Market stir aids third world - for now. But trouble looms if industrial world slips into recession, protectionism

Oddly enough, the stock market crash could be beneficial to the developing world - at least initially. That, note a few economists, is because of the 1.5 percent drop in interest rates that occurred with the decline in stock prices. Each 1 percent drop in interest rates saves the Latin American nations alone some $3 to $4 billion in service charges on their $300 billion in debts owed foreign commercial banks.

Over the longer run, however, the developing countries could suffer.

``It depends critically on whether the stock market crash turns into an economic recession or not,'' says William Cline, a senior fellow at the Institute for International Economics, a Washington think tank.

``If that happens, the debtor countries are in the soup,'' says John Sewell, president of the Washington-based Overseas Development Council. ``We [the United States] have been the major market for third-world goods.''

A slump in the industrial nations would weaken the demand for imports from the developing nations. With less income, the poorer nations would have greater difficulty servicing their debts and obtaining the imports that help their economies to grow adequately.

Economists differ on whether the market bust will push the US economy into recession or worse. Much, they say, depends on how governments react to the crisis.

Jean Baneth, a top economist at the World Bank, hopes ``it [the crash] wonderfully concentrates the minds'' of the administration and the Congress in their efforts to reduce the United States budget deficit.

Mr. Baneth admits that the stock market crash has ``marginally'' boosted the possibility of an economic slowdown. But if that market bust prompts a specific program of deficit reductions, it could be beneficial to the world economy.

On the negative side, however, the budget problem could prompt Congress to reduce foreign aid.

The administration has asked for $15.9 billion aid. The House of Representatives has been considering an aid level of $13.2 billion.

Speaking of the current negotiations between the administration and Congress, Mr. Sewell says, ``The pressure [to reduce foreign aid] is on the downside.''

Bernard Wood, director of the North-South Institute in Ottawa, wonders if the loss of confidence reflected in diving stock market prices could accelerate protectionism in the US and other countries.

If so, he says, ``We are in really big trouble.''

However, analysts in Washington suspect that the crash may have doomed the chances for passage by Congress of the Omnibus Trade and Competitiveness Act of 1987.

Though the bill does not match the protectionism of the 1930 Smoot-Hawley Act that worsened the Great Depression of the 1930s, some Congressmen fear they will be tarred with the same brush by historians should they vote for the Omnibus bill.

``There may be a bit of a salutary effect on broad macroeconomic policy,'' adds Mr. Wood. In other words, the key industrial nations may do a ``modestly'' better job of coordinating their fiscal and monetary policies to assure continued economic expansion.

Commodity prices, which recovered somewhat in the months preceding the debacle on most of the world's stock markets, fell in sympathy with the market slide. But to the relief of the World Bank's Baneth and the developing countries that rely on commodities for much of their income, the price decline has not been great.

For much of the world, Sewell notes, the bear market will not make much difference.

He points out that the economies of such heavily populated nations as India and China are highly self-sufficient, relying on large domestic markets more than on imports and exports for their growth.

Many developing countries suffered ``sympathetic'' drops in share prices in their own smaller markets.

Stocks listed on the Hong Kong market, which serves not just Hong Kong companies, lost one-third of their value Monday. The Mexican and Brazilian market also took a nose dive. But the Egyptian market survived relatively well.

The impact of the market slumps on capital flight from developing countries is unknown. It could discourage the well-to-do in these countries from sending more money abroad, or merely prompt them to shift their money to bonds or other more conservative investments.

Sewell urges leaders of the industrial countries to help the third world financially as a means of saving their own nation's economic skins.

Among the steps he would like to see are:

a major US boost to the capital of the World Bank;

another allotment of special drawing rights (a form of credit) from the governors of the International Monetary Fund;

enlargement of the IMF's Structural Adjustment Facility that would make loans to African and other extremely impoverished nations.

He wouldn't mind if the IMF sold some of its gold hoard to obtain the money to facilitate these moves.

Sewell also suggests the industrial nations, the multilateral institutions, and the commercial banks find some way to ease third-world debt problems.

All these measures would be designed to provide the third world with money it could use to buy goods and services from the first world (the democratic industrial nations), helping avert a recession.

You've read  of  free articles. Subscribe to continue.
QR Code to Market stir aids third world - for now. But trouble looms if industrial world slips into recession, protectionism
Read this article in
QR Code to Subscription page
Start your subscription today