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Urban scene from a developing country via Antonio V. Oquias / Shutterstock

World Bank: Developing countries need bigger economic buffers

The World Bank on Tuesday urged developing countries to build up their buffers against financial storms arising from the high-income countries, especially in Europe.

Developing countries have fewer means to weather shocks to their economies than they had in 2007, before the global financial crisis accelerated, and need to prepare for long-running turbulence, the development lender said.

“Another serious financial crisis is a possibility,” warned Hans Timmer, head of Development Prospects at the bank.

If high income countries continue to grow even slowly, “it is still possible for developing countries to turn out very solid growth rates,” Timmer said at a news briefing on the World Bank’s twice-yearly Global Economic Prospects report.

“In case of a serious financial crisis, no developing country will be spared.”

Growth in developing countries was expected to slow to 5.3 percent in 2012, the weakest rate in the past decade, and then modestly pick up in 2013-2014, according to the report.

That projection was just a notch below the World Bank’s January estimate of 5.4 percent.

However, high-income countries should see a feeble 1.4 percent growth rate this year, under pressure from a 0.3 percent contraction in the ailing eurozone.

Both numbers were unchanged from the January estimates, as was the overall growth estimate for the global economy — just 2.5 percent.

The 2012 global growth rate would be two percentage points lower than in 2010 and the most sluggish pace in the last 10 years, excluding the 2009 recession. Last year the pace was 2.7 percent.

The United States, the world’s largest economy, should have slightly slower growth of 2.1 percent, while Japan, recovering from the 2011 earthquake-tsunami disaster, should expand 2.4 percent, a sharp half point higher than believed six months ago.

China was projected to slow to 8.2 percent from the 8.4 percent pace seen in January.

The World Bank said after relatively good conditions during the first four months of this year, May brought renewed market tensions as the eurozone debt crisis escalated.

That wiped out about seven percent of the value in stock markets in advanced and developing countries, hitting commodity prices hard, and strengthening the dollar as investors sought a safe haven.

Andrew Burns, lead author of the report, said global capital flows fell 44 percent from April to May.

Even so, conditions in most developing countries have not deteriorated as much as they did in the 2011 fourth quarter.

Timmer said 60 percent of developing countries are now “close to overheating” after expanding spending and investment that insulated them from the European and US downturns.

He urged developing countries to adjust their economic policies now to “move away from firefighting to strengthening your underlying growth potential.”

Timmer predicted it would “take many years to undo the damage” of the 2008-2009 financial crisis.

If the situation in Europe deteriorates sharply, the developing Europe and Central Asia region would be especially vulnerable because of its close trade and financial ties with rich European countries.

Burns stressed that developing countries should reduce their vulnerabilities where possible by lowering short-term debt levels and cutting budget deficits.

“Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse,” Burns said.

[Urban scene from a developing country via Antonio V. Oquias / Shutterstock]

Written by | Agence France-Presse

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