• MD usa »BVaoPE1l co~tts ..... JMPBMTt.VJS Ol? V~B

a• <J.f t.be waJ<»: funotioftt:J. ot the »tP .tf#· to prov.l«e

fin~al as~1$Mnee to tte ~\'lttttl$$• tt ~y ~

··be· ttO:tU&tl that the l•s ~eloped 00\11ltt!• whteh a~r• poytngo

. to emba• <$ tile path <:;t ~~ deve1o~t. tryittg t()

~bJ.eve Enitlf••~Ua~• and .$el~suS'ttaln~ Qliowtb. need mre

fthlm~1e.1 a-.sit!tam;e t~ 4o tbo ~e~ =~r.tu q.f ~~·

~ toll$ ~ p#Ol>l• La ~l$t t.~e le- ~eloPfid ~td••

&J'~ ak~ ·lfm4• heavy de~ Whtle at the ~tame tim(!' i!bd)1

re.quiJi~t$ of ~s~ltt$1 flu~• ~~~ on the i~t'~ae.t

in fa~::~:t" Wbtat u ru•;~4-e-4 is t:h$t tho~ developino QOtmw£•

sh0ul4 i'ft'tl $Oft loQfJ tn'Yb).:;;.ttag easy~ and. eona!.~ns

a~cl st.l.Cb lO&N sbQ'u14 enable them. to acbie'fte .QCo~ •uto:nomv

~- ~ lfmt .t"Uft• If'Qw :£$,t JMr· ba& £ulfi.1led the as~tloM

of tl\ese 4we1opiltg co~.ltis ol t;btt tbl~ we>r14t llut., t.he

tel• o~ IMP a economic 4eve~ent of these ~ttrt• cannot

be etrakated unleaa we w<!ertft.and their :e)laracte!fLstf.(.ts, needs

of u~~ ~- and th•~ 1ocaUQn$.· ~ the ~t.t

of the wor16: ~ml'• 1'hetefotttt'* the .starting point has to

<:ondd..- 'Url4er~lopn$nt tn ~:r-~tLve.,.

-~~t_ID_!«SR!S$.&1rJi,

~hrougbout the U~t'Ure on •neve1opment EQ;)nom1«:13••

onG una. ~ ·.mul:tiplid.t? o.f J.nt.~ang-bl.e -te:ans ~ es ·tbe

65

·~ \fCI'ld~•, 'dev'eloPbio ·eonntr::wJ: "Ut~4'e~elo~

eol.llltd.e$•,.·~ •.1~•*' ~4E!lrel.Q~ C9Uf.lttt•'• <JJ:" the JS()uth',•

Although •1'$ .a~p.ri.~~eaeJ~$ o! .~ ~$\~S!Qn. ,ts ps~!~

able in i'ts own 1!igbt, ftle\re;ltt~ng *ZO~%'J.est ,I.e ~bab.ly t'he·

mot;~t·~nt•tious term• ltt impU~ all o~b·•g·ptoe~s of

devehl~l)t on tb$ part ()f the ~ottntneo eo-ncern~ implytnq

that t:MY ate ''eatehtn'Q' ~~· with ~ i~du$tr5,al.;L$ed co~ti®

. tcEttobJ.ng u.p ~.as Upol\ ~lat!ve ~wth ;t&.·~·~· A ~

may d$V'~11>P ~4 flt~.11 npt •catch ·~.,}. Thi9 t~ •·~ S utb' ~-.. ,....b it..~-~ ... ,.. 1t....__-... ,v.e .. 1'1lt !i'V'!iftit'tar """'·· ""--~ - .,ftA . Q' ' ... ,. ,,,~.:q~ ~~lil ~,a;.~,.;l.l(J·~ ~~4. I~· #c~.1"""'S~

.i:tl a ~·P'Oli~al c:ont~ ~~ td..ll ·be -~~ a~at.~ iio

isll 1A Une· w.tth WO.t'ld S$$3 and 'a<~opt. the t~ •·~& owe~~ ~~lee' (because the t:m:rn .. ~$$ D~$l.opE!do: tnd.f.~,

cates $ comparison Yltth.. developed ®t&n~d~s.) ,. The 'lfO::tld Banlt

:t.tt. qleaJ:lY 4lstln.gulsb$$ ~ •tow In<:Ome CCuntties•

with ~ ¢apito income qf us. 0 31l1 o:t bEllow (lln the bs.s!$

of ,..919 date.) and •Middle ~me Cou'ntdes• w!tl~ pep· capita

iric:Q.mo aboV~ W .'$ Jto • t 4000 and. the .t:emalnmg <:O~t;t;ies.

atre •·High ~e CQun'tzrtea• .~· trhte .ts~ aboWll .tn '®~ 3•~··

rvt!- ' ·_._,., 1 '_f TrifJr 1 e: · •' ,. - -·~··· ·· ., ... ·1,.

l t1ntt:~a Natto;ns ~$'Wt'E'Mll fQr th~ ~toono~ oevel~· aent of ~aer4evelope<S a~~~,,. liEU., P•:S•

2 Worl.a n~ ... ¥.Srtfil:lm~Sf;l,.!2~.f· l.'9S1·

6$

!f$1! .3:'&. (UASSl?le14'XON' OF COtmTRI!S 01" t'Jm wt".mtl.t

· (P~ap:l~ lncome ao Da$1td ·

raa.-~m.~··_l·,.· · ~· es

. if . . . - ··-· . ,. . ' ...... ' _' ..

, i . 'if -. ' ij_' It _Jt nu· i? -•

A. JQ!t_~s j£BEta•, ~ftgl$4esh

m;b;f.op!a 8tU:1na

AfganA>o~

tfl4la &x-t Lanka

China PakiSt$.1$

'ranaanla Xndone·si&. aud.an

&enya Egypt>

"l'bai:la.,wt(i

. Phi1Upirle1i N!~J~ta

<»ltallbLat ~~n oem.·RG9•· 'rttr'k~ Me;l&ysla J.(Qttean a~ •. ot M~<:O

SOUtb Aft'iC&. kaal.l. i¢gentJ.na \'UgoslavJ.a

210

~0 ,., 1~ 170. Ito .23.0 260 260 260 370 :J10

14:20 380· 380 590 6&0 670

101(1

1130 1330 !3"10 1480 1640 t7#0 1180 2230 2430

16 " .-.0·4'1-:t.a 111 o.·s

. t,..4 'i.2

2.9 2.3 .. , o.;~

3.,S 2.1 3 •. :4 4.6 2~6

·'·' s.o· 3,~5

,~·e

4.:0

'·:1 . 2.?

2.3 •~s a~• S•:4

_____ Wti_>_M_f'M-[f?-~ ·-·-· ·-· --· -~ -----.· -1'·-··@·F-0.-f'i'f!i'lip~ R- ,' _IT t }ii? d ~ 'pi If 'W +'tjopf!lli111011MF'llll.ltliii '

()jl•- Oo I f i" • 0 ''·". 1 it."' -·· "1 J'f.l!t. 0

0 RJjii(

V~ueta

X$rae1 Spe.1ta

c ! . .....Arot~.·~ ... ·'.al ~.· ~.t.·· ~.·.~-.· • -='"~~~·.·c·•'-~-•Sl=~~-J~leJ'ld.

lt~y

~slana

u~x.:

l1tfella.na A\U\rt:.!:'~*'­

Ca.tta$1.

F.-ame ••tn.-lands t:rnt~ states

' Ne$\tay

Belg:11ltR aermany F.a. -~k lwec:t~n .. SwJ. t~·erlsnd

D •. ~Ri~J, §!Utl:49R ()il !!Jert,ert Iraq $au41 A~7abJ.e;

~ Kuwait

•• N.2!'Cl~52S&t: ·&nt!l!staa+ .!sit·-. Bulg&i:i;l;.a

PO .lana. Hung~

tiSSR

)130 4.1$0

4380

9440 4210 52 SO 5930 63!0 8160 8$3Q H40· 9950

:tQJ$0

"S.0$30 to?OO 10920'

. 10730 11900 11930 11920 54?0 2410 1!80 9110

11100 4230 36~0

3810 lB$0 4110

a.11 4.to 1 .. 1

•• ,o a.a J•6

1•' 2~2 .. , i.tti

l•& ,,~o

3.4 2 .• 4 .~.s ,., l•3 a.A-·~~• .2.1 ,,.o 4;,.G

s,.·J S,.l

~t-·t

""' s • .s , .. 4,.a ... ,

e&eQhcud.ovaldJl 5~96 4 .. 1 $. ~. ISf ·.1 ~-~lla··!!R·•t. Jt ' 1 t.'J..· ..• !lfM'¥1.11( n ... 844:~·2.f.L. ~ ·-p )Ill. J.) ·:Til;t,flfH 11!1 Ald. ti_.

SO~et l'(tdd lE,t~ ,.Rtl!!~•· 'WOJ:ld eank.~ 19S1i

Xn sptt.e of the heterogeneity ~ch reflects relative­

d~GM tn un<le~tdeveJ.O}lnent ·and~ geneJ:aU$at1ons ·dlff.tcult,

-the J.et~s 4welol:)ed COlmtd.es sh&J:$ a ·~ of tun~ta1

fGatUt$$ tv:hich c:J1ea~1y dtst1n~sb them fi.rom thE! e.avano.a

!ndustr~a11raed count;ries of ~be weflt•· The most eaUeni! of th~se

. f~t~s $re de.scJ!"ibed beclowl

(a') M.Q:St of the less tlwetoped dounn!es ere fo~~ co).Qnt~.

~his ,otn~ to the iaot that w~devt!!lopment . i:e1. !:11 .many ways, . . ~ I

a ,legaey of <:o.l.Qnialtsm· .find also ~l.alnG that links ol! ·

~nom.tc depsnetenqe .• est~.Ushed ~tween .eelO.td.e.s G.~d met~ ...

]l)Oles ~ hav(l sutv1Ved the tb~.l intJ:Od,ueUon of. polii!ical . J;n<lepen;dende end nattonal SCYtt•eignty .t.n tbes£l •~olonJ..et~~oto

' . 'rhet is1 thf;;l moV.rop-;>l~sat.elllt$ relat.tonships which ~·~·

C'l!bat"~~isti.:.l of colonialism have ~ur:vJ.•1.(;ld t:hs f{)~l ae.tn~.ee

ot;.' the ;J.at.ter.

-fb' In ell !nst&.ne•s• the d~gJ:"ee .of J.nd.usilr!aUe~tton (as " '

meaS"wred 'by t.h$ tJhare of manu~tliri.ng tnaust:t'i$• in ·~or:

by thea pC:Cettage of the lal:x>ur fotos ~loyed. in s~b lnd\lSt.

rtes) of lGSs tteveloped countt't.e,s t.s eona.f.der&bly lower that\ ~

t.hat of any ·&dvance4 CO\Ult.ry,~;,.. Tektng the SOuth as a 'tlh01e1

~ ....... +' ••.. ,~.:·:···1

,

69

lt, accounts for on1t 2.0 pei"'ent of t~ wo~1d's ~nutactU.tin,g

output.4 "able 3. '2· smws the ~upat£o11a1 ·<11$'6-~oll of

ti40dt!ng popu1atton in some of ~he comtr!ee~··

tt.tia1:!,,!•1 P~N!AG£ OF Ae'»XV'B l?O~XDN 'ENG\(lD) tN AGRXCUL~t$E ARP· htllfS'l'RJAL ()ltXQXN or ON» ~­

SELltOTU> CO~ .til 1.978 .--·-,.. .. 11 d I·- ·-.ftxst~J.--1 :::::: _::x•~~g~¥.teh;::::: :::

AUSt#a.-. ~' . 1 • ' -~ • - • '

. -. . . ~- - "• ' .

qauaaa 1'#$.~

.Uap6ft

:t-ndf.a

6

6

' l-3

14

. A9t'1c;Ui.t=-e 11'1dUst.q ~tng

. lll I

' ,) • * --" 1-- .. f ··-:: ?. .I ., rre-

a !G 62

J $4 63

s )!. S!

4 31 65

s !1 59

5 40 JS

40 as 34

- •• -·_n'' lJ!L .. l .. :··r:J r·_,:··rt .·(T_.lTJi·l·,qttr ."f .• t -~J- ·.··~ -- ."._,:_iii:M'1 .. 1.11' a··_-.·-_-.···- ._._;-. f J_lf-·_p __ t_pjl',

(c) Gtven th• low· de-ee ()f ifKlusv.taUaa~n,, &gJ"l~t~

an<! prJ.m&J:iY --$'$cti:Ve 1ndu::.ttr1ett ~unt foJr tbe latrter $h$re

ot .enpl.o~~ a:nQ. in¢0rtle itt l$$$ develOl)ed <;O'Uti1Utles.:S

r r: ·- ,. ·i ,_ · t.J: · -_, _;.. __ ,_ ·_it<,_ --·~- ·: t-.- •- __

4 wor:l<~ lllarik, :n~2j 1te1~'

s ,~:'# 1.910,

6~

·( . .;t) t.ess ~veloped ceuntrtss are heavtly depGndent on

eJ!pbrts, pertic:ulatly of p~t!n1ary prod~ (ca$b ci:OpS and

mia~ral$)• 'fhese ~unt for some 6! pe.rcent of less d~eloped

eountry expotts.,~ in value terms. The. rrota~le fee.ture is that

even where the production of .. p~~ COttlnOdities is confu:'o.11ed

locally the ~cesainq and marketing of t.hlls·@! same eommoMt:t.s

is mostlY oontro1l$d by transnational corporations of tthe

a<tvancea west. lt. £sa situati-on oiLweak $$1lers and. pc>wet-fu1

bUyers.

(e) Even tn those 4Cttnt~if!s where indUat.Jrla1ieat1on .S.s mo~e

pronoimc.ed~ l.ocal ntanufaoew:-J.ng indUstries are mostly <=~ontl't01led.

1)r forej..gn mult1nationa1 C01rJ)O:tations an4 thus produCing goods·

f<:>r ~rt. ma.t::~t.s teHJ•'# ·cameras, calculators, etd. maete in

south East Asia) :. As a :t-etsult. the less developed cottntJ:'.ie$

depend on .i.mpo:;-ts fot' the prOVision of eons~ 4\ttables_,.

industrial tecl"tnology anu ~ requtremertts and thi.th· o:f

·course, .ts a part of satelll!fettioJ:l of let5s developed oountries

.referr~ to above~:

(f) The economtc atructure o! several les& developed oour.tt:.•

rtes reveals a duaU.~c tn the fot:m of the coedstetlCe of

teebnologpi.rl.t$tis£Ve J.nd\lst;:J.al SE!Qto~ ·On the one 'haft4, aQet $

bacltwa3;"4 tradlt.tona.l $Getot' ( e~ g.,, aUbstst.cmoe ~norrw ~:P4

\' ' ... •

10

ba~ar economy) ott the OthE!r .• 6 Although <J.ual.imn !s en 'Uftderd.•

abl~ feature of most of the ·eount.ries concerned. theories:

whtah attempt to ~1ain \U\<iardevelopment in tet:mS of tb&

retat'da.tive eff~t. o~ .baakwat-d sector$ on the economy as a ·whQl(!, •

are highly contztoversial. The etnetgence of modern en¢1av~a

with tecthnologtaallY .aavanQed industt"ies -- mostly controll.ad

by- for.eign J.nteres<ts . .-,. .ts, in fact,- 1mparttnq a n$1 tnt~•

t.tonal dtv1dt>n of labotu: and production• charaoter:tst~¢ of

the tnoreasing in'herne.tionali~at.ion of contanporasy cap!taUsm.

Whtle those enclaves undoUbtedly have a ·stimulat!ng impaot. on

the growth of GNP, they· e.z:e also a QOn~ibttttng factor U()

inet'&a$ed . st~uotuz:'al trnbalances. Pol: instance:~. by e.tt.:tactitlg

a le.rqe pa:rt of these countries·• reso\lr'Ces, the moa~m

enqlaves can cause a ClltttUlative retardation of the bacl<ward

seoto.ts•

(g) %t also follows that the low per capita GN; of ntOSt

less dev'$loped ooun~.ltas !s c:o~ut1ded by enormous dlspati.tles 1

1

71

in the d14tril:JUt.1on of ·ineortte and wealth~ On the one band,

there et.tEe' small1 wealthy. elites of burea~ats; land o~a l

and a :few .loc~l entr~pr~eurs while -ges in the •taoden1'

.s •. tor are gettE»:allY weU above the nattona.l ·wage. lt !$'

a«:l<:ompa:nted by la.rge scale Un~loyed ancl underemployed

J;iving und$r outright. pev$rty.

(b) Jdueat.!on of all but th~ ~11 privi:t.eged. ~Ute is

g.e~erally defieient.8 This ts .shown by the high lrtWe1~ of

i:lliter:aay and the underprovtoion. ?£ eetucational facilities

tn many l.ess· aeva:toped oountr1es and 'this' is excerbated by.a

b~ain drain of eduoated J.ndivtduals and skllled wor~er:J, to i:he

J,.n(iustrlal c.~nt.res o~ the vlest in the times of ~lU"onic st*"'~

tural unemployment- . This tendency is ptevalent even flrf\Qn-g

uaskilled WQt'kers p 'l'h1s large $<:ale nd.grat.J.on .ts ref1eeted

by the .ttnpQtrtance of ~t~iates remittances~ as a soUrti:e of

fox-e!gn .sxehang~ fot their Qountey of or!gin~ In some ¢ase:s,

net. :remtttanc4::ls ® exceed fox-Edgn earnings :front ~J:t$.·

U .. ) Since the lsvels o£ average dotrui!st1t!! income and savings

Of these QQtmtX'J.es at:e lOW (even if high .1h relatiVe ~$)I

they are 1nsuff1c:tent to ptov1de 'the basi8 for 1net19'er.tO\UI

cap.l tal. ~c~lation and indUst.rial deVelopment~ 9 The ~e¢hno­J.Qgtoa1 end import dependence of less developed oount .. iea on

,,., q--··rr. ·-J ·•· _·-;·~· . ,~-· • a._. t · ·-·r_: .:.

a Un!t¢d Nations; ,s;tatist:iea:l. 7'~1tb?.slv 19'-~· worl~ . 13ank. TreJ1ds ,.tn qevelo:Q~.ng .count,rie~- l973t pp.t.tO •.

