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Recent staff studies

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1982
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Morris Goldstein and Mohsin S. Khan

Effects of Slowdown in Industrial Countries on Growth in Non-Oil Developing Countries

IMF Occasional Paper 12, US$5 (US$3 for university libraries, faculty, and students).

This paper examines the relationship between economic growth in the industrial and the non-oil developing countries, with special reference to the reasons why the latter were able to maintain reasonably high growth rates in 1973–80 despite the slowdown in the industrial countries.

The findings indicate that four elements weakened the adverse impact on the non-oil developing countries of the industrial-country slowdown: (1) a significant increase in migrants’ remittances; (2) the increased availability of external finance at attractive real interest rates; (3) the substantial share of agriculture in the gross domestic product of the non-oil developing countries; and (4) the application of outward-looking economic policies in some non-oil developing countries.

The study also finds important differences between the various subgroups of non-oil developing countries. Specifically, the middle-income oil importers were more sensitive to the slow growth in the industrial countries than either the net oil exporters or low-income countries. The middle-income countries were, however, probably less vulnerable to other types of shocks. For any developing country, a relatively high degree of integration with the world economy is beneficial when industrial countries grow rapidly and costly when they grow slowly. Gains from trade, however, extend beyond the direct income increases from rising export growth, and these other gains are not forthcoming without a consistent outward-looking policy. Turning inward as a response to projected slow growth in the industrial countries might reduce short-run fluctuations in trade but would also be likely to reduce the rate of growth over the medium-term of the non-oil developing countries.

The study also offers some evidence that industrial country growth rates had a stronger impact on non-oil developing countries in 1973–80 than in 1965–72. This appears to be traceable to, among other causes, the large long-term increase in the share of manufactures in non-oil developing country exports. Manufactured exports have been emphasized because they are thought to stimulate growth more effectively than other types of exports, but imports of these manufactures by the industrial countries are also more sensitive to changes in income there, and tend to fall more quickly when growth slows down in the industrial countries.

Staff Team Headed by Patrick de Fontenay

Hungary: An Economic Survey

IMF Occasional Paper 15, US$5 (US$3 for university libraries, faculty, and students).

The Fund’s membership now includes a growing number of centrally planned economies. The nature and the operation of these economies are coming under increasing scrutiny and debate. Hungary applied to the Fund for membership in late 1981. This paper was originally prepared as an internal report on the main features of the Hungarian economy since the 1968 reforms, when the “New Economic Mechanism” was introduced.

These reforms, introduced in stages and with occasional temporary setbacks, were aimed at adapting Hungary’s centrally planned system to permit greater autonomy for enterprises—particularly regarding their investment, prices, and wages. Profit now figures as a more important incentive in the economy. This paper reviews recent economic developments, with particular attention to industry and agriculture, the wage and price system, and financial policies, and appraises the performance of the Hungarian economy.

Together with these systemic reforms, Hungary’s economic management since 1968 has been marked by an increased willingness to expand trade with the convertible currency area. Exports now account for about 40 per cent of Hungary’s gross domestic product, with about half of them going to the West. The paper traces the growth of this trade, which has been accompanied by a heavy reliance on foreign borrowing, as well as the still important trade with Hungary’s partners in the Council for Mutual Economic Assistance. The balance of payments difficulties that Hungary has experienced in recent years and the measures that authorities have taken to meet these difficulties are also examined.

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Vinod Thomas

Pollution Control in São Paulo, Brazil:

Costs, Benefits and Effects on Industrial Location

World Bank Staff Working Paper No. 501, US$5.

Serious environmental pollution has attended the rapid urbanization and industrialization of some developing countries. Often accepted as a necessary evil in the earlier stages of growth, pollution is now viewed with greater alarm as its social costs have become increasingly evident. Corrective measures exist but how does an industrializing country apportion its limited resources and weigh the costs and benefits of pollution control?

This study examines the pollution problem and the antipollution policies and options of Sao Paulo, Brazil—Latin America’s most industrialized area and one of the world’s largest metropolitan centers. Evidence indicates that there have already been significant losses from environmental degradation, with deleterious effects for human morbidity and mortality, particularly where heavy pollution has occurred in densely populated areas.

