Chapter

Recent Developments in the World Economy and in Non-Oil Developing Countries of the Western Hemisphere

Editor(s):
Joaquín Muns
Published Date:
September 1984
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Author(s)
LINDA M. KOENIG

INTRODUCTION

This paper summarizes the major findings of the world economic outlook exercise carried out by the Fund staff in December 1982, with particular emphasis on developments in the non-oil developing countries of the Western Hemisphere. For purposes of the world economic outlook exercise, Fund members are divided into three groups: industrial countries, oil exporting countries, and non-oil developing countries: nonmembers constitute a fourth group. In the case of the Western Hemisphere, the group of non-oil developing countries includes five net oil exporters—Mexico, Ecuador, Bolivia, Peru, and Trinidad and Tobago—which do not satisfy the world economic outlook criteria for inclusion as oil exporters.1 Only Venezuela satisfies these criteria.

The world economic outlook exercise is a comprehensive staff project involving a number of departments in the Fund. The exercise, carried out in full once a year and updated periodically, entails detailed country-by-country projections of growth, inflation, and the balance of payments based on a standard set of assumptions; these data are then aggregated for analytical purposes. The exercise draws on staff research and contacts with member countries and, particularly, on the consultations that the Fund conducts with member countries in the exercise of its responsibility for surveillance over exchange rate policies.

As is described in the following sections, 1982 was a year of slow, in many cases negligible, real growth in most parts of the world. The growth performance of the non-oil developing countries of the Western Hemisphere was much worse than that of the other non-oil developing country regional groupings. Concurrently, the downward adjustment of real imports in the non-oil developing countries of the Western Hemisphere was much more severe than elsewhere. To some extent this was due to a slower adjustment to the second oil shock of 1979 than occurred in certain other areas of the world. However, the severity of the financial problems faced by Western Hemisphere countries in 1982 also reflected an extremely sharp reduction in net capital inflow—the counterpart of the enormous increase in the net inflow of capital of the preceding five years. The experience of these Western Hemisphere countries in 1982 raises questions concerning (1) how to arrive at a judgment regarding the sustainable current account deficit of a country or region in the present fragmented world monetary system, and (2) whether indeed the present system can provide for the balanced expansion of world trade over the medium run, and, if not, how it can be improved. These key questions recur with respect to many of the subjects discussed in the other papers of this volume.

RECENT DEVELOPMENTS IN THE WORLD ECONOMY AND PROSPECTS FOR 19832

The world economy in 1982 was characterized by extremely weak economic activity and rising unemployment, declining inflation (but disappointingly small for the non-oil developing countries) and, for the first time since 1975, a shrinkage in the volume of world trade. Expectations of imminent economic recovery were repeatedly unfulfilled throughout the year. The recovery now apparently beginning is projected to bring year-on-year growth in gross national product (GNP) in the industrial countries of a little over 1 percent in 1983. In the second half of 1983, the real GNP of these countries is projected to expand at an annual rate of 2.5 percent. Inflation is expected to moderate further throughout the world in 1983 and the volume of trade to recover by 3 percent.

Output

Output growth in the industrial countries, as measured by the change in real GNP, declined by 0.3 percent in 1982 (Table 1). Output declines were particularly pronounced in the United States and Canada, at 1.8 percent and 4.9 percent, respectively. Real GNP grew weakly in all other industrial countries except the Federal Republic of Germany, where it declined by slightly over 1 percent. However, whereas output tended to stabilize in the second half of the year in the United States and Canada, activity in most European countries was much weaker in the second semester than in the first. Economic recovery, which appears to be beginning in the United States and Canada, is expected to spread gradually to the European countries during 1983. The Japanese economy, which among those of the major industrial countries was relatively less affected by the slowdown in activity, is projected to expand in 1983 at the same 3 percent rate it registered in 1982.

Table 1.Major Industrial Countries: Changes in Real Output1(In percent)
Proj.
19791980198119821983
Canada2.90.53.1–4.90.9
United States2.8–0.41.9–1.81.6
Japan5.24.22.93.03.0
France3.31.10.41.40.4
Germany, Federal Republic of4.01.8–0.2–1.2–0.3
Italy4.93.9–0.20.40.9
United Kingdom2.0–2.1–2.20.61.0

GNP, excepting gross domestic product (GDP) at market prices for France, Italy, and the United Kingdom.

