THIRD WORLD ECONOMIC PROSPECTS TO 1990: IMPLICATIONS FOR THE UNITED STATES

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• Sequence Number: 1
• Publication Date: May 1, 1985
• Content Type: REPORT

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9',.,~~""`+r~. Directorate of Confidential
~~
~~
Intelligence 25X1
Third World Economic
Prospects to 1990:
Implications for the United States
Confidential
GI 85-10122
May 1985
ropy 2 7 6
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Directorate of
Intelligence
Third World Economic
Prospects to 1990:
Implications for the United States
Confidential
GI 85-! 0121
May 1985
OGI, o
Global Issues. Comments and queries are welcome
and may be directed to the Chief, Development Issues,
This paper was prepared by
with contributions from ~
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25X1 Confidential
Third World Economic
Prospects to 1990:
Implications for the United States
Key Judgments Moderate improvements in economic performance will allow most Third
/rt/ormation available World governments to "muddle through" the next five years with varying
as oj22 April /98S degrees of policy compromise that neither dismantles their economic
was used in this report.
austerity programs nor leads to dramatic political or economic upheavals.
According to projections prepared by Data Resources Inc., Chase Econo-
metrics, and SRI International, the Third World should grow at a real
average annual rate of between 4 and 5 percent to 1990. Although below
the high rates recorded in the 1960s and 1970s, this performance is an im-
provement over the depressed rates experienced during the past few years.
At the same time, consumer price inflation is expected to slow, an
improved trade surplus will help the Third World reduce its current
account deficit, and outstanding external debt is forecast to rise more
slowly.
In our judgment, the Third World's economic prospects have several
important economic and political implications for the United States and its
industrial allies:
? In the area of international trade, the United States and other industrial
countries will be required to absorb increasing amounts of Third World
exports. We anticipate that the trade frictions between the Third World
and industrial countries will grow as many export-oriented Latin Ameri-
can and Asian countries make greater use of trade-distorting measures to
expand their exports. In addition, the newly industrialing countries pose a
potential threat of becoming an alternative supplier of sensitive, high-
technology products to Communist countries by the end of the decade.
? Although no major financial crises are expected to emerge under the
baseline outlook during the latter half of the decade, the need for periodic
financial rescue packages will continue, and their use probably will
broaden to such second-tier debtors as Egypt and Colombia. New
commercial bank lending is expected to be minimal, and the investment
incentives implemented by the Third World probably will not attract a
substantial amount of foreign direct investment. As a result, we believe
the Third World's demands for additional flows of concessional aid,
particularly by Sub-Saharan Africa, will heighten during the remainder
of the decade.
iii Confidential
GI 85-10122
May 1985
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? Increasing Third World stratification will lead the developing countries
to break into relatively small blocs or ad hoc groups with common
economic problems. We expect these groups to press the industrial
countries to adopt policies tailored to their members' unique conditions.
The Cartagena group of Latin American debtors is one such group.
Others could crystallize around aid and industrial country protectionism.
These special interests could lead to growing regionalism as the Latin
American countries concentrate on debt, the Africans on aid, and the
Asians on protectionism.
The Third World's improving economic outlook is fragile and could be
easily altered. Because of the high-downside risks attached to the baseline
forecast and to the fact that the Third World would only be in the initial
stages of an economic recovery, any one of a number of possible shocks
would worsen their economic prospects. According to the forecasters'
projections, the most disruptive effects on the Third World's economic
performance would occur if trade protectionism heightened or industrial
country growth slowed. In our judgment, the main implications of these
disruptions would evolve around the extensive use of aggressive export-
oriented trade policies, greater global financial instability, increased
cooperation among developing countries and would threaten the political
stability of some Third World governments.
In our judgment, Third World economic trends and desires during the
remainder of the decade will create a policy dilemma for the United States.
Aware that their economic prospects depend in large measure on US
economic policies, we believe the Third World will bring increasing
pressure on the United States to manage its economy with international
economic goals in mind. Specifically, they will call for reduced interest
rates, lowered US trade barriers, and continued protection of their own
markets, particularly in new areas such as services. Many of these
objectives, however, will reflect Third World needs and conflict with US
domestic concerns. Because of the fragile nature of the Third World's
economic outlook, it is unlikely that these pressures will diminish during
the remainder of this decade.
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Key Judgments
Preface
Economic Prospects to 1990
Implications
Trends in International Trade
Policy Implications
Trade Frictions Mount, Asian NICs Progress Into
Higher Technology Products
Periodic Payment Crises Continue, Dependence on
Concessional Aid Heightens
Policy Implications
Prospects and Implications Under Alternative Scenarios
Third World Stratification Accelerates, More
Emphasis on Single Issues
Economic Performance Probably Deteriorates 8
Greater Problems for the United States
A Policy Dilemma
A.
B.
C.
Methodological Note 15
Third World: Functional and Regional Classification Schemes 17
OECD: Baseline Assumptions, 1984-87 19
D. Third World Economic Outlook: Baseline Forecasts, 1984-89 21
Economic Prospects Under Alternative Scenarios 29
Third World Economic Outlook and Implications:
Some Related DI Publications 37
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ment Issues Branch, Office of Global Issues, on
This research paper is part of Directorate of Intelligence research efforts
concerning Third World development prospects. This report has been
prepared with the objective of providing quantitative estimates concerning
Third World economic prospects to 1990 and assessing their effect on the
interests of the industrial countries and particularly the United States. The
economic outlook presented is a consensus of forecasts prepared on
contract by Data Resources Inc., Chase Econometrics, and SRI Interna-
tional. Copies of these studies may be obtained from the Chief, Develop-
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Third World Economic
Prospects to 1990:
Implications for the United States
During the past two decades, the Third World has
emerged as a major actor in the world economy.
Today, Third World countries are suppliers of key
raw materials and selected manufactures, markets for
a growing share of industrial country exports, and
partners with an increasing number of industrial
country firms in the manufacture of many consumer
goods. At the same time, the Third World has
emerged as formidable competitors to industrial
country manufacturers of many labor- and capital-
intensive products and have had a significant impact
on the stability of the international financial system.
Our analysis of the Third World's economic prospects
to 1990 suggests that its influence on the political and
economic interests of industrial countries will not
diminish in the future. Indeed, the impact of its
economic performance on the industrial countries
probably will increase in:
? International trade, including growing tensions in
North-South trade relations and the emergence of
Third World exporters of high-technology products.
? International finance, including continuing debt re-
payment crises and heightened demands for addi-
tional concessional aid flows.
? North-South relations, including the formation of
Third World blocs or ad hoc groups confined to
single issues such as debt, aid, and protectionism.
The Third World is expected by most observers to
post modest improvements in economic performance
through the end of the decade. Continued industrial-
country growth and low world oil prices underlie this
improved outlook. According to forecasts prepared by
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Data Resources Inc. (DRI), Chase Econometrics
(Chase), and SRI International (SRI), the Third
World's economic prospects to 1990 include: '
? A modest acceleration in real economic growth to
4.5 percent annually during 1985-89. This rate is a
considerable improvement over the last six years
when growth averaged 2.4 percent per annum but is
still nearly a full percentage point below what was
achieved in the two decades prior to 1979 (table 1).
? A decline in the average rate of inflation to 25 to 35
percent per annum. Although a significant decline
from the 1984 peak of 50 percent, this outlook is as
inflationary as the late 1970s and early 1980s.
? A steady increase in the Third World's trade sur-
plus, which contributes to as much as a $25 billion
reduction in the current account deficit between
1984 and 1990.
? A slowdown in the growth of foreign indebtedness to
6 to 7 percent annually, a rate considerably lower
than the 21-percent average annual rate experi-
enced during the four years prior to 1981. The
Third World's net financing needs for the remainder
of the decade are expected to average $30-40 billion
annually, compared with $50 bi1125X1nually dur-
ing 1982-84.
The Third World's improved economic prospects,
however, will not be shared equally by all countries.
According to the forecasters' projections, the stron-
gest overall economic performance will be registered
' See appendixes A through D for the assumptions made by each
forecasting service and for the specific details of each forecasting
services' baseline forecasts.n
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Table 1
Third World: Comparison of Baseline Forecasts,
1984-89
a Estimated.
b Projected.
Data are for GDF.
d Real GNP and consumer prices are average annual rates of
growth.
Current account balance are annual averages.
by ,9sia where economic growth is expected to aver-
age 5 percent annually over the next five years. The
region's growth will be propelled by the Asian newly
industrialing countries (N ICs), which are projected to
grow at an average rate of about 7 percent per annum.
The growth of most other Asian countries, however,
will be encumbered by the expected weak world
demand for their exports of nonoil primary commod-
ities.' With the exception of the Philippines, Asian
inflation rates are expected to average 7 to 9 percent
annually, well below the Third World's average
(figure 1).
The Middle East's economic growth prospects are
expected to parallel those of the Third World at large.
The region's economies are projected to grow at a real
average annual rate of 4.2 percent. The rate of
inflation will significantly improve over the Third
World's performance, averaging roughly ]0 percent
annually, according to the forecasts. A gradual rise in
oil prices starting in 1986, because of an increase in
world demand for oil, is expected to help eliminate
some $20-25 billion from the region's current account
deficit by 1990. We believe this may be optimistic
because of available excess oil capacity. ~~
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Figure 1
Third World Economic Outlook, 1984-89
Note scale change
Real GDP Growth
l~hird W~xld :lggrega~e Latin America ~ Africa and Middle Last ?Asia
Tutal F:zternal Debt
Billion US $
900.
