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Finance & Development, March 1978
Article

Recent growth trends in developing countries: From a World Bank staff study of prospects for developing countries

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1978
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The economic concerns of the developing countries in the mid-1970s have been dominated by the need to adjust to the world-wide inflation, the rise in energy prices, and the recession of 1974-75. The degree to which their economic policies and management met this challenge was reflected in their growth rate of 4.3 per cent in 1975, whereas the Organization for Economic Cooperation and Development (OECD) countries as a group recorded a decline in output (see Table 1). Several factors combined to strengthen the developing countries’ economies in 1975 and 1976. Some of these were fortuitous: South Asia and sub-Saharan Africa had bountiful harvests, and high prices for exported tropical beverages were triggered by frosts affecting coffee in Brazil. But the developing countries’ increasing capability for economic management, evident in their adjustment to rapidly changing world economic conditions, was an important underlying factor.

Some of the adjustments made in the mid-1970s by the developing countries were of a short-term nature—involving the use of fiscal and monetary policies, of expanding Fund facilities, and of international capital markets—to reduce the short-term impact of fluctuations in their export earnings and of other temporary factors on their economies. Most of these countries were able to handle the “boom and bust” of 1972-75, although some were able to do so better than others. Countries exporting minerals other than oil had particular difficulties in managing fluctuating export earnings.

The developing countries, like the rest of the world, also had to adjust to the long-run effects of the increased oil prices. Domestic prices of oil and power needed to be raised to international levels, despite the considerable impact this move had on living standards—increasing the cost of transport, agricultural inputs, and cooking and lighting fuels. Oil importing countries also needed to expand their exports to meet the additional cost of oil imports. These adjustments are now for the most part complete. However, new adjustments to changing external factors are constantly called for: for example, coffee exporting countries are now having to readjust to the end of the coffee boom. One of the principal effects of the economic shocks of the mid-1970s is likely to be an improved capacity for economic management in many of the developing countries, which still face problems of inflation, export expansion, and employment creation.

The adjustment process was considerably eased by the relative smoothness with which additional financial resources were made available to the developing countries.

Table 1Estimated real GDP growth: developing and developed countries, 1374-76(In per cent per annum)
Developing countriesOECD countriesa
Including

BOP-

deftcit oil

countries
Excluding

BOP-

daficit oil

countries
19746.96.5-0.1
19754.33.8-1.1
19765.94.95.3
Average 1975-765.14.42.0
GDP (In billions of U.S. dollars)
19758156593,800
Source: World Bank staff estimates.

Excluding Greece, Iceland, Portugal, Spain, and Turkey.

Source: World Bank staff estimates.

Excluding Greece, Iceland, Portugal, Spain, and Turkey.

Official bilateral concessional aid expanded to help meet the needs of the low-income developing countries. International banking facilities and capital markets served as intermediaries to mobilize a large share of the Organization of the Petroleum Exporting Countries (OPEC) surpluses for the use of the intermediate and the upper middle-income developing countries and, to a lesser extent, of the centrally planned economies. (The extent and the nature of the debt obligations assumed by these countries were reviewed in “The external debt of developing countries” by Helen Hughes in the December 1977 issue of Finance & Development.) In addition, the augmented financing facilities of the Fund added to the assistance available to these countries for current account financing.

In retrospect, it is clear that by pursuing expansionary policies during a world-wide recession, the developing countries contributed to the recovery of the international economy. The developing countries’ share of total OECD exports, which had declined from 21 per cent in 1966 to 19 per cent in 1973, began to increase in 1974—in part as a result of additional sales to OPEC markets—and reached a peak of 25 per cent in 1975 in the depth of the recession.

This article reviews recent growth trends in five main groups of the developing countries: (i) the low-income group; (ii) the lower middle-income group; (iii) the intermediate middle-income group; (iv) the upper middle-income group; and (v) the balance of payments (BOP) deficit oil exporting group (the income level associated with each of these groups is identified in the chart). Some of the estimates have been built up, country by country, from a sample of 40 developing countries that represent more than 85 per cent of the population and of the total gross domestic product (GDP) of all the developing countries.

