Financing development in less developed countries

Financing Development in Less Developed Countries

MARTIN BYRNE*

ABSTRACT

Defining development and measuring growth is not an easy task. Countries without adequate internal capital seek financial aid from external sources. Private, direct investment from foreign sources has been inadequate for financing growth. Debt and development assistance in the form of grants has been necessary for financing less developed country growth. Foreign debt and foreign equity have contributed to growth and development unequally. This paper examines the relationship between development and financing in 15 less developed countries. (JEL 050)

INTRODUCTION

A country's use of internal and external capital combined with other resources is expected to produce desirable social and economic progress. To repay borrowed capital, economic growth is essential. When combined with social growth, the quality of life is better. Poorly planned and poorly implemented policies usually result in a deterioration of economic and social conditions [Ghartey, 1987, p. 10].

Too frequently, third world debt and foreign, direct investment are seen as failing to contribute to the development of democracy, social equity, or ecological prudence [George, 1992]. Among many fallacies, bank lending in the 1970s is seen as worsening the plight of the poor [WOW, 1991]. Just as frequently, the International Monetary Fund (IMF) austerity requirements for new and renegotiated loans are faulted for worsening social and economic conditions. Yet, it is the borrower who initiates an adjustment program and submits the letter of intent stating one's economic goals. Performance criteria that must be met for the IMF to continue loan disbursements are the result of the debtor's letter. The debtor may also include goals and policies which are not subject to non-performance sanctions [Carvaunis, 1986, p. 4].

IMF macroeconomists develop models for dealing with adjustment and stabilization. Modelers in the 1970s recognized that debt and debt service payments growth was already on its way to absorbing the net transfer of resources and requiring more borrowing [Garg, 1977]. The models, which are constantly reviewed and revised, stress the importance of monetary and fiscal restraint and the value of structural reforms [IMF, 1991]. Political and social factors, which are not quantifiable, are difficult to incorporate into these models. Improved debt service ratios (less than 20 percent is preferred) and debt-to-gross domestic product ratios are important to lenders. However, ratios are no real indication of a debtor's ability or willingness to pay [Cooper, 1985, p. 511.

Causes of debt service difficulties are usually country specific. These may include excessive short-term debt, debt with floating rates, deterioration in terms of trade, import or export dependence, inadequate export earnings, government deficits, capital flight, poor monetary and

"Loyola Maryrnount University.

326

NOVEMBER 1995, VOL. 1, NO. 4 327

fiscal policies, or natural disasters such as hurricanes, droughts, and earthquakes. External disturbances contributing to management problems include increases in prime and labor rates (in the late 1970s) and exchange rate volatility of the dollar. Commodity prices, other than oil, rose between 1960 and 1980 and were seen as a price correction until the deep global recession in the 1980s. Oil prices quadrupled in late 1973, rose again in 1979, and resulted in increased foreign debt for both oil importers and oil exporters.

For some debtor nations, more favorable conditions resulted from the October 1985 Baker plan, which encouraged private sector loans for growth-oriented economic policies, and the 1989 Brady plan, which encouraged debt reduction for more manageable debt servicing. Other plans have also favored debt reduction for the poorest nations to enable them to resolve debt problems which deter economic, political, and social growth.

This study is concerned with the effect of debt on development in 15 countries--five African, five Caribbean, and five South American nations--between 1960 and 1990.

METHODOLOGY

Statistical data collections are the major source of information on macroeconomic and quantifiable quality of life conditions. The various sources include IMF, World Debt Tables (IBRD), Comparative World Data [Muller, 1988], The New Book of World Rankings [Kurian, 1991], Statistical Yearbook for Latin America and the Caribbean [United Nations, 1991], Human Development Report [United Nations, 19901, and External Debt Statistics [OECD, 1991].

Statistical data are subject to review, correction, and recalculation due to errors and omissions discovered at a later date. Growth rates are readjusted when the base year is moved forward. Data from the sources used for this study should only be considered as indicators of trends and not as factually correct. This factor complicates the application of models and the evaluation of performance. A combination of a literature search, recourse to current periodicals and newspapers, and country visits provided the background for evaluations of policies and expectations of ongoing development.