200
-~0 I~)8-t 8~ 86 8? 88 89 100
suu rcc~ AppcnJi~ I), URI Inc
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Despite signs that Latin Arr erica's economic contrac-
tion is bottoming out, the longer term outlook for the
region is not optimistic. According to the forecasters'
projections, Latin America's GNP will expand at an
average real annual rate of about 3.5 percent by 1990,
well below the 6-percent-plus rates attained during
the 1970s. Although many debtor countries either
have implemented or intend to implement the adjust-
ment policies needed to sustain long-run growth,
private forecasters believe that the governments' fail-
ure to curb domestic inflation, reduce public expendi-
tures, and accelerate the pace of structural reform as
well as the weak improvement in industrial country
growth will encumber the region's growt'~ ~~a exacer-
bate its external financial problems.n25X1
Latin American inflation will continue to be the
highest in the Third World. Triple-digit inflation in
Argentina and Brazil and quadruple-digit inflation in
Bolivia are expected to keep the region's rate of
inflation near 80 to 100 percent to 1990. Measures
implemented to constrain imports and boost exports
should contribute to an $8-15 billion increase in the
region's trade surplus. The projected growth in inter-
est payments on outstanding debt, however, is expect-
ed to more than offset the trade surplus, and the
current account deficit will expand by an additional
$5-10 billion by 1990. The growth of Latin America's
outstanding debt and debt service payments is also
expected to be the highest in the Third Wor1d.0
for example, predicts that between 1984 and 1990 the
region's total debt will rise from $320 billion to more
than $410 billion and the debt service will average
roughly 72 percent of goods and services exports-
well above the Third World average of 48 percent.
The major exception to the improved Third World
economic outlook is Sub-Saharan Africa. According
to the forecasters' projections, Sub-Saharan Africa
will, at best, average only 3-percent real growth
during 1985-89. This slow growth is attributed to
nagging internal structural problems, such as domes-
tic pricing policies for agricultural products that have
weakened the region's productive capacity, and the
bleak outlook for nonoil primary commodity exports.
It is anticipated that the region's accelerating rate of
population growth will more than offset any gains in
economic growth, and the region's real per capita
income will continue to decline through 1990. Mount-
ing food, fuel, and debt service payments are expected
to consume up to 75 percent of the region's total
export earnings. Consequently, it is projected that the
current account balance will steadily deteriorate, and
the region will be confronted with a foreign exchange
crisis through the end of the decade.)
In our judgment, the Third World's improved eco-
nomic outlook will be sufficient to allow most Third
World governments to "muddle through" the next
five years. Nonetheless, we anticipate that the Third
World's economic performance to 1990 will have
several important economic implications for the
United States and its Western allies in the areas of
international trade, international finance, and Nnrth-
South relations (table 2). 0 25X1
Trade Frictions Mount, Asian NICs Progress
Into Higher Technology Products
Trends in International Trade. In our judgment, two
developments will dominate the trends in interna-
tional trade that emerge during the next five years.
First, the rapid growth of US imports, which has been
the locomotive of economic growth for many Third
World countries since 1982, is not expected to con-
tinue. Forecasters foresee a slight decline in the value
of the US dollar, acooled-off domestic economy, and
mounting trade protectionism, reducing the growth of
US imports from 8.9 percent in 1985 to 4.3 percent in
1986 before bottoming out at roughly 3.3 percent for
the remainder of the decade. Second, the Third World
is expected to take a more aggressive role in promot-
ing its exports in the world market. This judgment is
drawn because of their increasing emphasis on export-
oriented growth as a means to finance critical imports
and meet debt servicing obligations.~~
In light of these developments, we believe many US
industries that actively compete with Third World
manufacturers both domestically and abroad will be
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Table 2
United States: Implications of the
Third World's Economic Outlook
Asian NICs US manufacturers of selected la-
bor-intensive products will experi-
ence increased competition from
Asian imports.
Trade-distorting measures may be
used more aggressively.
Financial Concerns
Primary recipients of any new com- Competition for export markets
mercial bank lending. and foreign investment may re-
duce Third World solidarity.
Opened markets will benefit US
exporters of capital goods and agri-
cultural products.
Ylajor debtors More aggresive use will be made of Periodic debt repayment crises will
trade-distorting measures. spread to smaller debtor countries.
Oil exporters OPEC's ability to survive as a car-
tel is gradually diminished.
Nonoil commodity
exporters
sources, and associated US support of
these sources will grow.
Note: The baseline forecast for the Third World suggests that
overall economic growth will be sufficient to allow Third World
governments to "muddle through" the next five years. Although
several trade and financial concerns are likely to emerge that have
significant implications for the United States, we do not anticipate
that there will be any dramatic shocks through the end of the
decade.
subjected to increasing competitive pressures during
the remainder of the decade. The industries affected
will include consumer goods sectors such as textiles
and apparel, footwear and other leather goods, and
electronic components as well as others such as steel
and metal products in which the Third World, partic-
ularly the NICs, have achieved significant market
inroads in recent years. At the same time, however,
the Third World will become a more important
market for US and other industrial countries' exports.
We believe the major beneficiaries of this growth
May emerge as an alternative
source of supply to Communist
countries of COCOM-restricted
products.
Third World solidarity may be
reduced as competition for ex-
port markets and foreign invest-
ment intensifies.
Government stability may
waver under pressures against
austerity programs.
Financially troubled oil export-
ers become increasingly depen-
dent on trade, aid, and creditor
concessions to ease their eco-
nomic pressures.
- --- __
Greater amounts of foreign aid
will be required to offset the
slow growth of commodity ex-
port earnings.
probably will include exporters of capital goods, par-
ticularly construction and transportation equipment,
as well as exporters of agricultural products
An additional implication of these developments is
that competition between Third World countries will
intensify as they compete for a larger share of a slowly
expanding world market for manufactures. This com-
petition will be concentrated between the Asian NICs
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of Hong Kong, Singapore, South Korea, and Taiwan;
such second-tier exporters of manufactures as Malay-
sia, Thailand, and India; and several financially trou-
bled countries, such as Brazil and Mexico, where
manufactures exports account for a large share of
export earnings. We believe this competition, in turn,
will accelerate a trend that is already occurring
among these countries to broaden their manufactures
export base. The Asian NICs are expected to push
more aggressively into capital-intensive, higher tech-
nology industries that are subject to fewer import
restrictions in industrial countries. The second-tier
manufactures exporters will accelerate their move
into such labor-intensive, consumer goods industries
as textiles, apparels, and simple consumer electronics
where they have a comparative advantage in produc-
tion. Many of the financially troubled countries, on
the other hand, probably will attempt to improve the
competitiveness of their traditional expor* ??^*ors by
providing additional incentives.0 25X1
Policy Implications. In our judgment, the trends
toward export-oriented growth in the Third World
and slower import growth by the industrial countries
probably will be a major source of confrontation
between the Third World and industrial countries
during the remainder of the decade. Several countries
probably will increase their pressure on the United
States and other industrial countries to further open
their markets to Third World exports and to pursue
policies that promote increased industrial country
growth, even at the risk of inflation. Moreover, several
export-oriented countries, principally in Latin Ameri-
ca and Asia, probably will make greater use of
competitive devaluations, export subsidies, counter-
trade deals, and other trade-distor25X1 easures to
expand their exports.~~
Another concern for the United States and its West-
ern allies is the possibility that the Asian NICs may
become an alternative source of supply of strategically
sensitive, high-technology products to Communist
countries. In particular, the Asian NICs are steadily
progressing up the technology ladder in the produc-
tion and export of more sophisticated manufactures.
In our judgment, South Korea, Taiwan, and perhaps
Singapore could compete with certain high-technol-
ogy industries in Western countries in the next two to
five years. Improvements in indigenous capabilities
are most likely to be in microelectronics design and
production, computer systems design and disk drive
development, and telephone switching systems and
millimeter wave communication devices. The Asian
NICs are not members of COCOM. Although not at
the leading edge of technology, the products that they
could export would certainly enable the Communist
countries to save on research and development (R&D)
costs, shorten leadtimes, and reduce enn;neering risks
and acquisition costs.'~~ 25X1
Periodic Payment Crises Continue, Dependence on
Concessional Aid Heightens
Trends in International Finance. Although the
growth of their foreign indebtedness is projected to
slow, the Third World's financial problems are not
expected to diminish during the remainder of the
decade. In our judgment, a major obstacle to an
improved financial outlook is an anticipated reduction
in the net flow of financial resources from Western
and OPEC sources. The financial flows to the Third
World include bank loans, private direct investment,
bonds, government-guaranteed export credits, and
official flows. Between 1970 and 1981, these capital
flows steadily increased from an estimated $20 billion
to almost $110 billion. This trend, however, came to
an abrupt halt in 1982-83 when official flows stabi-
lized and the growth of private flows began to decline
(figure 2). We and most other observers believe it is
unlikely that these official and private flows will
quickly resume the growth rates established during
the past decade~~ 25X1
Aside from credits extended in conjunction with IMF
and World Bank adjustment and rescheduling pack-
ages, new commercial bank lending to the Third
World is expected to be minimal during the remain-
der of the decade. In our judgment, the rate of growth
in commercial bank lending to the major debtors will
be curtailed by the reassessment of Third World
creditworthiness, the withdrawal of relatively smaller
banks from international lending, and continued high
real interest rates. Moreover, the reduced volume of
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Figure 2
Net Financial Flows to the
Third World, 1970-83
Rillioit US S
i,o_
Bunk loans ~ Export credits ~ Bonds
1)ircct ou,el c~t~,a
investment official Mows
305319 485
lending will go almost exclusively to the ~Pt~+~~~ely
low-risk East Asian countries. I I 25X1
The outlook for the growth of official flows also is not
good. Although the aid programs of a number of
industrial countries are still increasing, the total
official development assistance (ODA) received by the
Third World from all sources has been declining since
1981 largely because of a sharp fall in OPEC aid.
