectiveness. migrate to another developing country. As a re- Third, donors (both developed and develop- sult, other developing countries (not industrial ing) and recipients should press for better donor economies) are the major source of workers' re- coordination, selectivity, and country ownership mittances to the poor countries. The countries to improve the effectiveness of aid, and increase with the highest remittance shares are all adjacent the focus on results. Significant progress has been to larger, wealthier developing countries, an inter- made on this agenda over the last decade, but dependence that creates both opportunities and there is still enormous duplication among donors risks. and a wide variation among them in terms of se- lectivity. As efforts are made to scale up interven- An agenda for financing the Millennium tions to achieve the MDGs, the relevance of initia- Development Goals tives targeting coordination and effectiveness will As other sources of finance grow, the development grow even further. community must continue to play the leading role Fourth, the development community should in mobilizing the external resources on which de- support policies that could facilitate better market veloping countries are depending to achieve the access for poor countries and encourage invest- MDGs. Action is needed on four fronts. ment through expanding risk-mitigation instru- First, donors must fulfill commitments al- ments to stimulate and build on private-sector ready made (at Monterrey and afterwards) to sub- participation. Most important, poor countries stantially increase ODA and other resources themselves need to pursue effective economic and needed to achieve internationally agreed develop- pro-poor policies. There is clear and growing evi- ment goals. Meeting those commitments will re- dence of a link between reforms in governance, an quire overcoming mounting fiscal pressures in improved investment climate, and growth in re- many donor countries and avoiding distractions source inflows of all types--FDI, official flows, surrounding shifting strategic considerations-- and even remittances. Poor countries should con- so that aid can be channeled to the places that tinue their efforts to improve the investment cli- need it most. Much of the enhanced aid effort mate not only to attract more resources, but also must be directed toward Africa, where the MDGs to ensure their effective use. 9 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 As a final point, the question of whether ro- imbalances will unwind in an orderly manner. bust growth in developed and developing coun- Collective policy actions by developed and devel- tries can be sustained over the medium term has oping countries alike will continue to play a potentially important implications for attaining prominent role. A multifaceted, cooperative the MDGs. A central concern underlying the approach involving all countries is essential to global economic outlook over the medium term rebalance the world economy on a path of sus- is whether the current large external payments tainable growth. 10 . 1 Financial Flows to Developing Countries: Recent Trends and Near-Term Prospects T HE GLOBAL RECOVERY BROADENED · Flows of foreign direct investment (FDI) in 2004, boosting world gross domestic into developing countries have become in- product (GDP) by an estimated 3.8 percent-- creasingly concentrated, while FDI outflows the highest rate in four years and up sharply from from developing countries have increased 2.5 percent in 2003 and 1.7 percent in 2002.1 Grad- dramatically. ual realignment of stimulative monetary policies in · Most emerging market economies have taken many advanced countries led to modest increases in advantage of favorable financing conditions short-term interest rates during the year (particu- over the past few years to restructure their debt. larly in the United States), but long-term rates · Strong gains in private capital flows over the remained low in most advanced and developing past few years have been partly offset by de- countries, particularly when adjusted for inflation. clining official flows arising from large repay- Macroeconomic objectives were attained in most ments to bilateral and multilateral creditors. developing countries, and progress was made on key · Within official flows, the shift from loans to structural reform initiatives. These favorable exter- grants has accelerated, with the decline in net nal and domestic factors contributed to strongly im- official lending more than offset by the in- proving economic fundamentals, as reflected in a crease in bilateral aid grants, but not to the record expansion in developing-world GDP growth extent of official aid commitments. More re- (6.6 percent in 2004, much higher than the global sources are needed to support efforts to reach average), upgrades in credit ratings, and a reduction the MDGs. in emerging-market bond spreads to near record lows by the end of the year. Against this favorable backdrop, capital flows to developing countries continued to expand in Capital flows to developing countries 2004, following a strong rebound in 2003. This Capital flows continue recovery, chapter examines key developments and emerging but pace slows N trends in the various components of capital flows et capital flows increased by $42 billion in and considers the outlook for continued short- 2004, continuing the recovery that began in term gains. Among our main findings: 2003, although at a slower pace than the $81 bil- lion rebound of 2003 (figure 1.1 and table 1.1). · The pickup in capital flows to developing Private and official net debt flows reached a record countries over the past two years has coin- high of $324 billion in 2004, up significantly from cided with a dramatic improvement in their $200 billion during 2000­2 and just above the current account balances. Developing coun- $323 billion level reached in 1997. tries continue to export capital to developed The pickup in net capital flows over the past countries (mostly the United States) in the two years appears more modest after taking into form of rapidly growing accumulations of account inflation, economic growth, and the size- foreign reserves. able depreciation of the dollar against most major 13 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 1.1 Financial flows to developing currencies. The offsetting impact of these factors countries, 1990­2004 can be captured by measuring capital flows as a $ billions percentage of GDP in the recipient countries (fig- ure 1.2). From this perspective, recent perfor- 350 mance has been less robust: net capital flows to 300 Total net capital flows developing countries equaled 4.5 percent of their GDP in 2004, up slightly from 4.3 percent in 250 2003, but significantly below highs of more than 200 6 percent reached in the mid-1990s. Net private flows 150 Developing countries continue to export capital 100 Current account balances in developing coun- Net official flows 50 tries continue to strengthen, swelling from a slight deficit in 1999 to a surplus of $153 billion 0 in 2004. That surplus was equal to 2.0 percent 1990 1992 1994 1996 1998 2000 2002 2004 of their GDP (table 1.1), up from 1.8 percent Sources: World Bank Debtor Reporting System and staff estimates. Table 1.1 Net capital flows to developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e Current account balance 83.6 87.2 93.7 8.0 43.6 16.9 72.0 112.8 152.7 as % of GDP 1.7 1.7 1.6 0.1 0.8 0.4 1.3 1.8 2.0 Financed by: Net equity flows 161.4 190.6 178.1 195.1 178.6 180.9 159.8 176.6 192.3 Net FDI inflows 128.6 168.1 171.5 182.4 166.2 174.8 154.0 151.8 165.5 Net portfolio equity inflows 32.9 22.6 6.6 12.7 12.4 6.0 5.8 24.8 26.8 Net debt flows 123.7 106.9 54.9 15.4 6.2 3.5 8.9 62.2 84.1 Official creditors 3.8 12.9 34.4 13.9 5.8 27.0 5.2 11.6 24.9 World Bank 7.3 9.2 8.7 8.8 7.9 7.5 0.2 1.2 1.4 IMF 1.0 3.4 14.1 2.2 10.7 19.5 14.0 2.4 10.9 Others 4.5 0.4 11.6 7.3 3.0 0.0 8.6 12.8 12.7 Private creditors 119.9 94.0 20.5 1.5 0.4 30.5 3.7 73.8 109.0 Net medium- and long-term debt flows 82.5 84.8 85.0 21.6 7.4 6.6 0.9 24.9 55.4 Bonds 49.5 38.2 39.7 29.8 17.5 11.0 11.2 28.1 63.0 Banks 30.7 43.8 50.4 6.8 5.8 11.0 3.8 3.1 1.8 Others 2.3 2.9 5.2 1.5 4.3 6.5 6.5 6.3 5.7 Net short-term debt flows 37.4 9.2 64.5 20.1 7.9 23.9 2.8 48.9 53.6 Balancing itema 111.2 157.5 122.9 169.1 169.1 112.5 69.0 59.9 50.9 Change in reserves 90.4 52.9 16.3 33.4 46.8 81.7 171.7 291.9 378.2 ( increase) Memo items: Total foreign aid (grants) (ex technical cooperation grants) 26.7 25.3 26.7 28.5 28.7 27.9 32.2 43.4 47.4 Net private flows (debt equity) 281.3 284.6 198.6 196.6 178.1 150.3 163.5 250.4 301.3 Net official flows (aid debt) 30.5 38.2 61.1 42.4 23.0 54.9 37.4 31.7 22.5 Total net capital flows (private and offical) 311.8 322.8 259.6 239.1 201.1 205.2 200.9 282.1 323.8 Note: e estimate a. Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. Sources: World Bank Debtor Reporting System and staff estimates; IMF, Balance of Payments Yearbook, various years; and Dealogic Bondware and Loanware. 14 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S Figure 1.2 Financial flows to developing Figure 1.3 Current account balance of developing countries as a percentage of GDP, 1990­2004 countries, 1976­2004 % GDP % GDP 7 3 2 6 Total net capital flows 1 All developing countries 5 0 4 1 Net private flows 3 2 3 2 4 Net official flows 1 Low-income countries 5 0 6 1990 1992 1994 1996 1998 2000 2002 2004 1976 1980 1984 1988 1992 1996 2000 2004 Sources: World Bank Debtor Reporting System and staff estimates. Sources: IMF; World Bank staff estimates. in 2003. Current account surpluses in the devel- holdings rose from 33 percent in 2003 to 38 percent oping world are a dramatic change from previ- in 2004. ous decades, when the developing countries as a group consistently ran modest current account Strong gains in private flows were partly offset deficits (figure 1.3) that averaged 1.4 percent of by declining official flows their GDP from 1976 to 1999. The swing in the The pickup in net capital flows over the past few current account is even more dramatic in low- years (measured in dollars) reflects strong gains in income countries, where current account deficits net private flows as well as declines in net official averaged 2.3 percent of GDP in 1976­99 flows (figure 1.1). Net private flows (debt and eq- (figure 1.3). uity) have grown by a cumulative total of $140 billion since 2001, rising from 3.8 to 4.2 percent The pace of reserve accumulation accelerates of GDP--still below the high of 5.2 percent The dramatic current account surpluses chalked reached in 1996 (figure 1.2). In contrast, net offi- up in the past few years have been used primarily cial flows (concessional aid and long-term debt) to accumulate foreign exchange reserves, rather have declined by a cumulative total of $32 billion than to finance productive domestic investments. since 2001 (from 1.0 to 0.3 percent of GDP). The That trend accelerated last year, as foreign re- $20 billion increase in bilateral aid that has oc- serve accumulation in developing countries con- curred has been eclipsed by a $52 billion decline in tinued to finance a large share of the U.S. current net official lending, which reflects large repay- account deficit in 2004. Foreign reserves held by ments made to multilateral and bilateral creditors. developing countries grew by $378 billion in From a historical perspective, the recent decline in 2004 (4.9 percent of GDP), following a $291 bil- net official flows continues a downward trend that lion (4.1 percent of GDP) increase in 2003. began in the early 1990s (figures 1.1 and 1.2). Meanwhile, the U.S. current account deficit bal- looned from $531 billion in 2003 (4.8 percent of GDP) to $666 billion in 2004 (5.6 percent of Capital flows from the private sector GDP). Debt and equity flows showed modest gains N The acceleration in reserve accumulation was et private flows (debt and equity) increased highly concentrated in just a few countries.2 China by $51 billion in 2004, following a $87 bil- accounted for more than half of the increase in lion surge in 2003. The modest gains in 2004 2004, with foreign reserves increasing by $207 were split between net debt and equity flows billion. China's share of developing-country reserve (figure 1.4). 15 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 1.4 Financial flows to developing countries Figure 1.5 Net equity flows to developing from the private sector, 1990­2004 countries, 1990­2006 $ billions $ billions Projection 250 200 Net equity flows Net FDI inflows 200 150 150 100 100 Net debt flows 50 50 Net portfolio equity 0 50 0 1990 1992 1994 1996 1998 2000 2002 2004 1990 1992 1994 1996 1998 2000 2002 2004 2006 Sources: World Bank Debtor Reporting System and staff estimates. Sources: World Bank Debtor Reporting System and staff estimates. Net equity flows increased by $16 billion in investment climate in many developing countries 2004, reaching $192 billion in 2004, marginally has improved markedly, with higher corporate below the $195 billion peak attained in 1999. Net earnings, liberalization of foreign ownership rules, equity flows have been stable at 2.7 percent of and a stronger global recovery. In response to GDP since 2002, below the high of 3.7 percent at- these improvements, net FDI inflows to developing tained in 1999. countries increased by $14 billion (9 percent) in Net private debt flows increased by $35 bil- 2004, partly reversing a $23 billion cumulative lion in 2004, reaching $109 billion, up signifi- decline in the previous two years (figure 1.5). cantly from a low of ­$30 billion recorded in The increase was spread across most regions, 2001, but still below the high of $120 billion with the exception of the Middle East and North recorded in 1995. As a percentage of GDP, net Africa (table 1.2). In Latin America, a $6 billion re- debt flows increased from ­0.5 percent in 2001 to bound reversed substantial declines in the previous 1.4 percent in 2004 (compared to the high of four years and raised Latin America's share of net 2.3 percent reached in 1995). FDI inflows to developing countries slightly from Equity flows have been much more stable 25 percent in 2003 to 26 percent in 2004, still well than debt flows since the late 1990s (figure 1.4). below the share of 48 percent the region reached in Why? First, FDI inflows--the largest component 1999­2000. The East Asia and Pacific region of equity flows--have been much more stable than flows of debt and portfolio equity (figures 1.4 and Table 1.2 Regional composition of net FDI inflows 1.5).3 Second, net FDI and portfolio equity flows to developing countries, 2002­4 have been negatively correlated over the past few $ billions years,4 so that the sum (net equity flows) becomes 2002 2003 2004e even more stable. This negative correlation reflects All developing countries 154.0 151.8 165.5 the substitutability of the two categories of equity. For example, mergers and acquisitions often in- Regional composition East Asia and Pacific 55.6 59.6 63.6 volve reclassifying portfolio equity claims as FDI of which China 49.3 53.5 56.0 claims, which entails offsetting changes in net FDI Latin America and Caribbean 45.7 36.5 42.4 and portfolio equity flows.5 East Europe and Central Asia 35.0 35.6 37.6 Sub-Saharan Africa 9.0 10.1 11.3 South Asia 4.8 5.2 6.5 FDI is increasingly concentrated Middle East and North Africa 3.8 4.8 4.1 Economic conditions over the past few years have Note: e estimate favored FDI inflows to developing countries. The Sources: World Bank Debtor Reporting System and staff estimates. 16 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S received a $4 billion increase in FDI inflows in African countries (Angola, Chad, Equatorial 2004, bringing its share of FDI flows to the develop- Guinea, and Sudan). The share of FDI going to the ing world to 38 percent, down slightly from 2003 least developed countries has shown steady gains but still substantially above the 27 percent average over the past 10 years, rising from a low of 1 per- share for the period 1999­2001. FDI to Europe and cent in 1994 to just under 5 percent in 2003/04.7 Central Asia has stabilized over the past three years at 23 percent of the developing-world total, signifi- FDI outflows from developing countries cantly above its 9 percent share in 1994. increased dramatically The widely distributed regional gains in FDI in- Faced with growing competition and limited mar- flows mask concentration at the country level. Fully kets at home, many companies in developing 88 percent of the estimated increase in net FDI countries have sought to expand their operations flows to developing countries in 2004 went to five abroad. Relaxed controls on capital outflows have countries--Brazil, China, India, Mexico, and the allowed them to pursue global investment oppor- Russian Federation. To understand this pattern, re- tunities more aggressively in recent years. As a member that several of these countries--China, consequence, FDI outflows from developing coun- India, and the Russian Federation--grew signifi- tries have swelled over the past few years, rising cantly faster than other developing countries. The from $3 billion (0.1 percent of GNI) in 1991 to same five account for just over 60 percent of net $16 billion (0.3 percent of GNI) in 2002, and FDI inflows in 2004, up from 57 percent during the then surging to an estimated $40 billion (almost previous three years. China accounted for one-third 0.6 percent of GNI) in 2004 (figure 1.7). of net FDI inflows to all developing countries6 The increase in FDI outflows is concentrated (down from 35 percent in 2003) and for almost in many of the same countries that receive the bulk 90 percent of net FDI inflows to the East Asia and of FDI inflows to developing countries--Brazil, Pacific region, a share unchanged from its average China, India, Mexico, and the Russian Federa- of the previous three years. tion).8 However, the correspondence between The share of net FDI inflows going to low- developing-country shares of FDI inflows and income countries increased substantially over the outflows is not very tight. For example, China past four years, rising from a low of less than 7 per- accounted for one-third of FDI inflows to develop- cent in 2000 to almost 11 percent in 2003/04, the ing countries in 2004, but less than 10 percent of highest level in the past 15 years (figure 1.6). The the estimated outflows. increase reflects strong gains in FDI in India's ser- Much of the surge in FDI outflows in recent vice sector and in the oil and gas sectors of a few years can be traced to developing countries Figure 1.7 FDI outflows from developing countries, Figure 1.6 Share of net FDI inflows to low-income 1990­2004 and least developed countries, 1990­2004 $ billions % GNI % net FDI flows to developing countries 40 1.0 12 0.9 35 10 0.8 Low-income countries 30 0.7 8 25 0.6 $ billions 6 20 0.5 0.4 15 4 Least developed countries 0.3 10 % GNI 0.2 2 5 0.1 0 0 0 1990 1992 1994 1996 1998 2000 2002 2004 1990 1992 1994 1996 1998 2000 2002 2004 Sources: World Bank Debtor Reporting System and staff estimates. Sources: World Bank Debtor Reporting System and staff estimates. 17 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 investing abroad in developed countries, as well as are substantial underestimates.10 The quality and other developing countries.9 This has enabled country coverage of the data are improving, how- companies to expand and diversify their opera- ever, and measurement improvements almost tions across a wider spectrum of countries and certainly account for some of the increase in provide greater scope for diffusion of technical in- reported FDI outflows over the past few years, as novation and managerial expertise. shown in figure 1.7. Because of the poor quality and coverage of data on FDI outflows from developing countries Prospects for net FDI flows (many developing countries do not even record The short-term prospects are good for further mod- statistics on FDI outflows), the reported figures est gains in FDI inflows to developing countries. As Box 1.1 Measuring capital flows in dollars versus as a percentage of GDP C apital flows to developing countries are in one of three dollars) has increased at an average annual rate of 9 per- major currencies--the dollar (the most common), cent, thereby exceeding the rate of real economic growth the euro, or the Japanese yen. Transactions in currencies and inflation by 1.4 percentage points on average. This other than the dollar are typically converted into dollars indicates that the value of capital flows has not only to facilitate comparison. The exchange rate used in the maintained its purchasing power relative to the general conversion can have a major influence on comparisons price level (inflation), but also has increased faster than across countries and over time. the expansion in real economic activity. To illustrate, consider a case in which transactions are The distinction between measuring capital flows in made in euros. A 1 billion transaction would have been dollars and as a percent of GDP is well illustrated with valued at $0.88 billion in February 2002, but $1.34 billion reference to net FDI flows to developing countries, as in December 2004--a 52 percent increase caused by the shown in the figure. Net FDI inflows are projected to depreciation of the dollar against the euro. increase from $152 billion in 2003 to a record high of In the simple case where the recipient country's $195 billion in 2006. The projected average growth rate exchange rate is fixed to the euro and it trades exclusively of 9 percent is similar to that projected for GDP; hence, with euro zone countries, the purchasing power of capital net FDI inflows are projected to be constant as a share of flows is best measured in euros. Converting the euro GDP. They are not expected to meet or exceed the level of value to dollars in such cases greatly overstates the 3 percent of GDP observed in the late 1990s. purchasing power of capital flows. In general, the purchasing power of capital flows will depend on the recipient country's exchange-rate regime, as Net FDI flows to developing countries, 1990­2006 well as the response of domestic prices to changes in the % GDP exchange rate. This can be captured by comparing the $ billions value of capital flows received with the value of goods and 200 Projection 5 services that the recipient country produces, as measured by its GDP. Returning to the simple example outlined $ billions 4 above, the 52 percent appreciation of the euro against the 150 dollar would have no effect on capital flows measured as 3 a percentage of GDP. 100 % GDP Measuring capital flows as a percentage of GDP also 2 takes into account inflation and economic growth. The value of GDP in developing countries, measured in dollars, 50 has grown at an average annual rate of 7.6 percent over 1 the past 40 years, which reflects an average real growth rate of 4.2 percent and an implicit average inflation rate 0 0 of 3.4 percent (measured in dollars). Meanwhile, the value 1990 1992 1994 1996 1998 2000 2002 2004 2006 of capital flows to developing countries (again measured in Sources: World Bank Debtor Reporting System and staff estimates. 18 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S economic fundamentals strengthen further and Figure 1.8 Equity price indexes, 2003­4 countries continue to implement policies designed Index (Jan. 2003 100) to attract investment, the climate should continue to 180 improve, especially with regard to liberalization of MSCI emerging market restrictions on foreign ownership (notably in India). Econometric projections based on economic 160 fundamentals indicate that over the next two years, MSCI world FDI inflows will grow at the 9 percent rate recorded 140 in 2004, keeping net FDI inflows at about 2.3 per- cent of developing-country GDP (see box 1.1).11 S&P 500 120 Small gains in portfolio equity flows in the 100 face of volatile equity prices Net portfolio equity flows registered a small in- crease of $2 billion in 2004, following a surge of 80 Jan. Apr. Jul. Oct. Jan. Apr. Jul. Oct. Jan. $19 billion in 2003. The $21 billion increase over 2003 2004 2005 the past two years was spread across most regions, Sources: J.P. Morgan Chase and Standard and Poor's. with the exception of Latin America and the Caribbean, where flows dropped by $5 billion in 2004, after increasing by $2 billion in 2003 income countries, up from 7 percent five years ago, (table 1.3). Almost half of the global gains of while 5 percent went to the least-developed coun- the past two years came in the East Asia and Pacific tries, up from 3 percent five years ago. region ($9.5 billion). China dominated, with a The strong rebound in portfolio equity flows $8.3 billion increase, accounting for almost 40 per- in 2003, followed by small gains in 2004, rode the cent of net portfolio equity flows to all developing back of large swings in emerging-market equity countries in 2004. There were also strong gains in prices. Equity prices rallied strongly throughout South Asia, where India recorded a $6.4 billion in- much of 2003, followed by a sizeable correction in crease over the past two years, bringing its share to the first half of 2004 and then a rebound in the one-third of the total for the developing world. second half of the year (figure 1.8). Portfolio equity flows continue to be highly The large swings in equity prices over the year concentrated in just a few countries--China, India, were mirrored in investments in emerging-market and South Africa together accounted for 82 percent equity funds. Inflows reached $3.1 billion in the of all portfolio equity flows to developing countries first quarter, reversed quickly to net outflows of in 2004, close to their average share for the past $1.4 billion between May and August, and then five years (85 percent). Eleven percent of portfolio recovered partially to finish the year with net in- equity flows to developing countries went to low- flows of $0.4 billion. Average returns on equity in emerging markets have been higher than in ma- Table 1.3 Regional composition of net portfolio ture markets over the past two years (figure 1.8), flows to developing countries, 2002­4 but prices have been much more volatile. Major $ billions divergences in equity prices have occurred across 2002 2003 2004e regions, with emerging Europe and Latin America All developing countries 5.8 24.8 26.8 outperforming emerging Asia by a wide margin. Regional composition The ongoing shift from bank to bond finance East Asia and Pacific 4.0 11.8 13.6 of which China 2.2 7.7 10.5 Net medium- and long-term lending by banks to de- Latin America and Caribbean 1.4 3.4 1.5 veloping countries has been on the decline since the East Europe and Central Asia 0.1 0.6 3.6 late 1990s, as bond issuance has risen. Net medium- Sub-Saharan Africa 0.4 0.7 3.5 South Asia 1.1 8.2 7.5 and long-term bank lending declined by $2 billion Middle East and North Africa 0.2 0.1 0.2 in 2004, following a $3 billion increase in 2003 and declines averaging $7 billion during the previous Note: e estimate Sources: World Bank Debtor Reporting System and staff estimates. four years (figure 1.9). In contrast, medium- and 19 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 1.9 Net private debt flows to developing Figure 1.10 Gross private flows to developing countries, 1990­2004 countries, 1990­2004 $ billions $ billions 70 175 60 150 Gross bank lending Net bond flows 50 125 40 30 100 20 75 10 50 Gross bond issuance 0 Net bank lending 25 10 20 0 1990 1992 1994 1996 1998 2000 2002 2004 1990 1992 1994 1996 1998 2000 2002 2004 Sources: World Bank Debtor Reporting System and staff estimates. Sources: Dealogic Bondware and Loanware. long-term net bond flows rebounded sharply over that central banks would be forced to raise interest the past two years, increasing by a total of $52 bil- rates abruptly. These concerns dissipated over the lion, reaching a record high of $63 billion in 2004. course of the year, however, as it became evident Gross bond financing also increased dramatically that the global recovery was decelerating and inter- over the past two years, exceeding gross bank lend- est rate increases would be implemented gradually. ing for the first time (figure 1.10). Emerging-market bond spreads narrowed over the Bank lending continues to cater to a wide second half of 2004--despite increases in short- array of developing countries' financing needs, de- term interest rates in many advanced countries (the spite the declines in net lending over the past six United States in particular). The Emerging Markets years. Twice as many countries tapped this segment Bond Index (EMBI) spread narrowed from a peak of the debt markets in 2004 than the bond financ- of 550 basis points in May to below 350 basis ing segment. The private corporate sector accounts points in December, the lowest level since 1997 (fig- for a growing share of bank credit to developing ure 1.11). The last time that the EMBI spread was countries. That share increased to 67 percent in below 500 basis points was in April 1998, just be- 2004, compared with 57 percent in 2003. In com- fore the sharp increase to almost 1,500 basis points parison, the private sector accounted for only a in August 1998, in the wake of the financial crisis in third of total developing-country bond financing. the Russian Federation. The strong gains in bond issuance over the Some emerging market economies, particu- past two years reflect both "push" and "pull" larly in Latin America, had difficulties accessing factors that sparked investors' interest in the external capital markets when bond spreads emerging-market asset class. Low interest rates in widened suddenly in the spring. Since then, bond advanced countries propelled a search for yield issuance by developing countries has been resilient, in higher-risk assets, while improved fundamentals even in the face of heightened economic and geopo- in most emerging-market economies lowered litical uncertainty. The narrowing of bond spreads investors' assessment of default risk significantly. to near record lows indicates that the transition to Emerging market bond markets exhibited higher interest rates in most advanced countries volatility in the first half of 2004, matching that in over the course of the year and the significant portfolio equity. In April/May, bond spreads increase in world oil prices have had little impact widened by about 125 basis points as various indi- to date on investors' assessment of risk in the cators suggested that the global recovery was emerging-market asset class. Investors' sanguine stronger than anticipated (particularly in the assessment is also reflected in improved credit United States and Japan), which raised concerns ratings for many emerging market economies. 20 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S Figure 1.11 Emerging-market bond spreads, rates in the United States and the euro zone remain 1997­2004 relatively low, particularly when adjusted for infla- EMBI (global) in basis points tion, the monetary tightening that began in the 1,500 United States in June 2004 has brought higher short-term rates. To date, long-term rates have 1,300 shown little movement. In fact, the yield on the benchmark 10-year U.S. Treasury note decreased 1,100 by 50 basis points between June and December, while the yield on one-month U.S. Treasury bills 900 increased by 100 basis points. Monetary condi- tions in the United States are expected to continue 700 to tighten gradually over the balance of the year as the slack in the U.S. economy is reduced. The risk 500 of an abrupt increase in U.S. interest rates remains a serious concern. Large, sudden movements in 300 long-term rates, in particular, could provoke a 1997 1998 1999 2000 2001 2002 2003 2004 2005 sharp widening of emerging-market bond spreads. Source: J.P. Morgan Chase. The potential impact of global imbalances on exchange rates also clouds the prospects for pri- Prospects for private debt flows vate capital flows to developing countries. Abrupt The outlook for private debt financing is expected movements in exchange rates--as in interest to remain quite positive in the short run, but could rates--could cause emerging-market bond spreads become less benign over the medium term. How- to widen dramatically, which could have signifi- ever, the probability of a generalized credit com- cant implications for those emerging market pression or major retrenchment remains low. economies that have high debt burdens and heavy The dynamics of both the supply of capital by financing needs (see chapter 3). investors and the demand for funds by developing On the upside, most developing countries are countries are likely to dampen flows in 2005. now less vulnerable to a sudden shift in investor Creeping tensions in pricing may put pressure on sentiment than they were a few years ago. The ex- benchmark spreads to widen, while rising bench- ternal and domestic credit quality of many coun- mark rates used in pricing bank loans (the Libor, tries has improved significantly over the past few in particular) may also curtail loan financing. In years. Moreover, there has been a marked decline addition, uncertainty surrounding the future path in speculative positions in emerging-market assets of interest rates may raise market volatility and over the past 10 years. further discourage bond issuance. Given the com- Favorable financial conditions have enabled petitive pricing of developing-country risk, oppor- many emerging market economies to prefinance a tunistic profit-taking by investors may also exert significant portion of their external funding re- occasional pressures on spreads to widen. quirements for 2005. Some countries have also The supply of capital for developing countries taken the opportunity to strengthen their debt man- may be affected by new, high-yield investment agement by issuing a higher proportion of bonds opportunities in the developed world. Improved that have longer maturities, are denominated in do- corporate profitability in industrial countries, mestic currency, or are not indexed to the exchange particularly for firms in high-yield sectors, would rate, inflation, or short-term interest rates. In addi- sharpen competition for investment funds. At the tion, many emerging market economies have same time, the lingering weakness in global equity accumulated additional foreign reserves over markets, especially in the technology sector, could the past year (see chapter 3). Taken together, these erode investor sentiment, reducing appetite for initiatives should make many emerging market risk. economies less vulnerable to the risk of a sharp The prospect of higher interest rates in ad- deterioration in financing conditions. vanced countries continues to pose a major down- Contagion is always a possibility, but it is less side risk. Although short- and long-term interest likely than in earlier periods, as investors appear to 21 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 be more discerning in assessing risks across coun- Federation) repaid structural adjustment loans tries. Thus, while pressures on pricing remain, the made in the midst of financial crises in the late probability of a sharp sell-off of emerging-market 1990s. debt remains limited. Net official debt flows, then, have been domi- nated by cycles in medium-term (three- to five- Capital flows from the official sector year) financing to developing countries in crisis Shift from loans to grants accelerates and by unscheduled repayments (prepayments) on O fficial flows of development finance have bilateral and multilateral loans. A better measure shown a dramatic shift from loans to grants of the resources available to finance countries' over the past three years (figure 1.12). Foreign aid long-term development needs is provided by offi- grants have increased by a cumulative total of cial development assistance (ODA), because ODA $20 billion during the period, while net official is defined by the Development Assistance Commit- lending has declined by $52 billion--implying a tee (DAC) of the Organisation for Economic Co- $32 billion decline in net official flows (aid and operation and Development (OECD) as aid grants lending combined). and concessional loans made by donor govern- Most of the decline in net official lending over ments and multilateral agencies for the purpose of the past three years can be attributed to a cumula- promoting economic development and welfare. tive $30 billion decline in net lending by the IMF, which reflects net repayments to the IMF of large Progress on official aid commitments disbursements of emergency assistance in 2001-- ODA data for 2004 will not be available until April mainly to Argentina, Brazil, and Turkey. Net lend- 2005. In 2003, ODA increased by $10 billion to ing by bilateral donors declined by a cumulative reach $69 billion, following a $6 billion increase in total of $14 billion over the past three years, largely 2002 (table 1.4). This represents a nominal increase from the shift in funding from loans to grants and of 18 percent in 2003, following a 2002 increase of because of prepayments by some developing coun- 11 percent. But in real terms (adjusting for inflation tries of earlier debt obligations to the Paris Club. In and exchange-rate changes), ODA increased by just addition, net lending by the World Bank fell by a 5 percent in 2003 and 7 percent in 2002. cumulative total of $9 billion over the three years as Strategic factors continue to play a major role in some developing countries (notably China, India, the allocation of ODA across recipient countries. In and Thailand) repaid a portion on their loans particular, the share of bilateral ODA disbursements ahead of schedule, while other developing countries to five countries--Afghanistan, Colombia, Iraq, (notably Argentina, Indonesia, and the Russian Jordan, and Pakistan--has increased from 3 percent on average during 1980­2000 to more than 6 per- cent in 2001­2, and more than 11 percent in 2003. Figure 1.12 Official debt flows and foreign aid Reconstruction aid to Iraq alone totaled $2.2 billion grants, 1990­2004 in 2004. Although the scope for improved aid effec- $ billions tiveness has improved in some of those countries, 50 such changes alone cannot account for the size of the Foreign aid grants increase in their shares of ODA. 40 From the perspective of the recipient coun- 30 tries, net ODA flows have grown gradually over 20 the past few years. ODA has been quite stable as a share of GDP in recipient countries, averaging just 10 over 1 percent since 1996, below the high of 0 2 percent reached in 1991 (figure 1.13). For the poorest recipient countries (excluding those in 10 Net debt flows from official sector conflict or postconflict), ODA has averaged just 20 over 2 percent since 1996, well below the high of 30 3.7 percent in 1992. 1990 1992 1994 1996 1998 2000 2002 2004 Half of net ODA flows in 2003 were com- Source: World Bank Debtor Reporting System. prised of special-purpose grants, which include 22 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S Table 1.4 Net official development assistance (ODA) from principal donor countries, 1990­2003 $ billions Percent change in 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 real terms in 2003a Total ODA 54.3 58.3 62.4 56.1 58.8 58.8 55.6 48.5 52.1 53.2 53.7 52.4 58.3 69.0 4.8 G-7 countries 42.4 45.6 48.6 44.6 46.6 44.7 41.3 35.1 38.6 39.4 40.2 38.2 42.6 49.9 6.3 United States 11.4 11.3 11.7 10.1 9.9 7.4 9.4 6.9 8.8 9.1 10.0 11.4 13.3 16.3 20.4 Japan 9.1 11.0 11.2 11.3 13.2 14.5 9.4 9.4 10.6 12.2 13.5 9.8 9.3 8.9 9.2 France 7.2 7.4 8.3 7.9 8.5 8.4 7.5 6.3 5.7 5.6 4.1 4.2 5.5 7.3 8.7 Germany 6.3 6.9 7.6 7.0 6.8 7.5 7.6 5.9 5.6 5.5 5.0 5.0 5.3 6.8 5.3 Non-G-7 countries 11.8 12.7 13.8 11.5 12.2 14.1 14.3 13.3 13.5 13.8 13.5 14.2 15.6 19.1 0.5 memo item: EU countries 28.3 30.3 33.5 29.5 30.1 31.2 31.4 26.8 27.6 26.7 25.3 26.4 30.0 37.1 3.0 a. Takes into account inflation and exchange-rate movements. Source: OECD Development Assistance Committee. Figure 1.13 ODA as a percentage of GDP in 0.7 percent of GNI. The bilateral portion of ODA recipient countries, 1990­2003 (less special-purpose grants) declined from 0.06 per- % GDP cent of GNI in 2000 to just under 0.05 percent in 4 2003, well below the 0.12 percent level reached in 1990.13 3 Prospects for development aid Poorest countries The World Bank's International Development As- sociation (IDA) helps the poorest countries allevi- 2 ate poverty by providing interest-free loans and some grants for programs aimed at boosting eco- nomic growth and improving living conditions. 1 All developing countries The fourteenth replenishment of IDA (IDA14), finalized in late February 2005, set a positive tone for future development financing. 0 During the replenishment negotiations, donor 1990 1992 1994 1996 1998 2000 2002 countries stressed the importance of several key Source: OECD Development Assistance Committee. initiatives: technical cooperation, debt forgiveness, emergency and disaster relief, and administrative costs. · A new system for allocating IDA grants based Although special-purpose grants are an essential on countries' risk of debt distress element of the development process and have · A strong focus on growth, private sector de- budgetary consequences for donor countries, they velopment, and infrastructure do not provide additional financial resources to · A results-measurement system for IDA14 recipient countries to support programs that are · Increased transparency and accountability, needed to achieve the Millennium Development including the disclosure of IDA's country per- Goals (MDGs).12 formance assessments Once special-purpose grants are subtracted · Measures to strengthen coordination and har- from the bilateral portion of ODA, development aid monization among development partners. declined slightly in 2003 (in nominal terms), after increasing by about $1 billion in 2002 (table 1.5). Financial resources provided by IDA over the com- Total ODA increased from 0.22 percent of GNI ing three years are set to increase by 25 percent at a in the DAC donor countries in 2001 to 0.25 per- minimum--the largest expansion in IDA resources cent in 2003, but it remains significantly below the in more than two decades. The proportion of 0.34 percent level reached in the early 1990s IDA resources provided through grants is set to (table 1.5) and well below the UN target level of increase from about 19 percent over the thirteenth 23 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Table 1.5 Net bilateral ODA and special purpose grants, 1990­2003 $ billions 1990 1995 2000 2001 2002 2003 Total ODA 54.3 58.8 53.7 52.4 58.3 69.0 Bilateral ODA 38.5 40.5 36.1 35.1 40.8 49.8 Special purpose grants: 18.7 24.0 21.5 22.4 26.9 36.1 Technical cooperation 11.4 14.3 12.8 13.6 15.5 18.4 Debt forgiveness 4.3 3.7 2.0 2.5 4.5 8.3 Emergency and diaster relief 1.1 3.1 3.6 3.3 3.9 5.9 Administrative costs 2.0 2.9 3.1 3.0 3.0 3.5 Bilateral ODA less special-purpose grants 19.8 16.5 14.6 12.8 13.9 13.7 As percentage of GNI in DAC donor countries Total ODA 0.34 0.26 0.22 0.22 0.23 0.25 Bilateral ODA 0.24 0.18 0.15 0.15 0.16 0.18 Bilateral ODA less special-purpose grants 0.12 0.07 0.06 0.05 0.06 0.05 Source: OECD Development Assistance Committee. replenishment to an estimated 30 percent over the required if developing countries were to achieve IDA14 period. The allocation of grants in IDA14 internationally agreed development goals and ob- will be determined primarily through assessments jectives. Developed countries were urged to of debt sustainability. Half of IDA14 resources "make concrete efforts" to increase ODA to the will be directed to those African countries that can UN target of 0.7 percent of GNI.14 New develop- meet performance standards required to make aid ment assistance commitments announced at Mon- effective. terrey implied that by 2006, ODA would increase This will be supplemented by an agreement on by a total of $12 billion per year. Moreover, there the tenth replenishment of the African Develop- was agreement at Monterrey that although addi- ment Fund (ADF-X) that was reached in late De- tional debt relief was an essential element of the cember 2005. The African Development Fund was development agenda (box 1.2), it should not de- established in 1972 to provide concessional devel- tract from augmenting the other financial re- opment finance to the poorest member countries. sources required to enable developing countries to The new agreement will provide $5.4 billion in attain the MDGs. funding, a 43 percent increase over the ninth re- In 2003, ODA in 5 of the 21 DAC donor coun- plenishment (ADF-IX). The grant component of tries exceeded the United Nations target of 0.7 per- funding will rise as well, from 21 percent under cent of their GNI: Denmark, Luxembourg, the ADF-IX to about 44 percent. ADF assistance to Netherlands, Norway, and Sweden (table 1.6). two-thirds of the eligible countries (26 countries) Three of these countries (Luxembourg, Norway, will be in the form of grants only. and Sweden) have agreed to increase ODA further The Commission for Africa issued a report to 1 percent of GNI. Four additional donor coun- in March 2005 that urges a doubling of aid to tries (Belgium, Finland, France, and Ireland) have Africa, including an investment of $150 billion in specified a firm date for raising ODA to 0.7 percent infrastructure over the next decade. The report of GNI. Spain and the United Kingdom have pro- calls for an additional $25 billion per year in aid, jected dates. Other donor countries have specified to be achieved by 2010. Subject to a review of interim targets for raising ODA as a percent of GNI progress, a further $25 billion per year is to be over time. As a group, the members of the European provided by 2015. Union aim to increase ODA from 0.35 percent of Participants at the United Nations Confer- GNI in 2003 to 0.39 percent by 2006. ence on Financing for Development in Monterrey Reflecting those commitments, ODA is pro- in March 2002 recognized that a substantial in- jected to increase from 0.25 percent of GNI in crease in ODA and other resources would be donor countries in 2003 to 0.30 percent by 2006, 24 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S Box 1.2 Implementation of the Heavily Indebted Poor Countries (HIPC) Initiative I n 1996, concerned that excessive debt was stifling eco- The debt stock of the 27 countries that have reached nomic growth and crippling efforts to reduce poverty in the decision point under the HIPC Initiative has been re- some of the world's poorest countries, the World Bank and duced by two-thirds. The World Bank alone has commit- International Monetary Fund (IMF) launched the Heavily ted about $13 billion in nominal debt-service relief to Indebted Poor Countries (HIPC) Initiative. The Initiative this group of countries over the next two decades. As a was based on an agreement by all major international result of the relief, ratios of debt service to exports have lenders to offer a fresh start to countries that were making been substantially reduced. Funds freed up by debt relief efforts to reduce poverty. The Initiative was enhanced in are directed, under the terms of the HIPC Initiative, to 1999 to provide deeper and faster debt relief to a larger programs designed to improve the lives of the poor. group of eligible countries and to increase the program's Poverty-reducing expenditures, on average, have risen links with ongoing poverty reduction efforts in those from 6.4 percent of GDP in 1999 to 7.9 percent of GDP countries. in 2003, nearly three times higher than debt service Currently eligible for debt relief under the HIPC expenditures. Initiative are 38 countries, 32 of them in Sub-Saharan Eligibility for the Initiative is based on several criteria Africa. Twenty-seven have reached the HIPC "decision related to income and indebtedness. In September 2004, point" at which donors make a commitment to provide the IMF and Bank extended the enhanced HIPC Initiative the debt relief necessary to meet a specified debt ratio. by two years to end-2006. The extended timeframe may (Most of the 11 countries that have not reached the allow other countries to enter the program. They will have decision point have been beset by internal strife, cross- to establish a track record of macroeconomic performance border conflict, governance challenges, or substantial in order to reach their decision point and qualify for debt arrears.) Fifteen countries have reached their "completion relief. In addition, several proposals are currently being points," seven since September 2003--Ethiopia, Ghana, considered to provide additional debt relief to make debt Guyana, Madagascar, Nicaragua, Niger, and Senegal. All more sustainable in low-income countries. 15 have received irrevocable debt relief. The debt relief accorded the other 12 "decision point" countries will not Sources: IMF/World Bank (2004) and World Bank staff. become irrevocable until they pass the completion point. Figure 1.14 ODA as a percentage of GNI in DAC still significantly less than the 0.34 percent level donor countries, 1990­2006 reached in the early 1990s (table 1.4 and fig- % GNI ure 1.14).15 The near-term increases imply an 0.35 Projections average 9 percent annual increase in ODA in real terms over the period 2004­6, well above the 0.30 average rate of real increases for the past two years 0.25 Total ODA/GNI (6 percent).16 The EU members as a group are projected to raise their net ODA contributions to 0.20 0.44 percent of their GNI, exceeding their stated goal of 0.39 percent by a significant margin. The 0.15 Bilateral ODA/GNI projected increase in EU contributions (equal to 0.10 $11.7 billion) accounts for 60 percent of the total projected increase in ODA ($19.4 billion). If donor 0.05 Bilateral ODA less special-purpose grants/GNI countries are to raise the amount of aid that can 0 be used for development purposes by the same 1990 1992 1994 1996 1998 2000 2002 2004 2006 proportion, bilateral ODA, less special-purpose Source: OECD Development Assistance Committee. grants, would have to increase from 0.05 percent 25 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Table 1.6 Projected increases in ODA from DAC Figure 1.15 Percentage of ODA disbursed to donors, 2003­6 Sub-Saharan Africa, 1990­2003 ODA as a percentage of GNI % ODA 2003 2006 Change 40 Norway 0.92 1.00 0.08 Denmark 0.84 0.83 0.01 35 Luxembourg 0.81 0.87 0.06 Netherlands 0.80 0.80 0.00 Sweden 0.79 1.00 0.21 30 Belguim 0.60 0.64 0.04 France 0.41 0.47 0.06 25 Ireland 0.39 0.61 0.22 Switzerland 0.39 0.38 0.01 Finland 0.35 0.41 0.06 20 EU members 0.35 0.44 0.09 UK 0.34 0.35 0.01 15 Germany 0.28 0.33 0.05 Australia 0.25 0.26 0.01 Canada 0.24 0.27 0.03 10 Spain 0.23 0.33 0.10 1990 1992 1994 1996 1998 2000 2002 New Zealand 0.23 0.26 0.03 Source: OECD Development Assistance Committee. Greece 0.21 0.33 0.12 Austria 0.20 0.33 0.13 Japan 0.20 0.22 0.02 Italy 0.17 0.33 0.16 Figure 1.16 ODA and grants from United States 0.15 0.19 0.04 Total 0.25 0.30 0.05 nongovernmental organizations, 1990­2003 $ billions Source: OECD Development Assistance Committee. 70 60 of GNI in donor countries in 2003 to 0.10 percent ODA by 2006. 50 African countries deemed to be strategically ODA less debt relief important are likely to be the largest recipients of 40 increases in ODA. The Africa Action Plan announced 30 at the G-8 Leaders Summit in Kananaskis (Canada) in June 2002 suggested that "in aggregate half or 20 more of our new development assistance could be directed to African nations that govern justly, invest 10 NGO grants in their own people, and promote economic free- 0 dom." Sub-Saharan Africa received 60 percent of 1990 1992 1994 1996 1998 2000 2002 increases in ODA disbursements over the five years Source: OECD Development Assistance Committee. from 1998 to 2003, raising its share of total ODA disbursements by DAC donors from 24 percent to 34 percent (figure 1.15). However, most of these resources from efforts to attain the MDGs. In funds were allocated to postconflict situations, limit- addition to providing emergency relief to the ing the amount provided for development aid. countries affected by the tsunami, substantial aid The major challenge facing most donor coun- will be needed to provide medical care and rebuild tries will be to augment aid to levels required to infrastructure over the medium term (box 1.3). support the MDGs and the Monterrey consensus Growing fiscal imbalances in many key donor in the face of growing fiscal pressures. Vigilance is countries, along with the prospect of further needed to ensure that unanticipated events (such financing gaps as populations age, are exerting as the devastation caused by the tsunami in late intense pressures on donor countries to pursue fis- December 2004), as well as funding for crisis re- cal consolidation. Financing for development will sponse and postconflict recovery,17 do not divert need to be a top priority on the political agenda of 26 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S Box 1.3 Aid in the wake of the Asian tsunami T he tsunami that hit the Indian Ocean basin on infrastructure is old. Between 1985 and 1999, December 26, 2004, is one of the worst human 96 percent of recorded disaster fatalities were in disasters of modern times. Triggered by an earthquake developing countries (Center for Research on the measuring 9.0 on the Richter scale, the tsunami affected Epidemiology of Disasters 2005). eight countries in East Asia, South Asia, and Africa. Fatalities are expected to exceed 200,000, and some Ensuring that disbursements follow the substantial 1.5 million people lost their homes and livelihoods. The resources pledged will require careful monitoring. world's response has been generous: some $7.8 billion According to the United Nations, resources actually in official emergency and reconstruction aid has been delivered have fallen far short of pledges in recent natural pledged, supplemented by private donations of between disasters. Just half of the $400 million pledged after the $1 billion and $2 billion. 2000 floods in Mozambique was received. And only This global response continues an upward trend one-third of the $8.7 billion promised to Honduras and in emergency relief. Since 1970, the proportion of ODA Nicaragua after Hurricane Mitch in 1998 was sent. accounted for by emergency relief has increased from Obstacles--damaged or destroyed transport and logistical 0.1 percent to 7.8 percent--a rise from $6.9 million infrastructure, a multiplicity of donor organizations, and to $5.4 billion. The trend is believed to reflect two shortages of local staff and officials to coordinate aid factors: distribution--need to be overcome before pledged aid can reach the affected areas. · Heightened awareness and concern about events in In addition to the emergency and reconstruction aid the developing world among people everywhere. outlined above, Paris Club creditors announced a debt Emergency aid can be seen as an altruistic response moratorium for countries affected by the disaster. The to more thorough and timely news from abroad, as countries have the option to request a deferral of principal well as a reflection of the growing importance of and interest payments due to Paris Club creditors so that developing countries in the global economy. more resources can be allocated to the reconstruction · An increase in the number of people living in vulner- effort. able areas. As the global population has grown from Tsunami aid should come on top of, rather than in 3.7 billion in 1970 to 6.2 billion in 2003, more lieu of, other programmed development assistance. With people now live in areas vulnerable to natural many of the bilateral donors making tsunami pledges disasters--on fault lines, in floodplains and regions approaching or exceeding their 2005 annual disaster relief susceptible to hurricanes, and in areas affected budgets, there is reason to be concerned that the assistance by environmental degradation or climate change. may be reallocated from existing commitments or diverted Population growth has been concentrated in from other recipient countries' aid budgets. Emergency aid developing countries, where fewer public and clearly plays a vital role in the broader development private resources are devoted to prevention and agenda, but it cannot displace other financial resources early warning, building codes are inadequate, and that are required to support the MDGs. these countries if ODA is to increase as a percent- nent of NGO grants) have increased by $5 billion age of GNI--as foreseen in Monterrey. (in nominal terms) between 1990 and 2003. ODA has increased by $15 billion over this period, while Grants from nongovernmental organizations ODA less debt relief has increased by $10 billion (NGOs) play a more prominent role (figure 1.16). Between 1990 and 2003, NGO NGOs are providing a growing source of financial grants increased from a value equal to 10 percent resources for developing countries.18 Grants by pri- of ODA less debt relief to 17 percent. vate voluntary agencies (the private-sector compo- 27 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Annex: Recent trends in workers' remittances to developing countries Strong gains in workers' remittances to Increases in remittance flows have been par- developing countries ticularly strong in China, India, Mexico, Pakistan, Workers' remittances provide valuable financial and the Philippines (table 1A.2). Those five coun- resources to developing countries, particularly the tries together account for $31 billion of the poorest.19 Remittances to developing countries $41 billion increase in remittances to all develop- from overseas resident and nonresident workers ing countries between 2001 and 2003. The data are estimated to have increased by $10 billion available for 2004 suggest that remittance flows (8 percent) in 2004, reaching $126 billion. That will continue to show strong gains in India, increase followed a $17 billion (17 percent) Mexico, and the Philippines. increase in 2003 (table 1A.1). Much of the Even though most top recipient countries are $10 billion increase in 2004 occurred in low- large, remittances to many small developing coun- income countries, where remittances rose by tries are significant as a share of GDP or in per capita $6.7 billion (18 percent).20 Since 2001, remit- terms. Examples include Lesotho, Tajikistan, and tances to developing countries have increased by Tonga. Lebanon also is among the top recipients of $41 billion (almost 50 percent). Low-income remittances, when measured on a per capita basis. countries account for almost half of the increase: The surge in remittance flows over the past the share of remittances going to low-income few years reflects several factors. There have been countries rose from 28 percent in 2001 to 35 per- significant reductions in remittance sending costs cent in 2004. in some countries--for example, 60 percent in the Most of the $41 billion increase in remit- U.S.