Global Economic Prospects 2010

Global
Economic
Prospects
Crisis, Finance, and Growth2010Global
Economic
ProspectsGlobal
Economic
Prospects
Crisis, Finance, and Growth
2010© 2010 The International Bank for Reconstruction and Development / The World Bank
1818 H Street NW
Washington DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
E-mail: feedback@worldbank.org
All rights reserved
1 2 3 4 13 12 11 10
This volume is a product of the staff of the International Bank for Reconstruction and
Development / The World Bank. The findings, interpretations, and conclusions expressed in
this volume do not necessarily reflect the views of the Executive Directors of The World Bank
or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. The
boundaries, colors, denominations, and other information shown on any map in this work do
not imply any judgement on the part of The World Bank concerning the legal status of any
territory or the endorsement or acceptance of such boundaries.
Rights and Permissions
The material in this publication is copyrighted. Copying and/or transmitting portions or all of
this work without permission may be a violation of applicable law. The International Bank for
Reconstruction and Development / The World Bank encourages dissemination of its work and
will normally grant permission to reproduce portions of the work promptly.
For permission to photocopy or reprint any part of this work, please send a request with
complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers,
MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.
All other queries on rights and licenses, including subsidiary rights, should be addressed to the
Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA;
fax: 202-522-2422; e-mail: pubrights@worldbank.org.
ISBN: 978-0-8213-8226-4
eISBN: 978-0-8213-8227-1
DOI: 10.1596/978-0-8213-8226-4
ISSN: 1014-8906
Cover photos: © iStockphoto.com/burakpekakcan (sky); © iStockphoto.com/mikeuk (sea)
Cover design: Critical Stages
The cutoff date for the data used in this report was January 8, 2010. Dollars are current
U.S. dollars unless otherwise indicated.
Contents
Foreword xi
Acknowledgments xiii
Abbreviations xv
Overview 1
The acute phase of the crisis is over 1
Impact of the boom period on developing-country potential 4
Medium-term implications of the bust for finance in developing countries 8
Medium-term impact on the supply potential of developing countries 12
Conclusion 14
References 14
Chapter 1 Prospects for Developing Economies 15
Recent developments in financial markets 18
Global growth 22
Prospects for high-income countries 23
Prospects for developing economies 25
Regional outlooks 26
Commodity markets 31
Inflation 35
World trade 36
Narrowing global external payment imbalances 38
Uncertain prospects 39
The impact of the crisis on the very poor 41
Policy implications for developing countries 42
Notes 43
References 44
Chapter 2 The Impact of the Boom in Global Finance on Developing Countries 45
Financial innovation, high-income finance, and the liquidity boom 47
Novel channels for credit creation 50
Developing-country finance during the boom 53
vCONTENTS
Real-side consequences of the surge in global finance 61
Concluding remarks 70
Notes 71
References 72
Chapter 3 Medium-Term Impacts of the Crisis on Finance and Growth in Developing
Countries 75
The impact of post-crisis regulatory and structural changes 77
Implications of a potential developing-country retreat from financial integration 88
The impact of higher borrowing costs 94
Strategies for dealing with a weaker international finance system 104
Implications for the global balance between savings and investment 107
Conclusion 108
Notes 109
References 112
Appendix: Regional Economic Prospects 117
East Asia and the Pacific 117
Europe and Central Asia 123
Latin America and the Caribbean 131
Middle East and North Africa 139
South Asia 146
Sub-Saharan Africa 154
Notes 163
References 164
Figures
O.1 Financial conditions have stabilized 2
O.2 Developments in high-income countries have driven the industrial
production cycle 2
O.3 The downturn in developing countries has been deeper and more broadly based than
during previous recessions 3
O.4 Selected indicators of macroeconomic stability in developing countries, 2007 5
