ECONOMIC FORCES FOR CHANGE IN THE THIRD WORLD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01116R000700790015-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 60
• Document Creation Date: December 22, 2016
• Document Release Date: July 1, 2011
• Sequence Number: 15
• Publication Date: November 15, 1984
• Content Type: REPORT

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The Director of Central Intelligence
wis nplon. D. C. 20505
5 December 1984
Dear Alan,
The enclosed is per our conversation
of today.
William J. Casey
Dr. Alan Greenspan
120 Wall Street
New York, New York 10005
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ECONOMIC FORCES FOR CHANGE IN THE THIRD WORLD
NIC/AG
15 November 1984
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ECONOMIC FORCES FOR CHANGE IN THE THIRD WORLD
15 November 1984
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Table of Contents
Economic Forces for Change in the Third World
OVERVIEW
1. The Changing Scene
II. The Newly Emerging Atmosphere
III. Lessons Learned
- Economic Dive ity Among LDCs
- The Elusive Elements of Economic Progress
- Growing Importance of "Second Economies"
IV. Outlook
V. Implications for US and Western Policy
- Potential Opportunities
VI. Impact on East-West Competition for the Third World
G4S
APPENDI*A
A. Changing Soviet Economic Role in LDCs
B. Case Studies
- Peru
- China
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Key Judgments
Third World economic policies are shifting away from the ideologically-inspired
policies of the post-colonial era and toward more pragmatic approaches. This trend
began in the 1970s and accelerated in the early 1980s, paralleling similar changes
taking place in the industrial world and in China and Eastern Europe. With many
Third World governments just beginning to initiate practical and market-oriented
policies, this trend probably will be gaining momentum during the next ten years.
During the post-colonial period, many leaders of newly established countries
perceived that the poverty of the Third World was a legacy of the colonial period
and part of a continuing Western attempt to exploit the Third World through economic
means. They viewed strong government control as the only way to achieve economic
independence from the West and to solidify their political power at home. Moscow
exploited these feelings by offering an alternative which featured the possibility
of rapid economic progress through state domination. At the same time,
comprehensive central planning in LDCs was widely promoted by Western experts and
reinforced by state-to-state economic assistance provided by the West. For many
years, this aid and the strong industrial country demand for LDC products allowed
many Third World governments to start and operate highly inefficient and often
counterproductive state-organized development programs without straining their
financial positions.
However, during the past decade circumstances have changed. The LDCs
encountered tough economic times: two huge oil price hikes, two recessions, higher
interest rates, and massive debt. At the same time, many LDCs began to realize
that:
-- Their highly centralized development policies often were a major cause of
economic stagnation.
-- They had less global, collective economic power than they perceived in the
late 1960s and early 1970s.
-- The Soviet, economic system did not live up to expectations, and Communist
countries supplied only meager amounts of economic aid and were unable to
provide significant alternative markets for LDC goods.
-- The Far Eastern LDCs presented a better economic model to emulate,
especially since these countries had been able to cope effectively with the
recent adverse external economic circumstances.
Prospects for sizable new amounts of Western foreign assistance have dimmed,
with aid increasingly going for security assistance, humanitarian purposes,
and debt repayment.
In the wake of these changes, the already wide economic disparities among LDCs
continue to increase. The poorer LDCs that account for the bulk of the group will
have to depend on the emergence of small-scale, domestically-oriented enterprises as
their main engine of growth. Few other LDCs, beyond the present newly
industrializing countries (NICs), can be expected to achieve the critical economic
mass to be able to export sizable amounts of manufactures. It is the lesser
developed countries that can least afford the burden of inefficient government
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bureaucracies and ponderous state enterprises. In many of these countries a
response is beginning to take shape. In some cases, large "second economies"
consisting of small-scale, often illegal, enterprises are emer in In other cases,
LDC governments are increasingly willing to contemplate and experiment with market-
oriented approaches. Within certain constraints, such as the need to maintain
central government political control, the private sector is being increasingly
allowed to operate independently.
This changing climate presents significant economic opportunities for the
United States:
-- To increase the promotion of small-scale enterprises within LDCs and the
acceptance and adaptation of new technologies.
-- To enlarge the flow of foreign direct investment, and to help state
enterprises to become more efficient and find ways to relinquish some
functions to the privator sector.
-- To stengthen its trade, finance and investment links with LDCs based upon a
growing mutuality of economic interest.
The shift to more domestically-oriented development also will likely limit
North-South trade frictions and help quiet protectionist sentiment in the developed
world. Those additional LDCs that do become major exporters of manufactures
(including China) will be mainly selling less sophisticated products and, as such,
they will be taking away developed country markets from the current NICs.
The increasingly important evolutionary and grass roots development process,
however, will create serious difficulties for both developed and less developed
country governments.
-- The developed world will face the dual problem of sustaining public interest
in this long-term effort and in reordering economic aid programs so that
more assistance reaches the small-scale entrepreneur.
-- Third World governments will feel threatened by a loss of control caused by
the diffusion of economic power. Many employees of the government and of
state enterprises, as well as owners of large private firms with monopoly
control over domestic markets, have a vested interest in the status quo.
These circumstances will provide opportunities for aroused nationalistic and
anti-Western sentiment, domestic political agitation and Soviet meddling.
These forces thus have security implications as well. They should strengthen
the West's position relative to that of the Soviet Union in LDCs. Soviet domestic
economic and foreign financial constraints over the next ten years will make Moscow
even less able to compete in nonmilitary sectors. At the same time, US security
interests will often coincide with opportunities for economic support, and security
assistance can reinforce the willingness of an LDC to make a change.
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CONFIDENTIAL
14 November 1984
ECONOMIC FORCES FOR CHANGE IN THE THIRD WORLD
1. The setting for developed country policy toward the Third World has
changed significantly in the past 10 years. By the early 1970s, a confluence
of circumstances began to produce perceptible shifts in the Third World
political-economic atmosphere, and in recent years these forces for change
have gained momentum. The most notable result has been a tilt of LDC
governments toward pragmatic approaches in choosing their economic policies.
This Memorandum looks at these changing circumstances, their policy
consequences, the new policy opportunities they create, and their impact on
East-West competition for the Third World.
The Changing Scene
2. For nearly 30 years after World War II, the political-economic
atmosphere in the Third World was influenced by decolonization and unrealistic
expectations as to economic outlook. Some 100 LDCs, mainly in Africa and
Asia, achieved independence, starting with India in 1947 land essentially
ending when the Portuguese African colonies gained independence in 1975.
3. Many of the leaders of these newly independent countries thought that
without the colonial shackles and the burdens of Western economic practices
and policies, their countries could soon approach the standard of living and
industrial prowess of the developed world. Spurred by economic achievements
in the USSR, China, and Cuba and bolstered by the dominant elite attitudes in
the West, many LDCs (mainly in Africa and South Asia) initiated grandiose
development programs that emphasized strong central government control (see
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Quotes
Gunnar Myrdal, a Swedish sociologist, was among the most influencial
individuals affecting the thinking of LDC and Western government leaders in
the 1950s and early 1960s.
"Now, what amounts to a sort of super planning has to be staged by
underdeveloped countries with weak political and administrative apparatuses
and a largely i-lliterate and apathetic citizenry. But the alternative to
making the heroic attempt is continued acquiescence in economic and cultural
stagnation or regression which is politically impossible in the world today;
and this is, of course, the explanation why grand-scale national planning is
at present the goal in underdeveloped countries all over the globe and why
this policy line is unamimously endorsed by governments and experts in the
advanced countries."
Gunnar Myrdal
Development and Underdevelopment, Cairo, 1956, p. 65. Emphasis as
in the original.
The opposite view has long been held by the prominient British Economist,
Sir P. T. Bauer, but his beliefs were not widely accepted until recent years.
"The historical experience" indicates that successful economic
development in both the industrial and Third World "was not the result of
conscription of people or the forced mobilization of their resources. Nor was
it the result of forcible modernization of attitudes and behavior, nor of
large-scale state-sponsored industrialization; nor of any other form of big
push. And it was not brought about by the achievement of political
independence; or by the inculcation in the minds of the local people of the
notion of national identity: or by the stirring-up of mass enthusiasm for the
abstract notion of economic development; or by any other form of political or
cultural revolution. It was not the result of conscious Worts at nation
building (as if people were lifeless bricks, to be moved about by some master
builder), nor of the adoption by governments of economic development as a
formal policy goal or commitment. What happened was in very large measure the
result of the individual voluntary responses of millions of people to emerging
or expanding opportunities created largely by external contacts and brought to
their notice in a variety of ways, primarily through the operation of the
market. These developments were made possible by firm but limited government,
without large expenditures of public funds and without the receipt of large
external subventions."
