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ECONOMY: Global Prospects Pinned on Developing World

Abid Aslam

WASHINGTON, Jan 9 2008 (IPS) - The world is entering its second straight year of a U.S.-led economic slowdown but resilient developing economies are cushioning the effects, the World Bank said Wednesday in a report portending pain for the poorest.

The global lender said it expects the world economy to grow by 3.3 percent this year, down from 3.6 percent in 2007 and 3.9 percent the previous year.

Developing countries are expected to post 7.1 percent growth, slightly off their 2007 performance of 7.4 percent but still a continuation of a four-year streak of record expansion.

By contrast, the bank anticipated a lacklustre 2.2 percent from high-income countries and 1.9 percent from the U.S. economy, the world&#39s biggest.

These predictions could prove rosy if the United States ends up taking other economies – including developing ones – down with it, the bank said in its Global Economic Prospects report for 2008.

A weaker U.S. dollar, the spectre of recession, and rising financial-market volatility could cast a shadow over this soft landing scenario for the global economy, it said.

These risks would cut export revenues and capital inflows for developing countries and reduce the value of their dollar investments abroad. If this happened, developing countries might have to draw down the reserves and other buffers they have built up in recent years.

"Overall, we expect developing-country growth to moderate only somewhat over the next two years. However, a much sharper United States slowdown is a real risk that could weaken medium-term prospects in developing countries," said Uri Dadush, the bank&#39s director of development prospects.

Although Dadush spoke of the "real risk" of a U.S. recession, some here already have declared it under way.

Financial powerhouse Merrill Lynch, in a report last week, said the U.S. government&#39s latest jobs data confirmed the country already was in the first month of a recession.

Last week&#39s government employment report, which rocked stock markets around the world, said the jobless rate rose further in December to reach five percent.

Other investment banks disagreed with Merrill&#39s assessment but the brokerage house chided its detractors and the larger commentariat.

"To say that the backdrop is &#39recession like&#39 is akin to an obstetrician telling a woman that she is &#39sort of pregnant&#39," the Merrill report said.

The World Bank, in its report, assumed that turmoil in international markets – unleashed by rash U.S. mortgage lenders, ravenous speculators, clueless ratings agencies, and ineffective financial regulators – would persist into late 2008.

However, the bank anticipated the costs of this to large financial institutions would remain manageable. It also expected falling housing prices in the U.S. would not have a calamitous impact on consumer demand.

In any case, it seems developing countries are taking up any slack.

"Looking at trade, strong import demand across the developing countries is helping to sustain global growth. As a result, and given a cheaper U.S. dollar, American exports are expanding rapidly," said Hans Timmer, a report co-author.

"This is helping shrink the U.S. current account deficit and is contributing to a decline in global imbalances," Timmer added.

The report said prudent macroeconomic management and technological progress have helped to increase developing countries&#39 total factor productivity and real income growth over the past 15 years. As a result, poverty would fall further over the next decade.

Many commodity exporters have benefited from robust developing-country growth, which has contributed to high prices for oil, metals and other items. Rising grain prices, however, are hurting real incomes among the urban poor, the bank said. It blamed the problem in part on high oil, energy and fertiliser prices.

The price of a barrel of light sweet crude oil exceeded 100 dollars last week on the New York Mercantile Exchange, breaking a psychological barrier but not setting a new record in real terms as the sum, once adjusted for inflation, amounted to less than the peak price in 1980. No one denies that prices remain near historic highs, however.

The report expected this year&#39s cost of a barrel of crude to average 84.10 dollars, up from 71.20 dollars last year, before coming down to 78.40 dollars in 2009.

The bank also attributed rising food prices to increased grain production for biofuels. It saw little prospect that food would become more affordable.

"Agricultural prices are expected to remain nearly flat at high levels in 2008, as biofuels production continues to ramp up in response to consumption mandates and production subsidies, drawing resources from other crops," the report said.