1. Main Messages of Chapter 1
Global Economic Prospects 1998/99
Main Messages of Chapter 1
World in 1.5% slowdown
Outlook for export earnings and financing difficult
All developing regions decelerate in 98/99 compared to 97
Recession possible, and risks mutually reinforcing

2. Growth of industrial and developing country GDP, 1970-2003(f)
Global Economic Prospects 1998/99
Growth of industrial and developing country GDP, (f)
Percent
projection
The slowdown in global growth expected in 1998 and 1999 is the most severe since the early 1980s debt crisis. Developing countries are hardest hit by the global financial crisis.
Note: GDP measured in constant 1987 prices and exchange rates.
Source: World Bank data and projections, November 1998.

3. Global Economic Prospects 1998/99
World export growth 3-month moving average, y/y with projections 1999/2000 %
1999/2000
projection
World trade growth is decelerating sharply during compared to the very strong pace in Sharp declines in import demand in Asia is a key contributing factor, but trade is losing momentum on a wider scale. Near-term prospects for developing country export revenues are thus clouded by slowing global demand.
Source: Datastream and DECPG staff estimates

4. Change in terms of trade as proportion of GDP, 1998
Global Economic Prospects 1998/99
Change in terms of trade as proportion of GDP, 1998
Weaker oil and non-oil commodity prices are hurting commodity producers, mostly in developing countries, but some regions benefit modestly from lower prices. Oil exporters hit particularly hard by the 30 percent declines in price in Manufactures prices are also falling in world trade.
Source: World Bank estimates.

5. Global Economic Prospects 1998/99
Net long-term private flows to developing countries, (e)
Billions of U.S. dollars
Private capital flows to developing countries have dropped precipitously in 1998, and by the end of the year were 40 percent of levels during the first half, not including FDI (foreign direct investment). FDI has held up better---as in other crises.
Source: World Bank data.

6. Global Economic Prospects 1998/99
Spreads on Brady Bonds and U.S. high yield bonds, January 1995-October 1998
basis points
Following the Russian crisis in mid-August, spreads on developing country bonds rose to highs not seen since the Mexican crisis of Spreads have come down since but remain high. Risk aversion in industrial economies is highlighted by rising spreads on high-yield bonds.
Source: World Bank.

7. Annual GDP growth in developing regions, 1997-99
Global Economic Prospects 1998/99
Annual GDP growth in developing regions,
Percent
All developing regions will experience slower growth in A modest recovery is expected in most regions in 1999 barring Europe and Central Asia--where output contraction in Russia is likely to continue-- and Latin America, where fiscal austerity to reduce current account deficits is expected to lower growth.
Note: Real 1987 dollars.
Source: World Bank data and projections, November 1998.

8. Global Economic Prospects 1998/99
Low-case scenario: output effects across regions, 1999 Difference in 1999 growth rate from baseline projection
If worse comes to worst, in a low-case scenario---characterized by a deeper recession in Japan, no resumption of private capital flows to emerging markets, and sharp declines in equity markets in the United States and Europe---the world economy goes into a recession. Growth in developing countries falls almost 2 percentage points below the “baseline” projections, while Latin America and East Asia are more adversely affected.
Source: World Bank estimates, November 1998.

9. Main Messages of Chapter 2
Global Economic Prospects 1998/99
Main Messages of Chapter 2
we were dealing with a different type of crisis than 1980s debt crisis
the appropriate policy responses were probably quite different
looking forward, supportive macro and corporate and debt restructuring keys
policies to protect the poor needed to have been given a bigger role

10. Debt Service Ratios were low or falling, 1982 and 1996
Global Economic Prospects 1998/99
Debt Service Ratios were low or falling, 1982 and 1996
The crisis in East Asian countries did not arise from excessive sovereign borrowing or severe macroeconomic imbalances. The capacity to service external debt was low or falling prior to the crisis, and compared to the early 1980s in Latin American countries.

11. The Critical Vulnerability: Private Short Term Debt to Reserves
Global Economic Prospects 1998/99
The Critical Vulnerability: Private Short Term Debt to Reserves
ST Debt to Reserves in East Asia rose rapidly between , exceeding 100%
In LAC, they were falling
The critical immediate vulnerability of the East Asian countries arose from an excessive build-up of short-term debt on the balance sheets of private corporations and banks during This was especially evident when expressed in terms of the countries’ holdings of foreign reserves, and in comparison, for example, to the situation in Latin America.

12. Global Economic Prospects 1998/99
Economies in Tailspin: Private investment in Thailand and Korea,
Index 1991 Q1 = 1
Onset of crisis
Thailand and Korea were already seeing the effects of an economic slowdown arising from the bursting of asset-price bubbles prior to their crises, and a corresponding build-up of financial fragility. With the onset of the crises in July -October 1997, aggregate demand, for example as measured by trends in private investment, came crashing down.
Growing financial fragility
Source: Datastream.

13. Global Economic Prospects 1998/99
Estimates of non-performing loans, capital asset ratios, and costs of recapitalizing banking systems
Given the effects of devaluations and interest rate hikes on their balance sheets, and an aggregate demand collapse, a full-fledged systemic crisis was in place. Non-performing loans by some estimates had climbed to about 30 percent of banks portfolios, and banking systems were essentially insolvent. The costs of recapitalizing the banking systems in these countries are estimated at between percent of GDP.
Note: NPLs are mid-points of ranges cited in source; recapitalization assumes 8% capital asset ratios.
Source: J.P. Morgan 1998b.

14. Social Consequences & Lessons
Global Economic Prospects 1998/99
Social Consequences & Lessons
Interests of poor should have been more central
Social safety nets not a substitute, but critical
Ex-ante social safety nets needed
The social consequences of the crisis have been devastating in East Asia. Around 7-8 million additional unemployed in Thailand and Indonesia and about 5 million in Korea; real wages have fallen by about percent in Indonesia; and poverty has increased by about 17 million in Indonesia and 2 million in Thailand. This crisis has illustrated the importance of constructing adequate social safety nets to protect the poor.
In millions
In millions
In percentage

15. Main Messages of Chapter 3
Global Economic Prospects 1998/99
Main Messages of Chapter 3
Crisis prevention is now key
Risks of crisis amplified by interaction of many causal factors
Need to adapt the pace of financial liberalization to institutional capability

16. Incidence of financial crises, 1970-97
Global Economic Prospects 1998/99
Incidence of financial crises,
The incidence of banking or currency crises, or both, have been rising since the 1980s.
Source: Caprio and Klingebiel 1996a, Frankel and Rose 1996, and Kaminsky and Reinhart 1997.

17. Global Economic Prospects 1998/99
Cumulative loss of output per crisis for industrial and emerging economies
Percent of GDP
The losses from such crises have been severe, and more in emerging countries than in industrial ones.
Note: Only crises with output losses are represented.
Source: IMF 1998b.

18. Net capital flows to Mexico, 1990-96
Global Economic Prospects 1998/99
Net capital flows to Mexico,
Millions of U.S. dollars
Shorter-term capital flows such as portfolio debt and inter-bank loans are especially volatile, as illustrated by the flight of these capital flows during the Mexican crisis. Longer-term FDI and equity flows, in contrast, are much more resilient, even during crises.
Source: IMF, World Bank.

19. Global Economic Prospects 1998/99
Economic growth and capital account liberalization in 100 countries,
Countries with more liberal capital accounts do not appear to grow significantly faster than those with less open regimes.
Note: The figure is a partial scatter plot (controlling for per capita income, secondary education, quality of governmental institutions, and regional dummies for East Asia, Latin America, and Sub-Saharan Africa.
Source: Rodrik 1998.