P. T. Bauer
Reality and Rhetoric
Harvard University Press
Cambridge, Mass. 1984, pp 4-5
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quotes). This tendency was reinforced by the need to channel goverment
foreign assistance through the recipient LDC government.
4. During the 1950s and 1960s, many Third World countries, after centuries
of near stagnation, did make impressive economic progress, as well as
achieving considerable improvements in education and health. Many of these
gains, were attributable to rising exports in response to the developed
world's exceptionally rapid economic growth, and indeed, to increased foreign
assistance mainly from the West. These receipts also helped start up and
indirectly subsidize the LDCs' state-dominated development programs, many of
which quickly became highly ineffective and inefficient and prone to waste and
corruption. In this fashion the economic costs of adopting central planning
models were largely masked.
5. The pre-1975 years provided considerable opportunities for the Soviet
penetration of the Third World. Most Importantly, the Soviet system offered a
model for centralized control which was important for the many shaky regimes
that were trying to consolidate their political power in states lacking
established institutions and often torn by tribal, ethnic, or religious
strife. By the early 1970s, the Soviets had made many inroads into the Third
World, although much less than they might have achieved given their
opportunities. Moscow and its surrogates had over 40,000 personnel spread
throughout the LDCs. Militarily, the Soviet Navy had secured the usage of
harbor facilities, airports, communications stations, or port of call rights
with 14 Third World states, while roughly 20 LDCs depended to one degree or
another on Soviet troops or military material. (See Appendix A for a
description of the Soviet economic role in the Third World.)
6. In many ways, the mid-1970s marked the end of an era for the LDCs and
the beginning of a decade of transition. Slower global economic expansion and
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UMIUMIALI
the substantial jump in oil prices greatly exacerbated the already
considerable differences in the economic fortunes of LDCs. The newly
industrializing countries (NICs) emerged as potent competitors in world
manufacturing markets and the standard of living of major oil exporters rose
substantially. The NICs and a number of other LDCs were greatly assisted by
the enormous transfer of funds to them from OPEC via loans from the Western
banking system, and by the negative real interest rates on these loans. The
economic development problems of most of the poorer LDCs of Africa and Asia
became much more apparent even though they received greater economic
assistance from the West and OPEC. Soviet opportunities in the Third World
meanwhile became less economic and more security oriented. Moscow took
advantage of political circumstances in Angola, Ethiopia, Afghanistan, and
later Nicaragua to displace Western Influence. Most of the expansion in
Soviet economic and technicial assistance went to these countries while aid
elsewhere stagnated.
The Newly Emerging Atmosphere
7. One of the most significant consequences of the trends affecting the
Third World is a tilt of LDC governments toward pragmatic approaches in
choosing their economic policies. Experience gained during the last 30 years
is producing a growing realization of the practical constraints involved in
fostering economic development and is leading to increased dissatisfaction
with centralized economic planning, controls, and intervention, which until
the early 1970s had been widely considered the best path to follow. This
changing LDC economic environment is being strongly influenced by:
-- Tough economic times. Nonoll exporting LDCs have been hurt by a
number of external factors such as much higher oil prices since
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1973, the relatively deep global recessions of 1974-75 and 1980-82,
and much higher interest rates since 1980. Also in recent years,
the oil exporting LDCs have seen their previously fortunate
financial circumstances fade quickly. In many cases, the economic
impacts of higher oil prices were delayed through massive
borrowing. In some instances, insurgencies and regional conflicts
have undermined promising economic circumstances; for example,
Lebanon, El Salvador, and Iran-Iraq. Differences among LDCs
increased further. The Far Eastern NICs continued to prosper while
the major Latin American countries became burdened by a heavy debt
load caused in large part by high real interest rates. The
kingdoms of the Persian Gulf could absorb the reduced oil earnings
while the more populated countries, such as Nigeria, Venezuela and
Mexico, found themselves facing financial troubles. The large
number of poorer LDCs that are mainly dependent on selling raw
materials and foodstuffs were hurt by the reduced demand for their
products during the long global recession of the early 1980s and by
the low prices that lasted even after recovery was underway. As a
result, many of these countries began to really feel the burden
created by their highly-inefficient, centrally-directed economies.
Slow growth in developed country demand for imported raw materials
and tropical foodstuffs. During the 1960s, the demand for
industrial raw materials expanded at an exceptionally rapid rate
largely because of the torrid economic growth of resource poor
Japan. Japanese economic growth cooled after the early 1970s and
the worldwide trend toward greater use of synthetically produced
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industrial raw materials accelerated. Besides the increasing
variety of petrochemical products available, ceramics, optic, and
carbon fibers are beginning to replace metals in many uses.
Moreover, the microelectronic revolution is moving the developed
world away from "smoke-stack" industries that are the major users
of metals. Demand for tropical foodstuffs, such as sugar, coffee,
tea, cocoa, have tended to stagnate or grow slowly.
-- Failure of LDC development policies that emphasize state-owned
industries and that are paid for by taxing farmers. These commonly
pursued policies had adverse consequences for all economic
sectors. Many state-owned industries and organizations became
highly inefficient, uncompetitive on world markets, and created a
large drain on the government budget. To pay for these outlays,
governments heavily taxed the farmer. In turn, the greatly reduced
profit potential for the farmer boosted the already sizable
migration of people from the rural to urban areas. With the rapid
growth of cities, LDC governments found that to stay in office they
had to meet the interests of politically volatile city dwellers for
cheap foodstuffs. They did so by taxing and pricing policies that
further reduced the farmers incentive to produce. As a result,
agricultural production slowed, and in some cases fell, and many
LDCs found themselves increasingly dependent on imported
foodstuffs, especially grain. In addition, to keep prices low in
the cities, many governments failed to adjust their overvalued
currency and thus hurt their country's ability to export. (See
insert 1)
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Insert 1
Impact of Low Prices on the Farmer
It is now widely agreed that insufficient price incentives for
agricultural producers are an important factor behind the disappointing growth
of African agriculture. The importance of price policy comes out strongly in
project experience. A 1980 review of 27 agricultural projects undertaken by
the World Bank noted "the almost overriding importance of producer prices in
affecting production outcome and production levels, often cutting across the
quality of technical-packages and extension services. Seven out of nine
projects implemented under favorable prices achieved or surpassed their
production objectives; 13 of the 18 under unfavorable prices failed to do so."
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Disenchantment with large-scale development projects. Operating
and maintaining major development projects often has become a
costly burden for LDC governments. The high costs and a shortage
of skilled manpower have kept many medical and other social
facilites from being used anywhere near capacity. New roads have
been allowed to deteriorate beyond the point where they can be
maintained effectively. Besides straining the local budget, large
amounts of foreign exchange have been needed to pay for the
imported goods to maintain roads and other projects--spare parts,
machinery, fuel, etc.
Fading of the ideological fervor that accompanied decolonization.
The earlier era of unrealistic expectations and strong anti-Western
sentiment began to fade in the mid-1970s with the independence of
the Portugese territories. Also by then most of mining and oil
operations that symbolized foreign domination had been
nationalized. By the early 1980s, most of the outspoken ideologues
of the 1960s had died, had been overthrown or were largely
ignored. Most current LDC leaders no longer take seriously global
initiatives such as the New International Economic Order. First-
Third World discussions on such issues have become backwaters,
attracting little serious interest on either side.
Recognition of many LDCs that they have much less global economic
power than they believed they had in the early 1970s. In those
years, many LDCs thought they could emulate OPEC and raise the
price of their raw materials. They tried and failed, and in the
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Insert 2
Economic Aid and Food Producton in Africa
The decline in African per capita food production occurred over a period
when the various governments and external sources of finance focused more
strongly on food production projects than ever before. Between 1973 and 1980,
about $5 billion in aid flowed into agriculture, $2.4 billion of which was
from the World Bank. These projects have so far failed to boost output or
have been offset by declines in other parts of the food economy.
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early 1980s it became clear that even OPEC could not continuously
push up prices.
-- Dimmed prospects for sizable new amounts of foreign assistance. In
recent years, few developed country governments have or have been
expected to increase economic aid significantly. Besides budgetary
constraints, domestic developed country support for such an
expansion has waned due to increasing indications that providing
foreign aid to poorly managed LDCs does little to spur economic
development and can even be counterproductive. (See Insert 2.)
Since the early 1970s, an increasing share of the economic aid, and
now the majority, is going for security assistance, humanitarian
purposes, and foreign payments relief. More recently, the LOC debt
crisis has greatly reduced expectations that sizable funds will be
forthcoming from Western private financial institutions.