Uni t.e4 Nations. ,savJ.nns ~..nr ,Develo:mon+: (New York), . . u••- ~ _ . tlii ~ 9 ~. r L. _ . ~- · -

19Sl. pp~S..7t

12

indust.tJ.al eountr.ies is thus t'~nforc!Xi by their dependence

on external capital injectionth

tf) The less dweloped. cou.nt.ties a~~ mainly an exporter

o,f primary proauets10 ana. ·their .expot:t earn.f.ngs from thes~

prtmary products ax-~ extr~ely $ensitive to the state of

'world max'kets aoo thus to the economic health -of the inClus•'

'f»:'ia1ized ~unt~tef3* to wh!oh the larg&Jt part of those ~xts

are Q!~eeted.- l!!eoxlonp.e $lO\tt dot-ms and import eontrrca~tion in

the latt~r direetiy affect the prosperity of primary -a:r.:xn:te:!i's•

Too .less ·developed QQunt.tr1es are sitni.latly affeoted by disca•

rtminatol'n{ pr:oteot!on!sm against their eXpOrts of 'fcheap·•

ma.nuf~tux-ed goods; essentiallY textil~s;. clc.rt:hingli footwear

and consumer eleQtronics, MOire <Jenerally, when .real tenrl$

o:f tJfad.e are favourable to them# lntports oan be stepped up

and c~e~is par~bus the prQc¢ss ·Of .industrialization and

eeonOld;.c gl!owths accelerated• Hot;ever., \ithen barter terms ot

tJ:ad(;t deterio.trate• $Xtern~l o:r el.ll:ttent account defieits

usually a~ . .tse and t.t;1gger off a number o£ .related seeondary

problem$~ The sharp variations in terms of trade thus have a

pX"ofoUr1dl.y 9.est.ab1lizing ~ffact on les.s developed Qountr1es

and accentuate the structural causes of und.erde'\teloprnentll!

10

73

These ctreumstahee$ force these eountrl<:!s . to go for heavy

e)tt~rnal debts.

Xt follows from abQve that the less develo~ countries

a:re ehet'acterised by low <i~gree of dE;N'elcpment. aut at. the

same ttme thes$ countr'ies aspi+e to develOp fast. On~ ·of the

essential requirements of fast groW"~ of thes.e countr,ies !s high

rate of investment whie.h could make the de'Velot:rnental ptOjeo:t.$

fee,sib~e. But the high~~ of investment would be pOssible

'Only vihen higher ~tes by sO.ving$ a~e forthcotn:t.ng (l()mest!callY.t

The savings a~e a direct function of 1ncome1 a.ceording to Keybesi'

but the income levels of these less dev-eloped countries ar~ low . and. the.refo~~ higher domestic swing$ ar~ not possible over·

11 aome fundamental theax>otical fo:rrnulations of the fc.a:eigb ·exchange constraint.., two gap analysis., and foreign capital requir~t$ a:re presented :in the following · studies'· · · · · · · ·

Mckir\nont R. ; •Fo:t:"ei.gn EXchange Const;:aints in EOonotd.¢ pev~l.Opment•., Eco.c Jo,umaf June l964t Che~ry. Hard Adelman, a .• :J ~t'Ore!gn A1~ and Ee<:>nomie Development• The Case o£_ Gree<;:e8

, .. ~~w J)t· !eon,omia ~.tudies, Februa~.· . 1966: Mac EWart" A., nQp. ·. al pe,ttern ol Gl"'l>Ttll and Ald. .t The t:a.s.~ of p!ak,istan••·. F!.k1,st,a.n P,sxeloeent. Rsvtew, sunmer 1966; Chen~ H~ and Strout., A•, nFo:relgn Aasts .... t€inee and EconoW.c oeveloprnent" American ·sc no··«:! R · w., Stapteniber 1966,. Vanek., E •• :Est.imat!n 'F rei Reso ee N s ~r Eecmo · e .D · lo · nt. New York • .l 6 1 John

·ler ~ ed• ·. ·~·· _ca: ta .. MOvr:snents an4, Economic p,evelo::rtnent, (tendon), 196 : A+Sengupta, 'lJ?oreJ.gn capital R~ir~ements fot" Economic Development••, 0~., !-'larch 19691 Bruton# H•J'•• 11'.t'Wo Gap Approach to Aid anO. Developtnent • Cortment,#' • perfGaq. Economi,c, R$,_~~.. June !969; ;t,al1 Deepak1 *'The. Fore~gn EXchange BOttYenec:k Revisited". illC£• ,July 197.2.

74

a sho~ span of time. 'l'bts creates ld.nderan<;:es .in atbanoln9

economi.G 11evelo~nt ,of these C!Qtmtties.

ln an open eqQnomy, when dotnest1e savings prove to ·he·

tnadeqtlf.tte and insufficient tn rel~t,i'on to the targ-att$d ~ate

of gml(t!h.,. then• ~hese Ciomest.te savings: tean be supplem~tecft by

many ld.nds of e~etnal assist-ance.- Tha •:oual-Gap t«>Q.el~ basi~ ....

· · ally ~'¢Pl:&.ins the rale of foreign bo~wtng in the develoPll\en.t: . . . .

·xndotne (1')

then,

Qt'

'* Q +X + J:

e + M + s "

~bus in national incorne ac~~tLng an excess of !nveet.

ment over domestic savJ.ng is equivalent to a sut""plus ~! impc:u,~,;

,

·OVft: expc>rts. 1\n ~rt surplus financed by . for:eign bo~rotd.nq

o'h sUpplement: dt.ntt~tic · stav:tngs. directly .or ~ndit'ectlV by l / -

pr~ri~g for~ign GX¢hanqe to buy impOrts which .QO\lld be $ap1t.~tt-1

g~~$ .or s\lbstitutes fer domest.$.ca1ly produced cons~ good$. ' i'f· ' .

/ k lr· It rnay be noted that in aceounttn9 terms the amount o.~

fdjetgn. · · lX>rrow,in.· 9 requi. r.ed to . s .. upplem··· · ent. dom. est1o s. wings i.s r: same wh-ether the need .ts just for more resources fo~ capital

/formation or fort imports as well.. The .4-dent: ty between the

two ~ps, the savings ·• J.b,vesttnent (s;...t,) g-ap and the ·~~

import. (X..M) · gap. follows from the ver:y nature of the eccountir,t.g

/procedure~~. Xt 1$ a mattet' of ari thmatic 'tllat if a country

tlt.les to invest more than !t save$1 a balance of pa~nt~

deficit w!ll result; or an exeet:Js of imports aver ~rts

neoes$a~ily :lntpUes an · ~ess of resotUZ"Css us&d by an economy

over ~esources aUpplled by it, that .ts. an exc:ese of investment

over savirtqs. The twq. gap~ .need not be equal ex....a.J'i't!-$• 12

·~ understand the meanantes or th~ ''Dual Gap1 analysis;.

stan w1th a .p$.~t:ieule:r ta.:rg:et. x-at.e of growth and to aehieve

~his 'target 9l'Owth rate, the savings and investment gooc:!l

imports wtll .be ~equired.,.l3 JJ.':)oking ~n t..erms of famous Ha~d-,.

12

- • ·.!" .. i ~· •.

Zbi~ t p~293~

76

pomar ncdel o.f e¢a:notnie growth, the relatton bet.weert growth \

and savings .i!f $Xpres$ed 1n te.tms ot. 1;be investment ¢aplta1 ...

output ·;flO ratio (Q-)~ which is the J:"®iproaal of the produativit.y

of capital (P) t~e· 9 !:# -s/4 or g =t -~ t.zhere p = ~, -, g = growth

ra~~ o.f inaont~,. s t3 .saving ra.tto. SWlarly the t'elat!on

between growth and t.nves~t gooas. tmports is expr~ssed in

· te.tms Qf the 1neranental capital impo~ ratio· (~l) t.•$• q a tm•

t.f~i'e 1 ~S import Jt&.tio GiVen P and rn• ,, an increase in g teqtdr~ '/ ' . .

an increase !n s &ftd :t, •f target ~auo of gt'o'Wth is r• then ' .

the :t"equired saving ratio ~s•> to achieve that target. growth

t:ate J.s S* =t ~ and the :r$qU!red ln\pOrt ta~io i* J.s i* • !• ._ If (k)me$tto saving is calculated to be less than the level

necessary to aohteve the target. growth ra.te1 the:re is said to

m1n1nru.m .import requlrenents to e.ehiev~ the target. qrowth J:ate

-are oal-culated to be great~ tban the ntaximUll\ fetasible ·leVel

of export~, there is said to ~st an export-imp()it or ~:r:e.ign

"' exchange gap equal to A,~- 1. l-n the absence of foreign borrowing

~wth will proc$$d at the highest rate permitted. by tb'$ most

l.tmiUng factor:. tf the b!,gqest gap is th~ s .. :t gap, then.,:

growth ,is lJ.n1ited by the availability of domestic savings ana.

is scd;.d ·to be investment l!mitG~ lf the biggest gap illS t:he

foretgn.exohanqe gap# then. the QrOwth .is limited~ ava11~J.1lt;y

o-f fo:t$1gn exchange and. 1~ said to be 'trade limited.14

77 T.tadttional).y the role of foreign bort"Owittg ·wa$ to supplement

. deficient domest.ie savings. But the distindtive eontr.tbUt1on

that has b&en made by dual (rap model to the -development theoey

is that. !f mt-eign exchange is t.he dond;nant oonstta!rtt, J:t

peA.nts to the additional ro1e of-· £oretqn l»~.tnq in E.iUppletne~

i:!t\g fo~eign -~angej'-5 wi'thout Which$ ifractton of dontestie

1!1aVinQ$ mlght 90 u.nutillse(l b(;lcaus~ ac:t.ual growth would be

aonstraint!d ·by tbe tnab!11tt to hnpo.rt: neeessar:y .tnputts. T()

put tt. m:>re necisely.- .tf fQr~ign gap J..s the larqer, $0 that

(t~t.ii.iJ m1'> (S*--S) P, growth -cannot. prooeed et the .-at~ Sp

but mast p:-oceed at tba l0t1~ rate· .tm• • lf p ~s given.~ a

ftaetion of. s must go unus$4.; lt. may be further stras.s«i

that since growth .~s Umit.eQ: by the la~ger of the two gaps~

iol:"cl.gn borrow~g .:ls only t~red. to ~et the larger of .the

two gaps• lf the (x-M) gap is the larger, then foreign borro-viin9'

tQ Sill 1t will -also £111 the s-.t gap slnQe investment goodS

~em. ®Ine btom Gither here ot abroad. Xf th$·s-:t gap is the

larger for~i9l'l bo.t-rowing- t.o fill it will obviOU$ly cover tln~

smaller Jr•E gap, The t~$. gaps are not ad&tive,..

'rhus . th$ dUal gap analysJ;.s not on.ly empb<u~i~es the rol.a

of l.mpox-ts and fot:eign ~bange in the developnent prQdess but

78

also $Yl\t'hesises the .tradtttona:t and modern vi,et-ts coneet."ning

aid~ trade and dsvelo]illtent~ 'While on the one hand it ~e~s .~

the trad.Ltiona.1 V'!~ of foreign a.ssistanoo· .as merely a bo0$'tl.

to domestic saVings and at the same ttme it also $uppot'te: the

eonolusion that many goods neceseaty for growth cannot be

produeed by the developing eountr.tEts th.emael.ves and, must,

t.herefore, be imported w!th the a,id of for.eign assistance, Xf '

foreign e,xohange is truely the dond.natttt oonsttaint and c:onsist-

ently iu sbQrt supply setne would aay that dual gap analysi~J

al$0 px-es·ents a more rE3levant thoory of trade fort developing

countries whieh just:J.f1es prot.ect!on and import aubst!;tut~iort.

%£ 9'l!Ol-lth is constrain$<1 by alack or foreign ~han.ge, free

trade eannot guarantee s;tmul.taneous. internal and ~ernPl equi.•

11btiun. and the gains ftom trade may be offset by W'lderuttlJ. ...

sation :of dom~stic resouroes~,1S

The d.ual ~P itndel no doUbt explains the t-ationale of

tmr1t1ng foreign asslstan(!e to develop1ti9' countries. ho,w$Vet'~

the nn,del. itt npt. free f£Pm o·dticr!,.smet• - :Wirst of a11,- it assumes

the lack of substit.utabilit.y,_ between imports and dom.estlc

resources,, but. in prac:t1c:e thi,s lack of stib.stitutability is

quest.ione.bl·e~ Second question relates to the ass.t»n,Pti¢ns of

!6 Thi.rlwal* n.12. pp.2!J.t.95~ .,.

11 Oheneey1 H and Bruno. M., ttl)evelopment Alternati\fes ill .an Open :Economy .t The Case o~ zsra~l "• ~donoroAp, Jo~~.l, March 196.2 ~, ·

