Global Economic Prospects 2008: World Bank says Developing Countries to cushion Rich-Country slowdown in 2008

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Global Economic Prospects 2008: World Bank says Developing Countries to cushion Rich-Country slowdown in 2008
By Finfacts Team
Jan 9, 2008, 03:20

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Resilience in developing economies is cushioning the current slowdown in the United States, with real GDP growth for developing countries expected to ease to 7.1 percent in 2008, while high-income countries are predicted to grow by a modest 2.2 percent, says the World Bank, in a report published today.

Global Economic Prospects 2008 (GEP 2008) notes that world growth slowed modestly in 2007 to 3.6 percent compared with 3.9 percent in 2006, a downturn due largely to weaker growth in high-income countries. In 2008 global growth is expected to be 3.3 percent.

A weaker US dollar, the specter of an American recession and rising financial-market volatility could cast a shadow over this soft landing scenario for the global economy. These risks would cut export revenues and capital inflows for developing countries, and reduce the value of their dollar-investments abroad. In this context, the reserves and other buffers that developing countries have built up in past years may be needed to absorb unexpected shocks.

“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, Director of the World Bank’s Development Prospects Group and International Trade Department.

The report’s authors assume that credit turmoil in international markets will persist into late 2008, but that costs to large financial institutions will remain manageable. Moreover, they predict that spillover from problems in the US housing market on consumer demand will remain limited.

“Looking at trade, strong import demand across the developing countries is helping to sustain global growth. As a result and given a cheaper US dollar, American exports are expanding rapidly. This is helping shrink the U.S. current account deficit and is contributing to a decline in global imbalances,” said Hans Timmer, co-author and Manager of the Global Trends team in the Bank’s Development Prospects Group.

Recent robust developing country growth has contributed to high commodity prices, notably for oil, metals and minerals. These have benefitted many commodity exporters, thus explaining the strength of demand growth in some poorer countries. However, the recent increase in grain prices – partly due to increased grain production for biofuels – is hurting real incomes among the urban poor.

GEP 2008 also argues that more prudent macroeconomic management and technological progress have helped increase total factor productivity and real income growth in developing countries over the past 15 years, a trend expected to help reduce poverty in the next decade. The special theme of GEP 2008 is technology diffusion in developing countries (see below).

Developing country highlights

In the first half of 2007, industrial production sped up across the developing regions, notably in East Asia (20%, year over year). Robust production data are also reflected in GDP results. China, India, and Russia were instrumental in driving up output.

GDP in East Asia and the Pacific is expected to grow about 10 % in 2007, with China expected to grow by more than 11%. Growth for the region should ease to 9.7 % in 2008 and to 9.6 % by 2009. The effects from the turmoil in the world’s financial centers may be small in most economies in the Region. Except for China, direct exposures of financial institutions in the region to mortgage-based securities (or sub-prime crisis) are limited.

GDP in Europe and Central Asia is expected to grow by 6.7 % in 2007, and then slow to 6.1 % in 2008 and 5.7 % in 2009. Inflation has risen in several countries, tied to sustained strong domestic demand and rising food and fuel prices (made worse by drought in Bulgaria and Romania). Signs of overheating are evident in Bulgaria and the Baltic states. In Turkey, an easing of monetary policy is expected to strengthen domestic demand, leading to a pickup in growth, and a continued large current account deficit.

GDP in Latin America and the Caribbean advanced by 5.1 % in 2007 and is growth expected to ease to 4.5 % in 2008 and further to 4.3 % by 2009, mainly reflecting a return to more sustainable growth rates in Argentina and Venezuela. Elsewhere, including in Brazil, growth should remains robust, while in Mexico it is expected to rebound from a weak 2007.

GDP in the Middle East and North Africa eased slightly in 2007 to 4.9 % and will likely rise with the help of high oil prices to 5.4 % in 2008. In oil-exporting countries, higher oil prices are adding to revenues, some of which are being invested infrastructure in countries like Algeria and Iran. Diversified exporters like Jordan, Morocco and Tunisia are enjoying double-digit growth, thanks to increased trade demand from Europe.

