Testing Economic Scenarios

ECONOMISTS sometimes play a game that could be called ``scenario-making.'' With the aid of computers, mathematics, and some key assumptions, they project the future. That's what World Bank economists have done in their annual World Development Report. They look out to the turn of the century for the economies of the industrial democracies and the developing countries.

Scenario 1 forecasts what will happen if the world's leaders behave with good economic sense. The United States reduces its budget deficit and then eases monetary policy. The Europeans and the Japanese maintain strong economies. The developing countries carry out a multitude of reforms.

Scenario 2 assumes these various economic adjustments are not carried out.

Guess what the results are?

Under Scenario 1, nations will enjoy, overall, ``good prospects for world growth through the year 2000.''

Under Scenario 2, the outlook is darker.

Economic growth in the industrial democracies slows to 2.4 percent a year on average for the next 11 years, instead of the 2.6 percent they would experience if they followed better economic policies.

In the developing countries, growth runs 4.1 percent a year, instead of 5.1 percent. Even under Scenario 1, many low- and middle-income countries would be unlikely to achieve the high growth rates they experienced in the 1960s and 1970s. Under Scenario 2, lower demand for their exports and higher interest rates reduce their prospects for growth to below the averages of the 1980s, when output was suppressed in many of these nations by the external-debt crisis.

In effect, the World Bank economists are telling politicians: ``Be good and you will get a reward.'' Whether such advice has any impact on national leaders is hard to say.

Such long-term economic forecasts don't often prove valid. Too many unexpected events destroy the assumptions. For example, the long-term predictions of the late 1960s were upset when the Organization of Petroleum Exporting Countries quadrupled the price of oil in 1973-74. The forecasts of the late 1970s were thrown for a loop by the severe 1981-82 recession and the international debt crisis.

The bank economists, by the way, do offer a third scenario in which the creditor nations agree on a 20 percent reduction in the debt stocks of the highly indebted developing countries. That would save these nations $5 billion to $6 billion in interest payments over the next three years and leave their national output 1 percent higher at the end of those years, they calculate.

Will the World Bank's scenarios for the 1990s be proved too pessimistic because of major disarmament in many nations? Or will a financial crisis of some sorts make it too optimistic? Or perhaps an environmental disaster (global warming?) will make the projections miss the mark?

Already one trend is affecting the economic future. Notes World Bank president Barber Conable in a forward to the report: ``Today, many countries are revising their approach to rely more heavily on the private sector and on market forces.''

Even the communist countries are moving in that direction, though with some setbacks, as seen in China.

This year the bank's development report looks at financial systems and economic development. (Earlier reports have focused on such topics as capital, population, agriculture, and industrialization.)

Here too, notes Mr. Conable, there has been movement in the direction of less government involvement in such matters as allocation of credit, the determination of interest rates, and the daily decisionmaking of financial intermediaries (banks, etc.).

``Relaxation of these economic and operational controls calls for an effective system of prudent regulation and supervision,'' he writes. ``In most countries, improvements in the legal and accounting system will be required to strengthen the financial structure.''

Some countries have experimented with varying degrees of financial liberalization in recent years. The experience with such measures in domestic finance and full or partial decontrol of capital has been mixed, Conable says.

So he offers some nonideological advice that might not square with the opinions of the more extreme free enterprisers around Washington.

The pace and sequencing of liberalization should depend on the initial structure of a country's financial system and the degree of economic stability, he says. ``Countries with unstable economies and price systems that do not reflect the scarcity of resources will need to deregulate their financial systems gradually.'' Conable worries about destabilizing capital flight. ``Although the objective is an open market, countries should not remove all capital controls until other economic and financial reforms are in place.''