CAPITAL INFLOWS: DEBT AND DEBT RELATED ACTIVITY

There is a strong consensus that developing nations need foreign capital to achieve economic growth. Domestic savings are either nonexistent or borrowed by governments to finance internal deficits. External capital sources include commercial and official loans, grants, and foreign direct investment. Failure to meet external debt service requirements led to concern about capital adequacy of the global financial system. Debtors' concerns centered on the possibility of negative growth due to the potential problems of negative flows resulting from less than full payment of debt service and the need for additional capital.

External debt outstanding for the 15 countries in this study shows dramatic increases between 1970 and 1982, the crisis year (Table 1). Annual data are available for all countries required to report to the IMF and the World Bank. Specific information on loan use by the borrowers is not available. Increases in debt could be the result of new investments, bridging loans to meet debt service payments, short-term loans, supplier credits, and interest arrearages. Data on interest arrears and reschedulings of official and private debt indicate the size of the problem. Only Barbados and Zimbabwe have no rescheduling record, while Mexico and Uruguay have no recorded interest arrearages for the period. Arrangements with other debtors include the Venezuelan Oil Facility by Jamaica (6 times) and the Dominican Republic (twice), negotiations with non-insured suppliers by Cote d'Ivoire and Nigeria (7 times), and agreements with non-Paris club governments.

328 INTERNATIONAL ADVANCES IN ECONOMIC RESEARCH

TABLE 1 External Debt, Reschedulings, Continuous Arrears Period,

and Debt/Equity Swaps (1985-89)

Country External Debt bn Reschds Arrears Debt/Equity 1970 1980 1990 Number Period Swaps

Antigua 45 18 t 239 na na na

Argentina 5171 27157 61470 13 1983-90 $2.355bn

Barbados 13 199 763 0 1982-88

Brazil 5128 70957 99303 9 1987-90 10.875

Cote d'Ivoire 267 5848 14928 9 1983-90

Dora. Republic 353 2002 3373 8 1980-90

Egypt 1781 20386 43737 2 1980-90

Jamaica 982 1903 4874 16 1985-90 0.033

Mexico 5966 57378 93659 14 . . . . . 7.615

Nigeria 567 8934 31531 15 1982-90 0.297

Paraguay 112 954 2568 1 1983-90

Trinidad/Tobago 102 828 2309 2 1988

Uruguay 298 1660 4632 5 . . . . . 0.230

Zambia 654 3266 5065 8 1980-90

Zimbabwe 229 786 3451 0 1987-90

Source: Compiled from OECD, Financing and External Debt of Developing Countries 1989 Survey; IBRD, Worm Debt Tables 1990-1991, December 1990; Merrill Lynch Capital Markets, LDC Debt Report; OAS, Statistical Bulletin 1987; and UN, Economic Survey of Latin America and the Caribbean, 1989.

Debt management requires negotiating skill and forecasting ability on interest rate movements and global economic conditions [Pigott, 1984, p. 45]. Debt service problems result from a combination of rising interest rates on floating debt and short-term maturities requiring rollovers. Under normal conditions, rollovers would extend maturities and rates would be renegotiated. Countries with large percentages of variable rate loans pay more debt service when interest rates rise. Argentina, Brazil, Jamaica, and Mexico have had variable rate debt as high as 40 percent of total debt. Variations in average interest rates may be the result of negotiations, the combination of official and private sources of credit, or the date the loans were made.

Serious concern about developing country ability to service debt and achieve economic growth was a phenomenon of the late 1980s (Table 2 ). The Baker and Brady Plans and the Toronto and Trinidad terms have been geared to reducing debt and debt service, forgiving debt for the poorest countries, encouraging the return of flight capital, and providing new loans. Estimates of private assets abroad between 1978 and 1987 for three major South American debtors in this study are Argentina ($31.4 billion), Brazil ($32.1 billion), and Mexico ($56.1 billion) [Fidler, 1989, p. 30].


Egypt received major debt cancellations in return for its cooperation in the 1990-91 Persian Gulf War.