ChartDeveloping countries: population by income groups, 1976a

Source: World Bank staff estimates

Note: The balance of payments deficit oil exporting countries included in the sample used in this study ere Indonesia (low-income), Nigeria (lower middle-icome). Algeria and Ecuador (intermediata middle-income), and Venezuela and Iran (upper middle-income) This group is treated separately for the purpose of this analysis.

a Includes balance of payments deficit oil exporters.

b Plus the Bahamas, Gabon, Singapore, and Venezuela

Low-income countries

Growth and external payments trends were not altogether favorable in 1374-76 for the two quite distinct groups of countries in the low-income category: the least developed countries in sub-Saharan Africa and those in the South Asian subcontinent. Although many of them have a poor natural resource base, recently there have been considerable improvements in agricultural production, particularly in South Asia.

The larger countries in the low-income group have improved their output in agriculture, industry, and exports. However, some individual countries in this group, such as Bangladesh, are very poor in natural resources and are still caught in a vicious circle of poverty. They have made little improvement in historical growth rates, which remain below 3 per cent per annum, and have little prospect of improving in the medium term.

The average rate of annual growth in real output of the low-income countries for 1974-76 has been estimated at 3.3 per cent, compared with 3.6 per cent in 1968-73. After I973, their current account deficit rose only slightly as a proportion of GDP, and their debt service ratio appears to have declined.

For this group in general, weather conditions are a more important short-term determinant of growth than fluctuations in the international economy. The four years of severe drought in the Sahel and the poor monsoon in South Asia, for instance, help to explain the slow growth up to 1974. While improved weather conditions and better harvests contributed to expanded agricultural output in 1975 and 1976. there were also other factors contributing to the overall growth performance of this group. Zaire, a typical mineral-rich country, had benefited from high mineral prices in 1972–74 and had borrowed heavily in that boom. Subsequently, when copper prices fell, it faced a major problem in adjusting import demand and investment to the prospect of lower long-term growth, at a time when its borrowing capacity was already strained. The situation in Zaire was similar to that in some other developing countries that were able to borrow relatively easily and where much of this borrowing initially allowed them to postpone adjustment.

At the other end of the spectrum, India was stimulated by the increase in oil prices to augment its coal output, to improve the efficiency of its energy supply sector, and to make a concerted effort to improve export performance. Together with favorable weather conditions, increased workers’ remittances, and better harvests, these efforts achieved an accelerated growth and secured for India a strong balance of payments situation by the end of 1976. This has been maintained into 1977.

Table 2Low-income country trends, 1968-76(In constant prices)
1966-731974-761975
(In per cent)(In billions of

U.S. dollars)
Average annual growth rates
GDP3.63.3136.4
Imports1.0-5.721.0
Exports2.6-2.313.8
Import capacity of exportsa2.5-8.413.8
Average ratio (In per cent)
Currant account deficit/GDP3.54.5
Debt service ratiob17.414.3
Source: World Bank staff estimates.

Based on export data adjusted for the effects ot barter terms or trade.

Total public and private debt service payments divided by total exports plus workers’ remittances Sample panel countries only (Bangladesh. Ethiopia, India, Kenya, Madagascar, Pakistan, Sri Lanka, and Tanzania).

Source: World Bank staff estimates.

Based on export data adjusted for the effects ot barter terms or trade.

Total public and private debt service payments divided by total exports plus workers’ remittances Sample panel countries only (Bangladesh. Ethiopia, India, Kenya, Madagascar, Pakistan, Sri Lanka, and Tanzania).

The improved outlook in India, which dominates the statistics in Table 2, contrasts with trends in other major countries in this group, which have been slower in departing from autarkic national policies. Some have achieved relatively high levels of education, health, and welfare despite low per capita incomes, but they have done so at the expense of growth. Although the foreign sector may be small in such large countries, an increase in exports can have dynamic and wide-reaching effects on domestic expansion.

Lower middle-income countries

Despite more complex economies, heavier oil imports, and larger foreign trade sectors than the low-income countries, most countries in this group adjusted to the changed oil price situation quickly, and began borrowing from private sources to maintain investment expenditures and prevent declines in employment and income. Some of these countries benefited from high commodity prices (for example, of phosphates and sugar) in 1973 and 1974, and in 1976 several enjoyed high earnings on coffee and other tropical beverages. The annual real growth rates in output averaged 5.3 per cent in 1968-73 and 5.0 per cent in 1974-76 (see Table 3).

