SWP737 Sustaining World Economic Recovery laE C O pyThe Challenges Ahead FILE COPY Jean Baneth Enzo Grilli WORLD BANK STAFF WORKING PAPERS Number 737 4FILE COPY WORLD BANK STAFF WORKING PAPERS ,W7 Number 737 Sustaining World Economic Recovery The Challenges Ahead Jean Baneth Enzo Grilli The World Bank Washington, D.C., U.S.A. Copyright (C 1985 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing May 1985 This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, the presentation of material, and any maps used in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country. territory, city, area, or of its authorities, or concerning the delimitation of its boundaries, or national affiliation. The most recent World Bank publications are described in the annual spring and fall lists; the continuing research program is described in the annual Abstracts of Current Studies. The latest edition of each is available free of charge from the Publications Sales Unit, Department T, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from the European Office of the Bank, 66 avenue d'lena, 75116 Paris, France. Jean Baneth is director of the Economic Analysis and Projections Department of the World Bank; Enzo Grilli is an assistant director. Library of Congress Cataloging in Publication Data Baneth, Jean, 1936- Sustaining world economic recovery. (World Bank staff working papers ; no. 737) 1. Developing countries--Economic conditions. 2. International economic relations. 3. Economic history--1971- . I. Grilli, Enzo R. II. Title. III. Series. HC59.7.B327 1985 338.9'009172'4 85-9529 ISBN 0-8213-0546-8 ABSTRACT The paper analyzes the characteristics of the 1983-84 world economic recovery and its effects on developing countries adjustment. It looks at the conditions for medium-term non-inflationary growth in the world economy and at the changes in policies necessary to cope with and redress over, time the real and financial imbalances that threaten the sustainability of the current recovery. It presents a scenario for medium-term growth, resulting from moderate policy changes in industrial countr-ies, within which-the room for growth and continued policy adjustment in developing countries is' examined in some detail. The risks of failure inherent in a continuation -of present policy trends are also examined. ACKNOWLEDGEMENTS This paper draws extensively on work done in the Global Analysis & Projections Division of EPD. In addition, Messrs. Peter Miovic, Christian Moran, Paul Armington, Denis Richard and Charles Larkum contributed in various ways to the preparation of this paper. Their help is gratefully acknowledged. RESUME Cette note analyse les characteristiques de la reprise economique mondiale en 1983-84, et ses effets sur l'ajustement des pays en developpement. Elle examine les conditions d'une croissance a moyen terme dans la stabilite des prix, et les modifications qu'il faut apporter aux politiques economiques afin de corriger les desequilibres, financiers et reels, qui risquent de compromettre la poursuite de la reprise actuelle. Elle presente un scenario de croissance a moyen terme qui serait le resultat d'adaptations modestes des politiques economiques des pays industriels, et elle examine l'impact de ce scenario sur la croissance economique des pays en developpement, et sur leur capacite a mener a bien des politiques d'ajustement. Finalement, la note examine aussi les risques que presenterait une continuation des politiques actuelles. REMERCIEMENTS Cette note est en grande partie basee sur le travail de la Division d'Analyse et Projections Globales du Departement d'Analyses et de Projections Economiques. De plus, Messieurs Peter Miovic, Christian Moran, Paul Armington, Denis Richard et Charles Larkum ont beaucoup contribue a sa preparation. Les remercient vivement de leur aide. RESUMEN El trabajo analiza las caracterfsticas de la recuperacio'n economica mundial de los anios 1983-84 y sus efectos en el ajuste de los pafses en vias de desarrollo. Describe las condiciones para un crecimiento no-inflacionario a mediano plazo en la economfa mundial, y los cambios en las polfticas necesarios para enfrentar y revertir los desequilibrios reales y financieros que amenazan el sostenimiento de la recuperaci6n actual. Presenta un escenario a mediano plazo que supone un ajuste moderado en las polfticas econo'micas de los palses industrializados, y que sirve para examinar en detalle las posibilidades de crecimiento y ajuste en las poifticas de los pafses en desarollo. Los riesgos inherentes a una continuacion de las polfticas econo'micas actuales son tambien examinados. AGREDECIMIENTOS Este estudio descansa en gran parte en el trabajo efectuado en la Division de Analisis Global y Proyeciones del Banco Mundial. Los seniores Peter Miovic, Cristian Moran, Paul Armington, Denis Richard y Charles Larkum contribuyeron en variadas formar a la preparacio'n de este trabajo. Agradezco enormemente la colaboracion que ellos prestaron. TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ............................................ ix I. INTRODUCTION ................................................. 1 II. THE ENVIRONMENT FOR THE DEVELOPING COUNTRIES: ECONOMIC RECOVERY IN THE INDUSTRIAL COUNTRIES, 1983-84 .............. 3 III. FINANCIAL ADJUSTMENT IN DEVELOPING COUNTRIES: 1982-84 ... ..... 11 IV. THE CHALLENGES AHEAD: TRANSITION TOWARDS SUSTAINABLE LONG- TERM GROWTH ................................................ 28 V. MEDIUM TERM ALTERNATIVES FOR INDUSTRIAL AND DEVELOPING COUNTRIES ........ 34 A. A Medium-Term Scenario with Moderate Policy Adjustments: 1985-90 ............................ 36 A.1. The Industrial Countries .... .......... 36 A.2. The Developing Countries .... .......... 43 B. The Risks of Non-Adjustment and the Effects on Developing Countries ............................. 55 SUMMARY AND CONCLUSIONS i. The world economy is now in a revival phase. In 1981-82 it suffered its deepest and most widespread recession in half a century, and in 1982-83 the debt servicing problems of many developing countries imposed strains on the international financial system that at times threatened it with breakdown. ii. Real output increased by 2.6 percent in 1983 and by an estimated 4.2 percent in 1984. World trade has also recovered strongly. After declining in both volume and value terms in 1982 and showing only a modest volume increase in 1983, world exports are estimated to have grown by between 8 and 9 percent in 1984. Despite the pace of this recovery, inflation in the industrialized countries has continued to moderate. In 1984, expressed in terms of the GDP deflator, it fell to its lowest level since the late 1960s, and a further modest improvement is anticipated for 1985. iii. This performance shows important gains from the policy changes adopted by industrialized countries in response to the 1979-80 oil price shock, when aggregate demand was adjusted downwards (in contrast to the demand supporting policies widely pursued after the 1973-74 oil shock) and monetary policies were tightened. It has also provided a vital respite for debtor countries facing the need both to allocate a higher proportion of foreign exchange earnings to debt service and to shift resources within their economies to more productive sectors. The recovery in world trade, strongly fuelled by US import demand, has encouraged exports, enabling adjustment-- - ix - especially for the major Latin American debtor countries--to be undertaken in an environment of positive economic growth. Internal policies, however, were critical to the progress made by developing countries in financial adjustment during the 1982-84 period. iv. Progress in recovering from the economic and financial difficulties of the years immediately following the second oil shock has thus been tangible. Important imbalances and disequilibrium persist, however. This is true of the progress in adjustment made by different groups of debtor countries and of the economic stances of the developed countries. It is also true of real interest rates, exchange rates, and, very importantly, of attitudes towards trade and the reviving tendency of protectionism. Given the scale of the problems that developed in the 1970s--quantitatively reflected in such variables as the size of developing countries' debts and their debt ratios, and the current account imbalances of key industrial countries--these disequilibria will need to be addressed and progressively corrected over a period of years for real stability to return as an inherent property of the world economy. v. For both developed and developing economies the necessary changes will be more easily effected against a background of steady, reliable and strong overall output growth. Indeed, without such a background it is questionable whether rigidities in the developed economies could be successfully removed, and whether--in circumstances of continuing high real interest rates and uncertain access to export markets--developing countries could maintain the momentum of adjustment needed to sustain creditor confidence and, avoid a recurrence of widespread financial disruption. For both groups of countries a failure of growth would involve high, social and political, as well.-as economic, costs. vi. This paper examines the issues involved in moving from the present recovery phase in the economic cycle to a sustainable level of world output growth adequate to permit a workable resolution of the problem of present debt levels carried by the developing countries. vii. Three factors precipitated the debt and-payments crisis-of the early 1980s: the deterioration in the debtors terms of trade, the sharp rise in interest rates, and the weakness in export demand that resulted from recession in the- industrialized countries. These undermined the basis on "which the rapid growth of lending had previously been undertaken--namely, the relative stability of debtor countries debt servicing ratios through the 1970s--and precipitated a sudden loss of confidence by creditors. viii. Underlying these visible causes were other, more fundamental factors. Borrowing had been used by many countries to sustain policies that delayed necessary adjustment and allocated investment inefficiently. Exchange rates were -left to go out of balance reducing price competitiveness in export markets that had become less assured because of growing -trade protectionism., ix. Both for internal and external reasons, therefore, all debtor countries faced the need to reduce domestic consumption relative to output and to achieve a new balance of resource allocation in their economies through appropriate policy change. As the paper shows, the need for adjustment, in nature and scale, was different in different groups of countries, and structural flexibilities and policy capabilities were also different across countries. Some countries, by timely action and as a result of long- established patterns in the orientation of their economies, avoided the need to reschedule their debts, thereby retaining some flexibility in their access to external finance. Others responded early and vigorously and have achieved substantial progress in adjusting their external payments position. Others have scarcely begun the process. While still others, mainly among sub-Saharan African countries, appear to have little prospect of restoring growth through adjustment without considerable further financial assistance on concessional terms. x. Even among those major debtors, however, whose progress in improving their payments position has been of vital importance in reducing financial tensions, the balance and durability of adjustment so far achieved leave room for uncertainties. Investment has borne the brunt of domestic demand compression, falling by 40 percent between 1981 and 1983 in the four major Latin American oil importing debtor countries. While the tempo of domestic policy reform needs to be maintained and, for many debtor countries, quickened, the emphasis must shift towards patterns sustainable in the longer- term. xi. The external environment in which this shift is undertaken is likely to be crucial to its outcome. In this regard the role of economic policies in the developed and developing economies is both critical and clear. Industrial countries policies will largely determine the level of real interest rates, the freedom of world trade movements and, through the aggregate current account position maintained by the developed countries, the levels of financing available to the developing countries. Developing countries policies will determine to a significant extent where better external conditions are translated into domestic growth. xii. The paper focuses on the changes in policies that industrialized countries will need to implement over the period 1985-90 in order to establish the basis for sustainable growth in the world economy after 1990 and on the scope that this will leave to developing countries trade, finance and growth. The necessary adjustments to policy are moderate and should be implemented gradually, but they cannot be long delayed. A key component is a change in the current fiscal stance of the United States and a corresponding realignment of US monetary policy, together with a sympathetic untightening of monetary conditions in Europe and a reduction of the degree of restrictiveness of fiscal policies in those countries where room for manouver exists from the standpoint of inflation. Japan also falls in this category of countries. xiii. The remainder of this decade could be either a period of transition to renewed worldwide economic growth in a reasonably stable price environment, or one of disorder and decline. This sombre scenario is easy to imagine. Continued budget deficits in the United States at the level now assumed by the Congressional Budget Office in case no policy is initiated to contain them, would feed a continued and growing current account deficit. This would become increasingly difficult to finance, putting upward pressure on interest rates. In such an environment, a growing trade deficit in the U.S. and continued slow growth in Europe would feed pressures which would easily lead to increased trade protectionism. Growth in the industrial countries would falter and reach an average of only 2.5 percent for the rest of the decade. Exports of the developing countries would suffer both from a slow growth of overall demand and protectionism, and would grow only at a rate of perhaps 3 percent. Overall GNP growth in developing countries would amount to only about 4 percent; only about 3 percent excluding India and China whose relative inward orientation and low debt would, for a time, somewhat protect them from the implications of this scenario. Taking into account the decline in their terms of trade, most developing countries would face stagnating or declining per capita incomes. xiv. But this picture might be overoptimistic. The financing crisis of U.S. deficits might emerge suddenly and precipitate a sharp recession with growth much below the average for a year or two. This would have obvious implications for the developing countries' debt servicing ability. Even under the scenario depicted above, the developing countries would have to generate continuous large trade surpluses to service their debt, under conditions of slow growth. Industrial countries would have to be willing to accept corresponding trade deficits despite their unemployment. Commercial banks, through involuntary lending or rescheduling would have to continue slowly increasing their exposure in developing countries, despite the latters impaired prospects. xv. However, this scenario is not unavoidable. Timely, moderate, but credible reduction in U.S. fiscal deficits could still bring about a much better outcome. The US dollar could decline gradually, and allow gradual decline in real dollar interest rates. If this is accompanied by some relaxation of financial policies in other industrial countries (mostly monetary in Europe, largely fiscal in Japan), and by adequate wage and other factor cost restraints, industrial countries could grow at a rate of 3 percent for the remainder of the decade and somewhat faster thereafter. Protectionism could then be more easily contained and developing countries exports grow at a rate of about 5 percent. Middle-income developing countries would then have an environment which could allow them to rebuild their debt service capacity and commercial banks gradually return towards modest, voluntary lending to them. Under this scenario, overall developing countries GNP could grow at 5 percent allowing room for growth in per capita incomes. Only in Sub-Saharan Africa would income growth not resume till the end of the period; but at least declines would halt. xvi. Of course, the international environment, determined by the industrial countries policies, is only a necessary, not a sufficient condition, for such an outcome. Developing country policies would also have to continue to improve, both