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After-Shock of Global Crisis Continues to Hit Developing Countries

Available in: 中文, 日本語, Français, русский, Português, Deutsch, Español, العربية
Press Release No:2000/117/S
Contacts: Phil Hay (202) 473-1796
Stevan Jackson (202) 458-5054
Cynthia Case McMahon (TV/Radio) (202) 473-2243
 

Washington, December 7, 1999 Developing countries are expected to grow in 1999 by 2.7 percent, and accelerate to 4.2 percent in 2000. For developing countries, excluding those in transition, growth is significantly less than the rate of the pre-crisis 1990's. Despite a faster than expected global recovery, the lingering effects of the global financial crisis continue to depress output across developing countries, and hamper efforts to reduce poverty worldwide, according to a new report released by the World Bank.

Growth will be strong in Asia this year and next as the crisis countries recover from the depths of recession, but it will remain well below historical averages, despite a continued robust performance in China and India. Outside Asia, average per capita income in developing countries will actually decline in 1999.

Global Economic Prospects and the Developing Countries 2000, the World Bank's yearly report on prospects for developing countries -- argues that recovery from the financial crisis is "fragile and uneven," with some regions recovering much faster than others, the report says.

"Improvements in the external environment, favorable policy trends in emerging markets, and increasing confidence among both domestic and, to a lesser extent, foreign investors should help spur growth in developing countries over the next two years," says Uri Dadush, Director of the World Bank's Development Prospects Group. The report forecasts growth in world trade of 5 percent this year, rising to 6.4 percent in 2000, and 6.3 percent by 2001.

Medium-term outlook and the prospects for poverty reduction

The report says that as the effects of the crisis recede, growth in developing countries (excluding the transition economies) is projected to average 5 percent a year in 20022008, a much faster rate of growth than in industrial countriesnonetheless, this will be significantly lower than developing countries achieved during the pre-crisis 1990s. The lower growth projection reflects assumptions that capital flows will take time to recover and that they will remain volatile, and that commodity prices are unlikely to stage a strong recovery from their recent historic lows. In addition, the crisis has uncovered, and in some cases accentuated, serious structural weaknesses in developing countriesparticularly in financial systems and government accountsthat will take considerable time to resolve. These weaknesses leave developing countries exposed to renewed bouts of volatility.

"There is a growing consensus that in order to maximize the positive effects of growth that can come with openness, the international community must find ways to reduce the frequency and severity of economic crises," says Joseph Stiglitz, World Bank Chief Economist and Senior Vice President for Development Economics.

For the first time, Global Economic Prospects presents forecasts for poverty reduction in developing countries. The report presents two scenarios for progress in reducing the number of people living in extreme povertymeasured as the equivalent of living on less than a dollar a dayover the next 10 years. It concludes that in many developing countries, progress in the fight against poverty is likely to fall short of the goal set by the international community, which calls for poverty to be reduced by half by 2015.

  • Based on assumptions about growth and changes in inequality, East Asia and South Asia appear to be on track for achieving significant poverty reduction, provided that no new crisis appears to undermine progress, and inequality does not increase. Building on a solid growth record and relatively low levels of inequality, Asia would be on track to cut poverty by half, even if growth is slightly lower than the report's baseline growth projection.
  • Eastern Europe and Central Asia, and the Middle East and North Africa could also reduce poverty significantly. However, the margin for error is smaller. A modest slowdown in growth, compared to the baseline growth projections or an increase in inequality, could result in limited progress, or even a rise in poverty.
  • In Sub-Saharan Africa, on the other hand, the number of people living in poverty is likely to rise even if baseline growth projections are achieved and inequality does not increase. Latin America is unlikely to make substantial progress in reducing the number of people in poverty.

"These differing regional outlooks highlight the importance of pursuing development strategies that can achieve both high and equitable growth," says Mustapha Nabli, Senior Economic Advisor in the World Bank's Development Prospects Group and the report's principal author.

