Changes in the size and structure of national economies and the effects of these changes  on

the global economy are the topic of the tables in this section. The indicators in this section include measures of macroeconomic performance (GDP, consumption, investment, and international trade) and of stability (central government budgets, prices, the money supply, the balance of payments, and external debt). Other important economic indicators appear throughout the book, especially in the States and markets section (credit, investment, financial markets, tax policies, exchange rates) and the Global links section (trade and tariffs, foreign investment, and aid flows).

Economy recovery continues

     Stronger performance by high-income economies in 2003 helped the world economy continue its recovery. The world economy grew 2.8 percent, an increase of 1 percentage point over 2002 but below the peak of 4 percent in 2000. The world’s recorded output—and income—grew by almost $4 trillion in nominal terms. The low-income economies, boosted by an unprecedented 8.6 percent growth in India, registered the fastest growth, followed by lower middle-income economies. The upper middle-income economies grew by 3.3 percent, reversing the previous year’s negative growth trend. The better performance was due to above-average growth in Argentina, Latvia, Lithuania, Malaysia, Poland, and Saudi Arabia. High-income economies grew by 2.2 percent (figure 4a).

Long-term growth trends

     Economic growth in the past decade was fastest in the developing economies of East Asia and Pacific (averaging 6.7 percent a year) and South Asia (5.5 percent). Leading this growth were China and India, each accounting for more than 70 percent of its region’s output. The two regions continued to do well in 2003, with East Asia registering 8.1 percent growth and South Asia recording 7.5 percent growth.

     The transition economies of Europe and Central Asia continued their strong recovery, growing at an impressive 5.8 percent in 2003, after an average of 3.3 percent in 2000–02. Several countries of the former Soviet Union—such as Armenia, Azerbaijan, Tajikistan, and Turkmenistan—registered growth of more than 10 percent, buoyed by increased exports of natural gas and petroleum products. Russia also did well with growth of 7.3 percent in 2003, an increase from 4.7 percent in 2002, but still below the 10 percent in 2000.

     In Latin America and the Caribbean and the Middle East and North Africa growth was faster in the 1990s than in the 1980s. But growth in Latin America decelerated sharply in 2001 and turned negative in 2002. The economies of Argentina, Uruguay, and Venezuela experienced large negative growth in 2002, while growth decelerated in Brazil and Mexico in 2001 and 2002. Better performance in 2003 by Argentina, Mexico, and Uruguay resulted in positive growth for the region, although growth in Brazil turned negative, and Venezuela, yet to recover, saw its GDP fall by 9.4 percent. The Middle East and North Africa region saw its growth rate more than double over 2002, due to about 7 percent growth in Algeria, Iran, and Saudi Arabia. The heavily indebted poor countries, many in Sub-Saharan Africa, registered 4.2 percent growth in 2003. Nigeria (10.7 percent) and Sudan (6 percent) had above average performance. As a result, Sub-Saharan Africa continued to improve its performance over earlier periods, with 3.9 percent growth.

     With two decades of high growth, the total GDP of East Asia and Pacific nearly reached that of Latin America and the Caribbean (figure 4b). By contrast GDP in the Europe and Central Asia region, almost equal to that of East Asia and Pacific in 1992, is now only half the GDP of East Asia and Pacific after a decade of stagnant economic performance. With steady growth, South Asia’s GDP has almost caught up with that of the Middle East and North Africa, but GDP per capita lags far behind in this populous region.

Growth paths      Most developing economies are following familiar growth paths, with agriculture giving way first to manufacturing and later to services as the main source of income. But some, such as Jordan and Panama, have moved directly from agriculture to service-based economies. For most economies services have been the fastest growing sector. In 1990–2003 the service sector grew by 3.8 percent a year in developing and transition economies and by 3.1 percent in high-income economies. Among developing regions South Asia had the fastest growth in services in the 1990s, at 7 percent a year, and Europe and Central Asia the slowest, at 1.7 percent (table 4.1).

4a

Economic growth varies greatly across regions

Source: World Bank data files.

4b

With more than two decades of rapid growth East Asia and Pacific has caught up with Latin America and the Caribbean

Source: World Bank data files.