-Mexico corridor since 1999. Growing migra- tances to developing countries from 2001 to 2004 tion and measurement issues also play prominent was concentrated in South Asia ($17 billion), roles. The sizeable depreciation of the dollar Latin America and the Caribbean ($13 billion), against most other major currencies (the euro in and, to a lesser extent, East Asia and the Pacific particular) over the past three years has increased ($7 billion). Remittances are more evenly distrib- the dollar value of nondollar remittances over uted than capital flows to developing countries. time. Some of the increase in remittance flows can Table 1A.1 Workers' remittances to developing countries, 1990­2004 $ billions Change 1990 1995 2000 2001 2002 2003 2004e 2001­4 Developing countries 31.3 56.7 76.8 84.6 99.0 116.0 125.8 41.2 Lower middle-income 17.5 34.8 41.9 44.1 49.1 54.8 55.6 11.5 Upper middle-income 5.7 8.6 13.1 16.8 18.7 24.4 26.8 10.0 Low income 8.1 13.3 21.7 23.8 31.2 36.7 43.4 19.6 Latin America and the Caribbean 5.8 13.4 20.2 24.2 28.1 34.1 36.9 12.7 South Asia 5.6 10.0 16.0 16.0 22.3 26.7 32.7 16.7 East Asia and the Pacific 3.2 9.0 11.2 12.9 16.6 19.5 20.3 7.4 Middle-East and North Africa 11.7 13.0 13.5 15.2 15.5 16.8 17.0 1.8 Europe and Central Asia 3.2 8.1 11.0 11.4 11.5 12.8 12.9 1.5 Sub-Saharan Africa 1.9 3.2 4.9 4.9 5.1 6.0 6.1 1.2 Note: e estimate Remittances are defined as the sum of workers' remittances, compensation of employees, and migrant transfers. Sources: IMF Balance of Payments Statistics Yearbook 2004 and World Bank estimates. 28 F I N A N C I A L F L O W S T O D E V E L O P I N G C O U N T R I E S Table 1A.2 Developing countries with highest 5. For a more complete discussion of the main factors remittance flows, 2001 and 2003 explaining substitution between FDI and portfolio equity $ billions flows, see box 4.8 in World Bank (2004: 101). 6. A recent study by Xiao (2004) estimates that FDI in- 2001 2003 Change flows to China are overstated by between 26 and 54 percent, India 11.1 17.4 6.3 implying that China's share of FDI inflows to all developing Mexico 9.9 14.6 4.7 countries is in the 15­25 percent range. China 1.2 4.6 3.4 7. See chapter 5 for a more detailed discussion of FDI Pakistan 1.5 4.0 2.5 flows to low-income developing countries. Philippines 6.2 7.9 1.7 8. FDI outflows from Brazil totaled $9.5 billion in Poland 1.1 2.3 1.2 2004. This includes a $5 billion merger between Ambev (a Bangladesh 2.1 3.2 1.1 Brazilian beverage group) and Interbrew (a Belgium-based Brazil 1.8 2.8 1.0 brewer), which was financed by an equity swap (Ambev Colombia 2.1 3.1 1.0 Vietnam 2.0 2.7 0.7 shareholders received shares of Interbrew and vice versa). All developing countries 84.6 116.0 31.4 This $5 billion transaction was reported in the inward and outward FDI flows in Brazil's balance of payments. Sources: IMF Balance of Payments Statistics Yearbook 2004 and 9. Developing countries are estimated to have ac- World Bank estimates. counted for about one-third of FDI inflows to other devel- oping countries ("South-South flows") over the period 1997­2001 (World Bank 2004: 81). 10. For a more complete discussion of the extent to be attributed to improvements in data recording which FDI outflows from developing countries are underes- by central banks. In addition, security concerns timated see box 4.3 in World Bank (2004: 90). and heightened scrutiny by immigration authori- 11. Econometric projections for net FDI inflows to de- ties in many rich countries are believed to have en- veloping countries over the period 2005­6 are generated couraged outward remittance of savings by undoc- using the model discussed in World Bank (2004: 100). 12. For one set of estimates of the financial resources umented migrants. This is reportedly the case in required to meet the MDGs, see chapter 4 of the Overview Pakistan, which recorded a tripling of remittance Report in United Nations (2005). receipts between 2001 and 2003. 13. See chapter 5 for a more complete discussion of the As a final point, it should be recognized that evolution of aid flows since the early 1990s. the above data represent officially recorded remit- 14. The 0.7 percent target was originally specified in a 1970 resolution of the UN General Assembly. tances, which are sometimes estimated. Flows 15. Reported in OECD (2005: 12). through informal channels, such as hawala, are not 16. This calculation is based on a projected growth captured in the official statistics but are believed to rate for GNI in donor countries of 2.5 percent in 2004 and be quite large. Also, a significant portion of remit- 2.7 percent in 2005­6 and abstracts from exchange-rate tances flows through formal channels that are not changes over the projection period. 17. Donor conferences have already committed sub- included in the official statistics, because most stantial funding to postconflict countries, notably Iraq ($32 countries do not insist on regular reporting of flows to $36 billion over the period 2004­7), Afghanistan ($8 bil- below certain predefined thresholds.21 lion over the period 2004­6), and Haiti ($1 billion over the period 2004­6). 18. See box 5.2 in chapter 5 for a discussion of the Notes growing importance of NGOs in financing poor countries. 19. For more detailed analysis of workers' remittances 1. Projections of world GDP growth are measured see chapter 7 in World Bank (2003), and "Monetary Life- using market exchange rates; projections measured using line" in The Economist, July 31, 2004, 66. purchasing power parity (PPP) weights are reported in 20. See chapter 5 for a discussion of the growing im- table 2.1. portance of remittances sent to the poorest countries. 2. For a more detailed discussion of foreign reserve ac- 21. For example, remittances under $10,000 are not cumulation in developing countries and global imbalances, required to be reported in the United States; nor are remit- see chapter 3. 3. More specifically, the equity capital component of tances under 12,500 in the European Union. FDI tends to be stable; the other two components-- intercompany loans and reinvested earnings--tend to be as volatile as portfolio equity and debt flows. This is discussed References in greater detail in World Bank (2004: 86­90) and in box 4.2 in World Bank (2003: 89). Debtor Reporting System Database. World Bank. 4. Net FDI and portfolio equity flows have a correla- http://www.worldbank.org/DRS/data.html (accessed tion coefficient of ­0.6 over the period 1996­2004. 2005). 29 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 IMF (International Monetary Fund). 2004. Balance of Pay- United Nations. 2005. Investing in Development: A Practi- ments Statistics Yearbook 2004. Washington, DC: IMF. cal Plan to Achieve the Millennium Development . 2005. International Financial Statistics Yearbook Goals. New York. 2004. Washington, DC: IMF. World Bank. 2003. Global Development Finance 2003. IMF/World Bank. 2004. "Heavily Indebted Poor Countries Washington, DC: World Bank. Initiative: Status of Implementation." Washington, . 2004. Global Development Finance 2004. DC: World Bank. Washington, DC: World Bank. "Monetary Lifeline." The Economist, 31 July 2004, 66. Xiao, Greg. 2004. "People's Republic of China's Round- OECD (Organisation for Economic Co-operation and Tripping FDI: Scale, Causes and Implications." ADB Development), Development Assistance Committee. Institute Discussion Paper 7, Asian Development Bank, 2005. Development Cooperation Report 2004. Devel- Manila. opment Assistance Committee. Paris: OECD. 30 . 2 Global Outlook and the Developing Countries F OLLOWING VERY STRONG GROWTH cause GDP growth among high-income countries of 3.8 percent last year, the world economy to slow to about 2.5 percent in 2005. Moreover, is slowing. Output increased particularly coupled with reduced demand for imports, those quickly in the first half of 2004, driven by solid factors are expected to reduce growth in low- and U.S. performance and a torrid export-led expan- middle-income economies--although continued sion in China. But higher oil prices and the effects gains in market share should temper the slow- of exchange rate appreciation caused quarterly down. Thus, while growth should decline, these output in many high-income countries to decline economies are nevertheless expected to expand in the second half, notably in Germany, Italy, and by a robust and above-trend 5.7 percent in 2005. Japan. Developing economies outgrew high-in- Partly as a result, oil and metal prices are expected come countries, with aggregate GDP rising by to rise further in 2005, before softening in 2006 some 6.6 percent for the year as a whole--a record and 2007 as new capacity comes onstream. expansion. In addition to China, India and Russia Over the period through 2007, a gradual also grew very quickly. But all developing regions pickup in activity outside of the United States, cou- grew faster in 2004 than they did during the past pled with higher U.S. interest rates and a limited decade. tightening of fiscal policy should reverse the rising Very strong world demand was reflected in trend in the U.S. current account deficit, which is emerging capacity constraints, rising prices in com- projected to fall from 5.6 percent of GDP in 2004 modity markets, and increased inflation in some to about 5.3 percent in 2007. At the same time sur- developing regions, notably South Asia, Latin pluses in the developing world are projected to America, and some parts of developing Europe. decline from 2.7 to 1.4 percent of GDP. Although Oil prices rose 31 percent, while other commodity these changes will not significantly reduce the sup- prices increased 18 percent, with mixed conse- ply of dollars on world financial markets, higher quences for developing countries. Oil and other U.S. interest rates should increase the appetite of commodity exporters were able to build up current private sector investors for dollar-denominated account surpluses, while importers (the majority of assets, so that the currency is likely to depreciate developing countries) saw a significant rise in their only modestly over the projection period. import bills. In contrast to earlier episodes of rising The depreciation of the dollar to date against commodity prices, developing countries, notably most currencies has increased the importance of China, were the principal source of increased domestic demand outside the United States as a demand over the past few years. driver of global growth. A further rotation of Increases in U.S. interest rates, the waning ef- trade patterns is projected, with the volume of ex- fect of earlier fiscal loosening, and, in Europe, the ports from the United States expected to grow effects of the 25 percent real effective appreciation by about 8 percent in 2007. Up to now, most of the euro since February 2002 contributed to a developing countries have experienced only mod- slowing of GDP growth in the second half of 2004 erate fluctuations in their real effective exchange and into 2005. These same factors are projected to rates, either because of co-movements of their 33 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 exchange rate with that of their dominant trading (table 2.1). Growth among high-income countries partner or because the effect of the dollar's depre- came in at a robust 3.1 percent, led by the United ciation has been offset by the appreciation of the States (up 4.4 percent), but moderated by weaker euro and the yen. While changes in bilateral ex- performance in Japan (2.6 percent growth) and change rates are likely to impose some adjustment Europe (1.8 percent). While growth in Japan and costs, the export growth of low- and middle- Europe was stronger than in 2003, the apprecia- income countries is expected to remain strong tion of their currencies contributed to the weaken- because their overall real-effective exchange rates ing of their exports in the second half of the year. have moved relatively little. As a result, these coun- Overall, output in Germany and Italy actually de- tries are projected to continue increasing their clined in the third and fourth quarters, although share of world markets. several other major European economies, including This is a relatively benign scenario. However, France and Spain, recorded growth in excess of an abrupt increase in interest rates, a further large 2.5 percent. Meanwhile, the depreciation of the dol- and precipitous depreciation of the dollar, a larger- lar supported U.S. export growth despite a slowing than-anticipated hike in oil prices, or a resurgence of in world trade volumes. This, plus strong consumer protectionist sentiment could provoke a significant and investment spending in an environment of very slowdown or even recession in the global economy. low interest rates, kept U.S. growth robust in the Policy can help reduce the likelihood and second half. Japan also recorded negative growth in potential severity of a weaker outturn. A signifi- the second and third quarters, but a pickup in cantly tighter U.S. fiscal policy would reduce the inventory accumulation in the fourth quarter re- extent to which higher interest rates in the United turned the economy to a positive growth track. States (or lower rates in Europe) will be required At 6.6 percent, growth among developing to support the dollar. For their part, developing economies was the fastest it has been at any time economies need to ensure that they do not accu- in the past 30 years (figure 2.1). China led the way mulate excessive liabilities, the future repayment of with growth of 9.5 percent, driven by strong which, under conditions of higher interest rates domestic demand and very large increases in both and slower world growth, could pose serious prob- exports and imports. As a result, China's perfor- lems. In addition, in some countries a managed mance has become an increasingly important appreciation might help alleviate domestic infla- factor in global growth prospects, particularly for tionary pressures and facilitate the sharing of the East Asia. Both India and Russia grew around benefits of economic growth by lowering the costs 7 percent, led by exports in the case of India of imported consumer goods and services. While a and strong oil-revenues in the case of Russia. move away from a strict dollar peg by some devel- Growth in the remainder of the developing world oping currencies would tend to cause the dollar to depreciate more, it would likely dissipate some of Figure 2.1 Developing-country and world growth, the tensions in international financial markets 1980­2007 caused by thus-far-unrealized expectations of such % GDP growth (1995 constant dollars) a depreciation. Meanwhile, the multilateral trade liberalization process is in need of a kick start. 7 Without it, the Doha Round runs the risk of yield- Developing countries 6 ing few gains for developing economies. While a coordinated international policy re- 5 sponse would likely be optimal, the policy steps out- 4 World lined above should be taken even in the absence of coordination because they would benefit each iden- 3 tified group even if the others failed to act. 2 Global growth 1 W orld GDP is estimated to have increased 0 3.8 percent in 2004, supported by an im- 1980 1985 1990 1995 2000 2005 pressive 10.3 percent increase in trade volumes Source: World Bank. 34 G L O B A L O U T L O O K A N D T H E D E V E L O P I N G C O U N T R I E S Table 2.1 The global outlook in summary (percentage change from previous year, except interest rates and oil price) 2003 2004e 2005f 2006f 2007f Global conditions World trade volume 5.6 10.3 7.7 7.7 8.0 Consumer prices G-7 countriesa,b 1.6 1.8 1.7 1.6 1.6 United States 2.3 2.7 3.0 3.5 3.2 Commodity prices (U.S. dollar terms) Non-oil commodities 10.2 17.5 4.7 5.2 5.4 Oil price (US$ per barrel)c 28.9 37.7 42.0 36.0 33.0 Oil price (percent change) 15.9 30.6 11.3 14.3 8.3 Manufactures unit export valued 7.5 7.0 3.0 2.8 1.9 Interest rates $, 6-month (percent) 1.2 1.6 3.5 4.6 5.0 , 6-month (percent) 2.3 2.1 2.1 2.8 3.2 Real GDP growthe World 2.5 3.8 3.1 3.1 3.2 Memo item: World (PPP weights)f 3.9 5.0 4.3 4.2 4.3 High income 1.9 3.1 2.4 2.6 2.6 OECD countries 1.8 3.1 2.3 2.5 2.6 Euro Area 0.5 1.8 1.2 2.2 2.6 Japan 1.4 2.6 0.8 1.9 1.9 United States 3.0 4.4 3.9 3.0 2.6 Non-OECD countries 3.2 6.2 4.4 4.4 4.3 Developing countries 5.3 6.6 5.7 5.2 5.4 East Asia and Pacific 8.0 8.3 7.4 6.9 7.2 Europe and Central Asia 5.9 6.8 5.5 4.9 5.0 Latin America and the Caribbean 1.7 5.7 4.3 3.7 3.7 Middle East and North Africa 5.8 5.1 4.9 4.3 4.3 South Asia 7.8 6.6 6.2 6.4 6.7 Sub-Saharan Africa 3.4 3.8 4.1 4.0 4.1 Memorandum items Developing countries excluding transition countries 5.2 6.7 5.7 5.3 5.5 excluding China and India 3.9 5.8 4.8 4.4 4.4 Note: PPP purchasing power parity; e estimate; f forecast. a. Canada, France, Germany, Italy, Japan, United Kingdom, United States. b. In local currency, aggregated using 1995 GDP weights. c. Simple average of Dubai, Brent, and West Texas Intermediate crude oils. d. Unit value index of manufactured exports from major economies, expressed in U.S. dollars. e. GDP in 1995 constant dollars; 1995 prices and market exchange rates. f. GDP measured at 1995 PPP weights. Source: World Bank. was also robust, with GDP expanding by more during 2004, with industrial-production growth than 5.5 percent. easing from 12 percent in the first half to 8 percent Strong investment growth has played a major in the second half (figure 2.2). Merchandise trade role in these results. Low interest rates helped in- volume also moderated, slowing from an crease ratios of investment to GDP to 28 percent annualized rate of 18 percent in the first quarter to for low- and middle-income economies as a group. some 14 percent in the second half. Slowing trends Double-digit increases in trade were also central to have continued into 2005, although leading busi- this strong performance, as developing countries ness indicators suggest that a turnaround can be exploited low domestic costs, market openings, and expected during the course of the year. other structural reforms to increase their share in Looking forward, rising interest rates and world exports (from 20 to 25 percent since 1999). high oil prices, combined with the waning of the High-frequency data suggest that the rate of fiscal stimulus that has supported growth in the expansion among developing countries slowed recent past should continue to dampen world 35 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 2.2 Slowing industrial production, Figure 2.3 Regional growth projections, 2003­7 September 2003­May 2005 Annual growth (%) % change (3-month moving average, annual rate) 9 2003 2004 2005 2006 2007 15 Developing Forecast countriesa 10 6 5 0 3 Worlda 5 High-income countries 0 10 ica Asia and and Asia 2003 2004 2005 andica Afr East Pacific Asia ica East Afr an a al ibbean South Excluding China. Europe th and AmerCar Source: World Bank. Centr MiddleNor Latinthe Sub-Sahar Source: World Bank. growth. As a result, global economic activity is projected to slow fairly sharply in 2005 before during the first half of 2005 in Indonesia, the stabilizing in 2006 and picking up somewhat in Maldives, Sri Lanka, and Thailand, with the 2007. brunt of the impact borne by the coastal regions As the Federal Reserve moves to a more neu- immediately affected. As reconstruction efforts get tral stance of monetary policy in the United States, underway, growth should firm toward the end of higher interest rates are expected to slow the pace the year. However, the overall impact of these of both consumption and investment activity. At changes will be difficult to discern in regional the same time, however, the depreciation of the growth rates.1 dollar should stimulate export growth, helping to The projected slowdown among high-income sustain activity at a relatively high level. In Japan, economies will be reflected in slower trade and sharply falling world demand for high-tech prod- output growth among developing economies, ucts, slowing global trade, the appreciation of the while higher world interest rates will also slow the yen, and the domestic investment cycle contributed expansion of domestic demand (figure 2.3). As to a weak second half in 2004. The economy is a group, however, low- and middle-income coun- projected to expand by just 0.8 percent in 2005. tries should again outperform the high-income Moderate wage growth in Europe and high oil economies by a large margin through to 2007. prices have cut into consumer demand, while the And growth rates are expected to exceed the levels appreciation of the euro has hurt exports. These observed in the 1990s.2 negative factors are counterbalanced by significant Growth in the economies of the East Asia and pent-up demand for capital goods, following Pacific region will continue to reflect developments years of subdued investment--already evident in China. There, administrative controls have suc- in the steady (if unspectacular) acceleration in ceeded in slowing the pace of investment in some investment activity over the past year. Further sectors, and there are increasing signs that personal strengthening of investment and the waning nega- incomes and expenditures are rising less quickly tive influence of the euro's appreciation are pro- than in the immediate past. As a result, GDP jected to result in a gradual firming of euro zone growth is expected to moderate, and inflation growth rates to about 2.6 percent in 2007. should stay in check. Elsewhere in East Asia, ex- While the human costs of the December 2004 ports are being affected by falling world demand for tsunami were horrific, its economic impacts are high-tech products and somewhat less robust expected to remain localized. Disaster-related Chinese investment demand. Overall, regional GDP declines in output are projected to slow growth growth is projected to ease to 7.4 and 6.9 percent in 36 G L O B A L O U T L O O K A N D T H E D E V E L O P I N G C O U N T R I E S 2005 and 2006 before picking up somewhat in countries benefited from strong world demand, no- 2007. For the region excluding China, a similar pat- tably from regional oil exporters, causing their ex- tern is expected, with growth at about 5.4 percent in ports to grow by 6.2 percent. Economic activity 2005 and picking up to 6.2 percent by 2007.3 among regional oil exporters is projected to slow to GDP increased in the Europe and Central Asia about 4 percent in 2006, partly because the full im- region by 6.8 percent in 2004, spurred on by very pact of stronger domestic demand will be partly off- strong growth in the Russian Federation, where set by leakages in the form of accelerating imports. high oil prices have boosted incomes. Regional GDP This strong import demand, coupled with the eas- and trade growth were also enhanced by investment ing of oil prices beginning in the second half of flows related to the accession of several countries to 2005 (see the commodities discussion below) and the European Union--a factor reflected in very high the entry into force of preferential trade agreements rates of increase in both imports and exports. A with the European Union will nudge up growth sharper-than-expected decline in Turkish inflation among oil importers to about 5.2 percent in 2006. boosted real incomes, triggering strong domestic GDP increased some 6.6 percent in South Asia demand and a steep increase in its current account in 2004, down from 7.8 percent the year before. deficit. Elsewhere in the region, inflationary pres- Most of the slowdown occurred in India and re- sures are building. This is expected to provoke a flected poor crops. Nevertheless the Indian econ- tightening of domestic monetary policy that, in omy led the region, expanding by 6.8 percent. combination with expected increases in world inter- Growth among other South Asian countries actu- est rates, should see regional interest rates rise even ally picked up a bit, coming in at 5.9 percent. further, slowing investment and consumption. A Overall regional GDP is projected to slow in 2005 leveling-off of oil incomes and the negative influence to 6.2 percent, reflecting more moderate Chinese of a strong real effective appreciation by a number and OECD import demand, before regaining of the region's economies4 are expected to dampen strength in 2006 and 2007, when it should in- regional growth to about 5 percent by 2007. crease by about 6.7 percent. Rising inflation in Economic activity in Latin America and the Pakistan and Sri Lanka will require a strong re- Caribbean increased by some 5.7 percent during sponse from domestic authorities, weakening near- 2004, substantially faster than the region's 0.4 per- term growth prospects in those countries. cent average growth rate over the preceding three Economic activity in Sub-Saharan Africa in- years. Strong world demand for commodities con- creased by an estimated 3.8 percent in 2004, with tributed to large output gains in Brazil, Chile, and virtually all countries reporting positive growth Mexico. Argentina's substantial rebound follow- (Côte d'Ivoire, the Seychelles, and Zimbabwe being ing its 45 percent real effective depreciation be- notable exceptions). A large number of countries tween late 2001 and early 2005 contributed to the saw output increase by 5 percent or more. Growth strong performance of the region. The expected in the region is projected to pick up in 2005 to leveling-off of commodity prices in 2005 and 2006 4.1 percent as the benefits from past reforms and a means that the contribution to growth from in- globally more peaceful environment are reflected in creases in resource-based incomes will decline. improved growth rates. Still-high metals and miner- Nevertheless, still-high prices imply that incomes als prices will contribute to good performance in will remain elevated, continuing to support de- many countries, notably South Africa, while contin- mand at high levels. Rising interest rates, ued tightness in the oil market will benefit regional prompted by higher world rates and growing do- oil exporters such as Nigeria. Ethiopia and Sierra mestic inflationary pressures, will be a further Leone are expected to perform particularly well as drag on growth, which is projected to slow to they continue to benefit from more peaceful condi- about 3.7 percent by 2007. tions. The projected upturn in Europe, the region's The economies of the Middle East and North main trading partner, should also stimulate growth, Africa continued to profit from high oil prices in while rising exports to China will play an increasing 2004. GDP growth among developing oil exporters role. Despite substantially improved performance, was strong at 5.5 percent, but down from 6.7 per- per capita GDP growth in the region will lag the rest cent in 2003 as capacity constraints made them- of the world by a significant margin, implying a fur- selves felt. Labor-abundant and resource-poor ther widening of income gaps. 37 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Global imbalances, currencies, Figure 2.5 Financing the U.S. current account: and inflation net flows by asset type, 2000, 2002, and 2004 T he current account of the United States has $ billions been in deficit throughout the past two 1,000 Foreign official assets decades, with the sole exception of 1990. Following and government securities several years of deterioration, it reached a new high 750 of $666 billion, or 5.6 percent of GDP in 2004. As Other private securities and banking a consequence of these repeated deficits, the United 500 States has been transformed from a significant net international investor in the 1970s to the world's 250 largest debtor. Its net external liability at the end of 2003 was estimated at $2.7 trillion (23 percent of 0 U.S. GDP, or 7.5 percent of world GDP). FDI plus equity investment Reflecting these developments, but also a wide 250 range of structural policies that have improved eco- 2000 2002 2004 nomic performance, the current account position of Sources: U.S. Department of Commerce; World Bank estimates. most developing countries has improved, and now virtually all major regions are running modest cur- rent account surpluses (figure 2.4). purchases is finding its way into the rapidly rising Until recently, the U.S. deficit was financed official reserves of foreign central banks, notably largely through private capital inflows in the form those of developing countries (chapter 3). of foreign direct investment (FDI) and purchases of Partly as a consequence of the net outflow of U.S. corporate securities. Beginning in 2001, how- private sector investment, the dollar began to ever, this changed. Net foreign purchases of private slide, not just against the euro but also against sector assets dried up and actually turned negative most developing-country currencies, both nomi- in the first half of 2004. For the year as a whole, nally and in real terms (figure 2.6). most of the current account deficit was financed These imbalances are expected to stop increas- by sales of public sector assets and securities (fig- ing and may even diminish somewhat. In particular, ure 2.5). Moreover, a substantial share of these the U.S. current account deficit is expected to stop rising and gradually decline--reaching 5.3 percent of GDP in 2007. Figure 2.4 Estimated global imbalances in current accounts, 2004 Several factors are expected to contribute to this development. $ millions 200 · Both U.S. short- and long-term interest rates 100 are projected to continue rising, reaching 0 about 5 percent by 2007 as the Federal 100 Reserve Bank moves towards a more neutral monetary policy stance. As a result, real inter- 200 est rates, which have been negative in recent 300 years, will turn positive. This should induce an 400 increase in net private savings,5 which cur- 500 rently represent less than 1 percent of house- 600 hold income, and reduce imports--thereby 700 contributing to a lower current account ica deficit. Asia and States Zone Japan China Eastica Other Asia Amerbbean · A modest tightening of U.S. fiscal policy is pro- Euro EastPacific Afr Middleth al ri United and Europe LatinCa Other Nor Centr the jected, with the general government deficit ex- and and pected to decline from an estimated 4.4 percent Source: World Bank. of GDP in 2004 to some 3.5 percent in 2007. 38 G L O B A L O U T L O O K A N D T H E D E V E L O P I N G C O U N T R I E S Figure 2.6 Appreciation of developing-country This, along with the cumulative effect of the currencies against the dollar between dollar depreciation, will also help constrain January 2002 and February 2005 overall demand and contribute to a decline in % change in real exchange rate the current account deficit. Iran, Islamic Rep. of · Continued strong growth in developing Argentina economies and robust demand for imports Uruguay Venezuela, R. B. de will increase U.S. exports. In particular, do- Romania mestic demand is projected to be very strong Madagascar Egypt, Arab Rep. of among oil-exporting countries, leading to a Dominican Republic Mexico reduction in the current account surplus of Bolivia oil-exporting Middle East countries equal to Jamaica Costa Rica 8 percent of their GDP. Saudi Arabia Depreciation Sri Lanka St. Vincent and the Grenadines In addition to the stabilization and even modest Philippines Malaysia shrinking in the U.S. current account deficit, rising Colombia interest rates in the United States relative to rates Brazil Paraguay elsewhere should alleviate downward pressure on Dominica the dollar by increasing investors' willingness to Jordan China finance the deficit. Specifically, short-term U.S. Honduras Algeria interest rates are projected to increase more than El Salvador European rates until 2006, opening up a gap of Peru Singapore almost 200 basis points between them. These higher Ukraine returns on dollar-denominated assets should be Chile Thailand sufficient to induce additional private sector pur- Ecuador Uganda chases of dollar-denominated bonds. As a result, the Nepal dollar is expected to depreciate only modestly, by Poland India about 10 percent over the forecast period. Estimates Armenia suggest that the increases in U.S. interest rates al- Guatemala Pakistan ready observed (figure 2.7) have been sufficient to Mauritius Tunisia almost eliminate financial incentives to continue the Kenya "carry trade" against the dollar (Moore 2004).6 Kyrgyz Republic Latvia Appreciation Kazakhstan Belarus Indonesia Figure 2.7 Interest rates and the weakening dollar, Hungary 1995­2005 Mali Albania Percent Euros/dollar Lithuania Congo, Rep. of 4 1.3 6-month interbank Russian Federation interest-rate differential Euro exchange rate Turkey 1.2 U.S.­Euro Zone Tonga 3 1.1 Benin Czech Republic 2 1.0 Slovenia Croatia 0.9 Burkina Faso 1 Estonia 0.8 Côte d'Ivoire Bulgaria 0 0.7 Angola Slovak Republic 0.6 Botswana 1 South Africa 0.5 Swaziland 2 0.4 80 40 0 40 80 1995 1997 1999 2001 2003 2005 Source: World Bank. Source: World Bank. 39 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 2.8 Very low real interest rates in the Figure 2.9 Rising consumer inflation, 2000­4 United States, 1997­2005 % change Percent 9 2000 2001 2002 5 2003 2004 Long-term interest rates 4 3 6 2 1 3 0 1 Short-term interest rates 2 0 3 an Asia and and Asia 1997 1998 1999 2000 2001 2002 2003 2004 2005 andica ica East Pacific Asia ica Afr al ibbean East Afr South Note: Long-term rates are 10-year yields on U.S. government bonds. Europe th and AmerCar Sub-Sahar Short-term rates are the federal fund rate. Both are deflated by Centr MiddleNor Latinthe consumer inflation. Source: World Bank. Source: World Bank. The recent period of very low real interest rates (figure 2.8) has been particularly beneficial As global interest rates rise, these pressures to developing economies. Together with narrower should dampen. However, inflation in developing risk premia, low rates have allowed developing countries is projected to continue rising in 2005 as countries to reduce their financing costs (chap- growth remains at or above trend rates. In Europe, ters 1 and 3) and pursue strong investment growth. the disinflationary effects of the euro's apprecia- However, this strong economic performance tion and still-large output gaps should limit price has brought on a pickup in inflation in many increases. In contrast, the lower dollar can be developing countries (figure 2.9). Inflation in- expected to generate additional upward price pres- creased from 3.8 percent in the fourth quarter of sure in the United States. In particular, import 2003 to 6.2 percent by the third quarter of 2004. prices are expected to begin contributing to rising Since then, it has eased somewhat and was 4.8 per- inflation in the United States, as rising inflation in cent in February 2005. The largest hikes have been developing countries is passed through as higher in commodity prices. Regionally, inflation has U.S. import prices.8 picked up markedly in South Asia (India, Pakistan) and to a lesser extent in Latin America (Argentina and Mexico) as emerging capacity constraints have World trade W made themselves felt. Most recently, falling food orld trade expanded dramatically in 2004, prices (see the discussion of commodity prices increasing by some 10.3 percent. China's below) have contributed to some easing of infla- integration into the global marketplace continued, tionary pressures. with exports and imports increasing by some In contrast, there are few signs of rising infla- 30 percent. The pace of trade expansion else- tion among high-income countries, except perhaps where in the developing world was more moderate in the United States, partly reflecting higher import (12.3 percent), but nevertheless much higher than prices following the slide in the dollar. Rather, wide- the 8.5 percent expansion registered by high- spread asset inflation, notably in housing prices, and income countries. High-frequency data indicate a strong increase in investors' tolerance for risk (as that trade growth slowed toward the end of the evidenced by reduced risk premia on junk bonds and year (figure 2.10). developing-country debt7) are the most visible signs In line with the projected moderation of of abundant liquidity and underlying inflationary global economic activity, international trade is pressures in high-income countries. forecast to slow as compared with 2004 as a 40 G L O B A L O U T L O O K A N D T H E D E V E L O P I N G C O U N T R I E S Figure 2.10 Slower trade growth, 2003­5 Figure 2.11 World semiconductor sales and East Asian technology exports, 1997­2005 Export volumes (quarterly, annualized growth rates, %) % change (3-month moving averages, seasonally adjusted 25 annualized rates) Forecast High-income countries 80 20 Developing countriesa 60 15 40 10 Worlda 20 5 0 East Asian 20 0 exports 40 World semiconductor 5 sales Q3 Q1 Q3 Q1 Q3 60 2004 2005 a 1997 1998 1999 2000 2001 2002 2003 2004 2005 Excluding China. Source: World Bank. Sources: Semiconductor Industry Association; World Bank. whole. Trade volumes are expected to increase by country currencies was relatively moderate because around 7.7 percent in 2005 and 2006, which is in many cases the depreciation of the dollar and nevertheless quicker than during the 1990s. the appreciation of the euro were offsetting, leav- In addition to slower trade growth due to re- ing countries' real effective position broadly duced import demand, developments in specific unchanged. markets will influence the overall pattern of trade. For those countries for which the United In particular, a sharp slowdown in the high-tech States or the euro zone represent a disproportion- cycle has hit exports from East Asia and the ate share of trade, co-movements in their own cur- Pacific, where such products represent as much as rencies have largely mitigated the impacts that two-thirds of some countries' exports.9 The high- these fluctuations might otherwise have had. Most tech market is characterized by sharp swings in de- developing countries that did experience a signifi- mand but over a relatively short cycle (figure 2.11). cant real effective revaluation did so because of Thus, while exporters in the region are expected to domestic factors or a strong terms-of-trade impact go through a difficult patch over the next several following the recent run-up in commodity prices months, demand should pick up toward the end of (South Africa). 2005 and remain strong in 2006. As discussed in While small compared with the shift in the the following section, demand for commodities is euro/dollar bilateral exchange rate, the currency also expected to remain strong. fluctuations experienced by developing countries are likely to have consequences for the real econ- Impact of dollar depreciation on developing omy over the projection period. economies Unless compensating policy measures are Notwithstanding the broad depreciation of the dol- taken, growth will be stimulated in depreciating lar and appreciation of the euro, most developing- countries, possibly overheating their economies. country currencies have been relatively stable in By the same token, economic activity is likely be real effective terms (figure 2.12). Of the 69 low- weaker among countries that appreciate. Or, if and middle-income countries for which data permit exporters lower margins to retain market share, the calculation of real effective exchange rates, only incomes will decline. 15 have experienced an appreciation of more than The realignment of currencies will influence 10 percent since February 2002, when the dollar the pattern of exports and imports and could began to slide, and more than half have impose adjustment costs.10 For individual develop- depreciated. The revaluation of many developing- ing economies the impact will depend importantly 41 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 2.12 Real effective revaluations of on preexisting trade patterns. Countries that trade developing-country exchange rates, 2002­5 more or less equally in Europe and the United % change in real effective exchange rate between States (Namibia, Paraguay, Poland) will find it eas- February 2002 and January 2005 ier to exploit changes in competitiveness because Zimbabwe firms already have knowledge of the foreign market Iran, Islamic Rep. of Venezuela, R. B. de and networks with which to deal. In contrast, firms Argentina (and nations) whose trade is particularly focused Romania Egypt, Arab Rep. of on the United States may encounter significant Azerbaijan Uruguay delays before lost sales in the U.S. market can be Algeria Uganda recuperated through increased sales in Europe or Oman elsewhere. Even countries that followed the dollar Congo, Dem. Rep. of Ukraine in its depreciation (many South American and East Mexico Depreciation Vietnam Asian countries) will face adjustment costs in the Bolivia Mauritius form of higher inflation and lost competitiveness Jordan among firms that rely on non-U.S. imports. China United States Finally, although evidence is not conclusive, Malaysia Tunisia some research (for example, Esquival and Larráin Jamaica Panama 2002) suggests that volatility in the exchange rates Philippines of major economies tends to introduce uncertainty Costa Rica Bangladesh into international trade and may therefore con- Ghana Poland tribute to a slowdown in global trade volumes. Latvia Belarus Ethiopia Longer-term prospects for trade expansion Sri Lanka Paraguay Notwithstanding these costs, low- and middle- Honduras Albania income countries are projected to continue in- El Salvador Pakistan creasing their world market shares. Over the past Singapore five years developing countries as a whole have Georgia Hungary increased their share of world exports from 20 to Nepal Thailand 25 percent. China actually doubled its market Peru share during this period from 2.5 to more than India Kazakhstan 5.4 percent. Ecuador Croatia This trade expansion has been a critical motor Trinidad and Tobago Morocco for economic betterment. Those countries that have Slovenia been most successful in expanding their market Lithuania Brazil shares have registered the sharpest reduction in Fiji Colombia poverty over the past 15 years.11 Chile Czech Republic Overall, 40 percent of the total increase in the Kenya Appreciation exports of developing countries was due to in- Kyrgyz Republic Estonia creased market share. This reflects several factors, Côte d'Ivoire Russian Federation including a gradual exposure of underlying com- Indonesia Guatemala parative advantages following the numerous trade Bulgaria liberalizations of the past two decades. These saw Turkey Swaziland developing-world tariffs fall from some 30 to less Botswana Slovak Republic than 10 percent. In addition, improved macro- Angola Namibia economic policies, lower inflation, reduced gov- Mozambique ernment deficits, and improved current account Dominican Republic South Africa positions contributed to better trade performance 100 80 60 40 20 0 20 40 60 by reducing uncertainty for investors and traders Source: World Bank. alike. 42 G L O B A L O U T L O O K A N D T H E D E V E L O P I N G C O U N T R I E S In the baseline forecast, these conditions are Figure 2.14 Developing-country demand and assumed to persist. As a result, developing-country commodity prices, 2003 and 2004 market shares should increase a further 1 percent- Breakdown of demand Breakdown of additional Percent age point between 2004 and 2007. (2003) demand (2004) 100 Other developing 80 countries Commodity markets T he run up in commodity prices since 2002 (fig- 60 ure 2.13) reflected very strong demand for China commodities and emerging capacity constraints in 40 producing countries. Overall, energy prices rose 20 some 30 percent in 2004. Metals and minerals OECD prices were up 37 percent, and, as yet, show no 0 sign of easing. In contrast, the prices of most agri- Oil Metals and Oil Metals and minerals minerals cultural commodities peaked in the second quarter of 2004 before beginning to decline, but still regis- Source: World Bank. tered a 10.5 percent annual gain. Unlike previous episodes of overheating, the main sources of excess demand were developing countries, notably China. Indeed, 74 percent of the total increase in This is unlikely to be an isolated develop- crude-oil demand during 2004 came from develop- ment. The share of developing economies in world ing economies (figure 2.14)--almost twice their demand for commodities is projected to continue share in total demand. Almost half of the increment rising. Partly this reflects the progressive transfer came from China, whose thirst for raw materials of an increasing proportion of the world's labor- also underpinned the increase in demand for metals intensive manufacturing activity to these countries. and minerals. Overall, low- and middle-income It also reflects faster population growth and rising countries were responsible for 74 percent of the incomes, which are projected to increase demand for additional demand for metals in 2004, but only resource-intensive products such as automobiles-- 45 percent of total demand. Developing-country placing further pressure on commodity markets. demand was particularly pronounced in the zinc Such factors underpin the prediction of the Interna- and aluminum markets, where their share in the tional Energy Agency (IEA 2004) that by 2030 the increase in demand exceeded 80 percent in 2004. demand for oil from economies currently classified as low- and middle-income will more than double Figure 2.13 Commodity prices, 2000­4 to some 50 percent of world demand. Notwithstanding the run up in commodity Index (1990 100) prices and the increasing importance of developing 220 economies in these markets, commodity prices are 200 Energy projected to ease over the next three years. In agri- 180 culture, increased supply--following endogenous reactions to high prices and recovery from poor 160 crop years--is already pushing down the prices of a 140 Metals and number of agricultural commodities, notably soy- minerals 120 beans and cotton. Further supply increases and the projected global slowdown are expected to reduce 100 agricultural prices by about 6 percent in 2006. 80 Agricultural Simple models of the derived demand for oil products 60 suggest that the developing world's demand for 2000 2001 2002 2003 2004 2005 petroleum products will continue to grow quickly. Source: World Bank. Although daily world production is expected to 43 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 2.15 Metals--lower stocks mean higher Figure 2.16 Terms-of-trade gains to developing prices, 1995­2005 countries from commodity price changes, 2001­4 $/ton Millions of tons % GDP 125 Metals prices 4 1.5 (left axis) Non-oil prices Oil prices 115 1.0 3 Both oil and non-oil prices LME stocks (right axis) 105 0.5 3 95 0.0 2 85 0.5 2 75 1.0 65 1 1.5 1995 1997 1999 2001 2003 2005 All developing Oil importers countries Low- and Low-income Highly indebted Sources: London Metals Exchange; World Bank. middle-income (excl. India) poor countries Source: World Bank. increase by about 1.5 million barrels, low stocks and robust demand are projected to keep oil eral years (figure 2.16). This is particularly true for prices high during the first half of 2005 before oil exporters, for whom higher oil prices have they begin to ease. For the year as a whole, they meant a terms-of-trade gain of an estimated 5.6 per- are projected to average some $42 in 2005.12 As cent of GDP. But net exporters of other commodi- the growth of demand moderates further and new ties also gained. Exporters of metals and minerals supplies come onstream, prices are expected to de- benefited strongly, while the positive effect for agri- cline slowly, reaching $33 by 2007. cultural exporters was less marked. Conditions in the mineral and metal market re- However, as discussed in more detail in last main very tight (figure 2.15). Excess demand, ema- fall's Global Economic Prospects 2005 (World nating particularly from China, drove prices up Bank 2004), although high commodity prices are some 37 percent in 2004 and caused inventories to good for developing countries in aggregate, most fall by 50 percent (60 and 90 percent in the case of developing countries are oil importers. For them lead and copper). Firms have reacted to high prices the net effect of the commodity price increases by substituting less-expensive materials (using observed to date has been negative. For South Asia lower quality nickel in the production of steel, for as a whole, the effect was equivalent to terms-of- example), which should help ease demand pressure. trade 2.2 percent of GDP. However, these conditions are projected to keep pushing metals prices up during the first half of 2005, before increasing supplies trigger a cyclical decline later in the year. A big uncertainty in this Risks and policy priorities for the projection is Chinese demand. If it fails to moderate global economy I as expected but remains at the levels seen in the first n the baseline outlook, increased private and half of 2004, metals prices (notably steel and iron public savings in the United States and strong ore), coal prices, and freight rates could remain growth among developing countries begin to high for an extended period or even rise further. redress global imbalances and generate a modest decline in the U.S. current account deficit. Com- Regional consequences of higher bined with the opening of a positive gap between commodity prices U.S. and European short-term interest rates, this is Higher commodity prices have contributed substan- expected to reduce, but not eliminate, downward tially to the solid economic performance of pressure on the dollar. The currency will continue commodity-exporting countries over the past sev- to depreciate, but in a gradual and orderly manner. 44 G L O B A L O U T L O O K A N D T H E D E V E L O P I N G C O U N T R I E S This scenario is exposed to a number of risks: rate hikes could generate substantial losses in wealth, with significant negative impact on con- · Higher interest rates sumer demand. For example, if housing prices · The possibility that oil prices rise further or were to stabilize at current levels, the elimination fail to moderate as projected of the positive wealth effect that higher housing · An overshooting or a disorderly depreciation prices have contributed to consumer demand of the dollar, and would be sufficient to reduce consumer spending · Endogenous reactions to high prices and the in the United Kingdom and the United States by emergence of protectionist sentiment. more than 1 percent.13 Were asset deflation to occur, the impact could be much more serious. The first and arguably most important risk is that Figure 2.17 reports the results of three simula- both short-term and long-term interest rates rise tions that attempt to quantify the real-side impacts by more than projected. Several distinct but re- of these risks.14 lated factors contribute to this risk. The first scenario assumes that U.S. short- and Rates could rise even further either because the long-term interest rates rise by 200 basis points current bearish sentiment of investors vis-à-vis the more than in the baseline scenario due to increases dollar intensifies or because Asian central banks, in investors' required rate of return on dollar- which have financed much of the U.S. current denominated assets. Real interest rates abroad account deficit (chapter 3), decide to slow the pace react endogenously, rising by somewhat less than in at which they accumulate reserves. In either case, the United States. Growth in the United States investors would demand higher rates before taking slows by about 1 percentage point in 2005 com- on more debt or additional risk. Indeed, recent sug- pared with the baseline and by 2 percentage points gestions by some Asian authorities that they might in 2006, but a recession is avoided. Slower growth be diversifying their reserve portfolios sparked in the United States dampens the expansion of brisk sell-offs that ceased only when firm denials of global trade. As a result, growth in developing such diversification were subsequently issued. economies slows by about 1 percentage point in Higher U.S. interest rates would likely put upward each of 2005 and 2006. pressure on interest rates in other countries as well. The second scenario builds on the first and as- Another factor that might lead to globally sumes that reduced global liquidity from the above higher rates is investors' appetite for risk. Risk tightening causes both bond and emerging-market premia for sub-investment-grade corporate and spreads to return to normal levels. This com- emerging-market bonds are at very low levels. pounds the effects of the first scenario in develop- Should investors' appetite for or perceptions of ing economies by provoking additional reductions underlying risk change, interest rates in these mar- in consumption and investment demand due to kets could rise sharply, rapidly drawing liquidity higher interest rates. Growth in the United States out of international capital markets. is broadly unchanged. Many developing countries have made signifi- Prospects for developing economies are much cant strides in reducing their overall financial vul- weaker, with a cumulated loss in output of close to nerability and are, therefore, in relatively strong 4.6 percent of GDP. Highly indebted countries are positions to withstand such a deterioration in in- hit particularly hard. ternational financial conditions. However, coun- The final scenario combines these effects, tries with weak domestic banking and capital mar- adding a substantial wealth effect in France, Spain, kets remain fragile. Those with high debt burdens the United States, and the United Kingdom, as are especially vulnerable to sudden reassessments higher interest rates are assumed to trigger a of country risk (chapters 3 and 4). 10 percent decline in housing prices and therefore Finally, if the excess liquidity engendered by in consumer wealth in each of these countries. low interest rates manifests itself as rising infla- This contributes to further slowing in demand. In tion, real interest rates would rise even further as this case, the United States enters a relatively deep the monetary authorities react. recession in 2006, leading a significant global To the extent that increases in asset prices are slowdown in which world growth declines to a reflection of unusually low interest rates, interest- about 1 percent. 45 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 2.17 Effects of higher interest rates on The risk that oil prices would rise further or GDP growth, 2005­7 fail to decline by as much as projected was dis- cussed in detail in the World Bank's Global Eco- World United States Developing countries nomic Prospects 2005 (2004, 12­14). That report Scenario 1: 200-basis-point increase in interest rates concluded that a further $10 hike in oil prices Deviation from 2004 baseline (% GDP) would slow global growth by about 0.5 percent the next year. For oil-importing developing coun- 2005 2006 2007 0 tries, the terms-of-trade shock of the hike would be about 2.4 percent of GDP. Moreover, because 2 such countries have limited access to international financial markets, the impact on domestic demand 4 of such a shock would be much higher than in high-income countries. 6 The possibility that the dollar will overshoot 8 its equilibrium value and become undervalued for a prolonged period is a risk in the medium 10 term. The depreciation to date has brought the dollar close to its long-run average level in real 12 effective terms (figure 2.18). If it were to depreci- ate by much more, as it might if public and pri- Scenario 2: Scenario 1 plus a 60-percent increase in emerging- market spreads vate savings behavior does not change, it could well overshoot its long-run equilibrium value. Deviation from 2004 baseline (% GDP) Such an event would increase adjustment costs as 2005 2006 2007 0 exporters lost sales in some markets and had to increase market penetration elsewhere. As the 2 dollar eventually returned to its long-run equilib- rium value, these costs would be incurred a 4 second time. In addition, large swings in the dollar could 6 have significant financial impacts for developing 8 countries (chapter 3). For countries with substan- tial dollar reserves, a depreciation would imply 10 12 Figure 2.18 The dollar in historical perspective, 1970­2004 Scenario 3: Scenario 2 plus a wealth effect Real effective exchange rate Deviation from 2004 baseline (% GDP) 120 2005 2006 2007 0 110 2 100 Period average 4 6 90 8 80 10 70 12 1970 1975 1980 1985 1990 1995 2000 2004 2005 Source: World Bank. Source: J.P. Morgan. 46 G L O B A L O U T L O O K A N D T H E D E V E L O P I N G C O U N T R I E S large paper losses that could have implications for to ensure that they do not accumulate excessive fiscal policy. In contrast, countries with significant liabilities or spending obligations, the future dollar-denominated debt would benefit from a financing of which under conditions of higher in- depreciation because it would erode the local- terest rates and slower world growth could pose currency value of their debt. serious problems. In addition, a careful reassess- Finally, the global slowdown could result in ment of exchange-rate policy in some countries a slowing of trade liberalization or the emergence might reveal that a managed appreciation of their of protectionism. The recent pursuit of initiatives currencies would help alleviate emerging inflation- to deepen trade has coincided with a period of ary pressures, while facilitating the sharing of the strong growth for both developing and developed gains from recent growth among the entire popu- countries. Weaker economic conditions could lation by lowering the cost of imported consumer prompt a break in that trend, by derailing the goods. Doha process or limiting the extent to which any While a coordinated international policy re- eventual agreement would benefit low-income sponse would likely be optimal and would mini- countries. At the extreme it could provoke a pro- mize the costs for developing countries, the do- tectionist backlash among high-income countries. mestic benefits of each of the policy steps outlined In either case, the access of developing countries above will accrue whether or not the other eco- to rich-country markets could be curtailed to nomies take action. the detriment of growth and poverty reduction. Similarly, should lower growth in developing countries reduce the pace of structural reform, which underpins much of recent economic gains, Notes the impact on future growth prospects could be 1. The East Asia and Pacific region suffered the great- est damage from the tsunami, followed by South Asia and, severe. to a much lesser extent, Sub-Saharan Africa. 