Facilitating Development in a

Changing Third World

Watanabe Lesourne McNamara

This report was prepared for the Trilateral Commission and is released under its auspices.
It was discussed at the Trilateral Commission meeting in Rome on April 17-19, 1983. The
authors, who are experts from Western Europe, North America and Japan, have been free
to present their own views; and the opinions expressed are put forth in a personal capacity
and do not purport to represent those of the Commission or of any organization with
which the authors are associated. The Commission is making this report available for
wider distribution as a contribution to informed discussion and handling of the issues
treated.
The Triangle Papers: 27

FACILITATING DEVELOPMENT
IN A
CHANGING THIRD WORLD

TRADE FINANCE AID

Report of the
Trilateral Task Force
on Strategies for Assistance
to Developing Countries to The Trilateral Commission

Authors: TAKESHI WATANABE Founding President, The Asian

Development Bank; Japanese Chairman, The Trilateral
Commission

JACQUES LESOURNE
Professor of Economics & Industrial Statistics, Conservatoire
National des Arts et Metiers; Director, OECD Interfutures
Project

ROBERT S. MCNAMARA Former President, The World Bank

The Trilateral Commission was formed in 1973 by private citizens of Western
Europe, Japan, and North America to foster closer cooperation among these three
regions on common problems. It seeks to improve public understanding of such
problems, to support proposals for handling them jointly, and to nurture habits
and practices of working together among these regions.
 The Authors
TAKESHI WATANABE was founding President of the Asian Development Bank
(1966-72) and has been Japanese Chairman of the Trilateral Commission since
its beginning in 1973. Educated at Tokyo Imperial University (Jurisprudence,
1930), Mr. Watanabe then joined the Ministry of Finance, rising through the
ranks to Vice Minister for International Affairs in 1949 and then Minister in the
Japanese Embassy in Washington (1952-56). In 1956-60 he was Executive
Director for Japan of the IMF and the World Bank. Among Mr. Watanabe's
publications are The Diary of the President of the Asian Development Bank (1973),
Towards a New Asia (1977) and, most recently, Chikyu to Nihonjin (The Earth
and the Japanese) and Watanabe Takeshi Nikki (detailed account of his experi-
ences with the occupation authorities in the early post-war period). Since 1979
he has been Chairman of the Asian Community Trust and of Japan Silver
Volunteers

JACQUES LESOURNE is Professor of Economics and Industrial Statistics at the

Conservatoire National des Arts et Metiers. He was Director of the OECD
Interfutures Project—to study "the future development of advanced industrial
societies in harmony with that of developing countries"—from its inception to
publication in 1979 of the final report, Facing the Future: Mastering the Probable
and Managing the Unpredictable. Professor Lesourne was educated in Bordeaux
and at the Ecole Polytechnique in Paris. He spent most of the first part of his
career as Chairman of METRA International and SEMA, an international con-
sulting group in applied economics, computer science, and management. Mr.
Lesourne has a long-standing interest in economic forecasting and systems
analysis. He is President of the French Economic Association and has been for
several years Vice President of the International Institute for Applied Systems
Analysis (IIASA) outside Vienna. His numerous books and articles include, most
recently, Les mille sentiers de l'avenir.

ROBERT S. MCNAMARA retired as President of the World Bank in 1981, a

position he held for 13 years. He was U.S. Secretary of Defense from 1961 to
1968. Educated at the University of California and Harvard
iii
(M.B. A., 1939), Mr. McNamara stayed on in Cambridge for three years to
teach at the Harvard Business School. In 1946, after three years in the
United States Air Force, he moved to the Ford Motor Company, where he
rose to President before leaving for Washington to join the Kennedy
Administration. In his years at the World Bank, Mr. McNamara became a
leading international spokesman on development issues. Many of his
addresses from this period are collected in The McNamara Years at the
World Bank (1981). He is also the author of The Essence of Security (1968)
and One Hundred Countries—Two Billion People (1973). Since his return to
private life in 1981, he has begun again to speak out on nuclear weapons
issues in particular.

iv
 The Trilateral Process
The report which follows is the joint responsibility of the three authors.
Although only the authors are responsible for the analysis and conclusions, they
have been aided in their work by many others. The persons consulted spoke for
themselves as individuals and not as representatives of any institutions with
which they are associated— some disagreed with the authors' conclusions.
The authors wish to express particular appreciation for the help of two special
consultants. They are greatly indebted to Isaiah Frank, William L. Clayton
Professor of International Economics at the Johns Hopkins School of Advanced
International Studies. Professor Frank prepared a background paper for the
authors for Chapter II which fit their needs so extraordinarily well that it largely
became the chapter. The authors are likewise indebted to Robert Solomon,
Senior Fellow at the Brookings Institution and for many years the Federal
Reserve Board's top international economist, who prepared a background paper
for the authors for Chapter HI. Dr. Solomon's paper became the detailed basis for
some parts of the chapter, and helped shape several of the other parts. The
authors, of course, assume full responsibility for their use of the Frank and
Solomon papers in these chapters.
Three other special consultants deserve particular mention. Keiko Atsumi,
Research Associate at the Japan Center for International Exchange, prepared
initial drafts of Chapters I and V and carried out discussions with several
Japanese consultants. Charles Morrison, concurrently Research Fellow at the
Japan Center for International Exchange and at the East-West Institute in
Honolulu, and Charles Heck, North American Director of the Trilateral
Commission, provided more general drafting and editing assistance.
Other persons consulted or otherwise assisting in the development of the
report included the following. Many of the following were consulted by
Professor Lesourne during his extensive discussions in several European capitals.
Others provided written comments to the Tokyo office on aid effectiveness
issues.

Samuel H. Armacost, President, Bank of America

Shinji Asanuma, Vice President, Lehman Brothers Kuhn Loeb
v
 Keiko Atsumi, Research Associate, Japan Center for International Exchange
Yves Berthelot, Director-General, CEPII (Centre d'etudes prospectives et
d'informations internationales)
Henk Bos, Professor of Economics, Erasmus University, Rotterdam
Christopher Brocklebank-Fowler, Member of British Parliament (SDP)
A. W. Clausen, President, World Bank
Jean-Pierre Cot, French Minister in charge of Cooperation and
Development
Massimo D'Angelo, Professor, University of Rome; Researcher, Institute
of International Affairs
David Ennals, Member of British Parliament (Labour)
Fritz Fischer, German Rapporteur, Brandt Commission; Head of Training and
Further Education Department, German Ministry of Economic
Cooperation
Per Fischer, Director for Economic Cooperation, German Ministry of Foreign
Affairs
Toyoo Gyohten, Deputy Director General, International Finance Bureau,
Japanese Ministry of Finance
Edward K. Hamilton, President, Hamilton, Rabinovitz & Szanton
Masaya Hattori, Vice President, World Bank
Kenzo Henmi, Professor, Tokyo University
Stephane Hessel, Ambassadeur de France; Interministerial Delegate for
Cooperation and Development Affairs, Office of the Prime Minister
Takashi Hosomi, President, Overseas Economic Cooperation Fund
David Hopper, Vice President, World Bank
Sam C. Hsieh, Vice Chairman, Council for Economic Planning and
Development, Executive Yuan (Taiwan)
Shaid Husain, Vice President, World Bank
Yusuke Kashiwagi, Chairman, Bank of Tokyo
Bong, H. Kay, Vice Chairman, Korean Traders Association
Volkmar Kohler, Parliamentary Secretary of State to the German Minister for
Economic Cooperation
Hans Labohm, Deputy Director, Foreign Policy Planning, Dutch Ministry of
Foreign Affairs
Jacques de Larosiere, Managing Director, International Monetary Fund
John P. Lewis, Director of Studies, Overseas Development Council; Professor
of Economics and International Affairs, Princeton University; former
Chairman, OECD Development Assistance Committee
vi
Chee Peng Lim, Chairman, Division of Analytical Economics, University of
Malaya
Giacomo Luciani, Director of Studies, Italian Institute for International Affairs
Roderick MacFarquhar, Leverhulme Research Fellow; former Member of British
Parliament
Bruce K. MacLaury, President, The Brookings Institution
Neil Marten, Minister of State for Overseas Development, United Kingdom
Koichiro Matsuura, Director, Policy Planning Division, Economic Cooperation
Bureau, Japanese Ministry of Foreign Affairs
Cesare Merlini, Chairman, Italian Institute for International Affairs
C.S. Krishna Moorthi, Former Vice President, Asian Development Bank
Shohei Muta, Japan Center for International Exchange
Seiji Naya, Chief Economist, Asian Development Bank
Daniel Newman, Program Assistant to the North American Director, The
Trilateral Commission
Calci Novati, Director, IPALMO, Rome
Kazuo Nukazawa, Director, Financial Affairs Department, Keidanren
Sadako Ogata, Professor, Institute of International Relations, Sophia University
Egidio Ortona, European Deputy Chairman, The Trilateral Commission
Joseph Pechman, Director of Economic Studies, The Brookings Institution
Edgar Pisani, Member of the Commission of European Communities
Sir William Ryrie, Permanent Secretary, Overseas Development Administration,
United Kingdom
Robert V. Roosa, Partner, Brown Brothers Harriman & Co.
Wolfgang Rumpf, Member of the Bundestag (FDP); Member, Select Committee
for Development
Eisuke Sakakibara, Director of Research and Planning, International Finance
Bureau, Japanese Ministry of Finance
Ferdinando Saleo, Vice Director, Development Cooperation Department, Italian
Ministry of Foreign Affairs
Anthony Sampson, Writer, U.K. reporter, Brandt Commission, United Kingdom
Rob van Schaik, Director-General, International Cooperation, Dutch Ministry
of Foreign Affairs
Sueo Sekiguchi, Professor of Economics, Social and Economic Research Institute,
Osaka University

vii
 John W. Sewell, President, Overseas Development Council N.K. Singh,
Minister, Economic Affairs, Embassy of India, Tokyo Ernest Stern, Senior
Vice President, Operations, World Bank Ferdinand Vandam, Deputy
Director-General, International Cooperation, Dutch Ministry of Foreign
Affairs Paul A. Volcker, Chairman, Board of Governors, U.S. Federal
Reserve System Henry C. Wallich, Member of Board of Governors, U.S.
Federal Reserve System Jurgen Warnke, German Minister for Economic
Cooperation Kiichi Watanabe, Japanese Vice Minister of Finance for
International Affairs Ray Whitney, Member of British Parliament
(Conservative) Bernard Wood, Executive Director, North-South Institute,
Ottawa Jungho Yoo, Associate Fellow, Korea Development Institute.

viii
 Table of Contents

Introduction 1

PART 1: STRATEGIES TO FACILITATE DEVELOPMENT

I. Growing Diversity in the Developing World 7

II. North-South Trade Relations 21
III. Financing Middle-Income Developing Countries 37
IV. Concessional Assistance for Low-Income Countries 60

PART 2: TRILATERAL ATTITUDES AND RESPONSES

V. Japan 81
VI. Western Europe 89
VII. North America 106

Summary and Recommendations 115

 Tables
Table III-l: Bank Lending to non-OPEC, non-OECD
Developing Countries 38
Table III-2: Financing Current Account Deficits of Major Debtors
in 1981 39
Table III-3: Ratio of non-Oil Developing Country Debt to
Exports and Reserves; 1960 and 1970-79 40
Table III-4: Non-Oil Developing Countries: Financing of Current
Account Deficits and Reserve Accretions; 1973-82 42
Table III-5: Contribution of Oil and Other Items to Deficits of
non-Oil Developing Countries 43
Table III-6: Interest Rates and Inflation 44
Table III-7: Trade Balances and Current Account Balances of
Major Debtors 45
Table III-8: External Assets, in Domestic and Foreign
Currency, of BIS-reporting Banks vis-a-vis
non-OPEC Developing Countries 47
Table III-9: "External Absorption" 56
Table IV-1: ODA from DAC Members as a percent of GNP,
1970-82 63
Table IV-2: Bilateral ODA from DAC Members to Low-Income
Developing Countries, 1980 66
Table IV-3: Geographical Distribution of ODA, Average
Annual, 1979-80 69
Table V-l: Japan's ODA: Trend of Budget & Disbursements 82
Table V-2: Flows of Resources from Japan to the Developing
Countries 85
Table V-3: Regional Breakdown of Japan's Bilateral ODA 88
Table VI-1: Third World Share of Imports of Manufactures
into Some Industrialized Countries 92
Table VI-2: Third World Share of Exports of Manufactures
from Some Industrialized Countries 93
Table VI-3: Third World Shares of Trade of Some EC
Countries 96
Table VI-4: Italian ODA 98
Table VI-5: ODA of EC Member Countries in 1980 102
Table VI-6: European Communities' Financial Contributions
to Developing Countries in 1980 103
Table VII-1: US. and Canadian ODA 108
Table VII-2: U.S. and Canadian Voluntary Foreign Assistance 113
 Abbreviations

ACP African, Caribbean, and Pacific

ADB Asian Development Bank
AID U.S. Agency for International International Development

ASEAN Association of Southeast Asian Nations

BIS Bank for International Settlements
CBI Caribbean Basin Initiative
CGIAR Consultative Group on International Agricultural
Research
CIDA Canadian International Development Agency
CIEC Conference on International Economic Cooperaion
CILSS Permanent Interstate Committee for Drought Control in
the Sahel
DAC Development Assistance Committee
EC European Community
FAO Food & Agriculture Organization
GAB General Agreement to Borrow
GATT General Agreement on Tariffs & Trade
GDP Gross Domestic Product
GNP Gross National Product
GSP Generalized System of Preferences
IDA International Development Association
IFAD International Fund for Agricultural Development
IMF International Monetary Fund
LDC Less-Developed Country
LLDC Least-Developed Country
MDB Multilateral Development Banks
MFA Multi-Fiber Arrangement
m.f.n. most favored nation
NIC Newly Industrialized Country
ODA Official Development Assistance

xiii
OECD Organization for Economic Cooperation &
Development
OPEC Organization of Oil Exporting Countries
SDR Special Drawing Rights
STABEX European Community-sponsored stabilization
scheme for 44 agricultural commodities
UNCTAD United Nations Conference on Trade and
Development
UNDP United Nations Development Program
UNHCR United Nations High Commissioner for Refugees
UNICEF United Nations Children's Fund
WFP World Food Program

xiv
 INTRODUCTION
Today the developing countries are facing an economic crisis of major
proportions. The terms of trade for most of their commodity exports have
substantially declined in the past few years, and in 1981 and 1982, the overall
volume of trade—for manufactured exports and commodities—stagnated or
declined. Commercial bank lending, a principal source of financing for non-
OPEC middle-income countries, decelerated so rapidly in 1982 that net credit
outstanding at the end of the year may have been less in real terms than at its
beginning. The concessional aid (ODA) of the OECD countries declined in
nominal and real terms in 1981, principally because of reduced U.S. disburse-
ments.
In the face of these conditions, after almost three decades of impressive
economic growth in the developing world, LDC economies are generally
stagnant. Some countries are experiencing a decline of already poverty-level
incomes. If the present crisis is allowed to continue, increased political and
social unrest is a likely consequence of these conditions.
Many of the trilateral governments and their publics have paid scant positive
attention to this evolving crisis of development. This neglect in part reflects the
ignorance of the public and even the vast majority of the political elites of their
basic interests in the developing world. It also partly reflects disenchantment
with the "South", either because of a false impression that the "heavy burdens" of
development assistance over the years have not resulted in substantial progress
or because of the strident and non-constructive tone of much of the North-South
debate. In part also, the inattentiveness of our countries reflects the intrusion of
other, apparently more immediately pressing policy issues, such as domestic
economic and budgetary problems and East-West security issues.
In the midst of our urgent internal problems of slow economic growth and
very high unemployment, are conditions in the developing world of vital concern
to the trilateral countries? Are investments of political attention and financial
resources to facilitate development beneficial to our national interests?
We believe the answer to both of these questions is a resounding "yes". The
trilateral countries have become increasingly engaged— economically,
politically, and socially—with the developing world, and this trend cannot but
continue. In the broadest but most funda-

1
mental sense, the ability of the developing countries to continue to make
economic progress is a question of long-term world stability, not just the
stability of the "third" world. Given the growth of interdependence and
the diffusion of knowledge, it is impossible to imagine as viable in the
long term a world order in which a relatively small fraction of the
population (those who live in the trilateral countries) have average
incomes some forty times that of the majority of mankind living in low-
income countries.1 Such a situation—if existing within the boundaries of
any one of our countries—would be regarded as socially, morally, and
politically unacceptable.
In a narrower and shorter-term sense, the restoration of normal
economic conditions in the trilateral countries is closely linked to a return
of satisfactory rates of growth in the developing countries. Even though
almost a quarter (and the fastest growing portion) of trilateral countries'
exports are destined for developing countries and the majority of
imported fuels and raw materials needed for industry come from them,
these basic facts of interdependence are not widely appreciated in our
countries. A resumption of growth in the developing world can help
reinforce economic recovery in the trilateral countries just as the
recovery of the trilateral countries is vital to renewed rapid growth in the
developing world.
Economic interdependence will continue and will require, over the
long term, the creation of new and stronger international institutions to
manage issues of interdependence. It is now politically impossible to
establish the international institutions ultimately needed, but it is possible
to develop policies for the longer term and to build on existing structures
to create transitional regimes to deal with the short-and medium-term
issues.
The current issues are so serious that if proper solutions to them are not
found, short- and medium-term developments may greatly reduce the possibility
of finding adequate long-term paths. The authors have therefore decided not to
focus on longer-term problems in this report, but to address themselves
principally to the immediate issues, keeping in mind the need for interim solutions
compatible with long-term needs.
It might be objected that economic development is a question for the
developing countries and thus not a principal concern of the trilateral
nations. We would agree that the primary responsibility for

1
According to the World Bank, average per capita incomes in low-income developing countries with most of the
population of the developing world lie between $100 and S400 annually, while those of the advanced countries
generally fall between $8,000 and $16,000. Studies based on purchasing power parity show the gap as perhaps only
half as great, but nonetheless very substantial.

2
development rests with the developing countries themselves. No matter what
trilateral country policies are, economic growth in the developing world cannot
be sustained without appropriate and necessary actions by the developing
countries. These actions include the formulation and effective implementation of
sound macro-economic policies, efforts to improve agricultural productivity, the
building of improved educational systems, the acquisition of appropriate tech-
nologies, the development of a sense of national identity bridging subnational
ethnic or religious groupings, and the like.
All of these actions may be necessary for sustained growth, but they are rarely
sufficient. It is also necessary that the trilateral countries, which play an essential
role in the functioning of the international system, provide the kind of external
environment which facilitates the development process and the harmonious
integration of the developing countries in a world economic system that itself is
constantly evolving to reflect their greater participation.
First and foremost, it is necessary that our countries adopt in practice, and not
simply in rhetoric, coherent strategies to facilitate development in the Third
World. Such strategies are not only a matter of more generous concessional
assistance, but must also incorporate trade policies and policies covering private
financial flows to the developing countries in an integral manner. These policies
must be adapted to the differentiation within the Third World in order to better
meet the needs of particular countries and regions.
Part 1 of this report deals with trade, private financial flows, and concessional
assistance, diagnosing the issues and suggesting intermediate solutions. The first
chapter, opening Part 1, describes the past progress and continuing requirements
of different groups of developing countries. The second chapter reviews North-
South trade and stresses the importance for economic growth of open access to
the markets of the advanced countries as well as liberalized access to the markets
of newly industrialized countries. In the third chapter, there is an analysis of the
current financial crisis. The authors regard it as a "liquidity" crisis (not a
"solvency" crisis) in which continued expansion of commercial bank lending,
though at a more moderate rate than in the recent past, is not only necessary for
the debtor countries but also sound from a banking perspective. The fourth
chapter analyzes the crisis in Official Development Assistance (ODA), the major
source of financing for the poorest countries, and recommends that the volume,
distribution, and enhanced effectiveness of ODA need immediate attention.
In Part 2 of the report, the attitudes and policy responses of the trilateral
countries are described. Chapter 5 covers Japan; Chapter 6

3
looks at five European countries as well as the European Community; and
Chapter 7 examines Canada and the United States.
In the final chapter, the authors summarize their major arguments and
restate in briefer form their principal recommendations.
The authors recognize that some topics which are important in a
medium- and longer-term perspective are not examined in this report,
which is primarily focused on the current crisis. We recognize, for
instance, the importance of private direct investment in facilitating
development, particularly in middle-income developing countries. The
contribution of private direct investment will be enlarged in cases where
host countries have developed a reasonable legal framework for foreign
investments and where multinational corporations have learned to adapt
to different socio-economic contexts. Private direct investment is an
efficient way of transferring technology and increasing productive
capacities. It cannot significantly contribute, however, to the solution of
the immediate dramatic difficulties in the present situation of the world
economy.
This report also does not deal with some key development policy issues
in many parts of the South, such as enhancing food production,
expanding national energy sources, and increasing the efficiency of
family planning—all crucial medium- and longer-term issues discussed in
many other reports. Finally, the report does not focus on global
negotiations. The authors are not convinced that these negotiations can
have an impact on short- and medium-term problems.

4
 Part 1

Strategies to Facilitate Development

I. GROWING DIVERSITY IN THE DEVELOPING
WORLD
In the vast developing world of more than 100 countries, there has been growing
differentiation. Some countries have built strong industrial bases and are
enjoying relatively high per capita incomes, while others have made little
advance and still depend heavily on external concessional aid. As indicated in
the Introduction, the trilateral countries must appreciate this differentiation in
order to improve the quality of their development assistance policies. After a
brief review of overall performance, this chapter will describe in general terms
the major categories of developing countries, to give more context to the
discussions of trade, non-concessional financing, and concessional assistance in
the three subsequent chapters. We recognize that categorizations are rough, and
that our own differ in some respects from the various categories used by the
World Bank, the IMF, or the OECD. Our categories include the newly
industrialized countries (NICs) of East Asia and Latin America, the OPEC
countries (with emphasis on those with large populations), and the other middle-
income countries, followed by China, India, sub-Saharan Africa, and the other
low-income countries. We have employed the World Bank's dividing line
between low-income and middle-income countries at $410 per capita GNP in
1980. Finally, it should be noted that some countries share the characteristics of
more than one category, and we have not attempted to provide completely
exclusive categories.

Development in Historical Perspective

There are many in the trilateral regions who believe that, despite the resources
poured into the developing world, little actual progress has occurred. In fact, the
overall growth record of the developing countries has been remarkable when
viewed in historical perspective, and when measured against both the official
goals and private expectations of thirty years ago.
In 1950, there was little serious thinking about the growth prospects of what
were then called "backward areas." The industrialized countries were still
absorbed in recovery from the war. Those who were

7
giving thought to the subject did not have much hope for the future. Their
pessimistic outlook was shaped by the historical growth performance of
the industrialized world, which had managed to increase per capita
incomes by only about two percent annually in the previous hundred
years. It was considered unlikely that the developing countries, many of
which had stood still for centuries and lacked significant infrastructure
bases on which to build, could do any better.
Against these expectations, the per capita GNP of the developing
countries as a whole grew at an average annual rate of 3.5 percent during
the 1950-75 period. Great improvement in physical infrastructure—such
as transportation and communications—are not fully reflected in these
figures. These economic advances were parallelled by progress in non-
economic measures of the quality of life. Life expectancy between 1960
and 1980 increased from 42 years to 57 years in low-income countries
and from 53 years to 61 years in middle-income countries. Great progress
was achieved in the eradication of communicable disease. The adult
literacy rate increased from 28 percent to 51 percent in low-income
countries and from 53 percent to 72 percent in middle-income countries.
While the economic stresses of the 1970s (particularly the oil price
increases) placed great pressures for adjustment on most of the de-
veloping world, most countries were fairly successful in making the
necessary adjustments until the 1978-79 oil shock and the long ensuing
recession. Until the second oil shock, a number of external conditions
facilitated adjustment: Trilateral markets for developing country exports
remained relatively open and bouyant; commercial bank loans to middle-
income developing countries, especially Brazil and Mexico, increased
dramatically; and Official Development Assistance (ODA) flows,
including concessional aid through the development banks and the
International Development Association (IDA), also increased. Despite the
fact that most developing countries successfully underwent a process of
appropriate structural adjustments, in some cases proper adjustments
were not consistently pursued. The principal policy failures were in the
use of commercial bank loans to maintain consumption rather than to
increase investment, the subsidization of agricultural goods consumption
rather than the adoption of appropriate incentives to encourage
agricultural production, and the maintenance of excessively high
exchange rates. Moreover, in many countries, little effort was made to
reduce severe inequities in income distribution.
Adjustment to the second oil shock has been much harder because of
the failure of the world economy to return soon to normal eco-

8
nomic conditions. Most resource-based developing economies (even-
tually including even the oil-exporting developing countries) have been
suffering from both a deterioration in the terms of trade for their products
and absolute declines in export volumes as the continuing recession
reduces demand. For the NICs, reduced demand for their exports and the
growth of protectionist sentiments in the advanced world mean lower
export earnings and less optimistic prospects for the future, discouraging
new investments. At the same time, since many of the NICs have
borrowed heavily from commercial banks at variable rates of interest in
the 1970s, the sharp rise in real interest rates in 1979-81 meant that their
debt servicing burdens ballooned dramatically. For the low-income
countries, which still depend heavily on concessional assistance for their
development programs, the decline in real ODA has begun to severely
affect their economies. Moreover, competition for these limited funds has
increased, as China seeks to become a concessional financing recipient
and India looks for larger flows of concessional assistance.

Common Problems of Developing Countries

While most of this chapter concentrates on the differentiation within the
developing world, it is important to keep in mind that this world is united
by a number of common features, which manifest themselves to different
degrees in individual countries, but which clearly divide them from the
trilateral countries.
First and most importantly, all the developing countries are "poor" in
relation to the trilateral countries. Two-thirds of the 3.3 billion people in
the developing world (1.7 billion in China and India alone) live in
countries with 1980 per capita incomes of under $400, compared to the
$8,000 to $16,000 range for most trilateral countries.1 Only about 425
million of the 3.3 billion people live in developing countries with 1980 per
capita GNP levels above $1500. Obviously, there remains a strong
bimodal distribution of per capita income levels among developing and
trilateral countries.
Aside from low average per capita GNP levels, another serious
problem is that income distribution within developing countries is
generally highly inequitable, suggesting that higher than needed numbers
of people are living below absolute poverty limits. In most low- and
middle-income countries, it appears that the poorest fifth of the
population generally has three to five percent of the income, while

1
In 1980, five trilateral countries were below the $8,000 per capita GNP level: United Kingdom
($7,920), Italy ($6,480), Spain ($5,400), Ireland ($4,880), and Portugal ($2,370).

9
the richest fifth earns 30 to 45 percent. The corresponding figures for the
advanced countries are approximately five to eight percent for the poorest
fifth and 25 to 30 percent for the richest fifth.
Rapid population growth and even more rapid urbanization of the
population is another general problem of the developing world. Between
1960 and 1980, the urban sector of the population increased from 13
percent to 17 percent for low-income countries and from 33 percent to 48
percent for middle-income countries. In 1950, only three of the world's
15 largest cities were in developing countries. According to U.N.
projections, by the year 2000, 11 of the 15 largest cities will be in
developing countries. Mexico City, with a projected population of 30
million, would be the largest urban agglomeration in the world, while a
number of other developing country cities are forecast to have between
20 and 27 million inhabitants. This urbanization, a consequence of high
rates of rural to urban migration in addition to natural demographic
increase, is creating economic, social, and political problems of massive
proportions and underscores the need for renewed emphasis on rural
development.
Other major problems, briefly stated, include the need to increase
agricultural production and productivity in the face of increasingly
unfavorable population-to-arable-land ratios, to provide basic educational
and medical services, to provide access to safe water and sewerage, to
develop a network of domestic communication and transportation links,
to undertake land reform, to monitor family planning systems, to develop
national energy sources, to establish and enforce minimum labor
standards, to deal with sharply fluctuating terms of trade and export
earnings, and to achieve more adequate integration into the world
economic system. This list does not begin to exhaust developing country
problems, but it illustrates the magnitude and scope of the challenges
developing countries face. Much of what is taken for granted in the
trilateral countries is now only beginning to be provided in many
developing countries whose governments are often operating with a very
limited margin of financial, administrative, and political support.

Newly Industrialized Countries (NICs)

The newly industrialized countries of East Asia and Latin America have
been the most successful of the developing countries in diversifying their
economies as well as increasing their incomes. As a category, the NICs
were the only countries whose per capita gross performance in the 1970s
exceeded that of the 1960s. Moreover, in the 1970s, most of the NICs
were characterized by political stability and

10
self-sustained growth in the private sectors of their economies.2
The East Asian NICs (Taiwan, South Korea, Hong Kong and Sin-
gapore) were particularly successful, with per capita GNP growth at an
average annual rate of 4.9 percent in the 1960s and 5.7 percent in the
1970s. Per capita incomes for these countries in 1980 ranged from about
$1,500 for South Korea to over $4,000 for Singapore and Hong Kong.
Adult literacy is 90 percent or above, and, where statistics are available,
income appears to be much more evenly distributed than in many other
developing countries. In South Korea and Taiwan, growth was based
largely on a supportive approach to increased agricultural productivity
combined with shifts from import substitution to export promotion
policies which gave particular emphasis to manufactured goods exports.
The three Latin American NICs grew somewhat less rapidly—a little
under five percent per capita in the 1970s. Per capita income in 1980 was
$2810 in Uruguay and between $2000 and $2100 in Brazil and Mexico.
Some of these countries had developed early substantial manufacturing
industries, although with an import substitution bias. Other indices of
social and physical well-being are generally below those of the Asian
NICs, and income distribution is more heavily skewed to favor the rich.
In Brazil, the fifth of households with the lowest income account for only
two percent of total income, and in Mexico this figure is 2.9 percent,
making income distribution in both countries among the most skewed for
all developing countries for which the World Bank provides such data.
While the Asian NICs are resource poor and primarily dependent upon
expanded exports of manufactured goods and services to compensate for
oil price increases, the Latin American NICs still rely on exports of fuels,
minerals, metals, and other primary commodities (in 1979, 52% of
Uruguayan exports and 61% of both Mexican and Brazilian exports were
of this nature) whose prices in the world market can fluctuate quite
severely. Moreover, the Latin American NICs had built up relatively high
debt service ratios during the 1970s, Brazil and Mexico alone accounting
for over 50 percent of commercial bank loans to developing countries in
that decade. How well these economies can adjust to a period of slower
export growth and more cautious lending by commercial banks is a
critical question for the future. It appears
2
On the definition of NICs, see OECD, The Impact of the Newly Industrialising Countries on Production and Trade
in Manufactures, Report by the Secretary-General (Paris: 1979), pp. 18-20. We have added Uruguay to Brazil and
Mexico among the Latin American NICs. The percentage of Uruguay's merchandise exports represented by
manufactures was higher than for Brazil or Mexico in 1979, and the growth rate of its exports in the 1970s was
above average among other middle-income countries.

