KEY DEBT-TROUBLED LDCS: EXPORT RESPONSE TO OECD RECOVERY

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00558R000500110003-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 19
• Document Creation Date: December 21, 2016
• Document Release Date: January 17, 2008
• Sequence Number: 3
• Publication Date: August 1, 1983
• Content Type: REPORT

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Directorate of Confidential
Key Debt-Troubled LDCs:
Export Response to
OECD Recovery
An Intelligence Assessment
Confidential
GI 83-10188
August 1983
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Directorate of Confidential
if
l ~l 's~ Intelligence
Key Debt-Troubled LDCs:
Export Response to
OECD Recovery
queries are welcome and may be directed to the
Chief, Economics Division, OGI,
Confidential
GI 83-10188
August 1983
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Key Debt-Troubled LDCs:
Export Response to
OECD Recovery
Key Judgments Perhaps the key factor behind the financial problems of the debt-troubled
Information available LDCs has been the recent falloff in their exports caused by the recession in
as of 12 July 1983 the OECD. LDC exports have failed to keep pace with import demands,
was used in this report.
leading to the continued debt buildup since 1980. Depressed export levels,
moreover, have made it increasingly difficult for many LDCs to service
these higher debt levels.
While the OECD economic recovery should reverse the declines in LDC
exports, we do not believe that, by itself, it will be sufficient to solve their
financial difficulties, at least not by the middle of the decade. We believe
that the lagged response of LDC exports to an OECD economic turn-
around will severely limit the export rebound this year. Further, we
estimate that the export gains in 1984-85 will not match the export growth
of the 1970s. Indeed, it would take a very rapid OECD recovery-on the
order of 5 percent a year-to help LDCs regain their prerecession export
growth rates.
LDC exports have in the past lagged OECD recovery by roughly four
quarters. The recovery period this time-which began late last year-may
even be longer. On the agricultural front, supplies are likely to be excessive,
with surpluses constraining OECD import demand and prices, thus
preventing LDC exports from rising. For most industrial raw materials,
large OECD stockpiles, excess LDC capacity, and structural changes that
reduce requirements are likely to limit OECD demand for these materials
during recovery and dampen price increases. Oil exports will be hurt by the
weak oil market and constant oil prices. Manufactured goods, on the other
hand, represent a more stable export product, and several of these countries
have increased their manufactured exports. Because of these trends,
countries such as Mexico-which exports a relatively high share of
manufactured goods-should do better than those such as Costa Rica,
Kenya, and Morocco-which rely heavily on agricultural sales.
If lenders continue to limit Third World borrowing, we expect that an
increasing number of LDCs will face difficult choices in adapting their
economies to a more austere long-run export growth path than they
experienced in the 1970s. We believe that the LDCs will have to limit their
iii Confidential
GI 83-10188
August 1983
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imports to accommodate the slower export growth. Some of the debt-
troubled LDCs-Argentina, Brazil, Chile, and Mexico-have already
reduced their imports to comply with balance-of-payments criteria set in
IMF programs. Import retrenchment is also likely in several other LDCs-
Indonesia, Peru, the Philippines, and Venezuela-that are having difficulty
coping with declining exports, capital flight, and shrinking reserves. These
LDCs are important markets for the OECD, and a reduction in OECD ex-
ports could reduce OECD industrial production and, in turn, OECD
economic growth and imports. We also expect the debt-troubled LDCs'
export opportunities among themselves will be curtailed as their imports
decline.
As the debt-troubled LDCs fail to increase export sales sufficiently to
resolve their financial problems despite the OECD recovery, they could
seek to remedy their situation at international bargaining tables. We
anticipate that, in addition to increased aid, they will press even harder for
greater market access, guaranteed market size, commodity price and
export income stabilization funds, export credit guarantee facilities, and
structural changes in international institutions.
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OECD Recovery and LDC Export Response
Outlook for LDC Export Response to OECD Recovery
1.
Key Debt-Troubled LDCs: Trends in Debt and Export Earnings
vi
2.
Key Debt-Troubled LDCs: Destination of Exports, 1981
2
3.
