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The prospects for the developing world a review of recent forecasts: A somber view of the economic prospects for the developing countries during the 1980s is reflected in a number of recent international reports

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1981
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Shahid Javed Burki

What are the prospects for the developing countries in the 1980s? Most recent assessments point to lower growth rates, greater numbers of poor, and scarcer and more expensive food and energy. Together with much higher populations, these make for a dismal outlook. The predictions depend of course on a number of differing assumptions about exactly how these key factors will take shape, and how they will affect the economies concerned. But there is a consensus that the boom days of the 1960s are over. And although the developing countries as a group responded well to the economic shocks of the early 1970s, they face a much more difficult situation in the 1980s.

What makes the situation particularly difficult for the developing countries is that they have had to respond to massive external shocks in a period of less than a decade. Although as a group these countries responded well to the difficult situation they faced in the early 1970s, they no longer have the economic resilience and the financial reserves to respond to the worsening conditions forecast for the next decade. They will need much greater help from outside: in the next few years, the very large demands for external capital of the poorest among them will have to be met on highly concessionary terms. Given the high interest rates likely to prevail in the international financial markets, the middle-income countries may also need some softening in terms of the capital they will need to borrow. In other words, the developing countries are reaching out for assistance at a time when the economic health of the industrial countries is not very sound either. To keep the global economy in good health during the 1980s, therefore, will need the efforts of developed and less developed countries working in harmony in support of policies which will foster world trade, investment, and aid.

This article draws upon a number of recent reports on the future of the world economy to form a composite picture of development prospects that shows a remarkable and pessimistic consensus. These reports include the World Bank’s World Development Reports, which have used a global economic model to project economic changes in the Third World in the 1980s. The 1978 Report focused on the problem of rural poverty and agricultural backwardness in Asia and Africa; in 1979, the emphasis was on the prospects of rapidly urbanizing middle-income countries; in 1980, the role of human resource development in economic change received a great deal of attention. All three Reports provide a rich statistical background on various aspects of the economies of the Third World. The Global 2000 Report prepared by the United States Government at the request of the President used the results of global models for a number of individual sectors—food and agriculture, forests, water, energy, and so on. However, the links between these models are not sufficiently well developed to present the types of scenarios contained in the World Development Reports. Interfutures, a study of the world economy sponsored by the Organization for Economic Cooperation and Development (OECD), looks in great detail at “the future development of advanced industrial societies in harmony with that of developing countries.” This concern with interdependence between developed and developing countries adds a useful dimension to the analysis of other reports. The Independent Commission on International Development Issues (Brandt Commission) Report, North-South: A Program for Survival is essentially a synthesis of the results of these and other reports with emphasis on the policy initiatives that the world community can take to avert “economic, political and social disaster” in the remaining decades of this century. Development Cooperation, the annual reports issued by the Chairman of the Development Assistance Committee of the OECD; the United States and World Development, the annual reports of the Overseas Development Council; and the International Monetary Fund’s World Economic Outlook provide useful insights into the short-term problems being faced by the various parts of the world economy.

The remarkable thing about these reports is the degree of concern and the consensus they show about the future of the developing countries. In reaching agreement, the institutions that have produced these reports have moved from the guarded optimism of the early 1970s to a grim pessimism for the early 1980s.

Adjustment in the 1970s

There were two shocks in the early 1970s to the Third World economies. First, widespread failure of harvests in a number of regions—China, the Sahel, South and Southeast Asia, and the Union of Soviet Socialist Republics—resulted in an unprecedented run on world grain supplies. As a result, the poor countries which had been meeting their food deficits from food aid now had to buy from the grain markets. Stocks were down and supplies were low. Within a few months in the winter of 1972-73, the price of wheat doubled and that of rice increased nearly two and a half times. This put a severe strain on the balance of payments situation of the developing countries. The low-income countries suffered very badly: their expenditure on food imports in 1973 was three and a half times as large in 1973 as in 1972 (see Table 1).