19

~~~ .propQttion$,,19 an inflexible compt)~!tions o£ .impo!'ts

· .. ·~t.~~ qonsurnpt.ton and investment goods~ and rigid rela·tion­f'~ t·- . ., . . . ~~/ sr;t~b betlteen impOrts and 1nvest.n'letlt a.nd J.rnport$ and output

. at'eA,l~tnewha.t strong• lf there is a complE!ta Sub$tit1,ltab11ity

~.en .imports at1d. dotnes~ie res .. ource&~ theo~~i~. ally. # 121. e~ J .one gap - ~ante end export. Then; the factor ,propo.ttions

/may be slow· ·to adjust, and substitution between foreign $Xld I - ,

I . . / d.Qmestl.c resota:ces rnar be a long drawn out prodess_. 'which makes

1.-t not ~•sonable,. to · ~dertake empi.rieal analysil! of shortagee

<>.~ foJre19n exchange ana domestic savings a-t part!oula.r points

in ttmo1 e:nd over time es \otell... Xt may further be pointed out ' .

that stnee the t'WO gaps are not additive~, the crit!e!sms of

dt.tel•Q'ap ana*y$is" &>not se~iously af!ec;:t ealcrulations o£ inte~

nat:Lon$1 a$s:ls~~u ne<;essary fo~ .gra,fth targets to be a<:h!evad,,

· except whete- tb.~ FE .gap s't!bstantially excee!ds .the savings- gap

and !lO al.lo-nee has been ro.ade tor the pOssibility o£ substitu-

1d.n~ domest~ Jt¢SOut:'Oes for imports. Xt is unlikely in developtn9

countries that Qna 9SP n11l predomtna.te as the major coP..atraint•

~ht,rdly. 1 t has also been a'.ttgued thet in the context of d~elo~ " .

I

ment! of a less develop$! co.untry. why only talk of two gaps#

namely. fO.re.t.gn eXchang-e and s-x gaps. '·Wlty not to talk of

multiple gaps e.9~· seotora.l gaps ei:e;j, By confining to two gaps

alone, we are not able to take into account ~he othet constraints

in the economy. while 1;hose constraints ~Y be qui t:.e important.

'.~:'here e.re other models that explatn how growth rat~ of

U>Cs can be 1nct:"-eaS~tt One such model rel.at~s capital imports

' lS · Chenery Qnd st.r:eut; n.~11.

eo and growth x-ate tn less developed -countxJ.e-.,,.19 This tnOde-1

tesu1t.s fr:Qm the outcome of a debate between. Ball a11,d Masaell

em: the t.-elatj.onsldp between capi ~1 !rnpc~s and eeonond.<: growths.

· ;t. u -.h.own by this model tbat.J

(~) '.rhe rat.e of ~'Wth of output \11.11 be fas:t~r with .eapit:al

.in:tpoJ:ts provided new inflowll of for~ign capital exceed the l()S$

of <lQmestte sa.vtng to ~Y zl.nt•est.. %£, noweve:t.; 1ntertest

ehq-gQs arC~! me1t by new bolrl:~wlr!<J, <C~ap.ttel iJ\pQrts tm.tst have a

.tavo'Ul'able effeqt on the growth rate o:e out.._putJ and

. -~Q.uoti:vit.y o .• <:$:p1tal ~.ltt$ e>tQ~~da th~ rate of 111te!:'est.

(1)

whex>:e :t =. '0\ttpu.t:

20

Y ·• Income t: • Interest· .rate, an4 D a Debt

_The d$.ffetenee .hM!ween ®mest1e output and national . • +

(2)

":he mo4e1 r~su1t.s from the outcome of a debate b~een Bail and Ma$seli-.: See R-J tall, •aapi.tal zmport.s ant! Eeonomtc nevelopmemt •I ParadOxy or O:tthodo~ "~· .~:rl$Aos no.l. 1962 and :S.F.Massell1 "EXpOrts capJ.ta.1 Imports and Economi.c Growths"~ K:z14os. no.4._ ig64.

'rldrl.walt n~.12, pp-,_29~300 .•

where cs- •

ad I = p;r;roductlv£ty of ·Qapl tal

sO+~D ... srn ~-(4)

·tiy substituting equation (4) into ($) and d!vidtnq by 0

gtves an exprcesaion for outp'* growth of

Bqjl $ snows that gt:Owth ·off outpUt will ·be higher; than the .rate

obtainable i1:otn 4omestie saving alone as long as a o 7 1St"· n.t that is as l.Qng ~a new inflows of ~pltal. mcceed th$ amount oe

outJ:low c>n ,paa:t lqa.n,;; that. wuld qtherwJ.s:a haY~e been s~ved•

'lbl.s ls .a fa.ir1y ete-t,n.gen.t;. condi t.ion unlt.ut~ it. is assumed tha-t '

the J.nt:er•su paym.m.te 4ue ar~ met by .c.-~at1ng new d®t. Eq~ S

also suggests that if .xn ~. ~ n, the rat.~ of gt'OWth oil output.

with Qap'ital imports will always. ba bighe~ then without

capt tal $.tnport.s .es long a$ s (J (whieh .is a nottnal e$se) •.

tt~ therefo~~ follows that lf ittt.er(!!st paymQl'ltl on past lo&na $Jl ·be ~rrcwed ill perpetuity~ thGre !'$ a ~nen't

qa.tn to be had from r~g .au !tnpO.tt surplus;!

Xf the rate of 9t'<)wth of !r'lCQme is 40lUJ1d~l'Eid to be

~ C~ependent variable, then from equation (1)

S.i:nce Y ca o .,. rD. therefore_, eque.tion (1) ecu:l also be

. wttitbell S.SI

if (!c,t;' (8) l~ divlded ·by "! through out., .t .. t results in the %'lita

of growth ot' J.noome ·Of

and .equation (t) abows that the growth rate of .lncome w.ltb

capital tnlpQrts will be higller than that obtaine¢1 froln dbmestlc

sa.ving -alone as long as the prodtnt!vlty Qf cap!:ta1 .tmpo.J."t$

( o- ) .exceeds the tate of .f.ntet-est on fcu::eign bOrrowing b:) ,.

wtcb is a $'tandard result that t.be .:J.nvestment. is pro:fJ.table

e.s l()ng la.$ the r~te of return .egc~ the re:te of interest.

t<so dOubt impo~ sw:plUSEJS haVe a ~-t. potential fo.t:'

a.ev-Ulpment-prooess, there are two <tanger$ in this .Lmpl!eat.S.on

of the (DI)del, J?irstly,. the ~::r:t su::pluses &anQed by foreign

captta1 lnfl.ow:s .increas$ t1n~ cap.ttal~ut.put ratio and tthereby

disoou:-ages the <.iomestJ.e $aV.ltlg. And secondly#' a fl'aetton of

cap.f.tal inflow .is. consumed x:ather ·than invested• Both thsse

faiClt.ors may redUCe ttbe gr(')Wth rate o~ may result. in .no ext.tG

9t0'Wtb .$t a11. ":hi$ argument was put fo~rd by S:r!_ff.ln~~1

21

$! s•s14••• tl\f). emp.t:,-i~al $t.U4.te$ a.lso sugg$st $ negative

. . . . . ;l~ ' #e.la.tf.on. ~Et&A 4tlpc;;res .aaa ~est14 #tt.Vift9• aut etu.m. tb!.s

baa tO- 1wJ consid•ed ln tbe Ug-ht of bo'W eavttifs a," a-fined

l.n a t~evel~ng \e~~ lii •ewing$ $Jte defin~d as $ ;o l j(jj>- •

<Whez:e F • VQ~gn. eapLi.tel) and 1f F ti~;,-ea.. ~d I r.ts&• -

.l(t$$ than ~. s ·mtlSt fal~ to· bttng about the equa1~'toy and itbu

t't '"'aDt'lOt; haVe e W$Gke~g $itt~ on ~elot>lnefit ~c~s::~. %1.'4

may .aA.mply sref1•t t.h$t ;a ~n <lf eapttal. i~ns l.s ~~

J'oa:tun$te1~ bo empirical studies baY$ suggostGd e. neoattve

rel~ne between ~p.ttal #.fnpo~t$ ana: tbe.in.vesttn~ tatto~

GJ'iifiJl. 4\l$0 al"gtte' tha~ 'th~ f0ftl9Fl <:mpital LnflOWiJ

also lt~ t.b& ~tvttv Q.f.capltal aft4 -t;e ~bs <=ap1"1

O'tt~put .-e."• 'b•$U,$G the .. rtted capi.•J. .14 u•.a i:n $0•al

i>Vubea4 ~aplUel. and tn_..tt.>Ut.ltwre ~~~s,.. • Thl$ e.~t G~tt'l be nsolvd ':by ®n.s4,d(llr!n-g t:.he dtffe~~o~ between the

eapt,-~~~:PUt J!a't£& of ~se pr~J•• an4 ;(lapltal output Dt:.Lo

of ·ttl~- ettD~Y fill a whole, ~t LSJ Sntpt>~ is tb& 1s:tt:ea:r •

• l-ong ·th~.t oapit::al o~tr • ~tit\ for the . «:onomy a.s a whole

is l'lOt t_,~•J..tlg, t:t ®es n.Qt ~· a ~~O$ c:f wo.t'ry.,

b£!1SJ!. J121!2il.11.s! ... S§ D~Stn~o!QI J;i~N.a~~--23

~h$ anal~l$ given a~$ no· ~t ~stabl~.shtas then~

ftlt -rtd.gn ~ng fQJ:· <ieveloptng oountr!~& in ·o.:Jtd.• t.o

.~· 'it_'l'L . . '· . . PKM.: 1"l!Jli_J;,tlt_'_$Ji@·

22 3l

at ~ ia\EJir dw~. eftons •.. b\tt. $.t may be ~~tid

tha-t· the assiotanc:e. tbat a tlevaloptng ®tm'tl:Y ~t'..tJ# ....

foteign ®unbrlea u not withoUt. tear:a!!l xn fact lt ~•et

a lot ~f 4ebt::w.~n £n the subs~ ~s.. !ftte uwes• . ~ 'arnort1zeticm pa~ts on th$ loafta an -ll.ed. ·~ •

a~tdug ~· aa'6 such ~ •ro• p-ov14e Q atratn on f\ltUt~ :t.taJ.ance of pa~ts be,cauoe t~ pa~ntsCln paflt. Mbt..-

'\ . . ___.

also absOI'b ·a ·hlQb proportJ.on-:" ,of: f6re19fl ~· e&rain91 .

. ~ ~ts, ~rdlng to an <~ts·tf.mate24 l.r. 1911 ·the cu.t"ren~ wt.ua of! ovtJ~rt;antU:.ng debt waa $ SO blllton and ae~

J;*j'mtmta ..,Ubt~ to nea#'lY $ 7 bilUOn, tbe't is, tapp~tdf 40 ~at. o£ nev oapit:al. tnflottth• Xt ~~~ ~lso ~timate<l ttJat)

i£ -~s 8:salsteMe tenaf.ned tltlebangetl ur.tt111917~ ~e..,tc<t

pa~u as e pete~e of gross &.lill1#ttil1Qe ift 1$71 ·W(1U14

/ oxceed. 100 ~ent. :;t J.s, ot •we•"' no~ poasiblt! to ·UK a

11mlt to ·it¥ <J.®t-~ic~ ot. fol'elgn ~mre teeld.pt4t J:G~

thai! sbtml:CI no-t be ~~. · The bade quutlOft ie can a ~

bc>now es rn\JI:b li$ it ~· $'# it -that af-tc a paint, ev'efl

'though a 4~1optag =~., stlU. Jrequiar• l!!fJ!SO~ ~ ft'btoaa.

~ d£$a~ntages oft 1\#the' bo.l"l:Cld."9 ontwoigb tho adV~qesJ

~here ts t1D «:dtenon. available on the bGQ..s of whlch o J~

meat ® the quost&on can be ~J-but th$ tbx'ee ~ra wou14

-~~t consi4et'ation~2' , 1.1 _ * It wM: .l .tr,. t -, - n ·• ·• 1 ·- M •. " _ a t.lt r · ' -

24 ':thl•lwal# a.12. PP• 302.03~

28 M$l'JL'ea, 8.23"

85

•$,) There is a question whether tnc:J:fjases. in the 1nteJ"et:lt

btttden ~eed the in~eases 1n national :f.neome which will

de~ne whether or not domestic Ga'Ving eont.inUe$ to inort!Rse

as a tesult of fOr~gn bo%.'t:'Qwin9• Do•stte saving will

continue to inCJ:ease as long as income !Mrsaseli a~d income

will .inQ.r-se es long as tbe .rate of intet"est on fotetgn lJon ....

owing t• 1f1ss than the P#Otluetivi"t;y of capital.

(2) tther(J is also the question o.f wheth~ Cl(!bt a:.; a prop0r....

t!on of national inc:ome is .~tsing or falling. 'rbls depends

not. only $$ !merest ~:ate on loana but a.lsc· on the re'i!la'tion

bet~ t.he aveaqe and marginal savings 5tio. Q):neid~ t.wo ~erne sltuattorUh At ·one <mtrane sav.tngs equal ~~

inve~t so that 'the ~ebt increases at a .:t:'Ste equal to the

rstle of interest. and if the .rate of :inter~st exq~ the ¥:ate

o:! qtowth o·f tttcome debt· aa a proportion of .inc:orne will .rise ..

At .. the other ~eme savings :exe·eed investMent by Just. anougb

tO A\Elet .int..-est payments on past tlabts so i:'hat thfitre ia no

iMJ"S~ast\l ln net indebtedness~ Be:tween these two attrem~.,

q1ven tb~ s:iSS$ of the debt ~ela1:1~ to nattonal. income (lnd a

·marginal eav.tnqs ;tate m:eat~r . than the investment tat!on, there

will .~ some rate of inte~$t such that d®t will increase

et the $&me ~ate as national income. Assuming no debt at the

begtnning ot the periocl the ~itioal interest rate oan be showrt

to be a. function of' !nttta1 and marginal (}avinqs ratio,. the

capt tal--output. eat:J.o. and the destted growth· te.tef in th~ formufB •

Wh.$r~ 1: a 4~s!red grQwth rate.

so "'* Wtt.al sav.t11gs #&tto.

c • captte1/out;put .raet.o. s a :marginal savJ.nga J:at1o jli

Xf ~be initial a;-at.e of .interest is exceeded, th$ debt ~uld

,~.11 l:J-roQine unmanageable~' in the ~~'Eli o£ being 'WlCO~et.va.ble . by furth~x bOn-.)wing+ Fore£911 eap1ta1 may .<ky til)· and t:r~.,

tor$ may be :fon:e-t to ~::opr.tate assets.

(3) 'l'h..U:e !s also the cons14eratton of x-at.io of d~

sen:icet payments to ~tt earn1n9s as a me&SUJt'f! o£ c:ountl:y•s,

pronen"Os.e tc (laf&.ult whtQh <;»uld be.ve tmpUoattqns ~· fut:ure

bcrltewing eapaoity~21 D~t-servf.ce payments are g.:m-.rally

t-equi:::-ed .tn e()nve;tible cu~ren<:.tes and these twacome e. fii3~

charge ,on export. earn!ngs • BUt $l!tp0l:t el:'l'ltngs haV~ a tEm&m­

ey to flu.otuate. KenQe t.he higher the t:at$.0 of ~t-service

payments to ~1!'1: es.mtngsf the greater the likelihood of

def~ult for aay give flt14tuat.tor. in SK.POrt. J:•eipts. At the

s~e tlme.,, a coun.t.ey nteY &1$0 w!$h tQ. aonsteleat the t-atio of·

loan rrepaymen1:a to new .c;::aptta1 tnflowEJ:.,: LOan npay,i't'tents will

exc~ nw t:nflows .tf the rate o:f intettest exceedS the rate ·~ -, - - - '

of growth of J.nvesi:m(:jnt ana the o•put will eu:tul1lly fall

.11! new <:apt tal inflow tall short· of the los$ of $8vilig

. arising-~ .dQbt tepayntent.s•~.

.. ?!he poltey lmpUcatton of 'tme al:;O:ve a.nalys'!s is· that

the way to help dettelt;ptng countries to J:eduae the de~

servioing burden is not t.o out inveStment but to reduce interest

charge$ or a1te=attve1y to allow the repayment c>f debts tn

domestic ew:.r~ney ott esk.f.ng t~ dono:r:s to dispense wtth loaru~

an<! $Ubs.~t.ut;e grants E~O tba1: the debt servi® obllgatt.on

could ·be dts~nsed ttith ent!re1y .as a matte:- Qf years.

The diagJtam b$lov analyses ~$~J.ol.nq .trnplleni:iona

of bOt.rQ\d.ng and these have been integrated wtth ch.tal.....g&l)

a:nalysta.t ae . The d!,agt~ shows the t;tme sequene~ of the

$~U9'~ inves~t,, oJt ~;tt;...J.mport« ~~ aqe.tnst net %"e$our¢e

flows,. r.tGt b:u:t'owing and net indebted:nes$. 'l'he analysi$ in

this d1.e9%!'atn is with refer~ 1t0 S.% gap, but the analysis

,ts ~<ltly stmtlar· in the cmee o£ the X..M gap.

The s-i gap is gi-ven by the <Uf,ference 'bertlween the

dU!:'V$$ sa ana. xx •.

'tho net teaouree flow (BR) requil:'~ to bridge the s...,t

gap to ~intaLn a target rat~ of giowt.h declines $'tead11y.

~omln9 .a n~ .. r~e outflow after ox years. J.tiet borrowing

go~ on a little longer tn order to C.OV$# intt:trest chugee on

aa¢'Umtt1ated indebte&less• Net borrowJ.ng (SB) is zero after

-~--- ---:·-------- ------

I 1- I. c" ··v't4~ •IA"-.hA..( \ t)

, -"1'P~'\(\ '1/) ( $)

1'--l -Q)- t\A::> i14/VtP,

. ~0W (ISR-)

j:Lv-~ oYntt~ l~f-0 )

' ' ' '

' I \f)

f

$9

OY reers and at thls pOillt net ii'l&!bteQbe$fl (ID) startG' ~

®elin~, l>ebt .r;epa~Mt.t:J•- in th«!!li'Yt tak$' p1ac:e by conv~g

the coefJS of savin-gs over ,tnvest.rnent i11to a balanee o~ papents

eurp#.W:1 ®til all tndebtecl.ru.l$$ iS~ ~d by the ~t' s. $£tu

whte:h tl$ e<>Ul'lt#r becom~ a net crea.ttor.

This moCllitl sequen<.'e of ~ants..,_, l$s be$tt ap~mated

to by mal'l¥ of the new- ~~;loped ctO'Untt:£~8-. Xn the case cit manJ'

developing qo\lt"itdes toda-y~ ho'tte'ler, tbe;:e ts lit.t;l-e evtaence \'\~V(Z...

that they t.iie $b!llty 1:0 pay of:B their J*.st J.ndebt;.e~ess an<t

cut aown on 11et. J:e®Wf:Ei .U!flows. The n$$.\ foJr J'G$O'turcea iii

as aoute &$ f!Na1t tand t.bek lndeb-te4n•f:i• is _,untlbg ·b$eause &:tt.

~rt-~t:t ga~- hGJ& replaced th$ a..: gap~a• "r~-~ c:ountt!es

_ t:.tnd tt di.fU<::nilt to tx"anslate dQme$tiQ saVings Lnto aet!vlttes

·whtoh -$e tbe shortage of ~re;tgn -exchan-ge l>eca•e ~~-

are p.d.Ce and income inclas~Lc and tmport.s are '*come elas-tlo-..

'fhat b whY the fanpus t~lO;an •'l'rade uot. Aid' ie (l plea for

more lJ.b.ef:a~ t.t:"ad!nq poU.oies to solVe a~ one and the S$M

tim$ t.hl;! folt.'tiign $l(ehange gap end the 4ebi$-~erv.lctn9 p~Oblem

and the 4ebt..$e:tVJ.ng pl'!Ob).«n a~;isin9 ~ m.ountlng :7$$0UtCe

flows tnay well ~me ~a{loabl.e &n not too dtstartb lutut~•,SO

l:tt.•.--.··.:tltle, x~ an. d .cu.· f ..• ~G. - t'. dt a •.• lt:!t;!ft!S&onnl .!U. Allen .. Mit unwtn (LQndort1 1965.- p.:1 ·· •· : · ·

30 .a!d~.,, :p~ 145~

to

t.l'bl\l analys.lJJ gtv~ a:bove exple.in$ the theo~al t'ela'""

t.to.nsl.Up 'between •avtng• .- Xmtestlil$n\; and ~~il¥\pott .giip!l and

a.lfiO bow these t'W Qe ret~~pt>nsJ.ble to~ tthtl debt·,.'b~n oi the

. dWE.liOpl.ng OOUt!tX"lG$~ wow it w.tll. be 1n~erest:lng to e~e the

.aeituaa ~nence oi! thiit developing oount.Ji$-ee in ~'O~a.tion to.

•avtngs• .snve•tlt'tent, l'3nla~£:~ o~ paymEmtst ana debt OW:®~ • .-

~eal capt'tl,ll fol:mat.ton from dom$stic ·,:eso~ea requi~~s

investment. e.n4 a. eottmenaurt.\t;e J.~~~$.~ ln · tbe VOl\1;\e of teal

se.v!ng. ln tlte iibael'lde of .tnteJ:national ttade and. foretQI) " < ' :

bortowt.ng• cap!:t.al fonnatton 1.& only possible thro~gh. abstin~ce

