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South Asia Continues To Grow Despite Sluggish Global Economic Outlook

Press Release No:2003/151/S
Contacts:
Lawrence MacDonald (202) 473 7465
lmacdonald@worldbank.org
Ana E. Luna (202) 473-2907
alunabarros@worldbank.org
Cynthia Case McMahon (TV/Radio) (202) 473-2243
Ccase@worldbank.org

NEW DELHI, December 11, 2002 — The Recent global economic slowdown, adverse weather conditions, and internal and external security concerns reduced growth figures for the South Asia Region in 2002. Growth in the region is expected to average 4.6 percent for the year, a downward revision from the Global Economic Prospects 2002 forecast of 5.3 percent GDP growth.

Future prospects appear brighter, however. According to a new World Bank report, Global Economic Prospects and the Developing Countries 2003: Investing to Unlock Global Opportunities, South Asia should achieve an average of 5.4 percent growth in 2003, and 5.8 percent in 2004.

"This improvement in growth prospects is premised upon a return to normal weather patterns, an improvement in political stability and regional security aspects thereby facilitating faster implementation of reforms, and a recovery in world trade volumes," says Sadiq Ahmed, World Bank South Asia's Chief Economist.

A sluggish global economic outlook, with slower growth in the next 12 to 18 months than previously anticipated, will impede poverty reduction in developing countries, according to the report. Action to remove barriers to trade and investment that hurt poor people in developing countries is becoming increasingly urgent.

According to the report,uncertainties in global financial markets have sapped the momentum of the modest recovery that began in late 2001. The report outlines steps that rich countries and developing countries can take in the current uncertain environment to increase growth rates and speed poverty reduction in developing countries.

Slower Global Growth Undermining Poverty Reduction

After exceptionally slow growth in 2001 and 2002, global GDP is now expected to rise by 2.5 percent in 2003, higher than the previous two years but still well below the 3.8 percent expansion recorded in 2000 and significantly below long-term potential growth rates, according to the report. The report warns that the global rebound might quickly lose momentum and there is a significant risk that the world could slip back into recession. "The recovery has been much more hesitant and uneven than we had expected," says Nicholas Stern, World Bank Chief Economist and Senior Vice President for Development Economics.

According to the latest forecasts, high-income countries are expected to grow at about 2.1 percent in 2003. On average developing countries will grow considerably faster, at 3.9 percent. But the average masks wide regional differences, with East Asia leading the pack at 6.1 percent, followed by South Asia at 5.4 percent. Other regions are expected to grow less than 4 percent, with Latin America managing a mere 1.8 percent. Outside of Asia and Eastern Europe, growth rates in most developing countries are too low to generate a marked reduction in poverty.

Private Capital Flows to Developing Countries Down Sharply

The sagging global economy has reduced private capital flows to developing countries. Net commercial bank lending has turned negative, and foreign direct investment flows to developing countries have fallen since their peak in 1999. "We're looking at the most sustained fall in foreign direct investment in developing countries since the global recession of 1981-83," says Richard Newfarmer, lead author of the report.

Private foreign investment in infrastructure is down 25 percent from 1997 in developing countries. Investors are becoming averse to long-term projects; accounting scandals in industrial countries have driven major players such as Enron and Worldcom from the market; and slower growth in East Asia, Russia and Brazil has reduced investment demand. Not only is there less investment, but investors are more discriminating. Investment in developing countries is being redirected to countries with better investment climates.

Action on Doha Trade Agenda More Important Than Ever

The slowing global economy threatens to distract attention from the need for rapid progress in global trade talks. Global trade talks launched at Doha in November last year to address the needs of developing countries are showing signs of becoming bogged down. "Rich-country agricultural subsidies and barriers to agriculture and textile exports from developing countries in Europe, Japan, and the U.S. prevent the developing countries from fully exploiting their comparative advantage," said Stern, in a recent speech in New Delhi. "Removing these barriers will greatly expand the market for products from the developing world, increase growth, and, most importantly, enable more people to improve their lives and to escape from poverty."

According to Global Economic Prospects 2003, an investment agreement on trade could potentially help developing countries - but only if it takes up the issues with the largest development impact such as removing investment-distorting trade barriers facing "developing-country's" exports. Developing countries in general face external barriers to their trade that are twice those of rich countries. The report enumerates many of these barriers, including for example, tariff escalation.

Improving the Investment Climate in Developing Countries

Even in a sluggish global economy, developing countries can do much on their own to promote growth and poverty reduction. While previous Bank studies emphasized good governance, sound institutions, and property rights as necessary conditions to produce greater quantities of private investment, both domestic and foreign, this year's Global Economic Prospects 2003 goes further by considering policies to promote competition as a way of improving the quality of investment - that is, making investment more productive.

The report analyzes policy barriers that limit competition in developing countries: trade barriers can prevent import competition; legal restrictions can prevent foreign entry that would increase the number of competitors; state monopolies can prevent entry of private firms, foreign and domestic alike; and badly-designed regulatory regimes in industries that have been privatized can impede both domestic and foreign competitors, to the detriment of consumers.

Addressing one area without addressing the others can produce perverse results: for example, permitting foreign entry behind high tariffs can create foreign-dominated oligopolies that reduce national income. But lowering trade barriers can help compete away monopoly profits. According to the report, increasing imports in concentrated industries from zero to 25 percent of domestic sales reduces oligopoly profit mark-ups by 8 percent through lower prices to consumers. Firms in Korea, Malaysia and Thailand are more productive than firms in India and China, in part because of lower trade restrictions and administrative barriers to entry.

Prospects for South Asia

For the South Asia region, the report's near to medium-term forecast of growth is based on a return to a more normal weather pattern, following the recent drought in the region. It also assumes improvement in political stability and regional security issues which allow a more rapid implementation of required reforms. As an example, given improved internal conditions in Sri Lanka and better policies, a sharp increase in GDP over the near term from their recent stagnant levels can be expected. In contrast, Nepal may under-perform in comparison to the regional growth averages for the near-term, if domestic turmoil continues and reforms falter.

The report also notes that a recovery in world trade prospects could translate into stronger external demand for exports from South Asia. Most regional economies have general monetary and exchange rate policies aimed at shoring up foreign reserves and promoting exports. These policies have a positive impact on the current account balances for the region.

The report's 10-year growth forecast for the region is expected to average about 5.5 percent, which is higher than the 5.2 percent average real growth posted during the 1990s. This forecast is based on the assumption that fiscal consolidation and further structural reforms will lead to an increase in productivity when combined with recent improvements in human development indicators, such as rising literacy rates and school enrollments, and declining infant mortality rates.

In contrast, some of the downside risks to this forecast include a weaker than anticipated recovery in global demand, which would slow down export growth; a protracted implementation of fiscal and structural reforms in the region; a persistence of regional political tensions; and vulnerabilities to external shocks and natural disasters. Should these risks prevail, growth prospects will be sharply lower than projected.

The report summary and related materials are available at: http://www.worldbank.org/prospects/gep2003





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