Second, the increase in the price of oil, announced by the Organization of Petroleum Exporting Countries (OPEC) in late 1973 added billions of dollars to the already large current account deficits of the developing countries. The price increased three times, with the result that in 1974 the developing countries paid $14 billion more for the import of nearly the same amount of oil as they had bought in 1973. Increases in the price of food and oil—two of the most essential needs of the developing countries—added $18 billion to their import bill. This represented a sizable resource transfer, equivalent to 55 per cent of the increase in the developing countries’ combined output between 1972 and 1973. As the effects of these price increases began to work through the economies of the developing countries, their long-run future looked less bright than their recent past.

Table 1Food and oil imports of the oil importing developing countries
1972197319741975
Oil imports
Volumein millions of barrels a day
Low-income countries0.40.40.40.4
Middle-income countries3.34.04.24.5
Total3.74.44.64.9
In U. S.dollars
Price per barrel, c. i. f.3.04.212.412.3
Cost of net importsIn billions of U. S. dollars
Low-income countries0.40.61.81.8
Middle-income countries3.66.119.220.3
Total4.06.721.022.1
Foodgrain imports1
VolumeIn millions of metric tons
Low-income countries6.511.411.714.8
Middle-income countries19.821.226.023.3
Total26.332.637.738.1
Price per tonIn U. S. dollars
Wheat270142193160
Rice147350542363
Cost of food importsIn billions of U. S. dollars
Low-income countries0.72.53.42.9
Middle-income countries1.73.76.34.4
Total2.46.29.77.3
Source: World Bank data.

Includes rice and wheat.

Average price of U.S. And Canadian wheat.

Source: World Bank data.

Includes rice and wheat.

Average price of U.S. And Canadian wheat.

But, despite these adverse circumstances, the developing countries managed to turn in a good performance. Between 1967 and 1973, for example, the output of these countries as a group had increased at the average rate of 5.9 per cent per year; in 1973-78, it increased at a rate only slightly lower, at 5.4 per cent. This performance was the result of a number of wisely chosen “adjustment policies,” including increased emphasis on exports, additional borrowings from the international financial markets to pay for the higher cost of imports, and a fairly significant reduction in the level of nonessential imports.

Different groups of oil importing countries chose different policies. The countries in Southeast Asia put additional efforts into increasing their exports, the Latin American countries relied more on additional borrowings from commercial banks, and the poor countries in South Asia and sub-Saharan Africa attempted to eliminate some of the fat that existed in their imports. All three groups succeeded—albeit in varying degrees—in absorbing the twin shocks of food and oil price increases. The World Bank found this performance encouraging. It also drew comfort from the decline in the real price of oil between 1974 and 1978. According to its 1978 Annual Report, “economic growth in the developing countries has exceeded original expectations, and their economic, managerial, and physical capacity for further development has been greatly strengthened.”

It was in this atmosphere of hope that the World Bank provided its first systematic set of projections for the performance of the developing countries in the 1980s. The World Development Report, 1978 predicted that the combined gross domestic product (GDP) of the developing countries in the 1975-85 decade would increase at the rate of 5.7 per cent per annum. This was even better than the very impressive performance of the Third World during the third quarter of the present century: between 1950 and 1975, GDP in the developing countries had increased at the rate of 5.5 per cent per year. The developing world was expected to improve on its past performance, despite the fact that the industrial countries’ growth in output was expected to slow down somewhat—from about the 5 per cent average they maintained in the 1960s and early 1970s to about 4.2 per cent per annum between 1975 and 1985. Implicit in these growth forecasts for the developing and industrial worlds was the assumption that some slight “delinking” would occur between these two parts of the global economy, because of some strengthening of links among the countries of the Third World.

By far the most cheerful part of the picture painted at that time was the impact of Third World growth on the incidence of poverty. A substantial reduction in the level of poverty was predicted in the developing countries: the number of absolute poor was expected to decline from 770 million in 1975 to 600 million by the end of the century. At 600 million, the poor would represent only 17 per cent of the population of the developing countries, down from as much as 37 per cent in 1975. The Third World, in fact, could do even better than this if it pursued the right kind of policies. For instance, if the share of the poorest in incremental wealth could be increased to 45 per cent compared with 25 per cent—the historical norm—the developing countries could virtually eliminate the worst forms of poverty by the year 2000. Such a high level of income distribution was considered to be politically difficult but not altogether unrealistic.

