The World Bank APRIL 2000 P 20 SNUMBER 38 ECONOMIC POLICY Global Development Finance projects a brighter outlook for developing countries Developing countries are recovering from the recent crisis more quickly than expected, but the adjustment is far from complete. Prospects for developing countries have Growing momentum in Developing country improved considerably in the past six industrial countries and months finds the World Bank'sjust-released in world trade growth is expected GlobalDevelopmentFinance 2000. Industrial Growth in high-income countries is expected country output and world trade growth toriseto3.2percentin2000,0.7pointsfaster to rise to 4.5-5.0 have become stronger and more broadly than envisaged last fall. In 1999 U.S. growth based. Although prices for primary com- reached about 4 percent for the third year percent in 2000-02 modities have firmed, inflationary pres- inarow, and this momentum is expected to sures in the world economy remain carry through 2000. Sustained tightening contained. And while interest rates in some by the Federal Reserve to ward off infla- industrial countries have risen, spreads on tion should slow growth to less than 3 per- lending to developing countries have fallen cent in 2001-02, however. sharply-and capital flows to developing Europe saw a strong rebound in growth countries have stabilized. in the second half of 1999 to near 4 per- Developing countries grew an estimated cent in annual terms, drawing strength from 3.3 percent in 1999, up 0.6 percentage points robust exports and high consumer and busi- from the estimate in last fall's GlobalEconomic ness confidence. Growth in Europe is Prospects and more than twice the pace in expected to continue at about the same pace 1998 (table 1). Developing country growth in 2000. Evenjapan, where outputfell in the is expected to rise to 4.5-5.0 percent in secondhalfof 1999, isexpectedto see growth 2000-02. During the recent financial crisis pick up to 1.0-1.5 percent over the next two 45 developing countries containing 1.6 bil- years as resumed fiscal stimulus, rising busi- lion people experienced a drop in per capita ness confidence, and stabilization in con- income. But in 2000 those numbers are sumer markets offset the costs of corporate expected to fall to 14 countries with 140 mil- and financial restructuring. lion people. Sharp swings in world trade growth have Still, the developing world's adjustment helped transmit the impact of the finan- to the recent crisis is far from complete. cial crisis through the global economy both Growth in 2000-02 will likely remain below during the downswing in 1997-98 and dur- trends before the crisis because frailties ing the current recovery. World import exposed and exacerbated by the crisis will growth rose to about 6.5 percent in 1999- take time to address. Moreover, the process up nearly 3 points from 1998-due to a sharp of recovery varies greatly by countryc recovery injapanese and East Asian demand FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK TABLE 1 REAL GDP GROWTH AND THE GLOBAL ECONOMIC ENVIRONMENT (percentage change from previous year except LIBOR) Global Economic Prospects Current forecasts 1999/2000 forecasts Estimate Indicator 1999 2000 2001 2002 2000 2001 2002 World GDP growth 2.9 3.5 3.1 3.1 2.9 2.8 3.0 High-income countries 2.7 3.2 2.7 2.6 2.5 2.3 2.5 Low- and middle-income countries 3.3 4.6 4.8 4.8 4.2 4.5 4.8 Sub-Saharan Africa 2.5 3.2 3.7 3.8 3.1 3.4 3.4 East Asia and Pacific 6.5 6.6 6.3 6.1 6.2 6.2 6.2 East Asia crisis countriesa 5.8 5.7 5.4 5.1 5.3 5.1 5.1 South Asia 5.8 5.9 5.8 5.5 5.5 5.3 5.3 Europe and Central Asia 1.0 2.5 3.4 3.6 2.5 3.3 3.6 Latin America and Caribbean 0.0 3.6 3.8 4.4 2.7 3.5 4.4 Middle East and North Africa 2.2 3.5 3.6 3.6 3.2 3.5 3.6 World trade volume 5.2 8.3 6.9 6.5 6.4 6.3 6.3 Inflation in G-7 countriesb 1.3 1.8 1.9 2.0 1.6 1.8 2.0 Commodity prices (except oil)c -11.2 5.6 3.9 3.3 3.0 4.6 3.8 Oil pricesc 38.3 27.3 -17.4 -5.3 2.8 -2.7 0.0 Manufactures export unit valued -0.6 2.5 2.5 2.6 2.5 2.5 2.6 Six-month LIBORe 5.5 6.5 6.5 5.5 6.0 6.0 5.5 a. Indonesia, Republic of Korea, Malaysia, Philippines, and Thailand. b. Canada, France, Germany, Italy, Japan, United Kingdom, and United States. In local currency, aggregated using 1998-2000 weights. c. In nominal U.S. dollars. d. Unit value index of manufactures exports from G-5 (France, Germany,Japan, United Kingdom, and United States) to developing countries, expressed in U.S. dollars. e. London interbank offered rate. and continued double-digit growth in the cultural goods experiencing especially United States. severe declines. Most commodities, how- World imports are projected to rise much ever, began to recover in 1999, due to ris- faster than previously anticipated, by 8-9 ing demand for industrial commodities