World Bank Document

ently estimated at slightly more than one-half that indication of success in addressing adjustment
of 1973-80. Despite export growth of close to 6 problems-in the next few years. As a result, there
percent, imports have increased at a little more is a reduction in unemployment rates, and the
than 1 percent a year in recent years. The share of annual increase in real labor costs in industrial
interest in total debt service has increased from 36 economies is assumed to slow by two percentage
percent in 1979 to 52 percent in 1983. Many devel- points. The Low simulation assumes that a failure
oping countries have run substantial trade sur- to tackle labor market rigidities would contribute
pluses in order to meet greatly increased interest to some increases in real labor costs and to keeping
payments. Current account deficits of developing unemployment, particularly in Europe, at high
countries declined sharply (in current prices) from levels.
$57 billion in 1983 to $36 billion in 1984. The high * Protectionism. Rapid and noninflationary
level of interest rates is thus one of the critical vari- growth in industrial economies in the High simulaables
whose course will influence outcomes in the tion would permit governments to reduce protecnext
five years. Developing countries need a rate of tion over the next few years. This would help to
growth in export earnings in excess of the rate of stimulate a more rapid growth of international
interest to bring down the principal debt ratios to trade from which both industrial and developing
more sustainable levels, even if the current countries would draw benefits. By contrast, the
account net of interest payments remains in bal- Low simulation assumes that difficulties in adjustance.
ment and low rates of economic growth contribute
Over the next five years, policies in industrial to substantially increased protection against
and developing countries will determine whether exports from developing countries.
developing countries can make a smooth transition The implications of these assumptions are sumback
to creditworthiness and steady growth. In marized in Table 10.3. The average annual growth
order to highlight the policy options and their con- rate in industrial countries is nearly a percentage
sequences for developing countries in 1985-90, point higher (3.5 versus 2.7 percent) in the High
two simulations have been prepared: a High simu- simulation than in the Low. It should be noted that
lation which embodies policies that result in
progress in adjustment, and a Low simulation Table 10.3 Average performance of industrial
which essentially assumes no particular further and developing countries, 1980-90
progress in adjustment.
(average annual percentage change)
Three aspects of industrial-country policy are 1985-90
particularly relevant. Countrygroup 1980-85 High Low
* Monetary-fiscal balance. The High simulation Iountri goup
sustaine reductin budgetdeficits Industrial countries
assumes a sustaied reduction m budget defints m GDP growth 2.3 3.5 2.7
major industrial countries, particularly in the Inflation ratea 0.5 7.5 5.0
United States. By the end of the decade, deficits Real interest rateb, 6.8 2.5 6.5
are assumed to be about one-third less than the Nominal lending rate' 12.6 6.1 11.8
levels that governments are currently projecting Developing countries
for that year. This permits steps to be taken to GDPLgrowth i59 5.65 .2
redress the monetary-fiscal balance and to accentu- Asia 6.4 5.8 5.4
ate international cooperation required for noninfla- Africa 1.4 3.4 2.5
tionary growth in industrial countries. In these cir- Middle-income oil importers 1.9 5.9 3.6
cumstances, real interest rates could be expected to Major exporters of manufactures 2.1 6.4 3.8
come down by 1990 to the levels that prevailed in Other countries 1.8 4.7 326
the 1960s and exchange rate relationships to Export growth 5.7 6.7 3.5
become more reasonable. The Low simulation, on Manufactures 9.7 10.4 5.4
the other hand, assumes that fiscal deficits in 1990 Primary goods 2.8 3.1 1.7
will be no lower than officially projected. Real Import growth 1.2 8.8 2.4
interest rates could thus be expected to rise and the Note: Projected growth rates are based on a sample of ninety developing
countries.
exchange value of the U.S. dollar to continue to be a. Industrial countries' U.S. dollar GDP deflator. Inflation in the
strong.
United States is 3.5 percent a year in the High and 5 percent a year in
the Low simulation.
* Labor markets. The High simulation assumes b. Average of six-month U.S. dollar Eurocurrency rates, deflated by
that industrial economies will have increased suc- the rate of change in the GDP deflator of the United States.
c. End of period rate.
cess in reducing rigidities in labor markets-an Source: World Bank data.
139