According to the OECD, ODA contributions from
Western governments are not expected to increase
any faster than the average growth rate of the
industrial countries' economies, and OPEC contribu-
tions to ODA are expected to continue to fall below
1981 levels during the remainder of the decade. In
addition, we believe other official flows provided to
the Third World will not be as readily available as in
the late 1970s largely because of budgetary con-
straints in both industrial countries and OPEC. ~
The anticipated continued slow growth of bank lend-
ing and lower levels of ODA may cause foreign direct
investment to play a larger role relative to other forms
of capital flows in meeting the Third World's future
financial needs. As a result, we believe that the Third
World's attitude toward foreign investment will grad-
ually improve. As the competition for foreign invest-
ment intensifies, many Third World countries can be
expected to pursue foreign investors more aggressively
by offering substantial investment incentives.
Policy Implications. Through a combination of pru-
dent economic management and continuing renegotia-
tions with lender organizations, we believe the finan-
cially troubled nations will be able to muddle through
the next five years without serious disruptions to the
international financial system. Because of the fragile
nature of their recovery process, however, we believe
the recent pattern of periodic payment crises and
IMF-organized rescue packages will continue. More-
over, the focus of these disruptions probably will
broaden from the major debtors of Argentina, Brazil,
and Mexico to second-tier debtor countries such as
Egypt and Colombia, which are expected to incur
mounting current account deficits and more serious
debt repayment problems. As a result of this trend, ~uP
expect that the Third World's demands for lower 25X1
international interest rates, lengthened debt repay-
ment periods, and increased financial flows will not
diminish during the remainder of the decade.
The investment incentives offered by the Third World
are not expected to attract a substantial amount of
additional foreign investment. In an attempt to retain
some control over the incoming foreign investment, we
believe many countries may impose performance re-
quirements such as export quotas, employment tar-
gets, and local content requirements that are a major
deterrent to potential foreign investors. Moreover,
with the exception of investments in petroleum and
other mineral extraction industries, most foreign in-
vestment probably will continue to be concentrated in
the safer investment climates of Asia. I
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In our judgment, the Third World's demands for
cuncessional aid flows will not diminish during the
remainder of the decade. Historically, the poorest
countries in the Third World have relied on official
loans and grants for nearly all of their external
financing. According to the forecasters' projections,
the economic prospects for the poorer countries-
particularly in Africa-are not going to improve. Real
economic growth is expected to be slow, debt and debt
service payments will continue to expand, and the
current account deficit will steadily increase. We
judge that this deterioration in Sub-Saharan Africa's
economic performance will only heighten these coun-
tries' dependence on official loans and grants and, in
turn, lead to greatf25X1 ands for concessional aid
flows.) I
Third World Stratification Accelerates,
More Emphasis on Single Issues
Trends in North-South Relations. In our judgment,
the North-South dialogue as constituted for the past
decade has become an anachronism. Until the early
1970s, most developing countries had similar econom-
ic objectives and saw the "New International Eco-
nomic Order" (NIEO) as a way to achieve them. They
envisaged OPEC control of world oil prices and
supply as the leverage needed to extract concessions
on trade, finance, and aid from the industrial coun-
tries. Since then, however, OPEC's power has de-
clined steeply, and the industr~~~ ^~*ions have largely
ignored the NIEOO 25X1
We believe a key factor affecting future North-South
relations is the accelerating stratification of the Third
World. The past decade has underscored the widely
different abilities of developing countries to adapt to
changes in the world economy. As a result, the
economic interests of developing countries have be-
come increasingly dissimilar. For example, the NICs
and second-tier exporters of East Asia and Latin
America are seeking to further penetrate OECD
markets with high-value-added manufactures. Other
developing countries face onerous debt burdens and
feel that some accommodation with creditor govern-
ments on debt relief is a necessary condition for their
future growth. Meanwhile, many Sub-Saharan Afri-
can countries need massive aid to stave off economic
disaster. The economic outlook suggests that these
differences will sharpen during the remainder of the
decade.0 25X1
Policy Implications. In our judgment, increasing
Third World stratification makes relatively small
blocs or ad hoc groups of developing countries with
common economic problems the most likely means for
them to try to improve their negotiating position with
industrial nations. We expect these groups to press the
industrial countries to adopt policies tailored to their
members' unique conditions. The Cartagena group of
Latin American debtors is one such group. Others
could crystallize around concessional aid and
industrial country protectionism against manufac-
tured exports. Because these special interests tend to
be identified with specific areas of the world, we
would expect to see growing regional divisions, with
the Latin Americans focusing on debt, the Africans
on aid, and the Asians on protectionism~~
Prospects and Implications Under Alternative
Scenarios
Economic Performance Probably Deteriorates
The Third World's economic outlook is fragile and
can be altered by a variety of external shocks. These
shocks include an increase in international interest
rates, lower industrial country growth rates, height-
ened industrial country protectionism, as well as
abrupt changes in world oil prices. According to the
forecasters' analyses, these deviations from the base-
line or "best guess" scenario probably would worsen
the Third World's economic prospects (figure 3).? The
most devastating effects on the Third World's eco-
nomic performance would occur if US protectionism
heightened or US economic growth slowed, according
to the forecasters' projections.5 The main impact of
these disruptions is on the Third World's external
sector. Under these scenarios, export earnings decline
by some $35 billion annually, resulting in a larger
current account deficit and an average annual in-
crease of roughly $30 billion in the Third World's 25X1
' See appendix E for the empirical results of the alternative
scenarios considered by the forecasters
analysis suggests t at, over atwo-year
period, the effect on t e Third World of a 1-percentage-point
decline in OECD GNP growth rates would be roughly comparable
to the effect of a 3-percentage-point increase in interest rates
during the first year and a 2-percentage-point increase during the
second year.
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Figure 3
Third World Economic Prospects:
Alternative Scenarios, 1984 -1989
Note scale changes
Real GUN Gmeih
I 1 __ - _ 1_ ~_ _- -~ _ _ __~ _ _l_-_ l- --- -~- _ __ ~_
0 I'1R4 8> H6 R7 K8 89 0 1984 85 86 H7 8R H9
Billion US $
900
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Third World Economic Prospects: Assumptions
Underlying the Alternative Scenarios
The alternative scenarios considered by theforecast-
ing services include a recession in the United States,
an increase in US protectionism, a decline in world
oil prices, rising international interest rates, and a
relaxation in debtor country progress on their auster-
ityprograms. The specific assumptions behind each
scenario are:
? US recession. Assumes tight monetary policies and
a growingfederal deficit clash to push the US
economy into a recession in 1986. US interest rates
rise sharpli?, and the growth of US imports slows.
The US eeonornv then grows more slowly over the
remainder of the decade.
? Protectionism. A,csumes that protectionist measures
implemented in the United States result in a 10-
percent cut in US imports beginning in 1985.
? Low oil prices. Assumes a $5 per barrel cut in oil
prices starting in the first quarter of 1985.
? Higher interest rates. Assumes international inter-
ect rates rise 1 percentage point above baseline
interest rates beginning in 1985.
? Relaxation of austerity. Assumes the debtor coon- .
tr}' governments increase the money supply by 20
percent and that government expenditure's share of
GDP rises 61' l0 percent in 1985.
Each alternative scenario also assumes that no major
political changes are triggered and that the needed
.financing is forthcoming 25X1
external indebtedness relative to the baseline scenario.
If some combination of these external shocks oc-
curred, the Third World's economic performance
would be significantly worse than what occurs under
the protectionism and recession scenarios0
In our judgment, the deterioration caused by these
scenarios would tip the Third World's outlook from a
muddling-through scenario toward a situation of sig-
nificant economic difficulties for most Third World
countries. Under DRI's protectionism scenario, for
example, the export-based growth of many Asian and
Latin American economies would be derailed by a
protectionism-induced, 10-percent cut in US imports.
The debtor countries' economic growth rate would
plummet to only 0.5 percent in 1985. To finance the
ensuing $25 billion gap in their current account
deficit, borrowing would accelerate and by 1990 the
debtor countries' foreign indebtedness would rise to
$520 billion, roughly $40 billion higher than the
baseline outlook. For the Asian NICs, real economic
growth suffers a 2.2-percentage-point decline in 1985
and averages only 5.6 percent for the remainder of the
decade, well below the baseline average of 6.5 per-
cent. For the oil and nonoil commodity exporters, the
increased protectionism would reduce their real eco-
nomic growth by 0.5 and 0.9 percentage points,
respectively, in 1985. The forecasters expect, however,
that these countries would quickly locate alternative
markets for their exports and resume the performance
projected under the baseline scenariog~
According to the recession scenario, the Third World
economies initially benefit from the upward cyclical
movement in the US economy in 1985. However, their
growth rates suffer a sharp drop in 1986, as US
economic growth begins to decline, and do not begin
to approach the baseline rates until 1988:
? Although medium-term interest rates decline, the
effects on trade are so dramatic that the debtor
countries' average debt service ratio increases
roughly 10 percentage points to 82 percent of goods
and services exports, according to0projections.