in moving towards reduction of internal and external imbalances and in terms of greater factor movement flexibility and improved pricing. xvii. The acceptable outcome outlined above is not the best possible. One can imagine better ones. They would require firmer correction of financial imbalances in the industrial countries, roll back rather than containment of protectionism, and more official capital flows. They would also require bolder movement toward improved policies in the majority of developing countries. While one cannot realistically count on this happening within the transition period under consideration, it is perhaps not too much to fix such improved policies and the faster growth they entail as a realistic and attainable goal for the 1990s. I. INTRODUCTION 1. In 1981 and 1982 the world economy suffered its deepest and most widespread recession in half a century. By 1983, recovery was under way, and it strengthened and spread further in 1984. It helped to relax payments tensions, to ease the path of domestic adjustment policies in developing countries and to contain the "debt crisis". Beyond these positive results, however, causes for concerns remain. Not the least of which is that a major driving force behind the recovery so far has been the emergence of new disequilibria in domestic finances, external payments and factor employment within industrial countries, which are themselves not sustainable in the medium term. 2. The world economy has not yet returned to an even growth path. Aside from the real and financial imbalances that still need to be corrected, trade protectionism is still a major threat and the danger of financial insolvency is still present for several countries. Furthermore, many industrial and developing countries will continue to face serious structural adjustment problems for several years, as adaptation to past price, demand and supply changes necessary to ensure fuller employment of existing factor supplies, especially labor, is still far from complete in many of them. 3. The present economic recovery presents both opportunities and challenges to policy makers in industrial and developing countries. Its continuation in the medium term, which is in their strong common interest, requires that economic policies be consistent with this objective. Current - 2 - policies must therefore be continuously reassessed, to identify the changes needed to achieve and maintain such consistency. Sustaining the current recovery, moreover, both depends upon and is a precondition for a return to durable trade and financial equilibria and for making steady progress in redressing the structural imbalances that stand in the way towards sustainable long-term non-inflationary growth. 4. Transition from the present cyclical recovery to steady long-term growth will have to be managed during the remainder of this decade, and this is the focus of this paper. The first part deals briefly with the overall impact on developing countries of the 1983-84 economic recovery in industrial countries. The second part examines in some detail the external adjustment paths followed by developing countries. The third part sums up the policy challenges that lie ahead. The last section deals specifically with the medium term prospects for the world economy and for developing countries in particular, in the event of moderate policy adjustments in industrial countries, and also assuming continuation of present policy trends. - 3 - II. THE ENVIRONMENT OF THE DEVELOPING COUNTRIES: GLOBAL ECONOMIC RECOVERY IN THE INDUSTRIAL COUNTRIES, 1983-84 5. The world economy now appears to be on the mend. In 1983-84 the major industrial countries succeeded in setting their economies on a recovery path, while also reducing inflation. In developing countries the growth of output was less fast and domestic inflation rates were still on the rise, but despite rising interest rates and associated debt service burdens, many of them made substantial progress in dealing with the payment difficulties. they faced. On the whole, financial tensions were eased and world output and trade once again grew. 6. World real output increased by 2.4 percent in 1983 and by an estimated 4.2 percent in 1984. World trade, which had declined in both volume and value in 1982 and had returned to a positive, if modest, volume growth in 1983 registered a strong increase in 1984, pulled by the expansion in economic activity in both industrial and developing countries. The growth of world exports is estimated at about 9 percent in 1984 (Table 1). 7. Industrial countries- real output grew by 2.6 percent in 1983 and, according to preliminary estimates, by 4.8 percent in 1984. Recovery in industrial countries was still regionally unbalanced. Real growth was fastest in the United States, whose economic expansion fueled the world recovery. Japan followed, with the second highest rate of growth of real domestic product for the whole year, and resumed its traditional place as the fastest growing industrial economy in the second half of 1984. Europe's recovery was at best tentative and slow, and unemployment there continued to increase. - 4 - Table 1: WORLD OUTPUT, TRADE AND PRICES Actual Estimated Projected 1981 1982 1983 1984 1985 (------------------% change…----------------- REAL OUTPUT Industrial Countries 1.9 -0.5 2.6 4.8 3.1 Developing Countries 3.3 1.9 2.0 4.1 4.5 High-Income Oil Exporting Countries 0.1 -1.7 -7.0 0.4 3.6 East European Countries 1.8 2.1 3.0 2.6 2.7 World 2.0 0.0 2.4 4.2 3.3 TRADE (EXPORT VOLUMES) Industrial Countries 2.2 -1.6 2.0 9.0 6.0 Developing Countries -1.3 3.1 5.8 8.9 6.8 World /a 1.5 -2.0 2.1 8.6 5.7 TRADE ($ PRICES) Export Unit Values of Industrial Countries -3.8 -4.0 -3.5 -3.2 4.0 Export Unit Values of Developing Countries -5.0 -6.7 -3.4 -2.5 -2.2 Manufactures' Export Prices (MUV) -5.0 -1.9 -4.2 -2.8 5.0 Non-Fuel Primary Commodity Prices -18.5 -16.8 3.7 -2.1 1.1 Oil Prices 12.4 -3.2 -12.3 -2.4 0.0 DOMESTIC PRICES (LOCAL CURRENCIES) /b Industrial Countries 10.5 7.8 5.3 5.0 4.5 Developing Countries 30.0 30.5 41.5 47.5 44.0 /a Including estimates for high-income oil exporting countries and the East European economies. /b Consumer prices (weighted averages). Sources: OECD, IMF, World Bank. - 5 - 8. Despite the pace of the recovery, inflation generally continued to moderate in the industrial countries. Overall, the rate of increase of the GDP deflator expressed in national currencies fell to its lowest level since the late 1960s. Continued restraint in monetary policy, moderation in the growth of wages and other industrial input costs were the key to this positive performance. In the United States and in Japan price stability was bolstered by rising exchange rates (Table 2). But the progress made against inflation was equally solid in Europe, and given the cost-push impact of depreciating exchange rates, this is perhaps even more remarkable. 9. The recovery of world demand did not exert any significant upward pressure on traded good prices. The prices of manufactures exported by industrial countries rose even less than their GDP deflators. Reductions in domestic inflation rates, coupled with improvements in manufacturing productivity, and strong competition in export markets helped contain the increase in manufactured goods prices in terms of domestic currencies. In dollar terms, their prices continued to fall in 1984 as the dollar continued to appreciate. The prices of primary commodities also fell in 1984, under the impact of dollar appreciation and of interest rate increases (Table 2). 10. That the cause of the continued appreciation of the US dollar are not well understood is illustrated by most observers' having forecast that it would decline in 1984. What is clear, however, is that the high value of the dollar, coupled with the early and vigorous resumption of growth in the United States contributed to a surge of imports. The Federal budget deficit Table 2: SELECTED MONETARY INDICATORS FOR INDUSTRIAL COUNTRIES 1981 1982 1983 1983 1984 iQ 2Q 3Q 4Q iQ 2Q 3Q 4Q (- %) A. Short-Term Domestic Interest Rates /a United States 14.1 10.7 8.6 8.1 8.4 9.2 8.8 9.1 9.8 10.3 9.1 Japan 7.7 7.1 6.7 6.9 6.7 6.8 6.5 6.3 6.3 6.3 6.3 Germany 12.1 8.9 5.8 5.7 5.4 5.7 6.3 6.0 6.0 6.0 5.9 France 15.3 14.7 12.6 12.9 12.6 12.6 12.5 12.7 12.5 11.6 10.8 United Kingdom 13.0 11.5 9.6 10.5 9.7 9.3 8.9 8.7 8.7 10.4 9.4 B. Short-Term International Interest Rates Eurodollar Rate /b 16.5 13.1 9.6 9.2 9.3 10.1 9.9 10.1 11.4 11.9 9.9 London Interbank Rate /b 16.8 13.2 9.6 9.3 9.3 10.0 9.8 10.2 11.4 11.8 10.0 London Interbank Rate 7T 16.6 13.5 9.8 9.5 9.5 10.4 10.0 10.4 11.8 12.2 10.4 C. Effective Exchange Rates /d (--yearly % change--) (---------- change from previous quarter----------) United States 12.7 11.7 5.8 -2.8 2.9 3.6 0.3 0.7 0.9 6.0 2.7 Japan 13.1 -5.7 10.1 9.2 1.1 0.4 4.4 2.1 1.0 -2.4 1.0 Germany -9.5 4.1 2.4 1.7 0.1 -2.4 0.3 0.0 -0.1 -2.1 -1.6 France -10.6 -9.1 -8.7 0.5 -5.5 -2.6 -1.6 -1.0 0.1 -2.0 -1.5 Italy -13.3 -7.5 -5.1 0.2 -2.0 -2.3 -2.4 -1.5 -0.4 -1.7 -1.9 United Kingdom -1.1 -4.8 -8.0 -9.5 4.6 0.6 -2.0 -1.7 -2.5 -2.2 -3.8 Australia 10.4 -5.0 -7.3 -2.2 -5.6 3.3 3.9 2.8 -2.4 -3.9 2.8 Canada 2.9 1.9 3.2 -0.6 1.1 1.4 -0.3 -1.2 -2.7 0.9 0.8 /a Three months treasury bill rates or private bill rates, except for France and Germany, for which interbank money rates are quoted. /b Three months, on US dollar deposits. 7T Six month, on US dollar deposits. 7- MERM weights. Source: IMF, International Financial Statistics (various issues). - 7 - constituted a parallel influence, also clearly related to the appreciating dollar. As a result, US import expenditure rose by 6 percent in 1983 and by 26 percent in 1984, while export revenue grew much less. The trade deficit of the US rose from $43 billion in 1982 to $108 billion in 1984, and the current account deficit increased by more than $90 billion over the same period (Table 3). 11. The corresponding increase in the net surplus outside the United States exercised a powerful expansionary influence on the rest of the world, equivalent to about 1 percent of world GDP. However, the distribution of this impulse was uneven. Although emphasis on absolute values is rendered difficult by the errors and omissions in the world current account balance, 1/ the broad trends are clear. Among industrial areas, the improvement in the current accounts of Japan and Europe over the 1982-84 period was of about equal magnitude: $28 billion. However, while improvement in the position of Japan came as an addition to existing surpluses, Europe reached equilibrium in its overall current account only in 1983, and improved slightly upon it in 1984. Some European countries are still running sizable deficits, offset by surpluses in others. One consequence of this is that concerns about balance of payments, and about the effects of deficits on exchange rates and on domestic inflation still constrain some European governments' willingness to relax financial policies in order to stimulate output and employment growth. 1/ "Errors and omissions" have increased rapidly since 1980. See Table 8. Table 3: ECONOMIC PERFORMANCE OF INDUSTRIAL COUNTRIES: 1981-85 Actual Estimated Projected 1981 1982 1983 1984 1985 (-------------------% change----------------) RETA GNr United States 2.5 -2.1 3.7 6.8 3.0 Japan 4.0 3.2 3.0 5.7 5.0 Europe -0.1 0.6 1.3 2.3 2.5 Total OECD 1.9 -0.5 2.6 4.8 3.1 REAL TOTAL DOMESTIC DEMAND United States 3.1 -1.2 5.0 8.7 3.7 Japan 2.1 3.1 1.6 4.2 4.5 Europe -1.8 0.8 1.0 2.0 2.0 Total OECD 1.1 0.0 2.7 5.2 3.0 PRIVATE CONSUMPTION DEFLATORS United States 8.6 5.9 3.7 3.2 3.5 Japan 4.5 2.7 1.6 2.2 2.7 Europe 11.6 10.7 8.4 8.0 7.0 Total OECD 9.4 8.0 5.4 5.0 4.7 (…--------$ billion---------------) CURRENT ACCOUNT BALANCES United States 6.3 -9.2 -41.6 -100.0 -130.0 Japan 4.8 6.9 20.8 35.0 40.0 Europe -21.5 -17.8 0.9 10.0 14.0 Total OECD -25.0 -27.5 -25.2 -61.5 -86.0 (--------------% of labor force------------) UNEMPLOYMENT United States 7.6 9.7 9.6 7.5 7.0 Japan 2.2 2.4 2.6 2.7 2.5 Europe 8.2 9.5 10.5 11.0 11.5 Total OECD 6.9 8.4 9.0 8.5 8.5 Source: OECD: Economic Outlook (various issues). 12. Table 3 shows the relationship between the movements in GNP, domestic demand and the balance of payments in the three major industrial areas. In the United States, real domestic demand grew much faster than real GNP. This was largely due to the impact of the rapidly growing fiscal deficit in a country where private savings, traditionally quite low, have barely exceeded private investments. Demand expansion fueled the growth of GNP, but also gave rise to the current payments gap, as in the past two years the growth of real domestic demand exceeded that of domestic product by more than 3 percentage points. In Europe, in part because of concern with the balance of payments, the growth of real domestic demand remained below that of GNP, thereby acting as a break on the growth of real domestic output. As for Japan, where the balance of payments constraint was never operative and domestic price rises were also contained more successfully than even in the United States and in most European countries, the growth in domestic demand accelerated only recently and remained on average lower than that of GNP, thus contributing to rising payments surpluses. 13. On the whole, the current account deficit of industrial countries increased from $25.2 billion in 1982 to $61.5 billion in 1984. This growing overall payments deficit and the rising imports of the industrial countries have contributed to easing the developing countries' financial adjustment to the particular problems of the early 1980s. Their own mounting debt, the changes intervened in the attitudes of commercial lenders and of aid suppliers, as well as the rise in interest rates, required the developing countries to move towards a trade surplus position. This was facilitated by the developments in the overall trade and payments position of industrial countries just described. - 10 - 14. Developing countries' export revenues increased by 8 percent in 1984, while import expenditure grew by 2.4 percent. Their trade balance went from an overall deficit of $49 billion in 1982 to a surplus of about $3 billion in 1984. 1/ Their current account imbalance was reduced by two-thirds during the same period. The upsurge of exports to the United States, and, to a smaller extent, to Europe and Japan also helped the recovery of domestic output in most developing countries. On the whole, their real GDP growth rate nearly doubled between 1983 and 1984. The impact of improved world demand and relative price conditions 2/ for developing countries exports varied, depending on individual country's export structure (by product and destination), capacity to respond to outside stimuli, external financial position and the nature and extend of the imbalances affecting it. It also depended critically on the domestic policies that were followed by the various countries, not only during the 1983-84 recovery period, but also earlier. 1/ See further Table 4. 2/ Developing countries' terms of trade improved in 1984 on account of the decline in the price of both manufactured products exported by industrial countries and oil (Table 10). - 11 - III. FINANCIAL ADJUSTMENT IN DEVELOPING COUNTRIES: 1982-84 15. In mid-1982, when Mexico's inability to meet its contractual debt service obligations suddenly transformed the "debt problem" into a "debt crisis", the world economic recession was at its worst. Economic activity, export prices and volumes were declining. The sharp reduction of voluntary private lending to developing countries (for many, a virtual cessation) left to those countries faced with a pressing need to reduce their balance of payments deficits no alternative to cutting back their imports. In some countries, which had either tried to anticipate the- emergence of financial difficulties or had already been affected by them (e.g. Turkey, Brazil), the adjustment process began earlier. On the whole, however, developing countries' imports began to be cut severely in 1982. 