2. All told, three quarters of developing countries saw Policy challenges their growth rates increase during the first four years of this Policy can help avoid and limit the severity of the decade, compared with the 1990s. This contrasts with high- scenarios dicussed above. A significantly tighter income countries, about half of which saw improvement and half declines. U.S. fiscal policy would increase aggregate saving 3. This chapter's companion Web site, Prospects for in the U.S. economy, narrow the current account the Global Economy, http://globaloutlook.worldbank.org, deficit, and reduce the extent to which higher in- presents more detail on regional economic developments terest rates will be required to support the dollar. and forecasts. In Europe, policy should seek to maintain interest 4. Bulgaria, the Russian Federation, and the Slovak Republic all recorded appreciations in excess of 10 percent. rates at relatively low levels. Not only would this 5. Household savings net of capital accumulation bolster domestic demand, thereby compensating (OECD 2004). for weaker exports following the appreciation of 6. The term "carry trade" describes the practice of the euro, it would also decrease the relative attrac- borrowing money at low interest rates in one currency and tiveness of euro-denominated financial assets-- investing it in a second currency at higher rates of return. Such interest rate arbitrage likely explains some of the thereby reducing the likelihood of a further appre- strong swings in the bilateral exchange rate of the dollar ciation and discouraging a disorderly shift away and euro. from dollars. In this regard, should inflationary 7. While significant improvements in fundamentals pressures arise it may be desirable to pick up the underpin some of the improvement in emerging-market risk pace of fiscal consolidation to reduce the likeli- premia, the concurrent compression of corporate spreads suggests that abundant global liquidity is also playing a key hood of overheating. role. Faced with the prospect of a slowing world 8. Until the third quarter of 2002, U.S. import economy and the possibility of a pronounced inflation was negative, reflecting a rising share in both im- slowdown, policymakers in developing countries ports and GDP of low-cost developing-country imports and need to redouble efforts to consolidate their fiscal falling import prices due to strong growth in developing- world productivity. positions and take advantage of today's low inter- 9. In 2003, high-tech products represented 13 percent of est rates to restructure debt--as indeed many have Thailand's exports, but more than 50 percent of Taiwanese, done. Moreover, they must be particularly prudent Malaysian, and Philippine exports. 47 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 10. These adjustment costs and the mechanisms by References which they effect output are qualitatively similar to those described by Lilien (1982) in the context of oil price hikes, Benjamin, J. D., P. Chinloy, and G. D. Jud 2003."Real Es- another international price shock. tate versus Financial Wealth in Consumption." Journal 11. The correlation coefficient between per capita in- of Real Estate Finance and Economics 29 (3): 341­54. creases in incomes and increases in trade shares is 0.5. Catte P., N. Girouard, R. Price, and C. André. 2004. "Hous- 12. A simple model of oil demand suggests that an in- ing Markets, Wealth and the Business Cycle." Econom- crease in demand of some 1.8 million barrels per day would ics Department Working Papers 394, Organisation for be consistent with World Bank output projections. Coupled Economic Co-operation and Development, Paris. with expected increases in output of 1.5 million barrels (IEA Esquivel, Gerard, and Felipe Larraín. 2002. "The Impact of 2004), there is little prospect for a substantial easing of oil G-3 Exchange Rate Volatility on Developing Coun- prices in 2005. tries." G-24 Discussion Paper Series 16, United Nations 13. The stock of housing in the United States is estimated Conference on Trade and Development, Geneva. by the Federal Reserve Bank to be equal to $15.2 trillion or International Energy Agency. 2004. World Energy Outlook about 138 percent of GDP. A 10 percent change in the value of 2004. Paris: IEA. that stock would represent 13.8 percent of GDP or 19 percent Lilien, David M. 1982. "Sectoral Shifts and Cyclical Employ- of consumption. Econometric estimates suggest that the long- ment." Journal of Political Economy 90 (4): 777­93. term marginal propensity to consume from housing wealth is Moore, J. 2004. "2004 Carry Trade Update." Barclays Capi- .05 (see, for example, Catte and others 2004 and Benjamin tal, December 22. and others 2004), implying a reduction in consumption of OECD (Organisation for Economic Co-operation and 1.35 percent. Development). 2003. Economic Outlook No. 74. Paris: 14. Chapter 3 discusses in more detail some of the OECD. potential financial-sector impacts of higher interest rates. 48 . 3 Global Imbalances and Emerging Market Economies T HE GROWING IMBALANCES IN countries. But the increasing size and complexity external payments among the world's of external balance sheets pose new challenges economies and the financing needs associ- that will require not only appropriate strategies to ated with those imbalances have provoked con- manage external assets and liabilities, but also cern in international policy circles and anxiety in attention to the domestic macroeconomic implica- capital markets. The previous chapter discussed tions of higher reserve levels. their nature and scale and identified the risks Serious concerns remain about how the they posed for financial markets and the global unwinding of global financial imbalances might economy. This chapter assesses the implications of affect the external financing conditions in which such risks for developing countries--particularly emerging market economies operate. From their emerging market economies, which depend on in- perspective, the gravest risk is an abrupt and ternational capital markets to finance their invest- disorderly adjustment of major exchange rates, ment and growth and, increasingly, to allocate combined with a higher-than-expected rise in their national savings.1 Our concern here is not international interest rates. Persistent structural only the traditional sensitivity of emerging-market weaknesses in banking and financial systems, finance to cyclical developments in international especially when coupled with high indebtedness capital markets, but also the implications for ex- or a record of macroeconomic mismanagement ternal balance sheets of accumulations of foreign and default, render some now-thriving economies exchange reserves. particularly vulnerable to sudden reassessments of The channels through which events in global country risk by capital markets.2 financial markets affect developing countries reflect the changing character and growing sig- · A sharp depreciation of the dollar could re- nificance of developing countries' international sult in large capital losses in local-currency financial relationships. An improved external envi- terms for developing countries with substan- ronment, years of structural reforms in developing tial dollar reserves. On the other hand, coun- countries, and improved macroeconomic stability tries with dollar-denominated debt would have combined to produce the current favorable benefit from the erosion in the dollar value of cycle of healthy trade surpluses, surging foreign their debt. exchange reserves, low inflation, and strong · Higher global interest rates could contribute growth prospects. Such developments have con- to wider emerging-market bond spreads, tributed to the marked strengthening of private particularly for borrowers with high ratios of capital flows in the past two years (2003­4) from debt to GDP, which would compound the their long slide after 1997 (see chapter 1). Rein- adverse impact of higher U.S. Treasury bench- forced by higher oil prices and fixed exchange mark rates. rates in Asia, they also have resulted in a large · The growing carrying costs associated with buildup of foreign currency assets with monetary central bank purchases of foreign exchange authorities and central banks of several developing reserves could increase pressure on some 51 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 countries to moderate their reserve accumula- Figure 3.1 Impact of dollar depreciation on debt tions and allow exchange rates to share some service ratios, 2002­4 of the adjustment burden. Expansion in Change in ratio of debt service to exports (in local currency) aggregate domestic demand (including Venezuela, R. B. de consumption) to reduce upward pressure on Mexico local currencies, coupled with greater open- Egypt, Arab Rep. of Higher debt Philippines burden ness on both trade and capital accounts, will Indonesia also be required in many countries with large Pakistan reserve holdings.3 Ukraine Romania Thailand India The mixed effect of exchange-rate Russian Federation Hungary fluctuations Czech Republic F Poland luctuations in the exchange rates of the major Argentina global currencies--dollar, euro, and yen--have Turkey important implications for emerging markets South Africa Lower debt Colombia burden through their impact on flows of trade and Chile finance. Because of the dollar's unique role in both Brazil 12 8 4 0 4 8 12 trade and finance, fluctuations in its value tend to have a relatively larger impact on emerging market Sources: World Bank data and staff estimates. economies than do changes in other currencies. On the trade side, high volatility among G-3 exchange effect of dollar depreciation for Brazil, for example, rates hurts developing countries' exports (Esquivel the ratio of debt service to exports has declined by and Larrain 2002). But to the extent that interna- 10 percentage points over the period, while for tional investment positions in emerging market countries (including Mexico) whose currencies fell economies diverge from their trade patterns, fluc- against the dollar, the debt-service burden rose tuations among major currencies may have various (figure 3.1). The overall impact of dollar deprecia- added effects. Such effects vary by country, de- tion will of course depend on net asset positions. pending on their net trade and foreign asset hold- As discussed in the next section, beneficial effects ing patterns. on debt service could be partially offset in countries A further weakening of the dollar does have that have accumulated large dollar-denominated positive benefits for certain emerging market foreign exchange reserves. There may also be an economies with large dollar-denominated external important distributional distinction between gains debt. To the extent that they are net debtors in accruing to the private sector in emerging markets dollars (as is the case for many that are active bor- (likely to be a net debtor) and losses accruing to the rowers in global financial markets), pronounced public sector (which may hold substantial dollar dollar weakening reduces their real net external reserves).4 Consideration should also be given to debt burden (measured in domestic currency). the extent to which policymakers or market partic- Since the end of 2002, the depreciation of the ipants may have hedged their net exposure to dollar against most developing-country currencies currency movements through forward or currency has reduced ratios of debt to GNP and of debt derivative markets.5 service to exports by 0.7 percentage point. If one excludes countries (such as China) whose curren- cies have been fixed against the dollar over this period, the decline in these ratios is even greater-- Global monetary tightening: nearly one percentage point. higher interest rates T The magnitude of this effect varies substan- he evolution of interest rates in world capital tially, depending on the amount of dollar- markets--strongly influenced by U.S. rates-- denominated debt and the magnitude of the dollar has the most direct (and perhaps most potent) depreciation that has occurred. Focusing on the impact on emerging-market risks. This occurs not 52 G L O B A L I M B A L A N C E S A N D E M E R G I N G M A R K E T E C O N O M I E S only through the traditional, direct channel-- there is scope for further monetary tightening monetary tightening to control inflation in (figure 3.4), and forward interest rates signal industrial countries, which produces higher expectations of higher future rates (figure 3.5). rates--but also because higher rates can lead to Estimates of "neutral" Fed fund rates for the large capital losses on official dollar-denominated United States--on the order of 2 percent in real bond portfolios. terms--imply a target rate of at least 4 percent in Historically, virtually every cyclical monetary nominal terms, or 150 basis points higher than the policy turn in the United States over the past two current level of 2.5 percent. decades has been accompanied by heightened volatility in emerging financial markets, with direct implications for the level and price of capital flows. The 1994 tightening cycle, which raised the Figure 3.3 Short-term policy rates in major Fed funds rate from 3 to 6 percent in just over a emerging markets, 2002­4 year, had particularly severe consequences, causing Percent turmoil in financial markets and reducing global 12 liquidity. On the other hand, the global monetary easing that began in the fall of 1998 helped 11 Poland end the 1997/98 round of crises (Frankel and 10 Roubini 2003). Mexico Market interest rates are influenced funda- 9 mentally by G-3 monetary policy, as shaped by 8 central banks' reaction to domestic inflation and 7 output gaps. The most visible turning point in the India current global interest rate cycle came in June 6 2004, when the U.S. Federal Reserve began a 5 China widely anticipated series of interest-rate hikes after a long period of monetary expansion. Short- 4 Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan. term policy rates have been increased in several 2002 2003 2004 2005 other countries, as well (figures 3.2 and 3.3). With real interest rates still negative in the United States, Source: World Bank data. Figure 3.2 Short-term policy rates in developed Figure 3.4 Movement of real federal fund rates, countries, 2002­4 1991­2004 Percent Percent 5.0 5 4.5 Average rate for the 4 4.0 period (1.32%) United Kingdom 3.5 3 3.0 2 Euro Zone 2.5 1 2.0 0 1.5 United States 1.0 1 0.5 Japan 2 0 3 Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan. Jan. Jul. Jan. Jul. Jan. Jul. Jan. Jul. Jan. Jul. 2002 2003 2004 2005 1991 1992 1994 1995 1997 1998 2000 2001 2003 2004 Source: World Bank data. Sources: U.S. Federal Reserve; World Bank staff estimates. 53 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 3.5 U.S.Treasury implied forward rates Figure 3.6 Estimated additional debt service burden due to increase of one percentage point Percent in U.S. interest rates 5.0 Share of export of goods and services (%) 15 4.5 13.0 Feb. 2008 4.0 10 Feb. 2006 3.5 7.0 5.0 5 3.0 Feb. 2005 3.0 2.8 2.0 1.0 2.5 1 2 3 4 5 7 10 20 0 Maturity (in years) ies an and and and andica Asia ica Asia ica Afr Source: Bloomberg. countr Asia Pacific al ibbean East Afr South All Europe th East AmerCar Sub-Sahar Centr MiddleNor Latin the The pressure from rising interest rates is likely to Source: World Bank staff estimates. have a negative impact on global economic growth, particularly in developing countries. About one-fifth of developing countries' outstanding external debt is estimated to be based on variable interest rates. Potential volatility in emerging- Thus, increases in U.S. rates and subsequent effects market spreads T on related dollar benchmarks, such as the dollar he cost of borrowing in emerging markets London-interbank-offered (LIBOR) rate, exact a di- will be affected not only by movements in in- rect cost. Estimates suggest that an increase of 1 per- terest rates in global markets, but also by the evo- centage point in U.S. medium-term interest rates can lution of country-specific spreads over these rates. imply an additional debt-service burden equivalent The persistence of emerging-market bond spreads to about 5 percent of developing countries' exports at near-record-low levels for much of 2004 (see of goods and services--with considerable regional chapter 1) raises concerns that markets are not variation, ranging from 1 percent in Sub-Saharan adequately assessing--and pricing--emerging- Africa to 13 percent in Latin America and the market risks. This in turn raises the possibility Caribbean (figure 3.6). that, should global conditions deteriorate, these A key question from the perspective of spreads could widen suddenly and dramatically, emerging market economies is how market inter- as investors adapt their expectations to a more est rates are likely to react to changes in monetary pessimistic outlook and shift out of emerging- policy--particularly in the United States--and market assets. how such reactions spill over to emerging bond Deteriorating global conditions can affect markets. With G-3 central banks relying on short- emerging markets through their impact on sover- term policy rates to conduct monetary policy, this eign credit ratings. Countries that rely primarily question can be pursued at two levels: first, how on market-based financing could face further market participants react to current and expected pressures if credit ratings deteriorated, because future changes in short-term policy rates in G-3 deterioration would increase borrowing costs in countries, particularly the United States (box 3.1); primary capital markets. In general, the marginal and second, how such reactions are factored cost of a downgrade increases as one moves down into the determination of dollar-denominated the credit spectrum. Since credit ratings for most emerging-market bond prices and spreads, which emerging markets are concentrated around low are typically benchmarked against 10-year U.S. investment grade or high noninvestment grade, Treasuries. a slip of one grade implies, on average, additional 54 G L O B A L I M B A L A N C E S A N D E M E R G I N G M A R K E T E C O N O M I E S Box 3.1 Asset prices and unanticipated news U nderstanding the transition from short-term policy asset prices. In most industrial countries, announcements rates to bond-market prices and yields requires paying are released regularly at specific times during any given greater attention to the dynamics of market expectations business day, providing market participants with a steady in shaping views on interest rates and monetary policy flow of new information and insights into economic changes. In forming views on the economic outlook, fundamentals, and shaping expectations about the including expected paths of inflation and short-term economic outlook and likely official policy reactions. interest rates, bond-market investors and traders pay close Using intra-day high-frequency data, recent empirical attention to actions, views, and perceived intentions of work has documented the adjustment response of differ- monetary authorities. Based on such expectations, market ent financial markets to economic news announcements. participants form their views about long-term interest rates For example, it has been shown that news regarding through the term structure of interest rates, which provides labor-market conditions, output changes, and consumer information on the whole maturity spectrum, from the confidence are incorporated in U.S. bond prices within short end (three months) to the long end (30 years). one minute, and also that German government bond Recent research on finance has emphasized the yields are more responsive to U.S. economic news than finding that asset prices are driven primarily by unantici- to Euro-area or German news. Also, favorable "growth pated information or news contained in macroeconomic news" causes the dollar to appreciate relative to other announcements. This analysis argues that the anticipated major currencies (Balduzzi and others 2001; Brandt and part of economic "news" is already incorporated into Kavajecz 2004; Goldberg and Leonard 2003). borrowing costs of about 80 basis points over and Treasury rate) more closely than the longer- above the regular costs. term (10-year) rates, implying that the Empirically, the link between global mone- orientation of investors in the asset class tary conditions and emerging bond markets is may be driven more by changes in short- also reflected in the way U.S. interest rates af- term U.S. rates than by longer-term yield fect emerging-market spreads. Examining time considerations. series of correlations of Emerging Markets Bond Index (EMBI) spreads with U.S. interest rates Such aggregate analysis helps delineate the (measured over 36-month rolling periods dynamics between U.S. interest rates and emerging- between December 1992 and June 2004) yields market bond conditions, but fails to incorporate several conclusions: the influence on spreads of specific country vari- ables and credit quality. It is reasonable to expect · First, the estimated correlations vary over that higher U.S. interest rates, for instance, have a time and fluctuate a great deal, with a clear more serious adverse effect on spreads in coun- break between crisis and noncrisis periods-- tries with high levels of external debt than in suggesting that during crisis periods, spreads countries with moderate external debt. For coun- are driven by factors other than movements in tries with strong economic fundamentals, the U.S. rates. impact of higher U.S. interest rates is likely to be · Second, the effect of U.S. rates on emerging- modest. Box 3.2 summarizes research results that market spreads is nonlinear; as higher U.S. consider the role of individual country factors in interest rates affect the creditworthiness of determining emerging-market spreads. emerging economies (through the channels A 200-basis-point increase in U.S. interest identified earlier), emerging-market spreads rates (approximately equal to current expecta- rise more quickly.6 tions of future U.S. Fed rate increases during the · Third, emerging-market spreads appear to current round of tightening) would translate into track movements in short-term U.S. rates additional increments in emerging-market spreads (both the Fed target rate and the three-month ranging from 6 basis points (for countries with 55 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Box 3.2 Determinants of emerging-market spreads T o examine how individual country conditions affect the dangers of external borrowing (especially short-term), the relationship between U.S. interest rates and and the level of foreign exchange reserves is considerably emerging-market bond conditions, we draw on the recent higher. Countries are differentially affected by the current literature on asset-pricing models for sovereign yield high level of commodity prices, with some benefiting from spreads (Duffie, Pedersen, and Singleton 2003; Menkveld, higher prices for key commodity exports, and others Cheung, and de Jong 2004; and Dailami, Masson, and adversely affected by the higher price of their oil imports. Padou 2004). To analyze determinants of the emerging- The fact that monetary tightening is largely market spread over U.S. Treasuries, we performed panel anticipated (which was not the case, for instance, in regressions on domestic determinants of a country's credit- March 1994) is likely to mean a less abrupt adjustment of worthiness, as well as global variables that explain the spreads that will permit emerging market economies to supply and cost of credit to emerging markets. The results take palliative measures, such as lengthening maturities to point to several important conclusions. lock in lower rates. The latter tactic is evident in actions Country-specific variables seem to dominate U.S. by several countries to "prefinance" future financing needs interest rates in terms of the influence on emerging-market while current conditions are favorable. For countries that spreads. In particular, trade openness has a strong negative still limit the fluctuations of their currencies against the effect on spreads--plausible because more open countries U.S. dollar through a peg or "dirty float," the weakening are better able to adjust their balance of payments to of the dollar against the euro and yen offers more room for generate earnings to service external debt. This variable maneuver. may also reflect the finding in the growth literature that There is evidence that today's investors are much more open countries tend to grow faster. Higher indebted- better able to discriminate among borrowers and less likely ness (measured by the ratio of debt to GDP) has a positive to infer that problems in one country signal problems in impact on spreads, whereas a higher ratio of reserves to others. The default by Argentina in 2002--the largest in debt and a lower share of short-term debt each have a history--did not cause much disruption in world capital significant negative influence. The latter effect may simply markets, nor did neighboring countries suffer major reflect an upward-sloping term structure. increases in their spreads. While the Argentina episode was The risk that U.S. monetary tightening might lead to in some ways a special case--the "crisis" unfolded over a dramatic increases in emerging-market spreads and in period of months, plenty of time for market participants global risk appetite appears lower than in past periods. to anticipate events--it may also signal that when higher Levels of indebtedness in emerging markets are generally interest rates push a country to the edge of default, the lower than in earlier periods, as countries have recognized likelihood of generalized contagion is now low. debt-to-GNI ratios below 40 percent) to 65 basis The aggregate current account surplus of de- points (for highly indebted countries with debt- veloping countries has widened steadily since to-GNI ratios above 90 percent). This increase 2000, rising in 2004 to $153 billion (2.0 percent would come on top of the underlying increase in of developing-country GDP). Within developing the 10-year U.S. Treasury yields, which would countries, the current account surpluses have been likely increase by less than the 200 basis points concentrated largely in emerging markets-- (figure 3.7). notably Brazil, China, Malaysia, the Russian Fed- eration, and República Bolivariana de Venezuela, several of which maintain managed exchange-rate regimes and limited capital account convertibility Capital flows and reserve (table 3.1). The large surpluses mirror a decline in accumulation domestic investment relative to savings, a trend D eveloping countries are now capital exporters that is particularly noteworthy in East Asia. The to the rest of the world. Highlighted in long-running stagnation of Japan and the steep fall Global Development Finance 2004, this trend has in growth and investment in developing economies continued to increase in scale and strategic impor- since the crisis of 1997/98 have generated sur- tance. It warrants careful attention. pluses equivalent to 9 percent of the U.S. deficit 56 G L O B A L I M B A L A N C E S A N D E M E R G I N G M A R K E T E C O N O M I E S Figure 3.7 Change in sovereign bond spreads Figure 3.8 World current account surpluses following increase of 200 basis points in U.S. as shares of U.S. current account deficit, 2004 interest rates, by degree of indebtedness of U.S. current account country deficit $666 billion Average change in spreads (bps) 70 64 Other Japan 27% 60 25% 50 Other Euro area 40 developing 8% 33 10% Other high 30 income 21% 20 20 Developing East Asia 9% 10 6 Source: World Bank staff estimates. 0 40 40­60 61­80 90 Debt/GNI (%) Sources: World Bank Debtor Reporting System and staff estimates; Figure 3.9 Capital flows, current account balances, J.P. Morgan Chase; Dailami, Mason, and Padou 2004. and reserve accumulations in developing countries, 1980­2004 Table 3.1 Current account balances in developing $ billions countries, 2000­4 500 $ billions 400 2000 2001 2002 2003 2004e Change in reserves Developing countries 43.6 16.9 72.0 117.7 152.7 300 Argentina 9.0 3.9 9.1 7.8 3.2 Brazil 24.2 23.2 7.6 4.0 11.1 200 Total capital flows China 20.5 17.4 35.4 45.9 47.3 Czech Republic 2.7 3.3 4.3 5.7 6.0 100 Egypt, Arab Rep. of 1.0 0.4 0.6 3.7 3.3 India 4.3 0.2 5.8 8.0 1.1 0 Indonesia 8.0 6.9 8.1 7.5 3.7 Malaysia 8.5 7.3 7.2 13.4 13.8 100 Mexico 18.2 18.2 14.1 9.2 8.3 Current account balances Pakistan 0.1 1.9 3.9 3.6 2.5 Philippines 6.3 1.3 4.4 3.3 4.1 200 Poland 10.0 5.4 5.0 4.6 4.4 1980 1984 1988 1992 1996 2000 2004 Russian Federation 46.8 33.8 29.1 35.8 55.4 Sources: World Bank staff estimates; IMF International Financial South Africa 0.3 0.1 0.6 1.5 5.6 Statistics. Thailand 9.3 6.2 7.0 8.0 5.4 Turkey 9.8 3.4 1.5 6.8 14.9 Venezuela, Rep. Bol. de 11.9 2.0 7.6 11.5 12.5 The disparity between growing current ac- Memo items: count surpluses and steady or declining domestic Low-income countries 8.2 3.2 15.3 12.1 7.6 Middle-income countries 35.4 13.7 56.7 100.7 145.0 investment and consumption is explained by the fact that a portion of the surplus has been funneled Note: e estimate Sources: World Bank, Global Development Finance, various years; into reserve accumulation (figure 3.9). Over the last World Bank staff estimates for 2004. five years, developing countries have accounted for more than half of the global increase in foreign (figure 3.8). At the same time, the ratio of invest- exchange reserves (figure 3.10). The developing ment to GDP in major developing East Asian countries as a group have raised their foreign economies (other than China) fell by an average of exchange reserves to unprecedented levels in recent 9 percentage points of GDP between 1996 and years. At the end of 2004, they held an estimated 2003 (World Bank 2004). $1.6 trillion in foreign exchange, compared to 57 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 3.10 Global-foreign exchange reserve The benefits of higher reserves accumulation, 1999­2004 Accumulation of higher reserve levels across a broad range of developing countries is tangible East Asia & evidence of prudent policies and strong trade Pacific performance since the crises of the late 1990s. In 28% Europe and Central Asia 11% general, it lowers vulnerability to external shocks. With financial markets focusing on borrowing Latin America and Developed the Caribbean 3% countries' level of reserves as an important indica- countries Middle East and North Africa tor of financial health, the recent increases provide 47% 3% South Asia 6% a margin of comfort and confidence. Sub-Saharan Three factors have driven the rapid growth in Africa 2% reserves: Sources: World Bank staff estimates; IMF International Financial Statistics Yearbook. · The quest for self-insurance against external shocks. The financial crises of the late 1990s gave developing-country policymakers a re- Figure 3.11 Foreign-exchange reserves in newed appreciation for the value of reserves developing countries, 1999­2004 as protection against currency crises and $ billions abrupt reversals of capital flows. Such protec- 1,800 tion is especially important for countries with Low-income countries heavy external financing needs (Brazil, 1,600 Other middle-income countries 231 Turkey) and for those with a high degree of 1,400 China trade concentration (Pakistan) that are vulner- 1,200 able to sudden interruptions in gross flows as 189 1,000 751 a result of changing domestic conditions or 144 broader contagion in global markets. 800 112 622 · The search for credit on favorable terms. 600 100 86 492 Reserve levels are also an important factor in 400 426 381 403 assessments of creditworthiness and broader 610 200 403 policy credibility. Increases in reserves con- 286 155 166 212 tribute to credit upgrades, which in turn 0 1999 2000 2001 2002 2003 2004 translate into lower borrowing costs and Sources: World Bank staff estimates; IMF International Financial reduced volatility. Statistics Yearbook. · The need for liquidity to achieve and manage exchange-rate stability. In countries pursuing a fixed exchange-rate policy, reserves help $1.2 trillion in 2003 and $921 billion in 2002. monetary authorities defend a target peg in Approximately 86 percent of the total is held the face of external pressures to raise the value by middle-income countries, with China alone of their currency. accounting for 38 percent, or $610 billion, an in- crease of $207 billion over 2003 (figure 3.11). The costs and risks of "excessive" reserves Other emerging market economies saw large in- There is ample evidence of and broad consensus creases as well--the reserves of the Russian Federa- about the benefits to developing countries from tion increased by $41 billion to $114 billion; India's maintaining an adequate level of foreign exchange by about $28 billion to $125 billion; and Malaysia's reserves that provide liquidity for exchange-rate by $18 billion to about $62 billion. In 2004, 101 of management and can be readily accessed when 132 developing countries that reported data for needed. 2004 increased their foreign exchange reserves, There is less agreement, however, on what con- approximately the same number as in 2003. And stitutes an "adequate level of reserves," especially while East Asia dominates, reserves have increased when countries are operating under a flexible in all developing regions over this period. exchange-rate regime and are relatively open to 58 G L O B A L I M B A L A N C E S A N D E M E R G I N G M A R K E T E C O N O M I E S Box 3.3 Developing countries as exporters of capital--a new twist on the Bretton Woods system T he buildup of foreign exchange reserves in the hands currency devaluation. But as the European countries of developing countries' central banks and monetary recovered from the devastation of the war, they made their authorities--and its use in financing global payment currencies convertible and secured access to private capital imbalances--marks a new phase in the postwar system for markets. Only developing countries continued to draw on financing international payments. In the years following official financing to maintain their balance of payments. the establishment of the Bretton Woods system in 1948, The rise in world oil prices in the 1970s and the when most exchange rates were fixed, capital mobility associated accumulation of balance-of-payments surpluses restricted, and access to private sources of capital limited in the member states of the Organization of Petroleum to a few high-income countries, the balance of payments Exporting Countries strengthened the role of private was maintained primarily through official finance. financing, as surpluses were intermediated to deficit Anchored by the International Monetary Fund (IMF), but countries through private capital markets, particularly also encompassing supplementary financing facilities banks. This "privatization" of balance-of-payments through the Bank for International Settlements and financing had the effect of easing previous balance-of- central banks, this regime assured a sufficient supply of payments constraints on national economies and, to a balance-of-payments financing as long as imbalances were degree, substituted market discipline for the discipline of not too large and countries adhered to the norms of good official financing. In the process it also contributed to the policy behavior--for example, by avoiding competitive financial crises of the 1980s and 1990s. foreign capital flows (IMF 2003; Wijnholds and Table 3.2 Ratios of foreign-exchange reserves to Kapteyn 2001; Feldstein 1999). In the 1970s and imports and external short-term debt in emerging 1980s, when most exchange rates were fixed and market economies, 2004 capital accounts closed, the rationale for holding Reserves as Ratio of reserves to reserves was to provide a safeguard against exter- months of imports short-term debt nal volatility in exports and imports (box 3.3). Argentina 11 1.1 Three to six months of imports was often used as a Brazil 12 1.8 China 12 14.1 rule of thumb to define an adequate level of re- Czech Republic 6 4.6 serves. When the underlying source of volatility Egypt, Arab Rep. of 14 3.7 and crisis shifted from trade to the capital account India 16 6.3 Indonesia 13 2.6 in the 1990s, the measure of reserve adequacy Malaysia 6 5.3 moved from an import-based indicator to one that Mexico 4 2.1 would express the country's ability to weather Pakistan 10 10.7 Philippines 4 1.6 volatility and the possibility of a reversal of capital Poland 6 2.6 flows--whence the new convention, likewise just a Russian Federation 11 3.1 rule of thumb, that reserves should be equal to Thailand 6 5.0 Turkey 6 1.8 short-term debt (debt maturing in one year or less). Venezuela, Rep. Bol. de 20 5.0 In several countries reserve levels have come to exceed, by a large margin, conventional measures Sources: World Bank staff estimates; IMF International Financial Statistics. of adequacy: six-months of imports or the entire stock of outstanding external short-term debt. In these countries, the question of the potential cost of economies have accumulated these reserves as a re- reserve holdings can reasonably be posed. China, sult of policies that have kept exchange rates fixed the Czech Republic, India, Malaysia, Pakistan, or pegged. Thailand, and República Bolivariana de Venezuela But holding reserves has costs, too. And when all have reserves that are more than four times their reserve levels become high enough, the costs can external short-term debt (table 3.2). Many of these become quite large. The high level of reserves, 59 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 particularly in emerging market economies, has Table 3.3. Reserve carrying costs in emerging prompted much debate about whether the protec- markets tion is worth the cost. The key economic costs of Expected excessive reserve accumulation fall into two annual change in Expectation- categories: (i) "quasi-fiscal" costs associated with exchange adjusted central banks' sterilization efforts; and (ii) poten- Spreads rate spreadsa tial capital losses on reserve assets held, typically, Brazil 0.6 14.3 14.9 in highly rated foreign government securities. China 2.4 5.2 7.6 Czech Republic 0.7 0.5 0.2 The quasi-fiscal cost of reserve accumulation Egypt, Arab Rep. of 6.8 stems from central banks' efforts to offset (or India 2.3 0.5 1.8 sterilize) the expansionary monetary impact of Indonesia 6.0 2.6 3.4 Malaysia 0.5 their purchase of reserves. Without open-market Mexico 5.6 4.3 1.3 sterilization operations (or other administrative Pakistan 0.1 measures), ballooning reserves would cause the Philippines 3.2 4.1 0.9 Poland 3.3 3.1 0.2 monetary base to expand beyond the productive Russian Federation 9.8 1.8 8 capacity of the economy, leading to inflation. As Thailand 1.2 0.2 1 central banks sterilize by selling government securi- Turkey 16.8 17.4 0.6 ties in local markets to mop up liquidity, they incur a. Spreads over U.S. two-year government bond yields as of Jan. 7, an income loss, because the yields on their reserve 2005. Sources: Bloomberg; J.P. Morgan Chase; World Bank staff estimates. holdings generally fall short of the yields they must pay on the securities they issue. The magnitude of this fiscal burden varies and in global euro-dollar markets. Although across countries, depending on the gap between detailed data on allocations in the reserve port- the interest rate paid on domestic issues and the folios of individual countries are not available rate earned on reserve holdings, adjusted by ex- (because central banks have little reason to disclose pected changes in exchange rates. For emerging such information),8 there is a strong correlation be- markets with high reserves, that gap (based on the tween emerging markets' total reserve holdings difference between domestic interest rates and the and total foreign official assets in the United States yield on two-year U.S. government bonds) is esti- (figure 3.12), suggesting that a substantial share of mated at around 7.6 percent for China, 8 percent reserves is in fact invested in dollar assets in the for the Russian Federation, and 1.8 percent for United States. If this is indeed the case, a drop in India (table 3.3). Assuming an average spread of the value of the dollar vis-à-vis the local currency 250 basis points between an emerging-market bond with a two-year maturity and a U.S. Trea- sury bill of corresponding maturity, each $10 bil- Figure 3.12 Foreign official assets in the United States, 1980­2003 lion of reserve holdings costs the central bank about $250 million in annual carrying charges--a $ billions sizable cost. Moreover, these costs are likely to in- 1,600 crease as sterilizing operations add to public sector 1,400 debt and put upward pressure on domestic interest rates, in turn increasing the size of the rate gap and 1,200 associated carrying charges.7 Total foreign official assets 1,000 The risk of capital losses on reserves depends 800 on the level of reserves, but also on the portfolio Middle-income countries' reserves investment decisions of reserve managers--and 600 particularly on their choices of currency composi- Japan's reserves 400 tion and acceptable risk parameters. Virtually all reserves are held in five major currencies (dollar, 200 euro, Japanese yen, British pound, and Swiss 0 franc), with about 70 percent invested in dollar- 1980 1983 1986 1989 1992 1995 1998 2001 2003 denominated assets, both inside the United States Source: U.S. Department of Commerce. 60 G L O B A L I M B A L A N C E S A N D E M E R G I N G M A R K E T E C O N O M I E S implies an equivalent drop in the real asset value of exchange reserves in the fourth quarter of 2004 the reserves held. Similarly, increases in global in- alone, had (as of November 2004) sold the equiva- terest rates can generate capital losses on reserve lent of nearly $80 billion of central bank bonds assets held in fixed-income securities, particularly domestically, more than tripling the total stock of those with longer maturity. For example, an in- bonds outstanding. crease of 200 basis points in U.S. interest rates Looking ahead, policymakers in developing would translate into a $26.8 billion loss on the countries are likely to find it increasingly difficult dollar-denominated bond portfolio of the six emerg- to ignore certain important policy questions: ing market economies, with the largest asset hold- ings in U.S. Treasuries as of October 2004 (Brazil, · As official financing from developing countries China, India, Mexico, Thailand, and Turkey). plays an increasingly important role in meeting In practice, these losses are typically absorbed global financing needs, questions regarding the by reducing income transfers from the central sustainability of these flows become more bank to the treasury or reflected in the central important. Changes in the pattern of reserve ac- bank's capital position. But other outcomes are cumulation could have important implications possible--in countries where the banking system is for international stability and repercussions for under government control and interest rates are private capital flows to developing countries. not market-determined, such as China, the quasi- · Developing countries that are accumulating fiscal expenditure has been largely off-loaded onto reserves in excess of (i) prudential demand for state-owned commercial banks that have been re- liquidity and (ii) amounts needed to protect quired to purchase securities sold by the People's against volatility in capital flows will have to Bank of China at below market-clearing interest address the growing quasi-fiscal carrying rates. While this approach keeps the cost of costs, potential capital losses from further reserve holdings off the government's (and the weakening of the dollar, and opportunity central bank's) books, it tends to further reduce costs associated with directing capital inflows the already tenuous profitability of the state- away from productive domestic investment owned banks and so contribute to financial system (including infrastructure) and into foreign fragility. The broader point is that these losses asset accumulation. impose real economic costs, whose incidence (on the treasury or on banks) will depend on the poli- cies and institutional arrangements pursued. For the majority of developing countries, Promoting stability in global capital whose currencies are not fully convertible on the flows S capital account, institutional constraints often limit ince the beginning of 2004, the external fi- the sustainability of sterilized foreign exchange in- nancing environment in which developing terventions. Underdeveloped government securities countries must operate has been extraordinarily markets and an insufficient volume of securities stable. Driven by improved domestic economic with which to conduct sterilization operations lim- fundamentals and high global liquidity, private its the scope for effective open-market action in capital flows expanded vigorously throughout the many countries. The Reserve Bank of India, for year, uninterrupted by any sign of crisis or abrupt example, now faces a dilemma because its inven- changes in market sentiment (with the exception tory of government securities is falling rapidly, yet of the short-lived rise in emerging-market bond it is not allowed to issue its own securities or sell spreads in April and May). Today, however, that rupee assets on international markets. Similarly, in stability is threatened by risks arising through connection with its open-market operations, the three channels discussed above: Bank of Korea came up against the annual limit set by the legislature on sales of government securities. · Growing imbalances in external payments By October 2004, it had sold 17 trillion won · Exchange-rate fluctuations among the major ($15.9 billion) of a permitted 18.8 trillion won currencies (dollar, yen, and euro) ($16.9 billion) total. The People's Bank of China, · Market reactions to the ongoing tightening which accumulated nearly $100 billion of foreign stance in global monetary policy. 61 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Enhancing the resilience of developing coun- the major currencies, to share the burden of tries to these risks requires actions on several exchange-rate adjustment with others (especially fronts, with important roles for both developed Japan and the European Union). and developing countries. As developing countries' external balance For developing countries, the greatest sheets have grown in recent years, the challenge challenge is to continue taking advantage of cur- of asset and liability management has taken on rent favorable external financing conditions while considerable significance. In that context, debt pursuing the domestic macroeconomic and struc- and asset management policies need to strike a tural reforms necessary for long-term stability in meaningful balance between risk and return, external financing. This strategy involves building through efforts to lengthen the maturity of port- on recent macroeconomic gains--low inflation, folios, diversify currency composition, and seek healthy trade surpluses, greater exchange-rate higher-yielding assets, while not losing sight of flexibility, and lower debt burden--to address broader macroeconomic and growth objectives. structural weaknesses in their financial systems, Many emerging market economies have taken local capital markets, and systems for managing advantage of recent favorable external financing external assets and liabilities. Such policies remain conditions to adjust maturity or currency struc- critical to forging closer links with global capital tures of their external debt through refinancing markets and to channeling capital flows to long- and, in certain cases, retirement of expensive term and productive investment and growth Brady bonds. On the asset side, more central opportunities. banks are relying on professional asset managers Progress in macroeconomic stabilization and to manage part of their foreign exchange reserve structural reforms during the last two decades holdings. helped provide the foundation for the recovery The Asian financial crises of 1997/98 pro- and vigorous expansion of capital flows over the vided a stark demonstration that weak domestic last two years. Commitment to such policies needs financial systems can easily transform a currency to be renewed through credible and concrete fiscal crisis into a full-blown economic free fall. Weak actions (reduction in public debt burdens and prudential regulation, undercapitalized banks, improved public debt management), monetary underdeveloped local capital markets, and actions (long-term price stability and low governments' implicit guarantee of foreign cur- inflation), and exchange-rate policies (avoiding rency borrowings through the prevailing fixed misaligned exchange rates and expanding flexibil- exchange-rate regimes of the time were among ity). Such policies have underpinned recent gains the factors that undermined investor confidence in creditworthiness in many emerging markets and and reversed capital flows. While considerable could help minimize the adverse impact on credit progress has been achieved in many developing spreads or availability of finance, should global countries in strengthening the banking sector and economic conditions worsen unexpectedly. developing local capital markets, the agenda is The cost-benefit calculus of continued reserve largely unfinished. In several countries, strength- accumulation by central banks in developing ening domestic financial institutions remains countries (especially in Asia) needs to be reexam- critical if monetary authorities are to pursue a ined in light of increasing associated fiscal costs broad range of policies (particularly related to and potential investment losses. While recognizing exchange rates) without jeopardizing the sound- that such policies have to date had a largely ness of the domestic financial system. positive macroeconomic effect on countries that But ultimately it is the macroeconomic policy pursued them, continuing accumulation of re- stance of G-3 countries that must shoulder the serves on such a large scale carries its own clear burden of required adjustments. As emphasized in risks, particularly if central banks (or others) with the previous chapter, an orderly and market- large dollar holdings shift to other major curren- determined depreciation of the dollar, a key cies. In both the short- and long-term, high- element of such a strategy, would help reduce U.S. reserve countries need to consider how best to external imbalances through its positive impact manage an appreciation of their currencies against on the current account deficit and on net external 62 G L O B A L I M B A L A N C E S A N D E M E R G I N G M A R K E T E C O N O M I E S debt. But orderly depreciation alone will not 6. The relationship between U.S. interest rates and secure a sufficient reduction in current global emerging-market bond spreads may be nonlinear because spreads incorporate default probability in a nonlinear way. payments imbalances. Equally important are For instance, at low interest rates and in periods of favor- efforts to promote a shift in relative aggregate able economic activity in developing countries, a rise in U.S. demand through fiscal consolidation in the United interest rates may have little effect on investors' estimates of States and policies in the European Union and the probability of default. By contrast, when the emerging- Japan to stimulate domestic demand. It is only market borrower is, or appears to be, at the limit of its abil- ity to repay, a given increase in U.S. rates may (appear to) through a combination of exchange-rate and de- push the borrower over the edge, sharply increasing the per- mand instruments that the necessary rebalancing ceived probability of default. Such a scenario may have oc- of world demand can be engineered in a sustain- curred, for instance, in 1982 and 1994 (Dailami, Masson, able manner. and Padou 2004). 7. The fiscal costs occur regardless of whether re- serves are held on the central banks' balance sheet or are Notes held by other authorities that purchase foreign exchange 1. The following countries are usually included in the reserves in the local interbank market and pay for them category of emerging market economies: in Asia--China, with local-currency liabilities or cash. To the extent that the India, Indonesia, Malaysia, the Philippines, and Thailand; return on reserve holdings in foreign securities falls short of in Latin America--Argentina, Brazil, Chile, Mexico, Peru, domestic financing costs, there exists a fiscal cost of reserve and República Bolivariana de Venezuela; in Eastern accumulation. The magnitude of this fiscal cost depends on Europe--Bulgaria, Czech Republic, Estonia, Hungary, the spread between foreign and domestic interest rates, the Poland, Russian Federation, and Slovakia. "Emerging mar- size of reserve increases, and the future changes in the ex- ket economies" are not a category in the World Bank's change rate of the local currency vis-à-vis reserve curren- country-classification system, which classes countries cies. But in practice and in a majority of countries, it is the according to gross national income, indebtedness, and other central bank that is the primary agency in charge of reserve criteria. See http://www.worldbank.org/data/countryclass/ management. Its responsibility extends to adopting more countryclass.html. stringent accounting standards for reporting the volume of 2. The notion that a country's history of macroeco- and changes in reserve levels. Estimating the fiscal costs of nomic management and default matters in the assessment of reserve accumulation also involves paying attention to the country risk by the capital markets is known as "debt intol- implications of holding reserves on the central bank's bal- erance." See Reinhart, Rogoff, and Savastano (2003). ance sheet for the determination of domestic interest rates, 3. This is not the first time the world economy has the exchange rate, monetary expansion, and government faced external payments imbalances and related adjustment debt dynamics. See Dailami 2005; Kletzer and Spiegel difficulties. Postwar history is replete with such episodes. 2004; and Becker and Sinclair 2004 for further discussion Just as at present, those episodes featured domestic and of such issues. external policy conflicts, international adjustment bargains, 8. Reflecting the progress achieved in recent years in disagreements on burden sharing, and several cases of the implementation of the IMF's safeguards assessments and macroeconomic diplomacy leading to cooperative solutions, the Special Data Dissemination Standard (SDDS, adopted in such as the Plaza Accord of September 1985 (Henning 1996), the accounting standards, transparency, and quality 1987; Bergsten 1991). of reserve information reported by central banks have sig- 4. Given their relatively higher risk aversion and nat- nificantly improved. As of the end of 2004, 53 central banks ural proclivity for safe assets, official investors have a strong had committed to the SDDS, and participation is expected demand for government securities, with equities given a low to rise further. (or even zero) weight in their investment portfolio. This pref- erence for government paper favors government bond mar- kets at the expense of equity markets. Higher bond prices mean lower costs of funds for the public sector, and lower References equity prices mean lower return on private capital. The macroeconomic consequence of this rotation is a reallocation Balduzzi, P., E. Elton, and T. Green. 2001. "Economic News of resources from the private to the public sector. With the and Bond Prices: Evidence from the U.S. Treasury Mar- U.S. economy relying increasingly on official sources in ket." Journal of Financial and Quantitative Analysis financing its current account deficit, the distributional im- 36 (4): 523­43. pact is again to the public sector. Becker, C., and M. Sinclair. 2004. Profitability of Reserve 5. While the potential for hedging against cross- Bank Foreign Exchange Operations: Twenty Years currency risk among major currencies is substantial, given the After the Float. International Department, Australia size and depth of global currency and interest-rate derivative Reserve Bank, Sydney. markets, the scope for hedging against currency risk vis-à-vis Bergsten, C. F., ed. 1991. International Adjustment and local currencies in developing countries is limited to six- Financing: The Lessons of 1985-­1991. Washington, month to one-year forward markets. DC: Institute for International Economics. 63 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Brandt, Michael W., and Kenneth A. Kavajecz. 2004. "Price Goldberg, Linda, and Deborah Leonard. 2003. "What Discovery in the U.S. Treasury Market: The Impact of Moves Sovereign Bond Markets? The Effects of Eco- Orderflow and Liquidity on the Yield Curve." The nomic News on U.S. and German Yields." Current Journal of Finance 49 (6): 2623­54. Issues (Federal Reserve Bank of New York) 9 (9). Dailami, M. 2005. "Fiscal Impacts of Reserve Accumula- Henning, C. R. 1987. "Macroeconomic Diplomacy in the tion: Measurement and Policy Recommendations." 1980s." Atlantic Papers 65, Atlantic Institute for Inter- Unpublished paper, World Bank, Washington, DC. national Affairs, United Kingdom. Dailami, M., P. Masson, and J. J. Padou. 2004. "Global IMF (International Monetary Fund). 2003. World Eco- Monetary Conditions Versus Country-Specific Factors nomic Outlook. Washington, DC: IMF. in the Determination of Emerging Market Spreads." . Various years. International Financial Statistics Unpublished paper, World Bank, Washington, DC. Yearbook. Washington, DC: IMF. Debtor Reporting System Database. World Bank. http:// Kletzer, Kenneth, and Mark M. Spiegel. 2004. "Sterilization www.worldbank.org/data/working/DRS.html (accessed Costs and Exchange Rate Targeting." Journal of Inter- 2005). national Money and Finance 23 (6): 897­915. Duffie, Darrell, Lasse Heje Pedersen, and Kenneth J. Menkveld, A., Y. C. Cheung, and F. de Jong. 2004. "Euro Singleton. 2003. "Modeling Sovereign Yield Spreads: Area Sovereign Yield Dynamics: The Role of Order A Case Study of Russian Debt." The Journal of Imbalance." Working Paper 385, European Central Finance 58 (1): 119­59. Bank, Frankfurt. Esquivel, Gerardo, and Felipe Larraín. 2002. "The Impact Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A. of G-3 Exchange Rate Volatility on Developing Savastano. 2003. "Debt Intolerance." NBER Working Countries." G-24 Discussion Paper 16, United Paper 9908, National Bureau of Economic Research, Nations Conference on Trade and Development, Cambridge, Mass. Geneva. Wijnholds, J. O, and Kapteyn, A. 2001. "Reserve Adequacy Feldstein, Martin. 