GNP, excepting gross domestic product (GDP) at market prices for France, Italy, and the United Kingdom.

The chief factors behind the poor output performance of the industrial economies in 1982 were the decline in fixed investment and inventory holdings and the contraction in real imports of the non-oil developing countries as a group. This decline in imports was the consequence of poor terms of trade and lower export volume for the non-oil developing countries; sharply higher interest payments; and a major decline in net long-term capital inflow.

In the non-oil developing countries, real output growth, while not actually declining, slowed substantially (Table 2), The only exceptions within this group were (1) major exporters of manufactures, whose real growth already had plunged to 0.4 percent in 1981 and remained at that rate in 1982, and (2) the so-called low-income countries—those whose output, as estimated by the World Bank, did not exceed the equivalent of $350 in 1978. On a regional basis, real output of non-oil developing countries in the Western Hemisphere contracted by 0.7 percent, while the output growth of other regional groupings except the non-oil developing countries in Europe slowed very substantially (Appendix, Table 11).

Table 2.Major Country Groupings: Changes in Real Output(In percent)
Proj.
19791980198119821983
Industrial countries13.41.21.2–0.31.3
Oil exporting countries23.1–2.3–4.3–4.74.5
Non-oil developing countries25.04.92.81.82.4

Mainly GNP. See footnote 1 of Table 1.

GDP at market prices.

Mainly GNP. See footnote 1 of Table 1.

GDP at market prices.

In 1983, the rate of real output growth of non-oil developing countries is projected to recover to 2.4 percent, still very far below their growth rate in the 1960s and 1970s. The recovery will be spread among most analytical and regional subgroupings with the exception of the non-oil developing countries in the Western Hemisphere, whose combined output is projected to decline by a further 0.3 percent.

Real output of the oil exporting countries fell in 1982, for the third consecutive year, but is expected to recover in 1983.

Inflation

The rise in the combined GNP deflator of the seven major industrial countries decelerated progressively during 1982, a trend that is projected to continue in 1983. Most of the decline in inflation from 1981 to 1982 reflected the sharp drop in the rate of price increase in the United States and Canada. In 1983, a pronounced decline in inflation is expected to be more widespread. As a great deal of the progress in reducing inflation has been made in countries whose inflation rates were above the industrial countries average, the dispersion of inflation rates across countries is expected generally to moderate in 1983 (Table 3).

Table 3.Major Industrial Countries: Changes in GNP Deflators(In percent)
Proj.
19791980198119821983
Canada10.311.010.110.47.0
United States8.79.39.46.04.6
Japan2.63.02.92.42.7
France110.311.812.012.59.0
Germany, Federal Republic of4.14.44.24.44.0
Italy115.920.717.617.117.2
United Kingdom115.019.212.18.35.6

GDP deflator.

GDP deflator.

Progress toward reducing inflation in the rest of the world was less marked in 1982 than in the industrial countries. While the average inflation rate for oil exporting countries declined from 13 percent to 10 percent, it rose from 31 percent to 36 percent for non-oil developing countries; however, this increase reflected an acceleration of inflation in a few large countries; the median inflation rate for non-oil developing countries dropped from 13.4 percent to 11.8 percent, the second consecutive year of decline from the 1980 peak of 15 percent. Continued weakness in demand management, particularly in the fiscal area, and the need, in many countries, for corrective price increases (Table 4 and Appendix, Table 12) impeded any further progress in reducing inflation.

Table 4.Major Country Groupings: Inflation Rates(In percent)
Proj.
19791980198119821983
Industrial countries18.09.18.67.26.0
Oil exporting countries210.912.712.910.09.5
Non-oil developing countries224.732.231.335.531.6

Mainly GNP deflators. See footnote 1 of Table 1.

Cost of living indices.

Mainly GNP deflators. See footnote 1 of Table 1.

Cost of living indices.

