Printer Friendly

The world economic outlook and developing countries: a review of 1990.

The World Economic Outlook and Developing Countries: A Review of 1990

Both industrial and developing countries experienced a slowdown in economic growth in 1990. Industrial countries' growth fell to 2.5 per cent, down from 4.4 and 3.4 per cent in 1988 and 1989, respectively. In developing countries the slowdown was even sharper with output growth of only 2.3 per cent in 1990, compared to 5.5 per cent in 1988, reflecting a contraction of output in Eastern Europe and some Latin American countries. In line with the global economic slowdown, the rate of expansion of world trade also declined from 7 per cent in 1989 to 5.5 per cent in 1990.

The average figure for economic growth in industrial countries conceals large differences in individual country performance. In the United States output increased by only 1.1 per cent, while in Japan it reached 6.3 per cent in 1990. In Europe, Germany also enjoyed healthy growth due to rising consumer and investment demand coming from the east. Conversely, the United Kingdom started showing signs of a recession and achieved only 1.3 per cent growth in gross domestic product.

The Gulf crisis in the second half of 1990 had a negative impact on most developing countries through higher energy prices. The growth rate in oil importing countries dropped from 2.9 per cent in 1989 to 1.7 per cent in 1990. At the same time, a substantial fall in non-oil commodity prices in 1990 reduced income to many developing country exporters. Slowing imports by the United States and the low dollar have also begun to hurt those developing countries strongly tied to the United States. On the other hand, some of the East and Southeast Asian economies such as South Korea, Malaysia, and Singapore benefited from trade expansion within their region and grew at rates of 9.2 per cent, 9.4 per cent, and 8 per cent, respectively. Prospects for 1991 and Beyond

The global economy will continue to expand in 1991, but at a lower rate than in the recent past. The forecast is for growth of 1.2 per cent in 1991, compared to 2.1 per cent in 1990, 3.3 per cent in 1989 and 4.5 per cent in 1988. The outlook for 1991 is less comforting than appears at first glance due to the higher level of uncertainty about the future that exists now compared to the same time last year. Uncertainty over the extent of current downturns in the US and parts of Europe point to the need to interpret these forecasts with caution. The remainder of this section provides more detail on each geographical region, and also describes further some of the sources of uncertainty in the outlook.

Industrial country economies are expected to grow, on average, by 1.3 per cent in 1991. This figure is down only marginally from the sluggish growth that characterized 1990 (2.5 %), but down substantially from the more vibrant years of 1989 (3.4 %) and 1988 (4.4 %). This average, however, masks considerable variation within the countries that make up the figure. The US lies at one extreme, with negative growth in the first half of the year, but with an expected rebound in the second half to produce an overall increase of 0.2 per cent. At the other extreme lie Germany, still enjoying the effects of reunification, and Japan. Both are expected to maintain strong growth (2.8 and 3.6 % respectively), albeit not as strong as in recent years. For the remainder of western Europe, except the UK which is expected to match the performance of the US, prospects are less cheerful but, in general, not gloomy.

The immediate outlook for developing countries overall is for an increase in growth to 3.1 per cent in 1991, with further expansion in 1992 to 4.3 per cent. It should be noted, however, that this optimistic forecast is dependent upon a continuation of structural adjustment policies that already are facing political difficulties in a number of highly indebted countries and upon a more impressive supply response than has hitherto occurred. Moreover, it assumes that the downturn in the US and elsewhere in the developed world will be mild and short-lived. In a less rosy scenario, average growth of developing countries could be reduced substantially.

In the Western Hemisphere, average growth for developing countries is expected to be no more than 1.1 per cent in 1991, but again the average masks considerable variation and is dependent on many factors, including the US economy and the success of recent and ongoing stabilization efforts. In the absence of policy slippage, economic activity is expected to revive in Venezuela, while growth is expected to strengthen further in Mexico and be relatively well sustained in a number of smaller countries in the region. In Brazil and Argentina, however, where there have been major reforms, more progress is needed before the conditions for sustained growth are established.

The importance of maintaining consistent and good policies is highlighted by the example of Chile, which is expected to experience relatively strong growth over the coming decade (4.6 %) and where a policy of structural adjustment has been followed for some time. A key measure of the country's success was provided by the recently signed agreement with commercial banks for a $ 320 million bond issue which, together with other sources, raised Chile's overall level of foreign indebtedness by $ 836 million in 1990. All of this was new financing and much of it came from private sources. Meanwhile, other countries less committed to reform continue to have difficulty renegotiating existing debt and are unable to raise any new funds.

