| Real GDP growth forecast for developing regions (percentage change from previous year) |
||
|---|---|---|
| Region | 2008 | 2009 |
| East Asia and the Pacific | 8.8 | 6.7 |
| Europe and Central Asia | 6 | 3.5 |
| Latin America & Caribbean | 4.5 | 2.1 |
| Middle East & North Africa | 5.7 | 3.5 |
| South Asia | 6.3 | 5.4 |
| Sub-Saharan Africa | 5.4 | 4.6 |
According from the worldbank site, A preview of the analysis for this year’s Global Economic Prospects report, to be published December 9, 2008, shows that real GDP growth will slow down across all developing regions in 2009.
“The direct impact of the crisis is less dramatic in the financial sectors of the poorest countries,” said Uri Dadush, Director Development Prospects Group, “but they will be hit nevertheless by slower export growth—global trade is expected to decline by 2.5 percent in 2009—reduced remittances by migrant workers; and lower commodity prices that will affect commodity-exporting countries.”
Commenting on the projected decline in world trade, which would be the first such drop since 1982, Mr. Zoellick said, “One of the primary drivers of this is the credit crunch. It’s not just the lack of demand for the product, but there’s a big gap in trade finance and, it appears, even working capital for some of the shipping firms. So, we at the World Bank had already expanded a trade finance facility that’s a pool to $1.5 billion, and we’re looking about expanding that. ”
Preventing the financial crisis from turning into a human one
Like previous crises, this one will hit the poorest people the hardest. Many households, already weakened, are faced with having to sell assets like livestock to survive. Malnutrition could well rise, and school enrollment may well fall. The financial crisis will turn into a human one if the poor are left to fend for themselves.
Economists at the World Bank believe that social safety net programs—particularly those that are well-designed—are a smart investment both for today and the future. These programs are affordable; Mexico’s successful Oportunidades and Brazil’s Bolsa Familia cost just about 0.4 percent of GDP.
“Crises have given birth to some of the worst social protection policies, and some of the best,” said Martin Ravallion, Director, Development Research at the World Bank. “Some developing countries, including Mexico, have turned crisis into opportunity by dismantling inefficient subsidies in favor of more efficient safety nets.”
In an October 2008 policy research working paper, “Bailing Out the World’s Poorest,” Ravallion notes that a comprehensive safety net requires a combination of two things—targeted conditional cash (or food) transfers for those who cannot work or should not be taken out of other activities like school, and guaranteed low-wage relief work on community-initiated projects.
Staff of the Bank’s Development Research Group note, in a November 2008 paper, “Lessons from World Bank research on financial crises,” that the short-term responses to a crisis—macroeconomic stabilization, trade policies, financial sector policies and social protection—cannot ignore longer-term implications for both economic development and vulnerability to future crises.
Stabilizing the financial sector
“A new agenda is now emerging for financial sector policymaking,” said Asli Demirguc-Kunt, Senior Research Manager, Finance, in the World Bank’s Development Research Group. “This crisis is prompting a reassessment of certain principles and practices in financial sector policymaking. There could be important changes in the structure and oversight of financial systems worldwide.”
To prevent shifts of deposits to state-owned banks, developing countries may now need to provide some sort of underwriting of banking system deposits, but deposit insurance should be designed carefully because such measures take large scale fiscal resources to be credible and may introduce incentives for excessive borrowing.
A stronger financial system will also require effective collateral registration and enforcement systems, well-functioning payments and settlement systems, and well designed corporate governance structures, says new World Bank policy analysis.
Governments will also need to strike a balance between maintaining financial stability and encouraging financial innovation.
The need to kick-start lending to the real sector once again following the credit squeeze may lead several countries to upgrade the role of development banks and the use of directed lines of credit and credit guarantee schemes, as well as to involve themselves in the resource allocation decisions of recently-nationalized banks. This projection depends on country circumstances.
“It is very important that countries come together to face the crisis in a coordinated way,” said Justin Lin, World Bank Chief Economist, speaking at the Korea Development Institute in Seoul in October 2008. “But whatever the details of the multilateral effort, the point is that the scale of the problem demands greater creativity. We cannot be constrained by institutional structures and approaches designed for a world before financial globalization.”