~tom pt.esen'l:, ®MUl'l'lptl.on ana when so¢Lety· 'PtQd04ea. a stl)tl)lus

tlf consun@ good$ .su~·ac1Gtrt: to meet the neec.is of labow:: engag~

1n pl"Q~1n9 capital, xn a subsistence economy saving and inv~

stJnent. are slttttd.~$!:>1J$ act$ wbU.e in a ltlOtt&y exchange eeonomy

savtnS'$ aDd inv'"t.lnt:mt may be 'un~aken by dif!er~t gr¢1.1P$«

ana ~~ proo~s of cap~~l fo.~Uon ts Ukely to ~~re a<>me

fo%1n of fin~nce and cred.lt ·meehan1$m to .r~d1$tribute l!'eS()~es

trom s&.Vfl:t'S to i'tl"''estc>rs. ~n t.he early st.a.qes of <Jevel0pm$.l'li:;.

main ~1e~ to capital fc:urmat.tol:'l &:Jes mt dQne fl!"9tn ahottagEt

of s"ings but. \lD.WilUngness to J.nv.._t an4 1nab11J.'t:.y to tnvest

in Jrtsky' vent~G$* one way -to overcome this ptob1em is through

!nt~tnat.tonal taeade and foreign bQ~g31 and it ~.e for thi.s

91

~te&son that. ~M ~P ls Uke.1y to ex¢ee.d t.he s-s gap in the

:eaJ:l.Y stages of &;ave2.0,pn&nt•

While loold.ng at the ~er1enae of the ~~1«>pU;tq o0Utlt:.

t'i&.s, our: ~g pcint WQu1d be to look at the key- indica-eon

of ileVf)iopment and how they nave behnveti Ln the r:eo«nt pase.~

The teport32 pctnts out that the· ~ession that nea$ afflic~ t.he world GQO~my $~e .19&0 ~s to -~ Qa$itl)J., i But tme

eco~a eondtU.Ons .tn Utatt:Y de_v$l{)ptng ·aountir!Et$ ~V'e worsened~

Me.l\.Y middl~inoome countltle$ have fac(1Q a .1iqu1<i1ty cri.sis

than W£l$. ~ec:tedf b...···c-.n:r.qht Qn by high .int~rest i:att~Js a~ reduc:!ed

il«n$l'ld for ~ns. tow ineome countries dependent· on the

expott:, Q-f raw •t.e;tal$ nave wfi!Ued ~m b1s~~oal1Y !.ow · ocnmodtty ~l<#ea 1n rea-l -t~. ·

trbe d-ev~1opj.ng ®uni!rieS' pt'esent dif f!cu1ti.tas a~e ube

culrntnet.t.on o£ f3Vents -&1 ting ba~k a decade ·Ot mo~e. 3-3 They aJ:>e

~ eon~end$ ~ll' of eonditLons in the tndustnal market

~nomtLe!l ·Slld pax-tly of theit ~ pOlicies., :tt i~· quite ¢1ea~.t

.from· the ~@le J.-~ that the reo~ei.On ·Of. the paet t.m:~e ~rs

~s no simple _.epetit.ton of t.be midi!!!il.t70s"~ following i:'he

hike in oil pt:J.-ces in i973t GOP gJ;"Owth rates £n indust,;ial '

~notd.es fa11 sha.J!ply for tWQ years and then l'e¢W~e4 t:a.p1dq

l:n 1$)7"' al.tho:UOh l.n th~ ttu:e~ sub$equertt. vear• -wth --•

... . t···x

~a

33

worla: ~ •. n~ 21. 1993t »~>•1·6~.

;tb:t(t., •. pp·· •lw.2 .. . ;:;, ' ~

92

~abl""" 3·· '3 f_ ., .. ~I;!;

ltSY 1NDXCATORS, l91S..Si (PE.RCEN:r.)

'fO:t'.ld 1'#ti4Cii Grolitb 12•$ 4.0 .;..4,.0 11-.S (vol\llQe)b

.~~t£!!1. ,P.~!!Qt:r4e1t

anp -cwths

unernplo~tlt

lnfl$-tion ,;ate

D~UQ~s. ,POtL.lt:Sltl

•O.tl ;mportets G'D, ~wths

Pebt Servlce rattce

a Est.trnate(l

&,3 () .• &. ....o.-1. !-.4 3i1 s,s

. 1,. 1 11•6 to .. ~.

o •. l "7-2 ~ ., 3"1

12 •. 2 G.,? 1-.e

·s ~~ ~-

s~~s

1.3

a. a 84 ...

~·6 39 • S"4 s.t 7.4 7 •. ·3

4 .. s 2!!'4

11.1 14.$j

Jl· ltlDr,. QSta for 1973 to l981>i . ~TT data fOX' l;9S},.

3.2

s,o 7 • .3

1.2

1S.JS

e S(;trvJ.ca on aod!un end.J.onq tem debt as a ~~nta-ge. o£ ~.tts of goods and $~ieea. ·

4 ~lude$ Chitta•

1.3 1.0

·.$.6 6.5

e. a a. a

·1·' 1·5

13.0 15.-1

93

still we'll below the . averaqe for the 1960.s. The. s~~nd

roos$sion was $hallower than the fhst. l::>ut tt bas last(!d .longer

since industr1aU.Ze4 ooun~tes ti9ht~ned monetary coptt-ols to

brinq down inflation but the unemplOl'frtent he$ picked \l.Pto· e% from 'that of 5%<.

Developing ®1.11\tl:ies ere directlY a.ffeoted. by fluct-uations

in the .indUstrial world.M The.!r overall #'owth rates have

been higher, but even tb.o$4a that have grow fastest J'tave not . . .

b~on able t.Q avoid the eyeUdal 1.nf1ueno~ of industrf[al c:Otlntries.

'l'h.ey bav<~ also bean af~t~ tr.f high 1n:te)re$t rate$ as a result,

many dwe,1()p1ng- eountJ:i~s hav~ been sque~ed beet.:~ stagnating

fOreign exehangt;;! ·e€1nlil19S and soaring .irtterest pa~s on their

debt.

Df;!V'elop!ng CO\li'it.r1es ·have :r~c:rtt.ed to t-hesE! p.Jtes:sures in

4ifferent ways .. 35 Those middle ineome <:Ountries ., l'QP.inly in

~st. As.ta - have manaq~ t¢· ma!ntaln the momentum. of ~rt

~n$!on and avo~d serious n~ tiebt pi'Oblems,.. aut some eQunt­

~i(Js, . ineluatng several in Latin. Amertoa that bat$. bo~etl

heavily and adjus;te(l less (o-r inapproprtat&ly) durtng the 1970$

bava been hit by the high interest rat$$ and )'la.ve ha~ to deflate

~n .response .to a llqtd.~ty cr~sts. In Latin .America as a whol.$;

aceorrdinq to prelJ,.tninary estiJnateg, ®l' fell by 3•6 ~roent

bet.t-1~. 19so.e2. 36

34 !bid.~ 1993. p.2.

35 :~~tlfi ~·Ilk~· n-,.21. p .• 2.i,

36 Ibid, ...

94

9ut. xnata .an(! Chtna bav$ shOwn enC:O'U.I:f1Qing reststant:e

in ov-ercrOllltng current x-eee&slort. 31 ~hey were not s¢ heavilY

·dependent on fot'eign trado•, ha4 llt.tle <:rommercial debt" and,

ao were not mucb effect~ by ·htgh interest rauea ana have

mad~ impl:'GSsiV'e progJr•sa in egr!oultwre~t India's iow GnP

growth ln 1992 was largely due t.o the f!e.Llur-e of t)le monsoon.. 3'

:But. tbe Aflr:iean countries h&.Vl3 suffer~ badly, their per

qaptta tncorne has continued to fall and is ~ed to !all

furth~ and .t ts prevention will requi~ international aid. to

the$e eountrtes .• Sf

vJh!le aomt.aring the growth of Ql!'O$S domestic pro(luet o,f'

1970 with that of 1990 for d~eloptnq oountriss,.. (.of courseJ

the f$..gures i!o~ 1990 have ~ pi.'Qjaat$d.) as listed in Table 3.4.

tile qcnQJ.us1Qll Seetna to GmelNJ'Q ·~ ttl.o. tJ!l'III\Q:fl\Uf.Jtl."))l ~ te

~-that ~~the ~!od 197S...S5 th~ main che.*ges that a££ect

the d~e1oping CO\m'b:i~~ ax-e alightly sl<.>~:er grOwth !n indus•

t.riali~•a cotmtries~ world. tta(l(l) and external conc..e!!t~d.onal

assistance; e.."\d a diff«E:n't trajectoJ:Y of privat~ commercial

lenainq~ 40 'rhe ove:rall e:ffeq~t is to :reduce the proj eqted

annual growth of ~o~s domestiC product in. the developing

oountrlet;~. in 1915-95 from 5,7 perl:lsnt to s~ 2 pe;:cent.

sa 39

40

world,. nwel-ot:MJlt Remx:1i; o. 2~ t>~ 2. •.

world ·sank:~. ·tr,e,r.id oovtl2ta.en1:. B!WG~. lt?a, p.i~

~~

t~hJ<t ,3~-·'

DWtn.OPlNG COtJN"llRIES 1 ~OtfrH OF . DOrm.sTIO PROOte.r (Average Annual 'J?ercentage growth ~ate$ on

· 1~75 - price•>

Afr1aa

A$,I.S.

Middle tncom.E~t eountriet~

All Pe:velo~tng count:r:1es

a.f

a.G 3•5

6-.2

5.1

5.1

4.0 ,_.o 4-.6

4 .• s

s.4

3 .. 4

s~.7-

s.o

5.1

4:?'

3.1

4 •. 9

5~3

5.2

s.a 5~1

· ·.::i:d:(.--u · -·-·-·-··ar" nsr,·s ··· --iauc'f,. ,._, .-.,.·-, __ .,._.,..._. •• .,.:-t,..w.-r•• •·'*'f!~'*-· .. t .. -, ·i_·_.-

(a) . ~~tee baaed on prel.Ud.natry and indom:Plete data.

96

-the largest . .:~uetion is seen in· the Mtdd1e Xnoome

countries ..,. fJ:'Oln ~h 9 perce-nt to s~ 3 percent a year • A $.1aeabl$

r:e<luct1¢n ts also !nd;lcated ln XDw x:naorne Aftlc:an CO:U11tr$es.4l

in the light:. of the infc>~tion r~g the m:owth

oi oott lor the •eloping countries gtven ab()ve. we can s-ee

tbe s.x- and JC-M. gap. Table 3"5 .stunmau:·!ze$ the ea:v·ings an<ii

btves.t~mmti e.e a perae11ta·ge of oross dbmesti¢ practuc~ at. 1~15

p,t.J.cea. The ~rison .$.8 rmde between t.he actual ,esUma'te foi!>

the year 1916 with that of; -the p;t:ojected ftoures of 1•90.

Th~ table snovs that the aav.tngs anet investment as a ratio of

GOP an ~~er! to ri$e :&om 1976 ~ U'O seen either in.(l!v.s....

<lually for Aflrica., Asta. FA!Jt Asia an<! Pact.flc. Mitt<Ue -.t and

ltolitb Atrica.; or for th~ gt:Ouji$ as a 'WbQle for Iow ~~:orne

<:ountrt.e.~J, M!ddl~ Xneom:e coupt.ttes Q-X' the Dew~loping e~ie§

~s a wb()le. What is more .f.mport~ant to note ie the gap betveen ' '

tbe ;t;J.avtngs and the invee~nt #at.!o. For .tndividu~l. centr-e-s/

groups the . .tn-vestment. r~tLo ts ,l~Y to-~ the· $&.vings

r;a~to ~ tb~ the s.;..x gap is Uk~ly to temain~ 11le teason$ fat

this wsp may be quite obvious nami!itly, high population qrowth,

1Qw pJ:Openst.ty t.~ .Jave,. inor$aatng m¢te.tn.a1 capt tal flows (But

t.he net :flat~ of ~ernal. assi.stanoe tc> •tess oevelo~ countrie.s*

~- a wbQle ts ~- to decline as a % o~ GDP) and the aeetl

far increasing £w:theJ:> the devel-opment ~ffort whi<lh t~auld requA.n

httqe investment ;-es~ts~·

~able ,lt:!i XNVFSl'MENr AND SAVINGS RATXOS, D'EVEtt)PlJtG COU!ft'RXU* . ,tg.1'6· and 1990

, . • .. ;(P:~o~aae ·~~ ,;rsss dgmes;x-;a, :emd:gct. at 197J · pr&ces~) . , .·•·· Gm'ss nomest· <Cinv.eatmsnt Gross: Domest.tc Net flow of external

· · savings ass.tstance. · n #.' 1

p, 1976 0 , I 199~ 0 1 .'0 j 19:16i! 0 II 1:~90 *!76 I 0 199p

Low Ineome co~EJ

Africa

I?. a 16•0

18~0

Middle lneom:e counU1es U-•1.

East Asia. and t.be Pacific 21 ... 0

Latin America end t:h~ Antill~$ 2'3 .• 7

Middle East and North Afriea 31.4

Africa South O•f' Sahara 2?~1>:

southern Eutope atS .. a Developing· c:omt.r.i.es ea a whOle 24.8

25 .• :0 15.1

22.'1. e.s 25.3 16 .. 1

24.:0 al~t

30.t as.s .

2o.·o 22.3

a!l •. 1 29.0

24.4 25.1

al.a. 19.-0

as.a 21.9

. 2l\.t2 2.t 3~&

..

'11 "~4. .... ' 7~2·. 10~~1

22·· 1.3 3.:0 .

23.9 3.0 2.'1

J:l.~ 1.$ -0..'2:

'2:4 •. 8, 1.4 1.'2

!2.·() 2 .• 4. s~1

21.6 .l;; •. S} 3.;4

.21 .• 1 1.2 2,.:7

23 •. 5 2· •. 9 2-.3

This gap between savings at'ld i,onveatrnent will Qbr/iottsly

be met l>:r fore,tgn bortowinglll This \dll invo,lve an .analysis o£

1.mpq~tt., •)(pe)~, balance ot payment, the qUanttum of fOreign

assiatanc.e and th~ c:Qru)eqnent debt ratio in &:ivelopl.ng <I!O~tries. ' . . . ,.

Jn the ea•ly 15)80s tnaQY c.ountr!es Jtan into sedo.us /

L-.al,anc$ oi p&YJftG.J""lt$ problems"'42 ReQessio:n 4-n. the ind\letrial

countries reduced the export ·~ngs <>f aev~lopinq c-ounU".ies,

wblle. 'high real interest t:ates tnex-ea:sed t.h~t' debt serv.ice

obl!gatJ..ons.43 some lenders ccncerned. about the ability of

.,indiVidual borrowers to surmount thes& Q!ffieul;ties and unoe.r:-•

· tatn about t.o.?'(Utld edonem1e prospects, b~ame l(!$s wil3J.tlg 'than e.

they have been to ~ettse theiz: l~nqs. '!'he outcome for (~~~ . . " . a::u. deVeloping in ·1992 on Table 3~-6 i11~at.es tb~ ~ent of

tleterl.orettoncff For t:nst.e.nc:Qi

(1) The C\Jt1:'ent a~eount. <iefi~t. was $ 1!9 billie~ th$

same · a• on. 1991 end mt>re than twice that in l'eo. tt was­equ1val~nt .to .5% of (tip anca_asn of_ exports o:; good$ and non

£a<;ttor ael!Vt<:Jes~ By oontrast. in 1~75 (the preVio\l!il peak

deUcit year) def$..eJ;es We.t'e 3.3% Q# GNP and 17-.-S% <'f ~s.

(2} .rt ~ming$ fell for second ~ons~t:tve year, to a level '"below that of .1980 .... the· resul.t <;)f declining

4o11ar pJ;"ices of e;cpo~s end stagnant volume.~

42 .Korld Bank# n.2. ·pp~3-Si

43 ·~s.~: ~ pp./3··~·

44 Worl.d.Sank~.n.2# p.19•

.tr~ble l.,f>. 99' - I - . -

DEVELOPXNG OOUNl'RXES BALANCl:: "'. PAYMEN.rs.. l97~S2. (atl11ons of current dollars)

,. .-,

current Account •7.2: Resource Balane&

Workers temi.ttar.u:eab 1.4 Xnterest .paymentsO ._.2 •. 1 Other current transactions •3.5 current Aecount balance -12.0

F.inanced by net capital flows 12: .• 7 Official &:!Nelopnent asaistanc:e4 4 .. 1 Other non-eonc:essioneJ. loans 1.1. Private J.()ans 4.7 Private direct. irwestmellt · 2.2 :u$e of resatvE:fs and Othet' c:ap1t:ale ·

~emor9l'l5lutn Its Debt outstanaing of£1e1al llr!vat• R.esource gap as perc~ age ·Of GNP

6,., l4.,0

3·5-.)

rw;s .. · .. "f9'79 ·• · ·

14.2 •lo,.::S-

- 4-.4 ·35.,.9'

65-.1

16 .• ~ !l.3

35·.1 .a.4

~11/1

120.4 191.!.

;os·ft. ..,. """":.c.: • .a

1S.:t . .a:2;.4.3 -: 2.4.

-31.3

81.1

19.6 1 •. 3

42 6 ... 11.6

310 .. '3

136.1 23'4 •. 2

. Sf-

t<'isao li'l- l -

·42.,.3 -91.?

,).,9.7 2:o .• a 32.9 •41.'B .3 ... 4 ... ·6.0

-se.9 •llS.6

&1 •. 6 96.16

24 •. 4 23.2 9.::$ 10.1

35.3 47.;'7 .12.115.1 15.6

·•'22 .. $ 22,.0

·424.2 491.6 . 157.2 177.6 267-..0 :3:14:.'0

1.'9 4.3

-as.?

22.6 ·49-.5

·-· 5.6 -11S . .t2

as.·!

23.9 11.0 s:s_.o 1&.3

33.0

S~Ui •. O

199.0 349.0

3.7·

.• j

CW:x.-mt A.oeotmt deficit~.­percentage .of GNP·

llebt' service a$ ~entag:e of GNP

Debt service as· peraeni:age of ·EtXpeft&

l'ntq.l:a.st pa:ymen.ts S$. pf!rt.lell-· · tnge o£ ··GNP

Deflatex-f

a Es~at.U

il ~.

2 •. 5

ll.:S

o.;s

38.:4

b Rat~ oil red. ttanoe peytneuts.

!.:2 1.:6

4.-0 4.,3

tS.4 15-,0

s·o . .,· s.s S3:.o· '91 . .;?

c Xn~est. paymen:ts on medtum atld long ~ loans

.2.7 s.:s s.o

3.1 4.5 a.. a

1:3, •. & 16.-3 :!0.7

s.:SJ 2.;0 2.1

100 99.3 98 •. 4

d Bet . o.ffie.la.l develoi;.inent cls:ststClnee:.. def.ined as not disbt.U."senent$ of· eoncess!or.tal official loans plus net official. tran.sf~s.

' . . e Other eapital .f.ncl:udes .. net· short t.etm borl!QW'inq, eapj.tal not els·ewhare indicated;

no •roro ·and.. «td.sslonu. · t us doll~ GlP defla~r fo.r .tnQusttial eot.ttt~t$$ ..

SOm:ctl~. worl4 Bank,. li'lg.t:,ld .RUII9Pment, .~..!W~" 1993 . .- p.J.l .•. . - . . - . . . ' - .

101

(3) Xnter•st payments on medium and long term debt rose

tO neatly $ 5~ o billion SD% above their 1900 leVel. The

r.t>ndon Interbank Offtar Raue (X13M) fo~ six month dollar

d,epos.tt• averaged 16~6% in 1991 and 13.5% 1ll 19e!_.

The external det$t"i.otation a£f-e¢!ted dif~etlt group$

of developing ,countries J.n different ways •s ~hoWn. in Table

3.745 Fo~ oil import~rs the high tntete$t tates a~d dep~e­ss.,Ci cap,J.tal markets of 1990..82 came on top of the 1979-SO

,rf.af.! £n 'tJil. price$ to whieb most eountrtes bad btlt'ely sttilrte.d

to aciju.:rt,.- Between 1978 and 1990 their current account.

def4.<t!t lt'Qse !rom $ 21.6 ~1llton to $ 56•2 billion, Well

though they reduced the rate o~ growth tn the VQlume of t:h&ir

:.i.mports fJ:Om an averag$ 1 ~ent a yee,~ tiC 191$..7g to only

4 percent in 19-SO• In l991 theY held ·the volume of thelr

. imports constant, bllt! this <ltd not $top the defteit ftO'm

Jtistnq to a new peak of a,lmost $ 61.? bill:i()n. E:,q,ort.:-J wer~

fal:ttnq ;:apidly while interest payment.s sttll ro,.e. Xn 1982

expo~t eamings fell agalnt stnae. <::at?i i1al importing count.rJ.q

were unable eo inereasG their l»rrow1n.g,t. they had to cut

back the!~ merchandise imports.

The oil exporting deVeloping (.Wuntr:t.es initially

benefitted from the l91J-aO t~ss in qil p.r:lees• However~ aa

the tnoment'Um of expanding imports ran J.nto pt'Ogressively

J)!.VE!.DPlNG CO'liNTli1!1$ ctJ:Rnmr ACCOtm BAlANCE EXCLUDXN'O OFFICIAL lf'MNSFERS" 197D-&2 (billioNJ of eux'~ent dollars)

. ~U develQllins. em~

Low rnccme

Asia

Africa

f!lgdlg. Jpeontt

Oil !inportel'S

011. exporters

. -1!7.q '"'

.;ta .• o

- 0.7 ...... o.s

-7.5

""" 3.~

191& 1979 ' .

-35 .• :9 ... 31.3

.... 1.9 - 5.4

• 2.6 -3~.0

•21.8 ·36.2

.... 9.,6 -tl.l

... sa.9 . . ·• •11S.,S

-11•·' - 6.6

.... 3-.7 .... s .• s

-56.2 ..,., 67.7

12.6 .... , 38.1

.-na •. J

.. 4.2 .. s.,s

- sa.e

• 49.,9

103

_Weakening 4emand .fer otl ana tbll.$ their surplus of 1980 ·

swung .iflto deftc:U: tn both USl and l.992• ~hetr $.mpt>rtt:J

rose by$ 4S billtc>n .ln ew:rent pr!o$$ durtnq 1980..82 while