Foreign debt for domestic debt and debt for equity swaps have been a way to reduce outstanding foreign debt and a convenient way to privatize state-owned businesses. A potential swapper would buy the country's sovereign debt on the secondary market and exchange it for domestic debt or equity at an agreed upon price below par determined by direct negotiation or by sealed bid. Additional requirements may ensure that the capital remains in the country for a specified period. Governments may also buy back their own debt on the secondary market. However, this creates the suspicion that it is using reserves to buy back debt rather than pay interest and may be a violation of debt-contract agreements [Fidler, 1990, p. 18].

TABLE 2 Short-Term Debt and Variable Debt as a Percentage of Total Debt

and Average Interest Rates on New Debt for Selected Years

Country 1970 1980 1990 VR Int STD VR Int STD VR Int

Antigua*

Argentina 64 7.3 38 46 13.8 16 70 7.8

Barbados -- 3.0 41 6 7.1 24 17 6.8

Brazil 41 7.0 19 58 12.5 12 66 9.4

Cote d'Ivoire 13 5.8 19 34 11.4 17 56 5.7

Dom. Republic 40 2.4 26 35 8.9 15 28 7.5

Egypt -- 5.3 21 4 5.4 14 9 6.9

Jamaica 84 6.0 21 18 7.7 17 22 6.7

Mexico 49 7.9 28 54 11.3 14 69 8.1

Nigeria 22 6.0 40 45 10.5 5 39 7.5

Paraguay -- 5.7 18 22 7.0 15 12 5.7

Trinidad -- 7.5 14 27 10.4 14 29 8.4

Uruguay I0 7.9 19 29 10.1 21 58 9.5

Zambia 5 4.2 32 9 6.7 36 9 5.3

Zimbabwe . . . . 11 -- 7.1 14 21 6.9

Note: Average interest on new loans is based on amounts borrowed from private and official creditors. Official rates are often lower. Source: Compiled from IBRD, Worm Debt Tables, 1989-90, 1990-91.

DIRECT INVESTMENT AND DEVELOPMENT ASSISTANCE

Other sources of capital inflows are foreign direct investment and development assistance. Multi- national companies, the usual source of direct investment, were considered threats to developing


countries in the 1960s and 1970s [Vernon, 1971]. Debt problems reversed this thinking in the 1980s when foreign direct investment became a viable alternative to commercial bank debt. Not only does foreign direct investment provide capital, it is also a source of technology, global marketing, and management skills [Wallace, 1990, p. 28]. The direct investor places capital at risk in expectation of a satisfactory return. The greater the risk, the higher the required return since the chance of loss is increased. A further advantage is the development of the private sector and the reduction of the blame on government when economic downturns occur.

The direct investment figures reported by the IMF show consistent investment over the 30-year period in most of the 15 countries. Jamaica and Zimbabwe have experienced the most disinvestment, probably a result of their stated preference for centrally controlled economies during most of this period (Table 3). Private investment as a percentage of total investment is an indication of the mix of public sector and private sector dominance of business. The larger the public sector, the greater the dependence on debt for development. Antigua and Trinidad/Tobago were the least debt dependent, and Cote d'Ivoire, Zambia, and Zimbabwe were the most debt dependent during this period.

TABLE 3 Direct Investment 1960-90, Total Debt 1990, Direct Investment (% of Debt), Direct

Investment (% of Debt Plus Direct Investment), and Development Assistance Per Capita 1988

Country Dir Inv Debt DI/Debt DI/DI+Debt Dev.Asst.pc 1960-90 1990 1988

Antigua 345.61 239 145 % 59 % . . . .

Argentina 9464.00 61470 15 13 $1.60

Barbados 167.70 763 22 18 30.60

Brazil 29728.00 99303 29 23 1.20

Cote d'Ivoire 981.90 14928 7 6 13.30

Dom. Republic 1487.40 3373 44 31 30.70

Egypt 11444.00 43737 26 21 37.40

Jamaica 968.30 4874 20 17 72.90

Mexico 24350.00 93659 26 21 1.10

Nigeria 9461.00 31531 30 23 0.40

Paraguay 446,30 2568 17 15 13.00

Trinidad 2608.10 2309 113 53 4.30

Uruguay 867.80 4632 19 16 1.40

Zambia 113.00 5065 2 2 36.80

Zimbabwe -21.50 3451 - 1 -1 35.50

Note: Debt and Direct Investment in $U.S. millions. Source: Compiled from various sources including IBRD, Worm Debt Tables; IMF, Balance of Payments Statistics Yearbook and International Financial Statistics Yearbook.


