II. Overall economic environment and agriculture

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Economic overview

In 1994 the world economy entered the fourth consecutive year of depressed growth, reflecting continuing weak economic activity in the industrial countries - which account for over 70 percent of world output and to a lesser extent the deep recession in Central and Eastern Europe and the former USSR. In the industrial countries, however, increasing indications of a solid resumption of growth in North America as well as converging, if still incipient, signs of recovery in other countries suggest that the trough may have been reached. Underlying such improved prospects are low inflation rates, which for many countries have fallen to the lowest levels in three decades; relatively low interest rates, despite mounting upward pressure in some countries; renewed efforts towards fiscal consolidation and deficit reduction - a key economic challenge in many countries; greater monetary stability within the European Monetary System; and the conclusion of the Uruguay Round of GATT negotiations which, beyond its expected benefits for trade, has generated more optimistic business expectations worldwide.

Against such positive features, mounting unemployment has reached worrisome proportions in many countries, particularly in Europe. A resumption of sustained growth could reverse the rise in cyclical unemployment; however, the risk of persistently high structural unemployment in many industrial countries points to the need for reforms to reduce rigidity in labour markets.

Several economies in transition in Central and Eastern Europe and the Baltic states have pursued or even accelerated the pace of economic reform and some have achieved encouraging progress in growth and stabilization. By contrast, the process of reform has continued to be sluggish and uneven in most former Soviet republics, which have seen their economic performances deteriorate further - in turn undermining popular and political support for pursuing reform.

Economic growth in 1993 in the developing countries again substantially outpaced that of industrial countries. A number of factors contributed to improving the economic outlook significantly for the developing countries: the ongoing process of recovery in the industrial world; generally lower interest rates, an important factor in the context of external debt servicing; the consolidation of economic reform and stabilization in many countries; the improved prospects for trade with the completion of the Uruguay Round, the North American Free Trade Agreement (NAFTA) and the revival of other regional arrangements; the recent strengthening in commodity prices; the massive inflow of private capital, particularly to Asia and Latin America and the Caribbean (which, nevertheless, has created its own set of problems, as discussed in the Regional review); reduced levels of civil strife in sub-Saharan Africa (the dramatic events in Rwanda reminding us, however, that peace and stability remain elusive targets in much of the region); and positive spillover effects of developments in South Africa.

Clearly, these factors have benefited developing countries to varying degrees and, indeed, performances and prospects widely differ among regions and countries (see Regional review). Nevertheless, the continuation of current economic trends seems set to evolve into the best environment in many years for developing countries' economic and agricultural development.

Figure 1: World economic output (percentage change over preceding year); Economic growth, feveloping country regions (percentage change over preceding year); Source: IMF; (* Real GDP or real NMP, ** Projectiond)

Economic outlook for developing countries' agriculture

Current Project LINK economic forecasts for the short and medium term (1994-1997) suggest annual growth rates in the order of 2.5 to 3 percent in the industrial countries; 5.2 to 5.8 percent in the developing countries; 2.5 to 4 percent in the transitional economies in Eastern and Central Europe; and a continuing stagnation or even further contraction in output in most countries of the former Soviet republics which, in the aggregate, may not resume positive rates of growth before 1997.

Figure 2: World output and volumeof world trade (percentage change over preceding year); Source: IMF; (* Projections)

Figure 3: Composition of DEBT; Source: World Bank, World Debt Tables, 1992-93(*Projections, **Including former USSR)

The overall acceleration in output growth is expected to be accompanied by an expansion in the value of world trade of about 6 percent in 1994, 6.6 percent in 1995 and close to 6 percent the following two years.

Trade is expected to gather considerable buoyancy in the developing countries, with both exports and imports rising at annual rates of approximately 10 percent throughout the period 1994-1997. Developed countries' trade should also gain momentum, the rate of change in their imports rising from a depressed -5 percent in 1993 to 3.8 percent in 1994 and 7 to 9 percent in 1995-97.

