Chapter 4


External macroeconomic shocks have been critical in disrupting trading patterns for many poor
countries. Perhaps the most dramatic shock was the oil price rise of the mid-1970s, which
brought about a major increase in the import bill and the domestic cost structure of many
countries. However, all violent changes in international prices can cause problems.
Commodity price booms have encouraged large spending programmes in exporting countries
which have been unsustainable when the commodity boom passed. Increases in international
interest rates in the early 1980s have led to sharp rises in debt service payments.

Domestic shocks have also been disruptive to market function and economic growth in some
countries. Drought has ravaged some of the poorest economies in Sub-Saharan Africa in the
1980s and 1990s. Civil war and the influx of refugees has disrupted economic activity in
others. In some countries economic policy has encouraged rent-seeking rather than productive
activity. In other words, entrepreneurs have seen greater opportunity for profit in manipulating
regulations governing access to resources, such as import licences, than in producing
agricultural or industrial output. Bureaucracies have flourished at the expense of the
manufacturer and entrepreneur.

International trends have not helped large regions of the world in the last decade. Hans Singer,
a leading development economist, has talked of the quadruple tax faced by many developing
countries: recession in the North leading to weaker markets for developing country exports:
declining terms of trade; high international interest rates; and the burden of debt repayment.

In summary one can state that internal and external shocks and unfavourable trends in
foreign trade, in conjunction with inappropriate policies, have caused a decline in economic
growth and exposed many developing countries to a vicious circle of growing internal and
external macro-economic disequilibria. Figure 4.1 shows the main factors causing economic
imbalances, the linkages between the factors, and how they contribute to a perpetuation and
aggravation of-a disequilibrium situation.

Figure 4.1 The process of growing macro-economic disequilibria


financed with
external h
 credits


Balance of01
 defic


 SIncreased .
 debt
 services

Initial (combined/repeated) factors:

 .Ektibhnl shocks
 etrntal shocks ..
I.,+ + < .,
K+ l~e.+ hea;_+


 Capital Market
 restrictions 40 r regulations M k
 Production and market imbalaknces
payments inefficiencies i
Pit I Shifts of
 Widening gap between production
t production and demand & demand

 STdeficit Inflation 0
 tradablee goods) (nontradable goods)


 c ntge\

 (o rt 'aIfluion)\


\Fisc l6Vrnroare axfsloi tn|ibaahn~cAbb kItt Oi tlxt eds production
Note: italics indicate policy parameters


- 110-


Increased
indebtedness