By contrast, the World Bank’s World Development Report, 1980 sketches a relatively pessimistic picture for the developing countries in the 1980s. There are three reasons for this change in perception about the future of the Third World. First, it is now believed that the world economy is going through a significant and irreversible structural change. The most important aspect of this change is that the industrial economies are not likely—perhaps not ever likely—to return to the boom days of the quarter century following World War II. The changes in the patterns of demand and production in the developed countries, the declines in productivity growth, the limitation on the ability to cope with inflation, and the high cost of developing alternative sources of energy are thought to ensure lower rates of economic growth in their economies during the remaining two decades of the present century (see Table 2).

Shahid Javed Burki

a Pakistani, holds the position of Chief, Policy Planning Division in the World Bank. A graduate of Punjab University (Pakistan), Oxford University (U. K.), and Harvard University (U.S.A.), he joined the Bank as a Senior Economist in 1974. His publications include: A Study of Chinese Communes (Harvard University, 1970) and Pakistan Under Bhutto, 1971-77 (Macmillan, 1980).

Table 2Changing perceptions of the Third World economic situation, 1978-80
WorldWorld
DevelopmentDevelopment
Report, 19781Report, 19802
Industrial countries’In per cent per annum
GDP4.23.7
World trade
Increase in world
trade6.45.5
Increase in
developing
countries6.36.0
Net capital flows
Commercial4.8
Concessionary4.3
Third World GDP
Middle-income
countries5.95.5
Low-income
countries5.04.6
Projected 1990 GDP
per capita3
Middle-incomeIn U. S. dollars
countries1,7401,620
Low-income
countries255240
Source: World Development Reports, 1978, 1980.

Rates projected for 1975-85.

Arithmetical average of the rates for 1980-85 and 1985-90. The projections here are based on the 1980 Reports high-case” scenario,

GDP per capita projections are in 1977 dollars.

Source: World Development Reports, 1978, 1980.

Rates projected for 1975-85.

Arithmetical average of the rates for 1980-85 and 1985-90. The projections here are based on the 1980 Reports high-case” scenario,

GDP per capita projections are in 1977 dollars.

Second, the world is now perceived as becoming increasingly interdependent. There is no longer the expectation that buoyancy in the economies of some Third World countries would fully compensate for the economic sluggishness in the industrial countries. No matter how the world is divided, its various parts are thought to function as gears in a machine: if one gear slows down, others also slacken. An illustration of this “meshing” of the gears can be found in the case of trade. It was thought in 1980 that the expansion in world trade would occur at a rate significantly lower than the one estimated two years earlier. One consequence of this slowdown was the lower projection in the 1980 Report for increases in developing countries’ exports.

Finally, the forecast is that the world is running out of resources. The period of abundance is over: mankind must now learn to do with less and less for more and more people. Fossil fuel is not the only vital resource destined for rapid exhaustion; questions have even been raised about the sufficiency of that seemingly inexhaustible resource: water. Therefore, the recent increase in the price of oil, persistent inflation, and recession are no longer viewed as events that temporarily interrupt progress. That was the perception in 1978. These developments are now seen as marking the beginning of a new age: the age of global scarcity. In this age the future of the developing world looks precarious.

The increase in the cost of obtaining essential imports will obviously affect development prospects. This is especially true for sub-Saharan Africa. For the countries in this region, the 1960s and, to some extent, the 1970s were periods of fairly steady performance. In 1960, average per capita income was $186. After increasing at the rate of 1.7 per cent per annum, it reached $239 in 1980. In the next ten years, however, average incomes in sub-Saharan Africa may actually decline to $235 in 1990. The poor countries in South Asia will do only marginally better: between 1980 and 1990, they will be able to add only $29 to their average per capita incomes.