? The oil exporters' total exports would decline by
about $4 billion from the baseline scenario, result-
ing in an almost equal widening of their current
account deficit from the baseline.
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Relaxation oJ'Austerity Policies:
Impact on Major Debtors
According to DRI and SRI projections, a relaxation
of the debtor countries' austerity policies produces
striking results. In particular, if the debtor countries
increase government expenditures and the money
supply, their real economic growth would gradually
accelerate. For the 1985-89 period, their real eco-
nomicgrowth would average 3.7 percent, which is
ahove the baseline proj25X1 of 2'9 percent (appendix
E, table E-1 J
This growth. however, does not come without longer
term costs. Under such a scenario, debtor country
imports grow at a faster pace than the baseline
scenario. Exports, on the other hand, only slightly
increase because of the debtors' limited access to
.foreign markets and higher rates of domestic it~a-
tion, thereby weakening their trade and current ac-
count balances. Assuming no constraints on borrow-
ing under this scenario, DRI projects total foreign
indebtedness would increase by $46 billion more than
the baseline .scenario in 1989, with an accompanying
deterioration of the debt service ratio. This deteriora-
tion is worse than what occurs unu25X1 recession
and protectionism scenarios.
The near-term implication of this scenario, according
to DRI and SR/, is that the relaxed austerity mea-
sures would accelerate growth and probably allow
debtor country governments to maintain political
stahility. We believe the longer term implication of
the scenario, however, is that the creditor banks
would either increase the spread on their loans or cut
q//~new lending to these countries. As a consequence,
the debtor countries would require substantial eco-
nomic and financial assistance to offset the effects of
their soaring external debt.~~ 25X1
? The Asian NICs' growth rate falls from 6.3 percent
in the baseline to 3.6 percent in 1986 because of
their strong trade ties with the United States. The
NICs, however, are able to recover quickly and post
growth rates in 1988 that equal the baseline rates.
The recession scenario has only minor effects on the
nonoil exporters because most of these countries rely
on primary commodity exports less sensitive to fluctu-
ations in world demand. n 25X1
Greater Problems for the United States
In our judgment, the deterioration that occurs in the
Third World's economic performance under these
alternative scenarios would have several important
economic implications for the United States and its
industrial allies. Although the importance attached to
each implication will vary depending on the cause of
the disruption, these implications probably would
evolve around a rise in mercantilist trade policies,
renewed financial crises, the threatened political sta-
bility of some Third World governments, and in-
creased coo eration among the dsveloning countries
(table 3).~ 25X1
In response to a significant deterioration in their
economic performance, many Third World countries
can be expected to adopt a more mercantilist ap-
proach to trade. In particular, we believe many of the
NICs, second-tier exporters of manufactures, and
debt-troubled countries probably would take whatever
means necessary-legitimate or not-to maintain or
expand their market shares. Under such circum-
stances, greater use of export subsidies, dumping, and
other predatory trade practices would be expected.
~ 25X1
If the economic deterioration is perceived by the
Third World to be the result of policies implemented
by industrial countries, such as in the recession and
protectionist scenarios, the Third World probably
would bring increasing pressure on industrial country
governments to stimulate their economies and open
their markets to Third World exports. In addition to
calls for the elimination or reduction of protectionist
policies, Third World governments may also seek
targeted trade concessions to compensate for specific
trade losses. Moreover, in retaliation or as a means to
force industrial country governments to open their
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Table 3
United States: Potential Implications
of Selected Alternative Scenarios
Alternative Trade Relations
Scenarios
US recession ~ Asian NICs and debtor countries
use whatever means necessary
legitimate or not-to maintain or
expand their market shares.
Increased Third World demands
for targeted trade concessions to
compensate for trade losses.
Protectionism n Demands for elimination or reduc-
tion of protectionist measures
intensify.
The Asian NICs and debtor coun-
tries may restrict US imports.
Asian NICs and debtor countries
use whatever means necessary--
legitimate or not-to maintain or
expand their market shares.
Increased Third World demands
for targeted trade concessions to
compensate for trade losses.
US banks would be forced to place
a larger number of loans on non-
performing status and reorder their
lending practices and policies.
Renegotiation of debt repayment
schedules becomes more frequent.
US banks would be forced to place
a larger number of loans on non-
performing status and reorder their
lending practices and policies.
Renegotiation of debt repayment
schedules becomes more frequent.
Increased Third World demands,
particularly by Africa, for addi-
tional bilateral and multilateral aid
programs.
Anti-US sentiments may shift from
rhetorical criticism to hostile
actions.
Deterioration in economic perform-
ance may be a rallying point for
Third World solidarity and greater
cooperation among developing
countries.
Increased Third World demands,
particularly by Africa, for addi-
tional bilateral and multilateral aid
programs.
Anti-US sentiments may shift from
rhetorical criticism to hostile
actions.
Deterioration in economic perfor-
mance may be a rallying point for
Third World solidarity and greater
cooperation among developing
countries.
Low oil prices ~ More difficulty for OPEC in en- Non-Arab producers, such as Mex- The ability of such radical Arab
forcing cartel pricing practices. ico and Ecuador, may require addi- producers as Algeria, Iran, and
tional debt restructuring. Libya to advance anti-US objec-
tives is reduced.
~~ Assumes the US economy enters a recession in 1986 and then
grows slower over the remainder of the decade.
n Assumes a ]0-percent cut in US imports beginning in 1985.
Assumes a $5 per barrel cut in oil prices starting the first quarter
of 1985.
Note: The forecasts under the alternative scenarios suggest that
slower industrial country growth or rising trade protectionism
probably would tip the Third World's outlook from a muddling
through scenario toward one of greater economic disruptions.
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markets to imports, some countries might impose
restrictior ?lected industrial country exports.
25X1'
The main financial implication of the alternative
scenarios is that a deterioration in the Third World's
economic outlook probably would prevent the debtor
nations from substantially easing their debt payment
positions by the end of the decade. In particular,
under the recession and protectionism scenarios, debt-
or country current account balances deteriorate by
roughly $10 billion from the baseline forecast and the
debt service ratio increases by almost 16 percentage
points to 78 percent of annual good and services
exports. In our judgment, these changes could trigger
renewed financial crises for several high-debt coun-
tries during the latter half of the 1980s. DRI believes
the deterioration is so immediate that massive renego-
tiations of debt repayment would have to occur by
1986 in the more seriously affected countries, which
alraidy have been through major debt restructuring
exercises. Under the recession scenario, these debtor
countries include Argentina and the Philippines be-
cause of the severe impact of the higher interest rates
on their debt service payments. Under the protection-
ism scenario, these debtor include Brazil, Chile, and
Mexico because of their st25X1Tade linkages to the
United States.l I
In response to a marked deterioration in their eco-
nomic performance, we believe several Third World
governments may implement measures that provide a
rallying point for public opposition. In the extreme,
there is a possibility that the political stability of some
Third World governments may be threatened. Latin
America is a region of particular concern. The eco-
nomic recovery projected for this region is fragile at
best. According to the forecasters' projections, a
deterioration such as that caused by the recession and
protectionism scenarios would increase this region's
average current account deficit approximately 40
percent beyond the baseline projection for the forecast
period. This deterioration, in our judgment, would
make it extremely difficult for many of the debtor
countries to continue pursuing austerity policies and
to maintain political stability.
025X1
A primary consideration with respect to North-South
relations is that a marked deterioration in the Third
World's economic performance may serve as a cata-
lyst for collective action by the Third World against
the United States. One issue around which the Third
World might rally is external debt. Thus far the debt
problems have been handled on a case-by-case basis.
A marked deterioration in their economic perfor-
mance, however, may cause many countries to band
together under such Third World initiatives as the
Cartagena group to gain bargaining strength ~~ a~~l-
;,,,. ,.,;*,, ,,,o,~ .~,~,,,. ,.w~a:.,._~ ~~ 25X1
The Third World may also see increased cooperation
among themselves as a means to increase their ex-
ports. In our judgment, the basis for this broadened
economic cooperation has already been established.
During the last several years, Third World countries
laid the framework for a system of trade preferences
among themselves. In addition, linkages between
countries have grown-Indian multinational corpora-
tions have established operations in Southeast Asia
and Africa, Brazil has developed close economic
relationships with several African countries, and
South Korean construction firms have been very
active in the Middle East. If it should become exceed-
ingly difficult for Third World countries to export to
industrial country markets, we believe there will be
attempts to increase greater South-South trade
25X1
In our judgment, several other developments may
occur under the alternative scenarios that have serious
repercussions for the United States. In particular:
? Third World drug tr~ficking becomes more wide-
spread. In response to depressed economic condi-
tions, we believe drug production in the Third
World probably would increase. The primary forces
behind this are the relatively higher economic re-
turns for drug crops than other major agricultural
commodities and the reduced enforcement efforts
caused by government budget reductions. Countries
most vulnerable to growing narcotic activity include
Mexico, Colombia, Peru, Bolivia, Belize, Costa
Rica, and Jamaica.
