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World Bank Sees Peril in U.S. Deficits

By Joe McDonald
Associated Press
Thursday, April 7, 2005; Page E03

BEIJING, April 6 -- Continued high U.S. budget and trade deficits could sharply cut economic growth in developing countries by driving up interest rates and weakening the dollar, the World Bank said Wednesday.

Even without the impact of U.S. deficits, average economic growth in China, Russia, India and other developing economies is expected to decline to 5.2 percent next year, from a three-decade high of 6.6 percent in 2004, the bank said in a report on the global economic outlook.

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But it said that fall could be sharper if financial markets respond to continued heavy U.S. borrowing by pushing up interest rates.

If rates rise, "and we think that that's what ultimately will happen if there's no [U.S.] policy adjustment, then all developing countries will suffer," said Hans Timmer, a bank economist.

Latin America is especially vulnerable, Timmer said. According to a projection by the bank's economists, if interest rates rise by 2 percent, the 4 percent growth forecast for the region next year "would completely disappear," he said.

A weaker dollar due to rising debt will hurt trade volume, Timmer said.

The U.S. deficit in trade and investment income with the rest of the world, commonly called the current account deficit, hit an all-time high of $665.9 billion last year while the budget deficit soared to a record $412 billion.

The report forecasts an average economic growth rate of 5.7 percent this year for developing countries, down from 6.6 percent in 2004. It says that rate should fall to 5.2 percent in 2006.

Uri Dadush, director of the bank's Development Prospects Group, said such a decline was healthy, reflecting more sustainable growth after surging economic expansions around the world drove up prices of energy and raw materials.

The report painted a positive picture of developing economies, saying many have lowered trade barriers and pursued prudent spending, holding foreign debt levels steady. It said their total foreign reserves rose by 30 percent last year, to $1.6 trillion.

Foreign investment in developing economies rose by nearly $14 billion last year to $165.5 billion, the report said.

Developing economies grew more rapidly than those of richer countries such as the United States last year by reducing reliance on exports and increasing domestic consumption, the report said.

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