11
that Brazil and Uruguay each experienced negative GNP growth in 1981
and 1982, as did Mexico in 1982.

Oil-Exporting Countries
Several oil-exporting countries with small populations, such as Saudi
Arabia, Kuwait, Qatar, and Libya, have per capita incomes at the OECD
level or above and large current-account surpluses. Since these countries
have more than sufficient capital resources, we will ignore them here,
despite the recent fall in their export earnings and their continuing
infrastructural needs, particularly for a pool of skilled, professional labor.
Other oil-exporting countries find themselves in very different sit-
uations. Nigeria and Indonesia have large populations which may not
stabilize at levels below 350 million, making them the third and fourth
most populous countries in the world, respectively, in the next century.
These countries also have ethnically diverse populations, complicating
the task of nation-building. Other oil exporters—Iran, Iraq, Algeria,
Ecuador—were still below $2500 per capita GNP levels in 1980 and
continue to seek capital from abroad in addition to their petroleum
earnings, as do Venezuela and Gabon in the $3000 to $4000 range.
The growth of all these countries was quite high during the 1970s, but
this reflected the price levels for a single good. The export sector of some
oil-exporting middle-income countries is extraordinarily dependent on
fuels and minerals (Venezuela and Algeria at 98% in 1979, Iran at 95%,
Nigeria at 91%), while others are somewhat more diversified (Indonesia
at 69%, Ecuador at 46%).
High petroleum exports have proven to be a mixed blessing in some
cases. The price rises in the 1970s produced a "boom" atmosphere where
capital resources were available beyond the developing country's ability
to use them wisely. Indonesia's oil company went bankrupt in the mid-
1970s as a result of excessive borrowing and dubious investments based
on overly optimistic assessments of petroleum earnings. An extreme case
today is Nigeria, where over-expansion and economic mismanagement,
combined with rapid urbanization and the failure to manage social
dislocation associated with growth, have created an explosive situation.
Nigeria's recent expulsion of about a million foreign laborers from Ghana
and other neighboring countries illustrates how mismanagement in one
country can have serious repercussions for the economies and societies of
its neighbors.
Petroleum-based economies are also frequently characterized by dual
economic structures, with a capital-intensive, highly moderni-

12
zed enclave of extraction and refining industry co-existing with the
traditional economy. Impressive aggregate incomes or high growth in
such countries as Nigeria, Indonesia and Venezuela should not obscure
the fact that in all these societies there live large numbers of people who
are desperately poor and who lack access to adequate education, health
facilities, or other social services.

Other Middle-Income Countries

Most other middle-income countries have economies which are domi-
nated by the production of agricultural products and/or minerals or fuels
and are not sufficiently diversified into manufactures to be termed newly
industrialized. For such countries, the share of the three most important
commodities in export earnings ranges from 40 percent to 70 percent for
agricultural economies and 60 percent to 80 percent for mineral-based
economies. Per capita incomes lie between $400 and $2,000.
These countries were hard hit by the shocks of the 1970s. As middle-
income countries, petroleum already occupied a substantial place in their
import structures, and its share doubled in value terms while their own
exports could rarely keep pace. Fluctuations in commodity prices, and
thus export earnings, can be a very serious problem for these countries.
During the past decade, commodity prices in general were high in 1973,
1976-77, and again in 1979, but sharp declines were registered in the
intervening years and during the current recession. The absence of a more
stable level of foreign exchange earnings, based on a diversified export
structure, complicates problems of economic planning, a problem now
partially addressed by the IMF compensatory financing facility and the
European Community's STABEX system for a number of African,
Caribbean and Pacific developing countries.
These countries went through different adjustment patterns in the late
1970s. Among agricultural economies, some pursued diversification
combined with an emphasis on exports (Ivory Coast, Thailand, Tunisia)
while others were more inward-oriented (Kenya). Among mineral
economies, some undertook structural reform (Chile) while others
experienced slow growth without reforms (Jamaica, Peru, Zambia). The
main policy issue facing many of these countries is how far they need to
modify their development strategies to deal with the changing
international environment.
On the whole the countries that adopted a more outward-looking policy
(for example, Ivory Coast, Philippines, Thailand, and Tunisia) managed
to affect adjustments with only a temporary interruption in

13
growth compared to the economies which turned toward inward-looking
policies (for example, Jamaica, Kenya, Morocco, Peru, and Zambia). The
annual average growth rate of GDP in the 1970s for Thailand was 7.2
percent, for the Philippines 6.3 percent, for the Ivory Coast 6.7 percent,
and for Tunisia 7.5 percent. On the other hand, Jamaica experienced
negative growth. The outward-looking countries were able to expand
both export markets and import substitution and eventually reduce their
reliance on additional external financing.
In order for these countries' growth to continue, the markets to which
they sell must remain open and continue to expand. In addition, the
countries themselves will have to continue to seek out new products and
new markets. Commercial borrowing can be a significant source of
external capital if these countries pursue growth paths.

China
Almost a third of the population of the developing world is Chinese.
China's economic structure (agriculture accounts for 34% of GDP and
70% of employment) and per capita income at $260 in 1979 are similar to
that of low-income countries generally, but the physical quality of life of
most Chinese appears to be better than average.
China's GNP grew at an average rate of 5.2 percent in the 1960s and 5.8
percent in the 1970s, considerably higher than most low-income
countries. Growth of GNP per capita—at an annual rate of 2 1/2-3 per-
cent in 1957-79—was also significantly higher than other low-income
countries overall (1.6%), but well below the average for middle-income
developing countries (3.8%).
Chinese development strategy has consistently been directed toward
the two main objectives of industrialization (particularly of a heavy
industrial base) and elimination of the worst aspects of poverty. This
development strategy has at the same time been shaped by two major
constraints: an extreme shortage of cultivable land for the one billion
population and a large degree of international isolation. Poverty
reduction has been largely based on local resources and initiatives.
Concerted efforts have been made in several related and interdependent
areas—basic education, health, nutrition and population control—with
considerable success. Life expectancy increased from 36 years in 1950 to
64 years in 1979, compared to 59 years in other low-income countries
which started at similar levels in 1950. However, around 35 percent of
primary age school children are not in school and approximately a fifth
of the population does not have adequate food.

14
 Industrialization, another development objective, has been based
mainly on centraly mobilized resources (with less concern for cost
effectiveness) and has used Soviet technology from the 1950s. A high
rate of domestic savings has facilitated the rapid pace of industrialization
(with industry accounting for 40% of the GDP), but has concurrently
caused consumption to grow significantly slower than income.
The government of China has shifted its economic policies to improve
the living standards of its people and introduced various reforms as well
as shifted priorities. In pursuit of higher living standards, China faces
such serious constraints as limited agricultural land, foreign exchange,
trained manpower, domestic energy production and financial resources
for new investment.
A shortage of cultivable land has always constrained Chinese agri-
culture and the amount of land per worker has been shrinking. Moreover,
irrigation, fertilizers and changes in cropping patterns, which have raised
yields so remarkably in the past (the agricultural output growth rate
doubled from 1.6% in the 1960s to 3.2 % in the 1970s), are not expected
to help as much in the future. A considerable increase is now expected,
however, from changes in agricultural policies and management. The
Chinese government is today emphasizing stronger incentives ("the
responsibility system"), and local specialization and agricultural research.
The energy sector absorbs over 40 percent of industrial investment.
Prospects for economic growth in the 1980s are said to depend critically
on reducing energy use per unit of output, particularly in view of the
declining production of existing oil fields.
In the industrial sector, emphasis is shifting to light industry. While the
shift has already reduced energy use significantly, expansion of light
industry is held down by shortages of raw materials (both industrial and
agricultural), energy, foreign exchange, and finance for new investment.
Today 75 percent of China's manufactured exports consist of products
(other than machinery and equipment) sold to developing countries or the
non-market countries. China should increase its small share of the richer
OECD market. The World Bank forecasts that, on this basis, China's
manufactured exports could grow by 10-15 percent per annum in the
1980s, which would have a critical influence on the growth rate of
foreign exchange earnings, hurt by declining oil exports.

15
India3
Many factors separate India (population 700 million), along with
Pakistan, from the rest of the low-income group of nations. Although
India's per capita GNP of $240 in 1980 makes it one of the world's
twenty poorest countries, she has diversified manufacturing industries
and a considerable number of well-educated, skilled people. With
manufacturing accounting for 18 percent of GDP and 60 percent of
exports, the country is semi-industrial in structure.
India's GNP grew by an average of 3.4 percent annually in 1964-73
and accelerated to 4.3 percent a year in 1974-79, despite the sharp rise in
oil prices. In per capita terms, the growth rate has been at 1.4 percent per
annum over the last two decades. The favorable performance of the last
several years has been assisted by strong agricultural production,
workers' remittances from the Gulf area (which jumped from $250
million in 1974 to $2.4 billion in 1980), and an increasing level of aid.
India's economic growth in earlier years took a different course, with
strong emphasis placed on centrally controlled heavy industrialization.
Although the First Five Year Plan (1951-56) was grounded in a more
laissez faire approach, the Second Five Year Plan gave stronger emphasis
to socialist approaches. In the Third Five Year Plan, industrialization
continued to be pursued at the expense of agriculture.
It was not until the Fourth Plan (1968-73) that agriculture began to
receive priority. Agricultural production increased at an average of 3.0-
3.5 percent a year in the 1970s compared to population growth of 2.2
percent. The factors bringing these positive changes were the spread of
irrigation and modern farming technology. High-yield variety wheat was
introduced in 1962, causing an acceleration of wheat production after
1965. High-yield variety rice came in 1964, although the rice production
take-off has yet to take place. After a drought in 1972, major emphasis
was placed on irrigation. Double and triple cropping also helped the
increase in output. It is believed that an annual four percent increase in
food production is possible depending on further investment in
infrastructure and transportation.
On the industrial side, India has not been as successful until recently.
Import substitution policies were pursued until the 1970s. While this
policy has produced a diversified industrial base, extra investment has not
produced more rapid growth. Since the mid-1960s, industrial growth has
slowed from a nine percent annual rate in 1960-65 to a three to four
percent level. This can be attributed
3
This section owes much to a lecture given in Tokyo by David Hopper.

16
partly to a sluggish rise in domestic demand and the industrial sector not
benefiting from the scale economies of exporting to world markets. Over-
regulation and supply constraints at home have also been significant causes.
Industrial sectors in trouble in the 1970s included transportation, coal mining,
and power generation.
What is now emerging is a total and thorough re-examination of the
constraints imposed on industry. Licensing requirements have been eased and
various measures taken to improve exports, and a large amount of investment is
being provided under the Sixth Plan.
However, if liberalization is to succeed, India is going to be under extreme
pressure for foreign exchange, which has become scarce since 1980. The Sixth
Plan, which envisages GDP growth of 5.2 percent per annum and per capita
growth of 3.3 percent per annum, calls for total investment of $190 billion, with
external financing at $10.8 billion. Assuming this foreign financing is available,
both from concessional and commercial sources, India's industrial expansion
may replicate its agricultural growth. This, if combined with continued
agricultural progress and more outward-looking trade policies (as well as
improved infrastructure support, particularly for power and railroads), should
allow India to restore its external position without seriously slowing down its
growth.

Sub-Saharan Africa
There are 39 countries in sub-Saharan Africa with populations of a million or
more.4 Of these, the World Bank, in a major report on the region published in
1981, classified 24 as "low-income" countries.5 Only two sub-Saharan African
countries—Nigeria, which we have previously discussed as an OPEC country,
and the Ivory Coast—have per capita GNPs in excess of $1000 annually.
Both low- and middle-income countries of the region share similar economic
structures, problems, and bleak outlooks. Population growth during the 1970s
was 2.7 percent a year and increasing. The urban population grew during the
same period at 5.9 percent annually. Life expectancy is 46 years. The countries
of this region have an extreme scarcity of indigenous trained administrators and
managers. Literacy averages only 25 percent. Virtually all the countries of

4
Six other countries have populations of less than one million. The region consists of all African countries except
South Africa, Egypt, Libya, Tunisia, Algeria, and Morocco.
5
Accelerated Development in sub-Saharan Africa: An Agenda for Action. Much of our description of the sub-
Saharan African region is based on this World Bank report.

17
 this region have a high degree of ethnic diversity and little sense of
nationhood. In some cases, such as Chad, Uganda, Burundi, Angola,
Zaire, and Ethiopia, there has been or continues to be serious civil unrest.
Political fragility inhibits effective economic leadership.
The economies of sub-Saharan Africa are typically highly dependent
on one or two primary commodities, particularly the export sectors, and
thus are highly vulnerable to the changing fortunes of these commodities
on world markets. Low incomes combined with political fragmentation
result in small markets which can rarely achieve needed economies of
scale. In fact, except Nigeria, no country in the region has a gross
domestic product larger than Hong Kong's.
The economic crisis is especially stark in the case of agriculture, which
accounts for between 30 percent and 60 percent of GNP, depending on
the country, and usually between 70 percent and 90 percent of the labor
force. Export crop production declined by 20 percent during the 1970s
(after growing an equal amount in the 1960s). Per capita agricultural
production was stagnant in the 1960s and declined by an average of 1.4
percent annually during the 1970s. Food imports and food aid have
increased at a rapid pace, increasing dependency on foreign food sources.
Poor economic performance has been exacerbated by domestic eco-
nomic policies. The World Bank report cites three areas of policy failure
as critical:
First, trade and exchange-rate policies have overprotected industry,
held back agriculture, and absorbed much administrative capacity.
Second, too little attention has been paid to administrative constraints
in mobilizing and managing resources for development: Given the
widespread weakness of planning, decisionmaking, and management
capacities, public sectors frequently became overextended. Third, there
has been a consistent bias against agriculture in price, tax, and
exchange-rate policies.6
Aside from internal structural weaknesses and policy deficiencies,
external factors such as recession in the advanced countries, higher
energy prices, slow growth of primary commodity trade, and worsening
terms of trade have been responsible for very slow growth. During the
1960s and 1970s, while most of the developing world was experiencing
rapid economic growth, per capita GNP growth in sub-Saharan Africa
averaged only 0.9 percent for low-income countries, 1.5 percent for
middle-income oil-importing countries and 3.2 percent

6
Ibid., p. 4.

18
for middle-income oil exporters. Fifteen countries had negative per capita
growth rates.
Compared to even this unfavorable past performance, the outlook is grim.
Under its most optimistic scenario, the World Bank forecasts virtually no per
capita growth in the 1980s; and under less favorable assumptions, an average
annual one percent per capita decline is predicted. Growth prospects for this
region are worse in the near-and medium-term than for any other region. The
Bank's report contends that a doubling of ODA, increased coordination among
donors, and domestic policy reforms are needed to increase the average annual
per capita growth rate to 2.5 percent through the decade. However, there has
been little or no follow-up by governments to this report.

Other Low-Income Countries

Aside from Haiti, all of the other low-income countries are located in South and
Southeast Asia. Pakistan shares a similar economic structure with India, with a
relatively diversified manufacturing base and a large number of skilled people.
Although the growth of manufacturing output declined from a 10 percent
average annual rate in the 1960s to four percent in the 1970s, the economy as a
whole managed sound growth with per capita income increasing 2.9 percent
annually over the past two decades. Agricultural production, particularly of
wheat, has made steady advances, recently buoyed by several years of good
weather.
In contrast, Bangladesh has recorded a decline of approximately 0.3 percent
annually between 1970 and 1980 in its per capita income, which is now
estimated at about $120. A basic problem is that agricultural production has not
kept up with population growth of three percent a year. Despite its very small
land area (less than half that of Italy or a third that of Japan), Bangladesh is the
world's eighth most populous country, with about 95 million people. Adult
literacy is just over 25 percent, and average life expectancy is just 46 years.
Since its separation from Pakistan, its first two presidents were assassinated. The
assassination of President Ziaur Rahman in 1981 shattered confidence in the
government's ability to manage development and set back efforts to attract
foreign investments. The world markets for Bangladesh's exports have been
exceptionally weak; the terms of trade in 1980 were only 59 percent of their
1975 level and export earnings covered only a third of the value of imports.
Bangladesh must rely heavily on concessional assistance, which provides 65
percent of its development financing.

19
 Other countries at the very bottom of the per capita income scale
include Afghanistan and the three Indochinese countries, where con-
tinuing warfare prevents any meaningful development. Burma has also
been plagued by internal conflict and economic mismanagement,
combined with a heavy emphasis on inward-looking development. One
positive effect of this has been that Burma was relatively insulated from
the economic shocks of the 1970s. Since 1977 its economy has grown at a
rapid pace, led by increased paddy production; but per capita income was
still only $170 in 1980.

Conclusion
This brief summary does not account for all developing countries, and
some countries share the characteristics of more than one of our broad
categories. It does, however, illustrate the very different situations in
which various developing countries find themselves, partly as a result of
their own policies, partly because of factors such as resource endowment
or other features of their natural environments, partly because of the
attention or lack thereof they have received from the advanced world.
The dichotomy between North and South or between rich and poor,
although clearly important, does obscure the internal inequities within
individual nations and minimizes the importance of the large gaps that
have appeared within the developing world between high-performance
economies like those of the NICs and the economies of many sub-
Saharan African and other least-developed countries. These gaps,
however, must be taken into account by the trilateral countries if they are
to pursue coherent strategies to facilitate and assist the development of
the Third World.

20
 II. NORTH-SOUTH TRADE RELATIONS1
Trade and Growth
In the literature of economic development, trade is often said to be the
"engine" of growth. However oversimplified this metaphor may be as a
statement of the complex interaction between these two gross variables, it
does serve to underline the importance of foreign trade in the growth
process. A healthy expansion of exports may not always be a sufficient
condition for rapid and sustained growth, but a strong positive
association between the two is clearly evidenced in inter-country
comparisons.
Trade expansion contributes to growth in many ways. Among them are
the benefits of specialization, including economies of scale; the favorable
effects of international competition on domestic economic efficiency; the
increased capacity to pay for the imports required in development, both
directly by earning foreign exchange and indirectly by increasing a
country's abililty to borrow and service debt; and more generally, the
stimulus to investment, to learning, and to entrepreneurship that comes
with expanding markets and incomes and exposure to new products, new
technology, new ideas and new standards. At the same time, of course,
expanding involvement in trade is not without important risks and
potential costs.2 A country with a high ratio of exports to domestic
product is more sensitive to the level of economic activity of its trading
partners and to protective measures taken by them—a risk particularly
evident in the current worldwide recession. Without appropriate domestic
policies, the increase in foreign exchange may have adverse effects on
development (through effects on income distribution, investment
priorities, nutritional patterns, and so forth). An issue for each developing
country is how to take advantage of trade while limiting risks and costs.
The

1
The authors are greatly indebted to Isaiah Frank for preparing a paper for them which largely became this chapter.
The authors, of course, take full responsibility for their use of Professor Frank's excellent piece. Some of the issues
in this chapter are more fully discussed in an earlier task force report to the Trilateral Commission: Albert Fishlow,
Jean Carriere, and Sueo Sekiguchi, Trade in Manufactured Products with Developing Countries: Reinforcing
North-South Partnertship (New York: Trilateral Commission, 1981).
2
The expansion of trade often induces the expansion of inward foreign direct investment (and vice versa).
Expanded trade and direct investment often generate similar advantages—and also similar risks.

21
responsibility of the trilateral countries is to help provide an environment
in which those developing countries really interested in trade-related
economic development can succeed. The trilateral countries can "help to
reduce the risks of interdependence and to distribute its risks and benefits
more equally between the weak and the strong."3 Given the important
contribution which trade can make to growth, the question arises as to
what are the principal determinants of developing country export
expansion. Underlying LDC export performance are factors of two broad
types: external and internal. The external factors are mainly the rate of
growth of GNP in the industrial countries and the conditions of access to
their markets. The internal factors are those that affect the capacity of
LDC economies to respond vigorously to external market opportunities.
In addition to the quantity and quality of their human and physical
capital, a major determinant of the responsiveness of developing
countries to trade opportunities is the orientation of their economic
policies and, more specifically, the system of economic incentives and
disincentives implied by those policies.

The Present Crisis

Since the industrial countries constitute the market for almost two-thirds
of the developing countries' exports, the present economic stagnation in
the industrial world is having a sharply adverse effect on LDC exports
and economic growth. With the severe contraction of trilateral markets,
the expansion of the volume of developing country trade came to a halt in
1981. Their non-oil commodity prices declined by more than 12 percent.
Although the ability to adjust to the adverse external environment has
varied greatly among developing countries, the combined economies of
the oil-importing developing countries grew less rapidly in 1981 than
their populations for the first time in over twenty years.4 A number of key
developing countries (e.g. Brazil and Korea) experienced absolute
declines in their GNP. Clearly the first order of business is to get the
world economy moving again at a satisfactory rate while avoiding the
inflationary excesses of the 1970s. One of the dangers of prolonged
stagnation in the industrial countries, in addition to its current depressant
effect on LDC exports and growth, is the climate it generates for
intensified protectionist pres-

3
Richard N. Cooper, Karl Kaiser, Masataka Kosaka, Towards a Renovated International System (New-York:
Trilateral Commission, 1977), p. 24.
4
GATT, "Developments in International Trade Which Have a Bearing on the Trade and Payments
Position of Developing Countries", COM, TD/W368, 18 June 1982, p. 1.

22
sures. If domestic demand is sluggish and jobs are scarce in the industrial
countries, firms and workers will resist strongly any moves to liberalize import
restrictions and will press hard for new restraints against foreign goods,
particularly those of the more labor-intensive variety in which newly
industrialized countries tend to specialize. Once recession-induced protectionist
measures are in place, they tend to persist long after economic recovery is under
way, slowing down that recovery. It is a matter of urgency therefore that the
industrial countries adopt a coordinated strategy of economic recovery both in
their own interest and in the interest of the broader international economic
community.
In the rest of this chapter we will deal first with the overall evolution of LDC
trade and the marked variations in the trade positions of different countries. Then
we will turn to market penetration and protection in the trilateral countries, and
to instability in commodity prices and earnings. A final section addresses the
"trade graduation" issue: the need for the NICs (newly industrialized countries)
to share more of the responsibility in maintaining an open trading system.

The Evolution of LDC Trade

Looking at the present situation from a longer-term perspective, the trading
positions of many developing countries have undergone a profound evolution in
the post-World War II period. Prior to the war, North-South trade tended to
conform to the classical pattern of an exchange of the raw materials of the South
for the manufactured products of the North. This pattern began to change in the
aftermath of the war as a number of developing countries adopted policies of
industrialization based on the substitution of domestic production for imports of
manufactured products.
The driving forces behind LDC policies of import substitution were diverse:
the desire for some degree of insulation against the war-time experience of
unreliable external sources of supply of manufactured products; the belief that
industrialization is an essential feature of the development process and that it
therefore warrants government protection of the home market for domestic
manufactures; the desire to conserve foreign exchange in the face of balance-of-
payments pressures; and more generally, the determination of less developed
countries—in an era of decolonization—to liberate themselves from the role of
"hewers of wood and drawers of water" for the industrial countries. This last
motivation derived not only from the association of concentration on raw
materials with a colonial status but also from the adverse characteristics of many
raw materials markets in the 1950s

23
and early 1960s, including sharp price fluctuations, sluggish growth in
earnings, and declining terms of trade.
Economic diversification based on extremely high levels of protection
achieved some early successes. But it proved short-lived in most cases as
domestic markets for manufactured goods became saturated and the need
for earning, rather than merely conserving, foreign exchange became
acute. Recognizing this need, a number of developing countries began to
shift their economic strategies in the 1960s so as to reduce the bias in their
incentive systems which had favored producing for the home market over
manufacturing for export.
The shift toward export-oriented industrialization policies was facil-
itated in the 1960s and early 1970s by a favorable external environment.
Economic growth in the industrial countries was rapid and inflation
relatively modest. At the same time, the world trading system was being
progressively liberalized under the aegis of GATT, with quantitative
restrictions being phased out and tariffs being steadily reduced. Despite
the shock of steeply higher oil prices and the slowdown in industrial
country growth after 1973, most of these developing countries were able
to maintain high rates of expansion in their exports of manufactures
during the decade of the 1970s.
By 1981, the proportion of manufactured products in all LDC non-oil
exports had risen to more than half (51%)—from only a sixth (16%) as late
as 1963.5 The sense of change conveyed by these overall figures obscures
as much as it reveals, however, when trading positions are examined
country by country. Most developing countries are still dependent on
primary commodities for more than 70 percent of their exports. The
exports of manufactures are heavily concentrated in a small group of
developing countries. Hong Kong, Taiwan, South Korea, and Singapore
accounted for 61 percent of developing country exports of manufactures
in 1979. Brazil, Mexico, Argentina, and India accounted for another 16
percent.6
At the other extreme is a large group of low-income countries (heavily
concentrated in Africa), each of which still depends overwhelmingly on
the export of a few primary products. These countries are still a long way
from becoming significant exporters of manufactures. Their principal
concerns are the stability and trends of world commodity markets.

5
Ibid., p. 3.
6
Op. cit., Fishlow, et al., p. 23.

24
 In between is a growing number of countries that have begun to export
manufactures on a significant scale. Among the newcomers are Malaysia,
Thailand, the Philippines, the Ivory Coast, Tunisia, Morocco, Colombia,
Uruguay and Chile. To some extent, the newcomers are succeeding the
original NICs, such as Taiwan and Korea, in more labor-intensive
products while the latter advance to more complex and skill-intensive
fields such as engineering products. International comparative advantage
is at work, therefore, not only between developed and developing
countries, but among the developing countries as well. We probably
should also include China in this "in between" category. China is
becoming more active in the international trading system, and already in
1978 manufactures constituted about one-half of Chinese exports.

Market Penetration by Developing Countries and its Effects

Because developing countries have become conspicuously successful
exporters of a number of manufactured products, there is a widespread
impression in the industrial countries that they are displacing a substantial
portion of domestic manufacturing and employment. Actually, the share
of developing countries in the apparent consumption of all manufactured
products in the industrial countries was only 3.4 percent in 1979. The
degree of market penetration was highest in the European Community
(4.7%); the middle position is occupied by the United States (4.1%); and
Japan was in last place (2.3%). If instead of the level of market
penetration, one looks at its annual rate of increase during the 1970s, one
finds the United States in first place (11.3%), the European Community
second (6.4%), and Japan in last place (5.5%).7
Although overall market penetration in manufactures is low, it has been
heavily concentrated in specific labor-intensive sectors. For example, the
share of the developing countries in industrial country consumption of
wearing apparel was 14 percent and of footwear 15 percent in 1979. In a
number of less aggregated sub-categories, the degree of market
penetration is even higher—e.g. 36.5 percent for knitted clothing and
38.7 percent for leather apparel.
At the same time that developing countries' exports of manufactures
have been expanding rapidly, their imports of manufactures from the
industrial countries have far exceeded their exports. In fact, the
developing countries have been in recent years a more rapidly

7
Helen Hughes and Jean Waelbroeck, "Can Developing Country Exports Keep Growing in the 1980s?', The World
Economy, June 1981.

25
growing market for the manufactured products of the industrial countries
than the industrial countries themselves. In part, the large excess of
developing country imports over exports of manufactures reflects the
trade of OPEC countries. But even excluding OPEC countries, LDC
imports of manufactures from the industrial countries are more than two
and a half times the value of their exports, and the excess grew from $25
billion in 1973 to $88 billion in 1980.
The rapid growth of two-way trade between the North and South
reflects a historic change in the global division of labor. Labor-intensive
and standardized activities are shifting to the Third World while the
industrial countries concentrate increasingly on the production of more
complex goods and services requiring higher proportions of capital,
technology and skills.8 To the extent that this process is permitted to
proceed without restriction, all participating countries benefit in the long
run.
A major concern in the industrial countries, however, is the short-run
employment effects of the restructuring of world production. Although
job displacement by imports is accompanied by job creation by expanded
exports, the higher labor intensity of imports must be taken into account
while estimating the net employment effect of North-South trade in
manufactures. After allowing for this consideration, a recent OECD study
concluded that the net effect of North-South trade in the period 1973 to
1977 was to increase employment in the OECD countries by
approximately 200,000 jobs annually.9
Despite this positive employment effect in the aggregate, particular
sectors of manufacturing in the developed countries have experienced
serious problems of adjustment. Displacement by imports is likely to
affect most severely relatively unskilled employees of such industries as
textiles and clothing. For instance, American studies comparing the
demographic and occupational characteristics of workers in "losing"
industries to workers in industries with substantial employment gains
have found that the former "tended to be older, female, less

8
This process is more complex, of course, than can be captured in a few sentences. Some production processes may
tend to shift back toward OECD countries—or shift away from them less rapidly— with the development of highly
automated processes. As for the shift of "labor-intensive" activities to developing countries, one should recall that
this refers to less-skilled labor in particular. Human capital is as important an input as labor per se and equipment.
Also, through competition between OECD countries, capital has sometimes been underpriced while industrial labor
in developing countries has been overpriced, inducing a competition not really based on the relative opportunity
costs of these inputs.
9
OECD, The Impact of the Newly Industrializing Countries on Production and Trade in Manufactures, Report by
the Secretary-General (Paris: 1979).