1/ In that year overall import expenditure by developing countries fell by almost 8 percent. Low- income Sub-Saharan African countries, hit by a dramatic decline in commodity export revenues, and middle-income Latin American countries, facing the most acute debt problems, reduced their import outlays most sharply; but. import cutbacks were general across geographical regions and income groups (Table 4). Except for China and some of the agricultural Asian countries, most developing countries also suffered declines in GDP growth rates. In the 1/ Unless otherwise specified, the developing countries' data quoted in this paper refer to a panel of 90 countries, which account for 97 percent- of total developing countries' population, 92 percent of total GNP and 86 percent of total-exports. The list is provided in Annex Table 1, together with the components of the various regional and analytical subgroups used in this paper. The IMF grouping. of developing countries that is most comparable with the 90 country panel totals is "non-oil developing countries". Table 4: IMPORTS, EXPORTS AND TRADE BALANCES OF DEVELOPING COUNTRIES Export Values Import Values Trade Balances 1981 1982 1983 1984 1981 1982 1983 1984 1981 1982 1983 1984 (--…-------------------- % change-------------------- --) ( ----Billions US$------) LJOR. am GROUPS 1. Sub-Saharan Africa /a -22.2 -11.2 -9.6 8.0 5.9 -11.8 -16.7 -14.8 -7.1 -6.1 -2.7 4.3 2. East Asia 8.5 -0.6 4.3 9.8 10.1 -3.0 5.6 4.5 -9.8 -5.8 -8.0 -3.3 3. South Asia 3.8 -3.1 5.9 4.3 -2.0 -4.3 -0.7 0.9 -10.3 -9.7 -8.8 -8.5 4. EMENA 3.4 -6.1 -2.0 5.5 8.0 -3.9 -4.0 -2.3 -36.0 -35.9 -33.4 -29.6 5. Latin American 6 Caribbean 3.1 -4.8 3.8 7.0 7.1 -20.7 -26.9 10.9 -10.9 6.2 31.9 35.4 ANALTTICAL C2DUPS 1. Low-Income Countries 3.0 -1.2 2.1 13.9 -3.9 -8.6 2.0 3.5 -15.2 -10.8 -11.0 -11.5 Africa -23.0 -6.8 -3.0 8.6 -13.2 -10.0 -6.4 1.0 -4.9 -4.2 -3.7 -3.3 Asia 10.2 -0.2 3.0 14.8 -1.2 -8.2 4.1 3.8 -10.3 -6.6 -7.3 -8.2 2. Middle-Income Countries 0.4 -3.3 1.8 7.1 9.9 -7.8 -7.2 1.7 -57.7 -38.2 -6.1 14.4 2.1 Oil Importers 4.9 -2.5 6.4 7.4 6.1 -7.0 -3.8 2.2 -61.2 -47.4 -24.8 -11.9 Major Exporters of Manufactures 7.1 -2.6 6.7 7.5 5.8 -6.2 -3.4 2.8 -35.8 -27.4 -9.3 -1.4 Other Non-Oil -5.1 -1.6 4.8 6.6 7.3 -10.1 -5.3 -0.4 -25.4 -20.0 -15.5 -13.3 2.3 Oil Exporters -6.3 -4.6 -5.9 6.5 19.3 -9.5 -15.0 0.6 3.5 9.2 18.7 26.3 ALL DEVKLOPING COUNTRIES /b 0.7 -3.1 1.9 7.9 7.9 -7.9 -6.1 1.9 -72.9 -49.0 -17.0 2.9 /a Excluding South Africa. The IMF definition excludes both South Africa and Nigeria. 71 Figures refer to a sample of 90 developing countries. Source: World Bank, Economic Analysis and Projections Department. - 13 - regions where import reductions were sharpest, the absolute level of output actually fell, by about 1 percent in Latin America and by 1.2 percent in Sub- Saharan Africa (Table 5). 16. In 1983, middle-income Latin American countries, whose debt servicing difficulties had reached a peak, again reduced their imports expenditure by compressing real domestic absorption, including investments. Import expenditure fell by 27 percent and the decline in their real output also accelerated (to -2.9 percent). The combined effect of such a strong reduction of imports and of increased exports to the United States and other industrial countries was a first strong improvement in current accounts during the year. 17. In the course of the adjustment process, private incomes and consumption expenditures were reduced throughout Latin America. However, the brunt of the compression of domestic demand fell on investment. In Brazil, for instance, the value of investment in constant prices was reduced by well over one-third in three years; in the four major oil-importing debtor countries (Argentina, Brazil, Chile, and Colombia) total real investments in 1983 were 40 percent below their 1981 level. 18. East Asian middle-income countries provided the sharpest contrast to Latin America. These countries, and particularly the major exporters of manufactures, had weathered the 1982 fall in their trade with only a moderate slowdown in their traditionally fast growth of real output. Recovery of demand for their exports, particularly in the United States, allowed them to restore normal import growth rates in 1983, and to raise the growth rate of - 14 - Table 5: REAL GDP GROWTH IN DEVELOPING COUNTRIES Actual Estimated Projected 1982 1983 1984 1985 (---------% change--------) MAJOR BANK GROUPS 1. Sub-Saharan Africa /a -1.2 -2.4 -0.8 2.0 East Africa 0.1 1.0 1.3 2.6 West Africa -1.8 -3.9 -1.7 1.7 2. East Asia 5.4 7.3 7.2 6.3 China 7.4 9.0 9.0 7.0 Other East Asia 3.8 5.9 5.5 5.8 3. South Asia 2.8 6.2 4.4 5.3 India 2.6 6.5 4.2 3-7 Other South Asia 3.5 5.2 4.9 6.4 4. EMENA 3.5 2.5 2.6 3.6 5. Latin America and Caribbean -0.9 -2.9 2.8 3.6 WDR ANALYTICAL GROUPS 1. Low-Income Countries 5.0 7.2 6.6 6.0 Africa 0.7 07 19 - Asia 5.4 7.8 7.1 6.3 2. Middle-Income Countries 0.8 0.0 3.1 3.8 2.1 Oil Importers 0.8 0.7 3.3 3.8 Major Exporters of 1.3 0.7 3.5 4.0 Manufactures Other Non-Oil -0.7 0.4 2.7 3.2 2.2 Oil Exporters 0.9 -1.0 2.7 3.9 ALL DEVELOPING COUNTRIES /b 1.9 2.0 4.1 4.5 Memorandum Items: Low-Income Countries (excluding China and India) 2.3 3.0 3.2 4.3 All Developing Countries (excluding China and India) 0.9 0.2 3.1 3.9 /a Excluding South Africa. lb Including South Africa. Total refers to a panel of 90 developing countries. Source: World Bank, Economic Analysis and Projections Department. - 15 - domestic output while also reducing their external deficits. This pattern continued and was consolidated in, among others, Korea, Thailand, Hong Kong and Singapore, whose joint current account balance improved by $4 billion and whose output growth was in excess of 5 percent during 1983. Better domestic policies, reflected in lower domestic inflation rates, lower budget deficits and more adroit exchange rate managements than in other middle-income developing countries, coupled with greater capacity to respond to changes in external conditions (built up through years of export-oriented fast development) helped this fast and relatively painless adjustment. 19. In the middle-income countries of the Middle East, North Africa and Southern Europe, 1/ the pattern of events followed a course mid-way between Latin America and the Far East. Turkey, for instance, became unable to meet its debt service obligations well before the onset of the world recession. Its adjustment thus begun at a time when external circumstances were more favorable. In the early 1980s, its exports and real GDP never stopped growing, and by 1983 private per capita consumption, and by 1984 investments could also start to recover. 20. As for Asian low-income countries, limited dependence on external trade partly insulated India and China from external shock. More broadly, these countries continued to improve their domestic policies, maintaining and even accelerating their output growth rates. They had contained their balance of payments deficits in the 1970s, and generally reduced them in the early 1/ These are the countries included in the Bank's EMENA region. - 16 - 1980s. China moved into substantial surplus. Only in the case of India and China, however, was the size of the payments deficit policy determined, in the sense that few, if any, of the other countries in this group had the ability to borrow much on commercial terms. India and China pursued very cautious foreign borrowing policies, with the deliberate aim of avoiding excessive dependence on external capital. 21. Sub-Saharan Africa continued to face the most severe difficulties in the early 1980s. The value of its exports, almost exclusively primary commodities, fell by more than 40 percent in 1981-83. Import expenditure had to be drastically reduced over the same period. The improved trade balance, however, was not enough to allow the region's debtor countries to meet their debt service obligations. GDP continued to fall, and per capita incomes, now frequently below their pre-independence levels, fell even more sharply. Undoubtedly, domestic policy improvements in the region remained limited and the policy thrust often unstable; but for these raw material exporters, with often very trade-dependent economies, the negative evolution of raw material prices, the lack of recovery in their traditional European markets and the decline of aid left very little room for sustained adjustment measures which did not require politically unenforceable sacrifices. 22. The consolidation of economic recovery in industrial countries during 1984, together with the significant shift in policy response that occurred in many developing countries, determined a major turnaround in adjustment results. Increased demand for their exports and greater ability to take advantage of improved export market conditions created by a combination of - 17 - expenditure reduction and expenditure switching policies, put developing countries in a position to resume output growth, while at the same time reducing further their payment deficits (Table 6). 23. The changes in terms of trade that occurred in 1984 and the relative import-export volume performances determined final outcomes in terms of trade balances. Middle-income countries accounted for most of the improvement that occurred from 1983 to 1984 ($14.5 billion). Among them the largest movements towards surplus were made by the major exporters of manufactures, in both East Asia and Latin America. Quantity factors played the major role, as the improvement in middle-income countries terms of trade was minimal in 1984. Low-income developing countries only marginally reduced their overall trade deficit. Sub-Saharan African countries and, to a smaller extent, India and China showed the largest improvement in trade balances. The former were helped by a strong improvement in terms of trade, largely determined by a fall in the prices of imported food and manufactures and a sharp increase in the prices of exported tropical beverages (Table 4). 24. Middle-income countries registered the strongest improvements in current account balances during 1984, despite sharply rising interest payments. Middle-income oil importing countries registered a $15 billion reduction in deficit, while oil exporters managed to reduce their current account imbalance by almost $7 billion. Net private lending to middle-income countries continued to fall in 1984, although by less than in 1983. Despite a small increase in official lending, this group of countries registered a net outflow of about $14 billion in 1984, as interest payments on existing and new - 18 - Table 6: DEVELOPING COUNTRIES CURRENT ACCOUNT BALANCE AND ITS FINANCING, 1970-84 (Billions of Current US$) 1970 1980 1981 1982 1983 1984 A. OWW-INCOME COUNTRIES Asia Net Exports (GNFS) -1.358 -15.755 -11.498 -6.831 -7.246 -8.687 Net Factor Income -0.390 0.078 -0.212 -0.983 -0.523 -0.605 Interest on KLT Debt -0.286 -1.363 -1.560 -1.515 -1.598 -1.833 Official -0.241 -0.689 -0.657 -0.762 -0.962 -1.079 Private -0.045 -0,674 -0.904 -0.752 -0.636 -0.754 Current Account Balance -1.551 -9.685 -6.164 -1.364 -1.001 -3.083 (Excl. Official Transfers) Net Official Transfers 0.370 1.952 2.084 1.884 2.011 1.952 MLT Loans 0.987 4.878 3.227 3.957 4.199 6.541 Official 0.971 3.410 3.452 3.883 3.542 4.222 Private 0.016 1.468 -0.225 0.074 0.657 2.319 Net Direct Investment 0.029 0.159 0.422 0.488 0.546 0.643 Change in Reserves -0.187 0.449 2.406 2.135 -4.224 -3.184 Debt Outstandtng and Disbursed 11.524 38.412 39.545 42.941 46.290 52.831 As Percent of GNP 6.958 7.798 8.175 8.850 9.058 9.741 *As Percent of Exp. GS 183.636 96.704 89.501 95.064 98.880 100.032 Debt Service Ratio 12.423 7.996 9.295 10.929 8.311 8.443 Africa Net Exports (GNFS) -0.381 -5.385 -5.391 -4.135 -4.339 -3.784 Net Factqr Income -0.161 -0.901 -1.098 -1.004 -1.049 -1.294 Interest on MLT Debt -0.080 -0.698 -0.643 -0.567 -0.662 -1.000 Official -0.042 -0.312 -0.259 -0.267 -0.315 -0.435 Private -0.038 -0.386 -0.384 -0.300 -0.348 -0.565 Current Account Balance -0.679 -5.837 -5.882 -4.978 -4.900 -4.594 (Excl. Official Transfers) Net Official Transfers 0.297 2.109 1.813 1.515 2.008 1.925 MLT Loans 0.276 3.349 2.862 2.198 1.910 2.025 Official 0.247 2.366 2.249 1.858 1.922 2.231 Private 0.030 0.983 0.614 0.340 -0.012 -0.206 Net Direct Investment 0.173 0.236 0.221 0.223 0.211 0.086 Change in Reserves -0-111 0.555 0.377 0.500 0.171 0.607 Debt Outstanding and Disbursed 2.874 20.787 22.905 24.487 25.399 26.583 As Percent of GNP 17.931 39.936 43.753 47.765 52.223 54.550 As Percent of Exp. GS 75.232 175.807 216.466 260.561 279.452 278.067 Debt Service Ratio 6.065 12.541 13.801 15.654 16.507 19.893 B. MIDDLE-INCOME COUNTRIES Major Exporters of Manufactures Net Exports (GNFS) -5.719 -28.892 -26.983 -17.988 0.487 19.590 Net Factor Income -1.768 -17.058 -25.505 -30.822 -32.135 -38.481 Interest on MLT Debt -1.120 -14.880 -19.504 -22.510 -20.139 -25.839 Official -0.217 -2.158 -2.381 -2.948 -3.320 -3.818 Private -0.903 -12.722 -17.123 -19.562 -16.819 -22.021 Current Account Balance -5.500 -35.260 -41.696 -38.294 -21.969 -9.345 (Excl. Official Transfers) Net Official Transfers 0.502 2.483 2.550 2.608 3.180 3.735 MLT Loans 3.590 21.401 29.160 25.043 16.617 17.474 Official 0.868 5.065 5.139 4.827 6.525 7.626 Private 2.722 16.336 24.021 20.216 10.092 9.848 Net Direct Investment 1.076 4.356 6.106 5.888 4.478 4.605 Change in Reserves -0.503 1.606 0.127 4.098 4.369 -10.554 Debt Outstanding and Disbursed 24.357 166.602 191.029 215.801 242.016 266.818 As Percent of GNP 15.871 22.848 24.839 28.017 34.746 37.638 As Percent of Exp. GS 91.507 77.315 81.728 97.079 105.221 109.099 Debt Service Ratio 15.100 16.060 17.067 19.350 16.189 15.997 - 19 - Table 6: DEVELOPING COUNTRIES' CURRENT ACCOUNT BALANCE AND-ITS FINANCING, 1970-84 (CONTINUED) (Billions 'of Current US$) 1970 1980 1981 1982 1983 1984 Other Non-Oil Net Exports (GNFS) -1.345 -18.179 -23.517 -17.146 -12.721 -9.617 Net Factor Income -0.960 -5.188 -6.005 -7.761 -9.900 -10.567 Interest on MLT Debt -0.445 -4.457 -5.551 -6.762 -6.733 -8.002 Official -0.194 -.136 -1.353 -1.604 -1.927 -2.418 Private -0.251 -3.321 -4.198 -5.157 -4.805 -5.584 Current Acdount Balance -1.923 -18.564 -24.056 -19.804 -17.743 -15.022 (Excl. Official Transfers) Net Official Transfers 0.583 3.084 3.'278 3.228 2.653 2.539 MLT Loans - 1.747 11.789 12.866' 11.873' 7.918 10.798 Official 0.800 5.931 6.119 5.905 5.160 5.333 Private 0.947 5.857 6.748 5.968 2.758 5.466 Net Direct Investment 0.149 1.653 1.875 1.355 1.390 1.126 Change ih Reserves -0.635 -3.420 0.397 3.619 3.003 1.461 Debt Outstanding and Disbursed 11.916 68.327 78.850 88.932 97.751 108.035- As Percent of GNP 21.986 30.187 33.831 40.713 48.658 52.966 As Percent of Exp. GS 110.987 120.672 136.398 155.433 175.472 183.860 Debt Service Ratio 13.577 17.184 20.765 22.697 23.094 24.929 Oil Exporters Net Exports (GNFS) -0.915 14.628 -10.713 -13.701 7.854 .16.666 Net Factor Income -2.207 -16.186 -19.006 -23.981 -22.631 -24.692 Interest on MLT Debt -0.693 -11.454 -13.903 -16.660 -17.463 -21.252 Official -0.209 -1.656 -2.045 -2.132 -2.508 -2.830 Private -0.485 -9.798 -11.859 -14.529 -14.956 -18.421 Current Account Balance -2.930 1.509 -27.297 -35.680 -11.052 -3.543 (Excl. Official Transfers) Net Official Transfers 0.595 2.007 2.485 1.918 1.918 1.809 MLT Loans 1.643 16.998 23.559 20.503 18.133 13.323 Official 0.i61 4.'800 - 4.706 5.314 3.660 ' 6.194 Private 0.881 12.198 18.853 15.190 14.473 7.129 Net Direct Investment 0.8i0 4.192 6.369 5.283 3.717' 2.922 Change in Reserves -0.499 -17.077 2.217 15.767 3.549 -7.339 Debt Outstanding and Disbursed 17.631 135.564 155.326 173.586 208.176 232.153 As Percent of GNP 18.519 24.863 25.058 32.386 39.893 43.849 As Percent of Exp. GS 115.298 87.431 98.507- 123.694 157.769 164.274 Debt Service Ratio 18.073 17.848 19.776 24.977 26.132 28.090 C. ALL DEVELOPING COUNTRIES Net Exports (GNFS) -9.717 -53.582 -78.102 -59.802 -15.966 14.168 Net Factor Income -5.486 -39.255 -51.827 -64.551 -66.238 -75.640 Interest on MLT Debt -2.624 -32.851 -41.161 -48.014 -46.596 -57.925 Official -0.902 -5.951 -6.694 -7.714 -9.032 -10.580 Pri'vate -1.721' -26.899 -34.'467 -40.301 -37.564 -47.345 Current Account Balance -12.583 -67.837 -105.095.-100.121 -56.665 -35.588 (Excl. Official Transfers) Net Official Transfers 2.347 11.635 12.209 11.153 11.768 11.960 MLT Loans 8.243 58.414 71.675 63.575 48.778 50.162 Official 3.646 -21.572 21.665 21.786 20.810 25.606 Private 4.596 36.842 50.010 41.788 27.969 24.556 Net Direct Investment 2.317 10.595 14.992 13.237 10.342 9.383 Change in Reserves -1.935 -17.887 5.524 26.119 6.868 -19.008 Debt Outstanding and Disbursed 68.303 429.692 487.655 545.748 619.631 686.420 As Percent of GNP 14.096 21.008 22.596 26.477 31.311 33.758 As Percent of Exp. GS 108.863 89.761 96.759 115.'037 130.843 135.383 Debt Service Ratio 14.746 16.016 17.589 20.543 18.999 19.690 Notes: GNFS. - Goods and Non-Factor Services; MLT - Medium-and Long Term; Debt Service Ratio - Ratio of interest and amortization payments to exports. Source: World Bank, Economic Analysis and Projections Department. - 20 - debt increased sharply during the year, and exceeded new loan receipts by that amount. The current account deficit of Asian low-income countries widened by about $2 billion in 1984, while that of African low-income countries remained virtually unchanged. Rising interest payments offset the small improvement in trade balances experienced by low-income African countries during 1984 (Table 6). 25. Growth in demand for developing countries exports was stimulated mostly by the US recovery and the strong dollar, and, to a more limited extent, by similar quantity and relative price impulses in Japan. Regionally, it affected most positively those developing countries which are traditional trading partners of the United States and of Japan. In terms of commodity composition, it most strongly affected exports of manufactures. The demand for non-fuel primary commodities and for petroleum remained surprisingly weak by historical standards. These demand factors largely explain the differences in observed trade patterns. Obviously, policy performance differences also intervened, but the weakness of primary commodity markets, particularly in 1984, left little room for export expansion to those countries which had not already developed a manufactures export potential in earlier years. 