What would these growth rates mean for peoples’ lives? The World Development Report, 1980 answers this question by estimating the changes in the number of people living in absolute poverty. For 1980, the number of absolute poor is estimated at 780 million. If the rates of growth forecast actually materialize, this number may increase to 800 million. The slight reductions in the middle-income countries and in the poor countries of South Asia will be more than accounted for by the increase in poverty in Africa. Between 1980 and 1990, the number of people living in absolute poverty in sub-Saharan Africa may increase from 110 to 150 million. If this happens, in 1990 four out of every five sub-Saharan Africans will be living below the absolute poverty line.

Consensus

The change in perception found in recent World Development Reports is not unique to the World Bank. The same general conclusions are reached in a number of other studies. For instance, the Global 2000 Report submitted recently to the President of the United States has the following statement on the opening page: “For hundreds of millions of the desperately poor, the outlook for food and other necessities of life will be no better. For many it will be worse. Barring revolutionary advances in technology, life for most people on earth will be more precarious in 2000 than it is now—unless the nations of the world act decisively to alter current trends.”

Although the authors of Interfutures, a report on the future, commissioned by the OECD, are careful to point out that their forecasts should be interpreted with a great deal of caution, their overall assessment is also clearly marked with considerable pessimism. They emphasize that future uncertainties could—in fact are likely to—lead to political rifts and many economic and social problems which could further exacerbate the uncertainty created by these likely political developments. An inflationary recession could be triggered by an energy shortage; industrial redeployment which, because of the transitional unemployment created, could encounter such resistance in some developed countries as to make protectionism develop cumulatively; and reordering of internal priorities within developed countries could generate serious tensions in their societies. These possible developments, according to the report, “… show that in the great transition now underway, the risk of a major crisis does not derive solely from the difficulties encountered in specific fields like population, energy, agriculture, and reallocation of industrial activities. It results first and foremost from a conjunction of the problems, which considerably increases the task of governments.”

Table 3Developing countries’ indicators of economic performance, 1960-90
Low incomeMiddleOilAll developingDeveloped
AfricaAsiaincomeexporterscountriescountries
1. Population in
millions (1980)1419927014562,290671
2. GNP per capita
(1980 dollars)2392121,6389687919,684
3. Growth
performanceIn per cent of GNP per annum
1960-704.44.06.05.75.64.6
1970-804.03.45.46.45.33.0
1980-852.73.34.25.84.33.0
1985-903.13.74.65.84.63.0
4. Growth
performanceIn per cent of GNP per capita per annum
1960-701.61.63.62.83.13.9
1970-800.91.13.13.52.92.4
1980-85-0.31.12.03.02.02.5
1985-900.11.52.43.02.32.5
5. Population growthIn per cent per annum
1960-702.82.42.42.92.50.7
1970-803.12.32.32.92.40.6
1980-853.02.22.22.82.30.5
1985-903.02.22.22.82.30.5
6. People living in
absolute poverty
The low-case scenarioIn millions
1975630140770
1980110570100780
1990150550100800
The high-case scenario
1975630140770
1980110570100780
199012052080720
7. Current account deficits1In billions of U. S. dollars
19701.27.18.3
19732.34.46.7
19756.138.344.1
19785.721.427.1
198010.051.061.0
198518.659.772.7
199032.072.278.4
8. Current account deficitsIn per cent of GNP
19701.62.52.3
19732.20.91.1
19753.85.35.1
19782.72.22.3
19803.64.03.9
19853.82.62.8
19903.91.82.1
Source: World Bank, based on statistical annexes to the World Development Reports.

Excluding oil exporters.

Source: World Bank, based on statistical annexes to the World Development Reports.

Excluding oil exporters.

The report of the Brandt Commission, published in February 1980, also paints a somber picture for the world economy. “A number of poor countries are threatened with the irreversible destruction of their ecological systems; many more face growing food deficits and possibly mass starvation. In the international economy, there is the possibility of competitive trade restrictions or devaluations; a collapse of credit with defaults by major debtors, or bank failures; a deepening recession under possible energy shortages, or further failures of international cooperation; and an intensified struggle for spheres of interest and influence, or for control over resources, leading to military conflicts. The 1980s could witness even greater catastrophes than the 1930s.”