26
skilled and educated, relatively low paid, and from minority groups."
Thus, "the burden of adjustment falls on categories of workers who can
least afford it."10 While protectionism is not the answer, at the same time
our national communities must recognize that "trade policy and policies
for adjustment to changes brought about by trade cannot, in the end, be
separated. Public acceptance of the concentrated costs of expanding trade
depends on an effective commitment from government to facilitate the
adjustment process and to minimize...the burdens imposed on those who
will pay the costs for general benefits."11
Other factors also complicate the employment adjustment process aside
from import competition. Studies indicate that net import competition—
from developed as well as developing countries—may be less important
overall in job displacement than labor productivity increases and changes
in domestic demand. Sectoral adjustment problems are severely
aggravated in economies experiencing overall economic stagnation and
high aggregate unemployment such as now prevails in most of the
industrialized countries. In this situation, protectionist pressures are
bound to intensify. The problem for trilateral governments is to elaborate
positive adjustment strategies which ease social adaptation and facilitate
the emergence of new activities.12

Protection in the Industrial Countries: Primary and Processed Materials

Even if protection does not increase, the present conditions of access to
the markets of industrial countries are far from satisfactory. Although the
most serious restrictions are those on manufactured products, significant
barriers impede developing country exports of a number of agricultural
products and primary commodities in processed form. Liberalization of
trade in these products should therefore be high on the agenda for
international action.
To the extent that developing country agricultural exports consist of
tropical products (e.g. coffee, cocoa, tea), they generally do not compete
with domestic production in the industrial countries and therefore are free
of trade barriers in those markets. The main exceptions are cane sugar—a
tropical product competing with temperate sugar

10
Morris Weisz, 'Strategies for Adjustment Assistance" in Trade and Employment, A Special Report of the National
Commission for Manpower Policy, Special Report No. 30 (Washington: 1978), p. 185.
11
Ibid., p. 239.
12
See the latest OECD report in this area, Positive Adjustment Policies: Managing Structural Change (Paris:
OECD, 1983).

27
 beets and sugar substitutes—and fruits and vegetables originating in
developing countries in close geographic proximity to the European and
North American markets.
Sugar is the LDC agricultural product that has been most seriously
affected by protection in the industrial countries. Imports into the United
States have been subject to country quotas, whereas in Japan sugar
imports face duties designed to maintain targeted prices for domestic
producers. Despite these restrictions, the United States and Japan have
been importing 40-50 percent and 70-75 percent, respectively, of their
consumption requirements.
In the European Community, however, a combination of price supports
and import controls have brought about self-sufficiency in sugar and
have promoted the Community to the position of a net exporter. Not only
is the domestic market virtually impenetrable to imports, but the EC
competes with developing countries in third-country markets at prices
subsidized under its Common Agricultural Policy.
Beef is another product that faces severe import constraints in the
major industrial countries. The restrictions take many forms, including
quotas, "voluntary" export restraints, and sanitary regulations. Again, the
most serious obstacles are found in the European Community where the
Common Agricultural Policy has led to the expansion of beef production
to the point where the Community is now virtually self-sufficient and is
subsidizing exports to the detriment of other exporters, including
developing countries such as Argentina and Uruguay.
Agricultural raw materials (e.g. cotton, jute, hard fibers, rubber) and
minerals are generally not subject to significant import restrictions in the
industrial countries. The problem of market access for these commodities
(as well as tropical food products) arises when they are exported in
processed form.
For many such products the nominal tariffs of the industrial countries
escalate with the stage of processing, resulting in even higher effective
protection on the value added in converting the raw material to processed
form. For example, whereas cocoa beans enter either duty-free or at very
low rates of duty, the nominal tariffs on cocoa powder and butter are 13.6
percent, 15.0 percent, and 2.6 percent for the European Community,
Japan and the United States respectively (pre-Tokyo Round m.f.n. rates).
However, this pattern of discrimination against the processed as
compared to the raw product is accentuated when the tariff is calculated
as a percentage, not of the total value of the final product, but only of the
value added in processing. On

28
that basis, the comparable "effective" rates of protection on the pro-
cessing of cocoa powder and butter are 76.0 percent, 125.0 percent and
22.0 percent respectively.13
How damaging these restrictions on processed products are to the
developing countries is difficult to assess. For one thing, the situation is
alleviated to the extent that processed primary products benefit from the
Generalized System of Preferences (GSP) under which the industrial
countries permit a wide range of processed and manufactured products to
enter their markets free of duty or at preferentially low rates. Nor does a
country's export of primary products automatically imply that, in the
absence of trade restrictions, it would be an efficient and competitive
producer and exporter of the processed form of its primary exports. Some
processing activities are, for technical reasons, best performed close to
the point of consumption; others are capital- or technology-intensive and
may represent a sub-optimal use of a developing country's relatively
scarce resources.
Nevertheless, it would be highly desirable to phase out and eliminate
protection on the processed forms of raw materials exported by
developing countries so that, in cases where this particular path to
industrialization is economic, obstacles in the form of government-
imposed import barriers in the industrial countries would not be en-
countered. Where the obstacles are not removed, a second-best policy
would be for developing country exporters to offset such trade distortions
by discouraging exports of the raw material through taxes and
encouraging exports of the processed product through export subsidies.

Protection in the Industrial Countries: Manufactured Products

As a result of successive rounds of trade negotiations, tariffs are generally
no longer significant barriers to trade in manufactures. By the time the
Tokyo Round reductions are completed, duties in the industrial countries
will average less than six percent. However, on some products of interest
to developing countries, such as textiles and clothing, rates will still
exceed 10 percent. Even these tariffs, however, are for the most part not
the governing obstacle to trade. In many of the more labor-intensive
fields, comparative advantage has shifted so sharply in favor of
developing countries that industrial countries have come to realize that
the only truly effective forms of protection are

13
Commonwealth Secretariat, Protectionism: Threat to International Order (London: 1982), p. 48.

29
non-tariff measures, usually involving some form of quantitative re-
striction on imports.
The tendency to resort to non-tariff measures has been bolstered by
other considerations as well. First, as a result of multilateral negotiations,
most tariffs have been bound against increase so that raising them entails
messy legal problems. Second, with fluctuating exchange rates the
protection afforded by a tariff can be quickly vitiated by the depreciation
of the exporting country's currency or the appreciation of the currency of
the importing country. Third, tariffs do not lend themselves well to
informal and discriminatory types of protection, such as "voluntary"
export restraints, where the burden of restriction can be targeted to a
particular exporting country.
Non-tariff measures have been applied most comprehensively in the
textiles and clothing sector. Since 1961 North-South trade in this sector
has been conducted under the umbrella of an "orderly marketing
agreement" now called the Multi-Fiber Arrangement (MFA), under
which GATT members are authorized to negotiate bilaterally for quotas
without regard to the relevant GATT restraints on the use of quantitative
restrictions. Over the years the agreement has developed in the direction
of greater restrictiveness. The alleged justification for this international
legitimization of quotas is that, in the absence of MFA, domestic political
pressures in the industrial countries would result not in a more liberal
regime for textiles and clothing, but in a complex of unregulated and even
more protective bilateral controls on trade.14
Other sectors in which non-tariff measures are important include
footwear, radios, television sets, steel, ships and chemicals. Many of the
restrictions are of the informal type and have been adopted without
reference to the criteria of market disruption and serious injury or the
GATT obligations regarding prior consultations, non-discrimination, and
compensation for the resulting losses to the countries affected.15

14
Imports have grown under the "orderly marketing" regime, in some cases quite considerably. For
instance, in the case of ladies' and childern's apparel in the United States, in 1961, for every 100
pieces produced domestically, four pieces were imported. In 1982, for every 100 pieces produced
domestically, 74 were imported.
15
Aside from issues of government policy—tariffs and non-tariff measures—a debate is also emerging
about the effects of the practices of multinational corporations on exports of manufactured products
from developing countries. Some argue that discriminatory practices reduce such exports below what
they would otherwise be. Others argue that intra-firm transactions—which represent perhaps a fourth
of all international trade in manufactures—have helped to create and expand this trade.

30
 It is imperative that all these measures be brought into the open and placed
under multilateral control and discipline.16 The mechanism for doing so should
be the negotiation of a new "safeguard" code in GATT which would elaborate
the escape clause provisions contained in Article XIX. The code should define
more precisely the criteria for safeguard action, including the concepts of market
disruption and serious injury, the allowable remedies (including strict time limits
on their application) the procedures to be adhered to, and the mechanisms for
maintaining transparency and multilateral surveillance of any temporary
restrictions that are adopted. The need for an improved safeguard code was
affirmed at the November 1982 GATT ministerial conference.
When the subject of safeguards was addressed in the Tokyo Round, a central
issue was that of selectivity. The European Community insisted that a new code
allow restrictions against selected countries deemed to be the principal source of
disruptive imports rather than against all countries without discrimination as now
required by Article XIX. The developing countries strongly opposed the
legitimizing of selectivity, fearing that it would encourage stronger countries to
impose restrictions against the weaker without risk of significant retaliation of
the sort that might occur if the restriction had to be applied to other industrial
countries. A practical compromise might be through a formula that, while not
outlawing selective restrictions, would subject them to stricter substantive and
procedural requirements than those applicable to non-discriminatory safeguard
actions.

Instability of Commodity Prices and Earnings

As noted earlier, the dependence of developing countries on exports of non-oil
primary products, while diminishing, is still almost 50 percent of non-oil
exports. Primary exports are particularly important for the lower-income
developing countries, many of which depend on one or two such products for the
bulk of their export earnings.
Apart from restrictions on market access, the primary commodity problem
consists of two aspects: the short-term instability of prices and export earnings;
and the adverse longer-term trends in certain commodity markets as reflected in
deteriorating terms of trade and sluggish growth in export earnings.
Of the two problems, the adverse long-term trends are the more

16
We do not underestimate the difficulty of defining together what is or is not a non-tariff barrier. At the margin,
what are seen as non-tariff barriers in foreign eyes sometimes fade into something quite different in domestic eyes.

31
fundamental. A strong correlation exists between rates of growth of GNP
in developing countries and the growth of their export earnings, but only
a weak relationship between GNP growth and stability of earnings.
Sluggish long-term growth in primary commodity exports is often
reflected in declining prices relative to those of other products, including
those that developing countries must import. It is the alleged general
tendency toward such deteriorating terms of trade for primary
commodities that provided much of the original impetus in the Third
World for a New International Economic Order to correct the "inequities"
of the present system.
Actually, empirical evidence over extended periods shows no such
general tendency. Both the prices and export earnings of individual
primary commodities show highly divergent long-term trends. In the ten
years prior to the oil shock of 1973, for example, food and metals more
than held their own, whereas the prices and earnings of agricultural raw
materials, such as jute, lagged considerably because of pressure from
substitutes. The present world-wide depression has, of course, induced a
steep drop in commodity prices generally, with serious implications for
the developing world, but this is a cyclical rather than a secular
phenomenon.
For developing countries dependent on commodities facing adverse
long-run market prospects (e.g. tea, hard fibers), the basic remedy is not
to be found in international schemes to shore up prices artifically but
rather in diversification into other lines of production. In the final
analysis, diversification is but another way of looking at development. It
implies a restructuring of production in order to increase a country's
returns on its resources. As with development generally, the constraints
are many, and it is the purpose of external finance and technical
assistance to help developing countries overcome them.
The other problem confronting primary commodity exporters is more
general. It is the short-term instability of commodity markets, as reflected
in both prices and earnings, which affects the ability of Third World
countries to plan and carry out rational development programs. Instability
is due mainly to the impact of variations in weather and business cycles
on price-inelastic markets. Agricultural commodities are most affected by
changes in supply due to natural causes such as weather and pests,
whereas minerals are more sensitive to changes in demand due to
business fluctuations in the industrial countries.
In dealing with the instability of primary commodity markets, two

32
basic approaches have been followed internationally: price stabilization
agreements and compensatory financing arrangements.
Commodity price stabilization agreements cannot cope effectively with the
extremes of market weakness experienced in the current worldwide depression
nor with the kind of upward price spiral that characterized the commodity boom
of 1973-74. However, they can serve a valuable function during more normal
swings in economic activity by stabilizing prices within prescribed ranges. The
mechanisms for doing so are buffer stocks (rubber and cocoa), export quotas
(coffee), or a combination of the two (tin and sugar).17
Despite heroic efforts on the part of UNCTAD to promote additional
commodity agreements in recent years as part of an "integrated commodity
program", only the aforementioned five are in existence today. Among the
inherent problems that have inhibited the successful negotiation of such
agreements, three are paramount: the difficulties of reaching agreement between
exporters and importers on an appropriate price range; differences among
exporters as to the basis for allocating export quotas; and problems concerning
the level and financing of stocks.
Because of the difficulties in negotiating individual commodity price
stabilization agreements and in operating them during extreme market conditions
such as now prevail, current attention has focused on more general arrangements
to stabilize export receipts rather than prices. Such arrangements, which do not
involve market intervention, include the compensatory financing facility of the
IMF and the STABEX scheme sponsored by the European Community.
The present STABEX is based on the Lome II Convention signed in 1979 by
the European Community and 58 African, Caribbean and Pacific (ACP) states. It
is a system for transferring foreign exchange to compensate, commodity by
commodity, for shortfalls in earnings from exports to the European Community
of 44 predominantly agricultural products. Compensation is triggered after
receipts from exports of the commodity to the European Community drop below
certain reference levels. Transfers to the 35 least-developed countries are in the
form of grants, and to the other countries as interest-free loans, with repayment
spread over five years after a two-year grace period.
As a compensatory financing arrangement, STABEX is a useful but very
limited scheme. Its total resources for the five-year period

17
Unlike the international buffer stocks provided in the rubber and cocoa agreements, the International Sugar
Agreement provides for nationally held stocks.

33
1980-84 are only 550 million European units of account (approximately
$500 million) divided into five annual allotments. Outlays in 1980 and
1981 have fallen far short of requests. Moreover, compensation is related
not to total export shortfalls but only to shortfalls of individual
commodity exports to the European Community regardless of export
performance to the rest of the world. Although liberal in its repayment
provisions, the way in which shortfalls are calculated makes no
allowance for normal growth in exports and therefore tends to understate
the shortfalls.
The IMF facility is a much larger, more comprehensive, and more
flexible arrangement. It provides support to members in balance-of-
payments difficulties from temporary shortfalls in total receipts from
world-wide exports of goods and services arising from circumstances
beyond the members' control. In calculating shortfalls, the scheme takes
account of the growth trend in exports. In 1981, a food financing facility
was incorporated into the scheme, providing compensation also for
excesses in the cost of cereal imports. Although broader in the foregoing
respects than STABEX, the IMF facility's repayment terms are less
concessionary: Maturities and charges on borrowing are the same as
those applying to the Fund's normal credit tranches.
In the 2 1/2 years following the liberalization of the IMF compensatory
financing facility in 1979, lending totaled about $3 billion. It has been
estimated that this amount offset 60 percent of the impact of the
commodity slump through the early part of 1982.18
Despite this substantial contribution to alleviating the effects of
commodity market instability on developing countries, further im-
provement and liberalization of the IMF facility are in order. Among the
ideas worth considering are the calculation of shortfalls in real terms, the
scheduling of repayments in relation to upturns in export earnings, and
concessional charges for low-income members.

The Newly Industrialized Countries (NICs) and the International

Trading System
The NICs, which are increasingly dependent on exports of manufactures,
have a heavy stake in maintaining an open international trading system.
Threats to the system in the form of formal and informal restrictions on
access to markets in the industrial countries can seriously damage their
growth prospects.

18
U.S. Department of State, "IMF Effectiveness During the Current Commodity Slump", Report 342-AR,
March 24, 1982.

34
 At the same time the NICs must recognize that an open international trading
system cannot withstand the pressures to which it is increasingly exposed when
they themselves still maintain highly restrictive trading regimes, including steep
tariffs, an array of quantitative restrictions and import licensing requirements,
and various forms of export subsidies. In addition, they enjoy preferential tariff
access to the markets of the industrial countries under the Generalized System of
Preferences (GSP). In effect, we have a trading system today in which the rules
apply to one group of about twenty OECD countries, while all others, regardless
of their stage or rate of development, are substantially and indefinitely free of
international constraints.
Some arrangement for graduation is clearly needed. Newly industrialized
countries with rapidly expanding exports of manufactures should progressively
relinquish differentially favorable treatment, bring their own trade policies
gradually into accord with regular GATT obligations, and pledge themselves to
adhere to those obligations in the future. Graduation in trade would parallel the
practice prevailing in the field of international development lending where the
World Bank, for example, has long based eligibility for various types of
concessional loans on standards such as per capita income.19
In addition to facilitating resistance to protectionist pressure in the industrial
countries, a system of graduation would serve the interests of the developing
countries directly. For the NICs themselves, economic rationality would dictate a
gradual phase-out of import restrictions and export subsidies that impose
unnecessary costs on their economies. For developing countries at an earlier
stage of development, intra-LDC trade would be stimulated by the opening up of
markets in the NICs for their simple manufactured products. In addition, the less
developed countries would gain an advantage relative to the NICs in industrial
country markets because of the gradual removal of the NICs as beneficiaries of
GSP.
We recognize an exception in the case of foodgrains. Many NICs and other
developing countries may have legitimate grounds to protect themselves to some
extent against imports of foodgrains from developed countries, frequently
subsidized, which would lead to excessive dependence on external supplies. The
world community may have an interest in developing countries maintaining a
reasonable level of self-sufficiency.
The present world economic situation is hardly optimum for

19
Isaiah Frank, "The 'Graduation' Issue for LDCs", journal of World Trade Law (July/August 1979).

35
launching a program of trade graduation. A number of NICs (e.g. Brazil,
Mexico) are in serious balance-of-payments difficulties and are facing extremely
severe liquidity crises, including the need for major debt rescheduling. As the
world economy returns to a more normal situation, however, a program of trade
graduation should be high on the international agenda.

36
 III. FINANCING MIDDLE-INCOME
DEVELOPING COUNTRIES1
A number of middle-income developing countries are presently facing
severe external financing difficulties. The number of countries in
trouble—and even more the large portion of overall developing country
indebtedness represented by a few key cases—has aroused fears about
wider international financial stability and called forth extraordinary
actions on the part of some governments and intergovernmental
organizations. Severe external financing difficulties have forced domestic
contraction which, given again the large size and international
involvement of some of the economies concerned, has been a drag on
wider international recovery.
A continuation of severe contraction will risk dislocations of considerable
importance. In those developing countries under greatest pressure, social and
political stability will be in jeopardy—and some voices can already be heard in
those countries asserting that the unilateral declaration of a moratorium
on debt service, or even debt repudiation, may be a lesser evil. In the
developed countries, exports to these developing countries will decline—
such as the $8 billion drop in U.S. exports to Mexico between 1981 and
1982—with important negative effects on employment. For commercial
banks and other lenders in private credit markets, the creditworthiness of
their borrowers will be undermined—risking turning a liquidity crisis
into something much more severe.
The underlying origins of the current crisis can be found in several
factors—the second oil shock, the great rise in real interest rates in
international financial markets, continuing recession in the world
economy, and the policies of particular debtor countries. These factors
are largely beyond the control of the developing country debtors
themselves—and a fundamental solution of the problem will come only
with sustained recovery and moderate inflation in the industrialized world.
Meanwhile, however, all sides—commercial banks, debtor countries, trilateral
governments and central banks, intergovernmental organizations—have
responsibilities in containing the immediate problem and minimizing the
associated dislocation.

1
The authors are greatly indebted to Robert Solomon for preparing a background paper for them which provided
the detailed basis for some parts of this chapter and helped shape other parts.

37
 A. CONCENTRATION OF BANK DEBT

Commercial bank debt of non-OPEC developing countries—about half the total

foreign debt of these countries and the most problematical aspect of financing in
the current crisis—is remarkably concentrated. Table III-l indicates that in most
years between 1972 and 1980 Brazil and Mexico alone accounted for more than
half of the total net financial credits extended by banks to non-OPEC, non-
OECD developing countries. In contrast, all low-income countries together ac-
counted for only a very small fraction.
Table III-2 focuses on 1981, the latest year for which complete information is
available. Brazil and Mexico accounted for a little over half of the increase in
bank debt, and Chile, Argentina and South Korea for another third—in all about
84 percent of the increase in bank debt for all non-OPEC developing countries.
These countries also constitute a large part of the overall current account deficit
of non-OPEC developing countries. Brazil and Mexico alone accounted for
about 30 percent, and Chile, Argentina and South Korea for another 16 percent—
in all, approaching half the total. What is most significant in distinguishing these
countries is that so much of their current account deficit was financed by
increases in bank debt—for the top five, about 88 percent. (The remainder was
financed primarily by direct investment and a drawdown of reserves.) In
contrast, the large majority of low-income developing countries are much more
dependent upon non-market and concessional financial flows (see next chapter).

TABLE III-l
Bank Lendinga to non-OPEC, non-OECD Developing Countries
(net annual disbursements in billions of dollars)

1972 1973 1974 1975 1976 1977 1978 1979 1980b

Total 3 7 9 9 10 10 14 15 16
Brazil & Mexico 2 4 5 6 7 5 9 8 7
Low Income — 0.2 0.3 0.4 0.3 0.6 0.2 0.4 0.6
Countriesc
a
Medium- and long-term loans, excluding officially guaranteed export credits, bonds, and other
portfolio. bEstimate. cexcludes Indonesia.
Source: Development Cooperation, 1981 Review (Paris: OECD, 1981), p. 74.

38
 B. EVOLUTION OF THE CURRENT CRISIS

Until rather recently, when measured against some general indicators of capacity
to carry debt, debt burdens of developing countries did not appear much heavier
than in 1970. An IMF staff paper published in May 1981 concluded that "in real
terms...and in relation to other economic magnitudes, such as exports and
reserves, the general debt situation does not seem to be substantially different
from that at the

TABLE III-2
Financing Current Account Deficits of Major Debtors in 1981
(billions of dollars)
CURRENT ACCOUNT INCREASE IN CHANGE IN
DEFICITA BANK DEBT RESERVESb

Mexico 13.1 14.4 + 1.0

Brazil 11.8 6.2 + 0.8
Chile 4.9 6.2 + 0.1
Argentina 4.0 4.0 -3.5
South Korea 4.5 2.9 -0.3
Subtotal 38.3 33.7 -1.9
Malaysia 2.9 1.0 -0.3
Israel 3.3 0.9 0.2
Egypt 2.1 0.8 -0.4
Colombia 2.0 0.6 -0.2
Peru 1.7 0.4 -0.8
Philippines 2.5 0.2 -0.6
India n.a. 0.2 -2.3
Subtotal n.a. 4.1 -4.4
Cumulative Subtotal n.a. 37.8 -6.3
Total: All non-OPEC LDCsc 83.5 40.0 -3.3

n.a. not available

a
Balance on goods, services, and private transfers. bForeign exchange reserves. cExcluding European
countries classified as developing, China, and South Africa.
Source: IMF, International Financial Statistics, Balance of Payments Yearbook, 1982; Bank for
International Settlements.

39
 TABLE III-3
Ratio of non-Oil Developing Country Debt to Exports and Reserves 1960 and
1970-79a
(per cent)
b b
1960 1970 1971b 1972 1973 1974 1975 1976 1977 1978 1979

Debt outstanding/ exports 49 126 140 111 94 85 103 108 108 116 109

Reserves/ debt outstanding 54 29 29 38 47 44 31 32 34 36 43

Debt service/ exports 7 16 17 15 14 13 14 15 15 18 19

a
Total medium-term and long-term debt, including private non-guaranteed debt. bFund
staff estimates.
Source: Bahram Nowzand, Richard C. Williams, et al., External Indebtedness to Developing
Countries, Occasional Paper No. 3 (Washington: IMF, 1981), p. 6.
beginning of the decade (1970)."2 Table III-3 is adapted from this IMF
paper. It indicates that relative to exports and relative to reserves, debt
levels appeared more manageable in 1979 than in 1970 for non-oil
developing countries, with deterioration in these two measures much
more evident between 1960 and 1970. Only the debt service line (prin-
cipal and interest) gives a different impression, climbing from 16 percent
of exports in 1970 to 19 percent in 1979 (after a much sharper rise
between 1960 and 1970).
When we take in more recent data than 1979, the unfolding of the
current crisis begins to come more clearly into view. Even in Table III-3,
a year-by-year examination shows a period of particular pressure just after
1973-74—that is, after the first oil price shock and in the ensuing
recession—which then eased (in debt/exports and reserves/ debt terms)
later in the decade. Financing pressures dramatically increased again with
the second oil price shock and the slide of the industrialized world once
more into recession. This second period of pressure has turned out to be
considerably more difficult.
Table III-4 shows the sharp, large increases in the combined current
account deficit of non-oil developing countries after 1973 and after 1978.
Part of their response was to increase reserves less (or draw them down),
so that the needed increase in financing was less than the increase in the
current account deficit. Part of the increase in deficits was covered by
increases in non-debt creating flows (e.g., official grants, worker
remittances). A large portion, nevertheless, could only be covered by an
increase in debt. The reader will note, incidentally, the sharp increase
after 1973 and after 1978 in "other financing flows," much of which is
short-term lending (maturities up to and including one year). Short-term
lending does not show up on most traditional debt tables but has been
important for some countries in meeting immediate financing pressures—
an expedient which can bring greater trouble later if overall financial
pressures are not by then relieved. To illustrate from the current situation,
the BIS reported that, in the first half of 1982, 55 percent of the gross new
borrowing of Latin American countries was in the "up to and including
one year" category. Mexico was one of those experiencing a "pronounced
shortening" of its maturity profile. Of the $7.3 billion of new funds
Mexico obtained from BIS reporting banks—by far the largest amount oi
any Latin American country—60 percent was short-term.

2
Bahram Nowzad, Richard C. Williams, et al., External Indebtedness of Developing Countries, Occasional
Paper No. 3 (Washington, D.C.: IMF, May 1981), p. 6.

41
 TABLE III-4
Non-Oil Developing Countries: Financing of Current Account Deficits and Reserve
Accretions
1973-82a

Current account deficit
Increase in official
reserves
Total
Financed by
Non-debt-creating flows, 10.1 12.9b 11.8 12.0 14.9
net
Long-term capital from
official sources, net
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982
(In billions U.S.
of dollars)
11.6 37.0 46.5 32.0 28.3 39.2 58.9 86.2 99.0 97.0
9.7 2.4 -1.9 13.3 12.4 15.8 12.4 4.9 1.6 4.0
21.3 39.4 44.7 45.3 40.7 55.0 71.3 91.1 100.5 101.0
17.2 23.0 24.1 26.3 27.8
5.4 9.4b 11.4 10.8 12.6 14.2 15.4 20.5 20.2 22.3

Long-term capital from 6.3 10.2b 15.2 17.1 13.8 21.0 22.5 25.1 35.6 37.0
private sources
Other financing flows, -0.5 6.8 6.3 5.4 -0.6 2.5 10.4 21.5 18.5 13.8
netc
Distribution of financing (per cent)
flows
Non-debt-creating flows, 47.5 32.8b 26.4 26.5 36.6 31.3 32.3 26.4 26.1 27.5
net
Official long-term 25.4 23.9b 25.5 23.9 31.0 26.0 21.6 22.5 20.1 22.1
capital, net
Private long-term 29.6 25.9 34.0 37.8 33.9 38.2 31.6 27.5 35.4 36.6
capital, net
Other financing flows, -2.5 17.4 14.1 12.0 -1.5 4.6 14.6 23.6 18.4 13.7
netc
a
Excludes data for the People's Republic of China prior to 1977. bExcludes the effect of a revision of
the terms of the disposition of economic assistance made by the United States to India and repayable
in rupees, and of rupees already acquired by the U.S. Government in repayment of such loans. The
revision has the effect of increasing government transfers by about $2 billion, with an offset in net
official loans. cIncluding, in addition to short-term capital flows, net use of IMF credit plus errors
and omissions.
Source: IMF, World Economic Outlook, 1982, Occasional Paper No. 9 (Washington: IMF, 1982), p.
167.
 TABLE III-5
Contribution of Oil and Other Items to Deficits of non-Oil Developing
Countries
(billions of dollars)

1973 1978 1980

Oil trade balance -5.2 -26.0 -66.5
Non-oil trade balance -4.0 -1.4 7.3
Net services and private transfers 0.3 -2.1 -10.6
Balance on current account -8.9 -29.5 -69.8

Source: Tony Killick, ed., Adjustment and Financing in the Developing World: The Role of the
International Monetary Fund (Washington: IMF, 1982), p.5.

