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ECONOMY: Global Woes Hit Developing Countries

Abid Aslam

WASHINGTON, Jun 10 2008 (IPS) - The global credit crunch unleashed in the United States is combining with runaway food and fuel prices to put the squeeze on developing countries, according to the World Bank.

Private capital flows to emerging markets hit a record 1 trillion dollars in 2007 but are expected to fall to around 800 billion dollars by 2009. This would remain the second highest level on record. Even so, economic growth in developing countries will slow from a collective 7.8 percent in 2007 to 6.5 percent in 2008, the bank said in a new report Tuesday.

The deceleration will prove most pronounced in developing countries that depend heavily on foreign capital, the lending agency warned in its “Global Development Finance 2008” report. This is because credit market problems are prompting financial institutions to tighten their lending standards.

Overall, the bank anticipated a slowdown in world gross domestic product (GDP) growth from 3.7 percent in 2007 to 2.7 percent in 2008. Prospects would dim further if the financial turmoil and economic malaise originating in the U.S. housing market proves more severe or prolonged, the bank said.

The assessment reflected growing pessimism about emerging and developing economies’ chances.

“More than at any other time in recent years, the uncertainty surrounding the outlook is quite pronounced and tilted to the downside,” the bank said.

The bank said the slowdown would affect most regions of the developing world, with the largest losses in East Asia and the Pacific and Latin America.

In East Asia, China will bear the brunt with a 2.5-percentage-point fall in growth to 9.2 percent next year and 9.0 percent in 2010.

By contrast, sub-Saharan Africa’s growth could pick up to 6.5 percent this year, the region’s fastest pace in nearly four decades. This likely would moderate to around 5.9 percent by 2010, still well above recent years’ performance.

Economies with large current account deficits and heavy external financing needs are particularly vulnerable, the bank said. These include Eastern European and Central Asian countries.

Even the poorest countries will feel some pain because of their reliance on official aid, which continues to dwindle. Donors trimmed their assistance to these countries by 3.4 billion dollars between 2005 and 2007, the report said, citing figures from the wealthy nations’ Organisation for Economic Cooperation and Development (OECD).

As recently as January, the bank and the International Monetary Fund said that although no region would be spared by a global slump, the effects in developing countries likely would prove mild. Tuesday’s gloomier predictions were based in large measure on fears about inflation in the developing world.

Staple foodstuffs have doubled in price since 2005, mainly because of rising demand for food, competition from the biofuels industry, protectionist trade policies, and financial speculation. Fuel prices also have surged. Oil traders now toy with the 140 dollar-per-barrel mark, and bank economists said they saw no let-up in the upward trend.

“Strong growth in the developing world is certainly helping to offset the sharp slowdown in the U.S.,” said Uri Dadush, director of the bank’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.”

In turn, spiraling prices are muddying the unfriendly waters in which central banks and finance ministries now find themselves.

“Across the developing world, inflationary pressures complicate the role that monetary and fiscal policy can play in maintaining macroeconomic stability over the medium term,” the bank said.

Among other potential hazards, the bank warned that a weaker U.S. dollar would add to expectations of inflation, further driving up commodity prices.

The bank offered its assessment amid warnings from economists that up to two-thirds of the world’s population likely will suffer double-digit rates of inflation over the course of this year.

The report also appeared as the U.S. central bank chief sought to persuade bankers that the U.S. economy has evaded a major recession.

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” Ben Bernanke, the Federal Reserve chairman, told a conference of bankers Monday.

Bernanke played down the government’s latest unemployment figures, according to which the country last month saw its largest rise in joblessness in two decades. He acknowledged, however, that rising energy prices could drive up inflation.

“The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations,” he said in a prepared speech.

Thus, the United States, like other countries, must walk a tightrope buffeted on one side by the need to stimulate a stagnant economy and on the other to keep a lid on inflation.

The World Bank report said the downturn in developed markets should prove relatively short-lived. It forecast a full recovery by 2010.