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Global Economic Prospects 2009: Commodities at the Crossroads

The eruption of the worldwide financial crisis has radically recast prospects for the world economy. Global Economic Prospects 2009: Commodities at the Crossroads analyzes the implications of
the crisis for low- and middle-income countries, including an in-depth look at long-term prospects for global commodity markets and the policies of both commodity producing and consuming nations.

Developing countries face sharply higher borrowing costs and reduced access to capital. This will cut into their capacity to finance investment spending—ending a five-year stretch of developing-country growth in excess of 6 percent annually. The looming recession presents new risks, coming as it does on the heels of the recent food and fuel crisis.

Commodity markets, meanwhile, are at a crossroads. Following decades of low prices and weak investment in supply capacity, commodity prices first spiked—spurred on by five years of very fast developing-country growth—and have now plummeted in response to the financial crisis.

In the longer run, commodities are not expected to be in short supply. Prices should be higher than they were in the 1990s but much lower than in the recent past. These higher prices should provide producers with sufficient incentive to discover new supplies, improve output from existing resources,
and promote greater conservation and substitution with more abundant alternatives. At the same time, slower population growth will ease the pace at which commodity demand grows. Policies to limit carbon emissions and boost agricultural investment, along with the dissemination of efficient techniques, should also contribute to this long-term outcome.

This year’s Global Economic Prospects also looks at government responses to the recent price boom. Producing-country governments have saved more of their windfall revenues, and are therefore less likely to be forced to cut into spending now that prices have declined. The spike in food prices tipped more people into poverty, which led governments to expand social assistance programs.
These programs need to be better targeted to the needs of the very poor so that governments can respond effectively the next time there is a crisis.

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