Lenders, concerned about a country's ability to meet debt service obligations, look at key ratios. Total debt to gross domestic product and debt service as a percentage of goods and services are two such indicators (Table 4). Current account balances are also indicators of debt service ability. Negative balances reflect imports in excess of exports. The quantity and quality of imports indicate a country's future ability to service debt. Heavy imports of food, consumer goods, and energy rather than machinery, equipment, and parts indicate potential long-run problems for the country. Consideration must also be given to trends in world market prices for commodities exported and imported and to currency conversion prices. Overvalued currencies encourage less expensive imports and foreign travel.

TABLE 4 Ratios of Debt Service to Exports of Goods and Services and Debt to Gross Domestic Product for Selected Years

Country 1959-61 1970 1980 1990 DS/XGS DX/XGS DS/XGS D/GDP DS/XGS D/GDP

Antigua* . . . . 6.6% -- 12.9% --

Argentina 18.4% 20.9% 37.33 47.882 34.90 75.57

Barbados** . . . . 2.07 29.40 9.13 90.15

Brazil** t7.1 16.6 63.09 30.16 20.16 22.58

Cote d'Ivoire . . . . 28.26 55.62 40.52 186.29

Dom. Republic -- 5.1 25.32 30.20 14.35 57.64

Egypt . . . . 21.70 152.50 21.70 146.70

Jamaica . . . . 19.87 71.01 30.98 110.22

Mexico 11.3 22,7 29.46 49.53 40,61 30.02

Nigeria . . . . 4.15 8.65 17,90 106.57

Paraguay 6.5 10.4 18.55 20.84 20.60 38.49

Trinidad . . . . 6.83 13.29 20.94 57.54

Uruguay 6.3 22.5 18.77 16.38 38.87 43.83

Zambia . . . . 25.29 84.09 t3.68 175.18

Zimbabwe . . . . 3.77 14.67 31.18 52.35

* Latest data 1987 ** Latest data 1989 Source: IBRD, Trends in Developing Countries, 1990 and 1991.

Oil exporters--Egypt, Mexico, Nigeria, and Trinidad--benefited in the 1970s when oil prices rose, but downward price movements in the 1980s were catastrophic. Fluctuating world prices have also affected exporters of copper, aluminum, coffee, cocoa, and tobacco. Droughts, hurricanes, and earthquakes have also had an impact on exports and imports. During the 1960-90 period, the


current account balances of all 15 countries have been more often negative than positive, requiring offsets in capital and other accounts (Table 5).

The countries in this study, including Antigua, have received funds for development from foreign loans, direct investment, and grants for development assistance. Grants require no repayment. Direct investors contribute to the economy by providing employment and paying taxes. Loans require repayment and interest referred to as debt service. Failure to meet payments creates problems between debtor and creditor and the likelihood of refusals for additional loans.

Although external shocks have been blamed for the debt crisis, government policies have been a major contributing factor. Excessive borrowing, public sector deficits, and unrealistic exchange rates have affected balance of payments accounts [Enders, 1984]. Low debt service ratios have not been achieved through export growth. Debt as a percentage of gross domestic product has increased for most countries.

