World Development Report 1984

Because the public sector in low-income coun- without excessive cost to themselves, they will
tries is large in relation to GDP, cutting imports need to expand their exports rather than just
usually means cutting public spending. Although reduce imports. Any worsening of global prosgovernments
may have scope for reducing spend- pects in terms of increased protectionism and furing
without damaging long-term growth, budget ther rises in dollar interest rates would erode the
cuts too often damage programs with the greatest ability and perhaps even the willingness, of borcapacity
for raising the economy's growth poten- rowers to service their debt.
tial. Some of them may be classified as current As in trade, so in finance there is a need for
spending; but education and health budgets are concerted international action. The success of
better seen as investments in human capital. developing countries' efforts to deal with the rigid-
Most human development programs have long ities and distortions in their own economies
gestation lags. Their output is not directly tradable depends in part on the actions of official and priand
often is not even marketable. Commercial vate suppliers of finance. For the poorer countries
financing of such investments is therefore unrealis- the main challenge for the international commutic.
A real increase in concessional assistance is nity is to find ways of supporting policy reform
needed, and has been for several years. Yet, at through additional flows of concessional assisttimes
of their greatest difficulty, low-income coun- ance. This has been the challenge in the negotiatries
have found that official aid has been falling in tions for the seventh IDA replenishment (see Box
real terms. This trend must be reversed if low- 3.5), the discussions for possible supplemental
income countries are to make any progress in the budgeting to IDA, and the extension of the Lome
years ahead and the lot of the poorest people is not Convention.
to deteriorate any further. For the middle-income countries the actions of a
wide range of private and public institutions are
International action important. Commercial banks have typically relied
on borrowing countries' agreements with the
This chapter has shown that the world economic International Monetary Fund (IMF) as a basis for
outlook would brighten considerably if every restructuring existing claims and, in selected cases,
country took steps to improve its own domestic for committing additional funds. Increases in volperformance.
The onus on the industrial countries untary lending by the commercial banks in the
is greatest, because growth prospects throughout long term is an important ingredient in the restorathe
world would be transformed if they overcame tion of growth momentum in middle-income
the rigidities and inflationary fears that slowed developing countries. But the transition back to
them down in the past ten years. Even without fully voluntary lending requires prudent managesuch
benefits, the developing countries could do ment on the side of both borrowers and lenders.
much to help themselves through policy changes Official institutions, particularly the IMF, the
that increase the flexibility of their own economies. World Bank, and the regional development banks
That said, some measures need to be taken at an can be helpful in this regard both by assisting in
international, not purely domestic, level and in a the design of more effective developing-country
coordinated way. A trade-liberalization initiative policies and by expanding their own lending in
that concentrated on the newer and proliferating support of policy reforms (see Box 3.5). Efforts by
forms of protectionism-various nontariff barriers, these institutions to encourage private direct
especially those affecting developing countries- investment should also continue. Finally, it is
would make an important contribution to restoring important that official export-financing institutions
the momentum of the world economy. It is also adjust to the greater risks of lending to developing
essential to start liberalizing trade in agriculture. countries in a nondisruptive fashion. What is
Just as the liberalization of trade in manufactures required need not be very dramatic for any single
provided a once-for-all but sizable boost to produc- institution, provided they all act constructively.
tivity growth in the late 1950s and early 1960s, so Measures that would result in increased financial
the same approach to agricultural trade, combined flows to developing countries to help them underwith
the reversal of the recent protectionist meas- take structural adjustment and maintain long-term
ures on industrial products, could boost productiv- financial viability will help make trade liberalizaity
in the 1980s. tion easier by improving their short-term balance
Freer trade is also vital for solving the debt crisis. of payments outlook. In turn, liberalization would
For the developing countries to service their debt expand exports and would tend to strengthen
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