Economic vital signs are picking up, but they’re considerably lower than before the financial crisis
The gap between what the world can produce and what it is actually producing is expected to remain large
Unemployment will continue to be a problem for both developing and high-income countries
October 1, 2009—Has the global economy bounced back from the sudden and very deep recession that began last fall?
World Bank economists say such economic vital signs as industrial production, trade, and foreign direct investment are picking up, though they’re at considerably lower levels than before the financial crisis.
“Right now, we see this recovery as ongoing, as something that’s actually going to gain steam,” says Andrew Burns, lead economist in the World Bank’s Development Prospects Group.
“We’ll start to see in 2010, 2011, growth rates that are lower than we’ve been used to over the last several years but nevertheless fairly steady. We’re looking at something in the range of 5 ½ percent for developing countries in 2010.”
But the gap between what the world can produce and what it is actually producing is expected to remain very large — about 6 percentage points of GDP for developing countries. Moreover, the higher borrowing costs and weakened financial system will likely reduce the long run potential output of developing countries by as much as 4 percent of their GDP.
“That means unemployment is going to be a sustained problem for developing countries and for high-income countries, and it means that many of the very difficult transitions and structural changes that are currently taking place as we adapt to this slower growth and lower level of output will continue for some time,” says Burns.
Indeed, many countries still feel the pain of the downturn.
Developing country growth will probably be less than 2 percent in 2009, compared with about 8 percent the previous year.
Some 43 low-income developing countries are still suffering from the combined effects of the food, fuel and economic crises.
And the World Bank estimates that financing shortfalls to cover core spending needs may amount to some $11.6 billion for these countries.
As many as 90 million more people will be living in extreme poverty, on less than $1.25 a day, by the end of 2010, the Bank predicts.
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In Africa, When Growth Slows, ‘Infants Die‘
“In a poor region like Africa, when incomes start falling, when per capita growth is negative, that has effects on people’s lives,” says Shanta Devarajan, World Bank chief economist for the Africa region.
“One of the most disturbing statistics we found is that when you have these kinds of growth slowdowns, infants die.
“One of my colleagues has made an estimate that for the size of this slowdown in Africa, you could lose about 30,000 to 50,000 infants before their first birthday.”
It took about six months for the economic crisis to hit Africa. Africa’s growth rate dropped from 4.8 percent a year in 2008 to about 1 percent in 2009.
Now, Devarajan fears Africa will also lag behind in recovery. Private capital flows are down. Revenues from the export of commodities are down.
Remittances are projected to fall by 8 percent in Africa this year after growing at double-digit rates over the last four or five years. And remittances may stay at lower levels if employment doesn’t pick up in the United States and Western Europe, where most of the African diaspora resides.
Worldwide, remittances could drop by as much as 10 percent—a big number in countries that rely heavily on them, says Dilip Ratha, lead economist and manager of the Migration and Remittances Team in the Development Prospects Group.
“There are countries out there which receive remittances that are 25 percent—sometimes 50 percent—of their national income. Smaller, poorer countries, conflict countries, fragile countries, depend a lot on remittances. A 10 percent fall may not appear big compared to the fall in foreign investment flows, but even a fall of 10 percent can mean significant hardships for, particularly, the poor people, and also for the governments that depend on the foreign currency that comes in.”
The World Bank increased lending this year to low-income countries in Africa to $7.8 billion—up 30 percent from the previous year. The extra funds were a lifeline, says Devarajan.
“It looks like they’ve at least managed to make it through the year, cushioning themselves with a lot of pain, and difficulty. But there has to be some assurance these resources will be there two years down the road, otherwise these countries will be in trouble.”