TABLE 5 Current Account Balances for Selected Years ($U.S. Millions)

Country 1965 1970 1975 1980 1985 1990

Antigua . . . . . . . . . . 18.8 -23.1 -83.3*

Argentina 162 -163 -1287 -4774 -952 1789

Barbados . . . . 41.8 -41.3 -25.7 40.3 -2.6**

Brazil 81 -837 -7008 -12806 -273 2983

Cote d'Ivoire 1 -37.9 -379 -1826.5 63.7 -1104

Dom. Republic -61.8 -101.9 -72.8 -719.9 -107.6 -59

Egypt -281 -148 -2383 -438 -2166 -1425

Jamaica -43.7 -152.9 -282.8 -166 -304.4 -271

Mexico -423 -1068 -4042 -10750 1130 -5255

Nigeria -256 -368 42 5127 2566 5126

Paraguay -6.6 - 16.4 - 72.2 -276.2 -225.5 102

Trinidad -49.3 -108.6 331.8 334.7 -90.3 430

Uruguay -0.8 -45.1 -I89.5 -709.1 -120.1 224

Zambia 105 108 -721 -537 -398 -343

Zimbabwe . . . . . . . . . . 243.8 -75.7 -158

* 1987 data ** 1989 data Source: IMF, International Financial Statistics and World Bank, Development and the Environment. 1992.

Economic Development A healthy and sustained rate of economic growth was the expected result of external financing.

Internally, growth is a reflection of economic policies which encourage productivity and control inflation. Externally, changing world conditions affect import and export costs and currency values.


External economic conditions were favorable during most of the 1960s. The inflationary expansion of the 1970s was terminated by the oil price rise. Developed country determination to bring down inflation and the severe global recession in the early 1980s contributed to the liquidity crisis in most of the countries in this study.

The 1960s and 1970s were growth periods except for Jamaica. During this same period, Zimbabwe was struggling for its independence. Not concerned about inflation while their economies were growing, Argentina, Brazil, and Uruguay experienced rapid inflation (Table 6). Indexing and nominal exchange rate shocks played a role in accelerating inflation in the 1980s [Montiel, 1989, p. 547]. The difference between official and unofficial exchange rates encouraged speculation, dollarization, and capital flight [IBRD, 1984]. In Argentina and Brazil, inability to control inflation and exchange rates has contributed to economic waste and debased monetary and ethical value concepts [Beckerman, 1992].

TABLE 6 Average Annual Gross Domestic Product Growth (%) and

Average Annual Inflation Trends (%) 1965-90

Country 1965-73 1973-80 1980-88 1989 1990 GDP INF GDP INF GDP INF GDP INF GDP INF

Antigua 6.5* 3.9*

Argentina 4.5 26.4 2.1 182.1 -0.1 285.5 -3.8 3079 -2.0 2315

Barbados 6. I 8.2 3.6 13.1 1.8 5.2 3.6 6.2 -4.3 . . . .

Brazil 9.8 22.7 6.4 43.0 2.8 287.3* 3.6 1320 -4.6 2740

Cote 8.9 4.2 5.7 16.2 0.5 4.9 -1.3 1.0 -2.9 -8.0

d'Ivoire

Dom.Rep. 9.7 3.4 4.8 10.2 2.0 18.4 4.2 -- -5.0 . . . .

Egypt 3.3 -- 7.9 12.7" 5.9* 14.5" 2.5 21.3 1.3 21.4

Jamaica 5.2 7.4 -3.2 20.9 0.5 15.6 4.5 14.3 3.8 22.0

Mexico 6.9 4.6 6.2 20.3 0.5 78.2 2.9 20.0 3.9 26.6

Nigeria 9.1 7.1 3.5 19.0 -1.6 11.8 8.0 51.9 5.1 7.5

Paraguay 5.0 3.3 9.7 13.1 1.7 19.9 6.1 26.2 3.5 . . . .

Trinidad 3.9 5.1 6.0 13.7 -4.4 11.0 -0.2 11.4 0.7 11.9

Uruguay 2.6 54.3 4.4 60.5 -0.4 55.1 0.5 89.2 0.9 113

Zambia 2.4 5.6 0.3 14.4 0.6 30.6 0.1 125 0.5 112

Zimbabwe 9.3 2.1 -0.4 9.9 2.8 14.3 5.5 12.9 3.99 17.4

* Antigua - - GDP 1981-88, INF 1981-87; Brazil -- INF 1980-90; Egypt - - GDP 1981-85, INF 1974-81, 1981-85. Source: Compiled from IBRD, Trends in Developing Nations; AID, Latin American Economic Growth Trends; IMF, International Financial Statistics; and OECD, Latest Information on National Accounts of D~veloping Countries.