-- Reduced LDC expectations that they could turn to the Soviets for
economic help. Many LDC leaders in the late 1950s and the 1960s
hoped to follow the economic development models*of the USSR, China,
or Cuba and anticipated considerable assistance from these
countries. It has become clear, however, that these Communist
countries are poor examples to follow. They all face serious
economic troubles and the Chinese and the East Europeans are
turning toward a more market oriented approach. In addition, the
Communist countries have supplied only meager amounts of economic
aid, and have been unable to provide major alternate markets for
LDC goods. By the 1980s, with Soviet economic performance
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wv. wvU.vna. V IIILTU.Mcm1J
POTENTIAL
NIC
s
NICS
OTHERS MINI-STATES
(Rapid economic growth
(Below $2,500
(Populations above 2 million
T -(Populations below 2 million)
& sizable ex
orts
er
)
it
p
p
a
cap
of manufactures)
Fast'Economic Growth(c) Slow Economic Growth
Medium Income
Low Income
($2,500-$10 000
(Below ,500 per capita)
per capita
Brazil
Malaysia
Algeria (a)
Afghanistan
Bahamas, The
Anguilla Tuvalu
Hong Kong
Philippines
Cameroon
Angola
Barbados
Antigua & Barbuda Vanatu
Mexico (a)
Tha it and
Colombia
Bangladesh
Cyprus
Belize Western Samoa
Singapore
Costa Rica
Benin
French Polynesia
.
Bhutan
South Korea
Medium
Dominican Republic
Bolivia
Gabon (a)
Botswana
Taiwan
Income
Ecuador (a)
Burma
Guadeloupe
Cape Verde
Hi Income
per capita)
Egypt
Guatemala
Burundi
Cent. African Republic
Martinique
Netherlands Antilles
Comors
Congo
(Above $10,000
Indonesia (a)
Chad
New Caledonia
Cook Island
per capita)
Argentina
h
Iraq (a)
El Salvador
Trinidad & Tobago(a)
Djibouti
Bahrain (a),(b)
ile
C
Libya (a)
Iran (a)
Ivory Coast
Ethiopia
Ghana
Dominica
Equatorial Guinea
Bermuda (b)
Uruguay
Jordan
Guinea
Fiji
Brunei (a),(b)
Venezuela (a)
Kenya
Haiti
Gambia
The
Kuwait (a),(b)
Lebanon
Honduras
,
Grenada
Nauru (b)
Malawi
India
Guinea-Bissau
Qatar (a),(b)
Morocco
Jamaica
Guyana
Saudi Arabia (c)
Nigeria (a)
Liberia
Kiribati
United Arab Emirates
(a),(b)
Pakistan
Madagascar
Lesotho
Panama
Papua New Guinea
Paraguay
Sri Lanka
Syria
Togo
Tunisia
Mali
Mozambique
Nepal
Nicaragua
Niger
Peru
Rwanda
Liberia
Macau
Maldives
Mauritania
Mauritius
Oman
Reunion
---------------
Yemen Arab Republic
(No. Yemen)
Senegal
Sierra Leone
Somalia
Sudan
Tanzania
Uganda
Upper Volta
Ye
l
P
D
i
St. Christopher & Nevis
St. Lucia
St.Vincent & the Grenadines
Sao Tome & Principle
Seychelles
Solomon Islands
Suriname
men,
eop
es
emocrat
c
Swaziland
(a)
Major oil exporting country
Republic (So. Yemen)
Tonga
(b)
Also Mini-States
Zaire
Turks & Caicos Islands
(c)
Annual growth of GDP per capita
Zambia
more than 2% from 1960 to 1980.
7imhahwo
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Figure 2
Developing Countries: Literacy Rate
(Percent of Adult Population)
51-75
76-100
Afghan istan
Algeria
Bolivia
Argentina
Angola
Bahrain
Cameroon
Anguilla
Bangladesh
Botswana
Dominican Rep.
Antiqua & Barbuda
Benin
Brunei
El Salvador
Bahamas
Bhutan
Cape Verde
French Guinea
Barbados
Burundi
Central African Rep.
Gabon
Belize
Chad
Congo
Guadelope
Bermuda
Comoros
Egypt
Honduras
Brazil
Djibouti
Ghana
Indonesia
Burma
Ethiopia
Guatemala
Iraq
Chile
Equatorial Guinea
India
Jordan
Colombia
Gamb i a
Iran
Lebanon
Costa Rica
Guinea-Bissau
Ivory Coast
Lesotho
Dominica
Haiti
Kenya
Malaysia
Ecuador
Liberia
Libya
Martinique
Fiji
Malawi
Madagascar
Mauritius
Guyana
Mali
Maldives
Nicaragua
Hong Kong
Mauritania
Morocco
Peru
Jamaica
Mozambique
Nigeria
Saudi Arabia
Kiribati
Nepal
Papua New Guinea
Seychelles
Macau
Niger
Qatar
Solomon Islands
Mexico
Oman
Rwanda
Swaziland
Nauru
Pakistan
Sao Tome & Principe
Syria
Panama
Senegal
Uganda
Tanzania
Paraguay
Sierra Leone
Zambia
Tun is a
Singapore
Somalia
United Arab
South Korea
Sudan
Emirates
Sri Lanka
Togo
Zaire
St. Christopher &
Upper Volta
Zimbabwe
Nevis
Vanuatu
St. Lucia
Western Sahara
St. Vincent &
Yemen Arab Rep
the Grenadines
(North Yemen)
( TO BE MAP )
Suriname
Yemen, People's Dem.
Taiwan
(Rep. of South Yemen)
Thailand
Tonga
Trinidad & Tobago
Uruguay
Venezuela
Western Somoa
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faltering, the free enterprise style of the NICs began to replace
the Soviets as the economic model to emulate. For their part, the
Soviets further emphasized the security nature of their assistance
to LDCs, in part because they had become bogged down in helping
their allies and surrogates counter antigovernment forces.
Lessons Learned
8. The changes and experiences of the past 30 years have provided some key
lessons about LDC economic dynamics. Most notably, the wide and growing
disparity among LDCs has become clear, and the factors influencing economic
progress have become better understood. More recently, these two lessons have
led many observers to recognize the importance of small-scale enterprises in
spuring economic gains, especially in the case of those countries with limited
skilled manpower resources.
Economic Diversity Among LDCs
9. Economic differences among LDCs have long been sizable no matter how
measured--GNP, per capita income, population, educational attainment, or value
of natural resources. During the past 10 years these differences have become
more stark and have become greater than those in the developed world. Per
capita income, for example, now ranges from $100 (Bhutan, Chad, Ethiopia) to
some $20,000 for Persian Gulf sheikdoms. By comparison, the much narrower
developed country range is between $5,000 and $15,000.
10. Other areas of considerable diversity include:
-- Literacy . Most countries of Africa's Sahel have literacy rates of
10 percent or less, while the NICs have rates exceeding 80
percent. (See Figure 1)
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Figure In Z
Major LDC Exporters of Manufactures to the
Industrial World . If 4'L
Percent of Total Sales of SBillion
Value of Exports
Billion US S Gdt.,?T0
0.5-t
Thailand, Argentina,
Pakisla0, Tunisia,
jam; o-rt.G.. ,-
India, Malaysia,
Philippines
Mexico, Singapore,
Brazil
Taiwan, Nong Kong,
South Korea
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-- Population. India has more than 750 million people, and Brazil's
and Indonesia's populations top 100 million. More than a third of
LDCs have populations of two million or less. Many mini-states
have less than a half million people.
-- Exports of Manufactures. The NICs account for more than 75 percent
of LDC exports of manufacturers. Only about 15 LDCs sell more than
a billion dollars in such goods annually while the vast majority
sell less than $100 million. (See Figure 2)
-- Natural Resources. About 15 LDCs have sufficient oil reserves to
be major oil exporters, and another 10 countries earn sizable sums
from other minerals. Similarly, only a few LDCs have become major
exporters of foodstuffs, and most are net importers.
The Important Elusive Elements of Economic Progress
11. Experience during the past 30 years indicates that while the elements
of economic progress cannot be easily pinpointed, the most important seem to
be those related to societal factors. These are intangible and not easy to
quantify. Those countries achieving rapid economic growth, such as the NICs,
tend to possess a hard working and well educated labor force, as well as
strong entrepreneurial drives which are reinforced, or at least not
discouraged, by government actions. Such conditions are particularly strong
in the Far East countries of Korea, Taiwan, Hong Kong, and Singapore, whose
cultures are based on the values of hard work and heirarchic Confucian
traditions of social and political responsibility.
