Journal Issue
Share
Finance & Development, September 1981
Article

World Development Report 1981—principal themes: The fourth annual review by Bank staff assesses global and national adjustment efforts

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1981
Share
  • ShareShare
Show Summary Details

Recession and inflation in the industrial countries together with the rise in oil prices have been the main forces at work in the world economy in the 1970s. The Report examines their impact on developing countries to see how adjustment has been managed, the lessons that may be learned, and what the prospects are for the 1980s.

Adjustment occurs through international trade and capital flows and through changes in national production and consumption patterns. The earlier chapters of the Report present global and regional projections for the 1980s, and consider international aspects of adjustment in trade, energy, and finance. The Report then turns to adjustment problems of different groups of developing countries and a consideration of the prospects for human development—the main subject of World Development Report, 1980—in the context of adjustment.

The international economic system has withstood recent convulsions with enough success to permit confidence that economic performance in the 1980s need be no worse than in the 1970s, and may indeed be somewhat better. The exception to this is the prospects for poorer countries; only a few of them managed to maintain their growth in the last decade, and they will have to improve their performance and receive greater international support to reverse this trend.

Problems of developing countries

Country performance is determined by national and international policies. The experience of several developing countries shows that even when external conditions are favorable, development is still difficult. In many countries, domestic policies and performance left much to be desired, even before the external climate deteriorated. That deterioration has nevertheless had a major influence on their progress. Oil importing countries had to cope with depressed markets for their exports in the mid-1970s and deteriorating terms of trade which were only partly due to the higher cost of imported oil. Fluctuating commodity prices have affected domestic policies, enticing several countries into shortlived investment booms which have had to be followed by drastic economies in current and capital spending.

A number of the middle-income oil importers adjusted while sustaining growth in the 1970s—they were able to increase their exports, reduce imports, and borrow large amounts of commercial capital. For that growth to continue, the markets they sell to must remain open and continue to expand. In addition, the countries themselves must continue to seek out new products and new markets. Commercial borrowing is expected to go on rising; however, not all countries borrowed equally wisely, and some now face short-term liquidity constraints.

Among the low-income countries, experience varied. For most, slower growth was the rule. Without finance to cover higher current account deficits, and with little capacity to increase exports in the short run, they found the tighter external environment difficult. Immediately after the first round of oil price increases, aid—including that from members of the Organization of Petroleum Exporting Countries (OPEC)—expanded considerably. But this expansion did not continue. The African countries had the lowest growth: their gross national product (GNP) per capita rose by only 0.5 per cent a year in the 1970s. Per capita incomes fell in several countries—but from domestic rather than external causes. South Asia fared somewhat better, assisted by workers’ remittances, several years of good harvests, and, compared with the African countries, greater freedom from war and civil strife.

The 1980s began with a worsening of external conditions for the oil importers. Recession in the industrial countries has reduced their export prospects; current account deficits have increased in the past two years, this time by amounts closely matching the increases in their oil import bills. Growth can be expected to resume in most middle-income countries once recovery begins in the industrial world, but the outlook for low-income countries is bleak.

There is no sign of increases in aid comparable to those which helped them through the mid-1970s. Workers’ remittances will grow more slowly. Few will have easier access to commercial borrowing, nor will there be any rapid improvement in their export earnings. For most low-income countries adjustment is likely to entail slower growth.

Adjustment and development

The Report describes how adjustment may take place internationally and nationally with the least damage to continuing development objectives. A summary of the results may be found by comparing the Report’s two projected scenarios for per capita growth of GNP, 1980-90 (see Table 1). Under the higher of the two, the middle-income countries grow at 3.4 per cent per capita annually in the 1980s and the low-income countries at 2.6 per cent; under the lower, these figures become 2.2 per cent and 1.5 per cent, respectively.

Table 1.Growth and prospects for growth, 1960-90
GNP

per capita

(In 1980

current

U.S. dollars)
Population

1980

(In millions)
Average annual growth of per capita GNP
Low caseHigh case
1960-701970-801980-901980-90
Oil importers1,9017903.42.71.83.1
Low income1,1662201.80.80.71.8
Middle income7351,7103.93.12.13.4
Oil exporters14821,0603.82.72.94.0
All developing countries2,3838503.52.72.23.3
Low income21,3072501.81.61.52.6
Middle income31,0751,5803.92.82.23.4
China49772604.12.94.1
Capital surplus oil exporters5277,3904.22.12.8
Industrial countries667410,6604.12.52.33.1
Nonmarket industrial economies73563,7203.92.83.0

Denotes data not available.

