World Bank Document

Part II Role of Economic Policies
3 Macroeconomic and trade policy in industrial countries:
a developing-country perspective
International trade and capital flows form the pri- tend to limit its benefits to the rest of the world.
mary economic links between industrial and devel- Worrisome features are the unprecedented level of
oping countries. The policies in industrial coun- real interest rates, especially in the United States,
tries-fiscal, monetary, and trade-largely shape and the large appreciation of the U.S. dollar. High
the international economic environment for devel- real interest rates increase the debt-servicing buroping
countries. Most of the influences are well den for borrowing countries. The high real
known. The pace of economic growth in industrial exchange value of the dollar has contributed to
countries affects the exports of developing coun- depressed primary commodity prices in terms of
tries, as does the scale of protectionism; interest purchasing power over goods imported from the
rates and exchange rates in industrial countries United States, so net exporters of primary cominfluence
the cost of borrowing for many develop- modities that import a great deal from the United
ing countries; and so on.
States, like Brazil, have profited less from the
Less familiar is the extent to which industrial recovery in industrial countries than they normally
countries are affected by what happens in the do at this stage of the business cycle (see Box 3.1).
developing world. Some 30 percent of all their Nonetheless, the dollar exchange rate may be a
exports in 1983 went there. The 48 percent decline factor behind the high U.S. trade deficits which
in U.S. exports to the five major Latin American have led to rapid growth in export volume for sevborrowers
over 1981-83 was a major factor in the eral developing countries.
deterioration of the U.S. trade balance over that This chapter first gives a broad description of
period. The past few years have also highlighted macroeconomic developments in the industrial
the risks for the banks in industrial countries when economies in the last fifteen years to illustrate the
their developing-country borrowers run into debt- changing nature of capital flows between indusservicing
difficulties. Like many cliches, the phrase trial and developing countries. It then analyzes
"an interdependent world" is founded on solid policy issues, paying particular attention to the
facts. influence of macroeconomic policies on world
Recent economic developments have again interest and exchange rates and on the volume of
borne this out. The strong recovery in the United credit available to developing countries, and to the
States has been the main cause of expanding world impact of protectionism on trade and on the debttrade.
The volume of world trade fell by 2.5 per- servicing capacity of the major borrowers.
cent in 1982, in line with the slowdown in the U.S.
economy, but recovered strongly to reach an esti- Macroeconomic constraints and capital flows
mated 8.5 percent growth rate in 1984. Developing
countries benefited: their exports grew by an esti- The upheavals of 1969-73 produced major current
mated 9 percent in 1984, up from 1.7 percent in account imbalances across the world. Higher oil
1982. Although most major borrowers increased prices transferred income from moderate and low
their supply of exports by reducing domestic savers (industrial and developing countries) to (at
demand and reforming their trade regime, the that time) high-saving oil exporters. The resulting
expansion in foreign demand has also played an excess supply of world savings put downward
important role. This is shown by the fact that pressure on world output and interest rates. In real
prices of developing countries' exports increased terms, interest rates turned negative for several
more than those of traded goods in general.
years, clearly a situation that led to misallocation of
However, the economic recovery in industrial resources and that could not be sustained.
countries has been unusual in certain respects that The current account developments during the
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