World Development Report 1984

Burundi, Guinea, Mali, Malawi, and Sierra Leone, countries did not worsen in the 1970s (see Table
public expenditure has increased despite budget- 2.8). In some countries-India being a prominent
ary constraints. In many countries domestic sav- example-they even improved. Nonetheless, disings
collapsed in the 1970s. In Ethiopia the savings tortions in the domestic financial system made the
rate declined from about 12 percent to 3 percent problems of domestic adjustment to external pres-
(1973-82); Tanzania from 16 percent (1967) to 9 per- sures more difficult. Thus Turkey in 1977-79 maincent
(1981); Sudan from 10 percent (1970) to about tained fixed nominal deposit rates in the face of
3 percent (1978); Ghana from about 15 percent accelerating inflation. Brazil reduced monetary
(1970) to 3 percent (1981); Kenya from about 15 correction on financial assets in 1980.
percent (early 1970s) to 9 percent (1981); and Zimbabwe
from about 20 percent in the early 1970s to Effects of the recent recession
about 10 percent in 1981. Despite foreign capital
inflows, the rate of capital accumulation also fell In 1974-75 many developing countries were able to
considerably in sub-Saharan Africa. compensate for the deterioration of trading oppor-
For oil exporters, the rise in oil prices consider- tunities by exploiting the better opportunities for
ably increased their incomes. But the volume of the migration of labor and for importing capital.
their exports grew very slowly and the booming Between 1979 and 1983, by contrast, most developenergy
sector had a depressing effect on other ing countries initially-and virtually all ultiparts
of the economy. After 1982, when it became mately-found their external circumstances detericlear
that the predictions of their oil revenues had orating in all significant respects.
been too optimistic, their relatively slow GDP Weak demand in the industrial countries during
growth of the 1970s was compounded by general 1980-82 was the main cause of falling export prices
deflation in an attempt to reduce imports (see for developing countries (see Table 2.7). Prices for
Box 2.4). industrial raw materials fell for the additional rea-
As with the industrial countries, harsher exter- son that high interest rates discouraged storage,
nal conditions in the 1970s exacerbated the conse- while food prices dropped because of bumper
quences of various policy-induced distortions in world harvests. Overall, the prices of primary
many developing countries. A common response products in relation to those of manufactures
in many middle-income countries (Brazil, Korea, reached a post-1945 low in 1982. In 1983, as eco-
Philippines, Turkey, and Yugoslavia) to the 1973- nomic recovery began in industrial countries, and
74 rise in oil prices was to stimulate demand as some supplies were limited by unfavorable
through expansionary monetary and fiscal policies weather, raw material prices started to rise again.
and then to finance the resulting current account Nevertheless, they remained lower than in 1979,
deficits through commercial borrowing. While and almost all developing countries faced worse
much of this borrowing went to finance invest- terms of trade by 1983 than they had in 1980.
ment, the rates of return to both public and private In volume terms, the developing countries'
investment were declining. Among the major bor- exports of raw materials and fuels fell absolutely
rowers, incremental capital-output ratios-the during the recession. Exports of food, always relaamount
of extra investment needed to produce an tively insensitive to income, continued to grow
extra unit of output-rose, for example, from less (see Table 2.9). Exports of manufactures, having
than 3 in Brazil in 1970-75 to nearly 4 in 1975-80, grown at 10.6 percent a year between 1973 and
and from 3.6 to 4.5 in the Philippines. Inefficiency 1980, rose at only 6.9 percent a year between 1980
increased for a variety of reasons: shifts toward and 1983. Given the sluggish GDP growth in
capital-intensive industry, low capacity utilization industrial countries, however, developing counin
various sectors, and inefficient use of resources tries did manage to increase their share of world
in expanding the public sector. markets for manufactures.
Countries which saw an improvement in their Among developing countries, one of the differterms
of trade in the early 1970s also expanded ences that weighed even more heavily in the
their public spending. But since the improvement recent recession than in the two preceding decades
was transitory, the extra public expenditure was between inward- and outward-looking trade
increased public sector deficits and exacerbated policies. Previous World Development Reports have
balance of payments and debt servicing problems. suggested that outward-looking policies-those in
Apart from low-income Africa, the trends in sav- which there is rough equality between the incenings
and investment rates in most developing tives for exporting and import-competing activi-
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