1999. "A Self-Help Guide for Emerging in Emerging Market Economies." IMF Working Paper Markets." Foreign Affairs 78 (2): 93­109. WP/01/143, Washington, DC. Frankel, Jeffrey A., and Nouriel Roubini. 2003. "Industrial World Bank. 2004. "Steering a Steady Course: Strengthening Country Policies." In Economic and Financial Crises the Investment Climate in East Asia." East Asia and Pa- in Emerging Market Economies (National Bureau of cific Half-Yearly Update, World Bank, Washington, DC. Economic Research, Conference Report), ed. Martin .Various years. Global Development Finance. Feldstein. Chicago: University of Chicago Press. Washington, DC: World Bank. 64 . 4 Complex Challenges in Developing-Country Debt M UCH HAS CHANGED SINCE THE Looking ahead, there is a risk that global wave of financial crises that rocked imbalances could unwind in a disorderly manner, emerging-market economies and dis- resulting in abrupt movements in interest rates rupted global financial markets after 1994. Several and exchange rates, possibly accompanied by a favorable economic and policy developments over global slowdown and perhaps even protectionist the past few years have renewed foreign investors' trade measures (chapters 2 and 3). Such develop- interest in developing countries.1 Private capital ments would almost surely affect investors' as- flows to developing countries have shown a strong essment of the risk of holding debt issued by rebound in the past two years (chapter 1) on the developing countries. Emerging-market bond strength of marked improvements in economic fun- spreads could widen rapidly with a sudden swing damentals and investors' search for higher yields in investor sentiment, debt-servicing burdens could than those available in developed-country markets. rise, and disruptions in capital flows could accentu- Emerging-market bond spreads have declined to ate stresses on vulnerable emerging markets. near record lows, reflecting investors' assessments But such pressures would not automatically that the risk of a looming financial crisis is close to lead to a replay of past crises. The drivers of debt an all-time low. accumulation since the mid-1990s are different But recent history provides a sobering re- from those of earlier decades, and this changed minder of how poor financial markets are at environment poses new and different risks. Several spotting brewing crises--and how costly such changes stand out. crises can be for the poor in developing coun- First, many countries that were at the center tries. The prospects are good for the current of earlier crises have made significant progress in favorable economic and financial conditions to improving prudential and regulatory policies and continue in most developing countries (chapter 2). structures, the weaknesses of which contributed to But rosy economic projections conceal vulnera- the crisis. Fiscal positions have been strengthened; bilities created by the stark external imbalances corporate practices are more prudent; and the in the global economy and by the evolution of financial sector has moved to adopt international financing patterns, notably the rise of domestic standards. debt in key middle-income countries. Many Second, the composition of financial flows has countries are better prepared for financial diffi- changed in a way that affects stability. Equity culties than they were in the 1990s, but others re- investments (foreign direct investment and portfo- main exposed. There is no room for complacency lio equity flows), which are less volatile than bank on the part of financial market participants and lending, account for a growing share of capital policymakers. inflows to emerging market economies. Bond and 67 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 short-term debt has grown in importance relative The change since the 1990s S to bank lending, with important implications for ince the mid-1990s, various developments the cost and availability of finance and the man- have occurred that reflect the changing vulner- agement of crises. ability of emerging-market economies to future Third, the external debt burden of developing crises: countries as a group has eased since the wave of financial and economic crises that began in the · Overall external indebtedness has improved. mid-1990s. But that easing has not been universal. · The composition and character of external Beyond the aggregates, one finds considerable debt has changed. country diversity. Severe difficulties persist in a · Domestic debt markets have grown rapidly in few countries, and debt burdens have risen in emerging-market economies, leading to new more than half. uncertainties about the scale of the overall Fourth, the aggregate decline in external debt burden in many countries. indebtedness has been partially offset by a rise in · The policy environment has improved in domestic debt. That shift brings some benefits, but many countries, notably the East Asian coun- excessive domestic borrowing can be just as harm- tries that were the focal point of the recent ful as excessive external debt. crises. Countries that have lowered their external · A more accommodating and discerning inter- debt have reduced their vulnerability to changes in national financial environment has evolved. the external financing environment and relieved · Progress has been made on the international pressure on their exchange rate. But the switch to framework governing debt. domestic debt heightens other risks--notably the uncertainties of rolling over short-term debt (because maturities of domestic debt are generally Reduced external indebtedness for many, and shorter than those of external debt) and associated a larger role for non-debt-creating flows interest-rate risks. Benchmarked against gross national income Despite the growing sophistication of interna- (GNI), developing countries' burden of external tional capital markets and a steady growth in the ca- debt (public and private) declined from a peak of pacity of central banks and monetary authorities in 45 percent of GNI in 1999 to an estimated 39 per- developing countries, significant weaknesses remain cent in 2003. The improvement was achieved both in the international architecture that has despite an increase of almost $207 billion in the evolved to regulate those markets (Global Develop- nominal value of total external debt, which rose ment Finance 2004, chapter 2) and in the quality of over the last few years (after declining in 2000 and data available on the fast-growing domestic debt 2001), although at a much slower pace than dur- markets in many emerging-market economies. ing the 1980s and early 1990s. Improving the monitoring and dissemination of Other indicators of the aggregate external information on public and private domestic debt debt burden of the developing world have im- flows should remain a priority for international proved significantly as well, although regions and institutions and national authorities. country groups have been affected differently The chapter proceeds as follows. After survey- (table 4.1), as detailed in the next part of the chap- ing significant changes in developing-country ter. Short-term debt as a percentage of total finance since the mid-1990s, we focus on current external debt is lower for both low- and middle- trends in external debt in the emerging-market income countries in all regions except in Europe economies. We then take a closer look at a particu- and Central Asia. This decline reflects reduced larly significant recent development in emerging pressures on countries to maintain foreign ex- economies--the rise of domestic debt markets. change liquidity. The aggregate ratio of external The interplay between external and domestic debt, debt to exports dropped sharply, from 135 percent and the special challenges of managing a mixed in 1997 to 105 percent in 2003, while the debt portfolio are the subjects of the last major part of servicing burden eased from 19 percent of exports the chapter. to 17 percent. 68 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T Table 4.1 Selected indicators of the burden of external debt, 1997­2002/3 Percent East Asia & Latin America Europe & All countries Low-income Middle-income Pacific & Caribbean Central Asia 1997 2003 1997 2003 1997 2003 1997 2003 1997 2003 1997 2003 Short-term debt/total debt 18.4 15.7 10.8 7.9 20.0 17.3 25.1 23.9 19.1 10.7 15.2 19.9 Total debt stock/exports 135.1 104.7 236.3 147.9 123.3 98.6 100.5 60.0 179.6 159.9 106.3 111.1 Total debt service/exports 18.8 17.2 17.7 12.0 18.9 17.8 12.1 10.5 35.1 30.7 12.2 19.8 Reserves/total debt stock 29.2 50.0 14.6 37.9 32.4 52.4 42.7 107.7 26.2 25.8 25.8 36.9 Reserves/imports (months) 4.4 6.5 3.5 6.8 4.5 6.4 5.3 8.3 4.8 5.0 3.0 4.8 Source: World Bank Debtor Reporting System. Most notably, foreign exchange reserves of Figure 4.1 Composition of developing countries' developing countries more than doubled, from external debt, 1990­2003 $631 billion in 1997 (about 30 percent of their % total external debt external debt stock) to $1.6 trillion in 2004 (60 per- 100 cent of their debt stock), providing a valuable cushion against unanticipated external shocks Private (chapter 3). In line with these marked improve- 80 ments in indicators of external debt, foreign capital flows from private sources recovered as well. 60 The share of foreign direct investment (FDI) and portfolio equity in the finance mix of many 40 developing countries has grown in recent years. Public That trend enhances stability, because FDI in- vestors generally emphasize long-term commitment 20 and exhibit greater tolerance for near-term shocks. Equity flows accounted for 80 percent of total 0 external financing during 1999­2003, compared 1990 1992 1994 1996 1998 2000 2002 2003 with just 60 percent during 1993­98. Sources: World Bank Debtor Reporting System and staff calculations. The changing composition of external debt-- more private borrowers finance often requires public participation to miti- The ownership pattern of external debt has shifted. gate credit risks, especially in countries with low The share of public sector debt in total external credit-risk ratings. In many countries bond debt declined from 82 percent during 1990­95 to financing is either a direct public sector liability or 69 percent during 1996­2003 (figure 4.1).2 Conse- carries public sector guarantees. And governments quently, the ratio of external public debt to GDP often postpone direct dealings between the corpo- declined from 31 percent to 27 percent over the rate sector and private international investors so as same period. Deregulation in international capital to maintain stability in the capital account. Both markets and developing countries, expansion in the measures have had the effect of raising public sector base of developing-country investors, and improved indebtedness in some middle-income countries since information and research--all facilitated access by the mid-1990s--among them Ecuador, Gabon, corporate borrowers in developing countries to Lebanon, Romania, and Republica Bolivariana de international capital markets. Venezuela. But the declining public share is not universal-- public sector indebtedness has increased in some Growing reliance on domestic debt markets countries, creating vulnerability related to their External debt reductions in emerging-market growing exposure to tradable external debt. Estab- economies have been partly offset by growth in do- lishing access to private sources of cross-border mestic public sector debt (figure 4.2). As a result, 69 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 4.2 Developing countries' total public exposure to currency risks and to assert greater sector debt, 1990­2003 control over public debt management. Both goals % GDP are supported by the recognition that the percep- tion of risk in international capital markets has an 35 External important influence on capital flows and can affect financing prospects regardless of domestic 30 conditions. (This was explored in chapter 3 of Global Development Finance 2003.) Liberaliza- 25 tion of capital accounts in many countries has contributed to the growth of domestic debt by fa- 20 Domestic cilitating the deepening of domestic financial mar- kets, a trend reinforced by the adoption of sound 15 institutional and regulatory policies. But not all of the new money in domestic debt markets has come 10 from within the country. With successful macro- 1990 1992 1994 1996 1998 2000 2002 2003 economic policies to manage inflation in some Sources: World Bank 2004 for external debt data for countries reporting under World Bank Debtor Reporting System; IMF 2003 developing countries, liberalization has brought for domestic debt data. greater foreign investment in domestic debt mar- kets in developing countries. Figure 4.3 Burden of public debt: external vs. In 1993/94, on the eve of the Mexican peso domestic, 1990­2002 crisis, the external public debt of developing coun- tries averaged 33 percent of their GDP, while their Change from average 1990­96 to 1997­2002 (% GDP) domestic public debt averaged about 19 percent. 60 By 2002/03, external public sector debt had 40 declined to 26 percent of developing countries' Change in domestic debt GDP, but the domestic public debt burden had 20 risen to 34 percent. Thus the total public sector debt burden of developing countries rose from 0 52 percent to 60 percent during this period. The implications of increased domestic debt are ex- 20 plored in greater detail later in the chapter. Change in 40 external debt An improved policy environment 60 Policies and performance in developing countries of de have helped bring about the observed improvement Turkey B. Jamaica BrazilMexico Rica China PeruAfricaIndiaPoland in indebtedness. Since the late 1990s, GNI in devel- Indonesia Thailand Morocco Ukraine Colombia Ecuador Rep.R. , HungaryNigeriad'Ivoire CostaPhilippinesSouth Arab Côte oping countries has grown three times faster than Egypt,Venezuela external debt. Many countries, especially those touched by recent crises, have adopted more Sources: IMF; World Bank Debtor Reporting System. market-oriented financial policies and increased their openness to international trade and invest- in many countries, the overall burden of public ment. Fiscal policies have been more prudent, al- sector debt remains high. In Costa Rica, Peru, the though concerns persist about the sustainability of Philippines, and other countries, the decline in exter- public debt in several countries. Inflation has fallen, nal indebtedness has been completely offset by the and many developing countries are showing strong rise in domestic debt. In others, such as Indonesia, growth in productivity. The spread of flexible Thailand, and Ukraine, external and domestic debt exchange-rate systems has reduced the likelihood have both risen since the mid-1990s (figure 4.3).3 that an exchange-rate crisis will become a debt crisis The growing importance of domestic debt has and raised awareness of the risks inherent in cur- been driven by several factors. Many developing rency mismatches. Since 1996, 19 developing coun- countries have made a concerted effort to avoid tries have shifted to floating exchange-rate regimes. 70 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T In the Asian countries at the epicenter of Figure 4.4 Credit quality of emerging markets, the crisis in the late 1990s, initiatives to 1997­2004 strengthen corporate and financial sectors have S & P credit-risk rating produced impressive gains. Considerable corpo- A rate restructuring has taken place, albeit at vary- ing degrees (Kawai, Lieberman, and Mako 2000; Binamira and Haworth 2000). In four key coun- BBB Domestic tries (Indonesia, Malaysia, Philippines, Thailand), measures of profitability (income/sales ratios and return on assets) were up in almost all cases be- BB tween 1998­2003, and measures of vulnera- bility to external pressures (interest/sales ratios, capital adequacy ratios) have strongly improved BB Foreign (table 4.2). More broadly, stronger domestic environ- 1997 1998 1999 2000 2001 2002 2003 2004 ments and lowered susceptibility to shocks have Note: The credit quality calculations are based on weighted averages impressed investors and raised credit ratings of long-term foreign and local-currency credit-risk ratings of throughout the developing world (figure 4.4). countries rated by Standard and Poor's. The weights applied are the total outstanding foreign-currency debt as reported in World Bank (2004). A more accommodating and discerning Sources: Standard and Poor's; World Bank staff calculations. financing environment Changes in the international financing environment have benefited emerging-market economies that Overall, these developments have reduced the have made improvements in their domestic macro incidences of contagion and systemic risk in policy. International capital markets today are more market-based emerging-market finance. Nearly 60 attuned to and more discriminating about develop- developing countries now carry formal credit-risk ment finance than in the past. This in turn imposes ratings, almost four times the number in the mid- a degree of discipline on borrowing through greater 1990s. And as international banks have aligned transparency, a more substantial flow of informa- their assets and liabilities more consistently, local- tion, increased market research, and finer distinc- currency bank lending to developing countries tions in credit risk (World Bank 2004). grew to 40 percent of all bank lending in 2003, compared with 15 percent in 1995. The switch from cross-border (or international) to local- Table 4.2 Corporate and financial sector compari- currency lending by banks permits better risk man- son for Asian crisis countries, 1998 and 2003 agement and thus greater stability. At the same Percent time, the base of investors interested in the develop- Indonesia Malaysia Philippines Thailand ing countries has changed--in particular, the share of speculative capital has declined relative to the 1998 2003 1998 2003 1998 2003 1998 2003 mid-to-late-1990s, which helps dampen excessive Corporate sector and potentially crippling volatility in capital flows Ordinary income to (World Bank 2003). sales 12.0 8.0 3.0 7.0 0.5 4.0 7.5 11.0 Interest A strengthened international framework expense to sales 13.0 3.0 4.5 1.7 7.8 3.0 8.2 1.0 The international financial architecture, which aims Financial sector to prevent sovereign debt defaults and facilitate Commercial orderly debt restructuring, has been strengthened banks' in significant ways (Frankel and Roubini 2003) return on assets 0.6 2.7 1.8 1.6 0.4 1.2 0.2 1.5 Capital though the work is by no means complete (Peterson, adequacy Goldstein, and Hills 2004). Collective action ratio 2.3 22.0 11.0 13.0 15.2 17.5 11.0 11.2 clauses (CACs) have been introduced in bond- Source: World Bank. financing transactions, and discussions over a code 71 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 of conduct continue. The Capital Adequacy Accord Figure 4.5 Change in net private debt flows (long- (Basel II) offers the potential to strengthen the term plus short-term) of crisis countries and banking sector and enhance the ability of banks others, 1994­2003 to take on and sustain riskier lending, through $ billions, year year measures to mitigate and manage risk. Joint efforts 80 on statistics and monitoring supported by the Accounted for by 60 World Bank, the Organisation for Economic other countries Co-operation and Development (OECD), the Inter- 40 Accounted for by crisis countries national Monetary Fund (IMF), and the Bank for 20 International Settlements (BIS) are improving the 0 quality and quantity of information available for assessing risk and managing approaching crises. 20 Despite these improvements, additional pro- 40 gress is needed. While CACs have emerged as the 60 main vehicle for facilitating debt restructuring, 80 they apply only to bond debt and even there the im- 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 pact is limited. CACs have not been universally Sources: World Bank Debtor Reporting System and staff adopted in new developing-country bond issues, calculations. and they are absent from most bond debt issued before 2002. Thus debt restructuring remains a laborious and time-consuming process. For exam- Nine countries that have absorbed the bulk ple, resolution of Argentina's default on its public of market-based financing since the 1990s-- sector debt, worth $102.5 billion, took more than Argentina, Brazil, Indonesia, Malaysia, Mexico, three years. The government and creditors differed Philippines, the Russian Federation, Thailand, and over the degree of reduction in the nominal value of Turkey--were also at the center of the crises of the debt, the treatment of past-due interest, and the ca- 1990s. These countries still have the potential to pacity of the government to pay. trigger systemic crises in market-sourced develop- ment finance, not only as bellwethers, but also be- cause together they account for almost 70 percent External debt trends in emerging of all developing-country debt tradable in the sec- markets ondary market and half of all privately sourced E xternal debt burdens played a key role in pre- debt (in 2002). cipitating the financial crises centered in Aside from their status as market leaders, the emerging-market economies during the 1990s. As countries that have developed and exploited their the current global growth cycle slows, and interest access to capital markets are a diverse group. Coun- rates rise, it is worth considering how emerging- tries such as Argentina, Brazil, and República market economies' external debt burdens have Bolivariana de Venezuela have long struggled with evolved and how resilient their debt situation high debt burdens in one form or another. After might be to changing external conditions. borrowing extensively from international banks Recent debt crises were concentrated in just a during the 1970s, their bank debt was restructured few countries, but the resulting tremors shaped the in the 1980s, giving rise to the phenomenon of evolution of development finance--and continue to Brady bonds. The emerging-market economies of do so. In the mid-1990s, contagion from localized East Asia, by contrast, obtained greater access to financial and economic pressures often led to broad capital markets as they matured. Until the early market closures for developing countries. Even the 1990s, the external debt burden of East Asia as a level of official financing available to the develop- whole (in relation to GNI) was half of that for ing world was affected, as financial rescue packages Latin America. A third group comprises relatively diverted resources from other countries. Since then, modest borrowers. Some, mostly high risk, have changes in net private debt flows for these countries long maintained limited access to syndicated or have been the main drivers of private debt flows to structured bank credit, while others (for example, all developing countries (figure 4.5). Estonia, Guatemala, Jamaica, and Lithuania), 72 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T Box 4.1 Currency valuation effects have significant impacts C ross-currency valuation effects arising from movements These revaluation effects are one way in which in the value of the dollar against other world curren- developing countries are exposed to the international cies, as well as debt forgiveness or reduction, have affected financing environment (chapter 3). At times, currency the value of developing-country debt from year to year effects dwarf actual changes in net cross-border debt flows. (table).a For example, in 2002, the magnitude of the In Argentina, Indonesia, and Morocco, for example, exchange-rate valuation effect for all developing countries unfavorable currency valuations neutralized the decline in ($71 billion) was almost equal to the nominal change in their total outstanding debt in 2002 (figure). In Argentina, their total debt stock ($76 billion). repayments and debt restructuring led to a decline in With almost 40 percent of developing-country debt outstanding debt of $5.4 billion in 2002, while cross- denominated in nondollar currencies, cross-currency currency valuations raised the price of that debt by valuation can be significant. Regional variations exist almost $7 billion. In Brazil, debt repayments amounted as well--in Latin America and the Caribbean, only to $1.4 billion in 2002, but cross-currency valuations 25 percent of external debt is denominated in currencies added $4.2 billion to the outstanding debt burden. other than the dollar, while in Middle East and North Africa, nondollar currencies account for 55 percent of outstanding debt. Cross-currency valuation effects have Magnitude of change in debt and currency valuations been particularly prominent since the late 1990s. as of 2002 $ billions Top countries where valuation Top countries where valuation 8 has diluted reduction in debt has accentuated increase in debt Composition of change in external debt in developing countries, 2000­3 6 $ billions 2000 2001 2002 2003 4 Currency Change in total debt stock 64 22 76 219 valuation Net flows on debt 6 4 7 62 2 Cross-currency valuation 53 41 71 87 Debt forgiveness or reduction 26 7 7 3 0 Net change in interest arrears 7 3 1 11 Interest capitalized 14 1 4 1 2 Residual 14 26 0 61 Change in 4 total debt a. Countries contract debt in various currencies. The debt data that countries report to the World Bank's Debtor Reporting System is expressed in the currencies in which the original debt was contracted or in currencies in which 6 it is repayable. For purposes of standardization and aggregation, the DRS a n a n d bia de on eria ali bia M . of an ro abonero aica gu converts these amounts into dollar values. The exchange rates used are ChinoroccoNig BrazilRep Zam d'lvoireAlgeria G generally the par values or central rates specified by the International RussianArgentinaolomla R. B.Indonesia C , M Uzbekista Serbiateneg Cam Jam icara N Monetary Fund or market rates when necessary. Exchange rates in effect at Federatio Arab Côte on M the end of any given year are used to convert the stock of debt outstanding for that year in various currencies into the nominal dollar value. Venezue Egypt, Source: World Bank Debtor Reporting System. Sources: World Bank Debtor Reporting System and staff calculations. have been able to penetrate the more discerning in a few countries--among them China, Mexico, bond financing segment of the market. and Thailand (table 4.3)--that together account for only about a third of outstanding developing- Higher external debt in two-thirds country debt. By contrast, in two-thirds of middle- of middle-income countries income countries, the debt burden increased from The overall reduction in the external debt burden 1997 to 2002, with the increase larger than 20 per- of middle-income countries since the crises of the centage points of GNI for more than one-quarter. 1990s masks diversity among individual countries. Overall, for middle-income economies, the ratio of The aggregate reduction derives from reductions external debt to GNI remains at levels higher than 73 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Table 4.3 External indebtedness of top 20 debtors, Figure 4.6 Total external debt of developing 1997 and 2003 countries, 1990­2003 Total external debt as percentage of GNI % GNI Fed. 1997 2003 75 Financial xico azil Turkey Argentina azil Me Thailand Russian Br Br Brazil 25 50 crisis China 17 14 65 Russian Federation 32 42 Argentina 45 136 Low-income Turkey 44 62 55 Mexico 38 23 Indonesia 65 68 India 23 19 45 Poland 27 46 Philippines 59 72 Middle-income Thailand 75 37 35 Malaysia 50 50 Hungary 57 58 25 Chile 37 63 1990 1992 1994 1996 1998 2000 2002 2003 Pakistan 49 51 Czech Republic 42 40 Sources: World Bank Debtor Reporting System and staff Nigeria 84 70 calculations. Venezuela, R. B. de 41 42 Colombia 31 44 Egypt, Arab Rep. of 39 38 Figure 4.7 Composition of outstanding external Note: Countries are ranked according to the nominal value of their debt of developing countries, 1970­2003 total external debt stock as of 2003. Source: World Bank Debtor Reporting System. $ billions 2,500 those seen in the early 1990s (figure 4.6). The big 2,000 Bond increase in the debt-GNI ratio occurred in 1997­99, rising by nearly 8 percentage points (from 35 to Bank 43 percent) with the combination of the Asian, short-term 1,500 Russian, and Brazilian crises. Among the emerging-market economies in Bank long-term 1,000 which external debt has risen, in some cases sharply, are Argentina, Brazil, Indonesia, Philippines, Poland, the Russian Federation, South Africa, and 500 Official Turkey, several of which have had persistent debt problems. For this group, the ratio of external debt 0 to GNI climbed on average by 21 percent between 1970 1975 1980 1985 1990 1995 2000 2003 1997 and 2002, while the ratio of debt to exports of Source: World Bank Debtor Reporting System. goods and services also rose by 28 percentage points (to 181 percent in 2002). In many cases, increased external debt has the end of 2003, bond and short-term bank debts been accompanied by rising domestic debt, as we together accounted for 45 percent of the outstand- shall see. ing external debt of developing countries, com- pared with 29 percent in 1990, and an average of New vulnerabilities created by market changes 24 percent during 1970­89 (figure 4.7, box 4.2). Developing-country debt crises became more Particularly noteworthy has been the growth in market-driven in the 1990s. Bond debt and short- bond debt, which mushroomed to 27 percent of term bank credit, both of which are strongly af- the total outstanding debt in 2003, up from only fected by short-run developments in the external 4 percent at the start of the 1990s. All of the coun- financing environment, now make up a much tries that have faced debt pressures or crises since larger share of developing countries' external debt the 1990s vigorously substituted bond financing than at any point in the past three decades.4 By for bank credit during 1990­2002 (figure 4.8). 74 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T Figure 4.8 Substitution of bond financing for bank credit, 1990­2002 Box 4.2 The role of Ratio of bond financing to bank credit short-term bank credit 5 in trade financing 1990 2002 4 T rade financing plays a crucial role in facilitating international trade for developing 3 countries. For many developing countries lacking access to capital markets, short-term bank credit 2 is the primary source of market-based finance for facilitating cross-border movement of goods. Availability of long-term credit for this set of 1 countries is severely restrained due to their credit risk (or its perception) and their minuscule share 0 of international trade. This can lead to a build- a de n bia es d d Africa Chile India alaysiaBrazilungaryPolanTurkey Chinaonesia Lebanon PanamBulgariaR. B.ArgentinaM FederatioColom exico up of primarily short-term debt for a country, H Thailan Ind which may be necessary for mobilizing trade. SouthPhilippinM Short-term trade financing via commercial banks Venezuela, Russian has reached developing countries owing to the mitigation of risk for creditors under security Note: Refers to countries that account for 90 percent of the bond debt outstanding as of 2002. arrangements provided by the traded goods. Sources: World Bank Debtor Reporting System and staff Such financing is even more widely spread than calculations. general bank lending, which unlike other forms of market-based debt financing is relatively Figure 4.9 Volatility in acquisition of new debt, more easily accessible by developing countries. 1994­2003 As shown in Global Development Finance 12-month trailing variance in gross flows ($ billions) 2004, the share of trade financing in total bank 20 lending commitments has been higher for non-investment grade and unrated developing Bond financing countries than for investment grade rated 15 countries. Thus, along with possible vulnerabili- ties, the merits of short-term bank lending should also be acknowledged. 10 Bond financing is more susceptible to pricing 5 Bank lending conditions (for new debt) and to risk perceptions (long-term) in international capital markets than is long-term 0 bank lending, where information asymmetry can 1994 1996 1998 2000 2002 2003 be at least partly dealt with through syndication Sources: Dealogic; World Bank staff calculations. with local banks (Esty and Megginson 2003; Nini 2004).5 New bond financing levels have fluctuated widely since 1994, often declining sharply in temic risk and contagion. Volatility has subsided response to localized market seizures or voluntary since 2000, with a widening of the investor base, postponement of issues to avoid a turbulent finer distinctions among credit risks, increased market environment, and sometimes spiking with prudence in borrowing and expanded efforts by short-run market euphoria (figure 4.9). both the public and private sector to promote a Volatility in new bond financing was high new financial architecture. during the mid to late-1990s, largely because in- Short-term bank credit, the other segment of vestors and borrowers were highly concentrated. debt financing that can be highly sensitive to At the same time, unfamiliarity with the market on short-run market developments, has been moti- both sides made bond financing vulnerable to sys- vated by the desire of international banks to limit 75 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 their medium-term exposure to developing coun- Figure 4.11 Composition of outstanding market- tries (and by the growth in financing for interna- sourced debt in the developing world, 1970­2003 tional trade transactions). But such adjustments $ billions can accentuate a crisis. For example, banks may 1,600 cut back on credit to a country facing tight credit conditions in other segments of the capital market to cover possible losses arising from that country's 1,200 Public inability to service its overall debt. In fact, most fluctuations in bank lending to developing coun- tries have been driven by sharp fluctuations in 800 short-term lending (figure 4.10). The increased external indebtedness of the pri- vate sector also has shaped the nature of financial 400 Private crises in recent years. Although crises and episodes of contagion have been linked to countries' overall debt burdens and their sustainability, the level of 0 private sector debt clearly matters. Investors per- 1970 1975 1980 1985 1990 1995 2000 2003 ceive that sovereign and public sector debt are backed by a greater capacity to service obligations Source: World Bank Debtor Reporting System. than is private debt. Thus, a larger private share in a country's external debt increases investors' of the total. The difference is that in the 1970s perceptions of risk. This is true even if corporate almost all market-sourced debt was in the form of sector vulnerability, as measured against private bank loans, rather than bonds. sector income and assets, shows improvement, as The private sector accounts for a rising share in East Asia, where most corporate debt-equity of both bond and bank financing. As access to ratios have fallen in the period since the crisis. international bond markets widened in the 1990s, At the end of 2003, the private sector ac- the private sector's share in outstanding bond debt counted for about 60 percent of all market-sourced almost tripled--from about 8 percent in the early debt outstanding, compared with 33 percent at the 1990s to an average of 22 percent since the mid- beginning of 1990 (figure 4.11). The current 1990s. In bank lending, the share of the private composition is similar to that of the 1970s, when sector has followed a more cyclical pattern. After the private sector accounted for about 57 percent averaging 57 percent in the 1970s, that share fell drastically in the 1980s (to 40 percent), as banks retrenched credit during and following the bank Figure 4.10 Bank credit to developing countries, debt crisis. Lending was concentrated in the public 1970­2003 sector as the banks reengaged with developing Net flows ($ billions) countries in the early 1990s. Lending to the private 100 sector did not pick up until the mid-1990s. For the Long-term bank period 1993­2003, the private sector accounted 80 lending for 70 percent of total outstanding bank debt. 60 40 20 0 The rise of domestic debt markets T 20 he aggregate external debt burden of develop- 40 ing countries, expressed as a share of GNI or Short-term bank exports, has fallen since the late 1990s. Mean- 60 lending while, their domestic debt burden rose--from 19 80 percent of developing-country GDP in 1993/94 to 1970 1975 1980 1985 1990 1995 2000 2003 34 percent in 2002/03. This rise in domestic debt Source: World Bank Debtor Reporting System. has thus kept the total public sector debt burden of 76 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T developing countries high, and in some cases has Figure 4.13 Stock of outstanding domestic bonds, increased it. by sector, 1993­2002 The collection and official reporting of domes- % GDP tic debt statistics are subject to considerable lag. 40 But estimates appearing in market sources suggest Corporate sector that the burden of domestic debt for developing Financial sector countries as a whole continued to rise modestly in Public sector 30 2004. Most of the growth appears to be centered in Europe and Central Asia and in East Asia and the 20 Pacific. In at least some countries, the capacity to service debt has increased with the debt burden. Many governments, mostly in middle-income 10 countries, have been able to finance their activities by drawing on growing domestic debt markets. The domestic finance pools have been fed by 0 1993 1996 1999 2002 several years of record trade growth in the devel- Sources: Bank for International Settlements; IMF. oping world, and, in many countries, by the liber- alization of capital accounts and the adoption of sound macroeconomic, regulatory, and prudential The stock of local bonds outstanding in devel- policies that have stanched capital flight and oping countries almost doubled between 1993 and attracted foreign investment in domestic debt 2002--from 20 percent of GDP in 1993 to 37 per- markets in developing countries. cent in 2002 (figure 4.13). According to data from The effect has been a shift in the composition the Bank for International Settlements (BIS), the of public sector debt from external to domestic stock of domestic debt securities in 20 major devel- sources, particularly in the emerging-market oping countries continued to grow in 2003/04--at economies. The magnitude of that shift has varied an average rate of 28 percent. Most of the growth across regions (figure 4.12), depending on the reflects issues of securities by public sector borrow- significance of emerging-market economies in the ers, from an average of about 14 percent of GDP region, national policies on the use of current ac- during 1993/94 to about 24 percent of GDP by count surpluses, and the state of development of 2001/02. During the same period, corporate bond national and regional debt markets. issuance rose from about 3 percent to about 6 per- cent of GDP. The more measured growth in the Figure 4.12 Public debt stocks in emerging corporate sector bond market partly reflects se- markets, 1997 and 2002 quencing in market development. The appearance and deepening of domestic $ billions bond markets in emerging-market economies has 900 881 External Domestic been among the most significant of the factors behind the growth in developing countries' domes- tic debt. Development of local bond markets re- 600 duces exposure to foreign currency­denominated 542 debt and other pitfalls of the international financ- 449 420 ing environment (Jiang and McCauley 2004; 338 357 352 332 Deutsche Bank 2003; Reserve Bank of Australia 300 222 225 197 206 2003). Local bond markets also offer governments an effective tool for conducting and managing domestic monetary policy (World Bank and IMF 0 2001) because issuing bonds can reduce the gov- 1997 2002 1997 2002 1997 2002 ernment's need to finance deficits by monetary Asia Latin America Europe means. A liquid bond market also can be used as a Note: Data are for 33 major developing countries that account for tool to target inflation, manage shocks, and help most developing country debt. Sources: IMF; World Bank Debtor Reporting System. guide consumption and investment cycles. But the 77 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Box 4.3 Foreign investment in developing countries' domestic debt markets W here sound macroeconomic and financial policies while also providing creditworthy, liquid, and diverse are in place, foreign investment can catalyze the investments to domestic investors. development of domestic debt markets, strengthening their The debt markets of developing countries are the new key role in the national financial sector. Foreign investment frontier for foreign investment. The trend started in the can increase the depth, breadth, and liquidity of domestic early 1990s with markets in the Czech Republic, Hungary, markets, while enhancing their efficiency through the Poland, and the Slovak Republic. IFIs were the first foreign development of financial instruments, the diversification of issuers of bonds in the Hungarian forint, whereas foreign portfolios, the encouragement of competition among local corporations led with issues in other countries' currencies. market intermediaries, and the promotion of international In Asia, after the opening of markets in the Republic of standards. In return, international investors can diversify Korea and the Philippines, the process stalled with the their financing sources, increase yields, and establish advent of the financial crisis of 1997/98. Since then IFIs strategic presence in local markets. have issued bonds in the Indian rupee market, and China, Strategic presence may become more important over Malaysia, and Thailand have expressed interest in opening time from the perspective of both borrowers and investors, their markets to foreigners, especially IFIs. In Latin America, as yield differentials between developing countries and the growth of institutional funds, notably through the industrial countries narrow. The differential shrank from pension system, has encouraged the issuance of foreign about 7 percent in the mid-1990s to 4 percent by 2004. bonds in domestic currencies. IFI bonds in Colombian International liquidity played a role in reducing the gap, pesos, Mexican pesos, and Peruvian soles have been but better economic policies in developing countries, as eagerly subscribed to by local institutional investors. reflected in improved domestic risk ratings, were Despite the growth in developing countries' domestic important as well. debt markets, and in international bonds denominated in International financial institutions (IFIs), including the developing country currencies, the share of foreign World Bank, have contributed to the development of investors in domestic markets remains small and spotty. domestic debt markets through their borrowing practices. Nonetheless, given the improvements in settlement, IFI bonds denominated in developing-country currencies clearing, and custodial services; regulatory frameworks; have helped decouple credit risk from currency risk, as and investment climates, there is considerable potential for these institutions command a solid presence in interna- growth in that share. tional bond markets. The decoupling imparts confidence to foreign investors, charting new territories of investment, Source: World Bank 2005. benefits of domestic bond markets extend more public sector institutions. Short-term government broadly to the domestic financial system. Bond securities trading at objective market-clearing markets can complement structured financing and prices become the foundation for larger and more stimulate healthy competition, not just in terms of diverse issues. Thus government debt provides the market intermediation, but in financial products essential liquidity and pricing benchmark necessary as well. In addition, the infrastructure required to for other forms of domestic bonds to take root.6 build and foster local bond markets, such as clear- ing and settlement systems and regulatory and The switch to domestic debt--deliberate legal frameworks, contribute to the overall sound- in Asia, less so elsewhere ness of the domestic financial system. Domestic The switch from external to domestic debt in Asia debt markets also have become an increasingly was deliberate and pronounced following the attractive destination for foreign investors, with market-enforced retrenchment of credit during the international financial institutions playing an crisis of 1997/98. As of 2002, Asia accounted for important catalytic role (box 4.3). half of all domestic debt in the developing world. Bond markets tend to bring increases in The region's share continued to increase, margin- domestic public debt because, in their nascent ally, in 2003/04, according to recent market esti- stages, they almost always require support from mates. The ratio of domestic to external debt for 78 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T the region increased from close to parity in 1997 Figure 4.15 Stock of domestic bonds outstanding to almost three to one by 2002, reflecting an an- in emerging markets, by region, 1993­2002 nual growth in domestic debt of about 20 percent. % GDP As the region's domestic debt stock soared, 45 external debt fell by $25 billion, with net external Asia debt flows reversing from an average inflow of 40 $50 billion during 1995­97 annually to an out- 35 Latin America flow of $21 billion annually in 1998­2000. Since 30 then outflows of external debt continued, arrested by modest net inflows in 2003. Since the 1997/98 25 crisis, the region has not only reduced its external 20 debt, but also has accumulated substantial interna- Eastern Europe tional reserves as a buffer against external shocks. 15 Reserves in Asia nearly tripled to almost $760 bil- 10 lion in 2004 from $247 billion in 1998. 1993 1996 1999 2002 The buildup of domestic debt in crisis-affected Sources: BIS and IMF data as presented in World Bank IMF countries began with the forced adjustment to the Brookings Institution 2003. shocks of 1997/98 (including costly bailouts), but it has not slowed with the passing of the crisis, evolving instead into an explicit tool of debt offset the benefits of a sizeable primary surplus. In management. Indonesia provides a good example India, domestic debt has been the primary source of the managed rebalancing of public sector debt. of financing for the government's deficit since the Since the contagion-induced crisis in 1998, the 1980s. The relatively high level of the domestic country's domestic debt, almost nonexistent before debt burden (about 75 percent of GDP) raises the crisis, has averaged 42 percent of GDP, while questions about its impact on the economy and the external portion of public sector debt has domestic financial markets, as well as about its declined from 70 percent to 40 percent over the sustainability. same period (figure 4.14). In Malaysia and the Asia also led developing-world regions in Philippines, the public sector relied on domestic growth of outstanding domestic bonds (fig- debt throughout the 1990s; crisis-related costs ure 4.15), in great part due to the fallout from the associated with contingent liabilities and losses on financial crisis of the late 1990s. Asia's stock of assets due to exchange-rate movements, added to public sector bonds jumped from 7 percent of the burden. In Malaysia, such costs have even GDP in 1997 to 15 percent in 1999, reaching almost 19 percent by 2002 (IMF 2004). Mean- while, corporate sector bonds jumped from 5 per- Figure 4.14 Share of domestic debt in total public cent to 9 percent between 1997 and 1999, and debt in selected Asian countries, 1990­2003 then edged up further to 10 percent by 2002. Percent Judging from trends in outstanding debt securities 80 drawn from BIS data, bond stocks (public plus Malaysia corporate) may have risen to 32 percent of GDP in 2003. In Asia, corporate sector bonds constitute a 60 much a larger share of the domestic bond market Philippines than in other emerging-market regions, where 40 local bond markets are still dominated by public sector securities. Since the Asian economic crisis, Thailand however, government bond issuance has grown 20 Indonesia significantly in a few countries, such as Malaysia and Thailand, where government issues have not 0 only served as a vehicle for government financing, 1990 1992 1994 1996 1998 2000 2002 but also have developed into benchmarks for pric- Sources: IMF; World Bank Debtor Reporting System. ing corporate bonds. 79 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 In Latin America, where external debt financ- ence illustrates one of the pitfalls of reliance on ing has declined since 1999, the offsetting substitu- domestic debt: The high costs of rolling over tion of domestic debt has been less pronounced domestically sourced public debt continue to add than in Asia--the ratio of domestic to external to the debt burden of the Brazilian government, debt in the region rose only modestly from 1.35 in even as maturities have tripled to about three years 1997 to 1.54 in 2002. Three-quarters of the since the rampant inflation of the late 1990s was region's domestic debt is concentrated in Brazil and tamed. Primary surpluses over the past few years, Mexico. But the factors underlying the buildup in up to and including 2004, combined with reforms domestic debt differ in the two countries. of pension systems, should add to the govern- Mexico's reliance on domestic funding of gov- ment's debt-servicing capacity. In Argentina the ernment debt increased after the financial crisis of forced exchange of dollar assets into peso assets 1994, with the role of domestic debt growing had the same effect. steadily from 30 percent of total public debt in Poland and Turkey accounted for some 70 per- 1993 to 75 percent in 2002 (figure 4.16). During cent of total domestic debt in the Europe and that period, stability-enhancing fiscal and mone- Central Asia region in 2002. In the region as a tary policies enabled the government to build cred- whole, domestic debt grew at an annual average ibility, reduce borrowing costs, and extend the rate of just 5 percent from 1995 to 2002, but in maturity of its debt by almost ten times since Poland it jumped to 31 percent of GDP in 2002, 1995, to an average of 10 years. Low short-term after hovering around 21 percent during the mid- interest rates, reflecting low inflationary measures, to late-1990s. It is estimated by market sources to have enabled the government to continue relying have jumped to 35 percent in 2004, as the stock of on the domestic debt market. The stock of domes- domestic government securities rose to 24 billion tic government securities rose by some 10 percent between 2002 and 2004. High interest rates and in 2003/04. loose fiscal policy, coupled with slow economic The switch from external to domestic sources growth, have been the main reasons for debt accu- of debt in Brazil (and Argentina) has been less mulation. The rise in Turkey's domestic debt since marked than in Mexico, and propelled more by 1999 was due to the combination of a high fiscal economic and financial pressures than by deliber- deficit (resulting in high domestic interest rates) ate strategy (Budina and Fiess 2004). Nevertheless, and the costs of supporting the banking system at 47 percent of GDP in 2002 (down from 61 per- during the exchange-rate and banking crisis of cent in 2001), the domestic bond market in Brazil 2000/01. The burden of domestic debt declined is among the largest in the region. Brazil's experi- noticeably in 2002/03, aided by primary surpluses and economic growth. The other major debtor in the region is the Figure 4.16 Share of domestic debt in total public Russian Federation. There, domestic debt fell sub- debt in selected Latin American countries, stantially from 27 percent of GDP in 1998 to only 1990­2003 8 percent in 2002, as strong economic growth and Percent currency appreciation helped reduce the public 80 Brazil sector's financing demands. In countries preparing for entry into the European Union (Bulgaria, Croatia, and Hungary), EU accession policies have 60 Mexico helped limit increases in domestic debt. The development of local bond markets in 40 Europe and Central Asia followed the establish- ment of the fundamentals required for a diverse Argentina and deep market and for the management of public 20 sector debt. In Hungary, for example, efforts have focused on shifting from external to domestic 0 sources of finance. As the country's external public 1990 1992 1994 1996 1998 2000 2002 sector debt declined from 54 percent of GDP in Sources: IMF; World Bank Debtor Reporting System. 1994/95 to 21 percent in 2002, the government's 80 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T issuance of local bonds increased from 27 percent of domestic debt brings into play an array of of GDP to 46 percent. In the Czech Republic and issues--management capacity, economic policy, Poland, the objective has been to finance govern- financial infrastructure, regulation, and technical ment deficits and to reduce the rollover risk of coordination--that previously had been in the back- debt. Trends in the Middle East and North Africa ground. External and domestic financing practices and Sub-Saharan Africa have varied.7 influence each other, and both are affected by the overall policy environment of individual countries. Domestic debt markets and the private sector: To understand those influences, one must consider: uncharted waters The financial health of a country's corporate sector · The policy environment helps determine how an economy stands up to fi- · The regulatory environment nancial and economic pressures. During the Asian · The interplay between the external and dom- crisis, highly leveraged and nonperforming loans, estic debt contingent liabilities, and unhedged positions, · The role of credit assessment accompanied by a cyclical deterioration in invest- · The role of information. ment returns, worsened the crisis by adding to the liabilities of the public sector. (See World Bank The policy environment 1998 for a detailed discussion.) Sound and credible economic, fiscal, and mone- Although individual country cases differ and tary policies are at the heart of debt sustainability systematic data on private sector borrowing are and creditworthiness, whether debt is contracted lacking, high levels of domestic credit in the in international or domestic markets. In their private sector have preceded many financial crises, absence, efforts to mobilize domestic finance are as in Chile, Indonesia (Caprio and Klingebiel unlikely to bear fruit. The public sector's fiscal 1996), and Mexico. And a general linkage seems position must rest on efficient revenue collection to exist between financial sector liberalization, and well-aligned spending plans that factor in con- credit booms, and banking crises (Demirguc-Kunt tingent liabilities. In addition to raising revenue, of and Detragiache 1998). Often credit booms occur course, tax policy can and should encourage the during buoyant economic times when domestic development of the domestic debt market. savings and private capital flows are strong. At The confidence of domestic and foreign such times, inflated asset values convey a false sense investors alike is enhanced when monetary policy of corporate net worth (Gavin and Hausmann is pursued independently of public financing con- 1996). Abundant liquidity can encourage corpora- straints. In particular, inflationary pressures (and tions to substitute high levels of debt for equity, expectations) should be carefully managed, as they leaving them--and governments--vulnerable to can affect (through their effect on interest rates) both domestic and external shocks. At the time of the cost of borrowing to finance domestic debt-- the Asian crisis, debt exceeded equity in the most- and thereby on the credibility and sustainability of affected countries by two or three times. the domestic borrowing program. Pressures on the In addition to overborrowing, derivative-type exchange rate also have to be managed effectively, transactions by financial corporations can create through economic policies that maintain the over- contingent liabilities. The direct and indirect all balance between the external and domestic hazards of such exposures were clear in Thailand sectors. For example, deterioration in a country's during the crisis of 1997/98, when the foreign external position can affect credit-risk perceptions. currency exposure of corporations accelerated the Once the basic foundation for the domestic decline of the Thai currency (IMF 1998). debt market has been laid, other issues come into play--chief among them coordinating debt management with monetary policy, managing the Balancing external and domestically implications of debt servicing on the budget, and financed debt controlling contingent liabilities (Currie, Dethier, T he shift in the balance of external and domestic and Togo 2003). Debt-management objectives debt has transformed rather than eliminated must be chosen with an eye to cost effectiveness, the risks and challenges posed by debt. The advent sustainability, and resistance to shocks. 