1986 world economic survey forecasts slow growth and falling commodity prices.

1986 World Economic Survey forecasts slow growth and falling commodity prices

So states the 1986 edition of theWorld Economic Survey (E/1986/59), one of the principal reports before the Economic and Social Council at its July session, in which it discussed development, finance, resources and related issues.

The 177-page text, prepared by theUnited Nations Department of International Economic and Social Affairs, begins with an overview of the world economy in 1985 and early 1986, as well as projections for the remainder of 1986 and 1987. Other chapters deal with fundamental issues in international trade policy; world payments imbalances; strengthening the international trading system; reform of the international monetary system; the relationship between capital formation and adjustment in developing, centrally planned and major industrial countries; and the critical economic situation in Africa.

According to the Survey, the worldeconomy in 1985 was characterized by modest expansion of production and "disappointingly slow growth" in international trade, after "significant but uneven" increases in 1984. Growth of world output slowed by nearly one third to 3.3 per cent, compared with 4.7 per cent in 1984. The increase in world trade was only 3.2 per cent, down from 9 per cent the year before.

In the developing countries, growthincreased slightly in 1985, to 2.4 per cent from 2 per cent in 1984. But 21 African countries--comprising 84 per cent of the region's population--as well as 18 countries in the Western hemisphere had a stagnant or declining gross domestic product (GDP) in 1985. "Living standards in much of developing Africa were worse than in 1960", the Survey reports.

Growth of the developed marketeconomies, which represent two thirds of world output and imports, slowed from 4.8 per cent in 1984 to 2.7 in 1985.

The material output of centrallyplanned economies dropped to 5.3 per cent from 6.2 per cent in 1984. China's strong growth in output moderated slightly, falling from 14.6 per cent in 1984 to 12.3 per cent in 1985.

Future trends

The Survey forecasts a modest accelerationof growth in many countries in 1986 and 1987. However, world output and trade are predicted to grow at rates far below those of previous decades. The Survey therefore calls for closer attention to the "crucial issues of underdevelopment and unemployment . . . than they tend to receive when concerns about payments and financial imbalances are so intense".

The Survey concludes that world economicperformance is likely to improve slightly in the short term, based on examination of "three key parameters"--interest rates, oil prices and the dollar's exchange rate.

The general decline of interest ratesis seen as the most important factor--a change that would benefit all countries and is perceived as critical to the sustainability of the world economy in the medium term. In the energy-importing developing countries the declines in interest rates and oil prices could mean as much as $25 billion savings per year in imports. "This is equivalent to 1.5 per cent of their aggregate GDP", states the Survey.

The Survey warns, however, that a"free fall" of oil prices would have a devastating effect on socio-economic conditions in oil-exporting developing countries. In 1985 those countries accounted for more than 40 per cent of the total GDP of the developing countries.

Further depreciation of the dollarwould ease inflation in the developed market economy countries, except for the United States, according to the Survey. Devaluation of the dollar would have a "negligible effect" on world GDP during 1986-1988; developed market economies overall would be likely to show a 0.3 per cent decline in growth rate during that period, although the United States GDP would show growth of some 0.8 per cent. Developing countries' output growth would rise by an additional 1.3 per cent by the third year, it is predicted.

In discussing factors affecting worldtrade growth, the Survey notes that in 1985 prices of non-fuel commodities were at their lowest "real" level since World War II and that there has been a "virtual collapse of practically all commodity agreements". The outlook is "sombre", according to the Survey, which forecasts only a 0.5 per cent improvement in terms of trade for energy-importing developing countries.

Developed market economies, onthe other hand, are expected to register a 6.5 per cent improvement in trade terms. Falling energy export prices account for the 5.0 per cent deterioration forecast for centrally planned economies in Europe.

The net outflow of financialresources from developing countries--which exceeded $30 billion in 1985--is a "serious anomaly", according to the Survey. The shift to negative transfer was due to the rise in interest payments--$543 billion in 1985--and the fall in net capital flows to $13 billion in 1985, from a peak of $63 billion in 1981.

Removing the incentives for "capitalflight" calls for action by the affected countries through policies promoting, for example, domestic savings, domestic investment and stability for investors, the Survey suggests. Creditor nations should assist developing countries in stemming outflows, the text adds.