The World Bank NUMBER 5 2 LCONO5NC POLICY Global Economk Prospects 22679 projectS soft landing Strong developing country growth in 2000 iS likely to be followed by a cyclical slowing in the near term, though longer-term prospects have improved. The World Bank's just-released Global Eco- tax cuts revived confidence in several coun- nomic Prospects and the Developing Countries tries. Japan's growth rose to about 2 percent, 2001 reports that developing country growth supported by public investment and rising surged to 5.3 percent in 2000, up from 3.2 business profits and investment. But the The potentiall for percent in 1999 and 1.0 percent in 1998 Japanese recoveryremains fragile because of (table 1). Al developing regions experienced high corporate debt, insufficient corporate long-term growth faster growth, though to varying degrees. and financial restructuring, low consumer World growth is expected to slow to a soft confidence, and growing government debt. may have frmproved landing in 2001, reflecting monetary tight- Growth among OECD countries is ening in industrial countries, stock market expected to slip below 3 percent in 2001 globa ly, improving declines, and high energy prices. Looking as the U.S. economy slows. Consensus fore- ahead, the potential for long-term growth casts envisage a U.S. soft landing rather than prospects for may have improved globally, improving outright recession. Over the longer term prospects for reducing poverty. (2003-10) OECD growth is expected to aver- reducing poverty But there are notable risks to the outlook, age 2.8 percent. Global Economic Prospects including higher oil prices, further slides in argues that industrial countries, led by the stock markets, and a U.S. recession. These U.S., are starting to see productivity payoffs developments would seriously reduce devel- from large investments in information and oping countries' trade, growth, and access communications technology. European inte- to capital. They could also worsen longer- gration has induced greater competition term global performance if they lead coun- and efficiency, along with more flexibility tries to retreat from reform and openness. in labor markets. InJapan continued efforts at deregulation and financial and corporate LMXlodest prospects for restructuring could yield long-term effi- Ngh-incomre countries ciency gains. Growth in high-income countries was esti- mated at 3.8 percent in 2000, the highest in %41Of 'hlA W @ a@ ; E aj a, c F_ aa 10 years. U.S. growth exceeded 5 percent, 0Y MiSh,S`,;e KY supported by strong productivity growth, World trade volume rose an estimated 12.5 buoyant business and consumer confidence, percent in 2000. This remarkable expan- and years of booming stock markets. Growth sion caps a decade of trade growth aver- in the euro area (consisting of the 11 coun- aging 10 percent for developing countries- tries using the euro) also accelerated in 2000, three times the rate of the 1980s. Rapid to more than 3 percent, and was accompa- trade growth reflects major multilateral and nied by higher employment. European regional trade liberalization agreements exports benefited from a weak euro, while (Uruguay Round, North American Free FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK TABLE 1 WORLD GROWTH AND THE GLOBAL ECONOMIC ENVIRONMENT (PERCENTAGE CHANGE FROM PREVIOUS YEAR EXCEPT LIBOR AND EURIBOR) Estimate Current forecasts March 2060 forecasts Indicator 1999 2000 2001 2002 2000 2001 2002 World GDP growth 2.8 4.1 3.4 3.2 3.5 3.1 3.1 High-income countries 2.7 3.8 3.0 2.8 3.2 2.7 2.6 U.S. 4.2 5.1 3.2 2.9 3.8 2.7 2.8 Japan 0.3 2.0 2.1 2.2 1.2 1.4 1.6 Euro area 2.4 3.4 3.2 2.8 3.4 3.1 2.8 Developing countries 3.2 5.3 5.0 4.8 4.6 4.8 4.8 Sub-Saharan Africa 2.1 2.7 3.4 3.7 3.2 3.7 3.8 EastAsia and Pacific 6.9 7.2 6.4 6.0 6.6 6.3 6.1 East Asia crisis countriesa 6.7 6.9 5.5 5.1 5.7 5.4 5.1 South Asia 5.7 6.0 5.5 5.5 5.9 5.8 5.5 Europt and Central Asia 1.0 5.2 4.3 3.9 2.5 3.4 3.6 Latin Ainerica and Caribbean 0.1 4.0 4.1 4.3 3.6 3.8 4.4 Middle East and North Africa 2.2 3.1 3.8 3.6 3.5 3.1j 3.6 World trade volume 5.8 12.5 8.0 6.8 8.3 6.9 6.5 Inflation in G-7 countriesb 1.2 2.0 1.9 1.9 1.8 1 9 2.0 Nonoil commodity pricesc -11.2 -0.8 3.4 4.9 5.6 3. 9 3.3 Oil pricesc 38.3 55.0 -10.7 -16.0 27.3 -17.4 -5.3 Manufactures export unitvalue,,d -2.7 -2.3 3.6 3.7 2.5 2. 