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12. Economic analysis is a useful tool, but no analysis could have
predicted that the basket cases of the 1950s (Japan) and the 1960s (Korea)
would emerge as industrial powers. No one looking at Peru, even today, would
have believed that semiliterate, communally oriented peasants from the Andes
would migrate to squatter land in Lima and create a thriving "second
economy." (See Appendix B for a series of examples of governments moving
toward market-oriented economies or creating them by pursuing ineffective
central government policies.)
13. Most of the more precise elements that are usually thought to affect
economic progress often are misleading or are replete with exceptions. For
example, the sizable amounts of foreign exchange earned from abundant natural
resources often have not been a key to development. Countries such as Zaire
and Colombia with their large natural resources have failed to show much
economic progress, while South Korea and Hong Kong with a paucity of such
resources have done extremely well. In fact, an abundance of natural
resources often hinders economic development as the largess undermines
entrepreneurial tendencies in favor of social-welfare outlays. This so called
"Dutch Disease" has inflicted Mexico, Venezuela, and Nigeria.
14. Literacy rates often are an important indicator of a country's ability
to make economic progress but not an influence in all cases. Zaire's rate is
nearly double that of the Ivory Coast, but the latter is one of the most
economically dynamic countries in Africa. Similar discrepencies can be found
in the case of foreign direct investment. South Korea has-received little of
these inflows while the amount going to Mauritania has been rather sizable.
15. Even the degree of government involvement in the LDC sheds little
insight. In fact, government outlays as a share of GNP usually rise as the
country develops. The share is much higher in Singapore, Malaysia, and South
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Korea than it is in Bangladesh, India, or Paraguay. Government ownership of
the steel capacity is as high in South Korea as in India. Yet the South
Korean industry is much more efficient than in India. Brazil's economy
expanded rapdily during the 1970s, in part because of the growth of its state
enterprises. In the 1980s, when the country was seriously affected by a
foreign debt crisis, these same enterprises were considered a major economic
burden.
16. Some aspects of government involvement in LDC economics, however, are
clear:
Lesser developed countries (i.e., other than the NICs and other
rich LDCs) can least afford the burden of government bureaucracies
and state-owned enterprises. These poorer countries tend to end up
with bloated bureaucracies, stiffling regulations, and crippling
corruption. In India, Liberia, Benin, and Tanzania about 50
percent of the nonagricultural salaried jobs are in government. In
Algeria during the 1970s, producers of fruit, vegetables, and
grains were strictly forbidden from moving their goods across
provincial boundaries, creating considerable supply difficulties.
The World Bank found that state-owned enterprises dominate domestic
credit markets in poor economies because of their borrowing
privileges. In the late 1970s they were responsible for 40 percent
or more of domestic credit outstanding in Benin, Guinea, Mali,
Senegal, and Bangladesh.
-- The creation of a favorable economic environment by LDC governments
is more important in enhancing economic progress than is the share
of GNP the government absorbs.
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17. By blending the positive but elusive elements of growth with the
considerable diversities among LDCs, such countries can be categorized
according to their growth potential, and in a manner that is useful for
considering economic policies toward each group. (See Table ):
The rapidly expanding NICs and the oil-rich countries in the
Persian Gulf and elsewhere that have achieved a level of economic
sophistication or income that approaches that of the developed
world (14 countries). The NICs have economic structures that are
at least equivalent to the poorer developed countries such as Spain
and Greece. Their exports of manufactures have reached sizable
proportions in developed country markets, and they become major
growth markets for developed country goods. Saudi Arabia and a few
other Persian Gulf countries have become major players in
international financial markets as well as in the International
Monetary Fund. The links of these newly emerging economic
powerhouses with other LDCs are similar to those of developed
countries. For example, Brazil and South Korea sell relatively
large amounts of manufacturers to LDCs and the Persian Gulf
countries are major suppliers of financial assistance.
Those LDCs that could within a decade or so reach NIC or high
income status (8 countries). Argentina, Chile, Uruguay, and
Venezuela have the best resources to expand manufactures greatly.
Along with the successful NICs they have a high literacy rate, per
capita income levels above $2,500, an abundance of skilled workers,
and a sophisticated economic and financial infrastructure. But
these countries are going to have to overcome serious past
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political and economic troubles. Argentina and Chile have been
hurt by domestic political problems, and Uruguay by a failure to
diversify its exports of manufactures. Venezuela has failed to
develop a competitive manufacturing sector because the incentive to
do so has been undermined by the many years of high oil income.
All four countries have seen their export competitiveness damaged
periodically by overvaluations of their currency. The ASEAN
countries of Malaysia, Thailand, and the Philippines also have a
good chance to expand exports of manufacturers. They have created
an environment to follow the path of the NICs. Much will depend on
their ability to achieve a sustained period of political
stability. Libya could easily become a high income country (more
than $10,000 per capita), if the government wisely uses its oil
wealth to assist its relatively small population.
-- Those countries with populations of more than two million that seem
likely to sustain moderately rapid economic growth--above 2 per
capita a year--but are still decades away from developed country
status. There are 27 countries in this category; for example,
c
Ivory Coast, Tunisia, Indonesia, and Pakistan.
-- The large number of LDCs (37) with populations of more than two
million that remain poor and seem to be making little progress in
sparking economic development. Among this sizable group, there
probably are a few countries which have the potential to reach the
fast growth category. They are the ones that have attained high
literacy rates and/or have demonstrated strong entrepreneural
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instincts for a portion of the past 20 years. These include El
Salvador, Jamaica, and Peru. India is a special case because of
its sizable population--some 750 million. Certain areas of the
country (more populous than most LDCs) have a well developed
industrial infrastructure, but taken as a whole, the country
remains poor, backward and has a low literacy rate.
The many ministates. About 10 of these countries have achieved a
middle income level ($2,500-$10,000 per capita) because of tourism,
oil refining, subsidies from the French, and being near-the United
States. Another 40 will have to find special niches in the world
economy if they want to achieve higher income levels.
Growing Importance of 'Second Economies'
18. In many of the less successful LDCs, ineffective and inefficient state
controls and enterprises have led to a rapid rise, especially in the growing
cities, of small-scale and often illegal economic endeavors (as retail outlets
and transporters of people and goods). These "grass roots" and seemingly
chaotic movements in many cases end up providing the best means for economic
development. In many cases, "second economies" are producing a vast new class
of entrepreneurs and a much broader development process. Although most
ventures do not develop beyond a rudimentary state, a number of dynamic medium
or large sized businesses emerge, and the process installs more modern
business practices that are passed on through family owned and operated
enterprises.
19. In addition, this broad-based development soon moves beyond trading.
Rather than simply distributing goods bought from others, many traders begin
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Insert
African Dependence on Agricultural Mineral Exports
Many of the countries that will probably continue to specialize in
primary commodities are in Sub-Saharan Africa. Indeed, African countries have
become more dependent on a small number of commodities for exports in recent
years, whereas countries in Latin America and Asia have generally reduced
their concentration on commodities. For example, coffee, cocoa, and cotton
exports as a share of total Sub-Saharan agricultural exports rose from 46
percent in 1964-66 to 63 percent in 1978-80, and the percentage of countries
in which three or fewer commodities account for more than half of Sub-Saharan
total exports increased from 61 percent in 1970 to 85 percent in 1977.
LDC Regions: Trends in Commodity
Experts Concentration
11.r.enl .d c.w111reeb where lhrec "woof ...muadd.c.
."..wnl 1.49 VI 1'??I.enl ..r nl..re .d I4.4.&1 .?\1?.w1.
Sob-Saharan Africa
E
Cali" America and (?aribbven
0
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Illustrations of a growing willingness to make the changes needed to cope with
the economic problems ahead.
o African LDCs are finally beginning to realize that many of their past
policies have reduced food production and that structural changes will
have to be made. Already, state farms have been handed over to private
management in Mozambique, and Mall and Zambia increased agricultural
prices to encourage farmers to produce more food.
o A major shift occurred in Algerian agricultural and distribution
systems in 1980. Free markets were allowed to spring up in all major
cities. Land owned by state enterprises were turned over to people who
expressed a willingness to develop it. Prices paid farmers are being
allowed to rise and consumer subsidies are being cut.
o A new government In Sri Lanka changed economic strategies. Most trade
and payment controls were dismantled and the exchange rate was devalued
by 44 percent.
o Bangladesh is moving from government to private channels in
distributing fertilizer to the farmers.
o State-owned enterprises have been turned over to private firms in
Pakistan, Somalia, Sudan, Zaire, the Philippines, Jamaica, and Chile.