Key Debt-Troubled LDCs: Commodity Composition of
6
Exports, 1981
4.
Key Debt-Troubled LDCs: Projected Export Response to
8
OECD Recovery
1.
Key Debt-Troubled LDCs: Changes in Total Export Earnings
1
2.
Key Debt-Troubled LDCs: Changes in Exports to the OECD
3
3.
Key Debt-Troubled LDCs: Estimated Changes in Exports to
7
the OECD
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Figure 1
Key Debt-Troubled LDCs: Trends in Debt
and Export Earnings'
I 1 1 1
0 1970
80
a Medium- and long-term debt; reliable short-term
debt totals are not available for years before 1979.
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Key Debt-Troubled LDCs:
Export Response to
OECD Recovery F_~
Burgeoning Debt Problems:
The Role of the OECD Recession
Table 1
Key Debt-Troubled LDCs:
Changes in Total Export Earnings
LDC debt problems have mounted steadily over the
past three years. For 15 key debt-troubled LDCs,
total debt rose from $215 billion at the end of 1979 to
$352 billion by yearend 1982, $268 billion of which
was medium and long term.' A key factor in the
recent inability of most of these countries to manage
their debt-and, indeed, behind the buildup of the
debt itself-has been the drop in their exports since
1980. Total exports of these countries fell from $138
billion in 1980 to $125 billion in 1982, a 10-percent
decline (figure 1).
Nearly all of these countries have experienced export
declines (table 1):
? Foreign sales by Chile, Ivory Coast, Kenya, Moroc-
co, Nigeria, Peru, the Philippines, and Zaire began
falling in 1981; by the end of 1982 these countries
together had lost nearly $16 billion in export sales.
For the first three months of this year, exports from
these countries were 30 percent below the year-
earlier level.
? Argentina, Brazil, Costa Rica, Ecuador, Indonesia,
and Venezuela joined the export decline in 1982. In
one year these countries together lost $9 billion in
export sales. Their exports were 15 percent lower in
the first quarter of 1983 than a year earlier.
Only Mexico has not experienced a decline in total
export sales; even it, however, witnessed a dramatic
slowdown in export growth. Between 1978 and 1981,
Mexico's exports rose at a 50-percent annual rate;
since early 1982 they have increased only 15 percent.
' The 15 countries examined are: Argentina, Brazil, Chile, Costa
Rica, Ecuador, Indonesia, Ivory Coast, Kenya, Mexico, Morocco,
Nigeria, Peru, the Philippines, Venezuela, and Zaire. These coun-
tries were selected on the basis of an evaluation of their relative
debt positions, considering, both their level of debt, as well as their
Annual
Average
1976-80
1981
1982
17,744
-928
-12,173
Argentina
1,013
1,122
-1,520
Brazil
-3,118
-84
-158
-403
2,961
354
-2,545
391
-607
-651
-206
-157
2,533
3,813
2,197
-55
-324
3,750
-7,015
-3,148
521
-643
-25
689
-86
-686
2,052
904
-1,431
-970
-120
The marked shift in export trends has been an
important factor-perhaps the key factor-in the
debt buildup experienced by these countries. We
estimate that if their exports had continued to grow in
1981-82 at the 1976-80 rate, their total foreign sales
in 1982 would have been $50 billion higher than they
were. In contrast, higher world interest rates in-
creased their debt service payments only $15 billion
during 1981-82. Whether or not higher export reve-
nues would have translated into lower debt or higher
import levels is problematical, but, in any case, these
countries' economic difficulties clearly would have
been greatly alleviated.
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Figure 2
Key Debt-Troubled LDCs: Destination of Exports, 1981
. us
Other OECD
i - Other
Argentina
Brazil
Chile
Costa Rica
Ecuador
Indonesia
Ivory Coast
Kenya
Mexico
Morocco
Nigeria
Peru
Philippines
Venezuela
Zaire
20 30
L L L _L
40 50 60 70 80
L L
90 100
The OECD recession is largely responsible for the 15
LDCs' declines in export revenues. It weakened ex-
port earnings by reducing both the volume and prices
of LDC exports. Taken as a group, their export
earnings from OECD sales, representing more than
two-thirds of their total export earnings (figure 2),
declined $11 billion in 1981-82. In contrast, sales to
the OECD had expanded at an average annual rate of
$14 billion during 1976-80.