Historical trading patterns and business ties imply that the performance of the US economy has significant repercussions for its Latin American neighbours. A worsening of the US slowdown would adversely affect other western hemisphere economies (and to some extent the exporting countries in East Asia) by limiting export opportunities. However, this relationship is clearly not all that matters. Mexico provides an interesting example both of the importance of the US economy in this region - 60-70 per cent of exports are sold to the US - as well as the effect of other exogenous factors. While a US downturn would be painful through the subsequent loss of some exports, Mexico reaped a multi-billion dollar export windfall from the rapid increase in oil prices that occurred after the invasion of Kuwait. A similar windfall was enjoyed by Venezuela, where economic prospects are favourable as the policy reforms introduced two years ago are beginning to yield benefits.

More on the upside, an additional source of uncertainty regarding growth prospects in Latin America is the prospect for increased intraregional trade. Falling trade barriers between Brazil and Argentina, for example, have increased trade between those countries and may improve economic performance through the promotion of both exports and foreign direct investment. An additional benefit will be movement away from over-reliance on the US market, thereby reducing their exposure to future US business cycles.

In Sub-Saharan Africa, growth is expected to improve in 1991 to 2.3 per cent, provided that structural adjustment efforts are sustained. Growth will be higher in those countries that have initiated stabilization and structural reform efforts, but will be lower, and possibly negative, in those countries that have delayed adjustment programmes. While further improvements in output are expected through 1992, high population growth rates could be more than offsetting in some countries, resulting in lower per capita levels of income overall.

The outlook for countries around the Mediterranean is somewhat more positive. Morocco and Tunisia have undertaken successful structural reforms over the past few years, as has Turkey, and growth is anticipated in 3.5 to 4 per cent range over the next few years. The regional outlook is complicated, however, because of the disruption caused by the Gulf War and the uncertainty over economic reconstruction. Some countries (notably, Egypt, Jordan and Turkey, but also Morocco and Tunisia) have been adversely affected by the blockade of Iraq and the collapse in tourism. This complicates an already delicate situation for Egypt where negative growth is expected for the next two years.

Earlier optimistic assessments of Eastern Europe's economic prospects have confronted a more sobering reality; even in the former German Democratic Republic, whose circumstances are more favourable than elsewhere in the region, current prospects are less than rosy. All countries are attempting to move toward market-based economies, a process that in the short run causes severe adjustment problems and economic dislocations before sustainable growth is possible. Volatile oil prices and the phasing out of preferential trade within CMEA have added to an already difficult situation and are expected to produce negative growth in the short term, but with a return to positive, albeit moderate, growth by 1995.

As in past years, East Asia promises to lead the developing world with rapid growth over the near-term future. Growth over the next five years will be comparatively high in Thailand (8 %), Malaysia (7 %), Korea (7 %) and Taiwan (6.9 %), with slightly lower growth expected in Indonesia (5.7 %) and the Philippines (5 %). In all cases, however, these rates are below levels attained in previous years and would be subject to revision if growth prospects of their export markets, especially the US recede.

An example of the sort of uncertainty inherent even in these rosy forecasts for East Asia is Korea, where inflation has reemerged as a possible source of instability. While not excessively high, recent increases in consumer prices there may lead to aggressive wage bargaining by unions. The uncertainty is over how aggressive the unions will become and whether management and the Government will accept their demands. If union demands are rejected, labour relations could become strained and the attractiveness of Korea for future foreign investors reduced. This could, however, prove beneficial for other developing countries where foreign direct investment might be redirected.

The countries in South Asia are expected to suffer a reduction in growth in 1991. The region is, however, currently experiencing the effects of political uncertainty and has been adversely affected by the Gulf crisis, again leading to forecast uncertainty. Pakistan is continuing reform efforts, but the Indian economy faces major near-term difficulties. [Tabular Data Omitted]
COPYRIGHT 1991 Economic and Industrial Publications
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:Economic Review
Date:Nov 1, 1991
Previous Article:Petro-chemical development.
Next Article:Sugar manufacturers urge government to check imports.

Related Articles
Economic global outlook.
The case for post-Cold-War U.S. foreign assistance: some concluding thoughts.
How the Asian Crisis Affected the World Economy: A General Equilibrium Perspective.
The Panacea Myth.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters