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April 8, 1988

LDC Debt

and Exports

Between 1983 and 1986, the major LessDeveloped Country (LDC) debtors together generated trade surpluses totalling $128 billion to
service their debts. At the same time, however,
both investment and output growth have deteriorated in these countries, and indicators of the
debt burden, such as ratios of debt to exports
and interest payments to exports, have not
improved significantly.
One reason for these anomalous and largely discouraging results is thatthe trade surpluses of
LDC debtors are the result of reduced imports
rather than growth in export revenues. Such
import compression has impaired the ability of
these countries to service their debts since many
LDC debtors traditionally have imported capital
goods to support investment and economic
growth. A long-term solution to the debt problem requires LDC debtors to grow and generate
increased export revenues to meet their debt
There is much pessimism on this score. Some
observers question whether there are adequate
markets for the products of LDCs. They believe
that markets in industrial countries are inaccessible or not likely to grow in the future, particularly because of growing protectionist
pressures. Thus, these observers hold out little
hope for successful investment in many LDC
debtor countries, and suggest that the prospects
for long-term growth and a solution to the debt
problem are grim.
More optimistic observers, on the other hand,
point to the rapid growth of the exports of the
Asian newly industrializing countries (NICs) as
evidence of a large potential market for LDC
exports to industrial countries. They argue that a
solution)o LDCs' debt problems lies in these
countries' willingness to adopt measures that
diversify their exports and in industrial countries'
continued willingness to ayoid protectionism.
This Letter reviews trends in the export growth of
LDC debtors and the prospects for enhancing
their export revenues.

Trends in export growth
Charts 1 and 2 illustrate the exports to industrial
countries of 14 heavily indebted countries listed
in the Baker Plan for LDC debtors (Cote d'ivoire,
also listed in the Baker Plan, is excluded due to
lack of data) and the four newly-industrializing
countries (NICs) in East Asia, respectively. The
Baker Plan countries include the major Latin
American and African debtor countries, and the
Philippines. The four Asian NICs are Hong
Kong, Singapore, South Korea, and Taiwan. The
growth in export revenue of the heavily indebted
countries fell from an 18 percent compound
annual growth rate in the 1970s to a 1 percent
annual decline in the period from 1980 to 1986.
In contrast, the growth in Asian NICexports to
industrial countries slowed from a 25 percent
compound annual growth rate in the 1970s to a
still very rapid 12 percent annual growth rate in
the 1980s.

As a result of these divergent growth patterns,
the value of the four Asian NICs' exports to
industrial countries in 1986 reached $86 billion,
a level that was roughly equal to the corresponding exports of the 14 heavily indebted
countries. For reference, the value of the exports
of the Asian NICs was less than half the value of
the exports of the heavily indebted countries in
The stagnation in the exports of the heavily
indebted LDCs in the 1980s largely is due to
these countries' reliance on primary commodities as their main source of export revenue
at a time when commodity prices have fallen
sharply. (According to International Monetary
Fund estimates, real non-oil commodity prices
fell 30 percent between 1980 and 1986.) Even
among countries that have a well developed
domestic manufacturing base, primary commodities still are the major exports. In contrast,
the East Asian NICs diversified their exports
towards manufactured goods and thus continue
to enjoy rapid export growth in the 1980s.
These contrasts are best illustrated by comparing
the changes in the composition of


which have been the major source of growth in
world trade in the 1980s, with the composition
of the exports of an East Asian NIC and a heavily
indebted country. In 1985, the share of primary
commodities (excluding fuels) in U.s. imports
was 12 percent, down from 39 percent 20 years
earlier. The share of machinery and transport
equipment rose 24 percentage points over the
period, to 38 percent. Such manufactured
goods, particularly office equipment, account for
a major part of U.S. import growth in the 1980s.
The change in South Korea's exports over the
period between 1965 and 1985 showed a corresponding shift in composition. Primary commodities fell from 25 percent to 5 percent of
total exports, and the share of machinery and
transport equipment rose from 3 to 36 percent.
Clearly, Korea has diversified towards areas of
greatest demand.
In contrast, although Argentina had a much
more developed manufacturing base than Korea
in 1965, by 1985 primary commodities sti II constituted 77 percent of Argentina's exports, and
machinery and transport equipment had only a
5 percent share. Of course, given its comparative advantage, Argentina, like the U.s., always
will be a major exporter of primary commodities. However, Argentina's export performance -and that of other major LDC debtors
- would have been far superior if it also had
diversified its export base to include those sectors where world demand was growi ng most
Import substitution policies