Services in developing economies generated slightly more than half of GDP in 2003, compared with 71 percent in high-income economies (table 4.2). But in East Asia and Pacific services produced only 36 percent of GDP, and from 1990 to 2003 growth in manufacturing, at 10 percent a year, outpaced growth in services, at 6.8 percent. This trend reflects the rapid growth of manufacturing in China (11.7 percent a year), which also had rapid expansion in services (8.8 percent a year).

The contribution of trade      Global trade (exports plus imports) grew by 6.3 percent in 2003, recovering from the low 3.6 percent in 2002. Trade in high-income economies, which account for more than 75 percent of global trade, grew by only 2.3 percent in 2002, after recovering from the decline in 2001. But trade in the low-income economies increased by 12.3 percent in 2003, and in the middle-income economies by 11.2 percent.      Trade in merchandise—primary commodities and manufactured goods— continues to dominate. In 2003 merchandise accounted for 81 percent of all exports of goods and commercial services, and manufactured goods for 77 percent of merchandise exports (tables 4.5 and 4.7). Exporters of primary nonfuel commodities saw their trade volumes increase, but a continuing decline in their terms of trade left them with less income (table 4.4). The economies of Sub-Saharan Africa were hit particularly hard.      The structure of trade in services is also changing. Transport services are being replaced in importance by travel, insurance and financial services, and computer, information, and other services. In the 1990s high-income countries were the main exporters of financial services. Now, many developing countries are emerging as exporters of these new services along with computer, information, and business services (table 4.7).      With expanding trade, and favorable current account balances, some exporting countries are accumulating large international reserves. The large trade deficit of the United States ($531 billion) and the efforts by many Asian exporters with large current account surpluses to prevent their currencies from appreciating against the dollar have resulted in large accumulations of international reserves in Asia. Workers’ remittances, growing steadily in countries like India, also contributed to favorable current account balances and higher reserves. India has the seventh largest reserves, ahead of most high-income countries. Japan has the largest reserves, followed by China. Of the 10 economies with the largest reserves, seven are in Asia (table 4.15 and table 4c).

4c

The 10 largest holders of foreign exchange reserves in 2003

Total reserves

$millions Months of imports Japan 673,554 17 China 416,199 416,199 11 Taiwan, China 212,315 17 United States 184,024 1 Korea, Rep. 155,472 8 Hong Kong, China 118,388 5 India 103,737 12 Germany 96,835 1 Singapore 95,746 7 Russian Federation 78,409 7

Source: World Bank and IMF data files.

Steady trends in consumption, investment, and saving      Most of the world’s output goes to final consumption by households (including individuals) and governments. The share of final consumption in world output has remained fairly constant over time, averaging about 80 percent in 1990–2003 (table 4.9). Growth of per capita household consumption expenditure provides an important indicator of the potential for reducing poverty. In 1990–2003 per capita consumption grew by 5.7 percent a year in East Asia and Pacific but by only 0.2 percent in Sub-Saharan Africa,1.7 percent in Europe and Central Asia, and 2.7 percent in South Asia (table 4.10).     Output that is not consumed goes to exports (less imports) and gross capital formation (investment). Investment is financed out of domestic and foreign savings. High-income countries consume a larger share of their output than do developing countries. So, some high-income countries, like the United States and United Kingdom, with low savings rates have to rely more on foreign savings to finance their investment.     In 2003 the global savings rate averaged 21 percent of total output. But global averages disguise large differences between countries. Savings rates are consistently lower in Sub-Saharan Africa. And they tend to be volatile in countries dependent on commodity exports. Gross domestic savings in the Middle East and North Africa rose from 20 percent of GDP in 1990 to 32 percent in 2003, buoyed by higher oil prices. The highest savings rate was in East Asia and Pacific, where gross domestic savings averaged above 35 percent during most of the past decade and reached 41 percent in 2003 (table 4.9).     Between 1990 and 2003 the rate of gross capital formation increased by about 7.9 percent a year in East Asia and Pacific and 6.4 percent in South Asia, but declined by 4 percent in Europe and Central Asia. East Asia and Pacific continued to have the highest investment rate in the world, at 38 percent of GDP in 2003. By contrast, investment averaged only 19 percent of GDP in Sub-Saharan Africa. Developing countries invested a larger proportion of their GDP (25 percent) than did high-income countries, which as a group saved and invested only about 20 percent of GDP (tables 4.9 and 4.10).

