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WORLD REVIEW

II. OVERALL ECONOMIC ENVIRONMENT AND AGRICULTURE

WORLD ECONOMIC ENVIRONMENT

After the financial turbulence and slowdown in economic activity that followed the financial crisis initiated in Asia in 1997, risks of a global recession have receded. Current estimates of world economic growth in 1999 point to a rate of about 3 percent, up from 2.5 percent in 1998.4 Prospects for the year 2000 are for a further acceleration, to 3.5 percent.

For the industrial countries, current estimates are for growth rates of around 2.8 percent in 1999 and 2.7 percent in 2000, with unbalanced cyclical patterns among the major economies. The long period of sustained growth in the United States is expected to continue, albeit at a slower pace in 1999 (3.7 percent, down 3.9 percent from the previous year) and 2000 (2.6 percent). In Japan, after a severe contraction in 1998, GDP only rose by an estimated 1 percent in 1999. With public investment and household confidence remaining weak, the economy is expected to recover only modestly in 2000. Japan's export sector did benefit from the rebound of its regional trading partners' economic activity, but these gains were offset by the strengthening of the yen.

Growth in the euro area fell to 2 percent in 1999, reflecting in particular weaker growth rates in Germany, Italy and the United Kingdom, but it was expected to recover to a level of 2.7 percent in 2000. The fall of the euro has stimulated exports and economic activity without creating inflationary pressure. In the second half of 1999, GDP growth strengthened, and hopes for a pickup in the world economy in 2000 now hinge to a large extent on increased demand in Western Europe. High unemployment has remained a problem despite some progress in job creation.

Economic recession in the economies in transition appeared to have bottomed out in 1998. The positive, if weak, economic growth forecast for 1999 was expected to gain momentum in 2000, thanks in particular to the forecast return to positive growth in the Russian Federation (2 percent). The very low petroleum prices in 1998, together with ineffective economic policies and the Asian financial crisis, had caused severe financial problems in the Russian Federation, but the subsequent strong rise in petroleum prices has improved the country's economic outlook. Growth in Hungary and Poland remained relatively strong, despite a slowdown in exports, but several other East European countries were experiencing difficulties in revitalizing economic activity.

For the developing countries as a whole, real GDP expansion in 1999 was estimated to be about 3.5 percent, only slightly above the previous year's rate, but an acceleration to 4.8 percent is forecast for 2000.

Figure 9

After the economic shock caused by the financial crisis, performances in Asia improved considerably, with growth forecast to be around 5.3 percent in both 1999 and 2000, up from 3.7 percent in 1998. In 1999, China's and India's economies expanded by 6.6 and 5.7 percent, respectively, despite generally disappointing performances of agriculture in both countries, and their growth was forecast to slow down only moderately in 2000. In China, however, private demand remains weak, and capital outflows and higher unemployment rates indicate strains. The implementation of further state enterprise and financial sector reforms remains a challenge. India benefited from past structural reforms and dynamic manufacture and service sectors.

In the rest of Asia economic performances also improved in 1999. The newly industrialized Asian economies saw real GDP contract by 1.8 percent in 1998 but recorded 5.2 percent growth in 1999. For four of the five countries most affected by the financial crisis (the Republic of Korea, Malaysia, the Philippines and Thailand), recovery is under way at a much more rapid pace than anticipated. In Indonesia, the fifth country, the economy seems to have turned around, but deep-seated structural problems remain and a modest growth rate of 2.6 percent is forecast for 2000. The initial catalyst for growth was a revival of exports, stimulated by competitive exchange rates and led by a global electronics boom. Improved agricultural output and the bottoming out and then gradual recovery of some commodity prices also played a role. Declining inflation allowed an easing of interest rates, while the region also saw a gradual recovery in capital inflows. However, private demand and, in particular, private investment remain sluggish, and unemployment high.

Africa's economies performed relatively well in 1998 and 1999, continuing the positive trend initiated in the mid-1990s. For the region as a whole, growth was in the order of 3.4 and 3.1 percent in 1998 and 1999, respectively, and was forecast to gain strength, reaching 5 percent in 2000. For sub-Saharan Africa, growth was estimated to be only around 2.9 percent in both 1998 and 1999, but this aggregate performance was strongly influenced by the two largest economies, South Africa and Nigeria, the latter having been hit hard by the decline in petroleum prices in 1998. Excluding these two countries, growth in sub-Saharan Africa was 3.7 percent in 1998 and 4.4 percent in 1999, and it may accelerate further to reach 5.5 percent in 2000.