81 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 In the early stages of domestic debt market only important in attracting foreign capital, but development, a significant portion of the debt car- also in maintaining the stability of such flows. ries a relatively shorter maturity than does external Among the technical issues to be addressed in debt. Sound policies enable a government to build developing a domestic debt market are the meth- credibility, which helps it lengthen the borrowing ods and financial instruments used in public sector tenure and minimize the frequency of risky and borrowing, the optimal sequence of development time-consuming rollovers of domestic debt. of various segments of local bond markets, coordi- nation between primary and secondary markets The regulatory environment for debt, adherence to market-clearing interest A strong institutional framework is needed to man- rates in financing budget gaps, and acceptable age the nation's financial infrastructure. Smooth trading practices. operation of debt markets, in particular, depends A major concern associated with high levels of on settlement, trading, and custodial services. public debt is the tendency of that debt to exert up- More generally, the framework should foster trans- ward pressure on domestic interest rates and crowd parency and availability of information to enable out private investment. The boost to liquidity market participants to make fair and efficient deci- provided by the supply of government securities, sions and to minimize systemic risk in the domestic however, may exert a countervailing effect. financial environment. The institutional setup should include cross-checks between the agencies The interplay between external that deal with domestic debt. Interactions between and domestic debt the government and investors to match investment The tilt in the composition of debt from external needs with borrowing objectives are an integral to domestic sources has several advantages for part of a public sector funding strategy. borrowers, as long as fiscal and economic policies Another challenge is to establish an effective remain prudent. Reduced reliance on external regulatory and legal environment that underpins, debt, primarily debt denominated in foreign as well as fosters, the smooth operation of the currency, lowers vulnerability to seizures in market- overall financial infrastructure. Laws and regula- based financing and exchange-rate shocks, which tions should aim to balance functionality, safe- can exacerbate debt and its servicing burden. The guards, and practicality, while encouraging movement out of external debt has improved adequate mobilization of capital and the develop- risk perceptions in the minds of external investors ment of local debt markets. The authority, scope, and credit raters, which must gauge the ability and statutes of public borrowing need to be clearly of countries to service external liabilities. Thus defined and enforced through the legal framework lower external debt improves the terms on which (Prasad et al. 2004). foreign-source capital may be obtained and re- Good regulatory regimes instill confidence in duces the overall vulnerability of developing coun- investors; bad regimes shatter confidence, espe- tries to shocks from the external financing cially among domestic investors, who are less likely environment. than external investors to have a widely diversified But risks accompany the benefits of greater portfolio. Lack of diversity in domestic investment reliance on domestic debt. High public sector debt portfolios (along with restrictions on international burdens in individual countries have at times led to diversification) may accentuate, or prolong, a dis- crises. Increased reliance on domestic debt raises torted debt financing environment. debt rollover risks (because it is generally shorter in Governments should try to enlarge and diver- maturity than external debt), as well as interest- sify the investor base to ensure liquidity, and to rate risks. Both may be affected by a variety of spread the financing burden over different seg- macroeconomic and debt management policies. ments of the economy. An added dimension con- For that reason, sustainability and management of cerns foreign investments in domestic debt mar- debt and fiscal balances must remain at the fore- kets, which, despite the perils, also play an front of national policy dialogue. important role in enhancing the breadth, depth, The external and domestic financing environ- and efficiency of domestic debt markets. Domestic ments respond to many of the same influences. exchange-rate and capital account policies are not With significant capital account liberalization in 82 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T many countries, shocks from the external environ- Figure 4.17 Distribution of volatility in risk ment can easily spill over to domestic credit premium for selected developing countries markets. Similarly, a loss of confidence in a coun- Basis points try's policies among international investors, who 250 may have direct exposure to credit risk in domestic 315 336 debt markets, will raise pressure on domestic Nigeria Brazil (NR; NR) interest rates and affect the maturity structure of 200 (BB ; BB ) Ecuador domestic debt. (CCC ; CCC ) In managing the overall shift in sources of 150 finance, countries need to be aware of the possible Côte d'Ivoire Turkey Colombia (NR; NR) deterioration in credit supply conditions. Of (BB ; BB) (BB; BBB) particular note is the pricing of debt, which Peru (BB; BB ) 100 Morocco reflects--among other things--the capital markets' (BB; BBB) Venezuela, R. B. de (B; B) perception of the probability of default (Merrick Mexico Ukraine (B ; B ) (BBB ; A ) 2004; Ferrucci et al. 2004; Kamin 1999; and Min 50 Philippines (BB; BBB ) Egypt, Arab Rep. of et al. 2003). Most pricing indicators, including the (BB ; BBB ) Thailand (BBB ; A) Poland (BBB ; A ) commonly used benchmark secondary-market China (BBB ; BBB ) Hungary (A ; A) 0 spread, reflect not only country fundamentals but also the broader supply and demand for capital Note: Higher volatility, primarily for low creditworthy countries, indicates greater vulnerability to market movements. Ratings are in financial markets. From 2002 onward, in- from Standard and Poor's. First rating external debt; second vestor sentiment toward emerging markets has domestic debt. Volatility is calculated for periods March and September 2002 and February and May 2004, when spreads improved considerably, as reflected in historically adjusted upwards. low secondary market spreads or benchmark risk Sources: J.P. Morgan Chase; Standard and Poor's; World Bank staff calculations. premiums. Because those spreads relate primarily to the probability of default on external debt, the buildup of reserves (as discussed in chapter 3) and agencies' assessments of a country's overall policies the decline in external debt burdens have sup- as well as its vulnerability to shocks (box 4.4). The ported the improvement in sentiment. Spreads distinction between external versus domestic debt have declined universally across almost all coun- is important, as a government's ability to service tries where external indebtedness has declined, the two kinds of obligations varies vastly, espe- even as domestic public sector indebtedness has cially in emerging-market economies. Servicing risen substantially for many countries. The better- foreign-currency obligations requires liquid foreign- ment of external and domestic credit-risk ratings currency assets that have to be contracted or both reflects and supports that improvement in earned at international exchange rates. Servicing spreads. local-currency debt is directly associated with a The pricing of new debt remains of utmost im- government's power to tax, as well as its control portance. Swift and abrupt changes in the external over domestic financial systems and policies. Thus, environment can undermine investor confidence the constraints for servicing foreign currency debt and exert pressure on domestic credit conditions are more restrictive than those for servicing local and interest rates. Continued tight pricing of new currency debt. external debt during times of market rally, such as The stance of institutional investors can 2003 and 2004, can increase pressures for adjust- greatly affect the availability and cost of capital for ment of risk premiums, particularly for less credit- developing countries. In compliance with risk- worthy borrowers (figure 4.17). Thus, countries management practices, such investors may be with lower creditworthiness may be more suscepti- mandated to invest within (or no lower than) a spec- ble to market exuberance and closures and there- ified class of credit risk, so that improved sovereign fore subject to greater volatility in capital flows. credit ratings translate directly into wider access to capital on better terms and thus greater ease in ser- Credit assessment vicing debt. Credit-risk ratings may be employed in The probability of defaulting on a debt is indicated portfolio allocation and risk assessment models. by long-term credit ratings, which reflect the rating They may also be used by banks to satisfy the Basel 83 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Box 4.4 Assessing the risk of external versus domestic debt M ajor credit-rating agencies assign risk ratings to Assessing the probability of default on local- governments' foreign (external) debt and their local- currency debt requires greater emphasis on a govern- currency-denominated (domestic) debt. The factors consid- ment's fiscal and monetary policies, likelihood of ered by rating agencies in assigning risk ratings are political revenue generation from the privatization of state-owned risk, income and economic structure of the economy, eco- enterprises, and other microeconomic reforms that affect nomic growth prospects, fiscal flexibility, general govern- a country's ability to service debt. Credit ratings for ment debt burden, monetary flexibility, external liquidity, foreign-currency debt consider similar factors, while also and public versus private sector external debt burden. taking into account the structure of the country's foreign Although all of the factors are relevant in assessing the obligations, its foreign exchange reserves, and its balance probability of default, their relevance varies depending on of payments. whether the obligation is in local or foreign currency. regulations on capital adequacy and risk manage- the emerging-market regions. Moreover, foreign ment, both domestically and internationally, thus debt in the region carries a much higher probability affecting countries' and firms' ability to obtain fi- of default than does domestic debt. For example, nancing from banks adhering to those regulations. foreign debt risk ratings for Brazil, Colombia, and In recent years, credit ratings have improved Mexico are three notches below domestic debt rat- markedly for many developing countries. Trends in ings, even though all three countries were projected average credit quality vary across regions (fig- to run primary fiscal surpluses in 2004. ure 4.18). East Asia scores the highest ratings Notwithstanding the improvement in aggre- among emerging-market regions and shows the gate credit quality, various risks remain--among least difference between the probabilities of default them vulnerability to external conditions that on external versus domestic debt. Credit ratings for may deteriorate rapidly, leading to a downward Eastern European countries have improved contin- spiral of confidence and credit cost, as seen in uously since 2001, with 60 percent of the rated the late 1990s. Qualitative considerations, such as countries in the region receiving upgrades. Ratings political uncertainty, may also influence the risk on domestic debt have remained about one notch associated with a country's debt and affect the higher than on foreign debt. On average, the region terms for rolling over that debt. maintained a primary fiscal surplus of about 0.9 percent of GDP between 2001 and 2004. Aver- The role of information age credit-risk ratings for Latin America, for both Both external and domestic indebtedness require foreign and domestic debt, are the lowest among diligent monitoring. In the wake of crises connected Figure 4.18 Average credit quality, by region, 1999­2004 Latin America and Caribbean Europe and Central Asia East Asia and Pacific AA AA AA A A A BBB BBB BBB Domestic debt Domestic debt BBB BBB BBB Domestic debt BB BB BB Foreign debt B Foreign debt B Foreign debt B 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 Source: Standard and Poor's. 84 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T with external indebtedness, progress has been made limited or no access to market-based international finance. to enhance the reliability, timeliness, and accessibil- This chapter is chiefly concerned with the first group. ity of information. Gaps remain, however, particu- 2. The World Bank's Debtor Reporting System (DRS) is one of the most comprehensive databases on the exter- larly in the supply of information on domestic debt nal debt of 135 developing countries. The figures on ex- markets and private sector borrowing, both of ternal public sector debt offered in this chapter are drawn which were important in the East Asian crisis of directly from the DRS data. The public-private composi- 1997/98. In the absence of full information, public tion of short-term debt is not known, because it is not borrowers should acquire new liabilities and man- reported to the DRS by member countries. Principal and interest arrears on official debt, a component of short- age old ones with a high degree of prudence, while term debt, are treated as public sector debt in this chapter. remaining alert for impending changes in financing Most of the rest of short-term debt is treated as private environments. sector debt, based on information gathered from market Information on domestic debt is much less data sources. plentiful and consistent than is information on ex- 3. Estimating developing countries' public sector debt remains a challenging task, and estimates can differ from ternal debt. For that reason, domestic debt is not source to source. Among the major issues are lack of data well handled by the risk-assessment models used (many countries have begun only recently to produce to price new debt. To ensure that accumulations of comprehensive measures of public debt), data coverage domestic debt are visible (if they are not, savvy (especially with regard to contingent liabilities), and defini- investors will assume the worst), policymakers in tional questions that can vary vastly from country to country. The International Monetary Fund's World Economic the emerging-market economies should enhance Outlook for 2003 estimates the 2002 public sector debt of their national framework for collecting and emerging-market economies at around 70 percent of GDP, reporting statistics on domestic debt. an average figure that differs from the one presented here. Several factors may account for the disparity: · Country coverage. This can be a source of major difference. Economies such as those of the Republic of No room for complacency, despite Korea and Taiwan (China), generally regarded as improvements "emerging markets," may form part of dataset used in the IMF report, but they are not classified as "develop- T he development of domestic debt markets ing countries" by the World Bank. The analysis provides important benefits, laying a solid presented in WEO is based on two sets of data. The first foundation for future growth and offering public (1990­2002) comprises just 34 countries; the second borrowers a measure of protection against (1970­2002), 79 countries. It is important to maintain changes in the external environment. But the perils consistency while comparing data across sources. · Data sources. The smaller of the WEO datasets is associated with debt cannot be avoided merely by based on information from IMF staff reports and switching from one type of debt to another. Exces- country economists. The larger dataset is a combina- sive debt will soon curb growth, regardless of its tion of World Bank data, IMF government finance source. Because a debt crisis driven by excessive statistics, and the OECD's analytical database. domestic borrowing can be just as devastating as · Definitional issues. The smaller WEO dataset is based on gross figures, while the World Bank data are for net one created through excessive external debt, devel- debt outstanding. oping countries need to pursue fiscal policies that · Combination of external and domestic public debt. align liabilities and revenues against the backdrop Because the World Bank's Debtor Reporting System of structural revenue reforms. They should perse- does not collect statistics on domestic debt, the figures vere with policies and reforms that promote on total public sector debt (external plus domestic) presented in this report are derived from several economic growth under sustainable levels of sources: World Bank data (DRS), IMF data, and debt--domestic and external. market sources. 4. The growth in bond debt started with the transfor- mation of distressed bank debt into bonds following the Notes collapse of the bank credit boom of the 1970s, which had 1. Developing countries are still split into two broad been driven by the "recycling" of foreign exchange earned categories by their access to international capital markets by oil-producing countries following cartel-driven price and thus by the nature of their debt. The first category is the increases. A simultaneous increase in real interest rates in emerging-market economies--primarily middle-income industrial countries (also driven by high oil prices) and the countries with access to international capital markets. The decline in commodity prices in the 1980s made inter- second is other countries--primarily low-income--that have national bank debt unsustainable for many developing 85 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 countries. The defaulted bank debt was converted into Currie, Elizabeth, Jean-Jacques Dethier, and Eriko Togo. Brady bonds, named for U.S. Treasury Secretary Nicholas 2003. "Institutional Arrangements for Public Debt Brady, beginning in the late 1980s. A beneficial side effect of Management." Policy Research Working Paper 3021, that innovation was to provide a foundation for modern World Bank, Washington, DC. bond financing in developing countries. Debtor Reporting System Database. World Bank. http:// Short-term credit grew during the early 1990s, as bond www.worldbank.org/data/working/DRS/drs.html financing was still developing roots and banks were begin- (accessed 2005). ning to reengage with the developing countries following Demirguc-Kunt, Asli, and Enrica Detragiache. 1998. the debt restructuring of the late 1980s. Another boost to "Financial Liberalization and Financial Fragility." Paper short-term lending came in 1995, following the successful prepared for Annual World Bank Conference on Devel- resolution of the Mexican peso crisis. opment Economics, Washington, DC, April 20­21. 5. Long-term bank credit can be more resilient than Deutsche Bank. 2003. "Asian Local Bond Markets." Emerg- bonds during periods of stress for several reasons. Banks pos- ing Markets-Global Market Research, Singapore. sess informational advantages on their borrowers that can be Esty, B., and W. L. Megginson. 2003. "Creditor Rights, used not only to differentiate credit risk during a period of Enforcement, and Debt Ownership Structure: Evidence contagion, but also to exercise greater control over borrow- from the Global Syndicated Loan Market." Journal of ers. And bank debt is easier to restructure than bond financ- Financial and Quantitative Analysis 38 (1): 37­59. ing, for which default may be the only option. Also, banks Ferrucci, G., V. Herzberg, F. Soussa, and A. Taylor. 2004. can spread out risk over a syndicate of lenders and keep credit "Understanding Capital Flows to Emerging Market lines open even in suboptimal circumstances, especially when Economies." Financial Stability Review 16 (June): other segments of capital markets are experiencing stress. 89­97. 6. Also important for bond-market development is the Frankel, Jeffrey A., and Nouriel Roubini. 2003. "Industrial adoption of flexible exchange rates, which encourage Country Policies. In Economic and Financial Crises in governments to borrow in domestic markets to avoid the Emerging Market Economies. National Bureau of possibility of debt increases stemming from depreciation of Economic Research Conference Report, ed. Mortison the currency and may also reduce investors' fear of sharp Feldstein. Chicago: University of Chicago Press. depreciation of their real asset values (Claessens, Klingebiel, Gavin, Michael, and Ricardo Hausmann. 1996. "The Roots and Schmukler 2003). of Banking Crises: The Macroeconomic Context." In 7. In the Middle East and North Africa domestic debt Banking Crises in Latin America. Washington, DC: rose from 18 percent of GDP in 1995 to 47 percent in 2002. Inter-American Development Bank. To a great extent the rise is due to Lebanon, whose overall IMF (International Monetary Fund). 1998. "Hedge Funds public sector debt, both domestic and external, has increased and Financial Market Dynamics." Occasional Paper sharply since the early 1990s to finance the government's 166, IMF, Washington, DC. spending on infrastructure and other public sector facilities. . 2003. World Economic Outlook. Washington, In comparison, increases in domestic indebtedness have been DC: IMF. much less notable in Egypt and Morocco. In Sub-Saharan . 2004. Emerging Local Securities and Derivatives Africa, domestic debt fell to 27 percent of the region's GDP Markets: Recent Developments and Policy Issues. World from 37 percent in 1995, a movement ascribable largely to Economic and Financial Surveys Series. Washington, lower borrowing in South Africa. DC: IMF. Jiang, G., and R. McCauley. 2004. "Asian Local Currency Bond Markets." BIS Quarterly Review (June): 67­79. References Kamin, S., and K. von Kleist. 1999. "The Evolution and Determinants of Emerging Market Credit Spreads in Binamura, J. A., and W. Haworth. 2000. "Debt Restructur- the 1990s." International Financial Discussion Paper ing in East Asia: Government and the Corporate Sec- 653, U.S. Federal Reserve Board, Washington, DC. tor." In Managing Financial and Corporate Distress: Kawai, M., I. Lieberman, and W. Mako. 2000. "Debt Re- Lessons from Asia, ed. Charles Adamas, Robert Litan, structuring in East Asia: How Much, How Fast, and and Michael Pomerleano. Washington, DC: The Lessons Learned." In Managing Financial and Corpo- Brookings Institution Press. rate Distress: Lessons from Asia, ed. Charles Adamas, Budina, Nina, and Norbert Fiess. 2004. "Public Debt and Robert Litan, and Michael Pomerleano. Washington, its Determinants in Market Access Countries: Results DC: The Brookings Institution Press. from 15 Country Case Studies." Unpublished paper, Merrick, John J. 2004. "Evaluating Price Signals from the World Bank, Washington, DC. Bond Markets." In Managing Economic Volatility and Caprio, Gerard, and Daniela Klingebiel. 1996. "Bank Insol- Crises: A Practitioner's Guide, ed. Joshua Aizenman vencies: Cross Country Experience." Policy Research and Brian Pinto. Washington, DC: World Bank. Working Paper 1620, World Bank, Washington, DC. Min, H., D. H. Lee, C. Nam, M. Cheol Parek, and Sang-Ho Claessens, Stijn, Daniela Klingebiel, and Sergio Schmukler. Nam. 2003. "Determinants of the Emerging Market 2003. "Government Bonds in Domestic and Foreign Bond Spreads: Cross Country Evidence." Global Currency: The Role of Macroeconomic and Institu- Finance Journal 14 (3): 271­86. tional Factors." Policy Research Working Paper 2986, Nini, G. 2004. "The Value of Financial Intermediaries: Em- World Bank, Washington, DC. pirical Evidence from Syndicated Loans to Emerging 86 C O M P L E X C H A L L E N G E S I N D E V E L O P I N G C O U N T R Y D E B T Borrowers." International Finance Discussion Paper, . 2003. Global Development Finance 2003. U.S. Federal Reserve Board, Washington, DC. Washington, DC: World Bank. Peterson, P., G. M. Goldstein, and C. A. Hills. 2004. "Safe- . 2004. Global Development Finance 2004. guarding Prosperity in a Global Financial System: The Washington, DC: World Bank. Future International Financial Architecture." Council . 2005. "The Opening of New Markets to Foreign on Foreign Relations, New York. Issuers: What Has Changed in the New Millennium?" Prasad, E., K. Rogoff, S. J. Wei, and M. A. Kose. 2004. In The Euromoney International Debt Capital Mar- "Financial Globalization, Growth and Volatility in De- kets Handbook. Washington, DC: World Bank. veloping Countries." Working Paper 10942, National World Bank and IMF. 2001. Developing Government Bond Bureau of Economic Research, Cambridge, Mass. Markets: A Handbook. Washington, DC: IMF. Reserve Bank of Australia. 2003. "Bond Market Develop- World Bank/IMF/Brookings Institution. 2003. The Future ment in East Asia--2003." Reserve Bank of Australia of Domestic Capital Markets in Developing Countries, Bulletin (December): 1­8. ed. Robert E. Litan, Michael Pomerleano, and V. Sun- World Bank. 1998. Global Economic Prospects 1998/99. dararjan. Washington DC: The Brookings Institution Washington, DC: World Bank. Press. 87 . 5 Meeting the Financing Needs of Poor Countries T HE WORLD'S POOREST COUNTRIES This chapter examines broad changes in the face severe challenges in their efforts to pattern of development finance available to a sam- eradicate extreme poverty and meet basic ple of 28 poor countries (see note to table 5.1),2 human needs. Among the challenges is an external without explicit consideration of whether the financing environment that is susceptible to sud- available resources will be adequate to achieve den and sharp shifts. the MDGs in individual countries or groups of From the United Nations Millennium Summit countries. For a treatment of those issues, see the in 2000 emerged the Millennium Development World Bank's Global Monitoring Report 2005. Goals (MDGs), which established targets for The key messages of this chapter are: progress on poverty, education, health, and sanita- tion. In March 2002, follow-up meetings in Mon- · Aid flows to poor countries must increase sig- terrey addressed the challenges of financing the nificantly if the MDGs are to be met by 2015. development priorities embodied in the MDG ODA to poor countries has declined steadily targets. Both conferences acknowledged that over the last decade. Although other sources reaching the agreed goals would require actions by of finance have grown, the growth is not suffi- the developing countries themselves--such as pur- cient to fill the gap in official financing. suing sound domestic policies. But they also recog- Donors must scale up ODA and other re- nized the need for substantial and stable flows of sources substantially if developing countries external resources. Estimates of the additional re- are to achieve the MDGs. Current and im- sources that poor countries would require to reach pending fiscal pressures in donor countries the MDGs by 2015 vary widely, but all point to a and strategic factors that can influence the al- dramatic shortfall unless current trends improve location of aid should not be allowed to cur- radically.1 tail this effort. The external financing environment facing the · FDI to poor countries has increased signifi- poor countries is more complex and fluid than cantly since the early 1990s, reflecting im- generally recognized. In many cases official devel- proving performance and a sounder in- opment assistance (ODA) is still the major exter- vestment climate. But much FDI to poor nal resource; in others, foreign direct investment countries flows to enclave mining or natural (FDI) and private debt are also important. Private resource projects, which may limit its bene- flows from nongovernmental organizations fits and add to volatility. Moreover, current (NGOs) and migrants (transfers that are included flows fall far short of needs. in the current account) are sizeable in some coun- · Private transfers are much more important in tries. So-called South-South linkages among devel- poor countries than in other developing coun- oping countries--and especially between larger tries. The private sector component of grants middle-income countries and poor countries--are from NGOs (mostly to poor countries) a growing source of trade, FDI, remittances, and reached $10 billion in 2003, while workers' development assistance. remittances reached $16 billion. Both are 89 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Table 5.1 Net capital flows to poor countries, 1990­2004 $ billions 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004p Current account balance 7.1 8.8 12.4 9.4 11.1 6.9 3.6 2.4 0.3 2.3 8.7 as % of GDP 4.3 4.3 5.6 4.1 4.8 2.9 1.5 1.0 0.1 0.8 2.7 Financed by: Net equity flows 0.7 3.9 5.4 6.5 5.3 5.0 4.2 4.0 5.9 7.7 8.4 Net FDI inflows 0.7 3.9 5.2 6.1 5.3 4.9 4.1 4.1 5.8 7.7 8.4 Net portfolio equity inflows 0.0 0.0 0.2 0.4 0.0 0.1 0.0 0.1 0.1 0.0 0.0 Net debt flows 6.4 7.0 4.9 6.8 3.3 4.1 2.6 3.2 3.5 3.2 4.3 Official creditors 4.8 4.8 4.6 4.3 4.4 5.0 4.0 5.3 4.6 3.9 4.2 World Bank 2.2 2.1 2.6 2.7 2.2 2.6 2.2 2.9 3.1 3.0 3.7 IMF 0.4 0.7 0.2 0.0 0.0 0.6 0.1 0.6 0.2 0.2 0.6 Others 2.9 2.0 1.8 1.7 2.2 1.8 1.9 1.8 1.3 1.0 1.1 Private creditors 1.6 2.2 0.3 2.5 1.1 0.9 1.3 2.1 1.0 0.6 0.1 Net medium- and long-term debt flows 0.2 0.3 0.6 1.7 0.1 1.4 1.1 1.1 1.4 1.0 0.3 Bonds 0.0 0.0 0.4 0.5 0.0 0.1 0.0 0.1 0.2 0.4 0.3 Banks 0.2 0.2 0.1 0.5 0.3 0.9 0.6 0.8 0.9 0.3 0.5 Others 0.4 0.2 0.3 0.7 0.2 0.4 0.5 0.2 0.3 0.4 0.5 Net short-term debt flows 1.5 1.8 0.3 0.8 0.9 0.5 0.3 1.0 0.4 0.4 0.2 Balancing item 0.3 1.5 2.9 2.4 2.1 0.7 1.1 0.6 0.3 0.6 -- Change in reserves ( increase) 0.4 0.6 0.8 1.5 0.3 2.9 2.1 4.2 8.8 9.3 -- Memo items: Official development assistance 14.4 16.2 14.2 13.1 13.6 13.5 13.8 15.6 16.8 19.6 -- Grants (excluding technical cooperation) 8.4 7.4 6.5 5.9 6.7 6.6 6.7 7.7 8.2 10.4 -- Workers' remittances 5.5 5.4 5.2 6.0 5.6 6.1 6.7 9.6 13.9 15.0 15.9 Net private flows (debt equity) 2.3 6.1 5.7 8.9 4.3 4.1 2.8 1.9 4.9 7.1 8.7 Exports 30.3 41.4 50.5 55.9 54.2 57.6 66.8 69.5 77.7 89.5 106.6 Imports 43.7 57.0 70.9 73.8 73.8 73.1 80.4 83.2 89.1 106.7 130.0 Note: -- not available. Country sample used in this table and throughout the chapter includes Azerbaijan, Bangladesh, Benin, Bhutan, Burkina Faso, Cameroon, Ethiopia, Ghana, Kenya, Kyrgyz Republic, Lesotho, Madagascar, Malawi, Mali, Mauritania, Moldova, Mongolia, Mozambique, Nepal, Nicaragua, Pakistan, Rwanda, Senegal, Tanzania, Uganda, Vietnam, the Republic of Yemen, and Zambia. Sources: World Bank Debtor Reporting System and staff estimates; OECD; IMF, various years. large, stable sources of foreign exchange for these countries to advance development in their poor countries and may be more likely than low-income neighbors should be supported by other flows to reach poor households. the broader development community. · To increase private capital flows to poor countries, the international community should support policies that lead to better market The external financing environment access for poor countries and encourage in- in poor countries F vestment through the use of risk mitigation oreign aid traditionally has been perceived as instruments. Financial instruments such as the primary source of external financing for securitization (of flows of workers' remit- poor countries. To some extent that view remains tances, for example) can expand the access of correct: poor countries rely on ODA more heavily poor countries to international capital mar- than do other developing countries. Ratios of kets. Most important, poor countries should ODA to GDP are higher in poor countries than in continue efforts to improve their investment the developing world as a whole. In 2003, ODA to climate, which remains crucial not only for the countries in our sample amounted to $19.6 attracting more resources, but also for ensur- billion (table 5.1). ing their effective use. · Other developing countries can be instrumental Declining aid flows throughout the 1990s in widening the pool of development resources Despite the recognized importance of aid, poor in poor countries. Initiatives undertaken by countries as a group are receiving less ODA today 90 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Figure 5.1 Shift from aid toward FDI in poor Figure 5.2 ODA to poor countries relative to total countries, 1990­2003 ODA, 1990­2003 Percentage of recipients' GDP ODA as percentage of donors' GNI 10 8.9 0.35 All developing countries 8 0.30 6.4 6 0.25 4 2.2 0.20 2 0.7 0.15 0 Poor countries 0.6 0.10 2 ODA FDI 0.05 4 Current account balance 4.0 6 0 1990­92 2000­3 1990 1992 1994 1996 1998 2000 2002 Sources: OECD; IMF, various years; UNCTAD; World Bank staff Source: World Bank staff estimates using data from OECD estimates. Development Assistance Committee. than in the early 1990s (figure 5.1). In nominal There has been a shift in the sectoral distribu- terms, ODA to poor countries fell from $16.4 bil- tion of ODA in the poorest countries away from lion in 1992 to $13.8 billion in 2000, before physical infrastructure and agriculture (figure 5.3). recovering to $19.6 billion in 2003. As a share of While education and health recorded an increase GDP, ODA for the poorest countries declined by from 8 to 13 percent over the decade, the biggest about one-third between 1990­92 and 2000­3. By increment went to debt relief, which rose from 8 contrast, FDI rose during the 1990s for the full to 22 percent. The shift in part reflects the intro- sample, tripling its share to 2.2 percent of GDP. duction of the Heavily Indebted Poor Countries These aggregate movements mask significant (HIPC) Initiative, launched by the World Bank country heterogeneity in the pattern of flows and IMF in 1996 (and enhanced in 1999) to ease (box 5.1). the crippling debt burden of some of the world's With the end of the Cold War came a decline poorest countries (see box 1.2).4 in the strategic importance of aid, particularly its During the 1990s, infrastructure financing use in supporting "client states." But Cold War to all developing countries from bilaterals and politics were not the only factor in the decline. The multilaterals declined as private flows rose-- 1990s were a period of fiscal tightening in most predominantly from a wave of privatizations and donor countries. With the European Union's fiscal liberalization in the 1990s that encouraged private policy constrained by the terms of the Maastricht investors with limited investment prospects at Treaty, and with political pressure in the United home to invest in power plants, roads, and telecom- States for a balanced budget, cyclically adjusted munication facilities in the developing world fiscal positions of the OECD donors improved (World Bank 2004a). The decrease in spending for from an average deficit of 4.4 percent of GDP in agriculture was predominantly due to changes in 1992 to 0.8 percent in 2000, while ratios of ODA India, related in part to the end of external assis- to GNI fell from 0.34 to 0.22 percent (figure 5.2).3 tance for the Green Revolution (OECD 2004), The proportion of total ODA directed to the although agricultural aid to Sub-Saharan Africa poorest countries has been remarkably stable since and other poor South Asian countries also fell. the early 1990s, at around one-third of the total, Some commentators find evidence of a more suggesting that ODA expenditures on this group selective approach in the allocation of aid by major donors are not protected from fiscal throughout the 1990s, with a better focus on pressures. On a country-by-country basis, ratios poorer countries and better performers (World of ODA to GDP declined throughout the 1990s in Bank 2004a; Dollar and Levine 2004). Dollar and 63 percent of the poorest countries. Levine (2004) found that the giving patterns of 91 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Box 5.1 Wide variations in the mix of external financing in poor countries A verage financing patterns mask enormous country · The size of and changes in the contribution of other variation. For example: financing sources--primarily foreign direct investment (FDI)--vary as well. FDI inflows were significant in · Dependence on official development assistance just a few of our sample countries in 1990­92, (ODA) varies enormously in the countries of our whereas by 2000­2 many more were receiving sub- sample--from a high of 36 percent of GDP for stantial inflows. Few countries had significant private Mozambique to about 2.2 percent of GDP for debt flows; for most that did, the net flows were Bangladesh and 2.7 percent for Pakistan. The negative. pattern of allocation of ODA also changed over · The picture that emerges is one of diversity and het- the past decade. Several countries (Kyrgyz Republic, erogeneity. Although these 28 poor countries share the Mongolia) that received no ODA during 1990­92 challenge of reaching the MDGs over the next decade, now receive significant amounts, whereas others the composition and level of external resources avail- (Nicaragua, Tanzania) have witnessed sharp declines. able to them differ enormously. Country differences in importance of external financing as a share of GDP, 1990­92 and 2000­2 1990­92 2000­2 Mozambique Mauritania Malawi Mongolia Rwanda Zambia Nicaragua Ethiopia Mali Burkina Faso Uganda Tanzania Kyrgyz Rep. Bhutan Ghana ODA/GDP Benin FDI/GDP Senegal Private debt/GDP Madagascar Moldova Lesotho Nepal Cameroon Vietnam Kenya Azerbaijan Yemen, Rep. of Pakistan Bangladesh 10 0 10 20 30 40 50 60 10 0 10 20 30 40 50 60 Sources: OECD DAC database; IMF, various years; World Bank Debtor Reporting System; staff estimates. 30 of 40 donors surveyed showed a positive Partially compensating for the decline in ODA relationship between aid allocations and the are nontraditional private resource flows. Classi- soundness of recipients' policies and institutions-- fied as current account transfers (and therefore not a sharp improvement from a decade ago. as capital flows or external financing), these foreign 92 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Figure 5.3 Sectoral distribution of ODA to poor FDI has grown in poor countries, and ratios countries, 1990­2002 of FDI to GDP are similar to those found in Education and health 8.1% other developing countries From an annual average of $0.5 billion in the 1980s, Action on debt 8.5% to $3.5 billion in the 1990s (before plummeting in Other 1998), FDI flows to poor countries rose to some 20.8% $8.4 billion in 2004 (box 5.4). At present, the aver- General Agriculture program age ratio of FDI to GDP in poor countries is close to 11.2% assistance the developing-country average of 2.7 percent. 19.3% Physical In absolute terms, FDI flows have been heav- infrastructure ily concentrated in a few countries. In our sample, 32.2% only Azerbaijan and Vietnam have annual FDI in- flows exceeding $1 billion. However, relative 1990­92 to the size of the economy, FDI has been of con- Education and health 10.9% siderable importance for some of the smaller poor countries, particularly Lesotho, Mauritania, Action on debt 10.1% Moldova, and Mozambique. FDI has also made a Other 22.1% significant contribution to gross domestic capital formation in many poor countries. The share of General program Agriculture FDI in gross capital formation averages 12 percent assistance 6.9% 9.9% for the poorest countries (compared to 10 per- Physical cent in middle-income countries); it is as high as infrastructure 60 percent in some poor countries. This in part 40% reflects a low savings ratio and limited access to 1995­97 international private debt flows. The positive trend in FDI has emerged despite the existence of significant barriers to attracting Education and health external private finance. FDI and other types of Other 13.1% private capital flows are strongly influenced by a 26.3% country's investment climate, which is defined by Action on debt its institutional and policy environment. Political Agriculture 22% 6.6% and regulatory risks--among them the risk of Physical confiscation, expropriation, nationalization, non- infrastructure convertibility of currency, losses to political vio- 17.6% lence, and lack of enforcement of regulatory General program rules--are believed to be higher in poor countries 2000­2 assistance 14.5% than in other developing countries and might be Note: Data include Indonesia and India. expected to discourage investment. Indeed, almost Source: World Bank staff estimates using data from OECD Development Assistance Committee. all poor countries score significantly lower than middle-income countries on measures of corrup- exchange sources have grown steadily in impor- tion, efficiency of bureaucracy, and law and order tance in recent years. Grants from NGOs have (OECD and AfDB 2003; UNCTAD 2003). emerged as a critical counterpart to official aid Inadequate infrastructure is cited as another flows in some environments, just as NGOs have be- key constraint to FDI. In most poor countries, come key stakeholders and partners in many foreign investors face unreliable and costly development programs and interventions (box 5.2). telecommunications services and electricity supply And the rapid growth in workers' remittances high- and also inefficient transportation links. Thirteen lighted in previous editions of Global Development of the 28 poor countries are landlocked, so that Finance has specific implications for some coun- goods produced for export must pass through tries because of the pattern of their migrant flows another country as they travel to global markets, (box 5.3). adding additional layers of cost and risk. 93 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Box 5.2 Growing financing role for NGOs N ongovernmental organizations (NGOs) play a more resources to be directed through nonstate growing role in funding development programs. The actors. With greater emphasis on partnerships and private-sector component of NGO grants to all developing shared ownership, NGOs are perceived to be in countries increased from $5 billion in 1990 to $10 billion touch with the needs of the poor (Tevdt 1998). For in 2003 (figure 1.16)--about 15 percent of the value of official donors, international NGOs have become a total ODA.a Although country breakdowns are not means to improve aid effectiveness through their available, much of this assistance is directed toward poor contacts with locals. Governments' increasing countries. The number of global NGOs has increased by acceptance of NGOs as legitimate stakeholders about half since the early 1990s (Union of International has helped as well. Associations 2002). In Bangladesh alone, the number of · Private philanthropy has increased sharply. foreign-funded NGOs grew from 382 in 1990 to 1,652 International giving by the Bill and Melinda Gates in 2002. This rapid growth can be attributed to several Foundation to developing countries surpassed factors: $1 billion in 2003. The Ford Foundation, the David and Lucile Packard Foundation, and the · Citizens of industrial countries are increasingly Rockefeller Foundation all provide more than aware of events in the developing world, partly $100 million annually in development assistance in response to more frequent and timely foreign (OECD 2003a). news. · Growing concern over the effectiveness of aid and aODA includes grants made by bilateral donors to NGOs, but not limits to state-led development have encouraged grants made by NGOs using private funds. Countries that have taken steps to improve to resolve future investment disputes. The result has their investment climates and have opened up been an overall improvement in investment climate industries to privatization have been much more indicators for poor countries,7 although risks are successful at attracting FDI (Pigato 2000). While still higher there than in middle-income countries FDI has been concentrated in the extractive sector-- with major oil and mining exporters receiving sig- nificantly higher FDI relative to the size of their Figure 5.4 Natural resource availability and ratios economy (figure 5.4) than other countries--the of FDI to GDP in poor countries, 1990­2003 considerable difference in FDI performance be- Percent tween countries (even in the extractive sector) high- 5 lights that countries can influence, to some extent, 1990­95 1996­2003 4.4 the degree of inward FDI. 4 In recent years, a number of poor countries have improved their macroeconomic performance, 3 with higher growth rates, lower inflation, greater 2.6 openness to trade, and improved exchange-rate 2.1 stability.5 In addition, some countries have 2 1.5 strengthened their foreign investment policy frame- work by expanding the number of industries open 1 to foreign investment, easing sectoral restrictions and limits on foreign exchange, signing double 0 Oil and mineral exporters Other poor countries taxation treaties to reduce tax burdens,6 and im- proving corporate regulations. In addition, several Note: Oil and mineral exporters are countries in which oil and mineral exports accounted for at least 20 percent of total exports in countries established investment promotion agen- 1996­2003. These countries include Azerbaijan, Bhutan, Cameroon, cies (UNCTAD 1998 and 1999; Collier and Ghana, Mauritania, Mongolia, the Republic of Yemen, and Zambia. Sources: World Bank, World Development Indicators and Global Gunning 1999), and signed multilateral agreements Development Finance, various years. 94 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Box 5.3 Workers' remittances to poor countries A fter a dramatic rise in recent years, workers' remit- the destination country; the presence of family members tances have emerged as a significant source of foreign or others of similar ethnic background in the destination exchange earnings for poor countries. Remittances are an country; and the distance between the destination and "above-the-line" item feeding into the current account, not origin countries (OECD 2003b). the capital account, of the balance of payments. A large part of remittance flows to poor countries In 2004, remittances to poor countries reached comes from other developing countries. Some countries $15.9 billion, averaging 5.1 percent of GDP in 2002/3, with the highest ratio of remittances to GDP (Lesotho, compared to just 2.8 percent in 1990/91. Because remit- Moldova, and Nepal) are those that are completely tances generally flow from household to household (a pri- surrounded by richer neighbors that are not in conflict. vate transaction), it is impossible to draw inferences from In Lesotho, for example, 37 percent of households have a aggregate figures about their allocation between consump- family member working in South Africa. Conversely, tion and investment--or their eventual development poorer countries receiving few remittances, such as impact. But their growth and relative size in poor Madagascar and Tanzania, do not share a common countries provide ample justification for analyzing their border with a significantly richer neighbor (see figure). determinants. The surge in recorded remittance flows in part re- flects better data gathering by central banks and statisti- "Neighborhood" effect on remittances to the poorest cal agencies in response to growing scrutiny of remit- countries, 2000­2 tances flowing through alternative channels. But it also Remittances as % GDP mirrors the rise in outward migration throughout the 1990s. Since the mid-1990s there has been an increase in 20 temporary and permanent migrant workers across all Lesotho 18 skill and income categories, with OECD countries regis- 16 Moldova tering a 7.6 percent increase in migrant inflows from 14 Nepal 1991 to 2000, and similar trends in many non-OECD Yemen, Republic of 12 countries (OECD 2003b). Finally, security concerns and 10 Nicaragua heightened scrutiny by immigration authorities in rich 8 Pakistan countries may have encouraged some migrants who fear Bangladesh 6 deportation or investigation to remit a larger portion of Vietnam Uganda Mongolia their savings back to their home country (World 4 Sub-Saharan Africa Bank 2004a). 2 Remittances sent to the poorest countries reflect the 0 stock of emigrants, the work they undertake, and the links 0 20 40 60 80 100 to their country of origin. Migration patterns are influ- Percentage of country's border shared with richer countries not in conflict enced by three key factors: the economic attractiveness of Sources: IMF, various years; World Bank staff estimates. (figure 5.5). Mozambique and Uganda are two Everything-but-Arms (EBA) program are expected poor countries that increased FDI after improving to help in this respect. So far the impact of AGOA their investment climate. has been positive, but limited. According to Trade policies and agreements have also AGOA progress reports in 2004, the Act contin- played an important role in attracting export- ues to encourage new U.S. investment. In addition, oriented FDI by providing access to regional and it has stimulated African investments as firms larger markets (box 5.5). Recent initiatives to work to access AGOA preferences through grant African manufacturers greater access to regional production. However, the effect of those developed-country markets may lead to higher investments may be temporary and limited to cer- levels of FDI in affected sectors. The African tain sectors. For example, the phasing out of Growth and Opportunity Act (AGOA) initiative Multi-Fibre Arrangement (MFA) in January 2005 by the United States and the European Union's may have repercussions for FDI flows to those 95 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Box 5.4 The rise, fall, and recovery of FDI to poor countries, 1990­2003 T he rise in FDI to poor countries in the early 1990s from $7.7 billion in 2003 and $5.8 billion in 2002. As a followed the pattern in FDI flows to all developing result, the share of the poor countries in FDI flows to de- countries. A distinctive feature of the world economy in veloping countries rose to 8.3 percent in 2003. The rise the past 15 years has been the growth in investments by can be attributed largely to the strong performance of FDI multinational firms for the purpose of controlling assets in the oil and gas sectors in Azerbaijan and Pakistan. That and managing production in specific countries. Starting in said, FDI flows to two-thirds of poor countries increased the early 1990s, the poor countries, like many other devel- in 2003. All regions experienced an increase, except the oping countries, eased restrictions on foreign investments Middle East and North Africa (largely because of ongoing and liberalized their capital accounts. At the same time, the disinvestments in Yemen). privatization process accelerated, particularly in the extrac- tive and service sectors. Privatization stimulated FDI flows to poor countries, although to a lesser extent and more FDI flows to poor countries, 1990­2003 slowly than to middle-income countries. As macroeco- $ billions nomic and political conditions improved, governments 9 undertook structural reforms to upgrade their investment climates. Some countries also made efforts to attract 8 export-oriented FDI through export-processing zones, 7 although with limited success. Despite these developments, FDI in the poor countries 6 fell sharply from 1998 to 2000 (see figure). The Asian 5 crisis of 1997/98 had a significant impact on aggregate flows to the region. Of the poor countries in the region, 4 Vietnam was hit particularly hard. The crisis also affected 3 poor countries elsewhere, particularly in Africa, because a considerable portion of investments in countries such as 2 Ethiopia and Malawi had come from Asian investors. In 1 addition, FDI flows from the United States fell on the heels of an overall increase in dividend repatriation in 1998­99 0 1990 1992 1994 1996 1998 2000 2002 2003 (World Bank 2004a). Other reasons for the 1990s decline a include deteriorations in the investment climate of coun- In Pakistan, a major dispute in 1997 between the government and the multinational energy company, Hub Power, led to a sharp decline in FDI. tries such as Pakistan and Lesothoa and the end of large In Lesotho, political unrest following the presidential elections was infrastructure and privatization projects elsewhere. instrumental in the FDI decrease. Sources: World Bank, Global Development Finance, various years; World More recently, FDI flows to poor countries have in- Bank, World Development Indicators, various years; UNCTAD, World creased, reaching an estimated $8.4 billion in 2004, up Investment Report, various years; World Bank staff estimates. poor countries that developed their garment in- may represent another opportunity to attract dustries in response to the MFA or other agree- export-oriented FDI. Although poor telecommuni- ments. Their severity will be determined by a host cations and an inadequate supply of skilled labor of factors--among them labor productivity, the make it difficult to attract FDI in business services, cost of labor, and proximity to large export mar- poor countries can export low-skill services such kets. While preferential agreements are in force, it as data entry. Recently, countries such as Ghana is essential that countries improve productivity and Senegal have benefited from service outsourc- and build the necessary infrastructure to advance ing (UNCTAD 2004). Nevertheless, this type of international competitiveness. FDI has limited linkages with the rest of the econ- The recent surge in outsourcing of business omy, despite a potentially significant impact on services to low-wage countries such as India employment. 96 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Box 5.5 Realizing the development promise of trade E xport earnings are an important source of foreign ex- especially critical: both developed and developing countries change for poor countries. Spurred by higher commod- should reduce barriers to poor-country exports of food ity prices, robust demand, better trade facilities, and more and agricultural products, labor-intensive manufactures, tightly integrated supply chains, the value of poor-country and services. exports has tripled over the last decade, reaching $62 bil- As a complement to further liberalization, "aid for lion in 2003 from $21 billion in 1990. Even so, poor coun- trade" can help widen market access. Most poor countries tries did not keep up with the explosion of international suffer significant behind-the-border constraints such as trade during the period: their global market share has poor trade-related infrastructure, lack of capacity in trade- declined over the years. related institutions, and poor access to information on Trade has a significant potential to promote further new opportunities. Targeted aid can play a crucial role in development and poverty reduction in poor countries, as it strengthening critical trade-related infrastructure, such as has done in middle-income countries. A serious obstacle to transport, and making other improvements in trade the realization of that potential, however, are the restric- logistics. tions and distortions that continue to hobble trade, no- Poor countries can improve their competitiveness by tably the persistence of high subsidies for agricultural pro- eliminating trade restrictions and anti-export biases (such duction and exports in rich countries. The potential gains as export taxes and onerous administrative fees and pro- for developing countries of reductions in those subsidies, cedures). In a broad sense, they can raise their productiv- accompanied by further multilateral liberalization of trade ity by improving their domestic investment climate. Im- rules, are greater than those that could be obtained from provements in investment climate and governance are any other source (World Bank 2003 and 2005). essential in attracting export-oriented foreign direct in- The ongoing Doha Round of world trade talks offers vestment, which in turn can improve trade logistics as an opportunity to increase the development potential of world-standard technologies and know-how are applied trade. Increasing market access for poor countries is to trade processes. Despite such examples, the concentration of Figure 5.5 Improving risk conditions in poor FDI in the extractive sector of poor countries re- countries, 1985­2003 mains high, pointing to several problems: ICRG index 70 · In addition to having limited linkages with the 1985 1995 2003 59.7 rest of the economy, high resource flows to the 60 54.0 extractive sector tend to reduce the country's Middle-income 50 average in 2003 competitiveness in other sectors (through the so-called Dutch disease), increase rent-seeking 40 36.9 risky behavior, and cause institutions to deteriorate 30.9 32.0 30 (Sachs and Warner 1995; Sala-i-Martin and Less 25.8 24.9 Subramanian 2003) 20 18.1 17.7 · FDI flows to these sectors tend to be volatile. 10 Most investments are large, but also very sensi- tive to world commodity prices (figure 5.6).8 0 Economic risk Financial risk Political risk Given the large share of such investments in gross capital formation and their influence on Note: Economic risk index assesses current economic strengths and weaknesses (GDP per capita, GDP growth, inflation, budget and exchange rates, volatility may cause further current account balance). Financial risk index reflects issues related economic difficulties in some countries. But to external debt (foreign debt, trade balance and exchange rate stability). Political risk index evaluates political stability (contract such a negative impact is not inevitable. For viability, profit repatriation, corruption, bureaucracy, and law and example, with strong policy and a sound insti- order). Source: International Country Risk Guide Index (ICRG). tutional framework, Botswana relied on large 97 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Box 5.6 Collapse in international bank lending to poor countries P oor countries have been affected by a reversal in bank of recent crises drew international banks into poor coun- lending. From 1991 to 1993, medium- and long-term tries, thus reducing international lending. Although local- net bank lending averaged $0.6 billion. By 2001­3 that currency lending could potentially be additional to interna- figure had fallen to $1.2 billion. tional lending, recent trends suggest that banks have Bank lending collapsed across all developing countries substituted in-country lending for traditional cross-border in the years following the Asian crisis, but the decline was far lending. The share of local currency lending in total for- deeper in poor countries. Behind this substantial retrench- eign claims nearly doubled between 1990­2003, from 23 ment lay a heightened perception of the risk of lending to to 44 percent. There is a strong incentive for foreign banks developing countries in the wake of the multiple crises of the not to make cross-border lending on a significant scale, es- 1990s and the 2001­2 slowdown in the global economy. pecially as local-currency lending largely eliminates ex- Increased risk sensitivity has made lenders more cautious, change-rate risk and facilitates penetration of the local re- especially toward poor countries, which tend to be perceived tail market. as high-risk borrowers. According to Institutional Investor, Part of the reason for the decline in international bank of the 28 poor countries, only four--Ghana, Kenya, lending also lies on the demand side, with poor countries Pakistan, and Vietnam--obtained an average risk rating reacting cautiously in the wake of financial crises. Some during the 1990s of more than 25 (on a scale of 0 to 100, countries have acted to limit short-term bank lending and with 100 representing the highest credit quality). This is far lengthen the maturity of bank loans. Since 1999, declining below the ratings of developing countries that received sig- interest margins and lower syndicated loan volumes also nificant capital inflows. Between 1990 and 2003, most bank suggest that demand for loans by poor-country borrowers lending to poor countries went to countries rated higher than has declined. 