Throughout the world, the decline in nominal interest rates lagged behind the decline in inflation, a development that to a significant extent reflected trends in the United States. However, during the second half of 1982, as the rate of inflation in the U.S. leveled off and, at the same time, inflationary expectations began to decline, real interest rates in the United States did decline substantially, although remaining far above their historical levels. This decline in real U.S. interest rates exceeded that of other industrial countries and virtually did away with the substantial yield differentials among industrial countries that had prevailed earlier in the year. At the end of 1982, real short-term interest rates of the major industrial countries were all around 4 percent, still far above historical levels.

International Trade and Payments

The volume of world trade, which had grown by very little in 1980 and not at all in 1981, contracted by 1.5 percent in 1982, the first such contraction since 1975. Imports of oil exporting countries grew much more slowly than in previous years, those of the industrial countries were flat and those of the non-oil developing countries contracted by an estimated 4 percent. As noted above, the import capacity of these countries was reduced by a variety of factors including a deterioration in the terms of trade (for the fifth consecutive year), a fall in export volume, sharply rising interest payments, and a substantial contraction in net external financing.

There was a major realignment in the current account positions of the different groups of countries, as the combined current account surplus of oil exporters virtually disappeared while, as noted above, the combined deficit of non-oil developing countries contracted (Table 5). In some countries, this contraction reflected successful adjustment efforts undertaken in the recent past but, in many others, it was a development imposed by the drop in external financing and the exhaustion of gross international reserves. Countries in the latter category had to effect an especially large compression in import volume, and in many cases suffered declines in real output.

Table 5.World Payments Balances on Current Account(In billions of U.S. dollars)
Proj.
19791980198119821983
Industrial countries–6–41–1–4–10
Oil exporting countries691146513
Non-oil developing countries–61–89–103–90–70
Other countries–6–5–6
Memo: asymmetry1–4–21–45–93–77

Corresponds mainly to flows between industrial and oil exporting countries.

Corresponds mainly to flows between industrial and oil exporting countries.

It is worth noting that between 1979 and 1982 the overall export volume of non-oil developing countries expanded cumulatively by 21 percent, whereas their import volume rose by only 2 percent.

For 1983, the combined current account position of the industrial countries is expected to move more strongly into deficit, a consequence of the emergence of a large current account deficit in the United States and a reduced surplus in the United Kingdom, and to be offset by a rise in the current account surpluses of Japan, the Federal Republic of Germany, and other European countries. The combined current account surplus of the oil exporting countries is projected to remain negligible, while the combined deficit of the non-oil developing countries is projected to contract further. This further narrowing of the non-oil developing countries’ current account deficit assumes the successful pursuit of major adjustment programs in Brazil, Mexico, Argentina, and a number of smaller Western Hemisphere countries. It is interesting to note that the improvement in the combined current account position of Western Hemisphere countries was responsible for one third of the fall in the aggregate current account deficit of the non-oil developing countries in 1982 and for over two thirds of the further contraction forecast for 1983.

Notwithstanding the improvement in their combined current account position, the non-oil developing countries, which as a group had accumulated net international reserves over the preceding six years, lost reserves in the amount of $11 billion in 1982, as their net borrowing from private sources declined even more sharply than the fall in the current account deficit. For 1983 it is projected that this group of countries will regain a little under half of the reserves lost in 1982 thanks to the continued reduction in their current account deficit and an estimated doubling in their reserve-related borrowing (mainly use of Fund credit).

DEVELOPMENTS IN THE NON-OIL DEVELOPING COUNTRIES OF THE WESTERN HEMISPHERE

The trends of slow growth and curtailed foreign borrowing that have been described for the non-oil developing countries as a group characterize, in a much more pronounced fashion, the non-oil developing countries of the Western Hemisphere. In part this is true because developments in the Western Hemisphere group as a whole are strongly influenced by trends in Mexico, Brazil, and Argentina. However, a great many other countries in the region heavily dependent on net inflows of capital from private lenders also suffered a curtailment of net lending which, coming on top of weak export demand and the rise in interest rates, seriously affected their overall performance.

Output

The Western Hemisphere countries constitute the only regional group among the non-oil developing countries to have suffered an absolute decline in their combined output in 1982—their combined gross domestic product (GDP) contracted by 0.7 percent, whereas for all non-oil developing countries together it rose by 1.8 percent.