The performances within the subregion varied substantially. A small group of countries continued to grow robustly, benefiting from successful macroeconomic policies. Ghana, Uganda and Mozambique, in particular, underwent continuously strong growth from the early 1990s, although prospects for continuing rapid growth in Mozambique were severely compromised by the recent catastrophic floods. CFA countries also performed strongly, continuing to benefit from the 1994 devaluation which had increased their competitiveness and boosted investment and exports. Elsewhere, performances ranged from average to poor. Very low petroleum prices in 1998 hurt a number of petroleum-exporting countries, but proved very beneficial for net petroleum importers. Conversely, their subsequent strengthening will play a major role in the strong growth expected for Africa as a whole in 2000, but it will hurt many small net importer economies. The decline in agricultural commodity prices was a severe blow to many economies in the region.

Figure 10

Growth in the Near East and North Africa averaged 3.2 percent in 1998, down from rates of more than 4 percent in the previous two years. The slowdown was largely due to the low petroleum prices in 1998, which hurt petroleum-exporting countries but also contributed to a drop in workers' remittances to other countries in the region. The agricultural sectors of a number of countries, including Morocco, the Syrian Arab Republic, Jordan, Iraq and Turkey, were adversely affected by drought. Estimates for 1999 were for a further deceleration to 1.8 percent, not as much as anticipated, however. Short-term prospects for the region have brightened considerably, thanks in particular to the strong rise in petroleum prices in 1999 and the first quarter of 2000.

Real GDP growth in Latin America and the Caribbean fell from 5.3 percent in 1997, the best performance in 25 years, to 2.2 percent in 1998, and is expected to fall to -0.1 percent in 1999. The spread of the international financial crisis to Brazil and the devaluation of the real had a delayed and uneven impact on the region. While Brazil's economy stagnated, Mexico, Argentina and Bolivia managed to grow strongly in 1998. In addition to deteriorating terms of trade, reduced world export volumes and capital flows after the Russian default in August of 1998 meant that by the fourth quarter of 1999 Argentina, Brazil, Chile, Colombia, Ecuador, Peru and Venezuela all experienced recession. Lower commodity prices and natural disasters also contributed to the downturn.

Projections for 2000 point nevertheless to a sizeable recovery from the 1999 slump, with a 3.9 percent growth rate. Brazil is benefiting from the firm implementation of stabilization policies. While trade was depressed in the first half of 1999, the pronounced fall in the effective exchange rate of the real is expected to boost Brazil's export sector. Argentina's downturn, on the other hand, was stronger than anticipated; economic conditions did not improve in several other countries that were facing difficult political and social challenges and financial instability. Caribbean countries experienced an average per caput growth rate of 2.2 percent in 1999, but prospects were less than bright for 2000. In particular, countries depending on sugar and banana exports suffered from adverse terms of trade.

WORLD TRADE AND COMMODITY PRICES

Owing to the Asian financial crisis and the subsequent crises in the Russian Federation and Brazil, the volume of global trade grew at just 3.6 and 3.7 percent in 1998 and 1999, respectively, compared with an average growth rate of 6.9 percent in the period 1991-97. The drop in export and import volume for 1998 was more severe in developing countries. African countries, in particular, saw the value and volume of their exports decline by 13.5 and 1.4 percent, respectively, in 1998, reflecting their heavy reliance on petroleum and metal commodities exports. Rising import demand, especially from Europe, is expected to boost international trade in 2000, including all main categories of primary and manufactured goods.

Commodity prices, which had been on a downward trend since 1995/96, further weakened in 1997 and 1998 in the wake of the Asian financial crisis and remained depressed during most of 1999. The index of non-fuel primary commodity prices fell by 30 points between early 1997 and mid-1999. Particularly hard hit were food products, beverages and metals. The index of petroleum prices fell from 91.7 in the first quarter of 1997 to 51.3 in the first quarter of 1999 and then recovered to 103 by the end of the same year.

Most commodity prices bottomed out during 1999 and some began to recover. In particular, in the first quarter of 2000, petroleum prices reached the highest level since the 1980s. The prices of several agricultural commodities also firmed somewhat in the same quarter (see Facts and figures, 6. International agricultural prices, p. 22). IMF forecasts a 4 percent rise in agricultural prices in 2000, although this modest upturn is subject to uncertainty. Indeed, supply generally failed to contract significantly in response to low prices and there are ample stocks for several commodities. Thus, barring output shocks or a strong upsurge in demand from the major importer countries, no sizeable price recovery can be expected in the short to medium term.