Several of the countries in this group are entering a period of export-led growth based on commodity and processed commodity exports. A few are diversifying into manufactured goods. As a group, these countries borrowed heavily to weather the recent economic shocks. After 1973, their current account deficit rose substantially, but, even with foreign borrowings, their average debt service ratio is not expected to go any higher that it was between 1968 and 1973.

Table 3Lower middle-income country trends, 1968-76(In constant prices)
1968-731974-761975
(In per cent)(In billions of

U.S. dollars)
Average annual growth rates
GDP5.36.078.9
Imports1.77.725.6
Exports5.4- 1.618.1
Import capacity of exportsa3.0-2.518.1
Average ratio (In per cent)
Current account deficit/GDP2.66.5
Debt service ratiob14.311.5
Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms of trade.

Total public and private debt service payments divided by total exports plus worker’ remittances. Sample panel countries only (Bolivia, Cameroon, Egypt, Ghana. Ivory Coast, Liberia, Morocco, the Philippines, Senegal, Sudan, and Thailand).

Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms of trade.

Total public and private debt service payments divided by total exports plus worker’ remittances. Sample panel countries only (Bolivia, Cameroon, Egypt, Ghana. Ivory Coast, Liberia, Morocco, the Philippines, Senegal, Sudan, and Thailand).

Intermediate middle-income countries

With oil imports higher and foreign trade more important, this group of developing countries was sharply affected by fluctuations in the world economy. The declines in growth that took place between 1974 and 1976 were, however, from relatively high levels (see Table 4). These countries accounted for more than half of all borrowing from private sources by developing countries between 1973 and 1976, and service payments have grown accordingly. The East Asian countries adjusted quickly and were able to increase their exports of manufactured goods as soon as world markets began to recover in 1976. The tropical beverage exporters, particularly in Latin America, benefited from high prices after 1976. The rapidly growing countries have resumed high rates of export and overall growth that will enable them to service the debts they incurred. A number of countries, however, are lagging behind.

Some of the larger countries in this group, mainly in Latin America, have followed capital-intensive production policies with consequent lags in employment creation. They have large pockets of poverty, and their creation of social infrastructure is lagging behind the growth of GDP. This has led to economic bottlenecks and social tensions. In the short to medium term, it will probably be necessary to increase rural productivity, to improve other productive employment opportunities, and to expand the supply of public goods in these countries. While expenditures in these areas would improve the conditions in which people live, they may well reduce measured growth rates because of the long gestation periods of such projects and because the nonmonetary benefits of such expenditures are not fully recorded in GDP accounts.

Table 4Intermediate middle-income country trends, 1968-76(In constant prices)
1968-731974-761975
(In per cent)(In billions of

U.S. dollars)
Average annual growth rates
GDP7.716.0332.1
Imports10.95.167.5
Exports9.68.549.0
Import capacity of exportsa9.62.549.0
Average ratio (In per cent)
Current account deficit/GDP2.25.4
Debt service ratiob18.119.3
Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms of trade.

Total public and private debt service payments divided by total exports plus workers’ remittances. Sample panel countries only (Brazil. Chile, Colombia, Guatemala, Korea. Malaysia, Mexico, Peru, Syria, Tunisia. Turkey, and Zambia).

Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms of trade.

Total public and private debt service payments divided by total exports plus workers’ remittances. Sample panel countries only (Brazil. Chile, Colombia, Guatemala, Korea. Malaysia, Mexico, Peru, Syria, Tunisia. Turkey, and Zambia).

Upper middle-income countries

In general, this group of countries was directly affected by adverse world economic conditions. Their real output after 1973 was sharply below the 1968-73 level (see Table 5). But the countries in this income category form a heterogeneous group. They include relatively highly developed economies emerging from long periods of economic mismanagement and stagnation, such as Argentina; socialist planned economies, such as Yugoslavia; banking centers, such as Lebanon and the Bahamas; and entrepot trade centers, such as the Netherlands Antilles, Hong Kong, and Singapore. Aggregate analysis is thus not meaningful.