O.5 The cost of risk in high-income countries fell sharply during the boom 6
O.6 Developing-country potential output growth was boosted by low borrowing costs 7
O.7 Foreign participation in selected emerging equity markets 9
O.8 FDI as a share of investment in developing countries, 1995−2008 10
O.9 Very volatile external debt flows pose serious macroeconomic challenges 10
O.10 Indicators of regulatory quality 12
O.11 Private credit provision is strongly correlated with per capita incomes 12
O.12 Higher borrowing costs result in a permanent decline in developing-country
GDP 13
1.1 Financial markets’ stabilization has partially restored pre-crisis financial conditions in
developing countries 19
1.2 Syndicated bank lending by region, 2008 and 2009 20
1.3 FDI flows to developing countries 21
1.4 External financing needs as a share of GDP, 2010 22
viCONTENTS
1.5 Growth in industrial production 23
1.6 Change in stock building as a contribution to GDP growth in G-3 countries 24
1.7 Dispersion of GDP growth results in the first quarter of 2009 25
1.8 China’s stimulus program yielded a pickup in import demand 27
1.9 Nonperforming loans rise across much of Europe and Central Asia 28
1.10 In Latin America EMBI-stripped spreads retreat as investor confidence
returns 28
1.11 Lower oil prices and production yield sharp decline in oil revenues during 2009 30
1.12 South Asia’s external position improves in most countries on lower oil prices and
decline in domestic demand 30
1.13 Quarterly GDP data point to output stabilization in Sub-Saharan Africa 31
1.14 Real commodity price indexes 32
1.15 OPEC spare capacity 33
1.16 Global stock-to-use ratio of key agricultural markets (excluding China) 34
1.17 Real commodity prices 35
1.18 Inflation in low-, middle-, and high-income countries 35
1.19 Core inflation in high-income countries 35
1.20 Food prices in low-income countries 36
1.21 World trade is recovering 36
1.22 International tourist arrivals 37
1.23 An easing of global imbalances 39
1.24 U.S.-China imbalances have diminished markedly 39
1.25 Comparison of 2015 poverty forecast, GEP 2009 versus GEP 2010 43
2.1 Since the early 2000s, credit expansion has grown more than twice as fast as
nominal GDP 49
2.2 High-income GDP and trade growth do not explain the acceleration in developing-
country economic activity 50
2.3 Notional value of derivative transactions, 2002–08 52
2.4 Share of commercial bank and securitized assets in total credit held by U.S. financial
sector, 1995–2008 52
2.5 The cost of risk in high-income countries fell sharply during the boom 55
2.6 Developing-country interest rates fell substantially during the boom period 56
2.7 Total capital inflows to developing economies 58
2.8 Portfolio equity flows to developing countries 59
2.9 FDI inflows to developing countries, 1980–2008 60
2.10 Distribution of capital flows as a percentage of GDP in 2007 61
2.11 The determinants of private finance 62
2.12 Private credit from banks and other financial institutions relative to per capita
income, 2007 63
2.13 Rising investment rates contributed to an acceleration in potential output 70
3.1 Foreign participation in selected emerging equity markets 84
3.2 Debt financing of M&A transactions, 1995–2008 85
3.3 FDI as a share of investment in developing countries, 1995−2008 86
3.4 Net external debt flows from private sources, 1980–2008 88
3.5 The recent buildup in reserves was concentrated in East Asia and among oil
exporters 89
3.6 Developing countries’ average financial openness, 1990–2006 91
viiCONTENTS
3.7 The global synthetic price of risk versus the portion explained by economic
fundamentals 95
3.8 Yields on selected U.S. government securities 97
3.9 Government debt is projected to rise in high-income, but not developing,
countries 97
3.10 Falling capital costs were reflected in rising capital-output ratios 99
3.11 Impact of 110-basis-point shock on the capital-output ratio of a typical country 102
3.12 Higher borrowing costs result in a permanent decline in developing-country
GDP 102
3.13 The effect of higher borrowing costs on the ratio of private-source debt to gross
national income 104
3.14 Higher intermediation costs will reduce the risk-free interest rate relevant to savings
decisions 108
A1 East Asian exports and production hard hit by downturn in capital goods demand 118