High interest rates ‘hurting’ developing Pacific nations

Press, 3 May 1984, Page 29

High interest rates ‘hurting’ developing Pacific nations

NZPA staff correspondent Washington The president of the World Bank. Mr A. W. Clausen, due to visit Wellington on May 2, said that the developing nations of Pacific-Asia, except for the countries of Indo-China, are coping “relatively well” but are being hurt by high interest rates. The economic output of the Pacific region as a whole — Japan, Australia, and New Zealand included was now equivalent to two-thirds of the output of the United States economy, up from one-third 20 years ago, he told the Los Angeles World Affairs Council in that city.

Population growth still posed a significant challenge, he said, but population growth rates in the market developing countries of the region had come down significantly. The most prominent feature of development in such countries as Korea, the Philippines, Malaysia, and Thailand was rapid growth in manufactured exports, Mr Clausen said, with the principal policy foundations competitive exchange rates and low barriers to imports. “A second aspect of their success story is less widely appreciated — agricultural production has expanded faster in these countries than almost anywhere else in the world.

“Agricultural growth has been related to export growth, in that openness to the world economy has encouraged these countries to avoid price distortions, also in agriculture,” he said. “A third key area of notable economic performance, in addition to exports and agriculture, has been investment. “Investment in these countries has been equivalent to more than a quarter of their income, with over

four-fifths of investment coming from domestic saving.

“The market developing countries of Pacific-Asia have relied extensively on market forces. “It is not the absence of state intervention, but rather the selectivity and effectiveness of state intervention, which distinguishes these countries. Their Governments have supported development with careful macro-economic management, strong policy direction, and necessary public investments,” he said.

“Many of these countries need to develop a broader base of political participation. and no one can predict the political future. But until now, at least, Governments in the region have been relatively stable and committed to development. This basic stability has allowed economic managers to change tactics quickly when mistakes became evident or in response to changes in the international economic environment.” “The effects of reform have been most striking in the countryside,” said Mr Clausen, who visited China last year.

“The Government has delegated more responsibility to lower-level institutions, and income is more directly linked to output. Over three-fourths of China's production teams have contracted out land to individual households. “At the same time, the Government has sharply increased agricultural prices. As a result of all these changes, agricultural production has grown at an extraordinary pace. Since 1978, rural incomes have gone up about 10 per cent a year,” he said. Economic growth in the region had slowed, although, Mr Clausen said, it was down to an average 3 per

cent a year in 1982 and 1983. but the countries were taking "impressive steps" to adjust and to re-accelerate their development. This meant, he said, that prospects were good for renewed economic development and social progress in the years ahead. All signs pointed to continued economic and social advance in China, too, Mr Clausen said.

China, in spite of the persistence of serious poverty, had achieved rapid growth in industry, although virtually no growth in productivity. This was done by assigning a large share of national income to industrial investment and decentralising economic decisionmaking, relying more on private incentives, and opening itself to increased foreign commerce. “In the urban areas, State enterprises now retain more profit and have greater scope for decision-making. There is also more scope for business activity by cooperatives and individuals. The Government is encouraging industry to use energy more efficiently, mainly by rationing." China’s relatively slight involvement in the global economy had insulated it from the global recession, Mr Clausen said, but its leaders were convinced that the benefits of international trade, technology, and finance outweighed the risks of deeper involvement.

Economic growth in China between 1978 and 1983 was over 6 per cent a year, he said, but it might be difficult for it to maintain that pace because it had already reaped the fruits of correcting some of the most glaring inefficiencies of the past. Competition from newly industrialising countries in the region stimulated established producers to raise

their productivity and meant consumers got better value for money, Mr Clausen said. “Some industries in the West have been hurt in the process, but the newly industrialising countries import more manufactured goods than they export. Their net effect on employment in the advanced industrial countries is positive." he said.

The increasing outward orientation of the developing countries in the region was. in part, an act of faith that advanced countries would maintain economic momentum and resist protectionist pressures. Mr Clausen said.

“If we disappoint them, it will be more difficult for them to maintain their outward orientation.”

The developing countries of the region had not, in general, borrowed excessively, he said, and together were responsible for less than a sixth of total devel-oping-country debt. Debt had nevertheless become a heavier burden for them, and the World Bank’s five biggest borrowers in the region, in spite of increasing export revenues five-fold over the last 10 years, had seen their debt service payments rise from 14 per cent of export revenue in 1973 to 20 per cent in 1983. This was largely due to “punishing" interest rates averaging 14 per cent in real terms. “Reducing real interest rates to a more normal level — say 4 to 5 per cent — should be among the leading goals of economic policy in the dominant industrial countries,” he said.

“Reducing real interest rates will be difficult, but getting government deficits under- control, especially in the United States, would surely help.”