A year ago, as the world say back to assess a deteriorating economic outlook, the consensus was that prospects for the poor countries might be "manageable" (if grim) in 1980, but 1981 loomed as a year of serious testing.
A basic assumption was that the second oil shock would hit the less developed world harder than the first, because commercial bank financing of the resultant deficits probably would not work as smoothly this time around.
It was an accurate forecast for 1980. Clobbered by oil-price increases of 150-to-180 percent since the end of 1978, the less developed countries paid a staggering oil bill last year of $50 billion, which ran their aggregate balance-of-payments deficit to $75 billion.Meanwhile, the aggregate inflation rate hit 35 percent. Spokesmen for the LDCs at the preliminary sessions before the International Monetary Fund-World Bank annual meetings here last September labeled the economic outlook "frightening."
But LDCs seem to have survived the worst of it without any major upheavals. To be sure, there were a few debt reschedulings, but none that was unexpected, and none had an adverse effect on the international monetary system as a whole.
Experts are less apprehensive about 1981 than they were a year ago. "Wer're more optimistic than we were in 1980 that the LDCs will get through this year in good shape," C. Fred Bergsten, assistant secretary of Treasury for monetary affairs, said in an interview. "The underlying state of the world economy is highly unsatisfactory, but I don't see any major disruptions to the LDCs."
If Bergsten's overall appraisal is correct, the situation in 1981 will be much like 1980 -- difficult but manageable; stagflation, but not global recession. In part, Bergsten attributes the less uncertain outlook to the greater willingness of the LDCs themselves to make basic adjustments to the reality of the energy crisis. This time, in contrast to the last oil-price shock, the affected nations are convinced that it's a real crisis, Bergsten said.
That means that the less developed nations are increasingly willingly to come to the International Monetary Fund for assistance. Such help comes at the price of cutting back old habits of relatively free spending, which were based on the assumption that either commercial banks or international institutions would provide the money to cover their debts.
An equally important change is a new attitude at the World Bank and the IMF. The bank not only is ready to concentrate on loans for energy production in the LDCs, but also is helping with balance-of-payments problems. The IMF is undergoing a major transformation, and recognizes that loans must be made for longer terms, and on a basis that won't impose unrealistically stringent economic restrictions on developing societies.
Another hopeful development relates to the distribution of payments deficits among industrial countries. Many of the deficits are held by countries with strong economies -- Japan and West Germany -- while the United States had a $5 billion current account surplus last year, and expects to double that in 1981. That results in a strong dollar, which in turn means more strength for the international monetary system as a whole.
To some extent, the calls for "reform" of the international monetary system are muted by the strength of the dollar. Proposals for a "substitution account" have been put on the back burner, but there has been more reliance on currencies other than the dollar for national reserves. In a sense, a multicurrency reserve system is evolving by itself. But demands for greater involvement of the IMF in the management of exchange rates are likely to arise whenever there is new pressure on the dollar.
From the perspective of the Third World, things still look discouraging. Writing in Foreign Affairs, Barbara Ward asserts that the "North" still shows no vision in dealing with the "South" and argues for massive changes in attitudes and structures, as set out in the Brandt Commission report.
But it is likely that the Third World will find the United States under Ronald Reagan even less forthcoming than it was under Jimmy Carter. Reagan advisers indicate that they think the United States has been to generous with both the World Bank and the IMF, and they talk of funneling more aid through bilateral deals -- which they can closely control -- and less through the multilateral institutions.
Bergsten conceded that even if, as he expects, the LDCs and the international monetary system escape a crisis in 1981, there is a price to be paid: not only will the LDCs be drawing down rather comfortable reserves, they will be forced to accept much lower growth rates than they have been accustomed to in the past decade. Slower growth means added unemployment, and in some cases, distressing social problems. Bergtsten estimated that the non-oil LDC world will have a real growth rate of only 4 percent this year, compared with about 5 1/2 percent in 1980.