Returning to a discussion of underlying factors in the current crisis, and

thinking of the current period of pressure as beginning in 1979, the second oil
price shock is a factor of primary importance. In Table III-5, the $40 billion
increase in the current account deficit of non-oil developing countries between
1978 and 1980 is almost exactly equal to the deterioration of their oil trade
balance. Right now, of course, the oil price factor is cutting in the opposite
direction, undermining those—such as Mexico—whose debt expanded greatly
on the basis of their increased earnings from oil exports.
Another underlying factor of primary importance has been the great increase
in interest payments since 1978—and their unpredictability as the great bulk of
bank debt came to carry floating interest rates in the course of the 1970s. Interest
rates were negative in real terms in the mid-'70s, but a sharp rise—in real as well
as nominal terms—occurred after 1978, as Table III-6 indicates. Total net
interest payments of Brazil and Mexico, for instance, rose from $1.0 billion in
1973 to an estimated $14.6 billion in 1981, an increase from 0.8 percent to 3.3
percent of GNP.3 Table III-7 presents the trade balances and current account
balances in 1978-81 of Argentina, Brazil, and Mexico. As the table indicates,
there has been a widening out of the difference between trade balances and
current account balances—a widening which reflects the great increase in
interest payments. It appears that each of these three countries had a trade surplus
in 1982.

3
OECD, Development Cooperation, 1981 Review (Paris: OECD, 1981), p. 72.

43
 TABLE III-6 Interest Rates and Inflation

(percent per year)

1978 1979 1980 1981 1982 1982 1982 19821983

Q-1 Q-2 Q-3 Q-4 Q-l
Libora 8.85 12.09 14.19 16.78 15.54 15.07 12.59 9.46 9.28
Inflation in 7.2 9.1 11.9 10.0 8.5 7.9 7.2 6.3 5.4c
Industrial
Countriesb
"Real" Rate of 1.65 2.99 2.29 6.78 7.04 7.17 5.39 3.16 3.78
Interest
a
Libor is London interbank offer rate on 3-month dollar deposits. bInflation is average increase, year
over year, in consumer prices in 19 industrial countries. cJan.-Feb. only.
Source: IMF, International Financial Statistics, January 1983.

The third underlying factor is, of course, the recession in the indus-
trialized world following the second oil price shock—broader and more
extended than any in the postwar era. Real GNP in the OECD area is
about where it was in 1979. Non-oil imports rose by only 1.5 percent in
1980, fell slightly in 1981, and probably fell again in 1982. The prices of
food and raw materials exported by many developing countries—
including many of the major debtors—declined more than 25 percent
from mid-1980 to mid-1982. Thus, as the developing countries saw their
debt service payments ballooning because of the steep rise in interest
rates, they also experienced reductions in the real value of their exports.
In the context of these underlying factors, another element in the
evolution of the current crisis is, of course, the policies of particular
debtor countries, especially the degree to which they used external
finance to facilitate adjustment—instead of consumption—after the
second oil price shock. A number of these countries were praised after the
first oil price shock for taking advantage of their large-scale access to
international financial markets4 for the financing that al-
4
The great expansion of commercial bank lending to developing countries in the 1970s provided a more
flexible type of financing for these countries—with both good and bad effects on the financing/
adjustment balance, depending on one's point of view. "Up to the late 1960s, capital flows to most
developing countries consisted largely of direct investment, short-term trade-related credits, and long-
term, mostly concessional, flows associated with project financing by official lenders.... The rapid
development of commercial bank lending during the 1970s [brought] access to private sources that
provide medium-term financing tied neither to trade nor to projects." (Op. cit., IMF Occasional Paper, p.
4.)

44
 TABLE III-7
Trade Balances and Current Account Balances of Major Debtors
(billions of dollars)

19 78 19 79 19 80 19 81
Argentina T.B. C.A. T.B. C.A. T.B. - C.A. T.B. C.A.
Brazil 2.9 1.9 1.8 -0.5 - 1.4 - -4.8 0.9 1.3 -4.0
Mexico -1.2 -7.0 -2.7 10.5 2.8 - -12.8 -3.3 -11.8
-1.7 -3.1 -2.8 -5.5 2.3 -7.5 -13.1

Note: T.B. is trade surplus or deficit (-) with imports measured f.o.b. C.A. is current
account surplus or deficit (-).
Source: IMF, International Financial Statistics.

lowed them to maintain relatively high rates of growth—which provided some

stimulus to others and helped hasten the international recovery which did finally
occur. A similar use of financing after the second oil price shock has not had
such felicitous results—as the recovery kept receding into the future. A number
of major debtors have instituted severe adjustment measures, cutting back their
own rates of growth and imposing stringent restrictions on their imports. In
Chile, real GNP is estimated to have dropped 13 percent in 1982. Brazil's real
GNP, which had grown at an average rate of almost nine percent per year in the
1970s, fell 3.5 percent in 1981 and an estimated further two percent in 1982. The
volume of Brazil's imports declined almost 15 percent from 1980 to 1981.
Mexico's real GNP grew 6.4 percent per year in the 1970s and more than eight
percent in 1980, but dropped to only two percent in 1981 and probably fell in
1982. Argentina, which has had a less impressive growth record—an annual
average of 2.6 percent in 1970-79—saw its real GNP fall six percent in 1981.
The 1982 merchandise trade surpluses of Brazil, Mexico, and Argentina,
mentioned earlier, are thus the result of an unhappy combination of
circumstances. They reflect cuts in imports by the debtor countries as they tried
to hold down their current-account deficits, which in turn were being driven up
by the recession and high interest rates in the industrial countries. These import
cuts in turn have the effect of worsening the recession in the industrial countries.
A vicious cycle is under way.

45
 For the proximate cause of the current financing crisis—particularly at its peak
so far in the late summer of 1982—we need to turn finally to the behavior of
commercial bank lenders. An important commercial banker involved in these
issues makes our point better than we could in an October 1982 speech:
The immediate liquidity problem arises from the increasing unwillingness of
the international financial community to lend. The international credit markets
have created a self-fulfilling prophecy. In questioning the short-run capability
of countries possessing a large foreign debt burden to service that debt, the
market has engineered an abrupt, relatively synchronized reduction in the
availability of new foreign credits that guarantees the impossibility of normal
debt service.
A loss of market confidence is now a reality. For many countries, particularly
in Latin America, important segments of the market for foreign lending have
virtually disappeared—in particular, regional bank participation in
international loan syndication and private placements intermediated by the
investment banks. Until debt-service uncertainties are resolved, the flow of
available credit will be sharply curtailed, and the resolution of those uncer-
tainties in many instances will entail debt reschedulings that will take a
significant period of time to prove their workability. We thus have now in
place each of the basic elements of a classic liquidity squeeze.5
It is not easy to track commercial lending in a detailed, comprehensive and
timely manner, but this judgment on commercial bank behavior does find
support in the BIS figures. Discussing the third quarter of 1982, the BIS
described what it called an "abrupt halt in new lending to non-OPEC developing
countries" and "the change in the banks' credit policies" vis-a-vis these countries.
As Table III-8 indicates, net outstanding bank debt to non-OPEC developing
countries declined by $800 million in the third quarter. The increase in out-
standing debt to Latin American countries, about two-thirds of total debt, slowed
sharply in the third quarter and turned downward in the fourth quarter. After
rising by 30 percent in 1979, 26 percent in 1980, and 23 percent in 1981,
outstanding debt to Latin America increased by only seven percent in 1982, with
almost all of the increase concentrated in the first half of the year.

5
William S. Ogden, "The Nature of the LDC Debt Problem," Remarks at the Manhattan Institute of Policy
Research, October 25, 1982, pp. 6-7.

46
 In understanding commercial bank behavior and involvement, it is
perhaps useful to turn back again to the period after the first oil price
shock. One of the important features of this first period of great external
financing pressure for developing countries was the emergence of
commercial bank lending as a major channel for financing. This was a
quite positive development in some very important ways. As noted
above, the large-scale access of many developing countries to interna-
tional financial markets was vital in their maintaining relatively high rates
of growth (of imports as well as GNP) in anticipation of international
recovery. These relatively high rates of growth provided some

TABLE III-8

External Assets in Domestic and Foreign Currency, of BIS reporting Banks vis-a-vis non-OPEC
Developing Countries

(amounts outstanding in billions of U.S. dollars)

NON-OPEC LATIN of which OTHER

DEVELOPING AMERICAA MIDDLE OTHER AFRICA
COUNTRIES EAST ASIA
1978 119.7 79.0 6.5 22.9 11.3
1979 155.6 102.5 7.8 31.0 14.3
1980 193.3 129.2 9.7 38.5 15.9
1981 end of

Marchb 196.1 132.9 9.2 38.4 15.6

June 201.2 136.7 10.0 39.6 14.9
Sept. 212.3 145.7 9.9 40.5 16.2
Dec. 230.1 158.5 11.5 43.0 17.0
1982 end of

March 230.0 161.4 10.9 41.1 16.6

June 241.9 168.5 12.6 43.7 17.1
Sept. 240.1 169.2 11.6 42.3 17.0
Dec. 246.9 169.0 12.9 47.0 17.9
a
Including those countries in the Caribbean area which are not classified as offshore banking
centers. bSince March 1981 the figures also include external positions of a number of securities
firms in the United States whose international assets amounted to $2.8 billion mainly not vis-a-vis
non-OPEC developing countries.
Source: Bank for International Settlements (BIS), Fifty-Second Annual Report (Basle: June, 1982),
BIS "International Banking Developments, Fourth Quarter 1982".

47
stimulus to trilateral countries and helped hasten the recovery. Com-
mercial banks were able to "recycle" OPEC surpluses in a more flexible
and timely manner, on the whole, than official bodies caught up in
various sorts of constraints. A sometimes neglected factor in under-
standing the great outward thrust of commercial bank lending was an
institutional factor in the banking system—the development of the
syndicated loan market—which was particularly encouraging of ex-
pansion at this early stage.
With the emergence of syndicated loans as a major vehicle for cross-
border lending, very large financing packages could be put together for
individual countries with the loan loss risk being spread over a large
number of banks. The use of syndications also drew many medium-
sized banks into lending to developing countries for the first time, and
even among the larger banks this new approach stimulated lending on a
broader geographical basis.... These important developments in
international financial intermediation facilitated a pattern of expansion
of bank lending, which, though quite dramatic in terms of the size of
the borrower's economy, produced relatively small increases in the
individual banks' exposure in the countries under review. It is,
therefore, unlikely that the growth in lending to these particular
countries attracted special attention from either bank managers or bank
regulators at this stage.6
In the second period of great financing pressure, a major difference has
been that the planned-for recovery kept receding into the future, to a
considerable extent due to the economic policy choices of major trilateral
countries. As nervous bankers new to developing country lending—or to
such lending in new regions—looked harder at these loans, some of the
possible pitfalls and complications of the institutional innovations of the
1970s came to the surface. The flexibility of commercial bank lending, so
helpful in the mid-'70s as new lending came into the picture, became
problematical as some bankers hastened to make an exit. An IMF
analysis of the experience of six middle-income countries in the 1970s,
each of whom went through debt restructuring in that decade, prefigures
tendencies in bank lending in the the current crisis.
With respect to commercial bank actions in the few cases studied, three
factors stand out: 1) the degree of acceleration of bank lend-

6
Op. cit., IMF Occasional Paper, p. 31.

48
 ing to the countries in the period preceding the emergence of servicing
difficulties; 2) the long time lag in a number of cases between identification of
the problem and a negotiated settlement; and 3) the difficulties in maintaining
or restoring banking inflows to the countries as adjustment policies were being
implemented.
Bank lending to each of these countries expanded very rapidly over a short
period and then declined sharply, with net flows from banks turning negative
at some point. The pattern of rapidly rising loan commitments when prices for
main export commodities were rising, followed by a sharp decline to very low
levels when export performance turned weak, added an additional
destabilizing element to the balance of payments.7

C. CONTAINING THE PROBLEM

Improvement of Underlying Factors

In the months since the Mexican crisis in August 1982—the peak of the crisis so
far—some positive developments have taken place. Among the three main
underlying factors discussed above, the substantial drop in interest rates since
last summer has been a great help. In 1981, as Table III-6 above indicates, Libor
averaged 16.78 percent. By the first quarter of 1983, it had fallen to 9.2 percent,
and hopefully will remain at more moderate levels throughout 1983. To grasp
what this could mean quantitatively, let us assume a seven percent drop in
interest rates between 1981 and 1983 on outstanding floating rate debt of about
$200 billion each year. This would bring a reduction in interest payments of $14
billion, about a sixth of the current account deficit of non-OPEC developing
countries in 1981. Outstanding debt will of course be higher in 1983 than in
1981 and other factors may also diminish—or enlarge—the drop in interest
payments, but the drop will be substantial.
The second underlying factor—oil prices—is cutting in both directions now.
We saw above how large a part the oil trade balance played in ballooning current
account deficits of non-oil developing countries after 1978. Brazil spent almost
$12 billion in 1981 on oil imports. Oil price levels in 1983 about 15 percent less
than in 1981, assuming static import volumes, would save Brazil some $1.8
billion. For Mexico, on the other hand, assuming exports of about 500 million
barrels of oil

7
Ibid., pp. 38, 30.

49
per year, a $5 drop in prices would mean $2.5 billion less in export
receipts.
The third underlying factor is, of course, the growth rate—or lack
thereof—in the industrialized world, and here the prospects remain
uncertain. There seems to be reasonable evidence at this writing that the
U.S. economy has bottomed out and begun to grow. What is in greater
doubt is the rate at which it will grow and how long the growth will be
sustained. The prospects in Europe and Japan are less promising. One
aspect of the poor performance in Europe and Japan has received
insufficient attention. In a number of countries, including Germany,
Japan, and the United Kingdom, fiscal policy has been perverse in this
recession. In each of the past three years in Japan and Britain and last
year in Germany, fiscal policy has moved toward restraint as these
countries tried to suppress deficits that were the product of recession. The
shift toward restraint has amounted, on average, to about one percent off
GNP per year.8 There is no evidence that the governments of these
countries plan to change their fiscal policy stances. If it turns out that
only the U.S. economy is expanding this year, the outlook for the exports
of developing countries will not be bright.
In sum, while the underlying factors offer some signs of hope, they
will not solve the problem themselves. A period of crisis management
will continue at least for this year and probably beyond. Each of the key
parties has major responsibilities—commercial banks, international
financial institutions, borrower governments, and trilateral governments
and central banks.

Liquidity Crisis
There are essentially two views of the current crisis. One view sees a
solvency crisis and believes that LDC repudiation of debts is a very real
and immediate danger. Those who hold this view have sometimes urged a
drastic and immediate restructuring of international debts, arguing that a
"socialization" of losses is needed, perhaps through a new official
institution which would take over LDC debts at a discount and turn them
into longer-term credits at lower interest rates.
A second view regards the present situation as a liquidity crisis. For
instance, Jacques de Larosiere, Managing Director of the IMF, stresses
that "there does not exist a global debt crisis," and that "current liqui-

8
OECD, Economic Outlook, No. 32 (December 1982), p. 24.

50
dity problems can be resolved" provided that debtor nations put rea-
sonable economic adjustments of their own into effect and provided
commercial banks continue to increase their net credit outstanding at
appropriate rates.
We strongly share this latter view. Although some mistakes were
made, most of the LDC debt was not imprudently acquired, and most of
these countries are facing liquidity and not solvency problems. In these
circumstances they need assistance in rescheduling their existing debt,
and they also need modest infusions of new debt as they undertake the
structural adjustments that will permit them to return to satisfactory
growth paths and a resumption of their debt service payments. If this is
not forthcoming, the international financial system is in danger of
freezing up, with heavy social and political penalties for the developing
countries and with a severe deflationary impact on the trilateral
countries.9

Modest Expansion of Commercial Bank Lending

It is incumbent upon commercial banks to continue financing developing
countries with major liquidity difficulties. It is not necessary that net
credit outstanding increase at the rate of recent years, but it probably is
necessary that it continue to increase at a modest rate— perhaps three to
five percent a year in real terms. The International Monetary Fund,
through its Managing Director, has already made history by virtually
requiring the banks to commit new funds to Argentina, Brazil, and
Mexico as a condition for its own lending. The Fund asked the banks to
extend additional loans equal to a given percentage of their outstanding
credits to the debtor countries. The percentage increase in the claims of
the banks on these borrowers will be less than the normal annual
percentage increase in bank capital. Hence there is scope for further
lending without enlarging the exposure of the banks in relation to their
capital. Whether the banks involved will each be willing to act in this
way is an open question. The major problems are with smaller banks.10
Action is required on several fronts to facilitate the needed expansion
of commercial bank lending: better information and monitoring,
appropriate central bank supervision, more standardized reschedul-

9
We should have contingency plans ready, of course, in case of major failures; but such failures are not at all
necessary if the key parties shoulder their respective responsibilities.
10
See, for instance, "Mexican Debt: Bridges, Piers, and Jumbos", The Economist (19 February 1983), p. 89. "Some
small American and Japanese banks are hoping that, if they delay long enough, the big banks will take over their
share."

51
ing procedures, and greater involvement of the key international financial
institutions in each of these areas.
• Thirty-five larger banks from Europe, Japan, North and South
America established in January 1983 the new Institute of International
Finance "to promote a better understanding of international lending
transactions by improving the availability and quality of financial and
economic information of major country borrowers."11 One of the
effects of the Institute will hopefully be to provide a more solid
foundation for creditworthiness judgements by individual banks, both
large and small. Membership is open to all institutions with cross-
border exposure, and one of the organizers recently expressed the
hope that the membership would climb to over 500 banks before
long.12 We share this hope.
The IMF and World Bank should, at a minimum, share information
with the Institute; and the Fund and Bank should themselves be more
candid and active in a wider sense in monitoring the financial
situations of developing countries. On the one hand, this would mean
that warning bells would ring at an earlier stage of financial
deterioriation than has often been the case in the past; but on the other
hand, it would also help provide an authoritative IMF and World
Bank judgement on the health of a developing country's economy at
times when—as now generally—conditions do not warrant a
contraction of net credit outstanding.
• There should be agreement among national bodies supervising
banking structures in trilateral countries that they will not act in ways
which would cause the banks and private markets to adopt
contractionary policies when the underlying economic situations in
the developing countries in question do not justify such action. The
IMF should consider announcing periodic quantitative guidelines
laying out the likely financing needs of developing countries as a
whole which could be appropriately met by commercial banks and
other private sources.
• There should be greater formalization of mechanisms for the re-
structuring of developing country debt when liquidity crises arise.
One of the complications of the development of syndicated lending to
developing countries is that hundreds of banks can be involved in a
single restructuring exercise. More order is needed in
11
From a press release announcing the establishment of the Institute.
12
Testimony of William S. Ogden, Vice-Chairman, The Chase Manhattan Bank, before the Subcommittee on
International Economic Policy of the Senate Foreign Relations Committee, February 1, 1983.

52
 the process to reduce the often distressingly long time lag between
identification of the problem and a negotiated settlement.13 Perhaps the new
Institute of International Finance will be of some help on this front as well.
The IMF and World Bank could usefully be more directly involved in debt
rescheduling operations. The advice of the Bank and Fund should be actively
sought in "Paris Club" official reschedulings and also in commercial bank re-
schedulings where large amounts are involved.14

Strengthening International Financial Institutions

We were encouraged by the quick action of the United States government last
summer and fall in providing emergency financing to Mexico and Brazil, which
signaled official American recognition of the gravity of the situation and brought
a much needed willingness to think more openly and urgently about wider
international action. We particularly applaud the role which the IMF under
Jacques de Larosiere has played in providing the overall international leadership
and systemic vision which the situation has required. • The International
Monetary Fund must be put in a strengthened position to extend emergency
assistance. It is vitally important that the IMF quota increase recently adopted by
the Interim Committee be ratified by national governments. The new resources
from quota increases are to become available at the end of 1983, but the IMF
may be called upon for a substantial increase in loans even before then. Access
to SDR 17 billion from the GAB (General Agreement to Borrow) is an important
backstop in this regard, with the GAB recently opened to the IMF from its
previous character as a swap arrangement among the Group of Ten countries.
The IMF would be acting fully within its charter in enlarging its loans this year
to countries where the reason for the poorer-than-forecast balance-of-payments
performance is continued re-

13
We noted above the shortening of the maturity profile of the bank debt of several major debtors. An important part
of containing the current problem is to lengthen those maturity profiles. A rescheduling does just that, of course, for
the debts covered. It would be helpful for rescheduling arrangements to cover larger blocks of debt. It has been the
practice to take only one year's obligations at a time, or perhaps eighteen months. An extension to two or three years
is needed under current circumstances. Aside from tradition, some bankers have argued against this to maintain a
"short leash" on the debtor countries involved. Surely arrangements could be devised, such as implicit links to IMF
standby programs with the countries involved (which are multi-year programs), that would give banks sufficient
assurance.
14
Greater use could be made of the BIS forum to assure IMF association with central banks, and through them to
commercial banks.

53
 cession in the world economy. This would require a change in the
existing policy of limiting IMF drawings to 450 percent of quota over
three years, but there is nothing sacred about that policy. It can be
altered by a decision of the Executive Board. The Fund might also
find it necessary to replenish its lendable resources before the
proposed quota increases become effective. That too can be done by a
decision of the Executive Directors. There is every reason to believe
that the Fund could go to the banks or the securities markets or both
and raise substantial sums to supplement its resources.
• The BIS has also played a vital role in providing emergency assis-
tance. We applaud the timely action of the BIS at several points in the
past year or so in providing short-term loans to key debtors, bridging
the gap while wider and longer-term restructuring arrangements could
be negotiated. The BIS has expressed a reluctance to continue in this
role. We hope that it will continue, and become more active.
• The international financial institutions—in particular, the World Bank
and regional banks—must be put in a postion to be able to provide a
higher percentage of long-term development financing in the coming
period. There has been a marked shift in percentage shares toward
private sources in the past decade, and a modest shift back over the
next five to ten years would be helpful. This does not mean that net
credit outstanding from commercial banks should stop expanding;
quite the contrary should be the case. And we mention a few ideas
below to help buttress this expansion.
While the largest current debtors are necessarily the primary focus of
current IMF efforts, and while ODA, as recommended below, is to be
increasingly concentrated on low-income countries, measures should be
taken to assure that the countries in between—who will rely to an
increasing extent on non-concessional financing—do not suffer.

Public Support
If public support for continuing expansion of the financial resources of
the international institutions is to be mobilized in our countries—as
indicated in the current struggle in the U.S. Congress over the IMF quota
increase—our publics must be led to understand that:
• With sound economic management, and assuming the international
community does not place absolutely unbearable adjustment burdens
on them, such countries as Mexico and Brazil will

54
 be creditworthy in the long run for existing and prospective levels of debt.
• In no sense of the word can the extension of financial support from
international financial institutions be considered a "bail out" of commercial
banks. Indeed, the IMF is requiring banks to extend additional credit in
several key cases.
• To deny the developing nations the credit which they require to service
existing debt and to maintain modest import levels will directly and
adversely affect economic growth and employment in the industrialized
world, and may weaken world stability in the longer term.
• The risk for taxpayers in trilateral countries is extremely limited in
comparison to the risks of other policies. There will be no penalty at all for
them assuming that the developing countries continue to pursue sufficiently
sound economic policies to carry their debts to international financial
institutions, which is certainly not an unwarranted assumption on the basis
of past performance.

D. FINANCING OVER THE MEDIUM TERM

Coping with immediate liquidity problems should not distract us from also
looking for longer-term policies to strengthen the international financial system.
We have not focused on the medium and longer term above, though our
recommendations have been cast with consideration to their compatibility with
medium- and longer-term needs. At a more practical level, assuming that the
major debtor countries manage to finance this year's deficits one way or another,
there is the question of financing over the next several years. We shall assume
that the industrial countries will be in a recovery phase from the present
recession. If this assumption turns out to be unjustified, a number of crises can be
imagined.
Growing external debt is normal for developing countries, as it was for, say,
the United States and Canada in an earlier phase of their economic history.
Developing countries absorb resources from abroad to supplement domestic
savings. Roughly speaking, they incur deficits in their current account, financed
by capital inflows.
But how are we to think about the likely scale of this absorption of financial
resources from the rest of the world? How are we to measure "external
absorption"? The current account deficit, since it includes interest payments and
dividends on foreign direct investment, is in itself an increasingly imprecise
indicator. The current-account deficit less net interest and dividends provides a
more useful measure of the

55
goods and services absorbed from the rest of the world, thereby per-
mitting domestic investment to exceed domestic saving. Table III-9
presents the calculation of this measure of "external absorption" for the
major debtors in 1978 and 1981.
From the table it may be seen that, for the top five countries taken
together, net interest and dividends paid came to more than two-thirds of
the current-account deficit in both years. External absorption by Brazil
was significantly lower in 1981 than in 1978, even though her current-
account deficit was significantly higher in 1981. If nominal interest rates
stay where they are in early 1983 or fall further, the

TABLE III-9
"External Absorption"
(billions of dollars)

CURRENT NET DIRECT

ACCOUNT INVESTMENT NET INTEREST EXTERNAL
DEFICITA PAYMENTS PAYMENTS ABSORPTION

1978 1981 1978 1981 1978 1981 1978 1981

Mexico 3.3 13.1 0.2 0.7 2.2 8.2 0.9 4.2
Brazil 7.0 11.8 0.6 0.4 2.7 9.2 3.8 2.2
Chile 1.1 4.9 0 0.1 0.5 1.3 0.6 3.4
Argentina -1.8 4.0 0.2 0.4 0.4 2.6 -2.4 1.0
South Korea 1.1 4.5 0.1 0.1 0.7 2.9 0.4 1.5
Subtotal 10.7 38.3 1.1 1.7 6.5 24.2 3.3 12.3
Malaysia -0.1 2.9 0.8 1.2 -0.1 -0.2 -0.8 1.9
Israel 2.5 3.3 * * 0.4 0.6
Egypt 1.2 2.1 n.a. n.a. 0.3 n.a.
Colombia -0.3 2.0 0.1 * 0.2 0.3 -0.6
Peru 0.3 1.7 0.1 0.2 0.5 0.9 -0.3 0.6
Philippines 1.3 2.5 0.1 0.1 0.3 0.9 0.9 1.5
India -0.2 n.a. n.a. n.a. -0.1 n.a.
Total: All
non-OPEC LDCsb 32.4 83.5 3.8 5.4 11.2 32.4 17.4 45.7

*less than 0.1 n.a. not available

a
Balance on goods, services, and private transfers. bExcluding European countries classified as
developing, China, and South Africa.
Source: IMF, Balance of Payments Yearbook, 1982.

56
picture will improve considerably this year. Either the current-account deficit of
the major debtors could, for this reason alone, decrease substantially or, if a
larger current-account deficit were financeable, the external absorption of
resources from the rest of the world could increase.
A close look at the last column of Table III-9 reveals considerable differences
among the major debtors. About three-fifths of the external absorption of the top
five in 1981 was accounted for by Chile and Mexico. By now Chile is in deep
recession and Mexico's growth has halted. Brazil, in recession in 1981, had
significantly reduced its external absorption. South Korea had a fairly high rate
of external absorption relative to the size of its economy in 1981. Whether this
continued in 1982 we do not know. In general, it seems likely that absorption fell
in 1982 and will remain relatively low in 1983.
But what of later years? Should these countries be expected to do without
significant external absorption, financing their investment primarily out of their
own savings?
In the case of Brazil, external absorption declined from 2.8 percent of GNP in
1976 to 1.9 percent in 1978 even though loans from banks were quite readily
available. It is only the recent fall of external absorption to 0.9 percent of GNP in
1981 that can be attributed to a concern about the availability of finance. Mexico,
on the other hand, increased its external absorption after 1978, both in absolute
terms and relative to its GNP. This reflected the investment that was stimulated
by the "oil bonanza." Given the change in expectations concerning the price oi
oil, there is good reason to doubt that Mexico will return to the high rates of
capital formation of the recent past.
This is not the place for a definitive judgment about the future absorptive
capacity of the middle-income developing nations. What the foregoing
discusssion suggests is that it should not be taken for granted that Brazil and
Mexico, which have accounted for such a substantial fraction of the current-
account deficit and the bank borrowing of developing countries, will continue to
be large demanders of external finance. Economic recovery in the industrial
world will bring an increase in the export receipts of these countries and permit
them to expand their own economies and their imports. This need not enlarge
their current-account deficits.
On the other hand, we cannot dismiss the possibility that Brazil and Mexico
will accelerate domestic capital formation once again, especially as and when the
industrial countries as a whole resume economic expansion. In that case, current-
account deficits could be larger, reflecting increased external absorption as well
as interest and

57
 dividend payments. The future attitude of the commercial banks toward lending
to these and other developing countries, however, is open to question. Will
Humpty Dumpty be put together again? Will the banks again become willing
lenders?
Studies should be made of methods to stimulate prudent levels of financial
flows from the private markets if these lag behind optimum levels, as at present.
There are two approaches, which need not be mutually exclusive. One is to
provide a form of insurance or guaranty to banks. The other is to try to attract
other private lenders by having the debtor countries issue securities, with or
without a guaranty. In either case, the insurance or guaranty would cover only a
portion of the risk.15 The World Bank is known to be exploring a scheme to
insure direct investment. It also hopes to expand co-financing in such a way as to
increase total financial flows. A scheme to insure a portion of bank loans
(presumably of at least medium-term maturity) or floating-rate notes issued by
developing countries would complement these initiatives.
The major argument against proposals of this kind is that they would
discourage uninsured lending that might have been forthcoming in any event,
unless the insurance premiums to be paid by the banks or investors were very
large, which would create a compensating disincentive. It has been suggested
that a way around this is to insure a portion of banks' portfolios of loans to
developing countries rather than individual loans. Such a scheme could also
apply to the portfolios of non-bank financial institutions but hardly to individual
investors in notes issued by developing countries. It should presumably apply
only to new lending.
Given the stake of the industrial countries in a vigorously growing developing
world, it should be possible to find acceptance for proposals of this nature,
especially since they would not require budgetary outlays by the industrial
countries.