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to produce easily made goods, such as clothing, by contracting with
individuals to make specified products at home. Later they establish their
own manufacturing establishments. Thereafter, small scale machine shops and
other support businesses begin to appear to service the burgeoning
manufacturing sector. This development process is particularly important in
poorer countries lacking natural resources and an highly educated and
disciplined labor force.-
Out 1 ook
20. We believe the ongoing forces, discussed in the previous sections, will
continue to drive LDC economic policies toward more pragmatic approaches
during the next 10 or so years. It is very unlikely that developed country
economic expansion will return to rates achieved during the exceptional years
between 1950 and 1973. For the bulk of LDCs, no new major sources of funding
are expected, such as foreign aid, bank lending, or windfall profits from
surges in oil prices. Technological changes within the developed world will
hold down purchases of many key raw materials, and the global demand for many
food items produced by LDCs probably will grow slowly, at best.
(See Insert 3.) f_
21. In fact, it seems likely that the impact of these forces will grow, and
that the trend toward pragmatism will become stronger. The era of more
pragmatic economic policies is still in its initial stages but gaining
strength. (See Insert 4.) While attitudes clearly have shifted toward more
realism, concrete actions are just beginning to be undertaken by LDCs other
than the 15-20 that have accepted such ideas for some time. In some cases, a
shift is occurring as the old-guard political elite who came to power during
the decolonization period are replaced by a new generation of technocrats.
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... a.,...., 'nLl
The most dramatic shifts are taking place in countries whose governments
previously had been most devoted to centralized-socialistic economic
development models--Algeria, Congo (Brazzaville), Guinea, Mozambique, and Sri
Lanka. India and Bangladesh are among major LDCs countries moving in the sane
direction but less dramatically. Moreover, throughout the Third World (as in
the First World), LDCs are seriously contemplating ways of reducing the
economic and financial burdens created by their highly inefficient state
enterprises.
22. The growing economic diversity among LDCs will mean that the important
role played by exports will change. As we have seen, beyond the present NICs,
few LDCs possess the capabilities to rapidly expand their exports of
manufacturers and sell the sizable amounts now being sold by the NICs. Those
major LDC exporters of manufacturers (including China) that do emerge will be
selling mainly less sophisticated products and moving into developed country
markets served previously by the present NICs. The more established NICs
likely will continue to prosper by upgrading their product lines. The newer
export-oriented LDCs thus will create less contentious trade problems for the
developed world than did the present NICs. The NICs meanwhile probably will
create trade issues that are much more akin to those contested among developed
states.
23. In the rest of the Third World, countries will have to emphasize small-
scale, domestically-oriented entrepreneurs as their main engine of growth.
Such a thrust is necessary if these countries are going to achieve the
critical mass in terms of the elusive elements of economic progress needed to
attain NIC status. A study by Jane Jacobs points out that urban areas give
rise to economies of scale and concentrations of buyers and sellers which spur
savings and economic growth. Nearly all LDCs possess the ability to move in
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Insert 5
Constrasting Public Policies in Tanzania and Kenya
The dramatic impact of government policies is demonstrated in Kenya and
neighboring Tanzania. The two countries have similar agricultural resources,
traditions, and population growth rates. While its policies have not always
been ideal, Kenya has offered its farmers price incentives and an effective
market-oriented infrastructure in most recent years. As a result, food
production has risen and, in several recent years, Kenya has exported food
surpluses. The drought cut last year's crop 15 percent but produced no real
food shortages.
In contrast, Tanzania uprooted its scattered farmers and concentrated
them in Ujamaa villages--where they were supposed to receive water projects,
machinery, and extension and social services. When the government proved
unable to provide the services, the result was a sharp drop in farm output and
an increase in soil degradation. Production of export crops plummeted as
villages increasingly retreated into subsistence production. The resulting
foreign exchange crisis is now so severe that Tanzania cannot import food or
fertilizer--nor transport either through its countryside.
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this direction, although goverment policies and political upheavals have
often thwarted such developments. Entrepreneurs flourished in many West
African countries until government policies discouraged their efforts.
Central America, especially El Salvador, was beginning to develop
entrepeneurial strengths and to achieve considerable economic growth in the
1970s, but these gains were set back by the region's political turmoil. The
alternative to greater emphasis on small-scale entrepeneurs is the reliance on
state controlled organizations, a practice which many LDC leaders now realize
has failed. Thus, it becomes less a matter of "whether" than of "to what
extent" market development can occur if economic progress is to take place.
(See insert 5.)
24. By its very nature this largely pragmatic and grass roots economic
development process will evolve slowly and will remain much less of a
noticeable phenomenon than the achievements of the NICs. The exceptions will
be countries--such as Algeria and Mozambique--that are undertaking dramatic
shifts from socialist to market-oriented economies. For those governments
switching gradually to pragmatic approaches, however, their policy changes
will not generate much notoriety. In addition, the gains stemming from the
broad based development process are nearly impossible to measure and therefore
often ignored. "Second economies" are just beginning to be recognized in
terms of their development potential and the cushion they provide during hard
economic times. More public notice will likely continue to be taken of the
considerable adverse impact of this development process--for example, the poor
living conditions in the rapidly expanding shanty towns that surround many key
LDC cities.
25. This evolutionary process could threaten LDC governments. Many leaders
will fear a loss of influence over their economy. There will be a great
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temptation to regulate the proliferation of small-scale entrepreneurs.
Government ability to control the increasingly inefficient state economic
organizations will be reduced in part because strong vested interests have
developed within these organizations that want to retain the status quo. Even
more important, the dynamic "second economies" have spawned an uncontrollable
economic sector that has become too big to eliminate and too diffuse to
control. To many LDC governments, the emergence of these small scale
entrepreneurs looks chaotic and provides opportunities for the growth of
opposition groups.
26. In many cases, while political control will remain firmly in the hands
of central governments (most likely some form of authoritarian power), a
division of power between the political leaders and the newly evolving broad-
based economic communities will likely develop. The private sector
increasingly will be allowed to operate independently of the government as
long as its participants do not become involved in antiregime acts or
movements. Spain under Franco and Brazil under military rule are prime
examples where such a division of interests lasted for many decades and was
successful in economic terms. Among other LDCs such a pattern is clearly
taking hold; for example, South Korea, Taiwan, Singapore, and Ivory Coast.
27. Although the trend toward pragmatic approaches will likely be
unrelenting, it will not always be smooth and will be characterized by
occasional setbacks. Within the expected highly unstructured and dynamic
development process, the potential for domestic political agitation will
remain high. Uneasy governments, especially those that fear losing control
over their nation's economy, are likely periodically to fan nationalistic
sentiment in an attempt to recoup their position. They will be strongly
supported by interest groups in their countries that benefit from the status
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quo. In some countries, the appearance of a large entrepreneurial class,
often from a minority group, will accelerate already deep racial or tribal
strains. Influences such as excessive religious fundamentalism--as in Iran
and Sudan--will set back the achievement of broad-based economic progress.
Countries that have some years to go before developing viable political
institutions--mainly in Africa--will be most vulnerable to domestic political
upheavals. Within this increasingly diffuse and tension laden milieu, the
Soviets can easily find groups to do their bidding. Using these groups, the
Soviets probably will be able to expand antigovernment propaganda and exploit
internal differences.
28. Occasional government attempts to reestablish authority over this
amorphous development process also will have a temporary adverse impact on
economic development. Experience with such attempts, however, indicates that
broad-based development soon emerges with even greater strength, because
second economies grow in response to government efforts to interfere with
market forces. A Marxist type police state--such as Cuba--is most likely to
avoid the more pragmatic development approach for the longest period, but at
the cost of scant long-term economic progress and increasing dependence on
external economic assistance.
Implications for US and Western Policy
29. The changing political-economic circumstances in LDCs present
significant economic opportunities for the United States to strengthen its
links with LDCs. This favorable climate essentially arises from a strong and
growing mutuality of economic interests. LDC leaders are becoming
increasingly aware that their economic fortunes are tied to the West and that
the East provides little in the way of a credible alternative. This view is
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Insert 6
Some projects guaranteed or financed by OPIC over the past few years,
that illustrate the development potential of small investments:
o In Thailand a project to dry, pelletize, and ship tapioca for export
wil pT provide training and employment for 185 people in a poor rural
area, transfer new technology, and increase foreign exchange earnings.
o In Costa Rica, expansion of acreage for a tropical houseplant export
project will generate some 500 new jobs and is expected to earn $10
million in foreign exchange over a five year period.
o In Rwanda expansion of a tea factory will create 103 jobs, generate
$3.4 mill on in foreign exchange earnings, and provide an expanded
market for 3,000 farmers who belong to the cooperative which sells tea
to the factory.
o In Haiti, two plants currently employ more than 400 Haitians who use
traditional weaving skills to make parts for high quality office
furniture.
o In Pakistan, a project to produce pharmaceutical products will
ultimately employ 139 workers and save the Pakistani Government $35
million in foreign exchange annually.
o In the Dominican Republic expansion of a meat processing plant will
provide 51 new jobs and will improve the quality and quantity of meat
available to the domestic market, as well as some for export.
o In Sudan, expansion of a small cargo service business will create 26
new jobs and include training and equipment maintenance and operation.
o In Peru, a fish processing plant will produce a high protein food
ingredient for local consumption and export and will create 125 jobs in
an area of high unemployment, while at the same time generating
signifcant foreign exchange earnings. F
o In Kenya. a high bread flour and vegetable seed production and
processing facility will create some 80 jobs and support government
plans to increase agricultural productivity and labor intensive
products.
o In Sri Lanka, expansion of a rubber tire manufacturing company will
create 92 local jobs and introduce advanced molding technology to the
country.
o In the Yemen Arab Republic, a small contract well drilling business
will dr , construct, and service water wells for private agricultural
and industrial use.
o In Honduras, expansion of a small condiment packing and processing
project will create an estimated 30 jobs.