The inability of major LDC debtors to diversify
into manufacturing exports is not accidental; it is
the result of trade, tax, and pricing policies that
have encouraged domestic production that substitutes for imports in these countries. By protecting domestic firms and limiting external
competition, these import substitution policies
have prompted the development of domestic
manufacturing sectors that are unable to compete in world markets. South Korea and Taiwan
also have protected their domestic manufacturing sectors, but they have encouraged producers
to face the test of competition in world markets
to a much greater exte.nt.
Since the unfavorable export performance of
heavily indebted countries in the 1980s largely
is the result of economic policies that dis-

couraged the diversification of their export
bases, and not the result of stagnant world markets, such LDCs have an opportunity to effect a
major improvement in their economic conditions. If they were to adopt policies to encourage
the international competitiveness of their manufacturing sectors, they would produce an
environment conducive to investment and
growth by encouraging capital inflows that
would enable them to overcome their present
Do markets for tDe exports exist?

One major question is whether the markets of
industrial countries are likely to remain open,
and whether these markets are sufficiently large
to accommodate growing manufacturing exports
of LDC debtors. A source of uncertainty is the
extent to which the expected reduction in the
U.S. trade deficit will lead to a decline in the
exports of LDC debtors. There are at least three
reasons to believe that in spite of a reduction in
trade deficit, there [s room for LDC
debtors to expand their manufacturing exports.


First, it is in the interests of industrial countries
to promote economic expansion and export
growth in debtor countries. There are economic,
as well as political, reasons for encouraging LDC
debtors to solve their debt problems. Growth in
LDC economies will stimulate demand for the
exports of industrial countries to debtor countries. Economit expansion among debtor countries may also contribute to a reduction in the
U.s. trade deficit. Part of the reason that the U.S.
trade deficit mushroomed in the 1980s is that
traditional U.S. export markets in Latin America
stagnated during this period.
Second, the penetration of LDC debtors in the
manufacturing sector of industrial countries currently is not all that large, so there is room for
growth in this area. Even after taking the rapid
growth in the exports of the NICs into account,
the share of developing country exports in the
markets for manufactures of industrial countries
was only 2.3 percent in 1983. In addition, even
among the Asian NICs, the range of manufacturing products exported to industrial countries is
fairly limited, suggesting a fairly wide scope for
further diversification. Thus, there appears to be
plenty of room for an increase in exports, particularly to Japan and West Germany, as these
countries thus far have absorbed only a small
proportion of LDC exports.

Chart 1
Exports of Heavily
Indebted Countries*



to all
Industrial Countries

Chart 2
Exports of Newly
Industrializing Countries*

to the




. . .-


to Ger~_any





to Japan









to all Industrial Countries

to the





United States


Billions $



_ ,.-


-"" to



,.- ,.-,.- ... ~.<'>..~~.I?'~~"""'l""""


* Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Morocco,
Nigeria, Peru, Philippines, Uruguay, Venezuela, and Yugoslavia.











* Hong Kong, Singapore, South.Korea,.and Taiwan.
Data for 1986 are estimated.

Third, as a result of the appreciation of their currencies in recent years, the export-led growth of
Japan and Germany in the 1980s probably is at
an end, at least in the near future. LDC debtors
that adopt appropriate trade and exchange rate
policies may be able to claim some of the shares
relinquished by Japan and Germany in world
markets. LDC debtors also may be able to
increase their shares of world exports if the rapid
growth in the exports of the Asian NICs slows
down. But even if this rapid growth continues
for some time, the Asian NICs are potential markets for the exports of LDC debtor countries, as
well as potential competitors.

diversified export sector attractive. Aside from
generating additional export revenue, appropriate trade policies in LDCs may encourage capital inflows. For example, the yen appreciation
has encouraged Japanese firms to shift production from Japan to LDCs (and to the U.s.) for
export to industrial countries. By continuing to
attract some of the direct investment capital
leaving industrial countries, LDC debtors can
enhance their productive capacity and increase
their shares in world exports. Capital inflows
also would alleviate the short term liquidity
problems faced by LDC debtors in meeting their
external obligations.

Emphasis on exports
This analysis suggests that there is significant
scope for debtor countries to increase their share
in the future growth of world exports. As a
result, debtor countries may be well advised to
shift away from policies that protect domestic
industries from competition with imports
towards policies that will make investment in a

Export-oriented economic policies likely will
enhance the repayment capacity of debtor countries, reduce the burden of servicing their debts,
and improve the competitiveness of their manufacturing sectors. These considerations are
likely to be important components of any longrun solution to the LDC debt problem.
Ramon Moreno

Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
San Francisco, or of the Board- of Governors of the Federal Reserve System.
Editorial comments may be addressed to the editor (Barbara Bennett) or to the author.... Free copies of Federal Reserve
publications can be obtained from the Public Information Department, Federal Reserve Bankof San Francisco, P.O. Box 7702,
San Francisco 94120. Phone (415) 974-2246.


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