In the late 1980s, the main global model used by the Bank was the capital flows model. Later, IECAP developed a close relationship with the National Institute of Economic and Social Research (NIESR) in London on its Global Economic Model. The two models are described below.

The capital flows model was a model of debt, creditworthiness, and borrowing for about 90 countries in which the import capacity of most developing countries was determined as a residual in their balance of payments identity. Creditworthiness indicators as well as domestically imposed financing constraints played crucial roles in determining the levels of private and nonconcessional official flows and debt services. GDP growth was affected through a reduced-form relationship with imports and investment. The model was not a fully linked system; it was solved as a set of separate small-country models. The model comprised about 900 equations and was installed in the TROLL system (an econometric software). It was used to prepare the base case and alternative scenarios the _World Development Reports_ (and in the 1990 Fardoust and Dhareshwar study).

The global economic model was a 640-equation macroeconomic model. It covered the world economy but focused on the seven major industrial countries. It was authored by and maintained at NIESR in London. A copy of the model, which was maintained by the then International Economics Department (IEC) at the World Bank, was used to produce forecasts and analyze events and policy options in the world economy. The model was divided into 16 sectors. Each of the G-7 country sectors contained about 60 variables, covering individual components of demand, price indexes, exchange rates and interest rates, and data on the trade and current accounts. The remaining sectors cover the other industrial countries, the Organization of Petroleum Exporting Countries (OPEC), Asia, Latin America, Africa, the centrally planned economies, and miscellaneous developing countries. These sectors contained equations for trade volumes and prices, which depended on five commodity price indices.

DECPG, which replaced IECAP in the late 1990s, uses a number of more sophisticated global models, such as the Global Linkage Model, iSimulate, MAMS, ENVISAGE, and the Global Income Distribution Dynamics Model. For descriptions of these models and more recent model developments see the World Bank website: http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:2027 9477~menuPK:538204~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html.

The key assumption of the baseline was that the twin U.S. deficits of the 1980s would be resolved over the longer term in an orderly manner, primarily through disciplined fiscal policies, and that the macroeconomic policy mix in Europe and Japan would accommodate relatively healthy growth rates. These developments, along with deregulation and other investment-friendly policies, especially in the United States, led us to assume an annual growth rate of 3.0 percent for the 1990s. Although lower than the trend rate influenced by the postwar “golden age,” this rate was higher than the anemic growth that characterized the 1970s and 1980s. Our low-case projection (2.4 percent) sought to capture an alternative scenario, not of a crisis or hard landing but of continued failure to deal with the fiscal and balance of payment imbalances, leading to lower growth in the industrial countries, mainly as a result of higher interest rates and lower private investment and private consumption.

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