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o In Egypt, a plant to assemble electronic video components will provide
training and employment for 122 people in a rural area in addition to
earning $1.5 million annually in foreign exchange.
o In Guatemala expansion of a small frozen vegetable processing and
packaging b siness will increase the local network of contract growers
by 300 and will generate foreign exchange. In addition the company
also provides technical and financial assistance to its network of
1,200 local contract growers.
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Insert 7
LDCs: Means of Harnessing the Technology Revolution
o As far as food supplies are concerned, irradiation has the potential to
reduce signifcantly spoilage which some experts calculate represents the
equivalent of 30 percent or more of total LDC food production.
o A second green revolution could easily be in the offering if the
genetic revolution is maintained at its present pace. Improved drought
and disease resistent seeds, could not only ensure healthier crops but
also could lead to greater growing areas.
o Prospects for irrigation could be greatly enhanced as new technologies
are applied to the area of desalinization engineering. This coupled with
the greater use of fiber-reinforced long-range piping, could noticeably
increase acreage suitable for cultivation in many areas of the Third
World at low costs.
o Advancements in biotechnology could ease energy problems in the LDCs.
On the one hand, biotechnology has the potential to reduce the need for
petroleum as a feedstock for organic compounds. On the other hand, it
could aid in oil recovery as microrganisms are developed to lower the
.viscosity of residual oil and produce carbon dioxide to repressurize
wells.
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Insert 8
Brazil: A Successful Use of Technology by the Private Sector
In 1975 the international oil situation prompted the creation in Brazil
of the National Alcohol Programme-PROAL000L-to increase the national output of
alcohol destined for industrial and automotive use.
Although the government coordinated and provided incentives, in all other
aspects PROALCOOL was given over entirely to private enterprise, a unique
decision for the otherwise state-controlled energy sector.
The results were impressive. Brazil's alcohol production multiplied 15
times in less than nine years, and in 1984 was equivalent to 127,000 barrels
of oil daily or was 14 percent of total oil consumption. This saved US$ 1.4
billion in foreign exchange.
In social terms, alcohol production has been important in improving and
developing the country's economy, creating enterprises in new areas, while
maintaining social stability in traditional cane-growing regions such as
Brazil's Northeast.
A total of 500,000 workers are directly involved with the current alcohol
crop, and more indirectly.
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strengthened by the tilt of LDC governments toward more pragmatic economic
approaches and the continuous expansion of market oriented second economies.
Strong ties will continue to exist in the other direction, too, since for most
Western developed countries, the LDCs provide dynamic export markets and still
play a key role in supplying some raw materials.
Potential Opportunities
30. The possibilities for strengthening developed country ties with the
Third World by building on ongoing economic forces can be grouped as follows:
-- Assisting the trend toward a more market-oriented agricultural
sector. This possibility is noteworthy in terms of both changes in
LDC attitudes and actions taken to remove constraints and burdens
on the agricultural sector. In some cases, state operated
marketing boards and organizations have been disbanded or allowed
to wither. More often, restrictions that hold down the price paid
farmers have been removed or liberalized as governments cut
consumer subsidies on staple foods.
Fostering the development of small-scale enterprises. LDC
governments have done little to encourage this possibility, in part
because they see such a trend as eroding their political power.
Most assistance for small-scale enterpeneurs has been
indirect--e.g., improving the country's roads. Often it has
involved a negative reaction to government policies--second
economies have evolved by selling goods and services at more
realistic prices than those set by the government. LDC governments
have established a few effective financial and other institutions,
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and Western governments are finding increasing means of assisting
private enterprise (OPIC and the IFC for example). The bulk of
available funds, however, are still used to back large-scale
enterprises. (See Insert 6.)
-- Pinpointing the available technology that could help the two areas
above. Significant new technologies are being developed that can
be adapted to particular LDC social-political circumstances. Many
relate to improving agricultural output or exports--for example,
the ability to keep farm goods at peak freshness for longer periods
through preservation techniques. Inexpensive or mobile satellite
receiving stations are being used in LDCs to improve communications
and to tap developed country or local. data bases. (See Insert 7
and 8.) By and large, however, the application of new technologies
to conditions in LDCs is still in its infancy.
-- Helping state entreprises to become more efficient or finding ways
to turn over their functions to the private sector. While this
possibility has received considerable attention, actual divestures
of state owned enterprises have been limited so far. Many LDC
governments are seriously thinking about possible ways of ridding
themselves of burdensome state enterprises or of making them more
efficient, but they have not found politically or economically
feasible means to do so yet.
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Insert 9
Major LDC Recipients of Foreign Direct Investment
(1980-1982)
Those LDCs receiving
more than $200 million
per year
Argentina
Brazil
Chile
Egypt
Malaysia
Mexico
Philippines
Saudi Arabia
Singapore
Those LDCs that are receiving
foreign direct investment equal
to more than 1% of GNP
Brazil
Chile
Egypt
Malaysia
Mexico
Philippines
Saudi Arabia
Singapore
Botswana
Cameroon
Costa Rica
Fiji
Gabon
Guatemala
an
Sri Lanka
Tunisia
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Finding the means to help the numerous ministates boost their
economic activity. Although this difficulty affects many LDCs, the
question is being largely ignored. Attracting tourists and
becoming an offshore financial center so far have helped some of
these small LDCs. Two earlier attempts at forging common markets
eventually failed because of political disruptions--East Africa and
Central America.
Assisting in enlarging the flow of foreign direct investment to
LDCs. Many LDC governments have liberalized their investment laws
while others have provided greater incentives for the foreign
investor. Although the amount of foreign direct investment placed in
LDCs has accelerated in the past decade along with improvements in
LDC attitudes, the decision to invest still depends mainly on how
firms weigh anticipated market opportunities against political
risk. (See Insert 9)
Encouraging LDCs to recognize the importance of policies that
foster entrepeneurs. These would include realistic exchange rates,
more open credit markets, minimal regulations, and price and wage
controls.
31. Although the new opportunities clearly abound, they will be
particularly hard to exploit. LDC regimes will be very reluctant to allow
large numbers of foreign experts into the country to assist small-scale
enterprises. Even if the foreign presence is small, LDCs will be suspicious
of direct foreign contacts with small businesses. Local businessman who have
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Insert 10
Kenya: Preference for the State-to-State Aid
President Moi of Kenya criticized the United States as being the "only"
donor which attempts to direct resources to the private sector, rather than
through the Treasury as other donors do. In a July 1984 discussion with Aid
Administrator McPherson, President Mol said "Kenya would not give up control
of the movement of grains during the drought." The President said that
middlemen traders (read Asians) were "evil."
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L.vnr iucni iIL
monopoly control of some aspects, of the LD.C economy, a common phenomenon in
many LDCs, will also attempt to restrain foreign efforts that could spur
potential competitors.
32. Problems will also exist from the developed country point of view.
Traditional aid efforts have tended to exclude help for grass roots
development. This reflects the natural use of state-to-state channels and the
tendency to fund large-scale development projects because the results are
clearer to see and easier to measure. State-to-state aid can also more easily
be tied to donor country exports, often a domestic political necessity in
maintaining foreign assistance spending. In addition, foreign businessmen are
not inclined to become involved in helping small-scale operations that are
mainly domestically oriented. Finally, the LDC economic gains from this
expected development process are likely to evolve much more slowly than the
NICs achievements, and will be much less dramatic. The developed countries,
thus will face the dual problem of reordering assistance for LDCs and
sustaining public interest in the effort.