But not all would suffer equally from the catastrophes of the 1980s. In the vivid language of a senior African official of the United Nations Economic Commission for Africa, “on the basis of all the economic projections we have seen so far, Africa in the year 2000 will not be in the ditch it is in now. It will be in the bottom of a deep black hole.” And so on. There is a remarkable consensus among scholars, institutions, and aid-giving agencies about the future of the developing countries. It is possible to keep on quoting from report after report on the considerably poorer prospects of the developing world in the 1980s.

Ability to adjust

While there is a remarkable degree of consensus in a number of reports that have recently appeared on the future of the developing world, there are some differences in their judgments about the ability of these countries to adjust to the difficult circumstances of the 1980s. According to the Chairman of DAC “If we avoid excessive hand wringing and get on with what is doable, there is no reason to extrapolate the collective adversities of 1980 to the whole of the decade, let alone beyond.”

The World Bank in its World Development Report, 1980 provides a list of “doables.” There are actions that need to be taken immediately: larger flows of concessional assistance to the poor nations and larger availability of commercial capital to the middle-income countries to help the two groups finance their deficits without hurting much their development efforts; structural adjustment within developing countries to save on the need to import large amounts of oil and food; and greater efforts within the developing world to generate additional resources for development. Over the long term the developing countries will need to improve their administration, raise agricultural productivity, and to make better use of their resources, laying greater emphasis on investments in human resources and in reducing the growth of their populations. Other necessary actions include the promotion of exports by the developing countries and a check on protectionism by the developed nations to help increase world trade and thus provide some additional resources to the Third World.

If policies such as these were adopted and successfully implemented, the developing countries might grow a shade faster. Instead of a 2.2 per cent per annum increase in their per capita incomes, they might manage a rate of 3 per cent. The higher rate would mean an addition of $80 to the average income of the citizens of the developing countries by 1990. It would also mean reducing rather than increasing the number of absolute poor. But “economic growth alone would not reduce absolute poverty at an acceptable speed.” Accordingly, the World Bank Report integrates concern with growth with the development of human resources. The case for human development—which encompasses education and training, better health and nutrition, and fertility reduction—is made not only on moral but also on economic grounds.

The Brandt Commission, in its North-South: A Program for Survival, is a bit more pessimistic about the world’s ability to help the poor out of their present difficulties. The Commission urges immediate action in at least three areas: poverty, hunger, and rapid population growth. This would need a collaborative effort between the North and the South. While the countries of the South “call for social justice internationally, they must not neglect such values at home,” and the North “for its part must not pursue selfish policies, depleting the world of precious resources; it, too, must find new patterns of growth, more sensitive to the world’s needs.”

The OECD, in its 1980 report, also underscores the problems of one geographic area and identifies it as the target for immediate world attention—sub-Saharan Africa. A big push aimed at improving physical infrastructure and increasing agricultural output is recommended with the initiative coming preferably from Pan-African regional multilateral organizations.

The Global 2000 Report is by far the most pessimistic of these documents. It finds that the time for action is running out. “Unless nations collectively and individually take bold and imaginative steps toward improved social and economic conditions, reduced fertility, better management of resources, and protection of the environment, the world must expect a troubled entry into the twenty-first century.”

The bold and imaginative steps that these reports call for would result in some fairly significant structural changes in the economies of the developed and developing countries. The industrial nations are being asked to conserve energy and other nonrenewable resources. The rate of growth in the consumption of these vital resources should be much less than the future rate of growth of the output of their economies. These countries must also concentrate future investments in the industries in which they have comparative advantage, leaving their demand for the products of some of the traditional industries to be met by exports from developing countries. The developing countries must also undertake structural adjustments. For most of them, dynamism for future growth will have to come from their large agricultural sectors and from greater investments in their human resources. For many of them, a large part of the demand for energy will have to be met from sources other than hydrocarbons. In sum, the developing nations will not be able to rely on industrialization and cheap energy for their growth. They will not, therefore, pass through the same stages of growth as did the industrial countries before them.

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