This contraction in output obviously was influenced to a significant extent by trends in the three largest countries of the region. The real GDP of Argentina contracted by 4 percent; that of Brazil was stagnant; and that of Mexico grew by only 2 percent—well below the 8 percent average annual expansion of the four preceding years (Table 6). Real output declines were, however, common throughout the region. Altogether, 12 countries out of the 26 Western Hemisphere countries covered by this survey experienced a contraction in the level of real output. Countries suffering particularly large output declines included Chile, Bolivia, Uruguay, the Dominican Republic, and Guyana—all of which faced major financial crises during the year. Apart from the 12 countries whose real GDP contracted, another three—Brazil, Bahamas, and the Netherlands Antilles—experienced zero real growth and more than half of those whose economies grew did so at a slower rate than in 1981. In no other regional grouping was the falling off in economic activity so severe, or so widespread. It also is worth noting that the weak growth performance of the Latin American economies continued the trend begun a year earlier when output in Argentina, Brazil, Paraguay, and several other countries fell in absolute terms while growth in certain others—notably Mexico and Chile—remained buoyant only because of large and ultimately unsustainable capital inflows.

Table 6.Major Western Hemisphere Non-Oil Developing Countries: Changes in Real GDP(In percent)
1979198019811982
Argentina7.10.7–6.0–4.3
Brazil6.87.9–3.5
Chile8.37.55.3–12.8
Colombia5.14.02.51.5
Mexico9.28.38.12.0
Peru3.83.13.20.7

A look at trends in median, as opposed to average, non-oil developing country growth rates by region conclusively demonstrates that the poor performance of the Western Hemisphere countries was not merely the consequence of what happened in a few large countries. The median GDP growth rate of non-oil developing countries in the Western Hemisphere dropped from 2 percent in 1981 to zero in 1982 but that of African non-oil developing countries remained stable, and that of European non-oil ones rose marginally. Median growth rates took a substantial dip in Asian and Middle Eastern countries, but these declines occurred from very satisfactory rates in the preceding two years. This was not so for the Western Hemisphere group of countries, whose median growth rate had been dropping steadily from its 1978 peak.

Inflation

The average inflation rate for non-oil developing countries of the Western Hemisphere accelerated sharply, whereas for many other country groupings it declined. However, in the case of inflation, unlike that of real output, this was the product of developments in a few countries. The median inflation rate for the region contracted sharply, from 14.8 percent to 9.4 percent. Inflation moved from two digits to one in 12 countries of the region and declined substantially in several others. Across the region inflation was influenced by the appreciation of the U.S. dollar, which contributed to a real effective appreciation of the currencies of most Western Hemisphere countries against the weighted average of trading partner currencies. The decline in the median inflation rate also reflected the adoption, in certain of the larger countries—notably Brazil and Chile—of economic strategies geared to the reduction of price increase (Table 7). The largest relative declines were experienced in the more open economies of Central America and the Caribbean.

Table 7.Major Western Hemisphere Non-Oil Developing Countries: Average Consumer Price Changes(In percent)
1979198019811982
Argentina159.5100.8104.5164.8
Brazil52.782.8105.698.0
Chile33.435.420.29.4
Colombia29.826.526.723.9
Mexico18.226.327.958.9
Peru67.759.275.464.5

In contrast, the rate of price increase accelerated markedly in Argentina and Mexico, where expansionary fiscal policies and an exhaustion of foreign exchange reserves combined to greatly intensify pressures on the domestic economies. Another country in this category was Bolivia, where major corrective price increases combined with expansionary demand policies to drive the rate of inflation up sharply.

The taking of corrective price action in many countries of the region is likely to preclude any significant progress on inflation in 1983. Although the adjustment programs for Brazil and Mexico do indeed aim for some reduction in the rate of price increase, in many others inflation, as measured by the rise in average consumer prices, is projected to intensify or merely stabilize.

International Trade and Payments

As noted above, a major part of the compression in the current account deficit of the non-oil developing countries is accounted for by the countries of the Western Hemisphere. And this external adjustment occurred despite an extremely weak export performance and a major increase in the net outflow on account of services and transfers.