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? htllotit~ of illegal aliens accelerates. We judge the
widening gap in economic growth that emerges
between the United States and the Third World
under the alternative scenarios would cause a large
number of migrants to illegally enter the United
States. Although these migrants would come from
throughout Latin America, the primary influx prob-
ably would originate from Mexico.
? Anti-American criticism heightens. Under the base-
line scenario, Third World anti-Western actions are
limited to rhetorical criticism. We believe the re-
duced standard of living associated with the alterna-
tive scenarios probably would give rise to more
frequent acts of random violence and politically
inspired uprisings that involve Americans. Under
such circumstances, there would be a heightened
concern for the safety of Americans and US firms
operating in certain Third World countries~~
Third Wurld countries are keenly aware that their
ccunomic prospects depend in large measure on indus-
trial country economic policies. This importance has
been reinforced by the US role as the main locomotive
of growth during the current world recovery. As a
consequence, we believe the Third World will bring
increasing political pressure on the United States
during the remainder of this decade to assume the
responsibility of an implicit world economic manager.
The focus of this pressure will take a predictable
direction-the US economy should be managed with
international economic goals in mind0 25X1
In our judgment, many of the international objectives
sought by the Third World will result in a conflict
between Third World needs and US domestic con-
cerns. The Third World, for example, probably will
insist that the United States pursue fiscal and mone-
tary policies that sustain high economic growth at the
risk of inflation. Moreover, the Third World probably
will seek increased official lending at lower interest
rates and greater access to industrial country markets
through the retirement of their "older" textile, foot-
wear, and other smoke-stack industries. Given the
Third World's prospects for a fragile economic recov-
ery, we believe it is unlikely that these pressures will
diminish during the remainder of this decade~~
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Appendix A
Methodological Note
The economic outlook presented for the Third World
is a consensus of forecasts prepared on contract by
Data Resources Inc., Chase Econometrics, and SRI
International. The projections are presented by both
regional and functional country groupings. The re-
gional categorization takes into account the common-
ality of influences caused by the geographic location
of a country and reflects both intraregional trade and
intraregional conflicts. The functional categorization
takes into account differences between countries be-
cause of natural resources and economic and political
criteria. The regional classifications are inclusive of
all Third World countries considered by the forecast-
ing services; the functional groupings are presented
for illustrative purposes and are neither all inclusive
nor mutually exclusive. As a result, certain countries
~y be ir2rj)(~d in more than one functional group.
? Estimation techniques. The manner in which the
forecasts were derived also differ by consulting
service. DRI and Chase have detailed behavioral
econometric models for each country included in
their sample and use these to derive their economic
projections. SRI, on the other hand, does not have a
formal econometric model. Its projections are an
amalgam of several official projections, adjusted to
take account of differences between their a~~,~.r,n-
tions and those of other models. n 25X1
The following appendixes describe in detail the differ-
ences between each consulting services' projections.
Appendixes B and C provide a detailed listing of the
countries included in each services' regional and
functional country grouping and the assumptions un-
derlying their baseline forecasts. Appendixes D and E
present the results of each services' "best guess" and
"alternative" scenario projections
In most instances the magnitude and direction of
change of each forecasting services' projections paral-
lel each other. However, wide variations are observed
in the current account, total external debt, and debt
service projections. These differences are attributed to
three factors:
? Country sample size. Each forecasting service used
a different sample of countries from which to base
its economic forecasts. Whereas DRI and Chase
forecasts are based on a sample of 26 and 36
countries, respectively,~used a sample of 128
countries.
? Baseline assumptions. Each consulting services'
projections are underpinned by a series of assump-
tions about world economic conditions during the
remainder of the decade. These assumptions vary as
to the variables selected and the values assigned to
these variables. This is particularly true of the
assumptions concerning OECD consumer prices,
OECD trade balances, and oil and nonoil commod-
ity prices.
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Appendix B
Third World: Functional and
Regional Classification Schemes
Table B-1
Data Resources Incorporated
Asian Hong Kong
NICs Singapore
South Korea
Taiwan
Debt-constrained Philippines
countries
Nonoil commodity China
exporters India
Malaysia
Philippines
Thailand
Latin America Africa and
Middle East
Argentina Nigeria
Brazil
Chile
Colombia
Ecuador
Mexico
Peru
Venezuela
Ecuador Iraq
Mexico Kuwait
Venezuela Nigeria
_ Saudi Arabia_
Chile Algeria
Colombia Egypt
Peru Morocco
Table B-2
Chase Econometrics
Far East Latin Middle East Sub-Saharan
America and North Africa
Africa
Asian Hong Kong
NICs Singapore
South Korea
Taiwan
Major Malaysia
commercial Philippines
borrowers South Korea
Thailand
Argentina Morocco Nigeria
Bolivia Zaire
Brazil
Chile
Colombia
Ecuador
Mexico
Peru
Uruguay
Venezuela
Financially Pakistan Argentina Egypt Zaire
vulnerable Philippines Bolivia Zambia
countries Thailand Brazil Zimbabwe
Chile
Colombia
Ecuador
Mexico
Peru
Uruguay
Venezuela
Oil Indonesia Ecuador Egypt
exporters Malaysia Mexico Iran
Venezuela Iraq
Nigeria
Kuwait
Libya
Saudi Arabia
United Arab
Emirates
Nonoil China Argentina Morocco Ivory Coast
commodity India Bolivia Tunisia Kenya
exporters Pakistan Chile Zaire
Philippines Colombia Zambia
Thailand Peru Zimbabwe
Uruguay
Aid- India
dependent Indonesia
countries Pakistan
Egypt Ivory Coast
Kenya
Zambia
Zimbabwe
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't'able B-3
SRI International
Latin America .Africa South Asia East Asia Middle East Other
--
Malur exporters of Argentina South Africa Hong Kong Israel Greece
manufactures Brasil Singapore Portugal
South Korea Yugoslavia
Taiwan
-_ ___
__
Major debtors Argentina Indonesia
Brazil Philippines
Mexico South Korea
Venezuela
__- __ _
Oil exporters Venezuela Nigeria Indonesia Algeria
Iran
Iraq
Kuwait
Libya
Oman
Qatar
Saudi Arabia
United Arab
Emirates
Luw-inromc countries Haiti Benin Afghanistan Solomon islands
Burkina Bangladesh Vanuatu
Burundi Bhutan
Cape Verde Burma
Central African India
Republic Nepal
Chad Pakistan
Comoros Sri Lanka
Ethiopia
Gambia
Guinea
Guinea-Bissau
Kenya
Lesotho
Madagascar
Malawi
Mali
Mauritania
Niger
Rwanda
Senegal
Sierra Leone
25X1 Somalia
Sudan
Tanzania
Togo
Uganda
Zaire
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Appendix C
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Baseline
lssumptiun
OF.CI) trade balances
lhilliun ('.S "I
1984 1985 1986 1987 1988 1989 Average
Annual
Growth
Rate,
1985-89
OI:( D
DRI NA NA NA NA SA NA NA
Chase 81 -71 -68 -63 77 87 -73
SRI N'A NA NA NA NA N'A NA
OI whlCh:
~~mtld States
pRI -116 -128 -140 -151 -165 -180 -153
Chase - I OS -109 1 I9 123 - 137 -145 -127
SRI N'A NA NA NA NA N'A NA
Lipan
pRI 44 46 64 77 89 109 77
Chase 30 32 38 40 38 37 37
SKI NA NA '1A NA NA NA NA
Interest rates and commodity prices
~~~~rreirtl
loterest rates
DRI
1LS
13.3
12.5
11.6
11.2
I1.2
12.0
Chase
11.6
13.5
13.3
11.2
10.3
9.8
11.6
SRI
II.O
12.0
12.5
11.5
I1.5
I1.5
11.8
'~''unoil commodity prices ~~
DRI
4.4
6.4
17.0
14.4
9.5
8.3
11.1
Chase
2.0
2.6
6.5
_
5.5
__
7.3
10.4
6.4
SRI
8.0
8.3
6.8
6.4
5.3
5.0
6.4
Oil prices ~'
DRI
-3.0
-0.2
2.5
5.9
6.7
9.1
4.7
( base
- 1.7
- 2.5
0.4
7.2
7.9
8.0
4.1
SR-
NFCt.
6.0
6.4
6.6
6.5
6.4
6.4
~~ Fur OECD trade balance, this column shows annual average.
~` SRI forecast is fur GNP.
DRI, three-month Eurodollar, Chase, three-month LIBOR; and
SRl,six-month LIBOR.
~~ Based on a 20-commodity index.
Import prices for petroleum and derivatives.
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Appendix D
Third World Economic Outlook:
Baseline Forecasts, 1984-89
Table D-1
Third World: Real GNP Growth, 1984-89
1984 a
1985 b
1986 b
1987 n
1988 b
1989 b
Average
Annual
Growth
Rate,
1985-89
DRI projections
-
- -___
LDC aggregate
2.8
4.0
4.1
4.7
5.2
5.]