20 on the Institutional Investor scale. The privatization of failed financial institutions and Source: World Bank staff. the removal of entry barriers for foreign banks in the wake Figure 5.6 FDI in oil- and mineral-exporting poor government revenues boosted by FDI were in- countries, 1990­2003 vested wisely to create the momentum and the infrastructure for more broad-based economic FDI as % GDP growth (UNCTAD 2003). 12 10 With the limited exception of FDI, the world- Oil and mineral wide expansion of private capital flows during the 8 Other exporters 1990s largely bypassed the poor countries. Private poor countries 6 equity flows to all developing countries tripled from $55 to $192 billion from 1990 to 2004--yet the 4 poor countries' combined 4.3 percent share of this 2 total remains small (see table 5.1). Most poor countries have few prospects of 0 attracting private debt flows or portfolio equity. 2 In our sample, only Pakistan received sizeable 1990 1992 1994 1996 1998 2000 2002 non-FDI flows because Pakistan was the only Note: See note to figure 5.4. country in the group, according to the S&P/IFC Sources: World Bank, World Development Indicators and Global Development Finance, various years. index, that had companies considered investment- worthy in the late 1990s--a key indicator for portfolio equity flows. The general collapse in in- FDI flows into its diamond and other mining ternational bank lending to poor countries in the industries to become a middle-income coun- course of the 1990s further limited flows of private try in one generation. Export receipts and debt (box 5.6). 98 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Other developing countries as a telecommunications sector are from other devel- source of finance for poor countries oping countries.9 D eveloping countries are often perceived as Proximity to larger economies has helped recipients and not providers of financial some poor countries such as Lesotho, Mongolia, flows. The final report of the 2002 UN Confer- and Nepal attract FDI. Nepal, India (in hotels ence on Financing for Development in Monterrey and manufacturing), and China (manufacturing) contained only a brief mention of the importance account for more than half of FDI. Most FDI in of encouraging cooperation between developing Mongolia originates from China and Russia. countries. However, with respect to poor coun- Companies from the South have comparative tries, other developing countries (especially larger advantages when investing in poor countries. Such countries such as Brazil, China, India, Saudi firms often have lower overhead costs and man- Arabia, and South Africa) are becoming increas- agers indigenous to the region. In addition, geo- ingly important financial players. With wealth in- graphical proximity and cultural similarities can creasing and capital controls lifted in the 1990s, make coordination of foreign operations less ex- developing countries have emerged as significant pensive. Companies from the South may also have sources of FDI--and even of aid. (New aid greater experience than companies from developed donors include Brazil, China, India, and South countries with the economic and political condi- Africa.) Finally, the developing South is the pri- tions of the host country (Wells 1983; Aykut and mary destination for poor country migrants and Ratha 2004). The relative success of the South also the major source of workers' remittances. African telecommunications company, MTN, in Below we examine what is known about the Uganda, compared to its competitors from devel- growing South-South financial interdependence. oped countries, is traceable to its in-house exper- We suggest that South-South flows represent an tise in managing pertinent economic and political under-recognized pool of development resources risks (Goldstein 2004).10 for the poor countries. The international commu- Like FDI from the North, South-South FDI nity should encourage developing countries to can raise productivity and tax revenue when develop policies to enhance the development of the environment is favorable. Following South their poorer neighbors. African Brewery's purchase of a controlling share of the state-owned Tanzanian Brewery Limited in South-South FDI cooperation with the IFC in 1993, productivity South-South FDI appears significant in the poorest and capacity utilization increased dramatically countries, although precise estimates of its magni- while output tripled in five years (Pigato 2000). tude are not available. Companies from China, Following the privatization of one Mozambican India, Malaysia, the Russian Federation, and state-owned company, taxes paid by the company South Africa have become important investors in rose more than fivefold and by 1998 provided many poor countries. To minimize risk--and the about 5 percent of the country's total tax revenues. cost of acquiring information--they tend to invest However, firms from the South may have in resource- and market-seeking activities in neigh- comparatively limited investment capacity, as their boring countries before expanding on a global cost of capital is usually higher and affected by basis. Ethnic and cultural ties often play a role in business cycles in their home country. the choice of trading partners, particularly for Asian companies (Aykut and Ratha 2004). South-South development assistance Privatization programs have been especially South-South development assistance has expanded important in attracting FDI from these companies, in parallel with South-South FDI, although here, in particular for Malaysian and South African in- too, data are lacking.11 But the potential relevance vestors, who contributed almost a third of the for- of South-South aid in generating economic growth eign exchange raised by privatization efforts in the in the world's poorest countries should not be un- poorest countries between 1989 and 1998. Re- derestimated.12 Other developing countries can be gional companies also expanded their operations instrumental in widening the pool of development in retailing, banking, brewing, satellite television, resources--and in creating pressure on industrial- and tourism. All the major players in the African country donors to do more. 99 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 With many developing countries experiencing Cooperative exchange between two develop- strong economic growth in recent years and seeking ing countries can help both countries in their de- new markets, as well as new spheres of economic velopment process. The capacities of the recipient and political influence, it is logical that their role in are strengthened, while the donor country gains an providing development assistance should expand. understanding of the development challenges of India's minister of finance announced in his 2003/4 the recipient--and possibly insight into challenges budget speech that India intended to increase its de- at home. The donor may also be able to identify velopment assistance to other developing countries, future market opportunities. By increasing the including debt relief to HIPC countries. Grants and national and collective self-reliance of developing loans from India to other developing countries countries, South-South development assistance can grew sharply in the past five years--from $83 mil- strengthen the voice of developing countries in ne- lion to $140 million.13 China, too, has become gotiations with the North. But it also has features increasingly involved in technical cooperation that make it a valuable complement to North- projects developed by the United Nations Develop- South cooperation. First, cooperation between ment Programme (UNDP), becoming the first de- countries with similar conditions of natural envi- veloping country to donate to the Voluntary Trust ronment, culture, and economic development is Fund for the Promotion of South-South Coopera- likely to result in more appropriate technology tion. In mid-2004, the Chinese government also of- transfer. Second, when a developing country offers fered $610,000 in humanitarian aid to the troubled assistance to neighboring countries, personnel and Darfur region of Sudan. Other developments point transportation costs, as well as other expenses, in the same direction: often are relatively low. Third, when developing countries take responsibility for development as- · In early 2005, developing countries pledged sistance and become donors in their own right, aid $173 million of emergency assistance in the resources can expand. wake of the Asian tsunami. Because the resources available for South- · Since 1976, Nigeria has promoted South- South cooperation will remain low compared to South cooperation through the Nigeria Trust North-South flows, there is clear scope for coordi- Fund, operated by the African Development nating South-South and North-South flows. Bank, with current resources of $432 million. Among the impediments to greater South-South · Brazil and Morocco sponsor extensive cooperation are limited institutional capacity and university scholarship programs and support lack of resources. One means to alleviate both technical and professional training for stu- constraints is to leverage potential projects with dents of developing countries. money from the North, an arrangement called · The government of India has provided finan- triangular cooperation. Triangular cooperation cial assistance for the construction of all occurs when a group of developing countries major hydroelectric power plants in Bhutan.14 working together to address a common problem · South Africa cofinanced the $2.3 billion con- obtains additional financial, technical, and logisti- struction of the Mozal aluminum smelter in cal resources from a developed-country partner or Mozambique. group of partners. The actors involved are various: traditional donors, multilateral agencies, private Within developing countries, the Arab na- sector firms, academic institutions, and civil soci- tions have long been an important source of de- ety organizations. In policy circles this approach is velopment financing. By the end of 2002, the looked on as an important way to achieve the Arab national and regional development institu- goals of South-South cooperation (Teheran Con- tions together had extended $76 billion in sensus 2001). Both the UNDP and Japan are active development assistance.15 Those resources have in South-South cooperation (box 5.7). supported some 4,500 operations in more than The collaboration between the South and the 130 countries around the world, mostly in low- North has produced some success stories. One is income countries. Half of the total went to Africa the New Rice for Africa (NERICA) initiative. Col- and most of the remainder to 36 Asian and laboration among African, Asian, European, and Middle Eastern countries. North American scientists under the auspices of 100 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Box 5.7 UNDP, Japan, and triangular cooperation T he Special Unit for South-South cooperation of the · Japan expanded its assistance for South-South United Nations Development Programme (UNDP) cooperation by introducing the third-country expert plays an important role in financing South-South program in 1995. The program involves sending cooperation through UNDP country allocations and experts from countries with similar natural environ- program resources and, indirectly, through the mobiliza- ments, languages, technical levels, and cultures to tion of funds from NGOs and the private sector. In the recipient countries to enable the smooth transfer of UNDP, two funds have been established to which technology. There has been a steady increase in both developed and some developing countries have con- the number of requests received and the number of tributed: the Voluntary Trust Fund for the Promotion of countries expressing interest in either sending or South-South Cooperation and the Perez-Guerrero Trust receiving experts. In fiscal 2003, 117 new experts Fund for Economic and Technical Cooperation among were sent to Africa, Asia, Latin America, and the Developing Countries. Between 1996 and 2002, the Middle East. Voluntary Trust Fund attracted $33 million, with most · Since the establishment of the Human Resources of the money coming from Japan. In 2002 the UNDP Development Fund within UNDP in 1996, Japan has Executive Board approved an annual allocation of made special contributions to South-South coopera- $3.5 million for technical cooperation among tion by earmarking about half of the Fund for that developing countries over the coming years. purpose. In 2002, the Fund was integrated into the Japan's support for South-South cooperation includes Japan-UNDP Partnership Fund, an important goal of the following elements: which is to promote South-South cooperation. · Japan has partnership programs to encourage eco- Other developed countries have provided vital support for nomically robust developing countries to become South-South cooperation. The Netherlands has cofinanced donors themselves. Since 1975 the Japan International sectoral programs in 22 developing countries through Cooperation Agency (JICA) has sponsored third- multidonor basket funds, providing support for the use of country training programs to help developing coun- developing-country technical resources in the programs. tries become donors. Under the program personnel Sweden has financed knowledge networks, three in Asia in developing countries who were previously trained (on renewable energy technologies, energy research, and in Japanese technical cooperation programs train environment) and two in Africa (on energy policy and technicians and administrators from other devel- biotechnology). Australia has set up training arrangements oping countries. In fiscal 2003, 2,335 people attended with ASEAN, Fiji, Papua New Guinea, Samoa, and 151 third-country training courses. Developing Vanuatu. The Organization of American States, through countries offering eight or more courses under the Inter-American Agency for Cooperation and Develop- the program included Brazil, Indonesia, Kenya, ment (IACD), coordinates cooperation among the member Malaysia, Philippines, and Thailand. The costs of states and forges partnerships with the private sector and the program are shared between Japan and the civil society. Most of the IACD technical cooperation grants host country. are supplemented by other donors. the West Africa Rice Development Association hectares in West and Central Africa will be under (WARDA) developed new, high-yielding rice vari- NERICA cultivation by 2006, raising local African eties for Africa by combining the best traits of rice production and saving nearly $90 million per African and Asian rice species. Growing demand year on rice imports. By 2006, 1.7 million African for NERICA in turn led to the creation of the farmers will have been exposed to the advantages African Rice Initiative, a consortium of partners of NERICA, increasing food security in dozens of that includes the Government of Japan, UNDP, the African nations. World Bank, the Rockefeller Foundation, USAID, In another sign that the idea of complement- the UN Food and Agriculture Organization, and ing North-South with South-South development the African Development Bank (AfDB). According assistance seems to be gaining momentum, the to the African Rice Initiative, nearly 210,000 Commonwealth Secretariat now advocates direct 101 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 cooperation and support between Commonwealth Faso have been adversely affected by conflict in countries without the involvement of the United neighboring Côte d'Ivoire, falling from 4.5 per- Kingdom. cent of GDP in 1990 to 1.2 percent in 2003. Four of the 10 largest economies today Lesotho has been affected by a decline in mining (measured using purchasing power parity weights) employment in neighboring South Africa. In are developing countries that offer significant 1990, an estimated 127,000 ethnic Basothos were export markets to many poor countries. If larger employed in South African mines (providing developing countries (such as Brazil, China, India, some 20 percent of the work force). Since then, and South Africa) were to reduce trade barriers however, new recruitment for the mines has virtu- against products from the poorest countries, the ally ceased, and total mine employment started additional resources generated for meeting devel- falling, mainly due to the declining profitability opment needs and reducing poverty could easily of gold mines. As the number of Basotho emi- dwarf aid and other flows. grant workers declined to 60,000 by 2003 (Cobbe 2004), remittances fell from 69.6 percent The South as a source of workers' remittances of GDP in 1990 to 18.5 in 2003. In the Republic For developing countries overall, industrialized of Yemen, remittances as a share of GDP fell from countries are the major source of remittance pay- 31.0 to 11.9 percent over the same period, re- ments, but in the poor countries, other developing flecting the regional situation in the aftermath of countries are most prominent. While comprehen- the first Gulf War. sive data are not available, estimates are that in Informal channels of remittances are ex- poor countries in East Asia, South Asia, and Sub- tremely important in poor countries, as when mi- Saharan Africa, more than two-thirds of emigrants grants carry funds on trips home or when they migrate to a country in the same region, while in call on hand couriers. Cost, speed, convenience, South Asia and Sub-Saharan Africa, most of them and trust are key in determining the channel migrate to another developing country (OECD through which migrants choose to remit money. 2003b). Speed and convenience have favored more formal The substantial income gap between the channels, including wire transfer agencies and poorest countries and their larger neighbors af- banks. But as with remittances from industrial fects the decision to migrate. For the four poor- countries, lack of competition and inefficiencies in est countries with the largest ratio of remittances the regulatory framework for money-transfer to GDP (Lesotho, Moldova, Nepal, and Republic operations raise costs to senders and recipients of Yemen), the income gap with their largest (Ratha and Riedberg 2004). South-South coop- developing-country neighbors ranges from $281 per eration to address such issues could yield sizable capita in the case of Nepal and India, to $7,230 per gains to participants. capita for the Republic of Yemen and Saudi Arabia. Transport costs and restrictions on migration also have been important in encouraging migrants Meeting the Monterrey challenge--an to remain closer to home. OECD countries have agenda for donors and recipients T increased restrictions on the admission of immi- he South is becoming a more important part- grants over the last three decades (UN 2002b). ner for poor countries in financing develop- Since 2002, 70 percent of all legislation on mi- ment, and poor countries are less exclusively grant workers has originated in OECD countries dependent on aid, but industrialized country (ILO 2004), making other developing countries an governments continue to play the leading role in easier destination, although restrictions are in mobilizing finance and managing the vulnerabili- place in the developing world as well. ties of these countries. Looking ahead, action is As a result of the concentration of poor needed on four fronts if progress toward the country migrants in other developing countries, MDGs is not to be derailed by a shortage of exter- events affecting richer neighbors can have a sig- nal resources. First, donors must scale up ODA and nificant impact on the workers' remittances flow- other resources substantially--overcoming the dis- ing to poor countries. Remittances to Burkina tractions of changing fiscal pressures and shifting 102 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S strategic considerations. Second, they should strive invest in their own people and promote economic to make aid more stable and predictable and less freedom." Sub-Saharan Africa received 60 percent procyclical. Third, they should press for better of increases in ODA disbursements over the five donor coordination, selectivity, and country own- years from 1998 to 2003, raising its share of total ership to improve the effectiveness of aid and in- ODA disbursements by DAC donors from 24 per- crease the focus on results. And fourth, they cent to 34 percent (see figure 1.15). (In 2003, one- should seek opportunities to engage the private third of ODA was allocated to the poorest sector in development efforts. To justify and effec- countries, unchanged from its average share over tively absorb increases in aid and attract more the previous 10 years.) However, most of these private-sector finance, poor countries, for their funds were allocated to postconflict situations, part, need to pursue effective economic and pro- leaving little for development aid. poor policies. A March 2005 report by the Commission for Africa urged a doubling of aid to Sub-Saharan Commitments to support the MDGs Africa, including an investment of $150 billion in Despite the decline in aid over the past 15 years infrastructure over the next decade. The report that has only recently been reversed (see chapter 1), calls for an additional $25 billion per year in aid the outlook for aid flows is positive. There was through 2010 and, subject to a review of progress, agreement at the UN Conference on Financing for a further $25 billion per year through 2015. Development in Monterrey in March 2002 that Raising resource flows to the world's poorest ODA and other resources had to be increased countries to levels required to support the MDGs substantially to provide developing countries with requires donors to remain committed to financing the financial resources required to meet the for development, even in the face of fiscal pres- MDGs. Developed countries that had not already sures and strategic considerations, both of which done so were urged to "make concrete efforts" to- have had an increasingly important influence on ward increasing ODA to the UN target of 0.7 per- the distribution of foreign aid. cent of GNP. The budget deficit for the OECD countries as The OECD (2005) projects that total ODA a group increased from 2.8 percent of GDP in disbursements (to all developing countries) will 2002 to 3.4 percent in 2003. The gap is projected increase from 0.25 percent of GNI in donor coun- to widen to 3.5 percent in 2004. While counter- tries in 2003 to 0.30 percent by 2006, still signifi- cyclical expansionary fiscal policies helped prevent cantly less than the 0.34 percent level reached in the recent global slowdown from deepening, the the early 1990s (see figure 1.14). The projection same policies, by increasing deficits to unsustain- assumes an average 9 percent annual increase in able levels, have created risks with clear implica- ODA in real terms over the period 2004­6, well tions for developing countries--for example, the above the average rate of real increases for the risk that real interest rates could be pushed higher past two years (6 percent). globally, dampening capital flows to develop- The case is strong for directing increased re- ing countries as the public sector in advanced sources to poor countries whose economic and economies competes with developing countries for social policies allow them to make effective use global savings (see chapter 3). With aging popula- of aid--because they have the greatest potential tions expected to place a rising fiscal burden on to reach the MDGs. In countries with low capac- advanced economies in coming years, the pressure ity to attract private investment, ODA is particu- for fiscal consolidation is not likely to wane any- larly important, both in itself and as an essential time soon. complement to other sources of development Historically, as donors' fiscal deficits have finance. been reduced, the ratio of ODA to GNI has fallen The G-8 Africa Action Plan announced at in tandem. At a time of fiscal consolidation, in the 2002 G-8 Leaders Summit in Kananaskis other words, foreign aid budgets appear particu- (Canada) suggested that "in aggregate half or larly vulnerable. Cuts in foreign aid are often more more of our new development assistance could be palatable to the electorate than cuts in domestic directed to African nations that govern justly, programs. In the face of claims from domestic 103 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 constituencies, donors may be tempted to over- Figure 5.7 Global military spending and aid, look pledges made at events such as the Monterrey 1992­2003 Conference, which are not legally binding under ODA as percentage of donors' GNI international law. 0.36 The threat to future aid flows appears even 1992 0.34 more serious when one considers that in 2003, Post­Cold eight DAC member countries reported budget 0.32 War era deficits that exceeded 3 percent of their GDP. 0.30 1993 Those eight countries account for roughly three- 1994 0.28 quarters of ODA. Fiscal consolidation will be a key element of the policy agenda in many devel- 0.26 2003 oped countries over the medium term. In this envi- 0.24 1995 2002 2001 ronment, increasing ODA and other resource flows 0.22 to the poorest countries must be given high pri- War on terror and Iraq 0.20 ority if the developed countries are to hold up 650 700 750 800 850 900 their end of the Monterrey bargain by providing Global military expenditure ($ billions) the financial resources required to support the Sources: Stockholm International Peace Research Institute; OECD MDGs. Development Assistance Committee. The war on terror and the conflict in Iraq will continue to divert donor attention. While dis- bursements have fallen considerably short of commitments in Iraq and Afghanistan, they have If the world is to meet the MDGs, substantial been significant. The share of ODA allocated to increases in ODA and other resources are certain to Iraq increased from an average of 0.3 percent be- be needed (World Bank 2004b). Innovative meth- tween 1980 and 2000 to 4.2 percent in 2003. Its ods of development finance may help to enrich the share is expected to be significantly higher in aid effort (box 5.8). 2004. More broadly, the share of ODA allocated Most important of all, developed countries to five countries--Afghanistan, Columbia, Iraq, could spur development by reducing agricultural Jordan, and Pakistan--increased from 3 percent subsidies and trade barriers that discriminate over the period 1980­2000 to more than 11 per- against developing countries' exports. Industrial cent in 2003. This pattern is consistent with the countries spend more than $300 billion each year idea that "strategic considerations" are more im- to subsidize domestic agriculture, more than five portant in determining aid flows than are devel- times the amount they spend on foreign aid. opment needs (McKinlay and Little 1979; Alesina Unless progress is made in the Doha round of and Dollar 1998). trade talks on agricultural protection and subsi- Further evidence of diverted attention is dies, negotiations within the World Trade Organi- shown by the link between aid and military ex- zation (WTO) are likely to be stalled, to the penditure. Since 2001, aid flows have not in- detriment of growth and development. creased with military expenditures to the extent that had been expected. In the immediate post­Cold War world, global military expendi- Making aid more predictable tures fell from $847 billion in 1992 to $693 bil- and less procyclical lion in 1998. During the same period aid fell from Aid can be better used if it is predictable. When 0.34 to 0.22 percent of donors' GNI, a drop at- aid flows wax and wane with international tributable to efforts to balance the budget and to economic cycles or with unexpected shifts in the perceived decline in the strategic importance donor policy, recipients often see aid decline when of aid following the end of the Cold War. How- they need it most. If aid is used for domestic ever, since September 11, as military expenditures investment, volatility can generate uncertainty, have increased from $743 to 879 billion, the ratio discourage investment, and impede growth.16 of ODA to GNI has not made up the decline suf- Aid volatility also complicates the conduct of fered in the 1990s (figure 5.7). fiscal and monetary policy. Tax increases and 104 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Box 5.8 New sources of financing P roponents of innovative financing mechanisms--such prominent example is the proposed "carbon tax" on con- as the International Finance Facility, global taxes, and sumption of hydrocarbons. Such a tax could generate sub- various voluntary giving arrangements--argue that such stantial revenue and help arrest climate change, but it mechanisms can partly offset shortfalls in official develop- would be very difficult to achieve politically. On a smaller ment assistance (ODA). scale, a recent proposal in the European Union would, for International Finance Facility. As proposed by the the first time, tax the jet fuel used in airliners and address British government, the IFF is designed to front-load aid the environmental harm caused by air transportation. Pro- flows in the short term to help reach the MDGs. Donors' ponents observe that the revenues raised from global taxes multiyear aid commitments would be used to back AAA- could complement the IFF by generating aid funds in the rated bonds. Bond proceeds would be channeled through medium to long term, as IFF flows diminish with repay- existing aid programs. Over time, the IFF would draw ment of bonds. down the donor pledges to pay off its bonds. Future aid Voluntary contributions. Private contributions al- budgets would thus be used to support aid disbursements ready fund development in various ways (see box 5.2) as and when they are needed in the short term. Critics of that could be expanded, encouraged, or made more effec- the proposal charge that bond repayments, as well as the tive. Some mechanisms, such as the establishment of affin- transaction costs of issuing the bonds, would put pressure ity credit cards that provide funding for development on aid budgets in the years ahead. through voluntary surcharges, could be undertaken by Technical aspects of the IFF proposal are being interested banks or companies. Others, such as the cre- worked through in a pilot project. The IFF for Immuniza- ation of a special-purpose global lottery or premium tion (IFFIm) seeks to raise front-loaded, reliable funding bond, would require regulatory action by participating over several years to expand global immunization and so countries, either unilaterally or acting in concert. As with help achieve the MDG on child health. IFFIm will use global tax mechanisms, it would be important--and not off-budget donor pledges of future aid increases as back- easy--to ensure that voluntary contributions resulted in ing for AAA bonds, relying largely on the existing gover- additional flows, rather than substituting for some por- nance structure and country programs of the Global Al- tion of existing flows or overemphasizing some needs at liance for Vaccines and Immunization (GAVI) and the the expense of others. Vaccine Fund. Although such innovative mechanisms offer some po- Global taxes. Proposals have been made in the past to tential to expand the resources available to support devel- raise funds for development through new global tax instru- opment efforts, the legal and political obstacles to their im- ments, but most have suffered from technical obstacles and plementation suggest that their practical significance in the all have faced varying degrees of political opposition. One short term will likely be limited. government spending cuts frequently follow aid output. Bulir and Hamann (2003) found that shortfalls (Gemmell and McGillivray 1998). Fur- it was more volatile than fiscal revenues, par- thermore, aid-dependent countries are often ticularly in highly aid-dependent countries. unable to offset an unexpected aid shortfall by Gemmel and McGillivray (1998) found that borrowing and must resort to unplanned and aid was significantly more volatile than costly fiscal adjustment--especially damaging revenue. Only Collier (1999) found that aid when aid flows are procyclical. (to Sub-Saharan Africa) was less volatile than Despite these damaging effects, aid to poor tax revenues. countries tends to be volatile.17 · Aid flows to poor countries have become more volatile over the 1990­2002 period · Aid has been more volatile than GDP (fig- (figure 5.8), although they are less volatile ure 5.8) in virtually all of the poor countries than for other low-income countries.18 The in our sample. Earlier studies showed similar increased volatility could reflect changing results. Pallage and Robe (2001) showed that donor sentiments, better linkages with coun- aid was highly volatile compared to recipients' try performance, or other factors. For the 105 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 Figure 5.8 Change in volatility of aid, 1970­2002 Figure 5.9 Volatility of different components of aid, remittances, and FDI, 1990­2002 Volatility (standard deviation) Volatility (standard deviation) 50 48.7 1970­90 1990­2002 80 71.1 40 70 60 30 50 21.2 39.6 40.0 40 20 16.4 17.3 16.2 30 9.7 10.6 10.9 21.4 10 19.7 20 16.3 10 0 GDP ODA GDP ODA 0 Poor countries LICUS ODA IDA FDI Note: LICUS Low-Income Countries Under Stress. Figure measures Structural median volatility for each group of countries. Volatility is equal to the Emergency Remittances standard deviation of the cyclical component of the Holdrick-Prescott filtered indexed series. Only countries with data available for both Note: IDA International Development Association. Figure periods are included. measures median volatility for each group of countries. Volatility is Source: World Bank staff estimates. equal to the standard deviation of the cyclical component of the Holdrick-Prescott filtered indexed series. Only countries with data available for both periods are included. Source: World Bank staff estimates. other low-income countries, this rise in aid volatility may be explained by the fact that many of these countries experienced conflict in 1990­2002 period, which disrupts aid when donors are unable to adequately monitor the operations and disbursements. recipient country's reform effort, aid disburse- · Among the several types of aid, humanitarian ments may be implicitly tied to economic perfor- aid and emergency assistance are by their mance, thus making aid procyclical (Svensson nature volatile (figure 5.9).19 But even when 2000). Second, donors may try to link aid flows to emergency aid is excluded, aid disbursements country performance using measures that are inde- are more volatile than other flows, such as pendent of domestic economic cycles. When coun- remittances. tries are hit by unforeseen adverse shocks, compli- ance with donor conditionality may be affected, Greater predictability in aid flows is one of which may reduce aid disbursements. Finally, some the touted benefits of the proposed International donors require matching grants by the recipient. If Finance Facility (IFF), sponsored by the British more matching resources are available during government. The IFF would require donors to out- cyclical upturns, some procyclicality of foreign aid line their intended contributions to aid over the disbursements may follow. long term and would then issue bonds backed by In recent years there appears to have been a those pledges (see box 5.8). shift away from procyclical aid flows--which Volatility of aid need not seriously affect out- should be encouraged.20 Ratha (2001) found that put or growth in developing countries, provided it multilateral lending played a countercyclical (sta- offsets fluctuations in GDP. Intuitively, this makes bilizing) role relative to private flows, with rising sense--if flows of external finance are counter- official flows during periods of private credit re- cyclical to the business cycle (and thus help offset duction. Multilateral lending also complemented the downturns), they can help to smooth out fluc- private flows with a time lag. Empirical work on tuations. But ensuring that aid will be countercycli- the cyclical character of ODA flows in 1970­90 cal implies donor control over volatility, which, of and 1990­2002 found less evidence of procyclical- course, has been lacking. In fact, there are good ity in the latter period, although short estimation reasons why aid flows tend to be procyclical. First, periods affect the robustness of these estimates. 106 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Strengthening the framework for aid as "managing for results"--the international effectiveness community can focus on national develop- Improving the effectiveness of aid involves four ment needs and objectives under the owner- key steps--donor coordination, aid selectivity, ship of the recipient country. Bilateral and country ownership, and a focus on results. multilateral development agencies agreed in Marrakech in February 2004 to a set of prin- · Strengthening donor coordination. Ongoing ciples that include focusing on results at all efforts to align and harmonize aid currently stages of the assistance process, including involve 60 developed and developing countries planning, implementation, and completion; and at least 40 bilateral aid agencies and multi- and keeping reporting systems simple, cost- lateral organizations. Harmonization initia- effective, and user friendly. tives may involve joint analytical work, joint preparation of country assistance strategies, Progress has been made in all these areas over and joint reviews of implementation. The the past decade, but more needs to be done to benefits of successful coordination are to make aid more effective in supporting attainment reduce duplication of effort among donors and of the MDGs (World Bank 2004a and 2004b). to reduce the bureaucratic burden on recipients. The ongoing replenishment of the International · Improving aid selectivity. A scarce resource, Development Association (IDA) also has stressed aid should be directed toward two classes of the link between new resources and effectiveness. countries: those that need it most and those that can use it to best effect--in other words, Leveraging private capital the poorest countries and those with the best flows to poor countries records of using aid to spur growth and re- Most poor countries will remain heavily reliant on duce poverty. Good performers will use signif- traditional financing sources for the next few icant increases in aid to improve their years. A long-term challenge is to tap the potential prospects of reaching the MDGs and their of international capital markets to provide greater own development goals (Dollar and Levine private participation in financing for the poorest 2004). At present, donors differ widely in countries. A key role for multilateral institutions is how they measure performance and select to devise frameworks for private sector involve- "merit-based" aid recipients. Initiatives such ment and to find ways to mitigate the risks associ- as the United States Millennium Challenge ated with investing in poor countries. Account, which is intended to provide addi- Improving the access of poor countries to tional aid based on 16 economic and political markets in developed and some large developing indicators (including control of corruption, countries could help to facilitate investment in the rule of law, primary education completion poor countries. Programs such as AGOA and EBA rate, country credit rating, and trade policy), that provide preferential access to poor countries have the potential to improve the application are one component of this story, but of greater of aid selectivity, but a proliferation of com- long-run importance will be multilateral liberaliza- peting criteria among donors raises renewed tion of trade, as is currently being pursued through concerns about harmonization. the WTO-sponsored Doha negotiations (box 5.5). · Country ownership. Countries that embrace Curbing the use of antidumping and similar in- development programs as their own will use struments of contingent protection, eliminating aid more carefully and more effectively. With certain repatriation taxes, and liberalizing rules of guidance from the World Bank and the partic- origin have the potential to promote trade and ipation of civil society, member governments investment in poor countries (World Bank 2005; now prepare poverty reduction strategy pa- Commission on Capital Flows to Africa 2003). pers (PRSPs), which set forth an agreed pro- Loans and guarantees to mitigate political, gram of action to reduce poverty with help contractual, regulatory, and foreign-exchange from development partners. risks--as currently provided by the International · Focus on results. By targeting assistance to Financial Corporation (IFC) and the Multilat- meet clearly defined goals--a practice known eral Investment Guarantee Agency (MIGA)--are 107 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 crucial, particularly for investment in infrastruc- and as such facilitate trade flows to Africa. The ture in poor countries (World Bank 2004a). Bilat- body was established with World Bank loans under- eral agencies from developed countries, such as the written by Lloyd's of London. The member coun- U.S. Overseas Private Investment Corporation tries (originally Burundi, Kenya, Malawi, Rwanda, (OPIC), Export Development Canada, and the Tanzania, Uganda, and Zambia) are financially U.K. Export Credit Guarantee Department should responsible for losses. intensify their assistance to private investments in Poor countries need help in using financial in- poor countries that support the development goals novations to improve their access to international of the recipient countries. Easing restrictions (such capital markets. In recent years, the securitization as on sectoral coverage) and offering broader and of future resource flows, such as remittances and more flexible risk insurance products could extend export receipts, has helped several middle-income the impact of these programs. countries to raise external financing and might also Regional export credit agencies can also facili- be implemented for poor countries (box 5.9). tate private sector access. One example is the Among the policy hurdles to be addressed are the African Trade Insurance Agency, established in lack of legal infrastructure in many poor countries 2001. The agency provides insurance for exports and the high fixed cost of necessary legal, invest- from and within Africa and imports to the continent ment banking, and credit-rating services. Box 5.9 Securitization of future workers' remittances and other external flows D eveloping countries can raise external capital on the collections to the borrowing bank. Since remittances do strength of current account flows from workers' not enter the issuer's home country, the rating agencies remittances, tourism receipts, and export receipts. believe that the structure mitigates the usual sovereign Securities issued on such flows are typically structured to transfer and convertibility risks. Such transactions also obtain an investment-grade rating, which allows issuers often build in excess coverage to mitigate the risk of to pay a lower interest rate and obtain longer maturity. It volatility and seasonality in remittances. also makes them attractive to a wide range of "buy-and- The first major securitization deal involving interna- hold" investors such as insurance companies, which may tional migrant remittances occurred in 1994 in Mexico. face limitations on buying issues below investment grade. Since then the volume of transactions has grown rapidly. Because they are free of currency convertibility risk, a Using this instrument, El Salvador, Mexico, and Turkey key component of sovereign risk, securities based on raised about $2.3 billion during 1994­2000. current account flows may be rated better than sovereign As electronic transfers became more prevalent and credit. made it easier to track complex transactions, remittances One important reason for governments to promote securitization gave way to securitization of diversified pay- this asset class stems from the related externalities. Such ment rights (DPRs) including mainly migrant remittances, deals bring closer scrutiny of the legal and institutional but also certain payments related to exports and foreign environment (for example, laws relating to property rights direct investment. During 2000­4, a total of $10.4 billion and bankruptcy procedures) than do unsecured transac- was raised through securitization of DPRs by Brazil tions. Securitization transactions backed by governments ($5.3 billion), Turkey ($4.1 billion), El Salvador, can thus help usher in reforms of the legal and institutional Kazakhstan, Mexico, and Peru. Following a sharp increase environment. in borrowing costs in 2002, Brazil has raised more than Remittance-backed securities often work as follows. $4 billion by issuing bonds backed by DPRs. These bonds The borrowing entity, such as a bank, pledges its future resulted in a saving of more than 700 basis points com- remittance receivables to an offshore Special Purpose pared with Brazil's sovereign spread. Vehicle, which issues the debt. Designated correspondent As experience with DPRs broadens, and investors banks are directed to channel all remittance flows of the become more comfortable with them, it is possible that borrowing bank directly to an offshore collection account they could be used in a wider range of countries (includ- managed by a trustee. The collection agent makes principal ing poor countries) and for a broader range of external and interest payments to the investors and sends excess flows (such as tourism receipts and commodity earnings). 108 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S Box 5.9 (continued) It is not easy to estimate the potential of future-flow Overcoming it need not require a grand overhaul of the securitization. But preliminary calculations, using an entire legal system, however. A more focused approach overcollateralization ratio of 5 to 1 and migrant remittance concentrating on bankruptcy law may suffice, by making figures for 2003, show that developing countries could sure that pledged assets remain pledged in the event of potentially issue nearly $9 billion a year. Low-income default. Finally, at a broader level, remittance securitiza- countries could raise up to $3 billion annually. tion can potentially conflict with the negative-pledge Several policy hurdles remain to be addressed before provision included in the IBRD's (or other multilateral securitization deals can approach that potential. Long agencies') loan and guarantee agreements, which prohibits lead times and the high fixed costs of legal, investment the establishment of a priority for other debts over the banking, and credit-rating services can pose difficulties for debts due to the IBRD. developing countries with few large institutions and high But as the recent upsurge in securitization suggests, borrowing needs. A master trust arrangement can permit none of these hurdles is insurmountable, and there would issuers to structure a large deal but tap the market in several appear to be ample opportunity for future growth in such tranches. Pooling receivables of several branches (or even deals, with corresponding benefits to a broad range of several borrowers) could also help defray large fixed costs. developing countries. The absence of an appropriate legal framework for such transactions is yet another constraint on issuance. Sources: Ketkar and Ratha (2001, 2004). Sound economic and pro-poor for investment, such as Mozambique, Uganda, and policies in recipient countries Vietnam, have been among the most successful at T he consensus reached in Monterrey in 2002 attracting external finance in the form of FDI, centered on a partnership between donors and ODA, and South-South financial flows. recipients. Donors agreed to increase assistance to The New Partnership for Africa's Develop- developing countries if the latter would pursue ment (NEPAD), launched in July 2001, is another economic policies to improve the effectiveness of positive step by the poorest countries. NEPAD is the additional resources. Moreover, by taking an expression of Africa's will to improve its own steps to improve their business and investment policies and institutions so as to justify a rise in aid climate, countries could expect to attract private levels. One especially critical focus of NEPAD is to capital. strengthen economic, corporate, and political gov- Many developing countries have held up their ernance through targets and a peer review mecha- end of the partnership. The World Bank's Country nism in which the peer reviewers come from other Policy and Institutional Assessment--the CPIA-- poor countries. shows an upward trend in economic management, The poorest countries in the world remain structural policies, policies for social inclusion and vulnerable to external shocks, but they are discov- equity, and public sector management in the poor- ering new ways to shape their own destiny. The est countries since 1995. The broad improvement donor community and other developing countries in the policies of the world's poorest countries is should be ready to help the poorest as they con- shown in the robustness of average annual GDP tinue to move in promising new directions. growth over the last decade (5.9 percent). Inflation The G-8 Africa Action Plan announced at the rates, too, have declined by more than half and 2002 G-8 Leaders Summit in Kananaskis aimed to now stand at an average of 6 percent. The current "ensure that no country genuinely committed to account moved from a deficit of about 3 percent poverty reduction, good governance, and eco- of GDP in the early and mid-1990s to a surplus of nomic reform will be denied the chance to achieve 1 percent in 2003. Fiscal deficits have been cut in the Millennium Goals through lack of finance." half. More recently, the Commission for Africa urged a It is not surprising that those poor countries doubling of aid to Sub-Saharan Africa. A key that have been most successful at undertaking theme of the 2005 G-8 Leaders Summit to be held economic reforms and creating a sounder climate in Gleneagles will be to strengthen international 109 G L O B A L D E V E L O P M E N T F I N A N C E 2 0 0 5 cooperation in support of greater progress on the Assessment (CPIA) indicator and the Institutional Investor MDGs in Africa. The next few years will deter- Rating indicate significant improvements in many of the mine whether developed countries will hold up poor countries. 8. Another reason for high volatility is that this type of their end of the partnership forged at Monterrey. flow is highly skewed toward intercompany loans, which tend to be as volatile as private debt flows. In addition, many countries do not report reinvested earnings that might Notes bring some level of stability. 1. The Report of the High-level Panel on Financing 9. South Africa's Vodacom and MTN, Orascom from for Development estimated that $50 billion in additional Egypt, and Telekom from Malaysia have large subscriber development assistance would be required to meet the bases in the region. Millennium Development Goals, in addition to humanitarian 10. The main competitor is Celtel, controlled by Voda- assistance and additional resources for global public goods fone of the United Kingdom. South African MTN managed (UN 2002a). According to the African Development Bank, to develop a subscriber base 22 times larger than Celtel's Africa needs $20­25 billion per year in addition to current despite the monopoly position of the latter prior to MTN's resources. A recently completed UN report comes up penetration of the market (Goldstein 2004). with even higher financing requirements (UN Millennium 11. South-South development assistance refers to aid Project 2004). from developing countries to poor countries. It is part of a 2. The sample consists of low-income countries (with concept referred to as South-South cooperation, a broad GNI per capita of $735 or less), but excludes two larger term used to describe a variety of strands of cooperation economies (India and Indonesia) that in many respects more among developing countries. Included are economic cooper- closely resemble middle-income emerging-market ation among developing countries, technical cooperation economies. It also excludes countries that suffer from ongo- among developing countries, cooperation among developing ing or recent conflict--the so-called LICUS group. Our 28- states in multilateral negotiations with the developed coun- country sample thus includes countries in which concerted tries, promotion of South-South trade, and the development efforts are underway to reach the MDG deadline a decade of regional political and economic associations. from now (in 2015), and for which the availability of re- 12. Data are not available to capture the magnitude of sources may be a binding constraint. About half of the South-South development assistance, but it is clear that the countries in our sample are in Sub-Saharan Africa, with the resources involved are small compared to total ODA. remainder scattered throughout other regions. South-South resources appear to be growing. For example, 3. For donors, the traditional means of representing grants and loans from India to other developing countries ODA disbursements is as a percentage of donors' GNI, not grew sharply in the five years from 1997 to 2002 (from $83 GDP. million to $140 million). During the same period, disburse- 4. Twenty-seven countries have reached the HIPC deci- ments from non-DAC donors almost tripled, from $1.2 bil- sion point. The decision point is reached if countries are lion in 1997 to $3.2 billion in 2002, with the bulk of the considered heavily indebted, once traditional debt relief money coming from Arab countries, followed by Korea. mechanisms have been taken into account. To qualify coun- Other contributors are the Czech Republic, Latvia, Lithua- tries usually must have a debt-to-export ratio of averaging nia, Poland, the Slovak Republic, and Turkey. Figures on 150 percent over the previous three years. Alternatively, non-DAC ODA understate the true volume of resources countries considered to have an open economy (defined as flowing from developing countries to other developing an export-to-GDP ratio of over 30 percent) and a ratio of countries, because some potentially important donors debt to government revenue of more than 250 percent de- (Brazil, China, India, and South Africa) are not included. spite a strong revenue collection system may also qualify. 13. Through its Technical and Economic Cooperation Countries need to have pursued World Bank and IMF ad- Program, India has spent nearly $2 billion on technical as- justment and reform programs for at least three years. Dur- sistance to 130 developing countries in all regions over the ing this time they must have completed at least an interim past four decades. poverty reduction strategy paper. Once the decision point 14. Except for the Basuchu Project. has been reached, further satisfactory performance in World 15. These include the Arab Bank for Economic Develop- Bank and IMF reform and poverty-reduction programs ment in Africa (BADEA), the Special Arab Fund for Economic leads to the completion point. At this point assistance is and Social Development, the Arab Gulf Program for United provided in the form of relief from up to 90 percent of the Nations Development Organizations (AGFUND), the Islamic present value of debt. Development Bank, the OPEC Fund, the Abu Dhabi Fund for 5. The ratio of trade to GDP increased to 44 percent in Development, the Kuwait Fund for Arab Economic Develop- 1996­2003. It was 35 percent in the first half of the decade. ment, and the Saudi Fund for Development. 6. According to the UNCTAD database, from 1990 to 16. Lensink and Morrissey (2000) show that uncer- 2002, 161 national laws passed by eight poor countries in tainty in aid flows, as measured by deviations from expected our sample were favorable to FDI (out of 168 total). During inflows, reduces the effectiveness of aid. the same period, the poor countries signed 3,052 double 17. An important question in discussions of volatility is taxation treaties and 2,465 bilateral investment treaties. how to measure the "volatility" of a particular variable. Even 7. In addition to the ICRG indicator used for the dis- though the measure is in principle built around the standard cussion, the World Bank's Country Policy and Institutional deviation of the variable in question, the correct standard 110 M E E T I N G T H E F I N A N C I N G N E E D S O F P O O R C O U N T R I E S deviation may be difficult to determine, as a single best mea- References sure is not available. Several considerations can affect the choice. First, the standard deviation of any variable is deter- Alesina, Alberto, and David Dollar. 1998. "Who Gives For- mined both by the trend of the variable as well as the cyclical eign Aid to Whom and Why?" NBER Working Paper behavior around that trend. A strongly trending variable that 6612, National Bureau of Economic Research, United shows no cyclical fluctuations will still have a relatively high Nations University, Tokyo. standard deviation. If one is interested in the true volatility of Aykut, Dilek, and Dilip Ratha. 2004. "South-South FDI the variable from year to year, it is necessary to correct for the Flows: How Big Are They?" Transnational Corpora- trending behavior of the variable. Seminal papers, such as tions 13 (1): 149­[end page?]. those of Lucas (1977) and Kydland and Prescott (1990), have BIS (Bank for International Settlements). Various years. defined business cycles as the deviations of output from International Banking and Financial Market Develop- trend. A well-established method to detrend a series is using ments. Basel: BIS. the Hodrick and Prescott (HP) filter. Second, the standard de- Bulir, Ales, and A. Javier Hamann. 2003. "Aid Volatility: An viation of a variable (whether the series is detrended or not) is Empirical Assessment." IMF Staff Papers 50 (1): 64­89. a function of the level of the variable. To make a sensible Clemens, Michael A., Steven Radelet, and Rikhil Bhavnani. comparison between the standard deviations of several vari- 2004. "Counting Chickens When They Hatch: The ables, one has to standardize the series. One way to do that is Short-Term Effect of Aid and Growth." Working Paper to detrend the log of the series; another is to detrend the in- 44, Center for Global Development, Washington, DC. dexed series. Third, sample length will have an impact on the Cobbe, James. 