percent in 2000 and by nearly 7 percent in such as metals and petroleum products and 2001-02, fueled by stronger growth in indus- to cuts in supply by producers-especially trial countries and by the recovery in devel- for oil, the price of which surged nearly oping Asia and large Latin American 40 percent. countries. Broader import growth in Europe Most major commodity groups are andJapan is helping reduce excessive depen- expected to strengthen further in 2000. But dence on the United States as an engine except for oil and metals, few increases of world growth. As a result developing coun- are expected to be especially robust. The try exports are expected to rise 7.5-8.5 per- skewed pattern of price recovery has cent in 2000-02, up 1.5-2.0 points from affected developing countries in different 1998-99. ways. Terms of trade gains boosted oil exporters' real incomes by 5 percent in 1999 Firming commodity prices and should yield another 3 percent in 2000. Falling world demand during the inter- But terms of trade shifts cut nonoil com- national financial crisis contributed to large modity exporters' income by more than 1 declines in prices for many primary com- percent in 1999, and some agricultural modities, exacerbating the burden of adjust- exporters suffered much larger losses. Diver- ment in commodity-exporting developing sified exporters experienced-and should countries. In 1998 energy prices fell 30 per- continue to experience-only minor effects, cent and nonenergy commodity prices, because higher prices for commodity 16 percent. Nonenergy commodity prices imports are offset by higher prices for man- fell another I1e percent in 1999, with agri- ufactured exports. PREMNOTE 38 APRIL 2000 Gradual recovery in private EastAsia'sfive crisis countries saw a much flows faster than anticipated aggregate recovery Gross flows from international capital mar- in 1999, boosted by strong growth in exports kets to developing countries fell 14 percent and domestic demand. Slow progress on cor- in 1999, though by the second half of the year porate and financial restructuring and con- they were stabilizing around the levels of a tinued political uncertainty in Indonesia are year earlier. Flows are projected to rise 15 per- expected to restrain growth in these coun- cent in 2000, to $185 billion, and to $220-230 tries to below precrisis levels, however. Over- billion in 2001-as high, relative to GDP, as all, East Asia's growth is expected to reach in 1995, though still less than during the extra- 6-7 percent in 2000-02. ordinary surge in 1996-97, just before the The financial crisis had less effect on Latin Several factors financial crisis. The stabilization of flows in America than was feared. Regional output 1999 was accompanied by a 6 percentage was flat in 1999 and is expected to grow may prevent a point drop in spreads on lending to devel- 3.6 percent in 2000-nearly 1 point more oping countries, reflecting improving per- than expected, supported by a strong U.S. more rapid return ceptions of risk. market and higher prices for exports. But Foreign direct investment to develop- several factors weigh against a stronger to the growth rates ing countries proved resilient during the cri- rebound in 2000-01, including higher U.S. sis and is expected to increase from $183 interest rates, lower terms of trade for the before the crisis billion in 1999 to $200 billion in 2000 and region's oil importers, and high current $215 billion in 2001. This growth rate would account deficits, which may deter foreign be more modest than in the first half of investors. Still, growth is expected to the 1990s. But it would be consistent with strengthen as countries make progress on a natural stock adjustment process in which, adjustment. after a decade of rapidly growing flows, multi- At 5.8 percent, growth in SouthAsia turned national corporations are closer to desired out higher than expected in 1999, reflect- levels of investment in target developing ing stronger results in agriculture and countries. improving business confidence, due in part to better prospects for political stability and A diverse outlook for continued economic reforms in India. developing regions Regional growth is expected to approach Developing country output is estimated to 6 percent in 2000-01. Several factors will have increased 3.3 percent in 1999, and is prevent growth from reaching higher, projected to rise 4.5-5.0 percent in 2000-02. including slow progress on correcting large But several factors may prevent a more rapid fiscal deficits, an erosion of cost competi- return to the growth rates before the cri- tiveness relative to SoutheastAsia, and high sis. First, domestic adjustment to the crisis, tensions between India and Pakistan. especially in the financial sector, is far from Europe