Developing Nations To Bear The Brunt As Global Crisis Deepens
29 June 2009
Countries in sub-Saharan Africa will continue to bear the brunt of the world economic crisis as it continues to deepen in the advanced countries.

Most countries have been hit hard by reduced external demand, plunging export prices, weaker remittances and tourism revenues, and sharply lower capital inflows, notably foreign direct investment.

 Economic growth is, therefore, expected to decelerate sharply this year to one per cent, down from 5.7 per cent on average over the past three years. By 2010, growth is forecast to rise by 3.7 per cent.

  Sharp cuts in remittances and official aid flows also represent a risk for the region, because many sub-Saharan countries rely on aid flows for budget support and also because remittances are a vital cushion against poverty.

Amidst global economic recession and financial market fragility, net private capital inflows to developing countries fell to $707 billion in 2008, a sharp drop from a peak of $1.2 trillion in 2007. International capital flows are projected to fall further in 2009 to $363 billion.

Global Development Finance 2009: Charting a Global Recovery warns that the world is entering an era of slower growth that would require tighter and more effective oversight of the financial system.

Developing economies are expected to grow by only 1.2 per cent this year, after 8.1 per cent growth in 2007 and 5.9 per cent growth in 2008.

Global gross domestic product growth is expected to rebound to two per cent in 2010 and 3.2 per cent by 2011. In developing countries, growth is expected to be higher at 4.4 per cent in 2010 and 5.7 per cent in 2011, albeit subdued relative to the robust performance prior to the current crisis.

“The need to restructure the banking system, combined with emerging limits to expansionary policies in high-income countries, will prevent a global rebound from gaining traction,” said Justin Lin, World Bank Chief Economist and Senior Vice President, Development Economics.

“Developing countries can become a key driving force in the recovery, assuming their domestic investments rebound with international support, including a resumption in the flow of international credit” he said.

While the authors note that extraordinary policy responses by a number of big economies have prevented systemic collapse, they stress the importance of concerted global action while the crisis is still underway.

“To prevent a second wave of instability, policies have to focus rapidly on financial sector reform and support for the poorest countries,” said Hans Timmer, Director of the bank’s Prospects Group.

Global integration and the expanding role of private actors in international finance have brought huge benefits, but have also widened the scope for turmoil. Today, developing countries rely heavily on private flows, and many countries are being hit by a collapse in corporate finance, with big companies and banks that were powering growth now in distress.

The risk of balance of payments crises and corporate debt restructuring in many countries warrant special attention, the report cautions.
Charting a worldwide recovery will require quick implementation of detailed reforms and  an eventual shift away from governments having high stakes in the financial system to a resumption of private sector control of the banking system, the report says.

In addition, the big expansion of the money supply in advanced countries will need to be unwound and fiscal deficits will need to be cut in the medium term to maintain debt sustainability and avoid another debt crisis as seen in the 1970s and 1980s.
World Bank