26. Generally speaking, the Latin American and East Asian countries, more deeply tied to booming demand in North America and to Japan, and also generally possessing relatively advanced manufacturing sectors were able to expand their exports most easily. African countries, more tied to Europe (where import demand grew much less than in North America and Japan) and, at the same time, more dependent on exports of primary commodities, found - 21 - themselves in a less favorable position. The same applies to South Asian countries (with India being a partial exception), for which exports of primary products are of great importance. 27. The differences in external pull faced by various developing regions are evident from their exports to the United States, Japan and the three major European countries (Germany, France and the United Kingdom) over the 1982-84 period. Africa's exports to these countries grew more slowly in 1984 than those of East Asia and Latin America, and recouped barely three-fifths of the loss experienced in 1983. Exports of East Asia to the major industrial countries increased in dollar value by about 6 percent in 1983, and by almost 25 percent in 1984. Latin American exports expanded by 13 percent in 1984 (about one-third faster than in the previous year), and South Asia's by about 12 percent (Table 7). 28. Within these total increases, developing countries' exports of manufactured goods to the major industrial countries increased in dollar value by 15.5 percent in 1983 and by almost 29 percent in 1984, pulled by a 31 percent increase in exports to the United States in 1983, followed by a 44 percent increase in 1984. Exports to Japan rose much less, and to Europe least, although even exports to Europe rose at least twice as fast as overall demand for manufactures in that region. Still incomplete data appear to indicate that primary commodity exports to industrial countries, including petroleum, also began to recover in 1984, even though they remained the weakest component of the developing countries' overall export picture. - 22 - Table 7: MAJOR INDUSTRIAL COUNTRIES' IMPORTS FROM DEVELOPING COUNTRIES BY GEOGRAPHICAL ORIGIN (% change) 1983 1984 (Jan.-Sept.) UNITED STATES from: Africa -24.3 4.0 East Asia 16.3 38.5 South Asia 47.8 17.8 Latin America 10.9 16.0 Total /a 6.0 22.0 JAPAN from: Africa -11.8 11.1 East Asia -4.0 21.6 South Asia 3.0 -1.8 Latin America 6.4 15.3 Total /a -2.0 17.7 EC3 /b from: Africa -1.4 11.4 East Asia 5.2 3.1 South Asia -18.5 14.8 Latin America 6.5 0.0 Total /a -0.5 4.7 MAJOR INDUSTRIAL COUNTRIES /c from: Africa -13.7 8.1 East Asia 6.4 24.5 South Asia 8.1 12.2 Latin America 9.5 12.6 Total /a 2.3 15.4 /a Including imports from EMENA countries. lb United Kingdom, France and Federal Republic of Germany. 7E United States + Japan + EC3. Source: IMF, Direction of Trade (various issues) and DRI, Trade System. - 23 - 29. Expanding exports directly contributed to GDP growth in all regions. In many countries, improved balance of payments positions also allowed the relaxation of direct import control measures and, somewhat less broadly, of financial stringency. Real GDP growth in 1984 was enough to ensure some increase in real per capita GNP in most developing regions, with the exception of Sub-Saharan Africa. 1/ Particularly remarkable was the turnaround in real output growth that occurred in Latin America: from -2.6 percent in 1983 to 2.6 percent in 1984. 30. Domestic adjustment policies played a key role in determining these outcomes. In the impact phase (1982 and the first part of 1983) a combination of direct restraint of imports (through quantitative controls and devaluation) and reduction in domestic absorption was predominant. This is particularly evident in the case of middle-income Latin American countries (Chart 1). Sometimes, direct import controls led to the reduction of production and income-generation through the scarcity of raw materials, and of machinery and other inputs into investment projects; sometimes, financial and other restraints on income (including depreciation of effective exchange rates) brought about the desired reduction of imports, also at the cost of lower production; most often, these two effects were combined. 31. Expenditure switching measures, among which currency devaluations were paramount, together with the onset of the recovery in industrial countries, set the stage for a recovery of exports that began in late 1983 and streugthened in 1984 (Chart 2). However, reduced domestic absorption still 1/ Per capita GDP growth is shown in Table 12. - 24 - Chart 1: REAL DOMESTIC ABSORPTION AND REAL INVESTMENT, 1980-84 (1980-100) Developing Countries /a Middle-Income Latin America /b O3 06=m. -bmrption 4' riI t rrm.t O __A_IIry-strn-r.t Chart 2: REAL EXPORTS AND REAL EFFECTIVE EXCHANGE RATES, 1980-84 (1980-100) Developing Countries /a Middle-Income Latin America /b ,f1a - Oao so lo *§lt*we Iga 19 19ao *"t lo lt 1064 O .es F.nl E:-. r--t=4 Rft=l E co,eRmte O3 M.er,-j,zr.:ie EF__=rt2; 4 R.ewnl Ex-hN=r9s- R=.nt_ /a Based on a sample of 26 developing countries. A7 Argentina, Brazil, Chile, Colombia and Mexico. Source: World Bank, Economic Analysis and Projections Department. - 25 - played a considerable role during 1984. In most of Latin America, and in many Mediterranean and several Asian developing countries, as well as in Sub- Saharan Africa, per capita consumption continued to decline in 1984. Investment was also generally lower than in earlier years, and mostly concentrated on- the completion of old projects. 32. Developing countries as a group succeeded in reducing their external imbalance by two-thirds in a relatively short time (between 1981 and 1984), despite interest rates which remained exceptionally high both in nominal and real terms throughout the period, and despite further growth in their stock of debt. The remarkable success attained in adjusting external imbalances is most evident in Latin America, whose trade balance went from -1.5 percent of GDP in 1981 to about 5 percent in 1984 (in absolute amounts, from a deficit of $11 billion to a surplus of about $35 billion). 33. Developing countries as a group have made dramatic progress in fitting the growth of their economies to that of available resources, not only by cutting overall demand through financial policies, but also by switching production from the domestic market to exports through effective devaluations. - The only major exception was Sub-Saharan Africa. African governments were either laggard in appreciating fully the need for policy change or were unable to implement them. However, the resources available in many African countries made it extremely difficult to implement policy changes that involved further reduction in domestic demand in the short term. More importantly still, the economic structures of these countries, with embryonic manufacturing sectors, greatly limit the scope that they have in the short run - 26 - for switching production to import substitution and, pending the revival of commodity markets, to exports. 34. While financial adjustment has made considerable progress in 1982-84, adjustment in the deeper sense of modified economic structures has barely begun in many developing countries. As shown by falling investment, resources continue to be scarce. In addition, high present and projected interest rates, and the uncertainties of financial markets, render even those developing countries that could borrow hesitant to do so and impel present borrowers (like those in East Asia) to reduce their current account deficits. Paradoxically, with Europe barely emerging from its current account deficit and Latin American countries still barely able either to service or to refinance their debt service obligations despite their current account surpluses, only the country with the largest payments deficit, the United States, is pursuing its expansion totally unconstrained by balance of payments considerations (while Japan's huge surplus has not provided it an incentive to accelerate growth). This unusual situation raises concerns as to what will happen to world economic growth when the US current account deficit is reduced, either by deliberate policy choice or by the emergence of a financing constraint. 35. Another concern relates to trade. One can no longer deny that protectionism is renascent and active. This is even better illustrated by Bangladesh shirts than by Japanese automobiles and Brazilian and Korean steel. When one of the world's poorest countries took a miniscule fraction of the world market in a product whose strategic importance for industrial countries is minor, it soon ran into quotas. Protectionism, and the threat of - 27 - it, most strongly affect the poorer developing countries by slowing down the process of specialization in labor-intensive expotts. 36. Finally, capital flows to developing countries have not yet been restored to normal levels. Financial market conditions - high real interest rates, high debt stocks, -reduced present willingness to lend (as compared to pre-1980 conditions) and the increased risk of sudden future changes in lending conditions continue to impose on developing countries strong pressures to reduce the growth of real domestic demand. Official flows have also fallen dramatically.. With few exceptions, middle-income countries have to do wi.thout significant development assistance at earlier stages of development than did their predecessors ten or twenty years ago. Poor countries, including those in Sub-Saharan Africa, whose needs are most acute, have to do with- lower concessional flows than was generally expected-. before the, worsening of external payments conditions in the early 1980s. - 28 - IV. THE CHALLENGES AHEAD: TRANSITION TOWARDS SUSTAINABLE LONG-TERM GROWTH 37. The current recovery presents opportunities and challenges to policymakers in industrial and developing countries both. Sustaining it is a matter of strong, common interest. Unemployment is still very high in industrial countries, particularly in Europe. Productive capital is also generally underutilized. Shifts in the composition of demand, and the reallocation of factor uses (in response to these shifts and to past and ongoing changes in factor prices) continue to require considerable structural adjustments in many industrial countries. Steady, reliable and strong overall output growth would facilitate the management of these changes. Conversely, the rigidities which have often contributed to past problems tend to be reinforced by an environment of slow growth in which unemployment is rife. On the financial side, debt, particularly public debt is very high in all industrial countries and still growing. The resulting large interest rate payments will have to be shouldered for many years. If inflation is kept under control, only accelerated income growth will ease management of corporate and public finances. 38. Developing countries are completing their financial adjustment phase. They need a continuation of the world recovery to complete it, to fully restore their creditworthiness, to regain access to the world capital market and to concentrate on the structural adjustments of their economies that are necessary to achieve long-term growth. The domestic costs, and - 29 - social and political pressures associated with the current financial adjustment phase, are already quite high, and would become even more difficult to bear without continued growth in export markets, a reduction in real interest rates and resumption of capital inflows. Without them the momentum of policy reform in developing countries would also falter and the attainment of structural adjustment goals would again be postponed. 39. To cope with the sharp reduction in the net inflows of medium and long term capital that occurred in 1982-84 as a consequence of the cutbacks in international private lending, developing countries had no alternative but to reduce their current account deficits. To do so, in the face of rising interest payments on existing and new debt, they had to move rapidly towards a trade surplus. This was facilitated in 1983-84 by the widening of the trade deficit in the United States. In fact, developing countries reached a substantial positive balance in goods and non-factor services in 1984, as their payments on interest and amortization on medium and long term debt exceeded the value of the new loans they were able to obtain from official and private sources. 40. While most industrial and developing countries were drastically reducing their current account deficits (or increasing their surpluses), the payments deficit of the-United States was rapidly growing, as the mirror image of the expanding US budget imbalance (Table 8). The channelling of the rest of the world's (ex-ante) excess savings into the United States in 1983-84 helped generate a level of world economic activity higher than would have otherwise been possible. However, this pattern cannot last if output growth - 30 - Table 8: WORLD TRADE AND CURRENT ACCOUNT BALANCE 1970-72 1976-78 1981 1982 1983 1984 (Est.) (-------------------Billions US$----------------) TRADE BALANCE Industrial Countries 10.5 -7.0 -28.0 -20.0 -16.0 -42.0 of which: United States -2.0 -26.0 -28.0 -36.5 -61.0 -108.0 Japan 7.0 17.0 20.0 18.1 31.5 44.0 Europe 1.7 -4.0 -24.0 -14.2 -1.0 5.0 High Income Oil Exporters 4.0 39.0 132.0 62.0 37.0 56.0 Developing Countries -7.5 -23.0 -73.0 -48.0 -15.0 2.0 Other Countries -2.5 5.0 -2.0 15.0 17.0 18.0 Total /a 4.5 14.0 29.0 9.0 23.0 34.0 CURRENT ACCOUNT BALANCE /b Industrial Countries 14.5 12.0 -4.0 -5.0 -3.0 -38.0 of which: United States 1.0 -4.5 10.7 -3.8 -35.5 -100.0 Japan 5.0 10.5 6.2 8.1 22.3 35.0 Europe 8.5 12.0 -6.3 -2.1 14.3 23.4 High Income Oil Exporters /c 3.5 24.0 60.0 10.0 -11.5 -4.5 Developing Countries -16.0 -38.0 -105.0 -100.0 -56.5 -35.5 Other Countries 1.0 -16.0 -8.0 8.0 10.0 12.0 Total /a -0.5 -18.0 -57.0 -87.0 -61.0 -66.0 /a Reflects statistical errors and asymmetrics. lb Excluding official transfers. 7-c Partially estimated in 1983 and 1984. Source: IBRD, OECD and IMF. 31 - in Europe and Japan rise towards their potentials and developing countries restore a measure of creditworthiness. It is unlikely that the United States can continue to draw on external savings at the same rate as in 1984. It is also undesirable that it should do sp. In the medium-term, a return to a pattern of savings allocation more in line with the capital endowments of the world's major regions would seem to be necessary on efficiency grounds. Without renewed access to world capital markets and to the rest of the world's excess savings, not only would the growth prospects of developing countries be considerably reduced, but also those of the whole world economy. This implies a return of industrial countries to a position of overall surplus on current account and to a net flow of savings to developing countries. 41. A period of sufficiently high and steady non-inflationary economic growth is needed to allow the progressive reabsorption of idle resources (particularly of unemployed labor), the correction of existing disequilibria in financial stocks and flows, and the completion of structural adjustments underway in industrial and developing countries and their fruition, in terms of greater efficiency in resource use and in capital accumulation. The challenge lies in that a partial solution to these problems is a precondition for sustained, non-inflationary growth, but it can hardly be achieved without adequate growth already taking place. Credible, sustained non-inflationary growth constitutes both a means and an end, which could become even more elusive unless it -is pursued without delay. 42. The developing countries are seeking to regain a reasonable medium- term balance in domestic and external finance. They need a more stable - 32 - external environment in terms of market access and finance to complete their financial adjustment processes. Once this phase is over, they will have to concentrate their efforts on the achievement conditions favorable to long term growth, that is on the shifts in prices, in expenditures and in factor uses most conducive to the sustained expansion of domestic output. 