June 10, 2008—Financial turmoil sent shock waves through high-income countries in 2007, but many developing countries emerged relatively unscathed, says a new World Bank report released today in Cape Town, South Africa.
China posted double-digit economic growth for a fifth year in a row last year, and emerging economies attracted a record US$1 trillion in net private capital flows, according to Global Development Finance 2008, the Bank’s annual review of global financial conditions facing developing countries.
In 2008, growth in China, the rest of East Asia and the Pacific, and other developing regions together will fall from 7.8 percent to a still-strong 6.5 percent while their high-income trading partners like the United States slow to between 1 and 2 percent and import less.
‘Not a Victim’ of the World Economy
Global Development Finance says developing countries as a whole have so far shown resilience in the face of US-based financial turmoil and soaring energy and food prices, partly because of improved policies, higher investments and technological progress in recent years, says the report.
“Their reform measures and good economic policies saved them during this financial crisis,” says Mansoor Dailami, the report’s lead author and Manager of International Finance at the World Bank. “They were not hit as badly as many people had feared and they’ve weathered, on balance, this round of financial crisis relatively well.”
Adds co-author Hans Timmer: “You see more and more they are not a victim of what is happening in the world economy, but are determining what is happening in the world economy. The slowdown in the US economy, especially in domestic demand, is not influencing them so much.”
1: Global Economy Financial market turmoil and rising inflation are slowing growth worldwide.
2008 World GDP growth: 2.7%, down from 3.7% in 2007
High-income country (OECD) growth: 1.5% in 2008
Developing country growth: 6.5% from 7.8% in 2007
2: East Asia & Pacific E Asia and China are emerging as centers of growth for the world economy.
2007 growth was 10.5%—the highest in a decade
Domestic demand and non-US exports drove growth
Steep declines in E Asia securities markets could pose risks
3: South Asia Impact of US credit crunch expected to be muted.
25-year high 9% growth in 2006 fell to 8.2% in 2007
Growth is expected to further ease to 6.6% in 2008
High oil and food prices may be region’s biggest challenge
4: Eastern Europe & Central Asia Non-oil exporters running current account deficits are vulnerable.
2007 growth hit 6.8%, down from 7.3% in 2006
Growth to slow to 5.8% in 2008 and stabilize at 5.4% in 2009 and 2010.
Oil-exporter Russia’s growth will ease from 8.1 % '07 to 6.3 % in '09
5: Latin America & Caribbean Region is better prepared to weather US economic slowdown.
GDP growth was 5.7% in 2007, up from 5.6% in 2006
Growth expected to ease to 4.5% in 2009 and 4.2% in 2010
Greater stability has encouraged more investment.
6: Middle East & North Africa World’s major oil-exporting region shows resilience.
GDP growth for developing countries hit 12-year high of 5.7% in ‘07
High unemployment eased despite labor force surge
Rising food prices, tendency toward gov't subsidies, a growing risk
7: Sub-Saharan Africa Growth accelerated and was broad-based in 2007.
Regional growth picked up to 6.1%
Net capital inflows reached a record $58 billion
Inflation expected to accelerate in several countries in 2008
Inflation Mounting Quickly
But inflation in the form of high energy and food prices is hurting poor people within developing countries. Prices of food staples have risen more than 100 percent since 2005. The real price of rice hit a 19-year high in March 2008; almost simultaneously the price of wheat reached a 28-year high.
“We’re seeing inflation mounting quickly, and that is throughout the developing world,” says Timmer, who is the Lead Economist and Manager of the Global Trends team in the Bank’s Development Prospects Group.
In addition, while appearing to ease in the first quarter of 2008, the financial turmoil affecting the US and some European countries is “still ongoing,” notes Dailami.
Development Assistance Urgently Needed
At the same time, flows of official development assistance (ODA) to the poorest countries, excluding debt relief, have increased only slightly in the last two years, despite donors’ pledges in 2005 to substantially increase aid, the report notes.
Meeting ODA commitments could help low-income developing countries adjust to soaring food and energy prices ,” says Dailami.
High oil prices are threatening growth in a few countries that have current-account deficits of 10 percent or more, such as Romania and the Baltic states, Balance of payment problems, in combination with the financial turmoil, are discouraging foreign investment, says Timmer.
Role of Foreign Banks
International banking, a special focus of the 2008 report, makes important contributions to local investment and growth, says Dailami, by “enhancing competition and efficiency, enlarging access to credit to many citizens in developing countries, providing a mechanism for transferring funds abroad , and promoting development of local capital markets.”
Foreign banks have over 2,000 local offices in 127 developing countries, giving the international banking industry the operating infrastructure and technology platforms to book overseas transactions, not only from their headquarters in major financial centers, but also from a large local network of branches and subsidiaries in developing countries.
On the downside, foreign banks could transmit adverse financial shocks from their home markets and sharply reduce credit to developing countries. “We have not seen that taking place on any kind of large scale, but there is a potential”, says Dailami.
Complex Challenges
“It’s difficult to recall any moment in recent history that the international policy community faced so many complex challenges at once,” adds Dailami.
The report calls for immediate action to address soaring food and energy prices and volatility in the financial markets. Helping developing nations cope with high prices by targeting assistance to the poorest people is the most critical challenge, it adds.
Recent events in financial markets also underline the need for policy coordination among the world’s major central banks.
“It’s a time that requires enlightened collective policy responses from all countries, and a time that the interest of the world economy at large should be the dominant driving factor,” says Dailami.
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