Inspite of the financial turmoil in high income c ountries and high food and energy prices, growth in developing countries is easi n g but 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 b e the second highest level ever, says the Bank’s report, titled “Global Developm e nt Finance 2008”.
The report predicts a slowdown in world GDP growth from 3.7 per cent in 2007 to 2.7 per cent in 2008, while growth in developing countries is expected to slow f r om an extraordinary 7.8 per cent in 2007 to 6.5 per cent in 2008.
“Strong growth in the developing world is certainly helping to offset the sharp slowdown in the US,” said Uri Dadush, Director of the World Bank’s Development P r ospects Group and International Trade Department.
“But at the same time, rising global inflationary pressures – especially high fo od and energy prices – are hurting large segments of the poor around the world.”
Developing country growth in recent years has been powered in part by expanding capital flows, by foreign banks that have expanded their presence in developing c ountries 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 d o mestic banks,” said Mansoor Dailami, Manager of International Finance in the Dev e lopment Prospects Group, and lead GDF author.
“However, the ripple effect of shocks from the US and European markets to certai n developing-country financial markets highlights the need for better and more c o ordinated financial regulation, liquidity provision, and macro-economic manageme n t,” Dailami added.
The report warns that countries with heavy external financing needs are potentia lly most vulnerable to a credit crunch, particularly in cases where private debt
inflows into the banking sector have contributed to a rapid expansion of domesti c credit, which stokes inflationary pressures.
In 2007 and 2008, several countries in Europe and Central Asia, and a selected f ew 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 ma rket, 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 D e velopment Assistance Committee totalled US$ 103.7 billion in 2007, down from a p e ak of US$ 107.1 billion in 2005, the report says.
High commodity prices are a major worry. Prices of both energy and international ly-traded food increased 25 per cent in nominal terms over the second half of 20 0 7, according to the report.
For oil, the increase was mostly due to years of underinvestment and tight suppl y. For food and agricultural commodities, the big drivers are demand for biofuel s in the US and Europe, high prices for fertilizer and energy inputs, and export b ans on key staple crops.
The report notes that such bans exacerbate shortages in global markets in the sh ort term and can curtail supply responses to higher prices in the long term.
Additionally, poor weather reduced output in some countries, and commodity-marke t speculation also pushed up prices. Grain prices rose the most during the first
months of 2008, they were twice as costly a year earlier.
High food and energy prices are now the dominant force behind increased inflatio n across developing countries – and worryingly, they are hitting the poorest peo p le the hardest.