The revival of growth and trade is also forecast to extend to agriculture. Stronger economic activity in the industrial countries is expected to activate international demand for agricultural products. A strengthening in the prices of several key commodities is already under way, and this tendency may be accentuated moderately. While sluggish demand from major grain-importing countries should keep grain prices generally depressed, prices of sugar and coffee are expected to strengthen in the short to medium term, reflecting supply shortages and to a certain extent the effects of producer countries' export retention schemes. An early 1994 forecast from the international Cocoa Organization (ICCO) points to three more years of production deficits, which may push up cocoa prices and perhaps reverse the rise in world consumption. Beef prices may also strengthen, owing in particular to increased demand for beef in Asia and a sharp reduction in stocks in the EC. Thus, after many years of steady deterioration, the terms of trade and purchasing power of agricultural exports may improve somewhat.

Overall, mid-term forecasts for total and agricultural output are summarized in Figure 4. The data underlying the Figure suggest the following developments:

Figure 4: Growth in total GDP and value added in agriculture, developing country regions(Percentage change over preceding year); Source: Project LINK and FAO; Note: 1993 - estimates; 1994-97 - projections

BOX 1: External debt situation of developing countries

The total external debt stock of all developing countries, which totalled $1662 billion at the end of 1992, is projected to reach $1770 billion in 1993, up by 6.5 percent from the end of the previous year. The projected increase of $108 billion is due to: i) a substantial increase in positive net flows, which reached almost $90 billion in 1993 and were composed of long-term and short-term net flows and the use of IMF credits; ii) the capitalization of interest through debt rescheduling, totalling $15 billion; and iii) the effect of cross-currency valuation change which is projected to add another $23 billion. Debt forgiveness and voluntary debt reductions, on the other hand, reduced the debt stock by $9 billion, while decreases in interest arrears accounted for a reduction of a further $10 billion. The largest growth in external debt liabilities was shown by East Asia and the Pacific, mainly as the result of easy access by many countries in the region to the capital markets.

Agricultural external debt in 1992 reached $73.4 billion, almost unchanged from the previous year. The share therein of official debt (bilateral and multilateral) is gradually increasing, having risen from 87 percent in 1988 to 93 percent in 1992.

During 1993, 11 countries reached restructuring agreements on a total of $4 billion of official bilateral debt with Paris Club member countries. Further, the Russian Federation rescheduled a total of $15 billion of its official debt outside the Paris Club framework.

Total debt-service payments of all the developing countries increased to $182900 million in 1993 from $178500 million the previous year. The debt-to-exports ratio, which reached 174 percent in 1992, is projected to increase to 180 percent in 1993. The projected debt-service ratio (the ratio between total debt service and export earnings) for 1993 should stabilize at 19 percent, remaining unchanged since 1990. However, for the 29 severely indebted low-income countries, with an outstanding debt stock of almost $208 billion in 1993, the debt-to-exports ratio is expected to increase from 413 percent in 1992 to 432 percent in 1993. Debt forgiveness, mainly by official bilateral creditors, which in 1991 reduced the debt stock of severely indebted low-income countries by some $22 billion, was largely offset by the capitalization of interest and accumulated interest arrears totalling $19 billion.

Total net flows on debt (disbursements less principal repayments of short- and long-term debt and IMF credits) are estimated to be $89700 million in 1993, a 2.5 percent increase over 1992. In 1992 net transfers on debt (net flows minus interest payments) turned positive, at $13 billion, for the first time since the outburst of the debt crisis in early 1980. For 1993 they are estimated to be $11400 million.

Net long-term resource flows (which include both debt-creating and non-debt-creating flows) to developing countries increased further from $156600 million in 1992 to a projected $176660 million in 1993, reflecting improved access to international capital markets by the developing countries. For some regions, especially Latin America, the increase in net flows is to a large extent attributable to repatriated capital flight.

In 1993, aggregate net long-term resource flows from private sources reached more than $113200 million ($102000 million in 1992), the highest in a decade, and for the second consecutive year they exceeded official flows (loans and grants), which accounted for $54580 million in 1992 and are projected to be $63450 million in 1993. The expansion of private capital flows is driven by a strong surge in foreign direct investment (FDI), estimated to be $56300 million in 1993, more than double the level recorded in 1990. The increase in equity investments and bonds is also remarkable, having gone from $3.8 billion in 1990 to 13.2 billion in 1993. The main beneficiaries of the expansion of private resource flows have been middle-income countries undergoing strong economic policy and market-oriented reforms and the countries that have avoided a commercial bank debt overhang. Most low-income countries, on the other hand, have not benefited from the rapidly rising private capital flows, except China which is the largest single recipient of FDI among developing countries.

