WORLD ECONOMY: FALLOUT FROM RECESSION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85M00363R001403220008-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 6
• Document Creation Date: December 20, 2016
• Document Release Date: October 16, 2007
• Sequence Number: 8
• Publication Date: March 18, 1983
• Content Type: REPORT

Approved For Release 2007/10/19: CIA-RDP85M00363R001403220008-6
World Economy: Fallout From Recession
The worldwide economic slump of the last three
years has created unprecedented problems in the
postwar period. In the OECD, unemployment rose
by record numbers; industrial capacity use fell to
extremely low levels; and business failures sur-
passed all previous postwar peaks in most major
OECD countries. In the LDCs, the recession
slashed export earnings, contributed significantly to
their debt problems, and forced a record 30 of them
into IMF-mandated austerity programs. More fa-
vorably, the recession led to a surprisingly marked
slowdown in world inflation rates.
Demand management policies generally fostered
the declines in world economic activity over the
past three years. As they focused on the goal of
lowering inflation, most OECD governments put in
place exceptionally tight fiscal policies in 1980-82.
Central banks generally pursued tighter monetary
policies as well.
1 1976-79a80 81 82 -1 1976-79a80
aAverage annual.
The Worldwide Slump in GNP
Over the last three years, the world economy
experienced its worst slump since the end of World
War II. In 1980-82, OECD real GNP rose a scant
2 percent; LDC real output increased at about a
2-percent annual rate, compared with a 6-percent
pace in the last half of the 1970s.'
The slump was unprecedentedly broad:
? Among the Big Seven OECD countries, only
Japan recorded cumulative growth greater than
1.5 percent a year in 1980-82; despite a slight
rebound, the UK's real GNP last year remained
lower than in 1978.
81 82 25X1
? Unlike the 1974-75 recession, the downturn se-
verely affected the smaller OECD countries. In
1981-82 seven of these countries-Belgium,
Greece, Iceland, Luxembourg, the Netherlands,
Sweden, and Switzerland-recorded cumulative
GNP declines; only Turkey managed greater
than 2-percent growth for the two years.
? The LDCs-both OPEC and non-OPEC-expe-
rienced the worst growth performances in over 30
years. OPEC real GNP grew only 2 percent
' Historical data presented in this article were obtained primarily
from OECD and IMF statistical blications; estimates for 1982
were made by CIA
Secret
DI IEEW 83-011
18 March 1983
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The Recession's Impact on LDCs Key LDCs Operating Under IMF-Mandated Austerity
Programs
The world recession has had far-reaching impacts
on the Third World. It has depressed growth to the
lowest levels in the postwar period, slashed export
earnings, caused unemployment to soar
,
and creat-
ed major international financial problems
.
More-
over, it has not provided a reduction in inflation.
marked contrast to their success in insulating
themselves from the 1974-75 recession
The chief differences between now and 1974-75 lie
in the international economic arena. In 1974-75 the
Third World countries were able to finance eco-
nomic expansion at rates more rapid than that
possible with domestic resources because they had
easy access to foreign funds. OPEC used its oil
surplus to finance its expansion; the non-OPEC
LDCs used increased borrowings from commercial
banks to cover their needs.
The reverse of this situation has been true in this
recession. The OPEC surplus is gone, constraining
OPEC members' ability to expand their own econ-
omies. In addition, the indebtedness of the non-
OPEC LDCs has become so large that concerns
about their creditworthiness have forced many to
reduce their rates of economic expansion. Many
have had to implement formal austerity programs
1980
1981
1982
Bangladesh
Argentina
Costa Rica
Ban ladesh
onduras
Guyana
Brazil
Jamaica
Honduras
Chile
Kenya
India
Costa Rica
Liberia
Ivory Coast
Guyana
Madagascar
Jamaica
Honduras
Malawi
Kenya
India.
Morocco
Liberia
Ivory Coast
Pakistan
Madagascar
Jamaica
Panama
Malawi
Kenya
Sudan
Morocco
Liberia
Uruguay
Pakistan
Madagascar
Panama
Malawi
Senegal
Mexico
Sierra Leone
Morocco
Sudan
Pakistan
Thailand
Panama
Togo
Peru
Uganda
Philippines
Uruguay
Senegal
Zaire
Sierra Leone
Zambia
Sudan
Zimbabwe
Thailand
Togo
Uganda
Uruguay
Zambia
Zimbabwe
during 1981-82 with a number of OPEC mem-
bers experiencing declines in real output. In the Increased Unemployment. OECD out-of-work to-
non-OPEC Third World, the 0.7-percent growth tals rose by 11 million persons in 1980-82, nearly
estimated for 1982, was dramatically lower than double the jump that occurred in 1974-75. More
any annual growth performance since 1950.0 than 30 million persons are now jobless in the
OECD, nearly 9 percent of the labor force.
