World Bank Document

Brazil, and to a lesser extent Mexico, three of the
Figure 3.5 Changes in current account largest developing-country debtors. Restrictions
balances between 1981 and 1984g
g
(bilaions ofbdollars)
on imported sugar in Europe, Japan, and the
United States hit Latin America and the Philip-
170 pines, another country with debt problems.
Increase in statistical
Restrictions on beef imports in Japan and the EC
discrepancy 150 damage Argentina's terms of trade. The list is long
Middle Eastern and getting longer.
/ oil exporterssinfct
Oil exporters, 120 In the next few years, without a significant
outside the
increase in capital inflows, the major debtors will
Middle East
/ 90 need to run substantial trade surpluses. That will
Industrial countries, - require an increase in their domestic savings.
except the
United States 60
These increased savings, however, also need to be
translated into increased export earnings: in tech-
developing
United States
UnitedpStates
nical terms, the ex ante trade surplus needs to be
Oil-importing 30 brought in line with the ex ante excess of domestic
countries
production over expenditure. If industrial coun-
tries increase barriers to exports from developing
o
Increased surplus or Increased deficit or countries, that will require a much larger real
decreased deficit decreased surplus depreciation of the exchange rate-or much higher
levels of unemployment. Lower levels of trade
Source: IMF and World Bank data.
therefore imply higher social costs for the adjust-
- nment programs of developing countries. This in
turn seriously threatens the continued implemendone
that to a larger degree. Furthermore, their tation of such programs and, more generally, the
export prices have grown less (by nearly a percent- creditworthiness of these countries and, by strainage
point a year) than the unit value of trade in ing the ability of major debtors to repay their
general since 1974.
debts, the stability of the global financial system.
The harm done to industrial countries by their
protectionist measures is well documented. The The roots of protectionism
losses they inflict on developing countries can also
be substantial. Increased protectionism in indus- Increased protectionist pressure during the past
trial countries would reduce the volume of exports fifteen years is closely related to the change in the
from developing countries and adversely affect the nature of the disturbances to the international
latter's terms of trade. By way of illustration, an economy that took place over the same period.
increase in protectionism big enough to produce a One example is the change in cyclical behavior of
10 percent deterioration in the terms of trade of inflation. The 1970-73-75 economic cycle (trough-
Latin America would cost the region as much as peak-trough) is the only major business cycle in
the real interest cost of their entire debt.,
U.S. history in which inflation during the contrac-
At the moment, the most severe trade interven- tion exceeded inflation during the upswing, by
tions in industrial countries aimed at developing some 8.4 percentage points. Until then, inflation
countries are almost all directed primarily against was dominated by demand fluctuations: an
major debtor countries (the Multifibre Arrange- increase in aggregate demand brought forth higher
ment being an exception). Restrictions on steel output, but also (in time) higher prices. But supply
imports in Japan, the United States, and the EC shocks, such as an increase in raw material prices,
affect each others' exports, but also those of Korea, lead to low output and high inflation simultane-
1. The calculation is as follows: in 1983, the ratio of external debt ously. Demand management can cure one or the
(including short-term debt) to GDP was 54.8 percent in Latin Amer- other, but not both at the same time. More rapid
ica. Assuming that 3.5 percent is the expected real interest rate in the structural was necessary restore
long run (see Chapter 10), such a debt to GDP ratio leads to real adjustment to
interest payments equal to 1.9 percent of GDP a year. Exports were growth, yet that was seldom forthcoming. As a
19 percent of GDP, so a permanent 10 percent terms of trade deterio- result, economic growth slowed down.
ration would also yield a permanent
annual loss of 1.9 percent of
GDP. An increase in protectionism in industrial countries that would Many commentators and governments have
permanently worsen Latin America's terms of trade by 10 percent attributed this slowdown to the large increase in
would thus deprive the region of income equivalent (in discounted
value terms) to its entire external debt.
oil prices in 1973-74. But that is not the whole
38