2004. "Lesotho: Will the Enclave Empty?" standard deviation measured. The appropriate length reflects Economics Working Paper, WUSTL (Washington Uni- a cost-benefit trade-off--a longer sample length increases versity in St. Louis), St. Louis, Mo. measurement accuracy, but only if the underlying volatility Collier, Paul. 1999. "Aid `Dependency': A Critique." Jour- has been stable over the sample period. If the sample length is nal of African Economies 8 (4): 528­45. too long the assumption of stable volatility is unlikely to hold, Collier, Paul, and Jan Willem Gunning. 1999. "Aid, Risk as transmission mechanisms are likely to change. 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Regional Integration, FDI, and technical assistance. There is no reason to expect that the Competitiveness in Southern Africa. Paris: OECD. volatility of each component is similar or, as pointed out by IMF (International Monetary Fund). Various years. Balance Clemens, Radelet, and Bhavnani (2004), that the impact on of Payments Yearbook. Washington, DC: IMF. economic performance will be the same. Following Institutional Investor. Various years. Country Credit Rat- Clemens, Radelet, and Bhavnani (2004), aggregate aid flows ings. New York: Institutional Investor. can be divided into three categories: short-impact aid, long- ILO (International Labor Organization) LABORSTA Data- impact aid, and humanitarian/emergency aid. The first two base. http://laborsta.ilo.org (accessed 2004). categories consist of aid disbursements aimed at creating International Country Risk Guide (ICRG) Index. economic growth either in the short run or after a longer pe- http://www.countrydata.com. riod. 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Macroeconomics, ed. William C. Brainard and George . 2005. Global Economic Prospects 2005: Trade, L. Perry, 1­118. Washington, DC: Brookings Institution Regionalism, and Development. Washington, DC: Press. World Bank. Sala-i-Martin, Xavier, and Arvind Subramanian. 2003. "Ad- . Various years. World Development Indicators. dressing the Natural Resources Curse: An Illustration Washington, DC: World Bank. 112 . Statistical Appendix T HE SUMMARY STATISTICAL TABLES · Key debt ratios and country classifications. are divided into six sections (see index of These tables provide a summary of indicators tables overleaf for full details): typically used by country risk analysts to monitor and classify countries. The World · Summary tables. These tables provide a snap- Bank's own debt classifications are defined shot of recent history and the outlook for the and tabulated. The precise method used to global economy and each of the six developing categorize countries as severely, moderately or country regions (for the full World Bank clas- less indebted is shown by a box in table A.50. sification of countries by region and income The two key ingredients used are the pre- level, see table A.51). sent value of future debt-service streams to · Key macro variables. These provide detail on (i) gross national income and (ii) to exports growth and inflation indicators by region and of goods and services. These variables are (historically) for selected economies. Although averaged over the three years, 2001­2003. detailed country forecasts form the basis for the regional growth and inflation projections, The use of critical values to define the bound- detailed developing country forecasts are not aries between indebtedness categories implies that shown separately. changes in country classifications should be inter- · Current account tables. These tables combine preted with caution. If a country has an indicator data from the IMF's balance of payments sta- that is close to the critical value, a small change in tistics, with aid-related data from the OECD's the indicator may trigger a change in indebtedness Development Assistance Committee publica- classification even if economic fundamentals have tions, and our own preferred measure of not changed significantly. Moreover, these indica- workers' remittances. tors do not represent an exhaustive set of useful · Capital account tables. New external financ- indicators of external debt. They may not, for ing tables have been developed. They combine example, adequately capture the debt servicing the IMF's current account, foreign exchange capacity of countries in which government budget reserve and net inward foreign direct invest- constraints are key to debt service difficulties. ment data with the World Bank's portfolio Moreover, rising external debt may not necessarily equity and debtor reporting system (DRS) imply payment difficulties, especially if there is a data to produce an overall tabulation of how commensurate increase in the country's debt servic- regions finance themselves externally. ing capacity. Thus, these indicators should be used · External liabilities and assets. These provide a in the broader context of a country-specific analysis summary of the DRS debt data that is provided of debt sustainability. on a country-by-country basis in volume 2. 115 S T A T I S T I C A L A P P E N D I X Contents Summary tables Page A.1: Global outlook in summary, 2003­2007 118 A.2: East Asia and Pacific outlook in summary, 1981­2005 119 A.3: Europe and Central Asia outlook in summary, 1981­2005 120 A.4: Latin America and the Caribbean outlook in summary, 1981­2005 121 A.5: Middle East and North Africa outlook in summary, 1981­2005 122 A.6: South Asia outlook in summary, 1981­2005 123 A.7: Sub-Saharan Africa outlook in summary, 1981­2005 124 Key macro variables A.8: Global real GDP growth, 1981­2005 125 A.9: Global inflation, 1991­2004 126 A.10: Commodity prices, 1980­2005 127 A.11: Commodity price indexes, 1980­2005 128 A.12: Global nominal GDP growth, 1981­2005 129 Current account A.13: Global goods export growth, 1981­2005 130 A.14: Global goods import growth, 1981­2005 131 A.15: Global goods trade balances, 1997­2005 132 A.16: Global trade prices and volumes, 1981­2005 133 A.17: Global current account balances, 1999­2005 134 A.18: Global current account balances, 1981­2005 135 A.19: Workers' remittances received by developing countries, 1996­2004 136 A.20: Net official development assistance from DAC countries, 1996­2003 137 Capital account A.21: External financing: all developing countries, 1998­2004 138 A.22: External financing: East Asia and Pacific, 1998­2004 139 A.23: External financing: Europe and Central Asia, 1998­2004 140 A.24: External financing: Latin America and the Caribbean, 1998­2004 141 A.25: External financing: Middle East and North Africa, 1998­2004 142 A.26: External financing: South Asia, 1998­2004 143 A.27: External financing: Sub-Saharan Africa, 1998­2004 144 A.28: Net inward foreign direct investment, 1996­2004 145 A.29: Net inward portfolio equity flows, 1996­2004 146 A.30: Net inward debt flows to developing countries, 1996­2004 147 A.31: Net inward short-term debt flows to developing countries, 1996­2004 148 A.32: Net inward debt flows to public sector and publicly guaranteed borrowers, 1996­2004 149 A.33: Net inward debt flows to private sector borrowers, 1996­2004 150 A.34: Net inward debt flows from public sector creditors, 1996­2004 151 A.35: Net inward debt flows from private sector creditors, 1996­2004 152 A.36: Gross market-based capital flows to developing countries, 1996­2004 153 A.37: Gross international equity issuance by developing countries, 1996­2004 154 A.38: Gross international bond issues in developing countries, 1996­2004 155 A.39: Gross international bank lending to developing country borrowers, 1996­2004 156 A.40: Change in foreign exchange reserves, 1996­2004 157 116 S T A T I S T I C A L A P P E N D I X External liabilities and assets A.41: Total external debt of developing countries, 1996­2004 158 A.42: Total external medium- and long-term debt of developing countries, 1996­2004 159 A.43: Total external short-term debt of developing countries, 1996­2004 160 A.44: Total external debt of developing countries owed by public and publicly guaranteed borrowers, 1996­2004 161 A.45: Total external debt of developing countries owed by private sector borrowers, 1996­2004 162 A.46: Total external debt of developing countries owed to public sector creditors, 1996­2004 163 A.47: Total external debt of developing countries owed to private sector creditors, 1996­2004 164 A.48: Gross foreign exchange reserves of developing countries, 1996­2004 165 Key debt ratios and country classifications A.49: Key external debt ratios for developing countries 166 A.50: Classification of countries by levels of external indebtedness 169 A.51: Classification of countries by region and level of income 170 117 S T A T I S T I C A L A P P E N D I X Table A.1 Global outlook in summary, 2003­2007 % change from previous year, except interest rates and oil price GEP 2005 forecasts 2003 2004e 2005f 2006f 2007f 2004 2005 Global Conditions World Trade Volume 5.6 10.3 7.7 7.7 8.0 10.2 8.4 Consumer Prices G-7 Countriesa,b 1.6 1.8 1.6 1.6 1.6 1.7 1.4 United States 2.3 2.7 2.0 3.5 3.2 2.7 2.2 Commodity Prices ($ terms) Non-oil commodities 10.2 17.5 4.7 5.2 5.4 17.0 3.1 Oil Price (OPEC average) 28.9 37.7 42.0 36.0 33.0 39.0 36.0 Oil price (percent change) 15.9 30.6 11.3 14.3 8.3 35.0 7.7 Manufactures unit export valuec 7.5 7.0 3.0 2.8 1.9 5.2 0.8 Interest Rates $, 6-month (%) 1.2 1.6 3.5 4.6 5.0 1.6 3.5 , 6-month (%) 2.3 2.1 2.1 2.8 3.2 2.1 2.4 Real GDP growthd World 2.5 3.8 3.1 3.1 3.2 4.0 3.2 Memo item: World (PPP weights)e 3.9 5.0 4.3 4.2 4.3 4.9 4.2 High income 1.9 3.2 2.4 2.6 2.6 3.5 2.7 OECD Countriesf 1.8 3.1 2.4 2.5 2.6 3.5 2.6 Euro Area 0.5 1.8 1.3 2.1 2.6 1.8 2.1 Japan 1.4 2.6 0.8 1.9 1.9 4.3 1.8 United States 3.0 4.4 3.9 3.0 2.6 4.3 3.2 Non-OECD countries 3.2 6.2 4.4 4.5 4.1 5.9 4.6 Developing countries 5.3 6.6 5.7 5.2 5.4 6.1 5.4 East Asia and Pacific 8.0 8.3 7.4 6.9 7.2 7.8 7.1 Europe and Central Asia 5.9 6.8 5.5 4.9 5.0 7.0 5.6 Latin America and Caribbean 1.7 5.7 4.3 3.7 3.7 4.7 3.7 Middle East and N. Africa 5.8 5.1 4.9 4.3 4.3 4.7 4.7 South Asia 7.8 6.6 6.2 6.4 6.7 6.0 6.3 Sub-Saharan Africa 3.4 3.8 4.1 4.0 4.1 3.2 3.6 Memorandum items Developing countries Excluding transition countries 5.2 6.7 5.7 5.3 5.5 5.9 5.4 Excluding China and India 3.9 5.8 4.8 4.4 4.4 5.4 4.6 Note: PPP purchasing power parity; e estimate; f forecast; GEP 2005 Global Economic Prospects and the Developing Countries, World Bank, January 2005. a. Canada, France, Germany, Italy, Japan, the UK, and the United States. b. In local currency, aggregated using 1995 GDP Weights. c. Unit value index of manufactured exports from major economies, expressed in $. d. GDP in 1995 constant $; 1995 prices and market exchange rates. e. GDP mesaured at 1995 PPP weights. f. Now excludes the Republic of Korea, which has been reclassified as high-income OECD. 118 S T A T I S T I C A L A P P E N D I X Table A.2 East Asia and Pacific outlook in summary, 1981­2005 Real economy Estimate Forecast (% change, unless stated) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 Real GDP growth 7.3 7.7 5.6 7.2 5.6 6.9 8.0 8.3 7.4 Private consumption per capita 5.1 5.5 4.9 5.4 3.6 4.4 4.9 6.0 6.3 GDP per capita 5.6 6.4 4.4 5.9 4.6 6.0 7.0 7.4 6.5 Population 1.6 1.2 1.2 1.3 0.9 0.9 0.9 0.9 0.8 Gross domestic investment/GDPa 26.8 31.9 30.1 31.1 32.1 34.0 37.4 40.9 42.8 Inflationb 5.5 5.6 2.9 4.1 2.0 3.9 3.6 5.3 2.2 Central Government Budget Balance/GDP 1.3 1.2 2.7 3.1 3.1 3.3 2.8 2.4 2.4 Export market growthc 6.9 8.2 7.2 14.1 1.8 4.3 8.2 12.1 8.3 Export volumed 8.4 12.0 4.2 22.8 2.4 14.8 21.2 23.1 14.9 Terms of Trade/GDPe 0.2 0.1 0.6 0.3 0.3 0.5 0.2 0.9 0.8 Current Account/GDP 0.3 0.4 4.1 3.4 2.4 3.4 3.7 3.1 2.5 Workers remittances ($, billions) 2.4 8.5 11.4 11.2 12.9 16.5 19.7 20.3 -- Memorandum items GDP growth: East Asia excluding China 5.7 4.6 3.2 5.9 2.4 4.6 5.4 6.0 5.4 External Financing and debt ($ billions, unless stated) 1996 1997 1998 1999 2000 2001 2002 2003 2004e Net inward fixed direct investment (FDI) 58.6 62.1 57.7 49.9 44.2 48.2 55.6 59.6 63.6 Net inward portfolio equity flows 9.7 3.9 3.4 2.3 4.8 1.4 4.0 11.8 13.6 Net inward debt flows 52.2 44.9 32.5 12.2 16.2 9.1 13.2 1.7 17.2 From public sources 3.6 17.3 14.7 12.6 7.0 3.2 7.9 7.5 9.2 From private sources 48.6 27.6 47.1 24.7 23.2 12.3 5.3 9.3 26.4 Gross market-based capital flows 69.2 73.1 31.6 32.4 49.7 21.8 44.5 53.1 60.0 Total external debt 494.0 526.3 533.2 538.6 500.7 502.0 498.2 525.5 536.5 Medium- and long-term 365.3 394.3 447.3 464.9 437.5 411.2 399.3 400.1 391.1 Short-term 128.7 132.1 85.9 73.8 63.2 90.8 99.0 125.5 145.4 Owed by public-sector borrowers 256.8 272.0 288.6 307.5 288.1 277.8 277.7 279.6 272.6 Owed by private-sector borrowers 237.2 254.4 244.6 231.1 212.6 224.2 220.6 246.0 263.9 Owed to public-sector creditors 153.7 152.5 179.1 200.3 188.2 180.6 183.4 190.8 179.4 Owed by private-sector creditors 340.3 373.8 354.1 338.3 312.5 321.4 314.8 334.8 357.2 Gross foreign exchange reserves 199.7 212.5 233.2 262.5 272.6 320.3 408.2 544.8 775.1 Note: -- not available; e estimate; f forecast. 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-factor services. e. Change in terms of trade, measured as a percentage of GDP. 119 S T A T I S T I C A L A P P E N D I X Table A.3 Europe and Central Asia outlook in summary, 1981­2005 Real economy Estimate Forecast (% change, unless stated) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 Real GDP growth 1.8 1.4 3.0 6.7 2.4 4.6 5.9 6.8 5.5 Private consumption per capita 0.6 0.3 0.2 4.4 3.4 5.7 6.7 7.0 6.3 GDP per capita 0.9 1.6 2.8 6.2 2.4 4.6 5.9 6.8 5.4 Population 0.9 0.2 0.2 0.5 0.0 0.0 0.0 0.0 0.0 Gross domestic investment/GDPa 40.6 23.9 20.9 21.5 20.6 20.3 21.0 22.2 22.7 Inflationb 1.1 52.5 6.0 7.6 6.5 4.2 5.4 6.8 6.2 Central Government Budget Balance/GDP 0.5 4.4 4.2 2.5 3.5 3.7 3.1 2.1 2.5 Export market growthc 3.9 5.4 0.5 11.4 4.9 5.9 8.5 10.5 6.7 Export volumed 3.1 1.3 4.0 15.9 6.3 7.9 12.0 15.3 9.4 Terms of Trade/GDPe 0.3 0.7 0.5 2.5 0.6 0.7 0.4 0.7 0.6 Current Account/GDP 0.3 1.1 0.1 1.8 2.0 0.5 0.0 0.6 0.1 Workers remittances ($, billions) 2.1 8.0 10.7 11.0 11.4 11.5 12.9 12.9 -- Memorandum items GDP growth: Transition countries 1.4 2.2 4.7 6.6 4.4 4.0 6.0 6.5 5.5 Central and Eastern Europe 0.4 1.0 4.0 3.7 2.8 2.9 4.0 5.0 4.5 Commonwealth of Independent States (CIS) 2.0 4.2 5.4 9.2 5.8 5.0 7.6 7.7 6.2 External Financing and debt ($ billions, unless stated) 1996 1997 1998 1999 2000 2001 2002 2003 2004e Net inward FDI 16.4 22.6 26.1 28.4 29.2 31.4 35.0 35.6 37.6 Net inward portfolio equity flows 4.3 4.0 4.0 2.0 1.3 0.4 0.1 0.6 3.6 Net inward debt flows 24.1 35.3 43.0 18.9 19.9 2.7 28.0 56.9 56.0 From public sources 8.6 6.6 7.5 0.6 0.0 2.2 2.6 6.2 6.2 From private sources 15.4 28.7 35.5 19.5 19.9 0.6 25.4 63.1 62.3 Gross market-based capital flows 25.7 46.0 42.9 30.1 45.5 26.0 34.6 58.5 87.0 Total external debt 368.3 391.2 490.3 503.5 510.8 507.8 560.2 676.0 728.5 Medium- and long-term 315.1 331.7 414.8 423.7 424.1 425.1 472.0 541.2 562.9 Short-term 53.2 59.5 75.5 79.7 86.7 82.6 88.2 134.8 165.6 Owed by public-sector borrowers 286.9 288.9 321.2 316.5 305.0 292.6 309.8 334.6 340.3 Owed by private-sector borrowers 81.5 102.3 169.1 186.9 205.8 215.2 250.4 341.4 388.2 Owed to public-sector creditors 160.0 156.2 172.4 171.4 166.8 159.2 165.4 176.2 169.6 Owed by private-sector creditors 208.3 235.0 317.9 332.1 344.0 348.6 394.8 499.8 558.9 Gross foreign exchange reserves 83.4 90.8 95.9 102.3 120.4 131.5 175.3 236.2 303.8 Note: -- not available; e estimate; f forecast. 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-factor services. e. Change in terms of trade, measured as a percentage of GDP. 120 S T A T I S T I C A L A P P E N D I X Table A.4 Latin America and the Caribbean outlook in summary, 1981­2005 Real economy Estimate Forecast (% change, unless stated) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 Real GDP growth 1.1 3.3 0.1 3.7 0.3 0.8 1.7 5.7 4.3 Private consumption per capita 1.1 2.3 1.8 1.8 0.9 3.3 0.2 3.2 2.0 GDP per capita 0.9 1.6 1.5 1.8 1.2 2.3 0.3 4.2 2.9 Population 2.0 1.7 1.6 1.8 1.5 1.5 1.4 1.4 1.4 Gross domestic investment/GDPa 20.2 20.0 19.9 19.8 19.1 17.9 17.7 18.6 19.3 Inflationb 17.3 11.9 5.4 7.6 5.7 6.4 8.4 4.0 4.0 Central Government Budget Balance/GDP 9.1 3.3 3.1 2.4 2.8 3.0 2.8 1.4 1.6 Export market growthc 4.5 9.1 5.1 11.7 1.1 0.7 6.9 10.9 6.8 Export volumed 5.4 8.7 7.2 10.3 0.6 1.9 4.8 11.9 6.1 Terms of Trade/GDPe 0.4 0.1 0.2 1.1 0.7 0.1 0.1 0.4 0.2 Current Account/GDP 0.3 2.8 3.1 2.4 2.8 1.0 0.5 1.5 0.7 Workers remittances ($, billions) 3.3 13.0 17.7 20.2 24.2 28.1 34.4 36.9 -- Memorandum items GDP growth: Central America 1.0 4.5 4.6 2.9 1.7 2.3 3.4 3.0 3.2 Caribbean 1.1 4.1 5.7 5.8 2.8 3.2 2.8 2.2 3.4 External Financing and debt ($ billions, unless stated) 1996 1997 1998 1999 2000 2001 2002 2003 2004e Net inward FDI 44.2 66.7 74.0 88.2 78.9 70.2 45.7 36.5 42.4 Net inward portfolio equity flows 12.2 13.3 2.2 3.6 0.6 2.5 1.4 3.4 1.5 Net inward debt flows 40.8 25.2 37.3 12.1 8.4 5.4 8.5 3.3 2.5 From public sources 10.7 8.6 10.9 1.6 11.1 20.4 13.0 4.9 10.3 From private sources 51.5 33.8 26.4 10.5 2.8 15.0 21.5 1.6 12.8 Gross market-based capital flows 75.7 105.4 74.8 67.0 85.5 71.1 44.3 63.3 77.7 Total external debt 638.5 670.4 752.2 771.8 755.1 749.2 746.2 779.6 773.5 Medium- and long-term 517.1 542.2 633.2 662.5 647.6 655.7 667.3 696.3 680.0 Short-term 121.4 128.2 119.0 109.3 107.5 93.5 78.9 83.3 93.5 Owed by public-sector borrowers 399.9 379.6 413.1 420.1 406.2 417.2 441.5 468.5 484.3 Owed by private-sector borrowers 238.6 290.8 339.1 351.7 348.9 332.0 304.7 311.2 289.1 Owed to public-sector creditors 164.1 145.9 161.0 163.2 150.1 162.9 183.1 196.9 189.2 Owed by private-sector creditors 474.3 524.5 591.2 608.6 605.0 586.3 563.1 582.8 584.2 Gross foreign exchange reserves 153.0 166.5 157.3 149.9 152.8 155.7 156.5 189.7 211.5 Note: -- not available; e estimate; f forecast. 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-factor services. e. Change in terms of trade, measured as a percentage of GDP. 121 S T A T I S T I C A L A P P E N D I X Table A.5 Middle East and North Africa outlook in summary, 1981­2005 Real economy Estimate Forecast (% change, unless stated) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 Real GDP growth 3.6 3.7 2.8 4.0 4.0 4.5 5.2 5.1 5.0 Private consumption per capita 1.7 0.2 0.2 1.3 2.3 1.3 2.9 1.6 1.9 GDP per capita 1.1 1.2 0.4 2.1 1.2 1.3 3.9 3.1 2.9 Population 3.1 2.1 2.1 2.2 1.7 1.8 1.9 1.9 1.9 Gross domestic investment/GDPa 25.5 20.5 21.0 20.7 21.2 21.7 21.7 22.3 22.9 Inflationb 8.4 6.4 7.5 10.7 1.9 2.0 3.6 4.2 4.0 Central Government Budget Balance/GDP 3.9 0.9 0.6 1.4 2.4 3.0 0.6 0.0 0.5 Export market growthc 2.9 6.9 7.0 13.2 1.0 4.9 7.9 10.0 7.5 Export volumed 0.8 4.8 0.2 8.1 0.9 2.9 9.4 5.9 4.0 Terms of Trade/GDPe 0.6 0.1 4.5 4.2 0.2 1.1 1.7 4.1 0.1 Current Account/GDP 0.3 0.2 1.3 6.7 4.5 4.2 6.1 9.3 8.0 Workers remittances ($, billions) 6.7 13.3 12.2 12.3 14.4 14.8 16.1 17.0 -- Memorandum items GDP growth: Resource poor, labor abundant 4.5 3.8 4.3 3.9 4.5 3.0 4.1 4.3 4.6 Resource rich, labor abundant 2.8 3.4 1.9 4.0 3.2 6.1 6.3 6.0 5.5 Resource rich, labor importing 0.6 3.5 0.3 6.2 1.4 0.5 7.2 5.2 4.8 External Financing and debt ($ billions, unless stated) 1996 1997 1998 1999 2000 2001 2002 2003 2004e Net inward FDI 1.7 3.2 3.1 3.7 4.3 5.7 3.8 4.8 4.1 Net inward portfolio equity flows 0.2 0.7 0.2 0.6 0.2 0.1 0.2 0.1 0.2 Net inward debt flows 0.7 3.5 3.6 3.0 4.5 0.1 2.1 0.7 0.1 From public sources 0.8 4.0 1.6 2.5 2.8 1.2 2.6 2.5 2.6 From private sources 1.5 0.5 5.2 0.5 1.8 1.3 4.6 1.8 2.6 Gross market-based capital flows 3.2 7.9 4.8 8.7 6.5 10.1 8.8 7.3 15.5 Total external debt 163.2 151.3 160.9 155.8 144.6 142.1 150.2 158.8 155.5 Medium- and long-term 144.4 132.7 138.9 132.6 123.8 123.8 131.7 138.5 134.9 Short-term 18.8 18.6 22.1 23.2 20.8 18.3 18.5 20.3 20.5 Owed by public-sector borrowers 140.3 127.7 131.8 125.6 117.2 117.2 125.2 131.8 127.4 Owed by private-sector borrowers 22.9 23.6 29.1 30.2 27.3 24.9 24.9 27.0 28.1 Owed to public-sector creditors 107.3 99.6 103.9 98.3 90.7 88.3 91.3 96.2 93.1 Owed by private-sector creditors 55.9 51.7 57.0 57.5 53.8 53.9 58.8 62.7 62.4 Gross foreign exchange reserves 37.6 43.7 42.0 40.8 45.6 55.1 67.1 89.1 101.3 Note: -- not available; e estimate; f forecast. 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-factor services. e. Change in terms of trade, measured as a percentage of GDP. 122 S T A T I S T I C A L A P P E N D I X Table A.6 South Asia outlook in summary, 1981­2005 Real Economy Estimate Forecast (% change, unless stated) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 Real GDP growth 5.6 5.2 6.4 4.2 4.7 4.6 7.8 6.6 6.2 Private consumption per capita 1.7 2.3 3.9 0.9 3.1 2.2 6.0 4.3 3.5 GDP per capita 3.3 3.3 4.5 2.3 2.9 2.9 6.1 4.9 4.6 Population 2.2 1.9 1.8 1.9 1.7 1.7 1.6 1.6 1.6 Gross domestic investment/GDPa 20.2 21.6 22.3 22.5 22.3 23.1 23.4 23.7 24.0 Inflationb 8.9 8.1 4.4 3.9 3.8 3.6 4.7 4.4 7.2 Central Government Budget Balance/GDP 12.6 10.3 12.2 9.1 8.5 9.1 7.9 8.3 8.3 Export market growthc 6.3 7.2 5.5 12.5 0.3 3.9 7.9 10.3 6.9 Export volumed 5.7 11.1 12.5 21.2 7.3 18.3 13.0 13.3 12.4 Terms of Trade/GDPe 0.0 0.1 1.2 0.9 0.4 1.2 0.1 1.2 0.8 Current Account/GDP 0.3 1.5 0.9 1.0 0.2 1.6 1.6 0.1 0.7 Workers remittances ($, billions) 5.7 10.9 15.1 16.0 16.0 22.2 26.8 32.7 -- Memorandum items GDP growth: South Asia excluding India 5.1 4.4 4.2 5.1 3.1 4.5 5.7 5.9 5.8 External Financing and debt ($ billions, unless stated) 1996 1997 1998 1999 2000 2001 2002 2003 2004e Net inward FDI 3.5 4.9 3.5 3.1 3.3 4.4 4.8 5.2 6.5 Net inward portfolio equity flows 4.1 2.9 0.6 2.4 2.5 2.8 1.1 8.2 7.5 Net inward debt flows 2.7 0.7 4.7 0.5 3.5 0.9 0.4 4.0 4.4 From public sources 1.0 0.3 2.3 2.5 0.5 2.2 2.4 1.8 1.6 From private sources 1.6 0.4 2.4 2.0 3.0 3.1 2.9 2.2 2.8 Gross market-based capital flows 10.3 12.4 4.9 4.1 4.3 3.2 2.5 7.0 17.5 Total external debt 149.6 149.6 157.6 162.0 160.0 156.2 170.2 182.8 184.7 Medium- and long-term 139.3 141.4 150.5 155.0 154.0 151.3 162.9 175.6 178.2 Short-term 10.3 8.2 7.1 7.0 6.1 5.0 7.3 7.2 6.5 Owed by public-sector borrowers 129.9 129.7 139.3 144.6 138.6 137.1 147.0 157.8 158.8 Owed by private-sector borrowers 19.8 19.9 18.3 17.4 21.5 19.1 23.2 25.0 25.9 Owed to public-sector creditors 104.1 98.9 104.6 113.3 102.7 101.1 106.3 113.8 113.7 Owed by private-sector creditors 45.5 50.7 53.0 48.7 57.3 55.1 63.9 68.9 71.0 Gross foreign exchange reserves 24.8 30.0 32.9 37.9 42.6 52.8 79.8 114.8 141.7 Note: -- not available; e estimate; f forecast. 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-factor services. e. Change in terms of trade, measured as a percentage of GDP. 123 S T A T I S T I C A L A P P E N D I X Table A.7 Sub-Saharan Africa outlook in summary, 1981­2005 Real economy Estimate Forecast (% change, unless stated) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 Real GDP growth 1.6 2.3 2.5 3.6 3.1 2.8 3.4 3.8 4.1 Private consumption per capita 1.0 0.4 0.1 2.2 3.8 5.9 2.5 2.8 2.0 GDP per capita 1.3 0.3 0.1 0.8 0.8 0.7 1.2 1.7 2.1 Population 3.0 2.6 2.6 2.7 2.3 2.2 2.1 2.0 2.0 Gross domestic investment/GDPa 19.0 17.1 17.9 18.1 18.1 19.4 19.4 19.9 20.2 Inflationb 9.6 9.5 5.8 7.5 6.0 6.5 8.2 4.1 4.0 Central Government Budget Balance/GDP 4.5 4.6 3.0 2.7 2.4 2.7 2.7 2.9 3.0 Export market growthc 3.2 7.0 6.8 11.1 0.4 3.2 6.9 9.6 6.8 Export volumed 0.8 4.9 2.5 8.4 0.8 0.4 5.7 7.3 8.4 Terms of Trade/GDPe 1.0 0.2 0.9 2.1 0.6 0.2 1.2 0.5 0.1 Current Account/GDP 0.3 1.5 2.1 1.2 0.8 0.3 0.8 0.6 0.3 Workers remittances ($, billions) 1.3 3.3 4.7 4.9 4.9 5.2 6.0 6.1 -- Memorandum items GDP growth: Sub-Saharan Africa excluding South Africa 2.3 3.3 3.7 2.4 3.4 2.0 1.7 4.2 4.6 Oil exporters 1.6 2.3 0.9 3.9 3.5 1.9 8.5 3.5 5.1 External financing and debt ($ billions, unless stated) 1996 1997 1998 1999 2000 2001 2002 2003 2004e Net inward FDI 4.2 8.4 7.0 9.1 6.3 14.9 9.0 10.1 11.3 Net inward portfolio equity flows 2.4 5.6 8.7 9.0 4.2 1.0 0.4 0.7 3.5 Net inward debt flows 3.2 4.4 1.3 1.0 0.5 1.7 0.3 2.7 3.6 From public sources 2.0 1.4 0.5 0.3 0.7 0.3 2.5 1.3 1.4 From private sources 1.2 3.0 1.8 1.3 1.2 2.0 2.8 1.5 2.2 Gross market-based capital flows 7.5 9.3 7.9 9.2 13.9 11.9 8.6 13.7 11.1 Total external debt 231.3 220.8 228.6 215.0 211.3 203.2 211.4 231.4 218.4 Medium- and long-term 188.8 180.0 186.2 174.0 178.2 171.5 182.4 200.3 189.6 Short-term 42.6 40.8 42.4 41.0 33.1 31.7 29.0 31.1 28.8 Owed by public-sector borrowers 178.5 171.1 177.9 163.6 166.9 159.1 170.0 184.7 171.5 Owed by private-sector borrowers 52.9 49.7 50.7 51.4 44.5 44.1 41.5 46.7 46.9 Owed to public-sector creditors 144.0 138.2 145.7 135.2 140.9 134.9 145.1 159.6 151.6 Owed by private-sector creditors 87.3 82.6 82.9 79.8 70.4 68.3 66.3 71.8 66.8 Gross foreign exchange reserves 20.6 28.2 26.7 28.0 34.2 34.5 34.8 39.0 58.4 Note: -- not available; e estimate; f forecast. 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-factor services. e. Change in terms of trade, measured as a percentage of GDP. 124 S T A T I S T I C A L A P P E N D I X Table A.8 Global real GDP growth, 1981­2005 GDP in 1995 prices and exchange rates, average annual growth (%) Average GDP 2003 Estimate Forecast (1995 $) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 World 35,249 3.1 2.7 3.0 4.0 1.4 1.7 2.5 3.8 3.1 High income 28,448 3.1 2.6 3.0 3.7 1.1 1.3 1.9 3.2 2.4 Industrial countries 27,556 3.1 2.5 2.9 3.5 1.1 1.3 1.8 3.1 2.4 European Union (15) 9,675 2.4 2.1 2.8 3.7 1.8 1.0 0.8 2.0 1.5 Japan 5,702 4.0 1.4 0.1 2.4 0.2 0.3 1.4 2.6 0.8 United States 9,562 3.2 3.3 4.4 3.7 0.8 1.9 3.0 4.4 3.9 Other high income 892 4.9 5.6 4.5 7.7 0.9 2.4 3.2 6.2 4.4 Asian newly industrialized economies (NIEs) 657 7.3 6.0 5.1 7.6 1.5 3.1 2.9 6.7 4.4 Developing countries 6,801 2.7 3.2 3.0 5.3 3.0 3.5 5.3 6.6 5.7 Excluding China 5,477 2.2 2.2 2.2 4.7 2.0 2.4 4.3 6.0 5.0 Excl. C.E. Europe/C.I.S. 5,641 3.2 4.7 2.7 5.0 2.7 3.4 5.1 6.7 5.7 Severely indebted 1,650 1.5 3.3 0.1 3.4 0.9 0.1 2.8 5.7 4.9 Moderately indebted 1,722 2.8 0.8 1.9 6.3 1.7 3.6 5.0 6.8 5.3 Less indebted 3,429 3.4 4.7 5.4 5.8 4.7 5.2 6.6 7.0 6.3 Middle-income countries 5,590 2.4 3.2 2.7 5.5 2.6 3.3 5.0 6.7 5.7 Upper middle-income countries 2,216 1.1 3.2 0.9 4.1 0.6 0.4 2.1 5.8 4.5 Lower middle-income countries 3,374 3.4 3.1 4.2 6.6 4.2 6.0 6.9 7.3 6.4 Low-income countries 1,210 4.4 3.3 4.4 4.4 4.6 4.2 6.7 6.2 5.9 East Asia and Pacific 2,010 7.3 7.7 5.6 7.2 5.6 6.9 8.0 8.3 7.4 China 1,324 9.3 10.1 7.1 8.0 7.5 8.3 9.4 9.5 -- Indonesia 263 6.4 4.3 0.8 5.4 3.8 4.3 4.5 5.4 -- Europe and Central Asia 1,376 1.8 1.4 3.0 6.7 2.4 4.6 5.9 6.8 5.5 Russian Federation 506 2.0 3.9 6.4 10.0 5.1 4.7 7.3 7.1 -- Turkey 216 5.2 3.6 4.7 7.4 7.5 7.9 5.5 8.2 -- Poland 186 0.3 3.7 4.1 4.0 1.0 1.4 3.8 5.4 -- Latin America and Caribbean 1,954 1.1 3.3 0.1 3.7 0.3 0.8 1.7 5.7 4.3 Brazil 807 1.5 2.7 0.8 4.4 1.4 1.5 0.2 5.1 -- Mexico 380 1.8 3.5 3.7 6.6 0.3 0.7 1.3 4.1 -- Argentina 272 1.5 4.5 3.4 0.8 4.4 10.9 8.8 8.6 -- Middle East and North Africa 393 3.6 3.7 2.8 4.0 4.0 4.5 5.2 5.1 5.0 Algeria 56 2.8 1.7 3.2 2.4 2.6 4.1 6.8 5.9 -- Iran, Islamic Rep. of 134 2.7 4.0 1.7 5.0 3.4 7.4 6.6 6.5 -- Egypt, Arab Rep. of 86 5.5 4.3 6.3 5.1 3.5 3.2 3.2 4.3 -- South Asia 723 5.6 5.2 6.4 4.2 4.7 4.6 7.8 6.6 6.2 India 561 5.8 5.5 7.1 3.9 5.2 4.6 8.4 6.8 -- Sub-Saharan Africa 344 1.6 2.3 2.5 3.6 3.1 2.8 3.4 3.8 4.1 South Africa 190 1.3 1.8 2.4 4.2 2.7 3.6 2.8 3.6 -- Nigeria 37 1.1 2.7 1.1 4.2 3.1 1.5 10.7 3.6 -- Note: -- not available. 125 S T A T I S T I C A L A P P E N D I X Table A.9 Global inflation, 1991­2004 Consumer price indexes; local currency (% change)a Weights Average Estimate 1995 1991­00 1998 1999 2000 2001 2002 2003 2004 World 100.0 3.3 2.0 1.7 2.6 1.5 2.0 1.8 2.6 High income 82.4 2.2 1.2 1.3 2.1 1.0 1.7 1.3 2.1 Industrial countries 80.2 2.2 1.2 1.4 2.1 1.1 1.8 1.3 2.1 European Union (15) 29.8 2.6 1.0 1.6 2.3 1.9 2.2 1.8 2.2 Japan 18.3 0.7 0.6 1.1 0.2 1.2 0.3 0.4 0.2 United States 25.3 2.7 1.6 2.7 3.4 1.6 2.4 1.9 3.3 Other high income 2.2 3.9 1.8 0.1 0.8 1.0 1.2 0.4 1.3 Asian NIEs 1.7 3.1 0.4 1.0 0.7 2.0 0.0 0.4 1.2 Developing countries 17.6 8.6 5.6 3.3 5.1 3.9 3.4 3.9 5.0 Excluding China 15.1 8.6 5.6 3.3 5.1 4.0 3.6 3.9 5.1 Excl. C.E. Europe/C.I.S. 14.8 8.5 5.8 3.2 4.9 4.1 4.1 3.9 5.3 Severely indebted 4.9 13.4 5.9 2.8 5.9 3.8 6.2 5.2 6.1 Moderately indebted 4.7 8.2 4.5 4.2 4.9 4.5 3.8 3.9 5.0 Less indebted 8.0 7.7 6.4 3.2 4.3 3.6 3.0 3.7 4.0 Middle-income countries 14.6 8.2 4.5 3.3 4.6 4.1 3.0 3.6 4.6 Upper middle-income countries 6.8 7.3 4.3 3.3 4.3 3.2 1.9 2.6 5.0 Lower middle-income countries 7.8 8.3 6.0 3.7 6.1 4.6 3.8 4.2 4.0 Low-income countries 3.0 10.2 6.4 3.3 5.8 3.8 3.9 5.2 6.4 East Asia and Pacific 4.4 4.3 7.0 1.3 2.7 3.2 3.2 3.3 2.9 China 2.4 7.1 1.0 1.0 1.5 0.3 0.4 3.2 2.4 Indonesia 0.7 13.4 77.7 1.9 9.3 12.6 10.0 5.1 6.4 Europe and Central Asia 3.4 49.4 5.3 7.0 6.1 3.6 2.1 3.6 4.6 Russian Federation 1.4 -- 84.4 36.5 20.2 18.6 15.1 12.0 11.7 Turkey 0.6 74.7 69.7 68.8 39.0 68.5 29.7 12.7 9.4 Poland 0.4 24.2 8.4 9.6 8.4 3.6 0.8 1.6 4.2 Latin America and Caribbean 5.8 13.6 7.4 4.9 5.3 4.4 7.0 5.7 5.3 Brazil 2.4 180.2 2.4 8.4 5.3 9.4 14.7 10.4 6.1 Mexico 1.0 17.5 18.6 12.3 9.0 4.4 5.7 4.0 5.2 Argentina, R. B. de 0.9 9.2 0.7 1.8 0.7 1.5 41.0 3.7 6.1 Middle East and North Africa 1.4 4.0 1.8 2.0 0.6 2.7 1.0 3.6 -- Algeria 0.5 15.0 3.9 1.2 0.1 7.5 1.5 3.9 -- Iran, Islamic Rep. of 0.3 24.1 20.2 19.0 12.8 10.6 16.4 15.9 -- Egypt, Arab Rep. of 0.2 8.6 3.6 3.1 2.3 2.4 3.0 5.8 -- South Asia 1.6 8.6 12.7 3.0 3.5 2.7 3.3 4.9 7.4 India 1.2 8.4 15.3 0.5 3.5 5.2 3.2 3.7 3.8 Sub-Saharan Africa 1.0 8.5 5.6 4.5 7.0 4.7 5.0 3.9 -- South Africa 0.5 8.5 9.0 2.2 7.0 4.6 12.4 0.3 3.4 Nigeria 0.1 29.0 11.9 0.2 14.5 16.5 12.2 23.8 -- Note: -- not available. a. Developing country aggregates computed using median. Industrial aggregates use 1995 $ GDP weights. World total is GDP weighted average of developing and high-income total. Inflation is calculated on a December/December basis. Where country CPI series ended before December 2004, estimates were made by extending the index series using the last available y/y change (effectively making the December inflation reading identical with the latest available one). These were then aggregated. 126 S T A T I S T I C A L A P P E N D I X Table A.10 Commodity prices, 1980­2005 Current $ Forecast Unit 1980 1990 1999 2000 2001 2002 2003 2004 2005 Energy Coal, Australia $/mt 29.4 39.7 25.9 26.3 32.3 27.1 27.8 54.7 50.0 Crude oil, average $/bbl 36.9 22.9 18.1 28.2 24.4 24.9 28.9 37.7 42.0 Natural gas, Europe $/mmbtu 3.4 2.5 2.1 3.9 4.1 3.1 3.9 4.3 5.3 Non-energy Agriculture Beverages Cocoa ¢/kg 260.3 126.7 113.5 90.6 106.9 177.8 175.1 155.0 162.0 Coffee, arabica ¢/kg 346.6 197.2 229.1 192.0 137.3 135.7 141.5 177.4 198.4 Coffee, robusta ¢/kg 324.3 118.2 148.9 91.3 60.7 66.2 81.4 79.3 88.2 Food Fats and oils Palm oil $/mt 583.7 289.8 436.0 310.3 285.7 390.3 443.3 471.3 450.0 Soybean meal $/mt 262.4 200.2 152.2 189.2 181.0 175.2 210.9 241.2 200.0 Soybeans $/mt 296.2 246.8 201.7 211.8 195.8 212.7 264.0 306.5 240.0 Grains Maize $/mt 125.3 109.3 90.2 88.5 89.6 99.3 105.4 111.8 100.0 Rice, Thailand, 5% $/mt 410.7 270.9 248.4 202.4 172.8 191.9 197.6 237.7 250.0 Wheat, U.S., HRW $/mt 172.7 135.5 112.0 114.1 126.8 148.1 146.1 156.9 145.0 Other food Bananas, U.S. $/mt 377.3 540.9 373.8 424.0 583.2 528.6 374.8 524.6 460.0 Sugar, world ¢/kg 63.2 27.7 13.8 18.0 19.0 15.2 15.6 15.8 19.0 Raw materials Cotton ("A" Index) ¢/kg 206.2 181.9 117.1 130.2 105.8 101.9 139.9 136.6 116.8 Rubber, Malaysia ¢/kg 142.5 86.5 62.8 69.1 60.0 77.1 105.6 144.7 198.3 Sawnwood, Malaysia $/cum 536.5 814.5 507.8 664.3 517.3 452.3 525.7 640.8 110.3 Fertilizers Triple superphosphate $/mt 180.3 131.8 154.5 137.7 126.9 133.1 149.3 186.3 185.0 Metals and minerals Aluminum $/mt 1,456.0 1,639.4 1,361.1 1,549.1 1,443.6 1,349.9 1,431.3 1,715.5 1,900.0 Copper $/mt 2,182.1 2,661.5 1,572.9 1,813.5 1,578.3 1,559.5 1,779.1 2,865.9 3,000.0 Gold $/toz 607.9 383.5 278.8 279.0 271.0 310.0 363.5 409.2 435.0 Nickel $/mt 6,518.7 8,864.1 6,011.2 8,637.7 5,944.7 6,771.8 9,629.5 13,823.2 14,000.0 Memo: Deflator Index 78.8 100.0 99.3 97.2 94.3 93.1 100.1 107.1 110.7 (MUV 1990 100)a Reuters/CRB Commodity Futures Index (1967 100) Note: bbl barrel; cum cubic meter; kg kilogram; mmbtu million British thermal units; mt metric ton; n.a. not available; toz troy oz. a. Unit value index in $ terms of manufactures exported from the G-5 countries weighted by exports to developing countries. 127 S T A T I S T I C A L A P P E N D I X Table A.11 Commodity price indexes, 1980­2005 Real dollar terms, deflated by $MUV (1990 100) Forecast Weights 1980 1990 1999 2000 2001 2002 2003 2004 2005 Energy Coal, Australia 29.4 39.7 25.9 66.2 81.5 68.2 70.2 137.9 134.2 Crude oil, average 36.9 22.9 18.1 123.4 106.4 109.0 126.3 164.9 191.9 Natural gas, Europe 3.4 100.0 2.1 151.3 159.1 119.7 153.2 167.7 214.7 Non-energy 125.5 100.0 88.0 86.7 78.8 83.0 91.5 107.4 112.5 Agriculture 138.1 100.0 92.8 87.5 79.5 86.4 94.7 104.7 103.3 Beverages 181.4 100.0 107.7 88.4 72.1 84.6 87.1 94.0 102.4 Cocoa 260.3 126.7 113.5 71.5 84.4 140.4 138.2 122.4 125.8 Coffee, arabica 346.6 197.2 229.1 97.3 69.6 68.8 71.8 89.9 127.4 Coffee, robusta 324.3 118.2 148.9 77.3 51.4 56.0 68.9 67.1 72.9 Food 139.3 100.0 87.6 84.5 86.0 90.1 96.4 110.0 102.5 Fats and oils 148.7 100.0 105.0 96.2 89.0 101.2 120.6 137.1 118.4 Palm oil 583.7 289.8 436.0 107.1 98.6 134.7 153.0 162.7 132.0 Soybean meal 262.4 200.2 152.2 94.5 90.4 87.5 105.4 120.5 102.5 Soybeans 296.2 246.8 201.7 85.8 79.4 86.2 107.0 124.2 105.7 Grains 134.3 100.0 86.4 79.5 78.2 88.1 90.2 100.2 96.5 Maize 125.3 109.3 90.2 81.0 82.0 90.8 96.4 102.3 87.1 Rice, Thailand, 5% 410.7 270.9 248.4 74.7 63.8 70.8 73.0 87.7 106.5 Wheat, U.S., HRW 172.7 135.5 112.0 84.2 93.6 109.3 107.8 115.8 112.4 Other food 134.3 100.0 74.0 77.7 87.9 82.1 80.1 93.2 92.7 Bananas, U.S. 377.3 540.9 373.8 78.4 107.8 97.7 69.3 97.0 135.0 Sugar, world 63.2 27.7 13.8 65.2 68.8 54.9 56.5 57.1 71.0 Raw materials 104.6 100.0 88.5 90.8 76.7 83.1 98.2 105.8 104.9 Cotton ("A" Index) 206.2 181.9 117.1 71.6 58.2 56.0 76.9 75.1 62.8 Rubber, Malaysia 142.5 86.5 62.8 79.9 69.4 89.1 122.1 191.2 264.8 Sawnwood, Malaysia 536.5 814.5 507.8 81.6 63.5 55.5 64.5 78.7 81.2 Fertilizers 128.9 100.0 114.1 105.8 98.8 100.5 106.2 126.6 126.9 Triple superphosphate 180.3 131.8 154.5 104.5 96.2 100.9 113.3 141.3 153.2 Metals and minerals 94.2 100.0 73.7 83.0 75.1 72.8 82.0 112.4 133.8 Aluminum 1,456.0 1,639.4 1,361.1 94.5 88.1 82.3 87.3 104.6 113.4 Copper 2,182.1 2,661.5 1,572.9 68.1 59.3 58.6 66.8 107.7 120.7 Gold 607.9 383.5 278.8 72.8 70.7 80.8 94.8 106.7 110.5 Nickel 6,518.7 8,864.1 6,011.2 97.4 67.1 76.4 108.6 155.9 168.4 Memo: Deflator Index 78.8 100.0 99.3 97.2 94.3 93.1 100.1 107.1 110.7 (MUV 1990 100)a Reuters/CRB Commodity Futures Index (1967 100) Note: a unit value index in dollar terms of manufactures exported from the G-7 countries, weighted by exports to developing countries. 128 S T A T I S T I C A L A P P E N D I X Table A.12 Global nominal GDP growth, 1981­2005 % change from a year earlier Average Estimate Forecast 1981­90 1991­2000 1998 1999 2000 2001 2002 2003 2004 2005 World 9.7 6.7 4.8 4.4 6.1 3.6 3.5 4.3 5.4 4.7 High income 8.5 4.6 3.6 3.4 4.8 2.5 2.5 3.0 4.4 3.7 Industrial countries 8.0 4.5 3.6 3.4 4.7 2.6 2.5 3.0 4.4 3.6 European Union (15) 8.8 5.0 5.5 3.4 5.1 4.1 3.5 2.9 3.8 3.3 Japan 6.2 1.5 1.2 1.4 0.8 1.1 1.6 0.1 1.4 0.3 United States 7.6 5.4 5.3 6.0 5.9 3.2 3.5 4.9 6.6 6.2 Other high income 25.5 9.6 1.9 4.3 8.5 1.7 1.9 1.7 6.6 6.7 Asian NIEs 12.2 8.5 1.9 1.6 5.6 1.9 1.6 0.1 5.7 5.8 Developing countries 15.3 16.7 10.5 9.2 12.0 8.8 8.5 10.5 10.2 9.4 Excluding China 15.3 16.7 10.8 9.4 12.1 8.9 8.6 10.5 10.2 9.4 Excl. C.E. Europe/C.I.S. 16.6 14.4 9.5 9.2 11.8 8.5 8.1 10.7 9.2 9.0 Severely indebted 19.0 15.7 8.1 8.2 12.3 8.8 8.4 10.3 10.5 9.7 Moderately indebted 15.4 19.0 12.1 8.0 12.6 9.2 8.9 11.2 10.2 8.8 Less indebted 14.1 15.5 10.8 10.9 11.5 9.2 8.2 10.5 9.8 9.5 Middle-income countries 14.4 17.2 9.8 8.5 12.0 8.4 8.7 9.8 9.5 9.0 Upper middle-income countries 14.0 17.4 9.9 6.5 11.0 7.7 8.1 9.0 9.0 8.4 Lower middle-income countries 14.6 16.8 9.8 9.1 12.1 9.9 9.4 10.4 10.2 9.4 Low-income countries 16.0 16.9 12.0 12.4 11.6 9.8 8.3 13.2 10.4 11.5 East Asia and Pacific 12.2 12.1 6.2 8.9 10.9 7.7 8.1 9.1 12.5 11.5 China 15.2 17.0 5.2 4.8 9.0 8.8 8.1 11.5 12.9 -- Indonesia 15.7 19.6 52.3 15.1 14.4 21.2 12.7 10.0 11.3 -- Europe and Central Asia 11.2 48.4 14.6 10.9 12.1 12.7 12.0 10.5 13.3 11.7 Russian Federation 40.0 99.6 12.3 83.5 51.5 22.4 21.1 22.6 18.3 -- Turkey 54.0 77.9 81.2 47.9 61.8 42.9 55.7 31.7 19.4 -- Poland 71.8 29.2 16.8 10.9 11.0 4.9 2.7 3.2 8.3 -- Latin America and Caribbean 25.1 17.3 12.2 6.6 11.1 7.6 8.3 12.2 8.0 7.7 Brazil 337.4 214.7 5.0 6.5 13.1 8.9 12.3 15.6 12.6 -- Mexico 66.7 22.2 21.0 19.5 19.4 5.1 5.9 10.5 8.0 -- Argentina, R. B. de 431.4 15.2 2.1 5.2 0.2 5.5 16.3 20.3 17.4 -- Middle East and North Africa 13.0 13.3 8.0 9.4 12.1 5.7 5.2 7.1 8.5 9.2 Algeria 13.1 21.9 0.7 13.9 27.0 5.3 5.2 15.6 11.2 -- Iran, Islamic Rep. of 18.6 31.1 9.8 18.2 42.2 23.9 32.5 24.1 14.1 -- Egypt, Arab Rep. of 19.3 13.4 8.1 8.6 12.1 6.8 7.1 7.1 8.5 -- South Asia 14.7 13.1 10.8 9.8 7.9 8.8 8.2 10.4 10.2 12.8 India 14.7 13.9 14.4 11.2 7.9 9.2 8.2 14.3 10.2 -- Sub-Saharan Africa 17.1 15.5 11.4 9.6 13.0 10.6 9.1 13.2 10.2 9.5 South Africa 16.5 12.3 8.3 9.6 13.3 10.6 14.2 7.4 9.8 -- Nigeria 17.9 32.3 3.8 13.5 33.3 24.8 5.5 34.0 13.2 -- Note: -- not available. Developing counties aggregated using median growth rates. Industrial aggregates use 1995 $ GDP weights. World total is GDP weighted average of developing and high-income total. 129 S T A T I S T I C A L A P P E N D I X Table A.13 Global goods export growth, 1981­2005 BOP goods exports (current $); average annual growth (%) Average Exports 2002 Estimate Forecast ($ bn.) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 World 6,025 6.1 6.5 3.2 12.4 3.8 4.4 15.6 20.6 12.1 High income 4,480 6.8 5.6 2.4 9.6 4.7 2.9 14.2 17.8 11.8 Industrial countries 3,916 7.3 5.4 2.1 7.9 3.9 2.8 14.2 17.4 12.1 European Union (15) 2,185 7.5 4.3 0.7 2.8 0.5 5.8 18.0 17.1 12.7 Japan 395 8.3 5.0 7.4 14.0 16.2 2.8 13.5 19.8 8.8 United States 697 5.7 7.2 2.4 12.5 6.8 4.7 4.2 12.3 9.7 Other high income 564 3.4 7.4 4.2 22.0 9.7 4.1 13.8 21.3 9.5 Asian NIEs 468 5.0 7.2 4.0 19.0 9.8 6.1 12.4 19.5 10.3 Developing countries 1,545 3.4 10.0 6.3 22.4 1.1 9.0 19.9 28.0 13.1 Excluding China 1,219 2.9 9.0 6.3 21.3 2.8 5.9 16.0 25.9 9.5 Excl. C.E. Europe/C.I.S. 1,225 4.3 10.4 7.9 22.0 2.7 8.7 19.9 28.4 13.5 Severely indebted 207 1.5 6.3 0.6 20.5 1.8 2.7 14.8 26.1 4.5 Moderately indebted 502 3.9 9.9 7.1 23.0 5.9 5.8 16.4 27.2 10.9 Less indebted 836 4.1 11.5 7.9 22.6 2.3 12.7 23.3 29.0 16.3 Middle-income countries 1,360 3.9 10.4 6.2 22.1 0.7 9.4 20.1 28.8 13.4 Upper middle-income countries 569 3.8 10.4 6.7 19.5 1.7 4.9 11.6 26.8 8.7 Lower middle-income countries 790 4.0 10.4 5.7 24.3 0.0 12.9 26.2 30.0 16.3 Low-income countries 185 1.2 7.9 7.2 24.5 4.0 6.2 18.9 22.5 11.1 East Asia and Pacific 597 8.5 14.2 8.6 23.0 1.8 14.3 24.0 28.0 20.1 China 326 11.8 17.1 6.1 27.9 6.8 22.4 34.6 34.8 -- Indonesia 57 3.3 9.2 0.4 27.6 9.3 1.5 6.8 14.4 -- Europe and Central Asia 360 1.5 8.8 0.9 22.4 6.0 10.9 20.4 26.2 11.2 Russian Federation 107 -- 10.8 1.5 39.0 3.0 5.3 26.7 34.3 -- Turkey 40 16.2 9.0 5.9 6.5 11.9 16.7 24.3 22.6 -- Poland 47 -- 8.5 7.4 19.4 16.0 12.2 21.7 20.7 -- Latin America and Caribbean 352 3.9 10.1 5.7 20.1 4.3 0.9 9.4 30.4 6.6 Brazil 60 4.5 5.8 6.1 14.7 5.7 3.7 21.1 29.8 -- Mexico 161 8.5 15.1 16.1 22.0 4.8 1.5 2.6 29.1 -- Argentina, R. B. de 26 4.4 7.9 11.8 13.0 0.8 3.1 15.0 16.6 -- Middle East and North Africa 93 3.2 5.1 28.3 37.3 6.8 7.7 24.4 29.5 4.2 Algeria 18 0.5 5.2 21.5 75.7 11.8 2.4 35.4 32.5 -- Iran, Islamic Rep. of 28 -- 3.9 60.3 34.8 16.0 17.9 42.2 33.5 -- Egypt, Arab Rep. of 7 0.2 6.1 18.9 34.8 0.5 1.3 26.3 25.0 -- South Asia 73 7.9 8.9 5.5 16.8 1.4 11.4 26.7 19.8 12.0 India 51 8.2 9.0 8.2 17.0 3.4 13.6 32.0 20.8 -- Sub-Saharan Africa 71 2.1 3.1 5.7 18.6 5.5 0.4 22.3 34.0 6.5 South Africa 31 0.7 2.7 2.0 11.0 2.7 1.4 23.2 26.2 -- Nigeria 14 6.3 3.7 43.5 51.4 17.7 12.5 31.6 58.0 -- Note: -- not available. 130 S T A T I S T I C A L A P P E N D I X Table A.14 Global goods import growth, 1981­2005 BOP goods imports (current $); average annual growth (%) Average Imports 2002 Estimate Forecast ($ bn.) 1981­90 1991­2000 1999 2000 2001 2002 2003 2004 2005 World 6,062 5.8 6.7 4.2 14.0 3.8 3.7 15.6 20.4 11.9 High income 4,647 6.5 6.0 5.7 12.5 5.2 2.8 14.3 18.5 11.0 Industrial countries 4,125 6.8 5.8 6.1 11.6 4.4 2.6 14.6 18.0 11.2 European Union (15) 2,065 6.8 4.2 1.6 5.5 1.8 3.8 18.9 18.5 12.0 Japan 301 5.5 4.9 11.4 23.0 8.6 4.1 13.5 18.7 12.0 United States 1,190 7.2 9.4 12.5 18.9 6.1 1.9 7.8 16.1 7.0 Other high income 522 4.2 7.2 2.6 19.8 10.8 4.0 11.6 22.6 9.6 Asian NIEs 436 5.0 7.2 2.6 21.7 12.2 3.9 11.6 23.8 10.2 Developing countries 1,416 2.9 9.7 1.2 19.6 1.0 6.8 20.0 26.1 14.5 Excluding China 1,134 2.5 8.7 3.6 17.0 0.4 3.7 15.1 22.9 10.4 Excl. C.E. Europe/C.I.S. 1,112 3.7 10.2 1.3 21.4 1.3 5.6 20.1 27.2 15.6 Severely indebted 143 1.1 7.7 13.4 12.6 1.1 11.7 12.6 31.2 10.8 Moderately indebted 433 4.5 7.7 5.3 18.3 2.0 6.7 16.6 23.5 10.7 Less indebted 840 3.4 11.6 5.1 22.1 3.1 10.7 23.1 26.6 16.9 Middle-income countries 1,246 3.2 10.2 1.0 19.5 1.1 7.1 19.8 25.7 14.3 Upper middle-income countries 531 1.8 12.5 0.3 16.2 1.1 0.2 9.1 21.1 8.8 Lower middle-income countries 715 4.2 8.5 1.6 22.5 3.0 13.1 27.7 28.7 17.6 Low-income countries 170 1.7 6.7 2.7 20.5 0.2 4.7 22.1 29.1 16.2 East Asia and Pacific 505 9.1 12.2 11.0 30.3 1.3 14.3 26.9 32.5 22.6 China 281 9.3 17.6 15.9 35.2 8.1 21.3 39.8 37.1 -- Indonesia 31 6.5 4.6 12.2 38.9 7.1 1.1 4.0 42.8 -- Europe and Central Asia 352 1.7 7.9 10.4 15.9 3.9 12.9 22.1 23.9 10.2 Russian Federation 61 -- 4.2 31.8 13.5 19.8 13.4 25.3 24.2 -- Turkey 47 11.6 8.9 12.7 35.0 27.7 24.4 37.6 33.6 -- Poland 54 2.5 14.7 0.4 6.8 2.3 9.5 18.5 19.7 -- Latin America and Caribbean 329 1.3 12.9 4.0 16.2 2.2 6.7 4.6 18.4 6.0 Brazil 47 1.0 10.4 14.6 13.3 0.5 15.0 2.2 28.0 -- Mexico 169 7.0 15.4 13.2 22.9 3.5 0.2 1.1 11.9 -- Argentina, R. B. de 8 8.8 20.4 18.4 0.9 19.8 55.8 54.8 65.6 -- Middle East and North Africa 82 2.7 2.4 0.4 6.9 5.8 7.3 20.3 16.1 6.4 Algeria 10 0.9 0.6 3.8 4.3 1.5 13.8 30.3 16.0 -- Iran, Islamic Rep. of 22 5.3 1.9 6.0 13.2 22.9 20.2 37.1 15.0 -- Egypt, Arab Rep. of 13 4.2 4.1 3.7 1.4 9.2 7.7 2.4 16.0 -- South Asia 87 4.7 8.5 2.3 23.0 3.9 6.5 25.9 31.0 17.2 India 63 5.3 9.8 1.6 30.4 3.5 9.4 27.3 31.9 -- Sub-Saharan Africa 60 2.4 4.1 7.5 3.7 4.5 1.8 26.4 26.5 8.6 South Africa 27 0.9 4.7 9.9 11.1 5.3 3.8 30.6 36.1 -- Nigeria 8 10.4 5.9 6.8 1.6 32.8 34.9 43.8 17.7 -- Note: -- not available. 131 S T A T I S T I C A L A P P E N D I X Table A.15 Global goods trade balances, 1997­2005 $ billions % of GDP Estimate Forecast 2002 1997 1998 1999 2000 2001 2002 2003 2004 2005 World 0.1 105.4 79.7 42.1 19.9 26.3 23.2 41.2 45.7 50.3 High income 0.6 85.3 76.4 56.8 190.2 156.9 148.6 173.7 244.1 227.1 Industrial countries 0.8 88.7 61.9 79.1 227.9 197.4 191.1 233.5 308.5 297.2 European Union (15) 1.6 158.8 136.0 92.9 40.1 88.4 138.0 142.3 129.6 166.4 Japan 2.4 103.1 123.9 123.2 115.3 70.9 94.4 106.8 131.8 130.2 United States 4.7 197.7 248.1 348.3 459.1 436.7 492.7 555.6 673.2 697.8 Other high income 5.5 3.4 14.5 22.4 37.7 40.5 42.5 59.7 64.4 70.1 Asian NIEs 6.2 9.0 12.6 18.6 11.5 22.0 32.6 40.1 27.3 30.8 Developing countries 2.6 13.3 14.1 76.5 145.1 108.4 150.4 192.9 275.3 266.5 Excluding China 2.7 26.2 43.3 62.9 135.9 96.5 127.6 170.2 238.5 227.3 Excl. C.E. Europe/C.I.S. 3.0 40.3 24.3 96.7 142.0 114.1 156.6 195.5 249.1 227.8 Severely indebted 6.0 5.5 3.2 24.7 41.2 39.2 63.6 76.2 87.7 48.5 Moderately indebted 5.0 17.1 12.8 59.7 90.1 68.8 69.0 79.2 118.8 132.9 Less indebted 1.1 31.7 12.7 14.5 39.0 22.6 39.3 59.5 83.3 66.0 Middle-income countries 3.2 26.1 7.0 89.8 154.5 122.4 160.1 205.6 291.7 293.6 Upper middle-income countries 4.1 19.4 13.3 25.8 65.1 47.9 68.1 92.8 133.0 134.5 Lower middle-income countries 3.2 15.3 39.2 85.9 114.8 96.6 114.7 138.1 179.0 180.0 Low-income countries 1.2 12.8 21.0 13.3 9.4 14.0 9.6 12.7 16.5 27.1 East Asia and Pacific 5.1 44.4 96.7 97.8 95.9 81.0 92.3 99.8 99.2 97.3 China 3.5 46.2 46.6 36.0 34.5 34.0 44.2 44.7 51.3 -- Indonesia 12.7 11.9 21.5 24.7 28.8 25.4 25.9 28.5 23.4 -- Europe and Central Asia 0.7 35.3 35.0 8.0 6.4 12.7 7.9 4.0 14.7 20.7 Russian Federation 13.4 14.9 16.4 36.0 60.2 48.1 46.3 59.6 87.8 -- Turkey 4.0 15.0 14.1 10.2 22.0 3.7 7.3 15.3 26.0 -- Poland 3.8 9.8 12.8 15.1 12.3 7.7 7.2 7.1 7.9 -- Latin America and Caribbean 1.4 14.5 36.5 7.3 3.6 4.2 22.5 40.8 64.8 55.7 Brazil 2.8 6.8 6.6 1.3 0.8 2.7 13.1 24.8 33.1 -- Mexico 1.3 0.6 7.9 5.6 8.0 10.0 7.9 5.6 7.3 -- Argentina, R. B. de 16.9 2.1 3.1 0.8 2.5 7.4 17.2 16.5 12.8 -- Middle East and North Africa 9.4 34.2 4.4 24.5 69.7 48.7 53.2 77.7 125.1 130.0 Algeria 4.7 6.5 2.4 4.3 13.2 10.6 8.9 12.6 18.7 -- Iran, Islamic Rep. of 4.9 4.3 1.2 7.6 13.1 5.1 5.6 9.2 17.9 -- Egypt, Arab Rep. of 6.4 8.6 10.2 9.9 8.3 6.9 5.8 4.2 4.1 -- South Asia 2.3 16.1 15.6 14.3 21.0 16.7 14.6 17.8 33.6 45.3 India 2.4 10.0 10.8 8.7 16.3 12.7 12.0 13.0 24.6 -- Sub-Saharan Africa 3.8 7.4 1.9 6.1 15.8 9.1 10.5 10.4 19.6 18.8 South Africa 4.2 2.3 2.1 4.2 4.6 5.2 4.6 3.7 1.2 -- Nigeria 13.9 5.7 0.2 4.3 10.8 4.5 6.5 7.6 16.4 -- Note: -- not available. 132 S T A T I S T I C A L A P P E N D I X Table A.16 Global trade prices and volumes, 1981­2005 Average annual % change Average change Estimate Forecast 1981­90 1991­2000 1998 1999 2000 2001 2002 2003 2004 2005 Trade prices Manufactured goods prices 2.4 0.3 3.8 0.3 2.1 2.9 1.3 7.5 7.0 3.3 Developing countries' export price 1.7 1.1 8.2 1.3 4.8 3.5 0.4 5.5 9.2 1.6 Oil price 4.7 2.1 31.9 38.3 56.2 13.7 2.4 15.9 30.6 11.3 Non-oil commodity prices 2.2 1.4 15.7 11.2 1.4 9.1 5.3 10.2 17.5 4.7 Terms of trade World 0.2 0.2 0.1 0.3 0.9 0.4 0.5 0.5 0.4 0.5 High income 0.7 0.0 0.9 0.5 2.3 0.1 0.7 0.4 0.4 0.5 Developing countries 2.7 1.0 3.6 0.8 4.3 1.6 0.0 0.9 0.1 0.8 Severely indebted 3.7 0.2 4.7 3.0 3.5 1.7 2.6 0.1 3.1 2.4 Moderately indebted 2.2 1.1 4.4 0.4 8.2 3.5 0.2 1.5 0.4 1.5 Less indebted 2.5 1.0 2.1 2.2 1.6 0.4 0.3 0.3 0.6 0.6 Middle-income countries 2.6 1.2 3.9 1.7 4.5 1.6 0.6 1.0 0.2 1.0 Upper middle-income countries 2.4 0.5 6.6 6.1 6.8 2.5 1.4 0.9 2.7 0.0 Lower middle-income countries 2.3 1.9 1.3 1.8 2.4 0.8 0.0 0.9 1.5 1.3 Low-income countries 3.5 0.8 1.1 6.8 1.9 1.9 5.6 0.3 3.6 2.3 East Asia and Pacific 1.5 0.2 1.0 2.2 1.1 0.8 1.5 0.6 2.6 1.8 Europe and Central Asia 1.6 2.2 1.1 1.5 6.7 1.4 1.7 1.1 1.7 1.5 Latin America and Caribbean 2.8 0.1 5.0 1.3 5.5 3.0 0.4 0.5 1.7 0.7 Middle East and North Africa 3.2 0.2 15.0 16.9 15.1 0.8 3.9 5.6 12.8 0.3 South Asia 0.5 1.0 5.9 8.5 6.0 2.7 7.8 0.7 7.0 4.0 Sub-Saharan Africa 4.1 0.0 7.0 3.4 7.6 1.9 0.7 4.0 1.6 0.3 Global export volumes World 4.8 6.8 4.2 5.4 12.9 0.4 3.8 5.4 10.4 7.4 High income 5.1 6.9 4.1 5.5 12.1 0.3 2.6 3.1 8.5 6.3 Developing countries 4.2 7.0 4.6 6.5 15.3 3.1 8.4 13.5 16.6 10.6 Severely indebted 3.0 6.3 6.1 6.3 14.0 5.1 3.5 9.3 13.2 9.4 Moderately indebted 4.8 4.7 3.0 6.4 13.2 0.7 5.9 8.4 13.6 8.6 Less indebted 3.5 8.0 5.9 6.9 18.4 4.2 10.9 17.5 18.9 12.3 Middle-income countries 4.4 6.9 4.4 6.3 15.2 2.9 8.1 13.5 17.1 10.5 Upper middle-income countries 2.9 8.9 7.5 5.0 13.6 0.2 1.6 6.9 12.4 8.5 Lower middle-income countries 4.6 4.9 2.9 3.7 17.1 4.8 11.6 16.7 19.2 11.8 Low-income countries 2.4 8.0 6.6 9.6 16.8 4.9 11.1 13.0 12.0 11.4 East Asia and Pacific 8.4 12.0 3.1 4.2 22.8 2.4 14.8 21.2 23.1 14.9 Europe and Central Asia 3.1 1.3 6.0 4.0 15.9 6.3 7.9 12.0 15.3 9.4 Latin America and Caribbean 5.4 8.7 7.8 7.2 10.3 0.6 1.9 4.8 11.9 6.1 Middle East and North Africa 0.8 4.8 1.2 0.2 8.1 0.9 2.9 9.4 5.9 4.0 South Asia 5.7 11.1 9.1 12.5 21.2 7.3 18.3 13.0 13.3 12.4 Sub-Saharan Africa 0.8 4.9 4.4 2.5 8.4 0.8 0.4 5.7 7.3 8.4 Note: Prices are in $ terms unless otherwise indicated. 133 S T A T I S T I C A L A P P E N D I X Table A.17 Global current account balances, 1999­2005 $ billions Percent of GDP (2002) Income balance and Merchandise Services net Estimate Forecast balance balance transfers 1999 2000 2001 2002 2003 2004 2005 World 0.2 0.1 0.4 155.9 214.0 200.8 184.5 150.0 167.2 216.5 High income 0.7 0.2 0.5 147.9 257.6 217.7 256.6 263.8 319.9 331.1 Industrial countries 0.8 0.1 0.5 175.5 291.6 250.7 290.3 316.1 377.1 391.6 European Union (15) 1.3 0.2 1.2 29.4 69.4 15.2 21.3 11.5 19.3 50.6 Japan 2.4 1.1 1.5 114.6 119.7 87.8 112.4 136.2 172.2 164.0 United States 4.6 0.6 0.5 296.8 413.4 385.7 473.9 530.7 660.4 691.1 Other high income 2.4 1.8 0.1 27.6 34.1 32.9 33.7 52.3 57.2 61.5 Asian NIEs 2.8 3.3 0.2 25.6 20.3 26.0 31.5 44.9 33.5 36.9 Developing countries 1.9 0.5 0.3 8.0 43.6 16.9 72.0 112.8 152.7 114.6 excluding China 1.4 0.5 0.3 29.1 23.0 0.5 36.6 66.9 105.3 70.8 excl. C.E. Europe /C.I.S. 1.9 0.5 0.2 6.9 18.3 2.9 66.7 108.6 128.2 96.0 Severely indebted 6.1 2.6 2.3 38.6 21.0 23.3 9.7 20.1 29.4 19.3 Moderately indebted 4.4 0.3 1.2 43.8 70.8 48.3 44.4 55.7 90.3 86.3 Less indebted 0.4 0.1 0.7 13.1 6.2 8.2 17.9 37.0 33.0 9.0 Middle-income countries 2.1 0.3 0.8 0.7 35.4 13.7 56.7 100.7 145.0 118.5 Upper middle-income countries 1.6 0.3 2.2 61.3 49.0 49.2 17.1 5.4 22.7 7.9 Lower middle-income countries 2.4 0.3 0.3 60.5 84.4 62.9 73.9 95.3 122.3 110.6 Low-income countries 1.0 1.2 1.8 7.3 8.2 3.2 15.3 12.1 7.6 3.9 East Asia and Pacific 5.3 1.2 0.6 60.2 53.5 39.6 61.4 74.7 71.3 65.6 China 3.5 0.5 0.2 21.1 20.5 17.4 35.4 45.9 47.3 -- Indonesia -- -- -- 5.8 8.0 6.9 8.1 7.5 3.7 -- Europe and Central Asia 0.7 0.4 0.7 2.5 15.5 17.4 3.8 2.6 9.6 1.7 Russian Federation 13.4 2.9 2.1 24.6 46.8 33.8 29.1 35.8 55.4 -- Turkey 4.0 4.3 1.2 1.3 9.8 3.4 1.5 6.8 14.9 -- Poland 3.8 0.4 0.7 12.5 10.0 5.4 5.0 4.6 4.4 -- Latin America and Caribbean 1.4 0.8 1.4 55.5 46.9 53.4 15.8 7.9 28.2 14.2 Brazil 2.8 1.1 3.4 25.4 24.2 23.2 7.6 4.0 11.1 -- Mexico 1.2 0.8 0.1 14.0 18.2 18.2 14.1 9.2 8.3 -- Argentina, R. B. de 16.9 1.6 6.3 11.9 9.0 3.9 9.1 7.8 3.2 -- Middle East and North Africa 5.2 2.4 4.8 4.2 24.1 17.3 15.6 25.7 41.7 38.3 Algeria -- -- -- 0.8 8.0 7.6 6.0 9.8 14.9 -- Iran, Islamic Rep. of -- -- -- 6.6 12.6 5.4 4.1 8.0 16.2 -- Egypt, Arab Rep. of 6.4 3.0 4.1 1.6 1.0 0.4 0.6 3.7 3.3 -- South Asia 2.5 1.0 3.1 5.2 5.8 1.2 10.1 11.6 0.7 6.8 India 2.4 1.3 2.2 3.2 4.3 0.2 5.8 8.0 1.1 -- Sub-Saharan Africa 3.2 3.1 1.4 9.3 3.2 5.1 3.1 4.5 2.6 1.5 South Africa 4.4 0.6 3.2 0.5 0.3 0.1 0.6 1.5 5.6 -- Nigeria -- -- -- 0.5 6.5 0.0 1.6 2.3 9.9 -- Note: -- not available. 134 S T A T I S T I C A L A P P E N D I X Table A.18 Global current account balances, 1981­2005 % of GDP Average Estimate Forecast 1981­90 1991­2000 1998 1999 2000 2001 2002 2003 2004 2005 World 0.7 0.4 0.3 0.5 0.7 0.6 0.6 0.4 0.4 0.5 High income 0.4 0.2 0.1 0.6 1.0 0.9 1.0 0.9 1.0 1.0 Industrial countries 0.5 0.2 0.0 0.7 1.2 1.0 1.2 1.1 1.2 1.2 European Union (15) 0.0 0.1 0.6 0.4 0.9 0.2 0.3 0.1 0.2 0.3 Japan 2.3 2.5 3.0 2.6 2.5 2.1 2.8 3.2 3.7 3.4 United States 1.9 1.8 2.4 3.2 4.2 3.8 4.5 4.8 5.6 5.5 Other high income 3.2 1.7 2.9 3.7 4.2 4.3 4.4 6.6 6.6 6.4 Asian NIEs 0.1 3.4 4.1 4.8 3.6 4.9 5.9 8.4 5.8 5.9 Developing countries 1.7 1.3 1.6 0.1 0.8 0.4 1.3 1.8 2.0 1.3 excluding China 1.8 1.9 2.7 0.6 0.5 0.1 0.9 1.4 1.8 1.1 excl. C.E. Europe /C.I.S. 1.8 1.4 1.3 0.1 0.4 0.1 1.4 2.0 2.1 1.4 Severely indebted 2.5 2.5 4.2 2.9 1.7 1.8 1.0 1.7 2.2 1.3 Moderately indebted 2.1 0.6 0.0 3.9 5.7 4.0 3.5 3.8 4.9 3.9 Less indebted 1.0 1.0 1.0 0.5 0.2 0.3 0.5 1.0 0.8 0.2 Middle-income countries 1.4 1.2 1.5 0.0 0.8 0.3 1.2 1.9 2.4 1.7 Upper middle-income countries 1.4 2.8 4.0 3.1 2.3 2.3 0.9 0.3 1.0 0.3 Lower middle-income countries 1.4 0.1 0.8 2.6 3.4 2.4 2.7 3.0 3.3 2.5 Low-income countries 2.7 1.8 2.6 0.3 0.9 0.7 1.6 1.1 0.5 0.2 East Asia and Pacific 1.7 0.4 4.5 4.1 3.4 2.4 3.4 3.7 3.1 2.5 China 0.2 1.6 3.3 2.1 1.9 1.5 2.8 3.2 3.0 2.3 Indonesia 2.8 0.3 3.9 3.7 4.8 4.2 4.0 3.1 1.4 2.2 Europe and Central Asia 0.7 1.1 2.5 0.1 1.8 2.0 0.5 0.0 0.6 0.1 Russian Federation -- -- 0.1 12.6 18.0 11.0 8.4 8.3 10.7 7.7 Turkey 1.3 1.1 1.0 0.7 4.9 2.3 0.8 2.8 4.8 4.2 Poland 1.4 3.5 4.1 7.6 6.0 2.9 2.6 2.2 1.9 2.1 Latin America and Caribbean 1.8 2.8 4.5 3.1 2.4 2.8 1.0 0.5 1.5 0.7 Brazil 1.6 2.1 4.3 4.7 4.0 4.6 1.7 0.8 1.9 0.8 Mexico 0.8 3.7 3.8 2.9 3.1 2.9 2.2 1.5 1.3 1.8 Argentina, R. B. de 2.2 3.2 4.9 4.2 3.2 1.4 9.0 6.0 2.1 0.6 Middle East and North Africa 1.0 0.2 3.5 1.3 6.7 4.5 4.2 6.1 9.3 8.0 Algeria 0.5 0.3 5.7 1.7 15.0 13.8 10.8 14.7 18.7 15.2 Iran, Islamic Rep. of 0.4 2.0 2.1 7.1 13.1 4.6 3.6 5.9 10.9 9.0 Egypt, Arab Rep. of 3.4 1.5 3.1 1.8 1.0 0.4 0.7 4.5 4.6 4.2 South Asia 2.0 1.5 1.8 0.9 1.0 0.2 1.6 1.6 0.1 0.7 India 1.7 1.2 1.7 0.7 1.0 0.0 1.1 1.3 0.1 0.7 Sub-Saharan Africa 2.2 1.5 5.0 2.1 1.2 0.8 0.3 0.8 0.6 0.3 South Africa 0.4 0.2 1.6 0.4 0.2 0.0 0.6 0.9 2.6 1.8 Nigeria 0.7 0.5 13.2 1.5 15.4 0.1 3.4 4.0 16.4 15.2 Note: -- not available. 135 S T A T I S T I C A L A P P E N D I X Table A.19 Workers' remittances received by developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 61.2 70.9 68.0 71.9 75.6 83.8 98.2 115.9 125.8 East Asia and the Pacific 10.3 15.2 9.1 11.4 11.2 12.9 16.5 19.7 20.3 China 1.7 4.6 0.3 0.5 0.8 1.2 2.4 4.6 4.6 Indonesia 0.8 0.7 1.0 1.1 1.2 1.0 1.3 1.3 1.3 Malaysia 0.9 1.1 0.9 1.0 1.0 0.8 1.0 1.0 1.0 Philippines 4.9 6.8 5.1 6.9 6.2 6.2 7.4 7.9 8.1 Thailand 1.8 1.7 1.4 1.5 1.7 1.3 1.4 1.6 1.6 Europe and Central Asia 9.4 9.7 12.8 10.7 11.0 11.4 11.5 12.9 12.9 Albania 0.6 0.3 0.5 0.4 0.6 0.7 0.7 0.9 0.9 Croatia 0.7 0.6 0.6 0.6 0.6 0.7 0.9 1.1 1.1 Poland 0.8 0.8 1.1 0.8 0.8 1.1 1.4 2.3 2.3 Russian Federation 2.8 2.3 1.9 1.3 1.3 1.4 1.4 1.5 1.5 Turkey 3.5 4.2 5.4 4.5 4.6 2.8 1.9 0.7 0.7 Latin America and the Caribbean 13.6 14.5 15.9 17.7 20.2 24.2 28.1 34.4 36.9 Brazil 2.5 2.0 1.6 1.9 1.6 1.8 2.4 2.8 2.8 Colombia 0.8 0.8 0.8 1.3 1.6 2.1 2.5 3.1 3.1 Dominican Republic 1.0 1.1 1.4 1.6 1.8 2.0 2.2 2.3 2.3 El Salvador 1.1 1.2 1.3 1.4 1.8 1.9 2.0 2.1 2.5 Mexico 5.0 5.5 6.5 6.6 7.6 9.9 11.0 14.6 17.0 Middle East and North Africa 12.4 12.7 12.5 12.2 12.3 14.4 14.8 16.1 17.0 Egypt, Arab Rep. of 3.1 3.7 3.4 3.2 2.9 2.9 2.9 3.0 3.0 Jordon 1.7 1.8 1.6 1.8 1.8 2.0 2.1 2.2 2.2 Lebanon 1.2 1.2 1.2 1.4 1.6 2.3 2.5 2.7 2.7 Morocco 2.2 1.9 2.0 1.9 2.2 3.3 2.9 3.6 3.6 South Asia 12.3 14.6 13.4 15.1 16.0 16.0 22.2 26.8 32.7 Bangladesh 1.3 1.5 1.6 1.8 2.0 2.1 2.9 3.2 3.4 India 8.8 10.3 9.5 11.1 11.7 11.1 13.8 17.4 23.0 Pakistan 1.3 1.7 1.2 1.0 1.1 1.5 3.6 4.0 4.1 Sri Lanka 0.9 0.9 1.0 1.1 1.2 1.2 1.3 1.3 1.3 Sub-Saharan Africa 3.2 4.4 4.3 4.7 4.9 4.9 5.2 6.0 6.1 Lesotho 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 Nigeria 0.9 1.9 1.5 1.6 1.7 1.3 1.4 1.7 1.8 Senegal 0.2 0.2 0.1 0.2 0.2 0.3 0.3 0.3 0.3 Sudan 0.2 0.4 0.7 0.7 0.6 0.7 1.0 1.2 1.2 Note: e estimate. 136 S T A T I S T I C A L A P P E N D I X Table A.20 Net official development assistance from DAC countries, 1996­2003 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 Total ODA 55.6 48.5 52.1 56.4 53.7 52.3 58.3 69.0 Australia 1.1 1.1 1.0 1.0 1.0 0.9 1.0 1.2 Austria 0.6 0.5 0.5 0.5 0.4 0.5 0.5 0.5 Belgium 0.9 0.8 0.9 0.8 0.8 0.9 1.1 1.9 Canada 1.8 2.0 1.7 1.7 1.7 1.5 2.0 2.0 Denmark 1.8 1.6 1.7 1.7 1.7 1.6 1.6 1.7 Finland 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.6 France 7.5 6.3 5.7 5.6 4.1 4.2 5.5 7.3 Germany 7.6 5.9 5.6 5.5 5.0 5.0 5.3 6.8 Greece 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.4 Ireland 0.2 0.2 0.2 0.2 0.2 0.3 0.4 0.5 Italy 2.4 1.3 2.3 1.8 1.4 1.6 2.3 2.4 Japan 9.4 9.4 10.6 15.3 13.5 9.8 9.3 8.9 Luxembourg 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 Netherlands 3.2 2.9 3.0 3.1 3.1 3.2 3.3 4.0 New Zealand 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.2 Norway 1.3 1.3 1.3 1.4 1.3 1.3 1.7 2.0 Portugal 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Spain 1.3 1.2 1.4 1.4 1.2 1.7 1.7 2.0 Sweden 2.0 1.7 1.6 1.6 1.8 1.7 2.0 2.4 Switzerland 1.0 0.9 0.9 1.0 0.9 0.9 0.9 1.3 United Kingdom 3.2 3.4 3.9 3.4 4.5 4.6 4.9 6.3 United States 9.4 6.9 8.8 9.1 10.0 11.4 13.3 16.3 137 S T A T I S T I C A L A P P E N D I X Table A.21 External financing: all developing countries, 1998­2004 $ billions 1998 1999 2000 2001 2002 2003 2004e Current account balance 93.7 8.0 43.6 16.9 72.0 112.8 152.7 as % GDP 1.6 0.1 0.8 0.4 1.3 1.8 2.0 Financed by: Net equity flows 178.1 195.1 178.6 180.9 159.8 176.6 192.3 Net FDI inflows 171.5 182.4 166.2 174.8 154.0 151.8 165.5 Net portfolio equity inflows 6.6 12.7 12.4 6.0 5.8 24.8 26.8 Net debt flows 54.9 15.4 6.2 3.5 8.5 60.0 83.7 Official creditors 34.4 13.9 5.8 27.0 5.2 11.9 25.3 World Bank 8.7 8.8 7.9 7.5 0.2 1.2 1.4 IMF 14.1 2.2 10.7 19.5 14.0 2.4 10.9 Others 11.6 7.3 3.0 0.0 8.6 13.1 13.1 Private creditors 20.5 1.5 0.4 30.5 3.3 71.8 109.0 Net M-L term debt flows 85.0 21.6 7.4 6.6 0.5 22.9 55.4 Bonds 39.7 29.8 17.5 11.0 11.2 26.6 63.0 Banks 50.4 6.8 5.8 11.0 4.2 2.5 1.8 Others 5.2 1.5 4.3 6.6 6.5 6.3 5.7 Net short-term debt flows 64.5 20.1 7.9 23.9 2.8 49.0 53.6 Balancing item* 122.9 169.1 169.1 112.6 68.6 57.4 50.4 Change in reserves ( increase) 16.3 33.4 46.8 81.7 171.7 291.9 378.2 Memo items: Bilateral aid grants 26.7 28.5 28.7 27.9 32.2 43.4 47.4 (ex technical cooperation grants) Net private flows (debt equity) 198.6 196.6 178.1 150.4 163.1 248.4 301.3 Net official flows (aid debt) 61.1 42.4 23.0 54.9 37.4 31.5 22.1 Workers' remittances 68.0 71.9 75.6 83.8 98.2 115.9 125.8 Note: e estimate. *Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. 138 S T A T I S T I C A L A P P E N D I X Table A.22 External financing: East Asia and Pacific, 1998­2004 $ billions 1998 1999 2000 2001 2002 2003 2004e Current account balance 59.6 60.2 53.5 39.6 61.4 74.7 71.3 as % GDP 4.5 4.1 3.4 2.4 3.4 3.7 3.1 Financed by: Net equity flows 54.2 52.3 49.0 49.6 59.7 71.5 77.2 Net FDI inflows 57.7 49.9 44.2 48.2 55.6 59.6 63.6 Net portfolio equity inflows 3.4 2.3 4.8 1.4 4.0 11.8 13.6 Net debt flows 32.5 12.2 16.2 9.1 13.2 1.7 17.2 Official creditors 14.7 12.6 7.0 3.2 7.9 7.5 9.2 World Bank 2.8 2.4 1.8 0.9 1.7 1.5 2.4 IMF 7.0 1.9 1.2 2.5 2.7 0.5 1.3 Others 4.8 8.2 3.9 4.8 3.4 5.6 5.5 Private creditors 47.1 24.7 23.2 12.3 5.3 9.3 26.4 Net M-L term debt flows 3.8 10.9 13.1 13.0 12.6 9.4 6.3 Bonds 0.7 0.9 0.7 0.4 0.1 2.0 11.9 Banks 4.8 12.0 11.3 11.8 10.5 8.4 2.1 Others 0.3 0.2 1.0 1.6 2.2 3.0 3.5 Net short-term debt flows 43.3 13.9 10.1 0.7 7.3 18.7 20.1 Balancing item* 60.6 70.9 76.3 32.4 20.0 11.3 64.6 Change in reserves ( increase) 20.7 29.3 10.1 47.7 87.9 136.7 230.3 Memo items: Bilateral aid grants 2.5 2.5 2.5 2.2 2.2 2.5 2.7 (ex technical cooperation grants) Net private flows (debt equity) 7.1 27.5 25.8 37.3 54.3 80.7 103.5 Net official flows (aid debt) 17.1 15.1 9.5 5.4 5.6 5.0 6.4 Workers' remittances 9.1 11.4 11.2 12.9 16.5 19.7 20.3 Note: e estimate. *Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. 