The following section introduces and analyzes observed developments in world trade during the first part of 1990s. It presents seemingly decoupling world output and trade activities in the early 1990s-sustained world trade growth in spite of a slowdown in world output growth-and introduces three major underlying factors. The three factors that worked in favor of sustaining trade growth in the early 1990s are: the desynchronization of business cycle patterns among the three growth poles in OECD;<sup>2</sup> the new role of developing countries in world trade; and the role of international capital flow as a form of purchasing power transfer in world trade integration. The emergence of new world growth and import engines in East Asia and Latin America, where output growth accelerated into the 1990s despite the slowdown in OECD and in world aggregate output, was made possible, in turn, by strong growth in domestic absorption buoyed by successful reform and adjustment policies in these regions. It was also made possible by their strong export growth brought by penetration into OECD markets and robust intraregional trade, and by a surge in capital inflow that alleviated import capacity limitations.

The third section further investigates the structural forces of the observed new role for LMICs. By analyzing past trends in LMICs' participation in international trade and world integration-particularly developments in the most recent decade-the paper confirms that this new robustness in world trade growth has been brought about-at least to a substantial degree-by the structural changes and liberalization drives that many developing countries undertook in the mid 1980s to early 1990s. This largely unilateral wave of liberalization among developing countries represents an effective shift in development strategy from an inward-oriented to an outward-oriented (export-promoting) framework designed to create a virtuous cycle of higher integration and faster growth under an expanded opportunity set. Thus the paper shows that what happened in the early 1990s-characterized as trade-output decoupling-was an enormous acceleration in the speed of LMIC trade integration into the world mnarket, which compensated for a deceleration in trade integration among the OECD countries, where the integration is highly pro-cyclical. Given the surge in outward-oriented development strategy, supported by a favorable trade environment created by the GATT Uruguay Round, this section also uses the BANK-GEM3 to project the dynamics of world integration through trade for the coming decade. With LMICs playing an increased role in the world trade market, a robust trade growth of over 6 percent a year, on average, is projected for the coming decade.

The fourth section examnines the balance and sustainability of trade integration on the part of developing countries. Liberalization measures taken by the developing countries since the mid 1980s have paved the way for these economies to integrate into the world market in order to enjoy faster growth under an expanded opportunity set. However, for some economies, the path to integration has not been smooth. The paper shows that dragging the legacy of the old inward-looking strategy into the globalizing world-i.e., a continuing anti-export bias often manifested in an overvalued exchange rate-has often proved disastrous. One has to have something to sell (export) to join and

- 2 Throughout this paper, OECD refers to high-income OECD countries, excluding Mexico.

> 3 BANK-GEM, the World Bank's Global Econometric Model, was created and is maintained by the Bank's International Economics Department.

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