5 2.6 Six-month LIBOR (percent a year)c 5.5 6.7 6.8 6.2 6.5 6.5 5.5 Six-month EURIBOR (percent a year)e 3.0 4.5 5.0 4.6 _-- - a. Indonesia, Republic of Korea, Malaysia, Philippines, Thailand. b. Canada, France, Germany, Italy, Japan, United Kingdom, U.S.. In local currency, aggregated using 1995 GDP weights. c. Measured in U.S. dollars. d. Unit vahle index of manufactures exports from G-5 (France, Germany, Japan, United Kingdom, U.S.) to developing counLtries. e. Measured in euros. Trade Agreement, deeper European inte- high prices may reduce prices to $25 a bar- gration) as well as unilateral tariff cuts by rel in 2001 and $21 a barrel in 2002. But an many countries. Trade growth has also been unusually cold winter or unanticipated sup- stimulated by reforms enhancing compe- ply disruptions could raise prices to $30 a tition, encouraging comparative advantage barrel in 2001. In the longer run, continued through international trade, and reducing improvements in supply and conservation communications and transport costs. World should cut prices to $18-19 a tbarrel. trade growth is expected to ease to about Industrial countries have been relatively 8 percent in 2001 and 7 percent in 2003-10. unscathed by the oil price shock because This will be 2.1 times the rate of world out- their output has become less energy- put growth-somewhat lower than in the intensive. Oil-importing developing coun- 1990s but well above the pace of the 1980s. tries have suffered more because their The difficulties in launching the next economies are more energy-intensive and round of multilateral trade talks in Seattle have less access to external financing. Many in 1999 showed that developing countries have also been hurt by declining prices for are an increasingly important part of the their commodity exports. Among the hard- world economy. They must exert influence est hit are C6te d'Ivoire, Kenya, and more effectively to achieve their objectives Uganda, where agriculture accounts for in the next round. 40-60 percent of exports and oil for 20-30 percent of imports. Divergent trends in commodity There has been some respite for exporters prices of metals and minerals because of a modest Oil prices rose 55 percent in 2000, to $28 a price recovery in 2000. In the longer run, barrel. Supply increases in response to these nonoil commodity prices are expected to PREMNOTE 52 FEBRUARY 2001 decline in real terms as technology reduces for catching up with industrial countries exploration and production costs. remains large. Still, prospects vary sub- stantially by region. Continued volatility in capital Growth in the five countries in East Asia flows hit hardest by the 1997-98 crisis (Indone- Private capital flows to developing countries sia, Republic of Korea, Malaysia, Philippines, fell about 25 percent between their peak in Thailand) rebounded to about 7 percent in 1997-the year of EastAsia's financial crisis- 1999 and 2000, bolstered by strong export and 1999. Though they increased slightly to growth. The unwinding of domestic debt $285 billion in 2000, volatility remained high. problems was aided by low inflation and Many emerging stock markets corrected interest rates, as well as some progress on sharply in 2000. Spreads on emerging mar- corporate and financial restructuring. ket debt remained high and volatile. And Growth in China also accelerated in 2000, Private flows to for the first time in 10 years, foreign direct with a resurgence in exports and public investment appears to have declined from investment. But regional growth will slow developing its previous-year peak ($180 billion in 1999), in 2001 as export growth wanes because of reflecting fewer new projects in major recip- the U.S. slowdown and a cyclical downswing countries should ient countries, slower merger and acquisi- in electronics. tion activity, and the near-completion of Growth in SouthAsiawas about 6 percent regain momentum privatization in many countries. Still, for- in 1999 and 2000, largely because of impres- eign direct investment flows have been fairly sive gains in India. But Pakistan continued stable since 1997, at $170-180 billion a year. to be constrained by severe external financ- Over the longer term, private flows to ing difficulties. The region's growth is developing countries should regain momen- expected to slow in 2001 because of falling tum. Growth in developing countries con- exports and rising oil import bills. tinues to exceed that in industrial countries, Since 1980 South Asia's per capita growth and privatization, fewer controls on foreign has averaged 3.5 percent, the second fastest direct investment, and financial reform con- level among developing regions. Over the tinue to advance. But the pace of private next 10 years this could rise toward 4 per- flows will probably be slower than during cent if chronic fiscal deficits are controlled the boom of 1991-97-and many of the and trade is liberalized further. poorest countries will continue to be Growth in Latin Americajumped to 4 per- excluded. In addition, capital market flows cent in 2000 from zero in 1999. That aver- will continue to be highly volatile, implying age cloaked a wide range of outcomes, risks even for countries with access. ranging from 6-7 percent growth in Chile and Mexico to little or no growth in Developing country prospects Argentina and Ecuador. The regional recov- improve ery is expected to consolidate in 2001-02, GDP per capita in developing countries is with some prospects for sustained moder- projected to rise 3.7 percent a year in 2000-10, ate