OECD Recovery and LDC Export Response
Just as OECD recession pulls LDC exports down,
rising consumption and production during OECD
expansionary periods translate into rising LDC export
revenues-but only after a considerable lag. This at
least has been the experience in the past. Coming out
of the last recession, for example, exports to the
OECD from the currently debt-troubled LDCs rose
only 1 percent in value terms during the first four
quarters of recovery. After three years of expansion,
exports by these LDCs stood nearly 35 percent higher
(table 2). Several countries fared better than the
others during this recovery period, with their perform-
ances related in part to the commodity mix of exports.
In general, past patterns of supply and demand are
valid for forecasting the immediate future because
structural changes take years to fully affect the
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Table 2
Key Debt-Troubled LDCs:
Changes in Exports to the OECD
1976
1st Qtr
1977
1st Qtr
1978
1st Qtr
Total
1.0
38.4
-4.1
Argentina
12.6
61.7
8.8
Brazil
-7.4
54.5
-8.0
Chile
4.5
16.8
25.8
Costa Rica
8.0
38.7
-3.1
Ecuador
-3.9
53.0
20.7
Indonesia
20.1
32.8
0.1
Ivory Coast
0.1
91.6
20.3
Kenya
-5.5
90.5
-2 . 6
Mexico
19.0
33.4
19.8
Morocco
-20.5
11.5
4.4
Nigeria
12.8
35.5
-28.5
Peru
-21.8
28.4
-5.0
Philippines
_
-29.5
36.0
12.9
Venezuela
Zaire
Change in OECD real
5.6
4.0
3.4
GNP
market. There are, however, some factors likely to
cause the effect of this economic recovery on the
exports of the key debt-troubled LDCs to differ from
the last recovery. In particular, agricultural and in-
dustrial commodity markets have suffered severely
during this recession, and we anticipate that exports
of these commodities will not recover as before. Oil
exports will be constrained by the weak oil market
and constant oil prices. Manufacturing trade, on the
other hand, has become relatively more important,
and we expect that those countries exporting manu-
factures will benefit more this time.
On the agricultural front, surpluses are likely to
constrain prices. Good harvests, depressed demand,
and huge carryovers-especially for grain, cocoa, and
coffee-have put downward pressure on farm com-
modity prices. Factors such as past investments in
better farming technology, land development, and
marketing infrastructure will further swell world farm
production despite low prices. New land continues to
be brought into production, and land is being worked
more intensively. Efforts by OECD governments to
protect their farm economies through domestic price
supports and import quotas and to conserve foreign
exchange spending on food imports encourage even
greater farm surpluses.'
As far as raw materials are concerned, a number of
factors will moderate the rebound in export earnings:
? Large OECD stockpiles of industrial raw materials
are likely to suppress demand and inhibit price
increases. For example, OECD stocks of copper,
aluminum, and tin amount to 80, 100, and 250 days
of consumption, respectively. Rapid reductions in
these inventories are unlikely as long as 30 percent
of OECD industrial capacity sits idle and invest-
ment in new industrial plant and equipment is down.
High interest rates and expectations of slower infla-
tion will also discourage future stock accumulation.
? Excess metals-producing capacity in the industrial
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swell metal supplies and restrain price increases. As
market conditions improve, some firms that have
temporarily mothballed capacity may start up pro-
duction and other firms may more fully utilize
production capabilities. Some of these LDCs-Bra-
zil, Chile, Peru, and the Philippines-invested
heavily in their metal-producing industries as they
increased their own consumption of metals in the
1970s. Their current financial difficulties, however,
will prevent them from undertaking large metal-
intensive capital projects in the foreseeable future,
thus further augmenting available supplies.