The small island economies in the Caribbean were most affected by external shocks. As providers of tourism services, unfavorable external economic conditions have a deleterious effect on the internal economy. Alternative sources of foreign exchange are in short supply in any small economy.

Human Development The growth of an economy has a social as well as an economic dimension. Social development

is illustrated by an improved quality of life for the population. Social development is not easily measurable. Improvement in per capita income requires dollar translation at an appropriate exchange rate for comparison purposes. Population growth is also an important factor in this calculation. The economic welfare of a growing population necessitates more employment opportunities associated with rapid growth of gross domestic product. The slower growth in the 1980s combined with a large number of new entrants into the job market in most of these countries has contributed to high unemployment rates.

Population growth may be an obstacle to economic growth, but academic research has failed to show that it has either enhanced or retarded the economic growth of developing countries [Horlacher, 1991, p. 368]. However, it may have adverse effects on quality of life and domestic capital formation. An external evaluation of internal purchasing power change is further complicated by the existence of vibrant informal sectors which expand to offset income losses. A 1986 study of the Mexican economy calculated that the informal sector accounted for 26 percent of GDP [Graham, 1987, p. 4]. People with formal jobs "moonlight" to improve purchasing power.

Quality of life measurements include improvements in adult literacy, health, sanitation, and safe water access. Political and civil rights are also important to human development. Low female adult literacy in Cote d'Ivoire (31 percent), Egypt (30 percent), and Nigeria (31 percent) contributes to low overall adult literacy [UN 1990]. Improving the quality of life may motivate governments to borrow at home and abroad to provide subsidies for basic necessities and provide the social benefits of education and health services.

Available sources indicate that human development has occurred during the 1960-90 period. Although every individual or group of individuals may not be better off, society as a whole is better off (Table 7).

POLICIES FOR DEVELOPMENT

Between 1960 and 1980, development policies appeared to be centered on import substitution and state involvement in business. Centralized planning and control financed by external debt was seen as essential for growth. Private sector contributions to growth and development were not considered adequate to achieve rapid growth. The private-public mix varied considerably from country to country, as did foreign direct-investment regulations.

The debt crisis of the 1980s has resulted in substantial policy and structural adjustment. Adjustment has been difficult when austerity and reforms were considered socially unacceptable. Movements to improve democracy frequently motivated the governments in power to introduce contradictory short-term policies. The resulting uncertainties lead to crises of confidence in the government's ability to control inflation and increase productivity. Argentina and Brazil have experienced the greatest difficulties in reversing unfavorable economic conditions. The multiple political, social, economic, and religious problems in Nigeria, Egypt, and Cote d'Ivoire continue to impede reform efforts.

The most open economies among the Caribbean nations have been susceptible to global changes affecting their commodity exports and tourism. Efforts at regional integration have had mixed results but are expected to bring future economic improvements. Improvements may continue to


depend on the continuation of protective arrangements under the Lome Convention and Caribcan and Caricom agreements.

TABLE 7 Per Capita Gross Domestic Product ($U.S. Millions), Population Growth (%), and

Development Indices--Adult Literacy, Political and Civil Liberties, Life Quality, and Human Development

Country Per Capita GDP Population Growth Development Indices 1968 1989 1959-69 1979-89 AdLit PolCiv Life Human