43. The tempo of domestic policy reform in developing countries needs to be maintained and whenever possible quickened for the second phase of their adjustment process to bear maximum results. Reform needs, though country specific, have some common threads. Better utilization of existing productive resources is clearly paramount. Greater efficiency is in large part a function of internal price relationships and of correct balance between domestic and world prices. Subsidies which distort prices and encourage waste must be reduced, along with those which directly sustain undesirable activities or inefficient enterprises. Reduction in subsidies is often a key precondition for reducing fiscal deficits, themselves an indirect cause of inflationary pressure. Reduced budget deficits, complemented by appropriate monetary policies, are a precondition for the build-up of efficient financial markets, which can attract renewed inflows of foreign capital and serve to channel efficiently domestic savings into domestic investments. Allocation of available capital resources, whether market or state determined, needs to be inspired by stringent performance objectives. The more flexible the domestic price system and the lower trade and exchange rate distortions, the greater the chances that private and public investment decisions will be economically and socially productive. - 33 - 44. In shaping the future, the role of economic policies is central and clear. In the short-term, a key objective of policies in both industrial and developing countries must be to ensure the continuation of the present economic recovery. In the medium-term, the objective of policies is to ensure sustained non-inflationary growth. The industrial countries bear a particular responsibility for ensuring, through appropriate domestic policies, that freedom of trade is maintained, that capital flows from the richer towards the poorer countries are renewed, and that national economic objectives are compatible with each other and with international efficiency in the use of resources. International cooperation for these objectives, so effective during the past three decades, is both a necessary condition for resumed growth and dependent upon it. - 34 - V. MEDIUM TERM ALTERNATIVES FOR INDUSTRIAL AND DEVELOPING COUNTRIES 45. The next 10 years, viewed schematically for the purpose of analyzing macroeconomic policy and setting priorities, can be divided into two phases: a period of unwinding the existing financial tensions, restoring more sustainable global payment balances, normalizing interest and exchange rates, decisively reducing inflationary expectations, and achieving a better equilibrium in net flows of funds; followed by a period of faster output growth in industrial countries and of overall development in developing countries, funded by sustainable patterns of domestic capital accumulation and of net foreign borrowing. These two phases roughly coincide with the medium and the long term perspectives normally taken in World Bank World Development Reports. Attention is focused here on the first phase. 46. Reasonably favorable central assumptions for the medium-term policy scenarios are that industrial countries will attempt to bring about a convergence of real interest rates with the trend growth rates of their outputs, and to reduce the deficit in their current accounts without disrupting the present phase of recovery in world economic activity. It is further assumed, in part as a result of a correct growth perspective being maintained by policymakers, and in part as the result of the postulated fiscal and monetary adjustments, that trade protection will not increase during this period. This assumption would be a break from recent trends. The effects of an increase in trade protectionism will be examined as part of the downside risks to the main scenario. - 35 - 47. Given the short-term dynamics-of the.4984-85 situation, characterized by strong financial tensions and considerable imbalances in trade and payments flows .within and across regions, progress towards these objectives will not be easy. Dealing in a positive and anticipatory fashion with the risks inherent in the current situation will require moving away from policies which have been successful in the short run. Good timing, and a degree.of compatibility (whether planned or coincidental) --of financial policies within and across countries are also prerequisites. An added difficulty is that correcting existing internal and external imbalances may, at least in the short term, tend to restrain output growth in both industrial and developing countries. However, at least in industrial countries, actual inflation and inflationary expectations seem to be under better control than at any time in the past 15 years, and this should leave some leeway to the policy adjustments necessary to sustain growth in the short-term. Moderate demand growth, continued restraint in the setting of wage rates and expectations of very slow increases in the prices of internationally traded primary commodities (including oil) -should facilitate the task of, financial authorities in regaining and maintaining control of both internal and external balances, without unduly great risks. 48. Considerable uncertainties thus surround the attainability of the policy objectives assumed to be pursued in the medium term, and not only because the efficacy of available policy instruments may itself be in doubt. However, there seems to be enough agreement on the desirability of the objectives to be pursued, appreciation of the scale of the adjustment problem at hand (particularly as it relates to the United States and to developing - 36 - countries), and signs of a will for action to make it reasonable to assume that the opportunity to start a viable transition to sustainable and balanced growth in the 1990s will be seized. However, if the assumption of the adoption of gradual adjustment policies seems reasonable, it nevertheless remains an assumption. We have not forecast that national authorities will indeed act in this way; we have merely explored some of the consequences that will ensue if they do--and also if they do not. 49. A continuation of existing policy trends would likely lead to medium term results appreciably worse in terms of growth, and no better in terms of inflation, than would a moderate but steady adjustment scenario. Moreover, a "do nothing" scenario presents considerable risks of crisis, given that the continued financing of some of the persisting fiscal and external payments disequilibria is in no way automatically ensured. Even without a sudden financing crisis, pressures towards greater trade protections could become irresistible in many countries. Avoiding these risks should be an additional reason for looking at feasible adjustment alternatives. A. A Xediumr-Term Scenario with Moderate Policy Adjustments: 1985-90 A.l: The Industrial Countries 50. The assumptions underlying the medium-term scenario illustrated here reflect appreciable adjustment in the existing financial imbalances, starting with the industrial countries. While moderate and gradual, such adjustments are assumed to start quite soon, probably within 1985 in terms of policy - 37 - decisions, and in 1986-87 in terms of initial effects. They are also expected to be broadly credible in the various markets and to generate some positive anticipatory effects. A key component of the overall adjustment process here envisaged is a change in the current fiscal position of the United States and a realignment of the US monetary stance to this new situation. The other major industrial countries are expected to assess correctly the trend, scale and likely effects of the US fiscal adjustment and to take action to ensure broad compatibility of financial policies- across the major industrial areas, in particular by ensuring that fiscal adjustment in the United States does not lead to overall tightening of global demand. While broad compatibility of policies is presumed, active coordination is not envisaged. 51. The reduction of the US budget deficit, beginning in 1986 and continuing in the medium term is postulated to be such as to reduce the Federal budget deficit to about 3 percent of 1990 GNP, from about 5 percent of GNP in 1984. Monetary policy is assumed partly to offset the short-term negative impact on domestic output of this tightening in fiscal policy. Continued wage restraint, consistent with current and projected levels of unemployment, should make a limited monetary accommodation possible and still ensure a non-inflationary environment. The credibility of the change in US fiscal position should also be of help in reducing expectations of future inflation. 52. Fiscal and monetary stances are assumed to change in other industrial countries. A parallel relaxation of monetary conditions is expected to take place in those European countries where domestic inflation rates and - 38 - inflationary expectations have already been brought under satisfactory control. In some cases it is expected that the restrictiveness of fiscal policy, as measured by the changes in structural budget balances, will be loosened, and taxes changed to stimulate investments. This should also be possible in Japan. 53. The main financial consequences of these gradual policy changes in industrial countries during the 1985-90 period are expected to be: (a) a progressive decline in real interest rates on US dollar assets; (b) a gradual depreciation of the US currency; (c) substantial stability of inflation (measured in local currencies); and (d) a very modest increase in the real price of non-fuel primary commodities, accompanied by a small decline in real fuel prices. Economic growth in industrial countries is expected to continue at a positive, if relatively modest, rate and to show greater stability than in the past ten years. These results would ensure that an unwinding of the existing financial tensions takes place in a context of reasonable, non- inflationary growth, that would leave developing countries room for continued internal and external adjustment (Table 9). 54. The postulated fiscal-monetary corrections are expected to bring about a considerable reduction in real dollar interest rates: six-month dollar LIBOR rates should gradually decline from the current 7 percent to about 4 percent in real terms by the end of the 1980s, and real long term dollar interest rates should gradually fall to a 3 - 4 percent range. This would bring them down close to the trend growth of real output by the end of the transition period, a significant break from the trends of the past five - -39 - Table 9: AVERAGE PERFORMANCE OF INDUSTRIAL AND DEVELOPING COUNTRIES, 1960-90 1960-73 1973-79 1980-85 1985-90 INDUSTRIAL COUNTRIES (Average Annual Percent Change) GDP Growth 4.9 2.8 2.1 3.0 Inflation Rate-/a 5.9 8.0 5.8 5.2 (Average Annual Rate) Real Interest Rate /b /c 2.5 0.7 6.8 4.1 Nominal Interest Rate 7a; 5.8 8.4 12.6 9.5 DEVELOPING COUNTRIES /d (Average Annual Percent Change) GDP Growth 6.3 5.2 3.0 5.0 Low-Income Asia 5.9 5.2 6.4 5.6 Low-Income Africa 3.5 2.1 1.5 3.1 Middle-Income Oil Importers Major Exporters of Manuf. 6.7 5.8 2.0 5.5 Other 5.3 4.3 1.5 3.8 Middle-Income Oil Exporters 6.9 4.9 1.8 4.4 Export Volumes /e 5.2 4.1 4.7 5.3 Manufactures /e 13.8 11.0 7.7 8.5 Primary /e 3.6 1.3 2.6 2.5 Import Volumes /e 5.9 5.9 2.0 6.5 Trade Prices (in current US$) Manufactures 3.8 12.7 -1.8 7.9 Oil 4.6 37.9 -1.4 7.1 Non-Oil 4.8 7.8 -7.0 9.5 /a GDP deflator in-local currencies. 7W 6-month dollar LIBOR. Owing to the lack of historical data, the 1960-73 and 1973-79 period averages use a 3-month Eurocurrency rate. /c Deflated by the U.S. GDP deflator. 7W_ Estimates/projections for 1980-85 and 1985-90 are based on a sample of 90 developing countries. /e Historical growth rates are for the periods 1965-73 and 1973-80. Source: World Bank, Economic Analysis and Projections Department. - 40 - years, when the divergence from trend output growth has increased. Nominal rates would follow a similar path from 1986 onwards. 55. Under this scenario, by 1990 the dollar would have gradually depreciated by about 15 percent in terms of the SDR, relative to its average 1984 level. This trend could start as the combined result of reduced US borrowing of foreign funds (as the growth of the US economy returns to a more normal and sustainable rate), and of the relaxation of monetary restraints. The reduction in expectations of future inflation generated by a credible program of budget deficit reduction, continued wage restraint and the slow growth of domestic unit costs should help allow the movement to remain gradual. A sympathetic relaxation of monetary conditions in major European countries would support the US policy adjustments. It would also help to ensure, via a broadly parallel decline in short term interest rates, that the depreciation of the dollar be gradual and orderly. 56. Inflation in industrial countries would remain stable at 4 to 5 percent throughout the period. The rate of increase of domestic prices would tend to accelerate somewhat in the US, but decelerate in Europe, as exchange rate adjustment unfolds. This process should be helped not only by a normalization of consumer expectations, but also by overall stability in international commodity prices. Prices of non-fuel commodities would increase in real terms at only 1.5 percent per annum between 1985 and 1990, while fuel prices would on average decrease in real terms by about 1 percent - 41 - per annum. 1/ Manufactured goods' export prices are also expected to increase only moderately in local currency terms, reflecting the slow growth of unit labor costs and competitive market conditions. In dollar terms, their prices would grow faster (at about 8 percent per annum in 1985-90), reflecting the US dollar depreciation. This would reverse the cumulative 14 percent decline in their dollar prices which occurred between 1981 and 1984. 57. Under this scenario of gradual adjustment, industrial countries' real growth would average 3 percent per annum over the' 1985-90 period.. This represents only a moderate acceleration of trend growth with respect to the previous five years (2.1 percent per annum). As trade protectionism is assumed to stay at its present level, these growth' results must be seen as a positive, if limited, outcome of a moderate fiscal-monetary adjustment package. If there also occurred substantial realignments in factor prices, and a reduction of rigidities in product and factor markets (particularly labor markets), growth would accelerate further, as a result of higher investment and of greater efficiency in the use of factors of production. In any case, this moderate adjustment package would also lead to a further acceleration of growth and slowdown in- inflation in industrial countries further in the 1990s. Simple continuation of these macro policy trends would improve the average growth of real output by half a percentage point in 1990- 95, and reduce average inflation by about the same amount. Real interest rate normalization would also be completed in this period, by a convergence of real interest rates and real growth rates of output in the early 1990s. 1/ The export prices of manufactured goods are used as deflators (Table 9). - 42 - 58. The projected behavior of current account balances is causally related to the projected path of interest rates. Globally, the current account deficit of the industrial countries would decline. This would involve some reallocation of surpluses from Japan to Europe, and a decline in the current account deficit of the United States. The overall savings deficit of the industrial countries would thus diminish. Taking into account errors and omissions (which prevent a precise balancing of the global payments account), the reduction in the overall current account deficit of industrial countries would allow increased financing of the capital needs of the developing countries, and some untightening of global capital markets. Nevertheless, at the end of the period under consideration (1990), global balance will not yet have been re-established. In particular, the United States would still be running a substantial deficit on current account, and also a fairly large structural (full employment) budget deficit. The persistence of these is not desirable; nor is it likely that their financing could continue to be ensured without risk. It is therefore assumed that an effort towards a further reduction and ultimate elimination of these twin deficits will be made before 1990. Indeed, the gradual nature of the adjustment (in particular, of the decline of the dollar) partly rest on the assumption that policies will rapidly be put in place, and in such a way as to lend credibility to the expectation that the U.S. payments deficit will in fact be eliminated before an excessive foreign debt is accumulated. Given the importance of the first steps towards the achievement of this goal, which are assumed to take place during the 1985-90 period, success in the transition phase should make the rest comparatively easy. - 43 - A.2: The Developing Countries 59. Moderate but timely policy changes in the industrial countries would make it easier-for developing countries to complete their internal adjustment process and to return, through trade and renewed access to private capital markets, to a relatively fast sustainable rate of economic growth. The interdependences are -numerous. Growth in the industrial countries imports (itself dependent on income growth there and on the containment of protectionism) is a necessary condition for the restoration of the developing countries' creditworthiness. To allow developing countries first to resume fully their contractual debt service, and then to reduce the share of exports absorbed by it, the export recovery of 1983-84 needs to be sustained. Trade growth is needed not only to service debt and to finance indispensable imports; it is vital to promoting specialization and efficiency in domestic production. 