Comprise Algeria, Angola, Bahrain, Bolivia, Brunei, Congo, Ecuador, Egypt, Gabon, Indonesia, Iran, Malaysia, Mexico, Nigeria, Oman, Peru, Syria, Trinidad and Tobago, Tunisia, and Venezuela.

Comprise those countries with a 1979 GNP per capita of US$370 and below.

Comprise those countries with a 1979 GNP per capita above US$370.

GNP per capita for China refers to 1979, in 1979 dollars; growth rate is 1970-79.

Comprise Iraq, Kuwait, the Libyan Arab Jamahiriya, Qatar, Saudi Arabia, and the United Arab Emirates.

Comprise members of the Organization for Economic Cooperation and Development (OECD) except Greece, Portugal, Spain, and Turkey.

Comprise the U.S.S.R., Bulgaria, Czechoslovakia, German Democratic Republic, Hungary, and Poland.

Denotes data not available.

Comprise Algeria, Angola, Bahrain, Bolivia, Brunei, Congo, Ecuador, Egypt, Gabon, Indonesia, Iran, Malaysia, Mexico, Nigeria, Oman, Peru, Syria, Trinidad and Tobago, Tunisia, and Venezuela.

Comprise those countries with a 1979 GNP per capita of US$370 and below.

Comprise those countries with a 1979 GNP per capita above US$370.

GNP per capita for China refers to 1979, in 1979 dollars; growth rate is 1970-79.

Comprise Iraq, Kuwait, the Libyan Arab Jamahiriya, Qatar, Saudi Arabia, and the United Arab Emirates.

Comprise members of the Organization for Economic Cooperation and Development (OECD) except Greece, Portugal, Spain, and Turkey.

Comprise the U.S.S.R., Bulgaria, Czechoslovakia, German Democratic Republic, Hungary, and Poland.

TheWorld Development Report 1981was prepared by Robert Cassen (Staff Director), Michael Finger, Norman Hicks, Frederick Jaspersen, Robert Liebenthal, Pradeep Mitra, Rupert Pennant-Rea, Christine Wallich, and Oktay Yenal, with the assistance of the Economic Analysis and Projections Department. The work was carried out under the general direction of Hollis Chenery.

The difference between the scenarios is not just one of growth rates, but a fundamental difference of outlook: the higher case implies diminishing poverty in developing countries and a large expansion of world trade, with the prospect of an easier overall adjustment for the world economy. In the lower scenario, trade and other trends worsen, and poverty extends to ever larger numbers of people. By the year 2000 the difference between the two cases amounts to some 220 million more absolute poor.

The main requirements for the higher scenario are not excessively demanding. First, industrial country growth has to average 0.3 per cent a year more in 1980-90 than in the stagflation years of 1970-80 to approach 4 per cent annual growth in the second half of the 1980s. Second, industrial countries should refrain from imposing any additional trade barriers, so exports of oil importing developing countries could grow at rates comparable to those of the 1970s. Third, measures to achieve a global balance between demand and supply for energy should result in an annual real increase in oil prices of some 3 per cent over the decade as a whole (though year-to-year changes may be quite irregular). Fourth, aid should increase steadily with a considerable reallocation to low-income countries, or total aid must rise substantially, to permit the low-income countries to receive some US$4 billion a year more (in 1980 dollars) than in the lower scenario. And finally, developing countries should maintain their domestic savings rates at least at 1980 levels and improve the efficiency of their use of capital.

Trade

For the developing and developed countries alike, trade has a crucial role in growth and adjustment. The most striking conclusion of the Report is the failure of the low-income countries to participate in the expansion of world trade. Their exports have not grown fast enough to match the rising cost of oil and other imports. It is a story partly of their difficulty in expanding competitive export supplies and partly of the obstacles to trade and the low rate of demand growth in their export markets. Most of these countries still depend heavily on commodity exports, with little potential for exploiting rapid growth in demand for manufactures. But even within commodity exports, the low-income countries’ export prices have been eroded more than those of the middle-income countries (see Table 2 and Chart 1).

Table 2World trade In exports, goods, and nonfactor services, 1970-90(High case)
197019801990197019801990
(In billions of current U.S. dollars)(Percentage share)
Industrial market
economies2741,5315,412696159
All developing
countries785612,300202225
Oil importers593571,565151417
Low income72788211
Middle income523301,478131316
Oil exporters19204735588
Others 1424351,460111716
Total3942,5279,172100100100
Note: For definitions of country categories, see Table 1.

Includes China as well as nonmarket and capital surplus economies.

Note: For definitions of country categories, see Table 1.

Includes China as well as nonmarket and capital surplus economies.

