Two tracks of high and low growth in the developing world
Deregulation and liberalization of product, labor, and financial markets---together with higher levels of investment and rapid technological advances in industrial and services sectors---should make the 1990s a period of fairly rapid growth in the high-income OECD countries and a number of leading developing countries. But the pattern of international financial flows is likely to perpetuate two tracks of high and low growth in the developing world. Those are the main conclusions of A Long-Term Outlook for the World Economy: Issues and Projections for the 1990s, by Shahrokh Fardoust and Ashok Dhareshwar (Washington, D.C.: The World Bank, September 1990 [see page 9]).
Fardoust and Dhareshwar argue that, at the broad level of global analysis, there are good reasons to be optimistic about the 1990s.
First, there are favorable supply-side developments in many of the high-income countries. Per capita real income growth rates in the 1990s are expected to be higher than in the 1980s: higher by about 0.4 percent a year for the industrial countries, and higher by as much as 1 percent a year for developing countries, on average. If there are no major policy mistakes and the international financial markets remain reasonably stable, the remarkable rebound in investment rates observed in many industrial countries during the past few years should promote a period of relatively rapid and noninflationary growth in these countries.
Second, considerable scope exists for a recovery of private consumption and investment in the debt-stricken developing countries, as well as in Eastern Europe and the USSR. Therefore, while concerns about financial volatility and about current economic slowdown in some of the major industrial countries cloud the world economic outlook in the short run, the long-term prospects for the industrial and leading developing countries are quite favorable.
Third, the 1990s will see a continuation of the process of economic integration currently under way, encompassing mainly the industrial and the newly industrializing economies, propelled by rapid technological progress and increased competition in international markets, and taking place against a backdrop of policy reforms, economic restructuring, and political liberalization that has been gathering momentum since the early 1980s. Several ongoing economic and political events---principally Project 1992, which aims for a deeper integration of the European Community, the ongoing changes in Eastern Europe and the USSR, and successful completion of the Uruguay Round of trade negotiations---may also act as growth impulses in the 1990s.
n marked contrast to the generally upbeat outlook for the more developed economies, the prospects are less certain for the developing regions, where performance is more diverse. The major sources of uncertainty are the level and cost of financial flows the developing countries can expect, the degree of their success in implementing policy reforms and structural adjustments, and the strength of world trade and the openness of the industrial-country markets to developing-country exports.
Given the inevitability of economic shocks, adaptability and economic resilience will be essential for satisfactory performance of the developing countries in the 1990s. With international prices and market structures changing radically, countries that lag behind in economic reform and in making the investments (in both physical and human capital) needed for growth are likely to suffer a significant decline in their relative standards of living during the 1990s.
According to Fardoust and Dhareshwar, the substantial differences in investment rates of the 1980s between the higher-income and other developing countries will, if not reversed, tend to widen the productivity and technology gap between them. Although growth can be expected to be high in many Asian industrializing economies, relatively high population growth and low private investment will probably continue to depress living standards in many countries in Latin America and Sub-Saharan Africa.
In sum, the short-term economic outlook is clouded by financial uncertainties associated with massive external payment imbalances, the heavy financial requirements of reform in Eastern Europe and the USSR, and the possibility of an economic slowdown. But barring policy mistakes and major adverse and lasting shocks, the long-term economic prospects for the industrial countries and some leading developing economies are quite favorable. And if successful, the structural reforms and economic transformations in developing countries and some of the formerly socialist economies should lead to more resilient economies, which---given the inevitability of external shocks---are essential for satisfactory performance.
The lingering external debt problems many developing countries face show that they are not well prepared, either financially or politically, to cope with major shocks like those that occurred in the 1970s and early 1980s, including the sharp rise in energy prices and international interest rates.
What does the recent runup in oil prices mean for these projections?
Fardoust and Dhareshwar argue that the Persian Gulf region will continue to be the predominant supplier of oil. Supply constraints in the industrial countries are expected to limit the supplies from non-OPEC sources and the quantity of oil exportable from the centrally planned economies (mainly USSR) is expected to decline significantly by the mid-1990s. Because conventional energy supplies are tight, energy is prone to shocks - often sizable---that would affect both oil-importing and oil-exporting countries. Global economic growth is not likely to be slowed down by availability of energy supplies, but because oil supplies are so concentrated in one region, there is a downside risk of volatile oil markets causing a serious shortage of conventional energy and threatening economic growth in many parts of the world. For oil-importing developing countries in financial straits, the effect of a major energy price shock would be severe.
If oil prices gradually decline from their current level of $35 to $40/bbl to around $20/bbl over the next 12 to 18 months, the impact of the shock on the industrial countries will be relatively small and short-lived. This shock would be relatively small compared with those in the 1970s, and the industrial economies are more energy efficient and resilient than before. The same is true for a number of developing countries, particularly the Asian newly industrializing economies.
The relatively optimistic picture painted for the industrial countries over the longer term in the baseline projections by Fardoust and Dhareshwar is consistent with a fairly steady rise of the real price of oil starting from 1992-93 to 2000. But the oil price shock of 1990, even if short-lived, will compound the problems faced by many developing countries. Under the baseline scenario, those countries already face global shortage of capital and fairly high real interest rates internationally in the first half of the 1990s. So, growth rates for many low-performing developing countries---those that have not carried out serious economic reform---are not expected to recover significantly before 1994-95, even in the absence of an oil price shock.
And if oil prices remain high---in the range $35 to $40/bbl or even higher---over the next several years (say, because of severe damage to the oil fields in the Middle East), the average growth rate of world output will drop sharply below that projected in the baseline scenario. The analysis and outcome would be somewhat similar to that of the low case ("low productivity") scenario of Fardoust and Dhareshwar.