World Bank Sees Global Contraction In 2009

By Annys Shin
Washington Post Staff Writer
Wednesday, April 1, 2009

Economic growth in developing nations will slow this year by far more than previously estimated and the global economy will contract for the first time since World War II, the World Bank said in a report released yesterday.

In the report, the World Bank more than halved its forecast for growth in developing nations, from 4.4 percent to 2.1 percent. The revision reflects the speed and ferocity with which the financial crisis has restricted economic activity since the World Bank issued its last forecast in November.

With the developing world cooling off, the World Bank had previously said it expected the global economy to contract but had not provided an estimate. Yesterday, it said it expected world output to decline by 1.7 percent. And while the bank said growth should resume next year, it might not be robust.

"Even with a return to positive growth, the problems that are being created at the moment because of the sharp fall [in growth] will remain with us in 2010 and 2011," Hans Timmer, manager of the bank's global prospects group, said in an interview.

Developing nations have been especially hobbled by a falloff in demand for exports, the flight of foreign investment and a decline in commodity prices. The World Bank said the developing world might need up to $1.3 trillion to finance current account deficits and to cover debt payments.

The report was released on the eve of the Group of 20 summit in London. The World Bank, the International Monetary Fund and some world leaders have been pushing richer countries to do more to help emerging and developing nations. In recent days, World Bank officials have argued that the global recession might end sooner if developed countries direct some of their stimulus spending to the world's poorest nations. British Prime Minister Gordon Brown has called for the creation of a $100 billion pool of trade credits to help boost the flow of trade.

William Easterly, a former World Bank official who now teaches at New York University, said that the proposals by Brown, the World Bank and the IMF are far too simplistic and that the idea that developed nations can stimulate economic growth by filling financing gaps for poor countries is "a delusion."

"The assumption is that just mechanically pouring money and credits into poor countries makes them have higher growth," he said. "We have 60 years of evidence against this proposition -- lots of money pouring in without discernible growth effects."

In a separate report released yesterday, the Organization for Economic Cooperation and Development, which includes the United States and other industrialized powers, said it estimated that the economies of its 30 member countries would shrink by an average of 4.3 percent this year. The OECD predicted that global trade would shrink by more than 13 percent this year.

"We are in the midst of the steepest, most synchronized recession in our lifetime, certainly since the 1930s," the chief economist of the OECD, Klaus Schmidt-Hebbel, told reporters in Paris.

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