60. In the medium term scenario just described, developing countries' export volumes could grow by about 5 percent per annum between 1985 and 1990: 8.5 percent for manufactures products and about 2.5, percent for primary commodities (Table 9). Relative to GDP trends in both industrial and developing countries, such export growth would constitute a favorable performance and would entail further success of policies to promote exports and to penetrate markets in industrial countries. Developing countries overall terms of trade would remain virtually unchanged over the period, as the projected modest changes in the real prices of non-fuel commodities and of oil have virtually offsetting effects. However, there are some differences - 44 - across country groups: oil importing middle-income countries should enjoy some improvement, mirrored by the worsening in the terms of trade of oil exporting countries. Low-income countries, which rely on commodity exports with the weakest price prospects, are likely to face a worsening of their terms of trade during the 1985-90 period (Table 10). 61. The projected evolution of financial markets would also help developing countries. Lower interest rates would reduce their debt service burden and, together with export growth, help restore the creditworthiness of many countries, particularly the heavily indebted middle-income countries of Latin America. As their debt-service ratios fall from the extremely high levels of 1982-83 and as international private banks become more confident in the ability of a number of developing countries to sustain export growth, voluntary lending could gradually resume (Table 11). This would help accelerate the return to adequate investment growth, together with a gradual relaxation of the restraints on private consumption. 62. Lower interest rates and adequate export growth would also ease the adjustment path of those middle-income countries--particularly in Asia--which are still creditworthy and continue to rely on significant private capital inflows. They would be able to reduce their balance of payments deficit more gradually than some of the large borrowers in Latin America had to do in recent years, and thus continue to cope with external imbalances at lesser costs in terms of reduced investments and foregone consumption. Table 10: CHANGE IN TERMS OF TRADE, 1965-90 (Percent change per annum) 1965-73 1973-80 1981 1982 1983 1984 /b 1985 /c 1985-90 /c TERIIS OF TE Developing Countries /a 0.5 2.0 0.3 -0.5 -0.6 0.8 -1.1 0.0 Low-Income 0.4 -1.5 -0.3 -1.5 0.9 3.4 -2.1 -0.1 Asia 0.8 -1.6 1.1 -2.1 0.5 3.1 -1.8 -0.1 Africa -0.7 -1.0 -5.6 0.3 2.8 5.2 -3.8 -0.3 Oil Importers -0.2 -2.3 -4.2 -0.7 2.5 0.1 0.0 0.1 Oil Exporters -0.4 9.0 9.8 1.0 -7.0 1.0 -2.8 -0.3 High-Income Oil Exporters 2i9 12.3 14.6 2.3 -8.6 -1.0 n.a. n.a. Industrial Countries -0.5 -3.5 -2.1 2.0 2.1 -0.2 n.a. n.a. /a Estimates for developing countries are based on a sample of 90 developing economies. 7W Preliminary estimates. 7T Projected. Source: World Bank, Economic Analysis and Projections Department. - 46 - 63. Private capital inflows would in any case be less important than in the 1970s as a vehicle for increasing developing countries' investment resources; private net lending to developing countries is expected to grow only slowly in the next five years. The share of developing countries in the total claims of private banks is also anticipated to decline during the remainder of the 1980s. However, the role of international private capital would still be quite important for some groups of developing countries, particularly the middle-income countries that are major exporters of manufactures and for the large low-income Asian countries. 64. Finally, official flows to middle-income countries could grow more evenly and be used more effectively. In a steadier trade growth environment, where current account imbalances in major industrial countries were also being reduced and protectionist practices kept in check, export credits could again expand faster than world trade. Given the expected lower growth rate of private capital flows and the uncertainties surrounding them, growth in official aid flows would be particularly important not only for low-income countries, but also for many middle-income developing countries. By facilitating the implementation of necessary policy reforms and by becoming the catalyst for other capital flows, the overall impact of higher aid flows could be a multiple of the yield of the investments that they directly finance. 65. Improvement in the economic outlook of the developing countries does not depend only on the external conditions they face. Sustained export growth, the essential precondition for creditworthiness, depends both on Table I1: Q'UERMTAC'WCO SBALA8 AM ITS 1I1hCING IM OEVLRPI1DG COUNTRIES, 1980, 1983 and 1990 /a (Billions of current US$) ALL DEVELOPING COUNTRiRs LCM-INCoIR COUNTRiEs NIDOI.B-INcoNR CoUNTRIES Major Exporters Oil Eaporting Asia Africa of Manufactures Other Non-OIl countries 1980 1983 1990 1980 1983 1990 1980 1983 1990 1980 1983 1990 190 1983 1990 1980 1983 1990 Imi WKNTl (GM) -53.6 -16.0 -36.8 -15.8 -7.2 -26.6 -5.4 -4.3 -5.5 -28.9 0.5 0.7 -18.2 -12.7 -7.7 14.6 7.9 2.2 1011ISr ON MtU M IAC T D13 -32.9 -46.6 -84.2 -1.4 -1.6 -6.0 -0.7 -0.7 -1.9 -14.9 -20.1 -36.9 -4.5 -6.7 -11.4 -11.5 -17.5 -27.9 Official -5.9 -9.0 -20.9 -. 7 -1.0 -2.2 -0.3 -0.3 -1.7 -2.2 -3.3 -6.8 -1.1 -1.9 -4.8 -1.7 -2.5 -5.3 1 Private -26.9 -37.6 -63.3 -0.7 -0.6 -3.7 -0.4 -0.3 -0.2 -12.7 -16.8 -30.0 -3.3 -4.8 -6.6 -9.8 -15.0 -22.6 4,' C91mmAOOf EALAmf lb -67.8 -56.7 -83.5 -9.6 -1.0 -20.5 -5.9 -4.9 -6.7 -35.4 -22.0 -27.2 -18.6 -17.7 -13.8 1.5 -11.1 -15.2 M omCI UNUSIU 11.6 11.7 22.9 2.0 2.0 2.8 2.1 1.9 3.5 2.5 3.2 9.1 3.1 2.7 4.5 2.0 1.9 3.0 MI=A I.D T uoamii 58.4 48.8 72.6 4.9 4.2 19.8 3.3 1.9 2.9 21.4 16.6 28.7 11.8 7.9 6.4 17.0 18.1 14.9 Official 21.6 20.8 27.4 3.4 3.5 8:3 2.4 1.9 3.5 5.1 6.5 3.2 5.9 . 5.2 6.0 4.8 3.7 7.1 Private 36.8 28.0 45.2 1.5 0.7 11.5 1.0 0.0 -0.6 16.3 10.1 25.5 5.9 2.8 0.4 12.2 14.5 7.9 liOtao [to: Debt Outatanding end Disbursed 429.7 619.6 1030.3 38.4 46.3 129.4 20.8 25.4 41.9 166.6 242.0 395.2 68.3 97.8 151.0 135.6 208.2 312.8 Aa a percent of GNP 21.0 31.3 23.3 7.8 9.-i 10.6 39.9 52.2 44.8 22.8 34.7 25.0 30.2 48.7 36.2 24.9 39.9 28.0 As a percent of Exports 89.8 130.8 94.9 - 96.7 98.9 118.3 175.8 279.5 252.1 77.3 105.2 67.8 120.71 175.5 125.3 87.4 157.8 121.9 Debt Service as a Percent of Exports 16.0 19.0 17.4 8.0 8.3- 10.9 12.5. 16.5 26.8 16.1 16.2 14.5 17.2 23.1 22.3 17.8 26.1 24.0 /a ligures are based on a sasple of 90 developing countrite. Tb Excludes official transfers. Source: Vorld Bank. Econogic AsnlysL antd Projections Departmnt. - 48 - demand growth in the industrial countries and on developing countries price competitiveness. The role of competitiveness is especially important for the exporters of manufactures, and also for exporters of those foods and industrial raw materials for which alternative supply sources exist in industrial countries. Export price competitiveness depends on relative productivity, and on exchange rates. Domestic policies have effects on the former, and fully determine the latter. Openness of domestic markets, and thus the degree of competition and the structure of incentives afforded to domestic producers, is an important determinant of productivity. Rationalization and movement towards greater liberalization of existing trade and exchange regimes are important requirements for improved performance of many developing countries in the 1980s. 66. Similarly, capital inflows contribute to determining investment levels, but domestic savings are the key source of investment financing. Encouragement of savings must remain a principal objective of development policy. Efficiency in the use of available savings and, more broadly, of all resources is not less important. Price distortions foster waste in many countries. They frequently involve waste of capital. In some countries misaligned incentives and inefficient firms (public or private) may actually destroy national wealth. Through foreign borrowing, they may be absorbing and misusing not only savings of the past, but also those of the future. Improved processes of capital accumulation must, therefore, be accompanied by greater efficiency in the use of domestic capital. - 49 - 67. For low-income developing countries, external and internal conditions for growth are -even more diverse than for middle-income countries. More dependent on exports of primary commodities and generally less dependent on international private capital inflows than their middle-income counterparts, they face very mixed prospects. India and China, whose overall performance dominates the low-income Asian countries, appear in general well placed to continue to make steady progress in agricultural production. Continued internal policy reform should help boost domestic production and improve their export prospects. The relative weight of manufactures in their total exports is greater than the average at their income levels. The ratio of their overall exports to GDP and of their manufactures exports to industrial production is still low, but these conditions magnify the potential benefits of a continued trend towards greater external openness. 68. Under this scenario one can foresee a modest increase in the current account deficit of these countries, in absolute amount and as a percentage of GDP. Within a global scenario of steady growth and declining interest rates, both India and China should be able to take on and use effectively increased amounts of private capital. Under the conditions assumed in industrial countries, and their implications for world capital markets, these large countries should be able to expand their borrowing on commercial terms without assuming undue risks, particularly if they can also rely on the projected steady support by official capital flows. The expected increase in their debt service and debt-to-GNP ratios is thus a reflection of these two economies improved performance and increased flexibility, and of improved global conditions. Both should maintain a strong growth performance in the remainder - 50 - of the 1980s. Most other low-income Asian countries could, under this scenario, replicate this performance, although at generally lower levels, and with greater reliance on aid rather than commercial capital. 69. By contrast, low-income African countries face a more uncertain and difficult economic future. They suffer from slow demand growth for their exports, declining terms of trade and low productivity in their agriculture. The region, moreover, has suffered enormously from natural disasters. It has experienced an almost constant decline in per capita income over the past decade. Current high debt service and debt to GNP ratios are not expected to return to historical levels within the next decade. Low-income African countries have virtually no capacity to borrow in private capital markets. Their external debt is small in absolute amount, but very large in relation to their servicing capacity. 70. Naturally, external conditions are not alone responsible for the African countries plight. Many domestic policy causes of their inadequate earlier performance have been identified elsewhere. Some improvement in performance has already taken place in many countries, particularly in overall demand management. 71. Preventing a further sharp decline in per capita income in low-income African countries would require steady improvement of domestic policies and better external support. Even under our relatively optimistic central scenario, net capital flows to these countries are expected to drop considerably in the medium term, because of the relatively slow growth of - 51 - gross flows in nominal terms and the concomitant substantial growth of debt service. Nowhere is aid a sufficient condition for economic improvement; but nowhere is it more evidently one of the necessary conditions than in Sub- Saharan Africa. Without a significant increase in the net resource inflows provided by official development assistance (bilateral and multilateral), adequate support for ongoing policy reforms and restructuring of development and investment programs will not be forthcoming. This will require a combination of growing gross inflows and, in some cases, of additional rollovers of amortization charges on earlier loans. As emphasized by,a recent World Bank report on Sub-Saharan Africa, it is necessary at a minimum that net capital inflows be maintained in real terms at their 1980-82 ievels; otherwise these countries will not have a chance to stop the economic and social decline of the past 15 years. 1/ 72. With an improved external environment and a measure of success in domestic policies, developing countries as a group should be able to return to a fairly rapid overall rate of output growth in the second part of the 1980s. A global export growth of about -5 percent per annum in 1985-90, combined with expansion of official development assistance in line- with GNP growth in industrial countries and growth in net private lending of about 10 percent per annum (from the very low levels-of 1985) should allow developing countries to sustain import growth slightly above that of exports. Under these conditions their current account deficit in 1990 would be almost twice 1/ World Bank, Towards Sustained Development in Sub-Saharan Africa, Washington, D.C., 1984. - 52 - as large as in 1983 in current dollars, but would decline from 29 to 22 percent of GNP. The debt/export ratio for all developing countries would also decline and tend to return to levels roughly comparable to those of 1980, while the debt service ratio would return to the same level as in 1983 (Table 11). 73. On average, developing countries would considerably improve their growth prospects with respect to the first half of the 1980s. They would experience an annual growth rate of real GDP of about 5 percent (Table 9). Low-income countries are expected to grow slightly faster rate than middle- income countries; but this result is totally attributable to the projected fast growth of China and, to a lesser extent, India. In per capita terms, all regions would advance, with the exception of low-income Africa, where even stemming recent declines would require considerable effort (Table 12). 74. In summary, under this scenario, the salient features of the transition period would be: (a) a modest but steady growth in economic activity in industrial countries, and a reasonably favorable growth of markets for manufactured goods of developing countries; (b) a reduction of the global current account deficit of industrial countries; (c) gradually declining interest rates; (d) a return to substantive creditworthiness of developing countries and renewal of voluntary lending to them by international commercial banks; and (e) a fairly substantial increase in real per capita output growth in all regions (except for Africa South of the Sahara, where a return towards as yet modest growth would also be in sharp contrast to the earlier decline). Table 12: GROWTH RATES OF GDP PER CAPITA FOR DEVELOPING COUNTRIES, 1965-90 (Percent change per annum) 1965-73 1973-80 1981 '1982 1983 1984 /b 1985 /c 1985-90 /c DEVELOPING COUNTRIES /a 4.1 3.3 1.2 -0.2 -0.1 2.1 2.4 3.0 Low-Income 3.0 3.1 2.0 3.0 5.2 4.7 4.1 3.6 Asia 3.2 3.5 2.5 3.4 6.0 5.3 4.4 3.9 Africa 1.3 0.0 -1.4 -2.4 -2.4 -1.5 -0.3 -0.2 Oil Importers 4.6 3.1 -0.2 -1.4 -1.6 1.1 1.6 2.9 Major Exporters of Manufactures 5.1 3.5 -0.4 -0.7 -1.3 1.5 2.0 3.5 )ther Non-Oil 2.8 2.1 0.8 -3.2 -2.1 0.2 0.7 1.3 Oil Exporters 4.5 3.1 2.0 -1.7 -3.6 0.1 1.3 1.8 /a All data are based on a sample of 90 developing countries. 7-b Preliminary estimates. 7-c Projected. Source: World Bank, Economic Analysis and Projections Department. - 54 - 75. The reduction in the current account deficits of industrial countries, while representing a move in the right direction, will still be a long way off the desirable objective of a surplus. In a period when very large surpluses are not expected to reappear soon in high income oil exporting countries, the restoration of a substantial surplus position in the global current account of industrial countries is a precondition for the cessation of net resource flows from the developing to the industrial countries. 