WB: Developing Countries Need to Shift from Crisis-fighting to Policies that Will Sustain Growth

As they put the financial crisis behind them, developing countries need to focus on tackling country-specific challenges such as achieving balanced growth through structural reforms, coping with inflationary pressures, and dealing with high commodity prices, the World Bank says in its June 2011 edition of Global Economic Prospects.

In contrast, prospects for high-income countries and many of Europe's developing countries remain clouded by crisis-related problems such as high unemployment, household and banking-sector budget consolidation, and concerns over fiscal sustainability among other factors.

The World Bank projects that as developing countries reach full capacity, growth will slow from 7.3 percent in 2010 to around 6.3 percent each year from 2011-2013. High-income countries will see growth slow from 2.7 percent in 2010 to 2.2 percent in 2011 before picking up to 2.7 percent and 2.6 percent in 2012 and 2013 respectively.

"Globally, GDP is expected to grow 3.2 percent in 2011 before edging up to 3.6 percent in 2012," said Justin Yifu Lin, the World Bank's Chief Economist and Senior Vice President for Development Economics. "But further increases in already high oil and food prices could significantly curb economic growth and hurt the poor."

Recent events in Japan and the political turmoil in the Middle East and North Africa have cut sharply into domestic growth, but spillover effects to other economies are expected to be modest. GDP growth in 2011 will likely be flat in Japan. Among developing Middle-East and North African countries, GDP growth in 2011 will be weakest in Egypt (1 percent), Tunisia (1.5 percent), and Libya . While uncertain, growth in both Egypt and Tunisia is projected to pick up in 2012, reaching close to 5 percent by 2013.

Strong growth in most developing economies has contributed to a new set of global challenges, including higher commodity prices, rising inflation, and the possible return of destabilizing capital inflows as monetary policies tighten and interest rates rise.

"Developing countries have been resilient despite remaining tensions in high-income countries," said Hans Timmer, director of Development Prospects at the World Bank. "But many developing economies are operating above capacity and at risk of overheating, most notably in Asia and Latin America. Monetary policy has responded, but fiscal and exchange rate policy may need to play a bigger role to keep inflation in check."

Inflation in developing countries reached almost 7 percent year-over-year in March 2011, more than 3 percentage points higher than the low point in July 2009. Inflation in high-income countries has also picked up reaching 2.8 percent in April 2011. The biggest increases in inflation have been in the East Asian and Middle-East and North African regions, reflecting capacity constraints in the former and food prices in the latter.

High oil prices and production shortfalls due to bad weather have contributed to higher food prices, which has negative consequences for the poor who spend a high proportion of their income on food. Although domestic food prices in most developing countries rose much less than international prices during the 2010/11 spike (7.9 percent since June 2010 versus 40 percent for international prices), local prices may rise further as international price changes slowly pass through into domestic markets. In addition, if the 2011/12 crop year disappoints, food prices may rise further, placing additional pressures on the incomes, nutrition, and health of poor families.

"The financial crisis for most developing countries is over," said Andrew Burns, manager of Global Macroeconomics and lead author of the report. "Efforts must now focus on returning monetary policy to a more neutral stance and rebuilding the fiscal cushions that allowed developing countries to respond to the crisis with counter-cyclical policies. Increasingly, medium-term prospects will depend on the kind of slow-acting social, regulatory and infrastructural reforms that generate improved productivity and sustainable growth."