Global Growth: A View from the World Bank

Developed_and_developing_countries

This article discusses growth projections revealed in the World Bank’s Global Economic Prospects 2013 and the analysis underlying the projections. It addresses the impact of US policies and growth on world markets and developing economies.

Compared to its estimates for 2013 growth made in January 2012, the World Bank’s Global Economic Prospects report, released in January 2013, estimates weaker global growth in 2013.

The most recent projections for 2013 of 1.3% growth in developed countries and 2.4% globally are lower than earlier predictions of 2% growth for developed countries and 3.1% growth globally. These numbers reflect decreased economic activity in the second half of 2012, says Mr. Burns, as well as the effect of risk factors such as fiscal uncertainty in the US and concerns about fiscal sustainability in the Eurozone.

Initial optimism regarding growth was curbed in high-income countries continuing to struggle with restructuring and fiscal issues in the aftermath of the financial crisis. High unemployment and “very weak” consumer and business confidence continue to hinder their activity in 2013. However, their growth is expected to start improving in the coming year, rising to 2% and 2.3% in 2014 and 2015.

In 2012, growth in developing countries, at 5.1%, was the weakest it had been in 10 years; this report projects a slight rise to 5.5% in 2013, which is roughly consistent with developing countries’ underlying potential, according to Mr. Burns. This will occur due to a combination of improved financial conditions, relaxed monetary policies, and slightly stronger growth in developed countries.

Risks: How the US and other developed countries affect developing country growth prospects

Strong growth in developing countries in the post-crisis period points to solid productivity growth due to policy reforms rather than external market conditions. These policies include strengthened macroeconomic and structural domestic policies and investments in infrastructure, education, and health. However, developing economies are not immune to shocks affecting high-income countries; linkages between the developed and developing world have strengthened, evidenced by the extent to which growth slowed just as much as in developing countries as it did in developed countries. (These developing markets were able to recover more quickly partially because they did not take part in many of the excesses of the pre-recession boom, says Burns.)

As the US has strong global trade and financial linkages, its policy uncertainty affects countries around the world and hurts world growth. Although signs show progress towards a more cooperative policy setting approach, Burns says, more is needed to establish a credible medium-term fiscal consolidation plan. If the US fails to control doubt about its solvency, the World Bank estimates that the resulting loss of confidence in the dollar and increased market tensions could potentially reduce US growth by 2.3%. Global growth could fall by as much as 1.4%. The exact impacts of the US economy’s fluctuations vary among developing countries and are based on a number of factors, including proximity, whether the country has signed a preferential trade/investment agreement with the US, the country’s competitiveness, and the commodity composition of developing countries’ exports vis-à-vis US import composition, says Burns. Among developing countries, those in the Latin American and Caribbean region have by far the greatest trade with the United States. For them, 37.1% of exports are destined for the US. The countries of the East Asia region come in second, with 16.1% of their exports to the United States; the past few years have seen a reorientation of trade within the region. Intra-Asian trade, especially with China, has increased.

Tensions in Asia and lack of confidence in the Eurozone could potentially push Europe into a steep recession and also hurt developing economies, subtracting “more than 1% of developing countries’ GDP”. Interruptions to global oil supply and resurgences in the prices of internationally traded food commodities (especially corn) still pose risks for these countries. Finally, although China’s unusually high investment rate is expected to decline over the medium-term, an abrupt unwinding would have serious domestic and global repercussions, especially for developing commodity exporters.

Policy Responses

Major central banks such as the Federal Reserve, the Bank of Japan, the Bank of England, and possibly the European Central Bank are likely to keep monetary policy loose, which is unlikely to lead to high global inflation (absent unexpected supply shocks such as substantial commodity price shocks). The World Bank estimates inflation in middle-income countries to remain low. In contrast to developed countries, output in developing countries is close to capacity, so very expansionary policies could increase inflation.

Volatility of capital flows to middle-income countries from high-income countries, especially in bond and treasury markets, can substantially impact developing countries. Capital flows generally increase during periods of low perceived risk and reverse towards so-called capital havens in times of high perceived risk. To limit the effects of such volatility, countries may lower domestic interest rates and tax short-term capital flows.

Long-term vs short-term challenges for developing countries

Moving forward, developing countries face a mandate to maintain the reform momentum of the last few decades to sustain strong growth, which specifically entails strengthening rule of law, establishing regulatory regimes, and investing in infrastructure, education, health, and social protection systems.

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