and Central Asia's growth of 1 per- complete in a number of Asian and Latin cent in 1999 was about 0.7 points higher American countries. Fiscal consolidation than forecast. Central European exports in the crisis countries and in some large devel- benefited from the recovery in Western oping economies less affected by the crisis Europe, while growth in the Commonwealth is also likely to be difficult and protracted. of Independent States was boosted by higher Second, growth in several large, highly oil prices and large import substitution indebted developing countries remains vul- effects in Russia. Problems arose, however, nerable to renewed volatility in capital flows. including the August earthquake in Turkey, Third, the terms of trade for agricultural the war in Kosovo, and weak consensus on exporters are likely to worsen in the short reform in the Balkans and Romania. Pro- term as prices for agricultural commodities jections for regional growth of 2.5-3.5 per- recover more slowly than prices for oil, met- cent in 2000-02 are in line with the previous als, and manufactured goods. forecast. PREMNOTE 38 APRIL 2000 Although the jump in oil prices in 1999 prevent a restoration of investor confi- led to better short-term fiscal positions and dence and an adequate flow of private real incomes for oil exporters in the Middle credit. East and North Africa, regional GDP growth A transition from strong cyclical recov- slowed to 2.2 percent. Growth should rise ery to sustained high growth in East Asia, to 3-4 percent in 2000, however, supported which will depend on restoring balance by recovery in Europe, higher oil prices, and sheet health in the financial and corpo- an expansion of oil production. Tight fis- rate sectors. Corporate restructuring cal polices aimed at strengthening longer- appears to be progressing slowly, leav- term fiscal sustainability will restrain ing countries vulnerable to a downturn near-term growth, but continued privati- in investor sentiment. Though the zation and policy reforms should help sus- The projected transition to lower oil tain growth of 3-4 percent in 2001-02, an prices would help oil importers, but it outtook has improvement over the past two decades. would hurt recovery prospects for several A number offactors slowed growth in Sub- oil exporters hit hard by the global finan- improved, Saharan Africa to about 2.5 percent in 1999: cial crisis, including Ecuador, Indonesia, low commodity prices, weak export demand, Nigeria, Russia, and the Republica Boli- significant bad weather, renewed civil strife, and higher variana de Venezuela. interest rates in South Africa. In 2000 stronger Except for a severe hard landing in the risks remain agricultural and export performance are United States, a failure to complete anyone expected to raise growth tojust over 3 percent. of these transitions is unlikely to derail the In 2001-02 growth is expected to strengthen global expansion. But each failure would to nearly 4 percent-assuming that gover- leave various groups of developing coun- nance and policies continue to improve. tries exposed to shocks and would con- tribute to problems that accumulate over Risks to the forecast time. The risks to the outlook presented in Global Development Finance 2000 are less than they This note is based on chapter 1 ofGlobal Devel- were six months or a year ago. But they opment Finance 2000. The chapter was writ- remain significant, originating in the need ten by a Development Prospects Group team to achieve four transitions: comprisingRobert Lynn (team leader), Annette * A transition to a soft landing in the United de Klein, CarolineFarah, Robert Keyfitz, Mick States. Sustained monetary tightening to Riordan, Dominique Van Der Mensbrugghe, curb excessive demand growth could pro- and Bert Wolfe. Questions on the forecasts voke a major correction in U.S. equity should be addressed to RobertLynn (03961). markets, leading to sharp drops in con- Swaminathan Aiyar Sandeep Mahajan, and sumption and investment. Milan Brahmbhatt prepared the summary in * A transition to private demand-led this note. growth inJapan.Japan's anemic growth Ifyou are interested in similar topics, consider is dependent on an unsustainable fiscal joining the Growth Thematic Group. Contact stimulus. Inadequate progress on finan- Sandeep Mahajan (x 80287) or click on The- cial and corporate restructuring could matic Groups on PREMnet. This note series is intended to summarize good practice and key policy find- Iog ings on PREM-related topics. The views expressed in these notes are those of the authors and do not necessarily reflect the views of the World Bank. PREM- notes are distributed widely to Bank staff and are also available on the PREM website (http://prem). 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