In U.S. dollar terms, the combined exports of the non-oil developing countries of the Western Hemisphere are estimated to have contracted from $87 billion in 1981 to $80 billion in 1982, slightly below the 1980 level (Table 8). This fall in export earnings was principally the consequence of a 7 percent contraction in the unit value of exports, but it also subsumed a 1 percent decline in export volume. Almost every country in the Western Hemisphere suffered a fall in the U.S. dollar value of exports in 1982, with major declines occurring in Argentina (from $9 billion to $8 billion), Uruguay (from $1.2 billion to $0.9 billion), Brazil (from $23 billion to $20 billion), and the Dominican Republic (from $1.2 billion to $0.8 billion). Mexico’s exports were stable at $21 billion.

Table 8.Western Hemisphere Non-Oil Developing Countries: Summary Balance of Payments(In billions of U.S. dollars)
Proj.
197819791980198119821983
Current account1–13.3–21.4–33.2–43.3–36.8–22.7
Merchandise–1.2–4.1–9.1–8.43.713.5
Exports(48.0)(62.1)(80.8)(87.2)(80.1)(88.3)
Imports(–49.3)(–66.2)(–90.0)(–95.6)(–76.4)(–74.8)
Services and private transfers–12.1–17.3–24.1–34.9–40.5–36.2
(Of which interest on indirect investment)(–9.9)(–14.7)(–22.2)(–31.4)(–36.9)(–36.0)
Capital account222.027.431.740.821.620.6
Other30.51.60.4
Overall balance9.27.6–1.1–2.5–15.2–2.1

Excluding official transfers.

Including official transfers and errors and omissions.

SDR allocation and valuation adjustment.

Excluding official transfers.

Including official transfers and errors and omissions.

SDR allocation and valuation adjustment.

With net capital inflow to the Western Hemisphere group dropping sharply and investment income payments (that is, interest payments on the external debt) claiming a much larger share of export earnings than in the preceding year, the region’s imports contracted by nearly $20 billion. Virtually all of this represented a fall in the real import level, as the unit value of imports decreased by less than 1 percent.

This abrupt contraction in imports put an end to the substantial and accelerating rise in regional imports that had taken place over the preceding five years. Notably, in 1979 and 1980 the growth in the value of the region’s imports had averaged 35 percent. Over this two-year period the combined current account deficit of the non-oil developing countries of the Western Hemisphere rose from $13 billion to $33 billion; the increase was financed by a $10 billion rise in the net inflow of long-term and short-term private capital and by a $10 billion deterioration in the overall balance of payments position of the region. As a consequence, in 1980 the combined net international reserves of these countries contracted after four years of steady increase.

In 1981, as the world recession took hold, the combined imports of the non-oil developing countries of the Western Hemisphere expanded by only 6 percent. This diminution in the growth of imports incorporated absolute declines in the import levels of Brazil and Argentina, two countries that were already facing financial constraints. Even though the combined trade balance of the Western Hemisphere countries stabilized in 1981, their current account deficit moved upward from $33 billion to $43 billion as the rise in the level of their external debt and the sharp increase in interest rates combined to produce a $9 billion increase in investment income payments. In retrospect, the diminution in the rate of import growth during this period must be seen as insufficient, as a large increase in the current account deficit was covered by higher borrowing from private financial intermediaries (as well as by a $2.5 billion loss of net international reserves, incorporating a $1.7 billion fall in gross reserve holdings). It is clear, however, that many countries of the region expected the decline in export growth to be short-lived, an expectation shared by a large part of the international financial community (Table 9).

Table 9.Western Hemisphere Non-Oil Developing Countries: Current Account Financing(In billions of U.S. dollars)
Proj.
19791980198119821983
Current account deficit21.433.243.336.822.7
Use of reserves–7.90.71.710.6–1.8
Non-debt-creating flows, net6.85.66.85.65.9
Net external borrowing22.526.934.820.618.6
Long-term borrowing18.422.739.322.128.2
From official sources2.53.15.04.54.6
From private sources15.919.634.317.623.7
Reserve-related liabilities0.30.40.84.63.9
(Of which use of Fund credit)(0.2)(–0.2)(0.3)(1.3)(6.8)
Other short-term borrowing3.93.8–5.3–6.1–13.6

Disappearing hopes of a strong economic recovery in 1982 caused private lenders to reassess their exposure to major Latin American borrowers early in the year and with growing intensity after the second quarter. As a consequence, the net inflow of long-term private funds to the region was cut back by nearly $17 billion and—despite several emergency debt rollovers—there appears to have been an increase in the outflow of short-term capital as well. Despite the sharp cutback in imports in 1982 and the actual decline in the current account deficit, the non-oil developing countries of the Western Hemisphere experienced a combined balance of payments deficit amounting to $15 billion and lost gross international reserves in the amount of nearly $11 billion. In many instances, gross official reserve positions were virtually exhausted.