4.6
Latin America
1.7
2.2
3.1
3.5
4.5
4.9
3.6
Africa and Middle East
1.5
3.5
3.8
4.1
5.8
5.5
4.5
Asia
_. --
---
5.8
5.2
4.6
4.9
5.0
4.6
4.9
Of which:
--
- -
- -- -
Asian NICs
8.3
6.8
6.3
7.0
6.6
5.8
6.5
Debt-constrained LDCs
_. _ _
1.1
1.4
2.3
3.1
3.8
4.1
2.9
Oil exporters
1.3
2.7
---
3.0
-
3.8
4.7
4.4
3.7
Nonoil commodity exporters
2.5
-
3.6
3.9
4.4
5.2
5.5
4.5
Chase projections
-
- __
_
LDC aggregate
2.7
4.3
4.3
4.3
4.6
4.4
4.4
Latin America
1.3
3.2
3.2
3.5
4.3
4.2
3.7
Sub-Saharan Africa
-1.8
1.1
2.8
2.5
3.4
3 4
2.6
Middle East and North Africa
0.2
3.8
4.9
4.2
4.1
3.8
4.2
Far East
_.. -
- - _--
5.5
5.7
5.0
5.0
5.1
4.9
5.1
Of which:
- - -
_--
Asian NICs
7.7
6.7
7.0
7.6
7.5
7.0
7.2
Major commercial borrowers
1.6
3.5
3.6
3.8
4.6
4.5
4.0
Financially vulnerable LDCs
1.2
3.2
3.3
3.5
4.2
4.1
3.7
Oil exporters
0.9
3.9
4.9
4.5
4.8
4.3
4.5
Nonoil commodity exporters
3.3
4.2
3.5
3.6
4.0
4.1
3.9
Aid-dependent countries
----- -
5.2
5.4
4.9
4.7
4.7
4.6
4.9
SRI projections
_
_ _
LDC aggregate
3.7
4.2
4.4
4.5
4.7
4.7
4.5
Latin America
1.1
3.1
3.0
3.0
3.0
3.2
3.1
Africa
3.2
2.9
3.0
3.2
3.2
3.0
3.1
Middle East
4.0
4.3
4.3
4.4
4.5
4.5
4.4
East Asia
6.9
6.5
6.5
6.7
6.8
7.0
6.7
South Asia
5.2
5.2
5.0
4.8
4.5
4.5
4.8
Other
2.3
2.9
3.3
3.5
3.5
3.5
3.3
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Confidential
Table D-1
Third World: Real GNP Growth, 1984-89 (continued)
Of which: __
Major exporters of manufactures
_ _ _
Major debtors
__ _ _-- __
Oil exporters
- --- __-
Low-income countries
Estimated.
n Projected.
Projections are for real GDP growth.
1984 a
1985 n
1986 b
1987 b
2.6
3.4
4.0
4.5
1.8
3.8
3.5
3.5 _
3.8
4.2
4.2
4.5
4.0
4.1
4.1
4.2
Confidential 22
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~ onnaennat
Table D-2
Third World: Consumer Price Inflation, 1984-89
1984 ~~
1985 n
1986 e
1987 n
1988 ~
1989 n
Average
Annual
Growth
Rate,
DRI projections
1985-89
LDC aggregate
-
____
57.9
41.4
30.2
25.4
23.5
21.4
28.2
Latin America
]98.2
148.1
116.6
94.5
83.7
75.0
103.6
Africa and Middle East
_. _ _.
8.5
.
..._....
7.5
..
6.3
6.0
5.8
6.3
6.4
Asia
Of which:
8
.3
-
10.4
8.7
- _
8.2
8.1
8.2
8.7
Asian NICs
5.1
5.3
5.7
5.7
5.6
5.7
5.6
Debt-constrained LDCs
__
110.9
90.8
63.3
51.2
46.7
4L4
57.5
Oil exporters
_-
22.0
19.6
18.0
16.5
15.5
15.0
16.9
Nonoil commodity exporters
__
Chase projections
_ __
37.3
___
28.6
22.5
19.0
17.5
15.3
20.5
LDC aggregate
44.6
37.8
28.9
23.8
21.8
20.4
26.4
Latin America
- -- -
150.0
-_
123.2
88.5
68.7
_ _
59.3
52.8
76.6
Sub-Saharan Africa
_ __
28.4
27.4
25.9
18.5
16.0
14.5
20.3
Middle East and North Africa
---
1 I.0
9.2
8.1
8.3
7.1
7.6
8.1
Far East
__ --
Of which:
7.8
7.1
6.4
6.5
6.4
6.7
6.6
_.
Asian NICs
__
4.1
5.3
5.4
5.7
5.7
6.2
5.7
Major commercial borrowers
_-__ _-
102.0
_
84.3
-
6L7
48.2
42.2
37.6
53.6
Financially vulnerable LDCs
112.7
93.3
--
68.5
54.0
47.5
42.7
61.2
Oil exporters
- ___
25.8
]9.6
17.1
15.7
15.1
14.1
16.3
Nonoil commodity exporters
- - -
66.4
57.9
43.4
34.6
31.2
28.6
39.0
Aid-dependent countries
-_ - _ _ _
SRI projections
11.9
11.3
10.1
10.0
9.9
9.8
10.2
LDC aggregate
35.6
30.0
32.0
35.0
38.0
40.0
34.9
Latin America
119.5
85.0
90.0
95.0
95.0
100.0
93.0
Africa
17.0
20.0
22.0
23.0
25.0
30.0
24.0
Middle East
___
- __
44.3
45.0
-__
40.0
40.0
35.0
35.0
39.0
East Asia
3.7
4.5
--
5.0
5.5
5.5
5.5
5.2
South Asia
_- _ _ _
6.3
7.5
_ -_
8.0
9.0
9.5
9.5
8.7
Other
- __
Of which:
30.3
20.5
__
23.0
27.0
27.0
30.0
25.5
-__ --
Major exporters of manufactures
_ __
101.1
80.0
_
85.0
_
85.0
85.0
90.0
85.0
Major debtors
___
96.1
60.0
55.0
__
55.0
60.0
60.0
58.0
Oil exporters
_ -__ -
10.8
11.0
11.5
_ __
12.0
12.5
13.5
12.1
Low-income countries
6.9
6.5
7.0
7.5
9.0
9.5
7.9
~~ Estimated.
~ Projected.
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Confidential
Table D-3
Third World: Trade Balance, 1984-89
1984 ~
1985 n
1986 n
1987 e
1988 e
1989 n
Annual
Average,
DRI projections
1985-89
LDC aggregate
62.0
46.0
49.0
52.0
69.0
79.0
59.0
Latin America
36.0
40.0
41.0
44.0
45.0
47.0
43.4
:1frica and Middle East
35.0
18.0
20.0
26.0
35.0
44.0
28.6
Asia
Of which:
-9.0
-I1.0
-12.0
-17.0
-I1.0
-11.0
-12.4
Asian NICs
-10.0
-12.0
-14.0
-14.0
-14.0
-17.0
-14.2
Debt-constrained LDCs
35.0
40.0
42.0
46.0
48.0
51.0
45.4
Oil exporters
41.0
40.0
44.0
53.0
63.0
74.0
54.8
Nonoil commodity exporters
Chase projections
1.0
1.0
I.0
vec~
1.0
2.0
1.0
LDC aggregate
61.8
67.2
78.4
86.9
96.2
100.9
85.9
Latin America
38.3
37.3
39.2
40.8
42.3
46.4
4L2
Sub-Saharan Africa
5.1
6.3
6.6
6.1
6.7
6.4
6.4
Middle East and Africa
25.5
32.0
41.6
47.7
54.8
57.8
46.8
Far Fast
Of which:
- 7.0
- 8.3
- 9.1
- 7.6
- 7.6
- 9.7
-- 8.5
Asian NICs
0.1
-L2
-2.7
-1.7
2.0
3.9
2.3
Major commercial borrowers
40.6
41.9
43.8
45.9
46.2
51.3
45.8
Financially vulnerable LDCs
32.6
33.1
34.7
35.1
36.4
39.0
35.7
Oil exporters
57.6
62.9
72.1
78.0
87.6
94.5
79.0
Nonoil commodity exporters
4.l
5.5
9.0
10.7
10.7
10.4
9.3
Aid-dependent countries
SRI projections
-9.6
-9.0
-8.9
-8.9
-7.9
-7.0
--8.3
l_DC aggregate
42.4
52.0
60.0
62.0
67.0
71.0
62.4
Latin America
25.4
29.0
31.0
33.0
38.0
39.0
34.0
Africa
-2.1
1.5
-2.0
-2.0
-2.5
-2.5
-2.1
Middle Fast
41.0
45.0
42.0
41.0
40.0
40.0
41.6
East Asia
- 8.0
- 8.8
- 8.0
- 7.5
- 6.5
- 6.0
- 7.4
South Asia
- 4.5
- 4.2
- 4.0
- 4.5
- 5.0
- 5.5
- 4.6
Other
Of which:
-9.4
-8.8
-1.0
tied.
2.0
5.0
0.6
Major exporters of manufactures
8.4
13.0
14.0
15.5
18.0
22.0
16.5
Major debtors
37.5
42.0
40.0
45.0
48.0
50.0
45.0
Oil exporters
52.9
55.0
50.0
45.0
45.0
40.0
47.0
Low-income countries
- 1 1.2
-11.3
-12.5
-14.0
- 15.0
- 18.0
- 14.2
~~ Estimated.
~~ Projected.
