World Bank says developing countries promote recovery

The world economy is moving from a post-crisis bounce-back phase of the recovery to slower but still solid growth this year and next, with developing countries contributing almost half of global growth, says the World Bank’s latest Global Economic Prospects 2011.

The World Bank estimates that global gross domestic product, which expanded by 3.9 percent in 2010, will slow to 3.3 percent in 2011, before it reaches 3.6 percent in 2012. Developing countries are expected to grow 7 percent in 2010, 6 percent in 2011 and 6.1 percent in 2012. They will continue to outstrip growth in high-income countries, which is projected at 2.8 percent in 2010, 2.4 percent in 2011 and 2.7 percent in 2012.

The Latin America and Caribbean region has emerged from the global crisis well compared with its own past performance and the pace of recovery in other regions, the World Bank said.

After contracting by 2.2 percent in 2009, gross domestic product is estimated to have expanded 5.7 percent in 2010, similar to the average growth recorded during the 2004-2007 boom years, it added. Growth is forecast to slow somewhat to around 4 percent in 2011 and 2012, largely because of a weaker external environment as growth in advanced economies and China moderates. Several countries in the region have been subject to potentially destabilizing capital inflows that have contributed to strong upward pressure on some currencies, it noted.

In most developing countries, gross domestic product has regained levels that would have prevailed had there been no boom-bust cycle, said the World Bank. While steady growth is projected through 2012, the recovery in several economies in emerging Europe and Central Asia and in some high-income countries is tentative. Without corrective domestic policies, high household debt and unemployment, and weak housing and banking sectors are likely to mute the recovery.

“On the upside, strong developing-country domestic demand growth is leading the world economy, yet
persistent financial sector problems in some high-income
countries are still a threat to growth and require urgent policy actions,” said Justin Yifu Lin, the World Bank’s chief economist and senior vice president for development economics.

Net international equity and bond flows to developing countries rose sharply in 2010, rising by 42 percent and 30 percent respectively, with nine countries receiving the bulk of the increase in inflows. Foreign direct investment to developing countries rose a more modest 16 percent in 2010, reaching $410 billion after falling 40 percent in 2009. An important part of the rebound is due to rising South-South investments, particularly originating in Asia.

“The pickup in international capital flows reinforced the recovery in most developing countries,” said Hans Timmer, director of development prospects at the World Bank. “However, heavy inflows to certain big middle-income economies may carry risks and threaten medium-term recovery, especially if currency values rise suddenly or if asset bubbles emerge.”

Most low-income countries saw trade gains in 2010 and, overall, their gross domestic product rose 5.3 percent in 2010, according to the report. This was supported by a pick-up in commodity prices, and to a lesser extent in remittances and tourism. Their prospects are projected to strengthen even more, with growth of 6.5 percent in both 2011 and 2012, respectively.

According to the report, current relatively high food prices are having a mixed impact. In many economies, dollar depreciation, improved local conditions, and rising prices for goods and services means that the real price of food has not risen as much as the U.S. dollar price of internationally traded food commodities.

“However, double-digit price increases of key staples in the past few months are pressuring households in countries with an already-existing high burden of poverty and malnutrition. And, if global food prices rise further along with other key commodities, a repeat of the conditions in 2008 cannot be excluded,” cautioned Andrew Burns, manager of global macroeconomics in the World Bank’s Prospects Group.

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