GDP growth in South Asia edged down slightly in 2007 to 8.4 %, with industrial production and GDP growth driven by strong domestic demand. An expansion of credit, rising incomes, and strong worker remittances are buoying private consumption. Meantime, improvements in business sentiment along with rising corporate profits, are providing a further boost.

GDP in Sub-Saharan Africa grew 6.1 % in 2007, and is expected to rise 6.4% in 2008, with much of the impetus coming from strong domestic demand. Investment in the region is expected to remain strong, despite the tightening of international credit conditions, due in part to large foreign-financed investments. In contrast, private demand in South Africa, where higher interest rates and an erosion of real incomes are curbing real outlays, is projected to soften. Regional growth may slip to 5.8 % by 2009 as oil exporters respond to international conditions and restrain output moderately.

Developing Countries must improve capacity to absorb and use technology

Rapid technological progress in developing countries has helped to raise incomes and reduce the share of people living in absolute poverty from 29 percent in 1990 to 18 percent in 2004. Despite these gains, the technology gap between rich and poor countries remains enormous, and the capacity of developing economies to adopt new technology remains weak, says the GEP 2008.

“Technological progress increased 40 to 60 percent faster in developing countries than in rich countries between the early 1990s and early 2000s,” said Andrew Burns, Lead Economist and main author of the report. “Nevertheless, developing countries have a long way to go, given that the level of technology that they use is only one quarter of that employed in high-income countries.”

Subtitled Technology Diffusion in the Developing World, the World Bank report notes that recent progress reflects increased exposure to foreign technologies. As a share of GDP, high-tech imports and foreign direct investment levels have doubled since the early 1990s.

“Rising trade and investment contacts with high-income countries, often facilitated by migrant groups, have been central to technological progress in developing countries.” said Uri Dadush. “However, openness alone is not enough. To continue catching up, countries need to strengthen educational achievement, governance, basic infrastructures, and links to migrant groups.”

The report stresses that the weak diffusion of technology within countries holds back overall technological achievement in many countries. Thus, while major centers and leading firms in Brazil, India and China may operate close to the global technological frontier, most firms in these countries operate at less than a fifth of the top productivity level.

According to the report, improving capacity to absorb foreign technology is critical in low-income countries, as well as in those middle-income countries that have exploited low-wage comparative advantages rather than strengthened domestic competencies.

More Highlights:

Most developing countries participate minimally at the global technological frontier. Their rapid economic progress has been achieved by adapting and adopting already-existing technologies. This will likely persist, given the large technology divide.
Technology now spreads much more quickly between countries. In the early 1900s, new technology took over 50 years to reach most countries; today it takes about 16 years.
Technology tends to spread slowly within countries. Main cities and leading sectors use more sophisticated technologies than the rest of the economy. For example, the IT-enabled services sector in urban India employs world-class technologies, but less than 10 percent of the country’s rural households had telephone access in 2007.
Use of some new technologies, such as mobile phones, has risen quickly. Nevertheless, some technologies have spread only slowly. Three-quarters of low-income countries have 15 or fewer personal computers per 1,000 people, and a quarter have fewer than five.
Governments should strengthen domestic technology dissemination channels as a high priority. These include transport infrastructure and the capacity of applied R&D agencies to orient themselves to markets through improved outreach, testing, and marketing.
Weak basic infrastructure systems limit the range of technologies that can be employed in many countries. Policies should ensure that critical enabling services such as roads and electricity are widely available, whether delivered by the private or public sector. In Sub-Saharan Africa, just 8 percent of the rural population has access to electricity.
Ineffective or uneven access to quality education also restricts countries’ ability to exploit technologies. Even simple technologies can have big impacts. For example, relatively simple skills are needed to build rainwater collection systems, which improve access to clean drinking water and reduce infant mortality by lowering the incidence of diarrhea.