E. FINANCING THE OTHER DEVELOPING COUNTRIES

Official Development Assistance is virtually the only source of external finance

for the low-income developing countries (see next chapter). This means that the
current-account deficits of these countries have no significant scope for variation
beyond the ODA provided. In contrast, the five major debtors frequently
mentioned above and a

15
See Non-concessional Flows to Developing Countries, Report of the Task Force on Non-concessional Flows to
the IBRD/IMF Development Committee, May 1982, pp. 33-36.

58
handful of other middle-income countries normally have the option of
approaching the commercial banks and, in some cases, the securities markets if
they need to finance a larger-than-expected current-account deficit. The great
majority of low-income developing countries have to cut the proverbial coat—
their current-account deficits—to fit the cloth, the amount of ODA made
available.
As we shall see in the next chapter, ODA grew considerably in the last decade.
In constant prices, it increased 47 percent from 1973 through 1981. But this was
a period when the terms of trade of the low-income non-oil developing countries
fell by more than 37 percent.
There is little more one can say about the financing of the "other" non-OPEC
countries in this chapter focussed on non-concessional flows, particularly bank
lending. For the medium-term future, they are dependent on official financing. It
is worth remembering, however, the lessons learned from the experience of the
current major debtors. In the mid-1960s, no one would have predicted that the
nine largest American banks would have loans outstanding to Brazil equal to 45
percent of their capital, not to mention the loans of banks everywhere to all the
more advanced developing countries. That lending has been, on the whole,
solidly based on impressive economic performance by the debtors. There must
be many among the "other" developing countries with a growth potential and
therefore a potential to attract private funds.
A prerequisite for this wider lending to materialize as well as for the ability of
the more advanced developing countries to service their debt while enjoying
economic progress, is that the industrial countries move out of the slough of
stagnation and recession and resume a healthy rate of economic growth.

59
 IV. CONCESSIONAL ASSISTANCE FOR LOW-INCOME
COUNTRIES
In the light of previous chapters, Official Development Assistance, that is
government to government transfers on concessional terms,1 acquires added
significance. Since this form of facilitating development comes directly from
central budgets, it is often regarded as an unwanted burden by the taxpayers. In
some quarters in some of our countries, it has also been seen as virtually
unnecessary. According to these critics, ODA can be discounted because
development can be accomplised more effectively through the private sector.
According to this view, non-concessional capital—such as commercial loans,
hard loans by development banks, and private investment—is available in
sufficient quantities to those developing countries willing to pursue economic
policies attractive to international business.
Such arguments neglect the crucial link between ODA and economic
development, especially in its early phases. As our previous chapter has shown,
private financial flows are highly concentrated on higher-income developing
countries. While it might be argued that many lower-income countries have
simply not adopted the kinds of economic policies which attract private sector
capital, and this argument is true for some countries, it must be pointed out that
during the postwar era concessional assistance has been typically required in the
early stages of development for even the most successful NICs. Those who point
to South Korea and Taiwan as miracles of development finance through the
private sector sometimes forget that these countries relied on very large amounts
of concessional foreign assistance during the 1950s and 1960s, and that South
Korea continues to receive such aid. Concessional aid was needed to help create
the basic foundation on which sustained growth was later achieved.
The importance of ODA to development is reflected in the fact that, except for
a handful of countries, ODA is far and away the main source of external
financing available for non-NIC, non-OPEC developing countries, in which live
over 2.5 billion people, including

1
ODA includes grants, of course, and loans with at least a 25 percent grant element. The OECD definition is limited
to flows "with promotion of economic development and welfare as main objectives," excluding military aid for
instance. Administrative costs of aid agencies are included.

60
those of China and India. According to the OECD's Development Cooperation,
1982 Review, for 31 least-developed countries, ODA in 1979 totalled 10 percent
of GNP, 50 percent of current imports and 80 percent of total investment. For
low-income countries as a whole (a category in which the OECD includes the
least developed plus some 35 other countries) ODA accounted for 73 percent of
their net external financial receipts in 1980, compared to only two percent for the
NICs. For low-income countries, bank lending provided only about three percent
of their net external receipts (compared to 74 percent for the NICs). In the case
of low-income African countries, in 1980, ODA financed about 55 percent of
total investments.
What makes ODA particularly critical at the present time is the heavy damage
that development efforts have sustained in many lower-income countries,
especially those of sub-Saharan Africa and South Asia, as a result of recent
adverse international economic conditions.
Export volume of non-oil commodities declined 14 percent in 1981 and an
estimated 13 percent in 1982. Further reducing the export earnings of developing
countries has been a sharp fall in prices. The most dramatic price drops between
1980 and 1982 were for sugar (-69%), cocoa (-32%), and copper (-32%);
commodities of special importance to low-income African countries. Africa
experienced an overall export price decline of 15 percent during this two-year
period. In Bangladesh, exports grew 15 percent in volume but declined by 26
percent in terms of import purchasing power as a result of both falling prices for
exports and rising prices for imports. Bangladesh has had to reduce imports 15
percent in real terms, meaning that it cannot afford imports critical to the
development process.
The decline in export earnings, without an offsetting increase in real ODA, has
meant that many low-income countries have had to reduce their investment
programs substantially, and that middle-income countries as well have been
affected. For example, in Togo, public investment has been cut to 65 percent of
its 1978 level, while even in the Ivory Coast, a prosperous middle-income
country, investment has been reduced 40 percent in real terms over the past three
years. This decline in investments, especially in West Africa, has made
significant programs of policy reform much more difficult.
Many needs critical to the development process—such as the training of
public administrators, the development of a transportation and communications
infrastructure, and water management projects in areas of low agricultural
productivity—have positive rates of return only in the long or very long term.
These are typically the kinds of

61
endeavors that are borne in the short run by the public sector in the
advanced countries, and similar assistance is required in developing
countries. Moreover, in the poorest of these, it is likely that domestic
savings must be augmented by external financial assistance for such
investments but that foreign exchange earnings will be inadequate to
service debt borrowed on market terms. Therefore, concessional as-
sistance is essential if these countries are to achieve self-sustained
growth.

ODA: The Record and Prospects

What has been the record of ODA giving? During the 1970s, the OECD
Development Assistance Committee (DAC) countries steadily expanded
their ODA at a rate of approximately four percent real annual growth.
Since the combined GNP of these countries did not grow quite this
rapidly, ODA increased as a percentage of GNP— from 0.34 in 1970 to
0.38 in 1980 (see Table IV-1). There was a rapid expansion during the
earlier part of the decade in OPEC concessional assistance. In 1970,
OPEC aid amounted to $1 billion (in 1981 dollars), but it had grown to
almost $9 billion in 1980, a level of giving in relation to GNP
approximately six times that of the industrialized countries. The only
decline in ODA during the 1970s by a group of countries came in
assistance provided by the communist countries, where assistance fell 15
percent from $2.5 billion (1981 dollars) in 1970 to $2.1 billion ten years
later. But since communist country aid is small and highly concentrated on
a few recipients, the overall flow of concessional aid, buoyed by DAC
and OPEC increases, remained strong despite the economic turbulence
during the decade.
This pattern changed in 1981. The total real ODA of all donors
declined, and in the case of the DAC donors, net disbursements dropped
seven percent in nominal U.S. dollar terms.2 As we have indicated, this
contraction came at the same time that export earnings were dropping and
private financial flows decelerating. On the other hand, the demands for
concessional assistance were substantially increasing, particularly for
low-income countries, like those of sub-Sa-haran Africa, India,
Bangladesh, and even China. These trends are deeply disturbing. To
surmount the current crisis, the trilateral countries face three urgent
challenges: to increase overall ODA levels sub-

2
As this report went to press, the preliminary 1982 DAC ODA figures appeared. The 1982 figures were higher than
those for 1981 in part because of a deferral of a portion of 1981 assistance into 1982. Therefore, to interpret the
data properly, these two years should be averaged. If that is done, the 1981-82 average amounts to 0.37 percent of
GNP, compared to 0.38 in 1980.

62
stantially, to concentrate available ODA more on low-income countries,
and finally to use ODA more effectively.

Increasing ODA
The growth of concessional assistance in the future seems problematic
given high unemployment and/or budget deficits in many OECD
countries on top of the general lack of enthusiasm in these countries for
large foreign aid programs. If Japan and the Western European

Table IV-1
ODA from DAC Members
as a percent of GNP
1970-82

(net disbursements)

1970a 1975a 1979b 1980b 1981b 1982b,c

Netherlands 0.61 0.75 0.98 1.03 1.08 1.08

Sweden 0.38 0.82 0.97 0.79 0.83 1.02
Norway 0.32 0.66 0.93 0.85 0.82 1.01
Denmark 0.38 0.58 0.76 0.74 0.73 0.77
Franced 0.66 0.62 0.60 0.64 0.73 0.74
Belgium 0.46 0.59 0.57 0.50 0.59 0.59
Australia 0.62 0.65 0.53 0.48 0.41 0.57
Austria 0.07 0.21 0.19 0.23 0.48 0.54
Germany 0.32 0.40 0.45 0.44 0.47 0.48
Canada 0.41 0.54 0.48 0.43 0.43 0.42
United Kingdom 0.39 0.39 0.52 0.35 0.44 0.38
Finland 0.06 0.18 0.22 0.22 0.28 0.30
Japan 0.23 0.23 0.27 0.32 0.28 0.29
New Zealand 0.23 0.52 0.33 0.33 0.29 0.28
United Statese 0.32 0.27 0.20 0.27 0.20 0.27
Switzerland 0.15 0.19 0.21 0.24 0.24 0.25
Italy 0.16 0.11 0.08 0.17 0.19 0.24f
Total DAC 0.34 0.36 0.35 0.38 0.35 0.39
a
Excluding administrative costs identified as such. bIncluding administrative costs. cProvisional.
d
Overseas departments and territories included. The provisional 1982 figure for France excluding
these departments and territories is 0.48%. eAdministrative costs are included in the U.S. data for all
years showing. fEstimate.
Source: Development Cooperation, 1982 Review (Paris: OECD, 1982), Table 1.6, p. 182; 1982
figures are from an OECD press release, June 1983.

63
countries which have pledged growth in their budgets can fulfill these
commitments, their ODA growth rate should remain at about the four
percent annual real growth level. On the other hand, the U.S. and U.K.
efforts are expected to decline further as a percentage of GNP, and the
political climate, as outlined in the following chapters, does not give
strong grounds for optimism in either of these two large donor countries.
To increase ODA levels, we believe that those DAC nations which are
below the 1981 overall DAC figure of 0.35 percent of GNP should, even
within the limits of their austere budgets, move as rapidly as possible to
increase their shares to at least this level. This level is actually quite
modest—only half of the target of 0.7 percent of GNP accepted by most
DAC governments (except Switzerland and the United States).
The United States is the major offender in this regard. Although
Americans have continued to increase their own income levels during the
past two decades, their foreign aid spending has not increased
proportionately. As a consequence, the U.S. ODA share of GNP steadily
dropped and abruptly declined to only 0.20 percent of GNP in 1981.3 In
real terms, U.S. ODA also has declined. In 1970, net disbursements were
$6.6 billion in 1981 dollars and exchange rates, but by 1980, this figure
was only $5.8 billion. The real value of ODA disbursements of all other
trilateral governments increased substantially during this decade.
In 1981, the United States had 36 percent of the GNP of all DAC
countries, but it provided only 23 percent of DAC ODA, a proportion far
below its fair share. Had the United States in 1981 been at the 0.35
percent of GNP level, world ODA would have been $4.4 billion greater
in that year, more than total Japanese and Canadian aid disbursements in
that year.
The only other major trilateral countries below the 0.35% of GNP level
in 1981 were Japan at 0.28 percent and Italy at 0.19 percent. In contrast to
the United States, Japan's aid giving has been increasing rapidly, though it
is still below Japan's fair share. Italy's ODA has been rising rapidly as
well.
Another important step to increase ODA (and also redistribute it more
toward low-income countries) is to restore IDA to financial health. We
urge the trilateral governments, again within the limits of their budgets, to
move forward to restructure the Sixth Replenish-

3
U.S. ODA appears to have rebounded to 0.27 percent of GNP in 1982, the same as the 1980 figure.

64
ment of IDA (IDA VI) to put it on a four-year rather than five-year basis, and to
immediately begin negotiations on an IDA VII that would provide at least a
modest increase in real terms effective July 1, 1984. IDA is the largest single
source of ODA funding available for low-income countries, including
Bangladesh and the low-income sub-Saharan African countries. Of IDA's net
disbursements in 1980, 80 percent went to low-income countries (per capita
incomes of $410 or less), in contrast to the 34 percent of DAC bilateral aid that
went to these countries (and the 20 percent of OPEC bilateral aid).4 While sub-
Saharan Africa receives about five percent of bilateral development assistance,
low-income Africa received about 30 percent of IDA commitments in 1982.
Thus the failure to continue IDA funding at past levels has serious implications
for these countries.
IDA is now "bankrupt" because of the failure of the United States to honor its
commitments to the most recent IDA replenishment (VI). This replenishment
was agreed upon in 1980 by the DAC nations, Kuwait and Saudi Arabia, and
several developing countries, when they promised to finance an IDA VI lending
program of $12 billion for fiscal years 1981-83. The U.S. commitment was for
27 percent ($3.2 billion), substantially below its proportinate share of donors'
GNP. Because the Congress failed to appropriate the amounts needed to honor
this commitment, it is clear the financing of the $12 billion will require five
rather than three years. Moreover, it is almost certain the IDA VII replenishment,
when it becomes effective July 1,1985, will be in real terms significantly below
those levels incorporated in the 1980 agreement for fiscal 1981. The implications
of this for the rate of economic and social advance, and for political stability, in
the poorest countries deserve the attention of every foreign minister and every
finance minister of the OECD nations.

The Distribution of ODA

Only a little over one-third of bilateral DAC ODA in 1980 was directed toward
low-income countries. Because ODA is so limited compared to need, we believe
that every effort must be made to increase this share to above one-half of
expanding ODA totals by the middle of this decade. Table IV-2 indicates the
1980 performance of individual DAC members. Among the seven largest
trilateral countries, the percentage of bilateral ODA going to low-income
countries in that year was particularly low in the United States (18%).

4
IDA in Retrospect: The First Two Decades of the International Development Association (Oxford University
Press: 1982), p. 16.

65
 TABLE IV-2
Bilateral ODA from DAC Members to Low-Income Developing Countries, 1980

as percent of as percent of total

GNP bilateral ODA
Netherlands 0.35 45
Sweden 0.33 56
Norway 0.28 56
Denmark 0.27 68
Belgium 0.26 67
Austria 0.11 55
Canada 0.11 41
Japan 0.11 58
United Kingdom 0.11 44
Francea 0.09 35
West Germany 0.09 32
Finland 0.08 62
Switzerland 0.08 47
Australia 0.07 20
United States 0.03 18
New Zealand 0.02 8
Italy 0.01 50
Total 0.09 36

Note: Low-income countries, including China and India, had a total population of 2.2 billion people
with per capita incomes of $410 or less in 1980 (a combined per capita income of $260).
Other developing countries had a combined population of 1.1 billion people and a combined
per capita income of about $1400 in 1980.
a
Excludes overseas departments and territories.
Source: World Bank, World Development Report 1982 (Oxford University Press, 1982), pp.
140-141. Right-hand column calculated, making use of Development Cooperation,
1982 Review, Table 1.8., p. 184.

The present skewing in favor of middle-income countries reflects political and

other goals, which may be worthy in themselves. Consider some examples from
the 1979-80 period:
• Israel, a country of four million people with a per capita GNP of

66
 $4,500 in 1980 received half again as much aid from DAC donor bilateral
programs as India, a country of almost 700 million people with a per capita
GNP of $240.
• The largest single DAC aid recipient was Egypt, whose 1980 per capita GNP
at $580 was considerably above that of Bangladesh ($120), Vietnam ($190),
India ($240), Pakistan ($300), and Indonesia ($420), all of which are more
populous than Egypt.
• A third of U.S. assistance went to these two Middle Eastern countries: Egypt
and Israel.
• Nine of the 10 top recipients of Japanese ODA were Asian countries, but the
rank ordering of recipients had little to do with population and income
levels.
• The 10 top recipients of British aid and of French aid were former colonies.
• The three top recipients of Belgian aid and three of the five top recipents of
Dutch aid were former colonies.
• Papua New Guinea (population three million, $780 per capita GNP) received
43 percent of Australian ODA.
• Germany provided three times as much assistance to Turkey (45 million
people, $1,460 per capita GNP) as to any other country.
• Forty-two percent of specified, bilateral OPEC aid went to two middle-
income countries: Syria and Jordan.
Some of the anomalies of distribution relative to population and income levels
can be explained by the policies of recipient governments. China, for example,
was not a recipient of DAC assistance because it chose not to be. The most
important explanation, however, is simply that donor governments, particularly
in their bilateral programs, have many objectives and interests aside from those
purely relating to development. In the U.S. case, for example, promoting a peace
process in the Middle East is a very high priority. In the case of some European
governments, the heavy emphasis on former colonies or associated states
suggests continuing political, commercial, humanitarian, and in some cases,
ethnic and linguistic ties with these developing countries. The Japanese emphasis
on Korea and Southeast Asian countries reflects commercial and political
interests, particularly in the early stages of postwar Japanese aid programs, as
well as a sense of obligation towards those countries which suffered from
Japanese occupation during the war.
These interests do result in a higher level of aid than would otherwise be
available because they are influential with the bureaucracies and legislatures of
the donor countries. However, from a global development perspective, the
resulting distribution patterns leave

67
something to be desired; and aid that is given to particular recipients primarily to
achieve political objectives, commercial objectives, or even humanitarian
objectives with respect to those recipients may not be used efficiently from a
developmental perspective.
We believe that developmental objectives need to be given a higher priority in
the aid policy decision-making considerations of the trilateral countries. Even
when bilateral programs are aggregated, the overall distribution is still severely
skewed, although not as much as when individual programs are considered
separately. Still, as is obvious from Table IV-3, the disparities are less wide in
the case of assistance provided by multilateral organizations. Although multi-
lateral assistance is also not directly proportionate to population and economic
need, its distribution gives more weight to these factors and less to political ones.
This pattern is also evident in the sectoral distribution of multilateral assistance;
almost twice as large a share of multilateral aid is directed toward the less
politically rewarding agricultural sector than is the case for bilateral programs.
For a variety of reasons, not least of which was the desire of some major
donors to "de-politicize" their assistance, a large part of the growth of ODA
during the 1970s came in the form of contributions to international financial
institutions. Since 1978, however, there has been a renewed emphasis on
bilateral aid programs, a shift that has been most pronounced in the case of the
United States. From 1978 to 1981, DAC contributions to multilateral institutions
declined on the average of three percent a year in nominal terms and perhaps as
much as eight percent in real terms. From 1979-80 to 1980-81, 13 of the 17 DAC
countries registered declines in the proportion of ODA provided through
multilateral institutions. While there are some special distorting factors
(including the appreciation of the dollar), DAC's 1982 Review reports that "the
current over-all trend appears at best as one of stagnation." Moreover, as
governments seek more political support for aid-giving in hard times, there will
be continuing pressures to re-emphasize bilateral programs, which can be more
easily associated with shorter-term, national economic, commercial or political
objectives.
Multilateral development banks account for only six or seven percent of the
total resources (concessional and non-concessional) available to developing
countries, but they are the largest single source of funding for the lowest income
countries. Consequently, these countries would suffer the most from sustained
movements away from multilateral institutions and toward bilateral programs.
This is another important reason we have urged above immediate action to
increase IDA funding. 68
 TABLE IV-3
Geographical Distribution of ODA Average Annual, 1979-80

Total Bilateral DAC

Recipient % of total ODA
Egypt 7.3
Israel 6.8
Bangladesh 5.5
Indonesia 4.9
India 4.7
Turkey 4.0
Tanzania 3.3
Reunion 2.9
Martinique 2.9
Pakistan 2.6
Total Multilateral
Recipient % of total ODA
India 17.5
Bangladesh 6.0
Pakistan 4.8
Egypt 3.5
Kampuchea 2.7
Sudan 2.4
Tanzania 2.1
Zaire 1.9
Ethiopia 1.9
Senegal 1.9
Thailand 1.8

OVERALL TOTAL % OF TOTAL

(DAC/MULTI LATERAL/OPEC) LDC
POPULATION
Recipient % of total ODA
India 7.0 22.2
Egypt 5.5 1.2
Syria 5.5 0.3
Bangladesh 4.7 2.7
Jordan 4.1 0.1
Israel 4.0 0.1
Pakistan 3.3 2.5
Indonesia 3.2 4.5
Morocco 2.5 0.6
Tanzania 2.4 0.6
Sudan 2.3 0.6
Source: Development Cooperation, 1982 Review (Paris: OECD, 1982), pp. 188-9.
In the redistribution of ODA and the provision of increased ODA, the
low-income region requiring the most immediate attention is sub-Saharan
Africa. The bleak prospects for this region and its tremendous needs have
been outlined in Chapter I. There seems every chance that stagnant
economic conditions will persist through this decade unless concessional
aid flows significantly increase. Because of the economic, political, and
humanitarian dimensions of stagnation in sub-Saharan Africa, we
recommend that the countries of this region receive priority attention
from all major trilateral donors in the use of existing and future ODA.
A shift in the distribution of ODA toward lower-income countries and
poverty-oriented projects does not necessarily mean that ODA will be
used any less effectively from a financial perspective. Recent World
Bank and IDA projects have experienced rates of return of about 17 to 18
percent, considerably higher than the perceived opportunity cost of
capital, which is generally taken to be about 10 percent. While these rates
of return vary between regions and between sectors for a variety of
reasons, poverty-oriented projects appear to have rates of return as high
as those for standard projects.

India and China: The Need for Financial Plans

Three-fourths of the population of low-income countries live in China
and India. India is the fifth largest recipient of bilateral DAC country
ODA and, when multilateral concessional aid is added, it becomes the
largest single recipient. Yet the per capita ODA received by India in 1980
was just $3.21, far lower than the $6.42 figure for Indonesia, $13.53 for
Bangladesh, and $34.05 for Egypt. China, until recently, has not sought
significant amounts of ODA, and only received $55 million, equivalent to
about $0.06 for each Chinese.
It is neither politically nor financially realistic to try to provide China
and India with a share of ODA equal, on a per capita basis, to that of
other smaller countries at similar income levels. Moreover, there are
compensating advantages to being large—larger internal markets can
support a broader diversity of industries and achieve economies-of-scale
more easily than those of smaller countries.
Today, however, both India and China are seeking larger amounts of
concessional aid and are certainly justified in so doing. To some degree,
their financial needs can be helped through the redistribution of ODA
toward the poorer countries and by their increased use, though to a
limited extent, of non-concessional financing. Clearly, however, these
needs cannot be fully accommodated except through an expansion, not
just redistribution, of ODA.

70
 Despite the tremendous strain that increased concessional aid for India and
China would place on the limited amounts of ODA available, there is no
apparent discussion in development institutions or donor governments of
financial plans for these countries. We believe that the interested parties should
urgently begin the process of developing realistic financial plans for India and
China.

Policy Dialogue
There is still no definitive theory of development although undoubtedly
development theory has become much more sophisticated as developmental
experiences accumulate. Early theories centered on "balanced growth" versus
"big push" models and progressively featured capital limitations, low
productivity, and foreign exchange gaps. More recently, as Dr. Raymond
Mikesell has pointed out in a study prepared for the U.S. Departments of State
and Treasury and the Agency for International Development, there is more
appreciation "that having the right domestic policies constitutes an indispensable
contributory factor to successful development."5 Mikesell adds that "right
domestic policies" does not mean governments should be passive or confined to
essentially laissez faire policies:
The development process requires institutional change for expanding
opportunities and eliminating a variety of economic and social barriers to the
participation of all economic groups and regions in the markets for
commodities, labor, land and capital. It requires an enlightened and dedicated
public sector to plan and carry out educational, health and sanitation programs
needed to broaden the opportunities of large sections of the country and to
increase their productivity. It requires the planning and carrying out of
infrastructure projects such as transportation, power, irrigation, and other
projects that constitute conditions for the operation of private indigenous
forces, but which for one reason or another cannot be provided by the private
sector. Finally, governments must adopt monetary and fiscal policies that
promote economic stability and outward-oriented trade and foreign exchange
policies to provide the proper incentives for exports.6

5
Raymond Mikesell, The Economics of Foreign Aid and Self-Sustaining Development, offset, February 1982, p. 23.
6
Ibid., p. 32. The authors would emphasize that development also requires other, more political activities, such as
land reform, removing serious income inequities, and the bridging of tribal and ethnic divisions.

71
 How can policy dialogues be more effectively carried out with de-
veloping country governments? Almost all informed judgments point to
the central role which international development banks should play in this
task. For example, a 1982 U.S. Treasury Department study of U.S.
participation in development banks noted that when it comes to providing
economic policy advice to developing countries, "the banks can be more
effective at this than individual donors because of the substantial
resources at their command and because of their 'non-political'
international character."7 The same report also notes that the World Bank,
because of its size, experience, and analytical capabilities, is the
preeminent development bank in providing policy advice.
Because shifts in economic policy inevitably favor or injure specific
interest groups and may well be closely related to shifts of political
influence within developing countries, "policy dialoguing" must be
managed with great care. Too strong or obvious pressure may be
counterproductive; the ultimate decisions on domestic economic policy
matters must be made by the recipient governments themselves. Often
these changes may not be very dramatic, and often they can occur
incrementally and over the longer-term, not explicitly linked to advice
from the outside. Yet those familiar with policy dialogues between
donors (especially the World Bank) and recipients know that these
dialogues can have a strong influence in shaping recipient government
thinking or in reinforcing the position of their economic planners and
technocrats.
Since concessional assistance is a limited resource and almost surely
will become even more limited in comparison to needs for it, appropriate
economic policies that help make the best use of that aid become more
and more important. Gearing aid levels to macro-economic policies and
performance is very difficult, however. Individual country donors, for
example, rarely want to reduce aid to friendly recipients, however poorly
their economic policies may be designed or implemented, because of the
political ramifications of such reductions.
We believe that more effective policy dialogue will require:
• Donors to be firmer in applying macro-economic policy criteria in
their lending and grant-making decisions. Aid levels should reflect the
quality of recipient economic policy. Assistance should be channeled
to those low-income countries and those sectors and

7
United States Participation in the Multilateral Development Banks in the 1980s (Washington: Department of the
Treasury, 1982), p. 49.

72
 projects where it is being put to the best use.
• The maintenance of staffs competent in economic and development theory
and policy in the donor governments and in the international financial
institutions, particularly the World Bank and International Monetary Fund.
• Correction of the tendency for donors to pay disproportionate attention to
micro-level policy aspects which affect individual projects and where donors
can often have more direct influence. More attention on the part of donor
institutions and governments needs to be given to macro-economic and
sectoral policy performance.
• Adequate volumes of ODA to assist the effective implementation of often
politically controversial policy changes.
• Better coordination among aid donors.
• Increased emphasis on the recipient side on the development of the basic
human skills and public administration infrastructures that are needed for
effective policy discussion and policy administration. The last two points on
coordination and human resources warrant further emphasis.

Coordination
As in the case of maintaining an adequate policy dialogue, improved
coordination among donors is closely linked in theory to more efficient use of
concessional assistance. In practice, however, it is both difficult to achieve and
very time and energy consuming.
John P. Lewis, former Chairman of the OECD's Development Assistance
Committee, has pointed out that there are approximately 40 official donors and
120 concessional assistance recipients, many of the latter of whom have limited
administrative capabilities for interactions with such a wide variety of actual or
potential donors. While some recipient governments welcome the opportunity to
play off some donors against others to improve the terms of assistance, for many
the administration of aid programs has become a serious drain on resources.
The problem of coordination has become particularly acute in sub-Saharan
Africa where there are 48 recipients, the majority of which have populations less
than that of London. In these countries, different donors and projects may be
competing for the same limited administrative resources, and the time spent
reviewing projects on a bilateral basis with different donors comes at the expense
of consideration given to more general issues of economic policy.

73
 In the long-term, the most important solution to this problem lies in creating
adequate administrative infrastructures, a subject we come to next. This will
clearly take years, however, and in the interim, efforts are needed to relieve both
donors and recipients of the burdens of duplicative administrative tasks.
Lewis recommends sub-regional coordination of recipients and donors, and he
notes the qualified success of the multi-donor, multi-recipient arrangement
known as CILSS-Club du Sahel. Eight small West African countries are
members of CILSS (Permanent Interstate Committee for Drought Control in the
Sahel), which has established a secretariat in Ouagadougou, and more than a
dozen DAC and OPEC donors are members of the associated Club du Sahel.
Lewis believes that this arrangement's most impressive achievements have been
in increasing "the vigor and coherence of the policy dialogue" between
recipients and donors in such areas as agricultural prices and the needs and
problems of recurrent-cost financing of development projects. The CILSS group
has shown remarkable capacity for self-criticism and policy change, although the
limited national resources of its members inhibit effective policy implementation
and it has so far failed to find a general formula for allocation of commonly
received aid resources.
There are also some indications that cooperative arrangements have improved
in a few other areas. It must be pointed out, however, that the creation of new
institutions does not necessarily alleviate coordination problems. Unless there
are effective links between the coordinating institution and recipient
governments, the institution may become yet another actor which needs to be
coordinated.
For twenty-four countries there are aid consortia or consultative groups, most
of which are chaired by the World Bank, which bring together donors with
representatives of the recipient governments. These meetings provide
opportunities for donors to exchange information on projects and to engage in
policy dialogue with the recipient. There are a number of limitations on these
meetings, however. The policy discussions may be neither candid nor extended,
and the consortia rarely deal with operational issues. Moreover there is very little
explicit follow-up between consortium meetings.
Although aid totals are aggregated, there is little effort through the consortia to
develop more explicit working relations between various bilateral programs.
Earlier we noted that for historical or political reasons individual donor
governments tend to emphasize particular recipients although the overall
distortion in aid-giving is reduced when aid programs are aggregated. This is
more a consequence of chance

74
than a planned division of labor among donors. Greater inter-donor coordination
could alleviate some of the inequities in aid distribution while still permitting
individual donors to retain the traditional country and sectoral emphases of their
programs.
The aid consortia could be enhanced in at least three different ways: First,
they could provide opportunities for close planning and the sharing of aid
responsibilities among donors. Secondly, there should be a joint review of
policies of donors and recipients alike that bear on the development process in
the recipient country. Third, they should have some dimension for consideration
of operational issues.

