Financial Crisis for Most Developing Countries is Over, Says World Bank

As they put the financial crisis behind them, developing countries need to focus on tackling country-specific challenges such as achieving balanced growth through structural reforms, coping with inflationary pressures, and dealing with high commodity prices, the World Bank says in its June 2011 edition of Global Economic Prospects.

 

In contrast, prospects for high-income countries and many of Europe’s developing countries remain clouded by crisis-related problems such as high unemployment, household and banking-sector budget consolidation, and concerns over fiscal sustainability among other factors.

 

"Globally, GDP is expected to grow 3.2 percent in 2011 before edging up to 3.6 percent in 2012,” says Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics. “But further increases in already high oil and food prices could significantly curb economic growth and hurt the poor." 

 

The World Bank projects that as developing countries reach full capacity, growth will slow from 7.3 percent in 2010 to around 6.3 percent each year from 2011-2013. High-income countries will see growth slow from 2.7 percent in 2010 to 2.2 percent in 2011 before picking up to 2.7 percent and 2.6 percent in 2012 and 2013 respectively.

 

Strong growth in most developing economies has contributed to a new set of global challenges, including higher commodity prices, rising inflation, and the possible return of destabilising capital inflows as monetary policies tighten and interest rates rise.

 

“Developing countries have been resilient despite remaining tensions in high-income countries,” says Hans Timmer, director of Development Prospects at the World Bank. “But many developing economies are operating above capacity and at risk of overheating, most notably in Asia and Latin America. Monetary policy has responded, but fiscal and exchange rate policy may need to play a bigger role to keep inflation in check.”

 

Growth in the East Asia and Pacific region is projected to slow but remain strong, with GDP gains easing from 9.6 percent in 2010 to 8.5 percent in 2011 and around 8.2 percent in 2012-13, says the World Bank.

 

Rising domestic goods and asset prices are a medium-term policy challenge, with inflation in the region having reached 5.3 percent in April 2011. The ongoing tightening of monetary and fiscal policies is projected to contribute to the projected slowing in growth toward more sustainable growth rates. A successful reorienting of demand toward domestic sources is reflected in the decline in the region’s current account surplus from some 9.3 percent of GDP in 2007 to a projected 3.6 percent in 2011, an improvement that is expected to be durable.

 

GDP growth in developing Europe and Central Asia rebounded to an estimated 5.2 percent in 2010, following a 6.5 percent contraction in 2009. Limited credit growth, the deleveraging of household-sector balance sheets, and continued industrial sector restructuring (following the easy-credit fueled excesses of the boom period) are projected to continue weighing on GDP, which is expected to increase by a relatively subdued 4.7 percent in 2011 and 4.5 percent in both 2012 and 2013. These aggregate figures hide significant variation across countries within the region, with outturns in those countries that were most caught up in the boom period performing least well. High commodity prices will boost incomes of resource-rich economies in the region, contributing to strong import demand and remittance flows, which will benefit other countries in the region with the closest trade and migration ties with them.

 

After growing 9.3 percent during calendar year 2010, activity in the South Asia Region moderated in the first quarter of 2011, pointing to a projected slowdown in aggregate regional growth to a still buoyant 7.5 percent in 2011. The slowdown partly reflects macroeconomic policy tightening aimed at curbing stubbornly high inflation and reducing large fiscal deficits. Tighter financing conditions and rising food and fuel prices have contributed to a weakening in consumption and investment growth, factors that have been partially offset by strong export growth and resilient remittances. Growth is projected to pick up in 2012-13, reaching 7.9 percent in 2013, led by robust investment expenditures in India, Sri Lanka, and Bangladesh. Pakistan and Nepal are projected to lag, given continued political challenges and associated difficulties with macro-policy implementation.

 

 

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