139 S T A T I S T I C A L A P P E N D I X Table A.23 External financing: Europe and Central Asia, 1998­2004 $ billions 1998 1999 2000 2001 2002 2003 2004e Current account balance 25.8 2.5 15.5 17.4 3.8 2.6 9.6 as % GDP 2.5 0.1 1.8 2.0 0.5 0.0 0.6 Financed by: Net equity flows 30.1 30.4 30.4 31.8 34.9 36.2 41.2 Net FDI inflows 26.1 28.4 29.2 31.4 35.0 35.6 37.6 Net portfolio equity inflows 4.0 2.0 1.3 0.4 0.1 0.6 3.6 Net debt flows 43.0 18.9 19.9 2.7 28.0 56.9 56.0 Official creditors 7.5 0.6 0.0 2.2 2.6 6.2 6.2 World Bank 1.5 1.9 2.1 2.1 1.0 0.7 0.6 IMF 5.3 3.1 0.7 6.1 4.6 2.0 4.4 Others 0.6 0.7 1.4 6.0 3.0 3.5 2.4 Private creditors 35.5 19.5 19.9 0.6 25.4 63.1 62.3 Net M-L term debt flows 29.8 17.9 11.6 5.9 20.5 30.9 33.4 Bonds 16.0 8.2 5.3 1.6 4.0 9.6 30.2 Banks 14.7 10.4 7.9 6.6 18.1 23.3 5.0 Others 0.9 0.8 1.6 2.2 1.6 2.0 1.7 Net short-term debt flows 5.7 1.6 8.3 5.4 4.9 32.2 28.8 Balancing item* 42.2 40.5 47.7 40.8 23.0 29.6 39.2 Change in reserves ( increase) 5.1 6.4 18.2 11.1 43.7 60.9 67.6 Memo items: Bilateral aid grants 5.4 8.2 8.6 7.1 8.6 8.7 9.0 (ex technical cooperation grants) Net private flows (debt equity) 65.6 49.9 50.4 32.4 60.4 99.3 103.4 Net official flows (aid debt) 12.9 7.7 8.6 9.3 11.2 2.4 2.7 Workers' remittances 12.8 10.7 11.0 11.4 11.5 12.9 12.9 Note: e estimate. *Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. 140 S T A T I S T I C A L A P P E N D I X Table A.24 External financing: Latin America and the Caribbean, 1998­2004 $ billions 1998 1999 2000 2001 2002 2003 2004e Current account balance 89.5 55.5 46.9 53.4 15.8 7.9 28.2 as % GDP 4.5 3.1 2.4 2.8 1.0 0.5 1.5 Financed by: Net equity flows 71.8 84.5 78.4 72.7 47.2 39.9 40.9 Net FDI inflows 74.0 88.2 78.9 70.2 45.7 36.5 42.4 Net portfolio equity inflows 2.2 3.6 0.6 2.5 1.4 3.4 1.5 Net debt flows 37.3 12.1 8.4 5.4 8.5 3.3 2.5 Official creditors 10.9 1.6 11.1 20.4 13.0 4.9 10.3 World Bank 2.4 2.1 2.0 1.3 0.3 0.4 1.9 IMF 2.5 0.9 10.7 15.6 11.9 5.6 4.6 Others 6.0 0.3 2.4 3.5 1.4 0.2 3.8 Private creditors 26.4 10.5 2.8 15.0 21.5 1.6 12.8 Net M-L term debt flows 54.7 18.8 4.3 1.5 11.5 1.2 9.7 Bonds 17.3 19.3 5.3 2.8 0.2 12.9 17.7 Banks 39.1 1.4 0.2 2.6 9.7 10.8 7.8 Others 1.7 0.9 0.8 1.6 1.6 0.9 0.2 Net short-term debt flows 28.3 8.3 1.6 13.6 10.0 2.8 3.1 Balancing item* 28.8 48.6 20.2 21.8 22.0 17.9 49.8 Change in reserves ( increase) 9.2 7.4 2.9 2.9 0.8 33.2 21.8 Memo items: Bilateral aid grants 3.2 2.9 2.5 3.2 2.8 3.1 3.2 (ex technical cooperation grants) Net private flows (debt equity) 98.3 95.0 81.1 57.7 25.6 38.3 53.6 Net official flows (aid debt) 14.1 4.5 8.7 23.6 15.7 7.9 7.1 Workers' remittances 15.9 17.7 20.2 24.2 28.1 34.4 36.9 Note: e estimate. *Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. 141 S T A T I S T I C A L A P P E N D I X Table A.25 External financing: Middle East and North Africa, 1998­2004 $ billions 1998 1999 2000 2001 2002 2003 2004e Current account balance 11.6 4.2 24.1 17.3 15.6 25.7 41.7 as % GDP 3.5 1.3 6.7 4.5 4.2 6.1 9.3 Financed by: Net equity flows 3.4 4.4 4.5 5.6 3.6 4.9 4.3 Net FDI inflows 3.1 3.7 4.3 5.7 3.8 4.8 4.1 Net portfolio equity inflows 0.2 0.6 0.2 0.1 0.2 0.1 0.2 Net debt flows 3.6 3.0 4.5 0.1 2.1 0.7 0.1 Official creditors 1.6 2.5 2.8 1.2 2.6 2.5 2.6 World Bank 0.2 0.2 0.3 0.1 0.3 0.3 0.6 IMF 0.0 0.0 0.2 0.1 0.3 0.6 0.4 Others 1.3 2.7 2.3 1.0 2.0 1.6 1.6 Private creditors 5.2 0.5 1.8 1.3 4.6 1.8 2.6 Net M-L term debt flows 1.8 1.5 0.8 3.8 4.5 0.0 2.4 Bonds 1.3 1.4 1.2 4.4 5.0 0.7 1.5 Banks 2.0 1.6 0.5 0.1 0.3 1.1 0.9 Others 1.5 1.2 0.9 0.4 0.2 0.4 0.0 Net short-term debt flows 3.3 1.0 2.5 2.5 0.1 1.8 0.2 Balancing item* 3.0 6.8 19.3 13.5 9.2 7.9 33.7 Change in reserves ( increase) 1.7 1.2 4.8 9.5 12.0 22.0 12.2 Memo items: Bilateral aid grants 3.5 2.7 3.1 2.2 2.4 3.6 4.0 (ex technical cooperation grants) Net private flows (debt equity) 8.5 3.9 2.8 6.9 8.2 6.7 6.8 Net official flows (aid debt) 1.9 0.2 0.3 1.1 0.1 1.1 1.3 Workers' remittances 12.5 12.2 12.3 14.4 14.8 16.1 17.0 Note: e estimate. *Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. 142 S T A T I S T I C A L A P P E N D I X Table A.26 External financing: South Asia, 1998­2004 $ billions 1998 1999 2000 2001 2002 2003 2004e Current account balance 9.4 5.2 5.8 1.2 10.1 11.6 0.7 as % GDP 1.8 0.9 1.0 0.2 1.6 1.6 0.1 Financed by: Net equity flows 2.9 5.5 5.8 7.2 5.9 13.4 14.0 Net FDI inflows 3.5 3.1 3.3 4.4 4.8 5.2 6.5 Net portfolio equity inflows 0.6 2.4 2.5 2.8 1.1 8.2 7.5 Net debt flows 4.7 0.5 3.5 0.9 0.4 4.0 4.4 Official creditors 2.3 2.5 0.5 2.2 2.4 1.8 1.6 World Bank 0.8 1.0 0.7 1.5 1.0 0.4 1.1 IMF 0.4 0.1 0.3 0.3 0.1 0.1 0.2 Others 2.0 1.6 0.0 0.4 1.4 1.3 0.7 Private creditors 2.4 2.0 3.0 3.1 2.9 2.2 2.8 Net M-L term debt flows 3.7 2.1 3.9 2.0 0.6 2.2 3.0 Bonds 4.2 1.2 5.4 0.2 0.5 3.1 3.2 Banks 0.7 0.5 2.0 1.4 1.2 0.8 0.3 Others 1.1 0.4 0.5 0.3 0.1 0.1 0.1 Net short-term debt flows 1.3 0.1 0.9 1.1 2.3 0.0 0.2 Balancing item* 4.8 4.1 1.3 2.7 10.5 14.0 9.2 Change in reserves ( increase) 3.0 5.0 4.7 10.2 27.0 35.0 26.9 Memo items: Bilateral aid grants 2.1 2.3 2.1 3.2 2.5 3.9 4.3 (ex technical cooperation grants) Net private flows (debt equity) 5.3 3.5 8.8 4.1 8.7 11.2 16.7 Net official flows (aid debt) 4.5 4.8 2.6 5.3 0.1 2.2 5.9 Workers' remittances 13.4 15.1 16.0 16.0 22.2 26.8 32.7 Note: e estimate. *Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. 143 S T A T I S T I C A L A P P E N D I X Table A.27 External financing: Sub-Saharan Africa, 1998­2004 $ billions 1998 1999 2000 2001 2002 2003 2004e Current account balance 16.9 9.3 3.2 5.1 3.1 4.5 2.6 as % GDP 5.0 2.1 1.2 0.8 0.3 0.8 0.6 Financed by: Net equity flows 15.6 18.1 10.5 13.9 8.6 10.8 14.8 Net FDI inflows 7.0 9.1 6.3 14.9 9.0 10.1 11.3 Net portfolio equity inflows 8.7 9.0 4.2 1.0 0.4 0.7 3.5 Net debt flows 1.3 1.0 0.5 1.7 0.3 2.7 3.6 Official creditors 0.5 0.3 0.7 0.3 2.5 1.3 1.4 World Bank 1.3 1.1 1.5 1.8 2.2 2.2 1.8 IMF 0.3 0.0 0.1 0.1 0.5 0.1 0.0 Others 0.5 0.8 0.9 1.7 0.1 0.9 0.4 Private creditors 1.8 1.3 1.2 2.0 2.8 1.5 2.2 Net M-L term debt flows 1.3 0.7 0.1 0.1 1.0 2.4 0.7 Bonds 0.3 1.2 1.0 1.9 2.7 4.6 1.6 Banks 1.3 1.7 0.7 1.5 3.0 1.4 2.6 Others 0.2 0.2 0.5 0.3 0.8 0.8 0.3 Net short-term debt flows 0.5 0.6 1.0 2.0 1.8 0.9 1.6 Balancing item* 1.1 6.5 7.0 6.8 4.9 4.8 1.6 Change in reserves ( increase) 1.5 1.4 6.1 0.3 0.3 4.2 19.4 Memo items: Bilateral aid grants 10.1 9.9 10.0 10.0 13.6 21.6 24.2 (ex technical cooperation grants) Net private flows (debt equity) 13.8 16.8 9.3 12.0 5.8 12.3 17.1 Net official flows (aid debt) 10.6 10.2 10.6 10.3 16.1 22.9 25.6 Workers' remittances 4.3 4.7 4.9 4.9 5.2 6.0 6.1 Note: e estimate. *Combination of errors and omissions and net acquisition of foreign assets (including FDI) by developing countries. 144 S T A T I S T I C A L A P P E N D I X Table A.28 Net inward foreign direct investment, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 128.6 168.1 171.5 182.4 166.2 174.8 154.0 151.8 165.5 East Asia and Pacific 58.6 62.1 57.7 49.9 44.2 48.2 55.6 59.6 63.6 China 40.2 44.2 43.8 38.8 38.4 44.2 49.3 53.5 56.0 Indonesia 6.2 4.7 0.4 2.7 4.6 3.3 1.5 0.6 0.5 Malaysia 5.1 5.1 2.2 3.9 3.8 0.6 3.2 2.5 2.8 Philippines 1.5 1.2 2.3 1.7 1.3 1.0 1.8 0.3 0.1 Thailand 2.3 3.9 7.3 6.1 3.4 3.9 1.0 2.0 1.7 Vietnam 2.4 2.2 1.7 1.4 1.3 1.3 1.4 1.5 1.8 East Europe and Central Asia 16.4 22.6 26.1 28.4 29.2 31.4 35.0 35.6 37.6 Bulgaria 0.1 0.5 0.5 0.8 1.0 0.8 0.9 1.4 1.6 Czech Republic 1.4 1.3 3.7 6.3 5.0 5.6 8.5 2.5 3.8 Hungary 2.4 2.2 2.1 2.0 1.7 2.6 2.9 2.5 2.9 Poland 4.5 4.9 6.4 7.3 9.3 5.7 4.1 4.1 4.7 Russian Federation 2.6 4.9 2.8 3.3 2.7 2.5 3.5 8.0 7.8 Turkey 0.7 0.8 0.9 0.8 1.0 3.3 1.0 1.6 2.4 Latin America and Caribbean 44.2 66.7 74.0 88.2 78.9 70.2 45.7 36.5 42.4 Argentina 7.0 9.2 7.3 24.0 10.4 2.2 1.1 1.0 0.6 Brazil 11.2 19.7 31.9 28.6 32.8 22.5 16.6 10.1 15.3 Chile 4.8 5.3 4.6 8.8 4.9 4.2 1.9 3.0 5.6 Mexico 9.2 12.8 12.4 13.2 16.6 26.8 14.8 10.8 14.1 Venezuela, R. B. de 2.2 6.2 5.0 2.9 4.7 3.7 0.8 2.5 0.7 Middle East and North Africa 1.7 3.2 3.1 3.7 4.3 5.7 3.8 4.8 4.1 Algeria 0.3 0.3 0.5 0.5 0.4 1.2 1.1 0.6 0.9 Egypt, Arab Rep. of 0.6 0.9 1.1 1.1 1.2 0.5 0.7 0.2 0.6 Morocco 0.3 1.2 0.4 1.4 0.4 2.8 0.5 2.3 1.6 Tunisia 0.2 0.3 0.7 0.4 0.8 0.5 0.8 0.5 0.4 South Asia 3.5 4.9 3.5 3.1 3.3 4.4 4.8 5.2 6.5 India 2.4 3.6 2.6 2.2 2.5 3.8 3.7 4.3 5.3 Pakistan 0.9 0.7 0.5 0.5 0.3 0.4 0.8 0.5 0.9 Sub-Saharan Africa 4.2 8.4 7.0 9.1 6.3 14.9 9.0 10.1 11.3 Angola 0.2 0.4 1.1 2.5 0.9 2.2 1.7 1.4 1.6 Nigeria 1.6 1.5 1.1 1.0 0.9 1.1 1.3 1.2 1.4 South Africa 0.8 3.8 0.6 1.5 1.0 7.3 0.7 0.8 1.1 Note: e estimate. 145 S T A T I S T I C A L A P P E N D I X Table A.29 Net inward portfolio equity flows, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 32.9 22.6 6.6 12.7 12.4 6.0 5.8 24.8 26.8 East Asia and the Pacific 9.7 3.9 3.4 2.3 4.8 1.4 4.0 11.8 13.6 China 1.9 5.7 0.8 0.6 6.9 0.8 2.2 7.7 10.5 Indonesia 1.8 5.0 4.4 0.8 1.0 0.4 0.9 1.1 1.1 Malaysia 2.7 8.0 0.4 0.1 1.8 0.7 0.1 1.3 1.7 Philippines 2.1 0.4 0.3 1.4 0.2 0.4 0.4 0.5 0.5 Thailand 1.2 3.9 0.3 0.9 0.9 0.4 0.5 1.2 0.2 Europe and Central Asia 4.3 4.0 4.0 2.0 1.3 0.4 0.1 0.6 3.6 Czech Republic 0.6 0.4 1.1 0.1 0.6 0.6 0.3 1.1 0.8 Hungary 0.4 1.0 0.6 1.2 0.4 0.1 0.1 0.3 0.8 Poland 0.7 0.6 1.7 0.0 0.4 0.3 0.5 0.8 0.8 Russian Federation 2.2 1.3 0.7 0.3 0.2 0.5 2.6 0.4 1.0 Turkey 0.2 0.0 0.5 0.4 0.5 0.1 0.0 1.0 1.0 Latin America and the Caribbean 12.2 13.3 2.2 3.6 0.6 2.5 1.4 3.4 1.5 Argentina 1.0 1.4 0.2 10.8 3.2 0.0 0.1 0.1 0.0 Brazil 5.8 5.1 1.8 2.6 3.1 2.5 2.0 3.0 0.9 Chile 0.7 1.7 0.6 0.5 0.4 0.2 0.3 0.3 0.1 Mexico 2.8 3.2 0.7 3.8 0.4 0.2 0.1 0.1 2.3 Venezuela, R. B. de 1.3 1.4 0.2 0.4 0.6 0.0 0.0 0.1 0.2 Middle East and North Africa 0.2 0.7 0.2 0.6 0.2 0.1 0.2 0.1 0.2 Egypt, Arab Rep. of 0.0 0.5 0.2 0.7 0.3 0.0 0.2 0.0 0.1 South Asia 4.1 2.9 0.6 2.4 2.5 2.8 1.1 8.2 7.5 India 4.0 2.6 0.6 2.3 2.5 3.0 1.1 8.2 7.5 Sub-Saharan Africa 2.4 5.6 8.7 9.0 4.2 1.0 0.4 0.7 3.5 South Africa 2.3 5.5 8.6 9.0 4.2 1.0 0.4 0.7 3.5 Note: e estimate. 146 S T A T I S T I C A L A P P E N D I X Table A.30 Net inward debt flows to developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 123.7 106.9 54.9 15.4 6.2 3.5 8.5 60.0 83.7 East Asia and Pacific 52.2 44.9 32.5 12.2 16.2 9.1 13.2 1.7 17.2 China 13.9 18.5 14.2 1.6 5.2 0.0 0.6 13.5 -- Indonesia 12.3 10.1 4.6 3.8 0.7 6.0 7.5 5.5 -- Malaysia 6.4 8.4 3.6 0.7 0.4 4.7 4.0 1.2 -- Philippines 4.5 7.6 3.1 3.1 2.3 1.7 0.9 0.6 -- Thailand 13.9 1.3 7.9 9.4 13.7 10.0 9.9 7.6 -- Eastern Europe and Central Asia 24.1 35.3 43.0 18.9 19.9 2.7 28.0 56.9 56.0 Bulgaria 0.2 1.0 0.2 0.3 0.5 0.2 0.6 1.0 -- Czech Republic 4.1 3.2 1.4 0.2 1.7 0.5 1.0 3.5 -- Hungary 2.0 1.4 2.7 2.0 0.4 1.7 0.5 4.4 -- Poland 1.0 3.8 5.1 4.8 0.8 2.5 1.2 7.0 -- Russian Federation 7.3 7.6 21.9 4.2 2.8 3.9 2.6 12.8 -- Turkey 3.1 4.2 5.5 10.9 18.2 4.5 13.2 4.9 -- Latin America and Caribbean 40.8 25.2 37.3 12.1 8.4 5.4 8.5 3.3 2.5 Argentina 14.1 17.1 11.7 6.3 4.3 5.7 1.8 0.1 -- Brazil 19.2 1.3 6.7 5.6 4.0 5.2 1.2 0.5 -- Chile 5.6 1.8 4.0 1.7 2.9 0.5 1.6 2.1 -- Colombia 4.4 3.6 0.8 1.3 0.2 2.8 0.9 0.9 -- Mexico 4.9 4.9 9.0 6.9 16.4 3.2 8.7 2.2 -- Venezuela, R. B. de 0.2 2.6 1.7 0.2 0.9 1.1 3.2 0.1 -- Middle East and North Africa 0.7 3.5 3.6 3.0 4.5 0.1 2.1 0.7 0.1 Algeria 1.6 0.4 1.6 1.9 1.6 2.0 1.4 1.4 -- Egypt, Arab Rep. of 0.5 0.6 1.1 0.6 0.7 0.1 0.7 1.1 -- Lebanon 1.1 1.1 1.7 1.5 1.8 2.7 4.4 1.2 -- South Asia 2.7 0.7 4.7 0.5 3.5 0.9 0.4 4.0 4.4 India 0.7 1.6 3.0 1.1 3.4 1.9 1.0 4.5 -- Pakistan 1.1 1.6 0.7 0.7 0.3 0.3 0.6 0.9 -- Sub-Saharan Africa 3.2 4.4 1.3 1.0 0.5 1.7 0.3 2.7 3.6 South Africa 0.7 0.4 0.3 0.7 1.2 0.8 0.5 2.7 -- Note: -- not available; e estimate. 147 S T A T I S T I C A L A P P E N D I X Table A.31 Net inward short-term debt flows to developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 37.4 9.2 64.5 20.1 7.9 23.9 2.8 49.0 53.6 East Asia and Pacific 19.6 4.7 43.3 13.9 10.1 0.7 7.3 18.7 20.1 China 3.1 6.1 14.1 2.2 2.1 1.8 6.3 18.4 -- Indonesia 6.3 0.6 9.7 1.6 1.5 1.0 0.2 0.9 -- Malaysia 3.8 3.9 6.5 2.5 1.4 1.7 2.1 0.5 -- Philippines 2.7 3.8 4.6 1.4 0.2 0.1 0.4 0.6 -- Thailand 3.6 9.9 8.2 6.2 8.5 1.7 1.3 1.0 -- Eastern Europe and Central Asia 7.8 10.9 5.7 1.6 8.3 5.4 4.9 32.2 28.8 Bulgaria 0.6 0.8 0.2 0.3 0.2 0.2 0.6 0.6 -- Czech Republic 0.7 2.4 0.5 1.1 0.2 0.6 0.3 1.6 -- Hungary 0.2 0.0 1.4 1.2 0.6 0.5 1.0 2.5 -- Poland 0.6 2.5 3.3 2.8 1.7 1.5 0.4 4.8 -- Russian Federation 0.3 1.4 0.5 1.0 2.0 2.5 1.6 9.6 -- Turkey 1.6 0.6 3.2 2.3 5.4 12.6 0.1 4.4 -- Latin America and Caribbean 4.6 7.8 28.3 8.3 1.6 13.6 10.0 2.8 3.1 Argentina 2.1 8.5 1.0 1.5 1.1 8.3 0.4 0.7 -- Brazil 4.3 16.0 24.0 0.7 1.8 2.5 4.9 3.8 -- Chile 3.6 1.5 0.4 0.8 1.9 0.9 0.5 1.7 -- Colombia 0.3 0.1 0.5 2.3 1.1 0.4 0.4 0.1 -- Mexico 7.5 2.0 1.5 2.3 5.1 4.4 4.7 0.7 -- Venezuela, R. B. de 0.2 1.5 2.0 0.1 2.0 0.7 0.2 0.2 -- Middle East and North Africa 1.9 0.0 3.3 1.0 2.5 2.5 0.1 1.8 0.2 Algeria 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.0 -- Egypt, Arab Rep. of 0.0 0.6 1.3 0.0 0.2 0.7 0.1 0.3 -- Lebanon 0.3 0.1 0.2 0.2 0.3 0.1 0.1 0.6 -- South Asia 1.2 2.1 1.3 0.1 0.9 1.1 2.3 0.0 0.2 India 1.7 1.7 0.7 0.4 0.5 0.7 1.8 0.2 -- Pakistan 0.4 0.3 0.5 0.1 0.3 0.2 0.2 0.3 -- Sub-Saharan Africa 2.4 3.5 0.5 0.6 1.0 2.0 1.8 0.9 1.6 South Africa 1.2 0.1 0.5 0.6 0.3 1.2 1.0 0.0 -- Note: -- not available; e estimate. 148 S T A T I S T I C A L A P P E N D I X Table A.32 Net inward debt flows to public sector and publicly guaranteed borrowers, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 39.1 42.0 68.5 30.3 5.0 18.9 4.5 17.0 22.3 East Asia and Pacific 12.8 29.0 18.8 11.2 4.7 0.8 11.8 12.7 1.5 China 10.7 11.1 2.5 1.6 1.1 0.0 5.3 5.9 -- Indonesia 0.6 3.6 9.0 2.0 0.9 2.2 3.1 0.9 -- Malaysia 0.3 1.7 0.5 0.9 1.4 3.1 2.1 2.0 -- Philippines 0.3 1.8 1.3 4.6 3.1 0.2 0.5 0.7 -- Thailand 1.3 9.4 4.6 1.9 0.2 2.7 6.2 5.6 -- Eastern Europe and Central Asia 11.8 15.5 21.8 7.0 5.2 1.5 3.3 5.9 8.5 Bulgaria 0.4 0.2 0.3 0.4 0.2 0.1 0.3 0.0 -- Czech Republic 2.8 0.9 1.0 1.0 1.0 0.9 0.1 0.5 -- Hungary 3.1 1.8 0.4 1.5 1.4 0.8 0.8 1.4 -- Poland 0.2 0.5 0.1 0.3 1.4 3.3 0.1 1.7 -- Russian Federation 7.0 7.1 16.2 3.5 3.9 7.0 4.1 7.1 -- Turkey 0.5 2.5 1.0 4.6 11.3 9.2 7.5 1.3 -- Latin America and Caribbean 13.7 2.0 24.6 11.7 6.6 18.6 9.6 8.5 14.5 Argentina 10.1 4.9 8.3 8.7 6.4 6.6 1.4 0.9 -- Brazil 2.7 0.3 12.1 0.8 6.5 9.4 10.8 3.7 -- Chile 2.0 0.3 0.6 0.6 0.4 0.4 1.1 1.1 -- Colombia 1.4 1.1 1.0 3.4 0.9 2.5 1.3 1.4 -- Mexico 0.6 9.9 0.7 3.7 9.8 3.3 2.4 1.5 -- Venezuela, R. B. de 0.2 0.4 0.2 0.6 0.5 1.7 2.6 0.3 -- Middle East and North Africa 1.4 4.1 1.9 2.9 2.6 2.3 2.2 2.6 1.7 Algeria 1.5 0.3 1.6 2.0 1.6 1.9 1.4 1.9 -- Egypt, Arab Rep. of 0.2 0.1 0.5 0.7 0.6 0.8 0.8 1.1 -- Lebanon 0.4 0.5 1.7 1.4 1.4 2.5 4.7 0.6 -- South Asia 0.5 0.8 5.5 1.4 4.5 0.5 1.7 5.7 2.8 India 1.5 1.5 3.6 0.1 3.8 1.2 2.7 6.7 -- Pakistan 1.1 1.6 0.9 1.2 0.3 0.9 0.4 0.3 -- Sub-Saharan Africa 1.6 2.8 0.4 1.8 0.2 0.1 2.8 1.5 0.3 South Africa 0.6 1.1 1.0 1.6 0.0 0.4 1.4 0.0 -- Note: -- not available; e estimate. 149 S T A T I S T I C A L A P P E N D I X Table A.33 Net inward debt flows to private sector borrowers, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 84.6 65.0 13.6 14.9 11.2 22.3 3.9 76.9 61.4 East Asia and Pacific 39.3 15.9 51.3 23.4 20.9 8.3 1.5 14.4 18.7 China 3.2 7.4 16.7 3.2 4.1 0.1 5.9 19.4 -- Indonesia 12.9 6.5 13.6 5.8 1.6 3.8 4.4 4.6 -- Malaysia 6.1 6.7 4.0 1.6 1.0 1.6 1.9 0.8 -- Philippines 4.2 5.8 4.3 1.4 0.8 1.5 1.5 0.1 -- Thailand 12.6 10.7 12.5 11.3 13.5 7.3 3.7 2.1 -- Eastern Europe and Central Asia 12.3 19.8 21.1 11.9 14.7 4.2 24.7 62.8 47.5 Bulgaria 0.6 0.8 0.1 0.1 0.3 0.1 0.9 1.0 -- Czech Republic 1.3 2.3 0.4 0.8 0.6 0.4 1.6 3.0 -- Hungary 1.1 0.5 3.1 0.5 1.8 2.5 1.3 5.8 -- Poland 0.8 3.3 5.2 5.1 2.2 5.8 1.0 5.3 -- Russian Federation 0.3 0.5 2.4 0.7 1.1 3.1 1.5 20.0 -- Turkey 2.7 1.8 6.5 6.3 6.8 13.7 5.7 4.7 -- Latin America and Caribbean 27.1 27.2 12.7 0.4 1.8 13.2 18.1 5.2 12.0 Argentina 3.9 12.3 3.4 2.4 2.1 12.3 0.5 0.8 -- Brazil 16.5 1.0 5.3 6.4 2.4 4.2 11.9 4.2 -- Chile 7.6 2.1 3.5 1.1 3.3 0.1 0.5 1.0 -- Colombia 3.0 2.5 0.2 2.1 1.1 0.3 0.4 2.4 -- Mexico 5.5 5.0 8.3 10.5 6.6 0.1 6.2 0.7 -- Venezuela, R. B. de 0.4 2.2 1.5 0.7 1.4 0.6 0.6 0.2 -- Middle East and North Africa 2.1 0.6 5.5 0.1 1.9 2.1 0.2 1.9 1.7 Algeria 0.1 0.2 0.0 0.0 0.0 0.0 0.1 0.5 -- Egypt, Arab Rep. of 0.2 0.6 1.5 0.1 0.1 0.7 0.1 0.0 -- Lebanon 0.7 0.6 0.1 0.1 0.4 0.2 0.2 0.6 -- South Asia 2.1 0.1 0.8 0.9 1.1 1.4 2.1 1.8 1.5 India 2.2 0.1 0.5 1.0 0.4 0.7 1.7 2.3 -- Pakistan 0.0 0.0 0.2 0.5 0.6 0.5 0.1 0.6 -- Sub-Saharan Africa 1.6 1.6 0.9 2.7 0.3 1.6 3.1 1.2 3.9 South Africa 0.1 1.5 0.7 2.3 1.3 0.4 1.9 2.6 -- Note: -- not available; e estimate. 150 S T A T I S T I C A L A P P E N D I X Table A.34 Net inward debt flows from public sector creditors, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 3.8 12.9 34.4 13.9 5.8 27.0 5.2 11.9 25.3 East Asia and Pacific 3.6 17.3 14.7 12.6 7.0 3.2 7.9 7.5 9.2 China 4.4 4.3 2.3 3.4 1.5 2.2 1.2 3.1 -- Indonesia 0.8 3.6 8.5 4.8 2.9 0.8 1.4 0.3 -- Malaysia 0.8 0.2 0.2 0.6 0.6 2.1 0.2 0.1 -- Philippines 0.3 0.6 0.7 0.2 0.3 0.3 0.4 0.6 -- Thailand 0.4 8.4 1.8 2.5 0.3 1.5 5.5 4.6 -- Eastern Europe and Central Asia 8.6 6.6 7.5 0.6 0.0 2.2 2.6 6.2 6.2 Bulgaria 0.1 0.3 0.4 0.3 0.2 0.3 0.3 0.1 -- Czech Republic 0.1 0.1 0.0 0.0 0.1 0.2 0.0 0.2 -- Hungary 0.9 0.1 1.1 0.2 0.2 0.2 0.0 0.5 -- Poland 0.2 0.1 0.5 0.4 0.5 4.1 1.1 1.7 -- Russian Federation 6.8 4.2 6.3 3.0 3.3 4.8 3.3 4.2 -- Turkey 0.8 0.2 0.4 0.1 4.4 10.4 6.7 1.3 -- Latin America and Caribbean 10.7 8.6 10.9 1.6 11.1 20.4 13.0 4.9 10.3 Argentina 0.4 0.1 1.0 0.1 0.9 10.3 1.4 0.9 -- Brazil 0.8 1.2 9.5 4.5 8.5 9.5 12.1 3.0 -- Chile 0.6 0.4 0.1 0.1 0.1 0.1 0.3 0.1 -- Colombia 0.1 0.5 0.2 1.0 0.1 1.1 0.0 2.1 -- Mexico 9.6 8.0 1.9 5.4 4.8 0.7 0.2 0.3 -- Venezuela, R. B. de 0.1 0.3 1.0 0.1 0.3 1.1 0.6 0.6 -- Middle East and North Africa 0.8 4.0 1.6 2.5 2.8 1.2 2.6 2.5 2.6 Algeria 1.5 0.3 0.3 0.4 0.4 1.0 1.3 1.4 -- Egypt, Arab Rep. of 0.0 0.0 0.2 0.5 0.6 0.7 0.8 0.8 -- Lebanon 0.2 0.1 0.2 0.1 0.1 0.1 0.0 0.6 -- South Asia 1.0 0.3 2.3 2.5 0.5 2.2 2.4 1.8 1.6 India 0.8 1.0 0.6 0.8 0.3 0.4 3.8 2.8 -- Pakistan 0.9 0.7 0.9 1.2 0.3 1.1 0.9 0.2 -- Sub-Saharan Africa 2.0 1.4 0.5 0.3 0.7 0.3 2.5 1.3 1.4 South Africa 0.0 0.4 0.4 0.0 0.1 0.0 0.0 0.1 -- Note: -- not available; e estimate. 151 S T A T I S T I C A L A P P E N D I X Table A.35 Net inward debt flows from private sector creditors, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 119.9 94.0 20.5 1.5 0.4 30.5 3.3 71.8 109.0 East Asia and Pacific 48.6 27.6 47.1 24.7 23.2 12.3 5.3 9.3 26.4 China 9.5 14.2 16.5 5.0 6.8 2.2 1.8 16.6 -- Indonesia 13.1 6.5 13.0 8.6 3.6 5.2 6.1 5.1 -- Malaysia 7.2 8.6 3.8 1.3 0.2 2.6 4.2 1.1 -- Philippines 4.9 7.0 3.7 2.9 1.9 2.0 0.5 1.2 -- Thailand 13.4 9.7 9.6 11.9 14.0 8.5 4.4 3.0 -- Eastern Europe and Central Asia 15.4 28.7 35.5 19.5 19.9 0.6 25.4 63.1 62.3 Bulgaria 0.3 0.7 0.2 0.1 0.2 0.1 0.9 0.9 -- Czech Republic 4.0 3.2 1.4 0.2 1.7 0.7 1.7 3.3 -- Hungary 1.1 1.3 3.8 1.8 0.7 1.9 0.6 4.9 -- Poland 0.7 3.9 5.6 5.2 1.3 6.6 2.2 8.7 -- Russian Federation 0.5 3.4 12.3 1.2 0.5 0.9 0.8 17.0 -- Turkey 4.0 4.4 5.9 11.0 13.8 14.9 6.5 4.7 -- Latin America and Caribbean 51.5 33.8 26.4 10.5 2.8 15.0 21.5 1.6 12.8 Argentina 13.7 17.3 10.7 6.4 3.4 16.0 0.5 0.8 -- Brazil 20.1 0.1 2.7 10.1 4.4 4.2 13.2 3.5 -- Chile 6.2 2.2 4.1 1.8 3.0 0.6 1.9 2.2 -- Colombia 4.5 4.1 0.6 0.2 0.3 1.7 0.9 3.0 -- Mexico 4.8 3.1 10.8 12.2 11.6 2.5 8.9 1.8 -- Venezuela, R. B. de 0.0 2.9 0.7 0.3 1.2 0.0 2.6 0.7 -- Middle East and North Africa 1.5 0.5 5.2 0.5 1.8 1.3 4.6 1.8 2.6 Algeria 0.1 0.7 1.3 1.5 1.2 1.0 0.1 0.0 -- Egypt, Arab Rep. of 0.4 0.6 1.3 0.1 0.1 0.8 0.1 0.3 -- Lebanon 0.8 1.0 1.6 1.4 1.7 2.6 4.4 0.6 -- South Asia 1.6 0.4 2.4 2.0 3.0 3.1 2.9 2.2 2.8 India 1.5 0.6 2.5 1.9 3.6 2.3 2.9 1.7 -- Pakistan 0.1 0.9 0.2 0.6 0.7 0.7 0.3 0.7 -- Sub-Saharan Africa 1.2 3.0 1.8 1.3 1.2 2.0 2.8 1.5 2.2 South Africa 0.7 0.0 0.1 0.7 1.2 0.8 0.5 2.6 -- Note: -- not available; e estimate. 152 S T A T I S T I C A L A P P E N D I X Table A.36 Gross market-based capital flows to developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004 All developing countries 196.1 264.5 176.9 160.0 213.5 151.6 146.5 206.5 269.4 East Asia and the Pacific 69.2 73.1 31.6 32.4 49.7 21.8 44.5 53.1 60.0 China 16.6 25.9 8.9 8.4 29.0 7.3 15.6 25.1 30.5 Indonesia 21.9 17.6 0.7 2.4 1.1 1.0 1.6 6.6 4.4 Malaysia 10.7 11.5 3.4 7.4 7.0 5.1 12.8 7.7 12.5 Philippines 6.0 9.2 11.7 11.9 8.5 5.8 10.1 8.9 8.1 Thailand 13.2 8.7 6.8 2.0 4.1 2.5 3.6 4.3 4.3 Europe and Central Asia 25.7 46.0 42.9 30.1 45.5 26.0 34.6 58.5 87.0 Hungary 3.5 3.3 3.8 3.4 2.1 2.7 1.8 6.5 9.3 Poland 0.8 4.3 3.6 4.5 3.8 5.4 6.4 10.2 6.8 Russian Federation 5.7 16.9 15.0 0.7 10.0 4.7 10.1 17.0 28.4 Turkey 8.6 9.9 9.7 12.9 22.4 6.9 7.4 10.2 15.7 Latin America and the Caribbean 75.7 105.4 74.8 67.0 85.5 71.1 44.3 63.3 77.7 Argentina 23.2 25.5 26.0 20.9 18.8 8.4 2.0 0.7 2.0 Brazil 13.7 32.7 18.1 15.0 28.7 24.9 15.0 19.1 22.4 Chile 3.7 6.5 3.8 7.2 7.3 3.9 2.3 2.7 5.8 Mexico 29.2 30.7 19.8 17.5 23.2 18.8 13.8 28.0 30.0 Middle East and North Africa 3.2 7.9 4.8 8.7 6.5 10.1 8.8 7.3 15.5 Egypt, Arab Rep. of 0.2 1.5 1.8 4.6 1.1 2.5 1.0 2.0 1.7 Lebanon 0.5 1.1 1.5 1.4 1.9 3.3 1.0 0.2 3.3 South Asia 10.3 12.4 4.9 4.1 4.3 3.2 2.5 7.0 17.5 India 7.4 10.5 3.8 3.7 3.9 2.7 2.1 5.2 15.9 Pakistan 2.9 1.7 0.9 0.0 0.0 0.2 0.4 1.5 1.4 Sub-Saharan Africa 7.5 9.3 7.9 9.2 13.9 11.9 8.6 13.7 11.1 South Africa 5.7 7.1 4.9 5.6 10.9 7.5 4.7 7.8 5.5 153 S T A T I S T I C A L A P P E N D I X Table A.37 Gross international equity issuance by developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004 All developing countries 12.9 19.9 7.5 10.9 35.0 5.9 10.4 16.7 33.4 East Asia and the Pacific 6.5 11.6 4.3 5.7 21.6 3.4 7.0 12.0 19.0 China 3.3 10.1 1.4 3.6 21.1 2.9 5.5 8.9 16.6 Indonesia 1.3 0.8 0.0 0.8 0.0 0.3 0.2 0.9 0.5 Malaysia 0.6 0.4 0.2 0.1 0.2 0.0 1.2 0.6 0.7 Philippines 1.0 0.3 0.5 0.2 0.2 0.0 0.0 0.1 0.1 Thailand 0.2 0.0 2.3 0.8 0.0 0.2 0.1 1.5 1.0 Europe and Central Asia 1.3 1.7 2.2 1.0 3.3 0.3 1.6 1.2 5.2 Hungary 0.4 0.8 0.2 0.2 0.0 0.0 0.0 0.0 0.8 Poland 0.0 0.5 0.8 0.3 0.1 0.0 0.2 0.6 0.8 Russian Federation 0.8 0.1 0.0 0.1 0.5 0.2 1.3 0.5 2.6 Turkey 0.0 0.3 0.8 0.0 2.4 0.0 0.1 0.1 0.8 Latin America and the Caribbean 2.7 4.1 0.2 0.7 6.7 1.3 1.1 1.1 2.3 Argentina 0.4 0.5 0.0 0.3 0.2 0.0 0.0 0.0 0.1 Brazil 0.4 2.3 0.0 0.2 3.1 1.2 1.1 0.5 1.9 Chile 0.1 0.5 0.1 0.0 1.7 0.0 0.0 0.1 0.1 Mexico 0.7 0.8 0.0 0.2 1.6 0.0 0.0 0.5 0.2 Middle East and North Africa 0.4 0.4 0.4 0.3 0.3 0.0 0.0 0.0 1.0 Egypt, Arab Rep. of 0.2 0.3 0.1 0.3 0.3 0.0 0.0 0.0 0.1 South Asia 1.3 1.1 0.0 0.9 0.9 0.5 0.2 1.3 4.6 India 1.3 1.0 0.0 0.9 0.9 0.5 0.2 1.3 4.6 Sub-Saharan Africa 0.7 1.0 0.4 2.3 2.2 0.5 0.5 1.1 1.2 South Africa 0.6 1.0 0.4 0.8 2.0 0.5 0.4 1.1 1.1 154 S T A T I S T I C A L A P P E N D I X Table A.38 Gross international bond issues in developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004 All developing countries 71.6 90.8 70.9 67.5 67.2 65.4 59.9 87.5 110.7 East Asia and the Pacific 17.3 15.8 10.1 12.9 6.7 8.1 16.1 13.4 19.6 China 3.9 5.0 1.9 1.4 1.3 2.6 0.9 3.4 6.4 Indonesia 2.8 1.6 0.0 0.0 0.0 0.1 0.8 1.5 1.7 Malaysia 2.5 2.4 0.1 2.6 1.4 2.4 6.0 1.5 4.1 Philippines 3.7 4.7 7.8 8.9 4.0 2.8 8.4 6.8 6.0 Thailand 4.4 2.1 0.3 0.0 0.0 0.3 0.0 0.3 1.4 Europe and Central Asia 6.2 15.2 21.8 12.9 19.5 10.3 15.1 26.4 39.2 Croatia 0.1 0.5 0.1 0.6 0.9 0.9 0.8 0.8 1.1 Hungary 0.3 0.4 1.7 2.3 0.5 1.2 0.0 2.3 5.1 Poland 0.2 1.4 1.1 1.6 1.4 2.5 2.7 4.7 3.9 Russian Federation 1.1 6.9 12.2 0.0 4.8 1.4 3.7 8.3 10.5 Turkey 2.9 3.9 3.2 5.7 8.7 2.2 3.6 5.5 6.4 Latin America and the Caribbean 45.0 54.3 36.5 38.0 37.2 39.5 23.9 41.6 40.4 Argentina 13.1 13.5 14.2 13.3 11.9 3.3 0.0 0.0 1.0 Brazil 10.0 15.5 6.4 7.8 11.4 12.8 7.4 14.9 11.5 Colombia 1.9 1.3 1.4 1.7 1.5 4.3 1.0 1.8 1.5 Mexico 17.8 15.2 8.3 8.8 8.5 8.2 7.4 14.1 15.7 Venezuela, R. B. de 0.5 4.5 3.3 1.4 0.5 1.7 0.0 3.7 4.3 Middle East and North Africa 0.9 2.0 1.5 1.9 2.4 5.3 2.7 1.0 4.6 Egypt, Arab Rep. of 0.0 0.0 0.0 0.1 0.0 1.5 0.0 0.0 0.0 Lebanon 0.5 1.1 1.5 1.4 1.9 3.3 1.0 0.2 3.3 Tunisia 0.1 0.5 0.0 0.2 0.5 0.5 0.7 0.4 0.5 South Asia 1.2 2.5 0.0 0.0 0.0 0.1 0.2 0.5 5.0 India 1.1 2.0 0.0 0.0 0.0 0.1 0.2 0.5 4.4 Pakistan 0.1 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.5 Sub-Saharan Africa 1.0 1.1 1.0 1.8 1.5 2.2 1.9 4.7 2.0 South Africa 1.0 1.1 1.0 1.8 1.5 1.5 1.5 3.4 2.0 155 S T A T I S T I C A L A P P E N D I X Table A.39 Gross international bank lending to developing country borrowers, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004 All developing countries 111.6 153.8 98.5 81.6 111.3 80.2 76.2 102.2 125.3 East Asia and the Pacific 45.4 45.7 17.2 13.8 21.4 10.2 21.4 27.7 21.4 China 9.4 10.8 5.5 3.4 6.6 1.9 9.3 12.8 7.5 Indonesia 17.8 15.3 0.7 1.6 1.0 0.5 0.5 4.2 2.1 Malaysia 7.6 8.7 3.2 4.7 5.4 2.7 5.6 5.7 7.6 Philippines 1.3 4.2 3.4 2.8 4.3 3.1 1.7 2.0 2.1 Thailand 8.7 6.5 4.3 1.2 4.1 2.0 3.5 2.5 1.9 Europe and Central Asia 18.2 29.1 18.9 16.2 22.8 15.4 17.9 30.9 42.7 Czech Republic 3.2 3.6 2.4 0.6 1.2 0.9 0.3 2.2 1.8 Hungary 2.8 2.1 1.9 0.9 1.5 1.5 1.8 4.2 3.3 Poland 0.6 2.5 1.6 2.6 2.3 2.9 3.5 4.9 2.2 Russian Federation 3.8 9.9 2.7 0.7 4.7 3.1 5.1 8.2 15.3 Turkey 5.7 5.7 5.7 7.1 11.3 4.7 3.8 4.7 8.5 Latin America and the Caribbean 28.1 47.0 38.1 28.4 41.6 30.3 19.3 20.6 35.1 Argentina 9.8 11.5 11.8 7.2 6.7 5.0 2.0 0.7 0.9 Brazil 3.3 14.9 11.7 7.1 14.2 10.8 6.5 3.8 8.9 Chile 3.6 6.0 3.7 7.2 5.6 3.9 2.3 2.6 5.7 Colombia 2.3 4.9 1.8 2.0 2.3 0.6 1.3 0.2 0.4 Mexico 10.6 14.7 11.5 8.6 13.2 10.6 6.4 13.4 14.2 Middle East and North Africa 1.9 5.5 2.9 6.5 3.8 4.8 6.1 6.3 10.0 Egypt, Arab Rep. of 0.0 1.2 1.6 4.2 0.8 1.0 1.0 2.0 1.5 Iran 0.6 0.5 0.5 0.7 1.0 1.0 3.0 2.2 5.7 South Asia 7.8 8.9 4.9 3.2 3.4 2.6 2.2 5.2 7.9 India 5.0 7.5 3.8 2.8 3.0 2.1 1.8 3.5 7.0 Pakistan 2.8 1.3 0.9 0.0 0.0 0.2 0.4 1.5 0.9 Sub-Saharan Africa 5.8 7.2 6.5 5.1 10.3 9.2 6.2 7.9 7.9 South Africa 4.1 5.1 3.5 3.1 7.4 5.5 2.8 3.3 2.5 156 S T A T I S T I C A L A P P E N D I X Table A.40 Change in foreign exchange reserves, 1996­2004 $ billions ( increase) Gross foreign exchange reserves 2003 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 1,213.6 84.6 52.5 16.3 33.4 46.8 81.7 171.7 291.9 378.2 East Asia and the Pacific 544.8 45.2 12.8 20.7 29.3 10.1 47.7 87.9 136.7 230.3 China 403.3 31.5 34.9 5.1 9.7 10.9 46.6 74.2 116.8 206.7 Indonesia 34.7 4.5 1.7 6.3 3.8 2.0 1.2 3.7 4.0 0.5 Malaysia 43.5 3.2 6.1 4.7 4.9 1.0 1.0 3.7 10.2 18.2 Philippines 13.3 3.7 2.8 2.0 4.0 0.2 0.4 0.3 0.3 0.8 Thailand 41.0 1.7 11.5 2.7 5.4 1.9 0.4 5.7 2.9 6.0 Europe and Central Asia 236.2 2.3 7.4 5.1 6.4 18.2 11.1 43.7 60.9 67.6 Czech Republic 26.3 1.5 2.6 2.8 0.3 0.2 1.2 9.1 3.0 1.1 Hungary 12.0 2.3 1.3 0.9 1.5 0.2 0.6 0.6 2.3 2.6 Poland 31.7 3.1 2.6 6.9 1.1 0.2 1.2 2.8 3.8 3.3 Russian Federation 73.2 3.0 1.5 5.0 0.7 15.8 8.3 11.5 29.1 40.5 Turkey 33.8 4.0 2.2 0.8 3.7 0.9 3.6 8.2 6.9 2.1 Latin America and the Caribbean 189.7 28.1 13.5 9.2 7.4 2.9 2.9 0.8 33.2 21.8 Argentina 13.1 4.0 4.4 2.3 1.6 1.7 9.9 4.1 2.7 4.2 Brazil 49.1 8.6 7.5 8.2 7.8 2.3 3.2 1.7 11.7 3.6 Chile 15.2 0.8 2.3 2.0 1.1 0.5 0.6 0.8 0.4 0.3 Mexico 57.7 3.9 9.0 3.3 0.5 4.2 9.2 5.5 7.8 5.0 Venezuela, R. B. de 15.5 5.4 2.9 2.4 0.1 0.9 3.8 0.8 7.5 2.1 Middle East and North Africa 89.1 5.6 6.0 1.7 1.2 4.8 9.5 12.0 22.0 12.2 Algeria 32.9 2.2 3.8 1.2 2.4 7.5 6.1 5.1 9.8 8.4 Egypt, Arab Rep. of 13.4 1.2 1.3 0.6 3.6 1.4 0.0 0.3 0.2 0.0 Lebanon 12.5 1.4 0.0 0.6 1.2 1.8 0.9 2.2 5.3 0.3 South Asia 114.8 0.6 5.2 3.0 5.0 4.7 10.2 27.0 35.0 26.9 Bangladesh 2.6 0.5 0.2 0.3 0.3 0.1 0.2 0.4 0.9 0.5 India 97.6 2.3 4.6 2.6 5.0 5.3 8.0 21.7 30.6 27.5 Pakistan 10.7 1.2 0.6 0.2 0.5 0.0 2.1 4.4 2.6 1.1 Sub-Saharan Africa 39.0 2.8 7.6 1.5 1.4 6.1 0.3 0.3 4.2 19.4 Botswana 5.2 0.3 0.7 0.2 0.4 0.0 0.4 0.4 0.2 0.1 Nigeria 7.1 2.6 3.5 0.5 1.7 4.5 0.5 3.1 0.2 9.8 South Africa 6.2 1.9 3.8 0.6 1.9 0.3 0.0 0.2 0.6 6.1 Note: e estimate. 157 S T A T I S T I C A L A P P E N D I X Table A.41 Total external debt of developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 2,045.0 2,109.7 2,322.9 2,346.6 2,282.6 2,260.5 2,336.5 2,554.1 2,597.1 East Asia and Pacific 494.0 526.3 533.2 538.6 500.7 502.0 498.2 525.5 536.5 China 128.8 146.7 144.0 152.1 145.7 170.1 168.3 193.6 -- Indonesia 128.9 136.2 151.2 151.2 144.4 134.0 131.8 134.4 -- Malaysia 39.7 47.2 42.4 41.9 41.9 44.6 48.8 49.1 -- Philippines 44.0 50.7 53.5 58.1 60.9 58.5 60.1 62.7 -- Thailand 112.8 109.7 104.9 96.8 79.7 67.2 59.5 51.8 -- Eastern Europe and Central Asia 368.3 391.2 490.3 503.5 510.8 507.8 560.2 676.0 728.5 Bulgaria 10.4 11.1 11.4 11.0 11.2 10.5 11.5 13.3 -- Czech Republic 20.1 23.1 24.2 22.8 21.5 22.7 27.6 34.6 -- Hungary 27.3 24.6 28.5 29.9 29.5 30.3 35.0 45.8 -- Poland 43.5 41.7 57.7 65.9 65.8 67.4 78.5 95.2 -- Russian Federation 126.4 127.6 177.9 174.8 160.0 152.5 147.4 175.3 -- Turkey 79.8 84.8 97.1 102.2 117.3 113.4 131.2 145.7 -- Latin America and Caribbean 638.5 670.4 752.2 771.8 755.1 749.2 746.2 779.6 773.5 Argentina 111.4 128.4 141.5 145.8 147.5 154.1 150.0 166.2 -- Brazil 181.3 198.0 241.0 244.0 239.2 226.8 228.6 235.4 -- Chile 27.5 27.0 33.7 34.8 37.3 38.6 41.2 43.2 -- Colombia 28.9 31.9 33.1 34.4 33.9 36.2 33.2 33.0 -- Mexico 156.3 147.6 159.0 166.5 150.3 145.7 140.2 140.0 -- Venezuela, R. B. de 34.5 35.7 37.8 37.6 38.2 36.0 34.0 34.9 -- Middle East and North Africa 163.2 151.3 160.9 155.8 144.6 142.1 150.2 158.8 155.5 Algeria 33.6 30.9 30.7 28.0 25.3 22.6 22.9 23.4 -- Egypt, Arab Rep. of 31.5 30.1 32.4 31.0 29.2 29.3 30.0 31.4 -- Lebanon 4.0 5.0 6.8 8.2 9.9 12.4 17.1 18.6 -- South Asia 149.6 149.6 157.6 162.0 160.0 156.2 170.2 182.8 184.7 India 93.5 94.3 97.6 98.3 99.1 97.5 106.3 113.5 -- Pakistan 29.8 30.1 32.3 33.9 32.8 31.7 33.7 36.3 -- Sub-Saharan Africa 231.3 220.8 228.6 215.0 211.3 203.2 211.4 231.4 218.4 South Africa 26.1 25.3 24.8 23.9 24.9 24.1 25.0 27.8 -- Note: -- not available; e estimate. 158 S T A T I S T I C A L A P P E N D I X Table A.42 Total external medium- and long-term debt of developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 1,670.0 1,722.2 1,970.9 2,012.6 1,965.2 1,938.6 2,015.6 2,152.1 2,136.7 East Asia and Pacific 365.3 394.3 447.3 464.9 437.5 411.2 399.3 400.1 391.1 China 103.4 115.2 126.7 136.9 132.6 128.5 120.5 120.6 -- Indonesia 96.7 103.3 131.1 131.2 121.8 112.2 108.9 111.5 -- Malaysia 28.6 32.3 33.9 35.9 37.3 38.3 40.5 40.2 -- Philippines 36.1 39.0 46.3 52.3 54.9 52.5 54.5 56.5 -- Thailand 65.1 71.9 75.3 73.4 64.8 54.0 47.5 40.9 -- Eastern Europe and Central Asia 315.1 331.7 414.8 423.7 424.1 425.1 472.0 541.2 562.9 Bulgaria 9.2 9.1 9.6 9.7 9.8 9.3 9.6 10.6 -- Czech Republic 14.3 15.0 16.6 14.0 12.5 13.2 16.8 20.7 -- Hungary 23.9 21.2 23.7 26.3 25.4 25.7 29.3 36.8 -- Poland 40.8 36.6 49.3 54.6 56.2 56.3 64.6 75.7 -- Russian Federation 114.5 121.7 163.1 159.0 144.4 133.5 131.1 144.5 -- Turkey 62.5 66.8 75.9 78.8 88.4 97.0 114.8 122.6 -- Latin America and Caribbean 517.1 542.2 633.2 662.5 647.6 655.7 667.3 696.3 680.0 Argentina 87.9 96.4 110.6 116.3 119.2 134.1 134.9 143.2 -- Brazil 145.4 163.2 211.1 214.7 208.2 198.5 205.2 215.8 -- Chile 20.4 21.5 28.6 30.5 31.1 33.3 35.4 35.7 -- Colombia 23.0 26.2 26.9 30.5 31.1 33.0 29.5 29.4 -- Mexico 126.4 119.8 132.7 142.4 131.4 131.1 130.3 130.8 -- Venezuela, R. B. de 31.8 31.5 35.5 35.5 34.1 31.2 29.4 30.5 -- Middle East and North Africa 144.4 132.7 138.9 132.6 123.8 123.8 131.7 138.5 134.9 Algeria 33.3 30.7 30.5 27.8 25.0 22.4 22.8 23.2 -- Egypt, Arab Rep. of 29.2 27.1 28.2 26.8 25.1 26.0 26.5 27.6 -- Lebanon 2.3 3.2 4.8 6.0 7.3 9.8 14.5 15.5 -- South Asia 139.3 141.4 150.5 155.0 154.0 151.3 162.9 175.6 178.2 India 86.7 89.3 93.3 94.4 95.6 94.8 101.7 108.7 -- Pakistan 27.0 27.6 30.1 32.1 31.3 30.4 32.1 35.1 -- Sub-Saharan Africa 188.8 180.0 186.2 174.0 178.2 171.5 182.4 200.3 189.6 South Africa 15.2 14.3 13.3 13.1 15.3 15.7 17.6 20.4 -- Note: -- not available; e estimate. 159 S T A T I S T I C A L A P P E N D I X Table A.43 Total external short-term debt of developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 375.0 387.4 352.0 334.0 317.3 321.9 320.8 402.1 460.4 East Asia and Pacific 128.7 132.1 85.9 73.8 63.2 90.8 99.0 125.5 145.4 China 25.4 31.5 17.3 15.2 13.1 41.6 47.9 73.0 -- Indonesia 32.2 32.9 20.1 20.0 22.6 21.8 22.8 22.9 -- Malaysia 11.1 14.9 8.5 6.0 4.6 6.3 8.4 8.8 -- Philippines 8.0 11.8 7.2 5.7 5.9 6.0 5.6 6.2 -- Thailand 47.7 37.8 29.7 23.4 14.9 13.2 11.9 10.9 -- Eastern Europe and Central Asia 53.2 59.5 75.5 79.7 86.7 82.6 88.2 134.8 165.6 Bulgaria 1.1 2.0 1.8 1.3 1.5 1.2 1.8 2.7 -- Czech Republic 5.7 8.1 7.6 8.8 9.0 9.6 10.8 14.0 -- Hungary 3.4 3.4 4.8 3.5 4.2 4.6 5.7 9.0 -- Poland 2.7 5.1 8.4 11.3 9.7 11.1 13.9 19.5 -- Russian Federation 12.0 5.9 14.8 15.7 15.6 19.0 16.3 30.8 -- Turkey 17.3 18.0 21.2 23.5 28.9 16.3 16.4 23.0 -- Latin America and Caribbean 121.4 128.2 119.0 109.3 107.5 93.5 78.9 83.3 93.5 Argentina 23.5 32.0 31.0 29.4 28.3 20.0 15.1 23.0 -- Brazil 35.9 34.9 29.9 29.2 31.0 28.3 23.4 19.6 -- Chile 7.0 5.5 5.1 4.3 6.2 5.3 5.8 7.5 -- Colombia 5.9 5.8 6.2 4.0 2.9 3.3 3.7 3.6 -- Mexico 29.8 27.9 26.3 24.1 18.9 14.6 9.9 9.2 -- Venezuela, R. B. de 2.7 4.2 2.2 2.1 4.1 4.8 4.6 4.3 -- Middle East and North Africa 18.8 18.6 22.1 23.2 20.8 18.3 18.5 20.3 20.5 Algeria 0.3 0.2 0.2 0.2 0.2 0.2 0.1 0.1 -- Egypt, Arab Rep. of 2.3 3.0 4.3 4.3 4.1 3.4 3.5 3.8 -- Lebanon 1.7 1.8 2.0 2.2 2.5 2.7 2.5 3.1 -- South Asia 10.3 8.2 7.1 7.0 6.1 5.0 7.3 7.2 6.5 India 6.7 5.0 4.3 3.9 3.5 2.7 4.6 4.7 -- Pakistan 2.8 2.5 2.2 1.8 1.5 1.3 1.5 1.2 -- Sub-Saharan Africa 42.6 40.8 42.4 41.0 33.1 31.7 29.0 31.1 28.8 South Africa 10.8 10.9 11.4 10.8 9.6 8.4 7.4 7.4 -- Note: -- not available; e estimate. 160 S T A T I S T I C A L A P P E N D I X Table A.44 Total external debt of developing countries owed by public and publicly guaranteed borrowers, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 1,392.2 1,369.1 1,471.9 1,477.9 1,421.9 1,400.9 1,471.2 1,557.0 1,555.0 East Asia and Pacific 256.8 272.0 288.6 307.5 288.1 277.8 277.7 279.6 272.6 China 102.3 112.8 99.4 99.2 94.9 91.8 88.6 85.6 -- Indonesia 60.0 58.8 76.4 83.9 80.6 77.8 78.9 83.7 -- Malaysia 15.7 16.8 18.2 18.9 19.2 24.1 26.5 25.5 -- Philippines 27.5 27.3 30.5 36.6 35.9 31.4 34.2 37.4 -- Thailand 16.9 24.7 31.3 34.7 32.5 27.9 23.0 17.8 -- Eastern Europe and Central Asia 286.9 288.9 321.2 316.5 305.0 292.6 309.8 334.6 340.3 Bulgaria 8.8 8.7 9.1 9.0 9.0 8.5 8.5 8.9 -- Czech Republic 12.2 12.8 11.6 7.7 6.5 5.7 7.0 8.6 -- Hungary 18.9 15.3 15.9 16.9 14.4 12.7 13.6 14.8 -- Poland 39.2 34.2 35.1 33.2 30.8 25.7 29.4 35.0 -- Russian Federation 114.5 119.8 140.9 136.4 122.6 111.2 102.6 103.3 -- Turkey 49.1 48.1 50.6 51.6 60.6 68.4 82.3 88.8 -- Latin America and Caribbean 399.9 379.6 413.1 420.1 406.2 417.2 441.5 468.5 484.3 Argentina 68.8 73.0 82.7 89.0 93.2 102.4 106.4 114.8 -- Brazil 96.4 87.4 103.0 101.2 95.5 102.2 117.8 123.3 -- Chile 4.9 4.4 5.0 5.7 5.3 5.6 6.8 8.1 -- Colombia 14.9 15.4 16.7 20.2 20.8 21.8 20.7 22.8 -- Mexico 106.1 92.4 95.4 92.4 81.5 77.0 76.3 77.5 -- Venezuela, R. B. de 29.9 29.0 29.6 28.7 28.0 25.2 23.4 24.5 -- Middle East and North Africa 140.3 127.7 131.8 125.6 117.2 117.2 125.2 131.8 127.4 Algeria 33.3 30.7 30.5 27.8 25.0 22.4 22.7 22.7 -- Egypt, Arab Rep. of 29.1 27.0 27.8 26.3 24.5 25.3 25.9 27.3 -- Lebanon 1.9 2.3 4.0 5.3 6.6 9.0 13.8 14.8 -- South Asia 129.9 129.7 139.3 144.6 138.6 137.1 147.0 157.8 158.8 India 79.4 80.1 84.9 86.4 83.2 83.1 88.2 92.8 -- Pakistan 25.0 25.3 27.5 29.8 28.7 28.3 30.1 33.5 -- Sub-Saharan Africa 178.5 171.1 177.9 163.6 166.9 159.1 170.0 184.7 171.5 South Africa 11.2 11.9 10.7 8.2 9.1 7.9 9.4 9.1 -- Note: -- not available; e estimate. 161 S T A T I S T I C A L A P P E N D I X Table A.45 Total external debt of developing countries owed by private sector borrowers, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 652.8 740.6 851.0 868.7 860.7 859.6 865.2 997.2 1,042.1 East Asia and Pacific 237.2 254.4 244.6 231.1 212.6 224.2 220.6 246.0 263.9 China 26.6 33.9 44.6 52.9 50.9 78.4 79.7 108.0 -- Indonesia 68.9 77.3 74.8 67.3 63.8 56.2 52.8 50.7 -- Malaysia 24.0 30.4 24.3 23.0 22.7 20.5 22.4 23.6 -- Philippines 16.5 23.5 23.0 21.4 25.0 27.1 25.9 25.2 -- Thailand 96.0 85.0 73.6 62.0 47.2 39.3 36.5 34.0 -- Eastern Europe and Central Asia 81.5 102.3 169.1 186.9 205.8 215.2 250.4 341.4 388.2 Bulgaria 1.6 2.4 2.3 2.0 2.2 2.0 2.9 4.4 -- Czech Republic 7.8 10.2 12.7 15.1 15.0 17.1 20.6 26.1 -- Hungary 8.4 9.3 12.6 13.0 15.2 17.6 21.4 31.0 -- Poland 4.3 7.5 22.6 32.8 35.1 41.7 49.1 60.3 -- Russian Federation 12.0 7.8 36.9 38.3 37.4 41.3 44.8 71.9 -- Turkey 30.8 36.7 46.6 50.6 56.7 45.0 48.9 56.8 -- Latin America and Caribbean 238.6 290.8 339.1 351.7 348.9 332.0 304.7 311.2 289.1 Argentina 42.6 55.4 58.8 56.7 54.2 51.6 43.6 51.4 -- Brazil 84.9 110.7 138.0 142.8 143.7 124.6 110.8 112.1 -- Chile 22.6 22.7 28.7 29.2 32.0 33.0 34.4 35.2 -- Colombia 14.0 16.5 16.3 14.2 13.1 14.5 12.5 10.2 -- Mexico 50.2 55.2 63.5 74.1 68.8 68.6 63.8 62.5 -- Venezuela, R. B. de 4.5 6.7 8.2 8.9 10.2 10.8 10.6 10.4 -- Middle East and North Africa 22.9 23.6 29.1 30.2 27.3 24.9 24.9 27.0 28.1 Algeria 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.7 -- Egypt, Arab Rep. of 2.5 3.1 4.6 4.8 4.7 4.0 4.1 4.1 -- Lebanon 2.1 2.7 2.7 2.9 3.3 3.5 3.2 3.8 -- South Asia 19.8 19.9 18.3 17.4 21.5 19.1 23.2 25.0 25.9 India 14.1 14.3 12.7 11.9 15.9 14.4 18.1 20.6 -- Pakistan 4.8 4.8 4.8 4.1 4.1 3.4 3.5 2.9 -- Sub-Saharan Africa 52.9 49.7 50.7 51.4 44.5 44.1 41.5 46.7 46.9 South Africa 14.8 13.3 14.1 15.7 15.8 16.1 15.6 18.7 -- Note: -- not available; e estimate. 162 S T A T I S T I C A L A P P E N D I X Table A.46 Total external debt of developing countries owed to public sector creditors, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 833.3 791.3 866.8 881.8 839.5 826.9 874.7 933.3 896.6 East Asia and Pacific 153.7 152.5 179.1 200.3 188.2 180.6 183.4 190.8 179.4 China 39.4 39.8 45.1 50.4 50.4 50.6 50.8 51.5 -- Indonesia 46.1 45.5 58.2 66.3 65.9 62.1 65.2 70.5 -- Malaysia 4.2 4.0 4.5 4.8 5.0 5.9 5.8 6.1 -- Philippines 21.0 19.7 22.2 23.6 22.0 19.8 21.0 22.3 -- Thailand 10.6 17.8 21.4 25.3 23.9 20.8 16.7 13.2 -- Eastern Europe and Central Asia 160.0 156.2 172.4 171.4 166.8 159.2 165.4 176.2 169.6 Bulgaria 3.4 3.4 3.9 3.9 3.9 3.4 3.5 4.1 -- Czech Republic 1.3 1.1 1.1 1.1 1.1 1.2 1.5 1.9 -- Hungary 3.7 3.3 2.3 2.3 1.9 1.7 1.9 1.8 -- Poland 30.5 26.6 27.1 25.1 23.7 17.8 19.7 20.4 -- Russian Federation 75.6 76.8 88.3 86.7 82.5 71.7 62.2 64.7 -- Turkey 15.9 14.3 15.0 13.8 17.3 26.9 35.8 37.5 -- Latin America and Caribbean 164.1 145.9 161.0 163.2 150.1 162.9 183.1 196.9 189.2 Argentina 26.1 24.2 25.9 25.5 25.6 35.2 35.6 36.9 -- Brazil 25.4 22.2 32.7 37.7 31.1 37.2 52.1 58.2 -- Chile 2.7 2.2 2.2 2.1 1.9 1.7 1.5 1.4 -- Colombia 6.5 5.6 6.0 7.8 7.7 8.6 8.9 11.4 -- Mexico 42.6 32.1 31.4 26.3 20.8 19.9 20.5 20.6 -- Venezuela, R. B. de 6.3 5.5 6.7 6.6 6.1 4.9 4.4 3.9 -- Middle East and North Africa 107.3 99.6 103.9 98.3 90.7 88.3 91.3 96.2 93.1 Algeria 20.2 20.3 21.5 20.4 19.2 17.7 17.7 17.8 -- Egypt, Arab Rep. of 27.7 25.9 26.9 25.7 24.0 23.4 24.7 26.4 -- Lebanon 0.6 0.7 0.9 0.9 0.9 1.0 1.0 1.7 -- South Asia 104.1 98.9 104.6 113.3 102.7 101.1 106.3 113.8 113.7 India 55.9 52.8 53.9 58.6 50.6 49.8 49.8 50.9 -- Pakistan 23.8 22.8 25.1 27.7 26.6 27.0 29.3 32.7 -- Sub-Saharan Africa 144.0 138.2 145.7 135.2 140.9 134.9 145.1 159.6 151.6 South Africa 0.9 0.4 0.0 0.0 0.1 0.1 0.1 0.2 -- Note: -- not available; e estimate. 163 S T A T I S T I C A L A P P E N D I X Table A.47 Total external debt of developing countries owed to private sector creditors, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 1,211.7 1,318.4 1,456.1 1,464.9 1,443.1 1,433.6 1,461.8 1,620.8 1,700.5 East Asia and Pacific 340.3 373.8 354.1 338.3 312.5 321.4 314.8 334.8 357.2 China 89.4 106.9 98.9 101.6 95.3 119.6 117.5 142.1 -- Indonesia 82.8 90.7 93.1 84.9 78.5 72.0 66.5 63.9 -- Malaysia 35.5 43.2 37.9 37.1 37.0 38.8 43.1 43.0 -- Philippines 23.0 31.1 31.4 34.4 38.8 38.7 39.1 40.3 -- Thailand 102.3 91.9 83.5 71.5 55.8 46.4 42.7 38.6 -- Eastern Europe and Central Asia 208.3 235.0 317.9 332.1 344.0 348.6 394.8 499.8 558.9 Bulgaria 7.0 7.7 7.5 7.1 7.3 7.1 8.0 9.2 -- Czech Republic 18.7 22.0 23.1 21.7 20.4 21.5 26.0 32.7 -- Hungary 23.6 21.3 26.2 27.6 27.6 28.6 33.1 44.0 -- Poland 13.0 15.1 30.6 40.9 42.2 49.6 58.8 74.9 -- Russian Federation 50.8 50.8 89.6 88.1 77.6 80.8 85.3 110.6 -- Turkey 64.0 70.5 82.2 88.4 100.0 86.5 95.4 108.2 -- Latin America and Caribbean 474.3 524.5 591.2 608.6 605.0 586.3 563.1 582.8 584.2 Argentina 85.3 104.2 115.6 120.3 121.9 118.9 114.3 129.3 -- Brazil 155.9 175.8 208.4 206.3 208.1 189.6 176.5 177.2 -- Chile 24.7 24.9 31.5 32.7 35.4 36.9 39.7 41.8 -- Colombia 22.4 26.3 27.1 26.6 26.2 27.7 24.3 21.6 -- Mexico 113.6 115.6 127.5 140.2 129.5 125.8 119.6 119.4 -- Venezuela, R. B. de 28.2 30.2 31.0 31.0 32.0 31.1 29.6 31.0 -- Middle East and North Africa 55.9 51.7 57.0 57.5 53.8 53.9 58.8 62.7 62.4 Algeria 13.4 10.6 9.2 7.6 6.1 4.9 5.2 5.6 -- Egypt, Arab Rep. of 3.8 4.2 5.5 5.3 5.2 6.0 5.3 5.0 -- Lebanon 3.4 4.3 5.9 7.3 8.9 11.5 16.1 16.9 -- South Asia 45.5 50.7 53.0 48.7 57.3 55.1 63.9 68.9 71.0 India 37.6 41.5 43.7 39.7 48.5 47.7 56.5 62.6 -- Pakistan 6.0 7.2 7.2 6.2 6.1 4.7 4.4 3.7 -- Sub-Saharan Africa 87.3 82.6 82.9 79.8 70.4 68.3 66.3 71.8 66.8 South Africa 25.2 24.9 24.8 23.9 24.7 23.9 24.9 27.6 -- Note: -- not available; e estimate. 164 S T A T I S T I C A L A P P E N D I X Table A.48 Gross foreign exchange reserves of developing countries, 1996­2004 $ billions 1996 1997 1998 1999 2000 2001 2002 2003 2004e All developing countries 519.2 571.7 588.0 621.5 668.3 750.0 921.7 1,213.6 1,591.8 East Asia and the Pacific 199.7 212.5 233.2 262.5 272.6 320.3 408.2 544.8 775.1 China 105.0 139.9 145.0 154.7 165.6 212.2 286.4 403.3 610.0 Indonesia 17.8 16.1 22.4 26.2 28.3 27.0 30.8 34.7 34.3 Malaysia 26.2 20.0 24.7 29.7 28.6 29.6 33.3 43.5 61.7 Philippines 9.9 7.1 9.1 13.1 12.9 13.3 13.0 13.3 12.5 Thailand 37.2 25.7 28.4 33.8 31.9 32.3 38.0 41.0 46.9 Europe and Central Asia 83.4 90.8 95.9 102.3 120.4 131.5 175.3 236.2 303.8 Czech Republic 12.4 9.7 12.5 12.8 13.0 14.2 23.3 26.3 27.4 Hungary 9.6 8.3 9.2 10.7 10.9 10.3 9.7 12.0 14.6 Poland 17.7 20.3 27.2 26.1 26.3 25.2 28.0 31.7 35.0 Russian Federation 11.3 12.8 7.8 8.5 24.3 32.5 44.1 73.2 113.7 Turkey 16.4 18.6 19.4 23.2 22.3 18.7 26.9 33.8 35.9 Latin America and the Caribbean 153.0 166.5 157.3 149.9 152.8 155.7 156.5 189.7 211.5 Argentina 17.7 22.2 24.5 26.1 24.4 14.5 10.4 13.1 17.3 Brazil 58.3 50.8 42.6 34.8 32.5 35.7 37.4 49.1 52.7 Chile 14.9 17.3 15.3 14.2 14.7 14.0 14.8 15.2 15.5 Mexico 19.2 28.1 31.5 31.0 35.1 44.4 49.9 57.7 62.8 Venezuela, R. B. de 11.1 14.0 11.6 11.7 12.6 8.8 8.0 15.5 17.7 Middle East and North Africa 37.6 43.7 42.0 40.8 45.6 55.1 67.1 89.1 101.3 Algeria 4.2 8.0 6.8 4.4 11.9 18.0 23.1 32.9 41.4 Egypt, Arab Rep. of 17.2 18.5 17.9 14.3 12.9 12.9 13.2 13.4 13.4 South Asia 24.8 30.0 32.9 37.9 42.6 52.8 79.8 114.8 141.7 Bangladesh 1.7 1.6 1.9 1.6 1.5 1.3 1.7 2.6 3.1 India 19.7 24.3 27.0 32.0 37.3 45.3 67.0 97.6 125.2 Pakistan 0.5 1.2 1.0 1.5 1.5 3.6 8.1 10.7 9.6 Sub-Saharan Africa 20.6 28.2 26.7 28.0 34.2 34.5 34.8 39.0 58.4 Botswana 5.0 5.6 5.9 6.2 6.3 5.8 5.4 5.2 5.1 Nigeria 4.1 7.6 7.1 5.5 9.9 10.5 7.3 7.1 16.9 South Africa 0.9 4.8 4.2 6.1 5.8 5.8 5.6 6.2 12.3 Note: e estimate. 165 S T A T I S T I C A L A P P E N D I X Table A.49 Key external debt ratios for developing countries %, averages for 2001­3 Total external debt Present value EDT as % of gross Total debt Interest (EDT) to exports of (PV) of EDT as national income PV as % service as % of service as % G&S (XGS) % of XGS (GNI) of GNI XGS of XGS Albania 81 57 28 20 3 1 Algeria 103 100 41 40 19 5 Angola 120 117 104 102 17 2 Argentina 473 531 104 117 40 6 Armenia 131 85 45 29 11 1 Azerbaijan 58 47 28 23 9 1 Bangladesh 188 128 37 25 7 2 Barbados 47 53 29 33 5 3 Belarus 27 27 18 18 3 1 Belize 206 241 125 146 26 13 Benin 347 151 65 28 11 3 Bhutan 270 252 79 74 5 1 Bolivia 308 157 74 38 23 7 Bosnia and Herzegovina 102 78 48 37 6 2 Botswana 16 13 9 8 2 0 Brazil 299 323 50 54 72 19 Bulgaria 148 152 83 86 13 5 Burkina Faso 497 178 54 19 14 5 Burundi 3,051 2,182 210 150 68 18 Cambodia 125 107 82 70 1 0 Cameroon 335 185 96 53 16 7 Cape Verde 156 107 74 51 7 2 Central African Republic 1,061 1,319 125 155 0 0 Chad 427 254 75 45 13 4 Chile 174 178 66 67 34 8 China 49 48 15 15 9 2 Colombia 182 200 43 47 46 12 Comoros 397 289 109 79 4 1 Congo, Dem. Rep. 923 625 222 150 12 8 Congo, Rep. 266 404 242 368 3 1 Costa Rica 69 74 34 36 11 4 Côte d'Ivoire 210 176 107 90 10 2 Croatia 183 183 102 102 26 6 Czech Republic 69 69 48 48 11 2 Djibouti 141 95 65 44 6 1 Dominica 243 234 123 119 14 7 Dominican Republic 59 58 34 33 9 3 Ecuador 217 240 74 82 31 14 Egypt, Arab Rep. of 147 131 35 31 13 4 El Salvador 119 132 50 55 9 5 Equatorial Guinea 15 13 -- -- -- -- Eritrea 543 333 76 47 10 5 Estonia 118 119 100 101 21 5 Ethiopia 621 135 112 24 8 4 Fiji 25 24 15 15 3 1 Gabon 111 114 87 89 11 4 Gambia, The 379 202 170 90 12 5 Georgia 155 122 54 43 14 3 Ghana 285 85 128 38 17 3 Grenada 205 190 99 92 17 10 Guatemala 88 86 22 21 8 3 Guinea 408 225 106 59 15 4 Guinea-Bissau 891 594 369 246 18 5 Guyana 198 78 215 84 8 3 Haiti 114 83 39 29 5 1 Honduras 171 106 87 54 13 3 Hungary 102 99 73 71 34 3 India 120 106 22 19 22 6 Indonesia 196 200 80 82 27 6 Iran, Islamic Rep. of 33 30 9 8 5 1 (Table continues on next page) 166 S T A T I S T I C A L A P P E N D I X Table A.49 Key external debt ratios for developing countries (continued) %, averages for 2001­3 Total external debt Present value EDT as % of gross Total debt Interest (EDT) to exports of (PV) of EDT as national income PV as % service as % of service as % G&S (XGS) % of XGS (GNI) of GNI XGS of XGS Jamaica 119 131 73 80 18 7 Jordan 125 117 90 84 17 3 Kazakhstan 181 183 94 95 42 6 Kenya 206 162 54 43 17 4 Kyrgyz Republic 282 221 125 98 19 2 Lao PDR 611 356 155 91 11 3 Latvia 206 204 93 92 22 4 Lebanon 458 482 104 110 80 35 Lesotho 112 80 66 47 11 2 Liberia 1,522 1,630 603 646 0 0 Lithuania 105 106 58 58 84 4 Macedonia, FYR 112 97 47 40 15 3 Madagascar 466 138 105 31 7 3 Malawi 660 393 181 108 7 4 Malaysia 44 45 55 56 8 2 Maldives 54 41 45 35 4 1 Mali 282 124 97 42 7 2 Mauritania 459 153 218 73 11 3 Mauritius 83 81 54 52 8 3 Mexico 74 83 23 25 22 6 Moldova 154 146 100 95 13 4 Mongolia1 188 140 127 95 37 2 Morocco 116 109 51 47 27 8 Mozambique 430 118 139 38 8 2 Myanmar 247 187 -- -- 4 1 Nepal 200 131 57 38 7 2 Nicaragua 436 98 178 40 13 4 Niger 542 148 93 26 9 3 Nigeria 153 148 78 76 7 2 Oman 32 32 19 19 11 1 Pakistan 232 189 50 41 19 5 Panama 99 123 75 93 11 6 Papua New Guinea 113 104 87 80 14 3 Paraguay 111 107 52 51 11 4 Peru 279 311 54 60 24 13 Philippines 141 147 77 80 23 6 Poland 150 147 49 48 30 4 Romania 124 126 45 46 21 5 Russian Federation 128 135 50 52 14 6 Rwanda 974 615 91 57 13 5 Samoa 253 209 148 122 9 6 Sao Tome and Principe 1,773 770 723 314 35 15 Senegal 222 96 84 36 12 4 Serbia and Montenegro 268 238 94 83 17 6 Seychelles 100 103 87 89 14 3 Sierra Leone 1,152 632 216 118 18 8 Slovak Republic 93 90 72 70 18 3 Solomon Islands 224 176 76 60 11 5 Somalia -- -- -- -- -- -- South Africa 67 69 23 23 10 3 Sri Lanka 134 110 62 51 8 2 St. Kitts and Nevis 210 212 102 103 29 14 St. Lucia 106 104 59 58 9 5 St. Vincent and the Grenadines 128 107 67 56 8 3 Sudan 561 550 123 120 1 0 Swaziland 28 28 27 26 2 1 Syrian Arab Republic 264 262 112 111 4 2 Tajikistan 139 112 96 77 11 2 Tanzania 457 132 77 22 6 2 Thailand 59 59 41 41 17 2 (Table continues on next page) 167 S T A T I S T I C A L A P P E N D I X Table A.49 Key external debt ratios for developing countries (continued) %, averages for 2001­3 Total external debt Present value EDT as % of gross Total debt Interest (EDT) to exports of (PV) of EDT as national income PV as % service as % of service as % G&S (XGS) % of XGS (GNI) of GNI XGS of XGS Togo 259 203 116 91 2 0 Tonga 106 74 57 40 5 1 Trinidad and Tobago 52 59 31 35 5 3 Tunisia 139 140 74 75 14 5 Turkey 232 243 77 81 45 11 Turkmenistan -- -- -- -- -- -- Uganda 408 170 78 33 8 2 Ukraine 66 64 38 37 15 2 Uruguay 334 351 86 90 25 9 Uzbekistan 149 142 49 47 24 5 Vanuatu 64 46 39 28 1 1 Venezuela, R. B. de 117 139 35 42 30 8 Vietnam 77 67 45 39 4 1 Yemen, Rep. of 102 72 57 40 3 1 Zambia 529 372 172 121 32 12 Zimbabwe 274 272 50 50 3 1 Notes: -- not available. For definition of indicators, see Sources and Definitions section. Numbers in italics include the effects of traditional relief and HIPC relief and are based on public and publicly guaranteed debt only. Exports comprise the total value of goods and services exported, receipts of compensations of employees and investment income and worker's remittances. In the ratios, the numerator refers to the 2003 data and the denominator is an average of 2001 to 2003 data. 168 S T A T I S T I C A L A P P E N D I X Table A.50 Classification of countries by levels of external indebtedness 136 economies in the World Bank Debtor Reporting System Severely indebted Severely indebted Moderately indebted Moderately indebted Less indebted Less indebted low-income middle-income low-income middle-income low-income middle-income Angola Argentina Benin Bolivia Bangladesh Albania Bhutan Belize Burkina Faso Cape Verde Equatorial Guinea Algeria Burundi Brazil Cambodia Chile Ghana Armenia Central African Republic Bulgaria Cameroon Colombia Haiti Azerbaijan Chad Croatia Ethiopia El Salvador India Barbados Comoros Dominica Kenya Honduras Lesotho Belarus Congo, Dem. Rep. of Ecuador Madagascar Hungary Mali Bosnia and Herzegovina Congo, Rep. of Estonia Mauritania Jamaica Mozambique Botswana Côte d'Ivoire Gabon Moldova Lithuania Nepal China Eritrea Grenada Mongoliaa Malaysia Nicaragua Costa Rica Gambia, The Guyana Niger Mauritius Senegal Czech Republic Guinea Indonesia Nigeria Paraguay Tanzania Djibouti Guinea-Bissau Jordan Pakistan Philippines Vietnam Dominican Republic Kyrgyz Republic Kazakhstan Papua New Guinea Poland Yemen, Rep. of Egypt, Arab Rep. of Lao PDR Latvia Solomon Islands Russian Federation Fiji Liberia Lebanon Uganda Slovak Republic Georgia Malawi Maldives Uzbekistan Sri Lanka Guatemala Myanmar Panama St. Lucia Iran, Islamic Rep. of Rwanda Peru St. Vincent and the Grenadines Macedonia, FYR São Tomé and Principe Samoa Tunisia Mexico Sierra Leone Serbia and Montenegro Turkmenistan Morocco Somalia Seychelles Venezuela, R. B. de Oman Sudan St. Kitts and Nevis Romania Tajikistan Syrian Arab Republic South Africa Togo Turkey Swaziland Zambia Uruguay Thailand Zimbabwe Tonga Trinidad and Tobago Ukraine Notes: Tables classify all World Bank member economies and all other economies with populations more than 30,000. Economies are divided among income groups according to 2003 GNI per capita, calculated using the World Bank Atlas method. Income groups are low income, $765 or less; lower middle-income, $766­$3,035; upper middle-income, $3,036­$9,385; and high income, $9,386 or more. a. Classification excludes the effect of Russian debt settlement. 169 S T A T I S T I C A L A P P E N D I X Table A.51 Classification of countries by region and level of income Europe and Sub-Saharan Africa Central Asia Middle East Asia and North Africa East and Eastern Income Southern West East Asia South Europe and Rest of Middle North group Subgroup Africa Africa and Pacific Asia Central Asia Europe East Africa Americas Low- Angola Benin Cambodia Afghanistan Kyrgyz Yemen, Haiti income Burundi Burkina Faso Korea, Dem. Bangladesh Republic Rep. of Nicaragua Comoros Cameroon Rep. of Bhutan Moldova Congo, Dem. Central African Lao PDR India Tajikistan Rep. of Republic Mongolia Nepal Uzbekistan Eritrea Chad Myanmar Pakistan Ethiopia Congo, Rep. Papua New Kenya Côte d'Ivoire Guinea Lesotho Equatorial Solomon Madagascar Guinea Islands Malawi Gambia, The Timor-Leste Mozambique Ghana Vietnam Rwanda Guinea Somalia Guinea-Bissau Sudan Liberia Tanzania Mali Uganda Mauritania Zambia Niger Zimbabwe Nigeria São Tomé and Principe Senegal Sierra Leone Togo Middle- Lower Namibia Cape Verde China Maldives Albania Turkey Iran, Islamic Algeria Bolivia income South Africa Fiji Sri Lanka Armenia Rep. of Djibouti Brazil Swaziland Indonesia Azerbaijan Iraq Egypt, Colombia Kiribati Belarus Jordan Arab Cuba Marshall Bosnia and Syrian Arab Rep. of Dominican Islands Herzegovina Republic Morocco Republic Micronesia, Bulgaria West Bank Tunisia Ecuador Fed. Sts. of Georgia and Gaza El Salvador Philippines Kazakhstan Guatemala Samoa Macedonia, Guyana Thailand FYRa Honduras Tonga Romania Jamaica Vanuatu Russian Paraguay Federation Peru Serbia and Suriname Montenegro Turkmenistan Ukraine Upper Botswana Gabon American Croatia Lebanon Libya Antigua and Mauritius Samoa Czech Oman Barbuda Mayotte Malaysia Republic Saudi Argentina Seychelles N. Mariana Estonia Arabia Barbados Islands Hungary Belize Palau Latvia Chile Lithuania Costa Rica Poland Dominica Slovak Grenada Republic Mexico Panama St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Trinidad and Tobago Uruguay Venezuela, R. B. de 170 S T A T I S T I C A L A P P E N D I X Table A.51 Classification of countries by region and level of income (continued) Europe and Sub-Saharan Africa Central Asia Middle East Asia and North Africa East and Eastern Income Southern West East Asia South Europe and Rest of Middle North group Subgroup Africa Africa and Pacific Asia Central Asia Europe East Africa Americas High- OECD Australia Austria Canada income Japan Belgium United States Korea, Rep. of Denmark New Zealand Finland Franceb Germany Greece Iceland Ireland Italy Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom Non- Brunei Slovenia Andorra Bahrain Malta Aruba OECD French Channel Israel Bahamas, The Polynesia Islands Kuwait Bermuda Guam Cyprus Qatar Cayman Islands Hong Kong, Faeroe United Arab Netherlands Chinac Islands Emirates Antilles Macao, Greenland Puerto Rico Chinad Isle of Man Virgin New Liechtenstein Islands (U.S.) Caledonia Monaco Singapore San Marino Taiwan, China Note: For operational and analytical purposes, the World Bank's main criterion for classifying economies is GNI per capita. Every economy is classified as low income, middle income (subdivided into lower middle and upper middle), or high income. Other analytical groups, based on geographic regions and levels of external debt, are also used. Low-income and middle-income economies are sometimes referred to as developing economies. The use of the term is convenient; it is not intended to imply that all economies in the group are experiencing similar development or that other economies have reached a preferred or final stage of development. Classification by income does not necessarily reflect development status. This table classifies all World Bank member economies, and all other economies with populations of more than 30,000. Economies are divided among income groups according to 2003 GNI per capita, calculated using the World Bank Atlas method. The groups are: low income, $765 or less; lower middle­income, $766­3,035; upper middle-income, $3,036­9,385; and high income, $9,386 or more. a. Former Yugoslav Republic of Macedonia. b. The French overseas departments French Guiana, Guadeloupe, Martinique, and Réunion are included in France. c. On July 1, 1997 China resumed its exercise of sovereignty over Hong Kong. d. On December 20, 1999 China resumed its exercise of sovereignty over Macao. Source: World Bank data. 171 Global Development Finance 2005 embraces three key chal- orderly fashion, the developing world will have to adjust lenges: as interest rates return to their historical norms and growth slows in the industrial economies. If efforts · Managing the vulnerability inherent in global eco- toward orderly adjustment prove to be "too little, too nomic and financial imbalances late" in the eyes of the capital markets, a sudden shortage · Confronting the risks posed by the growing market of finance, accompanied by spikes in interest rates, could sensitivity of developing-country debt severely shock indebted economies.The safest course for · Mobilizing and diversifying sources of finance for developing countries is to persevere with policies and low-income countries reforms that promote economic growth under sustainable In 2004 capital flows to the developing world reached levels of debt--domestic and external. levels higher than at any time since the crises of the The World Bank's annual review of recent trends in and 1990s. Low international interest rates allowed developing prospects for financial flows to developing countries, countries to restructure their debt on favorable terms. Global Development Finance 2005, I:Analysis and Statistical They also provoked a search for higher yields among Appendix is an indispensable resource for governments, international investors, whose appetite for risk was sharp- economists, investors, financial consultants, academics, ened by the growing ability of capital markets to gauge bankers, and the entire development community. risk in individual countries. Stronger creditworthiness ratings in many developing countries--reflecting Global Development Finance 2005, II: Summary and Country improved macroeconomic, fiscal, and regulatory Tables includes a comprehensive set of tables policies--contributed to investor confidence. with statistical data for 136 countries that report debt under the World Bank Debtor Reporting System, as For the poorest countries, which lack ready access to well as summary data for regions and income groups. market-based finance, official development assistance It contains data on total external debt stocks and flows, remains the most important source of external finance. aggregates, and key debt ratios, and provides a detailed, But other capital flows and nontraditional sources of country-by-country picture of debt. Global Development foreign exchange--workers' remittances, grants from Finance 2005 debt data are also available on CD-ROM, nongovernmental organizations, and aid from middle- with 217 historical time series indicators from 1970 to income countries--have risen in importance. 2003, and country group estimates for 2004. The favorable overall picture masks considerable country Prospects for the Global Economy is a new online com- variation. Both foreign direct investment and debt reduc- panion to Global Development Finance. It provides infor- tion are highly concentrated in a few countries. In much mation on the global economic outlook, detailed regional of the developing world, the external debt of the public forecasts, and additional features such as interactive sector has continued to rise--often compounded by graphs, analytical tools, and access to underlying growing levels of domestically sourced debt. data.This online publication is available in English, The overall picture also conceals vulnerabilities. Even if French, and Spanish at http://www.worldbank.org/ the present imbalances in global payments unwind in an globaloutlook. For more information on the analysis, please see www. THE WORLD BANK worldbank.org/prospects; further detail about the Summary 1818 H Street, NW and Country Tables can be found at www.worldbank.org/data. Washington, DC 20433 USA Telephone: 202 473-1000 For general and ordering information, please visit the Facsimile: 202 477-6391 World Bank's publications Web site at www.worldbank.org/ Internet: www.worldbank.org publications, or call 703-661-1580; within the United States, E-mail: feedback@worldbank.org please call 1-800-645-7274. ISBN 0-8213-5984-3