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OECD Recovery and the LDC Export Response:
The 1975-78 Experience
Exports of agricultural goods from Argentina, Ivory
Coast, and Kenya to the OECD rose significantly
during the last recovery. Argentina's grain exports
logged a record year in 1977, and increases in the
prices of coffee and cocoa, the major exports of
Kenya and Ivory Coast, buoyed their export sales to
record levels in 1977. Costa Rica and Ecuador also
benefited from higher coffee prices but overall did not
fare nearly as well, primarily because bananas, for
which prices did not rise, were their other major
export.
Exports from Chile, Peru, and Zaire also picked up
during the 1975-78 OECD recovery, rising 50 to 70
percent above 1975 lows by 1978. The volume-to-
price interaction in these countries was, however,
opposite that of the agricultural exporters. The price
of copper-their chief export-rose only slightly, but
volume growth boomed as OECD industrial produc-
tion and construction activity pulled up copper de-
mand. Zaire fared the best of these three countries,
primarily because it also exported cobalt, for which
there was volume growth, and coffee, the price of
which rose significantly
Exports to the OECD from the more industrialized of
these 15 LDCs-Brazil, Mexico, and the Philip-
pines-picked up less rapidly during the 1975-78
OECD recovery than did the OECD sales of most of
the other countries. While manufactured exports
? The linkage between raw material use and industri-
al country growth has steadily weakened for most
metals because OECD economic activity is shifting
from heavy industrial production toward services
and toward consumer goods with little metal con-
tent. Technological changes have led to new produc-
tion processes and product specifications, often re-
ducing metal content. Downsizing and
miniaturization have caused manufacturers to use
less metal per unit. Competition with lighter, less
expensive substitutes has increased the use of lower
respond fairly strongly to the OECD business cycle,
these 15 countries' exports of manufactured goods
were marginal in 1975-78, and secular increases in
OECD imports of manufactures had kept these ex-
ports on an upward track even during the preceding
recessionary period. The increased economic activity,
therefore, spurred LDC export recovery only slightly
beyond the pace that prevailed in the recession years.
Three major oil exporters-Indonesia, Nigeria, and
Venezuela-saw an immediate but unsustained rise
in their exports to the OECD, because the energy
crisis had changed the balance between supply and
demand in the world energy market and altered
OECD energy consumption patterns. OECD oil use
fell 3 percent during the last expansionary period
despite the fact that OECD industrial production
rose 19 percent and total energy consumption grew 4
percent. As a result, these three countries increased
their exports to the OECD only 27 percent ($4 billion)
over the entire 1975-78 recovery period. As oil ex-
porters, Mexico and Ecuador also faced declining
OECD demand for energy, but the circumstances
differed. Mexico was only beginning to emerge as an
oil exporter, so volume increases boosted oil export
earnings 300 percent. Ecuador, although an OPEC
member, was neither dependent on oil revenues nor a
significant oil exporter; foodstuffs were the major
export item.
gauge metals. Many of the substitutes, such as
plastic, are not exported by the 15 LDCs.
The combination of these factors will check OECD
demand for metals during recovery. This in turn will
dampen price increases, further limiting revenue
gains.
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Substitution and Conservation:
The Case of Copper
Aluminum virtually eliminates copper in the long-
distance power transmission field because of its light-
ness, conductivity, and usually lower cost. There has
also been considerable displacement of copper by
aluminum in insulated cables whenever insulation
costs are low. Aluminum could soon displace copper
in heat exchanger applications, particularly automo-
bile radiators. As automotive manufacturers reduce
vehicle weight to increase fuel economy, aluminum
radiators offer an attractive option if technical prob-
lems such as weldability can be eliminated.
Plastic pipes and tubes have made strong inroads on
copper in plumbing applications. For the most part,
plastics are cheaper, lighter, and easier to work with
than copper, and their use is becoming more wide-
spread with the gradual easing of local construction
codes
Another challenge comes from fiber optics. Optical
fibers are technically superior to copper coaxial
cables in telecommunications. Although copper is
still somewhat cheaper than optical fiber, as demand
Manufactured goods, on the other hand, represent a
stable export product, and manufactured exports are
no longer insignificant for several of the 15 LDCs.