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Conhdenttal
Table D-4
Third World: Current Account Balance, 1984-89
19254 a
1985 h
1986 b 1987 b
1988 b
1989 b
Annual
Average,
---
_
1985-89
DRI projections
LDC aggregate
___ _-
38.7
-
---
-40.8
_
39.1 -35.6
-29.8
-26.0
-34.3
Latin America
-6.2
----
-13.3
-13.8 -15.3
_
-18.1
- 19.0
- 15.9
Africa and Middle East
-21.7
-16.4
_ _
-18.1 -14.8
_
-7.2
-3.8
- 12.1
Asia
_ __ _ _
- 10.8
- 1 L 1
_
- 7.2 - 5.5
_
- 4.5
- 3.2
- 6.3
Of which:
__
Asian NICs
___
0.3
-3.4
-3.3 -2.5
_ _
-2.0
-2.0
-2.6
Debt-constrained LDCs
__ --_
-10.3
-17.8
-17.9 -18.6
--
-2.0.6
-21.7
-19.3
Oil exporters
20.3
-16.7
-15.4 - 12.0
-7.5
-2.6
-10.8
Nonuil commodity exporters
__
-15.2
-13.3
- 13.6 -13.8
-12.7
-12.1
- 13. I
Chase projections
LDC aggregate
_ __
---
-26.7
__ _
26.3
_ __ __
-16.2 -7.4
3.5
-3.1
-11.3
Latin America
_ _-
-8.3
-18.5
-I5.5 -12.1
- -_
-ll.]
-8.1
-13.1
Sub-Saharan Africa
-- -
-2.9
-2.5
-3.0 -3.5
-3.2
-3.7
-3.2
Middle East and Africa
-7.4
3.0
12.4 18.4
__ - - -
21.6
-
21.9
15.5
Far East
-8.0
-8.3
-10.1 -10.1
-
-10.7
_
-13.2
10.5
Of which:
-
Asian NICs
__
4.3
_ -
4.4
_ --
4.8 6.4
__ _ _
__
6.2
-
4.5
5.3
Major commercial borrowers
- -_
21.2
-29.2
-25.7 -22.0
-_
-20.5
-17.9
-23.1
Financially vulnerable LDCs
-16.0
-25.0
-22.4 -19.6
_
-18.6
_
-16.9
-20.5
Oil exporters
-6.6
-1.4
7.3 13.8
--
17.9
20.6
11.6
Nonoil commodity exporters
__ -
-24.4
-29.3
-
-28.2 -27.6
-27.6
-28.3
28.2
Aid-dependent countries
_ _ - _-_ __
-1 1.7
-11.6
-12.4 -12.8
__
-12.2
-1 1.8
-12.2
SRI projections
- - - -
LDC aggregate
___
Latin America
-
-54.0
-19.5
-- -
-57.0
-21.0
__ _
__
-70.0 -80.0
- _
-27.0 -32.0
_
-100.0
- _
-36.0
- 110.0
-38.0
__
-83.4
-30.8
Africa
-9.4
-10.0
-10.5 -10.8
-11.0
-11.5
-10.8
Middle East
_ _ _ _
-17.5
-18.5
-21.0 -23.0
-33.0
-38.0
-26.7
East Asia
- __
- 3.8
- 2.7
__
- 3.0 - 3.5
- 3.0
- 3.0
- 3.0
South Asia
-2.4
-3.8
---
-5.5 -7.0
-8.5
_ -
-10.0
7.0
Other
_ _ _ -_
- 1.4
- 1.0
- 3.0 - 3.7
- 8.5
9.5
- 5.1
Of which:
Major exporters of manufactures
-8.6
-7.5
-15.0 -25.0
-30.0
-35.0
-
-22.5
Major debtors
___ - -
-11.5
-20.0
-30.0 -40.0
-45.0
55.0
-38.0
Oil exporters
- 8.0
-10.0
-12.0 -14.0
___
- 16.0
_
- 20.0
_
- 14.4
l_uw-income countries
-19.2
-20.0
-25.0 -25.0
-25.0
-30.0
-25.0
Estimated.
n Prujected.
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Confidential
Table D-5
Third World: Total External Debt, 1984-89
1984 a
1985 e
1986 h
1987 e
1988 e
1989 n
Annual
Average,
1985-89
URI projections
LDC aggregate
610.6
597.1
630.7
724.9
762.7
804.8
669.4
Latin America
318.5
335.1
351.3
368.7
390.1
411.0
371.2
Africa and Middle East ~
114.6
73.4
79.9
85.9
90.6
96.9
85.3
Asia ~
177.5
188.6
199.5
21 ].I
224.3
241.0
212.9
Of which:
Asian NICs
60.2
60.5
63.4
67.1
73.3
81.5
69.2
Debt-constrained LDCs
363.7
386.4
406.9
428.8
453.4
477.9
430.7
Oil exporters e
184.8
199.0
210.1
220.6
232.4
245.6
221.5
Nonoil commodity exporters ~
135.2
146.2
156.1
166.6
175.9
184.4
165.8
Chase projections
LDC aggregate
613.5
NA
NA
NA
NA
804.2
NA
Latin America
336.2
NA
NA
NA
NA
384.7
N.A
Middle East and Afric
a
105.3
NA
NA
NA
NA
177.2
NA
Asia
172.0
Nn
NA
NA
NA
242.3
NA
Of which:
_
ASlitn NICs
NA
NA
NA
NA
NA
NA
NA
Major commercial bor
rowers
470.8
499.7
523.4.
544.2
564.0.
582.2
542.7
FlnanClall}' Wlnefable
LDCS
NA
_
NA
_
NA
NA
NA
NA
NA
OlI eXpOrICI'S
NA
NA
NA
NA
NA
NA
NA
N00011 COmmOdlty expOrtefS
NA
NA
NA
NA
NA
NA
NA
Ald-depCndent COlln[rICS
NA
NA
NA
NA
NA
NA
NA
SRI projections
__
LDC aggregate
827.0
872.0
-
945.0
--
1,014.0
1,084.0
1,163.0
1,015.6
Latin Amercia
352.0
- -
370.0
405.0
441.0
471.0
508.0
439.0
Africa
69.0
72.0
77.0
82.0
88.0
95.0
82.8
Middle East
94.0
101.0
110.0
119.0
126.0
135.0
118.2
East Asia
118.0
130.0
140.0
145.0
155.0
165.0
147.0
South Asia
68.0
70.0
78.0
85.0
95.0
105.0
86.6
Other
126.0
129.0
135.0
-- _
142.0
149.0
155.0
142.0
Of which:
-_
Major exporters of manufactures
287.0
300.0
315.0
335.0
350.0..
370.0
334.0
Major debtors
-
370.0
---
386.0
405.0
----
.425.0
455.0
470.0
428.2
Oil exporters
98.0
105.0
120.0.
135.0
140.0
145.0
129.0
Low-income countries
64.0
68.0
72.0
76.0
80.0
85.0
76.2
H Estimated.
n Projected.
Includes Algeria, Egypt, Morocco, and Nigeria. Excludes Iraq.
~ Excludes China.
Excludes Iraq.
~ Excludes Algeria and India.
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Confidential
Table D-6
Third World: Debt Service, 1984-89
1984 a
1985 e
1986 e
1987 e
1988 ~
1989 n
Average
Annual
Growth
Rate,
URI projections
1985-89
I.DC aggregate
NA
52.2
50.7
48.0
45.3
43.3
47.9
Latin ,4mcrica
72.0
81.3
77.6
72.4
67.1
63.3
72.3
Africa and Middle East a
58.8
59.4
57.0
54.3
52.2
50.1
54.6
Asia ~-
Of which:
34.5
37.0
37.4
35.7
34.1
33.2
35.5
Asian NICs
21.8
21.7
20.2
18.4
17.2
17.0
18.9
Debt-constrained countries
69.6
79.0
76.7
72.0
67.2
63.6
71.7
Oil exporters
32.6
35.0
31.5
29.9
27.2
25.5
29.8
Nonoil commodity cxportcrs
('hale projections'
76.6
84.0
84.7
81.1
77.7
75.4
80.6
I.D(' :1ggrCgatl
~
NA
NA
!JA
NA
120.8
NA
LULIn :l menca
~
NA
NA
NA
NA
266.4
NA
Snb-Saharan Africa
NA
NA
NA
NA
NA
NA
NA
Middle East and Africa
71.7
NA
NA
NA
NA
63.0
N.4
Atil:l
O1 WhICh:
107.8
NA
NA
NA
NA
91.7
NA
Asian NICs
NA
NA
NA
NA
NA
NA
NA
Major commercial borrowers
Financially vulnerable LDCs
OII CXt10rt Crs
NOn011 COmmOdlty Cxporiers
Ald-dcpendenl COUnICIes
290.8
NA
NA
NA
NA
283.4
NA
NA
NA
NA
271.7
NA
NA
NA
NA
258.4
NA
NA
NA
NA
242.2
NA
NA
NA
NA
226.6
NA
NA
NA
NA
256.5
NA
NA
NA
NA
SRI projections ~'
LDC ^ggrcgatc
21.5
24.0
25.0
25.0
25.0
25.0
24.8
Latin America
44.6
48.0
50.0
45.0
40.0
3.5.0
43.6
Africa
24.9
28.0
30.0
28.0
28.0
25.0
27.8
Middle Fast
23.1
26.5
28.0
27.0
26.5
25.0
26.6
Fast Asia
14.9
I5.5
14.9
14.7
14.0
14.0
14.6
South Asia
9.9
10.1
9.8
10.0
10.2
10.5
10.1
Other
21.3
23.6
24.1
24.2
24.1
24.1
24.0
Of which:
Major cxportcrs of manufactures
19.1
20.3
21.0
20.6
20.0
19.9
20.4
~1ujor debtors
35.5
39.0
42.0
38.0
35.0
31.5
35.1
Oil exporters
21.1
21.3
21.6
21.9
21.9
22.0
21.7
Low-income countries
22.2
25.0
28.0
27.0
26.0
26.0
26.4
Estimated.
