DUSHANBE, June 23, 2009, Asia-Plus — New World Bank analysis of the global economy paints an unprecedented picture: global output falling by 2.9 percent and world trade by nearly 10 percent; accompanied by plummeting private capital flows, likely to decline from $707 billion in 2008 to an anticipated $363 billion in 2009.
As the world enters what appears to be an era of markedly slower economic growth, the World Bank’s annual Global Development Finance (GDF) report, released on June 22, updates the outlook for the global economy, and explores the broad approach that will be necessary to chart a worldwide recovery.
“Extraordinary measures by governments around the world have helped save the global financial system from complete collapse, but the economic recession in the real sectors persists,” said the World Bank’s Justin Lin, Chief Economist and Senior Vice President, Development Economics. “To break the cycle, we need bold policy measures, including restoration of domestic lending and global capital flows.”
Lin was speaking at the Annual Bank Conference on Development Economics in Seoul, where experts gathered to discuss the financial crisis. He emphasized the key role that developing countries—the engine of future global growth—can play in the global recovery, as well as the grave development emergency posed by the impact of the crisis on poor, vulnerable countries.
As capital became increasingly hard to come by, and uncertainty soared about future demand, there was a sharp decline in production of manufactured goods, and in global trade in these goods. The level of industrial production in rich countries has dropped by 15 percent since August 2008, and that in developing countries, excluding China, by 10 percent.
GDP growth in developing countries is expected to slow sharply, from 5.9 percent in 2008 to 1.2 percent in 2009. However, their performance surpasses rich countries, whose collective GDP is expected to fall 4.5 percent in 2009. Notably, when India and China are removed from the total, developing countries as a group will experience a contraction in GDP of 1.6 percent, a real setback for poverty reduction.
Europe and Central Asia has been the region most adversely affected by recent developments, in large part because many countries in the region entered the crisis period suffering from substantial imbalances, the report said. Large current account deficits and domestic overheating made many countries vulnerable to the abrupt reversal of capital flows and weaker export demand that the crisis generated. GDP is projected to fall by 4.7 percent in 2009, recovering to grow by about 1.6 percent in 2010.
Within the CIS area, the most serious situation is in Ukraine, where GDP is expected to fall by 9 percent. In Russia, gross domestic product is projected to fall by 7.9 percent, in Belarus – by 3.3 percent and Kazakhstan – by 1.5 percent. In Tajikistan and Moldova, gross domestic product is expected to fall by 3 percent.
Global GDP growth is expected to rebound to 2% in 2010 and 3.2% by 2011. In developing countries growth is expected to be higher, at 4.4 % in 2010 and 5.7 % in 2011, albeit subdued relative to the robust performance before the current crisis.
Developing countries are likely to face a dismal external financing climate in 2009, according to the GDF. With private capital flows declining dramatically, many countries will find it difficult to meet their external financing needs, estimated at $1 trillion.
Private debt and equity flows will likely fall short of meeting the external financing needs of developing countries by a wide margin, amounting to a gap estimated to range between $350 billion and $635 billion. Capital flows from official sources, plus tapping foreign reserves, will help fill the gap in some countries, but in others, there will—of necessity—be sharp and abrupt macro adjustments.
The GDF highlights the importance of broad agreement among major governments on implementing reforms and staying away from beggar-thy-neighbor policies. The case for coordinated fiscal policy—usually weak, because of variation in the challenges each country faces—is now very strong as the world faces the common prospect of inadequate global demand.