Greater monetary and fiscal stability       Governments, because of their size, have a large effect on economic performance. High taxes and subsidies can distort economic behavior; when governments finance large fiscal deficits by growth of the money supply, the likelihood of inflation increases. As governments have adopted policies leading to greater fiscal stability, inflation rates and interest rates have tended to decline. In 2003, 32 countries had double-digit inflation measured by the GDP deflator, down from nearly 50 in 2000 when the highest inflation rate was 516 percent (Democratic Republic of Congo, table 4.14 and table 4d).      The central governments of developing countries have had larger cash deficits than have high-income countries. Central governments of South Asian economies had expenses averaging 16 percent of GDP in 2003 and revenues (mainly from taxes on goods and services) averaging 12 percent of GDP, leaving a cash deficit of about 4 percent of GDP after taking grants into account (table 4.11).      Government expenses are mostly for the purchase of goods and services (including the wages and salaries of public employees) and for subsidies and current transfers to private and public enterprises and local governments. The rest go to interest payments and other expenses. In 2003 subsidies and other transfers accounted for 61 percent of government spending in high-income economies and 55 percent in Europe and Central Asia, but only 11 percent in the Middle East and North Africa (table 4.12).

4d

Fewer countries had double digit inflation rates in 2003

Countries with more than 10 percent inflation in 2003 (%)

Country   Inflation rate   Angola   92   Venezuela, RB   37   Gambia, The   31   Belarus   29   Ghana   29   Dominican Republic   27   Haiti   25   Uzbekistan   24   Romania   23   Nigeria   21   Turkey   21   Zambia   20   Paraguay   18   Uruguay   18   Lao PDR   17   Iran, Islamic Rep.   16   Eritrea   15   Tonga   15   Ethiopia   14   Moldova   14   Russian Federation   14   Brazil   13   Congo, Dem. Rep.   13   Jamaica   13   Mozambique   13   Burundi   12   Guinea   12   Argentina   11   Kenya   11   Malawi   11   Tajikistan   10   Uganda   10

Source: World Bank data files.

The sources of government revenue have been changing. Taxes on international trade declined between 1995 and 2003. Taxes on income, profits, and capital gains and taxes on goods and services increased during the same period. High-income economies depended more on income taxes (28 percent) compared with low- and middle-income economies, which derived 32 percent of their revenue from taxes on goods and services and 8 percent from taxes on trade (table 4.13). External debt continues to increase      In 2003 the external debt of low- and middle-income economies increased by $220 billion in nominal terms, about 9 percent of their total debt stock in 2002 (table 4.16). But the external debt burden measured as the ratio of external debt to gross national income continued to decline for all income groups (except upper middle-income economies) and regional groups (except Latin America and the Caribbean). The total debt burden declined significantly for the Sub-Saharan African countries, down 11 percentage points to 58 percent in 2003. The upper middle-income economies saw an increase of 2 percentage points to 36 percent—Latin America and the Caribbean saw an increase of 1 percentage point to 47 percent.     The debt servicing burden declined overall for developing countries by 1 percentage point in 2003. The largest improvement was for Sub-Saharan Africa, with a decline of 3 percentage points to 8 percent of the value of exports of goods and services, income, and workers’ remittances. South Asia saw an increase of 2 percentage points to 16 percent, and Latin America and the Caribbean an increase of 1 percentage point to 31 percent. Data on the economy—some changes in reporting methods      Most of the indicators in this section remain the same as last year. But there have been some changes in reporting methods. For the national accounts the reference year for the constant price has been changed from 1995 to 2000 in keeping with the recommended practice in estimating and reporting national accounts data. Because rescaling changes the implicit weights used in forming regional and income group aggregates, aggregate growth rates in this year’s World Development Indicators are not comparable to those from earlier editions using different base years (for details see About the data for table 4.1). Readers interested in comparable aggregates over a long time period should consult the World Development Indicators 2005 CD-ROM or WDI Online, which contains the revised aggregates by region and income. Government finance data in tables 4.11 through 4.13 are now reported on an accrual basis, as recommended by the International Monetary Fund’s (IMF) Government Finance Manual 2001. Where data on an accrual basis are not available, the cash basis data have been recast into the new framework by IMF staff (see tables 4.11 through 4.13 for details on the changes).

Data initiative

With more than two decades of rapid growth East Asia and Pacific has caught up with Latin America and the Caribbean