In the face of mounting public concern, various environmental regulations have been enacted. As they are beginning to be implemented, the need has been felt to evaluate policy alternatives. Heavy costs from pollution abatement could be incurred unless a selective approach is adopted. Such an approach would be discriminating with regard to the industries and types of areas regulated and the nature of controls imposed on emissions. This paper offers a cost-benefit framework in which the pollution control policies can be analyzed and it enumerates some preliminary order-of-magnitude estimates.

The paper notes the large variations in the degree of environmental damages across locations and suggests the desirability of a selective strategy. With such an approach, industries may be induced to move from the seriously affected and thickly populated areas to places better able to absorb their discharges. This indirect effect of pollution abatement on manufacturing location improves the net benefit of the policy and is preferable to policies that directly control industrial production as a means to improve environmental quality.

Harold Hansen

The Developing Countries and International Shipping

World Bank Staff Working Paper No. 502, US$5.

Developing countries have captured an increasing share of world trade but their growing influence has not been reflected in its transport. While developing countries accounted for 30 per cent of the world’s seaborne tonnage in 1974, they were still, by mid-1978, responsible for shipping only 8 per cent.

Over the past two decades developing countries, for economic, political, and strategic reasons, have indicated increased interest in building and maintaining their own maritime fleets. Is this, however, in their best economic interests? And under what circumstances can developing countries benefit from investments in international shipping?

The potential benefits for a developing country are a lessened dependence on foreign-owned shipping, reduced foreign exchange outlays, lower freight costs, possible new markets, and generally facilitated trade, including trade with other developing countries. This study finds, however, a very mixed picture; some of the benefits can be negative and prospects should be evaluated carefully on a case-by-case basis. Satisfactory determination of intersectoral priorities and detailed project feasibility studies are essential.

International shipping is capital intensive and can be risky and highly competitive. The study concludes that investments are more likely to be productive in countries that have traditionally been involved in international shipping and have the appropriate institutions. It could be beneficial, also, where there is a potential for expanding employment and growth in related industries; where there are substantial prospective foreign exchange savings or earnings; and where the country has the capacity to develop new trading volumes, routes, or partners by removing service constraints. To be of net benefit to the country, the existence and strength of these factors must be tested in the context of overall economic transport needs and priorities, taking into account the possibilities for improving both inland and shipping technologies through such an investment.

Dennis Anderson

Small Industry in Developing Countries

World Bank Staff Working Paper No. 518, US$3.

Researchers and country development plans have increasingly acknowledged the important contribution that small industries can make to a developing country’s growth and prosperity. This paper looks primarily at three aspects of small industries: (1) the changing type and dominant size of manufacturing units over the course of development; (2) entrepreneurship; and (3) the impact and effectiveness of programs to assist the development of small industries.

Industrial units appear to evolve through three distinct phases: household manufacturing, small workshops or factories, and large-scale production. What triggers progression from one step to the next? In its review of the literature on the subject this study finds that small factories emerge rapidly in response to the growth of markets. The growth of rural markets suggests, too, that the nature of the agricultural development strategy has a very important role in determining both the size and the regional distribution of industrial development. Studies of the origins of large firms also indicate that many have their roots in the expansion of once small firms.

Entrepreneurship is often a factor in the successful transformation of businesses from small to large. Rapid market growth has generated remarkable entrepreneurial response. The response, however, has neither been as full nor as efficient as it could be. It is not as full because many in the labor force lack the background and income to even consider setting up a small firm; it is not as efficient because inefficiencies both in investment and operating details are compounded by inefficiencies in capital markets, in the structure of industrial incentives, and in policies toward agriculture.

Finally, in looking at the impact of assistance to small industries, the study cites the need for ex post evaluation of these programs and comparisons of country experiences. In the area of small industry finance, the study isolates parallels to agricultural credit findings, particularly the real risks of default. Risk is a critical factor and the study concludes that while risk-guarantee programs and the involvement of public banks may be necessary to transform financial institution policies, financing programs would clearly be more effective if they were accompanied by relaxed administrative controls on interest rate policies and on the borrowing and lending of financial intermediaries.

Overall, the more efficient the leading sector policies (such as tariffs, investment incentives, and agricultural policies), the more efficient small industries were likely to be.

Copies of these publications are available from the respective Fund and Bank publications units. For ordering information, please see the Fund advertisement on the back cover and the Bank advertisement on the inside front cover of this issue.

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