growth over the longer term. more than twice the rate in the 1990s. To Favorable factors include the unfolding some extent this increase reflects the end of benefits of reforms, rclatively strong finan- the 1990s collapse in output in transition cial and banking sectors, and growing trade economies after the fall of communism. But and foreign direct investment links with economic fundamentals are stronger too. North America and Europe. Unfavorable Developing countries are more open to factors include low savings, high debt, and foreign trade and investment. Macroeco- vulnerability to volatility in capital flows. nomic policies are better, keeping inflation Average growth in Europe and CentralAsia low and reducing fiscal deficits. Human cap- rose to more than 5 percent in 2000, up from ital has improved, with better enrollment, 1 percent in 1999. The sharp rise in world literacy, and health conditions. The scope gas and oil prices transformed Russia's fiscal PREMNOTE 52 FEBRUARY 2001 and current account positions. The spillover Progress on structural and fiscal reforms effects have been felt elsewhere in the Com- should help boost growth in the longer term. monwealth of Independent States. But problems remain, such as large and inef- Central and Eastern Europe is benefit- ficient public sectors, low savings, and a lack ing from recovery in Western Europe and of diversification in many co antries. from reforms geared toward EU accession. Growth is likely to stabilize at about 4 per- Risks to the forecast cent in 2001-02, in part as oil prices ease. Risks of a more severe global downturn are Longer-run growth is expected to average not insignificant and may emerge through 4.5-5.0 percent in Central and Eastern some combination of higher oil prices, fur- Europe and 3 percent in the Common- ther declines in stock markets, and a reces- wealth of Independent States. sion in the U.S. These effects would be Risks remain Growth in Sub-Saharan Africa rose to 2.7 magnified by a renewed loss of confidence percent in 2000. Oil exporters benefited from and downturn in capital flows to develop- of a more higher prices, and countries with better poli- ing countries. cies (Botswvana, Uganda, several countries in The impact on developing countries severe global the CFA zone) enjoyed growth of around 5 would vary widely. Latin America is highly percent. But countries experiencing civil strife indebted and dependent on trade with the downturn or political disruptions (Angola, Democratic U.S., and so is most vulnerable to a U.S. Republic of Congo, Ethiopia, Sierra Leone, recession. East Asia also depends on exports Zimbabwe) saw only 0.2 percent growth. to the U.S.. Middle Eastern and North Growth in the region should accelerate African countries are less vulnerable because to 3-4 percent a year in 2001-02. Additional they have more of a European focus. India petroleum capacity should come onstream, is likely to exhibit its usual resilience, but benefiting oil producers, and highly Pakistan would be hit hard by worsening indebted countries will benefit from debt international financial conditions. Transi- relief. Progress on reform and debt allevi- tion economies would suffer weaker growth, ation has improved longer-term prospects though without returning to the travails in the region, and per capita income is pro- of the 1990s. Sub-Saharan Africa could suf- jected to rise by 1.3 percent a year over the fer a further worsening of terms of trade. next decade. Growth in the MiddleEast and North Africa This note was written by Swam inathan Aiyar picked up to 3.1 percent in 2000. Higher (Consultant, Knowledge, Products, and Out- oil revenues have reduced budget deficits, reach Division, World Bank Institute) and Milan and strong growth in Western Europe has Brahmbhatt (Lead Specialist, 7,conomic Policy sparked a tourist boom and higher worker Division, PREM Network) and is based on chap- remittances. Growth should reach 3-4 per- ter I of Global Economic Prospects and the cent a year in 2001-02. Developing Countries 2001. For diversified exporters, the export If you are interested in similar topics, consider boom is being counterbalanced by strong joining the Growth Thematic G roup. Contact currencies, high fiscal deficits in Egypt and Sandeep Mahajan, x8028 7, or click on Thematic Lebanon, and declining stock markets. Groups on PREMnet. _ This note series is intended to summarize good practice and key policy find- *wS nS ings on PREM-related topics. The views expressed in these notes are those of the authors and do not necessarily reflect the views of the World Bank. PREM- PIE ' | | | notes are distributed widely to Bank staff and are also available on the PREM website (http://prem). If you are interested in writing a PREMnote, email your idea to Sarah Nedolast. For additional copies of this PREMnote please contact ieoRedAletinnandEcomnicManameent the PREM Advisory Service at x87736. Prepared for World Bank staff