World Development Report 1984

In many countries private investment suffered indeed outlast the resolution of the current debt
from weak domestic demand and high interest problems. There is evidence that government
rates. In Brazil capacity utilization has fallen by spending on social programs has fallen by less
about 13 percent since 1980. In the Ivory Coast than spending on production and infrastructure.
industrial value added fell by 3 percent in 1980 and But much of social spending undoubtedly goes to
1981, and investment (excluding petroleum) by 20 maintain staff salaries, so the materials and suppercent.
As for employment, the number of manu- plies necessary for maintaining health and educafacturing
jobs in greater Sao Paulo fell by 13 per- tional standards may be falling much more.
cent between mid-1980 and 1982; in the Ivory The consequences of austerity are dramatic for
Coast industrial employment has fallen by 10 per- the country concerned. But they go further than
cent since 1980. Distress borrowing by private that because cuts in imports affect the entire world
firms, bankruptcies, and government takeovers economy. As a group, developing countries are
have become common. In Argentina bankruptcies larger markets for the European Community, the
and judicial interventions increased from 52 in United States, and Japan individually than any
1977 to nearly 300 in 1981. In Chile several hun- one of the three is for the other two. Developing
dred bankruptcies were reported in 1982. countries are also of great importance to one
Cuts in public spending have often been another. This is a particularly serious problem in
achieved by reducing or eliminating subsidies- Latin America where a long history of import subnot
only for parastatals but also for food, educa- stitution and schemes for regional trade integration,
and health. The short- and long-term conse- tion have led to significant intraregional trade,
quences can be far-reaching. At one level, a especially in manufactures. In the case of Brazil,
reduction in food subsidies, along with devalua- the reductions in imports by the rest of Latin
tion, reduces real incomes. At another, a decline in America (as well as by other developing countries)
spending on education and health detracts from has seriously harmed its exports. Consequently,
building human capital, while less spending on the required external adjustments are more diffiinfrastructure
may damage a country's growth cult and the corresponding internal adjustments
potential in the medium term. These effects may more painful.
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