Developing countries to drive global growth, says WB report

MANILA, Philippines - The developing countries will provide the main engine for global economic growth in the next two years, according to the World Bank’s newly-released Global Economic Prospects (GEP) report.

Growth in these regions is estimated at 5.7 percent in 2014 and 5.8 percent in 2015, the WB said.

This projected growth is almost more than double the expected worldwide GDP growth for 2015 at only 3.3 percent. 

But the WB pointed out that developing countries, such as the Philippines, need to strengthen their buffers agains economic risks.

“Four years after the onset of the global financial crisis, the world economy remains fragile and growth in high-income countries is weak. Developing countries need to focus on raising the growth potential of their economies, while strengthening, buffers to deal with risks from the euro area and fiscal policy in the United States,” the report said.

“The economic recovery remains fragile and uncertain, clouding the prospect for rapid improvement and a return to more robust economic growth,” said WB Group president Jim Yong Kim. 

“Developing countries have remained remarkably resilient thus far. But we can’t wait for a return to growth in the high-income countries, so we have to continue to support developing countries in making investments in infrastructure, in health, in education. This will set the stage for the stronger growth that we know that they can achieve in the future.”

Last year, developing countries posted their slowest economic growth rate for the past decade, partly because of the heightened euro zone uncertainty in May and June of 2012. Since then, financial market conditions have improved dramatically.

But the WB noted that international capital flows to developing countries, which fell 30 percent in the second quarter of 2012, have recovered and bond spreads have declined to below their long-term average levels of around 282 basis points. 

The report further noted that developing-country stock markets are up 12.6 percent since June, while equity markets in high-income countries are up by 10.7 percent. 

However, the real side of the economy has responded modestly. Output in developing countries has accelerated, but is being held back by weak investment and industrial activity in advanced economies.

“From hopes for a U-shaped recovery, through a W-shaped one, the prognosis for global growth is getting alphabetically challenged. With governments in high-income countries struggling to make fiscal policies more sustainable, developing countries should resist trying to anticipate every fluctuation in developed countries and, instead, ensure that their fiscal and monetary policies are robust and responsive to domestic conditions,” said Kaushik Basu, WB senior vice president and chief economist.

Overall, global trade of goods and services, which grew only 3.5 percent in 2012, is expected to accelerate, expanding six percent in 2013 and seven percent by 2015.

“The weakness in high-income countries is dampening developing-country growth, but strong domestic demand and growing South-South economic linkages have underpinned developing country resilience – to the point that, for the second year in a row, developing countries were responsible for more than half of global growth in 2012,” said Hans Timmer, WB director for Development Prospects Group.

The WB noted that among the downside risks to the global economy would be a stalling of progress on the euro zone crisis, debt and fiscal issues in the United States, the possibility of a sharp slowing of investment in China, and a disruption in global oil supplies. 

However, the likelihood of these risks and their potential impacts has diminished, and the possibility of a stronger-than-anticipated recovery in high-income countries has increased.

Although fiscal sustainability in most developing countries is not an issue, government deficits and debt are much higher today than in 2007.

“To assure resilience to downside risks, developing countries need to gradually rebuild depleted fiscal and monetary buffers, and improve social safety nets and food security,” said Andrew Burns, WB manager of global macroeconomics and lead author of the report.