In the wake of financial turmoil in high income countries and amidst high food and energy prices, developing countries’ growth is easing but is still robust, according to a new report released by the World Bank Tuesday.
Private capital flows to emerging markets, which hit a record US$1 trillion in 2007, are expected to drop to around US$800 billion by 2009, which would still be the second highest level ever, said the Bank’s report, Global Development Finance 2008.
The report predicted a slowdown in world GDP growth from 3.7 percent in 2007 to 2.7 percent in 2008, while growth in developing countries is expected to slow from an extraordinary 7.8 percent in 2007 to 6.5 percent in 2008.
“Strong growth in the developing world is certainly helping to offset the sharp slowdown in the U.S.,” said Uri Dadush, Director of the World 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,” Dadush added.
Developing country growth in recent years has been powered in part by expanding capital flows, including by foreign banks that have expanded their presence in developing countries through acquisitions and the establishment of local affiliates.
As at the end of June 2007, foreign claims on developing-country residents held by major international banks stood at US$3.1 trillion, up from US$1.1 trillion at the end of 2002.
“The presence of foreign banks in developing countries expands access to credit and as well as financial services, which can spur efficiency and innovation in domestic banks,” said Mansoor Dailami, Manager of International Finance in the Development Prospects Group, and lead GDF author.
“However, the ripple effect of shocks from the US and European markets to certain developing-country financial markets highlights the need for better and more coordinated financial regulation, liquidity provision, and macroeconomic management,” Dailami added.
The report warned that countries with heavy external financing needs are potentially most vulnerable to a credit crunch, particularly in cases where private debt inflows into the banking sector have contributed to a rapid expansion of domestic credit, which stokes inflationary pressures.
In 2007 and 2008, several countries in Europe and Central Asia, and a selected few in Latin America and the Caribbean and Sub-Saharan Africa were most at risk.
While some low-income countries have recently accessed the international bond market, the bulk of private capital flows to developing countries go to just a few big economies, among them the so-called BRICs – Brazil, Russia, India and China.
The poorest nations, meanwhile, remain reliant upon official aid, which further declined in 2007.
Net official development assistance by members of the OECD’s Development Assistance Committee totaled US$103.7 billion in 2007, down from a peak of US$107.1 billion in 2005, the report said.
High commodity prices are a major worry.
According to the report, prices of both energy and internationally-traded food increased 25 percent in nominal terms over the second half of 2007.
For oil, the increase was mostly due to years of underinvestment and tight supply.
For food and agricultural commodities, the big drivers are demand for bio-fuels in the U.S. and Europe, high prices for fertilizer and energy inputs, and export bans on key staple crops.
The report noted that such bans exacerbate shortages in global markets in the short term and could curtail supply responses to higher prices in the long term.
Additionally, poor weather reduced output in some countries, and commodity-market speculation also pushed up prices.
Grain prices rose the most during the first months of 2008, as they were twice as costly a year earlier.
High food and energy prices are now the dominant force behind increased inflation across developing countries and, worryingly, they are hitting the poorest people the hardest.
