II. Overall economic environment and agriculture
WORLD ECONOMIC ENVIRONMENT
According to the International Monetary Fund (IMF)1 world economic output expanded by 3.5 percent in 1995, down from 3.7 percent the previous year and marginally below the long-term trend. The growth rate in 1995 resulted from:
Expectations for 1996 are for a continuation of slow growth in the industrial economies, with decelerating rates in the United States and Europe but a strengthening of recovery in Japan. By contrast, growth is forecast to accelerate to about 6.3 percent in the developing countries; this will be the result, in particular, of an economic upsurge in Latin America and the Caribbean and a further strengthening in output growth in Africa. A significant improvement is expected in the Russian Federation, Transcaucasia and central Asia where economic expansion of about 2 percent may be achieved after years of deep recession.
The other main features of the current economic environment are: reduced pressure on already low inflation rates in the industrial countries and considerably reduced price increases in the developing countries; rapid growth of world trade, reflecting progress in market liberalization and dynamic intratrade in developing country regions, particularly Asia and Latin America and the Caribbean; and a general decline in interest rates in the face of weak growth and low inflation in the major industrial countries - although interest rates have remained significantly higher in Europe than in North America and Japan. These features create a generally favourable environment for agricultural production, trade and food security.
The economic and agricultural outlook of the developing countries will be influenced by the following factors:
Agricultural outlook for the developing countries
Figures 1-5 show mid-term forecasts of economic and agricultural output and trade growth in the developing countries, as forecast by Project LINK. The following main features stand out:
The commodity price upsurge in 1994-95 also enabled a considerable improvement in the developing countries' terms of trade and the purchasing power of their agricultural exports, after years of steady deterioration. In the case of the African countries, which had benefited particularly from the high prices of the beverage products they chiefly export, the estimated gain in agricultural terms of trade was 20 percent in 1994 and a further
4 percent in 1995. Latin America and the Caribbean, the Near East and North Africa and, to a lesser extent, Asia and the Pacific also recorded considerable gains during these years. With the end of the price boom, however, the terms of trade of agricultural product exports are forecast to deteriorate again in 1996 by about
10 percent in sub-Saharan Africa, 5 percent in Latin America and the Caribbean and 1 to 2 percent in the Near East and North Africa and Asia and the Pacific regions. After this strong initial deterioration, however, the agricultural terms of trade are forecast to stabilize over the rest of the decade, with yearly ups and downs of 1 to 2 percent. In other words, the strong gains in terms of trade achieved during 1994-95 will only be partially eroded in 1996, when prices return to more normal levels, and the years up to 2000 will see a far more stable and - from the point of view of agricultural exporters - favourable pattern of relationships between agricultural and manufactured goods than has been the case during the past decade.
PROSPECTS FOR THE ECONOMIES HEAVILY DEPENDENT
The gains in export earnings achieved in 1994 and 1995 by the economies heavily dependent on agricultural exports (EHDAEs)1 were at the basis of a considerable improvement in these overall economic situations and prospects. According to IMF estimates, this group of countries achieved about 6 percent growth in 1994 and 5 percent in 1995, up from a yearly average of 3.4 percent over the previous five years. Strong growth of about 5 to 5.7 percent is expected for 1996-97. Also underlying the improved economic outlook for these countries are the following forecasts for 1996-97: an increase in gross capital formation to over 26 percent of GDP, from the 22 to 23 percent of the early 1990s; a reduction in the central government fiscal deficit to about 1 percent of GDP (from between
1 The group of EHDAEs comprises 47 countries (24 in sub-Saharan Africa, 18 in Latin America and the Caribbean and five in the Near East and North Africa) for which agricultural, fisheries and forestry exports were equivalent to 20 percent or more of their total export earnings, or 20 percent or more of their total imports, in 1988-90.
The stock of external debt of developing countries reached an estimated US$2 068 billion at the end of 1995, a net increase of $147 billion with respect to 1994. The change in external debt was caused by: net debt flows of US$133 billion (long- and short-term debt and IMF credits) against $86 billion in the previous year (the inflow of debt-creating financing includes the exceptional official financing rescue package for Mexico and high levels of new private debt flows to East Asian borrowers); the depreciation of the United States dollar which increased the dollar value of debt denominated in other currencies by US$13 billion; and capitalized interest from debt and debt service reduction programmes accounting for an additional US$9 billion. Voluntary debt reduction in Latin American arrears was offset by growing interest arrears in sub-Saharan Africa.
The estimated total debt service payments on all debts reached US$ 224 billion in 1995, a 15 percent increase over 1994, reflecting the fact that many countries have returned to full servicing of their external obligations. As a result of the improved export performance of many developing countries, the debt-to-export ratio declined for developing countries as a group, from 163 percent in 1994 to 150 percent in 1995. At the regional level, however, this trend is not uniform. In sub-Saharan Africa the debt-to-export ratio continues to increase and reached an estimated level of 270 percent in 1995. In contrast, for Latin America and the Caribbean the debt-to-export ratio in 1995 declined slightly from 258 percent in 1994 to 254 percent. The total debt-service-to-export ratio also continued to decline reaching just over 16 percent in 1995. For many middle-income countries the debt situation has improved and their economic reforms and stability have attracted strong private capital flows. However, the heavily indebted poor countries, most of them in sub-Saharan Africa, remained strongly dependent on the official resource flows and the debt indicators of these countries continued to deteriorate.
During recent years there has been a rapid rise in bilateral ODA forgiveness of debt and interest arrears, which amounted to US$3.3 billion in 1994. Since 1990, some $25 billion have been forgiven to all developing countries, of which $11 billion applied to heavily indebted poor countries.
Aggregate net long-term resource flows, composed of the official development finance and all private flows (comprising debt-related flows and other forms of external financing) to all developing countries increased by 11.5 percent in 1995 reaching a record US$231 billion.
ODA (comprising official grants and official concessional loans), remained almost at the same level in 1995 as during the previous year; US$47 billion, of which $33 billion was in official grants excluding technical cooperation grants. Sub-Saharan Africa, which has limited access to private flows, continued to be the largest recipient of ODA, receiving 36 percent of the concessional flows.
Private capital flows continue to grow and represent an important component of total net flows to developing countries, accounting for 72 percent of total flows in 1995. This was slightly below the peak of 76 percent in 1994, mainly because of the decline in portfolio flows caused by the rise in the United States interest rates and the Mexico crisis.
Net foreign direct investment (FDI) flows to developing countries grew rapidly in the late 1980s and early 1990s. In 1994 they reached an all-time high of US$80 billion, an increase of 17 percent over the previous year (and in 1995 they were estimated to have reached US$90 billion). Foreign direct investment continued to rise and increase its share in total private capital flows, in 1994 accounting for 50 percent and increasing to 54 percent in 1995. However, private flows remain concentrated mainly in a relatively small number of middle-income countries. In East Asia, China was the largest recipient of FDI, attracting US$38 billion in 1995. In Eastern Europe and Central Asia, FDI increased by almost 50 percent, reaching US$12 billion in 1995. In sub-Saharan Africa, by contrast, this kind of private flow reached only US$2 billion in 1995, against almost $3 billion in the previous year.
Source: World Bank. 1996. World Debt Tables 1996. Washington, DC.
1 Unless otherwise indicated, economic estimates and forecasts in this section are from IMF. 1996. World Economic Outlook 1996. Washington, DC.