~~ Projected.
Debt service as a share of goods and services exports.
~ Includes only Algeria, Egypt, Iraq, Morocco, and Nigeria.
~' Excludes China.
~ Debt service as a share of exports.
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Appendix E
Economic Prospects
Under Alternative Scenarios
Table E-1
DRI's Alternative Scenarios
Third World
Real GDP growth
~perc ent/
_
__
_
_
_
Baseline
4.0
4.1
4.7
5.2
5.1
4.6 ~+
Recession ~+
4.5
2.7
4.0
5.I
4.8
4.2
Protectionism ~
-
3.0
__
3.9
4.5
5.0
4.9
4.3
Low oil prices a
__
3.5
3.9
4.4
4.9
4.7
4.3
Consumer price inflation
fpen enU
Baseline
41.4
30.2
25.4
23.5
21.4
28.2 ~+
Recession
-
42.2
_-
30.2
-_
25.3
23.0
___
2L2
28.4
Protectionism
41.6
31.3
26.3
24.0
21.6
29.0
Low oil prices
__ _
40.5
_ __
29.9
25.7
23.6
__
21 8
28.3
Current account balance
(billion US $)
Baseline
__
-40.8
39.1
-35.6
_- --
X9.8_
-26.0
34.3'
Recession
-39.8
-56.2
-56.4
-51.2
-48.8
-50.5
Protectionism
-55.1
-53.2
-53.1
-49.0
-48.0
-51.7
Luw oil prices
-55.1
-52.3
-50.8
-47.5
-- _
-43.9
-49.9
Total debt outstanding ~
jbi!lion US $)
Baseline
-_.-.
__
597.1
-
__
630.7
--
__
665.7
705.0
__ -
748.9
__
669.4
Recession
599.2
644.3
693.0
746.2
803.1
697.2
Protectionism
608.1
--
651.3
698.8
__
749.8
__
808.1
703.2
Low oil prices
602.4
638.3
_.
679.1
727.1
777.4
684.9
Asian N[Cs
Real GDP growth
(/rercentJ
Basclinc
__
_----
6.8
- _ _ _
6.3
---
7.0
6.6
_ _
5.8
6.5 ~+
Recession
7.4
--_
3.6
6.3
___
6.8
5.2
5.9
Protectionism
__
4.6
5.7
-
6.3
- _
6.1
__
5.2
5.6
L.ow oil prices
7.8
7.5
7.6
-
7.4
6.3
7.3
Consumer price inflation
(percert(J
Baseline
-
5.3
_-
-- - -
5.7
- _
5.7
_-
5.6
5.7
5.6
Recession
___
4.8
-
5.8
4.9
--
5.0
__
5.3
5.2
Protectionism
5.6
5.2
__
5.3
_
5.2
_
5.5
5.4
Low oil prices
3.1
3.9
4.8
5.4
5.8
4.6
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"Cable F.-1
DRl's Alternative Scenarios (continued)
Current account balance
~hillinn US 5l
Baseline
- 3.4
- 3.3
- 2.5
- 2.0
- 2.0
- 2.6
Rcccssion
- L8
-8.3
-7.9
-8.1
- 10.6
-73
Protectionism
-6.9
6.9
-7J
-7.8
-9J
-7.8
Low oil prices
- 0.4
0.5
2.7
5.6
7.1
3.1
Total debt outstanding
~hillio> F.S' $)
Baseline
60.6
63.4
67.1
73.3
81.5
69.2
Rcccssio^
60.5
63.9
68.7
76.8
88.2
7L6
Protectionism
62.0
66.3
71.6
80.3
91.4
74.3
Low oil prices
60.2
61.7
62.2
64.2
66.0
62.9
Debt-constrained LUCs
Real GDP growth
~/rrrrer~U
Baseline
1.4
2.3
3.1
3.8
4.1
2.9
Rcccssion
2.1
0.6
2.2
3.5
3.9
2.5
Protectionism
0.5
2.1
3.0
3.7
4.0
2.7
Low oil prices
0.8
1.8
2.8
3.1
3.3
2.4
Police t
2.7
3.2
3.9
4.4
4.4
3 J
Consuntcr price inflation
(/ri'r~'e'~~l i
Baseline
90.8
63.3
51.2
46.7
41.4
58.7 ~~
Recession
92.6
63.1
51.5
45.6
41.2
58.8
Protectionism
90.9
66.1
53 5
48.0
42.1
60.1
Luw oil prices
90.4
63.9
52.3
47.2
42.4
59.2
Pnlic~
101.7
74.6
59.8
55.2
49.4
68.1
Current account balance
ihi!linn L'.S 4)
Baseline
-17.8
- 17.9
-18.6
-20.6
-21.7
-193 ~'
Rcccssion
-19.6
-27.3
-30.3
-32.1
-30.6
-28.0
Protectionism
-24.8
-25.0
-269
-29.6
-31.4
-27.5
Luw oil prices
-22.8
-21.9
-26.4
-31.8
-32.7
-27.1
Policy
-22.7
-25.0
-28.1
-32.0
-35.4
-28.6
Total debt outstanding
!hillinn ('.S YI
Baseline
386.4
406.9
428.8
453.4
477.9
430.7
Rcccssion
3883
4183
450.7
485.2
517.2
451.9
Protectionism
393.2
420.1
450.3
483.8
517.8
453.0
~ uw oil prices
388.6
410.2
437.3
470.1
502.4
441 .7
Police
39 L4
418.4
449.6
485.4
523.4
453.6
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Table E-1
DRI's Alternative Scenarios (continued)
Oil exporters
Real GDP growth
(percenO
_
__
Baseline
2.7
3.0
3.8
4.7
4.4
3.7 ~~
Recession
3.4
1.6
3.1
4.4
4.1
3.3
Protectionism
__
2.2
2.8
__
3.8
4.6
4.4
3.6
Low oil prices
_
0.6
1.4
___ _
2.4
__
3.6
3.4
2.3
Consumer price inflation
(Percent)
Baseline
19.6
18.0
16.5
15.5
15.0
16.9
Recession
20.3
17.8
15.9
14.9
14.7
16.7
Protectionism
19.3
17.8
16.6
15.6
15.0
16.9
Low oil prices
19.2
17 1
16.8
15.7
16.3
17.0
Current account balance
(hillion US $)
Baseline
-16.7
- 15.4
-12.0
-7.5
-2.6
-10.8
Recession
-15.8
-19.4
-17.5
-13.1
- 7.9
- 14.7
Protectionism
-20.4
-18.0
-15.3
- I I.0
-5.8
-14.1
I.ow oil prices
-35.0
-35.1
-32.6
-31.8
-28.8
-32.7
Total debt outstanding n
Ih1 ~~1011 (.~S .~)
Baseline
199.0
210.1
__
220.6
232.4
245.6
221.5
Rcccssion
199.4
215.9
230.5
246.7
262.7
231.0
Protectionism
201.5
214.1
226.7
240.7
255.8
227.8
Low oil prices
206.3
223.2
242.0
264.9
289.3
245.1
Nonoil commodity exporters
Real GDP growth
(percent)
Baseline
3.6
3.9
4.4
5.2
5.5
4.5 ~~
Rcccssion
4.1
2.5
3.6
5.2
5.3
4.1
Protectionism
2.7
3.8
4.3
5.1
5.4
4.3
Low oil prices
3.9
4.0
4.6
5.1
5.1
4.5
Consumer price inflation
/pc?rrent)
Baseline
28.6
22.5
19.0
17.5
15.3
20.6 ~~
Rcccssion
29.1
21.3
18.6
17.3
15.6
20.4
Protectionism
28.3
22.3
19.2
17.7
15.2
20.5
Luw oil prices
26.9
21.5
19.1
17.5
15.1
20.0
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"fable E-1
URI's Alternative Scenarios (continued)
Current :+ccount balance
~hillinrr C'S RI
Baseline
-13.3
-13.6
-13.8
-12.7
12.1
-13.1
Recession
-13.5
-16.3
- 16.5
-15.4
-- 14.5
-15.2
Protectionism
- 15. I
-15.5
-15.9
-14.9
-14.3
- 15. I
Low oil prices
-13.9
-13.3
-14.4
-13.9
- 12.8
-13.7
Total debt outstanding
~hillion C%S $1
Baseline
146.2
155.9
166.6
175.9
184.4
165.8
Recession
146.6
158.7
171.9
~
183.5
~
194.5
171.0
Protectionism
148.0
159.6
172.3
~~
183.8
194.7
171.7
Luw oil prices
146.6
156.2
167.5
177.8
187.2
167.1
~~ Data arc average annual rates of growth.
~~ US Recession. Assumes the continuation of tight monetary
policies and growing federal deficits push the US economy into a
recession in 1986 with the accompanying downward effects on
trade and higher interest rates. The economy then grows slower
over the remainder of the decade.
Protectionism. Assumes that protectionist measures instituted in
the United States result in a 10-percent cut in US imports
beginning in 1985. Oil imports are assumed to be unaffected.
~~ Luw Oil Prices. Assumes a $5 per barrel cut in crude oil prices
starting the first quarter of 1985.
Data arc annual overages.
~ Excludes Iraq.
~- Rcl