Impact on East-West Competition for the Third World
33. On balance, we believe the ongoing economic forces at work in the Third
World will strengthen the developed West's position vis-a-vis the Soviet Union
in that region and somewhat reduce the chances of takeovers by Marxist-type
police states or demagogues that would rely heavily on Moscow. While LDC
economic links with the developed West will remain strong and probably grow,
Moscow will have even less to offer than before:
-- The likely continued poor economic performance of the Soviets (and
most of their allies) will make the Soviet economic model even less
attractive than it has been for the past 10 years, nor are the
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WN 1uEniIMLJ
Soviets ideologically or institutionally equipped to respond to
opportunities to assist growth of LDC private sectors.
The Soviets will be unable to provide much of a growth market for
LDC exports. LDC export expansion will take place mainly in
consumer manufactures, and the Soviets are unlikely to purchase
many of these items, especially given their expected foreign
exchange constraints. Soviet efforts to remain self-sufficient in
raw materials will keep purchases of these goods low. Only imports
of bauxite-alumina probably will show a sharp rise. While the
Soviets will continue to import sizable amounts of grain, such
purchases will benefit only the few LDCs that possess an ability to
export these amounts, such as Argentina.
The Soviet ability to supply oil to LDCs will diminish with slowing
domestic production and increased needs at home. While the Soviets
will greatly increase the amounts of natural gas they sell,
transportation by pipeline restricts exports to Western Europe.
Most LDCs on the periphery of the USSR have ample supplies of
natural gas.
Economic aid provided by Moscow is unlikely to expand
significantly. Expected foreign exchange stringencies will
seriously limit Moscow from providing any sizable amounts of the
most valuable form of aid--hard currency loans. Growing domestic
shortages of goods and manpower will limit commodity and project
aid.
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CONFIDENTIALI
34. In sum, Soviet domestic economic and foreign financial constraints
expected during the next 10 years are likely to make Moscow even less inclined
than at present to accept costly new burdens like Cuba and Vietnam. The
Soviets currently are trying to trim outlays throughout their empire and are
hesitant in providing substantial economic support for their newest client
states--Angola, Mozambique, and Nicaragua. Despite its reluctance, Moscow
would supply emergency aid if it thought it was a necessary element in
maintaining a pro-Soviet state--for example, the mid-1984 supply of oil to
Nicaragua.
35. At the same time, the economic forces at work will mean security issues
will play an even greater role than present in the East-West competition for
the Third World. Moscow will have to rely even more heavily than it already
does on arms and security assistance to sustain its influence in the Third
World. The unsettling nature of the broad based development process will make
LDC governments uneasy about their ability to maintain power and will probably
tilt both developed and Communist aid toward security assistance. Many LDCs
will fear real or imagined Soviet meddling. Some will turn to the Soviets for
security assistance as a means of neutralizing the suspected Communist
interference. Most LDC governments, however, will turn to Western developed
countries for finding ways to allow LDC governments to cope more effectively
with a development process that increasingly defies control. Often, these
security requests will coincide with economic support, and security assistance
can reinforce the willingness of LDCs to make a change in economic policies.
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APPENDIX A
Changing Soviet Economic Role in LDCs
1. The decolonization period that lasted from 1947 to the mid-1970s
presented the Soviets with many strategic opportunities in the Third World.
Many leaders of newly established Third World countries had a personnal bias
against the West. They perceived that the poverty of the LDCs was in essence
either a legacy of the colonial period, or part of the continuing Western
attempt to dominate the Third World through capitalistic-dominated
institutions. Moreover, many LDC leaders quickly found that they could use
the possibility of a Soviet presence to attract more aid from the West.
2. Moscow for its part, could exploit anti-Western feeling by arguing
that not only was the USSR not a colonial power, but that its collectivist
system represented an effective counter to the Western imperialistic model.
Even more importantly, the Soviet system offered a model for centralized
control and state domination which was seen by LDC leaders as essential in
fractious ex-colonies which were often little more than administrative
fictions. State planning was also widely accepted in the developed world as
the only plausible development path for LDCs. Finally, Moscow could point to
the strong growth record of the Soviet Union--GNP increased more than 5
percent a year from 1955 to 1970--as proof of the superiority of the Socialist
model. Rapid Western economic growth during the same period was downplayed by
the bias of Third World leaders and the sizable LDC export earnings resulting
from the strong Western demand for LDC agriculture and mineral products helped
pay for the costs of pursuing socalist policies.
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3.. The Soviet ability to use economic means to influence LDCs began to
wane soon after the last major decolonization move--Angola and Mozambique in
1974. In many LDCs, the harsh economic realities of development became
evident, especially with the ending of the era of extraordinarily rapid
economic growth in the Western world. By that time, many of the anti-Western
Third World world leaders had left the scene. The more pragmatic new leaders
realized that Moscow was suppling meager amounts of economic aid, was unable
to supply alternative markets for LDC goods, and was a poor development model
to emulate.
4. The picture is clear:
-- Soviet and East European economic aid amounts to less than 5
percent of the assistance provided non-Communist LDCs. Aid from
these countries did increase from $0.8 billion in 1975 to $1.8
billion in 1983, but 80 percent of the increase went to new client
states of Afghanistan, Ethiopia, and Nicaragua. Aid to other
major recipients--India, Turkey, and Iran--stagnated.
A similar picture emerges for economic technicans and workers in
LDCs. They rose from about 30,000 in 1975 to more than 120,000 in
1984 with 80 percent of the gain accounted for by Libya, Iraq,
Algeria, and Afghanistan.
The USSR commercial trade with LDCs is much less than that of
South Korea and such Soviet trade is equal to only 5 percent of US
transactions with LDCs. Only six of more than 110 LDCs export to
or import from the USSR more than 10 percent of their total.
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-- The more recent poor domestic economic performance of the USSR has
undermined its credibility as the socialist model for the Third
World.
5. With the Soviet economy likely to grow slowly for many more years,
Moscow is likely to be stingy with its economic assistance and to continue to
give the bulk of that aid to its allies--Angola, Afghanistan, Ethiopia,
Nicaragua and South Yemen. The relatively high costs of maintaining its
political position,in these countries will mean that there will be little left
over for the others. In addition, the Soviet ability to exert influence
throughout the Third World will continue to depend heavily on more proven
tools--supplying arms and supporting insurgents.
6. At the June 1983 Plenum of the Central Committee, Andropov--replying
bluntly to frequent LDC complaints of Soviet tightfistedness in nonmilitary
economic assistance--put the Third World on notice not to expect much in the
way of such aid from the USSR. This posture, of course, was not intended to
signal less Soviet involvement in the Third World. Arms exports--mainly for
hard currency--are likely to remain high. But, economic assistance is being
channeled even more than before to the USSR's Communist allies and leftist
client states.
7. Over the next decade, the USSR will face a policy dilemma--how'to
maintain a balance between pressure to cut economic assistance to Third World
allies and the need to keep these regimes viable. The USSR's reluctance to
extend significant economic assistance to its clients is likely to create or
exacerbate strains in bilateral relations and could limit Soviet willingness
or ability to exploit opportunities in the Third World. Some states--Angola,
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Ethiopia, Mozambique, and South Yemen--are unhappy with Soviet stinginess on
development aid and are looking elsewhere for help. Although these regimes
are tied to the USSR by their urgent need for substantial military assistance
and will continue to be dependent for years, Soviet reluctance to furnish
meaningful economic aid might provide openings for the United States and other
Western states to gain leverage.
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Economic* Trade with LDCs, 1983
(Billions $)
US
S. Korea
USSR
Other Communist
Countries*
Exports
65.5
6.8
3.2
7.0
Imports (cif)
94.7
7.4
5.4
6.5
-----------------------
* East European (Albania, Bulgaria, Czechoslovakia, East Germany, Hungary,
Poland, Romania), Cuba, North Korea, Mongolia, and Vietnam
Exports
Imports
Albania
negl
negl
Bulgaria
0.5
0.5
Cuba
0.3
0.3
Czechoslovakia
1.0
0.6
East Germany
0.6
0.7
Hungary
1.2
1.0
North Korea
0.1
0.1
Mongolia
negl
negl
Poland
0.9
0.5
Romania
2.3
2.5
Vietnam
0.1
0.3
7.0
6.5
Exports.
Trade with Cuba, 1982
Imports
USSR
3.9
4.5
Other Communist
1.1
1.4
Developed
0.6
0.4
LDCs
0.3
0.3
5.9
6.6
* Excludes military
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LDC: Economic* Trade with the USSR and Eastern Europe, 1983
Share of LDC Total
1Number
LDCs
Percent
Both exports or imports less
than 1%
52
47
Either exports or imports
as much as 1.1% - 2.0%
23
21
Either exports or imports
as much as 2.1% - 5.0%
18
16
Either exports or imports
as much as 5.1 - 10%
11
Either exports or imports
above 10.0%
5
Total
TM
Eighteen Major LDC Traders with the USSR and Eastern Europe
(% of LDC trade)
Exports
Imports
Afghanistan
55
24
Argentina
23
1
Bangladesh
10
4
Brazil
5
3
Cyprus
6
3
Dominican Rep.
