Too many of the world’s fast-growing developing countries are deploying crisis-fighting policies even though their economies have recovered from the recession, exacerbating inflation, the World Bank says it its latest economic assessment.
These policies are fueling inflation and risk upsetting the global recovery. Low- and middle-income countries were responsible for 46 per cent of the growth in global gross domestic product in 2010, and will continue to power the world economy for the next several years, the Washington-based institution says in the June edition of “Global Economic Prospects.”
Most economies in Asia and Latin America are growing faster than economic models suggest is possible without stoking inflation, the World Bank said. Yet authorities in these countries continue to keep interest rates relatively low, and few governments have made plans to return their budget balances to pre-crisis levels over the next few years.
“Both monetary and fiscal policy in developing countries may have to tighten more quickly to curb” inflationary pressures and asset-price bubbles, the World Bank says in the report.
The World Bank was established in the aftermath of the Second World War to back development projects in poorer countries. As such, its analysis focuses on developing economies. The World Bank estimates that the global economy will expand 3.2 per cent this year, compared with 3.8 per cent in 2010. The institution predicts global growth of 3.6 per cent in 2012 and 2013.
“The recovery from the unprecedented global recession that followed the September 2008 financial crisis has gathered strength, and, despite significant tensions and hurdles ahead, appears likely to continue to mature over the coming three years,” the report says.
The natural disaster in Japan likely will have a surprisingly minor impact on the global economy, according to the World Bank’s analysis. The bigger threat to growth is another spike in oil prices, which would curb economic growth and inflate food prices. The authors also warn that rising interest rates could expose weaknesses that so far have been hidden by the availability of cheap money.
Economic growth in developing countries will slow to 6.3 per cent in 2011 from 7.3 per cent in 2010, according to the World Bank. China will continue to set the pace, expanding 9.3 per cent this year and 8.7 per cent in 2012.
High-income countries are projected to expand 2.2 per cent this year, a significant slowdown from 2.7 per cent in 2010. Much of that is a result of Japan’s earthquake; with Japan removed from the equation, rich-country growth is little changed.
GDP in the United States will expand 2.6 per cent in 2011, compared with 2.8 per cent last year. The World Bank’s assessment of the recent spate of poor economic data in the U.S. is that it reflects a “growth pause” in a long recovery, rather than evidence of a double-dip recession, Andrew Burns, lead economist of the World Bank’s Development Prospects Group, told reporters in Washington Tuesday.
The World Bank’s relatively positive assessment of the U.S. is welcome, but it’s the emerging markets that are the drivers of global growth for the foreseeable future. This might be something that these countries have yet to realize. For example, Mr. Burns suggested that developing countries have a tendency to see higher commodity costs as an external shock, rather than accepting that it is demand in their economies that is causing the surge in food and fuel prices. A change of mindset is needed, Mr. Burns said.
The median policy rate in Latin America was 9.6 per cent in May 2011, compared with 7.9 per cent in March 2010; in Asia, the median policy rate was 6.31 per cent last month, a little more than a percentage point higher than in March 2010. Yet, when central bank rates are deflated by inflation, benchmark rates remain low, and even negative, in many developing countries, the World Bank said. This is a problem if recent increases in inflation are permanent, rather than transitory.
But the bigger problem in developing countries is fiscal policy. Countries such as Mexico and Thailand were good students of previous financial crises. They rebounded with the help of careful fiscal policy, leaving them with buffers to absorb the shock of the most recent crisis. But The World Bank worries developing countries have become complacent. Discretionary cuts to spending have been limited and deficits have narrowed much less than might be expected given the strength of their economies.
“Even by 2013 no region is anticipated to see fiscal balances return to the pre-crisis levels of 2007,” the report says. “They will therefore not have in place the kind of fiscal buffers that allowed policy in developing countries to respond counter-cyclically to the financial crisis. Until such buffers are restored, countries will be more vulnerable to future domestic or external shocks.”