Impacts of the Recession
The impacts of the recession on the OECD econo-
mies were strong and mostly negative. Unemploy-
ment and business failures skyrocketed; only on the
inflation front was there ,a significant positive
Western Europe was particularly hard hit. A cut in
West European labor usage-in part a response to
increases in real wages in the late 1970s-com-
bined with rapid labor force growth to push jobless-
ness up by 2.5 million even during the expansion
Secret 16
18 March 1983
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World Economy: Changes in Real GNP
OECD
3.9
1.2
1.5
-0.4
United States
4.5
-0.4
1.9
-1.8
Japan
5.2
4.4
3.2
2.5
Canada
3.8
0.5
3.8
-4.8
Western Europe
3.3
1.4
-0.2
0.2
West Germany
3.9
1.9
0.2
-1.1
France
3.8
1.1
0.2
1.6
United Kingdom
2.5
-2.0
-2.0
0.5
Italy
3.8
3.9
-0.2
0.7
LDCs
5.7
4.6
1.8
0.9
Non-OPEC
5.6
5.7
3.1
0.7
Argentina
2.0
-1.6
-6.0
-7.0
Brazil
6.5
8.0
-2.0
0.0
India -
0.4
7.5
4.6
-0.5
Mexico
6.2
8.3
8.1
1.0
Singapore
12.6
10.2
12.5
13.4
South Korea
10.4
-6.2
6.4
6.0
5.8
2.0
-1.4
1.2
Indonesia
6.9
7.0
7.6
6.5
Nigeria
5.9
3.7
-2.4
-11.0
Saudi Arabia
9.5
10.9
8.1
5,2
Venezuela
4.8
-1.2
1.0
0.4
a Average annual percent change.
b Estimated.
years of 1976-79. Since 1979 an additional 6
million West Europeans have joined the unem-
ployed ranks, pushing the overall unemployment
Depressed Manufacturing. Capacity utilization in
the Big Seven manufacturing sectors fell to record
low levels. Revenue losses, combined with high
finance charges, to push many firms to the point of
bankruptcy.
? In the United States, where manufacturing ca-
pacity utilization has fallen to the lowest point
Percent OECD: Unemployment Million persons
OECD
19.1
21.3 24.
7
30.2
United States
6.1
7.6 8.
3
10.6
Japan
1.2
. 1.1 1.
3
1.4
Canada
0.8
0.9 0.
9
1.3
Western Europe
10.4
11.5 13.
8
16.2
West Germany
0.8
0.9 1.
3
1.8
France
1.4
1.5 1.
7
2.0
United Kingdom
1.3
1.7 2.
6
2.9
Italy
1.7
1.7 1.
9
2.1
since the series has been recorded, business liqui-
dations in 1982 were at the highest levels since
the 1930s.
? In West Germany, 1982 capacity usage was 5
percentage points below the 1975 low point; at
the same time, business failures, including some
large prominent firms, hit postwar record levels.
? Even in Japan, where the recession has been
mildest and capacity utilization remains the hi h-
est, bankruptcies have risen sharply. 25X1
Drop in Inflation. The prolonged slump in real
economic activity did lead to a rapid slowdown in
world inflation. At about 8 percent, OECD con-
sumer price increases in 1982 showed a remarkable
turnaround from 1980 when OECD consumer 25X1
prices rose by 13 percent, the worst record of the
postwar period except for 1974.
The shift in inflationary trends was even more
pronounced in commodity markets. World oil
prices stagnated, agricultural and metallic raw
material prices dropped over one-fifth, and prices
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World Economy: Changes in Prices
Percent OECD: Changes in Hourly Earnings Percent
in Manufacturing
6.2
8.0
4.9
2.6
8.4
10.1
12.5
10.8
Western Europe
10.8
15.1
13.3
10.9
West Germany
3.7
5.5
5.9
5.3
France
9.7
13.6
13.4
12.0
United Kingdom
13.4
18.0
11.9
8.6
Italy
15.5
21.2
19.5
16.4
LDCs
31.5
35.9
30.0
53.8
Non-OPEC
38.3
42.7
35.6
59.7
OPEC
15.4
17.6
16.7
19.0
Factor prices
Oil
14.1
65.3
11.8
-2.7
Food
0.5
34.0
-13.9
-20.9
Agricultural raw
materials
13.9
4.1
-9.8
-13.8
-13.8
-9.7
a Average annual percent change.
b Estimated.
of world-traded food items were off one-third.
Except for food, where downward price pressures
have emanated chiefly from high levels of produc-
tion, the recession has played a key role in com-
modity price declines.
OECD wage increases also moderated substantial-
ly. In Western Europe, rises in hourly earnings fell
to only 11 percent last year, well below the
14-percent-a-year pace of the 1970s and fairly close
to the 9-percent increases of the 1960s. Japan also
has achieved a marked slowing of wage gains.
Recession-induced slowdowns in productivity
growth, however, have limited the impact of favor-
able wage settlements on business costs. Unit labor
Secret
18 March 1983
OECD
11.5
10.3
8.6
United States
8.4
9.9
6.6
Japan
12.6
5.6
5.4
Canada
11.0
12.1
9.2
Western Europe
14.1
12.2
10.8
West Germany
7.5
5.2
4.4
14.8
14.5
13.6
22.4
23.7
17.8
a Average annual percent change.
b Estimated.
cost increases in the Big Seven OECD countries
have remained above 7 percent, down only about a
percentage point from the average pace of the
1970s and a full 5 percentage points above the rate
of unit labor cost increases in the 1960s.