Bank Experts on Different Aspects of the Financial Crisis
James Bond, chief operating officer for the Multilateral Investment Guarantee Agency. Shanta Devarajan, World Bank chief economist for Sub-Saharan Africa. Bernard Hoekman, World Bank Trade Director. Dilip Ratha, lead economist and manager of the Migration and Remittances Team. Augusto de la Torre, World Bank chief economist for Latin America and Caribbean
No Respite in Sight for Emerging Europe and Central Asia
Several countries in Eastern Europe and Central Asia are also struggling after being hit “probably worst of all” by the financial crisis, says the region’s Chief Economist Indermit Gill.
Economic growth across the region is expected to be a negative 6 percent in 2009, with several countries in the negative 10 percent range. Official unemployment has increased from 8.5 million to 11.5 million, but the actual number of unemployed may be much higher.
Remittances have fallen by double digits, in some countries to half their 2008 levels. Foreign financing has shrunk. Foreign debt, mostly private, is a looming problem for the region, which has more than $300 million of maturing debt next year that has to be financed somehow.
Fiscal deficits are expected to more than triple in some countries and force governments to work with smaller budgets.
The recession has reversed huge declines in poverty in the region.
“Instead of the number of poor falling by about 15 million this year, it will actually increase by almost 15 million. So we are seeing a big difference of essentially about 30 million poor,” says Gill.
“And these numbers don’t actually tell you how much worse things are for the 150 million poor who were already poor or vulnerable to poverty. There are no ‘green shoots’ for the region’s workers and their families.”
The World Bank Group increased lending and assistance to several countries in the region, including $2 billion in loans to Hungary, Ukraine and Latvia last week. And in February, it joined the European Bank for Reconstruction and Development and the European Investment Bank in a plan to provide up to €24.5 billion ($31 billion) to support the banking sectors and to fund lending to businesses hit by the global economic crisis. The World Bank Group will provide about €7.5 billion as part of this effort.
“We’re seeing a huge demand for MIGA to come in and to help banks recapitalize their subsidiaries in these countries,” says James Bond, chief operating officer for the Multilateral Investment Guarantee Agency, the arm of the World Bank Group that provides political risk insurance.
New Trade Concerns Emerge
Other regions have also had to deal with falling FDI, more costly credit, and shrinking export markets as a result of the financial crisis, Bond says.
Low-income countries are also worried that aid will slow down or go in reverse as donors face their own constraints at home, while the emerging BRIC countries—China, India and Brazil—are concerned about the significant declines in their normal export markets, the United States and Europe.
World trade has recovered a bit from its trough—a 35 percent decline—last spring. It’s now expected to decline overall by 10 percent this year.
However, a large proportion of the trade recovery has been as a result of fiscal and monetary stimulus and restocking of inventory, says World Bank Trade Director Bernard Hoekman.
“As governments start to pull that back, the big question is, is private sector demand going to pick up the slack? Clearly, in the big importing countries of the world, of which the US is by far the largest and most prominent example, households are going to be a lot more constrained in the capacity they have to consume at the levels that they used to or were used to,” says Hoekman.
“In the short run, a stronger-than-expected recovery should pull Latin America up, which in South America is now happening,” says Augusto de la Torre, chief economist for the Latin America and Caribbean region.
“But in the middle of 2010, there is more significant uncertainty as to whether the world as a whole can recover a high growth pattern in a more balanced way, with the US saving more, China consuming more and spending more, and, perhaps, Latin America investing more.”
After the Crisis?
Looking ahead, the world would benefit from “multiple poles of growth,” World Bank Group President Robert B. Zoellick said in a September 28 speech in Washington.
But first it must protect the vulnerable.
Last week, G20 leaders expressed support for World Bank-led initiatives: a new Crisis Support Facility to protect low-income countries from future crises, as well as the Global Partnership for Agriculture and Food Security.
And the Bank has instituted a number of other measures during the crisis to support social programs, trade, distressed banking systems, infrastructure projects, microfinance and the private sector.
“With investments in infrastructure, people, and private businesses, countries in Latin America, Asia and the broader Middle East could contribute to a ‘New Normal’ for the world economy,” Zoellick said.
And, Africa, too, with its population of 1 billion, can become a pole of growth, Zoellick added.