During the 1970s exports of manufactures from these
countries to OECD markets rose rapidly, from $800
million in 1970 to almost $12 billion in 1980, and now
account for more than 10 percent of total exports to
the OECD. While Brazil, Mexico, and the Philippines
export 80 percent of these 15 countries' manufactures,
Argentina also relies on manufactures for about 20
percent of total export earnings (figure 3).1 We also
expect new nontraditional, high-technology export
sales by the LDCs to rise, but most of their manu-
factured exports now are semifinished items and
consumer goods. Increased protectionism in the
' Both Morocco and Zaire are indicated as exporting over 20
percent manufactured goods because of their semimanufactured
for the latter increases and technological innovations
occur, prices could drop and fiber optics could re-
place copper in communications applications.
Improvements in the design and performance of tele-
phone equipment have permitted the use of thinner
gauge wires. Currently, the telephone systems in most
countries are shifting down to 0.4-mm or 0.32-mm
wire as the standard gauge, and it is estimated that
by 1990 this process will have eliminated around 40
percent of the copper required in the United States for
a given volume of traffic. In addition, improvements
in multiplexing-the process of sending multiple
conversations through a single telephone circuit-are
reducing the need for additional cables.
Savings in the use of copper have also been encour-
aged by the drive toward lightness and miniaturiza-
tion. For instance, the potential widespread use of
aluminum in automobile radiators has spurred cop-
per fabricators to develop thinner gauge strip and
walled tube.
OECD countries would dampen OECD imports of
these manufactured goods. Some of the products-
textiles, apparel, and footwear-are already subject to
import quotas and other restrictions.
Five of the 15 countries are important sources of
OECD oil imports: four-Ecuador, Indonesia, Nige-
ria, and Venezuela-are OPEC members, and the
fifth is Mexico. While we believe the OECD will
steadily reduce its reliance on imported oil per unit of
output, this is a slow process. Constant or declining
real oil prices, as exist at present, will postpone
investments and delay this process. Increased econom-
ic activity and rises in energy demand should pull up
OECD imports of oil, and consequently the oil-
producing, troubled debtors should experience a rise
in export earnings
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Figure 3
Key Debt-Troubled LDCs: Commodity Composition of Exports, 1981
Manufactures
Raw materials
Fuels
Foodstuffs
Argentina
Brazil
Chile
Costa Rica
Ecuador
Indonesia
Ivory Coast
Kenya
Mexico
Morocco
Nigeria
Peru
Philippines
Venezuela
Zaire
0 10
Percent of total
30 40
70 80
Outlook for LDC Export Response
to OECD Recovery
The exact course of these 15 countries' exports over
the next three years will depend on the strength of the
OECD recovery and the effect of the recovery on their
exports. To gauge the probable export-recovery paths
of these countries, we looked at the historical linkage
between the OECD business cycle and the exports to
the OECD for each of the 15 countries. This analysis
was then used, in connection with commodity market
analyses, to suggest likely paths for export earnings
under alternative OECD recovery scenarios.'
' For a description of the methodology employed for linking the
OECD business cycle to LDC exports and analyzing commodity
The Near-Term Outlook
On the basis of this analysis, we believe that while
LDC export sales have not yet picked up, these
countries' export declines have probably tapered off.
OECD-wide industrial output bottomed out in No-
vember 1982 and has risen since, but our analysis
indicates that LDC exports do not rebound until
roughly four quarters after OECD economic revival
begins (table 3 and figure 4). If anything, the actual
lag may be even longer than past experience would
suggest since high interest rates, low commodity
prices, and rising protectionist trends, coupled with
conditions in the raw materials' markets, may dampen
any export pickup in the early stages of recovery.
