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13.01.2011 Business & Finance

World Bank says most developing countries have recovered from crisis, projects steady global growth

By World Bank
World Bank says most developing countries have recovered from crisis, projects steady global growth
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WASHINGTON, DC, January 12, 2011 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 Banks latest Global Economic Prospects 2011.

The World Bank estimates that global GDP[1], which expanded by 3.9% in 2010, will slow to 3.3% in 2011, before it reaches 3.6% in 2012. Developing countries are expected to grow 7% in 2010, 6% in 2011 and 6.1% in 2012. They will continue to outstrip growth in high-income countries, which is projected at 2.8% in 2010, 2.4% in 2011 and 2.7% in 2012.

In most developing countries, GDP has regained levels that would have prevailed had there been no boom-bust cycle. 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 Banks 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% and 30% respectively, with nine countries receiving the bulk of the increase in inflows. Foreign direct investment to developing countries rose a more modest 16% in 2010, reaching $410 billion after falling 40%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 GDP rose 5.3% in 2010. 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% 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, cautionedAndrew Burns, manager of Global Macroeconomics in the World Banks Prospects Group.

Regional Highlights
East Asia and Pacific, withGDP growth estimated at 9.3% for 2010,led the global recovery. This was on the back of an estimated 10% increase in Chinese GDP and a 35% increase in its imports. Output growth in the rest of the region was also strong at 6.8%. Loose monetary policy in high-income countries boosted capital inflows, with the Thai and Indonesian equity markets up more than 40% since January 2010. The inflows have appreciated regional currencies, despite offsetting measures like reserve accumulation and other adjustments. As the pace of the global recovery eases, GDP growth is projected to slow, but remain strong at 8% in 2011 and 7.8% in 2012.

Following a 6.6% decline in GDP during 2009, output is expected to expand by 4.7% in the Europe and Central Asiaregion in 2010, as several countries undergo intense restructuring. Output in Bulgaria, the Kyrgyz Republic, Lithuania, and Romania stagnated or declined in 2010, and is forecast to expand by only 2% in 2011 and 3.3% in 2012. Excluding these countries, growth in the rest of the region is forecast to ease to 4.2% in both 2011 and 2012. The recovery in the region remains particularly sensitive to the situation in high-income Europe where the sustainability of sovereign debt remains a concern.

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. After contracting by 2.2% in 2009, GDP is estimated to have expanded 5.7% in 2010, similar to the average growth recorded during the 2004-2007 boom years. Growth is forecast to slow somewhat to around 4% 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.

For the developing countries of Middle East and North Africa, a modest upturn in growth in 2010 reflected both an improved external environment and the ongoing effects of earlier stimulus programs. Higher oil prices in the year benefitted developing oil exporters, while rebound in parts of the Euro Area- and growth in high-income Gulf Cooperation Council (GCC) countries helped to support a revival in exports, remittances and tourism. After an advance of 3.3% in 2010, the region is expected to enjoy stronger gains of 4.3% and 4.4% in 2011 and 2012 respectively, as domestic demand growth continues, export markets firm, and oil prices remain at high levels.

The South Asia region is projected to post GDP growth of 7.9% on average over the 2011-2012 fiscal years, buoyed by vibrant growth in India. This compares with estimated growth of 8.7% in fiscal year 2010. The region benefited from aggressive demand stimulus measures, a revival in investor and consumer sentiment, and a resumption of capital inflows. A recent move toward tighter policy will likely need to be pursued further, given the regions high fiscal deficits (the largest among developing regions), high inflation and deteriorating current accounts.

Output in Sub-Saharan Africa expanded by an estimated 4.7% in 2010, a strong rebound following a 1.7% growth rate in 2009. In South Africa, the regions largest economy, growth at an estimated 2.7% in 2010 was curtailed by declining private investment, rand appreciation and labor strikes. South African growth is projected to pickup to 3.5% and 4.1% in 2011 and 2012 respectively, as global conditions improve further. The rest of the region, excluding South Africa has actually fared better. GDP for these countries expanded an estimated 5.8% in 2010 and is projected to grow 6.4% in 2011 and 6.2% in 2012. The rebound was strongest among the metal and mineral exporters, and oil exporters, which have benefited from stronger commodity prices.

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