Only time will tell whether the developing countries will regain the economic momentum of the 1960s and the 1970s. But 1983 may well prove to be the worst year for them since the Second World War. There are four principal dangers.

First, that the world depression will continue...

Second, that protectionist actions by the major industrialized countries, especially the United States and the European Community, will restrict the imports of manufactured goods from developing countries...

Third, that either or both of the first two dangers could precipitate major defaults on outstanding loans. Not only would banks lose money under these circumstances, but the strong linkages among banks could lead in the absence of skillful management by the leading central banks of the world to a general seizing up of the international financial system, as happened in the early 1930’s.

Fourth, that a prolongation of the present period of low or negative growth, against the expectations established in the pervious quarter century for visible progress in improved living standards, will lead to violent political change in developing countries...”

“The Outlook on Development”

Fall 1984

Statements about the future almost always involve extensions of the past. They may be complicated extrapolations, incorporating rates of change and even identifying turning points, but they are extensions of the past nonetheless. Few individuals genuinely identify true discontinuities, and they are usually dismissed as crackpots or are admired as intellectual entertainers rather than as serious futurologists. Some extensions of the past rely implicitly on a model of the social system under consideration, with its own dynamics and constraints. Others rely on analogies across apparently different social systems at different stages of their evolution.

However, they too implicitly (or occasionally explicitly) assume a common model for different systems, such that the observed characteristics and dynamics of one system can be informatively applied to other systems. For instance, the rise of Germany from 1870 to 1914 and its challenge to the leading power of the day, Great Britain, is said to suggest an informative warning about the current rise of China and its potential challenge to the leading power of the day, the United States.

Analogies, of course, are tricky, and it is crucial to get the matching points right. People usually neglect, in the above analogy, that the more significant rising power with respect to Britain was not Germany, but the United States, and the United States did not challenge Britain to combat, as Germany did. Analogies are colorful, and often pedagogically useful for driving a point home. But they too often substitute for serious analysis, permitting the user to avoid specifying exactly what are the key elements of similarity between the two systems or events being compared, and the dynamics that drive them—that is, without specifying explicitly the underlying model that supposedly covers both cases, even though they may be separated by a century or more in time.

With respect to developing countries in the mid-1980s, I had in mind the existence of a reasonably well-functioning (but not trouble-free) world economy with the key economic determinants being the level of economic activity in its largest national economies (the G-7 for short: United States, Japan, Germany, Britain, France, Italy, and Canada, in order of size of gross domestic product) and their policies toward imports from the rest of the world—all set within a cooperative institutional framework that was basically established after the Second World War, involving the rules, procedural frameworks, and attitudes of the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT, now transformed into the World Trade Organization).

If the G-7 economies were growing well and maintaining open markets, the world economy presented a permissive environment for growing economic prosperity in other countries. It did not, of course, assure economic prosperity; that depended as well on the institutional structures and the economic policies of other countries. Many poor countries, in fact, passed up the opportunities permitted, while others, such as Japan, South Korea, Hong Kong, Taiwan, Malaysia, Chile, Greece, Portugal, and, beginning in the early 1980s, China, exploited them.

If, however, economic developments went badly wrong in the G-7, either in terms of economic recession or heavy protection against imports, other countries would find it difficult to sustain growing economic prosperity no matter how good their institutions and their policies were. In other words, G-7 openness and prosperity were necessary but not sufficient conditions for growing prosperity in smaller, poorer economies.

In the event, the world economy generally avoided truly bad outcomes in the post-1984 period. The G-7 were doing well economically in the period from 1984 to 1990, when a minor recession occurred in the United States. This recession was precipitated by Iraq’s invasion of Kuwait in August 1990, leading to a sharp increase in the price of oil to over US$40 a barrel, reminding the US public of similar increases in 1974 and 1979 -80, each of which was followed by severe recession. That association in turn precipitated a sharp drop in consumer confidence and in consumer spending, leading the United States into recession (a downturn in total production for two or more quarters), albeit one that was much shallower than the oil-shock recessions of 1975 and 1982. The policy mistake by the administration of US President George H.W. Bush was to not make clear at once that if necessary the Strategic Petroleum Reserve (built up to deal with a significant interruption of oil supplies) was available and to take publicly visible steps to activate it. That might not have been enough to avoid a recession, but on the other hand it might have been—we will never know.

Predicted Protectionism

Serious protectionist policies were avoided during this period, but pressures for protectionist actions were strong in the United States, as foreshadowed in the 1984 article. The dollar had strengthened greatly against other leading currencies during the period from 1979 to 1985, and US manufacturers were feeling strong competitive pressures from imports—especially in automobiles, when then, as now, US manufacturers strove to sell large cars with high unit profits, just when the US public, driven by the high oil prices of 1980-81, shifted their demand to smaller, more fuel efficient cars.