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:

• slow output expansion, of 2 percent, in the industrial countries. All the major industrial countries experienced lower growth than in 1994 except Japan, where economic activity began to pick up in late 1995, and Italy. Economic performances and prospects in Europe deteriorated reflecting eroded consumer and business confidence. Fiscal consolidation and the reduction of unemployment remain key challenges;
• a robust 5.9 percent growth in the developing countries. 1995 was the fourth consecutive year in which output increased by close to 6 percent, led by the dynamic Asian economies in particular. Africa and the Near East achieved significantly higher growth rates than in 1994, but a marked slow-down was recorded in Latin America and the Caribbean (see Developing Countries Regional Review);
• further economic momentum in the transition economies of Central and Eastern Europe (excluding Belarus and Ukraine), following the turnaround in 1994. The economies of other countries in transition continued to recede, however, although output appeared to have bottomed out during 1995 in the Russian Federation and a number of Commonwealth of Independent States (CIS) republics in Asia.

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.

Economic outlook and the implications for agriculture

The economic and agricultural outlook of the developing countries will be influenced by the following factors:

• In the years to come, a more stable international economic environment can be expected, with moderate but steady economic growth in the industrial countries, low inflation, increasingly open trade regimes and greater financial integration. These features augur well for the developing countries' prospects for growth and trade.
• Prospects for an extended period of low inflation with continued fiscal consolidation may be expected to contribute to lower interest rates in the industrial countries. This has considerable importance for the developing countries because of the effects it will have on industrial countries' GDP growth, import demand, private capital flows and, most significantly for developing countries, on external debt servicing.
• According to the World Bank, after a dramatic rise between 1990 and 1993, external private capital flows have stabilized in the range of US$160 to 170 billion, despite the Mexican crisis and the rise in interest rates in the United States in 1994. Expectations are for a continuation of moderate growth in private flows, caused by the decline in interest rates mentioned above and the continuing reforms and liberalization of investment regimes in the developing countries.
• External assistance flows have been falling. Official development assistance (ODA), which accounts for two-thirds of resource flows to low-income countries, declined from 0.35 percent of donors' GDP in 1983 to 0.29 percent in 1994, the lowest for more than 20 years. This unfortunate trend, which, as seen above, also extended to flows to agriculture, is likely to continue for a number of reasons, including fiscal consolidation in donor countries, reduced political rationale for official assistance after the fall of the Berlin wall and changing views on the development role of aid vis-à-vis private financing in the current era of economic liberalization.
• A factor of considerable importance for the economic prospects of the developing countries will be the future behaviour of commodity prices. As seen above, the commodity price boom in 1994 lost momentum in 1995 as the essentially transitory forces that had given rise to it subsided. Non-oil commodity prices rose in real terms by 18 percent in 1994 and by
  5 percent in 1995 (World Bank estimates). Such relative weakening of prices had a negative impact on the developing countries as it was more pronounced for their main export crops, particularly tropical beverages, while the prices of cereals, a major import item for many developing countries, strengthened. Expectations are for a weakening of non-oil commodity prices in 1996-97, which may erode many of the gains achieved over the previous two years, but for relative stability in the longer term.

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 mid-term economic outlook for the developing countries as a whole appears somewhat brighter than last year. Economic activity is forecast to stabilize at close to 6 percent growth during 1996-1999. Prospects for agricultural output also appear more favourable than previously forecast. However, agricultural value added, with rates of the order of 4 percent throughout 1996-1999, is forecast to grow at significantly lower rates than total output. This feature would mainly reflect the more dynamic behaviour of the industry and service sectors in the regions of Asia and the Pacific and Latin America and the Caribbean. By contrast, total and agricultural GDP are forecast to grow at approximately the same slow pace in the largely agriculture-based African economies.
• Agricultural value added is forecast to exceed population growth in all the developing country regions except sub-Saharan Africa. After a mediocre 1996, Latin America and the Caribbean is expected to accelerate agricultural value added growth to between 4.5 and 4.8 percent. A slight acceleration in agricultural output growth is expected in Asia and the Pacific. By contrast, after buoyant performances in 1996 and 1997, growth in the Near East and North Africa region is forecast to slow down to slightly above 4 percent.
• Prospects for merchandise trade appear particularly bright, with forecast growth rates in value terms approaching 13 percent yearly in Asia and the Pacific, 10 percent in Latin America and the Caribbean and 8 percent in the Near East and North Africa. Although less dynamic, agricultural trade is nevertheless expected to expand at an accelerating pace in all regions.



• In general, the growth of agricultural imports is forecast to exceed that of exports in all developing country regions, implying varying degrees of deterioration of agricultural trade balances. However, while the net trade positions of Latin America and the Caribbean and Asia and the Pacific are not likely to be modified to any significant extent, the trend is expected to have more serious consequences for Africa, where for a long time the tendency has been for agricultural exports to lag behind food imports, resulting in a shrinking of the agricultural trade surplus to very low margins. The export boom that followed the commodity price upsurge in 1994-95 temporarily reversed this trend, but, as the earlier trend is likely to resume, sub-Saharan Africa may be expected to become a regular net agricultural importer in the years to come.



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.





BOX 1 PROSPECTS FOR THE ECONOMIES HEAVILY DEPENDENT ON AGRICULTURAL EXPORTS 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 2 and 3 percent during the 1980s); an expansion in the value of exports of 13 percent yearly, following the sharp (close to 20 percent yearly) rise in 1994-95; and a 9 percent gain in the purchasing power of exports in each of the two years, after strong expansion (of the order of 12 percent) in both 1994 and 1995. Although the aggregate current account deficit of these countries is expected to widen further, following the sharp deterioration observed since 1993, this will reflect primarily the situation of the Latin American countries of the group.2 Indeed, African EHDAEs achieved a significant improvement in trade balances in 1994 and 1995 which, coupled with sustained levels of net current transfers, enabled current account deficits in 1995 to be reduced by about 30 percent below the levels of 1990-91. The outlook for 1996-97 is for such deficits to widen slightly, although remaining well below the levels of the early 1990s. 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. 2 A major influence in this context was the spectacular surge in imports of Brazil in 1995, following the strengthening in demand associated with the success of the stabilization plan.

BOX 2 EXTERNAL DEBT AND FINANCIAL FLOWS OF DEVELOPING COUNTRIES 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.