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Table 3
Key Debt-Troubled LDCs:
Estimated Changes in Exports to the OECD
Average -6.1 11.4
Argentina
Average Annual Average Annual Average
Past Performance Projected Performance Annual
During OECD Recession During OECD Recovery 1971-80
1981-82 1983-85
Chile -7.5 8.5
Costa Rica -3.4 7.9
Ecuador
Indonesia -5.7 14.3
Ivory Coast -13.3 6.7_
Kenya -12.3 10.3
Mexico
Peru
Philippines
As a result of the lagged response of LDC exports to
the OECD economic turnaround, the remainder of
1983 and the first half of 1984 probably will be a
difficult period for debt-troubled LDCs. Our esti-
mates indicate that even if OECD real economic
growth averages a 2.8-percent annual rate over the
four quarters of 1983-a rate that would yield year-
to-year OECD real growth of 2 percent-the aggre-
gate exports of the 15 countries in 1983 will be barely
higher than last year on a year-over-year basis. In this
case, more than half the countries would have lower
OECD sales this year than last. Argentine, Chilean,
and Costa Rican exports to the OECD will likely be
the slowest to recover in 1983. It is to Argentina's
disadvantage that nearly 60 percent of all its exports
to the OECD are foodstuffs, for which the outlook is
not particularly favorable, and that only 30 percent of
its exports go to the United States where the recovery
may be the strongest. Nearly 90 percent of Costa
Rica's exports are also foodstuffs. Copper is Chile's
21.7
13.6
19.3
15.8
14.6
21.2
37.5
18.5
20.1
27.9
17.6
45.3
18.0
15.4 2S.5
16.8 15.5
3.2 3.3
major source of export revenues and, unlike other
copper exporters, Chile is experiencing falling ore
grades at many mines. We expect Mexico and Vene-
zuela to be the fastest in expanding their exports to
the OECD in the near term. Nearly 65 percent of
Venezuela's predominantly oil exports are destined
for the United States and Canada.
The Longer Term Outlook
If OECD economies continue to expand through
1985, the export picture of the 15 debt-troubled LDCs
will begin to improve. Assuming a hypothetical
OECD growth path of 3.7 percent in 1984 and
4 percent in 1985, their sales to the OECD are likely
to expand $40 billion by the end of 1985, a 40-percent
increase over the 1982 export low of $102 billion and
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Figure 4
Key Debt-Troubled LDCs: Projected Export
Response to OECD Recoverya
Percent change from previous quarter
Exports to OECD
6
a We assumed constant quarterly OECD growth rates that would
yield probable year-to-year real OECD growth of 2 percent in 1983,
3.7 percent in 1984, and 4 percent in 1985. As such, our results
represent it scenario growth path rather than a projection. Using
a smooth OECD growth path would have affected the shape of
the export line but not the cumulative total.
a 35-percent increase over the 1980 peak of $113
billion. According to our analysis, all of these debt-
troubled LDCs will see some rebound in their exports
to the OECD.
Under this scenario we expect Mexico to do the best
of the 15 debt-troubled countries over the 1984-85
period. Its relatively high share of manufactured
exports, which we believe will do best in this recovery,
and its large share of exports destined for US markets
will benefit its export sales, as will its rising oil-
production capabilities. Mexican exporters should also
benefit from the depreciation of the peso vis-a-vis the
dollar. A healthy performance, however, depends on
the exporters' ability to get the foreign inputs needed
for production. On the other hand, we believe Costa
Rica, Ivory Coast, and Kenya will do the least well of
these 15 LDCs. They rely on agricultural products for
a significant percent of export earnings, and we do not
anticipate that agricultural prices will rise as they did
during the last recovery. Expanded plantings and
excessive stocks may even perpetuate the existing
depressed prices into 1985.
We believe that at best the export recovery will not be
strong enough to put the debt-troubled LDCs back on
their prerecession growth path. Even under the rela-
tively optimistic assumptions of a trouble-free OECD
recovery and a historically typical export response, the
average annual growth of nearly 16 percent in exports
projected for these countries for 1984-85 will be well
below the 22-percent average they experienced during
the 1970s (table 3). Chile, Peru, and Zaire, however,
could attain export growth in 1984-85 comparable to
that which occurred in 1971-80. These countries will
benefit if copper prices rebound as construction and
industrial activity increases. Chile's recent invest-
ments at major copper mines and smelters will not
help its initial export recovery, but may accelerate the
pace of export growth in 1984-85. The medium-term
export potential of the three major oil exporters-
Indonesia, Nigeria, and Venezuela-will depend
heavily on conditions in the oil market. At best, oil
prices will remain stable over the next few years.