76. Managing the transition period is going to require sense of direction. The practical steps are numerous and gradual. To keep a steady course will require perseverance in the face of less than dramatic results. Not doing so, would imply not only the loss of recent hard-won gains, but possibly incurring further and much more serious failures. 77. The type of policy adjustment here envisaged only includes what is deemed essential to the continuation of the current world economic recovery and to the achievement of moderate, steady growth during the transition period. At the higher end of the adjustment spectrum one could easily envisage a range of policy changes that would have even more beneficial effects on the world economy. If, for example, in addition to the changes in fiscal and monetary mixes assumed in the moderate policy adjustment scenario, one envisaged an actual decrease in trade protectionism and a growth of real wages at a rate below that of overall production (so as to allow a buildup of profits and of savings), incomes and employment could grow much faster still in both industrial and developing countries. Further improvements could come from improvements in labor mobility, from greater flexibility in labor and - 55 - capital utilizati6oi and, particularly- in the United States, from increased private savings propensities. B. The Risks of Non-Adjustment and the Effects on Developing Countries 78. Continuation of present policies and lack of fiscal adjustment in industrial countries, especially in the United States, would pose a serious threat to the durability of the present economic recovery. If existing fiscal and payment imbalances were to widen, this could well put an end to the recovery and cause a return to wide cyclical swings in the world economy. Continued high interest rates would tend to slow down the growth of private investments, consumption and real output in the United States and in the rest of the industrialized world. Budget imbalances would in turn tend to widen further, because of ensuing cyclical reduction in the growth of fiscal revenues and increases in interest payments. The interest service burden on public debt, on average already close to 5 percent of GNP in the seven major industrial countries (up from 2 percent in the 1970s)- would increase further, thus reducing by itself the already limited flexibility of fiscal policy. 79. The deterioration of world economic conditions could even be more severe if the large fiscal and external payment imbalance of the United States were to meet serious financing constraints deriving from changes in portfolio preferences of wealth holders. Unless credible measures are taken to reduce the fiscal deficit of the United States, external savers would, at some point soon, raise the interest premium they demand for accepting the exchange risk inherent in financing the US deficit. A sharp rise in dollar interest rates or a sudden, sharp devaluation of the dollar could ensue. As the latter would - 56 - renew inflationary pressures and inflationary expectations whose control would require considerable monetary tightening in the United States. The rise in interest rates that might ensue could be even more pronounced and the deterioration of growth conditions in industrial countries sharper and deeper. Other industrial countries might then be unable to prevent a recession even if they relax their own financial policies. 80. Employment, under these circumstances, would suffer. Trade protectionist pressure could then become irresistible. Reduced international competition would in turn contribute to a reversal of recent trends towards greater flexibility in the use of productive resources in many industrial countries. This would lead to rising real costs, first in the more protected sectors and then economy wide. 81. The causality chain could vary across countries, depending on local as well as global circumstances. The economic impact of higher trade protection could also vary depending on its size, typology and regional spread. What is clear, however, is that under a "do nothing" scenario, in terms of economic policies and fiscal imbalances in particular, it would be very difficult to avoid increased trade protectionism and reduced wage and cost discipline in the tradable goods sectors. 82. Under these conditions, real output in industrial countries could grow at best at only 2.5 percent between 1985 and 1990, a rate roughly the same as that of 1973-84, and unemployment would continue to increase. Developing countries would suffer even more in terms of reduced output - 57 - growth. Export volume and terms of trade prospects would worsen substantially, due to increased trade protection, slower overall demand growth for developing countries' goods and a fall -in the relative prices of primary commodities. Developing countries' export volume growth could slow down to about 3 percent per annum in 1985-90. 1/ Terms of trade could decline by as much as 6 percentage points and purchasing power of exports would thus increase at only 2 percent per annum. Roughly one-quarter of export revenue would have to go to service existing debt. Considering the likely growth of other net factor income, transfers and official long-term lending, simply to maintain debt service ratios at 1985 levels developing countries would have to constrain their import growth to about 2.5 percent per annum in real terms. 83. Reduced capacity to import, slower investment rates and deterioration in the relative prices of tradable goods would substantially constrain the rate of growth of developing countries real output: to less than 4 percent per annum between 1985 and 1990, as compared to the 5.2 percent achieved in the 1970s. This rate of growth of real output could even be slower if, as seems in fact likely under these circumstances, a number of developing countries found it impossible to maintain the momentum of policy reform assumed in the calculations. This could happen as a result of a breakdown of the social consensus necessary to keep meeting external obligations, and more broadly to continue exerting present efforts with a view to future results. 1/ Export volume growth could be even lower, approaching the growth of real GNP in industrial countries, if trade protection were to limit severely the expansion of exports of manufactured products from developing to industrial countries. - 58 - 84. Excluding from the total India and China, whose creditworthiness may continue to ensure access to international private lending, reveals the extent of the possible deterioration of growth prospects for other developing countries under these circumstances. For the remainder of the developing countries, average annual real output growth would be slightly higher than 3 percent. Taking into account the decline in their terms of trade, this would mean that per capita income would either stagnate or decline in many of these countries. 85. The medium term sustainability of such a scenario is open to serious questions. New lending would fall short of interest payments for many developing countries, which for the entire period would need to run a considerable annual external surplus to meet their debt service obligations. Higher net resource inflows could materialize only through increased official flows, which is unlikely, or through continued involuntary lending by international private banks to many developing countries having no concrete prospects of-a restoration of their debt servicing capacity. 86. The two large Asian countries would also suffer substantially from this situation, in terms of foregone growth, delayed modernization of their agricultural sectors, retarded expansion of manufacturing capacity and loss of policy reform momentum. Middle-income developing countries of Latin America and Asia could perhaps increase intra-regional trade (already larger for them than for other developing countries) to sustain export growth, but much would depend on their external payments situation, which increased protection on manufactured goods exports could render precarious. Other oil importing - 59 - middle-income- countries would find themselves in an -even more difficult situation, faced by a. massive deterioration of. export growth and terms of trade. Middle-income oil exporting devel-oping countries might. be able to sustain their export growth to industrial ,countries -and domestic investments somewhat better, although under these circumstances price prospects, for oil would not be bright. 87. Even without a disruptive and prolonged financial crisis, the world economy would suffer considerably in terms, of foregone growth and increased, instability from lack' of policy adjustment. While the case for adjustment cannot rest entirely on the anticipation o'f possible future losses and on their avoidance, the risks involved inma "do nothing" scenario appear to be so considerably high that their careful consideration should add both urgency arid purpose to the efforts that are needed to. afford both industrial and developing countries the possibility of a- sustained, non-inflationary period of growth. World Bank NEW indicate the effects of these systems on the aUlocation of resources, intema, Pub cations Sub-Saharan Africa: Progress tional trade, and economic growth. Of Related Report on Development The Johns Hopkins Univmrsity Press, 1982; of Related Prospects and Programs paperback 1984. 416 pages (including ap- Interest A review of the foregoing book two pendixe, index). years later. LC-81-15558. ISBN 0-8018-2569-5, hard- Highlights some of the major problems cover; ISBN 0-8018-2570-9, paperback. that African governments have faced Stock Nos. JH 2569, $39.95 hardcover; IH in designing and implementing pro- 2570, $18.50 paperback. gramns of reform. Examines changes that have been introduced in the level, Eastern and Southern Africa: pattem, and design of World Bank Past Trends and Future economic work and operations in sup- Prospects port of such reforms. Reviews the ex- * ulhati tent of donor government responses to Ravi G the increased and changed needs of Staff Working Paper No. 413. 1980. 24 African countries for external assis- pages. tance. Stock No. WP 0413. $3. 1983. 37 pages. Stock No. BK 9169. Free. Economic Growth and Human Resources Accelerated Development in Norman Hicks, assisted by Sub-Saharan Africa: An NEW jahangir Boroumand Agend forAction Staff Working Paper No. 408. 1980. 40 Agenda for Action Decentralization in Developing pages (including 3 appendixes, bibliog- In the faU of 1979, the African Gover- Countries: A Review of Recent raphy, and references). nors of the World Bank addressed a memorandum to the Bank's president Experence Stock No. WP 0408. $3. expressing their alarm at the dim eco- Dennis A Rondinelli, John R. nomic prospects for the nations of sub- NeUis, and G. Shabbir Cheema NEW Saharan Africa and asking that the Reports on the objectives of decentrali- Bank prepare a "special paper on the zation. Notes that many developing Economic Reform in Socialist economic development problems of countries began decentralization dur- Countries: The Experiences of these countries" and an appropriate ing the last 10 years to find ways of China, Hungry, Romania, and program for helping them. This report, using limited resources more effec- Yugoslavia building on the Lagos Plan of Action, tively. Evaluates types of decentraliza- Peter T. Knight is the response to that request. tion and conditions and factors affect- The report discusses the factors that ing the implementation of policies Descrbes the Soviet-style system of explain slow economic growth in Af- supporting decentralization. Provides centralized planning as a prelude to an rica in the recent past, analyzes policy information on political commitment, in-depth discussion of reform design changes and program orientations administrative support, effective de- as expenienced in China, Hungary, Ro- needed to promote faster growth, and sign and organization of programs, mania, and Yugoslavia. Some lessons concludes with a set of recommenda- and the need for adequate resources. from the reform of these countries are tions to donors, including the recom- Annexes look at Indonesia's provincial noted as possibly ylevant to future at- mendation that aid to Africa should development program, China's "pro- tempts at improving the efficiency double in real terms to bring about re- duction responsibility" system, and both of socialst economies and state newed African development and Tunisia's deconcentration program. sectors of mixed economies. growth in the 1980s. The report's Staff Working Paper No. 581. 1983. 112 Staff Working Paper No. 579. 1983. 131 agenda for action is general; it indi- pages. pages. cates broad policy and program direc- Stock No WP 0581 S5 ISBN 0-8213-0229-0. Stock No. WP 0579. tions, overall priorities for action, and $5. key areas for donor attention. Like the Development Strategies in Lagos Plan, the report recognizes that Semi-Industrial Economies The Extent of Poverty in Latin Africa has enormous economic poten- Bela Balassa and Associates America tial, which awaits fuUer development. Provides an analysis of development Oscar Aimdr 1981; 3rd printing 1983. 198 pages (in- strategies in semi-industrial economies Staff Working Paper No. 522. 1982. 117 cluding statistical annex, bibliography). that have established an industrial pages. French: L.e developpemnent accelere en af- base. Endeavors to quantify the sys- ISBN 0-8213-0012-1. Stock No. WP 0522. rique au sud du Sahara: programme indi- tems of incentives that are applied in catif d'action. six semi-industrial developing econom- S5. Stock Nos. BK 9114 (English) and BK ies-Argentina, Colombia, Israel, Ko- Prices subject to change without notice 9116 (French). Free. rea, Singapore, and Taiwan-and to and may vary by country. NEW Implementing Programs of Managing Project-Related Human Development Technical Assistance: The The Effects of Corruption on Edited by Peter T. Knight; Lessons of Success Administrative Performance: prepared by Nat J. Colleta, Jacob Francis Lethem and Lauren Illustrations from Developing Meernan, and others. Cooper Countries Staff Working Paper No. 403. 1980. 376 Practical guidance for technical assis- David J. Gould and Jose A. pages (including references). tance designers and appraisers based Amaro-Reyes Stock No. WP 0403. $15. on feedback from aid agencies and technical assistance recipients in Af- Analyzes the effects of corruption on International Technology rica, Asia, and the Middle East who thE- administrative performance of de- Tase.Ise n oiypriiae nscesu rjcs veloping countries. Examitines the po- Part an success wiful benefit ical, economic, and social factors that Optionts Plnnrsm and provnadvctitinerhs will rt contribute to its incidence. Data from Frances Stewart Covers idpentfaidvicei i this report. Asia, Africa, and Latin America form Staff Working Paper No. 344. 1979. 178 of services and administration, imple- the basis for discussion. pages (including references). mentation and management of techni- Staff Working Paper No. 580. 1983. 60 Stock No. WP 0344. $5. cal assistance. pages. Staff Working Paper No. 586. 1984. 104 ISBN 0-8213-0259-0. Stock No. WP 0580. pages. English and French. $3. NEW ISBN 0-8213-0239-6. Stock No. WP 0586. First Things First: Meeting $5. Basic Human Needs in the Developing Countries n NEW Paul Streeten, with Shahid Javed the P Burki,Mahbub ul Haq, Norman Managing the Public Service s Hicks, and Frances Stewart Developig Countries: Issues The basic needs approach to economic eanu Prospects development is one way of helping the - . ways Ozgediz poor emerge from their poverty. It en- Identifies better ways to manage hu- ables them to earn or obtain the ne- man resources to meet escalating de- cessities for life-nutrition, housing, mand for improved public services in water and sanitation, education, and developing countries, where public health-and thus to increase their pro- service employment is growing four ductivity. times faster than in developed coun- This book answers the critics of the tries. Resultant problems in personnel basic needs approach, views this ap- management, pubbic service training proach as a logical step in the evolu- programs, and the applicability of tion of economic analysis and develop- - western management practices in de- ment policy, and presents a - veloping country settings are consid- ment policy, and presents a ~~~~~~~~~~ered. clearsighted interpretation of the is- The Japanese and Korean Staff Working Paper No. 583. 1983. 