World Bank Document

Export Rehabilitation Program to provide intensi- were diminished in many cases, however, by a
fied technical assistance and management training deterioration in the quality of economic policies
in primary export industries.
and investment management.
In many countries, economic restructuring has * During 1979-82, there was a boost in the
involved heavy investment in energy production. demand for balance of payments and fiscally
These projects often require substantial foreign related finance. In many developing countries outfinance.
However, much can be achieved by rais- side of Asia, borrowing was used primarily to
ing domestic prices to international levels. This has postpone, rather than buy time for, structural
the dual effect of encouraging conservation and adjustment. Hence, its contribution to growth was
making domestic energy production more attrac- small, if any.
tive. Furthermore, the energy producers benefit * Since 1982, net capital flows have slowed confrom
higher prices, so they can often afford to siderably. Available financing has in many cases
invest in plant and equipment without having to been linked with debt-servicing and balance of
borrow. However, foreign exchange savings payments difficulties. It is more closely tied to proaccrue
gradually, although some countries have grams of structural adjustment, and its contribumade
substantial progress in recent years. Thai- tion to establishing a basis for recovery in growth
land has successfully begun to substitute domestic has been, by and large, positive, especially among
gas for imported oil. Brazil also reduced its oil the largest borrowing countries. Most new comimport
dependence from 83 percent in 1977 to 50 mercial finance is available only for trade and
percent in 1984 through enhanced conservation project-related purposes and only to a small numefforts,
stepped up domestic oil production, accel- ber of developing countries that have maintained
erated hydropower development, and a fuel alco- high standards of creditworthiness.
hol program.
Uses of foreign borrowing
Conclusions
Participating in the world economy provides sig-
Some broad generalizations about the uses of for- nificant benefits. It also entails some risks. The
eign borrowing can be inferred from the diverse more a developing country is linked with the rest
country experiences. Four periods can be distin- of the world, the greater its potential benefits-but
guished:
also, if policies are inappropriate, the more vulner-
* From the mid-1960s to the early 1970s, financ- able it is to external shocks. Some people concening
was predominantly from official sources for trate on the risks, arguing that the recent experispecific
investments. Economic growth was accel- ence of massive shocks and slower worldwide
erated, and the capacity to service rising debt was growth proves that developing countries should
maintained or improved. Borrowing for balance of avoid outward-oriented policies and also reduce
payments purposes was limited because develop- their reliance on foreign capital.
ing countries had limited access to commercial The first part of the argument is excessively
bank lending.
short-term, and even then misplaced. It is true that
. Between 1973 and 1978, a high proportion of inward-oriented developing countries suffered a
borrowed resources continued to flow into invest- smaller absolute fall in their growth rate during the
ment. Many economies grew rapidly. However, in early 1980s. But they still grew less rapidly than
order to adjust to higher energy prices and to outward-oriented economies; and, over a longer
maintain the momentum of growth, developing period, much less rapidly. As for the second part,
countries shifted the composition of their invest- it is wrong to specify the precise amount of foreign
ment in favor of large-scale energy production and borrowing a country should do. This chapter has
projects in heavy industry and infrastructure. Low shown that many factors influence that decision.
international real interest rates and domestic poli- Much depends on a country's ability to adjust
cies led in many cases to investment with low rapidly in the face of external shocks. The greater
returns, particularly in Africa and Latin America. its ability, the more it can afford to borrow. The key
The availability of cheap foreign funds also led to issues are the government's efficiency and its
the rechanneling of some borrowing into the political strength to resist interest groups that
financing of balance of payments and fiscal defi- oppose policy changes. Governments should
cits, although project-related finance remained assess how far they would be willing and able to
predominant. The potential gains from borrowing implement austerity measures, or to move the
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