Developing a Human Infrastructure

Once again, in identifying the development of local technical and administrative
skills as a critical aid issue and in suggesting approaches to it, John P. Lewis has
been a major influence on our thinking.
No country can be regarded as having achieved self-sustaining growth until it
has the necessary administrative structures and personnel, scientific and technical
skills, and business and other private sector managerial talent to keep the growth
process going. There is not only a shortage of policy makers, but of accountants,
of engineers, of operation and maintenance workers, and of managers for both
the public and private sectors. In many NICs and other high-growth economies,
these skills have been developing very rapidly, in some cases on the basis of
traditional cultures that gave heavy emphasis to literacy, commerce, or
administration. In the case of China and India, economies of scale once again
have helped to create such basic human resources needed for development,
although these are often stretched thin at the local level. In other cases, as in
Papua New Guinea and some oil countries in the Middle East, natural resources
have made countries very or moderately wealthy in per capita terms, but because
of the lack of indigenous personnel, they cannot yet be considered developed
countries.
The human skills base is most desperately thin in some countries of sub-
Saharan Africa. While external assistance and technicians can help, a very high
priority must be placed on the development of indigenous skills.
Unfortunately the kind of technical assistance provided by most donors does
not easily match the needs of recipient governments. In his 1981 DAC Review
essay, Lewis points out that in-coming information must be selected and "must
be married with local preferences and cultural factors and supplemented by
indigenous research. The

75
transfer process, in short, should be recipient-centered and in good part,
recipient-led." He also shows that technical assistance is very
fragmented, with individual experts sent out who reflect donor country
development skills and program priorities often not the same as recipient
priorities. Consequently, the general human infrastructural requirements,
including analytical policy skills of a general nature, are often short-
changed. Yet these are precisely the sort of individuals with whom an
effective policy dialogue should take place.
There are at least two approaches to this problem. One is a renewed
emphasis on technical and educational assistance, including stronger
support for programs, such as the U.S. Fulbright program, which involve
the exchange of scholars and students.
A second would be to pursue Prof. Lewis' suggestion for a more formal
pooling of technical skills, perhaps on a regional or subregio-nal basis.
Donor countries should make commitments of skills or financial support
for such a pool, but the recipient countries would play a leading role in
the programming of such a pool so that it would be most suited to their
needs. While technical assistance can help, human resource development
is a long-term intergenerational process which can only be ultimately
resolved through the continued expansion of education.

76
 Part 2

Trilateral Attitudes and Responses

In the face of the growing crisis of development, what has been the response of
the trilateral countries? In the next three chapters, we will briefly review policies
and prevailing attitudes in some of the major countries, beginning with Japan,
moving next to the European region, and ending with North America. Before so
doing, two general observations are in order.
First, there has been a tendency in all three regions to regard policies affecting
trade, private financial flows, and ODA as discrete rather than as interrelated
subjects. Indeed, some advocates of more generous ODA programs
simultaneously support trade restrictions on products of developing countries.
Some of those who urge freer trade turn restrictive when it comes to private
financial flows.
Tendencies to separate these policy elements are not only reflected in public
and governmental attitudes, but are often reinforced by governmental policy-
making structures. Foreign aid policies often have a high foreign ministry profile
and are closely related to political policies toward developing countries. Private
capital flows are predominantly the domain of finance ministries where foreign
policy considerations are much less prominent, and trade is usually handled by
another agency or other agencies. Attempts to integrate these elements through
inter-ministerial coordinating bodies or higher-level political or parliamentary
leadership are very difficult and most likely to happen, if ever, in the context of a
specific country or regional problem when it has already reached the crisis point.
As we have previously pointed out, the effectiveness of development
assistance strategies depends on better integration of these policy elements. ODA
cannot lead to self-sustained growth in itself, if there is no room for export
expansion once export industries have been established. The "magic of the
marketplace" cannot work without ODA as a catalyst in the case of those least-
developed countries with little access to commercial loans or private investment.
And, as countries "graduate" from ODA, private commercial loans can be a
powerful supplement to domestic investment just as they were in early phases of
U.S. development.
A second general observation is that many trilateral governments face a major
challenge in educating their publics about the importance of the developmental
process and the opportunities for mutual benefit from economic interaction
between the trilateral and developing

79
worlds. While attitudes vary from country to country, there are many
people in our countries who look upon the developing world as primarily
a source of threats. Popular misperceptions include the belief that trade
with developing countries on balance causes job losses in the advanced
countries (whereas detailed studies show net gains); that foreign
concessional assistance bankrupts trilateral budgets (whereas it is a very
small part of these budgets); and that governments are proposing an
expensive "bailing out" of commercial banks and developing countries at
the expense of developed country taxpayers (whereas we have shown that
there is extremely little risk to taxpayers). These misperceptions will need
to be corrected, where they occur, if governments are to take the
leadership in not only managing the current crisis, but in developing the
longer-term arrangements and institutions needed for an interdependent
world economy.

80
 V. JAPAN
With 43 percent of Japan's exports destined for the developing countries and 60
percent of its imports coming from these countries, the Japanese economy is
more closely linked with the Third World than any of the other industrialized
economies. Since this strong trade interdependence has existed throughout the
postwar period, Japan's initial interests in the developing countries were
primarily as a source of raw materials and secondarily as markets for Japanese
goods (and these continue as very important interests). Because of Japan's own
rehabilitation and development needs until recently, not much attention was paid
to "strategies" of development assistance as such. As a developing country itself
during the first part of the postwar period, Japan could empathize with the
developing world, but there was relatively little sense that Japan had either the
responsibility or capacity to take a leading role in the developmental process
outside its own boundaries.
This situation began to change when Japan joined the GATT in 1961 and the
OECD in 1964 and also became an IMF Article 8 country. These steps signified
Japan's entrance into a community of developed countries ard required
adjustments in Japan's trade and financial policies as well as improved ODA
efforts. The internal debate within Japan increased awareness of new
international expectations of Japan, and these expectations from both developed
and developing countries continued to grow as Japan's economy grew.
In its own immediate Asian surroundings, such factors as the desire for
friendly political relations with neighboring countries, a sense of cultural links
with these countries, and war guilt feelings have underscored independent
Japanese initiatives beginning in the 1960s, but much of Japan's development
activities in more distant regions reflect more commercial interests (as in Latin
America) or are regarded principally as a means of fulfilling responsibilities to
the United States and other OECD countries in maintaining the international
system.
In Japan's case, in welcome contrast to some other trilateral countries, there is
little or no question of ODA being cut back, and it has continued to liberalize
access to its markets for goods. The chief questions are how quickly additional
positive steps will be taken.

81
Trade Policy
Although, as shown in Table VI-1 comparing Japan with the United
States and various European countries, developing countries have a
larger share (about 30%) of the Japanese market for imported man-
ufactures, this share represents a smaller proportion of Japan's GNP.
Japan's overall trade relationship with the developing world still does not
show an international (horizontal) division of industries comparable with
those of other industrialized countries, but maintains a strong pattern of
importing fuels and raw materials and exporting manufactures. Japan's
failure to develop a horizontal division of labor reflects several factors—
its relatively narrow base of comparative advantage in manufactures, its
isolation from other major manufacturing centers, and a policy which
encouraged a self-sufficient industrial structure.
In recent years, however, Japanese imports of manufactured goods,
such as textiles, petrochemicals, and aluminum, have begun to rise
rapidly, and there is every reason to believe that manufactures will

TABLE V-l
Japan's ODA: Trend of Budget & Disbursements

1976 1977 1978 1979 1980 1981

Budget
billion yen 450.8 548.5 635.3 721.7 840.2 888.8
percent increase 5.9 21.7 15.8 13.6 16.4 5.8
% of GNP 0.266 0.284 0.302 0.311 0.339 0.336
Disbursements
billion yen 327.7 382.5 466.3 578.1 756.0 699.0
percent increase -3.9 16.7 21.9 24.0 30.0 -6.7
billion dollars 1.105 1.424 2.215 2.638 3.300 3.169
percent increase -3.7 28.9 55.9 19.1 25.0 -4.1
% of GNP 0.20 0.21 0.23 0.26 0.32 0.28
Currency rate (¥ = 296.55 268.51 210.47 219.17 226.74 220.53
$1)

Note: Budget figures are for fiscal year (April to March); disbursement figures are for
calendar year.
become more important in its trade with developing countries. Some reasons
include the expansion of Japanese investment in developing regions to take
advantage of low wages and avoid environmental constraints, the need to
respond to requests from developing countries for increased processing in their
countries, and the changing patterns of competitive advantage which have
moved Japan increasingly toward higher value-added stages of manufacturing.
Within the government bureaucracy, moreover, there is a basic acceptance both
of the principles of an international division of labor and of the need for
domestic industrial restructuring to facilitate this process, although pressure from
declining industries and sectors, especially small manufacturers and farmers,
inhibits easy or rapid implementation of these policies.
More under pressure from other advanced countries rather than developing
ones, Japan has been opening its market at a pace that seems very rapid to
Japanese. As a result of recent GATT rounds as well as unilateral tariff cuts, its
tariff levels are comparable to other industrialized countries and many quotas
have been eliminated. Non-tariff barriers are a more complicated problem, but
past and promised steps, such as the creation of a trade ombudsman's office,
simplified inspection and certification procedures, increased transparency, and
import promotion measures help developing countries as well as the advanced
ones. In addition, Japan maintains a GSP program providing preferential
treatment to developing countries for over 90 percent of agricultural imports and
54 percent of mining and manufactured goods imports. This program was
extended in 1981 for another ten year period.
Despite these measures, there are many complaints from Asian developing
countries that the Japanese market is not as open as the U.S. market. Japanese
often respond, however, that the difficulties are not a matter of governmental
policy but reflect cutthroat competition in Japan, unique Japanese tastes, and a
failure by developing country exporters to fully exploit the new open-market
measures Japan has taken.

Non-Governmental Financing
With Japan's progressive steps toward capital liberalization, private commercial
bank lending and private investment activities have increased in the developing
countries. When the LDC debt crisis became prominent, Japanese governmental
authorities generally took the position that the problem was a liquidity one which
could be resolved through the cooperation of the debtor countries, commercial

83
banks, international institutions, and creditor governments. The 1981 White
Paper on International Trade called for industrial nations to help debtors "1) by
facilitating the recycling of funds through the private market, 2) by extending
economic cooperation to them in ways designed to encourage their self-
motivated measures, and 3) by strengthening the roles of international agencies
to complement the private markets."1
The IMF is seen as having a particularly important role in providing
leadership for coordinating the policies of the BIS and creditor governments,
providing policy advice to debtor countries, and promoting continuing, but
prudent commercial lending.
To encourage appropriate Japanese commercial lending, consideration is
being given to relaxing the official guidelines under which a bank cannot lend
for the medium or long term more than 20 percent of its capital to a single
country and to relaxing the limitations placed on Japanese bank shares of
syndicated loans. Such limitations have impeded the ability of commercial banks
to change short-term loans into medium- and longer-term loans.
Japanese private investment in developing countries accounts for 55 percent of
Japan's total of $36.5 billion in private overseas investment. Compared to other
trilateral countries, a relatively large share of this represents small- and medium-
scale firms, often involved in manufacturing joint ventures. One policy that
facilitates real resource transfer is the tax credit the Japanese government allows
for any tax paid to a developing country by the parent firm for education and
training in the developing countries.

Official Development Assistance

Japanese concessional assistance began during the 1950s as a reparations
program with a heavy emphasis on export expansion. Although after 1958, and
particularly during the 1960s, its ODA expanded considerably, it generally
maintained a low profile aside from a few initiatives such as its role in the
establishment of the Asian Development Bank in 1966 and involvement in the
Inter-Governmental Group on Indonesia following the establishment of the new
Suharto government in that country.
By the early 1970s, however, Japan had become the second largest DAC
nation and, since it had both a large payments surplus and a very low ratio of aid
to GNP, it became the target of increasingly vocal

1
Japan External Trade Organization, White Paper on International Trade, Summary, p. 28.

84
criticism for its poor external aid performance. The Bonn Summit
Conference played a significant role in influencing the Japanese gov-
ernment to take a more positive attitude. Prime Minister Fukuda pledged
that Japan would double its 1977 ODA level by 1980. This was attained in
both dollar and yen terms despite a considerable appreciation of the yen
(see Table V-l). By 1980, ODA had risen to 0.32 percent of GNP, far
exceeding the performance of the United States but still below overall
DAC performance. In 1981 a new medium-term plan was established to
more than double the aggregate ODA disbursed in 1975-80 during the
1981-85 period, projecting disbursements of $21.4 billion during the
second five year period.
During the first year of the new doubling plan, despite an increase in
bilateral assistance of about nine percent, net disbursements of ODA as a
percentage of GNP declined (see Tables V-l and V-2). This

TABLE V-2 Flows of Resources from Japan to the Developing Countriesa

($ millionsb)

Year 1961 1971 1976 1980 1981

ODA
Bilateral
Grants 67.8 125.4 184.9 653 810.4
Loans 27.7 306.6 568.1 1,308 1,450.0
Sub-total 95.5 432.0 753.0 1,961 2,260.4
Multilateral 11.4 78.7 352.0 1,343 909.4
Total ODA 106.9 510.7 1,104.9 3,304 3,169.8
Other Official Flowsc - 651.1 1,333.4 1,478 3,022.6
Total Official Flows 106.9 1,161.8 2,438.3 4,782 6,192.4

Private Flows 274.5 978.7 1,564.3 1,984 6,037.9

Grand Total 381.4 2,140.5 4,002.6 6,765.9 12,230.0

ODA as a % of GNP .20 .23 .20 .32 .28

Total flows as a % of GNP .71 .95 .72 .65 1.08

a
Disbursements. bThe following dollar/yen exchange rates were used: 1971 = ¥360, 1976 = ¥296.55,
1979 = ¥219.17, 1980 = ¥226.74, 1981 = ¥220.53. cIncludes export credits, direct investment, and
loans to international institutions.
Source: MITI.

85
reflected the timing of Japanese contributions and capital subscriptions to
international financial institutions in that year and does not affect the long-term
trend, but it does mean that budget outlays in coming years will have to be
increased even more if the doubling objective is to be realized. Despite the
severely stringent budget allocations resulting from massive fiscal deficits,
budgetary authorities have exempted economic cooperation, along with defense,
from the spending ceilings imposed elsewhere in the budget, indicating the
seriousness with which this effort is regarded. However, 1982 disbursements
were not significantly higher and it now appears that, while there will be
considerable growth of ODA, the doubling objective will not be met.
Despite the increasing volume of Japanese ODA, it certainly cannot
compensate for the reduction in the American effort. The budget deficits remain
a major constraint. The reduced American effort also has the effect in some
quarters in Japan of weakening enthusiasm for Japanese aid, whose expansion
owed much to U.S. leadership and encouragement.
On the positive side, there is little public "aid fatigue" in Japan. The public
opinion poll sponsored by the Prime Minister's Office in 1981 recorded 43
percent believing aid should be increased, 34 percent finding the present level
sufficient, five percent supporting reductions, one percent in favor of
termination, and 17 percent with no opinion. Given the relatively keen awareness
of the public of the international economic interdependence of Japan, public
support is unlikely to recede, unless foreign aid is associated with a major tax
increase. Just as there is little fatigue, there is little outright public enthusiasm for
aid, in contrast to some Northern European countries.
Aside from these general trends in volume, some other characteristics of
Japanese aid involving quality and distribution should be noted:
First, Japanese aid is generally low on quality indices, which is perhaps a
reflection of the rapidity with which Japan moved from an aid recipient to an aid
donor and to underlying feelings that Japan is still poor and cannot afford to be
too generous. The grant element of total ODA commitments has been increasing,
but in 1981, at 75 percent, it was still far below the overall DAC figure of 90
percent and was the lowest of any major donor country.
Second, Japan has been making substantial progress in the untying of its
ODA. LDC untying began in April 1975 and general untying in 1978. By 1981,
58.4 percent of gross ODA disbursements were generally untied.

86
 Third, the regional distribution of bilateral ODA has been changing. In
the 1960s, Asian countries virtually monopolized bilateral Japanese
ODA, but by 1981 their share had decreased to 71 percent, while the
African share rose from three percent in 1971 to 14 percent in 1981 (see
Table V-3). Nevertheless, Japan will continue to emphasize Asia in view
of the continent's massive population and needs and its relatively small
per capita share of ODA.
Fourth, of current ODA, 47.5 percent goes to middle-income countries
and only 12.8 percent to the least developed countries. Of the latter,
Bangladesh is the major recipient, with about 6 percent of Japanese
bilateral ODA, but this is far less than the shares for Indonesia, Thailand,
and the Philippines, all middle-income countries.
Fifth, the percent of ODA for multilateral institutions in 1981 stood a
little below 30 percent, equal to the overall DAC figure. In general, Japan
has been a strong supporter of multilateral institutions. Its prominent role
in the creation of the ADB was a breakthrough in its ODA policies, and
Japan has consistently supported this institution, compensating for
shortfalls in contributions of other donors.
Sixth, the rationale for ODA has been shifting. Originally, ODA was
closely linked to export promotion, but this element has been gradually
diluted over the years. Japanese official institutions emphasize
humanitarian and moral obligations as well as foreign assistance's
contribution to the international order and "comprehensive security."
Concurrently, countries like Thailand, Pakistan, Turkey, and Egypt,
which are considered to border on friction areas, have received sub-
stantially more ODA in recent years.
In contrast to official development assistance, Japanese private con-
tributions to developing countries are very small—less than one percent
of ODA. In the past few years a number of charitable institutions oriented
toward activities in developing countries have been established, such as
OISCA Industrial Body, Japan Volunteer Center, Asian Community Trust
and Silver Volunteers (a private senior citizens "peace corps"), but the
lack of tax exemptions for donations to such institutions has hindered the
development of this sector.
As the foregoing suggests, Japan's policies toward developing countries
have been moving in a strongly positive direction, but there remains
much for Japan to do to improve market access, bring its ODA
contribution up to overall DAC performance, improve the quality and
distribution of its foreign assistance, and encourage private voluntary
organizations.

87
 TABLE V-3
Regional Breakdown of Japan's Bilateral ODAa
(per cent)

1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981
Asiab 98.4 98.2 88.1 86.7 75.1 77.4 59.7 59.9 69.9 70.5 71.0
Middle 0.9 -0.04 0.1 0.3 3.9 1.3 12.4 10.4 1.0 2.5 1.4
Eastc
Africad 3.0 1.1 2.6 5.2 13.0 10.7 17.1 18.6 18.5 18.9 14.0
Latin -2.6 -0.6 4.6 4.5 5.6 6.6 8.8 8.6 8.6 6.1 7.8
America
Europe -0.2 0.6 3.0 2.6 0.6 1.6 0.5 0.15 0.1 0.2 2.2
Pacific 0.02 0.04 0.3 0.6 0.6 1.0 0.01 0.3 0.7 0.6 0.9
Others 0.5 0.7 1.3 0.2 1.3 1.4 1.3 2.2 1.2 1.2 2.7
Total 100 100 100 100 100 100 100 100 100 100 100
a
On commitment basis, bIncludes Pakistan. cIncludes Turkey. dIncludes Egypt. Source: MITI.
 VI. WESTERN EUROPE

European attitudes towards the Third World are difficult to describe in a concise
way for several reasons:
• Although, on the whole, European governments and national public opinions
have positive attitudes with respect to the Third World and development
issues, the intensity of these attitudes differs significantly from one country
to another. In addition, the various reasons given to support these attitudes
are weighted differently in different countries. The Scandanavian countries
and the Netherlands, for instance, generally evoke humanitarian reasons for
promoting aid and development assistance; while in other countries, like the
United Kingdom and France, geo-eco-nomic and -political arguments are
more frequently mentioned.
• Positive attitudes do not necessarily imply consistent overall policies
regarding the developing countries. The same government may be willing to
increase concessional assistance and, at the same time, restrict imports from
the Third World. Within national administrations, there frequently coexist
departments with divergent views with respect to the Third World. Agencies
for aid and cooperation strongly support assistance in order to promote de-
velopment, departments for foreign affairs adopt a more geo-political
approach, while departments for foreign trade and industry warn of
competition from the Third World.
• Although the changes in political majorities in most European countries in
recent years have not changed Third World policies as abruptly as the change
from Carter to Reagan altered U.S. Third World policies, many European
governments have substantially modified their attitudes regarding the
developing world. Significant evolution in development assistance strategies
is taking place in some countries.
• Decolonization has posed several problems unique to Europe: Policy-makers
must balance conflicts which arise between policies favoring former
colonies—with cultural, linguistic, and economic ties to the donor country—
and those giving more weight to countries which might be more important
for the future of Western Europe.

89
 • For those countries belonging to the European Community, it is
important to consider separately Community and national policies,
since the EC Commission plays an important role in several aspects
of developmental assistance—trade and aid in particular.
To simplify the picture, we shall deal in this chapter only with EC
countries. It should be recalled, however, that some of the non-EC
Western European countries spend significant percentages of their GNP
on concessional aid, namely the Nordic States [Sweden (0.83%), Norway
(0.82%), Finland (0.28%)] and the Alpine States [Austria (0.48%),
Switzerland (0.24%)],1 and that some of these countries are among the
most active supporters of positive OECD policies with respect to the
Third World. On the other hand, most of the Southern European
countries, whether they are EC members (Greece) or not (Portugal,
Spain, Turkey) do not provide much concessional assistance, mainly
because of their own low per capita GNP levels.
Since we do not have the room here to describe the position of each of
the ten EC members, the chapter will consider only a subset of five
countries: France, the United Kingdom, the Federal Republic of Ger-
many, Italy and the Netherlands. After this analysis at the national level,
the chapter will consider the Community policy and will try to evaluate
the probable evolution of European attitudes towards development issues
in the coming years.

A. FRANCE

The coming to power of the Socialist coalition in 1981 has reinforced the
positive attitude of the French government with respect to development
assistance. One symbol of this evolution is the fact that the government
has announced its intention to exclude the French territories from the
computation of its contribution and to reach by 1988 the 0.7 percent target
for the ratio of ODA to GNP. However, given the French economic
situation, one may doubt whether this objective will be reached.
In spite of this governmental attitude, French public opinion seems to
have mixed feelings with respect to development assistance. It is
increasingly concerned with unemployment, inflation, the restructuring of
productive activities, and the low rate of economic growth. Hence,
although there exist small groups actively supporting aid to the poorest
countries, the majority, while not objecting to aid, is more

1
1981 figures. See OECD, Development Cooperation, 1982 Review (Paris: 1982), p. 182.

90
sensitive to the so-called economic threat of the countries with low labor costs.
Turning to recent financial and trade flows, in 1981 French aid to developing
countries (excluding the French territories) increased 43 percent in national
currency terms and 28 percent in real terms. As a consequence, ODA to these
countries as a percentage of GNP rose to 0.46 percent from a level of 0.38
percent in 1980. The preliminary 1982 figure is 0.48. France has also decided to
bring up to 0.15 percent of its GNP by 1985 the ODA to the least advanced
countries (the 1981 percentage being 0.10%).
Most of French aid is bilateral (83% of ODA in 1980). This aid is
concentrated in sub-Saharan Africa (62%) and the Mediterranean area (25%),
with the Far East and Oceania receiving only five percent, the Middle East and
South Asia four percent and Central and South America three percent. Fifty-
seven percent of France's multilateral aid is channelled through the European
Community and 24 percent through the World Bank group; the remainder is
divided between the regional banks and the United Nations organizations.
Other official and private flows of financial resources represented 1.15 percent
of GNP in 1980. Export credits registered a 45 percent increase from 1979 to
1980, the main beneficiaries being Algeria, Egypt and Brazil.
Foreign trade with the Third World is of growing importance to the French
economy. For instance, in 1981, the non-oil LDCs constituted the only world
region with which the French trade balance was positive. In 1980, trade with
developing countries (excluding the Middle East) represented 13.1 percent and
17.8 percent of total French imports and exports respectively, growing from 11.0
percent and 15.0 percent in 1973.
As a percentage of total imports of manufactured products, as Table VI-1
shows, imports of manufactured products from the Third World are less
important in France than in many other industrialized countries. The penetration
ratio for these imports in the total French domestic market for manufactures
increased from 1.2 percent in 1973 to 2.2 percent in 1980. On the export side the
picture is rather different. The Third World provides an essential market for
French exports of manufactures, as is clearly illustrated in Table VI-2. Among
categories of manufactures, almost 40 percent of French equipment exports are
sold to developing countries. From 1973 to 1980, the scale of French exports of
manufactures to LDCs increased from 3.9 percent to 6.5 percent of the
consumption of manufactures in the French domestic market.

91
 TABLE VI-1
Third World Share of Imports of Manufactures into Some Industrialized
Countries
(per cent)

1973 1977 1980

France 5.4 6.4 8.2
Scandinavia 3.2 4.2 5.2
Netherlands 5.2 5.8 6.4
West Germany 7.3 8.0 9.5
United Kingdom 10.4 10.9 9.7
United States 19.3 23.4 27.3
Japan 29.7 32.5 30.5

Source: CEPII (Centre d'etudes prospectives et d'informations internationales).

According to a recent French government report,2 the number of jobs created

in France from 1973 to 1980 by the increase in exports to the Third World lies
between 220,000 and 360,000. Jobs lost to Third World imports numbered
between 70,000 and 160,000. Hence the balance is definitely positive.3 This
report and some others have shown to the administration the favorable impact on
the French economy of trade relations with the Third World and have
contributed to combating negative attitudes in circles of French public opinion.
The French government has made great efforts to stimulate French exports to the
Third World (especially on contracts concerning heavy equipment) and at the
same time has taken rather cautious positions on imports of Third World
manufactures at the EC level.
During the last decade, French foreign policy has given many signs of the
increased importance attached by the government to relations with the Third
World. For instance, in the last two years one may recall the position taken at
the conference on the Least Advanced Countries (LLDCs) in September 1981,
the support for the Cancun Summit and the favorable attitude with respect to
global negotiations. It is also significant that, in order to contribute to Algerian
development, France has agreed to import natural gas at a price well above the

2
L'impact des relations avec le Tiers-Monde sur l'economie francaise (Rapport Berthelot), (Paris: October 1982).
3
However, the same report also stressed that Third World competition increasingly theatens many French exports
to other industrialized countries.

92
market price. The prospects are that French foreign policy will continue
to be favorable, in principle, to development assistance, but, in practice,
may be more restrictive due to the economic situation. For the same
reason, it will remain cautious on the issue of trade with developing
countries.

B. UNITED KINGDOM

The Conservative government in Britain considers it the first priority to

get the OECD economies sound again, since growth in the North will
generate resources, stimulate trade and increase private investment, and
hence will have a positive impact on the evolution of the South. With
respect to development assistance, the purpose should be to help Third
World countries stand on their own feet through know-how and
technology transfer and not to engage in an endless policy of giving more
and more aid.
Though knowledge of the Third World is probably more widespread in
the United Kingdom than in other European countries, public opinion
does not seem too much concerned by Third World development, except
for some minority groups which are extremely interested, as
demonstrated by the immense interest aroused in the United Kingdom by
the Brandt Commission report. This situation is reflected to a certain
extent in the positions of the main political parties. The Labour party is in
favor of aid but has a much more restrictive attitude with respect to trade
with developing countries.

TABLE VI-2
Third World Share of Exports of Manufactures from Some Industrialized
Countries
(per cent)

1973 1977 1980

France 19.0 26.1 25.9
Netherlands 9.1 12.8 12.4
Scandinavia 10.3 13.5 13.8
West Germany 12.5 18.3 15.9
United Kingdom 20.8 27.2 23.8
United States 28.2 35.9 39.2
Japan 42.1 46.8 46.5
Source: Same as Table VI-1.

93
The Conservative party is the least convinced of the effectiveness of aid
programs to developing countries and certainly would not oppose a
decrease in the percentage of GNP devoted to aid. The SDP is the only
political party with a clear platform on Third World issues, but it seems
to have difficulty getting its message across to the public.
Turning to recent financial and trade flows, in 1980, British ODA
represented 0.34 percent of GNP. It rose in 1981 to 0.43 percent, but this
increase—due to the refinancing of IDA—has no long-term significance.
The 1982 figure was back down to 0.38 percent. In the medium-term, the
percentage should remain within this range. Through the last decade the
share of multilateral aid in British ODA has increased considerably, from
nine percent in 1970 to 30 percent in 1980. Within multilateral aid, 47
percent is directed through the EC, 29 percent through the World Bank
group, and 15 percent through UN agencies. The two main regions
receiving British bilateral aid are Africa (37%) and Asia (36% excluding
the Middle East)—the principal recipients being, in Africa, Tanzania,
Sudan, Kenya and Malawi and, in Asia, India, Bangladesh, Sri Lanka and
Pakistan. India alone receives almost 10 percent of British bilateral aid.
Overall, Commonwealth countries get 67 percent of the total and non-
Commonwealth countries 22 percent, while 11 percent is not allocable on
a country basis.
Other official and private flows of financial resources represented
almost two percent of GNP in 1980, which placed the United Kingdom in
second position among DAC countries behind Switzerland. This reflects
the important role played by financial institutions located in the United
Kingdom in the recycling of funds to developing countries.
Trade with the Third World is an important feature of the British
economy. In the first half of 1982, imports from developing countries
represented 16.2 percent of Britain's imports, and exports to developing
countries represented 21.3 percent of her exports. Britain's trade balance
with these countries is positive, contrary to the situation vis-Avis other EC
countries or non-EC industrialized countries. As for manufactures,
imports from developing countries as a share of total imports is slightly
higher for the United Kingdom than for West Germany and France (see
Table VI-1). Among aid recipients, the main exporters to the United
Kingdom are India and Kenya. The main importers of British exports are,
in Africa, Kenya, Sudan, and Tanzania and in Asia, India, Pakistan, Sri
Lanka and Bangladesh. Hence, a significant correlation exists between
aid and trade flows.

