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26.11.2008 Business & Finance

Trade Drop Could Set Developing Countries Back Years

By World Bank Ghana Office
Financial Crisis and TradeFinancial Crisis and Trade

A looming drop in world trade could 'set developing countries back for many years' and erase recent gains in development, a senior World Bank official warned ahead of a United Nations international conference in Qatar.

Danny Leipziger, Vice President of the Poverty Reduction and Economic Management network at the World Bank, says the financial crisis has already affected trade and could undermine progress achieved in Africa and elsewhere in the last six years.

Low-income countries, weakened by high food and fuel prices over the last year, 'have little to fall back on in terms of sheltering the vulnerable. With a global downturn a certainty, we are in for a rough patch,' adds Leipziger.

The World Bank Group announced during its Annual Meetings in October it stands ready to step up assistance to developing countries. Measures include increasing IBRD lending to as much as $100 billion over the next three years and doubling IFC's trade finance program to $3 billion.

The World Bank Group is also working to speed up grants and long-term, interest-free loans to the world's 78 poorest countries, 39 of which are in Africa. About $42 billion in funds are available through the International Development Association, the World Bank's fund for these countries, over a three-year period.

Trade as Engine for Development

World trade has indeed been an engine of the world economy, with developing countries posting nearly 8 percent growth and attracting a record $1 trillion in net private capital flows in 2007. Global trade is more than the mere exchange of goods and services. It includes exchanging knowledge, know-how, and ideas more generally, notes Leipziger.

But in 2009, world trade could decline for the first time since 1982. The global economy is forecast to grow by only 1 percent, with developing country growth expected to fall to 4.5 percent from a previously projected 6.5 percent. The World Bank estimates each 1 percent drop in growth could trap another 20 million people in poverty.

Global recession looms as heads of state are set to meet at the International Conference on Financing for Development in Doha, Qatar, November 29 to December 2. The conference is a follow up to a 2002 meeting in Monterrey, Mexico, often seen as a turning point in development cooperation by the international community.

World Bank President Robert B. Zoellick is sending World Bank Chief Economist Justin Lin to represent him and the institution as a voice for developing countries. Lin, who comes from China, will be leading a high-level delegation, which will include World Bank Senior Vice President Marwan Muasher of Jordan.

The meeting will be preceded by a special UN summit on the financial crisis in Qatar on November 28, expected to be attended by leaders of G20 and non-G20 countries.

Lack of Trade Finance

'At the moment what's constraining world trade is not only falling global demand but lack of trade finance,' says Leipziger. 'You can't get enough financing to ship your goods. So this is something that needs to be solved, and the quicker the better.'

'The main thing is to try and have this recession be as short as possible,' he says.

With most developed countries expected to slip into recession, fears linger some will move to raise trade barriers.

'The multilateral trading system is no doubt being tested,' says Leipziger. A case in point are the subsidies and other forms of domestic support to various industries that developed countries are contemplating.

Leipziger says keeping markets open is key. Governments should strive to use the crisis as an opportunity to invest in trade-related infrastructure, implement measures to facilitate trade, and maintain trade finance credit lines and guarantees, especially through their export credit agencies, he adds.

The World Bank welcomes the commitment to trade that G20 participants made at the Washington Summit on November 15. In their communiqué they said: 'we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.'

Helping Countries Improve Trade Prospects

Leipziger says the World Bank's trade programs can also help countries improve their trade prospects.

One program focuses on expanding the Bank's trade facilitation and logistics and aims at getting exports to ports more efficiently, as well as helping developing countries reduce the costs of engaging in international trade and take better advantage of global trade opportunities, including meeting OECD import standards.

Another program helps create new trade opportunities and expand the 'Aid for Trade' initiative by supporting country programs on trade and competitiveness, trade-related infrastructure, and other trade-related issues.

'We need to ensure developing countries have access to credit and international markets. I think that's where the maintenance of an open trading system is very important,' says Leipziger. 'Even though OECD countries may be in recession, that doesn't mean we should be resorting to protectionism, which will set developing countries back for many years.'

'It's really incumbent on all countries to keep international trade and finance flowing, because that can limit the damage of the global downturn; we all stand to benefit the most from that, especially developing countries.'

This article has been revised to reflect the following correction:

Correction: November 25, 2008

The paragraph about the World Bank's delegation attending the Financing for Development meeting was added.