Prices, of course, could easily nosedive if Iran and
Iraq attempt to reenter the market in a large way-a
possibility that is not unlikely over this three-year
period. Under these conditions Mexico and Ecuador
would also suffer.
A recovery stronger than expected would be necessary
to help many of these LDCs get back on their
prerecession export growth path. It would take, for
example, OECD growth of 3.5 percent in 1983, 5.2
percent in 1984, and 5.4 percent in 1985 for these
LDCs, as a group, to achieve the rapid export growth
in 1984-85 that they experienced during past expan-
sionary periods. Generally, for each 0.5-percent in-
crease in annual OECD growth during 1983-85, these
LDCs' exports to the OECD should increase another
$20 billion by the end of 1985-adding roughly
2 percentage points to the average annual rate of
export growth in 1984-85. To the extent that OECD
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growth is lower-on the order of 2 percent-in 1983,
reaching such export performance would require more
rapid growth-about 6 percent a year in both 1984
and 1985. In the past decade, the strongest back-to-
back annual performance has reached only a little
more than 4 percent a year.
If, as we expect, the debt-troubled LDCs are unable
to achieve the pace of export growth sustained in the
1970s and if, as also seems likely, they are unable to
increase their debt as rapidly as they did in the 1970s,
then the rate at which they expand their imports must
also suffer. For example, between 1975 and 1980,
Brazilian imports increased 14 percent a year. Aver-
age annual increases in debt of nearly 23 percent and
in exports to the OECD of 18 percent over the same
period funded this import growth. Under our baseline
growth path, Brazil will achieve less than 15 percent a
year growth in exports during 1983-85. This will
occur at a time when new borrowings are likely to be
extremely limited
Lower import growth could increase the domestic
strains on these 15 economies on two fronts. On the
one hand, the reduced ability to import could lead to
fewer consumer goods, slower rises in living stand-
ards, and potential civil unrest. On the other hand, the
reduced import ability could lead to fewer imports of
capital goods and, in turn, to a smaller economic
growth potential later in the decade. In either case,
these countries are going to face difficult choices in
adapting their economies to a more austere long-run
growth path than they were accustomed to in the
1970s.
A reduction in the debt-troubled LDCs' imports could
also slow the pace of the OECD recovery and further
limit other LDCs' export expansion.' Some of the
debt-troubled LDCs-Argentina, Brazil, Chile, and
Mexico-have already reduced their imports to com-
ply with balance-of-payments criteria set in IMF
programs.7 Import retrenchment is also likely in sever-
al other LDCs-Indonesia, Peru, the Philippines, and
Venezuela-that are having difficulty coping with
declining exports, capital flight, and shrinking re-
serves. These LDCs are important markets for the
OECD, and a reduction in OECD exports could 25X1
reduce OECD industrial production and, in turn,
OECD economic growth and imports. We also expect
the debt-troubled LDCs' export opportunities among
each other will be curtailed as their imports decline.
25X1
If the debt-troubled LDCs fail to increase export sales
sufficiently to resolve their financial problems despite
the OECD recovery, they could seek to remedy their
situation at international bargaining tables. Attempts
to redress problems through discussions rather than
the marketplace are nothing new for the LDCs. The
LDCs' principal goal at this summer's UNCTAD
meeting, for example, was the adoption of measures
that would raise and stabilize commodity prices and
export earnings. We anticipate that pressures for such
solutions will only build as the LDCs maneuver for
greater market access, guaranteed market size, com- 25X1
modity price and export income stabilization funds,
export credit guarantee facilities, and structural
changes in international institutions. 25X1
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Appendix
Methodology
In the past many LDCs, including those that are at
present financially troubled, have relied heavily on
export sales to OECD markets. Generally, the value
of these LDCs' exports to the OECD has paralleled
the pace of OECD economic activity, rising during
expansionary periods and falling during recessionary
periods. During the 1970s, for example, it rose sharply
in the 1972-73 boom, fell in the 1974-75 recession,
and then recovered in the 1976-79 expansion.