The report points out that the outlook for official flowsmoney from donor countries and institutions such as the World Bank, is improving modestly. In an important step forward, donor countries have agreed to accelerate debt relief for very poor countries that implement sound economic policies. New guidelines for the Heavily Indebted Poor Countries Initiative (HIPC) are expected to expand the number of eligible countries from 29 to more than 36, and to double the amount of money available for debt relief up to $27 billion.

Key issues raised by the crisis

The report discusses three aspects of the continuing impact of the global crisis on growth and welfare in the developing world, namely: the impact on poverty; continued structural problems in East Asian economies; and the downwards pressure on commodity prices and the likely implications for countries that are highly dependent on exports of oil, and non-oil commodities.

First, it finds that the crisis increased poverty in 1998 in the East Asian crisis countries and Russia, which, in turn, has stalled the progress of the early 1990s in reducing poverty worldwide. Urban poverty increased in all East Asian crisis countries in 1998. For example, in Korea, poverty among its urban population more than doubled, from 9 percent in 1997 to 19 percent in 1998.

Real wages also declined in the crisis countries. In Indonesia, real wages fell by an average of 41 percent in 1998. Flexible labor markets moderated the impact of the recession on employment in the crisis countries, as labor was reallocated from the formal (urban) sector to the informal sector and agriculture.

The crisis has also forced large numbers of people into the costly process of moving home in search of work and affordable shelter, and produced sharply falling living standards for the middle classes. Although efforts were made to maintain spending on social services, real public spending on health and education fell in the East Asian crisis countries, with particularly serious impact to services in Indonesia.

Second, despite the cyclical recovery in East Asia, serious structural problems remain. The value of non-performing loans range from approximately 30 percent of GDP in South Korea and Malaysia to 60 percent for Thailand, well above the experience of most earlier crises. Moreover, non-performing loans continue to rise as further problems are revealed, and weak firms add to their problems by borrowing new money to make interest payments on their existing debt. More than a quarter of all listed firms in South Korea, Malaysia and Thailand (and nearly two-thirds in Indonesia) are unable to service their debts. This situation will continue to act as a brake on investment until financial claims are resolved. The fiscal costs of the crisis are huge. For example, in Indonesia the estimated cost of re-capitalizing its banking system could amount to half the country's GDP.

Without vigorous corporate and financial restructuring, sustainable growth will take longer to return, the costs of the crisis are likely to rise, and economies will remain vulnerable to new external and internal shocks, the report says.

Government support for restructuring the banking system is critical to safeguard the payments system, restore credit availability and reduce fiscal costs. Healthy banks are also better positioned to facilitate corporate restructuring. The first step in this restructuring process calls for an evaluation of the losses incurred, and then identifying who is ultimately responsible. Once such claims are resolved, restructuring can be expected to occur normally through market forces. Government funds should not as a rule be required for corporate restructuring.

Third, primary commodity prices have swung sharply since the mid-1990s, driven by changes in global demand, weather-related supply shocks, supply responses to the high prices of the early 1990s, technological innovations that have reduced production costs, and exchange rate depreciations among large commodity exporters linked to the Asian crisis.

Countries that depend on primary commodities have faced an enormous challenge in evening out consumption in the face of booms and busts in commodity prices during the 1990s. In several oil exporting countries, weak policies produced lower savings and lower investment over the oil price cycle. These countries have generally been unsuccessful in reducing their dependence on oil revenues, and the fall in investment will further blunt progress.

By contrast, the commodity price cycle of the 1990s does not appear to have adversely affected the prospects for growth in the non-oil exporting countries of Sub-Saharan Africa. Changes in real incomes were generally smaller than in the oil-exporting countries, and improvements in policies in several countries enabled them to increase savings and investment rates during the boom and bust of commodity prices.

The full text of the report, an illustrated talk, Q&A, and other materials will be available for free to the public on the World Wide Web immediately after the embargo expires at:
http://www.worldbank.org/prospects/
Media outlets are encouraged to include this Web address in their coverage of the report.

Journalists can access the material before the expiration of the embargo through the World Bank Online Media Briefing Center. Accredited journalists who do not already have a password may request one by completing the registration form at:
http://media.worldbank.org/





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