In absolute terms, the largest cutbacks in current account deficits occurred in Mexico (from $13 billion to $6.5 billion), Argentina (from $4.5 billion to $2 billion), and Chile (from $4.5 billion to $2.5 billion) (Table 10). Monetary authorities in the first two countries were forced to suspend the sale of exchange not only for capital remittances but also for a wide range of current transactions, and sizable arrears were incurred. In Chile, a comfortable international reserve position enabled the authorities to maintain free access to exchange for current transactions, but they were forced to abandon the fixed exchange rate policy which was the cornerstone of the authorities’ economic strategy.

Table 10.Major Western Hemisphere Non-Oil Developing Countries: Current Account Balances(In billions of U.S. dollars)
1979198019811982
Argentina–0.5–4.8–4.6–2.2
Brazil–10.7–12.9–11.7–15.9
Chile–1.2–2.0–4.7–2.5
Colombia0.6–0.2–1.7–1.8
Mexico–5.6–7.7–13.0–6.6
Peru0.7–0.1–1.5–1.4

An even more drastic curtailment of capital inflows to the region was avoided by action on the part of national monetary authorities, the Bank for International Settlements (BIS), and the International Monetary Fund, which undertook to convince private banks that any abrupt cutoff of credit to countries in severe financial straits would lead to extremely serious difficulties in these countries and might, possibly, precipitate an international financial crisis. In the context of negotiations of medium-term adjustment programs in Mexico, Argentina, and Brazil, private lenders agreed to increase their overall exposure, although at a much slower pace than that of previous years.

Notwithstanding the slower rate of net borrowing in 1982, the debt service burden of the non-oil developing countries of the Western Hemisphere—which increased very sharply in 1982—will decline only moderately in 1983. Interest payments on long-term and short-term debt together are projected to absorb 27 percent of exports of goods and services and amortization on the long-term debt only, 25 percent. By comparison, the same ratios in 1982 were 32 percent and 24 percent, respectively.

A forecast incorporating the adjustment targets of the countries that have entered into Fund-supported stabilization programs and the staff’s broad assumptions regarding the policies which other Western Hemisphere countries will follow in 1983 (subject to the constraints of capital availability and international reserve positions) points to a continued contraction in the combined current account deficit of the region—to approximately $23 billion—with a further small contraction, of 2 percent, in total import value. This is based on the assumption of a 10 percent recovery in the value of exports (3 percent on account of unit values and 7 percent on account of volume), which is consistent with the 1.5 percent recovery in real output of the industrial countries. The implicit further 5 percent contraction in total import volume is, of course, predicated on the pursuit of adjustment policies in a number of large countries. This forecast incorporates a greater net use of Fund credit than at any time in the past ($6.8 billion compared with $1.3 billion in 1982 and $0.3 billion in 1981) but, on the other side, a $2.7 billion net repayment of emergency short-term lines of credit from the BIS and national lenders and a small ($1.8 billion) buildup of gross reserve assets, which is viewed as the minimum to restore such assets to a minimum working level in a number of countries.

APPENDIX
Table 11.Non-Oil Developing Countries: Changes in Real GDP(In percent)
Proj.
19791980198119821983
Weighted Averages5.04.92.81.82.4
Africa2.54.42.91.31.4
Asia4.65.14.84.15.3
Europe4.11.62.22.31.5
Middle East4.56.74.22.55.4
Western Hemisphere6.75.90.5–0.7–0.3
Medians4.43.43.22.43.0
Africa4.02.43.03.03.4
Asia6.15.45.43.84.5
Europe5.72.62.22.30.6
Middle East4.55.34.83.54.7
Western Hemisphere4.73.52.02.0
Table 12.Non-Oil Developing Countries: Changes in Consumer Prices(In percent)
Proj.
19791980198119821983
Weighted Averages24.732.231.335.531.6
Africa18.919.922.118.521.2
Asia6.612.79.85.65.8
Europe27.540.526.125.718.3
Middle East25.942.434.738.435.1
Western Hemisphere49.658.365.586.373.8
Medians12.015.113.411.810.0
Africa11.713.613.014.112.0
Asia7.915.013.08.07.5
Europe14.316.215.719.614.2
Middle East14.015.211.211.813.0
Western Hemisphere15.618.114.89.49.0

