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Economic shocks and the global environment


  • McCarthy, F. Desmond
  • Dhareshwar, Ashok


Policy formulation in most countries is complicated by the role of the external economic environment, especially during periods of great external shocks. The authors examine how individual countries were affected by, and responded to, external shocks. They apply an enhanced version of an earlier methodology for estimating the effect of three kinds of shock: terms of trade, variations in global demand, and changes in the interest rate. They discuss the magnitude of these shocks and country responses to them in Brazil, Ireland, and Korea and present numerical results for some other countries. The authors find that the magnitude of external shocks may be greater than previously recognized. The size and components of the shock depend on such factors as the country's openness to trade, the composition of its imports and exports, and its level of external debt. The authors also found that countries differ greatly in their responses to external shocks. Some rely on additional external financing, some place more emphasis on export promotion, and others favor import substitution. The authors conclude that the magnitude and composition of external shocks should be part of any explanation of why growth rates differ among countries.

Suggested Citation

  • McCarthy, F. Desmond & Dhareshwar, Ashok, 1992. "Economic shocks and the global environment," Policy Research Working Paper Series 870, The World Bank.
  • Handle: RePEc:wbk:wbrwps:870

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    References listed on IDEAS

    1. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, March.
    2. Bruno, Michael, 1982. " Adjustment and Structural Change under Supply Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 199-221.
    3. Prebisch, Raúl, 1950. "The economic development of Latin America and its principal problems," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 29973, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    Cited by:

    1. McCarthy, F. Desmond & Pant, Chandrashekar & Kangbin Zheng & Zanalda, Giovanni, 1994. "External shocks and performance responses during systemic transition : the case of Ukraine," Policy Research Working Paper Series 1361, The World Bank.
    2. McCarthy, F. Desmond & Neary, J. Peter & Zanalda, Giovanni & DEC, 1994. "Measuring the effect of external shocks and the policy response to them : empirical methodology applied to the Philippines," Policy Research Working Paper Series 1271, The World Bank.
    3. E. V. K. Fitzgerald, 1997. "Measuring External Shock and Domestic Response in LDCs: Completing Ballassa's Decomposition Method," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(5), pages 675-693.


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