Table 1

PERCENTAGE CHANGE IN WORLD TRADE: VOLUME AND TERMS OF TRADE

Percentage change in the volume and terms of trade

World

Advanced countries

Developing countries

Year

 

Exports

Imports

Terms of trade

Exports

Imports

Terms of trade

1997

9.9

10.3

9.2

-0.5

12.4

10.4

-0.3

1998

3.3

3.2

4.8

1.2

4.6

-1.3

-6.9

19991

3.8

3.0

5.9

0.8

2.4

2.0

1.0

20002

5.8

6.2

5.9

-0.3

6.1

8.0

1.3

1 Estimate.
2 Forecast.
Source: IMF.

Table 2

PRIMARY COMMODITY PRICE INDEXES BY QUARTER, 1997-1999

   

Non-fuel primary commodities

Year/ quarter

All primary commodities

All

Food

Beverages

Agricultural raw materials

Metals

Petroleum

1997:Q1

1997:Q2

1997:Q3

1997:Q4

106.1

101.7

98.5

96.1

116.6

117.2

111.2

106.4

120.2

116.5

107.5

110.4

147.0

189.6

167.6

157.8

126.8

123.0

117.8

108.7

92.0

92.8

93.4

85.4

91.7

80.5

81.2

82.0

1998:Q1

1998:Q2

1998:Q3

1998:Q4

85.0

81.1

77.2

75.1

102.2

98.2

92.4

92.3

106.3

101.4

93.7

96.4

165.1

141.8

129.1

125.3

102.8

102.0

96.8

96.8

79.6

77.6

74.9

72.2

61.6

57.8

56.6

51.6

1999:Q1

1999:Q2

1999:Q3

1999:Q4

73.3

80.9

89.2

97.0

89.4

88.0

88.7

92.3

89.5

83.8

81.6

82.3

119.3

110.9

98.6

113.2

99.3

99.4

101.3

106.2

68.3

72.2

78.6

81.9

51.3

71.2

89.9

103.3

Source: IMF.

Implications for growth, trade and food security in developing countries

Economic developments have major and direct effects on agricultural performance and food security. It has been estimated that annual growth rates of 3 percent per caput should be required on a sustained basis to allow tangible improvements in living standards and poverty alleviation in the developing countries. According to the UN, a minority of only 23 of these countries met this criterion in 1998, and even fewer (including, however, the major cases of China and India), appear to have met it in 1999.5

Among the poorer countries, very few have shown such high levels of economic activity over protracted periods in the recent past. The revival of economic growth that has taken place in sub-Saharan Africa since the mid-1990s is remarkable in a historic context, but at best it enabled only modest gains in per caput terms.

For these and many other countries in the developing world, one factor of particular concern is the weakness of commodity prices on which many of these countries' economies depend. As pointed out, a demand-driven price boost for these products can only be expected to result from strong economic growth in the industrialized countries. The very high price of petroleum and overheated stock indexes bring the risk of inflation, which could lead to heightened interest rates slowing the industrial economies.

Most current forecasts appear to be cautiously optimistic for the medium term, however. As seen above, IMF expects a "soft landing" of the United States economy; growing momentum in growth in Europe; a gradual improvement in economic conditions in Japan; and a further solid recovery in Asian and several other developing country economies. These are also the general assumptions incorporated in the Project LINK economic and agricultural forecasts reviewed below.6 For the developing countries, Project LINK forecasts average economic growth of more than 5 percent for 2000/01 (4 percent in Latin America, 4.5 percent in Africa, 5.6 percent in South and East Asia and 4.2 percent in West Asia).

Project LINK projections also suggest a recovery in the developing countries' agricultural output and trade:

Prospects for countries particularly dependent on agricultural trade

There are two country groups for which agricultural trade is particularly important, and they are therefore especially sensitive to changes in the international economic and agricultural market environment: i) low-income food-deficit countries (LIFDCs) with the lowest capacity to finance food imports; and ii) economies highly dependent on agricultural exports (EHDAEs).7

Two forecast criteria are used: i) short-term economic (1999-2000) forecasts, estimated for FAO by IMF, and; ii) medium-term (2000-03) agricultural forecasts prepared by Project LINK.

i) Short-term economic forecasts

LIFDCs with the lowest capacity to finance food imports. IMF economic forecasts for these countries indicate:

EHDAEs. For this group of countries, IMF forecasts:

ii) Medium-term agricultural forecasts

LIFDCs with the lowest capacity to finance food imports. For this group, as for the developing countries as a whole, Project LINK projections indicate a recovery in agricultural output and trade. In particular, LINK forecasts:

EHDAEs. For this group of countries, Project LINK projections for 2000-03 point to:


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