In the next several years, economists say, the risk is that per capita growth in the LDCs may be significantly less than per capita growth in the more industrialized world, a reversal of the situation in recent years. Not to be forgotten is that the phrase "less developed country" covers a broad spectrum: the situation in the sub-Saharan African countries, where per capita income has been slipping since 1974, is particularly bad.
A somewhat more pessimistic appraisalthan Bergsten's comes from a highly respected private expert, Rimmer de Vries of the Morgan Guaranty Trust Co. Writing in the December 1980 World Financial Markets, De Vries said: "Looking into 1981 and beyond, the environment for smooth adjustment and financing of LDC deficits looks much less promising (than before)." He makes the point that at $40 a barrel, the oil bill of the 12 major non-oil LDCs will take nearly one-third of their export earnings. And there is little expectation of the sort of decline in real oil prices that followed the first shock wave.
In its recently published World Economic Outlook, the Paris-based Organization for Economic Cooperation and Development also observed that the LDCs will face weaker growth of their export volume. This problem could be exacerbated if the worrisome trend toward trade protectionism continues.
At least there is no doubt that the IMF has been able to double the resources available to the poor countries with the completion of its last quota increase, and intends to increase loan funds further by borrowing in private capital markets and from the richer OPEC members -- if they are willing to lend.
Whereas the IMF had advanced less than $3 billion in standby assistance to LDC members in 1979, the amount jumped to $9 billion in 1980. At the fund, policy-makers say that new commitments for $7.8 billion are planned for the first half of 1981, and an equal amount may be available in the second half.
Toward the end of last year, the IMF loaned a record $6.75 billion to Pakistan, on terms considered strikingly lenient, to rescue the government of Mohammed Zia ul-Haq. Other sizable loans went to Turkey and Morocco, where the negotiations were wide-ranging and relaxed, perhaps a prototype of IMF negotiations in the future. Negotiations are under way to aid the new government of Edwart Seaga in Jamaica. A year ago, former prime minister Michael Manley booted the IMF out of Jamaica when it took what he considered an unyielding, excessively tough attitude. The new willingness of the IMF to try to strike a deal with Seaga may have great symbolic importance for the way the IMF will be regarded in the Third World.
A somewhat less Draconian attitude on the part of the IMF does not mean that there are no longer specific conditions for loans, or that the problems of the LDCs are at an end. The larger role to be played by the IMF is in part necessitated by the uncomfortable debt structure in the Third World, which makes the private banks less willing to play the extensive role they did after the first oil shock.
De Vries argues that the limited ability of private banks to recycle funds to the LDCs means that there should be more lending by OPEC itself. "At the moment," he says, "OPEC's involvement in lending to developing countries is to modest."
According to Citibank Vice President Jack Guenther, some of the frightening figures describing Third World debt are pulled out of an unrealistic context. He says it is true that it sounds ominous when one says that the aggregate foreign debt of the LDCs has soared from about $115 billion in 1975 to at least $280 billion now. But the $280 billion figure is still less than 20 percent of the collective gross product of these countries, compared with 15 percent in 1975. And much of the debt is borne by advanced LDCs such as Korea, Singapore, Taiwan and Brazil, which are major exporting nations.
Nonetheless, there could be trouble spots in 1981 -- notably Brazil, whose international debt since 1973 has increased from $12 billion to $55 billion. It is understood at the IMF -- although never officially stated -- that Brazil, running a balance-of-payments deficit of $12 billion, will have to appeal to the IMF for a loan this year for the first time.
In addition, the IMF anticipates that some of its most difficult problems this year will be in Africa, almost totally ignored by the IMF until two or three years ago. Now there are lending operations of one sort or other in 18 African nations.
Azizali Mohammed, named last year to be IMF director of external relations (in part to focus attention on the IMF's growing commitment to its LDC members) said in a recent speech in Amsterdam that there are 38 low-income countires -- all oil importers -- that face "serious financing difficulties."