Chart 1Developing countries’ increases in export purchasing power, 1970-80

(In billions of 1978 U.S. dollars)

1 Part of total change resulting from change of relative price.

2 Part of total change resulting from change of volume.

The Report’s findings imply that international measures to improve the trading prospects of developing countries will tend to benefit most the more advanced among them. The implication is not that such measures are without merit in their own right; on the contrary, reduction of trade barriers and other trade-enhancing measures are important—both to developing and developed countries. But low-income countries are not likely to increase their exports very fast—in primary or processed commodities or in manufactures—unless their development simultaneously advances in other directions.

Despite a number of problems, the international trading system did not, on balance, become less open over the 1970s. The economies of the middle-income countries will continue to expand, if the trade environment remains as open as it is now. Their export expansion has resulted more from their own push than from the pull of world markets and they have demonstrated considerable capacity to diversify. Their economies are becoming large enough to support economies of scale—particularly if they open up to each other.

A major determinant of trade prospects for developing countries is whether or not the industrial countries will maintain a reasonable rate of economic growth and employment. But the effects run in both directions: there are gains from trade which contribute to efficiency and growth. Indeed, the choice for the industrial countries is not to adjust or protect; the choice is grow or protect.

Energy

The pattern of energy use prior to the oil price rise in 1973 was unsustainable. When the consumption of oil began to grow faster than additions to reserves, the stage was set for mounting price pressures even in the absence of actions by the oil exporting countries. Although the adjustment to higher prices has not been smooth, their effects have already been marked. In the industrial countries increases in consumption have slowed. But in developing countries continued growth requires rapidly rising quantities of energy (see Chart 2).

Chart 2Increments to world energy supply, 1970-2000

(In percentage shares)

Adjustments on the supply side will also take place to ease energy bottlenecks in the coming decade. Investments in energy development—which because of the long lead times made little contribution to adjustment in the past decade—are now coming to fruition. In the 1980s changes in the composition of supplies are expected to be as important as changes in demand. While oil supplied more than 60 per cent of additional energy in the 1960s, its incremental contribution will be about one quarter in the 1980s. Production of coal is expected to grow twice as fast as that of oil in the 1980s—coal will gradually replace oil as the world’s main source of energy growth. Later, a significant increase in nuclear and synthetic fuels may also be expected.

Until recently, the transition to more expensive energy has been managed relatively smoothly in many of the oil importing developing countries. Although continued progress may be more difficult for some countries in the 1980s, higher energy prices will not, on their own, prevent industrialization and a resumption of faster growth. There will be some changes in comparative advantage, and slower growth in the transition period. Policies to increase domestic energy supplies and to plan for efficient energy use will ease this transition.

Capital flows

Borrowing by developing countries has always been an important source of balance of payments (BOP) support, permitting higher levels of imports and domestic investment to accelerate growth. In the 1970s, borrowing also gave time for adjustment and helped to limit the immediate impact of terms of trade losses. The international capital market recycled the OPEC surpluses efficiently, particularly to middle-income developing countries. Bilateral and multilateral aid agencies responded well, at least at first, to the immediate needs of many low-income countries. Remittances from migrant workers in the Gulf States also contributed. The round of oil price rises in 1979-80, however, has been accommodated with the help of short-term borrowing and use of reserves to a degree that is not viable for very long. The Report’s projections indicate large needs for further external finance—commercial loans for the better-off countries and (mainly) concessional loans and grants for the poorer countries (see Chart 3).

Chart 3Oil importing developing countries: sources and uses of financial flows, 1970-80

(In billions of 1978 U.S. dollars)

1 Includes workers’ remittances.

The international capital market is capable of providing much of the required external finance. Commercial banks of the industrial countries have had a smaller proportion of bad debts from lending to developing countries than in their own countries, and developing countries as a group are no less creditworthy today than a decade ago. The number of middle-income countries with short-term liquidity problems has, however, increased, at a time when there may be incipient constraints on the banks for several reasons: the balance of domestic and foreign loans in their portfolios, country-exposure limits, national regulation, risk perception, and capital/asset ratios. The composition of borrowers and lenders may well change, but the private capital market is expected to continue to play a large role in recycling funds from surplus to deficit countries. While substantial growth in commercial bank lending is foreseen in the projections, this Report sees the need for international financial institutions to bear a larger share of the overall flow of recycled funds.

For the low-income countries, the adjustment problem described in this Report has no short-term solution. Apart from immediate BOP needs, the longer-term tasks of investment and restructuring will require a decade or more of increased support with concessional funds, even longer for the very poorest countries. There are no current indications that aid at required levels will become available.