100 sues. Based on the actual experience of Experienes an an pages. various countries-their successes and Experences in Managing pages. failures-the book is a distillation of Development ISBN 0-8213-0243-4. Stock No. WP 0583. World Bank studies of the operational Miyohei Shinohara, Toru $3. implications of meeting basic needs. It Yanagihara, and Kwang Suk Kim also discusses the presumed conflict The special style of economic manage- dist on for and between economic growth and basic ment that has produced the "econonmicc Distribution, for Brazil needs, the relation between the New miracles" of these two countries is Lance Taylor, EdmariL. Bacha, Intemational Economic-Order and analyzed. Of particular interest are in- Eliana Cardoso, and Frank J. Lysy basic needs, and the relation between ferences about the power of prices and Explores the Brazilian experience from human rights and basic needs. role of compefition, both intemal and the point of view of political economy Oxford University Press, 1981; 3rd paper- extemal. Korean and Japanese eco- and computable general equilibrium back printing, 1984. 224 pages (including nomic management are characterized income distribution models. appendix, bibliography, index). as pragmatic and flexible. Oxford Univsity Press, 1980. 368 pages LC 81-16836, ISBN 0-19-520-368-2, hard- Stqff Working Paper No. 574. 1984. 98 (including references, appendixes, index). cover; ISBN 0-19-520-369-0, paperback. pages. LC 80-13786. ISBN 0-19-520206-6, hard- Stock Nos. OX 520368, $18.95 hardcover; ISBN 0-8213-0233-7. Stock No. WP 0574. cover; ISBN 0-19-520207-4, paperback. OX 520369, $8.95 paperback. $3. Stock Nos. OX 520206, $27.50 hardcover; The Hungarian Economic Levels of Poverty: Policy and ox 520207, $14.95 paperbac. Reform, 1968-81 Change Patterns of Development, 1950- Bela Balassa Amartya Sen 1970 Staff Working Paper No. 506. 1982. 31 Staff Working Paper No. 401. 1980. 91 Hollis Chenery and Moises pages (including references). pages (including references). Syrquin Stock No. WP 0506. $3. Stock No. WP 0401. $3. A comprehensive interpretation of the structural changes that accompany the in developing countries during the Meeting Basic Needs: An growth of developing countries, using post-World War 1 period. Analyzes Overview cross-section and time-series analysis problems, successes and failures, Mahbub ul Haq and Shahid Javed to study the stability of observed pat- e,nerging trends, and lessons learned. Buki terns and the nature of time trends. Staff Working Paper No. 576. 1983. 71 Pureo Oxford Unitersity Press, 1975; 4th paper- pag. Presents a sumary of the main find- back prnnting, 1984. 250 pages (including ISBN 0-8213-0303-1. Stock No. WP 0576. World n ank as part of a program for technical appendix, statistical appendix, Wa2 bibliography, index). reducing absolute poverty and meeting LC 74-29172. ISBN 0-19-920075-0, hard- NEWb1 2 pees( cover; ISBN 0-19-920076-9, paperback. 1980. 28 paga (including 2 annexes). Stock Nos. OX 920075, S19.95 hardcover; Policies for Strengthening Stock Nos. BK 9015 (Arabic), BK 9016 OX 920076, $8.95 paperback. Local Government in (English), BK 9027 (French), BK 9018 Spanish: LA estructural del crecimiento Dev(popin Countnes (ppanae), BK 9019 (Spanish). $3 paper- economico: un analisis para el periodo Glyev Cochpine Sheltec 1950-1970. Editorial Tecnos, 1978. Shelter ISBN 84-309-0741-6, Stock No. IB 0523, Looks at the ways by which highly Anthony A. Churchill $8.95, ~~~~~~~~centralized govemnments effectively S8.95. utilize and improve resources within Defines the elements that constitute local governments. The need for shelter; discusses the difficulties en- NEW strengthening personnel performance countered in developing shelter pro- at the local level is discussed, includ- grams for the poor; estimates orders of Pioneers in Development ing an analysis of useful methodology, magnitude of shelter needs for the Edited by Gerald M. Meier and Discussion of local revenue sources next twenty years; and proposes a Dudley Seers and patterns of revenue generation strategy for meeting those needs. Some of the pioneers in development provides a framework from which to 1980. 39 pages. economics-Lord Bauer, Cohn Clark, examine factors affecting government Stock Nos. BK 9020 (Arabic), BK 9021 Albert 0. Hirschman, Sir Arthur performance at higher levels. (English), BK 9022 (French), BK 9023 Lewis, Gunnar Myrdal, Raul Prebisch, Staff Working Paper No. 582. 1983. 76 (Spanish). $3 paperback. Paul N. Rosenstein-Rodan, W.W. Ros- pages. tow, H. W. Singer, and Jan Tinber- ISBN 0-8213-0240-X. Stock No. WP Water Supply and Waste Ren-offer a retrospective view of the 0582. $3. Disposal formative decade after World War 11 Discusses the size of the problem of when they made their seminal contri- Policy Interventions for meeting basic needs in water supply butions to the subject. In individual Technological Innovation in and waste disposal and its significance papers, the pioneers recapture the in- Developing Countries to development in the context of the tellectual excitement, expectations, and Charles Cooper International Drinking Water Supply activism of that period and provide and Sanitation Decade. Examines the rare autobiographical detail and insight Staff Working Paper No. 441. 1980. 59 Bank's past role in improving water into why they said what they did and pages (including references). supply and waste disposal facilities in what they now think about the state of Stock No. WP 0441. $3. developing countries and draws con- development thought and policy. clusions for the future. Commentary is provided by econo- Poverty and Basic Needs Series 1980. 46 pages. mists of the succeeding generation, who reappraise their ideas with the A series of booklets prepared by the Stock Nos. BK 9024 (Arabic), BK 9025 benefit of hindsight. General over- staff of the World Bank on the subject (English), BK 9026 (French), BK 9027 views of the subject have been written of basic needs. The series includes (Spanish). $3 paperback. by Gerald Meier and Paul Streeten. cept of basuc needs, counhtrre the csn-P Oxford University Press. May 1984. ies, and sectoral studies. Poverty and the Development About 400 pages. Hardcover only. of Human Resources: Regional ISBN 0-19-520452-2. Stock No. OX Brazil Perspective 520452, $29.95. Peter T. Knight and Ricardo J. Willem Bussink, David Davies, Moran Roger Grawe, Basil Kavalsky, and NEW An edited and updated edition of the Guy P. Pfeffermann more detailed publication, Brazil: Hu- Staff Working Paper No. 406. 1980. 199 Planning in Developing man Resources Special Report (see de- paga (including 7 tables, 2 appendixes, Countries: Lessowts -of scription under Country Studies list- refprences, footnotaes). Experience Stock No. WP 0406. $5 Ramgopal Agarwala Z981. 98 pages (including statistical ap- Reports that, in most developing pendix, map). English. Poverty and Human countries, planning failed to live up to Stock No. BK 9028. S5. Development expectations. Outlines steps to remedy Malnourished People: A Policy Paul Isenman and others this situation. Recommends a general View Since economic giwth alone has not reorientation and emphasis on the reduced absolute poverty, it has been most effective areas in the initial for- Alan Berg necessary to consider other strategies. mulation of plans.Provides an in-depth Please refer to Food and Nutrition for The strategy examined in this study- review of the experience of planning information. human development-epitomizes the idea that poor people should be LC 79-18026. ISBN 0-19-520094-2, hard- in public administration and manage- helped to help themselves. Four chap- cover, ISBN 0-19-520095-0, paperback. ment training (PAMT) in developing ters provide an overview of alternative Stock Nos. OX 520094, $34.50 hardcover; countries. Highlights various aspects strategies; a detailed look at health, OX 520095, $12.95 paperback. of traWng and career development educadon, nutrition, and fertility; les- French: Changement des structres c poli- programs including the impact of sons from exising programs; and an tque de devloppement. Econo ica, 1981. PAMT programs in developing coun- examinaion of broader issues in plan- ISBN 2-7178-0404-8, Stock No. IB 0540, tries during the past 30 years, the rea- ning. $12.95. son for successful programs, and some Oxford University Press. 1982. 96 pages Spanish: Cambio estructural y politica de innovative training designs and meth- (including statistical appendix). . desarrollo. Editorial Tecnos, 1980. ISBN st LC 82-2153. ISBN 0-19-520389-5. Stock 84-309-0845-5, Stock No. iB 0612, Staff Woring No. 584. 1984. 127 paga. No. OX 520389. $7.95. $12.95. ISBN 0-8213-0234-5.Stock No. WP 0584. _ _ _ _ _ _ _ $~~~~~~~~~5. Reforming the New Economic Ne n Mechanism in Hungary NEW bela Balassa Successes and Failures in Development. Human Ecologic Staff Working Paper No. 534. 1982. 56 Meeting the Management Considerations pagIS. Challenge: Strategies and Their Robert Goodland ISBN 0-8213-0048-2. Stock No. WP 0534. Implementation . At the current time, approximately 200 $3. Milan Kubr and John Wallace milion tribal people live in all regions - ~~of the world and number among the Social Infrastructure and Exankines the original nature of key poorest of the poor. This paper de- Services in Zimbabwe - management problems faced by devel- scribes the problems associated with Rashid Faruqee oping countries and outlines proven the development process as it affects Staff Working Paper No. 495. 1981. 111 strategies for improving management tribal peoples; outlines the requisites pages (including bibliography, map). competence and performance. Presents for meeting the human ecologic needs SokN.WP 0495. $5. approaches to management develop- of tribal peoples; and presents general Stock No. WP 0495. S5. ment recently introduced by enter- principles that are designed to assist prises and institutions such as busi- the Banks staff and project.designers ness clinics and self-development in incorporating appropriate proce- NEW programs for management as well as dures to ensure the survival of tribal tailored and action-oriented programs. peoples and to assist with their devel- Some Temporal Aspects of Staff Working Paper No. 585. 1984. 120 opment. Development: A Survey pages. 1982, 118 pages (including 7 annexes, bib- R. S. Eckaus ISBN 0-8213-0254-X.Stock No. WP 0585. liography). Identifies, quantifies, and explains fac- S5. ISBN 0-8213-0010-5. Stock No. BK 0010. tors that lengthen project design and Tourism-Passport to $5. completion. Analyzes changes that Development? Perspectives on take place over time in principal areas th S and Cultr Eff The Tropics and Economic that affect economic development-la- e ocl an tura es Development: A Provocative bor supply, social structures and their of Tourism in Developing Inquiry into the Poverty of behavior, govemrnment support func- Countries tions, market organization and effi- Emanuel de Kadt, editor Nations ciency, and capital productivity. Notes The first serious effort at dealing with AnrwM.aac that development has proved to be a the effects of tourism development in Examines major characteristics of the relatively slow process. a broad sense, concentrating on social tropical climates that are significant to Staff Working Paper No. 626. 1983. 51 and cultural questions. economic development. pages. A joint World Bank-Unesco study. Oxford The Johns Hopkins University Press, 1976; ISBN 0-8213-0300-7.Stock No. WP 0626. University Press, 1979. 378 pages (includ- 2nd printing, 1979. 128 pages (including $3. ing maps, index). naps, bibliography, index). Structural Change and LC 79-18116. ISBN 0-19-520149-3, hard- LC 76-1 7242. ISBN 0-8018-1891-5, hard- Development Policy cover; ISBN 0-19-520150-7, paperback. cover; ISBN 0-8018-1903-2, paperback. Development Policy ~~~~Stock Nos. OX 520149, $24.95 hardcover; Stock Nos. JH 1891, $12.50 hardcover, IH Hollis Chenery OX 520150, $9.95 paperback. 1903, $5 paperback. A retrospective look at Chenery's Spanish: Los tropicos y desarrollo econom- thought and' writing over the past two ico: reflexiones sobre la pobreza de las na- decades and an extension of his work NEW ciones. Editorial Tecnos, 1978. ISBN 84- in Redistribution with Growth and Pat- 309-0740-8, Stock No. IB 0529. $5. terns of Development. Develops a set of Training for Public techniques for analyzing structural Administration and Twenty-five Years of Economic changes and applies them to some ma- Development, 1950 to 1975 jor problems of developing countries Management in Developing David Morawetz today. Countries: A Review A broad assessment of development Oxford University Press, 1979; 2nd paper- Samuel Paul efforts shows that, although the devel- back printing, 1982. 544 pages (including Analyzes the results of a survey of the oping countries have been remarkably references, index). trends, developments, and problems successful in achieving growth, the distribution of its benefits among and LC 77-17243. ISBN 0-8018-2134-7, hard- ica, 1978. ISBN 2-7178-0038-7, Stock No. within countries has been less satisfac- cover; ISBN 0-8018-2092-8, paperback. IB 0546, $7.95. tory. Stock Nos. IH 2134, $16.50 hardcover; IH Spnish: Venticinco anos dc daarroJlo The Johns Hopkins University Press, 1977; 2092, $7.95 papback. economico: 1950 a n975. Editorial Tesnos, 3rd printing, 1981. 136 pages (including French: Vingt-cinq annees de deveop*- 1978. ISBN 84-309-0792-0, Stock No. IB statistical appendix, rerences). ment economnique: 1950 a 1975. Econom- 0529, $7.95. World Development Report issue brings not only an overview of M anagement and / ~~~~~~the state of development, but also a detailed analysis of such topics as Development Senes i ' / structural change, the varying experi- /fi | ! , ences of low- and middle-income Decentralization in Developing countries, the relation of poverty and Countries: A Review of Recent - t - human resource development, global Experience. WP 0581. $5. (Development) - I - - and national adjustment, and agricul- Development Finance Companies, State K _ _ / ture and food stability. Each contains a and Pdvately Owned: A Review. WP statistical annex, World Development 0578. S3. (Finance and Debt) A large-format series of annual studies Indicators, that provides profiles of Economic Reform in Socialbt Countries: of 200 or more pages, the World Devel- more than 120 countries in twenty-five The Experiences of China, Hungary, opment Report, since its inception, has multipage tables. The data cover such Romania, and Yugoslavia. WP 0579. $5. been what The Guardian has called "a subjects as demography, industry, (Development) most remarkable publication. It is the trade, energy, finance, and develop- The Effect of Corruption on nearest thing to having an annual re- ment assistance and such measures of Administrative Performance: lllustrations port on the present state of the planet social conditions as education, health, from Developing Countries. WP 0580. 53. and the people who live on it." Each and nutrition. (Development) The Japanese and Korean Experiences in Managing Development. WP 0574. 53. World Development Report 1983 World Development Report 1978 (Development) Profiles the economies of 125 nations. (Discusses the development experi- Managing Project-Related Technical Explores the role of management in ence, 1950-75, development priorities Assistance: The Lessons of Success. WP successful development enterprises, in the middle-income developing 0586. $5. (Development) Provides reliable up-to-date statistics. countries, and prospects for alleviating Managing the Public Service in Oxford University Press, 224 pages (in- poverty.) Developing Countries: Isues and cluding maps, annex, World Development Ordering information for World Devel- Prospects. WP 0583. 53. (Development) Indicators). ISBN 0-19-520432-8; $20 opment Report. All editions are $8, pa- Managing State-Owned Enterprises. WP hardcover; $8 paperback. perback. 0577. S5. (Industry) World Development Report 1982 World Development Report 1983: Planning in Developing Countries: (Tackles the principal issues and obsta- Stock Nos. OX 520431 (English) hard- Lessons of Experience. WP 0576. $3. des in the efforts to improve the per- cover; OX 520432 (English) paperback. (Development) formance of world agriculture.) World Development Report 1982: Polides for Strengthening Local World Development Report 1981 Stock Nos. BK 0086 (Arabic), OX 503225 Goverfinent in Developing Countries. (Discusses adjustment-global and na- (English), BK 0087 (Spanish), lB 0607 WP 0582. $3. (Development) tional-to promote sustainable growth (French), IB 0606 (Japanese). Price Distortions and Growth in in the changing world economy.) World Development Report 1981: (Finance and Debt)res . S3. Stock Nos. lB 0594 (Arabic), OX 502998 (Finaces and Dauebt) etig h World Development Report 1980 (English), IB 0598 (German), IB 0593 Succes and Failu in Meing the (Discusses adjustment and growth in Management Challenge: Strategies and the 1980s and poverty and human de- (Spanish). Their Implementation. WP 0585. $5. velopment,) World Development Report 1980: (Development) Stock Nos. OX 139419 (English), IB 0599 Training for Public Administration and World Development Report 1979 (Spanish). Management in Developing Countries: A (Discusses development prospects and World Development Report 1979: Review. WP 0584. $5. (Development) intemnational policy issues, structural Stock No. OX 502638 (English). 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