expurta fe.ll by $ i3 bl.llton .. 46

In ·the 1970$ medium. and lOng tetnt borrowing exceeded

otwren~ payments needS and re$ult.ed In a sttb8tant!al build

Up of fO;:etgn ex~hange resotll'ees~47 -t'he $ eo biilton ~­s!on of the combined current account def!C!its of: dENeloping

countries between 191S.S2 waG accompanied by notable sbi~s

t.n ftnaneing pat:eerrm,. MQ.<U.um and; long tE»..rm finfl.noa I:"'Sfl by

30 ~cE!nt over thts period but this inezrease met only 1/3r4

of the rJ.se tn ~be current aeE:otUlt deficit.. Within thi.&

total.,. 1ol'lg.terrn private 1em9!ng, which ha4 expanded to $ · 48

billion in 1991,·£~11 back in 1992 to close to the level. !n

197a.. Net receipts of ODA expanded by 50 pereen-tr between

··l97S and 1980, but. have !'fubseq;Uently stagnated" plnoing

sGVete st,:ains on low 1ne<m\$ cotmt.ries t.hat cannot borrow ·

pdvately. 4S Net private dh"ectl .investment wh!cb began to

accel~ate ln the ·late 1910s also stalled. as growth in dEJVel*'

oping and. lndustr.tal count~:1~s dealined..49 MOst of the eat:ra

46 !fo,r,ld nwelg:e!!!!V}t . Repol£S:;. u~ 32~ P• 20.

47 !W-et•·*' p.2o.

49 !fO.rld 1Jank,":n~32,. p.20.r 49 !1?.\d~:-\ p.20.

104

S.nan¢ing needs sine$ 19SO have 'f:.berefore been met by both

resot.1rces l'flGVettenta al:td short-term bo~ing~t 50

Now J..t has been established both theor~tid~l.ly and

.-npiric:ally that domestic def!ci ts continue to persist an(l

rather tn 11'tcrsasinq amo.unt over the yearet· tberE!fox-t:t.. 'the

importta.nctt~~ of the inflow of G(ter~t&l. capital fOJ: 1fbe develop.

ing aountrtes <:!&Mot be ruled. out,. !n faet~ lt aequlrea a11

the more .important r:ole as they ~bance theitt d~elopmant..

efforts~ An. estttnat.e as w~U as the f.utur.a projections about

t.hQ eaptt.tll requ;trcnetlt$ ~.e given in t'he i!able below. The

tnvest.ments of e. :Qountry are equal to its domosti¢ savtngs1

subj taCt: to one varieblo,. the $;!fiei t in tb$ C1irrent balance

Of payments~ This dcflett pOsition,. elthOu~ no:t un~m in

eettain ~el~ countr'iea is pert1.cularly widespread in

the· c:tevelop1ng c:ountrles- This deficit can be f!tnanced in

.different \i'S.'YS.t net private transfes:s.~ e~ternal i.naOmet foreign

.tnvesttnentt but aJJove all tlu;'ough government grants anct. loans, ' ~~ . . .

at Sub$¥ed or market interest ratet~,o; Table 3·•S shows the

gro:w1ng neet\ fol:' fin&ne;lng haa two main ortgins. The first is

the repaj7rr.an1: o£ prev!out!! debts and the second the defioii:

in tba balanee of trade and 'dt.h .internal pl:'i<;:es rising faster

then the extatmal pric~s. the real debt will grow heavier"

while ~~s will be more difficult and .t.mporta will b~

dearer a11d thus the defieit. vi11 tend to inar~se and th~e

J . I i8:a iiW ·-- -

105 ·t,a,ble l•'f:l

UllttUU\L C-t'Wl'l'AL lUliOUIRIMENlS OEVILOPING COtltlrRJES t ) . ,-_ . ·~ 19_76,.. 19~c .• l99t;. ( ~illion pf e~ros~t dollartd ...

.... ; l .. 7 l

(Imports O·f goods & non-factor serv1ces)

Lesss (Exports of goo.as arvi ll01'1o1ir f'aetoJt services:)·

l'nterest on 11editn'llo*tent\S long term lOans

Repayment of. principal

zncrease of resewa Total to be financed

and

Ret factor 1neolne., excluding interest on medbun and long­terms ~s

Offietal Grants & Concesaional loans (g.t'()ss) ·

Medium and lon~term loans at xnarket tems (gmss)

l:otf Xncome Countries: Middle Inccnne count.rie~ llevelop1nq c::ounu-.. 1e!J a-st a whOle

(25) {90) (146) (21S) (aSP) {·1$39) (301) ('979) (1685)

·(24) (:71) (llS)· (i51J ($.14) (1448.)' (275) (SBS) (1566)

1 4 6 9 4tl "13 10 44 79

2 a 11 18 115 214 20 122 225

{.) '1. 2 21 32 '$ 21 .33

5 1~ 9 23 33 15 4:2: &$

4 9 12 45 1'19 309 49 188 321

<.,;ablf! centinues .•. ..,.n/paga) '

. LQw-fncome CO~tr!es Middle Income Countries" '"nc:WelOpfng-eountrJ..e

. . .lfti.f : :it~.Ja:: : l!!t[ , Hil : ::: ~~~~::: : l~2o: :: =tiita::'::~l:: :. :-.J~9Q: · I . J «

Direct lnvestment and other cap.t.tel (net}

Ne-t private 'transfers

TOtal f.tnanci:ng· ·or ~pi tal :reeeived

At. 1975 price~;~

,-1

(.l

a

2 3 .. s

l 1 2

so 56

17

23 '36 .,0 25 41

s e .3 1 g

251 64 283 469 -

147 133 -165

--------------~------------------------------------------------------------~ Total• may not adii due to rounding. The assumed ·average annual rate of tnfla:t!on bet-ween 1975-90 i-s 7.2%

/

107

J.s a danger that inflation could be one of the factors eausing

increasing financial requirements which wiU be met by external

loans. 51

'The main forM$ of international resottt'C!·a flows to

dcwelop1ng countries consist of pt!V'ate :foreign 1nve!}tm~nt,

bilateral grants~ loans and teehn1eal a.ssist:~nce and multJ.la­

'teral a•stste.nce of various qpes channelled through intetnat•

iona1 inst$o.tutione such as eba united Nations, the wcrld Bank

and its aff!l!at!on1 the Intetnat.tonalt>evelopment Assoete.tion

(XDA) and the lntet'l'~St!onel Finanee co~ration (l~C) + The

'q,rant olement • o:r • aid eomponent. 1 occUpies a place of $1g:ni f­

tcanee,- in ·the total assistance, reee1ved by developing

countries from donors, The grant element or bene~1t of $1d is

mea.sur:eti as a 41 ffet:ent!al (as in cost benefi~ .analysts) beween

return to internat.!o.na.l assistance (whieh is the dif.fer«lt'!e

between the nominal value of assistance and the r.epaymQnts

discounted by t!be produetiv.ity of assistance in the ree1p1ent

country} end the benefi.t of assistanee (W'hieb is the difference

betwe$n the l'iOtninal value of assistance and repayments diaeount.cad

by the rate of interest at which the ~untry would have had ttl

borrow 1n the oapita..l market, ).52 O~iously if ~he x-ate at

which the country borrows ~m the dono.r is as high as it oould

' . 51.

. -

have borrowed i·n the free market,- t!.here is no ~ant element.

attaab$4 to the capital transfer.. The bene£,1.t of <as:s;tstanoe

may dlff~r !tom .t ts, however:; if the east stance i$ tied to

thE purchases of dono:rs• 9oods which diff~ in prtee from the

world ma.1.'."ket prtof!ht .!f tb~ was no concessionatY J.neer(irst

rut.a attaehEK! to the qap3. tal flow and t.he prices of dOnortr'

goods were higher than the world tnai'ket prices, the value of

thd. aid would ·be negat:tve.53

The developing eo\ll'ltries ha1te redeived ¢apital flowe

from e!thelt' pri~ate sources~ namely dir~ invest::ment. pOt:~

fo.lio investtnC9nt and the provision of export credits ·o~ offiCial

sourQeS which comp"'J.tie of five prin.clpal. forms e,.g,. grants

tt.neluding tecbniea1 assi!Jtan<:e) conc:essionaJrY loans (.J"epa.y-. . . I

able J.n bor.l"()\fe):s' ot lenders • currency) .; eontrtbutions in

kind~ supplie!rS credi.i!s and the repara t~on paym~ts:.

J!'CG$ ftom D~A•C• countries ~ the develOping Cduntrtes and

multilateral development agencies 11 S:hown in 'l'tiblo 3.9 .•

The total. of private flows, off;lc;.ta1 devetopmetli: a$s1st.e.nQe ·

and other official flows* n¢ .Qf emoJ."tigatton (but not of

interes~ &J1d prQfit.s)., is call~ the net flow of financial

)1!'esourc~. Of the $ 19'..iG billion total net· £lOY of f1nanoia1

reaourees from developed. to developi~g eountJ,".ies in 1972•

109

approldmately $ 9.5 billion represented private flows, $ e.G billion was ODA a.nd the remaining $ t., 5 billion was other

official flovs not primarilY for dev.elopMent purposes. Of the

tot.al oifl<U.al ass:tstanf::e 20 percent. was mul:t11ateral and the

rost was bilateral transfers.

~.able . 3.e! AN ANA%3SIS OF THE N&T FLOtf OF FINANCIAL RESOORCS:S FROM DAC .COUNTRlES TO t.tsS Ol\.1/ELOP.ED COt~N'11tXF.S ANt> Mut:r:ILATERAL AGENciES~ 197~

( $ 1 million) ,

A• Bilateral g1:ants e£ which teeind.cal assistanee

e. Bilateral loans ·on concessio­. nal terms

c.., contribut1ona to multilat&ral .tnstitu~cns

2. Other Official flows

~· Bilateral

a. Mu1t11ateral.

a. Private flows

A., Direct:. Investment B. Bilateral POrtfolio c. Multilateral D. ~rt credits E• Voluntary agenoies

'• Total net flow of financial tesources

S654

9459

source• OECDt Develor;ent Cooperation,. 1913 Review (Paris, OEX:m 1 1973•

4360 (1842)

1S99

1169

372

4306 2030

6·67 1427 1028

110

The aid targets set for the developed countries 0~

1 pereent of their national incomes re.fer to the tt)tal net

flow of financial r:esout"ces. · The t$rget: $:>r offi~ial de\felo~

ment assistance alone is 0,.7 percent of donor•s national

1naome. In if$b14 l.to it .is quite <:lsar that us acaountts

ns<.lr.1y ·Is of th$ total n~t; flow Qf financial resour~es, the

flow ft'om Japan is also high but p~:edom.tnantly private inVest ....

ment., The outflow from us l:'epr.esent o,.ue o£ its GlSIP.._ Ortly £oux aountl:ies of D,.A.c. t~c:hed th4 target of t percent tn

1g12, The av~aqe percentage of the total flOw to total

national inoomt:~s Of the D,.A.c. countries amounted t:o 0<~~'78 tn

1912. The us is also the major provoid.eJ: of otftetal developmetlt

assistanoe; followed by France, Japan,, U.K. Only France~ the

Nethe:-lands and Portugal~ how<Wer• provide official' development

assistance olose to or in ~xcess of the te.rg-et of 0~7 percent

of natt.ona:l lncomt)~: '!'he pereentage contribution of the t1S and

3apan are among the lowest of all count~,tes~

The major sourees of mult1lateral assis~OO$ ares. tbe

world· Bank and its tlfo affiliates., the International Developmen.t

Assoeiat.t.on and the Internetdonal J!inance Corporation' tm

Institution the European Development Pundt anc;i the nevelopment

Sanks for Latin America,. Asia, and Africa • Disbursements from

World Dank in fiscal year 1974 totall$d $ 1S33 m11Lf.on- end

from IDA .$ 711 million.;,_ The d1sbur.$ements by multilateral ag(:!neiec~~

to developing: countries consist not. only of the contribution

of developed eountr.f.es but also of funds $'ai$Gd on the capital

111

Tabl-e 3.10

'THE '.t'O'.t'AL NEr :&'LOW OF ttNANCXAL RESOURCES. 1\NP m:t OFFXCIAL PEVELOPME:tll' ASSlSTAt~E l1ROt4 +l•Ac;~C•

COUN'tRXl:S 1972 . ( $ 1 rn,. )

· r . · - 11··· 11.

Australia

Au$t:rta

Selg.tum

canada

Pe=ark

France

OeJ.'matly

:Italy .

.:tapan

Neth~:ttlandS

Noway

Portu.qa!.

sweaen

$w1~eJr.l&n4

21.1.,1

.19.9

193.2

492.0

95.6 i

1.120.6

aoe.s 99.4

611.1

30fJ.7

6.3.3

153.7

197··1 . '.!If

"·' 608.'7

.6,1

,09

•. ss .41

~45

.67

.31

.os

.21

.61

.4:t

1.91

.• 48

.22

,.40

.34

'{ •. c "i . To>al flow

'- [ i! -·

421.9

111 6 ... 905~1

1015~4

119-f9

2072,.8

1713,:8

652.2

2725 '4 ' ' ·: ... · :

650.0

56 .• 1

200~7

2'12ct.o

i7G •. 7

14S5i6

Percentage ' £ l"n.'ft'l ·a- ·~- ::r+!£ -, -- - ·1···· }~ •

• 95

~ss

1.16

.98

~s1

~.06

.. ,,

.93

1.42

,.'34

2 .. 4t

•'66

~59

.ta

1.12 trtark$ts a.r.<t J:$p&y.rnt3n.ts of previous l.Oans~54 1'ha Wbrl4 Dank

is eesent!e.lly a QOmmercial institution anci raises large

sum.s of mon~Y on the world• s <:apital m~.n:kets.- 1.'he :r,.o.A.

!s the soft loan affiliation of the \-toJtl<.i bal'lk whi~h dispenses

loans att low intet-est :t:.ates with long repayment periods.

'rbe x.F.c.,, the other main atfiliat~ of the world .Bank_,

concentrat$S an encouraotng .p;rtvate ent~rp,rise in c;twe1oping

~oun~t"ies by mald.ng ~ty inve:Stment$~t ·Wh!le $ 20000 m!lllon

1$ 'QndQtlbtetUy a s:ubatan:tisl sum absolutely, lt is 'tirl'ivtal

d0mpare4 to ·the development ner!ds o:f the countries to whtch

ttt flew$ and l.ook$ _.,en more de~so~ when divideca ey· the

population of the 4fNelopS.ng eo~tr1es.55 In 1972 the average

net: ·flow o:e total asetst.enQe per head of population of develop.

int countries was approXimately $ g.·e per annun.

The .s,lgnt.£J.c:tSJt't ~~ is that &Qm 1970 onwatds. t:h&,We

has peen & gradual shift: in the so~e~ of development. fbanoe,

from opA to aon-conoe$sJ.onal mar'ket of bot't'Cwings. $$ Por

!nst~nce~ b~ween 1970.11. and 1975..76 ilhel:'$ he$ been a thirtzeeu

fol4 . .t~reas~ tn the flow-, of QQ!'l'lm&lZ'e!al ·bank loans to tDC:s

tthil' over ~he same, per!oet1 t.he reiative share of OVA ~ell

by 20 ~c~. on the whole. private flows (tnolttd!nq ~ft

credits b:om,the We$t:) haV4i! ac<:ounted for·near:ly n4nety ~Mt;

54 'l'hirlwal,, n.12~ PP• :U.2•14. 55 ~.!d.~ pp~312-..t4.

56. pF ,sME:tez.# l!lf, June 19?7• PP•;l6S.1o.

113

of international capital flows to developing ¢0unt:ries

between 1970..75.57

'!'able 3~11 shows tha progres~iJ.ve increase in the

relative sher:e of pr!v.ate commi:t:ment;s (exclUding supplier

oredits) from 21 perdent .of the total in 1970 to 41 percent

in 1915 and during 1972-.75 funds committed were doubled.

1'a~l!! ,3•·11

LOAN CoMMITMEN'fS TO 84 :DEVELOPING COUNTRZE$

' ' p • ' ~ ' ~ n ;~ • • '(M£eeut,asm! ' ' ' ~ ' ~ ~ '

.Ss;t!¥'Qe, . , 1~?0 ,1211 ,19,7;2, ,19'73 J974 ... 1~7!3

%nterna.Uonal Orga.n.taatton a,s 3,1 3.7 6.1 4.9 7,8

r

GOvernment loans 4.9 3.2 '

1.3 8.'6 11,7 .1o,e

Supplier credits 2.9 2.,3 2 •. 1 21!3 s.n thO

Ftna·ncial markets 2"'8 ..... 5.7 10.6 14.2 16 .• 4

T-atal

P4l anal.ysj.s of emot.mts Outstanding U .• e. $tOek$-

as OppOsed to flows and crOtl'lni t.tnents) is equally ~svaal!ng

'rbese data are shown .in. Table 3.12. As these amounts &r$

cumulative,, t.he sh1ft: in the relative irrtportance of private

j I :~ .. s,gur· G ' ·C

Off.leial

Pr.tvate

114 'l',a~lg, 34 .1i

EXI'ERNAL PUBLIC J)13:BT OF 84 l>EV'ELOPlNG COtiN".rR!ES ( figtU:•s tn million us doa.'lars)

i

. : .'197,0 ... l97J. 1272 '!9'73 •• '. . Ill i . 1'§;! .. '·• 1974 • r . 11 iMI • p- "J I .. ""•"tl_p_......,

so.s, 58.4 ''~!;. 79~3 9$~1 106.8

' 20 .• 9 25.1 29.4 57.8 52.3 67:.5 "

. 1 . 11.2 sJfs-- 7 . _ 1 ·- ' M ll"h I

so~es ie more diluted and ·one notices that they trebled.

in· volume betw<!en 1970.75 whilEr 1their relative shar,e incre­

esea from 29 percant to 39 percent~

While looking at a brea.l«lown of aqgrsqate eommaJ:c:ial

bOr!:'Owings by less develQped countries (including oil expor•

ting oountries) by so~e (medium terms cred! ~/bond. issues) '

after 1973 .reveals the trend of non-concessional <:il.pital flows

td dE!V'e1op1ttq co'Untties,. Tho &scr.epe.n~!es b~tl<~~en ~he amounts

and flows Ust.ed by various sources ari.t:h! from the ~et56 t~'lt

(a) d.tffQX"entsamples ~f eountries. are often used, (b) different

methods are· used for ag~egat!on of market. bol:'rowings and

(c) these are nee.,ssary diverge.ncies be'tween eontnl~s and

· actual borrotdngs~, These data are recorded in T~ble J.l~ and

rev~l the follwtng salient pointer

59

115

Tab&$ 31 1;-3

tNTSRNATlONAL MAR!OlT BORROWXNGS BY LESS DEVELOPl!U CO'fJ'NTRXES., 1974-197~

soui~-· '''1974"" I 1975 I976 ... l ~~Q,5'*!S7eys 1lt79

~are4its 734~ 111t$4 1$018 20975 37300 47964 of whtch . .Non-OPEC 6276 6264 11019 13494 26902 35411

OPEC 1067 :2900 3999 7481 10399 125i3

Percent total 2~ 53 52 so S3 sa market

Fore19t't and 603 $21 1595 3421 4227 3083 l:bternatione.l bond$