8
negl
Egypt
5
4
Ethiopia
negl
26
Gambia
negl
6
Ghana
34
negl
India
12
6
Iran
N.A
6
Malta
5
2
Morocco
5
8
Reunion
8
negl
Sudan
7
1
Syria
16
8
Uruguay
7
2
---------------
* Excludes military
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USSR Economic* Trade with LDCs, more than $150 million, 1983
Exports
(% of total)
Imports
(% of total)
Afghanistan
5
Afghanistan
4
Brazil
5
Argentina
32
Egypt
5
Brazil
13
Ethiopia
7
Ghana
5
India
30
India
15
Iran
17
Malaysia
6
Morocco
7
Singapore
4
Others
24
Syria
4
Other
17
Total Value
$3.2 Billion
$5.4 Billion
* Excludes military
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Soviet and East European Economic Credits and Grants drawn by LDCs
1975
1983
Change 1975 to 1983
(Billion $)
(Percent of
Total)
Afghanistan
negl
0.4
0.4
40
Egypt
0.1
0.1
-
Ethiopia
negl
0.2
0.2
20
Nicaragua
negl
0.2
0.2
20
Nigeria
negl
0.2
0.2
20
India
0.1
0.1
-
Iran
0.1
0.1
-
Turkey
0.1
0.1
-
Other
0.4
0.4
-
0.8
-1
To
TM
Soviet and Eastern European Economic Technicians and Workers in LDCs
1975
1984 Change 1975 to 1984
(Thousand)
(Percent of
(Total)
Afghanistan
0.9
5.3
4.4
5
Algeria
5.6
11.4
5.8
6
Angola
negl
3.5
3.5
4
Iraq
2.6
15.3
12.7
14
Libya
5.8
54.7
48.9
55
Nigeria
0.2
6.4
6.2
7
Other
17.4
25.2
7.8
9
5
T21. 8
893
T6O
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Appendix B
Case Studies
Governments can provide incentives for the development of an indigenous
economy or can provide such a stifling economic atmosphere that an illegal
"second economy" arises so that the populace can earn a livelihood. South
Korea, Taiwan, and Ivory Coast are examples of the former, Peru and Burma of
the latter. China has features of both as its partial liberalization has
created a sizable second economy. Case studies of Peru and China are shown
below.
1. Peru today is an exceptional example of the ability of an indigenous
market economy to take root without any external advice or assistance in a
developing country environment that is essentially hostile to its growth. The
Peruvian economy and society have traditionally been defined by two major
forces. In the urban areas, the direction of industrialization has been set
by privileged, conservative oligarchs who operate highly protected and
subsidized industries for which the government has erected legal barriers from
both internal and external competition.
2. The poor in the rual areas, on the other hand, come from a tradition
imbued with the Inca mentality of collectivism and cooperative undertakings.
Indeed, this fact has been well exploited by the leftist groups including the
Sendaro Luminoso (The Shining Path) who have used traditional economic
patterns as a basis for modern Marxist prescriptions and recruitment.
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3. Interestingly, however, both the left and the right agree on a dominant
role for the government in economic affairs, and both have cooperated in
attacking the growth of economic liberalism. When the rual poor arrive in the
cities, however, they find access to the legal marketplace barred by a dense
bureaucracy that favors the entrenched businessmen of the traditional private
sector. After actually going through the required 310 legal steps to set up a
small clothing enterprise, someone without experience or political connections
would have to work 40 hours a week for more than six months, and pay eight
unavoidable bribes, merely to register to do business. Rather than lose
themselves in this legal morass, most poor immigrants to Peru's cities ignore
the law and earn a living in the informal sector. Today, two out of every
three urban workers are employed in this sector.
4. In this environment, a second economy has grown to the point that it is
now nearly 50 percent larger than the legal economy. Although the small
independent entrepreneurs involved in this illegal economy have no recourse to
the established legal or banking system, rarely own the land on which they
build and work, and receive no government incentives, they dominate the
economic life of the country. The second economy assembles cars and builds
the machine tools needed by the automotive industry. It 'operates nearly all
public transportation, including 85 percent of the bus system. About 90
percent of the clothing business and 60 percent of housing construction is in
this system. None of these activities are in any way subsidized, thus the
only justification for their existence is earning a profitable livelihood. A
majority of workers now go to work in the second economy where wages are
comparable with the legal economy.
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5. Perhaps most interesting is the land situation. In Peru, most land is
government owned, and most of the millions of migrants are squatters on
government land. Yet squatters build houses and even office buildings, and a
majority of new construction is on untitled squatter land with nearly half of
Peruvian housing construction done by illegal contractors.
6. It is important to examine the means by which this second economy can
operate and grow:
-- It has established a financial system, which despite higher risks
(and thus costs) and the lack of access to capital markets, grows
apace with that of the formal banking system.
-- While there is no formal court to adjudicate commercial or land
ownership disputes, there is an underground system which functions
fairly and effectively using "moonlighting" judges, working for a
fee paid by both sides.
-- In spite of the absence of legal title to land, there is a system
of deed registration which allows "title" to squatter land that can
be used as collateral for loans from "banks" and even passed on to
ones heirs. Indeed, even prime street vending spots are registered
and can be bought, sold, or used as collateral. These spots have
sold up to $750.
7. This transformation has taken place without government paternalism and
central planning, without a formal financial and legal foundation, and without
even a philosophical tradition of capitalism. There is no Peruvian Adam
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prohibitive red tape and government regulation which are extremely costly to
the people of Peru.
8. In 1978, the third plenum of the 11th Central Committee began a process
of reform that is increasingly unleashing market forces in the Chinese
economy. In China's rural areas, "responsibility systems" were introduced
which permitted farmers to sign contracts with the state on what they would
produce and market+surplus production freely. This has resulted in an
economic boom in the countryside. In the past three years agricultural
production has increased by over 30 percent even though the sown area in grain
has been reduced. Rural income has jumped rapidly.
9. Reform of the urban industrial economy lagged behind, though the stage
was being set for change there also. On 20 October 1984, the third plenum of
the 12th Central Committee issued a "Decision on the Reform of the Economic
Structure" which, if carried out as planned over the next five years, will
change the face of Chinese socialism. The economic system most likely to
emerge will mix free market regulation with Soviet-style planning in a fashion
similar to that of Hungary.
10. This decision aimed reform at four undesirable features of China's
Soviet-style planned economy: (1) the lack of clear distinction between
functions of government and industry; (2) excessive and rigid state control;
(3) an inadequate role for prices and markets; and (4) the practice of
"absolute egalitarianism." What Beijing envisions is an economic structure
where major assets continue to be state owned, but where enterprise managers
are free to respond in a competitive way to market signals.
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11. Under the new system, state guidance will become "rough and flexible"
but enterprises will have far greater managerial responsibility and will be
responsbile for profits and losses. Enforcement of state guidance plans will
be accomplished mainly through the use of economic levers such as interest
rates, bank lending policies, and taxes. Besides issuing the general plan,
the state will continue to appoint and remove key enterprise managers and will
determine which firms will be subsidized and which will be forced to merge or
shut down when financial problems arise. Consequently, Beijing will retain
considerable control. Nevertheless, enterprises will have much more control
over what and how much they produce, their finances, and over hiring and
firing workers, and even setting product prices.
12. The key to the reform is overhauling China's irrational price
structure. Beijing will gradually reduce the number of items subject to
state-set fixed prices, except for some essential products. Prices will be
allowed to float, but only in an incremental way, since the regime wishes to
avoid panic buying, or hoarding and speculation. Gradually Beijing hopes to
bring its raw material and energy prices into line with world prices.
13. What about the rise of the second economy? Marxist rhetoric precluded
the Chinese from admitting its existence prior to the reforms, but evidence
now suggests that it is becoming increasingly prominent. The large numbers of
trials and executions in China for "corruption" show that fairly large amounts
of money and commodities have been involved.
14. The unleashing of private entrepreneurship has contributed to the
second economy, since many entrepreneurs take advantage of the state marketing
system to illicitly acquire goods for private sale. An elaborate system of
kickbacks has been established so that workers in the state system can also
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profit. While there are no figures available on the size of this economy,
those who have lived and traveled in China report that it is widespread.
15. We can expect that the urban reforms will enhance this tendency.
Because the overall scheme will remain socialist in nature, the market and
private forces that coexist will enable clever entrepreneurs to enlarge the
second economy. There is every reason to expect that the Chinese of China
will be just as effective as the Chinese in the rest of Asia at finding ways
to make money.
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