Commentary*

GUSTAVO LUNA UZQUIANO

Linda Koenig’s paper discusses the development prospects of the non-oil developing countries of the Western Hemisphere against the background of the world economic recession. The analysis concerns the performance over the last few years of economic growth, inflation, trade, and International payments. Focusing on the short term, Koenig leaves aside the major questions of economic policy—which will be discussed later during the seminar.

I would like to make the following points with respect to the paper.

1. Economic Growth

In 1982 the world economic recession and the declining output of the industrial countries in terms of gross domestic product (GDP), especially that of the United States (which decreased by 2 percent), depressed the growth rates of the non-oil developing countries, and meant that most commodity prices were at their lowest levels in three decades and that the volume of international trade had ceased to grow. Many developing countries, already struggling with large debt repayments, were thus seeing their problems exacerbated by the rise in interest payments, adverse trends in the terms of trade, and depressed export volumes, not to mention a sharp decline in per capita income, aggravated by a high level of unemployment.1

The foregoing shows the large extent of economic interdependence among our countries, strikingly evident in a situation of increasingly overwhelming crisis, as at present.

In her analysis of the outlook, Koenig states that the recovery of the industrial countries “assumes” a recovery of the real output growth rate to 2 percent in 1983, which assumes, in this relationship of interdependence, a rise in economic growth of 2.4 percent for the non-oil developing countries. This is definitely inadequate. But more serious is the exception made for the non-oil developing countries of the Western Hemisphere, whose combined production is expected to decrease again, by 0.3 percent. An initial conclusion we might draw from what has been said is that a recovery of output and a slight improvement in demand in the industrial countries would mean an adjustment in world trade, enabling the non-oil developing countries to expand their exports and thus improve their balances of payments.

In the non-oil developing countries of the Western Hemisphere, however, inflation apparently accelerated in 1981–82, though countries fared differently in this respect. While it is desirable to stabilize inflation, inflationary expansion in a large number of developing countries is possible in 1983. This is said given the unfortunate structural constraints on a number of our economies and because immediate, drastic anti-inflationary policies could aggravate unemployment and depress the income of the public. This sociopolitical reality leads us to prefer the alternative of a gradual, progressive, medium-term anti-inflationary policy for certain countries in the region. From the standpoint of our countries, it is difficult for me to understand how economic growth can be stimulated and the planned targets met if we assume that the instruments of anti-inflationary policy mean reducing expenditure, restricting credit, and curbing domestic demand.

2. International Trade and Payments

In general terms, it is confirmed that the growth rate of world trade fell significantly in 1982. While the current account deficit of the industrial countries will be much higher in 1983, that of the non-oil developing countries is expected to contract even more.

In the past, many of the non-oil developing countries of the Western Hemisphere have financed their chronic current account deficits by steadily expanding their external borrowing, largely from private international banks, and by drawing down their international reserves. This state of affairs has become unsustainable because, while international trade has been contracting, commodity prices have fallen in an unprecedented manner, the terms of trade have deteriorated, and interest payments have reached impossible levels, revealing the vulnerability of the international financial system. In general terms, therefore, the adjustment process implies adoption of anti-inflationary policies, improvement of international trading conditions, and the inducement of more accessible credit policies on the part of international banks (Mexico, Brazil, Argentina).

In this framework we note the prospect that the debt service burden of the non-oil developing countries of the Western Hemisphere will decline moderately in 1983. Interest payments should not exceed 27 percent of exports of goods and services, reducing the region’s overall current account deficit to some $23 million. All this depends on the industrial countries’ achieving a real output increase on the order of 2 percent, otherwise, as another paper points out, there will be serious consequences for the trade and growth of the developing countries and a further reduction in lending to those countries by private banks.