To gauge the probable export-recovery paths of the
debt-troubled LDCs, we linked the level of OECD
economic activity and the LDCs' exports to the
OECD, and examined the historical lag structure.' As
our primary analysis, we examined the impact of
OECD real GNP on the aggregate exports of each
country. For additional commodity detail, we also
examined the impact of OECD economic activity, as
well as prices, exchange rates, and interest rates, on
LDC exports of agricultural products, industrial raw
materials, manufactures, and fuels. Quarterly data
were used in the country-specific analyses, and annual
data in the commodity-specific analyses
The choice of the methodology employed in the study was a
difficult one-involving trade-offs among timeliness, data availabil-
ity, model complexity, and desired forecast precision. We do not
believe that the methodology is without faults; however, we are
confident that the results are meaningful enough that we can draw
some quantitative conclusions about the timing, direction, and
magnitude of LDC exports if this recovery resembles the last. The
intent of the study was to examine the relationship between OECD
economic expansion and the debt-troubled LDCs' exports to the
OECD. While we realized that a variety of factors would affect
these flows, we were primarily interested in their response to an
OECD recovery. Consequently, instead of trying to identify numer-
ous variables and correctly specify their relationships among one
another within a complex model, we chose to look at only OECD
real GNP. Therefore, by default, we assumed that to the extent
that LDC exports were linked with the OECD business cycle in the
past, the relationship would also foreshadow the changes in the
future. Ideally, we would have liked to have estimated export
volume as a function of real GNP and then combined an estimate
of export volume and an estimate of export prices to generate an
estimate of export value. However, we were unable to find accept-
able export prices that we could use to convert nominal exports to
export volume. Many of the countries examined in the study do not
have overall export price deflators; none has a deflator for goods
exported to the OECD only. We opted to assume that OECD real
GNP could explain both the change in export volume and export
prices. Basically, we assumed that inflation during this recovery
would be similar to inflation during the last recovery and affect
For the quarterly, country-specific analysis, we as-
sumed that LDC exports to the OECD were a
function of present and lagged OECD real GNP. We
also assumed that the impact of lagged OECD real
GNP declined geometrically with time.' Reflecting
this assumption, we estimated a standard Koyck
specification. Where the results indicated, we adjust-
ed for serial correlation.
25X1
25X1
For the annual, commodity-specific analysis, we as-
sumed that LDC commodity exports to the OECD
were a function of OECD real GNP, exchange rates,
interest rates, and prices. To capture short-run move-
ments, we analyzed the deviations in these variables
from their long-run trend levels. Commodity exports
were then estimated by ordinary least squares regres-
sion techniques, and the commodity-specific analysis
underpinned the differences we found in the individ-
ual country responses. LDC exports of manufactured
goods, industrial raw materials, and fuels all respond- 25X1
ed strongly to changes in OECD real GNP, while
exports of agricultural products did not.'
In the country-specific analysis, we found that the
model specification fit well and tracked historical
data, limiting increases around turning points. Except
for Argentina's and Zaire's exports, the variation in
' We estimated a variety of lag structures, expecting that some
amount of time would elapse between a movement in OECD real
GNP and the response of LDC exports. We estimated the lags
individually up to eight quarters, and we combined up to eight lags.
We also considered the distributed lag where a series of lags
accounted for the time adjustment process and estimated both
polynomial and geometric distributed lags. With the polynomial
distributed lag, we tried constraining earlier periods to zero, later
periods to zero, and both time periods to zero. For all of the
equations involving lags, serial correlation was indicated so we
adjusted accordingly. Nonetheless, the regression statistics were not
good except for those equations involving the geometric distributed
lag, estimated according to the Koyck specification. On this basis,
we chose to use the Koyck specification in our final analysis.=
Further detail describing the estimation procedure and individual
25X1
25X1
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GNP explained 90 to 99 percent of the total variation
in each country's exports to the OECD. Both Argenti-
na and Zaire export a significant amount of food-
stuffs, and we did not expect the changes in OECD
GNP to explain their export changes. Nonetheless,
OECD GNP regressed against exports to the OECD,
for both of these countries explained a significant
proportion of the change in exports-65 percent for
Argentina and 87 percent for Zaire.
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