Resilience at work

In a recent report, Global Development Finance 2008, the World Bank examines the impact of the U.S. financial crisis on developing countries. While the global economy slowed down, developing countries have come out relatively unscathed. The world economy is expected to grow at 2.7 per cent, down from the 3.7 per cent registered in 2007. GDP growth in high income countries is forecast at 1.6 per cent, which is one percentage point below what was achieved in 2007. However, growth in China, the rest of East Asia and the Pacific, and other developing regions will be an impressive 6.5 per cent during the current year (compared with 7.8 per cent in 2007). In the World Bank’s view, the economies of both India and China will slow down but still grow at very respectable rates. China, which posted double-digit GDP growth for the fifth time in succession last year, is forecast to grow at 9.7 per cent. India will see a sharper deceleration from 8.7 per cent to 7 per cent in 2008. While being lower than the forecasts made by several official Indian agencies, this figure will be above the average for developing countries. In what is seen as a demonstration of the resilience of developing nations, a record $1 trillion of net private capital flowed to them in 2007.

In the light of this experience and taking into account other factors, the World Bank concludes that developing countries are not victims, and that in many respects they determine the trends in the global economy. Better macroeconomic policies, higher levels of investment, and wider application of technology have helped these countries. In fact, domestic demand and increasing imports have to a large extent cushioned the impact of the global downturn on the developing economies. More than half of the global import demand now originates from developing countries. However, the developing world has been hit the most by inflation arising from the global phenomenon of high energy and food prices. The problem is exacerbated by the unwinding of global imbalances and the unsustainable situation of high current account and fiscal deficits in the U.S being financed by the savings of developing countries. International banking, a focus area in the World Bank report, has won a fair amount of praise. It has enhanced competition and efficiency and widened the scope of the credit markets. On the downside, it has transmitted the shocks from developed markets and reduced credit availability to the developing countries. For policy-makers, the present economic environment presents challenges of great complexity.