For most developing regions, the international economic environment should improve over the next decade
As economic recovery spreads from the United States to the rest of the G-7 (and with low interest rates, low inflation, and substantial capital flows expected to continue), most developing countries can on balance expect a marked improvement in the international economic environment over the coming decade. Growth in world trade is likely to increase with the recent successful conclusion of the Uruguay Round of trade talks and the North American Free Trade Agreement, and commodity prices are projected to stabilize after more than a decade of decline.
Along with continued domestic policy reforms, these more favorable global economic conditions place many developing countries in a good position to accelerate growth. Economic performance will continue to be disparate, however.
The external environment and balance of payments constraints play an important role in conditioning the outlook for growth in the developing world. But expectations about the pace and pattern of progress in individual developing countries are also conditioned largely by the internal dynamics between resource endowments and domestic policies.
Barring any major political upheaval, East Asia is likely to remain the fastest growing developing region over the next decade, but its performance will probably be less spectacular than in the past, partly as a result of infrastructural and environmental constraints. The already large gap between the economic performance of East Asia and that of the rest of the developing world widened sharply in the 1980s. The region's per capita GDP grew twice as fast as that of South Asia and five times as fast as the average for the developing world. In the first three years of the 1990s, the gap widened further still; East Asia grew at an average of about 7% a year, compared with only 2.6% annual growth in the aggregate GDP per capita of all developing countries (excluding Eastern Europe and the former Soviet Union). Per capita income in the Republic of Korea is rapidly converging with those in Hong Kong, Taiwan (China), and Singapore (all high-income economies), and together these economies are joining the ranks of the industrial countries.
South Asia's growth prospects for the coming decade will depend on the spread and intensification of its reforms. Compared with other developing regions, South Asia's performance in the 1980s was an improvement over previous decades. GDP growth averaged 5.6% annually for the region as a whole, with exports rising at a healthy 6.3% a year in real terms. All economies (except Sri Lanka) enjoyed more rapid growth, with a significant improvement in the performance of the largest country, India.
Latin America's growth rate is likely to accelerate modestly, depending in part on the deepening of reforms and continued private capital flows. Latin America has witnessed significant changes in its economic policies in recent years. Argentina, Bolivia, Chile, Colombia, Mexico, and (more recently) Peru have implemented stabilization policies and structural economic reforms, including trade and exchange rate liberalization. GDP growth, high in the 1970s on the shaky foundation of variable-rate debt financing, plunged in the debt crisis of the 1980s. Now, with the implementation of stabilization and reform policies in several countries, GDP growth has started to recover again. But the full benefits of trade liberalization are unlikely to flow immediately. The Latin American economies that adjusted early, such as Chile and Mexico, show that it takes almost a decade of consistent progress after the initiation of reforms for the potential gains in GDP growth to be realized. The region's growth outlook projected over the next decade takes these long lags into account and recognizes that the speed of policy reforms is unlikely to be uniform across countries or over time.
If civil strife continues to decline in Sub-Saharan Africa, widespread efforts at implementing policy reforms, and a projected stabilization of real commodity prices are expected to help the region improve its economic performance modestly in the coming decade. Nevertheless, average per capita incomes and consumption are unlikely to increase significantly. And the number of poor is expected to increase both in absolute terms and as a proportion of the population. In the 1980s, of the region's 46 countries for which data are available, 28 suffered declines in real GDP per capita. Population growth remained high. Poverty and deprivation continued to deepen. Civil conflicts destroyed physical capital and infrastructure in at least eight countries. To make matters worse, the region has been hit hard by AIDS, which, affecting people in their most productive years, inflicts significant costs on households and enterprises.
Prospects for developing countries in Europe and Central Asia remain the most uncertain of all: although market-oriented reforms appear to be generating positive results in some countries, great uncertainties remain about the direction and speed of reforms in others. The economic situation in Eastern Europe and the former Soviet Union varies widely, depending on how long reform policies have been in place and on the commitment of governments to implement difficult measures in the face of severe economic disruption. Recent developments in Russia provide some grounds for concern. Although the currency has depreciated dramatically and inflation has not slowed, the rate of output decline has fallen. Following a drop of 20% in 1992, real GDP contracted by 12% in 1993, and the decline is expected to be in single digits in 1994 as once-and-for-all systemic changes run their course. The possibility exists, however, that failure to reduce budget deficits and to slow credit expansion, combined with increased velocity of money circulation as individuals and corporations learn to avoid the inflation tax, could lead to another big rise in inflation. This, in turn, would further undermine confidence and delay the onset of recovery.
The past 10 years have been difficult for the economies of the Middle East and North Africa because of low oil prices, policy problems, and a drop in capital inflows. The outlook for the next decade is brighter---in part because of the potential peace dividend---but fraught with uncertainty. Oil-exporting countries, which dominate the region economically (accounting for 75% of regional GDP), have had difficulties since the mid-1980s in adjusting to lower oil and gas prices. All except Oman experienced a decline in real per capita consumption between 1983 and 1993. Non-oil countries achieved only marginally better results but as a group did achieve positive per capita income growth. Several experienced balance of payments crises and three (Egypt, Jordan, and Morocco) had to seek debt relief. Virtually all non-oil countries have made at least a start toward major structural adjustment, with Morocco and Tunisia being the most advanced.
The growth prospects of developing countries are contingent on industrial countries overcoming structural impediments to growth and maintaining low inflation and real interest rates.