Antigua $3821 1.8 1.0 95% 1.0 .88 .898

Argentina $849 2160 1.4 1.6 96 4.2 .90 .800

Barbados 6370 0.3 0.3 95 1.0 .95 .925

Brazil 446 2500 2.8 2.2 78 4.5 .77 .800-

Cote d'Ivoire 262 790 3.8 4.3 42 5.7 .49 .500-

Dom. Republic 303 780 2.9 2.9 78 2.75 .75 .500-

Egypt 196 640 2.6 2.7 45 5.15 .49 .500-

Jamaica 572 1260 1.5 1.9 82 1.85 .92 .824

Mexico 590 2080 3.4 2.2 90 3.75 .84 .876

Nigeria 75 250 2.5 3.4 43 4.85 .47 .500-

Paraguay 244 1030 2.6 3.2 88 5.15 .83 .500-

Trinidad 798 3230 2.4 1.8 96 2.05 .90 .885

Uruguay 599 2620 1.3 0.6 95 5.2 .91 .916

Zambia 378 390 2.6 3.8 76 4.95 .62 .500-

Zimbabwe 240 650 3.2 2.8 74 5.45 .67 .576

Note: The lower the political and civil liberties index, the more favorable. The higher the life quality and human development indices, the more favorable. Source: Compiled by the author from various sources including OECD, Latest Information on National Accounts of Developing Nations; UN, Human Development Report; Muller, Comparative Worm Data; and Kurian, The New Book of Worm Rankings.

Zambia and Zimbabwe are moving away from centralized economies and one party states which were preferred at the time of independence from Great Britain. Their commodity exports have been seriously affected by droughts and global market conditions. The economies of Uruguay and Paraguay are largely influenced by their neighbors, Brazil and Argentina. The oil discovery in Mexico in the mid-1970s affected the government's economic policies unfavorably.

Since the mid 1980s, structural adjustments and monetary and fiscal reforms have been introduced in each country. The reforms, associated with IMF conditionality, have had varying degrees of success. Privatization of state enterprises, reform of the money and capital markets, deregulation, and revision of foreign direct investment codes have been major challenges.


Government revenues have improved where obsolete tax systems and collections have been revised and public spending reforms introduced. Mexico's social pact accompanied by sound implementation of reforms provides a model which is more enviable than practical in the large economies in this study. Using the Haner [1980] factor analysis approach, Nigeria, Egypt, and the Dominican Republic are least attractive to foreign direct investors except in industries such as petroleum.

FORECASTING THE FUTURE

Forecasting is always a precarious, but necessary task for governments, international agencies, lenders, and investors. All forecasts are based on probabilities and uncertainties compounded by earthquakes, hurricanes, and droughts. Planning involves best-case, worst-case, and average expectations which allow for flexibility and consistency. The Mexican approach has enabled it to return to the international capital markets for new money.

Prospects for inflation control, gross domestic product growth, and debt management are summarized for most countries in this study (Table 8). Paraguay has made substantial reforms since I989. The World Bank considers its growth and stability prospects good [IBRD, 1990, p. 437]. Uruguay's new government (1990) plans a gradual de-indexation of the economy along with an export promotion policy and improved financial sector supervision [IBRD, 1990, p. 559].

TABLE 8 Prospects for Inflation Control, Gross Domestic Product Growth,

and Debt Management

Country Inflation Control GDP Growth Debt Management

Argentina Reform Dependent Uneven Reform Dependent

Barbados Low Int'l Dependent Potential Problems

Brazil Reform Dependent Sluggish Vacillating

Cote d'Ivoire Moderate Negative Problematic

Dom. Republic Fluctuating Low Problematic

Egypt Low Low Problematic

Jamaica Controllable Possible Reform Dependent

Mexico Controllable Sluggish Improvement

Nigeria Difficult Moderate Problematic

Trinidad Low Slow/Fast Will Improve

Zambia A Problem Slow Problematic

Zimbabwe A Problem Slow A Concern

Source: Summarized from Chapter 11, The Global Debt Crisis) Forecasting for the Future, edited by Scott B. Macdonald et al.


IMF conditionality will mean continued supervision of economic policies and implementation. Political and social development will depend on democratization processes and the ability of governments to generate enough revenues to continue to provide adequate health and education services.

CONCLUSION

The data and information obtained for this study indicate that the growth in the 1960s was not generated by recourse to external debt. The success of the import substitution policies fostered excessive optimism about growth potential and the need for foreign debt to achieve it. Failure to move to export expansion policies as foreign debt increased was an early indicator of future debt service problems. The situation was exacerbated by overvalued currencies, high inflation, and excessive state control of the economy.

In the 1980s, the major world economies experienced a deep recession and a determination to keep inflation under control through the use of orthodox monetary and fiscal policy. External conditions increased the difficulty of controlling inflation for the developing countries. Nevertheless, economic and human development were achieved in all the countries in this study.