94
 Finally, it is important to stress the presence of British firms in developing
countries. Out of a total of 12,006 subsidiaries of EC firms in the Third World
registered by the European Commission in 1976, 6,921 were subsidiaries of
British firms. British subsidiaries outnumbered American ones (5,412).
According to the Ministry for Overseas Development, the British government
favors better coordination among donor countries and would also welcome
dialogue between each recipient country and donors in order to make aid more
effective within the context of local development policies. No reallocation of
resources between Africa and Asia is planned. Though a concentration of aid
toward smaller countries could be considered, India will, at any rate, remain an
important element in British aid policy. The British government would
appreciate a greater expansion of co-financing schemes. With respect to EC
policy, it considers the food aid program disproportionately large. It does not
favor, as too expensive, any global STABEX.

C. FEDERAL REPUBLIC OF GERMANY

There exists in Germany a fairly high level of consensus within public opinion
and the political parties regarding relations with the Third World. The political
circles both favor positive aid policy and support actively the open trading
system.
Turning to recent financial and trade flows, ODA represented 0.47 percent of
German GNP in 1981 and 0.48 percent in 1982, which puts the Federal Republic
of Germany alongside Japan as the largest donors in absolute terms after the
United States. In current DMs, the amount of ODA has been increased by four
percent in the 1983 budget, which is greater than for most other items in the
budget.
In 1982, bilateral aid represented 78 percent of total ODA. This percentage
could decrease to 72 percent in 1988, not because of a political choice but as a
consequence of prior commitments. Out of the bilateral total, 17.3 percent is for
Southern Europe (primarily Turkey), 6.3 percent for North Africa (mostly to
Egypt), 25 percent for sub-Saharan Africa, 13.2 percent for Central and South
America, and 30.1 percent for Asia (the main beneficiaries being India,
Indonesia, Bangladesh and Thailand). Most German aid is untied, but this is
criticized by the German business community. Grants comprise the bulk of ODA
(97% in 1980, 61% in 1981). Multilateral aid is primarily channelled through the
EC (46.6% in 1981), the World Bank group (32.1%) and UN organizations
(14.4%).

95
 Total official and private flows of financial resources represented 1.30
percent of its GNP in 1980, i.e. 0.85 percent after exclusion of ODA.
The structure of Germany's trade with developing countries differs
from that of France and the United Kingdom since exports of man-
ufactures to developing countries (Table VI-2) represent only 15.9 percent
of total German exports of manufactures, as against approximately one-
fourth for the two other countries. The differences are less significant for
imports, as Table VI-1 indicates, where the German percentage (9.5%) is
about the same as the British figure (9.7%) and only moderately higher
than the French percentage (8.2%). As a consequence, the German trade
balance with non-OPEC developing countries is not strongly positive: In
1981, imports amounted to 35.8 billion DM and exports to 37.8 billion
DM. In the first half of 1982, the Third World's shares of total German
imports (17.7%) and of total German exports (16.6%) were almost equal,
as Table VI-3 indicates.
The German government issued in 1980 a policy paper on German
cooperation with developing countries which is still considered to
represent basic German policies in this field. The key points of this paper
are as follows:
"The reduction of tension within developing countries, among de-
veloping countries and between developing and industrialized countries
can help to avert international conflicts, promote world economic
development and contribute to maintaining peace in the world....
"The object of German development policy is to promote economic
and social development in countries of the Third World." Among the
main tasks are: the fight against absolute poverty, the support of
developing countries' independence and responsibililty, the recogni-

TABLE VI-3 Third World Shares of Trade of Some EC Countries

(first half of 1982 in percent)

EXPORTS IMPORTS
France 25.6 25.8
United Kingdom 16.3 21.3
West Germany 16.6 17.7
Italy 27.6 30.5
Netherlands 10.9 20.7
Source: EC statistics.

96
tion of the joint responsibility of all countries in a world of increasing
interdependence, the promotion of integration of developing countries into the
world economy.
The priorities set up for bilateral cooperation include: rural development and
protection of natural resources. By regions, the priority areas are the countries in
the poverty belts of Africa and Asia.
"The Federal Government regards cooperation between the private sector and
the countries of the Third World as a major contribution to the economic and
technological progress of these countries. It supports cooperation in the private
sector with a wide range of instruments designed to encourage a steady transfer
of private capital, technology, and services."
Multilateral development cooperation is also considered "an effective form of
international partnership," the German government considering that
"development policy is an essential component of a comprehensive EC policy of
cooperation with developing countries" and being in favor in particular "of a
further improvement in access to markets and measures to facilitate inevitable
structural changes in the European economy.... The Federal government actively
supports the further development of the worldwide EC policy of cooperation
with countries of the Third World. In this context, it aims to intensify relations,
as appropriate in each case, with the ASEAN states, Latin America, the
Mediterranean area in a wider sense and the Persian-Arabian Gulf." With respect
to the World Bank group, the document states that the German government will
contribute to an increase in the funds available.

D. ITALY

Italy is in the process of becoming a much more active partner in development

assistance. It plans to increase its ODA from an average of 0.11 percent of GNP
in 1977-79 to 0.34 percent in 1983, which would bring it up to the percentage for
the DAC countries taken as a group. This explosion of concessional aid is the
result of an active campaign pursued in public opinion and in the Parliament by
political groups which have stressed the need to increase aid for humanitarian
reasons, more precisely to eradicate hunger throughout the world. Since the
Italian authorities have expressed their intention to reach the 0.7 percent target
before 1990, the present trend should continue beyond 1983, though at a slower
pace.
Table VI-4, which presents Italian commitments for the period 1981-83 (from
Law no. 31 of July 9, 1980), clearly shows the rapid increase of Italian ODA.
97
 The Italian government plans to increase its voluntary contributions to various
international organizations in the development area, for instance the UNDP and
organizations operating either in the food sector (WFP, CGIAR) or on
emergency problems (UNHCR, UNICEF). However, the share of total Italian
ODA represented by multilateral aid is to regularly decrease from 90 percent in
1980 to 30 percent in 1983.
As for bilateral aid, Italy intends to provide much of it on a co-financing basis
in cooperation with international organizations (UNDP, FAO, UNIDO),
development funds (IFAD, Arab funds) and development banks (World Bank
and regional banks).
The sectoral priorities are agriculture and food production, energy and raw
materials, services, and industry. Bilateral aid is to be restricted to a number of
countries having historical and cultural links with Italy (as indicated, for
instance, by the presence of an Italian community) and those which complement
Italy economically such that aid might be mutually beneficial. Consequently, the
main recipients should remain East African countries (Somalia and Ethiopia),
Southern African countries (Mozambique), Mediterranean countries (Egypt and
Malta) and, in Latin America, Venezuela and the Andean countries. In 1982, the
distribution of bilateral aid was approximately

TABLE VI-4 Italian ODA

(billions of lire)
1981 1982 1983
BILATERAL AID
Cooperation fund and other grants 177 390 670
Food aid 40 45 50
Loans on special conditions 170 420 680
Subtotal 387 855 1400
MULTILATERAL AID
EC 235 275 293
International organizations 85 100 127
Funds and banks 293 270 180
Subtotal 613 645 600
Total 1000 1500 2000

Source: Italian Foreign Ministry, Department of Development Cooperation.

98
the following: sub-Saharan Africa, 56.6 percent; Mediterranean and
Middle East countries, 23.4 percent; Latin America, 13.4 percent; and
Asia, 6.5 percent.
In addition to ODA, other flows of financial resources represented 0.89
percent of its GNP in 1980, which is similar to the German figure but
significantly lower than the British and French figures.
At the 1981 Ottawa Summit, the Italian Prime Minister expressed the
determination of his government to develop on a multilateral and bilateral
level a policy to fight world hunger. In accordance with this declaration,
the Italian government organized in Rome in April 1982 a meeting of
high-level civil servants to look for concrete ways to combat hunger. The
meeting considered topics like food aid, food security, agricultural and
food strategies, and aid coordination. The Italian government intends to
pursue its international effort in this field.

E. THE NETHERLANDS

The Netherlands is certainly the EC country in which support for

development assistance is the greatest and, consequently, government
policy in this field is not at issue. The Dutch attitude is essentially of a
moral nature. Aid is supported for humanitarian reasons and not on geo-
political or geo-economic grounds.
In 1981 and 1982, Dutch ODA, for the seventh and eight consecutive
years, remained well above the 0.7 percent DAC target: In both years it
represented 1.08 percent of GNP. In spite of a very difficult economic
situation, the Dutch government has maintained its own target of 1.5
percent of net national income (approximately 1.2% of GNP), which
should be reached in the coming years, though at the expense of
designating some new items as ODA (for instance, aid to exports to
developing countries).
The political consensus explains some of the features of Dutch ODA:
1) Grants represent the major part of ODA (92% in 1980). 2) Two-thirds
of bilateral aid is devoted to low-income countries, the LLDCs having
received in 1980 24 percent of bilateral aid. 3) Aid programs give priority
to improving the situation of the lowest-income group within recipient
countries.
Bilateral aid is spread over many countries (around 70), but 13 countries
are favored (Indonesia, Pakistan, Sri Lanka, India, Bangladesh, Kenya,
Sudan, Zambia, Upper Volta, Egypt, North Yemen, Tanzania, and
Colombia). In 1980, India, the Dutch Antilles, Indonesia, Tanzania and
Surinam received around 40 percent of Dutch bilateral aid.

99
Multilateral aid amounted to 31.5 percent of ODA in 1980; the contri-
bution to UN programs representing 36.3 percent (a much higher
percentage than for the other countries examined in this chapter) and the
amount channelled through the EC only 26.9 percent (linked to the size
of the Dutch GNP and thus lower given the overall Dutch aid effort).
Though the Dutch government supports the EC development program, it
regrets that this program is mainly centered on Africa and does not
include Asian countries with which The Netherlands has close ties, such
as Indonesia.
In addition to ODA, other Dutch official and private flows of financial
resources reached 0.46 percent of the GNP in 1980.
In the Dutch context, to discuss trade with developing countries just
after aid does not follow logically since the two fields are far less linked
in the public debate than in countries like the United Kingdom and
France. In recent years, however, the trade unions have become more
critical of imports from the NICs and there is a movement in public
opinion tending not to consider NICs or OPEC countries as developing
countries. It should be stressed nevertheless that the Dutch administration
supports the view that the development of trade has a major influence on
economic growth in the South and that protectionism should be fought at
all levels.
Tables VI-1, 2, and 3 exhibit the main features of Dutch trade with
developing countries. Third World markets for exports are relatively less
important for the Netherlands than for larger EC countries, whether one
considers all products or manufactured goods only. The same fact may be
observed with regard to the Third World share of Dutch imports of
manufactures. A deeper analysis would be necessary to judge whether
these features are not a consequence of the high degree of openness of the
Dutch economy within the European Common Market.

F. THE EUROPEAN COMMUNITY

The European Community as a whole plays an important role in

development assistance, not only because it distributes a significant
amount of ODA, but also because it has the responsibility for the
common trade policy and as such has signed important agreements with
Third World countries (for instance, Lome I and Lome II). In addition, it
should be noted that the EC Commission is now in the process of
proposing to the member states a reformulation of its policy.

100
 The Community policy with respect to the Third World has given rise to two
types of instruments:
• Regional agreements include the Lome I and Lome II agreements with
African, Caribbean and Pacific countries (61 such ACP countries for Lome
II) and special agreements with Maghreb countries (Morocco, Algeria, and
Tunisia), Mashrek countries (Egypt and Libya), and Israel.
• World actions include commercial agreements, trade preferences, food aid,
assistance to non-governmental organizations and disaster relief.
The Lome II agreement includes: 1) free access to the European market,
except for agricultural products; 2) special rules for beef, sugar, rum and
bananas; 3) a stabilization scheme (STABEX) for 44 agricultural commodities;
4) a similar fund for six raw materials; 5) grants and special loans from the
European Development Fund and aid to regional cooperation; 6) special loans
from the European Development Bank; and 7) an emergency aid program.
Out of the 35 billion dollars of world ODA in 1980, the EC countries' aid
represented 36 percent, while the portion of this aid channelled through the
European institutions amounted to 1.26 billion dollars, i.e. approximately 0.05
percent of EC GNP or 10 percent of total aid from EC countries. This aid was yet
more concentrated on Africa than national aid programs: In the 1977-79 period,
Africa, Asia, Europe and Latin America received respectively 65 percent, 21
percent, nine percent, and five percent of Community aid while the same
percentages were 46 percent, 27 percent, 10 percent, and 17 percent of member
countries' bilateral aid. Table VI-5 gives an overview of EC member countries'
ODA and Table VI-6 breaks down the European institutions' ODA. It is
important to emphasize the importance of food aid within the total financed by
the European Community's budget. The volume of this aid is criticized by some
of the Member countries.
The trade policy of the Community being defined at the European level, it is
worth noting that EC imports from developing countries reached 42.2 percent of
total imports in 1980 (269 billion ECUs), while the corresponding figure for
exports was 37 percent (on total exports amounting to 282 billion ECUs). Out of
these totals the figures for ACP countries were modest: 19 billion dollars of
imports from ACP countries, 15.7 billion dollars of exports to them. The trade
balance of ACP countries with the EC was positive (plus 3.3 billion dollars) but
the main part of it went to Nigeria as an oil-exporter. Overall, if the effects of oil
price increases are neutralized, the share of EC imports provided by the Third
World has not changed much over the decade

101
 TABLE VI-5 ODA of EC Member Countries in 1980
(net payments in millions U.S. dollars)

Net Payments Percent of GNP

Netherlands 1,577 0.99
Denmark 464 0.72
France 4,041 0.62a
Belgium 575 0.48
West Germany 3,518 0.43
United Kingdom 1,785 0.34
Ireland 33 0.19
Luxembourg 8 0.19
Italy 678 0.17
Total 12,679 0.46
a
Overseas departments and territories included. Source: OECD, Development Assistance Committee.

1970-80. The figures at the EC level have the advantage of factoring out
intra-EC trade and are therefore more comparable to the U.S. and
Japanese figures given in Tables VI-1 and 2. For instance, the Third
World share of EC imports of manufactures was around 16 percent in
1980, still much lower than the figures for Japan or the United States, but
twice the national levels.
European trade policy is necessarily a compromise between the views
of the member countries. It has to take into account the fact that, with the
present high level of unemployment, there exists in some countries a
social resistance to structural adjustment. Hence, the Community's
achievements are judged as insufficient by the advocates of free trade
(especially when they live outside of the EC) and as too liberal by the
protectionists within the member countries. An example is the Multi-
Fiber Arrangement (MFA) for textiles, which at the same time restricts
imports but accepts a regular increase of developing countries' shares of
the European market.
The most important event in EC development policy in 1982 was the
presentation by the Commission of the Pisani memorandum to the
governments and the European Parliament.4 The following extract from
the memorandum's "Summary and Conclusions" presents its key ideas:
4
Commission of the European Communities, "Memorandum on the Community's Development
Policy," COM(82)640 final (Brussels: October 1982).

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 OBJECTIVES
The following objectives must be pursued if the developing countries, and in
particular the poorest among them, are to achieve lasting, autonomous
development:
• help countries to apply development policies based on self-reliance;
• help people attain food self-sufficiency by providing support for active rural
development policies and for the framing of economic policies which
promote food production;
• help to develop human resources and foster awareness of the cultural aspects
of development;
• develop independent capacity for scientific research and technical
applications and the use of the whole range of science and technology in the
service of development;
• systematically exploit all natural resource potential;
• restore and preserve the ecological balances and control the growth of
urbanization....
METHODS
In its development activities, the Community will seek ways to
take political dialogue beyond mere negotiations on projects to be

TABLE VI-6
European Communities' Financial Contributions to Developing Countries in 1980
(net payments in millions U.S. dollars)
ODA
EC budget 669
Food aid 437
Aid to non-associated LDCs 61
Maghreb, Mashrek 21
NGOs 14
Other items 136
Lome agreementsa 592
Total 1261
Other Public Contributions 257
a
The Stabex contribution, which is included in the Lome agreements figure, amounted to $92
million.
Source: OECD, Development Assistance Committee.

103
financed. The Community respects the sovereign right of beneficiary
countries over the use of the resources it puts at their disposal; it also
considers it has a right and a duty to engage in a dialogue with the
governments of those countries concerning the effectiveness of the
policies it is supporting. Such a dialogue is being tried out for the first
time with regard to food strategies.
• In support of consistent food strategies, the Community will, among
other things, deploy food aid which, emergencies apart, should be
integrated into its development activity instead of existing as an end in
itself.
• The Community will supplement food aid with funds allocated
according to the same criteria in all cases where other types of action
and the supply of agricultural inputs would be more suitable (e.g. in the
form of agricultural inputs or support for structural measures)....
THE INSTITUTIONAL FRAMEWORK
The Community confirms the special importance it attaches to the
cooperation links set up with the ACP countries under the Lome
Conventions and will expand the joint development work under taken
within that framework.
The Community is willing to organize its relations with the ACP
countries under a framework convention of unlimited duration.... [This
paragraph confirms the priority given to Africa.] Recognizing that the
stability and prosperity of the Mediterranean developing countries are
linked to their own political and economic interests, the Community...is
willing to organize its relations with the southern Mediterranean
countries, in due course, within the framework of a comprehensive
region-to-region convention.
The Community is willing to improve the content of the cooperation
agreements with developing countries in Asia and Latin America....
In its cooperation ties with the various groups of developing countries,
the Community will continue to press for the necessary regional aspect of
development work to be taken into account.
On the multilateral front the Community and the Member States will
improve the effectiveness of their work within the multilateral
development financing bodies by jointly defining and implementing a
European position in those institutions. In this connection the idea of
financial participation in certain multilateral institutions by the
Community as such should be examined.... 104
 MEANS
The Community will set itself a development aid target level of 0.1 percent of
Community GNP and will try to achieve it by stages over the next 10 years, in
order to affirm the continuity of its operations and make them more
predictable.... The Community's first priority in the trade field is to keep
access as open and predictable as possible, especially where the arrangements
are based on a contract negotiated with its partners. As regards commodities,
the Community will continue, as in the past, to work at the international level
for the stabilization of commodity markets.

G. THE COMING YEARS

To make a prognosis on the possible evolution of European attitudes towards

development issues in the coming years is, of course, delicate. Two tendencies
coexist which to a certain extent may appear contradictory: On one side,
European public opinions tend to be more and more conscious of the dramatic
situation of the poorest countries and feel concerned, either for humanitarian
reasons or for long-term security reasons, about the development patterns of
those countries. Therefore, ODA will not decrease as a percentage of GNP in
spite of extremely tight domestic budgets. On the other side, Europeans tend to
have more divergent views about trade, the debate existing within each of the
member countries, though the center of gravity is not identical from one country
to another. Hence, problems may arise, especially with the NICs or between EC
countries, if mutual trade develops at a speed not compatible with a restructuring
of European productive structures. A return to positive growth rates, even
moderate growth, would greatly facilitate such adaptations.

105
 VII. NORTH AMERICA
In the past, Canadian and U.S. attitudes toward issues regarding the Third World
have been markedly at variance. Canada has long been willing to give Third
World views a serious hearing, it has been supportive of multilateral cooperation
to aid development, and has been prepared to serve as a political broker between
the North and South. It was also an instrumental force behind the push for the
Canciin Summit. The United States, on the other hand, has been much more
reluctant to give such a sympathetic hearing to Third World concerns.
Multilateral development assistance has had many detractors in the United
States. A more willing acceptance of multilateral cooperation only materialized
after the United States became aware of its growing economic links with the
South. Full appreciation of the extent of those economic linkages has yet to be
demonstrated.
Now, however, both Canada and the United States are experiencing serious
economic difficulties. In each nation, real income has declined, unemployment
has reached post-Depression highs and threatens further upward movement, and
industrial production has dropped. In both countries, particularly in the area of
trade policy, a troubled economy has meant less responsiveness to Third World
interests. Protectionism has risen to the surface, and the developing world has
felt its impact. High inflation contributed to an erosion of the real value of U.S.
development assistance in 1981. Inflation also virtually eliminated any real
growth in Canadian aid in 1981. Economics has also played a role in, and will
continue to affect, the degree of U.S. and Canadian support for multilateral aid.
Budgetary restrictions have been cited as one of the reasons behind diminished
U.S. multilateral contributions; in Canada, the reduction in multilateral aid is
attributable to a weak domestic constituency for this aid channel and a concern
for a demonstrable "return" on its aid expenditures. As long as domestic
economic problems persist, each country may become less responsive to the
needs and demands of Third World nations.

A. CANADA

As a country without colonial ties or major global interests, Canada's perceptions

of the Third World have been shaped to an unusual extent by the development
assistance Canada has made available to the

106
developing countries. Development aid, while generally supported by the public,
is popularly perceived by Canadians as a one-way transfer of resources in which
recipients gain but Canada receives little in return. Canada has maintained a very
substantial aid program since the beginning of the Colombo Plan of the 1950s,
outperforming many of the other OECD donor countries in terms of aid
transferred as a proportion of GNP—including the United States since 1970. Un-
derstandably, as a "middle power," Canada has long been a supporter of
multilateralism. This is reflected in Canada's participation in U.N. peacekeeping
activities, multilateral development programs, international trade and monetary
agreements, etc. Canada's aid program has reflected a strong multilateral bent
since the mid-1970s; as Table VII-1 indicates, the percentage of Canada's net
ODA contributions that were multilateral in nature reached 52 percent in 1977
(though it dropped to 38 percent in 1980, for reasons outlined below).
As for the future of the Canadian foreign aid program, a number of issues and
concerns are worth noting. For one, the Trudeau government in 1981 reiterated
its intention to attain a level of 0.5 percent for ODA as a percentage of GNP and
set a target date of 1985, the percentage having fallen from its mid-1970s peak of
0.54 percent to 0.43 percent in 1981. In its November 1981 budget, the
government, while anticipating an historically high budget deficit, slated the
foreign aid program for an 18 percent increase (six percent in real terms)—one
of only two items in the budget marked for a real increase. (ODA, in real terms,
declined by 6.0 percent in 1980 and increased only 0.3 percent in 1981. It has
decreased 20 percent since 1975, a situation which has engendered some
criticism from aid enthusiasts.) In a more recent budget in June 1982, the
government has cut projected aid expenditures by $175 million over two years,
but this is not expected to result in any reduction of ODA as a share of GNP.1
The proposed increase in aid came at a time when unemployment was over 10
percent of the work force, inflation was running between 11 and 12 percent
annually, and real GNP was projected to drop by one to two percent for 1982.
Public support for development assistance remains quite strong, according to a
recent survey conducted by CIDA (although most respondents had little
knowledge of the issues); but it is not clear whether such support will be
maintained through a prolonged period of economic distress. Even among the
members of the development community there is growing concern that the aid

1
The provisional 1982 figure is 0.42 percent of GNP, a slight decline from 1981.

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 TABLE VII-1 U.S. and Canadian ODA

1970 1975 1977 1979 1980 1981

CANADA 77.3 69.6 48.0 54.9 61.7 62.8
Bilateral ODA (% of total)
Multilateral ODA (% of total) 22.7 30.4 52.0 45.1 38.3 37.2
ODA as percent of GNP 0.42 0.54 0.50 0.46 0.43 0.43
UNITED STATES
Bilateral ODA (% of total) 87.1 73.4 61.9 89.0 61.2 74.7
Multilateral ODA (% of total) 12.9 26.6 38.1 13.0 38.8 25.3
ODA as percent of GNP 0.31 0.26 0.25 0.20 0.27 0.20

1970-1975 1975-1980 1978-1981

CANADA
Nominal Annual Growth Rates (per cent)

Total ODA 20.5 4.1 3.9

Bilateral 18.0 0.9 4.8
Multilateral 27.8 8.2 2.4
Real Annual Growth Rates (per cent)

Total ODA 11.5 -4.4 -4.4

UNITED STATES
Nominal Annual Growth Rates (percent)

Total ODA 5.6 12.2 0.7

Bilateral 2.0 8.2 7.5
Multilateral 22.1 21.1 -12.5
Real Annual Growth Rates (per cent)

Total ODA -1.1 -4.7 -7.5

Source: OECD, Overseas Development Council.

108
 program, as a significant budgetary outlay, must be able to stand more intense
scrutiny.
The multilateral component of Canadian ODA has steadily declined since
1977, and critics from business and parts of the bureaucracy have pressed for
further reductions. The decrease can be linked to the growing concern about how
much economic and political return Canada gets from its aid expenditures.
Among many, there is a growing interest in trying to extract more short-term
benefit for Canada through the aid program by directing bilateral aid to targeted
middle-income countries of commercial and political importance to Canada.
CIDA's present heavy emphasis on aid to the poorest countries would thus be
reduced, and efforts to refine an effective "basic needs" program diminished.
Also, the concessional element of Canadian aid might be reduced and a
continued emphasis would be placed on "tying" aid to Canadian goods. The
current aid debate could result in further movement away from multilateral
contributions and toward targeted bilateral aid.
Canadian economic relations with the Third World have increased
significantly in recent years. The developing countries represent a sizeable
market for Canadian products (in nominal terms, 11.3 percent of total exports in
1980, up from 6.3 percent in 1973). Since 1977, the average annual growth in
exports to the developing countries has been 23.6 percent, compared with 11.2
percent for exports to developed countries. Fully one-fourth of Canada's direct
foreign investment is in the Third World.
Canadians are also becoming more sharply aware of the developing countries
as competitors. This competition has come first in the form of greater penetration
of the Canadian market for manufactures. Imports of manufactured products
from the Third World are growing at almost double the rate of imports from
developed countries. Canada, like other countries, has responded defensively to
increased imports, limiting market access and protecting import-sensitive
industries, particularly labor-intensive industries such as clothing, textiles, and
footwear. It has used high tariffs, and, since 1977, import quotas and bilateral
agreements under the MFA to retard the growth of Third World imports. Canada
also competes directly with Third World countries in terms of investment capital
from other developed nations, particularly in the resources area, the foundation
of Canada's economic strength.
High Canadian unemployment and stagnating real income are increasing
pressures for protectionist barriers. The Canadian Labour Congress, traditionally
supportive of Third World demands for a fun-

109
damental reordering of the world's economic institutions, altered its position on
trade increasingly during the 1970s, favoring protectionism over loss of
Canadian jobs. In 1981, the government renewed its effort to control Third
World encroachment in Canada's textile and clothing markets, extending
controls for an additional five years. It did so by negotiating bilaterally with the
major LDC exporters of textiles and clothing for more restrictive measures on
imports, before signing the 1981 renewal of the MFA. Quotas were also applied
to canvas footwear in 1981, and the government subsequently reinstated a four-
year-old quota on leather footwear, even over developed-coun-try objections.
In a positive move that may become even more significant in the future, the
government has created a new agency to promote adjustment within the textile,
clothing, and footwear industries. For the first time, concerted attention is to be
given to assisting workers' adjustment and to applying rigorous competitiveness
criteria in providing assistance to firms.
The prospects are that Canada's foreign policy will continue to give a more
central place than many other industrialized countries to an open, respectful
North-South dialogue. The overall aid effort will probably remain better than
most. On both points, however, Canadians are vulnerable to the lack of interest
exhibited by some other OECD nations, the United States among them. There is
also understandable reluctance to try to do too much without U.S. involvement.
There is discouragement about the lack of impact of efforts where Canada has
been asked (e.g., CIEC) and/or offered (e.g., Cancun and Global Negotiations) to
build bridges, only to find that others, in North or South, then back away.
Canadian governments will probably continue to respond to such calls (and be
supported in it) if there is any reasonable chance of progress. It is clear, however,
that they will have the same pressures at home as others and thus will not run far
ahead of the pack with concrete measures (e.g., in trade access) that are painful.
Nor can Canada realistically expect to promote major global initiatives in areas
where its stake and influence do not warrant it. Perseverance in helping keep
alive useful ideas (e.g., the "energy affiliate" in the World Bank or related
efforts) and the habits of multilateral cooperation would not be an unreasonable
Canadian contribution.
On other development issues, Canada has usually given out mixed signals to
the Third World. Canada probably would not support strong international codes
on transnational investment at this time, fearing too much governmental
interference and a negative effect on

110
potential investors in Canada; it has not been a leading enthusiast for commodity
stabilization agreements; it has strongly supported the Law of the Sea Treaty and
Global Negotiations—although its receptivity toward further negotiations on the
New International Economic Order is not what it once was.