Government demand management policies general-
ly fostered rather than counteracted the decline in
world economic activity, over the past three years
as the political response to a decade of rampant
inflation led to strong commitments to end the
price spiral. In the Big Seven OECD countries, for
example:
? The Thatcher government implemented extreme-
ly contractionary fiscal policies, actually moving
the budget toward surplus even in the face of a
three-year decline in real output. According to
OECD estimates, London's discretionary shifts in
fiscal policy were more contractionary than in
any other Big Seven country. London's monetary
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OECD: Changes in Money Supply
Monetary
Base
M1
M2
OECD
10.2
9.8
11.7
United States
8.1
7.6
8.6
Japan
9.9
9.3
12.4
Canada
10.4
4.8
16.7
Western Europe
12.5
12.4
13.9
West Germany
8.9
8.0
9.2
9.2
10.3
13.8
United Kingdom
11.2
14.5
11.9 c
Italy
19.8
22.3
21.4
a Average annual percent change.
b Estimated.
c Sterling M3 definition of the money supply.
policy in 1980-82 was mixed. Growth rates of
narrowly defined monetary aggregates, such as
the monetary base and M1, were reined in sharp-
ly. On the other hand, broader definitions of the
money supply, such as sterling M3, grew more
rapidly, largely because of technical factors and
institutional shifts similar to the recent changes
in the US financial sector.
? Japan's demand management policies were gen-
erally contractionary on both the monetary and
fiscal fronts. Despite a steady slowing of real
domestic economic activity, the budget deficit as
a share of GNP declined in 1980-81 only to
rebound last year. The chief cause of the increase
in the 1982 deficit was an unexpectedly large
shortfall in tax revenues. Concurrently, expansion
of Japan's monetary aggregates was reined in
sharply.
? The OECD estimates that the discretionary
tightening of Canadian fiscal policy was exceeded
only by the United Kingdom and Japan's. Otta-
wa's monetary policy also generally was tighter in
1980-82 than in the 1970s.
Monetary
Base
MI
M2
5.5
6.8
12.1
3.8
4.7
7.1
4.6
4.9
8.8
4.6
7.6
13.6
6.4
8.8
12.8
2.7
2.5
5.2
13.2
11.5
10.8
2.0
10.1
14.6 c
13.7
10.1
10.3
? Ever fearful of inflation, Bonn also engaged in
essentially contractionary demand management
policies over the past three years. Despite a drop
in GNP of 1.1 percent last year, West Germany's
government budget deficit remained at a constant
4 percent of GNP. In addition, the Bundesbank
slowed growth of credit. In 1980-82, M2 in-
creased 4 percentage points less per year than in
1976-79; growth of M 1 and the monetary base
dropped even more.
? France shifted to expansionary policies with the
coming to power of President Mitterrand in May
1981; the subsequent acceleration of French in-
flation, deterioration of competitiveness, and de-
preciation of the franc, however, forced a shift to
contraction.
? In Italy, the budget deficit increased more in
1980-82 than in any Big Seven country except
Canada and the United States. With shaky coali-
tion governments unable to chart a clear fiscal
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Big Seven:
Changes in Government Budget Balances, 1979-82 a
Actual
Change
Effect of
Changes in
Economic
Activity
Effect of
Increased
Interest
Payments
Estimated
Discretionary
Change
Big Seven
-2.3
-3.0
-0.8
1.5
United States
-4.3
-3.5
-0.6
-0.2
Japan
1.5
-0.7
-1.2
3.4
West Germany
-1.4
-2.8
-0.7
2.1
France
-2.2
-2.5
-0.9
1.2
United Kingdom
1.1
-4.4
-0.5
6.0
Italy
-2.9
-2.3
-1.8
1.2
Canada
-4.4
-5.7
-1.3
2.6
Big Seven: Change in Percent of GNP
Government Budget a
United Kingdom 1.5 1.1
Italy 2.4 -2.9
a OECD estimates.
b Big Four only.
course, the Bank of Italy battled inflation by
substantially slowing the growth of all three
monetary aggregates.
? The United States followed the least contraction-
ary fiscal policies in 1980-82. According to esti-
Secret
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mates by the OECD, it was the only major
OECD country to engage in discretionary shifts
in fiscal policy that have been expansionary. On
the other hand, monetary policy was quite tight,
with all major monetary aggregates expanding
considerably more slowly in 1980-82 than in the
previous four years.
Fiscal and monetary policy in the smaller OECD
countries also was generally tight. The weighted
average budget deficit for Australia, Austria, Bel-
gium, Denmark, the Netherlands, Norway, and
Sweden increased by only 1.3 percent of GNP
during 1981-82, despite real GNP growth that
averaged only 0.4 percent a year. During 1974-75
these countries swung into deficit by a degree equal
to nearly 3 percent of their GNP. Monetary policy
also was tightened, with more than half of the
Small Seventeen-including larger countries such
as Spain, Sweden, the Netherlands, and Belgium-
recording reductions in the growth of their broadly
defined money stocks between 1976-79 and 1980-
82.
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