Commentary*

JOSÉ PAEZ AND JULIO ROMERO

Ms. Koenig’s paper raises a number of issues. Members of the International Monetary Fund are classified for the purpose of this paper as industrial countries, oil-exporting countries, and non-oil developing countries. The classification itself suggests the prevalent ranking by order of importance in the world economic order, with the non-oil developing countries at present being of little significance in its composition. The analysis focuses basically on three issues: first, output as measured by the change in gross domestic product; second, inflation; and third, the balance of payments. The paper presents a study that is a sort of diagnosis of the world economy, and of Latin America in particular; it proves what we all know, namely, that the slowdown in the pace of economic activity throughout the world has been such that in Latin America there was a significant decline in the combined gross domestic product. In addition, there has been an increase in inflation in Latin America as a product of the sharp price increases in the major countries of the region. Finally, the projections for 1983 present what might be termed an optimistic vision in that they predict a reactivation of the world economy, a decline in the rate of inflation, and a general improvement in the world economy as a consequence of the reduction in the price of oil.

Koenig’s paper suggests that the considerable increase in the importance of the oil factor has contributed to all the economic problems facing the world economic order. Furthermore, there would appear to be some suggestion that the analysis of the behavior of the Latin American region stems largely from an examination of events in Mexico, Brazil, and Argentina, while the remaining countries other than Venezuela—which is classified as an oil exporting country—remain on the periphery. Therefore, their behavior is reflexive. One might well ask how long oil and its derivatives will continue to set the pace for world events. Given the challenge implied by our current situation with regard to world trade, and, fundamentally, the behavior of oil prices, would it be possible to achieve successfully a new economic order, the outgrowth of a new strategy, in the short or medium term?

The Fund seeks to maintain stability throughout the world by making recommendations to its members; however, it is finding that its prescriptions cannot be implemented in many countries of our region simply because the actual situation does not correspond to the criteria sketched out by the Fund. On some occasions, this may include the prevailing ideology in a country, which can make it impossible to follow up on some Fund recommendations. It would thus seem that there are factors affecting the international economic order that are outside the scope of action or the influence of the Fund. It is obvious that few relationships have changed in the developed world, or shall we say industrial world, and that the developing countries, as noted earlier, behave reflexively. Koenig’s paper appears to suggest that there are some countries in the developed world, such as the United States, Canada, Japan, which set the pace for the rest of the world.

The paper shows clearly that increasing net investment can still validly be considered a necessary condition for growth and development. Consequently, the role of external financing in the countries that receive capital remains and will continue to be significant. The information provided by Koenig shows the high degree of correlation between dynamism in the developing world and the flow of external financing. Accordingly, when it is posited that some of the major countries in the world are not in a position to sustain greater growth than at present, this underlines the fundamental importance to us of a limiting factor, namely, the flow of external resources into the developing countries. The prospects should not be assessed too optimistically because from the outset there is a limiting factor, the scant growth in the developed or industrial countries today. The possibilities for improving the financial and economic positions of all countries, increasing their rates of growth, decreasing their balance of payments shortfalls, all depend on the price of oil and petroleum derivatives remaining at their present levels or declining. The mere fact that a drop in the price of oil is announced causes us to change our projections, meaning that oil prices will continue to be a factor of great importance to our economic development in the medium term.

The criteria used in the world economic outlook exercise to distinguish a country as an oil exporter are that oil exports (net of any imports of crude oil) account for at least two thirds of the country’s total exports and that such net exports are at least 100 million barrels a year (roughly equivalent to 1 percent of annual world exports of oil). For a breakdown of the country groups see World Economic Outlook: A Survey by the Staff of the International Monetary-Fund, IMF Occasional Paper No. 9 (Washington, May 1982), pp. 140–41.

The 1983 projections cited in this paper are those made by the Fund staff in February 1983. Subsequent estimates indicated, for the industrial countries, a somewhat faster recovery in output, a better current account balance, and a more rapid reduction in inflation than originally had been foreseen, linked to a lower than projected level of petroleum prices. However, the situation of the non-oil developing countries and, in particular, those of the Western Hemisphere was not materially altered by these changes.

The original version of this paper was written in Spanish.

See, World Bank, World Development Report 1982.

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