The 1990s may see accelerated growth under market-based economic systems. Much depends on favorable external and internal conditions which are not uncertain. Domestic policies are as important for ongoing economic and social development as opening an economy to free market influences [Balassa, 1982]. Credible and consistent policies should foster healthy economic growth which will lead to improved economic and living standards [Khan. 1989, p. 279].

The debt and development crises of the 1980s can be regarded as a threshold for change. The future development of each of these countries will probably take place at a slower rate under more conservative policies. Open economies and stronger private sectors, as well as improved political and social environments, can be expected to support continued human development.

REFERENCES

Balassa, Bela. Development Strategies in Semi-Industrialized Economies, Baltimore: John Hopkins University Press, 1982.

Beckerman, Paul. The Economics of High Inflation, London: Macmillan, I992. Bogdanovich-Bindert, Christine A. et al. Solving the Global Debt Crisis, New York: Harper & Row, 1987. Carvounis, Chris C. The Foreign Debt~National Development Conflict, Connecticut: Quorum Books, 1986. Cooper, Richard N.; Sachs, Jeffrey D. "Borrowing Abroad: The Debtor's Perspective," in Gordon W. Smith;

John T. Cuddington, eds., International Debt and Developing Countries, Washington, DC: World Bank, 1985.

EBT. Egyptian British Trade Journal, 2, 10, London, England. Enders, Thomas O.; Mattione, Richard P. Latin America: The Crisis of Debt and Growth, Washington, DC:

The Brookings Institute, 1984. Fidler, Stephen. "BIS Casts Doubt on Brady Debt Initiative," Financial Times, June 14, 1989, p.30. . "Bankers in Brazil May Have Bought Back $17 bn Own Debt," Financial Times, July 12, 1991, p. 18. Garg, Ramesh C.; Welborn, Stephen. "Debt Servicing Problems of Developing Countries," Unpublished

paper, Seattle, Washington: FMA Meeting, October 1977. George, Susan. The Debt Boomerang, London: Pluto Press, 1992. Ghartey, J. B. Crisis Accountability and Development in the Third World, Aldershot, England: Avebury Press,

1987. Haner, R. T. Global Business Strategy for the 1980s, New York: Praeger, 1980. Horlacher, D. E.; Heligman, L. "Recent Findings," in The Consequences of Rapid Population Growth in

Developing Countries, Proceedings of Expert Group Meeting in New York, August 1988, United Nations: Taylor and Francis, 1991.


IBRD. Brazil Financial Systems Review, Washington, DC: 1984. IMF; Khan, Mohsin S. et al., eds. Macroeconomic Models Jbr Adjustment in Developing Countries,

Washington, DC: t991. James, Canute. "Canada Gives Caribbean a Breathing Space," Financial Times, April 12, 1990, p 6. . "Trinidad Sees Most of the Cross-Border Action," Financial Times, May 17, 1991, p. 42. Khan, Mohsin S.; Montiel, Peter J. "Growth Oriented Adjustment Programs," IMF Staff Papers 36, 2, June

1989, pp. 297-306. Kurian, George Thomas. The New Book of Worm Rankings, 3rd ed~, Oxford, England: Facts on File, 1991. Montiel, Peter J. "Empirical Analysis of High-Inflation Episodes in Argentina, Brazil, and Israel," IMF Staff

Papers, 36, 3, September 1989, pp. 537-49. Muller, Georg. Comparative Worm Data, Baltimore: The John Hopkins University Press, 1988. Piggott, Charles. "Indicators of Long-Term Real Interest Rates," Economic Review, 1, Winter 1984, San

Francisco: Federal Reserve Board. Vernon, Raymond. Sovereignty at Bay: The Multinational Spread of U.S. Enterprises, New York: Basic

Books, 1971. Wallace, Cynthia Day et al. Foreign Direct Investment in the 1990s, Dordrecht, Netherlands: Martinus Nijhoff

Publishers, 1990. WOW. Profits Out Of Poverty, London: War on Want Campaigns, 1991.

Financing development in less developed countries

Documents

Transcript of Financing development in less developed countries