o:f wb!<::h Non-oP.J'd. N.A., N.A. '1456 2616 2694 i667

'ro~l 1946 11991 166'13 24.i9S 41527 51040

(a.) ·b'Qm 1975 onwards loans to developing countries have

never dropped below so p~raent of the total mar net for

mediunt +Iem syndicated euro-c:urrency ored:S. ta •.

(b) tore~gn aid inte;national bond$ :taised by non-oil . develop!nq countries represe-nt: a minor patt of their non-.

concesf!tona1 borrowingst

(c) amounts x-aised tn the first quarter of 1979 already

ex<:eed the total re¢rorded .t.n 197St even after allotd.ng for

inflation, the progression in real terms remaitu:J impressive.

.116

td) Fol.lowJ.ng tb~ sharp increase in market bortowings1

th& annual debt service payment of the S4 countri.es i:n

Table 3+14 inereasect from US $ 5.a billion 11'11970 to $ 14.3

billion in .1975 and this increase of 220 pere~nt eo!ne:idad

w.lth the very sharp deterioration of the borrowers export

perfQ~noe'o! fot the 96 dt.Wf!loptng c:ountri~s 1nelu<ied tn world I

Bank• s sample, the total projec:tecl debt sel!Vice to ~996• for:

the ~ernal debt outstand.inq at 31 Decembex' 1976# amounted

to us $ 213 billlon of this $ 15.4 billion ( 35%) was owed

to bt\nks.

(e) Tbe debt set:Vic:~ figures When taken in the form of

·d.ebt-serv!ee ratio (i., e., annual ·debt service paym~nts as a

· propc:u;t~on of foreign exchan.qe income over the same p~iod) .,

S.t is noUceable that these ;oatios in e3tQess. of 20 percent.

are f!atrly. comt!Dn plae~ among developing countr.!e$ as shown

in debt analysis above. Evidently these ratio'S db not reflect.

the impact of loans oontraQted in 19781 19·79• etc• A more

recent picture h$6 been presented ill Table 3.15. Thi.$ suggests

_that while the developing countr.tes medium and lohq term

debt increased by 20 pt'!X'cent a year in 1970s~ the, resources

needed tC) service the debt \Jter:e also growing rapidly· and

therefore, the debt service ration in 1990 was no hiqher as

compared to 197o,.Ji9 But after·l9SO the position ohsng:ea,.

although the rate of growt;h of debt valued to an estimate!d 1!

percent in l9S2. the slow down in ~rt ea:t-n!ng!l ·was sbQ:rper

.ua 1.eb1!i) 3• .. 11.

SELEC'.I'ED DEVI!;LOPING COUN:rRIES DEBT SERVICE RAT:tOS (1975-1977)

qom{{fi : :: : :< )27s.: :: : ''1276: :.:." • ::l9~i GUinea 10.3 20,~- 43,.5

Mauritania 20.6 31 0 ! 22 6 .... zamhta 1o.o 10~0 18.6

Chile 2S.G 32.2 '32 ·4 .. r.texic:o as.o 32.5 48.1

Peru 23.3 25.9 30,3 . Uruguay 45.6 . 29.2 27 1 • Egypt 22·4 • 19.2 22.a

~able.3f15. . -· -

l)EBT SERVXCE RATIOS FOR ALL DEVELOPING COUNTRXES (1970.1992) '

_··:~_-.,- '" p?

country CJroup

. All developing oo\'llltr.tes· tbt1· ·.Income

Ast4i\· AftiG;a

Midaie·:rneome Oi 1· Imp(:)rters:

.• J~~a.~ A$ie.

~.tin A1\1~ri\::a F • or,t; ~xpg~~tff · . . .

. i970

tJ •. s 13.3' 6.5

6~7

13t0 13.9 ..

l9"eo

13.6

7.9 a~ a

14.9 7~0

':'·33.3 . 13•0

DS% 1 n f • l'§saa

16,3 20~7

s.,4 10 .. 1 ll,.t) 2e.Jb

16.0 .23,0

.15.7. 19.1 a ~: ... Es~~at~a> .b ... The· sha;p· :~i:;~e it:t i9S2 reflecr;a the ao:c'UlnUiation .of

.· l?:X'.r'~lf:artCiidoes · not allcn1 ·.£or J:esehedulings in 1992. souree• · worla··aank, ·.wor'ld i>evalopn;tent Reyrt, l9s3, ·p.2l.

:::

119

and consequently the tate of debt to exports ros~ · from 16"

to 104 percent during 198M2 and wi ~h the inclusion o~ '

$h0rt-tem ~t this ratio EOC¢e~ 150 perc"nt. stnee a

large_ part of d6tleloping country debt is· denotnJ,nat:ed in

dol.lsre# the appr:ectation of dollar tn foreign exchange

msr'kets has added to their debt-.bur4en•60

' > •

:Dutting 1975-80 the medium and long tt'41!i debt of 4eve-

lopift9 economies. gt'ew by ~n artnu:al average of 2.1 percetit!•

· tt reached an estimated figute of $ 426 bil.lion in .1980, ·a

yE'Jar earliEtt J.t had been $ 7S b. 61 The Table 3,.15 shOt-rs ~·

~treordinary pace at t-.rhieh the total debt and the short . . •"

an.d medi\ln\ period debt has increased ove~t the decade 1971-so. · . ~ ,·

(1) There ba$ been enormous increase in the extemal debt.

of i:he deYt!lopinq count;"ios .in the l97l...SO decade and that

within th• total debt,., pubUc debt f.J:om private sow:'dtla ha$

grown disproponionately high .during this period. Thus- out­

standing debt of third world countJ:"ies incteased from$ 18

billion (1911) to $ 426 billion in l9SO ~;tnd ~ut of this:# ' "

,

share of pr.tvat:e lenders was $ 269 (6)?4) as ~ed to $ as,, (46") tn 1911* PUblic ban!Owars tn • the developing cotU't'Ct'ies

LJl¢~;$8S<ld thelr debt to fi·ttanc.te.l markets at an average of

34 percent. a year durtnq .. 1971-eo,

60 ,J.bip,,.. p,.21.

61 ~os:;ld Devel9pment Repgr.e,, n,4o. p.21.,

!t9

(2) Mainly due to prJ.'V'Ste souree of financing~ the terms

on wbleh devE!!1op1ng countries borrowed hardened steadily

durinq the 1910s, share of offi~lal ~~nd!n9 deel!ned~ average

interest rates en cot'lt1'01tntent.s J:Ose, maturities and gr:aee

periodtJ shortced. Besides while in 1977# muoh of the

bor:toW!ng was on filled interest ratetJ but in 19tl0 1 t. was ' .

on variable ititerest rates ·and fw:thet' t:hat the interest -··- - - • - . - -- 1- -- •.•

payment rose sharply by an ·annual average of over· .40 percent

during 197S..SO, compcared to annual average rate of only 6%

during 197]...:77• The first oil crisis mark$d the begintd.ng

of the present debt problem and that o£ 1979 and 90 accentu­

ated it further and bro\lght. it to a flash point artd the

.resuli! was that . the dtsbw:'sed and outstand!nq lobq and. meditun

t$:tms debt rose by 14 p~ent in l97l..SO. ay 19S2, the

interest. rates bad r:L.sen further and .fresh lending. which

further ·det~io~ated ~he eituat1on~6~

,Less DE:~Velo:gecll. count::r~es P,nd the XM;l? • 63

What emerges from the preceding analysis .ts that fot'eign

62 _ :S••• x. !;10nthiy Rem~~ pp.,230•J2.

63 Some of the important studies. on relationship bet:weat 1es& developed countries and the IMF are fOllowing& Bird, o •• "'!'he 1'nfcrmal Link between SDR AllOQation and Aid", A Note, '!'he. Jow;n~l of ~evel~t st;uales, .. no.,12 {J)" 1976• pp,268•73. Bird a., The ~~t@mat;I,oq£\1 .Mo;uaiiaa s:l!(tems and the Les:s Develo,2ed.cguntrles. Macmillan, ~Londo'ii). I978r' 'cliv·e,. w.R., xg~ernatigna,l,. ~netaEZ Rsfo,rm and the ,D,ev-alo-eing Countries, · Brooktrigs Xnstltute, hvasblngton o.c.,, 1976t Ghatak, s •• Pevelo2!!f.!nt J£eono;mi;es, Longman (London), _1978. Hellelnert G.t<:._. 'rhe Less Develop$d. Countries and the International MOnetary System•, T)le JottrnaJ.n .. of.: ~elOJ)1.l!!!n1;,,,Stud!f.ts, vo1.10(3), 1974, pp.l47-71.

: ::: : . ·: . ' :: . : : : '

Total Public & Pr.lvat.e

Official sources

120:

. DEDr OUl'STANDINQ~. COMM~S., DISSt:IRSEM.Em'S~: SERV:XCE PA'!ll-~NTS AND NET CAPITAL ltiOVEMEN'l'S OF DEVELOPING . COUN'l'Rl:F.S J t.fEDIUM AND

LOUG TERl"t. DEB!' 1977-80 ( In US 1Jollara 'billion) .

77: .. :9' 111'~1 174.~1. 212.0 ~ ~,;~

262~7 327.4 372.~& 426 .. 1

4a.o 55.7 75.2 M •• 104.,1 124.,0 1,37.1 1S6.7

35 •. 9': 62'•,P 97.,9 12:3.:6 1sa.o 203.4 '-'~-

2:38~'7' 264.4

(Publie credit from fin• and.al markets) 11.;5 22.,3 ._2,!:,6' 59.9 a.;.s ll.4.5 140~4 162.5

oommitnl!Pte

Total Public & Private

Offieial sources

Private sources

(Public creelit from financial markets)

20 •. 6

'9:~t)

11 •. 6

4 •. 4

31'.5

13.9

23.6. ',·.

11.9

oo.,-s '74 •. 3

2li~.,6 24.5

38.0 49.8

lS,,, 285 ~

ss.o 10SA~<O 116.9 toa.2 25.2 29.9

•.

'· 31~4, 37 •. 2

.s.a.a 75.2 'SS"'S 71.0

M . .-s 48.3 '

{:6 9' ..... l9~,o

(Table cont:!:nues ... nfpaqe)

121 .~Tab~f& 3,:\§ co,nttnumtst:l 1 f'J

'l!J~7I 1i,J .. 19's·· 1976' . t~

1971 .. I'18 ~9~ "1979 1990

DisbursEI.'t'ttent .

Toe-tal Pub lie & Prtvate 17.0 30.,4 4'9 .• 4 56 .• 5 70.3 91.2 .99.'2 101.3

Official Sources t).,4 9.5 ls.a lS.l l"' 6 ' ! .• . 14.1 ~2.1 :28-.3

Private so1lrC::es 1D.6, 20.9 33.6· 4i.2 ·52.7 71.:5 77.1 73.0

(Pub lie Credit from f1ttanci.al markets) 3 •. 1 9.-,4 1:5 .• 6 21.9 2.9.3 43-.1 49.S 4o.e

.:t~:te£~

lfotal PUb lie & Private 3.0 s.2 9·,.0 10.0 1.2.3 17.2 24.,2 34.0

Official souraes 1 .. 1 1.7 2.4 .a.s 3.6 4.5 5.1 6,.,2

Private sources 1. •. 9 .3.5 6.:6 7.2: a •. 7 12.7 19.,1 27.8

(Public: credit from financial markets) 0.,6 ~~~ 2.9 3.5. 4,..6 7.7 11.4 17.6

122

aid has been declining just. at a time when there is a greater

capacity to use aid mor-e effectively and when t~e need in

many countries has b~e ~en more urvent. Recently many

developin~ countries have app~oached Int.ernatS.onal Monetary

Fund fer iinarto!al resource$. The international monetary

$ystem ln the 1940s and 1970s has w1tneased ~amatie changes,

culminating in the collaps$ of Bretton woods sy$tem~ an

acc•ptance of the float.tng exQbang& rate• the dethronement of

United states as world Banker, the tall in 1:he value of the

dollar, and tt.s rejection as the effectiv-e numeraire of the '

system. There has betm an explosive growth of 1ntemational

capt tal marl¢ets, and radical shifts ill balance ()f payments#

d.efic!t atld surplus centres~ part!aularly with in¢rease$ in

the price of oil• The announcement by tbe Pres;ldent of

uttlted Stat~s on 15 August. 1971 that t.he monetary ~uthor1t!es

of his courttry no_ longer undertook to convert :Eoreign official

b01dinqa of u*s. dollars into gold; added :tmpetus to tbe

gr®t &f;bate about the reforms of the international monetary

system. The 1!)70$ may be seen as a. period of attempts to

write a ne\'t monetary constit~ion for the world bf a revis.ton

of XMF Art cles of Agreement and the amendment becJame

effective in April 1978• 64 It ,is at least debatable wh$ther

those cbanf}es in the international monetary system may be

64 Jennings-; A•~: ttThe :tnternatione.l Moneta~ System ond the LOCst Reforms, Change and the second Amen~ent**, in s.Ghatak, t·tonetar:z ,Economie$ J.p. pevelp;eing s;;ountries".. P•12g,. _ -

.123

regarded as reforms~ partiaularly from the view point of

developing oountr.l.e$.65 ·The Att.t.eles of Agrsem~nt o£ th$

lt4F have been emended only t:~t!de oncE! in 1961 to legit!mi.se

t.he erestion of the SDRI secondly in 1978 as a <!Ulrnination

to the chang~ .r::eali ties of the world eeonomy and the need

to redraft. the nonetaey tiOnstttution of the worl;d.66 Before

the .c:hrc>nolog!oal sequence of the refo.rms of the IMF~ lt . -

w!ll necessary to know the bas.i<: rules of t.he B*etton WOods

~ystem through which :tMF int.er.fers .in the affairs of different

eoun:tri-es when t.hey approached for financial as~istaftee to·

l:Mlr and they (Zan also shm1 how t.oday's IMP praetU .. ces are·

contrary t.o those: rules artd bow irrelSV'ant the rules were

to -the needs <>f the Third World eount!;'1es.67

(1) Each member state had to define t:he par value of its

national cur~~ncy tn terms of gold. sUbscriptiQns to IMF

(qUOtas) were to be paid up to as percent .tn qo:1d •

. (2) M~r ~;~tat.es ·eomm!tted to maintain the tates of

exchange resttlting from the qold content of 43C!Ch currency

as . defined u.pon its participation· tn the system• Changes

in par valuetl were only to be used to correct a • fundamental

6$

66

67

lbidt:'l' p.135 ~-

Jenn~gs, n.64,. PP•136-37.

l'ntg:g:tt;one.1 lt'inaneial Statistics. IMF, 1993, .PP~1-. -~ .

124

disGqUillbr!um' • They were to be p:ropese(l to the ll-fP by

t.he member concerned~ Faill.lre t.o obtain the lMF 1 s approval

O·f a par value change could result in ~elusion from the

Fund•

(3) General convert1b111ty of the currenctea of member

states .f.nto eaoh other and at par value. -G oons!derE'4

essential for trade ltbera.lietlon and moneta" sta'bi1it.y.

(4) ·AQtlng as a centJtal Bank,; tbe tMF was suppesed to

help national cen_tral ba.n'ks 1n ~ling wtth t$npQt"at'Y deficits

1n balene~ .of _payments:., A membar ·~ountry ,.,as entitled to , I

~-nds for t.bis purpose upto a 11m1t related to i't.s quota

beyond this lind t" the country conc:arned was supposed to ' take appropriate meas~es to reduce its deficits and estab-. .

lish .equilibrium or surplus• mainly by tnereasinq its t«pOrts

(becoming more competitive-) conditions attached to .such

drawings became stiffer as the amount passf;ld thxough success­

ive trenehes •

. (5) When ·the conventional meaaures of credit and f1$cal

pollcies fatllitdf the lMl? might agree to a deva~uation. in

order to mak~ imports mo.:re GXPensive and expo~$ more compe­

·t11!1ve,. wJ.:ehout areating imbalances in internat..tonsl t.tad$

tha.t could lead to a $er1es of competitive devaluations of

other Qurrenoies.

Before ±ntt."Oduc.tng the SDRs1 the IMi' had made loans

125

fJrom ~;ta holdtngs of Ottn:'encies (which were subScribed by

merribers) to oounttte$ to help them. with financing bala.nea o£

payments def.t.ctts pending th$ tntrodwt:t.on of eorre.o-t.tve

policies_. These loans eventually had to be r~id and so

dtd not constitute a p~nent addition to world r·eserves.

Purthermore, as the si2e of the loan gtG\<11 increasingly

stringent. eon&ttions were applled so that the ~raz:y l

add! t!on to a ~1.m:try-" s res &EVes was said to be through

conditional llqutdity. .By eont.rast,. SDRs repX"esent a perma ..

nent eettl!t.1on to wor.ld reserves aad th~ir use unconditional

(subject. only to the rules t;egarding· maximum and minimum

holdings).

Both the a1l<:Jeat!on of SDRs and the QOnditional borr ..

owing facilities are tied f:o. quotas68 whose deterrunants

ar-e (a) the voting rights of a member of the Fundi (b) the

degree of a member's aeQeas to special iacillttes in t-he XMI'J

(c) the uee of a member's ordinary drawi..~g right.a with the

XM!'I (d) the amolJtlt of ~he sl.lhsc::ription o£ member to the IMF.

ThesEt quota a were not firmly based on any fiXed $et of rules~

Quotas are subject to a five-yearly review-. Also any in&.-,

vidual country could request for a review of its quota at any

time~ In 1976 the quota was raised tQ SDR 39 billion under

the StKth General Revtew~ For the oil exporting countries,

the quota. share was doubleCI from 5 percent to 10 percent. nut

126

the total share of the .other lees dev~lop~ countries X!en'tained

stable at 2o.as pera~.69 It was also <lecJ.ded in 1976

that 2S percent: .of a member't subsar.tptton which ~iously

bati had to be eontr!buted . .t.n gold $hou1d ln futw:e be paid

eith~ in SJ.)Rs or in currencies of some other cut7:ene1es

cf some othc members of the mr subjeot to thetr eon&ent or

.tn the member eountr.y• s ow eurz:~cy without any obl!ga:tt!.on

to repurchase. *''I' hie chanqe in the mode of paym-ent !s quite

significant for less <tev'eloped eountrle$ m~ers whose

cur.renoy :ts held. by the Fund 1n excess of too percent of the

relevant qUOta,. since previOU$lY the only way in wh!oh they

had been able to derive the extra oondittonal liquidity

associated with a qUOta tnereass was to sacrifice a measure

