WB sees growth in developing nations slowing to 6.5% this year
Ted P. Torres
Philippine Star
The World Bank is predicting growth in developing countries to slow from an extraordinary 7.8 percent in 2007 to 6.5 percent this year as the financial turmoil in high-income countries and high food and energy prices continue to stifle economic activities.
Based on its Global Development Finance 2008 report, the WB also cited private capital flows to emerging markets, which hit a record $1 trillion in 2007, are expected to drop to around $800 billion by 2009, which would still be the second highest level ever.
“Strong growth in the developing world is certainly helping to offset the sharp slowdown in the US,” said Uri Dadush, director of the WB’s Development Prospects Group and International Trade Department. “But at the same time, rising global inflationary pressures – especially high food and energy prices – are hurting large segments of the poor around the world.”
Developing country growth in recent years has been powered in part by expanding capital flows, including by foreign banks that have expanded their presence in developing countries through acquisitions and the establishment of local affiliates. As of end-June 2007, foreign claims on developing-country residents held by major international banks stood at $3.1 trillion, up from $1.1 trillion at the end of 2002.
“The presence of foreign banks in developing countries expands access to credit and as well as financial services, which can spur efficiency and innovation in domestic banks,” said Mansoor Dailami, manager of international finance in the Development Prospects Group, and lead GDF author. “However, the ripple effect of shocks from the US and European markets to certain developing-country financial markets highlights the need for better and more coordinated financial regulation, liquidity provision, and macroeconomic management.”
The report warned that countries with heavy external financing needs are potentially most vulnerable to a credit crunch, particularly in cases where private debt inflows into the banking sector have contributed to a rapid expansion of domestic credit, which stokes inflationary pressures. In 2007 and 2008, several countries in Europe and Central Asia, and a selected few in Latin America and the Caribbean and Sub Saharan Africa were most at risk.
While some low-income countries have recently accessed the international bond market, the bulk of private capital flows to developing countries go to just a few big economies, among them the so-called BRICs – Brazil, Russia, India and China. The poorest nations, meanwhile, remain reliant upon official aid, which further declined in 2007.
Net official development assistance by members of the OECD’s Development Assistance Committee totaled $103.7 billion in 2007, down from a peak of $107.1 billion in 2005, the report said.
The WB said high commodity prices are a major worry, as prices of both energy and internationally-traded food increased 25 percent in nominal terms over the second half of 2007.
For oil, the increase was mostly due to years of under-investment and tight supply. For food and agricultural commodities, the big drivers are demand for biofuels in the US and Europe, high prices for fertilizer and energy inputs, and export bans on key staple crops. Such bans exacerbate shortages in global markets in the short term and can curtail supply responses to higher prices in the long term.
Additionally, the WB said poor weather reduced output in some countries, and commodity-market speculation also pushed up prices. Grain prices rose the most during the first months of 2008, they were twice as costly as a year earlier.
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