Policies

Several policy conclusions emerge from this Report. Together they form an agenda, concentrated mainly on national action, affecting countries’ own economies and the international environment. Table 3 stylizes the policies needed in trade, energy, and capital flows if the different groups of countries are to adjust successfully in the 1980s.

Table 3.Adjustment policies
CountriesTradeEnergyCapital flows
Oil importing developing countriesExpand exports, including diversification of agricultural exports, and provide adequate incentives for exporters

Import substitution in line with international prices
Raise internal prices to encourage production and conservation

Expand energy supplies
Borrow to cover balance of payments deficits and invest for structural adjustment
Capital surplus oil exportersExpand imports, especially from developing countriesStabilize price policy

Support assistance for developing countries’ energy production
Increase aid to poor countries

Increase direct lending and investment in developing countries
Industrial countriesExpand imports from developing countries

Avoid protection and make positive adjustments to expand trade
Conserve energy

Switch to alternative energy sources

Support assistance for developing countries’ energy production
Increase aid to poor countries Support recycling
InternationalMeasures to improve poor countries’ gains from tradeInternational financial institutions assist developing countries’ energy productionInternational financial institutions allocate aid to poorest countries and support recycling

Most developing countries face a difficult decade adjusting to changed external conditions. They must reduce their present BOP deficits to sustainable levels. Ultimately adjustment requires shifts in trade, domestic production, and consumption. Borrowing is needed for investment to accelerate growth and to gain time for adjustment. But countries that have borrowed to support unsustainable patterns of production, consumption, and trade soon face the reckoning of excessive debt and forced macroeconomic contraction.

Comparative analysis suggests that outward orientation—export promotion and import substitution in line with international prices—improved countries’ ability to cope with the external environment of the 1970s. This was not equally possible for all countries—low-income countries with one or two exportable commodities and modest manufacturing capacity obviously have less room to maneuver.

The Report also describes the threat to human development programs from the austerity inevitable during a period of adjustment. It discusses ways of minimizing cuts and using resources to spread benefits as widely as possible. It shows that food and nutritional problems seldom result from global food shortfalls; but rather from local and seasonal supply variations, poor distribution systems, and a lack of effective demand.

Finally, the Report discusses population. Except in an initial phase when mortality falls before fertility decline follows, rapid population growth results from failed development—failed human development in particular. The response required is active promotion of those features of development associated with fertility decline—education, improved health, advancement of women, modern-sector employment—and family planning programs. All these are at risk from the budget cuts made likely during adjustment in the 1980s.

The rise in oil prices has obviously been a boon for the oil exporting developing countries, resulting in greater ease in the BOP and capacity to borrow. But it has not by any means solved their development problems. Many of the oil exporters have large, rapidly growing populations—Indonesia, Nigeria, Mexico—and all the other problems faced by most developing countries, not least considerable poverty.

The developing countries’ efforts must be complemented by satisfactory external conditions. Above all the industrial countries and the capital surplus oil exporters must support their actions and policies. Each group of countries has to invest efficiently and raise or maintain growth rates—this will be assisted by successful adjustment. The task of adjustment is made easier for each group of countries by complementary actions in energy markets, capital flows, and trade, rather than by exclusive reliance on any one of them. Similarly, in each area of policy, the actions of the main groups of countries need a degree of consistency. The relationships among actions by these different groups of countries exhibits the interdependence in the world economy. Trade and capital flows, for example, assist each other: countries can only remain creditworthy if they trade successfully; banks will not be repaid unless they do. But that, in turn, requires openness of markets.

The difficult world environment of the 1980s may make it all too easy to lose sight of the purposes of economic development. The most urgent of them is to further the struggle against poverty. The faster economic growth that the Report judges to be attainable will provide the resources to tackle poverty directly. People and governments in developing countries must play their part in ensuring that this happens. Poor people must be reached by the education and health programs that have equipped others to raise their incomes, live longer lives, and fulfill their potential. The slower economies grow, the greater the risk that those programs will be sacrificed for lack of finance. The vicious circle of poverty and slow growth will then be drawn round another generation. That is the price of failure. It is a price that need not be paid.

Copies of theWorld Development Report 1981are available in English from Oxford University Press (200 Madison Avenue, New York, NY 10016, U.S.A.) at US$15.95 (cloth) and US$6.95 (paperback), from the Press’ London office (Press Road, Neasden, London, NW10 ODD, U.K.) at £10 (cloth) and £4.95 (paperback), and from Oxford branches and distributors, where prices will differ. Arabic, French, German, Japanese, and Spanish editions are also available; information on the distribution and price (if any) of these editions can be obtained from the World Bank, Publications Unit, 1818 H Street, N.W., Washington, DC 20433, U.S.A.

Other Resources Citing This Publication