World Bank Document

expected to be high-a view consistent with high
Figure 3.4 Government expenditures as a iong-term interest rates at the moment.
percentage of national income in Europe,
g
the United States, and Japan, 1965-84
To bring real interest rates down for more than a
short period, a credible change in fiscal policy in
Percent
the United States therefore seems desirable. The
60 high dollar exchange rate has stimulated exports to
the United States and has therefore increased pro-
50 duction in other countries. Avoiding any recesuro
sionary impact of such a policy change will require
40 Europ nited States careful coordination with monetary policy in the
United States and also with monetary and fiscal
30 policies in other industrial countries. However,
Japan
failing such a policy change, high real interest rates
20 and a continued high exchange value of the dollar
would eventually tend to reduce growth in indus-
10 trial countries and continue to divert world savings
1965 1970 1975 1980 1984 away from developing countries. Moreover, sus-
Source: OECD National Accounts; national sources. tained trade imbalances and exchange rate misalignments
will lead to increased protectionist
pressure in industrial countries. In those circumstances,
developing countries would find it
importing developing countries and industrial increasingly difficult to increase export earnings
countries other than the United States (see Figure and service their debts.
3.5).
Between 1979 and 1984, the U.S. inflation- Protectionism
adjusted budget deficit (see Box 3.3) deteriorated
by $162 billion, a shift that was far greater than, for Increased protectionism in industrial countries
example, the $70 billion current account deteriora- against developing countries' exports reduces the
tion of oil-exporting countries over the same export earnings that developing countries would
period. To put this in perspective, total gross world otherwise obtain. That is detrimental to their
savings in 1979 is estimated at $2,060 billion. The capacity to import and to service their debt. It
$162 billion increase therefore represents 8 percent therefore is a threat to efficient economic growth
of world savings in 1979. Budget shifts of this size and to a satisfactory solution of the debt problems
can explain a significant part of the increase in real many developing countries face.
interest rates. Fiscal deficits can also explain the In aggregate, exports from oil-importing develupward
tilt in the term structure of interest rates. oping countries have in fact grown faster than
Since the U.S. budget deficit is expected to remain world trade in general since 1974 (in volume
high, future short-term interest rates are also terms). With less protectionism they would have
Table 3.2 Inflation-adjusted government budget balance as a percentage of national income in selected
industrial countries, 1965-84
Nine large
industrial countries
United United Including Excluding
Year Kingdom Germany Italy France Japan States United States United States
1965-73 3.8 1.0 -3.6 1.8 1.8 1.6 1.5 1.4
1974-78 2.7 -2.4 0.3 0.5 2.4 1.0 0.1 -0.6
1979 2.1 -1.9 -0.7 0.8 -4.4 3.6 0.7 -1.3
1980 3.4 -2.1 4.5 2.2 -3.6 2.0 0.7 -0.2
1981 2.2 -2.5 2.0 0.5 -3.3 2.4 0.6 -0.8
1982 1.5 -1.9 -0.3 -0.4 -2.8 -2.0 -1.6 -1.3
1983 -1.1 -1.7 -0.4 -1.5 -3.4 -3.0 -2.7 -2.4
1984 -0.3 -0.4 -4.7 -1.9 -1.7 -2.7 -2.3 -1.9
Note: Negative sign indicates deficit.
Source: OECD National Accounts; national sources.
37