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Global Economic Prospects 2010: Crisis, Finance, and Growth

Global Economic Prospects 2010: Crisis, Finance, and Growth explores both the short- and medium-term impacts of the financial crisis on developing countries. Although global growth has resumed, the recovery is fragile, and unless business and consumer demand strengthen, the world economy could slow down again.

Even if, as appears likely, a double-dip recession is avoided, the recovery is expected to be slow. High unemployment and widespread restructuring will continue to characterize the global economy for the next several years. Already, the crisis has provoked large-scale human suffering. Some 64 million more people are expected to be living on less than $1.25 a day in 2010 than would have been had the crisis not occurred and between 30,000 and 50,000 more infants may have died of malnutrition in 2009.

Over the medium term economic growth is expected to recover. But increased risk aversion, a necessary and desirable tightening of financial regulations in high-income countries, and measures to reduce the exposure of developing economies to external shocks are likely to make finance scarcer and more costly than it was during the boom period.

As a result, just as the ample liquidity of the early 2000s prompted an investment boom and an acceleration in developing-country potential output, higher costs will likely yield a slowing in developing-country potential growth rates of between 0.2 and 0.7 percentage points, and perhaps as much as an 8 percent decline in potential output over the medium term.

In the longer term, however, developing countries can more than offset the implications of more expensive international finance by reducing the cost of capital channeled through their domestic financial markets.

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