B. THE UNITED STATES

A marked disparity now exists between the economic and political interests of
the United States in the developing countries and the low priority that its
policymakers in both the public and private sectors assign to our relations with
these countries. U.S. foreign policy still does not reflect adequate recognition of
the emergence of the developing countries as important participants in the
international arena. The longer the disparity continues, the more opportunities
will be missed, the higher the costs will be to this country, and the greater will be
the risk of permanently losing the leadership role the United States has played
for so long in international development cooperation.
The developing countries provide a market for 38 percent of all U.S.
merchandise exports. The United States imports a large amount of its
manufactured products from the Third World. One-quarter of its direct foreign
investment reposes in developing countries, and these countries are firmly tied
into the U.S. financial system. The developing countries provide substantial
quantities of valuable resources, resources upon which the past economic might
of the United States has, in part, been predicated. Yet despite the prominent and
growing economic and political importance the developing countries have for
the United States, they are consistently underestimated economically and largely
ignored in the formulation of U.S. foreign policy. The U.S. posture toward the
Third World is largely defensive. Each succeeding administration has failed to
devise a comprehensive or consistent approach to U.S.-Third World issues,
preferring to deal with them on a case-by-case basis, and then allowing real and
potential crises to shape policy.
The Reagan Administration has shown little interest in North-South issues. It
views the developing countries primarily in terms of East-West competition,
questions the purpose of pouring budgetary resources into aiding their
development, and laments U.S. dependence on their strategic resources. The
administration's view of development is that it should proceed through a more
thoroughgoing application of market principles.

111
 In its first year, the administration advised the developing countries to look
toward private initiative and the "magic of the market" as the keys to economic
improvement. It proposed to aid Third World development by encouraging trade
between the United States and developing countries. The administration also
proposed to reduce the U.S. presence in multilateral institutions, initially calling
into question their very legitimacy. It called for the graduation of some de-
veloping countries from dependence on soft-loan development aid and for
greater usage of co-financing of development projects to encourage private
sector involvement in development.
The administration's plans for the foreign assistance program included greater
utilization of bilateral aid, especially for those developing nations of strategic
interest to the United States. Within the bilateral program itself, greater weight
was to be given to security assistance; arms sales to developing countries were
to be actively promoted; and development assistance was to be de-emphasized.
During the first year the Reagan administration was responsible for the
foreign assistance program, it fell 18 percent in nominal terms and about 25
percent in real terms. As Table VII-1 indicates, net ODA as a percentage of
GNP declined from 0.27 percent in 1980 to 0.20 percent in 1981.2 The reduction
in ODA in 1981 was primarily due to a marked slowing of contributions to IDA.
As planned, development assistance was de-emphasized, and arms sales to the
Third World were actively promoted.
In its budgetary proposals for fiscal 1983, the administration has requested an
increase of 35 percent over fiscal 1982 levels in security assistance, which
accounts for almost one-half of the foreign assistance budgetary request.
Development assistance administered by the U.S. Agency for International
Development (AID) is to be only $3 million more than in fiscal 1982. While
these proposals are subject to Congressional modification, it is clear that the
trend will be toward an enhanced bilateral program, with emphasis on security
assistance.
The future of U.S. support for multilateral programs is still in doubt. The
release of the Treasury report on U.S. participation in the multilateral
development banks (MDBs) refuted many of the harshest allegations voiced by
critics of the banks; it maintained that the MDBs have been effective vehicles
for the promotion of various U.S. interests.
The report, however, did call for appropriate conditionality on MDB loans,
stricter graduation procedures, greater usage of co-financing,
2
Provisional figures indicate that ODA rebounded to 0.27 percent of GNP in 1982.

112
 TABLE VII-2 U.S. and Canadian Voluntary Foreign Assistance

1970 1980
Canada U.S. Canada U.S.
Total Contributions ($ billions) 0.05 0.6 0.1 1.3

Per Capita Contributions 2.42 2.92 4.26 5.84

GROWTH RATE OF TOTAL CONTRIBUTIONS 1970-75 1975-80
Canada U.S. Canada U.S.
Nominal Annual Rate (per cent) 5.2 6.1 8.9 10.1

Real Annual Rate (per cent) -3.8 -0.6 0.2 1.1

Source: OECD, Overseas Development Council.

and a cap on the expansion of MDB lending. While it also suggested the
possibility of future "real" reductions in U.S. soft-loan window contributions,
once current obligations have been met, it stated that the United States must
continue to have a leading role in the MDBs. There is not strong support for the
MDBs in Congress, which, of course, has a role to play along with the
administration in setting policy on development issues. The soft-loan windows
of the MDBs in particular are not popular in Congress; and the budgetary ax, as
far as foreign assistance is concerned, is more likely to fall in this area than any
other. The Congress, for example, was instrumental in limiting the fiscal 1982
contributions to IDA, undercutting even the administration's request. Almost
certainly, the U.S. failure to fulfill IDA VI commitments will cause the
replenishment to be cut 35-40 percent (it is likely to cover a five-year rather than
a three-year period) and the outlook for IDA VII (and hence for concessional aid
to the sub-Sa-haran African and low-income South Asian countries) is dark
indeed. The American public, in general, is receptive to the idea of humanitarian
aid efforts aimed at helping the poor in foreign countries. As Table VII-2
indicates, Americans contributed $1.3 billion in aid through voluntary
organizations in 1980. This is $5.84 per capita. (In comparison, Canadians
contributed $4.26 per capita, though the voluntary agencies can collect
"matching funds" from the federal and some provincial governments.) However,
the concept of "foreign aid" has never been particularly popular, and the issues
behind the con-

113
 cept are rarely understood. This, however, is a problem that applies to
international relations generally.
While the government has stated its intention to promote development
through enhanced trade, rising unemployment, sagging real production, and
clamor from affected labor unions and industries have put increasing
protectionist pressure on U.S. trade policy. The Reagan Administration has
remained outspoken in declaring the virtues of an open trading system, and has
taken some steps to liberalize access to the American market, such as in lifting
the quotas on imports of footwear from Taiwan and South Korea. At the same
time, the Reagan Administration has taken a fundamentally "tougher" line on
administrative application of subsidies and injuries tests. The United States
agreed to stricter limitations on developing-country textile exports by signing the
Multi-Fiber Arrangement in late 1981. Recently, a sugar quota trade policy was
implemented that will serve to insulate the American market from developing-
country penetration. The President now has greater discretionary authority to
"withdraw, suspend, or limit duty-free treatment" of developing-country
products under GSR On March 31, 1983, graduation actions under this authority
were implemented involving numerous products from developing countries.
In early 1982, the Administration unveiled a major trade and development
program for the Caribbean area. The Caribbean Basin Initiative was the
centerpiece of the Administration's initiatives for the Third World. It was
bilateral in design, dependent upon a favorable private sector response for its
success, and born of U.S. strategic interests in the region. Currently, the CBI is
stalled in Congress, mainly because Congress has balked at the military aid
implications of the initiative. Perhaps more importantly, the Administration has
bowed to industry pressure and withdrawn support for key elements of the trade
package involving duty-free status for certain products. This is further proof of
the strength of protectionist sentiment at present. The Administration, however,
remains a strong supporter of this proposal.
Other U.S. policies on certain development issues have become clear in recent
months. The United States will not sign the Law of the Sea Treaty; and it has
opposed the creation of an energy affiliate in the World Bank. The United States
has given a grudging nod to the concept of global negotiations, on its terms, but
fundamental change in world institutions is not expected to be supported. For the
foreseeable future, only incremental movement can be expected in overall U.S.-
Third World relations, in large part because public and policymaking attention
will be focused on domestic economic difficulties.
114
 SUMMARY & RECOMMENDATIONS
Within a few decades, the vast majority of mankind will live in the Third World.
It is essential for the long-term future of the trilateral countries that they
contribute positively to the evolution of an international economy which allows
the developing countries to advance socially and economically and to engage
themselves as harmoniously as possible in the world economic system. The
present report, while keeping this long-term perspective in mind, is nevertheless
addressed primarily to shorter- and medium-term issues. The current issues are
so serious that if proper solutions to them are not found, short- and medium-term
developments may greatly reduce the possibility of finding adequate long-term
paths.
Today the developing world is facing a crisis in its ability to make economic
progress in the near term. This crisis did not appear overnight, but is a
consequence of the international economic turbulence of the 1970s and the
worldwide recession in the 1980s, a recession aggravated by the macro-
economic policies of some of the major trilateral countries. Full world recovery
requires both economic revital-ization in the trilateral countries and a return to
sustained economic growth in the developing countries.

A. THE PAST RECORD OF DEVELOPMENT

Contrary to the common popular conception, the general postwar record of

economic development in the developing countries has not at all been one of
failure, but rather a remarkable record of achievement. During the quarter
century after 1950, the developing world as a whole grew at an average annual
per capita rate of 3.5 percent, far higher than the historical two percent annual
average of the trilateral countries in the preceding hundred years. Developing
country income growth was parallelled by advances in other important indicators
of social modernization. For example, life expectancy between 1960 and 1980
increased from 42 to 57 years in low-income countries and from 53 to 61 years
in middle-income countries. Adult literacy rates increased from 28 percent to 51
percent in low-income countries and from 53 percent to 72 percent in middle-
income countries during the same period.

115
 But when this generally favorable record is examined more closely, it
shows a wide spectrum of performances. For example, rapid growth has
been achieved by the newly industrialized countries of East Asia and
Latin America, while in much of South Asia and sub-Saharan Africa
progress has been much slower. In particular, the low-income countries
of sub-Saharan Africa have faced the most serious obstacles to
development and have turned in the poorest record—an average per
capita growth rate of little more than one percent per annum in the 1960s
and early 1970s.
The economic stresses of the 1970s, particularly the oil price increases,
placed great pressure for adjustment on most of the developing world.
Until the second oil shock of 1978-79, most developing countries were
reasonably successful in adapting to the necessary adjustments. During
this period, trilateral markets for developing country exports remained
relatively open and bouyant; commercial bank loans to middle-income
developing countries, especially Brazil and Mexico, increased
dramatically; and Official Development Assistance (ODA), including
concessional flows through the development banks and the International
Development Association(IDA) and other multilateral channels, also
increased.
While most developing countries undertook a process of structural
adjustment (which would have facilitated growth had international
economic conditions returned to normal), in a few countries proper
adjustments were not consistently pursued. The principal policy failures
were in the areas of overvalued exchange rates and in failing to provide
the proper incentives (including prices) for expanded agricultural
production. In some cases, international loans were used to finance
consumption rather than investment. And in many countries, little effort
was made to reduce severe inequities in income distribution.

B. THE CURRENT OUTLOOK

The disparities in economic performance during the postwar period have

resulted in a highly differentiated Third World in the early 1980s. Two-
thirds of the 3.3 billion people in the developing countries (1.7 billion in
India and China alone) are still to be found in low-income countries
whose 1980 per capita GNPs ranged downwards from $410, compared to
$8,000 to $16,000 for most trilateral countries. On the opposite side of
the developing country spectrum, some 425 million live in countries with
1980 per capita GNPs above $1500. This certainly does not mean that all
the inhabitants of these countries have

116
achieved middle-income levels; the income distributions in countries such as
Brazil and Mexico remain highly skewed.
All the oil-importing developing countries have been affected by the continuing
delay, after the second oil shock, of a return of normal international economic
conditions, on which many of their economic programs were based. Most
resource-based developing economies— eventually including even the oil-
exporting developing countries— have suffered from a substantial deterioration
in the terms of trade for their exports as well as absolute declines in export
volumes as the continued recession reduces demand. For the NICs, reduced
demand for exports and the growth of protectionist sentiments in the advanced
world have meant lower export earnings and less optimistic prospects for the
future, discouraging new investments. Exceptionally high interest rates have also
discouraged investments. Since many of the NICs borrowed heavily from
commercial banks at variable rates of interest in the 1970s, their debt servicing
burdens ballooned drastically in the past few years, and the commercial banks
are now hesitating to make new loans. For the lowest-income countries, which
still depend heavily on concessional assistance for their development programs,
the stagnation in ODA—which declined in 1981—has begun to affect their
economies. In particular, there is reduced funding from the soft loan windows of
the development banks, especially with the U.S. failure to honor past
commitments to replenish IDA resources. Moreover, competition for these
limited funds has increased as China comes to seek a share.
The oil-importing developing countries as a whole experienced stagnating or
declining per capita incomes in 1981 and 1982, and the outlook for 1983 is again
for near-stagnation. But for the sub-Saharan Africa region, the outlook is much
bleaker, with virtually no prospects for growth until the end of the decade. This
is a situation which not only threatens the economic interests of the trilateral
world, but which has very serious social and security implications as well. In-
creased political unrest is a likely consequence of the present crisis if it is
allowed to continue.

C. WHAT SHOULD BE DONE

Restoring satisfactory rates of development in the Third World requires two sets
of actions, both of which are necessary and neither of which is sufficient in and
of itself. On one hand, of course, the developing countries must accept primary
responsibility for their own development. Even in the face of world recession,
there is much they

117
can do to advance economically, for instance, in initiating and pursuing needed
structural adjustments. On the other hand, satisfactory rates of development will
also require complementary and appropriate actions by the trilateral countries to
assist the developing countries in moving forward, since the trilateral countries
contribute in an essential manner to the functioning of the international
economic system. Our report is addressed primarily to the actions required of the
trilateral countries.
First and foremost, it is necessary that our countries adopt in practice, and not
simply in rhetoric, coherent strategies toward the Third World. Development
strategies consist not only of concessional aid, but must also incorporate both
trade policies and policies covering private financial markets. These policies
must take into account the increased differentiation in the Third World, to better
adapt to the real needs of each group of developing countries and to make our
assistance more efficacious. In the medium- and long-term, private direct
investment may also play a very important role.

North-South Trade Relations

The present condition of economic stagnation in the industrial world is having a
sharply adverse effect on LDC trade and economic growth. The industrial
countries have constituted the market for almost two-thirds of the developing
countries' exports. With the severe contraction of these markets, the expansion of
the volume of LDC trade came to a halt in 1981 and probably declined in 1982.
Clearly the first order of business is to get the world economy moving again at a
satisfactory rate while avoiding the inflationary excesses of the 1970s.
There is a widespread impression in the industrial countries that imports of
manufactured goods from the developing countries are causing a substantial net
reduction of domestic production and employment. Actually, the share of the
developing countries in the apparent consumption of all manufactured products
in the industrial countries was only about 3.4 percent in 1979 (highest in Europe,
lowest in Japan). And even excluding OPEC countries, LDC imports of
manufactures from the industrial countries are more than two and a half times the
value of their exports, a difference of $88 billion in 1980. A recent OECD study
estimating the net employment effects of North-South trade in manufactures
concluded that in 1973-77 this trade increased employment in the OECD
countries by approximately 200,000 jobs annually.
Our main recommendation is that the trilateral countries hold the line against
further protectionist advances and move, over time, to a

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more open system. And in formulating their trade policies, trilateral governments
should take developing countries into account as much as they do their OECD
partners.
Even if protection does not increase, the present conditions of access to the
markets of industrial countries are far from satisfactory. Although the most
serious restrictions are those on manufactured products, significant barriers
impede developing country exports of a number of agricultural products (such as
sugar) and primary commodities in processed form (given the escalation of
tariffs with stages of processing). Liberalization of trade in these products should
be high on the agenda for international action.
As for the adverse long-term trends in certain commodity markets on which
some developing countries depend (e.g., tea and hard fibers), the basic remedy is
not to be found in international schemes to shore up prices artificially but rather
in diversification into other lines of production. In dealing with the separate
problem of instability of primary commodity markets, we recommend further
improvement and liberalization of the IMF compensatory financing facility,
which provides loans to developing countries that experience a significant and
temporary shortfall in export earnings. Among the ideas worth considering are
the calculation of shortfalls in real (rather than nominal) terms, the scheduling of
repayments in relation to upturns in export earnings, and concessional loan terms
for low-income members. The significance of this facility is indicated by the
estimate that the $3 billion lent from it since 1979 offset 60 percent of the impact
of the commodity slump through the early part of 1982. A less comprehensive
export earnings stabilization scheme is the STABEX agreement between the
European Communities and the Lome Convention group of developing
countries. We urge that this scheme be backed with larger financial resources.
Turning to manufactures, tariffs are generally no longer significant barriers to
trade. Non-tariff measures are much more important, usually involving some
form of quantitative restriction on imports. Non-tariff measures have been
applied most comprehensively in the textiles and clothing sector, and are also
important in footwear, radios, television sets, steel, ships and chemicals. It is
imperative that all these measures be brought into the open and placed under
multilateral control and discipline, for which the GAIT framework is most
appropriate.
The NICs must recognize that an open international trading system cannot
withstand the pressures to which it is increasingly exposed when they themselves
still maintain highly restrictive trading re-

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gimes. In effect, we have a trading system today in which the GATT rules
apply to one group of about 20 OECD countries, while all others,
regardless of their stage or rate of development, are substantially and
indefinitely free from international constraints. The world economic
situation now is hardly optimum for launching a program of "trade
graduation"—that is, reducing import restrictions and export subsidies in
the newly industrialized countries. As the world economy returns to a
more normal situation, however, a program phasing down these
restrictions and subsidies should be high on the international agenda.
An exception may be justified with regard to import restrictions on
food, especially cereals. Some developing countries need to protect
themselves against imports, frequently subsidized, from developed
countries which could lead to excessive dependence on external food
supplies.
The trade issue is closely related to the debt issue. Protectionist
pressures must be resisted if the debt servicing capacity of developing
countries is to be maintained and the deflationary impact of the current
crisis on the trilateral economies minimized.

Financing Middle-Income Countries

It is the middle-income countries which depend most on rising levels of
commercial bank credit, and it is among this group of countries that the
major debt servicing problems have arisen. Bank lending has been
heavily concentrated, and several of the largest borrowers have been
among the first to require emergency assistance. Over the next 12 to 18
months, many others will face liquidity crises.
There are essentially two views of the current crisis. One view sees a
solvency crisis and believes that LDC repudiation of debts is a very real
and immediate danger. Those who hold this view have sometimes urged
a drastic and immediate restructuring of international debts, arguing that
a "socialization" of losses is needed, perhaps through a new official
institution which would take over LDC debts at a discount and turn them
into longer-term credits at lower interest rates.
A second view regards the present situation as a liquidity crisis. For
instance, Jacques de Larosiere, Managing Director of the IMF, stresses
that "there does not exist a global debt crisis," and that "current liquidity
problems can be resolved" provided that debtor nations put reasonable
economic adjustments of their own into effect and provided commercial
banks continue to increase their net credit outstanding at appropriate
rates.

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We strongly share this latter view. Although some mistakes were made,
most of the LDC debt was not imprudently acquired, and most of these
countries are facing liquidity and not solvency problems. In these
circumstances they need assistance in rescheduling their existing debt,
and they also need modest infusions of new debt as they undertake the
structural adjustments that will permit them to return to satisfactory
growth paths and a resumption of their debt service payments. If this is
not forthcoming, the international financial system is in danger of
freezing up, with heavy social and political penalties for the developing
countries and with a severe deflationary impact on the trilateral countries.
It is incumbent upon commercial banks to continue financing developing
countriequies. It is not necessary that net credit outstanding increase at
the rate of recent years, but it probably is necessary that it continue to
increase at a modest rate— perhaps three to five percent a year in real
terms. Given this situation, what should be done? We urge the following:
• The International Monetary Fund must be put in a strengthened position
to extend emergency assistance. The recently granted access to SDR 17
billion from the General Agreement to Borrow (GAB) is an important
backstop in this regard; and a 47 percent increase in quotas, which it is
vital that governments ratify, is to become effective on January 1, 1984.
But more resources may be required before the quota increase becomes
effective, or further down the road. Consideration should be given to the
ways in which the IMF itself could borrow from the financial markets to
supplement its resources in an emergency. The country lending ceiling of
450 percent of quota over three years may need to be relaxed by the IMF
Executive Board in some cases.
The BIS has also played a vital role in providing emergency assis-
tance, particularly in the short-term before an IMF package is put into
place. While the BIS has been forthcoming on several occasions, it
could be still more so.
The IMF and World Bank could usefully be more directly involved in
debt rescheduling operations. The advice of the Bank and Fund
should be actively sought in "Paris Club" official reschedulings and
also in commercial bank reschedulings where large amounts are
involved.1

1
Greater use could be made of the BIS forum to assure IMF association with central banks, and through them to
commercial banks.

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 • Central banks and the IMF should encourage appropriate expansion of
commercial bank lending to developing countries. The national bank
supervisory bodies in the trilateral countries should agree that they
will not act in ways that would cause or encourage banks and private
markets to adopt contractionary policies when the underlying
economic conditions in the developing countries do not justify such
actions. The IMF should consider announcing periodic quantitative
guidelines laying out the likely financing needs of developing
countries as a whole which could be appropriately met by commercial
banks and other private sources.
• The commercial banks must organize themselves to become more
capable of making better-informed judgments as to what are prudent
lending limits to individual developing countries. The recently created
Institute of International Finance is a step in the right direction. The
IMF and World Bank should, at a minimum, share information with
the Institute; and the Fund and Bank should themselves be more
candid and active in a wider sense in monitoring the financial
situations of developing countries. On the one hand, this would mean
that warning bells would ring at an earlier stage of financial
deterioriation than has often been the case in the past; but on the other
hand, it would also help provide an authoritative IMF and World
Bank judgment on the health of a developing country's economy at
times when—as now generally—conditions do not warrant a
contraction of net credit outstanding.
• The international financial institutions—in particular, the World Bank
and regional banks—must be put in a position to be able to provide a
higher percentage of long-term development financing in the coming
period. There has been a marked shift in percentage shares toward
private sources in the past decade, and a modest shift back over the
next five to ten years would be helpful. This does not mean that net
credit outstanding from commercial banks should stop expanding;
quite the contrary should be the case.
• To help buttress expansion of bank lending, studies should be made of
methods of finance which might lessen the increase in risk exposure
of commercial banks, such as guarantees of a portion of a bank's
portfolio of new medium-term and long-term lending. More generally,
coping with immediate liquidity problems should not distract us from
also looking for longer-term policies to strengthen the international
financial system.
• While the largest current debtors are necessarily the primary focus of
current IMF efforts, and while ODA, as recommended

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 below, is to be increasingly concentrated on low-income countries, measures
should be taken to assure that the countries in between—who will rely to an
increasing extent on non-concessional financing—do not suffer.
To attract sufficient political support in our countries for these measures,
certain fundamentals must be better understood by our publics. First of all, even
in some usually well-informed circles, there is a general misconception that the
current financial crisis reflects mismanagement by developing countries and
greediness by commercial banks. These have been factors in a few cases, but the
great majority of developing country debtors remain creditworthy in the long run
for existing and prospective levels of debt. Most of their debt was prudently
acquired on the basis of not outlandish economic assumptions. Second, in a
liquidity crisis, it is essential that more credit be extended. The IMF is rightly
requiring the banks to extend additional credit in several key cases (hardly a
"bailing out" of commercial banks). To deny the middle-income developing
countries the credit they require to service existing debt and to maintain modest
import levels will directly and adversely affect economic growth and employ-
ment in the trilateral countries, and may weaken world stability in the longer-
term. Finally, there is extremely little risk for taxpayers in trilateral countries in
the expansion of financial resources of the key international institutions. There
will be no penalty at them assuming that the developing countries continue to
pursue sufficiently sound economic policies to carry their debts to international
financial institutions, which is certainly not an unwarranted assumption on the
basis of past performance.

Making More Assistance Available to Low-Income Countries

The financial problems facing the low-income countries are significantly
different from those of the middle-income countries. The former have no real
alternative in the near-term to substantial dependence on concessional ODA
financing. Recent trends in ODA are deeply disturbing. ODA declined in 1981
(in real as well as nominal terms), while the competition for the limited amounts
available has increased. In view of this situation, the trilateral countries face
three urgent challenges: to increase overall ODA levels significantly, to con-
centrate available ODA more on the low-income countries, and finally to use
ODA more effectively.
Specifically, we recommend the following:

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 • To increase ODA levels, those DAC nations which are below 0.35
percent of GNP—the combined DAC performance in 1981—should,
even within the limits of their austere budgets, move as rapidly as
possible to increase their ODA to at least that level. The United States
is the major offender in this regard; it's ODA fell in 1981 to 23
percent of total DAC ODA, only 0.20 percent of GNP, a proportion
far below the fair U.S. share (U.S. GNP is 36 percent of total DAC
GNP). Had the United States contributed in 1981 0.35 percent of
GNP, overall ODA in that year would have increased by $4.4 billion,
more than the total of the Japanese and Canadian ODA programs in
that year.
• The OECD nations, again within the limits of their austere budgets,
should move forward to restructure the Sixth Replenishment of IDA
(IDA VI) to put it on a four-year rather than five-year basis, and
immediately begin negotiations on an IDA VII that would provide at
least a modest increase in real terms effective on July 1, 1984. IDA is
the largest single source of ODA funding available for low-income
countries, including Bangladesh and the low-income sub-Saharan
African countries. It is now "bankrupt" because of the failure of the
United States to honor its commitments to the most recent IDA
replenishment. This replenishment was agreed upon in 1980 by the
DAC nations, Kuwait and Saudi Arabia, and several developing
countries, when they agreed to an IDA VI lending program of $12
billion for fiscal years 1981-83. The U.S. commitment was for 27
percent ($3.2 billion), substantially below its proportionate share of
donors' GNP. Because the Congress failed to appropriate the amounts
needed to honor this commitment, it is clear the financing of the $12
billion will require five rather than three years. Moreover, it is almost
certain that the IDA VII replenishment, when it becomes effective
July 1,1985, will be in real terms significantly below those levels
incorporated in the 1980 agreement for fiscal 1981. The implications of
this for the rate of economic and social advance, and for political
stability, in the poorest countries deserve the attention of every
foreign minister and every finance minister of the OECD nations.
• Every effort must be made to concentrate available ODA on low-
income countries. In 1980, these countries received only a little over
one-third of DAC bilateral ODA. We believe that this level should be
brought up above one-half of expanding ODA totals by the middle of
this decade.
• Within the existing ODA, the low-income countries of sub-Saharan
Africa should receive priority attention from all major DAC
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 donors. As we have indicated, the low-income sub-Saharan African
countries face a most desperate economic situation with immediate
economic, political, and humanitarian implications that will affect the
interests of all trilateral countries.
• Plans should be agreed upon for assuring China and India appropriate
amounts of financial assistance, including concessional aid. It will be
impossible to provide per capita levels of ODA for these massive
countries equivalent to the levels provided smaller nations with
equivalent per capita income levels. However, it is important that the
donor countries and institutions begin urgently to develop plans to
help these countries meet their financial needs.
• Although on balance most ODA is used effectively by most low-
income countries, the following steps should be taken to further
increase the effectiveness of ODA: First, there should be increased
use of policy dialogue between donors and recipients on recipient
countries' macroeconomic and sectoral policies at the national or
regional level. The multilateral financial institutions are best placed to
provide leadership in these dialogues. Second, there should be
improved coordination among donors, including the enhancement of
aid consortia in several ways. Through the consortia there should be
closer planning and the sharing of aid responsibilities among the
donors, a review of the impact of donor and recipient country policies
on the developmental process in the recipient countries, and more
consideration of operational is sues. Third, it is important to maintain
within the aid-giving countries and institutions personnel familiar
with the recipient countries' cultural heritages, political and social
situations, and macroeconomic and sectoral policies. Fourth, there
should be increased efforts by donors to help recipients train the
personnel within their countries needed for effective implementation
of development plans. Such personnel should not be limited simply to
economic technocrats at the top, but more importantly must include
middle-level administrative cadres. Finally, ODA, although given and
sought for multiple objectives, should always contribute to the
developmental process in the recipient countries. Developmental
objectives need greater emphasis.

Finally we stress what may be obvious: The greatest single contribution the
industrialized nations can make to the developing countries

125
is, as Jacques de Larosiere has said, to "move to sustainable growth— it
should constitute the central objective of economic policy." This requires
first of all that the United States move forward. While there are signs of
recovery in the U.S. economy at present, it is hard to believe that this
recovery can proceed on a sustained acceptable basis until the present
fiscal policy of the United States—a fiscal policy which assures large
structural deficits a few years out—has been corrected. More generally,
the absence of agreement among the main OECD countries on
coordination of their macroeconomic policies has reinforced the tendency
of some countries—in particular, Japan and Britain in each of the past
three years and Germany in the past year— to adopt restrictive fiscal
policies which have further aggravated the recession induced by the
second oil shock.

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 The Industrialized Democratic Regions
in a Changing International System
The Trilateral Commission, launched in July 1973, is a non-governmental,
policy-oriented discussion group composed of about 300 distinguished
citizens from Western Europe, North America, and Japan, drawn from a
variety of backgrounds. Its purpose is to encourage mutual understanding
and closer cooperation among these three regions, through analysis of
major common problems and consideration of policy proposals for ad-
dressing them.

The historical roots of the Commission can be traced primarily to serious

strains early in the 1970s in relations among Japan, North America, and
Western Europe. As the decade proceeded, however, it became increas-
ingly clear that the strains and shifts in the international system are global
as well as trilateral in scope. The renovation of the international system is
thus a task of global as well as trilateral dimensions, and the work of the
Commission, as evidenced in its meetings and reports, has moved
accordingly.

In this global effort, the industrialized democratic regions remain an iden-

tifiable community and a vital core. Their focus, however, must not be on
the preservation of the status quo, but on arrangements which increas-
ingly embrace the Third and Fourth Worlds in a cooperative endeavor to
secure a more equitable world order.

The renovation of the international system will be a very prolonged

process. The system shaped after World War II was created through an act
of will and human initiative in a relatively restricted period of time. One
power had overwhelming might and influence, and others were closely
associated with it. In contrast, a renovated international system will now
require a process of creation — much longer and more complex — in
which prolonged negotiations will have to be initiated and developed. In
nurturing habits and practices of working together among the trilateral
regions, the Commission should help set the context for these necessary
efforts.