of unconditional liquid!ty1 by paying out gold ... 7°

The quota· system is made quota for the lestJ dwelcpad

countries on account of the following reason~~~ 71·

71

PfJP -~ ta sept~· 1978, p.29S. ·

Blrd o."' · Tl)~ .Int!.£national Mggetaa .. sl!!!tftm and ,th,s LUS Davalgmg Co,un;§rl;~s,. t1acirn11lan (t.onqon), 1979, P•l93•· ·. These art ticisms of the quota System are based on thQ folloltling workst .I1'fi ,S,S!f.!ez~ sept. 19, 1918, pp.294 .... 9e, 24 Jan. 1 FeB. 21 Feb,.., pp.l7-,.40,. 49.SOt a":s.t.rd. "The lnformal Link Between SOR Alloeatl.on and Aic?-# A Note*'~ -The J<rsrnai of Devalo;gment stpdf.es,. no~12(3)~ pp.26S....731 G.Bird, n. 70• ·· Clive., w.R.# Xpterna;t:Lon;al Monet9ey Refsr!M ana the D§.Vf&lopin~ .. . ~o,untri4¥§, Brookings Institute (waslUngt~::m.. o.c. ""19761 Gupta o. ~ T o erations of the Trus:t Fund • F nane !-Ulfl DENeloment., '·no.lS. 3 , pp.3'7•40., 1979; Helllner, G,.K., 1The Lese Developed Countries: and the Internet• 1one1 Monetary System,., "r,hs Jour~al o£ D!i!el~t Stwjiep, no.,10(3) 1 1974., pp.347• ~11 Leipziqer~~o. ted.).. Determin~ts of use ~f .. , s;eecial Dramna ~ights by; ,Dey,elgpiny Cpuntries. Agency f. o. r International Development washington., o.c.), 1976 •. ·

(1) The quota system ts .based on p:r:inetples wbich ·do not

t:ake into aceount some important probleme faced .j:;y· most le•s

Citwelope<i CO'UtltJ:ies., ••fl,·~ eOJmn()dity concentrations ;in

Tt:ade and instability of export eamings'!i.·

(2} D~inq the first half of the 1970$ the ratio of quotas

to impOrts declined by about. so percent for the ~ess eevelop&d

countries while the rise in expons was tnad.~te to cover

the large deficits that less developed countries experience

teday+ ·An 1Mrease in qUOta woulei have balpf!Ki these countries

to mitigate the J.neidenc:e of 4eficits~.

(3) The qUOta syst.em has failed to protect. most o£ these

countries fNm t.h~ severe ef'feets of some exogenous shocks

tha~ they experienced dur!rtg the mi.U..l970$ because of a qUa•

&t"upllng ·Of oil prices and the $ystem of r~yment of credlt

to the .tMF is stx-ict.ly related to the shol'l't•J!'Un objective

of stabiU2ing the balance of payments rather than the long-.

run etn. o~ acbt(NJ.ng grottteb obj.ec:t:ive~

(.4) .Xt is also argued that the balance of payrnt;itnts d!f~..,

cu1tJ.~s experienced by the leas d~eloped eountries are tha

result of domestic poUoies Slteh as dan&nd mismartagement; .

the XMF*s policies fer internal adjustntents could be appropriate

but 1n many casea these countries suffeJ:> from ext:emal

disttlrbances e•g• a fall .in ~ernal demand or a sudden fall ' .

128

in sUpply of ~jor eXports. Deflat1on under suoh co~dit£ons

would increase costs substantie.ll.y 1n th$se. countries., but

an 1nerease quota wtll provi.cJ.e time long ln"!OUgh to work out

tbe needed ad.jnstments to ov~ome balance of p$ym~t deft•,

dt.s and the costs of deflation~

'(5.) LastlYw quotes should "£1~t the eaQnomic: need ·for

reserves by the member c:owrt:r.tes, Xn pract.tee, it re£lects

to a large degree the relative po11tiea1 bargaitllnq pow~

of the members of the J\lnd• Bestdes qt,tOtas are b1a$e4 in

favout:" of dev-eloped eomtr:.les sine!e they have larg.e J:"eserves

and more c:onvertible currencies.

It was in late lg60$ that a.n amendment \fS.S int.rod.uced

in thQ Articles of Agreement of! the IMF t.o introduce the

scheme of Special Drawing Rights (sDRs)'72 'l'he Special D.r:awi'ng

Account of ·the .IMP was established in July 1969 ~ 13 over a

three-year periOd beginning in 1910 $ 9•$ billion cf SDRs

(or &% of total internat;tonal res~esl ·were allocated. and

this allooetion was based on quotas subscriptions of the

member cotmtr1es.74 'rhi.s means that. 16 per:eent of the new

JLntemat!onal money crea.too is distributed to t.he world•e

12 iMP, Surve~ 2 S·eptenber 191S" p-.-301~.

?3 Xbid., P• 301 ..

·14 ZMF sm:vu, n~6'• p.301~"

l29

r.tchest 26 countries while 90 poorest oount~ies par'b£c1pat!fl9'

in the DlF reoca!ve only 25 ~reent• This distribution te

at-b.itra!:".l in the sense that.. it was d~i9l'led primari~y to

inc:r$ase the total level ·of int:emattottal liquidity not to

altet" the dist;;ibution of total 't"es~rves or to .efff!Ct a per­

manent transf• of real resout¢!$S from one set of Qountrtee

to another,.

Xnit!allY snRs were valued in terms of gold, but since

1974 they hav'S had tbeU' value specifted to terms of a weighted

averag• of cur~$n<d.Gs7!.. a ohaf19'e \ilh!ch reflects both the

ending of the link bet.ween gold and the dollar and the objee ...

tive of phasing out gold as an international rese;r:ve asset~

SDRs wer~ seE!n e.s a supplement to goldi though the posstbiU.ty

that they might eventually replace the dOllar and the pound

as reserve assets was not igno.r;$d. Countries can us& SDRs

to settle tlefic! t,s but until D~embel:' 197$ flb.ey hao an average

30 per<:$11t of· their alloc:ations over a five-year period: (they

also ·need not accept more than three times their allocau!ton).

Net USEl!r& of SDR:EJ pay o rate of interest ~hich WS$ 1ni tially

l. p•rC!eJtt ~ame a.,,~ pt!!rcent. J.n 1914 and be'S been subseqUently

raised to 3.75 percent. 76 These rules have recently been ·,

':

15 lbidu PP• 301 ... 302.

76 ~· survey# n.69, P-..~02~,

2.30

Throughout the di~ssions on refonting th,e .irt~t~

.tonal monetary system which have taken place since 1960 . .

t.here have been suggestions to link the creation of internat-

ional fiat rroney to the prQVtston of aid to detteloping count­

ries. Xt is argued that in the absenoe of SDft!J e.ll countl'~es

other than. reserve centre count.riea have to eam their

reserves bt export1nq mor~ than they 1Jttpoxt. Xf whole or

p$rt of .1;1ny iss,. of SDRa were ahann~lled in the first instance

to less developed cot.mtrt.es (or !BPJ'> a.nd its aqeneies so that

they eould make soft loans g,rants to less d\'Welopad countrie$)

the develOped countries other than reserve-eentx-e countries.

would not lose rela-ei'V'e t.o a situation where SDRs did not

~at~ The less developed countries., on the ~thef' hand, would.

benefit by being a.ble to use ®Rs to obtain retlOurces from

develope! countries. To the extent that SDlts replaced g-old

this wuld simply mean that some or all of the soaial sav1ngs

involved in .replacing a cottlrl¥)dity money w.tt.b .a ftat noney

\ll()Uld accrue to the x-elati1'/ely poorer metttbers Of the vor1d

community of nations~ To the mttent that SDRs aeted as $

replacement for dO llsrs and the othe~ reserve cur;r~ there

would be no addit.tonal resource saving., but there would be a ,·

distribution of seigniorage from oount~t!e:S 1.:U<e the USA tc

poorer countries whiah wuld sesn to be attracttiv:a on equi<ty

grounds.77

131

T'he Xnterim COlttfrttttea (IC) of the XMF on 24 sep~.

l97S made the following ·reeommonda.t!ons regarding the allo•

cation of stms and changes in ir,rt~est. rates and quotas,. 79

(1) Xt was decided that interest rate should. be incl!'eased

f~om oO ~ent of the weig-hted av$t"age of short t$t'm interest

rates in the fJ.ve member countries w1 th the la#rgest qUOtas

to ao percent of this flgure. e.nd the :t"ate ·of :te.munerat1on

should be fi:~ted at 90 paroent. of the interest rate on the

SOl\. that is, 72 percent of the weighted average interest·

r:tates. The Executive !loard will al$0 review the justi£1-ea­

t.ion of a rate of remun~ration of. Upto 100 perdertt of the ,

rate of intar:est on the stme.,.

(2) The ~eqtdrement of ReeonstJ:tution of st>Rs should be '

g:radual.ly brought down from 3'0 peti:ent t() 1$ perc<mt of net

cummulative allQOational and this t'equtrement should be

cU.seussed further in the li9ht. o% experience.

(3) Regarding t!he general quota lncree.se~ tc .tE!CQtmnended

that the overall siae of qu.otas should be rai$e4 by SO

percent inc,J:eas!ng the total member .quotas from .about SDR.

30 billion to abo't.lt soo 59 billion and thes'G shOuld be sele­

ctive quota increases for e1even and le~s develop-ed countries

whQse curr~t quotas ere regarded as most out of line with

thau ealeulated quotas.

l3i (4) A" t~ the m&tbOd of pa~, XC dea.f4ed tbet 25 '

pet"Cettt of the quota ~ses ie to be paid tft Stm~ by

pe.rticipants in too SDR ~ttment $ftd !ti fe~ei~ ~}lange

bY ~8 whioh ere not pnrUoipanttl !n t:be SM ,c1epe:1:~t

and the r«natnit&g 75 percent 1s tc be paid tn tho ~er•a

~-r~· ·~ ........ --.~·•

(S) .~o t"sponstt to ~of the cr!.t!eisma which llo.Ve ~

mo4e conc.m.ng the amount of assistance pmvUed by the DW

to leas ~elOped countrJ.es1 the :tt·1F i~ed ~e &Mt~

r~al outleto C!.g.,, ~ended Jrund Fac.t1S:ty1 Oil £ac$,11ty'* tbe

T~ ?t.tn4, eta. tc tide fiVer the balance of pa:~t$ pmbl~

m they~ 1~90 IMr fae• 4 eituation of $-ntem&ttonal

rncnetGa:y &eo~ et'l4 ~%\U.ng to some it has: lottt lts

foun4e.tJ.ons,70 some r(!1evant f1~es80 wuld be t11~attnq t.n th!a Jl'ega~ 'the us t:ra4e <kftcits of$ so.,g ~111ton tn 1917 and $ 34.2 bill~ lb 197St the dollar depreclatlon

(1970 w $'ld 1978) of between 4S and so percent agail'lSt tho

mart tm4 the ~ ~ vs ' aoo billion held bf noq-US cc.mtml

bna.'ktt'- dOllars awash .ln th~ Em'Ottlflt''lcet ., around -.the--clcck

facillty a~ the 4l$posel of transnational banks anti corporatlons-

II H'r.f Ul' i't:il PN! . . 4 -__ ,_It -u I _ Jl 1 Htt "li I:L

113

~; t;tpto 100 b!Uton an4 Third t~ror14 ind~es•

~tad au$ 4:00 billion a good ~~n of wl'tlch in pmvJ.W

by tr'«~•ional betiktJ &G oinaicat..S loeu,. These aJl4 otlhet'

fi9n1"es of the tmn» ~ .tntiwste tho apoealypt;lc. dli.1.wtnnloll•

of! 'l1he ~a1 =~eh whieh ccn,.ld occur c.t any tl.me .if ·tho

tigt~ts1prknt:t ·web o! l"elatlonebips. betwGD f.tna"'1*'1 1nstltu-·

Uotte • Jl$~.1, ~mlit6~1 or :ln~~~ • ~J:ts

-~ ttha ~tbiUty of tho pttruJont st&to of ne~:tn

goes to XMP., AS en iDstltut!o.n, the JMV· hao ~ butl'tc ill

tea~ ~ set:'\'e 1:» ~Wn this tGhaviour.. In tl1o Une

· t~e. tme edj.cU.ve iate.t1'ltltioft01 1ft the~ of the

th.1114 tn -.al~q. 81 Jt doe• not. havo t.he G$liW ~l'l\l as

When eppU.S, w ~le~ to the unitea sat.t.ons Or~atJ.Ooo,

wit,h Vhich the fund h&s a i::GfttlQwa .l'eltltionsbtp•. 1'bl8 ls

~uso ~· !10Cia1iafe eounutee u-e I:\O't. ~rs of the ••

~· 9~-e.l df!Jfce u tho olig&~tehic ~:- at~\11"G·

of th• :Dfrf. t1o a&Cfl• ~· leavu 1\s m!me\al'f policY to

be sbapet4 t.ty-tb~ e~1~ of e bantt. Yet in the nw. ~ wttng ~ te 4~ed er:om quai»•• the •Jolr' lAve t.lb&JtGh0148J's (USA, \14 nc,. '*'anco an4 Japan) ~= 4o.t· "

of tho voto&, which they ~U. t.bZ"OUgb dh'eetly appO:tntecS

~J£.,.1ve .t).t~ton.ea ~. r~hon oil ~o t:be mr are.ielGJ!t; •.I,W~ · •.. ..,-, r·w·tiJ,.u.i·r••• .,,,,._-•u•• a.. ~A.

134

thess five we$tern indUstrial!~~ countries ere ab.1e to

·dired!t t.be managanent cf t:.be .tntemettone.l monetary system

1.n t.he way they id.S:h. Xn pract1ce1 a summit meeting of

th~ lea-ders ,of the biggest wsstem qUotas hOlders has always

psedoded major eha.ng$$ tn . the lMF • What was Clec4ded ttpOl'l at

RambOuill$1: Oii' Puerto Rioo was later Gndorsed by thG govern­

ing organs of the ~und~ Thir4ly, as the IMF ha$ gtOWft more

atld mcu:e ienien.t in tr'esponding to ehe requir~t.s of big

weet~rn powers. it has shown mors eonservat1$m and r.tgour

in d~ling with Third WOrld eountrS.es because lMF staff ean

exert. !nfluene.e and power only in ·dealing t-litb ~bird Wor1d

oountrias, 93 The big western fl(>Wers consider tlle!.r monetary

ana. f!naildial pr.ol>lems too tmpanant ·for t.ho t~hnoet"ats of

the XMF .• Per these countries, the IMF is irreleVant. a rubber,

stamp. Therefotei Third world countries are the: only 'victims •

avatl.able.e4 Bes.tdes the decline Ln develOpment assistance

t:o ~hitd Wol."ld fa:-om western world with the end of gloriOus

yea;-s of ~ntinuous eao. growth) was accompanied by transna ...

ttonal banks ac-cumulating huge liquidities %rom the growth

of Eur:()Currenoies and thG recycling of petrodoll$rs, the

main outlet for 'tJlese, funds was in tlle form of loans to th!rd

world C(Juntries, ':rhe$e banks d9 not have the advantages o~

8J Versluyse,. E~ts., n.sa., p.l12f(.

84 ~bUr~ p~l72.

135

bilateral atd ag$ll~ies, the possibility o£ tmposing clauses

that .influcmc:e its soc;10.pQl1tica1 orientation~ 'J.'he tntelU•·

gence provided by the .. donor• s embass17 and othe~ services

about the country, its policies and its political personne1,.95

A single bank. of course,. pay to s~t the ~elev~ inf""rmation

and us~ pressure .in ne9o't!at1ons behind elo.aed doors, which

tJ.ts new role eat:. of a financial sheriff of the transnational

banks tn t.be Third WOrld. Bein9' e.n .international organtaation.,

it can take the liberty of inspeCting ell aspects of a

country's economy and s®i~y of the world be b6rrowf3r$

through appropriate conditions for its: sU.nd•by agreemen~

and the oountry•s •stabiliaat~n programm$'• The :Fu:nd. imposes

on the borrower ·the behaViour pattern wtdeh reassures trans .....

. national flnanee and the West as a whole that qovernments

which agr(!e to be eoonomi~dally timorous~ sceially consGrVa•

tive and politically docile can thus hope to obtain from the

IMr a e~1f1eate of qo~d behaviour., 'Which ia tben suppOsed

to -ve a oref!ln light to purveyors Of commercial ered!t. 66

The best evidence fot: these- statGlnent.s :1$ the modest.y oi! ~he

t"esourees provide<t by the IMP in eomparl$0tl w! th the bOnrowet:'' s

estd.mate<l needtt and the price !n t.ex-ms of the bot'rower• s

---------------------es veralws~, :s.~ •• n,.se.., .J?p.l44-t47 •.

96 a.M.:Bhataai in s.:a.x •. ~n;thl:z ~eli!2£t•

136

sovereignty, 81 In th!a peJ:Speetive• it will be 1ntereat1ng

to ~amine the Jr,ecent. ea$e study of on$ the bi,gqest debtor

countries, 1 .. e.,. Meid.eo.

Mexico ls one of· the largest ®ttntrtes of La tin America

in terms o.f .=-escuree en~wm,ents and popul~tion~ 'rh~ recent.

oiscovetY. of proven o~l res~es 9f about 40 b.!lllion bar:tels

in Mexico not only plac:~s- it second ·to saudi A~ab.!a in the

comity of ·Oil producing dountries. but has alsc;> enhanced J.t.s

potential for economic development,. with an ·&s.tJ.mated pop\11•

e.t!on oi 64 mtll.ion in 191S .,. the second lC'itgest populated

country in Latin At\tertca, it ts also on·e of the fastest pOp.--·

ulat.:Lon gr:owJ.nq (around 3,3 pe1:0eat per annum) area o£ the

world• 88 MeJtt~ e.1so w1 tnessed a high ra<t:e of growth (around

6 perc~t ·per aMum) tn the post"!!lwar yea~:s and ma!neained

it. till mitt.l970th

Despite the natura.l resotu:"Ce 4ttdowment, targe size of

thE;t tnte.rnal market and h!.gh ·GNP grot~th rate, the proces$ of

Mexican e¢onom1e devolopment bas at best# remained unevert and

lopsided and is in itself a d$bate amonq economie historians

97

sa

,rbiitl,.

