Pointers to progress

The 1980s were generally seen as a lost decade for the less developed world. For parts of South-east Asia it was a period of astonishing economic growth, but the economies of much of the developing world went backwards. Average economic growth per head was a mere 0.8 per cent, but in Latin America and in sub-Saharan Africa growth per head actually fell. It was particularly tragic that the poorest part of the world, sub-Saharan Africa, should see the sharpest fall of all.

But the 1990s will be vastly better, a new report* from the World Bank on the economies of the developing world concludes. Average growth per head will be 2.9 per cent between 1992 and 2002 on its main forecast, with even sub-Saharan Africa making modest progress in living standards. The bank, perhaps wisely, does sketch a low-growth variant of its forecast under which living standards in South-east Asia would continue to progress and in Latin America stay stable, but see a further sharp fall in sub-Saharan Africa.

Given past disappointments, it is worth a closer look at the credibility of the positive case. Why should the 1990s really be any better for the developing world, given that the conventional wisdom seems to be that they will be worse for the industrial countries?

There are three main planks to the positive case. One is that policy in the developing countries is more favourable to economic growth. Another is that the flow of capital, in particular private sector capital, to the developing world will bring considerable additional benefits. A third is that some special factors that depressed growth in the 1980s - the Latin American debt crisis, stagnation and subsequent collapse in Eastern Europe - will have disappeared, allowing growth in these areas to resume.

All these points have merit. One of the side-effects of the collapse of Communism in the former Soviet Union has been to make virtually all developing countries realise that if they followed Soviet-style economic policies they were backing the wrong horse. A wave of market-related reforms - ending subsidies, reducing foreign exchange controls, privatising state monopolies, for example - had already begun, but since the late 1980s it has swept the developing world. Privatisation is seen as particularly helpful in that it not only increases the efficiency of the operations concerned, but also creates investment vehicles that attract foreign capital.

This leads to the second point, the growth of private sector finance. Private sector funds bring with them much more than the money. While the benefit of portfolio investment is largely in cutting the cost of funds, foreign direct investment also brings technology and help in developing export markets. Foreign direct investment has risen fourfold since the mid- 1980s and is now the dominant form of capital flow to the developing world.

Third, just avoiding the sort of economic disasters that struck Latin America and Eastern Europe would be enormously helpful to the world economy. The reform process in Latin America seems reasonably secure, in as far as one can generalise about half a continent, and the World Bank praises the reforms in Argentina, Mexico and Chile.

Meanwhile, the retreat in Eastern Europe ought to be nearing its end and the baseline forecast of the World Bank suggests that by the second half of this decade these countries ought to be running at 4 to 5 per cent annual growth. But, quite properly, it does acknowledge that the risks are particularly high when forecasting economic progress in these countries, for the reform process might easily be derailed by social or political tensions.

What might go wrong? The more gloomy outlook of the bank is based on the effects of slower-than-expected growth in the three main industrial economies, the US, Japan and Germany. This would cut imports from the developing world, reduce commodity prices (and stop a projected rise in the oil price after 1995) and be associated with higher real interest rates.

That is all perfectly plausible, and would make it very much more difficult for the developing countries to make progress. But what the World Bank does not really consider is the possibility that the lessons of the 1980s in the developing world might not be as securely learnt as it believes.

To a large extent the fate of the developing world is in its own hands. East Asia has continued to grow throughout this recession despite the slowdown in its main export markets. Large parts of Africa would have become poorer whatever the rest of the world did.

The great puzzle is surely this: why do some parts of the developing world manage to achieve sustainable growth, making the leap from developing country status to the income levels of the middling-rich industrial world in little more than one generation, while other parts of the world achieve nothing?

The report points out that the total GDP of the Chinese economic area (China, Taiwan, Hong Kong) will be larger than that of both Germany and Japan by 2002 and will be approaching the size of the US. If this proves right there are profound implications for the whole development process, for China's growth owes nothing to the official development institutions. There are also profound implications for world politics - but that is another story.

*Global Economic Prospects and the Developing Countries 1993, World Bank, Washington DC.