Scenarios for growth in the 1990s

Using two macroeconomic models and results, the authors simulate global outcomes in the 1990s under several scenarios, allowing for the impact of: (a) changes in industrial countries'financial and macroeconomic conditions; (b) changes in the international oil market; and (c) changes in developing countries'domestic policies under varying assumptions about the world economy and trading environment. They find that an increase in the growth rate in industrial countries has an unambiguously positive effect on the growth rate in developing countries, but that the magnitude of the impact depends largely on the level of real international interest rates. To an extent, low real interest rates together with continuing financial flows to the developingcountries could cushion the negative impact on developing countries of the recession in industrial countries. The authors'simulations reinforce the argument that developing countries'domestic policies play a crucial role in determining long-run growth, inflation, and interest rates. The simulation results show that as world oil prices become more volatile, so do world inflation, interest, and GDP growth rates. The results also show the superiority of non-debt-creating flows to debt-creating, interest-sensitive flows to developing countries, in terms of long-term sustainable growth.