Table 5Upper middle-income country trends, 196B-76(In constant prices)
1968-731974-761975
(In per cent)(In billions of

U.S. dollars)
Average annual growth rates
GDP6.23.8111.5
Imports9.47.040.5
Exports7.67.835.2
Import capacity of exportsa8.64.135.2
Average ratio (In per cent)
Current account deficit/GDP1.73.4
Debt service ratiob18.215.9
Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms ol trade.

Total public and private debt service payments divided by total exports plus workers’ remittances. Sample panel countries only (Argentina, Jamaica, and Yugoslavia).

Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms ol trade.

Total public and private debt service payments divided by total exports plus workers’ remittances. Sample panel countries only (Argentina, Jamaica, and Yugoslavia).

BOP deficit oil exporting countries

These countries recorded an annual average real growth rate of 8.1 per cent in 1974-76 compared with 9.4 per cent in 1968-73 (see Table 6). However, the countries span a wide range of per capita incomes, from Indonesia at $210 to Venezuela at $2,350. They benefited from large increases in income and import capacity with the oil price increases between 1973 and 1975, and were able to absorb most of the balance of payments gains by a very rapid growth in imports. These countries had already grown rapidly before 1973, led, of course, by the growth in petroleum exports. They used the sharp increase in their export earnings after 1973 to raise investment and consumption levels.

Overall GDP growth rates reached a peak in 1974 and have since declined (see Table 6). Two factors have contributed to the decline in growth rates. First, expansion prior to 1973 was based largely on a rapid increase in the volume of petroleum production. As a result of the oil price increase, world demand for oil stagnated in 1974-75 and is expected to grow much more slowly in the future. The major production and export sectors in these countries must also grow more slowly, at about 3 per cent per annum, or less than half the growth rate between 1960 and 1975. Export surpluses that peaked at 17.1 per cent of GDP in 1974 fell sharply in 1975 and 1976. Second, much of the investment undertaken has been in heavily capital-intensive projects with long gestation periods and even longer periods before high capital utilization, and hence high productivity, can be achieved. Some of the investment has not been directly productive in adding to real GDP. The implied incremental capital/output ratio seems to be rising sharply in these countries, suggesting a dampening effect on recorded growth.

Table 6BOP deficit oil exporting country trends, 1968-76(In constant prices)
1968-731974-761975
(In per cent)(In billions of

U.S. dollars)
Average annual growth rates
GDP9.48.1155.8
Imports9.330.247.2
Exports10.5— 0.753.0
Import capacity of exports19.922.453.0
Average ratio (In per cent)
Current account deficit/GDP2.1-6.9
Debt service ratiob7.35.7
Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms ol trade.

Total public and private debt service payments divided by total exports plus workers’ remittances Sample panel countries only (Algeria, Ecuador. Indonesia, Iran, Nigeria, end Venezuela).

Source: World Bank staff estimates.

Based on export data adjusted for the effects of barter terms ol trade.

Total public and private debt service payments divided by total exports plus workers’ remittances Sample panel countries only (Algeria, Ecuador. Indonesia, Iran, Nigeria, end Venezuela).

Overview

The developing countries have managed to continue domestic expansion at only moderately slower rates during the turbulent period in the world economy since 1973. A number have done so by substantial borrowing from private sources, and others by receipt of official concessional aid. As a group, they have not only maintained domestic growth out have also helped to avoid an even deeper world recession and a greater contraction in world trade than actually took place in 1974 and 1975.

The unprecedented character of recent international disturbances has created uncertainties about policy reactions in developed and developing countries alike. In retrospect, it was a considerable achievement that many of the developing countries were able both to continue their long-term structural adjustments to post-1973 conditions in the world economy and to cushion the impact of unprecedented international short-term fluctuations on their domestic economies. Their demonstrated ability to undertake effective and responsible national economic policies is an important factor lending support to optimism regarding their long-run prospects for continuing growth—a view that is in keeping with the experience of the past 25 years of development (see David Morawetz, “Twenty-five years of economic development,” Finance & Development, September 1977).

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