World Bank Sees Slow Growth for Economy

By Annys Shin
Washington Post Staff Writer
Tuesday, June 23, 2009

The world economy is headed into an era of slower growth, according to a World Bank report released yesterday, with developing nations bearing the brunt of a stubborn credit crunch.

Despite recent signs that the recession is easing in the United States and Britain, the downturn continues to cripple developing nations. Rising unemployment has left émigrés with less money to send home, the drop in consumer spending has killed demand for exports, and foreign banks and investors have pulled back.

As a result, total private capital flows into developing nations shrank in 2008 to $707 billion, down from a 2007 peak of $1.2 trillion. The World Bank said yesterday that it expects that figure to decrease further this year to $363 billion.

The global economy is expected to start growing again during the second half of the year but at a pace "much more subdued than might normally be the case," the report said.

The bank recently revised its forecast for the global economy downward, saying it would contract at an annualized rate of 2.9 percent this year -- worse than its March forecast, which predicted it would shrink at a rate of 1.7 percent.

As conditions have improved slightly in wealthier nations, pressure has increased to scale back deficit spending and withdraw new money created to shore up financial systems. Limits on further stimulus efforts, combined with an ailing banking sector, "will prevent a global rebound from gaining traction," Justin Lin, World Bank chief economist, said in a written release.

The bank forecast that developing countries would grow at an annualized rate of 1.2 percent this year, after expanding at a rate of 5.9 percent in 2008. But that figure includes economic powerhouses China and India. Excluding those countries, the remaining developing economies are expected to shrink by 1.6 percent.

That kind of contraction poses a serious threat to efforts to reduce poverty levels. In the wake of the East Asian financial crisis in the late 1990s, it took almost a decade for poverty rates in the region to return to pre-crisis levels, the World Bank noted in yesterday's report. Child malnutrition increased, as did infant mortality rates.

In countries such as Poland, Croatia and Latvia, the recent fall-off of foreign private investment and exports has caused industrial production to contract at double-digit rates and have forced several countries to turn to the International Monetary Fund for bailouts.

The drop in private foreign investment, as well as in global trade, has also had an impact on sub-Saharan Africa, even though the region is less intertwined with the global financial system, said Todd Moss, an African development expert and senior fellow at the Center for Global Development, an independent research group in Washington. The crisis has put infrastructure projects on hold, increased pressure on governments to devalue their currencies and could eventually force some to seek aid from the IMF.

"We don't know how bad it will get," Moss said.

World Bank officials said that if private capital were to return to developing nations, such outcomes could not only be averted but growth in developing nations could give the global economy a much-needed boost.

"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," Lin said.

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