Source: World Bank. 1993. World Debt Tables, 1993-94; and The World Bank Annual Report 1993

Outlook for developing country economies highly dependent on agricultural exports

The effects of the changing economic and trade environment are examined here from the perspective of a selected group of developing countries for which agricultural exports account for a high proportion of total exports and imports (see definition and list of economies highly dependent on agricultural exports [EHDAEs] in Table 1). Box 2 on p. 41 summarizes the results of a study on structural characteristics and past export and growth performances of these countries. As regards their economic and agricultural prospects for the short term (1994 and 1995), IMF and Project LINK forecasts point to the following:

TABLE 1 - Economies highly dependent on agricultural exports1

Latin America and the Caribbean Far East and the Pacific Sub-Saharan Africa
Argentina Sri Lanka Côte d'Ivoire
Paraguay Thailand Malawi
Honduras Afghanistan Zimbabwe
Cuba Viet Nam Mali
Uruguay Malaysia Sudan
Brazil   Madagascar
Guatemala   Burundi
Costa Rica   Cameroon
Colombia   Ghana
Saint Vincent and   Liberia
the Grenadines   Uganda
Ecuador   Kenya
Guyana   Ethiopia
Belize   Rwanda
Dominica   Swaziland
Nicaragua   Mauritius
El Salvador   Central African Rep.
Dominican Rep.   Tanzania, United Rep.
Sao Tome and Principe   Chad
    Burkina Faso

1Countries for which agricultural, fishery 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 above forecasts generally indicate a marked improvement in the economic and trade outlook of developing countries, including those that are more oriented towards agricultural exports. The tentative nature of these forecasts must, however, be underlined. Many remaining impediments to a strong and sustained recovery in both developing and developed countries suggest that projections are subject to a considerable downside risk. Uncertainties particularly concern: the pace and speed of recovery in OECD countries (mainly in Europe and Japan) and, more generally, the ability of industrial countries to maintain growth-conducive monetary policies, absorb unemployment significantly and reduce fiscal deficits; the economic collapse, political instability and ethnic and regional tension in the former USSR and other transitional economies; emerging excess demand pressure in China where major efforts also remain to be made to broaden the benefits of rapid growth, particularly into rural areas; the unwelcome side-effects of capital inflows, particularly into Latin American and Caribbean countries and - on the other hand - fears that a reversal of such inflows would involve severe economic and financial imbalances and disruptive monetary and exchange rate adjustments; the still vulnerable adjustment and recovery process in many developing countries; the unevenness of economic recovery among and within regions - the dismal economic situation and prospects in many African countries being a major reason for concern; and the likelihood that the international trading environment following the Uruguay Round Agreement, particularly for agricultural products, will remain subject to intense competition and protectionist pressure.

However welcome, the recent upsurge in commodity prices should also be subject to cautious interpretation. The prices of several of these commodities had fallen for so long and to such depressed levels that the recent upturn provides only meagre compensation for commodity exporters. Moreover, the strengthening in commodity prices can hardly be seen as a sign either of an emerging new trend or of any significant reduction of the structural weaknesses and inherent instability of commodity markets.

BOX 2: Economies highly dependent on agricultural exports: export performance and growth

A number of background studies are under way for the preparation of the 1995 issue of The State of Food and Agriculture, which will feature a special chapter on agricultural trade and development. One of these studies analyses the structural characteristics and past export performances of EHDAEs and explores some of the main factors behind successes and failures in expanding agricultural exports and economic growth. Highlights of the findings are as follows:

Further research is under way to explore the main questions and issues arising from the study, for example: By what means did some countries reduce their dependence on a few products and markets? What are the policy options for countries that produce and trade a narrow range of commodities if they face unpromising markets and intense competition among themselves? Should they aim primarily at improving productivity and competitiveness in their traditional exports or pursue alternatives? What are their alternatives forging closer links with upstream (inputs) and downstream (food processing) industrial activities and promoting non-traditional agricultural exports, or accelerating the process of "de-agriculturization" in favour of industry? What are the options for those low-income countries that do not appear to have developed to a point of "critical mass" for their exports to be translated into growth?

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