~~~ ttations# .~P9J!l!c .~!!t!!Z ,p1f ,Laitin ,Su,ic:~,

137

of both in Mexico and els~e. · aa.sid issu~ remain still.

unresolvedr whether to rely on agr.tcu1ttlt'e or .tndust:J:YI

export p~tion c:u: ·import sUbstl tut.ton ind.ustria.li.za.tionr l ' .: . •

excessive d.epen.dence on foreign capital or self-reliance.

stnte1 ' p:t:ivate Qr forei9D enterpri:elef!l rad!eal agrat"ian

refOrms or not, a:re some of the debat$ble t.h~es whioh hJ;I.ve

attrected the .ai4tention of MeXican eeonomie planners and

policy--makers since the S$Cet:td w~ld wa~ years~ .

. Th~re is no do~ that. Men!® has made aPf'reciable

economic ed.vanee/~wth bat.ween 1935 and 1965 w~s a~t time$.

From 1970 to 1979 it has been about.2 percent yearly~99 The

Mexican eoonomy has however. bec:ome moa:-e complex and. pe.srhaps

dtf£ieult to l(:!Orttrol. And w.tth it nf!W basis of pOlitical

conflict bave artseth There 1s about 60 percent of M~co 1 s

trade w1. th the USA. 90 Thts bas 1 ts. own logic of acaommo®tion.

Mexico bad ·to pe.ntltt vast. .inflow of us c:~ap! tal~ A;l,d Mlt:Qd.co

also bol:'roweel beav1:1Y from the 601 s tnatnl:Y fJrOm t.)le USA whtcb

tied it ·Olo~er to the uattad states. The disqovety of

bydr<)c=arbons has led to wild ~ectations, The USA saw itt

this tb& poss.tb1l:tty of seoure supp.Ues Qf oil and gas as

it$ doorstep,. This has added a new 'Utlprec.ed.ented cU.mension

to Me)d..eo1 s futtUre~ 91 And this too will call for a bargain

DA'l• . COtnmESS.iO kt:erioz.: de .Mex:ie'Ct (Mexico CitY) # vo1.22, no,..l.,.. August li7a ..

"Mexico • The Polities of Accommodation"• national .~ez:a!d (Delhi) • 20 OCtober 1982,;

1.38

or deal with the northern neighbour. for the.t'e can be no

stability unlese the ·northern neighbour is a~sed~ This

fo::c.ed. appeasement in faet began J.n the forties,. Mexieo

suppo.rts the t1SA on all fundamenta.l 1$Slles. though it bas A.t .i.A i1 h . 1 . . 91 u.~.S<lltc'eV<&.on •n ow t does so.

The emex-gence of larlile $m0\lflt of us prt~tei inVestment

1n Mexico and heavy borrowings by Mexico from thf!! US!t J.n

lOGo"$ created finsnata1 <ttis1.s in 1916"'93 Thf.s was the

result of SY$teur• s $truct.ural defects. The eount:ty was under

e heavy debt• The oil bubble had now burst,, and from Wng

the darling of the fore.tqn bankers, WhiCh tutnt;ld th~ country

int.o the world's biggest 'bo.t"r()wer 1 Me)doo has $Uddenly becatrte

a dubious .customer whieh may have to res•hedule its debt. and.

'11 . ~ -~ 94 ~a . . 9n tue .u"¥; ,. ··

After the 1976 finanatel. critd.s. oil 't1GS seen aQ a

quiok end easy alternative to the Hercnllean task of «oahecU~ the eystems structural defeot.s. so in 1977. Jo;cge Pia•

Serrano, newly appo.int.ed head of the $tate oil~, Pemox,

se't about $Xp8nding the cotlt1.trY' s oil production at a frenetic

peoe.. Although nominally under the control of the Ministry

;c.f Natural Resources; Oiaa Serrano used his person111l lJ.nks

·wt th the Presidtult to set. up a V'irtual1y in~ent 1 f£e:fd0ta*

94

Ibid.

"Why Oil has been a Disaster For Mtxieo•·, Q~r$U«:ln. (London) 4 August, 1982.

lbids.

:m.aktnq his. own policy and spending money, as t-tell a• bQ~r ....

owinq !1: as lavishly as he thOught f.tt; 95 Paemex soon

slipped outside even the Presid$!1t's eonttol~ ~ nd.$led

the Prestdt."mt. .tnt:o beUtWit'lg that M~n refitu:~riet~ 40ul.d

handle uhe heavy oS..l in the offshore Gulf reserves """"" which

t.hay could not... Petnex was auth0r1se4 to· deVelop offshore

oi1, whteh ·coul<l not be useu in the home market $nd whi-c:;h l

·no one wan-ted ttrnch anywhere Ellae e~tllelt• But t~se offshoare

oil· platf¢rms had to be imported and were finaneoo by borrow­

ing.. ln feet, Pemei(, more then any other .single entity~

was ~eeponstble fo# the enotmOus growth of Mexteq' s fOreign

debt dtu:"itH1 President Portillo* s term. of office. 96 This

·was liilt'gely dUe to the speed with whi<:h. oil ana. gas pro~

ti<>n was i.ne~eased~

By 1979-90 the oil bOom. was in full swing an<i GNP

was growtng: at. more ~han a ~cent a yeaTJ,.91 M~~ went

on a 1t!ld spend.!nq spr~e .... though little money found it~r

w~y down to urban t:itld t'W:'al poor ...,. and foreign bankers .f.ell

over thetUJelves to lend money to such an oil ricth country.

Mexi·CO could pick and (l!hoOee and enfo~e J.ts OWtt' 'borrowing

terms. 99 . %nf1a:tion, how~. remained ~h higher than in

95

96

97

99

qua.t;dia,a (London);· n~:9 3~

lb"d : 'a6·.•_

1m' P':m:!:!X•c· IMP~ 1.0 Jan~. 19831 · p-.1,.·

•R$Sp.tte 0¥: way out ;Of Red"• 'rJle HindU (Ma.(tras ) " 3 August l9Sl.' · · ·

140

t.be W but the gavsmment: sav no need to devalue again.

Manufacturing industry had no spare oepaetty for sellinq

abroad while t:he oil and oOl'ttl'riodities wh1oh MexieO' e)tpOtted

were priced in dollars~ Agri~ult.ure wa$ flagging and large

quantities of grains had to be imported. lf the peso had

been devalued, the effect would have been bi9hly inflat!o.

nery. With u.nexpeoted.ly ~gh oil revenues as the world

p~iee soared in 1979-801 Meldcc had no u1ff!oul;ty i.n defena­

!nq an inc:rea.sinqly tu'U!'eal. e:cohange rete. 99 But ever1 before . .

the oil pr:tce br:o'ke last year: trouble W8$ building up~ Xnfl-

ation was 30 l)$roent in 19eo. Tourist 1nqome fe,_l steadily

because Mexteo became too ~nsive.-1°0

M~oo• s borrowing soared dtee!ngly .after 191&101 to

meet molmttnq balance of ,payment deficit wh!oh was caused

by huge .tn<:rease in pUb~c ~pendlture J.nitiated that year.

Tha over: valuat:ton of the currency_, the peso, simultaneously

aggravat(:td the .balance of pa.fmenta _and with it. th& debt

problem ¢f the colll'l'try"l02 Bp l9Sl. the country's public

sector debt had reacthed $ $.3 billion maktng a 56 percent

'100 ,~be 'itn(\q• n~ 9S:t . . ~ . • .. : ·."

101 'Rfi! .survel~, n~t7~. p-,1,

102 Ibi4,,

141

increa•-tn the year before.· Short-tetm bot'li0\-t.1n9 as a pet•

oen-tage of the Mexican publ!o debt ro$e that year ftom 4

percent to 20 percent. The Government WQke up wh&n the flow­

of fOreign advances was deytnq up.103 %n Vebruary 1982:, peso

was devalued by 40 percent and the government raised· wagas

by the same arnowt;; thereby 1 to(ip.il'ig otlt any bene£! ts arising

out of !t.104 Public spenp.tng 1-ncrea:;t&d from 14.5 pe~ent: to 16. S perceilt• In Jun~ 1962 MeJd.co obta1ned a. ;:lynd!cated

loan with co.nsidet'al:>l.e &ffieulty and in August 1992 Gov~

men-t W$ forced ·to devalue !urtheli~ At tlhat $~ge, us

.mounted its rescue <Jpetat.ions prOviding more than $ 3 bi1l,i.on

in loans to enable Mexico to meat immediate demands and

goaded by usA~>" The Mexl<.:$ns announced that. they wculd start

talking to nw about. e restruct-llring of the eountry•s debt.

On NoV'enlber 10• 1992 MexiCO had, signed e. letter of intent!

with ZMt?· allowing it to draw on credit of SOI'tiQ • 3.9 billion

extenaea by thE! Fund.105 This poised tha way for e .:POstpQll""'

ement in repayment of e.bout $ 20 biUion of debt; follotd.ng

due t!his and next year and to a $ 5 billion fresh commercial.

oredl1! whicm was tied down next March.

10.3

104

105

106

The col)dit.ions attached to IMF 1Qan t-tere so st!fi10G

Ib!g •.. I -.

ttta

.. , iiDtt comtn mey uot fi.Da it ~sy to comply with. 'I'M . . . . 107 mal.ft cQndltlons ent

(1) ~ ~--meat will e~~ ~ a-J.esb the pubUc

eoct.or aefidt, fJtom :se.,s percent of t;bG. 91'0•• dOmatJ.o

J>I'Oduet. to s.s pGrCont 1.8 J.ita3#' s.s percent. An l9e4, .m 3.,5

~e= 1u· 10891·

(2) 'rl» COW'ttV'• tt!lple ~-o tteto ~ w.I.U be

phalle4 0~

(3) ln~ J,tates •11 be el~ tc riso to toa~

ktvel.,

(4) The oowts.y \Qo'UJ.d ~V'Q'Ur to ecbieVo a t~e4e ~:tl4

of t a-to Mll~

(S) Tbe laiU'lidon JtOto 1411 bet bt'o~ do\m ~ M$1'lY

t.OO percent, t.O ltHJs ebao 1D ~

~ Wi.ll ~, f1ft4 it (4Bsy· to fUlfill t'J\eSO ~t.t.omJ#

wbtch itt l~'tat\ b? ~ fact. tb$~ the gova~ ~

!n the ~ flvo ttOnthtl o! the teat;·~:~ b7 1.6 perrcunt · total~ ·

~ to e-/ l~t1e o~ s' ~ to gov~ •w..-, ttbicb wtil lKIC~o ~· defie.t• ra~ thnft zoG6uGlft9'

it.. tlcdas o •esive cut! in publio J.nvatmcte J#Oqn;1rae·

Au ~lt'eedy ~ way· but. An tho ~· Pn•~ oS MfDtl.eo

118-tt a.keacSy felt:. :foree4 to tntcoctuae, a· b111lon cio11at-·

143 "\ . " •nationa.l emerg~noy pt"ogramme• to create s .. ·? lakh jobs,. In

spite of th1s1 lMF has tmpressed .tts sat!s£aetion w! t.h the

proQress made by the country and allowed to draw Sin\$ 300

il!llion second trenehe of the Ftmd • s loan to it.

What is important to note is that !MV lends funds to·

its member-country for o,ercoming shore... term balance of

payments deficits,. Howe.ve~. in case ot MeXico, the loan was

"given not for thJ.s purpose b'ut for improving the qeneral

economic oonaitions of the eountrr1°9 a.tld. this was done

precisely at the tnstance of USA, ·109 Se$ides:.. duo to heavy

debt on Menco and its inability to pt\y t.hemf the er$dlt

worthl~ss of M~eo bad become veey weak both for the eomm­

<4"·0ial borrowings as tttell as from the borrowings from the

'international agencies l!ka IMI? and the World Batlk etc.1l0

%t ts for these reasons t.hat loan con<UttoM !mp(>se<l on Mendo

were tough.. But J.t is also important t'Q· see how XMF has

wo.rked at the instance .Qf vn!ted states in case of M$Xico.

.108

109

110

'

~Mextco•s ouandery"1 ~ni!an !XB£ess, 11 Sepi:.,l9133t "l.fexico on Verge o.f eo .. 1~ pse", .~und~f, 0Att.e~ar(.l:Qndon) 17 Ap;t:il 1983. In fact Madrid, Pres dent o ·. Mexit:O declare$ that the balance-of'"'!'payments deficit bas been converted into a. healthy surplus. The f~deral .deficit for the first su months of ,1983 was in the range of $ 2.G billion, well. within the $ 7~& htll.ion tarqet for the whole year, Pox- this statement of the Pres1dent se(a . BMextco No LOnver Panieky on Eeenomy" but la. Crts.1s continues'*, rierni;ltiogal 1jf! ... alg T.,t~bune (Parts} 1 24 AuqtJ.St l EJ "

SY&r<!,ian, n.936 l~;:;ioAAl. aera~d., n,91J "From Riches to Ragsa, The Hindu (Madras) 6 September 1982.

Quardi<.'ln• n.937 Guardian,. n.,1061 Jl!i;S,qt~ n~106.

/

144

T~ts is elear fttmt the f-ollowi;ng ergument$1

First o'f all M~ico did not acek loan £or short tettm -------

balance c;,£ payttrent prices but:, to OV'ercome general ~~c:

crisis as ihdicated above. Xn tl1e second plece,· :even J.n$pite

·of IMF' s .tns1staMe on Meld.Qan 9QV~ent to meet J. ts back

obligations~ Mex1¢e.n gov.ernment refussd tQ abide by i-t.111 ~

Subsequently, the Ir·1F was xath~..r pet"suad~d by a. panicked us

'freas\lt'Y Departmen~ to soft® :S.ts Une tOtv-ards Mex1co.,112

MexiCO'$ ar.tttons were the focus o:f the To:t·onto nw meeting

hel4 in August 1982. ~ -,:hG.re ia spectre of similar aotions

by other 4w~1oping nat.tons113• In fact, at the tMF meeting,

Meld~n Finanoe Mtaist-er dalled for ~ th~ y(!f;ar morotorium

on 11\terest pa~nts by the entire developing wor).d and since

·t septetnber 1982. Mext-eo suspended ·al.l debt pa.ym~ts for 90

days beCause. on t:b1s dat·e the Mexican cgovernment. announced.

the natiionaltsat:ton of the private l.1anld.ng eystsn and the . ~sit.ion of t.ht! strict f¢reign exchange <eontrolo.114 'this

waa an aet!on aimed at the IMF•s attempt to seek full control

of t-!e.."deo' s ec;onom!c pol!Q!es~ th4! nationaltzation of! t;)r.tvat~

banks was an anti-t.bes:t.s of DU?•s prttseriptions. HoWWEt:r,

st.tll stteh aotions of t-textcan gove:tr.nnent were tolerated. What.

111

112

113

114

Patriot. Xbid.

pajQ!;;Ao,t1 ' n.lOG, The liJ.nd,H., n.9s. Xb!d,. ·l.f __ ,..

145

The basic force was the USA which !s one of the most

powerful oouni:ties in t:he tMJ?" ':he us interest tn Mexico

was clearly the ,.oil dipl.omacytt. Bei:ore the oil, resetves

were discovered in Me;W:;o, t.h~ us intetast in M~1eo ~•

very 11 ttle ~ept that us citizens set up their farms and

indusuies on the US.Mexieo border ana used cheap Mexl.cen

labcn~.r. The us private foreign investment W$$ ma~e in Mexieb!5

- Bowev•r• after the oil reserves were discovered us developed

a keen ·interest in Menc;o. Lergt'! amount oi: priva-te investment:

B'tart.ed pour1ng tn Me&too,. Private banks started g!ving

lOans to governments because the prtvate secto~ J.n Mexico

had tbe.u influence frCJm private businessmen ill Ame:d.ca-.

Me:Jd.oo oil suited the US the most:. becatlSe of prox.tmity and

this oil diplomacy made the t.JS to change its ~ttitude towardS

Mextc.o.- Us started pla~tnq gJreater ~hasis on Me)dao in

its fore.tqn pol1¢y., !t was for this reason that us helped

Mexico • .s debt rescheduUnq an4 a.l® made IMl? to gt"allt. e. loan

to Me:dco inaptte of heavy debts o.f commercial ·~u:rowittqt~

on Mt»ti® already.

Tbus we Gan conc::lude that yesteltday• s pxo$pel'Outt Mexico

is today deep in -the ttad, This oil rich Latin Amer.lcan

nation baa accumulat-ed a debt totalling 81 biUio.n tbllars

115 For this part of dlsaus$10n. X owe to Mt'.Chawla who worked for his M.Phil dissertation frOm Centre f.or Latin American studies. School of Interna1d.onal Studies., JNU.

and finds it has little loose ehange to meet 1ntE!"rest

payments and ntaturing principl%i as much as 60 percent of

1t.s ~rt earn.t.ngs are &stitnated to be s~t on debt ser~

viatnq. Even after devalUing· its cw:reney by 70 perccent

against the us dollar Mscieo COl').tinues to feel the fin.an­

atal crunch a.s its Oil fa~hes less a.nd less~ Inflation

is. running at. an annual pace of about 90 percent; 40 pere~nt

of the work force is· un~loyed, Motivat.~ by a desire to

end poben:t!ally dieast.~us currency a~lation, President

P0"111C. had nC!tionalieed M-.teen baftks.t The President fGels,

~hat the banks •.toot-ed.• the nation by provtdiug ways and­

means ·of massive outflow of eapJ.t:al. Mmd.co•s pUgh~ is as

much its own mald.ngs as e. by-product of global recession.'

Xf Me:d.oo wants to recover~ then, aa Qou.ntry will have to rely

.on generostty and fol:'esight of pr.tvat& intemet!~nal bank~

1n the short run but in the long run the government will

have to turn t.o -the IMF and will have to aeeept standud

prescrJ.pUons the agency is suggesting ·to borrowing couni:ries.

What has been shown aboVe ts the relatton$b!p of !MF

and Mmdco in terms of Me)d~o• s reoent transaction with the

.IMF • Sinee India has also borrowed $ bill1o.n SMs from IMF

recently, it will be interesting to examine what kind cf

tole XMF has p.layed .ln the eont.~xt of rni!U.a.~,