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Developing Countries to Cushion Rich-country Slowdown in 2008

Resilience in developing economies is cushioning the current slowdown in the United States, a phenomenon driven in no small part by the East Asia and Pacific Region, which grew by 10 percent in 2007. Growth for the region should ease to 9.7 percent in 2008 and to 9.6 percent by 2009, predicts the World Bank's Global Economic Prospects 2008 (GEP 2008).

The expansion was powered by China's 11.3 percent gain, with other countries in the region growing at a 5.9 percent pace, the report's authors say. Domestic demand helped power many economies, as a downturn in the global high-tech cycle for most of 2006-07 tempered the momentum of exports for technology-producing countries.

"The pickup in regional growth in 2007 was all the more notable because it occurred despite a slowdown in the US economy. Indeed, regional exports advanced to 17.8 percent, a slight pick up from 2006," said Hans Timmer, co-author and Manager of the Global Trends team in the Bank's Development Prospects Group.

According to the authors, East Asia appears to have absorbed the effects of the financial turmoil in the high-income markets well. Except for China, direct exposures of financial institutions in the region to mortgage-based securities (or sub-prime crisis) are limited.

More broadly, real GDP growth for all developing countries is expected to ease to 7.1 percent in 2008, while high-income countries are predicted to grow by a modest 2.2 percent, said the World Bank.

The report notes that world growth slowed modestly in 2007 to 3.6 percent compared with 3.9 percent in 2006, a downturn due largely to weaker growth in high-income countries. In 2008 global growth is expected to be 3.3 percent.

A weaker US dollar, the specter of an American recession and rising financial-market volatility could cast a shadow over this soft landing scenario for the global economy. These risks would cut export revenues and capital inflows for developing countries, and reduce the value of their dollar-investments abroad. In this context, the reserves and other buffers that developing countries have built up in past years may be needed to absorb unexpected shocks.

"Overall, we expect developing-country growth to moderate only somewhat over the next two years. However, a much sharper United States slowdown is a real risk that could weaken medium-term prospects in developing countries," said Uri Dadush, Director of the World Bank's Development Prospects Group and International Trade Department.

The report's authors assume that credit turmoil in international markets will persist into late 2008, but that costs to large financial institutions will remain manageable. Moreover, they predict that spillover from problems in the US housing market on consumer demand will remain limited.

"Looking at trade, strong import demand across the developing countries is helping to sustain global growth. As a result and given a cheaper US dollar, American exports are expanding rapidly. This is helping shrink the US current account deficit and is contributing to a decline in global imbalances," said Timmer.

Recent robust developing country growth has contributed to high commodity prices, notably for oil, metals and minerals. These have benefited many commodity exporters, thus explaining the strength of demand growth in some poorer countries. However, the recent increase in grain prices – partly due to increased grain production for biofuels – is hurting real incomes among the urban poor.

GEP 2008 also argues that more prudent macroeconomic management and technological progress have helped increase total factor productivity and real income growth in developing countries over the past 15 years, a trend expected to help reduce poverty in the next decade. The special theme of GEP 2008 is technology diffusion in developing countries (

Other developing country highlights

In the first half of 2007, industrial production sped up across the developing regions, notably in East Asia (20 percent, year over year). Robust production data are also reflected in GDP results. China, India, and Russia were instrumental in driving up output.

GDP in Europe and Central Asia is expected to grow by 6.7 percent in 2007, and then slow to 6.1 percent in 2008 and 5.7 percent in 2009. Inflation has risen in several countries, tied to sustained strong domestic demand and rising food and fuel prices (made worse by drought in Bulgaria and Romania). Signs of overheating are evident in Bulgaria and the Baltic states. In Turkey, an easing of monetary policy is expected to strengthen domestic demand, leading to a pickup in growth, and a continued large current account deficit.

GDP in Latin America and the Caribbean advanced by 5.1 percent in 2007 and is growth expected to ease to 4.5 percent in 2008 and further to 4.3 percent by 2009, mainly reflecting a return to more sustainable growth rates in Argentina and Venezuela. Elsewhere, including in Brazil, growth should remains robust, while in Mexico it is expected to rebound from a weak 2007.

GDP in the Middle East and North Africa eased slightly in 2007 to 4.9 percent and will likely rise with the help of high oil prices to 5.4 percent in 2008. In oil-exporting countries, higher oil prices are adding to revenues, some of which are being invested infrastructure in countries like Algeria and Iran. Diversified exporters like Jordan, Morocco and Tunisia are enjoying double-digit growth, thanks to increased trade demand from Europe.

GDP growth in South Asia edged down slightly in 2007 to 8.4 percent, with industrial production and GDP growth driven by strong domestic demand. An expansion of credit, rising incomes, and strong worker remittances are buoying private consumption. Meantime, improvements in business sentiment along with rising corporate profits, are providing a further boost.

GDP in Sub-Saharan Africa grew 6.1 percent in 2007, and is expected to rise 6.4 percent in 2008, with much of the impetus coming from strong domestic demand. Investment in the region is expected to remain strong, despite the tightening of international credit conditions, due in part to large foreign-financed investments. In contrast, private demand in South Africa, where higher interest rates and an erosion of real incomes are curbing real outlays, is projected to soften. Regional growth may slip to 5.8 percent by 2009 as oil exporters respond to international conditions and restrain output moderately.

(China Development Gateway January 9, 2008)

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